BCAJ | Bombay Chartered Accountant Journal

ALLIED LAWS

20. Additional Evidence – Translated document would not amount to
additional Evidence. [Civil Procedure Code, 1908; Or. 41 R. 27]

Chandreshwar Bhuthnath Devasthan vs. Baboy Matiram
Varenkar (2018) 12 Supreme Court Cases
548

The Defendant
in support of the title had filed certain documents in Portuguese language in
trial court. The English translation of the said document was submitted before
the First appellate court. The first appellate court in para 43 of its judgment
observed that there was no application filed under the provisions of Order XLI
Rule 27 of the Code of Civil Procedure, 1908 (in short ‘the CPC’) for producing
the additional translation of the original document. As such translation could
not be taken on record prayer had been disallowed for taking English version on
record, which the High Court upheld.

It was held
that the translated version of the already filed document could not be said to
be constituting additional evidence as the original document was already on
record of the trial court. It was thus in order to facilitate the just decision
of the matter and to enable the court to read the document, its translated
version had been filed which ought to have been taken on record without any
demur by the court below. Interest of justice required it to be taken on record
being document recording title. Accordingly, the matter was set aside to the
first appellate authority to re-assess the evidence taken into consideration.

21. Conditional Gift – Cancellation during lifetime is held to be
proper. [Transfer of Property Act, 1882; Section 122, 123]

S. Sarojini Amma vs. Velayudhan Pillai Sreekumar AIR 2018 Supreme Court
5232

In the facts of
the case, in expectation that, Respondent would look after Appellant and her
husband and also for some consideration, appellant executed a purported gift
deed in favour of Respondent. Gift deed clearly stated that, gift would take
effect after death of Appellant and her husband.

It observed
that a conditional gift with no recital of acceptance and no evidence in proof
of acceptance, where possession remains with the donor as long as he is alive,
does not become complete during lifetime of the donor. When a gift is
incomplete and title remains with the donor the deed of gift might be
cancelled. Moreover, a conditional gift only becomes complete on compliance of
the conditions in the deed.

It was held
that, in the present case, since the appellant applied for cancellation before
the death of the appellant, there was no completed gift of the property in
question by the Appellant to the Respondent and the Appellant was within her
right in cancelling the deed.

22. Consumer – Person purchasing goods for self employment is considered
as a ‘consumer’. [Consumer Protection Act, 1986; Section 2(1)(d)]

Paramount Digital Color Lab and Ors. vs. Agfa India Pvt. Ltd. and Ors.
AIR 2018 Supreme
Court 3449

Complaint was
filed where the State Commission directed Respondents to pay compensation on
account of loss, mental and physical torture and expenses of Appellants. Appeal
was filed by Respondents which was allowed on ground that Appellants should not
be considered as consumers.

The facts show
that the appellants being unemployed graduates decided to start a business of
photography in partnership for self-employment and for their livelihood. For
such purpose, they purchased a developing and printing machine which eventually
failed to work due to a defect in a pre-loaded software. A contention was made
by the respondents that the Appellants do not come under the definition of
‘Consumer’ under the Consumer Protection Act, 1986, since the appellant
intended to use the goods for ‘Commercial Purposes’, which the ‘Act’
specifically prohibits.

It was observed that the point to be considered was whether the
Appellants had purchased the machine in question for “commercial
purpose” or exclusively for the purposes of earning their livelihood by
means of “self-employment”.

It was held by
the Hon’ble Supreme Court that the Appellants purchased the machine for their
own utility, personal handling and for their small venture which they had
embarked upon to make a livelihood. The same is distinct from large-scale
manufacturing’ or processing activity carried on for huge profits. There is no
close nexus between the transaction of purchase of the machine and the alleged
large-scale activity carried on for earning profit. Since the Appellants had
got no employment and they were unemployed graduates, that too without
finances, it is but natural for them to raise a loan to start the business of
photography on a small scale for earning their livelihood. Accordingly, the
appeals were allowed.

23. Hindu Law – Under the principles of prestine Hindu Law, daughters
would not inherit properties of their father if there are male survivors and
widows. [Hindu Succession Act, 1956; Section 14]

Kunnath Narayani and Ors. vs. Kunnath Kochan and Ors. AIT 2018 Kerala
141 Full Bench

There was a
difference of opinion between the different schools of Hindu law as to the
nature of the right that would be inherited by a daughter. The Courts in Bengal
and Madras have consistently decided in a series of decisions that the daughter
takes only a qualified estate, though the courts of Bombay have taken the view
in some cases that the daughter inherits the property absolutely. Where the
daughter succeeds to the estate of the father in the absence of male survivors
under the principles of pristine Hindu law, the estate would be a qualified one
and the same would certainly ripen into an absolute one by virtue of section 14
of the Act. Hence the full bench was constituted in order to resolve such
issue.

Before the Full
bench, the facts stated that the Plaintiff is the sister of the defendants. The
suit was filed raising the contentions that the suit property belonged to the
father of the parties, Perachan, who died prior to enforcement of the Hindu
Succession Act. The deceased was survived by his wife, his sons, the defendants
and his daughters; they contended that since the plaintiff (daughter) and her
sister were unmarried, they acquired limited ownership in the suit properties
on the death of their father; they also contended that the said limited
ownership became absolute ownership by virtue of section 14 of the Act; further
they contended that the plaintiff’s sister died unmarried and issueless on
10-9-1972; that the mother died on 22-8-1985 and that since the plaintiff’s
sister and mother are survived by the plaintiff and defendants, the plaintiff
is entitled to l/3^rd share over the suit properties which are in
joint possession of the plaintiff and defendants. As defendants did not accede
to the demand of the plaintiff to partition the property, the suit was laid.

Defendants
contested the suit contending mainly that they being the male children of
Perachan (father), the suit properties devolved on them exclusively on the
death of their father in terms of the principles of Hindu Mitakshara Law
applicable to them and they are in exclusive possession of the same.

The Full bench
held that Hindu Woman’s Right to Property Act was introduced in circumstances
to give better rights to woman in respect of property. However, said statute
only applies to Hindu widows and not to other Hindu females. Rights to Hindu
females are governed by principles of Hindu Law till the Act came into force.
Under the principles of Mithakshara Law, self-acquired properties and separate
properties of the Hindu male devolves in the heirs by succession and not to his
coparceners. But, daughter, mother and to grandmother were recognised as heirs
only to one who died without male issues. As regards order of succession among
them, daughter does not inherit until all widows are dead and gone. Under
principles of Hindu Law, daughters would not inherit properties of their father
if there are male survivors and widows. In case where daughter succeeds to
estate of father in absence of male survivors under principles of Hindu Law,
estate would be qualified one and same would certainly ripen into absolute one
by virtue of section 14 of Act.

In the facts of the present case, the plaintiff being the daughter of
Perachan was not covered by the Hindu Women’s Rights to Property Act. The Court
held that as the plaintiff was unmarried at the time when the succession
opened, she had only a right to claim maintenance out of the income from the
properties till her marriage. When the plaintiff has not acquired any right in
the property, as explained in the various decisions of the Apex Court and High
Courts referred to in the case, the application of section 14 of the Act does
not arise in her case.

24. Partnership Firm – Properties allotted to
Partners vide a valid dissolution deed – Transfer not valid if no valid deed of
Conveyance. [Partnership Act, 1932; Section 48, 14; Registration Act, 1908;
Section 17(1)]

State of Kerala and Ors. vs. V.D. Vincent AIR 2018 Kerala 199

The facts of the case show that there were partners in a Firm who were
entitled to a transfer of registry of the properties accruing to them
consequent to the dissolution of the Firm, without there being a registered
document, transferring the interest of the partner, who had the ownership of
the property, prior to it being brought into the stock of the Firm.

It was observed that a dissolution deed, that merely allocates items of
immovable properties to a partner, proportionate to his share in the assets of
the firm without conveying title of the said property to him, does not confer
on the said partner a right to obtain mutation of the property in his name,
under the Transfer of Registry Rules.

It was held that only a
valid deed, duly registered, can convey the title over immovable property to
the writ petitioners, and it is only thereafter that they can seek a transfer
of registry in respect of the said items of immovable property.

BCAJ Admin

GOODS AND SERVICES TAX (GST)

I.
High Court

19. 2018 [19] G.S.T.L. 29
(Guj.) Teesta Distributors vs. Union of India dated 10^th October,
2018

Levy of GST on lotteries is constitutionally
valid.

Facts

Petitioner assessee is engaged in selling of
paper lotteries of several states within the state of West Bengal. Assessee
challenged the constitutional validity of levy of GST on sale of lottery
tickets contesting that lotteries are not goods as per the definition provided
in the Constitution of India and thus should be exempt under Schedule III of
the CGST Act, 2017

Held

The Hon’ble High Court referring to various
judgments of the Hon’ble Supreme Court wherein it was held that lottery is an
actionable claim and therefore goods held that as lottery ticket evidences the
transfer of right and thus falls within the definition of actionable claim.
Under the GST law, Schedule III deals with activities or transactions which are
treated neither as a supply of goods nor as a supply of services and takes out
actionable claims but other than lottery, therefore levy of GST on the same was
held valid.

20. 2018 [19] G.S.T.L. 46
(M.P.) Advantage India Logistics Pvt. Ltd. vs. Union of India
dated 23^rd August, 2018

State GST Officers are duly empowered to
inspect, search and seize under IGST Act, 2017.

Facts

Petitioner assessee challenged jurisdiction
of M.P. State Government or officials
authorised under the MPGST Act, 2017 to exercise the powers under IGST Act, 2017
particularly u/s. 4 of the IGST Act, 2017. Further, it was also contested that
no such notification was issued empowering the State officers to practice provisions of IGST. Thus, the Respondent department had no power to
search and seize goods under IGST Act, 2017 and so the seizure order issued
u/s. 129 (1) of MPGST Act, 2017 was liable to be quashed.

Held

The Hon’ble Court after analysing section 4
of the IGST Act, 2017 held that officers appointed under the MPGST Act are
authorised to be proper officers for the purpose of IGST and therefore the writ
petition was dismissed.

21. 2018 [19] G.S.T.L. 578
(Del.) Napin Impex Pvt. Ltd. vs. Commissioner of DGST, Delhi
dated 28^th September, 2018

On account of non-production of books of
accounts and other documents, complete sealing of premise by Revenue
authorities is illegal.

Facts

Revenue officers visited the premises of the
petitioner and directed to produce books of accounts and other documents. Upon
non-availability of same, the petitioner sought 3 days-time to produce the
same. Ostensibly the Revenue ordered temporary sealing of the premises and next
day the premises were completely sealed as per section 67 of the CGST Act
(power of inspection, search and seizure). Grieved petitioner preferred writ
before the Hon’ble High Court. Respondent contested that till date they have
neither co-operated nor produced books of accounts or any other material.
Consequently premises were rightly sealed in light of the said section. Upon
co-operation from petitioner same can be de-sealed.

Held

The Hon’ble Court held that on plain reading
of the statute, especially section 67(4), which merely authorises the concerned
officials to search the premises and if resistance is offered, break-open the
lock or any other almirah, electrical device, box, etc. containing books and
documents. The complete sealing of the premises however in the opinion of the
Court is per se illegal. Hence, allowing the writ petition a direction was
given to remove the seal forthwith within next 12 hours of the order and
handover the premises to the petitioner.

22. 2018 [19] G.S.T.L. 582
(Cal.) Sanjay Kumar Bhuwalka vs. Union of India dated 9^th July, 2018

Evasion of GST led to arrest, bail was granted
to accused assessee.

Facts

The Assessees were arrested due to
involvement in business of generating and selling of fake tax invoices to
various entities without supplying the underlying goods or services and
facilitating irregular availment and utilization of input tax credit by such
entities to whom such fake invoices were issued and the amount involved was
substantial amounting to several crore. Summons were issued to them u/s. 70
read with 174 (2) of the CGST Act wherein it was admitted in their statement
that they were looking after and controlling the business activities of the
companies. Upon reasonable belief the petitioners were arrested by the Revenue
officials. Petitioners then applied for the bail, challenging the legality of
arrest contesting that reasonable belief was not properly dealt by the
arresting officer.

Held

The Hon’ble Court held that while granting
bail, the Court has to keep in mind the nature of the accusations, the nature
of evidence in support thereof the severity of the punishment which conviction
will entail the character of the accused, reasonable apprehension of the
witnesses being tampered with, the large interest of the public/ state and
other similar considerations are required to be taken into consideration. Bearing
in mind the evidence collected so far by the Investigating Agency and in
consideration of the compounding nature of the offence, the Court released the
petitioners on bail on furnishing bond of the sum of Rs.50,00,000/- each on
condition to deposit Rs.39 crore.

23. 2018 [19] G.S.T.L. 590
(All.) Maa Vindhyavasini Tobacco Pvt. Ltd. vs. State of U.P
dated 5^th April, 2018

Seizure of goods and vehicle for the reason
of writing vehicle number by hand held not sustainable.

Facts

Petitioner’s goods were seized on the ground
that goods started journey one week after the date of the invoice and details
with regard to the vehicle were not mentioned in the E-way Bill though they
were mentioned subsequently after downloading the E-way Bill in hand writing.
Doubting the transaction because of hand written details of the vehicle number,
the authorities seized the goods as well as the vehicle.

Held

The Hon’ble Court while deciding the issue
found no irregularity in the transaction in question for the reason that till
downloading of E-way Bill the transport company and the vehicle were not
engaged. They were engaged subsequently,
so the details were mentioned later by hand. Neither details of transport
company nor the vehicle were necessary while downloading E-way Bill. Thus the Court was of the view
that the petitioner, a registered dealer had issued invoices clearly indicated
the charge of IGST and Central Cess so there seemed no irregularity in the
transaction in question it was ordered to release the goods and the vehicle.

24. [2019-TIOL-07-AAR-GST]
GGL Hotel & Resort Company Ltd dated 8^th January, 2019

Input tax credit is not eligible on lease
rental paid for the leasehold land used for furtherance of business.

Facts

Applicant sought a ruling as to whether Input
Tax Credit was available for the lease rent paid during pre-operative period
for the leasehold land on which the resort was being constructed to be used for
furtherance of business when the same was capitalised and treated as capital
expenditure.

Held

The Authority ruled that the cost of
constructing the immovable asset included the lease rental paid for right to
use the land on which the asset was being built. Thus being an integral part of
the cost of the immovable property, the lease rental paid for the service of
right to use the land is a supply for construction of the said property.
Construction of the hotel etc. is impossible unless the applicant enjoys
uninterrupted right to use the land. Construction of the immovable property is
therefore, critically dependent on the supply of the leasing service. The
leasing service for right to use the land is therefore a supply for
construction of the immovable property. The disallowance of input tax credit
u/s. 17(5)(d) of the GST Act, is not limited to the civil structure being
constructed but it extends to the immovable property in general which includes
the supplies received for retaining the right to use and develop the land.
Input tax credit is therefore not admissible.

25. 2018 (19) G.S.T.L 65
(N.A.P.A.) Sukhbir Rohilla vs. Pyramid Infratech Pvt. Ltd.
dated 18^th September, 2018

Imposition of penalty on Builder for not
passing GST ITC benefit to customers/ home buyers.

Facts

Complaint of profiteering was filed by home
buyers against the respondent in respect of its affordable housing projects,
complaining that the respondent had not passed on the benefit of ITC to the
buyers of the flats in contravention of the provision of section 171 (1) of the
CGST Act, 2017.

Held

The authority of National Anti-profiteering
after investigating the complaint held that though rationalisation of tax not
resulted in reduction in tax rate, benefit of ITC ought to have been extended
to all goods and services utilised by any builder which was not available in
pre-GST era. Section 171 of the CGST Act, 2017 not only deals with passing on
benefit of reduction in rate of tax but also deals with passing on the benefit
of ITC. Thus, it is evident that respondent had contravened the said provision
and therefore ordered to reduce the price to be realised from the buyers of the
flats commensurate with the benefit of ITC received by him and held liable for
penalty also.

26.
[2019-TIOL-02-NAA-GST] Shri Surya Prakash Loonker, Director General
Anti-Profiteering, CBIC vs. Excel Rasayan Pvt. Ltd.
dated 16^th January, 2019

Increase in the base price, post reduction in
the GST rate is a clear case of
profiteering.

Facts

Allegation was that the respondent did not
pass on the benefit of reduction in the GST rate applicable to detergents from
28% to 18% w.e.f 15.11.2017 but increased the base prices so that there was no
reduction in the prices to the recipients. The Respondent submitted that he was
availing SSI exemption under Central Excise and charging VAT @12.5% on the base
price that on introduction of GST, 28% tax was levied and since this disturbed
his pricing pattern, he had reduced the base price and absorbed the burden and
when the GST rate was reduced from 28% to 18% w.e.f. 15.11.2017, though the
base price was increased, it was much less than the base price in the pre-GST
era.

Held

The National Anti-profiteering Authority
noted that the decision not to increase MRPs when tax rates were increased on
account of implementation of GST was a business call taken by the assessee and
therefore he could not claim any concession on this ground. Benefits arising
due to the GST rate reduction could not be denied to the consumers just because
in the earlier scenario MRPs was not changed to extend some extra benefit to
the consumers. The Respondent admittedly did not pass on the benefit of tax
reduction since the base prices of the products were increased to maintain the
same selling prices which were existing before the reduction of rate of tax.
Profiteering was thus proved. The authority thus directed to reduce the sale
prices of the product immediately commensurate with the reduction in rate of
tax and the profiteered amount was ordered to be deposited in the Consumer
Welfare Fund along with interest. Further notice was issued asking the
Respondent to explain that why penalty should not be imposed under Rule 133 of
the CGST Rules 2017 for the offense committed u/s. 122 of the Act.

27. 2018 (19) G.S.T.L 84
(N.A.P.A.) Ankur Jain and Ors. vs. Kunj Lub Marketing Pvt. Ltd
dated 8^th October, 2018

Imposition of penalty on the supplier on
denial of passing the benefit of ITC to his customers.

Facts

The applicant filed complaint against Kunj
Lub Marketing Pvt. Ltd alleging that it had not passed the benefit of reduction
in the rate of tax by way of reduced prices and had instead increased the base
price of the product by Rs.0.24 per pack. On further scrutiny it was found that
the total amount of profiteering was determined at Rs.90,778/. Thus, on
allegation of contravention of section 171 (1) of the CGST Act, 2017
investigation was initiated.

Held

The authority of National Anti-Profiteering
after investigating the complaint held that according to the facts of the case
it was seen that the respondent was supposed to not only pass on the benefit of
ITC to his customers but was also supposed to pass the benefit of reduced base
prices on the reduction of the rate of tax charged on the product supplied.
However instead it had resorted to profiteering and charged higher prices for
the product sold. Respondent’s contention that it had reduced the MRP of one of
the products, such liberty to arbitrarily reduce the price of one product and
not of others was not available. Thus, it was held that the respondent violated
the provisions of Anti-Profiteering and held liable to penalty and interest on
the amount of profiteering.

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

7. Sankalp Recreation Private Limited vs. Union of India and Ors. (2019) 418 ITR 673 (SC)

Purchase of immovable property by Central Government – In terms of an
auction where the Chief Commissioner reserves the right to reject any tender
form, including the highest bid, without assigning any reason – Cancellation
without reasons is not per se invalid especially when the Commissioner
had indicated the reasons for doing so to CBDT – So long as the auction process
is conducted in a bona fide manner and in public interest, a judicial
hands-off is mandated

A property admeasuring 1,053.5 square meters bearing Plot No. 27/A, Survey
No. 8, 9, 10, opposite Santacruz Police Station at the junction of Juhu Tara
Road and Linking Road, Santacruz (West), Mumbai 400054, although acquired by
the Union of India in 1994 u/s 269UD(1) of the Act, could only be sold in 2018.
Despite various attempts starting in 1994, several auctions conducted qua
the said property failed. Even an auction dated 27^th March, 2017
with a reserve price fixed of Rs. 32.11 crores failed to elicit a response from
any buyer. This being the case, Sankalp Recreation Pvt. Ltd., the appellant,
then made an offer to the Central Board of Direct Taxes to purchase the
aforesaid property for a sum of Rs. 32.11 crores. But this offer could not be
accepted because the CBDT stated that accepting such an offer by a private
treaty would be beyond their jurisdiction.

In the meanwhile, a fresh valuation report of the aforesaid property was
called for which was submitted on 4^th September, 2017 valuing the
property at Rs. 29,91,35,000. Pursuant to this, a brochure / catalogue was
circulated sometime in September, 2017.

The reserve price was fixed at Rs. 30 crores and the appellant was again
the sole bidder, offering Rs. 30.21 crores, or Rs. 21 lakhs above the reserve
price.In a letter dated 26^th September, 2017, the CCIT-2 sent a
report to the CBDT stating that although the bid of Rs. 30.21 crores offered by
the appellant was above the reserve price, it was less than the sum of Rs.
32.11 crores that had been offered by the same bidder earlier. In view of this,
a clarification was sought as to the future course of action.

On 20^th November, 2017, the CBDT directed that the auction
proceedings be kept in abeyance for the time being and appointed a valuer from
outside the State, viz., Mr. P. Ramaraj, District Valuation Officer, Chennai.
This valuer submitted a report on 23^rd February, 2018 valuing the
property at Rs. 31.07 crores because on 23^rd January, 2018 a cap had
been introduced in the TDR which would be available by way of FSI. Short of
this cap, the Chennai valuer valued the property at Rs. 36,51,59,000. Based on
this report, the property was put up for auction yet again.

Meanwhile, through a letter dated 4^th May, 2018, the earlier
auction which had yielded the sum of Rs. 30.21 crores from the appellant, was
treated as cancelled. The said letter specifically called upon the appellant to
participate in the upcoming auction to be conducted shortly.

The appellant, by a communication dated 12^th April, 2018,
referred to the return of the Demand Drafts of Rs. 7.5 crores and Rs. 5 lakhs
towards earnest money and caution money stating that the burden of interest
liability was continuing. The appellant made it clear that he would be
participating in a future auction and he was not exiting the auction
proceedings.

Pursuant to the valuation report, a notice for a public auction was
published on 10^th May, 2018 with the reserve price this time fixed
at Rs. 31.10 crores. On 17^th May, 2018 the Income tax Department
wrote to the appellant in which it intimated the fact that a fresh auction was
to be conducted on 30^thMay, 2018 and that the appellant should
participate in the same.

Meanwhile, the appellant, being aggrieved by the cancellation of the
auction process in which he was the highest bidder at Rs. 30.21 crores, filed a
writ petition in the High Court of Judicature at Bombay on 21^stMay,
2018. Two days later, on the 23^rd, the High Court permitted
Respondent Nos. 2 and 3 to conduct a fresh auction subject to refraining from
confirmation of the sale.

On 30^th May, 2018 the fresh auction was conducted and another
person (auction purchaser) was the sole bidder, with the bid being equal to the
reserve price of Rs. 31.10 crores.

Ultimately, by the impugned judgment dated 27^th July, 2018,
finding no infirmity in the auction process and finding that the cancellation,
though without reason, was not arbitrary, the High Court dismissed the writ
petition filed.

Before the Supreme Court, the learned counsel appearing on behalf of the
appellant urged that the cancellation being without reason was per se invalid in law and, therefore, ought to
have been set aside by the High Court. He also argued that the process of
conducting yet another auction after so many auctions had failed was itself
arbitrary and that as he was the highest bidder at Rs. 30.21 crores, that is,
Rs. 21 lakhs above the reserve price, the auction sale ought to have been
confirmed in his favour. Further, after citing a number of judgments, he made a
‘with-prejudice’ offer stating that he was willing to abide by the earlier
offer made by him of Rs. 32.11 crores.

The learned senior counsel appearing for auction purchaser urged that
there was no infirmity whatsoever in the
entire process. He highlighted the fact that under Clause 16 of the
brochure / catalogue, the Chief Commissioner reserved the right to reject any
tender form, including the highest bid, without assigning any reason. He, inter
alia, also made a ‘with-prejudice’ offer that his client would pay a sum of
Rs. 35 crores with an adjustment qua the earnest money that had been
deposited and lying with the Union of India, with a reasonable rate of interest
thereon.

The Supreme Court, referring to its earlier judgments which held that so
long as the auction process is conducted in a bona fide manner and in
the public interest a judicial hands-off is mandated, concluded that the
reasons disclosed both in the report dated 26^th September, 2017 and
the letter dated 6^th April, 2018 from the Government of India,
Ministry of Finance, to the Chief Commissioner of Income Tax made it clear that
there was no arbitrariness that was discernible in the entire auction process.
This being the case, the appeal had to be dismissed. The Supreme Court further
held that the offer made by the auction purchaser was very fair and directed
that from the figure of Rs. 35 crores, which would be paid within a period of
12 weeks directly to the Union treasury, a sum equivalent to interest of 9% on
the amount of Rs. 7.78 crores that was lying with the Union, calculated from
the date on which it was deposited with the Union till the date of the order,
be subtracted and the net figure be handed over as aforesaid.

8. Genpact India Private Limited vs. DCIT (2014) 419 ITR 440 (SC)

Appealable Orders – The contingencies detailed in (ii) and (iii) of section 246A(1)(a) arise
out of assessment proceedings u/s 143 or u/s 144 of the Act but the first
contingency is a standalone postulate and is not dependent purely on the
assessment proceedings either u/s 143 or u/s 144 of the Act – The expression
‘denies his liability to be assessed’ is quite comprehensive to take within its
fold every case where the assessee denies his liability to be assessed under
the Act

Alternative remedy – The High Court must not interfere if there is an
adequate, efficacious, alternative remedy available to the petitioner and he
has approached the High Court without availing the same unless he has made out
an exceptional case warranting such interference, or there exist sufficient
grounds to invoke the extraordinary jurisdiction under Article 226 – It cannot
be laid down as a proposition of law that once a petition is admitted, it could
never be dismissed on the ground of alternative remedy

Out of the opening share capital of 25,68,700 shares held by its sole
shareholder and holding company Genpact India Investment, Mauritius, the
appellant bought back 2,50,000 shares in May, 2013 at the rate of Rs. 32,000
per share for a total consideration of Rs. 800 crores.

On 10^th May, 2013, Chapter XIIDA consisting of sections
115QA, 115QB and 115QC was inserted in the Income-tax Act, 1961 (hereinafter
referred to as the Act) by the Finance Act, 2013 which came into effect from 1^stJune, 2013.

Some time later, on 10^th September, 2013, a scheme for
arrangement was approved by the High Court of Delhi in Company Petition No. 349
of 2013. Pursuant thereto, the appellant bought back another tranche of
7,50,000 shares at the rate of Rs. 35,000 per share for a total consideration
of Rs. 2,625 crores from Genpact India Investment, Mauritius.

In the income tax return for A.Y. 2014-15 filed on 28^th
November, 2014, the appellant stated that ‘Details of tax on distributed
profits of domestic companies and its payment’ were given in ‘Schedule DDT’
where the details of the aforesaid transactions were given but the liability to
pay any tax was denied.

A notice u/s 143(2) was issued to the appellant on 3^rdSeptember,
2015 seeking further explanation, pursuant to which requisite details were
furnished.

Vide his letter dated 28^th December, 2016, the assessee
submitted that the buyback of shares had been done in pursuance of the ‘scheme
of arrangement’ u/s 391 of the Companies Act, 1956 approved by the Hon’ble High
Court of Delhi and in such a manner that the same was not a buyback in terms of
section 115QA of the Act.

The matter was thereafter considered and an
assessment order was passed by the first respondent on 31^stDecember,
2016. As many as ten additions were made by the first respondent, one of them
being in respect of liability u/s 115QA of the Act. According to the first
respondent, section 115QA was introduced to provide that where shares are
bought back at a price higher than the price at which those shares were issued,
then the balance amount would be treated as distribution of income to the
shareholder and tax @20% would be payable by the company. Section 115QA was
applicable only to domestic unlisted companies.

Insofar as nine additions made by the first respondent were concerned,
an appeal was filed by the appellant. The appeal was decided in his favour but
a further challenge at the instance of the Revenue was under consideration.

As regards the issue concerning tax u/s 115QA, the appellant filed a
Writ Petition (Civil) No. 686 of 2017 in the High Court submitting, inter
alia, that the order passed by the first respondent was without
jurisdiction as buyback of shares in the instant case was in pursuance of the
‘scheme of arrangement’ approved by the High Court.

The High Court disposed of the petition with the following directions:

(i) The Court declines to entertain this writ petition under Article 226 of the Constitution against the
impugned demand raised by the Revenue by way of the impugned assessment order
u/s 115QA of the Act against the assessee;

(ii) The assessee is granted an opportunity to file
an appeal u/s 246A of the Act before the CIT(A) to challenge the impugned
assessment order only insofar as it creates a demand u/s 115QA;

(iii) If such an appeal is filed within ten days
from today, it will be considered on its own merits and a reasoned order
disposing of the appeal will be passed by the CIT(A) on all issues raised by
the assessee, not limited to the issues raised in the present petition as well
as on the response thereto by the Revenue in accordance with law;

(iv) The reasoned order shall be passed by the
CIT(A) not later than 31^st October, 2019. It will be communicated to
the petitioner within ten days thereafter. For a period of two weeks after the
date of such communication of order, the demand under the impugned assessment
order, if it is affirmed by the CIT(A) in appeal, will not be enforced against
the assessee;

(v) The
Court places on record the statement of the Revenue that it will not raise any
objection before the CIT(A) as to the maintainability of such an appeal and as
to the appeal being barred by limitation. The Court also takes on record the
statement of the Revenue that it will not enforce the demand in terms of the
impugned assessment order till the disposal of the above appeal. All of the
above is subject to the assessee filing the appeal before the CIT(A) within ten
days from today;

(vi) It is made clear that this Court has not
expressed any view whatsoever on the contentions of either party on the merits
of the case.

A challenge to the aforesaid view taken by the High
Court was raised by way of a Special Leave Petition No. 20728 of 2019 filed in
the Court on 26^th August, 2019. Within the time limit of ten days as
afforded by the High Court, an appeal was also preferred by the appellant
‘without prejudice’ on 30^th August,2019 against the ‘demand raised /
order passed u/s 115QA’. The aforesaid SLP came up before the Supreme Court on
6^th September, 2019, whereafter the matter was adjourned on a few
occasions and then taken up for final disposal.

The Supreme Court after going through the appeal
provisions observed that one of the key expressions appearing in section
246(1)(a) as well as in section 246A(1)(a) is ‘where the assessee denies his
liability to be assessed under this Act.’

It noted that a similar expression occurring in section 30 of the
Income-tax Act, 1922 came up for consideration before it in Commissioner
of Income Tax, U.P., Lucknow vs. Kanpur Coal Syndicate (1964) 53 ITR 225,
wherein it was concluded that the expression ‘denial of liability’ is
comprehensive enough to take in not only the total denial of liability but also
the liability to tax under particular circumstances.

The Court noted that the submission advanced on behalf of the appellant,
however, was that ‘denial of the assessee’s liability to be assessed’ in
section 246A is confined to his liability to be assessed u/s 143(3) and the
same has nothing to do with the liability to pay tax u/s 115QA. According to
the appellant, tax payable in respect of buyback of shares u/s 115QA is not a
tax payable on ‘total income’.

The Supreme Court considered the kinds of orders or situations that are
referred to in section 246(1)(a) of the Act, which are:

(i) An order against the assessee, where the assessee denies his
liability to be assessed under this Act, or

(ii) An intimation under sub-section (1) or sub-section (1B) of section
143 where the assessee objects to the making of adjustments, or

(iii) Any order of assessment under sub-section (3) of section 143 or
section 144, where the assessee objects:

to the amount of income assessed, or

to the amount of tax determined, or

to the amount of loss computed, or

to the status under which he is assessed.

According to the Supreme Court, the contingencies detailed in (ii) and
(iii) hereinabove arise out of assessment proceedings u/s 143 or section 144 of
the Act but the first contingency is a standalone postulate and is not
dependent purely on the assessment proceedings either u/s 143 or u/s 144 of the
Act. The expression ‘denies his liability to be assessed’ as held by this court
in Kanpur Coal Syndicate was quite comprehensive to take within
its fold every case where the assessee denies his liability to be assessed
under the Act.

The Supreme Court held that section 115QA stipulates that in case of
buyback of shares referred to in the provisions of the said section, the
company shall be liable to pay additional income tax at the rate of 20% on the
distributed income. Any determination in that behalf, be it regarding
quantification of the liability or the question whether such company is liable
or not, would be matters coming within the ambit of the first postulate
referred to hereinabove. Similar is the situation with respect to provisions of
section 246A(1)(a) where again, out of certain situations contemplated, one of
them is ‘an order against the assessee where the assessee denies his liability
to be assessed under this Act’. The computation and extent of liability is
determined under the provisions of section 115QA.Such determination under the
Act would squarely get covered under the said expression. There was no reason
why the scope of such expression be restricted and confined to issues arising
out of or touching upon assessment proceedings either u/s 143 or u/s 144.

The Court therefore rejected the submissions advanced by the appellant
and held that an appeal would be maintainable against the determination of
liability u/s 115QA of the Act. It thereafter dealt with the question whether
the High Court was justified in refusing to entertain the writ petition because
of the availability of adequate appellate remedy. According to the Supreme
Court, the law on the point was very clear and was summarised in Commissioner
of Income Tax and Ors. vs. Chhabil Dass Agarwal (2014) 1 SCC 603 as
under:

‘…It is settled law that non-entertainment of petitions under writ
jurisdiction by the High Court when an efficacious alternative remedy is
available is a Rule of self-imposed limitation. It is essentially a Rule of
policy, convenience and discretion rather than a Rule of law. Undoubtedly, it
is within the discretion of the High Court to grant relief under Article 226
despite the existence of an alternative remedy. However, the High Court must
not interfere if there is an adequate, efficacious, alternative remedy
available to the petitioner and he has approached the High Court without
availing the same unless he has made out an exceptional case warranting such
interference, or there exist sufficient grounds to invoke the extraordinary
jurisdiction under Article 226…’

The Supreme Court, referring to its various other
decisions, observed that while it can be said that it has recognised some
exceptions to the Rule of alternative remedy, i.e., where the statutory
authority has not acted in accordance with the provisions of the enactment in
question, or in defiance of the fundamental principles of judicial procedure,
or has resorted to invoke the provisions which are repealed, or when an order
has been passed in total violation of the principles of natural justice.
However, the Court further stated that the proposition laid down by it in many
cases that the High Court will not entertain a petition under Article 226 of
the Constitution if an effective alternative remedy is available to
the aggrieved person or the statute under which the action complained of has
been taken, itself contains a mechanism for redressal of grievance still holds
the field. Therefore, when a statutory forum is created by law for redressal of
grievances, a writ petition should not be entertained ignoring the statutory
dispensation.

Therefore, the Supreme Court did not find any infirmity in the approach
adopted by the High Court in refusing to entertain the writ petition. The
submission that once the threshold was crossed (i.e., the petition is
admitted)despite the preliminary objection being raised, the High Court ought
not to have considered the issue regarding alternate remedy may not be correct.
The first order dated 25^th January, 2017 passed by the High Court
did record the preliminary objection but was prima facie of the view
that the transactions defined in section 115QA were initially confined only to
those covered by section 77A of the Companies Act. Therefore, without rejecting
the preliminary objection, notice was issued in the matter. The subsequent
order undoubtedly made the earlier interim order absolute. However, the
preliminary objection having not been dealt with and disposed of, the matter
was still at large.

In State of U.P. vs. U.P. Rajya Khanij Vikas Nigam Sangharsh
Samiti and Ors. (2008) 12 SCC 675 the Supreme Court dealt with an issue
whether, after admission, the writ petition could not be dismissed on the
ground of alternate remedy and held that it cannot be laid down as a
proposition of law that once a petition is admitted, it could never be
dismissed on the ground of alternative remedy.

BCAJ Admin

FROM PUBLISHED ACCOUNTS

ILLUSTRATION OF AUDIT REPORT WITH ‘DISCLAIMER OF
OPINION’ AND ‘EMPHASIS OF MATTER’

RELIANCE INFRASTRUCTURE LTD. (31^ST MARCH, 2019)

From auditors’ report

Basis for Disclaimer of Opinion

We refer to Note 40 to the standalone financial statements which
describes that the Company has investments in and has various amounts
recoverable from a party aggregating Rs. 7,082.96 crores (net of provision of
Rs. 3,972.17 crores) (Rs. 10,936.62 crores as at 31^st March, 2018,
net of provision of Rs. 2,697.17 crores) comprising inter-corporate deposits
including accrued interest / investments / receivables and advances. In
addition, the Company has provided corporate guarantees during the year
aggregating to Rs. 1,775 crores (net of corporate guarantees aggregating to Rs.
5,010.31 crores cancelled subsequent to the balance sheet date) in favour of
the aforesaid party towards borrowings of the aforesaid party from various
companies including certain related parties of the Company.

According to the management of the Company, these amounts have been
mainly given for general corporate purposes and towards funding of working
capital requirements of the party which has been engaged in providing
Engineering, Procurement and Construction (EPC) services primarily to the
Company and its subsidiaries, its associates and its joint venture. We were
unable to obtain sufficient appropriate audit evidence about the relationship
of the aforementioned party with the Company, the underlying commercial
rationale / purpose for such transactions relative to the size and scale of the
business activities with such party and the recoverability of these amounts.
Accordingly, we were unable to determine the consequential implications arising
therefrom and whether any adjustments, restatement, disclosure or compliances
are necessary in respect of these transactions, investments and recoverable
amounts in the standalone financial statements of the Company.

Material uncertainty related to going concern

We draw attention to Note 41 to the standalone financial statements. The
factors, more fully described in the aforesaid Note, relating to losses
incurred during the year and certain loans for which the Company is guarantor,
indicate that a material uncertainty exists that may cast significant doubt on
the Company’s ability to continue as a going concern.

Emphasis of matter

(a) We draw attention to Note 38 to the standalone financial
statements regarding the Scheme of Amalgamation (the Scheme) between Reliance
Infraprojects Limited (wholly owned subsidiary of the Company) and the Company
sanctioned by the Hon’ble High Court of Judicature at Bombay vide its order
dated 30^th March, 2011, wherein the Company, as determined by the
Board of Directors, is permitted to adjust foreign exchange gain credited to
the standalone statement of profit and loss by a corresponding credit to
general reserve which overrides the relevant provisions of Indian Accounting
Standard 1 Presentation of financial statements. Pursuant to the Scheme,
foreign exchange gain of Rs. 192.24 crores for the year ended 31^stMarch,
2019 has been credited to the standalone statement of profit and loss and an
equivalent amount has been transferred to the general reserve.

(b) We draw attention to Note 39 to the
standalone financial statements, wherein pursuant to the Scheme of Amalgamation
of Reliance Cement Works Private Limited with Western Region Transmission
(Maharashtra) Private Limited (WRTM), wholly owned subsidiary of the Company,
which was subsequently amalgamated with the Company with effect from 1^stApril,
2013, WRTM or its successor(s) is permitted to offset any extraordinary /
exceptional items, as determined by the Board of Directors, debited to the
statement of profit and loss by a corresponding withdrawal from General
Reserve, which overrides the relevant provisions of Indian Accounting Standard
1 Presentation of financial statements. The Board of Directors of the
Company in terms of the aforesaid Scheme determined an amount of Rs. 6,616.02
crores for the year ended 31^stMarch, 2019 as exceptional items
comprising various financial assets amounting to Rs. 5,354.88 crores and loss
on sale of shares of Reliance Power Limited (RPower), an associate company,
pursuant to invocation of a pledge of Rs. 1,261.14 crores. The aforesaid amount
of Rs. 6,616.02 crores for the year ended 31^st March, 2019 has been
debited to the standalone statement of profit and loss and an equivalent amount
has been withdrawn from General Reserve.

Had the accounting treatment described in paragraphs (a) and (b) above
not been followed, loss before tax for the year ended 31^st March,
2019 would have been higher by Rs. 6,423.78 crores and General Reserve would
have been higher by an equivalent amount.

(c) We draw attention to Note 7(a) to the
standalone financial statements which describes the impairment assessment
performed by the Company in respect of its investment of Rs. 5,231.18 crores
and amounts recoverable aggregating to Rs. 1,219.63 crores in RPower as at 31^stMarch, 2019 in accordance with Indian Accounting Standard 36 Impairment
of assets / Indian Accounting Standard 109 Financial instruments.
This assessment involves significant management judgment and estimates on the
valuation methodology and various assumptions used in determination of value in
use / fair value by independent valuation experts / management as more fully
described in the aforesaid note. Based on management’s assessment and the
independent valuation reports, no impairment is considered necessary on the
investment and the recoverable amounts.

Our opinion is not modified in respect of the above matters.

Auditor’s Responsibilities for the Audit of the Standalone Financial
Statements

Our responsibility is to conduct an audit of the standalone financial
statements in accordance with Standards on Auditing and to issue an auditor’s
report. However, because of the matter described in the Basis for Disclaimer of
Opinion section of our report, we were not able to obtain sufficient
appropriate audit evidence to provide a basis for an audit opinion on these
standalone financial statements.

We are independent of the Company in accordance with the Code of Ethics
and provisions of the Act that are relevant to our audit of the standalone
financial statements in India under the Act, and we have fulfilled our other
ethical responsibilities in accordance with the Code of Ethics and the
requirements under the Act.

Report on other legal and regulatory requirements

(1) As required by the
Companies (Auditors’ Report) Order, 2016 (the Order) issued by the Central
Government in terms of section 143 (11) of the Act, and except for the possible
effects, of the matter described in the Basis for Disclaimer of Opinion
section, we give in the ‘Annexure A’ a statement on the matters specified in
paragraphs 3 and 4 of the Order, to the extent applicable.

(2) (A) As required by
section 143(3) of the Act we report that:

(i) As described in the
Basis for Disclaimer of Opinion section, we were unable to obtain all the
information and explanations which to the best of our knowledge and belief were
necessary for the purposes of our audit.

(ii) Due to the effects /
possible effects of the matter described in the Basis for Disclaimer of Opinion
section, we are unable to state whether proper books of accounts as required by
law have been kept by the Company so far as it appears from our examination of
those books.

(iii) The
standalone balance sheet, the standalone statement of profit and loss
(including other comprehensive income), the standalone statement of changes in
equity and the standalone statement of cash flows dealt with by this report are
in agreement with the books of accounts.

(iv) Due to the effects /
possible effects of the matter described in the Basis for Disclaimer of Opinion
section, we are unable to state whether the financial statements comply with
the Indian Accounting Standards specified under section 133 of the Act.

(v) The matter described in
the Basis for Disclaimer of Opinion section and going concern matter described
in the material uncertainty related to going concern may have an adverse effect
on the functioning of the Company.

(vi) On the basis of the
written representations received from the directors as on 31^st
March, 2019 taken on record by the Board of Directors, none of the directors is
disqualified as on 31^st March, 2019 from being appointed as a
director in terms of section 164(2) of the Act.

(vii) The reservation relating
to maintenance of accounts and other matters connected therewith are as stated
in the Basis for Disclaimer Opinion section.

(viii) With respect to the
adequacy of the internal financial controls with reference to standalone
financial statements of the Company and the operating effectiveness of such
controls, refer to our separate Report in ‘Annexure B’.

(B) With respect to the other
matters to be included in the Auditors’ Report in accordance with Rule 11 of
the Companies (Audit and Auditors) Rules, 2014, in our opinion and to the best
of our information and according to the explanations given to us:

(i) Except for the possible
effects of the matter described in the Basis for Disclaimer of Opinion section,
the Company has disclosed the impact of pending litigations as at 31^st
March, 2019 on its financial position in its standalone financial statements –
Refer Note 32 to the standalone financial statements.

(ii) Except for the possible
effects of the matter described in the Basis for Disclaimer of Opinion section,
the Company did not have any long-term contracts including derivative contracts
for which there were any material foreseeable losses.

(iii) Other than for dividend
amounting to Rs. 0.05 crore pertaining to the financial year 2010-2011 which
could not be transferred on account of pendency of various investor legal
cases, there has been no delay in transferring amounts, required to be
transferred, to the Investor Education and Protection Fund by the Company.

(C) With respect to the
matter to be included in the Auditors’ Report under section 197(16) of the Act:
In our opinion and according to the information and explanations given to us,
the remuneration paid by the Company to its directors during the current year
is in accordance with the provisions of section 197 of the Act. The
remuneration paid to any director is not in excess of the limit laid down under
section 197 of the Act. The Ministry of Corporate Affairs has not prescribed
other details under section 197(16) of the Act which are required to be
commented upon by us.

From Notes to Financial Statements

7(a) The Company has an
investment of Rs. 5,231.18 crores as at 31^st March, 2019 which
represents 33.10% shareholding in Reliance Power Limited (RPower), an associate
company. Further, the Company also has net recoverable amounts aggregating to
Rs. 1,219.63 crores from RPower as at 31^stMarch, 2019. RPower has
incurred a net loss (after impairment of certain assets) of Rs. 2,951.82 crores
for the year ended 31^st March, 2019 and its current liabilities
exceeded its current assets by Rs. 12,249.17 crores as at that date. Management
has performed an impairment assessment of its investment in RPower as required
by Indian Accounting Standard 36 Impairment of assets / Indian
Accounting Standard 109 Financial instruments, by considering inter
alia the valuations of the underlying subsidiaries of RPower which are
based on their value in use (considering discounted cash flows) and valuations
of other assets of RPower / its subsidiaries based on their fair values, which
have been determined by external valuation experts and / or management’s
internal evaluation.

The determination of the value in use / fair value involves significant
management judgement and estimates on the various assumptions including
relating to growth rates, discount rates, terminal value, time that may be
required to identify buyers, negotiation discounts, etc. Further, management
believes that the above assessment based on value in use / fair value
appropriately reflects the recoverable amount of the investment as the current
market price / valuation of RPower does not reflect the fundamentals of the
business and is an aberration. Based on management’s assessment and the independent
valuation reports, no impairment is considered necessary on this investment and
recoverable amounts.

38. Scheme of amalgamation of
Reliance Infraprojects Limited (RInfl) with the Company

The Hon’ble High Court of Judicature of Bombay had sanctioned the Scheme
of Amalgamation of Reliance Infraprojects Limited (RInfl) with the Company on
30^th March, 2011 with the appointed date being 1^st April,
2010. As per the clause 2.3.7 of the Scheme, the Company, as determined by its
Board of Directors, is permitted to adjust foreign exchange / hedging /
derivative contract losses / gains debited / credited in the Statement of
Profit and Loss by a corresponding withdrawal from or credit to General
Reserve.

Pursuant to the option exercised under the above Scheme, net foreign
exchange gain of Rs. 192.24 crores for the year ended 31^stMarch,
2019 (net loss of Rs. 11.68 crore for the year ended 31^st March,
2018) has been credited / debited to the Statement of Profit and Loss and an
equivalent amount has been transferred to General Reserve. The Company has been
legally advised that crediting and debiting of the said amount in the Statement
of Profit and Loss is in accordance with Schedule III to the Act. Had such
transfer not been done, the Loss before tax for the year ended 31^st
March, 2019 would have been lower by Rs. 192.24 crores and General Reserve
would have been lower by Rs. 192.24 crores. The treatment prescribed under the
Scheme overrides the relevant provisions of Ind AS 1: Presentation of
financial statements.

39. Exceptional items

Rs. crores

Particulars

Year ended 31^st
March, 2019

Year ended 31^st
March, 2018

Write off /
loss(profit) on sale of investments

2,446.61

(261.58)

Provision /
write-off / loss on sale of loans given and w/off of interest accrued thereon

8,410.99

190.39

Loss on
invocation of pledged shares

1,261.14

–

Loss on
transfer of Western Region System Strengthening Scheme (WRSS) – Transmission
Undertaking

–

198.50

Provision for
diminution in value of investments

678.62

–

Expenses /
(Income)

12,797.36

127.31

Less:
Withdrawn from General Reserve

6,616.02

411.50

Exceptional
items (net)

6,181.34

(284.19)

In terms of the Scheme of Amalgamation of Reliance
Cement Works Private Limited with Western Region Transmission (Maharashtra)
Private Limited (WRTM), wholly owned subsidiary of the Company, which was
subsequently amalgamated with the Company w.e.f. 1^stApril, 2013,
during the year ended 31^st March, 2019 an amount of Rs. 6,616.02
crores (31^stMarch, 2018 – Rs. 411.50 crores) has been withdrawn
from General Reserve and credited to the Statement of Profit and Loss against
the exceptional items of Rs. 12,797.36 crores (Rs. 127.31 crores for the year
ended 31^stMarch, 2018) as stated above which was debited to the
Statement of Profit and Loss. Had such withdrawal not been done, the loss
before tax for the year ended 31^stMarch, 2019 would have been
higher by Rs. 6,616.02 crores (31^stMarch, 2018 – Rs. 411.50 crores) and General Reserve would have been
higher by an equivalent amount. The treatment prescribed under the Scheme
overrides the relevant provisions of Ind AS 1 Presentation of financial
statements.

40. The Reliance Group of
companies, of which the Company is a part, supported an independent company in
which the Company holds less than 2% of equity shares (EPC Company) to inter
alia undertake contracts and assignments for a large number of varied
projects in the fields of power (thermal, hydro and nuclear), roads, cement,
telecom, metro rail, etc. which were proposed and / or under development by the
Group. To this end, along with other companies of the Group, the Company funded
EPC Company by way of EPC advances, subscription to debentures and preference
shares and inter-corporate deposits. The aggregate funding provided by the
company as on 31^stMarch, 2019 was Rs. 7,082,96 crores (previous
year Rs. 10,936.62 crores) net of provision of Rs. 3,972.17 crores (Rs.
2,697.17 crores). In addition, the Company has provided corporate guarantees
during the year aggregating (net of subsequent cancellation) to Rs. 1,775
crores.

The activities of EPC Company have been impacted by the reduced project
activities of the companies of the Group. In the absence of the financial
statements of the EPC Company for the year ending 31^st March, 2019
which are under compilation, it has not been possible to complete the
evaluation of the nature of relationship, if any, between the independent EPC
Company and the Company. At present, based on the analysis carried out in
earlier years, the EPC Company has not been treated as a related party.

Similarly, in the absence of full visibility on the assets and
liabilities of EPC Company and considering the reduced ability of the holding
company of the Reliance Group of Companies to support the EPC Company, the
Company has provided / written-off further Rs. 2,042.16 crores during the year
(Nil for the financial year ended 31^stMarch, 2018) in respect of
the outstanding amount advanced to the EPC Company and the same has been
considered as an exceptional item. Given the huge opportunity in the EPC field,
particularly considering the Government of India’s thrust on the infrastructure
sector coupled with increasing project and EPC activities of the Reliance
Group, the EPC Company with its experience will be able to achieve substantial
project activities in excess of its current levels, thus enabling the EPC Company
to meet its obligations. The Company is reasonably confident that the provision
will be adequate to deal with any contingency relating to recovery from the EPC
Company.

41. During the year, the
Company has incurred net losses (after impairment of assets) of Rs. 913.39
crores. Further, in respect of certain loan arrangements of certain
subsidiaries / associates, certain amounts have fallen due and / or have been
reclassified as current liabilities by the respective subsidiary / associate
companies. The Company is guarantor in respect of some of the loans / corporate
guarantee arrangements and consequently, the Company’s ability to meet its
obligations is significantly dependent on material uncertain events including
restructuring of loans, achievement of debt resolution and restructuring plans,
time-bound monetisation of assets as well as favourable and timely outcome of
various claims. The Company is confident that such cash flows would enable it
to service its debt, realise its assets and discharge its liabilities,
including devolvement of any guarantees / support to the subsidiaries and
associates in the normal course of its business. Accordingly, the standalone
financial statement of the Company has been prepared on a going concern basis.

From Directors’ Report

Auditors and Auditor’s Report

M/s Pathak H.D. & Associates, Chartered
Accountants, were appointed as statutory auditors of the Company to hold office
for a term of 4 (four) consecutive years at the 87^th Annual General
Meeting of the Company held on 27^thSeptember, 2016 until the
conclusion of the 91^stAnnual General Meeting of the Company. The
Company has received confirmation from M/s Pathak H.D. & Associates,
Chartered Accountants, that they are not disqualified from continuing as
auditors of the Company. M/s BSR & Co. LLP, Chartered Accountants, who were
appointed as statutory auditors of the Company at the 88^thAnnual
General Meeting of the Company, vide their letter dated 9^th August,
2019, have resigned as one of the statutory auditors of the Company with effect
from 9^th August, 2019. The other duly appointed statutory auditor,
M/s Pathak H.D. & Associates, who are statutory auditors of the Company
since the last nine financial years, i.e. from the financial year 2011 and
whose term is valid until the conclusion of the Annual General Meeting for the
year ended 31^st March, 2020, are continuing as the sole statutory
auditors of the Company.

The Auditors in their report to the members have given a Disclaimer of
Opinion for the reasons set out in the paragraph titled Basis of Disclaimer of
Opinion. The relevant facts and the factual position have been explained in
Note 40 of the Notes on Accounts. It has been explained that the Reliance Group
of companies, of which the Company is a part, supported an independent company
in which the Company holds less than 2% of equity shares (EPC Company) to inter
alia undertake contracts and assignments for a large number of varied
projects in the fields of power (thermal, hydro and nuclear), roads, cement,
telecom, metro rail, etc. which were proposed and / or under development by the
Group. To this end, along with other companies of the Group, the Company funded
EPC Company by way of EPC advances, subscription to debentures and
inter-corporate deposits.

The activities of EPC Company have been impacted by
the reduced project activities of the companies of the Group. While the Company
is evaluating the categorisation of the nature of relationship, if any, with
the independent EPC Company, based on the analysis carried out in earlier
years, the EPC Company has not been treated as a related party. Given the huge
opportunity in the EPC field, particularly considering the Government of
India’s thrust on the infrastructure sector coupled with increasing project and
EPC activities of the Reliance Group, the EPC Company with its experience will
be able to achieve substantial project activities in excess of its current
levels, thus enabling the EPC Company to meet its obligations. The Company is
reasonably confident that the provision will be adequate to deal with any
contingency relating to recovery from the EPC Company.

The observations and comments given by the Auditors in their report,
read together with notes on financial statements, are self-explanatory and
hence do not call for any further comments under section 134 of the Act.

BCAJ Admin

ETHICS AND U

Shrikrishna: Arjun, are you reading something? Shall we meet later?

Arjun: Bhagwan, please don’t say so. There is nothing more important in
my life than meeting you! Good that you came.

Shrikrishna: Why? What are you reading? I rarely see you referring to any book. Oh!
It’s a dictionary!

Arjun: Yes. Looking for a very strange word. I referred to three dictionaries,
but did not find it. It is an English word NOCLAR.

Shrikrishna: Where did you come across it?

Arjun: Yesterday, in some CPE seminar everybody around was talking about it.
They said it is very serious. Something like a disease.

Shrikrishna: (laughs) It is not a disease, but it will certainly make one Un-easy.

Arjun: What is it about? Is it going to add to our thankless burdens?

Shrikrishna: Yes, to some extent. It depends on how you take it.

Arjun: But why is that word not there in any dictionary?

Shrikrishna: Dear Paarth, it is only an acronym like your CARO. It means your
response to ‘Non-Compliances with Laws and Regulations’.

Arjun: Oh! Interesting. But wherever we go for audit, we see nothing but
non-compliance only. Anyway, what are we supposed to do then?

Shrikrishna: See, you know IESBA?

Arjun: Who is this ‘Yesba’?

Shrikrishna: (smiles) He is not a
person but a body – called International Ethics Standards Board for
Accountants. They issue guidelines for the Public Accountants (PA’s).

Arjun: Yes, our ICAI also has an ESB. What next?

Shrikrishna: While doing the audit or any other work of a company, if you come
across any non-compliance with any law or regulation which is of a very serious
nature, or which is illegal, then the question is how does a PA respond to it?
Whether he should act as a whistle-blower and expose the illegalities, or just
keep quiet?

Arjun: To tell you the truth, all these years, we CA’s have been keeping quiet
only. We never had the courage to speak out. That is why we are taken for a
ride.

Shrikrishna: I understand. You have a fear that you will lose your client. There is
a feeling of insecurity among the practising accountants like you. But remember
that NOCLAR applies not only to practising CAs, but it also covers the
accountants in employment.

Arjun: Baap-re! This is even more dangerous. Many accountants will have
to quit their jobs.

Shrikrishna: As an enlightened citizen and professional you cannot turn a blind eye
to the illegalities.

Arjun: That is exactly what Dhrutarashtra Uncle did in Mahabharata. If
he had done his duty conscientiously, the entire war and disaster could have
been avoided.

Shrikrishna: Wah, Arjun. What an apt example! That means you have understood
what NOCLAR is… I don’t have to explain it to you any further.

Arjun: No, Bhagwan, you can’t leave just like that. Please tell me what
exactly we are supposed to do? Since when will it be applicable? Where is it to
be reported? Does it cover fraud, corruption and bribery? Does it also include
money laundering? You need to tell me all this.

Shrikrishna: (smiles) Yes, dear. We need to discuss it in detail. All accountants
are now worried as to how they should tackle this. It will be very embarrassing
for anyone to expose the illegalities of the clients. It will be a serious threat
to the client as well as to the accountant.

Arjun: If it is so damaging then why bring this regulation at all.

Shrikrishna: Remember, Arjun, your
client as well as you yourself are a part of the society and the country. A company may have its vested self-interest in doing illegal acts. You as
auditors or service providers are indirect beneficiaries of the client’s business. But one must see whether such
illegal or irregular acts can be sustained by a client for a long time. Some
day or the other, the irregularities are bound to get exposed. Such acts cause
irreparable damage to the society and the country. If educated professionals
like you overlook or ignore these things, then you are breaching the trust
reposed in you. If such things continue, the social atmosphere will continue to
worsen.

Arjun: I agree. Is this the reason why some big firms are giving up a few
audit assignments? This is all very interesting. Tell me further.

Shrikrishna: I’m in a hurry. You please read it yourself. We will discuss it again
next time.

Om Shanti

This dialogue
is based on the new concept emerging in the profession – NOCLAR.

BCAJ Admin

CORPORATE LAW CORNER

10. Anand Rao Korada (Resolution
Professional) vs. Varsha Fabrics (P) Ltd. [2019] 111 taxmann.com 474 (SC) Civil Appeal Nos. 8800-8801 of 2019 Date of order: 18^thNovember,
2019

Sections 14, 231 and 238 of Insolvency and
Bankruptcy Code, 2016 – High Court cannot continue with auction proceedings to
sell the assets of corporate debtor if the proceedings under the Code have been
initiated and order declaring the moratorium has been passed by the NCLT

FACTS

I Co held shares in H Co. Pursuant to a
share purchase agreement (SPA) dated 10^thJuly, 2006 it sold its
entire shareholding in H Co to V Co, IF Co and M Co. H Co shut down its factory
on 8^th May, 2007. Subsequently, their stake in H Co was sold to IW
Co.

The workers of
H Co through their union (hereinafter referred to as the Union) filed writ
petitions before the Odisha High Court for cancellation of the SPA dated 10^thJuly, 2006 and payment of the arrears and current salaries of the
workmen. The High Court vide order dated 14^thMarch, 2012 directed
the Deputy Labour Commissioner to recover the workmen’s dues by sale of the
assets of H Co through a public auction. The Supreme Court in the said matter
passed an order dated 3^rd August, 2015 wherein it was directed that
the issue of quantifying the compensation payable to the workmen should be
determined by the Labour Court. In the event V Co, IF Co and M Co failed to pay
the compensation so determined, the assets of H Co would be sold in a public
auction and the proceeds would be used to disburse the arrears of workmen.

Pursuant to an order of the High Court dated
12^th January, 2017, the sale of a parcel of land of H CO was
completed and the amounts recovered compensated a portion of the total dues of
the workmen.

During the pendency of proceedings with the
High Court, N Co, a financial creditor of H Co, initiated corporate insolvency
resolution proceedings (CIRP) against H Co for default in payment of financial
debt. The National Company Law Tribunal (NCLT) admitted the petition and
declared a moratorium in accordance with the provisions of sections 13 and 15
of the Insolvency and Bankruptcy Code, 2016 (the Code) vide order dated 4^th
June, 2019.

The writ petitions came up for further
hearing and orders were passed by the High Court on 14^th August,
2019 and 5^th September, 2019. The Resolution Professional filed a
civil appeal to challenge the interim orders of the High Court on the ground
that since CIRP were already underway, the proceedings before the High Court
ought to be stayed.

HELD

The Supreme Court heard the parties at
length. It examined the provisions of sections 13, 14, 231 and 238 of the Code
and observed that section 238 gave an overriding effect to the Code over all
other laws. The provisions of the Code vested exclusive jurisdiction on the
NCLT and the NCLAT to deal with all issues pertaining to the insolvency process
of a corporate debtor and the mode and manner of disposal of its assets.
Further, section 231 of the Code bars the jurisdiction of civil courts in
respect of any matter in which the adjudicating authority, i.e. the NCLT or the
NCLAT, is empowered by the Code to pass any order.

In view of the said provisions, it was held
that the High Court ought not to have proceeded with the auction of the
property of H Co once the proceedings under the Code had commenced and an order
declaring moratorium was passed by the NCLT. It was observed that if the assets
of H Co were alienated during the pendency of the proceedings under the Code,
it would seriously jeopardise the interest of all the stakeholders.

The interim orders of the High Court were
set aside by the Supreme Court and it was held that the sale or liquidation of
assets of H Co would now be governed by the Code. Further, the union was
directed to file its claim under Regulation 9 of the Insolvency and Bankruptcy
Board of India (Insolvency Resolution Process for Corporate Persons)
Regulations, 2016 for payment of arrears, salaries and other dues before the
competent authority. All the parties were granted liberty to pursue the
available remedies in accordance with law.

11. Omega Finvest LLP vs. Direct News (P)
Ltd. [2019] 112 taxmann.com 297 (NCLT, N.Del.) C.P. (IB) No. 1478 (PB) of 2019 Date of order: 30^th September,
2019

Section 5 of Insolvency and Bankruptcy
Code, 2016 – Providing a place on lease for the purpose of carrying on
day-to-day activities was a supply of services – Lessor was an operational
creditor who was entitled to commence resolution proceedings when there was a
default in payment of rent

FACTS

D Co, a private
limited company, had entered into a lease agreement with S Co on 28^th
August, 2008. S Co was demerged into O Co and O Co was converted into an LLP in
the year 2012. In order to continue the lease of the premises, the parties had
entered into a lease deed dated 13^th July, 2016 for a period of
three years from 1^st July, 2016 to 30^th June, 2019. D Co
paid a sum of Rs. 1.25 crores to O Co pursuant to the lease deed. O Co submitted
that upon execution of the modification deed dated 14^th June, 2018,
D Co issued 13 post-dated cheques for payment of rent for each month from 1^stJune, 2018 to 30^th June, 2019 for a sum of Rs. 21,60,000,
inclusive of the base rent of Rs. 20,00,000 along with Goods and Services Tax @
18% amounting to Rs. 3,60,000. It is claimed by O Co that cheques issued
towards payment of rent for the months of April, 2019 and May, 2019 got
dishonoured.

O Co furnished a demand notice dated 28^th
May, 2019 to D Co u/s 8 of the Insolvency and Bankruptcy Code, 2016 (the Code).
O Co alleged that there was no reply to the notice so served.

D Co opposed the petition on the ground that
the debt claimed does not fall in the ambit of the definition of ‘operational
debt’ and therefore O Co was not an ‘operational creditor’. D Co further
submitted that a reply to the demand notice was communicated in due time. There
was prior communication to adjust the rent against the security deposit and
accordingly, it was alleged that there was a pre-existing dispute even before
notice u/s 8 was served.

HELD

The National Company Law Tribunal (NCLT)
heard both the sides at length. It examined the provisions of sections 5(20)
and 5(21) of the Code which define operational creditor and operational debt.
It was observed that in the facts of the present case, lease of premises was
for functioning of day-to-day operations and it was directly related to the
input and output of the supply of services by D Co. O Co had provided
infrastructure services to D Co for its functioning. Thus, leasing of premises
was held to be supply of services. Reliance was also placed on the report of
the Bankruptcy Law Reforms Committee dated 4^th November, 2015 which
also mentions that… ‘the lessor. that an entity rents out space from is an
operational creditor to whom the entity owes monthly rent’. It was held
that O Co was an ‘operational creditor’ within the meaning of section 5(20) of
the Code.

NCLT perused the communication between D Co
and O Co regarding adjustment of security deposit towards rent. The request for
adjustment was not met with by O Co and it proceeded to deposit the cheques
issued and the same were returned for want of sufficient funds.

NCLT also examined the provisions of the
rent agreement and observed that the security deposit had an entirely different
purpose. O Co had never agreed to adjust the rent from the security deposit.
The assumption of D Co that the agreement would extend to August, 2019 was
unfounded and the submission that there was a pre-existing dispute could not be
accepted.

As the default
stood established, NCLT proceeded to admit the petition
for initiating corporate insolvency resolution
process against D Co and declared a moratorium over its assets. An
interim resolution professional was also appointed.

12. Anil Syal
vs. Sanjeev Kapoor [2020] 113
taxmann.com 52 (NCLAT) Company Appeal
(AT)(Insolvency) No. 961 of 2019 Date of order:
8^th November, 2019

Sections 8 and 9 of the Insolvency and
Bankruptcy Code, 2016 – Dues claimed in the demand notice related to sister
concern of the corporate debtor and not the corporate debtor itself – Service
of such a notice was not valid – Application for initiating corporate
insolvency resolution proceedings was not maintainable for want of appropriate
notice

FACTS

A service
contract was entered into and executed between Sanjeev Kapoor, proprietor of
Kapoor Logistics (operational creditor) and Flywheel Logistics Solutions
Private Limited (corporate debtor) for running route vehicles in freight-line
haul operations between Pantnagar and Pune. Anil Syal is ex-director and
shareholder of the company Flywheel Logistics Solutions Pvt. Ltd. (corporate
debtor).

The operational creditor submitted that
Logistics Services were provided to the corporate debtor and pursuant to that
invoices were raised for the amount totalling Rs. 66,00,860 for the period
January, 2017 to August, 2017. Part payment of Rs. 35,68,484 was received from
the corporate debtor against the pending bills. Anil Syal stated that the balance
confirmation of Rs. 30 lakhs was admitted by the corporate debtor vide e-mail
dated 27^thJuly, 2018. But despite repeated e-mails and reminders,
the outstanding dues were not paid by the corporate debtor. The operational
creditor claimed that a demand notice was furnished calling upon the corporate
debtor to pay the total outstanding amount of Rs. 33,69,997.

The corporate debtor challenged the
submission stating that the demand notice and invoices were never received and
therefore the application was not maintainable for want of a valid demand
notice. Further, it was alleged that the demand notice was furnished to a
sister concern which was a separate legal entity by the name of Flywheel
Logistics Pvt. Ltd. having a different CIN and registered address, separate and
distinct from the corporate debtor. It was also submitted that the National
Company Law Tribunal (NCLT) which passed an order for initiation of the
corporate insolvency resolution process (CIRP) against the corporate debtor did
not take into account the evidence establishing a pre-existing dispute.

HELD

The National Company Law Appellate Tribunal
(NCLAT) observed that invoices were issued against M/s Flywheel Logistics Pvt.
Ltd. but the demand notice was issued to Flywheel Logistics Solutions Pvt. Ltd.
being the corporate debtor. The two are different corporate entities having
different CIN numbers and registered addresses.

NCLAT held that the operational creditor had
no right to claim dues relating to the invoices issued against ‘M/s Flywheel
Logistics Pvt. Ltd.’ from the corporate debtor, ‘M/s Flywheel Logistics
Solutions Pvt. Ltd.’ which is a separate corporate entity, having a different
CIN number.

It was observed that the mandatory primary
requirement for filing a petition u/s 9 of the Code was the service of the
demand notice u/s 8 of the Code. Since the demand notices related to the dues
of another corporate entity, it could not be treated as a valid and proper
service. The order passed by NCLT was thus set aside by NCLAT. It was further
held that this order would not prejudice the right of the operational creditor
to proceed against Flywheel Logistics Pvt. Ltd.

13. Indiavidual Learning (P) Ltd. vs.
Registrar of Companies [2019] 112 taxmann.com 101 (NCLT-Beng.) Date of order: 10^th October, 2019

In the Board
Report of the company filed with the ROC, certain matters were unintentionally
omitted to be reported – It could be permitted to revise the said Board Report
if the same would not prejudice the interests of the company, its shareholders
or stakeholders, or violate any provisions

FACTS

The Audited Financial Statements of I Pvt.
Ltd. (company), which included the Board’s Report for the financial year
2015-16, were approved by the Board of Directors. The Auditor’s Report attached
to the Financial Statements was sent to the shareholders of the company. The
same were laid before and adopted at the Annual General Meeting. The Audited
Financial Statements, together with the Board’s Report, was filed with the ROC
in due course.

It was brought
to the notice of the Bench that in the aforesaid Board’s
Report for the financial year 2015-16, certain matters to be covered in terms
of the provisions of section 134 of the Companies Act, 2013 were
unintentionally omitted to be reported. Those inadequacies were noticed by
the company later on, when it was reviewing the documents filed with the NCLT
in connection with a proposed reduction of share capital. It was further stated
in the petition that the inadequacies and omissions arising from non-compliance
of various applicable provisions happened purely due to inadvertence and no
part of it was prejudicial to the interests of any of the stakeholders.

A decision was taken at the meeting of the
Board of Directors of the company to revise the Board’s Report for the
financial year 2015-16, subject to approval of the Tribunal, and accordingly
the petition filed sought permission to revise the Board’s Report.

The notice of the petition was served on the
ROC concerned. Even though notice was served on the ROC and sufficient time
granted, ROC had not filed any response.

HELD

The proviso to section 131(1) of the
Companies Act, 2013 mandates that the Tribunal shall give notice to the
statutory authorities and it shall take into consideration the representations,
if any made by such authorities, before passing any order under this section.
Since ROC had not filed any representation on the petition, it appeared to the
Bench that it had no representation against the petition. Therefore, on the
principle of ease of doing business, it was held that orders are to be passed as
per merits of the case.

The inadequacies noticed in the Board’s
Report were as under:

(i) The financial highlights of the performance
of the company in terms of Rule 5(i) of the Companies (Accounts) Rules, 2014;

(ii) Details of subsidiaries, joint ventures or
associate companies in terms of Rule 5(iv) of the said Rules;

(iii) Details relating to deposits in terms of Rule
5(v) of the said Rules;

(iv) Details in respect of frauds reported by
auditors in terms of section 134(3)(ca) of the Companies Act, 2013;

(v) Disclosures on details of the Employee Stock
Option Scheme in terms of the Companies (Share Capital and Debentures) Rules,
2014;

(vi) The statutory auditor had made a qualification
stating that ‘no employee compensation expenses is accounted as required by
ICAI guidelines in absence of the fair value option, the impact on loss for the
year is not ascertained’. As per provisions of section 134(2)(f) of the
Companies Act, 2013, the Board was required to include in the Board’s Report
explanations or comments of the Board on every qualification, reservation or
adverse remark or disclaimer made by the Auditor in his report, if any.
However, there was an omission in this respect also since in the Board’s Report
dated 6^th September, 2016 no explanation was provided for the
adverse remarks / comments of the statutory auditors in their Report;

(vii) In terms of the provisions under the Sexual
Harassment of Women at Workplace (Prevention and Prohibition and Redressal)
Act, 2013 the company had to make certain disclosures on the complaints
received, if any, under the said Act. While the company had during the F.Y.
2015-16 complied with the requirements under the said Act, a statement to that
effect was omitted in the Board’s Report; and

(viii) In respect of the paragraph under
Directors’ Responsibility Statement in terms of section 134(3)(c) read with
section 134(5) of the Companies Act, 2013, the wording in the said paragraph
was not on the lines prescribed under the Act and, therefore, warranted a
correction.

On perusal of
the inadequacies of the Board’s Report as noticed and pointed out, it was
observed that they were not serious in nature and happened due to inadvertence
and if permitted to be revised as sought for, would not prejudice the interests
of the company, its shareholders, or stakeholders, or violate any provisions of
the Act. They have also declared that the company has been prompt in all annual
filings with the ROC in the past and all statutory registers and records were
maintained in accordance with the provisions of the Act. Therefore, considering
the fact that the instant petition is filed duly following the provisions of
the Act and the rules made thereunder and thus, by following the principle of
ease of doing business, the company petition is to be disposed of subject to
compliance of provisions of the applicable NCLT rules.

In the result, the company was permitted to
revise its Board’s Report for the financial year 2015-16 in terms of section
131(1) of the Companies Act, 2013.

However, it was made clear to the company
that the order would not absolve the company of any other violation(s)
committed by it and the statutory authorities were entitled to take appropriate
action in accordance with law.

BCAJ Admin

ALLIED LAWS

19. Auction sale of secured assets – Bank
obliged to disclose any dues on secured assets in notice of sale – Failure of
disclosure – Auction purchaser cannot be fastened with the liability to pay the
same [SARFAESI Act, 2002, S. 13, 38]

Corporation Bank and Ors. vs. Jayesh Kumar
Jha; AIR 2019 Cal 328

The auction purchaser successfully
participated in the e-auction for the sale of an immovable property undertaken
by the bank through its officers under the provisions of the SARFAESI Act,
2002. On receipt of the consideration price fixed by the auction, the appellant
bank issued sale certificate in favour of the respondent in respect of the
property in question. The sale was free from all encumbrances.

Subsequent to this, the purchaser was
charged for payment of property tax and maintenance tax in respect of the
property for the period prior to the auction payable to the Kolkata Municipal
Corporation. Contending that he was not liable to pay any such tax or charge
levied for the period prior to the sale, the purchaser moved Court with a
prayer for issuance of a writ of mandamus directing the bank authorities
to set aside the letter under which it communicated to him that the bank was
not liable to any outstanding dues with a further writ of mandamus
directing the bank authorities to reimburse the amount paid by the purchaser
towards the outstanding property tax to the Kolkata Municipal Corporation with
interest.

The Court held that Rules 8 and 9 of the
Security Interest (Enforcement) Rules, 2002 deal with the stage anterior to the
issuance of sale certificate and delivery of possession. Rule 9(8) casts a duty
upon the authorised officer to deliver the property to the purchaser free from
encumbrances (or) requiring the purchaser to deposit money for discharging the
encumbrances. The ignorance of the second creditor regarding the encumbrance on
the property is no longer a good and acceptable defence in view of the
statutory provisions and various precedents by the Hon’ble Supreme Court and
different High Courts on the subject… The SARFAESI Act and the Rules have
replaced the rule of caveat emptor by caveat venditor. When a
property is put to sale, the bank is under statutory obligation to sell the
secured asset with a clear title free from any encumbrance. As the bank did not
disclose the pre-sale property tax dues which are a charge on the land or
building in respect of the secured asset, therefore, the bank has failed to discharge
its statutory obligation.

After completion of the sale and delivery of
possession, the auction purchaser-respondent cannot be fastened with the
liability to discharge such encumbrances.

20. Hindu law – Right in coparcenary
property – No document to show that property was purchased with the money of
the HUF – Partition taken place – Devolution of coparcenary property takes
place only when succession opens and not before that – Father of the plaintiff
(daughter) is still alive – Suit claiming right in coparcenary property was not maintainable [Hindu
Succession Act, 1956, S. 6]

Chandribai and Ors. vs. Tulsiram and Ors;
AIR 2019 MP 206

The plaintiff (daughter) filed a suit for
declaration as well as for setting aside the sale deed which had been executed
in favour of the defendant. It was alleged that the disputed property is
ancestral undivided property of the plaintiffs and the plaintiffs have right,
title and interest in the property since their birth. It was also alleged that
the property has been purchased by transfer of ancestral property and that it
continued to remain so.

The trial Court, after framing the issues
and recording the evidence, held that the plaintiffs have 1/6^th
share each in the disputed property and they are entitled for partition and
possession. The trial Court further held that the property is not a
self-acquired one. The 1^st Appellate Court reversed the judgment
passed by the trial Court.

The Hon’ble High
Court upheld the order of the 1^stAppellate
Court that there is no presumption of a property being joint family property
only on account of the existence of a joint Hindu family. The one who asserts
this has to prove that the property is a joint family property and the onus
would shift on the person who claims it to be self-acquired property to prove
that he purchased the property with his own funds and not out of the joint
family nucleus (corpus) that was available.

Further, it is significant to note that the
phrase ‘devolution of coparcenary property’ only takes place when succession
opens and not before that. It is well settled that succession opens on the
death of the karta. As a necessary corollary, the karta being
alive, the suit in issue was not maintainable.

21. Tenancy rights – Inheritance of tenancy
right is not applicable to a joint family [Bombay Rent Act, 1947, S. 5, 13, 15]

Vasant
Sadashiv Joshi. & Ors vs. Yeshwant Shankar Barve through Lrs & Ors.; WP
2371 of 1977; Date of order: 2^nd January, 2020 (Bom)(HC)(UR)

The petition was filed by a tenant who was
being evicted from the suit premises. The original tenant was his father and
upon his death the rent receipt came to be transferred in the name of the
petitioner. The premises was occupied by his cousin as the petitioner had moved
to an alternate accommodation. The petitioner argued that tenancy rights can be
inherited by any and every member of the joint family.

The Court held
that the provisions of the Bombay Rent Act, which pertain to tenancy rights
would not be applicable to a joint family unit. After the death of the original
tenant, tenancy rights cannot be inherited by any member of the family of the
deceased by claiming to be in a joint family set-up.

22. Will – Attestation – Signature of the
testator on the Will is undisputed where the attesting witnesses deposed that the testator came to them individually with his own
signed will and read it out to them after
which they attested it [Succession Act, 1925, S. 63]

Ganesan (D) through Lrs. vs. Kalanjiam and
Ors.; AIR 2019 SC 5682

The appellant filed a suit claiming share in
the suit properties asserting them to be joint family properties. The trial
Court held that the suit property was the self-acquired property of the
deceased who died intestate and the genuineness of the Will had not been
established in accordance with the law, entitling the appellant to 1/5^th
share. The appeal was allowed holding that the signature of the testator was
not in dispute and the testator was of sound mind. The second appeal by the
appellant was dismissed.

The Hon’ble Supreme Court held that where
the signature of the testator on the Will is undisputed and the Succession Act
requires an acknowledgement of execution by the testator followed by the
attestation of the Will in his presence, and where a testator asks a person to
attest his Will, it is a reasonable inference that he was admitting that the
Will had been executed by him.

There is no express prescription in the
statute that the testator must necessarily sign the Will in the presence of the
attesting witnesses only, or that the two attesting witnesses must put their
signatures on the Will simultaneously at the same time in the presence of each
other and the testator.

Both the attesting witnesses deposed that
the testator came to them individually with his own signed Will and read it out
to them, after which they attested the Will. Therefore, the appeal was
dismissed.

23. Power of attorney holder – Cannot depose
for principal by entering in his shoes – His testimony cannot be treated as
that of principal [Civil Procedure Code, 1908, O. 3, Rr 1,2]

Narmada Prasad vs. Bedilal Burman; AIR 2019
MP 660

In the instant
civil suit, the petitioner filed a power of attorney in favour of his son and
apprised the Court below specifically that his son will enter the witness box
on his behalf. In turn, the son, Jitendra Burman, entered the witness box,
deposed his statement and was cross-examined. The petitioner introduced his son
as power of attorney holder on the ground that he is suffering from an aliment
of forgetfulness because of which his memory was not in order and, therefore,
his son will depose on his behalf.

The Court held
that the son cannot be permitted to depose on behalf of the principal for the
acts done by him. As a necessary corollary, the son cannot be cross-examined on
those aspects in respect of the principal. Thus, the right to adduce evidence
by the power of attorney holder is available to a limited extent. By no stretch
of the imagination can the son be treated to be a representative of the
principal in all aspects and, therefore, it cannot be said that the stand of
the petitioner will deprive him from entering the witness box. In other words,
it is trite that no estoppel operates against the law.

BCAJ Admin

FROM THE PRESIDENT

Dear Members,

The Institute of Chartered Accountants of
India (ICAI) declared the results of the Chartered Accountants Final
Examination (old & new Course) held in November, 2019 on 16^th
January, 2020 and totally 14,591 newly-qualified CAs were added to our
fraternity. This is comparable to the 14,185 students that qualified earlier in
the CA Final examinations held in May, 2019. A comparison of % of students
passing in both groups in the old course has increased in the November, 2019
attempt as compared to May, 2019 from 7.63% to 10.19%.– whereas under the new
course the same has fallen from 20.85% to 15.12%. A point to be noted is that
this % was 9.09% (old course) and 9.83% (new course) in May, 2018 and 15.03%
(old course) and 16.44% (new course) in November, 2018: 14,969 & 9,243 newly-qualified
CAs were added in November, 2018 and May, 2018 respectively.

In order to sharpen the analytical and
comprehension skills of students and to have an objective assessment of their
performance in the examination, ICAI has introduced an assessment system in
which 30% of the questions asked in the examination of select papers are
multiple choice-based questions (MCQ) of 1 and 2 marks. Thus making scoring
possible even in certain theory subjects as compared to the previous paper
pattern and eliminating subjectivity in the assessment process to some extent.
This system was put in place for the May, 2019 examination for both
intermediate and final levels under both the old and new courses of education
and has been one of the major factors in improved performance of the students
resulting in better results.

However, there is a rising concern about a
substantial decline in the number of fresh students entering our profession.
There has been an almost 70% drop in the students’ registrations for the CA
course in the last five years from 141,241 in FY 2015 to only 45,048 in FY
2019. This reduction in the number of new students wanting to enter our
profession is a worrying factor considering the fact that there are less than 3
lacs Chartered Accountants out of which only 138,874 are in practice (as on
01/04/2019) in a country with an estimated population of 1.37 billion people.
One of the possible reasons could be increased competition from other similar
courses in finance such as ACCA, CFA and CPA etc. Another reason could probably
be the structure of the entire examination system, where entry is relatively
easy but final qualification much more difficult. This creates uncertainty and therefore discourages newer entrants from taking up this course.

Recent developments in the profession have
also attracted negative publicity discouraging students from entering this
profession. Lastly, I believe that there is a perception that other professions
like MBA, Law, etc. are more contemporary and offer better earnings prospects.
This should be an area of concern for us and the Institute along with the
entire CA fraternity needs to work together to bring in changes to address
these concerns and meet the needs and aspiration of the young aspiring
students.

In my view, Chartered Accountancy is a very
respected and an evergreen course having lots of opportunities, great prospects
and a very bright future.

BCAS is reaching out: Our Society has a strong legacy of ethical values, culture of financial
discipline and focus on quality of service to its members. We also believe that
today our Society needs to increase its reach and circle of influence by
expanding beyond the traditional service delivery channels. We recognise the
facts that the demographic profile and preferences of our members are changing
and we need to embrace technology to stay relevant and deliver the best to our
stake holders. In this endeavour, we at the BCAS have taken many
initiatives like: (1) organising joint events with other professional, trade
and industry bodies, (2) organising lecture meetings in the suburbs, (3)
exploring maximum opportunities of having events outside Mumbai, (4)
digitisation of our course contents and educational materials (including the
publications and the Journal) (5) tailormade industry specific training
and educational programmes.

We are open to co-operate, coordinate and
collaborate with other like-minded organisations within and outside the city of
Mumbai. Please free to get in touch with me or write to me at president@bcasonline.org
for any initiative in which you would like BCAS to participate.

I very strongly believe that effective
implementation of your constructive suggestions and honest feedback will go a
long way in BCAS maintaining its vibrancy, position of eminence and inspirational
leadership for a long time to come.

CA Manish Sampat

President

BCAJ Admin

STATISTICALLY SPEAKING

1. Cities where libraries are
thriving

Source:
World Cities Culture Forum

2. Countries with biggest decrease of carbon emission (in million
tonnes – 2015 compared with 2000)

Source: US Energy
Information Administration

3. Indian APA report for 2018-19

Source: CBDT’s third APA
Annual Report (2018-19)

4. Changing trend in boards of
companies

Source: nseinfobase.com

5. Increase in resignations of
independent directors

Source: nseinfobase.com

BCAJ Admin

SOCIETY NEWS

TAXATION ON MUTUALITY PRE- AND POST-GST

In the light of the
Hon’ble Supreme Court’s decision in the case of ‘State of West Bengal vs.
Calcutta Club Ltd. and others’, the Indirect Tax Committee organised a lecture
meeting on ‘Taxation on Mutuality – Pre- and Post-GST’ at the BCAS Conference
Hall on Wednesday, 6^th November, 2019. In the bespoke case the Court
decided upon applicability of mutuality in VAT and Service Tax laws in the
light of Article 366(29-A)(e) and the ratio of the Young Men’s
Indian Association case (considering its applicability after the 46^th
Amendment).

Advocate
Vipin Jain delivers an outstanding talk on ‘Taxation on Mutuality – Pre
and Post GST’ His talk was very well received by full house of
participants.

Advocate Vipin
Jain was the principal speaker who explained the judgment in detail,
covering all significant aspects and threw light on how the Court has
interpreted the provisions under VAT and Service Tax laws at different times.
He also highlighted other landmark decisions of the Apex Court on the issue of
mutuality and English cases in which various aspects of mutuality have time and
again been tested.

In a session that
continued over 100 minutes, the learned speaker also gave his views on how the
said decision will impact the transactions of mutual association in the GST
regime and what would be the fate of taxes already paid by mutual organisations
in the pre-GST regime.

The meeting was
extremely interactive and attracted a full house with more than 100
participants attending in person and over 40 online viewers following the
lecture through a live audio / video stream.

INTENSIVE STUDY
GROUP ON GST

The Intensive Study
Group’s third batch meeting on ‘Goods and Services Tax – Clause by Clause Study
and Analysis of the GST Act’ was organised from 8^th November to 7^th
December, 2019 at the BCAS Conference Hall.

After the
enthusiastic response to the previous batches, it was decided to further extend
the study for even more participants. Batch-III was planned over eight sessions
of four hours each on Fridays and Saturdays. This was motivated by the
appreciation received for the first two sessions wherein section-wise study of
the GST Act was organised. There was in-depth study of all the sections and the
sessions were found to be very interactive by the participants. Each session
was held under the guidance of a mentor who had studied the law in great detail
and had a great deal of expertise on the subject. The discussions were led by a
group leader from amongst the participants.

Participation in
the event was by invitation and each session was attended by more than 20
participants who appreciated this initiative of the Bombay Chartered
Accountants’ Society. Most of the members shared their practical experience
which was found to be of tremendous benefit by those attending the sessions.

INTERNATIONAL
ECONOMICS STUDY GROUP

The International
Economics Study Group organised a meeting on 12^th December, 2019 to
discuss ‘Industrial Automation (Industry 4.0) and its Macroeconomic Impact’.

Mr. Kartik Shah, a young technocrat working in the Silicon Valley in the area of
industrial automation, led the discussion and presented his thoughts on the
subject. He dwelt on issues such as, ‘What is Industrial Automation and
Industry 4.0? What is its impact on companies? What is its overall impact on
the economy?’ He pointed out that Industry 4.0 represented cyber physical
systems, the Internet of Things (IoT) and Networks. GDP had spiked
post-Industry 3.0.

He presented case studies of the latest trends in technology that make Industrial Automation a reality and the maturity level of
various technologies, the Internet of Things (Low), Cloud Computing (High),
Artificial Intelligence (Medium) and Robotics (Low to Medium).
The microeconomic impact would be cost savings, improvement in labour
productivity, achieving safety, security and compliances and carbon savings.

Mr. Shah pointed out that automation impacts low-wage and low-skill labour
much more than anything else and differs from sector to sector. While the USA,
Germany and Japan would note a significant adverse impact on jobs, it would
have a low to medium adverse impact on China (also facing an ageing population)
and low on India. India could make significant progress in the area of
construction and infrastructure with the use of automation.

In short,
automation is a necessary evil but will boost global productivity and lead to
rise in GDP.

The key takeaway
was that Industrial Automation was no longer just hype – it was reality.
Companies could see the impact of automation and had begun investing in it, but
the adoption rate was slower than expected. Jobs would be impacted by
automation but there were other factors at play that would offset the impact of
automation.

SEMINAR ON ESTATE / SUCCESSION PLANNING

A full-day seminar
on ‘Estate Planning, Wills and Family Arrangement / Settlement – Critical
Aspects’ was organised at the BCAS Hall on 13^th December,
2019. It was organised with the aim of emphasising the importance of estate /
succession planning and to create awareness about some of the critical aspects
thereof.

The seminar
received tremendous response with more than 150 participants of all
generations, members and non-members and also outstation participants from 14
cities across India.

BCAS
Vice- President Suhas Paranjpe presents a memento to Ashok Shah, who
presented several case studies on estate planning and so on.

Suhas Paranjpe, BCAS Vice-President, welcomed the gathering and made the
opening remarks. Chetan Shah, Chairman of the Corporate and Allied Laws
Committee, introduced the subject.

Ashok Shah inter alia highlighted the emerging need and the parameters
for Estate Planning and Family Settlement / Family Arrangements (through trusts
/ companies). The case studies that he presented made various structuring
options easier to understand. He also touched upon the role of a CA in a family
office. The session was chaired by Suhas Paranjpe.

Dr.Anup
Shah, a key speaker at the seminar provides members with insights into
various succession laws in the country, with special focus on intestate
law and domicile.

In the second
session, Dr. Anup Shah provided the members with ‘Insights of Succession
Law’ such as the Hindu Succession Law and the Indian Succession Law, with focus
on Intestate Law and Domicile. He also touched upon the relevant provisions of
the Special Marriage Act, the Adoption and Guardianship Act, the Maintenance
and Welfare of Parents Act and the Senior Citizens Act. This session was
chaired by Past President Raman Jokhakar.

Gautam Doshi gives his expert opinion at the seminar on Estate and Succession Planning.

In the next session, Gautam Doshi dealt with Taxation and FEMA
issues in Family Partitions and Succession Planning comprising of inheritance
tax, trust taxation, family arrangement taxation, FEMA and other issues. The session was chaired by Past President Ameet Patel.

Dr.
Rashmi Oza, well- known advocate, threw light on the key nuances of
drafting of wills and also on stamp duty, registration and documentation
aspects.

In the last
technical session, Advocate Dr. Rashmi Oza enlightened the participants
with the nuances of drafting of wills as well as stamp duty, registration and
documentation aspects. This session was chaired by Chetan Shah, Chairman
of the Corporate and Allied Laws Committee.

The seminar
concluded with a joint question-and-answer session featuring Dr. Anup Shah
and Dr. Rashmi Oza and moderated by Chetan Shah and Gautam Shah.
Thanks to their expert knowledge and rich practical experience, they addressed
all the queries posed to them.

TRAINING SESSION FOR
CA ARTICLE STUDENTS

The Students’ Forum
under the auspices of the HRD Committee organised a training session for CA
article students on ‘Significant Changes in GST in Last One Year’ and ‘Recent
Changes in Form GSTR9 and 9C’ on 14^th December, 2019 in the BCAS
Conference Hall.

Interestingly, the
session was broadly divided into two parts: Changes in GSTR9 and 9C; and
Significant Changes in GST in the Last One Year. Student speaker Mr. Sachin
Mittal and Jigar Shah were in charge of the sessions.

Anand Kothari, Convener of the HRD Committee, spoke about the various activities
conducted by the BCAS Students’ Forum, while Dnyanesh Patade,
Student Co-ordinator, introduced the speakers for the respective sessions.

The GST law is
still in the process of stabilising and the GST Council has issued various
notifications, circulars and amendment acts.

Mr. Sachin
Mittal, the student speaker, started off with
statistics of the number of notifications, circulars and orders issued. He
covered significant changes such as notifications, amendments, circulars and so
on, exhibiting his meticulous study. He also highlighted the various issues /
complexities involved. A clause-by-clause analysis of the changes in GSTR9 and
9C was done by him. And he gave useful tips to the article students on various
clauses of GSTR9 and 9C.

The mentor for the
session, Jigar Shah, presented a Certificate of Appreciation to Mr.
Sachin Mittal and applauded his outstanding presentation.

Anand Kothari, the Convener of the HRD Committee, proposed the vote of thanks.
More than 40 students participated in the interactive session and their
feedback was very positive.

FEMA STUDY CIRCLE
MEETING

The FEMA Study
Circle meeting was held on Monday, 16^th December, 2019 at the BCAS
Conference Hall.

The speaker on the
occasion, Ms Niki Shah, highlighted the differences between the old FDI
Regulations and the new Non-Debt Rules, viz. placement of various schedules in
the new regulations, classification of different types of instruments and the
various schedules.

Following her presentation, the discussion continued on the same
interesting tract as the other participants discussed and debated various
issues based on their personal experiences. This also brought to the fore the
changes made and those that needed further clarification from the authorities
concerned. In short, it set the stage for other professionals to advise their
clients going forward.

CASE STUDY ON THE TAKEOVER OF ABN AMRO

A lecture meeting
on the above subject was organised on 23^rdDecember, 2019 at the BCAS
Conference Hall. It was addressed by Mr. Prakash Advani, who was part of
the team which dealt with the takeover of ABN AMRO.

Prakash
Advani, who was part of the team experts that dealt with the team of
experts that dealt with the battle for the takeover of ABN AMRO, giving a
master class on Mergers and Acquisitions (M&A).

He shared insights
about the largest takeover deal in the financial sector till date. The takeover
battle had begun just before the financial meltdown of 2007-08. The reasons for
the initiation of the takeover by a consortium of three banks, Fortis, RBS and
Santander, was the announcement of the merger of ABN AMRO with Barclays to
create a European leader in retail and commercial banking. The consortium
brought on the table an offer worth Euro 71.1 bn.

There was a counter
bid by Barclays with other international financial players roped in to have a
pie of the lucrative deal. Barclays received the financial muscle to raise its
bid through investment in it by China Development Bank (CDB), Temasek, Qatar
and Abu Dhabi. Their bid, though an improved one, was still substantially short
on the cash component in the overall deal.

The consortium
sweetened its deal further by increasing the cash component in the overall deal
to 93%, though it offered the same price as was offered in its initial bid,
that is, Euro 71.1 bn. This provided greater certainty of the value than
Barclays’s proposed offer.

The events which
unfolded after the takeover, which was highly leveraged and in the times of
financial meltdown, has key learnings for the financial sector.

Due to high leverage,
the operations at RBS, Fortis and Santander were affected seriously. The
governments in the UK, the Netherlands and Belgium had to step in to bail out
the operations of RBS and Fortis. Santander had some strategic standalone
operations in LATAM and Italy which assisted it in integrating parts of the
operations acquired through the ABN AMRO deal and swapping some of its business
with GE Money.

As per Mr.
Prakash Advani, the key learnings for M&A professionals are as follows:

There is never a merger of
equals.

Revenue synergies never
exist, though this may be highlighted as a great rationale for the merger /
acquisition.

Buying a perpetual
instrument (equity) by raising debt is an avoidable sin.

Never love the assets and
try to offload the risks.

Winning is about losing
less.

We always remember what
happened but do not remember what could have happened.

He also provided an
acquirer’s and seller’s perspective during the M&A.

From the
perspective of an acquirer, the following points should be kept in mind:

There should be thorough
due diligence, understanding of the culture and motivations of the sell side.

A valuation model is a
tool and not the gospel truth.

Structuring purchase price
payment and acquisition funding (tenor long vs. short) is important.

Understand the incentive
structure to selling company key executives and its value exclusivity.

Fee structure to the
advisers and investment bankers.

From the
perspective of a seller / target, the following points should be kept in mind:

Thorough preparation –
preparation is 90% success.

A highly motivated team
with full alignment of goals and incentives.

Test the appetite
informally pre-launch. Once sale launched, go all out to close. A deal that
launches but doesn’t close gets tainted.

Disclose more; the more
one discloses the lesser is the chance of a call on warranties.

Exit clauses / guarantees
to minority investors.

Mr. Prakash
Advani also briefly touched upon the Indian
diaspora in M&A and provided insights into the major cause of the NBFC
crisis which, in his opinion, is more of an asset-liability mismatch and not
the intent of the management to defraud the investors. He opined that the
Indian NBFC sector is highly geared and has a lot of dependency on wholesale funding
which, again, is short-term in nature and the activities of lending carried out
by them is for the medium to long term which creates pressure in repayment of
the borrowed funds.

He gave thorough insights into the art of deal-making and the 80 odd participants
received several valuable inputs in the course of the exemplary exposition presented by him.

DIRECT TAX
LAWS STUDY CIRCLE MEETING

The Direct Tax Laws
Study Circle meeting was held on 24^th December, 2019 at the BCAS
Conference Hall.

The Chairman of the
Study Circle Devendra Jain, and the Group Leader Dipan Agte
anchored the meeting.

Dipan Agte covered the four major issues mentioned below:

(i) Withholding tax and prosecution: wherein the
new prosecution guidelines were discussed. Various judgements in this regard
were taken up and practical implementation by the tax officers was discussed.

(ii) Disallowance u/s 14A: A brief background of
the provision and related rule was debated. Various issues arising from section
14A such as investment in subsidiaries, investments held as stock-in-trade,
etc. were taken up, including references to applicable case laws.

(iii) Depreciation on goodwill: Judgements relating
to depreciation on goodwill on amalgamation and depreciation of goodwill on
acquisition saw detailed discussions.

(iv) Deemed dividend: A practical
illustration to understand the applicability of provisions relating to deemed
dividend in various scenarios was discussed. Further, three recent judgements
on deemed dividend and the distinguishing facts in each case were taken up in
depth.

Chairman Devendra Jain, on the other hand, gave practical insights
on various issues and their impact. Both the Chairman and the Group Leader took questions from the
participants throughout the highly interactive session.

The session concluded with a vote of
thanks.

BCAJ Admin

GOODS AND SERVICES TAX (GST)

29. [2019 108 taxmann.com 330 (Chen.-CESTAT)] M/s Global Analytics India (P) Ltd. vs. CGST &
C.Ex., Chen.) Date of order: 22^nd July, 2019

When the exporter of services files a refund claim for service tax and
KKC paid on input services under Rule 5 of CENVAT Credit Rules, but instead of
reserving the said credit by debiting CENVAT Credit ledger, carries forward the
credit in TRAN01, the subsequent reversal of the said credit in GST regime can
be taken as a sufficient compliance of debit to CENVAT credit account for the
purpose of grant of refund

FACTS

The assessee, an exporter of services under Rule 6A of the Service Tax
Rules, made applications for refund of Service Tax and Krishi Kalyan Cess paid
on input services under Rule 5 of CENVAT Credit Rules and also under Notification
No. 27/2012-C.E.(N.T.) dated 18^thJune, 2012. However, the
Adjudicating Authority, after considering the explanation of the appellant,
rejected the refund claims inter alia on the grounds that the assessee
had not fulfilled the primary condition of debiting equal amount of CENVAT
Credit under Rule 5 ibid at the time of filing refund claim and that
since the appellant had carried forward in TRAN-1 under GST, refund need not be
granted as per section 142(3) of the CGST Act, 2017.

HELD

The Hon’ble Tribunal observed that it is an undisputed fact that the
appellant did not reverse an equal amount as required by the condition in
paragraph 2(h) of Notification No. 27/2012 (Supra). But the fact
remains that there was no provision in the ACES system to debit the value of
refund and the entire credit carried forward in TRAN-1 was reversed by the
appellant voluntarily in its GSTR3B filed for the month of April, 2018.

In view thereof, it was held that the assessee made sufficient
compliance with the condition in paragraph 2(h) since post-GST it would become
an impossible task for an assessee when the filing of ST-3 returns itself was
done away with. The Tribunal also relied upon the Board Circular No.
58/32/2018-GST for granting relief to the assessee.

30. 2019 112 taxmann.com 370 (Guj.)] Synergy Fertichem (P) Ltd. vs. State of Gujarat Date of order: 23^rd December, 2019

High Court explained the principles for the purpose of invocation of
powers granted to the authorities under sections 129 and 130 of the CGST Act

FACTS

The petitioner imported a consignment of ceramic pigment ink and cleared
the same from the customs by filing a bill of entry and payment of applicable
customs duty and IGST. Considering the perishable nature of the goods (such ink
is required to be preserved at a certain temperature), the C&F agent
initiated transport of the ceramic ink to the warehouse of the petitioners in
Vadodara without even waiting for the e-way bill in respect of the goods. This
was resorted to considering the fact that the proof of payment of GST on the
transaction itself was accompanying the goods in the form of a bill of entry
for home consumption. The transporter duly prepared the transport receipt in
respect of the vehicle for transport of goods from the airport to the warehouse
of the petitioners.

But the truck with the goods was stopped for verification by the
Department and detained on the ground of absence of e-way bill in respect of
the goods. The petitioner subsequently generated the e-way bill and also
explained its case to the officer. The authorities, however, refused to release
the goods on the ground of the absence of an e-way bill. The authorities, in
addition to tax, also insisted on 100% penalty u/s 129 of the GST Act and also
a fine in lieu of confiscation equal to the value of the goods u/s 130
of the GST Act. Hence the petition.

HELD

The High Court held that sections 129 and 130 of the Act are mutually
exclusive and independent of each other. Referring to the plethora of decisions
on the interpretation and construction of the non-obstante clause, the
Court held that two provisions in the same Act, each containing a non-obstante
clause, requires a harmonious interpretation of the two seemingly conflicting
provisions in the same Act after giving proper consideration of giving effect
to the object and purpose of the two provisions and the language employed in
each. Section 129 deals with detention, seizure and release of goods and
conveyances in transit, whereas section 130 talks about the confiscation of
goods or conveyances and levy of tax, penalty and fine thereon. The Court held
that section 130 of the Act can be invoked even in cases where the amount of
tax and penalty is paid in terms of the provisions of section 129 of the Act.
This would be provided the case falls in any of the five eventualities
prescribed in section 130(1) of the Act.

The question whether the movement of the consignment without valid e-way
bills constitutes a substantive error or a mere technical breach is to be
considered by the AO keeping in mind the provisions of sections 122, 125 and
126 of the Act, as well as all relevant Instructions and Circulars issued by
the Board.

The High Court specifically observed that this litigation is nothing but
an outburst on the part of the dealers that practically in all cases of
detention and seizure of goods and conveyance, the authorities would
straightway invoke section 130 of the Act and would thereby issue notice
calling upon the owner of the goods or the owner of the conveyance to show
cause as to why the goods or the conveyance, as the case may be, should not be
confiscated. The High Court held that without any justifiable grounds or
reasons to believe, the authorities may not be justified in issuing a notice of
confiscation u/s 130 of the Act. For the purpose of issuing the said notice at
the threshold, i.e., at the stage of Section 129 of the Act itself, the case
has to be of such a nature that on the face of the entire transaction, the
authority concerned is convinced that the contravention was with the definite
intent to evade payment of tax.

Further, the Court held that section 130 of the Act is an independent
provision for confiscation in cases where it is found that the intention was to
evade payment of tax. Confiscation of goods or vehicle is almost penal in
character. In other words, it is an aggravated form of action and the object of
such aggravated form of action is to deter the dealers from evading tax and
that all cases of contravention of the provisions of the Act or the Rules, by
itself, may not attract the consequences of such goods or the conveyance being
confiscated u/s 130 of the Act. The High Court, therefore, clarified that for
the purpose of invoking section 130 at the very threshold, the authorities need
to make out a very strong case. Merely on suspicion, the authorities may not be
justified in invoking section 130 of the Act straightway.

The High Court held that if the authorities are of the view that the
case is one of invoking section 130 at the very threshold, then they need to
record their reasons for such belief in writing and such reasons should,
thereafter, be looked into by the superior authority so that the superior authority
can take an appropriate decision whether the case is one of straightway
invoking section 130 of the Act. In short, the notice for the purpose of
confiscation must be based on the materials and the action must be held in good
faith and should not be a mere pretence. The Court also held that sections 129
and 130 have non-obstante clauses, whereby they can be operated upon in
spite of sections 73 and 74 of the Act.

Further, the Court clarified that where the driver of the vehicle is in
a position to produce all the relevant documents to the satisfaction of the
authority concerned as regards payment of tax, etc. and the authenticity of the
delivery challan is also not doubted, but unfortunately he is not able
to produce the e-way bill – in such a situation it would be too much for the
authorities to straightway jump to the conclusion that the case is one of
confiscation, i.e. the case is of intent to evade payment of tax. The court
also clarified that where the documents are found to be in order, detention and
seizure of goods on the ground that tax paid was less cannot be justified. In
such an eventuality, the correct procedure which the inspecting authority is
expected to follow is to alert the Assessing Authority to initiate the
assessment proceedings.

Thus, in a case of a bona fide dispute with regard to the
classification between the transporter of the goods and the Squad Officer, the
Squad Officer may intercept the goods and detain them for the purpose of
preparing the relevant papers for effective transmission to the jurisdictional
AO. It is not open to the Squad Officer to detain the goods beyond a reasonable
period. The process can, at best, take a few hours. The process of detention of
the goods cannot be resorted to when the dispute is bona fide,
especially concerning the exigibility of tax and, more particularly, the rate
of tax.

31. [2019 108 taxmann.com 570 (Karn.)] Suma Oil Agencies vs. Commissioner of

Commercial Taxes Date of order: 18^th July, 2019

When, as a
result of confusion over jurisdiction, the assessee received two notices of
re-assessment for the same period and assessee appears and replies before one
assessing officer intimating to the other of the said fact, the ex parte
assessment order passed by the said other officer is liable to be set aside

FACTS

The petitioner
was issued with a re-assessment notice relating to tax period 2012-13 by the
DCCT (Audit)-5.2 to which the petitioner replied suitably; he produced the
books of accounts before the said authority. Subsequently, re-assessment notice
was issued by the DCCT (Audit)-5.5 to re-assess the assessee. The petitioner
brought to the notice of the said authority the earlier notice issued by the
DCCT (Audit)-5.2 relating to the very same tax period. Despite this, the DCCT
(Audit)-5.5 passed an ex parte re-assessment order. Hence this writ
petition.

HELD

The High Court
observed that ex facie the assignment note issued to the DCCT
(Audit)-5.2 relating to the tax period 2010-11 and 2011-12 has been considered
to be the assignment note issued even to the tax period 2012-13, by the said
authority, resulting in issuance of re-assessment notice to re-assess the
assessee under the provisions of the Act for the tax period 2012-13. On the
reply filed by the petitioner to the notice issued by the DCCT (Audit 5.5), an
endorsement dated 14^th December, 2016 has been issued by the said
authority – DCCT (Audit)-5.5 bringing these aspects to the notice of the
petitioner, more particularly, the assessment under the tax period 2012-13
being assigned to the DCCT (Audit)-5.5.

However, the
High Court held that since the jurisdiction of the officers to proceed with the
re-assessment relating to the tax period 2012-13 was not clear among the authorities
concerned, the ex parte re-assessment order now impugned certainly
deserves to be set aside for the reason that the assessee had appeared before
DCCT (Audit)-5.2, pursuant to the re-assessment notice issued by the said
authority relating to the tax period in question, and if that be the position,
the DCCT (Audit)-5.2 ought to have transferred the proceedings initiated by him
to the competent authority assigned with the jurisdiction.

That having not been done, the petitioner cannot be made to suffer.

BCAJ Admin

VAT

7. State of Uttar Pradesh & Anr. vs. Birla Corporation Limited [(2020) 72 GSTR 1 (SC)]

FACTS

A notification dated 27^th February, 1998 was issued by the
State Government of U.P. u/s 5 of the UP Trade Tax Act, 1948 granting rebate on
the tax levied under the Act to industrial units set up in notified districts
within the State for ten years from the date of commercial production, subject
to certain conditions in respect of goods manufactured using fly ash procured
from thermal power stations within the State. This notification was challenged
before the High Court on the ground that the conditions specified in the
notification resulted in causing discriminatory treatment to the producers and
suppliers of the same product imported from neighbouring States as opposed to
goods manufactured and produced in the State of U.P. The High Court upheld the
challenge and the Supreme Court in appeal confirmed the decision of the High
Court declaring that the notification would also apply to cement manufacturing
units of neighbouring States who used fly ash as raw material.

After the decision of the High Court, a notification dated 14^th
October, 2004 was issued rescinding the notification dated 27^th
February, 1998. This notification was also challenged on the ground that the
same could not be enforced against industries which had already commenced
commercial production after 27^th February, 1998 but before 14^th
October, 2004 and taking any other view would result in giving retrospective or
retroactive effect to the notification dated 14^th October, 2004. Giving
such effect was not permissible in law. The High Court allowed the Writ
Petition based on the principle of promissory estoppel. The State of
Uttar Pradesh filed an appeal; however, the Supreme Court dismissed the same.

HELD

The Apex Court observed in its judgment that it was evident from section
5 of the UP Trade Tax Act, 1948 that there was no express authority given to
the executive to issue notifications for withdrawing or rescinding the rebate
facility from a date prior to the date of notification. Thus, the
respondent-unit and similarly placed persons would be entitled to rebate for
the relevant period prescribed in the notification dated 27^thFebruary,
1998 which would continue to remain in vogue until the expiry of the specified
period, that is, ten years. It is well established that the Court is obliged to
insist on a highly rigorous standard of proof in the discharge of the burden
and the onus is upon the State to justify its action as supervening
public interest.

8. Ultra Readymix Concrete Private Ltd. vs. State of Tamil Nadu &
Ors. [(2020) 72 GSTR 62 (Mad.)]

FACTS

The petitioner used to make inter-State purchases of high speed diesel
oil at a concessional rate @ 2% by way of ‘C’ forms. However, the ‘C’ forms
could not be downloaded after the introduction of the GST Act. After due
inquiry with the Department, the petitioner was informed that after the
introduction of the GST Act with effect from 1^stJuly, 2017, the
petitioner was not entitled to make purchases of high speed diesel oil from
other States at a concessional rate of tax, i.e., 2% and thus the Department’s
site had been blocked to deny access to the petitioner and other similarly
placed persons from downloading ‘C’ forms.

HELD

The Madras High Court, allowing the petition, held that the amendment
restricting the definition of ‘goods’ u/s 2(d) of the GST Act to six petroleum
products did not affect the provisions entitling the dealers to a concessional
rate of tax after the GST regime came into force. Thus, the petitioner was
entitled to make purchase of high speed diesel from other States on a
concessional rate of tax even after introduction of the GST Act.

9. K.M. Refineries and Infraspace Pvt. Ltd. vs.
State of Maharashtra & Others[(2020) 72 GSTR 94 (Bom.)]

FACTS

The New Package Scheme of Incentives, 1993 was introduced by the State
which allowed monetary and other incentives in the matter of tax subsidy or tax
exemption at the rates prescribed in the Scheme and other benefits. The
incentives could be availed of only on the industries qualifying in terms of
the eligibility conditions prescribed in the Scheme. The industries were
required to obtain an eligibility certificate from the District Industries
Centre. Thereafter, the Commissioner of Sales Tax shall endorse the eligibility
certificate issued by the implementing agency and it shall be his duty to
specify the date of effect of the eligibility certificate under the Incentives
Scheme. There is no authority given to the Commissioner of Sales Tax to modify,
enlarge or curtail the validity period decided by the implementing agency.

The petitioner-dealer made an application to the District Industries
Centre for issuance of an eligibility certificate under the 1993 Scheme. The
dealer was found eligible and by a final order dated 20^th March,
2017, the General Manager, District Industrial Centre, issued an eligibility
certificate which was valid for nine years. However, when the eligibility
certificate reached the Commissioner of Sales Tax, the latter prescribed the
effective date but, while doing so, curtailed the validity period by about
three years by his order passed on 10^th August, 2017.

HELD

The Bombay High Court held that the curtailment was beyond the powers of
the Commissioner of Sales Tax. The dealer had acted upon a promise given by the
State. The principle of promissory estoppel would thus apply and would
forbid the Government from taking any decision of not implementing the
Incentive Scheme. The Scheme had been framed ostensibly to achieve one of the
Directives contained in Article 39(C) of
the Constitution for ensuring equal distribution of wealth and means of
production. Thus, the order of the Commissioner of Sales Tax was quashed and
set aside.

BCAJ Admin

SERVICE TAX

I. HIGH COURT

20. [2019 109 taxmann.com 265 (Bom.)] Raymond Ltd. vs. UOI Date of order: 6^th August, 2019

Even if notices
can be kept in the call-book to avoid multiplicity of proceedings, yet the
principle of natural justice would require that before the notices are kept in
the call-book, or soon after, the petitioners are informed the status of the
show-cause notices so as to put the parties to notice that the said notices are
still pending. Giving notices for hearing after a gap of 17 years is to catch
the parties by surprise and prejudice a fair trial, as the documents relevant
to the show-cause notices may not be available with the petitioners for it is
reasonable for the assessee to presume that the notices have been abandoned

FACTS

The petitioner
challenged the action of the Central Excise Department seeking to revive six
show-cause notices issued between April, 2001 and January, 2004 under the
Central Excise Act, 1944 by issuing a notice for a personal hearing in respect
thereof in June and July of 2018. The petitioner submitted that issuing notices
to hear 14 to 17 years later is bad in law. Even in the absence of any time
limit in the law, show-cause notices must be disposed of within a reasonable
time. This revival of abandoned show-cause notices after so long causes
prejudice to the petitioner as the relevant documents pertaining to the
impugned notices were not available so as to appropriately meet the charge in
the impugned show-cause notices. The petitioner relied upon the decision in the
case of Bhagwandas S. Tolani vs. B.C. Aggarwal 1983 (12) ELT 44 (Bom.);
Premier Ltd. vs. Union of India 2017 (354) ELT 365 (Bom.); and
Sanghvi Reconditioners (P) Ltd. vs. Union of India [Writ Petition No. 2585 of
2017, dated 12^th December, 2017].

The Department
represented that the Revenue had kept the show-cause notices issued to the
petitioner in the call-book in 2001 (although show-cause notices for the
subsequent period were issued) in terms of the CBEC Circular No. 162/73/95-CX
dated 14^th December, 1995 and only after the Hon’ble Supreme Court
passed the final order in Revenue’s appeal in September, 2017 that the impugned
show-cause notices were removed from the call-book and the notices for personal
hearing were issued to the petitioners. It also submitted that at no time did
the Revenue inform the petitioner that the show-cause notices are being
dropped; therefore, it was obligatory on the part of the petitioner to keep the
papers and proceedings available till such time as the show-cause notices were
disposed of.

HELD

The Hon’ble
High Court observed that the Department gave no intimation to the assessee of
the fact that the impugned notices were kept in the call-book. It, therefore,
held that this delay in taking up the adjudication of the show-cause notices
(in the absence of any fault on the part of the party complaining) is a facet
of breach of the principles of natural justice. It further held that such a
practice impinges upon procedural fairness, in the absence of the party being
put to notice that the show-cause notices will be taken up for consideration
after some event and / or time when it is not heard in reasonable time. The
reasonable period may vary from case to case.

However, when
the notices are kept in abeyance (by keeping them in the call-book as in this
case), the Revenue should keep the parties informed about the same. This is the
transparent manner in which the State administration must function. The High
Court also quoted Circular No. 1053 of 2017 dated 10^th March, 2017
wherein at paragraph 9.4 the CBEC has directed the officers of the Department
to formally communicate to the party that the notices which have been issued to
them are transferred to the call-book. In the absence of such procedure being
followed by the Department, it was reasonable for the petitioners to proceed on
the basis that the Department was not interested in prosecuting the show-cause
notices and had abandoned them. The High Court thus quashed the show-cause
notices.

21. [2019 110 taxmann.com 293 (Mad.)] Delphi TVS Technologies Ltd. vs. Assistant
Commissioner (ST) Date of order: 9^th September, 2019

Where in response
to the notices received from the Department, the assessee requested for
additional time stating reasons for the same, passing final orders by simply
confirming the proposals made in the notice without first intimating to the
assessee as to whether his request for additional time is accepted or not, is
violation of the principle of natural justice

FACTS

The Department
originally issued notices of the proposal in February, 2019 to the assessee in
respect of four assessment years. The assessee, through letters in March, 2019,
requested the AO to give time up to April, 2019 for submission of reply by
stating that they need to collect more data to justify their stand; and that
they are occupied in preparing GSTR2A reconciliation against their input credit
taken in the monthly return. However, the AO, without giving time to the
assessee, proceeded to pass assessment orders in March, 2019 by stating that
the assessee failed to file their objection, though sufficient time was given.
The assessee challenged these orders before the High Court in a writ petition.

HELD

The Hon’ble
High Court observed that the assessee sought time to file their objection
through their letter dated March, 2019 and that such communication was also
received by the AO, as found in the impugned order itself. The Court,
therefore, held that in such circumstances the AO is not justified in
proceeding to pass assessment orders without informing the assessee as to
whether their request for time to submit their reply has been accepted or
rejected. The High Court further held that in both events, the AO is bound to
send a communication to the assessee and inform the result of the request made
by the assessee. In the absence of any such communication from the AO, there is
a possibility of drawing a reasonable presumption by the assessee that their
request has been accepted.

Therefore, the
act of the AO in not passing any order on the request of the petitioner seeking
time and proceeding to pass the orders of assessment straightway amounts to a
violation of the principles of natural justice. The High Court also observed
that the orders of assessment were passed simply by confirming the proposals in
the absence of any objection from the petitioner. Accordingly, the High Court
remanded the matter back to the AO to redo the assessment once again on merits
and in accordance with the law after inviting objection/s from the petitioner.

II. TRIBUNAL

22. [2020-TIOL-130-CESTAT-Kol.] M/s. Adhunik Fuels Pvt. Ltd. vs. CCE & ST Date of order: 17^th December, 2019

Suppression
requires to be established. If not, section 78 not invokable

FACTS

During the EA 2000 audit, the Department observed that the assessee as
recipient did not pay service tax liable to be paid under the reverse charge
mechanism. On this being pointed out, the assessee paid service tax with
interest. However, a show-cause notice was issued wherein tax was adjudged and
penalty was confirmed and also upheld by the first appellate authority. The
appellant pleaded before the Hon. Tribunal that they did not contest the tax
adjudged and interest but that would not justify the element of suppression and
penalty u/s 78. Further, section 74 was not invoked in the show-cause notice
and therefore late fee imposed meant going beyond the show-cause notice.

HELD

Short payment
was detected based on records maintained by the assessee. However, suppression,
misstatement, etc. needs to be established for invoking section 78. In its
absence thereof, section 78 cannot be invoked to levy penalty; and since the
show-cause notice did invoke section 74, late fee for delayed filing of ST-3
returns was also not sustained. The appeal thus was fully allowed.

23. [2020-TIOL-67-CESTAT-Mum.] M/s. Visible Alpha Solution India Pvt. Ltd.

vs. CCGST Date of order: 4^thDecember, 2019

Registration
not a prerequisite for granting refund claim. No contrary decision of any other
High Court to Karnataka High Court

FACTS

Two refund claims filed under Rule 5 of CENVAT Credit Rules, 2004 were
rejected on the ground that the appellant did not obtain registration. The
appellant pleaded that in terms of various decisions registration was not
required in terms of Karnataka High Court in the case of mPortal India
Wireless Solutions Pvt. Ltd. 2011-928-HC-Kar-ST.

HELD

Considering the matter no more res integra as per the decisions
of this Bench and other Benches and in terms of the Karnataka High Court’s
decision in the case of mPortal (Supra) and the fact of no
contrary decision being pronounced by any other High Court though Revenue
presented a few adverse decisions of the Coordinate Bench at Delhi, the issue
is settled in favour of the appellant. So far as the credit on general
insurance service for Mediclaim and water and recreation services is concerned,
they are covered by the ratio of the cases cited by the appellant (and)
are required for the business of the assessee. There is nothing on record that
proves their use for anything other than business purpose. Hence the credit is
eligible and consequently the refund.

24.
[2020-TIOL-16-CESTAT-Del.] Om Logistics Ltd. vs. Commissioner (Appeals) CGST Date of order: 5^th
December, 2019

Service tax on
Keyman Insurance Policy eligible credit if the beneficiary is the company

FACTS

The assessee,
providing courier agency service and business auxiliary service, filed ST-3
returns and paid service tax regularly. Credit for expenses on Keyman Insurance
Policy taken for the Managing Director was availed. Revenue contended that this
policy was for personal use and not for business purpose and hence directed the
assessee to reverse the credit – and hence the dispute.

The assessee
submitted that in the case of their own appeal No. 52845 of 2018 (SM), it was
held as eligible credit. The Revenue supported the order and stated that the
assessee had produced only the premium receipt and not the policy and hence was
required to be remanded to the adjudicating authority for deciding afresh.

HELD

Considering the
Tribunal’s order in the earlier appeal, it was observed that the benefit under
the policy in question is payable to the policy holder, viz., the company and
there is no nominee required when the policy is in the name of the corporate.
In view thereof, the order was set aside.

25. [2020-TIOL-52-CESTAT-Chd.] Verma Brothers vs. CCE & ST Date of order: 20^th November, 2019

Refund claimed
for an amount paid on exempted service not to be considered tax payment. Hence
not barred by limitation

FACTS

The appellant,
a construction service provider, paid service tax mistakenly on an exempt
service under entry 12(a) of Mega Exemption Notification No. 25/2012-ST dated
20^th June, 2012. This exemption was withdrawn with effect from 1^st
April, 2015 vide Notification No. 6/2015 dated 1^st March, 2015.
Assuming that the said notification was applicable from 1^stMarch,
2015 instead of 1^st April, 2015, the appellant paid service tax for
the said period and later, on 7^th November, 2016 as per the limit
prescribed under the Central Excise Act, lodged a refund claim.

Considering it
time-barred, the Department rejected it. The Revenue contended that the refund
is governed by section 11B of the Central Excise Act as per the decision of the
Apex Court in the case of Anam Electric Manufacturing Company 1997 (90)
ELT 260 (SC) relying on the decision of Mafatlal Industries vs.
Union of India 1997 (89) ELT 247 (SC), and therefore barred by
limitation.

HELD

Relying on the
decision in the case of Anam Electrical Manufacturing Co.
2002-TIOL-650-SC-CUS and based on this the view taken by the Delhi High
Court in National Institute of Public Finance and Policy 2018-TIOL-1746-HC-Del-ST,
the appellant was held as entitled to claim refund as in the case of Anam
Electric (Supra), the time prescribed is three years. In this case, the
assessee had filed the claim of refund within three years.

BCAJ Admin

MISCELLANEA

I. Technology

13. Now all you
need is TEN minutes to charge e-cars

Engineers have
discovered a way to recharge electric cars in just ten minutes, overcoming one
of the biggest obstacles with electric vehicles. Electric cars currently take
longer than an hour to fully recharge, with the original Tesla Model S taking
75 minutes to achieve a full charge. Researchers at Pennsylvania State
University developed a lithium-ion battery capable of adding 200 to 300 miles
(320 km. to 480 km.) of driving range to an electric car in ten minutes by
charging it at an elevated temperature.

What this does
is ‘limit the battery’s exposure to the elevated charge temperature, thus
generating a very long cycle life,’ said senior author Chao-Yang Wang, a
mechanical engineer at the Pennsylvania State University. ‘In addition to fast
charging, this design allows us to limit the battery’s exposure time to the
elevated charge temperature, thus generating a very long cycle life,’ said
Wang.

‘The key is to
realise rapid heating; otherwise, the battery will stay at elevated
temperatures for too long, causing severe degradation… The ten-minute trend
is for the future and is essential for adoption of electric vehicles because it
solves the range anxiety problem.’ The extremely fast charging process could be
carried out without causing significant damage to the battery, meaning it could
sustain 2,500 charging cycles – the equivalent of half a million miles of
travel. Typical lithium-ion batteries would only last around 60 charges using
the new method.

The discovery
comes just weeks after the inventors of the first lithium-ion battery were
awarded the 2019 Nobel Prize in Chemistry. The combined work of John
Goodenough, Stanley Whittingham and Akira Yoshino led to the first commercially
viable lithium-ion battery being produced in 1985. They are now used in
everything from mobile phones to laptops, as well as the rapidly growing
electric vehicle industry. The researchers now hope to improve this charge time
to just five minutes.

‘We are working
to charge an energy-dense electric vehicle battery in five minutes without
damaging it,’ Wang said. ‘This will require highly stable electrolytes and
active materials in addition to the self-heating structure we have invented.’

(Source:
www.timesofindia.com)

14. Average
Indian spends over 1,800 hours a year on smartphone

With
smartphones entering every facet of our lives, a new survey to understand how
mobile devices are altering lives and relationships of users found that 75% of
the respondents agreed to have owned a smartphone in their teens and of them,
41% were hooked to phones even before graduating from high school.

From showcasing
the benefits to the depth of addiction, the Vivo and CMR study tried to look at
the behavioural changes pertaining to smartphone usage. The study, styled
‘Smartphones and their impact on Human Relationships’, looks into the influence
of mobile devices on the consumers and their social interactions.

According to
the study, the average Indians spend 1/3^rd of their waking hours on their phones, which
translates to 1,800 hours a year. About 30% fewer people meet family and loved
ones multiple times a month now (vs. ten years ago). One in three people felt
that they can’t even have a five-minute conversation with friends and family
without checking their phones. About 73% agree that if smartphone usage
continues at the current rate or grows, then it is likely to impact mental and
/ or physical health.

The report is
based on a survey conducted online as well as face-to-face across top eight
cities in India. It cuts across age groups and demographics: youth, working
professionals and housewives, spanning the age group 18 to 45. The total number
of respondents was 2,000, of whom 36% were females and 64% males.

According to
Mr. Nipun Marya, Director, Brand Strategy, Vivo India, ‘Smartphones are
ubiquitous in our lives today, be it connecting with friends, family,
entertainment, eating out or even travel and entertainment. As the “born in the
net” generation grows up as digital natives, there is a fundamental change
underway within society – redefining relationships, interactions and the very
fabric of human emotions and exchanges. This transformation is also an
opportunity to harness and drive positive change, reinforce balance and
responsible proliferation of technology and its usage amongst consumers.’

Commenting on
the survey findings, Mr. Prabhu Ram, Head, Industry Intelligence Group of CMR,
said, ‘While the explosive surge in smartphones in India has enabled Indians
not just communicating with loved ones, but with myriad other uses, including
in consuming entertainment and in expressing themselves, our survey results
demonstrate that the dependency on smartphones has increased. While the
smartphones will continue to be the primary go-to device, smartphone users have
realised that periodically switching-off would help benefit their personal
health.’

(Source:
www.thehindubusinessline.com)

15. Now Twitter
warns Indians of data breach

In a very
stressful year for social media users who have been bugged several times,
Twitter recently admitted a malicious code was inserted into its app by a ‘bad
actor’ that could have compromised several Android users’ information
worldwide, including in India.

Some users in India woke up to an email from Twitter, warning them to
update the app for Android and immediately change their password. The
vulnerability within Twitter for Android could allow the ‘bad actor’ to see
non-public account information or to control your account (send tweets or
direct messages), said an apologetic Twitter.

‘Prior to the
fix, through a complicated process involving the insertion of malicious code
into restricted storage areas of the Twitter app, it may have been possible for
a “bad actor” to access information (direct messages, protected tweets) from
the app,’ Twitter said.

It added that
it does not have direct evidence that malicious code was inserted into the app
or that this vulnerability was exploited, but it can’t be fully sure.

(Source: www.freepressjournal.in)

II. World News

16. Trump
unveils America’s sixth military branch: Space Force

The United States
has met a mounting 21^st century strategic challenge from Russia and
China with the creation of a full-fledged US space force within the Department
of Defence. Acting on the ‘ambition’ of President Donald Trump that had met
with resistance at first, the White House signalled its determination to not
cede superiority in a Star Wars-like future of killer satellites and
satellite-killer weapons.

President Trump made the Space Force’s creation real with the signing of
the 2020 National Defence Authorisation Act, which set the initial budget for a
Pentagon force that will stand equally with the military’s five other branches.

‘Going to be a lot of things happening in space, because space is the
world’s newest war-fighting domain, Trump told members of the military gathered
for the signing. The Space Force will be the sixth formal force of the US
military after the Army, Air Force, Navy, Marines and Coast Guard. “Our
reliance on space-based capabilities has grown dramatically and today outer
space has evolved into a war-fighting domain of its own,” said Secretary of
Defence Mark Esper. Maintaining American dominance in that domain is now the
mission of the US Space Force.’

The Defence
Intelligence Agency warned in a report early this year (2019) that China and
Russia have both developed ‘robust and capable’ space services for
intelligence, surveillance and reconnaissance. ‘China and Russia, in
particular, are developing a variety of means to exploit perceived US reliance
on space-based systems and challenge the US position in space,’ it said.

China already
demonstrated that it could shoot down a satellite with a ground-based missile
in 2007. ‘Both states are developing jamming and cyberspace capabilities, directed
energy weapons, on-orbit capabilities and ground-based anti-satellite missiles
that can achieve a range of reversible to non-reversible effects,’ it said.

Iran and North
Korea, too, are increasingly able to extend their military activities into
space, jamming the communications of adversaries and developing ballistic
missile technologies, it noted.

China and
Russia have the perception ‘that space represents an (American) Achilles’ heel
and that this is an asymmetric advantage for them to then take on the United
States’ power,’ Steve Kitay, Deputy Assistant Secretary of Defence for Space
Policy, said in August. ‘Space will not be an Achilles’ heel’ for the US, he
said.

The new
organisation builds on the US Space Command already operating under the Air
Force following its creation in August. Like the Marines, which operate within
the umbrella of the Navy, the Space Force will continue to be under the Air
Force. The Space Force will be comprised of about 16,000 air force and civilian
personnel, some already taking part in the Space Command, according to Air
Force Secretary Barbara Barrett.

(Source:
www.economictimes.com)

III. Economy

17. Inaccurate
diagnosis, draconian remedy – India’s black money problem was misdiagnosed

India’s fight
against foreign black money has returned a whimper. The Government’s intent
cannot be faulted, but since the problem itself was misdiagnosed, the ensuing
legislative measures have been bereft of constitutional and economic common
sense. They relied too little on persuasion and far too much on brow-beating.
The economic results are nothing to rave about.

High on
populism, low on constitutional wisdom, the Black Money Act was a draconian law
that was bound to fail. At a minimum tax rate of 60%, it gave marginal incentive
for the hoarders to come clean. Lawmakers overestimated the writ of
international laws and made no economically persuasive case. As a result, as of
May, 2019 the total untaxed foreign assets mined was Rs. 12,500 crores. Wholly
recovered, this wouldn’t even pay Prasar Bharati’s bills for four years. Even
this recovery was aided greatly by international exposes such as the Panama
Papers in which the government’s legislation played no role. In comparison,
Indonesia recovered about Rs. 25 lakh crores under similar schemes. The
government’s initial obsession with brow-beating had an ominous start. But,
instead of doing course correction, it passed an even more confiscatory law, the Fugitive Economic Offenders Act.

Existing laws

The intent of
both the laws could have been achieved by a few tweaks in the existing laws.
The Income-tax Act has, since 1989, provided for up to three times penalty on
escaped tax. Similarly, wilful attempts to evade taxes have, since 1975, been
punishable with imprisonment of up to seven years. A protocol for automatic
exchange tax information, under which India is now receiving data from
Switzerland, was signed in 2011, as was the amendment requiring all citizens to
disclose foreign assets with their domestic tax returns.

Post-May 2014,
tax control policy is different only in three aspects, all constitutionally
suspect. The first relates to retrospective application of tax and penal laws
that are so confiscatory and brazenly discriminatory that they walk all over a
citizen’s right to life, carry on business and own property. The second is
about shifting the burden of proof onto the citizen to establish that he is not
an offender. Lastly, and this is what makes this new policy rather wicked,
citizens can be subjected to criminal trial without the taxman first proving
that there has been tax evasion. The results of giving such unbridled powers to
agencies have been disastrous.

The Enforcement
Directorate, India’s money laundering watchdog, secured conviction in less than
1% of cases but attached assets worth Rs. 29,468 crores. In contrast, the
agency’s equivalents in the U.S. and the U.K. secured conviction in about 50%
cases. The Income tax Department’s records were not inspiring either, hovering
at near 2% conviction rates in Financial Year (FY) 2016-2017. A Comptroller and
Auditor General report showed that in FY 2016-2017 – the demonetisation year –
the number of raids more than doubled as compared to FY 2013-2014, the last
year of UPA-II; but in the same period the undisclosed income detected was less
than one-fourth the amount during the latter period.

In medical
sciences, intrusive methods of treatment are generally resorted to when
diagnosis shows evidence that less risky methods may not be restorative. But,
India’s fiscal policy seems to be driven by the opposite logic: intrusion
first, diagnosis later.

No clear
estimate of black money owned by Indians and stashed abroad is available.
Between 2008 and 2012, various reports quoted anywhere between $500 billion and
$1.5 trillion, some relying on estimates of a Swiss Bankers’ Association (SBA)
report. These turned out to be false. James Nason, an officer of the SBA, has
said that the SBA had never published any such report. In March, 2019 the National
Institute of Financial Management reported to the Lok Sabha Standing Committee
on Finance that the estimate is about $216 billion to $490 billion. This is
one-seventh the estimate quoted ahead of the 2014 elections. In essence,
India’s foreign black money problem was misdiagnosed and unverified and
exaggerated numbers went into satisfying Parliament that draconian financial
laws are justified.

Taking
cognisance

For the
judiciary, one question that arises is: if the conventional wisdom on black
money was based on disinformation, should it take cognisance of it? If yes,
how? For example, should the Supreme Court take a relook at its verdict in Ram
Jethmalani’s case against black money, especially to guide lower courts in
their examination of financial crime allegations?

A democratic
state cannot unjustly enrich itself by making citizens pay for what is not
rightly owed. The belief that the government will act on principles of honour
and good faith is an invaluable but fragile national asset, the late Mr. Nani
Palkhivala wrote in an article in 1993. He said that the fiscal system must
have not just legality but also legitimacy. It is denuded of all legitimacy
when there is a breach of faith on the part of the government in its dealings
with the taxpayer.

The government
should give up the belief that being an intrusive, brow-beating confiscator
enriches Indians. It doesn’t. This approach is reminiscent of India’s
imperialistic past and, in its current form, is impoverishing us into an
economic depression. The draconian fiscal laws must at once be repealed.
Increased international co-operation, technological advances and banking
penetration implodes black money more than any law or sermon on patriotism.
India’s war on black money can only be won through democratic, persuasive and
economically-sound means.

(Source: www.thehindu.com

BCAJ Admin

FROM THE PRESIDENT

My dear Members,

The 54th edition of the BCAS Residential Refresher Course (RRC) was a virtual affair this year and yet managed to make a mark with various initiatives, especially the high quality of the programme, the faculty and the participants.

It started with the felicitation of Past President Pradyumna Shah – it was during his term as President that the very first RRC was held way back in the year 1968-69. There was also the publication of a book on ‘Partnership’, the e-release of an e-version of ‘Gita for the Professional’ and the release of the long-awaited BCAS Mobile App.

All the members and the office-bearers of the BCAS felt honoured and privileged to felicitate the nonagenarian ‘student at heart’, Pradyumna Shah.

It would not be way off the mark to say that the month of January turned out to be a month of historical moments for all.

This year’s Budget season also started with the launch of the ‘Union Budget Mobile App’ by the Union Finance Minister, Mrs. Nirmala Sitharaman. Another historical initiative has been to make ‘Budget 2021’ completely paperless for the first time since Independence – with hassle-free access of Budget-related documents for both the Members of Parliament and also for the public. This is a huge digital achievement; of course, all thanks to the exigencies forced upon us by the pandemic. In the process, we conserved a very large quantum of paper, avoided humungous printing efforts and saved precious time, thus displaying solid social responsibility.

Turning to sport, it was a ‘Chak de India’ moment for Indian cricket lovers when our team created history with a 2-1 series win over the mighty Australians – in Australia – in the Gabba Test. It was even more commendable because this was achieved in spite of our team being adversely affected by injuries suffered by key players. The younger and fresher lot of players took charge along with a few from the experienced elders to create Test history.

Similarly, the BSE Sensex created history in the same month of January to cross the 50,000 mark for the very first time in the Indian stock market. It is a dynamic figure and would undergo ups and downs from time to time, depending on economic and liquidity conditions. However, achieving the 50,000 mark is a clear-cut indicator of investor confidence in the Indian economy in the long term.

Another history-making event was Kamala Devi Harris becoming the 49th Vice-President of the United States of America. She is that country’s first female Vice-President, the highest-ranking female elected official in US history and the first African-American and first Asian-American US Vice-President. After the complex US electoral process, Joe Biden took over as the 46th President and Kamala Harris as his Vice-President. Her Indian-American ancestry is an early indication that pragmatism will dictate the future of the Indo-US relationship. President Biden has long been an advocate of deeper ties with India and we should look forward to positive political, economic and trade relations between the two economies.

The results of the Covid-affected Chartered Accountants’ examination conducted in November, 2020 are expected in the first week of February, 2021. By the time this communication reaches you, the results would be out and new members would get added to our esteemed profession. The BCAS is ready to welcome these new entrants who are expected to carry the flag of our profession forward. Good luck to all of them.

We welcome these fresh professionals with the 8th Youth RRC planned in the month of April, 2021 by the BCAS HRD Committee. Please await a detailed announcement and enrolment for an interesting youthful experience. Do not forget to visit the site www.bcasonline.org for more announcements.

Before I close, I wish you Happy Budget Times!

Best Regards,

Suhas Paranjpe
President

BCAJ Admin

MISCELLANEA

I. General

16. Faced with authoritarianism? Think liberty

Regulating speech is a dangerous notion and not compatible with the principles of a free society – By Chris Rossini

There are always authoritarians mixed with the human population. These are people who have chosen to believe that they should be the boss of not only themselves, but everyone else as well. The most notorious authoritarians have always been tied to government in some way, since government is force.

But authoritarianism is not exclusive to government. People in any field or occupation can have the same lust to dominate just like a politician. But again, because of the nature of government being force, authoritarians are usually drawn to it like a magnet.

These misguided individuals are difficult because they never want to leave anyone else alone. In their minds, they can’t leave others alone. They’re supposed to tell everyone else what to do.

This can be quite daunting at times, especially when authoritarians have a lot of believers that want to be told what to do. This reinforcing relationship of the blind leading the blind will then drag society as a whole into a downward spiral.

Fortunately, there are always limits and it’s important to keep in mind some key thoughts, especially when the downward spiral escalates:

•   Authoritarians cannot create energy or matter or life.
•   They cannot create the truth or natural law.
•   They cannot be omnipotent or omniscient. They cannot be everywhere at all times and know everything that can be known.
•   They cannot turn all individual human beings into being the same exact thing. They can’t even turn two individuals into being the same thing. In fact, they can’t even make one individual remain the same. We’re all constantly changing. The infant you was different from the teenager you, who is different from the adult you.
•   Everyone is born at a different time and place. Everyone occupies a different and unique position in the universe. Everyone is raised under different conditions, in different environments and surrounded by different people.
•   We have different cultures and traditions.
•   We have different beliefs about God.
•   Authoritarians cannot think for anyone else. They only think for themselves.
•   They cannot interpret the non-stop occurrence of events for everyone. They only interpret events with their own thinking about them. They can certainly share their interpretations with others, but they can’t make others believe those interpretations or agree with them.
•   Authoritarians can’t believe anything for anyone else. They only have their own beliefs. They can change those beliefs, just as everyone else can change their beliefs and convictions.
•   They cannot value for anyone else. They value everything by themselves.
•   They cannot choose for anyone else. Everyone chooses on their own.
•   Authoritarians cannot know what knowledge everyone possesses. Knowledge is always decentralised. It cannot be centralised because there are no limits to knowledge. Like interpretations, knowledge can be shared. But also like
interpretations, knowledge does not have to be believed by anyone else, other than by their own voluntary choice.
•   Authoritarians can’t have all the data, because there are no limits to data. No matter how much data has been collected, far more will forever remain uncollected.
•   They cannot know the future no matter how much data they have. Data is always an incomplete look at the past. The future can certainly be guessed and projected by anyone, but it is always a matter of probabilities and can never be known with certainty and with pinpoint precision.
•   Authoritarians cannot know the unknown. Whatever is known will forever be dwarfed by what is yet to be known.
•   They cannot ‘order’ the universe, or human life, or the world, because these are not made and ordered by man. They cannot be re-made or re-ordered by man either.

Now, as liberating as the above is, does this mean authoritarians are a non-issue? No, it does not. Authoritarians are actors in this world, just like everyone else. As such, they choose their values and beliefs and then act on them. Those actions create consequences and results.

Those consequences, because they come from misguided beliefs and actions, produce bad results for everyone else. Much of human history, and especially the 1900’s, has been dominated heavily by authoritarian ideas. Hundreds of millions have perished as a consequence of those misguided ideas and subsequent actions.

Those ideas, in case you haven’t noticed, are still believed and embraced by many individuals today. They want to believe that authoritarian ideas can produce different results.

They can’t.

So, authoritarians are a serious issue, always.

The antidote to a bad idea is a good idea: individual liberty.

When the ideas of individual liberty dominate, the authoritarians have to take a back seat and society goes into an upward spiral.

Authoritarian ideas are never gone. They are always a choice for people to accept and embrace. So the best that can happen (in any time period) is that authoritarianism is kept at bay. And the only way for it to be kept at bay is for enough individuals to accept and embrace the glorious ideas of liberty.

Source: Ron Paul Liberty Report, By Chris Rossini – 13th January, 2021

II. Economy

17. Refine quality of expenditure to help fiscal sustainability

Maintaining and improving the quality of expenditure would help address the objectives of fiscal sustainability while supporting growth, RBI Governor Shaktikanta Das said on 16th January, 2021.

‘As per IMF’s calculations, the total fiscal support in response to Covid-19 amounted to about 12% of global GDP by mid-September, 2020,’ he said while delivering the Nani Palkhivala Memorial Lecture online on the subject, ‘Towards a Stable Financial System’.

‘Global public debt is said to have reached 100% of GDP in 2020. As a result, most economies are expected to emerge from the pandemic with higher deficits and debt vulnerabilities.

Mr. Das said although the scale of fiscal spending was expected to breach the quantitative targets of fiscal prudence across most economies in the short run, it was crucial in the context of the pandemic from the perspective of the welfare aspect of public expenditure.

‘Expenditure on physical and social infrastructure, including human capital, science and technology, is not only welfare-enhancing, it also paves the way for higher growth through their higher multiplier effect and enhancement of both capital and labour productivity,’ he said.

‘Going forward, it becomes imperative that fiscal road maps are defined not only in terms of quantitative parameters like fiscal balance to GDP ratio or debt to GDP ratio, but also in terms of measurable parameters relating to quality of expenditure, both for the Centre and the States.’

While conventional parameters of fiscal discipline will ensure medium- and long-term sustainability of public finances, measurable parameters of quality of expenditure would ensure that welfarism carries significant productive outcomes and multiplier effects, Mr. Das noted.

He also said that the principal objective of the Reserve Bank of India (RBI) during the pandemic was to support economic activity.

‘Looking back, it is evident that our policies have helped in easing the severity of the economic impact of the pandemic.’

The RBI ‘remains steadfast to take any further measures, as may be necessary, while at the same time remaining fully committed to maintaining financial stability.’

Responding to a question, Mr. Das said the RBI was open to examining any proposal for setting up a bad bank. ‘It is up to the government and the private sector to put up such a proposal,’ he added.

Source: The Hindu, Special Correspondent – 16th January, 2021)

III. World News

18. Oak trees take root in Iraqi Kurdistan to help climate

Delband Rawanduzi spoke softly to her oak seedlings, as if willing them to grow fast and repopulate forests in Iraqi Kurdistan depleted by war, illegal logging and fires.

Over the next five years, the 26-year-old aims to plant
one million oaks – resilient trees that can endure both the cold of northern Iraq and the dry spells of one of the world’s hottest countries. Her plan is taking root in her native Kurdistan.

In a pilot project late last year ‘we planted 2,000 oak trees. And in the upcoming autumn we will plant 80,000,’ said Rawanduzi, a hiker and rock climber.

She has mobilised visitors and shepherds who collect oak seeds from the mountains which are then planted in two greenhouses donated by a private university in the Kurdish regional capital of Arbil.

Once the young seedlings grow into saplings, they are re-planted in mountain areas selected by the Kurdish agriculture ministry.

And to ensure the oaks will thrive, Rawanduzi is winning over several sponsors who are asked to donate 1,000 Iraqi dinars (around 68 US cents) per tree.

‘It’s a response to climate change threats, as well as an effort to promote ecosystems and create a culture among people to contribute to a healthy climate,’ she told AFP.

Those threats are serious: some 2.2 million acres (nearly 900,000 hectares) of natural and manmade forests in the Kurdish region have been destroyed in the past two decades, according to estimates by Kurdish authorities.

This represents nearly half the forests of the region, with most of the damage occurring in the last five years. The culprits include uncontrolled grazing, tree-cutting for firewood, unregulated urban development and bombardment.

While the Kurdish north has been spared much of the carnage seen across Iraq after the US-led invasion in 2003, it has been targeted by several cross-border Turkish operations against Kurdish militants.

A review of satellite images conducted by Dutch civil society organisation PAX International found that Turkey’s military campaigns ‘can be directly linked’ to the burning of nearly 50,000 acres of land in northern Iraq from May until September, 2020. ‘About half – around 23,000 acres – of the burned land is part of special protected areas with a rich biodiversity,’ it said.

Another 250,000 acres of land in the autonomous region were burned during the same period, PAX said, without identifying the perpetrators.

‘Shelling and bombing resulted in bushfires and caused the displacement of thousands of people, destroying their livelihoods and damaging fragile ecosystems.’

According to the UN’S Food and Agriculture Organization (FAO), a mere 2% of Iraq’s 437,000 square kilometres (168,700 square miles) is forested. Most of that area lies in the Kurdish zone, where Rawanduzi hopes her project can make a change.

Young saplings have already been sponsored by Kurdish emigrants in Europe, Syrian refugees living in the Kurdish region, expatriates working in Arbil and local staff at schools and hospitals.

Intira Thepsittawiwat, a 50-year-old from the Czech Republic living in Arbil, is sponsoring 500 trees.

‘It’s a reliable, practical and inexpensive project. This is my small involvement and contribution to the nature of Iraqi Kurdistan,’ she told AFP.

For climate campaigners, tree planting is crucial but must be part of a wider effort to combat global warming.

Iraq recently ratified the 2015 Paris Climate Agreement which aims to chart a path away from catastrophic warming and has begun drafting plans to reduce carbon emissions.

Ahmed Mohammad, who headed the Kurdish region’s environmental awareness department till 2015, told AFP there are many ways to reach that goal.

Developing public transport, eliminating the usage of single-use plastics and educating the population on climate issues top his list.

‘People here like the open-air life, go picnicking on the weekends and have houses in the mountains, but still many of them don’t realise the importance of nature and climate catastrophes,’ Mohammad said.

He is petitioning regional authorities to ban the use of plastic bottles in government offices.

Environmentalist Hawker Ali, 35, said the region must be ready for the long haul. ‘It is not like Covid-19 for which scientists can find a cure,’ said Ali, who is helping Rawanduzi care for the oak seedlings in the Arbil greenhouses.

‘With climate change, everyone must get involved in order to reduce the threats and the consequences,’ he added.

Source: International Business Times, By Quassim Khidir – 18th January, 2021)

BCAJ Admin

RIGHT TO INFORMATION (r2i)

PART A | DECISION OF HIGH COURT

Disclosure of an interest in the information sought would be necessary to establish the bona fides of the applicant

Case name:

Har Kishan vs. President Secretariat through its
Secretary and Anr.

Citation:

Writ Petition (Civil) No.: 7976/2020

Court:

The High Court of Delhi

Bench:

Justice Prathiba M. Singh

Decided on:

12^th January, 2021

Relevant Act / Sections:

Section 8(1)(j) of Right to Information Act, 2005

Brief Facts and Procedural History:

The petitioner sought information on 6th August, 2018 under the Right to Information Act, 2005 (‘RTI Act’), in respect of certain appointments made for Multi-Tasking Staff at the Presidential Estate, Rashtrapati Bhawan.

In reply, the Public Information Officer gave partial information and did not provide information relating to Item Nos. 4, 5 and 6 – the total number of candidates as per every centre separately who appeared for the given examination; complete name and address of the examination centres of all the candidates who had been selected for appointment to the post of Multi-Tasking Staff, Notification Circular No. A35011/7/16-Admn.; and complete residential address and the father’s name of all selected candidates who had been appointed to the post.

Being aggrieved, the RTI applicant preferred an appeal before the First Appellate Authority, the response to which is not on record. Thereafter, a second appeal was preferred by the petitioner before the CIC, which was disposed of by the CIC vide the impugned decision dated 17th July, 2020, where the CIC had directed the respondent to provide the information under Item Nos. 4 and 5 of his application and rejected information under Item No. 6. The present writ petition is filed against the above CIC order.

On a query from the petitioner it is revealed that the petitioner’s daughter had also applied for appointment as Multi-Tasking Staff in the Presidential Estate, Rashtrapati Bhawan. However, this fact does not find any mention in the present writ petition.

Issues before the Court
Whether information sought under Item No. 6 is protected u/s 8(1)(j) of the RTI Act?

Whether disclosure of an interest in the information sought would be necessary to establish the bona fides of the applicant under the RTI Act?

Ratio Decidendi
Whenever information is sought under the RTI Act, disclosure of an interest in the information sought would be necessary to establish the bona fides of the applicant. Non-disclosure of the same could result in injustice to several other affected persons whose information is sought.

The information sought in respect of the names of the fathers and residential addresses of the candidates is completely invasive and would be a roving and fishing inquiry. The said information which is sought is clearly protected u/s 8(1)(j) of the RTI Act which provides that any such information shall not be provided which constitutes personal information and is invasive of the privacy of individuals.

Decision
The Court did not find any merit in the present writ petition which challenges the rejection of information sought under Item No. 6.

For the act of the petitioner having concealed the material facts, including that his daughter had applied for appointment to the post of Multi-Tasking Staff, the petition was dismissed with costs of Rs. 25,000 to be paid to the ‘High Court of Delhi (Middle Income Group) Legal Aid Society’. The said costs shall be paid within two weeks.

PART B | RIGHT TO INFORMATION

How to file RTI online
By now many of us are aware that an RTI application can be filed online without the hassle of printing, posting or even hand-delivering it. But only few of us use this tool effectively. As discussed in our earlier articles, RTI can assist in seeking information which would be necessary in our professional lives, for example, information from the Ministry of Corporate Affairs.

File your online application on: https://rtionline.gov.in

Steps for filing RTI online
1. For submitting an RTI application, click on ‘submit request’ option on the RTI online website. On clicking the ‘submit request’ option, the ‘Guidelines for use of RTI online portal’ screen will be displayed. This screen contains various guidelines for using the RTI online portal.

2. On accepting the ‘I have read and understood the above guidelines’ tab and clicking on ‘submit’, the online RTI request form screen will be displayed next for the user. The Ministry or Department for which the applicant wants to file an RTI can be selected from the ‘Select Ministry / Department / Apex body’. Personal details of the applicant need to be filled along with the information requested. After entering the security code and submitting the application, the portal will take you to a payment gateway.

3.    The applicant can pay the prescribed fee through the following modes:
   (a) Internet banking through SBI;
   (b) Using credit / debit card of Master / Visa;
   (c) Using RuPay Card.
   (Fee for making an application is as prescribed in the RTI Rules, 2012.)

4. No RTI fee is required to be paid by any citizen who is below poverty line as per RTI Rules, 2012. However, the applicant must attach a copy of the certificate issued by the appropriate government in this regard, along with the application.

5. On submission of an application, a unique registration number would be issued which may be referred to by the applicant for any references in future.

6. In case additional fee is required representing the cost for providing information, the CPIO would intimate the applicant through this portal. This intimation can be seen by the applicant through ‘Status Report’ or through his / her e-mail alert.
.

7. Status of the RTI application filed online can be seen by the applicant by clicking at ‘View Status’ and entering the required details.

In case any more information / assistance is required, one can connect with the BCAS RTI Clinic.

PART C | INFORMATION ON AND AROUND

(1) State Information Commission has no power to direct removal of encroachment under RTI ACT: Uttarakhand High Court

The Bench of Justice Manoj Kumar Tiwari hearing the plea of one Manju Agarwal who challenged the order dated 8th August, 2016 passed by the State Information Commission directing Nagar Palika Parishad, Kotdwar, to take necessary action with the help of the local administration to remove the encroachment, observed in its order that giving a direction for removal of encroachment is beyond the scope of the State Information Commission’s powers under the Right to Information Act.1

(2) ‘Beneficiaries of state largesse’: Karnataka High Court holds Bangalore Turf Club and Mysore Race Club as public authorities under the RTI Act

A single Bench of Justice P.B. Bajanthri, while refusing to interfere with the order passed by the Karnataka Information Commission against the companies, said ‘In the present case, state largesse has been extended to the petitioners under lease deeds. Therefore, they are holding lease lands on behalf of the people and are accountable to the people. If this material information is taken into consideration, one has to draw the inference that petitioners do fall under the definition of ‘public authority’ under the Act, 2005.’2

(3) ‘Issue of considerable public importance’: Delhi High Court seeks response from Central government on plea seeking RTI information about Aarogya Setu
A single-judge Bench of Justice Prathiba M. Singh issued notice to the Central Government and RTI authorities seeking their response to the plea (Saurav Das vs. CPIO, NeGD & Ors.) stating that issues raised in respect of supply of information regarding the Aarogya Setu App and its creation are of considerable public importance. The information sought was with respect to the origin of the app, the approval details, communications with private people involved in making / developing the app, internal notes, memos, file notings and minutes of the meetings held while creating the app, among other information.3

1 https://www.livelaw.in/rti/state-information-commission-has-no-power-to-direct-removal-of-encroachment-under-rti-act-uttarakhand-high-court-168102

2 https://www.livelaw.in/news-updates/karnataka-high-court-rti-bangalore-turf-club-mysore-race-club-168489

3 https://www.barandbench.com/news/litigation/delhi-high-court-issues-notice-challenge-cic-order-refusing-information-creation-aarogya-setu

The most valuable of all talents is that of never using two words when one will do
– Thomas Jefferson

If you want to determine the nature of anything,
entrust it to time: when the sea is stormy, you can see nothing clearly
– Seneca

BCAJ Admin

REGULATORY REFERENCER

DIRECT TAX

1. The last date for making a declaration under Vivad Se Vishwas Scheme has been extended to 31st January, 2021 from 31st December, 2020. [Notification No. 92 of 2020 dated 31st December, 2020.]

2. Government notifies extended due dates for issuing Tax Audit Reports, filing of tax returns and VSV Scheme. [Notification No. 93 of 2020 dated 31st December, 2020.]

3. Introduction of Faceless Penalty Scheme, 2021. [Notification No. 2 of 2021 dated 12th January, 2021.]

4. Directions for the Implementation of the Faceless Penalty Scheme, 2021. [Notification No. 3 of 2021 dated 12th January, 2021.]

COMPANY LAW

I. COMPANIES ACT, 2013

(I) MCA enforces certain provisions of Companies (Amendment Act, 2020) w.e.f. 21st December, 2020. MCA has appointed the 21st day of December, 2020 as the date on which certain provisions of the Companies (Amendment) Act, 2020 shall come into force. Accordingly, major defaulting provisions such as defaults related to formation of section 8 companies, non-compliance of provisions related to matters to be stated in the prospectus, transfer and transmission of securities and rectification of register of members, etc., are decriminalised effective from the said date. [MCA Notification S.O. 4646 (E) dated 23rd December, 2020.]

(II) MCA allows ROC to extend timeline for name reservation up to 60 days The MCA has made an amendment to the Companies (Incorporation) Rules, 2014 whereby a new Rule 9A has been inserted. The said rule allows the Registrar to extend the period of a name reserved under rule 9 by using web service SPICe+INC-32, up to 40 days from the date of approval on payment of a fee of Rs. 1,000 before expiry of 20 days under rule 9; 60 days on payment of Rs. 2,000 before expiry of 40 days; and extension up to 60 days on payment of Rs. 3,000 in case of expiry of 20 days from the date of approval. [MCA Notification G.S.R. 795(E) dated 26th December, 2020.]

(III) Companies allowed to conduct board and general meetings virtually till 30th June, 2021 Owing to the Covid-19 outbreak, the MCA has further extended the due date in relation to companies for conducting their meetings virtually from 31st December, 2020 to 30th June, 2021. [MCA Notification G.S.R. 806 (E) dated 2nd January, 2021.]

(IV) MCA clarifies that ‘Spending of CSR funds for awareness campaigns on Covid-19 vaccination programme is an “eligible CSR activity”’ under item Nos. (i), (ii) and (xii) of Schedule VII of the Companies Act, 2013 relating to promotion of healthcare, including preventive healthcare and sanitization, promoting education and, disaster management, respectively. [MCA General Circular 1/2021 dated 13th January, 2021.]

(V) Timeline for companies to hold AGMs through video conferencing extended till 31st December, 2021 In continuation of Circular 20/2020 dated 5th May, 2020, the MCA has decided to allow companies whose AGMs were due to be held in the year 2020, or become due in the year 2021, to conduct their AGMs on or before 31st December, 2021 through video conferencing or other audio visual means. [MCA General Circular 2/2021 dated 13th January, 2021.]

(VI) MCA launches ‘Scheme for condonation of delay for companies restored on the Register of Companies between 1st and 31st December, 2020 under section 252 of the Companies Act, 2013’. The Companies Fresh Start Scheme, 2020 [CFSS-2020] is no longer applicable for various filings done under the provisions of the Companies Act, 2013. The companies restored between 1st and 31st December, 2020 could not avail benefit of CFSS-2020 scheme and as such are liable to pay additional fees on filing overdue e-forms. MCA has accordingly launched the scheme for the purpose of condoning the delay in filing forms with the Registrar, insofar as it relates to charging of additional fees on account of delay in such filings. [MCA General Circular 3/2021 dated 16th January, 2021.]

II. SEBI

(VII) SEBI further extends relaxations for compliance with certain provisions of the SEBI (LODR) Regulations, 2015 due to the Covid-19 pandemic The MCA has further extended relaxations to companies to conduct their Extraordinary General Meetings through video conferencing or through other audio-visual means up to 30th June, 2021. It has also extended these relaxations to Annual General Meetings of the companies due in the year 2021 (i.e. till 31st December, 2021). Accordingly, the relaxations in respect of sending physical copies of annual reports to shareholders and the requirement of proxy for general meetings held through electronic mode are extended for listed entities till 31st December, 2021. [Circular SEBI/HO/CFD/CMD2/CIR/P/2021/11 dated 15th January, 2021.]

(VIII) SEBI extends relaxations for compliance with rights issues In view of the difficulties faced due to the Covid-19 pandemic and the lockdown measures, the SEBI has further extended the relaxations for compliance with rights issues in order to ensure that all eligible shareholders are able to apply to the rights issues during hard times. The validity of relaxations shall be applicable for rights issues opening up to 31st March, 2021. [Circular SEBI/HO/CFD/DIL1/CIR/P/2021/13 dated 20th January, 2021.]

ACCOUNTS AND AUDIT

(A) Risk-Based Internal Audit (RBIA) Framework. The RBI has issued a Notification on the RBIA Framework applicable to Scheduled Commercial Banks (excluding RRBs), Local Area Banks, Small Finance Banks and Payments Banks. Banks are expected to re-orient their approach, in line with evolving best practices, as part of their overall Governance and Internal Control framework. Banks are also encouraged to adopt International Internal Audit Standards. The Notification also contains advisories aimed at bringing uniformity in the approach followed by banks. [Notification No. RBI/2020-21/83 Ref. No. DoS.CO.PPG./SEC.04/11.01.005/2020-21 dated 7th January, 2021.]

FEMA

(i) The DPIIT has, vide a Circular, revised the SOP for seeking approval in FDI Proposals setting down the procedures, timelines and advisories to other Ministries / Departments. Some of the important changes are:
* An inter-Ministerial committee will assess delayed proposals and proposals escalated for quicker disposal.
* A review mechanism has been brought in before rejection of a proposal along with mandatory concurrence of DPIIT before rejection, including detailed guidelines regarding rejection or closure due to incomplete applications, proposals requiring amendments to earlier approvals, requirement of NCLT approval first for M&A applications, and imposition of compounding provisions in case of FEMA violations.
* Applications covered under Press Note 3 will be dealt with by the respective Ministries / Departments and
will also require clearance from the Ministry of Home Affairs.
* Regular review of pending proposals by the DPIIT along with the departments concerned will take place every four to six weeks, instead of the three months earlier.
* DPIIT and each of the Competent Authorities shall maintain a database on the proposals received along with details such as date of receipt, investor and investee company details, volume of foreign investment involved and date of grant of approval / rejection letter.
* The number of mandatory documents to be submitted has been reduced.
* Digitally-signed online submissions are now accepted.
* Overall time limit for processing of applications is set at 10-12 weeks.

The SOP also provides for other important points, advisories and formats for submitting FDI proposals and for Approval letter. [Circular No. 1/8/2016-FDI POLICY dated 9th November, 2020.]

(ii) The Directorate-General of Civil Aviation (DGCA) had, in March, 2019, issued revised SOPs for export of aircraft by companies lending them in case of defaults by companies which have leased such aircraft under the ‘Cape Town Convention’. RBI has now amended the Export of Goods and Services Regulations exempting the furnishing of declaration in case of re-export of leased aircraft / helicopters and / or engines / auxiliary power units (APUs) re-possessed by overseas lessor and duly de-registered by the DGCA on the request of Irrevocable Deregistration and Export Request Authorisation (IDERA) holder, subject to permission by the DGCA / Ministry of Civil Aviation for such exports. [Notification No. FEMA 23 (R )/(4)/2021-RB, dated 8th January, 2021.]

ICAI ADVISORIES AND ANNOUNCEMENTS

* Advisory – ICAI Valuation Standards 2018 to be followed while conducting any type of Valuation Engagement. [21st December, 2020.]
* Announcement – Clarification on Statutory Auditor of a company giving feedback to Credit Rating Agencies about Auditee Client. [5th January, 2021.]

ICAI MATERIAL

* Report on Audit Quality Review 2019-20. [29th December, 2020.]
* Handbook on Audit of CSR Activities. [11th January, 2021.]
* Compendium of Opinions of the Expert Advisory Committee – Volume XXXVII. [12th January, 2021.]

BCAJ Admin

CORPORATE LAW CORNER

9. Man Industries (India) Ltd. vs. State of Maharashtra [2019] 106 taxmann.com 123 (Bom.) Date of order: 22nd April, 2019

Non-payment of dividend to a shareholder is an offence which invites penal action – However, such non-payment will not be called an offence if payment is not made because a dispute regarding entitlement to receive dividend exists between parties

FACTS

•   The complainant ‘S’ was a shareholder of the company ‘M’ Limited.
•   ‘M’ had declared a dividend in the AGM held on 12th December, 2015. All the shareholders were paid the dividend except ‘S’.
•   The dividend was not paid to ‘S’ on account of the pendency of a dispute between the parties and, therefore, taking protection u/s 127(c) of the Companies Act, 2013 (CA 2013), dividends were not distributed to ‘S’.
•   The Sessions Judge, Bombay, by an order dated 30th January, 2017 had issued process and summons against the accused ‘M’ and its directors for non-payment of dividends to ‘S’.
•   The accused (the applicants herein) filed an application u/s 482 of the CrPC praying that the notices which were issued in the company petition and the order of issuance of process dated 30th January, 2017 be quashed and set aside.

HELD

The Court observed / noted as under:
•   The provisions of section 127 of the CA 2013 at the relevant point in time read as under:
   Punishment for failure to distribute dividends – Where a dividend has been declared by a company but has not been paid or the warrant in respect thereof has not been posted within thirty days from the date of declaration to any shareholder entitled to the payment of the dividend, every director of the company shall, if he is knowingly a party to the default, be punishable with imprisonment which may extend to two years and with fine which shall not be less than one thousand rupees for every day during which such default continues and the company shall be liable to pay simple interest at the rate of eighteen per cent per annum during the period for which such default continues:
   Provided that no offence under this section shall be deemed to have been committed:
   (a) to (b)**
   (c) where there is a dispute regarding the right to receive the dividend;
   (d) to (e)**

• Whenever there is an ambiguity in the section and the section is susceptible to different amendments, then the proviso controls the main section. How the proviso is worded and in what context the deeming provision is incorporated matters while giving weightage to the section as a whole. Due to the deeming provision, the Legislature wants the Court to believe the existence or non-existence of certain facts, then it undoubtedly forms a part of that section without which the section is incomplete.

• It is to be noted that though proviso and exception are not synonyms, they are usually taken alike. Both the proviso and exception are defences and both while interpreting the statute provide internal aid independently. The proviso carves out certain situation/s from the enacting clause and thus, proviso follows the enacting clause. Exception is an extended section. Exception is used to exempt something absolutely from the statute; otherwise it is a part of the statute. The proviso is subsidiary to the main section. It is not an addendum to the main provision.

• Thus, both the proviso and the exception help the reader to understand the enactment as a whole. Sub-section (c) of section 127 of the CA 2013 is a part of the proviso which further provides deeming provision. While interpreting deeming provision in the proviso, the Court cannot overlook the internal aids which are made available by the Legislature, i.e., the context and simple meaning of the word. Therefore, the completeness of the section is a decisive point while interpreting section 127 of the CA 2013 along with the proviso and deeming provision.

• In the instant case, there is a dispute regarding the right to receive dividend, as the matter was referred to the NCLAT, and if a dispute regarding the right to receive dividend exists then no offence under the section shall be deemed to have been committed. Thus, non-payment of dividend to the shareholder is an offence, which invites penal action. However, non-payment of dividend to the shareholder will not be called an offence if the payment is not made because there exists a dispute between the parties. A dispute regarding entitlement to receive the dividend exists. In other words, the act of non-payment of dividend by the directors of the company can be justified because, according to them, a particular shareholder is not entitled to receive dividend. Merely having an opinion or holding a view that a shareholder is not entitled to receive dividend is not sufficient but there should be the existence of a dispute as understood by law. Therefore, mere denial of the entitlement is not enough to get the benefit of section 127(c) of the CA 2013, but a real dispute between the parties should exist. Similarly, mere denial of the existence of a dispute by the shareholder after pursuing litigation against the company and its directors cannot render the dispute non-existent. Indeed, this can be ascertained on the basis of the facts and circumstances of each case.

• In the instant case, admittedly the dispute existed between the shareholder and the directors and it was pending in the NCLT and the NCLAT. It was also pending before the Arbitrator. In the absence of such litigations before the forums mentioned it would have been difficult to state that there was a dispute between the petitioner and ‘S’.

• The Court perused the order dated 30th January, 2017 passed by the Judge on the issuance of process u/s 127 of the CA 2013. The Court also perused the criminal complaint filed by ‘S’ before the City Civil & Sessions Court. In the said complaint, ‘S’ had made a mention against the present applicants. The order of issuance of the process passed by the Sessions Judge is a reasoned order wherein the Judge has referred to the defence of the applicant / accused as per proviso (c) of section 127 of the CA 2013. It is further mentioned that ‘on account of dispute pending, the dividend on disputed shares of “S” be kept in abeyance’ as alleged in the notice reply, which is a matter of evidence. Therefore, a prima facie case has been made against accused ‘M’ and its directors for commission of an offence.

• Thus, it is apparent from the order that the Judge was aware of the history of the dispute between the parties. The fact of the existence of the dispute is also known to the Judge and, therefore, he has mentioned the word ‘dispute’. Under the circumstances and in view of the deeming provision in the section the Judge should not have issued process when the proviso is attracted and, hence, the offence u/s 127 of the CA 2013 is not constituted.

• In the instant case, the facts are totally different. The record placed before the trial Judge itself discloses the proviso of section 127(c) and if the material placed before the Court clearly fulfils the requirement of the proviso or an exception, then it cannot be ignored and the trial Judge after taking into account the material placed before him and also the proviso, should have formed an opinion that an offence u/s 127 is not constituted.

• Thus, a dispute exists in the instant matter. The orders of issuance of process passed by the Sessions Court and the common notices issued in the company petition were quashed and set aside.

10. Real Time Interactive Media (P) Ltd. vs. Metro Mumbai Infradeveloper (P) Ltd. [2018] 90 taxmann.com 89 (Bom.) Date of order: 12th January, 2018

Nothing in section 248 shall affect the power of the Court to wind up a company the name of which has been struck off from the register of companies

FACTS
• R Pvt. Ltd. (‘R’), the petitioner, was engaged in the business of publishing and managing advertisements on BEST TV LED screens in the BEST buses (BEST TV) running in Mumbai.

• By an agreement entered into between ‘R’ and M Pvt. Ltd., the respondent company, ‘M’, engaged the services of ‘R’ for the purpose of displaying advertisements on BEST TV in 1,300 non-AC buses and 250 AC buses for a period of three months for a consideration of Rs. 15 lakhs plus taxes.

• In accordance with the agreement, ‘R’ displayed the advertisements on BEST TV and raised three invoices. ‘M’ paid in instalments an amount of Rs. 5 lakhs and thus there was a balance outstanding. As no payments came forth, ‘R’ caused statutory notice to be issued to ‘M’.

• ‘R’ filed a winding up petition against ‘M’ stating that the recent MCA website extract of the Company Master of ‘M’ indicated the status of the company as ‘Strike Off’.

HELD
The Court observed / noted as under:

• Though it is not clear why the name of ‘M’ was struck off, section 248(1) of the Companies Act, 2013 empowers the Registrar to remove the name of a company from the register of companies. However, before he does that he shall send a notice to the company and all its directors about his intention to remove the name of the company and requesting them to send their representations along with copies of the relevant documents, if any, within a period of 30 days from the date of the notice. At the expiry of that time, the Registrar may, unless cause to the contrary is shown by the company, strike off its name from the register of companies and shall publish notice thereof in the Official Gazette; on the publication of the notice in the Official Gazette, the company shall stand dissolved. At the same time, nothing in section 248 shall affect the power of the Court to wind up a company the name of which has been struck off from the register of companies.

• The effect on the company notified as dissolved is that it shall, on and from the date mentioned in the notice under sub-section (5) of section 248, cease to operate as a company and the Certificate of Incorporation issued to it shall be deemed to have been cancelled from such date, except for the purpose of realising the amounts due to the company and for the payment or discharge of the liabilities or obligations of the company. Thus, it is clear that just because the name of the company is struck off the register u/s 248 that will not come in the way of the Court to pass an order winding up the company.

• Similar provisions are also available in the Companies Act, 1956, viz., section 560 and section 560(5). Therefore, even under the Companies Act, 1956 if the Registrar of Companies was to strike off the name of a company from the register that would not affect the power of the Court to wind up a company whose name has been struck off the register.

• In the circumstances, there is no bar in winding up ‘M’. It should be noted that ‘M’ has not filed any affidavit in reply opposing the petition. Therefore, the averments in the petition are not controverted. No reply has been filed even to the statutory notice. It is settled law that where no response has been made to a statutory notice, the Court may pass a winding up order on the basis that the amount claimed has not been denied by ‘M’ and there is a presumption of inability to pay by ‘M’. Where no response has been made to the statutory notice, ‘M’ runs a risk of the winding up petition being allowed. By virtue of section 434 of the Companies Act, 1956 a presumption of the indebtedness can be legitimately drawn by the Court where no reply to the statutory notice is forthcoming.

• In the circumstances, having heard ‘R’ and having considered the petition along with the documents annexed to it, the Court held that ‘M’ is indebted to ‘R’ and is unable to discharge its debts, is commercially insolvent and requires to be wound up.

•   The Court accordingly directed that:
•    ‘M’ be wound up by and under the directions of the Court under the provisions of the Companies Act, 1956; and that
•   the Official Liquidator be appointed as the liquidator of ‘M’ to take charge of the assets, books of accounts and properties of ‘M’ with all powers under the provisions of the Companies Act, 1956.

Without ambition one starts nothing. Without work one finishes nothing. The prize will not be sent to you. You have to win it
– Ralph Waldo Emerson

BCAJ Admin

ALLIED LAWS

19. The Internet & Mobile Association of India vs. RBI WP(C) No. 528 of 2018 (SC) Date of order: 4th March, 2020 Bench: Rohinton Fali Nariman J., Aniruddha Bose J., V. Ramasubramanian J.

Cryptocurrencies – RBI – Circular imposing ban on trading in cryptocurrency – Subordinate legislation – Violation of Fundamental Rights [Constitution of India, Art. 19(1)(g), Art. 14; Banking Regulation Act, 1949, S. 35A, S. 36(1)(a), S. 56; RBI Act, 1934, S. 45JA, S. 45L; Payment and Settlement Systems Act, 2007, S. 10(2), S. 18]

FACTS

The Reserve Bank of India (RBI) issued a ‘Statement on Developmental and Regulatory Policies’ on 5th April, 2018 and a Circular dated 6th April, 2018 in exercise of the powers conferred on it by section 35A read with section 36(1)(a) and section 56 of the Banking Regulation Act, 1949; section 45JA and 45L of the RBI Act, 1934; and section 10(2) read with section 18 of the Payment and Settlement Systems Act, 2007, which directed the entities regulated by RBI (i) not to deal with or provide services to any individual or business entities dealing with or settling virtual currencies, and (ii) to exit the relationship, if they already have one, with such individuals / business entities, dealing with or settling virtual currencies (VC).

The petitioner challenged the said Statement and Circular and sought a direction to the respondents not to restrict or restrain banks and financial institutions regulated by RBI from providing access to the banking services to those engaged in transactions in crypto assets.

HELD

The measure taken by the RBI should pass the test of proportionality, since the impugned Circular has almost wiped the VC exchanges out of the industrial map of the country, thereby infringing Article 19(1)(g) of the Constitution.

While regulation of a trade or business through reasonable restrictions imposed under a law made in the interests of the general public is saved by Article 19(6) of the Constitution, a total prohibition, especially through a subordinate legislation such as a directive from RBI, of an activity not declared by law to be unlawful, is violative of Article 19(1)(g). The Circular dated 6th April, 2018 was set aside on the ground of proportionality.

20. Tarabai Wellinkar Charitable Trust & Anr. vs. The State of Maharashtra & Ors. WP No. 448 of 2020 Date of order: 12th February, 2020 Bench: Pradeep Nandrajog J., Bharati Dangre J.

Leave & Licence – No transfer of right, title or interest – Levy u/s 37A of Maharashtra Land Revenue Code is held to be not valid [Maharashtra Land Revenue Code, 1966, S. 37A]

FACTS

Petitioner No. 1, the trust, executed a Leave & Licence agreement with M/s Sheorey Digital Systems Private Limited demising to it, as a licensee, the ground floor of a building popularly known as ‘Tarabai Hall’ for three years commencing from 15th July, 2019 to 14th July, 2022 with licence fee of Rs. 4,00,000 per month plus GST and other taxes to be borne by the licensee.

Treating the Leave & Licence agreement to be a sale / transfer of interest, the Collector has by order dated 21st June, 2019 issued u/s 37A of the Maharashtra Land Revenue Code, 1996 demanded from the petitioner Rs. 41,27,427 towards unearned income.

HELD

A bare reading of the legislation in section 37A of the Maharashtra Land Revenue Code, 1966 makes it clear that the permission of the State Government, with right vested in the State Government under sub-section (2), is required when a sale, transfer, redevelopment, use of additional Floor Space Index, transfer of Transferable Development Rights or change of use is taking place under a document. The transfer referred to in the said section has to be a transfer of an interest in the corpus.

An Indenture of Leave & Licence does not create any right, title or interest in the corpus of the property in favour of the licensee. It only permits the licensee to enter upon the property and do such acts as are permitted and which in the absence of the licence would amount to a trespass.

The Indenture of Leave & Licence, be it for residential, commercial or industrial purpose, would not be subject to any levy u/s 37A of the Maharashtra Land Revenue Code.

21. Vidya Drolia & Ors. vs. Durga Trading Corporation Civil Appeal No. 2402 of 2019 (SC) Date of order: 14th December, 2020 Bench: Sanjiv Khanna J., N.V. Ramana J.

Arbitration – Landlord-Tenant disputes under Transfer of Property Act, 1882 – Arbitrable if Rent Control Laws are not applicable [Arbitration and Conciliation Act, 1996, S. 8, S. 11; Transfer of Property Act, 1882, S. 111, S. 114, S. 114A]

FACTS

A reference was made to a larger bench vide order dated 28th February, 2019 in Civil Appeal No. 2402 of 2019 titled Vidya Drolia and Others vs. Durga Trading Corporation, 2019 SCC OnLine SC 358 as it doubted the legal ratio expressed in Himangni Enterprises vs. Kamaljeet Singh Ahluwalia (2017) 10 SCC 706 that landlord-tenant disputes governed by the provisions of the Transfer of Property Act, 1882 are not arbitrable as this would be contrary to public policy.

The issues that are required to be answered relate to two aspects that are distinct and yet interconnected, namely:

(i) meaning of non-arbitrability and when the subject matter of the dispute is not capable of being resolved through arbitration; and

(ii) the conundrum – ‘who decides’ – whether the Court at the reference stage or the arbitral tribunal in the arbitration proceedings would decide the question of non-arbitrability.

HELD

The landlord-tenant disputes arising out of the Transfer of Property Act, 1882 are arbitrable as they are not action in rem but pertain to subordinate rights in personam that arise from rights in rem.

Further, the Transfer of Property Act, 1882 does not expressly bar arbitration and an arbitral award may be executed and enforced like a decree of a civil court.

The Arbitration and Conciliation Act, 1996 itself does not exclude any category of disputes as being non-arbitrable. However, post the 2015 amendment the structure of the Act was changed to bring it in tune with the pro-arbitration approach. Under the amended provision, the Court can only give a prima facie opinion on the existence of a valid arbitration agreement. In clear cases where the subject matter arbitrability is clearly barred, the Court can cut the deadwood to preserve the efficacy of the arbitral process.

However, where a dispute would be covered by State Rent Control Laws, then the said dispute is not arbitrable.

22. Rajesh Agarwal vs. RBI & Ors. WP 19102 of 2019 (Telangana)(HC) Date of order: 10th December, 2020 Bench: Raghvendra Singh Chauhan J., B. Vijaysen Reddy J.

RBI – Master Circular – Principles of Natural Justice to be read into the Circular

FACTS

The petitioner was the Chairman and Managing Director of the borrower company. In the course of its business, the company approached several banks, including the respondent banks, and availed a loan of Rs. 1,406.00 crores. The company defaulted in repayment of the loan amount.

As per the Circular Guidelines of the Reserve Bank of India, all lender banks, with the State Bank of India as the lead bank, formed the JLF (a Joint Lenders Forum). On 29th June, 2016 the JLF declared the company’s accounts as Non-Performing Assets.

Based on the Forensic Audit Report dated 29th August, 2016, on 31st August, 2016 the JLF closed the issue observing that ‘there were no irregularities, with regard to fraudulent transactions pointed out in the Forensic Audit Report’.

Thereafter, by invoking Clause 2.2.1(g) of the Master Circular, on 2nd February, 2019 the JLF & Fraud Identification Committee declared the account of the company as ‘fraud’. Hence the writ petition.

HELD

Fair play in governance is the gravitational force which binds the entire State. Therefore, before a person or entity is obliterated, or is subjected to civil and penal consequences, the person or entity must be given an opportunity of a hearing. Without giving such an opportunity, without giving the opportunity to explain the intricacies of the accounts, or of the business dealings, to denounce a person is to act unfairly, unjustly, unreasonably and arbitrarily. Even in an administrative action, justice should not only be done but must also appear to be done to the satisfaction of all the parties.

Considering the grave civil consequences and penal action which would follow as a result of classifying a borrower as ‘a fraudulent borrower’, or ‘a holder of a fraudulent account’, it is imperative that the principles of natural justice, especially the principles of audi alteram partem, must be read into Clauses 8.9.4 and 8.9.5 of the Master Circular.

23. Nautilus Metal Crafts (P) Ltd. vs. Joint Director-General of Foreign Trade WP(C) No. 5167 of 2020 (Del.)(HC) Date of order: 18th November, 2020 Bench: Navin Chawla J.

Foreign Trade (Development and Regulation) Act, 1992 – Suspension or cancellation – Licence, certificate, scrip or any instrument bestowing financial or fiscal benefits – Only with ‘for good and sufficient reasons’ – Mandatory requirement [Foreign Trade (Development and Regulation) Act, 1992, S. 9]

FACTS

The petitioner dealt with readymade garments. It procured orders from other countries and after procurement of an order directly approached the manufacturer in India who manufactured the same and thereafter these were supplied by the petitioner to the foreign buyers.

The respondent issued the impugned show cause notice dated 8th November, 2019 to the petitioner stating that the DRI had informed it that an investigation is being carried out against the petitioner ‘for gross overvaluation to fraudulently avail export benefits’ and it had been requested not to issue any export incentives to the petitioner. The petitioner was asked to show cause as to why it be not placed in DEL so that benefits under Foreign Trade Policy (FTP) are stopped, including future refusal of Authorisation / Scrips under Rule 7(c), 7(j) and 7(n) of the Foreign Trade (Regulation) Rules, 1993 (‘Rules’).

The petitioner has challenged the show cause notice dated 8th November, 2019 on the ground that it was vague as it did not spell out the exact nature of violation for which the petitioner is sought to be proceeded against and also the impugned order dated 10th January, 2020 on the ground that the same had been passed without supplying the petitioner the documents sought to be relied upon for proceeding against it.

The petitioner further claimed that pursuant to the Circular No. 16/2019-Customs dated 17th June, 2019 issued by the Director, Customs, Central Board of Indirect Taxes and Customs with regard to IGST refund, the exports made by the petitioner were subjected to 100% examination and no discrepancy was found in the same. It was further claimed that even the export proceeds against these exports and other exports had been realised by the petitioner.

HELD

The Court held that any refusal to grant, suspend or cancel any licence, certificate, scrip or any instrument bestowing financial or fiscal benefits can only be ‘by an order in writing’. In fact, section 9(4) expressly mandates that suspension or cancellation of any licence, certificate, scrip or any instrument bestowing financial or fiscal benefits can only be ‘for good and sufficient reasons’. The requirement of giving reasons cannot, therefore, be dispensed with and is mandatory.

Further, in the order there is no reference to the show cause notices and to the replies submitted by the petitioner and how they have been dealt with and appreciated by the Authority. In fact, it gives no reason except stating that the ‘Firm is under DRI Ludhiana investigation’.

The impugned order dated 10th January, 2020 does not show any application of mind to these submissions as the order contains no reasons. The impugned order was set aside. Costs were imposed on the respondent.

BCAJ Admin

RECENT DEVELOPMENTS IN GST

NOTIFICATIONS

(a) Extension for anti-profiteering compliance – Notification No. 91/2020-Central Tax dated 14th December, 2020

By the above Notification the principal Notification, No. 35/2020 dated 3rd April, 2020 as amended by Notification No. 65/2020 dated 1st September, 2020, is further amended. The effect of this amendment is that the time of compliances and actions under anti-profiteering measures gets extended till 31st March, 2021.

(b) Implementation of amendments – Notification No. 92/2020-Central Tax dated 22nd December, 2020

The Central Government has effected amendments in the CGST Act vide the Finance Act, 2020 (12 of 2020). The amendments were to be brought into operation by issue of a Notification. Now, by the above Notification the amendments effected by sections 119, 120, 121, 122, 123, 124, 126, 127 and 131 of the Finance Act, 2020 (12 of 2020) are brought into force from 1st January, 2021. The indicative changes are stated as under:

Sl. No.	Section of Finance Act, 2020	Relevant section of CGST Act	Indicative changes
1.	Section 119	Section 10(2)(b) / (c) / (d)	Section 10(2)(b) / (c) / (d) of the CGST Act is amended to include services also in the said section. Section 10 relates to the composition scheme and by the amendment, services are also included in the above provisions relating to restrictions under composition
2.	Section 120	Section 16(4)	By this amendment, the requirement of correlating debit note with invoices is done away with. The ITC reflected in debit notes can be claimed independently, irrespective of the date of the original invoice
3.	Section 121	Section 29(1)	Sub-clause (c) in section 29(1) is replaced. Now the cancellation of registration facility is extended and made available to a person who wishes to opt out of the voluntary registration
4.	Section 122	Section 30(1)	The proviso is substituted. Due to substitution, power is given to the Additional Commissioner or Joint Commissioner to extend the time for filing application for revocation of cancellation of registration up to 30 days in deserving cases
5.	Section 123	Section 31(2)	The proviso u/s 31(2) is substituted. By the substitution more powers are given to the Government about prescribing requirements for tax invoices in relation to services
6.	Section 124	Section 51(3)	Power is taken to issue prescribed form for TDS certificate. Exemption is given to Government enterprises from late fees applicable for failure to furnish TDS certificates
7.	Section 126	Section 122	Sub-section (1A) is inserted in section 122. The newly-inserted section widens the scope of penalty provision and intends to cover the beneficiary and connected persons. The quantum of penalty is also prescribed
8.	Section 127	Section 132(1)	Section 132(1) of the CGST Act relates to punishment. By amendment in section 132(1), in addition to the person who has committed the offence, the person who causes the offence and retains benefit is also made liable for punishment. The scope of clauses (c) and (e) is also widened to include ITC taken fraudulently
9.	Section 131	Paragraph (4) in Schedule II	The amendment in paragraph (4) in Schedule II to the CGST Act is to remove the words ‘whether or not for a consideration’ from the said paragraph. The above paragraph (4) relates to transfer or disposal of business assets, etc., and prescribes the same as supply of goods or services in different clauses in the said paragraph. By removal of the above words, it appears that the transaction without consideration may not be covered by the above paragraph. However, the matter requires clarification

Sl. No.

Section of Finance
Act, 2020

Relevant section of
CGST Act

Indicative changes

Section
119

Section
10(2)(b) / (c) / (d)

Section
10(2)(b) / (c) / (d) of the CGST Act is amended to include services also in
the said section. Section 10 relates to the composition scheme and by the
amendment, services are also included in the above provisions relating to
restrictions under composition

Section
120

Section
16(4)

By
this amendment, the requirement of correlating debit note with invoices is
done away with. The ITC reflected in debit notes can be claimed
independently, irrespective of the date of the original invoice

Section
121

Section
29(1)

Sub-clause
(c) in section 29(1) is replaced. Now the cancellation of registration
facility is extended and made available to a person who wishes to opt out of
the voluntary registration

Section
122

Section
30(1)

The
proviso is substituted. Due to substitution, power is given to the Additional
Commissioner or Joint Commissioner to extend the time for filing application
for revocation of cancellation of registration up to 30 days in deserving
cases

Section
123

Section
31(2)

The
proviso u/s 31(2) is substituted. By the substitution more powers are given
to the Government about prescribing requirements for tax invoices in relation
to services

Section
124

Section
51(3)

Power
is taken to issue prescribed form for TDS certificate. Exemption is given to
Government enterprises from late fees applicable for failure to furnish TDS
certificates

Section
126

Section
122

Sub-section
(1A) is inserted in section 122. The newly-inserted section widens the scope
of penalty provision and intends to cover the beneficiary and connected
persons. The quantum of penalty is also prescribed

Section
127

Section
132(1)

Section
132(1) of the CGST Act relates to punishment. By amendment in section 132(1),
in addition to the person who has committed the offence, the person who
causes the offence and retains benefit is also made liable for punishment.
The scope of clauses (c) and (e) is also widened to include ITC taken
fraudulently

Section
131

Paragraph
(4) in Schedule II

The
amendment in paragraph (4) in Schedule II to the CGST Act is to remove the
words ‘whether or not for a consideration’ from the said paragraph. The above
paragraph (4) relates to transfer or disposal of business assets, etc., and
prescribes the same as supply of goods or services in different clauses in
the said paragraph. By removal of the above words, it appears that the
transaction without consideration may not be covered by the above paragraph.
However, the matter requires clarification

All the above amendments are made effective from 1st January, 2021.

(c) Waiver of late fee – Notification No. 93/2020-Central Tax dated 22nd December, 2020

By the above Notification, the late fee for filing GSTR4 (composite persons) for the financial year 2019-20 is waived for the registered persons whose principal place of business is in the Union Territory of Ladakh if such return is filed till 31st December, 2020.

(d) Amendments to Rules – Notification No. 94/2020-Central Tax dated 22nd December, 2020

Through this Notification, amendments are made in various Rules under the CGST Rules, 2017. The indicative changes are as under:

Sl. No.	Indicative changes in CGST Rules
a)	Rule 8(4A) is substituted and further requirements like biometric-based Aadhaar authentication and KYC documents are introduced for registration. The amendment to be effective from a date to be notified;
b)	Rules 9(1) and (2) are amended to extend the time for grant of new registration from three days to seven days and up to 30 days in specified cases, i.e., where physical verification is involved;
c)	Rule 21 about cancellation of registration is amended. The following three contingencies are also added to cancel the registration: (i) Availing ITC in contravention of section 16 or the Rules thereunder; (ii) Amounts reflecting in GSTR1 being more than amounts reflecting in GSTR3B; (iii) ITC claimed is more than allowed by the newly-introduced Rule 86B;
d)	Rule 21A(2) relates to suspension of registration. The power to suspend registration, pending cancellation, etc., is now made strict in the sense no hearing will be required to be given before such suspension;
e)	Sub-rule (2A) is inserted in Rule 21A. By the above Rule, suspension can also be made in case there is significant difference between outward / inward supplies furnished in Form GSTR1 and return in GSTR3B. Pending final cancellation, an opportunity to clarify the differences within 30 days will be given;
f)	Sub-rule (3A) is inserted in above Rule 21A and it is further provided that the person whose registration is suspended will not be eligible for refund u/s 54 during the period of suspension;
g)	Sub-rule (4) of Rule 21A is amended to give power of revocation of suspension, if the proper officer deems it fit;
h)	In Rule 22 consequential changes are made to align the same with amendments in Rule 21A;
i)	Amendments are effected in Rule 36 from 1^st January, 2021. The major amendment in Rule 36(4) is that if the supplier has not furnished details of supplies in GSTR1 or using invoice furnishing facility, then additional ITC can be availed at 5% of the eligible ITC. In other words, the previous limit of 10% is reduced to 5%;
j)	Rule 59 is amended to debar the person from filing GSTR1 or invoice furnishing facility if he has not furnished return in GSTR3B for preceding two months or preceding tax period. Similarly, a person who is allowed to use his ITC for more than 99% of his tax liability under Rule 86B, will also not be allowed to furnish GSTR1 or use the invoice furnishing facility, if he has not filed GSTR3B for the preceding tax period;
k)	Rule 86B is inserted from 1^st January, 2021. The newly-inserted Rule puts restriction on the use of ITC in credit ledger for discharging outward liability. A registered person can use only 99% of outward tax liability for adjustment towards his outward tax liability, if his taxable supplies in a month are more than Rs. 50 lakhs (excluding exempt supply or zero-rated supply). Certain registered persons are excluded from the above restriction. If proprietor, karta, partners or directors, etc. are paying more than Rs. 1 lakh income tax in the last two financial years, then the entity concerned will not be governed by the above restriction. Similarly, if the registered person has received refund of more than Rs. 1 lakh in the preceding financial year as exporter or under inverted duty structure, the above restriction will not apply. The above restriction will also not apply to registered person who has discharged his output liability through electronic cash ledger exceeding 1% of total output liability applied cumulatively up to the current month of filing return. The said restriction will also not apply to Government authorities. Power is also given to the Commissioner or an officer authorised by him to remove the restriction after verification and safeguard as he deems fit;
l)	Rule 138(10) is amended. The earlier limit for validity of E-way bill for 100 km. for one day is changed to 200 km. for one day;
m)	Rule 138E is amended and ‘two months’ are substituted by ‘two tax periods’. Thus, failure to file two returns as per tax period will bring the person under the above rule and will not be eligible to generate E-way bill. Similarly, a person whose registration is under suspension will not be allowed to generate E-way bill.

Sl. No.

Indicative changes in
CGST Rules

Rule
8(4A) is substituted and further requirements like biometric-based Aadhaar
authentication and KYC documents are introduced for registration. The
amendment to be effective from a date to be notified;

Rules
9(1) and (2) are amended to extend the time for grant of new registration
from three days to seven days and up to 30 days in specified cases, i.e.,
where physical verification is involved;

Rule
21 about cancellation of registration is amended. The following three
contingencies are also added to cancel the registration:

(i) Availing ITC in
contravention of section 16 or the Rules thereunder;

(ii) Amounts reflecting in
GSTR1 being more than amounts reflecting in GSTR3B;

(iii) ITC claimed is more
than allowed by the newly-introduced Rule 86B;

Rule
21A(2) relates to suspension of registration. The power to suspend
registration, pending cancellation, etc., is now made strict in the sense no
hearing will be required to be given before such suspension;

Sub-rule
(2A) is inserted in Rule 21A.

By
the above Rule, suspension can also be made in case there is significant
difference between outward / inward supplies furnished in Form GSTR1 and
return in GSTR3B. Pending final cancellation, an opportunity to clarify the
differences within 30 days will be given;

Sub-rule
(3A) is inserted in above Rule 21A and it is further provided that the person
whose registration is suspended will not be eligible for refund u/s 54 during
the period of suspension;

Sub-rule
(4) of Rule 21A is amended to give power of revocation of suspension, if the
proper officer deems it fit;

In
Rule 22 consequential changes are made to align the same with amendments in
Rule 21A;

Amendments
are effected in Rule 36 from 1^st January, 2021. The major
amendment in Rule 36(4) is that if the supplier has not furnished details of
supplies in GSTR1 or using invoice furnishing facility, then additional ITC
can be availed at 5% of the eligible ITC. In other words, the previous limit
of 10% is reduced to 5%;

Rule 59 is amended to debar the person from filing
GSTR1 or invoice furnishing facility if he has not furnished return in GSTR3B
for preceding two months or preceding tax period.

Similarly, a person who is allowed to use his ITC for
more than 99% of his tax liability under Rule 86B, will also not be allowed
to furnish GSTR1 or use the invoice furnishing facility, if he has not filed
GSTR3B for the preceding tax period;

Rule
86B is inserted from 1^st January, 2021. The newly-inserted Rule
puts restriction on the use of ITC in credit ledger for discharging outward
liability. A registered person can use only 99% of outward tax liability for
adjustment towards his outward tax liability, if his taxable supplies in a month
are more than Rs. 50 lakhs (excluding exempt supply or zero-rated supply).
Certain registered persons are excluded from the above restriction.

If
proprietor, karta, partners or directors, etc. are paying more than Rs. 1
lakh income tax in the last two financial years, then the entity concerned
will not be governed by the above restriction.

Similarly,
if the registered person has received refund of more than Rs. 1 lakh in the
preceding financial year as exporter or under inverted duty structure, the
above restriction will not apply.

The
above restriction will also not apply to registered person who has discharged
his output liability through electronic cash ledger exceeding 1% of total
output liability applied cumulatively up to the current month of filing
return. The said restriction will also not apply to Government authorities.

Power
is also given to the Commissioner or an officer authorised by him to remove
the restriction after verification and safeguard as he deems fit;

Rule
138(10) is amended. The earlier limit for validity of E-way bill for 100 km.
for one day is changed to 200 km. for one day;

Rule
138E is amended and ‘two months’ are substituted by ‘two tax periods’. Thus,
failure to file two returns as per tax period will bring the person under the
above rule and will not be eligible to generate E-way bill.

Similarly,
a person whose registration is under suspension will not be allowed to
generate E-way bill.

(e) Extension of filing annual return – Notification No. 95/2020-Central Tax dated 30th December, 2020

By the above Notification the due date for filing annual return for the year 2019-2020 is extended up to 28th February, 2021.

(f) Amendment to Rules – Notification No. 01/2021-Central Tax dated 12th January, 2021

By this notification, Rule 59 is amended and new sub-rule (6) is inserted in Rule 59. The amendment seeks to debar a person from filing GSTR1 if he has not filed GSTR3B for the preceding two months or the preceding tax period, as the case may be.

(g) Amendment to Rules – Notification No. 02/2021-Central Tax dated 1st January, 2021

Through this Notification, administrative changes in appellate authorities are notified.

CIRCULARS

The Government of Maharashtra has issued Circular No. 1T of 2021 dated 12th January, 2021. Through this, the earlier Circular No. 39T of 2019 dated 5th July, 2019 is withdrawn. By that Circular (39T of 2019), there was deemed adoption of Circulars issued by the CBIC for the MGST Act. Now, the State Government will examine the Circulars issued by the CBIC and will issue a separate Circular regarding their applicability for implementation of the MGST Act. The effect will be that there will be confusion about following the same under the CGST Act. This will also lead to different situations under CGST and MGST for the same subject. However, sometimes the State Government may give more benefit compared to the CBIC Circular.

ADVANCE RULINGS

1. Classification – Classic Malabar parota and whole wheat Malabar parota
M/s Modern Food Enterprises Pvt. Ltd. (Order No. KER/23/2018 Dated 12th October, 2018) (Ker)(AAAR)

The above appeal was against the Advance Ruling Order (AR) dated 12th October, 2018 passed by the Kerala AAR. In that, the above products were held to be covered by CTH 2106 and not entitled to exemption as per heading 1905. They were held to be liable to GST @18% (9% CGST and 9% SGST).

In the appeal, the appellant reiterated its contentions, mainly that the parota meets the description of heading 1905 and hence is exempt as per Notification No. 2/2017-Central Tax SRO No. 361/2017.

The learned AAAR examined the contents and manufacturing process of the parota and noted as follows:

‘7. During the course of final hearing, the appellant has submitted a detailed list of ingredients, manufacturing process chart, etc., as explained in paragraphs 3.2 and 3.3 above. It is noticed that the impugned products are manufactured by the appellant using various ingredients including refined wheat flour atta (maida) / wheat atta, purified water, edible vegetable oil (sunflower oil), milk solids, sugar, common salt and yeast. The impugned goods also contain permitted quantities of gluten, preservative, emulsifier and acidity regulator. Upon raw material intake, the ingredients go through various processes as detailed in paragraph 3.3. The whole wheat Malabar parota and the Classic Malabar parota are made up of whole wheat flour and refined wheat flour (maida), respectively. Preservatives and acidity regulators are added for a longer shelf life for distribution in the retail chain. The appellant has stated that the impugned goods are branded as “100% whole wheat Malabar parota” and “Classic Malabar parota” and sold in poly-laminated packets. The impugned products are not readily consumable (ready to eat) but need to be heated or further processed before consumption.’

The AAAR also analysed the HSNs 2106 and 1905. The comparative study showed that items under 1905 are ready to consume bakery products.

He observed that the parotas in the present case are not ready to consume but require a process before consumption. He also referred to the Rules of Classification given under Custom Tariff. Even by this analysis, the AAAR came to the conclusion that even if the products are considered to be falling equally in 1905 and 2106, heading 2106 comes last. Exemption can be availed if the product comes under 1905. Observing as above, the AAAR confirmed the order of the AAR, holding that the products are liable to 18% GST. However, in conclusion the AAAR clarified as under:

‘It is further clarified that this ruling is not applicable to generic parota and wheat parota that is supplied as a part of composite supply of services mentioned in item 6(b) of schedule II to KSGST and CGST Acts.’

The parties concerned will be required to consider the above position.

2. Agency – Electricity payment M/s Gujarat Narmada Valley Fertilizers & Chemicals Ltd., Narmada Nagar, Bharuch, Gujarat (Order No. GUJ/GAAR/R/93/2020 Dated 17th September, 2020) (Guj.)

The applicant, Gujarat Narmada Valley Fertilizers & Chemicals Ltd. (GNFC) (also referred to as lessor) has rented its premises situated in Ahmedabad to the Central Government for use by its CGST Department. The rent is fixed at Rs. 20,80,848 per month. In addition, there was the following clause in the agreement:
‘9) “the Govt. of India” shall pay all charges in respect of electric power, air-conditioning charges, light and water used along with the applicable taxes thereon for the said premises during the continuance of these presents”.’

Under the Service Tax regime, the applicant was paying service tax on rent and electricity charges paid by it and collected from the Central Government as per the above clause. The applicant had provided a sub-meter for calculating electricity charges as per actuals and also did the same for its other lessees. However, when the CGST Act came into operation, the Central Government conveyed to the applicant that no GST is payable on electricity charges paid by it to the applicant for onward payment to the electricity company.

In view of this, GNFC applied to the AAR to know about its liability to pay GST on electricity charges collected by it from the lessee, the Central Government. The following questions were raised:

‘1. When the landlord charges electricity or incidental charges in addition to rent as per the lease agreement for immovable property rented to the tenant, is the landlord liable to pay and recover GST from the tenant on the electricity or incidental charges charged by it?

2. Can electricity charges paid by the landlord to Torrent Power Ltd. (the supplier of electricity) for electricity connection in the name of the landlord and recovered based on the sub-meters from different tenants be considered as amount recovered as pure agent of the tenant when the legal liability to pay the electricity bill to Torrent Power Ltd. is that of the landlord?’

The applicant was canvassing that the electricity meter is in its own name and it is the applicant who is liable to pay for the electricity. It was further contended that such charges are incidental; are other charges liable to be clubbed in taxable consideration as per section 15(c) of the CGST Act? The applicant was inclined to collect GST on electricity charges and pay it to the Government.

The learned AAR discussed the facts and legal provisions. He felt that the rental amount is fixed and GST is being paid on the said amount.

Regarding collection towards electricity charges, he observed that as per the specific clause in the agreement, the responsibility is of the lessee to pay electricity charges and it is independent of rent, which is a fixed amount. The AAR held that such charge is not incidental or other charges for renting.

The AAR applied Rule 33 of the CGST Rules about agency transaction. The relevant observations are as under:

‘16.2 The above discussion read with the agreement entered into between the applicant and the Government of India makes it expressly clear that the agreement contains an inbuilt clause of actual payment of electric charges by the lessee directly to the electric company. However, due to lack of infrastructure on the part of the lessor, there is a silent agreement between both the parties that the applicant will collect the actual usage charges on the basis of the reading of the sub-meter and in turn pay the same to the electric company. Since this arrangement has been on-going since a long time, it can be clearly said that there is a mutual understanding between both the parties and such mutual understanding is also called an “agreement” in terms of the provisions of the Indian Contract Act, 1852. Thus, the conditions of Rule 33 of the CGST Rules, 2017 also stand satisfied in the instant case and as such it is concluded that the electricity expenses incurred by the applicant on behalf of the lessee have been incurred in the capacity of a pure agent. At this point it is reiterated that the decision would apply only in respect of the agreement under discussion and analogy of this decision would not be applicable to different set of circumstances.’

Thus, based on the peculiar terms of the agreement, the AAR held that it is the lessee who is liable to pay electricity charges to the electricity supply company. The applicant is arranging it on behalf of the lessee, so it is an agent of the lessee for such payment. The learned AAR ruled that there is no liability on the applicant to pay GST on electricity charges collected by it from the lessee and paid to the electricity supply company. This is one of those cases where the supplier also becomes an agent of the recipient.

BCAJ Admin

GOODS AND SERVICES TAX (GST)

I. HIGH COURT

26. [2021-TIOL-121-HC-Tripura-GST] M/s Sri Gopikrishna Infrastructure Pvt. Ltd. vs. The State of Tripura and Ors.

Non-preparation of E-way bill not attributable to any intention for evasion of tax, should not be exigible to 100% of the tax as penalty

FACTS

The petitioner company was transporting some goods when the consignment was intercepted by the Enforcement Wing. The goods were seized and duty liability was determined. They were unable to produce E-way bill against the vehicle; an equivalent (additional) amount of penalty was also imposed. A show cause notice was issued u/s 129(3) of the CGST Act, section 68(3) of the UTGST Act and section 20 of the IGST Act. It was claimed that for two vehicles used consecutively the valid E-way bills were generated, but due to sudden lockdown the consignment could not be brought into the State of Tripura within time. They could not generate a new E-bill against a new vehicle and were compelled to cause trans-shipment as the earlier vehicle broke down while being stranded during the nationwide lockdown.

HELD

The High Court noted that the breach falls within the ambit of section 122(xiv) of the CGST Act and as such the petitioner is excisable to the penalty. However, the Superintendent has exceeded his jurisdiction in imposing the (additional) penalty. For the breach, which falls u/s 122(xiv), the penalty is fixed at Rs. 10,000. Penalty of an amount equivalent to tax is leviable for the incidents when the tax is sought to be evaded or not deducted u/s 51. There is no dispute about the payment of tax; however, the Revenue authority shall be at liberty to verify the facts to ascertain whether or not tax has been paid. In the event of non-payment of tax, appropriate action be taken for realising the said tax. In the circumstances, the Court set aside the order of the (additional) penalty and directed the petitioner to pay the sum of Rs. 10,000 as penalty for the breach within a period of one month.

II. AUTHORITY OF ADVANCE RULING

27. [2021-TIOL-33-AAR-GST] Dharmashil Agencies Date of order: 30th July, 2020

The place of supply of intermediary services provided to a foreign company is the location of the supplier – Accordingly, being an intra-state supply CGST and SGST is payable

FACTS

The applicant has submitted that it has entered into an agreement with a company in Japan to sell its machinery and is receiving commission income in foreign currency. The applicant sought advance ruling on the question whether to charge CGST and SGST or IGST looking to the nature of the transaction.

HELD

The services provided by the applicant, i.e., ‘intermediary services’, appears at sub-section (8)(b) of section 13 of the IGST Act. And sub-section (8) clearly mentions that the place of supply in respect of services described under the said sub-section shall be the location of the supplier of services. Further, the supplier is the applicant and the location of the said supplier is in Ahmedabad, Gujarat. Since the location of the applicant, who is the supplier of services, is in Gujarat and both the supplier of service as well as the place of supply of service is in Gujarat, the supply of services would be considered akin to intra-state supply of services and would be liable to CGST and SGST.

Life is not measured by the number of breaths we take,
but by the moments that take our breath away
– Maya Angelou

BCAJ Admin

Service Tax

I. HIGH COURT

15. [2020 (43) GSTL (Bom.) New India Civil Erectors Pvt. Ltd. vs. UOI Date of order: 25th September, 2020

Section 87 of Finance Act, 1994 – Without assessment and determination of tax due, no conclusion can be reached that any amount has become due to be paid and invocation of section 87 shall be premature and unjustified

FACTS

The petitioner was a private limited company engaged in the business of construction. For the period from 1st April, 2015 to 30th June, 2017, due to non-realisation of legitimate dues the petitioner was unable to discharge its service tax liability of Rs. 94,26,823 as alleged by the Department. The respondent also alleged that as per the statements by the accountant and legal consultant of the petitioner, it was evident that there was admission on the part of the petitioner of service tax liability. Such statement was also sustained by the director of the petitioner. The respondent contended that such declarations amounted to admission of liability which was recoverable u/s 87 of the Finance Act, 1994. Thus, the respondent issued a garnishee notice and froze the bank account of the petitioner to hold Rs. 94,26,823. Being aggrieved, the petitioner filed the present writ petition seeking relief by way of unfreezing of the bank account.

HELD

The High Court was of the view that the crucial expressions to be noted from section 87 of the Act are ‘any amount payable’, ‘is not paid’ and ‘shall proceed to recover’. A joint reading of these expressions can be interpreted to mean that before issuing garnishee notice u/s 87(b)(i), the amount has to be first determined and quantified. In the case of M.P. Enterprise vs. Union of India, 2018 (19) GSTL 487 (Bom.), the High Court had held that prior to determination of the amount due the invocation of section 87 would be premature. Further, mere statements by the officials themselves cannot lead to the conclusion that a certain amount has been determined as due from the petitioner. Without there being any assessment, no conclusion can be reached about any amount becoming due. Thus, the Court held that such invocation of section 87 was premature and unjustified and directed the respondent to withdraw the restraint on the petitioner’s bank account.

16. [2020 (42) GSTL 21 (HC-Mad.)] TVL Madura Coats W.P. (MD) No. 521 of 2020 and W.M.P. (MD) No. 399 of 2020 Date of order: 13th August, 2020

Section 83 of Central Sales Tax, 1956 – Onus lies on assessing authority to prove a statement as false in case of non-acceptance of explanation on the discrepancy pointed – Stand taken in subsequent assessment by the assessing authority prevails over a year unless it is justified

FACTS

The petitioner was served with an order rejecting exemption claimed on certain export transactions consequent to an assessment. The variation in the export value as set out in the export documents and books of accounts due to fluctuation in foreign exchange was rejected for want of a bank reconciliation statement. Reversal of export transactions erroneously shown by the petitioner as sales return were also rejected for non-submission of relevant documents even though the transactions were supported by bona fide documents and a certificate issued by the Chartered Accountant. The petitioner contended that the stand taken by the authority was contradictory to its subsequent assessment and thus had preferred the present writ.

HELD

The High Court held that when the assessing authority had accepted the explanation of the petitioner for the same discrepancy in the subsequent assessment, it cannot change its stand unless it has a proper reason for doing so. Further, if the authority was of the view that the statement of the petitioner was false, the onus lies on the authority itself to prove this. The petitioner cannot be expected to prove its point. Thus, the respondent was directed to revise the order.

17. [2020 (43) GSTL 479] Vianaar Homes Pvt. Ltd. vs. Asstt. Commr. (Circle-12), CGST, Audit-II, Delhi & Ors. (Del.) Date of order: 25th September, 2020

Rule 5A of Service Tax Rules, 1944 framed under the repealed / omitted Chapter V of the Finance Act, 1994 is saved by sections 173 and 174 of CGST Act, 2017

FACTS

The petitioner is a company engaged in the business of construction of residential complexes. It challenged a letter dated 1st November, 2019 by virtue of which the respondents commenced audit / verification under Rule 5A of the Service Tax Rules, 1994. The primary reason for challenging the action was that with effect from 1st July, 2017, with the advent of the CGST Act, the respondents cannot take recourse to a subordinate legislation (i.e., Rule 5A, Service Tax Rules, 1994) framed under Chapter V of the Finance Act, 1994 because it stands omitted by virtue of section 173 of the CGST Act. Besides, section 174 of the CGST Act, 2017 does not specifically repeal or save Rule 5A of the Service Tax Rules, 1994.

HELD

After extensively examining sections 173 and 174 of the CGST Act, 2017 along with sections 6 and 24 of the General Clauses Act, the High Court came to the conclusion that the intention of the Parliament was to save not only the ongoing proceedings but also the initiation of fresh investigation, inquiry, verification, etc., under the erstwhile service tax regime. Non-inclusion by title in the saving clause will not have any bearing on enforcement of the subordinate legislation (Rule 5A of the Service Tax Rules) where the parent Act is specifically saved. Thus, the Court held that Rule 5A of the Service Tax Rules, 1994 framed under the repealed / omitted Chapter V of the Finance Act, 1994 stood saved.

18. [2020 (43) GSTL 333 (Ker.)] Madhav Motors vs. State Tax Officer, GST
Department, Kannur Date of order: 27th October, 2020

Section 139 of Central Goods and Services Tax Act, 2017 – Where fresh registration is granted without cancellation of provisional registration, then such registration must relate back to the date of provisional registration and assessee be allowed to file returns and claim input tax credit from the date of provisional registration

FACTS

The petitioner was a dealer in automobiles registered under the erstwhile Kerala VAT Act. With the introduction of the GST Act, it applied for registration under the new Act and was granted provisional registration on 28th June, 2017 as per section 139 of the CGST Act, 2017. Thereafter, it tried uploading Form TRAN-1 for conversion of provisional registration to permanent registration and to claim transitional credit. But since no permanent registration was granted, it was not able to upload the said Form. Hence it opted for a representation, but the respondent did not give any response. In the interim, on 4th January, 2020 it was granted a fresh registration without cancellation of the provisional registration. The fresh registration indicated the liability of the petitioner from 1st July, 2017, whereas the registration certificate would be valid only from 4th January, 2020. Noticing this discrepancy, the petitioner requested the respondent for a change in the effective date of the registration certificate from 4th January, 2020 to 1st July, 2017. But this request was rejected. Aggrieved, the petitioner filed the present writ petition.

HELD

The High Court found that the provisional registration granted was not formally cancelled by the respondent as per the procedures envisaged under the GST law. The permanent registration was granted by the respondent on 4th January, 2020 and the date of liability was shown as being from 1st July, 2017. This clearly indicated that the respondent was aware that the petitioner was under the category of those who were taking refuge under transition credit. The respondent, however, stipulated the validity of the registration only from 4th January, 2020. Therefore, the Court held that where the provisional registration is not cancelled the permanent registration must relate back to the date of the provisional registration. It directed the respondent to amend the certificate and make it valid from 1st July, 2017 and permit the petitioner to upload returns and claim ITC (input tax credit) based on the returns so uploaded for the impugned period.

II. TRIBUNAL

19. [2020 (42) GSTL 66 (Tri.-Del.)] Om Logistics Limited ST/51121/2019 Date of order: 5th December, 2020

Rule 2(I) of CENVAT Credit Rules, 2004 – CENVAT credit available on tax paid on insurance premium under ‘Keyman’ insurance policy

FACTS

The appellant, registered under the Service Tax Act, availed CENVAT credit on tax charged on insurance premium paid in respect of the ‘Keyman’ insurance policy of key managerial persons. The respondent alleged that the life insurance policy was primarily for the personal use of the persons involved and not for any business purpose. Further, instead of the insurance policy, they had produced only the receipt of the premium. Thus, the credit availed was disallowed.

HELD

The Tribunal, relying upon on its own judgement, held that benefit of the policy in question was payable to the appellant company, being registered under the Companies Act and having perpetual existence. Thus, credit availed in respect of the insurance premium paid on account of ‘Keyman’ insurance had to be allowed to the appellant.

20. [2020 (42) GSTL 84 (Tri.-Hyd.)] Ushodaya Enterprises Pvt. Ltd. Date of order: 18th November, 2019

Section 73 of Finance Act, section 11A of Central Excise Act, 1994 – The show cause notice issued invoking extended period subsequent to Department audit wherein no such objection was raised is time-barred

FACTS

The appellant, a division of Ramoji Film City, operated satellite T.V. channels. A show cause notice was served on it on 7th April, 2011 for the period 2006-07 to 2009-10, alleging that the hire charges paid to a party abroad for the purpose of lease / rent of transponders which are attached to a satellite was to be classified as business support services and calling upon it to pay service tax on the same.

HELD

The Tribunal observed that the show cause notice was received by the appellant on 7th April, 2011, even though the Department claimed to have issued it on 24th March, 2010. The Department could not produce any document of dispatch or service thereof. Further, the appellant was admittedly audited by the Department where no objection was raised on the issue. Thus, the subsequent show cause notice cannot propose the demand for a period beyond one year of the period in dispute nor can it allege suppression of facts or misstatement with an intention to evade tax. Besides, if service tax paid under RCM on the value of hire charges paid by the appellant to the service provider abroad was available as credit in case such value was categorised as taxable, the situation would be revenue neutral. Consequently, penalty cannot be imposed as the facts indicated the absence of intention to evade tax.

21. [2020 (42) GSTL 79 (Tri.-All.)] Shriram Pistons and Rings Ltd. ST/70444/2019 Date of order: 4th February, 2020

Section 65 of Finance Act, 1994 – Amount recovered from salary of employees leaving job before completion of their term fixed as per contract entered into with them is not liable to tax

FACTS

The appellant was served with an order demanding service tax from that part of the amount which it recovers out of the salary paid to the employee if the employee breaches the contract of total term of employment.

HELD

It was held that the said recovery was out of the salary paid and also that the salary was not covered by the provisions of service tax. Relying upon the decision of the Madras High Court in GE T & D India Ltd. (Formerly ALSTOM T & D India Ltd.) vs. Deputy Commissioner of Central Excise 2020 (35) GSTL 89 (Mad.), the impugned order was set aside.

22. [2021-TIOL-04-CESTAT-Chd.] Mohan International Builders vs. Commissioner of Central Excise and Service Tax Date of order: 24th November, 2020

Works contract service is a service as a whole and therefore even though service tax is payable on a part of the value, reversal is not required under Rule 6(3) of the CENVAT Credit Rules, 2004

FACTS

The assessee is a registered contractor and providing Works Contract Service. It is liable to pay service tax on 40% of the value of service; therefore during audit an objection was raised that the remaining 60% of the value is to be treated as an exempted service in view of Rule 2(e) of the CENVAT Credit Rules, 2004; as such, the assessee was required to pay an amount under Rule 6(3)(i) of CENVAT credit availed by it.

HELD

The Tribunal relied on the decision in Surya Contractors Pvt. Ltd [2020-TIOL-899-CESTAT-Chd.] where the Tribunal categorically held that service as a whole provided by the appellant is a Works Contract Service and the same is a taxable service. It was also noted that the Scheme of Rule 6 read with Rule 2(e) of the CENVAT Credit Rules, 2004 shows that Rule 6 is applicable only in respect of distinct transactions of services wherein the appellant is providing two distinct transactions, one by way of a taxable service and another by way of an exempted service under Rule 2(e). Rule 6 does not become applicable in respect of the same taxable service where a part of it is being exempted by way of any notification issued which exempts a certain portion of the value of the same taxable service. The Tribunal accordingly held that Rule 6(3) of the CCR is not applicable to the present case.

23. [2021-TIOL-06-CESTAT-Bang.] M/s Northern Operating Systems Pvt. Ltd. vs. Commissioner of Customs, Central Excise and Service Tax Date of order: 3rd December, 2020

Deputation of employees by a group company is not liable to service tax under manpower recruitment or supply agency service – Employer-employee relationship exists therefore such transactions are excluded from the purview of service tax

FACTS

The appellant entered into an agreement with its group companies located outside India to provide general back office and operational support to such group companies. The terms of the agreement stipulated that when required the appellants would request the group companies for managerial and technical personnel to assist in its business and accordingly the employees would be deputed by the group company. The employees would act in accordance with the instructions and directions of the appellants, they would be on the payroll of the group company and would receive salary and other social security benefits from the group company. The Revenue alleged that the appellant failed to discharge service tax under manpower recruitment or supply agency service with respect to services received from their group company.

HELD

The Tribunal noted that service by an employee to the employer in the course of or in relation to his employment stands excluded from the definition of service. The persons seconded are working in the capacity of employees and payment of salaries, etc., is made by group companies only for disbursement purposes and hence an employee-employer relationship exists and such an activity cannot be termed as ‘manpower recruitment or supply agency’. The demand is accordingly set aside.

24. [2020 (43) GSTL 533 (Tri.-Del.)] Vaatikaa Construction Pvt. Ltd. ST/53250-53251/2015, 53307/2015 Date of order: 5th December, 2020

Section 65(105) – Service tax demand raised under one category cannot be confirmed under another category

FACTS

The appellant’s activities were in the nature of works contracts. A show cause notice was issued to it demanding service tax under ‘residential complex construction’ service, whereas the demand was confirmed under ‘works contract’ service.

Further, the respondent rejected the CA’s certificate and raised service tax liability on the closing balance of advances as reflected in the balance sheet, overlooking the months during which the advances were received.

HELD

The Tribunal, relying upon the various judgments quoted by the appellant, held that demand cannot be confirmed under a different category than the category quoted under the show cause notice even if the nature of business is in line with the said category quoted in the order. Besides, as the respondent failed to assign any specific reason for rejecting the CA’s certificate and computed the liability on the closing balance of the advance receipt, the additional demand was set aside.

BCAJ Admin

FROM PUBLISHED ACCOUNTS

Compiler’s Note: Division II of Schedule III to the Companies Act, 2013 requires disclosures regarding ‘Contingent Liabilities and Commitments’. These disclosures include, apart from other items, ‘Other Commitments’. ICAI has, in its Guidance Note on the same, mentioned that ‘the term “Other commitments” would include all expenditure related contractual commitments apart from capital commitments such as commitments arising from long-term contracts for purchase of raw material, employee contracts, lease commitments, etc. The scope of such terminology is very wide and may include contractual commitments for purchase of inventory, services, investments, employee contracts, etc.’ Given below are some illustrations of disclosures made by companies for such ‘Other commitments’ for the year ended 31st March, 2020 (Disclosure of Contingent liabilities, Capital commitments, Litigations and Lease commitments is not included since the same is done by almost all companies).

ADANI PORTS AND SPECIAL ECONOMIC ZONE LIMITED

Other Commitments

a) The port projects of subsidiary companies, viz., The Dhamra Port Company (‘DPCL’) and joint venture Adani International Container Terminal Private Limited (‘AICTPL’) have been funded through various credit facility agreements with banks. Against the said facilities availed by the aforesaid entities from the banks, the Company has pledged its shareholding in the subsidiary / joint venture companies and executed Non-Disposal Undertaking, the details of which are tabulated below:

Name of subsidiaries / Joint venture	% of non-disposal undertaking (as part of pledged)	% of shares pledged of the total shareholding of investee company
Adani International Container Terminal Private Limited	24.97%	24.97%	25.03%	25.03%
The Dhamra Port Company Limited	–	21.00%	30.00%	30.00%

Name of subsidiaries /
Joint venture

% of non-disposal
undertaking (as part of pledged)

% of shares pledged
of the total shareholding of investee company

As on 31st March,
2020

As on 31st March,
2019

As on 31st March,
2020

As on 31st March,
2019

Adani International Container Terminal Private Limited

24.97%

25.03%

The Dhamra Port Company Limited

–

21.00%

30.00%

b) Contract / Commitment for purchase of certain supplies. Advance given Rs. 356.95 crores (previous year Rs. 356.95 crores).

c) The subsidiary companies have imported capital goods for the Container and Multipurpose Port Terminal Project under the EPCG Scheme at concessional rate of customs duty by undertaking obligation to export. Further, outstanding export obligation under the scheme is Rs. 1,025.26 crores (previous year Rs. 1,331.15 crores) which is equivalent to 6 to 8 times of duty saved – Rs. 167.04 crores (previous year Rs. 218.03 crores). The export obligation has to be completed by 2020-21 to 2025-26.

d) One of the subsidiary Company has entered into agreement in financial year 2013-14 to acquire land measuring 85,553 square metres in the Hazira region and an advance consideration of Rs. 18.23 crores paid towards the land has been classified as capital advance. The AHPPL has entered into agreement to acquire additional land measuring 933 acres in the Patan and Hazira region and an advance consideration of Rs. 35.85 crores paid towards the land classified as capital advance, respectively. As at 31st March, 2020 the AHPPL does not have physical possession of the said land, although it has contractual right in the said land parcels. The management represent that land area and location are identifiable and the transaction will be conducted on receiving necessary government approvals.

e) As part of Environmental Clearance obtained by the Vizhinjam International Sea Port Limited (VISL or ‘the Authority’), the AVPPL has been obliged to incur expenditure of Rs. 33.70 crores towards ‘Corporate Social Responsibility’ along with development of Port Infrastructure under Phase 1 and the same is included under the total Project Cost. Out of total commitment of Rs. 33.70 crores, the AVPPL has incurred Rs. 9.91 crores till 31st March, 2020.

TATA CONSULTANCY LIMITED

The proposed Social Security Code, 2019, when promulgated, would subsume labour laws including Employee’s Provident Funds and Miscellaneous Provisions Act and amend the definition of wages on which the organisation and its employees are to contribute towards Provident Fund. The Company believes that there will be no significant impact on its contributions to Provident Fund due to the proposed amendments. Additionally, there is uncertainty and ambiguity in interpreting and giving effect to the guidelines of the Hon. Supreme Court vide its ruling in February, 2019 in relation to the scope of compensation on which the organisation and its employees are to contribute towards Provident Fund. The Company will evaluate its position and act as clarity emerges.

VEDANTA LIMITED

A) Commitments
The Company has a number of continuing operational and financial commitments in the normal course of business including:
•   Exploratory mining commitments;
•   Oil and gas commitments;
•   Mining commitments arising under production sharing agreements; and
•   Completion of the construction of certain assets.

Committed work programme (other than capital commitment)

Particulars

As on 31^st
March, 2020 (Rs. in crores)

As on 31^st
March, 2019 (Rs. in crores)

Oil & Gas Sector

Cairn India (OALP – new Oil and gas blocks)

5,841

3,811

Other Commitments

Power Division of the Company has signed a long-term power purchase agreement (PPA) with Gridco Limited for supply of 25% of power generated from the power station with additional right to purchase power (5% / 7%) at variable cost as per the conditions referred to in the PPA. The PPA has a tenure of twenty-five years.

LARSEN & TOUBRO LIMITED

Commitments

Particulars

As on 31^st
March, 2020 (Rs. in crores)

As on 31^st
March, 2019 (Rs. in crores)

(b) Funding committed by way of equity / loans to joint venture
companies / other companies:

Joint venture companies

19.56

42.87

Other companies (including investment through purchase of
investments from other parties)*

–

10,732.85

* the Company had entered into a definitive share purchase
agreement to acquire 20.32% stake in Mindtree Limited on 18^th
March, 2019 at a price of Rs. 980 per share aggregating to a consideration of
Rs. 3,269. 00 crores. Further, the Company had placed a purchase order with
its stock broker for acquiring 15% stake through on-market purchases for an
overall consideration amount not exceeding Rs. 2,434.00 crores from any
recognised stock exchange, but only after receipt of relevant approvals from
regulatory authorities. The Company had also made an open offer to acquire
31% stake for a consideration of Rs. 5,029.85 crores in accordance with the
requirements of SEBI (Substantial Acquisition Shares and Takeover)
Regulations, 2011

RELIANCE INDUSTRIES LIMITED

2019-20

2018-19

Investments

445

464

INFOSYS LIMITED

Particulars

As at 31^st
March

2020

2019

Other Commitments ⁽¹⁾

Uncalled capital pertaining to investments

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

9. Tamil Nadu State Marketing Corporation Ltd. vs. Union of India [2020] 429 ITR 327 (SC)

Validity of provision – When the vires of any provision of any Act is challenged, it is the High Court alone which can decide the same in exercise of powers under Article 226 of the Constitution of India – Once the show cause notice is issued by the Authority calling upon the person to show cause why an action should not be taken under a particular provision of the Act, it can be said that the cause of action has arisen for that person to challenge the vires of that provision of the Act and the person need not wait till the adjudication by the adjudicating authority

A show cause notice was issued by the A.O. for the Assessment Year 2017-18 stating that the VAT expense levied on the appellant was an exclusive levy by the State Government and therefore was squarely covered by section 40(a)(iib) of the Income-tax Act, and therefore VAT expenditure was not allowable as deduction in accordance with section 40(a)(iib) while computing the income of the appellant. The A.O. finalised the assessment and passed the assessment order for the A.Y. 2017-18 vide order dated 30th December, 2019.

The High Court, vide judgment and order dated 26th February, 2020 in Writ Petition No. 538 of 2020, set aside the said assessment order insofar as disallowance in terms of section 40(a)(iib) was concerned, on the ground of violation of principles of natural justice.

During the pendency of the matter before the A.O., the appellant filed another writ petition before the High Court challenging the validity of section 40(a)(iib). It was the case on behalf of the appellant that the amount which was deductible in computing the income chargeable in terms of the Income-tax Act was not being allowed under the garb of the aforesaid provision. According to the appellant, the said provision was discriminatory and violative of Article 14 of the Constitution of India, inasmuch as many Central Government undertakings had not been subjected to any such computation and were enjoying exemption.

The High Court dismissed the said writ petition without deciding the validity of section 40(a)(iib) by observing that the issue of raising a challenge to the vires of the provision need not be entertained at this stage as the matter was still sub judice before the IT Authority even though it was open to the aggrieved party to question the same at the appropriate stage. Feeling aggrieved and dissatisfied with the impugned judgment and order passed by the High Court in dismissing the said writ petition without deciding the vires of section 40(a)(iib) on merits, the appellant preferred an appeal before the Supreme Court.

According to the Supreme Court, when the vires of section 40(a)(iib) was challenged, it was the High Court alone which could decide the same in exercise of powers under Article 226 of the Constitution of India. The Supreme Court held that the High Court ought to have decided the issue on merits, irrespective of the fact whether the matter was sub judice before the IT Authority. The vires of a relevant provision goes to the root of the matter. Once the show cause notice was issued by the A.O. calling upon the appellant to show cause why the VAT expenditure was not allowable as deduction in accordance with section 40(a)(iib) while computing the income of the appellant, it could be said that the cause of action had arisen for the appellant to challenge the vires of section 40(a)(iib) and the appellant need not wait till the assessment proceedings before the IT Authority were finalised.

According to the Supreme Court, the stage at which the appellant approached the High Court and challenged the vires of section 40(a)(iib) could be said to be the appropriate moment and the High Court ought to have decided the issue at that stage. Therefore, the Supreme Court remanded the matter to the High Court to decide the writ petition with respect to the challenge to the vires of section 40(a)(iib) on merits.

BCAJ Admin

SOCIETY NEWS

TP STUDY COURSE FOR BASIC AND INTERMEDIATE LEVEL

The International Taxation Committee conducted the Study Course on Transfer Pricing (Basic and Intermediate level) from 8th November, 2021 to 6th December 2021.Key highlights:

• Month-long course, spread over 13 sessions, conducted online over Zoom platform with 150+ participants.

• In the first week, the speakers covered the basic principles such as an overview of the transfer pricing concept, functional analysis and the various transfer pricing methods.

• The following week covered issues such as comparability analysis and adjustments, transfer pricing compliances in India and select transfer pricing issues such as intangibles, corporate guarantee, interest, share transfer, locations savings, etc.

• The participants were taken through the latest developments in the following week covering issues such as secondary adjustments, corporate restructuring, Pillar 1 and Pillar 2, recent important judicial precedents and the impact of Covid-19 on transfer pricing.

• In the concluding week, the speakers covered various provisions of Advanced Pricing Agreements and issues relating to distributors, licensed manufacturers and marketing intangibles.

• The course also contained a benchmarking workshop wherein the participants were taken through the entire benchmarking process in a live case study. A Brain Trust session was also held wherein the Brain Trustees debated a wide range of transfer pricing issues and gave their thoughts on the same.

The speakers explained the issues in their topics with case studies and provided a practical insight into various issues which was appreciated by the participants.

The course was ably coordinated by CA Jagat Mehta and CA Chaitanya Maheshwari.

The following were the speakers: CA Hitesh Gajaria, CA Akshay Kenkre, CA Siddharth Banwat, CA Bhupendra Kothari, CA Dhruba Saha, CA Saurabh Dhadphale, CA Hitesh Sharma, CA Archana Choudhary, CA Vaishali Mane, CPA Nilesh Patel, CA Vijay Iyer, CA Swapnil Bafna, CA Karishma Phatarphekar, CA Chhavi Poddar, CA Namrata Dedhia, CA Bhavesh Dedhia, CA Vishal Gada, CA Arun Saripalli, and CA Rahul Mitra.

WEBINAR ON ANNUAL INFORMATION STATEMENT (AIS)

The society had organized the Webinar on “Annual Information Statement (AIS)” on 14th December, 2021, on online platform – Zoom. This online Webinar was addressed by the panel comprising of CA Ameet Patel, Past President of the society and CA Sonalee Godbole, member of Taxation Committee and Journal Committee of the society. The Webinar was broadcasted on YouTube as well for the benefit of membership at large for future reference. More than 1,100 participants were registered and attended this very crucial Webinar.

The online Webinar was divided into two parts – the first part was very aptly addressed by CA Ameet Patel giving complete information on objectives, documents to be referred to and emanating Whys and How’s of AIS and the second part was very well dealt with by the other capable panellist CA Sonalee Godbole, wherein further niceties of TIS and other relevant, practical and significant aspects of the subject concerned were superbly dealt with. Thus, both the able panellists dealt with the subject very holistically in a very short span of 90 minutes.

Having addressed the online Webinar with their sheer zeal, enthusiasm and gripping style and content, both the panellists addressed queries from the online participants in the most pragmatic manner. The 90 minutes online session was indeed an eye-opener where very current and pertinent apprehensions and initial hiccups relating to the subject concerned of all the participants got satisfactorily addressed.

Online link:

VIRTUAL WORKSHOP ON “HOW TO USE TRANSFER PRICING SOFTWARE”

The Technology Committee of the Society organized a virtual workshop on “How to use Transfer Pricing Software” on 8th January, 2022. The session was led by CA Naman Shirmal.

He began the session with a background to Transfer Pricing and the basis of TP within the Income Tax Act. The session was engaging in a storytelling format with a live presentation on using software in a case study model. He also shared some of the applications that various professionals currently use for TP engagements.

Key matters covered during the session:
• Basic concept of Transfer Pricing and the Income Tax provisions of TP audit.
• Introduction to the general structure of a TP study report followed by a detailed live working on the TP software (“Prosess”).
• How the application would automate and digitize handling of TP engagements.
• How to deal with benchmarking and filtration, especially in geographically spread businesses.
• How the application will enable TP audit documentation.
• How application would enable an auditor to substantiate the quality of TP audits and study reports conducted.
• Tools and Functions of a good Transfer Pricing Software.
• The ease of use of TP Software.
• Other General usages of Transfer Pricing.

Participants learned new ways of working more effectively with the Transfer Pricing application. CA Naman satisfactorily answered the questions raised by the participants.

LECTURE MEETING ON ESG REPORTING – GLOBAL AND LOCAL DEVELOPMENTS

BCAS organised a Lecture Meeting on ‘ESG Reporting – Global and Local Developments’ in online mode on 12th January, 2022. The Speaker CA Spandan Shah covered the nuances of ESG reporting in detail.

Key matters covered during the Session:
•   Applicability of ESG requirements.
•   Increasing Importance of ESG (Environmental, Social and Governance) in India and Globally.
•   ESG mutual funds shall be allowed to invest in ESG compliant Companies only.
•   Practical examples of ESG.
•   Impact of ESG on Valuation of entity, shareholder wealth, brand valuations, cost of funds. Market cap, investors were covered.
•   Regulatory compliances – SEBI.
•   ESG framework – Outward looking, Inward looking, Sector-specific and other areas.
•   Disclosure requirement – SASB, IFRS, SEBI etc.
•   Reporting requirements under 9 key elements of EGS reporting were discussed in detail.

The speaker responded satisfactorily to the queries raised by the members during the meeting.

Online link:

BCAJ Admin

MISCELLANEA

I. World News

15 We have spent many fruitless decades discussing what divides us. Let us spend a little time honouring what unites us

Dr. Har Gobind Khorana at 100: Re-evaluating a shared heritage.

The divisions that have plagued the land of the five rivers — divisions over religion, national boundaries, war, diplomacy, cricket — have been the focus of the energies of our people for the 75 years since Independence. But if we can bring ourselves to move past the superficialities of these divisions, our shared legacies and heritage — of food, language, literature, geography, music — are far more profound and historical. Today, I wish to highlight one such shared heritage.

A century ago on 9th January, 1922, in the dusty village of Raipur, in Multan District — a village so small only about a hundred people could lay claim to residing there — my great-grandmother gave birth to her youngest son, whom they called Har Gobind. Our family came from poverty, although the meaning of our last name Khorana (alternatively spelt Khurana) perhaps reflects a time when we were “rich” enough to own a well. My great-grandfather, the family patriarch, was a patwari — a village clerk occupying the lowest rung in the agricultural revenue collection system set up by the ruling colonial government.

Few records have survived the times, so we know little of how the boy Gobind grew up, although family lore speaks of a mischievous child who liked to steal sugarcane from the sugarcane fields. Gobind described our ancestral home as consisting of a kitchen and bedrooms in one corner, with a courtyard housing cows and horses on the opposite end. Raipur at the time had no schools to speak of, so my great-uncle Gobind mostly learned informally from his father who very much valued education, and his older siblings — the only literate family in the village. As he got older, Gobind attended Dayanand Anglo-Vedic High School in Multan. When he turned 18, he sought admission to Punjab University in Lahore where he went on to complete both a Bachelor of Science and a Master of Science.

In 1945, Gobind was fortunate to be sent to England on a studentship to study insecticides and fungicides. Even more fortunately, the positions he was sent for were all taken by soldiers returning from the World War II, so he ended up being sent instead to study organic chemistry at Liverpool University. This latest stroke of luck not only set him on the path of cutting-edge science at the time, it also saved him from the junoon that possessed both halves of Punjab in August of 1947. The family had to leave Multan, their home for centuries — as it had been for other Hindus, Sikhs and Muslims. Thanks in part to help from Muslim friends, the family all made it alive crossing over as refugees in Delhi in later 1947. Sadly, Gobind would never see his homeland and his favorite sugarcane fields again — a minor yet real tragedy amidst the tragedy of 12 million dispossessed and a million or more murdered on both sides.

To succeed in his chosen field, Gobind must have had to set aside the pain of the loss of his homeland and the very real dangers to his family and focus on science. A combination of luck, hard work and the right mentors helped vault Gobind into the elite few working in the new field of genetics. In the early 1950s, science was on the cusp of understanding for the first time the exact mechanisms that translate genes into proteins — the code of life. At his first independent job in Vancouver, British Columbia, Gobind began to work on understanding this process. His methods quickly attracted the attention of scientists elsewhere who started to make summer trips to Vancouver and his fame as an innovative scientist grew. In 1960, moving to Madison, Wisconsin, Gobind and his colleagues worked hard to solve the problem of the genetic code — how the “language” of DNA and RNA is transformed into proteins in the cell. The Khorana lab was able to show that triplet sequences encode specific amino acids, corroborating the work of Marshall Nirenberg who was to share the Nobel Prize in Medicine in 1968 with Gobind.

For many scientists, the Nobel is a lifetime achievement award but for Gobind, only 46 at the time, it was a rest stop onto even more ambitious projects. Two years after the Nobel, Gobind and his team reported the first chemical synthesis of a gene, coding for a transfer RNA. Finally, in the mid-1970s, Gobind — ever-curious, ever-enthusiastic, unable to rest on his laurels — made a complete change in his research career, transitioning to work on biological membranes and light transduction in the photoreceptor cells of the retina. Upon his death in 2011, obituaries across the scientific journals spoke of a scientist “who traversed boundaries”, pioneering “concepts and tools from chemistry and physics to tackle fundamental questions of biology”.

Today, a century after his birth, we honor the scientific legacy of this pioneer of molecular biology, whom many call the “father of chemical biology”, a legacy that has transformed our understanding of genes, genetics and the genome and impacted the clinical course of many illnesses, from cancer to Covid. For people of the subcontinent, however, Gobind is also the pioneer of a different kind of legacy — a demonstration that the place of our birth or the colour of our skin has nothing to do with our potential or our talent. In this he was not alone — Subrahmanyam Chandrasekhar, born in Lahore in 1910 went on to receive the Nobel Prize in Physics in 1983. Abdus Salaam, born in Punjab in 1926 (and also a Punjab University alumnus) received the Physics Nobel in 1979.

The village of Raipur still exists, although it is now part of Punjab province. If I hover over the area on Google Maps, as I do on occasion when my heart draws me to our ancestral land, I can see the outlines of green fields and of homes with courtyards that remind me of the family home he described in conversation — a house on one side of the courtyard, a shed for cows on the other. Although I cannot discern this for sure on satellite imagery, I think it is safe to assume that there are still sugarcane fields, and children still stealing from them. The Dayanand Anglo-Vedic High School is now one of the oldest schools in Multan, under a different name. Punjab University continues to graduate future scientists and rightly lists my great-uncle as an alumnus. The legacies and triumphs of Dr H G Khorana are, therefore, the shared legacies and triumphs of the people of the subcontinent. We have spent many fruitless decades discussing what divides us — on this landmark day, the centennial of Dr Har Gobind Khorana’s birth, let us spend a little time honouring what unites us.

(Source: Alok A Khorana – Published 8th January, 2022- https://www.dawn.com/news/1668120)

II. Science

16 Indian-origin scientist creates first molecular structure of Omicron protein; how it helps

An Indian-origin researcher at University of British Columbia (UBC) has created the world’s first molecular-level structural analysis of the Omicron variant spike protein.

Published in the Science journal, the analysis which is done at near atomic resolution using cryo-electron microscopy, reveals how the heavily mutated Omicron variant attaches to and infects human cells.

“Understanding the molecular structure of the viral spike protein is important as it will allow us to develop more effective treatments against Omicron and related variants in the future,” said the study’s lead author Dr Sriram Subramaniam, a professor at UBC’s department of biochemistry and molecular biology.

“By analysing the mechanisms by which the virus infects human cells, we can develop better treatments that disrupt that process and neutralise the virus,” Subramaniam added.

The spike protein, which is located on the outside of a coronavirus, enables SARS-CoV-2 to enter human cells.

The Omicron variant has an unprecedented 36 mutations on its spike protein – three to five times more than previous variants.

The structural analysis revealed that several mutations create new salt bridges and hydrogen bonds between the spike protein and the human cell receptor known as ACE2.

The new bonds appear to increase binding affinity – how strongly the virus attaches to human cells.

“The findings show that Omicron has greater binding affinity than the original virus, with levels more comparable to what we see with the Delta variant,” said Subramaniam.

“It is remarkable that the Omicron variant evolved to retain its ability to bind with human cells despite such extensive mutations.”

The Omicron spike protein exhibits increased antibody evasion.

In contrast to previous variants, Omicron showed measurable evasion from all six monoclonal antibodies tested, with complete escape from five.

The variant also displayed increased evasion of antibodies collected from vaccinated individuals and unvaccinated Covid-19 patients.

“Notably, Omicron was less evasive of the immunity created by vaccines, compared to immunity from natural infection in unvaccinated patients. This suggests that vaccination remains our best defence,” Subramaniam informed.

(Source: International Business Times, By IANS – 24th January, 2022)

III. Technology

17 Big Tech In The US: What To Expect When Top Leaders Meet With Joe Biden

A virtual meeting is set for Thursday between White House officials, the Defense Department, the Department of Homeland Security and executives from major tech companies like Amazon, Meta, IBM and Microsoft.

The meeting will touch on a crucial vulnerability that could have affected hundreds of millions of devices last month. The focus will be on how to make open-source computer code more secure.

National Security Advisor Jake Sullivan’s letter to chief executives of tech firms stated that the matter is a “key national security concern.”

Reuters reports that the meeting will be hosted by deputy national security advisor for cyber and emerging technology Anne Neuberger. The Biden administration has made cybersecurity a priority after data breaches in the 2016 presidential election and for multinational corporations.

Also attending the meeting are two open-source software organizations: Linux and volunteer-run Apache. The latter handles Log4j, which many organizations use to log data in their applications. In December, it was discovered that there was an easy-to-exploit bug in Log4j.

While there is no evidence federal agencies have been breached, the scale of the vulnerability and its impact is yet to be found given that Log4j is a widely used software. As security ramps up, so will efforts by hackers to break that security.

The meeting comes as the White House said Wednesday that it was happy with Washington, D.C., judge James Boasberg’s decision to not dismiss the Federal Trade Commission’s antitrust lawsuit against Facebook. The lawsuit asks that Facebook, now known as Meta Platforms Inc., sell Instagram and WhatsApp to break up tech monopolies.

(Source: International Business Times – By IANS – 13th January, 2022)

BCAJ Admin

REGULATORY REFERENCER

DIRECT TAX

1. CBDT notifies Faceless Appeal Scheme, 2021: As per the Faceless Appeal Scheme, 2021, an assessee can request CIT (A) for a personal hearing through Video Conference, and upon such request, CIT(A) will have no discretion to refuse it. As per the new scheme, CIT (A) will not prepare a draft order. Instead, he shall prepare an appeal order, sign the same digitally and send it to the National Faceless Appeal Centre (NFAC), which will communicate to the assessee. [Notification No. 139 of 2021 dated 28th December, 2021.]

2. One-time relaxation for verification of all ITRs e-filed for A.Y. 2020-21 which are pending for verification and processing: All ITRs for A.Y. 2020-21 which were uploaded electronically by the taxpayers within the time allowed u/s 139 and which have remained incomplete due to non-submission of ITR-V Form or pending e-Verification, can be verified by one of the prescribed mode before 28th February, 2022.[Circular No. 21 of 2021 dated 28th December, 2021.]

3. Insertion of Rule 16DD and Form 56FF – Income-tax (35th Amendment) Rules, 2021: Form 56FF is to be furnished along with return of income for claiming deduction u/s 10A(1B)(b). [Notification No. 140 of 2021 dated 29th December, 2021.]

4. Extension of timelines for filing of ITRs and various Audit Reports for A.Y. 2021-22: Due to the difficulties reported by taxpayers/stakeholders due to Covid and in e-filing of Audit Reports for A.Y. 2021-22, CBDT has further extended the due dates for filing Audit Reports and ITRs for A.Y. 2021-22. The due dates were earlier extended vide Circular No.9/2021 dated 20th May, 2021 and Circular No.17/2021 dated 9th September, 2021. [Circular No. 1 of 2022 dated 11th January, 2022.]

COMPANY LAW

I. COMPANIES ACT, 2013

1. MCA requires filing of Form IEPF-7 within 30 days of remittance of funds to bank account of IEPF Authority: MCA specifies Investor Education and Protection Fund Authority (Accounting, Audit, Transfer and Refund), Third Amendment, Rules, 2021. As per the amended rules, companies remitting any amount to the Fund must furnish details thereof to the Authority in Form No. IEPF-7 within 30 days from the date of remittance or within 30 days from the commencement date of the IEPF (Accounting, Audit, Transfer and Refund), Third Amendment, Rules, 2021. [Notification No. G.S.R. 888(E), dated 28th December, 2021.]

2. MCA extends the due date for filing of financials and annual return: In view of requests from various stakeholders regarding the levy of additional fees for filing of annual financial statements for the year ended 31st March, 2021, MCA has decided that no additional fees shall be levied for filing of AOC -4, AOC-4 (CFS), AOC- 4 XBRL, AOC – 4 Non-XBRL up to 15th February, 2022 and for MGT – 7, MGT- 7A up to 28th February, 2022. [Circular No. 22/2021, dated 29th December, 2021.]

3. MCA prescribes higher additional fees in certain cases for delayed filing of forms w.e.f. 1st July, 2022: The MCA has notified the Companies (Registration Offices and Fees) Amendment Rules, 2022, w.e.f. 1st July, 2022. The amendment prescribes a table of higher additional fees (in certain cases) which shall be applicable for delay in filing of forms other than for increase in nominal share capital or Forms u/s 92/137 of the Companies Act, 2013 (Annual Return, Financial Statements), or forms for filing charges. [Notification F. No. 01/16/2013CL-V PT -1, dated 11th January, 2022.]

II. SEBI

4. SEBI permits InVITs & REITs to conduct unitholders’ AGM and other meetings virtually till 30th June, 2022: Based on the representations from REITs/InvITs, SEBI has decided to extend the facility to conduct annual meetings and other meetings of unitholders through VC/OAVM till 30th June, 2022. Earlier, SEBI vide circular no. SEBI/HO/DDHS/DDHS/CIR/P/2021/21 dated 26th February, 2021 permitted REITs/InvITs to conduct annual meetings of unitholders through VC/OAVM till 31st December, 2021 and other meetings of unitholders through VC/OAVM till 30th June, 2021.[Circular No. SEBI/HO/DDHS/DDHS_DIV2/P/CIR/2021/697, dated 22nd December, 2021.]

5. SEBI directs exchanges to levy fines and take action for non-compliances by issuers of non-convertible securities: In the interest of investors and the securities market, SEBI has directed the Stock Exchanges to levy fines and take action in case of non-compliance with continuous disclosure requirements by issuers of listed Non-Convertible Securities/ Commercial Paper. SEBI has also prescribed the fines to be levied in case of any non-compliances in an annexure to the said circular. The provisions will be effective in respect of due dates of compliance falling on or after 1st February, 2022. [Circular No. SEBI/HO/DDHS_DIV2/P/CIR/2021/699, dated 29th December, 2021.]

6. SEBI issues framework for operationalizing Gold Exchange in India: SEBI has laid out a framework for operationalizing the Gold Exchange, wherein gold will be traded in the form of Electronic Gold Receipts (EGRs). SEBI specifies that the supply of the physical gold, to be converted into EGR, will be the fresh deposit of gold, coming into the vaults, either through imports or through stock exchange accredited domestic refineries. Vault managers must ensure that ‘gold’ to be converted into EGR meets the criteria. [Circular No. SEBI/HO/CDMRD/DMP/CIR/P/2022/07, dated 10th January, 2022.]

FEMA

1. No permission required by NRIs/OCIs for acquisition/transfer of immovable property: RBI has issued a Press Release stating that NRIs and OCIs do not require prior approval of RBI for acquisition and transfer of immovable property in India other than for agricultural land, farmhouse or plantation property. RBI received many queries based on news reports related to a recent Supreme Court Judgement stating that prior approval of RBI is required for the acquisition/transfer of immovable property in India by OCIs. RBI has clarified that the concerned order related to FERA, which has been repealed on the enactment of FEMA. The position is different under FEMA. [Press Release: 2021-2022/1439 dated 29th December, 2021.]

ICAI MATERIAL

Audit
1. Implementation Guide to Standard on Auditing (SA) 560, Subsequent Events. [15th January, 2022.]

2. Implementation Guide to Standard on Auditing (SA) 210, Agreeing the Terms of Audit Engagements. [15th January, 2022.]

Valuation
1. Booklet on Valuation of Complex Securities. [23rd December, 2021.]

2. Booklet on Fair Value – Purchase Price Allocation. [23rd December, 2021.]

3. Handbook on Best Practices for Registered Valuers. [10th January, 2022.]

BCAJ Admin

CORPORATE LAW CORNER

13 Ateet Bansal vs. Unitech Ltd National Company Law Appellate Tribunal Company Appeal (AT) No. 216 of 2019 Date of order: 25th February, 2020

There should be no sympathy with the defaulting company and its directors. The National Company Law Appellate Tribunal (NCLAT) directed the Company to repay the amount to its Deposit Holders along with Interest pursuant to the provisions of Section 73(4) of Companies Act, 2013 read with Section 45Q of the Reserve Bank of India Act, 1934

FACTS
• Mr. AB was a depositor who had placed an amount of Rs. 1,00,000 as a Fixed Deposit with M/s. UL for three years and an amount of Rs. 1,45,217 was payable to the depositor (Mr. AB) upon maturity on 1st June, 2016.

• Through an application under Section 74(2) of the Companies Act, 2013, M/s. UL proposed to make payment to its depositors of matured amounts along with interest from the date of maturity till the date of payment through a rescheduled plan.

• Mr. AB approached M/s. UL several times since his Fixed Deposit got matured with them, but on all such occasions, the Company did not pay any attention to Mr. AB’s demand and never replied regarding the outstanding payment.

• Mr. AB filed a Company Petition in March, 2019 before Hon’ble NCLT, Delhi Bench under Section 73(4) of Companies Act, 2013 read with Section 45Q of the Reserve Bank of India Act, 1934 for repayment of maturity amount of the aforesaid deposit with 12.5% interest p.a. due thereon as per the terms and conditions of the deposit. The said petition was admitted by the Hon’ble NCLT, New Delhi Bench. Thereafter, no reply was filed by M/s UL and the order dated 30th May, 2019 was passed directing the Company to pay Rs. 1,45,217 to Mr. AB with pendent lite ( while the suit continues) and future interest @ 10% from the date of filing till the date of receipt.

• Mr. AB argued that NCLT, New Delhi Bench had erred in giving pendent lite and future interest @ 10% p.a. from the date of filing till receipt thereof instead of 12.5% p.a. as per the terms and conditions of the deposit and has also failed to appreciate that the interest should have been awarded from the date of maturity.

• Mr. AB further argued that National Company Law Tribunal, New Delhi Bench, has failed to award the interest amounting to Rs. 60,507, which was calculated at 12.5% p.a. from the maturity date on the matured amount for the delayed period till September 2019.

• Mr. AB stated that the NCLT order has failed to appreciate that Section 76A of the Companies Act, 2013 provides punishment for contravention of Section 73 or Section 76 of Companies Act 2013.

• Mr. AB, being aggrieved party, preferred an appeal before the National Company Law Appellant Tribunal (NCLAT) against the order passed by NCLT, Delhi Bench.

• Before NCLAT, M/s UL had submitted that with respect to certain ongoing disputes against the Respondents, the Managing Directors of the Respondent Company filed Special Leave Petitions under Article 136 of the Constitution of India where the Hon’ble Supreme Court has directed that no coercive steps should be taken against the company or directors, and Mr. AB has taken no coercive steps against M/s UL and its directors.

• Also, the Supreme Court further directed for the appointment of Amicus Curie (Friend of a Court) to create a portal where the persons who have invested with the Company by way of fixed deposits shall give the requisite information.

HELD
• NCLAT observed that M/s UL taking the shelter of Supreme Court order was creating hurdles in the process of law such as accepting notice and then not appearing/ postponing the hearing.

• NCLAT also observed that we should have no sympathy with the defaulting company and its directors. NCLT has reduced the rate of interest for which no justification has been given and also for not awarding interest from the maturity date to filing of the petition.

• NCLAT further noted that the NCLT order was a reward to the defaulting company and punishment to the honest depositor running from pillar to post to get his amount back with interest.

• NCLAT further observed that if M/s UL tries to get fresh deposits from the Public, the company will not get at cheaper rate but at a higher rate since the depositor will place fresh deposit seeing the risk factor of the deposit.

In view of the above observations the order of NCLT was set aside and the following order was passed:
• Mr. AB was entitled to a decree under his respective matured FDR. The amount was decreed in favour of the respective appellant together with pendent lite and future interest @ 12.5% p.a. from the date of maturity of the respective FDR until receipt thereof.

• M/s. UL was liable to pay Rs.50,000 towards cost of litigation, costs etc.

14 Brillio Technologies (P.) Ltd. vs. Registrar of Companies, Karnataka and Regional Director South Eastern Region, MCA [2021] 163 CLA 449 (NCLAT) National Company Law Appellate Tribunal Company Appeal (AT) No. 293 of 2019 Date of order: 19th April, 2021

Section 66 of the Companies Act, 2013 provides for the reduction of the share capital simpliciter without it being a part of any scheme of compromise and arrangement under Section 230-232 of the Companies Act, 2013 and Security Premium Account can be utilized for making payment to shareholders in respect of reduction in capital

FACTS
• The Board of Directors of M/s BTPL received a request from non-promoter shareholders to provide them with an opportunity to dispose of their shareholding in the Company. Board of M/s BTPL resolved on 24th January, 2019 to reduce the equity share capital from the existing Rs. 21,72,50,000 to Rs. 20,82,97,363 by reducing Rs. 89,52,637 equity shares from non-promoter equity shareholders. It proposed that the premium be paid out of the Securities Premium Account (SPA). Further, an Extraordinary General Meeting (EGM) was held on 4th February, 2019 wherein by special resolution duly passed by 100% members present, voted in favour of the resolution for the reduction of the Company’s share capital.

• M/s BTPL, thereafter filed a petition before National Company Law Tribunal (NCLT), Bengaluru bench in accordance with Section 66 (1) of the Companies Act, 2013 and NCLT directed M/s BTPL to issue notices to the Regional Director, Registrar of Companies and Creditors of the Company.

• Thereafter, the Regional Director, Ministry of Corporate Affairs, South-East Region, Hyderabad represented by Registrar of Companies, filed their observations before NCLT with respect to the proposed Scheme of Reduction of the capital of M/s BTPL.

• NCLT, based on the objections/observations submitted by the Office of Regional Director, held that as per Section 52 (2) of the Companies Act, 2013, SPA may be used only for the purpose specifically provided thereunder. Selective reduction in equity share capital to a particular group involving non-promoter shareholders, making the company as a wholly-owned subsidiary of its current holding company (M/s GCI Global Ventures), and also returning the excess of capital to them would tantamount to an arrangement between the company and shareholders or a class of them and hence, it is not covered under Section 66 of the Companies Act, 2013.

• NCLT further held that the case may be covered under Sections 230-232 of the Companies Act, 2013 wherein compromise or arrangement between the Company and its creditors or any class of them or its members or any class of them is permissible. Therefore, M/s BTPL failed to make out any case under Section 66, and thus, the petition was dismissed with the liberty to file an appropriate application in accordance with the law.

• M/s BTPL being aggrieved with NCLT order preferred an appeal against the said order before National Company Law Appellant Tribunal (NCLAT).

HELD
• NCLAT after hearing both the parties passed an order with following reasons as listed below:

Sr. No.

Objections raised by Regional
Director, Ministry of Corporate Affairs, South-East Region, Hyderabad before
NCLT

Responses to the objections and
Reasoning given by NCLAT

(i)

No proper genuine reason has been given for the reduction of
share capital.

NCLAT held that it cannot be said that M/s BTPL has not given any
genuine reasons for reduction of share capital as M/s BTPL had filed certain
emails received from the non-promoter shareholders with the request to provide
them with an opportunity to dispose of their shareholding in the petitioner
company.

(ii)

Consent affidavit from creditors has
not been obtained.

NCLAT held that NCLT had
erroneously stated that no consent affidavits from creditors have been
produced with regard to the reduction of share capital. M/s BTPL had provided
sufficient proof with respect to the delivery of notice to the unsecured
creditors. No representation was received from the creditors within three
months. Therefore, as per proviso to Section 66(2) of the Act, it shall be
presumed that they have no objection to the reduction.

(iii)

Security Premium Account cannot be utilized for making payment
to the non-promoter shareholders.

NCLAT was of the view that SPA can be
utilized for making payment to non-promoter shareholders, by taking into
consideration various Judgements and responses from M/s BTPL that SPA is
quasi-capital and section 52(1) specifically provides that SPA has to be
treated as if it was the paid-up share capital of the Company. Such Account
can be statutorily utilized for the purposes set out in Section 52(2) and (3)
of the Act and hence reduced without Tribunal’s approval, but for other
purposes, it can be utilized by resorting to the reduction of share capital.

(iv)

Consent from 171 non-promoter
shareholders who were not traceable has not been obtained, and the claim of
such shareholders has not been secured or determined.

NCLAT found no force in the argument
of the Regional Director as M/s BTPL had specifically mentioned that the
amount to be paid to the untraceable non-promoter shareholders would be kept
in an Escrow Account, and thereafter it would be transferred to Investor
Education and Protection Fund.

(v)

Selective reduction of shareholders is not permissible.

As per Section 66 of the Act, reduction of
share capital can be made in ‘any manner’. The proposed reduction is for the
whole non-promoter shareholders of the company. NCLAT held that
selective reduction is permissible if the non-promoter shareholders are being
paid the fair value of their shares. In the present case, none of the
non-promoter shareholders of the company have raised objection about the
valuation of their shares.

(vi)

The Petition for reduction of capital
under Section 66 of the Act, is not maintainable. However, it may be filed
under Section 230-232 of the Act.

NCLAT held
that Section 66 of the Companies Act, 2013 makes provision for the reduction
of share capital simpliciter without it being part of any scheme of
compromise and arrangement. The option of buyback of shares as provided in
Section 68 of the Companies Act, 2013 is less beneficial for the shareholders
who have requested the exit opportunity.

Therefore, NCLAT had set aside the order passed by the NCLT. Thus, the reduction of equity share capital resolved on 4th February, 2019 by the special resolution was confirmed.

15 Bank of Maharashtra vs. Videocon Ltd. & Ors Company Appeal (Ins.) No. 503, 505, 545, 529, 650 of 2021 National Company Law Appellate Tribunal Date of order: 5th January, 2022

FACTS
1. Videocon were repaying the agreed instalments to the consortium of lenders led by SBI till 2015. The VIL, along with 13 other companies of Videocon groups, were classified as ‘SMA – 2’ in the year 2016 onwards. Entities of Videocon group (along with its 12 Domestic subsidiaries) were under CIRP due action taken by SBI under Section 7 of the Code.

2. The Adjudicating Authority vide its order dated 8th August, 2019 passed the consolidation order and partially allowed SBI’s Application and directed the consolidation of the CDs out of the 15 Videocon Group companies.

3. Total claims of Rs. 72,078.5 crore has been filed, out of which claims of Rs. 64,637.6 crore had been verified and accepted for CIRP by the RP.

4. The plan provides a meagre amount of Rs. 2,962.02 crore against an admitted liability of approx. Rs.65,000 crore.
RULING IN CA NO. 545 OF 2021
1. This case is related to Trademark License Agreement (TLA) dated 7th July, 2005 between Electrolux Home products and Electrolux Kelvitor Limited, which got merged to the CD. The Appellant was entitled to terminate the
TLA if the CD underwent any event that resulted in the Dhoot family no longer being in control. The Appellants were entitled to terminate the TLA once CD is admitted to CIRP.

2. The Adjudicating Authority in IA 527 of 2019 held that the Agreement should continue for at least a year from the date of approval of the plan as per the existing Terms and Conditions as a transitional arrangement.

3. The NCLAT observed that: The Adjudicating Authority in IA No. 527/2019 has adjudged the agreement dispute. The Adjudicating Authority has made an error of judgment by permitting Agreement during transitional arrangement for a year or so and thereafter parties to decide as per their mutual understanding. Hence, it is prudent to remand the matter back to CoC for a review in accordance with the law.

RULING IN CA (INS.) NO. 650 OF 2021
1. It was filed to include all assets owned by Videocon group, particularly, foreign oil and gas assets are not included in the information memorandum as also no valuation thereof has been considered while the claim of lenders of foreign oil and gas assets of Rs. 23,120.90 crore being considered as claims without considering the corresponding assets – foreign oil and gas assets for which the borrowings were used.

2. The RP is submitted that explanation – b to Section 18 of the Code specifically excludes the assets of any Indian and foreign subsidiary of the CD from the purview of the terms Assets.

3. The NCLAT observed that: in ‘finance and accounts’ there is a matching concept of liability and its corresponding assets wherever liability is considered, the corresponding assets is supposed to exist in the form of the assets or the liability / borrowings which have been used to finance the losses. In any case, the commercial wisdom of CoC is non-justifiable as already laid down by multiple judgments of the Hon’ble Supreme Court. Hence, this appeal deserves to be dismissed and
is dismissed.

RULING IN CA (INS.) NO. 503, 505 AND 529 OF 2021
1. Resolution Plan does not provide ‘upfront’ payment in priority to the DFC as provided in Section 30 of the Code R/w IBBI Regulation 38. The plan proposes that NCD will be issued to the DFC redeemable after a significant period of around five years which does not qualify as ‘payment’ in terms of Section 30 (2)(b) of the Code.

2. NCLAT observed following:
a. Direction by the Adjudicating Authority to the SRA to pay the DFC by cash instead of NCD amounts to modification of the Resolution Plan. This is a domain of the CoC & not the Adjudicating Authority.

b. It is the CoC that has got the final decision-making authority. The Hon’ble Apex Court has already held in CoC of Essar Steel (supra) that the commercial wisdom of the CoC cannot be adjudicated by the Adjudicating Authority. As far as commercial decisions are concerned, they are the supreme authority. They have the full power to decide one way or other any resolution based on input provided to them or otherwise.

c. In the judicial forum, once an order is passed by a particular authority for, an example, by the Adjudicating Authority, it cannot review its order or judgment except as permitted under Section 420(2) of the Companies Act, 2013 r/w Rule 154 of the NCLT, Rules 2016. The same judicial authority can only rectify any mistake apparent from record, either on its own motion or brought to its notice by the parties. So, the power of review under the judicial arena lies with the higher judiciary.

d. The CoCs are the best judge to analyze, pick up and take prudent commercial decisions for the business, but they are also subjected to test of prudence to ensure fairness and transparency.

e. The Adjudicating Authority does not have the power to modify and change the plan as held by Hon’ble Apex Court in the case of K. Shasidhar and CoC of Essar Steel.

f. The CoC is not functus – officio on the approval of the Resolution plan, and accordingly, the judicial precedents clearly established that the Adjudicating Authority and this Tribunal is competent to send back the Resolution plan to the CoC for reconsideration

HELD
• Section 30 (2)(b) of the Code has not been complied with, and hence, the approval of the Resolution Plan is not as per Section 31 of the Code. Accordingly, the approval of Resolution Plan by the CoC as well as Adjudicating Authority is set aside, and the matter is remitted back to CoC for completion of the process relating to CIRP in accordance with the provisions of the Code.

BCAJ Admin

ALLIED LAWS

1 V. Prabhakrara vs. Basavaraj K. (Dead) by Lr. and another AIR 2021 Supreme Court 4830 Date of order: 7th October, 2021 Bench: Sanjay Kishan Kaul J. and M.M. Sundresh J.

Suit Property – Doubting genuineness of a registered will – factors such as existence of a forged unregistered will and severance of relationships to be kept in mind before raising suspicion on the registered will – Registered will is held to be valid. [Indian Evidence Act, 1872, S. 63, S.68]

FACTS
The Suit Property originally belonged to one Ms. Jessie Jayalakshmi (since deceased). The deceased Ms. Jessie Jayalakshmi, a spinster, was the maternal aunt of the Appellant/Plaintiff. Mr. Vijay Kumar and Ms. Kantha Lakshmi were his brother and sister, respectively. It is the case of the Appellant that the deceased, Ms. Jessie Jayalakshmi adopted him as her son and that he took care of her when she suffered an attack of paralysis.

A registered Will was executed by Ms. Jessie Jayalakshmi on signature in favour of the Appellant. The said Will was attested by Mr. Vijay Kumar, brother of the Appellant. Ms. Jessie Jayalakshmi was also brought to the office of the Sub-Registrar by none other than Ms. Kantha Lakshmi.

The relationship between Ms. Kantha Lakshmi and her husband (Respondent No. 1) got strained. She obtained a divorce decree on 26th March, 1988. It is the further case of the Appellant that Respondent No. 1 was permitted to reside in the Suit Property. The Respondent No. 1 refused to vacate the Suit Property, which is a residential house.

The Defendants/Respondents while acknowledging the factum of execution of the registered Will, introduced an unregistered Will, allegedly executed by Ms. Jessie Jayalakshmi in favour of the Respondent No. 2 (minor son of Respondent No.1).

The trial court held in favour of the Petitioner holding that the registered will had been proved. It gave exhaustive reasoning for doubting the genuineness of the unregistered will.

The High Court reaffirmed the findings of the Trial Court. However, the High Court did an exercise by entertaining a suspicion about the genuineness of the registered will and accordingly found that it has not been dispelled by the Appellant. On that basis, the suit was dismissed by allowing the appeal. The Appellant filed an appeal against the order of the High Court

HELD
A testamentary court is not a court of suspicion but that of conscience. It has to consider the relevant materials instead of adopting an ethical reasoning. A mere exclusion of either brother or sister per se would not create a suspicion unless it is surrounded by other circumstances creating an inference. In a case where a testatrix is accompanied by the sister of the beneficiary of the Will and the said document is attested by the brother, there is no room for any suspicion.

Both the Courts found that the unregistered will is a forged and fabricated document. The Appellate Court, in our considered view, has unnecessarily created a suspicion when there is none. That too, when the Trial Court did not find any. The factors such as the fabrication and severance of relationship between himself and his wife in pursuance of the decree for divorce, coupled with the status while squatting over the Suit Property being the relevant materials, ought to have weighed in its mind instead of questioning the registered Will.

Appeal was allowed.

2 Samruddhi Co-operative Housing Society Ltd. vs. Mumbai Mahalaxmi Construction Pvt. Ltd. Civil Appeal No. 4000 of 2019 (SC) Date of order: 11th January, 2022 Bench: Dr. D. Y. Chandrachud J. and A. S. Bopanna J.

Consumer – Deficiency in services – Real Estate – Not obtaining Occupation Certificate amounts to deficiency in services. [Consumer Protection Act, 1986, S. 2(1)(d), S. 2(1)(g)]

FACTS
The appellant is a co-operative housing society. The respondent constructed Wings ‘A’ and ‘B’ and entered into agreements to sell flats with individual purchasers in accordance with the Maharashtra Ownership Flats, 1963. The members of the appellant booked the flats in 1993 and were granted possession in 1997. According to the appellant, the respondent failed to take steps to obtain the occupation certificate from the municipal authorities. In the absence of the occupation certificate, individual flat owners were not eligible for electricity and water connections. Due to the efforts of the appellant, temporary water and electricity connections were granted by the authorities. However, the members of the appellant had to pay property tax at a rate 25 per cent higher than the normal rate and water charges at a rate which was 50 per cent higher than the normal charge.

HELD
The respondent was responsible for transferring the title to the flats to the society along with the occupancy certificate. The failure of the respondent to obtain the occupation certificate is a deficiency in service for which the respondent is liable. Thus, the members of the appellant society are well within their rights as ‘consumers’ to pray for compensation as a recompense for the consequent liability (such as payment of higher taxes and water charges by the owners) arising from the lack of an occupancy certificate.

Appeal is allowed.

3 Murthy & Ors vs. C. Saradambal & Ors Civil Appeal No. 4270 of 2010 (SC) Date of order: 10th December, 2021 Bench: L. Nageswara Rao J. and B.V. Nagarathna J.

Will – Sound and disposing state of mind – Onus on the propounder to discharge the suspicion pertaining to the execution – Letters of administration was not granted. [Indian Evidence Act, 1872, S. 68, Indian Succession Act, 1925, S. 63]

FACTS
E. Srinivasa Pillai, father-in-law of the 1st plaintiff, died on 19th January, 1978 leaving behind his last will and testament dated 4th January, 1978. The said will was said to be executed in the presence of two attestors. The testator E. Srinivasa Pillai had a son, named S. Damodaran, who died intestate on 3rd June, 1989 at Madras, leaving behind the plaintiff-wife C. Saradambal and his two daughters.

The testator, apart from his son, S. Damodaran, left behind two daughters.

The bequest was made in the name of testator’s son namely S. Damo viz., S. Damodaran to the exclusion of the testator’s daughters in respect of the house in which the testator and his family were residing. The daughters of the testator filed a suit in the City Civil Judge Court, Madras seeking partition of the said property and regarding the genuineness of the Will. Therefore, it had become necessary for the plaintiffs to file the petition seeking Letters of Administration. This was converted into suit.

The Trial court dismissed the suit. On appeal, the High Court allowed the appeal. Hence the present appeal.

HELD
On reading Section 63 of the Indian Succession Act, 1925 and Section 68 of the Evidence Act, 1872 it is clear that the propounder of the will must examine one or more attesting witnesses and the onus is placed on the propounder to remove all suspicious circumstances with regard to the execution of the will.

The respondents-plaintiffs have failed to prove the will in accordance with law inasmuch as they have not removed the suspicious circumstances, surrounding the execution of the will. Hence, not being a valid document in the eye of law, no Letters of Administration can be granted to the respondents-plaintiffs.

Appeal is allowed.

4 Beereddy Dasaratharami Reddy vs. V. Manjunath and another Civil Appeal No. 7037 of 2021 Date of order: 23rd December, 2021 Bench: M R Shah J. and Sanjiv Khanna J.

Hindu Undivided Family – Rights of Karta – Karta can sell HUF property – Signature of coparcener is not mandatory [Hindu Succession Act, 1956]

FACTS
Veluswamy, the Karta of the joint Hindu family executed an agreement to sell of the suit property and received advance from one Beereddy Dasaratharami Reddy (the Appellant). On 26th November, 2007, the Appellant instituted the suit for specific performance of the agreement to sell, impleading both Veluswamy, the Karta and his son V Manjunath (coparcener).

The Trial Court held that the Karta of the joint Hindu family property was entitled to execute the agreement to sell.

His son preferred the regular first appeal before the High Court of Karnataka wherein it was held that the agreement to sell is unenforceable as the suit property belonged to the joint Hindu family consisting of three persons, K. Veluswamy, his wife V. Manimegala and his son V. Manjunath and, therefore, could not have been executed without the signatures of V. Manjunath.

On appeal to the Supreme Court.

HELD
Right of the Karta to execute agreement to sell or sale deed of a joint Hindu family property is settled and is beyond cavil. Signatures of V. Manjunath, son of Karta – K. Veluswamy, on the agreement to sell were not required. K. Veluswamy being the Karta was entitled to execute the agreement to sell and even alienate the suit property. Absence of signatures of V. Manjunath would not matter and is inconsequential.

Appeal was allowed.

BCAJ Admin

Service Tax

I. TRIBUNAL

15 M/s. Suraj Forwarders and Shipping Agencies vs. The Principal Commissioner of GST and Central Excise [2021-TIOL-844-CESTAT-Mad] Date of order: 10th December, 2021

When service tax paid twice is established, the refund cannot be denied on the ground of limitation

FACTS
The appellant inadvertently paid service tax under the wrong service tax registration number. At the time of scrutiny of the returns, it was found that the payment was made under the wrong service tax number. Thereafter, they discharged the service tax once again under the correct number. A refund claim was filed for the refund of the amount wrongly paid. A show-cause notice was issued proposing to reject the claim as the same was barred by limitation under section 11B of the Central Excise Act, 1944. After due process of law, the original authority rejected the refund claim. On appeal, the Commissioner (Appeals) upheld the same. The appellant is thus before the Tribunal.

HELD
The Tribunal noted that the service tax was paid twice by the appellant for the very same taxable value. The department directed them to pay the tax again as their in-house formalities do not allow adjustment of tax wrongly paid towards one Commissionerate to another. The appellant again paid service tax mentioning the correct service tax registration number. It is clear that the department has collected service tax twice. This is not permissible under the law. Relying on several decisions, the Tribunal held that the rejection of claim on the ground of limitation is not justifiable and therefore deserves to be set aside forthwith.

16 M/s Cades Digitech Pvt. Ltd. vs. Commissioner of Central Tax [2022-TIOL-52-CESTAT-Bang] Date of order: 4th January, 2022

Reimbursement of expenses in the nature of salary, rent, travelling expenses etc., from the head office to the branch office cannot be considered a service provided by the head office to the branch

FACTS
The appellants are engaged in providing “Consulting Engineers Services” to their customers through their branches located outside India namely USA, Korea, Japan, UK, Germany etc. Their branches are manned by their own employees, and they are reimbursing the expenses on account of salaries, rents, other and other expenses etc. They are also receiving consideration/remuneration for the Consultancy Services rendered abroad to their customers through their branches. Remuneration earned in this regard is treated as export of service, and no dispute is made on this count. Revenue has raised an issue stating that the appellants are paying money to their branches located outside India, as consideration towards the service rendered by the branches to them, such payments made are consideration towards the services provided by the branches to the appellants.

HELD
The Tribunal noted that the amounts incurred by the head office towards the salaries etc., of the employees working in their branches could by no stretch of imagination be equated to any service rendered to them by the respective branches. The legal fiction created in the proviso to section 66A for consideration of branch as a separate establishment is certainly not for the purposes of demanding service tax on the services alleged to have been rendered by the branch to the head office. In fact, the payments made by the appellants are none other than the recurring expenses like salary, travelling allowance, rent, telephone charge etc. It is not brought on record if any other payment for any other service alleged as provided was made. Thus, the demand on account of reimbursement of expenses to the employees working in the overseas branches does not constitute any remuneration in lieu of a service received by the appellants. The demand is therefore set aside.

17 Circor Flow Technologies India (P.) Ltd. vs. Principal Commissioner of GST & Central Excise [2021 133 taxmann.com 327 (CESTAT – Chen)] Date of order: 16th December, 2021

The assessee is entitled to refund in respect of CENVAT credit of service tax paid under the RCM in the GST period under section 142(3) of the CGST Act if the said CENVAT credit was otherwise eligible under the erstwhile law

FACTS
The appellant paid service tax under reverse charge mechanism on the import of software made during the pre-GST period belatedly in March 2019. In terms of CENVAT Credit Rules, 2004, as it stood during the relevant period, the appellants were eligible to avail credit of the service tax paid by them.

HELD
Hon’ble Tribunal noted that the Adjudicating Authority had rejected the refund holding that the service tax has been paid voluntarily and also that no credit is available in the GST regime. Hon’ble Tribunal held that as per section 174(2) of the CGST Act, as amended Act shall not affect any right, privilege, obligation, or liability acquired, accrued or incurred under the amended Act or repealed Acts. As the liability, if any, under the erstwhile law of Finance Act, 1994 to pay service tax would continue even after the introduction of GST, conversely, the right accrued under the said Act in the nature of credit available under CCR 2004 also is protected. It also observed that in this case, there is no allegation that the credit is not eligible to the appellant in the service tax regime and accordingly held that such credit has to be processed under section 142 (3) of GST Act, 2017 and refunded in cash to the assessee.

Note: The Hon’ble New Delhi Tribunal in a similar matter, in the case of Jagannath Polymers (P.) Ltd. vs. Commissioner, Central Goods and Services Tax, Jaipur 1 [2021] 133 taxmann.com 328 (New Delhi – CESTAT) [15-12-2021] also held that merely because the appellant has deposited the service tax payable under RCM in the GST period only after being pointed out by the audit, they shall not be denied refund thereof as the CENVAT credit was available under the service tax regime.

18 MIRC Electronics Limited vs. Commissioner of CSGT, Thane [2021 (55) GSTL (301) (Tri – Mum)] Date of order: 19th July, 2021

Penalty under the provisions of section 11AC of Central Excise Act, 1944 cannot be invoked merely on the basis that irregularities were observed by the audit wing where the appellant has maintained statutory records reflecting particulars of CENVAT credit

FACTS
The appellant was engaged in the business of manufacture of colour television sets, washing machines, etc. The appellant was availing CENVAT credit of excise duty paid on input and service tax paid on input service. During the course of audit by the department, it was observed that CENVAT credit was availed in respect of Rent-a-Cab Service, Insurance, Membership Fees, Foreign Travel expenses. The department denied the CENVAT credit on the ground that the above services are not confirming to the definition of input service under Rule 2(l) of CENVAT Credit Rules. The Adjudicating Authority raised a demand of Rs.9,80,675 with interest and imposed penalty under section 78. This was confirmed by Commissioner Appeals. Hence this appeal.

HELD
Since the appellant failed to produce proper documentary evidence and substantiate its claim with respect to CENVAT credit Rent-a-Cab Service and foreign travel expenses, the respondent was justified in denying the CENVAT credit pertaining to such services. Further, penalty under section 11AC of the Central Excise Act cannot be levied because there was no concealment on the part of appellant as the particulars of CENVAT credit have been recorded in statutory records and books of account.

19 Chryso India Private Limited vs. Commissioner of GST & Central Excise, Alwar [2021 (55) GSTL 159 (Tri- Del)] Date of order: 10th August, 2021

Service tax paid twice on ocean freight is liable to be refunded

FACTS
The appellant had imported raw material and discharged customs duty along with CVD on CIF basis. During the course of audit, it was pointed out that service tax is payable on reverse charge basis on ocean freight for the period prior to 30th June, 2017. In response to the audit objection, appellant deposited service tax along with interest. On being advised that appellant had already paid customs duty and CVD on the import price which includes freight element therefore, the appellant was not required to pay service tax again on freight (under reverse charge basis). Accordingly, appellant filed refund application of the amount of service tax paid on reverse charge basis. However, the refund application was rejected.

HELD
Tribunal held that since the transaction value for Customs Duty and CVD included ocean freight element, therefore, appellant had suffered the double taxation, by again paying the service tax on ocean freight on reverse charge basis. Thus, appellant was allowed refund of such service tax along with interest.

20 Astra Zeneca India Pvt Ltd. vs. Commissioner of GST & Central Excise, Chennai 2021 (55) GSTL 39 (Tri – Chen) Date of order: 23rd June, 2021

Refund of CENVAT credit cannot be rejected merely because such refund claim is clubbed with the CENVAT credit of previous quarter

FACTS
The appellant had filed a refund claim by clubbing the unutilized CENVAT credit of two quarters, namely July to September, 2016 and October to December, 2016. The primary reason for combining the credit for two quarters was that there was no Foreign Inward Remittance Certificate (FIRC) during the earlier quarter, i.e. July to September 2016. The Adjudicating Authority granted a partial refund and rejected the amount of Rs.12,00,695 pertaining to CENVAT credit of the quarter July to September, 2016 by stating that the definition of export turnover under Rule 5(1)(D) of CENVAT Credit Rules, 2004 was not satisfied. Similarly, Commissioner Appeals also rejected the refund claim, and hence the appellant, aggrieved by the Commissioner Appeals’ order filed the appeal before the Chennai Tribunal.

HELD
The Learned Bench relied upon the orders of M/s. B.A. Continuum India Pvt Ltd vs. Commissioner of Service Tax-II, Mumbai 2018 (6) TMI 1011-CESTAT-Mum, M/s. WNS Global Services Pvt. Ltd. vs. C.C.E., Pune III-2015 (11) TMI 905-CESTAT-Mum, and held that for the purpose of refund, the CENVAT credit of any particular quarter can include the amount of brought forward credit from the earlier quarter; the only bar is that refund application must be filed within one year. The refund cannot be rejected merely on the ground that CENVAT credit pertaining to the period prior to October, 2016 was taken while arriving at the total CENVAT credit taken during the quarter October to December, 2016. The Tribunal concluded that the rejection of the refund claim was unjustified and set aside the order of Commissioner Appeals.

BCAJ Admin

GOODS AND SERVICES TAX (GST)

I. HIGH COURT

27 Saiher Supply Chain Consulting (P.) Ltd vs. UOI [2022 134 taxmann.com 154 (Bombay)] Date of order: 10th January, 2022

The Order of Hon’ble Supreme Court issued under Misc. Application No. 665 of 2021 in Suo Motu Writ Petition (Civil) No. 3 of 2020 extending the period of limitation is also applicable to refund applications filed under section 54(1) of the CGST Act

FACTS

The Petitioner filed two refund applications which were rejected by the officer by issuing deficiency memos. When the third application was filed, the same was rejected as time-barred. Petitioner filed a writ petition praying for the restoration of the third refund application and a declaration that Rule 90(3) of the Central Goods and Services Tax Rules, 2017 is ultra vires the Constitution of India.

HELD

Relying upon the Extension of Limitation (Order dated 23rd September 2021), reported in 2021 SCC Online SC 947, passed by the Hon’ble Supreme Court in Misc. Application No. 665 of 2021 in Suo Motu Writ Petition (Civil) No. 3 of 2020 and considering that the third refund application is filed between the period 15th March, 2020 and 2nd October, 2021, the Hon’ble High Court held that the exclusion of the period of limitation falling between 15th March, 2020 and 2nd October, 2021 would also apply to the refund applications filed under section 54(1) of the CGST Act and consequently, the said refund application is within time. The Court however did not go into the question of the validity of the Circular dated 18th November, 2019 and the Rule 90(3) of the Central Goods and Services Tax Rules, 2017.

Note: The above period of 15th March, 2020 to 2nd October, 2021 has been further modified to 15th March, 2020 till 28th February, 2022 by the Order of Hon’ble Supreme Court dated 10th January, 2022.

28 Meritas Hotels (P.) Ltd. vs. State of Maharashtra [2021 133 taxmann.com 222 (Bombay)] Date of order: 3rd December 2021

The time limit for filing of the appeal under section 107 of the Act would commence from the receipt of a scanned copy of the impugned order by the Petitioner and not from the date of uploading of the appeal on the GST portal

FACTS

In this case, the petitioner did not file the GST return for February, 2019 on account of financial crunch. The petitioner was issued notice for non-filing of return followed by summary assessment order in Form GST ASMT-13 under section 62 of the MGST Act, 2017 fixing the liability of tax amount of Rs. 20,96,888 along with interest of Rs. 32,502 and penalty of Rs. 23,06,577 was made. The physical true copy of the assessment order was not served on the petitioner, nor was the same uploaded on the GSTN portal. However, the scanned copy of the impugned assessment order was sent by email to the General Manager of the petitioner company on the very same day. This email communication remained to be reported by the General Manager to the management of the petitioner company. The petitioner filed GSTR-3B for the said month on 14th June, 2019 based on the actual books of accounts. The petitioner came to know about the impugned assessment order only when their bank account came to be attached on 1st July, 2019. As the impugned assessment order was unavailable online, the petitioner had to file a physical appeal. The petitioner even tried to file the online appeal on the GSTN portal immediately after the order was uploaded on the GSTN portal. However, the status on the portal was showing that there is a delay in filing the appeal.

HELD

The High Court observed that the issue in the present case is whether, in the facts of the present case, the period of limitation to file an appeal under section 107(1) of the said Act would commence from the date when the impugned assessment order is uploaded on the GSTN portal or from the date of service upon the petitioner of the scanned copy of the impugned assessment order by email. The High Court further observed that it is not the case of the petitioner that the General Manager was not competent and/or not authorised to receive the communication of the impugned assessment order on behalf of the petitioner and accordingly held that failure on part of the General Manager to inform the petitioner regarding receipt of the impugned assessment order will not have the effect of extending the period of limitation prescribed under sub-section (1) of section 107 of the said Act. The Court did not accept the contention of the petitioner that the limitation prescribed by sub-section (1) of section 107 of the Act will commence from the date when the impugned assessment order is uploaded on the GSTN portal and that except for communication of the impugned assessment order on the GSTN portal, all other communications are to be disregarded for the purpose of sub-section (1) of section 107 of the said Act. Referring to Rule 108, the Court held that Rule 108 no doubt prescribes that the appeal has to be filed electronically, but it nowhere prescribes that the same is to be filed only after impugned assessment order is uploaded on GSTN portal online. Relying upon the decision of Hon’ble Supreme Court in the case of Assistant Commissioner (CT) LTU, Kakinada, and Ors. vs. Glaxo Smith Kline Consumer Health Care Limited, Hon’ble Court held that the policy behind the Act on the constitution of a special adjudicatory forum is meant to expeditiously decide the grievances of a person who may be aggrieved by the order of the adjudicatory authority. The Hon’ble High Court also did not apply the ratio of the decision of Hon’ble Gujarat High Court in the case of Gujarat Tate Petronet Limited vs. Union of India 2020-VIL-426-GUJ, wherein it was held that filing of the appeal and uploading of the order are intertwined activities. Hence though the physical copy of the adjudication order was handed over to the petitioner, the time period to file an appeal would start only when the order is uploaded on the GST portal as without the order being uploaded, the petitioner could not file the appeal and therefore, the contention raised on behalf of the respondents that the uploading of the order and filing of the appeal are two different processes is not tenable in law.

Note: With great respect, the author (MT) is of the view that the ratio of the Three Members’ decision of Hon’ble Gujarat High Court is more appropriate as the procedure for filing an appeal under Rule 108 electronically cannot be implemented unless the order is uploaded on the GST portal.

29 St. Joseph Tea Company Ltd. vs. State Tax Officer [2021 133 taxmann.com 3 (Kerala)] Date of order: 17th June, 2021

The recipients shall not be denied the claim of ITC on the ground of non-appearance of the credit in GSTR-2A, if the supplier is restrained from the filing of GST returns for circumstances beyond his control, provided the supplier has paid the tax to the Government

FACTS

The petitioner, a registered dealer under the Kerala Value Added Tax Act, had migrated to the Goods and Services Tax Act regime and applied for registration under the GST statutes. Having failed to obtain registration due to technical glitches in the GST portal, the petitioner filed a writ petition, and by an interim order, he was permitted to apply for registration afresh. Accordingly, he was granted registration afresh from 9th March, 2018. Even though the issue of registration was thus solved, the petitioner’s grievance about the inability to comply with the requirements in terms of the statutes for the period from 1st July, 2017 to 9th March, 2018 subsisted. As the petitioner was unable to upload the returns for the period from 1st July, 2017 to 9th March, 2018 and remit tax, the petitioner’s customers could not claim Input Tax Credit (ITC), and many of them stopped doing business with the petitioner. The department also started issuing notices in Form GST Asmt-10 to the petitioner’s customers, citing discrepancies in the return.

HELD

The Hon’ble Court observed that the department ought to provide the petitioner opportunity for statutory compliance for the period prior to 9th March, 2018. However, as stated by the respondent, it is technically impossible to make changes in the GST portal for providing an opportunity for an individual assessee to comply with the statutory requirements from a date prior to its registration. In such circumstances, the Hon’ble Court held that the only possible manner in which the issue can be resolved is for the petitioner to pay tax for the period covered by provisional registration from 1st July, 2017 to 9th March, 2018 along with applicable interest under Form GST DRC-03 against the show cause notice (SCN) or statement. If such payment is effected, the recipients of the petitioner under its provisional registration (ID) for the period from 1st July, 2017 to 9th July, 2018 shall not be denied ITC only on the ground that the transaction is not reflected in GSTR 2A.

30 Evertime Overseas Pvt Ltd. vs. Union of India [2021 (55) GSTL 257 (Bombay)] Date of order: 8th October, 2021

Refund of Goods and Service Tax paid cannot be withheld by the Revenue merely on the ground of pending Investigation

FACTS

Petitioner had filed a refund application under section 16 of the Integrated Goods and Service Tax Act, 2017 r. w. s. 54 of the Central Goods Service Tax Act, 2017, on account of making zero-rated supply. However, the application for refund was not processed on the ground that an investigation was pending and to secure the interest of revenue. Being aggrieved by such non-processing of the refund, the petitioner submitted an appeal before the Hon’ble Bombay High Court.

HELD

It was held that the petitioner’s application for refund shall be processed expeditiously as per law and directed the department to dispose of the refund application in an expeditious manner after passing a reasoned order based on the merits of the case.

31 Assistant State Tax Officer vs. VST and Sons (P) LTD. [2021 (55) GSTL 259 (Kerala)] Date of order: 22nd July, 2021

Transportation of used vehicles categorized as used personal effects are exempted from the requirement of E-Way Bill

FACTS

Respondent filed a writ petition challenging the detention of “Range Rover” motor vehicle while being transported as used personal vehicle from Coimbatore to Thiruvanthapuram. The motor vehicle was new and ran only for 43 kms. The department detained the vehicle on the ground that transportation was done without generation of e-way bill. Aggrieved by such detention the Respondent filed a writ petition before the Hon’ble High Court.

HELD

The High Court relied upon the judgement of Kun Motor Company Private Limited vs. Assistant Commissioner of State Tax 2019 (21) GSTL 3 (Kerala HC) and held that used vehicles are to be categorised as “used personal effects” irrespective of how negligible they have been used. Goods classifiable as “used personal and household effect” are exempt from the requirement of e-way bill in terms of Rule 138(14)(a) of CGST Rules. Thus, there was no requirement for the generation of e-way bill.

32 Daulat Samirlal Mehta vs. Union of India [2021 (55) GSTL 264 (Bombay)] Date of order: 15th February, 2021

An Arrest cannot be made merely because certain sections of the Central Goods and Service Tax provide for the same for specific violations or offences

FACTS

The petitioner, aged around 65 years, was a director of Twinstar Industries Limited and Originet Technologies Limited. During 2018 an investigation was initiated for the alleged fraudulent availment and utilization of Input Tax Credit (ITC) based on bogus invoices without actual receipt of goods or services. Summons were issued to the petitioner under section 70 of CGST Act on several occasions. In response to the summons, the petitioner appeared before the investigating officer and his statements were recorded on five occasions. After the fifth interrogation, the petitioner was arrested and sent to judicial custody. Petitioner was accused of committing an offence under section 132(1)(c) of CGST Act for availment of ITC around Rs.122.59 crores on strength of bogus invoices and offence under section 132(1)(b) and section 132(1)(c) of CGST Act for issuing bogus invoices and wrongfully passing ITC approximately Rs.191.66 crores without actual supply of goods or services. The petitioner, without admitting the allegations, filed three compounding applications under section 138 of CGST Act, one his personal account and the other two on behalf the two companies in which he is a director to avoid multiple proceedings as well as to avoid rigours of prosecution besides any further prejudice to his personal liberty. With the aforesaid grievance, the petitioner filed a writ petition before the Bombay High Court seeking bail.

HELD

It was held that the requirement under subsection (1) of section 69 of CGST Act is “reasons to believe” that not only a person has committed any offence as specified but also as to why such person needs to be arrested. The primary intention of the Central Goods Service Tax Act is to collect the revenue, and arrest is only incidental to achieve the main objective. An arrest cannot be made only because the offence is cognizable and non-bailable. The officers have to take into account whether arrest is necessary to prevent further commission of offences or tampering of evidences or influence of witness or producing before the courts. Further, once compounding under section 138 of the Central Goods Service tax Act is done, no further proceedings shall be initiated, and all the existing proceedings for the same offence shall stand abated. The Court concluded by granting bail to the petitioner subject to requisite bond, surety and conditions.

II. AUTHORITY FOR ADVANCE RULING

33 Suez India Pvt. Ltd. [2022-TIOL-15-AAR-GST] Date of order: 31st December, 2021

Even though there are two separate contracts, the contract for design and construction and operation and management for water loss management is a single indivisible contract

FACTS

Applicant entered into a performance-based contract for water loss management with Kolkata Municipal Corporation which includes construction of water distribution networks and operation and maintenance. The contract was awarded to him for a single lump sum amount, however, for the contract signing purposes, two separate contracts were prepared namely design and construction phase and operation and maintenance phase along with the Letter of Award. Applicant therefore, wished to know whether such an agreement be considered as divisible supplies or a single contract under the GST law and the taxability thereof.

HELD

Contract for water loss management made by the applicant with Kolkata Municipal Corporation which includes construction of water distribution networks and operation and maintenance shall be treated as an indivisible single contract and qualifies as works contract as defined under clause (119) of section 2 of the GST Act. Such composite supply of works contract gets covered under entry serial number 3(iii) of the Notification No. 20/2017-Central Tax (Rate) dated 22nd August, 2017 and therefore, would attract tax @ 12% with effect from 22nd August, 2017 – For the period from 1st July, 2017 to 21st August, 2017, however the supply would be taxable @ 18% vide entry serial number 3(ii) of the Notification No. 11/2017-Central Tax (Rate).

34 M/s Emcure Pharmaceuticals Ltd. [2022-TIOL-10-AAR-GST] Date of order: 4th January, 2022 [AAR-Maharashtra]

Recoveries made for providing canteen facility, bus facility and notice pay recovered from employees are not liable to GST

FACTS

The Applicant, a pharmaceutical company, makes recoveries at subsidized rates for providing canteen and bus transportation facilities to its employees and engages third- party service providers to provide the said facilities. These service providers raise invoices with applicable GST. The Applicant recovers a certain portion of the consideration paid to such third-party service providers from its employees. Also, there are instances where the employees leave without serving the mandated notice period. In such cases, the salary is deducted for the tenure not served as compensation for the breach of terms of Employment Agreement. The question before the Authority is whether such recoveries made are liable to GST.

HELD

The Authority noted that the canteen services are provided by the third-party service providers, and the company is not in the business of providing canteen facility, thus it is not their output service. Thus, the provision of a canteen facility is not a transaction made in the course or furtherance of business in terms of section 7 of the CGST Act, 2017 for a transaction to qualify as supply. Essentially it has to be made in the course or furtherance of business. Hence the canteen services cannot be considered as a ‘supply’ to attract GST payable on such recoveries. Also, recoveries made for the bus facility will not be liable for GST. With respect to the notice pay recovery, the Authority noted that the services by an employee to the employer in the course of or in relation to his employment are neither supply of goods nor supply of service. The employee opting to resign by paying an amount equivalent to month of salary in lieu of notice, has acted in accordance with the contract, and that being the case, no question of any forbearance or tolerance does arise. Thus notice pay recovered is also not liable to GST.

35 M/s. Chikkaveeranna Sweet Stall [2022-TIOL-08-AAR-GST] Date of order: 24th November, 2021 [AAR-Karnataka]

GST rate for composition tax payers engaged in the manufacture of sweet and namkeens and doing only the counter sales, is one percent

FACTS

Applicant is a composition taxpayer engaged in the manufacture of sweets and making counter sales without having any facility of restaurant or hotel. The question before the authority is the rate of GST applicable on the same.

HELD

The Authority held that since the applicant is into the manufacture of sweets, he can opt to pay GST at one per cent of the turnover subjected to the condition mentioned in the Notification No. 8/2017 (Central Tax) dated 27th June, 2017 and further amended notifications related to composition tax.

BCAJ Admin

RECENT DEVELOPMENTS IN GST

I. NOTIFICATIONS

(A) Changes in Rules – Notification No.38/2021 – Central Tax – dated 21st December, 2021
By
notification No. 35/2021-Central Tax dated 24th September, 2021
(Reported in BCAJ November, 2021), certain changes were made in rules to
come to effect from notified date. By the above notification, the said
rules are brought into effect from 1st January, 2022. The above changes,
which are coming into effect from 1st January, 2022, are basically in
respect of Aadhar Authentication for a registered person for carrying
out certain functions like filing of refund application, revocation
application etc.

(B) Changes in Act – Notification No.39/2021 – Central Tax – dated 21st December, 2021
By
above notification, effective date is notified for certain amendments
made by Finance Act, 13 of 2021 dated 28th March, 2021 under CGST Act.
As per the above notification, the given amendments are effective from
1st January, 2022 (discussed in detail in BCAJ, March 2021). The
indicative changes are mentioned below for ready reference:

Sr. No.	Section of the Finance Act, 13 of 2021	Section of the CGST Act, 2017	Particulars
1.	108	7	The amendment is to dilute the effect of the Mutuality Concept in the meaning of “supply” given in section 7, especially in relation to clubs, society etc.
2.	109	16	Matching ITC with outward details of supplier (GSTR 2B) is made applicable.
3.	113	74	Amendment in the above section is about the conclusion of proceedings in specified cases.
4.	114	75	Self-assessment for recovery to include details shown in GSTR-1 but not reflected in GSTR-3B.
5.	115	83	The extension of provisional attachment to the beneficiary is brought into effect.
6.	116	107	In case of an appeal against penalty order under section 129(3), pre-payment of 25% will be necessary.
7.	117	129	Penalty enhancement from 100% to 200% for E-way bill default becomes applicable.
8.	118	130	Penalty of 100% specified in the section becomes applicable.
9.	119	151	About collection of statistics.
10.	120	152	About bar on disclosure of information.
11.	121	168	Procedural changes
12.	122	Schedule-II, Para 7	The said Para about the treatment of unincorporated association is deleted. This is to be read with amendment in section 7.

Sr. No.

Section of the Finance Act, 13 of 2021

Section of the CGST Act, 2017

Particulars

108

The amendment is to dilute the effect of the Mutuality Concept
in the meaning of “supply” given in section 7, especially in relation to
clubs, society etc.

109

Matching ITC with outward details of supplier (GSTR 2B) is made
applicable.

113

Amendment in the above section is about the conclusion of
proceedings in specified cases.

114

Self-assessment for recovery to include details shown in GSTR-1
but not reflected in GSTR-3B.

115

The extension of provisional attachment to the beneficiary is
brought into effect.

116

107

In case of an appeal against penalty order under section 129(3),
pre-payment of 25% will be necessary.

117

129

Penalty enhancement from 100% to 200% for E-way bill default
becomes applicable.

118

130

Penalty of 100% specified in the section becomes applicable.

119

151

About collection of statistics.

10.

120

152

About bar on disclosure of information.

11.

121

168

Procedural changes

12.

122

Schedule-II, Para 7

The said Para about the treatment of unincorporated association
is deleted. This is to be read with amendment in section 7.

(C) Changes in Rules – Notification No.40/2021 – Central Tax – dated 29th December, 2021
By above notification, following changes are made in CGST Rules, 2017:

Sr. No.	Rule No.	Indicative Changes
1.	36(4)	Rule 36(4) about availment of ITC has been substituted from 1^st January, 2022. By the substitution, it is provided that, ITC availability will be as per reporting in GSTR-1 by the suppliers and reflected in GSTR-2B. The relaxation of 5% is removed.
2.	80	By inserting sub-rule (1A), the due date for filing annual return (GSTR-9) for 2020-2021 is extended till 28^th February, 2022. Similarly, by inserting sub-rule (3A), the due date for filing the self-certified reconciliation statement (GSTR-9C) for 2020-2021 is extended till 28^th February, 2022.
3.	95	In Rule 95(3)(c), a proviso is inserted to clarify that where the Unique Identity Number of the refund applicant is not mentioned on the invoice then, such applicant can submit a self-attested invoice copy with refund application in form GST-RFD-10.
4.	142	An amendment is made in sub-rule (3) of Rule 142 from 1^st January, 2022. As per the unamended position, the penalty proposed under section 129(1) could be paid within 14 days of detention or seizure of the goods and conveyance and informed to the officer and officer can conclude the proceedings in respect of the said notice. However, by amendment, the time period is now changed to seven days of the notice issued under section 129(3) but before the issuance of the order under said section. Therefore, now intimation of payment of penalty amount should be made and informed within 7 days of the notice otherwise; proceeding, will continue. In sub-rule (5), Prior to amendment, the provision was to specify tax, interest and penalty in DRC-07 payable by the person chargeable with tax. Now amendment is made to the effect that in Form GST-DRC-07, the amount of tax, interest and penalty, as the case may be, shall be payable by the person concerned.
5.	144A	This is a new rule inserted from 1^st January, 2022. It is regarding recovery of penalty by the sale of goods or conveyance detained or seized in transit. If the person liable to pay penalty under section 129(1) does not pay the same within 15 days from the date of receipt of order, then the proper officer can initiate proceeding for sale or disposal of the said goods or conveyance. The procedure
5. (continued)		to be adopted for sale or disposal like e-bidding etc. is also specified in the said rule. It is also clarified that in case appeal is filed and a stay is granted, then the above proceedings of sale or disposal will be stayed. This is a welcome insertion in as much as there is clarity about the procedure which will be followed by the authorities.
6.	154	Rule 154 is substituted from 1^st January, 2022 to support above Rule 144A. Under this Rule, the sequence of appropriation of the amount received under Rule 144A is provided.
7.	159	Rule 159 relates to procedural aspects of provisional attachment of property. Some procedural changes are made in the above rule. Amongst others, GST-DRC-22A is prescribed for filing objections against attachment. The time limit of 7 days for filing an objection is removed. It appears that the affected person can file an objection anytime within continuation of the attachment.
8.		There are also a few changes in some of the forms prescribed under the Rules.

Sr. No.

Rule No.

Indicative Changes

36(4)

Rule 36(4) about availment of ITC has been substituted from 1^st
January, 2022. By the substitution, it is provided that, ITC availability
will be as per reporting in GSTR-1 by the suppliers and reflected in GSTR-2B.
The relaxation of 5% is removed.

By inserting sub-rule (1A), the due date for filing annual
return (GSTR-9) for 2020-2021 is extended till 28^th February,
2022. Similarly, by inserting sub-rule (3A), the due date for filing the
self-certified reconciliation statement (GSTR-9C) for 2020-2021 is extended
till 28^th February, 2022.

In Rule 95(3)(c), a proviso is inserted to clarify that where the
Unique Identity Number of the refund applicant is not mentioned on the
invoice then, such applicant can submit a self-attested invoice copy with
refund application in form GST-RFD-10.

142

An amendment is made in sub-rule (3) of Rule 142 from 1^st
January, 2022. As per the unamended position, the penalty proposed under
section 129(1) could be paid within 14 days of detention or seizure of the
goods and conveyance and informed to the officer and officer can conclude the
proceedings in respect of the said notice. However, by amendment, the time
period is now changed to seven days of the notice issued under section 129(3)
but before the issuance of the order under said section. Therefore, now
intimation of payment of penalty amount should be made and informed within 7
days of the notice otherwise; proceeding, will continue.

In sub-rule (5), Prior to amendment, the provision was to
specify tax, interest and penalty in DRC-07 payable by the person chargeable
with tax. Now amendment is made to the effect that in Form GST-DRC-07, the
amount of tax, interest and penalty, as the case may be, shall be payable by
the person concerned.

144A

This is a new rule inserted from 1^st January, 2022.
It is regarding recovery of penalty by the sale of goods or conveyance
detained or seized in transit.

If the person liable to pay penalty under
section 129(1) does not pay the same within 15 days from the date of receipt
of order, then the proper officer can initiate proceeding for sale or
disposal of the said goods or conveyance. The procedure

(continued)

to be adopted for sale or disposal like
e-bidding etc. is also specified in the said rule. It is also clarified that
in case appeal is filed and a stay is granted, then the above proceedings of
sale or disposal will be stayed. This is a welcome insertion in as much as
there is clarity about the procedure which will be followed by the
authorities.

154

Rule 154 is substituted from 1^st January, 2022 to
support above Rule 144A. Under this Rule, the sequence of appropriation of
the amount received under Rule 144A is provided.

159

Rule 159 relates to procedural aspects of provisional attachment
of property. Some procedural changes are made in the above rule. Amongst
others, GST-DRC-22A is prescribed for filing objections against attachment.
The time limit of 7 days for filing an objection is removed. It appears that
the affected person can file an objection anytime within continuation of the
attachment.

There are also a few changes in some of the forms prescribed
under the Rules.

II. NOTIFICATIONS – RATES

Changes in Rate of Tax

(A)
Government has issued Notifications No.18/2021-Central Tax (Rate)
dated 28th December, 2021 and 18/2021-Integrated Tax (Rate) dated 28th
December, 2021 for effecting changes in rate schedules namely in
Notification No.01/2017-Central Tax (Rate) dated 28th June, 2017 and
Notification No.01/2017-Integrated Tax (Rate) dated 28th June, 2017. By
above amendments, changes are made in entries under 2.5%, 6%, 9% and 14%
slabs. For the sake of brevity entry wise amendments are not mentioned
here. The changes are effective from 1st January, 2022.

(B)
Government has issued Notifications No.19/2021-Central Tax (Rate) dated
28th December, 2021 and 19/2021-Integrated Tax (Rate) dated 28th
December, 2021 for effecting changes in rate schedules namely in
Notification No.02/2017-Central Tax (Rate) dated 28th June, 2017 and
Notification No.02/2017-Integrated Tax (Rate) dated 28th June, 2017
which are relating to exempting goods. By above amendments, changes are
made in exemption entries. For the sake of brevity entry wise amendments
are not mentioned here. The changes are effective from 1st January,
2022.

(C)
Government has issued Notifications No.20/2021-Central Tax (Rate) dated
28th December, 2021 and 20/2021-Integrated Tax (Rate) dated 28th
December, 2021 for effecting changes in rate schedules namely in
Notification No.21/2018-Central Tax (Rate) dated 26th July, 2018 and
Notification No.22/2018-Integrated Tax (Rate) dated 26th July, 2018
which are relating to handicraft items. By above amendments, changes are
made in said Notifications. For the sake of brevity entry wise
amendments are not mentioned here. The changes are effective from 1st
January, 2022.

(D) Government has issued Notifications
No.21/2021-Central Tax (Rate) dated 31st December, 2021 and
21/2021-Integrated Tax (Rate) dated 31st December, 2021 for superseding
Notification No.14/2021-Central Tax (Rate) dated 18th November, 2021 and
Notification No.15/2021-Integrated Tax (Rate) dated 18th November, 2021
and amend Notification No. 01/2017- Central Tax rate and
08/2017-Integrated tax (rate) respectively. By above amendments, changes
are made in said Notifications. For the sake of brevity entry wise
amendments are not mentioned here. The changes are effective from 1st
January, 2022.

(E) Government has issued Notifications
No.22/2021-Central Tax (Rate) dated 31st December, 2021 and
22/2021-Integrated Tax (Rate) dated 31st December, 2021 for superseding
Notification No.15/2021-Central Tax (Rate) dated 18th November, 2021 and
Notification No.14/2021- Integrated Tax (Rate) dated 18th November,
2021 and amending Notification No.11/2017-Central Tax rate and
01/2017-Integrated tax (rate). By above amendments, changes are made in
description in entries. For the sake of brevity item wises amendments
are not mentioned here. The changes are effective from 1st January,
2022.

III. CIRCULARS

(A) GST on services supplied by restaurants through e-commerce operators – Circular No.167/23/2021-GST dated 17th December, 2021
By
this Circular, various clarifications are given in respect of new
system of taxation of restaurants making supplies through e-commerce
operators.

(B) Mechanism for filing of refund claim by the
taxpayers registered in erstwhile Union Territory of Daman & Diu for
period prior to merger with U.T. of Dadra & Nagar Haveli – Circular
No.168/24/2021-GST dated 30th December, 2021
By this Circular, the clarifications are given about refund claims in the above Union Territory of Daman & Diu.

(C) Press Release
By
Press release dated 31st December, 2021 it is informed that vide
decision in 46th GST Council Meeting, the existing rates in Textile
sector will continue beyond 1st January, 2022 also. It means the
increase in rates for Textile sector is kept on hold.

(D) HSN Change from 1st January, 2022
The
Custom Department has informed vide D.O.F No.524/11/2021-STO(TU) dated
20th December, 2021, that there are changes in HSN codes from 1st
January, 2022 and stakeholders should take care of the same by making
reference to the changes.

IV. ADVANCE RULINGS

(A) Export of services vis-à-vis Intermediary Services

M/s. DKV Enterprises Pvt. Ltd. (AAR No. 02/AP/GST/2021 dated 11th January, 2021)

The
applicant is an authorized non-exclusive consultant for Grace Products
(Singapore) Pte Limited situated in Singapore to sell fluid cracking
catalysts and additives.

The applicant is expected to be a
consultant for the sale of products of Singapore Company to the HPCL
Vishaka Refinery and other such refineries. The applicant claimed that
he is rendering marketing consultant services to Singapore Company, and
they are billing directly to Singapore Company. It is also stated that
money is received in foreign currency. It was further clarified that the
applicant is not giving any services to Indian clients nor any payment
is received from them.

In this case, earlier advance ruling order
was passed dated 24th February, 2020. In the said order, the above
services were held as intermediary services and not export of services.
Applicant then filed appeal to the Appellate Authority for advance
ruling. Before the Appellate authority, applicant made request to remand
back the case to original authority in light of the judgment in case of
IBM India Pvt Ltd. vs. Commissioner of Central Excise and Service Tax reported in 2020 (34) G.S.T.L. 436. Consequent
to above request the matter was remanded back to original authority
i.e., AAR. Therefore, fresh hearing was done, and this advance ruling
order dated 11th January, 2021 is passed. In the order, the learned AAR
has held that the judgment cited by applicant i.e., in case of IBM India
Pvt. Ltd. is under service tax regime and not applicable in the present
situation. The learned AAR held that applicant is covered and fits into
the definition of intermediary as defined in the section 2(13) of the
IGST Act, 2017 and therefore, “Place of Supply” is required to be
decided as per section 13(8) of IGST Act, 2017. The learned AAR held
that, the transaction is not about export of services but it is liable
under IGST Act at 18% as per section 7(5)(c). The fresh ruling is passed
accordingly.

(B) Nature of service as “Going concern”

M/s SCV Sky Vision (AAR No. 04/AP/GST/2021 dated 12th January, 2021)

The
applicant is engaged in the cable operation business in Andhra Pradesh.
Applicant is Multi System Operator (MSO), whereby it purchases digital
signals from broadcasters, E-TV etc. The applicant transmits the said
signal to Local Cable Operators (LCO), who supplies the same to
individual home and customers premises. In relation to above business,
the applicant has assets and subscribers/customers linked LCO etc. The
applicant has entered into Business Transfer Agreement (BTA) with one
M/s ACN Cable Pvt. Ltd. In terms of BTA, ACN has agreed to purchase the
entire cable operation business of the applicant. All rights, title and
interest in and to the business, assets, subscribers/ customers, linked
LCOs will get transferred from the applicant to ACN as a going concern.
However, liabilities that have presently arisen or will arise for the
past business relationship/ earlier period and the employees are not
transferred. Based on the above facts, the applicant was contesting that
it has transferred business as a going concern and hence it is exempt
in light of entry at Sr. No.2 of the Notification No. 12/2017 – Central
Tax (Rate) dated 28th June, 2017 (‘Service Exemption Notification’).

The entry is also reproduced in the advanced ruling as under:

Sr. No.	Chapter, Section, Heading, Group or Service Code (Tariff)	Description of Services	Rate (per cent.)	Condition
1	Chapter 99	Services by way of transfer of a going concern, as a whole or an independent part thereof.	NIL	NIL

Sr. No.

Chapter,
Section, Heading, Group or Service Code (Tariff)

Description
of Services

Rate
(per cent.)

Condition

Chapter 99

Services by way of transfer of a going concern, as a whole or an
independent part thereof.

NIL

In support of the above claim, the applicant has given its
lengthy submission and has relied upon certain judgments, including the
definition of going concern as per dictionary and clarifications given
by CBIC under service tax.

The learned AAR examined the claim and
observed that there would be a transfer of assets but not liabilities.
The learned AAR observed as under about nature of transfer as going
concern:

‘Going concern is not included in the GAAP (Generally
Accepted Accounting Principles) but included in the GAAS (Generally
Accepted Auditing Standards). Accounting standards determine what a
company disclose on its financial statements if there are doubts about
it’s ability to continue as a going concern. Conditions that lead to
substantial doubt about going concern include the following like
negative trends in operating results, continuous losses from one period
to next, loan defaults, lawsuit against a company, and denial of credit
by suppliers. Moreover, transfer of a going concern means transfer of a
running business which is capable of being carried on by the purchaser
as an independent business. Such transfer of business as a whole will
comprise comprehensive transfer of immovable property, goods and
transfer of unexecuted orders, employees, goodwill etc.,

The
concept of transferring a company as a ‘going concern’ was examined by
the Delhi High Court in the landmark judgement of Inre Indo Rama Textile
Limited (2013) 4 Comp LJ 141 (Del). In this case the Delhi High Court
held that a company is said to be transferred as a ‘going concern’ when
the assets and liabilities being transferred constitute a business
activity capable of being run independently for a foreseeable future.
The Supreme Court in Allahabad Bank vs. ARC Holding AIR 2000 SC 3098
(Allahabad Bank case) held that if the company is sold off as a ‘going
concern’, then along with the assets of the company, if there are any
liabilities relevant to the business or undertaking, the liabilities too
are transferred.’

In light of the above judicial precedents and
legal position, the learned AAR held that the applicant’s transaction
could not fit into the exemption entry cited above. The learned AAR held
the transaction is taxable.

BCAJ Admin

FINANCIAL REPORTING DOSSIER

1. KEY RECENT UPDATES

SEC: Accounting Guidance on ‘Spring-Loaded’ Compensation Awards to Executives
On 29th November, 2021, the US Securities and Exchange Commission (SEC) released guidance (Staff Accounting Bulletin No. 120) for companies to properly recognize and disclose compensation costs for ‘spring-loaded awards’ made to executives. Spring-loaded awards are share-based compensation arrangements where a company grants stock options or other awards shortly before it announces market-moving information (such as an earnings release with better-than-expected results or the disclosure of a significant transaction). The Bulletin provides additional guidance to companies estimating the fair value of share-based payment transactions regarding the determination of the current price of the underlying share and the estimation of the expected volatility of the price of the underlying share for the expected term when the company is in possession of material non-public information. [https://www.sec.gov/news/press-release/2021-246]

PCAOB: Updated Guidance on Disclosures Related to Audit Participant Reporting in Form AP
On 17th December, 2021, the Public Company Accounting Oversight Board (PCAOB) released updates to its Staff Guidance: Form AP, Auditor Reporting of Certain Audit Participants, and Related Voluntary Audit Report Disclosure Under AS 3101, The Auditor’s Report on an Audit of Financial Statements When the Auditor Expresses an Unqualified Opinion. Extant PCAOB Rules require each registered public accounting firm to provide information about engagement partners and accounting firms that participate in audits of issuers by filing a Form AP for each audit report issued by the firm for an issuer. The current updates to the guidance include a revised description of secondment arrangements to address both in-person and remote work and a revised illustrative example of disclosure in the audit report. [https://pcaob-assets.azureedge.net/pcaob-dev/docs/default-source/standards/documents/2021-12-17-form-ap-staff-guidance.pdf?sfvrsn=52d4323d_4]

FASB: Exposure Draft Proposing Enhanced Transparency around Supplier Finance Programs
And on 20th December, 2021, the Financial Accounting Standards Board (FASB) issued an Exposure Draft (ED): Liabilities – Supplier Finance Programs (Subtopic 405-50), Disclosure of Supplier Finance Program Obligations. The proposed Accounting Standards Update affects buyers that use supplier finance programs (commonly known as reverse factoring, payables finance, or structured payables arrangements) to purchase goods and services. The ED requires buyers in a supplier finance program to disclose sufficient information to allow an investor to understand the program’s nature, activity during the period, changes from period to period, and potential magnitude. [https://www.fasb.org/cs/Satellite?c=Document_C&cid=1176179161221&pagename=FASB%2FDocument_C%2FDocumentPage]

International Financial Reporting Material
1. UK FRC: Developments in Audit 2021. [18th November, 2021.]
2. IAASB: Non-Authoritative Support Material Related to Technology: Frequently Asked Questions (FAQ) on Audit Planning. [7th December, 2021.]
3. IASB: Issue 25 of Investor Update. [16th December, 2021.]

2. EVOLUTION AND ANALYSIS OF ACCOUNTING CONCEPTS – EXTRAORDINARY ITEMS

Setting the Context
Financial statement analysis and exercises in valuation involve inter-alia, a process of normalizing GAAP reported figures for the effects of items of income/expense that are non-recurring, not related to the core business operations and the like. The isolation of such items could involve labelling them separately on the face of the income statement or providing a narrative in the accompanying management commentary. In this context, broadly, accounting has had two presentation categories: namely 1) extraordinary items and 2) exceptional items (also labelled in practice globally as ‘special items’, ‘one-time items’, ‘unusual items’, ‘infrequent items’, etc.).

Items of income or expense were considered Extraordinary in accounting when they arose from events or transactions that were distinct from the ordinary activities of the enterprise and, therefore, not expected to recur frequently or regularly.

The concept of ‘extraordinary items’ prevails under the AS accounting framework in India. US GAAP, IFRS and little GAAPs like IFRS for SMEs have eliminated the same. According to global standard setters, eliminating extraordinary items dispensed the need for arbitrary segregation of the effects of related external events – some recurring and others not – on the profit or loss of an entity for a period. For example, arbitrary allocations would have been necessary to estimate the financial effect of an earthquake on an entity’s profit or loss if it occurs during a significant cyclical downturn in economic activity. Companies could continue to communicate the impact of such events/transactions using the guidance available for ‘exceptional’/ ‘unusual or non-recurring items.’

The Position under prominent GAAPs

US GAAP

Historical Developments
The Committee on Accounting Procedure (CAP) issued Accounting Research Bulletin (ARB) No. 321 in December 1947, the first Bulletin that covered the concept of extraordinary items. It contained the viewpoint that only ‘extraordinary items’ may be excluded from determining net income (when their inclusion would impair the significance of net income leading to misleading inferences). This accounting literature contained a general presumption that all items of profit and loss recognized during a period should be used in determining net income, with the only possible exception being material items that are not identifiable with or do not result from usual or typical business operations.

The Bulletin discussed two conflicting viewpoints: ‘current operating performance’; and ‘all-inclusive’. The principal emphasis in the ‘current operating performance’ concept is upon an entity’s ordinary, normal, recurring operations during the period under report. If extraordinary transactions have occurred, their inclusion could impair the significance of net income leading to misleading inferences by users of financial statements. Under the ‘all inclusive’ viewpoint, it is a presumption that net income includes all transactions affecting the net increase/decrease in Equity, excluding dividend distributions and capital transactions.

In 1966, the Accounting Principles Board (APB) of AICPA issued APB Opinion No. 9, Reporting the Results of Operations, which concluded that net income should reflect all profit and loss items recognized during the period (with the sole exception of prior period adjustments). However, it stated that ‘extraordinary items’ should be segregated from the results of ordinary operations and shown separately in the income statement, with disclosure of the nature and amounts thereof, thereby providing meaningful information to users. In the document, the Board acknowledged that this approach could involve difficulty in segregating extraordinary items.

In later years, the financial reporting practices indicated that interpreting the criteria in APB Opinion No. 9 had been difficult for stakeholders and significant differences of opinion existed concerning certain of its provisions.

Accordingly, APB Opinion No. 30, Reporting the Results of Operations (issued in 1973), superseded APB Opinion No.9. It provided more definitive criteria for extraordinary items as follows:

‘Extraordinary items are events and transactions that are distinguished by their unusual nature and by the infrequency of their occurrence. Thus, both of the following criteria should be met to classify an event or transaction as an extraordinary item:

1. Unusual nature—the underlying event or transaction should possess a high degree of abnormality and be of a type clearly unrelated to, or only incidentally related to, the ordinary and typical activities of the entity, taking into account the environment in which the entity operates.

2. Infrequency of occurrence—the underlying event or transaction should be of a type that would not reasonably be expected to recur in the foreseeable future, taking into account the environment in which the entity operates.

The Board concluded that an event or transaction should be presumed to be an ordinary and usual activity of the reporting entity, the effects of which should be included in income from operations unless the evidence supports its classification as an extraordinary item. This Opinion formed Codified US GAAP. [Sub Topic 225-20.]

In this context, it is pertinent to note the Emerging Issues Task Force (EITF) had, post the September 11 US Terror Attack decided against extraordinary treatment for terrorist attack costs (EITF 01-10.) It stated that while the events of 9/11 were indeed extraordinary, the financial reporting treatment that uses that label would not be an effective way to communicate the financial effects of those events. The EITF observed that the economic effects of the events were so pervasive that it would be impossible to capture them in any one financial statement line item. Any approach to extraordinary item accounting would include only a part—and perhaps a relatively small part—of the actual effect of those tragic events. Readers of financial reports will be intensely interested in understanding the complete impact of the events on each company. The EITF concluded that showing part of the effect as an extraordinary item would hinder, rather than help, effective communication.

In 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2015-01, Income Statement: Extraordinary and Unusual Items – Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items. The ASU eliminated the Concept of Extraordinary Items in response to stakeholders’ feedback that the concept causes uncertainty since it was unclear when an item should be considered both unusual and infrequent. The FASB noted that it was extremely rare in practice for a transaction or event to meet the requirements to be presented as an extraordinary item.

The Board issued the Accounting Standards Update as part of its initiative to reduce complexity in accounting standards. (Effective for fiscal years commencing after 15th December, 2015.)

In reaching its conclusion, the FASB concluded that the elimination of the concept would not result in a loss of information since the presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained and would be expanded to include items that are both unusual in nature and infrequently occurring.

Current Position
Extant US GAAP, ASC Subtopic 225-20 does not contain the concept of extraordinary items.

IFRS

Historical Developments

IAS 8, Net Profit or Loss for the Period, Fundamental Errors and Changes in Accounting Policies (issued in 1993), required extraordinary items to be disclosed in the income statement separately from the profit or loss from ordinary activities. ‘Extraordinary items’ was defined as ‘income or expenses that arise from events or transactions that are clearly distinct from the ordinary activities of the enterprise and therefore are not expected to recur frequently or regularly’.

In 2002, the Board decided to eliminate the concept of extraordinary items from IAS 8. Accordingly, as per IAS 1, Presentation of Financial Statements no items of income and expense are to be presented as arising from outside the entity’s ordinary activities. The Board decided that items treated as extraordinary result from the normal business risks faced by an entity and do not warrant presentation in a separate component of the income statement. The nature or function of a transaction or other event, rather than its frequency, should determine its presentation within the income statement. Items currently classified as ‘extraordinary’ are only a subset of the items of income and expense that may warrant disclosure to assist users in predicting an entity’s future performance. [IAS 1. BC 63.]

Current Position
Paragraph 87 of IAS 1 states, ‘An entity shall not present any items of income or expense as extraordinary items, in the statement(s) presenting profit or loss and other comprehensive income or in the notes.’

Current Position
AS 5, Net Profit or Loss for the Period, Prior Period Items and Changes in Accounting Policies (Revised 1997), defines extraordinary items as income or expenses that arise from events or transactions that are clearly distinct from the ordinary activities of the enterprise and, therefore, are not expected to recur frequently or regularly.

AS 5 states that whether an event or transaction is clearly distinct from the ordinary activities of the enterprise is determined by the nature of the event or transaction in relation to the business ordinarily carried on by the enterprise rather than by the frequency with which such events are expected to occur. [AS 5. 10.]

Extraordinary items require disclosure in the P&L Statement as a part of net profit or loss for the period.

The Little GAAPs

US FRF for SMEs
AICPA’s US Financial Reporting Framework for Small and Medium-Sized Entities (FRF for SMEs), a self-contained framework not based on US GAAP in Chapter 7, Statement of Operations, contains no reference to extraordinary items.

IFRS for SMEs
International Financial Reporting Standard for Small and Medium-sized Entities (IFRS for SMEs), Section 5, Statement of Comprehensive Income and Income Statement prohibits the presentation or description of any items of income and expense as ‘extraordinary items’. [Section 5.10.]

Conclusion
The prevailing pandemic situation might not have qualified as extraordinary under accounting. Regulators/accounting bodies worldwide had stepped in to provide advisories/guidance to preparers of financial statements of publicly accountable companies to provide disclosures related to the effects of the pandemic.

3. GLOBAL ANNUAL REPORT EXTRACTS: “SHAREHOLDER ENGAGEMENT”
Background
The UK Companies (Miscellaneous Reporting) Regulations 2018 require Directors to explain how they considered the interests of key stakeholders and the broader matters set out in Section 172(1) (A) to (F) of the Companies Act 2006 when performing their duty to promote the success of the Company. This includes considering the interest of other stakeholders which will have an impact on the long-term success of the Company. Herein below is provided an extract from an Annual Report with respect to reporting on Shareholder Engagement.

Extracts from an Annual Report

Company: 4imprint Group PLC, listed on London Stock Exchange (YE 2nd January, 2021 Revenue – $ 560 million).

Stakeholder Engagement – Shareholders

Why we engage

We aim to attract
Shareholders whose requirements are aligned with our strategic objectives, and
who are interested in a long-term holding in our Company. This involves a
good understanding of our strategic objectives, our business model and our
culture.

How we engage

Our key Shareholder engagement activities are:

• Annual Report & Accounts.

• Investor Relations website.

• Annual General Meeting (“AGM”).

• Results announcements.

• Investor roadshows.

• Periodic trading/performance updates.

• Meetings and calls throughout the year with existing and
potential investors, including Environmental, Social and Governance
(“ESG”)/Compliance departments.

• Meetings with Chair, NEDs and Company Secretary as required.

Key topics

•
Effect of COVID-19 on the business.

•
Growth strategy and evolution of marketing portfolio.

•
Market dynamics and opportunity for a return to organic revenue growth.

•
Capital allocation priorities.

•
ESG.

•
Remuneration Policy.

• Culture, ethics and sustainability in the business.

Outcomes & actions

•
Frequent communication and active governance at Board level throughout the
pandemic.

• Effective and timely communications to the market of the
effects of COVID-19 on the business, including mitigating actions taken
addressing order intake, operational adjustments and the Group’s liquidity
position.

• Shareholder register and investor relations activity regularly
reviewed by the Board.

• Involvement of Company Secretary and Chairman in ESG
discussions with Shareholders and compliance agencies.

• Extensive review of Remuneration Policy and Shareholder
consultations in preparation for requesting Shareholder approval at the AGM
in May 2021.

4. FROM THE PAST – “OUR STARTING POINT IN DEVELOPING A STANDARD IS UNDERSTANDING AND EVALUATING THE INVESTOR’s PERSPECTIVE”

Extracts from a speech by Leslie F. Seidman (then Chairman of FASB) at the 12th Annual Baruch College Financial Reporting Conference held in 2013:

“Our starting point in developing a standard is understanding and evaluating the investor’s perspective – how can we make financial reports more decision-useful for them?

But financial information comes at a cost – the cost of preparing and using that information. When the FASB says it won’t issue a standard unless the benefits justify the costs, we mean the following: We issue standards if the expected improvements in the quality of reporting, from the perspective of investors and other users, are expected to justify the costs of preparing and using the information. Until investors have experience using that new information, our understanding of benefits is based on what they tell us they need and how they will use the information. Likewise, until a company has actually adopted a new standard, our understanding of costs is based on imprecise estimates, even in a well-constructed and broad-based field test.

The process I have described is designed to identify the most faithful way to present the information; we do not try to control how others will interpret or act on the information.

It is observable that when market participants perceive an improvement in the quality and credibility of the information they are receiving, the efficiency of the market improves, and investors are better able to price stocks and other capital investments.”

BCAJ Admin

GLIMPSES OF SUPREME COURT RULINGS

7 CIT vs. Reliance Telecom Limited and Ors. (2021) 133 taxmann.com 41 (SC)

Rectification of mistake – Section 254(2) – In exercise of powers under Section 254(2), the Appellate Tribunal may amend any order passed by it under Sub-section (1) of Section 254 with a view to rectifying any mistake apparent from the record – The powers under Section 254(2) are akin to Order XLVII Rule 1 Code of Civil Procedure – While considering the application under Section 254(2), the Appellate Tribunal is not required to re-visit its earlier order and to go into detail on merits – The powers under Section 254(2) of the Act are only to rectify/correct any mistake apparent from the record.

The Assessee entered into a Supply Contract dated 15th June, 2004 with Ericsson A.B. Assessee filed an application under Section 195(2) of the Act before the Assessing Officer, to make payment to the non-resident company for purchase of software without TDS. It was contended by the Assessee that it was for the purchase of software and Ericsson A.B. had no Permanent Establishment in India and in terms of the DTAA between India and Sweden & USA, the amount paid is not taxable in India.

The Assessing Officer passed an order dated 12th March, 2007 rejecting the Assessee’s application holding that the consideration for software licensing constituted under Section 9(1)(vi) of the Act and under Article 12(3) of the DTAA is liable to be taxed in India and accordingly directed the assessee to deduct tax at the rate of 10% as royalty.

The Assessee after deducting the tax appealed before the Commissioner of Income Tax (Appeals). CIT vide order dated 27th May, 2008 held in favour of the Assessee. Revenue appealed before the ITAT and by a detailed judgment and order dated 6th September, 2013, the ITAT allowed the Revenue’s appeal by relying upon the judgments/decisions of the Karnataka High Court and held that payments made for purchase of software are in the nature of royalty. Against the detailed judgment and order dated 6th September, 2013 passed by the ITAT, the Assessee filed miscellaneous application for rectification under Section 254(2) of the Act. Simultaneously, the Assessee also filed the appeal before the High Court against the ITAT order dated 6th September, 2013.

By an order dated 18th November, 2016, the ITAT allowed the Assessee’s miscellaneous application filed under Section 254(2) of the Act and recalled its original order dated 6th September, 2013. Immediately, on passing the order dated 18th November, 2016 by the ITAT recalling its earlier order dated 6th September, 2013, the Assessee withdrew the appeal preferred before the High court, which was against the original order dated 6th September, 2013.

Feeling aggrieved and dissatisfied with the order passed by the ITAT allowing the miscellaneous application under Section 254(2) of the Act and recalling its earlier order dated 6th September, 2013, the Revenue preferred writ petition before the High Court. By the impugned judgment and order, the High Court dismissed the said writ petition/s. Hence, the Revenue approached the Supreme Court.

The Supreme Court considered the order dated 18th November, 2016 passed by the ITAT allowing the miscellaneous application in exercise of powers under Section 254(2) of the Act and recalling its earlier order dated 6th September, 2013 as well as the original order passed by the ITAT dated 6th September, 2013.

Having gone through both the orders passed by the ITAT, the Supreme Court was the opinion that the order passed by the ITAT dated 18th November, 2016 recalling its earlier order dated 6th September, 2013 was beyond the scope and ambit of the powers under Section 254 of the Act. According to the Supreme Court, while allowing the application under Section 254(2) of the Act and recalling its earlier order dated 6th September, 2013, it appeared that the ITAT had re-heard the entire appeal on merits as if the ITAT was deciding the appeal against the order passed by the C.I.T. The Supreme Court observed that in exercise of powers under Section 254(2) of the Act, the Appellate Tribunal may amend any order passed by it under Sub-section (1) of Section 254 of the Act with a view to rectifying any mistake apparent from the record only. Therefore, the powers under Section 254(2) of the Act are akin to Order XLVII Rule 1 Code of Civil Procedure. According to the Supreme Court, while considering the application under Section 254(2) of the Act, the Appellate Tribunal is not required to re-visit its earlier order and to go into detail on merits. The powers under Section 254(2) of the Act are only to rectify/correct any mistake apparent from the record.

The Supreme Court noted that in the present case, a detailed order was passed by the ITAT when it passed an order on 6th September, 2013, by which the ITAT held in favour of the Revenue. According to the Supreme Court, the said order, therefore, could not have been recalled by the Appellate Tribunal in exercise of powers under Section 254(2) of the Act. If the Assessee was of the opinion that the order passed by the ITAT was erroneous, either on facts or in law, in that case, the only remedy available to the Assessee was to prefer the appeal before the High Court, which as such was already filed by the Assessee before the High Court, which the Assessee withdrew after the order passed by the ITAT dated 18th November, 2016 recalling its earlier order dated 6th September, 2013. Therefore, as such, the order passed by the ITAT recalling its earlier order dated 6th September, 2013 which has been passed in exercise of powers under Section 254(2) of the Act was beyond the scope and ambit of the powers of the Appellate Tribunal conferred under Section 254(2) of the Act. The order passed by the ITAT dated 18th November, 2016 recalling its earlier order dated 6th September, 2013, therefore, was unsustainable, which ought to have been set aside by the High Court.

The Supreme Court observed that from the impugned judgment and order passed by the High Court, it appeared that the High Court had dismissed the writ petitions by observing that (i) the Revenue itself had in detail gone into merits of the case before the ITAT and the parties filed detailed submissions based on which the ITAT passed its order recalling its earlier order; (ii) the Revenue had not contended that the ITAT had become functus officio after delivering its original order and that if it had to relook/revisit the order, it must be for limited purpose as permitted by Section 254(2); and (iii) that the merits might have been decided erroneously but ITAT had the jurisdiction and within its powers it may pass an erroneous order and that such objections had not been raised before ITAT.

According to the Supreme Court, none of the aforesaid grounds were tenable in law. Merely because the Revenue might have in detail gone into the merits of the case before the ITAT and merely because the parties might have filed detailed submissions, it did not confer jurisdiction upon the ITAT to pass the order de hors Section 254(2) of the Act. The powers under Section 254(2) of the Act are only to correct and/or rectify the mistake apparent from the record and not
beyond that.

According to the Supreme Court, even the observations that the merits might have been decided erroneously and the ITAT had jurisdiction and within its powers it may pass an order recalling its earlier order which is an erroneous order, could not be accepted. If the order passed by the ITAT was erroneous on merits, in that case, the remedy available to the Assessee was to prefer an appeal before the High Court, which in fact was filed by the Assessee before the High Court, but later on the Assessee withdrew the same in the instant case.

The Supreme Court, therefore, quashed the impugned judgment and order passed by the High Court as well as the order passed by the ITAT dated 18th November, 2016 recalling its earlier order dated 6th September, 2013 and the original orders passed by the ITAT dated 6th September, 2013 passed in the respective appeals preferred by the Revenue were restored.

However, considering the fact that the Assessee had earlier preferred appeal/s before the High Court challenging the original order passed by the ITAT dated 6th September, 2013, which the Assessee withdrew in view of the subsequent order passed by the ITAT dated 18th November, 2016 recalling its earlier order dated 6th September, 2013, the Supreme Court observed that if the Assessee/s prefers/prefer appeal/s before the High Court against the original order dated 6th September, 2013 within a period of six weeks from today, the same would be decided and disposed of in accordance with law and on its/their own merits and without raising any objection with respect to limitation.

BCAJ Admin

FROM THE PRESIDENT

Dear BCAS Family,

I am communicating with you when the Finance Ministry will be giving final touches to the Union Budget, 2022, which shall be presented on 1st February, 2022. As always, there is euphoria all around for a progressive budget. Expectations are that the impact of COVID will gradually recede, and with it, the pressure for allocation of funds to mitigate the impact of the pandemic will recede. It is expected that funds allocation will move to sectors that would enable the creation of employment, easing of logistics issues, creation of world class eco system for smooth functioning of manufacturing sector, digitized businesses as well as state of the art banking and financial set up. There is clamor for allocation of substantial funds towards agriculture to improve rural spending. This will in turn have a spiral effect on spending and demand creation. On the taxation front, there are expectations for tax breaks for salaried class, rationalization of tax rates to bring parity amongst all taxpayers, and ease of compliances.

We all are waiting with bated breath to know how far expectations are met when the Finance Bill, 2022 is tabled by the Hon. Finance Minister Ms. Nirmala Sitharaman. However, being an optimist, I am confident that we shall not be disappointed.

We all have passed through sufferings during the past two years, and there were adversities that had to be faced. However, we are coming out with resilience, and due to facing such adversities, we know what happiness means. Here I would share a thought-provoking quote:

Adversity is another side of the same coin of happiness,
And our life is an interplay of both in order to have meaning in life.

In our professional career too we have passed through such adversities which may have been faced due to natural calamities like the one we encountered in the past two years as well as due to fast changing professional landscape. During such times to win over adversity, we should follow an ABCD process. Initially, accept that adversity is part and parcel of our professional life, and we shall not be able to attain success without experiencing it. After accepting this fact, one should behold (embrace) adversity. Then let us challenge the adversity. This will enable one to face the situation and follow the path to success. This is achieved through devotion and perseverance towards the goal, and one will be detached from adversity.

Now I turn my discussion to the two current trending topics in the financial and capital markets. First is the cryptocurrencies. The world’s largest cryptocurrency, Bitcoin has seen its value eroding to the extent of 20% since the start of 2022 and has almost halved from its all-time high in November of USD 69,000. There may be great potential in cryptocurrencies as a digital asset, but currently, there are many grey areas that have to be addressed, and investors should be aware of the pitfalls while dealing with cryptos. Worldwide, central bankers are also evaluating issuing central bank digital currency (CBDC). Reserve Bank of India is contemplating ways to implement a CBDC in phases. In its recent report ‘Trend and Progress of Banking in India 2020-21’, it has elaborated on its thought process on a CBDC. Its initial recommendation is to “adopt basic models initially, and test comprehensively so that they have minimal impact on monetary policy and the banking system”. We have to comprehend its implications and be ready for the dynamic changes which will take place in the way business transactions are settled going forward.

Second is the thrust towards the growing relevance of sustainability, measured through the Environmental, Social and Governance (ESG) parameters.Its significance in the financial markets cannot be overlooked. ESG investing has become one of the most rapidly expanding sustainable investing methods. International investors with global investment portfolios are increasingly calling for high quality, transparent, reliable and comparable reporting by companies on ESG matters. As professionals, we have to be conversant with the trends that will open up newer vistas of professional offerings.

BCAS constantly evaluates the opportunities which can be brought to the professionals to make them aware and curious to explore further. Regarding cryptocurrencies, BCAS made a compilation of articles published in the BCA Journal, distributed them to its members, and made them available on Social Media platforms to disseminate knowledge to the public. These articles covered legal and accounting aspects.

BCAS organised a lecture meeting to provide insights into the developments on ESG Reporting at global and local levels. A young Chartered Accountant, CA Spandan Shah, addressed the meeting from London.

During January, a case studies based two days’ Workshop on Valuations, addressed by five valuation experts, was also conducted successfully. The workshop dealt with valuations during mergers, demergers, slump sales, cross border transactions, issue of ESOPs/Convertible instruments, as well as for intangibles and startups.

A new area of professional opportunities which is in demand was also deliberated on the BCAS platform through an Expert Chat on ‘How to develop Forensic Accounting and Investigation Practice’. This was attended in large numbers, and great insights were provided by veterans of forensic practice CA Chetan Dalal and Mr. Kanwal Mookhey.

Further, one more practice area opening up for CAs is risk consulting practice. An awareness session ‘Build your own risk consulting practice’, jointly with the Institute of Risk Management (IRM) India Affiliate, is scheduled on 11th February to be addressed by two eminent risk consulting professionals, Mr. Rama Warrier and CA Hersh Shah. I urge you all to take advantage to understand the opportunities in the risk consulting space.

As I commenced my message by discussing Budget 2022, I am happy to inform you that BCAS had an opportunity to convey its viewpoints on expectations on taxation proposals through a budget special interaction for ETNow Swadesh channel. By the time this message reaches you all, the session will have been aired on 31st January, 2022. I hope our views would have been addressed in the upcoming Budget. You all may view the same on their YouTube channel.

The annual Public Lecture Meeting on ‘Direct Tax Law Provisions of the Finance Bill, 2022’ is scheduled on 5th February at 5.30 PM on Virtual Platform. It will be addressed by CA Shri Pinakin Desai. I am sure you all will take benefit of expert analysis by the speaker.

I am happy to share that TAXCON, an annual taxation event that was jointly organized by Mumbai based professional associations, has been revived after more than a decade. TAXCON-2022 – Triveni Sangam – Tax, Tech & Accounting is organized in Hybrid Mode on 18th and 19th February by six professional associations. The topics selected and the speakers to address them will enrich your knowledge base. I appeal to all to register for this event at the earliest.

Today, I have discussed the changes which are taking place at a breakneck speed and the professional opportunities that are unfolding before us in new areas where we have to deep dive and prosper. To sum up the pace of change, I leave you all with a thought narrated by my GURU Mahatria Ra.

The world is growing so fast…..
Even before you say “It is not possible”,
You are interrupted by someone who is already doing it.

Best Regards,

Abhay Mehta
President

BCAJ Admin

Society News

NEW INITIATIVES AT BCAS

At BCAS, a constant endeavour is always underway to exceed the expectations of its members and continue to remain a preferred professional development body for Chartered Accountants. The BCAS legacy over the last 70+ years has been enamoured by its ability to evolve with changing times and remaining extremely relevant to its ever-evolving community.

At the Society various initiatives are underway and few mentioned below have fructified over the last months:

1. Revamped audio-visual infrastructure at BCAS Auditorium:

Modern-day learning delivery environment is significantly different in comparison to the earlier times. This difference was further accentuated by the Covid-19 pandemic which made adoption of digital learning a common-place. BCAS is blessed to be one of the few professional societies of Chartered Accountants to have its own physical auditorium to conduct live events. Over the last few months the entire audio-visual infrastructure at the BCAS auditorium has been revamped by addition of state-of-the-art 4K LED visual screens, hybrid classroom infrastructure, studio-quality voice and sound equipment, surround-sound microphones, teleprompter and multiple point-and-zoom cameras.

These upgradations have significantly improved the learning delivery capabilities from the BCAS Auditorium. Members are encouraged to attend an in-person event at the BCAS Auditorium and experience the new-age digital infrastructure.

This hybrid infrastructure is also available for use to members who choose to make use the BCAS Auditorium for their own learning events.

2. Self-paced learning through E-Learn initiative:

Self-paced learning courses and event recordings are available through the E-Learn learning management initiative of BCAS. Members can now access a catalogue of courses and event recordings by accessing the E-Learn module. The E-Learn platform opens up the BCAS learning content to its large base on outstation members as well.

3. WhatsApp communication with members:

WhatsApp has today become the de-facto choice of quick communication. BCAS has initiated an additional communication channel with its members through WhatsApp. A right balance of quick communication and respecting member privacy will be embedded in the WhatsApp communication initiative.

Once you receive any BCAS WhatsApp message, do save the senders phone number in your mobile address book. This will help in seamless communication moving forward.

4. BCAS back-office on cloud infrastructure:

The Society is able to deliver on its objectives owing to a strong back-office team at the BCAS office. The BCAS office staff comprises a team of more than 20 committed individuals who work diligently to serve the large BCAS membership. With an objective to enable the key departmental heads at BCAS to seamlessly perform their roles, each of them have now unhindered access to Microsoft cloud infrastructure equipping them with seamless access to data, co-creation collaboration and backup capabilities.

5. QR Code and UPI payment functionality:

In a recent initiative, BCAS has enabled receiving payment through QR code as well as through UPI. This functionality is enabled at BCAS front office reception as well as the publication kiosks at the event location.

EVENTS AT BCAS

1. HRD COMMITTEE ORGANIZES ‘TARANG 2K23’

Under the auspices of the HRD Committee of the Bombay Chartered Accountants’ Society (BCAS), the Students’ Committee organized the 15th Jal Erach Dastur CA Students’ Annual Day competition from 24th December, 2022 to 8th January, 2023.

Described as an ecstatic annual CA students’ celeberation, Tarang 2k23 was engaging, enthralling and magnificent. Under the requisite guidance of CA Anand Kothari, CA Jigar Shah, CA Dnyanesh Patade and CA Utsav Shah, Tarangs mainly intended to provide a platform for CA students to unleash their talent and creativity in areas of public speaking, writing skills, performing arts, business, technical and innovative skills. Additionally, the event also intended to act as an insight and potential gateway into the real world outside academic books by providing access and tutelage by skilled and experienced leaders in the form of participation in various fields to building interpersonal relations and network with hundreds of like-minded students.

This year’s Students’ Committee comprised a group of 31 passionate and enthusiastic students. Tarang 2k23 changed the earlier dull and monotonous perception of the CA students as they were now being witnessed as event managers, anchors, talented dancers, and photographers too!

It was truly an event ‘Of CA Students, By CA Students and For CA students.’

Tarang 2k23 saw a huge enrollment of around 500 students despite the Christmas holidays and pending due dates. Overall 279 students participated in the event along with the highest number of participants witnessed in the ‘Talent Show’ and the ‘Antakshari Competition.’ This year Tarang 2k23 also introduced the revolutionary event “CA’Preneur – Pitch Your Business Ideas,” whose concept was taken from the popular TV show, ‘Shark Tank India’ to promote thinking, problem-solving and entrepreneurial skills amongst CA students. The event received huge enrollments along with some amazing ideas being pitched to the judges.

The elimination rounds of the 15th Jal Erach Dastur CA Students’ Annual Day – ‘Tarang 2K23’ were held at the BCAS Hall on the 24th and 25th, December, 2022 with the beautiful Christmas themed décor to give the participants a joyful vibe. To keep the crowd engaged, the students’ team organized various online games and networking sessions including the Tarang’s Networking Bingo and an intriguing Quiz via the Zoom platform two days prior to the grand finale day. This provided a unique opportunity to all participants to build a productive and constructive network along with a lot of fun too.

The Grand Finale of Tarang 2k23 was held at the Lala Lajpat Rai College Auditorium on 8th January, 2023. Vahura and IDFC Bank sponsored the winners’ prizes for various games and quizzes held online. Arrangements for various exciting game stalls, live caricatures and a 360° photobooth were made to engage and build excitement amongst the audience before the event’s commencement.

The grand finale commenced with the lighting of lamp by the HRD Committee and the student coordinators with the Ganesh Vandana and Saraswati Vandana being played in the background

The event kickstarted with a ‘Antakshari Competition’, where the two finalist teams namely, ‘Deewane’ and ‘Parwane’ competed on the stage. The event comprised engrossing rounds to test the presence of mind the sound musical knowledge of the participants. It was hosted by CA Vijay Bhatt.

The next event to follow was a Debate Competition with eight finalists. The moderator for this event, titled, “Traditional Indian educational system of Gurukul was more effective than today’s Universities,” was CA Ujjwal Gadhvi. The tagline for the Debate was “War of Words.”

This event was followed by the ‘Talk Hawk,’ sponsored by the Chandanben Maganlal Bhatt Elocution Fund. Here, three finalists were given four minutes to speak on any one of the 10 given topics.

This was followed by a short 15 minutes break after which Tarang 2k23 resumed with a blissful and soothing jamming session with some beautiful lyrical songs sung by the students’ team. This was followed by an energetic and well-coordinated Bollywood dance flash mob choreographed by CA Rishikesh Joshi.

The most anticipated event of the evening, CA’s Got Talent! included 12 performances by the finalists in all three categories including – music which included vocals as well as instrumental, dancing and the other performing arts category.

This was followed by a short 2-minute video which was a compilation of the past 14 years of the event Tarang.

The concluding valedictory session started with the displaying of the compilation of business ideas of the contestants of the CA’Preneur competition.

Post that the winning reels and the pictures of the Tarang Reel Star and the Khinch Le Photography Competition were displayed on the screen. Two prizes, in each of the two categories; namely, the Public Choice Award and the Judges’ Choice Award, were given.

The winners of the competition representing their firms were also announced.

The event was anchored by Ekta Singh, Krrish Pipaliya and Nikita Sahu, who ensured an environment full of spirit, vigor and humor.

Mayur Pandya and Sagar Gupta proposed the vote of thanks to Sohrab Erach Dastur, the family of Chandanben Maganlal Bhatt, Managing Committee and HRD Committee members, event coordinators, photographers, BCAS Staff, parents, sound technicians, student volunteers, CA students and the audience.

Link – https://www.youtube.com/watch?v=jqOB2df7W8k

BCAJ Admin

MISCELLANEA

I. TECHNOLOGY

31. AI-powered Robot Lawyer ‘world’s first’ to represent human client in Court

The “first-ever robot lawyer” will represent a client in court. According to reports, a defendant will use the legal assistant powered by artificial intelligence (AI) to contest a traffic ticket. Here’s what all we know.

The “DoNotPay” firm developed the AI robot. It will function as a smartphone app and stream all court proceedings in real-time. The robot will instruct the defendant on what to say using headphones, much like a human attorney would do in real life.

Joshua Browder established the chatbot for legal services known as DoNotPay in 2015. It was introduced as a chatbot to give users facing late fees or fines legal guidance. The AI helper needed a lot of time to be trained on the case, according to Browder.

February 2023 is the scheduled month for the hearing. The actual date, the venue of the court, and the name of the defendant are still being kept a secret by the robot’s creators.

The defendant in the case, who will only respond to commands from the AI robot, is being sued for receiving a speeding ticket. According to the science and technology magazine New Scientist, the AI robot will process and analyse the evidence presented in court and then advise the defendant on how to respond.

According to Joshua Browder, DoNoPay has agreed to pay any fines if they lose the case. The business’s mission is to help people “battle corporations, beat bureaucracy, and sue anyone at the touch of a button.”

“DoNotPay utilizes artificial intelligence to help consumers fight against large corporations and solve their problems like beating parking tickets, appealing bank fees, and suing robocallers,” reads the company’s mission.

(Source: indiatimes.com dated 8th January,2023)

32. iPhone exports from India during April-December double to surpass $2.5 billion

Apple Inc. exported more than $2.5 billion of iPhones from India from April to December 2022, nearly twice the previous fiscal year’s total, underscoring how the US tech giant is accelerating a shift from China with geopolitical tensions on the rise.

Foxconn Technology Group and Wistron Corp. have each shipped more than $1 billion of Apple’s marquee devices abroad in the first nine months of the fiscal year ending March 2023, people familiar with the matter said

Pegatron Corp., another major contract manufacturer for Apple, is on track to move about $500 million of the gadgets overseas by the end of January, the people said, asking not to be identified revealing private information.

Apple’s rapidly growing export numbers illustrate how it is ramping up operations outside China, where chaos at Foxconn’s main plant in Zhengzhou exposed vulnerabilities in the Cupertino-headquartered company’s supply chain and forced it to trim output estimates.

That compounded a broader problem with evaporating demand for electronics as consumers weigh the risks of a global recession.

Apple, the world’s most valuable company, began assembling its latest iPhone models in India only last year, a significant break from its practice of reserving much of that for giant Chinese factories run by its main Taiwanese assemblers including Foxconn.

While India makes up just a fraction of iPhone output, rising exports bode well for Prime Minister Narendra Modi’s plan to make the country an alternative to China as factory to the world.

China’s Covid Zero policies and an episode of violence at the Zhengzhou plant — nicknamed iPhone City as the world’s biggest production centre for the device — laid bare the dangers of relying on the country. While Beijing has since dropped that approach to containing the virus, Apple and other global names are exploring alternative locations more than ever before.

India’s vast workforce, Modi’s support and a thriving local market make it a prime candidate to take on more electronics manufacturing. Foxconn, Apple’s largest supplier, began building facilities in the country more than five years ago in anticipation of a need to extend its geographic range.

One recent selling point is a raft of new government incentives, a cornerstone of Modi’s drive to make India an electronics manufacturing hub. Foxconn has won Rs 3.6 billion ($44 million) of benefits in the first year of the so-called production-linked incentives scheme, while Wistron’s claims are currently being processed, the people said.

Apple’s contract manufacturers currently make iPhones at plants in southern India. But production in the country is just beginning. About 3 million of the devices were made in India in 2021, compared to 230 million in China, according to Bloomberg Intelligence estimates.

Foxconn began making the iPhone 14 in India a few months ago — sooner than anticipated — after a surprisingly smooth production rollout that slashed the lag between Chinese and Indian output from months to mere weeks. Apple’s three Taiwanese partners currently assemble iPhones 11 to 14 in India.

But moving out of China, where Apple has built a deep supply chain for close to two decades, isn’t easy. A Bloomberg Intelligence analysis estimated it would take about eight years to move just 10% of Apple’s production capacity out of China, where roughly 98% of the company’s iPhones are being made.

India tracks production and exports of all smartphone makers who enjoy financial incentives as part of Modi’s push.

Beyond smartphones, the country is drawing up plans to boost financial incentives for tablet and laptop makers, hoping to woo Apple to make everything from earphones to MacBooks locally as well as attract other brands.

The iPhone maker is also expected to open its first retail store in India in 2023, after meeting certain criteria imposed on foreign retailers.

(Source: economictimes.indiatimes.com. dated 09th January, 2023)

II. WORLD NEWS

33. Global recession likely in 2023: World Economic Forum survey

With geopolitical tensions continuing to shape the global economy and anticipate further monetary tightening in the United States and Europe, a majority of the World Economic Forum’s Community of Chief Economists expects a global recession in 2023.

The findings were found in the e January 2023 Chief Economists Outlook’ by the World Economic Forum’s Centre for the New Economy and Society.

As per the survey, almost two-thirds of chief economists believe a global recession is likely in 2023; of which 18 per cent consider it extremely likely – more than twice as many as in the previous survey conducted in September 2022. A third of respondents consider a global recession to be unlikely this year. However, views are divergent, with a third of respondents considering a global recession to be unlikely this year.

All of the chief economists surveyed expect weak or very weak growth in 2023 in Europe, while 91 per cent expect weak or very weak growth in the US. This marks a deterioration in recent months at the time of the last survey, the corresponding figures were 86 per cent for Europe and 64 per cent for the US, it showed.

The survey aims to summarise the emerging contours of the current economic environment and identify priorities for further action by policymakers and business leaders in response to the compounding shocks to the global economy from geo-economic and geopolitical events. The survey was conducted November-December 2022.

War and international tensions continue to shape global economic developments, and every respondent viewed it as likely, with 73 per cent saying somewhat and 27 per cent saying extremely, that patterns of economic activity will continue to shift around the world in line with new geopolitical fissures and faultlines.

The two strongest regions in 2023 according to the survey are the Middle East and North Africa (MENA) and South Asia.

In South Asia, 85 per cent of respondents expect moderate (70 per cent) or strong (15 per cent) growth, a modest improvement since the September edition. Some economies in the region, including Bangladesh and India, may benefit from global trends such as a diversification of manufacturing supply chains away from China.

On inflation, the chief economists see significantly variation across regions, with the proportion expecting high inflation in 2023, ranging from just 5 per cent for China to 57 per cent for Europe.

Following a year of sharp and coordinated central bank tightening, the chief economists surveyed expect the monetary policy stance to remain constant in most of the world this year.

However, a majority of respondents expect further tightening in Europe and the US with 59 per cent and 55 per cent, respectively.

At the start of 2023, concerns about the cost of living remain acute in many countries. Yet, survey respondents indicate that the cost of living crisis may be close to its peak, with a majority (68 per cent) expecting the crisis to have become less severe by the end of 2023. A similar trend is evident in the energy crisis, with almost two-thirds of respondents optimistic that conditions will have begun to improve by the end of the year.

The survey also asked chief economists to highlight any sources of optimism in the current global economic context. Three factors were mentioned repeatedly: The strength of household balance sheets, the peaking of inflation and the resilience of labor markets.

The outlook for the global economy is gloomy, according to the results of the latest survey of chief economists. Global growth prospects remain anaemic, and global recession risk high.

(Source: livemint.com. dated 17th January, 2023)

34. China’s population falls for first time since 1961

China’s population has fallen for the first time in 60 years, with the national birth rate hitting a record low – 6.77 births per 1,000 people. The population in 2022 – 1.4118 billion – fell by 850,000 from 2021.

China’s birth rate has been declining for years, prompting a slew of policies to try to slow the trend. But seven years after scrapping the one-child policy, it has entered what one official described as an “era of negative population growth”.

The birth rate in 2022 was also down from 7.52 in 2021, according to China’s National Bureau of Statistics, which released the figures on Tuesday. In comparison, in 2021, the United States recorded 11.06 births per 1,000 people, and the United Kingdom, 10.08 births. The birth rate for the same year in India, which is poised to overtake China as the world’s most populous country, was 16.42.

Deaths also outnumbered births for the first time last year in China. The country logged its highest death rate since 1976 – 7.37 deaths per 1,000 people, up from 7.18 the previous year. Earlier government data had heralded a demographic crisis, which would in the long run shrink China’s labor force and increase the burden on healthcare and other social security costs.

Results from a once-a-decade census announced in 2021 showed China’s population growing at its slowest pace in decades. Populations are also shrinking and ageing in other East Asian countries, such as Japan and South Korea. “This trend is going to continue and perhaps worsen after Covid,” says Yue Su, principal economist at the Economist Intelligence Unit. Ms Su is among experts who expect China’s population to shrink further through 2023.

“The high youth unemployment rate and weaknesses in income expectations could delay marriage and childbirth plans further, dragging down the number of newborns,” she added. And the death rate in 2023 is likely to be higher than it was pre-pandemic due to Covid infections, she said. China has seen a surge of cases since it abandoned its zero-Covid policy last month.

China’s population trends over the years have been largely shaped by the controversial one-child policy, which was introduced in 1979 to slow population growth. Families that violated the rules were fined and, in some cases, even lost jobs. In a culture that historically favors boys over girls, the policy had also led to forced abortions and a reportedly skewed gender ratio from the 1980s.

The policy was scrapped in 2016 and married couples were allowed to have two children. In recent years, the Chinese government also offered tax breaks and better maternal healthcare, among other incentives, to reverse, or at least slow, the falling birth rate.

But these policies did not lead to a sustained increase in the births. Some experts say this is because policies that encouraged childbirth were not accompanied by efforts to ease the burden of childcare, such as more help for working mothers or access to education.

In October 2022, Chinese President Xi Jinping made boosting birth rates a priority. Mr Xi said in a once-in-five-year Communist Party Congress in Beijing that his government would “pursue a proactive national strategy” in response to the country’s ageing population.

(Source: bbc.com. dated 18th January,, 2023)

III. ENVIRONMENT

35. Ozone layer on track to recover within decades, UN reports

The ozone layer is on track to recover within four decades, according to a new UN assessment. Human emissions of certain chemicals cause a hole to open up in the ozone layer each year over the Antarctic. This affects the ability of the ozone to protect life on Earth from the sun’s harmful radiation.

In 1987, just seven years after scientists discovered man-made chemicals were damaging the ozone layer, the Montreal Protocol was signed by 197 parties to try and curb the amount of harmful chemicals in the atmosphere.

The global phase-out of ozone-depleting chemicals previously found in hair spray, refrigerators, air conditioners and industrial cleaning products is already helping to mitigate climate change and decrease human exposure to UV rays. If current policies remain in place, the ozone layer is expected to recover to 1980 values – before the appearance of the ozone hole – within decades.

A UN-backed panel of experts, presenting at the American Meteorological Society’s annual meeting , said the ozone would heal by around 2066 over the Antarctic, by 2045 over the Arctic and by 2040 for the rest of the world.

Variations in the size of the Antarctic ozone hole, particularly between 2019 and 2021, were driven largely by meteorological conditions. Nevertheless, the Antarctic ozone hole has been slowly improving in area and depth since the year 2000.

“Ozone action sets a precedent for climate action,” says WMO Secretary-General Professor Petteri Taalas. “Our success in phasing out ozone-eating chemicals shows us what can and must be done – as a matter of urgency – to transition away from fossil fuels, reduce greenhouse gases and so limit temperature increase.”

Nearly 99 per cent of banned ozone-depleting substances have been successfully phased out, according to the UN-backed Scientific Assessment Panel to the Montreal Protocol on Ozone Depleting Substances four-yearly report.

Hydrofluorocarbons (HFCs) – another group of industrial chemicals that was used to replace banned chlorofluorocarbons (CFCs)- were additionally targeted in the 2016 the Kigali Amendment to the Montreal Protocol. While HFCs do not directly deplete ozone, they are powerful climate change gases that were on track to increase global warming by 0.3 to 0.5°C by 2100, according to the Scientific Assessment Panel.

“That ozone recovery is on track… is fantastic news. The impact the Montreal Protocol has had on climate change mitigation cannot be overstressed,” says Meg Seki, Executive Secretary of the United Nations Environment Programme’s Ozone Secretariat. “Over the last 35 years, the Protocol has become a true champion for the environment.”

(Source : euronews.com. 10th January, 2023)

BCAJ Admin

LETTER TO THE EDITOR

Dear Sir,

*Ease of Living & Doing Business in India – Reduce Compliance Burden under the Income-tax Act*

I refer to your Editorial *‘‘The Middle Class Deserve More”* in BCAJ, January, 2023.

In the last 18 years, more so in the last 8 years, the compliance burden on individuals and small businesses has increased a lot by way of increasing the scope and ambit of various TDS/TCS provisions. For example, 1 per cent TDS from payment of purchase price of Real Estate and TDS from payment of rent by Individuals, are unnecessary Compliance burdens which cannot be discharged by Individuals without seeking professional help as the process is very cumbersome.

One really wonders if the Revenue accruing to the government is really worth the burden placed on the Citizens.

Further, the scope of TDS & TCS provisions has increased a lot particularly on SME Businesses which are already struggling to survive since the Lockdown due to Covid’19.

When all the financial and business transactions are linked with PAN and are required to be reported to the Income-tax and GST Authorities by the Taxpayers and various Banks/Financial Intermediaries and Registrars, which get consolidated/amalgamated into AIS/26AS, one really feels that the scope and ambit of various TDS/TCS provisions can be greatly reduced; at least, various monetary thresholds can be suitably increased several folds.

It may be worth mentioning that such extensive provisions don’t apply in various advanced tax jurisdictions, particularly to the Resident Taxpayers.

Modiji has repeatedly emphasized the need and importance of facilitating Ease of Doing Business and Living in India and reducing the Compliance Burden on SMEs but the real impact on the ground is yet to be felt and seen by the Citizens and the Taxpayers.

Yours Sincerely,

CA Tarunkumar Singhal

BCAJ Admin

REGULATORY REFERENCER

DIRECT TAX

1. Clarification for the purposes of clause (c) of Section 269ST of the Income-tax Act, 1961 in respect of dealership/distributorship contract in case of Co-operative Societies – Circular No. 25/2022 dated 30th December, 2022

In respect of Co-operative Societies, a dealership/ distributorship contract by itself may not constitute an event or occasion for the purposes of Section 269ST(c). Receipt related to such a dealership/distributorship contract by the Co-operative Society on any day in a previous year, which is within ‘the prescribed limit’ and complies with Section 269ST(a) and (b), may not be aggregated across multiple days for purposes of Section 269ST(c) for that previous year.

2. Extension of time limit for compliance to be made for claiming exemption under section 54 to 54GB of the in view of the then-COVID-19 pandemic – Circular No. 1/2023 dated 6th January, 2023

CBDT had vide Circular No. 12/2021 dated 25th June, 2021 provided relaxation in respect of certain compliances to be made by the taxpayers for claiming exemption under section 54 to 54GB of the Act. The said circular provided that compliances for which the last date fell between 1st April, 2021 to 29th September, 2021 (both days inclusive), may be completed on or before 30th September, 2021. In view of the representations received and on further consideration of the then prevailing COVID-19 pandemic and resultant restrictions imposed, causing genuine hardship faced by taxpayers CBDT provided further relaxation. Compliances to be made by the taxpayers such as investment, deposit, payment, acquisition, purchase, construction or such other action, by whatever name called, for the purpose of claiming any exemption under section 54 to 54 GB of the Act, for which the last date of such compliance falls between 01” April, 2021 to 28th February, 2022 (both days inclusive), may be completed on or before 31st March, 2023.

3. Statement of Financial Transactions (SFT) for Interest income – Notification No. 1/2023 dated 5th January, 2023

CBDT has abolished the limit of interest income exceeding Rs. 5,000 for the purpose of SFT reporting. Now the information in SFT is required to even include details of account holders earning interest income up to Rs. 5000 except for ‘Jan Dhan Account’ holders.

COMPANIES ACT, 2013

1. CA shares the link to take MHA’s security clearance for obtaining DIN by foreign nationals from border-sharing countries: Earlier, the MCA had notified that foreign nationals from border-sharing countries need security clearance from Home Ministry to obtain the Director’s Identification Number (DIN). The said clearance is required to be attached along with the consent to act as a director. Now, the MCA has provided the link to the application for MHA Security Clearance for appointment as director of a country sharing a land border with India. The application can be made by visiting https://esahajmcaservices.nic.in/. [Source based information]1. Companies can hold the AGM for F.Y.‘22-23 till 30th September, 2023 through video conference or other audio-visual means: The MCA has decided to allow the companies whose AGMs are due in the Calendar Year 2023 to conduct their AGMs on or before 30th September, 2023 through video conferencing (VC) or other audio-visual means (OAVM).

[General Circular No. 10/2022, dated 28th December, 2022]

SEBI

1. Corporate governance provisions shall be applicable even if net-worthnet worth is changed due to accounting practice: SEBI through informal guidance has clarified that corporate governance provisions of Listing Regulations shall be applicable even though the increase in net-worthnet worth is only on account of change in the accounting practice. It is further clarified that the same is immaterial in the context of the applicability of the provisions of the LODR Regulations. As and when the net-worthnet worth of the company is above the threshold for corporate governance provisions, the company shall comply with such relevant provisions.

[No.: SEBI/HO/CFD/PoD2/OW/P/2022/62027/1 dated 13th December, 2022]

1. SEBI reduces the timeline for completion of Buyback through Tender Offer Route by 18 days: The existing buyback regulations are amended so as to include the following in the amended regulations:

buyback done through stock exchanges route to be phased out in a gradual manner and increasing minimum utilisation of the amount earmarked for buyback through stock exchange route from existing 50 per cent to 75 per cent
creation of a separate window on stock exchanges for undertaking buyback till the time buyback through stock exchange is permitted
reduction in the timeline for completion of the Buyback through the Tender Offer Route by 18 days. [Press release No. 37/2022 dated 20th December, 2022]

FEMA AND IFSCA REGULATIONS

1. IFSC Authority issues several directions for Insurance:

IFSCA has notified several regulations for the IFSC Insurance Offices (IIOs) and related matters:

a. IFSCA (Preparation and Presentation of Financial Statements of IIO) Regulations, 2022 to put in place the process of preparation and presentation of financial statements of the IIOs.

b. IFSCA (Investment by IFSC Insurance Office) Regulations, 2022 to put in place the regulatory framework and processes related to an investment of assets by an IIO.

c. IFSCA (Insurance Products and Pricing) Regulations, 2022 to provide a framework for designing and pricing of insurance products by IIOs.

d. IFSCA (Manner of Payment and Receipt of Premium) Regulations, 2022 to specify the manner for payment of premiums by a person proposing to take an insurance policy or by a policyholder to an IIO.

e. IFSCA (Maintenance of Insurance Records and Submission of Requisite Information for Investigation and Inspection) Regulations, 2022 to specify the maintenance of records by an IIO or IFSC Insurance Intermediary Office (IIIO).

f. IFSCA (Appointed Actuary) Regulations, 2022 to lay down the regulatory framework for the persons who are engaged by the IIOs to perform the roles and discharge the functions as ‘Appointed Actuary’.

[NOTIFICATION NOs.: IFSCA/2022-23/GN/REG033, IFSCA/2022-23/GN/REG030, IFSCA/2022-23/GN/REG029, IFSCA/2022-23/GN/REG032, IFSCA/2022-23/GN/REG031, and IFSCA/2022-23/GN/REG028]

2. Forms submitted on FIRMS portal for reporting of foreign investment will be auto-acknowledged:

RBI has made changes with respect to reporting of foreign investment in Single Master Form (SMF) on FIRMS portal to allow for:

i) Earlier forms filed on the FIRMS Portal had to be acknowledged separately by the AD Banks resulting in delays. RBI has now amended the procedure whereby the forms submitted on the portal will be auto-acknowledged. The AD banks shall thereafter verify the forms within five working days based on the uploaded documents.

ii) In cases of delayed reporting, the AD banks shall advise the Late Submission Fee (LSF) to the applicants, which will be computed by the system; or shall advise for compounding of contravention, as the case may be.

The Annex to the Circular provides for the steps by which processing will be undertaken on the FIRMS portal now.

[A.P. (DIR SERIES 2022-23) Circular No. 22 dated 4th January, 2023]

BCAJ Admin

Service Tax

I. HIGH COURT

27 Mahindra & Mahindra Ltd vs. UOI
[2022] 144 taxmann.com 200 (Bombay)
Date of order: 15th September, 2022

The charging sections for the imposition of CVD and SAD or surcharge are section 90(1) of the Finance Act, 2000, section 3(1) and section 3A(1) of the Customs Tariff Act, 1975, respectively and not section 12 of the Customs Act, 1962. The Court held that section 3(6) and section 3A(4) of the Customs Tariff Act, 1975 do not provide for any interest or penalty. Neither does section 90 of the Finance Act, 2000 provide for the same. Therefore, no interest or penalty can be levied on the portion of payment pertaining to a surcharge, CVD and SAD.

FACTS

The petitioner is engaged in the manufacture of vehicles in India and filed four applications before the settlement commission against four show cause notices demanding differential customs duty. The Orders passed by the Settlement Commission were challenged before the High Court. The High Court quashed these orders and directed to pass fresh orders. The respondents re-heard the matter and passed the orders confirming the earlier orders and imposing interest and penalties.

The petitioner contended that section 90 of the Finance Act, 2000 related to a surcharge, section 3 of the Customs Tariff Act, 1975 related to an additional duty of customs equal to excise duty, and section 3A of the Customs Tariff Act, 1975 related to a special additional duty of customs and none of these provisions provided for the imposition of penalty or interest on the chargeable duty thereunder. Therefore, there was no power under the provisions of law to impose penalties or interest. It was also submitted that the basic customs duty with surcharge had already been paid and the penalty and interest has been levied only on the differential duty which the show cause notice alleged that the petitioner had evaded and since neither section 3 nor section 3A of the Customs Tariff Act, 1975 or the Finance Act, 2000 provided for the imposition of penalty or interest, there is no power under the Act to impose the same upon the petitioner.

HELD

The Hon’ble Court held that any provision made in a statute for charging or levying interest on delayed payment of tax must be construed as substantive law and not adjectival law. The Court held that section 3 and section 3A of the Customs Tariff Act, 1975 are charging sections creating liability for CVD and SAD but do not provide for a penalty. The mere fact that there is a machinery for assessment, collection, and enforcement of tax and penalty under the Customs Act, 1962, it does not mean that the provision for penalty and interest in the Customs Act, 1962 is treated as applicable for penalty and interest under the Customs Tariff Act, 1975. The meaning of penalty or interest under the Customs Tariff Act, 1975 cannot be enlarged by the provisions of the machinery of the Customs Act, 1962 incorporated for working out the Customs Tariff Act, 1975. Referring to various judicial pronouncements the Court reiterated that when the penalty is an additional tax, the constitutional mandate requires a clear authority of law for imposition thereof. Where the Act has to be explained by referential legislation or legislation by incorporation levies penalty or not, it is better for the Court to lean in favour of the taxpayer. There is no room for the presumption in such cases.

The Court held that section 3(6) and section 3A (4) of the Customs Tariff Act, 1975 do not provide for any interest or penalty. Neither section 90 of the Finance Act, 2000 provides for the same. Therefore, no interest or penalty can be levied on the portion of payment pertaining to a surcharge, CVD and SAD. The Court also noted that unlike in the case of section 9A(8) of the Customs Tariff Act, where a specific amendment was made by section 76 of Finance (No.2) Act, 2004 by replacing the words, “relating to non-levy, short levy, refunds and appeals” with “relating to, the date for determination of rate of duty, non-levy, short levy, refunds, interest, appeals, offences and penalties”, no amendment is made to include interest and penalty in sub-section (6) of section 3 or sub-section (4) of section 3A of the Customs Tariff Act, 1975. Therefore, the intention of the legislature was very clear that it wanted to include interest and penalties only with regards to the anti-dumping duty on dumped articles and not for CVD, i.e., levy of additional duty equal to excise duty and SAD, i.e. special additional duty. No such insertion or amendment was made in section 90 of the Finance Act, 2000 relating to a surcharge. Therefore, interest and penalty cannot be levied on the portion of the demand pertaining to surcharge under section 90 of the Finance Act, 2000 or additional duty of customs under section 3 or special additional duty of customs under the Customs Tariff Act, 1975.

The Court also did not accept the contention of the Revenue that the charging section for the imposition of CVD and SAD or surcharge is section 12 of the Customs Act, 1962, and held that the charging sections for the imposition of surcharge, CVD and SAD are section 90(1) of the Finance Act, 2000, section 3(1) and section 3A(1) of the Customs Tariff Act, 1975, respectively.

II. TRIBUNAL

28 Devraj Luxury Hotels Pvt Ltd vs. Commr. of C Ex & CGST, Jaipur
2022 (67) G.S.T.L. 76 (Tri. – Del.)
Date of order: 16th June, 2022.

Extended period of limitation not available to the Revenue when demand is raised on the basis of audit where assessee had maintained records and availed the credit rightly.

FACTS

The appellant was engaged in rendering services of accommodation in hotel, banquet hall and restaurant service. The appellant paid the service tax under RCM on works contract services and legal services and availed Cenvat credit on the same. During the course of the audit, the department noticed that the credit availed on both services was ineligible and issued a show cause notice on 7th November, 2019. The Adjudicating Authority confirmed the demand vide Order-In-Original passed on 2nd July, 2020 for the denial of credit along with interest and penalty under Rule 15(3) r.w.s. 78 of the Finance Act, 1994. Being aggrieved by the impugned order, the appellant filed an appeal before Commissioner (Appeals) stating that all the transactions were properly recorded and the credit towards legal services and works contract services was taken based on the challan paid, and thus, pleaded that an extended period was not available to department. However, the Commissioner (Appeals) passed an impugned order holding that without an audit taking place, it would not have come to the notice of the department of ineligible credit taken pertaining to the works contract services and hence extended period of limitation was rightly invoked. Being aggrieved by the impugned order, the appellant filed an appeal before the Tribunal.

HELD

It was held that the demand raised by the Department alleging suppression of facts or contumacious conduct based on audit notes was not available as the appellant maintained the books of account and vouchers based on the transaction. Further, the credit on tax paid under RCM on legal services was allowed to the appellant and thus there was no suppression of facts. Consequently, invoking an extended period of limitation was not available to department. Accordingly, the impugned order was set aside.

BCAJ Admin

Goods and Services Tax

66 Sunny Jain vs. UOI

[2022] 145 Taxmann.com 601 (Del)

Date of order: 5th December, 2022

The non-payment of consideration within a period of 180 days cannot be the ground for blocking ITC in terms of Rule 86A of the CGST Act. The ineligible credit mentioned in Rule 86A covers only such ITC which has suffered ineligibility on account of situations mentioned in the said Rule and not any other cases of ineligibility. Rule 86A is a drastic measure and has to be construed strictly.

FACTS

The petitioner challenged the action of the GST officer blocking a certain amount of ITC which was credited to the Electronic Credit Ledger (ECL) of the petitioner. The assessee was intimated about the said blockage of ITC by email without any inquiry and without affording the petitioner opportunity of being heard. The petitioner had earlier filed his objection with the department for blocking of the ITC for a period of eighteen months contending that it has been done without inquiry and is beyond the time limit prescribed in Rule 86A of the CGST Act. The petitioner also submitted various documents called for by the GST officer. The GST officer directed the petitioner to deposit the interest on account of non-payment of consideration to a supplier, within a period of 180 days as required in terms of section 16(2) of the Central Goods and Services Tax Act, 2017 (hereafter “the CGST Act”) and Rule 37 of the CGST Rules. The petitioner disputed the said demand on the ground that they are not liable to pay interest as the said amount was never utilised. Before the High Court, the department filed an affidavit to the effect that the ECL of the petitioner has been blocked pursuant to an email received from the Directorate General of Analysis and Risk Management (DGARM) that contained the list of taxpayers who have availed inadmissible credit and had petitioners name in it. The department claimed that in view of the said e-mail, they have a reason to believe that the ITC available in the ECL of the petitioner had been wrongly availed and therefore, the same was blocked on 11th February, 2020.

HELD

Referring to the provision of Rule 86A, the Hon’ble Court held that the restriction applies, where the ITC available in the ECR has been “fraudulently availed” or is “ineligible” as specified in the said rule. The Court noted that in the present case, there is no allegation that the petitioner has fraudulently availed the ITC lying to the petitioner’s credit in the ECR and the only reason for blocking the ECL is that the petitioner is ineligible to take ITC in view of section 16(2) of the CGST Act. The Court held that the said provision is a drastic measure and therefore, can be taken only when the conditions for taking such measures are met as the statutory provisions empowering harsh measures such as freezing the assets of a person, have to be strictly construed. The Court held that the words “inasmuch as” used in Rule 86A(1) qualify the word ‘ineligible’ and is not a phrase of wide import and hence is used in a restrictive sense to qualify the subject. Thus, the use of the expression “inasmuch as” restricts the scope of ineligibility to the conditions as set out in sub-clauses of Rule 86A(1) of the CGST Rules. It is only if any of these conditions are satisfied that the restriction under Rule 86A(1) can be imposed in respect of ITC on the grounds that the ITC available in the taxpayer’s ECL is ‘ineligible’. The Court then referred to the provisions of section 16(2) and provisos thereto and held that it is, clearly, not the scheme of the CGST Act to restrain a person from availing the ITC till he has paid the supplier for such goods/services. The second and third provisos to section 16(2) of the CGST Act make it clear that a party is not disentitled to avail the ITC in respect of goods/services prior to his discharging the liability to pay the supplier for such goods/services and tax thereon. However, if the taxpayer does not discharge his liability to the supplier within a period of 180 days, he is required to account for the benefit of the ITC availed by the taxpayer along with interest as a part of the output liability. However, the taxpayer would be entitled to avail of the ITC once again on payment being made to the supplier. The Court thus held the respondents have completely misdirected themselves in proceeding on the basis that unless a taxpayer pays the supplier, he is ineligible to avail of the ITC lying to his credit in the ECL and directed the GST department to unblock the ITC available to the petitioner in his ECL.

67 OLA Fleet Technologies (P.) Ltd. vs. UOI

[2023] 146 taxmann.com 83 (Telangana)

Date of order: 16th March, 2022

The High Court held that calling upon the respondents to adjust IGST paid by the petitioner with CGST and SGST would amount to going beyond the statute and directs the petitioner to comply with the SCN issued demanding CGST/SGST and file a refund application in respect of IGST.

FACTS

The petitioner inadvertently mapped the State of Telangana as the State of Andhra Pradesh in its IT system and hence the IT system of the petitioner determined the nature of supply to be that of inter-state supply, though the transaction was very much within the State of Telangana and would therefore amount to intra-state supply. Consequently, the petitioner paid IGST instead of CGST/SGST. Hence, a show cause notice was issued to the petitioner demanding CGST/SGST. The petitioner filed the writ praying that the respondents be directed to adjust the amount of IGST against the CGST/SGST. The respondents objected to the same on the grounds that such an adjustment is beyond the provisions of CGST Act, TGST Act and IGST Act. The petitioner however relied upon the decision of Kerala High Court in the case of Saji S. Proprietor, Adithya and Ambadi Traders vs. Commissioner, State GST which allowed a similar petition.

HELD

The Hon’ble Court referred to the provisions of section 77 of the CGST Act and section 19 of the IGST Act which permits the refund of taxes paid erroneously by treating intra-state supply as inter-state supply. The Court also observed that Rule 92(1) lays down a procedure for sanctioning the refund. The Court held that calling upon the respondents to adjust IGST paid by the petitioner with CGST and SGST would amount to adopting a procedure, which is not provided under the relevant statute. The Hon’ble Court, therefore, did not agree with the decision of Kerala High Court in the case of Saji S Proprietor (supra) and directed the Petitioner to respond to show a cause notice with a liberty to file a refund application in respect of IGST erroneously paid.

68 Bharti Airtel Ltd vs. State of UP
[2022] 145 taxmann.com 326 (Allahabad)
Date of order: 25th November, 2022

If the owner of the goods disputes and does not volunteer the payment of penalty specified in clauses (a) or (b) or (c) of section 129(1) of the Act, the department must initiate proceedings under sections 73, 74 or 75 of the CGST Act and penalty can be determined only in terms of section 122 of the CGST Act. In other words, in disputed cases, there is no provision for the determination of tax due under section 129 of the CGST Act.

FACTS

The Petitioner challenged the order purportedly to be passed in the exercise of the power under section 129 of the CGST Act and order dismissing the appeal filed by the petitioner against such order. The petitioner transported the goods on the strength of tax invoice, however, he failed to generate Part B of the E-way Bill. After the vehicle was intercepted, the petitioner generated the Part B of the E-way Bill, however despite that the revenue authorities passed a detention order after four days mainly on the grounds that when the vehicle was intercepted, Part B of the E-way Bill was not generated. A show cause notice was issued to the petitioner under section 129(3) of the CGST Act read with section 20 of the IGST Act. The petitioner submitted a detailed reply to the show cause notice and prayed that the show cause notice be dropped mainly on the ground that the tax was duly paid as was required under the Act and that Part B of the E-way bill was also uploaded prior to the passing of the detention order. Before the High Court petitioner contended that the order is bad in law as no proceedings under sections 73, 74 or 75 are initiated in the present case and the penalty can be determined only in terms of section 122 of the CGST Act. In other words, the petitioner submitted that in terms of the mandate of section 129, the proper officer is neither authorized nor justified in determining the tax or imposing the penalty as has been done by means of the impugned orders.

HELD

The Hon’ble Court held that under the scheme of the Act, the procedure for the determination of tax and penalty is contained in Chapter XV read with sections 122, 123, 125, 126, 127 and 128 of the Act and a parallel procedure is prescribed under section 129 of the Act in case of goods, which are in transit. The Court further held that if in the event the owner of the goods comes forward for payment of penalty as specified in clause (a) or (b) or (c) of section 129(1) of the Act and pays the same, the intent is to give quietus to the litigation. However, if the owner of the goods does not volunteer to pay the penalty, the department is well equipped to initiate proceedings by taking recourse to sections 73, 74, 75 of the Act r.w.s 122 for determination of tax and the penalty leviable.

The Court noted that in the present case, the department has proceeded to determine the tax liability as well as penalty only under the provisions of section 129 of the Act. However, on a plain reading of section 129, there is no provision for the determination of tax due, which can be done only by taking recourse to the provisions of section 73 or 74 of the CGST Act, as the case may be.

The Court, therefore, allowed the appeal and directed the department to refund the amounts paid by the petitioner for the release of the goods.

69 Aartos International LLP vs. Deputy Commissioner (Customs)

[2022] 145 taxmann.com 558 (Gujarat)

Date of order: 2nd December, 2022

Where the petitioner’s claim for refund could not be processed due to system limitations, and there being no other dispute, the Court allowed the petition and directed the refund along with applicable interest.

FACTS

The petitioner exported the goods in the month of February and March 2020 and shipping bills along with GSTR-3B and GSTR-1 are a part of the record. Out of three export invoices, the petitioner received a refund for only two invoices. As regards one invoice, they attempted to approach the department as there is a portal of the Department of Administrative Reforms and Public Grievance (“the CPGRAMS”). However, for two months, there was no response and subsequently, the matter was disposed of stating that Customs Mudra has forwarded various requests to ICEGATE and is also in touch with NIC Team and requesting them to look into and resolve the matter at the earliest. It was also stated that the exporter is advised to contact ICEGATE helpdesk. Aggrieved by the delays caused in processing the refund, the petitioner filed this writ.

HELD

The department filed an affidavit before the High Court contending that the Indian Customs EDI System (“the ICES” hereinafter) has an in-built mechanism to automatically grant a refund after validating the shipping bill data available in ICES against the GST Returns data transmitted by the GSTN. The department then explained the entire system process, validation checks, etc, and stated that since the process of sanction of refund claim is automatic and system driven, as and when the Shipping Bill will be available again in Scroll PC, the same will be taken up for processing for refund and the relevant amount of IGST paid with respect to each Shipping Bill or Bill of Export shall be electronically credited to the petitioner’s bank account. The Court held that as per provisions of section 54(6) read with Rule 91(2) of the CGST Rules the amount is required to be refunded and it is the respondent’s obligation to make an order sanctioning 90 per cent of the amount claimed in Form RFD-04 within a period of seven days from the date of acknowledgment received. There are no separate applications for the refund. The shipping bills are deemed to be refund applications when the goods are exported with the payment of tax. Admittedly, in the present case, it appears to be the difficulty at the end of the GST network or some error in the software itself which would require a cure. When nothing is disputed and everything is done electronically if there is any difficulty at the level of the mismatch or the processing of the claim of the refund, it becomes the duty of the GSTN to look into the same. The Court noted that there is nothing for the Court to adjudicate in this matter except pointing out the limitation of the software of the respondent department. The Court, therefore, allowed the refund along with applicable interest.

70 Sheetal Dilip Jain vs. State of Maharashtra

2022 (67) GSTL 11 (Bom.)

Date of order: 20th September 2022.

30 days’ time limit under section 73(8) of MGST Act for making the payment of tax and interest after the issuance of SCN cannot be reduced by the Adjudicating Authority as per its personal preference.

FACTS

Petitioner was issued a SCN under section 73(8) of MGST Act, demanding the payment of tax along with interest within 7 days on 2nd March, 2022. On 10th March, 2022, the impugned order was passed by the respondent confirming the liability before the completion of minimum time period of 30 days. Being aggrieved by the impugned order passed by the respondent, the petitioner preferred this petition before Hon’ble High Court.

HELD

The High Court held that the impugned order passed without application of mind ignoring and contradicting the basic provisions of the MGST Act and rules made thereunder are unacceptable and resulted in undue hardship to the public. Accordingly, the writ petition was allowed with cost.

71 Mahalaxmi Infra Contract Ltd vs. GST Council

2022 (67) GSTL 140 (Jhar.)

Date of order: 18th October, 2022

Rectification of inadvertent mistake by the supplier in mentioning details of the recipient in his FORM GSTR-1 for the passing of ITC should be allowed in absence of a mechanism to verify inward and outward supplies details.

FACTS

The petitioner was engaged in the business of mining and transportation of goods. While filing of FORM GSTR-1 for January 2019, the petitioner inadvertently quoted GSTIN of its own joint venture company MIPL(NKAS) instead of the recipient of service (Respondent). The petitioner realized this error quite late in June 2021 during the settlement of accounts with the recipient of supplies. However, by then, the time limit to amend the details of outward supply on GSTN portal had already lapsed. Further, MIPL(NKAS) did not utilise the ITC reflected in its GSTR 2A and provided an affidavit for the same. Also, there was no operative mechanism under GST Law to verify or correct the details of outward and inward supply during the said period. Being aggrieved by the absence of a mechanism at the GSTN portal to allow rectification of such errors to pass on the ITC to the respondent, the present petition was filed.

HELD

The Hon’ble High Court observed that the petitioner’s rationale for his inability to rectify this error in absence of a mechanism under GST Law was valid and hence communication for such discrepancy could not be made. Also, the Court held that there was no loss to the Government as the tax was already deposited and the respondent was rightly eligible for the ITC. The Court further held that the respondent should be allowed to rectify the said mistake by amending the details electronically through the portal or manual mode if the same is not possible due to technical reasons. Accordingly, the writ was allowed.

72 Chromotolab and Biotech Solutions vs.
Union of India
2022 (67) G.S.T.L. 160 (Guj.)
Date of order: 21st October, 2022.

Refund cannot be denied when a refund application was submitted within the prescribed time limit on the common portal merely because CBIC Circular dated 15th November, 2017 required for physical submission of the application before the jurisdictional officer was done after the expiry of the time limit.

FACTS

The petitioner was engaged in trading of various goods used by pharmaceutical companies. During the period of August 2017 to October 2017, the petitioner made zero-rated supplies of goods to pharmaceutical companies located in the Special Economic Zones by issuing tax invoices. He filed a refund application as per section 54 of CGST Act read with Rule 89 of CGST Rules, for the invoices raised during the period of August 2017 to October 2017 on unutilised input tax credit electronically on 28th December, 2018 and acknowledgment for the same was generated. However, documents were submitted physically to the jurisdictional officer belatedly. The respondent rejected the refund claim on the grounds that the refund application was time-barred by passing an order dated 19th November, 2019 since submission of physical printout of the application as required by Circular No. 17/17/2017 dated 15th November, 2017. Being aggrieved by such rejection, the petitioner preferred a writ before this Hon’ble Court.

HELD

It was held that Circular No. 17/17/2017 dated 15th November, 2017 providing the procedure of filing an application cannot have an overriding or restrictive effect over the applicability of GST Act in a manner prejudicial to the appellant. Accordingly, the date of filing of refund application on the common portal shall be considered for adhering to the requirement of section 54 of CGST Act and Rule 89 CGST Rules. Thus, the refund application was allowed in favour of petitioner.

BCAJ Admin

Goods and Services Tax

I. NOTIFICATIONS

1. Notification No.26/2022-Central Tax dated 26th December, 2022

By above notification, the rules under CGST Rules, 2017 are amended. The amendments are regarding following aspects:

Changes in rules regarding registration namely, authentication and verification of application through separate onetime password.
Rule 37A is inserted providing reversal of input tax credit in case of non-payment of tax by the supplier and re-availment thereof.
Rule 46 is amended regarding mention of PIN in invoice issued for supplies made by or through electronic commerce or by supply of online information and database accesses or retrieval services.
Amendment in Rule 59 disallowing furnishing of details in GSTR-1 for non-compliance of intimation issued under Rule 88C.
Rule 88C is inserted to provide about the manner and method of payment of differential tax between Form GSTR-1 and GSTR-3B.
Rule 89 is inserted regarding requirements for refund to unregistered persons.
Rules 108, 109 & 109C, which are regarding appeal provisions, are substituted to make procedural changes.
In addition, there are various small and procedural changes in several other Rules and Forms.

2. Notification No.27/2022-Central Tax dated 26th December, 2022

By above notification Rule 8(4A) is made applicable to all States and Union Territories except the State of Gujarat.

3. Notification No.1/2023-Central Tax dated 1st January, 2023

By the above notification, powers of Superintendent of Central Tax are assigned to Additional Assistant Director in DGGI, DGGST and DG Audit.

II. NOTIFICATIONS – RELATING TO RATES

1. Notification No.12/2022- Central Tax (Rate) dated 30th December, 2022

By the above notification changes are affected in certain items mentioned in Schedule 1, Schedule 2 and Schedule 3 of the notification no.1 of 2017 – Central Tax (Rate) dated 28th June, 2017. The changes are in relation to items ethyl alcohol and fruit pulp etc. and the same are effective from 1st January, 2023.

2. Notification No.13/2022- Central Tax (Rate) dated 30th December, 2022

By the above notification changes are affected in certain items mentioned in notification no. 2 of 2017 – Central Tax (Rate) dated 28th June, 2017. The changes are in relation to items, aquatic food, husk, etc., effective from 1st January, 2023.

3. Notification No.14/2022- Central Tax (Rate) dated 30th December, 2022

By the above notification changes are affected in certain items mentioned in notification no.4 of 2017 – Central Tax (Rate) dated 28th June, 2017. The changes are relating to essential oils, effective from 1st January, 2023.

4. Notification No.15/2022- Central Tax (Rate) dated 30th December, 2022

By above notification changes are affected in certain items mentioned in notification no.12/2017-Central Tax (Rate) dated 28th June, 2017. The changes are relating to the renting of residential dwelling and others, effective from 1st January, 2023.

5. Similar changes are also affected under IGST Rates vide notification no.12/2022, 13/2022, 14/2022 and 15/2022 – Integrated Tax (Rate), all dated 30th December, 2022.

III. CIRCULARS

1.) Clarification to deal with difference in ITC availment – Circular no.183/15/2022-GST, dated 27th December, 2022

The CBIC has issued the above circular giving clarification about how to deal with the problem relating to difference in ITC availed through GSTR-3B as compared to GSTR-2A for past periods.

2.) Clarification on the Entitlement of Input Tax Credit – Circular no.184/16/2022-GST, dated 27th December, 2022

The CBIC has issued the above circular giving guidelines about availment of ITC in relation to Transportation services, where the place of supply is determined in terms of proviso to section 12(8) of IGST Act.

3.) Clarification about time limits for adjudication – Circular no.185/17/2022-GST, dated 27th December 2022.

Where the charge of section 74(1), about fraud, etc., is not upheld by appellate authority, then the proper officer can determine the tax payable by deeming if the notice is issued under section 73(1). The CBIC has given guidelines about determining the time limit in such cases.

4.) Clarification about Taxability of certain claims – Circular no.186/18/2022-GST, dated 27th December, 2022

The CBIC has issued the above circular giving clarification about taxability of “No-claim bonus offered by Insurance Companies” and also clarifications are given about applicability of E-invoicing.

5.) Clarification about dues vis-à-vis IBC – Circular no.187/19/2022-GST, dated 27th December, 2022

The CBIC has issued the above circular in which clarifications are given regarding the treatment of statutory dues under GST law in respect of Tax payer for whom the proceeding have been finalized under Insolvency and Bankruptcy Code,2016.

6.) Refund to unregistered persons – Circular no.188/20/2022-GST, dated 27th December, 2022

The CBIC has issued above circular in which manner of filing an application for refund by unregistered person is given.

IV. ADVANCE RULINGS

36 MEL Training and Assessment Ltd

AAR No. ADRG/02/2022

dated 2nd February, 2022 (UP)

Supply of Services to Education Institution

The applicant is engaged in the business of providing exam, certification and other allied services including various types of surveys, assessments and exam services to various clients including individuals, educational institutions, firms, corporate bodies, government undertakings, etc.

The present application was filed with respect to applicability of GST for services of examination conducted for ALL INDIA INSTITUTE OF MEDICAL SCIENCES (AIIMS).

The broad nature of services provided to AIIMS are as under-

(a) Recruitment Examination for recruiting various persons within the organization.

(b) Entrance Examination for granting admissions to students in different courses in AIIMS.

The fees charged were to be based on the number of candidates appearing for each examination.

The applicant made a claim that the services provided by them in respect to sl. No.(a) and (c) are liable for payment of GST and the issue for opinion of learned AAR is regarding services provided by them with respect to sl. No. (b), contemplated to be exempt from payment of GST as per entry 66(b)(iv) of Notification No. 12/2017-Central Tax (Rate) dated 28th June, 2017. Thus, the issue was:

“Whether the services provided by the applicant can be considered as exempted under Entry 66 of Notification 12/2017-Central Tax (Rate).”

The learned AAR referred to entry 66 of Notification No.12/2017-Central Tax (Rate) dated 28th June, 2017 as amended.

The learned AAR found that that the applicant is providing services in respect of (i) Recruitment Examination (ii) Entrance Examination and (iii) Semester/course Examination to the AIIMS. The services provided to an educational institution relating to admission to, or conduct of examination by, such institution is exempted as per entry 66(b)(iv) of the said notification. As the services by way of Recruitment Examination (for recruitment of employees) and Semester/Course examination are not mentioned in the said notification, the same are held as not exempt. As such these were not issues before the AAR. The issue for determination was regarding services provided in respect of Entrance examination. Ld. AAR referred to meaning of Educational Institution.

As per para 2(y) of the notification no.12/2017-Central Tax (Rate) dated 28th June, 2017, educational institution is clarified to mean an institution providing services by way of,

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

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

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

Learned AAR observed about nature of AIIMS as under:

“We find that the All India Institute of Medical Sciences (AIIMS) was established in 1956 by an Act of Parliament. As per Section 5 of the All India Institute of Medical Sciences Act, 1956, the AIIMS has been declared as an institution of national Importance. As per Section 13 of the AIIMS Act, 1956, the objective of the AIIMS is to develop patterns of teaching in undergraduate and postgraduate medical education in all its branches so as to demonstrate a high standard of medical education to all medical colleges and other allied institutions in India; to bring together in one place educational facilities of the highest order for the training of personnel in all important branches of health activity and to attain self-sufficiency in postgraduate medical education. AIIMS conducts teaching programs in medical and para-medical courses both at the undergraduate and postgraduate levels and awards its own degrees.

As such, we are of the view that the AIIMS qualifies the definition of educational institution and accordingly services provided by the applicant to AIIMS by way of services relating to admission i.e. by way of entrance examination is exempt under entry no. 66(b)(iv) of the Notification No. 12/2017-ST dated 28.06.2012.”

Accordingly, the learned AAR gave a ruling that services towards entrance examination are exempt.

V. SCOPE OF ADVANCE RULING

37 Deputy Commissioner, CGST & C. Ex.

Division-II, Agra Commissionerate

Appeal order No. 01/AAAR/2021

dated-21st May, 2022(UP)

This was an appeal from an Advance Ruling given by UP AAR in order no.84/2021 dated 18th October, 2021. As per the appeal, the respondent (original applicant) is engaged in the business of manufacturing, marketing and distribution of cigarettes. The goods are manufactured outside the State and later transferred, on stock transfer basis, after payment of 28 per cent GST and Compensation Cess. In order to grow its business, the respondent has launched a new scheme wherein they will be supplying extra packs of cigarettes along with regular supply quantity without receiving any extra consideration for that additional supply.

With a view to know the correctness of taxability / ITC on the given transactions, an advance ruling application was filed.

The authority for Advance Ruling ruled as under:

“Q-1 – Whether the extra packs of cigarettes would again be leviable to GST?

Ans – Answered in negative, in view of the discussions made above.

Q-2 – If yes, the taxable value which can be attributed to such extra packs of cigarettes for levy of GST?

Ans – Not answered in view of answer to Question No. 1 above.

Q-3 – Whether extra packs of cigarettes would be considered as exempt supply or free samples and hence attracts provisions of Section 17(2) of the UPGST, Act 2017 read with Rule 42 of the UPGST Rules 2017, or clause (h) of Section 17(5) of the UPGST Act, 2017?

Ans – The extra packs of cigarettes will not be considered as exempt supplies or free samples and hence the provisions of 17(2) of the UPGST Act 2017 read with Rule 42 of the UPGST Rules, 2017 or clause (h) of Sec 17(5) of the UPGST Act, 2017 will not be applicable.”

The original respondent, i.e. revenue department has filed this appeal before AAAR taking following contentions:

“a. Cigarettes are subjected to ad-valorem taxation as well as specific taxation of quantity based system, therefore any ruling passed without considering all aspect of applicable is bad in law.

b. The Authority for Advance Ruling does not have authority to discuss about Central Excise Act, 1944, IGST Act, 2017 and GST (Compensation to State) Act, 2017.

c. Compensation Cess on cigarettes is applicable at specific rate (depending upon filter/non-filter and length of cigarette) hence calculation of tax on all 130 packs of cigarette on the basis of tax invoice issued showing taxable value only for 100 packs of cigarettes is misleading.

d. Buy one get one free clause in the Circular No. 92/11/2019-GST dated 07.03.2019 talks about only certain sections of trade and industry such as pharmaceutical companies etc. and not about evasion prone commodity like cigarette and pan masala.

e. The respondent did not inform the Authority that there are several alerts issued against the said firm by department and that they are indulged in claiming refund of accumulated ITC obtained through fraudulent means and many search operations have been conducted against the party”.

Regarding objection of maintainability of Advance Ruling the learned AAAR made reference to section 95(a) and 97(2). The learned AAAR observed as under:

“In light of above, we are of the opinion that advance ruling can be sought on the questions specified in the sub-section (2) of the Section 97 of the Act and there is no bar on the any specific commodity / entity, in the Act. Further, we also observe that the Authority for Advance Ruling can give its ruling, on the question specified under sub-section (2) of the Section 97 of the Act, with reference to the tax levied under the Act. If any particular commodity attracts tax/cess, levied under any other statutory Act/Rules then the advance ruling will be restricted to the tax portion levied under the CGST Act, 2017 only.”

Thus, the learned AAAR justified ruling about tax under GST and observed that cess is not covered by Advance Ruling order.

Regarding further objection about scope of circular no.92/11/2019-GST, the learned AAAR held that it does not relate to a particular industry but to the concept of ‘buy one get one free’. Thus, the said contention by revenue also was rejected by Ld. AAAR.

Regarding the objection of the Appellant that the respondent did not inform the Authority that there are several alerts issued against the said firm by department and that they are indulged in claiming refund of accumulated ITC obtained through fraudulent means and many search operations have been conducted against the party, the ld. AAAR observed that sub- section (2) of Section 98 of the Act provides as under:

“(2) The Authority may, after examining the application and the records called for and after hearing the applicant or his authorized representative and the concerned officer or his authorized representative, by order, either admit or reject the application:

PROVIDED that the Authority shall not admit the application where the question raised in the application is already pending or decided in any proceedings in the case of an applicant under any of the provisions of this Act.”

The learned AAAR observed that nothing is brought on record by the appellant department in respect of question decided in Advance Ruling. Therefore, the learned AAAR rejected the said contention also and dismissed the appeal.

VI. MIXED SUPPLY – SCOPE

38 Medha Servo Drives Pvt Ltd

AAAR order No. AAAR.Com/04/2021

dated 21st June, 2022 (Telangana)

The appellant had filed an Advance Ruling before the Telangana AAR regarding its supply contract with Indian Coach Factory (ICF), Chennai. The details of such supply as mentioned in appeal order are that it was a contract for design development, manufacture, supply, testing and commission of each set. Each set consisted of multiple items including goods and services. Individual prices of items are mentioned in annexure to contract and then totaled to arrive at total price, which is also mentioned in contract.

The appellant’s contention in advance ruling was that each supply of item in set is separately priced, having HSN Code and was separately invoiced and hence they are individual supplies and not mixed supply. Ruling of Karnataka AAR in case of M/s. Healersark Resources Pvt. Ltd., dated 06th December, 2021 was cited.

The learned AAR held that it is mixed supply.

Hence this appeal was filed before ld. AAAR and grounds raised above were reiterated.

The learned AAAR made reference to the subject contract and observed as under:

“In the present case, the applicant is involved in the supply of ‘design, development, manufacture, supply, testing and commissioning of 152 sets of 25 KV AC microprocessor controlled IGT based 3 phase propulsion system and equipment to rdso specification’.

As per the Purchase Order ‘PO No 08/17/1119/1101/F’ the price of each set was quoted to be Rs. 4,77,82,716-00. This price is for design, development, manufacture, supply, testing and commissioning of each set. Each set consists of multiple items including both goods and services which are made in conjunction with each other for a single price of Rs.4,77,82,716-00 per set. Some of the items are Main traction converter, TCMS /Multiplexing system, Pneumatic system comprising of main air compressor along with mounting frame, Set of MCBs, Contactors, relays, inter vehicle couplers, supervision of installation, training of personnel etc.”

Regarding price break up in annexures, the learned AAAR observed as under:

“The item wise price breakup is examined. The Annexure A-I, A-II, A-III contain the prices of 92 sets, 36 sets and 24 sets respectively. The price mentioned is of individual items used in all the 92 sets and it is not possible to arrive at the price of each item of a single set. Further, when the Purchase Order is seen as a whole, the applicant is obligated to design, develop, manufacture, supply, testing and commissioning of each set. The price agreed upon by the applicant and their client includes the cost of design, development, manufacture, supply, testing and commissioning of each set. In other words, though item wise pricing is adopted in their Annexures, but the price still remains for the whole gamut of supply of goods and supply of services entrusted to the applicant.

Price break up doesn’t necessarily imply that the items are being supplied separately for separate prices. Here, though the supplies are capable of being made individually, the essential concomitant of the present agreement is that they should be supplied in conjunction with each other to function as one complete rake set. The schedule of delivery mentions that the entire set is to be delivered at once but not the individual items separately. Even as per terms of payment, payment is done for the entire set and not individual items, implying the supply is being made for single price per unit. Further, this supply cannot be termed a composite supply because the supplies involved are not naturally bundled and only one of the supply cannot be determined as a principal supply.”

In view of above, the ld. AAAR upheld the advance ruling holding the supply as a mixed supply.

VII. MAINTAINABILITY OF ADVANCE RULING APPLICATION

39 Tata Advanced Systems Ltd

AAR order No. GUJ/GAAR/R/2022/27

dated11th May, 2022)(Guj)

The facts are that the applicant has filed application for an Advance Ruling before Gujarat AAR. The applicant intends to manufacture and supply 40 Air Crafts as per contract with Airbus Defence and Space, S. A. U., Spain under the C295 Air Craft Programme of Ministry of Defence. The applicant is registered in Bengaluru, Karnataka.

The applicant has submitted that it has identified three locations in Gujarat for manufacture of given air crafts. Under above facts, the applicant has posed following questions before learned AAR:

“2. Question on which Advance Ruling sought

(i) What is the nature of supply under the contract between the Applicant and Airbus (i.e., whether the same will qualify as ‘supply of goods’ or ‘supply of service’)?

(ii) Given the nature of the activities undertaken by the Applicant under the contract, what will be the appropriate classification and rate of tax of the said supply?

(iii) What is the value to be adopted for the purpose of payment of GST?

(iv) What will be the time of supply for payment of GST?”

The learned AAR noted that in contract, the place of execution is mentioned as Karnataka and if any change, it is to be conveyed to the contractee. Thus, having no finality of the execution place, the Ld. AAR denied to answer questions giving reasons as under:

“i. The Applicant has no locus standi to file said Advance Ruling Application, as per clause 2.2.1 of the said Contract 29-10-21, wherein the project execution unit is TASL Bengaluru GSTIN is 29AACCT5245K1ZZ.

ii. The Application by the applicant is premature and without locus standi, as no Intimation for change in place of project execution as per clause 2.2.1 has been made in the name of TASL Ahmedabad GSTIN 24AACCT5245K1Z9.

iii. In the eyes of GST scheme of law, GSTIN 24AACCT5245K1Z9 (TASL Ahmedabad), GSTIN 29AACCT5245K1ZZ (TASL Bengaluru) and GST registered Unit of TASL Hyderabad are distinct persons for the purposes of CGST Act, as per the provisions of Section 25(5) CGST Act, which reads as follows:

‘Section 25(5):

Where a person who has obtained or is required to obtain registration in a State or Union territory in respect of an establishment has an establishment in another State or Union territory, then such establishments shall be treated as establishments of distinct persons for the purposes of this Act.”

Thus, application is rejected as non-maintainable under Section 95(a) of CGST Act.

BCAJ Admin

Glimpses of Supreme Court Rulings

18 Deputy Commissioner of Income-tax vs. Kerala State Electricity Board (2022) 447 ITR 193 (SC)

Company – Minimum Alternate tax – Section 115JB – Provisions not applicable to the Electricity Board or similar entities totally owned by the State or Central Government

Business Expenditure – Section 43B could not be invoked in making the assessment of the liability of the appellant under the Income-tax Act with regards to the amounts collected by the appellant pursuant to the obligation cast on the appellant under section 5 of the Kerala Electricity Duty Act, 1963.

For the A.Y. 2002-03, the appellant filed returns declaring the current loss at Rs. 411,56,63,704. The returns were subsequently revised and loss reduced to Rs. 203,81,27,595. The assessment was made under section 143(3) of the Income-tax Act.

The assessing authority invoked the legal fiction under section 115JB of the Income-tax Act, which enables the Revenue to arrive at a fictitious conclusion regarding the total income of the assessee and assess the tax on such total income. Further, the assessing authority relying upon section 43B of the Income-tax Act rejected the claim of the assessee that the amount collected by the assessee from the consumer under section 5 of the Kerala Electricity Duty Act, was not the income of the assessee and consequently not eligible to tax under the provisions of the Income-tax Act.

Though, the first appellate authority accepted the submission of the assessee on the abovementioned two issues, the Tribunal by the order under appeal confirmed the views of the assessing authority in rejecting the claim of the appellant.

The High Court noted that all the three sections (sections 115J, 115JA and 115JB) created legal fictions regarding the “total income” (a defined expression under section 2(45) of the Act) of the companies. While the earlier two sections mandate the Department to make the assessment on a fictitious amount of “total income” where the actual amount of total income computed in accordance with the Income-tax Act is less than 30 per cent of the book profits of the company, section 115JB mandates the Department to resort to the fiction in those cases where the tax payable on the basis of the “total income” computed in accordance with the Income-tax Act is less than a specified percentage of the book profit. Further, sections 115JA and 115JB also stipulate a definite manner of preparing the annual accounts including the profit and loss accounts. More specifically, section 115JB stipulates that the accounting policies, and standards, etc., shall be uniform both for the purpose of Income-tax as well as for the information statutorily required to be placed before the annual general meeting conducted in accordance with section 210 of the Companies Act, 1956.

The High Court further noted that that under section 166 of the Companies Act every company is mandated to hold a general meeting in each year. Section 210 mandates that every year the board of directors of the company in the general meeting shall lay before the company a balance-sheet as at the end of the relevant period and also a profit and loss account for the period. Parts II and III of Schedule VI to the Companies Act specify the method and manner of maintaining the profit and loss account.

The High Court observed that, the appellant though, is by definition a company under the Income-tax Act, and deemed to be a company for the purpose of the Income-tax Act, by virtue of the declaration under section 80 of the Electricity (Supply) Act, it is not a company for the purpose of the Companies Act. Therefore, the appellant is not obliged to either to convene an annual general meeting or place its profit and loss account in such a general meeting. As a matter of fact, a general meeting contemplated under section 166 of the Companies Act is not possible in the case of the appellant as there are no shareholders for the appellant Board. On the other hand, under section 69 of the Electricity (Supply) Act, the appellant is obliged to keep proper accounts, including the profit and loss account, and prepare an annual statement of accounts, balance-sheet, etc., in such a form as may be prescribed by the Central Government and notified in the Official Gazette. The prescription of the rules in this regard is required to be made in consultation with the Comptroller and Auditor-General of India, and also the State Governments. Such accounts of the appellant are required to be audited by the Comptroller and Auditor-General of India or such other person duly authorised by the Comptroller and Auditor- General of India. The accounts so prepared along with the audit report is required to be laid annually before the State Legislature and also published in the prescribed manner and copies of such publication shall be made available for sale at a reasonable price, obviously for the benefit of the general public who wish to scrutinise the accounts.

The High Court looked at the legislative history and the mischief sought to be remedied by the amendment. The High Court noted the Circular No. 762 issued by CBDT ((1998) 230 ITR (St.) 12, 42).

The High Court noted that the Legislature found that the number of companies paying the marginal and also the zero-tax had grown. Such companies earned substantial book profits and paid handsome dividends to the shareholders without paying any tax to the exchequer. Such a result was achieved by these companies by taking advantage of the then existing legal position which permitted the adoption of dual accounting policies and practices, one for the purpose of computation of Income-tax and another for determining the book profits for the payment of dividends. Therefore, the amendment was made to plug the loophole in the law. However, the companies engaged in the business of generation and distribution of electricity and enterprises engaged in developing, maintaining and operating infrastructure facilities, as a matter of policy, were not brought within the purview of the amendment (section 115JA) for the reason that such a policy would promote the infrastructural development of the country.

According to the High Court, considering the background in which section 115JA is introduced into the Income-tax Act, section 115JB, being substantially similar to section 115JA, could not have a different purpose and need not be interpreted in a manner different of section 115JA.

According to the High Court, another reason for which fiction fixed under section 115JB could not be pressed into service against the appellant was that the appellant or bodies, similar to the appellant, totally owned by the Government—either State or Central— have no shareholders. Profit, if at all, made by the appellant would be for the benefit of entire body politic of the State of Kerala. In the final analysis, all taxation is meant for the welfare of the people in a Constitutional Republic. Therefore, the enquiry as to the mischief sought to be remedied by the amendment, becomes irrelevant.

Coming to the next question of whether section 43B of the Act was properly invoked, the High Court on a plain reading of section 43B opined that the only clause relevant in the context of the facts of the appellant’s case was clause (a) which deals with “any sum payable by the assessee by way of tax, duty, . . . . under any law for the time being in force”. According to the High Court, the words, “by way of tax” were relevant as they were indicative of the nature of liability. The liability to pay and the corresponding authority of the State to collect the tax (flowing from a statute) is essentially in the realm of the rights of the sovereign. Whereas the obligation of the agent to account for and pay the amounts collected by him on behalf of the principal is purely fiduciary. The nature of the obligation, continues to be fiduciary even in a case wherein the relationship of the principal and agent is created by a statute. The High Court held that that, when section 43B(a) speaks of the sum payable by way of tax, etc.; the said provision is dealing with the amounts payable to the sovereign qua sovereign, but not the amounts payable to the sovereign qua principal. Therefore, section 43B could not be invoked in making the assessment of the liability of the appellant under the Income-tax Act with regards to the amounts collected by the appellant pursuant to the obligation cast on the appellant under section 5 of the Kerala Electricity Duty Act, 1963.

The Supreme Court, after going through the circumstances on record and considering the rival submissions concluded that no interference was called for and therefore, dismissed the appeal of the Revenue.

19 Commissioner of Income-tax vs. SBI Home Finance Ltd. (2022) 447 ITR 659 (SC)

Depreciation – Leased assets – Lessee having a right to purchase the plant after the expiry of a stipulated period of time – The alleged third party interest does not affect the ownership of the lessor nor can it be doubted or disputed

A plant was being set up on the premises of M/s. Maize Products, a division of Sayaji Industries Ltd (SIL). M/s. Western Paques India Ltd. (WPIL) approached the assessee for leasing finance for the aforesaid effluent treatment and bio-gas generation plant, being set up at the premises of M/s. Maize Products of SIL. Pursuant to such an approach, the assessee itself acquired the said plant and leased out the same to WPIL upon taking symbolic possession. According to the terms of the agreement between SIL and WPIL, SIL had a right to purchase the plant after the expiry of a stipulated period of time.

The Tribunal held that the ownership of the assessee could not be established or accepted because that there was a stipulation that a third party, other than the lessee to whom the plant was leased out by the assessee, had a right to purchase.

The High Court observed that in the present case, neither SIL had claimed any right; nor WPIL. Similarly, neither SIL nor WPIL in their return had claimed depreciation for the plant. WPIL had not claimed any benefit of payment of interest on capital borrowed. On the other hand, WPIL had treated the rental paid to the assessee for the plant as revenue expenditure. If it was finance, then the assessee would be entitled to recover the principal. But in this case by reason of the agreement the assessee would not be entitled to recover any principal.

The High Court further noted from the additional paper book filed that on account of default on the part of WPIL to pay the rental, the assessee had filed a suit in the Bombay High Court in which a Receiver has been appointed. The Court Receiver had taken possession of the said plant and an undertaking had been given on behalf of SIL that it will preserve the possession carefully and execute an agency agreement with the Receiver, and will neither part with the possession nor mortgage, alienate, encumber or create any third party interest and had further undertaken to cover the said plant by insurance, etc. However, SIL had neither claimed any title or possession over the plant nor claimed depreciation in respect thereof. It had also not exercised its option to purchase.

Therefore, the High Court was of the view that in respect of the period covered by the financial year under assessment, the ownership of the assessee in respect of the plant could not be disputed for the purpose of section 32 of the Act. According to the High Court, the lessee cannot dispute the title of the lessor and the alleged third party interest does not affect the ownership of the lessor nor can it be doubted or disputed. In this case, the lessee had never claimed ownership of the plant. Thus, the alleged right of SIL to purchase the plant would in no way affect the ownership of the assessee. The ownership of the assessee was not only absolute and perfect but also apparent and real until SIL established its rights.

The High Court, therefore, held that the assessee was the owner of the plant for the purpose of section 32 and by leasing it out to WPIL the assessee had used the plant wholly for the purpose of its business, namely, for carrying on the business of leasing, and the income earned by the way of a rental of the plant was business income.

The Supreme Court dismissed the appeal after going through the relevant clauses of the agreements dated 8th December, 1993 and 30th December,1994 holding that on construing the relevant clauses, it was apparent that the Respondent assessee had become the owner of the plant and machinery and that the lease rentals in the entirety had been taxed as a revenue receipt/ income.

20 Ashok Leyland Ltd vs. CIT (2022) 447 ITR 661 (SC)

Export – Special deduction –The unabsorbed loss should not be deducted to arrive at the profits for the purposes of calculating the deduction under section 80HHC

The assessee was engaged in the manufacture and sale of chassis for medium and heavy duty commercial vehicles, engines, etc. The assessment for the year 1991-92 was originally completed under section 143(3); again after the giving effect to the order in appeal.

Subsequently, it was taken up for rectification under section 154 on the question of depreciation, as regards the lease of buses to MSRTC and Pune Municipal Transport Corporation which according to the revenue was a sale transaction. Apart from that the relief under section 80HHC, as well as the interest and commitment charges on the loan were also taken up for consideration.

As regards the claim for deduction under section 80HHC, the AO reworked the calculation.

Aggrieved by the said order, the assessee went on appeal. The Commissioner of Income-tax (Appeals) inter alia on the question of deduction under section 80HHC rejected the appeal for deduction.

The Tribunal allowed the appeal.

The revenue filed an appeal before the High Court.

One of the questions of law raised before the High Court related to deduction of unabsorbed loss to arrive profits for the purpose of calculating the deduction under section 80HHC. The Tribunal upheld the claim following CIT vs. Vegetable Products Ltd [1973] 88 ITR 192 (SC). The revenue questioned this contending that the brought forward loss should be deducted from the profits and gains of business for the purpose of working out the relief under section 80HHC.

The High Court observed that section 80A(1) describes the deductions to be computed from the gross total income. Section 80B(5) defines the total income as one computed in accordance with the provisions of the Act before making any deduction under Chapter VI-A. Touching on the provision of section 80AB, in the case of IPCA Laboratory Ltd vs. Dy. CIT [2004] 266 ITR 521, the Supreme Court held that in computing the total income of the assessee, both profits as well as losses will have to be taken into consideration. Referring to section 80B(5) as well as to section 80AB, the Apex Court held that for the purposes of working out the relief under section 80HHC, the computation has to be made first as given under section 80AB, which means, the computation of income has to be in accordance with the provisions of the Act. Hence, before deduction under section 80HHC is considered, the assessing authority has to compute the income in accordance with the provisions of the Act. In which event, the profits and gains of income from business will have to be computed taking note of section 72A also. The Commissioner (Appeals) pointed out that the accumulated loss which were carried forward and set off under the provisions of section 72A were correctly deducted by the assessing authority before computing the deduction under section 80HHC. Hence, the computation done was in accordance with the scheme, as interpreted by the Supreme Court. The High Court did not find any justification to accept the plea of the assessee that the unabsorbed loss should not be deducted to arrive at the profits for calculating the deduction under section 80HHC. According to the High Court, the order of the Tribunal in this regard was unsustainable, and hence the question was answered in favour of the revenue.

The Supreme Court dismissed the appeal of the assessee holding that the issue raised in the appeal by the assessee was covered against them, vide its judgment in CIT vs. Shirke Construction Equipment Ltd [2007] 161 Taxman 212/291 ITR 380 (SC)/[2007] 14 SCC 787.

The appeal was dismissed without any order as to costs.

21 Director of Income-tax (Exemptions) vs. Meenakshi Amma Endowment Trust
(2022) 447 ITR 663 (SC) Charitable purpose – Registration – Application should be decided looking at the objects of the Trust in a case where activity has not commenced

The assessee trust was established by way of a trust deed dated 23rd January, 2008. The assessee sought for registration under section 12A on 31st October, 2008. The assessee was called upon to furnish certain details which were furnished. The assessee fairly indicated that they had not yet commenced any activities of the trust.Not being satisfied with this reply the Director of IT (Exemptions) refused to grant registration and, consequently, recognition under section 80G was also refused by orders dated 13th April, 2009. Aggrieved by the same the assessee approached the Tribunal challenging the order of the Director of IT (Exemptions).

The Tribunal taking into consideration the law laid down by the Division Bench this court in Sanjeevamma Hanumanthe Gowda Charitable Trust vs. DIT (Exemptions) [2006] 285 ITR 327/155 Taxman 466 (Kar.) directed the Director of Income-tax (Exemptions) to grant recognition to the trust if other conditions are satisfied. The Tribunal noted that the trust was formed on 23rd January, 2008 and within a period of nine months they had filed an application under section 12A for issuance of the registration claiming exemption. The fact that the corpus of the trust was nothing but the contribution of Rs. 1,000 by each of the trustees as corpus fund showed that the trustees were contributing the funds by themselves in a humble way and intended to commence charitable activities. The grievance of the concerned authorities seemed to be that there was no activity which could be termed as charitable as per the details furnished by the assessee, therefore, such registration could not be granted. The Tribunal was of the view that when the trust itself was formed in January, 2008, with the money available with the trust, one cannot expect them to do activity of charity immediately and because of that situation the authority could not have concluded that the trust was not intending to do any activity of charity. In such a situation the objects of the trust had to be taken into consideration by the authority and the objects of the trust could be read from the trust deed itself. In the subsequent returns filed by the trust, if the Revenue came across that factually the trust had not conducted any charitable activities, it was always open to the authorities concerned to withdraw the registration already granted or cancel the said registration under section 12AA(3) of the Act.

The High Court dismissed the appeal of the revenue holding that the conclusion arrived at by the Tribunal was just and it did not give rise to any substantial question of law.

The Supreme Court also dismissed the appeal of the Revenue in view of its judgment in Ananda Social & Educational Trust vs. CIT [2020] 426 ITR 340 (SC) which judgment had approved the view taken by the Delhi High Court in DIT vs. Foundation of Ophthalmic & Optometry Research Education Centre [2013] 355 ITR 361.

The Supreme Court however, observed that the dismissal of the appeal would not bar the AO from cancelling the registration in case he finds that the ‘charitable activity’ was not undertaken, set-up or established by the assessee.

Business income – Remission or cessation of liability – The turnover tax paid by the assessee was allowed as deduction in the assessments during the preceding assessment years and therefore, when refund is received in the assessment year 1995-96, it is income assessable under section 41(1) of the Income-tax Act

22 Ishwardas Sons vs. Commissioner of Income-tax (2022) 447 ITR 755 (SC)

The question raised before the High Court, in this appeal, was whether the Tribunal was justified in cancelling assessment of Rs. 25,27,734 being the refund of turnover tax assessed by the department during the previous year relevant for the A.Y. 1995-96.It was the case of the Revenue that the turnover tax paid by the assessee was allowed as deduction in the assessments during the preceding A.Ys. 1990-91, 1991-92 and 1992-93 and therefore, when refund is received in the relevant A.Y. 1995-96, it is income assessable under section 41(1) of the Income-tax Act.

It was the case of the assessee that the High Court in IT Appeal No. 232/2002 in assessee’s own case had held that the turnover tax recovered by the assessee and retained as a contingency deposit in their account was income assessable at their hands. Based on this judgment, the contention of the assessee was that the very same income got assessed in the year in which it is recovered from the principals.

From the orders of the Tribunal, the High Court noted that the assessee has not disputed that the deduction was allowed to it on payment of turnover tax during the A.Ys.1990-91, 1991-92 and 1992-93 as stated by the AO. However, the Tribunal had proceeded to allow the appeal by holding that by virtue of decision of High Court in another case, the refund order had not become final and so much so, it was not income of the assessee. The High Court was unable to agree with this reasoning of the Tribunal because it was not the assessee’s case that the department had filed a further appeal or claimed return of the refund amount. The High Court, therefore, reversed the order of the Tribunal. However, it was clarified that if the assessee has not claimed deduction of the turnover tax on payment basis under section 43B for 1990-91, 1991-92 and 1992-93 as stated in the order, then it would be open to the assessee to produce evidence that no deduction is claimed for payment of turnover tax for the A.Ys. 1990-91, 1991-92 and 1992-93 as stated in the assessment order and if the same is found to be a mistake, the AO would exclude the amount from assessment by rectifying the order.

Before the Supreme Court, an order of remand to the High Court was sought by the assessee but, however, the Supreme Court was not inclined to pass remit order, as the issue, in its opinion, had been correctly decided. The Supreme Court, therefore, declined to exercise its power under Article 136 of the Constitution of India and dismissed the appeal.

BCAJ Admin

CORPORATE LAW CORNER PART B : INSOLVENCY AND BANKRUPTCY LAW

8 Shekhar Resorts Ltd (Unit Hotel Orient Taj) vs. Union of India & Ors (CIVIL APPEAL NO.8957 OF 2022)

FACTS

The corporate debtor was engaged in the business of proving hospitality services and therefore was registered with Service Tax Department. On evasion of taxes by the Corporate Debtor, show cause notices were issued by the Service Iax Department. In interregnum, one Financial Creditor had filed an application under section 7 of the Code and vide order dated 11th September, 2018 and therefore moratorium kicked in which got over on 24th July, 2020 when plan of a resolution applicant was approved by the Adjudicating Authority. The Corporate Debtor had filed an application through Form 1 under the Sabka Vishwas (Legacy Dispute Resolution) Scheme, 2019 within the due date as prescribed and the application was accepted and necessary forms were issued for payment of the tax due by Designation Committee i.e. Rs. 1,24,28500. However, due to moratorium imposed under section 14 of the Code, the corporate debtor was unable to deposit the tax within the due date. When he approached the Joint Commissioner CGST, he was told that as the payment was not made within the due date, the benefit of scheme could not be availed. Aggrieved by the order, the corporate debtor approached the Allahabad High Court but the Court refused to entertain the writ as the Designation Committee was not in existence.

Question of law

a) Whether it was impossible for the corporate debtor to deposit the settlement amount due to restrictions under the IB Code and whether the corporate debtor can be punished for no fault of his?

b) Whether the High Court was right in quashing the petition on the basis of non-existence of the Designation Committee?

HELD

It was evident from the backdrop that the Corporate Debtor cannot e deposit the sum due to the operation of law in place. The Corporate Debtor was unable to make the payment due to the legal impediment and the bar to make the payment during the period of moratorium. Even if the Corporate Debtor wanted to deposit the sum before 30th June, 2020,, it would be against the provisions of the Insolvency and Bankruptcy Code because of the calm period in action. Once a moratorium is kicked in, any existing proceeding against the Corporate Debtor shall stand prohibited and it is a well-settled law that IBC shall have precedence over any inconsistent legislations. When the Form No.3 was issued under the Scheme 2019, the Corporate Debtor was subjected to the rigors of process of IBC by virtue of the moratorium. In such a scenario, the Corporate Debtor cannot be rendered remediless and should not be made to suffer due to a legal impediment which was the reason for it and/or not doing the act within the prescribed time. The Corporate Debtor could not make the payment due to legal disability and no one can be expected to do the impossible.

It was also held that the High Court shall grant relief to the Corporate Debtor when there are valid reasons or causes for his inability to make the payment. The High Court cannot extend the time period of the Scheme under section 226 of Constitution of India but it can consider extra ordinary circumstances where there is a legal disability on the part of the Corporate Debtor for the interest of justice. The Designated Committee under the Scheme had been constituted on a need basis to comply with the orders of the courts across the country and in many cases they have rejected the applications under the Scheme, 2019 erroneously.

The Apex Court is of the view that the corporate debtor cannot be remediless just because he is restrained by law. It is a pity if a person is accused wrongly when he is willing to not do that wrong thing. The orporate Debtor cannot make the payment due to legal disability and therefore, he is entitled to claim benefits under the Scheme.

shailesh.kwebmaker

Proposed Changes to Reporting Material Developments

INTRODUCTION AND BACKGROUND

SEBI has proposed changes to the provisions related to reporting of material events/developments by listed entities. These provisions are contained in the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“the Regulations” or “the LODR Regulations”).

Timely reporting of material events and developments with regards to listed entities is important for several reasons. It puts an end to speculation and gossip due to leaks, guesswork (informed or otherwise) or even media reports. It informs the investors and public of important developments in a timely way to enable them to take their decisions factoring these into account. Hence, they do not have to wait for the financial statements released within about one and half months at the end of every quarter, which, while have much improved over previous annual reporting, are still considered late if major developments take place between two such reporting dates.

Further, reporting right from the proverbial horse’s mouth, is more reliable than market gossip. Indeed, as we will see, while there are already some provisions related to reporting by listed entities to reports/rumors in the market, the proposed provisions now require mandatory reporting by certain listed entities.

Reporting of material events also helps curb insider trading since more delayed the reporting, more are the chances of insiders abusing knowledge of price sensitive information. However, what is considered ‘material’ for the purposes of LODR Regulations is different from the corresponding term – price-sensitive information – under the Regulations relating to insider trading, even if one may see overlap. Further, while there is a fairly elaborate definition of what is considered price-sensitive, there is no specific definition of ‘material’ under the LODR Regulations.

Instead, it is seen that the term material is defined as a mix of specific cases that are deemed to be material and for other cases, there is a blend of policy and discretion. The listed entity is required to lay down a policy related to not only determining the materiality of events, but also one that gives an element of discretion to the specified key managerial personnel in this regard.

Further, while the Regulations related to insider trading focus more on proper preservation of price sensitive information and prevention/prohibition of its abuse, the LODR Regulations are more concerned with prompt reporting.

The LODR Regulations have broadly divided material events into two categories. There are a set of items deemed to be material leaving no discretion to the company in this regard. Thus, these have to be reported, irrespective of the amounts involved or their nature. Then, there is a list of items in respect of which the top specified executives have to exercise discretion and report if found material.

To these provisions, SEBI has now proposed several changes vide its consultation paper on 12th November 2022. After taking feedback, SEBI will notify the final amendments. However, as has been often the practice, and a good one at that, the consultation paper gives the actual wording of the proposed amendments to the regulations. Hence, even the fine print as proposed is available making it easier to visualize the implications in more detail than otherwise when only the description of the proposed amendments is given.

Let us consider some of the important amendments as proposed.

QUANTIFIED PARAMETERS TO GIVE MINIMUM LIMITS TO DETERMINE MATERIALITY

At present, as discussed, there are two categories of criteria to determine whether a particular event or development is material or not. In the first category, are clearly specified events deemed to be material and where, thus, no discretion is available to management but to report. There is criticism, and in some cases rightly so there are areas in which these deemed material events are not really material at all in substance. Hence, there is a needless deluge of information which the public may actually misconceive as material on one hand and, on the other hand, substantially material events get lost in these.

The second category relates to matters where a principle-based guidance is given by SEBI to determine materiality but the company has the discretion to decide whether or not an event is material in context of this guidance. It is now proposed that one more principle, a quantified one, be laid down to provide a minimum lower limit which, if crossed, would make the event material. Three alternative parameters are provided and if the impact of the information in financial terms exceeds any of these three parameters, then the same would be deemed material. These three parameters, simplified for present purposes are 2 per cent of turnover, 2 per cent of net worth or 5 per cent of average net profits of last 3 years, whichever is lower.

Quantified limits are always welcome as they reduce ambiguity, and thus also avoid second guessing by the regulator, often based on hindsight wisdom. However, they may often be far from the substance, and may at times make non-material events material, material events non-material or, worse, may miss items not easy to quantify.

Secondly, the quantified limits are applied irrespective of whether the event may impact the turnover, net worth or profits. Thus, an event may have a significant impact on the turnover but not on profits (or vice versa). If, even one of the limits is crossed, the event is deemed to be material. Thus, not only more events would be reported because quantified parameters are provided but the number would also be more since the parameters provided are three, and not necessarily connected to the nature of the event and the impact it may have on a particular parameter.

It is also provided that while the company may continue to determine the policy of how it determines material events, this policy will not dilute the specified quantified parameters. Thus, these parameters would represent absolute lower limits which even the policy or discretion cannot exclude.

ESCALATION OF INFORMATION OF MATERIAL EVENTS UP THE LADDER OF MANAGEMENT

Typically, it is the man or woman in the field or on the ground level who becomes aware of a development that could have such material implications requiring reporting under the Regulations. For example, there may be a fire at a plant whose implications would have to be determined as material or not. It may take some time for the information to reach, with relevant data, to the KMPs. However, these requirements specify a short time limit (which is proposed to be shortened even further, as we will see herein) within which the information should be reported.

SEBI now proposes that a system be laid down in the policy whereby the information of material events would be escalated up to the KMPs for them to determine whether such an event is material or not. The details of how this would work would be up to the company to frame.

SHORTER TIMELINES FOR REPORTING OF MATERIAL EVENTS

The present provisions have a generic requirement of reporting of material developments within a maximum of 24 hours. It is now proposed to divide these requirements into three categories. In case of developments that emanate from outside the organization, the time limit would be maximum 24 hours. In case the information emanates from within the organization, a shorter period of 12 hours would be available. In case of events arising out of Board meetings, within 30 minutes of closure of such meeting.

Companies particularly have to plan well for this since this is the maximum time available for many things. Firstly, for the information to reach the management. Secondly, for deciding whether the event is material, whether deemed to be so under the Regulations or otherwise determined to be so taking into account the principles as well as the quantified parameters laid down. Thirdly, to compile the information in the format, if so prescribed. Finally, reporting the same. Too often, the compliance officer and even external legal advisors have to provide inputs in the process. The already short time limits are being proposed to be cut further. This may end up affecting the quality of information including its clarity and specificity.

REACTING TO MEDIA REPORTS

Under existing provisions, it is discretionary for management to react to media reports or rumors regarding developments related to the company. Exchanges, however, may ask in some cases a company to react to specific news.

It is now proposed to make companies proactively react to news in mainstream media. To begin with, top 250 companies (based on market capitalization) would be required to react to news reported in mainstream media that could, if true, have material implications. What is considered mainstream media (which may be print or digital), however, is not defined or described.

Companies thus will now have to keep track of reports in mainstream media and react to them. No time limit has been prescribed but, at least in spirit of the provisions, the 24 hour limit may be considered.

RATINGS, REVISIONS, RATING SHOPPING

Presently, companies need to report on ratings and revisions thereon. Now it is proposed that such reporting should be carried out even if the rating (or revision thereto) was not requested by the listed entity or, if requested, such request has been withdrawn by it. This may counter rating shopping that some entities may engage in.

WIDER COVERAGE OF DEVELOPMENTS RELATING TO PERSONNEL

At present, resignations by independent director or auditor, frauds or defaults by promoter/key management personnel, etc, are required to be reported. Now, it is proposed that certain developments by other specified persons should also be reported on by the listed entity.

Such information, in situations like fraud, defaults, etc, would have to be informed first by the person concerned to the entity, for the latter to report. However, curiously, such persons themselves are not required to report to the company. SEBI may, however, take a view that the requirements implicitly require them to do such reporting and if they do not report, SEBI could take action against them. However, it would have been better if the provisions had contained a specific obligation on such persons to report to the listed entity and a time limit therefor. Even better, the person could report simultaneously also to the exchanges.

CONCLUSION

There are several other changes proposed. Curiously, there seems to be a distinct change in approach from a principle-based reporting to rule-based reporting. In other words, instead of laying down broad principles that would have wider effect but at the same time give discretion to the entity to decide for each event based on its substance, increasingly the discretion is being taken away. Instead, detailed rules are being specified for reporting giving quantified parameters, specific categories of events/persons, etc. Partly this may arguably be considered as a failure of the principle-based approach. However, rule based reporting may also end up being tick-the-box attitude where form has precedence over substance. Worse, particularly considering the wider coverage and also lower quantified limits, there may be a deluge of reporting in which the real material developments may be missed by most except the discerning few who have time and experience to monitor and screen the reports.

shailesh.kwebmaker

CORPORATE LAW CORNER PART A : COMPANY LAW

15 Hydro Prokav Pumps India Pvt Ltd ROC/CBE/A.O./10A/9881/2022 – Office of the Registrar of Companies, Tamil Nadu-Coimbatore Adjudication order Date of Order: 10th October, 2022

Adjudication order: Penalty for violation of not attaching notes to the financial statements which is the mandatory requirement as per section 134 (7) (a) of the Companies Act, 2013.

FACTS

HPPIPL was having its registered office at Coimbatore in the state of Tamil Nadu.

HPPIPL realised that the financial statements along with the Director’s report filed with the Office of the Registrar of Companies, Tamil Nadu-Coimbatore (‘RoC’) for the financial years ended as on 31st March, 2017, 31st March, 2018, 31st March, 2019, 31st March, 2020 and 31st March, 2021 did not contain the notes to the financial statements which is a mandatory requirement as per section 134 (7) (a) of the Companies Act, 2013.

Thereafter, HPPIPL and its directors filed a suo-moto application before the office of the Registrar of Companies, (‘RoC’) for Adjudication of the penalty for violation of provisions of Section 134 of the Companies Act, 2013.

Provisions of Sub-section (7) of Section 134 of the Companies Act, 2013; A signed copy of every financial statement, including consolidated financial statement, if any, shall be issued, circulated or published along with a copy each of:-

(a) Any notes annexed to or forming part of such financial statement;

(b) The auditor’s report and

Further, penal provision for any default/violation of Section 134 of the Companies Act, 2013 are provided under Sub-section (8) of section 134;

that if a company is in default in complying with the provisions of this section, the company shall be liable for a penalty of ₹3 lakhs and every officer of the company who is in default shall be liable to a penalty of ₹50,000.

HELD

The Adjudication Officer was of the view that HPPIPL had defaulted in complying with provisions of Section 134 (7) (a) by not attaching/annexing the notes to the financial statements. Hence, he imposed penalty on HPPIPL and every officer of the company in default in a manner as provided under provisions of Section 134 (8) of the Companies Act, 2013 as mentioned below:

Sr. No.	Penalty imposed on	Maximum penalty imposed
1.	HPPIPL	Rs. 3,00,000
2.	Officers in default (Total 3 Officers of Company i.e. 3 Directors)	Rs. 1,50,000 (Rs. 50,000 each)
	TOTAL	Rs. 4,50,000

It was further directed that the company and its director(s) rectify the defect immediately on receipt of copy of the order.

16 Kosher Realhome Pvt Ltd ROC/D/Adj Order /defective/2022 Office of the Registrar of Companies, NCLT of Delhi & Haryana Adjudication order Date of Order: 16th November, 2022

Adjudication order: Penalty for violation of Rule 8(3) of (Registration Offices and Fees) Rules 2014 under Section 450 and 446 B of the Companies Act, 2013 for filing incorrect attachments along with e-form AOC-4 with the Registrar of Companies.

FACTS

KRPL was having its registered office at Delhi.

The Registrar of Companies, Delhi & Haryana (‘RoC’) had issued a show cause notice to the Company and its Directors stating that the financial statements attached by KRPL in E-form AOC-4 with RoC were the financial statements of “IGCPL” i.e., Transferee Company instead of financial statements of “KRPL”.

Further KRPL and its officer in default submitted their reply to the RoC admitting the fact that financial statement of “IGCPL” were attached to e-form AOC-4 instead of “KRPL.”

The following provisions were violated by the KRPL and its officer/s in default;

Rule 8 (3) of Companies (Registration Offices and Fees) Rules, 2014; The authorised signatory and the professional if any, who certify e-form shall be responsible for the correctness of its contents and the enclosures attached with the electronic form
Rule 8 (7) of Companies (Registration Offices and Fees) Rules, 2014; It shall be the sole responsibility of the person who is signing the form and professional who is certifying it to ensure that all the required attachments relevant to the form have been attached completely and legibly as per provisions of the Act and rules made thereunder to the forms or application or returns filed.

Section 450 of the Companies Act, 2013 for penal provision for any default / violation where no specific penalty is provided in the relevant section / rules;

If a company or any officer of a company or any other person contravenes any of the provisions of this Act or the rules made thereunder, or any condition, limitation or restriction subject to which any approval, sanction, consent, confirmation, recognition, direction or exemption in relation to any matter has been accorded, given or granted, any for which no penalty or punishment is provided elsewhere in this Act, the company and every officer of the company who is in default or such other person shall be liable to a penalty of Rs. 10,000 and in case of continuing contravention, with a further penalty of Rs. 1,000 for each day after the first during which the contravention continues, subject to a maximum of Rs. 2,00,000 in case of a company and Rs. 50,000 in case of an officer who is in default or any other person.

Further, KRPL being a Small Company, applicability of Section 446B of the Companies Act, 2013 provides for lesser penalties for certain companies and the relevant provision is as given below:

Section 446B – Notwithstanding anything contained in this Act, if a penalty is payable for non-compliance of any of the provisions of this Act by One Person Company, small company, start-up company or Producer Company, or by any of its officer in default, or any other person in respect of such company, then such company, its officer in default or any other person, as the case may be, shall be liable to a penalty which shall not be more than one half of the penalty specified in such provisions, subject to a maximum of Rs. 2,00,000.

HELD

The Adjudication Officer held that the concerned director i.e. Mr. VP was authorized by the board of directors for certifying the financial statements in e-form AOC 4 with complete and legible attachments and therefore he was liable under section 450 of the Companies Act 2013, for the in-correctness of the content of e-form AOC-4 and enclosures attached with the same pursuant to Rule 8 of the Companies (Registration Offices and Fees) Rules, 2014.

The Adjudication Officer also considered the provision of section 446 B of the Companies Act, 2013, r.w.s2(85) of the Companies Act, 2013, as the company fulfilled the requirements of the small company. Therefore, lesser penalty was levied as mentioned below:

Violation of section/rule	Penalty imposed on Company / directors	Penalty specified under section 450 of the Companies Act 2013	Penalty imposed by the Adjudicating Officer under section 454 r.w.s 446B of the Companies Act 2013
Rule 8 (3) of the Companies (Registration Offices and Fees) Rules 2014	Mr. VP, Director	Rs. 10,000	Rs. 5,000

Further it was held that Mr. VP, who was the authorized signatory shall have to make the payment of penalty individually out of his funds.

The AO order also directed Mr. VP to rectify the default immediately from the date of receipt of copy of this order.

shailesh.kwebmaker

Hindu Gains of Learning Act

INTRODUCTION

Hindu Undivided Families (HUFs) often have a scenario wherein the family sponsors the education of one of the members and he goes on to become a successful professional/businessman. In such a case, the question that one comes across is whether the joint family, which has funded his education, can stake a claim to his earnings? In other words, can the other family members state that whatever income / wealth the member has on account of the investment made by the family in his education and hence, they should also share in the same? Let us examine this quite interesting facet of family law.

HINDU LAW AND HUF

Hindu Law is a unique statute since part of it is codified by the Parliament whereas part of it is governed by customs, traditions, and usages. The answer to the above questions could be dissected into two scenarios ~ the position before 1930 and the position post-1930.

POSITION BEFORE 1930

Before 1930, the position in this respect was dictated by the ancient uncodified Hindu Law which was explained by a Division Bench ruling of the Supreme Court in the case of Chandrakant Manilal Shah vs. CIT (1992) 193 ITR 1 (SC). It held that before 1930, it was settled law that income earned by a member of a joint family by the practice of a profession or occupation requiring special training was joint family property if such training was imparted at the expense of the joint family property.

Accordingly, till 1930 if a joint family had spent on a coparcener’s education, then whatever he earned by virtue of this degree/skill became joint family property in which all coparceners also had a right.

POSITION AFTER 1930

On 25th July, 1930, the Parliament passed the Hindu Gains of Learning Act, 1930 (“the 1930 Act”). The 1930 Act was passed to remove doubts as to the rights of a member of a Hindu Undivided Family in the property acquired by him by means of his learning.

Section 3 of the 1930 Act provides that notwithstanding any custom, rule, or interpretation of the Hindu Law, gains of learning of a member shall be held to be the exclusive and separate property of the acquirer even if —

(a) his learning having been, in whole or in part, imparted to him by any member, of his family, or with the aid of the joint funds of his family/ any family member, or

(b) himself or his family having, while he was acquiring his learning, been maintained or supported, wholly or in part, by the joint funds of his family, any member.

The Act further describes “gains of learning” in an inclusive manner to mean `all acquisitions of property made substantially through learning, whether such acquisitions be made before or after the commencement of this Act and whether such acquisitions be the ordinary or the extraordinary result of such learning’.

The important term “learning” has been defined to mean education, whether elementary, technical, scientific, special or general, and training of every kind which is usually intended to enable a person to pursue any trade, industry, profession or a vocation in life.

Thus, the net impact of the 1930 Act is that on and from the date of its enactment:

(a) All gains of learning of a coparcener of an HUF shall be held to be his exclusive and separate property even if his learning was funded by the joint family funds /HUF. Thus, all income earned by him by virtue of his skill / knowledge / learning would solely belong to him.

(b) Even acquisitions of properties made by him out of such gains of learning are treated as his exclusive and separate property and not that of the HUF.

RATIONALE

The Supreme Court in Raj Kumar Singh Hukam Chandji vs. CIT, [1970] 78 ITR 33 (SC) has explained the rationale behind the enactment of the 1930 Act. It held that in Gokul Chand vs. Hukum Chand Nath Mal AIR 1921 PC 35, the Judicial Committee ruled “that there could be no valid distinction between the direct use of the joint family funds and the use which qualified the members to make the gains on his efforts”. In making this observation, the Judicial Committee appeared to have been guided by certain ancient Hindu law texts. According to the Supreme Court that view of the law became a serious impediment to the progress of the Hindu society. It was well-known that the decision in Gokul Chand’s case (supra), gave rise to a great deal of public dissatisfaction and the Central Legislature was constrained to step in and enact the Hindu Gains of Learning Act, 1930, which nullified the effect of that decision.

JURISPRUDENCE

The Gujarat High Court in CIT vs. Dineschandra Sumatilal, 1978 112 ITR 758 (Guj) has explained this Act. It held that the law now recognised the distinction between the earnings of a coparcener as a result of his learning, efforts, and advancement in life and the income which a coparcener received merely as a result of the investment of the family funds in the source which produced such income.

The Court held that with technological advancements in commerce and industry, a qualified coparcener might be employed in a business in which his family had contributed its funds, and by his skill, experience, and labor, all of which were his incorporeal property or intangible assets, might contribute to the growth of such a business. If any remuneration was received by him for the services so rendered, it could not, by any stretch of imagination, be related to the joint family investment in the business. The salary of such a coparcener was not an alias for the return of profits of the investment made by the family. It was a legitimate return for the human capital – sweat, skill, and toil, which were productive investments, which the coparcener made in such business. To treat his income as the income of the family was not only not in consonance with the true legal position, but would also lead to the denial to the family business of the human capital which the coparcener would contribute with greater sincerity than an outsider. Thus, the Gujarat High Court held that even in a case where the HUF funded the business, the remuneration earned by the coparcener would remain his personal property.

The decision of the Supreme Court in Chandrakant Manilal Shah vs. CIT (1992) 193 ITR 1 (SC) held that the definition of the term ‘learning’ was wide and encompassed every acquired capacity which enabled the acquirer of the capacity “to pursue any trade, industry, profession or avocation in life”. Skill and labor involved as well as generated mental and physical capacity. This capacity was in its very nature an individual achievement and normally varied from individual to individual. It was by utilisation of this capacity that an object or goal was achieved by the person possessing the capacity. Achievement of an object or goal was a benefit. This benefit accrued in favor of the individual possessing and utilising the capacity. Skill and labour were by themselves possessions. They were assets of that individual and there seemed to be no reason why they could not be contributed as a consideration for earning profit in the business of a partnership firm. They certainly were not the properties of the HUF but were the separate properties of the individual concerned.The Court held that where an undivided member of a family qualified in technical fields – may be at the expense of the family – he was free to employ his technical expertise elsewhere and the earnings were his absolute property; he will, therefore, not agree to utilise them in the family business, unless the latter is agreeable to remunerate him therefore immediately in the form of a salary or share of profits.

The Madras High Court in the case of Prof. G. S. Ramaswamy (2003) 259 ITR 442 (Mad) was dealing with the case of a Professor who was educated from funds belonging to his joint family. He published a book on a technical subject and threw the royalties from the book into the HUF hotchpot and claimed that the royalties would now belong to the HUF. The Tax department objected on the grounds that after the passage of the 1930 Act, all gains of learning of an individual cannot be treated as HUF property even if the education was funded by the HUF funds. The High Court said while the proposition of the Department was correct, the 1930 Act would not apply if the coparcener himself took steps to blend his self-acquired earnings / property with the joint family hotchpot.

In K Govindrajan vs. K Subramanian, 2013 AIR (Mad) 80, it was contended that if a member got educated from out of the joint family funds, and also acquired properties, the member should put all those properties into the common hotchpot, and also render accounts. The Madras High Court negated this claim and held, nothing had been demonstrated as on what basis the plaintiff should render accounts of his earnings and also put all the properties he earned out of such learning into the common hotchpot. Simply because, he admitted that he got his education, during the lifetime of his father that per se did not mean that it should be construed that what all he acquired out of his salary should be put into common hotchpot. The 1930 Act was relied upon by the Court to hold this conclusion.

CONCLUSION

Based on the above discussion, the following position emerges:

(a) If a coparcerner’s education was funded out of HUF property, even in that scenario, his earnings and investments would remain his separate property.

(b) The 1930 Act would clearly apply in this case and all gains of learning of such a coparcener would be his separate self-acquired property.

(d) As long as the coparcener has not taken any action of blending his gains of learning with the common family hotchpot and hence not converted his personal property into joint family property, the gains of learning would not be a part of the HUF property.

This very old piece of pre-independence legislation could help quell several family disputes. It is interesting to note that even though this Act has been around for over 80 years it has not got the recognition which it deserves!

shailesh.kwebmaker

MANAGED

Once upon a time, there was a large kingdom that was overpopulated. The new King was good. He had honest intentions to have a clean and efficient administration. He had a few good ministers; but over the past many years, there had been complete lawlessness and indiscipline. Many ministers and bureaucrats were addicted to lavish living and resorted to rampant corruption.

Nothing moved without ‘speed money’. Corruption was firmly rooted in every walk of life. School admissions, exam results, health services, transport, business deals, jobs, defense, internal security services, and even judiciary. Nothing favorable could be achieved without ‘setting’. All conscientious persons and professionals were finding it very difficult to survive and perform without resorting to undesirable things.

Nobody listened to professionals and wise people. Justice was delayed inordinately. Wrongdoers were never punished. On the contrary, they enjoyed a high status in society. The common man was frustrated. Meritorious students could not join their desired course of study due to peculiar policies of the Government. They preferred to go, study and settle abroad.

This corruption had percolated down to the common people. Nobody was interested in hard work. Everybody wanted easy and quick money. Therefore, even the common man had become lazy and corrupt. The new king wanted to clean up all these things, but bureaucracy never allowed him to do so. They troubled the common man more and more so that people would hate the king. Nobody wanted discipline.

Since there were many complaints and grievances, the king announced that he would listen to 10 grievances every day and would sort them out immediately. People had to personally come to collect coupons to meet him in serial order. King used to himself issue the tokens early morning strictly on a ‘first come first served’ basis. There was no record as to whom the tokens were issued as it was not considered necessary. The King had an ambitious plan to eradicate corruption.

One day, just after 10 tokens were distributed, a man came. He was educated and wanted to share many grievances against the revenue authorities. The King asked him to come the next day. He urged that he was traveling the next day; but the King was uncompromising and refused to entertain him.

At 9 am sharp, the King would sit for meeting the ten persons. To his surprise, the man who was refused the token appeared before him! King got confused and puzzled.

“Oh! You gentleman, the one who came late in the morning?

“Yes, Your Majesty”.

“How come, you got the serial number one token?”

“ I paid money to the first person!’

‘ How did you do it?”

“Sir, I am a tax professional. I have to manage all such things. Otherwise, we will not survive!

The King realised that even the common citizen who sold the token was tempted by money! He also realised that his task was endless like an ocean!

shailesh.kwebmaker

Overview of the United Arab Emirates’s Corporate Tax Law

In a recent important development on the international tax front, United Arab Emirates (“UAE”) has issued its Decree-Law introducing taxation of Corporations and Businesses on their income.

In this article the authors endeavour to make the readers aware of the salient features and provide an overview of the UAE’s new Corporate Tax (“CT”) law. It is expected that further information and guidance on the technical details and other specifics of the UAE’s CT Regime will be made available in due course by the Federal Tax Authority (“FTA”) and Ministry of Finance (“MoF”) of the UAE. Accordingly, the authors have not touched upon the areas which are yet to be clarified.

INTRODUCTION

The UAE has been one of the few countries in the world with no taxes on income for most of the taxpayers, with the exception of a few industries. However, keeping the changing international tax landscape of global minimum tax in mind, the UAE has sought to introduce income tax on Corporations and Businesses. The MoF of UAE had issued a Public Consultation Document 28th April, 2022 seeking comments by 19th May, 2022.

Following the comments received, the Federal Decree-Law No. 47 of 2022 on the Taxation of Corporations and Businesses (“CT Law” or “CT Decree-Law”) was issued by the UAE on 9th December, 2022. The CT Law is materially aligned with the Public Consultation Document and expands on many of the key provisions.

The CT Law provides the legislative basis for the introduction and implementation of a Federal Corporate Tax in the UAE. CT is a form of direct tax levied on the net income of corporations and other businesses. The CT Law was published in the Official Gazette on 10th October, 2022 and became effective on 25th October, 2022 and will apply to Taxable Persons for financial years commencing on or after 1st June, 2023.

The law has been supplemented with CT FAQs comprising of 158 questions and answers, also released on 9th December, 2022 to provide guidance on the UAE CT Decree-Law. The reader is advised to refer to the same for a detailed study and understanding.

The UAE CT regime appears to build from best practices globally and incorporates principles internationally known and accepted, with a minimal compliance burden placed on businesses as compared to other regimes internationally, to ensure efficiency, fairness, transparency and predictability in the design and execution of the proposed CT regime.

On 16th May, 2018, the UAE became the 116th jurisdiction to join the Inclusive Framework on Base Erosion and Profit Shifting (“BEPS”). The CT Law lays the foundation for the UAE to align with the global minimum tax initiative as proposed under Pillar Two of the OECD BEPS project. The introduction of a CT regime helps provide the UAE with a framework to adopt the Pillar Two rules.

OVERVIEW OF THE UAE CT LAW

The CT Law has 20 chapters and 70 articles covering a wide range of areas and provisions. A brief outline of the same is given for a better understanding of the overall contents of the Law.

Chapter	Articles
One – General provisions	Article 1 – Definitions
Two – Imposition of Corporate Tax and Applicable Rates	Article 2 – Imposition of Corporate Tax Article 3 – Corporate Tax Rate
Three – Exempt Person	Article 4 – Exempt Person Article 5 – Government Entity Article 6 – Government Controlled Entity Article 7 – Extractive Business Article 8 – Non-Extractive Natural Resource Business Article 9 – Qualifying Public Benefit Entity Article 10 – Qualifying Investment Fund
Four – Taxable Person and Corporate Tax Base	Article 11 – Taxable Person Article 12 – Corporate Tax Base Article 13 – State Sourced Income Article 14 – Permanent Establishment Article 15 – Investment Manager Exemption Article 16 – Partners in an Unincorporated Partnership Article 17 – Family Foundation
Five – Free Zone Person	Article 18 – Qualifying Free Zone Person Article 19 – Election to be Subject to Corporate Tax
Six – Calculating Taxable Income	Article 20 – General Rules for Determining Taxable Income Article 21 – Small Business Relief
Seven – Exempt Income	Article 22 – Exempt Income Article 23 – Participation Exemption Article 24 – Foreign Permanent Establishment Exemption Article 25 – Non-Resident Person Operating Aircraft or Ships in International Transportation
Eight – Reliefs	Article 26 – Transfers Within a Qualifying Group Article 27 – Business Restructuring Relief
Nine – Deductions	Article 28 – Deductible Expenditure Article 29 – Interest Expenditure Article 30 – General Interest Deduction Limitation Rule Article 31 – Specific Interest Deduction Limitation Rule Article 32 – Entertainment Expenditure Article 33 – Non-deductible Expenditure
Ten – Transactions with Related Parties and Connected Persons	Article 34 – Arm’s Length Principle Article 35 – Related Parties and Control Article 36 – Payments to Connected Persons
Eleven – Tax Loss Provisions	Article 37 – Tax Loss Relief Article 38 – Transfer of Tax Loss Article 39 – Limitation on Tax Losses Carried Forward
Twelve – Tax Group Provisions	Article 40 – Tax Group Article 41 – Date of Formation and Cessation of a Tax Group Article 42 – Taxable Income of a Tax Group
Thirteen – Calculation of Corporate Tax Payable	Article 43 – Currency Article 44 – Calculation and Settlement of Corporate Tax Article 45 – Withholding Tax Article 46 – Withholding Tax Credit Article 47 – Foreign Tax Credit
Fourteen – Payment and Refund of Corporate Tax	Article 48 – Corporate Tax Payment Article 49 – Corporate Tax Refund
Fifteen – Anti-Abuse Rules	Article 50 – General anti-abuse rule
Sixteen – Tax Registration and Deregistration	Article 51 – Tax Registration Article 52 – Tax Deregistration
Seventeen – Tax Returns and Clarifications	Article 53 – Tax Returns Article 54 – Financial Statements Article 55 – Transfer Pricing Documentation Article 56 – Record Keeping Article 57 – Tax Period Article 58 – Change of Tax Period Article 59 – Clarifications
Eighteen – Violations and Penalties	Article 60 – Assessment of Corporate Tax and penalties
Nineteen – Transitional Rules	Article 61 – Transitional Rules
Twenty – Closing provisions	Article 62 – Delegation of Power Article 63 – Administrative Policies and Procedures Article 64 – Cooperating with the Authority Article 65 – Revenue Sharing Article 66 – International Agreements Article 67 – Implementing Decisions Article 68 – Cancellation of Conflicting Provisions Article 69 – Application of this Decree-Law to Tax Periods Article 70 – Publication and Application of this Decree-Law

SALIENT FEATURES AND IMPORTANT PROVISIONS OF THE CT LAW

Effective Date

The CT Law will become effective for financial years starting on or after 1st June, 2023. Accordingly, for F.Y. 1st July, 2023 – 30th June, 2024, the effective date would be 1st July, 2023. However, if the F.Y. is 1st January, 2023 – 31st December, 2023 then the effective date would be 1st January, 2024 and if the F.Y. is 1st April, 2023 – 31st March,2024, then the effective date would be 1st April, 2024 [FAQ 4].

CT is imposed on Taxable Income, at the rates determined under this Decree-Law, and payable to the Authority under CT Decree-Law and the Tax Procedures Law.

CT RATE [ARTICLE 3]

CT will be levied at a headline rate of 9 per cent on Taxable Income exceeding AED 375,000. Taxable Income below this threshold will be subject to a 0 per cent (zero per cent) rate of CT.

CT will be charged on Taxable Income as follows:

A.	Resident Taxable Persons	Rate of Tax
1	Taxable Income not exceeding AED 375,000 (this amount is to be confirmed in a Cabinet Decision )	0%
2	Taxable Income exceeding AED 375,000	9%
B.	Qualifying Free Zone Persons (“QFZP”)
1	Qualifying Income	0%
2	Taxable Income that does not meet the Qualifying Income definition	9%

TAXABLE PERSON AND CT BASE, ETC [ARTICLES 11 TO 17]

CT applies to the following “Taxable Person”:

UAE companies and other juridical persons that are incorporated or effectively managed and controlled in the UAE;
Natural persons (individuals) who conduct or undertake a business activity in the UAE as specified in a Cabinet Decision to be issued in due course; and
Non-resident juridical persons (foreign legal entities) that have a Permanent Establishment (“PE”) in the UAE, derive a UAE-sourced income and have a nexus in the UAE.

The main purpose of the PE concept in the UAE CT Law is to determine if and when a foreign person has established a sufficient physical presence in the UAE to warrant the business profits of that foreign person to be subject to CT.

The definition of PE in the CT Law has been designed on the basis of the definition provided in Article 5 of the OECD Model Tax Convention on Income and Capital and the position adopted by the UAE under the Multilateral Instrument to implement tax treaty related measures to prevent base erosion and profit shifting. This allows foreign persons to use the relevant Commentary of Article 5 of the OECD Model Tax Convention when assessing whether or not a PE has been constituted in the UAE. This assessment should consider the provisions of any bilateral tax agreement between the country of residence of the non-resident person and the UAE.

Juridical persons established in a UAE Free Zone are also within the scope of CT as “Taxable Person” and need to comply with the requirements set out in the CT Law. However, a Free Zone Person that meets the conditions to be considered a QFZP can benefit from a CT rate of 0 per cent on their Qualifying Income only.

In order to be considered a QFZP, the Free Zone Person must:

maintain adequate substance in the UAE;
derive ‘Qualifying Income’;
not have made an election to be subject to CT at the standard rates; and
comply with the transfer pricing requirements under the CT Law.

The Minister may prescribe additional conditions that a QFZP should meet. If a QFZP fails to meet any of these conditions, or makes an election to be subject to the regular CT regime, he will be subject to the standard rates of CT from the beginning of the Tax Period where he failed to meet the conditions.

Non-resident persons who do not have a PE in the UAE or who earn UAE-sourced income not related to their PE may be subject to Withholding Tax (at the rate of 0 per cent). Withholding tax is a form of CT collected at source by the payer on behalf of the recipient of the income. One of the reasons for the payment being subject to a Withholding Tax at 0 per cent is to bring such income within the scope of the income tax law while not taxing it. Therefore, one may be able to argue that such an income is subject to tax in the UAE even though no tax has actually been paid on the same.

For the purposes of the CT Law, a distinction is made between a Resident Person and a Non-Resident Person and the applicable tax base will depend on the nature of the taxable person.

In line with the tax regimes of most countries, the CT Law taxes income on both residence and source basis. The applicable basis of taxation depends on the classification of the Taxable Person.

A “Resident Person” is taxed on income derived from both domestic and foreign sources (i.e. a residence basis).
A “Non-Resident Person” will be taxed only on income derived from sources within the UAE (i.e. a source basis).

Residence for CT purposes is not determined by where a person resides or is domiciled but instead by specific factors set out in the CT Law. If a person does not satisfy the conditions for being either a resident or a non-resident person then he will not be a Taxable Person, and will not therefore be subject to CT.

Briefly, the following aspects should be considered when determining the nature of a Taxable Person as well as the applicable tax base:

Resident Person	Tax base
An entity that is incorporated in the UAE (including a Free Zone entity)	Worldwide income
A foreign entity that is effectively managed and controlled in the UAE	Worldwide income
A natural person/individual who conducts a business or undertakes business activity in the UAE	Worldwide income
Non-resident Person	Tax base
Has a PE in the UAE	Taxable income attributable to the PE
Derives UAE-sourced income	The UAE-sourced income not attributable to the PE
Has a nexus in the UAE	Taxable income attributable to such a nexus

EXEMPT PERSON [ARTICLES 4 TO 10]

Certain types of businesses or organizations are exempt from CT given their importance and contribution to the social fabric and economy of the UAE. Exempt Persons include:

Exemption Category	Entities covered
Automatically exempt	a) Government Entities Government Controlled Entities specified in a Cabinet Decision
Exempt if notified to the Ministry of Finance (and subject to meeting certain conditions)	a) Extractive Businesses b) Non-Extractive Natural Resource Businesses
Exempt if listed in a Cabinet Decision	a) Qualifying Public Benefit Entities
Has a PE in the UAE	Taxable income attributable to the PE
Exempt if applied to and approved by the FTA (and subject to meeting certain conditions)	a) Public or private pension and social security funds b) Qualifying Investment Funds c) Wholly-owned and controlled UAE subsidiaries of a Government Entity, a Government Controlled Entity, a Qualifying Investment Fund, or a public or private pension or social security fund.
Has a nexus in the UAE	Taxable income attributable to such a nexus

In addition to not being subject to CT, Government Entities, Government- Controlled Entities specified in a Cabinet Decision, Extractive Businesses and Non-Extractive Natural Resource Businesses may also be exempted from any registration, filing and other compliance obligations imposed by the CT Law, unless they engage in an activity which is within the charge of CT.

Resident and Non-resident Persons

Insofar as foreign incorporated entities effectively managed and controlled in the UAE are concerned, no additional guidance is provided in the CT Law. Therefore, taxpayers should rely on guidance from the OECD’s international tax commentaries, which provide detailed guidance on determination of ‘effective management and control’.

NON-RESIDENT PERSONS

Certain UAE sourced income of a Non-Resident Person that is not attributable to a PE in the UAE will be subject to withholding tax @ 0 per cent.

It will be subject to UAE CT on any Taxable Income attributable to the PE of the non-resident, or any UAE sourced income where the income is not attributable to the PE, or any Taxable Income attributable to the nexus of the non-resident in the UAE.

Both Resident Persons and Non-Resident Persons are regarded as Taxable Persons for purposes of the CT Law, meaning that the tax compliance obligations for these persons should be carefully considered.

DETERMINATION OF TAXABLE INCOME [ARTICLE 20]

CT is imposed on Taxable Income earned by a Taxable Person in a Tax Period. CT would generally be imposed annually, with the CT liability calculated by the Taxable Person on a self-assessment basis. This means that the calculation and payment of CT is done through the filing of a CT Return with the FTA by the Taxable Person.

The starting point for calculating the Taxable Income is the Taxable Person’s accounting income (i.e. net profit or loss before tax) as per their financial statements. The Taxable Person will then need to make certain adjustments to determine his Taxable Income for the relevant Tax Period. For example, adjustments to accounting income may need to be made for income that is exempt from CT and for expenditure that is wholly or partially non-deductible for CT purposes.

For this purpose, the financial statements should be prepared in accordance with accounting standards accepted in the UAE. The UAE does not have its own Generally Accepted Accounting Principles (“GAAP”) and International Financial Reporting Standards (“IFRS”) are commonly used by businesses in the UAE.

In order to arrive at Taxable Income, expenditure incurred wholly and exclusively for the purposes of the Taxable Person’s Business, not capital in nature, may be deductible in the Tax Period in which it is incurred. However, the CT Law disallows/restricts the deduction of certain expenses. This is to ensure that relief can only be obtained for expenses incurred for the purpose of generating Taxable Income, and to address possible situations of abuse or excessive deductions.

The CT Law prescribes a number of key adjustments to the accounting net profit (or loss) in order to compute the Taxable Income. These include; unrealised gains/losses (Taxable Persons now have an election to make on how to treat it), exempt income, certain tax reliefs, non-deductible expenditure, Transfer Pricing (“TP”) adjustments, tax loss reliefs, other incentives or special reliefs for a Qualifying Business Activity (as specified in a future Cabinet Decision), and any other income or expenditure as may be specified in a Cabinet Decision at a later stage.

The CT law makes reference to certain incentives and special relief for qualifying business on which further detail will be provided in a subsequent cabinet decision. The CT law is also silent on the tax treatment of depreciation, adjustments in respect of revenue and expense items accounted for in Equity or Other Comprehensive Income and Leases.

SMALL BUSINESS RELIEF [ARTICLE 21]

Article 21 provides that a tax resident person may elect to be treated as not having derived any Taxable Income where the revenue for the relevant and previous tax periods do not exceed a threshold and meet certain conditions, set or prescribed by the Minister.

If a tax resident person applies for “small business relief”, certain provisions of the CT Law will not apply such as exempt income, reliefs, deductions, tax loss relief, TP compliance requirements, as specified in the relevant chapters of the CT Law. The Authority may request any relevant records or supporting information to verify the compliance within a timeline, to be prescribed.

EXEMPT INCOME [ARTICLES 22 TO 25]

The CT Law also exempts certain types of income from CT. This means that a Taxable Person will not be subject to CT on such income and cannot claim a deduction for any related expenditure. Taxable Persons who earn exempt income will be subject to CT on their Taxable Income.

The main purpose of a certain income being exempt from CT is to prevent double taxation on certain types of income. Specifically, dividends and capital gains earned from domestic and foreign shareholdings will generally be exempt from CT. Furthermore, a Resident Person can elect, subject to certain conditions, to not take into account income from a foreign PE for UAE CT purposes.

The following income and related expenditure shall not be taken into account in determining the Taxable Income:

1. Dividends and other profit distributions received from a juridical person that is a Resident Person.

2. Dividends and other profit distributions received from a Participating Interest in a foreign juridical person as specified in Article 23.

3. Any other income from a Participating Interest as specified in Article 23.

4. Income of a Foreign PE that meets the condition of Article 24.

5. Income derived by a Non-Resident Person from operating aircraft or ships in international transportation that meets the conditions of Article 25.

RELIEFS [ARTICLES 26 & 27]

Article 26 contains provisions for relief in respect of Transfers within a Qualifying Group and provides that no gain or loss needs to be taken into account in determining the Taxable Income in relation to the transfer of one or more assets or liabilities between two Taxable Persons that are members of the same Qualifying Group.

Two Taxable Persons shall be treated as members of the same Qualifying Group where all of the following conditions are met:

a) The Taxable Persons are juridical persons that are Resident Persons, or Non- Resident Persons that have a PE in the UAE.

b) Either the Taxable Person has a direct or indirect ownership interest of at least 75 per cent (seventy-five per cent) in the other Taxable Person, or a third Person has a direct or indirect ownership interest of at least 75 per cent (seventy-five per cent) in each of the Taxable Persons.

c) None of the Persons qualify as an Exempt Person.

d) None of the Persons qualify as a QFZP.

e) The Financial Year of each of the Taxable Persons ends on the same date.

f) Both Taxable Persons prepare their financial statements using the same accounting standards.

Article 27 contains provisions for Business Restructuring Relief and provides tax relief on mergers, spin-offs and other corporate restructuring transactions where whole or independent part of business is being transferred in exchange of shares or other ownership interest provided the following conditions are met:

a) The transfer is undertaken in accordance with, and meets all the conditions imposed by, the applicable legislation of the UAE.

b) The Taxable Persons are Resident or Non-Resident Persons that have a PE in the UAE.

c) None of the Persons qualify as an Exempt Person.

d) None of the Persons qualify as a QFZP.

e) The Financial Year of each of the Taxable Persons ends on the same date.

f) The Taxable Persons prepare their financial statements using the same accounting standards.

g) The transfer is undertaken for valid commercial or other non-fiscal reasons which reflect economic reality.

DEDUCTIONS [ARTICLES 28 TO 33]

In principle, all legitimate business expenses incurred wholly and exclusively for the purposes of deriving a Taxable Income will be deductible, although the timing of the deduction may vary for different types of expenses and the accounting method applied. For capital assets, expenditure would generally be recognized by way of depreciation or amortization deductions over the economic life of the asset or benefit.

Expenditure that has a dual purpose, such as expenses incurred for both personal and business purposes, will need to be apportioned with the relevant portion of the expenditure treated as deductible if incurred wholly and exclusively for the purpose of the taxable person’s business.

Certain expenses deductible under general accounting rules may not be fully deductible for CT purposes. These will need to be added back to the Accounting Income for the purposes of determining the Taxable Income. Examples of expenditure that is or may not be deductible (partially or in full) include:

Types of Expenditure	Limitation to deductibility
• Bribes • Fines and penalties (other than amounts awarded as compensation for damages or breach of contract). • Donations, grants or gifts made to an entity that is not a Qualifying Public Benefit Entity • Dividends and other profits distributions • Corporate Tax imposed under the CT Law • Expenditure not incurred wholly and exclusively for the purposes of the Taxable person’s Business	No deduction
• Expenditure incurred in deriving income that is exempt from CT
• Entertainment Expenditure	Partial deduction of 50% of the amount of the expenditure
• Interest Expenditure	Deduction of net interest expenditure exceeding a certain de minimis threshold up to 30 per cent of the amount of earnings before the deduction of interest, tax, depreciation and amortization (except for certain activities).

Further, there are certain exclusions, for example, expenses incurred in deriving an exempt income will not be tax deductible.

WITHHOLDING TAX [ARTICLE 45]

A 0 per cent withholding tax may apply to certain types of UAE-sourced income paid to non-residents insofar as it is not attributable to a PE of the non-resident. Because of the 0 per cent rate, in practice, no withholding tax would be due and there will be no withholding tax related registration and filing obligations for UAE businesses or foreign recipients of UAE sourced income.

Withholding tax does not apply to transactions between UAE resident persons.

TAX LOSSES [ARTICLES 37 TO 39]

Businesses will be able to carry forward tax losses indefinitely, subject to certain conditions. These losses can be used to offset up to 75 per cent of the taxable income of future tax periods. Losses incurred before the effective date of CT will not be eligible for relief.

TAX GROUP [ARTICLES 40 TO 42]

Two or more Taxable Persons who meet certain conditions can apply to form a “Tax Group” and be treated as a single Taxable Person for CT purposes.

To form a Tax Group, both the parent company and its subsidiaries must be resident juridical persons, have the same Financial Year and prepare their financial statements using the same accounting standards.

Additionally, to form a Tax Group, the parent company must:

own at least 95 per cent of the share capital of the subsidiary;
hold at least 95 per cent of the voting rights in the subsidiary; and
is entitled to at least 95 per cent of the subsidiary’s profits and net assets.

The ownership, rights and entitlement can be held either directly or indirectly through subsidiaries, but a Tax Group cannot include an Exempt Person or QFZP.

Forming a Tax Group may be more efficient from a tax standpoint when compared to each legal entity in a group filing on a standalone basis. This is mainly due to reduced administration costs, offsetting tax losses and profits within the group and the fact that inter-company balances and transactions between group entities should typically be eliminated on consolidation, thus reducing TP compliance obligations.

With regards to the offsetting tax losses and profits within the group, pre-grouping tax losses of any joining member will be the carried forward losses of the Tax Group; however, the offset of such pre-grouping loss is limited by the attributable income of the new joining member.

TAXABLE INCOME OF A TAX GROUP

To determine the Taxable Income of a Tax Group, the parent company must prepare consolidated financial accounts covering each subsidiary and member of the Tax Group for the relevant Tax Period. Transactions between the parent company and each of the group member and transactions between them would be eliminated for calculating the Taxable Income of the Tax Group.

TAX REGISTRATION AND DEREGISTRATION, RETURNS, CLARIFICATIONS, VIOLATIONS AND PENALTIES [ARTICLES 51 TO 60]

All Taxable Persons (including Free Zone Persons) will be required to register for CT and obtain a CT Registration Number. The FTA may also request certain Exempt Persons to register for CT.

Taxable Persons are required to file a CT return for each Tax Period within 9 months from the end of the relevant period. The same deadline would generally apply for the payment of any CT due in respect of the Tax Period for which a return is filed.

TRANSACTIONS WITH RELATED PARTIES AND CONNECTED PERSONS I.E. “TP” [ARTICLES 34 TO 36 AND 55]

The TP provisions will also take effect for financial years starting on or after 1st June, 2023.

The term ‘Related Parties’ has been defined in a very broad manner. When a legal entity or individual has more than 50 per cent of direct or indirect ownership or control over a taxable person, this falls within the related party definition. In addition to ‘related parties’ and ‘connected persons’, the law also defines ‘control’ as ‘the ability of a person, whether in their own right or by agreement or otherwise, to influence another person’.

TP rules seek to ensure that transactions between Related Parties are carried out on Arm’s Length Price (“ALP”), as if the transaction was carried out between independent parties and the consideration of transactions with Related Parties and Connected Persons needs to be determined by reference to their “Market Value”. The market value may represent an arm’s length range of financial results or indicators, subject to certain conditions.

Transactions between domestic related parties as well as between mainland and free zone entities are all covered within the scope of the Law.

A non-resident person, through a PE in the UAE, would also be subject to the UAE TP provisions, and therefore would be required to maintain and submit the relevant TP documentation.

Transactions carried out between different business lines of an Exempt Person (e.g. an exempt business and a non-exempt business of an Exempt Person) should also be carried out in accordance with the ALP.

Methods: For the purpose of the application of the ALP, the Law sets forth 5 TP methods (by applying one or a combination), broadly in line with the OECD TP Guidelines. The 5 methods are (a) Comparable Uncontrolled Price Method; (b) Resale Price Method; (c) Cost Plus method; (d) Transactional Net Margin Method; and (e) Transactional Profit Split Method.

In case neither of these methods can be reasonably applied, the Law allows for the application of any other TP method to the extent that it would lead to an arm’s length result.

Documentation: Certain businesses will be required to submit a disclosure containing information regarding their transactions with Related Parties and Connected Persons along with their tax return.

Certain businesses may be requested to maintain a master file and a local file.

The FTA may seek a taxpayer to provide a copy of their Master File or Local File or any information to support the arm’s length nature at any time by issuing a notice of not less than 30 days.

Threshold and format of the master file and a local file to be prescribed by the FTA.

The CT FAQs state that businesses which claim small business relief will not have to comply with the TP documentation rules.

Corresponding Adjustment: In the event of an adjustment imposed by a foreign tax authority which impacts a UAE entity, an application must be made to the FTA for a corresponding adjustment to provide the UAE Company with relief from double taxation. A corresponding adjustment related to a domestic transaction does not require this type of application.

TP Adjustment: While making any TP adjustments to the tax base of taxable persons, the FTA would need to rely on information that can or will be made available to the Taxable Person.

Advanced Pricing Agreements (APAs): An APA is an approach that attempts to prevent TP disputes from arising by determining criteria for applying the ALP to transactions in advance of those transactions taking place. The law provides that APAs will be exploitable, through the regular clarification process that is already in place.

The CT Law does not provide any materiality thresholds, but it is expected that the MoF will issue further guidance /clarification in this respect.

Penalties: Presently, no specific penalties for non-compliance of TP documentation requirements or non-submission of such information have been set out in the Law.

GENERAL ANTI-ABUSE RULE (‘GAAR’) [ARTICLE 50]

Article 50 applies to a transaction or an arrangement if, having regard to all relevant circumstances, it can be reasonably concluded that the entering into or carrying out of the transaction or arrangement, or any part of it, is not for a valid commercial or other non-fiscal reason which reflects economic reality; and the main purpose or one of the main purposes of the transaction or arrangement, or any part of it, is to obtain a CT advantage that is not consistent with the intention or purpose of CT Law.

Where the GAAR applies, the Authority may make a determination that one or more specified CT advantages are to be counteracted or adjusted. If such a determination is made, the Authority must issue an assessment giving effect to the determination and can make compensating adjustments to the UAE CT liability of any other person affected by the determination.

For the purpose of determining whether the GAAR applies to a transaction or arrangement, specific facts and circumstances should be analysed, such as form and substance, the manner in which entered into, the timing, whether the transaction or arrangement has created rights or obligations which would not normally be created between persons dealing with each other at arm’s length, changes in the financial position of the Taxable person or of another person etc.

In any proceeding concerning the application of the GAAR, the Authority must demonstrate that the determination made is just and reasonable.

Considering that GAAR aims to counteract any abusive tax arrangements, taxpayers should ensure that all their transactions have a bona fide business purpose and are properly documented.

CONCLUSION

With the CT law and FAQs in place, businesses should assess what impact the new CT law will have on their operations and legal structure. One should consider the law carefully and areas that are yet to be clarified by the MoF by way of separate Cabinet Resolutions / Ministerial decisions.

In this connection it would be advisable to (a) read the CT Law and the supporting information available on the websites of the MoF and the FTA; (b) use the available information to determine whether the business will be subject to CT and if so, from what date; (c) understand the requirements for business under the CT Law, including, for registration, determination of the accounting / tax Period, applicable due date for filing CT return, elections or applications may or should make and financial information and records needed to be kept for CT purposes. Further, regularly visiting the websites of the MoF (https://mof.gov.ae/) and the FTA (https://www.tax.gov.ae/en/) for further information and guidance on the CT regime will be useful.

shailesh.kwebmaker

E-Commerce: Media or Mediator of Supply

INTRODUCTION

The internet revolution followed with the insurgence of mobility solutions has triggered an unprecedented growth in the e-commerce industry. Initially, emerging as a mere mediator of commercial transactions, e-commerce has now engulfed the entire traditional buy-sell and service delivery model into its wave. The start-up culture with its unconventional business models has further thrusted the steep degeneration of physical interface in commercial transactions. Moreover, with FDI limitations in multi-brand retail/ecommerce inventory trading, innovative techniques have crept into the transaction system. This has resulted in peculiar GST issues which are dealt with in the present article.

BUSINESS MODELS IN E-COMMERCE

E-commerce has been understood as buying and selling goods or services including digital products over digital or electronic network. The typical business models alive in the industry are:

Inventory Model: The operator owns and operates both the electronic platform as well as the inventory for supply of goods/services. He engages into a traditional buy-sell relationship with the end consumer (e.g. Brand Webstores).

Market Place Model: The FDI policy restriction has germinated this model for foreign PE funded companies in e-commerce retail space. The operator only owns the platform and provides ancillary functions in the form of logistics, packaging, collection and customer support. He does not own the inventory and projects itself as a platform where buyers and sellers transact with each other (e.g. Amazon/Flipkart). Sub-variants include aggregator of market-place (such as Trivago) which host multiple web platforms on one platform, akin to super-market place.

Aggregator Model: This is a variant of the market-place model where the operator plays a significant role in monitoring, influencing and pricing the commercial transaction (e.g. Uber). Not only does the aggregator perform a platform service but it also projects itself as a pseudo-service provider to the end customer.

Conversational Model: Social media platforms have made it possible for e-commerce companies to sell their products from their posts. Using this method, consumers are able to shop directly from their newsfeed. One could equate them with a super-market place assisting the market place in procurement of orders.

Each of these variants raise certain intriguing GST issues which have been addressed in the later part of the article.

LEGAL PROVISIONS ON E-COMMERCE

E-Commerce transactions are commercial transactions that take place through electronic networks. In legal sense, the terminology is with reference to ‘supply’ transactions which are executed over the internet network:

(44) “electronic commerce” means the supply of goods or services or both, including digital products over digital or electronic network;

(45) “electronic commerce operator” means any person who owns, operates or manages digital or electronic facility or platform for electronic commerce;

The phrase e-commerce has been adopted in two provisions: (a) section 9(5): ‘Tax shift mechanism’ where GST is being imposed on the E-commerce operator (ECO) as a deemed supplier of the services (Uber/Ola, etc); (b) section 52 – ‘Tax collection at source’ in cases where the e commerce operator is collecting payments on behalf of suppliers for orders received and fulfilled through the e-commerce portal, such an operator retains a portion of the sale proceeds as TCS which is deposited to the Government treasury (Amazon/ Flipkart, etc).

RATES/EXEMPTIONS INFLUENCED BY THE E-COMMERCE BUSINESS

Rate/exemption notifications have been customised for businesses operating under the ecommerce model. Some of them are:

– Entry 23 and 25 provide for taxation of house-keeping services (such as plumbing, carpentering, etc) classifiable under SAC 9985 and 9987 when supplied through an ECO provided input tax credit has not been availed, even though the individual suppliers are below taxable threshold limits and otherwise not taxable;

– Entry 17 and 15 provides for exemption to transportation of passengers in specified cases. But the exemption is not available if the service is supplied through ECO who is liable to pay tax under section 9(5)

SCOPE OF THE TERM ‘E-COMMERCE’ & ‘E-COMMERCE OPERATOR’

E-commerce supplies are generally contracted online but are performed/delivered either in on-line or off-line mode depending on the nature of supply and the customer requirements –variations are tabulated below:

Contractual Mode	Performance/Delivery	Payment	Example
Offline	Online	Online	Banking services
Online	Online	Online	NetFlix
Online	Offline	Offline/Online	Amazon
Offline	Offline	Online	UPI transactions

The narrow issue under consideration is whether adoption of electronic mode is with respect to the contractual mode (for ease we call it ‘contractual supply’) or with reference to mode of performance/ delivery (‘performed supply’). There is absolutely no doubt in cases where both events (i.e. contract to performance) takes place over digital networks; the doubt arises where either one of the commercial elements takes place through physical mode. This debate leads us to (a) basics of supply; (b) the meaning of the phrase supply ‘over digital network’; and (c) contexts in which this phrase is used in the GST scheme.

SUPPLY IS CONTRACTUAL OR PERFORMANCE DRIVEN?

Taking a step back to the charging provisions, the scope of supply under section 7 is: sale, transfer, barter, exchange, license, rental, lease or disposal. These are legally recognized contracts with an obligation on the supplier for performance of certain acts. As a noun, it would refer to the genre of contract and the interpretation would tilt towards the ‘contractual supply’ rather than the ‘mode of performance’. The scope of supply also uses the phrase ‘made or agreed to be made.’ This implies that the scope of supply would stand with reference to the mode of agreement. If this is to be juxtaposed into the above analysis, it appears that supply is triggered the moment a contract comes to birth, and is not prolonged until performance/ delivery.

Alternatively, if supply is understood as a verb, then one would understand it to involve the actual performance obligations undertaken by the supplier. Traditionally, supply involved performance of obligations and counter obligations e.g. sale involves a transfer of property in goods for consideration; services in the nature of lease, license, etc, involve the promise of grant of use of a premises in consideration for a consideration. Historically, Courts have concurred that tax on services is on ‘rendition of service.’¹ Mere agreements for sale were not considered as taxable events under the ambit of sales tax law.² The GST law should not deviate on the fundamental principle that mere agreements should not form basis for imposing a tax levy. Though the tax may be collectible on advances or agreements, the said liability crystallises only on performance of the supply (i.e. rendition of service or sale of goods). While this is a debated topic, some implicit cues from the Government’s own circulars may indicate that performance is a necessary ingredient of supply:

– Circular³ on liquidated damages states that ‘performance is the essence of a contract’ and non-performance results in loss/damages which is not intended to be taxed, thus implying that without performance tax may not be imposable;

– The circular⁴ on fake invoicing also states that the person merely issuing bills is not to be subjected to tax but only penalty in the absence of a supply a.k.a. movement of goods;

– Section 34 provides for issuance of credit notes for reversal of tax payments on account of tax charged being in excess of tax payable, which includes cases where supply is not performed;

– Circular⁵ indicates eligibility of refund on advances for cancelled contracts where supply was not performed.

1. AL&FS v/s. UOI 2010 (20) S.T.R. 417 (S.C.) & AIFTP v/s. UOI 2007 (7) S.T.R. 625 (S.C.)
2. 1954 (5) TMI 17 SC Sale Tax officer vs.. Budh Prakash Jai Prakash
3. No. 178/10/2022-GST 3-8-2022
4. No. 171/03/2022-GST 6-7-2022
5. No. 137/07/2020-GST 13-4-2020

If performance is the basis of understanding supply, the definition of E-commerce should be apply only where ‘performance’ is over digital network rather than mere contracting over digital network. The consequence of these two extremes is laid down for better understanding:

SUPPLY ‘OVER’ E-COMMERCE – WIDE INTERPRETATION OF CONTRACTING USING DIGITAL NETWORK

Toeing the wide interpretation of supply to refer to ‘contractual supply’, ECOs, who facilitate digital communications and order confirmations through digital networks, would be covered and subjected to E-commerce provisions. In real-world scenarios the following could be classifiable as E-commerce transactions:

Contract Mode	E-commerce operator	Performance	Example	Classification
Email	Internet service provider (ISP)	Physical	All transactions	E-commerce
Telephonic	Telecom service provider (TSP)	Physical
Web-portal	ISP	Physical

In today’s digital era all communications/contracts which take place over digital network would be engulfed into this wide interpretation. The only transaction which would be excluded would be the ones which take place over the counter. Consequently, all ISP/TSPs would be conferred as the ECOs and provisions of section 52 could be said to apply to all such transactions which are settled through their online systems. Section 24 would then mandate everyone to compulsory obtain registration without applying the threshold limit in which case the threshold limit of 20 lakhs would become a dead letter. Is this the probable intention of the law? We will hold onto the conclusion until examining other forms of interpretation.

SUPPLY ‘OVER’ E-COMMERCE – NARROW INTERPRETATION

Paying attention to the phrase ‘over’, it appears that the same has been used as an ‘adverb’ to the function of supply (which can be understood as a verb – refer supra). As an adverb to the verb, dictionaries indicate that the term represents a passage or trajectory over which the act is performed. The emphasis in the definition is then on the actual ‘performance’ of the supply obligations (refer discussion above) over digital networks. A narrow interpretation would demand that the definition of e-commerce would be applicable only for digital goods and services performing or passing through the digital network and cannot extend to physical world supplies even-though the agreement or order took place over the digital network. Unless and until the supply i.e. performance takes place over digital network (which is possible only for digital products and/or services), it would not amount to an ecommerce transaction. In the absence of a regulatory supervision, an appointment of an intermediary in the web of digital services would assist the Government in collecting the TCS and building a ‘crawler’ mechanism to identify the supplier in the digital format.

In contradistinction, supplies of goods through Amazon/Flipkart, where the delivery takes place at the doorstep, cannot be considered as an E-commerce transaction. Narrow interpretation demands that supply is performance driven and not merely contract driven i.e. sale and physical delivery should also take place over digital network. Online marketplaces perform services of displaying the product, recording orders, receipt of payment and coordinating the logistics. The subject-matter of contract performance is taking place in the real world through physical performance and hence one may contend that Amazon/Flipkart not falling within the GST understanding of ‘e-commerce’.

SUPPLY ‘OVER’ E-COMMERCE – REASONABLE INTERPRETATION

Naturally, the above views would face immediate resistance on perception as well as legality. The three-fold challenge would be (a) the context of the phrase (section 9(5) or 52 of GST law) encompass cases where even mere agreement or arrangement of the supply takes place through digital network – the very operation of ‘Tax shift’ or ‘TCS mechanism’ is linked to the core function of e-commerce being a facilitator of supply rather than engaging in performance itself; (b) the definition of e-commerce operator signifies a role distinct from that of a supplier, as one who owns, operates or manages a digital network for e-commerce transaction and does not extend to performing the subject supply. It also includes digital products and services separately implying that non-digital supplies would also be covered in the initial part of the definition; (c) FAQs and other government material suggests that Ecommerce operators like Amazon/ Flipkart are intended to be covered in this model and no indication has been made to narrow the scope to digital goods/ services only.

While on one hand, the wide interpretation of E-commerce results in the inclusion of all possible transactions as e-commerce, leaving none out of its fold, narrow interpretation limits inclusion only of digital products or services that are completely performed over electronic network, hence leaving the popular transactions over Amazon/ Flipkart outside its fold, making the other substantive provisions (TCS/ Tax-shift) very limited in operation. Naturally, this confusion would guide us onto a balanced interpretation on following contextual reasons:

– For tax shift mechanism to function under section 9(5), one needs a de-facto supplier which is then substituted with an ECO as a de-jure supplier (refer discussion below) – simple objective being administrative convenience to collect the same from a single point who aggregates all the supplies under an umbrella;

– TCS mechanism (including GSTR-8) is aimed at collecting taxes at the source of a supplier performing supplies of goods or services and receiving the payments through the ecommerce portal though tax is finally payable by the supplier;

Both these contexts indicate that e-commerce is intended to be a mediator of supplies wherein three parties must be necessarily involved. Where the e-commerce operator is the performer of supply itself (such as NetFlix), such transactions would stand excluded from TCS mechanism in the absence of a third party. Unless pure digital supplies are routed through online aggregators TCS provisions should not be invoked. This view also synchronises well with the amendments in GSTR-3B form in table 3.1.1 where separate tables have been now provided for reporting the taxable supplies at both points (a) at the ECO through whom the supplies have been performed under section 9(5) (b) exclusions of the corresponding value at the registered person’s end who performs the supplies through ECO under section 9(5). The industry appears to have accepted this reasonable view and implemented the law accordingly.

TAX SHIFT MECHANISM – SECTION 9(5)

E-commerce operators operating as ‘aggregators’ are governed by the Tax Shift mechanism under section 9(5). This section states that the e-commerce operator is liable to tax on specified categories of services (presently cab travel, accommodation, house-keeping, restaurant services). The e-commerce operator is deemed as a supplier (‘deemed supplier’) instead of the de facto supplier and consequently all provisions applicable to the suppliers extend even to the ecommerce operator. There is a stark difference between the reverse charge mechanism specified in section 9(3)/(4) and the said tax-shift mechanism under section 9(5). Reverse charge provisions fixes the ‘recipient’ of a supply (possessing contract privacy) to discharge the tax liability. Moreover, since this tax liability is not an output tax for the recipient, it has to be necessarily discharged through cash payment rather than input tax credit.

On the contrary, the tax shift mechanism fixes the tax liability onto a third party i.e. beyond contracting parties (i.e. supplier and recipient). It is intended to apply where an e-commerce platform aggregates all the suppliers and recipients (‘Aggregator’) and the parties formalize their agreement through the e-commerce aggregator. Since the aggregator is a central database of all agreements executed through it, the administration thought it fit to fix the liability (of otherwise unorganized service providers) on the e-commerce operator.

Therefore, by legislative choice the e-commerce operator, though an intermediary in the transaction is placed into the shoes of the supplier for GST purposes.

Now this tax shift scheme does not have a separate code. It operates within the entwines of regular provisions as applicable to other suppliers. Hence, all provisions should be read as applying to the e-commerce operator performing the supply of goods itself. Consequently, statutory responsibilities otherwise entrusted on the de-facto suppliers are now placed onto the ECO i.e. (a) ascertainment of character of inter-state/intra-state supplies (b) classification and/or rate of tax – composite/ mixed supply (c) fixation of time and value of supply (d) claim of input tax credit (e) discharge of output tax liability (f) apply for refunds (if any), etc. Consequently, all legal actions would operate against the ECO de-hors the taxable status of the actual supplier who performed the service – for example, revenue action would be taken on Uber for all rides booked through its application even-though the actual cab service was rendered by unregistered/non-taxable individual cab-driver to the passenger.

INPUT TAX UTILISATION FOR TAX PAYMENT UNDER SECTION 9(5)

It is certain that ECOs would have accumulated the input tax credit on account of the IT development and back-end functions. Apart from discharging its own liability on platform service fee, they may still possess the accumulated input tax credit (esp. in cases where the ECO is burning cash). Therefore, one would wonder whether the input tax credit accumulated through the platform business (say Zomato and Swiggy) would be eligible for utilisation/discharge of output taxes under the Tax-Shift mechanism – in other words whether the tax liability of a restaurant that has been shifted to the ECO by the way of deeming fiction can be discharged through electronic credit ledger balance standing to its account.

As stated above, the deeming fiction of section 9(5) does not merely fix the tax liability on the ECO – it treats the ECO as a supplier for all purposes of the Act. Such deeming fiction must be given a strict interpretation and taken to its logical conclusion. Where the law has fixed the ECO as a supplier for all purposes including the tax obligations, in the absence of a specific bar, the input tax credit otherwise eligible to the ECO on the platform business should, as a natural consequence, devolve upon such ECO.

In this context, the following clarifications of the CBEC⁶ may also be worth observing:

“2. Would ECOs have to mandatorily take a separate registration w.r.t. supply of restaurant service [notified under 9(5)] through them even though they are registered to pay GST on services on their own account?

As ECOs are already registered in accordance with rule 8 (in Form GST-REG 01) of the CGST Rules, 2017 (as a supplier of their own goods or services), there would be no mandatory requirement of taking separate registration by ECOs for payment of tax on restaurant service under section 9(5) of the CGST Act, 2017

3. Would the ECOs be liable to pay tax on supply of restaurant service made by unregistered business entities?

Yes. ECOs will be liable to pay GST on any restaurant service supplied through them including by an unregistered person.

6. Would ECOs be liable to reverse proportional input tax credit on his input goods and services for the reason that input tax credit is not admissible on ‘restaurant service’?

ECOs provide their own services as an electronic platform and an intermediary for which it would acquire inputs/input service on which ECOs avail Input Tax Credit (ITC). The ECO charges commission/fee etc. for the services it provides. The ITC is utilised by ECO for payment of GST on services provided by ECO on its own account (say, to a restaurant). The situation in this regard remains unchanged even after ECO is made liable to pay tax on restaurant service. ECO would be eligible to ITC as before. Accordingly, it is clarified that ECO shall not be required to reverse ITC on account of restaurant services on which it pays GST in terms of section 9(5) of the Act. It may also be noted that on restaurant service, ECO shall pay the entire GST liability in cash (No ITC could be utilised for payment of GST on restaurant service supplied through ECO)

5. Can the supplies of restaurant service made through ECOs be recorded as inward supply of ECOs (liable to reverse charge) in GSTR-3B? No, ECOs are not the recipient of restaurant service supplied through them. Since these are not input services to ECO, these are not to be reported as inward supply (liable to reverse charge).”

6.    167/23/2021-GST, dated 17-12-2021

Now, the circular makes certain critical points: (a) registration of ECO as a platform service provider and as an ECO can be under one number implying that they need not be distinct persons under law; (b) the tax liability of ECO ought to be discharged necessarily in cash; (c) input tax credit on platform business is permissible to be availed and utilised in terms of section 49 (d) the ECO is not a recipient of services, and hence does not pay tax as RCM. This leads us to the provisions to verify if law bars utilisation of input tax credit to discharge tax payable under section 9(5) as an ECO.

Manner of Payment of Tax: Section 49(4) provides that electronic credit ledger may be used for ‘any payment of output tax’. Rule 86(2) also states that the said ledger could be debited to the extent of ‘any liability’ in terms of section 49, 49A or 49B. Output tax under section 2(82) has been defined in relation to a taxable person, as tax chargeable on taxable supply of goods or services or both made by him or by his agent but excludes tax payable by him on reverse charge basis. Therefore, neither the definition of output tax nor section 49 provide for a separate legal treatment for payments of tax under section 9(5).

Input tax Credit Rationing: Similarly, provisions of section 17(2) r,w,s. 17(3) bar input tax credit only where the ‘recipient’ is liable to pay tax on reverse charge basis. Reverse charge has been defined under section 2(98) as a liability imposed on the ‘recipient’ under section 9(3)/9(4) and does not make any reference to liability imposed under section 9(5). Therefore, the ITC legal provisions do not also place any specific bar on payment of tax liability under section 9(5) through accumulated input tax credit.

The above analysis could be applied for restaurant services operated through Swiggy/Zomato. The notification prescribing the rates of taxes to restaurant services7 bars the availment of input tax credit used in supplying the restaurant service. Explanation (iv) to the said entry provides that credit used exclusively in supplying the said restaurant services as well as common credits may be reversible on proportionate basis in terms of section 17(2) of the GST law (‘credit rationing provisions’). The fine point which needs to be appreciated is that rate notification conditions as well as provisions of section 17(2) aim at credit rationing at the ‘stage of availment’ and not at the ‘stage of utilisation’. Validly availed input tax credit which have already passed the credit rationing test (such as platform business which is completely taxable) and accruing to the electronic credit ledger, should be available for utilisation of the ‘deemed output tax’ of the ECO under the tax shift mechanism. The difference in availment and utilisation is also evident from the entry for real estate developers which not only bars the availment of ITC, but also bars utilisation (payment) of the output tax liability through input tax credit. The entry for a restaurant does not place any such embargo on input tax credit utilisation.

This issue takes us back to the service tax regime where reverse charge provisions were made applicable to the service recipient as a deemed service provider. Until the amendment in Cenvat regime, input tax credit was permitted to be utilised for payment of tax on reverse charge basis⁸ since the RCM provisions were treated at par with output tax. Adopting these service tax precedents, one could certainly consider paying taxes under section 9(5) through utilisation of input tax credit despite the Circular’s contrary view.

8.   2012 (25) S.T.R. 129 (P & H) CCE vs. Nahar Industrial Enterprises Ltd; 2014 (33) S.T.R. 148 (Mad.) CCE vs. Cheran Spinners Ltd

TAX COLLECTION MECHANISM

Section 52 provides for collection of tax at source where:

– ECO is not operating as an agent;

– Consideration in respect to supplies are collected by ECO;

Unlike the tax-shift mechanism, the said provisions are purely machinery provisions intended to collect taxes at a convenient point and build a transaction trail. The ECO, being in possession of the funds realised from supply of goods or services, has been tapped by the Government as its tax collecting representative. However, the final tax liability on such supplies would be assessed at the supplier’s end and not at the ECO’s end. Moreover, tax liability, rates, exemptions, etc would also be examined at the supplier’s end and ECO would not have any role to play in tax ascertainment. The said provision also provides that any discrepancy in data populated on the GST system would be communicated to the ECO and the supplier, and tax liability arising therefrom would be recoverable from the supplier. ECO’s liability is extended only to collection of taxes at source and its remittance to the Government.

Whether ECO can discharge the said TCS through input tax credit? The answer is a clear NO. This is because section 52 directs the ECO to collect an ‘amount’ rather than ‘output tax’; whereas section 49 clearly directs ‘amounts’ to be discharged through electronic cash ledger and not through the electronic credit ledger.

AGENCY IN E-COMMERCE

Provisions of section 52 are not applicable if ECO operates as an agent of the supplier. The phrase ‘agent’ has been defined under section 2(5) as being factor, broker, commission agent or any other person who carries the business of another person in representative capacity. Many ECO’s in today’s time perform the following:

– List the products over its platform;

– Promote products through listing preferences;

– Collect orders and transmit the same to the suppliers;

– Collect payments on behalf of the suppliers;

– Manage customer returns through their call centre support;

– Influence the product pricing, etc

The circular⁹ also emphasises the definition under section 182 of Contract Act to state that a principal agent relationship is present in case the agent has the authority to represent and bind the principal with its actions. Invoicing has been adopted as a critical factor in assessing whether the agent possess representative character in such transactions.

9.    No. 57/31/2018 dated 4-9-2018

In many instances, online market place perform clinching actions which make them agents. It is not unknown that marketplaces influence product pricing of suppliers listed on their platform through Flash/ Big Billion-day sales, etc. They also develop systems where invoices are issued by their platform for sales made through them. Payments are also routed through their system and the marketplaces deduct their commissions prior to disbursing the sale proceeds to suppliers. These features make certain ECO’s as agents and hence all GST implications applicable to principal-agent relationships (Schedule-1, etc) would fall upon the ECO. While implications under GST can be addressed and neutralised, the larger concern for such ECO’s emerge on the FDI and Income tax front. The FDI policy may hold them as being engaged in retail trading and hence violating FDI regulations. Income tax would hold that ECOs (especially non-resident in India) as operating in India through agents would be taxable in India. This is a touchy subject and ECOs in the zest for market share sometimes go overboard and expose themselves to tax and regulatory vulnerability.

ONLINE DATABASE AND RETREIVAL SERVICES (OIDAR)

OIDAR was introduced as concept to tax digital services in B2C scenarios under the service tax era and carried forward into the GST regime. Service providers outside India having digital footprint in the country were not subjected to any taxation. B2B OIDAR services were in subjected to RCM taxation in the hands of business recipients under regular provisions.

OIDAR has been defined to apply where services are necessarily mediated through internet or electronic network, and so automated that involves either no or minimal human intervention. The scope of OIDAR services has been further spread-out to include all electronic services such as advertising, cloud services, music/video/textual content, database services, online gaming, etc. The wide expanse of such definition naturally places question on the outer limit of the definition. CBEC circulars¹⁰ have clarified that mere order processing or communication of outcomes over internet does not make the services as OIDAR. The essence of OIDAR is that suppliers do not involve any physical exchange with the recipient, and services are delivered entirely over the internet through an automated process – for example pre-recorded video courses were OIDAR but live streaming of the very same course is excluded therefrom.

10.    No. 202/12/2016-S.T., dated 9-11-2016

The OIDAR scheme requires the non-resident service provider to assess whether the recipient of their services resides in India through certain parameters (such as address, credit/debit card issuance, IP address, bank account number, SIM country code, etc). By virtue of the digital footprint, the service provider is required to either establish a physical presence or appoint a representative for performing the tax compliances in India.

OTHER ISSUES

In summary, E-commerce has influenced the revenue administration to develop special provisions to address the peculiarities of this sector. Moreover, the sheer volumes and digitisation of the transactions sometimes makes it impossible for one to ascertain the fundamental character of the transactions. ECOs should thus disclaim their responsibilities not just in agreements but also in their acts and insulate from any regulatory risks. ECO startups are adopting innovative marketing techniques to increase their customer base through promotional or incentive programs. Some of them include exclusive co-promotion programs, cash-backs/ incentives, loyalty discounts/points, etc. These issues would be taken up in the subsequent articles.

shailesh.kwebmaker

Disclosures in Financial Statements Regarding Impairment of Goodwill

BHARTI AIRTEL LTD (Y.E. 31ST MARCH, 2022

From Notes to Consolidated Financial Statements

Impairment review – Goodwill

The carrying value of the Group’s goodwill has been allocated to the following six groups of CGUs, whereby Nigeria, East Africa and Francophone Africa Group of CGUs pertain to Airtel Africa plc. (Airtel Africa) operations.

Particulars	As on 31^st March, 2022		As on 31^st March, 2021
Mobile Services Africa – Nigeria	96,792		95,254
Mobile Services Africa – East Africa	1,39,276		1,33,670
Mobile Services Africa – Francophone Africa	54,431		52,544
Mobile Services – Africa		2,90,499		2,81,468
Mobile Services – India		40,413		40,413
Airtel Business		7,057		6,839
Homes Services		344		344
		3,38,313		3,29,064

The change in its goodwill is on account of foreign exchange differences. Details of impairment testing for the Group are as follows:

Impairment review of goodwill pertaining to Airtel Africa operations

The Group tests goodwill for impairment annually on 31st December. The carrying amount of goodwill as of 31st December, 2021 was USD 1,277 Mn (approx. ₹ 96,943), USD 1,861 Mn (approx. ₹141,278) and USD 719 Mn (approx. ₹54,583) for Nigeria, East Africa and Francophone Africa respectively. The recoverable amounts of the above group of CGUs are based on value-in-use, which are determined based on ten-year business plans that have been approved by the Board.

Whilst the Board performed a long-term viability assessment over a three-year period, for the purpose of assessing liquidity, the Group has adopted a ten-year plan for the purpose of impairment testing due to the following reasons:
The Group operates in emerging markets where the telecommunications market is underpenetrated compared to developed markets. In these emerging markets, short-term plans (for example, five years) are not indicative of the long-term future prospects and performance of the Group.

– The life of the Group’s regulatory licenses and network assets are at an average of ten years, and

– The potential opportunities of the emerging African telecom sector, which is mostly a two-three player market with lower smartphone penetration.

Accordingly, the Board approved that this planning horizon reflects the assumptions for medium to long-term market developments, appropriately covers market dynamics of emerging markets, and better reflects the expected performance in the markets in which the Group operates.

While using the ten-year plan, the Group also considers external market data to support the assumptions used in such plans, which is generally available only for the first five years. Considering the degree of availability of external market data beyond year five, the Group has performed a sensitivity analysis to assess the impact on impairment using a five-year plan. The results of this sensitivity analysis demonstrate that the initial five-year plan, with appropriate changes including long-term growth rates applied at the end of this period, does not result in any impairment and does not impact the headroom by more than 5 per cent in any of the group of CGUs as compared to the headroom using the ten-year plan. Further, the Group is confident that projections for year’s six to ten are reliable and can demonstrate its ability, based on past experience, to forecast cash flows accurately over a longer period. Accordingly, the Board has approved and the Group continues to follow a consistent policy of using an initial forecast period of ten years for the purpose of impairment testing.

In assessing the Group’s prospects, the Directors considered 5G cellular network potential in the markets which the Group operates. The Group’s first endeavor is to secure a spectrum for 5G launch and roll out the 5G network in key markets. Given the relatively low 4G customer penetration in the countries where it operates, the Group will continue to focus on its strategy to expand its data services and increase data customer penetration by leveraging and expanding its leading 4G network.

During the year, the Central Bank of Nigeria gave Airtel Africa’s subsidiary Smartcash Payment Service Bank Ltd (Smartcash) approval in-principle to operate a payment service bank (PSB) business in Nigeria. The PSB license allows Smartcash to accept deposits from individuals and small businesses carry out payment and remittance services within Nigeria, and issue debit and prepaid cards among other activities set out by the Central Bank of Nigeria (CBN). As of the date of impairment testing, the Group had an in-principle approval of such a license. Subsequent to the year end, in April 2022, the Group has received the final approval from the Central Bank of Nigeria for a full PSB license affording the Group the opportunity to deliver a full suite of mobile money services in Nigeria.

The management is in early stages of considering the impact of climate change. Based on the analysis conducted so far, the Group is satisfied that the impact of climate change did not lead to impairment, as on 31st December, 2021, and was adequately covered as part of the sensitivities disclosed below.

The cash flows beyond the planning period are extrapolated using appropriate long-term terminal growth rates. The long-term terminal growth rates used do not exceed the long-term average growth rates of the respective industry and country in which the entity operates, and are consistent with internal/external sources of information.

The inputs used in performing the impairment assessment on 31st December, 2021 were as follows:

Assumptions	Nigeria	East Africa	Francophone Africa
Pre-tax discount rate	24.35%	16.17%	15.43%
Capital expenditure*	8% – 15%	7% – 15%	7% – 12%
Long term growth rate	2.65%	5.31%	5.46%

*Capital expenditure is expressed as a percentage of gross revenue over the plan period.

On 31st December, 2021, the impairment testing did not result in any impairment in the carrying amount of goodwill in any group of CGUs.

The key assumptions in performing the impairment assessment are as follows:

Assumptions	Basis of assumptions
Discount rate	Discount rate reflects the market assessment of the risks specific to the group of CGUs and estimated based on the weighted average cost of capital for each respective group of CGUs
Capital expenditure	The cash flow forecast of capital expenditure are based on experience after considering the capital expenditure required to meet coverage and capacity requirements relating to voice, data, and mobile money services
Growth rates	The growth rates used are in line with the long term average growth rates of the respective industry and country in which the entity operates and are consistent with internal / external sources of information.

On 31st December, 2021, the impairment testing did not result in any impairment in the carrying amount of goodwill in any group of CGUs. The results of the impairment tests using these rates show that the recoverable amount exceeds the carrying amount by USD 5,579 Mn (approx. ₹423,530) for East Africa (173 per cent) and USD 2,559 Mn (approx. ₹194,266) for Francophone Africa (160 per cent). For Nigeria, the recoverable amount exceeds the carrying amount by USD 2,842 Mn (approx. ₹215,750) (104 per cent) including the cash flows of PSB licence which was received subsequent to the impairment testing date. Excluding such cash-flows did not result in any impairment in Nigeria. The Group therefore concluded that no impairment was required to the Goodwill held against each group of CGUs

Sensitivity in discount rate and capital expenditure

The management believes that no reasonably possible change in any of the key assumptions would cause the difference between the carrying value and recoverable amount for any cash-generating unit to be materially different from the recoverable value in the base case. The table below sets out the breakeven pre-tax discount rate for each group of CGUs, which will result in the recoverable amount being equal with the carrying amount for each group of CGUs:

Assumptions	Nigeria	East Africa	Francophone Africa
Pre tax discount rate	43.70%	34.34%	32.63%
Capital expenditure	9.64%	13.99%	11.06%

No reasonably possible change in the terminal growth rate would cause the carrying amount to exceed the recoverable amount

Impairment assessment for the Y.E. 31st March, 2021:

The inputs used in performing the impairment assessment on 31st December, 2020 were as follows:

Assumptions	Nigeria	East Africa	Francophone Africa
Pre-tax discount rate	22.45%	14.82%	14.25%
Capital expenditure*	8% – 19%	6% – 17%	5% – 10%
Long term growth rate	2.51%	5.11%	3.70%

* Capital expenditure is expressed as a percentage of Gross Revenue over the plan period.

On 31st December, 2020, the impairment testing did not result in any impairment in the carrying amount of goodwill in any group of CGUs

The key assumptions in performing the impairment assessment are as follows:

Assumptions	Basis of assumptions
Discount rate	The Discount rate reflects the market assessment of the risks specific to the group of CGUs and is estimated based on the weighted average cost of capital for each respective group of CGUs. Following the onset of the COVID-19 outbreak, the Group had concluded that in determining the discount rate as on 31^st March, 2020, using spot country risk premiums would not give a discount rate that a market participant would expect at the balance
	sheet date in determining the present value of cash flows over a ten-year period. As on 31^st December, 2020 this significant market volatility has reduced and management has reverted to using a spot rate.
Capital expenditure	The cash flow forecast of capital expenditure is based on the experience after considering the capital expenditure required to meet coverage and capacity requirements related to voice, data, and mobile money service.
Growth rates	The growth rates used are in line with the long term average growth rates of the respective industry and country in which the entity operates, and are consistent with internal / external sources of information.

On 31st December, 2020, the impairment testing did not result in any impairment in the carrying amount of goodwill in any group of CGUs. The results of the impairment tests using these rates show that the recoverable amount exceeds the carrying amount by USD 1,719 Mn (₹126,149) for Nigeria (69 per cent), USD 4,811 Mn (₹353,055) for East Africa (155 per cent) and USD 1,811 Mn (₹132,900) for Francophone Africa (107 per cent). The Group therefore concluded that no impairment was required to the Goodwill held against each group of CGUs.

Sensitivity in discount rate and capital expenditure

The table below sets out the breakeven pre-tax discount rate for each group of CGUs, which will result in the recoverable amount being equal with the carrying amount for each group of CGUs.

Assumptions	Nigeria	East Africa	Francophone Africa
Pre tax discount rate	33.28%	29.04%	26.32%
Capital expenditure	6.81%	13.94%	9.86%

No reasonably possible change in the terminal growth rate would cause the carrying amount to exceed the recoverable amount.

Impairment review of goodwill pertaining to operations other than Airtel Africa

The Group tests goodwill for impairment annually on 31st December The recoverable amounts of the above group of CGUs are based on value-in-use, which are determined based on ten-year business plans.

The Group has adopted a ten-year plan for the purpose of impairment testing due to the following reasons:

– The Group operates in growing markets where the telecommunications market is continuously converging towards adoption of smartphone devices. In these markets, short-term plans (for example, five years) are not indicative of the long-term future prospects and performance of the Group.

– The life of the Group’s spectrum bandwidth has remaining useful life of more than ten years.

Accordingly, the management believes that this planning horizon reflects the assumptions for medium to long-term market developments, appropriately covers market dynamics and better reflects the expected performance in the markets in which the Group operates.

The Group, in line with para 99 of Ind AS 36 ‘Impairment of Assets’, has used the most recent detailed calculation made in the preceding year (31st December, 2020 – the annual goodwill impairment assessment date) of the recoverable amount of Mobility, Airtel Business and Homes CGUs to which goodwill has been allocated. Accordingly, the disclosures made in the preceding year’s financial statements relating to recoverable value are carried forward and disclosed.

As a part of such testing, the key assumptions used in value-in-use calculations were as follows:

Assumptions	Basis of assumptions
EBITDA margins	The margins have been estimated based on past experience after considering incremental revenue arising out of adoption of value added and data services from the existing and new customers, though these benefits are partially offset by a decline in tariffs in competitive scenario. Margins will be positively impacted by the efficiencies and cost rationalisation / others initiatives driven by the Group; whereas, factors like higher churn, increased cost of operations may impact the margins negatively.
Discount rate	Discount rate reflects the current market assessment of the risks specific to a CGU or group of CGUs and estimated based on the weighted average cost of capital for respective CGU / group of CGUs. Pre-tax discount rates
	used are 11.60 per cent for the year ended 31^st March, 2021and 13.40 per cent for the year ended 31^st March, 2020.
Growth rates	The growth rates used are in line with the long-term average growth rates of the respective industry and country in which the entity operates, and are consistent with the internal / external sources of information. The average growth rate used in extrapolating cash flows beyond the planning period is 3.5 per cent for 31^st March, 2021 and 3.5 per cent for 31^st March, 2020.
Capital expenditures	The cash flow forecasts of capital expenditure are based on past experience after considering the additional capital expenditure required for roll out of incremental coverage and capacity requirements and to provide enhanced voice and data services.

Sensitivity to changes in assumptions

With regard to the sensitivity assessment of value-in-use for Mobile Services- India, Homes Services and Airtel Businesses, no reasonably possible change in any of the above key assumptions would have caused the carrying amount of these units to exceed their recoverable amount.

PVR LTD (Y. E.31ST MARCH 2022)

Notes to Standalone / Consolidated Financial Statements

Note mentioned below PPE schedule

Impairment testing of Goodwill: Goodwill represents excess of consideration paid over the net assets acquired. This is monitored by the management at the level of cash generating unit (CGU) and is tested annually for impairment. Cinemax India Ltd., Cinema exhibition undertaking of DLF Utilities Ltd. and SPI Cinemas Pvt.Ltd. acquired in F.Ys. 2012- 13, 2016-17 and 2018-19 respectively are now completely integrated with the existing cinema business of the Company, and accordingly monitored together as one CGU. The Company tested goodwill for impairment using a post-tax discounted cash flow methodology with a peer-based, risk-adjusted weighted average cost of capital, using discount rate of 10 to 12.5 per cent p.a. and terminal growth rate of 5 per cent to 10 per cent. This long-term growth rate takes into consideration external macroeconomic sources of data. Such long-term growth rate considered does not exceed that of the relevant business and industry sector. We believe use of a discounted cash flow approach is the most reliable indicator of the fair values of the businesses. The Company believes that any reasonably possible change in the key assumptions on which a recoverable amount is based would not cause the aggregate carrying amount to exceed the aggregate recoverable amount of the cash-generating unit.

No impairment of goodwill was identified as on 31st March, 2022.

DR REDDY’S LABORATORIES LTD (Y.E. 31ST MARCH 2022)

Notes to Standalone Financial Statements

₹ in millions

Particulars	As on 31^st March, 2022	As on 31^st March, 2021
Gross carrying value
Opening balance	853	323
Goodwill arising on Business Combination	–	530
Disposals	–	–
Closing balance	853	853

Impairment loss
Opening balance	–	–
Impairment loss	–	–
Disposals	–	–
Closing balance	–	–
Net carrying value	853	853

For the purpose of impairment testing, goodwill is allocated to acash generating unit, representing the lowest level within the Company at which goodwill is monitored for internal management purposes and which is not higher than the Company’s operating segment.

The carrying amount of goodwill was allocated to the cash generating units as follows:

Particulars	As on 31^st March, 2022	As on 31^st March, 2021
Global Generics – Branded Formulations	853	853

The recoverable amounts of the above cash generating units have been assessed using a value-in-use model. Value-in-use is generally calculated as the net present value of the projected post-tax cash flows plus a terminal value of the cash generating unit to which the goodwill is allocated. Initially, a post-tax discount rate is applied to calculate the net present value of the post-tax cash flows. Key assumptions upon which the Company has based its determinations of value-in-use include:

• Estimated cash flows for five years, based on management’s projections.

• A terminal value arrived at by extrapolating the last forecasted year cash flows to perpetuity, using a constant long-term growth rate of 0 per cent. This long-term growth rate takes into consideration external macroeconomic sources of data. Such long-term growth rate considered does not exceed that of the relevant business and industry sector.

• The after-tax discount rates used are based on the Company’s weighted average cost of capital.

• The after-tax discount rates used range from 11.7 per cent to 14 per cent for various cash generating units. The pre-tax discount rates range from 12.72 per cent to 17.92 per cent.

The Company believes that any reasonably possible change in the key assumptions on which a recoverable amount is based would not cause the aggregate carrying amount to exceed the aggregate recoverable amount of the cash-generating unit.

Notes to Consolidated Financial Statements

Goodwill
Goodwill arising upon business combinations is not amortised but tested for impairment at least annually or more frequently if there is any indication that the cash generating unit to which goodwill is allocated is impaired. The gross carrying value and accumulated amortisation with respect to goodwill represent Indian GAAP balances, that have been carried forward as such, relating to business combination entered before the transition date i.e., 1st April, 2015.

₹ In millions

Particulars	As on 31^st March, 2022	As on 31^st March, 2021
Gross carrying value
Opening balance	38,909	37,186
Goodwill arising on Business Combination(1) (2)	260	530
Disposals	–	–
Effect of changes in foreign exchange rates	(593)	1193
Closing balance	38,576	38,909

Accumulated amortization
Opening balance	33,310	32,273
Impairment loss (3)	311	–
Effect of changes in foreign exchange rates	(518)	1,037
Closing balance	33,103	3,3310

Net carrying value	5,473	5,599

(1) Refer note 2.42 of these financial statements for further details

(2) Refer note 2.41 of these financial statements for further details

(3) Impairment losses recorded for the year ended 31st March, 2022. During the year ended 31st March, 2022, the Company recorded impairment loss of Rs 311 pertaining to Shreveport CGU. Refer Note 2.1 for details. The said goodwill was included as part of “Global Generics-North America Operations” in the below mentioned schedule for allocation of goodwill among CGUs

The carrying amount of goodwill (other than those arising upon investment in a joint venture) was allocated to the cash generating units as follows:

Particulars	As on 31^st March, 2022	As on 31^st March, 2021
Global Generics-Germany Operations	2,506	2,288
Global Generics-Complex Injectables	1,894	1,928
Global Generics-Branded Formulations	905	905
PSAI-Active Pharmaceutical Operations	167	170
Global Generics-North America Operations	1	308
	5,473	5,599

The recoverable amounts of the above cash generating units have been assessed using a value-in-use model. Value in use is generally calculated as the net present value of the projected post-tax cash flows plus a terminal value of the cash generating unit to which the goodwill is allocated. Initially, a post-tax discount rate is applied to calculate the net present value of the post-tax cash flows. Key assumptions upon which the Company has based its determinations of value-in-use include:

a) Estimated cash flows for five years, based on management’s projections.

b) A terminal value arrived at by extrapolating the last forecasted year cash flows to perpetuity, using a constant long-term growth rate of 0 per cent to 2 per cent. This long-term growth rate takes into consideration external macroeconomic sources of data. Such long-term growth rate considered does not exceed that of the relevant business and industry sector.

c) The after-tax discount rates used are based on the Company’s weighted average cost of capital.

d) The after-tax discount rates used range from 11.7 per cent to 14 per cent for various cash generating units. The pre-tax discount rates range from 12.72 per cent to 17.92 per cent.

UNITED PHOSPHOROUS LTD (Y. E.31ST MARCH, 2022)

Notes to Standalone financial statements
For the purpose of impairment testing, goodwill has been allocated to the Company’s CGU of ₹1,115 crores (March 31, 2020, ₹1,485 crores).

The recoverable amount of the CGUs have been determined based on the value in use, determining by discounting the future cash flows to be generated from the continuing use of the CGU. Discount rates reflect Management’s estimate of risk specific to each CGU. The key assumptions used in the estimation of the recoverable amount are set out below.

	Growth rate	Discount rate	Growth rate	Discount rate
	31^st March, 2022	31^st March, 2022	31^st March, 2022	31^st March, 2022
Cash generating units	8% – 12%	10% – 13%	8% – 12%	10% – 11%

The discount rate reflect management’s estimate of risk specific to each CGU. The cashflow projections included specific estimates for five years and a terminal growth rate thereafter. The terminal growth rate was determined based on Management’s estimate of the long term compound annual EBITDA growth rate, consistent with the assumptions that a market participant would make.

Sensitivity Analysis
The Company has conducted an analysis of the sensitivity of the impairment test to changes in the key assumptions used to determine the recoverable amount of CGU to which goodwill is allocated. The management believe that any reasonably possible change in the key assumptions on which the recoverable amount is based would not cause the aggregate carrying amount to exceed the aggregate recoverable amount of the related CGU.

shailesh.kwebmaker

Eligibility of Educational Institutions to Claim Exemption under Section 10(23C) of the Income-Tax Act – Part II

INTRODUCTION

4.1 As mentioned in paras 1.2 and 1.3 of Part I of this write-up (BCAJ January 2023), section 10(22) of the Income-tax Act, 1961 (‘the Act’) provided an exemption for any income of a university or other educational institution existing ‘solely’ for educational purposes and not for profit [hereinafter referred to as Educational Institution]. The Finance (No. 2) Act, 1998 while omitting section 10(22) of the Act, inter alia introduced clauses(iiiab), (iiiad), and (vi) in section 10(23C) of the Act providing similar exemptions for Educational Institutions and also introduced various provisos providing requirements for approval, prescribing the procedure for dealing with application for such an approval [Basic Conditions] and making other provisions such as application of income, accumulation of income, investment of funds, etc. [Monitoring Conditions] which are mainly applicable to Educational Institutions covered by only section 10(23)(vi) with which we are concerned in this write-up as mentioned in paras 1.3 and 1.4 of Part 1 . The interpretation of these provisions and the term ‘solely’ had given rise to considerable litigation and was a subject matter of dispute before different authorities/ courts.

4.2 As mentioned in Part I (paras 1.5 to 1.9), the Supreme Court in its several decisions has from time to time laid down the law on the meaning of ‘education’, the applicability of the ‘predominant test’ in the context of section 2(15), the entitlement of exemption under section 10(22), etc. To recall this in brief, the Supreme Court in Sole Trustee, Loka Shikshana Trust vs. CIT (1975) 101 ITR 234 (Loka Shikshana’s case) held that the term ‘education’ in section 2(15), was not used in a wide and extended sense which would result in every acquisition of knowledge to constitute education but it covered systematic schooling or training given to students that results in developing knowledge, skill, mind and character of students by normal schooling or training given to students that results in developing knowledge, skill mind and character of students by normal schooling. Constitution bench of the Supreme Court in the case of ACIT vs. Surat Art Silk Cloth Manufacturers Association (1978) 121 ITR 1 (Surat Art Silk’s case) laid down what came to be known as the ‘predominant test’ in the context of section 2(15). Supreme Court held that if the primary or dominant purpose of a trust or institution is charitable, another object which by itself may not be charitable but which is merely ancillary or incidental to the primary or dominant purpose would not prevent the trust from being a valid charity for the purpose of claiming exemption. Supreme Court in Aditanar Educational Institution vs. ACIT (1997) 224 ITR 310 (Aditanar Institution’s case) allowed the assessee’s claim for exemption under section 10(22) as the assessee was set up with the sole purpose of imparting education at the levels of colleges and schools. The Supreme Court in American Hotel & Lodging Association, Educational Institute vs. CBDT (2008) 301 ITR 86 (American Hotel Association’s case), followed Surat Art Silk’s decision and held that the predominant object is to determine whether the assessee exists solely for education and not to earn profit. The Supreme Court in the Queen’s Educational Society vs. CIT (2015) 372 ITR 699 (Queen’s Society’s case) placing reliance on earlier decisions in Surat Art Silk’s, Aditanar Institution’s and American Hotel Association’s cases allowed exemption under section 10(23C)(iiiad) and held that the educational society exists solely for educational purposes and not for profit where surplus made by the educational society is ploughed back for educational purposes.

4.3 As discussed in para 2 of Part I, Andhra Pradesh High Court [A. P. High Court] in New Noble Educational Society vs. CCIT (2011) 334 ITR 303 (New Noble’s case) held that the term ‘solely’ means exclusively and not primarily. The High Court took the view that an educational institution, for being entitled to exemption under section 10(23C)(vi), must exist solely for educational purposes and must not have any other non-educational objects in its memorandum. However, if the primary or dominant purpose of an institution is “educational”, another ancillary or incidental object to the primary or dominant purpose would not disentitle the institution from the benefit of section 10(23C)(vi). As discussed in para 3 of Part I, A. P. High Court in R. R. M. Educational Society vs. CCIT (2011) 339 ITR 323 (AP) [RRM’s case] followed its decision in the New Noble’s case and held that the main or primary object of an institution must be ‘education’ and presence of any other object which is not integral to or connected with education will disentitle the assessee from benefit under section 10(23C)(vi). The Court also took the view that the Authority has no power to condone the delay in making application for approval under section 10(23)(vi).

NEW NOBLE EDUCATIONAL SOCIETY VS. CCIT (2022) 448 ITR 598 (SC)

5.1 The above two judgments of the A. P. High Court (along with other cases from the same High Court) came-up before the Supreme Court at the instance of the assessees on the issue of grant of approval under section 10(23)(vi).

5.2 Before the Supreme Court, the assessee, interalia, contended that while the High Court was right in considering the memorandum of association, rules or constitution of the trust, the literal interpretation by the High Court of the expression ‘solely’ in section 10(23C)(vi) was not correct and urged that there was no bar or restriction on trusts engaged in activities other than education from claiming exemption under section 10(23C)(vi) if the motive of such trusts was not to earn profit. It was further submitted that its objects other than education were charitable in nature and, therefore, the Commissioner (Authority) erred in denying approval. Further, the fact that the assessee had non-educational objects [other charitable objects] would not mean that it ceased to be an institution existing ‘solely’ for educational purposes. The assessee also urged that the term ‘solely’ was in relation to the institution’s motive to not function for making profit and not in relation to the objects of the institution. The assessee also submitted that the conditions prescribed in the subsequent provisos to section 10(23C) such as manner of utilization of surplus, etc. [i.e. Monitoring Conditions] were not relevant at the stage of considering application for approval under section 10(23C) and that such considerations could be gone into only during the course of assessments.

5.2.1 The assessee placed reliance on decisions of the Supreme Court in American Hotel and Association’s case, Queen’s Society’s case, Aditanar Institution’s case, etc. to submit that the test for determination was whether the ‘principal’ or ‘main’ activity was education and not whether some profits were incidentally earned.

5.2.2 With respect to registration under the state laws such as the A. P. Charities Act, the assessee contended that the Act was a complete code in itself and did not prescribe any condition for obtaining approvals under any state laws before becoming eligible for grant of approval under section 10(23C).

5.3 On the other hand, the Revenue submitted that the role of charitable institutions in imparting education was vital and important, and for deciding the issue of granting tax exemption under the Act to Educational Institutions, the term ‘education’ as a charitable purpose could not be given an enlarged meaning. The Revenue also urged that education could not be regarded as a business activity either under the Constitution of India or under the Act and any commercialisation of education would result in loss of benefit of tax exemption otherwise available to a charitable trust. The Revenue distinguished the decisions cited and relied upon by the assessee.

5.4 After considering the rival contentions and referring to relevant provisions of the Act, the Supreme Court proceeded to decide the relevant issues and noted that following three issues require resolutions [page 624] :-

“The issues which require resolution in these cases are firstly, the correct meaning of the term ‘solely’ in Section 10 (23C) (vi) which exempts income of “university or other educational institution existing solely for educational purposes and not for purposes of profit”. Secondly, the proper manner in considering any gains, surpluses or profits, when such receipts accrue to an educational institution, i.e., their treatment for the purposes of assessment, and thirdly, in addition to the claim of a given institution to exemption on the ground that it actually exists to impart education, in law, whether the concerned tax authorities require satisfaction of any other conditions, such as registration of charitable institutions, under local or state laws.”

5.5 After noting the importance of education, the Court, however, stated that the term ‘education’ in the context of the Act meant imparting formal scholastic learning and that the broad meaning of ‘education’ did not apply. In this context, the Court noted that what is “education” in the context of the Act, was explained by the Supreme Court in Loka Shikshana’s case (Supra) in following terms [page 623] :-

“5. The sense in which the word ‘education’ has been used in section 2(15) is the systematic instruction, schooling or training given to the young in preparation for the work of life. It also connotes the whole course of scholastic instruction which a person has received. The word ‘education’ has not been used in that wide and extended sense, according to which every acquisition of further knowledge constitutes education. According to this wide and extended sense, travelling is education, because as a result of travelling you acquire fresh knowledge. Likewise, if you read newspapers and magazines, see pictures, visit art galleries, museums and zoos, you thereby add to your knowledge….All this in a way is education in the great school of life. But that is not the sense in which the word ‘education’ is used in clause (15) of section 2. What education connotes in that clause is the process of training and developing the knowledge, skill, mind and character of students by formal schooling.”

5.5.1 Referring to the above, the Court further stated as under [page 623] :-

“Thus, education i.e., imparting formal scholastic learning, is what the IT Act provides for under the head of “charitable” purposes, under Section 2 (15).”

5.6 With respect to the ‘predominant test’ evolved in Surat Art Silk’s case, the Court noted that the decision in that case was not rendered in the context of an Educational Institution but in the context of a charity which had the object of advancement of general public utility. Having noted this factual position, the Court stated as under [page 626] :-

“It is thus evident that the seeds of the ‘predominant object’ test was evolved for the first time in Surat Art (supra). Noticeably, however, Surat Art (supra) was rendered in the context of a body claiming to be a charity, as it had advancement of general public utility for its objects. It was not rendered in the context of an educational institution, which at that stage was covered by Section 10 (22). In that sense, the court had no occasion to deal with the term ‘educational institution, existing solely for educational purposes and not for purposes of profit’. Therefore, the application of the ‘predominant object’ test was clearly inapt in the context of charities set up for advancing education. It is important to highlight this aspect at this stage itself, because the enunciation of ‘predominant object’ test in Surat Art (supra) crept into the interpretation of ‘existing solely for educational purposes’, which occurred then in Section 10 (22) and now in Section 10 (23C).”

5.7 While interpreting the main provision in section 10(23C) and the meaning of the term ‘solely’ used therein, the Court also considered as to whether a wider meaning is to be given to the main provision in view of the seventh proviso to section 10(23C) which exempts business profits if the business is incidental to the attainment of the trust’s objectives and separate books of account are maintained by it in respect of such business. In this context, the Court observed as under [page 637] :

“The basic provision granting exemption, thus enjoins that the institution should exist ‘solely for educational purposes and not for purposes of profit’. This requirement is categorical. While construing this essential requirement, the proviso, which carves out the exception, so to say, to a limited extent, cannot be looked into. The expression ‘solely’ has been interpreted, as noticed previously, by other judgments as the ‘dominant / predominant /primary/ main’ object. The plain and grammatical meaning of the term ‘sole’ or ‘solely’ however, is ‘only’ or ‘exclusively’. P. Ramanath Aiyar’s Advanced Law Lexicon explains the term as, “‘Solely’ means exclusively and not primarily”. The Cambridge Dictionary defines ‘solely’ to be, “Only and not involving anyone or anything else”. The synonyms for ‘solely’ are “alone, independently, single-handed, single-handedly, singly, unaided, unassisted” and its antonyms are “inclusively, collectively, cooperatively, conjointly etc.””

5.7.1 The Court rejected the assessee’s argument that one has to look at the ‘predominant object’ for which the trust or educational institution is set up for determining its eligibility for approval under section 10(23C). The Court then stated that the term ‘solely’ is not the same as ‘predominant/ mainly’ and, therefore, the Educational Institution must necessarily have all its objects aimed at imparting or facilitating education. The Court then distinguished the decision in Surat Art Silk’s case and while deciding the main issue, explained the meaning of the term ‘Solely’ used in section 10(23C) as follows [pages 637/638] :-

“The term ‘solely’ means to the exclusion of all others. None of the previous decisions – especially American Hotel (supra) or Queens Education Society (supra) – explored the true meaning of the expression ‘solely’. Instead, what is clear from the previous discussion is that the applicable test enunciated in Surat Art (supra) i.e., the ‘predominant object’ test was applied unquestioningly in cases relating to charitable institutions claiming to impart education. The obvious error in the opinion of this court which led the previous decisions in American Hotel (supra) and in Queens Education Society (supra) was that Surat Art (supra) was decided in the context of a society that did not claim to impart education. It claimed charitable status as an institution set up to advance objects of general public utility. The Surat Art (supra) decision picked the first among the several objects (some of them being clearly trading or commercial objects) as the ‘predominant’ object which had to be considered while judging the association’s claim for exemption. The approach and reasoning applicable to charitable organizations set up for advancement of objects of general public utility are entirely different from charities set up or established for the object of imparting education. In the case of the latter, the basis of exemption is Section 10(23C) (iiiab), (iiiad) and (vi). In all these provisions, the positive condition ‘solely for educational purposes’ and the negative injunction ‘and not for purposes of profit’ loom large as compulsive mandates, necessary for exemption. The expression ‘solely’ is therefore important. Thus, in the opinion of this court, a trust, university or other institution imparting education, as the case may be, should necessarily have all its objects aimed at imparting or facilitating education. Having regard to the plain and unambiguous terms of the statute and the substantive provisions which deal with exemption, there cannot be any other interpretation.”

5.7.2 For the purpose of taking above literal view, the Court also made reference to its earlier decisions including the decision of the Constitution bench of the Supreme Court in the case of Commissioner of Customs (Import), Mumbai vs. Dilip Kumar and Co. (2018) 9 SCC 1 where it was held that taxing statutes are to be construed in terms of their plain language. The Supreme Court observed that aids to interpretation can be used to discern the true meaning only in cases of ambiguity and that where the statute is clear, the legislation has to be given effect in its own terms.

5.8 With respect to the seventh proviso to section 10(23C) of the Act, the Court observed as under [page 641] :-

“……The interpretation of Section 10 (23C) therefore, is that the trust or educational institution must solely exist for the object it professes (in this case, education, or educational activity only), and not for profit. The seventh proviso however carves an exception to this rule,and permits the trust or institution to record (or earn) profits, provided the ‘business’ which has to be read as the education or educational activity – and nothing other than that – is incidental to the attainment of its objectives (i.e., the objectives of, or relating to, education).”

5.8.1 Furthermore, dealing with the provisions contained in the seventh proviso permitting incidental business activities, the Court stated that the underline objective of the seventh proviso to section 10(23C), and section 11(4A) are identical and will have to be read in the light of main provision which spells out the conditions for exemptions under section 10(23C). According to the Court, the same conditions would apply equally to other sub-clauses of section 10(23C) that deal with education, medical institution, hospitals, etc.

5.8.2 Interpreting the meaning of the expression “incidental” business activity in the context of the seventh proviso, the Court explained as under [page 646] : “What then is `incidental’ business activity in relation to education? Imparting education through schools, colleges and other such institutions would be per se charity. Apart from that there could be activities incidental to providing education. One example is of text books. This court in a previous ruling in Assam State Text Book Production & Publication Corporation Ltd. v. CIT has held that dealing in text books is part of a larger educational activity. The court was concerned with State established institutions that published and sold text books. It was held that if an institution facilitated learning of its pupils by sourcing and providing text books, such activity would be `incidental’ to education. Similarly, if a school or other educational institution ran its own buses and provided bus facilities to transport children, that too would be an activity incidental to education. There can be similar instances such as providing summer camps for pupils’ special educational courses, such as relating to computers etc. which may benefit its pupils in their pursuit of learning.

However, where institutions provide their premises or infrastructure to other entities, trusts, societies etc. for the purposes of conducting workshops, seminars or even educational courses (which the concerned trust is not actually imparting) and outsiders are permitted to enroll in such seminars, workshops, courses etc. then the income derived from such activity cannot be characterised as part of education or “incidental” to the imparting education. Such income can properly fall under the heads of income.”

5.9 After discussing the judicial precedents dealing with cases of Educational Institutions, the Court noted the emerging position flowing from the same and stated that it is evident that this court has spelt out the following to be considered by the Revenue, when trusts or societies apply for registration or approval on the ground that they are engaged in or involved in education [pages 636/637] :

“ (i) The society or trust may not directly run the school imparting education. Instead, it may be instrumental in setting up schools or colleges imparting education. As long as the sole object of the society or trust is to impart education, the fact that it does not do so itself, but its colleges or schools do so, does not result in rejection of its claim. (Aditanar (supra)).

(ii) To determine whether an institution is engaging in education or not, the court has to consider its objects (Aditanar (supra)).

(iii) The applicant institution should be engaged in imparting education, if it claims to be part of an entity or university engaged in education. This condition was propounded in Oxford University (supra) where the applicant was a publisher, part of the Oxford University established in the U.K. The assessee did not engage in imparting education, but only in publishing books, periodicals, etc., for profit. Therefore, the court by its majority opinion held that the mere fact that it was part of a university (incorporated or set up abroad) did not entitle it to claim exemption on the ground that it was imparting education in India.

(iv) The judgment in American Hotel (supra) states that to discern whether the applicant’s claim for exemption can be allowed, the ‘‘predominant object’’ has to be considered. It was also held that the stage of examining whether and to what extent profits were generated and how they were utilised was not essential at the time of grant of approval, but rather formed part of the monitoring mechanism.

(v) Queen’s Educational Society (supra) approved and applied the ‘‘predominant object’’ test (which extensively quoted Surat Art (supra) and applied it with approval). The court also held that the mere fact that substantial surpluses or profits were generated could not be a bar for rejecting the application for approval under section 10(23C)(vi) of the IT Act.”

5.10 The Court overruled the decisions in the cases of American Hotel Association and Queen’s Society as they dealt with the meaning of the term ‘solely’ and held as under [page 642] :

“In the light of the above discussion, this court is of the opinion that the interpretation adopted by the judgments in American Hotel (supra) as well as Queens Education Society (supra) as to the meaning of the expression ‘solely’ are erroneous. The trust or educational institution, which seeks approval or exemption, should solely be concerned with education, or education related activities. If, incidentally, while carrying on those objectives, the trust earns profits, it has to maintain separate books of account. It is only in those circumstances that ‘business’ income can be permitted- provided, as stated earlier, that the activity is education, or relating to education. The judgment in American Hotel (supra) as well as Queens Education Society (supra) do not state the correct law, and are accordingly overruled.”

5.11 In respect of the nature of powers vested in the Commissioner / Authority to call for documents and verify the income of the trust at the time of granting approval under section 10(23C), the Court held as under [page 647] :

“ …….From the pointed reference to ‘audited annual accounts’ as one of the heads of information which can be legitimately called or requisitioned for consideration at the stage of approval of an application, the inference is clear: the Commissioner or the concerned authority’s hands are not tied in any manner whatsoever. The observations to the contrary in American Hotel (supra) appear to have overlooked the discretion vested in the Commissioner or the relevant authority to look into past history of accounts, and to discern whether the applicant was engaged in fact, ‘solely’ in education. American Hotel (supra) excluded altogether inquiry into the accounts by stating that such accounts may not be available. Those observations in the opinion of the court assume that only newly set up societies, trusts, or institutions may apply for exemption. Whilst the statute potentially applies to newly created organizations, institutions or trusts, it equally applies to existing institutions, societies or trust, which may seek exemption at a later point. At the same time, this court is also of the opinion that the Commissioner or the concerned authority, while considering an application for approval and the further material called for (including audited statements), should confine the inquiry ordinarily to the nature of the income earned and whether it is for education or education related objects of the society (or trust). If the surplus or profits are generated in the hands of the assessee applicant in the imparting of education or related activities, disproportionate weight ought not be given to surpluses or profits, provided they are incidental. At the stage of registration or approval therefore focus is on the activity and not the proportion of income. If the income generating activity is intrinsically part of education, the Commissioner or other authority may not on that basis alone reject the application.”

5.12 While considering the effect of state laws requiring registration of charitable institutions, the Court noted that the charitable objects defined by the A.P. Charities Act are parimateria with the Income-tax Act. The Court then noted that the charitable institutions are mandatorily required to obtain registration under the AP Charities Act and that such local Acts provide a regulatory framework by which the charitable institutions are constantly monitored. With respect to the impact of such local laws while deciding application for approval under section 10(23C), the Court took the view as under [page 645] :

“In view of the above discussion, it is held that charitable institutions and societies, which may be regulated by other state laws, have to comply with them- just as in the case of laws regulating education (at all levels). Compliance with or registration under those laws, are also a relevant consideration which can legitimately weigh with the Commissioner or other concerned authority, while deciding applications for approval under Section 10 (23C).”

5.13 The Court specifically mentioned that approval under section 10(23C) in RRM’s case was denied, interalia, on the grounds that it was not merely imparting education but also was running hostels. In this context, the Court clarified as under [pages 646/647] :

“ ……It is clarified that providing hostel facilities to pupils would be an activity incidental to imparting education. It is unclear from the record whether R.R.M. Educational Society was providing hostel facility to its students or to others as well. If the institution provided hostel and allied facilities (such as catering etc.) only to its students, that activity would clearly be “incidental” to the objective of imparting education.”

5.13.1 With respect to the time limit for making application for approval, the Court noted that the trust or societies are required to apply for registration or approval within a specified time and there is no provision to extend such time limit for the concerned year. The Court did not find fault with the decision of the High Court in refusing to interfere with the decision of Authority rejecting the approval when the institution made application beyond the specified time.

5.14 After discussing the legal position, and the earlier position based on Judicial precedents, the Court summarized it’s conclusions as follows (page 647 & 648) :-

“a. It is held that the requirement of the charitable institution, society or trust etc., to “solely” engage itself in education or educational activities, and not engage in any activity of profit, means that such institutions cannot have objects which are unrelated to education. In other words, all objects of the society, trust etc., must relate to imparting education or be in relation to educational activities.

b. Where the objective of the institution appears to be profit-oriented, such institutions would not be entitled to approval under section 10(23C) of the IT Act. At the same time, where surplus accrues in a given year or set of years per se, it is not a bar, provided such surplus is generated in the course of providing education or educational activities.

c. The seventh proviso to section 10(23C), as well as section 11(4A) refer to profits which may be ‘incidentally’ generated or earned by the charitable institution. In the present case, the same is applicable only to those institutions which impart education or are engaged in activities connected to education.

d. The reference to “business” and “profits” in the seventh proviso to section 10(23C) and section 11(4A) merely means that the profits of business which is “incidental” to educational activity – as explained in the earlier part of the judgment, i.e., relating to education such as sale of text books, providing school bus facilities, hostel facilities, etc.

e. The reasoning and conclusions in American Hotel (supra) and Queen’s Education Society (supra) so far as they pertain to the interpretation of expression “solely” are hereby disapproved. The judgments are accordingly overruled to that extent.

f. While considering applications for approval under section 10(23C), the Commissioner or the concerned authority as the case may be under the second proviso is not bound to examine only the objects of the institution. To ascertain the genuineness of the institution and the manner of its functioning, the Commissioner or other authority is free to call for the audited accounts or other such documents for recording satisfaction where the society, trust or institution genuinely seeks to achieve the objects which it professes. The observations made in American Hotel (supra) suggest that the Commissioner could not call for the records and that the examination of such accounts would be at the stage of assessment. Whilst that reasoning undoubtedly applies to newly set up charities, trusts, etc. the proviso under section 10(23C) is not confined to newly set up trusts – it also applies to existing ones. The Commissioner or other authority is not in any manner constrained from examining accounts and other related documents to see the pattern of income and expenditure.

g. It is held that wherever registration of trust or charities is obligatory under state or local laws, the concerned trust, society, other institution etc., seeking approval under section 10(23C) should also comply with provisions of such State laws. This would enable the Commissioner or concerned authority to ascertain the genuineness of the trust, society, etc. This reasoning is reinforced by the recent insertion of another proviso of Section 10(23C) with effect from April 1,2021.”

5.15 After summarizing its conclusions referred to in para 5.14 above, the Court, in context of importance of education as charity in the society in general, further observed as under [page 648] :

“ In a knowledge based, information driven society, true wealth is education – and access to it. Every social order accommodates, and even cherishes, charitable endeavour, since it is impelled by the desire to give back, what one has taken or benefitted from society. Our Constitution reflects a value which equates education with charity. That it is to be treated as neither business, trade, nor commerce, has been declared by one of the most authoritative pronouncements of this court in T.M.A Pai Foundation (supra). The interpretation of education being the “sole” object of every trust or organization which seeks to propagate it, through this decision, accords with the constitutional understanding and, what is more, maintains its pristine and unsullied nature.”

5.16 Finally, the Court stated that its decision would operate prospectively in the larger interests of the society and observed as under [page 649] :

“……This court is further of the opinion that since the present judgment has departed from the previous rulings regarding the meaning of the term ‘solely’, in order to avoid disruption, and to give time to institutions likely to be affected to make appropriate changes and adjustments, it would be in the larger interests of society that the present judgment operates hereafter. As a result, it is hereby directed that the law declared in the present judgment shall operate prospectively. The appeals are hereby dismissed, without order on costs.”

CONCLUSION

6.1 In view of the above judgment of the Supreme Court, the issue now stands settled that for obtaining benefit of section 10(23C), the Educational Institution must exist solely and exclusively for educational purposes and education-related activities and should not have any other objects unrelated to education in its Memorandum/ Trust deed even though the same are charitable in nature. In other words, mere existence of object unrelated to education in the Memorandum/ Trust Deed will result in denial of benefit under section 10(23C). In view of this, most of the Educational Institutions claiming exemptions under section 10(23C)(vi) are likely to be affected as they will have some or the other charitable objects not related to education in their Memorandum/ Trust Deed and if they desire to continue to claim exemption under section 10(23C)(vi), they will have to amend their Trust Deed, etc. at the earliest to fall in line with the law declared in the above judgment .

6.1.1 In cases where Educational Institution desires to amend it’s Trust Deed, etc. to fall in line with the law laid down by the Court in the above case, the question of effective date of such amendment may also become relevant. In this context, the reference may be made to para 3.6 of Part 1 of this write-up where the A. P. High Court, while dealing with RRM’s case, has dealt with this issue in the context of provisions of A.P. Registration Act.

6.1.2 Similar problem is also likely to be faced by Educational Institutions governed by section 10(23C) (iiiab)/(iiiad) in the context of the interpretation of the term ‘solely’, though such institutions are not required to seek any approval and follow other requirements mentioned in various provisos which are not applicable to such institutions as mentioned in para 1.4 of Part I of this write-up.

6.1.3 In view of the above situation resulted from the judgment of the Supreme Court literally interpreting the term ‘solely’, in all fairness, the relevant provisions should be amended in the coming Budget on 1st February, 2023 mainly to replace the word ‘solely’ by the word ‘pre-dominantly’. Of course, while amending the provisions on this line, appropriate precautions can be taken, if necessary, to avoid the possibility of any abuse.

6.2 It is a well settled principle that a judicial decision acts retrospectively and that Judges do not make law, they only discover or find the correct law. However, the Court in this case [refer para 5.16 above] has made its decision applicable prospectively to avoid disruption and give time to the affected Educational institutions to make appropriate changes and adjustments. Therefore, an institution which has other objects unrelated to education may consider amending its objects to retrain only object of education and education related objects [which are incidental to the main object of education] so as to claim the benefit of section 10(23C)(iiiab) / (iiiad) / (vi) of the Act.

6.2.1 With respect to prospective applicability of the above judgement and the time given by the Court to trusts/institutions to amend their objects, a question that arises is the date from which the judgment dtd. 19th October, 2022 will come into operation – i.e. whether it will apply from (i) 19th October, 2022 or (ii) from financial year beginning 1st April, 2023 or any other date. Considering the object for which the Court has granted concession by giving the above judgment prospective effect, the better view seems to be that the same should not apply before the Financial Year commencing from 1st April, 2023. It is desirable that the Government should come out with an appropriate clarification for this fixing reasonable time limit at the earliest to avoid anxiety in the minds of the persons looking after the affairs of such Educational Institutions and also to avoid unnecessary fruitless litigation on issues like this.

6.3 As stated in para 5.13.1 above, the Court noted that the trust or societies are required to apply for requisite approval under section 10(23C)(vi) within a specified time and there is no provision to extend such time limit for the concerned year. It may be interesting to note whether High Courts, while exercising their extraordinary jurisdiction under Article 226 of the Constitution of India, will grant some relief in this to entertain belated applications in deserving cases where such applications could not be filed within the specified time due to genuine difficulties /circumstances beyond the control of the Educational Institution.

6.4 Considering the implications of the above judgment for Educational Institutions claiming exemptions under section 10(23C), it appears that these provisions in the present form are hardly workable and of any use. Therefore, such institutions [particularly, those claiming exemption under section 10(23C)(vi) ] may prefer to switch over to regime of section 11 exemption, which under the current circumstances may be considered to be more beneficial. For this useful reference may be made to provisions of section 11(7) together with proviso and section 12(A)(1)(ac). It is also worth noting that for section 11 regime of exemption, definition of Charitable purpose given in section 2(15) also specifically includes object of ‘education’ and proviso to section 2 (15) is relevant only in the cases of object of ‘advancement of any other object of general public utility’.

6.5 As stated in para 5.12 above, Educational Institutions may be required to be registered under the relevant State Laws [in New Noble’s case this was A. P. Charities Act] and the same is also a relevant consideration (though not a pre-requisite) for the Authority to decide the applications for approval under section 10(23)(vi). It seems that if such registration is not obtained, the Authority may grant approval subject to condition of obtaining such registration. Furthermore, it should be noted that need for compliance of such requirements of any other laws, for the time being in force [which should include such State Laws], as are material for achieving the objectives of the Educational Institutions has now been specifically incorporated in the 2nd proviso to section 10(23C) by the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 [T.L.A.Act, 2020] w.e.f. 1st April, 2021.

6.6 It is also worth noting that the Court has effectively followed Loka Shikhasan’s case in the context of meaning of the term ‘education’ to adopt a narrower meaning of the same i.e. ‘imparting formal scholastic learning. As such for the purpose of exemption under the Act, the term ‘education’ may have to be understood accordingly [refer paras 5.5 and 5.5.1 above].

6.7 In the context of exception carved out with regard to business income in the 7th proviso to section 10(23C) [similar to section11(4A) ], the Court has given narrower meaning of these provisions. It has also given examples of incidental business activity in relation to Educational Institutions such as facilitating learning of its pupils by sourcing and providing textbooks, running its own buses and providing bus facility to transport children, etc. for which reference may be made to para 5.8.2 above. It is also worth noting that in the context of hostel facility provided by the educational institutions, the Court appears to have taken a view that the hostel and allied facilities (such as catering, etc.) provided only to its students would fall within the category of ‘incidental to the objective of importing education’ For this, findings of the Court given in RRM’s case [referred to in para 5.13 above] should be carefully read and its possible implications properly understood in the context of facts of each case.

6.8 As mentioned in para 5.10 above, the Court has overruled it’s earlier decision in the cases of American Hotel Association and Queen’s Society in so far as they dealt with the meaning of the term ‘Solely’ . Therefore, these earlier decisions are overruled only to this extent. Except for this, the earlier position summarised by the Court [referred to in para 5.9 above] should continue to hold good for dealing with the application for approval under section10(23C)(vi).

6.8.1. In the context of the powers of the Authority, while dealing with such applications for approval, the Court has explained the effect of the judgment in American Hotel Association’s case [refer para 5.11 above] and in this context, the position should change only in context of application of approval made by the existing entities as explained by the Court [refer to in para 5.11 above]. As such in case of a new entity applying for such an approval, it would appear that only Basic Conditions may have to be looked at and Monitoring Conditions, such as utilisation of income etc. [referred to in para 4.1 above], may be considered at the time of assessment. Furthermore, in this context, the amendments made by the TLA Act, 2020 w.e.f. 1st April, 2021 widening the scope such powers should also be borne in mind.

6.9 It would also appear that the objective of the Educational Institutions should not be profit oriented. However, at the same time, where surplus accrues in a given year or set of years per se, is not to be considered as a restrain for claiming exemption so long as the same is generated in the course of providing education/ educational activities.

6.10 Recently, the Hyderabad Bench of Tribunal in the case of Fernandez Foundation [TS-950-ITAT-2022 (Hyd)] by order dated 9th December, 2022 has, inter alia, also considered and relied on the above judgment of the Supreme Court while confirming the order of CIT (E) rejecting the application of the assessee for approval under section 10(23C)(vi).

shailesh.kwebmaker

Section 279 (2) of the Act – Section 276B, r.w.s. 278B –compounding of offence – Application filed after conviction – guidelines for compounding offence – cannot override the provisions of the statute i.e. Section 279

21 Footcandles Film Pvt Ltd vs. Income-tax Officer – TDS – 1 & Ors

[Writ Petition No.429 of 2022

Date of order: 28th November, 2022 (Bom) (HC)]

Section 279 (2) of the Act – Section 276B, r.w.s. 278B –compounding of offence – Application filed after conviction – guidelines for compounding offence – cannot override the provisions of the statute i.e. Section 279:

The Writ Petition, filed under Article 226 of the Constitution of India, impugns the order, under the provisions of sub-section (2) of Section 279 of the Income- tax Act, 1961, dated 1st June, 2021, passed by respondent no.3- Chief Commissioner of Income Tax (TDS), Mumbai, whereby an application filed by the petitioners for compounding of an offence committed, under section 276B, r.w.s. 287B of the Income-tax Act, 1961 during the F.Y. 2009-10 relevant to the A.Y. 2010-11, was rejected.

The case of the petitioner no. 2 is that for the relevant F.Y. 2009-10, the petitioner no.1-company deducted income tax to the tune of Rs. 25,02,336/- from the salaries of its employees, under the provisions of Section 192 of the Act, but had failed to deposit the tax so deducted to the credit of the Central Government within the time prescribed under section 200 r.w.s. 204 of the Act. The petitioners claim that this situation arose due to the accumulated losses and delays in receiving tax refund from the respondent no.1 during the period 1st April, 2009 to 31st March, 2010.

It is further the case of the petitioners that, subsequently, on 2nd September, 2010, petitioner no.1-company voluntarily deposited the entire amount of tax deducted at source due, along with statutory interest liability thereon, with respondent no.1 without any prior notice of default or demand from the said respondent. However, the petitioner no.1-company subsequently received a show cause notice dated 18th October, 2011, calling upon it to show cause as to why prosecution should not be launched for offences committed under section 276B, r.w.s. 278B, of the Act for failure to deposit tax deducted to the credit of the Central Government, within the statutory timeframe. The said show cause notice also required the petitioner no.1 to nominate its Principal Officer for that purpose. Petitioner no.1 replied to the show cause notice on 24th October, 2011 and 16th November, 2011, attributing accumulated losses, cash crunch and delay in receiving tax refund from respondent no.1 as reasons for their inability and delay in discharging the tax deduction liability. Petitioner no.1 further stated in the reply that the entire liability, along with interest on the delayed payment, had already been deposited by petitioner no.1 voluntarily, before any demand was made. Thereafter, upon hearing petitioner no.1-company, the respondent no.2 issued sanction letter dated 10th March, 2014, granting sanction for prosecution against petitioner no.1-company and its Principal Officer- petitioner no.2 herein, pursuant to which, on 11th March, 2014, respondent no.1 lodged a Criminal Complaint bearing No.75/SW/2014 against the petitioners before the 38th Court of Additional Chief Metropolitan Magistrate, Ballard Pier, Mumbai alleging offence punishable under section 276B, r.w.s. 278B, of the Act.

It is further the case of the petitioners that the said criminal case was tried and by order dated 14th January, 2020, the learned Magistrate convicted the petitioners, under section 248(2) of the Code of Criminal Procedure, for the offence punishable under section 278B, r.w.s. 276B of the Income-tax Act, whereby both the petitioners were sentenced to pay the fine of Rs.10,000/- each and imposed a sentence of rigorous imprisonment for one year on petitioner no.2.

Aggrieved by this Judgment and Order of the Additional Chief Metropolitan Magistrate, convicting the petitioners, Criminal Appeal No.127 of 2020 was filed on 5th February 2020 before the City Sessions Court at Greater Mumbai. Along with the Criminal Appeal, Criminal Miscellaneous Application No.407 of 2020, for stay and suspension of sentence, was filed before the same court and the sentence was suspended by order dated 7th February, 2020. Since then, the criminal appeal is pending adjudication before the Sessions Court.

In this set of facts, the application, under the provisions of Section 279(2) of the Income-tax Act, came to be filed on 5th February, 2020 for compounding of offence before respondent no.3. Along with this application, the petitioners have also filed an application for condonation of delay, if any, in filing the application for compounding of offence. It is stated by the petitioners that the application under section 279(2) of the Act was rejected by the impugned order dated 1st June, 2021, which is now challenged before the court.

The respondents opposing the petition have relied upon the CBDT Circulars No.25/2019 and 01/2020, which deal with the procedure set down by the Board for consideration of applications for compounding of offences under the provisions of Section 279 of the Income-tax Act.

The petitioner contended that the provisions of Section 279(2) do not impose any fetters on respondent no.3 from considering the petitioners’ application for compounding of offence, even when the Court of Metropolitan Magistrate had convicted the petitioners and during pendency of an appeal before the Sessions Court. It is further contended that plain reading of the provisions of sub-section (2) of Section 279 allows compounding of offence either before or after the institution of proceedings and the word “proceedings” encompasses all stages of the criminal proceedings i.e. to say before the Magistrate and even after the Magistrate has convicted the concerned party or when the proceedings are pending before the Sessions Court in appeal.

The Petitioner contended that the Circulars of the CBDT, relied upon by respondent no.3 while rejecting the application for compounding of offence, which provides that the application for compounding of offence is required to be filed within twelve months from the end of the month in which the complaint was filed, cannot operate as a rule of limitation since the same cannot override the provisions of the statute i.e. Section 279 of the Income-tax Act.

The petitioners relied upon the following decisions:-

(i) Sports Infratech (P) Ltd vs. Deputy Commissioner of Income-tax (HQRS) (2017) 78 taxmann.com 44 (Delhi)

(ii) Vikram Singh vs. Union of India (2017) 80 taxmann.com 371 (Delhi)

(iii) Government of India, Ministry of Finance, Department of Revenue (Central Board of Direct Taxes) vs. R. Inbavalli (2017) 84 taxmann.com 105 (Madras)

(iv) K.V. Produce and Ors. vs. Commissioner of Income-Tax and Anr. (1992) 196 ITR 293 (Kerala)

The Petitioner contended that the CBDT Guidelines for Compounding of Offences under Direct Tax Laws, 2019, dated 14th June, 2019, more specifically contained in paragraph 8.1(vii), made the petitioners ineligible for compounding the offences notwithstanding the fact that the provisions of the statute contained in Section 279 of the Income-tax Act, 1961 do not provide for any rule of limitation.

The Hon’ble Court observed that in Sports Infratech (P) Ltd (Supra), a Division Bench of the Delhi High Court was considering the provisions of the Board’s Guidelines dated 3rd December, 2014. In that case, an application for compounding came to be rejected on the grounds that the petitioner did not fulfil the eligibility criteria for consideration of its case for compounding. The Delhi High Court has concluded that the condition in the guidelines, no doubt, is important but cannot be the only determining factor for deciding an application under section 279(2) of the Act. It further held that the authority, while exercising jurisdiction under this provision, was also required to consider the objective facts in the application before it.

In Vikram Singh (Supra), another Division Bench of the Delhi High Court considered the provisions of the Circular dated 23rd December, 2014 issued by the CBDT and, more specifically, the guidelines contained in para 8(vii), which provides that offences committed by a person for which complaint was filed by the Department with the competent court twelve months prior to receipt of the application for compounding was generally not to be compounded. While considering the import of such a clause in the circular, it has held as under :“The Circular dated 23rd December 2014 does not stipulate a limitation period for filing the application for compounding. What the said circular sets out in para 8 are “Offences generally not to be compounded”. In this, one of the categories, which is mentioned in sub-clause (vii), is : “Offences committed by a person for which complaint was filed with the competent court 12 months prior to receipt of the application for compounding”.

“The above clause is not one prescribing a period of limitation for filing an application for compounding. It gives a discretion to the competent authority to reject an application for compounding on certain grounds. Again, it does not mean that every application, which involves an offence committed by a person, for which the complaint was filed to the competent court 12 months prior to the receipt of the application for compounding, will without anything further, be rejected. In other words, resort cannot be had to para 8 of the circular to prescribe a period of limitation for filing an application for compounding. For instance, if there is an application for compounding, in a case which has been pending trial for, let us say 5 years, it will still have to be considered by the authority irrespective of the fact that it may have been filed within ten years after the complaint was first filed. Understandably, there is no limitation period for considering the application for compounding. The grounds on which an application may be considered, should not be confused with the limitation for filing such an application.”

A similar provision, as has been dealt with by the Delhi High Court, contained in the Circular dated 23rd December, 2014 is found in para 7(ii) of the Circular dated 14th June, 2019, which is applicable to the present case. The provisions of para 7(ii) of 2019 Circular would be required to be read with the provisions of para 9.1 of that circular, which provides for relaxation in cases where an application is filed beyond twelve months referred to in paragraph 7(ii), specially when there is a pendency of an appeal or at any stage of the proceedings.

In R. Inbavalli (Supra), a Division Bench of the Madras High Court was dealing with the CBDT Guidelines dated 16th May, 2008, wherein an application for compounding was rejected on the grounds that it was not a deserving case as parameters of para 7.2 of those guidelines had not been adhered to. In that case, it was argued by the Revenue that wherever conviction order has been passed by the competent court, it would fall under the category of cases not to be compounded and though a discretionary power was given under clause 7.2 of the guidelines for grant of approval for compounding of an offence in a suitable and deserving case, such discretion could not be exercised in favor of the assessee when the assessee had been convicted. In that case also, an appeal was pending against the order of conviction before the higher court when the application for compounding of offence was made to the party.

In the face of these facts, the Madras High Court, considering the provisions of the Guidelines dated 16th May, 2008, has held as under :“Therefore, the mere pendency of the appeal against the conviction, in our view, could no longer be a reason for refusing the consideration for compounding of offence within the meaning of clause 4.4(f) of the guidelines dated 16.05.2008.”

The Explanation to sub-section (6) of Section 279, provides power to the Board to issue orders, instructions or directions under the Act to other income tax authorities for proper composition of offences under the section. The Explanation does not empower the Board to limit the power vested in the authority under section 279(2) for the purpose of considering an application for compounding of offence specified in section 279(1).

The Hon’ble Court observed that the orders, instructions or directions issued by the CBDT under section 119 of the Act or pursuant to the power given under the Explanation will not limit the powers of the authorities specified under section 279(2) in considering such an application, much less place fetters on the powers of such authorities in the form of a period of limitation. Therefore, the guidelines contained in the CBDT Guidelines dated 14th June, 2019 could not curtail the power vested in Principal Chief Commissioner or Chief Commissioner or Principal Director General or Director General under the provisions of section 279(2) of the Income-tTax Act.

Thus, the Hon’ble High court held that to the extent CBDT Guidelines dated 14th June, 2019 creates a limitation on the time, within which application under section 279(2) of the Income-tax Act is required to be filed, is of no consequence and does not take away jurisdiction of respondent no.3 or the other authorities, referred to in sub-section (2) of Section 279, from entertaining an application for compounding of offence at any time during the pendency of the proceedings, be they before the Magistrate or on conviction of the petitioners, in an appeal before the Sessions Court. As long as a proceeding, as referred to in sub-section (1), is pending, an application for compounding of offence would be maintainable under sub-section (2) of Section 279 and will have to be dealt with by the authorities on its own merits.

The Guidelines/Circular of 2019 sets out “Eligibility Conditions for Compounding” the condition specified in clause 7(ii) is not a rule of limitation, but is only a guideline to the authority while considering the application for compounding. It does not take away the jurisdiction of the authority under section 279(2) of the Act to consider the application for compounding on its own merits and decide the same.

The court further observed that this was a classic case for consideration by respondent no.3 for compounding of offence, inasmuch as petitioner no.1- company has deposited the TDS due, though beyond time-limit set down, but before any demand notice was raised or any show cause notice was issued. The Tax Deducted at Source was deposited along with penal interest thereon. A reply setting out detailed reasons for not depositing the same within the time stipulated under the law had been filed in reply to the show cause notice issued earlier. Though the petitioners had been convicted, a proceeding in the form of an appeal is pending before the Sessions Court, which is yet to be disposed of, and in which there is an order of suspension of sentence imposed on petitioner no.2 is operating.

Under these circumstances, the impugned order dated 1st June, 2021, that the application for compounding of offence, under section 279 of the Income-tax Act, was filed beyond twelve months, as prescribed under the CBDT Guidelines dated 14th June, 2019, are contrary to the provisions of sub-section (2) of Section 279. The impugned order dated 1st June, 2021 be quashed and set aside.

shailesh.kwebmaker

Section 143(3), r.w.s 144B – Show Cause Notice – two days’ time to file response – violated the mandate of Circular dated 3rd August, 2022 – reasonable opportunity of filing a response should be provided – minimum of seven days period.

20 CS & Sons, vs. The National Faceless Assessment Centre, Delhi & Ors

Writ Petition (l) No. 32925 of 2022

Date of order: 8th December, 2022 (Bom)(HC)

Section 143(3), r.w.s 144B – Show Cause Notice – two days’ time to file response – violated the mandate of Circular dated 3rd August, 2022 – reasonable opportunity of filing a response should be provided – minimum of seven days period.

The petitioner challenged the order of assessment dated 18th September, 2022, passed under section 143(3), r.w.s. 144B, of the Income-tax Act, 1961, relevant to the A.Y. 2020-21 primarily on the grounds that the show cause notice dated 13th September, 2022, issued in terms of section 144B sub-section (6), clause (vii) of the Act, did not provide to the petitioner a reasonable opportunity of filing a response to the said show cause notice. It is stated that the show cause notice came to be issued on 13th September, 2022, which was signed by the concerned AO at 6:44 p.m. on the same day and was received by the petitioner at 6:50 p.m. on the same day i.e. 13th September, 2022. It is further stated that the show cause notice required the petitioner to file its response by 15th September, 2022 by 11:00 a.m., thereby giving the petitioner less than two days’ time to file the response. It is further stated that considering the issues involved, the time made available to the petitioner being not enough, yet the petitioner tried to upload its reply on 16th September, 2022, which could not be so uploaded because the portal had been closed. It is further stated that the petitioner accordingly registered its grievance on the official portal and also uploaded along with the said grievance its objections to the proposed variation on 16th September, 2022. Thereafter, the assessment order is stated to have been passed on 18th September, 2022.

The petitioner states that since the objections to the Show Cause notice dated 13th September, 2022 were already available on the system of the respondents, the same could have been considered while passing the order of assessment, which came to be issued at a subsequent point of time. In any case, it is urged that, the AO had violated the mandate of the circular dated 3rd August, 2022, in particular Clause N.1.3.1 thereof, which prescribes a minimum of seven days period that is required to be given in such types of cases.

The respondents contended that Clause N.1.3.2 does give enough powers to the AO to curtail the period of seven days in certain cases, keeping in view the limitation date for completing the assessment.

The Hon’ble Court observed that the time made available to the petitioner to file its response to the show cause notice was quite inadequate and illusory and therefore, the principles of natural justice can be said to have been violated in the case of the petitioner.

The Hon’ble Court allowed the petition and the matter was remanded back to the AO, to consider the objections to the Show Cause notice dated 13th September, 2022, which shall be filed within two weeks for which the system be enabled accordingly.

The Petitioner was also given an opportunity of being heard in terms of Section 144(6)(vii) of the Income-tax Act, and thereafter AO shall proceed to pass appropriate orders in accordance with the law.

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Reassessment — Notice after four years — Condition precedent — Failure on part of the assessee to disclose fully and truly — Assessee disclosing all material facts in response to notices — Reasons recorded not specifying material that the assessee had failed to disclose — Notice issued on erroneous factual basis — Mere reproduction of statutory provisions do not suffice — Notice and order rejecting assessee’s objections quashed and set aside

79 Rajeshwar Land Developers Pvt Ltd vs. ITO

[2022] 450 ITR 108 (Bom)

A Y.: 2013-14

Date of order: 13th June, 2022

Sections: 142(1), 143(2), 147 and 148 of ITA 1961

Reassessment — Notice after four years — Condition precedent — Failure on part of the assessee to disclose fully and truly — Assessee disclosing all material facts in response to notices — Reasons recorded not specifying material that the assessee had failed to disclose — Notice issued on erroneous factual basis — Mere reproduction of statutory provisions do not suffice — Notice and order rejecting assessee’s objections quashed and set aside

For the A. Y. 2013-14, the AO issued a notice under section 148 of the Income-tax Act, 1961 to reopen the assessment on the ground that the assessee had claimed excess deduction of Rs. 7,44,36,332 on account of other expenses which were required to be disallowed as details of expenses in annexure amounted to only Rs. 12,71,375. The assessee filed objections and submitted that the AO had overlooked the second page of Note 15 in the return of income wherein the details of the amount of Rs. 7,44,36,332 were mentioned and the break up given. The assessee’s objections were rejected.

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

“i) During the original scrutiny assessment the Assessing Officer had looked at all the documents on record and had stated so in the assessment order. The assessee had submitted details of all expenses, a list of creditors and details of purchasers in response to the notices u/s. 142(1) and 143(2). The details such as steel purchase, electrical materials, plumbing, labour charges, etc., were provided in detail. Even the queries in respect of other expenses, unsecured loans were furnished. In the assessment order also, it was stated that the reply, details, clarifications and explanation filed by the assessee were considered.

ii) Therefore, the reasons given ought to have specified the failure on the part of the assessee to disclose fully and truly all material facts. It was not enough to reproduce the language of the statutory provision. The reasons did not give any particulars as to the failure on the part of the assessee. It was nowhere stated that the second page of Note-15 was not part of the assessment record. Furthermore, it was not explained as to how the second page came to be missed. Even when this fact was stated by the assessee, while disposing of the objections, the Assessing Officer did not state that the second page of the note was not available.

iii) The notice for reopening of the assessment and the order rejecting the assessee’s objections were on an erroneous factual ground without looking at the relevant page. Since the foundation for reopening the assessment on the facts was erroneous, apart from various other legal challenges that arose, the notice and consequent order were quashed and set aside.”

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Reassessment — Notice under section 148 — Limitation — Notice for A. Y. 2013-14 sent by e-mail and received by the assessee on 1st April, 2021 — Notice issued beyond time limit — Not valid

78 Mohan Lal Santwani vs. UOI

[2022] 449 ITR 476 (All)

A. Y.: 2013-14

Date of order: 25th April, 2022

Sections: 147, 148 and 149 of ITA 1961

Reassessment — Notice under section 148 — Limitation — Notice for A. Y. 2013-14 sent by e-mail and received by the assessee on 1st April, 2021 — Notice issued beyond time limit — Not valid

For the A. Y. 2013-14 a notice under section 148 was sent by the Department by e-mail. The e-mail was received by the assessee on 1st April, 2021. The assessee filed a writ petition and challenged the validity of the notice.

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

“i) The principles of judicial discipline and propriety and binding precedent, are as follows :

(a) Judicial discipline and propriety are the two significant facets of administration of justice. The principles of judicial discipline require that orders of the higher appellate authorities are followed unreservedly by the subordinate authorities. The mere fact that the order of the appellate authority is not “acceptable” to the Department, in itself an objectionable phrase, or that is the subject matter of an appeal can furnish no ground for not following it unless its operation has been suspended by a competent court. If this healthy rule is not followed, the result will only be undue harassment to assessees and chaos in administration of tax laws.

(b) Just as judgments and orders of the Supreme Court have to be faithfully obeyed and carried out throughout the territory of India under article 141 of the Constitution, so should be judgments and orders of the High Court by all inferior courts and tribunals subject to supervisory jurisdiction within the State under articles 226 and 227 of the Constitution.

(c) If an officer under the Income-tax Act, 1961 refuses to carry out the clear and unambiguous direction in a judgment passed by the Supreme Court or High Court or the Income-tax Appellate Tribunal, in effect, it is denial of justice and is destructive of one of the basic principles in the administration of justice based on hierarchy of courts.

(d) Unless there is a stay obtained by the authorities under the Income-tax Act, 1961 from a higher forum, the mere fact of filing an appeal or special leave petition will not entitle the authority not to comply with the order of the High Court. Even though the authority may have filed an appeal or special leave petition, where it either could not obtain a stay or the stay is refused, the order of the High Court must be complied with. Mere filing of an appeal or special leave petition against the judgment or order of the High Court does not result in the assailed judgment or order becoming inoperative and unworthy of being complied with.

ii) It was evident that the notice u/s. 148 of the Income-tax Act, 1961 for the A. Y. 2013-14 was issued to the assessee on April 1, 2021, whereas the limitation of issuing the notice expired on March 31, 2021. Thus, notice u/s. 148 of the Act was time barred and consequently it was without jurisdiction. The notice cannot be sustained and is hereby quashed. Consequently, the order dated March 19, 2022 and the reassessment order dated March 29, 2022 for the A. Y. 2013-14 can also not be sustained and are hereby quashed inasmuch as, the jurisdictional notice itself was without jurisdiction.”

[It was directed that the Revenue shall ensure that the date and time of triggering of e-mail for issuing notices and orders are reflected in the online portal relating to the concerned assessees.]

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Rectification of mistake — Mistake apparent from record — Set-off of loss — Opinion of audit party on manner of set-off of loss — Opinion on a point of law — Not a mistake apparent from record — No reassessment proceedings could also have been permissible — Rectification order set aside

77 Ambarnuj Finance and Investment Pvt Ltd vs. Dy CIT

[2022] 450 ITR 40 (Del)

A. Y.: 2017-18

Date of order: 2nd November, 2022

Section: 154 of ITA 1961

Rectification of mistake — Mistake apparent from record — Set-off of loss — Opinion of audit party on manner of set-off of loss — Opinion on a point of law — Not a mistake apparent from record — No reassessment proceedings could also have been permissible — Rectification order set aside:

The assessee filed a writ petition challenging the rectification order passed under section 154 of the Income-tax Act, 1961 dated 15th February, 2021, passed by the Deputy Commissioner during the pendency of the assessee’s application for settlement of disputed tax under the Direct Tax Vivad Se Vishwas Act, 2020 and also seeking a direction to reconsider its application for settlement of disputed tax under the 2020 Act for the A. Y. 2017-18.

The Delhi High Court held as under:

“i) There was no mistake apparent in the computation of income in the assessment order dated December 21, 2019, within the meaning of section 154 of the 1961 Act which could have been a subject matter of rectification. The objection raised by the audit party was not a mistake apparent from the record, which could be corrected u/s. 154 of the 1961 Act, but an opinion in law on the manner in which set-off of business losses was to be permitted. The legal opinion of the audit party was at variance with the opinion of the Assessing Officer, who determined that it was permissible to add as income, the amount arising from disallowed bad debt resulting in reduction of loss, while passing the original assessment order. Therefore, there were two different legal opinions available on record with respect to the sequence of set off giving rise to a debatable issue. There was no legal error in the method of computation made in the original assessment order dated December 21, 2019. The Assessing Officer acting upon the audit party’s objection had set off the loss as claimed by the assessee in its original return, first against the other heads of income and then taxed the amount of disallowed bad debt as a stand alone addition to the returned income. This was contrary to facts as the amount of the disallowed bad debt had to be added to the income of the assessee to arrive at the net income or net loss and was not chargeable to tax as a separate head of income as was sought to be done.

ii) The objection raised by the audit party on the sequence of set-off of losses was an opinion on law and no reassessment proceedings could also have been permissible. The Assessing Officer himself was not of the independent opinion that the original assessment order passed by him on December 21, 2019, was erroneous in law and there was no new or fresh material before him except the opinion of the audit party. The objection raised by the audit party was in regard to the law which on the facts was debatable could not have formed the basis for passing a rectification order under section 154 of the 1961 Act. Therefore, the rectification order was set aside.”

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Identification of Related Party Relationships

This article evaluates whether (a) subsidiary of an associate is related to the investor and (b) associate of an associate is related to the investor under Ind AS 24 Related Party Disclosures.

QUERY

Following are the definitions of terms such as associate, significant influence, control and subsidiary under the respective standards.

Ind AS 28 Investments in Associates and Joint Ventures

Paragraph 3An associate is an entity over which the investor has a significant influence.Significant influence is the power to participate in the financial and operating policy decisions of the investee but is not control or joint control of those policies.

Ind AS 110 Consolidated Financial Statements

Appendix A – Defined termsControl of an investee – An investor controls an investee when the investor is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.Subsidiary – An entity that is controlled by another entity.In the table below, there are two examples:1. Investor X has an Associate Y, which has a Subsidiary Z2. Investor P has an Associate Q, which has an Associate R

In the above example is (a) X related to Z and (b) P related to R under Ind AS 24 Related Party Disclosures?

RESPONSE

Technical references

Ind AS 24 Related Party Disclosures

Paragraph 9

The following terms are used in this Standard with the meanings specified:

A related party is a person or entity that is related to the entity preparing its financial statements (in this Standard referred to as the ‘reporting entity’).

a) A person or a close member of that person’s family is related to a reporting entity if that person:

i. has control or joint control of the reporting entity;

ii. has significant influence over the reporting entity; or

iii. is a member of the key management personnel of the reporting entity or of a parent of the reporting entity.

b) An entity is related to a reporting entity if any of the following conditions applies:

i. The entity and the reporting entity are members of the same group (which means that each parent, subsidiary and fellow subsidiary is related to the others).

ii. One entity is an associate or joint venture of the other entity (or an associate or joint venture of a member of a group of which the other entity is a member).

iii. Both entities are joint ventures of the same third party.

iv. One entity is a joint venture of a third entity and the other entity is an associate of the third entity.

v. The entity is a post-employment benefit plan for the benefit of employees of either the reporting entity or an entity related to the reporting entity. If the reporting entity is itself such a plan, the sponsoring employers are also related to the reporting entity.

vi. The entity is controlled or jointly controlled by a person identified in (a).

vii. A person identified in (a)(i) has significant influence over the entity or is a member of the key management personnel of the entity (or of a parent of the entity).

viii. The entity, or any member of a group of which it is a part, provides key management personnel services to the reporting entity or to the parent of the reporting entity.

Paragraph 12

In the definition of a related party, an associate includes subsidiaries of the associate and a joint venture includes subsidiaries of the joint venture. Therefore, for example, an associate’s subsidiary and the investor that has significant influence over the associate are related to each other.

ANALYSIS AND CONCLUSION

Before we proceed to respond to the two questions, please note that definition of group under paragraph 9 (b) (i) means a parent, subsidiaries and fellow subsidiaries.

ANSWER TO QUESTION 1

X is related to Y, the associate in accordance with paragraph 9 (b) (ii) Y and Z belong to the same group, and X is related to this group by virtue of being an investor in the Associate Y. Consequently, X is related to Z. This is abundantly clear from Ind AS 24.12 which states that “in the definition of a related party, an associate includes subsidiaries of the associate”. Therefore, X and Z are related parties.

ANSWER TO QUESTION 2

P is related to Q, the associate in accordance with paragraph 9 (b) (ii). Q and R do not belong to the same group; therefore, P is related only to Q and not to R. Though, P and Q are related parties by virtue of being an investor and an associate respectively; P and R are not related parties, in accordance with the definition of related party in Paragraph 9 and in Paragraph 12 of Ind AS 24.

CONCLUSION

The broad conclusion that can be drawn from this article is that the relationships under Ind AS 24 are determined with reference to a group (parent and all its subsidiaries). If an entity is related to an entity of a group, it is related to all entities in that group. Therefore, in our example, since X is related to Y, it is related to Z since Y and Z are from the same group. On the other hand, P is related to Q but not to R since Q and R are not from the same group.

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Payment of Taxes Pending Appeal before Tribunal

ISSUE FOR CONSIDERATION

The tax demanded vide a notice under section 156, issued in pursuance of an order of assessment, is required to be paid within 30 days of the demand. A provision is made under section 220 for a stay of the recovery proceeding in deserving cases on an application to the AO in cases where an appeal is filed before CIT(A) against the assessment order. A similar provision is made under section 253(7) in cases where an appeal is filed before the Appellate Tribunal. No specific criteria have been laid down by section 220(6) or section 253(7) for the grant of stay, and the decision to stay the demand or otherwise is left to the discretion of the AO or the Tribunal. The Courts have held from time to time that a demand for tax should be stayed on satisfaction of troika of conditions which are financial stringency, prima facie case or high-pitched assessment and the possibility of success in appeal, and lastly the balance of convenience.

The CBDT, under the Ministry of Finance, has issued guidelines, addressed to the AO, for stay of the recovery proceeding in the circumstances specified in the guidelines issued from time to time. The Board has advised the AO to stay the recovery proceeding in cases of financial difficulties and also in cases of high pitched assessment, and in cases where the issue in appeal is covered in favor of assessee by the order of Courts, where an appeal has been filed by the assessee, and is pending for hearing and/or disposal by the CIT(A), provided, as per the latest guidelines of 2017, the assessee has paid 20 per cent of the taxes due, till the disposal of the first appeal.

The taxes due become payable in full on disposal of the first appeal against the assessee even where a second appeal is preferred before the Appellate Tribunal. The assessee, however, has an option to apply under section 254(7) to the Tribunal for a stay of the demand and recovery proceedings, and the Tribunal is empowered to stay the proceedings at its discretion, on being satisfied of the presence of the troika of the conditions. The Finance Act, 2020 has amended the First Proviso to sub-section (2A) of section 254 under which the Tribunal is empowered to stay the recovery proceedings on application under section 253(7) of the Act. The amendment provides that the Tribunal may pass an order of stay subject to the condition that the assessee deposits not less than 20 per cent of the amount of tax, interest, fee, penalty, or any other sum or, in the alternative, the assessee furnishes security of an equal amount. No such statutory restriction is provided in the Act on the powers of the CIT(A) or AO while entertaining an application for stay of the demand.

The tax demand arising out of the high-pitched assessment poses a serious challenge for the assessee, more so, where there is a financial difficulty or no liquidity of funds. The High Courts and even the Tribunal in such cases, on the touchstone of the troika of conditions, has ordered for complete stay of the proceedings without payment of 20 per cent of the taxes demanded.

Post the amendment of 2020, a difficulty is faced by the assessee and also by the Tribunal in granting a stay of demand where the assessee is unable to pay 20 per cent of the outstanding taxes demanded or to make an arrangement for security of the payment. The issue was first examined in the year 2020, immediately post amendment, by the Mumbai Bench of the Tribunal, which had found merit in the case of the assessee for grant of interim stay without payment of taxes and had referred the matter to the special bench of the Tribunal, keeping in mind the express provisions of the amendment of 2020.

Recently, the Mumbai Tribunal held that no application for stay under section 253(7) could be entertained without a payment of 20 per cent of the taxes demanded in view of the amendment of 2020 in the Act. The decision has raised serious concerns for the assessees and also in respect of the powers of the AO, CIT, CIT(A) and of the Courts, besides the Tribunal, to stay the recovery proceedings, even in the cases of serious hardship or where the issue is otherwise decided by the courts in favour of the assessee in other years, without payment of 20 per cent of the taxes demanded. With the latest decision of the Mumbai Bench of the Tribunal, delivered in the context of the first Proviso to section 254(2A), taking a view against the stay of the demand, the issue requires consideration in light of the independent powers of the AO and the other authorities, and also inherent powers of the Tribunal and those of the Courts.

HINDUSTAN LEVER’S CASE

The power of the Tribunal and its limitation, post amendment of 2020, was directly examined in the case of Hindustan Lever Ltd v/s. DCIT, 197 ITD 802 (Mum). In this case, an application for the stay of recovery proceedings, for A.Y. 2018-19, of the demand aggregating to Rs. 172.48 crore was made. The demand was raised under an assessment order passed under section 143(3) of the Act, against which an appeal was filed before the Tribunal and was pending for hearing. No payment or partial payment was made towards the tax demanded by the assessee.

The applicant company stated that its case on merits was covered by the decisions in its own case for the preceding previous year, on most of the grounds in appeal, and therefore it was not required to make any payment. It also stated that it was not in a position to make any payment. In applying for the blanket stay of the demand, it expressed that it was not required to make a payment and did not intend to make it.

In the context of the amendment in the first proviso to section 245(2A), requiring payment of 20 per cent of the taxes demanded, the applicant drew the attention of the Tribunal to the provisions of section 254(1) which empowered the Tribunal to pass such orders as it thought fit. The applicant also heavily relied on the decision of the Supreme Court in the case of M. K. Mohd.Kunhi,71 ITR 815, where the court held that the Tribunal had inherent powers of granting a stay on the recovery of disputed tax demand in fit and deserving cases, and the said powers were ancillary and incidental to the powers of disposing of an appeal. It further argued that the powers under section 254(1) could not be curtailed or diluted or narrowed down by the proviso to section 254(2A), which had no bearing on the powers of the Tribunal under section 254(1).

It was next highlighted that several co-ordinate benches of the Tribunal had granted a blanket stay of the recovery proceedings, post amendment, in fit and deserving cases. A reference was made to the guidelines of the CBDT which permitted the stay of demand in cases where an appeal was pending before the first appellate authority, and also to the cases where the issues in appeal were decided in favor of the assessee in other years by the courts. The applicant also highlighted that the High Courts in many cases have stayed the recovery proceedings, even in the cases where appeals were pending before the Tribunal.

In contrast, the Revenue brought to the attention of the Tribunal the inherent limitation imposed on the Tribunal by the first proviso to section 254(2A), which required the Tribunal to insist on payment of 20 per cent of the outstanding disputed tax. The attention of the Tribunal was invited to the amendment of 2020 to contend that the Tribunal had no power to grant a blanket stay.

The Tribunal, on due consideration of the rival contentions, observed and held as under;

The Tribunal had the power to grant a stay of demand under the powers of section 254(1) itself, which powers were incidental or ancillary to its appellate jurisdiction.
It noted with the approval the decision of the Supreme Court in Mohd.Kunhi‘s case (Supra), which had held that even in the absence of power to stay available to an AO under section 220(6), in cases of first appeal, the Tribunal had an inherent power to stay the demand once it assumed the appellate jurisdiction, provided the power was not used in a routine manner.
The position stated by the Supreme Court was changed by the amendment of 2020 and post amendment, no stay could be granted by the Tribunal without insisting on payment of 20 per cent of tax outstanding.
There was a difference between reading the power to stay the proceeding, when there was no express power to do so, and the case where there was an express statutory prohibition to grant a stay, unless a payment of 20 per cent of tax was made.
Reading and retaining the power to stay, post amendment of 2020, would render the amendment and its condition for payment otiose.
The Tribunal has no power to construct a provision that would make an express provision redundant.
The powers of the Tribunal should be gathered by harmonious reading of sections 254(1) and 2A) of the Act in a manner that did not destroy one of the provisions.
Granting a stay, post amendment, without payment would be a clear disharmony with the statutory condition of payment.
The law laid down in Mohd. Kunhi’s case stood modified in view of the amendment of 2020.
No courts have held that the Tribunal has the powers to stay the recovery proceedings, post the insertion of the amendment in sections 254(2A) of the Act, to permit the Tribunal to grant a stay without payment of taxes.

Having so held that it does not have the power to stay the demand, without payment of 20 per cent of the taxes, the Tribunal allowed the application for stay on assurance of the applicant that it would provide a security for the payment of outstanding tax demanded of an equal amount and directed the AO to stay the recovery proceeding on being satisfied that a security of an equal amount was furnished by the applicant which was an alternative permitted under the amendment of 2020.

TATA EDUCATION AND DEVELOPMENT TRUST

The issue first arose in the case of Tata Education and Development Trust vs. ACIT, 183 ITD 883 (Mum), for A.Ys.: 2011-12 and 2012-13.

In this case, involving stay applications, the assessee applicant was a public charitable trust registered under the Bombay Public Trust Act, 1950 as also as a charitable institution under section 12A of the Act. The assessee had returned NIL income, after claiming the amounts remitted to educational universities outside India as application of income under section 11(1)(c). This claim was disallowed by the AO on the grounds that the requisite approval of the CBDT for such remittance was not taken. The assessee challenged the orders of the assessment in appeal before the CIT(A) and, pending the disposal of the appeals, the assessee obtained the orders of approval for remittance by the CBDT. Based on the same, while the AO rectified the assessment orders, the same were ignored by the CIT(A) in adjudicating the appeal resulting in the disallowance and demand for taxes being upheld. The assesseee Trust challenged the order of the CIT(A) before the Tribunal and sought a stay on collection / recovery of the amount of tax and interest, etc., aggregating to Rs. 88.84 crore for the A.Y. 2011-12 and aggregating to Rs. 10.91 crore for the A.Y. 2012-13, in respect of the assessment orders under section 143(3) r.w.s. 250 of the Income-Tax Act, 1961, which were contested in appeal before the Tribunal.

The assesee submitted that its case was very strong on merits. It submitted that it was not open to the CIT(A), in any case, to question the wisdom of the CBDT, and that on passing the order of rectification by the AO himself, the appeals had become infructuous, and that there was a very strong prima facie case, and very good chances to succeed in appeals before the Tribunal. It was thus urged that the assessee had a reasonably good case in appeal, that there was no apprehension to the interests of the revenue by waiting till outcome of the appeal, and that therefore, the balance of convenience was in favour of the demands being stayed till the outcome of the appeals.

It was explained that the amendment in the first Proviso to Section 254(2A) vide Finance Act, 2020, was only directory, not mandatory, in nature, and it did not curtail the powers of the Tribunal; it was submitted that any other interpretation would result in unsurmountable practical difficulties. With examples, it was explained to the Tribunal that taking a different view would require the payment of the mandated tax even in cases where the issue has been squarely decided in favor of the assessee in its own case for a different year by the High Court or the Supreme Court or a case where the Tribunal or the High Court had decided the issue in the assessee’s favor and the Department had preferred an appeal before the higher court just to keep the matter alive. It was also explained that the view that the provision was mandatory in nature and would result in a situation which was completely arbitrary, unconstitutional and contrary to the well settled scheme of law.

On the other hand, the Revenue submitted that so far as the merits of the case was concerned, there was a good chance for the Revenue to support the appellate order, in as much as the AO could not have subjected the contentious issue to rectification proceedings, and, in any case, presently the appeals were not being argued on merits, and, therefore, it was not really material whether the assessee had a good case or not. It was pointed out that no case had been made out for the paucity of funds, and that, in any case, in view of the amendment to the first proviso to Section 254 (2A), the assessee was required to pay at least 20 per cent of the disputed demand raised on the assessee. The Memorandum explaining the provisions of the Finance Bill, 2020 specifically stated that the condition was inserted for payment of 20 per cent of tax and was mandatory. It was submitted that the intention of the legislature was very clear and unambiguous, that the assessee had to pay at least 20per cent of demand for a stay of the balance amount of tax demanded.

On due consideration of the contentions of the rival parties, the Tribunal granted an interim stay of the demand to remain in operation till the time the stay applications were finally adjudicated by the Special bench of the Tribunal, to which the applications were referred to for the final adjudication by the division bench of the Tribunal, by observing that there were two very significant aspects of the whole controversy- first, with respect to the legal impact, if any, of the amendment in first proviso to Section 254(2A) on the powers of the Tribunal, under section 254(1) to grant stay; and, second, if this amendment was held to have any impact on the powers of the Tribunal under section 254(1),- (a) whether the amendment was directory in nature, or was mandatory in nature; (b) whether the said amendment affected the cases in which appeals were filed prior to the date on which the amendment came into force; (c) whether, with respect to the manner in which, and nature of which, security was to be offered by the assessee under first proviso to Section 254(2A), what were the broad considerations and in what reasonable manner such a discretion must essentially be exercised, while granting the stay by the Tribunal.

While recommending the stay applications for consideration of the special bench, the Tribunal observed as under; “We are of the considered view that these issues are of vital importance to all the stakeholders all over the country, and in our considered understanding, on such important pan India issues of far reaching consequence, it is desirable to have the benefit of arguments from stakeholders in different part of the country. We are also mindful of the fact, as learned Departmental Representative so thoughtfully suggests, the issues coming up for consideration in these stay applications involve larger questions on which well-considered call is required to be taken by the bench. Considering all these factors, we deem it fit and proper to refer the instant Stay Applications to the Hon’ble President of Income Tax Appellate Tribunal for consideration of constitution of a larger bench and to frame the questions for the consideration by such a larger bench, under section 255(3) of the Income Tax Act, 1961.”

The Tribunal granted an interim stay on collection/ recovery of the aggregate amounts of tax and interest, etc, amounting to Rs. 88.84 crores and Rs. 10.91crores for the A.Ys. 2011-12 and 2012-13 respectively, on the condition of giving an undertaking to not to dispose of the investments of a value equivalent to the amount of tax demanded.

DR. B. L. KAPUR MEMORIAL HOSPITAL’S CASE

The issue of stay recently came up for consideration of the Delhi High Court in the case of Dr. B L Kapur Memorial Hospital vs. CIT, (2022) 11 DEL CK 0160, Civil Writ Petition No. 16287, 16288 Of 2022. In this case, the writ petitions were filed before the High Court, challenging the orders dated 6th September, 2022 and 7th November, 2022, rejecting the applications filed by the petitioner assessee and directing the assessee to make a payment to the extent of 20 per cent of the total tax demand arising under section 201(1) of the Income Tax Act, 1961, for the A.Ys. 2013-14 and 2014-15.

The AO had passed orders dated 30th March, 2021 under Section 201(1) / 201(1A) of the Act holding the assessee to be an ‘assessee-in-default’ for short deduction of tax at source of Rs. 16.47 crores and Rs. 20.09 crores for A.Ys. 2013-14 and 2014-15, respectively. Aggrieved by the orders, the assessee had filed appeals, along with an application seeking a stay on the recovery of demand.

The stay applications filed by the assessee were dismissed in a non-speaking manner and the assessee was directed to pay 20 per cent of the disputed demand. The review petitions filed by the assessee were also rejected without dealing with the contentions raised by the petitioner assessee. It was explained to the authorities and the Court that the assessee hospital had executed contracts for service, and not contract of service with its consultant doctors, and the consultant doctors had paid their tax dues, and as such no tax was payable by the assessee hospital as per the first proviso to Section 201 of the Act, which however was summarily ignored by the authorities.

It was contended that the AO or the CIT, while disposing of the stay applications, had failed to appreciate that the condition under Office Memorandum dated 31st July, 2017, read with the Office Memorandum dated 29th February, 2016, stating that, “the assessing officer shall grant stay of demand till disposal of the first appeal on payment of twenty per cent of the disputed demand”, were merely directory in nature and not mandatory. In support of the submission, the assessee had relied on the decision of the Supreme Court in Pr. CIT vs. LG Electronics India (P) Ltd., 303 CTR 649 (SC) wherein it had been held that it was open to the tax authorities, on the facts of individual cases, to grant stay against recovery of demand on deposit of a lesser amount than 20 per cent of the disputed demand, pending disposal of appeal.

In reply, the Revenue contended that the consultant doctors of the assessee hospital were not allowed to work in any other hospital; consequently, the consultant doctors had executed a contract of service and not a contract for service and that the first proviso to Section 201 was not attracted to the cases of the assessee.

Having heard the parties and having perused the two Office Memoranda in question, the Court held that the requirement of payment of 20 per cent of the disputed tax demand was not a pre-requisite for putting in abeyance the recovery of demand pending first appeal in all cases; the said pre- condition of deposit of 20 per cent of the demand could be relaxed in appropriate cases; even the Office Memorandum dated 29th February, 2016, gave instances like where addition on the same issue had been deleted by the appellate authorities in the previous years or where the decision of the Supreme Court or jurisdictional High Court was in favour of the assessee where a demand could be stayed; the Supreme Court in the case of PCIT vs. M/s LG Electronics India Pvt. Ltd. (Supra) had held that the tax authorities were eligible to grant a stay on the deposit of amounts lesser than 20 per cent of the disputed demand in the facts and circumstances of a case.

Having held so, the court noted that the impugned orders were non-reasoned orders and neither the AO nor the Commissioner of Income Tax had dealt with the contentions and submissions advanced by the assessee nor had they considered the three basic principles i.e. the prima facie case, balance of convenience and irreparable injury, while deciding the stay application.

Consequently, the orders and notices were set aside, and the matters were remanded back to the Commissioner of Income Tax for fresh adjudication of the application for stay, with a direction to grant a personal hearing to the assessee.

BHUPENDRA MURJI SHAH’S CASE

The issue of the stay of demand had arisen before the Bombay High Court in the case of Bhupendra Murji Shah vs. DCIT 423 ITR 300, before the amendment of 2020. In this case, the assessee petitioner had filed an appeal against the assessment orders demanding the sum of Rs. 11,15,99,897 for A.Y. 2015-2016 and a similar amount for A.Y. 2016-17, which were not paid. He had, in the meanwhile, filed appeals before the CIT (A), and had approached the AO, pending the appeals, with an application termed as a request for stay of the demand for taxes.

The applications for stay were dismissed and the petitioner assessee was ordered to pay 20 per cent of the outstanding amount as prescribed in Office Memorandum dated 29th February, 2016, and produce the challan and seek stay of demand again, failing which collection and recovery would continue, and the appeal would be heard on payment of taxes.

The Court observed that the right of appeal vested in the petitioner assessee by virtue of the statute should not be rendered illusory and nugatory by such communication from the Revenue. The Court was concerned with the mistaken understanding of the authorities that on failure of the assesseee to pay the 20 per cent of the tax demanded, the petitioner might not have an opportunity to even argue his appeals on merits, or that the appeals would become infructuous, if the demand was enforced and executed during the pendency. The court observed that the right to seek protection against collection and recovery, pending appeals, by making an application for stay could not be defeated and frustrated, as doing so would be against the mandate of law.

In the circumstances, the Court directed the appellate authority to conclude the hearing of the appeals as expeditiously as possible and, during pendency of the appeals, the petitioner should not be called upon to make payment of any sum, much less to the extent of 20 per cent of the demand or claim outstanding. The Court noted that, in ordinary circumstances, it would have relegated the petitioner to the remedy of making an application for stay before the Commissioner (Appeals), and thereafter left it to the Commissioner (Appeals) to take an appropriate decision thereon. However, since the appeals were being held back, the order for stay was passed by the Court, which order could not be treated as a precedent for all cases of this nature. The Court directed that during the pendency of the appeals, the petitioner should not dispose of or create any third party right in respect of his movable assets and properties, subject however, with the permission to use assets and properties in the ordinary and normal course of business.

OBSERVATIONS

No revenue law could be held to be equitous, fair and judicious without the provision for the right to challenge the order of the authorities appointed under the law before the same authorities or the higher or the superior authorities. This understanding of law equally applies to the tax demands arising out of the orders passed by these authorities. A statute for levy of tax, duty, cess, fee or any other revenue by the government should ideally provide for the right to challenge any order, and the demands arising out of such orders. In cases where the remedies are not expressly provided for in these statutes, they may be read into the statute. This power to challenge, however could be subjected to specific condition incorporated in the statute itself, provided compliance of such condition is possible under the circumstances of each case, Secondly the power to read the right to challenge, and even to insist for relaxation of condition, should be entertained in cases wherein the order in question is prima facie not tenable in law; where it is passed in violation of the tenets of law touching the existence of a judicious system of law. It is on this sound understanding that the courts have regularly and liberally stayed the recovery proceedings, and, in doing so, the courts have, over the period, laid down certain conditions known as troika of conditions, which conditions have so far acted as a lighthouse in the matters of staying the recovery proceedings.

The condition for payment of a certain percentage of the tax demand has been prescribed by the Board in Office Memoranda of 2016 and 2017, without in any manner withdrawing the power of the AO, Additional CIT, CIT, PCIT and CCIT to stay the recovery of taxes in fit and deserving cases on satisfaction of the conditions otherwise prescribed in the past from 1969 onwards.

It is significant to note that this power to grant a stay has not been subjected to any express statutory condition for any of the authorities, other than in respect of the Tribunal. An express condition is provided by the legislature only in respect of the Tribunal’s power to stay the proceedings, by amending section 254(2A) providing for the payment of 20 per cent of the tax due before a stay is granted by it. This has created a highly anomalous situation wherein the authorities lower than the Tribunal have the discretion to grant a blanket stay, while the Tribunal’s power is limited to grant of stay for 80 per cent of tax demand only.

It should be just and fair for the Tribunal to examine the condition of the assessee, and use its inherent power to grant a stay of demand in full, on being satisfied that the assessee otherwise has complied with the conditions for the grant of stay, and its case is fit and deserving. Taking any other view might mean that the Tribunal has necessarily to grant the stay once the stipulated condition is satisfied by payment of 20 per cent of tax demanded, even where the case of the assessee otherwise does not deserve a stay.

An assessee will be advised to move the Court for a grant of a complete stay of demand, in cases where the Tribunal has rejected the stay application only on the grounds that the assessee has failed to pay 20 per cent of the demand. The High Court is not shackled by any provision of the law, express or otherwise, in granting the complete stay of the recovery proceeding for 100 per cent of the tax demanded.

The issue was first examined by the Tribunal in the case of Tata Education & Development Trust, (supra) and the Tribunal by an order dated 17th June, 2020 granted an interim stay of the demand of taxes and referred the issue to the Special Bench on the grounds that the issue was of greater importance with wider application on the national level and it was appropriate to refer the matter to the special bench. The said reference since than was withdrawn by the Tribunal on adjudication of the appeals in favour of the Trust, leading to cancellation of the tax demands. The time has come for the Tribunal to make or approve of another reference to the Special Bench to set the issue at rest.

It is a settled position that any Court, including the Tribunal, while interpreting a statutory provision, cannot interpret it so as to render the provision unworkable and contrary to the settled law. In the context of the Third Proviso of the same section 254 (2A), providing for a limitation on the period of stay granted prohibiting the extension of the stay and /or vacation of the stay, even where the assessee was not in default, the Bombay High Court in the case of Narang Overseas Pvt Ltd vs. ITAT, 295 ITR 22 held that the third proviso to Section 254 (2A) was directory in nature; that the proviso could not be read to mean or that a construction be given for holding that the power to grant interim relief was denuded, even where acts attributable for delay were not of assessee but of revenue or of Tribunal itself. It was held that the power of the Tribunal to grant stay or interim relief, being inherent or incidental, was not overridden by the language of the proviso to section 254 (2A).

The Supreme Court, in the case of DCIT vs. Pepsi Foods Ltd 433 ITR 295, has approved the decision of the Bombay High Court in Narang Overseas (supra), holding as under:

“The object sought to be achieved by the third proviso to section 254(2A) is without doubt the speedy disposal of appeals before the Appellate Tribunal in cases in which a stay has been granted in favour of the assessee. But such object cannot itself be discriminatory or arbitrary. Since the object of the third proviso to section 254(2A) is the automatic vacation of a stay that has been granted on the completion of 365 days, whether or not the assessee is responsible for the delay caused in hearing the appeal, such object being itself discriminatory, in the sense pointed out above, is liable to be struck down as violating article 14 of the Constitution of India. Also, the said proviso would result in the automatic vacation of a stay upon the expiry of 365 days even if the Tribunal could not take up the appeal in time for no fault of the assessee. Further, vacation of stay in favour of the revenue would ensue even if the revenue is itself responsible for the delay in hearing the appeal. In this sense, the said proviso is also manifestly arbitrary being a provision which is capricious, irrational and disproportionate so far as the assessee is concerned.”

The Punjab & Haryana High Court in the case of PML Industries Ltd vs,Vs CCE (2013) SCC OnLine P&H 4440, in the context of a similar condition under the Central Excise Act, held that such a condition was directory and not mandatory, and that the Tribunal, in appropriate circumstances, could extend the period of stay beyond 180 days. Likewise, the amendment to Section 254(2A) by the Finance Act, 2020, in the first Proviso should be read as directory and not mandatory in nature.

Reading the condition for payment of 20 per cent as mandatory for admission of appeal, would cause serious harm to the right of the appeal vested in the assessee. The right of appeal is a creation of a statute, and such right of appeal cannot be circumscribed by the conditions imposed by the Legislature as well. In Hoosein Kasam Dada (India) Ltd. vs. State of Madhya Pradesh AIR 1953 SC 221, the Supreme Court held that a provision which is calculated to deprive the appellant of the unfettered right of appeal cannot be regarded as a mere alteration in procedure. It was held that in truth such provisions whittle down the right itself and cannot be regarded as a mere rule of procedure.

The Tribunal has the power to grant a stay and even to award costs; a direct appeal lies to the High Court against its order and the Tribunal is entitled to try a person for contempt under the Contempt of Courts Act, 1979. It has all the trappings of a Court, and its powers are similar to the power of an appellate Court under the Code of Civil Procedure. As such the powers of the Tribunal are widest possible, and should authorize it to interpret the provisions of law and supply meaning to the amendments including the implication of the amendment to first Proviso to section 254 (2A) of the Act. It has the powers to pass such orders as it thinks fit under section 254(1), which powers should include the power to stay the demand for taxes payable out of the assessment order in appeal before it. This power is an inherent power, independent of the power under section 254(2A) of the Act, and such inherent power under section 254(1) is not scuttled or curtailed or limited by the provisions of section 254(2A) or its Provisos. There is nothing in section 254(2A) to overwrite or even limit the powers of the Tribunal conferred under section 254(1) of the Act. Chitra Devi Soni, 313 ITR 174 (Raj.). The powers of the Tribunal include all the powers which are conferred upon the CIT(A) by section 251 which should include the power to grant stay in fit and deserving cases. Hukumchand, 63 ITR 233 (SC).

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Income — Income deemed to accrue or arise in India — Fees for technical services — Technical services do not include construction, assembly and design — Contract for design, manufacture and supply of passengers rolling stock including training of personnel — Dominant purpose of contract was supply of passenger rolling stock — Training of personnel ancillary — Amount received under contract could not be deemed to accrue or arise in India:

76 CIT vs. Bangalore Metro Rail Corporation Ltd [2022] 449 ITR 431 (Karn)
A. Y.: 2011-12
Date of order: 30th June, 2022
Section: 9(1)(vii) of ITA 1961:

Income — Income deemed to accrue or arise in India — Fees for technical services — Technical services do not include construction, assembly and design — Contract for design, manufacture and supply of passengers rolling stock including training of personnel — Dominant purpose of contract was supply of passenger rolling stock — Training of personnel ancillary — Amount received under contract could not be deemed to accrue or arise in India:

The assessee entered into a contract with a consortium consisting of BEML, H, MC and ME, of which, BEML was the consortium leader, for design manufacture, supply, testing and commissioning of passenger rolling stock, including training of personnel and supply of spares and operation. The total cost of the contract was Rs. 1672.50 crores. The Department conducted a survey under section 133A of the Income-tax Act, 1961 and observed that a sum of Rs. 182 crores had been paid by the assessee to the consortium. The Department was of the view that the assessee ought to have deducted tax at source before making the payment. Accordingly, a show-cause notice dated 27th December, 2011was issued calling upon the assessee to show cause why it should not be treated “as an assessee-in-default” under section 201(1) of the Act for not deducting tax at source and remitting it to the Government. The assessee submitted its reply contending, inter alia, that the contract was one for supply of coaches and other activities such as design, testing, commissioning and training were only incidental to achieving the dominant object and therefore, it would constitute a sale of goods and hence, the provisions of section 194C or section 194J would not apply. It also contended that the assessee was not aware how the consortium partners had utilized the 10 per cent. of the contract amount given as “mobilisation amount”. The AO, not being satisfied with the assessee’s reply, treated it as ”an assessee-in-default” and levied tax and interest thereon under section 201(1A) of the Act.

The Tribunal allowed the assessee’s appeals.

On appeals by the Department, the Karnataka High Court upheld the decision of the Tribunal and held as under:

“i) A careful perusal of Explanation 2 to section 9(1)(vii) of the Income-tax Act, 1961 shows that fees for technical services do not include construction, assembly and mining operation, etc.

ii) The contract was one for designing, manufacturing, supply, testing, commissioning of passenger rolling stock and training personnel. The total contract was for Rs. 1,672.50 crores whereas, the training component was about Rs. 19 crores. All cheques had been issued in favour of BEML. Firstly, the Revenue had taken a specific stand before the Tribunal that the contract was a composite contract. Secondly, the dominant purpose of the contract was for supply of rolling stocks and the cost towards service component was almost negligible. Thirdly, the word “assembly” must include the manufacture or assembly of rolling stock by BEML, being the consortium leader. Fourthly, the entire payment had been made in favour of BEML. Fifthly, the Revenue had not raised any objection with regard to payment of 90 per cent. of the project costs, so far as deduction u/s. 194J was concerned.

iii) For these reasons the questions raised by the Revenue were not substantial questions for consideration. The tax and interest thereon levied u/s. 201(1A) were not valid.”

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Charitable purpose — Exemption under section 11 — Effect of s13 — Transactions between trustee and related party — Diversion of income of charitable institution must be proven for application of s.13 — No evidence of diversion of funds — Exemption could not be denied to the charitable institution

75 CIT(Exemption) vs. Shri Ramdoot Prasad Sewa Samiti Trust

[2022] 450 ITR 288 (Raj)

A. Y.: 2012-13

Date of order: 8th December, 2022

Sections: 11 and 13 of ITA 1961

Charitable purpose — Exemption under section 11 — Effect of s13 — Transactions between trustee and related party — Diversion of income of charitable institution must be proven for application of s.13 — No evidence of diversion of funds — Exemption could not be denied to the charitable institution

The respondent-assessee is a trust registeredunder section 12AA of the Income-tax Act, 1961. The assessee had claimed exemption under section 11 of the Act for the A. Y. 2012-13. The AO noticed that the assessee had made total purchases of raw materials worth Rs. 12.24 crores (rounded off) out of which purchases of Rs. 9 crores were made from Pawansut Trading Company Pvt Ltd. Upon further scrutiny it was found that the one Kishorepuri Ji Maharaj was the main trustee of the assessee-trust and also the director of the said company and from whom purchases worth 75 per cent. were made. The AO was of the opinion that such substantial purchases made from a related party had to be at arm’s length. The AO thereupon referred to section 13 of the Act and without any further discussion concluded that the assessee-trust has made purchases on unreasonable rates from Pawansut Trading Pvt Ltd, New Delhi who is person specified under section 13(3). The AO held that the management of the trust has used the property of the trust for their personal benefits without justification which attracts the provisions of section 13(1)(c)(ii) r.w.s. 13(2)(g) of the Act as such the assessee is not eligible to claim exemption under sections 11 and 12 of the Act.

The Commissioner (Appeals) called for the remand report and thereafter deleted the disallowance by observing that the rates of purchase by the assessee from the related party were same as with unrelated party. Further, there were no findings in the assessment order on the basis of which additions were made except that purchases have been made from the related party. The appellant has also proved that such purchases were made at the same rate as paid to unrelated party. The Tribunal confirmed the view of the Commissioner (Appeals).

The Rajasthan High Court dismissed the appeal filed by the Revenue and held as under:

“i) Clause (g) would be applicable in a case where any income or property of a trust or institution is diverted during the previous year in favour of any person referred to in sub-section (3). Sub-section (3) in turn relates to persons or institutions which are closely related such as the author of the trust or the founder of the institution, any trustee of the trust or manager of the institution etc. Clause (g) would apply where any income or property of the trust or institution is “diverted” during the previous year in favour of any person referred to in sub-section (3). The crux of this provision is diversion of income. Mere transaction of sale and purchase between two related persons would not be covered under the expression “diversion” of income. Diversion of income would arise when the transaction is not at arm’s length and the sale or purchase price is artificially inflated so as to cause undue advantage to other person and divert the income.

ii) The assessee and P Ltd. were entities covered under sub-section (3) of section 13. However, the Assessing Officer never examined whether the transactions between the assessee and the company were at arm’s length. He merely referred to statutory provisions and without further discussion came to the conclusion that disallowance had to be made. The Commissioner (Appeals) not only criticised this approach of the Assessing Officer but also independently examined whether the transaction was at arm’s length. It was found that the rate paid to the related person was the same as paid to the unrelated party.

iii) The Tribunal confirmed this view and correctly so. On the facts and in the circumstances of the case and in law the Tribunal was correct in allowing exemption u/s. 11 of the Act, to the assessee.”

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Capital or revenue receipt — Interest — Interest earned from fixed deposits of unutilised foreign external commercial borrowing loans during period of construction — Interest received was capital receipt

74 Principal CIT vs. Triumph Realty Pvt Ltd (No. 1)[2022] 450 ITR 271 (Del)

A. Y.: 2012-13

Date of order: 31st March, 2022

Capital or revenue receipt — Interest — Interest earned from fixed deposits of unutilised foreign external commercial borrowing loans during period of construction — Interest received was capital receipt

The assessee availed foreign external commercial borrowings of Rs. 82.37 crores for the purpose of acquisition of a capital asset, i. e., renovation and refurbishment of hotel acquired by the assessee under the Securitization and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002. The entire loan was disbursed in a single tranch in the A. Y. 2012-13 and during this year, the assessee could utilise only Rs. 33.70 crores. Therefore, the assessee had temporarily made fixed deposits of the external commercial borrowing funds till utilisation for fixed asset or capital expenditure. The assessee had paid interest of Rs. 13.38 crores on the borrowings and had earned interest of Rs. 4.03 crores on the fixed deposits. The net interest of Rs. 9.35 crores was added to the preoperative expenditure pending capitalization.

The Tribunal allowed the capitalisation of interest on fixed deposit receipts earned during the period of construction.

The Delhi High Court dismissed the appeal filed by the Revenue and held as under:

“The Tribunal had not erred in allowing the capitalisation of interest on fixed deposits earned during the period of construction by the assessee. No question of law arose.”

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Business expenditure — Deduction only on actual payment — Electricity duty — Assessee, a licensee following mercantile system of accounting — Merely an agency to collect electricity duty from consumers and to pay it to State Government — Provisions of section 43B not applicable

73 Principal CIT vs. Dakshin Haryana Bijli Vitran Nigam Ltd

[2022] 449 ITR 605 (P&H)

A. Y.: 2008-09

Date of order: 3rd August, 2022

Section: 43B of ITA 1961

Business expenditure — Deduction only on actual payment — Electricity duty — Assessee, a licensee following mercantile system of accounting — Merely an agency to collect electricity duty from consumers and to pay it to State Government — Provisions of section 43B not applicable

The assessee was a licensee under the Electricity Act, 2003 and distributed power in the State of Haryana. For the A. Y. 2008-09, the AO made a disallowance with respect to the electricity duty under section 43B of the 1961 Act.

The Commissioner (Appeals) and the Tribunal deleted the disallowance.

On appeals by the Revenue, the Punjab & Haryana High Court upheld the decision of the Tribunal and held as under:

“i) Under section 43B(a) of the Income-tax Act, 1961 a deduction otherwise allowable under the Act in respect of any sum payable by the assessee by way of tax, duty, cess or fee, by whatever name called, under any law for the time being in force, shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of the previous year in which such sum is actually paid by him. Section 43B contains a non obstante clause. It was inserted by Finance Act, 1983 with an intent to curb the malpractice at the hands of certain taxpayers, who claimed statutory liability as a deduction without discharging it and pleaded the mercantile system of accounting as a defence.

ii) The liability to pay electricity duty lies on the consumer and it is to be paid to the State Government. Section 4 of the Punjab Electricity (Duty) Act, 1958 casts a duty on the licensee to collect the electricity duty from the consumers and to pay it to the State Government. The licensee is only a collecting agency.

iii) The contention of the Department that section 43B of the 1961 Act would be attracted merely for the reason that the assessee followed the mercantile system of accounting was rejected. The Department was required to show that the electricity duty was payable by the assessee. There was no such provision contained in the 1958 Act which showed that the liability to pay the electricity duty was upon the assessee. Rather section 4 of the 1958 Act read with the provisions contained in the Punjab Electricity (Duty) Rules, 1958 made it clear that the assessee was merely an agency assigned with a statutory function to collect electricity duty from the consumers and to pay it to the State Government. Therefore, the provisions of section 43B of the 1961 Act would not be applicable to the assessee.”

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Assessment — International transactions — Proceedings under section 144C mandatory — Draft assessment order proposing variations to returned income must be submitted to DRP — Order of remand — Order passed on remand must also be submitted to DRP — Failure to do so is an incurable defect

72 Principal CIT vs. Appollo Tyres Ltd

[2022] 449 ITR 398 (Ker)

A. Y.: 2009-10

Date of order: 23rd September, 2021

Section: 144C of ITA 1961

Assessment — International transactions — Proceedings under section 144C mandatory — Draft assessment order proposing variations to returned income must be submitted to DRP — Order of remand — Order passed on remand must also be submitted to DRP — Failure to do so is an incurable defect

For the A. Y. 2009-10, for determination of the arm’s length price of the assessee’s international transactions, a reference was made to the Transfer Pricing Officer under section 92CA of the Income-tax Act, 1961. The AO served on the assessee the draft assessment order under section 144C(1) of the Act. The assessee filed objections to the draft assessment order under section 144C of the Act upon which the Dispute Resolution Panel(DRP) issued directions to the AO. The AO passed a final assessment order against which the assessee appealed before the Tribunal. The Tribunal allowed the appeal in part and remitted the matter to the AO for fresh assessment on the issues referred to the AO. The AO thereupon passed a revised final assessment order under section 144C of the Act. The assessee filed an appeal before the Commissioner (Appeals) against the revised final assessment order who allowed the appeal in part. Against this order the Department filed an appeal to the Tribunal while the assessee filed cross objections questioning the legality and propriety of the revised final assessment order of the AO. The Tribunal dismissed the Department’s appeal and allowed the assessee’s cross objections.

The Kerala High Court dismissed the appeal filed by the Department and held as under:

“i) In cases to which section 92CA of the Income-tax Act, 1961 is attracted, the assessment could be completed only by following the procedure u/s. 144C of the Act. At the first instance the Assessing Officer u/s. 144C(1) forwards a draft of the proposed order of assessment known as draft order to the assessee, in the event the Assessing Officer proposes a variation to the income return which is prejudicial to the assessee. The assessee u/s. 144C(2) has the option within 30 days to accept the variation or file objections to the proposed draft variation of the Assessing Officer. The issues at divergence being proposed variation and objections of the assessee are made over to the Dispute Resolution Panel (DRP) u/s. 144C(15). The DRP follows the procedure stipulated by section 144C(5) to (12) and finally issues directions to the Assessing Officer. The directions of the DRP are binding on the Assessing Officer and the final assessment order is issued by the Assessing Officer in terms of the DRP directives. The Assessing Officer does not have jurisdiction to make a revised final assessment order without recourse to the DRP. The omission in redoing the procedure u/s. 144C is not a curable defect. Once there is a clear order of setting aside of an assessment order with the requirement of the Assessing Officer/Transfer Pricing Officer to undertake a fresh exercise of determining the arm’s length price, the failure to pass a draft assessment order, would violate section 144C(1) of the Act result. This is not a curable defect in terms of section 292B of the Act.

ii) The requirement of redoing the same procedure upon remand to the Assessing Officer u/s. 144C is mandatory and omission in following the procedure is an incurable defect. Hence the order was not valid. The filing of appeal before the Commissioner (Appeals) could not be treated as a waiver of an objection available to the assessee in this behalf u/s. 144C. Section 253(1)(d) provides for appeal only when order has been made u/s. 143(3) read with section 144C of the Act.

iii) For the above reasons and the discussion the questions are answered in favour of the assessee and against the Revenue.”

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Article 4 of India – Singapore tax treaty – Tie Breaker in case of individual breaks in favor of Singapore since the assessee stayed in a rental house with his family in Singapore. The Indian house was rented and the assessee paid tax on Singapore income.

15 Sameer Malhotra vs. ACIT
[2023] 146 taxmann.com 158 (Delhi – Trib.)
[ITA No: 4040/Del/2019]
A.Y.: 2015-16
Date of order: 28th December, 2022

Article 4 of India – Singapore tax treaty – Tie Breaker in case of individual breaks in favor of Singapore since the assessee stayed in a rental house with his family in Singapore. The Indian house was rented and the assessee paid tax on Singapore income.

FACTS

The assessee received salary income from the Indian Company (ICO) for the period 1st April, 2014 to 25th November, 2014 and from Singapore Company (Sing Co) from 15th December, 2015 to 31st March, 2015. The assessee did not offer salary received from Sing Co to tax in India on the basis that under India-Singapore DTAA he was a resident of Singapore. The AO held that the assessee was a resident of India under Act as he was physically present in India for more than 182 days. Further, the assessee was an Indian resident even under the tie-breaker test of the DTAA. CIT(A) upheld the order of the AO. Being aggrieved, assessee appealed to Tribunal.

HELD

The assessee shifted with his family to Singapore, stayed there for the whole of the remaining period in the relevant assessment year and earned the income while serving in Singapore itself.

The assessee had an apartment on rent in Singapore, obtained a Singapore driving license, had overseas Bank Account, showed Singapore as his country of residence in various official forms and even paid taxes in Singapore while working from there.

With respect to tie-breaker test the Tribunal held that:

Permanent Home – The permanence of home can be determined on qualitative and quantitative basis. Although the assessee owned a home in India, it was not available to him as it was rented out by him.

Centre of Vital Interests Test: The CIT(A) held that the centre of vital interests of the asssessee was in India and not in Singapore, as the majority of the savings, investments and personal bank accounts are in India. However, the assessee worked in Singapore during the period under consideration and stayed there along with his family for the purpose of earning income. Thus, his personal and economic relations remained in Singapore only.

Habitual Abode: Habitual abode does not mean the place of permanent residence, but in fact it means the place where one normally resides. Since the assessee had an apartment on rent in Singapore and resided therein only, he had a habitual abode in Singapore.

Based on above, it was held that assessee was a tax resident of Singapore. Accordingly, as per Article 15(1) of the India-Singapore DTAA, which states that remuneration derived by a resident of a contracting state in respect of an employment shall be taxable only in that State unless the employment is exercised in the other contracting state, the assessee’s income earned in Singapore was held to be non-taxable in India.

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Article 5 of India-Switzerland DTAA – Liaison Office (LO) does not constitute PE as long as it is adhering to the approval conditions imposed by RBI

14 S.R Technics Switzerland Ltd vs. ACIT (International Taxation)

[ITA No: 6616/Mum/2018]

A.Y.: 2015-16

Date of order: 25th November, 2022

Article 5 of India-Switzerland DTAA – Liaison Office (LO) does not constitute PE as long as it is adhering to the approval conditions imposed by RBI

FACTS

Assessee, a Swiss Company was engaged in the maintenance, repair and overhaul for aircrafts, engines and components. It had a subsidiary company in Switzerland (Swiss Sub Co). Swiss Sub Co had set up a LO in India. The AO alleged that the said LO constituted the PE of the assessee in India. The assessee appealed to the DRP. The DRP upheld the order of the AO. Being aggrieved, the assessee appealed to the Tribunal.

HELD

Tribunal took note of following factual aspects:

Employees of the LO do not negotiate, finalize or discuss contractual aspects including pricing with the assessee’s customers.
Employees of LO are acting as a communication link between the assessee and customers.
The LO did not carry any activity, beyond that permitted by the RBI
LO did not have any infrastructure, facilities or stock of goods to carry out maintenance activities or render services.
Staff was not of seniority who can negotiate with the customers, sign and finalize the contracts
Activities carried by LO are preparatory and auxiliary in nature. RBI accepted the functioning of the LO indicating that the LO could not carry on any business or trading activity.

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When the AO had himself observed that the undisclosed income surrendered by the assessee, during survey, was nothing but the accumulation of the profit which it had been systematically enjoying, then, drawing of a view to the contrary and holding the same as not being sourced out of latter’s business but having been sourced from its income from undisclosed sources within the meaning of Section 69 of the Act is beyond comprehension.

56 Kulkarni & Sahu Buildcon Pvt Ltd vs. DCIT

TS-969-ITAT-2022 (Rajkot)

A.Y.: 2012-13

Date of Order: 12th December, 2022

Section: 69

When the AO had himself observed that the undisclosed income surrendered by the assessee, during survey, was nothing but the accumulation of the profit which it had been systematically enjoying, then, drawing of a view to the contrary and holding the same as not being sourced out of latter’s business but having been sourced from its income from undisclosed sources within the meaning of Section 69 of the Act is beyond comprehension.

FACTS

The assessee company, engaged in the business of civil construction, e-filed its return of income declaring an income of Rs. 1,32,56,660. In the course of assessment proceedings the assessee was asked to explain the excess WIP of Rs. 30,71,500 as also excess stock of building material which included shuttering material of Rs. 24,60,000 unearthed by the survey team in the course of survey proceedings conducted on 2nd November 2011.

The assessee had surrendered, in the course of survey proceedings, the sum of Rs. 55,31,500 which sum was credited to its Trading Account. The (AO contended that the same was not separately offered in computation of income. The AO was of the view that as the excess stock or unexplained investment or cash surrendered during the course of survey operations was nothing but the accumulation of the profits of the assessee, which it had been systematically enjoying, and hence on being detected was surrendered in the course of survey operation as undisclosed income, thus, the same was liable to be assessed as the assessee’s undisclosed income against which no deduction for any expenditure would be allowable.

The AO excluded the amount of the undisclosed income surrendered by the assessee from its declared net profit and brought the same to tax separately as its income under the head “business income” under section 69 of the Act. The claim of depreciation on shuttering material was also denied by the AO.

Aggrieved, assessee preferred an appeal to CIT(A) which was dismissed.

Aggrieved, assessee preferred an appeal to the Tribunal.

HELD

The Tribunal observed that the AO while framing the assessment had categorically observed that the excess stock or unexplained investment or cash surrendered during the course of survey operation was nothing but the accumulation of the profit which the assessee had been systematically enjoying and was detected during the survey action and surrendered as its undisclosed income. The Tribunal held that the aforesaid observation of the AO in a way relates the amount surrendered by the assessee during the course of survey operation to the accumulated profit which the assessee had been systematically enjoying and thus, by no means could solely be related to the year under consideration.

The Tribunal was of the view that the aforesaid observation of the AO finds support from the judgement of the Hon’ble Supreme Court in the case of Anantharam Veerasingaiah & Co. vs. Commissioner of Income Tax [(1980) 123 ITR 457 (SC)] wherein it was observed by the Supreme Court that secret profits or undisclosed income of an assessee earned in an earlier assessment year may constitute a fund, even though concealed, from which the assessee may draw subsequently for meeting expenditure or introducing amounts in his account books.

The Tribunal observed that it is unable to comprehend that when the AO had himself observed that the excess stock or undisclosed investment or cash surrendered during the course of survey operation was nothing but the accumulation of profits which the assessee had been systematically enjoying and the difference was detected during the course of survey operation, therefore, on what basis a contrary view was taken by him to justify the treating of the same as the investment made by the assessee from its unexplained sources.

The Tribunal held that that the undisclosed income of Rs. 55,31,500 surrendered by the assessee during the course of survey operation had rightly been offered to tax by the assessee under the head “business income”, and in light of the clearly established source of the corresponding investment the same could not have been held to be the deemed income of the assessee under section 69 of the Act. Our aforesaid conviction is all the more fortified by the order of the Tribunal in the case of M/s Shree Sita Udyog vs. DCIT & Ors, Bhilai in ITA No. 249 to 255/RPR/2017, dated 22nd July, 2022 wherein, involving identical facts, it was observed by the Tribunal that the amount surrendered by the assessee qua the investment in the excess stock was liable to be taxed under the head “business income” and not under the head “income from other sources.”

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Authorities directed to correct the demand raised due to deposit of TDS by the assessee vide a wrong challan.

55 WorldQuant Research (India) Pvt Ltd vs.
CIT, National Faceless Appeal Centre
TS-963-ITAT-2022 (Mumbai)
A.Y.: 2021-22
Date of Order: 13th December, 2022

Authorities directed to correct the demand raised due to deposit of TDS by the assessee vide a wrong challan.

FACTS

Aggrieved by the demand, the assessee raised on account of short payment of TDS under section 195 of the Act due to error in depositing TDS under wrong challan.

During the year under consideration, the assessee paid a dividend to a non-resident shareholder and deducted tax under section 195 of the Act. However, while depositing the amount of TDS, the assessee deposited the taxes vide challan no. 280 which is applicable for payment of advance tax, self-assessment tax, tax on regular assessment, tax on distributed income to unit holders, etc. The assessee ought to have correctly deposited the taxes vide challan no. 281 which is applicable for taxes deducted at source. The relevant TDS return was filed by the assessee on 31st March, 2021.

Upon noticing the error of having deposited the amount of TDS vide an incorrect challan the assessee filed a letter with DCIT-15(3)(1) as well as with DCIT-TDS (OSD) requesting to consider the deposit of taxes on dividend under challan no. 281 though erroneously deposited vide challan no. 280. However, vide Intimation dated 5th April, 2021 issued under section 200A/206CB for Q2 a demand of Rs. 2,95,78,630 was raised on account of short payment of taxes.

Aggrieved, the assessee preferred an appeal to CIT(A) who after taking note of the letters filed by the assessee held that the assessee has simply requested both the AO (including TDS) to treat the tax paid through challan No. 280 as tax paid as TDS, however, has not made any formal request for correction of challan from 280 to 281 with the AO (TDS). He further held that the AO (TDS) only after receipt of a formal request for change/correction in challan No. from 280 to 281, can act within the time limit prescribed as per the notification. The CIT(A) dismissed the appeal filed by the assessee.

Aggrieved, the assessee preferred an appeal to the Tribunal where during the course of the hearing, on behalf of the assessee, the Tribunal’s attention was drawn to a letter dated 12th August, 2022 filed before DCIT–TDS [OSD TDS Circle 2(3)] praying for correction of challan. In the said letter reference has also been made to an e-mail dated 12th April, 2021, to DCIT TDS praying for rectification of challan.

HELD

During the course of the hearing, upon the direction of the Tribunal to the Revenue to update the Tribunal about the status of the applications filed by the assessee, the DR filed an e-mail informing the Bench that the DCIT-TDS(OSD) has escalated the issue to CPC-TDS.

The Tribunal held that the assessee has pursued this matter with the concerned authorities and not only requested to consider the deposit of taxes on dividends by the company but has also prayed for correction of the challan from challan No. 280 to challan No. 281. It observed that from the copy of the e-mail dated 6th December, 2022, filed by the learned DR, the Tribunal found that the office of DCIT (OSD) TDS has escalated the issue to CPC – TDS for either necessitating the required changes in the challan from the backend or enabling the system to allow the TDS–AO to do the same from his login at TRACES AO – Portal.

Therefore, the Tribunal directed the concerned authority to make every possible endeavour of carrying out the necessary correction in the challan within a period of 2 months from the date of receipt of this order and grant the relief to the assessee as per law.

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Theatre owner is not liable to deduct tax at source on convenience fee charged by BookMyShow to the end customer and retained by it.

54 Srinivas Rudrappa. vs. ITO

TS-1026-ITAT-2022 (Bang.-Trib.)

A.Y.: 2013-14 & 2014-15

Date of Order: 2nd December, 2022

Section: 194H, 201, 201(1A)

Theatre owner is not liable to deduct tax at source on convenience fee charged by BookMyShow to the end customer and retained by it.

FACTS

The assessee, a proprietor of a theatre, was engaged in the business of exhibition of films. A survey under section 133A was conducted in the business premises of M/s Bigtree engaged in providing services through their online platform BookMyShow, facilitating booking of cinema tickets by providing an online ticketing platform for customers and sale of cinema tickets, food and beverages coupons, and events through its website www.bookmyshow.com.

In the case of cinema owners, when the end customers booked cinema tickets through the BookMyShow portal and made the payment to Bigtree, the payment was raised towards ticket cost along with convenience fees that were charged over and above the ticket charges. The ticket cost was remitted by Bigtree to the cinema owners after deducting TDS while it retained the convenience fee which constituted revenue in the hands of Bigtree.

The AO was of the opinion that the convenience fee retained by Bigtree was in lieu of commission/service charges payable by the cinema owner (assessee) and amounts to constructive payment made by the cinema owner (assessee) to Bigtree. The AO was of the opinion that the tax should be deducted at source under section 194H of the Act. He issued a show cause to the assessee, asking why the assessee should not be treated as `assessee-in-default’ as per provisions of sections 201 and 201(1A) of the Act.

In response, the assessee submitted that it is not availing services of Bigtree for sale of online cinema tickets, but has permitted Bigtree to list assessee’s cinema tickets on the Bigtree platform. The assessee also submitted that, the relationship between the assessee and Bigtree is of principal-to-principal, and, therefore, the conditions laid down in section 194H do not stand satisfied.

The AO held that the assessee was liable to deduct tax at source on the amount of convenience fee retained by Bigtree. He rejected the contention that the assessee is giving permission to Bigtree to list assessee’ cinemas tickets on the Bigtree’s platform and is not availing services from Bigtree for booking the tickets.

Aggrieved, the assessee preferred an appeal to CIT(A) who dismissed the appeal filed by the assessee.

Aggrieved, the assessee preferred an appeal to the Tribunal interalia on merits.

HELD

The Tribunal went through the agreement and observed that Bigtree was facilitating the end customer for booking cinema tickets for which a transaction/convenience fee was charged from him. Further, as Bigtree was making a payment to the assessee after deducting the transaction/convenience fee and there was no occasion for the assessee to deduct tax at source and also that Bigtree was acting on behalf of the end customer and not the assessee. The Tribunal noted that in the present case, no expenditure is claimed by the assessee in respect of any payments alleged to be in the nature of commission / service fee.

The Tribunal also noted that there was no non-compete clause wherein a complete/partial control of Bigtree by the assessee could be established. Bigtree on its online platform sells tickets of other / many theatre owners apart from the assessee. For example if the theatre has a total 200 seats, if in the event no tickets are sold by the Bigtree, there is no penalty that is levied on Bigtree. It is totally the discretion of the customers to use Bigtree for booking the tickets. The agreement of the assessee with Bigtree is a non-exclusive agreement for selling cinema tickets of the assessee through its platform. The only income earned by the Bigtree is the convenience fee that it collects from the customers/movie viewers. Even there are no discount given by the assessee to the Bigtree on account of the tickets purchased by the customer from their platform.

The Tribunal held that the transaction/service fee collected by Bigtree from the end customers was actually the margin charged from the end customers for provision of such services. Also, the fact that the end customer paid service tax on such additional/convenience fee and no service tax was charged on the ticket charges. This, according to the Tribunal, established that the assessee did not cast any obligation on Bigtree to sell tickets on its platform.

The Tribunal was of the opinion that one aspect which needs to be considered is the situation where tickets are liable to be refunded. The Tribunal raised a question that if the theatre owner was not able to start/play the movie who would be liable to refund the ticket price – Bigtree or the theatre owner? This issue needs to be ascertained and risk analysed.

The Tribunal directed the AO to carry out the necessary verification and consider the claim of the assessee in accordance with law.

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Other Information – Auditor’s Responsibility beyond Financial Statements

INTRODUCTION

As we have evidenced over the years, information included in the Annual Reports of the companies is increasing year after year. Such information is used by users of financial statements for their analysis and decision-making. Therefore, the “Other Information” is a fundamental part of the Annual Report. Such “Other Information” may have also been used as a part of the audit work such as evaluation of going concern assumption, various transactions reported in CARO related to loans, etc. For example, CARO requires auditors to report on loans granted by the company. Such information shall also form a part of the Board’s report which is Other Information included in the Annual Report. Similarly, there could be legal or regulatory matters discussed in Other Information which may be part of key audit matters in the auditor’s report.

The audit report includes a section titled “Other Information”. This section describes the management’s and auditor’s responsibilities relating to Other Information and the outcome of the audit procedures carried out on such Other Information. Standard on Auditing (SA) 720 (Revised) – The Auditor’s Responsibilities Relating to Other Information describes the reporting responsibilities on such Other Information by the auditor in his / her audit report. This aims to enhance the credibility of financial statements.

This article discusses certain specifics about reporting by the auditor on such Other Information.

Other Information section in an audit report

In this section, the auditor states:

– Management’s responsibility of Other Information

– Identified Other Information received prior to the audit report date and for a listed entity, expected to be received thereafter

– That the audit opinion does not cover Other Information

– Auditor’s responsibility for Other Information

– If information is received prior to the audit report date, whether the auditor has identified any material misstatement of Other Information to report

APPLICABILITY TO PRIVATE COMPANIES AND NON-CORPORATE ENTITIES

The audit report on financial statements of private companies or unlisted companies also needs to include a section titled “Other Information” if any such information is received by the date of the audit report. Further details regarding the distinction between listed and unlisted entities are discussed in the below paragraphs.

In the case of unlisted non-corporate entities, auditors would not be in a position to report on Other Information because many a times such entities do not prepare annual reports whereas, by definition, Other information refers to information included in an entity’s annual report. Therefore, SA 720 (Revised) requires reporting on Other Information in the case of unlisted corporate entities only.

ELEMENTS OF OTHER INFORMATION

Other Information is a defined term in SA 720 (Revised). It is defined as “Financial or non-financial information (other than financial statements and the auditor’s report thereon) included in an entity’s annual report.” The SA further explains that the Annual Report may be referred to as such or may be referred to by any other name. The legal environment or custom may require the entity to report to owners, the information on the entity’s operations and financial statements. Such a report is considered as an Annual Report which may be a single document or a set of documents. Usually, the Annual Report contains a Management Report, Chairman’s statement , Corporate Governance Report, etc. All of this information are elements of Other Information.

Such Other Information may contain various aspects related to the entity and its operations. For example, it may contain information about the company, Chairman’s statement may include business- related relationships and specifics related to contracts entered into with key suppliers or customers, segment-wise performance of the company, market presence of the company, what are the risks that the company is expected to face, what opportunities it foresees in the market in the future year, information about human resources, sustainability disclosures and report thereon, new products the company plans to launch, so on and so forth. Over the years, the volume of such information is increasing. Such information may be in quantitative form or narrative form. All this information is other than the financial statements and is part of Other Information.

However, if there are any reports published outside the Annual Report to meet the needs of a specific group of users, such reports usually will not meet the definition of Other Information such as Diversity Report, various reports filed with government agencies and Registrar of Companies, etc. If any of such reports are included in the Annual Report itself, then those will meet the definition of Other Information and will be scoped in SA 720 (Revised).

OBTAINING OTHER INFORMATION

Before reporting, the auditor should discuss with the management which documents comprise annual report. Based on such discussion, the auditor should make arrangements with the management to obtain such information in a timely manner and before the date of the audit report, if possible. Such documents should be the final version of the information going to be included in the Annual Report. This can be done by appropriately wording the audit engagement letter. The Audit Committee and Board of Directors should be requested to review the Other Information.

IDENTIFICATION OF OTHER INFORMATION IN THE AUDIT REPORT THAT IS SCOPED AS PART OF THE AUDIT

The audit report identifies Other Information so that the reader can understand what has been scoped by the auditor as Other Information. Usually, the audit report includes a sentence for such identification as “The other information comprises the information included in the Company’s annual report, but does not include the standalone financial statements and our auditor’s report thereon.” However, SA 720 (Revised) clarifies that it does not apply to preliminary announcements of financial information or securities offering documents, including prospectuses.

AUDITOR’S RESPONSIBILITY FOR OTHER INFORMATION

The auditor is not required to “audit” the Other Information. He auditor is required to only read Other Information to consider whether there is a material inconsistency between the Other Information and the financial statements. This ensures that the credibility of the audited financial statements is not undermined by material inconsistencies between the audited financial statements and Other Information. The auditor’s procedures would include:

– Reading the Other Information to ensure consistency with financial statements and information obtained as part of the audit

– Comparing the Other Information or ratios with the financial statements and auditor’s understanding of the entity

– Checking clerical accuracy with the data presented in the financial statements

– Obtaining a reconciliation with the information included in the financial statements, if required. For example, the Other Information may include revenues for specific key products whereas financial statements shall include the total revenue of the entity. The product-wise revenue should reconcile with total revenue in the financial statements by excluding the revenue related to the products that are not included in Other Information. Another example could be the bonuses paid to the key management team of the entity, which are included in the statement of profit and loss along with salaries and bonuses of all the employees in the entity.

If there is a material inconsistency, it may indicate that either there is a material misstatement in the financial statements or in the Other Information. Either of such a situation undermines the credibility of financial statements and the auditor’s report thereon. In such cases, economic decisions of the users of the financial statements will be affected.

Upon reading of Other Information for the purpose of identifying any material inconsistencies, if the auditor becomes aware of any apparent material misstatement of fact, the auditor should discuss the matter with the management.

The auditor is not required to “identify” and settle material inconsistencies or material misstatements of fact in Other Information. However, he auditor may become aware that such Other Information includes material inconsistency or material misstatement. In such cases, the auditor should not be allowing the audited financial statements to be included in the document that contains such materially false or misleading Other Information or material omission of fact. The auditor should discuss the matter with the management and request the management to rectify the inconsistency in Other Information or not to include such information as part of the Annual Report in which financial statements are being included.

DATE OF THE AUDIT REPORT AND ANNUAL REPORT MAY BE DIFFERENT

The auditor should agree with the management on the timing of availability of the final version of the information that will be included in the Annual Report, so that he / she can discharge the responsibility towards it as casted by SA 720 (Revised). Such information should be in the near final draft stage and written representation to this effect should be obtained from the management.

Other Information obtained till the date of the audit report

The auditor is required to report on the Other Information obtained until the date of the audit report. If the auditor expects to receive such information after the audit report date, then the auditor is required to state so in the audit report in he case of a listed entity. In the case of an unlisted entity, though it is not mandated in SA 720 (Revised), it states that the auditor may consider it appropriate to do so. It provides an example of a situation when management is able to represent to the auditor that such Other Information will be issued after the date of the auditor’s report.

No Other Information was obtained till the date of the audit report

Even if no Other Information is obtained till the date of the audit report, the auditor is required to state such a fact in the audit report of a listed entity. In the case of an unlisted entity, if no Other Information is available to the auditor at the date of the audit report, he auditor is not required to report anything on the “Other Information” through the auditor’s report. Thus, even if reporting on Other Information is applicable for unlisted entities, such reporting is triggered only if part or all of such Other Information is obtained before the date of the audit report. Other Information obtained after the date of the audit report is discussed below.

Other Information obtained after the date of the audit report

When all or part of Other Information is made available to the auditor after the date of his audit report, in case of both listed and unlisted entities, auditor’s responsibility under SA 720 (Revised) continues i.e., the auditor needs to read such other information to ensure that it does not contain any material misstatement. In such cases, the auditor should obtain written representation from the management that such Other Information will be provided to the auditor before it is issued so that the he can fulfill his duties.

STATUTORY REPORTS AND OTHER INFORMATION

The Annual Report contains certain reports required to be included as per law, for example, Board’s Report. All such statutory reports which are required to be included in the Annual Report are elements of “Other Information”.

The Annual Report may contain certain information that the entity provides voluntarily. Such information also forms part of “Other Information” within the scope of SA 720 (Revised).

THE SUMMARY REPORT INCLUDED IN ANNUAL REPORT AND A DETAILED REPORT IS PLACED OUTSIDE

There may be situations where a summary of the report is included in the Annual Report giving reference to the detailed report placed outside such as on the website, etc. For example, entities may prepare a Business Responsibility and Sustainability Report in detail but provide only the summary in its Annual Report and give a link to the detailed report.

If such a detailed report is required to be part of the Annual Report, it is considered as part of “Other Information” irrespective of its placement. However, in other cases, a mere reference to such a report will not bring it in the scope of “Other Information”.

INCONSISTENCY BETWEEN INFORMATION ON THE WEBSITE AND INFORMATION OBTAINED AS PART OF THE AUDIT

SA 720 (Revised) clarifies that when other information is only made available to users via the entity’s website, the version of the other information obtained from the entity, rather than directly from the entity’s website, is the relevant document for the auditor under the SA.

EXAMPLES OF MATERIAL MISSTATEMENTS OF FACTS IN OTHER INFORMATION

As part of his audit work, the auditor receives a plethora of information regarding the entity, its environment, its operations and products, etc. Some of the examples where Other Information contains material misstatements of facts could be:

– As part of the impairment analysis, the auditor has been provided with future cash flow projections for value-in-use calculation made by the management. But Management Discussion and Analysis included in Annual Report gives materially different projections about its future years.

– Corporate Governance Report in the Annual Report includes reference to whistle-blower complaints received during the year. However, the auditor was not provided any information on such events during the audit process.

Similarly, when the audit opinion is modified, i.e., the financial statements contain or may possibly contain material misstatement, the Other Information included in the Annual Report would also carry such material misstatement. In such situations, the Other Information section in the audit report shall also include auditor’s remarks about material misstatements in Other Information.

CONCLUSION

Unlike other auditing standards which focus on the audit of financial statements, SA 720 (Revised) discusses the auditor’s responsibility for the information that is outside financial statements. Therefore, the auditor needs to ensure that such information is appropriately identified in the audit report and the auditor has discharged his / her duty in respect of such Other Information along with the audit of financial statements. The Institute of Chartered Accountants of India has also issued an implementation guide on SA 720(Revised). It deals with various aspects and possible situations that the auditor may face while reporting on Other Information.

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Guidance for Executing Audit of Small and Medium Enterprises by Small and Medium Practitioners

INTRODUCTION

Auditing is a process of reviewing the financial transactions of the entity, verifying records for the transactions which are material, assessing the risks of material misstatements based on the overall samples selected and then giving an assurance to the readers of the audited financial statements that they reflect the true and fair view of the affairs of the entity.

The process of auditing requires going through various types of documents like payment vouchers, purchase invoices, sales invoices, expenses invoices, receipt records, bank statements, contracts and agreements entered into by the entity which has a bearing on the financial results, filings for regulatory compliances, assessments/demands under various statutes, maintenance of records as per various regulations, etc.

Challenge lies in documenting the audit process for SME entities. The primary reason for this challenge is that the organisational structure is lean and majority of the decisions are centralised with a few persons managing the business. Sometimes, decisions are taken off the cuff during informal meetings and there may be no official documents for the process followed for decision making. Further, there may be explanations provided which may be genuine and convincing, however they would not be recorded in any form. The auditors of these SME entities are also Small and Medium Practitioners (SMPs) who may not have professional staff with adequate exposure to elaborate documentation and process flow experience.

It is with this background that this article has been conceived to provide some insights on the importance of documenting the audit work carried out during the year and thereby ensuring that the auditor is not caught on the wrong foot during any scrutiny of the audit either due to some wrongdoing by the auditee or during the random selection by the peer reviewer.

It is rightly said “What is not documented is not audited”

PROCESS OF COLLATING AUDIT EVIDENCE

One should understand the different types of audit evidences which can be used. The evidence collection methodology will vary depending upon the purpose for which it is sought. However, here are some of the most commonly used forms of evidence.

1. Physical Verification

This entails confirming the existence of assets and/or their condition. This type of examination is the major source to obtain audit evidence on fixed assets and inventory.

Auditor should ensure to carry out physical verification of fixed assets as well as inventory on test check basis and keep the working sheets of such physical verification countersigned by the personnel of the auditee.

It must also be ensured to take all the working sheets of the physical verification carried out by the personnel of the auditee and have a reconciliation of the same with the accounting records as part of the audit working papers.

2. Confirmations

Whenever there are balances of vendors, customers and banks whose correctness has to be established by the auditors in the financial statements, the auditor should place reliance on confirmations from such third parties.

It is always possible that all the balances for which confirmations are called for may not be matching with the balances in the auditee’s books of accounts. In such cases, the auditor should ensure to obtain reconciliation and be satisfied with the reasons for the reconciliation and document the same.

3. Documentary evidence

There may be transactions in current times which are negotiated over emails. Further, there may be the authorisation of the transactions on the documents moving between the parties. In such cases, the auditor should ensure to vouch and trace parts of the documents to take comfort in the genuineness of the transactions for the auditing procedure.

4. Analytical procedures

At the macro level to verify the true and fair representation of financial statements, auditors usually use these procedures by performing their own calculations.

An example can be relating to working out material consumption. Here auditor may compare the prices of the material consumed against the average price of such material throughout the year which may be available from the public domain. This will provide comfort that there is no inflated consumption.

For quantitative consumption, inquire about the quantum of materials which are required for the sale of different items manufactured or if the entity maintains a Bill of Material then obtain the same. Extrapolate the total consumption of various materials which are required for producing the items sold or in inventory. Compare the same against the consumption of various materials as per the financial records in quantity. If the variation is not material then the auditor can take comfort in the consumption-related financial data.

This process of analytical procedures can be applied using various ratios and formulas for working out variances and then seeking explanations from the management for such variances.

The entire process as well as findings should be well documented as part of audit documentation.

5. Oral evidence

Normally at the commencement of the audit, auditors will typically interrogate company executives regarding business operations and also from their past audit experience design the auditing procedures to be performed and the extent of checking to be carried out in various areas of audit.

6. Accounting Systems

This typically serves as a source of auditing evidence. It allows the auditor to access financial reporting documents and anything interconnected with financial statements.

Audit staff should be trained to document the internal flow of documents within the accounting system and their authorisations before it gets finally recorded in the accounting system. There should be a record of the selection of the entries which have been checked from various registers or ledgers in the accounting system. They should also record the selection criteria and the materiality considered for selection based on the size and nature of transactions audited.

7. Re-performance

For the purpose of testing internal controls in financial reporting, the auditor should walk through a limited number of transactions in each category of the business cycle getting recorded in the financial statements. This will enable them to test the controls which have been set by the entity and also identify shortcomings in key internal control processes.

This will act as additional support in carrying out an audit through sampling basis considering the level of controls in operation and the comfort which can be derived by the auditors based on their walk-through.

8. Observational Evidence

When there are fewer layers of operational personnel in SME entities, auditors would have to rely on observational skills too. They should take notes of how the entity processes some of its work. They should specifically observe how the entity goes about handling operations, policies, and protocols to find weaknesses.

This will enable the auditor to understand the business of the entity as well as structure its audit plan in a better manner.

BENEFITS AND NATURE OF DOCUMENTATION

Documentation will ensure better planning and make effective supervision and review possible. It results in clarity of thoughts and expressions and evidence of work performed and compliance with Standards.

Here are some extracts reproduced from ICAI’s Peer Review Manual 2020, which can serve as a guiding light for SMP’s documentation compliance –

Audit documentation is very important in the areas of quality control of the audit. Audit documentation should be prepared in such a manner that other auditor who is not involved with the audit engagement previously can understand the work that he performs when he reviews the documents.

The general guidelines which can be adopted by the audit firm for the preparation of working papers are:

a) Clarity and Understanding

b) Completeness and Accuracy

c) Pertinence

d) Logical Arrangement

e) Legibility and Neatness

f) Safe and retrievable

g) Initial and Date

h) Summary of conclusions

WHAT INFORMATION MUST DOCUMENTS PROVIDE?

The following is the key information that should be a part of the audit documentation:

(a) The nature, timing and extent of the audit procedures performed to comply with the SAs and applicable legal and regulatory requirements.

(b) The evidence that the auditor obtains, the procedures that they use for testing and the result of testing should be properly and clearly documented in the audit working papers. This is to ensure that the reviewer could easily perform the quality review and to prove that the relevant Standards are implemented.

(c) The auditor should clearly document significant matters related to financial statements, their ethics, as well as their process, during the audit.

(d) Testing or sampling requires auditors’ use of their professional judgment and it is important to document these judgments.

Further, the ICAI has issued SA 230 – “Audit Documentation” which should be read in conjunction with other Standards on Auditing (SAs) having a bearing on documentation.

There is guidance for the maintenance of the Permanent Audit File and Current Audit File. This article addresses the process of audit documentation for SME clients by SMPs.

PERMANENT AUDIT FILE

A permanent audit file contains those documents, the use of which is not restricted to one time period and extends to subsequent audits also, e.g. Engagement letter, Communication with the previous auditor, Memorandum of Association, Articles of Association, Organization structure, List of directors/partners/trustees/bankers/lawyers, etc.

During each year’s audit, there may be some developments which shall have bearing or reference for more than one time period in the future. Accordingly, it should be ensured to update the permanent file with such further documentation. Examples of such changes which would need updating permanent file are changes in Articles of Association, Joint Venture agreement, long term supply contract, change in KMPs/directors, etc.

The following table illustrates the contents of a permanent file:

Title	Information Contained
Engagement	Letter of Engagement Correspondence with the retiring auditor (NOC)
Constitution	Copies of Memorandum and Articles of Association in case of corporate entities or Partnership agreement in case of partnership firm or Act, Regulation, byelaws, trust deeds, as applicable under which the entity functions
Background and Organisation Structure	Nature and history of the business Profile of ownership Registered office details Management structure including organisation chart Industry specification with reference to client’s size, economic factors affecting the industry, seasonal fluctuations and demands
Background and Organisation Structure	Facility locations, plant capacity, owned or leased, age, capital expenditure budget, etc. Products specifying diverse ranges along with classification Purchase volumes, main suppliers, policies Inventory norms, inventory levels during the last five years and related ratios. Sales volumes including exports, main customers, methods of distribution, pricing policies, credit policy Personnel showing numbers, analyses by departments or function, method of remuneration, contracts, union agreements, HR policy Copy of audited financial statement for the previous five years, if it exists. Study and evaluation of internal controls Significant audit observations of past Statistical information showing 5 years comparison of performance indicators (major accounting ratios) Industry Statistics.
Systems (for larger Audits, this section could be held on a separate file)	Details of methods of accounting including cost accounting, flow charts, specimens of accounting documents, code structure and list of accounting records EDP-systems security, source code security, authorisation and backup policy
Contracts, agreements, Minutes	Leases agreements photocopies/ extracts of the same Title deeds inspected annually by an auditor Royalty agreements Minutes of continuing importance such as Directors’ meetings, Members’ meeting
Group	Group structure – subsidiaries, associates Joint venture Names of auditors
Other professional advisor’s list	Bankers Solicitors Investment Analysts Registrars Credit Rating Agency
Miscellaneous	Details of other client information of a permanent nature

CURRENT AUDIT FILE

A current audit file contains those documents relevant to that time period of audit. The Current Audit File comprises of one or more files, in physical or electronic form, meaningfully arranged containing the records that comprise the audit documentation for a specific engagement.

The auditor should ensure that the file is providing evidence that the engagement was carried out in accordance with the basic principles mentioned in SA 200- Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with Standards on Auditing.

The following table illustrates the contents of an audit file:

Title	Information Contained
Engagement	Acceptance of annual reappointment
Accounts	Copy of draft financial statement Copy of final signed financial statement
Reports and Final Papers	Copies of all draft and final reports issued to the client Correspondence with other auditors and experts Comments received from client and letter of representation Observations on accounts and points carried forward to next year Final journal entries Company accounts checklist – directors’ report Audit completion report
Audit Plan	Planning programme Time and cost summary Briefing notes Copy of planning letter to client Points carried forward from the previous year
Balance sheet, statement of profit and loss account and cash flow statement audit – systems testing	Lead schedules/ Notes Audit programmes Detailed working papers and conclusions Company accounts and Accounting Standards, if any, checklists Queries raised and explanations received Third-party confirmations and certificates Weaknesses identified and a copy of the letter of weaknesses sent to the client
Accounts preparation	Schedules/ Notes Trial balance Cross-reference to audit work performed
Audit Programme	Audit procedure (compliance and substantive) Detailed working papers and conclusions Queries raised and explanations received
Extracts from minutes relating to accounting	Directors’ meetings Members’ meetings Audit committee meetings Investment and other Board committee meetings
Statistical information	Performance indicators collected which have a bearing on the extent, nature, and timing of substantive tests

ASSEMBLY OF AUDIT FILE

The audit firm shall have adequate policies and procedures to ensure compliance with SA 230 in respect of the assembly of files. The final audit file is required to be assembled within 60 days after the date of the Auditor’s Report. However, after the assembly of the file, no document should be added or deleted subject to exceptional circumstances wherein the auditor shall mention the specific reasons for making them and when and by whom they were made and reviewed.

GENERAL EXAMPLES OF DOCUMENTS TO BE MAINTAINED

Some of the examples of documents which shall be maintained by an audit firm for an audit engagement are as follows:

	Miscellaneous – Others
1	Audit engagement letter (with reference to SA 210)
2	Opening and closing trial balance
3	Last year’s signed financial statement
4	List of various registrations obtained under other laws
5	List of Branches
	Direct Tax Reporting
6	Copy of computation of income of last year
7	Summary of disallowances to be made and allowances as per section 43b of I T Act
8	Deferred tax working
9	Form 26AS
10	Advance tax payment challans
	Indirect Tax Reporting
11	Applicability of GST
12	Applicability of Customs
13	Respective returns copy
14	Respective challans copy
15	Respective order status, if any
16	Reconciliation statement of turnover declared and booked, wherever required
	Company Law
17	Shareholding pattern
18	List of Directors
19	List of KMP
20	Register extracts of transactions with related parties
21	Minutes of meetings
	Compliance Under Allied Laws
22	PF payment challans and returns copy, if any
23	Profession tax payment challans and returns copy, if any
24	ESIC payment challans and returns copy, if any
25	LWF payment challans and returns copy, if any
26	SEBI compliances

CONCLUSION

The basic aim of this article is to drive through the importance of documenting the findings throughout the journey of the audit. It also strives to provide an insight into the different ways in which comfort can be drawn by the auditor to arrive at the conclusion of the financial statements to be true and fair. These processes and documentation will also act as safeguards against any regulatory proceedings and protect the auditor from adversities of fines and penal consequences. This exercise also acts as a reference check of the process followed during the audit as well it acts as a lighthouse for the audits of the future years. All in all it increases the efficiencies in the audit process and enables the audit firm to scale up the audit quality maturity model.

shailesh.kwebmaker

Conundrum on Section 45(4) – Pre- and Post-SC Ruling in the case of Mansukh Dyeing

BACKGROUND

The general concept of a partnership, firmly established by law, is that a firm is not an ‘entity’ or ‘person’ in law but is merely an association of individuals and a firm name is only a collective name of those individuals who constitute the firm. In other words, a firm name is merely an expression, only a compendious mode of designating the persons who have agreed to carry on business in partnership.

Prior to the insertion of section 45(4), it was a judicially well-settled position that cash/capital assets received by the partner on retirement or dissolution of the partnership firm neither resulted in the transfer of any asset from the perspective of the firm nor resulted in transfer of partnership interest from the perspective of partners¹. The judicial decisions were rendered on the premise that (a) a partnership firm is not a distinct legal entity (b) a partnership firm has no separate rights of its own in the partnership assets (c) the firm’s property or firm’s assets are property or assets in which all partners have a joint or common interest (d) distribution of asset or property by the firm to its partners is nothing but a mutual adjustment of rights between the partners and there is no question of any extinguishment of the firm’s rights in the partnership assets (e) what a partner receives on retirement/dissolution is nothing but the realisation of pre-existing right and that does not result in any transfer.

In addition to the above, statutory exemption was provided under section 47(ii) on capital gains in the hands of a partnership firm on the distribution of capital assets on the dissolution of a firm.

1. See Supreme Court (‘SC’) rulings in case of CIT v Dewas Cine Corporation [1968] 68 ITR 240, Malabar Fisheries Co v CIT [1979] 120 ITR 49 from the perspective of firm and Sunil Siddharthbhai v CIT [1985] 156 ITR 509, Addl. CIT v Mohanbhai Pamabhai [1987] 165 ITR 166, Tribuvandas G Patel v CIT [1999] 236 ITR 511, CIT v. R. Lingamullu Raghukumar [2001] 247 ITR 801 (SC) from the perspective of partners

Insertion of Section 45(4) to the Income-tax Act, 1961 (“Act”):

Section 45(4) was introduced vide Finance Act, 1987 with effect from 1 April 1988 and is as under:

“The profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals (not being a company or a co-operative society) or otherwise, shall be chargeable to tax as the income of the firm, association or body, of the previous year in which the said transfer takes place and, for the purposes of section 48, the fair market value of the asset on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as a result of the transfer.”

Upon insertion of section 45(4), vide Finance Act, 1987, s. 47(ii) was omitted. There was, however, no amendment made to the definition of ‘transfer’ in s. 2(47).

Explanatory Memorandum (‘EM’) to Finance Bill, 1987 explained the intent of legislature behind the insertion of section 45(4) which provided that there should be a distribution of capital asset by a firm to trigger section 45(4)². CBDT Circular No. 495 dated 22 September 1987 explaining the provisions of the Finance Act, 1987 provided the following rationale for insertion of section 45(4):

“24.3 Conversion of partnership assets into individual assets on dissolution or otherwise also forms part of the same scheme of tax avoidance. Accordingly, the Finance Act, 1987 has inserted new sub-section (4) in section 45 of the Income-tax Act, 1961. The effect is that profits and gains arising from the transfer of a capital asset by a firm to a partner on dissolution or otherwise shall be chargeable as the firm’s income in the previous year in which the transfer took place and for the purposes of computation of capital gains the fair market value of the asset on the date of transfer shall be deemed to be the full value of the consideration received or accrued as a result of the transfer.”

2. Refer para 36 of EM to Finance Bill, 1987

Controversies arisen under section 45(4):

Insertion of section 45(4) gave rise to its fair share of controversies and resulted in litigation. By and large, prior to the SC ruling in the case of Mansukh Dyeing and Printing Mills [2022] 145 taxmann.com 151, controversies arose on interpretation of section 45(4) which were the subject matter of judicial scrutiny can be summed up as under:

Provisions of section 45(4) are triggered where the firm distributes capital asset on dissolution of a firm. Such will be the position even where no amendment is carried out to the definition of ‘transfer’ contained in section 2(47)³.
Provisions of section 45(4) are not triggered where the firm settles the retiring partner in cash including by taking into account the balance credited on revaluation of a capital asset⁴.
Provisions of section 45(4) are triggered where a firm distributes capital to a retiring partner during the subsistence of the firm. Such will be the position even where no amendment is carried out to the definition of ‘transfer’ contained in section 2(47)⁵.
However, there were two stray decisions on the subject. One is that of Madhya Pradesh HC ruling in the case of CIT v Moped and Machines [2006] 281 ITR 52 wherein HC held that to trigger section 45(4), it is essential that there must be a transfer of capital asset and in absence of an amendment to the definition of the term ‘transfer’ contained in section 2(47), there cannot be a charge under section 45(4). Second is that of Madras HC ruling in the case of National Company v ACIT [2019] 263 Taxman 511 wherein HC held that provisions of section 45(4) are not triggered where a subsisting firm distributes capital asset to a retiring partner. Strangely, Revenue has not preferred an appeal before SC against both these rulings.

3. CIT v Vijayalakshmi Metal Industries [2002] 256 ITR 540 (Madras), M/s Suvardhan v CIT [2006] 287 ITR 404 (Karnataka HC), CIT v Southern Tubes [2008] 326 ITR 216 (Kerala HC), CIT v Kumbazha Tourist Home [2010] 328 ITR 600 (Kerala HC), ITO v Pradeep Agencies [Tax Appeal No. 309 and 310 of 2004, order dated 10 December 2014] (Bombay HC)
4. CIT v R.K. Industries [Income Tax Appeal No. 773 of 2004) (Bombay HC, order dated 3 October 2007), CIT v Little & Co [Income Tax Appeal No. 4920 of 2010, order dated 1 August 2011] (Bombay HC), CIT v Dynamic Enterprises [2014] 359 ITR 83 (Karnataka Full Bench), PCIT v Electroplast Engineers [2019] 263 Taxman 120 (Bombay HC)
5. CIT v Rangavi Realtors / CIT v A N Naik & Associates [2004] 265 ITR 346 (Bombay HC)

Discussion on Bombay HC ruling in case of Rangavi Realtors (supra) and A N Naik Associates (supra):

In these two cases before Bombay HC, pursuant to a family settlement, the business carried on by the firm was distributed to the partner on retirement. The firm was reconstituted by the retirement of existing partners and the admission of new partners. One of the contentions put forth before HC by the taxpayer was whether the charge would fail under section 45(4) in absence of an amendment to section 2(47). As regards this contention, Bombay HC leaned in favour of the interpretation that section 45(4) created an effective charge without it being necessary to amend the definition of transfer in section 2(47). Relevant extracts from the Bombay HC ruling are hereunder:

“23. Considering this clause as earlier contained in section 47, it meant that the distribution of capital assets on the dissolution of a firm, etc., were not regarded as “transfer”. The Finance Act, 1987, with effect from April 1, 1988, omitted this clause, the effect of which is that distribution of capital assets on the dissolution of a firm would henceforth be regarded as “transfer”. Therefore, instead of amending section 2(47), the amendment was carried out by the Finance Act, 1987, by omitting section 47(ii), the result of which is that distribution of capital assets on the dissolution of a firm would be regarded as “transfer”. Therefore, the contention that it would not amount to a transfer has to be rejected. It is now clear that when the asset is transferred to a partner, that falls within the expression “otherwise” and the rights of the other partners in that asset of the partnership are extinguished. That was also the position earlier but considering that on retirement the partner only got his share, it was held that there was no extinguishment of right. Considering the amendment, there is clearly a transfer and if, there be a transfer, it would be subject to capital gains tax.”

One more contention dealt with by the Bombay High Court was with regard to the controversy of whether the expression “otherwise” qualifies the transfer of a capital asset or whether it qualifies dissolution. Dealing with this controversy, Bombay HC observed as under:

“21. The expression “otherwise” in our opinion, has not to be read ejusdem generis with the expression, “dissolution of a firm or body or association of persons”. The expression “otherwise” has to be read with the words “transfer of capital assets” by way of distribution of capital assets. If so read, it becomes clear that even when a firm is in existence and there is a transfer of capital assets it comes within the expression “otherwise” as the object of the Amending Act was to remove the loophole which existed whereby capital gain tax was not chargeable. In our opinion, therefore, when the asset of the partnership is transferred to a retiring partner the partnership which is assessable to tax ceases to have a right or its right in the property stands extinguished in favour of the partner to whom it is transferred. If so read, it will further the object and the purpose and intent of the amendment of section 45. Once, that be the case, we will have to hold that the transfer of assets of the partnership to the retiring partners would amount to the transfer of the capital assets in the nature of capital gains and business profits which is chargeable to tax under section 45(4) of the Income-tax Act. We will, therefore, have to answer question No. 3 by holding that the word “otherwise” takes into its sweep not only cases of dissolution but also cases of subsisting partners of a partnership, transferring assets in favour of a retiring partner.”

It may be noted that against the Bombay HC ruling, taxpayers had filed SLP⁶ before SC and the same was granted. On grant of SLP, appeals were converted into Civil Appeals.

6. Civil Appeal No. 6255 of 2004 and Civil Appeal No. 6256 of 2004

Surprising SC ruling in the case of Mansukh Dyeing (supra):

In the case of Mansukh Dyeing (supra), SC was concerned with appeals for A.Y. 1993-94 and 1994-95. In this case, the revaluation of capital assets was carried out in A.Y. 1993-94 and corresponding credit was given to the Partners’ Capital Account (A/c). The total amount of revaluation was Rs. 17.34 crore. Amount to the extent of Rs. 20-25 lacs were withdrawn by the partners either during A.Y. 1993-94 or A.Y. 1994-95. Further, there was a conversion of the partnership firm into a company under Part IX of the Companies Act, 1956 in A.Y. 1994-95. However, not much information is available about conversion.

While concluding the assessment for A.Y. 1993-94, the assessing officer taxed the amount of Rs. 17.34 Cr. as being assessable to tax under section 45(4) by considering that the process of revaluation together with the credit of revaluation amount to the accounts of the partners attracted section 45(4) of the Act. Mumbai Tribunal [ITA No. 5998 & 5999/Mum/2002, order dated 26 October 2006] and Bombay HC [[2013] 219 Taxman 91 (Mag.)] deleted the additions on the ground that in the absence of distribution of capital asset to a partner, section 45(4) was not triggered. SC, however, upheld the addition made under section 45(4) for AY 1993-94 and thereby restored the order of the assessing officer. Relevant extracts from SC ruling at para 7.5 are as under:

“7.5 In the present case, the assets of the partnership firm were revalued to increase the value by an amount of Rs. 17.34 crores on 01.01.1993 (relevant to A.Y. 1993-1994) and the revalued amount was credited to the accounts of the partners in their profit-sharing ratio and the credit of the assets’ revaluation amount to the capital accounts of the partners can be said to be in effect distribution of the assets valued at Rs. 17.34 crores to the partners and that during the years, some new partners came to be inducted by introduction of small amounts of capital ranging between Rs. 2.5 to 4.5 lakhs and the said newly inducted partners had huge credits to their capital accounts immediately after joining the partnership, which amount was available to the partners for withdrawal and in fact some of the partners withdrew the amount credited in their capital accounts. Therefore, the assets so revalued and the credit into the capital accounts of the respective partners can be said to be “transfer” and which fall in the category of “OTHERWISE” and therefore, the provision of Section 45(4) inserted by Finance Act, 1987 w.e.f. 01.04.1988 shall be applicable”

In terms of the SC ruling revaluation of capital asset coupled with credit of such amount to Partners’ Capital A/c would ‘in effect’ result in the distribution of asset and such can be considered as ‘transfer’ under the category ‘otherwise’. Consequently, provisions of section 45(4) are triggered.

Considering the rationale of the SC ruling, provisions of erstwhile section 45(4) are triggered merely on the revaluation of a capital asset even where the actual distribution of that asset has not taken place.

Questions to ponder on post SC ruling in case of Mansukh Dyeing (supra):

Explanatory Memorandum (EM) to the Finance Bill, 1987 and CBDT Circular No. 495 require the distribution of a capital asset to trigger provisions of section 45(4). Accordingly, can it be suggested that the SC ruling in the case of Mansukh Dyeing (supra) (which neither refers to EM to Finance Bill, 1987 nor CBDT Circular) is against the Legislative intent and thereby not laying down the correct law? It may be noted that Circulars are binding on Court. Once SC has interpreted the law, such interpretation becomes binding and if such interpretation is against the EM/Circular, such EM/Circular may not be regarded as placing correct interpretation of the law – refer the SC rulings in the cases of CCE v. Ratan Melting & Wire Industries [2008] 17 STT 103, and ACIT v Ahmedabad Urban Development Authority [2022] 143 taxmann.com 278.
At para 7.6 of the ruling in case of Mansukh Dyeing (supra), SC has completely agreed with the Bombay HC ruling in the case of A N Naik Associates (supra). To reiterate, the Bombay HC ruling was delivered in the factual background that the firm had transferred capital asset (business undertaking) in favour of a retiring partner. If one refers to various observations from Bombay HC ruling in case of A N Naik Associates (supra), it has been held that transfer of capital asset by a firm to its partner results in the extinguishment of a capital asset and hence there is a transfer which falls within the term ‘otherwise’. Absent distribution of capital asset by firm (as it was in case of Mansukh Dyeing (supra)), there cannot be transfer. In view of the same, there is a conflict between para 7.5 and 7.6 of SC ruling which is irreconcilable.
Whether revaluation of stock-in-trade may also trigger section 45(4) in the light of the SC ruling in the case of Mansukh Dyeing (supra)? Taxability of stock in trade is not governed by the capital gains chapter and section 45(4) cannot be triggered on revaluation of stock in trade. Further, the head of income ‘Profits and gains from business or profession’ does not contain a provision similar to section 45(4) and hence no amount can be brought to tax under the head ‘Profits and gains from business or profession’. Additionally, one may rely on the SC ruling in the case of Chainrup Sampatram v CIT [1953] 24 ITR 581 to urge that valuation of stock cannot be ‘source of profit’ and hence revaluation of stock in trade cannot trigger section 45(4).
Whether the revaluation of a capital asset which is credited to Revaluation Reserve A/c (and not to Partner’s Capital A/c) triggers section 45(4) in the light of SC ruling in case of Mansukh Dyeing (supra)? At para 7.5 of SC ruling, it is held that revaluation of capital asset coupled with credit to Partners’ A/c is regarded as ‘in effect’ distribution of a capital asset. Absent credit to Partners’ A/c, there is, arguably, no distribution of capital asset and hence section 45(4) is not triggered.
In view of SC ruling Mansukh Dyeing (supra), where a firm carries out ‘downward revaluation’ (i.e., devaluation) of a capital asset and the same is debited to Partners’ Capital A/c, can capital loss be granted to the firm? Arguably, when section 45(4) refers to profits or gains, it includes losses – see CIT v Harprasad & Co (P) Ltd. [1975] 99 ITR 118 (SC), CIT v Sati Oil Udyog Ltd. [2015] 372 ITR 746 (SC). Accordingly, downward revaluation coupled with a debit to Partner’s Capital A/c results in an effective distribution of a capital asset for section 45(4) per ratio of SC ruling in the case of Mansukh Dyeing (supra). The capital loss so computed is incurred by the firm.
Consider a case where the firm carries out revaluation of a capital asset and credits the same to Partners’ Capital A/c which resulted in the trigger of section 45(4). In view of the SC ruling in Mansukh Dyeing (supra), as and when a firm transfers a capital asset to a third party, whether capital gains arise in the hands of a firm? If yes, whether amount considered in computing gains under section 45(4) be allowed as the cost of acquisition? Though not free from doubt, the firm may contend that once the distribution of capital asset has taken place, no capital gains arise on the transfer of capital asset to a third party. In case capital gain is again taxed in the hands of the firm, arguably, the amount considered in computing under section 45(4) shall be available as a cost to the firm. Any other view will result in double taxation, and such cannot be an intent of the Legislature – see Escorts Ltd. v Union of India [1993] 199 ITR 43 (SC), CIT v Hico Products (P) Ltd [2001] 247 ITR 797 (SC).
Consider a case where Mr. A, Mr. B and Mr. C are partners of a partnership firm. Mr. C decides to retire from the firm. No revaluation of partnership asset is carried out in the books of the partnership firm. However, the partnership deed provides that the outgoing partner’s dues shall be settled at fair value. An independent valuer carries out the valuation of partnership assets and thereby determines the share of Mr. C in the partnership. The amount determined to be payable to Mr. C is more than the amount standing in his Capital A/c. Accordingly, the excess amount (difference between the fair value of Mr. C’s share in partnership and the amount standing in the capital A/c of Mr. C) is debited to continuing partners’ capital A/c (capital A/cs of Mr. A, and Mr. B) and credited to Mr. C’s capital A/c. Further, Mr. C retires by withdrawing cash from the partnership firm. In such a case, even post SC ruling in case of Mansukh Dyeing (supra), in absence of revaluation of capital asset in the books of accounts coupled with no credit to the retiring Partner’s Capital A/c, it is arguable that provisions of section 45(4) are not triggered.

Does SC ruling in the case of Mansukh Dyeing (supra) suffer from ‘per incuriam’?

As mentioned above, assesses have filed SLP before the SC against the Bombay HC ruling in the case of Rangavi Realtors (supra) and A N Naik Associates (supra), and the same have been granted.

In the case of M/s Suvardhan v. CIT [2006] 287 ITR 404, the Karnataka HC upheld that the charge under section 45(4) would be attracted to a case of distribution of a capital asset by the partnership firm on its dissolution. HC rejected assessee’s argument that a charge would fail in absence of an amendment to the definition of ‘transfer’ contained in section 2(47). While concluding, Karnataka HC relied on the Bombay HC decision in the case of A.N. Naik Associates (supra) on the scope of section 45(4). While rendering the decision, Karnataka HC made the following observations:

“A reading of the said provision would show that the profits or gains arising from transfer of capital assets by way of distribution of capital assets on dissolution of a firm shall be chargeable to tax as income of the firm in the light of transfer that has taken place. Transfer has been defined under section 2(47) of the Act. What is contended before us that if section 2(47) read with section 45(4), there is no transfer at all, and if there is any transfer, it is not by the assessee but by the retiring partner. Therefore, according to Sri Parthasarathi, orders are bad in law. To consider this aspect of the matter, we have to notice section 47 of the Income-tax Act. Section 47 is a special provision which would say as to which are the transactions not regarded as transfer. A reading of the said section 47 of the Act would show that several transactions were considered as no-transfer for the purpose of section 45 of the Act.

On the other hand, as rightly pointed out by Sri Seshachala, learned counsel for the Department, a similar question was considered by the Bombay High Court in the case of CIT v. A.N. Naik Associates [2004] 265 ITR 3462. In the said judgment, Bombay High Court has noticed the effect of Act of 1987. After noticing, the Bombay High Court has ruled that section 45 of the Income-tax Act is a charging section. Bombay High Court further ruled that:

“…From a reading of sub-section (4) to attract capital gains tax what would be required would be as under: (1) transfer of capital asset by way of distribution of capital assets: (a) on account of dissolution of a firm; (b) or other association of persons; (c) or body of individuals; (d) or otherwise; the gains shall be chargeable to tax as the income of the firm, association, or body of persons. The expression ‘otherwise’ has to be read with the words ‘transfer of capital assets’. If so read, it becomes clear that even when a firm is in existence and there is a transfer of capital assets it comes within the expression ‘otherwise’. The word ‘otherwise’ takes into its sweep not only cases of dissolution but also cases of subsisting partners of a partnership, transferring assets to a retiring partner….” (p. 347)

Bombay High Court has noticed section 2(47) and thereafter ruled reading as under:

“…The Finance Act, 1987, with effect from April 1, 1988, omitted this clause, instead of amending section 2(47), the effect of which is that distribution of capital assets on the dissolution of a firm would be regarded as transfer….” (p. 347)

9. We are in respectful agreement with the judgment of the Bombay High Court. When the Parliament in its wisdom has chosen to remove a provision, which provided ‘no transfer’, there is no need for any further amendment to section 2(47) of the Act as argued before us. In our view, despite no amendment to section 2(47), in the light of removal of Clause (ii) to section 47, transaction certainly would call for tax at the hands of the authorities.”

Further, in the case of Davangere Maganur Bassappa v ITO [2010] 325 ITR 139, Karnataka HC was concerned with a case where the taxpayer firm was dissolved, and assets of the firm were distributed to partners. The taxpayer firm contended that no capital gains were triggered in the hands of the firm. Karnataka HC, relying on its earlier ruling in the case of M/s Suvardhan (supra), held that the taxpayer firm was liable to pay capital gains tax under section 45(4).

Against the Karnataka HC in the case of M/s Suvardhan (supra), Special Leave to Petition (SLP) was preferred by the taxpayer before SC7. SC granted Special Leave Petition, vide order dated 5 January 2007, on the ground that SLP has already been granted in the case of A N Naik (supra) and the Karnataka HC relied upon the Bombay HC ruling in the case of A N Naik Associates (supra) while passing the order. Similarly, against the Karnataka HC in the case of Davangere Maganur Bassappa (supra), the taxpayer filed SLP before SC8. SC granted SLP, vide order dated 29 March 2010, on the ground that SLP was granted in the case of M/s Suvardhan (supra). On granting the SLP, both the appeals in case of M/s Suvardhan and Davangere Maganur Bassappa were converted into Civil Appeal No. 98/2007 and 2961/2010 respectively before SC.

7. SLP (Civil) No. 21078 of 2006
8. SLP (Civil) No. 8446 of 2010

Post grant of SLP, four cases viz. Rangavi Realtors (supra), A N Naik Associates (supra), M/s Suvardhan (supra) and Davangere Maganur Bassappa (supra) were placed before Three Judge Bench. Taxpayers in the cases of Rangavi Realtors (supra) and A N Naik Associates (supra) withdrew their appeals and consequently, Civil Appeals were dismissed. Hence, no ratio was laid down by Court in their cases. In the cases of M/s Suvardhan (supra) and Davangere Maganur Bassappa (supra), SC dismissed the Civil Appeals without assigning any specific reasons. It must be noted that M/s Suvardhan (supra) and Davangere Maganur Bassappa (supra) do not deal with the mere dismissal of SLP. In these cases SLPs were granted, but resultant Civil Appeals were dismissed. Considering the same, one may rely on the following observations from SC ruling in the case of Kunhayammad v State of Kerala [2000] 245 ITR 360 (as approved by Khoday Distilleries Ltd. v. Sri Mahadeshwara Sahakara Sakkare Karkhane Ltd. [2019] 4 SCC 376) to contend that once the order is passed by SC, doctrine of merger is applicable, and order of HC becomes the order of SC.

“Once a special leave petition has been granted, the doors for the exercise of appellate jurisdiction of this Court have been let open. The order impugned before the Supreme Court becomes an order appealed against. Any order passed thereafter would be an appellate order and would attract the applicability of doctrine of merger. It would not make a difference whether the order is one of reversal or of modification or of dismissal affirming the order appealed against. It would also not make any difference if the order is a speaking or non- speaking one. Whenever this Court has felt inclined to apply its mind to the merits of the order put in issue before it though it may be inclined to affirm the same, it is customary with this Court to grant leave to appeal and thereafter dismiss the appeal itself (and not merely the petition for special leave) though at times the orders granting leave to appeal and dismissing the appeal are contained in the same order and at times the orders are quite brief. Nevertheless, the order shows the exercise of appellate jurisdiction and therein the merits of the order impugned having been subjected to judicial scrutiny of this Court

We may look at the issue from another angle. The Supreme Court cannot and does not reverse or modify the decree or order appealed against while deciding a petition for special leave to appeal. What is impugned before the Supreme Court can be reversed or modified only after granting leave to appeal and then assuming appellate jurisdiction over it. If the order impugned before the Supreme Court cannot be reversed or modified at the SLP stage obviously that order cannot also be affirmed at the SLP stage.”

Relying on the above, one may contend that order passed by Karnataka HC in the cases of M/s Suvardhan (supra) and Davangere Maganur Bassappa (supra) achieved finality and thereby order passed by Karnataka HC stood merged with order of SC. Judicial discipline requires that the decision of a Larger Bench must be followed by Bench with a lower quorum – refer to Union of India v Raghubir Singh (Dead) [1989] 2 SCC 754 (Constitution Bench) and Trimurthi Fragrances (P) Ltd. v Govt. of NCT of Delhi [TS-729-SC-2022] (Constitution Bench). Accordingly, a question that may arise is whether observations made by Karnataka HC as regards the requirement of transfer of a capital asset by way of distribution of capital assets to trigger provisions of section 45(4) are approved by SC? If yes, since the earlier ruling was rendered by Three Judges’ Bench, will the same not become binding on a Two Judge Bench in the case of Mansukh Dyeing (supra)? Further, will it mean that the ruling rendered in the case of Mansukh Dyeing (supra) without referring to a Larger Bench ruling in the case of M/s Suvardhan (supra) and hence suffers from ‘per incuriam’?

Since we are purely treading on a legal issue, one shall remain guided by Senior Counsel.

Is there a possibility that SC may examine/re-examine the ratio laid down in the case of Mansukh Dyeing (supra) in near future?

In the case of Hemlata S Shetty v ACIT [ITA No.1514/Mum/2010 and ITA No. 6513/Mum/2011, order dated 1 December 2015), Mumbai Tribunal was concerned with a case of money received by a partner on his retirement from the firm. In this case, the taxpayer had contributed Rs. 52.5 lacs as capital on being admitted as a partner on 16 September 2005. Subsequently, the partnership firm acquired immovable property in 2006 which was held as stock in trade and not as capital asset. From the facts, it appears that, immediately, post-acquisition of immovable property, revaluation was carried out and revaluation was credited to Partner’s Capital A/c. On 27 March 2006, the taxpayer retired from the partnership firm and received a sum of Rs. 30.88 Crores. The source of money for the discharge of the amount payable to the partner on his retirement was not known. Tax authorities sought to bring the difference between the amount received on retirement and the amount contributed by the tax taxpayer as capital gains. Tribunal, relying on various judicial precedents, held that the amount received on the retirement of a partner does not result in transfer and hence no capital gains are chargeable in the hands of the taxpayer. Against the Tribunal ruling, Revenue preferred an appeal before Bombay HC [reported in PCIT v Hemlata S Shetty [2019] 262 Taxman 324]. Bombay HC held that the amount received by the partner on retirement is not taxable in her hands and further held that capital gains liability (if any) can arise in the hands of the partnership firm.

Against the Bombay HC ruling, Revenue preferred SLP before SC – [SLP (C) No. 21474/2019]. This matter came up for hearing before SC on 10 November 2022. While hearing the matter, Counsels appearing for parties informed SC that a similar matter was heard by a co-ordinate bench [SLP (Civil) No. 3099/2014 – which is a matter of Mansukh Dyeing (supra)]. Accordingly, the case of Hemlata S Shetty before SC was parked in view of the pendency of the final Judgement of Mansukh Dyeing (supra). As the SC has, now, delivered the ruling in case of Mansukh Dyeing (supra), it is likely that SC may refer to the ruling while disposing of SLP in the case of Hemlata S. Shetty (supra) which is scheduled to be heard on 15 February 2023. Interested parties may keep a close watch on this proceeding before SC.

Whether ratio laid down by SC in case of Mansukh Dyeing (supra) has bearing on section 9B and / or substituted section 45(4)?

Vide Finance Act, 2021, with effect from AY 2021-22, section 9B was inserted and section 45(4) was substituted. Section 9B(1) provides that where a specified person (partner) receives a capital asset or stock in trade in connection with the dissolution or reconstitution of a specified entity (firm) then the firm shall be deemed to have transferred capital asset or stock in trade to partner. Substituted provisions of section 45(4) are triggered where a specified person (partner) receives during the previous year any money or capital asset or both from a specified entity in connection with the reconstitution of such specified entity.

An important question that may arise is that under the new regime where revaluation of capital asset and/or stock in trade is carried out and same is credited to Partner’s Capital / Current A/c, provisions of section 9B or section 45(4) are triggered⁹? In terms of SC ruling in the case of Mansukh Dyeing (supra) may urge that on revaluation of capital asset coupled with credit to Partner’s capital A/c is regarded as transfer. Relying on the SC ruling, tax authorities may urge that once there is a transfer of a capital asset, the asset cannot remain in a vacuum. The recipient of an asset has to exist, and the partner can only be the recipient. Accordingly, on revaluation, there is effective receipt of capital asset/stock in trade by a partner which triggers provisions of section 9B. Since section 45(4) is also triggered on a receipt basis, for similar reasons, there is a trigger of substituted section 45(4) also.

9. For the purpose of present analysis, we have proceeded on the assumption that revaluation and credit to the account of partners’ is along with reconstitution or dissolution of firm. It may be noted that mere revaluation of asset which is not coupled with reconstitution / dissolution, there is neither trigger of section 45(4) nor section 9B

For the following reasons, in view of author, revaluation of capital asset/stock in trade and credit to partner’s capital account does not trigger section 9B and section 45(4).

The dictionary meaning of the term ‘receipt’ means ‘to take into possession’, ‘conferred’, ‘have delivered’, ‘given’, ‘paid’, ‘take in’, ‘hold’ etc. On revaluation of capital asset and/or stock in trade, revalued asset remains within the coffers of a firm, and it is not the possession of the partner or conferred/given / paid to the partner. Absent receipt by the partner, there is no trigger of section 9B.
Section 9B and substituted section 45(4) are worded differently from erstwhile section 45(4). Under the old provision, in terms of sequence, distribution had to follow, and such distribution was deemed to be a transfer. In the amended provision, in terms of sequence, there should be a receipt of an asset by a partner and such receipt will be considered to be a transfer. Hence, before alleging that there is a transfer, there is an onus to establish that there is a receipt of an asset by the partners. The onus is to first establish that the act of revaluation results automatically in a receipt. The expression “distribution” does not appear in section 9B / 45(4). SC ruling in the case of Mansukh Dyeing (supra) that revaluation could amount to distribution cannot be applied in a case where there is no reference to the expression “distribution”.
Section 45(5)(b) uses the term ‘received’ for the purpose of taxing the enhanced compensation received on compulsory acquisition of an asset. In the context of section 45(5), reference may be made to the Karnataka HC ruling in the case of CCIT v Smt. Shantavva [2004] 267 ITR 67. In this case, the taxpayer received the amount of enhanced compensation in pursuance of an interim order which was subject to a final order. HC held that the amount received pursuant to the interim order cannot be considered as amount received for the purpose of section 45(5)(b). HC held that, ‘received’ shall mean ‘receipts of the amount pursuant to a vested right or enforceable decree’. In case of revaluation of an asset, the partner does not get any vested / binding right to demand the asset from the firm. During the subsistence of a firm, what all partners can demand is their share of profit and nothing beyond that. Additionally, as held by SC in the case of Sunil Siddharthbhai v CIT [1985] 156 ITR 509, the value of the partnership interest depends upon the future transactions of the partnership and the value of the partnership interest may diminish in value depending on accumulating liabilities and losses with a fall in the prosperity of the partnership firm. Accordingly, artificial credit on revaluation cannot be considered as a receipt in the hands of partners.
Where a partner receives any capital asset or stock in trade from the firm in connection with dissolution or reconstitution, section 9B(1) creates a fiction that there is deemed transfer of a capital asset or stock in trade by the firm to partner. Perhaps the fiction is created to overcome the past SC rulings¹⁰ wherein it was held that the distribution of an asset by the firm to its partners does not result in any transfer. The opening para of section 9B(2) provides that any profits and gains arising from deemed transfer shall be an income of the firm. Section 9B(2) creates a charge of income in the hands of the firm. In order to create a charge in the hands of the firm, there shall be profits and gains in the hands of the firm – see opening para of section 9B(2). There is no fiction created under section 9B to provide that deemed transfer results in deemed profits or deemed gains in the hands of firm. It is a well-settled principle that deeming fiction shall be construed strictly and cannot be extended beyond the purpose for which it is created – see State Bank of India v D. Hanumantha Rao [1998] 6 SCC 183 (SC), CIT v V S Dempo Company Ltd. [2016] 387 ITR 354 (SC). Accordingly, to trigger section 9B(2) there shall be commercial profits or gains. On mere revaluation, no profits or gains are derived by the firm – see CIT v Hind Construction Ltd. [1972] 83 ITR 211, Sanjeev Woollen Mills v CIT [2005] 279 ITR 434 (SC). The firm stands where it was. Further, it is a well-settled principle that one cannot earn income out of oneself – see Sir Kikabhai Premchand v CIT [1953] 24 ITR 506 (SC). Accordingly, it may also be urged that the firm cannot earn profits or gains out of itself to trigger provisions of section 9B(2).
On close scrutiny, a charge under section 45(4) is triggered where any profits and gains arising from the receipt of a capital asset or money in the hands of a partner. Section 45(4) seems to deem two aspects (a) profits and gains arising from receipt of a capital asset or money in the hands of a partner as income of the firm and (b) year of taxation to be the year of receipt of a capital asset or stock in trade. Like, section 9B, section 45(4) does not deem that receipt of a capital asset or money results in profits or gains in the hands of a partner. Accordingly, to trigger section 45(4) there shall be commercial profits or gains. Mere revaluation of the asset of the firm and credit to the account of the partner does not result in any commercial profits or gains in the hands of a partner. Partners’ interest in the firm remains the same with or without revaluation. The economic wealth of the partner would depend upon the inherent value of his share in the firm irrespective of whether revaluation is carried out or not. Mere revaluation cannot change the economic wealth or standing of a partner. Even where the partner was to assign his stake in the firm to a third party, he would have derived the same value, which he would derive irrespective of whether the revaluation of an asset was carried out by the firm or not. Absent commercial profit or gains, provisions of section 45(4) cannot be triggered.
Mere revaluation of an asset, even when there is no reconstitution will automatically result in the receipt of assets by partners without attracting any charge in absence of dissolution or reconstitution. Having already received the asset at some stage, there would be no further receipt possible in as much as the same asset cannot be received twice.

10. Dewas Cine Corporation (supra), Malabar Fisheries Co (supra)

shailesh.kwebmaker

Reopening of Assessments under section 147 with effect from 1st April 2021

1. INTRODUCTION

The law applicable to the reopening of assessments is enshrined in sections 147 to 151. That law was changed by the Finance Act 2021 with effect from 1st April 2021.

The objective for the change is explained in the Explanatory Memorandum explaining the provisions of the Finance Bill 2021:

There is a need to completely reform the system of assessment or reassessment or re-computation of income escaping assessment and the assessment of search related cases. The Bill proposes a completely new procedure of assessment of such cases. It is expected that the new system would result in less litigation and would provide ease of doing business to taxpayers.

This Article discusses –

(i) Change in the law of reopening of assessments by the Finance Act 2021 with effect from 1st April 2021.

(ii) The consequences of the aforesaid change in the law.

(iii) Judgement of Hon. Supreme Court in UOI vs Ashish Agarwal (2022) 444 ITR 1 (SC)

(iv) How should the assessee reply to notices issued by the Assessing Officer under section 148A(b)?

(v) When should the assessee challenge, in a Writ Petition before the High Court, the order passed by the Assessing Officer under section 148A(d) as well as the notice issued by the Assessing Officer under section 148?

2. CHANGE IN LAW WITH EFFECT FROM 1ST APRIL 2021

With effect from 1st April 2021 the Finance Act 2021 changed the law applicable to reopening of assessments under section 147 read with sections 148 to 151. The New Scheme of reopening is based on the procedure laid down by the Hon. Supreme Court in GKN Driveshaft (India) Ltd vs ITO¹ . In that case the Hon. Supreme Court held that on issuance of the notice under the erstwhile section 148 the assessee should file a return of income in response to such notice and seek reasons recorded by the Assessing Officer (AO) for issuing such notice. The AO is bound to furnish reasons to the assessee within a reasonable time. On receipt of the reasons, the assessee is entitled to file objections to the issuance of notice under section, 148 and the AO is bound to dispose of the objections by passing a speaking order. Only after following this procedure, the AO could proceed with the reassessment. This procedure, prescribed by the Hon. Supreme Court under the Old Law (applicable up to 31st March 2021), has now been incorporated in the New Law (applicable from 1st April 2021).

1. (2003) 259 ITR 19 (SC)

3. COMPARISON OF THE LAW

APPLICABLE UP TO 31ST MARCH 2021 (OLD LAW) AND THE LAW APPLICABLE FROM 1ST APRIL 2021 (NEW LAW)

The salient features of the Old Law and the New Law are highlighted in the table below –

Section	Old Law up to31^stMarch, 2021	New Law from1^st April, 2021 inserted by Finance Act, 2021
147: Income escaping assessment	• Under the Old Law, before initiating proceedings to reopen the assessment, the Assessing Officer (AO) had to record ‘reasons to believe’ that income had escaped assessment.• On the basis of those reasons, the AO was required to form a belief that there is escapement of income and therefore action is required under section 147.	• Under the New Law, section 147 does not use the phrase reason to believe that any income has escaped assessment but rather states if any income has escaped assessment.• So, now the reason to believe that any income has escaped assessment is not necessary.• Rather there is a requirement of having prescribed information (as defined in Explanation 1 to
		section 148²) suggesting that income has escaped assessment.
148 (2): Issue of notice where income has escaped assessment	• Under the old section 148 the AO was only required to record reasons for reopening before issuing notice under section 148.• Courts interpreted the phrase ‘reason to believe’ to lay down several legal principles to prevent abuse of power by the AO. [Refer CIT vs Kelvinator of India Limited (2010) 320 ITR 561 (SC)].	• New section 148 provides that no notice can be issued unless there is information (as defined in Explanation 1 to section 148³) which suggests that income has escaped assessment.
Explanation 1 to Section 148	Did not exist under the Old Law	• Under the New Law the AO can issue a notice under section 148 only when the AO has information which suggests that the income has escaped assessment.• The statutory definition of ‘information which suggests that the income has escaped assessment’ is provided in Explanation 1 to section 148⁴.Note: In Explanation 1 to section 148 any information flagged in the case of the assessee for the relevant assessment year in accordance with the risk management strategy formulated by the Board from time to time – this means information received by the AO from the Insight Portal of the Department.
Explanation 2 to Section 148	Did not exist under the Old Law	• Explanation 2 to section 148 lays down that in cases of search, survey and requisition, initiated or made on or after 1st April 2021, the AO shall be deemed to have information which suggests that income chargeable to tax has escaped assessment.• So, in cases of search, survey and requisition, NO information as defined in Explanation 1 to section 148 is required by the AO to issue notice under section 148.
148A: Conducting inquiry and providing opportunity before issue of notice under section 148	Did not exist under the Old Law	• Under the New Law before issuing notice under section 148 the AO has to follow the procedure prescribed under section 148A and pass an order under section 148A (d).Thus, under section 148A, the AO has to –(1) Conduct enquiry with respect to information which suggests that income chargeable to tax has escaped assessment. Such enquiry is to be conducted with the prior approval of the Specified Authority as prescribed in section 151. [Section 148A (a)]
		(2) Issue a notice upon the assessee to show cause why notice under section 148 should not be issued on basis of information which suggests that income chargeable to tax has escaped assessment and enquiry conducted under section 148A (a). The AO must provide time of minimum 7 days
		and maximum 30 days to the assessee to respond to the show-cause notice.This provision provides opportunity of being heard to the assessee before issue of notice under section 148. [Section 148A (b)](3) Consider the reply of the assessee to the show-cause notice. [Section 148A (c)](4) Decide on the basis of material available on record and reply of the assessee by passing an order within one month of the assessee’s reply whether or not it is a fit case for issuing notice under section 148 with the prior approval of the Specified Authority as prescribed in section 151.The AO has to consider the reply of the assessee, in response to the show-cause notice under section 148A (b), before passing an order under section 148A (d). [Section 148A (d)]
149 (1): Time limit for issuing notice under section 148	*Under the Old Law –* • General cases: 4 years • Where income escaping assessment more than 1 lakh: 6 years • Where there was undisclosed Foreign Asset (including Financial Interest): 16 years.	*Under the New Law –* • General cases: 3 years • Where likely escapement of income in the form of asset/expense/entry is more than Rs. 50 lakhs: 10 years [the term “asset” is defined in the Explanation to section 149 (1)⁵] • No separate category for undisclosed Foreign Asset
151: Sanction for issue of notice	• If four years have elapsed from the end of the relevant assessment year,	• If three years or less than three years have elapsed from the end of the relevant
	then the AO had to take approval/sanction of PCCIT or CCIT or PCIT or CIT for issuing notice under section 148.• If less than four years have elapsed from the end of the relevant assessment year, then the AO himself had to be a JCIT. Otherwise, the AO had to take approval/sanction of JCIT for issuing notice under section 148.	assessment year, then the AO has to take approval/sanction of PCIT or PDIT or CIT or DIT for the purposes of conducting enquiries, issuing show-cause notice and passing order under section 148A, and for issuing notice under section 148.• If, however, more than three years have elapsed from the end of the relevant assessment year, then the AO has to take approval/sanction of PCCIT or PDGIT or CCIT or DGIT for the aforesaid purposes.

2. For statutory definition of the phrase ‘information which suggests that the income has escaped assessment’ please refer to Point 7.2 of Para 7
3. Ibid
4. Ibid
5. For discussion on the condition term ‘likely escapement of income in the form of asset/expense/entry is more than 50 lakhs’ please refer to Point 7.3 of Para 7

4. TIME LIMIT FOR COMPLETING THE REASSESSMENT UNDER THE NEW LAW

Section 153 (2): No order of assessment, reassessment or recomputation shall be made under section 147 after the expiry of nine months from the end of the financial year in which the notice under section 148 was served:

Provided that where the notice under section 148 is served on or after the 1st day of April, 2019, the provisions of this sub-section shall have an effect, as if for the words “nine months”, the words “twelve months” had been substituted.

5. JUDGMENT OF HON. SUPREME COURT IN UOI VS ASHISH AGARWAL (2022) 444 ITR 1 (SC)

Following the CBDT clarification by way of Explanations to the Notifications dated 31st March, 2021 and 27th April, 2021 issued under The Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (TOLA), the AOs across the Country issued several reassessment notices under section 148 as per the Old Law even after 1st April 2021 (not complying with the procedural safeguards introduced in New Law by the Finance Act 2021).
This raised an interesting question: Whether, in view of TOLA, the Old Law or the New Law should apply to 148 notices issued from 1st April 2021 to 30th June 2021?
On Writ Petitions filed by the assessee, the High Courts of Allahabad⁶, Delhi⁷, Rajasthan⁸, Calcutta⁹, Madras¹⁰, and Bombay¹¹, over the course of several decisions, quashed the 148 notices issued by the AOs from 1st April 2021 to 30th June 2021 under the Old Law. The High Courts held that once the Finance Act 2021 came into force on 1st April 2021, the Old Law ceased to exist and the same could not be revived through a Notification of the CBDT under TOLA.
The Department filed appeals before the Hon. Supreme Court against the common judgment of the Allahabad High Court in Ashok Kumar Agarwal vs Union of India¹² (which directed the quashing of 148 notices issued from 1st April 2021 to 30th June 2021).
In UOI vs Ashish Agarwal (supra) the Hon. Supreme Court favourably allowed the Department’s appeals.
The Hon. Supreme Court held –
We are in complete agreement with the view taken by the various High Courts in holding that the New Law should apply on or after 1st April 2021 for reopening of even the past assessment years.
However, at the same time, the judgments of several High Courts would result in no reassessment proceedings at all, even if the same is permissible under the Finance Act 2021 and as per amended sections 147 to 151 of the IT Act. The Revenue cannot be made remediless and the object and purpose of reassessment proceedings cannot be frustrated.
Thus, the Hon. Supreme Court allowed an opportunity to the Department to continue with the reassessment proceedings initiated under the Old Law by following the procedure prescribed under the New Law.
The CBDT issued Instruction No. 01/2022, Dated 11th May 2022 interpreting the Judgement of Hon. Supreme Court in UOI vs Ashish Agarwal (supra) and issuing instructions to the AOs for completion of the reopened assessments.

6. Ashok Kumar Agarwal vs UOI [2021] 439 ITR 1 (Allahabad HC)
7. Man Mohan Kohli vs ACIT [2022] 441 ITR 207 (Delhi HC)
8. Bpip Infra Pvt. Ltd. vs Income Tax Officer & Others [2021] 133 taxmann.com 48 (Rajasthan HC); Sudesh Taneja vs ITO [2022] 135 taxmann.com 5 (Rajasthan HC)
9. Manoj Jain vs UOI [2022] 134 taxmann.com 173 (Calcutta HC)
10. Vellore Institute of Technology vs CBDT 2022] 135 taxmann.com 285 (Madras HC)
11. Tata Communications Transformation Services vs ACIT [2022] 137 taxmann.com 2 (Bombay HC)
12. 2021] 439 ITR 1 (Allahabad HC)

The AOs passed order under section 148A (d) after ostensibly considering replies of the assessee to notice under section 148A (b), in accordance with the Judgement of Hon. Supreme Court in UOI vs Ashish Agarwal (supra). However, in several cases such replies were not properly considered by the AOs.

Due to defects in the order passed by the AOs under section 148A (d) the assessees have filed Writ Petitions before various High Courts challenging the order passed by the AOs under section 148A (d) as well as the notice issued by the AOs under section 148.

These Writ Petitions are yet to be disposed of by the High Courts.

This has given rise to the second round of litigation as in view of the assessee the Department has failed to give effect to judgment of Hon. Supreme Court in UOI vs Ashish Agarwal (supra) in the right spirit.

6. THE JUDGMENT OF THE HON. SUPREME COURT IN UOI VS ASHISH AGARWAL (SUPRA) AND THE CBDT INSTRUCTION NO. 01/2022, DATED 11TH MAY 2022 ARE NOW NOT RELEVANT

The judgment of the Hon. Supreme Court in UOI vs Ashish Agarwal (supra) and the CBDT Instruction No. 01/2022, Dated 11th May 2022 were applicable to notices under section 148 issued by the AOs during the period 1st April 2021 to 30th June 2021. But for notices issued under section 148A (b), and under section 148, from 1st July 2021 onwards the judgment of the Hon. Supreme Court in UOI vs Ashish Agarwal (supra) and the CBDT Instruction No. 01/2022, dated 11th May 2022 are no longer relevant. For notices issued 1st July 2021 onwards we need to, without relying on UOI vs Ashish Agarwal (supra) and the CBDT Instruction No. 01/2022, dated 11th May 2022, check (action points related to new notices are discussed below) whether the notices meet the requirements of the New Law.

The action points related to new notices issued by the AOs under section 148, under the New Law, are discussed below.

7. WHAT SHOULD YOU DO IF YOU NOW RECEIVE NOTICE UNDER SECTION 148A (B) UNDER THE NEW LAW?

Reassessment notices issued under section 148 on or after 1st July 2022 have to be as per the New Law. So, before issuing notice under section 148 under the New Law notice under section 148A (b) must first be issued by the AO.

Upon receipt of notice under section 148A (b), you must check the following points.

Point 7.1: Whether the Notice is pertaining to AY 2016-17 and subsequent years?

Although, under the New Law, the Department can reopen assessments up to ten years from the end of the relevant assessment year, by virtue of the first Proviso to the new section 149 –

No notice under section 148 shall be issued at any time in a case for the relevant assessment year beginning on or before 1st day of April, 2021, if a notice under section 148 could not have been issued at that time on account of being beyond the time limit specified under the provisions of clause (b) of sub-section (1) of this section as it stood immediately before the commencement of the Finance Act 2021.

By virtue of this Proviso, reopening of assessment for any assessment year prior to AY 2016-17 would be time-barred and bad in law. That is because under the Old Law assessment could be reopened up to six years where the income escaping assessment was one lakh rupees or more (and where there was no undisclosed Foreign Asset). For AY 2015-16 and earlier years more than six years have already elapsed on 31st March 2022. So, under the New Law, the notices under section 148 read with section 148A (b) have to be now in relation to AY 2016-17 and later years.

Point 7.2: Whether the information provided by the AO along with the Notice under section 148A (b) suggest that income has escaped assessment?

Explanation 1 to Section 148 defines ‘information which suggests that income has escaped assessment’. We should check whether the information provided by the AO along with the notice under section 148A (b) meets the said definition.

Explanation 1 to section 148

For the purposes of this section and section 148A, the information with the Assessing Officer which suggests that the income chargeable to tax has escaped assessment means –

(i) any information in the case of the assessee for the relevant assessment year in accordance with the risk management strategy formulated by the Board from time to time; or

[Note: Information in accordance with the ‘risk management strategy formulated by the Board’ means information available on the Insight Portal of the Department and received by the AO from the Insight Portal.]

(ii) any audit objection to the effect that the assessment in the case of the assessee for the relevant assessment year has not been made in accordance with the provisions of this Act; or

(iii) any information received under an agreement referred to in section 90 or section 90A of the Act; or

(iv) any information made available to the Assessing Officer under the scheme notified under section 135A;
or

(v) any information which requires action in consequence of the order of a Tribunal or a Court.

Point 7.3: Whether the concerned AY is within 3 years, or beyond 3 years (but within 10 years) from the end of the relevant assessment year sought to be reopened?

As per section 149 (1), no notice under section 148 shall be issued beyond three years from the end of the relevant assessment year unless the AO has in his or her possession books of account or other documents or evidence which reveal that the income chargeable to tax is represented in the form of:

(a) an asset,

(b) expenditure in respect of a transaction or in relation to an event or occasion; or

(c) an entry or entries in the books of account,
and the amount of income which has escaped assessment amounts to or likely to amount to fifty lakh rupees or more.

As per Explanation to section 149(1), “asset” shall include immovable property, being land or building or both, shares and securities, loans and advances and deposits in bank account.

Further, as per section 149 (1A), where the income chargeable to tax represented in the form of an asset or expenditure has escaped assessment, and the investment in such asset or expenditure, in relation to an event or occasion, has been made or incurred, in more than one previous year relevant to the relevant assessment years, notice under section 148 shall be issued for every such assessment year.

Point 7.4: Whether the Notice is issued with the prior approval of the Specified Authority as laid down in section 151?

Sanctioning Authority under section 151 is –

(i) Where three or less than three years have elapsed from the end of the relevant assessment year: Principal Commissioner or Principal Director or Commissioner or Director

(ii) Where more than three years have elapsed from the end of the relevant assessment year: Principal Chief Commissioner or Principal Director General or Chief Commissioner or Director General

Sanction by an unauthorized authority would render the approval bad in law. When the statue authorizes a specific officer to accord approval for issuing notice under section 148, then it is for that officer only, to accord approval and not for any other officer even superior in rank¹³.

13. (i) CIT (Central-1) vs Aquatic Remedies (P.) Ltd. [2020] 113 taxmann.com 451 (SC); (ii) Ghanshyam K Khabrani vs ACIT 2012 (3) TMI 266 (Bombay HC); (iii) Reliable Finhold Ltd vs Union of India [2015] 54 taxman.com 318 (Allahabad HC); (iv) Dr. Shashi Kant Garg vs CIT (2006) 285 ITR 158 / [2006] 152 Taxman 308 (Allahabad HC); (v) Sardar Balbir Singh vs Income Tax Officer [2015] 61 taxmann.com 320 (ITAT Lucknow)

Point 7.5: Whether sanction is obtained by the AO prior to issuance of Notice?

The AO must bring on record documents to demonstrate that he or she had obtained the sanction of the appropriate authority before issuing notice under section 148 or 148A. If the AO issues the notice for reopening the assessment before obtaining the sanction, the reopening proceeding is void ab initio.

Point 7.6: Whether a period of at least seven days has been provided to the assessee to respond to the Notice?

There have been instances where less than seven days have been given to the assessee to respond to the notice issued under section 148A (b). This results in a violation of the procedure laid down by law.

Violation of the Principles of Natural Justice is not a curable defect in appeal¹⁴. Lack of opportunity before the AO cannot be rectified by the Appellate Authority by giving such opportunity.

14 Tin Box Co. vs CIT (2001) 249 ITR 216 (SC)

7A Raise objections in reply to the Notice, file a robust reply, and seek an opportunity of a personal hearing.

On checking the notice under section 148A (b), if you find any defects and shortcomings highlighted above, you must raise objections to the notice in your reply. Further, you should file a detailed submission on the merits of your case and ask the AO to provide an opportunity of a personal hearing before the AO passes the order under section 148A (d). Filing of robust submission at the first stage i.e., reply to notice under section 148A (b) will help the assessee before the High Court (in case of a Writ Petition) or in appellate proceedings subsequent to completion of reassessment proceedings.

8. WHAT SHOULD YOU DO WHEN YOU NOW RECEIVE AN ORDER UNDER SECTION 148A (D) ALONG WITH NOTICE UNDER SECTION 148 UNDER THE NEW LAW?

On the basis of material available on record, including the reply of the assessee, the AO has to pass an order under section 148A (d), with the prior approval of the Specified Authority, within one month from the end of the month in which the reply of the assessee is received by the AO.

Upon receipt of an order under section 148A (d) you must check the following points.
Point

8.1: Whether Notice under section 148 has been served along with the Order under section 148A(d)

As per amended section 148 of the Act, under the New Law, the AO has to serve a notice under section 148 along with a copy of the order passed under section 148A (d).

Point 8.2: Whether in the order passed under section 148A (d) the AO has recorded a finding of income escaping assessment on the basis of “information” which suggests that income has escaped assessment?

When no finding of escapement of income is recorded in the order passed under section 148A (d) on basis of “information” as defined in Explanation 1 to section 148, but on some other ground, then the order under section 148A (d) will be invalid.

The Hon’ble Bombay High Court in the case of CIT vs Jet Airways (I) Ltd¹⁵ held, under the Old Law, that if after issuing a notice under section 148 of the Act, the AO accepts the contention of the assessee and holds that income, for which he had initially formed a reason to believe had escaped assessment, has, as a matter of fact, not escaped assessment, it is not open to him to independently assess some other income; if he intends to do so, a fresh notice under section 148 of the Act would be necessary, the legality of which would be tested in event of a challenge by the assessee.

15. [2011] 331 ITR 236 (Bombay HC)

Point 8.3: Whether the AO has passed a detailed speaking Order under section 148A(d) after considering the reply of the assessee?

It is a well-settled law that the AO has to pass a speaking order disposing of the objections of the assessee. If the order is without dealing with the contentions and issues raised by the assessee in its reply to the notice under section 148A(b), then such an order would not be in accordance with the law. Such an order can be challenged in Writ Petition before the High Court.

Point 8.4: Whether the Order passed by the AO has the sanction of the Specified Authority?

Please refer to Point 7.4 above.

Point 8.5: Whether the Order is passed by the AO within one month?

The AO must pass an order under section 148A (d) within one month from the end of the month in which the reply of the assessee, in response to the notice under section 148A(b), is received by the AO.

Where the order under section 148A(d) is passed after a period of one month, such an order would be considered time barred and bad in law. Such an order can be challenged in Writ Petition before the High Court.

Point 8.6: Whether the information on the basis of which assessment is reopened was furnished to the AO during the original assessment?

[Please refer to Paragraph 5. Power to Review and Change of Opinion above]

Point 8.7: Whether your case is a search or search-related case?

No notice under section 148A is required for search cases, search-connected matters, cases where information has been obtained pursuant to a search, and cases where information has been received under section 135A of the Act.

Point 8.8: Whether the AO has followed the procedure prescribed under section 148A in a survey case?

As stated above in Point 13, Section 148A will not be attracted in certain cases, including search cases. Further, Explanation 2 to Sec. 148 lays down that in cases of search, survey and requisition, initiated or made on or after 1st April 2021, the AO shall be deemed to have information that suggests that income chargeable to tax has escaped assessment. So, in cases of search, survey, and requisition, no information as defined in Explanation 1 to Sec. 148 is required by the AO to issue a notice under section 148.

However, the due procedure prescribed under section 148A needs to be followed in section 133A survey cases before issuing notice under section 148 – please refer to the Proviso to Section 148.

Therefore, in survey cases, section 148A of the Act is attracted and the AO has to issue a notice under section 148A (b) and pass an order under section 148A (d) in survey cases.

Point 8.9: Whether Opportunity of a personal hearing has been granted?

If the assessee asks for a personal hearing in response to the notice issued under section 148A (b), then the AO must grant the opportunity of a personal hearing. If the AO has not granted the opportunity of personal hearing despite the assessee asking for it, then the principle of natural justice is vitiated.

8A Filing Return of Income

Pursuant to the order under section 148A(d), the AO shall serve the assessee with a notice under section 148 asking the assessee to file the return of Income. In response, the assessee should file a return of income. The assessee can challenge the order under section 148A(d) as well as the notice under section 148, by filing a Writ Petition before the High Court, either before or after the filing of the return of income in response to notice under section 148. Filing of return of income does not cause any prejudice to the filing of Writ Petition.

Note: Penalty – As per section 270A(2)(c) of the Act, a person shall be considered to have under-reported his income, if the income reassessed is greater than the income assessed or reassessed immediately before such reassessment. Therefore, disclosing of income in the return in compliance with section 148 of the Act may not help during penalty proceedings.

9. When should you file a Writ Petition before the High Court?

Where you find, while checking Points 1 to 15 mentioned above, that there is any lapse or violation, then you can file a Writ Petition on receipt of the notice under section 148 of the Act along with an Order under section 148A(d) of the Act.

You may, however, note that a Writ Petition before the High Court, under Article 226 of the Constitution of India, is different from an appeal before the High Court under section 260A of the Act. One cannot file the Writ Petition in a routine manner when an alternative remedy is available.

If you choose not to file a Writ Petition but to go ahead with the reassessment (under the Faceless Assessment Regime), then you will have to go for the regular route of appeal to CIT (Appeals), ITAT, High Court and Supreme Court.

10 CONCLUSION

The New Law mandates that the AO shall carry out the procedure prescribed under section 148A before issuing a notice under section 148. Only after carrying out that procedure (conducting an enquiry, issuing a show-cause notice, considering the assessee’s reply to the show-cause notice and passing a speaking order whether it is a fit case for issuing notice under section 148) the AO can issue a notice under section 148 and reopen an assessment.

Further, the AO must have in his or her possession ‘information which suggests that income has escaped assessment’ as defined in Explanation 1 to section 148. Without such statutorily defined information, the AO cannot issue a notice under section 148 and reopen an assessment.

Also, if more than three years have elapsed from the end of the relevant assessment year then the AO can issue notice under section 148 only when the AO has in his or her possession books of account or other documents or evidence which reveal that the income chargeable to tax, represented in the form of (i) an asset (immovable property, being land or building or both, shares and securities, loans and advances and deposits in bank account); or (ii) expenditure in respect of a transaction or in relation to an event or occasion; or (iii) an entry or entries in the books of account, which has escaped assessment amounts to or is likely to amount to fifty lakh rupees or more.

For passing an order under section 148A (d) the AO has to obtain prior sanction or approval of appropriate authority specified in section 151.

The assessee should take note of these changes and check that the statutory procedure is followed by the AO for reopening the assessment. If the AO fails to follow such procedure, and if there are shortcomings and defects in the show-cause notice issued by the AO under section 148A (b) and in the order passed by the AO under section 148A (d), then the assessee should challenge the notice issued by the AO under section 148, by filing a Writ Petition before the High Court.

Let us hope that the AOs follow the new procedure in the right spirit so that unnecessary reopening of past assessments is prevented, and the taxpayers are spared the brunt of costly litigation.

shailesh.kwebmaker

We the people of India…

Last month, on 26th January, 2023, we celebrated the 73rd Republic Day, which is the anniversary of the day when we adopted the Constitution. In a couple of years, we will celebrate the Amrut Mahotsav of our Republic. The Constitution is the pillar of any civilised society, as it ensures and assures the Rule of Law. It is perhaps time to reflect on some of the aspects of the Indian Constitution, considering the present circumstances.

The Preamble to the Constitution reads as follows:

“WE, THE PEOPLE OF INDIA, having solemnly resolved to constitute India into a SOVEREIGN SOCIALIST SECULAR DEMOCRATIC REPUBLIC and to secure to all its citizens:

JUSTICE, social, economic and political;

LIBERTY of thought, expression, belief, faith and worship;

EQUALITY of status and of opportunity; and to promote among them all FRATERNITY assuring the dignity of the individual and the unity and integrity of the Nation.”

Our forefathers, who were part of the Constituent Assembly, enacted and adopted this Constitution on 26th November 1949, after careful debate and consideration. It plays an important role in shaping the destiny of the country.

The words “Socialist, Secular and Integrity” were added to the Preamble of the Indian Constitution in 1976 during the Emergency, by the 42nd Constitutional Amendment, altering the structure of the Preamble in a hushed manner. Many amendments made during the Emergency period in India were reversed by the succeeding government. However, these three words remained part of the Preamble since then.

India adopted the socialistic pattern of society, where public and private enterprises coexist. Some drastic socialistic steps were taken during the 1970s, such as the Nationalisation of leading private sector banks and general insurance companies, the Gold Control Act, the Land Ceiling Act, etc. Entrepreneurship and the free-market economy were stifled with the ‘license, permit, and quota system (raj)’. It was only in 1991, that India opened her economy and embarked on the path of liberalization. The rest is history.

Socialism, which failed all over the world, including Russia, has not worked in India as well. Lee Edward¹ writes “Socialism?has failed everywhere it has been attempted for over a century, from the Bolshevik Revolution of 1917 to present-day?Chavez-Maduro socialism in Venezuela.” People talk about socialism to get votes, but there is hardly anyone who would want to go to North Korea, or who would have jumped over the wall from West Germany to East Germany. It is the epitome of inefficiencies, corruption, and red-tapism. There is a strong case for dropping the word “Socialist” from the Preamble of the Constitution.

1. https://www.heritage.org/progressivism/commentary/dismantling-the-mythsthe-socialist-paradise

India is a multi-faith country and not a secular state. India is also a civilizational state and not just a geographical entity. The division of the population into minority and majority mocks the word ‘equality’. The word ‘secular’ being inappropriate, should be replaced with ‘multi-faith’, or delete it entirely, as Justice, Liberty, Equality, and Fraternity cover sufficiently.

The Constitution promises social, economic, and political justice and equality of status and opportunity to all. However, in practice, we find one class is preferred over the other. Caste-based reservation is a classic example of discrimination based on birth and injustice to meritorious students, employees, and job aspirants, resulting in a brain drain. It is a national shame that governments stretch this to the extent of 70 per cent in jobs and education, extending these to education and job reservations to various vote banks. Reservation which was originally contemplated as a temporary measure for 10 years only is continuing even after 75 years showing the need to rethink the manner in which it is provided. Reservation, if at all considered necessary, should be based on economic criteria only.

In fact, the division of the population based on caste, creed, religion, etc. has made the Indian population unequal in their rights, privileges, opportunities, and justice. Let’s obliterate these divisions. ‘Divide and Rule’ was a policy of the Britishers, and the colonial legacy still continues from the founding document. These ‘special cases’ break citizens into groups and creates inequality before law. It is a time to set up a ‘classless’ and ‘casteless’ society.

There is a strong case and need for the Uniform Civil Code, whereby all citizens have equal rights and obligations irrespective of their caste, creed, religion, language, or region. There is a dire need to integrate India socially and culturally through INDIANNESS. If NRIs can live as Indians abroad without being divided into any considerations of caste, creed, or religion, why can’t we live in India as “Indians”?

In the words of the late Nani A. Palkhivala, “We are all individuals. The sense of belonging to one country, the sense that we are all parts of one indivisible society – in short, our identity as a nation – has yet to be evolved.”

When we talk of rights as citizens of India, we must discharge our duties as citizens. Every citizen must be made accountable for his/her conduct. It is the duty of every citizen to contribute to the growth and development of the country, upholding the highest moral values and ethical practices. Each of us must play one’s role diligently in building a strong nation. For this, we must live in a disciplined manner.

India has already crossed the population of China and becomes the most populous country in the world with 141 crore people. India as the largest democratic country in the world has a major responsibility to share. Today the entire world is looking to India to provide leadership for solving its problems. Fortunately, we have strong leadership at the Centre, which is seized of this development and doing its best.

We the people of India have a greater role to play in leading the world.

Today India has become the world’s fifth-largest economy and soon it will ascend to the first three. If we want to become a superpower, we must act and behave like one. We must rise above the ‘caste, class, region, and religion-based politics’ and embrace development. Our aim should be to uplift every citizen from poverty and provide him with the basic necessities of life and equal opportunities. Instead of fighting with each other; let’s fight illiteracy, poverty, corruption, inefficiencies, prejudices and injustice.

India has become the most populous country in the world, the time has come to become the most popular country as well! We as an enlightened class of society, have a greater role to play. Are we ready?

shailesh.kwebmaker

Ahilyabai Holkar
(31.05.1725 – 13.08.1795)

Ahilyabai, the daughter-in-law of Malharrao Holkar – Jagirdar of the Malwa region in Madhya Bharat, was known for her bravery, governance and philanthropy. She shifted her capital town to a place called Maheshwar, South of Indore, on the banks of the river Narmada. After the demise of Malharrao, she ruled Malwa between 1766 to 1795.

Ahilyabai’s father, Mankoji Shinde was the Patil (Chief) of the Choundi Village, in Jamkhed taluka of Ahmednagar district. In those times, when females were deprived of education, Mankoji taught her to read and write. Once Malharrao Holkar, a sardar of Bajirao Peshwa, was passing by Choundi village. He saw this eight-year old girl and was impressed by her smartness. He got her married to his son Khanderao.

Unfortunately, Khanderao was killed in a battle in the year 1754. In those days’ sati system was in vogue – i.e. a widow sacrifices her life into the funeral pyre of her husband. Malharrao stopped her from going ‘sati’. After Malharrao’s death in the year 1766, she took up the charge of the Malwa region. During wars, she used to be in the forefront. Later, she appointed Tukojirao Holkar as her General. He was the adopted son of Malharrao. English author Lawrence has described her as Katherin the Great (Russia) Queen Elizabeth (Briton) and Queen Margaret (Denmark) of India.

Ahilyabai was known for her sense of justice and fairness. She established many temples, constructed the ghats to many rivers, renovated many temples all over India. She made a provision for maintenance of all such temples. She looked after the beautification of Indore and Maheshwar. She also constructed residential hostels (dharmashalas) at the places of pilgrimage. These included Dwarka, Nashik, Varanasi, Ujjain and so on. When she saw the Somnath Temple destroyed by Mohammad Gazani, she constructed another Shiv temple near Somnath. Through all these temples, she promoted and supported great social work.

Malharrao had full trust in her administrative abilities. After his death, she requested Peshwas to allow her to rule the Malwa region.

She used to hear the complaints of the common people and settle all the grievances. She constructed roads and forts in Malwa and developed the ‘village’ of Indore into a city. She constructed wells, lakes, ghats and dharmashalas at many places in India.

Ahilyabai prevented many widows from going sati. She encouraged them to adopt children. She punished many corrupt officers. Citizens of Indore have instituted a prestigious award in her name for a dedicated social worker. The University of Indore is named after her, so also the University of Solapur.

Ahilyabai tried to control the nuisance of the dacoits belonging to Bhil and Gond communities. She supported many poets, scholars, artists, sculptors, entrepreneurs in Malwa as well as in Maharashtra. She also set up a textile mill in Maheshwar.

All Indian historians, as well as British and American historians recognise the fact that she was a saintly figure. That is why she is described as ‘Punyashloka Ahilyadevi (a holy person). In those days, transport facilities and roads were not underdeveloped. Still, she did lot of developmental work in many cities of India.

She supported farmers, relieved them of unjust taxes and trained them in maintaining cows. She worked to eradicate superstitions; and inhuman customs like sati. She argued that there was no mention of such a custom anywhere in Ramayana, Mahabharata or any other ancient literature. She earned a reputation for her sense of justice and judicial wisdom. She punished even senior officers and relatives if they erred.

Ahilyabai evolved a novel scheme of giving 12 trees to each of the poor farmers. They were expected to look after the trees. Every year, the fruits of 7 of the 12 trees were to be retained by them while fruits of 5 trees were to be given to the State. The State distributed them among poor people. Interestingly, this is believed to be the origin of the present day 7/12 extract of land records.

Unfortunately, she lost her 13-year-old grandson. So also, her son-in-law died in a battle. Her health deteriorated and she left for her heavenly abode on 13th August, 1795.

Namaskaar to this Great Woman of our country.

shailesh.kwebmaker

BOOK EXTRACT

BANKING DECEITS: ROGUE CREDIT CULTURE

“A diamond is forever” is the tag line of De Beers, the world’s household name for diamonds. Nirav Modi diamonds, which aspired to be the Indian De Beers brand equivalent, however failed to get its name etched as a diamond jeweller forever.

The unassuming Nirav Modi, owner of the once famed brand, grew up in Belgium, got admitted to Wharton School but failed to continue. He moved back to India in 1990 when he was 19. He trained for the diamond jewellery business under the sharp eyes of his uncle Mehul Choksi, promoter of another scam-hit, stock-market listed company, Gitanjali Gems.

In 1999, Nirav Modi branched out on his own, under the banner of Firestar Diamonds, starting his own diamond jewellery-making facility in India. Meanwhile the diamond industry was undergoing two major shifts. First, brands loomed large on the landscape that was once ruled by mom-and-pop boutiques and family jewellers. Clients began moving to branded jewellery – assurance of ethics was needed to repose trust. Second, design started taking precedence – shifting to ‘wearable’ creativity instead of just traditional diamonds and stones.

Nirav Modi took full advantage of these shifts in consumer preference. He realized that the luxury jewellery market was red hot, pushing into the ultra-luxe retail jewellery market in 2010. With the tagline “Haut Diamantaire”, he launched an eponymous jewellery business branded NIRAV MODI with 8 boutiques worldwide, including high street luxury stores in London, New York and Hong Kong.

Nirav Modi was just flying higher and higher in the $275 billion global jewellery market. Firestar group turnover grew to a whopping Rs 14,700 crore ($2 billion) by 2016-17 and he expressed his vision of having 100 stores by 2025. His name became the stamp of corporate India’s growing global status.

His diamonds sparkled on Hollywood red-carpets, adorning the necks and earlobes of celebrities like Kate Winslet. Back home in India, the Nirav Modi brand was splashed on hoardings across Delhi and Mumbai bearing the image of its global brand ambassador, actor and former Miss World, Priyanka Chopra.

Then came out the fraud – the mega heist structured by the borrower, aided by the lender. Nirav Modi used the classical method of relying on bank insiders, greasing palms and dodging technology, more than using it.

His lender, Punjab National Bank (PNB) stunned markets when it declared in February 2018 that its Mumbai branch in Fort area has lost over Rs 11,000 crore ($1.5 billion). Nirav Modi, three of his relatives (his wife, brother and uncle Mehul Choksi) and three firms (Diamonds R US, Solar Exports and Stellar Diamonds) in which Modi and Choksi were partners, got embroiled in one of the largest scams in the Indian financial market.

How was the fraud committed? It began with the diamond firms approaching PNB for financing import of rough diamonds. The much popular Letter of Credit (LC) facilities were opened by the bank, in favour of Nirav Modi’s firms, which allowed credit for a certain period. Nirav Modi bribed his way to obtain the LCs without any security, which is the primary requirement for any such facility. What these LCs allowed were imports for which payment can be made by the importer to the bank later that is, after the agreed credit period.

Based on the strength of the LCs, Nirav Modi firms got PNB to open Letters of Undertakings (LoUs) apparently for one year (though legally, it could not exceed three months), on foreign branches of certain Indian banks (LoU is a bank guarantee which allows bank’s customer to raise money from another Indian bank’s foreign branch in the form of short-term credit). When these LoUs were shown at the foreign branches, these banks remitted funds to PNB’s Nostro Accounts (accounts PNB had with the overseas banks). The available funds were then drawn and utilized by Nirav Modi’s team.

It was expected that Nirav Modi’s firms would settle their obligations with PNB on the expiry of the LoU period. This last leg did not happen; and this was the problem and obviously the swindle!

About 150 LoUs were fake – issued by a few PNB employees. Based on these unauthorized LoUs, PNB employees misused SWIFT network to transmit messages to foreign banks communicating details of sanctioned LoUs; by wilfully not recording these SWIFT messages in the bank’s core system. These omissions made the transactions by-pass the main PNB banking control system.

When the news of the fraud got flashed all over – ironically on a Valentine’s Day – Nirav Modi’s abrupt upsurge to eminence came crashing down.

Why did he cheat? A logical reason could be his need for continuous funding. The pace of growth of his business was so fast and furious, it was perhaps difficult for him to fund his enormous marketing cost, super-model remunerations, new luxury-stores and investing in working capital.

Nirav Modi tagline “Say Yes, Forever” was literally followed by the lax Indian bank by continuing to heed his request for incessant loan-guarantees, fraudulently or otherwise.

Nirav Modi’s troubles mirror those of another Indian tycoon, Vijay Mallya. [Both Nirav Modi and Vijay Mallya are holed up in UK with the Indian government desperately trying to lock them up in Indian jails.]

When corporate tycoons run away with the money they have borrowed from banks, what credit culture are we talking about? It is sheer corporate crime of the highest order.

Instances abound on entrepreneurs running away after loan defaults, especially when they have the ability to pay but do not do so. These instances raise doubts on the prevalent credit habits among the Indian corporates. It is true that all businesses cannot be painted with the same brush. But thousands including big names like Winsome Diamonds, Zoom Developers, Varun Industries, S Kumars and DSQ Software have taken the banking system to the cleaners.

Exasperated over the behaviour of certain borrowers, India’s largest banker lamented in 2017 that they no longer trusted ‘steel companies’. It was a sad day. Arundhati Bhattacharya, ex-State Bank of India chief, slammed steel firms for being non-transparent in their data presentation to the banks – disappointed over the way the industry misrepresented by twisting facts, while seeking loans. It was a bank-chief’s way of expressing annoyance over corporate India’s attitude towards taking bank funding and servicing thereof.

Many woes of non-payment in the Indian economy are due to past instances of political gridlocks, delayed permissions and economic slowdown. But it does not provide the license to any borrower, not to repay its liabilities willingly. Poor business conditions leading to banking defaults are excusable, but not when the borrower wilfully defaults. Sadly, numerous borrowers default in paying bank debts even when economic situations improve. This is poor corporate culture.

Tailpiece

Credit is oxygen to business. Its adequate flow is a necessity for any business to function effectively. The loans disbursed need to be supervised and recovered by the lenders, in accordance with the lending terms. But what if the borrower does not, purposefully? This is a significant issue of banking fraud. Money borrowed if properly utilised for intended purposes are often duly paid-back. But if the borrowed sums are either siphoned off, money laundered or used for unapproved projects, it becomes a huge hoax.

Not returning money borrowed are deceptions which render short term gains to the borrowers but obliterate their long term wellbeing.

Extract from the book: CORPORATE FRAUDS: BIGGER, BROADER, BOLDER by Robin Banerjee
Chapter 6 titled “Banking Deceits”, Pages 114-118

ABOUT THE BOOK

Think of East India Company. This business outfit came to India to do business and then stayed on to loot for 200 years. And this is not a solitary instance of corporate artifice.

Look around, and you will find businesses are cheating on you and me.

Take instances like banking mischiefs, which have been long known. It happens both ways. When banks are cheated and when banks cheat on us.

Many rich hide their wealth. Money laundering, creating shell companies, offshore banking and hiding ill-gotten wealth from the taxmen, are practised by many of the who’s who of our society.

Converting black money into white and vice versa is rather popular. Try to buy a home, and the chances are that a proportion needs to be paid in black. And you will need to figure out ways to acquire it!

Stock markets are somewhere we place our confidence to maximise our savings. But it’s full of potholes. Instances of insider trading, penny stocks, short selling, falsified profit numbers of companies are rather common.
Our way of knowing how companies perform is through their accounting numbers. But there are various ways to doctor them. This is a colossal value destroyer.

There are numerous such stories and anecdotes in the book – over 350 of them. Simply written in understandable form, for all of us to understand. A recommended reading for all professionals.

shailesh.kwebmaker

SHOCK

A very interesting case was going on in the Court. The issue was very sensitive, and there were many stakeholders. The case had many social and financial ramifications. One party to the dispute was very influential and financially sound. The opponent party was aggrieved was not so resourceful.

The influential party had engaged a very reputed counsel who had an enviable track record of success. He and his client both were celebrities. The other party was a mediocre person. He could not afford a senior counsel. He had engaged a not so well-known junior counsel. People had concluded that it was then a one-sided battle.

However, contrary to the expectations of all, the junior counsel fought it brilliantly. He had taken it as a challenge. And merits were really on his side. In the good old days, such merits had a good value in courts of law. Today, truth has to live with a lot of fear, and it does not come out that easily. It gets buried under money or muscle power!

Many experienced lawyers say that they win the cases not because of merits or their arguing skills, but just because the opponent’s lawyer is often not well prepared. In this case, the senior counsel, as usual, was very well prepared and had not taken it lightly. Still, the junior posed a great challenge to the senior. He made such brilliant arguments so beautifully that the people in the courtroom were pleasantly surprised. They were impressed. The senior was often put into a defensive position.

The balance had clearly tiled on the juniors side. The mediocre party was completely satisfied with his counsel’s performance.

He could barely afford the juniors counsel’s fees but had no means to purchase the decision.

The court was adjourned. The decision was to be announced the next day. The senior counsel was a little embarrassed, while the junior appeared to be triumphant. Many people congratulated him and even the media persons were all praise for him. The curiosity about the decision was mounting!.

The next day the proceedings resumed. The influential party and his counsel were very cool. The other party was very anxious. There was a pin-drop silence when the court started reading the judgement. The contents appeared to be quite balanced, though a little in favour of the smaller party.

However, unfortunately, the final verdict went against the junior; everybody was stunned! The influential party and his counsel were smiling as if they knew the outcome beforehand.

The junior counsel stood up and exclaimed –“I am shocked by this decision!” The court looked at him with a frown. It took it as an offence. People were confused about reacting, although they held the same opinion. There were anxious moments in the Court.

However, a very senior and respected counsel came to the rescue of junior counsel. He said, “My Lord, please forgive my learned young friend. He is new and has not much experience. Had he been experienced enough, he would not have been even half as much shocked as he is today!”

shailesh.kwebmaker

BOMBAY HIGH COURT ON RIGHTS OF SHAREHOLDERS – A RULING RELEVANT TO CORPORATE GOVERNANCE

BACKGROUND

A recent decision of the Bombay High Court not only lays down and confirms important principles of law but also has implications for corporate governance and rights of shareholders (‘activists’ or otherwise). The decision has seen differing views and reactions. Some support it as laying down correctly the law. Others hold that a more purposeful view of the provisions could have been taken as they believe the conclusions drawn impact the spirit of good corporate governance. Be as it may be, these important legal conclusions of the court are valuable to review. This decision is in the matter of Zee Entertainment Enterprises Ltd. vs. Invesco Developing Markets Fund ((2021) 131 Taxmann.com 321 (Bom.)).

This ruling is under appeal before the Division Bench of the Bombay High Court. Interestingly, parallel proceedings are also pending before the National Company Law Tribunal/National Company Law Appellate Tribunal for the same matter. Indeed, the core question of whether the NCLT has sole jurisdiction over such matters to the exclusion of the High Court is itself being pursued. Thus, we are likely to see further developments, including possibly a different view of the facts and/or law, in the matter.

SUMMARY OF CORE FACTS AND ISSUES
The core issue is whether shareholders have the unfettered right to call a general meeting and place resolutions for consideration by shareholders? Does the Board of Directors have any discretion or power to review and reject any of such resolutions or they are bound to call (or, in default, the shareholder group would itself call) such general meeting? Is the only thing the Board is expected to check is whether the procedural requirements of calling such general meetings are complied with? Or can the Board consider the merits of such resolutions in terms of their legality, whether such resolutions could result in violations of law by the company, etc.?

The matter concerned Zee Entertainment Enterprises Ltd. (ZEEL), a listed company. Two shareholders (‘the Shareholders’), holding, in the aggregate, 17.88% of the equity share capital of ZEEL, served a requisition under section 100 of the Companies Act, 2013 on ZEEL to convene an extraordinary general meeting (EGM) to consider primarily two categories of resolutions (aggregating to nine resolutions in all). The first three resolutions proposed the removal of three existing directors. The remaining six resolutions proposed the appointment of six specified individuals as independent directors. Two of the first three resolutions became redundant since two of the specified directors resigned voluntarily. Interestingly, the promoters of the company held only 3.99%.

The independent directors of ZEEL met and considered the matter. The Board of ZEEL considered various legal opinions and concluded that the notice of EGM was invalid and hence decided not to call the EGM. The reasons for holding that the notice was invalid were several and which were considered by the High Court. Since, under section 100, if the Board does not call the EGM, the Shareholders themselves could call it, ZEEL approached the High Court with three prayers. The first was to declare that the notice was illegal, ultra vires, invalid, bad in law and incapable of implementation. The second sought a declaration that the rejection by ZEEL to convene the EGM was valid in law. The third prayer sought an injunction against the Shareholders from holding the EGM themselves.

These prayers, including the grounds for rejection of such requisition, became the issues for consideration by the Court.

DOES THE HIGH COURT HAVE ANY JURISDICTION TO ENTERTAIN SUCH PETITIONS OR DOES THE NCLT HAVE SOLE JURISDICTION?
The Shareholders claimed that, in view of Section 430 of the Act, the High Court had no jurisdiction and the NCLT/NCLAT had sole jurisdiction over this matter. The Court rejected this contention stating that the relevant Rules that set out the provisions which NCLT has sole jurisdiction on does not include Section 100 and other relevant provisions. Thus, the Court concluded that it did have jurisdiction over such matters.

CAN SHAREHOLDERS PASS RESOLUTIONS WHICH HAVE LEGAL INFIRMITIES? CAN THE BOARD REJECT A REQUISITION ON SUCH GROUNDS?
This was the core and substantive issue before the Court. The Shareholders claimed that so long as the requirements of Section 100 are complied with, the Board was bound to call the EGM. Indeed, it was argued that Section 100 mandated the Board to do this by use of the word ‘shall’. The only principal substantive requirement the Board of Directors are required to check is whether the procedural requirements of Section 100 are complied with (e.g., the minimum percentage of shareholders specified (10%) have sought the holding of such EGM). This is the sole test that is relevant to decide whether the requisition is ‘valid’ (as specified in section 100(4)) or not. Effectively, the argument, as the Court highlighted, was that even if the resolutions could have resulted in ZEEL committing illegalities, the Board had no say and was bound to call the EGM.

ZEEL countered this by pointing several issues in the resolutions which made them illegal to be proceeded with and would also mean committing illegalities by ZEEL if such resolutions were passed. The appointment of six independent directors could possibly exceed the limit of 12 directors on the Board. ZEEL operated in areas that were regulated by Ministry of Information and Broadcasting (‘MIB’). Any change in the Board required prior approval of the MIB. The resolutions, however, proposed the appointment first and made it subject to approval, meaning the approval, if received, would be a post-facto approval. Thus, the removal or appointment of directors would mean violation of the MIB rules for which the company would suffer.

Appointment of independent directors could be made, in law, only by following a specified procedure. The Nomination and Remuneration Committee is required to review the merits of the proposed independent directors and recommend them to the Board. The Board thereafter, at their discretion, appoints such directors and this appointment has to be then approved by the shareholders. Thus, it was a three-step process mandated by law. ZEEL contended that the requisition sought to bypass the first two steps and, thus, again, the company would be held to commit violation if it allowed the resolutions. Indeed, it was contended, the shareholders could only ‘approve’ an appointment already made and not directly appoint an independent director itself.

ZEEL even questioned whether the directors proposed for appointment by certain substantial shareholders could be held to be ‘independent’, despite their respective merits and qualifications. In the ordinary course, nominee directors are by definition, not independent directors.

Thus, ZEEL contended on these and other grounds that if the EGM was allowed to be proceeded with and the resolutions passed, ZEEL would be committing several violations of law.

The High Court, in the very eloquently written judgment, held that the Board could not proceed with a requisition that would, if implemented, result in the company committing violations of law. Citing early precedents from the UK (where the law had thereafter changed, but the rulings still had merit) and also elsewhere, as well as decisions of Indian courts, the Court held that the Board was not bound to convene an EGM if the resolutions resulted in the company committing illegalities. Particularly for listed companies (and ZEEL was a listed company), there were certain specified requirements to be followed for the appointment of independent directors, and these could not be bypassed. The prior approval of the MIB for changes in the Board was required while the resolutions proposed that it could be obtained later on.

An issue arose whether the Board of Directors could consider extreme situations and possibilities to decide whether the resolutions may end up in the company committing illegalities. The Court held that the Board could and cited the philosopher Karl Popper and held that the test of illegality was to be checked from every angle, even extreme ones. It observed, ‘Any hypothesis has to be tested, repeatedly, for failure; including testing at the margins or extremities. It is no use saying that a hypothesis fits a median situation. The question is whether the hypothesis survives a test or collision against a polarity? If it does, then it is sound; if not, it must fail throughout and considered unsound’. To demonstrate this, the Court asked the counsel for the Shareholders whether a resolution proposing that the company engage in gambling business (illegal in India) could be allowed? The counsel replied that this was an extreme or outlandish proposition. The Hon’ble Court held that even such extreme tests were necessary to test the proposition raised. If the argument of the Shareholders was accepted, even a ‘madcap resolution’ would end up being allowed.

The Court also made another important point. It observed that even the Board of Directors itself could not propose such resolutions in the manner in which they were proposed as there would be violations of law. The shareholders are not on any higher pedestal, and the same criteria are applied. Had the Board proposed such resolution, could a shareholder object before a court against such proposals and seek injunctions? The Court answered in the affirmative.

Thus, the Court affirmed the decision of the Board of ZEEL to reject the requisition and granted the injunctions prayed. The EGM was directed not to be held by the Board or by the requisitioning shareholders.

IMPLICATIONS ON RIGHTS OF SHAREHOLDERS AND ON CORPORATE GOVERNANCE GENERALLY
With due respect, some aspects are worthy of consideration and debate. Concerns have been raised whether the court ruling would disempower shareholders and put brakes on even healthy shareholder activism. It could, it is argued, excessively empower an existing board having support of a small minority of shareholders and exclude the majority shareholders from exercising their rights. In particular, the issue raised was whether the process of screening prospective directors through the Nomination and Remuneration Committee was for the benefit of shareholders or could be used to supplant and exclude them? Indeed, this would mean that the shareholders could not even appoint directly those board members who would form this Committee. These, it is respectfully submitted, are valid points but it is also respectfully submitted that the answer lies in an amendment of the law, which, perhaps in hindsight, does seem to have lacuna which the present decision has thrown up.

In any case, it is respectfully submitted, that the Hon’ble Court is right in holding that the Board could not allow resolutions to be passed and implemented resulting in the company violating legal requirements. As the Court pithily observed, ‘Sometimes, it happens that a company must be saved from its own shareholders, however well-intentioned’.

shailesh.kwebmaker

IBC AND MORATORIUMS

INTRODUCTION

The Insolvency and Bankruptcy Code, 2016 (‘the Code’) has become one of the most dynamic and fast-changing legislations. Not only has the Government been modifying it from time to time, but the Judiciary is also playing a very active role in ironing out creases and resolving controversies. The Code provides for the insolvency resolution process of corporate debtors. The Code gets triggered when a corporate debtor commits a default in payment of a debt, which could be financial or operational. The initiation (or starting) of the corporate insolvency resolution process under the Code may be done by a financial creditor (in respect of default of financial debt) or an operational creditor (in respect of default of an operational debt) or by the corporate itself (in respect of any default).

One of the important facets of this resolution process is a moratorium on legal proceedings against the corporate debtor contained u/s 14 of the Code. This provision has seen a great deal of judicial development in recent times. Let us analyse this crucial section in greater detail.

MORATORIUM
Once the insolvency resolution petition against the corporate debtor is admitted by the National Company Law Tribunal (NCLT), and after the corporate insolvency resolution process commences, the NCLT declares a moratorium prohibiting institution or continuation of any suits against the debtor; execution of any judgment of a Court / authority; any transfer of assets by the debtor; and recovery of any property against the debtor. The moratorium continues till the resolution process is completed. Thus, total protection is offered to the debtor against any suits / proceedings. In Alchemist Asset Reconstruction Company Ltd. vs. Hotel Gaudavan (P.) Ltd. [2018] 145 SCL 428 (SC), it was held that even arbitration proceedings are stayed during this period.

An extract of the relevant provisions is given below:

‘Moratorium.
14. (1) Subject to provisions of sub-sections (2) and (3), on the insolvency commencement date, the Adjudicating Authority shall by order declare moratorium for prohibiting all of the following, namely:—
(a) the institution of suits or continuation of pending suits or proceedings against the corporate debtor including execution of any judgment, decree or order in any court of law, tribunal, arbitration panel or other authority;
(b) transferring, encumbering, alienating or disposing of by the corporate debtor any of its assets or any legal right or beneficial interest therein;
(c) any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property including any action under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (54 of 2002);
(d) the recovery of any property by an owner or lessor where such property is occupied by or in the possession of the corporate debtor.
…………………….
(2) The supply of essential goods or services3 to the corporate debtor as may be specified shall not be terminated or suspended or interrupted during the moratorium period.
…………………….
(3) The provisions of sub-section (1) shall not apply to:—
(a) such transactions, agreements or other arrangements as may be notified by the Central Government in consultation with any financial sector regulator or any other authority.
(b) a surety in a contract of guarantee to a corporate debtor.’

(4) The order of moratorium shall have effect from the date of such order till the completion of the corporate insolvency resolution process:
Provided that where at any time during the corporate insolvency resolution process period, if the Adjudicating Authority approves the resolution plan under sub-section (1) of section 31 or passes an order for liquidation of the corporate debtor under section 33, the moratorium shall cease to have effect from the date of such approval or liquidation order, as the case may be.”

The Supreme Court in P. Mohanraj vs. Shah Brothers Ispat P Ltd. [2021] 125 taxmann.com 39 (SC) has explained that the object of a moratorium provision such as s.14 of the Code was to see that there was no depletion of a corporate debtor’s assets during the insolvency resolution process so that it could be kept running as a going concern during this time, thus maximising value for all stakeholders. The idea was that it facilitated the continued operation of the business of the corporate debtor to allow it breathing space to organise its affairs so that new management may ultimately take over and bring the corporate debtor out of financial sickness, thus benefitting all stakeholders, which would include workmen of the corporate debtor. The Apex Court further explained that while s.14(1)(a) referred to monetary liabilities of the corporate debtor, s.14(1)(b) referred to the corporate debtor’s assets. Together, these two clauses formed a scheme that shielded the corporate debtor from pecuniary attacks against it in the moratorium period so that the corporate debtor got breathing space to continue as a going concern in order to rehabilitate itself ultimately. Relying on this explanation, the Supreme Court did not allow cheque bouncing proceedings to continue against the corporate debtor u/s 138 of the Negotiable Instruments Act, 1881. It held that a quasi-criminal proceeding that is contained in Chapter XVII of the Negotiable Instruments Act would, given the object and context of s.14 of IBC, amount to a ‘proceeding’ within the meaning of s.14(1)(a) of the Code. Hence, the moratorium would attach to such a proceeding.

In the case of Sandeep Khaitan vs. JSVM Plywood Industries Ltd. [2021] 166 SCL 494 (SC) the Apex Court dealt with an issue of whether the High Court has inherent powers under s.482 of the Criminal Procedure Code, 1973 to make such orders against the corporate debtor to give effect to any order under that Code, or to prevent abuse of the process of any Court or otherwise to secure the ends of justice? The Court held that the power under s.482 of the CrPC may not be available to the Court to allow the breach of a statutory provision. The words ‘to secure the ends of justice’ in s.482 cannot mean to overlook the undermining of a Statute, i.e., the provisions of s.14 of the Code.

Similarly, in Anand Rao Korada v Varsha Fabrics P Ltd. [2019] 111 taxmann.com 474 (SC), in order to recover labour dues, the High Court ordered the auction of the assets of the corporate debtor after issuance of the moratorium. The Supreme Court set aside this Order and held that if the assets of the company were alienated during the pendency of the proceedings under the IBC, it would seriously jeopardise the interest of all the stakeholders. The sale or liquidation of assets had to be in accordance with the IBC only.

RECOVERY OF PROPERTY
In Rajendra K Bhutta vs. MHADA [2020] 160 SCL 95 (SC), a society redevelopment project was blessed by the Maharashtra Housing and Area Development Authority (MHADA). The developer went into insolvency, MHADA wanted to take over possession of the land given to the developer for demolition and redevelopment. The Supreme Court disallowed this owing to the moratorium u/s. 14(1)(d). It held that under s.14(1)(d) what was referred to was the ‘recovery of any property’ of the corporate debtor. It was clear that when recovery of property was to be made by an owner under s.14(1)(d), such recovery would be of property that was ‘occupied by’ a corporate debtor. The expression ‘occupied by’ would mean or be synonymous with being in actual physical possession of or being actually used by, in contra-distinction to the expression ‘possession’, which would connote possession being either constructive or actual and which, in turn, would include legally being in possession, though factually not being in physical possession. Since it was clear that the Joint Development Agreement had granted a license to the developer (i.e., the corporate debtor) to enter upon the property, with a view to do all the things that were mentioned in it, it is obvious that after such entry, the property would be ‘occupied by’ the developer. Section 14(1)(d) of the Code, when it speaks about recovery of property ‘occupied’ refers to actual physical occupation of the property. Hence, MHADA’s plea for repossession of the land was turned down.

NATURAL PERSONS NOT PROTECTED
In the above referred decision of P.Mohanraj (supra), the Supreme Court also held that it is clear that the moratorium provision contained in s.14 of the IBC would apply only to the corporate debtor, the natural persons, i.e., its Directors in charge of its affairs continued to be statutorily liable under the Negotiable Instruments Act. Accordingly, criminal proceedings could continue unabated against the Managing Director / Other Directors who have drawn the bounced cheque.

Similarly, in Anjali Rathi vs. Today Homes & Infrastructure Pvt. Ltd. [2021] 130 taxmann.com 253 (SC), the Supreme Court allowed proceedings to be carried out against the promoters of a corporate debtor which was a developer for failing to honour the terms of settlement entered into with home buyers.

PERSONAL GUARANTOR NOT SHIELDED
Another novel issue arose in SBI vs. V. Ramakrishnan [2018] 96 taxmann.com 271 (SC) of whether the moratorium extended to the personal guarantor of a corporate debtor also? The Court held that the moratorium under s.14 cannot possibly apply to a personal guarantor. This decision has since been given the shape of law by inserting sub-section (3) in s.14 which expressly provides that the moratorium under s.14 will not apply to a surety in a contract of guarantee to a corporate debtor.

WILFUL DEFAULTER PROCEEDINGS CONTINUE
An interesting question arose before the Calcutta High Court in the case of Gouri Prasad Goenka vs. State Bank of India, LSI-473-HC-2021(CAL). Here the corporate debtor had gone into insolvency resolution. However, the question was whether wilful defaulter proceedings could be initiated against the promoter, in view of the moratorium imposed u/s 14? The Court held that whole-time directors and promoters who were in charge of the affairs of the defaulting company during the relevant period, when the default was committed, could not be said to be absolved of their act of wilful default committed prior to final approval and acceptance of a resolution plan. The moratorium in no way prevented this. The wilful defaulter declaration proceeding were to disseminate credit information for cautioning banks and financial institutions so as to ensure that further bank finance was not made available to them and not for recovery of debts or assets of the corporate debtor, which could hamper the corporate resolution process.

PMLA ATTACHMENT OF ASSETS
In Directorate of Enforcement vs. Manoj Kumar Agarwal [2021] 126 taxmann.com 210 (NCL-AT), the National Company Law Appellate Tribunal was determining whether an attachment order passed by the Enforcement Directorate under the Prevention of Money Laundering Act, 2002 before the start of the resolution process of the corporate debtor could survive in view of s.14?

The NCL-AT held that the aim and object of the PMLA for attaching the property alleged to be involved in money laundering was to avoid concealment, transfer or dealing in any manner which may result in frustrating any proceedings relating to the confiscation of such proceeds of crime under PMLA. Thus, Provisional Attachment Order was issued for a period not exceeding 180 days from the date of Order. Now if s.14(1)(b) of IBC relating to the moratorium was seen, the NCLT was required to pass an order declaring a moratorium, inter alia prohibiting ‘transferring, encumbering, alienating or disposing of by the Corporate Debtor any of its assets or any legal right or beneficial interest therein? thus the moment an insolvency was initiated, the property of the corporate debtor was protected by such a moratorium. Thus, both the provisions sought to protect the property of corporate debtor from transfer etc. till further actions take place. It further held s.14 would be attracted in all such cases. Once the moratorium was ordered, even if the Enforcement Directorate moved the Adjudicating Authority under PMLA, further action before the Adjudicating Authority under PMLA must be said to have been prohibited. Section 14 of IBC will hit the institution and continuation of proceedings before Adjudicating Authority under PMLA.

CONCLUSION
The provisions relating to the moratorium are very important to protect the assets and going concern of the corporate debtor. However, Courts are quick to ensure that while it is a shield for the debtor it cannot be used as a shield by its promoters / directors.

shailesh.kwebmaker

NO CONSTRUCTIVE CREDITS!

INTRODUCTION
In the previous article, we discussed clause (h) of Section 17(5) of the CGST Act, 2017 which deals with the restriction on claim of input tax credit in cases where goods are lost, stolen, destroyed, written off or disposed of by way of gift or free samples. In this article, we will discuss clauses (c) & (d) of Section 17(5) which restrict claim of input tax credit on goods or services received in the construction of an immovable property.

PROVISIONS UNDER GST REGIME
Let us first refer to the relevant provisions for ease of reference:

‘(5) Notwithstanding anything contained in sub-section (1) of Section 16 and sub-section (1) of Section 18, input tax credit shall not be available in respect of the following, namely:

(c) works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service;

(d) goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.

Explanation — For the purposes of clauses (c) and (d), the expression ‘construction’ includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property’;

Clause (c) above restricts the availability of input tax credit in respect of works contract services supplied for construction of immovable property other than plant and machinery while clause (d) restricts the availability of input tax credit on goods or services or both received for construction of immovable property other than ‘plant or machinery’ on his own account including when such goods or services or both are used in the course or furtherance of his own business. On a plain reading, one may feel that clauses (c) and (d) are similar, with the only distinction being that the former applies to works contract services received while the latter applies to independent goods or services being received for the same activity, i.e., construction of immovable property. However, there are various nuances, which will be discussed later.

THERE SHOULD BE AN IMMOVABLE PROPERTY
This is the primary condition for an inward supply to be covered under the blocked credit list. It, therefore, becomes important to analyse the scope of the term ‘immovable property’. While the same is not defined under the GST law, one may refer to the definition u/s 2(26) of the General Clauses Act, 1897, which defines the same as under:

‘Immovable Property includes land, benefits to arise out of land, and things attached to the earth, or permanently fastened to anything attached to the earth.’

Even the Real Estate (Regulation & Development) Act, 2016 defines the term ‘immovable property’ in a similar manner:

‘Immovable property includes land, buildings, rights of ways, lights or any other benefit arising out of land and things attached to the earth or permanently fastened to anything which is attached to the earth, but not standing timber, standing crops or grass.’

Ongoing through the above set of definitions, it is apparent that land, along with anything attached or fastened to it, is an immovable property. However, when something is attached/ fastened to an immovable property, the nature of attachment/ fastening needs to be looked into before concluding if such thing is also a part of the immovable property. In Triveni Engineering & Industries Limited [2000 (120) ELT 0273 SC], the Hon’ble SC had held that installation or erection of turbo alternator on the concrete base specially constructed on the land cannot be treated as a common base and, therefore, it follows that the resultant structure would be an immovable property and therefore, cannot be treated as ‘excisable goods’.

On the contrary, in the case of Solid & Correct Engineering Works [2010 (252) E.L.T. 481 (S.C.)], the Court held that attachment of plant with nuts and bolts intended to provide stability and prevent vibration not covered as attached to the earth and hence not immovable property. It was more so as such attachment was easily detachable from foundation and not permanent in nature.

In Craft Interiors Private Limited [2006 (203) ELT 529 (SC)], the SC dealt with the issue of whether furniture attached to an immovable property can be treated as immovable property or not? The SC held that furniture items, such as storage cabinets, kitchen counters, etc., which are erected at customer site and cannot be dismantled/removed in complete or semi-knocked conditions, are immovable in nature and, therefore, not excisable. On the other hand, the Court also held that items like desks and chairs, are easily movable and therefore, excisable.

In WeWork India Management Private Limited [2020 (37) GSTL 136 (AAAR – GST – Kar)], the issue before the Appellate Authority was eligibility to claim the input tax credit on detachable sliding & glass partitions. Observing that the sliding/ partitions could be removed without any damage, the Authority held that the same was a movable property and, therefore, the same was not hit by clause (c)/(d) of Section 17(5).

Therefore, while determining whether a property is movable or not, following needs to be taken care of:

• What is the degree of permanency of the attachment to the land?
• Whether the goods attached/ fastened can be detached without causing substantial damage to it?
• Is the identity of the goods post-removal lost?

THE IMMOVEABLE PROPERTY SHOULD NOT BE IN THE NATURE OF PLANT AND MACHINERY
In case the resultant immovable property is in the nature of ‘plant and machinery’, the credit is not blocked. What constitutes ‘plant and machinery’ has been explained by way of explanation to Section 17(5) as under:

‘For the purposes of this Chapter and Chapter VI, the expression ‘plant and machinery’ means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes —

(i) land, building or any other civil structures;
(ii) telecommunication towers; and
(iii) pipelines laid outside the factory premises’.

The terms ‘apparatus’, ‘equipment’ and ‘machinery’ are not defined under the CGST Act, 2017 or the rules made thereunder. Therefore, to understand the said terms, let us refer to their dictionary meaning:

	Apparatus	Equipment	Machinery
Oxford Dictionary	The equipment needed for a particular activity or purpose	The items needed for a particular purpose	Machines as a whole or parts of machine
Collin’s Dictionary	Apparatus is the equipment, such as tools and machines, which is used to do a particular job or activity	Equipment consists of the things which are used for a particular purpose	Machines, machine parts, or machine systems collectively
MacMillan Dictionary	The machines, tools and equipments needed for doing something, especially something technical or scientific	The tools, machines, or other things that you need for a particular job or activity	The moving or working parts of a machinery
Black’s Law Dictionary	An outfit of tools, utensils or instruments adapted to accomplishment of any branch of work or for performance of experiment or operation. A group or set of organs concerned in performance of single function.	Whatever is needed in equipping; the articles comprised in an outfit	Complex combination of mechanical parts
(continued)	A generic word of the most comprehensive significance which may mean implements and an equipment of things provided, and adapted as a means to some end

Apparatus

Equipment

Machinery

Oxford Dictionary

The equipment needed for a particular activity or purpose

The items needed for a particular purpose

Machines as a whole or parts of machine

Collin’s Dictionary

Apparatus is the equipment, such as tools and machines, which is
used to do a particular job or activity

Equipment consists of the things which are used for a particular
purpose

Machines, machine parts, or machine systems collectively

MacMillan Dictionary

The machines, tools and equipments needed for doing something,
especially something technical or scientific

The tools, machines, or other things that you need for a
particular job or activity

The moving or working parts of a machinery

Black’s Law Dictionary

An outfit of tools, utensils or
instruments adapted to accomplishment of any branch of work or for
performance of experiment or operation. A group or set of organs concerned in
performance of single function.

Whatever is needed in equipping; the articles comprised in an
outfit

Complex combination of mechanical parts

(continued)

A generic word of the most comprehensive significance
which may mean implements
and an equipment of things provided, and adapted as a means to some end

Ongoing through the above, anything which can perform a specific function or operation or undertaking any process can qualify as apparatus or equipment or machinery and will, therefore, consequently be treated as ‘plant and machinery’.

The above explanation refers only to such plant and machinery which has been fixed to earth by foundation or structural support, i.e., this explanation is specifically for cases where there can be a dispute as to whether the ‘plant and machinery’ are classifiable as immovable property or not. For instance, elevators for a building are plant and machinery, but are of such a nature that once installed, it is impossible to uninstall them without any damage to the structure. However, it is apparent that the elevator is machinery, and therefore, the legislature has specifically carved out an exception that permits the claim of input tax credit for such transactions.

However, in the case of Las Palmas CHS [2020 (41) GSTL 548 (AAAR-Mah)], the issue raised before the Appellate Authority was whether input tax credit could be claimed on receipt of inward supply of elevator, if the cost of such elevator was recovered from the members? The Authority held in the negative as Section 17(5)(c) applied only when the input works contract services were used for further making an outward supply of works contract services. However, it seems that the Authority has not analysed whether the elevator qualified as ‘plant and machinery’ and thereby eligible for input tax credit.

In P K Mahapatra [2020 (40) GSTL 99 (AAAR – GST – Chhattisgarh)], the issue before the Appellate Authority was to determine whether input tax credit could be claimed on the installation of private railway siding? Once again, the Authority denied the benefit concluding that the same amounted to an immovable property, without going into whether the railway siding could have been treated as plant and machinery or not? In fact, the CESTAT has, in the case of India Cements Ltd. [2017 (3) GSTL 144 (Tri – Hyd)], already held that CENVAT credit can be claimed on railway siding.

This takes us to the includes clause which provides that foundation and structural supports in relation to apparatus, equipment or machinery will also be included within the scope of ‘plant and machinery’. This would primarily cover expenses incurred towards civil works done for installing the goods purchased. However, in Maruti Ispat & Energy Private Limited [2018 (18) GSTL 847 (AAR – GST)], the Authority held that input tax credit on inputs/ input services used for constructing a foundation for installation of ‘plant and machinery’ was hit by Section 17(5)(c) as the same was ‘other structures’ referred to in Explanation to Section 17(5) defining the scope of ‘plant and machinery’.

What is important is the third clause, i.e., the excludes clause, which excludes the following from the scope of ‘plant and machinery’:
(i) land, building or any other civil structures;
(ii) telecommunication towers; and
(iii) pipelines laid outside the factory premises.

It is imperative to note that an inward supply may fall under the means or includes clause and therefore be classifiable as ‘plant and machinery’. However, if such inward supply gets covered under any of the above entries provided in the excludes clause, the same would not be considered ‘plant and machinery’ and, therefore, covered under the blocked credits.

The above provisions bring to limelight the interplay between the concept of land, building and civil structures and ‘plant and machinery’. Indeed, in the past, various decisions have held that if the land, building or any other civil structure thereon is so constructed to act as a plant, the functional utility of the asset would be pre-dominant and the asset could indeed be classified as a ‘plant and machinery.’ For instance, the House of Lords, in the case of IRC vs. Barclay Curle & Co. has held that a concrete dry dock is a plant [76 ITR 62 (House of Lords)]. Similarly, one may also refer to the following decisions, though in the context of Income Tax, where different civil structures have been held to be a plant:

• Dam – Tata Hydro Electric Power Supply [(122 ITR 288 (Bom)]
• Nursing Home – Dr. B Venkata Rao [243 ITR 81(S.C)]
• Cold Storage – Kanodia Cold Storage [(100 ITR 155(All)]

• Safe deposit vault – Central Bank of India [(102 ITR 270 (Bom)]

The claim of input tax credit on the above structures, which otherwise are classifiable as plant is hit, in view of the excludes clause in the definition of ‘plant and machinery’. The next two entries, i.e., telecommunication towers and pipelines laid outside the factory premises, are industry-specific restrictions on claim of credit, similar to the restriction on the claim of an input tax credit on the purchase of motor vehicles and there, does not appear to be much scope to escape from the purview of Section 17(5)(c) for the specific industries.

PLANT OR MACHINERY
As stated above, explanation to Section 17(5) defines the scope of ‘plant and machinery’ as a whole. However, clause (d) carves out an exception for ‘plant or machinery’ and not ‘plant and machinery’. This, unless one undertakes a liberal or purposive interpretation, the Explanation to Section 17(5) cannot be used to examine whether a particular item is ‘plant or machinery’ as the same deals with ‘plant and machinery’. Therefore, the common parlance meaning needs to be applied while analysing the said terms.

The dictionary meanings of term ‘plant’ are reproduced below for reference:

Oxford Dictionary – Machinery used in an industrial or manufacturing process.

Collin’s Dictionary – Plant is a large machinery that is used in industrial processes.

MacMillan Dictionary – Large machines and equipment’s used in factory.

Black’s Law Dictionary – The fixtures, tools, machinery and apparatus which are necessary to carry on a trade or business. Physical equipment to produce any desired result or an operating unit.

The above dictionary definitions give plant a wider scope for interpretation, and machinery is included within the purview of the term ‘plant’. The term ‘plant’ was interpreted on multiple occasions by Courts in the context of Income Tax, where it was defined to be an instrument which is utilized to carry on the business, and which is not merely the setting in which the business is carried on. The Courts have on multiple occasions held that when an immovable property has been so constructed as to facilitate the carrying on of the operations of a particular business, the said immovable property can be treated as ‘plant’ and not merely ‘building’.

One may refer to the decisions in the case of C.I.T vs. Kanodia Warehousing Corpn [121 ITR 996(All)], Benson vs. Yard Arm Club Ltd. [1979 Tax L.R 778(Cr.D)], C.I.T vs. Bank of India Ltd. [118 ITR 809 ,818-9 (Bom)], George Mathew vs. C.I.T [43 ITR 535 at 540 (Kar)], Mangalore Ganesh Beedi Works vs. C.I.T [52 ITR 615 (Mysore)] and C.I.T vs. Elecon Engineering Co Ltd. [96 ITR 672 at 686-689 (Guj)] affirmed by the Supreme Court [166 ITR 66 (S.C)] where an extremely wide meaning has been given to the term ‘plant’.

If a view that a particular immovable property is classifiable as a plant survives, one can escape from the purview of Section 17(5)(d) since the entry itself does not apply. Therefore, the phrase “on his own account” becomes irrelevant in such a case. However, the same would not apply for Section 17(5)(c) since the same refers to ‘plant and machinery’, which is specifically defined u/s 17(5).

THERE SHOULD BE CONSTRUCTION OF AN IMMOVABLE PROPERTY

Clauses (c) and (d) of Section 17(5) apply for the activity of construction. The term ‘construction’ has been defined by way of an explanation as under:

For the purposes of clauses (c) and (d), the expression ‘construction’ includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property;

The definition is provided in an inclusive manner, and therefore, the general parlance meaning of the word ‘construction’ would be applicable. Generally, the word construction is used in a situation where a new building or a structure comes into existence when none existed beforehand. In distinction, reconstruction would be a more appropriate term where an existing building is demolished, and a fresh structure is being brought into existence. Nevertheless, it was held that the general meaning of construction would take in its’ fold not only the creation of a new building but also a case of demolition of an existing building and re-construction of the building (Sadha Singh S Mulla Singh vs. District Board AIR 1962 Pun 204).

While the terms ‘construction’ and ‘re-construction’ both envisage a situation of a new civil structure coming into existence, the later inclusive words like renovation, addition or alteration or repairs are all intended to cover existing structures where certain activity is carried out. In this context, it may be useful to refer to the erstwhile service tax legislation wherein a distinction was made between construction, repair, renovation or restoration of a building or civil structure and ‘completion and finishing services’. Separate sub-clauses governed these activities under the positive list regime of service tax, and abatement was denied for ‘completion and finishing services’. Similarly, a separate valuation rule was provided for ‘completion and finishing services’. Various controversies arose in the said legislation where the assessee argued the classification of activities like plumbing, glazing, electrical work, painting, etc., as construction activities being eligible for the abatement/lower valuation, whereas the Revenue contended that the activities do not constitute construction but completion and finishing services. For example, whether plumbing activities would constitute completion and finishing or construction activity is a matter pending before the Supreme Court in the case of Commissioner vs. Sai Shraddha Plumbing Private Limited 2019 (28) GSTL J71 (SC). The outcome of the said decision may perhaps open up an opportunity for claiming input tax credit.

Further, the Explanation restricts the scope of construction activity. Accordingly, a receipt of works contract services u/s 17(5)(c) or goods or services or both u/s 17(5)(d) can be said to be towards the construction of immovable property only to the extent the cost has been capitalized in the books of accounts.

To capitalize means to expense the cost over the useful life rather than in the period in which it is incurred. In accounting, capitalisation occurs when a cost is included in the value of an asset. The matching principle requires companies to record expenses in the same accounting period in which the related revenue is incurred. For example, office supplies are generally expensed in the period when they are incurred since they are expected to be consumed within a short period of time. However, some larger office equipment may benefit the business over more than one accounting period. These items are fixed assets, such as computers, cars, office buildings, significant renovation and repair works to the building, etc. The cost of these items is recorded on the general ledger as the historical cost of the asset. Hence, these costs are said to be capitalized,
not expensed.

Therefore, if the taxpayer has satisfied this condition also, whereby he has capitalised the cost of works contracts service or goods/ services received for repairs, renovation, alteration, etc. of immovable property, only then does the restriction under clauses (c) and (d) of Section 17(5) get triggered.

This also raises an interesting question. Let us take an example of a partnership firm that has constructed a shopping mall, to be given on rental basis post-construction. The activity of renting is liable to GST and for the purpose of income tax, is treated as income from house property. Being a partnership firm, it is not required to get its accounts audited under the Partnership Act or under the Income Tax Act, 1961 as Section 44AB does not apply since the rental income is treated as ‘income from house property’ and not ‘business income’. In such a circumstance, the firm can always take a view to expense out the entire construction cost upfront, in which case the inward supply received cannot be said to be used for construction of an immovable property and therefore, would entitle the partnership firm to claim full input tax credit. This view of course would be subject to litigation.

MEANING OF ‘OWN ACCOUNT’
One of the phrases used in Section 17(5)(d) and not in Section 17(5)(c) is that the construction of the immovable property should be on recipients ‘own account’. The term ‘own account’ is defined in various dictionaries
as under:

Collin’s Dictionary – If you take part in a business activity on your own account, you do it for yourself, and not as a representative or employee of a company

MacMillan Dictionary – for yourself, not for someone else

Lexico – For one’s own purpose; for oneself

Black’s Law Dictionary – To have a good legal title; to hold as property; to have a legal or rightful title to; to have; to possess.

Therefore, the construction of an immovable property on his ‘own account’ means something that a person or a company does for itself. The rights and benefits of the constructed immovable property are enjoyed by the person who has actually got the construction
work done.

This interpretation of term ‘own account’ is likely to cause disputes. A mall owner, while constructing a mall, has the intention to lease the entire mall and earn income from it. Although the asset appears in its books, and therefore legally one may say the construction is for own account, it can be argued that the intention is not to use it for his own operations but allow other tenants to use it, thereby the benefit of the construction is not to his ‘own account’. Therefore, the same should not be covered under the blocked credits list.

This aspect has already seen judicial scrutiny in the case of Safari Retreats Pvt. Ltd. & Others vs. Chief Commissionerof CGST [2019-TIOL-1088-HC-ORISSA-GST] wherein the Hon’ble High Court allowed ITC on the construction of a mall by laying a principle that the creation of an asset will generate revenue which will be subject to GST. The Appeal against the said order is pending before the Hon’ble Supreme Court, and the matter is awaiting finality.

CONCLUSION
The intention of clauses (c) and (d) is clear, which is to deny the input tax credit in relation to immovable property. However, the manner in which the provisions are worded and the possibility of varied interpretation makes the said clauses a land mine for litigation. Already, the Hon’ble Orissa HC, in the case of Safari Retreats, has agreed with one of the views perhaps contrary to the legislative intent. However, the fact cannot be ruled out that the intention of the Government is to deny the input tax credit on such inward supplies, and therefore, retrospective amendment of this provisions may not be ruled out. Consequently, one has to be careful while taking a position w.r.t claim of input tax credit having an overlap with clauses (c) and (d) of Section 17(5) of the CGST Act, 2017.

shailesh.kwebmaker

QUALIFIED OPINION – IMPAIRMENT TESTING NOT CARRIED OUT FOR INVESTMENT IN A MATERIAL SUBSIDIARY

DISH TV INDIA LTD (31st MARCH 2021)

From Auditors’ Report (Standalone)
Basis of Qualified Opinion
As stated in Note 41 to the accompanying standalone financial statements, the Company has a non-current investment in and other non-current loans to its wholly-owned subsidiary amounting to Rs. 515,412 lacs and Rs. 74,173 lacs respectively. The wholly-owned subsidiary has negative net current assets and has incurred losses in the current year, although it has a positive net worth as of 31st March 2021. As described in the aforementioned note, management, basis its internal assessment, has considered such balances as fully recoverable as of 31st March 2021. However, the management has not carried out a detailed and comprehensive impairment testing in accordance with the principles of Indian Accounting Standard – 36, “Impairment of Assets” and Indian Accounting Standard – 109, “Financial Instruments”. In the absence of sufficient appropriate evidence to support management’s conclusion, we are unable to comment upon adjustments, if any, that may be required to the carrying value of these non-current investments and non-current loans and its consequential impact on the accompanying standalone financial statements.

Our opinion for the year ended 31st March 2020 was also modified in respect of this matter.

From Auditors’ Report on Internal Financial Controls regarding Financial Statements
Qualified Opinion
According to the information and explanations given to us and based on our audit, the following material weakness has been identified in the operating effectiveness of the Company’s internal financial controls with reference to financial statements as of 31st March 2021: As explained in Note 41 and Note 42 to the standalone financial statements, the Company has performed an internal assessment to estimate the fair value of its investment in its subsidiary, which in our view is not a detailed and comprehensive test in accordance with the principles of Indian Accounting Standard – 36 “Impairment of Assets” and Indian Accounting Standard – 109 “Financial Instruments”. As a result, the Company’s internal financial control system towards estimating the fair value of its investment in its subsidiary were not operating effectively, which could result in the Company not providing for adjustment, if any that may be required to the carrying values of non-current investment and other non-current loans, and its consequential impact on the earnings, reserves and related disclosures in the accompanying standalone financial statements.

From Notes to Financial Statements
Note 41
The Company has non-current investments (including equity component of long term loans and guarantees)
in and non-current loans to its wholly-owned subsidiary, Dish Infra Services Private Limited (‘Dish Infra’), amounting to Rs. 515,412 lacs and Rs. 74,173 lacs respectively. Dish Infra’s net worth is positive although it has incurred losses in the current year. Based on internal assessment, the management believes that the realisable amount from Dish Infra will be higher than the carrying value of the non-current investments and other non-current loans. Hence, no impairment has been considered. The internal assessment is based on the ability of Dish Infra to monetise its assets including investments in new-age technologies, which will generate sufficient cash flows in the future.

From Directors’ Report
Details of Audit Qualification, as per Auditors’ Report dated 30th June 2021, on the Standalone Financial Results of the Company for the Financial Year 2020-21: Not reproduced

Management Response:
(a) The Company as of 31st March 2021, has non-current Investment (including equity component of long term loans and guarantees) in and non-current loans to its wholly-owned subsidiary, Dish Infra Services Private Limited (‘Dish Infra’), amounting to Rs. 5,15,412 lacs and Rs. 74,173 lacs respectively. Dish Infra’s net worth is positive although it has incurred losses in the current year. Based on internal assessment, Management believes that the realisable amount from Dish Infra will be higher than the carrying value of the non-current investments and other non-current financial assets. Hence, no impairment has been considered. The internal assessment is based on the ability of Dish Infra to monetise its assets including investments in new-age technologies, which will generate sufficient cash flows in the future.

(b) The Company has a well-defined system in place to access the appropriateness of the carrying value of its investments and estimation is performed with proper laid down process based on valuation models, usually applied in such cases. The model is refined from time to time to provide appropriateness, accuracy and fair value at a particular point in time. Our internal valuation team has performed the assessment of valuation models, specifically in the testing of key assumptions, the accuracy of inputs used in the models to determine the fair value.

shailesh.kwebmaker

TAXABILITY OF EXPORT COMMISSION PAID TO A NON-RESIDENT AGENT

Rapid globalisation and the increasing use of technology has resulted in a significant increase in foreign remittances from India. Given the onerous responsibility of a practitioner to certify the tax liability of the non-resident recipient to a foreign remittance, it is imperative that one is aware of the various interpretations available, and takes an informed view while issuing Form 15CB.

Over a series of articles, the authors seek to analyse the withholding tax implications and some of the issues arising on some of the common remittances. While all forms of remittances may not be covered in this article, the authors’ objective is to provide comprehensive coverage of the limited types of remittances.

In this first part of the series, we have analysed payments regarding export commission.

1. BACKGROUND
Let us consider the payment of export commission to an agent situated outside India. The activities undertaken by such an agent would typically include marketing the goods in the country of sale, identifying the buyer, coordinating with the buyer on the logistical aspects of the sale, and placing the order for the goods with the buyer. The activities of such an agent may also include receiving goods from the principal and delivering it to the buyer. For such activities, the agent may charge a fixed commission to its principal situated in India.

2. WHETHER THE INCOME OF SUCH AGENT WOULD ACCRUE OR ARISE IN INDIA?
Section 5 of the Income Tax Act, 1961 (‘the Act’) provides that income of a non-resident would be taxable in India if such income:

a. Is received or is deemed to be received in India; or

b. Accrues or arises or is deemed to accrue or arise in India.

In the case of export commission paid to a non-resident agent, generally such income is paid outside India and is therefore, not received in India. Therefore, one would need to evaluate whether such income is accruing or arising in India or is deemed to accrue or arise in India.

In this regard, Circular No. 23 of 1969 throws some light on the matter by providing the following:

“3.4 A foreign agent of Indian exporter operates in his own country and no part of his income arises in India..”

Therefore, the Circular provided that in respect of a non-resident agent, commission income from export would not be considered as accruing or arising in India.

While the Circular has since been withdrawn, the principle emanating from the Circular should apply even after the withdrawal.

There are various judicial precedents which have held that the income of such agent would not be considered as accruing or arising in India.

The Delhi ITAT in the case of Welspring Universal vs. JCIT [2015] 56 taxmann.com 174, held:

“4…….In the context of rendering of services for procuring export orders by a non-resident from the countries outside India, there can be no way for considering the actual export from India as the place for the accrual of commission income of the non-resident. One should keep in mind the distinction between the accrual of income of exporter from exports and that of the foreign agent from commission. As a foreign agent of Indian exporter operates outside India for procuring export orders and further the goods in pursuance to such orders are also sold outside India, no part of his income can be said to accrue or arise in India.”

Interestingly, in the above case, the Tribunal distinguished between the source of income for the foreign agent vis-à-vis that for the exporter. The source of income for the exporter, as held by the Chennai ITAT in the case of DCIT vs. Alstom T & D India Ltd. (2016) 68 taxmann.com 336, would be the place where the manufacturing activities are undertaken or where the export contract has been entered into. On the other hand, for the foreign agent, the source of his income i.e. commission on the sale of goods would depend on where the services are rendered by such agent.

Prior to the amendment in Explanation to section 9(1)(vii) of the Act, the Supreme Court in the case of Ishikawajima-Harima Heavy Industries Ltd. vs. DCIT (2007) 288 ITR 408 held that even if the services are considered as fees for technical services (‘FTS’), if such services are not rendered in India, the income arising from such services would not be considered as accruing or arising in India. While the above decision of the Apex Court has been overruled by the amendment vide Finance Act 2010 (with retrospective effect from 1st June, 1976), the principle arising from the decision would still apply in the case of services rendered (to the extent the same is not considered as FTS) outside India.

The Karnataka High Court in the case of PCIT vs. Puma Sports India (P.) Ltd. (2021) 434 ITR 69 held that commission paid to a non-resident agent for placing orders with manufacturers outside India would not be liable to tax in India as such services were rendered as well as utilized outside India. Therefore, no taxing event had taken place within the territories of India. The Supreme Court dismissed the SLP filed by the Revenue against the above High Court order (2022) 134 taxmann.com 60.

3. WHETHER SUCH INCOME IS DEEMED TO ACCRUE OR ARISE IN INDIA UNDER SECTION 9(1)(i)
The next question which arises is whether such income is deemed to accrue or arise in India under section 9 of the Act. While the question as to whether such income is considered as FTS under section 9(1)(vii) of the Act has been analysed in the ensuing paragraphs, let us first evaluate whether section 9(1)(i) of the Act could bring the commission income of a non-resident agent from services rendered to the principal outside India, to tax in India.

Section 9(1)(i) of the Act deems the following income to accrue or arise in India:

a. Income accruing or arising, directly or indirectly, through or from any business connection in India;

b. Income accruing or arising, through or from any property in India;

c. Income accruing or arising, through or from any asset or source of income in India; or

d. Income accruing or arising, through the transfer of a capital asset situated in India.

With regards to the first limb, the Supreme Court in the case of CIT vs. R.D. Aggarwal and Co. (1965) 56 ITR 20, has laid down the broad principle for defining the term ‘business connection’. In the context of section 42(1) of the Income Tax Act, 1922, similar to the provisions of section 9(1)(i) of the Act, the Apex Court held as follows:

“The expression “business connection” undoubtedly means something more than “business”. A business connection in section 42 involves a relation between a business carried on by a non-resident which yields profits or gains and some activity in the taxable territories which contributes directly or indirectly to the earning of those profits or gains. It predicates an element of continuity between the business of the non-resident and the activity in the taxable territories: a stray or isolated transaction is normally not to be regarded as a business connection. Business connection may take several forms: it may include carrying on a part of the main business or activity incidental to the main business of the non-resident through an agent, or it may merely be a relation between the business of the non-resident and the activity in the taxable territories, which facilitates or assists the carrying on of that business. In each case the question whether there is a business connection from or through which income, profits or gains arise or accrue to a non-resident must be determined upon the facts and circumstances of the case.

A relation to be a “business connection” must be real and intimate, and through or from which income must accrue or arise whether directly or indirectly to the non-resident. ….

…. Income not taxable under section 4 of the 1922 Act of a non-resident becomes taxable under section 42(1) of the 1922 Act, if there subsists a connection between the activity in the taxable territories and the business of the non-resident, and if through or from that connection income directly or indirectly arises.”

Therefore, in order for business connection [other than the provisions of Significant Economic Presence (‘SEP’), which have been discussed subsequently in this article] to exist, there needs to be a business activity continuously undertaken in the country. In other words, in the absence of any business activities undertaken in India, a business connection may not be constituted.

This is also evident from Explanation 1 to section 9(1)(i) of the Act which provides as follows:

“(a) in the case of a business, other than the business having business connection in India on account of significant economic presence, of which all the operations are not carried out in India, the income of the business deemed under this clause to accrue or arise in India shall be only such part of the income as is reasonably attributable to the operations carried out in India ;”

Therefore, except in the case of a business connection on account of the SEP provisions, only such part of the income as is reasonably attributable to operations carried out in India can be considered as income deemed to accrue or arise in India.

In this regard, the Supreme Court, in the case of CIT vs. Toshoku Ltd. (1980) 125 ITR 525, had analysed whether the export commission paid to non-resident agents would be considered as income deemed to accrue or arise in India.

In that case, the assessee was an exclusive sales agent of tobacco in Japan and France for an Indian exporter. The assessee, for its services rendered, received commission from the Indian exporter. Without evaluating whether ‘business connection’ of the non-resident assessee was constituted in India, the Supreme Court held that in the absence of any activities undertaken by the non-resident assessee in India, no income could be considered as attributable to any operations in India and therefore, no income could be considered as deemed to accrue or arise in India.

The second limb of section 9(1)(i) of the Act refers to income accruing through or from a property situated in India. Arguably, sale of goods may not be considered as sale of property. Moreover, even in case such sale of goods is considered as sale of property, one may be able to argue that section 9(1)(i) refers to income accruing through or from a property situated in India and income from the sale of such property would not qualify as income from a property (such as rental income) nor as income through a property. Additionally, one can also argue that the commission income, being income from services rendered in relation to the sale of goods, is one step further away from income from sale of property and income through or from property.

The third limb of section 9(1)(i) of the Act refers to income accruing or arising through or from any asset or source in India. As discussed above, income from services rendered towards sale of goods may not be considered as income accruing or arising through or from any asset in India. Interestingly, the AAR in the case of Rajiv Malhotra, In re (2006) 284 ITR 564, held that export commission would be considered as income accruing or arising through or from a source of income in India.

In that case, the assessee was organising an exhibition in India and had appointed foreign agents to furnish information to foreign participants about the exhibition and for booking space in the exhibition. Such agents would be rendering the services outside India, and no services by the agents were rendered in India. The agents were responsible for planning, directing and executing the sales campaign for the assessee and the exhibition in the foreign jurisdictions. The agent would receive the commission only on participation by the exhibitors in the exhibition in India.

The AAR held that the fact that the income of the agent was dependent on the participation by the exhibitors (customers) in India would mean that the source of income for the non-resident agent would be considered to be in India. The AAR further also held that the fact that the services by the agents were rendered outside India would be of no consequence.

The above decision of the AAR was also followed in the decision by the same authority in the case of SKF Boilers and Driers (P.) Ltd., In re (2012) 343 ITR 385.

In the view of the authors, with the utmost respect to the AAR, the above decisions of the AAR may not be considered as an appropriate analysis of the matter on account of the following reasons:
a. The AAR did not consider the decision of the Supreme Court in the case of Toshoku Ltd. (supra), wherein the commission received by non-resident agents was considered to be accruing or arising outside India and hence not taxable; and

b. The AAR did not consider the impact of Explanation 1(a) to section 9(1)(i) of the Act. Even if the decision of the AAR is considered, the fact that no operations of the agent are actually undertaken in India would result in no attribution of income of the agent to be deemed to accrue or arise in India.

Therefore, subject to the applicability of the SEP provisions, analysed in para 6 below, export commission earned by a non-resident agent would not be deemed to accrue or arise in India under section 9(1)(i) of the Act.

4. WHETHER THE SERVICES RENDERED BY THE AGENT CAN BE CONSIDERED AS FEES FOR TECHNICAL SERVICES
The other sub-clauses of section 9(1) of the Act – dealing with salary, interest and royalty would not be applicable in this case. One would now need to analyse whether the services rendered by the commission agent would be considered as FTS under section 9(1)(vii) of the Act. There are various decisions discussing various facets of the FTS clause, and this article does not cover all such case laws on the matter. This article covers those case laws relevant to the type of payment, i.e. export commission and the taxability thereof.

The crux of the matter is whether the consideration received by a commission agent would be considered as towards rendering of services. In this regard, one may refer to the Ahmedabad ITAT in the case of DCIT vs. Welspun Corporation Ltd. (2017) 77 taxmann.com 165, wherein it has been held that the agent receives the commission on securing order and not for the provision of the services. The reasoning provided by the ITAT is as under:

“Even proceeding on the assumption that these non-resident agents did render the technical services, which, is an incorrect assumption any way, what is important to appreciate is that the amounts paid by the assessee to these agents constituted consideration for the orders secured by the agents and not the services alleged rendered by the agents. The event triggering crystallization of liability of the assessee, under the commission agency agreement, is the event of securing orders and not the rendition of alleged technical services. In a situation in which the agent does not render any of the services but secures the business any way, the agent is entitled to his commission which is computed in terms of a percentage of the value of the order. In a reverse situation, in which an agent renders all the alleged technical services but does not secure any order for the principal i.e. the assessee, the agent is not entitled to any commission. Clearly, therefore, the event triggering the earnings by the agent is securing the business and not rendition of any services. In this view of the matter, the amounts paid by the assessee to its non-resident agents, even in the event of holding that the agents did indeed render technical services, cannot be said to be ‘consideration for rendering of any managerial, technical or consultancy services’…..The work actually undertaken by the agent is the work of acting as agent and so procuring business for the assessee but as the contemporary business models require the work of agent cannot simply and only be to obtain the orders for the product, as this obtaining of orders is invariably preceded by and followed by several preparatory and follow up activities. The description of agent’s obligation sets out such common ancillary activities as well but that does not override, or relegate, the core agency work. The consideration paid to the agent is also based on the business procured and the agency agreements do not provide for any independent, standalone or specific consideration for these services.”

Therefore, the Ahmedabad ITAT in the above case held that the consideration received by the agent is towards the procurement of business and not for services rendered.

However, generally, the revenue authorities also seek to tax the export commission as FTS, given the sheer number of judicial precedents on the issue. Therefore, it is important to analyse whether such commission can be classified as FTS under section 9(1)(vii).

The term ‘fees for technical services’ broadly covers the following categories of services:

• Managerial services;

• Technical services; and

• Consultancy services.

The terms ‘managerial’, ‘technical’ or ‘consultancy’ have not been defined in the Act, and therefore, one would need to understand these terms in common parlance.

4.1 MANAGERIAL SERVICES
Black’s Law Dictionary defines the terms ‘manage’ to mean the following:

“To conduct; to carry on the concerns of a business or establishment.”

Further, the term ‘manager’ is defined to mean the following:

“One who has charge of corporation and control of its business or branch establishment, and who is vested with a certain amount of discretion and independent judgment.”

Having looked at the dictionary meaning of the term ‘manage’, the question arises as to what is meant by managerial services, specifically – managing a particular function of an entity such as purchase or sales or managing the entity as a whole, akin to a director of a company.

The issue as to what is meant by ‘managerial services’ and whether the services rendered by a commission agent would constitute managerial services have been analysed by the Mumbai ITAT in the case of Linde AG vs. ITO (1997) 62 ITD 330, albeit in the context of a procurement agent. In the said case, the assessee procured certain materials and spares required to set up a fabrication plant in Gujarat. These purchases were charged from the Indian concern, i.e. Gujarat State Fertilizers Company, at cost plus 4% procurement charges. Referring to the decision of the Delhi High Court in the case of J.K. (Bombay) Ltd. vs. CBDT & Anr. (1979) 118 ITR 312 in the context of section 80-O of the Act, the ITAT held as under:

“Their Lordships of Delhi High Court referred to an article on ‘Management Sciences’ in 14 Encyclopaedia 747, wherein it is stated that the management in organisations include at least the following:

(a) discovering, developing, defining and evaluating the goals of the organisation and the alternative policies that will lead towards the goals;

(b) getting the organisation to adopt the policies;

(d) initiating steps to change policies when they are judged to be less effective than they ought to be.

The third category is managerial service. The managerial service, as aforesaid, is towards the adoption and carrying out the policies of a organisation. It is of permanent nature for the organisation as a whole. In making the stray purchases, it cannot be said that the assessee has been managing the affairs of the Indian concern or was rendering managerial services to the assessee.”

Therefore, while holding that procurement services would not constitute managerial services, the ITAT explained that managerial services would refer to carrying out the organisation’s policies as a whole.

In this regard, as the broad range of services rendered by an export agent as well as a procurement agent is similar, albeit, for two different ends of a transaction, their taxability would also be similar. Therefore, any decision in respect of taxability of income of a procurement agent (for procurement outside India) would equally apply to the export commission earned by an agent.

The Authority for Advance Rulings in the case of Intertek Testing Services India (P.) Ltd., In re (2008) 307 ITR 418 held the term ‘managerial services’ to mean the following:

“Thus, managerial services essentially involves controlling, directing or administering the business.”

In the context of export commission, the Delhi High Court in the case of DIT (International Taxation) vs. Panalfa Autoelektrik Ltd. (2014) 272 CTR 117, held as follows:

“The services rendered, the procurement of export orders, etc. cannot be treated as management services provided by the non-resident to the respondent-assessee. The non-resident was not acting as a manager or dealing with administration. It was not controlling the policies or scrutinising the effectiveness of the policies. It did not perform as a primary executor, any supervisory function whatsoever.”

This differentiation between ‘execution’ and ‘management’ has also been explained by the Mumbai ITAT in the case of UPS SCS (Asia) Ltd. vs. ADIT (2012) 50 SOT 268, wherein it has been held that:

“Ordinarily the managerial services mean managing the affairs by laying down certain policies, standards and procedures and then evaluating the actual performance in the light of the procedures so laid down. The managerial services contemplate not only execution but also the planning part of the activity to be done. If the overall planning aspect is missing and one has to follow a direction from the other for executing particular job in a particular manner, it cannot be said that the former is managing that affair. It would mean that the directions of the latter are executed simplicity without there being any planning part involved in the execution and also the evaluation of the performance. In the absence of any specific definition of the phrase “managerial services” as used in section 9(1)(vii) defining the “fees for technical services”, it needs to be considered in a commercial sense. It cannot be interpreted in a narrow sense to mean simply executing the directions of the other for doing a specific task. …….. On the other hand, ‘managing’ encompasses not only the simple execution of a work, but also certain other aspects, such as planning for the way in which the execution is to be done coupled with the overall responsibility in a larger sense. Thus it is manifest that the word ‘managing’ is wider in scope than the word ‘executing’. Rather the latter is embedded in the former and not vice versa.”

The Chennai ITAT in the case of DCIT vs. Mainetti (India) P. Ltd. (2011) 46 SOT 137 held that canvassing for orders would not constitute managerial services.

Similarly, Madras High Court in the case of Evolv Clothing Co. (P.) Ltd. vs. ACIT (2018) 407 ITR 72 held that market survey undertaken incidental to the services of a commission agent would also not be considered as fees for technical services under section 9(1)(vii).

Further, as regards whether one can argue that one is providing managerial services if one is managing the purchase/sales function, the ITAT in the case of Linde AG (supra) held as under:

“The Learned Departmental Representative brought to our notice a concept of ‘marketing management’ but such marketing services are to be, as aforesaid, on a regular basis, i.e. when the purchases of the assessee on a permanent or semi-permanent or at regular interval basis. It does not include the purchases made only to be utilised for a particular venture taken up by the assessee, which in this case is fabrication of a new scientific plant. It being a one-time job and not marketing management of making purchases by the assessee for the new concern.”

Therefore, one can conclude based on the above observation by the Mumbai ITAT that if the purchase or sales function of the entire organisation has been completely outsourced to an agent, then the services rendered by such agent may be considered as managerial services. For example, if an entity within the entire MNE group is in charge of undertaking the entire purchase or sales function of all the entities within the MNE and such entity is also deciding the policies of such function, one may possibly consider such services managerial services.

4.2 TECHNICAL SERVICES
The second limb of the definition of FTS is ‘technical service’. The Merriam – Webster dictionary defines the term ‘technical’ to mean “as having special and usually practical knowledge especially of a mechanical or scientific subject”

Similarly, the Collins dictionary defines the term as “of, relating to, or specializing in industrial, practical, or mechanical arts and applied sciences”.

Therefore, in common parlance, one may say that technical services would mean services which require application of industrial, mechanical or applied sciences.

The Madras High Court in the case of Skycell Communications Ltd. & Anr. vs. DCIT & Ors (2001) 251 ITR 53 has provided guidance as to what would be considered as ‘technical services’ as under:

“Thus while stating that “technical service” would include managerial and consultancy service, the Legislature has not set out with precision as to what would constitute “technical” service to render it “technical service”. The meaning of the word “technical” as given in the New Oxford Dictionary is adjective 1. of or relating to a particular subject, art or craft or its techniques: technical terms (especially of a book or article) requiring special knowledge to be understood: a technical report. 2. of involving, or concerned with applied and industrial sciences: an important technical achievement. 3. resulting from mechanical failure: a technical fault. 4. according to a strict application or interpretation of the law or the rules: the arrest was a technical violation of the treaty.

Having regard to the fact that the term is required to be understood in the context in which it is used, “fee for technical services” could only be meant to cover such things technical as are capable of being provided by way of service for a fee. The popular meaning associated with “technical” is “involving or concerning applied and industrial science”.”

Interestingly, the Memorandum of Understanding to the DTAA between India and US provides as follows:

“Article 12 includes only certain technical and consultancy services. But technical services, we mean in this context services requiring expertise in a technology.”

While the term ‘technology’ refers to machines and processes, the term ‘technical’ would be wider and would cover applied and mechanical sciences and would mean a kind of specialized or complex knowledge.

Therefore, the meaning under the MOU in the India – US DTAA may be restricted in application to the India – US DTAA only as it provides a narrower meaning than used in common parlance.

Having understood the meaning of the term ‘technical services’, the issue arises is whether the services rendered by a commission agent could be considered as ‘technical services’. In this regard, the Delhi High Court in the case of Panalfa Autoelektrik Ltd. (supra) held as follows:

“The non-resident had not undertaken or performed “technical services”, where special skills or knowledge relating to a technical field were required. Technical field would mean applied sciences or craftsmanship involving special skills or knowledge but not fields such as arts or human sciences.”

On the other hand, the Cochin ITAT in the case of ITO vs. Device Driven (India) (P.) Ltd. (2014) 29 ITR (T) 263 held that export commission in case of software was considered as technical services. In this regard, the ITAT held as under:

“Software is a highly technical product and it is required to be developed in accordance with the requirements of the customers. Even after the development, it requires constant monitoring so that necessary modifications are required to be carried out in order to make it suitable to the requirements. The work of the assessee company also does not end upon developing and installing the software at the client’s site. As stated earlier, it requires on-site monitoring, especially when the customized software is developed. Hence, in our view, it cannot be equated with the commodities, where the role of the Commission agent normally ends after supply of goods and receipt of money. Hence, in the case of software companies, the sales agent should also possess required technical knowledge and then only he could procure orders for the company by understanding the needs of clients and further convincing them..….. As per the clauses of the agreement, which are extracted above, the Commission agent is responsible in securing orders and for that purpose only he has to assist the assessee company in all respects including identifying markets, making introductory contacts, arranging meeting with prospective clients, assisting in preparation of presentations for target clients. His duty does not end on securing the orders, but he has to monitor the status and progress of the project, meaning thereby the Commission agent is responsible for ensuring supply of the software and also for receiving the payments. All these activities, in our view, could be carried on only by a person who is having vast technical knowledge and experience. Hence, we agree with the tax authorities’ view that the payment made to Shri Balaji Bal constitutes the payment made towards technical services.”

Interestingly, the Cochin ITAT equated the nature of product sold by the agent with the nature of services rendered by the agent. With due respect to the Cochin ITAT, the authors are of the view that it may not be appropriate to equate the product sold with the service rendered. The ITAT in the above case did not list out any specific services required to be rendered by an agent distributing software that would be different from that distributing other commodities. For example, even if one sells an iron rod, one is required to have certain knowledge of the product sold to enable him to match the client’s requirement with the product and sell the product. Further, identifying markets, arranging meeting with prospective clients, preparing presentations for target clients, and ensuring that the product is smoothly delivered is something an agent selling any product may be required to undertake.

In this regard, the Ahmedabad ITAT in the case of Welspun Corporation Ltd. (supra) has succinctly segregated the nature of service from the nature of product sold. It has held as follows:

“Just because a product is highly technical does not change the character of activity of the sale agent. Whether a salesman sells a handcrafted souvenir or a top of the line laptop, he is selling nevertheless. It will be absurd to suggest that in the former case, he is selling and the latter, he will be rendering technical services. The object of the salesman is to sell and familiarity with the technical details, whatever be the worth of those technical details, is only towards the end of selling. In a technology driven world that we live in, even simplest of day to day gadgets that we use are fairly technical and complex. Undoubtedly when a technical product is being sold, the person selling the product should be familiar with technical specifications of the product but then this aspect of the matter does not any way change the economic activity.”

On the other hand, it is also important to highlight that the above Cochin ITAT decision was upheld by the Kerala High Court in the case of the same assessee in Device Driven (India) P Ltd. vs. CIT (2021) 126 taxmann.com 25. However, the Kerala High Court did not analyse the services rendered by the agent to determine whether the services were ‘technical services’ but relied more on the argument that the services were rendered for earning source outside India, and therefore, not accruing or arising in India.

4.3 CONSULTANCY SERVICES
The last limb of the definition of the term FTS is ‘consultancy services’.

In common parlance, ‘to consult’ would mean ‘to advise’. With regards to the overlap with technical services, the MOU in the India – US DTAA provides as under:

“By consultancy services, we mean in this context advisory services. The categories of technical and consultancy services are to some extent overlapping because a consultancy service could also be a technical service. However, the category of consultancy services also includes an advisory service, whether or not expertise in a technology is required to perform it.”

The Supreme Court in the case of GVK Industries Ltd. & Anr. vs. ITO & Anr. (2015) 371 ITR 453 evaluated the meaning of ‘consultancy services’ under section 9(1)(vii). In the said case, a non-resident company rendered services related to raising finance for the assessee, which included, inter alia, financial structure and security package to be offered to the lender, making an assessment of export credit agencies worldwide and obtaining commercial bank support on the most competitive terms, assisting the appellant loan negotiations and documentation with lenders and structuring, negotiating and closing the financing for the project in a co-ordinated and expeditious manner.

“The word ‘consultation’ has been defined as an act of asking the advice or opinion of someone (such as a lawyer). It means a meeting in which a party consults or confers and eventually it results in human interaction that leads to rendering of advice. The NRC had acted as a consultant. It had the skill, acumen and knowledge in the specialized field i.e. preparation of a scheme for required finances and to tie-up required loans. The nature of service rendered by the NRC, can be said with certainty would come within the ambit and sweep of the term ‘consultancy service’ and, therefore, it has been rightly held that the tax at source should have been deducted as the amount paid as fee could be taxable under the head ‘fees for technical services’.”

Similarly, the AAR in the case of Guangzhou Usha International Ltd., In re (2015) 378 ITR 465 held that where the agent was not only identifying new products but also generating new ideas for the principal after market research, evaluating credit, finance, organisation, production facility, etc. and on the basis of the evaluation, giving advice to the principal, the services rendered by such agent would be considered as ‘consultancy services’.

However, the Delhi High Court in the case of Panalfa Autoelektrik Ltd. (supra) as well as the Mumbai ITAT in the case of Linde AG (supra) have held that services rendered by an agent would not constitute ‘consultancy services’.

On similar lines, the Delhi High Court in the case of CIT vs. Grup Ism (P.) Ltd. (2015) 378 ITR 205 held that export commission would not be considered as ‘consultancy services’ even though the nomenclature of the transaction as per the agreement was of ‘consultancy services’. It held as follows:

“‘Consultancy services’ would mean something akin to advisory services provided by the non-resident, pursuant to deliberation between parties. Ordinarily, it would not involve instances where the non-resident is acting as a link between the resident and another party, facilitating the transaction between them, or where the non-resident is directly soliciting business for the resident and generating income out of such solicitation. The mere fact that CGS confirmed that it received consultancy charges from the assessee would not be determinative of the issue. The actual nature of services rendered by CGS and MAC needs to be examined for this purpose.”

From the above jurisprudence, it is clear, in the view of the authors, that export commission by itself would not be considered as ‘consultancy services’. However, if the agent provides advisory services along with the export commission, one may need to evaluate the predominant nature of services to determine the characterisation of the transaction.

5. WHETHER THE WITHDRAWAL OF CIRCULAR NO. 23 OF 1969 WOULD RESULT IN TAXABILITY

As discussed above, the CBDT Circular No. 23 of 1969 had clarified non-taxability in India for commission earned by a foreign non-resident agent. This Circular was subsequently withdrawn stating that it did not reflect the correct position under section 9 of the Act. In this regard, the question therefore, arises is whether the withdrawal of the Circular can result in the taxation of the commission earned by a foreign agent.

In this regard, the Delhi ITAT in the case of Welspring Universal vs. JCIT (supra) held as follows:

“11. ….The legal position contained in section 5(2) read with section 9, as discussed above about the scope of total income of a non-resident subsisting before the issuance of circular nos. 23 and 786 or after the issuance of circular no. 786 has not undergone any change. It is not as if the export commission income of a foreign agent for soliciting export orders in countries outside India was earlier chargeable to tax, which was exempted by the CBDT through the above circulars and now with the withdrawal of such circulars, the hitherto income not chargeable to tax, has become taxable. The legal position remains the same de hors any circular in as much as such income of a foreign agent is not chargeable to tax in India because it neither arises in India nor is received by him in India nor any deeming provision of receipt or accrual is attracted. It is further relevant to note that the latter Circular simply withdraws the earlier circular, thereby throwing the issue once again open for consideration and does not state that either the export commission income has now become chargeable to tax in the hands of the foreign residents or the provisions of section 195 read with sec. 40(a)(i) are attracted for the failure of the payer to deduct tax at source on such payments.

12. Ex consequenti, we hold that the amount of commission income for rendering services in procuring export orders outside India is not chargeable to tax in the hands of the non-resident agent and hence no tax is deductible under section 195 on such payment by the payer.”

The authors are also of a similar view that the legal position upheld by various courts does not change, and the export commission earned by a non-resident agent may still not be liable to tax in India.

6. WHETHER THE PROVISIONS OF SEP CAN TRIGGER IN THE CASE OF EXPORT COMMISSION
The Finance Act, 2018 has introduced the significant economic presence (‘SEP’) provisions in India. Explanation 2A to section 9(1)(i) of the Act extends the definition of business connection to include SEP and SEP has been defined to mean the following:

(a) transaction in respect of any goods, services or property carried out by a non-resident with any person in India including provision of download of data or software in India, if the aggregate of payments arising from such transaction or transactions during the previous year exceeds such amount as may be prescribed; or

(b) systematic and continuous soliciting of business activities or engaging in interaction with such number of users in India, as may be prescribed:

Further, the Proviso to the Explanation also provides that the transactions or activities shall constitute SEP, whether or not:

(i) the agreement for such transactions or activities is entered in India; or

(ii) the non-resident has a residence or a place of business in India; or

(iii) the non-resident renders services in India

In other words, the SEP provisions apply even if such services are rendered outside India if it is undertaken with any person in India and if the aggregate payments during the year exceed the threshold prescribed.

Further, the CBDT vide Notification No. 41/2021/F.No.370142/11/2018-TPL dated 3rd May, 2021, has notified the thresholds to mean INR 2 crore in the case of payments referred to in clause (a) above and 3 million users in clause (b) above.
The authors have analysed the SEP provisions in detail in their article in the March, 2021 edition of BCAJ Journal.

Therefore, now, if the services rendered by the commission agent exceed INR 2 crore in a financial year, such non-resident agent may be considered as having a business connection in India due to the SEP provisions under section 9(1)(i) of the Act.

7. CONCLUDING REMARKS
In this article, the authors have analysed the taxability of export commission in detail. To summarize, the commission earned by a non-resident in respect of agency services rendered for exports, where no activities are undertaken in India, would not be taxable in India under the Act. However, one would need to evaluate if there are any additional services rendered by such an agent, such as managing the entire purchase or sale function of an organisation which could result in taxability under the Act or the relevant tax treaty as FTS. Moreover, one may need to also evaluate if the payments to the agent during the year exceed INR 2 crore, in which case the SEP provisions may apply, resulting in taxability of the commission earned by such non-resident agent on account of the business connection being constituted in India. In such a scenario, one may still be able to apply the provisions of the DTAA and such income may not be taxable in the absence of a PE of such agent in India, subject to the requirement of documents such as tax residency certificate, etc as well as fulfilling the conditions as may be provided in the OECD Multilateral Instrument, if applicable.

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S. 148 – Reopening of assessment – Within 4 years – original assessment completed u/s. 143(3) – Change of opinion on the same set of facts – Not permissible

10 M/s. Gemstar Construction Pvt. Ltd. vs. Union of India & 3 Ors. [W.P. No 1005 of 2008; Date of order: 6th January, 2022 (Bombay High Court)]

S. 148 – Reopening of assessment – Within 4 years – original assessment completed u/s. 143(3) – Change of opinion on the same set of facts – Not permissible

The petitioner challenged the notice dated 12th December, 2007 issued u/s 148 of the Act, on the ground, inter-alia, that respondents are relying on the same material to take a different view. The Assessing Officer had passed the assessment order dated 17th March, 2005, and conclusively took one view. Therefore, it could not be open to reopen the assessment based on the very same material with a view to take another view.

The reasons for issuing notice u/s 148 is contained in a communication dated 27th December, 2007 and the same reads as under:-
“On close scrutiny of the assessment record, it is observed that the assessee company has claimed deduction u/s. 80IB(10) as it is engaged in the development and building approved housing project. Contrary to the provisions of the statute, the housing project includes shops. As a result, the company is not entitled to deduction u/s. 80IB(10). In the light of the aforesaid fact that I have reason to believe that the granting of deduction u/s. 80IB(10) of Rs.1,42,50,816/- has resulted escapement of income within the meaning of Section 147.”

In the assessment order itself, it was recorded that a show-cause notice was issued on 17th January, 2005 requiring the assessee to substantiate the claim of deduction. In paragraph 7.1 of the assessment order, it was recorded that the petitioner has filed detailed submissions vide letter dated 10th March, 2005 and has shown cause as to why it was entitled to the claim of deduction under section 80IB(10).

It is settled law that the Assessment Officer has no power to review an assessment that has been concluded. The Assessing Officer, before he passed the assessment order, had in his possession all primary facts necessary for assessment and then he made the original assessment. When the primary facts necessary for assessment are fully and truly disclosed, the Assessing Officer is not entitled to a change of opinion to commence proceedings for reassessment. Where on consideration of the material on record, one view is conclusively taken by the Assessing Officer, it would not be open to reopen the assessment based on the very same material with a view to take another view.

The Court observed that this is not a case where the assessment is sought to be reopened on the reasonable belief that income had escaped the assessment on account. This is a case wherein the assessment is sought to be reopened on account of change of opinion of the Assessing Officer about the manner of computation of deduction under section 80IB(10) of the Act.

The Court was satisfied that not only material facts were disclosed to the petitioner truly and fully, but they were carefully scrutinized, and figures of income, as well as deduction, were viewed carefully by the Assessing Officer.

In the circumstances, the petition was allowed and the notice under section 148 of the Act, dated 12th December, 2007, was quashed.

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S. 148 – Reopening of assessment – Non-application of mind by AO while recording the reasons – Non-application of mind by PCIT while granting approval u/s. 151 of the Act – CBDT directed to train their officers

9 Sharvah Multitrade Company Private Limited. v/s. Income Tax Officer Ward 4(3)(1) & Anr; [W.P. No. 3581 of 2021; Date of order: 20th December, 2021; A.Y.: 2015-16 (Bombay High Court)]

S. 148 – Reopening of assessment – Non-application of mind by AO while recording the reasons – Non-application of mind by PCIT while granting approval u/s. 151 of the Act – CBDT directed to train their officers

The Petitioner had challenged the issuance of notice for A.Y. 2015-2016 dated 31st March, 2021 issued u/s 148 of the Act, and the order rejecting the objections dated 23rd July, 2021.

The assessment had been completed u/s 143(3) of the said Act on 28th September, 2017. The Petitioner submitted that the reasons recorded for reopening indicate total non-application of mind in as much as in the tabular form, it is stated that Sharvah Multitrade Company Private Limited for F.Y. 2014-15 had been a beneficiary through fund trail of Rs. 3.72 Crores. Then again, it is mentioned that the above mentioned bogus entities managed, controlled and operated by M/s. Sharvah Multitrade Company Private Limited for providing bogus accommodation entries, hence, all the transactions entered into between the above-mentioned entities and the assessee/beneficiary are bogus accommodation entries in nature.

The Court observed how can a company provide bogus entry to itself. Sharvah Multitrade Company Private Limited is alleged to be a beneficiary identified through fund trail, and its PAN number is shown to be AAQCS2595H. Petitioner, who is the assessee, is also Sharvah Multitrade Company Private Limited, and its PAN number is AAQCS2595H. Therefore, this clearly shows total non-application of mind by the Assessing Officer Mr. Suryavanshi. His statement in the reasons “…………… and after careful application of mind ……..” is risible. Thus there was total non-application of mind by the A.O. while recording the reasons.

The Court further observed that there had been total non-application of mind while filing the affidavit in reply to the petition by the same officer – Mr. Shailendra Damodar Suryavanshi, Income Tax Officer, Ward 4(3)(1), Mumbai. In the affidavit in reply, the same Mr. Suryavanshi states, “as Annexure – 2 is the copy of the approval u/s 151 of the Act ”. There was no annexure – 1 mentioned anywhere. Moreover, in the affidavit filed in the Court, even this annexure was missing. This further displayed total non-application of mind by this officer.

The Department Counsel tendered a copy of the approval u/s 151 of the said Act, which he had in his file where it says “In view of reasons recorded, I am satisfied that it is a fit case to issue notice u/s 148 ”. PCIT, Mumbai Anil Kumar, signed this.

The Court observed that if this PCIT only read the reasons recorded, he would have raised a query about how can an entity provide bogus entry to itself. That shows total non-application of mind by the said Mr. Anil Kumar as well.

The Court further observed that one Vijay Kumar Soni, Range 4(3), Mumbai, has recommended a grant of approval. That shows non-application of mind even by this Vijay Kumar Soni. The Court wondered whether the officers of respondents ever bothered to read the papers before writing the reasons or recommending for approval or while granting approval.

The Court observed that in the objections filed by petitioner vide its letter dated 10th May, 2021, the petitioner raised these points and alleged lack of application of mind. The said Mr. Suryavanshi while rejecting the objections, by an order dated 23rd July 2021, first of all, makes a false statement that “the assessee’s above submissions and objections have been carefully considered and the same are dealt with as under ” but he does not deal with the objection of the assessee of lack of application of mind. The said Mr. Suryavanshi is totally silent about the objections raised on non-application of mind.

In view of the above, the Court allowed the petition and quashed the impugned reassessment proceedings for A.Y. 2015-16 as wholly without jurisdiction, illegal, arbitrary, and liable to be quashed.

A copy of this order was directed to be sent to the Chairman, CBDT, to formulate a scheme whereby the officers are trained on how to apply their minds and what all points should be kept in mind while recording the reasons. The Chairman, CBDT, may also advise the concerned Commissioners not to grant approval u/s 151 of the said Act mechanically but after considering the reasons carefully and scrutinizing the same.

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TDS — Credit for — Assessee an airline pilot and employee of airline company — Company deducting tax at source but not paying it into government account — Assessee cannot be denied credit for tax deducted at source

39 Kartik Vijaysinh Sonavane vs. Dy. CIT [2021] 440 ITR 11 (Guj) A.Ys.: 2009-10 and 2011-12; Date of order 15th November, 2021 S. 205 of ITA, 1961

TDS — Credit for — Assessee an airline pilot and employee of airline company — Company deducting tax at source but not paying it into government account — Assessee cannot be denied credit for tax deducted at source

The assessee was a pilot by profession and an airline company employee. The company deducted tax at source of Rs. 7,20,100 and Rs. 8,70,757 for the A. Ys. 2009-10 and 2011-12 respectively in his case but did not deposit it in the Central Government account. The assessee was denied credit for the tax deducted at source and recovery notices for tax with interest were raised against the assessee.

The Gujarat High Court allowed the writ petition filed by the assessee and held as under:

“The Department was precluded from denying the assessee the benefit of the tax deducted at source by the employer during the relevant financial years. Credit shall be given to the assessee and if in the interregnum any recovery or adjustment was made by the Department, the assessee shall be entitled to the refund thereof with the statutory interest, within eight weeks.”

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TDS — Commission — Expenses incurred on doctors by assessee, a pharmaceutical company — Doctors not legally bound to prescribe medicines suggested by assessee — No principal-agent relationship — Payments cannot be construed as commission — No liability to deduct tax at source

38 ClT(TDS) vs. INTAS Pharmaceuticals Ltd. [2021] 439 ITR 692 (Guj) A.Ys.: 2011-12 to 2013-14; Date of order: 11th August, 2021 S. 194H of ITA, 1961

TDS — Commission — Expenses incurred on doctors by assessee, a pharmaceutical company — Doctors not legally bound to prescribe medicines suggested by assessee — No principal-agent relationship — Payments cannot be construed as commission — No liability to deduct tax at source

The assessee was a pharmaceutical company. Pursuant to a survey u/s 133A of the Income-tax Act, 1961 carried out at the premises of the assessee, e-mails and other correspondences that ensued between the sales executive and the general manager, seized during the survey operations, suggested that the doctors had acted as the agents of the assessee, by prescribing the medicines of the assessee over a period of time, and therefore, the expenses incurred by the assessee on the doctors towards taxi fares, air fares, etc., for attending regional conferences or scientific conferences were required to be treated as commission received or receivable as contemplated u/s 194H. The Assessing Officer treated the assessee as an assessee-in-default u/s 201(1) for non-deduction of tax at source u/s 194H of the Act on such payments.

The Commissioner (Appeals) restricted the addition to expenditure incurred on the doctors under various heads and held that the expenses incurred on other stakeholders did not fall within the definition of the term commission. Both the Department and the assessee filed appeals before the Tribunal. The Tribunal partly allowed the assessee’s appeals and dismissed the appeals filed by the Department.

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

“i) According to the provisions contained in section 194H of the Income-tax Act, 1961 and the Explanation to the section, any payment received or receivable by a person for rendering medical services is excluded from the purview of section 194H. The Explanation to section 194H cannot be interpreted so widely as to include any payment receivable, directly or indirectly for services in the course of buying or selling goods.

ii) In the absence of an element of agency between the assessee and the doctors, the provisions of section 194H could not be invoked. The doctors were not bound to prescribe the medicines as suggested by the assessee. There was no legal compulsion on the part of the doctors to prescribe a particular medicine suggested by the assessee, and therefore, the doctors had not acted as the agents of the assessee.

iii) There was no illegality or infirmity in the order of the Tribunal in holding that the expenditure incurred on the doctors could not be classified as commission. No question of law arose.”

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TDS — Commission to insurance agent — Scope of S. 194D — Arrangement for foreign travel of agents — Expenses paid directly to service providers — Tax not deductible at source on payments to service providers

37 CIT vs. SBI Life Insurance Company Ltd. [2021] 439 ITR 566 (Bom) Date of order: 22nd October, 2021 S. 194D of ITA, 1961

TDS — Commission to insurance agent — Scope of S. 194D — Arrangement for foreign travel of agents — Expenses paid directly to service providers — Tax not deductible at source on payments to service providers

The assessee respondent is engaged in the business of underwriting life insurance policies. The assessee’s business comprises of individual life and group business. The Assessing Officer noticed that the assessee had incurred foreign travel expenses for its agents who were working for soliciting or procuring insurance business for the assessee and opined that foreign travel expenses incurred by the assessee on its agents were covered under the words “income by way of remuneration or reward whether by way of commission or otherwise” used in section 194D of the Income-tax Act, 1961. Since the assessee had not deducted tax at source, the Assessing Officer treated the assessee as an assessee in default.

The order was set aside by the Commissioner (Appeals) and this was affirmed by the Tribunal.

The Bombay High Court dismissed the appeal filed by the Revenue and held as under:

“i) U/s 194D the obligation to deduct is on the person who is paying and the deduction to be made at the time of making such payment.

ii) Factually and admittedly no amount had been paid to the agents by the assessee as a reimbursement of expenses incurred by the agent on foreign travel. The assessee had made arrangement for foreign travel for all the agents and paid expenses directly to those service providers. Therefore, as no amount was paid to the agents by the respondent, the obligation to deduct Income-tax thereon at source also would not arise.”

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Reassessment — Notice u/s 148 — Validity — Assessment not finalised in pursuance of return of income — Notice u/s 148 issued before issuing notice u/s 143(2) for assessment u/s 143(3) — Impermissible

36 Loku Ram Malik vs. CIT [2021] 440 ITR 159 (Raj) A.Y.: 1999-00; Date of order: 3rd May, 2017 Ss. ss. 143, 143(2), 143(3) & 148 of ITA, 1961

Reassessment — Notice u/s 148 — Validity — Assessment not finalised in pursuance of return of income — Notice u/s 148 issued before issuing notice u/s 143(2) for assessment u/s 143(3) — Impermissible

The assessee showed the investment in a plot of land at a certain value in his return of income filed on 6th December, 1999. The Assessing Officer processed the return u/s 143(1)(a) of the Income-tax Act, 1961 on 11th August, 2000. Thereafter, the assessee revised the balance sheet and profit and loss account on 16th August, 2000 enhancing the investment in such property. The Assessing Officer issued a notice u/s 148 on 14th September, 2000, based on the revised balance sheet filed by the assessee and then issued a notice u/s 143(2) on 3rd October, 2000.

In appeal, the assessee challenged the validity of the notice u/s. 148. The Tribunal upheld the issuance of notice u/s 148 though the Assessing Officer could have issued a notice u/s 143(2) to make the regular assessment u/s 143(3).

The Rajasthan High Court allowed the appeal filed by the assessee and held as under:

“i) The order u/s 143(1)(a) was confirmed on 11th August, 2000 when the return was filed and the notice u/s 148 came to be issued before the assessment could have been done.

ii) The Tribunal had committed an error in upholding the notice issued u/s 148.”

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Reassessment — Notice after four years — Condition precedent — Notice not specifying failure to disclose any material facts truly and fully by assessee — Notice and subsequent order invalid

35 Coca-Cola India P. Ltd. vs. Dy. CIT [2021] 440 ITR 20 (Bom) A.Y.: 1998-99; Date of order: 21st September, 2021 Ss. 147 & 148 of ITA, 1961

Reassessment — Notice after four years — Condition precedent — Notice not specifying failure to disclose any material facts truly and fully by assessee — Notice and subsequent order invalid

For the A.Y. 1998-99, the assessee filed a second revised return declaring a loss as a result of demerger of its bottling division. The Deputy Commissioner issued notices u/s 143(2) and 142(1) of the Income-tax Act, 1961 along with a questionnaire. The assessee furnished the reasons for filing the revised returns of income and provided clarifications in response to the various queries raised and the balance sheet and the profit and loss account. Thereafter, the Deputy Commissioner passed an order dated 30th March, 2001 u/s 143(3), computing the assessee’s total income at nil after setting off earlier years’ losses. Aggrieved by certain disallowances made by the Deputy Commissioner, the assessee filed an appeal before the Commissioner (Appeals). The Commissioner, by an order u/s 263 directed the Deputy Commissioner to pass a fresh assessment order after considering the issues identified in his order. Thereafter, an order u/s 143(3) read with section 263 was passed. After the expiry of four years, the Deputy Commissioner issued a notice u/s 148 to reopen the assessment u/s 147.

The assessee filed a writ petition and challenged the notice. The Bombay High Court allowed the writ petition and held as under:

“i) According to the proviso to section 148 of the Income-tax Act, if the notice is issued to reopen the assessment u/s 147 after the expiry of four years from the relevant assessment year, it will be time barred unless the assessee had failed to disclose material facts that were necessary for the assessment of that A.Y. and if there is no failure to disclose, it would render the notice issued as being without jurisdiction.

ii) The reasons recorded for reopening of the assessment did not state that there was failure on the part of the assessee to disclose fully and truly all material facts necessary for the assessment of the assessment year 1998-99. The notice issued u/s 148 after a period of four years for reopening the assessment u/s 147 and the consequential order passed were quashed and set aside.”

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Reassessment — Notice after four years — Condition precedent — Notice issued on basis of information received subsequent to search and seizure of another party — Nexus between undisclosed loan activity of searched party and assessee not established — Notice and consequential assessment order quashed and set aside

34 Peninsula Land Ltd. vs. ACIT [2021] 439 ITR 582 (Bom) A.Y.: 2012-13; Date of order: 25th October, 2021 Ss. 132, 147 & 148 of ITA, 1961

Reassessment — Notice after four years — Condition precedent — Notice issued on basis of information received subsequent to search and seizure of another party — Nexus between undisclosed loan activity of searched party and assessee not established — Notice and consequential assessment order quashed and set aside

For the A.Y. 2012-13, an order u/s 143(3) read with section 153A of the Income-tax Act, 1961 was passed on 30th December, 2016 against the assessee. After a period of four years, the Assessing Officer issued a notice u/s 148 dated 30th March, 2019 for reopening the assessment u/s 147 of the Act. He recorded reasons that information was received from the Deputy Director that a search and seizure operation was conducted u/s 132 in the case of an entity EE and based on the statement recorded of the partner of EE and documentary evidence found in the search, an undisclosed activity of money lending and borrowing in unaccounted cash was found being operated at the premises of EE, that the assessee had indulged in lending of cash loan and the amount of Rs. 30 lakhs had escaped assessment within the meaning of section 147. Consequent reassessment order was passed on 5th September, 2019.

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

“i) Under the substituted section 147 of the Income-tax Act, 1961 if the Assessing Officer has reason to believe that income has escaped assessment that is enough to confer jurisdiction to reopen the assessment. But the Assessing Officer has no power to review an assessment which has been concluded. After a period of four years even if the Assessing Officer has some tangible material to come to the conclusion that there is an escapement of income from assessment, he cannot exercise the power to reopen unless he discloses what was the material fact which was not truly and fully disclosed by the assessee.

ii) The reasons for the reopening of assessment have to be tested or examined only on the basis of the reasons recorded at the time of issuing a notice u/s 148 seeking to reopen the assessment. These reasons to believe cannot be improved upon or supplemented much less substituted by affidavit or oral submissions. The reasons for reopening an assessment should be those of the Assessing Officer alone who is issuing the notice and he cannot act on the dictates of any another person in issuing the notice. The tangible material upon the basis of which the Assessing Officer entertains reason to believe that income chargeable to tax has escaped assessment can come to him from any source, but the reasons for the reopening have to be only of the Assessing Officer issuing the notice.

iii) In the reasons for the reopening, the Assessing Officer had not stated anywhere that one BS was an employee of the assessee. Further, he did not even disclose when the search and seizure u/s 132 was carried out in the case of the entity EE, whether it was before the assessment order dated 30th December, 2016 against the assessee was passed or afterwards. The reasons for reopening were absolutely silent on how the search and seizure on EE or the statement referred to or relied upon in the reasons recorded had any connection with the assessee.

iv) The notice dated 30th March, 2019 issued u/s 148 and the subsequent order dated 5th September, 2019 passed were without jurisdiction and hence, quashed and set aside. Any consequent notice or demand, if issued, was also quashed and set aside.”

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Perquisite — Exceptions — Treatment of prescribed ailment in approved hospital — Application for approval filed by hospital before outbreak of Covid-19 pandemic — Renewal denied on ground that State Government Authority had revoked approval granted to assessee for treating Covid-19 patients — Order of Principal CIT rejecting application unsustainable

33 Park Health Systems Pvt. Ltd. vs. Principal CIT [2021] 439 ITR 643 (Telangana) Date of order: 28th September, 2021 S. 17(2)(viii) Proviso (II)(B) of ITA, 1961

Perquisite — Exceptions — Treatment of prescribed ailment in approved hospital — Application for approval filed by hospital before outbreak of Covid-19 pandemic — Renewal denied on ground that State Government Authority had revoked approval granted to assessee for treating Covid-19 patients — Order of Principal CIT rejecting application unsustainable

The assessee was a hospital, and it was granted approval by the Principal Chief Commissioner under proviso (ii)(b) to section 17(2)(viii) of the Income-tax Act, 1961 initially in the year 2011-12, with each renewal being valid for three years and the last of the renewal granted being valid till 21st March, 2020. The assessee made an application on 13th January, 2020 seeking renewal of approval granted two months prior to the expiry of the validity period of the existing approval granted. While the application was pending for renewal of approval, the Covid-19 pandemic struck and the assessee was granted approval by the State Government Department of Public Health and Family Welfare for providing treatment for Covid-19 patients. Thereafter, based on complaints, the State Government Medical and Health Officer, on 3rd August, 2020 revoked the permission granted to the assessee. The assessee submitted its explanation and sought for recalling the revocation order. While the explanation offered by the assessee was under consideration by the State authorities, the second respondent issued a notice dated 12th October, 2020 calling upon the assessee to show cause why the cancellation order of the State Government should not be considered for deciding the application for recognition under proviso (ii)(b) to section 17(2)(viii). The assessee submitted in its letter to the Principal Chief Commissioner that when it made the application for renewal of approval, there was no Covid-19 pandemic outbreak, that the State Government Department of Public Health and Family Welfare revoked the permission for Covid-19 treatment only and not for other medical treatments, that the State authority’s action was based on misinformation and baseless propaganda made by the media without taking into consideration the actual facts, that the assessee was under the process of getting permission again for Covid-19 treatment from the State Government Department of Public Health and Family Welfare and requested to grant the renewal of application under proviso (ii)(b) to section 17(2)(viii). The Principal Chief Commissioner rejected the application for renewal of approval by an order dated 19th October, 2020.

On a writ petition challenging the order, the Telangana High Court allowed the writ petition and held as under:

“i) The order rejecting the renewal of approval under proviso (ii)(b) to section 17(2)(viii) had been passed by the Principal Chief Commissioner by traversing beyond the notice and was in violation of principles of natural justice causing prejudice to the assessee. The order read with the notice showed that it was passed as a chain reaction to the order of the State Government, which dealt with determination of corona virus disease as a respiratory disease and it was a prescribed disease under clause (a) of sub-rule (2) of rule 3A of the Income-tax Rules, 1962.

ii) The order indicated that it had taken into consideration various issues which had not been mentioned in the notice issued to the assessee. The only ground mentioned in the notice was with regard to the State Government revoking the mandate given for covid treatment, whereas the order, apart from dealing with the revocation of mandate for covid treatment by the State Government, also dealt with other aspects as to the nature of the corona virus disease being a respiratory disease and the assessee having resorted to excessive, exorbitant and unconscionable pricing being a misconduct or an offence, without putting the assessee on notice of the allegations and to offer its explanation. The claim of the Principal Chief Commissioner that Covid-19 treatment was a respiratory disease was not backed by any material or scientific data. Since the notice issued relied only on the revocation of permission for providing medical treatment for Covid-19 by the State Government, and the revocation having been lifted by the State authority by proceedings dated 13th September, 2020 and the assessee was permitted to provide treatment for Covid-19 patients, the very basis of the notice dated 12th October, 2020 issued was removed.

iii) The order rejecting the renewal of approval granted under proviso (ii)(b) to section 17(2)(viii) was unsustainable.”

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ACCOUNTING FOR SPONSORSHIP ARRANGEMENTS

INTRODUCTION

Companies may enter into sponsorship agreements for World Cup events or Olympic games as a means of building their brands or advertising their products. Consider a scenario, where an entity enters into an arrangement with the owners of the Cricket World Cup event to use the World Cup brand in its products or activities for one year ending one month after the event is concluded. To gain that right, the entity pays INR 100 million.

Question 1
On Day 1, Should the entity account for this amount as an intangible asset or advance against future sales promotion expenses?

Question 2
Assume that the entity shall exploit the brand for the entire year starting from the date of acquisition and ending one month after the event is concluded. How will the INR 100 million be debited to profit and loss, when the amount is capitalised as an intangible asset and when it is presented as an advance? Will the P&L charge differ under either approach?

Accounting Standard References from Ind AS 38 Intangible Assets

Paragraph 8
An intangible asset is an identifiable non-monetary asset without physical substance.

An asset is a resource: (a) controlled by an entity as a result of past events; and (b) from which future economic benefits are expected to flow to the entity.

Paragraph 29
“Examples of expenditures that are not part of the cost of an intangible asset are:
(a) costs of introducing a new product or service (including costs of advertising and promotional activities);
(b)…….
(c)………..”

Paragraph 69
“……Other examples of expenditure that is recognised as an expense when it is incurred include:
(a) ………
(b) …..
(c) expenditure on advertising and promotional activities (including mail order catalogues).
(d) …………….”

Paragraph 70
Paragraph 68 does not preclude an entity from recognising a prepayment as an asset when payment for goods has been made in advance of the entity obtaining a right to access those goods. Similarly, paragraph 68 does not preclude an entity from recognising a prepayment as an asset when payment for services has been made in advance of the entity receiving those services.

Paragraph 97
The depreciable amount of an intangible asset with a finite useful life shall be allocated on a systematic basis over its useful life. Amortisation shall begin when the asset is available for use, i.e., when it is in the location and condition necessary for it to be capable of operating in the manner intended by management. ……….The amortisation method used shall reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity. If that pattern cannot be determined reliably, the straight-line method shall be used.

Response to Question 1
View A: INR 100 million should be recognised as an intangible asset
The sponsorship arrangement can be accounted for as an acquisition of a right to use the World Cup brand, and therefore can be recognized as an asset. The right to use the Cricket World Cup Brand represents a license to use a brand for a defined period, in this case, one year.

The definition of an intangible asset requires that the asset is identifiable, controlled by the entity, and that future economic benefits are expected to flow to the entity from the use of the asset. These requirements are met, as the asset is identifiable through a contractual right, the entity has control over the licence and future economic benefits will flow to the entity from that licence.

View B: INR 100 million should be recognised as an advance for future services to be received
Paragraph 29 of Ind AS 38, provides examples of costs that do not form part of the cost of an intangible asset. One of the examples is the cost of introducing a new product or service including cost of advertising and sales promotion expenses. This requirement seems to suggest that sales promotion activities are expenditure and are not capitalised as intangible asset. The benefit of the sales promotion activity is to enhance the value of the brand and the customer relationship of the entity, which in turn generates revenue. As the brand and customer relationship of the entity are internally generated brands, and are not recognised as assets of the company, expenses to enhance those internally generated intangibles should not be recognised as an intangible asset. Additionally, the Cricket World Cup brand will not be used in isolation but will be used in conjunction with the entity’s brand, and therefore the arrangement is a co-branding arrangement.

In substance, the right to use the World Cup Brand is no different from an advertising activity, that enhances the value of the entity’s brand value. This is an internally generated brand and should not be capitalised as an intangible asset. Till such time the services are received; INR 100 million should be presented as an advance (or prepaid expense) in accordance with paragraph 70.

Response to Question 2
Basis paragraph 97 the intangible asset is amortized from the date the asset is available for use till the date the license is used, i.e., amortisation ends one month after the event is concluded. The amortisation method used shall reflect the pattern in which the asset’s future economic benefits are expected to be consumed by the entity. If that pattern cannot be determined reliably, the straight-line method shall be used. The pattern of consumption will be significant when the actual event is unfolding; however, because it cannot be estimated reliably, the amortisation will happen on a straight-line basis, over the one-year period of the licence.

When INR 100 million is presented as an advance, the expensing will not be different from the one that is undertaken with respect to amortisation of intangible assets. Typically, for a supply of services, an expense is recognised when the entity receives the services. Services are received when they are performed by a supplier in accordance with a contract which is equally over the contractual period of one year, as the World Cup brand is utilised over that period.

CONCLUSION
The question raised in this article is a very interesting question with respect to whether a payment for future services constitutes an advance for a service or an intangible asset. Under the present case, the author believes that the argument to capitalize the INR 100 million as an intangible asset is much stronger, because the payment represents a payment for acquiring a licence to use the World Cup Brand. Additionally, it may be noted that many global companies have capitalised such payments under IFRS as intangible assets. However, the other view of presenting the payment as an advance, cannot be ruled out.

With regards to the expensing in the profit or loss, the charge will generally be agnostic to whether the payment is capitalised as an intangible asset or presented as an advance. If presented as an advance, the cash outflow will be classified as operating, and if presented as intangible asset, the cash outflow will be classified as investing. As regards EBITDA, it will be higher (favourable) when the payment is treated as an intangible compared to when presented as an advance, because EBITDA will not include the amortisation charge, but expensing of the advance will be included in the EBITDA.

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CONTROVERSIES

ISSUE FOR CONSIDERATION

Charitable institutions generally receive donations (voluntary contributions) from various donors for carrying out their charitable activities. Earlier, till A.Y. 1972-73, section 12(1) provided that voluntary contributions would not be included in income, while section 12(2) provided that voluntary contributions from another trust referred to in section 11, would be deemed to be income from property held in trust for charitable purposes. These voluntary contributions now fall within the definition of ‘income’ by virtue of insertion of section 2(24)(iia) of the Income Tax Act, 1961, with effect from A.Y. 1973-74. Such contributions (other than corpus donations) are also deemed to be income from property held under trust for charitable purposes, by virtue of section 12(1) of the Act, since A.Y. 1973-74. The exemption under section 11 of a charitable trust, registered under section 12A/12AA (now section 12AB), is therefore now computed by considering such voluntary contributions and adjusting the same by the application and accumulation of income, for charitable purposes, by applying the various sub-sections of section 11.

At times, charitable institutions receive grants from other institutions or persons, Indian or foreign, Government or non-government, with the condition that such grants are to be utilised only for specific purposes (“tied-up grants”). In most such cases, there is also a stipulation that in case the tied-up grants are not used for the specified purposes within a specific period of time, the unutilised amounts are to be refunded to the grantor of the aid.

The issues in the context of taxation have arisen before the courts as to whether such tied-up grants could be termed as voluntary contributions and whether, where not utilized during the year, are income of the recipient institution, as the same are to be refunded and represent a liability to be discharged in the future. While the Bombay High Court has taken the view that such grants are voluntary contributions, the Delhi High Court has taken the view that such receipts are not voluntary contributions and are liabilities and not in the nature of income of the recipient institution. A similar view has been taken by the Gujarat High court following the Delhi High court decision.

GEM & JEWELLERY EXPORT PROMOTION COUNCIL’S CASE
The issue had first come up before the Bombay High Court in the case of CIT vs. Gem & Jewellery Export Promotion Council 143 ITR 579.

In this case relating to A.Y. 1967-68, the assessee was a company set up for the advancement of an object of general public utility, i.e., to support, protect, maintain, increase and promote exports of gems and jewellery, including pearls, precious and semi-precious stones, diamonds, synthetic stones, imitation jewellery, gold and non-gold jewellery and articles thereof, whose income was applied only for charitable purposes as defined in section 2(15).

The assessee received grants-in-aid from the Government of India for meeting the expenditure on specified projects. Some of the conditions on which those grants-in-aid were given were the following:
1. The funds should be kept with the State Bank of India, the total expenditure should not be more than the expenditure approved by the Central Government for each project; separate accounts should be kept for Code and non-Code projects and the accounts were to be audited by chartered accountants approved by the Government.
2. Any amount unspent was to be surrendered to the Government by the end of the financial year unless allowed to be adjusted against next year’s grant.
3. The grant should be spent upon the object for which it had been sanctioned. The assets acquired wholly or substantially out of grant-in-aid would not, without prior sanction of the Central Government, be disposed of, encumbered or utilised for purposes other than those for which the grant was sanctioned.

At that point of time, relying on section 12(1), which provided that any income derived from voluntary contributions applicable solely to charitable or religious purposes would not be includible in the total income, the assessee claimed that the grants-in-aid were in the nature of voluntary contributions, and were therefore not taxable, whether spent or not. The assessing officer taxed such unspent grants-in-aid, allowing accumulation of 25% of such amount.

In first appeal, the assessee’s claim was allowed, holding that such grants-in-aid were not taxable, being voluntary contributions. Before the Tribunal, the Department argued that the grants-in-aid could not be considered as voluntary contribution for the purpose of section 12(1), having regard to the fact that the grants were made subject to conditions mentioned above. The Tribunal confirmed the first appellate order, holding that the amounts given by the Government were voluntary contributions and were not in the nature of any price paid for any benefit or privilege, nor were they for any consideration. According to the Tribunal, the conditions imposed by the Government did not change the nature of the payment, which was initially a voluntary contribution.

Before the Bombay High Court, on behalf of the revenue, it was argued that while making contributions, the Government imposed certain conditions and having regard to the fact that the conditions governed the grants, the grants could not be considered to be a donation or a voluntary contribution or, in other words, it was not a pure and simple gift by the Government.

The Bombay High Court observed that it was well known that grants-in-aid were made by the Government to provide certain institutions with sufficient funds to carry on their charitable activities. The institutions or associations to which the grant was made had no right to ask for the grant. It was solely within the discretion of the Government to make grants to institutions of a charitable nature. The Government did not expect any return for the grants given by it to such institutions. There was nothing which was required to be done by these institutions for the Government, which can be considered as a consideration for the grant.

The Bombay High Court noted the meaning of the words ‘voluntarily contributed’ as held in Society of Writers to the Signet vs. CIR 2 TC 257, as “the meaning of the word ‘voluntary’ is ‘money gifted voluntarily contributed in the sense of being gratuitously given’.” The Bombay High Court held that the conditions attached to the grant did not affect the voluntary nature of the contribution. The conditions were merely intended to see that the amounts were properly utilised, and therefore did not detract from the voluntary nature of the grant.

The Bombay High Court accordingly held that the grants-in-aid were voluntary contributions, and were exempt under section 12(1), as it then stood.

SOCIETY FOR DEVELOPMENT ALTERNATIVES’ CASE
The issue again came up before the Delhi High Court in the case of DIT vs. Society for Development Alternatives 205 Taxman 373 (Del).

In this case, relating to A.Y. 2006-07 and 2007-08, the assessee was a society, which was registered under Section 12A and Section 80G. It was undertaking activities relating to research, development and dissemination of (i) Technologies for fulfillment of basic needs of rural households (ii) Solutions for regeneration of natural resources and the environment and (iii) Community based institution strengthening methods to improve access to for the poor.

It had received grants for specific purposes/projects from the government, non-government, foreign institutions etc. These grants were to be spent as per the terms and conditions of the project grant. The amount, which remained unspent at the end of the year, got spilled over to the next year and was treated as unspent grant. The Assessing Officer treated such unspent grants as income of the assessee, invoking the provisions of section 12(1). This section then provided that any voluntary contributions received by a trust created wholly for charitable or religious purposes (other than corpus donations) were, for purposes of section 11, deemed to be income from property held under trust wholly for charitable or religious purposes.

The Commissioner (Appeals) deleted the addition, noting that:
1. The amounts were received/sanctioned for a specific purpose/project to be utilized over a particular period.
2. The utilisation of the said grants was monitored by the funding agencies who sent persons for inspection and also appointed independent auditors to verify the utilisation of funds as settled terms.
3. The assessee had to submit inter/final progress/work completion reports along with evidences to the funding agencies from time to time.
4. The agreements also included a term that separate audited accounts for the project would be maintained.
5. The unutilised amount had to be refunded back to the funding agencies in most of the cases.
6. All the terms and conditions had to be simultaneously complied with, otherwise the grants would be withdrawn.
7. The assessee had to utilise the funds as per the terms and conditions of the grant. If it failed to utilise the grants for the purpose for which grant was sanctioned, the amount was recovered by the funding agency.

The Commissioner (Appeals) was therefore of the view that the assessee was not free to use the funds voluntarily as per its sweet will and, thus, these were not voluntary contributions as per Section 12. He concluded that these were tied-up grants, where the appellant acted as a custodian of the funds given by the funding agency to channelise the same in a particular direction. The Tribunal upheld the order passed by the Commissioner (Appeals).

The Delhi High Court agreed with the findings of the Tribunal, holding that these were not voluntary contributions, and were therefore not income under section 12(1).

A similar view has been taken by the Gujarat High Court in the case of DIT(E) vs. Gujarat State Council for Blood Transfusion, 221 Taxman 126, for AY 2009-10, holding that the grant received from the State Government was not income of the trust for the purposes of section 11.

OBSERVATIONS
Though both the Bombay and Delhi High Court decisions were decided in favour of the assessee and held that the tied-up grants were not taxable, since the law in both the years was different, the ratio of these decisions is opposite to that of each other – while the Bombay High Court has held that tied-up grants are ‘voluntary contributions’, the Delhi High Court has taken the view that these tied-up grants are not ‘voluntary contributions’.

The Bombay High Court, in examining whether the tied-up grants were voluntary contributions or not, looked at the receipt from the perspective of the grantor – was the grant voluntary, or was it for some consideration, and held that since it was voluntary from the viewpoint of the donor, the receipt was a voluntary contribution; and applying the then applicable law, it held that voluntary contributions were not income, as the definition of ‘income’ at the relevant time did not include voluntary contributions. The Bombay High Court did not have to consider the subsequent amendment, under which such amounts were independently in the nature of income.

The law presently applicable provides that a ‘voluntary contribution’ is an income, and hence it has become necessary to examine whether a tied-up grant, not spent by the year end or not accumulated, is a voluntary contribution, more so where it is attached with the condition of refunding the unspent amount. Following the Bombay High Court, the receipt is a voluntary contribution, and once so accepted, the same has to be subjected to the rules of application and accumulation. In contrast, where the Delhi High court is followed, the receipt in the first place shall not be construed as a voluntary contribution and would not be subjected to the rules of application and accumulation.

In order for a receipt to be regarded as a voluntary contribution and for it to bear the character of income, the recipient has to have some element of domain over the receipt – the freedom to apply such income as it desires. If the recipient has to necessarily spend the receipt as per the directions of the grantor, and under the supervision of the donor, it has no control over such spending and over such amounts. Such receipts should be considered as held in trust for the grantor and when spent, the expenditure be held to be the expenditure of the grantor, and not that of the recipient trust, which disburses the amounts. Besides, where the unspent amount is refundable, it is a liability and cannot be regarded as income at all.

The Hyderabad bench of the Tribunal has therefore held, in the case of Nirmal Agricultural Society vs. ITO 71 ITD 152, that ‘The grants which are for specific purposes do not belong to the assessee-society. Such grants do not form corpus of the assessee or its income. Those grants are not donations to the assessee so as to bring them under the purview of section 12 of the Act. Voluntary contributions covered by section 12 are those contributions freely available to the assessee without any stipulation which the assessee could utilise towards its objectives according to its own discretion and judgment. Tied-up grants for a specified purpose would only mean that the assessee, which is a voluntary organisation, has agreed to act as a trustee of a special fund granted by Bread for the World with the result that it need not be pooled or integrated with the assessee’s normal income or corpus. In this case, the assessee is acting as an independent trustee for that grant, just as same trustee can act as a trustee of more than one trust. Tied-up amounts need not, therefore, be treated as amounts which are required to be considered for assessment, for ascertaining the amount expended or the amount to be accumulated.’

According to the Tribunal, such unspent grants should be shown as a liability, and the expenditure incurred for the specified purposes adjusted against such liability, and not be treated as the expenses of the assessee. Only any non-refundable credit balance in the liability account of the grantor would be treated as income in the year in which such non-refundable balance was ascertained.

A similar view has been taken by the Mumbai bench of the Tribunal in the case of NEIA Trust v ADIT ITA No 5818-5819/Mum/2015 dated 24th December 2019 (A.Y. 2011-12 and 2012-13), where the Tribunal has held:
‘upon perusal of stated terms & conditions, it could not be said that the funds received by the assessee were not in the nature of voluntary contributions rather they were more in the nature of specific grants on certain terms and conditions and liable to be refunded, in case the same were not utilized for specific purposes. It is trite law that entries in the books of accounts would not be determinative of the true nature / character of the transactions and the same could not be held to be conclusive. Therefore, the mere fact that the assessee credited the receipts as corpus contribution, in our considered opinion, would not make much difference and would not alter the true nature of the stated receipts. The said funds / receipts, as stated earlier, were more in the nature of specific grants and represent liability for the assessee and liable to be refunded in case of non-utilization.’

The Hyderabad Bench decision in Nirmal Agricultural Society’s case has also been followed by the Tribunal in the cases of Handloom Export Promotion Council vs. ADIT 62 taxmann.com 288 (Chennai) and JB Education Society vs. ACIT 55 taxmann.com 322 (Hyd).

Besides, in the cases of various Government Corporations set up to implement Government policies, grants received from the Government by such corporations have been held not to constitute income of the Corporation, since the Corporation acts as an agency of the Government in spending for the Government schemes. The funds therefore really belong to the Government, until such time as the funds are spent. This view has been taken by the High Courts in the following cases:
• CIT vs. Karnataka Urban Infrastructure Development and Finance Corpn. 284 ITR 582 (Kar.)
• Karnataka Municipal Data Society vs. ITO 76 taxmann.com 167 (Kar)

The position may be slightly different in case of grants from the Government and a few specified bodies, with effect from A.Y. 2016-17. Clause (xviii) of section 2(24) has been inserted in the definition of ‘income’, which provides for taxation of grants from the Central Government, State Government, any authority, body or agency as income. Such grants would therefore be taxable as income of the recipient trust, and the fact anymore may or may not be material that the receipt is not a voluntary contribution. This inserted provision in any case would not apply to grants received from other non-governmental organisations.

In case the Government tied-up grant is refundable if not spent, can it be regarded as income at all post insertion of clause (xviii)? One way to minimize the harm on the possible application of clause (xviii) of section 2(24) could be to tax such unspent receipts in the year in which the fact of the non-utilisation is final; even in such a case, a possibility of claiming deduction for the refund of unspent amount should be explored. Alternatively, in that year, the expenditure, where incurred, should be treated as an application of income. The other possible view is that clause (xviii) applies only to recipient persons, other than charitable organisations, to whom the specific provisions of clause (iia) of section 2(24) applies, rather than generally applying the provisions of clause (xviii) to all and sundry.

The better view therefore seems to be that of the Delhi and Gujarat High Courts, that tied-up grants are not voluntary contributions and/or income of the recipient institution.

shailesh.kwebmaker

Book profits — Company — Provision for bad and doubtful debts — Corresponding amount reduced from loans and advances on assets side of balance sheet and at end of year loans and advances shown net of provision for bad debts — Provision not to be added in computation of book profits

32 Principal CIT. vs. Narmada Chematur Petrochemicals Ltd. [2021] 439 ITR 761 (Guj) A.Y.: 2004-05; Date of order: 14th July, 2021 S. 115JB of ITA, 1961

Book profits — Company — Provision for bad and doubtful debts — Corresponding amount reduced from loans and advances on assets side of balance sheet and at end of year loans and advances shown net of provision for bad debts — Provision not to be added in computation of book profits

The assessee claimed deduction u/s 80HHC of the Income-tax Act, 1961 and after setting off unabsorbed loss and depreciation of the preceding years, the assessee filed a nil return for the A.Y. 2004-05 and declared the book profits under the provisions of section 115JB. The Assessing Officer made various disallowances in his order u/s 143(3).

The Commissioner (Appeals) deleted the addition made on account of bad and doubtful debts holding that the provision for bad and doubtful debt was not a provision for a liability but for diminution in value of assets and therefore, clause (c) of the Explanation to section 115JB would not be applicable. The assessee and the Department filed appeals before the Tribunal. The Tribunal held that since the assessee had simultaneously obliterated the provision from its accounts by reducing the corresponding amount from the loans and advances on the assets side of the balance-sheet and consequently, at the end of the year shown the loans and advances on the assets side of the balance sheet as net of the provision for bad debts, it would amount to a write-off and such actual write-off would not be hit by clause (i) of the Explanation to section 115JB.

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

“The Tribunal was right in deleting the addition on account of the provision for bad and doubtful debts in the computation of the book profits for computation of minimum alternate tax liability in the light of clause (i) of the Explanation to section 115JB. No question of law arose.”

shailesh.kwebmaker

Section 195 read with Section 40(a)(i) of the Act – Section 40(a)(i) is applicable on failure to deduct tax on payments made for FTS and does not encompass fees for professional service

6 Chandan Mohon Lal vs. ACIT [TS – 1123 – ITAT – 2021 (Del)] ITA No: 1869/Del/2019 A.Y.: 2015-16; Date of order: 9th December, 2021

Section 195 read with Section 40(a)(i) of the Act – Section 40(a)(i) is applicable on failure to deduct tax on payments made for FTS and does not encompass fees for professional service

FACTS
The assessee was an advocate practicing in the field of Intellectual Property Laws. During the relevant year, the assessee had made payments to various persons/entities outside India towards professional/technical fees without deducting TDS. AO disallowed expenditure under Section 40(a)(i) of the Act. AO held that payments were chargeable to tax as they were made to persons from non DTAA countries, and in respect of DTAAs countries, the assessee had not furnished TRCs. CIT(A) affirmed AO’s order. Being aggrieved, the assessee appealed to ITAT.

HELD
Reimbursement of expenses
• The assessee had made foreign remittances in respect of (a) amounts recovered in a court proceeding on behalf of the client in litigation (b) official fee for international application (c) publication and trade fair services.

• Payments representing reimbursements for official purposes and trade fair services were not in the nature of income chargeable to tax. Accordingly, provisions of Section 195 were not applicable.

Fees for technical services vs. Professional fees
• Non-resident attorneys had rendered the following professional services outside India:

? Filing of application for grant/registration of IPRs.
??Filing of Form/responses/petitions in relation to activity leading to, or in the process of, grant/registration.

??Maintenance of such grant/registration or services in relation thereto, as required under law, such as, annuity payment, renewal fee, restoration of patent, etc.

??Undertaking compliances for effecting change in the ownership/address etc., of such intellectual property.

• Non-resident attorneys had rendered services outside India. Accordingly, income received in respect thereof could not be treated as income received in India, or deemed to be received in India, or as income accrued or arisen in India.

• The Act considers legal/professional services and FTS as two distinct and separate categories. A conjoint reading of Sections 40(a)(i) and 40(a)(ia) brings out a clear distinction between FTS and fees for professional services. Section 40(a)(ia) encompasses both FTS and fees for professional services. However, Section 40(a)(i) is applicable only in case of failure to deduct tax on payments made for FTS.
• This could be because, as per Section 5 and Section 9 of the Act, legal/professional fee payment to a non-resident does not accrue or arise in India, or is not deemed to accrue or arise in India.

• In reaching its conclusion, ITAT placed reliance on under noted decisions1 where similar view was expressed.

Source Rule exclusion
• Indian/overseas clients had engaged the assessee for availing certain services. In turn, the assessee had engaged foreign attorneys to perform certain services required to be performed in foreign jurisdictions. Clients were not concerned whether work was done by the assessee or someone else.

• Thus, the source of income of the assessee through services rendered by non-resident attorneys in foreign jurisdictions was located outside India.

_____________________________________________________________________________________________________________________________________________________
1 NQA Quality Systems Registrar Ltd. vs. DCIT: 92 TTJ 946; ONGC vs. DCIT, Dehradun: 117 taxmann.com 867 (Delhi-Trib.); Deloitte Haskins & Sells vs. ACIT: [2017] 184 TTJ 801 (Mumbai –Trib.)

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Exemption u/s 54 was available even if the new residential property was purchased in the joint names of assessee, her daughter and son in law

26 ITO vs. Smt. Rachna Arora [2021] 90 ITR(T) 575 (Chandigarh – Trib.) ITA No.: 1112 (Chd) of 2019 A.Y.: 2015-16 Date of Order: 31st March, 2021

Exemption u/s 54 was available even if the new residential property was purchased in the joint names of assessee, her daughter and son in law

FACTS
Assessee sold a residential property and invested entire amount on purchase of a new residential property in joint names of assessee with her daughter and son in law and claimed exemption under Section 54. Assessing Officer held that assessee was entitled for claim of exemption only to extent of her share in new residential property.

The CIT (A) allowed the assessee’s appeal.

Consequently, the revenue filed an appeal before the ITAT.

HELD
The ITAT confirmed the order passed by the CIT(A) and dismissed the revenue’s appeal on the following grounds:

The CIT(A) had followed the ratio contained in the decision of Jurisdictional High Court in the case of CIT vs. Dinesh Verma 2015 233 Taxman 409 (Punj. & Har.)

The Hon’ble High Court in the case of Dinesh Verma (supra) held that the assessee would be entitled to the benefit of exemption u/s 54B only on the amount invested by him after the sale of his original property and not on the amount invested by his wife jointly in the same property. The high court also held that the plain reading of provisions of section 54 of the Act indicated that in order to claim the benefit of exemption u/s 54, the assessee should, invest the capital gain arising out of sale of residential property in purchase of another residential property within stipulated time. Nothing contained in Section 54 precluded the assessee to claim the exemption in case the property was purchased jointly with close family members, who are not strangers or unconnected to her provided the assessee invested the entire amount of Long Term Capital Gain.

Based on the principle, he held that in the instant case, since the entire investment is made by the assessee herself, albeit in joint names with daughter and son-in-law, the assessee is entitled to exemption u/s 54. The ITAT also observed that the Ld. DR was neither able to controvert the facts of the present case as noted by the CIT(A) nor had he pointed out how the decision in the case of Dinesh Verma (supra) was applicable against the assessee in the facts of the present case.

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A society formed with the primary object of construction of chambers for its members and their allotment is eligible to be registered u/s 12AA since the objects amount to advancement of object of general public utility within the meaning of Section 2(15) of the Income Tax Act

25 Building Committee (Society) Barnala vs. CIT (Exemption) [2021] 89 ITR(T) 1 (Chandigarh – Trib.) ITA No.: 1295 (Chd) of 2019 Date of Order: 18th May, 2021

A society formed with the primary object of construction of chambers for its members and their allotment is eligible to be registered u/s 12AA since the objects amount to advancement of object of general public utility within the meaning of Section 2(15) of the Income Tax Act

FACTS
Assessee-society applied for registration u/s 12AA. However, the CIT (Exemption) rejected the application of the assessee inter alia holding that genuineness of the activities of the assessee could not be established; and that the assessee had not incurred any expenditure for activities of general public importance. Main ground for rejecting the application was that purpose for which the society was formed was for the benefit of specific group of professionals which does not come within the purview of ‘advancement of object of general public utility’ under Section 2(15) of the Act.

Aggrieved, the assessee filed appeal to the ITAT.

HELD
The ITAT analysed the case on hand in the context of provisions of Section 2(15) which define ‘charitable purpose’ and Section 12AA which provide for grant of registration.

The ITAT observed that the bye-laws of the society provided that society was established for the welfare, construction and allotment of chambers in the District Court Complex, Barnala for the members of District Bar Association, Barnala. It further provided that all the incomes/earnings would be solely utilized and applied towards the promotion of its aims and objectives only as set forth in the memorandum of association, and that the society will work on no profit and no loss basis. Bye-laws also provided social welfare activities such as growing of trees for environments, de-addiction drug campaign, welfare of girl child, and also provide legal awareness among the general public.

The CIT (Exemptions) proceeded only on the basis that since the society was formed for construction of building for members, benefits thereof only restricted to the members, and not to the general public at large and failed to comprehend the role of Bar Association in judicial dispensation. Attainment of justice for all the parties of the case and the society at large is the main object of our judicial system.

The Bench and Bar were the essential partners in judicial dispensation, and therefore, considering the importance of Bar Association in every adjudicating body, particular space was being earmarked and maintained for Bar Association and for litigants. Thus, since working space for professionals was an integral part of infrastructure for judicial dispensation, the ITAT held that the CIT (Exemptions) was wrong in rejecting the assessee’s application u/s 12AA, disregarding the bye-laws and not considering the object of the assessee from a larger perspective.

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Since income from TDR is inextricably linked to the project and its cost, the cost of building has to be deducted against the income from sale of TDR. TDR receipts cannot be considered in isolation of assessee’s obligation under the SRA agreement to complete the SRA project

24 DBS Realty vs. ACIT [TS-1096-ITAT-2021(Mum)] A.Ys.: 2010-11 and 2011-12; Date of order: 24th November, 2021 Section: 28

Since income from TDR is inextricably linked to the project and its cost, the cost of building has to be deducted against the income from sale of TDR. TDR receipts cannot be considered in isolation of assessee’s obligation under the SRA agreement to complete the SRA project

FACTS
The assessee, a partnership firm, engaged in the business of real estate development entered into an agreement with the Slum Rehabilitation Authority (SRA) to develop a project over a plot of land spread over 31.9 acres. The said plot of land was purchased by the assessee for a consideration of Rs. 44.21 crore and handed over to SRA as per SRA scheme. As per the terms of the agreement with SRA, the assessee was to develop the SRA project at its own cost. In return of the land surrendered to SRA and the project cost to be incurred the assessee was granted Land TDR of 93,623 sq. mts. and construction TDR of 4,78,527 sq. mts.

Since the assessee was required to fund the entire cost of the project itself, the TDR granted to the assessee in a phased manner was sold from time to time to incur the cost of the project. In the process, the assessee received various amounts aggregating to about Rs. 304 crore in financial years 2009-10 to 2013-14.

In the course of assessment proceedings for the assessment year under consideration, the Assessing Officer (AO) called upon the assessee to explain why the amount received from the sale of TDR should not be treated as income of the assessee in respective assessment years. In response, the assessee submitted that since it is following percentage completion method for recognising the revenue from the SRA project and since 25% of the total estimated project is not completed till date, TDR income cannot be treated as income but has to be shown as current liability.

The AO did not accept the contentions of the assessee and held that the amount received by the assessee from sale of TDR has to be added to the income of the assessee in the respective assessment years.

Aggrieved, the assessee preferred an appeal to the CIT(A) who upheld the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal where it contended that-

(i) sale of TDR is integrally connected to the SRA project, hence, cannot be considered in isolation;

(ii) since SRA is not funding the project, the assessee has to incur the cost of project by utilizing the amount received from sale of TDR;

(iii) the very idea of granting TDR to the assessee is for enabling it to finance the project;

(iv) since the project is not complete even to the extent of 25%, no amount is taxable, much less, the amount received from sale of TDR, that too, without looking at the corresponding cost incurred by the assessee.

HELD
The Tribunal noted that the issue for its consideration is whether the amount received by the assessee from the sale of TDR granted in respect of the SRA project is taxable in the year of receipt or the assessee’s method of revenue recognition following percentage of completion method is acceptable. It also noted that the assessee has received certain amount from the sale of TDR in A.Ys. 2012-13 and 2013-14 as well.

While completing the assessment, the AO accepted the method of accounting followed by the assessee. However, PCIT held the assessment orders to be erroneous and prejudicial to the interest of the revenue since AO failed to tax the amount received by the assessee from the sale of TDR. While setting aside the assessments, the PCIT directed the AO to assess the amounts received from the sale of TDR.

However, while deciding the assessee’s appeals challenging the aforesaid direction of PCIT, the Tribunal held that percentage completion method followed by the assessee is a well-recognised method as per ICAI guidelines and judicial precedents; the sale of TDR cannot be considered in isolation of assessee’s obligation under the SRA agreement to complete the SRA project; the assessee was under obligation to complete the project as per the agreement; the TDR was granted to provide finance to the assessee to complete the project. Thus, the assessee’s income from TDR cannot be considered independently without taking the corresponding expenses, more so when the TDR receipts are directly linked to execution of the project. Since income from TDR is inextricably linked to the project and its cost, the cost of building has to be deducted against the income from sale of TDR.

Since the project has been stalled due to dispute and litigations and the assessee has not been able to complete the project, the bench observed that though assessee has earned income from sale of TDR, however, no income from SRA project, as yet, has been offered to tax. It also observed that the Tribunal has in appeals against orders passed under Section 263 has recorded findings touching upon the merits of the issue, which indeed, are favourable to the assessee and the said order of the Tribunal was not available before the AO or CIT(A) the applicability of the said order to the facts of the case needs to be examined. The Tribunal set aside the order of CIT(A) and restored the issue to the file of the AO for fresh adjudication after examining the applicability of the order of the Tribunal for A.Ys. 2012-13 and 2013-14.

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Where premises were let along with furniture and fixture and rent for furniture and fixtures has been bifurcated by the assessee, deduction under Section 24(a) held to be allowable even for rent of furniture and fixture, etc Reimbursement of member’s share of contribution for repairing the entire society building held to be not taxable as it has no income element in it

23 Lewis Family Trust vs. ITO [TS-1121-ITAT-2021(Mum)] A.Y.: 2012-13 ; Date of order: 30th November, 2021 Sections: 23, 24

Where premises were let along with furniture and fixture and rent for furniture and fixtures has been bifurcated by the assessee, deduction under Section 24(a) held to be allowable even for rent of furniture and fixture, etc

Reimbursement of member’s share of contribution for repairing the entire society building held to be not taxable as it has no income element in it

FACTS I
The assessee, in its return of income, declared rental income of Rs 57,56,998 under the head `Income from House Property’ and claimed deduction under Section 24(a) of the Act. The Assessing Officer (AO) on perusal of the leave and license agreement, found that the assessee trust had let out premises along with furniture, fixtures and decoration, air-conditioning, etc, and the rent for furniture and fixtures has been separately bifurcated by the assessee. The AO held that rent of premises amounting to Rs. 34,54,199 is only taxable under the head `income from house property’ and deduction under Section 24(a) allowable in respect thereof and rent of furniture, fixtures, etc amounting to Rs. 23,02,799 would get taxed under the head `income from other sources’ and therefore, standard deduction @ 30% thereon would not be allowable.

Aggrieved, the assessee preferred an appeal to CIT(A) where it contended that the total rent has been bifurcated into rent for premises and hire charges for furniture, fixtures, etc. only for the purpose of enabling property tax charged by MCGM at a lower amount and there was no intention to defraud the income-tax department; furniture is attached with the property and cannot be removed without damaging the wall or the floor; and that without furniture rent cannot be equivalent to the amount agreed upon. The CIT(A) confirmed the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

FACTS II
During the previous year relevant to the assessment year under consideration, the assessee made a payment of Rs. 4,45,266 towards members’ share of contribution for repairing the entire society building. This payment was made by account payee cheque through regular banking channels by the assessee to the housing society. Since repairs costs were to be borne by the tenant, the assessee got a sum of Rs. 4,45,266 reimbursed from the lessee bank. The AO taxed this sum of Rs. 4,45,266 under the head `income from other sources’.

Aggrieved, the assessee preferred an appeal to CIT(A) who confirmed the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD I
The Tribunal noted that the assessee had received composite rent from its tenant State Bank of Patiala. The lessee bank had treated the entire payment of rental and hire charges as the composite payment and had charged tax at source in terms of Ssection 194I of the Act. It observed that this aspect is not a relevant consideration for determining the taxability of rental under the head of income in the hands of the assessee. However, it noted that for A.Y. 2010-11, the AO, in order giving effect to order of CIT(A), had accepted the stand of the assessee vide his order dated 19th March, 2014 and in scrutiny assessments framed for A.Ys. 2016-17 and 2018-19 also the stand of the assessee has been accepted. Applying the principle laid down by the Apex Court in Radhasoami Satsang [193 ITR 321 (SC)], namely that the revenue cannot take a divergent stand for one particular year, ignoring the rule of consistency, the Tribunal allowed this ground of appeal filed by the assessee.

HELD II
The Tribunal held that since the assessee had merely got the reimbursement of the amount paid by it to the society, there is no income element in it. Hence, it held that the reimbursement received by the assessee cannot be taxed under the head `income from other sources’.

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