BCAJ | Bombay Chartered Accountant Journal

Article 11 of India-China DTAA — Interest received by China Development Bank qualified for exemption under Article 11(3) since, in fact, it was a financial institution owned by the Government of China.

11 [2024] 165 taxmann.com 603 (Delhi – Trib.)

Income Tax Officer vs. Tata Teleservice Ltd

ITA No: 1393 (Delhi) of 2023

A.Y.: 2016-17

Dated: 21^st August, 2024

Article 11 of India-China DTAA — Interest received by China Development Bank qualified for exemption under Article 11(3) since, in fact, it was a financial institution owned by the Government of China.

FACTS

For FY 2015-16, the assessee had made interest payments to M/s. China Development Bank (‘CDB’), a tax resident of China without deducting taxes under Section 195. As per the assessee, CDB was wholly controlled by the Government of China. Therefore, in terms of source rule exemption as provided in Article 11(3) of India-China DTAA, the interest received by CDB was not taxable in India.

While the appeal related to AY 2016-17, in 2018, India and China subsequently executed a Protocol to DTAA, and the amended Protocol explicitly mentioned that ‘CDB’ was a qualified entity for Article 11(3).

According to the TDS officer, CDB was not eligible for exemption since the Government of China held only a 36.45 per cent stake in CDB. Therefore, he treated the assessee as an ‘assessee in default’ for not deducting taxes on interest payments. The officer did not grant an exemption since the protocol amendment entered into effect only on 17^th July, 2019. The CIT(A) held that CDB qualified for the benefit of exemption.

Aggrieved by the order of CIT(A), the Department appealed to ITAT.

HELD

The Ministry of Finance of China directly held 36.45 per cent stake in CDB. Four other entities, which were controlled by other state-owned entities or limited liability companies or funds established under the law of the People’s Republic of China held the remaining stake in CDB.
Audited financial statements of CDB clearly showed that entities that owned CDB were funded either by the Administration of Foreign Exchange or the State Council of China.
The erstwhile Article 11(3) provided the benefit to financial institutions wholly owned by the Government of China, and such provision was expansive in nature.
The newly inserted Article 11(3) vide Notification No.S.O.2562(E)(No.54/2019/F.No.503/02/2008-FTD-II dated 17th July, 2019) provides similar benefit to financial institutions.
Further, the protocol amended vide notification dated 17^th July, 2019 specifically included CDB in the list of financial institutions eligible for benefit under Article 11(3).
Under the existing and amended Article 11(3), CDB was a financial institution wholly owned by the Chinese Government and, therefore, it was entitled to the benefit of exemption. Hence, the Assessee could not be treated as ‘assessee in default’.

BCAJ Admin

Article 12 of India-US DTAA — Sincereceipts for providing access to online courses and conduct of examinations did not satisfy ‘make available’ condition, it was not taxable as fees for included services.

10 [2024] 165 taxmann.com 683 (Delhi – Trib.)

Coursera Inc vs. ACIT (International Taxation)

ITA No: 2416 & 3646 (Delhi) of 2023

A.Y.: 2020-21 & 2021-22

Dated: 21^st August, 2024

Article 12 of India-US DTAA — Sincereceipts for providing access to online courses and conduct of examinations did not satisfy ‘make available’ condition, it was not taxable as fees for included services.

FACTS

The Assessee, a tax resident of the USA, provided access to online courses and degrees offered by educational institutions and universities through its global online learning platform. The Assessee earned fees for enabling Indian institutions to access its platform. According to the assessee, in terms of Article 12 of India-USA DTAA, such fees were not taxable in India, either as royalties or fees for included services (‘FIS’).

According to the AO, the receipts were in nature of FIS under Article 12(4) due to the following assertions:

The services rendered were not confined to ‘content service’ but included a range of user-specific services that involved significant human intervention.
Training element was involved in navigating the features of the platform.
Since the assessee was not an education institution, the exception made in Article 12(5) was not applicable.

DRP directed the AO to verify the specific agreement and pass a speaking order. In his order passed pursuant to directions of DRP, the AO treated the receipts as FIS.

Being aggrieved, the assessee appealed to ITAT.

HELD

The educational institutions create the courses and conduct examinations, not the Assessee. The competition certificate issued by the university bears the logo of the Assessee.
The Assessee only provides access to the content created by the universities and does not create any content on their own. Upon payment of fees, the users access the content/study materials through the Assessee’s online platform. The Assessee acts as a facilitator between the universities and users. Hence, the Assessee was an aggregation service provider. The Assessee does not render any technical services while providing users with access.
The AO brought no evidence on record to prove that the Assessee rendered technical services. Even assuming that services are technical in nature, the same could not be regarded as FIS unless the ‘make available’ condition was satisfied. Mere customisation of the webpage does not regard the service as technical. The burden was on the revenue to prove that the assessee had transferred technical knowledge, know-how, or skill as envisaged under Article 12(4).
Relying on the rulings in the case of Elsevier Information Systems GmbH vs. Dy. CIT (IT) [2019] 106 taxmann.com 401 (Mumbai) andRelx Inc. ACIT [2023] 149 taxmann.com 78 (Delhi – Trib.), the ITAT held that receipts towards granting of access to data / information through the platform are towards ‘copyrighted article’. Hence, the same cannot be regarded as royalty.
Further, providing access to data to users of the database does not involve any human intervention and, hence, cannot be regarded as fees for technical services as held by the Supreme Court in Bharati Cellular Ltd 330 ITR 239.

BCAJ Admin

S. 17(3) — Voluntary severance compensation received by an employee for loss of employment could be regarded as capital receipt not subject to tax as profits in lieu of salary under section 17(3).

66 (2024) 168 taxmann.com 369(Ahd. Trib)

Sudhakar Ratan Shanker Gautam vs. ITO

ITA No.: 1033(Ahd) of 2024

A.Y.: 2018-19

Dated: 3^rd October, 2024

S. 17(3) — Voluntary severance compensation received by an employee for loss of employment could be regarded as capital receipt not subject to tax as profits in lieu of salary under section 17(3).

FACTS

The assessee, an individual, was employed with “Y” which was subsequently acquired by “E”. Following this acquisition, the assessee’s employment was terminated on 26^th October, 2017 on account of redundancy, and he received a severance compensation of ₹15,50,905. This amount was claimed as a capital receipt not chargeable to tax in the return of income filed for AY 2018-19 on 31^st August, 2018.

The AO treated this amount as “profits in lieu of salary” under section 17(3) and added it to the total income of the assessee. On appeal, CIT(A) observed that since the compensation received by the assessee was related to the termination of employment, it should be treated as “profits in lieu of salary” under section 17(3)(i), thereby confirming the addition made by the AO.

Aggrieved, the assessee filed an appeal before ITAT.

HELD

The Tribunal observed that–

(a) Gujarat High Court [in Arunbhai R. Naik vs. ITO, (2015) 64 taxmann.com 216 (Guj)] and various ITAT decisions have consistently held that voluntary severance payments made without contractual obligation are capital receipts and not subject to tax as profits in lieu of salary.

(b) The severance payment received by the assessee was paid for the loss of employment and not for past services. It is consistently held that payments, when not tied to services rendered, are capital in nature and not taxable as salary income. Since the employer had no obligation to pay further amounts upon termination, the compensation should be deemed a capital receipt and thus not taxable under Section 17(3).

(c) Under section 17(3), “profits in lieu of salary” is a key provision that seeks to tax certain payments received by an employee in connection with the termination of employment. On the other hand, capital receipts, especially in the context of employment, typically relate to compensation for the loss of a source of income and are generally not taxable, unless specified. This distinction is critical in determining whether a severance payment or other termination-related compensation is subject to tax as salary income or can be treated as a non-taxable capital receipt.

(d) Section 56(2)(xi), w.e.f. 1^st April, 2019, deals with compensation received or receivable in connection with the termination or modification of terms of employment contracts. However, this amendment applies to assessment years starting from AY 2019-20 onwards and not to the case in question.

Accordingly, the Tribunal held that severance compensation received by the assessee was a capital receipt, not chargeable to tax under section 17(3).

BCAJ Admin

Where the assessee was not only for the benefit of its members but also for benefit of insurance consumers from the general public, it was regarded as engaged in charitable activity in the nature of advancement of object of general public utility and therefore, principle of mutuality could not be applied. Where participation in the annual meet of the assessee was free of cost, it was not a case of rendering of any service for a fee and therefore, proviso to section 2(15) did not apply.

65 Insurance Brokers Association of India vs. ITO

ITA No. 3955 & 3958 / Mum / 2024

A.Ys.: 2016-17 & 2018-19

Date of Order: 13^th November, 2024

Section 2(15), principle of mutuality

Where the assessee was not only for the benefit of its members but also for benefit of insurance consumers from the general public, it was regarded as engaged in charitable activity in the nature of advancement of object of general public utility and therefore, principle of mutuality could not be applied.

Where participation in the annual meet of the assessee was free of cost, it was not a case of rendering of any service for a fee and therefore, proviso to section 2(15) did not apply.

FACTS

The assessee was a company registered under section 25 of the Companies Act, 1956 in 2001 and was registered as a charitable organization under section 12A of the Act. For AY 2016-17 and 2018-19, the assessee filed its return of income claiming exemption under section 11 of the Act.

For AY 2016-17 and AY 2018-19, the case of the assessee was selected for scrutiny. Relying on Circular No. 11/2008 dated 19^th December, 2008, the AO held that the assessee cannot claim exemption under section 11 of the Act since 1st proviso to section 2(15) of the Act was applicable and also held that the principle of mutuality was applicable in assessee’s case and brought to tax the interest income and other income.

CIT(A) confirmed the addition made by the AO.

Aggrieved, the assessee filed an appeal before ITAT.

HELD

On the question of applying the principle of mutuality, the Tribunal observed that-

(a) It was not in dispute that the assessee was a charitable organisation since it was registered under section 12A of the Act and that the tax department till now had not held the assessee to be otherwise.

(b) A perusal of the financial statements of the assessee showed that the income consisted of subscription fee from members, sponsorship fees for annual event, and bank interest. Further, a perusal of the brochure of the annual event showed that the event was held for the benefit of insurance consumers and brokers and that the events were conducted without collecting any fees.

(c) The assessee was not only for the benefit of members but was also for the benefit of insurance consumers from general public and therefore, the assessee could be regarded as engaged in charitable activity in the nature of advancement of object of general public utility.

Therefore, the Tribunal held that the principle of mutuality was not applicable in the assessee’s case.

On the question of the applicability of proviso to section 2(15), the Tribunal observed that the income of the assessee did not contain any revenue from any activity in the nature of trade, commerce or business. Further, the participation in the annual meet for which the sponsorship fees was received was free of cost and therefore, it could not be held to be a service for a fee for rendering services. Relying on observations of the Supreme Court in ACIT vs. Ahmadabad Urban Development Authority, (2022) 143 taxmann.com 278 (SC), the Tribunal held that the AO was not correct in denying the benefit of section 11 by invoking proviso to section 2(15).

Accordingly, the appeals of the assessee were allowed.

BCAJ Admin

Ss. 12AB, 2(15) – Where the objects and activities of the trust showed that its charitable activities were for the general public at large and not only for the alumni and faculty of the university, it was entitled to registration under section 12AB.

64 (2024) 168 taxmann.com 526 (AhdTrib)

Indus Alumni Association vs. CIT(E)

ITA No.: 916 (Ahd) of 2024

A.Y.: N.A.

Dated: 4^th November, 2024

Ss. 12AB, 2(15) – Where the objects and activities of the trust showed that its charitable activities were for the general public at large and not only for the alumni and faculty of the university, it was entitled to registration under section 12AB.

FACTS

The assessee was a trust registered under Gujarat Public Trusts Act, 1950. The main objects of the trust were educational, medical relief and charitable in nature. It was created for the benefit and advancement of the whole mankind of the society without discrimination of caste, creed, sex and religion of any person.

The assessee obtained provisional approval for registration under section 12AB in 2022 and thereafter, applied for final registration under section 12AB by filing Form 10AB on 23^rd September, 2023.

After considering the details filed by the assessee, CIT(E) held that the objects of the trust were for the benefit / welfare / interest of the members of the association only, namely alumni and faculty members of Indus University and not for the benefit of the public at large. Accordingly, the trust does not fall within the ambit of charitable purposes as defined under section 2(15) and is not eligible for registration under section 12AB.

Aggrieved with the order of CIT(E), the trust filed an appeal before ITAT.

HELD

The Tribunal observed that-

(a) Looking into the objects of the trust, it cannot be held that the assessee had been formed only for the benefit of a particular set of public, namely alumni and faculty members of the University.

(b) Perusal of the activities carried out by the trust, namely — food donation, blood donation, women empowerment, English learning, awareness of ecological concept, new library for the under privileged school children in a village clearly demonstrate that the trust was not doing charitable activities only for the alumni members of the University but for the general public at large.

(c) In any case, this aspect should be considered at the time of grant of exemption under section 11 and the provisions of section 13 should not be invoked at time of grant of registration under section 12AB.

The Tribunal also observed that this view was supported by decision of co-ordinate bench in Parul University Alumni Association vs. CIT(E),(2024) 162 taxmann.com 98 (AhdTrib).

Accordingly, the appeal of the assessee was allowed and the impugned order was set aside with a direction to CIT(E) to grant final registration under section 12AB to the assessee-trust.

BCAJ Admin

Annual value of vacant flats held as stock-in-trade is not chargeable as `Income from House Property’.

63 Palm Grove Beach Hotels Pvt. Ltd. vs. DCIT

ITA No. 3858/Mum./2024

A.Y. : 2017-18

Date of Order : 11^th October, 2024

Sections: 22, 23

Annual value of vacant flats held as stock-in-trade is not chargeable as `Income from House Property’.

FACTS

The assessee, engaged in the business of development of housing complexes, industrial parks and running five star hotels at Kodaikanal, e-filed the return of income for A.Y. 2017-18, declaring total income to be a loss of ₹1,22,20,66,420/-. While assessing the total income of the assessee under section 143(3) of the Act, the Assessing Officer (AO) inter alia taxed deemed annual letting value of finished property held in stock.

Aggrieved, the assessee filed an appeal before learned CIT(A), who partly allowed the assessee’s appeal by reducing the estimated annual value to 2.5 per cent as against 8.5 per cent determined by the AO in the assessment order.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal, at the outset, observed that the main point for consideration is as to whether the flats held by the assessee as stock-in-trade, be treated as income from house property. The Tribunal noted that the issue is no more res integra and that in this connection the observations made by the Bombay High Court in the case of PCIT, Central 1 vs. Classique Associates Ltd (order dated 28^th January, 2019) are important. The Tribunal considered the observations of the court in paragraphs 3 to 5 of the order of the Bombay High Court. The Bombay High Court has, in its decision, considered the ratio of the decision of the Gujarat High Court in the case of CIT vs. Neha Builders (296 ITR 661) and of the Apex Court in Chennai Properties and Investments Ltd. vs. CIT (377 ITR 673). The Tribunal having reproduced the observations of the Bombay High Court found it futile to reproduce the observations of the Gujarat High Court and the Supreme Court. It also observed that the co-ordinate bench in the assessee’s own case by common order dated 1^st July, 2021 passed in ITA NO. 1973/MUM/2019 and 1974/MUM/2019 for A.Y. 2014-15 and 2015-16 respectively.

BCAJ Admin

The allotment letter issued by developer is to be construed as an ‘agreement’ for the purpose of section 56(2)(vii)(b). Consequently, benefit of proviso to section 56(2)(vii)(b) will be available and valuation of the property as on the date of allotment letter will need to be considered and not the valuation as on the date of conveyance.

62 Tamojit Das vs. ITO

ITA No. 1200/Kol./2024

A.Y.: 2015-16

Date of Order: 3^rd October, 2024

Sections :56(2)(vii)(b)

The allotment letter issued by developer is to be construed as an ‘agreement’ for the purpose of section 56(2)(vii)(b). Consequently, benefit of proviso to section 56(2)(vii)(b) will be available and valuation of the property as on the date of allotment letter will need to be considered and not the valuation as on the date of conveyance.

FACTS

In the course of assessment proceedings, for AY 2015-16, the Assessing Officer (AO) noticed that the assessee has purchased a residential flat jointly with his wife Smt. Gargi Das through Deed of Conveyance, which was registered on 28^th October, 2014 before District Sub-Registrar-II, South 24-Parganas. The value of the said transaction was declared by the assessee at ₹24,05,715/- as against stamp duty valuation of ₹38,74,500/-.

When assessee was confronted with, then the assessee submitted that he has booked this flat with Greenfield City Project LLP and first payment was made on 08.06.2010. In support of his contention, he filed (i) copy of receipt from Greenfield City Project LLP, (ii) letter of allotment by Greenfield City Project LLP dated 10.06.2010 and (iii) copy of typical floor plan purported to be allotment of flat to the assessee.

The AO did not equate the allotment letter and payment of the installment by the assessee through account payee cheque as an agreement contemplated in proviso appended to sub-Clause (2) of section 56(1) of the Income-tax Act, 1961. He made the addition of the difference between the transaction value and the stamp duty value i.e. ₹14,68,785/- as a deemed gift within the meaning of section 56(2)(vii)(b)(ii) of the Act.

Aggrieved, the assessee filed an application under section 154 wherein he emphasised that the letter given by the developer demonstrating the booking of the flat amounts to an agreement. The AO rejected the application.

Aggrieved, the assessee preferred an appeal to the CIT(A) who dismissed the appeal filed by the assessee.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal observed that the dispute is whether the allotment letter by the developer is to be construed as an agreement or not. The Tribunal perused the copy of the allotment letter. It also noted that the payments of amounts starting from 1^st June, 2010 have been made through account payee cheques and that part payment has been made before issuance of the allotment letter.

The Tribunal held the interpretation by both the lower authorities to be incorrect. It held that the allotment letter is be equated to an agreement to sale. The agreement is not required to be a registered document. The only requirement in the law is that agreement should be followed by payments through banking channel, so that its veracity cannot be doubted. It observed that in the present case, the assessee has established the genuineness of the allotment letter by showing that payments were made through account payee cheques. Therefore, the valuation date for the purpose of any deemed gift is the date when first payment was made, in this case it happened around June, 2010. It held that the AO has erred in taking the valuation of the property as on 28^th October, 2014.

BCAJ Admin

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BCAJ Admin

Learning Events at BCAS

1. Webinar on Transforming Tax Practice with AI: A Practical Approach for Professionals on Automating Compliance, Litigations and Drafting held on Thursday, 19^th December, 2024 @ Virtual

The Technology Initiatives Committee of BCAS conducted this webinar and it was aimed at enlightening the participants on how to improve a CA Firm’s tax practice management techniques through the use of technology. It was a highly informative session that attracted participants from more than 65 different cities. Led by the speaker CA Vijay Srinivas Kothapalli, the webinar focused on how artificial intelligence (AI) is revolutionising the tax profession and practice. The session highlighted the growing role of AI in automating various aspects of tax compliance, litigation processes, and document drafting, offering practical strategies for professionals to leverage these advancements. As tax regulations become increasingly complex, the integration of AI into routine tasks is emerging as a game changer for efficiency and accuracy.

A significant portion of the webinar covered the automation of Income Tax (IT) and Goods and Services Tax (GST) notices using AI. This technology allows tax professionals to quickly generate responses, manage compliance deadlines, and process notices with greater precision. Additionally, AI-powered tools for Income Tax Return pre-scrutiny were discussed, which can help identify potential issues before submission, reducing errors and enhancing the quality of tax filings. The session also delved into documentation demonstrating how AI streamlines the preparation and filing process while ensuring adherence to legal requirements. Managing compliance calendars with AI tools was another key area covered, allowing professionals to stay on top of critical dates and avoid penalties.

Overall, the webinar provided tax professionals with practical insights on how to harness AI to streamline their work, reduce manual errors, and stay competitive in an increasingly digital landscape and received active participation from more than 330 participants.

2. Suburban Study Circle Meeting on “Navigating GST Reforms: Updates and Opportunities under the Amnesty Scheme on Thursday, 5^th December, 2024 at C/o Bathiya& Associates LLP, Andheri

The meeting brought together tax professionals and GST enthusiasts to deliberate on the recent GST reforms, including key changes introduced as part of the Amnesty Scheme and was led by Group Leader CA Akshay Sharma and chaired by CA Janak Vaghani.

The speaker provided detailed insights into recent GST Council recommendations, including procedural simplifications, rate revisions, and compliance relief measures under the Amnesty Scheme. The session Chairman provided valuable guidance and support to the session leader, offering relevant examples to enhance the discussion on the topic.

KEY AREAS COVERED INCLUDED:

Analysis of GST Reforms — A comprehensive overview of the latest changes and their practical implications for businesses.
Opportunities under the Amnesty Scheme — Strategies to leverage this scheme for pending returns, late fee waivers, and compliance restoration.
Challenges in Implementation — A discussion on resolving ambiguities and preparing for future reforms.

The meeting was well received and participants actively engaged in the Q&A session, seeking clarity on various provisions and discussing sector-specific challenges.

3. Lecture Meeting on Deciphering The Current State of Indian Capital Markets held on Wednesday, 4^th December, 2024@ Virtual.

The Bombay Chartered Accountant Society (BCS) organised a lecture meeting on 4^th December, 2024, marking the conclusion of its 75th anniversary celebrations. The session, titled “Deciphering the Current State of Indian Capital Markets,” was presented by Mr. Nilesh Shah, Group President and Managing Director of Kotak Mahindra Asset Management Company.

During the insightful discussion, Mr. Shah delved into significant trends shaping global and Indian capital markets. He highlighted challenges such as rising debt levels in major economies, uneven economic growth within India, and the critical role of domestic investors in sustaining market resilience amidst Foreign Portfolio Investor (FPI) movements.

KEY TAKEAWAYS INCLUDED:

Global Dynamics: The economic leverage seen in global powerhouses like the US and China, underscoring their implications for interest rates and global trade.
Indian Economy: Despite its robust growth trajectory, India faces challenges of uneven development and employment generation. Mr. Shah pointed out structural reforms and sectoral opportunities necessary for sustaining long-term growth.
Market Analysis: He offered an optimistic view on corporate earnings and advised moderation in return expectations for equity markets due to high valuations. He also shared insights into sectoral opportunities, emphasising private banking and telecom, while cautioning about sectors like capital goods and infrastructure.

The session concluded with a lively Q&A, where participants engaged on topics like asset allocation, sectoral outlooks, and strategies for navigating the current investment landscape. Mr. Shah’s data-driven insights, combined with his ability to weave economic trends with relatable analogies, made the session highly impactful.
The meeting was well appreciated by 200 plus participants.

YouTube Link:

QR Code:

4. The Non-Profit Organization (NPO) Conclave 2.0, 2024 held on Friday, 29^th November, 2024 at the Mayor’s Hall, All India Institute of Local Self Government, Andheri West

This event was organised by Finance, Corporate and Allied Laws Committee along with Internal Audit Committee of Bombay Chartered Accountants’ Society.

The details of the program are as follows:

The sessions focused on balancing regulatory compliance with continued growth and uninterrupted charitable work. Key takeaways included actionable steps to stay compliant with evolving regulations, safeguard resources, and ensure financial transparency in the NPO sector.

The program was well received and attended by 70+ participants

5. 7^th Long Duration Course on Goods and Services Tax held on 16^th August, 2024 to 29^th November, 2024 @ Virtual

The 7^th Long Duration Course on GST- 2024 was conducted by BCAS Virtually (Online mode) and was spread across 10 live sessions designed on a panel discussion format covering theoretical as well as practical aspects of GST.

The course covered 27 pre-recorded training videos of 90-120 minutes duration each conducted by the proficient faculty having immense expertise in the field of indirect taxation. The pre-recorded videos were made available in advance to the participants. Listening to pre-recorded videos helped the participants to have an interactive session by highlighting various issues in GST before the faculties. The live session covered the queries posted by the participants as well as drafted by the moderators. The presence of multiple faculties at the same time enabled sharing of thoughts and detailed deliberations. The course covered various concepts such as supply, valuation, ITC, place of supply, returns, registration, refunds and litigations etc.

The course received a very good response having 200 + participants enrolled from across the nation. The participants appreciated the program structure, course content and its’ execution.

6. Indirect Tax Law Study Circle — Blocked Credits under GST — clause (c) & (d) of section 17 (5) of CGST Act, 2017 held on Monday, 25^th November, 2024 @ Virtual

Group leader, CA Yash Shah prepared case studies covering various contentious issues around clauses (c) & (d) of Section 17(5) of the CGST Act, 2017, especially in light of the recent decision of the Hon’ble Supreme Court in the case of Safari Retreats Private Limited. The discussion was ably supported by insights from mentor-
CA Naresh Sheth

The presentation covered the following aspects for detailed discussion:

Availability of ITC on goods & services used for construction of hotels, cold storage facilities, theatres (single screen / multi-screen), auditorium, recreation parks, etc.
Availability of ITC on transfer fee paid to industrial corporations and lease owner in case of assignment of lease when the lease hold land is used for construction of a Mall / manufacturing facility for own use.
Availability of ITC on goods and services used for construction of a R&D department.
Interplay between section clause (c) & (d) of section 17 (5) and availability of ITC to the extent used for construction of premises to be leased out.
Is vivisecting a contract an option to seek exclusion from the scope of clauses (c) & (d)?

Around 75 participants from all over India benefitted and took an active part in the discussion. Participants appreciated the efforts of the group leader & group mentor.

7. Full Day Workshop on Recent Developments in GST held on Saturday, 23^rd November, 2024 @ BCAS.

The workshop was organized to cover various judicial & legislative developments in the field of GST.

CA Sunil Gabhawalla covered the legislative amendments and took the participants through the proposed amnesty u/s 128A, amendments relating to section 16 (5) of the CGST Act, 2017 and RCM related amendments from the perspective of time of supply.

CA DivyeshLapsiwalla covered the procedural amendments, such as the introduction of Invoice Management System, TDS on Metal Scrap, etc.

As the due date for filing of annual returns for FY 2023-24 is approaching, CA Chirag Mehta took the participants through the various issues revolving around the filing of annual returns and specific care to be taken in the same.

A panel comprising of CA S S Gupta & CA A R Krishnan moderated by CA Mandar Telang covered recent decisions (Safari Retreats, Mineral Area Development Authority, Creative Infocity, L&T IHI Construction, etc.) under the GST Law.

The participants appreciated the content of the workshop. The workshop was conducted in a hybrid mode with 50 participants attending physically and around 100+ participants attending virtually across India.

8. Finance, Corporate & Allied Laws Study Circle meeting on “All About Fast track merger” held on 18^th November, 2024@ Virtual.

Group Leader CA Ankit Davda gave an overall perspective of Fast Track Merger (including demerger).

He covered the applicable provisions under the Companies Act 2013 with the help of case studies. The learned speaker highlighted key elements of a Scheme of Arrangements, key provisions and procedures, broad timelines and critical points for consideration in respect of fast track merger. He touched upon other aspect which have an effect on such mergers in areas of Income tax, GST, Stamp duty, Transfer premium, Other charges and Change of control.

He satisfactorily responded to all the queries of the participants. In limited time, he dealt with all the aspects of Fast Track Merger in a lucid manner. The program was attended by 85+ participants.

YouTube Link:

QR code:

9. International Economics Study Group – Impact Analysis of Trump’s victory on Geo-economics & Geopolitics held on Monday, 18^th November, 2024 @ BCAS

The Participants deliberated following points:

A. Geopolitics:

Ukraine-Russia Conflict: Trump’s victory could result in a shift in the U.S. stance towards Ukraine.
Middle East Tensions: Trump may take a more aggressive approach against Iran and its proxies (Hamas, Hezbollah & Houthi).
Heightened tensions with China are expected.
Russia and NATO Expansion: Trump’s policies could challenge NATO’s expansion in Eastern Europe.
India and Neighbouring Challenges: India’s relationship with the U.S. could be impacted favorably over troubled neighbours like China, Pakistan and Bangladesh.

B. Geo-economics:

Trade War with China: The likelihood of a second trade war under Trump could result in higher tariffs on Chinese goods, worsening trade relations, and impacting global supply chains.
Immigration Restrictions: With a focus on reducing illegal immigration, there may be tighter border controls, potentially affecting labour markets and demographic dynamics in the U.S.
Tax Cuts and Healthcare: Trump’s tax policies may reduce taxes, but with concerns about rising deficits and the challenge of controlling government spending.
Economic Impact on India: Economic fallout from tariffs, restrictions on immigration, and shifts in U.S. economic policies could create uncertainties for India’s export-driven economy.

All the Participants, Co-Convener CA Harshad Shah put up their points for discussions.

BCAS in News – BCAS as one of the stakeholders have been quoted in various news for its views, the below is link of the news articles where the Society was quoted. Also, our various other events and alliances are released in press too. Our readers can view these articles through this QR code. and You can then just provide list of articles.

Link: https://bcasonline.org/bcas-in-news/

QR Code:

BCAJ Admin

SME IPOS: Regulatory Challenges and Proposed Reforms

BACKGROUND

Small and Medium Enterprises (SMEs) have long been considered the backbone of the global economy, driving innovation, creating jobs, and contributing significantly to economic growth. In India, SMEs are a critical segment of the business ecosystem, and over the past few years, many SMEs have turned to public markets to raise capital and expand their operations. The advent of the Small and Medium Enterprises (SME) Platform on stock exchanges, particularly the BSE SME Platform and the NSE SME Emerging Platform, has provided these companies with an opportunity to access a broader pool of investors, enhancing their growth prospects. However, as these companies increasingly tap into public investments, the risk of fraudulent activities and mismanagement has also grown, raising concerns over the integrity of the process. Additionally, that SME’s are promoter driven or family-run business with minimal private equity, which limits checks on promoter influence.

A striking example of this trend is the case of Trafiksol ITS Technologies Ltd., a company that specializes in providing intelligent transportation systems and automation solutions. Trafiksol filed its Draft Red Herring Prospectus (DRHP) for an Initial Public Offering (IPO) in May 2024, offering 64.10 lakh equity shares with the aim of raising funds for various purposes, including the purchase of software for its operations. However, soon after the subscription period, a complaint raised serious doubts about the company’s financial practices and the legitimacy of its business dealings, particularly its procurement of software from a vendor with questionable credentials. This led to a series of regulatory investigations and the subsequent halting of the company’s IPO listing.

The allegations against Trafiksol revealed the other side of the SME IPO market, where issues such as misleading prospectus disclosures, fraudulent vendor relationships, and concealment of material facts can lead to severe investor losses and erode trust in the market. As the investigation into Trafiksol unfolded, it became clear that the company had relied on a third-party vendor (TPV) with dubious financials, raising alarms about potential misuse of IPO proceeds and the company’s failure to conduct adequate due diligence.

This case serves as a stark reminder of the need for robust and urgent regulatory oversight in SME IPOs, as well as for greater transparency from companies seeking to raise public capital.

REGULATORY CONCERNS AND PROPOSED CHANGES TO THE SME IPO FRAMEWORK

The increasing participation of investors in Small and Medium Enterprises (SMEs) listed on stock exchanges, coupled with growing regulatory concerns, has prompted the Securities and Exchange Board of India (SEBI) to review and propose changes to the SME IPO framework. Investor participation in SME offerings has surged significantly, with the applicant-to-investor ratio rising from 4X in FY 2022 to 46X in FY 2023 and 245X in FY 2024. However, concerns have arisen about the governance practices of SME listed companies, many of which are promoter-driven and exhibit a high concentration of shareholding. There have been instances of fund diversion, revenue inflation, and circular transactions involving related parties, shell companies, and connected parties. SEBI has taken action against such companies in the past, but the issue of related party transactions (RPTs) remains a point of concern. SEBI has found that one in two SME listed entities have undertaken RPTs of over ₹10 crores, with one in seven involving more than 50 per cent of the company’s consolidated turnover. These risks underline the need for more stringent scrutiny of SMEs, with the ultimate goal of protecting investors’ interests.

To address these issues, SEBI has worked with stock exchanges, merchant bankers, and its Primary Market Advisory Committee (PMAC) to propose reforms aimed at strengthening both the regulatory framework for SME IPOs and the governance norms for these companies. These proposals focuses on the IPO process and migration from the SME platform to the Main Board, along with corporate governance norms and post-listing disclosures for SME-listed companies.

KEY PROPOSALS AND RATIONALES

Increase in Minimum Application Size: SEBI has proposed raising the minimum application size for SME IPOs from ₹1 lakh to ₹2 lakh, or even ₹4 lakh, to reduce the risk of investor losses in high-risk SME stocks. This change would attract more informed, risk-taking investors rather than smaller retail investors who may be less prepared to deal with the risks inherent in SME investments. This proposal also aims to enhance the credibility of the SME segment by limiting participation to those with more risk tolerance.
NII (Non-Institutional Investor) Allocation: To align SME IPOs with main-board IPOs, SEBI recommends that the NII category be split into two sub-categories: one for investments up to ₹10 lakh and another for amounts above ₹10 lakh. Additionally, it suggests moving from proportional allotment to a “draw of lots” method for the NII category, similar to the retail category. This aims to provide a more equitable distribution of shares in the case of oversubscription.
Increase in Minimum Allottees: Currently, SME IPOs require a minimum of 50 allottees to be considered successful. SEBI proposes increasing this threshold to 200 to ensure broader investor participation and enhance the stability of the listing, which would help build investor confidence.
Phased Lock-In for Promoters: The lock-in period for promoters’ holdings in excess of the minimum promoter contribution (MPC) is proposed to be phased, with 50 per cent remaining locked in for two years after the IPO and the remaining 50 per cent for one year. This gradual release is intended to prevent rapid exit by promoters after listing, ensuring they have a long-term interest in the company’s performance. SEBI also suggests extending the lock-in period to 5 years for the minimum promoter contribution for SME IPOs.
Restriction on Offer for Sale: It is suggested to put restriction on OFS part of SME IPO to 20 per cent of issue size as OFS proceeds are not forming capital of issuer and they may limit for OFS in issue size as well as threshold may be prescribed for selling shareholders also which shall not exceed more than 20 per cent of their pre-issue shareholding on fully-diluted basis.
Monitoring of Issue Proceeds: Mandatory Appointment of monitoring agency shall be applicable for issuer company if fresh issue size is higher than 20 Crore or for specified objects. They will certify on utilisation of proceeds and will ensure funds are used for the purposes disclosed in the offer document, thus reducing the risk of misuse or diversion. This will also bring more transparency for investors and accountability for issuer.
Increased Tenure of Promoter Lock-In: Since, SME companies are mostly promoter driven, it is necessary to ensure that promoter continues to have certain skin in the game until the company is on the SME Exchange. It is proposed that lock-in on minimum promoter contribution (MPC) in SME IPO shall be increased to 5 years. Additionally, lock-in on promoters’ holding held in excess of MPC shall be released in phased manner i.e. lock-in for 50 per cent holding in excess of MPC shall be released after 1 year and lock-in for remaining 50 per cent promoters’ holding in excess of MPC shall be released after 2 year.
Eligibility for SME IPO: To improve the quality of companies listed on SME exchanges, SEBI proposes stricter eligibility criteria. For instance, companies should only be allowed to list if they have an operating profit of ₹3 crore in at least two of the last three financial years. Additionally, the promoter group of the issuing company should not have been involved in any fraudulent activities, like being debarred from the capital markets or being labelled as wilful defaulters or fugitive economic offenders.
Disclosure of Firm Arrangement for Financing: In cases where a project is partially funded by a bank or financial institution, SEBI suggests requiring issuers to disclose the details of the sanction letters and appraisals in the offer document. This will provide additional transparency and safeguard investor interests by ensuring the financial feasibility of projects.
Public Availability of Offer Documents for Comment: Unlike main-board IPOs, which require a 21-day public comment period for the Draft Red Herring Prospectus (DRHP), SME IPOs currently lack such a provision. SEBI now proposes to extend this requirement to SME IPOs, ensuring that investors have ample opportunity to review and comment on the offer documents before they are filed with stock exchanges. This increase in transparency would allow for a more informed investor base and help identify potential issues early on.
Convertible Securities: Similar to main-board IPOs, SEBI recommends that SME companies convert all outstanding convertible securities into equity before filing for an IPO. This would offer investors a clearer picture of the company’s capital structure.
Applicability of RPT norms to SME: Applying RPT norms under LODR Regulations to SME listed entities would contain the risks of siphoning of funds through related parties. In view of the above, it is proposed that the applicability of RPT norms under LODR Regulations should be extended to SME listed entities other than those which have paid up capital not exceeding ₹10 crores and net worth not exceeding ₹25 crores. This will harmonize the applicability of RPT norms between SME listed entities and Main Board listed entities. However, materiality threshold under Regulation 23(1) of LODR Regulations for approval by shareholders for RPT shall be only for transactions exceeding 10 per cent of annual consolidated turnover, and not lower of ₹1,000 crore or 10 per cent annual consolidated turnover since SMEs may not enter into high value transactions exceeding ₹1,000 crores.
Merchant Banker Due-Diligence Certification: SEBI proposes that Merchant Bankers must submit a due-diligence certificate to stock exchanges at the time of filing the draft offer document, aligning this requirement with the practices for main-board IPOs. This will help ensure that proper due diligence is conducted before the offering, providing more protection for investors.
Post-Listing Exit Opportunity for Dissenting Shareholders: SEBI suggests introducing provisions for post-listing exit opportunities for dissenting shareholders in case there are changes in the objects or terms outlined in the offer document. This will ensure that investors are not unfairly impacted by such changes after the IPO.
Clarification on Price Adjustments for Corporate Actions: SEBI has noted cases where issuers conduct corporate actions like bonuses or stock splits shortly before an IPO, resulting in a mismatch between the actual value of shares and the issue price. To address this, SEBI proposes that the price per share for determining eligibility for minimum promoters’ contribution should be adjusted for such corporate actions, ensuring consistency and fairness in the IPO process.

Out of the proposed changes, SEBI in its 208th board meeting conducted on 18^th December, 2024 reviewed SME framework under SEBI (ICDR) Regulations, 2018, and applicability of corporate governance provisions under SEBI (LODR) Regulations, 2015 on SME companies approved the following amendments to SEBI (ICDR) Regulations, 2018 and SEBI (LODR) Regulations, 2015:-

An issuer shall make an IPO, only if the issuer has an operating profit (earnings before interest, depreciation and tax) of ₹1 crore from operations for any 2 out of 3 previous financial years at the time of filing of its draft red herring prospectus (DRHP).
Offer for sale (OFS) by selling shareholders in SME IPO shall not exceed 20 per cent of the total issue size and selling shareholders cannot sell more than 50 per cent of their holding.
Lock-in on promoters’ holding held in excess of minimum promoter contribution (MPC) to be released in phased manner i.e. lock-in for 50 per cent promoters’ holding in excess of MPC shall be released after 1 year and lock-in for remaining 50 per cent promoters’ holding in excess of MPC shall be released after 2 years.
Allocation methodology for non-institutional investors (“NIIs”) in SME IPOs to be aligned with methodology used for NIIs in main board IPOs.
Amount for General Corporate Purpose (GCP) in SME IPO shall be capped to 15 per cent of amount being raised by the issuer or ₹10 crores, whichever is lower.
SME issues shall not be permitted, where objects of the issue consist of Repayment of Loan from Promoter, Promoter Group or any related party, from the issue proceeds, whether directly or indirectly.
DRHP of SME IPO filed with the Stock Exchanges to be made available for 21 days for public to provide comments on DRHP, by making public announcement in newspaper with QR code.
Further issue by SME Companies to be permitted without migration to Main Board subject to the issuer undertaking compliance of the provisions of SEBI (LODR) Regulations, 2015 as applicable to the companies listed on the Main Board.
Related party transaction (RPT) norms, as applicable to listed entities on Main Board, to be extended to SME listed entities, provided that the threshold for considering RPTs as material shall be 10 per cent of annual consolidated turnover or ₹50 crore, whichever is lower.

While the SME IPO market plays a crucial role in enabling small and medium enterprises to access capital and expand their operations, recent incidents have exposed the vulnerabilities within this space. The concerns regarding transparency, corporate governance, and the potential misuse of IPO proceeds highlight the need for stronger oversight and regulatory reforms. The proposed regulatory changes by SEBI aim to enhance investor protection, bolster corporate governance practices, and improve market transparency. By focusing on tightening eligibility criteria, implementing phased lock-in regulations, and conducting more stringent scrutiny of promoters, SEBI seeks to create a more secure and reliable environment for SMEs to raise funds, while protecting retail investors from unnecessary risks.

For SMEs to truly reach their full potential, it is essential that companies maintain the highest standards of accountability and governance. By fostering a transparent, investor-friendly ecosystem, we can ensure that legitimate, growth-driven businesses thrive without the threat of exploitation or fraud. This will not only safeguard investor interests but also cultivate a sustainable, long-term investment landscape that supports the ongoing growth and success of SMEs in India.

BCAJ Admin

Regulatory Referencer

I. DIRECT TAX : SPOTLIGHT

1. Extension of due date for furnishing return of income in the case of an assessee who is required to furnish a report referred to in section 92E for the A Y 2024-25 from 30^th November, 2024 to 15^th December, 2024 – Circular No. 18/2024 dated 30^th November, 2024

2. Guidance Note 2/2024 on provisions of the Direct Tax Vivad se Vishwas Scheme, 2024 – Circular No. 19/2024 dated 16^th December, 2024

3. Safe Harbour Rules prescribed for a foreign company engaged in diamond mining and selling of raw diamonds and insertion of Form 3CEFC- Income-tax (Tenth Amendment) Rules, 2024- Notification No. 124/ 2024 dated 29^th November, 2024

II. FEMA READY RECKONER

Central Govt. notifies pension fund schemes as ‘financial products’ under IFSCA Act, 2019:

The International Financial Services Centres Authority has notified the ‘schemes operated by a pension fund’ as a ‘financial product’ for the purposes of the International Financial Services Centres Authority Act, 2019. This has been made effective from the date of publication of the notification.

{NOTIFICATION NO. S.O. 5241(E)[F. NO. 3/15/2022-EM-PART (1)], dated 5^th December, 2024}

IFSCA renews recognition of ‘India International Bullion Exchange’ as Bullion Exchange & Clearing Corp till 8^th December, 2025:

The IFSCA has renewed the recognition of India International Bullion Exchange IFSC Limited, Gujarat, as Bullion Exchange and Bullion Clearing Corporation for one year, commencing on the 9^th day of December 2024 and ending on 8^th day of December 2025 in respect of bullion contracts.

[NOTIFICATION NO. IFSCA-PMTS/9/2023-PRECIOUS METALS, dated 5^th December, 2024]

BCAJ Admin

Recent Developments in GST

A. NOTIFICATIONS

i) Notification No.26/2024-Central Tax dated 18^th November, 2024

By above notification, extension of time is granted for furnishing of return in Form GSTR 3B for tax payers registered in State of Maharashtra and Jharkhand. The extension was up to 21^st November, 2024 for above returns.

ii) Notification No.27/2024-Central Tax dated 25^th November, 2024

Above notification seeks to amend Notification No. 02/2017-Central Tax, dated the 19^th June, 2017. This notification is regarding powers of Central Tax Authorities and the Table in original notification is substituted.

iii) Notification No.28/2024-Central Tax dated 27^th November, 2024

Above notification seeks to appoint common adjudicating authority for Show-cause notices issued by DGGI.

iv) Notification No.29/2024-Central Tax dated 27^th November, 2024

By above notification due date for furnishing Form GSTR-3B for the month of October, 2024 for registered persons whose principal place of business is in the State of Manipur, was extended till 30^th November, 2024.

v) Notification No.30/2024-Central Tax dated 10^th December, 2024

By above notification the due date for furnishing FORM GSTR-3B for the month of October, 2024 for registered persons whose principal place of business is in the district of Murshidabad in the state of West Bengal is extended up to 11^th December, 2024.

vi) Notification No.31/2024-Central Tax dated 13^th December, 2024

Above notification seeks to appoint common adjudicating authority for show cause notices issued by officers of DGGI.

B. CIRCULARS

Clarifications of amendment in circular – Circular no. 239/33/2024-GST dated 4^th December, 2024.

By above circular amendments are done in Circular No. 31/05/2018-GST dated 9^th February, 2018 which is about ‘Proper officer under sections 73 and 74 of CGST Act and under IGST Act.

C. ADVISORY

i) Vide GSTN dated 13^th November, 2024, information is given about Supplier View of Invoice Management System (IMS).

ii) Vide GSTN dated 12^th November, 2024, information regarding IMS during initial phase of its implementation, is given.

iii) Vide GSTN dated 8th November, 2024, information about Waiver Scheme under Section 128A, is given.

iv) Vide GSTN dated 16^th November, 2024, information relating to generation of GSTR-2B and IMS, is given.

v) Vide GSTN dated 26^th November, 2024, information regarding Reporting of TDS deducted by scrap dealers in October, 2024, is given.

vi) Vide GSTN dated 27^th November, 2024, information about Biometric based Aadhaar Authentication and Document Verification for GST Registration Applicants of Madhya Pradesh, is given.

vii) Vide GSTN dated 9^th December, 2024, information about difference in value of Table 8A and 8C of Annual Returns FY 2023-24, is given.

viii) Vide GSTN dated 4^th December, 2024, information regarding sequential filing of GSTR-7 returns as per Notification No.17/2024, is given.

D. ADVANCE RULINGS

Time of Supply vis-à-vis RCM

Deccan Cements Ltd. (AR Order No. RAJ/AAR/2024-25/08 dated 26^th June, 2024 (Raj)

The applicant is a Limited Company incorporated under the Companies Act, 1956 and is in the business of manufacturing and selling of cement in south India having corporate office in Hyderabad. The applicant is having its manufacturing plant in the State of Telangana.

To expand its business activities in manufacturing and trading in cement throughout India, the applicant intended to start manufacturing unit in the State of Rajasthan. For this purpose, the applicant participated in Tender process for E-Auction of mining lease floated by Rajasthan Government.

Applicant is selected as Preferred Bidder and as a Preferred bidder, applicant has to pay some upfront amount as first installment.

Thereafter, the applicant has to pay second installment as upfront amount. Thereafter, the applicant has to furnish performance security for total amount of auction amount.

The performance security amount is to be adjusted every five years as per auction rules. The applicant has then to pay balance amount, where after the Mining lease agreement is entered into with Government of Rajasthan.

With above background, the applicant has raised following questions before the ld. AAR.

“(i) Whether the applicant is liable to pay any GST on the Mining Lease payments (applicability of GST on the Royalty payment of Mining Lease to Government of Rajasthan under Reverse Charge Mechanism).

(ii) If the applicant is liable to pay GST on the above, what will be the applicable rate of GST.

(iii) If GST is applicable, whether the applicant is liable to pay GST on the payment of Upfront Payments as per the Tender Documents which are paid in installments much before issuing LOI and after issuing LOI but before entering in to the Lease Agreement.

(iv) If GST is applicable, whether the applicant can pay GST from the State of Telangana or to apply for registration in the State of Rajasthan and pay GST.

(v) Whether the GST paid is eligible to be claimed as Input Tax Credit or not.”

The applicant was of the view that the lease agreement is entered into only after making all payments and hence it is the time of supply and it becomes liable to RCM at such point of time. The ld. AAR referred to relevant provisions of Act.

Regarding question (1) and (2), the ld. AAR referred to entry at Sl.No.17 of Notification No.11/2017-Central Rate dated 28^th June, 2017 as amended from time to time and observed that Licensing services for the right to use minerals including its exploration and evaluation is covered under SAC 997337 and it is subject to levy of GST.

The ld. AAR also referred to Serial no. 5 of Notification No.13/2017-Central Rate dated 28^th June, 2017 and observed that the Applicant, being recipient of service, is liable to pay GST under RCM.

The ld. AAR also determined that the applicant is liable to pay GST @ 18 per cent (SCST 9 per cent & CSGT 9 per cent).

Regarding question three about the time of supply, the ld. AAR referred to definition of ‘consideration’ given in section 2(31) of CGST Act.

To determine the time of supply of services, the ld. AAR also referred to Section 13 (3) of the CGST Act, 2017 which stipulates that: –

“In case of supplies in respect of which tax is paid or liable to be paid on reverse charge basis, the time of supply shall be earlier of the following dates:

(a) The date of payment as entered in the books of account of the recipient or the date on which the payment debited in his bank account, whichever is earlier; or

(b) The date immediately following sixty days from the date of issue of invoice or any other document, by whatever name called, in lieu thereof by the supplier.

Provided that where it is not possible to determine the time of supply under clause (a) or clause (b), the time of supply shall be date of entry in the books of account of the recipient of supply.“

The ld. AAR observed that there is difference between advance payment and advance deposit amount. The ld. AAR observed that the advance payment is adjusted towards goods or services or both to be supplied, whereas advance deposit money is received only as security. The ld. AAR further observed that, generally security is not used by the supplier in the course of supply of goods or services but can be forfeited in case of violation of terms and conditions, as mentioned in tender document. The ld. AAR noted that in this case, as per point 13.1 of Tender Document, the upfront payment paid by the Successful Bidder will be adjusted in full at the earliest against the amount to be paid under sub-rule (3) of rule 8 of Auction Rules on commencement of production of mineral, which shows that advance payment made by the Applicant shall be adjusted towards future payments to be made by them.

The ld. AAR also noted that no where there is clause of refund of upfront payment in tender documents after allotment of mines on lease and therefore upfront payment made to the State Govt. is no more deposit but advance which shall be adjusted towards future payments of revenue share amount.

Accordingly, the ld. AAR held that the Applicant is liable to pay GST on the upfront payments made to the State Govt., under Reverse Charge Mechanism (RCM) in terms of Serial No.5 of Notification No. 13/2017-Central Rate Dated 28^th June, 2017.

Regarding fourth question, the ld. AAR, referred to section 24 of CGST Act and held that the RCM should be paid in Rajasthan by obtaining registration in said State.

For last question, the ld. AAR held that the recipient will be eligible to ITC subject to fulfillment of conditions of section 16 of CGST Act. The ld. AAR thus disposed of the application.

Government Entity and RCM on Legal Services

THDC India Ltd. (THDCIL) (AR No. 02/2024-25 in Application No.01/2024-25 dated 19^th June, 2024 (Uttarkhand)

The facts are that the Applicant i.e. THDCIL is a Public Sector enterprise and registered as a Public Limited Company under the Companies Act, 1956 and has been conferred ‘Mini Ratana-Category-I Status’ and upgraded to Schedule ‘A’ PSU by the Government of India.

The Equity of Company was earlier shared between Govt. of India and Govt. of Uttar Pradesh in the ratio of 75:25. However, pursuant to the strategic sale, the Share Purchase Agreement was executed between NTPC Limited and President of India on 25^th March, 2020, for acquisition of legal and beneficial ownership of equity held by the President of India in THDC India Limited and after strategic sale, Equity in THDC India Limited is shared between NTPC Limited and Government of UP in a ratio of 74.496 per cent and 25.504 per cent.

The applicant has to pay legal fees to Advocates including Senior Advocate or Firm of Advocate. Applicant expected exemption from payment of RCM on such legal fees under Entry 45 of the Notification No.12/2017- C.T. (Rate) dated 28^th June, 2017.

However, for purpose of legal guidance following questions were raised before the ld. AAR.

“1. Whether the Applicant i.e. the THDCIL is a Government Entity or not?

2. If yes, can Legal Services provided by the advocates including Senior Advocate or firm of Advocate is exempt from GST for THDCIL i.e. THDCIL does not need to pay tax under RCM?”

The ld. AAR held that since at present the equity or control of the Government is less than the stipulated 90 per cent, the applicant cannot be categorized and considered as “Governmental Entity” and cannot be eligible to exemption from payment of RCM.

The prime contention of the applicant was that since before transfer of shares to ONGC, shareholding was between Government of India and Government of UP; it remains Government Company even after change in ratio of shareholding. To support its plea the applicant relied on Uttarkhand AR in case of Application No.11/2018-19 – 2018-VIL-284-AAR.

The ld. AAR referred to Notification No. 31/2017-Central Tax (Rate), dated 13^th October, 2017, which amended the Notification No 11/2017 – Central Tax (Rate), dated 28th June, 2017 and defined the “Governmental Entity” as under:

““x. “Government Entity” means an authority or a board or any other body including a society, trust, corporation,

i) set up by an Act of Parliament or State Legislature; or

ii) established by any Government, with 90 per cent. or more participation by way of equity or control, to carry out a function entrusted by the Central Government, State Government, Union Territory or a local authority.””

The ld. AAR analysed the above definition and observed that, to be “Government Entity”, following conditions are to be met and fulfilled independently:

“- must be an authority or a board or any other body including a society, trust, corporation,

– established by any Government,

– with 90 per cent. or more participation by way of equity or control,

– to carry out a function entrusted by the Central Government, State Government, Union Territory or a local authority.”

The ld. AAR further observed that the applicant fulfills the first two conditions i.e. an authority or a board or any other body including a society, trust, corporation, and established by any Government. However, the ld. AAR held that the applicant falls short of fulfilling the third condition, which prescribes, “with 90 per cent. or more participation by way of equity or control,”. The ld. AAR observed that as on the date of filing of the application dated 1^st May, 2024 for the present proceedings, the Equity in the applicant company i.e. THDC India Limited is shared between NTPC Limited and Government of UP in a ratio of 74.496 per cent and 25.504 per cent, which is less than the stipulated 90 per cent of equity and therefore, the applicant is not a Government Entity. The ld. AAR observed that earlier status has changed due to change in shareholding ratio. The ld. AAR opinioned that the usage of the word “Government” in relation to any organisation / firm / entity / company, signify and indicate that the Government has a controlling stake (legal power) in the day to day affairs of such organisation / firm / entity / company. It further observed that where the equity holding of the Government is zero, there would not and cannot be any controlling stake (legal power) in the day to day affairs of such organisation / firm / entity / company and in such a case it cannot be said to be a Government Entity.

Classification – “Vanilla Mix”

VRB Consumer Products Pvt. Ltd. (AR No.RAJ/AAR/2024-25/16 dated 31^st July, 2024 (Raj)

The facts are that VRB Consumer Products Private Limited, applicant, intends to manufacture and supply dried softy ice cream mix (low fat) in vanilla flavour (“Vanilla Mix”) at its manufacturing unit (factory) located at Plot SP3-7, RIICO Industrial Area, Tehshil Kotputli, Keshwana, Jaipur, in Rajasthan.

The said product contains following ingredients:

The manufacturing process is explained as under:

“a. Procurement of raw materials — Firstly, raw materials such as milk solids, sugar, stabilizers, anti-caking agents etc. will be procured. Upon receipt thereof, applicant will undertake rigorous scrutiny and inspection of such raw materials. Thereafter, the raw materials which will meet the quality standards of applicant than these materials will be stored under appropriate conditions.

b. Mixing of ingredients— The raw materials sourced and stored above will be weighed, sieved and subsequently, mixed with each other in required proportion for the required time and speed in a mechanical mixer.

c. Quality check — The mixture obtained above will thereafter be subjected to sensory evaluation,
metal detection and moisture determination. Mixtures, which will pass the evaluation, shall be proceed ahead for packing.

d. Packing and dispatch– Mixtures, which will be received after a quality check, will undergo the primary packing and thereafter will be packed in cartons. The cartons will, subsequently, be stored in godown from where they will be dispatched after micro-testing.”

The applicant submitted question about correct classification of above product.

The applicant has submitted that Vanilla Mix is liable to be classified under Heading 0404 as mentioned at Sr. No. 10 of Schedule I to Rate Notification, attracting tax @ 2.5 per cent (CGTS, 2.5 per cent SGST).

Applicant interpreted that Heading 0404 seeks to cover within in its ambit, products which consist of natural milk constituents and therefore, so long as any product contains natural milk constituents, it shall be classified under Heading 0404.

The Department submitted to classify the product under heading 2106.

After discussion of submissions of both sides, the ld. AAR observed as under:

“7) In view of above discussion, we find that the product in question i.e. “Vanilla Mix”

– dried softy ice cream mix (low fat) in vanilla flavour comprise of several ingredients

and each ingredient play a vital role in the product. Since this product is intended to use for making of soft serve, each ingredient has a specific role to make the soft serve smooth and creamy in texture. Further, it is also conclusive that not only the contents of the product in question but the processing done in the soft serve machine also play a vital role in giving the smooth and creamy texture characteristic of soft serves.

8) In view of above, we find that the submissions made by the applicant are not enable and the product in question does not fall under the Heading 0404.

9) Further, we find that Chapter 21 of the First Schedule to the Tariff Act covers ‘Miscellaneous edible preparations’ which is clearly distinguishable from “products of animal origin”, the basic difference being the nature of products in question. While Chapter 4 covers products of animal origin which means that the products are normally natural or near to natural in their nature and not much processing has been done thereupon, on the other hand Chapter 21 covers prepared foodstuffs which means that those items of animal origin have been subjected to some processing which and the resultant product has acquired the nature of being prepared foodstuff etc.”

Accordingly, the ld. AAR held that the product i.e. “Vanilla Mix” — dried softy ice cream mix (low fat) in vanilla flavour is classifiable under Heading 2106 90 99 of the First Schedule to Tariff Act attracting tax at the rate of 9 per cent of CGST and 9 per cent of SGST.

E-commerce operator – Scope

Medpiper Technologies Pvt. Ltd. (AR Order No. KAR-ADRG-41/2024 dated 13^th November, 2024 (Kar)

The facts are as under:

“5.1 The applicant gets in contract with companies to provide diagnostic labs and wellness services to the employees of the company or any group of people that the company decides, through third-party labs and wellness providers. The contract can be between an insurance company and the applicant to provide the said services to a specific group of people. These employees or groups of people can select a specific date, time and a specific diagnostic and lab tests to be done from diagnostic lab and wellness providers from the list the applicant provides. The medium of interaction between these employees and group of people with the applicant and with diagnostic labs can be through a mobile app developed by the applicant or Whatsapp or e-mail or telephonic conversation. The diagnostic labs will be providing medical reports to these employees or group of people through the medium of their choice.”

Thus, the applicant acts as an aggregator for diagnostics and labs for companies, insurance companies and insurance brokers.

In above background following questions were put for determination before the ld. AAR.

“a. Whether the assesse need to collect GST on the diagnostic and lab services provided through third party diagnostic labs? If yes, Whether GST has to be collected for the whole invoice amount or on the margin on the supply alone and what will be the applicable tax rate and which SAC to be used?

b. Whether TCS needs to be collected?

c. Whether the assesse fall under the definition/meaning of an “Insurance Agent” if invoiced to an insurance company, If yes how is GST applicable? “

The applicant interpreted that, it is E-commerce Operator and not required to collect tax under GST.

It also interpreted that it provides health care services and hence exempted under Notification 12/2017-Centre Tax.

The ld. AAR referred to definitions of ‘E-Commerce’ and ‘E-Commerce Operator’ given in section 2(44) and 2(45) of CGST Act.

The ld. AAR held that as per definitions, the Electronic Commerce Operator (ECO) means any person who owns, operates or manages digital or electronic facility or platform for electronic commerce i.e. for the supply of goods or services or both, including digital products over digital or electronic network.

Noting the process of applicant, the ld. AAR observed that the service is not being provided by the labs to the recipients, through the App / Mobile platform, but through the applicant. The ld. AAR observed that the applicant merely provides the platform for the recipients so as to enable them to select the lab from whom the services are to be procured and once the selection is over, the labs, after the tests, provide the reports directly to the recipients. The invoices are raised by the labs on the applicant. The ld. AAR, therefore held that the applicant doesn’t qualify to be an e-commerce operator.

The ld. AAR also observed that the applicant is neither acting as an agent of the client company to whom the services are provided nor of the diagnostic labs / wellness providers from whom the services are procured, as the applicant is not carrying the business of supply of services on behalf of another party but on his own account.

The ld. AAR also held that the applicant, add mark up on the cost of the services procured from the diagnostic labs / wellness providers and raises invoices on their clients with the marked-up value and in such scenario, the applicant has to charge GST on the whole invoice amount, being the transaction value and not merely on the mark-up value, in terms of Section 15(1) of the CGST Act 2017.

The ld. AAR also examined the contention of applicant that its services are falling in health care services covered by SAC 9993. In this regard the ld. AAR referred to entry number 74 and also paras 2(zg) & 2(s) of the Notification 12/2017-Central Tax (Rate) dated 28^th June, 2017 and SAC 9993.

The ld. AAR held that, to avail the said exemption, the following two conditions have to be fulfilled.

“(i) The services being provided must be covered under health care services.

(ii) The service provider must qualify to be a clinical establishment.”

The ld. AAR held that the services being provided by the applicant are covered under healthcare services and held that the first condition is fulfilled.

However, the ld. AAR held that the applicant does not fulfill the second condition as the applicant does not qualify to be “a hospital, nursing home, clinic, sanatorium or any other institution by, whatever name called, that offers services or facilities requiring diagnosis or treatment or care for illness, injury, deformity, abnormality or pregnancy in any recognised system of medicines in India”. Holding so the ld. AAR held that since second condition is not fulfilled, the applicant is not entitled to avail the aforesaid exemption and the applicant is liable to collect GST on the diagnostic and lab services provided through third party diagnostic labs to their clients.

The ld. AAR also held that since the applicant is not an E-Commerce Operator, it is not liable to TCS. The ld. AAR also negated the contention of the applicant as being an insurance agent, since the services provided by the applicant are not connected, not even remotely, with the sale of insurance policies and hence, the applicant does not fall under the definition / meaning of the “Insurance Agent”. The ld. AAR held that the applicant has to raise invoice at par with the other companies.

Accordingly, the ld. AAR held that applicant is liable to discharge GST @ 18 per cent under SAC 9993 without any liability for TCS

BCAJ Admin

Goods And Services Tax

I SUPREME COURT

77 2024-TIOL-121-SC-CX — M/s. Bharti Airtel Ltd. Vs. The Commissionerof Central Excise, Pune
Dated: 20^thNovember, 2024

Hon. Supreme Court resolves conflicting interpretation on applicability of CENVAT credit on telecom towers.

FACTS

Appellant operates as a Mobile Service Provider (MSP) by supplying Sim cards to provide wireless telecom services. They usually own and operate infrastructure such as cell towers, Base Transceiver System (BTS) along with accompanying network equipment and structures like PFBs electricity generating sets, battery backup and stabilizers. A separate set of assessees offer passive infrastructure services including towers and incidental equipment to telecom companies at completely various sites. Telecom towers and shelters were fabricated offsite and supplied in a completely Knocked Down Condition (CKD) form and thereafter fastened to civil foundation for operational stability.

CENVAT credit availed on mobile towers as well as Pre-Fabricated Buildings (PFBs) was the centre point of dispute since the Bombay High Court in Bharti Airtel (earlier Bharti Televentures Limited vs. Commissioner of Central Excise, Pune) 2014-TIOL-1453-HC-MUM-ST had ruled against allowing CENVAT credit on the following grounds:

Mobile Towers, their parts and PFBs are not capital goods as they are neither mentioned in Rule 2(a)(A) nor are components, spares and accessories of goods falling under any of the Chapters or Headings of the first Schedule of the Central Excise Tariff Act, 1985 (Tariff Act) and as specified in Rule 2(a)(A).
Further, these items become part of immovable property once they are fastened and fixed to the earth.
Also, these items cannot be construed as ‘inputs’ as these items are immovable, non-marketable and non-excisable goods.

As against the above Delhi High Court in the Vodafone Mobile Services vs. CST Delhi 2019 (27) G.S.T.L. 481 (Del) decided that towers and other associated structures like PFBs are covered by the definition of capital goods and are also ‘inputs’ as defined under CENVAT Credit Rules and hence, MSPs are entitled to CENVAT credit on excise duty paid on installation of mobile towers and PFB.

The decision of both the High Courts were challenged by the aggrieved parties before the Supreme Court.

HELD

Upholding the judgment in the case of Vodafone (supra), Apex Court held as follows:

Mobile Towers and PFBs do not become immovable property by their mere attachment to the earth as it is not intended to be permanent. The attachment is done to only provide support and effective functioning to the antenna. They can be easily dismantled and moved to another place without any substantial damage. Hence they are ‘goods’ and would come within the definition of ‘input’ as defined in Rule 2(k)(ii) of CENVAT Credit Rules. Hence, the Hon. Supreme Court while referring to Gujarat High Court’s decision in Industrial Machinery Manufacturers Pvt. Ltd. vs. State of Gujarat, (1965) 16 STC 380 (Guj), held that towers and PFBs though are themselves not electrical equipment, they are essential for proper functioning of antenna and thus, they are essential for rendering output service of mobile telephony and are inputs.

Alternatively, mobile towers and PFBs can be considered as accessory to antenna as they are necessary to provide height and stability to the antenna for ensuring uninterrupted and seamless service to subscribers. Hence they can be construed as accessory to antenna and PFBs which are “capital goods” falling under Chapter 85 of the Schedule to Central Excise Tariff. Thus, they are also “capital goods”.

Accordingly, by ruling that the CENVAT credit of excise duties paid on mobile towers and PFBs is allowed, Hon. Apex Court ended a decade long dispute.

Note: Under GST law, section 17(c) and (d) of CGST Act restrict input tax credit on the construction of immovable property, except for plant and machinery. The definition of “plant and machinery” expressly excludes telecommunication towers. However, it requires to be noted that the said definition of “plant and machinery” is relevant only for section 17(5)(c) and (d). If any goods under question do not become immovable property, this definition of plant and machinery is not required to be referred to. The expression “plant and machinery” is also used in section 16(3), 18(6) and 29(5) of the CGST Act, 2017 without making any reference to immovable property. Hence, though telecom towers are excluded from plant and machinery, they are not implied as “immovable property”. In the scenario, it will be interesting to note that mere exclusion of telecom towers would not affect input tax credit in respect of goods and services not becoming immovable property.

II HIGH COURT

78 [2024] 169 taxmann.com 152 (Kerala) Rejimon Padickapparambil Alex vs. UOI
Dated: 26^th November, 2024

Where the assessee inadvertently claimed IGST credit as CGST and SGST credit in GSTR-3B, the mistake being only a procedural error, the order confirming the demand for recovery of such CGST and SGST credit is liable to be set aside. The Hon’ble Court praised the Central Tax Officer who passed favourable order in some other matter involving similar issue for rendering timely and effective justice and emphasised that an expeditious disposal of cases, especially those involving procedural aspects of taxation, is the need of the hour so as to ensure fairness and certainty in tax administration.

FACTS

During the assessment year for the inter-state inward supplies, on which IGST (Integrated Goods and Services Tax) was paid by the supplier, the appellant, instead of showing the IGST component in the eligible credit details in Form GSTR-3B, inadvertently showed the IGST component as nil. Further, the appellant added the bifurcated CGST and SGST components of IGST to the existing figures showing eligible CGST and SGST credit. This resulted in a mismatch between Form GSTR 2A and Form GSTR 3B maintained in relation to the assessee. It is undisputed that the aggregate amount shown as CGST and SGST in GSTR-3B was matching with IGST amount shown in GSTR-2A. The department raised demand towards CGST & SGST ITC treating the same as unavailable credit which was used for payment of output tax of CGST and SGST. The petitioner, relied upon an Order passed by Assistant Commissioner of Central Tax, East Division-6, Bengaluru in identical matter, allowing the credit to the assessee in that case.

HELD

The Hon’ble Court reproduced the favourable order relied upon by the petitioner and acclaimed the said officer for passing such a judicious order and rendering timely and effective justice in our country which is known for its huge backlog of cases. The Hon’ble Court stated that at a time when the justice dispensation system is looking for ways and means to reduce litigation generally (especially in the field of taxation where delays can affect the nation’s economy), orders such as the one extracted above come as a welcome breath of fresh air, and are to be duly appreciated and encouraged. The Hon’ble Court also emphasised that an expeditious disposal of cases, especially those involving procedural aspects of taxation, is the need of the hour so as to ensure fairness and certainty in tax administration. On merits, the Hon’ble Court held that the only mistake committed by the appellant was an inadvertent and technical one, where he had omitted to mention the IGST figures separately in Form GSTR 3A. Accordingly, the demand is liable to be set side. The Court further held that respondent State who may have lost its legitimate share of IGST, may represent before the GST Council and the GST Council shall issue necessary directions to resolve the issue by taking note of the declaration in this judgment.

79 [2024] 169 taxmann.com 24 (Delhi) Xiaomi Technology India (P.) Ltd vs. Additional Commissioner, CGST Delhi West Commissionerate
Dated: 29^th October, 2024

Mere allegation of mismatch between GSTR-1 and GSTR 3B cannot be the grounds of invoking Section 74.

FACTS

Petitioner was served with a notice intimating a huge difference between the GSTR 1 and GSTR 3B filed. The department had given many opportunities to the noticee to rebut the allegations, but the noticee had not submitted any documents. The department owing to a doubt of fraud/misstatement, invoked section 74.

HELD

Provisions of section 74 would not be attracted on a mere allegation of mismatch between GSTR-3B and GSTR-1 as said provision would itself be liable to be invoked only if it be alleged that a case of fraud, wilful misstatement or suppression of facts is made out.

80[2024] 169 taxmann.com 22 (Madras) Sri Kaleeswari Stores vs. Assistant Commissioner
Dated: 14^th October, 2024

Confirming demand higher than the demand proposed in the SCN for a particular issue would tantamount to travelling beyond the show cause notice which is in violation of Principle of Natural Justice.

FACTS

The petitioner filed its returns for the period 2019-20 and discharged appropriate taxes as self-assessment. An audit was conducted on the petitioner and a show-cause notice was issued proposing demand under the head / defect “GSTR 2A and GSTR 3B (ITC Discrepancies)”, alleging that there is an excess ITC to the extent of ₹97,010/- under the CGST and SGST Act respectively. However, while passing the impugned order of adjudication, the entire ITC claimed during the period was disallowed. There were three more issues in respect of which also the demand was confirmed by the same order.

HELD

As regards to the primary dispute viz. discrepancy between GSTR 2A and GSTR 3B which constitutes 90 per cent of the demand liability, the Hon’ble Court held that the impugned order traversed beyond SCN in violation of natural justice as party was denied opportunity to put forth its case. As regards the other three issues the Hon’ble Court observed that the order records a finding that reply filed by the petitioner was not supported by documentary evidence. In these circumstances, the Hon’ble Court remanded the matter back for adjudication with a direction to the petitioner to deposit tax in respect of the other three issues and file its objections within a period of 4 weeks.

81[2024] 169 taxmann.com 9 (Punjab & Haryana) J.S.B. Trading Co vs. State of Punjab
Dated: 4^th November, 2024

Once the proceedings are dropped after a valid conclusion that no tax was payable, reinitiating the same proceedings are bad in law and the impugned order is to be set aside.

FACTS

A notice under section 61 of Punjab CGST/SGST Act, 2017 was issued to the petitioner for scrutiny of the return by the Proper Officer to explain the ITC claimed on certain purchases from four different firms, whose registration had already been cancelled. Therefore, the petitioner was directed to prove the genuineness of the claim regarding ITCs. The petitioner submitted its reply to the notice and was intimated, vide GST ASMT-12 that their reply was found satisfactory and no further action was required in the matter. However, an intimation under Rule 142(1)(A) in Form GST DRC-01A was issued to the petitioner stating that the reply to the notice in Form ASMT-10 was not satisfactory and raised the demand. Hence, this petition.

HELD

The Hon’ble Court observed that the same officer has expressed two different views; one dropping the proceedings under section 61(2) and the other intimating liability. The Court held that once the authority reaches the conclusion that no additional demand was payable, dropping the proceedings, the fresh proceeding after passing of such order, stands vitiated in law and therefore, same is liable to be set aside.

82 (2024) 23 Centax 161 (Del.) A.R. Enterprises vs. Additional Commissioner, Central Goods and Service Tax (Appeals)
Dated: 19^th September, 2024

Appellate Authority has the power to condone the delay beyond the permissible time limit of 30 days where delay was due to circumstances beyond the petitioner’s control.

FACTS

Petitioner, belatedly filed an appeal on 16th August, 2023 against order in original received on 27^th March, 2023 beyond the stipulated time and also permissible condonation limit. Petitioner attributed the delay to financial hardships as well critical medical condition of their Managing Director requiring bed rest as evidenced by a medical certificate. Appellate authority rejected to admit the appeal on the grounds that it lacked the authority to condone a delay beyond the 30-day period allowed under section 107(4) of the CGST Act, 2017 vide its order dated 8^th December, 2023. Being aggrieved by order refusing to allow the appeal by appellate authority, petitioner preferred this writ before this Hon’ble High Court.

HELD

The Hon’ble High Court after considering petitioner’s financial difficulties and Managing Director’s illness as valid and reasonable grounds for the delay. The High Court relied on the case of Central Industrial Security Forces, FGUTPP Unit vs. Commissioner of Central GST and Central Excise,[2018 (14) G.S.T.L. 198 (All.) dated 23^rd May, 2018] where it was held that delays caused by circumstances beyond the petitioner’s control should be considered for condonation in the interest of justice by ignoring the limitation aspect. Consequently, impugned order passed by respondent was set aside and remanded back for consideration on merits, by disregarding the limitation period, and after providing an opportunity for a hearing.

83(2024) 22 Centax 575 (A.P.) Apco Arasavalli Expressway Pvt. Ltd. vs. Assistant Commissioner, State Tax
Dated 19^th September, 2024

Time of supply for Annuity received for construction and maintenance of a national highway shall be taxable earlier of issuance of invoice or receipt of payments of annuity as per CBIC Circular No. 221/15/2024-GST Dated: 26^th June, 2024.

FACTS

Petitioner was engaged in the construction of roads and highways, and entered into a concession agreement with National Highway Authority of India on 18^th January, 2018 for construction and maintenance of National Highway No.16 on a Hybrid Annuity Mode (HAM) under design, build, operate, and transfer model. As per agreement, petitioner was to be paid consideration during the construction period and subsequently on an annuity basis for the concession period. While GST on the initial construction payments was settled, a dispute arose regarding the time of supply for GST on the annuity payments. Respondent passed an order stating that petitioner is liable to pay GST on all the annuity installments at the very inception of the concession period which was confirmed by appellate authority on further appeal. Hence, this writ petition. .

HELD

The Hon’ble High Court held that in case of HAM contract, the time of supply shall be as per clarification provided in CBIC Circular No. 221/15/2024-GST dated 26^th June, 2024. Accordingly, GST is payable on annuity at the time of invoice issuance or payment receipt, whichever is earlier where invoices are issued prior to completion of milestone as per the agreement and not when concession agreement was entered into. Consequently, the order was set aside, and respondent was directed to collect tax in accordance with the CBIC circular.

84(2024) 22 Centax 132 (Kar.) Bosch Automotive Electronics India Pvt. Ltd. vs. State of Karnataka
Dated 29^th July, 2024

ITC claim on GST paid under RCM cannot be denied without considering the clarification issued by CBIC Circular No. 211/5/2024-GST, supporting the timely availment of ITC.

FACTS

Petitioner paid GST under RCM after doing self-invoice on 31^st May, 2023 and availed ITC of IGST amounting to ₹3,92,52,317 in respect of manpower supply services received for the period July 2017 to March 2023. Impugned SCN was issued under section 73(1) alleging that the petitioner was ineligible to claim the ITC as there was a delay in taking the credit beyond the stipulated period as specified under section 16(4) of CGST Act, 2017 and the same should be reversed along with interest and penalty. However, petitioner pointed out that CBIC Circular No. 211/5/2024-GST dated 26^th June, 2024 was not considered while raising the demand of tax, interest and penalty. Being aggrieved by such impugned SCN, Petitioner filed a writ petition before Hon’ble High Court.

HELD

The Hon’ble High Court observed that Circular No. 211/5/2024-GST dated 26^th June, 2024 which supports the claim of petitioner is squarely applicable in the case at hand and hence, no demand can be made on account of belated claim of ITC. Moreover, it relied on the decision of Supreme Court in the case of K.P. Varghese vs. ITO [1981] 7 Taxman 13, AIR 1981 SC 1922 where it was held that CBIC circular is binding upon respondent. Since SCN was issued prior to the release of the aforementioned circular, the Court directed the respondent to consider the objections raised by the petitioner and pass a reasoned order in light of the aforesaid circular. Accordingly, the petition was disposed-off.

85(2024) 23 Centax 76 (Uttarakhand) New Jai Hind Transport Service vs. Union of India
Dated: 27^th September, 2024

Value of free fuel provided by service recipient shall not be treated as consideration for providing GTA service and would be included in value of service for charging GST.

FACTS

Petitioner was engaged in business of providing GTA Services. It had entered into a contract where it was agreed between the parties that service recipient will provide free diesel in order to enable petitioner to provide GTA service. However, in order to seek clarification as to whether value of free diesel provided by service recipient would be included in the value of GTA service for the levy of GST, petitioner filed an application for Advance Ruling. However, both AAR and AAAR ruled against the petitioner. Hence, the writ petition.

HELD

The Hon’ble High Court by placing reliance on the decisions of Supreme Court in Commissioner of Service Tax vs. Bhayana Builders Private Limited [2018 (10) G.S.T.L. 118 (S.C.)] and Jayhind Projects Ltd. vs. Commissioner of Service Tax, Ahmedabad [(2023) 13 Centax 32 (S.C.)] where it was held that cost of free diesel provided by service recipient cannot be added to the value of GTA service for the purpose of levying GST as well as providing free diesel cannot be constituted as consideration for rendering GTA service. Accordingly, the petition was disposed of in petitioner’s favour.

86(2024) 22 Centax 576 (All.) — Allahabad High Court Arpit Agarwal vs. State of U.P.
Dated 18^th September, 2024.

Proceedings cannot be initiated in the name of partnership firm once it ceases to exist.

FACTS

Petitioner was a partner in a partnership firm consisting of two partners (Arpit Agarwal & Arvind Jain). During the COVID-19 period, Arvind Jain passed away, resulting in dissolution of the partnership firm. The said fact was informed to GST authorities during search operations. However, respondent issued a Show Cause Cum Demand Notice thrice on 16^th December, 2023, 19^th December, 2023, and 23^rd April, 2024. Vide an Order dated 28^th April, 2024, tax was confirmed from the partnership which was already dissolved. Being aggrieved by issuance of SCN and subsequently the order confirming tax demand, petitioner filed this writ petition.

HELD

The Hon’ble High Court after perusing section 94 of CGST Act, 2017 observed that once the firm is dissolved, the proceedings with respect to taxes and assessment should be carried out against the partners as well as legal heirs of the partners to the extent of his share. Accordingly, the Court set aside the order in the name of non-existent firm as
the same is nullity in the eyes of law. However, the Court has granted liberty to the respondent to proceed against the petitioner and other legal heirs of deceased partner.

87(2024) 22 Centax 220 (Guj.) Ketan Stores vs. State of Gujarat
Dated: 9^th August, 2024

Recovery proceedings and provisional attachment cannot be initiated solely on the basis of Summary Order in Form DRC-07 where order itself was non-existent.

FACTS

Petitioner received a summary of order in Form GST DRC-07 dated 13^th August, 2019 confirming demand of ₹94,71,738/- based on mismatch between GSTR 3B and GSTR 2A for the period from April 2018 to September 2018 with reference to an order dated 14^th June, 2019. Petitioner stated that there was no such order dated 14^th June, 2019, which formed the basis for the summary of order issued in Form GST DRC-07. However, respondent initiated recovery proceedings based on such summary order in Form DRC-07 and provisionally attached the bank accounts of petitioner. Being aggrieved, petitioner filed this writ petition.

HELD

The Hon’ble High Court observed that summary of order dated 13^th August, 2019 in Form GST DRC-07 is only for the purpose of quantification of demand and has no value in the eye of law where there was no order itself in existence. Accordingly, High Court quashed summary order dated 13^th August, 2019 and the consequent actions for recovery, as well as directed the respondents to lift the attachment of the bank accounts of the petitioner immediately.

BCAJ Admin

Miscellanea

1. TECHNOLOGY AND AI

#World-first’ AI camera targets drink-drivers

Motorists under the influence of alcohol or drugs could be caught by a pioneering AI camera which is being tested for the first time in Devon and Cornwall. The state-of-the-art Heads-Up machine can detect road use and behaviour consistent with drivers who may be impaired by drink or drugs.

Police further up the road can stop the vehicle, talk to the driver and do a roadside test for alcohol and illegal drugs. Geoff Collins, UK general manager of camera developer Acusensus, said: “We are delighted to be conducting the world’s first trials of this technology right here in Devon and Cornwall.”

The camera can be moved quickly to any road in either county, without warning, with drivers unaware they have been spotted until police pull them over. “We are all safer if we can detect impairment before it causes an incident that could ruin lives,” said Mr. Collins.

Acusensus cameras have previously been used to help police catch drivers using mobile phones at the wheel or not wearing seat belts. With drink-drivers six times more likely to be involved in a fatal crash, Devon & Cornwall Police are hoping the Heads-Up system will help to save lives.

“Our officers cannot be everywhere,” said Supt Simon Jenkinson, whose team polices the 14,000 miles of roads in the two counties. As members of the Vision Zero South West road safety partnership, we’re committed to doing everything we can to reduce the number of
people killed and seriously injured on our roads. Embracing emerging technology such as these cameras is vital in that quest. The trial is taking place throughout December to coincide with other drink-driving campaigns.

(Source: bbc.com dated 14^th December, 2024)

#THE 12 GREATEST DANGERS OF AI

In his new book Taming Silicon Valley, the AI expert Gary Marcus shared what he sees as the greatest dangers of AI and gave a list of 12 immediate dangers of AI in Silicon Valley.

1. Deliberate, automated, mass-produced political disinformation.

“Generative AI systems are the machine guns (or nukes) of disinformation, making disinformation faster, cheaper, and more pitch perfect,” says Marcus. “During the 2016 election campaign, Russia was spending $1.25 million per month on human-powered troll farms that created fake content, much of it aimed at creating dissension and causing conflict in the United States.”

2. Market manipulation.

He argues, “Bad actors won’t just try to influence elections; they will also try to influence markets. I warned Congress of this possibility on 18th May, 2023; four days later, it would become a reality: a fake image of the Pentagon, allegedly having exploded, spread virally across the internet,” which made the stock market briefly buckle.

3. Accidental misinformation.

“Even when there is no intention to deceive, LLMs can spontaneously generate (accidental) misinformation. One huge area of concern is medical advice. A study from Stanford’s Human-Centered AI Institute showed that LLM responses to medical questions were highly variable, often inaccurate,” notes Marcus.

4. Defamation.

“A special case of misinformation is misinformation that hurts people’s reputations, whether accidentally or on purpose,” notes Marcus. “In one particularly egregious case, ChatGPT alleged that a law professor had been involved in a sexual harassment case while on a field trip in Alaska with a student, pointing to an article allegedly documenting this in The Washington Post. But none of it checked out.”

5. Nonconsensual deepfakes.

Marcus explains that “Deepfakes are getting more and more realistic, and their use is increasing. In October 2023 (if not earlier) some high school students started using AI to make nonconsensual fake nudes of their classmates.”

6. Accelerating crime.

Marcus argues that Generative AI is already being used for impersonation scams and spear-phishing. “The biggest impersonation scam so far seems to revolve around voice-cloning. Scammers will, for example, clone a child’s voice and make a phone call with the cloned voice, alleging that the child has been kidnapped; the parents are asked to wire money, for example, in the form of bitcoin.”

7. Cybersecurity and bioweapons.

“Generative AI can be used to hack websites to discover ‘zero-day’ vulnerabilities (which are unknown to the developers) in software and phones, by automatically scanning millions of lines of code—something heretofore done only by expert humans,” explains Marcus.

8. Bias and discrimination.

“Bias has been a problem with AI for years. In one early case, documented in 2013 by Latanya Sweeney, African American names induced very different ad results from Google than other names did, such as advertisements for researching criminal records.”

9. Privacy and data leaks.

Marcus points to Shoshana Zuboff’s book The Age of Surveillance Capitalism, where she argued that companies are spying on all of us and that surveillance capitalism “claims human experience as free raw material for translation into behavioral data [that] are declared as proprietary behavioral surplus, fed into [AI], and fabricated into prediction products that anticipate what you will do now, soon, and later.” Marcus adds: “and then sold to whoever wants to manipulate you.”

10. Intellectual property taken without consent.

A lot of what AI will “regurgitate is copyrighted material, used without the consent of creators like artists and writers and actors,” notes Marcus. “The whole thing has been called the Great Data Heist — a land grab for intellectual property that will (unless stopped by government intervention or citizen action) lead to a huge transfer of wealth — from almost all of us — to a tiny number of companies.”

11. Overreliance on unreliable systems.

Marcus explains: “In safety-critical applications, giving LLMs full sway over the world is a huge mistake waiting to happen, particularly given all the issues of hallucination, inconsistent reasoning, and unreliability we have seen. Imagine, for example, a driverless car system using an LLM and hallucinating the location of another car. Or an automated weapon system hallucinating enemy positions. Or worse, LLMs launching nukes.”

12. Environmental costs.

The training of LLMs requires enormous amounts of energy, which has implications for the environment. “Generating a single image takes roughly as much energy as charging a phone. Because Generative AI is likely to be used billions of times a day, it adds up,” explains Marcus. Additionally, he notes that the trend among AI companies is to train bigger and bigger models, which requires astronomical amounts of energy.

(Source: Forbes.com dated 9^th November, 2024)

2 HEALTH

#Elon Musk’s Neuralink announces study to connect brain implant to robotic arm

Elon Musk’s brain-computer interface implant startup Neuralink announced on X that it received approval to launch a new feasibility study, CONVOY, which will test the use of its wireless brain-computer interface (BCI), or N1 implant, to control an investigational assistive robotic arm.

“This is an important first step towards restoring not only digital freedom, but also physical freedom. More info to come, but the CONVOY study will enable cross-enrolling participants from the ongoing PRIME study,” Neuralink said in a post.

Neuralink’s PRIME study (short for Precise Robotically Implanted Brain-Computer Interface) involves the placement of a small, cosmetically invisible implant in the area of a person’s brain that plans movements. The N1 implant is designed to interpret one’s neural activity to assist them in operating a computer or smartphone by simply intending to move.

The ongoing medical device clinical trial is designed to provide individuals with quadriplegia the ability to use digital devices with their thoughts, and the company is continuing to seek individuals to participate in the study.

Neurolink’s BCI device was first implanted into 29-year-old quadriplegic Noland Arbaugh in February, resulting in Arbaugh having the ability to play chess and video games hands-free.

In July, Elon Musk joined Neuralink to give a live update on patients implanted with the Telepathy device. “Let’s say somebody has lost their arms or legs, we could actually attach an Optimus arm or Optimus legs to a Neuralink implant so that the motor commands from your brain that would go to our biological arms now go to your robot arms or robot legs, and you’d basically have cybernetic superpowers,” Musk said.

Optimus, also known as the Tesla Bot, is a general-purpose robotic humanoid that was initially announced by Musk in 2021, with a prototype shown in 2022. Musk showcased the robot’s progress at Tesla’s “We, Robot” event at Warner Bros. Studio last month in Los Angeles.

Neuralink recently announced it received approval from Health Canada to perform a clinical trial on its N1 brain implant and R1 robot, which is used to place the implant into the brain. The “Canadian Precise Robotically Implanted Brain-Computer Interface” (CAN-PRIME) study will be performed by the University Health Network (UHN) hospital at its Toronto Western Hospital.

Last month, the company received FDA breakthrough device designation for Blindsight, an implant that aims to restore vision in individuals who are blind. Blindsight implants a microelectrode array into the visual cortex of a person’s brain. The array then activates neurons, which then provide the individual with a visual image.

(Source: www.mobihealthnews.com dated 27^th November, 2024)

BCAJ Admin

Input- Output Ratio

A Chartered Accountant’s client wanted to sell his large immovable property. It was ancestral, and there were 3 to 4 co-owners. A client approached the CA and entrusted the assignment to him. The client said that he would also prefer to have a good lawyer in the picture.

The CA, as usual, was overly sincere and desired to save income tax for the client. He gave him several lawful advice. He broad-based the ownership structure so as to divide the capital gains. Internal gifts did not attract income tax. He also tried to save stamp duty. Different individual members of the family could claim different exemptions legitimately. The client was very happy.

The CA asked for some initial payment of fees. The client said — Sir, you are aware I have no money. That is why I am selling my property.

The CA met the purchaser many times. Meetings were held in the CA’s office, and the CA spent liberally on hospitality. Then, they approached the lawyer selected by the client. On three or four occasions meetings with the lawyer got postponed after waiting for more than one or two hours, as he was held up in a Court. After meeting the lawyer, the lawyer tried to understand the facts and delegated the work to his junior. The lawyer took advance fees, which the client instantly paid. He assured the CA that he would pay him later.

The lawyer’s office drafted the deed — standard format for all co-owners. It was mailed to the CA’s office. The CA took printouts of all agreements and corrected errors. He realised that despite his specific instructions, an appropriate clause of HUF was not added. So, he made corrections in the context of tax provisions, section 50-C, section 56, and so on. Virtually, he had to re-write the agreements from the tax perspective.

Purchasers insisted on the updation of ownership records in the society of plot owners. The CA followed up by doing all the paperwork.

The client received a good amount of advance from the buyer, but the CA advised him to make immediate investments to save tax. The client had ‘no money’ to pay fees to the CA.

Finally, the deal was over. The CA had saved a sizeable amount of tax for the client through proper tax planning and ensured that the deal would happen smoothly. He also guided him on advance tax, exemptions under sections 54, 54F, and 54EC by researching case laws.

However, when CA demanded his fees, he had to face a hard bargain and reduce his fees substantially, whereas, the lawyer was paid handsomely, not to mention a hefty two percent brokerage of the deal amount charged by the broker.

That is the input-output ratio!

BCAJ Admin

Letter To The Editor

The Editor,
BCAJ,
Mumbai

Dear Shri Mayurbhai,

Re: BCAJ Editorials

I always look forward to reading your Editorials first thing upon receiving my copy of the Journal.

I find the Editorials very well researched, meaningful, contemporary, relevant, and mature, and the language employed is very well-balanced.

I only hope the message reaches the policy / decision makers in New Delhi and the State Capitals and favourably impact their Policy Decisions.

Please keep up the good work you are doing.

Sincerely,

CA. Tarunkumar Singhal

BCAJ Admin

Property Owned By Hindu Females

INTRODUCTION

Is the property of a Hindu Female always her absolute property or does she have a limited rights in certain situations? Does not the Hindu Succession Act, 1956 (“the Act”) empower every Hindu female to own property?

It is interesting to note that these questions are not as completely settled as they appear and the issues have travelled all the way to the Supreme Court on numerous occasions and met with different responses! Thus, while it is quite easy to understand in theory that right to property is a vested right of a Hindu female under the Hindu Succession Act, it becomes quite difficult to understand its implications given the facts and circumstances of a particular case. The issue is thrown into sharper focus by the seeming dichotomy under sub-sections (1) and (2) of section 14 of the Hindu Succession Act, 1956, which deal with property of a Hindu female.

A recent two-Judge Supreme Court decision in the case of Tej Bhan (D) Through LR vs. Ram Kishan (D) through LRs, Civil Appeal No. 6557 of 2022, Order dated 9^th December, 2024 has realised this difference of opinions amongst various decisions of the Apex Court and has directed the Court Registry to place the order before the Hon’ble Chief Justice of India for constituting an appropriate larger bench for reconciling the principles laid down in various judgments of the Supreme Court and for restating the law on the interplay between sub-section (1) and (2) of Section 14 of the Hindu Succession Act.

SECTION 14 OF THE ACT

The Act governs the position of a Hindu intestate, i.e., one dying without making a valid Will. The Act applies to Hindus, Jains, Sikhs, Buddhists and to any person who is not a Muslim, Christian, Parsi or a Jew. The Act overrides all Hindu customs, traditions and usages and specifies the heirs entitled to such property and the order of preference among them.
S.14 which is the crux of the issue needs to be studied closely.

S.14(1) states that any property possessed by a female Hindu, whenever it may be acquired by her, shall be held by her as full owner thereof and not as a limited owner. Thus, the Act lays down in very clear terms that in respect of all property possessed by a Hindu female, she is the full and absolute owner and she does not have a limited / restricted right in the same. The explanation to this sub-section defined the term, “property” to include both movable and immovable property acquired by a female Hindu by inheritance or devise, or at a partition, or in lieu of maintenance or arrears of maintenance, or by gift (from any person, whether a relative or not, before, at or after her marriage), or by her own skill or exertion, or by purchase or by prescription, or in any other manner whatsoever. Thus, an extremely wide definition of property has been given under the Act. Property includes all types of property owned by a female Hindu although she may not be in actual, physical or constructive possession of that property — Mangal Singh & Ors vs. Shrimati Rattno, 1967 SCR (3) 454. The critical words used here are “possessed” and “acquired”. The word “possessed” has been used in its widest connotation and it may either be actual or constructive or in any form recognised by law. In the context in which it has been used in s.14(1) it means the state of owning or having in one’s hand or power – Gummalapura Taggina Matada Kotturuswami vs. Setra Veerayya and Ors. (1959) Supp. 1 S.C.R. 968.The use of the words ‘female Hindu’ is also very wide in scope and is not restricted only to a ‘wife’ — Vidya (Smt) vs. Nand Ram Alias Asoop Ram, (2001) 1 MLJ 120 SC.

In Dindyal & Anr. vs. Rajaram, (1971) 1 SCR 298, it was held that, before any property can be said to be “possessed” by a Hindu woman as provided in s.14(1), two things are necessary (a) she must have a right to the possession of that property and (b) she must have been in possession of that property either actually or constructively. However, this section cannot make legal what is illegal. Hence, if a female Hindu is in illegal possession of any property, then she cannot validate the same by taking shelter under this section.

S.14(2) of the Act carves out an exception to s.14(1) of the Act. It states that nothing contained in sub-section (1) of s.14 shall apply to any property acquired by way of gift or under a will or any other instrument or under a decree or order of a civil court or under an award where the terms of the gift, will or other instrument or the decree, order or award prescribe a restricted estate in such property. Thus, if a female Hindu acquires any property under any instrument and the terms of acquisition, as laid down by such instrument, itself provided for a restricted or a limited estate in the property then she would be treated as a limited owner only. In such an event, she cannot have recourse to s.14(1) and contend that she is an absolute owner.

Whether sub-section (1) or (2) of s. 14 apply to a particular case depends upon the facts of the case — Seth Badri Pershad vs. Smt. Kanso Devi, (1969) 2 SCC 586. In this decision, it was further held that sub-section (2) of Section 14 is more in the nature of a proviso or an exception to Sub-section (1). It can come into operation only if acquisition in any of the methods indicated therein is made for the first time without there being any pre-existing right in the female Hindu who is in possession of the property. It further approved of the observations of the Madras High Court Rangaswami Naicker vs. Chinnammal, AIR 1964 Mad 387 that s.14(2) made it clear that the object of s. 14 was only to remove the disability on women imposed by law and not to interfere with contracts, grants or decrees etc. by virtue of which a women’s right was restricted.

DECISIONS ON S.14

Several decisions of the Supreme Court have analysed s.14(1) and s.14(2) in depth. Some of the important (and conflicting) ones are discussed below.

R.B.S.S. MUNNALAL AND OTHERS VS. S.S. RAJKUMAR,AIR 1962 SC 1493

The Supreme Court held that by s.14(1) the legislature converted the interest of a Hindu female, which under the customary Hindu law would have been regarded as a limited interest, into an absolute interest and by the Explanation thereto gave to the expression “property” the widest connotation. The Court held that the Act conferred upon Hindu females full rights of inheritance, and swept away the traditional limitations on her powers of dispositions which were regarded under the Hindu law as inherent in her estate. She was under the Act regarded as a fresh stock of descent in respect of property possessed by her at the time of her death.

NIRMAL CHAND VS. VIDYAWANTI, (1969) 3 SCC 628

If a lady is entitled to a share in her husband’s properties then the suit properties must be held to have been allotted to her in accordance with s.14(1), i.e., as an absolute owner in spite of the fact that the deed in question mentioned that she would have only a life interest in the properties allotted to her share.

ERAMMA VS. VERRUPANNA, 1966 (2) SCR 626

The Supreme Court held that mere possession of property by a female does not automatically attract s. 14(1) of the Act.

MST. KARMI VS. AMRU, AIR 1971 SC 745

A person died leaving behind his wife. His son pre-deceased him. He gave a life interest through his Will to his Wife. It was held that the life estate given to a widow under the Will of her husband cannot become an absolute estate under the provisions of the Act. S.14(2) would apply to such a situation and it would not become an absolute estate. The female having succeeded to the properties on the basis of her husband’s Will she cannot claim any rights over and above what the Will conferred upon her. This is one of the important decisions which have gone against the tide of conferring absolute ownership on the Hindu female.

V. TULSAMMA VS. SESHA REDDI, (1977) 3 SCC 99

In this landmark case, the Supreme Court clarified the difference between sub-sections (1) and (2) of Section 14, thereby restricting the right of a testator to grant a limited life interest in a property to his wife. case involved a compromised decree arising out of a decree for maintenance obtained by the widow against her husband’s brother in a case of intestate succession. The compromise allotted properties to her as a limited owner. The Supreme Court held that this was a case where properties were allotted in lieu of maintenance and hence, s.14(1) was clearly applicable. Thus, the widow became the absolute owner of these properties.

The Court held that legislative intendment in enacting sub-section (2)was that this subsection should be applicable only to cases where the acquisition of property is made by a Hindu female for the first time without any pre-existing right. Where, however, property is acquired by a Hindu female at a partition or in lieu of her pre-existing right to maintenance, such acquisition would be pursuant to her pre-existing right not be within the scope and ambit of s.14(2) even if the instrument allotting the property prescribes a restricted state in the property. Sub-section (2) must, therefore, be read in the context of sub-section (1) so as to leave as large a scope for operation as possible to sub-section (1) and so read, it must be confined to cases where property is acquired by a female Hindu for the first time as a grant without any pre-existing right, under a gift, will, instrument, decree, order or award, the terms of which prescribe a restricted state in the property. It further held that a Hindu woman’s right to maintenance is a personal obligation so far as the husband is concerned, and it is his duty to maintain her even if he has no property. If the husband has property then the right of the widow to maintenance becomes an equitable charge on his property and any person who succeeds to the property carries with it the legal obligation to maintain the widow. Though the widow’s right to maintenance is not a right to property, it is undoubtedly a pre-existing right in the property, i.e. it is a jus ad rem not jus in rem and it can be enforced by the widow who can get a charge created for her maintenance on the property either by an agreement or by obtaining a decree from the civil court.

SMT. GULWANT KAUR VS. MOHINDER SINGH, AIR 1987 SC 2251 / GURDIP SINGH VS. AMAR SINGH, 1991 SCC (2) 8

The provisions of Section 14(1) of the Act were applied because it was a case where the Hindu female was put in possession of the property expressly in pursuance to and in recognition of the maintenance in her / where the wife acquired property by way of gift from her husband explicitly in lieu of maintenance. This decision was affirmed by a three-Judge bench in Jaswant Kaur vs. Major Harpal Singh, (1989) 3 SCC 572

THOTA SESHARATHAMMA VS. THOTAMANIKYAMMA, (1991) 4 SCC 312

The Apex Court dealt with a life estate granted to a Hindu woman by a Will as a limited owner and the grant was in recognition of pre-existing right. Thulasmma’s decision was followed and s.14(1) was held to apply. The Supreme Court also held that the contrary decision in the case of Mst. Karmi cannot be considered an authority since it was a rather short judgment without adverting to any provisions of Section 14(1) or 14(2) of the Act. The judgment neither made any mention of any argument raised in this regard nor there was any mention of the earlier decisions on this issue.

NAZAR SINGH VS. JAGJIT KAUR, (1996) 1 SCC 35/ SANTOSH VS. SARASWATHIBAI, (2008) 1 SCC 465 / SUBHAN RAO VS. PARVATHI BAI, (2010) 10 SCC 235

Applying Thulasamma’s decision it was held that lands, which were given to a lady by her husband in lieu of her maintenance, were held by her as a full owner thereof and not as a limited owner notwithstanding the several restrictive covenants accompanying the grant. According to the Court, this proposition followed from the words in sub-section (1) of s.14, which insofar as is relevant read: “Any property possessed by a female Hindu … shall be held by her as full owner and not as a limited owner”

SHAKUNTALA DEVI VS. KAMLA AND OTHERS, (2005) 5 SCC 390

A Hindu wife was bequeathed a life interest for maintenance by her husband’s Will with a condition that she would not have power to alienate the same in any manner. As per the Will, after death of the wife, the property was to revert back to his daughter as an absolute owner. It was held that u/s.14(1) a limited right given to the wife under the Will got enlarged to an absolute right in the suit property.

SADHU SINGH VS GURDWARA SAHIB NARIKE, (2006) 8 SCC 75 / SHARAD SUBRAMANAYAN VS. SOUMIMAZUMDAR (2006) 8 SCC 91

The Supreme Court in these well-considered decisions held that the antecedents of the property, the possession of the property as on the date of the Act and the existence of a right in the female over it, however limited it may be, are the essential ingredients in determining whether sub-Section (1) of Section 14 of the Act would come into play. Any acquisition of possession of property by a female Hindu could not automatically attract s.14(1). That depended upon the nature of the right acquired by her. If she took it as an heir under the Act, she took it absolutely. If while getting possession of the property after the Act, under a devise, gift or other transaction, any restriction was placed on her right, the restriction will have play in view of s.14(2) of the Act. Therefore, there was nothing in the Act which affected the right of a male Hindu to dispose of his property by providing only a life estate or limited estate for his widow. The Act did not stand in the way of his separate properties being dealt with by him as he deemed fit. His Will could not be challenged as being hit by s.14(1) of the Act. When he validly disposed of his property by providing for a limited estate to his wife, the widow had to take it as the estate devolved on her. This restriction on her right so provided, was really respected by s.14(2) of the Act. Thus, in this case where the widow had no pre-existing right, the limited estate granted to her under her husband’s Will was upheld u/s. 14(2).

Any acquisition of possession of property (not right) by a female Hindu after the coming into force of the Act, cannot normally attract Section 14(1) of the Act. The Court distinguished Tulsamma’s decision as follows:

“….., it is clear that the ratio in V. Tulasamma vs. Shesha Reddy ………has application only when a female Hindu is possessed of the property on the date of the Act under semblance of a right, whether it be a limited or a pre-existing right to maintenance in lieu of which she was put in possession of the property. Tulasamma ………ratio cannot be applied ignoring the requirement of the female Hindu having to be in possession of the property either directly or constructively as on the date of the Act, though she may acquire a right to it even after the Act.

……….when a male Hindu executes a will bequeathing the properties, the legatees take it subject to the terms of the will unless of course, any stipulation therein is found invalid. Therefore, there is nothing in the Act which affects the right of a male Hindu to dispose of his property by providing only a life estate or limited estate for his widow. The Act does not stand in the way of his separate properties being dealt with by him as he deems fit. His will hence could not be challenged as being hit by the Act.”

The Court concluded that when a male validly disposed of his property by providing for a limited estate to his heir, the wife, she took it as the estate devolved on to her. This restriction on her right, was respected by the Act. It provided in Section 14(2) of the Act, that in such a case, the widow is bound by the limitation on her right and she could not claim any higher right by invoking Section 14(1) of the Act. In other words, conferment of a limited estate which was otherwise valid in law was reinforced by this Act by the introduction of Section 14(2) of the Act and excluding the operation of Section 14(1) of the Act.

JUPUDYPARDHASARATHY VS. PENTAPATI RAMA KRISHNA, (2016) 2 SCC 56

After analysing a host of decisions and the legal principles, the Supreme Court in Jupudy’s case held that the bequest under the Will to the 3rd wife was in the nature of maintenance even though the express words maintenance were not mentioned in the Will. She was issueless and the husband was duty bound to maintain her. Hence, he gave her the house and access to incidental facilities. Accordingly, s.14(1) applied and the limited right stood enlarged into an absolute estate by virtue of a pre-existing right of maintenance. The Court observed that no one disputed the genuineness of the Will and the fact that the 3rd wife continued to enjoy the said property in lieu of her maintenance.

TEJ BHAN’S CASE

A person purchased property under a sale deed executed by the wife of one Kanwar Bhan, the testator, who was the original owner of the property. Kanwar Bhan executed a will that created a life estate in favour of his wife. It stated that she was entitled to maintain herself out of the proceeds from the same but she was not be entitled to mortgage or sell the said land. Once she got the property after her husband’s demise, she executed a sale deed. This was objected to by other claimants under the Will. The lower Courts relied on decision in Tulsamma’s case and held that the property given to the wife of Kanwar Bhan was in the nature of maintenance and such a pre-existing right enlarged into a full estate. Accordingly, it upheld the right of the widow to sell the property. The High Court rejected this stand and held that the widow only had a limited right and hence, the correct principle was as laid down in the case of Sadhu Singh (supra).

CONCLUSION

The Supreme Court in Tej Bhan concluded that there were a large number of decisions which were not only inconsistent with one another on principle but have tried to negotiate a contrary view by distinguishing them on facts or by simply ignoring the binding decision. Accordingly, it was of the view that there must be clarity and certainty in the interpretation of Section 14 of the Act.

S.14(1) is a very important piece of legislation when it comes to ensuring protection of a Hindu female’s rights over property. It ensures that a lady is an absolute owner in respect of her property. However, it is also essential that this provision is used as a shield and not a sword. S.14(2) ensures that what was originally acquired as a limited owner does not automatically enlarge into absolute ownership. One important principle which emerges from the numerous Court cases is that applicability of these two sub-sections has to be tested on the facts of each case and there cannot be one straight-jacketed approach to all cases. One hopes that a Larger Bench of the Apex Court will conclusively settle this issue once and for all.

BCAJ Admin

Proposed Amendments to IAS 37 Provisions, Contingent Liabilities and Contingent Assets

IASB has published an Exposure Draft (ED), to make certain changes to IAS 37 Provisions, Contingent Liabilities and Contingent Assets. Similar changes should be anticipated for Ind AS standards as well. In this article we discuss some of the important changes and an example of how the ED relates to climate commitments, with a simple example.

The IASB’s proposed amendments aim to clarify the requirements for the present obligation criterion, and to change the timing of the recognition of some provisions, in particular, levies. The IASB has proposed to update the definition of a liability to match the 2018 Conceptual Framework for Financial Reporting (Conceptual Framework). The updated wording would replace the current requirement for an obligating event with three distinct conditions: obligation, transfer and past-event.

The proposed amendments include separate sections of requirements to support each of the conditions. The proposed amendments would also replace the requirements in IFRIC 21 Levies, which would be withdrawn. The accounting for levies would be aligned with the general requirements for provisions. However, new requirements are proposed for levies when they are triggered only after two or more specific actions (or events) or once a specific threshold is exceeded.

Entities would need to recognise a provision after the first action or event if they have no practical ability to avoid the second event. The proposed amendments would supersede the requirements in IFRIC 6 Liabilities arising from Participating in a Specific Market — Waste Electrical and Electronic Equipment, which would be withdrawn. The proposed amendments would clarify the requirements for restructuring provisions in order to eliminate potentially misleading terminology. Nevertheless, they are not intended to change the outcome of applying the requirements for restructuring provisions.

Change in definition of provision

Existing provision

Proposed Amendment

A provision is a liability of uncertain timing or amount.

A liability is a present obligation of the entity arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.

An obligating event is an event that creates a legal or constructive obligation that results in an entity having no realistic alternative to settling that obligation.

A liability is a present obligation of the entity resource to transfer an economic resource as a result of past events.

The following paragraphs have been added.

Paragraph 14A

The first criterion for recognising a provision is that an entity has a present obligation (legal or constructive) to transfer an economic resource as a result of a past event.

This criterion (the present obligation recognition criterion) comprises three conditions: (a) an obligation condition — the entity has an obligation (paragraphs 14B —14H); (b) a transfer condition — the nature of the entity’s obligation is to transfer an economic resource (paragraphs 14I–14L); and (c) a past-event condition — the entity’s obligation is a present obligation that exists as a result of a past event (paragraphs 14M–14U).

Obligating condition

Paragraph 14B

The first condition for meeting the present obligation recognition criterion is that the entity has an obligation. An entity has an obligation if:

(a) a mechanism is in place that imposes a responsibility on the entity if it obtains specific economic benefits or takes a specific action; (b) the entity owes that responsibility to another party; and (c) the entity has no practical ability to avoid discharging the responsibility if it obtains the specific economic benefits or takes the specific action.

Paragraph 14C reiterates the obligation can be legal or constructive.

Paragraph 14D

The economic benefits the entity obtains could be, for example, cash, goods or services. The action the entity takes could be, for example, operating in a specific market, causing environmental damage or other harm to another party, owning specific assets on a specific date, or constructing an asset that will need to be decommissioned at the end of its useful life.

Paragraph 14E (this is derived from the current standard)

An obligation is always owed to another party. It is not necessary for an entity to know the identity of the party to whom the obligation is owed. The other party could be a person or another entity, a group of people or other entities, or society at large

Paragraph 14F

An entity has no practical ability to avoid discharging a responsibility:

(a) in the case of a legal obligation, if: (i) the other party has a legal right to act against the entity if the entity fails to discharge the responsibility — for example, to ask a court to enforce settlement, charge the entity a financial penalty or restrict the entity’s access to economic benefits; and (ii) as a result of that right, the economic consequences for the entity of not discharging the responsibility are expected to be significantly worse than the costs of discharging it; or

(b) in the case of a constructive obligation, if the entity’s pattern of past practice, published policy or sufficiently specific current statement creates valid expectations in other parties that the entity will discharge the responsibility

14G (this is derived from current standard)

If details of a proposed new law have yet to be finalised, an obligation arises only when the legislation is virtually certain to be enacted as drafted. In this Standard, such an obligation is treated as a legal obligation. Variations in circumstances surrounding enactment make it impossible to specify a single event that would make the enactment of a law virtually certain. In many cases it will be impossible to be virtually certain of the enactment of a law until it is enacted

14H (this is derived from current standard)

An obligation requires an entity to have no practical ability to avoid discharging a responsibility. Therefore, a management or board decision does not give rise to a constructive obligation at the end of the reporting period unless the decision has been communicated before the end of the reporting period to those affected by it in a sufficiently specific manner to create a valid expectation in those affected that the entity will discharge its responsibility.

Transfer condition

14I

The second condition for meeting the present obligation recognition criterion is that the nature of the entity’s obligation is to transfer an economic resource. To meet this condition, the obligation must have the potential to require the entity to transfer an economic resource to another party.

14J

For that potential to exist, it does not need to be certain, or even likely, that the entity will be required to transfer an economic resource — the transfer may, for example, be required only if a specified uncertain future event occurs.

14K

Consequently, the probability of a transfer does not affect whether an obligation meets the present obligation recognition criterion — an obligation can meet that criterion even if the probability is low. However, the probability of a transfer could affect: (a) whether the obligation meets one of the other criteria for recognising a provision — a provision is recognised only if it is probable (more likely than not) that the entity will be required to transfer an economic resource to settle the obligation (see paragraphs 14(b) and 23); and (b) whether the entity discloses a contingent liability if the obligation does not meet all the criteria for recognising a provision (see paragraph 23).

14L

An obligation to exchange economic resources with another party is not an obligation to transfer an economic resource to that party unless the terms of the exchange are unfavourable to the entity. Accordingly, the obligations arising under an executory contract — for example, a contract to receive goods in exchange for paying cash — are not obligations to transfer an economic resource unless the contract is onerous.

Past-event condition

14M

The third condition for meeting the present obligation recognition criterion is that the entity’s obligation is a present obligation that exists as a result of a past event.

14N

An entity’s obligation becomes a present obligation that exists as a result of a past event when the entity: (a) has obtained specific economic benefits or taken a specific action, as described in paragraphs 14B and 14D; and(b) as a consequence of having obtained those benefits or taken that action, will or may have to transfer an economic resource it would not otherwise have had to transfer.

14O

If the economic benefits are obtained, or the action is taken, over time, the past-event condition is met, and the resulting present obligation accumulates, over that time.

14P

In some situations, an entity has an obligation to transfer an economic resource only if a measure of its activity in a period (the assessment period) exceeds a specific threshold. In such situations, the action that meets the past event condition is the activity that contributes to the total activity on which the amount of the transfer is assessed. At any date within the assessment period, the present obligation is a portion of the total expected obligation for the assessment period. It is the portion attributable to the activity carried out to date. The entity recognises a provision if the recognition criteria in paragraphs 14(b) and 14(c) are met — that is, if: (a) it is probable that the entity’s activity will exceed the threshold and the entity will be required to transfer an economic resource (see paragraph 14(b)); and (b) a reliable estimate can be made of the amount of the obligation (see paragraph 14(c)).

14Q

In some situations, an entity has an obligation to transfer an economic resource only if it takes two (or more) separate actions, and the requirement to transfer an economic resource is a consequence of taking both (or all) these actions. In such situations, the past-event condition is met when the entity has taken the first action (or any of the actions) and has no practical ability to avoid taking the second action (or all the remaining actions).

14R

A decision to prepare an entity’s financial statements on a going concern basis implies that the entity has no practical ability to avoid taking an action it could avoid only by liquidating the entity or by ceasing to trade.

Interactions between the obligation and past-event conditions

14S

The enactment of a new law is not in itself sufficient to create a present legal obligation for an entity. A present legal obligation arises only if, as a consequence of obtaining the economic benefits or of taking the action to which the law applies, the entity will or may have to transfer an economic resource it would not otherwise have had to transfer (see paragraph 14N).

14T

Similarly, having an established pattern of past practice, publishing a policy or making a statement is not in itself sufficient to create a present constructive obligation for an entity. A present constructive obligation arises only if, as a consequence of obtaining the economic benefits or of taking the action to which the practice, policy or statement applies, the entity will or may have to transfer an economic resource it would not otherwise have had to transfer (see paragraph 14N).

14U

[Derives from former paragraph 21] An action of the entity that does not give rise to a present obligation immediately might do so at a later date,

because a mechanism is introduced that imposes new responsibilities on the entity — a new law might be enacted, an existing law might be changed or the entity might establish a pattern of practice, publish a policy or make a statement that gives rise to a constructive obligation. For example, if an entity causes environmental damage, it might have no obligation to remedy the damage at the time of causing it. However, the causing of the damage will be the past event that has created a present obligation if, at a later date, a new law requires the existing damage to be rectified, or if the entity accepts responsibility for rectification in a way that creates a constructive obligation.

Example 15 — Climate-related commitments

In 20X0 an entity that manufactures household products publicly states its commitments: (a) to gradually reduce its annual greenhouse gas emissions, reducing them by at least 60 per cent of their current level by 20X9; and (b) to offset its remaining annual emissions in 20X9 and in later years by buying carbon credits and retiring them from the carbon market.

To support its statement, the entity publishes a transition plan setting out how it will gradually modify its manufacturing methods between 20X1 and 20X9 to achieve the 60 per cent reduction in its annual emissions by 20X9. The modifications will involve investing in more energy-efficient processes, buying energy from renewable sources and replacing petroleum-based product ingredients and packaging materials with lower-carbon alternatives.

Management is confident that the entity can make all these modifications and continue to sell its products at a profit. In addition to publishing the transition plan, the entity takes several other actions that publicly affirm its commitments. Having considered all the facts and circumstances of the entity’s commitments — including the actions it has taken to affirm them — management judges that the entity’s statement has created a valid expectation in society at large that the entity will fulfil the commitments, and hence that it has no practical ability to avoid doing so (paragraph 14F(b)).

The entity is preparing financial statements for the year ended 31^st December, 20X0. Present obligation to transfer an economic resource as a result of a past event three conditions specified in paragraph 14A of IAS 37 are not all met:

Obligation condition	Met	The entity’s public statement of its commitments imposes on the entity responsibilities: (a) to operate in the future in a way that reduces its annual greenhouse gas emissions; and (b) to offset its remaining emissions if it emits greenhouse gases in 20X9 and later years (paragraph 14B(a)). The entity owes those responsibilities to society at large (paragraph 14B(b)). The entity has no practical ability to avoid discharging its responsibilities (paragraph 14B(c)). The obligations meet the definition of a constructive obligation (paragraph 10).
Transfer condition	Not met	Obligation to reduce emissions The entity’s obligation to operate in the future in a way that reduces its greenhouse gas emissions is not an obligation to transfer an economic resource. Although the entity will incur expenditure in changing the way it operates, it will receive other economic resources — for example, property, plant and equipment, energy, product ingredients or packaging materials — in exchange, and will be able to use these resources to manufacture products it can sell at a profit (paragraph 14L).
Transfer condition	Met	Obligation to offset remaining emissions The entity’s obligation to offset its remaining annual greenhouse gas emissions in 20X9 and later years is an obligation to transfer an economic resource. The entity will be required to buy and retire carbon credits without receiving any economic resources in exchange (paragraph 14I).
Past event condition	Not met	Obligation to offset remaining emissions The entity has not yet taken the action (emitting gases in 20X9 or in a later year) as a consequence of which it will have to buy and retire carbon credits it would not otherwise have had to buy or retire (paragraph 14N).

Conclusion — No provision is recognised at 31^stDecember, 20X0.

If the entity emits greenhouse gases in 20X9 and in later years, it will incur a present obligation to offset these past emissions when it emits the gases. If, at that time, the entity has not settled the present obligation and it is probable that it will have to transfer an economic resource to do so, the entity will recognise a provision for the best estimate of the expenditure required.

Although the entity does not recognise a provision for its constructive obligations at 31^st December, 20X0, the actions it plans to take to fulfil the obligations could affect the amounts at which it measures its other assets and liabilities (for example, its property, plant and equipment), and the information it discloses about them, as required by various IFRS Accounting Standards.

As can be seen from the above example, the ED provides much more clarity on whether a provision is required and in a very methodical and step-by-step manner. Similar changes can be expected under Ind AS.

BCAJ Admin

Section 148 — Reassessment — On deceased person — Not permissible

23 Mary Gene Gracious vs. ITO Ward 20(1)(1), Mumbai
[WP(L) 3460 OF 2024
Dated: 10^th December, 2024, (Bom-HC)

Section 148 — Reassessment — On deceased person — Not permissible

The Petitioner challenged the action as resorted by the respondents against Mr. Gene Gracious, the husband of the petitioner by issuance of notice under Section 148 of the Act dated 29^th July, 2022, which was preceded by a notice issued under Section 148A(b) dated 26^th May, 2022, and an order passed thereon under Section 148A(d) dated 29^thJuly, 2022.

The case of the petitioner is that the impugned notice under Section 148 and the action prior thereto as initiated by respondent no.1 are non-est and illegal in as much as Mr. Gene Gracious against whom these notices were issued, passed away on 09 November 2016. A Death Certificate issued by Department of Health, Municipal Corporation of Greater Mumbai.

The Petitioner relying on various decisions contended that the petition is required to be granted as respondent no. 1 could not have resorted to impugned action by issuance of notices underSection 148A(b) and 148, and passing an order under Section 148A(d), against a deceased person.

The Court observed that the Supreme Court has held it to be the first principle of civilised jurisprudence that a person against whom any action is sought to be taken or whose right or interests are being affected should be given reasonable opportunity to defend himself (UMC Technologies Private Limited vs. Food Corporation of India &Anr., Civil Appeal No. 3687 of 2020, decided on 16^th November, 2020). This basic jurisprudential principle becomes applicable when any action of such nature was being initiated against Mr. Gene Gracious. Once Mr. Gene Gracious passed away, there was no question of his defending such action or being heard so as to accord any sanctity to such order, and the consequential notice under Section 148 of the Act. The entire action under clause (b) and clause (d) of Section 148A of the Act were of no consequence being non-est. In this situation, even the legal heirs cannot be bound by such order which is non-est, void ab initio.

Also, the scheme of provisions of Section 148A read with Section 148 as applicable in the facts of the present case (AY 2015-16) rests on a foundation that no notice under Section 148 could have been issued without a prior show-cause notice being issued to an assessee. Further, a hearing would need to be granted to the assessee on such show cause notice and thereafter an order could be passed. All this is certainly not possible to be undertaken against a deceased person and / or even against a non-existing entity [refer Principal Commissioner of Income-Tax, New Delhi vs. Maruti Suzuki India Ltd. [2019] 107 taxmann.com 375 (SC).]

Once such mandatory legal compliance itself could not be achieved, on such sole ground, the notice issued under Section 148 preceded by earlier actions is required to be held to be non-est and void ab initio. The department cannot maintain issuance of the notice as impugned to a deceased person.

In the present case, admittedly, the concerned assessee Mr. Gene Gracious passed away on 9^th November, 2016, the show cause notice under Section 148A(b) of the IT Act was issued on 26^th May, 2022 and an order thereon was passed on 29^th July, 2022 under Section 148A(d), as also the impugned notice under Section 148 was also issued on 29^th July, 2022. All this has happened after the said assessee, Mr. Gene Gracious had passed away.

In view of the above, the petition deserves to be allowed.

BCAJ Admin

Deduction in respect of the broken period interest — securities held as stock in trade: Expenditure incurred by the assessee on the issue of Fully Convertible Debentures.

22 HDFC Bank Ltd. (formerly, Housing Development Finance Corporation Ltd.) vs. The DCIT Spl. Range – 15
[ITXA No. 58 OF 2006]
Dated: 13^th November, 2024. (Bom) (HC) [Arising from ITAT order dated 12^th September, 2005]
Assessment Year: 1993-94

Deduction in respect of the broken period interest — securities held as stock in trade: Expenditure incurred by the assessee on the issue of Fully Convertible Debentures.

The appellant is inter alia engaged in the business of providing long term finance in the course of which, various securities are held as stock in trade. These securities are purchased from time to time, which carry interest. The purchase price includes the component of interest for the broken period. The securities which remain unsold at the end of the year are shown in the closing stock at cost. However, while computing the income, the assessee claims deduction on account of interest for the broken period in respect of unsold securities since according to assessee, the entire interest income accrues to the assessee on the fixed date falling after the end of previous year. However, the assessee offered the interest income in respect of such securities in the next year either when the securities were sold or when interest is received.

The Assessing Officer rejected the claim of the assessee and disallowed the sum. The reason for disallowance was that broken period interest formed part of the price of the asset purchased, which has already been debited to Profit & Loss Account and, therefore, question of allowing deduction did not arise in view of the Supreme Court judgment in the case of Vijaya Bank Ltd. vs. Additional Commissioner of Income-tax [1991] 187 ITR 541 (SC).

The Commissioner of Income-tax (Appeals) also agreed with the Assessing Officer and confirmed the order passed by the Assessing Officer. Against such order passed by the CIT(A), the appellant carried the matter to the Tribunal. The Tribunal also did not accept the contentions as urged on behalf of the assessee that the interest on securities is taxable as business income, since securities are held as stock in trade. As the interest paid on purchase of securities would be on revenue account, the same would entitle the assessee to claim a revenue loss, being the consistent accounting method followed by the assessee. The Tribunal, while rejecting the assessee’s contention, was of the view that when the securities are purchased by the appellant along with interest thereon, the price paid becomes the cost of the asset which is to be debited to Profit & Loss Account. The Tribunal observed that the assessee debited the entire cost of the purchase including broken period interest to Profit & Loss Account as per the commercial practice. Hence, if the security is sold, then profit would form part of the Profit & Loss Account as sales would be credited. It was observed that when such security was not sold, then as per the settled principle of accountancy, it has to be shown in the closing stock either at cost or market price whichever is lower. There is no other method of accounting for computing business profit. The Tribunal rested its view referring to the decision of Supreme Court in Chainrup Sampatram vs. Commissioner of Income-tax [1953] 24 ITR 481 (SC). It is for such reason the Tribunal was of the considered opinion that the question of allowing any deduction separately did not arise.

On further appeal, the Assessee relied on the orders passed by the Division Bench of this Court in American Express International Banking Corporation vs. Commissioner of Income-tax [2002] 258 ITR 601 (Bombay) wherein similar questions as the present questions were raised for the consideration of the Division Bench. The key issue which fell for consideration there was with regard to the correct treatment of the broken period interest and whether the broken period interest (net) paid by the assessee at the time of purchase of securities was a part of the capital costs of the investment. The Court considered the Revenue’s contention that the payment for the broken period interest (net) cannot be claimed as a revenue expenditure. It was the assessee’s contention that the banks were valuing the securities/interest held by it at the end of each year and offered to tax, the appreciation in their value by way of profits/interest earned. In answering such question, the Court considered the decision of the Supreme Court in Vijaya Bank Ltd. (supra), and the question was answered in favour of the assessee.

The decision of the Division Bench in American Express International Banking Corporation (supra) was assailed before the Supreme Court in the proceedings of Special Leave to Appeal (Civil) CC.301-303/2004, which came to be rejected by an order dated 27^th January, 2004.

The Assessee further relied on the order passed by the Hon Court in ITA No. 278 of 1997 in the case of Citi Bank N.A. vs. Commissioner of Income Tax wherein similar issues had arisen for consideration of the Court, when the Court answered the questions in favour of the assessee. The order dated 16 April, 2003 passed by the Division Bench was carried to the Supreme Court in the proceedings of Civil Appeal No. 1549 of 2006 in Commissioner of Income Tax vs. Citi Bank N.A. The Supreme Court rejected the Revenue’s appeal by its judgment dated 12 August, 2008 where the Supreme Court, while referring to the decision in Vijaya Bank Ltd. vs. Additional Commissioner of Income Tax, Bangalore (supra), as also the decision in case of American Express (supra), rejected the Revenue’s appeal. Similar view was taken by the Supreme Court in dismissing another appeal filed by the Revenue in the case of Commissioner of Income Tax vs. Citi Bank N.A., for AY 1982-83.

The Court’s attention was also drawn to a recent decision of the Supreme Court in case of Bank of Rajasthan Ltd. vs. Commissioner of Income-tax (2024) 167 taxmann.com 430 (SC) wherein the Supreme Court affirmed the view taken by this Court in Citi Bank N.A. (supra), American Express International Banking Corporation(supra) as also in HDFC Bank Ltd. vs. CIT (2014) 49 taxmann.com 335.

In view of the above, the questions of law were answered in affirmative in favour of the assessee and against the Revenue.

Insofar as the other question of law, the same pertains to a deduction in respect of the expenditure incurred by the assessee on the issue of Fully Convertible Debentures. The assessee had made a ‘rights issue’ of Fully Convertible Debentures (FCDs) and in such connection, had incurred expenditure on account of printing expenses, advertisement, professional fees, stamp duty and filing fees, bank charges, packages, etc. This expenditure was claimed as a deduction in view of the decision of the Supreme Court in India Cement Ltd. vs. CIT (1966) 60 ITR 52 (SC). The assessee’s claim for deduction was rejected by the Assessing Officer on the ground that the real intention of the assessee was to increase its capital and not to raise borrowed capital. On appeal, CIT(A) confirmed the disallowance made by the Assessing Officer inter alia following the decision of the Supreme Court in Brooke Bond India Ltd. vs. CIT (1997) 225 ITR 798. It is against such decision of the CIT(A), the assessee approached the Tribunal. The Tribunal in confirming the order passed by the CIT(A) observed that there was no dispute on the entire issue on share capital in parts. It was observed that the true intention was not to raise a loan, but to raise share capital to increase its capital base. The Tribunal opined that it was therefore necessary to apply the ratio of the decision of Supreme Court in Brooke Bond India Ltd. (supra). Accordingly, the expenditure incurred on such public issue was not allowed as a deduction confirming the order passed by the CIT(A), against which the present appeal has been filed.

In assailing such orders of the Tribunal, assessee firstly relied on the decision of the Delhi High Court in Commissioner of Income Tax vs. Ranbaxy Laboratories Ltd. ITA No. 93 of 2000 dated 13^th September, 2013 wherein one of the issues which fell for consideration was whether the Tribunal was legally correct in allowing debenture issue expenses on the issue of convertible debentures. In answering such issue in favour of the assessee and against the Revenue, the Delhi High Court observed that the said question would stand covered by the decision of Delhi High Court in CIT vs. Havells India Ltd. (2013) 352 ITR 376 (Del.), which followed the decision of the Supreme Court in India Cements Ltd.(supra) and the decision in Commissioner of Income Tax vs. Secure Meters Ltd. (2010) 321 ITR 621 (Raj.). In Ranbaxy Laboratories Ltd. vs. Deputy Commissioner of Income Tax, the Delhi High Court has taken a similar view. A similar view was also taken in case of The Commissioner of Income Tax- 6 vs. M/s. Faze Three Ltd. Income Tax Appeal No. 1761 of 2014 decided on 16^th March, 2017.

In answering such question in favour of the assessee and against the Revenue, the Court held that the expenditure incurred thereon was revenue in nature, referring to the decision in Secure Meters Ltd. (supra), as also in Havells India Ltd. (supra) wherein it was held that as the debentures were to be converted in the near future into equity shares, the expenditure incurred needs to be allowed as revenue expenditure on the basis of the factual position as reflected by the accounts and which was the consistent view being accepted by the Courts. The Court also observed that the Revenue has not been able to show any reason which would require the Court to take a different view from the one taken by the various High Courts in the country on an identical issue.

In the light of the above discussion, the question of law also needs to be answered in affirmative in favour of the assessee and against the revenue.

Resultantly, the Appeal stands allowed .

BCAJ Admin

Refund of tax — interests payable thereon — delayed payment of refunds burdens the public exchequer with such interest amounts – Rules would be required to be framed — Accountability to be fixed

21 Bloomberg Data Services (India) Pvt. Ltd. vs. Pr. DCIT Circle – 6(1)(2) &Ors.
[WP (L) No. 31412 OF 2024]
Dated: 2^nd December, 2024 (Bom) (HC)]

Refund of tax — interests payable thereon — delayed payment of refunds burdens the public exchequer with such interest amounts – Rules would be required to be framed — Accountability to be fixed

The Petitioner being aggrieved by the Revenue’s inaction of the refund being not granted to the petitioner for the Assessment Year 2016-17 and 2013-14, and which was being adjusted for the refund for 2023-24, approached the Court. The Petitioner claimed that a large sum of refund of ₹77,64,71,629/- was not being granted to the Petitioner. The Revenue department filed their reply affidavit.

The Court noted that after the earlier orders were passed by the Court, on 29^th November, 2024 a refund of ₹77,64,71,629/- was granted in the proportion of ₹45,84,30,382/- for A. Y. 2016-17 and ₹31,80,41,247/- for the A.Y. 2013-14. However, an interest of ₹1,83,37,215/- for A.Y. 2016-17 and ₹1,27,21,649/- for A.Y. 2013-14, totalling to an amount of ₹3,10,58,865/- (₹3.10 crores) was due and payable to the Petitioner which was not granted.

The Court observed that in these situations, payment of interest is an unwarranted burden required to be borne by the Government of India. The Hon. Court was concerned with several similar proceedings reaching the Court. The Court observed that it was not aware as to whether the income tax department has any procedure of any internal control / checks in such matters, in which the interest burden keeps increasing purely for departmental reasons, which may be either negligence or a casual approach on the part of the officials, not taking prompt and timely steps on such issues. Secondly, whether there is any routine audit, as to who would become accountable for such huge interest amounts being required to be paid by the Government of India, when there are refund amounts which are admittedly payable to the assessee’s. Any delay being caused in making payments of such refund and the interests payable thereon, is attributable wholly to the officials of the department, as it is they who are not taking prompt actions.

The Hon Court observed that the petition brings to the fore a serious concern in the laxity of the Respondent-department in the matter of refund of tax to the petitioner and which is an admitted amount. The Court also observed that routinely cases are reaching the Court where refunds for no rhyme or reason are stuck, they are either not being processed or if even processed, they are not being released and in such cases the interest burden on the Government of India / Public exchequer keep mounting every passing day. Once the tax payer is entitled to the refund and when there are no proceedings against the assessee in that regard are intended to be taken by the Revenue, the refund of the tax amount ought to be immediately granted to the assessee. If this is being followed in breach, merely on account of negligence / laxity on the part of the department, it results into an unwarranted interest burden being imposed on the public exchequer. It may be quite easy for the tax officials not to be serious on such issue, however, it cannot be forgotten that such interest payment goes from the taxpayers’ pockets.

The Court observed that why this laxity or lack of prompt and appropriate communication between two authorities / departments, should result in Government of India being unwarrantedly saddled with huge interest amounts is the issue. This can certainly be avoided by an effective mechanism, by having a meaningful and prompt flow of instructions between the concerned officers, handling the assessee’s case. Such unwarranted interest amounts being required to be paid, if saved can be utilised for other essential public expenditures. It is the citizens of the country who are being deprived of the benefits of such amounts instead of the same being paid to the assessee’s, on account of the negligence and / or the fault of the officers of the department. The Court observed that it is routinely seen that when the matters reach the Court, the Revenue instantly takes a position that the refund would be credited to the assessee, without disputing the claim of the assessee for refund, as in such cases there is no defence to such petitions, as it is a statutory obligation on the part of the Revenue to refund that amounts and on such refunds huge interest amounts are paid to the assessee.

The Court directed the Respondent to place an affidavit on record, after taking appropriate instructions from the CBDT and after confirming such affidavit from the CBDT, as to approach the concerned officials are required to follow, in such situations so as to avoid burdening the public exchequer with interest payments.

The Court further observed that if already the rules are not in place, such rules would be required to be framed. If any rules are already framed, as to why such rules are not being strictly adhered. The mechanism by which accountability needs to be fixed on the particular officers, whose actions are increasing the burden on the Government of India, is required to be immediately looked into.

The Court also noted that it was equally conscious that the delayed payment of refunds not only burdens the public exchequer with such interest amounts being required to be paid, but it also brings about a situation that the assessees’ are deprived of these amounts causing them a serious prejudice. Also, the Government of India would not be in a clear position to utilise such funds for any public purpose, as these funds are required, to be in any case paid to the assessee. Thus, any situation of an unjust enrichment is not acceptable. The situation in hand is of a delay, by which a serious prejudice to both the revenue and to the assessee is caused.

BCAJ Admin

Trust — Educational institution — Registration — Validity — Application for registration erroneously made while charitable institution continued to be registered — Assessee permitted to withdraw application filed inadvertently:

75 Purandhar Technical Education Society vs. CIT(Exemption)
[2024] 468 ITR 711 (Bom)
A.Ys. 2022-23 to 2026-27
Date of order: 8^th July, 2024
Ss. 12A, 12AA and 12AB of ITA 1961

Trust — Educational institution — Registration — Validity — Application for registration erroneously made while charitable institution continued to be registered — Assessee permitted to withdraw application filed inadvertently:

The assessee was a trust engaged in educational activities and was granted registration u/s. 12A of the Income-tax Act, 1961. The assessee stated that it could not trace the certificate and although it availed of the benefits for certain number of years without any objection from the Department, the authorities called upon the assessee to produce the registration certificate. Hence, the assessee made an application on 14^th October, 2019 to obtain a duplicate certificate of registration u/s. 12A but was not responded. The assessee made a fresh application on 19^th April, 2022. The assessee contended that both the applications were not decided and the duplicate certificate was also not issued. On 25^th March, 2022, the assessee applied for a fresh provisional certificate u/s. 12A(1)(ac)(i) in the prescribed form 10A as per rule 17A of the Income-tax Rules, 1962, that although the application for provisional registration was made on 4^th April, 2022, an order on form 10AC u/s. 12A(1)(ac)(i) for the A. Y. 2022-23 to 2026-27 was passed by the competent authority thereby granting registration to the assessee. Thereafter, the assessee inadvertently applied for registration under the same provision in form 10AB on 30^th September, 2022. The Commissioner (Exemption) issued notices requiring the assessee to submit copy of the provisional registration granted u/s. 12AB and the assessee furnished the necessary details. Another notice was received by the assessee on 9^th March, 2023 to which the assessee failed to submit a reply. On 31^st March, 2023, the Commissioner (Exemption) passed an order rejecting the assessee’s mistaken application on the ground that the assessee did not possess a copy of the provisional registration granted u/s. 12AB.

The assessee filed a writ petition contended that the Commissioner (Exemption) might take further actions to cancel the registration dated 4^th April, 2022, of the assessee and seeking to be fully protected under the decision of the Supreme Court in CIT vs. Society for the Promotion of Education [2016] 382 ITR 6 (SC) and to permit withdrawal of the application inadvertently filed u/s. 12A(1)(ac)(i) :

The Bombay High Court allowed the writ petition and held as under:

“i) The assessee having already been granted registration u/s. 12A(1)(ac)(ii) read with section 12AB(1)(a) of the 1961 Act on April 1, 2022, for a period of five years, i.e., from the A. Y. 2022-23 to 2026-27, there was no need to make a fresh application on September 30, 2022 under which the order rejecting the application for registration had been passed.

ii)Hence the assessee could withdraw its application filed u/s. 12A(1)(ac)(i) , dated September 30, 2022 rendering the order dated March 31, 2023 of no consequence.”

BCAJ Admin

Return — Delay in filing return — Application for condonation of delay — Limitation — Period to be computed with reference to date on which return had been filed

74 Vivek Krishnamoorthy vs. Pr. CIT
[2024] 469 ITR 605 (Kar)
A. Y. 2013-14
Date of order: 2^nd November, 2023
S. 119 of ITA 1961

Return — Delay in filing return — Application for condonation of delay — Limitation — Period to be computed with reference to date on which return had been filed

The assessee had to file his Income-tax return before 31^st March, 2015 but the Income-tax return was filed on 22^nd August, 2015, and because Income-tax return was belated by about five months, an application was filed on 15^th November, 2021 under section 119(2)(b) of the Income-tax Act, 1961, for condonation of delay in filing the Income-tax return. The application was rejected on the ground of limitation.

The assessee filed a writ petition against the order. The Karnataka High Court allowed the writ petition and held as under:

“i) In the case of a delay in filing an application to condone delay in filing returns according to the terms of Circular No. 9 of 2015 dated June 9, 2015 ([2015] 374 ITR (St.) 25) the period of six years will have to be computed with reference to the date when the belated Income-tax return is filed.

ii) The assessee’s application for condonation of delay in filing the Income-tax return on August 22, 2015 was to be restored for consideration in the light of the reasons offered to explain the delay between March 31, 2015 and August 22, 2015 and with the directions to consider the application within a reasonable period from the date of receipt of a certified copy of this order.”

BCAJ Admin

Recovery of tax — Stay of recovery during first appeal — Requirement of deposit — Discretion to forgo requirement and grant stay — Debatable issue — Direction for stay of recovery proceedings without deposit

73 Chaitanya Memorial Educational Society vs. CIT(Exemption)
[2024] 469 ITR 571 (Telangana)
A. Y. 2018-19
Date of order:9^th October, 2023
S. 220(6) of ITA 1961

Recovery of tax — Stay of recovery during first appeal — Requirement of deposit — Discretion to forgo requirement and grant stay — Debatable issue — Direction for stay of recovery proceedings without deposit

The Commissioner (Exemption) while deciding a stay application u/s. 220(6) of the Income-tax Act, 1961, pending an appeal challenging the assessment order for the A. Y. 2018-19, allowed the application subject to the assessee depositing an amount of ₹35 lakhs out of the total outstanding demand of ₹2,50,33,530.

The Telangana High Court allowed the writ petition filed by the assessee and held as under:

“i) In considering whether a stay of demand should be granted, the court is duty bound to consider not merely the issue of financial hardship, if any, but also whether a strong prima facie case raising a serious triable issue has been raised which would warrant dispensation of deposit.

ii) The contention of the assessee was that the assessee had been availing of the exemption from payment of Income-tax on account of the fact that the assessee was a charitable institution and the works executed by it again were with a charitable purpose. Since the assessee availed of the benefits all along prior to the issuance of the demand notice and even in the subsequent years as well, no prejudice was going to be caused if the stay application u/s. 220(6) of the Act, was decided in favour of the assessee. Moreover, though the appeal was filed as early as on April 17, 2021 and the rectification application also was filed on March 20, 2021, both the rectification application and the appeal were still pending consideration or were undecided for more than 2½ years. The Assessing Officer should have allowed the application u/s. 220(6).

iii) In view of the same, we are inclined to allow the writ petition. The impugned order dated September 4, 2023 for the reasons stated above stands set aside/quashed. It is ordered that there shall be stay of the recovery of the entire demand raised by respondent No. 4 dated March 19, 2021 till the disposal of the appeal filed by the petitioner on April 17, 2021.”

BCAJ Admin

Offences and prosecution — Wilful evasion of tax — Deletion of penalty with regard to same issues on ground that there was no concealment of income — Prosecution not valid.

72 RohitkumarNemchandPiparia vs. Dy. DIT(Investigation)
[2024] 469 ITR 593 (Mad)
A. Y. 2008-09
Date of order: 16^th November, 2023
S. 276C(1) of ITA 1961

Offences and prosecution — Wilful evasion of tax — Deletion of penalty with regard to same issues on ground that there was no concealment of income — Prosecution not valid.

The assessee was a non-resident for more than 40 years. The respondent lodged a complaint for the offence u/s. 276C(1) of the Income-tax Act, 1961 alleging that during the course of the enquiry by the Investigation Wing, it was noticed that in the bank account maintained by the petitioner, there was unusual credit of large amount through real time gross settlement and funds were debited for investment in the stock market. The petitioner had entered into 165 share transactions during the financial year 2007-08 and filed his return of income for the A. Y. 2008-09 on February 5, 2009 declaring a taxable income of ₹3,10,226. However, the petitioner has not disclosed any capital gains in the return of income filed for the financial year 2007-08 relevant to the A. Y. 2008-09. Further, the petitioner entered into 165 share transactions to the tune of ₹155.20 crores and short-term capital gains arose from the said transactions is ₹52.13 crores. Though tax has been deducted, it was not fully deducted and the petitioner did not disclose in his return of income under the head “Capital gain” and paid the tax. Thus, the petitioner failed to show the same in his return of income and attempted to evade payment of tax. Only after deduction by the Income- tax Department, the petitioner had share transactions during the relevant financial year and accepted the same. Therefore, the petitioner committed the offence punishable u/s. 276C(1) of the Income-tax Act, 1961.

The assessee filed a Criminal writ petition for quashing the proceedings. The Madras High Court allowed the petition and held as under:

“i) The Commissioner (Appeals) held in the appeal that the assessee was under the bona fide belief that there was no tax liability to be discharged by him on account of his residential status as non-resident external accounts and the deduction of tax at source made by the bank. Thus, the intention to conceal income by furnishing inaccurate particulars was not established. Therefore, the Assessing Officer was directed to delete the penalty imposed on the assessee.

ii) Therefore, once the penalty on the assessee was deleted, the prosecution initiated by the respondent could not be sustained.”

BCAJ Admin

Income from House Property and Business Income — Difference — Finding by Tribunal that the Assessee Company had been formed with the object of developing Commercial Properties — Rental income from such properties is assessable as business income

71 Pr. CIT vs. M. P. Entertainment and Developers Pvt. Ltd.
[2024] 469 ITR 421 (MP)
A. Ys. 2011-12 to 2014-15
Date of order: 16^th April, 2024
Ss. 22 and 28 of ITA 1961

Income from House Property and Business Income — Difference — Finding by Tribunal that the Assessee Company had been formed with the object of developing Commercial Properties — Rental income from such properties is assessable as business income

The Assessee had constructed a shopping cum entertainment mall in the name of Malhar Megha Mall and declared the nature of business as carrying on the business of purchase for development of the land, estates, structure and rented income from immovable properties. In the scrutiny assessment for the A. Ys. 2011-12 to 2014-15, the Assessing Officer observed that only part of the construction of the mall was complete and the assessee had started deriving rent from shops and other space in the mall and showed such income under the head Business & Profession. However, as per the Assessing Officer, the Assessee should have bifurcated under the head Income from House Property and Income from Business. Accordingly, the Assessing Officer restricted the claim of depreciation at the rate of 51.6 per cent of the occupied area of the Mall.

The CIT(A) deleted both the additions made by the Assessing Officer. The CIT(A) held that income from letting out properties were essentially required to be computed as Income from Business u/s. 28 and cannot be treated as Income from House Property. The Tribunal dismissed the appeal of the Department and held that where the letting of the property is the main object of the Assessee, its income has to be computed under the head Income from Business and it cannot be treated as Income from House Property.
The Madhya Pradesh High Court dismissed the appeal of the Department held as follows:

“i) In determining whether a particular income is income from house property or business income, in the case of Sultan Brothers Pvt. Ltd. vs. CIT [1964] 51 ITR 353 (SC) the Supreme Court held that each case has to be looked at from the businessman’s point of view to find out whether the letting was the doing of business or exploitation of the property by the owner.

ii) The Tribunal had found that the main object of the assessee was the business of constructing, owning, acquiring, developing, managing, running, hiring, letting out, selling out or leasing multiplexes, cineplexes, cinema halls, theatres, shops, shopping malls, etc., according to its memorandum and articles of association. The income was liable to be categorised as income derived from the shopping mall under the head of “Income from business” u/s. 28 of the Income-tax Act, 1961. The Assessing Officer did not find any material against the assessee to come to the conclusion that sub-leasing of the premises was only a part of its predominant object. The assessee right from the construction of the mall till the matter was taken into scrutiny had been offering income from the business of constructing, owning, acquiring, developing, managing, running, hiring, letting out, selling out or leasing multiplexes, cineplexes, cinema halls, theatres, shops, shopping malls, etc., sub-licensed by it under the head “Profits and gains of business or profession”.

iii) Therefore, the Commissioner (Appeals) as well as the Tribunal had rightly set aside the order of the Assessing Officer treating the income as one from house property.”

BCAJ Admin

Company — Computation of Book Profits — Scope of section 115JB — Disallowance u/s. 14A — Amount disallowed cannot be taken into consideration when computing book profits

70 Pr. CIT vs. Moon Star Securities Trading and Finance Co. Pvt. Ltd.
[2024] 469 ITR 15 (Del.)
A. Y. 2011-12
Date of order: 11^th March, 2024
Ss. 14A and 115JB of ITA 1961

Company — Computation of Book Profits — Scope of section 115JB — Disallowance u/s. 14A — Amount disallowed cannot be taken into consideration when computing book profits

The assessee earned dividend income of ₹58,09,619. In respect of the dividend income, the Assessee made disallowance u/s. 14A of the Income-tax Act, 1961. However, in the scrutiny assessment, the AO enhanced the disallowance u/s. 14A to ₹12,65,71,862 computed as per section 14A r.w.r. 8D and made addition under the normal provisions as well as to the book profits computed under the provisions of section 115JB of the Act.

The CIT(A) partly allowed the appeal of the Assessee and restricted the disallowance to ₹2,08,72,836 as against the disallowance of ₹12,65,71,862 determined by the Assessing Officer. The Tribunal deleted the disallowance on the ground that there was no satisfaction recorded by the Assessing Officer. Further, the Tribunal held that the disallowance u/s. 14A of the Act could not be made while computing book profits u/s. 115JB of the Act.

The Delhi High Court dismissed the appeal of the Department and held as follows:

“i) Section 115JB of the Income-tax Act, 1961, by virtue of a deeming fiction, considers book profits as the total income of the assessee which is calculated post authorised adjustments to the profits shown in audited Profit and loss account of the assessee. A bare perusal of the provisions would signify that sub-section (1) prescribes the mode and manner of computing the total income of the assessee u/s. 115JB of the Act.

ii) Clause (f) of Explanation 1 only alludes to the amounts of expenditure relatable to any income to which section 10 (excluding provisions contained in clause (38) thereof) or section 11 or section 12 apply. The Assessing Officer does not have the jurisdiction to go behind the net profit shown in the profit and loss account except to the extent provided in the Explanation to section 115JB. The scheme of section 115JB, particularly in relation to clause (f) of Explanation 1 therein, does not envisage any addition of disallowance computed u/s. 14A of the Act to calculate the minimum alternate tax as per section 115JB of the Act. Rather, the two provisions stand separately as no correlation exists between them for the purpose of determining the taxable income.”

BCAJ Admin

Charitable institution — Exemption — Scope of sub-sections (1), (2) and (3) of section 11 — Explanation to section 11 cannot be applied — Accumulated income — Donations to extent of 15 per cent. of surplus income accumulated to other charitable institutions for short period — Not permanent endowments made or donations imbued with some degree of permanency — Donations reversed — Exemption could not be denied

69 CIT(Exemption) vs. Jamnalal Bajaj Foundation
[2024] 468 ITR 723 (Del)
A. Y. 2009-10
Date of order: 31^st May, 2024
S. 11 of ITA 1961

Charitable institution — Exemption — Scope of sub-sections (1), (2) and (3) of section 11 — Explanation to section 11 cannot be applied — Accumulated income — Donations to extent of 15 per cent. of surplus income accumulated to other charitable institutions for short period — Not permanent endowments made or donations imbued with some degree of permanency — Donations reversed — Exemption could not be denied

The assessee was a charitable institution registered u/s. 12AA of the Income-tax Act, 1961. The assesseeutilised the accumulated fund to extend corpus donations to other charitable institutions in the A. Y. 2009-10. The Assessing Officer was of the view that extending donations to other charitable trusts would amount to utilisation of the funds for a purpose other than those for which the surplus was accumulated u/s. 11(2) which was violative of section 11(3)(c) and section 11(3)(d).

Before the Commissioner (Appeals) the assessee contended that the surplus accumulated income to the extent of 15 per cent. was handed out as donations to other charitable institutions for a temporary period of less than two months and that since the contravention was for a very short period, the exemption u/s. 11(2) should not be withdrawn. The Commissioner (Appeals) held in favour of the assessee on the issue of accumulation of 15 per cent. u/s. 11(2) and his order was affirmed by the Tribunal.

The Delhi High Court dismissed the appeal filed by the Revenue and held as under:

“i) Donations extended to other charitable institutions would meet the test of application of income for charitable purposes. Section 11(3)(c) and (d) of the Income-tax Act, 1961 deals with situations where the income so accumulated is either not utilised or applied for a charitable purpose. It is only in such a situation that the deemed income would lose the sheen of protection of exemption which would otherwise be applicable by virtue of section 11.

ii) In terms of the Finance Act, 2002 ([2002] 255 ITR (St.) 9), an Explanation was appended to section 11(2) which gets attracted in a situation where income referable to clauses (a) or (b) of section 11(1) and so accumulated or set apart is credited or paid to institutions specified therein, not being liable to be treated as application of income for charitable or religious purposes. Explanation 1 to section 11(1) applies to situations where the income applied to charitable causes falls short of 85 per cent. of the income derived. Section 11(2) on the other hand constitutes a gateway which enables the charity to stave off the spectre of the income which is not applied for a charitable purpose coming to be included in the total income of the assessee.

iii) The donations, to the extent of 15 per cent. of the accumulated surplus income, made by the assessee in the A. Y. 2009-10 would not be hit by Explanation 2, inserted by the Finance Act, 2017 ([2017] 393 ITR (St.) 1) with effect from 1^st April, 2018 since Explanation 2 applied only to amounts credited or paid to certain categories of institutions and those being in the nature of a contribution accompanied by a direction that the amounts extended would form part of the corpus of those entities. Although the donations were made out of the accumulated income, the money was retrieved within two months.

iv) Section 11(3) and the adverse consequences would have been attracted provided the accumulated income was diverted for a purpose other than charitable or religious, or where it was not utilised for the purpose for which it was so accumulated or set apart during the period of five years contemplated u/s. 11(2)(a). The assessee did not make a permanent endowment or one where the donation stood imbued with some degree of permanency. It also was not that the money was lost or became unavailable to be applied. Since the donations were reversed and had been advanced only for an extremely short duration, the Tribunal had not erred in allowing deduction u/s. 11(1) to the extent of 15 per cent on the deemed income u/s. 11(3)(c) or section 11(3)(d) and for justifiable reasons, had answered the issue in favour of the assessee.”

BCAJ Admin

Capital gains — Transfer — Possession taken in part performance of contract — Agreement must be registered — Joint Development Agreement — Not registered — Ownership of capital asset retained by Assessee throughout — Possession clauses suggesting possession to be parted with for limited purpose of development — Unregistered agreement not effecting transfer of property u/s. 2(47)

68 Prithvi Consultants Pvt. Ltd. vs. Dy. CIT
[2024] 470 ITR 37 (Bom.)
A.Ys. 2005-06 to 2011-12
Date of order: 5^th September, 2023
S. 2(47)(v) of ITA 1961, Ss. 17(1A) of Registration Act, 53A of Transfer of Property Act 1882

Capital gains — Transfer — Possession taken in part performance of contract — Agreement must be registered — Joint Development Agreement — Not registered — Ownership of capital asset retained by Assessee throughout — Possession clauses suggesting possession to be parted with for limited purpose of development — Unregistered agreement not effecting transfer of property u/s. 2(47)

In December 2008, the Assessee entered into two Joint Development Agreements (JDA) in respect of two plots of land. These agreements were not registered as required u/s. 17(1A) of the Registration Act. A search and seizure action was carried on in the case of one Mr. PK and others, where the said two JDAs were found. The Department issued notice u/s. 153C of the Act requiring the Assessee to file return of income for the AY 2009-10. Subsequently, notices were issued u/s. 153A and 142(1) for the AYs 2005-06 to 2010-11 as well as notice u/s. 143(2) for AY 2011-12 to conduct inquiry and the assessment of the Assessee’s income. In response to the notices, the Assessee filed response submitting that the Assessee had not received any consideration under the two JDAs. Further the transaction did not constitute transfer u/s. 2(47) of the Act. In March 2013, the Assessee cancelled the two JDAs because of non-performance by the Developer. However, in the assessment, the Assessing Officer concluded that the two JDAs constituted transfer u/s. 2(47) of the Act. He referred to the minimum guaranteed amounts reflected in the JDAs and concluded that additional income had accrued to the Assessee even though the Assessee may not have received any amount.

The CIT(A) allowed the appeal of the Assessee. On Department’s appeal before the Tribunal, the order of the CIT(A) was set aside and the assessment order was restored.

On appeal by the Assessee the High Court framed the following questions for consideration:

“i) Whether in the light of section 17(1A) read with section 49 of the Registration Act, 1908, the unregistered agreement dated December 31, 2008, can be construed as a document effecting transfer of the subject properties in terms of section 2(47) of the Income-tax Act, 1961?

ii) Whether in the absence of income having accrued to the appellant in terms of the agreement dated December 31, 2008, the appellant can be made liable to pay tax on capital gains in terms of section 45 read with section 48 of the Income-tax Act, 1961?”

The Bombay High Court decided the above questions of law in favour of the Assessee and held as follows:

“i) The Registration and Other Related Laws (Amendment) Act, 2001 made simultaneous amendments in section 53A of the Transfer of Property Act, 1882, and sections 17 and 49 of the Registration Act, 1908. By these amendments, the words “the contract, though required to be registered, has not been registered, or” in section 53A of the Transfer of Property Act, 1882, have been omitted. Simultaneously, sections 17 and 49 of the Registration Act, 1908 , were also amended, clarifying that unless the document containing the contract to transfer for consideration any immovable property (for the purpose of section 53A of the Transfer of Property Act, 1882, is registered, it shall not have any effect in law, other than being received as evidence of a contract in a suit for specific performance or as evidence of any collateral transaction not required to be effected by a registered instrument.

ii) The joint development agreements dated December 31, 2008, were not registered, though they were required to be compulsorily registered under section 17(1A) of the Registration Act, 1908, post the introduction of this provision by the Registration and Other Related Laws (Amendment) Act, 2001. In the JDAs the ownership of the capital asset was retained by the assessee throughout. The clauses relating to parting of possession, besides being unclear, suggested that at the highest, possession was to be parted with for the limited purpose of development. The unregistered agreement dated December 31, 2008, could not be construed as a document effecting transfer of the subject properties in terms of section 2(47) of the Act.”

BCAJ Admin

Glimpses of Supreme Court Rulings

15 Addl CIT vs. Ericsson India Pvt. Ltd
(2024) 468 ITR 2 (SC)

Jurisdiction to impose penalty- No Penalty can be imposed by the TPO u/s. 271G in respect of default that has occurred prior to the date of amendment conferring jurisdiction on TPO (i.e. 1^st October, 2014).

For the assessment year 2011-12, the assessee filed its returns together with transfer pricing report. A notice was issued by the Transfer Pricing (TPO) on 18th February, 2014 to produce some documents by 25^th March, 2014. The assesee did not comply with the said notice. On 5^th December, 2014, TPO issued notice alleging default and proposing penalty u/s. 271G. TPO passed order on 16^th January, 2015 proposing certain transfer pricing adjustment and imposing penalty of ₹64,43,03,352 u/s. 271G. A draft assessment order was passed on 22^nd June, 2015.

On writ petition being filed before the High Court, the High Court noted that till 1^st October, 2014, the jurisdiction and authority to impose penalty u/s. 271G was with the Assessing Officer (AO) as defined in section 2(7A). This changed with enactment of the Finance (No. 2) Act, 2014. The amendment expanded the jurisdiction of the TPO, who was for the first time authorized to inflict penalty for non-compliance of the notice.

The High Court following the judgment in Brij Mohan vs. CIT (1979) 120 ITR 1 (SC) and Varkey Chacko vs. CIT (1993) 203 ITR 885 (SC) quashed the order imposing penalty by holding that ‘event of default’ occurred in March, 2014, that is, well prior to the date of coming into force the amendment (from 1st October, 2014) and hence the order passed by TPO in respect of such default was without jurisdiction.

The Supreme Court dismissed the SLP as the issue was covered by its decision in Varkey Chacko vs. CIT (supra).

16 ITO vs. Tia Enterprises Pvt. Ltd
(2024) 468 ITR 10 (SC)

Statutory approvals — Approval granted by the statutory authorities, as required under the provision of the Act, has to be furnished to an assessee along with the reasons to believe — the statutory scheme encapsulated in the Income-tax Act provides that the reassessment proceedings cannot be triggered till the Assessing Officer has reasons to believe that income, which is otherwise chargeable to tax, has escaped assessment and the reasons recorded by him are placed before the specified authority for grant of approval to commence the process of assessment.

The Petitioner challenged the notice dated 30^th March, 2018 issued under section 148 of the Act and the order dated 6^th December, 2018 disposing of the objections of the Petitioner to the issuance of the aforesaid notice on one singular ground, namely, that the reassessment proceedings were commenced without the approval of the specific authority.

The High Court observed that the approval has a two-stage process. The satisfaction with regards to commencement of reassessment proceedings is required to be recorded by the Additional Commissioner of Income-tax (ACIT); and by Principal Commissioner of Income Tax (PCIT).

The High Court noted that the ACIT had made an endorsement that he was satisfied that it was a fit case for issue of notice u/s. 148, but the PCIT had not made any noting and merely signed the Form of Recording Reasons without a date. The High Court also noted that the reasons recorded by the Assessing Officer on 30^th March, 2018, were approved by ACIT and PCIT on the same date and the notice was also issued on 30^th March, 2018.

The Petitioner had alleged that this was a case of mechanical approval without application of mind and was contrary to law.

In counter affidavit, the respondent made an assertion that the PCIT had conveyed the approval to AO via letter F No. Pr. CIT-Delhi/148/2017-18 dated 30^th March, 2018, but the said letter was not annexed.

The High Court held that the approval granted by the statutory authorities, as required under the provisions of the Act, has to be furnished to an assessee along with the reasons to believe. The statutory scheme encapsulated in the Act provides that the reassessment proceedings cannot be triggered till the Assessing Officer has reasons to believe that income, which is otherwise chargeable to tax, has escaped assessment and the reasons recorded by him are placed before the specified authority for grant of approval to commence the process of assessment.

According to the High Court, the second condition requiring Assessing Officer to obtain prior approval of the specified authority was not fulfilled, as otherwise, there were no good reasons to not to furnish the same to the Petitioner along with the document which contained the Assessing Officer’s reasons for holding the belief that income otherwise chargeable to tax had escaped assessment.

The High Court therefore set aside the impugned notice and the impugned order.

The Supreme Court dismissed the SLP in view of the categorical finding recorded in paragraph 13 by the High Court and opining that in the facts of the case, no case for interference was made out by the Revenue.

17 PCIT vs. Nitin Nema
(2024) 468 ITR 105 (SC)

Reassessment — Gross Receipts of Sale consideration and income chargeable to tax are not same — Notice issued treating the sale consideration as asset which has escaped assessment is not sustainable.

A notice u/s. 148A(b) was issued observing that the amount of ₹72,05,085 was received by the assessee as a result of export transaction. The assessee had not filed return of income. Hence, a sum of ₹72,05,084 had escaped assessment. Since the amount of ₹72,05,084 was more that ₹50 lakhs, the said income was amenable to proceedings u/s. 148 and 148A.

Assesee filed his objections to the notice issued u/s. 148A(b). After considering the said reply, an order u/s. 148A(d) was passed rejecting the objections of the assessee and consequentially a notice u/s. 148 was issued.

The assesssee challenged the order dated 25^th March, 2023 passed u/s. 148A(d) of the Act deciding that it was a fit case for issuance of a notice u/s. 148 for assessment/ reassessment of income which had escaped assessment for the assessment year 2016-17. The assesee further challenged the consequential notice u/s. 148 of the Act.

The High Court observed that neither the notice u/s. 148A(b) nor the order u/s. 148A(d), nor the consequential notice u/s. 148 gave any indication that the amount of ₹72,05,084 alleged to be income escaping assessment, included land/building/shares/equities/loans/ advances, etc.

The High Court noted that the assessee had filed a rely to the notice u/s. 148A(b) explaining that the said amount of ₹72,05,084 was gross receipt of sale consideration of 16 scooters. Along with the reply, the details of items sold and payment receipt, computation of total income and computation of tax on total income was worked out.

The High Court observed that the said amount of ₹72,05,084 was the total sale consideration receipt of the transactions in question and not income chargeable to tax, which would obviously be less than the said amount.

The High Court noted the decision of the Karnataka High Court in Sanath Kumar Murali vs. ITO (2023) 455 ITR 370 (Kar) which held that the entirety of sale consideration does not constitute income.

According to the High Court, in passing the order u/s. 148A(d) the Respondent had adopted highly casual and perfunctory approach and elementary aspect of clear distinction between consideration of sale and income chargeable to tax was overlooked.

The High Court opined that had the Revenue arrived at the correct figure of income chargeable to tax instead of gross receipts / consideration, possibility of the amount of ₹72,05,084 coming
down to a figure below ₹50 lakhs could not be ruled out.

The High Court quashed the order u/s. 148A(d) and the notice u/s. 148 with costs.

The Supreme Court dismissed the SLP observing that it was not inclined to interfere with the impugned judgment and order of the High Court.

BCAJ Admin

From Published Accounts

COMPILER’S NOTE

I. Interesting Key Audit Matters in Independent Auditors’ Report:

Assessing Carrying value of Inventory Oberoi Realty Limited (31^st March 2024)

Key audit matters

How our audit addressed the key audit matter

Assessing the carrying value of Inventory

(as described in note 1.2.15 of the standalone financial statements)

As at March 31, 2024, the carrying value of the inventory of ongoing and completed real-estate projects is Rs. 9,18,507.87 lakhs. The inventories are held at the lower of the cost and net realisable value (“NRV”).

The determination of NRV involves estimates based on prevailing market conditions and taking into account the stage of completion of the inventory, the estimated future selling price, cost to complete projects and selling costs.

We identified the assessment of the carrying value of inventory as a key audit matter due to the significance of the balance to the standalone financial statements as a whole and the involvement of estimates and judgement in the assessment.

Our audit procedures included, among others:

• We evaluated the design and operation of internal controls related to testing recoverable amounts with carrying amount of inventory, including evaluating management processes for estimating future costs to complete projects.

• As regards NRV, for a sample of selected projects, compared costs incurred and estimates of future cost to complete the project with costs of similar projects and compared NRV to recent sales or to the estimated selling price.

MATERIAL ACCOUNTING POLICIES

1.2.15 INVENTORIES

i. Construction materials and consumables

The construction materials and consumables are valued at lower of cost or net realisable value. The construction materials and consumables purchased for construction work issued to construction are treated as consumed.

ii. Construction work in progress

The construction work in progress is valued at lower of cost or net realisable value. Cost includes the cost of land, development rights, rates and taxes, construction costs, borrowing costs, other direct expenditure, allocated overheads and other incidental expenses.

iii. Finished stock of completed projects

Finished stock of completed projects and stock in trade of units is valued at lower of cost or net realisable value.

iv. Food and beverages

Stock of food and beverages are valued at lower of cost (computed on a moving weighted average basis, net of taxes) or net realisable value. Cost includes all expenses incurred in bringing the goods to their present location and condition.

II. Business Combination – Acquisition of business from Raymond Consumer Care Limited

Godrej Consumer Product Limited (GCPL) (31^st March 2024)

Key audit matters

Business Combination – Acquisition of business from Raymond Consumer Care Limited

(refer Note 55 to standalone financial statements)

How our audit addressed the key audit matter

The Company has completed the acquisition of FMCG business of Raymond Consumer Care Limited effective 8^th May 2023 pursuant to a business transfer agreement at a total consideration of ` 2,825 crores.

The Company has accounted for such acquisition as a business combination as per Ind AS 103 ‘Business Combinations’ by recognizing identifiable assets and liabilities at fair value.

The measurement of the identifiable assets and liabilities acquired at fair value is inherently judgmental.

Fair value of brands was determined by the Company with the assistance of an external valuation expert using income approach (royalty relief method), considering the assets being measured.

Given the complexity and judgement involved in fair value measurements and magnitude of the acquisition made by the Company, this is a key audit matter.

Our audit procedures included:

• We have read the business transfer agreement to understand the key terms and conditions of the acquisition;

• We have evaluated the accounting treatment followed by the Company with reference to Ind AS 103;

• We have evaluated the design and implementation and tested the operating effectiveness of key internal controls related to the Company’s valuation process;

• We have involved our valuation specialists;

• to gain an understanding of the work of the experts by examining the valuation reports.

• to critically evaluate the key assumptions (including revenue projections, royalty rate, terminal growth rate and discount rate) and purchase price allocation adjustments.

• to evaluate the valuation of acquired tangible and intangible assets based on our knowledge of the Company and the industry.

• We have assessed the adequacy of the Company’s disclosures in respect of the acquisition in accordance with the requirements of Ind AS 103.

NOTE 55: BUSINESS COMBINATION

ACQUISITION OF RAYMOND CONSUMER CARE BUSINESS

On 8^th May, 2023, the Company acquired the FMCG business of Raymond Consumer Care Limited (“RCCL”) through a slump sale for consideration of ₹2,825 crores which included the intellectual property rights of brands like ‘Park Avenue’ and ‘Kamasutra’.

The acquisition date is determined to be 8^th May, 2023, i.e. The date on which the Company obtained control of the business since the consideration was transferred and the business transfer agreement was executed on 8^th May, 2023.

The acquisition was in line with company’s strategy to build a sustainable and profitable personal care business in India by leveraging the categories of personal grooming and sexual wellness. RCCL was one of the key players in these categories with brands such as ‘Park Avenue’ and ‘Kamasutra’ which comprised of a wide product portfolio.

The acquisition had been accounted for using the acquisition accounting method under IND AS 103- “Business Combinations”. All identified assets acquired, and liabilities assumed on the date of acquisition were recorded at their fair value.

The transactions cost of ₹87.83 crores that were not directly attributable to the identified assets are included under exceptional items in the standalone statement of profit and loss comprising mainly stamp duty expenses, legal fees and due diligence costs.

For eleven months ended 31^st March, 2024, the RCCL acquired business contributed revenue from sales of products of ₹466 crores. If the acquisition had occurred on 1^st April, 2023, the management estimates that combined standalone revenue from sales of products would have been ₹8,336.04 crores. In determining these amounts management has assumed that the fair value adjustments, determined provisionally, that arose on the date of acquisition would have been the same if the acquisition had occurred on 1^st April 2023. The profit or loss since acquisition date and combined standalone profit or loss from the beginning of annual reporting period cannot be ascertained as the acquired business is already integrated with the existing business of the company, thereby making it impracticable to do so.

a. Purchase consideration transferred:

The total consideration was ₹2,825 crores which was cash settled. (Net of cash acquired)

b. Details of major assets acquired, and liabilities assumed:

Particulars	Amounts (In Crores)
Specified Tangible Asset
Property, Plant and Equipment
Owned Assets	4.10
Specified Intangibles Assets
Brands	2,199.69
Other Assets
Trade and other receivables	62.70
Inventories	44.30
Cash and cash equivalents	95.86
Bank Balances other than cash and cash equivalents	12.85
Others	18.40
Total identifiable assets (A)	2,437.90
Specified liabilities
Trade payables	70.60
Other liabilities	47.38
Other Provisions	61.22
Total identifiable liabilities (B)	179.20
Total identifiable net assets acquired (A)-(B)=(C)	2,258.70
Total Consideration (D)	2,825.00
Goodwill (D-C)	566.30

c. Measurement of fair values:

i. Specified Intangible Assets – Brands:

Brands were valued based on an independent valuation using the relief from royalty approach, which values the intangible asset by reference to the discounted estimated amount of royalty the acquirer would have had to pay in an arm’s length licensing arrangement to secure access to the same rights.

ii. Inventories:

The fair value is determined based on the estimated selling price in the ordinary course of business less the estimated cost of completion and sale, and a reasonable profit margin based on the effort required to complete and sell the inventory.

iii. Acquired Receivables:

The gross contractual value and fair value of trade and other receivables as at the dates of acquisition amounted to R62.70 crores which is expected to be fully recoverable.

d. Goodwill:

Goodwill amounting to ₹566.30 crores arising from acquisition has been recognised as the difference between total consideration paid and net identifiable assets acquired as shown above.

The goodwill is mainly attributable to the expected synergies to be achieved from integrating the business into the Company’s existing personal care business. None of the goodwill recognised is expected to be deductible for tax purposes.

III. The direct access of certain overseas foreign agents to fund collected on account of freight and other charges

Shipping Corporation of India Limited (31^st March, 2024)

Key audit matters

How our audit addressed the key audit matter

The direct access of certain overseas foreign agents to fund collected on account of freight and other charges:

Liner division of the Company has been carrying out its vessel’s operations and container marketing activities at various ports in India and abroad through its agency network. Agents perform various activities such as marketing, booking, clearing of cargo, port calls of vessels & also collection of freight on behalf of the Company.

The Company depends on its agents for the operation of Liner segment business.

Since all the activities are performed by the agents, there is a requirement of funds. The collection of income is done directly by agents and subsequently remitted to the Company. Therefore, it involves a risk on the part of the Company and hence is identified as a Key Audit Matter

We assessed the Company’s process to evaluate Agents on timely basis to identify the impact on the revenue and collection of funds.

• The Company has obtained bank guarantee from major agents & also reviewed the same periodically to confirm its validity and completeness with respect to risk exposure on revenue due to direct access to agents.

• The Company has provided Statement of Account (SOA) obtained from these foreign agents for confirmation of transactions and closing balance.

IV. Assessing the recoverability of carrying value of Inventory and advances paid towards land procurement (including refundable deposits paid under JDA)

Brigade Enterprises Limited (31^st March, 2024)

Key audit matters

How our audit addressed the key audit matter

Assessing the recoverability of carrying value of Inventory and advances paid towards land procurement (including refundable deposits paid under JDA)

As at 31^stMarch, 2024, the carrying value of the inventory of real estate projects is ₹395,591 lakhs and land advances/deposits is ₹39,944 lakhs respectively.

The inventories are carried at lower of cost and net realisable value (‘NRV’). The determination of the NRV involves estimates based on prevailing market conditions and taking into account the estimated future selling price, cost to complete projects and selling costs.

Deposits paid under joint development arrangements, in the nature of non-refundable amounts, are recognised as land advance under other assets and on the launch of the project, the same is transferred as land cost to work-in-progress. Further, advances paid by the Company to the seller/ intermediary towards outright purchase of land is recognized as land advance under other assets during the course of transferring the legal title to the Company, whereupon it is transferred to land stock under inventories.

The aforesaid deposits and advances are carried at the lower of the amount paid/payable and net recoverable value, which is based on the management’s assessment including the expected date of commencement and completion of the project and the estimate of sale prices and construction costs of the project.

We identified the assessment of the carrying value of inventory and land advances/deposits as a key audit matter due to the significance of the balance that involves estimates and judgement.

Our procedures in assessing the carrying value of the inventories and land advances/deposits included, among others, the following:

• We read and evaluated the accounting policies with respect to inventories and land advances/deposits.

• We assessed the Company’s methodology applied in assessing the carrying value under the relevant accounting standards including current market conditions in assessing the net realisable value
having regard to project development plan and expected future sales.

• We made inquiries with management with respect to inventory of properties on test check basis to understand key assumptions used in determination of the net realisable value/ net recoverable value.

• We enquired from the management regarding the project status and verified the underlying documents for related developments in respect of the land acquisition, project progress and expected recoverability of advances paid towards land procurement (including refundable deposits paid under JDA) on test check basis.

• We obtained and tested the computation involved in assessment of carrying value and the net realisable value/ net recoverable value on test check basis.

V. Accounting and valuation of Hedging Instrument

Dishman Carbogen Amcis Limited (31^st March, 2024)

Key audit matters

How our audit addressed the key audit matter

Accounting and valuation of Hedging Instrument

The Company hedges its foreign currency risk and interest rate risk through derivative instruments and applies hedge accounting principles for derivative instruments as prescribed by Ind AS 109. Receivable pertaining to derivative instruments as at March 31, 2024 is amounting to R9.69 Crores and debit balance of Cash Flow Hedge Reserve of R28.09 Crores as on that date.

These contracts are recorded at fair value and cash flow hedge accounting is applied, such that gains and losses arising from fair value changes are deferred in equity and recognised in the standalone statement of profit and loss when hedges mature and / or when the hedge item occurs.

The valuation of hedging instruments and consideration of hedge effectiveness has been identified as a key audit matter as it involves a significant degree of complexity and management judgment and are subject to an inherent risk of error.

Our procedures included the following:

• Obtained understanding of the Company’s overall hedge accounting strategy, forward contract valuation and hedge accounting process from initiation to settlement of derivative financial instruments including assessment of the design and implementation of controls and tested the operating effectiveness of those controls.

• Assessed Company’s accounting policy for hedge accounting in accordance with Ind AS.

• Tested the existence of hedging contracts by tracking to the confirmations obtained from respective counter parties.

• Tested management’s hedge documentation and contracts, on sample basis.

• Involved our valuation specialists to assist in reperforming the year end fair valuations of derivative financial instruments on a sample basis and compared these valuations with those records by the Company including assessing the valuation methodology and key assumptions used therein.

• Assessed the relevant disclosures of hedge transactions in the financial statements.

VI. Jai Balaji Industries Limited

Key audit matters

How our audit addressed the key audit matter

Accounting Software and Audit Trail

Proviso to Rule 3(1) of the Companies (Accounts) Rules, 2014 for maintaining books of account using accounting software which has a feature of recording audit trail (edit log) facility is applicable to the Company with effect from April 1, 2023, and accordingly, reporting under Rule 11(g) of Companies (Audit and Auditors) Rules, 2014.

We have examined that the company is using customised software and audit trail is enabled but the software and its trail need to be strengthen more.

The Company is in process of implementing more advance and latest ERP Software which will prove to be more efficient and effective for the company. with those records by the Company including assessing the valuation methodology and key assumptions used therein.

• Assessed the relevant disclosures of hedge transactions in the financial statements.

GMR Airports Infrastructure Limited

Key audit matters

How our audit addressed the key audit matter

Accounting for Business combination – composite scheme of amalgamation and arrangement among GMR Airports Limited (GAL), GMR Infra Development Limited (‘GIDL’) and the Company

(refer note 2.2(u) for the accounting policy and note 48 for disclosures of the accompanying standalone financial statements)

Subsequent to year end, the composite scheme of amalgamation and arrangement (the ‘Scheme’) amongst GAL, GIDL and GIL as under Sections 230 to 232 of the Companies Act, 2013 (“Scheme”) was approved by the Hon’ble National Company Law Tribunal (‘NCLT’), Chandigarh bench (‘‘the Tribunal’’) vide its order dated 11^th June 2024 (formal order received on 2^nd July 2024). Such NCLT order was filed with the Registrar of Companies by GAL, GIDL and GIL on 25^th July, 2024 thereby making the Scheme effective from such date.

Pursuant to the NCLT order, GAL and GIDL have been merged with the Company and all the assets, liabilities, reserves and surplus of the transferor companies have been transferred to and vested in the Company. Considering, the transaction is a common control business combination, these Standalone Financial Statements have been prepared by giving effect to the Scheme in accordance with Appendix C of Ind AS 103 by restating the financial statements from the earliest period presented consequent to receipt of approval to the Scheme from NCLT, as further disclosed in Note 48.

The determination of appropriateness of the accounting treatment and the complexities with respect to the control assessment and implementation of the terms of the approved Scheme required significant auditor attention. Accordingly, this matter is identified as a key audit matter for the current year audit.

Further, owing to the significant and pervasive impact of the merger on the accompanying standalone financial statements as disclosed in Note 48, the matter is also considered fundamental to the understanding of the users of the accompanying standalone financial statements.

Our audit procedures to assess the appropriateness of the accounting treatment of the business combination, included, but were not limited to the following:

• Obtained and read the Scheme and final order passed by the NCLT and submitted with the ROC to understand its key terms and conditions.

• Evaluated the design and tested the operating effectiveness of the internal financial controls relevant for recording the impact of the Scheme and related disclosures.

• Assessed the appropriateness of accounting policy of business combination of entities under common control by comparing with applicable accounting standard and that approved in the Scheme which involved assessment of control pre and post-merger.

• Tested the management’s computation for arriving at the value of fully paid-up equity shares to be issued and treatment of reserves as per the Scheme;

• Tested the management’s computation of the amount determined to be recorded in the amalgamation adjustment reserve; and

• Assessed the adequacy and appropriateness of the disclosures made with respect to the accounting of the transaction under the Scheme in note 48 to the accompanying standalone financial statements, as required by the applicable Indian Accounting Standards.

Material Accounting Policies

Note 2.2(u): Revised financial statements after approval of scheme of merger

The standalone financials of the Company for the year ended 31^st March, 2024 were earlier approved by the Board of directors at its meeting held on 29^th May, 2024 and reported upon by the statutory auditors vide their report dated 29^th May, 2024. The said standalone financial statement did not include the effect of scheme of merger of GAL with GIDL followed by merger of GIDL with the Company which was approved by the Hon’ble National Company Law Tribunal, Chandigarh bench (“the Tribunal”) vide its order dated 11^th June, 2024 (Certified copy of the order received on 2nd July, 2024). The said Tribunal order was filed with the Registrar of Companies by GAL, GIDL and the Company on 25^th July, 2024 thereby the Scheme becoming effective on that date from the appointed date of 1^st April, 2023 for merger. As a result, the aforesaid standalone financial statements have been revised by the Company so as to give effect to the Composite scheme of amalgamation and arrangement (‘Scheme’) in accordance with Appendix C of Ind AS 103 “Business Combination” from the earliest period presented consequent upon receipt of approval to the Scheme from National Company Law Tribunal (NCLT). Further, the subsequent events so in far it relates to the revision to the standalone financial statements are restricted solely to the aforesaid matter relating to the scheme and no effects have been given for any other events, if any, occurring after 29^th May, 2024 (being the date on which standalone financial statements were first approved by the board of directors of the company). Also refer note 48 to the standalone financial statements.

Note 48: Business Combination – Common control transaction

a. The Board of directors in its meeting held on 19^th March, 2023 had approved, a detailed Scheme of Merger of GAL with GIDL followed by merger of GIDL with the Company referred herein after as Meger Scheme. Subsequent to year ended 31^st March, 2024, the Merger Scheme has been approved by the Hon’ble National Company Law Tribunal, Chandigarh bench (“the Tribunal”) vide its order dated 11^th June, 2024 (Certified copy of the order received on 2^nd July, 2024). The said Tribunal order was filed with the Registrar of Companies by GAL, GIDL and the Company on 25^th July, 2024 thereby the Scheme becoming effective on that date.

Accordingly, GAL merged with GIDL and merged GIDL stands merged into the Company with an appointed date of 1^st April, 2023 and the standalone Financial Statements of the Company have been prepared by giving effect to the Composite scheme of amalgamation and arrangement in accordance with Appendix C of Ind AS 103 “Business Combination” from the earliest period presented consequent upon receipt of approval to the Scheme from National Company Law Tribunal (NCLT). The difference between the net identifiable assets acquired and consideration paid on merger has been accounted for as capital reserve on merger.

Pursuant to the Scheme of amalgamation, 3,41,06,14,011 equity shares and 65,111,022 Optionally Convertible Redeemable Preference Shares (OCRPS) will to be issued to Groupe ADP by the Company. These equity shares was presented under equity share capital pending issuance and OCRPS pending issuance respectively for the current period and comparative period. As part of the Scheme, the equity shares held by the Company in merged GIDL stands cancelled.

Accounting of amalgamation of the Merged GIDL with the Company

i. On the Scheme becoming effective on 25^th July, 2024 (“Effective Date”), the Company has accounted for the amalgamation in accordance with “Pooling of interest method” laid down by Appendix C of Ind AS 103 (Business combinations of entities under common control) notified under the provisions of the Companies Act, 2013.

ii. The cumulative carrying amount of investments held by the company in Merged GIDL in form of equity shares and OCRPS shall stand cancelled together with the cumulative corresponding unrealised gain recognised in FVTOCI reserve, and related deferred tax liability.

iii. The Company has recorded all the assets, liabilities and reserves of the Merged GIDL, vested in the Company pursuant to the Scheme, at their existing carrying amounts.

iv. The loans and advances or payables or receivables or any other investment or arrangement of any kind, held inter se, between the Merged GIDL and the Company have been cancelled.

v. The difference between the book value of assets, liabilities and reserves as reduced by the face value of the equity shares and OCRPS issued by the Company and after considering the cancellation of inter-company investments was recorded in other equity of the Company.

The book value of assets, liabilities and reserves acquired from Merged GIDL as at 1^st April, 2023 were:

Particulars	Amount (In Crores)
ASSETS
Non-current assets
Property, plant and equipment	2.43
Capital work-in-progress	46.49
Right of use assets	3.62
Financial assets
Investments	47,082.91
Loans	808.10
Other financial assets	37.16
Income tax assets (net)	22.73
Deferred tax assets (net)	107.28
Other non-current assets	20.01
Total	48,130.73
Current assets
Financial assets
Investments	445.45
Trade receivables	74.80
Cash and cash equivalents	41.20
Bank balances other than cash and cash equivalents	4.86
Loans	147.82
Other financial assets	222.89
Other current assets	33.17
Total	970.19
	49,100.92
LIABILITIES
Non-current liabilities
Financial liabilities
Borrowings	1,949.99
Lease liabilities	3.71
Other financial liabilities	143.39
Provisions	9.54
Deferred tax liabilities (net)	9,198.74
Other non current liabilities	20.67
Total	11,326.04
Current liabilities
Financial liabilities
Borrowings	3,122.18
Lease liabilities	0.07
Trade payables	102.75
Other financial liabilities	494.04
Other current liabilities	50.27
Provisions	4.46
Total	3,773.77
Total liabilities	15,099.81
Net assets acquired	34,001.11
Less: Investment in merged entity (net off fair valuation and deferred tax effect thereon)	-4,456.57
	29,544.54

Particulars	(` in crore)
Represented by:
Fair valuation through other comprehensive income (’FVTOCI’)	33,207.01
Special  Reserve  u/s  45IC of  Reserve Bank  of  India  (’RBI’)  Act	81.05
Securities Premium	1,251.36
Retained earnings	-2,228.82
Capital reserve	0.23
Equity share pending issuance	341.06
OCRPS pending issuance	260.44
Amalgamation adjustment deficit account	-3,367.81

b. The Board of Directors of the Company vide their meeting dated 17^th March, 2023 had approved the settlement regarding Bonus CCPS B, C and D between the Company, erstwhile GMR Airports Limited (GAL) and Shareholders of erstwhile GAL wherein cash earnouts to be received by Company were agreed to be settled at ₹550.00 crore, to be paid in milestone linked tranches and conversion of these Bonus CCPS B, C and D will take as per the terms of settlement agreement. Further, the Company, erstwhile GAL and Shareholders of erstwhile GAL had also agreed on the settlement regarding Bonus CCPS A whereby erstwhile GAL will issue such number of additional equity share to the Company and GMR Infra Developers Limited (‘GIDL’) (wholly owned subsidiary of the Company) which will result in increase of shareholding of Company (along with its subsidiary) from current 51 per cent to 55 per cent in erstwhile GAL. The settlement was subject to certain conditions specified in the settlement agreements. As part of the settlement agreement, the Company has received 4 tranches of ₹400.00 crore towards the sale of these CCPS till 31^st March, 2024. Subsequent to balance sheet date, on completion of conditions precedent the Company has received last tranche of ₹150.00 crore towards the sale of these CCPS. On 17^th July, 2024 the board of directors of erstwhile GAL has approved the conversion of CCPS A, B, C and D into equity shares of erstwhile GAL.

c. On 10^th December, 2015, the Company had originally issued and allotted the 7.5 per cent Subordinated Foreign Currency Convertible Bonds (FCCBs) aggregating to US$ 300 Mn due 2075 to Kuwait Investment Authority (KIA) and interest is payable on annual basis.

Pursuant to the Demerger of the Company’s non-Airport business into GMR Power and Urban Infra Limited (GPUIL) during January 2022, the FCCB liability was split between the Company and GPUIL. Accordingly, FCCBs aggregating to US$ 25 Mn. were retained and redenominated in the Company and FCCBs aggregating US$ 275 Mn. were issued to KIA by GPUIL. As per applicable RBI Regulations and the terms of the Agreements entered into between KIA and the Company, the Company had the right to convert the said FCCBs into equity shares at a pre-agreed SEBI mandated conversion price. Upon exercise of such conversion right, KIA would be entitled to 1,112,416,666 equity shares of the Company.

Subsequent to 31^st March, 2024, the US$ 25 Mn. 7.5 per cent Subordinated Foreign Currency Convertible Bonds (FCCBs), issued by the Company to KIA have been transferred by KIA to two eligible lenders i.e., Synergy Industrials, Metals and Power Holdings Limited (“Synergy”) (US$ 14 Mn) and to GRAM Limited (“GRAM”) (US$ 11 Mn).

The 7.5 percent US$ 25 Mn. FCCBs have been converted dated 10^th July, 2024 into 111,24,16,666 number of equity shares of ₹1/- each, proportionately to the above-mentioned two FCCB holders, as per the agreed terms and basis receipt of a conversion notice from the said FCCB holders. As the FCCB holders are equity investors, and as a part of the overall commercials between the parties, the outstanding interest on the FCCB’s of ₹100.43 crore was waived.

BCAJ Admin

Waiver Scheme

Equity and Taxation are considered as aliens to each other. Successive Governments have introduced amnesty, dispute resolution, waiver and / or trade facilitation schemes for benefit of taxpayers. Legal ambiguity, legacy laws, tax augmentation, administrative backlog, etc. have been the primary drivers for such schemes. While every scheme is open to criticism for being detrimental to the interest of tax diligent persons, being a policy decision and beneficial to a litigant class, they have not been challenged on the grounds of equality. However, these optional schemes are subject to strict application of the law, with Courts inclined to examine the intent only in case of any ambiguity in the law. This implies that applicants or cases which are not expressly included in the scheme cannot take shelter under such schemes. One such scheme has been proposed by way of insertion of Section 128A to CGST Act, 2017.

Though the scheme has been understood by many as an ‘amnesty’, it should be appreciated that the scheme neither provides for any haircut in ‘tax payments’, nor does it provide for immunity from prosecution, late fees, redemption fines, etc. The waiver is conditional and limited only towards interest and penalty payable under specific disputes. It would be inappropriate to term this as a ‘dispute resolution’ since the scheme does not preclude the revenue from agitating the matter even on conclusion of the order. Moreover, in case the taxpayer is denied the benefit of the scheme, the taxpayer is entitled to continue with the dispute before appropriate appellate forums and seek remedial action. It would hence be appropriate to classify the scheme as a ‘conditional waiver scheme’, where the waiver is extended to only interest and penalty, subject to the taxpayer discharging the disputed tax and abandoning its right to litigate the said matter.

BROAD CONTOURS

This scheme has been implemented, pursuant to the decision of the 53^rd GST Council, by insertion of Section 128A providing for conditional waiver of interest or penalty relating to tax demands raised u/s 73 for the FY 2017-18 to FY 2019-20. Considering the difficulties in initial stages of GST implementation, tax demands pursuant to genuine legal disputes (such as GSTR-2A v/s. 3B difference, rate classification, taxability, etc) are attempted to be settled on full payment of tax reported in the notice or order on or before the notified date¹. One cannot seek redressal over the merits of the matter and opting for the scheme does not imply acceptance of the legal proposition canvassed in the dispute. The waiver also does not cover demands of erroneous refund and those pertaining to the tax period from FY 2020-21. Rule 164 has also been inserted prescribing procedures and forms related to the waiver. The CBIC has issued Circular No. 238/32/2024 dt. 15th October, 2024 clarifying many aspects of the scheme.

1 31.03.2025 for S.73 cases and 6 months in cases subsequently converted into S.73

SCOPE OF SCHEME

Section 128A under ‘Chapter 19 — Offences and Penalties’ grants a conditional waiver of interest and penalty on payment of the tax payable arising from the said proceedings in the following situations:

i.Show Cause notice (DRC-01) has been issued u/s 73 and such notice is pending adjudication;

ii. An adjudication order u/s 73(9) (DRC-07) has been issued and no appellate order has been passed against such order;

iii. An appellate order has been passed by the first appellate authority and no further appellate order (second appellate authority onwards) has been passed against the said appellate order.

CONDITIONS OF SCHEME

The above interest and penalty waiver is subject to certain conditions:
i. Full amount of tax payable as per the notice / order is discharged on or before the notified date;

ii. Demands raised u/s 74 (unless converted into Sec. 73 pursuant to a specific appeal) or any other sections² are not covered under the scheme;

iii. Issue of recovery of erroneous refund is not covered under the scheme;

iv. Appeal / writ petition should be withdrawn on or before the notified date;

v. On favourable conclusion of the scheme, the underlying order cannot be continued in appeal or writ.

2 Section 52, 76, 122, 123, 124, 125, 127, 129 or 130

PROCEDURE FOR AVAILMENT OF SCHEME

The scheme would be implemented through the GSTN Portal and eligible persons would have to follow a defined process:

a) Preparatory Stage

STEP 01: Check the eligibility of the scheme based on the applicable notice/ order (i.e. DRC-01 or DRC-07 or APL-04), period involved and the issues which are covered under the scheme. File a letter with the appropriate authority to upload the said notice / order in case the same is not visible on the electronic portal;

STEP 02: Withdraw the appeal or petition filed by making an application in APL-01W and obtain a withdrawal order from the appropriate authority — one need not await the withdrawal order for proceeding further;

STEP 03: Quantify the tax payment (year wise). Discharge the tax payment in full for the demand quantified in the said demand notice / order vide DRC-03 with appropriate narration of the notice/ demand reference number (including demand for erroneous refund) — exclusion may be made for input tax now available pursuant to introduction of section 16(5);

STEP 04: Once the demand is available on the common portal, apply for mapping the DRC-03 with the relevant demand order uploaded on the common portal with the proper officer in form DRC-03A — verify the mapping of the said payment with demand order in the electronic credit ledger.

b) Application Stage

STEP 05: Where the tax demand is proposed in DRC-01, file an application in SPL01 reporting the details of the DRC-01 and the corresponding tax payments details (if any) in DRC-03;

STEP 05A: Alternatively, in case of confirmed demand u/s 73 or 107 appeal proceedings, an application in SPL02 reporting the corresponding demand order and the tax payment details in Electronic Liability Ledger or DRC-03 & 3A would be reportable;

STEP 06: Upload the self-certified copy of relevant notice / order along with the withdrawal application / order and any order documents (such as order of High Court, communication with officers etc) and establish mapping the tax payment with the demand notice along with application in SPL-01/02.

c) Processing Stage

STEP 07: The officer would issue a notice in SPL-03 in cases where the application is ineligible for the scheme, granting an opportunity for appearance. A response to the said notice in SPL-04 would be submitted;

STEP 08: In case the application is accepted, the officer would issue an order in SPL-05 concluding the proceedings under the scheme. The liability proposed in DRC-01 would be considered as recovered in full and the liability demanded in DRC-07 or APL-04 would be accordingly modified in PMT-01.

d) Redressal Stage

STEP 09: In case the application is rejected³, officer would issue an order in SPL-07 mentioning the reasons for rejection. The said order is subject to appeal u/s 107 before first appellate authority.

STEP 10: In case the tax payer does not file an appeal u/s 107 against the order of rejection (in SPL-07), the original appeal (on merits) would stand automatically restored. In case the matter was pending before the High Court, the petitioner would have to make an application for restoration before the appropriate court.

3 On account of incomplete payment; payment made after the date notified in Section 128A; Notice/ Order pertaining to sections other than section 73; appeal/ writ petition filed before Appellate Authority/ Appellate Tribunal/High Court/ Supreme

e) Post Processing Stage

STEP 11: In case the tax payer files an appeal u/s 107 against the order of rejection (in SPL-07), the ‘128A waiver appeal’ would be examined by the appropriate appellate authority and an appropriate decision would be made. Where such appeal is admitted and allowed, the appellate authority would issue an order in SPL-06 concluding the proceedings and also directing payment of any shortfall in interest or penalty not covered under the scheme. Where the ‘128A waiver appeal’ is dismissed and the appellant decides give-up any further remedy, the ‘original appeal’ on merits would be restored and matter would follow the regular course of appellate remedy on merits.

STEP 12: The conclusion of the proceeding is subject to payment of the demand specified in SPL-05/06 within the specified time frame.

STEP 13: In the eventuality of a rejection order in SPL-07, an appropriate appeal would have to be filed in terms of the appeal provisions u/s 107/112 and in case the appeal is not sought to be preferred at any stage, a declaration may be filed stating its intention so that the appeal on merits stands restored.

f) Restoration Stage

STEP 14: Once the appeal against the wavier order has attained finality, the original appeal on merits would be restorable and the applicant would be permitted to argue the case on merits despite having made the entire tax payment under the scheme. The liability under the Electronic Payment ledger would be maintained as it is.

Particulars	Timelines	Remarks
Payment of Tax demanded pursuant to notice/ order u/s 73	Notified date	31^st March, 2025
Withdrawal of appeal (if any)	Before SPL-02	30^th June, 2025
Application in SPL-01/02	3 months	30^th June, 2025
Rejection notice in SPL-03	3 months from SPL-01/02	Mapped to application date
Response in SPL-04	1 months from SPL-03	Mapped to SPL-03
Acceptance Order in SPL-05	3 months from SPL-01/02	No SPL-03 cases
	3 months from SPL-04⁴	Reply filed in SPL-04
	4 months from SPL-033	No reply filed in SPL-04
Rejection order in SPL-07	Same as above³	Same as above
In case of Appeal against SPL-07	3 + 1 months as specified in appellate section 107/112	Regular appeal provisions apply to rejection order
Appellate acceptance in SPL-06	No time limit	NA
Appellate rejection in APL-04	No time limit	NA
Shortall in payments of tax, interest or penalty	3 months of demand	In cases of departmental appeal, revision, etc
128A application for S. 74 notices/ orders which are subsequently converted into S.73	6 months from 73 order and the subsequent sequence of events above would follow suit	Pursuant to application of 75(2) appellate/ court proceedings

4 In cases where the withdrawal order is not uploaded, the time limit from date of application in SPL-02 till the date of filing the withdrawal order would be excluded for purpose closure of the proceedings

Note – If no acceptance order is issued within the timelines for SPL-05, the application would be deemed to be approved and the proceedings are concluded with necessary modifications carried out in the Electronic Liability Register.

PROCEEDINGS EXCLUDED FROM THE SCHEME

The stages of notices or proceedings are excluded if the same are not converted into a proceeding under section 73.

Stages / Forms	Covered
ASMT-10 (Scrutiny)	No
ADT-01 / ADT-02 (Audit)	No
INS-01 (Inspection / Search)	No
MOV-09 (E-Way Bill Interception without DRC-01 or DRC-07 u/s 73)	No
MOV-09 (E-Way Bill Interception with DRC-01 or DRC-07 u/s 73)	Yes
Only Penalty – DRC-01 / DRC-07 u/s 122 only	Yes
Only Interest – DRC-01 / DRC-07 u/s 50 only	Yes

In such scenarios, the taxpayer would have to filter out the frivolous / clarificatory matters through its legal submission and urge the officers to proceed with the matter into adjudication — which typically would be performed u/s 74 in view of the expired time limit of section 73.

FAQS / COMMON QUESTIONS IN RESPECT OF THE SCHEME

Q1 – Can the applicant cherry pick a particular issue or year from within a notice / order for closure u/s 128A?

Pick a particular issue — Section 128A(1) states that the scheme would be available only on full payment of the tax liability under the notice/ order. Since the scheme is designed qua the notice or order, the applicant cannot cherry pick any issue for waiver and seek appellate remedy for the rest. In view of specific wordings, the scheme has been designed for closure of the entire notice / order and there is no window for authorities to conclude the notice / order partially. Even in cases where a particular issue pertains to erroneous refunds, it has been specified in the rules that the applicant would have to settle the tax demands from such erroneous refunds to be eligible for the scheme (Rule 164(3) and Q5 of Circular).

Pick a particular year – Where notices have been issued for a larger assessment period, with the scheme being limited to the first 3 years, one would have to settle the tax, interest and penal liability for the years 2020-21 onwards. Once again, the taxpayer is not permitted (in view of Rule 164(4) r.w. Q6 of Circular) to cherry pick any particular year from among the notice / order period. Taxes for all the years would have to be discharged including those which are not covered under the scheme prior to application of the scheme. To tabulate the above issue:

Consolidated Notice/ Order	2017-18	Apply for scheme
	2018-19
	2019-20
	2020-21	No appellate remedy for next 2 years — consequential tax, interest and penalty to be paid
	2021-22
Notice for each year is separately issued	2017-18	Apply for Scheme or choose to appeal
	2018-19	– same as above –
	2019-20	– same as above –
	2020-21	Appeal remedy
	2021-22	Appeal remedy

A careful SWOT assessment and numerical analysis of the proceeding would have to be performed to address such dilemma. Alternatively, taxpayer can seek the intervention of the court which have directed the revenue authorities to split the SCNs year wise and permitted the taxpayer to avail the scheme.

Q1A – As a follow-up issue, can applicant seek a direction from the High Court for splitting the issue year-wise or issue-wise and then pick / choose a particular matter for closure under the scheme?

Section 73/74 does not bar the proper officer to consolidate all the tax issues for multiple assessment period in one show cause notice. But courts have recognised that each financial year is a separate assessment unit and hence there does not seem to be much difficulty in obtaining separate notices / orders for each assessment year by a direction from the High Court.

The open-ended wordings of section 73/74 also do not bar multiple issues in one single notice / order. Conversely it does not also bar the proper officer separate the issues in separate notices and consequently separate orders. This leaves the proper officer with significant discretion for adjudication proceedings. Is the discretion at the officer’s end determinative of the eligibility of taxpayer under the scheme? The answer unfortunately appears to be in the affirmative for reasons discussed below.

By now we are aware that Section 128A has been legislated for the notice / order in totality. But if one where to examine the fundamentals of taxability and its recovery through adjudication proceedings, each outward and inward supply stands on its own merits. GST law being a ‘transaction-based tax’, each supply would have to be independently examined for all the taxable aspects (such as taxability, rate of tax, time of supply, place of supply, etc) and hence any short payment or non-payment would be a separate proceeding even if they are contained in a single notice / order. Similarly, availability of input tax credit is also linked to each inward supply and its eligibility (including its usage) is to be analysed on an input invoice basis. Having said this, equity demands that 128A ought to have been designed keeping in perspective this fundamental principle of taxation.

5 Titan Company Ltd. v. Joint Commissioner of GST & Central Excise [2024] 159 taxmann.com 162 (Madras) & Veremax Technologie Services Ltd. & ACT Bengaluru [2024] 167 taxmann.com 332 (Karnataka)

Historically, adjudication proceedings were ‘issue specific’ and notice on a particular issue did not preclude another notice on a distinct issue. Assessments, on the other hand, were ‘period specific’ in so far as the assessment involved conclusion for the assessment year as a whole. The practical experience of adjudication seems to have overtaken the academic essence of assessments and the GST Council / Legislature, have thought it fit in their wisdom (keeping the administrative hurdles) to design the waiver scheme for the adjudication proceeding as a ‘whole’ and refrain from entering into granular aspects. The defence for such an approach would be that optional schemes are the prerogative of the legislature and any grievance on this aspect may not be sustainable even before Constitutional Courts. If one were to invoke the fundamental principles of equity, Courts may treat both the taxpayers (one with a consolidated proceeding vis-à-vis individual proceeding) as unequals from the perspective of adjudicative and administrative procedure, which is the primary bedrock for introduction of this scheme. While an issue wise fragmentation may be tested before Courts, it would defeat the very purpose of even approaching this scheme as it would add another layer of a litigation to a dispute resolution-oriented approach of the taxpayer.

Q2 – Are Section 74 notices / demands totally barred from relief under this scheme?

Section 128A has been designed to grant relief vis-à-vis a specific proceeding and implicitly excludes all other proceedings under the Act. Taxes payable u/s 74 is one such implicit exclusion u/s 128A or rule 164. Considering the grievance of taxpayers who have received SCNs alleging fraud / suppression, etc u/s 74 even on issues of genuine misclassification, numerical discrepancies, legal ambiguity, etc, the scheme has provided for a separate window for clearance of such proceeding.

Section 75(2) provides that in cases where the appellate authority overturns the grounds of fraud/ suppression, etc, the proper officer would have to conclude the proceedings u/s 73(9) within 2 years from appellate order u/s 75(3). The scheme recognises this and extends the waiver even to such scenarios, permitting the taxpayer to apply in SPL-02 subsequent to the revised adjudication order u/s 73 of the Act. In effect, the scheme would come into operation only after the adjudication order u/s 73 is passed in favour of the taxpayer.
Curiously, this mis-action by the department would lead to multiple advantages to the taxpayer:

– Firstly, the taxpayer now possesses the flexibility of applying for the scheme and making the requisite tax payment only after the revised adjudication order u/s 73(9); effectively giving the taxpayer an indefinitely long time period to make the tax payment without any additional interest or penal implications;

– Secondly, the taxpayer also has the opportunity to argue the issues on merits and seek redressal of any patently unsustainable tax demands which would otherwise not be available to an applicant subjected to 73 proceedings on similar issues;

– Thirdly, the taxpayer is also benefited by exclusion of tax demands which are barred by the period of limitation on account of conversion of proceedings from section 74 to 73;

– Fourthly, the taxpayer can advance arguments for splitting a single order into multiple orders and treatment of each of the same independently under the legal provisions;

While the scheme would apply in entirety for recipients of SCNs u/s 73, other applicants who are initially subject to proceedings u/s 74 can avail the scheme at their option after the appellate authority delivers its decision on the grounds of fraud, suppression, etc. Barring cases of circular trading, fake bill cases and tax fraudulently collected, it appears that multiple taxpayers would explore the opportunity to avail the benefit of these scheme at a later point in time, enjoying the interest arbitrage.

Q3 – While the applicant cannot file an appeal, can the department file an appeal or revise an order subsequent to conclusion of under the scheme?

Yes, the scheme functions as a waiver scheme and is limited only to wavier of interest or penalty but does not provide any immunity from assessment/ appeal of the subject period. The conclusion of the proceedings by virtue of SPL05/06 is to the extent of the adjudication process and not further. The revenue can separately initiate proceedings including filing an appeal or revision under the respective sections against the underlying adjudication or appellate order (including SPL-05/06) which has been subjected to the scheme. A particular issue, which was previously dropped or not examined appropriately, can theoretically be agitated in departmental appeal or revisionary proceedings. Unfortunately, the applicant would have to discharge the additional tax quantified under the scheme within 3 months from the date of the enhanced order. Where the applicant believes that the enhancement is not in order, the next appellate remedy would have to be pursued and depending on the outcome, the enhanced tax would be liable to be discharged (Q8. of Circular). The
silver lining would be that the taxpayer would be eligible for the waiver of interest and penalty for the additional tax liability which was demanded by virtue of this process.

Q4 –Can parallel proceedings initiated (either before or after the scheme) abate by virtue of this scheme?

As stated above, the scheme does not place any bar on the department to initiate proceedings on the similar subject matter or any other subject matter. Moreover, the conclusion of the proceeding is not with reference to the merits of the matter, rather only with respect to the adjudicative / appellate process governing the notice / order. For example, an applicant obtains conclusion for an adjudication order (in DRC-07) in respect of numerical differences in input tax credit in GSTR-2A v/s 3B. Pursuant to an inspection or scrutiny proceedings, the tax department discovers that some vendors have failed to discharge their output taxes and have escaped the issue in the original adjudication. Invoking the adjudication powers, fresh notices can be issued against the applicant, and the said proceedings would be independently viewed and cannot be clubbed to be covered / admitted in the original adjudication proceedings. In essence, the department is not precluded from initiating proceedings on the very same issue or rake up fresh issues by virtue of the closure order issued under the scheme. Even if parallel proceedings are underway on similar subject matter by the corresponding administration, the scheme would achieve closure only in so far as the notice / order which has subjected to the scheme and the parallel proceedings would be governed by regular provisions of the Act.

Q5 – Whether appeal should be filed for orders which are anyway being withdrawn as part of waiver scheme?

There are cases (especially for 2019-20) where orders are passed or due to be passed before February 2025. Filing an appeal and withdrawing the same for purpose of application of the scheme may seem a futile exercise. Yet, it is advisable to file the appeal and withdraw on three counts:

(a) the scheme covers cases where an adjudication order has been passed and no appellate order has been passed. The provision does not explicitly state whether an appeal proceeding should be pending as on the date of the application. Though, the condition has been worded in the negative, revenue can very well interpret that pendency of appeal is implicit, since only in such scenarios one can state that an appellate order is due to be passed. To address this technical interpretation, filing an appeal may be an advisable option.

(b) In the eventuality the waiver application is rejected, the scheme mandates that the original appeal in merits (which was withdrawn) would be re-instituted. This presupposes that an appeal was originally filed. The scheme does not in anyway permit fresh filing of appeal (on merits) after rejection of the waiver application. Neither does it grant an exclusion in the time period for the time spent in processing of the wavier application. Thus, in order to protect one’s interest in pursuing the appellate remedy, it would be suitable to file an appeal and subsequently withdraw the same prior to an application before the waiver scheme.

(c) More importantly, the waiver application may take time to process and conclude. Till the time of the favourable conclusion of the waiver application, there is a risk of recovery proceedings being initiated and if such proceedings are initiated, the taxpayer will have no recourse but to knock the doors of the High Court.

Q6 – Who is the proper officer for application of the scheme?

Rule 164 prescribes that the proper officer would be the authority who is under law entitled to recover the tax, interest and penalty arising from the order u/s 79. Where the waiver is in respect of the notice itself, the proper officer would be the officer who has issued the notice u/s 73.

Q7 – Whether the recipient of output invoice is eligible for input tax credit for tax payments under thescheme?

Supplier applicants who have been alleged with short payment of tax are entitled to the scheme on differential output tax paid since the tax paid would be considered as part of proceedings u/s 73. For example, automobile OEM suppliers who have been subject to intense litigation on the applicable rate for parts are considering opting for the scheme and passing on the said
burden to the manufacturers/ dealers for availment of the input tax credit by issuance of a ‘supplementary invoice’. This is possible in B2B transactions as the customer would be eligible for input tax credit and the same would not be barred under the provisions of section 17(5)(i).

Q8 – Whether orders / notices limited to interest or penalty are eligible under the scheme?

Section 128A specifies that notices/ order which report a ‘tax payable’ are eligible for waiver under the scheme. Though this phrase ‘tax payable’ is adopted, the rules and circular indicate that taxes already paid (in part or full) would also be adjusted under the scheme (Q1, 2 & 4 of Circular). Though tax liability is a sine-qua-non for invocation of the rights under the scheme, the tax need not be unpaid as on the date of the scheme. However, the circular makes a mention that ‘self-assessed taxes’ which are paid would not be eligible for the scheme and the interest or penalty would be payable in such scenarios.

CONCLUSION

The scheme clearly has all the ingredients of the experience of the Government administration from earlier amnesty and dispute resolution scheme. Old disputes of mapping tax demands, lack of appellate remedy and restoration, time frame under a quasi-judicial process, etc which were missing in the legacy schemes are eminently visible in this current format. The circular issued by the Government is also progressive and granted the relief to advance the object of the scheme. In the midst of the everlasting debate of equity in such schemes, on may state that the approach of the Government for launching this scheme is fairly commendable.

BCAJ Admin

Part A | Company Law

12 In the Matter of:

M/s. Venkatramana Food Specialities Limited

Registrar of Companies, Puducherry

Adjudication Order No. ROC/PDY/Adj / Sec.203 / 02550/ 2024

Date of Order: 9^th October, 2024

Adjudication order for violation of section 203 of the Companies Act 2013 (CA 2013) by the Company: Failure to fill the vacancy arising from the resignation of the whole time Company Secretary within a period of 6 months.

FACTS

The company had appointed a Whole-time Company Secretary on 15^th April 2019 as required under the provisions of Section 203(4) read with Rule 8A of the Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014. Subsequently, the said Secretary resigned and moved out of the company from 26th December, 2019.

The company was required to appoint a whole-time company secretary on or before 20^th June, 2020 i.e. within 6 months from the date of resignation (26^th December, 2019). However, the company appointed a whole-time secretary who joined w.e.f. 9^th December, 2023. Thus, there was a delay of 1442 days in the appointment of the Company
Secretary. (From 27^th December, 2019 to 8^th December, 2023).

The show-cause notice was issued and hearing was fixed. The authorised representative explained that due to Covid it was not possible to appoint any CS even after many advertisements and it was difficult to appoint a whole time Company Secretary. However, the default was accepted for the adjudication.

PROVISIONS OF THE ACT IN BRIEF:

Section 203(4) of CA 2013:

If the office of any whole-time key managerial personnel is vacated, the resulting vacancy shall be filled-up by the Board at a meeting of the Board within a period of six months from the date of such vacancy.

Note: Section 203(1) requires certain classes of companies to have a whole-time key managerial personnel which includes a Company Secretary.

Section 203(5) of CA 2013:

If any company makes any default in complying with the provisions of this section, such company shall be liable to a penalty of five lakh rupees and every director and key managerial personnel of the company who is in default shall be liable to a penalty of fifty thousand rupees and where the default is a continuing one, with a further penalty of one thousand rupees for each day after the first during which such default continues but not exceeding five lakh rupees.

FINDINGS AND ORDER

Considering the default and acceptance of the same by the company, the Adjudication Officer, imposed a Penalty of ₹20 Lakhs as under:

Penalty imposed on	Calculation	Amount ( R)
Company	As per the provisions of Section 203(5)	5,00,000
Each of the 3 directors	[50,000+(R1000 per day for 1442 days) Subject to Maximum of R5 Lakhs per Director] X 3	15,00,000
	Total	20,00,000

13 In the Matter of M/s. Shunmugam Traders Private Limited

Registrar of Companies, Tamil Nadu, Chennai

Adjudication Order No. ROC/CHN/SHUNMUGAM/ADJ/S.137/2024

Date of Order: 16^th September, 2024

Adjudication order for violation of section 137 of the Companies Act 2013(CA 2013) by the Company: Non-Filing of Financial Statements.

FACTS

It was observed from the MCA records that the company has filed its financial statements only up to the financial year 2014-2015. Since the company and its directors have not filed its financial statements up to date, Section 137 of the Companies Act, 2013 has been contravened and the defaulters are liable for action under section 137 (3) of the Companies Act, 2013. Accordingly, on submission of the inquiry report by the officer, Regional Director, Ministry of Corporate Affairs, Chennai had directed to take necessary action against the defaulters under the provisions of the Companies Act, 2013 for the financial year 2015-2016 to till date.

(i.e. FY 2022-23)

PROVISIONS OF THE ACT IN BRIEF:

Section 137 of the Companies Act, 2013-

Copy of financial statement to be filed with the Registrar:

(1) A copy of the financial statements, including consolidated financial statement, if any, along with all the documents which are required to be or attached to such financial statements under this Act, duly, adopted at the annual general meeting of the company, shall be filed with the Registrar within thirty days of the date of annual general meeting in such manner, with such fees or additional fees as may be prescribed.

(2) Where the annual general meeting of a company for any year has not been held, the financial statements along with the documents required to be attached under subsection(l), duly signed along with the statement of facts and reasons for not holding the annual general meeting shall be filed with the Registrar within thirty days of the last date before which the annual general meeting should have been held and in such manner, with such fees or additional fees as may be prescribed
(3) If a company fails to file the copy of the financial statements under sub-section (1) or sub-section (2), as the case may be, before the expiry of the periods specified therein, the company shall be liable to a penalty often thousand rupees and in case of continuing failure, with a further penalty of one hundred rupees for each day during which such failure continues, subject to a maximum of two lakh rupees, and the managing director and the Chief Financial Officer of the company, if any, and, in the absence of the managing director and the Chief Financial Officer, any other director who is charged by the Board with the responsibility of complying with the provisions of this section, and, in the absence of any such director, all the Directors of the company, shall be liable to a penalty often thousand rupees and in case of continuing failure, with further penalty of one hundred rupees for each day after the first during which such failure continues, subject to a maximum of fifty thousand rupees.

FINDINGS AND ORDER

Considering the default and further considering the fact that no response was received from the company, the Adjudication Officer concluded that the company and its directors have violated Section 137(3) of the companies Act, 2013. For the purposes of levy of penalty, date of AGM was considered as 30^th September of the respective financial year.

Financial Year for which Penalty was levied	Final Penalty imposed on the Company and the Officers in default (Amount in R)
2015-16	4,50,000
2016-17	4,50,000
2017-18	4,50,000
2018-19	4,35,800
2019-20	3,99,200
2020-21	3,62,700
2021-22	3,26,200
2022-23	2,38,200
Total	33,12,100

Further, in exercise of Section 454 (3) (b) of the Companies Act,2013 the company was directed to rectify the default by filing Financial Statements for the remaining periods i.e. from 2015-16 onwards and intimate the details of filings along with SRNs within 30 days from the date of the order.

14 In the Matter of M/s. Subh Laabh Polymers Private Limited,

Registrar of Companies, Cum Official Liquidator, Chhattisgarh

Adjudication Order No/ Reference no. to Show Cause Notice:ROC-cum-OL-C.G./008625/ATR/Adj/140/1/2024/611

Date of Order: 13^th September, 2024

Adjudication order issued against Statutory Auditor of the Company for delay in filing of Resignation Notice in the prescribed e-form ADT-3 under provisions of Section 140 (2) of the Companies Act 2013.

FACTS

An inquiry under Section 206(4) of the Companies Act,2013 was carried into the affairs of M/s SLPPL and it was observed that M/s SLPPL had appointed M/s R.K.S.A as the Statutory Auditor of M/s SLPPLunder Section 139(1) of the Companies Act, 2013 for the period starting from 1^st April, 2016 to 31^st March, 2021 and M/s SLPPL had informed the same to ROC by filing form ADT-1 on 21^st October, 2016, after receiving the consent letter from the Auditor on 20^th August, 2016 and in between this period, M/s SLPPL further had appointed M/s NC&A as the Statutory Auditor for the period of 1^st April, 2017 to 31^st March, 2022.

Therefore, in accordance with Section 140(2) of the Companies Act, 2013, the auditor who had resigned from the Company must within a period of thirty days file in e-form ADT-3 his / her resignation with Registrar of Companies (ROC).The same was not complied by M/s R.K.S.A.

Thereafter on the direction of the Regional Director (RD), a Show Cause Notice (SCN) was issued to M/s R.K.S.A on 14^th August 2024 and M/s R.K.S.A replied to the SCN via letter dated 4^th September, 2024 which stated that the auditing firm was going through a constitution change in the Institute of Chartered Accountants of India by way of conversion into a Limited Liability Partnership (LLP) and name change. Due to engagement on the above matter, the auditing firm missed out on the filing of a notice of resignation in form ADT-3 to the Registrar of Companies. The firm realised its default in the year 2023 and soon after, the firm filed the ADT-3 form along with the applicable fees in addition to the applicable late filing fees.

PROVISIONS

“As per Section 140(2) The auditor who has resigned from the company shall file within a period of thirty days from the date of resignation, a statement in the prescribed form with the company and the Registrar, and in case of companies referred to in sub-section (5) of section 139, the auditor shall also file such statement with the Comptroller and Auditor-General of India, indicating the reasons and other facts as may be relevant with regard to his resignation.

As per Section 140 (3); If the auditor does not comply with the provisions of sub- section (2), he or it shall be liable to a penalty of fifty thousand rupees or an amount equal to the remuneration of the auditor, whichever is less, and in case of continuing failure, with further penalty of five hundred rupees for each day after the first during which such failure continues, subject to a maximum of two lakh rupees.”

ORDER

AO after consideration of facts and admission made by Auditor that the filing of ADT-3 form was delayed by period of 2077 days. Hence concluded that the auditor had violated the provisions of Section 140(2) read with Section 140(3) of the Companies Act, 2013 for which penalty of ₹2,00,000 (Rupees Two Lakhs only) was imposed.

BCAJ Admin

Closements

Reassessment provisions, applicability of TOLA and way forward in light of the decision in the case of Rajeev Bansal – Part II

INTRODUCTION

7.1 As stated in Part I of this write-up (BCAJ December, 2024), considerable amendments were made in the reassessment provisions by the Finance Act, 2021. Prior to these amendments, a notice could be issued under section 148 of (the ‘old regime’) within the time limits of 4 years (in all cases) / 6 years (escaped income of ₹ 1 lakh or more) / 16 years (asset outside India) as provided in section 149 of the Act if the Assessing Officer (‘AO’) had reason to believe that income chargeable to tax had escaped assessment. Considerable amendments in the provisions dealing with reassessment proceedings (the ‘new regime’) as stated in para 1.4 of Part I of the write-up were brought about by the Finance Act, 2021. The entire procedure for issuance of a reopening notice was revamped by introducing section 148A(d). The erstwhile time limits were also modified and the ‘new regime’ provided for time limit of 3 years in all cases and 10 years in cases where escaped income represented in the form of asset was more than ₹50 lakhs.

7.2 As stated in para 1.3 of Part I of the write up, the time limit to issue notice under section 148 of the Act, granting sanction or approval, etc. was extended by the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 (‘TOLA’) and the subsequent Notifications issued under TOLA. In short, the time limits for doing the above acts which were expiring during the period from 20^th March, 2020 to 31^st March, 2021 were extended upto 30^th June, 2021. These Notifications contained an Explanation effectively clarifying that the ‘old regime’ will continue to apply for issuing reassessment notices despite the amendments made by the Finance Act, 2021.

7.3 As stated in paras 1.5 and 1.6 of Part 1 of the write-up, reassessment notices issued after 1^st April, 2021 for the assessment years 2013 — 14 to 2017 — 18 relying upon the time extension granted by TOLA and following the procedure as per the ‘old regime’ were struck down by several High Courts and the Explanation issued under the Notifications were also struck down.

7.4 As stated in para 1.7 of Part I, the decisions of the High Courts were upheld by the Supreme Court in UOI vs. Ashish Agarwal (444 ITR 1). However, invoking powers under Article 142 of the Constitution of India, the Supreme Court deemed the notices issued under section 148 of the Act to be show cause notice issued under section 148A(b) of the Act under the ‘new regime’ and issued directions to the AOs to provide material and information for reopening to assessee and then pass an order under section 148A(d) after considering assessee’s submissions. Supreme Court kept all the defences available to the assessee under section 149 and / or under the Finance Act, 2021 and in law and rights available to the AOs under the Finance Act, 2021 open. Thereafter, as stated in para 1.8 of Part I of the write-up, the Central Board of Direct Taxes (‘CBDT’) issued Instruction no. 1 of 2022 dated 11th May, 2022 stating the manner of implementation of the judgment of the Supreme Court in Ashish Agarwal.

7.5 Thereafter, as stated in para 1.9 of Part I of the write up, fresh notices were issued under section 148 of the Act after following the directions contained in the decision of the Supreme Court in Ashish Agarwal pertaining to assessment years 2013 – 14 to 2017 – 18. These notices issued between July to September, 2022 were challenged by the assessees before several High Courts and the same were quashed by the High Courts. A brief gist of these decisions is provided in Part I of the write-up. As stated in para 1.10 of Part I of the write-up, the Supreme Court in Rajeev Bansal’s case (and connected matters) adjudicated on the issues raised by the Revenue in appeals filed against such high court judgments.

UOI vs. Rajeev Bansal (469 ITR 46 – Supreme Court)

8.1 In a challenge by the Revenue to the correctness of the views taken by the High Courts in favour of the assessee, the Supreme Court was called upon to decide two primary issues – (1) whether TOLA and notifications issued thereunder would apply to reassessment notices issued after 1^st April, 2021 and (2) whether the reassessment notices issued under section 148 of the ‘new regime’ post Ashish Agarwal’s decision between July and September 2022 were valid.

8.2 Before the Supreme Court, the Revenue contended that TOLA was a free-standing legislation and that section 3(1) of TOLA which applied “notwithstanding anything contained in the specified Act” overrides the time limits for issuing a notice under section 148 read with section 149 of the Act. It was further submitted that TOLA did not extend the life of the ‘old regime’ but merely provided a relaxation for the completion or compliance of actions following the procedure laid down under the ‘new regime’. It was urged that section 2 of TOLA defined “specified Act” to mean and include the Income-tax Act and that TOLA would continue to apply to the ‘new regime’ which became a part of the Income-tax Act from 1st April, 2021. The Revenue contended that invalidation of notices issued under the ‘new regime’ post the Supreme Court decision in Ashish Agarwal on the ground that the same were beyond the time limit specified under the Act read with TOLA will completely frustrate the exercise undertaken by the Supreme Court in Ashish Agarwal.

8.2.1 The Revenue submitted that the first proviso to section 149 [refer para 1.4(iv) of Part I of the write-up] did not expressly bar the application of TOLA and once the first proviso to section 149(1)(b) was read with TOLA, the following would be the position for the different years:

Assessment year (1)	Within 3 years (2)	Expiry of limitation read with TOLA \ for (2) (3)	Within 6 years (4)	Expiry of limitation read with TOLA for (4) (5)
2013 – 14	31-3-2017	TOLA not applicable	31-3-2020	30-6-2021
2014 – 15	31-3-2018	TOLA not applicable	31-3-2021	30-6-2021
2015 – 16	31-3-2019	TOLA not applicable	31-3-2022	TOLA not applicable
2016 – 17	31-3-2020	30-6-2021	31-3-2023	TOLA not applicable
2017 – 18	31-3-2021	30-6-2021	31-3-2024	TOLA not applicable

The Revenue conceded that for the assessment year 2015-16, all notices issued on or after 1^st April, 2021 will have to be dropped as they will not fall for completion during the period provided under TOLA. It seems that this is, possibly, on the ground that last date for issuing notice under section 148 was 31^st March, 2022 (6 years time limit) under the ‘old regime’ and that was outside the limitation period covered by TOLA (refer para 7.2 above) for extension.

8.3 On the other hand, the assessee submitted that TOLA applied in cases where the period of limitation expired between 20^th March, 2020 and 31^st March, 2021 and, therefore, recourse could not be taken to the extended timelines provided under TOLA with respect to the notices issued under section 148 of the ‘new regime’ which came into effect from 1^st April, 2021. Assessee further submitted that TOLA did not amend section 149 of the ‘old regime’ but merely extended the specified time limits and that the first proviso to section 149(1)(b) of the ‘new regime’ only referred to the period of limitation as specified under the erstwhile section 149(1)(b) of the ‘old regime’. Assessee contended that Notification no. 38 of 2021 issued on 27^th April 2021 to extend the time limits expiring under section 149(1)(b) of the ‘old regime’ till 30^th June, 2021 could not be read into the ‘new regime’ once the ‘old regime’ was repealed and substituted by the ‘new regime’.

8.3.1 Assessee categorized the notices post Ashish Agarwal’s decision under the following four categories and submitted as under:

a. First category — notices for AY 2013–14 and 2014–15 issued after 1^st April, 2021 would be barred by limitation as the six-year time limit in terms of section 149 expired on 31^st March, 2020 and 31^st March, 2021 respectively.

b. Second category – notices for AY 2015–16 issued under the ‘old regime’ after 31^st March, 2020 but before 1^st April, 2021. It was submitted that these notices issued for AY 2015–16 after a period of 4 years which expired on 31^st March, 2020 under the ‘old regime’ were bad in law as sanction under section 151 of the ‘old regime’ was not properly obtained.

c. Third category — notices for AY 2016–17 and 2017–18 for which the three-year period as per the ‘new regime’ expired on 31^st March, 2020 and 31^st March, 2021 respectively. Assessee submitted that the notices were issued after 1^st April 2021 after taking sanction of authorities prescribed in section 151(i) instead of those specified in section 151(ii) [refer to in para 1.4 (v) of Part I of the write-up].

d. Directions in the Supreme Court decision in Ashish Agarwal were not intended to apply to assessees who did not challenge the reassessment notices before the High Court or the Supreme Court in the first round.

8.3.2 Assessee further submitted that the applicability of the first proviso to section 149(1)(b) of the ‘new regime’ had to be tested on the date of issuance of notice under section 148 of the ‘new regime’. Assessee also urged that even if TOLA is read into the Income-tax Act, the time limits for completion of actions could be extended till 30^th June, 2021 and that the notices issued under the ‘new regime’ from July 2022 to September 2022 were beyond the extended time limits. Assessee further contended that the decision of Ashish Agarwal could not be interpreted in a manner to exclude the entire period from April 2021 to September 2022 and that the directions issued under Article 142 of the Constitution could not contravene the substantive provisions contained in the Act. With respect to the grant of sanction under section 151, assessee submitted that TOLA applied only to provisions that specified time limits and, therefore, section 151 which did not prescribe any time limits was out of ambit of TOLA.

8.4 After considering the rival contentions and referring to relevant provisions of the Act, the Supreme Court proceeded to decide the relevant issues.

8.4.1 Initially, the Court broadly discussed the relevant legislative and judicial background dealing with various principles relating to : (i) Assessment as a quasi-judicial function, (ii) Assessment as an issue of jurisdiction, (iii) Principles of strict interpretation and workability and (iv) Principle of harmonious construction.

8.4.2 The Court then proceeded to discuss and consider the impact of first proviso to Section 149 under the `new regime ‘ and summarised the position of law in that regard in para 53 as under:

“The position of law which can be derived based on the above discussion may be summarized thus: (i) Section 149(1) of the new regime is not prospective. It also applies to past assessment years; (ii) The time limit of four years is now reduced to three years for all situations. The Revenue can issue notices under Section 148 of the new regime only if three years or less have elapsed from the end of the relevant assessment year; (iii) the proviso to Section 149(1)(b) of the new regime stipulates that the Revenue can issue reassessment notices for past assessment years only if the time limit survives according to Section 149(1)(b) of the old regime, that is, six years from the end of the relevant assessment year; and (iv) all notices issued invoking the time limit under Section 149(1)(b) of the old regime will have to be dropped if the income chargeable to tax which has escaped assessment is less than Rupees fifty lakhs.”

8.4.3 The Court also observed that notices will have to be judged based on the law existing on the date the notice is issued. The Court then referred to the proviso to section 149(1)(b) of the ‘new regime’ and observed that the Revenue can issue reassessment notices for past assessment years only if the time limit of 6 years as per section 149(1)(b) of the ‘old regime’ survives. Court then recorded in para 52 a concession made by the Revenue as under:

“……..MrVenkataraman has also conceded on behalf of the Revenue that all notices issued under the new regime by invoking the six year time limit prescribed under Section 149(1)(b) of the old regime will have to be dropped if the income chargeable to tax which has escaped assessment is less than Rupees fifty lakhs.”

8.4.4 After noting that Finance Act, 2021 substituted the ‘old regime’, Court then referred to the legislative practice of amendment by substitution which involves repeal of an earlier provision and its replacement by a new provision and observed that after an amendment by substitution any reference to a legislation must be construed as the legislation as amended by substitution. In the context of application of extended time limit under TOLA to the ‘new regime’, the Court in para 63 observed as under:

“TOLA extended the time limits for completion or compliance of certain actions under the specified Act, which fell for completion during the COVID-19 outbreak. The use of the expression “any” in Section 3(1) indicates that the relaxation applies to “all” or “every” action whose time limit falls for completion from 20 March 2020 to 31 March 2021. Section 3(1) is only concerned with the performance of actions contemplated under the provisions of the specified Acts. Consequently, the amendment or substitution of a provision under the specified Acts will not affect the application of TOLA, so long as the action contemplated under the provision falls for completion during the period specified by TOLA, that is, 20 March 2020 to 31 March 2021.”

8.4.5 With respect to the applicability of TOLA to the ‘new regime’ after 1st April, 2021, the Court in para 68 held as under:

“On 1 April 2021, TOLA was still in existence, and the Revenue could not have ignored the application of TOLA and its notifications. Therefore, for issuing a reassessment notice under Section 148 after 1 April 2021, the Revenue would still have to look at: (i) the time limit specified under Section 149 of the new regime; and (ii) the time limit for issuance of notice as extended by TOLA and its notifications. The Revenue cannot extend the operation of the old law under TOLA, but it can certainly benefit from the extended time limit for completion of actions falling for completion between 20 March 2020 and 31 March 2021.”

8.4.6 Furthermore, the Court referred to the non-obstante clause in section 3(1) of TOLA and observed that the same will override section 149 to the extent of relaxing the time limit for issuance of reassessment notices under section 148 of the Act which fell between 20^th March, 2020 and 31^st March, 2021.

8.4.7 With respect to application of TOLA to grant of sanction under section 151 of the Act, the Court held that the specified authority under section 151 of the Act is directly co-related to the time when a notice is issued. Court further held that TOLA will extend the time limit for grant of sanction by the authority specified under section 151 of the Act.

8.4.8 While dealing with one of the issues raised by the assessee that whether the directions in Ashish Agarwal applied to all the reassessment notices issued under the ‘old regime’ post 1^st April 2021 or only those which were challenged by way of writ petitions before the High Courts, after considering the relevant paras of that decision, the Court observed as under at end of para 90:

“The purpose of this Court in deeming the reassessment notices issued under the old regime as show cause notices under the new regime was two-fold: (i) to strike a balance between the rights of the assesses and the Revenue which issued approximately ninety thousand reassessment notices after 1 April 2021 under the old regime; and (ii) to avoid any further appeals before this Court by the Revenue on the same issue by challenging similar judgments and orders of the High Courts (arising from approximately nine thousand writ petitions).”

On this issue, the Court finally held that the decision in Ashish Agarwal would apply PAN India to all the reassessment notices issued between 1^st April, 2021 and 30^th June, 2021 under the ‘old regime’.

8.4.9 The Court then considering the validity of reassessment notices issued between July to September 2022 post the decision in Ashish Agarwal broke down the period into three parts — (i) period upto 30^th June, 2021 – covered by the provisions of the Act read with TOLA, (ii) period from 1^st July, 2021 to 3^rd May 2022 — period before the decision in Ashish Agarwal and (iii) period after 4^th May, 2022 – period covered by the directions issued in Ashish Agarwal. Court then referred to the third proviso to section 149 of the Act which excludes (i) the time allowed under section 148A(b) and (ii) the period during which the proceedings under section 148A are “stayed by an order or injunction of any Court”. Thereafter, the Court at paras 105 to 106 explained the legal fiction created by Ashish Agarwal and held as under:

“105. … During the period from the date of issuance of the deemed notice under Section 148A(b) and the date of the decision of this Court in Ashish Agarwal (supra), the assessing officers were deemed to have been prohibited from passing a reassessment order. Resultantly, the show cause notices were deemed to have been stayed by order of this Court from the date of their issuance (somewhere from 1 April 2021 till 30 June 2021) till the date of decision in Ashish Agarwal (supra), that is, 4 May 2022.

106. … A show cause notice is effectively issued in terms of Section 148A(b) only if it is supplied along with the relevant information and material by the assessing officer. Due to the legal fiction, the assessing officers were deemed to have been inhibited from acting in pursuance of the Section 148A(b) notice till the relevant material was supplied to the assesses. Therefore, the show cause notices were deemed to have been stayed until the assessing officers provided the relevant information or material to the assesses in terms of the direction issued in Ashish Agarwal (supra). ”

8.4.10 Referring to exclusion of time granted to the assessee to respond to the notice and total time to be excluded under the third proviso to section 149 of the Act, the Court in para 107 stated as under:

“… Hence, the total time that is excluded for computation of limitation for the deemed notices is: (i) the time during which the show cause notices were effectively stayed, that is, from the date of issuance of the deemed notice between 1 April 2021 and 30 June 2021 till the supply of relevant information or material by the assessing officers to the assesses in terms of the directions in Ashish Agarwal (supra); and (ii) two weeks allowed to the assesses to respond to the show cause notices.”

8.4.11 In the context of time limit for issuing notice under section 148 and deciding validity of such notices issued post the decision in Ashish Agarwal, the Court further stated in para 111 as under:

“The clock started ticking for the Revenue only after it received the response of the assesses to the show causes notices. After the receipt of the reply, the assessing officer had to perform the following responsibilities: (i) consider the reply of the assessee under Section *149A(c); (ii) take a decision under Section *149A(d) based on the available material and the reply of the assessee; and (iii) issue a notice under Section 148 if it was a fit case for reassessment. Once the clock started ticking, the assessing officer was required to complete these procedures within the surviving time limit. The surviving time limit, as prescribed under the Income Tax Act read with TOLA, was available to the assessing officers to issue the reassessment notices under Section 148 of the new regime.”

* This should be 148A

8.4.12 Supreme Court then held that the reassessment notices issued under Section 148 of the ‘new regime’ ought to be issued within the time limit surviving under the Income Tax Act read with TOLA and that a reassessment notice issued beyond the ‘surviving period’ will be time barred. Supreme Court explained the ‘surviving period’ as was available to the Assessing Officers for issuing the reassessment notices under the ‘new regime’ by way of an example in para 112:

“Let us take the instance of a notice issued on 1 May 2021 under the old regime for a relevant assessment year. Because of the legal fiction, the deemed show cause notices will also come into effect from 1 May 2021. After accounting for all the exclusions, the assessing officer will have sixty-one days [days between 1 May 2021 and 30 June 2021] to issue a notice under Section 148 of the new regime. This time starts ticking for the assessing officer after receiving the response of the assessee. In this instance, if the assessee submits the response on 18 June 2022, the assessing officer will have sixty-one days from 18 June 2022 to issue a reassessment notice under Section 148 of the new regime. Thus, in this illustration, the time limit for issuance of a notice under Section 148 of the new regime will end on 18 August 2022.”

8.4.13 Finally, Supreme Court set aside the judgments of various High Courts to the extent of the observations made in its present decision.

8.4.14 With respect to the way forward post its decision in Rajeev Bansal, the Supreme Court in its Record of Proceedings dated 3^rd October, 2024 (unreported) stated in para 3 as under:

“The assessing officers will dispose of the objections in terms of the law laid down by this Court. Thereafter, the assessees who are aggrieved will be at liberty to pursue all the rights and remedies in accordance with law, save and except for the issues which have been concluded by this judgment.”

Conclusion

9.1 In view of the decision of the Supreme Court, the applicability of TOLA to the provisions of the ‘new regime’ has now been settled. However, the validity of reassessment proceedings initiated for assessment years 2013–14 to 2017–8 will now have to be decided afresh on a case to case basis as per the principles laid down by the Supreme Court in its decision. While doing so, one may also bear in mind that the High Court decisions have been set aside only to the extent of the observations made by the Supreme Court in its decision.

9.2 With respect to reassessment proceedings initiated for AYs 2013–14 and 2014–15, the primary point that will have to be considered is as to whether the reopening notices were issued within the ‘surviving period’ as explained by way of an example by the Supreme Court in para 112 of the judgment (refer para 8.4.12 above). Depending on the date on which the 148 notices were issued under the ‘old regime’, it is possible that some of the notices issued for the assessment years 2013–14 and 2014–15 could be barred by limitation. For instance, if the 148 notice under the ‘old regime’ was issued on say 21st June 2021, the AO would have 10 days (days between 21^st June, 2021 and 30^th June, 2021) to issue notice under the ‘new regime’ which would start after receiving the response of the assessee. Assuming that the assessee submitted his response on 9^th June 2022 post the decision in Ashish Agarwal, the AO ought to have issued the 148 notice under the ‘new regime’ by 19^th June 2022. If the notice is issued after 19^th June, 2022, the same would be barred by limitation. For further clarity on this, discussions appearing at paras 8.4.9 to 8.4.11 above is also useful.

9.2.1 In the above example, had the 148 notice under the ‘old regime’ been issued on 29^th June, 2021, the time available to the AO for issuing notice under the ‘new regime’ being less than 7 days should be extended to 7 days as per the fourth proviso (as at the time of introduction) to section 149(1) of the Act [refer para 1.4(iv) of Part I of the write-up].

9.2.2 In an event where no response was filed by the assessee pursuant to the information supplied by the AO as per the directions in Ashish Agarwal, the time for issuing 148 notice under the new regime in the above example would start from the end of the date by which the response ought to have been filed by the assessee.

9.2.3 Further, what is envisaged by the third proviso to section 149(1) is exclusion of the time or extended time allowed to the assessee to file a response. In a case where the AO suomotu extends the time to file the response without any request by the assessee such time should not be excluded while computing the period of limitation. In this regard, useful reference may be made to the decision of the Bombay High Court in Godrej Industries Ltd. vs. ACIT Cir. 14(1)(2) [2024] 160 taxmann.com 13 (Bombay).

9.2.4 With respect to reassessment proceedings for AYs 2016–17 and 2017–18 where income alleged to have escaped assessment is less than R50 lakhs, one can contest the validity of such notices after considering the example of the ‘surviving period’ and considering the dates in each case. In such cases also, the position mentioned in paras 9.2 to 9.2.3 above will be relevant. Further in the context of applying ₹50 lakhs limit, it is worth noting that gross sales consideration is not the income. There is distinction between the two. For this useful reference may be made to the M.P. High Court judgment in the case of Nitin Nema[ (2023) 458 ITR 690] against which Revenue’s SLP is recently dismissed [(2024) 468 ITTR 105-SC]
9.3 With respect to the reassessment proceedings for assessment year 2015–16 initiated on or after 1st April. 2024 the same ought to be dropped by the Assessing Officers in light of the concession made by the Revenue recorded in para 19(f) of the Supreme Court judgment (refer para 8.2.2 above) to this effect (also refer para 8.4.3 above). For this useful reference may also be made to tribunal decisions referred to next para 9.4.

9.4 Reference may be made to a decision of the Mumbai Tribunal in ITO 10(3)(1) vs. Pushpak Realities Pvt. Ltd. (ITA no. 4812, 4814 and 4816/ Mum/2024) where the Tribunal was dealing with the appeal filed by the Revenue challenging the order of the CIT(A) quashing the reassessment proceedings for AY 2013–14 to 2015–16. Tribunal followed the ratio laid down in Rajeev Bansal’s case while deciding the matter. Tribunal held that the notices issued for AY 2013–14 on 29^th July 2022 and for AY 2014–15 on 31^st July, 2022 were barred by limitation even under TOLA. Tribunal also quashed the 148 notice for AY 2015–16 issued on 28th July, 2022 after noting Revenue’s concession before the Supreme Court that TOLA did not apply to AY 2015–16 and held that the same was barred by limitation under the new provisions of section 149(1). It is worth noting that in this case relevant facts for determining the ‘surviving period’ to find out time limit available for issuing notice under section 148 post Ashish Agarwal’s decision is not available from the ITAT decision. It may be noted that this is ex-parte decision and nobody appeared for the assessee. In the context of AY 2015-16, similar view is also taken by the Mumbai Tribunal in ACIT vs. Manish Financial (ITA nos. 5050 and 5055/ Mum/ 2024) where the reopening notice dated 29^th July 2022 for AY 2015-16 is quashed.

9.5 In appropriate cases, based on the facts, the validity of the reassessment notices will have to be seen based on whether the approval of the specified authority under section 151 was validly obtained. In this regard, the example given by the Supreme Court in para 78 is of paramount importance. Supreme Court observes — “For example, the three year time limit for assessment year 2017-2018 falls for completion on 31^st March, 2021. It falls during the time period of 20^th March, 2020 and 31^st March, 2021, contemplated under Section 3(1) of TOLA. Resultantly, the authority specified under Section 151(i) of the ‘new regime’ can grant sanction till 30^th June, 2021.” From this, it would appear that while TOLA applied for the purposes of section 151 of the ‘new regime’ as well, however, the authority specified in section 151(i) of the ‘new regime’ could grant sanction only upto 30^th June 2021 and not beyond that. The 148 notices issued post Ashish Agarwal’s decision were all issued in 2022. In such an event, with respect to 148 notices issued under the ‘new regime’ for AYs 2016–17 and 2017–18, the sanction ought to have been obtained from the authority specified under section 151(ii) after 30^th June, 2021. If the sanction is not so obtained, the reopening notices for these AYs should be bad in law. In the case of ACIT vs. Manish Financial (ITA nos. 5050 and 5055/ Mum/ 2024) before the Mumbai Tribunal, for AY 2016-17, reassessment notice was issued on 30^th July 2022 under the ‘new regime’ post the directions in Ashish Agarwal. The said notice was issued after obtaining sanction of PCIT-19, Mumbai i.e. authority specified u/s. 151(i) of the Act. Tribunal held that the 148 notice was invalid and liable to be quashed as the notice was issued beyond a period of three years and that the approval ought to have been taken from an authority specified u/s. 151(ii) of the Act.

9.6 As stated in para 9.1 above, the decisions of the High Courts are set aside only to the extent of the observations made by the Supreme Court in Rajeev Bansal’s case. As stated in para 5.5 of Part 1 of the write-up, Bombay High Court in the decision of Siemens while adjudicating on the validity of the reassessment proceedings, had also held that the concept of ‘change of opinion’ will apply even under the ‘new regime’. Supreme Court may be considered to have impliedly approved the above decision of the High Court on the point of change of opinion.

9.7 In the above Rajeev Bansal’s case, the Court has disposed of large number of appeals involving different assessment years and facts by adjudicating on common legal issues. Therefore, each case will have to be finally decided on it’s facts applying the legal position decided by the Supreme Court on given issues. As such, one more round of litigation in many cases can’t be ruled out for the re-assessment notices originally issued during 1^st April, 2021 to 30^th June, 2021. This set of provision, which was undoubtedly well intended and beneficial to the assessees in the area of reassessments, met with such kind of litigation up to the highest court twice and still cases involved are not concluded with a possibility of further litigation. This reflects the state of affairs in the Country with regard to repetitive and long drawn unending litigation in tax matters leading to uncertainty. Unfortunately, such trend may also continue in future if the past experience of tax litigation is any guide. This also affects the investments and growth prospects of overall economy which is against the interest of every one. As such, some drastic steps are needed to remedy this situation and more importantly, mind set and approach of All Stake Holders need to change in this regard and that is perhaps the need of the hour in overall national interest. Let us be positive and hope for the sunrise.

9.8 Further amendments have been made in the provisions dealing with reassessment proceedings such as sections 148, 148A, 149, 151 etc. by the Finance (No.2) Act, 2024 w.e.f. 1^st September, 2024. Therefore, reassessment notice issued from 1st September, 2024 will be governed by these amended provisions.

BCAJ Admin

Climate Change and Its Impact on Financial Statement

This article explores the critical intersection of climate change and corporate finance. As the world grapples with the urgent need to address climate change, driven by the UN Sustainable Development Goals (SDGs) and the growing emphasis on Environmental, Social, and Governance (ESG) factors, companies are increasingly recognising the financial implications of their environmental impact. From rising operational costs and disrupted supply chains to changing consumer preferences and increased regulatory scrutiny, climate change poses significant risks and opportunities for businesses. This article will delve into how these climate-related factors can impact a company’s financial statements, highlighting the crucial role of ESG reporting frameworks like the Business Responsibility and Sustainability Reporting (BRSR) in navigating this evolving landscape.

WHAT IS CLIMATE CHANGE?

Our planet is experiencing a dramatic shift in its climate, largely due to human activities over the past couple of centuries. By burning fossil fuels like coal, oil, and gas, we’ve released a massive amount of greenhouse gases into the atmosphere. These gases act like a blanket, trapping heat and causing our planet to warm up. This warming trend isn’t just about rising temperatures. It’s disrupting our weather patterns, leading to more intense heatwaves, stronger storms, and a significant rise in sea levels as glaciers and ice caps melt. These changes threaten our ecosystems and have devastating consequences for people and economies around the world.

India, unfortunately, is particularly vulnerable to these impacts. We’re already seeing a surge in extreme weather events like floods, droughts, and scorching heatwaves. These events disrupt lives, damage infrastructure, and threaten our agricultural productivity. To tackle this crisis, we need a two-pronged approach:

Mitigation: We must drastically reduce our greenhouse gas emissions to prevent further warming.
Adaptation: We must also adapt to the changing climate by implementing measures to protect our communities and infrastructure from the inevitable impacts.

The effects of climate change are not confined to the environment. They are deeply intertwined with our financial systems. Extreme weather events can devastate businesses, damaging assets, disrupting supply chains, and increasing operational costs. The transition to a low-carbon economy also presents challenges, such as the need for significant investments in renewable energy and the risk of stranded assets. Recognising these risks, financial regulators and standards-setting bodies are now demanding greater transparency around climate-related issues. The International Accounting Standards Board (IASB), for example, recently issued an exposure draft addressing the disclosure of climate risks in financial statements underscoring their relevance to financial stability.

By understanding and disclosing these risks, companies can better manage them and make more informed decisions. It’s time for businesses to acknowledge their role in addressing climate change and to embrace sustainable practices that safeguard their long-term viability.

CLIMATE-RELATED RISKS AND OPPORTUNITIES

Climate related financial information has an increased demand for decision making by the investors, lenders, insurance underwriters and other stakeholders. However, the improved disclosures of the climate-related information would assist the investors, lenders, insurance underwriters and other stakeholders to analyse the potential financial impacts due to climate change. These improved disclosures would include climate-related risks and opportunities which will be the handbook to evaluate such disclosures.

The TCFD (Task Force on Climate-Related Financial Disclosures) has identified that there are several frameworks for climate-related disclosures in different jurisdictions to favour the growing demand of such information disclosure, however, it is significant to have a standardised framework that will align all the jurisdictions including G20 and other existing regimes and look for an opportunity to provide the common framework for climate-related disclosures.

The important elements of such climate-related disclosure framework is the categorisation of the disclosures into climate-related risks and opportunities. Hence, the TCFD has defined their categories. These recommendations has resulted in encouraging the businesses to make such disclosures as a part of their annual reports highlighting issues that are more pertinent to their business activities.

The main climate-related risks and opportunities are given below followed by their brief descriptions:

1. Climate-related Risks

The TCFD has divided the Climate-related Risks in two sub-categories each having further divisions in its type of risk. The two major sub-categories of risks are: (a) risks related to the transition to a lower- carbon economy, and (b) risks related to the physical impacts of climate change. Further, the detailed sub-categories are as under:

(a) Transition Risks

Transition to a lower-carbon economy can have extensive policy & legal, technology, market and reputational changes to adopt the mitigation and adaptation requirements related to the climate changes. These transitional risks can result in varying levels of financial and reputations risk to the organisation depending on the nature, speed, and focus of these changes.

(i) Policy and Legal Risks:

The policy and legal risks refers to the challenges that are faced by the companies due to the changes in the policies, regulations, frameworks and other legal changes that are aimed at addressing the climatic challenges. These kind of risks arise from governmental and regulatory bodies as they are the ones who implement these new laws, standards and policies to transit towards a low-carbon economy and mitigate the impact of climate changes. In case of failure to comply and adopt these changes, it will lead to financial losses, legal liabilities, and reputational damages.

Policy Risks are the ones that are linked to changes in governmental policies and regulatory frameworks related to climate change mitigation and adaptation. Some of these examples include: Stricter Limitations on Emissions, Subsidy Reforms, Energy Efficiency Regulations, Carbon Pricing and Taxes, Ban on Certain Activities, etc.

Legal Risks are the fines / penalties imposed on the businesses due to non-compliance with evolving climate-related regulations or failure to meet disclosure and sustainability standards. Such legal risks includes litigation for non-compliance, increased disclosure requirements, contractual obligations, securities fraud or misrepresentation, liability for environmental harm, etc.

(ii) Technology Risk

Such risks refer to the potential disruptions and challenges due to shifts in technology aiming towards reduction in carbon emissions and enhancing sustainability. These risk arises when the companies transit towards low-carbon energy-efficient technologies to adhere to the regulatory changes, market demands, or several environmental objectives.

Technology Risks includes certain key aspects, such as: Use of outdated technology, investment cost for adopting greener technologies, and competitive market in terms of adapting climate-friendly technologies, temporary operational disruptions while introducing new technologies, changing regulatory requirements, etc.

Managing such risks requires strategic planning, investment in innovation, and staying aware of technological and regulatory developments.

(iii) Market Risk

Financial impact that arises from the shift in supply and demand due to the transition to low-carbon economy are identified as the Market Risks. Under this factor, the transitions to low-carbon economy are driven by the factors such as new climate policies, technological advancements, or changes in consumer behaviour.

The key components of market risks includes: Demand shifts, changes in prices of commodities, devaluation of assets, fluctuation in investor behaviour, supply chain impacts, etc.

(iv) Reputation Risk

This risk has a potential harm to a Company in terms of damage to public image, brand value, or stakeholder trust due to its perceived or lack of response to climate change and sustainability expectations. This occurs when companies fail to address climate-related demands from customers, regulators, investors, or the general public, which can negatively affect Company’s reputation and market positioning.

The manifested reputation risks includes: Failure to adapt to regulatory changes, environmental negligence, changes in customer preferences, greenwashing accusations, investors’ pressure, etc.

(b) Physical Risks

Physical Risks are the potential harm or disruptions to the businesses, economies, and ecosystems caused by the physical impacts of climate change. There risks resulting from climate changes can either be event drive (acute) or longer-term shifts (chronic) in climate patterns. They can significantly affect the operations, assets, supply chains, and financial performance of the Company.

(i) Acute Physical Risk

These risks are the immediate or short-term consequences of the extreme weather events that are caused due to climate change. Such risks includes sudden and severe climate- related incidents, such as: Floods, Storms, Hurricanes, Heatwaves, Wildfire, etc.

Acute Risks can disrupt company operations, harm supply chains, damage assets, and affect the communities. To face and mitigate such risks, companies shall plan for resilience, disaster recovery, and other mitigation strategies to manage the potential impacts.

(ii) Chronic Physical Risk

Chronic Risk refers to the long-term changes in environmental and climatic conditions that could affect the businesses, its infrastructure, and societies. Unlike acute physical risks, that are associated with short-term, severe weather events, chronic physical risks are gradual and has persistency in climate patterns that can disrupt normal operations and productivity.

These risks include examples such as: Rising global temperatures, long-term droughts or shift in rainfall, sea-level rise, soil degradation, etc.

2. Climate-related Opportunities

Climate-related Opportunities refer to the potential benefits and positive impacts that the companies get which arise from the transition to a low-carbon economy and from proactive approaches to managing climate risks. Companies that recognise and leverage these opportunities can enhance their competitiveness, drive innovation, and contribute to sustainability.

Climate-related Opportunities are further classified as under:

(a) Resource Efficiency

Resource Efficiency under climate-related opportunities refers to effective utilisation of resources such as energy, water, material and land, in a way that it minimises waste generation and reduces negative environmental impact while maximising the productivity and profitability.

Embracing the resource efficiency could provide various benefits such as: Lower operation cost, gain competitive advantage, risk mitigation, adoption of innovative technologies, improved brand image, complying with environmental regulations, etc.

(b) Energy Source

Energy Source can be referred to the potential benefits that occurs from a transition to cleaner, renewable, and more efficient energy solutions to reduce the negative environmental impact and other greenhouse gas emissions.

The Companies that invest in the sustainable solutions can benefit from financial, operational, and reputational advantages. The transitional journey may include key aspects such as: Adoption of Renewable Energy Sources, Implementing Energy-efficient Technologies, Investing in Clean Energy Solutions, Offering Green Products in the Market, etc.

(c) Products & Services

Products & services refers to the creation, innovation, and adaptation of sustainable practices in the business offerings that helps the businesses and customers to transit to low-carbon sustainable economy. Such sustainable offerings benefits the businesses in generating new revenue streams by addressing the environmental risks and challenges.

The key examples here includes, development of low-carbon products, sustainable packaging, green financial products, adapting renewable energy services, energy efficiency solutions, carbon credits and reforestation programs, etc.

(d) Markets

The new or growing sectors, regions, and types of assets where businesses can gain a competitive advantage by adapting the practices to transit to low-carbon economy can be referred to as Markets. These markets offer potential growth and diversification by aligning with sustainability and decarbonisation goals.

The key aspects of these markets include: Sustainable Financing like investing in Green Bonds, Impact Investing; Low-Carbon Infrastructure, Renewable Energy Production, Collaborations with Governments & Development Banks, Carbon Trading & Offsetting Markets, etc.

(e) Resilience

It is a business’s ability to adapt and withstand to climate change challenges. This is merely focused on transitioning the climate-related risks to climate-related opportunities by minimising disruptions and enhancing adaptive capacity. Opportunities that are related to resilience includes, efficiency improvements, innovative products / processes, supply chain adaptation and investment in long-term sustainability projects, etc.

FINANCIAL IMPACTS OF POTENTIAL CLIMATE-RELATED RISKS

The financial impacts are basically the economic consequences faced by the companies due to both transition and physical risks posed by climate change. These impacts includes effects on the company’s operations, liabilities, assets and costs in several ways.

Below are the key areas where financial impacts may arise:

Type

Climate-Related Risks

Potential Financial Impacts

Transition Risks

Policy and Legal

Increased costs related to greenhouse gas (GHG) emissions pricing

• Increased obligations for emissions reporting

• Regulatory mandates on existing products and services

• Heightened risk of litigation

Higher operating expenses, including compliance costs and increased insurance premiums

• Asset write-offs, impairments, or early retirements due to policy shifts

• Elevated costs or reduced demand for products and services as a result of fines and legal judgments

Technology

Replacement of current products and services with lower-emission alternatives

• Unsuccessful investments in developing or adopting new technologies

• Expenses incurred in transitioning to low- emission technologies

• Asset write-offs and premature retirement of existing infrastructure

• Decline in demand for current products and services

• Increased research and development (R&D) expenses for new and alternative technologies

• Capital investments and cost required for developing new technologies and adopting & implementing new practices and processes

Market

• Shifts in customer preferences and behavior

• Uncertainty in market trends and signals

• Rising costs of raw materials

• Declining demand for products and services as consumer preferences shift

• Higher production costs due to fluctuating input prices (e.g., energy, water) and stricter output regulations (e.g., waste management)

• Sudden and unforeseen increases in energy costs

• Altered revenue streams and mix, potentially leading to lower overall revenues

• Revaluation of assets such as fossil fuel reserves, land, and securities

Reputation

• Changes in consumer preferences

• Negative perception or stigmatisation of the industry

• Heightened stakeholder concerns or adverse feedback from stakeholders

• Decline in revenue due to reduced demand for goods and services

• Loss of revenue from disruptions in production capacity (e.g., delays in planning approvals or supply chain interruptions)

• Decreased revenue from challenges in workforce management, such as difficulties in attracting and retaining employees

• Limited access to capital due to increased exposure to physical risks

Physical Risks

Acute

Heightened intensity of extreme weather events, including cyclones and floods.

Chronic

• Alterations in precipitation patterns and increased variability in weather conditions

• Increasing average temperatures

• Rising sea levels

Reduced revenue from diminished production capacity (e.g., challenges in transportation and supply chain disruptions)

• Decreased revenue and elevated costs due to adverse workforce impacts (e.g., health risks, safety issues, and absenteeism)

• Asset write-offs and early retirement of existing assets resulting from damage in “high-risk” locations

• Increased operating costs due to insufficient water supply for hydroelectric plants or cooling systems for nuclear and fossil fuel plants

• Heightened capital expenditures driven by facility damage

• Lower revenues resulting from decreased sales and output

• Rising insurance premiums and potential restrictions on coverage for assets situated in “high-risk” areas

FINANCIAL IMPACTS OF POTENTIAL CLIMATE-RELATED OPPORTUNITIES

Though the companies navigate the challenges / risks posed by climate-change, it also identifies significant opportunities to drive growth and enhance resilience. These opportunities can lead to various positive financial impacts, such as:

Type

Climate-related Opportunities

Potential Financial Impacts

Resource Efficiency

Adoption of more energy-efficient transportation methods

• Implementation of streamlined production and distribution processes

• Increased focus on recycling and resource recovery

• Transition to energy-efficient and sustainable buildings

• Reduction in water consumption and improved water management practices

• Lower operating costs achieved through efficiency improvements and cost reductions

• Enhanced production capacity, leading to higher revenues

• Increased asset value, such as energy-efficient buildings with higher ratings

• Positive impact on workforce management, including improved health, safety, and employee satisfaction, resulting in reduced costs

Energy Source

• Adoption of low-emission energy sources

• Utilisation of supportive policy incentives

• Integration of innovative technologies

• Participation in carbon trading markets

• Transition to decentralised energy generation systems

• Lower operating cost through cost-effective emissions reduction measures

• Reduced vulnerability to future increases in fossil fuel prices

• Decreased exposure to GHG emissions, minimising sensitivity to carbon pricing changes

• Enhanced returns on investments in low- emission technologies

• Improved access to capital as investors increasingly prioritise low-emission businesses

• Reputational gains leading to higher demand for products and services

Products

& Services

• Expansion and innovation in low-emission products and services

• Creation of climate adaptation and insurance risk management solutions

• Development of new offerings through research, development, and innovation

• Opportunities to diversify business operations

• Capitalising on shifting consumer preferences toward sustainable products and services

• Increased revenue driven by growing demand for low-emission products and services

• Revenue growth from offering innovative solutions to climate adaptation needs (e.g., insurance and risk management products)

• Enhanced competitive advantage by aligning with evolving consumer preferences, leading to higher revenues

Markets

• Entry into new markets and expansion opportunities

• Utilisation of regulatory incentives and support

• Access to new assets and locations requiring insurance coverage

• Increased revenue opportunities through entry into new and emerging markets (e.g., collaborations with governments and development banks)

• Enhanced diversification of financial assets (e.g., investments in green bonds and sustainable infrastructure)

Resilience

• Engagement in renewable energy initiatives and implementation of energy-efficiency strategies

• Diversification and substitution of resources

• Enhanced market valuation through strategic resilience planning (e.g., infrastructure, land, and buildings)

• Greater supply chain reliability and operational continuity under diverse conditions

• Increased revenue from new products and services designed to support resilience and adaptability

EFFECTS OF CLIMATE-RELATED MATTERS ON FINANCIAL STATEMENTS

Ind AS Standards

Impact

Ind AS – 1

Presentation of Financial Statements

• Companies must disclose significant climate-related matters that could materially impact their financial performance. This includes uncertainties related to future cash flows, asset impairment, and decommissioning obligations. These disclosures should help investors understand the potential impact of climate change on the company’s financial health.

• Disclose key assumptions and judgments used in financial reporting, particularly those related to climate-related uncertainties. This includes how climate-related factors are considered in areas like impairment testing, the determination of cash-generating units, and the estimation of future cash flows.

• Disclose the sensitivity of financial results to different climate-related scenarios. This helps investors understand how changes in climate conditions or policy responses could impact the company’s financial performance.

• Assess and disclose the company’s ability to continue as a going concern, considering the potential impact of climate-related risks. This includes evaluating the potential impact of climate change on the company’s operations, market demand, and access to resources.

Ind AS – 2

Inventories

• Climate-related events can significantly impact the value of a company’s inventory. For example, extreme weather events can damage inventory, rendering it obsolete. Changes in consumer preferences due to climate change can also reduce the selling price of inventory or increase the costs associated with completing and selling it.

• When the cost of inventory is no longer recoverable, IAS 2 requires companies to write down the inventory to its net realisable value. Net realisable value represents the estimated selling price of the inventory in the current market, minus the estimated costs of completion and sale.

• Companies must use the most reliable evidence available to estimate the net realisable value of their inventory. This may include market prices, recent sales data, and expert opinions.

Ind AS – 12

Income Taxes

• Ind AS 12 allows companies to recognise deferred tax assets for tax losses and temporary differences that can be used to reduce future tax bills. However, these assets can only be recognised if it’s likely that the company will generate enough future taxable profits to utilise these tax benefits.

• Climate-related issues can significantly impact a company’s future taxable profits. For example, extreme weather events can disrupt operations, leading to lower profits and potentially preventing the company from utilising its deferred tax assets. Conversely, climate change mitigation efforts, such as investments in renewable energy, can impact future tax liabilities and therefore the value of deferred tax assets.

Ind AS – 16

Property, Plant and Equipment &

Ind AS – 38

Intangible Assets

• Climate change can significantly impact a company’s research and development (R&D) activities. This may lead to increased expenditures on developing new technologies, such as renewable energy solutions, or adapting existing products to mitigate climate risks. These R&D costs may be capitalised as assets under certain accounting standards, depending on their nature and expected future benefits.

• Companies must disclose the amount of R&D costs recognised as an expense during each reporting period. These expenses may be impacted by climate-related changes, such as increased spending on climate-related R&D projects or adjustments to existing R&D programs due to changing market conditions or regulatory requirements.

• Companies are required to regularly review and adjust the estimated useful lives and residual values of their assets. This includes considering the potential impact of climate change. For example, climate-related events like extreme weather can shorten the useful life of certain assets, while changing regulations related to greenhouse gas emissions can render some assets obsolete.

• Companies must disclose the expected useful lives of each class of asset and any changes to these estimates. These disclosures should include the impact of climate-related factors, such as asset obsolescence or changes in regulatory requirements, on the estimated useful lives and residual values of assets.

Ind AS – 36

Impairment of Assets

• Companies are required to regularly assess whether their assets, such as goodwill, property, plant and equipment, and intangible assets, have lost value. Climate-related factors, such as reduced demand for products that emit greenhouse gases or significant environmental changes, can signal potential impairment. For example, changes in environmental regulations or shifts in consumer preferences towards more sustainable products can lead to a decline in the value of certain assets.

• When assessing asset impairment, companies must estimate the future cash flows that the asset is expected to generate. These estimates should consider the potential impact of climate-related factors on the company’s future operations and market conditions. It’s crucial to base these projections on reasonable and supportable assumptions that reflect management’s best estimate of future economic conditions, taking into account potential climate-related risks.

• IAS 36 prohibits the inclusion of cash flows arising from future restructuring or performance enhancement activities in the impairment assessment. This ensures that the impairment test reflects the intrinsic value of the asset under normal operating conditions.

• Companies must disclose the events and circumstances that led to any impairment losses.
This includes disclosing the impact of new legislation on emission reductions, changes in consumer preferences, or other climate-related factors. Additionally, companies must disclose the key assumptions used in their impairment assessments and the potential impact of reasonably possible changes to these assumptions.

Ind AS – 37

Provisions, Contingent Liabilities and Contingent Assets and Appendix “C” Levies

• Climate change can significantly impact a company’s liabilities. This includes potential liabilities arising from government fines for failing to meet climate-related targets, costs associated with environmental remediation, and expenses related to restructuring efforts to adapt to a low-carbon economy. Additionally, existing contracts may become onerous due to changes in climate-related legislation or regulations.

• IAS 37 requires companies to disclose the nature of provisions and contingent liabilities. This includes any uncertainties related to the timing and amount of expected future cash outflows. Companies must also disclose the major assumptions made about future events when determining the amount of provisions, particularly when these assumptions are significantly influenced by climate-related factors.

Ind AS – 107

Financial Instruments

• Ind AS – 107 requires companies to disclose information about their financial instruments and the associated risks. Climate change can significantly impact these risks, such as by affecting the likelihood of borrowers defaulting on loans (credit risk) or by impacting the value of investments in sectors vulnerable to climate change. Companies must disclose how these climate-related factors may affect their financial instruments.

• For companies holding investments in other companies, Ind AS – 107 requires disclosure of investments by industry or sector. This helps investors understand the company’s exposure to industries that may be more vulnerable to the effects of climate change, such as those heavily reliant on fossil fuels or those operating in regions prone to extreme weather events.

Ind AS – 109

Financial Instruments

• Climate change can significantly impact the accounting for financial instruments. For example, loan agreements may include clauses that link interest rates or repayment schedules to a company’s progress in meeting climate-related targets. This can complicate the accounting for these loans, as lenders need to carefully assess whether the cash flows received are solely interest payments or include performance-based components.

• Climate-related factors can increase the risk of borrowers defaulting on loans. Extreme weather events like wildfires or floods can disrupt a borrower’s operations, impacting their ability to repay debt. Changes in climate regulations can also significantly impact a borrower’s financial performance, increasing the risk of default. Additionally, the value of collateral used to secure loans may be diminished due to climate change impacts, such as the inaccessibility or non-insurability of certain assets.

• When assessing the likelihood of borrowers defaulting on loans (credit risk), lenders must consider all relevant factors, including climate-related risks. Ind AS – 109 requires the use of all reasonable and supportable information in estimating expected credit losses. This means that lenders must incorporate potential climate-related impacts into their economic forecasts and credit risk assessments.

Ind AS – 113

Fair Value Measurement

• Climate change can significantly impact the fair value of a company’s assets and liabilities. For example, the introduction of new climate-related regulations can change how market participants perceive the value of certain assets or liabilities, potentially impacting their market price.

• Fair value measurements, particularly those based on less observable inputs (Level 3 of the fair value hierarchy), are highly sensitive to underlying assumptions. These assumptions must consider the potential impact of climate-related risks, such as the likelihood of extreme weather events, changes in consumer preferences, and shifts in regulatory landscapes.

• Ind AS – 113 mandates companies to disclose the key inputs used in their fair value measurements, especially for assets and liabilities classified within Level 3 of the fair value hierarchy. They must also explain how changes in these unobservable inputs, including those related to climate change, could significantly affect the fair value measurement.

IFRS 17

Insurance Contracts

(Ind AS 117 is yet to be issued)

• Climate change can significantly impact insurance companies. As climate change intensifies, we can expect to see more frequent and severe weather events, such as hurricanes, floods, and wildfires. This increases the likelihood and severity of insured events like property damage, business interruptions, and health claims, which in turn can impact the insurance company’s financial obligations.

• IFRS 17 requires insurance companies to accurately measure and disclose their insurance liabilities. Climate change introduces significant uncertainties into these calculations. Companies must carefully consider how climate change may impact the frequency and severity of insured events when determining their liabilities.

• Companies must disclose significant judgments made in applying IFRS 17. This includes how they account for the potential impact of climate change on the likelihood and severity of insured events. They must also disclose how they manage the risks associated with these climate-related events and how sensitive their insurance liabilities are to changes in these risks.

PROPOSED ILLUSTRATIVE EXAMPLES

The International Accounting Standards Board (IASB) has recently issued an Exposure Draft titled “Climate-related and Other Uncertainties in the Financial Statements.” This draft introduces eight illustrative examples to enhance the application and disclosure of climate-related and other uncertainties in financial statements. These examples aim to improve the quality and consistency of climate-related disclosures by providing practical guidance on how to apply existing International Financial Reporting Standards (IFRS) to various scenarios. Two of the examples are given below, for reference:

Example 1 – Materiality Judgements Leading to Additional Disclosures (IAS 1/IFRS 18)

Scenario: A manufacturer with a climate-related transition plan, including investments in energy-efficient technology and changes in manufacturing methods.

Disclosures: The entity discloses that its transition plan has no material effect on its current financial position and financial performance.

Basis for Disclosure

The entity determined that the transition plan does not currently impact the recognition or measurement of assets, liabilities, income, and expenses.
However, the entity recognises that the absence of this information could mislead users, as they might expect some financial impact from the planned changes.
Considering the detailed disclosure of the transition plan outside the financial statements and the industry’s known exposure to climate-related transition risks, the entity concludes that this disclosure is necessary to provide a complete picture to financial statement users.

Example 2 – Disclosure of Assumptions: Specific Requirements (IAS 36)

Scenario: A company operates in an industry with significant greenhouse gas emissions and is subject to existing and anticipated future emissions regulations.

Disclosures: The entity discloses that future emission allowance costs are a key assumption in its impairment testing of a cash-generating unit.

Basis for Disclosure:

IAS 36 requires disclosure of key assumptions used in impairment testing, particularly those with a significant impact on the recoverable amount.
Future emission allowance costs are identified as a key assumption due to their potential impact on the cash flows of the cash-generating unit.

CONCLUSION

Climate change is no longer just an environmental issue; it’s a significant financial risk that companies cannot afford to ignore. The increasing frequency and severity of extreme weather events, growing pressure from regulators, and shifting consumer preferences are all impacting businesses. These factors directly affect a company’s bottom line, influencing revenues, costs, and the value of its assets.

As companies are increasingly required to disclose climate-related risks and opportunities in line with regulations like SEBI LODR and other frameworks, it’s crucial to connect this information to their financial performance. Simply put, companies need to understand how climate change impacts their finances. ESG reporting provides a structured way to do this, helping companies bridge the gap between their environmental and social impacts and their financial performance.

This approach aligns with the principles outlined in IFRS S2, which emphasises the importance of connecting financial and non-financial information. By understanding how climate risks and opportunities influence both their financial performance and broader sustainability objectives, companies can gain deeper insights into their overall business health. Embracing ESG principles allows companies to navigate this evolving landscape more effectively, building long-term resilience and positioning themselves for sustainable success.

REFERENCES

https://www.ifrs.org/content/dam/ifrs/supporting-implementation/documents/effects-of-climate-related-matters-on-financial-statements.pdf
https://assets.bbhub.io/company/sites/60/2021/10/FINAL-2017-TCFD-Report.pdf
https://www.cpaaustralia.com.au/-/media/project/cpa/corporate/documents/tools-and-resources/environmental-social-governance/guide-to-climate-change-and-financial- reporting.pdf
https://assets.bbhub.io/company/sites/60/2022/ 10/2022-TCFD-Status-Report.pdf
https://www.ifrs.org/content/dam/ifrs/project/climate-related-other-uncertainties-fs/iasb-ed-2024-6-climate-uncertainties-fs.pdf

BCAJ Admin

Business Succession Planning: The Strategic Role of Chartered Accountants and Creating Value beyond Compliance

Many Indian businesses are family-owned and operated. Statistics suggest that only a few such businesses (and the wealth created through them) survive and thrive for generations to come. Succession Planning thus becomes an important issue in the survival, maintenance and growth of businesses and wealth. The Author of this article highlights some of the critical aspects of Succession Planning and the role of Chartered Accountants in it. Succession Planning can become an attractive area for practice as CAs are trusted business advisors, are close to family members and have the skills to balance legal nuances with commercial acumen and feasibility.

INTRODUCTION

The Indian MSME sector, comprising over 63 million enterprises and contributing approximately 30 per cent to India’s GDP, stands at a critical juncture. As the first-generation entrepreneurs of post-independence India start ageing, the question of business continuity and succession looms large. According to a 2021 survey on Indian Family Businesses, only about 30 per cent of family businesses survive to the second generation, approximately 13 per cent make it to the third generation, and merely 4 per cent survive beyond that.

These statistics become more alarming, considering their economic impact. The Credit Suisse Family 1000 Report 2018 highlights that family-owned businesses account for approximately 79 per cent of India’s organised private sector. Family businesses contribute significantly to India’s GDP and employment generation, as reported by the FICCI and ISB’s ‘Indian Family Business Report 2022’. They employ approximately 49% of the country’s workforce. Family-owned enterprises contribute to 63 per cent of India’s industrial output. These businesses are responsible for 90 per cent of India’s industrial units. Furthermore, the report indicates that 96 per cent of all companies in India are family-owned, underlining their crucial role in the nation’s economic fabric. Despite this outsized impact, the low survival rate across generations poses a significant risk to economic stability and growth. Yet, most entrepreneurs postpone succession planning until it’s too late, often leading to value erosion or complete business dissolution during generational transitions.

The contrast with Japan presents a compelling case for structured succession planning. Japan has over 33,000 businesses that are more than 100 years old. According to research by Shinise (long-established Japanese companies) studies, over 3,100 companies have survived for more than 200 years, with some continuing successfully for over 1,000 years. Remarkably, about 90 per cent of these long-lasting businesses are small and medium-sized enterprises with fewer than 300 employees. The oldest existing independent company in the world is Kongō Gumi, a Japanese construction company founded in 578 AD, which operated continuously for 1,428 years.

This stark contrast in business longevity between Indian and Japanese enterprises can be attributed to several factors, but at the core lies Japan’s systematic approach to succession planning, which is deeply embedded in their business culture. Their concept of ‘shinise’ emphasises preserving business value across generations through well-defined succession practices, strong governance mechanisms, and clear leadership transition protocols.
While large corporations like the Tatas, Birlas, Ambanis, and, more recently, the Adani Group have formalised their succession planning, the vast majority of small and medium enterprises remain unprepared for a leadership transition, potentially risking the very existence of enterprises built through decades of entrepreneurial effort.

For professional practitioners serving these enterprises — chartered accountants and lawyers — this presents both a challenge and an unprecedented opportunity. Having served as trusted advisors, often across generations, these professionals are uniquely positioned to evolve from their traditional role of compliance specialists to strategic consultants in succession planning.

UNDERSTANDING BUSINESS SUCCESSION PLANNING: A STRATEGIC IMPERATIVE

Succession planning transcends the conventional understanding of mere ownership transfer through wills or trusts. For professionals advising SMEs, it is crucial to first internalise and then effectively communicate that succession planning encompasses a comprehensive framework addressing four crucial dimensions: ownership transition, management succession, control mechanisms, and operational continuity.

Professional’s Perspective

From a technical standpoint, succession planning integrates multiple disciplines, including personal laws, corporate restructuring, tax planning, family governance, and business continuity planning. It requires professionals to analyse various legal structures, evaluate the tax implications of different transition mechanisms, and design governance frameworks that separate ownership from management. The complexity increases when dealing with multi-locational businesses, diverse asset classes, and cross-border implications.

The implementation demands a thorough understanding of various tools and techniques, from family constitutions and business governance frameworks to management transition mechanisms and wealth distribution structures. Central to this understanding is the recognition that succession planning isn’t merely a legal or financial exercise, but a complex interplay of business, family, and individual aspirations.

Communicating with Clients

When explaining succession planning to clients, professionals need to translate these technical concepts into relatable business scenarios. The approach begins with fundamental questions about business continuity beyond the promoter’s active involvement, naturally progressing to discussions about the client’s vision for their business and family’s future.

Real-Life Scenarios and Professional Intervention

Scenario 1: The Unequal Siblings

Imagine an established family business where the elder son joined straight out of college, learning the ropes from the ground up over ten years. The younger son, having just completed his MBA, is eager to join but feels he deserves an equal say in decision-making.

Without Succession Planning: Tensions rise as the elder son resents his brother’s equal authority despite less experience. The younger son feels his education is undervalued. Family dinners become battlegrounds for business disputes. The business suffers as operational decisions get delayed and employees receive conflicting instructions.

With Professional Intervention: The professional advisor facilitates structured family discussions to achieve consensus on a clear organisational framework. Their role encompasses conducting individual sessions with both siblings, designing role definitions that acknowledge the elder son’s experience while utilising the younger son’s fresh perspectives, creating objective performance metrics for leadership roles, and establishing a family council for major decisions.

Scenario 2: The Diverging Paths

Consider a family where the daughter has been actively involved in the business while the son pursues a different career path. The business forms the bulk of family assets.

Without Succession Planning: The daughter feels overburdened with business responsibilities, while the son feels disconnected from the family legacy. No clear mechanism exists to “cash out” the son’s share without straining business finances.

With Professional Intervention: The professional advisor architects a balanced solution by structuring ownership and management rights separately, creating a fair valuation methodology, and designing a phased buy-out mechanism that maintains business stability.

Scenario 3: The Reluctant Heirs

A successful entrepreneur’s children have chosen different career paths – one a doctor, another an artist, and the third in tech overseas. None show interest in the family business.

Without Succession Planning: The promoter continues running the business well into their seventies, becoming increasingly stressed. The business stagnates due to delayed investments and decisions. When finally forced to sell, the business receives significantly discounted valuations due to its key-person dependency.

With Professional Intervention: The professional advisor helps implement a comprehensive transition
strategy focusing on developing strong second-line management, documenting systems and processes, and exploring various exit options while maintaining business value.

VALUE CREATION THROUGH STRATEGIC SUCCESSION PLANNING

Transforming Professional Practice

The traditional role of professionals serving SMEs has predominantly centredaround compliance, taxation, and dispute resolution — services that clients often view as necessary obligations rather than
value-adding propositions. Succession planning presents an opportunity to transcend this perception, positioning professionals as strategic advisors who help preserve and enhance business value across generations.

The Hub and Spoke Model of Service Delivery

In the complex landscape of succession planning, the professional advisor acts as the central hub, coordinating with various specialists who form the spokes of the service delivery wheel. This model recognises that no single professional can possess expertise in all required domains. The primary advisor orchestrates the contributions of legal experts, valuation specialists, family business consultants, wealth managers, and other professionals while maintaining oversight of the entire process and preserving their position as the client’s trusted advisor.

Technical Framework: Integration of Tax and Regulatory Considerations

The Indian regulatory landscape presents both challenges and opportunities in succession planning. Tax considerations span across direct taxes, including income tax, capital gains, and tax impact from gifts, while indirect tax implications, particularly post-GST, add another layer of complexity. The professional must navigate these along with personal laws as applicable to different sections of the society, corporate law requirements, FEMA regulations for international assets, and industry-specific compliance needs.

Creating efficient succession structures requires careful consideration of the following:

– Transfer pricing implications in family business restructuring

– Capital gains optimisation in asset transfers

– GST impact on business reorganisation

– Regulatory approvals in regulated sectors

– Cross-border compliance requirements

– Corporate governance norms

BUILDING A COMPREHENSIVE SUCCESSION PLANNING PRACTICE

In the dynamic landscape of professional services, chartered accountants are uniquely positioned to develop robust succession planning practices, particularly focusing on promoter-driven and family businesses. This specialised field offers significant opportunities for professionals to add value and build long-term relationships with clients while contributing to broader economic stability.

Succession Planning for Promoter-driven and Family Businesses

The cornerstone of a succession planning practice lies in addressing the complex challenges faced by promoter-driven and family businesses. These entities require tailored strategies that balance business continuity with family dynamics and personal aspirations. Professionals in this field must develop expertise in various ownership transfer mechanisms, including share transfers, management buy-outs, and trust structures. They should be adept at creating models for the gradual transition of control while maintaining business stability, a crucial factor in ensuring the longevity of family enterprises.

Establishing effective governance structures is paramount in family businesses. This involves assisting in the creation of family councils and boards of directors, developing comprehensive family constitutions and shareholder agreements, and implementing systems for transparent decision-making and conflict resolution. These structures serve as the foundation for smooth transitions and ongoing business operations.

Financial planning and business valuation form critical components of the succession planning process. Chartered accountants must conduct thorough business valuations to ensure fair distribution among heirs or stakeholders. This process often involves developing complex financial models for various succession scenarios and creating strategies for liquidity management during ownership transitions. The ability to navigate the intricate tax implications of business transfers is equally crucial, ensuring compliance with relevant laws and regulations while optimising tax efficiency for all parties involved.

Navigating the Complexities of Generational Wealth Transfer

The transfer of wealth from one generation to the next presents a unique set of challenges that succession planning professionals must address. This process often involves facilitating intergenerational communication, aligning expectations and values across different age groups, and mediating conflicts arising from
differing perspectives on wealth management. Professionals must develop frameworks for open discussions about wealth transfer and design equitable distribution plans that don’t compromise business operations.

Preserving family legacy while managing the practical aspects of wealth transfer requires a delicate balance. Succession planners should assist in articulating and documenting family values and vision, developing strategies to maintain family unity through the transition, and creating mechanisms for involving the next generation in philanthropy and social responsibility. This approach helps in maintaining the family’s core values and social impact while adapting to changing business environments.

Exploring Diverse Exit Strategy Options

A comprehensive succession planning practice must be well-versed in various exit strategies to cater to the diverse needs of business owners. Family succession, often the preferred route in family businesses, requires assessing family members’ capabilities and interest in taking over the business. Professionals should be capable of developing training programs for potential family successors and creating phased transition plans for the gradual transfer of responsibilities.

Management buy-outs (MBOs) present another viable option, requiring evaluation of the management team’s capacity to take over ownership. This strategy often involves structuring financing options for management to acquire ownership and developing incentive plans to retain key managers during the transition period. For businesses considering external sales, succession planners must prepare the business for sale, conduct market analysis to determine optimal timing and valuation and manage the complex sale process, including due diligence coordination.

Initial Public Offerings (IPOs) and Employee Stock Ownership Plans (ESOPs) represent more complex exit strategies that require specialised knowledge. Assessing a company’s readiness for going public, guiding through the IPO process, and developing strategies for managing family control post-IPO are crucial skills. Similarly, evaluating the suitability of ESOPs, designing structures that balance owner, employee, and business interests, and managing the tax implications and compliance requirements of these plans are essential components of a comprehensive succession planning practice.

The Role of the Trusted Adviser in Family Dynamics and Succession

Navigating complex family dynamics is perhaps one of the most challenging aspects of succession planning. As trusted advisers, chartered accountants must develop a high level of emotional intelligence and soft skills, including expertise in family systems theory, conflict resolution, and mediation. The ability to provide an objective, third-party perspective is invaluable in these situations, offering unbiased assessments of family members’ capabilities and providing a neutral ground for family discussions and negotiations.

Succession readiness assessment forms a critical part of this process. Professionals must be adept at evaluating both the business’s readiness for leadership transition and potential successors’ preparedness for their roles. This involves identifying gaps in skills or experience and developing plans to address them. Facilitating family councils, developing protocols for family decision-making processes, and guiding the creation of family employment policies and codes of conduct are also essential services that a succession planning practice should offer.

Crisis management is an often overlooked but crucial aspect of succession planning. Developing contingency plans for unexpected events, mediating family conflicts that threaten business continuity, and providing stability and guidance during turbulent transition periods are vital services that can significantly impact the success of a succession plan.

Expanding into Shared Family Office Services

As an extension of succession planning, chartered accountants can expand their practice by offering shared family office services. This involves providing comprehensive wealth management services, coordinating investment strategies across multiple family members, managing complex portfolios, including business assets, real estate, and financial investments, and providing regular performance reporting and analysis.

Centralised administration services, including consolidated bookkeeping and financial reporting for family entities, managing bill payments, cash flow, and day-to-day financial operations, and coordinating with legal and tax professionals for compliance and planning, can add significant value to high-net-worth families. Risk management and insurance services, encompassing the assessment and management of risks across family businesses and personal assets, coordination of insurance coverage, and development of crisis management plans, further enhance the service offering.

By developing expertise in these multifaceted areas of succession planning and family business advisory, chartered accountants can position themselves as indispensable partners in ensuring the longevity and success of family enterprises. This comprehensive approach not only adds significant value to clients but also contributes to broader economic stability by facilitating the smooth transition and continued prosperity of family-owned businesses, which often form the backbone of many economies.

CONCLUSION

Succession planning represents a significant opportunity for professionals to elevate their practice from routine compliance to strategic advisory. The professional’s role extends beyond technical expertise to become a trusted advisor who helps preserve both business value and family relationships. Success in this domain requires a commitment to continuous learning, the development of specialised skills, and the ability to coordinate multiple specialists while maintaining primary client relationships.

For professionals serving small and medium businesses, succession planning offers a natural extension of their trusted advisor role. By helping clients address succession planning proactively, professionals not only create substantial value for their clients but also enhance their practice sustainability. The complexity and long-term nature of succession planning engagements provide opportunities for deeper client relationships and premium service offerings.

As India witnesses one of the largest inter-generational transfers of wealth and business assets in its history, professionals who develop expertise in succession planning will be well-positioned to serve this growing need. The journey from being a compliance advisor to a succession planning consultant may be challenging, but it offers rich rewards both professionally and personally.
“The best time to plant a tree was 20 years ago. The second best time is now.” Chinese Proverb

This ancient wisdom perfectly encapsulates the essence of succession planning – both for business families and for professionals aspiring to build expertise in this domain. The opportunity exists today; the choice to seize it rests with us.

BCAJ Admin

Chatting Up About India: Taxpayer Asks From Income Tax Code

The purpose of this article is to present income taxpayer view and some asks. Its cause is some movement in the government about relooking at tax code project more actively. After all, hope of taxpayer cannot be taken or taxed.

Ideally and reasonably, the tax code should mean an enabling force to lead Bharat towards the vision of 2047. For this to happen, taxpayer inputs are critical. Normally taxpayer inputs are taken as a checkbox ticking process. Tax administration does not record reasons for acceptance or rejection of inputs nor communicates anything about them, leave alone reasoning them out. Taxpayer suggestions pass as ‘consultation’, but falls way short of taking the shape of ‘consideration’. Everyone knows that the powerful finally do what they want and what will balance the budget as the obvious and fundamental matters remain off the agenda for decades. At the same time, it will be unfair to ignore work done by this NDA government in last 11 years towards making positive changes.

Nothing in this article that sounds sweeping, is not meant to be so, as there will always be exceptions. The matters in the following paragraphs are based on trends, concept of pre-dominance for the purpose of relevance, emphasis and common sense.

Nation: From Claws to Clauses

The claws of British Raj ended in 1947 and 1950 as we celebrate 75 years of Samvidhaan. The Claws of British ended and a new Rule of Law was envisaged where the nation will run with Clauses that will work for its citizens. The transition is ongoing from the CLAWS of the RAJ to CLAUSES of the STATE and not complete. The legacy system of income taxes is modelled on the Raj. Social Contract (rights, obligations and functions of citizens and government) is still not in place as a diverse country like ours would like. Now we are faced with the magical opportunity to make Bharat glorious for everyone where everyone works towards that common dream. The state obviously is funded by taxes and in that context; the taxpayer is that sub set of the citizenry, which is akin to National Treasure or the precious lot¹, that makes a tangible contribution towards making Bharat glorious.

1 Budget Documents of 2024: 19% of Union Budget met by Income taxes

Taxpayer — KarDaataais the real Rashtra Samvardhak

Often the Sarkar takes credit for all development and good news. That is not true largely. Like the AnnaDaata, that is glorified in every political speech (despite them remaining poor and dependent), a taxpayer is the AnnaDaata. She gives nourishment to all schemes, spending, and development through taxes and therefore is a राष्ट्रपोषक, राष्ट्रसंवर्धक, and राष्ट्रकर्तारः. So, taking credit by executive would be like RBI taking credit for every rupee spent or earned since it prints the currency.

The point here is critical: understanding of the KarDaataaas VikasPoshak and should therefore be central to tax laws (by the way, it is not). While many people in the country take to streets, block roads for months, climb on Red Fort and remove tricolour to thrust their demands or protest; the taxpayers who contribute 19 per cent of Union Budget 2024 via income taxes don’t do any of this despite having fair case for a much better treatment. The words of then revenue secretary and now the Reserve Bank of India Governor, Shri Sanjay Malhotra talking to DRI officers pointed out: “We are here not only for revenue, we are here for the whole economy of the country, so if in the process of garnering some small revenue, we are hurting the whole industry or the economy of the country, it is certainly not the intent. Revenue comes in only when there is some income, so we have to be very cautious so that we do not in the process, as they say, kill the golden goose”²

2 https://www.cnbctv18.com/economy/revenue-secretary-sanjay-malhotra-stresses-balanced-approach-to-customs-duty-enforcement-19519098.htm - cnbctv18.com, December 4, 2024

Let’s look at who is this taxpayer?

a) Out of about 140,00,00,000 people of India, 7,54,61,286 individuals file tax returns³.

3 Income Tax Returns Statistics AY 2023-24, Published in June 2024

b) Of the 7.54 Crores individual tax returns, 2,81,61,361⁴ individual tax returns contributed to ₹6,77,350 Crore as Income Tax Liability⁵ as declared by them as tax on ₹61,77,988 Crores of GTI or Gross Total Income⁶. Thus, only 2 per cent of the population in India pays income taxes.

4 Ibid Page 31
5 Ibid Page 6
6 Ibid Page 6

c) Of the above 7.54 Crore people, about 6.92 Crore⁷ people are in the slab of up to ₹15,00,000 GTI, and declare some 40 Lac Crore as GTI⁸.

7 Ibid Page 21
8 Ibid page 21

d) During her working life, a taxpayer contributes 5-10-20-30-40 per cent of working life towards this goal excluding indirect taxes and other taxes and levies. How? Because the time spent by her at work, results in earnings, out of that earning, a portion goes as tax. Therefore, she gives on an average 5 per cent to 43 per cent of working life time for the country. That is how Karadaatais Annadataor Vikas Poshak that nourishes the nation.

e) What is a common taxpayer trying to do: He is wanting to come out of poverty / lack and improve his ability to buy for himself and family a life of dignity, comfort, safety and wishes to die without lack and pain.

f) This taxpayer is also “valuable convertible currency” — she can move to other countries and contribute to that country’s development and growth and pay taxes there if the opportunity is better elsewhere. It is well known that Indians are TOP expats anywhere in the world who contribute more and take less from those governments. Richest group in America is of Indian origin — they seek little benefits, they are most educated, they have open outlook, contribute to economy and society in every sphere from taxes to politics.

g) What is beating down the taxpayer in achieving his goal: Inflation and tax obligation defeat the citizen’s aspirations given in (e) above. Therefore, one cannot talk of taxes without inflation. Normally one can compare rise in basic exemption limit by comparing it with inflation indices. But for a moment I wish to present the ‘gold standard’ on how even the Basic Exemption Limit (BEL) furthers this beating of taxpayer:

9 Finance Bill, 1971 for FY 2071-72 
10 https://www.bankbazaar.com/gold-rate/gold-rate-trend-in-india.html

Analysis:

i) Why Gold: Gold has been historically and presently the store of value for all central banks. Value of currency is not the real value nor is declared inflation true reflection of what currency can do. This comparison tells us that BEL is actually going down instead of up, it hasn’t protected taxpayers, and erodes their ability to save and invest. Even if one were to take, ₹700,000 as that BEL, it is more than 30 per cent lower. The author does understand gold as investment class, however it has been so for millennia.

ii) The Basic Exemption Limit if one wants 143 gms. gold should be ₹10.56 lacs at ₹73,909 / 10 gms gold price on 1^st April, 2024.

iii) The table shows that BEL has been beating the hell out of taxpayer, especially those on the edge who are trying to stay afloat to remain in the middle income group.

iv) Similar exercise can be done for upper limit of 30 per cent from which maximum rate applies. It could have the same outcome.

h) A taxpayer tries to race and beat the scourge of inflation eating into his savings by investing in modes like the stock market. However, today LTCGs is taxed at flat rate above ₹1.25 Lacs despite continuation of STT (which was brought in place of exemption of LTCG).

i) Inflation basket: The inflation basket doesn’t take two major expenses of middle income group adequately —housing costs and education cost. For emerging middle-income group, which pays this tax at a level that it bleeds, inflation is not factored by tax system fairly. BEL is not ‘inflation adjusted’.

j) What do you get for being a taxpayer: It must be noted that taxpayer doesn’t get ONE BENEFIT from Sarkar that a non-taxpayer doesn’t get (well we received certificates for 1-2 years). Further the taxpayer is susceptible to come into a ‘harassment net’ in the form of not given tax credit despite tax credit in Form 26AS or sending claims for unpaid taxed that are of 10-15 years old without showing any basis and even adjusting refunds against those so called unpaid demands. In fact, if you are general category, your taxes will be used to deny your children admissions on merit by huge margins to the extent that you pay two to three-times apart from being discriminated on marks. One reason for brain drain.

k) Paying taxes will debar you from every incentive a non-taxpayer enjoys at the expense of the taxpayer.

Therefore, the only response a government with a reasonable mind-set, which can grasp the above, is to protect this taxpayer number, and let it grow organically so that it can contribute more by earning more. Disrupting its earning, taking taxes excessively, being unfair will have adverse results.

Tax Administration — A Business Case

The tax administration consists of unelected people but it carries substantial power. The taxpaying citizens’ ask from tax administration is small and reasonable: have clear to understand and easy to comply tax laws and procedures.

At a structural level, the problem with the tax administration is that an individual administrator has nothing to lose personally for a decision he takes or not take whereas the taxpayer has a large monetary stake. This problem gets bigger by slow, expensive, cumbersome and little recourse to justice.

Typically, administrative system is modelled to self-perpetuate — making more of itself and increase the work and importance for itself. This is despite the bureaucracy often identified with sub-par outcomes, corruption, revenue bias, inability to listen to people it is meant to serve, slow implementation, and low standards of services.

Considering the above facts and facets about the taxpayer, the supreme role of tax administration should be to make lives of taxpayers easy, remove difficulties with pace and not have adversarial attitude. The idea of Sarkar vs. Kardaataa where the previous is chasing the latter is a remnant of the Raj. Yet, Sarkar remains the biggest litigant and from tax litigation its track record at winning at all three levels is far from admirable. Therefore, adversity, except with proven evaders and criminals, should be avoided. It just makes business sense.

The idea of serving the taxpayer where he can earn more and therefore he can in absolute terms pay more tax is genetically and historically missing. Tax laws should be made and presented as enablers.

Taxpayer Asks

The following paragraphs carry some simple ideas. Ideas that can:

a) be implemented without much effort,

b) be disproportionately in favour of benefits while evaluating effort vs. benefits ratio,

c) yield long term and short term benefits to taxpayer and tax collector.

d) makeViksit Bharat Sankalp a reality.

e) be measuring rods to evaluate existing laws and as tools to fix undesirable tax laws and their administration.

I. SIMPLICITY OF DRAFTING

Law is how it reads, just as money is what money can buy. Law need not be simple, but its drafting certainly can be.

Anyone who opens the ITA or Rules can tell that it’s not in English that common taxpayer can read and understand both. It is written in terse, dated, Queen’s English that is already BANNED in many countries¹¹ where Queen / King are still on their currency. Such legal writing is culturally misplaced and at best a remnant of the Raj. US and UK had a Plain English movement¹² in 1970s. New Zealand has a Legislation Manual¹³ on drafting laws in a language that is clear for mortals to decipher. It says: “Drafters must never lose an opportunity to make legislation easier to understand. This is primarily a matter of using plain language and drafting clearly¹⁴”. The Legislation Manual prohibits use of certain words that are everywhere in Indian tax laws.

Indian legislative drafting is far from plain English. India is not Bharat so far as legislative drafting of income tax laws is concerned. We are more British than even the present Britain despite the Queen having left 75 years ago and now even the planet. We haven’t won the battle between Authority and Accessibility yet, which such drafting poses. Lawyers and even CAs too, often tend to believe that complexity in writing is a sign of expertise and even genius. While actually it is only a form of barrier to communication and access at best. A recent MIT report¹⁵, posted by Elon Musk¹⁶ says the same thing and gives causes and means of obfuscating laws through such writing. How are Indian laws written? Well, most Dharma Shashtras, ArthaShashtra — ideas on conduct and economics are written in poetry, with high level of aesthetics.

Clarity can only come when the language is not a barrier, and drafting is for understanding and not casting a spell. Lack of clarity shows lack of understanding and /and certainly lack of adequate care for the reader. About 0.02 per cent people said English was their first language, 6.8 per cent people said it was their second language, and 3.8 per cent said it was their third language as per last census of 2011. If I were the head of drafting team of Law Ministry, I would have them put this framed:

11 Search Plain English movement and Pg45 , Para 158 of NZ Legislation Manual
12 The movement began in the 1970s in the United States and England. It was a response to criticism of the complexity of legal English and the lack of clarity in consumer information
13 https://www.lawcom.govt.nz/assets/Publications/Reports/NZLC-R35.pdf
14 Ibid Para 118, Page 35
15 https://news.mit.edu/2024/mit-study-explains-laws-incomprehensible-writing-style-0819
16 17^th December, 2024 on X

Simplicity is the price for Clarity.
Clarity is the pre-requisite of greatness.¹⁷

Here is what research, experience and common sense tells us: Sentences longer than 27 to 30 words don’t land on the other side as they should. I tried redrafting such sections and normally found that in most cases there is 30 per cent flab. The short point is that Income Tax Act should be redrafted largely to:

1. Remove long sentences and break them down in shorter sentences about 30 words in length;
2. Remove / Reduce endless web of clauses, sub clause, sub-sub clauses, explanations, provisos, cross references. Remove all obfuscating words and replace them with common sense words;

3. Shorten the entire law of 1000s of pages by 20 to 30 per cent as legalise is akin to cholesterol and visceral fat in the words of a recent report¹⁸.

4. Keep the intent, meaning, key words, numbering and flow as it is. The Act should be contemporaneous and can be rearranged where necessary and yet reduced in size.

Is this doable? Very easily. How long should this take? Perhaps 6-12 Months, if one starts with important clauses.

17 Inspired by Da Vinci quote “Simplicity is the ultimate sophistication”
18 https://www.teamleaseregtech.com/reports/jailed-for-doing-business/ - Jailed for Doing Business, 2022

II. CLARITY

Clarity amongst other meanings would be:

– Words are simple and commonly used

– Where needed, words are defined; no undefined key word should be there;

– Words should not be absurd / redundant – Example: Assessment Year. I wonder whether this has any meaning at all except confusing people. You have year of Birth, year of graduation. Take the word “actually incurred” in Sections 10(5), 10(13A), 17(2) Proviso, 35 (2B)/ (5B) and Section 220 explanation;

– Low on repetition within the section of words and phrases and structuring;

– It’s not over the top long with numerous explanations, provisos, further tarnished by multiple amendments – Example: Read Rule 11UA, Rule 2(a) has 101 words in one sentence.

– Keep control of phrases such as “being”. The word Being seeks to change reality. It creates notion and fiction rather than deal with reality. Such subjectivity causes litigation and tax evasion. Ideas of notional rent (a property which can be reasonably let out). Rent is real, it’s not a word or fiction. Law creates a fiction and then creates a charge.

– Keep control over the phrase “as may be prescribed”. This is the passport to endlessly add directions on taxpayers.

Here is an example of Clarity

Original:

“Notwithstanding anything contained herein, a person who knowingly fails to comply with the provisions of this section shall, upon conviction, be liable to a fine not exceeding fifty thousand rupees or imprisonment for a term not exceeding one year, or both.” (41 words)

Clear:

“If someone knowingly violates this section, he may be fined up to ₹50,000, imprisoned for up to one year, or both.” (21 words)

As you will see Clarity and Simplicity are twins. When they play together, the game is unambiguous.

III. CONGRUENCE OF LAWS WITH EASE OF COMPLIANCE

It is a stated State Policy of PM Modi’s government where ease of living and ease of doing business are pillars of everything. However, the laws are not congruent with the state policy.

Example: Size of ITR. A blank PDF ITR 6 is 80 Pages, ITR 3 is 58 pages, ITR 7 is 33 Pages.ITR 2 is 34 Pages. I could not find ease anywhere in those pages.

Why? Because snoop for data which is otherwise available. For example, for small businesses / companies it is asking Financial Statements
details at trial balance line item level. Today the same government has, and I believe government is one in this country:

i) access to GST data — which is invoice level sale and purchase and expenses.

ii) Annual Filing with MCA of every line item of Balance Sheet and Profit and Loss Account.

iii) AIS and TIS give transactions;

iv) There is NSDL CAS Data for Financial Assets which an assessee can offer to share.

It’s hard to understand why ITD cannot use some of this data instead of seeking it again under every regulation and then causing internal mismatch within the ITR or ITR and TAR or even ITR and other data sets / points like customs / GST etc. It seems like a trap set up or a synonym for ‘got you’.

Duplication and Excess is an impediment. It is probably a means of the state to see if the same data comes at 3–4 places. But doesn’t help Ease of Doing Business and Ease of Living.

Action Point

1. Take Company Identification Number (CIN) and MCA filing challan number of small companies in ITR, if filing is done and audited accounts are uploaded there;

2. This can be done post ITR also — like UDIN for TAR — within say 30 days instead of giving huge financial data. This will mean authorising ITD to fetch data from MCA;

3. Same for LLP;

4. Further, there is an option to attach FS for all others where there is no tax audit or only take total assets, total liabilities, Sale, Expenses and Profit figures where there is GST.

5. Today there are many options to reduce excess, duplicity and cumbersome data filling which often are made a cause of mismatch and dispute.

IV. RESTRAINT ON AMENDMENTS AND NOTIFICATIONS

RBI brings out Master Circulars / Master Directions once a year on a fixed day. It consolidates all Circulars and Notifications.

125 Notifications and 18 Circulars are issued till 15th December, 2024 under the Direct Tax Laws. Most Notifications are very specific and irrelevant to most people. Circulars are often Q&A or clarifications. Many seem like announcements. Here is the statistics:

Calendar Year	Notifications	Circulars
2024 (15 Dec)	125/2024	18/2024
2023	106/2023	20/2023
2022	128/2022	25/2022

Wouldn’t it be great to have a Quarterly Notification and Circular giving all that is needed unless its life and death situations — like flood relief institutions etc.? Income Tax Department (ITD) must end piecemeal and haphazard approach, which makes income tax law fragmented, messy, and lying all over the place.

Action Point

a. Bring One Notification per quarter or month

b. Bring One Circular per quarter or month

c. Bring and Annual Master Direction collating all changes of the year — Notifications and Circulars.

d. Eventually review all Circulars and Notifications and withdraw what is already a law or Rule and make collation of Circulars that are applicable from a date onwards.

V. FAIRNESS & TIMELINES

a) Laws tilted in favour of tax department

i. Penalties only on taxpayer, nothing on tax officer for their shortcomings.

ii. Interest charged: 12 per cent, Interest given: 6 per cent. This promotes delay in refunds apart from being unfair. Why should a tax payer pay double interest whereas government will pay 6 per cent for delay? This is unfair and promotes late refunds and also causes working capital problems for taxpayer.

iii. Tax Department should be treated akin to trade credit for MSME. Same laws of repayment should apply as often government causes business downfall due to cash flow crunch.

b) Taxpayers’ Charter and Taxpayer Services should be made a law, at least most of it. This will mean that government is committed to taxpayer and treat them as clients. Taxpayer rights and protections are not in the law, but in taxpayer charter on the wall. Much of the taxpayer service should become part of law and tax officer should be bound to deliver basic services – timely response, not closing queries, closing grievances without confirmation of assessee, escalation available for assessee, and so on. RTI like mechanism where 14 days’ rule will apply to provide data to taxpayer. Power without corresponding responsibility and accountability is lacking in the present law.

c) Approval & Discretion without Time lines: This mechanism is most prone to abuse. We all live within time. Taxpayer has to comply within a timeline. Then why not for tax collector at every stage? Example: Taxpayer services like Section 197 certificate. There cannot be anything that requires permission or application or justice without timeline — Say I have to file an appeal in 60 days, shouldn’t ITD dispose appeal in xxx days?

VI. ARBITRARY UNMOVING MONETARY LIMITS

Arbitrary limits that remain unchanged for years and decades:

a. Section 54E: ₹50 lac permitted investment has remained same since 1^st April, 2007.

b. TP Study: International transactions of ₹ One Crore and above need a TP Study. This limit is there since TP law was introduced in 2001.

c. ₹100,000 remained as a limit for exempting LTCG from 2018 till 2024.

d. ₹10 Crore on Capital Gains investment in House Property is arbitrary — no explanation, just a law that if you sell shares and buy a property which was allowed without limit, now will be allowed till ₹10 crores. What if a young citizen was planning and saving to buy a dream house for 20 years, and now he will have to pay tax on the tax paid money I invested.

e. Mediclaim limit, 80C limit of ₹150,000, ₹50,000 Standard Deduction Limit have remained unchanged for years.

f. R100 for school allowance¹⁹ — this is not a limit; it is an insult. In fact, higher education allowance is a must for taxpayers. Today general category will pay ₹20 lacs minimum in Deemed Medical colleges per year per child despite getting adequate marks. Is this honouring middle income group?

19 Section 10(14), read with Rule 2BB

VII. CONSISTENCY, SURPRISES AND TURNAROUNDS

Taxpayers want consistency and stability. This is the bedrock of any relationship. One of the main ask is to keep the policy and law consistent.

LTCG

Late FM Arun Jaitley, mentioned that India won’t impose tax on LTCG²⁰. In February 2018 tax imposed on LTCG by Shri Jaitley. But it did not end there, STT wasn’t rolled back. Till November ₹36,000 Crores of STT²¹ collected in FY 24-25 and also LTCG for FY 2023-24 was ₹36, 867 Crores from Individual ITRs between the range of 150,000 to 15,00,000²².

20 25 December 2016, https://www.business-standard.com/article/reuters/india-won-t-impose-long-term-capital-gains-tax-finance-minister-jaitley-116122500535_1.html

21 https://www.thehindubusinessline.com/markets/stt-collection-hits-36000-crore-reaching-97-of-budget-target-amid-market-rally/article68858203.ece

22  Income Tax Returns Statistics AY 2023-24, Published in June 2024, page 25

This is one recent example of lack of consistency and turnaround.

Budget as a Surprise Genie

Is Budget a magic show, where new changes are released? Much of this can stop. There is zero reason to bring out changes via Budgets without informing people in advance.

Example: Sudden change to limit of ₹10 Crore for property Purchase from sale of Shares.

If someone is in the middle of a transaction or is planning for years to buy a property, his costing changes in a big way. If there was knowledge that such changes are effective, then people can plan better. Such changes are used in the Budget as if they are a trap, as in a war where surprise is an element of ambush. Yes some rate changes etc. which are expected, or minor amendments to make law more efficient. However, taxpayer benefit should be above all and taxpayer needs to know what is coming when it’s a major change.

Imagine if this was known in advance that you have 12 months to sell equity, make gains and buy a house if you need to before 12.5 per cent and ₹10 Crore kicks in. Will it result in homes price inflation? Will there be a sell out in equity? I don’t think so. India is way too large now for such changes rocking the markets.

Example of Turnaround: Adding MAT to Tax Free SEZ Units midway in 10-year time period.

SEZ were exempt from tax as scheme. One fine day MAT on SEZ was introduced. This is breaking a promise. Once an investor has started a project with knowledge that there won’t be taxes, and then taxes creep in, it is breaking the contracts through law. A sovereign right need not be used to disrupt and throw taxpayers under the bus.

Predictability attracts investments as it reduces risk and is the bedrock of Trust.

Finally, taxmen always ask this question: will all these increase tax compliance and revenue? The answer is yes, because this government itself has adopted some simplification measures that resulted in better compliance, more tax, and more taxpayers. Mahabharata says Dharma always wins in the end. It means if one does the right things, the end result will be right.

There is a vision and idea of Amrit Kal. Another article will deal with some of the specific changes that are necessary in tax laws and procedures and affecting most taxpayers. Some of these may be redundancy, absurdity, unclarity, complexity and the like. Amrit only comes from manthan, and income tax law requires true manthan, where Amrit and Laxmi can both emerge for all people of Bharat.

BCAJ Admin

Auditor’s Report on Special Purpose Financial Statements

Special Purpose Financial Statements (SPFS) are prepared to meet the information needs of specified users. In February 2024, the Institute of Chartered Accountants of India (ICAI) issued the revised Standards on Auditing (SAs): SA 800 dealing with SPFS; SA 805 dealing with Audits of Single Financial Statements and Specific Elements, Accounts or Items of a Financial statement and SA 810 dealing with auditor’s report on summary financial statements. This article provides an overview of the requirements of SA 800 (revised) and explains the key aspects of special purpose financial statements.

An entity generally prepares general purpose financial statements as per the general purpose framework. A general purpose framework is designed to meet the common financial information needs of a wider range of users, e.g. financials prepared as per applicable Generally Accepted Accounting Principles for tax filing purposes; financial statements prepared under the Companies Act, 2013. The general purpose framework, i.e. Indian Accounting Standards and Accounting Standards, are used for the preparation and presentation of the financial statements and such financial statements are called statutory financial statements (i.e. prepared pursuant to a regulation or statute).

However, under certain circumstances, an entity would be required to submit financial statements as per a special purpose framework or an audited financial statement, specific elements, accounts, or items of a financial statement to meet the requirements of a specific category of stakeholders, e.g. shareholders, investors, lenders. Financial service entities such as asset managers or management companies may also be required to prepare financial statements for a specific purpose or for specific users. Such financial statements are often called as special purpose financial statements.

Special purpose financial statements can often be more relevant and less costly to prepare than financial statements that are fully GAAP compliant, depending on the intended use of the financial statements. The audits of such special purpose financial statements are required to be conducted in accordance with special consideration standards issued by the ICAI. In February 2024, the Institute of Chartered Accountants of India (ICAI) issued the revised Standards on Auditing (SAs): SA 800 (Revised), “Special Considerations – Audits of Financial Statements Prepared in Accordance with Special Purpose Frameworks; SA 805 (Revised), “Special Considerations – Audits of Single Financial Statements and Specific Elements, Accounts or Items of a Financial Statement”; SA 810 (Revised), “Engagements to Report on Summary Financial Statements”. These Standards will be applicable to audits/engagements for financial years beginning on or after 1st April, 2024, i.e., these Standards will be applicable to audits / engagements for the financial year 2024-25 and onwards.

The objective of this article is to provide an overview of the requirements of the revised SA 800 issued by the ICAI and to explain the key aspects of special purpose financial statements. It is important to understand why special purpose financial statements are prepared and the underlying reporting framework for the preparation of such special purpose financial statements. For example, if the company is required to get a special audit of the financial statements based on a regulatory order, it is important to understand the reporting framework followed for the preparation of such financial statements. If financial statements have been prepared as per the general purpose framework, the auditor will apply the requirements in SAs 100 to 700 series and not SA 800. It is the primary responsibility of the management to prepare financial statements. In order to do so the management should understand the purpose for which such financial statements are being prepared and its intended users.

SA 800 deals with special consideration in the application of the SAs (100-700 series) to an audit of financial statements that are prepared in accordance with a special purpose framework. SA 800 is written in the context of a complete set of financial statements prepared in accordance with a special purpose framework. However, in addition to the application of all SAs (SA 100 to SA 700 series), an auditor is also required to comply with these special considerations specified in SA 800. Therefore, it is important to understand whether the reporting framework in accordance with which financial statements have been prepared is a ‘special purpose framework’ or not.

SA 805 deals with special considerations in the application of the SAs (100-700 series) to an audit of a single financial statement or a specific element, account or item of a financial statement.

In 2016, ICAI issued the revised auditor’s reporting standards, i.e. Revised SA 700 — ‘Forming an Opinion and Reporting on Financial Statements’, Revised SA 705 — ‘Modifications to the Opinion in the Independent Auditor’s Report’ and Revised SA 706 — ‘Emphasis of Matter Paragraphs and Other Matter Paragraph in the Independent Auditor’s Report’. These standards are effective for audits of financial statements for periods beginning on or after 1^st April, 2018. The auditor’s reporting requirements for SA 800 and SA 805 engagements are linked directly to the reporting requirements in SA 700 (Revised).

What are special purpose financial statements?

Special purpose financial statements are prepared to meet the information needs of specified users. As a result, the special purpose financial statements are prepared using an applicable special purpose framework that meets those users’ needs.

A special purpose framework, as defined by SA 800, is a financial reporting framework designed to meet the financial information needs of specific users. The financial reporting framework may be a fair presentation framework or a compliance framework¹.

The special purpose framework may comprise the financial reporting provisions of a contract. For example, for the purpose of establishing the value of net assets of a company at the date of its sale, the vendor and the purchaser agree that very prudent estimates of allowances for uncollectible accounts receivable are appropriate for their needs, even though such financial information is not neutral when compared with financial information prepared in accordance with a general purpose framework. In this case, the special purpose framework meets the needs of the specified users².

1 Refer paragraph 7 of SA 700 for definition of fair presentation framework and compliance framework. 
2 Refer paragraph A8 of SA 800.

It is important to note that when financial statements are prepared based on the needs of a regulator, e.g. audit of an overseas subsidiary of an Indian company, which is not required in the host jurisdiction but required under Indian regulations, e.g. pursuant to FEMA regulations (filing of Annual Performance Report), it should not be construed that such financial statements are special purpose financial statements if the underlying framework is general purpose framework. Special purpose financial statements are financial statements with a special purpose framework which is designed to meet the financial information needs of specific users.

Other examples wherein special purpose financial statements may be prepared include:

The cash receipts and disbursements basis of accounting for cash flow information that an entity may be requested to prepare for creditors.
The financial reporting provisions established by a regulator to meet the requirements of that regulator.
The financial reporting provisions of a contract, such as a bond indenture, a loan agreement, or a project grant.
Combined financial statements prepared for submission to lenders or investors³;

³  Refer Guidance Note on Combined and Carve-Out Financial Statements issued by ICAI.

There may be circumstances when a special purpose framework is based on a financial reporting framework established by an authorised or recognised standards-setting organisation or by law or regulation but does not comply with all the requirements of that framework. In such a case, the special purpose framework will not be a fair presentation framework since it does not comply with all the requirements of the financial reporting framework that are necessary to achieve a fair presentation of the financial statements, e.g. all disclosures required by accounting standards, have not been made by a company.

Therefore, it will be inappropriate for the description of the applicable financial reporting framework in the special purpose financial statements (and in the auditor’s report) to imply full compliance with the financial reporting framework established by the authorised or recognised standards setting organisation or by law or regulation.

For example, a contract may require financial statements to be prepared in accordance with most, but not all, of the Accounting Standards. In this case, it is preferable that the description of the applicable financial reporting framework refers to the financial reporting provisions of the
contract (and may also refer to management’s description of those provisions in the disclosures to the financial statements) rather than make any reference to accounting standards.

Under SA 800, financial statements prepared on an accrual basis of accounting as per applicable Indian GAAP for filing with income tax authorities are considered to be general purpose financial statements and not special purpose financial statements.

Key considerations for acceptance of an engagement to express an opinion on special purpose financial statements

In deciding whether to accept an engagement to express an opinion on special purpose financial statements, the auditor should determine whether the special purpose framework applied in the preparation of the financial statements is acceptable. The auditor should obtain an understanding of –

the purpose for which the financial statements are prepared;
the intended users;
the steps taken by management to determine that the applicable financial reporting framework is acceptable in the circumstances.

Such a special purpose reporting framework may comprise financial reporting standards established by an authorised or recognised standard-setting organisation. If so, these standards may be presumed acceptable if the organisation follows an established and transparent process involving deliberation and consideration of the views of relevant stakeholders. It could also be a special purpose framework prescribed by the jurisdiction to be used in the preparation of special purpose financial statements for a certain type of entity.

Forming an opinion and reporting considerations

The standard setter retained the approach in extant SA 800 and SA 805, whereby the reporting requirements in SA 700 (Revised) and other SAs are not repeated in SA 800 (Revised) and SA 805 (Revised). Therefore, SA 700 (Revised) contains the overarching reporting requirements applicable for auditor’s reports on special purpose financial statements and single financial statements, or elements of a financial statement, with additional requirements and guidance as considered necessary in SA 800 (Revised) and SA 805 (Revised). Therefore, when forming an opinion and reporting on special purpose financial statements, the auditor is required to apply the requirements in SA 700 (Revised).

Reference may be made to Illustrative auditor’s reports in the Appendix of SA 800 (Revised) and Appendix 2 of SA 805 (Revised).

Key revisions in SA 800 and SA 805 as compared to extant SA 800 and SA 805 include the following:

Refinements to the requirements and corresponding application material in the standard, where applicable, to clarify the reporting responsibilities of the auditor in light of new concepts established by the new and revised Auditor Reporting Standards (i.e. SA 700, SA 705 and SA 706).
New application material relating to Going concern, key audit matters, Other information and inclusion of the name of the Engagement Partner.
Update illustrative auditor’s report that:

⇒Align with the reporting requirements in SA 700 (revised) in terms of the layout and content, including the ordering of elements (for example, the Opinion section is now positioned first) and use of heading and terminologies consistent with SA 700.

⇒Include more fulsome descriptions of the circumstances that are assumed for each of the illustrative auditor’s reports and indicate the applicability of the auditor’s reporting enhancements.

It is important to note that SA 800 makes reference to SA 700 for forming an opinion and reporting on special purpose financial statements, i.e. the auditor is required to apply the requirements in SA 700 (Revised).

Inclusion of restriction on use paragraph in auditor’s report

When an auditor’s report on special purpose financial statements is intended for the use of specified users, a restriction on use paragraph for the specific users’ needs to be included in the auditor’s report to avoid any unintentional reliance on our auditor’s report by others. For example, a financial reporting framework that is specified in a purchase agreement for the preparation of financial statements of an entity to be acquired may be acceptable, but only with respect to the needs of the parties to the agreement. In this case, the auditor restricts the use of the report to the parties to the agreement. The auditor informs management and those charged with governance, in writing, that the auditor’s report is not intended for use by non-specified parties. Such restriction on use paragraph is included in the auditor’s report as the auditor may not have any control over the distribution of the auditor’s report.

Emphasis of Matter paragraph

When preparing an auditor’s report, the auditor recognises that the special purpose financial statements may be used for purposes other than those for which they were intended; for example, a regulator may require certain entities to place the special purpose financial statements on public record. To avoid misunderstandings, auditors alert users of the auditor’s report by including an Emphasis of Matter paragraph explaining that the financial statements are prepared in accordance with a special purpose framework and, therefore, may not be suitable for another purpose. The auditor describes the purpose for which the financial statements are prepared and, if necessary, the intended users or refers to a note in the special purpose financial statements that contains that information.

Illustrative Emphasis of Matter — Basis of accounting

“We draw attention to Note X to the financial statements, which describes the basis of accounting. The financial statements are prepared to assist [Name of entity] to meet the requirements of [name of regulator]. As a result, the financial statements may not be suitable for another purpose. Our opinion is not modified in respect of this matter.”

The auditor may expand the Emphasis of Matter paragraph to include the restriction on use (instead of adding a separate Other Matter paragraph), and the heading in the auditor’s report can be modified accordingly (refer below).

Emphasis of Matter — Basis of accounting and restriction on use

We draw attention to Note X to the financial statements, which describes the basis of accounting. The financial statements are prepared to assist [Name of entity] in complying with the financial reporting provisions of the contract referred to above. As a result, the financial statements may not be suitable for another purpose. Our auditor’s report is intended solely for the information and use of [Name of entity] and [Name of other contracting party] and should not be used by parties other than [Name of entity] or [Name of other contracting party]. Our opinion is not modified in respect of this matter.

Inclusion of a Reference to the Auditor’s Report on the Complete Set of General Purpose Financial Statements

SA 800 states that the auditor may deem it appropriate to refer, in an Other Matter paragraph in the auditor’s report on the special purpose financial statements, to the auditor’s report on the complete set of general purpose financial statements or to matter(s) reported therein. For example, the auditor may consider it appropriate to refer in the auditor’s report on the special purpose financial statements to a Material Uncertainty Related to Going Concern section included in the auditor’s report on the complete set of general purpose financial statements.

Adequate disclosures in the financial statements

The management should ensure that the special purpose financial statements contain adequate disclosures to enable the intended users to understand the information contained in the financial statements.

Concluding remarks

Financial statements prepared under a special purpose framework or special circumstances are specific engagements that provide specific information relevant to a specified group of users. Therefore, it is imperative for the management and the auditor to understand the requirements of such specific users. As the audit reports of general purpose financial statements and special purpose financial statements are governed by two separate sets of auditing standards, i.e. SA 700 and SA 800, an auditor should understand the difference between the two frameworks. Also, the auditors should exercise professional judgement while accepting such engagements and issuing opinions, as it helps maintain stakeholder confidence in the assurance.

BCAJ Admin

Small Steps, Big Impact: Beginning Your AI Journey

For CAs grappling with late hours and an overwhelming workload, it’s time to unlock the transformative power of AI. This article explores how small, thoughtful AI implementations can drive significant efficiency gains, enabling a balanced and more productive professional life.

CA Rahul sat alone in his office. It was 9:15 pm, and the staff had long gone home. The faint hum of the air conditioner was the only sound breaking the stillness of the small office. His eyes drifted to his inbox, overflowing with hundreds of unread emails, while his phone buzzed with a barrage of WhatsApp messages from clients and staff, each demanding his attention.

Rahul sighed. The past years had felt like an endless loop of tax compliances, constantly racing to keep up with changing regulations. Finding capable staff and managing a shortage of article trainees only added to the stress. Then there were the clients — always needing reminders and follow-ups to share their data on time, making the job even more challenging.

He had heard and read a lot about AI in recent months. He recalled a seminar he had attended on AI and how it can improve efficiency at work. On his college-going daughter’s insistence, he had even installed ChatGPT on his mobile. But aside from a few casual attempts, he hadn’t explored its potential seriously.

Can you relate to Rahul’s story?

Rahul’s situation mirrors that of many small and medium-sized CA firms. The daily grind often leaves no time to focus on “important but not urgent” tasks, like finding ways to improve efficiency. While most CAs recognise AI’s potential, the sheer volume of information and multiplicity of solutions creates confusion. Like Rahul, you might be asking:

Where do I begin?
With concerns about inaccurate results, should I use it at all?
Which tool should I choose among so many options?
How do I handle work from younger staff already using AI tools?
How do I prepare my firm to collaborate with young, tech-savvy clients?

Basics First

Before diving in, let’s clarify some fundamental concepts and understand some terms which keep appearing in AI related articles and conversations.

Artificial Intelligence

A branch of science concerned with the ability of computers or machines to perform tasks that usually require human intelligence, like learning, problem-solving, and decision-making.

Generative AI

A field of AI that focuses on generating new content (text, images, videos, etc.) based on patterns learned from existing data.

Large Language Model

Large Language Models are a specific category within Generative AI, trained on massive amounts of text data to understand and generate human-like text.

ChatGPT by OpenAI is a product of Generative AI that uses a Large Language Model (LLM) to understand context and produce coherent, human-like responses in a conversational format. Similarly, there are other tools in the market, such as Gemini by Google and Claude by Anthropic, which also utilise advanced AI models for similar purposes.

Making of a Large Language Model

A Large language model creation requires the following steps:

1. Collection of Data: Large Language Models (LLMs) are trained on vast amounts of publicly available data, including Wikipedia articles, news reports, educational materials, and legal documents. This diverse dataset helps the model understand human language patterns and usage. During the data selection process, careful filtering is done to minimise harmful or biased content.

2. Pre-processing Data: The collected data is then pre-processed to remove duplicate, irrelevant and low-quality data. The remaining data is then properly formatted and broken down into smaller units like words or sub-words.

3. Model Architecture and Training: At this stage, developers design and build the AI system’s structure, then train it to predict the next word in a sequence of text. This forms the technical foundation of how the model processes and generates language.

https://arxiv.org/abs/2303.18223v14

Is 100 per cent accurate output possible?

The content generated by LLMs is not guaranteed to be 100 per cent correct, and the main reasons for these inaccuracies are as follows:
LLMs are trained on vast public datasets that may contain inaccuracies, outdated information, or biases. The model can unintentionally learn and replicate these errors.
LLMs don’t “understand” the world as humans do. They predict likely sequences of words based on patterns in the data. While these predictions often appear coherent, they may not always be factually correct.
If the user’s input is unclear or lacks detail, the model might make incorrect assumptions and provide an inaccurate response.
LLMs rely on pre-trained data. If not continuously updated, they might lack knowledge about recent events or developments.
While LLMs are versatile, they might provide superficial or generic answers in specialised fields without deep domain-specific knowledge.
LLMs can “hallucinate” information, generating details or facts that seem convincing but are entirely fabricated

Although LLMs have inherent limitations, several scientific approaches can significantly reduce errors in their outputs. Using well-crafted prompts can guide the model to provide more accurate responses. Retrieval Augmented Generation (RAG) enhances accuracy by connecting the model to verified external information sources. Additionally, custom-trained models can be developed for specific domains to improve performance in specialised areas.

Why does a good prompt matter?

A prompt is the input text or query that guides the LLM to generate a response. As mentioned earlier, if the query is vague or not complete, the LLM will make certain assumptions and create output which may not be relevant. While precise, detailed prompts typically yield accurate and relevant responses.

Poor Prompt: “Write about AI.”

Good Prompt: “Write a 500-word article explaining the role of AI in automating repetitive tasks, with examples from the perspective of a tax practitioner, in a conversational tone.”

In fact, prompts are so important that Prompt Engineering is becoming a specialised area of expertise and a valuable skill of crafting and refining prompts to achieve specific, high-quality outputs from AI models.

Rahul makes a beginning.

After understanding the basics of LLMs, their inherent strengths and limitations, Rahul called a brainstorming session with his team. He invited ideas on how to start using AI to improve efficiency.

“Sir let’s use AI for routine drafting,” suggested Zaid, the new article trainee. Other young team members eagerly supported the idea. Alex demonstrated how
ChatGPT could draft client communications and compliance-related documents. The team was impressed.

The discussion continued, and a decision was arrived at to start the use of AI for drafting purposes, starting small but aiming for impactful results.

Standard Operating Procedure

To ensure smooth integration, Rahul outlined an SOP:

Scope: Specify which team members can use AI for drafting and clearly define the tasks AI can assist with.

Routine emails to clients asking for data, payment reminders, etc.
Explaining tax-related queries to a client.
Drafting compliance-related documents, e.g., Minutes of Board Meetings, Resolutions, etc.
• Drafting Agreements, e.g., Partnership Deed
Drafting replies to legal notices

Tool Selection: Evaluate various AI tools. Decide between free and paid versions based on usage needs and features.
Each tool comes with a free and paid version. The differentiation is in terms of limit of use, access to better models, access to better features, etc. Here is a brief comparison of a few prominent tools:

Tool	Free Version	Paid Version
ChatGPT	• Access to GPT-4o mini. • Standard voice mode. • Limited access to file uploads, advanced data analysis, web browsing, and image generation.	• Everything in Free, plus + the following: • Extended limits on messaging, file uploads, advanced data analysis, and image generation. • Limited access to o1 and o1-mini. • Create and use custom GPTs. • Subscription: USD 20 per month.
Claude	• Limited daily message limit, which varies based on demand. • Access to Claude 3.5 Sonnet model.	• 5x more usage versus the Free plan. • Access to Claude 3 Opus model. • Early access to new features. • Access to Projects to organise. documents and chats. • USD 20 per month.
Gemini	• Access to 1.5 Flash Model. • Free flowing voice conversation. • Connect with multiple Google Apps.	• Access to 1.5 Pro model. • Access to Deep Research. • Work seamlessly with Gmail, Docs and more. • Upload up to 1500 pages of text. • Subscription: INR 1950 per month.
Microsoft Co-Pilot	• Limited Access during peak hours.	• Priority Access. • Early Access to new features. • Works seamlessly with Word, Excel, PowerPoint, and OneNote. • Subscription: USD 30 per month.

Note: These features are highly dynamic and are frequently updated by companies

Training: Basic training to each member for tool usage and effective prompt creation.

Maintaining a library of standard prompts.

Confidentiality Measures: Understand the privacy policy of the AI tool. Set up strict confidentiality protocols for inputting sensitive data. Avoid sharing client-identifiable information unless it is redacted or anonymised.

When uploading files or posting queries, ensure that all Personally Identifiable Information (PII) is deleted. For example, if you are uploading a document that contains details such as the company name, PAN, address, CIN, etc., remove this information before uploading.

Drafting and Review Process: Define the review process for each type of AI-generated output.

What kind of documents can be generated from scratch? What kind of documents require a rough draft to be written by a team member and then improved using an AI tool?

Each document must be reviewed before it goes externally. Some documents may be reviewed by seniors, and other more sensitive documents may require approval by proprietor / senior.

The review must be done to spot inaccuracies and correct them. Case law citations should always be sourced from authoritative and reliable references, not from AI-generated content.

Continuous Improvement: This SOP must be reviewed every quarter and amended for improvements and accuracy

Drafting- AI-Generated vs. Human Generated

As the use of AI tools for content generation continues to grow, various tools have emerged in the market to identify whether the content is human-written or AI-generated. Some of these detection tools include TraceGPT, Hive, and Originality.ai.

AI excels at generating content quickly, with accurate grammar, proper punctuation, and consistent style. However, it often struggles with complex requirements. On the other hand, human-created text, though more time-consuming, stands out for its uniqueness and ability to better convey human emotions. The ideal approach is combining AI efficiency with human creativity and insight.

AI should be used to enhance NI (i.e. Natural Intelligence) and not to substitute the latter. NI should be used to make effective use of AI. Excessive use of AI may kill creativity and natural skills, just as we lost our memory skills of remembering telephone numbers with the advent of cell phones.

Rahul’s office- Two months later

It was 7 pm, and Rahul was packing up to leave for home. Watching his favourite sports event and having dinner with family now felt like a luxury he could afford. The team’s adoption of AI for drafting tasks significantly reduced his workload.

“What’s next?” he wondered. Rahul was ready to explore some more ways AI could transform his practice.

Here’s how you can begin implementing AI in your office:

Ready to take the first step? The possibilities are endless. Start small, think big, and let AI handle the routine while you focus on what truly matters.

Identify a Starting Area: Choose a specific area to begin using AI. For example, Rahul’s firm started with drafting. You could consider areas like research or financial analysis, depending on your comfort level and the potential for time savings.

Select the Right Tool: Research and choose an AI tool that aligns with your chosen area of focus.

Conduct Team Training: Organise a formal training program to ensure team members understand how to use the tool effectively.

Develop a Standard Operating Procedure (SOP): Create a clear and structured SOP to streamline the AI implementation process and maintain consistency.

Note: This article was conceived, structured, and written entirely by a human. However, several sentences were paraphrased with the assistance of AI to enhance clarity and ensure grammatical accuracy.

BCAJ Admin

Allied Laws

43 Rizwi Khan vs. Abdul Rashid and Ors.

AIR 2024 Jharkhand 167

12^th July, 2024

Transfer of property — Gift deed — No title with the donor to start with — Illegal occupation over property — Gift deed invalid. [S. 122, Transfer of Property Act, 1882; O. 1, R. 10, Code for Civil Procedure, 1908].

FACTS

A suit was instituted by the Plaintiff (Rizvi Khan) for declaration of title over the suit property. The suit was filed on the strength of a gift deed executed by the donor (one Mr. Shamsher Ali, father of both Plaintiff and Respondents) in favour of the Plaintiff. The Respondents had argued, inter alia, that the said gift deed was null and void on the ground that the donor did not have a clear title over the suit property on the date of transfer of property.

HELD

The Hon’ble Jharkhand High Court observed that the suit property belonged to the state government, which was leased out to TISCO. Further, it was observed that the donor was illegally occupying the said land. Thus, relying on the legal maxim ‘Nemo dat quod non-habit’, i.e., one cannot give what he does not have, it was held that the gift deed was invalid.

The suit was, therefore, dismissed.

44 Parvati alias Parvati Mohapatra vs. Sadasiba Mohapatra (dead) and Ors.

AIR 2024 (NOC) 819 (ORI)

28^th February, 2024

Succession — Void Marriage — Children from void marriage — Illegitimate children also have right over the property of parents. [S. 16, Hindu Marriage Act, 1955; S. 11, Hindu Succession Act, 1956].

FACTS

The Respondent (Original Plaintiff) had filed a suit for eviction of the Appellants (Original Defendant) from possession of the suit property. Plaintiff had contested that Defendant was staying with him for the last 30 years in the suit property. Thereafter, due to issues between the parties, the Plaintiff had asked the Defendant to vacate the property. The Defendant had contested the removal on the ground that the Defendant had been married (as per social norms) to the Plaintiff for the last 30 years and, therefore, she and their children had a legal right, title, and interest over the suit property and thus, cannot be evicted. Plaintiff had rebutted by stating that he was already married to somebody else and, therefore, Defendant was not his wife as per section 11 of the Hindu Marriage Act, 1956, and consequently, the children also did not possess any right, title and interest over the suit property. Thereafter, during the pendency, Plaintiff expired, and his legal heirs (children through his first wife) were made a party to the plaint. The Ld. Trial Court dismissed the plaint. Aggrieved, an appeal was filed before the Ld. division Bench. The Ld. Division Bench allowed the Plaintiff’s appeal.

Aggrieved, a second appeal was filed by the Defendant before the Hon’ble Orissa High Court.

HELD

On appeal, the Hon’ble Orissa High Court observed that the children of the Plaintiff and Defendant (Defendant 2 to 4) had become legal heirs to the suit property upon the death of the Plaintiff. Further, relying on section 11 of the Hindu Succession Act, 1956 and the decision of the Hon’ble Supreme Court in the case of Revanasiddapa and others vs. Mallikarjun and Others AIR 2023 Supreme Court 4707, it was held that Defendants 2 to 4 inherited right, title, and interest over the property even though they were born out of a void marriage.

The Appeal was, therefore, allowed.

45 Kripa Singh vs. GOI & Ors

2024 LiveLaw (SC) 970

21^st November, 2024

Arbitration — Delay in filing appeal — Implications of the Limitation Act — Court of law to secure and protect appellants. [S.14, Limitation Act, 1963; S. 34, S. 37, Arbitration and Conciliation Act, 1996 (Act)].

FACTS

The appellant’s land was acquired by the Government vide an award. After receiving a certified copy of the award, the appellant filed an appeal before the High Court. Thereafter the appellant came to know about the appropriate action available, being the statutory remedy under Section 34 of the Act, and instituted proceedings under Section 34 of the said Act before the District Court.

The District Judge took up the application under Section 34 of the Act and dismissed the same on the ground that it was barred by limitation. An appeal under section 37 of the Act was also dismissed.

The appellant filed an appeal before the Supreme Court.

HELD

The substantive remedies under Sections 34 and / or 37 of the Act are by their very nature limited in their scope due to statutory prescription. It is necessary to interpret the limitation provisions liberally, or else, even that limited window to challenge an arbitral award will be lost. The remedies under Sections 34 and 37 of the Act are precious. Courts of law will keep in mind the need to secure and protect such a remedy while calculating the period of limitation for invoking these jurisdictions. Applying Section 14 of the Limitation Act, we hold that there is sufficient cause excluding the period commencing from the filing of the wrong appeal before the High Court to the filing of the correct appeal before the District Court will be excluded.

The Appeal was allowed.

46 Manohari R vs. The Deputy Tahsildar (Revenue Recovery) & Ors

2024 LiveLaw (Ker) 783

5^th November, 2024

Writ Jurisdiction — Difference between Maintainability and Entertainability. [Art. 226, Constitution of India, S. 7 Kerala Revenue Recovery Act, 1968].

FACTS

The Appellant / Original Petitioner had challenged a notice issued under Section 7 of the Kerala Revenue Recovery Act, 1968 by filing a Writ Petition. The notice was issued by Respondent No.1, authorising the Village Officer, to seize the movable property of the Appellant for the defaulted amount of ₹1,10,096/- with interest due to the Kerala State Electricity Board (KSEB).

The Writ Petition was dismissed as not maintainable. Being aggrieved by the summary dismissal of the writ petition, the Petitioner filed appeal under Section 5 of the Kerala High Court Act, 1958.

HELD

There is a difference between the entertainability and maintainability of a writ petition. Even if the alternate remedy is available to the Petitioner, that cannot be a ground to hold the writ petition under Article 226 of the Constitution of India against an administrative authority as “not maintainable”. The powers under Article 226 of the Constitution of India can be exercised even if there exists an alternate remedy. However, it is in restricted circumstances, within well-defined parameters. As a matter of settled judicial practice, the jurisdiction under Article 226 of the Constitution of India is not exercised if there is an alternative efficacious remedy available and in such circumstances, the writ court may decline to “entertain” the writ petition. There is, therefore, a difference between maintainability and entertainability of a writ petition.

Therefore, the petition filed by the Appellant / Petitioner was maintainable. The impugned judgment was set aside, to decide whether the writ petition should be entertained.

The Appeal was allowed

BCAJ Admin

From The President

Adios 2024!

The landmark calendar year of 2024 has come to a close, marking the 75^th anniversary of our esteemed Society. This year has been an opportunity to express gratitude and recognise the numerous contributions made by our Society over the past several decades. It also served to reinforce our commitment and dedication to our Society’s mission for our shared future. The year commenced with the landmark ReImagine mega-conference and concluded on a high note with India’s inaugural CAthon — a marathon run for Chartered Accountants, which attracted over 1600 participants in support of noble causes. On behalf of the entire BCAS team, I would like to extend my heartfelt thanks to all our members and well-wishers for their unwavering support for the various BCAS initiatives throughout the year.

The beginning of a brand-new year is always a good spot to pause and reflect on the year gone by, as well as expectations from the new year. Whilst 2024 gave us new governments at the centre and the state, closer home, the new council of our Institute of Chartered Accountants (‘ICAI’) is also set to get started soon. In this backdrop, we discuss some trends affecting our profession that can seemingly unfold (or accelerate) as we glide into the new year:

i. Evolving Assurance Regulatory Landscape: In 2024, India’s assurance regulatory landscape underwent significant changes, with the NFRA demonstrating its strong intent through various amendments and circulars despite opposing views from other stakeholders. With a new council leading ICAI and the recent opinion from the Solicitor General of India, the outcome of the proposed amendments will be closely observed. Additionally, as the NFRA team expands, it is expected that their monitoring and oversight functions will accelerate, resulting in an increase in Audit Quality Review Reports, inspections, and orders.

The Accounting and Auditing Committee at BCAS initiated a series of webinars in December 2024 focusing on significant auditing standards and recent NFRA orders analysis. Featuring speakers from NFRA, the objective of these webinars was to enhance our members’ understanding of the evolving assurance landscape.

ii. Simplification Effort for Income Tax Act: In 2025, it is anticipated that meaningful amendments will be made to the Income Tax Act, 1961, in an effort to simplify its provisions. As announced by the Honourable Finance Minister in her Budget Speech of 2024, there is considerable expectation regarding the changes that may be proposed in the upcoming 2025 budget. These modifications are likely to be refined over the coming months, with the budget document setting the groundwork for this initiative.

At BCAS, the Direct Tax Committee has established a sub-group to provide suggestions on simplification initiatives. This sub-group will also focus on training and knowledge dissemination for our members following the announcement of these changes. Additionally, in December 2024, BCAS had the honour of hosting Dr. Pushpinder S. Puniha and other members from the Consultative Group on Tax Policy at NITI Aayog, where suggestions were shared on tax policy-related matters.

iii. The fruition of legal challenges under GST: The GST law has travelled through the phases of awareness > implementation > assessments > dispute resolution. Since the dispute resolution process is time-consuming, many important matters, including certain constitutional challenges to GST law, might see conclusion in 2025. It would not be of surprise if legislative amendments are resorted to cover some of these judicial pronouncements, as is the expectation with the Safari Retreats judgment. The commencement of matters at the appellate tribunal level is also expected to gather steam in the coming year.

The Indirect Tax Committee at BCAS recently hosted a comprehensive full-day workshop on recent developments in GST, which included a Brain’s Trust session addressing issues arising from recent judgments. Additionally, the committee is preparing a representation to be submitted to the Union Finance Minister and the CBIC, focusing on specific provisions related to the legal and procedural aspects of GST.

iv. Embedded usage of AI across practice areas: The discussion on AI has transitioned from questioning its impact to examining the extent of its influence. As more AI tools become widely used, AI adoption is expected to increase across all professional practice areas by 2025. It is unlikely that AI will replace accountants entirely, but it is entirely probable that ‘accountants with AI’ will replace ‘accountants without AI’.

At BCAS, our AI mission is to enable members to harness the power of AI rather than perceiving it as an adversary. The Technology Initiatives Committee has embarked on a journey of organising subject-specific AI discussions. Having successfully concluded a session on ‘Transforming Tax Practice through AI’, the team is all set to host an upcoming session on ‘Revolutionising CA Practice through AI’.

v. Acceleration in the trend towards audit-only firms and non-audit firms: The changing regulatory framework, increased stakeholder expectations, and the need for specialised domain knowledge are likely to accelerate the trend of firms focusing their efforts on either audit services or non-audit services. As this distinction becomes more pronounced, it may lead to the formation of audit-only firms that utilise their core assurance expertise to provide conflict-free services.

The forthcoming Members’ RRC in Lucknow-Ayodhya will feature insightful sessions on the topic of the future of firms, raising private equity for professional firms and developing non-conventional practice areas. While registration for the Members’ RRC is closed, individuals can join a waitlist to possibly secure a spot in the event of cancellations.

The BCAS membership extends across over 350 towns and cities in India. In December, the Vice President visited Coimbatore to conduct the first BCAS Townhall. These Townhall sessions, which are held outside of Mumbai, provide an excellent opportunity for the BCAS office bearers to engage with our membership and exchange thoughts. Coupled with the Sherpa initiative, these BCAS Townhalls will help reaching out to the growing diverse membership at BCAS.

This month, we surpassed 25,000 subscribers on our BCAS YouTube channel. The BCAS YouTube channel is a treasure trove of professional knowledge and deep insight on various topics. Now, all videos from the ReImagine mega-conference have been added to the BCAS YouTube channel for the benefit of our community.

BCAS congratulates the newly elected council members of the Institute of Chartered Accountants of India as they embark on leading and guiding our collective efforts towards the betterment of our profession.

Please also join me in congratulating the 11,500 newly qualified Chartered Accountants as they embark on their journey in this esteemed profession, with a promising future ahead of them.

As the new year begins, I hope you have obtained your copy of the BCAS Calendar and Diary. Best wishes for a healthy, happy and fruitful new year ahead. Bienvenue 2025!

CA Anand Bathiya

President

BCAJ Admin

Do Not Kill The Golden Goose

Corporate Tax contributed 46.47 per cent, and Personal Income Tax contributed 53.31 per cent of total direct tax collections in India in the FY 2023-24.¹ Total collection on account of direct taxes in the FY 2023-2024 was ₹19.60 lakh crores. Thus, we find that taxpayers, both corporate and non-corporate, are major contributors to the government exchequer. GST contributed ₹18.01 lakh crore for the FY 2023-2024².

1 https://incometaxindia.gov.in/Documents/Direct%20Tax%20Data/Final-Approved-Time-Series-Data-2023-24-English.pdf
2 https://pib.gov.in/PressReleasePage.aspx?PRID=2016802

There were 7.5 crore individual taxpayers for the AY 2023-2024.³ This shows that only 5 per cent of the population pays tax in India or files tax returns. Out of this, 87 per cent has returned income of less than ₹10 Lakhs. Fifty per cent of the total individual taxpayers are salaried class, of which 82 per cent have income less than ₹10 lakhs. This shows that the majority of the taxpayers belong to the middle class. Individual taxpayers, and especially the salaried class are the worst hit by inflation and taxes. Over and above income tax, they pay GST on their gross spending. GST should be reduced on items of mass consumption to give relief to people. There is no social security for a large number of private sector employees, and they are taxed at a higher maximum marginal rate of 30 per cent as against the peak corporate tax rate of 25 per cent. There is a strong case for substantial relief to the middle class.

3 https://incometaxindia.gov.in/Documents/Direct%20Tax%20Data/Approved-version-Income-Tax-Return-Statistics-for-the-AY-2023-24.pdf

The government refers to taxpayers as “Pratyek Karadata — ek Rashtra Nirmata”(प्रत्येक करदाता एक राष्ट्र निर्माता). However, unfortunately, this Rashtra Nirmata is not given his due credit, respect, benefit or any social security. In fact, a ‘taxpayer’ is debarred from many government benefit schemes. It pains to see the hard-earned money of the taxpayers utilised in freebies and unproductive work.

Instead of rewarding taxpayers, they are penalised by assessing officers with high-pitched assessments, unreasonable penalties / demands, unfriendly communications, prosecution notices, litigation and so on. Complex tax laws, long-drawn litigation and ambiguity have resulted in uncertainty in tax system / compliances.

It is interesting to note that Mr Sanjay Malhotra, then Revenue Secretary⁴, echoed the sentiments of taxpayers while addressing the Directorate of Revenue Intelligence⁵ on 4^th December, 2024:

The government aims to make the tax system simple, easier to understand and comply with. He said that the aim is to reduce disputes and litigation.
He conveyed the government’s intent of building trust with taxpayers by avoiding harassment and inconvenience to honest taxpayers, at the same time dealing rigorously with dishonest.
He exhorted members present to remain alert and keep the interest of the economy ahead of the interest of the revenue.
He said that tax officials should desist from raising unwarranted high-pitched demands and keep economic growth in mind.
He said, “If in the process of garnering some small revenue, we are hurting the whole industry and economy of the country, that is certainly not the intent,”
He said, “Revenue comes in only if there is some income and so we have to be very cautious that in the process, as they say, ‘do not kill the golden goose’.”

4 Mr. Sanjay Malhotra has been appointed as the 26th Governor of Reserve Bank of India w.e.f. 11^th December 2024
5 DRI is the apex anti-smuggling agency of the Central Board of Indirect Taxes & Customs (CBIC).

Mr. Malhotra’s comments carry a lot of weight, as he has played a pivotal role in shaping policies related to both direct and indirect taxes. On 31^st May, 2024, he met BCAS along with many other organisations and trade bodies to understand the challenges faced by taxpayers. While he has now taken up office as Governor of the Reserve Bank of India, let us hope that his successor will follow a similar approach and provide much needed relief to the taxpayers.

It is heartening to note that the government is seized of these issues and has set up a Consultative Group on Tax Policy at NITI Aayog⁶ to analyse tax policies and processes and suggest reforms that help in tax simplification, enhance tax collections, reduce tax compliances, and other costs for the taxpayers through improved filing, grievance redressal mechanisms and reduced litigation. Dr Pushpinder Puniha, IRS, the chairman of the Consultative Group on Tax Policy, along with Mr Sanjeet Singh, IRS, Senior Adviser at NITI Aayog, visited BCAS on 10^th December, 2024 to discuss the changes required in the direct tax laws to achieve the above objectives. They were very open, and their approach was pragmatic. The profession and business community have high hopes from this Consultative Group with regard to tax reforms.

6 National Institution for Transforming India (NITI)

UNION BUDGET 2025

Union Budget 2025 will be presented on 1^st February, 2025. One hopes that the Government fulfils the hopes of Aam Adami (Common Man) and brings in reforms to ease the tax burden and compliances. The government consults various trade associations, professional bodies and stakeholders before the Budget. However, once it is announced, there is hardly any discussion by the honourable Members of Parliament (MPs) while passing the same. It would be better if a Committee of Experts from across sectors is set up to study and evaluate the proposals in the Union Budget, including the Finance Bill, before the same is taken up for debate and discussion in Parliament. This group can highlight the pros and cons of various proposals, which would guide MPs while passing them.

ECONOMIC CHALLENGES AHEAD

It is well known that India is facing tough competition from countries like Vietnam, Indonesia, etc. Somehow, India has failed to attract desired investments and capitalise on the present geo-political and economic upheavals and the economic turmoil in Bangladesh, China (credibility crisis post-Covid) and other war zone countries. If India is to attract foreign investment and play a crucial role in the global market, then it needs to address some of its perennial problems, such as lack of stability and consistency in tax laws, adversarial tax regime, corruption, long-drawn tax litigation and complex laws.

It is imperative that India creates an image of a taxpayer-friendly jurisdiction, that cares for and respects all contributors to the progress of the country. India needs to focus on the generation of employment, exports and economic development. Revenue is the by-product of economic growth and should not become a hindrance to development.

At present, India is facing multiple challenges, namely, the slowdown of the economy (for the Q.E. Sep 2024, it is expected to be 5.4 per cent — a seven-quarter low), rising inflation and depreciating rupee⁷. The new RBI governor has a tightrope to walk on.

7 Rupee ended at 85.53/$1 on 27^th December, 2024 – the steepest single day fall since 15^th March 2023 Source: The Economic Times dated 28.12.2024.

NEED OF THE HOUR

In the present global scenario, India needs to play its cards wisely. As Mr. Malhotra rightly said, if there is income, revenue will come automatically. All we need to do is to provide a conducive environment for the business community to grow and prosper. A friendly and reasonable tax regime will give much-needed relief to the middle-class population. GST rates need to be reduced, as they are regressive, and ultimately, the end consumer (which is largely lower and middle-income class people) bears the burden.

As we bid adieu to 2024, let us hope that 2025 will bring a simplified tax regime in which the golden goose (taxpayers) will be so well treated that it will give more and more golden eggs for a very long time.

I wish you all a happy New Year 2025!

Best Regards,

Dr CA Mayur Nayak

Editor

BCAJ Admin

जानामि धर्मम् न च मे प्रवृत्ति: !

This is a wonderful line adopted from Pandav Geeta (57). It is also incorporated in ‘Vidurniti’, i.e. the preaching by Vidur to his eldest brother Dhrutarashtra in Mahabharata. It is an all-time truth, experienced by and applicable to almost every person. One needs the courage to accept it.

In Pandav Geeta, Duryodhana says this, while in Vidurniti, it is said by Dhrutarashtra, Duryodhana’s father. I am presuming that the readers are aware of the basic story of Mahabharata.

All persons, even uneducated or illiterate, have a basic idea of what is good and what is bad. The problem is that despite this knowledge, one is not inclined to do good things, nor can one refrain from doing bad or undesirable things. He leaves everything to the diktats of his ‘God’ at the time of actual action. The literal meaning: –

जानामि धर्मम् न च मे प्रवृत्ति: ! I know what is good, i.e. what is as per ‘Dharma’ — norms of good behaviour. But, I am not always inclined or willing to act according to the Dharma.

जानाम्यधर्मम् न च मे निवृत्ति:! I also know what is bad or not acceptable to the Dharma. But I am not able to refrain myself from doing that thing. I cannot withdraw myself from evil things.

केनापि देवेन हृदि स्थितेन Some God who is in my heart always guides me on what and how to do (behave) and I can’t disregard Him! I cannot resist His directions!

यथा नियुक्तोस्मि तथा करोमि! I act as per that ‘God’s diktat. (often in a selfish manner)

The learned and wise readers of BCAJ do not need any elaboration on this principle. We experience and observe this every now and then in all walks of life. We develop a feeling that it is ‘inevitable’. That is the ‘gift of Kaliyuga. That is the tragedy of human life.

In any walk of life — education, health, profession, business, administration, judiciary even in so-called ‘spiritualism’ bad or false things are routinely done. There is hypocrisy. There is a dichotomy between what we say and what we do. About politics, elections, etc., the less said, the better.

In the present scenario and systems in India, it is extremely difficult for any professional to remain completely above board. Either he is a victim of corruption or a forceful supporter of it for various reasons. It is sad to see that most professions are losing their charm, respect and credibility in society. The irony is that it is the same society and system, which force them to adopt unethical practices, and when they succumb to pressures, they are defamed.

One of the fallouts of unrighteous ways is the loss of courage to fight. When we are part of the rotten system, we cannot fight or complain against it. We have lost the courage to expose crimes happening before our eyes or in our knowledge. We need to learn a lesson from King Dasharatha in this respect.

Dasharatha, by mistake, killed Shravan. Dasharatha was a King and not answerable to anyone, yet he admitted his guilt and accepted the punishment (A curse from Shravan’s parents).

Hundreds of such examples can be given in our scriptures. However, in the DwaparYuga and Kaliyuga, the value system degenerated rapidly, and today, we are in this pathetic and undesirable situation! Today, the ‘self’ dominates over good morals, and we lack the courage and willingness to act dutifully and conscientiously!

BCAJ Admin

Glimpses of Supreme Court Rulings

14 Deputy Commissioner of Gift Tax,

Central Circle-II vs. BPL Ltd.

(2022) 448 ITR 739 (SC)

Gift-tax – Equity shares during lock-in period are not ‘quoted shares’ as defined- Valuation of “unquoted equity shares” in companies – Schedule II to the G.T. Act read with Rule 11 of Part C of Schedule III of the W.T. Act is a statutory rule which prescribes the method of valuation of “unquoted equity shares” in companies, other than investment companies, which prescription and method of valuation is mandatory in nature – The effect of Rule 11 of Part C of Schedule III of the W.T. Act is that unquoted shares must be valued as per the formula prescribed – No other method of valuation is permitted and allowed – Ad hoc depreciation/reduction from the quoted price of equity shares transferable in the open market is not permitted and allowed vide Rule 9 of Part C of Schedule III of the W.T. Act.

The assessee company was engaged in the the manufacture and sale of consumer electronic products like television sets, VCR’s, audio and video products, etc.

The assessee had also invested in various other companies manufacturing allied or similar electrical, electronic and engineering goods. On 2^nd March, 1993, the assessee transferred its holdings in eight companies to one Celestial Finance Ltd. for a total consideration of ₹23,10,03,974 which was equal to the cost of acquisition of the shares to the assessee.

The assessee had transferred the shares to Alpha Securities Pvt. Ltd., a 99.7 per cent subsidiary of the assessee. Alpha Securities Pvt. Ltd., in turn, had transferred the same to the 100 per cent subsidiary of Celestial Finance Ltd.

In the course of the assessment proceedings for A.Y. 1993-94, there was an audit objection dated 17^th August, 1995. The assessee satisfied the Department that there was no element of gift.

Thereafter, in August, 1998, a search was carried out u/s 132 of the Income-tax Act. The Deputy Commissioner of Gift Tax issued a notice u/s 16 of the Gift Tax Act, 1958. An assessment order was passed that concluded that there was a deemed gift u/s 4(1)(a) [which provided for deemed gift in a case where the property is transferred for inadequate consideration] and 4(1)(b) [this dealt with the situation where consideration was not intended to be passed] to the extent of ₹69,78,49,800. The gift tax with interest u/s 16B (from July, 1993 to January, 2000) was quantified at ₹54,01,12,525.

On appeal, the Commissioner of Income-tax (Appeals) upheld the validity of reopening, but reduced the quantum of the gift tax. He held that the shares of BPL Sanyo Utilities & Appliances Ltd. and BPL Sanyo Technologies Ltd. [the transfer of these shares were also the subject matter of gift tax proceedings] had to be treated as unquoted equity shares as they were in the lock-in-period and, therefore, valued under Rule 5 of Gift Tax Rules and directed that the said value be substituted in place of valuation that adopted the quoted value of shares. He deleted the amount assessed u/s 4(1)(b) as it was difficult to hold that the consideration was not intended to be passed. He also modified the interest u/s 16B.

On further appeal by the assessee and a cross objection by the Revenue, the Tribunal approved the action of the AO but accepted the finding of the Commissioner with regard to issue u/s 4(1)(b). The Tribunal dismissed the assessee’s appeal and accepted the Revenue’s appeal in part.

On an appeal to the High Court by the assessee, it was held that (i) the gift tax proceedings were validly initiated in the facts and circumstances of the case; (ii) there was a ‘deemed gift’ in terms of section 4(1)(a) as the status of subsidiary company was given probably to avoid payment of gift tax; and (iii) as the shares in question were not traded and were not tradable, the valuation made by Commissioner was proper.

The High Court further held that the interest u/s 16B was leviable on the returned income and not on the assessed income.

The High Court noted that the finding of the Commissioner (Appeals) deleting the deemed gift u/s 4(1)(b) for alleged non-receipt of consideration was confirmed by the Tribunal and no further appeal having been filed by the Revenue, the order of the Commissioner (Appeals) had become final.

On an appeal by the Revenue, the Supreme Court noted that the limited issue raised in the appeal before it related to the valuation of 29,46,500 shares of M/s. BPL Sanyo Technologies Ltd. and 69,49,900 shares of M/s. BPL Sanyo Utilities and Appliances Ltd. which were transferred by the Respondent-Assessee, M/s. BPL Ltd. to M/s. Celestial Finance Ltd. on 2^nd March, 1993. The shares of M/s. BPL Sanyo Technologies Ltd, and M/s. BPL Sanyo Utilities and Appliances Ltd, both public limited companies, were listed and quoted on the stock exchanges. However, these shares, being promoter quota shares, allotted to the Assessee on 17^th November, 1990 and 10^thJuly, 1991, were under a lock-inperiod up to 16^th November,1993 and 25^th May, 1994, respectively.

The Supreme Court noted that Sub-section (1)(a) to Section 4 of the Gift Tax Act, 1958 [G.T. Act] states that where a property is transferred otherwise than for adequate consideration, the amount by which the market value of the property, at the date of the transfer, exceeds the value of the consideration, shall be deemed as a gift made by the transferor. Sub-section (1) to Section 64 of the G.T. Act states that the value of any property, other than cash, which is transferred by way of gift, shall be its value on the date on which the gift was made and determined in the manner as laid down in Schedule II of the G.T. Act. Schedule II, which incorporates the rules for determining the value of a gifted property, states that the value of any property, other than cash, transferred by way of gift, subject to the modifications as stated, shall be determined in accordance with the provisions of Schedule III of the Wealth Tax Act, 1957 [W.T. Act]. The provisions of Part C of Schedule III of the W.T. Act lays down the method of valuation of shares and debentures of a company. Rules 9 and 11 of Part C of Schedule III of the W.T. Act relate to the valuation of quoted shares and debentures of companies and valuation of unquoted equity shares in companies other than investment companies respectively.

The expressions “quoted share” and “quoted debentures”, and “unquoted shares” and “unquoted debentures” have been defined vide Sub-rules (9) and (11), respectively, to Rule 2 of Part A of Schedule III of the W.T. Act. As per the definitions, the expression “quoted share” in case of an equity share means a share which is quoted on any recognised stock exchange with regularity from time to time and where the quotation of such shares is based on current transactions made in the ordinary course of business. Explanation to Sub-rule (9) of Rule 2 of Part A of Schedule III of the W.T. Act states that when a question arises on whether a share is a quoted share within the meaning of the rule, a certificate to that effect furnished by the concerned stock exchange in the prescribed form shall be accepted as conclusive. The expression “unquoted share”, in relation to an equity share, means a share which is not a quoted share.

The Supreme Court agreed with the view expressed by the High Court, which observed that the equity shares under the lock-in period were not “quoted shares”, for the simple reason that the shares in the lock-in period were not quoted in any recognised stock exchange with regularity from time to time.

According to the Supreme Court, when the equity shares are in a lock-in period, then as per the guidelines issued by the Securities and Exchange Board of India (SEBI), there is a complete ban on transfer, which is enforced by inscribing the words “not transferable” in the relevant share certificates.

The Supreme Court noted that the aforesaid position was accepted by the Revenue, which, however, had relied upon a general circular issued by SEBI, wherein it is stated that the shares under the lock-in period can be transferred inter se the promoters. This restricted transfer, according to the Supreme Court, would not make the equity shares in the lock-in period into “quoted shares” as defined vide Sub-rule (9) to Rule 2 of Part A of Schedule III of the W.T. Act, as the lock-in shares are not quoted in any recognised stock exchange with regularity from time to time, and it is not possible to have quotations based upon current transactions made in the ordinary course of business. The possibility of a transfer to promoters via a private transfer/sale does not satisfy the conditions to be satisfied to regard the shares as quoted.

The Supreme Court held that Rule 11 of Part C of Schedule III of the W.T. Act is a statutory Rule which prescribes the method of valuation of “unquoted equity shares” in companies (other than investment companies), which prescription and method of valuation is mandatory in nature. The effect of Rule 11 of Part C of Schedule III of the W.T. Act is that unquoted shares must be valued as per the formula prescribed. No other method of valuation is permitted and allowed. Any ad hoc depreciation/reduction from the quoted price of equity shares transferable in the open market is not permitted and allowed vide Rule 9 of Part C of Schedule III of the W.T. Act. The shares in question being “unquoted shares”, therefore, must be valued in terms of Rule 11 as a standalone valuation method.

Faced with the aforesaid position, the Revenue further relied upon Rule 21 of Part H of Schedule III of the W.T. Act before the Supreme Court.

The Supreme Court noted that Rule 21 of Part H of Schedule III of the W.T. Act had been enacted to clarify and remove doubts. It states that notwithstanding the negative covenants prohibiting or restricting transfer, the property should be valued for the purpose of the W.T. Act and the G.T. Act, but according to the Supreme Court, the valuation is not by overlooking or ignoring the restrictive conditions.

The Supreme Court held that the shares in the lock-in period have market value, which would be the value that they would fetch if sold in the open market. Rule 21 of Part H of Schedule III of the W.T. Act permits valuation of the property even when the right to transfer the property is forbidden, restricted or contingent. Rights and limitations attached to the property form the ingredients in its value. The purpose is to assume that the property which is being valued is being sold, and not to ignore the limitations for the purpose of valuation. This was clear from the wording of Rule 21 of Part H of Schedule III of the W.T. Act, which when read carefully expresses the legislative intent by using the words “hereby declared”. The Rule declares that the price or other consideration for which any property may be acquired by, or transferred, to any person under the terms of a deed of trust or through any other restrictive covenant, in any instrument of transfer, is to be ignored as per the provisions of the Schedule III of the W.T. Act. However, the price of such property is the price of the property with the restrictions if sold in the open market on the valuation date. In other words, notwithstanding the restrictions, hypothetically the property would be assumed to be saleable, but the valuation as per Schedule III of the W.T. Act would be made accounting and taking the limitation and restrictions, and such valuation would be treated as the market value. The Rules do not postulate a change in the nature and character of the property. Therefore, the property must be valued as per the restrictions and not by ignoring them.

In view of the aforesaid discussion, and for thereasons stated above, the appeal by the Revenue was dismissed.

Notes:

1. The above judgment of the Supreme Court gives an impression that this was a case of gift of shares. However, this was a case of transfer/sale of shares at cost and that had raised the issue of valuation of such shares and consequently the issue of deemed gift u/s 4(i)(a) of the Gift-Tax Act, 1958. The relevant facts are available in High Court judgment [(2007) 293 ITR 321(Karn)].

2. The Gift-Tax Act, 1958 is effectively inoperative from 1st October, 1998. Likewise, the Wealth-Tax Act, 1957 is also not operative from A.Y. 2016-17. However, the principle of valuation of shares of listed company during lock-in period of promoters’ quota shares decided by the Court will be still relevant.

15 Indian Institute of Science vs. Dy. Commissioner of Income Tax

(2022) 446 ITR 418 (SC)

Salary – Perquisite – Merely because an assessee might have adopted the Central Government Rules and/or the pay-scales etc., by that itself, it cannot be said that the assessee is a Central/State Government – Employees of such an assessee cannot be construed to be employees of the Central Government for the purposes of computing perquisite value which was governed by Sl. No. 2 of Table 1 appended to Rule 3 of the Rules.

The assessee, a premier research institution engaged in imparting higher learning and carrying out advanced research in science and technology, was recognised as a ‘Deemed University’ under the provisions of University Grants Commission Act, 1956 (‘the UGC Act’).

The service conditions of the employees of the assessee were governed by the rules as were applicable to the Central Government employees.

Accordingly, TDS returns in Form 24Q was filed by the assessee u/s 192 of the Act r.w.s 17(2) of the Act, for the period from 1^st April, 2009 to 31^st March, 2010, which was applicable in respect of the employees of the Central Government.

The AO, by an order dated 26^th April, 2013 passed u/s 201(1) and 201(1A) r.w.s 192 of the Act (A.Y. 2010-11), held that the assessee had not correctly worked out the perquisite value of accommodation in accordance with amended Rule 3 of the Rules, and was liable to be treated as an assessee in default u/s 201(1) of the Act for non-deduction/short deduction. It was further held that the assessee was liable to pay interest u/s 201(1A).

The assessee thereupon filed an appeal before the CIT (A) who, by an order dated 22^nd July, 2014, affirmed the orders passed by the AO.

The assessee thereupon filed an appeal before the Tribunal. The Tribunal, by an order dated 27^th February, 2015, inter alia, held that the employees of the assessee cannot be construed to be employees of the Central Government for the purposes of computing perquisite value which was governed by Sl. No. 1 of Table 1 appended to Rule 3 of the Rules. Accordingly, the appeal was dismissed.

The assessee, thereupon, filed an appeal before the Karnataka High Court. The High Court noted that the assessee, which was a Trust under the 1890 Act, was controlled and financed by the Central Government, and governed by the Rules governing the service conditions of the employees of the Central Government. According to the High Court, the assessee may be an instrumentality of the State for the purpose of Article 12 of the Constitution of India. However, for the purposes of Rule 3, the requirement was that the accommodation should be provided by the Central or State Government to the employees either holding office or post in connection with affairs of the Union or of a State or serving with anybody or undertaking under the control of such Government from deputation. The High Court held that merely because the assessee is a body or undertaking owned or controlled by the Central Government, it cannot be elevated to the status of Central Government. Thus, the assessee cannot claim that valuation of perquisites in respect of residential accommodation should be computed as in case of an accommodation provided by the Central Government. Therefore, Sl. No. 1 of Table 1 of Rule 3 of the Rules did not apply to the assessee.

The assessee thereupon filed a Special Leave Petition before the Supreme Court.

The Supreme Court agreed with the findings recorded by the High Court that even if the petitioner may be considered as a State instrumentality within the definition of Article 12 of the Constitution of India, the same cannot be treated at par with the Central/State Government employees under Table-I of Rule 3 of the Income- tax Rules, 1962. Accordingly, the rules applicable to government employees for the purpose of computing the value of perquisites u/s 17(2) would not be applicable in the case of the petitioner. The Supreme Court held that merely because the petitioner might have adopted the Central Government Rules and/or the pay-scales etc., by that itself, it cannot be said that the petitioner is a Central/State Government. The Supreme Court therefore declined to interfere with the order of the High Court.

Insofar as the merits of the claim is concerned, the Counsel for the Petitioner pointed out that some of the crucial aspects had not been considered on merits by the High Court and, therefore, the petitioner proposed to file a review application before the High Court pointing out certain aspects on merits.

The Supreme Court, without expressing anything on the same, simply permitted the petitioner to file a review application on the aforesaid only and directed that as and when such a review application is filed, the same be considered in accordance with law and on its own merits.

16 ACIT vs. Kalpataru Land Pvt. Ltd. (2022)

447 ITR 364 (SC)

Reassessment – Assessment could not be reopened on a change of opinion.

The assessment of the assessee, engaged in the business of real estate, for A.Y. 2013-2014 was completed u/s 143(3) of the Income -tax Act, 1961 (the Act) on 20^th February 2016 by determining nil total income.

On 27^th March 2019, a notice u/s 148 was issued to the petitioner for A.Y. 2013-2014.

The assessment was reopened for the reason that the assessee company had issued its shares at premium of ₹990 per share in F.Y. 2012-13 (relevant to A.Y. 2013-14). During the said period, the assessee company had no significant transaction except having capitalized its interest expenses to the cost of the land purchased. The valuation of shares at a high premium of ₹990 per share by the company was based on the Discounted Cash Flow (DCF) method, which projections of profitability, according the AO, were computed on unrealistic future growth projections. The AO was of the view that the company had received consideration which exceeded the Fair Market Value (FMV) of the shares and therefore was liable to be taxed as the difference between the aggregate value of the shares and FMV u/s 56(2) (viib) of the Act.

The High Court noted that by a letter dated 5^th October, 2015, the AO had called upon the assessee to produce evidence in support of increase of the authorised share capital, produce the evidence of share allotment and name and address of the parties from whom share premium was received, among other things. The assessee by its letter dated 23^rd December 2015, provided the details of share premium received including name of the party from whom it was received. After considering the same, the assessment order has been passed on 20^th February, 2016. Therefore, according to the High Court, it was not permissible for an AO to reopen the assessment based on the very same material with a view to take another view without consideration of material on record once view is conclusively taken by the AO.

The Supreme Court dismissed the SLP, considering the fact that earlier the AO had called upon the assessee to produce the evidence in support of increase of authorised share capital, produce the evidence of share allotment and names and addresses of the parties from whom share premium was received, among other things before passing the assessment order. According to the Supreme Court, the subsequent reopening could be said to be a change of opinion.

Note:

The Supreme Court has also dismissed SLPs of the Revenue for similar reasons in other two cases [(i) PCIT vs. State Bank of India (2022) 447 ITR 368 (SC); and (ii) DCIT vs. Financial Software and Systems P Ltd. (2022) 447 ITR 370 (SC)].

17 Harshit Foundation Sehmalpur Jalalpur Jaunpur vs. Commissioner of Income Tax, Faizabad

(2022) 447 ITR 372 (SC)

Charitable purpose – Registration –There is no provision in the Act by which it provides that on non-deciding the registration application u/s 12AA(2) within a period of six months there shall be deemed registration.

In an appeal filed u/s 260A of the Income-tax Act, 1961 (‘the Act’) by the Revenue before the Allahabad High Court from the order dated 28^th June, 2013 passed by the Income-tax Appellate Tribunal, Lucknow, the Appellant had raised a question as to whether non-disposal of the application for registration within a period of six months will result in deemed grant of registration u/s 12AA(2) of the Act.

The High Court set aside the order of the Tribunal and allowed the Revenue’s appeal holding that non-disposal of the application for registration, by granting or refusing registration, before expiry of six months as provided u/s 12AA(2) of the Act would not result in deemed grant of registration by following the decision of its Full Bench in CIT vs. Muzafar Nagar Development Authority (2015) 372 ITR 209 (All) (FB).

After considering in detail the provisions of Section 12AA(2) of the Act, the Supreme Court found that there is no specific provision in the Act by which it provides that on non-deciding the registration application u/s 12AA (2) within a period of six months there shall be deemed registration.

According to the Supreme Court, the Full Bench of the High Court had rightly held that even if in a case where the registration application u/s 12AA is not decided within six months, there shall not be any deemed registration. The Supreme Court was in complete agreement with the view taken by the Full Bench of the High Court. The Special Leave Petition was, therefore, dismissed.

BCAJ Admin

From The President

Dear BCAS Family,

The new year is here to welcome us, and so are the several new technologies that are knocking on our door to bring about a massive disruption in life soon. Every beginning implicitly means the end of the old, – however discomforting it is. Over the years of human evolution that we have witnessed, change was slow, gradually impacting the way we lived. However, that was a way back then. Since the last decade, we are all subjected to such a rapid pace of change that disruption has become a way of life than an exception. These disruptions are brought about through innovations made by a few individuals who refuse to accept limitations; who are keen to relook at the challenges and find a solution which can change the paradigm. Years ago, disruption was a word with strong negative connotations, and today it has become the fulcrum of creativity and the springboard to innovation.

Let me talk about a few of the recent disruptions that will change our way of living.

In the arena of energy, scientists in California have crossed a mega milestone by successfully replicating the power of the Sun in the laboratory. – What it means is that for the first time, more energy can be released than what has been consumed. This breakthrough is a leap ahead for the world in accessing green energy without any radioactive by-products. Using the universally abundant hydrogen and limitless, carbon-free supply of energy is possible. In a world dictated by energy-rich countries and companies, this is indeed a giant game-changer, with huge political and economic implications ahead.

In early December, the Artificial Intelligence powered, dialogue-based chatbot – ChatGPT was unleashed, garnering 1 million users in just 5 days. The bot has the remarkable ability to understand and respond in natural language, with incredible accuracy and creativity. It aptly demonstrates the increased ability of machines to imitate humans. With Machine Learning, this ability will escalate drastically…which could lead to some horror-story scenarios, in which machines could enslave humans. For the time being, these new-generation chatbots with their enormous power to process humongous amounts of data will become our personalised, all-knowing teachers…and give engineers at google and other search engines some sleepless nights!

5G is expected to re-invent the way we work, play and live, but most significantly, it will give a huge impetus to the adoption of the Fourth Industrial Revolution. High speed and low latency are the twin hallmarks of 5G that will have huge potential to transform industries. Shop floors with robotics and automated assembly lines will be able to connect seamlessly and streamline production with greater efficiency. Healthcare is another sphere that will benefit immensely from 3D imaging, advanced diagnostics, and wireless connections to robotic surgical tools in near-real time. The Internet of Things will also get a huge shot in the arm, as more devices can get connected, be it wearables, smart refrigerators, autonomous cars or just a laptop, to name but a few.

Moving to finance, we have in Unified Payment Interface (UPI) a disruption that has become an outstanding success, beating the best in advanced countries too. Launched in 2016, to move people away from the inconvenience of cash and the menace of black money, UPI has been widely adopted by banks, fin-techs, merchant establishments and the public. Thanks to UPI, many Indians today no longer carry a wallet in their pockets – but a wallet in their smartphones!

According to data released by the National Payments Corporation of India (NPCI), UPI reported transactions amounting to ₹10.72 lakh crore in August 2022 alone. In FY22, UPI processed more than 46 billion transactions amounting to over ₹84 lakh crore. In comparison, debit card spending stood at ₹7.3 lakh crore in FY22, while credit card spending stood at ₹9.7 lakh crore that same year. Not surprisingly, India has become the acknowledged leader in digital payments…and UPI has become a major disruptor.

Are we ready? Will we be able to accept the increased pace of disruption? I guess we have no choice but to evolve – physically, mentally and emotionally. We will need to grow the wings to soar with disruption.

Events:

A workshop, “ERM 101” on Enterprise Risk Management was organized jointly with the Institute of Risk Management on 3rd December, 2022 at the JIO World Convention Centre. It provided a good learning experience. A lecture meeting was organised on 15th December, 2022 jointly with The Auditors Association of Southern India on “Tax Implications on Reconstitution of Partnerships” with BCAS as Knowledge Partner. It received a very encouraging response. The lecture Meeting on the subject “Value in the Metaverse& Why Metaverse is Inevitable” gave a good insight into the subject.

The new calendar year is beginning with some exciting events on the anvil. A long-duration course on income tax, “Income Tax Ki Paathshala”, from 2nd January, 2023 to 30th January, 2023 will offer guidance on the theory and practical issues to the budding income tax practitioners, Lecture Meeting on “Penalties under Income Tax” will provide an opportunity to understand the practical issues around the subject and ways to deal with them. HRD Committee has planned several activities to stimulate soft skills by organising a workshop on “Effective Public Speaking and Business Presentation Skills” and improving the quality of life by organising a Lecture Meeting on “Learnings from Swami Vivekananda Biography” on 12th January, 2023. A Leadership Retreat is organized on the subject of “Leadership Skills & Management – The Chanakya way” on 14th and 15th of January 2023. The most awaited students’ programme, “Tarang 2K23” under the auspices of Jal Each Dastur Student’s Annual Day Fund, is happening on 8th January, 2023. I request you all to participate and sponsor your interns, students and colleagues. Please do keep a tab on the BCAS announcements to avoid missing any event.

Budget preparations have already started at theFinance Ministry. The Budget and the Finance Bill to be presented on the 1st February, 2023 will be the last by the current government. BCAS has already made recommendations to the Hon. Finance Minister on the number of issues that need to be fixed and clarified for better governance. Let us hope to have a good response to those.

As we leap into 2023, let us be ready to ride the crest of disruption and change, with confidence…always keeping in mind that the future belongs to brave and the stout-hearted. To those who harbour doubts, I would quote Shakespeare from his play ‘Measure for Measure’ where Lucio the protagonist states “Our doubts are traitors and make us lose the good, we oft might win but fearing to attempt”. So, on this note…let me take this opportunity to wish you a Happy New Year full of exciting opportunities and pleasant surprises!

Thank You!

Best Regards,

CA Mihir Sheth

President

BCAJ Admin

Full day seminar on charitable trust held on 7th November, 2015

The Seminar was held at the Walchand Hirachand Hall. The Vice President
CA. Chetan Shah inaugurated the programme and was then joined by
President CA. Raman Jokhakar. CA. Shri Arvind Dalal spoke on the
Importance and the way forward in respect to Charities. The main
speakers at the said seminar were

M
r. S. B. Savale â€“ Maharashtra Charity Commissioner who spoke on the
regulatory requirements of the Charity Commissioner’s office and what is
expected for the filing requirements and documentary requirements from
the trusts. He also dwelt on the issues that arise post the filings, the
deficiencies and the methods to control them.
Mr. Shaily
Jindal â€“ CIT (Exemptions) who spoke on the issues faced by the trust and
the problems of the department vis-a-vis the trusts and the
expectations of the departments from the trustees and the consultants to
the trusts.
CA. Vipin Batavia spoke on the important
provisions of the Maharashtra Public Trust Act and the important clauses
to be incorporated in the Trust Deed at the time of drafting.
CA.
Paras Savla spoke on the rules and regulations for the trusts and
highlighted the registration aspect u/s 12 AA of the Income-tax Act.
CA.
Rajesh Kadakia spoke on the taxation aspect of the trusts with special
reference to Section 10 (23C) and Section 80 â€“ G provisions, steps and
methods to obtain the said registration and the problems faced in the
said registration and its remedial measures.
CA. Shailesh
Haribhakti spoke on the Foreign Contribution Regulation Act, its
provisions and the specific important issues that all should be aware
about in relation to the trusts. After that he dwelt on the CSR
Provisions and the way and means a trust can avail the benefits of the
CSR provisions to raise funds for their projects.

The
Seminar was conducted by the Corporate & Allied Laws Committee of
the Bombay Chartered Accountant Society jointly with the Chamber of Tax
Consultants and was well received by the participants including CAs,
Consultants, Trustees, and employees of Trusts.

Workshop on Advance Professional Writing & Communication Skills on 21st November, 2015

This Workshop was held on 21st November and was well attended. A summary of the proceedings of the Workshop is as under:

CA. Dr. Dilip Sheth spoke on the Art of professional communication.

CA.
Dr. Dilip Sheth mentioned that the most important point while
communicating is the objective or purpose of communication. For
professionals, the objective is to convey what a client wants to know,
so use of plain, easy-to-understand language is preferred. However, if
the objective is to show off knowledge then use of flowery language and
complex words are allowed.

He shared the following basic principles of communication as:

follow logical sequence
have meaningful communications by making it concise and clear
consider that communication reflects individual’s competence and enables others to form a judgement about speakers
communication
killers like long sentence, redundant words, archaic words or words
requiring frequent reference to dictionary to be avoided.

While
giving an opinion, it is important that a CA should read, absorb and
understand the case, to give the best of his knowledge to a client.

He
discussed the art of report writing, opinion writing, drafting minutes
and action plan and synopsis of written submission with examples. He
also discussed case studies report of investigation to board, report of
80-IA and other reports.

With continuous changing objectives of
professional communication, the style and manner of communication
changes, and gives way for innovative clarity in expression. He
described this case on innovation by charactering persons – seer,
observer, alchemist, fool, sage, etc. Each one of us have each of these
characters at different stages of life.

His style of
communicating through personal life experiences enabled the audience to
connect with him and learn ways of communicating effectively through
writing.

From the eyes of an Editor – Anil Sathe

BCA
Journal has been in existence for 45 years. The journal provides
information about latest updates and case laws related to core subjects
of the Chartered Accountant profession and articles that are of
professional interest

CA. Anil Sathe’s expectation from writers are

article must be written from target audience perspectives
must be complete on standalone basis
information shared must be corraborated with analysis.

A
comprehensive article must have each of the following components –
Introduction, Facts, Reasons, Analysis, Opinion and Conclusion. In the
introduction, the writer must introduce the reader to the topic. Facts
and reasons are the information that a writer aims to share with the
reader. Analysis and opinion are a writer’s own thoughts. Generally,
factually-based writing is stronger and more persuasive than writing
that relies on opinion. All analysis must be corraborated with facts, to
enable reader to clearly understand the writer’s message. The
conclusion must leave a clear message in mind of readers. The conclusion
must be free from any ambiguity.

After writing the first draft,
the writer must go through it in detail. He or she must ensure that the
article is complete piece and all paragraphs are connected. To ensure
that the article is error free, it is better to bounce it off with
colleagues or friends and seek their independent point of view. While
sharing articles for opinion, the writer must share it with a non-biased
reader.

To develop effective writing skills, individual must be
voracious reader. He shared a few tips that he personally followed
while reading other articles or books.

He encouraged each participant to write articles for BCAS Journal.

Writing effectively – experience from managing a professional content exchange website â€“ Sharmila Ramani

Sharmila Ramani emphasised on following points which sharing her experience from her journey to becoming effective communicator

use of correct grammar and sentence formation
use of simple language
importance of punctuation mark style and manner of use of acronym
preference towards use of active voice over passive voice
facts be correctly stated

She
emphasised on the importance of editing. Each copy of the written word
to be edited by an independent person to ensure that it is free from
error. She shared 3 styles of editing – copy editing, substantive
editing and proof editing

The ABC of Professional Writing – Swati Jalal

Swati Jalal made her presentation by sharing 6 elements of effective communication starting with C.

Clarity – use of familiar words, avoid sentence construction and punctuation error
Concise – avoid redundant and repetitive words
Complete – to ensure sentence is complete – focus on 5 W – who, what, when, where and why
Coherent – sequential flow of sentences. parallel structure
Correct – facts should be correctly stated and errors to be avoided
Courteous – pleasant and positive tone and maintain level of professional formality.

Each element of effective communication was discussed, followed by examples and activity.

Drafting in Tax litigation – Submission, Appeals and Opinions – CA. Yogesh Thar

CA.
Yogesh Thar shared effective writing techniques from regulatory aspects
and customary / preferred aspects. Relevant column of forms of appeal
memorandum. He also shared points to be considered while drafting
application for condonation for delay, admission of additional evidence.

Style and manner of submission and important points of
consideration were discussed. Sequence to be followed for each
submission and philosophy behind submission of each opinion was
explained to the participants.

At the end of each session,
participants were encouraged to ask questions. All the participants
carried with them the treasure of knowledge in communicating effectively
with them from this practical seminar. After 5 interactive session, the
day of learning effective writing skills has opened up avenues for each
participants to impress their clients and officers by their writing
skills. .

Publication Release on 24th November 2015

The
official launch of the book “Novel and Conventional Methods of Audit,
Investigation and Fraud Detection” authored by CA. Chetan Dalal and
co-published by Bombay Chartered Accountants’ Society (BCAS) along with
Wolters Kluwer was released by Padmashri CA. T. N. Manoharan on 24th
November 2015 at Crossword, Kemps Corner, Mumbai. The book is the 3rd
edition by the author. It offers an insightful and descriptive account
of the frauds and accounting irregularities and methodologies to detect
them by using combination of novel and conventional audit approaches.

The
objective of this book is to provide practical approach for
investigation to auditors and person entrusted with the task of
investing white collar crimes. The MRP of the book is Rs. 2,295/-. BCAS
is offering the book to its members at a discounted price of Rs.1,380/-
along with additional postage of Rs.100/-. The publication pre-booking
is open till 30th December 2015 at BCAS office. Orders from publishing
house will be made post close of pre-booking period and couriered
directly to members after 5th Jan 2016.

So Hurry!!!! Book your copy now.

Seminar on Cloud Hosted Apps from Google and Microsoft on 28th November, 2015

The
Human Development & Technology Initiatives Committee had organised
the half day workshop. The speaker Mr. Punit Thakkar explained the
concept and importance of the cloud computing. Cloud computing, also
known as ondemand computing, is a kind of Internet-based computing,
where shared resources, data and information are provided to computers
and other devices on-demand.

He further discussed the features
of “Google Apps for Work” which is a cloud computing and storage
solution by Google. He emphasised on the security features, ease of
usage and cost effectiveness of the product. The speaker also explained
the various apps from Google like Gmail, Drive, Docs, Calender, Forms
etc.

The speaker continued with explaining the cloud computing
product of Microsoft that is named “Office 365”. He also outlined the
unique features and advantages of Office 365. The speaker made good use
of technology for live demonstration of the cloud computing.

The participants benefited immensely from the presentation and experiences shared by the speaker.

Two days Students’ Orientation Programme on 4th & 5th Dec 2015:

Human
Development & Technology Initiatives Committee Committee of our
Society organised a two-day orientation programme on 4th& 5th
December 2015. Focus of the program was on the practical a s p e c t s
of work as an articled student under the seniors in their respective
offices. The orientation programme laid emphasis on how to work on given
assignments. Practical issues faced while handling assignment on
important subjects was the key area of discussion.

The
programme commenced with guidance on effective articleship addressed by
CA. Atul Bheda. He made a presentation to guide students as to how to
make best use of opportunities during their three years of practical
training. He highlighted the fact that working during article ship
invariably involves real life situations. It helps to sharpen one’s
skill and knowledge across diverse industries on various subjects. The
speaker explained at length the concept of industrial training, armed
forces training and facility of secondment for an all round exposure.

CA.
Mukesh Trivedi presented the session on Direct Taxes. The speaker
explained some important definitions and concepts at length. He covered
important topics viz. heads of income, types persons, residential status
as well as method of computing income under different heads, claim of
deductions, credit for pre assessed taxes, various important dates for
statutory compliance, losses and clubbing provisions. He explained the
procedure and check list of preparing and uploading the different ITR
forms. While explaining the procedure of rectifications he emphasised on
accuracy of data entry.

While concluding his presentation he
shared information about references & study material, websites way
to study the Income Tax Law etc.

Speaker
Kewal Shah presented concepts on Indirect Taxes, Zonobia Kagzi on
Accounts and Audit and Pankaj Tiwari on Company Law. All the speakers
provided valuable inputs for working on assignments effectively with
accuracy and integrity. CA. Kamlesh Doshi provided insightful tips on
Tally software and use of Excel. He gave useful guidance on the subject.

On
the 1st day, in the post lunch session the Film ‘ Nani Palkhiwala a
crusader’ was screened. Advocate Jignesh Mr. Punit Thakkar (Speaker) Mr.
Atul Bheda (Speaker) Mr. Jignesh Shah (Speaker) Mr. Mukesh Trivedi
(Speaker) Mr. Kewal Shah (Speaker) Mr. Kamlesh Doshi (Speaker) Shah
shared his personal experience and learning from the life of senior
advocate Nani Palkhiwala.

Students
were provided with some key tools to equip themselves for excellent
learning and guidance in their respective articleship training.
President Raman in the welcome address shared Arunima Sinha’s life story
who bravely climbed the Mount Everest after loss of one and injury on
the other leg.

The
grit, determination and focus on goal with hard work is the key to
success. Chairman of the Committee Nitin Shingala also addressed the
students, emphasising on attitude, hard work and consistency in the
work.

Human Development Study Circle Meeting on “Happiness : “A Choice” on 8th December 2015

This meeting was addressed by Presenter: Kalpesh Thakkar.

The
Discussion was about: How, it is our Choice ‘to be happy’ or ‘not to be
happy’. What is happiness and how to be happy in all circumstances.

Overall,
the participants acknowledged as to how true it is that it is in our
hands to be happy and we hardly know it. We keep blaming others for our
miseries. The major lesson was that we have to take charge of our lives
right now and Be Happy.

Lecture Meeting on “Software and Other Intangibles – Indirect Tax Implications” on 9th December 2015

CA.
Sagar Shah explained the basic concept of intangible property. He
discussed, in detail, whether intangibles are goods, services or both
and its taxability under Indirect Tax laws. To explain this, he
discussed various judgements on the subject viz. Tata Consultancy
Services, BSNL, Tata Sons, etc. He discussed Indirect Tax implications
for various intangibles such as Trade marks, Designs technical know-how,
patent, Copy rights, Franchise and more particularly and in length, an
intangible in the nature of software.

In respect of software, he
deliberated on the tax implications vis-a-vis transfer of right to use
v/s license to use, packaged software, customised software and import /
export of software. He touched upon GST perspective and answered
questions by participants. .

2 Days Intensive Seminar on
Income Computation & Disclosure Standards (ICDS) :Held at the
Walchand Hirachand Hall, IMC on 11th & 12th December, 2015 :

A
2 Day seminar on ICDS was organized by Taxation Committee on 11th &
12th December, 2015 at Walchand Hirachand Hall, IMC in Mumbai.

The
seminar received an overwhelming response. The object of the seminar
was to help the participant to understand the application of ICDS and
their far-reaching implications for all taxpayers following mercantile
system of accounting.

The
proceedings commenced with a Keynote address by CA. Milin Mehta, who
was involved in the Committee which formulated the Standards (ICDS). He
explained to the members the view of the government, and the purpose for
notifying ICDS. Thereafter in the following sessions, the learned
speakers covered all the 10 standards.

ICDS
I & VII was covered by CA. Anil Sathe, ICDS III by CA. Ravikant
Kamath, ICDS V & IX by CA. Gautam Nayak, ICDS VIII by CA. Pradip
Kapasi, ICDS VI by CA. Alpesh Gandhi, ICDS IV & X by CA. Yogesh
Thar, ICDS II by CA. Atul Suraiya.

They dealt with:

1) Applicability & coverage of each standard (ICDS),

2) Various terms as defined under ICDS,

3) Comparison between ICDS and relevant Accounting standards (AS) and Ind-AS,

4) Disclosure requirements and Transitional provisions,

5) I ssues arising in regard to interpretation of the standards.

6) Impact where ICDS was in conflict with a judicial pronouncement.

The
learned speakers help the participants to understand all the applicable
10 ICDS with practical examples. The presentations given during the
seminar were very useful to understand the impact of ICDS on the tax
computation. The speakers also showed the way forward and the manner in
which all issues should be dealt with. The seminar was of immense value
to all participants.

Workshop on Successful Implementation of ERP Package and Audit Features in SAP on 12th December, 2015

The Human Development & Technology Initiatives Committee had organised the full day workshop.

The
speaker for first session was CA. Jairam Motwani, Sr. GM Internal
Audit, M&M. He explained in detail, the nuances, need and benefits
of the Enterprisewide Resource Planning (ERP) Solutions. He discussed
the SAP R/3 Integration Model, the various SAP terminologies and the
financial enterprise structure in SAP.

The speaker also shared
his experiences on the ERP implementation and auditing in the SAP
environment at Mahindra & Mahindra. He concluded with a discussion
on the Governance & Risk Compliance (GRC) in SAP.

The
second speaker Mr. Madhav Pai, Director (Solution Engineering), SAP
India took up the topic on successful implementation of SAP. He
suggested the recommended path, approach and pillars for ERP
Implementation. He explained in detail the various stages, timeline of
implementation methodology.

The speaker also elaborated on the
various reasons for failure of ERP and gave suggestions for mitigating
the failure risks. He further discussed the new SAP S4 HANA Finance
platform and explained its features. The second session was followed by a
panel discussion where both the speakers answered the questions and
issues raised by the participants. The workshop was well attended and
participants benefited immensely from the presentation and experiences
shared by both the speakers.

Lecture Meeting on “Recent Developments in Securities Laws” by Advocate Somasekhar Sundaresan on 16th December, 2015

The
learned speaker Mr. Somasekhar Sundaresan gave a bird’s eye view of the
developments in Securities Laws in 2015. He highlighted important
changes made through the new Insider Trading Regulations, the new
Listing Regulations and some far reaching changes in the SEBI Act. He
also touched upon the complexity arising out of Takeover regulations and
Delisting regulations. He covered in great detail changes concerning
making of disclosures of material developments, related party, document
preservation, etc. Considering the positive policy of SEBI in engaging
in public consultation for even the smallest of proposed changes, the
speaker suggested making the best use of this, instead of complaining
about difficulties in new laws/ changes later. He replied all of the
several queries raised to him by participants.

Study Circle on Outbound Investment â€“ Nuances and Issues on 17th December, 2015

The
Study Circle meeting on “OUTBOUND INVESTMENT â€“ NUANCES AND ISSUES” was
held on 17th December which was very well led by CA. Sagar Maru. He took
the participants through various issues surrounding outbound investment
specially issues around calculating the networth of the Indian Parties,
precautions to be taken for export capitalisation as a method of
funding, structuring oubound investment with debt and guarantee , round
tripping, flipping of structures etc. The participants deliberated on
these issues and shared their personal knowledge as well. In all it was a
very enriching meeting. On account of time constraint, few issues will
be taken up in the next meeting.

Study Circle Meeting on Highlights of Release 5.0 Tally.ERP9 with special focus on Service Tax on 18th December, 2015

The
Technology Initiatives Study Circle of the Society organised this Study
Circle to equip our members with the updated knowledge about Tally’s
latest offering. The objective of the meeting was met by way of an
interactive Q&A by the speaker with the audience over the course of
the session. The speaker for the session was CA Punit Mehta. This
program was well received by the members after the successful Part-1
session held by the same speaker on Tally. ERP9 with focus on VAT in
November 2015.

Study Circle Meeting on “Acceptance of
Deposits by Companies u/s. 73 and Loans and Investments by Companies
u/s. 186 of the Companies Act 2013 â€“ Recent Amendments and Issues with
special reference to the relaxations in rules for acceptance of deposits
by private limited companies.” on 19th December, 2015

The
Suburban Study Circle jointly with Company Law, Accounting &
Auditing Study Circle had organised the study circle meeting.

The
speaker CA. Paresh Clerk explained the provisions of section 73 of the
Companies Act, 2013(CA, 2013) governing the Acceptance of Deposits by
companies. He made good use of tables to answer key questions on
acceptance of deposit rules by private, public and eligible company.
Various case studies were also discussed by the speaker.

The
speaker further discussed provisions of section 185 and 186 of the CA,
2013 on Loans to Director and Loans & Investments by company. The
presentation highlighted the exemptions and also the penal provisions
for non compliances.

The participants benefited from the presentation and experiences shared by the speaker.

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Statistically Speaking

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Society News

Lecture Meeting on Capital Market Opportunities for SMEs on 3rd December, 2014

This lecture meeting was held at Walchand Hirachand Hall, IMC, Churchgate, Mumbai. CA. Nisha Subhash, Sr. AVP, National Stock Exchange shared her insights on various aspects of Capital Market Opportunities for SMEs. The faculty being associated with the National Stock Exchange for a long time was able to elaborate on the opportunities for SME’s Capital Market in depth. The main focus was on the difference between two platforms, that is SME Platform & Institutional Trading Platform. Members present gained immensely from the knowledge shared by the speaker. The presentation and video of the lecture is available at www.bcasonline.org & www.bcasonline.tv, respectively, for the benefit of all.

Lecture Meeting on Economic Offences: Criminal Law Systems; Cheque Bouncing Cases and EOW on 10th December, 2014

This lecture meeting was held at Walchand Hirachand Hall, IMC, Churchgate, Mumbai.

Mr. Niranjan Mundargi, Advocate and Mr. Yogesh Israni, Advocate, shared their experience on the various aspects of Economic Offences. The purpose of the lecture meeting was to make the members aware on the procedures of Economic Offences and their categories.
The faculty answered the various queries raised by the members which reflected how deeply the audience got interested on the subject. More than 200 members present gained immensely from the expert deliberation from the faculties. The video of the lecture is available at www.bcasonline.org & www.bcasonline.tv, respectively, for the benefit of all.

Lecture Meeting on Pursuing Excellence in Profession – A Holistic Approach on 17th December, 2014

This lecture meeting was organised under the auspices of Shri Dilip N. Dalal Oration Fund at the Auditorium, K.C. College, Churchgate, Mumbai. Swami Swatmananda, Acharya, Chinmaya Mission, the learned speaker, threw light on how excellence in all spheres of life is a must as also in profession. He gave examples in his talk which revolved around professional excellence in their professional life. More than 300 members gained immensely from the deep knowledge shared by Swamiji. The presentation and video of the lecture is available at www.bcasonline.org & www.bcasonline.tv, respectively, for the benefit of all.

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Society News

Human Development Study Circle Meeting
on “Introduction to Management Concepts in
Acharya Chanakya’s Arthashastra” held on
24th October, 2016

Human Development Study Circle organised a meeting
on “Introduction to Management Concepts in “Acharya
Chanakya’s Arthashastra” on 24th October, 2016 at
BCAS Conference Hall which was addressed by Mr.
Mahendra Garodia.

Mahendra Garodia is the Author of “Chanakya Business
Sutras” & “What’s Stopping your Growth”. He spoke about
Chanakya Pandit’s Artha Niti. He simplified management
concepts in 4 steps which are called as T.I.M.E. (Think,
Ink, Map and Execute).

Everyone should learn the crux delivered by the Speaker
in these 4 steps along with 14 principles of management
concised in Chanakya Business Sutras.

The talk was well received by all participants and was
followed by question & answer session.

Human Development Study Circle Meeting
on “Ahimsak Lifestyle” held on 8th November,
2016

Human Development Study Circle Meeting on “Ahimsak
Lifestyle” was conducted on 8th November, 2016 at BCAS
Conference Hall where CA. Atul Doshi presented the
various facets of lifestyle in a challenging environment.

The Speaker Mr. Doshi explained through many videos
and picture clips on how Animals need our Love and Care
and how we can be healthy and enjoy our life by adapting
Ahimsak Lifestyle to live in such a manner that we do not
harm other human, any living beings or environment.

“Ahimsa Paramo Dharma” (Non-violence is supreme
religion) is the foundation of humanity. Knowingly or
unknowingly, we consume or use lot of things which
causes harm to other living beings and environment as
well. India, a country of origin of word –‘ahimsa’ is the
highest meat exporter in world. India is also a large
producer & exporter of leather and dairy products which
are supporting slaughter houses. This is worst for both
animals and humans. India has highest numbers of
diabetes patients and facing sever diseases like cancer,
heart attacks and obesity.

As per affidavit filed by Government of India in theSupreme
Court, 68% of milk is adulterated in the country. Thus, the
milk we consume may not be pure.

Veganism is a buzz across globe. Vegan people do not
consume any products which contain animal ingredients.
Globally, people are giving up meat and dairy products for
health and environment reasons and its negative impact.
The presentation created awareness about cruelty free and
healthy living and the videos made the presentation lively.

Full day Seminar on Alternative Fund Raising
Options for Corporates held on 25th November
2016

A Full day Seminar on Alternative Fund Raising Options
for Corporates was held on 25th November 2016 at
Babubhai Chinai Hall, IMC, Jointly by the Corporate &
Allied Laws Committee of BCAS and the Chamber of Tax
Consultants.

CA. Kanu Chokshi, Chairman
of Corporate & Allied Laws
Committee of the Society
inaugurated the Seminar and was
then joined by the Vice President
CA. Narayan Pasari. Mr. Manish
Gunwani, the Guest Speaker
spoke about his analysis on Macro
economic Outlook and impact
of Demonetisation on various
financial markets.

The other speakers at the seminar
were:

CA. Abizer Diwanji who took participants through current scenario of Bank credit in
India. He dwelt on various types of financing prevailing
in India which can be used by corporates for various
purposes like Acquisitions, Infrastructure as well as
restructuring of assets.

Mr. Bhavesh Shah explained
the role of Private Equity and
advantages and disadvantages in
PE funding. He also touched upon
the process and documentation of
PE funding, global scenario of PE
funding and challenges faced by
PE industry.

Mr. Shameek Ray talked about
bond and debenture markets and
the current situation of efflux for
fixed income securities with the
declining interest rates in India.
He also dwelt upon the need for
dynamic and liquid bond markets.
Mr. N. S. Venkatesh explained the
overall impact of Demonetisation
on the Indian Economy in general
and the Banking & Financial sector
in specific. He also explained the
various instruments and options for
raising funds in foreign currency.
He touched upon the advantages
and disadvantages of various
options and also emphasised the
importance of hedging contracts
as safeguard to currency fluctuation with various real life
case studies.

The queries of the participants were answered by the
speakers and the seminar was very well received by the
delegates.

Lecture Meeting on Prevention of Money
Laundering Act (PMLA) and its implication on
Assurance and Advisory services provided
by Chartered Accountants held on 29th
November 2016

BCAS, Jointly with Corporate & Allied Laws Committee,
organised a lecture meeting on Prevention of Money
Laundering Act (PMLA) and its implication on Assurance
and Advisory services provided by Chartered Accountants,
on 29th November 2016 at BCAS Conference Hall.
CA. Chetan Shah, President BCAS welcomed the
participants and set the tone for the meeting by
highlighting the relevance of the topic in the current
regulatory perspective.

The Speaker – Mr. Satyabrata
Kumar (IRS), Joint Director –
Enforcement Directorate (Western
Region), explained the important
provisions of Prevention of Money
Laundering Act. He explained the
concept of money laundering and
modus operandi used to launder
the money viz, layering, placement and integration. The
Speaker dealt with the investigation process generally
adopted by investigating agency while investigating the
offence of money laundering.

He also shared his experience about the cases where
Chartered Accountants were prosecuted for offence
relating to money laundering and also the safeguards to
be adopted by Chartered Accountants while rendering the
assurance and consultancy services to their clients.

The speaker shared various case studies and satisfactorily
replied to the queries raised by the participants. There was
an overwhelming response to the meeting both through
personal attendance as well as online viewership.

Study Circle Meeting on Ind-AS held on 30th
November 2016.

The third Meeting of the Company Law, Accounting
& Auditing Study Circle on Ind AS was held on 30th
November 2016 at the BCAS Conference Hall.

CA. Kishor Parikh led the discussion on the topic Ind AS
12 – Taxes on Income. He covered the major issues of
the accounting standard like recognition of current tax
assets and liabilities, recognition of deferred tax assets
and liabilities with particular reference to taxable and
deductible temporary differences, unused tax losses
and unused tax credits, measurement, presentation and
disclosure. He also covered the various types of events
and transactions that normally give rise to deferred tax
adjustments with regard to business combinations that are
accounted for acquisitions such as fair value adjustments,
tax deductible goodwill, etc.

He explained the key differences between Ind AS and
Indian GAAP and then ended the session with multiple choice questions and case studies which were discussed
and solved by the participants.

Study Circle Meeting on “Draft GST Rules”
held on 3rd December, 2016

The Suburban Study Circle jointly with Indirect Tax Laws
Study Circle organised the Study Circle Meeting on “Draft
GST Rules” on 3rd December, 2016 at Directiplex, Andheri
(E).

The group leader CA. Darshan Ranavat explained the
Draft GST Rules in regard to Registration and Returns.
The group leader discussed the flow of migration of
existing assesses and rules for fresh registration. He
further explained the types of returns, flow of generic
returns and pre-requisites for filing the returns. The
speaker also informed the group about the rules for
Refunds and Invoices.

CA. Samir Kapadia, Chairman of the Meeting provided
his insights and analysis of the draft rules. He also
deliberated on the issues that could arise out of the draft
rules and difficulties faced by assessees in migration from
existing registrations.

The participants benefited from the presentation and
experiences shared by the chairman and the group leader.

Interactive Lecture meeting on “Issues
and Impact of Demonetisation” held on 5th
December 2016 at Santokba Hall, Near N. M.
College, Vile Parle (West), Mumbai

After the great viewership of Expert Chat session on
“Issues and Impact of Demonetisation”, the students
of NM College enthusiastically approached the BCAS
for conducting a similar session with them. The BCAS
interactive lecture meeting was held on 5th December 2016
at Santokba Hall which was fully packed by around 200
students of the college. The students of the Finance and
Investment Cell of N. M. College welcomed the President,
Vice President and the Speakers for the meeting CA.
T. P. Ostwal and CA. Ameet Patel. The session started
with opening remarks by President Chetan Shah informing
the students about the BCAS and educating them on the
benefits what they can gain from the Society. This was
followed by session by CA. Ameet Patel who touched
upon the various aspects of Demonetisation, its benefits
to the society, the tax implications and the importance
of digitization involved in the process. This was further
followed by session of CA. T. P. Ostwal who expressed his
thoughts on the various issues faced by the common man
on demonetisation. He touched upon the global impact of
Demonetisation and how the Modi government is bringing
about simple and good tax administration.

The students heard them with great enthusiasm which
was followed by a series of overwhelming and intelligent
Q&A session. The students attending posed various
questions to which both the speakers responded with
great in-depth detailing.

Study Circle Meeting on “Income-tax
implications due to Demonetization of High
Denomination Currency Notes” held on 6th
December 2016.

The captioned meeting by Direct Tax Study Circle was
held at BCAS Conference hall where the Chairperson
CA. Gautam Nayak gave his introductory remarks and
explained as to how the Government has planned and
brought out amendments in the income tax laws pre
and post demonetisation scheme. He pointed out the
important amendments in the penalty provisions.

The group leader, CA. Darshana Deshmukh, gave an
overview of the provisions of Second Amendment Bill
2016 which consist of amendments in sections 115EE,
271AAB, 271AAC and insertion of new Chapter IXA
‘Pradhan Mantri Garib Kalyan Yojana 2016’. She then
moved onto case studies whereby the group discussed
the possible tax implications in case of various scenarios
such as cash deposits in the bank accounts, holding of
jewellery, disclosure of income in the income tax return,
search proceedings, agricultural income, household
savings and charitable trusts. Attention was drawn to few
old case laws which have dealt with issues relating to
demonetization of the currency notes. The meeting was
interactive and the participants benefitted a lot.

FEMA Study Circle Meeting held on 8th
December 2016

The second FEMA Study Circle Meeting was held on 8th
December, 2016 at BCAS Conference Hall on the topic
of “Foreign Direct Investment in India” where CA. Rutvik
Sanghvi & CA. Naziya Siddiqui led the discussion. The
session was chaired by CA. Naresh Ajwani.

The Group Leaders discussed FDI in Single Brand Retail
Trade (SBRT) & e-commerce. In SBRT, various topics such as ownership of brand, E-commerce, sourcing
norms, exemption from the sourcing norms, Indian
branded products, FDI in Multi Brand Retail Trade were
discussed. The Group Leaders deliberated on market
place model of E-commerce and business model of an
existing e-commerce player in India. They also discussed
about the provisions related to transfer of shares and the
valuation methods. Chairman CA. Naresh Ajwani shared
his experience on various issues and that was a valuable
takeaway for the participants who benefited from his rich
experience on the subject.

Lecture Meeting on “Cyber Crime, Cyber
Security and Cyber Laws” held on 9th December
2016 Jointly with Corporate & Allied Laws
Committee

BCAS organised a Lecture Meeting on Cyber Crime,
Cyber Security and Cyber Laws on 9th December 2016
at BCAS Conference Hall, Jointly with Corporate & Allied
Laws Committee.

CA. Narayan Pasari, Vice-President, BCAS welcomed
the participants and set the tone for the meeting by
highlighting the relevance of the topic in the current
perspective, post demonetisation, where the masses
shall encounter quantum jump in digital transactions.

The Speaker – CA. Sachin Patil
(IPS), Deputy Commissioner
of Police, Cyber Crime Branch
(EOW) – Mumbai Police explained
the concept of cyber frauds and
explained various kinds of cyber
frauds like Credit Card Frauds,
Email Spoofing, Nigerian Lottery
fraud, fake profile, matrimonial frauds, cyber terrorism
etc. The speaker gave live demonstrations of recorded
mobile phone conversations of some credit card and
internet banking frauds.

He shared some useful tips and safeguards to prevent
online frauds, Dos and Don’ts for young citizens while
sharing personal information on social medial like
facebook, precaution to increase the safety of personal
computers, Wifi, routers etc. He explained the modus
operandi for frauds relating to stealing of personal
information stored on mobile phones (Smart Phones) and
tips to increase Mobile Security.

He also deliberated upon various types of cyber crimes and
prosecution provisions enumerated under the Information
Technology Act and the Indian Penal Code respectively.
The Speaker dealt with the investigation process for
investigating cybercrimes and various hindrances/
limitations faced by law enforcement agencies due to
inherent limitation of cyber space.

Through various case studies, he shared his experience
about precautions to be taken by a Chartered Accountant
(CA) to protect and safeguard the client’s data especially
in view of the recent cases of ransomware used by cyber
criminals to extract money from CA.

The meeting received an encouraging response from the
participants who found the lecture useful as to how to
avoid such cyber-criminal elements.

Report on Full Day Seminar on GST at Kolkata
on 10th December 2016.

It is said that GST will be a game changing reform for
Indian economy by developing a common Indian market
and reducing the cascading effect of tax on the cost of
goods and services. It will impact the Tax Structure, Tax
Incidence, Tax Computation, Tax Payment, Compliance,
Credit Utilization and Reporting leading to a complete
overhaul of the current indirect tax system. GST will
have a far reaching impact on almost all aspects of the
business operations in the country, for instance, pricing
of products and services; supply chain optimization; IT,
accounting and tax compliance systems.

Having acknowledged the significance of GST, your
Society, under its initiative to expand its horizons and
reach out to professional members across the country,
extended support through its Indirect Tax Committee
to DTPA Chartered Accountants Study Circle – EIRC,
Kolkata in organizing a full day seminar on Goods and
Service Tax at Kolkata on 10th December 2016.

The session was inaugurated by
Chief Commissioner of Service
Tax, Kolkata, Mr. S. K. Panda,
who in his opening remarks gave
brief overview about compliances
under registration and significance
of anti-profiteering clause. The
President of the Society, CA.
Chetan Shah gave a homely welcome to all the participants
and shared with them various initiatives that BCAS has
taken up and would be taking up in law making process and in spreading awareness about
GST. Chairman of Indirect Tax
Committee of the Society, CA.
Govind Goyal along with CA. Sunil
Gabhawalla, CA. Mandar Telang
and CA. Udayan Choksi acted as a
faculty for four technical sessions
in the said seminar and addressed
more than 350 participants. Vice
President of the Society, CA. Narayan Pasari in his
address covered various activities undertaken by BCAS
in general and appealed to members to strengthen BCAS
initiatives by becoming a part of it.

During the technical sessions,
CA. Sunil Gabhawalla explained
to the participants, the framework
of GST and concept of supply.
CA. Mandar Telang dealt with
provisions relating to time and
value of supply and Input Tax
Credit. CA. Udayan Choksi took
up various case-studies and
examples and elaborated the
provisions governing Imports/
Exports/Inter-State transactions
and Place of Supply of Goods
and Services. CA. Govind Goyal
enlightened the members about
the procedural aspects dealing
with registration, payment, filing of
returns and also various critical issues which the industry
as well as tax practitioners would have to face.

The program was attended 400 members from Kolkata
and adjoining areas.

ITF Study Circle held on 13th December, 2016

International Taxation Committee of BCAS conducted
its ITF Study Circle meeting on 13th December, 2016 at
BCAS Conference Hall. The study group discussed the
charge and scope sections under the Income-tax Act. CA.
Bhaumik Goda gave an overview of the provisions and
then dealt with some case studies on salaries received in
India for services rendered outside India, deemed transfer
provisions, inadequate consideration through gifting
of shares by non-residents and presumptive taxation
under section 44BB. The interactive session brought out
several issues and nuances in the law and case law on
the subject.

Seminar on “Estate Planning, Wills & Family
Settlement” held on 14th December 2016

A Seminar was organised by our Corporate & Allied Laws
Committee at BCAS Conference Hall to throw light on
importance of Estate Planning, Wills & Family Settlement
and to create awareness about some of the critical
aspects thereof.

CA. Chetan Shah, President of the Society welcomed
the delegates and CA. Kanu S. Chokshi, Chairman of
the Corporate & Allied Laws Committee introduced the
subject. The Seminar was inaugurated by the speaker of
the first session CA. Dileep Choksi.

CA. Dileep Choksi inter alia highlighted the emerging
need for Estate Planning & Family settlement / Family
Arrangements (Through Trust / Companies).

Dr. Anup Shah took the members
through intricacies of Wills,
including Hindu Succession
Law, Indian Succession Law,
various types of trusts etc. He
also touched upon the relevant
provisions of Special Marriage
Act, Adoption and Succession law
in other religions such as Muslims
/ Christians / Parsis etc.

Mr. Mahesh Shah, Solicitor,
enlightened the participants on
the clause-wise drafting of Will as
well as stamp duty, registration &
documentation aspects. He also
explained the intricacies of family
arrangements / family settlements
relating to properties held in joint family or joint business and related documentation
aspects.

CA. Yogesh Thar dealt with the
taxation issues in estate planning
/ Family Settlements / Family
Arrangements / Wills / Private
Family Trusts etc., Taxation of HUF
/ Partitions etc., Filing of returns of
deceased, Returns of Executors of
Estate.

The speakers responded to the queries of the participants.
The Seminar received an overwhelming response.

Study Circle Meeting on Ind-AS held on 14th
December 2016.

The fourth Meeting of the Company Law, Accounting
& Auditing Study Circle on Ind AS was held on 14th
December 2016 at the BCAS Conference Hall.

The discussion on Ind AS 9 – Revenue Recognition
and Ind AS 7 – Construction Contracts was led by
CA. Sachin Khopde. In the first part of the meeting he
covered key definitions, timing of revenue recognition
and measurement of revenue with respect to sale of
goods and rendering of services. He also explained some
important concepts like Agency Agreements, Gross v/s
Net Reporting, Multiple Element Transactions and Barter
Transactions.

In the second part of the meeting, he covered various
industry specific issues with regard to Service Concession
Agreements, Real Estate Transactions and also shared
insights as to how certain E-commerce companies and
Telecom companies recognise sales and revenue. The
discussion during the meeting was very interactive.

Human Development Study Circle Meeting on
‘Introduction into the World of Handwriting
and Signature Analysis” held on 15th
December, 2016.

HRD Study Circle organized a meeting on ‘Introduction
into the World of Handwriting and Signature Analysis” on
15th December, 2016 at BCAS Conference Hall.

The discussion was led by Mr. Navin Thantri (Graphologist)
Mr. Navin is a Professional Consultant and Trainer in the
field of Graphology, Numerology, Vaastu and many such
allied alternative sciences having close to 10 years of
experience.

He discussed about the scope and utility of the subject
for CAs and their Families i.e. Recruitment, Professional
Success and Health amongst others. He also explained
about the relevance and importance of the signature of a
person and emphasised as to what the signature reveals
about a person signing.

The participants expressed a desire for such workshops
and presentations in future.

Lecture Meeting on “Crude Diplomacy and
Global Economy and Q & A” held on 21st
December, 2016

A Lecture Meeting on “Crude Diplomacy and Global
Economy and Q & A” was held on 21st December, 2016
at BCAS Conference Hall which was addressed by the
Speaker Mr. Kushal Thaker, an Investment Strategist
and Consultant.

President Chetan Shah welcomed the speaker.

Mr. Thaker made a straight forward analysis on crude oil,
its products, uses, strategies in pricing, costs, production,
technology, financials, hedging tendencies, issues which
affect the economy. He made an in-depth study of many
countries in this regard and shared his research and
statistical analysis. He also touched upon some vital data
that can enable right speculation and investment.

The audience came up with good questions that made the
discussion interesting.

BCAJ Admin

Society News

CHARTERED ACCOUNTANTS’ PROGRAM IN
MANAGEMENT, BUSINESS & ACCOUNTING
ORGANIZED BY MPR & HDTI COMMITTEES
OF BCAS AT ISME CAMPUS

To hone the Management, Leadership and Technical skills
of Chartered Accountants to achieve growth, whether in
practice or in industry, Membership & Public Relations
Committee (MPR Committee) and Human Development
and Technology Initiatives Committee (HDTI Committee)
jointly organized Chartered Accountants’ Program in
Management, Business and Accounting (CAMBA) at the
ISME Campus, Lower Parel, which is equipped with the
latest facilities for a conducive learning environment. The
CAMBA Course was designed by BCAS along with the
Management Institute of ISME. The 1st batch of the course
started in May, 2017 and concluded in December, 2017.
.
With an eligibility criteria of minimum 2 years of postqualification
experience, the first batch saw participation
from 16 CAs in practice as well as those working with
Big 4s or in the industry. The participants shared their
experiences and ideas, problems faced in their respective
work environments and best practices employed.
The course, designed to conduct 120 hours of classroom
training of which 102 hours were dedicated to various
emerging aspects of Entrepreneurship, Management,
Human Resources, Strategy, Soft Skills and Marketing
was conducted by highly experienced faculty from ISME.
The subjects were taken up with a variety of interactive
pedagogical techniques including discussing case
studies, role playing, movies, model building and team
work by learned and experienced faculties like Prof.
David Wittenberg, Dr. Amarpreet Singh Ghura, Dr. A.
Doris Greenwood, Prof. Anjana Vinod, Dr. Ramkishen Y,
Prof. Omkar Pandharkame, Ms. Anubhuti Gupta,
Mr. Moksh Juneja and CA. Nikhil Srinivas.

The remaining 18 hours of the course included sessions
designed by the BCAS team on subjects relevant to the
professionals. The speakers and the topics discussed
during these well-conceived sessions in the 1st batch are
enumerated hereunder:

The participants thoroughly enjoyed their journey of
this long course, experiencing a transformation in their
perspective towards their profession.
It was indeed a very enlightening experience for the
participants who benefitted a lot from the sessions.

“Motivational Talk for Young Chartered
Accountants & Felicitation of CA’s cleared in
Nov’2017” held on 19th February, 2018 at BCAS
Conference Hall.

The Membership & Public Relations Committee organized
a motivational talk for Young Chartered Accountants on the
topic of “How to become an Extraordinary Professional?”.
The talk was addressed by CA. Mudit Yadav, a TEDx
Speaker and Success Coach.
The session began with the
opening remarks by CA. Chetan
Shah, Chairman, MPR Committee
who briefed the audience about
BCAS and its initiatives. He also
encouraged new CAs to become
members of BCAS. Few rank
holders of Nov’ 2017 were felicitated and they shared
their views on success in CA exams.

The Speaker CA. Mudit took up the following major issues
faced by young professionals:

 How to choose the ideal career path for oneself?
 Difference between an average and a star professional.
 Habits of the most extraordinary professionals.
 How to develop the mind-set of a true professional?
 How to develop a sharper executive presence?
 How can you be a pioneer of the future of CA profession?

CA. Mudit Yadav also shared his experiences and the
challenges he faced while carving out his career as
a motivational speaker, in unconventional and nontraditional
field.

The talk was attended by more than 150 young Chartered
Accountants and the participants benefited from the
experience shared by the Speaker.

“8th Residential Study Course on IndAS” held
from 22nd February to 24th February, 2018

Accounting & Auditing Committee organized its 8th IndAS
Residential Study Course (RSC) from 22nd to 24th February,
2018 at Hotel Gateway, Pune. The Course was conducted
to address the Ind AS implementation challenges being
faced as well as to impart knowledge of its execution to the
professionals. This would enable a smooth transition for
the corporate sector and also appraise them of impending
changes which are applicable in future. The Course was
attended by 110 participants from all across India.
This year’s RSC was structured with three sessions
based on Case Studies which involved group discussions.
The RSC also had four more papers for presentation by
eminent faculties.

RSC started with group discussion on First case study
paper by CA. Jayesh Gandhi on “Case Studies on Business
Combinations and Consolidated Financial Statements”.

The case studies highlighted the
complexities involved in carrying
out accounting for business
combinations and consolidation
as well as the evaluation of the
relevant consolidation standard
in specific circumstances.

The session commenced with the inaugural address by
CA. Narayan Pasari, President, BCAS. He urged nonmembers
enrolled for this course to become members of
BCAS and enumerated various activities/initiations being
undertaken by BCAS for the benefits of profession and
industry. The Chairman of the Committee CA. Himanshu
Kishnadwala gave introductory remarks on the design
and structure of the course and the purpose of selection
of the topics for group discussion and presentation.
Inaugural session was followed
by presentation paper on Revised
Audit Report Requirements by
CA. Vijay Maniar which covered
SA 701 on Key Audit Matters to
be applicable from FY 2018-19.
CA. Jayesh Gandhi analysed and
replied to the issues raised on the
Case Studies during the group discussion.
The 2nd day started with group
discussion on the paper by
CA. Arvind Daga on “Case
Studies on PPE and Financial
Instruments” that highlighted the
intricate issues on measurement,
recognition and impairment
under relevant standards. He
also made a presentation on his paper explaining finer
points of the standards as
well as dealing with the
issues which came up for
deliberation. CA. Raghu
Iyer presented the paper
on “Derivative and Hedge
Accounting” and explained
what is ‘derivative’, types
of hedges, its purpose and
importance in the commercial world.
There was another group
discussion on the paper by
CA. Archana Bhutani on
“Case Studies on Revenue
Recognition IndAS 115”. The
case studies dealt with typical
situations in various sectors
including real estate, bundled
services, FMCG and retail
distribution and also some other related issues. She
further made the presentation on her paper explaining
finer points and concepts and principles of revised IndAS
115 which is likely to be applicable from 1st April 2018.

The last day began with the
presentation on “IndAS 116
– Leases” by CA. Srinath
Rajanna who came all the
way from Dubai to address
the participants. It is for the
first time that an international
faculty has addressed an
IndAS RSC. He explained the
major differences in the revised
standard as compared to IAS 17 as also the thought
process for the same at IASB. Thereafter, CA. Himanshu
Kishnadwala gave presentation on “Global Developments
in IFRS” and made the participants aware about the projects
in pipeline at IFRS for the next five years and the way it will
impact industry as well as the profession. He also explained
the process of development of standards at IFRS as also
how as a stakeholder everybody can participate in the
said process.

The concluding session was presided over by the
Chairman CA. Himanshu Kishnadwala who acknowledged
the contribution of the faculty, group leaders and other
participants for the success of the RSC.

Participants were satisfied with the level of discussion
and the value imparted through the RSC.

Workshop on “Transfer Pricing – CBCR and
Master File” held on 27th February 2018 at
BCAS Conference Hall

“The Workshop on Transfer Pricing – CBCR and Master
File was conducted on 27th February 2018 at BCAS
Conference Hall which was attended by over 110
participants from profession and industry.
The speakers CA. Hasnain Shroff
and CA. Anjul Mota provided a
comprehensive insight on the
conceptual understanding and
interpretation of legal provisions
and other key issues surrounding
the CBCR and Master File. This
was followed by case studies
touching upon intricacies in filing
the CBCR and Master File. The
speakers also outlined some
practical suggestions in dealing
with inherent issues.

The Workshop was well received
by the participants who benefitted
a lot from the sessions.

Interactive Fire Side Chat on “Strengthening
the Profession” held on 28th February, 2018 at
IMC, Churchgate

The CA profession is passing through tectonic shifts which
have posed various challenges for the professionals. To
address the issues of profession and challenges faced
by the CA firms, review the regulatory impediments, learn
the possible changes in this regard for strengthening
and developing the capacity of Indian CA firms, enhance
the competence and improve the visibility amongst the
business community, BCAS organised a Fire Side Chat
with the experts from the profession and industry.

The Panelists for the discussion were:
1. Mr. M. Damodaran, Former Chairman, SEBI
2. CA. Mukund Chitale, Former President, ICAI
3. CA. T. N. Manoharan, Former President, ICAI
The Fire Side Chat was moderated by CA. Himanshu
Kishnadwala, Past President, BCAS.

President CA. Narayan Pasari in his opening remarks
stated that presently the Chartered Accountancy profession
is in a constant state of flux on account of profound changes
in the sphere of economy, regulation, technology & society
that throw many challenges resulting in higher complexity.
CA. Himanshu Kishnadwala while opening the chat
referred to the Prime Minister’s address to the CA
community on the CA foundation day on 1st July, 2017 and
threw light on the various statistics about the members and
the firms. He also mentioned as to what can be done to
improve the profession and counter the challenges of the
bigger multinationals. CA. Himanshu also talked about the
SEBI Order in Satyam Case, RECO Scam, PNB Scam and
Supreme Court Order on multinational firms etc.

The Fire Side Chat commenced with the expert opinions
of the panelists:

CA. Mukund Chitale started with a comment of Nani
Palkhivala “The time has come to see as to who will shave
the barber”, which was citing Institute’s motto given by
Yogi Anand “Ya esa suptesu jagarti”. He expressed that
strengthening the profession doesn’t come automatically
and for that there has to be an introspection as to what to
do with failures individually & in a communicative manner
because any profession which is rendering service exists
as long as society expects it to exist. Quality of our
work should match the Society’s expectations at the
highest level.

Mr. M. Damodaran was of the view that professionalism
is not derived just from academic qualification.

Professionalism is to contribute to the informed discussion
and debate where professionals should set the agenda
and plan in the direction of strengthening the profession.

He emphasized that Chartered Accountancy Course is
enhancing the quantity but must also ensure that quality
shall not be compromised.

CA. T. N. Manoharan’s remarks were amply supported with
hardcore statistics of the CA profession. He stated that
CA firms lack playing the role of knowledge partner. Each
CA firm should ensure that any new article who comes to
the office be given an open idea that they are welcome to
the firm and can grow to the level of employee, manager,
director or even can become partner of the firm. Every firm
should have partners in different age groups that is how
succession happens and the seniors will have smooth
exit after handholding and guiding. The focus should not
be only on tangibles like top line, bottom line, physical
infrastructure etc. but also on the quality & integrity aspects.
One of the issues of Indian firms is reluctance to invest
in Infrastructure and growth projects. He said that we can
follow principles having eternal utility for humanity and we
can adopt values which will hold good forever.

Later on CA. Himanshu Kishnadwala posed some
pertinent issues faced by the profession, for the response
of the panelists, which were deliberated in great depth.
Participants were provided fair insights as to the current
state of affairs in the profession, how the society perceives
the profession and what should be the measures initiated
to shore up the image of the profession.

The participants got extremely enlightened with the
invaluable insights from discussion by the expert panelists.

ITF STUDY CIRCLE

Meeting on “Proposed Amendments to
International Taxation Provisions in Budget,
2018” held on 15th March 2018 at BCAS
Conference Hall

The International Taxation Committee organized a panel
discussion on 15th March, 2018 at BCAS Conference Hall,
to analyze the impact of the amendments to International
Taxation provisions, proposed in the Union Budget, 2018.
The meeting was kicked-off with a discussion on the
proposed amendment in the Explanation 2 (a) to section
9 (1) (i) where if a non-resident appoints a person who
will negotiate but not conclude contracts on his behalf, it
may still constitute a Business Connection in India. It was
discussed how the OECD had reviewed the definition of
a Permanent Establishment in Action Plan 7 to prevent
avoidance of tax by fragmentation of business and to align
with the modified definition of MLI. The discussion was then
turned to the newly introduced Explanation 2A in section
9 (1) (i) which clarifies meaning of a significant economic
presence. It was also discussed that there was a need for
proposing this amendment as a result of digital economy,
whether physical presence of a person in a country is
no longer the only measure of an economic connection,
challenges in implementing such an amendment, impacts
of such amendments on taxation, etc.

The session was very interactive and the participants
benefitted a lot from the panel discussion.

INDIRECT TAX STUDY CIRCLE

Meeting on “GST E-Way Bill Provisions –
Analysis and Demo of Online Preparation”
held on 17th March, 2018

The Suburban Study Circle organized a meeting on GST
E-way Bill Provisions on 17th March, 2018 which was
addressed by CA. Manish Gadia & CA. Jignesh Kansara.
Speaker CA. Manish Gadia discussed the revised
provisions and rules regarding the E-Way Bills Under
GST and its applicability wef 1st April, 2018. He made
detailed presentation on the following issues:

a) Procedure for generation of e-way bill, b) Multiple
Consignments, c) Exemptions, d) Cancellation, e) Validity,
f) Acceptance or Rejection, g) Verification of documents,
h) Case Studies etc.

Speaker CA. Jignesh Kansara made a step-by-step online
demonstration of the process regarding various aspects
of E-Way bill through the GSTN portal. He covered the
following activities in relation to the e-way bills:
a) Registration as dealer and transporter, b) Creation of
masters for clients, products and godowns, c) Generation
of Part A and Part B of E Way Bills, d) Generation of
Consolidated E-way bill, e) Cancellation / Modifications in
E-way Bills generated earlier, f) MIS reports.

He also threw light on the various technical and statutory
glitches faced by the dealers and gave suggestions for
corrective actions.

The participants benefited from the sessions and
experience shared by the learned speakers.

BCAJ Admin

Learning Events at BCAS

1. 16th Jal Erach Dastur CA Students’ Annual Day — ‘Tarang @75’ at BCAS Hall on 2nd & 3rd December 2023 and CA Member’s event — JhanCAr on 10th December 2023 at M.M. Pupils School, Khar(W), Mumbai

‘Tarang @75’

In its Platinum Jubilee year, BCAS celebrated student’s annual day viz. ‘Tarang @75’ in a grand style with a huge enrolment of around 500 students. The day began with all of the students unleashing their literary journey with the power of words. The Talk Hawk Competition provided a platform where ideas were presented and stage fear was battled for many. The talks were not only enriching but also highlighted very sensitive areas around men’s mental health, feminism, cancel cultures, etc., the narratives left a lasting impression emphasizing the power of communication and their delivery. The Talk Hawk was followed by a Debate Competition, a dynamic forum of intellectual exchanges and challenging thoughts. It was moderated by CA Parth Patani. As arguments clashed and ideas collided, the atmosphere was charged with discussions and controversies. Thought-provoking perspectives came to life as the students put their points forward with well-researched statistics and their own general understanding of the topics.

The next day, started with enthusiasm of treasures and clues, and students running around the streets of south Bombay and taking photos around the place. ‘Treasure Hunt’ was an event largely participated by the students showing the spirit of adventure and teamwork. The spirit of adventure and teamwork took over the day that began with zeal and zest! After all the chaos and actions, students finally gathered at the BCAS hall with all fun and excitement awaiting how the rest of the day unfolds!

The fun of the evening quickened as the spotlight shifted to a dazzling talent hunt, where students showcased their skills in music, dance, and various performing arts categories. The stage came alive with a fusion of creativity and talent, leaving the audience cheering for their friends and enjoying the love and light of the energies around them.

Almost 279 students participated in various activities like Treasure Hunt, Reel Mix Competition, Photography Competition, Antakshari Competition, Talk Hawk’, Essay Writing Competition and Talent show.

‘JhanCAr 20K3’

JhanCAr 2k23 marked its beginning by kicking off with an exhilarating event Corporate Roadies — a multisport adventure — a team play filled with excitement, surprises, and physical challenges with diverse courses of action!!

As the opening bell chimed, signalling the commencement of the Mock Stock Exchange, the room buzzed with excitement and nervous energy. Participants, each armed with a virtual portfolio and a strategy, gathered around their mobile screens, ready to engage in a thrilling financial adventure. Little did we know that the next few hours would be a rollercoaster of fun, thrills, and chaos. The rounds kicked off with a flurry of buy and sell orders. Excitement was palpable as stock prices fluctuated wildly. Laughter and cheers erupted when someone made a brilliant move, while groans echoed across the room when others faced unexpected losses. With CA Jigar Shah creating expert comments and news being read, the entire place was full of screams and laughter!

Following the physically exhausting games, now finally came the mental exhaustion, where teams gathered, each armed with a case file and a determination to uncover the secrets hidden within the financial statements in the event named ‘Investigator’. As the simulated crime scene unfolded on spreadsheets and balance sheets, teams meticulously combed through financial statements, scrutinizing every transaction, entry, and ledger balance. The case study presented a scenario where the cash flow appeared to be at odds with the company’s reported revenues and expenses, creating a financial puzzle. In the end, the true victory lay not just in solving the financial mystery but in the collaborative spirit that had driven each team.

JhanCAr took an innovative turn with the introduction of a captivating ‘Reverse Shark Tank’ — an investment ideology game. Participants showcased their entrepreneurial acumen by justifying the pitching of unconventional and creative business ideas to a panel of judges. This unique twist added a strategic and competitive edge to Jhancar 2k23, challenging participants to think outside the box and answer questions that judges had for them.

The pulse of the evening quickened as the spotlight shifted to a dazzling talent hunt, -Starquest where individuals and teams showcased their skills in music, dance, and various performing arts categories. The stage came alive with a fusion of creativity and talent, leaving the audience in awe of the diverse abilities displayed by the participants. CA Hrudyesh Pankhania truly brought the event to life with his supercharged energy and shayaris!!

A drumroll of anticipation seemed to echo and the winners were announced. Cheers erupted and the smiles and high-fives were not just a celebration of victory but a testament to the dedication, collaboration, and analytical skillset that had propelled them to the top.

The Winners of various competitions are as under:

*Winners- 16^th Jal Erach Dastur CA Students’ Annual Day*
Treasure Hunt	Antakshari ‘Suronke Maharathi’	Debate ‘War of Words’
*Winning Teams*
Naman Jogani,	Khushi Kaushal	Vishesh Mehta
Raghav Singhal,	Virati Shah	Yash Mehta
Siva Vignesh Shan	Ruchita Gupta	Arnav Singh
Reel Mix ‘Tarang Reel-Star’	Photography ‘Khinch Le’	Talk Hawk ‘Aspire to Inspire’
Best Performers*
Vrushti Mehta	Yashwardhan Mandoth	Vaidik Parwal
Essay Writing ‘Awaken the Writer Within!’	Talent Show* ‘CA’s Got Talent’
	*Music*	Ashwati Nair
Neha Agnihotri – 1^st Prize	*Dancing*	Tanvi Shenoy
Siddhi Sancheti – 2^nd Prize	*Instruments*	Vineet Mishra
Sunidhi Gaur -3^rd Prize	*Other Performing Arts*	Sakshi Chaubey

Winners- 16th Jal Erach Dastur CA Students’ Annual Day

Starquest	Mock Stock	Investigator
*Winning Teams*
Rishikesh Joshi – 1^st Prize	Bansari Sanghvi	Bansari Sanghvi
Sagar Shah – 2^nd Prize	Lokesh Rathod	Lokesh Rathod
Nidhi Bawri – 3^rd Prize	Arnav Goyal	Arnav Goyal

Reverse Shark Tank	Corporate Roadies	Overall games Winners
*Winning Teams*
Hardik Thakkar	Sagar Patel	Bansari Sanghvi
Smit Jain	Parth Dongra	Lokesh Rathod
Vriddhi Rawtani	Pushkar	Arnav Goyal

As the night progressed, the rhythm intensified with an electrifying Jamming session that got everyone on their feet, celebrating the success of Jhancar 2k23. The event reached its pinnacle with a dinner, providing a perfect finale to a day filled with excitement and creativity.

Both events were conducted by the Human Resource Development Committee (HRD) Team under the able guidance of CA Anand Kothari, CA Jigar Shah, CA Dnyanesh Patade and CA Utsav Shah. The Society is thankful to the Bank of Baroda and J.K.Shah Classes for partnering with BCAS by sponsoring JhanCAr 20K3.

2. The International Tax and Finance Study Circle organised a meeting “Moving to Singapore — A Singapore Perspective” on 12th December, 2023 in an Online Mode.

Group Leader Mr. Sanjay Iyer shared his practical insights with respect to nuances in setting up the presence in Singapore in the session. The topics covered in the discussion were:

1. Recent amendment of capital gains on foreign assets becoming taxable in Singapore.

2. Various routes of investments along with procedures and relevant government authorities involved.

3. Opening of a bank account in Singapore and the potential difficulties a new investee may face.

4. The concepts of Single and Multi-Family Offices along with key processes and potential issues that may arise.

5. Key aspects of succession planning.

Towards the end, some important practical aspects of living in Singapore including an approximate cost of living were also discussed. The session provided great insight into the overall operational aspects of moving to Singapore.

3. HRD Study Circle Meeting held a Film Screening — “The Power of Vision” on 25th November, 2023 @ BCAS.

The participants watched the film “The Power of Vision” by Joel Barker (known as a futuristic visionary) and discussed the same as a case study. Mr. Vinod Kumar Jain explained about the film. He explained the importance and power of having a vision in a person’s life, in a commercial or one’s socio-economic endeavours.

The participants discussed that the said film demonstrated how having a positive vision of the future is the most forceful motivator for change and success that companies, schools, communities, nations, and individuals possess.The film explained how a prisoner found the will to survive suffering on earth — at Auschwitz concentration camp — so he could help others find the meaning of life. How did most students in a neighbourhood finish high school beating all the odds paving their way to college? How do organisations inspire employees to be more than observers, exercise their choices wisely and create their futures?

Futurist Joel Barker showed why a shared vision makes decision-making easier, why effective visions are never expressed in numbers, and why a vision must be inspiring enough to challenge each member of the vision community to grow and reach beyond their previous limits.

“The Power of Vision” showed how in your organisation thinking together, dreaming together, and acting together can make a difference in the world.

Key Learnings:

1. Creating a compelling vision that goes beyond numbers

2. Challenging others to stretch beyond their perceived limits

3. Inspire a personal, daily connection to a shared vision

4. Improved decision making

5. New employee training

6. Leadership

7. Team building

After the screening of the film, participants discussed their learnings from the film, their experiences and how the same can be applied in their personal lives, educating their students and children. They also discussed how our nation’s present image-building action by our government will help our country grow to much greater heights.

4. Webinar on “Digital Brandscaping for Professionals” held on 25th November, 2023 in Online Mode.

The Technology Initiatives Committee of BCAS conducted a Webinar on Digital Brandscapting for Professionals. The webinar was planned to guide professionals in creating and nurturing their brand digitally within the Code Of Ethics of ICAI.

The webinar began with Mr. Mihir Karkare, a founder of a renowned social media marketing company, sharing with the participants the importance of branding digitally on various social media platforms. He also emphasised and shared insights on why digital branding is important for professionals in this digital age and era.

The webinar in its second part, addressed basic but important and relevant questions on balancing digital branding ourselveswith the Code of Ethics of ICAI as far as CAs in profession are concerned. Speaker CA Aseem Trivedi shared the practical aspects and clarified the ambiguity around using social media without violating the code of conduct.

The third part was quite an eye-opening session where our committee member CA Hrudyesh Pankhania gave participants a hands-on demonstration of how to use social media and make every bit of one’s reach count. The session focussed on refining social media networking and reach.

The webinar had participants from 25 cities across all age groups.

5. Suburban Study Circle Meeting on “Recent Litigation Trends in GST” on Friday 24th November, 2023 at Golden Delicacy Multicuisine Restaurant, Borivali (W).

The Group Leader CA Prerana Shah discussed with the group various issues arising in GST Compliance at the time of filing various returns including annual returns and commonly raised issues during assessments. She shared an educative presentation on important points based on judicial precedents/circulars and notifications and her views thereon.

In a knowledge-oriented and practical session, she lucidly covered all important points. She illustrated the interpretation of some of the important provisions with the help of case studies.The session was very interactive with participants deliberating upon a large number of practical queries. CA Prerana’s experience with the subject area was well appreciated by the group.

6. Indirect Tax Laws Study Circle on “GST Portal — Recent Developments and Challenges” held on 24th November, 2023 in Online Mode.

Group leader CA Umang Talati presented various issues & challenges faced by taxpayers on the GST portal as well as various recent developments on the portal. The presentation covered the following aspects for detailed discussion:

1. Discussion on Circular 170/02/2022-GST and its impact on disclosure to be made while filing GSTR-9.

2. New functionality of Electronic Credit Reversal and Reclaimed Statement enabled on the portal.

3. New functionality of Return Compliance Portal — DRC-01B/ DRC-01C enabled on the portal and manner of replying to such notices.

4. Implementation of Rule 37A and associated issues.

5. Procedural challenges in filing an appeal.

6. Geocoding facility on the portal – applicability & other challenges.

7. Utility of verifying RFN facility introduced on the portal.

Around 60 participants from all over India benefitted while taking an active part in the discussion.

7. ITF Study Circle Meeting held on 16th November, 2023 in Online Mode.

In the study circle meeting, the participants discussed the implications of the landmark Supreme Court ruling in the case of Nestle SA on the MFN Clause in a tax treaty:

The group leader CA Gunjan Kakkad explained the facts of both the lead cases which were adjudicated in the common order by the Supreme Court, along with providing some background to the controversy at hand.
The Supreme Court’s ruling was discussed in great detail.
This was followed by a detailed analysis of the ruling and its reasoning.
The Way Forward and the potential consequences of the ruling were discussed in detail. Many members expressed divergent views on the potential consequences.
There was also a discussion on the potential arguments that may be taken in various proceedings initiated as a result of the Supreme Court ruling.

BCAJ Admin

CPE and COE

Arjun : Hey Bhagwan, I am really tired.

Shrikrishna : That you always are! What is the reason today?

Arjun : Want to complete my CPE hours.

Shrikrishna : What is CPE?

Arjun : As per the Continuing Professional Education (CPE), every member must devote at least 30 hours, every years to studies to keep himself updated.

Shrikrishna : Very good. 10,000 years ago, we also had this system. My Guru Sandipani and all other Gurus used to give us send-off on completion of our education of 12 years. They used to give a few instructions for life, from Taittireeya Upanishad.

Arjun : What were those instructions?

Shrikrishna : ‘Satyam Vada’ – Speak the Truth. Dharmam Chara – Perform your duty religiously and Swadhyayat Ma Pramadah – Never commit default in continuous Studies. Never give up on studies!

Arjun : Oh! I heard somebody saying these are the foundations of our Code of Ethics. Your last point is nothing but our CPE!!

Shrikrishna : Now tell me, what is your difficulty?

Arjun : Somehow, I managed 20 hours out of the target of 30 hours.

Shrikrishna : You people are known as the ones who ‘manage’ everything. Even CPE hours you manage?

Arjun : Yes, Lord, we can’t help it. Who has time to go and attend those boring lectures? From my college days, I lost my habit of attending any lectures and sitting there.

Shrikrishna : In college, was attendance not compulsory?

Arjun : It was; but the muster was kept outside the classroom. We used to sign and be elsewhere! Sometimes, we friends used to sign for one another. Proxy is acceptable in law as well!

Shrikrishna : Oh! So, right from your college days, you had no connection with ethics!

Arjun : Ethics? Ah! Who cares?

Shrikrishna : Still, I didn’t understand your problem.

Arjun : Bhagwan, nowadays our branches and study circles hold many Seminars and lectures to enable the members to complete their CPE Hours. 31st December is the last date.

Shrikrishna : That means, as usual, you wake up not at the 11th hour but at the 11th month! I wonder when you will learn ‘pro-activeness’. First things first!

Arjun : Further trouble is that it is mandatory to complete at least 2 hours on Ethics and at least 2 hours for Standard on Audits. Conveners are saying, “Now all good speakers are booked, and no venue is available!”

Shrikrishna : But why do you wait till the last moment? Your Branches and Study Circles should arrange mandatory lectures at the beginning of the year, between January to June.

Arjun : Nobody attends so early. Lord, we CAs cannot work unless it becomes compulsory. And we are quite used to getting an ‘extension of time’. But nowadays, no extension is granted. So, this ‘running around’.

Shrikrishna : So now, you need to be always on your toes. You can’t afford to relax and take things lightly. Actually, you should learn ethics before you start working on audits and taxation. There is no point in knowing about them when all audits and tax filings are over!

Arjun : Lord, I agree. I will tell the conveners to arrange COE and SA lectures before June every year so that we are equipped with knowledge before doing audits.

Shrikrishna : That’s it. You need to be eternally vigilant and proactive. That is your motto – Ya Esha Supteshu Jagarti.

Arjun : I agree, My Lord!

“Om Shanti”

Note:

This dialogue is based on the need for a proper attitude towards CPE and COE. It is in our interest to understand the spirit behind it.

BCAJ Admin

Interesting Apps

lashDim

Many Android users have marvelled at the ability to control the intensity of the flashlight in iPhones. Your wait is now over! FlashDim does just that.

Once installed, it allows you to adjust the intensity of your flash. This comes in useful when you are using it as a flashlight. The app provides three flash intensity levels: minimum, half and maximum.

It also has an SOS mode, where the flashlight blinks repeatedly at regular intervals, for as long as you wish. You may adjust the frequency of the beats per minute or even adjust the interval time from 50 to 10,000 ms.

A neat little feature is that you can adjust the blips to mimic Morse Code. So you can send messages from a distance to someone in the dark, and he will be able to decipher the same — provided he knows Morse Code.

A very handy tool for day-to-day use.

Android: https://bit.ly/3FTfDDZ

AfterShip

AfterShip is a package tracker which is pretty simple. It allows you to track packages for over 700 carriers worldwide. Just enter your tracking number and sit back and relax!

AfterShip will track your package in real-time. You can check your shipment location on a Map, and get notified of the progress automatically no checking frequently on an app / website for the status of your documents / parcels. Once your package is out for delivery or delivered, it will notify you about that too.

The app is smart. When you enter the tracking number, it will automatically detect the carrier — how cool is that! If, for some reason, it cannot do so, it will give you a few options to choose from, and most likely, the carrier will be one of them! You just have to tap to accept the carrier.

If you link your Gmail account with the app, it can even pick up the tracking number from your Gmail. If you copy a tracking number from your WhatsApp account or any other app on your phone, it will automatically tell you when it detects it in your clipboard and remind you to enter it in the app, for easy access and tracking.

So, if you send / receive many parcels / documents, this is a very easy way to track them. And even if the frequency is less, it is so easy and convenient. Try it out today!

Android: https://bit.ly/3QyY5Su

iOS: https://apple.co/49LojtR

Otter: Transcribe Voice Notes

Otter is a pioneer in transcribing voice to text. Whether you are in a lecture, seminar or classroom, just activate the app, and it will transcribe speech to text on your screen in real-time, so that you can focus on the discussion at hand.

You can even OtterPilot your meetings with AI. Get a meeting assistant that records audio, writes notes, automatically captures slides and generates summaries.

All notes are searchable. The app is currently available only in English. You can collaborate, share and highlight your notes. You can also ask questions for topics covered, and it will point to the exact sections where it has been discussed.

Speech recognition systems are never perfect, but this one is as close to being perfect as it could be.

Android: https://bit.ly/47vZv6U

iOS: https://apple.co/3SxE0OZ

Lensa

Lensa is a different type of photo editor – it combines photo editing with AI art. It is most suitable for retouching portrait selfies. Forget about conventional filters and photo editing tools. The app has many photo editing filters and techniques for pictures to get you a sweet selfie, remove any blurred background or do other necessary editing. With its simple editing features and camera editor effects, you can make every photo perfect.

You can perfect the complexion, make eyes impeccable, adjust the background and even use auto-adjust if you don’t have time to do each of these individually.

You can capture memorable moments and do the necessary photography editing to freeze each moment in time. You don’t need a lab or dark room because within seconds, your peachy selfie is ready. Most of the time, the AI effects are beautiful, though not every picture is perfect.

And now, they have introduced Magic Avatars 2.0, a phenomenal update that empowers you to express yourself in ways you have never imagined. With an entirely new quality level and tens of unique styles, Magic Avatars 2.0 takes the app to new heights. You must try it now!

Android: https://bit.ly/40yqVa2

iOS: https://apple.co/47wMt9t

BCAJ Admin

Miscellanea

1. TECHNOLOGY

1 Apple set to open its fourth iPhone factory in India in a China+1 strategy

Apple is set to get its fourth manufacturing facility in India, with the Tata Group reportedly planning a new factory that will manufacture iPhones, a move that aligns with Apple’s strategy of accelerating its supply chain in India. The new factory, according to a Bloomberg report that cites unnamed sources, is expected to have 20 assembly lines and employ 50,000 staffers within two years of being operational.

The sources further said that the group plans to make the factory operational in the next 12 to 18 months. “India is important to many big tech companies for several reasons — the human capital, relatively cheap labor pool, a maturing supply chain, and the country’s pragmatism,” said Prachir Singh, senior analyst at Counterpoint Research.

In October, the Tata Group acquired an iPhone assembly plant, located in Karnataka, from Taiwanese manufacturing firm Wistron for $125 million. The acquisition is still pending regulatory approval.Queries sent to the Tata Group and Apple went unanswered.

These developments come at a time when Apple is looking to scale down its operations in China, due to the ongoing trade war between Washington and Beijing, and scale up its operations in Asian economies, including India, Thailand, Vietnam and Malaysia.

“Apple has been looking for a second place to expand and diversify its manufacturing operations beyond China. The new plant at Hosur could be a clear indication that India is that second destination,” said Abhilash Kumar, industry analyst at TechInsights. “The year 2023 saw a lot of activity in India that propelled the nation to be the 4th largest in terms of Apple’s supply chain network,” Kumar added.

Apple’s strategy to shift its manufacturing operations to India gained more mileage in January this year as New Delhi provided initial clearance to several Chinese suppliers, who assemble multiple Apple products and sell parts for these products to Apple.

Other than the Tata Group, other contract manufacturers such as Foxconn and Pegatron, are also manufacturing Apple products in India. Foxconn, the largest contract manufacturer globally, has a plant at Sriperumbudur in Tamil Nadu, which manufactures iPhones, metal casings and other components.

The company, which is the only manufacturer of Apple’s latest iPhone 15 and 15 plus models, has announced plans to open two other manufacturing facilities at Devanahalli, Karnataka, and Kongara Kalan, Telangana. Pegatron, which manufactures older models of iPhones at its Singaperumal Koil plant in Tamil Nadu, is also reportedly planning a second plant in Tamil Nadu.

The new plant from Tata Group, according to Kumar, could generate a lot of employment opportunities for Indians while putting the country at the forefront of Apple’s manufacturing plans.

Another proof of India’s growing importance to Apple, Kumar said, is the recent launch of two retail stores by the company in Mumbai and New Delhi.

(Source: www.computerworld.com— 8th December, 2023)

2 Attacks against personal data are up 300 per cent, Apple warns

Apple tells us more than 2.6 billion personal records have already been compromised by data breaches in the past two years.

It’s almost as though the best way to ensure your online data is safe is to make sure no one stores any of it. It feels likely that the Apple-commissioned study (“The Continued Threat to Personal Data”) is designed to reinforce the company’s arguments around the need for strong end-to-end data encryption and security.

• What Apple said?

In a statement, Craig Federighi, Apple’s senior vice president of software engineering, warned:

“Bad actors continue to pour enormous amounts oftime and resources into finding more creative andeffective ways to steal consumer data, and we won’trest in our efforts to stop them. As threats to consumer data grow, we’ll keep finding ways to fight back onbehalf of our users by adding even more powerful protections.”

• Attack velocity is increasing incredibly fast

The study, conducted by Massachusetts Institute of Technology professor Stuart Madnick, found clear proof that data breaches have become a global epidemic. The number of data breaches more than tripled between 2013 and 2022 and has continued to worsen in 2023.

The big message is that robust protection against breaches needs to be mandatory. End-to-end encryption, for example, is all the more important when criminals and dodgy government-backed spies are attempting to break into the servers your data sits on.

That’s less of a problem when even the server doesn’t understand and can’t read that information. If the server can’t read it, chances are neither can the perpetrators.

• We should use Advanced Data Protection

The report also delivers a pretty powerful message of recommendation for the need to enable Apple’s recently introduced Advanced Data Protection for iCloud.

Apple’s data protection already extends to encryption of critical information such as passwords and other sensitive information. Advanced Data Protection adds protection for Notes, iCloud Backup, and Photos to the list, though there are some limitations.

It really should concern anyone online that the momentum of these attacks is increasing so dramatically. In the US alone, there were nearly 20 per cent more breaches in just the first nine months of 2023 than in any prior year, Apple said.

The report also warns that more than 80 per cent of breaches involved data stored in the cloud, even as attacks against cloud infrastructure nearly doubled between 2021 and 2022.

• Attackers are sophisticated and well-resourced

Hackers are becoming more professionalised and better resourced, most security experts agree.Some even run help desks to assist impacted customers!

The deal is that ransomware is a huge business, one that benefits from more sophisticated attackers who have always known how to gather and combine small pieces of data from individuals lower down the enterprise security chain to violate security elsewhere.

Simen Van der Perre, strategic advisor at Orange Cyberdefense, recently warned that many of the most sophisticated ransomware attacks take place over time in different stages.

In this environment, you must expect every small vulnerability to be prodded and explored.

“Hackers are evolving their methods and finding more ways to defeat security practices that once held them back. Consequently, even organizations with the strongest possible security practices are vulnerable to threats in a way that wasn’t true just a few years ago,” Apple said.

• Encrypt all the things

“In recent years, we have seen an unprecedented increase in both the number of cyber threats and their sophistication, with attacks becoming more tailored as criminals aim for maximum impact, and maximum profit,” according to Bernardo Pillot (INTERPOL’s Assistant Director of Cybercrime Operations) who’s quoted in the report.

But making sure data is incomprehensible even if it is accessed is the company’s approach to personal and enterprise security. After all, if someone breaks into your online data but can’t make any sense of it, your data remains effectively safe.

Of course, data isn’t solely a problem for employees and users. All those data lakes held by a myriad of different firms are potential targets, and we’ve seen data brokers and government-related systems broken into enough times to understand that the information those systems hold about people should also be more effectively protected.

• We need bigger walls, not larger gates

Apple warns that because people now live more of their lives online, corporations, governments and other types of organisations collect more and more personal data — sometimes with little choice from individuals.

At the same time, the interconnected nature of global business means a successful hack against one small supplier making use of data about people at the company stolen elsewhere can give attackers access to information stored on servers belonging to a much larger company, putting everyone at risk.

Attacks of this kind can ruin customer relationships and bankrupt companies — and those nations that remove the protection of end-to-end encryption from consumer and business users alike had better recognise the risk they are taking with their population’s digital security and enterprise success.

Strong and robust digital protection is essential in a connected world, weakening that is a luxury no one can afford.

(Source: computerworld.com— 10th December, 2023)

2. ENVIRONMENT

1.World’s biggest iceberg A23a on the move after 30 years

The iceberg, called A23a, split from the Antarctic coastline in 1986. But it swiftly grounded in the Weddell Sea, becoming, essentially, an ice island. At almost 4,000 sq km (1,500 sq miles) in area, it’s more than twice the size of Greater London. The past year has seen it drifting at speed, and the berg is now about to spill beyond Antarctic waters.

A23a is a true colossus, and it’s not just its width that impresses. This slab of ice is some 400m (1,312 ft) thick. For comparison, the London Shard, the tallest skyscraper in Europe, is a mere 310m tall.

A23a was part of a mass outbreak of bergs from the White Continent’s Filchner Ice Shelf. At the time, it was hosting a Soviet research station, which just illustrates how long ago its calving occurred. Moscow dispatched an expedition to remove equipment from the Druzhnaya 1 base, fearing it would be lost. But the tabular berg didn’t move far from the coast before its deep keel anchored it rigidly to the Weddell’s bottommuds.

So, why, after almost 40 years, is A23a on the move now?

“I asked a couple of colleagues about this, wondering if there was any possible change in shelf water temperatures that might have provoked it, but the consensus is the time had just come,” said Dr Andrew Fleming, a remote sensing expert from the British Antarctic Survey.

“It was grounded in 1986 but eventually it was going to decrease (in size) sufficiently to lose grip and start moving. I spotted the first movement back in 2020.” A23a has put on a spurt in recent months, driven by winds and currents, and is now passing the northern tip of the Antarctic Peninsula.

Like most icebergs from the Weddell sector, A23a will almost certainly be ejected into the Antarctic Circumpolar Current, which will throw it towards the South Atlantic on a path that has become known as “iceberg alley”.

Eventually, all bergs, however big, are doomed to melt and wither away. Scientists will be following the progress of A23a closely. If it does land in South Georgia, it might cause problems for the millions of seals, penguins and other seabirds that breed on the island. A23a’s great bulk could disrupt the animals’ normal foraging routes, preventing them from feeding their young ones properly.

But it would be wrong to think of icebergs as being just objects of danger — Titanic and all that. There’s a growing recognition of their importance to the wider environment. As these big bergs melt, they release the mineral dust that was incorporated into their ice when they were part of glaciers scraping along the rock bed of Antarctica. This dust is a source of nutrients for the organisms that form the base of ocean food chains.

“In many ways, these icebergs are life-giving; they are the origin point for a lot of biological activity,” said Dr Catherine Walker, from the Woods Hole Oceanographic Institution, who was born in the same year as A23a. “I identify with it; it’s always been there for me.”

(Source: www.reuters.com— 25th November, 2023)

2 COP28 Summit in Dubai: Indian climate activist Licypriya Kangujam storms the stage

A 12-year-old protester burst onto the stage at the COP28 climate summit in Dubai. Conference of the Parties or COP28 saw many firsts this year. From organising the COP’s first-ever “Health Day” to hosting “the first-ever COP ministerial dialogue on building water-resilient food systems” — there were many events and “landmark” moments that embraced the COP28 climate summit.

Several countries clashed over a possible agreement to phase out fossil fuels at the COP28 summit in Dubai, jeopardising attempts to deliver a first-ever commitment to eventually end the use of oil and gas in 30 years of global warming talks.

Activists designated Saturday a day of protest atthe COP28 summit in Dubai. But the rules of thegame in the tightly controlled United Arab Emirates at the site supervised by the United Nations meant sharp restrictions.

Public protests have been limited at the United Nations talks that are being held in the United Arab Emirates, which bans many organised groups, including political parties and labour unions.

COP28 Summit in Dubai: Who is Licypriya Kangujam, an Indian protestor who dashed onto the stage?

1) Licypriya Kangujam is a child climate justice activist from India who was escorted away as the audience clapped, Reutersreported.

2) She delivered a short speech after rushing onto the stage at the COP28 summit in Dubai. The teenager protested against the use of fossil fuels.

3) “End fossil fuels. Save our planet and our future”, a 12-year-old protester ‘Licypriya Kangujam’ burst onto the stage at the COP28 climate summit in Dubai on Monday, holding a sign above her head.

4) COP28 Director-General Ambassador Majid Al Suwaidi said he admired the enthusiasm of young people at COP28 and encouraged the audience to give Kangujam another round of applause.

5) In a post on X (formerly Twitter), the activist wrote, “Here is the full video of my protest today disrupting the UN High-Level Plenary Session of #COP28UAE. They detained me for over 30 minutes after this protest. My only crime — Asking to Phase out Fossil Fuels, the top cause of the climate crisis today. Now they kicked me out of COP28.”

6) “Governments must work together to phase out coal, oil and gas – the top cause of the climate crisis today. Your action today will decide our future tomorrow. We are already the victims of climate change. I don’t want my future generations to face the same consequences again. Sacrificing the lives of millions of innocent children for the failures of our leaders is unacceptable at any cost,” she said.

7) The teenager also wrote, “Millions of children like me are losing their lives, losing their parents and losing their homes due to climate disasters. This is a real climate emergency. Instead of spending billions of dollars in wars, spend it on ending hunger, giving education and fighting climate change.”

8) “I’m a child who is completely frustrated by today’s climate crisis. We are the first line of victims. I feel the core issues of phasing out fossil fuels are kept inside in the negotiations process going on in the COP28 with over 2,500 fossil fuel lobbyists,” she added.

(Source: www.livemint.com— 12th December, 2023)

BCAJ Admin

Regulatory Referencer

I. COMPANIES ACT, 2013

1. Specified public companies may issue securities for listing on permitted exchanges in permissible foreign jurisdictions: MCA has notified 30th October, 2023 as the effective date for enforcement of section 5 of Companies (Amendment) Act, 2020. Section 5 of Companies (Amendment) Act deals with provisions related to public offers and private placement. New sub-sections have been inserted which states that a specified class of public companies may issue such class of securities for the purpose of listing on permitted stock exchanges in permissible foreign jurisdictions or other jurisdictions as may be prescribed. [Notification No. S.O. 4744(E), dated 30th October, 2023]

2. MCA notifies LLP (Significant Beneficial Owners) Rules, 2023: The MCA has notified LLP (Significant Beneficial Owners) Rules, 2023. The provisions of these rules shall apply to all the LLPs. As per the newly notified rules, every reporting LLP shall take steps to find out if there is any individual who is a significant beneficial owner, in relation to that LLP, and if so, identify him and cause such individual to make a declaration in Form No. LLP BEN-I. Existing SBOs shall file a declaration within 90 days from the commencement of these rules. [Notification dated 9th November, 2023]

II. SEBI

3. SEBI redesigns format for Mutual Fund scheme offer documents: In order to enhance the ease of preparation of the Scheme Information Document (SID) by mutual funds and increase its readability for investors, SEBI undertook an exercise to revamp the format of SID. In the revised format, SEBI has mandated AMCs to disclose the risk-o-meter of the Benchmark on the Front page of the initial offering application form, Scheme Information Documents (SID), and Key Information Memorandum (KIM); in the Common application form. The updated format is to be implemented w.e.f. 1st April, 2024.
[Circular No. SEBI/HO/IMD/IMD-RAC-2/P/CIR/2023/000175, dated 1st November, 2023]

4. SEBI introduces a procedural framework for dealing with unclaimed amounts lying with InvITs, REITs & specified entities: SEBI with an objective to make the process of claiming unclaimed funds by investors uniform, has specified a procedural framework for dealing with unclaimed amounts lying with InvITs, REITs and entities having listed non-convertible securities. Further, the norms w.r.t the manner of claiming such unclaimed amounts by investors have also been prescribed. The circular shall be effective from 1st March, 2024.
[Circular No. SEBI/HO/DDHS/DDHS-RAC-1/P/CIR/2023/178, dated 8th November, 2023]

5. SEBI mandates brokers to inform the most important terms and conditions to clients: SEBI with an objective to bring into focus the critical aspects of the broker-client relationship and for ease of understanding of the clients, mandates brokers to inform a standard Most Important Terms and Conditions (MITC) to the clients. Further, this MITC shall be acknowledged by the client. Further, the detailed norms for implementation of MITC shall be published latest by 1st January, 2024, by the Brokers’ Industry Standards Forum (ISF) in consultation with SEBI. [Notification No. SEBI/HO/MIRSD/MIRSD-POD-1/P/CIR/2023/180, dated13th November, 2023]

6. SEBI sets aside the norms w.r.t freezing of folios without PAN, KYC details and nomination: Earlier, the SEBI notified the norms w.r.t furnishing PAN, KYC details and nomination. Under the extant norms, if PAN, nomination, and other details were not submitted by holders of physical securities by 1st October, 2023, the folios shall be frozen by the RTA and shall also be referred by the RTA / company to the administering authority under the Benami Act/ PMLA. Now SEBI has decided to take away this to mitigate unintended challenges on account of freezing of folios. [Circular No. SEBI/HO/MIRSD/POD-1/P/CIR/2023/181, dated17th November, 2023]

III. FEMA AND IFSCA REGULATIONS

1. Permission to International Branch Campuses and Offshore Educational Centres at GIFT-IFSC to avail infrastructure services from Academic Infrastructure Service Providers: The IFSC (Setting up and Operation of International Branch Campuses and Offshore Education Centres) Regulations, 2022 enable globally reputed foreign universities or foreign educational institutions to set up International Branch Campuses (IBC) or Offshore Educational Centres (OEC) in IFSC. Based on requests from stakeholders, a circular has been issued allowing IBCs and OECs to avail of infrastructure and other support services from Academic Infrastructure Service Providers (AISP). The circular prescribes several conditions with respect to the type of infrastructure and support services that are permissible; eligibility conditions for the AISP; and obligations of the IBCs/OECs. [Circular eF.No.IFSCA-BDev./FU/1/2023-BD dated 14th December, 2023]

BCAJ Admin

Part A – Company Law

16 Case Law No. 01 /Jan 2024

In the matter of Shri Thiyagarajan Parthasarathy

Registrar of Companies, Tamil Nadu

F.NO.ROC/CHN/THIYAGARAJAN/ADJ ORDER/S.155/2023

Adjudication Order

Date of Order: 10th July, 2023

Adjudication Order for the violation of the provisions of Section 155 of the Companies Act, 2013 which do not permit holding more than one “Director Identification Number” (DIN).

FACTS

Shri Thyagrajan Parthsarathy made an application in DIR 5 before the office of the Regional Director (Northern Region) hereinafter RD for the surrender of his DIN.

RD further observed upon processing of application received in e-form DIR-5 with respect to the surrender of the second DIN that, the applicant earlier had applied for and obtained two DINs on the MCA portal, namely DIN: 03191514 dated 23rd August, 2010 (First DIN) and DIN: 09018479 dated 4th January, 2021 (Second DIN).

Thus, the applicant himself had admitted to holding two DINs and the same had been verified by the e-records of MCA. Further, it was observed that the DIN being surrendered was still associated with a company namely “M/s SPS HPL” and a new DIN was applied, while forming the new company i.e. “M/s SPS MPL”.

Thereafter, on request from the office of RD vide letter dated 5th September, 2022, the Adjudication Office (AO) i.e. Registrar of Companies, Tamil Nadu issued a Show Cause Notice to the director Shri. TP on 19th October, 2022 for violation of provisions of Section 155 of the Companies Act, 2013 for holding 2nd DIN. The AO issued an Adjudication hearing notice to the director Shri. TP vide letter dated 15th June, 2023.

Thereafter, Mr F, Practising Company Secretary representative of the Shri TP had appeared before the AO on 30th June, 2023 and admitted to the violation on behalf of Shri. TP.

Provisions of the Section 155 of the Companies Act, 2013 states that:

“No individual, who has already been allotted a Director Identification Number under Section 154, shall apply for, obtain or process another Director Identification Number.”

Whereas Section 159 of the Companies Act, 2013 reads as under:

“If any individual or director of a company makes any default in complying with any of the provisions of section 152, section 155 and section 156, such individual or director of the company shall be liable to a penalty which may extend to fifty thousand rupees and where the default is a continuing one, with a further penalty which may extend to five hundred rupees for each days after the first during which such default continues.”

HELD

AO after examination and hearing, held that Shri. TP had violated the provisions of Section 155 of the Companies Act, 2013 for which a penalty was imposed as per Section 159 of the Companies Act, 20l3. Further, AO noted that the clarification provided with respect to duplication did not seem satisfactory and that the 2nd DIN was obtained in violation of Section 155 of the Companies Act, 2013.

Therefore, in the exercise of the powers vested with AO under Section 454 (l) & (3) of the Companies Act, 2013 penalty imposed was as follows:

Name of the Officer in default	Amount of Penalty for 1^stDefault	Additional Penalty for Continuing Offence	Total amount of Penalty Imposed
Shri TP	₹50,000	₹4,53,500 (500*907) No. of days of default: 907 days	₹5,03,500

17 Case Law No. 02/Jan 2024

M/s Sarada Pleasure And Adventure Limited

No. ROC/PAT/Sec. 88/13364/691

Office of the Registrar of Companies, Bihar-Cum-Official Liquidator, High Court, Patna

Adjudication order

Date of Order: 27th July, 2023

Penalty order for non-maintenance of Statutory Registers under section 88 of the Companies Act, 2013.

FACTS

Registrar of Companies, Bihar (“RoC”) during the course of their inquiry, noticed that M/s SPAL had failed to maintain the statutory registers as required under sections 88 of the Companies Act, 2013. Thus, M/s SPAL and Mr RS, Mr SD and Mr SR, directors of M/s SPAL had violated the provisions of section 88(1) of the Companies Act, 2013 w.r.t. non-maintenance of the register of members, etc.

As per Section 88(1) of the Companies Act, 2013: Every company shall keep and maintain the following registers in such form and in such manner as may be prescribed, namely:

(a) register of members indicating separately for each class of equity and preference shares held by each member residing in or outside India;

(b) register of debenture-holders; and

(c) register of any other security holders.

Further, RoC had issued a show cause notice to M/s SPAL and Mr RS, Mr SD and Mr SR, directors of M/s SPAL for default under section 88(1) of the Companies Act, 2013 vide office letter dated 12th June, 2023 on which no reply was received.

Hence, RoC observed that the provisions of Section 88 (1) of the Companies Act, 2013 were contravened by M/s SPAL and therefore were liable for penalty under section 88 (5) of the Companies Act, 2013.

Section 88(5) of Companies Act, 2013 states that:

“If a company does not maintain a register of members or debenture-holders or other security holders or fails to maintain them in accordance with the provisions of sub-section (1) or sub-section (2), the company shall be liable to a penalty of three lakh rupees and every officer of the company who is in default shall be liable to a penalty of fifty thousand rupees”.

It was further observed that, as per the MCA portal, the paid-up capital of M/s SPAL is ₹2,22,56,77,000. As regards to its turnover, M/s SPAL has not filed its balance sheet since the financial year 2014-2015, hence the turnover M/s SPAL could not be ascertained. Therefore, the benefits of a small company under Section 446B could not be extended to M/s SPAL while adjudicating penalty.

HELD

The Adjudicating Officer (“AO”) after considering the facts and circumstances of the case, imposed a penalty as stated below for violation of Section 88(1) of the Companies Act, 2013 and the matter was disposed of.

Penalty on M/s SPAL: ₹3,00,000

Penalty on officers in default:

Mr RS (Director of M/s SPAL): ₹50,000
Mr SD (Director of M/s SPAL): ₹50,000
Mr SR (Director of M/s SPAL): ₹50,000

Further, it was directed to pay the penalty within 90 days of the date of the order.

BCAJ Admin

Part B – Service Tax

I. TRIBUNAL

25 Ours Aariya Bhavan vs. CGST & CE

2023-TIOL-1-36-CESTAT-MAD

Date of Order: 13th October, 2023

Whether service charge for the supply of bed rolls for the use of passengers travelling in A/C and First Class during train journeys would amount to business auxiliary service. Held, No.

FACTS

Appellant vide an agreement with Indian Railways Catering and Touring Corporation (IRCTC) supplied bed rolls for the use by passengers and collected a service charge from IRCTC and paid no service tax. A show-cause notice was issued proposing to levy service tax considering the activity and service charge towards business auxiliary service along with interest and imposed penalties. It was upheld by the adjudicating authority and also in the first appeal. It was argued for appellant that the clause (vi) of definition of business auxiliary service contained in section 65(19) of Finance Act, 1994 (the Act) relates to rendering of a service on behalf of a client whereas the service in the instant case of providing bed rolls is rendered to IRCTC and charge also is collected from them and no amount is collected from passengers. According to the department, the demand was legal and proper as the appellant had to clean bed rolls periodically and supply the same for passengers. Hence, it was covered by the definition of business auxiliary service in the clause invoked.

HELD

On examining the definition contained in section 65(19) of the Act, there was no merit found in sustainability of demand apart from non-justification of invoking of extended period.
Appeal was thus allowed on merits.

26 HSBC Electronic Data Processing India Pvt. Ltd. vs. CCT
2023-TIOL-1102-CESTAT-HYD
Date of Order: 20th November, 2023

Input services of advertising, air travel agents, courier services, erection, commissioning insurance, insurance auxiliary service, management consultancy etc., whether can be disallowed ad hoc?

FACTS

Appellant provided Information Technology (IT) or IT enabled service and claimed CENVAT credit on input services utilized for providing these output services. However, credit was disallowed under Rule 14 of CCR though a similar issue involved in refund proceeding under Rule 5 of CCR read with Notification No. 26/2012 and nexus theory was examined in detail allowing CENVAT credit. Hence, pursuant to the order of Commissioner (Appeals) which recorded that disallowances were arbitrarily done during adjudication and as a result of inadequate effort to determine justifiability, the eligibility or otherwise of the credit of tax on input services was in dispute. Considering the nature of activity, its relevance and judicial rulings, the benefit was extended to appellants on input services listed above in the said refund proceeding.

HELD

It was observed that the proceedings under Rule 14 and Rule 5 of CCR are similar in nature. Taking notice, the order of the Commissioner (Appeals), it was found that the issue involved was already adjudicated in detail and has been allowed in favour of appellants.

Hence the order was set aside.

27 Hawkins Cookers Ltd vs. CCGST & CE
2023-TIOL-1136-CESTAT-MUM
Date of Order: 6th November, 2023

CENVAT credit of service tax on outdoor catering service provided for canteen facilities for employees and staff during shifts and office hours, whether an eligible input service.

FACTS

Appellant, a manufacturer registered under Central Excise and also under service tax under reverse charge mechanism had a dispute with the department on eligibility of CENVAT credit of service tax paid on canteen facility provided by outdoor caterer. Per department, outdoor catering service is excluded from the definition of “input service” contained in Rule 2(l) of CCR for the period 1st January, 2016 to 30th June, 2016, and hence credit is disallowable with interest and attracting penalty under section 78. Both adjudicating authority and the appellate authority confirmed the liability with interest and penalties and hence, the present appeal. For appellant, it was conceded that the issue stood covered in the Larger Bench of the Tribunal in the case of Wipro Ltd. vs. CCE Bangalore – III 2018-TIOL-3256-CESTAT-Bang-LB. However, the extended period of limitation along with imposition of interest and penalty are not sustainable in view of the decisions of higher judicial forum in support of the same. Reliance was placed on:

a) ICCE 7 ST Rohtak vs. Merino Panel products Ltd. 2023 9383) ELT 129 (SC)

b) Hindustan Coca Cola Beverages Ltd. vs. CCE & ST Vadodara (2023) 2 CENTAX 116 (Tri. Ahmd), and

c) Sasken Technologies Ltd. vs. CCE Bangalore 2019-TIOL-3374 CESTAT Bang.

It was submitted for appellant that for the earlier period in their own case, Tribunal had allowed the appeal by way of remand for verification and passing of fresh order vide order dated 29th November, 2017. Thus it was claimed that the department was well aware of the issue of taking credit in respect of outdoor catering service. According to the department, however the issue has attained finality when Supreme Court upheld Karnataka High Court’s order denying credit of service tax on outdoor catering services in the case of Toyota Kirloskar Motors Pvt. Ltd. 2021(55) GSTL129 (SC) post 01/04/2011 and interest on irregular availment of CENVAT credit is provided under section 75 read with Rule 14 of CCR and consequently penalty imposed was sustainable.

HELD

Submissions of both the parties were heard, considered and discussed in detail to reach a conclusion that the appellant was registered under both Central Excise and Service Tax, and the department was well aware of the factual matrix of the case and grounds of suppression was unable to be accepted. Reliance in this context was placed on the case of Pushpam Pharmaceutical Company vs. CCE Bombay 1995 (78) ELT 401 (S.C) ruling that when the Revenue is aware of the facts, issuance of show cause notice should be confined to normal period. Also it was observed, similar situation and decision in the case of Anand Nishi Kawa Co. Ltd. vs. CCE Meerut 2005 (188) ELT 149 (SC) and it was observed and held that various Tribunal decisions bring out the fact that there was lack of clarity during the disputed period on the issue of availment of CENVAT credit of service tax on outdoor catering service and hence, was considered an interpretational issue. There were divergent views prevailing until it got settled by the Larger Bench in case of Wipro (supra) and ultimately also at the highest forum in Toyota Kirloskar (supra). Hence, invoking suppression and penalty under Rule 15(2) for demanding inadmissible credit cannot sustain. Hence, interest and penalty imposed were set aside and the matter was remanded back to original authority for re-quantification of demand for the normal period with regard to outdoor catering service and thus allowed appeal partly.

28 Naya Sarai SSS Ltd vs. CST & Others

2023-TIOL-1135-CESTAT-KOL

Date of Order: 23rd November, 2023

When work order clearly provided for execution of jobs as contractors, confirmation of demand as manpower supply was unsustainable.

FACTS

All the three appellant societies involved executed various jobs entrusted to them by Heavy Engineering Corporation Ltd. (HEC) and the impugned common order was passed for all the three appellants. Hence, all are taken together. As per specimen work order issued by HEC, according to appellants, fixed rate on Tonnage basis and the quantity was specified and not the number of workers to be employed. It had to be decided by each of the appellant societies to display the workers as required and number of days as they deemed appropriate. HEC being a PSU, however was responsible to avoid exploitation of labour and hence ensured adherence by appellants of Minimum Wages Act, deductions of ESI, CPF etc. and depositing the same to the respective authorities. The execution of work did not amount to supply of manpower as defined in section 65(68) of the Act read with section 65(105)(L). Reliance was placed inter alia on 2016 (41) STR 806 (Bom) CCCEX & ST Aurangabad vs. Shri Samarth Sevabhavi Trust and 2023 (73) GSTL 363 (Tri. Chennai) S Selvam vs. CCE & ST Tiruchirapally.

HELD

After interpreting the contract between the parties and perusing statutory provisions of manpower recruitment and supply agency and considering relied upon authorities, it was held that the work orders issued by HEC clearly revealed job and the quantity by contractors and not to supply or recruit manpower.

Hence, the orders were set aside.

BCAJ Admin

Effect of Unregistered Documents

INTRODUCTION

A transfer of a movable property can be affected by mere delivery and possession. However, any transfer of interest in an immovable property requires an instrument which is duly registered. What happens when such an instrument which needs to be registered is not registered? Can it transfer any interest or can it be used for any other purpose? Can it attract income-tax liability on the transferor? What would be the position under the Stamp Act on such unregistered instruments? These are some of the very interesting questions in this respect which have been answered by different decisions of the Supreme Court and High Courts. This article analyses some of the key principles and pronouncements on this very important facet of conveyancing law.

REGISTRATION ACT

The Registration Act, 1908 (“the Act”) provides for the registration of various documents. Under the Act, certain documents are subject to compulsory registration while for certain documents registration is optional. Under the Act, instruments which create, declare, assign, limit or extinguish any right, title or interest (vested or contingent) in any immovable property, exceeding ₹100 in value, need to be compulsorily registered. Similarly, leases of immovable properties which are made on a yearly basis exceeding a term of one year or reserving a yearly rent.

Documents containing contracts to transfer for consideration any immovable property in Part Performance of a Contract u/s. 53A of the Transfer of Property Act, 1882, which was executed on or after 24th September, 2001 must be compulsorily registered. It has been further provided that if such documents are not registered, then they shall not have any effect for the purposes of s. 53A of the Transfer of Property Act, 1882. A corresponding amendment has also been made to the Transfer of Property Act. In this respect, the decision in Rambhau Namdeo Gajre vs. Narayan Bapuji Dhotra, 2004 (8) SCC 614 is relevant wherein it held:

“Protection provided under Section 53A of the Act to the proposed transferee is a shield only against the transferor. It disentitles the transferor from disturbing the possession of the proposed transferee who is put in possession in pursuance to such an agreement. It has nothing to do with the ownership of the proposed transferor who remains full owner of the property till it is legally conveyed by executing a registered sale deed in favour of the transferee. Such a right to protect possession against the proposed vendor cannot be pressed in service against a third party.”

In addition to the Registration Act which specifies registration of certain documents, some other Statutes also provide for registration of documents pertaining to immovable properties. For instance, s. 54 of the Transfer of Property Act, 1882 provides that sale is a transfer of ownership in exchange for a price paid or promised or part-paid and part-promised. Such a transfer, in the case of tangible immovable property of the value of ₹100 and upwards, or in the case of a reversion or other intangible thing, can be made only by a registered instrument. It further provides that a contract for the sale of immovable property is a contract that a sale of such property shall take place on terms settled between the parties and it does not, of itself, create any interest in or charge on such property. In Narandas Karsondas vs. S.A. Kamtam (1977) 3 SCC 247, the Supreme Court observed:

“A contract of sale does not of itself create any interest in, or charge on, the property. This is expressly declared in Section 54 of the Transfer of Property Act. See Rambaran Prosad v. Ram Mohit Hazra [1967] 1 SCR 293. The fiduciary character of the personal obligation created by a contract for sale is recognised in Section 3 of the Specific Relief Act, 1963, and in Section 91 of the Trusts Act. The personal obligation created by a contract of sale is described in Section 40 of the Transfer of Property Act as an obligation arising out of contract and annexed to the ownership of property, but not amounting to an interest or easement therein.”

U/s. 107 of the Transfer of Property Act, 1882, a lease of immovable property from year to year for any term exceeding one year or reserving a yearly rent can be made only by way of a registered instrument. It further provides that all other leases of immovable property may be made by a registered instrument or by an oral agreement accompanied by delivery of possession.

EFFECT OF NON-REGISTRATION

U/s. 49 of the Act, any document which is required to be registered and is not registered shall not affect any immovable property, comprised in the document, or be received as evidence of any transaction affecting such property. S. 50 provides that registered documents shall in respect of the property they comprise, take effect against every unregistered document relating to the same property.

However, an unregistered document pertaining to immovable property and which is required to be compulsorily registered either under the Act or under the Transfer of Property Act shall still be admitted as evidence in a suit for specific performance or as evidence for any collateral transaction which does not require a registered instrument.

SC IN SURAJ LAMPS

The Supreme Court’s decision in the case of Suraj Lamp & Industries (P) Ltd. vs. State of Haryana, (2012) 1 SCC is of great significance in this respect. In that decision, the issue was the legality of the transfer of immovable property in the National Capital Region by executing an unregistered Agreement of Sale + an unregistered General Power of Attorney from the seller to the buyer and a Will executed by the Seller in favour of the buyer bequeathing the property to the buyer as a safeguard against the consequences of the death of the vendor before the transfer. This hybrid system was devised as an alternative to obtaining a registered and stamped conveyance for the property. The Court was faced with the validity of such an arrangement.

Ill-effects – The Court frowned on such hybrid arrangements and held that its consequences were disturbing and far-reaching, adversely affecting the economy, civil society and law and order. Firstly, it enabled large scale evasion of income tax, wealth tax, stamp duty and registration fees thereby denying the benefit of such revenue to the government and the public. Secondly, such transactions enabled persons with undisclosed wealth / income to invest their black money and also earn profit / income, thereby encouraging the circulation of black money and corruption. These transactions also had disastrous collateral effects. For example, when the market value increased, many vendors (who effected power of attorney sales without registration) were tempted to resell the property taking advantage of the fact that there was no registered instrument or record in any public office thereby cheating the purchaser. Such power of attorney sales indirectly led to the growth of the real estate mafia and the criminalisation of real estate transactions.

Agreement to Sale – The Supreme Court next considered the effect of an unregistered agreement to sell. It held that a transfer of immovable property by way of sale could only be by a deed of conveyance (sale deed). In the absence of a deed of conveyance (duly stamped and registered as required by law), no right, title or interest in an immoveable property could be transferred. Any contract of sale (agreement to sell) which was not registered would fall short of the requirements of sections 54 and 55 of the Transfer of Property Act and would not confer any title nor transfer any interest in an immovable property (except to the limited right granted under section 53A of that Act). According to that Act, an agreement of sale, whether with possession or without possession, was not a conveyance. Section 54 of the TP Act enacted that a sale of immovable property could only be made by a registered instrument and an agreement of sale did not create any interest or charge on its subject matter.

Power of Attorney – It then considered the scope of a Power of Attorney and held that a power of attorney was not an instrument of transfer in regard to any right, title or interest in an immovable property. The power of attorney was the creation of an agency whereby the grantor authorised the grantee to do the acts specified therein, on behalf of the grantor, which when executed were binding on the grantor as if done by him.

Will – Lastly, it is considered the essence of a Will. According to the Court, a Will was the testament of the testator. It was a posthumous disposition of the estate of the testator directing the distribution of his estate upon his death. It was not a transfer inter vivos, i.e., between living persons. The two essential characteristics of a Will were that it was intended to come into effect only after the death of the testator and was revocable at any time during the lifetime of the testator. So long as the testator was alive, a Will was not worth the paper on which it was written, as the testator could at any time revoke it. In the case under review, the seller was an individual and the buyer was a company. The seller had executed a Will in favour of the buyer. The Supreme Court observed:

“Execution of a Will by an individual bequeathing an immovable property to a company, is also incongruous and absurd.”

It is respectfully submitted that the above statement of the Court made in the context of the case needs reconsideration. There is no bar as to who can be a beneficiary under a Will. In this context the decision of the Supreme Court in Krishna Kumar Birla vs. Rajendra Singh Lodha, (2008) 4 SCC 300, is relevant. It was concerned with a Will being affected in favour of a `stranger’. It held that why an owner of the property executed a Will in favour of another was a matter of his / her choice. She had a right to do so. The court was only concerned with the genuineness of the Will. If it was found to be valid, no further question as to why she did so would be completely out of its domain. It concluded that a Will may be executed even for the benefit of anyone including animals.

SUBSEQUENT CASES

The above decision of Suraj Lamps has been endorsed by several subsequent Supreme Court decisions, including the latest one in Shakeel Ahmed vs. Syed Akhlaq Hussain, CA 1598/2023, Order dated 1st November, 2023, which it has again held that the law is well settled that no right, title or interest in an immovable property can be conferred without a registered document. It also held that the decision of Suraj Lamps is retrospective in nature since it emanates from various Statutes and earlier judgments on the same point. Hence, the principles laid down therein applied even to unregistered agreements to sale executed prior to the date of the decision, i.e., before 2009.

On facts similar to those found in Suraj Lamps, the Karnataka High Court in Smt. K. Shashikala vs. ACIT, [2023] 147 taxmann.com 315 (Kar)has held that in order to attract Section 2(47)(v) of the IT Act, it is absolutely essential that the sale agreement should be a registered agreement to sale. In the absence of the same, there was no transfer under the Income-tax Act by the land owner in favour of the buyer and hence, there was no liability to capital gains tax.

UNREGISTERED JDA

In the case of CIT vs. Balbir Singh Maini, [2017] 86 taxmann.com 94 (SC),the Supreme Court considered whether capital gains arose to the land owner by executing an unregistered joint development agreement (JDA). The Court negated this argument and analysed the provisions of s. 2(47) of the Income-tax Act along with s.53A of the Transfer of Property Act. It held that it was well-settled law that the protection provided under Section 53A was only a shield, and could only be resorted to as a right of defence. An agreement of sale which fulfilled the ingredients of Section 53A was not required to be executed through a registered instrument. The Court held that this position was changed by the Registration and Other Related Laws (Amendment) Act, 2001. Amendments were made simultaneously in Section 53A of the Transfer of Property Act and Sections 17 and 49 of the Indian Registration Act. By the aforesaid amendment, the words “the contract, though required to be registered, has not been registered, or” in Section 53A of the 1882 Act were omitted. Simultaneously, Sections 17 and 49 of the 1908 Act were amended, clarifying that unless the document containing the contract to transfer for consideration any immovable property (for the purpose of Section 53A of the 1882 Act) was registered, it shall not have any effect in law, other than being received as evidence of a contract in a suit for specific performance or as evidence of any collateral transaction not required to be effected by a registered instrument.

The Supreme Court held that the effect of the aforesaid amendment was that, on and after the commencement of the Amendment Act of 2001, if an agreement, like the JDA, was not registered, then it had no effect in law for the purposes of Section 53A. In short, there was no agreement in the eyes of law which could be enforced under Section 53A of the Transfer of Property Act. Thus, in order to qualify as a “transfer” of a capital asset under Section 2(47)(v) of the Act, there must be a “contract” which can be enforced in law under Section 53A of the Transfer of Property Act. A reading of Section 17(1A) and Section 49 of the Registration Act showed that in the eyes of the law, there was no contract which could be taken cognizance of, for the purpose specified in Section 53A. Hence, it concluded that there was no contract in the eyes of law in force under Section 53A after 2001 unless the said contract was registered. This being the case, and it being clear that the said JDA was never registered, since the JDA had no efficacy in the eyes of the law, no “transfer” under the Income-tax Act could be said to have taken place under the JDA.

POSITION UNDER MAHARASHTRA STAMP ACT

It may be noted that even though the legal position is as stated above, the Maharashtra Stamp Act, 1958 has amended the definition of conveyance in Article 25 of Schedule I to the Stamp Act. It provides that in the case of an agreement to sell immovable property, where the possession of any immovable property was transferred or agreed to be transferred to the purchaser before the execution, or at the time of execution, or after the execution of, such agreement, then such Agreement to Sell is deemed to be a conveyance, and stamp duty thereon shall be leviable accordingly. Hence, the net effect of this is that in the State of Maharashtra, an Agreement to Sell is stamped as if it were a conveyance.

Based on this feature in the Stamp Act, a question arose whether such an agreement changed the legal position in Maharashtra. The Bombay High Court in Naginbhai P. Desai vs. Taraben A. Sheth, 2003 AIR(Bom.) 192 answered the question in the negative. The Court held that Section 54 of the Transfer of Property Act specifically provided that an Agreement for Sale by itself did not create any interest in or charge on the property agreed to be sold. There was no transfer of any interest in the property. The fiction created by Explanation I to Article 25 of the Bombay Stamp Act by which the agreement for sale was to be treated conveyance was limited only for the purposes of the Stamp Act and for no other purpose.

USE FOR COLLATERAL PURPOSES

The Supreme Court in K.B. Saha and Sons P Ltd vs. Development Consultant Ltd, (2008) 8 SCC 564 has laid down how an unregistered document can be considered for collateral purposes. It could be used as evidence of collateral purpose as provided in s. 49 of the Registration Act. A collateral transaction must be independent of, or divisible from, the transaction to effect which the law required registration. A collateral transaction must be a transaction, not itself required to be effected by a registered document, that is, a transaction creating, etc. any right, title or interest in immovable property.

In M/s Paul Rubber Industries P Ltd vs. Amit Chand Mitra, CA No. 1598/2023,the Supreme Court held that the determination of the nature and character of a lease could not be treated as collateral under an unregistered lease deed since that constituted the primary dispute and hence the Court was excluded by law from examining the unregistered deed for that purpose.

It has been held in Ameer Minhaj vs. Dierdre Elizabeth (Wright) Issar,(2018) 7 SCC 639, that a contract to transfer the right, title or interest in an immovable property for consideration is required to be registered if the party wants to rely on the same for the purposes of Section 53A of the Transfer of Property Act to protect its possession over the stated property. However, when an unregistered sale deed is tendered in evidence, not as evidence of a completed sale, but as proof of an oral agreement of sale, then such a deed can be received as evidence. However, an endorsement needs to be made that it is received only as evidence of an oral agreement of sale. The Court held that the document is received as evidence of a contract in a suit for specific performance and nothing more.

In Balram Singh vs. Kelo Devi, CA 6733/2022, the Supreme Court was considering a question of the use of an unregistered Agreement to Sale for collateral purposes. It had to decide whether a decree for a permanent injunction could be passed on the basis of such an agreement which restrained the defendant from interfering with her possession. The Court held that such an unregistered document / agreement to sell was not admissible as evidence. The Supreme Court disallowed the permanent injunction. It held that being conscious of the fact that the plaintiff might not succeed in getting the relief of specific performance for such an unregistered Agreement to Sale, the plaintiff filed a simple suit for permanent injunction. While it was true that in a given case, an unregistered document could be used and/or considered for collateral purposes, but the plaintiff could not get the relief indirectly which otherwise he cannot get in a suit for substantive relief, namely, the relief for specific performance. Therefore, the Court held that the plaintiff could not get the relief even for a permanent injunction on the basis of such an unregistered document / agreement to sell.

It appears that this decision of Balram Singh is somewhat of a variance to the above-mentioned decision in the case of Ameer Minhaj. In Ameer Minhaj’s case, the Court allowed an unregistered contract as evidence in a suit for specific performance whereas in this case, the Court made an observation that the plaintiff would not succeed in getting the relief of specific performance for such an unregistered contract.

EPILOGUE

As would be evident from the above discussion, an unregistered document offers very little protection. Registering a document offers a “notice to the entire world” regarding the execution of the document. Registration also leads to revenue in the form of stamp duty and helps curb undervalued transactions in immovable properties.

BCAJ Admin

Part A – Goods and Services Tax

I. HIGH COURT

71 Xilinx India Technology Services Pvt. Ltd vs. Special Commissioner, Zone-VIII

2023 (78) GSTL 24 (Del.)

Date of Order: 1st September, 2023

Refund of IGST of a Subsidiary EOU incorporated in India providing services to its holding company outside India, cannot be denied by contending that the condition stated under section 2(6)(v) of the IGST Act 2017 are not satisfied.

FACTS

Petitioner, an Export Oriented Unit, had entered into an intercompany service agreement with its holding company located in the USA for export of information technology software services. Petitioner filed an application for refund of IGST amounting to ₹1,83,34,289 which was rejected by the respondent. A SCN was issued contending that condition under section 2(6)(v) of IGST Act which -provides that the petitioner and its holding company are merely establishments of a distinct person. Hence the condition was not satisfied and thus service provided did not constitute as export of services. Reply was filed by petitioner after referring to Circular No. 161/17/2021-GST dated 20th September, 2021 which expressly clarified that supply of services by a subsidiary of a foreign company, incorporated in India by establishment of said foreign company located outside India would not be barred by the condition stipulated under section 2(6)(v) of IGST Act. Petitioner further stated that the services provided were on their own account and were on principal-to-principal basis. Despite the detailed reasoning, the respondent without referring to the circular simply passed an order rejecting the refund.

HELD

The Hon’ble High Court held that services provided by a subsidiary of foreign company to its holding company are not covered under section 2(6)(v) of IGST Act. Impugned order was passed mechanically without application of mind ignoring and disregarding the basic provisions of law and circular. The respondent was directed to process the refund along with interest. Accordingly, petition was allowed in favour of the assessee.

72 Modern Insecticides Ltd. vs.

Commissioner CGST

2023 (78) GSTL 423 (P & H.)

Date of Order: 19th April, 2023

Amount deposited during the search operation cannot be treated as voluntary where no proceedings under section 74 of CGST Act, 2017 have been initiated and hence liable to be refunded to petitioner.

FACTS

Petitioner was a manufacturer of pesticides. On 5th March, 2020, respondent conducted a search operation at factory premises of petitioner, during which respondent seized all the documents and prepared a panchnama on the same day. Further, the respondent created an artificial shortage of goods without actual stock count which involved the GST and penalty amounting to ₹34,04,855 and ₹5,10,728, respectively. Petitioner deposited the said amount under pressure. Subsequently, a second search was conducted on 15th January, 2021, wherein director and CA of petitioner were detained. Both were released on a condition of deposit of ₹2.15 cr which was paid by reversing the ITC and surrender of refund application filed. Petitioner requested to refund the total amount of ₹2.54 cr as no proceedings were initiated by issuance of notice and no summons were issued under section 74(1) of the Act from the date of search till the amount deposited. Respondent contended that since petitioner had deposited money voluntarily, no notice was required to be issued. Being aggrieved, petitioner preferred this petition before Hon’ble High Court.

HELD

The Hon’ble High Court, relying upon the decision of Delhi High Court in case of Vallabh Textiles vs. senior intelligence officer and others2023 (70) STL 3 (Del) held that the amount deposited during search operation cannot be considered as voluntary. Department cannot issue Form GST DRC-01A for tax recovery since no proceedings were initiated by the department till date. The deposit of tax amount during search cannot be retained by the department and accordingly, the department was directed to refund the deposited amount along with interest.

73 Shyam Sel and Power Ltd. vs. State of U.P.

2023 (78) G.S.T.L. 283 (All.)

Date of Order: 5th October, 2023

Penalty under sections 129(3) and 130 should not be levied where there was a minor breach and no intention to evade tax was observed.

FACTS

Petitioner was engaged in manufacture and sale of industrial grade steel components. Goods sold by the petitioner were in transit from West Bengal to Kanpur were accompanied with all necessary documents such as tax invoice, e-way bill and goods receipts. Subsequently, these goods were intercepted by concerned authorities on the way and on verification it was found that the e-way bill had already been cancelled by the purchaser without informing the petitioner, the reason being disagreement with valuation and quantum of goods. Form MOV 06 was issued and goods were seized. Further, GST MOV 07 was issued seeking response from petitioner wherein no intention to evade tax was observed. Response submitted by petitioner that all e-way bills were filled up and they were unaware that the same were cancelled by purchaser was rejected. Further, order in Form MOV 09 was passed and penalty was imposed under sections 129(3) and 130 of CGST Act. Subsequently, an appeal filed by the petitioner was rejected. Aggrieved, a writ petition was filed before Hon’ble High Court.

HELD

High Court relying upon decision of Apex Court in case of Asstt. Commissioner (ST) vs. Satyam Shivam Papers (P.) Ltd. 2022 (57) GSTL 97 (SC), held that there was no intent to evade tax and goods in question did not reach the destination only due to circumstances beyond the control of petitioner. No such intention was observed for invoking proceedings under section 129(3) and 130 of CGST Act. It was a minor breach and proceedings should have been initiated under section 122 of CGST Act. Impugned order was set aside.

74 M. Sathess Kumar vs. Deputy State Tax Officer-2

2023 (78) GSTL 388 (Mad.)

Date of Order: 30th August, 2023

No Assessment Order shall be passed under section 73 of CGST Act, 2017 before considering the reply filed by the petitioner.

FACTS

Petitioner was engaged in providing works contract services to Government departments and local bodies. Subsequent to the increase in the rate of GST from 12 per cent to 18 per cent, notice was issued by respondent stating that petitioner had not paid excess liability. Petitioner submitted a reply on 24th July, 2023 but an order was passed by respondent on 25th July, 2023 without considering the reply submitted on the ground that petitioner failed to appear and submit their reply during 3 personal hearings granted previously. Aggrieved, writ petition was filed before Hon’ble High Court to quash the impugned order.

HELD

It was held that assessment order was passed by violating the principle of natural justice and the respondent is bound to consider the response submitted by the appellant before passing any impugned order. Respondent to grant one or more opportunities for personal hearing before passing a speaking order.

75 Rane Madras Ltd. vs.

Assistant Commercial Tax Officer (Appeals)

2023 (77) GSTL 382 (Mad.)

Date of Order: 2nd August, 2023

Appeal filed manually due to technical glitches on portal against TRAN-1/2 Order before issuance of Notification No. 29/2023-CT dated 31st July, 2023 cannot be rejected merely on account of delay as specified under Section 107 of CGST Act.

FACTS

Petitioner attempted to file an appeal against the TRAN-1 rejection order dated 28th February, 2023 electronically as per Rule 108 of CGST Rules. Due to technical glitches on the portal, the petitioner was not able to upload the appeal. Another attempt was made to file an appeal online which was unsuccessful. Subsequently petitioner filed a complaint on the portal on 31st May, 2023 to which there was a reply from GST Helpdesk on 13th June, 2023 that TRAN-1/2 orders are not enabled for Appeal on GST Portal and petitioner was asked to wait till further instructions were issued on this matter. Meanwhile, the petitioner filed an appeal manually on 12th June, 2023 which was rejected by respondent by issuing order on the ground that appeal was filed after time specified under section 107 of CGST Act. Aggrieved, writ petition was filed before Hon’ble High Court.

HELD

It was held that appeal should not be rejected on the ground of delay, where due to absence of facility on GST portal, appeal was filed manually. Petitioner had already complied with Notification No. 29/2023-Central Tax dated 31st July, 2023. Any appeal filed before issuance of this notification was considered to be filed on time and hence cannot be rejected on the basis of delay in filing appeal as per section 107 of the CGST Act. Respondent directed to dispose off the order on merits.

76 Vriddhi Infratech India (P.) Ltd vs. Commissioner, Commercial Tax

[2023] 157 taxmann.com 278 (Allahabad)

Date of Order: 23rd February, 2023

Whether the authorities have misread Form GSTR-9 by not taking into consideration the entire form, the orders passed confirming the demands are set aside.

FACTS

Notice under section 61 of the CGST Act was served upon the petitioner, claiming that in the annual return filed in the form GSTR-09, he has shown his turnover as R129.52 lakh which does not tally with his Bank Statement. The demand was confirmed by both the original as well as appellate authorities. The petitioner contended that the very basis of the notice is wrong since in his GSTR-9, the turnover of an amount R129.52 lakh is shown as only with regard to supply made to unregistered persons i.e., under the B2C category. It was thus contended that the authorities did not read the form as a whole.

HELD

The Hon’ble Court held that since the authorities concerned failed to take into consideration the entire form which at its end shows a total turnover of R2037 lakh in GSTR-9 and have committed the said misreading of GSTR-9, both the orders are liable to be set aside.

Note: The SLP filed against the said judgment is dismissed by the Hon’ble Supreme Court Refer (2023) 57 taxmann.com 279 (SC) dated 24th November, 2023.

77 Sine Automation and Integration (P.) Ltd.

vs. UOI

[2023] 157 taxmann.com 259 (Bom) Date of Order: 29th November, 2023

Where the petitioner filed a refund application for the period April 2018 to July 2019 and included therein ITC attributable to F.Y. 2017–18 which was standing to the credit of the petitioner in the form of a running account, the order rejecting the refund on the ground that it was not permissible for the petitioner to club both the periods i.e., period before 1st April, 2018 and subsequent period is set aside.

FACTS

The petitioner had made an application for a refund of the unutilized ITC under section 54(3) of the CGST Act, 2017 on export of goods under Letter of Undertaking (LOU) for the period April 2018 to July 2019. The said refund application included certain credits claimed even for the financial year 2017–18. The refund was sanctioned after due verification, however, the said order was challenged by the department before the Commissioner (Appeals) and the order directing payback of the refund was passed on the ground that as per Circular dated 18th November, 2019, the refund claim filed could not be spread across different financial years.

HELD

The Hon’ble Court held that as the credit which was available for the period prior to 1st April, 2018 pertained to the financial year 2017–18 the same was certainly available to the petitioner in its electronic ledger in the form of a running account, such refund cannot be denied.

78 Nemi Pharma Chem vs. Additional Commissioner of CGST & CX

[2023] 157 taxmann.com 478 (Bombay)

Date of Order: 14th December, 2023

Whether the assessee filed a request for adjournment allowing 30 days to make submissions, the Order passed without responding to the said adjournment request and without giving an opportunity of being heard is liable to be set aside.

FACTS

The petitioner was issued a show cause notice on 12th April 2023, however, there was no compliance of the said show cause notice by the petitioner. On 26th June, 2023, the petitioner filed a letter requesting the respondents to provide a copy of the said show cause notice, since the address at which it was issued was no more occupied by the petitioner and also requested for an adjournment of 30 days, so as to enable him to make submissions and for personal hearing. The respondents handed over the hard copy of the show cause notice dated 27th June, 2023. Thereafter, on 21st July, 2023, an Order-in-Original came to be passed.

HELD

The Hon’ble Court observed that the impugned order came to be passed within two weeks from the date of application for adjournment, without the respondents replying to the request for adjournment of the petitioner. The Court further held that the respondents ought to have also complied with the provisions of section 75(4) and provided an opportunity for a hearing where any adverse decision was contemplated against such a person. The Hon’ble Court held that since there has been a violation of principles of natural justice and the mandatory provision of section 75(4) of the CGST Act, the impugned Order was quashed with a direction to decide the matter afresh and for passing a reasoned order after considering the submissions made by the petitioners.

Note: The attention is also invited to the decision in the case of Cart2India Online Retail (P.) Ltd. vs. UOI [2023] 157 taxmann.com 212 (Bombay) wherein the Hon’ble Court held that where the petitioner had sufficiently indicated that he needed a personal hearing, merely because the petitioner did not appear on a scheduled date, in the absence of a valid reason, it should not have been presumed by the State Tax Officer that the petitioner is not interested in hearing.

79 Saloom Trading vs. Superintendent, Central Goods and Services Tax and Central Excise

[2023] 157 taxmann.com 46 (Kerala)

Date of Order: 22nd November, 2023

The Hon’ble Court recorded a prima facie view that the benefit of waiver of late fees for delay in filing of GSTR-9 for F.Ys. 2017–18 to 2020–21, granted by Notification No.8/2023 dated 31st March, 2023, should also be extended to persons who have filed the returns before 1st April, 2023.

FACTS

The issue before the Court was whether the benefit of waiver of late fee for delay in filing of GSTR-9 for the financial years from 2017–18 to 2021–22 filed during the period 1st April, 2023 to 31st August, 2023 as provided in Notification no. 08/2023 dated 31st March, 2023 should be extended to persons who have filed GSTR-9 before 1st April, 2023.

HELD

The Hon’ble Court granted one week’s time to file an affidavit on what basis different treatment is sought to be given to assessee’s filing GSTR-9 prior to 1st April, 2023, and thereafter for the purpose of treating differently for the purpose of benefit under the Amnesty Scheme. However, the Hon’ble Court recorded a prima facie view that any person who has filed GSTR 9/9C in respect of the financial years 2017–18, 2018–19, 2019–20, 2020–21, 2021–22 up to 31st August, 2023 should be eligible for the concessional late fee as mentioned in the said notification.Otherwise,it would amount to a violation of Article 14 of the Constitution of India since no intelligible differentia is coming out from the Scheme to differentiate an assessee/dealer who had filed GSTR-9/9C before 1st April, 2023 and an assessee/dealer who has filed GSTR-9/9C in between 1st April, 2023 to 31st August, 2023.

80 Nexus Motors (P.) Ltd vs. State of Bihar

[2023] 157 taxmann.com 538 (Patna)

Date of Order: 30th November, 2023

Although Notification No.53/2023-CT restricts the benefit of Amnesty allowing belated filing of appeals beyond the condonable period for orders passed up to 31st March, 2023, the High Court extended the said benefit even where the impugned order was passed after the said date stating that the order passed in at least three months before the date of the said notification i.e., 2nd November, 2023 should be considered for the beneficial treatment.

FACTS

The proper officer passed the order in original on 27th April, 2023, which was challenged by the petitioner before the first appellate authority five days after the condonable period of one month for filing of appeal u/s 107(4) of the CGST Act had expired.

HELD

The Court held that there is no power vested either in the Appellate Authority or in a Constitutional Court acting under Article 226 to extend the period of limitation, especially when there is a specific stipulation and period prescribed for the purpose of filing a delayed appeal. The Court however referred to the Amnesty Scheme notified under Notification No.53/2023- CT dated 2nd November, 2023, permitting the belated filing of appeal only in respect of orders passed by the proper officer on or before 31st March, 2023. The Court held that there is no rationale for the date of 31st March, 2023 fixed as a cut-off date and that the Notification itself was brought out on 2nd November, 2023. The Hon’ble Court therefore held that in such circumstances any order passed during at least three months before that date; the time provided for filing an appeal, ought to have been considered for such beneficial treatment. The Court, therefore, allowed the benefit under the notification to the petitioner and the order rejecting the appeal was set aside.

81 Diamond Beverages (P.) Ltd vs. Assistant Commissioner of CGST & CX

[2023] 157 taxmann.com 479 (Calcutta)

Date of Order: 15th December, 2023

A show cause notice reproducing the reply of the appellant and containing allegations without dealing with the contentions of the appellant cannot be said to have been issued with proper application of mind. Such a notice issued without considering the reply to the pre-show cause notice and without conducting any inquiry or investigation at the supplier’s end is liable to be set aside.

FACTS

The appellants were issued certain notices pointing out certain discrepancies and alleging that the appellants had availed/utilised input tax credit during the financial year 2018–19 on suppliers whose registration was cancelled retrospectively, and who had not filed GSTR3B Returns during the financial year 2018–19. The appellants filed a reply to the said notices from time to time. However, without considering the said reply to a pre-show cause notice in Part -A of Form DRC-01A was issued to the appellant computing a demand pertaining to the same allegations. The appellant submitted a very detailed reply to the pre-show cause notice giving all the factual details and also placing reliance on certain decisions of this Court as well as the Hon’ble Supreme Court. The appellant specifically sought an opportunity for a personal hearing. However, the impugned show-cause notice was issued to the appellant without considering the said reply. On challenging the said show cause notice, the learned Single Judge Bench disposed of the writ petition by directing the appellants to submit a reply to the show cause notice and raise all issues of facts as well as on law and also place the decisions on which they placed reliance. Aggrieved by the same, the petitioners filed an appeal before the division bench.

HELD

The Hon’ble Court noted that essentially, in their replies the appellants requested the authority to investigate at the supplier’s end, where there was an allegation of retrospective cancellation of the supplier’s registration and allegations, where the suppliers did not file the returns for the concerned financial year. The court therefore held that the authority was required to examine the reply given in the pre-show cause notice and considering the nature of allegations in the pre-show cause notice, it was supposed to investigate or inquire into the matter by taking note of the relevant details at the supplier’s end. The court further held that if that is not done, the true facts will not emerge and consequently, issuance of any show cause notice will be a fait accompli. The Hon’ble court noted that in the instant case, the authority has not conducted any such investigation and proceeded to issue the impugned show cause notice under section 73(1) of the Act.

The department argued that the replies given by the assessee were considered before issuing the impugned show cause notice. The Hon’ble Court observed that except for extracting the reply given by the appellants, the authority has not dealt with the contentions that were placed by the appellants in the reply to the pre-show cause notice. The court therefore held that the show-cause notice has been issued without due application of mind. Accordingly, the impugned show-cause notice was set aside and the matter is remanded back to the adjudicating authority to the stage of pre-show cause notice.

BCAJ Admin

Recent Developments in GST

A. NOTIFICATION

Notification No. 54/2023-Central Tax

dated 17th November, 2023

By above notification, the notification 27/2022 dated 26th December, 2022, is amended to notify Biometric Based Aadhaar authentication for GST registration in Andhra Pradesh.

B. ADVISORY / INSTRUCTIONS

a) The GSTN has issued Advisory dated 14th November, 2023, for Online Compliance pertaining to ITC mismatch-GST-DRC-01C.

b) Further Advisory dated 14th November, 2023, regarding ITC reversal on account of Rule 37(A) is issued.

c) Advisories dated 10th November, 2023, and 28th November, 2023, regarding procedure for provision related to the amnesty for tax payers who missed the appeal filing deadlines for the orders passed on or before 31st March, 2023, are issued.

d) Advisory dated 1st December, 2023, is issued about two-factor authentication for Taxpayers.

e) Further Advisory dated 1st December, 2023, regarding Pilot Project of Biometric-Based Aadhaar Authentication and Document verification, of GST registration applications of Andhra Pradesh, is issued.

f) Instruction No. 4/2023-GST dated 23rd November, 2023, is issued which is regarding serving of the summary of notice in Form GST-DRC-01 and uploading of summary of order in Form GST-DRC-07 electronically on the portal by the proper officer.

C. ADVANCE RULINGS

45. Liability on Canteen recovery — ITC — Inward transportation service

Kirby Building Systems & Structures India P. Ltd. (Order No. A. R. Com/21/2022

dated 15th November, 2023, (Telangana))

The facts are that the applicant M/s. Kirby Building Systems & Structures India Private Limited, Sangareddy, is into the manufacture and supply of pre-engineered buildings and storage racking systems. They provide canteen and transportation facilities to its employees at subsidised rates as per the terms of the employment agreement entered between the applicant and the employees.

In light of the above agreement, the applicant further submitted that by virtue of Section 46 of the Factories Act, 1948, they are obliged to run and maintain a canteen for their employees and for said purpose they are procuring canteen services from a third party who in turn is issuing invoice to the applicant by charging GST at a rate of 5 per cent.

The applicant submitted its say in brief as under:

“i. According to the applicant the canteen facilities provided to its employees do not qualify as supply u/s. 7 of the CGST Act and therefore no GST is leviable on the same.

ii. The applicant further relies on clarification provided by CBIC in Circular No. 172/04/2022 dt: 06.07.2022 and the press release no. 73/2017 dt: 10.07.2017 wherein it was clarified by the CBIC that prerequisites provided by the employer to its employees in terms of contractual agreement will not be subjected to GST.

iii. Further the applicant claims eligibility to ITC on the GST paid on canteen services in terms of provision to Section 17(5)(b) of the CGST Act, 2017 wherein it is provided that the input tax credit in respect of such goods or services or both shall be available, where it is obligatory for an employer to provide the same to its employees under any law for the time being in force.”

In respect of transportation service to employees, the applicant submitted that they are arranging for transportation facilities for the employees and recovering nominal amounts from the employees’ salaries towards the cost incurred for providing such transportation facility, without any commercial objective. It was submitted that:

“i. Such supply of transportation service shall not be treated as supply in terms of Section 7 of the CGST Act, 2017.

ii. That vide Notification No. 12/2017 dt: 28.06.2017, the intra-state supply of transport of passengers in non-air conditioned contract carriage, excluding tourism shall be exempted from the payment of Central tax; and that they are providing a service for transport of passengers in non-air conditioned contract carriage and therefore the service provided by them is exempt from tax.

iii. That the applicant is procuring bus services to facilitate smooth functioning of his business in the course of furtherance of his business and the cost incurred by the applicant pertaining to the transport facility provided to its employees is the expenditure incurred by the applicant in terms of the contract between the employer and employee. Therefore, that the applicant is eligible for input tax credit on the tax paid on hire of such vehicles.”

With the above background, following questions were raised.

“1. Whether GST is liable to be discharged on the recoveries being made by the applicant from its employees towards the canteen and transportation facilities provided to them?

2. Whether the applicant is eligible to avail input tax credit in respect of the GST paid on inward supplies used for providing canteen and transportation facilities?”

The learned members gave their different but concurring orders.

The sum and substance of the said order is that the canteen facility is as per requirement of Factories Act,1948, and the applicant is entitled to recover the cost as per Rule 68 of AP Factories Rules,1950, as adopted under Telangana Factories Rules.

The ld. members, in general, observed that if cost is fully recovered, then no cost will be borne by the applicant and hence no ITC. However, if only nominal amount recovered and rest born as cost, then the applicant will be eligible to ITC, as it is allowable as per section 17(5)(b) read with proviso thereto.

In respect of traveling inward, the ld. members were of the view that it is not under any statutory requirement but in the nature of personal consumption for employees.

Therefore, on inward transportation service, ITC is not eligible in view of section 17(5)(b), observed the ld. AAR.

On the supply outward side in both cases, it is held that if the providing service is as part of perquisite, then no liability to GST, but if it is against consideration as business, then such action will be liable to GST.

The ruling given by ld. AAR is as under:

Questions	Ruling
1. Whether GST is liable to be discharged on the recoveries being made by the applicant from its employees towards the canteen facilities provided to them?	If it is by way of perquisites not liable. However, if canteen services as a business are liable to GST.
2. Whether the applicant is eligible to avail input tax credit in respect of the GST paid on inward supplies used for providing canteen facilities?	ITC will be eligible in view of section 17(5)(b).
3. Whether GST is liable to be discharged on the recoveries being made by the applicant from its employees towards the transportation facilities provided to them?	If it is by way of perquisites not liable. However, if such services as business are liable to GST.
4. Whether the applicant is eligible to avail input tax credit in respect of the GST paid on inward supplies used for providing transportation facilities?	No ITC as it will be personal consumption.

46 Supply by sub-contractor to Contractor — separate supply than by principal contractor to its contractee

Immense Construction Co.

(Order No. A.R. Comm/13/2023

dated 13th November, 2022 (Telangana))

The Applicant M/s Immense Construction Company is a Firm registered under the Goods and Services Tax Act, 2017. It undertakes contracts / subcontracts of the entire work for Operation and Maintenance of Water Supply Projects / Sewerage Projects / Facilities.

The Applicant is awarded a contract by M/s. The Indian Hume Pipe Company Ltd. (referred to as “Principal Contractor”).

The Principal Contractor is awarded a contract by the State of Telangana, Mission Bhagiratha.

The subcontract agreement is carved out of the Principal Contract, and it clearly indicates scope of the work to be undertaken and obligations of such subcontractor. The conditions of subcontract also provide that the subcontract agreement is liable to termination if the work is not executed and maintained as per Guidelines of Mission Bhagiratha, State Government of Telangana.

It is also mentioned by applicant that value of goods is not more than 25 per cent of the subcontracted value (as can be verified from the Contract so awarded) and therefore exempted from payment of GST in terms of entry 3A in Notification No. 12/2017 – Central Tax (Rate) as amended by Notification No. 2/2018 Central Tax (Rate) dated 25th January, 2018; and that the subcontract only for supply of Man Power is Pure Service and hence exempted from payment of GST in terms of Entry 3 in Notification No. 12/2017 – Central Tax (Rate) as amended by Notification No. 2/2018 – Central Tax (Rate) dated 25th January, 2018.

The applicant further presented its Interpretation of Law for each of the above questions as under:

“a) That services provided by the Applicants are Pure Services;

b) That these services are ultimately provided to the State Government of Telangana;

c) That these services are in relation a function entrusted to a Municipality under Article 243W of the Constitution (the present work falls under Serial No. 5 of 12th Schedule being water supply for domestic purpose);

d) That the services are covered by the Entry No. 3 of Notification No. 12/2017 Central Tax (Rate) dated 28th June, 2017;

e) That the Applicant draws support from Circular No. 147/16/2011-Service Tax dated 21st October, 2011 issued under the erstwhile Service Tax regime wherein under similar situations the Department had clarified that the services provided by the subcontractors to the main contractors in relation to those very projects which are classifiable as Infrastructure Projects Works Contract Services, then they too will get the benefit of exemption so long as they are in relation to the very same Infrastructure Projects i.e. WCS;

f) That the Applicant also draws support from the observations of the Hon’ble Apex Court in the case of State of Andhra Pradesh vs. Larsen and Toubro 17 VST 1 (SC) – 2008-VIL-30-SC wherein it was submitted by the Company and upheld by the Court that the transfer of property in goods, as effected by the sub-contract, resulted in direct sale to the Contractee and consequently it did not involve multiple sales either in favour of the main contractor or in favour of the Contractee.”

In respect of ‘Pure Service’ they further submitted that the said transaction is covered by Notification No. 12/2017- Central Tax (Rate), dated 28th November, 2017, as amended by Notification No. 2/2018 dated 25/01/2018 under Entry 3 and it is exempt from Tax.

With above facts, following questions were raised:

“a. Whether the supply of Services by the Applicant to M/S. THE INDIAN HUME COMPANY LTD. is covered by Notification No. 12/2017- Central Tax (Rate), dated 28th November, 2017 as amended by Notification No 2/2018 – Central Tax (Rate) dated 25/01/2018;

b. If the supplies as per Question (a) are covered by Notification No. 12/2017 Central Tax (Rate), dated 28th November, 2017 as amended by Notification No 2/2018 Central Tax (Rate) dated 25/01/2018, then what is the applicable rate of Tax under the Goods and Services Tax Act, 2017 on such Supplies; and

c. In case, if the supplies as per Question (a) are not covered by the Notification supra then what is the applicable rate of tax on such supplies under the Goods and Services Tax Act, 2017.”

Based on above, the ld. AAR observed that the basic enquiry in this proceeding is regarding.

“1. Whether the supply of works contract services by a contractor and his procurement works contract services constitute two independent taxable events under the CGST Act.

2. Whether an exemption extended to a contractor supplying works contract services is applicable to his procurement of works contract.”

The ld. AAR made reference to the Notification No. 12/2017 – Central Tax (Rate), dated 28th June, 2017, which is amended vide Notification 2/2018 – Central Tax (Rate), dated 25th January, 2018, to include entry 3A in same in order to exempt works contract with value of supply of goods less than 25 per cent, when the said supply is made to the Central Government, State Government or Local Authority, etc., and if the activity is related to any function entrusted under Article 243G or 243W of the Constitution of India.

The ld. AAR observed that the exemption is not a general exemption but subject to conditions that the supply has to be made to Central Government, State Government or Local Authority, etc. The ld. AAR found that there is no mention in entry of sub-contractors making supply of such services to a contractor who in turn is making supplies under entry 3A of Notification 12/2017, as amended above.

The ld. AAR, making reference to judgments, held that the exemption entry is to be interpreted strictly. It is also observed that where it is felt necessary, the Government has mentioned the category of sub-contract also for grant of concession like, in Notification no. 1/2018 – Central Tax (Rate) dated 25th January, 2018, r/w. Notification no. 11/2017. The ld. AAR observed that though the CGST Act does not define a subcontractor, however, the Notification 11/2017, as amended, makes a mention of the subcontractor whose services are procured by the main contractor. Accordingly, the ld. AAR observed that the Scheme of the Act clearly identifies the subcontractor as a supplier of works contract services to the main contractor.

With above observations, the ld. AAR passed ruling as under:

“Questions	Ruling
a. Whether the supply of Services by the Applicant to M/S. THE INDIAN HUME COMPANY LTD. is covered by Notification No. 12/2017- Central Tax (Rate), dated 28^th November, 2017 as amended by Notification No. 2/2018 – Central Tax (Rate) dated 25^th January, 2018;	No
b. If the supplies as per Question (a) are covered by Notification No. 12/2017 Central Tax (Rate), dated 28^th November, 2017 as amended by Notification No. 2/2018 Central Tax (Rate) dated 25^th January, 2018, then what is the applicable rate of Tax under the Goods and Services Tax Act, 2017 on such Supplies; and	Not Applicable
c. In case if the supplies as per Question a are not covered by the Notification supra then what is the applicable rate of tax on such supplies under the Goods and Services Tax Act, 2017.	9 per cent CGST + 9 per cent SGST”

47 Business — Composite Supply in Education / Healthcare Services

Kasturba Health Society (Order No. MAH/AAAR/DS-RM/13/2022-23

dated 5th December, 2022, (MAH))

The facts are that the appellant had earlier filed an AR application, which was rejected. Against the said rejection, appeal was filed before AAAR. The said appeal was also rejected. Therefore, a writ petition was filed in Bombay High Court and Hon. Bombay High Court directed the authorities to decide the question raised in the AR application. Accordingly, the AAR decided issues vide its order in GST-AAR-120/2018-2019/B-90 dated 30th November, 2021. Some questions were decided against the appellant and hence, this appeal was filed before AAAR.

The basic facts are that the Kasturba Health Society was formed as a Charitable Institution by way of Registration under the Societies Registration Act, 1860, and also under The Bombay Public Trust Act, 1950, with the sole objective of attending the health needs of rural India.

The Appellant society was also registered under Section 12AA of the Income Tax Act, 1961, and it has other registrations also.

The appellant is imparting Medical Education, till Post Graduation. The appellant has its setup in the form of a “Medical College” named as “Mahatma Gandhi Institute of Medical Science”, at Village Sewagram. Dist. Wardha, which is attached with a clinical laboratory named as “Kasturba Hospital”.

The appellant was not registered under earlier BST/MVAT Act or Service Tax. However, entertaining doubt, this application for AR was filed under GST.

The questions put forward by appellant in its AR application and its replies by AAR are as under:

i. Whether the applicant, a Charitable Society, having the main object and factually engaged in imparting Medical Education, satisfying all the criteria of “Educational Institution”, can be said to be engaged in the business so as to cast an obligation upon it to comply with the provisions of Central Goods and Service Tax Act, 2017, and Maharashtra Goods and Service Tax Act, 2017 in totality.

Reply: Appellant engaged in business.

ii. Whether the applicant, a Charitable Society, having the main object and factually engaged in imparting Medical Education, satisfying all the criteria of “Educational Institution” is liable for registration under the provisions of section 22 of the Central Goods and Services Tax Act, 2017 and Maharashtra Goods and Services Tax Act, 2017, or it can remain outside the purview of registration in view of the provisions of section 23 of the said act as there is no taxable supply.

Reply: Liable for registration.

iii. In a situation, if above questions are answered against the contention of the appellant institution, then following further questions were raised for the kind consideration by the Honourable Bench.

a. Whether the fees and other charges received from students and recoupment charges received from patients (who is an essential clinical material for education laboratory) would constitute as “outward supply” as defined in section 2(83) of The Central Goods and Service Tax Act, 2017 and Maharashtra Goods and Service Tax Act, 2017, and if yes, then whether it will fall in classification entry at Sr. No. 66 or the portion of nominal amount received from patients (who is an essential clinical material for education laboratory) at Sr. No. 74 in terms of Notification 12/2017 Central Tax(R) – dated 28th June, 2017.

Reply: Charges are exempt from GST.

b. Whether the cost of Medicines and Consumables recovered from OPD patients along with nominal charges collected for Diagnosing by the pathological investigations, other investigation such as CT-Scan, MRI, Colour Doppler, Angiography, Gastroscopy, Sonography during the course of diagnosis and treatment of disease would fall within the meaning of “composite supply” qualifying for exemption under the category of “educational and /or health care services.”

Reply: Charges are exempt from GST.

c. Whether the nominal charges received from patients (who is an essential clinical material for education laboratory) towards an “Unparalleled Health Insurance Scheme” to retain their flow at one end for the purpose of imparting medical education as a result to provide them the benefit of concessional rates for investigations and treatment at other end would fall within the meaning of “supply” eligible for exemption under the category of “Education and/or Health Care Services.”

Reply: The charges are liable to 18 per cent GST.

d. Whether the nominal amount received for making space available for essential facilities needed by the students and staffs such as Banking, Parking, Refreshment, etc. which are support activities for attainment of main activities and further amount received on account of disposal of wastage would fall within the meaning of “supply”, qualifying for exemption under the category of “educational and / or health care services”.

Reply: The charges are liable to 18 per cent GST.

This appeal was filed against the above ruling of ld. AAR. In appeal, the appellant mainly contended that it is not doing any business and, therefore, GST not applicable to it.

Similarly, the ruling about taxability of charges was contested as erroneous.

In the course of appeal, the department also made its submission and reiterated that the AR is correctly decided.

The ld. AAAR thereafter analysed the argument of both sides.

Regarding the first issue as to whether the impugned activities of Appellant of providing educational services by way of imparting medical education through MGIMS, and providing the health care services through Kasturba Hospital, can be construed as “Business” in terms of the provisions of CGST Act, 2017, the ld. AAAR examined the definition of “Business” provided under section 2(17) of the CGST Act, 2017.

The ld. AAAR also observed that the appellant is doing such job or work which requires the services of highly educated, trained and skilled persons in the form of doctors hired by them for imparting the medical education to the students and hence, the said work done by the appellant is in the nature of “profession”, and accordingly, it is to be construed as “business” in terms of the GST provisions. The provision of health care services by the Appellant through its establishment, Kasturba Hospital, is also “profession” as envisaged under the definition of the term “business” provided under the GST law. The ld. AAAR held that the appellant is in business.

The ld. AAAR also examined whether the said activities of educational services and health care services undertaken by the Appellant will be construed as “supply” in terms of section 7(1)(a) of the CGST Act, 2017 or not. The definition of “supply” also reproduced as under:

“Section 7

(1) For the purposes of this Act, the expression ‘supply’ includes-

(a) ‘all forms of supply of goods or services or both such as sale, transfer, barter, exchange, license, rental, lease or disposal made or agreed to be made for a consideration by a person in the course or furtherance of business.’”

The ld. AAAR observed that following criteria is to be fulfilled for activity to be ‘supply’.

“i. that such supply should be made by a person for a consideration;

ii. that such supply should be made in the course or furtherance of business;”

The ld. AAAR held that the appellant fulfils criteria of being a person, the activity being in the course of business and hence, the activities are ‘supply’ under GST.

Coming to the next issue about exemption, the ld. AAAR held that the activities of imparting medical education

to the students squarely fit under entry at Sl. No. 66 of the exemption Notification No. 12/2017-C.T. (Rate) dated 28th June, 2017, which reads as under:

“Sl.

No.

Chapter, Section, Heading, Group or Service Code (Tariff)

Description of Services

Rate

(percentage)

Conditions

Heading 9902

Services provided – (a) by an educational institution to its students, faculty and staff;

NIL

NIL”

The ld. AAAR observed that the services of medical education provided by the Appellant-Society is recognised by the Maharashtra University of Health Sciences, Nashik and Nagpur University, hence it falls under the category of “educational institution” as defined under the GST law, and accordingly, the ld. AAAR held that the medical education services provided by the Appellant to the students will attract NIL rate of GST as per the aforesaid entry 66, and allowed it as exempt.

Regarding the second activity of the health care services also, the ld. AAAR held that it will squarely fit under the entry at Sl. No. 74 of the exemption Notification No. 12/2017-C.T.(Rate) dated 28th June, 2017, which reads as under:

“Sl.

No.

Chapter, Section, Heading, Group or Service Code (Tariff)

Description of Services

Rate

(percentage)

Conditions

Heading 9993

(a) Services by way of (a) health care services by a clinical establishment, an authorized medical practitioner or paramedics;

(b) services provided by way of transportation of a patient in an ambulance, other than those specified in (a) above.

NIL

NIL”

The ld. AAAR observed that the services of appellant are ‘health care services’ and will be exempt from the payment of GST in terms of the entry at Sl. No. 74 above.

The learned AAAR observed that the above services are ‘outward services’ as appellant receives charges from students and recoupment charges from patients which constitute consideration for outward supply.

Accordingly, the ld. AAAR held that the core services of the Appellant, viz. provision of medical education to the students and provision of health care services to the patients, are exempted supplies.

In respect of cost of medicines and consumables recovered from OPD, patients along with nominal charges collected for diagnosis etc. during the course of diagnosis and treatment of disease, the ld. AAAR held that they are covered by scope of ‘composite supply’ as defined in section 2(30) of GST Act.

The ld. AAAR, therefore, held that they are exempt along with core health care services.

Regarding the recovery under the second activity, namely, “Unparallel Health Insurance Scheme” under which the Appellant collects a nominal specific amount from the public who intends to avail the health care services from the Appellant in future at the concessional rate, the ld. AAAR observed that it is not an insurance service in real terms as it is not under licence from IRDAI. The AAR has classified the said activities as liable to GST at 18 per cent. However, the ld. AAAR concurred with the Appellant’s contention that the said nominal amount being charged by them are in the nature of advances towards the provision of the health services which would be provided to the subscribers of the said scheme. Therefore, the ld. AAAR held that receipts are eligible for exemption under the entry at Sl. No. 74 of the exemption Notification No. 12/2017-C.T. (Rate) dated 28th June, 2017.

Regarding further activity of providing space for the facilities, like Banking, Parking, Refreshment Canteen, etc., the ld. AAAR observed that the said activities are not directly provided to the students or patients, who are the recipients of the main services of the Appellant. The receipts are from third parties for renting of immovable property by way of providing space for the facilities like banking etc., who are running these establishments on their own account.

The ld. AAAR held that they are, therefore, not composite supply as not provided to the same one person but two separate persons.

Accordingly, the ld. AAAR held the said receipts taxable at the applicable rate of 18 per cent.

In respect of receipts on account of disposal of wastes such as medical equipment, apparatus and other instruments, etc., by selling them to the interested vendors, the ld. AAAR held them as independent activity and hence ruled as liable to tax.

Accordingly, the ld. AAAR concurred with replies of AAR mentioned in questions (i), (ii), (iii)(b) and (iii)(d). The ld. AAAR modified the ruling in respect of (iii)(a) and (iii)(c) to hold said activities as exempt.

Classification — ‘Honeycomb paper for wrapping’

V. M. Technocoatings (AR No. UP-ADRG-11/2022 dated 30th August, 2022 (UP))

The applicant is undertaking a process to prepare eco-friendly expandable paper wrap (replacement of bubble wrap) from kraft paper and to sell the same in open market.

The process is explained as under:

“First they prepare the core material by using the two or more sheets of honeycomb like structure kraft paper which is glued together in an alternate glue strip pattern to create structure of multiple layers of kraft paper in vertical direction. These corrugated layers open out in the form of continuous honeycomb like grid with center of each corrugated strip attached to another layer of corrugated strip upon expansion. Depending upon the product being packed with this material, multiple paper honeycomb wrap may be glued together to make specific design of packing material.

These paper honeycomb used in the primary packing of goods as a cushioning material, separators or edge protector, to make shipping cartons of goods and as pallets and pallet boxes.

This paper honeycomb wrap consists of 80 to 90% of kraft paper and rest is other adhesive, hence this paper honeycomb wrap classifies under HSN 4808 category. Contrary to this, 4823-chapter heading is more oriented towards ‘other paper, paperboard, cellulose wadding and webs of cellulose fibers’ etc. and not specific to kraft paper products.”

The applicant made reference to the fact that the main raw material to make honeycomb wrapping paper contains 80–90 per cent of kraft paper, and the rest other things are consumable items.

Reliance placed on order of Karnataka AAR in the case of M/s. Lsquare Ecoproducts Pvt. Ltd. (2020 (37) GSTL 394 (AAR-GST-Kar-2020-VIL-123-AAR)) where in it held as below:

“Therefore, on verification of the structure and purpose for which kraft paper honeycomb board or paper honeycomb board used are similar to the corrugated paperboard (listed under 4808 10 00), only difference is that this paper honeycomb board consists of honeycomb like structure core material at the center and on either side of this one or more layer of kraft paper is glued by using adhesive with fluting direction being perpendicular to corrugated boards. Hence this honeycomb paperboard classified under the Heading 4808 90 00 as other instead 4808 10 00.”

In the above case, the same item is held as covered by heading 4808-9000 attracting GST at 12 per cent.

The applicant also referred to the setting of heading 4808 in Custom Tariff.

The ld. AAR also considered the submission of the department, wherein they submitted that the item is classifiable under Chapter Sub-heading No. 48239013.

The ld. AAR observed about meaning of ‘paper’ referring to dictionary as under:

Meaning of the said word is explained in The Shorter Oxford Dictionary [Volume 2 (Third Edition)] as- “a substance composed of fibres interlaced into a compact web, made from linen and cotton rags, straw, wood, certain grasses, etc. which are messed into a pulp, and pressed; it is used for writing, printing, or drawing on, wrapping things in, for covering the interior or walls, etc.”

Encyclopaedia Britannica says – “Paper, the general name for the substance commonly used for writing upon or for wrapping things in.”

In Unabridged Edition of the Random House Dictionary of the English Language the word “paper” has been defined as “a substance made from rags, straw, wood or other fibrous material, usually in thin sheets, used to bear writing or printing on or for wrapping things, decorating walls etc.”

As per Webster’s Dictionary- “Paper, a thin flexible material made in leaves or sheets from the pulp of rags, straw, wood or other fibrous material and used for writing or printing upon or for wrapping and various other purposes.”

Accordingly, the ld. AAR observed that in popular parlance the word “paper” is understood as meaning a substance which is used for writing or printing, or for packing or for drawing on, or for decorating, or covering walls.

The ld. AAR after referring to the process adopted by the applicant also made reference to judgment of Hon’ble Rajasthan High Court in the case of Deepak Agencies vs. Assistant Commercial Tax Officer, (1993) 90 STC 376 (Raj) to ascertain the meaning of ‘paper’.

The ld. AAR held that the intended use of the material in question should be the guiding factor for deciding the classification of the commodity.

The ld. AAR also referred to the scheme of classification under GST with reference to Notification no. 1/2017-Central Tax (Rate) dated 28th June, 2017, and also to General Rules for the Interpretation of Import Tariff which provides for classification of goods in this Schedule.

After examining the schedule of Tariff, the ld. AAR observed as under:

“As per Rule 3(a) of General Rules for the Interpretation of Import Tariff, the heading which provides the most specific description shall be preferred to headings providing general description. The Tariff item 48239013 contains specific description of Packing and wrapping paper. The product ‘eco-friendly expandable paper wrap (honeycomb paper for wrapping)’ is manufactured from the kraft paper and adhesives and the same is used in wrapping/packing as such Rule 3(a) of General Rules for the Interpretation of Import Tariff will apply and the same merits classification under HSN 48239013.”

After considering the above position the ld. AAR gave ruling as under:

“25. Ques. Whether HSN applicable to eco-friendly expandable paper wrap (honeycomb paper for wrapping) is 48239013 or 48084090?

Answer- The HSN code of the product namely “eco-friendly expandable paper wrap (honeycomb paper for wrapping) is 48239013.”

BCAJ Admin

Corporate Guarantee: Quasi Capital or Taxable Service

Business Conglomerates fund their SPVs, subsidiaries, joint ventures, etc., with self-generated capital and / or leveraged capital. The downstream entity may not be capable of attracting debt capital based on its own net-worth and would require an intervention of the parent entity to guarantee such debt. In many cases, they are also issued to notch-up the credibility of the debt entity and reduce the cost of debt capital.

These Guarantees are reported in the financial statements (as contingent liabilities), Transfer pricing reports (as international transactions), Bank sanction letters and have caught the taxman’s eye of a possible revenue leakage, creating significant litigation under the Direct and Indirect Taxes domain. Therefore, it would be apt to unravel the concept of Guarantees, their forms / types, and the tax exposure they carry under the GST law.

COMMERCIAL UNDERSTANDING

Guarantees are contracts which grant the financier of capital the “assurance” over the repayment capacity of the borrower and carry an “obligation” to make good any default by the borrower entity. In many cases, promoters / directors of the Company (being the deployers of the capital) are also roped into the financial arrangement and made personally liable in case of any default. Such guarantees may also be backed with realisable security (such as deposits, capital assets, mortgageable / pledge assets, etc.,) to secure any default of the guarantor itself.

TYPES OF GUARANTEES

1) Bank guarantees / performance bank guarantees — Banks and FIs issue Guarantees to third parties at the insistence of their customer securing the performance of a financial obligation by the said customer. These guarantees are backed with liquid or illiquid securities which secure any possibility of default by the entity whose obligations are being underwritten. These are issued in Government / large contracts where a contractor must project his financial commitment to deliver such contracts. Banks charge a guarantee commission for the issuance of such guarantee which is liable to GST.

2) Corporate / personal guarantees — Banks / FIs insist that debt capital is supported by due corporate guarantees from their parent entities and hence incorporate guarantee conditions. The parent companies may not charge any fee from the funded entity towards such a guarantee. Promoters / Directors, etc., also extend personal guarantees and are barred from recovering any fee from the related entity in terms of the RBI Master Circular No. RBI/2021-22/121 dated 9th November, 2021.

3) Commercial / standby letter of credit (LC) — This is used commonly in international trade¹. LC is an undertaking, or a guarantee issued, generally by a Bank, to pay to the beneficiary a certain or determinable amount upon simple demand or on presentation of specified documents. Commercial LCs are distinct from standby LCs to the extent that the former involves an upfront payment obligation to the beneficiary while in the case of the latter, the payment obligation is triggered only on a default by the person whose obligation is being guaranteed. Like the Bank guarantee commission, the LC issuance fee is liable to GST.

4) Contractual Performance Guarantee — Similar to bank performance guarantee, the parent entity also guarantees that its SPV, being the awardee of the contract, would successfully and satisfactorily execute the obligations under the contract. It also includes a guarantee that the contract would be performed with the material and workmanship meeting the required standards.

5) Letter of Comfort — Letters of comfort are issued by the Parent entity, more as a moral commitment rather than a legally binding obligation, to discharge the debts of the funded entity in case of there being any default therein. No explicit cost is charged either by the bank / FI from the parent entity for this facility.

Among the above, guarantees by third parties (such as Banks / FIs) are simple and against valuable consideration, and are clearly chargeable to GST. Other forms of guarantee involving related entities (such as Corporate / personal Guarantees, etc.,) have come to the forefront regarding the applicability of GST, in the absence of any visible consideration in the contract. We could address this by going back to the genesis of guarantees from the Contract Act.

1. Governed by Uniform Customs & Practice for Documentary Credits (UCP-600)

INDIAN CONTRACT ACT, 1872

Chapter VIII of the Indian Contract Act, 1872 titled as “Indemnity and Guarantee” contains special provisions for Contract of Guarantee:

“126. A “contract of guarantee” is a contract to perform the promise, or discharge the liability, of a third person in case of his default. The person who gives the guarantee is called the “surety”; the person in respect of whose default the guarantee is given is called the “principal debtor”, and the person to whom the guarantee is given is called the “creditor”. A guarantee may be either oral or written.

127. Anything done, or any promise made, for the benefit of the principal debtor, may be a sufficient consideration to the surety for giving the guarantee.

145. In every contract of guarantee there is an implied promise by the principal debtor to indemnify the surety, and the surety is entitled to recover from the principal debtor whatever sum he has rightfully paid under the guarantee, but, no sums which he has paid wrongfully.”

Contracts are a set of promises and counter-promises wherein each party undertakes an obligation for the benefit of the other. Section 2 of the Contract Act beautifully lays down the sequence in the formation of a contract – a proposal by the promisor, its acceptance by the promisee, leading to an agreement between the promisor and promisee and then finally being sealed as an enforceable contract. Guarantees are one such type of contract of counter-promises which have to evolve through this very same process.

Unlike typical contracts, the definition of guarantee identifies three parties to a contract – “Surety / Guarantor” giving the guarantee, such guarantee being given to the “principal creditor” and the guarantee being rendered in respect of the default of “principal debtor”. The subject-matter of the guarantee (when invoked by the Creditor) could be the “performance of a promise” or “discharge of a liability” of the principal debtor. Each of these terms / phrases are significant and have to be specifically identified in a contract of guarantee. Pictorially it would appear as follows:

Speaking in contract language, the Surety promises / assures the Creditor that the financial assistance proposed to be issued to the Debtor is backed by its guarantee and in the event of the default being committed by the Debtor, the Surety would step into the shoes of such debtor and make good the financial assistance which has been rendered to the Debtor. In the tri-party arrangement, the liability of the debtor and the surety are co-extensive and alteration of the liability simultaneously alters the rights of both parties vis-à-vis the Creditor.

The subject-matter of a contract of guarantee flows from the Surety to the Creditor i.e. the promise of a guarantee, and the recipient of such guarantee is the Principal Creditor. It is against the promise of guarantee that the Principal Creditor extends the financial assistance to the Principal Debtor. Therefore, there are two sets of promises in such a scenario (a) one being the promise of guarantee by the Surety / Guarantor (as a promisor); and (b) the promise of rendering the due financial assistance by the Creditor to the debtor (being the consideration against the promise of guarantee). This would be crucial while applying the concept of supply and consideration under section 7 of the GST law (elaborated later).

After defining the contract of guarantee, section 127 now proceeds to define the consideration of the contract of guarantee. One may note that the Creditor and the Debtor are engaged in an independent debtor-creditor arrangement². The contract of guarantee acts as a top-up to the underlying arrangement where the surety may not receive any direct benefit from the Creditor for extending its assurance / promise. As can be seen from the diagram above, the assurance / guarantee does not have any reciprocal flow of consideration back to the Surety / Guarantor either from the Creditor of Debtor. Thus, in the absence of any consideration, direct or indirect, flowing to the Surety, it was imperative that such contracts are given statutory enforceability, else may constitute a void contract. Section 127 fills this gap by stating that the ‘financial assistance to the Debtor’ against the ‘promise of Guarantee’ would constitute sufficient consideration to the Surety for a rendition of the promise of Guarantee. Technically speaking, the financial assistance to the debtor would constitute sufficient discharge by the Creditor under the contract of guarantee and the Surety cannot claim any further consideration from the Creditor for rendition of such guarantee. However, there is an option for the Surety, though no contractual obligation, to claim a consideration from the Debtor for agreeing to issue such a guarantee.

2. Mak Impex Chemicals vs. UOI AIR 2003 Bom 88

Section 128–144 of the said Act defines the rights, obligations, liabilities, and discharge of the Surety on account of the guarantee extended to the Creditor. Section 145 is critical as it defines the relationship between the Debtor and Surety—it states that there is an implied responsibility by the Debtor to ‘indemnify’ the Surety against all costs which the surety has rightfully incurred under the Contract of guarantee (including costs of defending suits, etc.,). This section grants legal protection to the Surety to proceed against the Debtor for recovery of all costs under this contract despite there being no express contract between these parties. This is akin to an implied contract of indemnity underlying the contract of guarantee and establishes an indemnifier-indemnity holder relationship.

REVENUE’S CONTENTION UNDER GST

Now turning to the revenue’s understanding of this arrangement. Revenue claims that Banks generally charge a fee from third parties for the issuance of Bank guarantees. Corporates issuing guarantees within group entities ought to charge a similar fee to be considered at arm’s length. The issuance of the guarantee is at the request of the related entity. Hence, there is a service being rendered by Surety in delivering a guarantee to the Bank. Thus, the transaction aptly fits into Entry 2/4 of Schedule I and is liable to tax in the hands of the Surety under the residuary services entry @ 18 per cent. In cases where the Surety is located outside India or personal guarantees are provided by Promoter-Directors, RCM is proposed by the Debtor Company as a “recipient” of Corporate Guarantee services. To further the case of the revenue, the GST council has inserted Rule 28(2) to provide a mechanism to value such services. A Circular has also been issued elaborating on the valuation methodology in corporate / personal guarantees.

APPLICATION OF GST LAW

With this backdrop, the points for examination would be as follows:

a) Is there any service between the Surety and the Debtor (as related persons) under a contract of guarantee?

b) Can the guarantee form part of the ‘shareholder function’ as it is provided by the parent company in respect of its related company whose shares it holds?

c) If at all there is a service being imputed under law, what is the taxable value of such service?

Section 7 of GST law stands upon four important pillars (a) an act of supply of goods / service; (b) supplier-recipient relationship; (c) consideration for such supply; (d) supply being in the course or furtherance of business. In cases where a service is being imported from outside India, it is taxable whether or not, it is in the course of business. In respect of related parties, Entry 2/4 of Schedule I excludes the requirement of ‘consideration’ for an activity to constitute a supply.

GST being levied on a transaction of supply can be termed as a “transaction-based tax” involving two or more persons. The Contract Act lays down the foundation for transactions which emanate from contracts between two or more persons. Thus, it is important to intertwine the contract law and the GST law to understand the deemed GST implications in case of related entities located either in India or outside India. The analysis is to take place in two parts (a) Cases where no commission / fee is charged for such activity from related parties (b) Cases wherein a specific charge is made from the related party for such activity. For analysis, “A” may be considered as the Creditor; “C” as the Debtor and “B” as the Guarantor / Surety for the Debtor, with B and C being related entities.

A) Cases where no fee is charged from the Debtor

Is there an Act / Contract of Supply between B and C?

The primary question is whether at all, there is a service being rendered by B to C by issuing guarantee to A, or is it a self-activity done by B for its own interest?

At the outset “activity of supply” should be viewed as emerging from an “enforceable contract” between the contracting parties. The essential elements of a contract should clearly be reflected in the contract of supply for it to be taxable under section 7 of GST law. Invalid, incomplete, or non-existent contracts cannot be considered as taxable or even imputable into section 7. The Bombay High Court in Bai Mamubai Trust³ placed the requirement of an enforceable contract and contractual reciprocity between parties as quintessential for a taxable supply. The Court very finely distinguishes payment of sums in respect of a disputed price of a taxable supply vs. payment of sums towards restitution or damages for an illegal act. Payment of sums for wrongful unilateral acts or damages were not emerging from reciprocal obligations and hence not considered as passing the “supply doctrine”.

Thus, the ingredients of the contract (as elaborated above) are core to the taxation of supply under GST. The terms supplier (promisor), recipient (promisee), the act of supply (promise) and consideration should be explicit and agreed upon by the contracting parties. If a transaction is to be considered as a supply, the contractual obligations and promises should also align with the act of supply i.e. if a service is said to be taxed between a supplier and a recipient, there has to be a contractual obligation by the supplier to render such a service to the recipient. Without any contractual obligation, a service cannot be said to have been agreed between the contracting parties. Gratuitous acts are not meant to be taxed under the GST law⁴. Thus, there is no room for intendment or imputation of a ‘contract’ even by way of a statutory fiction under section 7 of GST law.

3. 2019 (31) G.S.T.L. 193 (Bom.)
4. Circular No. 116/35/2019-GST, dated 11th October, 2019 issued on donations and free gifts

Contract of Guarantee is clearly between B and A under which the promise of guarantee flows from B to A. In consideration for the receipt of the guarantee from B, A renders financial assistance to C. Clearly, C is the only beneficiary of reciprocal obligations between A and B. Neither are B and C acting on behalf of each other while contracting with A. Both the parties have their respective obligations to A: C has its primary obligation to repay the financial debt and B has the co-existent secondary obligation to repay in case it is called upon to do so by A. C (though a witness / signatory) does not have contractual privity to the promise of guarantee. C’s obligation to A emerges from the separate loan contract between A and C. C cannot enforce any of the obligations or promises which is agreed upon between A and B and they stand on an independent footing.

Any supplier-recipient identification under GST law should have contractual authenticity. Similarly, the guarantee service sought to be deemed under Schedule I by the revenue should also possess valid contractual obligations between B and C. Yet Revenue through the CBIC Circular (discussed later) claims that there is a flow of guarantee service by B to C. If we attempt to implement the course adopted by the CBIC circular, we may reach a conclusion which is in direct opposition to sections 125 and 126 of the Contract Act:

Party	Contractual Status	GST imputed status	Implication on account of deeming fiction
B	Guarantor / Promisor	Supplier of Guarantee	B issuing the assurance to C that the Debt will be repaid by C
C	Beneficiary of funds	Recipient of Guarantee	C would be receiving the promise of guarantee for the debt availed by itself
A	Guaranteed entity / Promisee	Neither supplier or recipient	A would be considered as an outsider in this supplier-recipient relationship between B and C

The above table depicts the anomaly which results in imputing a contract of guarantee between B and C. The Contract Act does not identify or even deem any flow of a guarantee obligation by B to C. Therefore, any attempt to impute a contract of guarantee between B to C for the purpose of taxation would be fatal to commercial reality itself.

This brings us to the question as to the true nature of the relationship between B and C. The answer is spelled out in section 145 of the Contract Act. It states that Surety B has an implied right of indemnity against the Debtor C to the extent of financial loss incurred because of the contract of guarantee. Clearly, the consequence of any wrong-doing by C in defaulting in the payment obligation to A, would trigger A’s right to recover the sums from B. B after settling the debts due to A can now claim the said sums as damages indemnifiable under this implied contract. Therefore, the true relationship etched by the Contract Act is that of ‘indemnity’ rather than the act of service by B to C.

Then for what benefit does B issue a guarantee to A where no counter-benefit arises either from A or C? Does the act of agreeing to issue the guarantee constitute a legal obligation by B to C? Can C claim that by virtue of being an invested entity, it can enforce B to issue a guarantee for all the loans C avails from A? Certainly Not. B would have its own vested interests in issuing the guarantee in favour of C. Such issuance would be without any contractual consensus with C. Unless there is an agreed contract, C cannot as a matter of right direct B to issue a guarantee on its behalf. Thus, the issuance of the guarantee by B is on its own account and not ‘on behalf’ of C. Probably, B performs this act for protecting / enhancing its ownership interest in C. B may choose (out of its own volition) to refrain from issuing any guarantee, in which case, the only consequence would be that C may not receive the financial assistance and would be remediless without any legal recourse of B.

This therefore brings us to the commercial rationale of the issuance of Corporate / personal guarantees. As one would appreciate, a guarantee is issued by the Company / person on account of the ownership / financial interest over the entity for whom it is being issued. If not for such interest, the guarantee would not have been issued at all. Thus, the key driver for such a guarantee is the protection / enrichment of its own ownership interest in the subject entity and nothing beyond this. It is a ‘self-activity’ and does not warrant any counter-consideration either from the recipient or the debtor.

In transfer-pricing context, this act was termed as a ‘shareholder function’. Whether a corporate guarantee issued in favour of its subsidiary constituted an ‘international transaction between related parties’ warranting a benchmarking of the said activity to the arm’s length price. This issue was raised based on the definition of ‘international transaction’ (prior to 2012) which required a transaction between related parties having a bearing on the profits, incomes, losses or assets of the related entity. Taxpayers claimed that such issuance did not entail any explicit cost and was part of the shareholder obligation to adequately fund the entity for its business operations. Reliance was placed on OECD Transfer Pricing guidelines which is extracted below:

“Shareholding Activity – An activity which is performed by a member of an MNE (multinational enterprise group) (usually the parent company or a regional holding company) solely because of its ownership interest in one or more other group members, i.e. in its capacity as shareholder.”

When an Activity is considered / not considered as intra-group service

“7.6………………………..This can be determined by considering whether an independent enterprise in comparable circumstances would have been willing to pay for the activity if performed for it by an independent enterprise or would have performed the activity in-house for itself. If the activity is not one for which the independent enterprise would have been willing to pay or perform for itself, the activity ordinarily should not be considered as an intra-group service under the arm’s length principle.”

“7.9. A more complex analysis is necessary where an associated enterprise undertakes activities that relate to more than one member of the group or to the group as a whole. In a narrow range of such cases, an intra-group activity may be performed relating to group members even though those group members do not need the activity (and would not be willing to pay for it were they independent enterprises). Such an activity would be one that a group member (usually the parent company or a regional holding company) performs solely because of its ownership interest in one or more other group members, i.e. in its capacity as shareholder. This type of activity would not be considered to be an intra-group service, and thus would not justify a charge to other group members. Instead, the costs associated with this type of activity should be borne and allocated at the level of the shareholder. ……”

“7.13. Similarly, an associated enterprise should not be considered to receive an intra-group service when it obtains incidental benefits attributable solely to its being part of a larger concern, and not to any specific activity being performed. For example, no service would be received where an associated enterprise by reason of its affiliation alone has a credit-rating higher than it would if it were unaffiliated, but an intra-group service would usually exist where the higher credit rating were due to a guarantee by another group member, or where the enterprise benefitted from deliberate concerted action involving global marketing and public relations campaigns. In this respect, passive association should be distinguished from active promotion of the MNE group’s attributes that positively enhances the profit making potential of particular members of the group. Each case must be determined according to its own facts and circumstances. See Section D.8 of Chapter I on MNE group synergies.”

The above extract clearly ruled out the possibility of an intra-group service to a related entity in case it incidentally benefited from a guarantee issued by its parent entity. A similar analysis was performed by the Income tax appellate Tribunal in Micro Ink’s case⁵ wherein it was examined whether corporate guarantees issued by the Parent Company were not in the nature of ‘provision for service’ but a shareholder function to the invested entity. A retrospective amendment in the definition of ‘international transaction’ vide Finance Act 2012 led to a deemed inclusion of Corporate guarantees as an international transaction. Yet, the decision in Micro Ink’s case considered the retrospective insertion and held that since the said guarantee did not meet the primary threshold of the ‘transaction having a bearing on profits, income, assets or losses’, it was still outside the ambit of the definition. However, subsequent to this, there was an overturn of decisions based on the High Court’s / Tribunal’s view⁶ that such activity was deemed to be an international transaction by virtue of an explicit amendment. While one may believe that this would have limited applicability in view of the distinct fabric of Income tax and GST law, it certainly leaves us with an important conclusion that in the absence of deeming fiction akin to ‘international transactions’ under Income tax, such corporate guarantees may not be considered as a transaction at all, but a self-activity as part of shareholders responsibilities and hence outside the tax net itself.

5. Micro Inks Ltd. vs. Addl. CIT [2015] 63 taxmann.com 353/[2016] 157 ITD 132 (Ahd. – Trib.)
6. PCIT vs. Redington (India) Ltd. reported in 122 taxmann.com 136 (Mad-HC) affirming Prolifics Corporation Ltd. vs. Dy. CIT – Hyderabad ITAT[[TS-497-ITAT-2014(HYD)-TP] ]; Infotech Enterprises Ltd. vs. Addl. CIT - Hyderabad ITAT [TS-159-ITAT-2018(HYD)-TP]; Nimbus Communications Ltd – Mumbai ITAT[TS-43-ITAT-2016(Mum)-TP]

SCOPE OF SCHEDULE I

The role of Schedule I also comes to the forefront when taxpayers claim that there is no service between the related parties and the activity is for ‘own account’. Revenue invokes Schedule I and claims that the relationship has disguised the performance of guarantee service between B and C. B has rendered the guarantee service and has deliberately not charged a consideration. Schedule I addresses such situations and brings to tax the service rendered by B to C.

Truly speaking, Schedule I has been legislated by virtue of section 7(1)(c) to give legal sanctity to acts without consideration in specified cases. If the law was to tax any and every activity (including self-activity), Schedule I need not have to be made so restrictive. Section 7(1)(c) could have simply stated that all acts without consideration are taxable as supply. The purpose of legislating limited entries in Schedule I is to identify commercial cases where consideration may not be charged on certain counts even-though there exists a contractual obligation (oral / written) between the parties concerned. The question to be asked before applying Schedule I is this – “Whether there exists any contractual obligation between the related parties?” If the answer is in the negative (like a gratuitous or self-act), one may not even enter Schedule I for application. To reiterate, Schedule I is designed only to fill the gap of consideration but not to deem / impute a contract itself between related parties.

This conclusion also emerges from the title of Schedule I which uses the phrase “Activities treated as supply even if without consideration” indicating that only activities which fall short of being treated as supply u/s 7(1) on account of a ‘lack of consideration’ would be deemed as supply. As a corollary, it means that a mere existence of a relationship would not constitute a supply of goods / services. There must necessarily be an identifiable supply under section 7(1), albeit absent a consideration, prior to invoking the entries in Schedule I. Guidance is obtained from the entries and adjunct circulars on this aspect.

Section 7(1)(c) itself deems an act as ‘Supply’ under Schedule I only if it is “made” or “agreed to be made”. Making of an agreement cannot be with oneself and requires the consensus of another person.
Use of the phrase ‘transfer’, ‘supply’, ‘import of service’ in the entries itself emphasise that other requirements of supply (u/s section 7(1)) are mandatory.
Supply being a commercial term is used in trade or business involving sale, transfer etc., for consumption. The deeming fiction in Schedule I is an extension of such supply-consumption theory;
In the context of goods, circulars have treated mere movement of goods without any transfer as not involving as supply (e.g., warranty replacement, job work movement, inter-state movement of goods rigs / equipment, free supply or gifts to customers, etc.,).
In the context of services, circular on liquidated damages, penalties, late payment charges etc., emphasise the requirement of an agreement or contract for the provision of service for the imposition of tax i.e., contractual relationship is an essential element of supply;

Thus Schedule I is to be invoked only when a service (guarantee or any other identifiable service) is provided between the related parties concerned. Any artificial imputation of a contract of guarantee between B and C would result in grave anomaly as tabulated above. It’s a different matter that revenue may claim that the activity is in the nature of a support function to agree to issue the guarantee, but certainly cannot claim it to be a guarantee service.

IS THERE A SERVICE PROVIDER — RECIPIENT RELATIONSHIP?

This now takes us to the question of whether at all there is a service provider-recipient relationship between the parent and related entity. Of course, once it is established that there is no service at all and the entire activity is a shareholder function, there is no requirement to examine this point. Yet to allay any doubts, an examination of the strict definition of service provider (supplier) and service recipient (recipient) can be made. Typically, revenue places the argument that an act of guarantee by the Surety constitutes a service provider-recipient relationship between the B as a service provider and the C as a service recipient. This is on the premise that a service flows from Surety to Debtor.

Supplier — Section 2(105) defines a supplier as the person supplying the service and includes an agent acting on his behalf. Under Section 126 of the Contract Act, the promise of the contract of guarantee (being the rendition of the service) flows from the Surety (say Parent Co / Director) to the Principal Creditor (Banks / FIs). In such contracts, the supplier of a service (if any), in terms of 2(105), is clearly the Surety / Guarantor who is issuing the promise of guarantee and rendering the service. Till this juncture the contract law and GST law are aligned as the Surety is the person who is rendering the guarantee promise and liable to be called a supplier.

Recipient — 2(93) defines a recipient as the person who is “liable to pay” the consideration for the rendition of service and where no consideration is payable, the person “to whom the service is rendered”. It is here where the legal error appears to be committed by the Revenue. Contractually, the service of guarantee is being rendered only to the Banks / FIs. Banks are also the ‘beneficiary of the guarantee obligation’ which is being issued by the Surety. In the eventuality of any default, the promise / assurance to recoup the loss endures to the benefit of the Creditor. The confusion arises because the ‘beneficiary of funds’ is mixed with ‘beneficiary of the guarantee service’. This fine distinction can only be solved by appreciating the contract law implications as elaborated above.

C has undoubtedly been the beneficiary of the loan, but that does not by implication make it the beneficiary of the guaranteed service. The loan may be disbursed as a consequence of the guarantee obligation. The debtor (except where a fee is being specifically charged) in no circumstance can be treated as the contractual recipient of the guarantee. Clearly, there is no service provider-recipient relationship between the B as a Surety and the C as Debtor. Thus, revenue’s contention that the Debtor is a ‘recipient’ of the guarantee service and liable to tax under reverse charge provisions fails on this front.

FLOW OF CONSIDERATION FOR SUPPLY?

One may traverse further into the scope of the term consideration. Section 2(31) defines consideration as any monetary or non-monetary act in response to or in respect of or for inducement of the act of supply. To impose a tax on the guarantee, it is imperative that C should be liable to pay a consideration to B. C would be liable to pay a consideration only if B was obligated to render the Guarantee service. But since B performs the guarantee on its own behest as a shareholder function, it cannot be said that C has induced the performance of the guarantee service. While one may say that the relationship between B and C has induced the act of guarantee, the mere existence of a relationship between B and C cannot be termed as a consideration in terms of 2(31) of the GST law.

The revenue places reliance on the Edelweiss Financial Services decision (refer to later para) to claim that the element of consideration which was absent in the service tax regime has been made good by virtue of Schedule I and hence the transaction is now taxable. However, this argument fails to appreciate that there is certainly a consideration in this contract in terms of section 126. Section 126 of the Contract Act identifies the consideration in the said contract of guarantee as being the financial assistance by A to C i.e. involving the issuance of the debt itself. B has been the recipient of the consideration in terms of the Contract Act in the form of the disbursement to C. In which case it would be incorrect to state that guarantee service has been rendered without consideration. No other consideration has been identified under the Contract law and hence one cannot impute a consideration between B and C merely to invoke Schedule I between the parties. The act of the revenue to invoke Schedule I on the premise that there is no consideration flowing to B is against the contract law provisions itself.

RECENT DEVELOPMENTS

An issue arose before the Supreme Court in the context of the negative list regime of service tax in the case of Edelweiss Financial Services⁷. The Court while affirming the decision of the Mumbai tribunal held that “consideration” is an inevitable requirement of taxation and the absence of such consideration to compensate for the corporate guarantee activity, rendered the transaction as non-taxable. Amidst this uproar, 51st GST Council took cognizance and recommended legislation of a deemed valuation rule in the form of Rule 28(2) w.e.f. 26th October, 2023:

“(2) Notwithstanding anything contained in sub-rule (1), the value of supply of services by a supplier to a recipient who is a related person, BY WAY of providing corporate guarantee to any banking company or financial institution ON BEHALF of the said recipient, shall be deemed to be one per cent of the amount of such guarantee offered, or the actual consideration, whichever is higher.”

Parallelly, CBIC’s Circular⁸ clarifies the issue from a valuation perspective:

Issue of corporate guarantees by Corporates to related entities

In view of Schedule I and section 15, the activity of providing “guarantee by the parent entity to the Bank / FIs” is treated as a “service by the parent entity to the related entity”. Valuation is to be performed in terms of Rule 28. W.e.f. 26^th October, 2023 – rule 28(2) deems the value of such service at 1 per cent of the amount guaranteed

Issue of personal guarantees by Directors to related entities

While the issuance of personal guarantees is a deemed service in terms of Schedule I, in view of RBI’s circular⁹ which bars charging any commission or fee for such activity, it was clarified that there cannot be an open market value for such activity and hence the said activity is not taxable. It is surprising that the circular reaches the conclusion of non-taxability without testing other valuation alternatives and Rule 31 (residual method).

7. [2023] 149 taxmann.com 76 (SC) affirming (2023) 5 Centax 57 (Tri.-Bom)
8. Circular No. 204/16/2023-GST dated 27th October, 2023
9. Para 2.2.9 (C) of RBI's Circular No. RBI/2021-22/121, dated 9th November, 2021

The GST council has curiously introduced Rule 28(2) for the valuation of Corporate / Personal Guarantees, by-passing the examination of taxability itself. The GST council has presumed that there is a guarantee service activity which flows from the Surety (B) to the Debtor (C) in all cases. This is evident from the literal wordings of Rule 28(2) which identifies the supply as being ‘by way of’ providing a corporate guarantee service to a Company / FI ‘on behalf of’ a recipient.

Rule 28(2) and circular seem to be creating a dichotomy by attempting to identify the service as a ‘guarantee service’ and also deeming it to be rendered to the Debtor. This clearly does not align well with the contractual structure prescribed in the Contract Act. Neither the definition of recipient nor section 7(1)(c) r.w. Schedule I, permits the rules to deem the ‘guarantee service’ as flowing from the Surety to the Debtor.

One may only probably view the rule to be applicable where an enforceable contract is agreed between B and C, wherein B takes on an obligation to issue a guarantee to A. The obligation under the contract would merely be an ‘agreement to issue a corporate guarantee to the Bank’ but would not be the act of guarantee itself. One may call it a financial support activity or by any other nomenclature but in substance such obligation cannot be the guarantee obligation as understood in terms of section 125 of the Contract Act.

Taking this perspective forward, Rule 28 would now attempt to value the support activity between related persons. Pre-amendment, in the absence of any consideration being charged, the said rule would rely upon the ‘open market value’ or the ‘value of like services’ or the ‘cost approach’. The first proviso to the said rule also provided flexibility to adopt a nominal fee as low as even “Zero” if the recipient was eligible to avail input tax credit. In view of this subjectivity, the manner of valuation of the open market value varied across various jurisdictions—while some adopted the SBI / Bank rate for guarantee commissions, others adopted ad-hoc rates leaving it to the taxpayer to defend with a better alternative. The amendment has now swept away the flexibility. It pegs the rate at 1 per cent of the amount of guarantee or the actual consideration, whichever being higher¹⁰.

10. The practice of fixing such ad-hoc rates through valuation rules is a separate debate.

Assuming the rule is valid, the intriguing question is whether the amended rule in its zeal to value the support activity misdirected itself in going after a non-taxable guarantee activity. Special importance should be placed on the phrase ‘by way of providing corporate guarantee’ and ‘on behalf of the recipient’ in the said Rule. Since the presence of a guarantee is already negated, the ad-hoc valuation rules introduced do not seem to be valuing the support function between B and C. Though support function may ultimately lead into a guarantee provided to the Bank / FI but the mere agreement to do so (between B and C) is not guarantee service per se. Hence one can clearly claim that in such a fact pattern, Rule 28(2) does not have applicability, and one may have to fall back upon the default option as available pre-amendment i.e. open market value, etc., As a consequence, the flexibility of 1st proviso granting the leverage to adopt any value (subject to full input tax credit at the recipient’s end) would now become available. Propagators of this rule may contend that this interpretation would make the rule itself redundant and inapplicable in all cases. Probably the rule would have limited applicability within Banking sectors where Bank / FIs act as co-guarantors in large arrangements. However, redundancy (if any) cannot result in forceful application of the provisions to a non-existent contract.

B) Cases where a consideration is charged or a contract is entered

No doubt the scenario changes completely if B and C enter into a specific contract wherein B is obligated to issue a corporate guarantee in consideration for a commission. This would be an enforceable contract wherein B would be receiving consideration in exchange for the promise of guarantee by B to A. In such case, the guarantee service has been induced by virtue of the contractual obligation and against a consideration flowing from C to B. Section 2(31) r.w. 2(93) clearly spells out that where a specific consideration is charged, the person liable to pay consideration would be termed as a ‘recipient’ of service. In view of the specific provision to treat C as the recipient of service and an identifiable flow of consideration inducing the guarantee, tax may possibly be invoked in such cases.

In summary, the legislation has not permitted imputation of any contract of guarantee de hors the contract law legislation. Thus, any assumption of a guarantee service by Surety to the Debtor is unwarranted. The service, if any, between the related entities may be a support function if the Surety takes it as part of a contractual obligation (such as under a shareholder agreement, etc.,). In case a consideration is charged by the Surety to the Debtor, such consideration is not towards the guarantee service, but rather a support function and is liable to be taxed accordingly. Though the law is settled under the service tax regime, the unfolding of the true picture under the GST setting would certainly be an interesting journey.

BCAJ Admin

From Published Accounts

Compilers’ Note:

Illustration of accounting treatment and disclosures for a proposed scheme of arrangement under implementation and pending regulatory approvals.

Zee Entertainment Enterprises Ltd (31st March, 2023)

From Auditors’ Report

(₹ million)

Key audit matter	How our audit addressed the key audit matter
Proposed Merger with Sony Pictures Networks India Private Limited (Refer to note 30, 40 and 58 of Standalone financial statements): The company has entered into a proposed Scheme of arrangement with Sony Pictures Networks India Private Limited in the current year. The Company has obtained approvals from stock exchanges, the Competition Commission of India (CCI), Shareholders of the Company and the Registrar of Companies (ROC) for the proposed scheme of arrangement and the draft scheme is currently pending for final approval with NCLT as at 31^st March, 2023. As per the above approvals and condition precedents of the Merger Co-Operation Agreement (MCA), the management is in the process of either liquidating or selling the components not forming part of the aforesaid Scheme of the merger. Accordingly, investment and other balances in relation to these components are classified as Non-current Assets held for sale / disposal in accordance with IND AS 105 (Non-current Assets Held for Sale and Discontinued Operations). Considering these assets are held for sale, the assets have been recorded at their realisable value and an impairment loss of R3,313 million has been recorded in the financial statements which has been disclosed as an exceptional item. Further, to expedite the merger process, the company settled certain objection applications / insolvency proceedings	Our audit included, but was not limited to, the following procedures: • Obtained an understanding of management’s process to identify key financial reporting elements of the Scheme of arrangement, Merger Cooperation agreement; • Evaluated the design, implementation and tested the operating effectiveness of key controls that the Company has in relation to the aforesaid process; • Evaluated the orders received from BSE, NSE, NCLT and CCI; • Obtained and examined the details of objection filed against the merger in the NCLT, reply filed by the Company and settlement agreement entered into by the Company; • Assessed the trigger to classify the excluded entities as business held for sale in line with management action and NCLT approval as Non-current assets held for sale in accordance with Ind AS 105 — Non-current Assets Held for Sale and Discontinued Operations; • Tested on a sample basis the merger cost recorded as exceptional items in the standalone financial statements; • Evaluated the adequacy of
filed by operational creditors and bankers for a total amount of ₹2,230 million (₹1960 million already provided). Accordingly, an additional charge of ₹270 million has been recorded as an exceptional item. The Company has also incurred expenses aggregating to R1,762 million pursuant to such scheme of merger which has also been disclosed under exception items. Considering the uncertainty of the impact on standalone financial statements because of the entire merger process including approvals from various regulatory authorities, the outcome of various litigations and materiality of the amount allocated for expenses in relation to the merger, the above matter has been considered as a Key Audit Matter for the current period audit.	disclosures given in the standalone financial statements with regard to the merger.

Key audit matter

How our audit addressed the key audit matter

Proposed Merger with Sony Pictures Networks India Private Limited (Refer to note 30, 40 and 58 of Standalone financial statements):

The company has entered into a proposed Scheme of arrangement with Sony Pictures Networks India Private Limited in the current year. The Company has obtained approvals from stock exchanges, the Competition Commission of India (CCI), Shareholders of the Company and the Registrar of Companies (ROC) for the proposed scheme of arrangement and the draft scheme is currently pending for final approval with NCLT as at 31^st March, 2023.

As per the above approvals and condition precedents of the Merger Co-Operation Agreement (MCA), the management is in the process of either liquidating or selling the components not forming part of the aforesaid Scheme of the merger. Accordingly, investment and other balances in relation to these components are classified as Non-current Assets held for sale / disposal in accordance with IND AS 105 (Non-current Assets Held for Sale and Discontinued Operations). Considering these assets are held for sale, the assets have been recorded at their realisable value and an impairment loss of R3,313 million has been recorded in the financial statements which has been disclosed as an exceptional item.

Further, to expedite the merger process, the company settled certain objection applications / insolvency proceedings

Our audit included, but was not limited to, the following procedures:

• Obtained an understanding of management’s process to identify key financial reporting elements of the Scheme of arrangement, Merger Cooperation agreement;

• Evaluated the design, implementation and tested the operating effectiveness of key controls that the Company has in relation to the aforesaid process;

• Evaluated the orders received from BSE, NSE, NCLT and CCI;

• Obtained and examined the details of objection filed against the merger in the NCLT, reply filed by the Company and settlement agreement entered into by the Company;

• Assessed the trigger to classify the excluded entities as business held for sale in line with management action and NCLT approval as Non-current assets held for sale in accordance with Ind AS 105 — Non-current Assets Held for Sale and Discontinued Operations;

• Tested on a sample basis the merger cost recorded as exceptional items in the standalone financial statements;

• Evaluated the adequacy of

filed by operational creditors and bankers for a total amount of ₹2,230 million (₹1960 million already provided). Accordingly, an additional charge of ₹270 million has been recorded as an exceptional item.

The Company has also incurred expenses aggregating to R1,762 million pursuant to such scheme of merger which has also been disclosed under exception items.

Considering the uncertainty of the impact on standalone financial statements because of the entire merger process including approvals from various regulatory authorities, the outcome of various litigations and materiality of the amount allocated for expenses in relation to the merger, the above matter has been considered as a Key Audit Matter for the current period audit.

disclosures given in the standalone financial statements with regard to the merger.

From Notes to financial statements

30. EXCEPTIONAL ITEMS

(₹ million)

	Mar–23	Mar–22
Provision for trade and other receivables (Refer note 43(d)(ii)A)	1,068	527
Provision for diminution in value of investments classified as held for sale (Refer note 40)	3,313	–
Provision for diminution in value of investment *	255	–
Other exceptional expenses #	2,032	744
Total	6,668	1,271

# During the previous year, the Board of Directors approved payment of a one-time bonus as part of the Talent Retention Plan, payable in two tranches. Accordingly, an amount aggregating ₹671 million was accounted for during the previous year.

Further, during the year, the Company has accounted for ₹1,762 million (₹73 million) for certain employee and legal expenses pertaining to the proposed Scheme of Arrangement. The said amount is disclosed as a part of ‘Exceptional items’ (Refer to note 54).

During the year, the Company has settled the dispute with Indian Performing Rights Society Limited (IPRS) in relation to the consideration to be paid towards royalty for the usage of literary and musical works. On 6th March, 2023, the Company entered into agreement with IPRS to settle its old disputes in light of the impending merger. The agreement entails the settlement of the dues for the period 1st April, 2018 to 31st March, 2023. Accordingly, all the legal cases and proceedings filed by IPRS at various forums stand withdrawn. During the year ended 31st March, 2023, the Company has recorded an additional liability of 270 million pertaining to earlier years as an ‘Exceptional Item’ by virtue of this settlement.

40. NON-CURRENT ASSET CLASSIFIED AS HELD FOR SALE

(₹ million)

	Mar–23	Mar–22
Investment in subsidiary and others #	3,850	–
Less: Provision for diminution in value of investment	3,313	–
	537	–
Receivables from subsidiary#	372	–
Freehold land and building $	573	–
Total	1,482	–

# The Management as part of its portfolio rationalisation initiative and conditions of impending merger; is in the process of either liquidating / discontinuing / selling certain entities (primarily Margo Networks Private Limited). Based on the same, the Management has classified the investment in relation to these entities as Non-current Assets held for sale / disposal under IND AS 105 (‘Non-current Assets Held for Sale and Discontinued Operations’). Considering these assets are held for sale, the assets have been recorded at their realisable value. Accordingly, the Company recorded an impairment of ₹3,313 million on such assets which has been disclosed as an exceptional item.

$ The Company has entered into a memorandum of understanding for the disposal of freehold land which it no longer intends to use and the sale transaction is in progress and is expected to be completed in the next 12 months. Accordingly, the same has been classified as a Non-current asset classified as held for sale.

58. The Board of Directors of the Company, at its meeting on 21st December, 2021, has considered and approved the Scheme of Arrangement under Sections 230 to 232 of the Companies Act, 2013 (Scheme), whereby the Company and Bangla Entertainment Private Limited (an affiliate of Culver Max Entertainment Private Limited (formerly known as Sony Pictures Networks India Private Limited)) shall merge in Culver Max Entertainment Private Limited. After receipt of requisite approvals / NOCs from shareholders and certain regulators including SEBI, CCI, ROC etc., the Company has filed a petition with NCLT for approval of the Scheme which shall be effective NCLT approval and balance regulatory approvals / completion formalities.

From Directors’ report

8. COMPOSITE SCHEME OF ARRANGEMENT

The Board of Directors of the Company at its Board Meeting held on 21st December, 2021 had considered and approved (subject to requisite approvals consents) the Scheme of Arrangement under Sections 230 to 232 and other applicable provisions of the Act amongst the Company, Bangla Entertainment Private Limited (BEPL) and Culver Max Entertainment Private Limited (formerly known as Sony Pictures Networks India Private Limited) (CMEPL) and their respective shareholders and creditors (Scheme). The Scheme provides for, inter alia, the merger of the Company and BEPL into CMEPL; the consequent issue of equity shares of CMEPL to the shareholders of the Company and BEPL, in accordance with Sections 230 to 232 of the Act; dissolution without winding up of the Company and BEPL; appointment of Mr. Punit Goenka, Managing Director & Chief Executive Officer of CMEPL on the terms set out in the Scheme; and amendment of the Articles of Association of CMEPL. The Scheme is sanctioned/approved by:

The BSE Limited and the National Stock Exchange of India Limited vide their observation letters dated 29th July, 2022;
The Competition Commission of India vide its letter dated 4th October, 2022;
Shareholders of the Company at the meeting held on 14th October, 2022 convened under the directions of the National Company Law Tribunal, Mumbai Bench (‘NCLT’);
The Official Liquidator by way of report dated 3rd January, 2023 on the Scheme, inter alia, stating that the affairs of the Company have been conducted in a proper manner and raising no objections to the Scheme;
The Regional Director, Western Region, Ministry of Corporate Affairs, by way of the report dated 10th January, 2023, inter alia, stating that he did not have any objections to the Scheme; and
On the basis of the above no-objections and approvals, the NCLT by order dated 10th August, 2023 sanctioned the Scheme.

The Company is in the process of making an application with the Ministry of Information and Broadcasting for the transfer of the licenses relating to the up-linking and down-linking of television channels obtained by the Company to CMEPL, pursuant to the Scheme.

The Scheme shall become effective upon fulfilment of all the conditions and precedents mentioned in the Scheme.

The Scheme is in the interest of the shareholders, creditors, and all other stakeholders of the Company, CMEPL, BEPL and the public at large.

BCAJ Admin

Streaming Arrangements

Mining companies (also referred to as producers) use metal streaming arrangements to raise funds. The Producer enters into a metal streaming arrangement with a streaming company (the “Investor) where the Producer may receive an upfront cash payment plus ongoing predetermined per unit payments for part or all of the metal production and sometimes by-product metals (e.g., silver extracting from zinc ores). This enables the Producer to access funding by monetizing the product or by-product metal. The Investor too is assured of a supply of metals without having to develop or operate the mine. The accounting of such arrangements can be extremely complex and is dealt with below.

QUERY

Hindustan Metal (HM), owns iron ore mines. HM enters into a streaming arrangement with the Investor. HM commits to deliver 60 per cent of the iron ore production of the mine over the life of the mine in exchange for an upfront advance of $100 million and the lesser of, $120 and the market price per tonne of iron ore, for each future tonne or iron ore delivered. The upfront advance funds generally will be used to finance capital expenditures in the development of the mine project for which HM holds the mineral rights. When the market price exceeds $120 / tonne, the notional drawdown of the upfront advance funds is based on the difference between the market price of iron ore at the time of delivery and the actual amount received (i.e., the $120 / tonne.). Even if the advance is reduced to zero, HM is still contractually obligated to deliver iron ore over the remaining term of the arrangement and will receive the lesser of $120 / tonne and the market price. The balance of the upfront advance may be reimbursable (in cash, usually without interest) to the Investor at a specified date or the end of the life of the mine if the amount has not previously been reduced to zero. How is the arrangement recorded in the books of HM?

RESPONSE

Streaming arrangements may be accounted for by the Producer in a number of ways based on an analysis of all of the relevant facts and circumstances. Potential methods of accounting for these streaming arrangements by the Producer include, but are not necessarily limited to be discussed after the accounting standard references below:

ACCOUNTING STANDARD REFERENCES

Ind AS 109 Financial Instruments

Paragraph 2.4

This Standard shall be applied to those contracts to buy or sell a non-financial item that can be settled net in cash or another financial instrument, or by exchanging financial instruments, as if the contracts were financial instruments, with the exception of contracts that were entered into and continue to be held for the purpose of the receipt or delivery of a non-financial item in accordance with the entity’s expected purchase, sale or usage requirements. However, this Standard shall be applied to those contracts that an entity designates as measured at fair value through profit or loss in accordance with paragraph 2.5.

Paragraph 2.6

There are various ways in which a contract to buy or sell a non-financial item can be settled net in cash or another financial instrument or by exchanging financial instruments. These include:

(a) when the terms of the contract permit either party to settle it net in cash or another financial instrument or by exchanging financial instruments;

(b) when the ability to settle net in cash or another financial instrument, or by exchanging financial instruments, is not explicit in the terms of the contract, but the entity has a practice of settling similar contracts net in cash or another financial instrument or by exchanging financial instruments (whether with the counterparty, by entering into offsetting contracts or by selling the contract before its exercise or lapse);

(c) when, for similar contracts, the entity has a practice of taking delivery of the underlying and selling it within a short period after delivery for the purpose of generating a profit from short term fluctuations in price or dealer’s margin; and

(d) when the non-financial item that is the subject of the contract is readily convertible to cash.

A contract to which (b) or (c) applies is not entered into for the purpose of the receipt or delivery of the non-financial item in accordance with the entity’s expected purchase, sale or usage requirements and, accordingly, is within the scope of this Standard. Other contracts to which paragraph 2.4 applies are evaluated to determine whether they were entered into and continue to be held for the purpose of the receipt or delivery of the non-financial item in accordance with the entity’s expected purchase, sale or usage requirements and, accordingly, whether they are within the scope of this Standard.

RESPONSE

Following are some of the factors (not an exhaustive list) to be considered when making an assessment of the appropriate accounting for streaming arrangements:

The settlement mechanism of the upfront advance (e.g., through delivery of the commodity, cash or other financial assets)? Settlement through the delivery of commodity may suggest that own-use exemption may apply.
When settlement happens fully or partly using cash or another financial asset, the following aspects may need to be considered:
Contingent settlement provisions, whereby the Producer is required to pay cash only under certain conditions and the genuineness of those conditions;
Provisions which allow the Investor the right or option to receive cash instead of commodity;
The right of the Investor to cancel the arrangement and require the Producer to make a lump sum cash payment or transfer other financial assets;
Reimbursement of the upfront advance at a specified date or the end of the life of the mine if the upfront advance has not been reduced to zero and whether such an amount could be significant.
When settled through delivery of the commodity, will it always be obtained from the Producer’s operations or expected to be purchased from the open market or a third party? Own-use exemption may not apply when settlement is the basis of the purchase from an open market or third party, which may be suggestive of a derivative contract. Other related factors to consider may be:
The amount of the commodity required to settle the arrangement compared to expected future production from the Producer’s operation and estimated mineral quantity;
The timing of expected future production from the operation compared to any specific delivery dates per the arrangement;
The past business practice of the producer for similar arrangements;
The term of the arrangement in relation to the expected life of the mine;
Understanding how the risks are shared between the Producer and the Investor if the output of the mine is not as expected or changes in government policy regulating mines?
Which party bears the price risk of the underlying commodity?
Which party bears the risk that the cost of developing the mine is higher than anticipated?
Whether the Producer or the Investor controls the mines and who has the right to take significant decisions relating to the operation of the mine, such as a go or no-go area?
Can the commodity be readily converted to cash? Is the commodity indexed to a quoted price?
Provisions relating to defaults, e.g., the right of the Investor to levy a penalty on the Producer for not delivering the commodity as per the agreed schedule. Such a right may be suggestive that the risks relating to the mine are not shared by the Investor, and therefore, the arrangement may not qualify as a part sale of assets. It would mean that such arrangements are commodity arrangements and assessment would be required to determine if an own-use exemption applies.
Is there an explicit or implicit and significant financing component (e.g., rate of interest) in the arrangement?

COMMODITY ARRANGEMENT

This arrangement may qualify as a commodity arrangement that is outside of the scope of Ind AS 109 provided the streaming arrangement is determined to be an executory arrangement to deliver an expected amount of the commodity to the Investor from the Producer’s own operation (i.e., it meets the “own-use” exemption as set out in paragraph 2.4 of Ind AS 109). For the “own-use exemption” to apply, the arrangement must always be settled through the delivery of the commodity which has been obtained by the Producer as part of its own operations.

If the own-use exemption applies, then the arrangement is treated as an executory arrangement to be fulfilled on an ongoing basis, and the upfront advance received by the Producer is accounted as an advance payment (unearned revenue) related to the future sale of commodities. Care is needed when analysing all the terms of the arrangement to determine whether they give rise to separable embedded derivatives (such as caps, floors and collars) that need to be separated and accounted for as derivatives.

DERIVATIVE CONTRACT

If the “own-use exemption” does not apply, the streaming arrangement may qualify as a derivative under Ind AS 109. When the commodity is readily convertible to cash, or either party can settle net in cash or has a past practice of doing so, and delivery will not be made with the Producer’s own production, the arrangement would qualify as a derivative. If the streaming arrangement is considered a derivative, it would be measured at fair value through profit and loss (“FVTPL”). In such an assessment, the upfront advance made under the streaming arrangement would make the derivative partially pre-paid.

FINANCIAL LIABILITY

The arrangement may qualify as a financial liability (i.e., debt) in accordance with Ind AS 109 when the streaming arrangement establishes a contractual obligation for the Producer to deliver cash or another financial asset. An example of net settlement in cash is where a commodity producer enters into a contract to supply a specified amount of a commodity and, in addition, pays or receives an amount in cash based on the difference between the market price of the commodity on the date of its supply and the price stated in the contract. Settlement may be part or the entire contract can be paid in cash, instead of through the physical delivery of the commodity.

When the streaming arrangement is classified as a financial liability, the commodity-linked principal (and interest) may be separated from the host debt instrument and accounted for at FVTPL because it is exposed to dissimilar risks and would not be closely related. Alternatively, a company could elect for the entire instrument to be measured at FVTPL. A call, put, or prepayment option embedded in a host debt instrument should be reviewed to determine if separation is required. Caution needs to be exercised when analysing all the terms of the arrangement to determine whether they give rise to other embedded derivatives and/or if they are important in the assessment of the classification of the streaming arrangement.

SALE OF A MINERAL INTEREST AND A CONTRACT TO PROVIDE SERVICES

Such an arrangement may qualify as a sale of a mineral interest and a contract to provide services — such as extraction, refining, etc., in accordance with Ind AS 16 Property, Plant and Equipment and Ind AS 115 Revenue from Contracts with Customers when the streaming arrangement meets the criteria under Ind AS 115 for a sale.

Under the sale of the mineral interest classification, an argument might be made that the upfront advance relates to the sale of a portion of the mineral interest, and the price per unit payments made by the Investor as the commodity is delivered in the future relates to the cost of the services (e.g., extraction, refining, etc.) provided by the Producer to the Investor.

The service portion of the arrangement may include a “cap” or “out-of-the-money floor” on the selling price of a commodity that may need to be accounted for separately as an embedded derivative. Caution needs to be exercised to determine whether such features give rise to embedded derivatives or if they are determinative in the assessment of the classification of the streaming arrangement.

CONCLUSION

Determining the appropriate accounting approach is not an accounting policy choice but rather an assessment of the specific facts and circumstances. Examples of additional terms that can be found in these arrangements include a cap on the price per tonne, interest-bearing upfront advance, a commitment to deliver a minimum quantity within a specified limit, time-bound arrangements, buy-back rights of the producer, etc. Some arrangements may include by-products only, e.g., fines (pieces of iron ore) rather than the iron ore.

The determination of how to account for a streaming arrangement requires significant judgment and careful consideration of the facts and circumstances, as discussed above. Globally, it appears that there is a mixed practice for the accounting of streaming arrangements.

BCAJ Admin

Allied Laws

41 Cox and Kings Ltd vs. SAP India Pvt Ltd

[2023] 157 taxmann.com 142 (SC)

Date of Order: 6th December, 2023

Arbitration — The validity of the ‘group companies’ doctrine — non-signatory parties can be bound by an arbitration agreement [Arbitration and Conciliation Act, 1996, 1 S. 2, S. 7].

FACTS

Five judges of the Hon’ble Supreme Court were called upon to determine the validity of the ‘Group of Companies’ doctrine in the jurisprudence of Indian arbitration. The challenge was to figure out whether there can be reconciliation between the group of companies’ doctrine and well-settled legal principles of corporate law and contract law.

HELD

The definition of “parties” under Section 2(1)(h) read with Section 7 of the Arbitration and Conciliation Act, 1996 (ACA) includes both the signatory as well as non-signatory parties. The conduct of the non-signatory parties could be an indicator of their consent to be bound by the arbitration agreement. The requirement of a written arbitration agreement under Section 7 of the ACA does not exclude the possibility of binding non-signatory parties. Under the Arbitration Act, the concept of a “party” is distinct and different from the concept of “persons claiming through or under” a party to the arbitration agreement.

The underlying basis for the application of the group of companies doctrine rests on maintaining the corporate separateness of the group companies while determining the common intention of the parties to bind the non-signatory party to the arbitration agreement. The group of companies doctrine has an independent existence as a principle of law which stems from a harmonious reading of Section 2(1)(h) along with Section 7 of the ACA. Further, to apply the group of companies doctrine, the courts or tribunals, as the case may be, have to consider all the cumulative factors laid down in Oil and Natural Gas Corporation Ltd vs. Discovery Enterprises (2022) 8 SCC 42. Resultantly, the principle of a single economic unit cannot be the sole basis for invoking the group of companies doctrine.

The group of companies doctrine should be retained in the Indian arbitration jurisprudence considering its utility in determining the intention of the parties in the context of complex transactions involving multiple parties and multiple agreements. At the referral stage, the referral court should leave it for the arbitral tribunal to decide whether the non-signatory is bound by the arbitration agreement; and in the course of this judgment, any authoritative determination given by this Court pertaining to the
group of companies doctrine should not be interpretedto exclude the application of other doctrines and principles for binding non-signatories to the arbitration agreement.

42 Vijay vs. UOI & Ors

CA No. 4910 of 2023 (SC)

Date of Order: 29th November, 2023

Secondary Evidence — Admissibility — Agreement for sale — Executed prior to the amendment — Allowed [Indian Stamp Act, 1899, S. 35].

FACTS

The Original Plaintiff and Defendant entered into an agreement to sell a property on 4th February, 1998, and pursuant to that, Plaintiff was allegedly put in possession of the property by the Defendant. When the Defendant denied the existence of such an agreement, Plaintiff filed a suit for specific performance of the contract. In the said suit, Plaintiff moved an application to file a copy of the agreement to sell, among other documents, as secondary evidence. Initially, the said application was allowed but when the Defendant sought a review of the order, the Court held that secondary evidence of an agreement to sell could not be allowed as it was not executed on a proper stamp, thus barred under section 35 of the Indian Stamp Act, 1899 (Stamp Act). Subsequently, the Plaintiff filed a Writ Petition challenging the review order and the Constitutional validity of Section 35 of the Stamp Act. The High Court upheld the validity of the said section and the order of the Review Court.

On Appeal.

HELD

The Explanation deeming certain ‘agreements to sell’ as conveyance (and thus making them liable to be stamped as conveyance) inserted in Article 23 of Schedule I-A contained in the Stamp Act (vide MP Amendment Act, 1990) creates a new obligation for the party and, therefore, cannot be given retrospective application. Thus, it will not affect the agreement(s) executed before such amendments. Hence, the documents in question were not required to be stamped at the relevant period to attract the bar of Section 35 of the Stamp Act. Thus, a copy of a document can be adduced as secondary evidence if other legal requirements are met.

The Appeal was allowed.

43 Manu Gupta vs. Sujata Sharma & Ors

RFA (OS) 13 of 2016 (Del)(HC)

Date of Order: 4th December, 2023

Hindu Undivided Family — Right of a female coparcener to be Karta — Held Yes. [Hindu Succession Act, 1956, S. 6].

FACTS

The Appeal was preferred by the appellant / Manu Gupta (defendant No.1 in the main Suit), against the Judgement whereby the Suit for Declaration for declaring the plaintiff (respondent No.1 herein) as the Karta of Late Shri D.R. Gupta and Sons, HUF, has been allowed.

On an appeal.

HELD

The explicit language of Section 6 of the 2005 Amendment Act makes it abundantly clear that though the reference in the Preamble may be to inheritance, but conferring “same” rights would include all other rights that a coparcener has, which includes a woman’s right to be a Karta. Thus, if a woman can be a coparcener but not a Karta of HUF, would be giving an interpretation that would not only be anomalous but also against the stated Object of the introduction of the Amendment.

The appeal was dismissed.

44 Anumolu Nageswara Rao vs. AVRL Narasimha Rao

AIR 2023 TELANGANA 178 (FB)

Date of Order: 27th June, 2023

Rights of adoptee — Right of a coparcener — In the family of birth — Ceases on adoption — unless partition before adoption. [Hindu Adoption and Maintenance Act, 1956, S. 12].

FACTS

A full bench was constituted to address the question of whether the rights of a coparcener in the joint possession and enjoyment of the property is a clear vesting of title in the coparcener even before partition, and can he be said to be short of rights of a full owner or whether his rights would get crystallized into definite share only on an actual partition, and whether by virtue of the proviso (b) to Section 12 of the Adoption Act, the undivided interest in the property of a coparcener will not, on his adoption, be divested, but will continue to vest in him even after his adoption.

HELD

On adoption by another family, the adoptee becomes a coparcener of the adoptive family and ceases to have any connection with the family of his birth. He / she ceases to perform funeral ceremonies and loses all rights of inheritance as completely as if he / she had never been born. Court held that the child ceases to be a coparcener of the family of his / her birth and forgoes interest in the ancestral property in the family of his birth. Only if a partition has taken place before the adoption and property is allotted to his share or self-acquired, obtained by will, inherited from his natural father or other ancestor or collateral which is not coparcenary property held along with other coparceners and property held by him as sole surviving coparcener, he carries that property with him to the adoptive family with corresponding obligations.

BCAJ Admin

Claim of Loss in Revised Return of Income

ISSUE FOR CONSIDERATION

The provisions relating to filing of return of income are contained in section 139 of the Income Tax Act, 1961. A return of income filed within the due date is governed by sub-section (1) of section 139 Sub-section (3) deals with a return of loss. A return not filed in time can be furnished within the time prescribed under sub-section(4). The return furnished under sub-section (1) or (4) can be revised as per sub-section (5) of section 139.

Section 139(5) reads as under:

“If any person, having furnished a return under sub-section (1) or sub-section (4), discovers any omission or any wrong statement therein, he may furnish a revised return at any time before three months prior to the end of the relevant assessment year or before the completion of the assessment, whichever is earlier.”

Section 80 provides that no loss shall be carried forward and set off unless such loss has been determined in pursuance of a return filed in accordance with sub-section (3) of section 139. Section 80 reads as under:

“Notwithstanding anything contained in this Chapter, no loss which has not been determined in pursuance of a return filed in accordance with the provisions of sub-section (3) of section 139, shall be carried forward and set off under sub-section (1) of section 72 or sub-section (2) of section 73 or sub-section (2) of section 73A or sub-section (1) or sub-section (3) of section 74 or sub-section (3) of section 74A.”

Sub-section (3) of section 139 reads as under:

“If any person who has sustained a loss in any previous year under the head “Profits and gains of business or profession” or under the head “Capital gains” and claims that the loss or any part thereof should be carried forward under sub-section (1) of section 72, or sub-section (2) of section 73, or sub-section (2) of section 73A or sub-section (1) or sub-section (3) of section 74, or sub-section (3) of section 74A, he may furnish, within the time allowed under sub-section (1), a return of loss in the prescribed form and verified in the prescribed manner and containing such other particulars as may be prescribed, and all the provisions of this Act shall apply as if it were a return under sub-section (1).”

A question had earlier arisen before the courts as to whether a return of income filed under section 139(1) declaring a positive income, could be revised under section 139(5) to declare a loss, which could be carried forward for set-off as per s.80 by treating such a return as the one filed under s. 139(3) of the Act. The Gujarat High Court in the case of Pr CIT vs. Babubhai Ramanbhai Patel 249 Taxman 470, the Madras High Court in the case of CIT vs. Periyar District Co-op. Milk Producers Union Ltd 266 ITR 705, and various benches of the Tribunal, in the cases of Sujani Textiles (P) Ltd 88 ITD 317 (Mad), Sarvajit Bhatia vs. ITO ITA No 6695/Del/2018, and The Dhrangadhra Peoples Co-op. Bank Ltd vs. DCIT 2019 (12) TMI 976 – ITAT Rajkot had all taken a view that it was permissible to file a return of loss for revising the return of income, and such a loss so declared in the revised return could be carried forward for set off. The Kerala High Court in the case of CIT vs. Kerala State Construction Corporation Ltd 267 Taxman 256, however, held to the contrary disallowing the right of set-off in the case where the original return of income was for a positive income,

The position believed to be settled was disturbed by a decision of the Supreme Court. The Supreme Court, in the case of Pr CIT vs. Wipro Ltd 446 ITR 1, in the context of withdrawal of a claim for exemption (of a loss) under section 10B through a revised return under section 139(5) claiming to carry forward of such loss (not claimed in view of s.10B exemption), has observed that the Revenue was right in claiming that the revised return filed by the assessee under section 139(5) can only substitute its original return under section 139(1) and cannot transform it into a return under section 139(3), in order to avail the benefit of carry forward or set off of any loss under section 80. The review petition against this order was dismissed by the Supreme Court vide its order reported at 289 Taxman 621.

Subsequent to this Supreme Court decision, the controversy has arisen before the Tribunal as to whether the Supreme Court’s decision has impacted the allowance of a claim for carry forward or set off of a loss not made in the original return by filing a revised return filed under section 139(5), after the due date of filing of the return under section 139(1). While the Pune Bench of the Tribunal has held that a claim of enhanced loss under a revised return is permissible, the Delhi Bench has taken a view that a claim of loss under a revised return would not enable the assessee to carry forward or set off a loss claimed for the first time in the revised return of income.

BILCARE’S DECISION

The issue first came up for discussion before the Pune bench of the Tribunal in the case of Dy CIT vs. Bilcare Ltd 106 ITR(T) 411, the relevant assessment year being the assessment year 2016-17.

In this case, the assessee had a wholly-owned subsidiary in Singapore, which went into liquidation. While the company was ordered to be liquidated within 30 days in February 2014, the assessee made an application to the High Court of Singapore in October 2015 seeking permission to transfer the shares held by it in the Singapore subsidiary to another foreign subsidiary incorporated in Mauritius for a consideration of SGD 1. The permission was granted by the Singapore High Court in October 2015, and the transfer of shares was completed on 22nd October, 2015.

The assessee had not reflected this sale of shares of the Singapore subsidiary in its audited financial statements. The assessee had filed its original return before the due date on 28th November, 2016, declaring a loss of ₹45.98 crore, not taking into consideration such loss on the sale of shares of the Singapore subsidiary. The return was revised after the due date on 29th March, 2018, increasing the loss to ₹968.31 crore. The increase in loss was on account of the claim for long-term capital loss of ₹922.33 crore arising on transfer of shares of the Singapore subsidiary of the company, which claim was not made in the original return of income.

In the draft assessment order, the assessing officer refused to take cognizance of the revised return of income, in which the claim for such long-term capital loss was made. The assessee filed an application before the Joint Commissioner of Income Tax under section 144A for issuance of a direction on the issue of disallowance of the long-term capital loss arising on the sale of shares of the subsidiary of ₹922.33 crore. The Joint Commissioner directed that the loss on sale of shares claimed in the revised return should not be entertained, but that the claim of capital loss of ₹922.33 crore made during the course of assessment proceedings may be examined on merits.

The assessing officer disallowed the claim of long-term capital loss on the sale of shares of the foreign subsidiary on the following grounds:

(i) the claim for deduction of loss on the sale of shares in the revised return of income was not valid in law as the necessity for filing the revised return of income was not on account of any omission or wrong statement in the original return of income;

(ii) the Singapore High Court simply permitted the assessee to sell the shares of the Singapore subsidiary without mentioning the consideration for the sale of shares, and therefore the transaction of sale of shares was not by operation of law;

(iii) the assessee only sold the shares of the Singapore subsidiary to another wholly-owned subsidiary in Mauritius, and there being complete unity of control between the seller and purchaser, the transaction was not undertaken at arm’s length;

(iv) the assessee failed to furnish the information sought by the AO in order to determine the fair market value of the shares in terms of the provisions of rule 11UA of the Income Tax Rules, 1962.

The assessing officer was of the view that it was a dubious method adopted by the assessee in order to avail the benefit of set-off of the long-term capital loss arising on the sale of the shares of the subsidiary. Invoking the doctrine laid down by the Supreme Court in the case of McDowell and Co Ltd vs. CTO 154 ITR 148, the AO denied the claim for deduction of long-term capital loss of ₹922.33 crore arising on sale of shares of the Singapore subsidiary.

The Commissioner (Appeals) considered the chronology of events and facts of the case and upheld the finding of the AO that the long-term capital loss could not have been claimed through a revised return of income. He however held that since the assessee had suffered a loss, the claim made during the course of assessment proceedings could also be considered, placing reliance on the decision of the Bombay High Court in the case of CIT vs. Pruthvi Brokers & Shareholders 349 ITR 336. He therefore directed the AO to allow the loss as the claim was genuine and bona fide.

Before the tribunal, on behalf of the revenue, it was contended that the revised return of income was not valid in law and that the Commissioner (Appeals) ought not to have applied the ratio of the Bombay High Court decision in the case of Pruthvi Brokers & Shareholder (supra), as the decision related to a claim made for the first time before the Commissioner (Appeals) and that the ratio of the decision of the Supreme Court in the case of Goetze (India) Ltd 284 ITR 323 was squarely applicable to the facts of the case. It was further claimed that the Commissioner (Appeals) had failed to examine the colourful device adopted by the assessee and that the transactions of sale of shares of the Singapore subsidiary to another wholly-owned foreign subsidiary were not at arm’s length price.

On behalf of the revenue, it was further claimed that the revised return of income was not valid in law, as the assessee had chosen not to challenge this finding before the tribunal. It was claimed that the Commissioner (Appeals) had failed to take cognizance of the provisions of section 139(3) read with section 80. Reliance was placed on the decision of the Supreme Court in the case of Wipro Ltd (supra).

On behalf of the assessee, it was submitted that the ratio of the decision of the Supreme Court in the case of Wipro Ltd (supra) had no application to the facts of the case, as the issue before the Supreme Court was regarding the interpretation of the provisions of section 10B(8). It was further submitted that the claim of the assessee in the case before the tribunal was totally different from the facts in the case of Wipro Ltd (supra), and therefore the ratio of the decision of the Supreme Court in the case of Wipro Ltd (supra) could not be applied to the facts of the case before the tribunal. It was submitted that the material on record clearly showed that after meeting the liabilities of creditors of the Singapore subsidiary, nothing remained to be distributed amongst the shareholders. Therefore the intrinsic value of the shares was nil, and that there could not be any dispute with regard to consideration received on the sale of the shares.

It was further pointed out on behalf of the assessee that rule 11UA did not apply to the year under consideration, since it came into effect from 1st April, 2018. It was further submitted that the transaction was not a dubious transaction but was a real transaction, as evidenced by the documents showing the completeness of the transaction of the sale of shares. It was argued that the ratio of the decision in the case of McDowell & Co Ltd (supra) had no application to the facts of the case as it was a real transaction, and citizens were free to arrange affairs in order to minimise the tax liability.

Analysing the provisions of section 139, the tribunal observed that there was no dispute that the original return was filed within the due date for filing of the return of income under section 139(1). Even the revised return of income was filed within the prescribed period as required by section 139(5). The revised return could be filed in a situation where an assessee discovered any omission or any wrong statement made in the original return of income. The circumstances that led the assessee not to claim the long-term capital loss in the original return of income were explained before the AO, and which explanation remained uncontroverted. Therefore, according to the tribunal, it could not be said that it was not a bona fide omission made in the original return of income, or that the assessee had failed to satisfy the conditions prescribed under section 139(5) for filing the revised return of income. The Tribunal therefore held that the AO was not justified in not accepting the revised return of income filed by the assessee.

The tribunal observed that it was a settled position of law that an assessee was entitled to revise the return of income within the time allowed under section 139(5). Once the revised return of income was filed, the natural consequence was that the original return of income was effaced or obliterated for all purposes, and it was not open to the AO to revert to the original return of income. This position of law was approved by the Supreme Court in the case of CIT vs. Mahendra Mills/Arun Textile C/Humphreys Glasgow Consultants 243 ITR 56.

As regards the applicability of the Supreme Court decision in the case of Wipro Ltd (supra), the tribunal observed that, in that case, the Supreme Court was concerned with the interpretation of the provisions of section 10B(8), and had made a passing remark that the revised return of income filed by the assessee under section 139(5) only substituted original return of income under section 139(1), and such a return could not be transformed as return of loss filed under section 139(3) in order to avail the benefit of carry forward and set off of any loss under the provisions of section 80. The issue of interpretation of the provisions of section 139(3) and section 80 was not before the Supreme Court in the case of Wipro Ltd (supra). According to the tribunal, it was a settled legal position that every interpretation made by the Honourable Judges did not constitute the ratio decidendi. The tribunal further observed that the observations made by the Supreme Court had no application to the facts of the case before it, as the assessee had filed the original return of income showing loss within the time prescribed under section 139(1), and therefore the decision of the Supreme Court was distinguishable on facts.

According to the tribunal, it was clear that the assessee had discovered and omitted to claim a genuine loss arising on sale of shares, and therefore filed a revised return of income under section 139(5) within the prescribed time limit claiming the determination and carry forward of loss. It was a valid revised return of income filed under section 139(5). Therefore, the findings of the AO as well as the Commissioner (Appeals) to the extent that the revised return of income was not a valid one, was reversed by the tribunal.

The tribunal further rejected the arguments made on behalf of the revenue, that the finding that the revised return of income was not valid was accepted by the assessee as the issue was neither raised in cross-appeal nor in cross-objection, observing that respondent to an appeal could always support the order of the Commissioner (Appeals) on the ground decided against him under the provisions of rule 27 of the Income Tax (Appellate Tribunal) Rules, 1963. The tribunal observed that it was a settled position of law that in a case where the assessee filed the return of loss within the time prescribed under section 139(1), there was no bar under the provisions of the Income Tax Act to claim a higher loss during the course of assessment proceedings, nor were there any fetters on the AO to allow such higher loss.

Placing reliance on the decisions of the Delhi High Court in the case of CIT vs. Nalwa Investment Ltd 427 ITR 229 and Karnataka High Court in the case of CIT vs. Srinivasa Builders 369 ITR 69, the tribunal observed that when the assessee had claimed a lower amount of loss erroneously, which was sought to be corrected during the course of assessment proceedings, the AO was not justified in not determining and allowing the carry forward and set off of the loss, as the conditions for triggering the provisions of section 80 would not apply.

The Tribunal therefore held that the reasoning of the AO, that the loss not claimed in the original return of income but claimed in the revised return of income could not be allowed, was not sustainable in the eyes of the law.

RRPR HOLDING’S DECISION

The issue again came up before the Delhi bench of the tribunal in the case of RRPR Holding (P) Ltd vs. DyCIT 201 ITD 781.

The assessee was an investment holding company set up to acquire and hold shares of NDTV Ltd and its group companies. It filed its original return of income under section 139(1) on 15th October, 2010, declaring total income at ₹4,17,005. The original return was subjected to scrutiny assessment by the issuance of notice under section 143(2) dated 29th August, 2011. Pending completion of assessment under section 143(3), the assessee filed a revised return under section 139(5) on 2nd February, 2012 within the prescribed time. As per the revised return, the assessee claimed a long-term capital loss of ₹206.25 crore arising on the sale of shares, along with the income from other sources of ₹4,17,005 declared in the original return and claimed to carry forward of such loss.

The AO noted that no such loss arising on the sale of shares was claimed in the original return filed by the assessee. Subsequently, according to the AO, enquiries in respect of certain transactions entered into by the assessee were carried out by the Investigation Wing. Following the same, the assessee revised its return of income after a lapse of 17 months and filed a revised return claiming the long-term capital loss. The AO observed that such a revised return was not a valid return, and therefore non-est in the eyes of law. The AO noted that there was not even an iota of reference to any transaction involving any capital gains or capital loss in the original return. As per the AO, for entitlement of carry forward of losses, as per section 139(3), the loss return had to be necessarily filed within the time allowed for filing return under section 139(1), whereas the capital loss had been claimed for the first time in the revised return filed beyond the time limit stipulated under section 139(1). Thus, the AO refused to admit the claim of long-term capital loss and denied carrying forward and setting off of such loss.

The Commissioner (Appeals) upheld the denial of the long-term capital loss, on the ground that the return had to be necessarily filed within the time limit prescribed under section 139(1), but that the loss had been claimed by filing a revised return under section 139(5) beyond the time limit prescribed under section 139(1).

Before the tribunal, on behalf of the assessee, it was contended that where the original return had been filed on or before the due date under section 139(1), the assessee was entitled in law to revise the return under section 139(5) within the due date prescribed therein. The assessee had filed the original return as well as the revised return within the due dates prescribed under the respective sub-sections (1) and (5) of section 139. Thus the loss arising on the sale of the shares claimed as long-term capital loss was not hit by the embargo placed by section 80. Reliance was placed on the decisions of the High Courts in the case of Babubhai Ramanbhai Patel (supra), Dharampur Sugar Mills Ltd (supra), and the decision of the Mumbai bench of the tribunal in the case of Ramesh R Shah vs. ACIT 143 TTJ 166 (Mum) in support of this proposition. It was submitted that the denial of carry forward of losses claimed in the revised return was opposed to the scheme of the Act as interpreted by the judicial dicta and hence was required to be reversed by admitting the claim made towards long-term capital losses by way of revised return, and allowing carry forward and set off of such losses.

On behalf of the revenue, it was submitted that the loss return under section 139(3) must be necessarily filed within the due date prescribed under section 139(1) to avoid the rigours of section 80. The losses claimed had come into consideration by virtue of a revised return which was filed subsequent to the due date prescribed under section 139 (1), and thus the revised return to make a new claim giving rise to losses, could not be allowed in defiance of the provisions of the Act, regardless of the fact that the revised return had been filed within the due date prescribed under section 139(5). It was further submitted that the claim of capital loss had been made for the first time in the revised return, and it was not a case where the claim of loss made in the original return had been modified in the revised return. It was further pointed out that such a huge loss was claimed for the first time by way of a revised return, and that there was no reference to the loss in the original return or in the profit and loss account. It was contended that such an omission to claim the loss in the original return was prima facie willful to hide the transactions from the knowledge of the Department, and therefore the claim of loss made by filing the revised return should not be granted.

The tribunal observed that the moot question in the case was whether the assessee was entitled in law to make an altogether new claim of capital loss in the revised return which was filed within the due date prescribed under section 139(5) but subsequent to the due date prescribed under section 139(1), and consequently, whether the assessee was entitled to carry forward such capital losses claimed in the revised return. The other integral issue was whether the loss claimed in the revised return met the requirement of section 139(5).

The tribunal analysed the provisions of sections 139(1), 139(3), 139(5) and 80. It noted that section 80 began with a non-obstante clause, unequivocally laying down that to get the benefit of carry forward of loss pertaining to capital gains, the return of loss had to be filed within the time allowed under section 139(1). Section 80 therefore prohibited the claim of carry forward of such losses unless determined under section 139(3). Section 139(3) in turn made the mandate of the law clear that the loss return must be filed within the time limit permitted under section 139(1). The revision of the return under section 139(5) was also circumscribed by the expression “discovers any omission or any wrong statement in the original return”.

Analysing the facts of the case before it, the tribunal noted that the original return filed under section 139(1) did not make reference to the existence of any capital loss at all. The loss had been claimed for the first time in the revised return of income filed beyond the time limit prescribed under section 139(1). According to the tribunal, the provisions of section 80 thus came into play. The tribunal observed that the law codified was plain and clear and did not have any ambiguity. Therefore, the tribunal was of the view that the capital loss claimed under a return filed beyond the time limit under section 139(1) could not be carried forward under section 74.

The tribunal was of the view that the decision of the Allahabad High Court in the case of Dhampur Sugar Mills Ltd (supra) did not apply as the facts of the case before it were quite different. The tribunal refused to follow the decision of the Gujarat High Court in Babubhai Ramanbhai Patel (supra) on the ground that section 80 had not been pressed for the consideration of the High Court at all, and reliance upon such judgment rendered without reference to section 80, which was pivotal to the controversy, was of no relevance, and the observations made therein could not be applied to the facts of the case before it.

The tribunal further observed that no explanation was given as to how the omission to account for such a large loss had resulted, and therefore the propriety of such capital loss itself was under a cloud. It was therefore difficult for the tribunal to affirm that the omission or wrongful statement in the original return was sheer inadvertence and not deliberate or willful. The revised return could be filed only if there was an omission or wrong statement. A reference was made by the tribunal to the decision of the Supreme Court in the case of Kumar Jagdish Chandra Sinha vs. CIT 220 ITR 67, where it was held that a revised return could not be filed to cover up deliberate omission etc. in the original return.

The Tribunal therefore upheld the order of the AO.

OBSERVATIONS

There are various facets to the issue of claim of loss vis-à-vis a revised return;

A claim of increased loss where the original return declared loss that was increased in the revised return,
A claim of loss vide a revised return of income filed within the due date prescribed under s. 139(1),
Where the claim for loss was made during the course of assessment before the AO,
Where the claim for loss was made before the appellate authorities.
A claim of loss where the original return disclosed positive income,
Where the omission or wrong statement was conscious.

In Wipro’s case, the Supreme Court has rejected the claim for set-off and carry forward of the loss on two grounds;

the reason for filing the revised return could not be attributed to a mistake or a wrong statement, and
the return so filed could not transform itself into a return of loss under s. 139(3).

The Supreme Court in Wipro’s case considered the facts where the assessee filed a return under section 139(1), claiming exemption under section 10B, and therefore did not claim carry forward of the loss otherwise incurred. After the due date, it filed the declaration under section 10B(8) claiming that the provisions of section 10B should not apply, and claimed loss and the right to carry forward of losses under section 72, withdrawing its claim under section 10B. It may be noted that section 10B(8) requires the filing of the declaration to opt out before the due date prescribed under section 139(1). The Supreme Court held that the requirement to file the declaration under section 10B(8) was a mandatory requirement and not a directory one, and therefore filing the revised return under section 139(5) could not help the assessee to withdraw the claim under s. 10B of the Act and in its place stake a claim for the loss.

The Supreme Court also held that the assessee could file a revised return in a case only where there was an omission or a wrong statement. As per the Supreme Court, the revised return of income could not be filed to withdraw the claim of exemption and stake a claim for set-off of loss and to carry forward such loss. The Court held that the filing of a revised return to take a contrary stand regarding the claim of exemption was not permissible. In deciding so, the Supreme Court observed that the revised return filed by the assessee under section 139(5) only substituted the original return under section 139(1) and could not transform the original return into a return under section 139(3) in order to avail the benefit of carry forward or set-off of any loss under section 80. The issue in Wipro’s case was more about the right to withdraw the claim for an exemption by filing a revised return, and less about the right to claim a loss for the first time in a revised return of income.

In a situation where an original return of income is filed claiming a loss, either under the head “Business or Profession” or “Capital Gains” or both, which is filed within the time limit specified in section 139(1), what has undoubtedly been filed is a return of loss as envisaged by section 139(3), which is regarded as a return under section 139(1) by reason of operation of section 139(3). As held by the Supreme Court in Mahendra Mills case (supra), the revised return effaces or obliterates or replaces the original return, which original return cannot be acted upon by the AO. Any mistake or wrong statement made in a return furnished under section 139(1) can be corrected by filing a revised return under section 139(5) within the time specified in that sub-section. Therefore, logically, a return under section 139(3) declaring a loss under any one of the two heads of income can be revised to disclose a further loss under any of those heads (either the head with a positive income or the head with a loss in the original return) not disclosed in the original return. In Bilcare’s case, this was the position. The Delhi High Court supports this proposition in Nalwa Investments (supra) case, where a higher loss than that filed in the original return was claimed during assessment proceedings and allowed by the High Court. The Madras High Court also supports this proposition in the case of Periyar District Co-op. Milk Producers Union Ltd (supra), where it held that in view of the expression “all the provisions of this Act shall apply as if it were a return under sub-section (1)” contained in section 139(3), there was no reason to exclude the applicability of sub-section (5) to a return filed under sub-section (3). A similar view was taken by the Pune Tribunal in the case of Anagha Vijay Deshmukh vs. DyCIT 199 ITD 409, where a revised return was filed to claim a higher capital loss than that claimed in the original return.

In Bilcare’s case, the tribunal was concerned with a case where the original return of loss was revised and the claim of loss was substituted with the higher loss. This made it easier for the tribunal to hold the case in favour of the assessee as the original return was a return under s. 139(3). The facts presented by the assessee substantiated that there was an omission while filing the original return which was circumstantial and not deliberate. On a co-joint reading of the provisions of s. 139(3) and (5) along with sub-section (1), it is correct to hold that a return of loss filed under s. 139(3) can be revised under s.139(5) of the Act. In our considered view, there is no room for doubt about this position in law. The ratio of the decision in the case of Wipro was not applicable in this case, even where its decision in the context was not held to be obiter dicta.

Likewise, a case where the assessee has filed the revised return filed before the expiry of time prescribed under s.139(1), for claiming the loss for the first time should not pose a problem as such a return is nonetheless within the time permissible under s. 139(3) of the Act. The case of the assessee will be better served where there was a mistake in omitting to claim the loss originally.

A claim for deduction or expenditure is permissible to be made during the course of assessment or appellate proceedings, and such a claim resulting in assessed loss should not be disallowed and should be eligible for carry forward as long as the return of income was filed within the due date of s.139(1).

The challenge remains in a case where the original return of income filed u/s 139(1) was for a positive income which was changed to loss while filing the revised return under s. 139(5), outside the time prescribed under s.139(1) of the Act. It is in such a case that the Supreme Court in Wipro’s case held that it was not possible to grant the claim of loss staked under the revised return. The facts in RRPR’s case were similar to the facts in Wipro’s case, and therefore the tribunal in that case had no option but to apply the ratio of the decision of the Supreme Court.

In all cases of the revised return under s.139(5), the assessee has to establish that the revision was on account of the omission or a wrong statement and was not a deliberate and conscious act. Kumar Jagdish Chandra Sinha (supra),

Assuming that a given case does not suffer from the handicap of the deliberate or intentional act on the part of the assessee, one can perhaps analyse the issue in the absence of Wipro’s decision, notwithstanding the fact that even the application for the review of Wipro’s decision is rejected.

A situation where the income declared in the original return is a positive income under both heads of income, “Business or Profession” as well as “Capital Gains”, but a loss under either head is sought to be claimed in a revised return, as was the situation in RRPR Holding’s case. These were the facts before the Gujarat High Court in Babubhai Ramanbhai Patel’s case, where a positive return of income that was filed was sought to be revised disclosing such income, but also disclosing a speculation loss. While the Gujarat High Court did not expressly refer to section 80, they did hold that accepting the contention of the revenue would amount to limiting the scope of revision of the return, which did not flow from the language of section 139(5).
Similarly, the Karnataka High Court, in the case of Srinivas Builders (supra) allowed the claim for loss made during assessment proceedings, where the return of income originally filed was of a positive income.
A contrary view was taken by the Kerala High Court in the case of CIT vs. Kerala State Construction Corporation Ltd 267 Taxman 256, where the High Court held that when a return is originally filed under section 139(1), the enabling provision under section 139(5) to file a revised return only enables the substitution or revision of the original return filed. On a revised return filed, it can only be a return under section 139(1) and not one under section 139(3). The Kerala High Court relied (perhaps unjustifiably) on the decision of the Punjab & Haryana High Court in the case of CIT vs. Haryana Hotels Ltd 276 ITR 521, which was a case where a loss of an earlier year was claimed for set off without a return of income being filed at all and without any assessment having been done for that earlier year.
In Ramesh R Shah’s case (supra), a return of positive income was sought to be revised by claiming a long-term capital loss which was to be carried forward, in addition to the income declared in the original return. In that case, the Tribunal observed as under:

“In our humble opinion correct interpretation of section 80, as per the language used by the Legislature, condition for filing revised return of loss under section 139(3) is confined to the cases where there is only a loss in the original return filed by the assessee and no positive income and assessee desires to take benefit of carry forward of said loss. Once, assessee declares positive income in original return filed under section 139(1) but subsequently finds some mistake or wrong statement and files revised return declaring loss then can he be deprived of the benefit of carry forward of such loss? In our humble opinion, if we accept interpretation given by the authorities below, it would frustrate the object of section 80. Section 80 is a cap on the right of the assessee, when the assessee claims that he has no taxable income but only a loss but does not file the return of income declaring the said loss as provided in sub-section (3) of section 139. It is pertinent to note here that Legislature has dealt with two specific situations (i) under section 139(1), if the assessee has a taxable income chargeable to tax then it is a statutory obligation to file the return of income within the time allowed under section 139(1). So far as section 139(3) is concerned, it only provides for filing the return of loss if the assessee desires that the same should be carried forward and set off in future. As per the language used in sub-section (3) to section 139, it is contemplated that when the assessee files the original return, at that time, there should be loss and the assessee desires to claim said loss to be carried forward and set off in future assessment years. Sub-section (1) of section 139 cast statutory obligation on the assessee when there is positive income. In the present case, admittedly, the assessee filed the return of income declaring the positive income and even in the revised return, the assessee has declared the positive income as the loss in respect of the sale of shares, which could not be set off, inter-source or inter-head under section 70 or 71 of the Act.

11. We have to interpret the provisions of any statute to make the same workable to the logical ends. As per the provisions of sub-section (5) to section 139, in both the situations where the assessee has filed the return of positive income as well as return of loss at the first instance as per the time limit prescribed and subsequently, files the revised return then the revised return is treated as valid return. In the present case, as the assessee filed its original return declaring the positive income and hence, in our opinion, subsequent revised return is valid return also and the assessee is entitled to carry forward of ‘long-term capital loss’. Sub-sections (1) and (3) of section 139 provides for the different situations and in our opinion, there is no conflict in applicability of both the provisions as both the provisions are applicable in the different situations. We are, therefore, of the opinion that there is no justification to deny the assessee to carry forward the loss.”

Unfortunately, the decision in Ramesh R Shah’s case, though cited before the Tribunal in RRPR Holding’s case, was not considered by it in deciding the matter. It appears that the decision in RRPR Holding’s case was swayed by the assessee’s failure to furnish an explanation of the nature and character of transactions resulting in the capital loss, and therefore the genuineness of the transactions.
This view taken in Ramesh R Shah’s case has also been followed by the Tribunal in the case of Mukund N Shah vs. ACIT, ITA No 4311/Mum/2009 dated 17th August, 2011, where a revised return was filed during the course of assessment proceedings, claiming a capital loss which had not been claimed in the original return filed under section 139(1). The Tribunal held that once the return is revised the original return filed gets substituted by a revised return, and therefore, loss determined as per the revised return was to be treated as loss declared under section 139(3), because the original return was filed within the time allowed under section 139(1). Therefore, the loss determined has to be taken as a loss computed in accordance with the provisions of section 139(3) and such loss has to be allowed to be carried forward under the provisions of section 80. The Tribunal also looked at it from a different angle. If the assessee had not revised the return at all and no loss was shown in the original return due to some mistake, the AO in the assessment under section 143(3) was required to compute income or loss correctly. Once the loss had been determined by the AO under section 143(3), it cannot be said that the loss cannot be allowed to be carried forward when the return has been filed within the time allowed under section 139(1).

A harmonious reading of the provisions of sub-sections (1),(3),(5) of s. 139 with s.80 of the Act reveals that the return of income is to be filed under s.139(1) and of loss under s. 139(3) and both the returns are to be filed within the time prescribed under s.139(1). The reading also confirms that both of these returns can be revised under sub-section (5). There is no express or implicit condition in s.139 that stipulates that a return of income cannot be revised to declare loss for the first time.

Importantly s.139(3) clearly states that all the provisions of the Act shall apply to such a return as if the return of loss is the return of income furnished under s.139(1) of the Act. In our respectful opinion, it is clear that no further transformation is called for where the legislature itself had bestowed the return of loss with the status of a return under s.139(1), and no further aid is required from the provisions of sub-section (5) to further transform the return filed thereunder as one under sub-section (3).

The purpose of section 80 is that, while there is no obligation to file a return of income under section 139(1), the assessee should file a return of income and have the loss determined in order to be able to claim carry forward and set off of the loss. This purpose is achieved even in a situation where the original return declaring a positive income is filed in time but is revised on account of a mistake to reflect a loss. Further, if a return of loss can be revised to claim a higher loss or can be assessed at a higher loss on account of a claim made in assessment proceedings, there is no justification in denying a claim of a loss merely because it was made through a revised return and not through the original return. This view also results in a harmonious interpretation of sections 80, 139(3) and 139(5).

There is no doubt that the ratio of the Supreme Court‘s decision in Wipro Ltd.’s case will be applicable to cases with identical facts, till such time the relevant part of the decision is read as obiter dicta by the courts or the same is reconsidered by the Supreme Court itself. Better still is for the legislature to come forward and correct an aberration that is harmful, and the harm is unintended.

BCAJ Admin

Principle Of Mutuality Cannot Be Extended To Interest Earned By Mutual Concern On Fixed Deposits Placed With Member Banks

INTRODUCTION

1.1 Section 4 of the Income-tax Act, 1961 (‘the Act’) provides that income-tax shall be charged for any assessment year in respect of the ‘total income’ of the previous year of every person. It is a well-settled law that no person can earn profits from himself. This is the basis of the principle of mutuality which has been accepted by the Courts in their decisions rendered from time to time.

1.2 One such decision is that of the Supreme Court in the case of CIT vs. Bankipur Club Ltd. [(1997) 226 ITR 97 –SC)] which was analysed in this column in the August 1998 issue of the BCAJ. In this case, a batch of appeals filed by the department came up before the Supreme Court, and the same were divided into 5 groups. One of the assessees – Cawnpore Club Ltd. which was initially a part of this group of matters was subsequently delinked and kept for hearing separately. While delinking the matter, the Supreme Court observed that it did not appear that the issue of income being exempt on the ground of mutuality was decided in favour of the assessee and the only issue in that appeal filed by the tax department was whether certain income could be taxed under the head Income from house property. In the remaining group of cases, the assessees were companies registered under section 25 of the Companies Act, 1956, and were mutual undertakings in the nature of ‘Members’ clubs’. The issue before the Supreme Court was as to whether the surplus receipts of the clubs earned from providing facilities to its members was in the nature of ‘income’ chargeable to tax. The income received by the clubs from providing facilities to non-members was not an issue before the Supreme Court. The Court held that it was not necessary that the individual identity of contributors and participants should be established for an entity to be regarded as a Mutual Concern. Such identity should be established between the class of contributors and the class of participants. The Court after setting out the facts in each of these groups of cases observed that the receipts for the various facilities extended by the assessee clubs to its members as part of the usual privileges, advantages, and conveniences, attached to the membership of the club could not be said to be ‘a trading activity’ and held that the surplus as a result of mutual arrangement could not be said to be ‘income’ of the assessees.

1.3 Thereafter, the case of CIT vs. Cawnpore Club Ltd. [(2004) 140 Taxman 378 -SC], which was delinked in the above group of cases, was separately taken up by the Supreme Court. The Supreme Court in Cawnpore’s case noted that one of the questions which the High Court had decided in other cases relating to the same assessee was that the doctrine of mutuality applied and, therefore, the income earned by the assessee from the rooms let out to its members could not be subjected to tax. The Supreme Court further noted that no appeal had been filed against the said decision of the High Court and the matter stood concluded in favour of the assessee. Having noted so, the Supreme Court observed that there was no point in proceeding with the appeals on the other questions.

1.4 In the case of Bangalore Club vs. CIT [(2013) 350 ITR 509 –SC], the assessee relying on the principle of mutuality took a stand that interest earned on the fixed deposits kept with certain banks which were corporate members of the assessee was not chargeable to tax. The tax was, however, paid by the assessee on the interest earned on fixed deposits kept with non-member banks. The Supreme Court denied the assessee’s claim for exemption on the basis of mutuality principle. The Supreme Court held that (i) the arrangement lacked a complete identity between the contributors and the participants as once the surplus funds were placed in fixed deposits, the closed flow of funds between the assessee and the member banks was broken and the use of these funds by the member banks for advancing loans to third parties and engaging in commercial operations ruptured the privity of mutuality; (ii) the excess funds of a mutual concern must be used in furtherance of its objects which was not so in the present case and (iii) the third condition that the funds must be returned to the contributors as well as expended solely on the contributors was violated in the present case once the deposits placed by the assessee with the banks were given to third parties by the bank for commercial reasons.

1.5 Recently, this issue of taxability of interest earned by a mutual concern from fixed deposits placed with banks came up before the Supreme Court in the case of Secundrabad Club vs. CIT and it is thought fit to consider the said decision in this column.

Secundrabad Club vs. CIT (2023) 457 ITR 263 – SC

2.1 In this case, the Supreme Court heard a batch of appeals filed by the respective assessees from the decision of the Andhra Pradesh High Court in the case of Secunderabad Club [(2012) 340 ITR 121] and from the decisions of the Madras High Court in the cases of Madras Gymkhana Club [(2010) 328 ITR 348], Madras Cricket Club [(2011) 334 ITR 238], etc. The High Courts in all these cases concluded that the deposit of surplus funds by the appellant Clubs by way of bank deposits in various banks was liable to be taxed in the hands of the Clubs and that the principle of mutuality would not apply in such a case.

2.1.1 Before the Supreme Court, one of the primary arguments urged by the assessee in these appeals against the aforesaid High Court judgments was that the Supreme Court’s decision in the case of Bangalore Club (para 1.4 above) called for a reconsideration in view of the Court’s earlier decision in the case of Cawnpore Club (para 1.3 above).

2.2 The assessee submitted that the two-judge bench decision of the Supreme Court in the case of Bangalore Club was not a binding precedent as the same did not notice the order passed in the case of Cawnpore Club and, therefore, the decision of Bangalore Club required reconsideration. The assessee urged that prior to the decision in the case of Bangalore Club, all interest earned from fixed deposits, and post office deposits by the clubs were entitled to exemption from income tax as the same was surplus income of the clubs earned without any profit motive and such interest income earned from the deposits was exclusively used for the benefit of the clubs and its members.

2.2.1 The assessee further submitted that the reasoning of the Supreme Court in the case of Bangalore Club was flawed and, further, such judgment being contrary to the order passed in Cawnpore Club was per incuriam and not a binding precedent. The assessee pointed out that the Bangalore Club failed to note that once there is no profit motive in the activities of a club and despite such fact, a surplus is generated, the activities and income of the club cannot be tainted with commerciality. The assessee also placed reliance on the Supreme Court’s decision in the case of Kunhayammed vs. State of Kerala [(2000) 6 SCC 359] to urge that when a special leave petition (in the case of Cawnpore Club) is converted into a Civil Appeal and a judgment is rendered in the Civil Appeal, the same is a binding precedent to be followed subsequently by all courts which was not done by the Court in Bangalore Club. The assessee also submitted that as two decisions of the Supreme Court in the case of Cawnpore Club and Bangalore Club took two diametrically opposite views, a reference ought to be made to a larger bench to lay down the correct law.

2.2.2 The assessee also contended that once the triple test for the applicability of the principle of mutuality is satisfied, the notion of rupture of mutuality or one-to-one identity could not have been the basis for denying exemption on the interest income generated by the clubs.

2.2.3 The assessee further urged that for social clubs and mutual associations, the character and nature of the receipt are immaterial and the only thing which is of significance is the utilisation of the income earned by a club only for the benefit of its members. The assessee urged that irrespective of whether the banks are corporate members of the club or not, there is complete identity between the source of deposits made by the Club in banks, post offices etc., and the beneficiaries of the interest earned, as the interest earned on the said deposits are being used for the benefit of the members of the Club.

2.2.4 The assessee submitted that the aspect of profit motive could not be attributed to clubs, as the only intention behind depositing surplus funds of the clubs in a bank was a matter of prudence, and the interest earned thereon along with the principal amount deposited would only be used for the benefit of the members of a club.

2.2.5 The assessee also placed reliance on the decision of the Karnataka High Court in the case of Canara Bank Golden Jubilee Staff Welfare Fund vs. DCIT [(2010) 308 ITR 202] where on the facts of that case, the Karnataka High Court had held that the principle of mutuality would apply even to interest earned from fixed deposits, National Savings Certificates etc., invested by the appellant-Clubs in various banks who may or may not be corporate members of these Clubs.

2.3 On the other hand, the Revenue submitted that the impugned judgments of the High Courts did not require any interference. The Revenue also submitted that the decision of the Supreme Court in Bangalore Club squarely covered the issue at hand and did not call for any reconsideration.

2.3.1 The Revenue placed reliance on Bangalore Club’s decision to urge that the principle of mutuality applied to the generation of surplus funds but once the funds were invested in the form of fixed deposits in the banks (whether corporate members of the club or not), in post offices or through national savings certificates etc., the funds suffer a deflection as a result of being exposed to commercial banking operations or operations of the post offices which use the said funds for advancing loans to their customers and thus, generate a higher income by lending it at a higher rate to the third party customers and pay a lower rate of interest on the fixed deposits made by the clubs.

2.3.2 The Revenue further submitted that the Bombay High Court and the Madras High Court had not concurred with the judgment of the Karnataka High Court in Canara Bank, and had observed that the said judgment may be restricted to the facts of that case alone and cannot act as a precedent, particularly in view of the judgment of the Supreme Court in Bangalore Club. The Revenue contended that the judgment in Bangalore Club had impliedly overruled the decision of the Karnataka High Court in Canara Bank’s case.

2.4 Rebutting the Revenue’s arguments, the assessee pointed out that the Supreme Court had dismissed the special leave petition filed by the Revenue against the judgment of the Karnataka High Court in Canara Bank’s case. The assessee submitted that once the Supreme Court had affirmed the Karnataka High Court’s judgment in the case of Canara Bank which was in line with the judgment of the Supreme Court in Cawnpore Club, the subsequent judgment in Bangalore Club taking a totally contrary view required reconsideration.

2.5 After considering the rival contentions, the Supreme Court set out the jurisprudence on the principle of mutuality and then proceeded to decide the issue.

2.5.1 With respect to the binding nature of Cawnpore Club’s judgment, the Supreme Court held that there was no ratio decidendi that arose from Cawnpore Club’s order which could be treated as a binding precedent for subsequent cases. The relevant observations of the Supreme Court, in this regard, are as follows [page 301]:

“ ……..It must be remembered that the appeals in the case of Cawnpore Club were filed by the Revenue and merely because the Revenue did not press its appeal in respect of the other aspects of the case and this Court found that the income earned by the assessee from the rooms let out to its members could not be subjected to tax on the principle of mutuality, it would not mean that the other questions which were not pressed by the Revenue in the said appeal stood answered in favour of the assessee and against the Revenue. On the other hand, in the absence of there being any indication in the order as to what “the other questions” were in respect of which the principle of mutuality applied, in our view, there is no ratio decidendi emanating from the said order which would be a binding precedent for subsequent cases. In view of the disposal of Revenue’s appeals in the case of Cawnpore Club by a brief order sans any reasoning and dehors any ratio, cannot be considered to be a binding precedent which has been ignored by another Coordinate Bench of this Court while deciding Bangalore Club. In our view, the Order passed in Cawnpore Club binds only the parties in those appeals and cannot be understood as a precedent for subsequent cases.”

2.5.2 The Supreme Court held that there was no need to refer the decision in Bangalore Club’s case to a larger bench as there was no binding ratio decidendi which was laid down in Cawnpore Club’s order which could be said to have been ignored in Bangalore Club’s case. The relevant observations of the Supreme Court are as under [pages 305/306]:

“When the appeals were considered thereafter in the case of Cawnpore Club this Court simply applied the principle of mutuality to the income earned by the club from rooms rented out to its members as not being subject to tax. As far as the other questions were concerned, this Court only observed that “no useful purpose would be served in proceeding with the appeals on the other questions when the respondent cannot be taxed because of the principle of mutuality.” This observation in Cawnpore Club must be juxtaposed with the observations expressed above in Bankipur Club. When the aforesaid observations made in Cawnpore Club are considered in light of the larger plea, we find that the same was not answered in Bankipur Club nor in Cawnpore Club. But, the subsequent decision in Bangalore Club ultimately answered the said larger plea through a detailed reasoning. Therefore, it cannot be held that the short order passed in Cawnpore Club is a precedent which was ignored by a Coordinate Bench of two judges in Bangalore Club, so as to make the latter decision per incuriam. On the other hand, we are of the view that the larger plea which was neither considered in Bankipur Club nor in Cawnpore Club was ultimately considered and answered in Bangalore Club by a detailed judgment.

Therefore, we do not find any fault in a subsequent Coordinate Bench of this Court in Bangalore Club in not noticing the Order passed in the case of Cawnpore Club while dealing, in a detailed manner, on the taxability of the income earned from the interest on fixed deposits made by the said Club in banks, whether the banks are members of the clubs or not………”

2.5.3 The Supreme Court noted that Bangalore Club had noted the three principles of mutuality, namely, (i) complete identity between contributors and participators, (ii) action of the participators and contributors which are in furtherance of the mandate of the associations or the Clubs and (iii) no scope for profiteering by the contributors from a fund made by them which could only be expended or returned to themselves. The Supreme Court concurred with the decision in Bangalore Club and held that the aforementioned tests of mutuality were not satisfied when the assessee club made an investment in fixed deposits of a bank. The Supreme Court observed as under [page 311]:

“………These appellant Clubs just like Bangalore Club are social clubs, and it is the surplus funds earned through various activities of the Clubs which are deposited as fixed deposit in the banks so as to earn an interest owing to the business of banking. In the absence of the said fixed deposits being utilized by the banks for their transactions with their customers, no interest can be payable on the fixed deposits. This is so in respect of any customer of a bank who would deposit surplus funds in a bank. It may be that the interest income would be ultimately used for the benefit of the members of the Clubs but that is not a consideration which would have an impact on satisfying the triple test of mutuality. It was observed in Bangalore Club that even if ultimately the interest income and surplus funds in the fixed deposit are utilised for the benefit of the members of the clubs, the fact remains that when the fixed deposits were made by the clubs in the banks, they were exposed to transactions with third parties, i.e., between the banks and its customers and this would snap the principle of mutuality breaching the triple test. When the reasoning of this Court in Bangalore Club is considered in light of the judgments of overseas jurisdictions, it is noted that this proposition would squarely apply even to fixed deposits made in banks which are members of the clubs. In other words, it is only profit generated from the payments made by the members of the clubs, which would not be taxable…….”

2.5.4 With respect to the reliance by the assessee on the decision of the Karnataka High Court in the case of Canara Bank, the Supreme Court observed that the said decision must be restricted to apply to the facts of that case only and cannot be a precedent for subsequent cases as the judgment of the Karnataka High Court in Bangalore Club’s case was not brought to the notice of the judges hearing the Canara Bank’s case.

2.5.5 The Supreme Court concluded that the reasoning given in its earlier decision of Bangalore Club was proper and did not call for reconsideration and held that interest income earned by the clubs on fixed deposits made in the banks or any income earned from persons who are not members of the club would be liable to be taxed.

CONCLUSION

3.1 In view of the above judgment of the Supreme Court, the issue now stands settled, that any interest income earned by a mutual concern or club from interest on fixed deposits placed with member banks of the club would be subjected to tax and the principle of mutuality would have no applicability in such an instance. For a concern to claim exemption on account of mutuality, it will be necessary to demonstrate that the three tests of mutuality laid down by the Court which are extracted in para 2.5.3 above are fulfilled.

3.2 In light of the Supreme Court’s decision, the fact that the interest earned on the fixed deposits is used only towards the objects of the mutual concern or club is also irrelevant once the surplus has been invested in the fixed deposits which are used by banks to give loans to third parties.

3.3 In the past, the issue had also come up as to whether the ‘annual letting value’ [‘deemed house property income’] of vacant immovable property owned by the Members Club [which is otherwise entitled to benefit of Principle of Mutuality] is liable to tax or the same will not be liable to tax applying the Principle of Mutuality. This issue was considered by the Apex Court in the case of Chelmsford Club Ltd [(2000) 243 ITR 89 -SC] wherein the Court has taken a view that even such ‘deemed house property income’ can be governed by the Principle of Mutuality. This judgment was analysed in this column in the August, 2000 issue of BCAJ.

BCAJ Admin

Glimpses of Supreme Court Rulings

53 Kotak Mahindra Bank Limited vs. Commissioner of Income Tax, Bangalore (2023) 458 ITR 113(SC)

Settlement Commission — Immunity from prosecution and penalty as contemplated — Section 245H — Based on such disclosures and on noting that the Appellant co-operated with the Commission in the process of settlement, the Commission proceeded to grant immunity from prosecution and penalty as contemplated under Section 245H of the Act — The High Court ought not to have sat in appeal as to the sufficiency of the material and particulars placed before the Commission, based on which the Commission proceeded to grant immunity from prosecution and penalty as contemplated under Section 245H of the Act.

The facts giving rise to the present appeal, in a nutshell, are that the Appellant-Assessee, Kotak Mahindra Bank Limited (formerly, “M/s. ING Vysya Bank Limited”) is a Public Limited Company carrying on the business of banking and is assessed to tax in Bangalore where its registered office is located. Apart from the business of banking, the Appellant also carries out leasing business on receiving approval from the Reserve Bank of India (hereinafter “RBI” for short) vide Circular dated 19th February, 1994. Thus, the Appellant derives its income, inter alia, from banking activities as well as from leasing transactions.

The Appellant filed its income tax returns for the assessment years 1994–1995 to 1999–2000, and assessment orders were passed up to the assessment year 1997–1998 and the assessment for the subsequent years was pending. During the assessment proceedings for the assessment year 1997–1998, the Assessing Officer (AO) made certain additions and disallowances based on which the assessment already concluded for the assessment years 1994–1995 to 1996–1997 were proposed to be reopened. The AO then passed an Assessment Order dated 30th March, 2000, for the assessment year 1997–1998. The main issue pertained to the income with respect to the activity of leasing. As per the Assessment Order, the Appellant had been accounting for lease rental received, by treating the same as a financial transaction. As a result, the lease rental was bifurcated into a capital repayment portion and an interest component. Only the interest component was offered to tax. In other words, the Appellant treated such leases as loans granted to the “purported” lessees to purchase assets. In such cases, the ownership of the assets is vested with the lessees. However, the Appellant claimed depreciation on those assets under Section 32 of the Income-tax Act, 1961 (“the Act”) though the Appellant was not the owner of the assets for the purpose of the said transactions.

On 9th June, 2000, the AO issued a notice under Section 148 of the Act for the reassessment of income for the aforesaid assessment years. The AO also passed a penalty order dated 14th June, 2000, levying a penalty under Section 271(1)(c) of the Act, after being satisfied that the Appellant had concealed its income as regards lease rental.

While various proceedings, such as an appeal before the CIT(A) for the assessment year 1997–1998, re-assessment proceedings for the assessment years 1994–1995 to 1996–1997 and regular assessment proceedings for the assessment years 1998–1999 and 1999–2000 were pending before various income tax authorities, the Appellant, on 10th July, 2000, approached the Settlement Commission at Chennai to settle its income tax liabilities under Section 245C(1) of the Act. The Appellant sought for determination of its taxable income for the assessment years 1994–1995 to 1999–2000, after considering the issues pertaining to the income assessable in respect of its leasing transaction; eligibility to avail depreciation in respect of leased assets; the quantum of allowable deduction under Section 80M and exemption under Sections 10(15) and 10(23G); and depreciation on the investments portfolio of the bank classified as permanent investments.

When matters stood thus, the concluded assessments for earlier assessment years were reopened by the issuance of notices under Section 148 of the Act. The Appellant filed returns under protest with respect to the said assessment years.

Before the Settlement Commission, the Respondents-Revenue raised a preliminary objection contending that the Appellant did not fulfil the qualifying criteria as contemplated under Section 245C(1) and, hence, the application filed by the Appellant was not maintainable, as, under the said provision, the Appellant was required to make an application in the prescribed manner containing full and true disclosure of its income which had not been disclosed before the AO and also the manner in which such income had been derived. That unless there is a true and full disclosure there would be no valid application and the Settlement Commission will not be able to assume jurisdiction to proceed with the admission of the application. It was thus contended that the purported application made before the Settlement Commission was not an application as contemplated under Section 245C(1) of the Act for the reason that the Appellant had not made a full and true disclosure of its income which had not been disclosed before the AO.

After considering the contentions of both parties, the Settlement Commission passed an Order dated 11th December, 2000, entertaining the application filed by the Appellant under Section 245C and rejecting the preliminary objections raised by the Revenue. The Settlement Commission allowed the application filed by the Appellant by way of a speaking order and permitted the Appellant to pursue its claim under Section 245D. Thus, the application proceeded further under Section 245D(1) of the Act.

The Revenue challenged the Order dated 11th December, 2000, passed by the Settlement Commission before the High Court of Karnataka at Bangalore by way of Writ Petition No. 13111 of 2001. The Revenue questioned the jurisdiction of the Settlement Commission in entertaining the application filed by the Appellant under Section 245C(1) of the Act.

The learned Single Judge of the High Court of Karnataka, after going through the legislative history of the provisions of Chapter-XIXA, accepted the argument advanced by the Appellant that the proviso to Section 245C as it stood earlier, which enabled the Commissioner to raise an objection even at the threshold to entertain an application of this nature had been later shifted to sub-section (l)(A) of Section 245D and from the year 1991, it had been totally omitted, and in the light of such legislative history, it was not open to the Revenue to raise any such preliminary objection regarding maintainability of the application itself. It was further held that the application can be proceeded with by the Settlement Commission for determination of the same on merits and it was not necessary that the Revenue should be permitted to raise a preliminary objection as to the maintainability of the application.

The learned Single Judge disposed of the above Writ Petition by way of an Order dated 18th August, 2005, in favour of the Appellant herein by holding that notwithstanding any preliminary finding, it was still open to the Commissioner to agitate or to apprise the Commission of all the aspects of the matter that he may find fit to be placed before the Commission. The Single Judge was of the view that it was not necessary to examine the legal position that may require an interpretation of provisions of Section 245C at that stage when the matter itself was still at large before the Settlement Commission as the very object of Chapter-XIXA was to settle cases and to reduce the disputes and not to prolong litigation. Thus, the High Court disposed of the Writ Petition, holding that it was open to the parties to raise all their contentions before the Commission at the stage of disposal of the application and the Commission may, independent of the findings which it has given under the Order dated 11th December, 2000, examine all the contentions and proceed to pass orders on merits in accordance with the provisions of the Act.

As a result of the Order dated 18th August, 2005, passed by the High Court of Karnataka, the Settlement Commission heard both parties on merits as well as on the issue of maintainability. The Settlement Commission upheld the maintainability of the application filed by the Appellant and passed an Order dated 4th March, 2008, under Sections 245D(1) and 245D(4), determining the additional income at ₹196,36,06,201. As regards the issue of immunity from penalty and prosecution, the Commission, having regard to the fact that the Appellant had co-operated in the proceedings before the Settlement Commission, and true and full disclosure was made by the Appellant before the Commission, granted immunity under Section 245H(1) from the imposition of penalty and prosecution under the Act and the relevant Sections of the Indian Penal Code. Further, the Settlement Commission annulled the penalty levied by the AO under Section 271(1)(c) for the assessment year 1997–1998 in respect of non-disclosure of lease rental income. The same was annulled considering that the non-disclosure was on account of RBI guidelines and subsequent disclosure on the part of the Appellant, of additional income of the lease income before the Settlement Commission when the Appellant realised the omission to disclose the same as per income tax law.

Being aggrieved by the Order dated 4th March, 2008, passed by the Settlement Commission, the Respondent-Revenue preferred Writ Petition bearing No. 12239 of 2008 (T-IT) before the High Court of Karnataka assailing the said Order. The learned Single Judge of the High Court vide Order dated 20th May, 2010, upheld the Order of the Settlement Commission as regards the jurisdiction to entertain the application and also as regards the correctness of the Order passed by the Settlement Commission in determining the tax liability, but found fault with the Commission in so far as granting immunity to the Appellant from the levy of penalty and initiation of prosecution was concerned. The Single Judge was of the view that the reasoning of the Settlement Commission was vague, unsound and contrary to established principles and that the burden was on the Appellant herein to prove that there was no concealment or wilful neglect on its part and in the absence of such evidence before the Settlement Commission, the Order granting immunity from penalty and prosecution was an illegal order. The learned Single Judge, thus, remanded the matter to the Settlement Commission for the limited purpose of reconsidering the question of immunity from levy of penalty and prosecution and the Order of the AO levying penalty, after providing an opportunity to both parties.

Being aggrieved by the remand order passed by the learned Single Judge, the Appellant preferred Writ Appeal No. 2458 of 2018 before a Division Bench of the High Court.

In the meanwhile, Revenue preferred Special Leave Petition (C) CC No. 19663 of 2010 before the Supreme Court against the Order dated 20th May, 2010, passed by the learned Single Judge in Writ Petition No. 12239 of 2008. On 6th January, 2012, the Supreme Court directed the Special Leave Petition to stand over for eight weeks and directed the Settlement Commission to dispose of the matter remanded to it by the High Court. In pursuance of the Order dated 6th January, 2012, passed by this Court, the Settlement Commission, Chennai, issued a notice in the remanded matter on 30th January, 2012.

On 10th February, 2012, the Appellant moved an application before the Supreme Court seeking modification of its Order dated 6th January, 2012, by issuing a direction to the High Court to dispose of Writ Appeal No. 2458 of 2010. It was contended that the filing of a Special Leave Petition against the order of the learned Single Judge was not proper as a Writ Appeal should have been filed. That admittedly, Writ Appeal No. 2458 of 2010 was pending before the High Court and the Revenue suppressed this vital information while filing the Special Leave Petition. The Supreme Court by way of an Order dated 21st February, 2012, recalled its earlier Order dated 6th January, 2012, passed in SLP (C) CC No. 19663 of 2010 and directed the High Court to dispose of Writ Appeal No. 2458 of 2010 within a period of two months.

Following the same, a Division Bench of the High Court of Karnataka vide Order dated 6th July, 2012, dismissed the Writ Appeal preferred by the Appellant and upheld the Order passed by the learned Single Judge. It was observed that the Order of the learned Single Judge remanding the matter to the Settlement Commission for adjudication did not suffer from any material irregularity or illegality.

Aggrieved by the judgment dated 6th July, 2012, in Writ Appeal No. 2458 of 2010, the Appellant has preferred Civil Appeal before the Supreme Court.

According to the Supreme Court, the following points emerged for its consideration:

“Whether the Division Bench of the High Court was right in affirming the findings of the learned Single Judge, to the effect that the Settlement Commission ought not to have exercised discretion under Section 245H of the Act and granted immunity to the Assessee de hors any material to demonstrate that there was no wilful concealment on the part of the Assessee to evade tax and on that ground, remanding the matter to the Commission for fresh consideration?”

The Supreme Court found that in the present case, the Settlement Commission had rightly considered the relevant facts and material and, accordingly, decided to grant immunity to the Appellant from prosecution and penalty. The Supreme Court arrived at this conclusion having regard to the following aspects of the matter, recorded by the Settlement Commission:

The Commission in its order dated 4th March, 2008, had noted that the Appellant had realised while adhering to the RBI guidelines of accounting of lease income that there was an error in not disclosing the full lease rental receipts as per income tax law. Thus, the Appellant offered additional income under various heads, which were not considered by the AO. Considering the nature and circumstances and the complexities of the investigation involved, the Commission was of the view that the application was to proceed under Section 245D(1) of the Act and that prima facie, a full and true disclosure of income not disclosed before the AO had been made by the Appellant. The findings of the Commission to this effect are usefully extracted as under:

“4.3 We have considered the rival submissions. We are of the opinion that there is no bar for banking companies to approach the Commission. The disclosure of the material facts in the return of income or the documents accompanying return of income is not a bar for the applicant to approach the Commission. In view of this, we hold that the applicant is eligible to approach the Commission.
…

5.1 Finally we have carefully gone through the settlement application and the confidential annexures and are satisfied that the complexities of investigation as brought out in the application do exist. We have also considered the nature and circumstances of the case as explained by the applicant’s representative. The applicant is an established scheduled bank with several branches. The applicant has realized that when adhering to RBI guidelines of accounting of lease income there was an error in not disclosing the full lease rental receipts as per income tax law. In addition the applicant has offered additional income under various heads not considered by the Assessing Officer. We are satisfied that the nature and circumstances and the complexities of investigation involved do warrant the application to be proceeded with under Section 245D(1) of the Act. We are also reasonably satisfied that, prima facie, a full and true disclosure of income not disclosed before the Assessing Officer has been made by the applicant. Additionally, taking a practical view of the case, we are also concerned by the time taken to dispose of this application, particularly in respect of a scheduled bank. We feel that the matters need to be given a quietus and brought to close as speedy collection of taxes is also an important function of the Settlement Commission. We therefore allow the application to be proceeded with Under Section 245D(1) of the Act.”

According to the Supreme Court, the aforesaid findings of the Settlement Commission demonstrated that it had applied its mind to the aspect of whether there was wilful concealment of income by the Assessee. Having noted that non-disclosure was on account of RBI guidelines, which required a different standard of disclosure, the Commission decided to grant immunity to the Appellant from prosecution and penalty.

In the light of the aforesaid discussion, the Supreme Court was of the view that the learned Single Judge of the High Court was not right in holding that the reasoning of the Settlement Commission was vague, unsound and contrary to established principles. The Division Bench was also not justified in affirming such a view of the learned Single Judge. The Supreme Court was of the view that the Commission had adequately applied its mind to the circumstances of the case, as well as to the relevant law and accordingly exercised its discretion to proceed with the application for settlement and grant immunity to the Assessee from penalty and prosecution. The Order of the Commission dated 4th March, 2008, did not suffer from such infirmity as would warrant interference by the High Court, by passing an order of remand.

The Supreme Court concluded that in the present case, the Appellant placed material and particulars before the Commission as to the manner in which income pertaining to certain activities was derived and has sought to offer such additional income to tax. Based on such disclosures and on noting that the Appellant co-operated with the Commission in the process of settlement, the Commission proceeded to grant immunity from prosecution and penalty as contemplated under Section 245H of the Act. The High Court ought not to have sat in appeal as to the sufficiency of the material and particulars placed before the Commission, based on which the Commission proceeded to grant immunity from prosecution and penalty as contemplated under Section 245H of the Act.

The Supreme Court was of the view that the Order of the Settlement Commission dated 4th March, 2008, was based on a correct appreciation of the law, in light of the facts of the case and the High Court ought not to have interfered with the same. Therefore, the judgment dated 6th July, 2012, passed by the High Court of Karnataka at Bangalore in Writ Appeal No. 2458 of 2010 whereby the judgment of the learned Single Judge dated 20th May, 2010, passed in Writ Petition No. 12239 of 2008, remanding the matter to the Settlement Commission to determine afresh, the question as to immunity from levy of penalty and prosecution was affirmed, was set aside by the Supreme Court. Consequently, the order of the learned Single Judge was also set aside. The Order of the Settlement Commission dated 4th March, 2008, was restored. The appeal was accordingly allowed.

54 Director of Income Tax, New Delhi vs. Travelport Inc. Civil
(2023) 454 ITR 289 (SC)

India-USA DTAA – Article 7 — Under Explanation 1(a) under clause (i) of Sub-section (1) of Section 9 of the Income-tax Act, 1961, what is reasonably attributable to the operations carried out in India alone can be taken to be the income of the business deemed to arise or accrue in India — What portion of the income can be reasonably attributed to the operations carried out in India is obviously a question of fact — Article 7 of DTAA is of no assistance as the entire income was taxable in contracting state.

Before the Supreme Court, the Respondents in the appeals before it were in the business of providing electronic global distribution services to Airlines through what is known as “Computerized Reservation System” (hereinafter referred to as CRS). For the said purpose, the Respondents maintain and operate a Master Computer System, said to consist of several mainframe computers and servers located in other countries, including the USA. This Master Computer System is connected to airlines’ servers, to and from which data is continuously sent and obtained regarding flight schedules, seat availability, etc.

In order to market and distribute the CRS services to travel agents in India, the Respondents had appointed Indian entities and had entered into distribution agreements with them.

The Respondents earned an amount of USD 3 / EURO 3 accordingly, as the case may be, per booking made in India. Out of the said earnings, of USD 3 / EURO 3, the Respondents paid various amounts to the Indian entities, which ranged from USD / EURO 1 to USD / EURO 1.8. In other words, the amount paid by the Respondents to their Indian entities ranged from 33.33 per cent to about 60 per cent of their total earnings.

The respective Assessing Officers in the original proceedings came to the conclusion that the entire income earned out of India by the Respondents was taxable. This was on the basis that the income was earned through the hardware installed by the Respondents in the premises of the travel agents and that, therefore, the total income of USD / EURO 3 was taxable.

The orders of assessment so passed were upheld by the respective Commissioners of Income Tax (Appeals) by independent orders.

Appeals were filed by the Respondents before the Tribunal and the Revenue also filed cross objections on a different aspect. The Tribunal held that the Respondents herein constitute Permanent Establishment (PE) in two forms, namely, fixed place PE and dependent agent PE (DAPE). At the same time, the Tribunal also held that the lion’s share of activity was processed in the host computers in USA / Europe and that the activities in India were only minuscule in nature. Therefore, as regards attribution to the PE constituted in India, the Tribunal assessed it at 15 per cent of the revenue and held, on the basis of the functions performed, assets used and risks undertaken (FAR), that this 15 per cent of the total revenue was the income accruing or arising in India. This 15 per cent worked out to 0.45 cents. However, the payment made to the distribution agents was USD 1 / EURO 1 in many cases and much more in some cases. Therefore, the Tribunal held that no further income was taxable in India.

The Revenue filed miscellaneous applications, but the same were dismissed by the Tribunal, clarifying that after apportioning the revenue, no further income was taxable in India, as the remuneration paid to the agent in India exceeded the apportioned revenue.

Appeals were filed both by the Revenue and Assesses against the orders of the Tribunal before the Delhi High Court. The Delhi High Court dismissed the appeals filed by the Revenue on the grounds that no question of law arose in these matters. The Delhi High Court held that insofar as attribution is concerned, the Tribunal had adopted a reasonable approach.

Aggrieved by the orders passed by the Delhi High Court, the Revenue has come up with the above appeals.

Assailing the judgment of the High Court, it was argued by the learned Additional Solicitor General: (i) that the attribution of only 15 per cent of the revenue as income accruing / arising in India within the meaning of Section 9(1)(i) of the Income-tax Act, 1961 read with Article 7 of the Treaty, was completely wrong; and (ii) that the computers placed in the premises of the travel agents and the nodes / leased lines form a fixed place PE of the Respondent in India.

The Supreme Court was of the view that there was no need to go into the second contention of the learned Additional Solicitor General because the approach of the Tribunal and the High Court on the question of attribution appears to be fair and reasonable.

So far as the first contentions were concerned, the Tribunal had arrived at the quantum of revenue accruing to the Respondent in respect of bookings in India, which could be attributed to activities carried out in India, on the basis of FAR analysis (functions performed, assets used and risks undertaken). The Commission paid to the distribution agents by the Respondents was more than twice the amount of attribution, and this had already been taxed. Therefore, the Tribunal had rightly concluded that the same extinguished the assessment.

Further, the question as to what proportion of profits arose or accrued in India was essentially one of the facts. Therefore, according to the Supreme Court, the concurrent orders of the Tribunal and the High Court did not call for any interference.

The Supreme Court observed that under Explanation 1(a), under clause (i) of Sub-section (1) of Section 9
of the Income-tax Act, 1961, what is reasonably attributable to the operations carried out in India alone can be taken to be the income of the business deemed to arise or accrue in India. What portion of the income can be reasonably attributed to the operations carried out in India is obviously a question of fact. On this question of fact, the Tribunal had taken into account relevant factors.

According to the Supreme Court, Article 7 of the India-USA DTAA also may not really come to the rescue of the Revenue for the reason that in the contracting state, the entire income derived by the Respondents, namely, USD / EURO 3 would be taxable. That is why Section 9(1) confines the taxable income to that proportion which is attributable to the operations carried out in India.

Therefore, the Supreme Court was of the view that the impugned order(s) of the High Court did not call for interference. Insofar as the second issue, namely, the question of permanent establishment was concerned, the Supreme Court did not go into the same, as it had concurred with the High Court on the first issue.

All the appeals filed by the Appellant-Department of Income Tax were, therefore, dismissed.

BCAJ Admin

Section 148: Reassessment — No new facts — merely to investigate and make enquiry — Not justified — Arbitration Award — Consent term — Amount received in full and final settlement of all disputes and claims raised in regards to firm / Will etc. — Income not chargeable to tax

26 Ramona Pinto vs. Dy. Dy. CIT – 23(3), Mumbai

ITXA No. 2610 Of 2018, (Bom.) (HC)

A.Y.: 2010–2011

Date of Order: 8th November, 2023.

Section 148: Reassessment — No new facts — merely to investigate and make enquiry — Not justified — Arbitration Award — Consent term — Amount received in full and final settlement of all disputes and claims raised in regards to firm / Will etc. — Income not chargeable to tax.

The Assessee — Appellant has preferred an appeal against the impugned order dated 2nd April, 2018, passed by the Tribunal. The following substantial questions of law was admitted:

(i) Whether the Tribunal ought to have held the Respondent No. 1 had assumed jurisdiction under section 147 of the Act without fulfilling the jurisdictional pre-conditions and hence, the reassessment proceedings were without jurisdiction?

(ii) Whether on the facts and in the circumstances of the case and in law, the Tribunal ought to have held that the amount of R28 crores received by the Appellant as per the arbitration Award was not chargeable to tax?

A partnership firm by name M/s. P. N. Writer & Co. (the said Firm) was established in or about the year 1954 between Appellant’s late father Mr. Charles D’Souza and one Mr. P. N. Writer. The said Firm was reconstituted from time to time, and the last partnership deed in this regard, according to Appellant, was executed on 18th January, 1979. As per the partnership deed, Appellant along with her late father and brothers were the partners in the said Firm. Appellant was entitled to a share of 20 per cent in the profits or losses made by the said Firm.

Appellant’s father Mr. Charles D’Souza expired on 24th November, 1997 leaving behind his last Will and Testament dated 16th September, 1990. Appellant was bequeathed a further share of 5 per cent in the profits and losses of the said Firm. Accordingly, the Appellant became entitled to a 25 per cent share in the profits and losses of the said Firm. This fact has been also mentioned in the application for probate filed by Appellant’s brother.

It is Appellant’s case that somewhere in 2005, Appellant realised that the said Firm was reconstituted vide a Deed of Partnership dated 25th November, 1997, entered into between Appellant’s brothers. According to the said Deed, Appellant was treated as having retired from the Firm as and from the close of business on 24th November, 1997. The said Firm had filed its return of income for Assessment Year 1998–1999, enclosing reconstituted Deed of Partnership and financial showing Appellant as an erstwhile partner. Appellant’s case was that she continued to be a partner in the said Firm.

Since disputes arose, Appellant and the continuing partners of the said Firm decided to refer their matter to arbitration. Finally, by an interim order dated 20th July, 2007, the Apex Court directed the said Firm to pay an amount of R50,000 per month to the Appellant. Subsequently, by a final order dated 28th March, 2008, the Apex Court appointed a sole Arbitrator to decide the disputes between Appellant, her siblings and the said Firm.

Claims and counter-claims were filed before the Arbitrator. During the course of arbitration proceedings, the parties arrived at consent terms, which was taken on record by the Arbitrator and an award in terms of the consent terms was passed on 25th September, 2009. As per the consent terms, Appellant relinquished all her rights, claims and demands of any nature whatsoever against the said Firm or its partners. In consideration thereof, Appellant was to receive an amount of ₹28 crores. Appellant was to be paid an amount of ₹7 crores on or before 25th December, 2009 and the balance amount of ₹21 crores was to be paid, in seven equal installments of ₹3 crores, on or before 25th December of each subsequent year.

The Appellant, pursuant to the interim order dated 20th July, 2007, of the Apex Court referred earlier, received an amount of ₹5 lakhs in the previous year relevant to Assessment Year 2008–2009. In the course of assessment proceedings, Respondent no. 1 issued a show cause notice for assessment of the said receipt wherein Appellant contended that the receipt was related to her retirement from the said Firm and was, therefore, not chargeable to tax under the Act. Being satisfied, no addition in respect of the said receipt was made in the assessment order dated 26th November, 2010, passed under Section 143(3) of the Act.

As per the consent terms, during the previous year ending 31st March, 2010, Appellant received an amount of ₹7 crores. Appellant filed return of income for Assessment Year 2010–2011 on 16th July, 2010, offering to tax a total income of ₹18,91,589. In the note annexed to the return of income, Appellant referred to the receipt of ₹7 crores pursuant to the arbitration award. Reference was also made to ₹4,82,258 received during the Financial Year 2009–2010 pursuant to the interim order dated 20th July, 2007 passed by the Apex Court. Appellant claimed that as the amounts were received upon her retirement from the said Firm, the same were not chargeable to tax under the Act. Appellant also relied on various decisions of the Apex Court and of this Court.

The return of income filed by Appellant was processed by the Assessing Officer (AO), on 20th March, 2012, under Section 143(1) of the Act, whereby, the total income as offered by Appellant in her return of income was accepted.

Almost two years later, the Appellant received a notice dated 19th March, 2014, from the AO under Section 148 of the Act alleging escapement of income for Assessment Year 2010–2011. Appellant was directed to file return of income once again which was complied with. Appellant also received a copy of the reasons for reopening. The said reasons referred to the information received in respect of an order dated 21st July, 2007, passed by the Supreme Court as well as the arbitration award dated 25th September, 2009. The reasons also made reference to the fact that the amount of ₹7 crores received by Appellant during the Financial Year 2009–2010, corresponding to Assessment Year 2010–2011, has not been offered for tax in the return of income. Based on this, Respondent no. 1 has formed his belief that income of ₹7 crores chargeable to tax for Assessment Year 2010-2011 has escaped assessment.

The AO passed the assessment order on 30th March, 2015, determining Appellant’s total income at ₹28,18,91,590. Therein, the amount of ₹28 crores was added as business income by invoking Section 28(iv) of the Act. Alternatively, he held that the amount of arbitration award was chargeable to tax as capital gains. It was further alleged that Appellant had not retired from the said Firm because the consent terms did not mention so and further held that the entire amount was not towards her retirement from the said Firm.

Aggrieved by the assessment order, Appellant filed an appeal before the Commissioner of Income Tax (Appeals) [CIT(A)]. During the course of hearing before the CIT(A), Appellant filed valuation reports in respect of various properties owned by the said Firm to justify the amount of ₹28 crores that was received as her share from the said Firm. The CIT(A) dismissed the appeal by an order dated 3rd February, 2017. While dismissing the appeal, the CIT(A), however, accepted Appellant’s contention that the provisions of Section 28(iv) had no application to the present case and that the amount of ₹28 crores could not be assessed as capital gains in the hands of the Appellant. The CIT(A), however, held the amount of the arbitration award as income from other sources under Section 56(1) of the Act because the amount had been received for settlement of a composite bundle of rights. It is Appellant’s case that the CIT(A) failed to appreciate that the dispute between Appellant and her brothers was primarily in respect to her wrongful retirement from the said Firm and as reference was also made to the inheritance from the father which also mainly comprised of further partnership interest of 5 per cent in the said Firm being given to her, even assuming that any part of the said award also related to the inheritance right as per the father’s Will, no part

of such amount would be chargeable to tax under the Act.

The Appellant filed an appeal before the Tribunal. Appellant raised all grounds before the Tribunal which dismissed the appeal by the impugned order dated 2nd April, 2018. The Tribunal upheld the reassessment proceedings to be valid on the ground that prima facie there was material on record which shows that income chargeable to tax had escaped assessment. The Tribunal, however, referred to the amount of arbitration award as special income which has to be considered in a wider sense. Miscellaneous application was filed before the Tribunal which came to be dismissed.

The Hon. Court observed that the jurisdictional pre-conditions have not been fulfilled. Therefore, it can be stated that the assumption of jurisdiction by the AO under Section 148 of the Act to reassess the Appellant’s income is without jurisdiction.

The Hon. Court observed that on a bare perusal of the reasons shows that there was no mention as to whether and how the amount as per the arbitration Award was in the nature of income. Apart from referring to the fact that there was a decision of the Supreme Court as well as an arbitration award pursuant to which Appellant had received the amount of ₹7 crores, nothing else has been mentioned in the reasons. The belief formed by the AO without any statement on whether and how the receipt was of an income nature would render the reasons as vague and incomplete thereby making the reassessment proceedings initiated under Section 148 of the Act bad in law. The AO while disposing the objections raised by Appellant to his assumption of jurisdiction under Section 148 of the Act has stated that the receipt of ₹7 crores was not in respect of Appellant’s retirement from the said Firm. The order, however, states that the information / material available with the AO at the time of formation of his belief consisted of information received by him from the AO of P. N. Writer & Co. as well as the note placed by Appellant in her return of income filed for Assessment Year 2010–2011. The information reveals that the said receipt was towards the Appellant’s retirement from the said Firm. Therefore, justification given by the AO in the order dated 21st August, 2014, for taxability of the said receipt as not relating to Appellant’s retirement from the said Firm was contrary to the information / material available with him.

The law is very settled in as much as the belief formed by the AO has to be based on the information / material available with him at the time of formation of the belief. There was no material whatsoever available with the AO at that point of time to show that the said receipt of R7 crores by Appellant as referred to in the reasons did not relate to her retirement from the said Firm. In the absence of any statement in the reasons recorded for reopening the assessment regarding taxability of the said receipt and in view of non-sustainability of the justification provided by the AO, the reassessment proceedings initiated under Section 148 of the Act is bad in law.

The Court further observed that for Assessment Year 2008–2009 also, Appellant had received similar amounts from the said Firm. After scrutinising the character of such receipt, it was held by the predecessor of the AO that the receipt was not taxable in nature. Therefore, the formation of the belief that the amount received for the current year was taxable, tantamount to a change of opinion which is not permissible in law.

The Court further observed that in the present case, as the AO has initiated reassessment proceedings without forming the requisite belief and only with a view to enquire / investigate into the facts, his assumption of jurisdiction under Section 148 of the Act would be bad in law. Moreover, it also indicates that even at the stage of disposing the objections, the AO was not clear on the basis why Appellant’s income chargeable to tax has escaped assessment.

As regards taxability of the amount is concerned, the court observed that having considered the consent terms with the arbitration award and the statement of claim, it is clear, the amount of ₹28 crores was receivable by Appellant in terms of the arbitration award dated 25th September, 2009. As per the award, Appellant has relinquished all her claims against the partnership firm of P. N. Writer & Co. as well as the partners. Appellant had initiated arbitration proceedings as she was wrongfully shown as retired from the said Firm. This is brought out by the statement of claim made by the Appellant before the Arbitrator. Even the claim based on the father’s Will was mainly related to the additional 5 per cent share of the said Firm. Therefore, the real dispute between the parties related to the termination of Appellant’s partnership interest in the said Firm. The consent terms were arrived at between the parties with a view to settle this dispute. It goes without saying that when Appellant’s rights and claims in the said Firm were settled by the consent terms and the arbitration award, there could not be her continuance as a partner with the said Firm. Therefore, the arbitration award was receivable by Appellant in respect of her retirement from the said Firm. As held by the Apex Court in Mohanbhai Pamabhai ((1987) 165 ITR 166) and this Court in Prashant S. Joshi ((2010) 324 ITR 154 (Bom)), the amount receivable upon retirement from the said Firm could not be of an income nature. Therefore, the Tribunal was not correct in holding that the amount of arbitration award receivable by Appellant was not relatable to her retirement from the said Firm.

The Tribunal has failed to appreciate that there was a dispute between Appellant and her brothers with respect to her wrongful retirement from the said Firm. For invocation of arbitration proceedings, the matter was carried right up to the Hon’ble Supreme Court. The settlement amount was receivable by Appellant for relinquishment of her rights and claims as a partner of the said Firm. In these circumstances, though there may be no mention of her retirement from the said Firm in the consent terms or the arbitration award, the only inference possible would be that she no longer continued as a partner of the said Firm after such settlement. It is also not anybody’s case that the Appellant has not played any role in the said Firm or received any share from the said Firm after the settlement.

Further, the said Firm — P. N. Writer & Co. had also filed the relevant information with respect to change of constitution of the firm with the Registrar of Firms which showed that Appellant had retired from the said Firm with effect from 24th November, 1997. The arbitration award was also given for withdrawal of all claims and rights in respect of the suits filed by Appellant against the said Firm and its partners. This fact also supports Appellant’s claim to show that the rights settled were in respect of her partnership interest in the said Firm. As regards the observation on no positive balance in Appellant’s capital account with the said Firm, the same is an irrelevant factor because for working out of rights upon retirement, one is not required to look at the balance in the capital account. Further, Appellant had produced a valuation report valuing the immovable assets of the partnership firm which discloses that the value of the immovable properties of the said Firm was more than ₹100 crores. The fact that the partners agreed to a payment of ₹28 crores fits in with this value. Further, the said Firm had also transferred its business on a going concern basis to a private limited company by name P. N. Writer & Co. Pvt. Ltd., in the Financial Year 1992–1993. The Balance Sheet of the said company as on 31st March, 2006, revealed that there were substantial reserves which showed that the business of the said Firm was extremely profitable. Therefore, the Tribunal was not correct in holding that the amount of the arbitration award was not relatable to the Appellant’s retirement from the said Firm.

Moreover, the amount of the arbitration award was also related to the settlement of the inheritance rights which the Appellant was entitled to under her father’s Will. An amount received in satisfaction of the inheritance rights also cannot be regarded as of an income nature chargeable to tax under the Act. The Tribunal failed to appreciate that the relevant details formed part of the arbitration proceedings, and Appellant had raised this as an alternative claim in view of the stand taken by the AO in the assessment order and the CIT(A) in the appellate order.

The court further observed that the dominant component in the settlement was Appellant’s separation from the said Firm. The Tribunal ought to have considered each component of the rights and claims which were relinquished and withdrawn by Appellant and bifurcated the amount of arbitration award between each of such rights and claims. Instead of doing this exercise and considering whether the amount was capital or revenue in nature, the ITAT has simpliciter accepted the conclusion reached by the CIT(A) to the effect that such receipt is of an income nature chargeable to tax as income from other sources. The Tribunal has failed to consider this issue in a proper perspective.

The Tribunal failed to appreciate that a receipt on capital account cannot be assessed as income unless it was specifically brought within the scope of the definition of the term “income” in Section 2(24) of the Act . The Tribunal erred in evolving a concept of “special income” when no such concept exists either in the Act or in the jurisprudence and saying that the same is judicially settled.

The Court further held that even if the portion of the arbitration award relates to the inheritance by Appellant under the Will of her late father or otherwise, in the absence of Estate Duty or a similar tax, no tax is chargeable in respect of the same. In any event, the same would be on the estate and not on a legatee. Even the provisions of Section 56(2)(vii) which seek to tax an amount received without consideration specifically excludes from the ambit of the charge any amount received pursuant to a bequest.

Alternatively, even if the amount received / receivable under the arbitration award is regarded as damages, the nature of the dispute which was settled was with respect to disputes pertaining to the partnership firm or inheritance and, hence, the receipt should be capital in nature (CIT v/s. Saurashtra Cement Ltd.18). Further, it has been held by this Court in CIT v/s. Abbasbhoy A. Dehgamwalla19 that the amount received as damages also cannot be brought to tax as capital gains.

Burden to show that a particular receipt is of an income nature is on the Revenue which has not been discharged in the facts of the present case. The mere rejection of an assessee’s explanation without any positive finding as to the true character of the receipt cannot justify a conclusion being reached by an AO that the amount is of an income nature.

Therefore, the amount of ₹28 crores can be considered as the amount received by a partner upon retirement from the said Firm and is not chargeable to tax.

In the circumstances, the substantial questions of law were answered in favour of the Appellant. It was held that the reassessment proceedings were without jurisdiction. Further, the Tribunal ought to have held that the amount of ₹28 crores received by Appellant as per the arbitration award was not chargeable to tax.

BCAJ Admin

TDS — Technical services — Contracts — Principle of indivisibility of a contract — Taxing authorities should not overlook the dominant object of the contract — The assessing authority should not break down the indivisibility or composite nature and character of the contract

25 The Commissioner Of Income Tax (TDS) And Another vs. Lalitpur Power Generation Co. Ltd.

ITXA No. 111 of 2018, (All.) (HC)

Date of Order: 16th November, 2023

[Arising from Income Tax Appellate Tribunal, Delhi Bench “C” New Delhi order dated: 20th February, 2018 (Assessment Year 2013–2014)].

TDS — Technical services — Contracts — Principle of indivisibility of a contract — Taxing authorities should not overlook the dominant object of the contract — The assessing authority should not break down the indivisibility or composite nature and character of the contract.

The assessee was engaged in the business of generation of power. It set up a 3×660 MW (Mega Watt) Super Critical Thermal Power Plant at District-Lalitpur, Uttar Pradesh. For that purpose, the assessee was incorporated as a Special Purpose Vehicle (“SPV”) by the State Government of Uttar Pradesh. Later, its ownership was transferred to a private company.

To set up that thermal power plant, the assessee entered into two sets of contracts. First, with Bharat Heavy Electric Ltd. (“BHEL”) to set up a Boiler Turbine Generator (“BTG”) and the second with Carbery Infrastructure Pvt. Ltd. (“CIPL”) to set up a Balance of Plant (“BOP”).

The contract entered into between the assessee and the BHEL involved services of Transportation, Insurance, Erection, Installation, Testing and Commissioning of BTG, for consideration ₹689 crores. Similarly, the contract with CIPL involved Erection, Installation and Commissioning of BOP for ₹197 crores.

These two contracts included description and execution of other work as well, inasmuch as the contract with BHEL for BTG involved supply of BTG package equipments of value ₹5,311 crores, whereas the contract for BOP with CIPL involved procurement and supply of equipments and civil constructions, structural works, engineering, information, design and drawings and project management of value ₹2,008 crores. The supply component under the two contracts entered into by the assessee with BHEL and CIPL does not form the subject matter of dispute in these appeal proceedings.

On 19th June, 2014, individual orders came to be passed under Section 201 of the Act describing the assessee to be in default of deduction of TDS required to be made by it at the higher rate of 10 per cent (under Section 194J of the Act) against the lower rate of 2 per cent (under Section 194C of the Act) applied by the assessee, to the payments made by the assessee in each year, against the two contracts for the works done under the head of “services of Transportation, Insurance, Erection, Installation, Testing and Commissioning of BTG”, awarded to BHEL and also the work under the head of “Erection, Installation and Commissioning of BOP”, awarded to CIPL.

Thus, under the assessment order dated 15th January, 2015 passed by the Assistant Commissioner of Income Tax (TDS), Noida for the Assessment Years 2012–2013, 2013-2014 and 2014–2015, demand for short deduction of TDS and the corresponding demand of interest were raised. The Orders were confirmed on appeal by common order dated 16th March, 2016, passed by the Commissioner of Income Tax (Appeals)-I, Noida.

Upon further appeal, the Income Tax Appellate Tribunal, vide its common order dated 20th February, 2018, allowed the appeals preferred by the assessee.

The Revenue appeal was admitted on following substantial question of law:

Question No. 1

Whether the Tribunal has erred in annulling the assessment order and reaching to a conclusion that Tax Deduction at Source (for short “TDS”) was required to be made under Section 194C of the Act and not under Section 194J of the Income-tax Act, 1961 without first dealing with the reasons and findings recorded by the assessing authority, as affirmed in first appeal?

Question No. 2

Whether, in absence of proper books maintained to establish the exact expenditure incurred by the assessee in availing technical services, the Tribunal has erroneously granted relief to the assessee?

The revenue contended that the assessing authority had made a detailed consideration of facts. It was found that the assessee had not maintained any account to establish the actual payment made to BHEL for the work of Testing and Commissioning of BTG. Similarly, the assessee had not maintained a separate account to establish the payment made to CIPL for Installation and Commissioning of BOP. Since payments for those works performed by the BHEL and CIPL fell under the head “fees for technical services” as defined under clause (b) of sub-section (1) of Section 194J of the Act, read with Explanation [2] to clause (vii) to sub-section (1) of Section 9 of the Act, the assessee was liable to deduct the Tax at Source / TDS, at the rate of 10 per cent in terms of Explanation (b) to section 194J of the Act. Relying on the reasoning given by the assessing authority, it was submitted that it cannot be denied that BHEL had performed Testing and Commissioning of BTG and similarly, CIPL had performed the work of Installation of Commissioning of BOP.

The revenue further contended that since the payments made to BHEL and CIPL were “fees for the technical services”, rendered to the assessee by BHEL and CIPL, the Assessing Officer had not erred in determining the default in deduction of TDS by the assessee.

The assessee contended that the contracts awarded by the assessee to BHEL and CIPL were exactly identical to that awarded to BHEL, as was considered by the Punjab and Haryana High Court in Pr. Commissioner of Income Tax, TDS-II, Chandigarh vs. The Senior Manager (Finance), Bharat Heavy Electricals Ltd., Jhajjar (2017) 390 ITR (P&H).

The assessee further contended that the contract awarded to BHEL was for BTG and the contract awarded to CIPL was for BOP and the reliance placed by the revenue to non-specification or quantification of value of sub-components or parts of the contracts awarded to the BHEL and CIPL is inconsequential. Those contracts remained indivisible or composite. The revenue authorities being obligated to assess income tax payable by the assessee, they could not have broken down that indivisible contract for wholly artificial reasons-to discover on an assumptive basis, the alleged component of “fees for technical services”. The undisputed fact remains that the work awarded to the BHEL was for commissioning of BTG and that awarded to CIPL was for BOP, the contract clauses should have been read in light of that main object. In absence of any internal tool arising therefrom and in absence of any legal provision allowing the assessing authority to break down the indivisibility or composite nature and character of the contract, the exercise carried out by the assessing authority is described as erroneous and impermissible in law.

Reliance was placed on the decision of the division bench of the Karnataka High Court in the case of Commissioner of Income Tax vs. Bangalore Metro Rail Corporation Ltd. (2022) 449 ITR 431 (Karnataka).

The assessee alternatively submitted that it was only a payer. The payees i.e., BHEL and CIPL were subjected to tax. Upon completion of their assessment, those payers were also issued certificates of full payment of tax due. Therefore, if at all the assessee may only be liable for delay in payment of TDS. Yet, liability of short deduction of TDS could not be imposed.

The Hon Court held that it has not been disputed that the essence of the contract involved in the present case and that involved in the case of Pr. Commissioner of Income Tax, TDS-II, Chandigarh vs. The Senior Manager (Finance), Bharat Heavy Electricals Ltd., Jhajjar (supra) were similar — to set up a thermal power plant. In both cases, the dispute arose upon a survey. That inconsequential similarity apart, it is undisputed that in both cases, the element of testing and commissioning of technical works etc. was part of the main contract — to set up a thermal power plant including therein the work of Transportation, Insurance, Erection, Installation, Testing and Commissioning of BTG and also Commissioning of BOP.

In view of the undisputed similarity between two cases, the court followed the reasoning given by the division bench of Punjab and Haryana High Court in the case of Pr. Commissioner of Income Tax, TDS-II, Chandigarh vs. The Senior Manager (Finance), Bharat Heavy Electricals Ltd., Jhajjar (supra) that the work of testing etc., had to be performed by the contractor not by way of independent work awarded to it but by way of execution of the whole contract that was to set up a thermal power plant.

Thus, Punjab and Haryana High Court has principally reasoned that the primary / dominant object of the contract would govern or subsume the other object /clause therein. In absence of any internal tool shown to exist (in the contract), it was incorrect to reach an inference that the contracting parties, i.e., assessee on one hand and BHEL and CIPL on the other, had intended to treat the work of Testing and Commissioning, separate / independent of the contract to set up BTG and BOP by those contracting parties. Further, in absence of any enabling law, it never became open to the taxing authorities to overlook the dominant object of the contract and reach to a conclusion, because part of the contract involved Testing, Commissioning, etc., necessarily, there would exist component of “fees for technical services”, by necessary implication.

Then, the Karnataka High Court in Commissioner of Income Tax vs. Bangalore Metro Rail Corporation Ltd. (supra) has further reasoned that an indivisible / composite contract may not be bifurcated to cull out any indivisible component of such contract, to make a higher deduction of tax at source. Thus, that Court applied the principle of indivisibility of a composite contract. It may not be bifurcated to subject a part of the contract to higher TDS. Thus, that Court applied the principle of indivisibility of a contract, that may not be artificially dissected at the hands of a taxing authority, to the prejudice of the assessee.

On plain reading, the contracts executed by the assessee with BHEL and CIPL were indivisible contracts for BTG and BOP, respectively. The taxing authorities exist to apply the taxing statute to the proven facts of a case. Such facts are not for the taxing authority to imagine or presume or assume. Therefore, the burden existed on the revenue authorities to establish that they were enabled in law and also that the proven facts of the case permitted them to divide an otherwise indivisible / composite contracts executed by the assessee with the BHEL and CIPL. Unless that exercise had been carried out by the assessing authority, no presumption was available in law.

Accordingly, the first question of law framed was answered in negative, i.e., in favour of the assessee and against the revenue.

The question no. 2 was left unanswered, at this stage. Accordingly, the revenue appeal was dismissed.

BCAJ Admin

Search and seizure — Assessment in search cases — Additions to be confined to incriminating material found during the course of search — Not erroneous

72 Principal CIT vs. Kutch Salt and Allied Industries Ltd.

[2023] 457 ITR 44 (Guj)

A.Y.: 2007–08

Date of Order: 5th May, 2023

Ss. 132(1), 143(3) and 153A of ITA 1961

Search and seizure — Assessment in search cases — Additions to be confined to incriminating material found during the course of search — Not erroneous.

For the A.Y. 2007–08, the Assessing Officer in his order u/s. 143(3) read with section 153A(1)(b) of the Income-tax Act, 1961, made disallowances on account of power and fuel expenses, Registrar of Companies and stamping expenses, sale made to group concern, transportation expenses and interest u/s. 36(1)(iii).

The Commissioner (Appeals) recorded a finding that no incriminating material was found at the premises of the assessee during the search u/s. 132(1) and deleted the additions. The Tribunal upheld his order.

The Gujarat High Court dismissed the appeal filed by the Revenue and held as under:

“The Tribunal had not erred in holding that addition during the assessment u/s. 153A had to be confined to the incriminating material found during the course of search u/s. 132(1). No question of law arose.”

BCAJ Admin

Offences and prosecution — Money laundering — Issue of tax determination certificate in Form 15CB without ascertaining the genuineness of documents — Not an offence

71 Murali Krishna Chakrala vs. Deputy Director, Directorate of Enforcement

[2023] 457 ITR 579 (Mad)

Date of Order: 23rd November, 2022

R. 37BB of Income Tax Rules 1962

Offences and prosecution — Money laundering — Issue of tax determination certificate in Form 15CB without ascertaining the genuineness of documents — Not an offence.

On a complaint given by the Deputy Manager of a Bank, a case was registered against six accused. Since the FIR disclosed the commission of a scheduled offense under the Prevention of Money Laundering Act, 2002, the Enforcement Directorate, took up the investigation of the case. The case was related to moneys remitted abroad on the basis of forged documents. The allegations were to the effect that these persons had opened fictitious bank accounts, submitted forged bills of entry, parked huge amounts in those bank accounts and had them transferred to various parties abroad through the bank in order to make it a legitimate transaction for the alleged purpose of import.

In the course of its investigation, the ED came across 15CB certificates issued by the accused MKC, a Chartered Accountant. In the interrogation, the accused MKC submitted that one of his clients, Mr. KM, approached him for issuance of Form 15CB under Rule 37BB of the Income-tax Rules, 1962, and submitted the documents in support of his request. On perusal of the documents, the accused MKC issued certificates to the effect that it was not necessary to issue Form 15CB for remittances abroad in respect of imports. The certificate numbers were uploaded on the Income-tax portal and copies of certificates were also submitted to the Branch Manager for transferring a sum of R3.45 crores to various entities in Hong Kong.

After completing the investigation, a supplementary complaint was filed by which MKC, inter alia, was declared an accused.

The discharge application was dismissed by the trial court. The Madras High Court allowed the revision petition and held as follows:

i) In issuing form 15CB under rule 37BB of the Income-tax Rules, 1962, a chartered accountant is required only to examine the nature of the remittance and nothing more. The chartered accountant is not required to go into the genuineness or otherwise of the documents submitted by his clients.

ii) The accused MKC had issued five form 15CB in favour of B, which were handed over by him to his client K for which, a sum of ₹1,000 per certificate was given to him as remuneration. The prosecution of MKC in the facts and circumstances of the case at hand, could not be sustained.”

BCAJ Admin

Insurance Business — Computation of profits — Effect of S. 44

70 Sahara India Life Insurance Co. Ltd. vs. ACIT

[2023] 457 ITR 548 (Del.)

A.Y.: 2014–15

Date of Order: 22nd February, 2023

S. 44 of ITA 1961

Insurance Business — Computation of profits — Effect of S. 44.

The assessee carries on a life insurance business. In the assessment for the A.Y. 2014–15, the Assessing Officer (AO) made four disallowances, viz. disallowance on account of amortization of investment, disallowance of interest on TDS, disallowance of unpaid bonus and disallowance on account of unpaid leave encashment.

CIT(A) allowed the assessee’s appeal and deleted all the additions. Except on the ground of amortization of investment, the Tribunal reversed the order of the CIT(A) and upheld the disallowances made by the AO.

In an appeal by the assessee, the High Court framed the following question of law:

“(i) Whether the Tribunal misdirected itself in law and on facts in not appreciating that the profits and gains of the appellant-assessee were to be computed in accordance with the provisions of section 44 read with First Schedule to the Income-tax Act, 1961?”

The Delhi High Court allowed the appeal and held as follows:

“i) What emerges upon perusal of section 44 of the Income-tax Act, 1961 is that it contains a non-obstante clause, which excludes the application of all provisions contained in the Act, which relate to computation of income chargeable under the heads referred to therein, by providing that computation of income qua the said heads will be made in accordance with rules contained in the First Schedule. Therefore, in the event of any dissonance, the provisions of the rules contained in the First Schedule will prevail over the provisions of the Act.

ii) Section 44 of the Act provides for a statutory mechanism for computing profits and gains of an insurance business and includes, in this context, the business carried on by a mutual insurance company or even by a co-operative society. In that sense, it moves away from the usual and general method of computing income chargeable to tax by bearing in mind the heads of income referred to in section 14 of the Act. This is plainly evident, since there is a specific reference to section 199, (which broadly deals with granting credit to the person from whose income tax has been deducted at source) and the sections spanning between sections 28 and 43B. The rules contained in the First Schedule appended to the Act will determine the manner in which the profits and gains of the insurance business are to be ascertained.

iii) Thus, according to us, the Tribunal has committed an error in law, which needs to be corrected.

iv) Therefore, for the foregoing reasons, we allow the appeal and set aside the impugned order. Consequently, the question of law, as framed, is answered in favour of the appellant-assessee and against the respondent-Revenue.”

BCAJ Admin

Capital gains — Capital loss — Capital asset — Leasehold rights in land is a capital asset — Lease of land granted by State Government with permission to build thereon or sub-lease it — Compensation on subsequent cancellation of lease — Loss sustained was a capital loss

69 Principal CIT vs. Pawa Infrastructure Pvt. Ltd.

[2023] 457 ITR 392 (Del)

A.Y.: 2013–14

Date of Order: 18th November, 2022

S. 2(14) of ITA 1961

Capital gains — Capital loss — Capital asset — Leasehold rights in land is a capital asset — Lease of land granted by State Government with permission to build thereon or sub-lease it — Compensation on subsequent cancellation of lease — Loss sustained was a capital loss.

The petitioner, a real estate developer, was allotted a plot of land in Goa by the Government in September 2006. The lease deed was executed and registered in favour of the assessee for an initial period of 30 years which could be further extended by 60 years. The assessee had shown the property as a Fixed Asset in its books of account. Due to a change in the policy, the allotment was subsequently cancelled, and the assessee received ₹28,03,68,246. The said amount included compensation of ₹9,86,07,762. After reducing the indexed cost of cancellation of ₹30,49,54,129, the assessee claimed a long-term capital loss of ₹2,45,85,883 in the return of income filed for the A.Y. 2013–14. On scrutiny assessment, the return of income filed by the assessee was accepted by the Assessing Officer (AO) after considering the replies filed by the assessee with respect to the compensation received on cancellation of allotment of plot.

Subsequently, the Principal Commissioner issued notice u/s. 263 of the Income-tax Act, 1961, for revision of order and directed the AO to pass a fresh order keeping in mind that the assessee had wrongly treated the property in question as a capital asset and the assessee’s claim of indexed cost of acquisition could not be allowed.

The Tribunal allowed the assesee’s appeal and held that compensation received for the cancellation of the plot was capital in nature and not revenue receipt.

The Delhi High Court dismissed the appeal filed by the Department and held as under:

“i) The leasehold rights held by the assessee in the plot created an interest in the land in favour of the assessee. The assessee under the terms of the agreement not only had the right to construct on this plot but it had a further right to transfer and alienate the building along with the land to third parties and, therefore, the leased land came within the definition of capital asset u/s. 2(14) of the Act. Further, in this case, the allotment of land was cancelled by the Government of Goa in pursuance of the Act of 2012. The payment received by the assessee towards compensation was in terms of sub-sections (3) and (5) of section 3 of the Act of 2012. The leasehold rights held by the assessee in the plot were a capital asset and the compensation received by the assessee from the Government of Goa on the cancellation of the plot was a capital receipt and not a revenue receipt.

ii) The Assessing Officer’s order was correct and did not suffer from any error, justifying the invocation of powers u/s. 263 of the Act by the Principal Commissioner.”

BCAJ Admin

Capital Gains — Computation of — Deduction u/s. 48 — Determination of actual amount deductible — Tax payable by seller agreed to be reimbursed by the assessee seller — Is an allowable deduction in proportion to assessee’s share

68 Smt. Durga Kumari Bobba vs. DCIT

[2023] 457 ITR 118 (Kar)

A.Y.: 2009–10

Date of Order: 4th July, 2022

S. 48 of ITA 1961

Capital Gains — Computation of — Deduction u/s. 48 — Determination of actual amount deductible — Tax payable by seller agreed to be reimbursed by the assessee seller — Is an allowable deduction in proportion to assessee’s share.

The assessee agreed to sell her shares in a company for a consideration of ₹2,70,32,278. Clause 7 of the agreement dealt with the payment of taxes, and it had been agreed between the parties that the seller would reimburse the tax that may be levied on the company up to the closing date. In substance, what the parties agreed was for consideration towards the sale of shares at ₹2,70,32,278 minus the tax component of ₹90,74,103. The assessee claimed deduction under the head “Capital gains” on the tax component u/s. 48 of the Income-tax Act, 1961. The Assessing Officer did not allow the claim for deduction.

The Commissioner of Income-tax (Appeals) allowed the appeal in part. The Tribunal dismissed the appeal of the assessee.

On further appeal to the High Court, it was contended by the assessee that the assessee realised the full value of consideration after excluding the tax component. On the other hand, the Department contended that the tax component which was being claimed as a deduction by the assessee was neither an expenditure in connection with transfer nor was it the cost of acquisition being the only permissible deductions u/s. 48 of the Act. Further, it was contended that since a company is not allowed to claim the tax paid as deduction, applying the same analogy, the assessee cannot be allowed the deduction of tax from the sale consideration.

The Karnataka High Court held as follows:

“i) In the facts of this case, the total amount realised, or in other words, which the appellant got in her hand, is R1.80 crores. The deduction is claimed based on the agreement between the parties. A careful perusal of the agreement shows that the intention of the parties is clear to the effect that the value of the shares shall be the amount agreed between the parties excluding the tax component.

ii) The contention urged by the Department that tax components should be distributed among both sellers merits consideration. Therefore, the appellant shall be entitled to a deduction of only 50 per cent of the tax component proportionate to her shareholding.”

BCAJ Admin

Assessment u/s. 144C — Limitation — Order passed on remand by the Tribunal — Section 144C does not exclude section 153 — Final assessment order barred by limitation — Return of income filed by the assessee to be accepted

67 Shelf Drilling Ron Tappmeyer Ltd. vs. ACIT(IT)

[2023] 457 ITR 161 (Bom.)

A.Ys.: 2014–15 and 2018–19

Date of Order: 4th August, 2023

Ss. 92CA, 144C and 153 of ITA 1961

Assessment u/s. 144C — Limitation — Order passed on remand by the Tribunal — Section 144C does not exclude section 153 — Final assessment order barred by limitation — Return of income filed by the assessee to be accepted.

For the A.Y. 2014–15, the assessee filed its return of income declaring a loss of R120,18,44,672 after fulfilling the condition u/s. 44BB(3) of the Act by exercising the option available to compute its income under the regular provisions of the Act. The asssessee’s case was selected for scrutiny and a draft assessment order was passed on 26th December, 2016, after rejecting the books of account and invoking section 145 of the Act. Despite the option exercised by the assessee, the assessee’s income was computed u/s. 44BB(1) of the Act on the presumptive basis at 10 per cent of the gross receipts.

Objections were filed before the DRP against the draft assessment order. The DRP rejected the objections and gave its directions vide order dated 28th September, 2017, and based on such DRP directions, the final assessment order was passed on 30th October, 2017, u/s. 143(3) read with section 144C(13) of the Act.

On appeal, vide order dated 4th October, 2019, the Tribunal disposed of the appeal by remanding the matter back to the Assessing Officer (AO) for fresh adjudication.

The assessee, vide letter dated 5th February, 2020, informed the AO about the order passed by the Tribunal and requested for early disposal of the same. The assessee followed up with the oral requests. Over one year later, on 22nd February, 2021, the AO called upon the assessee to produce the details of contracts entered into by it and reasons for loss incurred during the A.Y. 2014–15. Details were called in time and again, which were replied to. Thereafter, the AO passed an assessment order dated 28th September, 2021, which read like the final assessment order. However, vide communication dated 29th September, 2021, the AO clarified that it was only a draft order. In order to safeguard against the objections being treated as delayed, the assessee filed its objections on 27th October, 2021, before the DRP.

Meanwhile, the assessee also filed a writ petition challenging the order dated 28th September, 2021, on various grounds. The main objection being that the limitation to pass the final order expired on 30th September, 2021, u/s. 153(3) of the Act read with the provisions of Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020, and the notifications issued thereunder. Therefore, no final assessment order can be passed in the present case, and the same is time-barred, and therefore, the return filed by the assessee should be accepted.

The Bombay High Court allowed the petition and held as under:

“i) Although in passing a final assessment order, sub-section (13) of section 144C of the Income-tax Act, 1961 specifically excludes the provisions of section 153 stating that the Assessing Officer shall pass a final order of assessment even without hearing the assessee, in conformity with the directions issued by the Dispute Resolution Panel within one month from the end of the month when such directions were received by him, the exclusion of section 153 or section 153B is specific to, and comes in only at the stage of, passing of the final assessment order after directions are received from the Dispute Resolution Panel and not at any other stage of the proceedings u/s. 144C. Hence, the entire proceedings would have to be concluded within the time limits prescribed.

ii) No doubt, section 144C is a self contained code for assessment and time limits are in-built at each stage of the procedure contemplated. Section 144C envisions a special assessment, one which includes the determination of the arm’s length price of international transactions engaged in by the assessee. The Dispute Resolution Panel was constituted bearing in mind the necessity for an expert body to look into intricate matters concerning valuation and transfer pricing and it is for this reason that specific timelines have been drawn within the framework of section 144C to ensure prompt and expeditious finalisation of this special assessment. The purpose is to fast-track a special type of assessment. That cannot be considered to mean that overall time limits prescribed have been given a go-by in the process.

iii) Wherever the Legislature intended extra time to be provided, it expressly provided therefore in section 153. Sub-section (3) of section 153 also applies to a fresh order u/s. 92CA being passed in pursuance of an order of the Tribunal u/s. 254. Sub-section (4) of section 153 specifically provides that notwithstanding anything contained in sub-sections (1), (1A), (2), (3) and (3A) where a reference under sub-section (1) of section 92CA is made during the course of the proceeding for assessment or reassessment, the period available for completion of assessment or reassessment, as the case may be, under these sub-sections shall be extended by twelve months. Explanation 1 below section 153 also provides for the periods which have to be excluded while computing the twelve-month period mentioned in section 153(3). However, there is no mention anywhere of section 144C.

iv) The time limit prescribed u/s. 153 would prevail over and above the assessment time limit prescribed u/s. 144C since the Assessing Officer may follow the procedure prescribed u/s. 144C, if he deems fit and necessary but then the entire procedure has to be commenced and concluded within the twelve-month period provided u/s. 153(3) because, the procedure u/s. 144C(1) also has to be followed by the Assessing Officer if he proposes to make any variation that is prejudicial to the interest of the eligible assessee. If the Assessing Officer did not wish to make any variation that is prejudicial to the interest of the eligible assessee, he need not go through the procedure prescribed u/s. 144C.

v) The exclusion of applicability of section 153, in so far as the non-obstante clause in sub-section (13) of section 144C is concerned, is for the limited purpose to ensure that de hors the larger time available, an order based on the directions of the Dispute Resolution Panel is passed within 30 days from the date of the receipt of such directions. Section and subsection have to be read as a whole with connected provisions to decipher the meaning and intentions. A similar non-obstante clause is also used in section 144C(4) with the same limited purpose, even though there might be a larger time limit u/s. 153, once the matter is remanded to the Assessing Officer by the Tribunal u/s. 254, so that the process to pass the final order u/s. 144C is taken immediately. The object is to conclude the proceedings as expeditiously as possible. There is a limit prescribed under the statute for the Assessing Officer and therefore, it is his duty to pass an order in time.

vi) The date on which the draft assessment order had been passed was 28th September, 2021. Therefore, there was no possibility of passing any final assessment order as the matter had got time-barred on 30th September, 2021. Since the final assessment order had not been passed before this date the proceedings were barred by limitation. Therefore, the return as filed by the assessee should be accepted. Since the order had been passed by the Tribunal on 4th October, 2019, the time would be twelve months from the end of the financial year in which the order u/s. 254 was received. The submission of the Department that when there was a remand the Assessing Officer was unfettered by limitation would run counter to the avowed object of provisions that were considered while framing the provisions of section 144C. The assessment should have been concluded within twelve months as provided in section 153(3) when there had been remand to the Assessing Officer by the Tribunal’s order u/s. 254. Within these twelve months prescribed, the Assessing Officer was to ensure that the entire procedure prescribed u/s. 144C was completed. Since no final assessment order could be passed as it was time-barred, the return of income as filed by the assessee was to be accepted.

vii) This would however, not preclude the Department from taking any other steps in accordance with law.”

BCAJ Admin

Appeal to High Court — Deduction of tax at source — Payment to non-resident — Fees for technical services — Agreement entered into by assessee with USA company for testing and certification of diamonds — Execution of work by laboratory in Hong Kong and payment made in its name as instructed by USA company — Payment to non-resident entity which had no permanent establishment in India — No technical knowledge made available to assessee — Assessee not liable to deduct tax — No question of law arose.

66 CIT(IT & TP) vs. Star Rays

[2023] 457 ITR 1 (Guj)

A.Y.: 2015–16

Date of Order: 31st July, 2023

Ss. 9(1)(vii)(b), 201(1), 201(1A) and 260A of ITA 1961; DTAA between India and USA

Appeal to High Court — Deduction of tax at source — Payment to non-resident — Fees for technical services — Agreement entered into by assessee with USA company for testing and certification of diamonds — Execution of work by laboratory in Hong Kong and payment made in its name as instructed by USA company — Payment to non-resident entity which had no permanent establishment in India — No technical knowledge made available to assessee — Assessee not liable to deduct tax — No question of law arose.

The assessee was in the business of cutting, polishing and export of diamonds. For purposes of testing and certification services, the assessee entered into a customer services agreement with GIA, USA, which set up a laboratory in Hong Kong. The invoices were raised by GIA, USA, instructing the assessee to make payment to the offshore bank accounts of GIA, Hong Kong with which the assessee had no direct relationship or any agreement. The assessee made the payments accordingly but erroneously mentioned the name of the beneficiary in forms 15CA and 15CB as GIA, Hong Kong. The Assessing Officer (AO) was of the view that the remittance made by the assessee for diamond testing certification charges to GIA’s Hong Kong laboratory was in the nature of “fees for technical services” u/s. 9(1)(vii)(b) of the Income-tax Act, 1961, which was applicable in the absence of a Double Taxation Avoidance Agreement between India and China or Hong Kong and treated the assessee as in default u/s. 201(1) for non-deduction of tax at source. He held that the assessee having made payments to GIA’s Hong Kong laboratory could not claim the benefit of the Double Taxation Avoidance Agreement between India and USA, and that the assessee ought to have deducted tax on those payments and accordingly passed an order u/s. 201(1) read with section 201(1A). GIA, Hong Kong did not have a permanent establishment in India.

The Tribunal held that in view of the tax residency certificate and form 10F furnished by GIA, USA from the tax authority of that country for the A.Y. 2015–16, the assessee was entitled to the benefits of the Double Taxation Avoidance Agreement between India and USA, even though such services were not rendered by the USA entity but the service was rendered by a subsidiary situated in Hong Kong, and the payment was merely routed through GIA, USA.

The Gujarat High Court dismissed the appeal filed by the Revenue and held as under:

“i) The concurrent findings of fact by the authorities were that there was a “take in window” where articles were delivered but the service agreement was between the assessee and GIA, USA. The rightful owner of the remittances was also the U.S.A. entity. Based on factual appreciation, especially the condition in the customer service agreement, the bank invoice and the bank remittance advice, a finding of fact had been arrived at that the assessee was protected under the Double Taxation Avoidance Agreement between India and the U.S.A. and that mere rendering of services could not be roped into fees for technical services unless the person utilising the services was able to make use of the technical knowledge. A simple rendering of the services was not sufficient to qualify the payment as fees for technical services.

ii) The orders of the Commissioner (Appeals) and the Tribunal were based on appreciation of facts in the right perspective. No question of law arose.”

BCAJ Admin

Advance tax — Interest u/s. 234B — Advance tax paid in three years proportionately for transaction spread over three years — Transaction ultimately held to be entirely taxable in the first year itself — Assessee is allowed to adjust the advance tax paid in subsequent two assessment years while computing interest liability u/s. 234B.

65 Mrs. Malini Ravindran vs. CIT(A)

[2023] 457 ITR 401 (Mad)

A.Ys.: 2011–12, 2012–13 and 2013–14

Date of Order: 14th November, 2022

Ss. 119 and 234B of ITA 1961

Advance tax — Interest u/s. 234B — Advance tax paid in three years proportionately for transaction spread over three years — Transaction ultimately held to be entirely taxable in the first year itself — Assessee is allowed to adjust the advance tax paid in subsequent two assessment years while computing interest liability u/s. 234B.

The assessee entered into an MOU with a company on 12th December, 2010, for the sale of property for a sale consideration of ₹121,65,21,000. The sale took place over the A.Ys. 2011–12, 2012–13 and 2013–14, and the assessee had computed and paid capital gains for each of the years and also paid advance tax during each of the corresponding financial years. Returns filed by the assessee had become final.

Subsequently, the assessments were re-opened, wherein the Assessing Officer (AO) held that the transfer took place upon the execution of MOU, that is, on 12th December, 2010, and the entire sale consideration was taxable in the A.Y. 2011–12. The AO also made assessments for A.Ys. 2012-13 and 2013-14 on a protective basis.

In the appeal before the first appellate authority, the assessee agreed that the gains were taxable in year one, and the entire demand arose in A.Y. 2011–12. The assessee confirmed that substantive assessment for A.Y. 2011–12 could be confirmed, and the protective assessments for A.Ys. 2012–13 and 2013–14 be cancelled. The CIT(A) confirmed the position vide order dated 31st January, 2019.

While giving effect to the orders passed by the CIT(A), a demand of ₹40,78,17,870 was raised for A.Y. 2011–12 and refunds were due for A.Ys. 2012–13 and 2013–14. The refunds were adjusted against the demand for A.Y. 2011–12 and after adjustment, a sum of ₹8,30,05,290 was determined to be payable by the assessee. The total demand for A.Y. 2011–12 included a sum of ₹19,43,57,718 as interest u/s. 234B of the Act.

The assessee submitted a request for waiver of interest u/s. 234B on the grounds that self-assessment tax / advance tax paid for A.Ys. 2012–13 and 2013–14 be considered as paid towards A.Y. 2011–12. The AO did not accede to her request and held that there was no provision for adjustment of tax paid in one year as against the liability of another year.

Against the said order of rejection of waiver by the AO, as well as the order of the appellate authorities, the petitions were preferred before the High Court. The Madras High Court partly allowing the writ petitions held as under:

“i) The advance taxes relevant to the assessment years 2012–13 and 2013-14 had been paid in time, in the course of financial years 2011–12 and 2012-13, respectively. The reassessments had transpired on 29th December, 2017. The payments were not ad hoc, and had been made specifically towards advance tax for liability towards capital gains in the financial years 2011–12 and 2012–13.

ii) Moreover, the Department had been in possession of the entire amounts from the financial years 2011–12 and 2012–13, since the assessee had satisfied the demands for the corresponding assessment years by way of advance and self-assessment taxes. It was those amounts that had been adjusted against the liability for the assessment year 2011–12 and therefore, substantially revenue neutral.

iii) The phrase ‘or otherwise’ used in section 234B(2) would encompass situations of remittances made in any other context, wherein the amounts paid stood to the credit of the assessee. However, the liability to advance tax had commenced from the financial year relevant to the assessment year in question 2011–12. The assessee sought for credit in respect of the advance tax remitted during the financial years 2011–12 and 2012–13, relevant to the A.Ys. 2012–13 and 2013–14 and there was a delay of one and two years, respectively, since the amounts for which credit was sought for ought to have been remitted in the financial year 2010–11, relevant to the A.Y. 2011–12. To such extent, the assessee was liable to interest u/s. 234B. The order rejecting waiver of interest was set aside to that extent. There was no justification in the challenge to the order of the Commissioner (Appeals) and the consequential order passed by the Assessing Officer.”

BCAJ Admin

The Tribunal held the act of PCIT in treating the assessment order as erroneous and prejudicial to the interest of the revenue only because the capital gain was not deposited in the capital gain account scheme as a hyper-technical approach while dealing with the issue. When the basic conditions of section 54(1) are satisfied, the assessee remains entitled to claim deduction under section 54.

48 Sarita Gupta vs. PCIT

ITA No. 1174/Del/2022

A.Y.: 2012–13

Date of Order: 7th December, 2023

Sections: 54, 263

The Tribunal held the act of PCIT in treating the assessment order as erroneous and prejudicial to the interest of the revenue only because the capital gain was not deposited in the capital gain account scheme as a hyper-technical approach while dealing with the issue.

When the basic conditions of section 54(1) are satisfied, the assessee remains entitled to claim deduction under section 54.

FACTS

The assessee, a resident, filed a return of income declaring total income of ₹6,42,740. The AO upon receiving information that the assessee has sold immovable property for a consideration of ₹62,06,000 issued a notice under section 147. The assessee, in response, filed a return of income declaring the income to be the same as that declared in the original return of income.

In the course of assessment proceedings, the AO asked the assessee to submit details relating to property sold and capital gain arising out of such property. From the documents, the AO observed that the assessee along with one another had purchased the property for ₹20 lakh of which ₹10 lakh was contributed by the assessee. The property was sold for ₹62,06,000, out of which, the share of the assessee was ₹31,03,000. After reducing the indexed cost of acquisition, the long-term capital gain aggregated to ₹14,59,324. The assessee made purchase of a new residential property and consequently claimed that the entire long-term capital gain to be exempt under section 54. The AO completed the assessment accepting the returned income.

Subsequently, PCIT called for an examined assessment record and found that the amount of capital gain was not deposited in the capital gain account scheme during the interim period till its utilisation in purchase / construction of new property. The PCIT was of the view that these facts were not looked into by the AO and therefore the assessment order is erroneous and prejudicial to the interest of the revenue. After issuing a show cause notice and considering the response of the assessee thereto, the PCIT set aside the assessment order with a direction to disallow the deduction claimed under section 54 of the Act as the assessee has failed to deposit the amount of capital gain in the capital gain account scheme.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal observed that in the course of assessment proceedings, the AO had thoroughly examined the issue of the sale of immovable property and the resultant capital gain arising from such sale. The AO had called upon the assessee to furnish details of exemption claimed under section 54 of the Act with supporting evidence. The Tribunal held that the AO has duly examined the issue relating to capital gain from the sale of the property as well as assessee’s claim of deduction under section 54 of the Act.

The Tribunal noted that the PCIT had not doubted the amount of capital gain arising in the hands of the assessee, and also the fact that such capital gain was invested in purchase / construction of residential house within the time limit mentioned in section 54(1) of the Act. It is only because the capital gain was not deposited in the capital gain account scheme, the revisionary authority has treated the assessment order to be erroneous and prejudicial to the interest of the revenue.

The Tribunal held that in its view, the PCIT adopted a hyper technical approach while dealing with the issue. The Tribunal held that when the basic conditions of section 54(1) have been satisfied, the assessee remains entitled to claim deduction under section 54 of the Act. The Tribunal also held that in any case of the matter, there is no prejudice caused to the Revenue as the assessee in terms of section 54(1) of the Act is entitled to deduction. The Tribunal held that exercise of power under section 263 of the Act to revise the assessment order to be invalid. The Tribunal quashed the order passed under section 263 of the Act and restored the assessment order.

The appeal filed by the assessee was allowed.

BCAJ Admin

Levy of penalty under section 271AAB is not mandatory. The AO has discretion after considering all the relevant aspects of the case to satisfy himself that the case of the assessee does not fall within the definition of an `undisclosed income’ as provided in Explanation to section 271AAB of the Act. Initiation of penalty will be invalid where show cause notice for initiation thereof neither specifies the grounds and default on the part of the assessee nor does it specify the undisclosed income on which the penalty is proposed to be levied.

47 JCIT vs. Vijay Kumar Saini

ITA No. 371/Jaipur/2023

A.Y.: 2020–21

Date of Order: 8th November, 2023

Section: 271AAB

Levy of penalty under section 271AAB is not mandatory. The AO has discretion after considering all the relevant aspects of the case to satisfy himself that the case of the assessee does not fall within the definition of an `undisclosed income’ as provided in Explanation to section 271AAB of the Act.

Initiation of penalty will be invalid where show cause notice for initiation thereof neither specifies the grounds and default on the part of the assessee nor does it specify the undisclosed income on which the penalty is proposed to be levied.

FACTS

A search under section 132 of the Act was carried out at the premises of the assessee in connection with search and seizure action on Saini Gupta Malpani — Somani Group of Ajmer on 13th February, 2020. During the year, under consideration, the assessee filed the return of income on 25th February, 2021, declaring a total income of ₹3,34,40,150. During the course of assessment proceedings, the assessee only furnished revised computation of the total income but the revised return of income was not found on the e-filing portal, nor was it furnished by the assessee. Revised computation of total income was not given cognizance and the assessment of total income was completed by making an addition of ₹2,87,50,000 to the returned income on account of an undisclosed business income, and assessing the total income at ₹6,21,90,150 vide order dated 29th September, 2021 passed under section 143(3) of the Act. The AO also initiated proceedings for levy of penalty under section 271AAB(1A) by issuing a show cause notice without specifying the default prescribed under section 271AAB(1A) of the Act.

In response to the show cause notice, the assessee furnished the reply but the same did not find favour with the AO and he held that the assessee is liable for penalty under section 271AAB(1A) @ 60 per cent of the undisclosed income of ₹2,87,50,000 and he levied a penalty of ₹1,72,50,000. In the penalty order, the AO did not point out any specific document and the nature of transactions recorded therein which may substantiate the charge that undisclosed income was detected during the course of search.

Aggrieved, the assessee preferred an appeal to the CIT(A) who upheld the order of CIT(A) by observing the appellant to be guilty of mischief of clause (a) of section 271AAB(1A) instead of clause (b) under which penalty was supposedly levied by the AO. Thus, CIT(A) granted partial relief to the assessee.

Aggrieved, by the order passed by the CIT(A), revenue preferred an appeal to the Tribunal.

HELD

At the outset, the Tribunal observed that this appeal by the revenue is a cross appeal against order passed by CIT(A) against which order, the assessee preferred an appeal being ITA No. 303/Jp/2023 raising common issue as raised by the revenue and the said appeal of the assessee has been disposed off vide Tribunal’s order dated 25th July, 2023. It observed that the appeal of the assessee has been decided on legal issues as well as on merits in favour of the assessee after elaborately discussing the matter at great length, and after considering the identical issues as have been decided by the co-ordinate benches in the case of Ravi Mathur vs. DCIT [ITA No. 969/Jp./2017; Order dated 9th April, 2019, and Rajendra Kumar Gupta vs. DCIT [ITA No. 359/Jp./2017; Order dated 18th January, 2019.

The Tribunal noted the decision in the appeal filed by the assessee wherein the Tribunal interalia observed that the assessee, in the course of search, admitted an undisclosed sales of ₹5 crore and offered the same for taxation, and therefore, penalty cannot be levied under section 271AAB of the Act. The Tribunal held that —

(i) it is pertinent to note that the disclosure of additional income in the statement recorded under section 132(4) itself is not sufficient to levy the penalty under section 271AAB of the Act until and unless the income so disclosed by the assessee falls in the definition of `undisclosed income’ as defined in Explanation to section 271AAB(1A) of the Act;

(ii) the question whether the income disclosed by the assessee is undisclosed income in terms of definition of section 271AAB has to be considered and decided in penalty proceedings;

(iii) since the assessee has offered the said income to buy peace and avoid litigation with the department, the question of taking any decision by the AO in the assessment proceedings about the true nature of surrender made by the assessee does not arise, and only when AO has proposed to levy the penalty then it is a pre-condition for invoking the provisions of section 271AAB that the said income disclosed by the assessee in the statement under section 132(4) is an undisclosed income as per definition in section 271AAB. Therefore, the AO in proceedings under section 271AAB has to examine all the facts of the case as well as the basis of surrender and then arrive at the conclusion that the income disclosed by the assessee falls in the definition of undisclosed income.

(iv) it did not agree with the CIT(A) that levy of penalty under section 271AAB is mandatory simply because AO has to first issue a show cause notice and then has to make a decision for levy of penalty after considering the fact that all the conditions provided for in section 271AAB are satisfied. It relied on the ratio of the decision of the co-ordinate bench of the Tribunal in the case of Ravi Mathur vs. DCIT.

As regards the second issue regarding validity of initiation, the Tribunal while deciding the appeal of the assessee held —

“We further note that in the case in hand, the AO in the show cause notice has neither specified the grounds and default on the part of the assessee nor even specified the undisclosed income on which the penalty was proposed to be levied. Thus it is clear that the show cause notice issued by the AO for initiation of penalty proceedings under section 271AAB(1A) is very vague and silent about the default of the assessee and further the amount of undisclosed income on which the penalty was proposed to be levied. Even the Hon’ble Jurisdictional High Court in case of Shevata Construction Co. Pvt. Ltd in DBIT Appeal No. 534/2008 dated 6th December, 2016 has concurred with the view taken by Hon’ble Karnataka High Court in case of CIT vs. Manjunatha Cotton & Ginning Factory, 359 ITR 565 (Karnataka) which was subsequently upheld by the Hon’ble Supreme Court by dismissing the SLP filed by the revenue in the case of CIT vs. SSA’s Emerald Meadows, 242 taxman 180 (SC). Accordingly, following the decision of the Coordinate Bench as well as Hon’ble Jurisdictional High Court, this issue is decided in favour of the assessee by holding that the initiation of penalty is not valid and consequently the order passed under section 271AAB is not sustainable and liable to be quashed.”

Since Revenue did not place any material to controvert the submissions of the assessee, the Tribunal on the basis of observations made while deciding the appeal filed by the assessee, allowed the appeal of the assessee and dismissed the appeal filed by the Revenue as it had become infructuous.

BCAJ Admin

Once tax has been deducted at source credit, it therefore has to be granted to the deductee even though the deductor has not deposited the tax so deducted with the Government

46 Vishal Pachisia vs. ITO

ITA No.: 764/Kol/2023

A.Y.: 2016–17

Date of Order: 7th November, 2023

Section: 205

Once tax has been deducted at source credit, it therefore has to be granted to the deductee even though the deductor has not deposited the tax so deducted with the Government.

FACTS

The assessee, a salaried employee, received a salary of ₹17,40,264. The employer deducted tax at source of ₹3,96,700. The employer did not deposit the tax deducted in the government treasury. The assessee in its return of income claimed credit of taxes deducted at source which interalia included the tax of ₹3,96,700 deducted at source by the employer. The AO, CPC denied the credit in respect of the tax deducted at source by the employer on the ground that the same was not deposited by the employer in the government treasury.

Aggrieved, the assessee preferred an appeal to CIT(A) who held that since the employer of the assessee has not deposited the tax so deducted into the government treasury, the assessee is not entitled to claim the credit.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal noted that the case of the assessee is covered in its favour by Departmental Circular No. F.No. 275/29//2014–IT(B) and also by decision in Unique Buildcon Private Limited vs. ITO in W.P.(C) 7797/2003 order dated 31st March, 2023, and also decision of co-ordinate bench Pune in the case of Mukesh Padamchand Sogani vs. ACIT in ITA No. 29/Pune/2022 order dated 30th January, 2023.

The Tribunal observed that in all the above cases the issue of non-deposit of TDS by the deductor has been allowed in favour of the assessee by holding that once TDS is deducted then liability resulting from non-deposit of TDS by the deductor cannot be fastened upon the assessee.

The Tribunal having reproduced the operative part of the decision of the Pune bench in the case of Mukesh Padamchand Sognai (supra) followed the said decision and set aside the order of CIT(A) and directed the AO to allow the credit of TDS to the assessee.

The appeal filed by the assessee was allowed.

BCAJ Admin

BCAS President CA Chirag Doshi’s Message for the Month of January 2024

Dear BCAS Family,

At the start of the New Year 2024, BCAS is celebrating its 75^th year with a 3-day conference from 4^th to 6^th January, 2024, with topics on Reimagining the way the World, India, and the Profession will be unfolding in the future.

I, therefore, felt that it would be apt to share my thoughts on the way we can ReImagine to be of relevance going forward as well as be part of the change that we envisage for a better world in the future.

REIMAGINE

Reimagine as a vibrant tapestry of innovation, sustainability, and inclusive growth. Imagine a healthcare system that prioritizes preventive care and embraces technological advancements for universal well-being. Envisage governance that is transparent, accountable, and participatory, fostering a strong democracy. Reimagine the world not just in economic terms but as a beacon of social harmony, cultural richness, and sustainable development, inspiring the overall trajectory of progress.

REIMAGINE INDIA

Envision a nation where diverse cultures and traditions coalesce into a harmonious mosaic, fostering unity amidst diversity. Picture a dynamic economy propelled by cutting-edge technology, entrepreneurship, and green initiatives ensuring a balance between progress and environmental stewardship. See education as the cornerstone, empowering every citizen with knowledge and skills, and bridging urban-rural gaps. Taking a pole position not just in the economic diaspora but also becoming an ambassador of peace and sustainability.

REIMAGINE TAX

Integrate digital taxation models to address the challenges of the modern, globalized economy. Environmental and social impact taxes to incentivize sustainability and fund social initiatives. Simplify tax codes for clarity and reduce administrative complexities.

“One World, One Tax” envisions a unified global tax system, transcending national boundaries for simplicity and fairness. This concept involves a harmonised approach to taxation, minimizing complexities and disparities across countries. It aims to prevent tax evasion, ensure a level-playing field for businesses, and foster international economic cooperation.

“Let us redefine the narrative of taxation, moving from a story of burdens to a tale of empowerment and abundance – where taxes are not only paid but invested in a better future for all.”

REIMAGINE ACCOUNTING AND AUDITING

a. AI for Accounting

Accountants and Chief Information Officers (CIOs) agree that artificial intelligence software is one of the new technologies that will shape the industry’s future.

b. Big Data

Big data has always been preferable for financial experts and accountants whenever it comes to resorting to crucial financial task completion. This technological form is imperative in transforming vital internal data sets into dynamic, secure data analysis.

c. Automated Accounting Process

Automation has drastically changed most industries, and accounting is no exception. The entire management process has become automated with comprehensive solutions. It has helped reduce errors and eliminate confusion. Since the process relies on computers and servers, businesses tend to fall into money scams and compromised security attacks. This, in turn, raises the demand for in-house auditors to check the financial inputs and data accuracy.

d. Outsourcing the Accounting Functions

Outsourcing is a new way of making advancements in the accounting business. It helps the firms to focus more on their core work rather than worrying over petty issues. By 2027, the market for outsourcing financial and accounting functions is expected to grow to $56.6 billion.

REIMAGINE AUDIT

“The future of audit is a symphony of innovation, where artificial intelligence and human expertise harmonise to unveil insights that transcend numbers.”
The future of audit is poised for a transformative shift driven by advanced technologies and evolving methodologies. Artificial intelligence and machine learning will play a central role, enhancing risk assessment, automating routine tasks, and providing deep insights into complex data sets. Continuous auditing frameworks will replace periodic assessments, offering real-time monitoring and adaptive risk management. Environmental, social, and governance (ESG) considerations will become integral to audit practices, reflecting a broader commitment to sustainability and responsible corporate practices. The future of audit envisions a dynamic, technology-driven, and collaborative ecosystem that goes beyond financial scrutiny to encompass a holistic evaluation of business performance and ethical standards.

“Audit’s evolution is not just about embracing technology; it’s a commitment to crafting narratives that tell the full story of a company’s impact on the world.”

To stay a step ahead of corporate transformation, auditors must be agile and achieve technological fluency with data and analytics, AI, and robotic process automation.

Way Forward (NFRA)

The establishment of NFRA is a significant step toward improving financial reporting and auditing practices in India. By ensuring transparency, accountability, and adherence to international standards, NFRA contributes to the overall health and trustworthiness of the Indian financial system. However, its success will depend on its ability to navigate challenges, engage stakeholders, and adapt to evolving economic and technological landscapes.

Changing Corporate Landscape – Culture of Innovation and Technology

Cultivating a culture of innovation is essential for organisations aiming to thrive in a rapidly changing environment. It begins by creating an environment that encourages and rewards creativity. When employees feel empowered to think outside the box, share ideas, and experiment without the fear of failure, true innovation can thrive. Collaboration across functional lines and platforms for idea sharing fosters diverse perspectives and sparks innovative solutions.

Technology also plays a vital role in driving innovation and agility in businesses.

“As we look ahead, fintech’s future promises a seismic shift towards democratising finance. Startups are driving this transformation, embodying the spirit of change as expressed by Elon Musk: ‘The first step is to establish that something is possible; then probability will occur.’ Fintech is not just proving the possibility; it’s redefining the probability of financial accessibility for diverse populations globally.”

“As we conclude, we see a narrative of continual evolution, driven by a commitment to innovation, inclusivity, and responsible finance. The words of Steve Jobs resonate: ‘Innovation distinguishes between a leader and a follower.’ Fintech is not just leading; it is pioneering a future where financial technology becomes a force for positive change, shaping a world where finance is a tool for empowerment and inclusion.”

“Also, the Banks of the future are not just witnesses to change; they actively shape a future where banking transcends its traditional boundaries, embracing technological evolution, and fostering financial landscapes that are inclusive, efficient, and resilient.”

Let us celebrate not just our achievements but the spirit of resilience, adaptability, and innovation that defines us as a nation. As we step into this reimagined future, let the journey continue, fuelled by the collective aspirations of a nation that embraces change as a catalyst for progress.

Hope to see you all at the BCAS mega conference – ReImagine, at the Jio World Convention Centre, Mumbai.

BCAJ Admin

Navigating the “CA (E)Volution”: Balancing Responsibility and Compliance in the Fight Against Money Laundering

“The Expanded Role of Chartered Accountants: Implications, Obligations, and Considerations under the New PMLA Rule in India”

The regulatory landscape in India has undergone a significant change with the new rule incorporating Chartered Accountants (CAs), along with Company Secretaries (CSs) and CMAs, as reporting entities under the Prevention of Money Laundering Act (PMLA). CAs, considered the warriors of the national economy, are expected to take the role of reporting entities as a vital role-upgradation for safeguarding the financial system and countering financial crimes. This expansion of reporting requirements places the role of CAs in the spotlight in combating money laundering and terrorism financing. As trusted professionals and gatekeepers of financial information, CAs now have the responsibility of detecting and reporting suspicious transactions linked to illicit activities or money laundering.

This article examines the concerns and considerations faced by CAs, compares approaches in other countries and provides insights on effective ways for CAs to equip themselves in light of the new rule. While there are already sources available for professionals to understand the notification and rules under the PMLA, this article primarily focuses on examining the specific implications and effects on CAs as reporting entities, providing insights and guidance relevant to their role in combating money laundering and terrorist financing.

BACKGROUND

In the context of combating money laundering and terrorist financing, the Financial Action Task Force (FATF), established by the G-7 countries as a global money-laundering watchdog headquartered in Paris under the OECD Secretariat, assumes great significance. This organisation sets global standards to combat money laundering, terrorist financing and other threats to the international financial system. FATF has developed 40 recommendations on legal, financial regulatory, and international cooperation that serve as a framework for countries to collectively address the challenges of money laundering, terrorist financing, and the financing of proliferation. These recommendations are meant to guide countries in effectively implementing measures within their national systems. The accounting profession plays a vital role in supporting the FATF 40 Recommendations in two key methods. Firstly, the “General Framework” recommendations align with the profession’s mission of promoting transparency and facilitating multilateral cooperation. Secondly, the “Financial System” recommendations emphasise the importance of record-keeping, reporting and promoting transparency, which directly aligns with the core competencies of the accounting profession, such as implementing controls and systems and maintaining audit trails.

One such recommendation is Recommendation 29, which requires the establishment of a Financial Intelligence Unit (FIU) in each country. The FIU serves as a central authority responsible for receiving, analysing and disseminating information related to suspicious transactions and financial intelligence. Reporting entities (RE), such as banks, financial institutions and other relevant businesses, are obligated to submit reports to the FIU in accordance with national laws and regulations.

In India, the FIU is known as FIU-IND and operates under the provisions of the PMLA. FIU-IND serves as the national centre for receiving, analysing and disseminating reports on suspicious transactions, money laundering activities, associated predicate offences and terrorist financing. This includes Suspicious Transaction Reports (STRs), Cash Transaction Reports (CTRs) and reports on cross-border wire transfers. The FIU utilises advanced analytics and intelligence tools to analyse the data received from these reports and shares actionable intelligence with law enforcement agencies.

With the recent rule, CAs have also been included as RE under the PMLA, expanding the concept to include them as well. This brings an important understanding of the differentiation between ‘reporting entities (RE)’ and ‘relevant persons.’ Relevant persons, including practising CAs, CSs and Cost and Works Accountants, become RE when they engage in specified financial transactions, thereby requiring them to comply with the necessary regulatory obligations. As relevant persons, CAs are included in the category of professionals who carry out specified financial transactions on behalf of their clients. These financial transactions fall within the ambit of RE, which means that CAs have reporting obligations under the PMLA. Hence, CAs can be referred to as both relevant persons and RE in the context of the PMLA.

As mentioned earlier, the PMLA encompasses a broad range of entities and individuals involved in designated businesses or professions. To specify the scope of RE, the Ministry of Finance, empowered by the PMLA, has outlined certain financial transactions conducted by relevant persons. These transactions pertain to diverse areas such as property dealings, management of client assets and establishment or administration of companies. The Ministry has further clarified that relevant persons encompass practising individuals or firms who hold certificates of practice under the Chartered Accountants Act, 1949, Company Secretaries Act, 1980 or Cost and Works Accountants Act, 1959. This inclusion aligns with the definition of a “person carrying on designated business or profession” and encompasses these professionals undertaking financial transactions on behalf of their clients. Consequently, these professionals assume the role of RE and are obligated to fulfil the requisite compliance obligations stipulated by the PMLA.

Recommendation 22

The above inclusion by PMLA aligns with Recommendation 22 of the FATF on Designated Non-Financial Businesses and Professions (DNFBPs). Recommendation 22 outlines the customer due diligence and record-keeping requirements that apply to DNFBPs in specific situations. These situations include activities carried out by lawyers, notaries, other independent legal professionals and accountants on behalf of their clients.

Recommendation 22(d): “The CDD and record-keeping requirements set out in Recommendations 10, 11, 12, 15, and 17 apply to designated non-financial businesses and professions (DNFBPs) in the following situations: Lawyers, notaries, other independent legal professionals, and accountants – when they prepare for or carry out transactions for their client concerning the following activities:

buying and selling of real estate;
managing of client money, securities, or other assets;
management of bank, savings, or securities accounts;
organisation of contributions for the creation, operation, or management of companies;
creation, operation or management of legal persons or arrangements, and buying and selling of business entities.”

By including CAs as RE and imposing compliance obligations on them, the PMLA takes reference from and assumes importance with the customer due diligence and record-keeping requirements outlined by the FATF for DNFBPs. While legal professionals like lawyers are excluded from this rule, unlike in other countries, the inclusion of CAs highlights their crucial role as relevant persons engaged in financial transactions, actively contributing to the fight against money laundering and other illicit activities. Consequently, this ensures that valuable information is gathered as part of the reports collected by FIU-IND, enhancing overall efforts to combat financial crimes.

ACCOUNTANTS AS RE IN OTHER COUNTRIES

In several countries, accountants have been included as RE under their respective Anti-Money Laundering (AML) acts or regimes.

The International Federation of Accountants (IFAC) highlights that while national AML regulations may not explicitly assign accountants specific responsibilities, practitioners are still obligated to adhere to the standards and guidelines set by local accounting bodies. Money laundering is generally not as directly impactful on financial statements as other forms of fraud, like misappropriation. Therefore, detecting money laundering through a financial statement audit is unlikely. However, the indirect consequences of money laundering can still affect an entity’s financial statements, which make it an area of concern for external auditors.

This leads us to the important question of the specific obligations imposed on CAs under this new rule.

THE TRANSITION OF OBLIGATIONS

When interpreting the notification, it is crucial to consider the purpose of the PMLA, which is to combat money laundering and terrorist activities. Suppose a transaction involves the client’s use or sourcing of funds and raises suspicions regarding money laundering or terrorism financing. In that case, the professional cannot claim ignorance of the client’s credentials, as due diligence on the client is a requirement. Additionally, if the professional identifies transactions that require reporting to the FIU-IND, they are obligated to report such transactions.

Comprehensively, below are the factors to be considered or that are expected by the CA to be performed.

1. Enhanced Customer Due Diligence (CDD): There is a need to implement robust CDD measures when establishing a business relationship with a client or when conducting occasional transactions above a certain threshold. Further, the professionals need to gather and verify information about the client’s identity, beneficial ownership and the purpose of the transaction.

2. Transaction Monitoring: The professionals ought to enhance their transaction monitoring systems to detect and report any suspicious transactions. They need to develop an understanding of the typical transaction patterns for each client and be alert to any anomalies or red flags.

3. Suspicious Transaction Reporting: If the professional identifies any suspicious transactions during their audit or through their transaction monitoring systems, they have a legal obligation to report these to the FIU-IND in a timely manner. This involves preparing an STR and submitting it as per the prescribed format and timelines.

4. Record Keeping: The professional must maintain detailed records of their clients, transactions and the measures taken to comply with the reporting obligations. These records should be readily accessible for review by regulatory authorities.

5. Compliance Training and Policies: There is a need for practising professionals to provide appropriate training to their staff on AML / CFT compliance, including recognising and reporting suspicious transactions. They should also update their internal policies and procedures to reflect the new reporting requirements and ensure adherence across the organisation.

As a result, CAs, in addition to the traditional roles in financial auditing, now need to be proactive in identifying and reporting suspicious transactions as per the new PMLA rule. This transition requires them to enhance their knowledge, implement new procedures and stay vigilant in their efforts to combat money laundering.

In practical terms, it is beneficial for CAs to consider the following points, drawing inspiration from a money laundering guide for lawyers. These recommendations encompass similar activities and requirements that can be relevant for CA professionals.

FATF Recommendation	Key Consideration	Relevance	Recommended Actions
10	Customer due diligence	Identifying clients and their ownership	– Identify the client and their beneficial owner.
			– Use reliable, independent source documents or information.
			– Request a structure map and details of beneficial ownership for corporate clients.
			– Understand the business relationship and the purpose of the transaction.
			– Conduct ongoing due diligence to align with your knowledge of the client’s profile and source of funds.
			– Refrain from establishing or continuing the business relationship if satisfactory due diligence cannot be carried out. – Consider reporting suspicious transactions.
11	Record-keeping requirements	Maintaining records	– Keep copies or originals of documents obtained during CDD measures.
			– Maintain files and business correspondence for a specified period or as per the recommended period by the PMLA.
			– Include electronic and physical communications and documentation.
			– Ensure records are sufficient to reconstruct individual transactions as potential evidence in suits.
12	Enhanced CDD for politically exposed persons (PEPs)	Dealing with high-risk clients	– Obtain senior partner approval for establishing or continuing a business relationship with PEPs, their families or close associates.
			– Take reasonable steps to determine the source of wealth and funds.
			– Conduct enhanced ongoing monitoring of the business relationship.
15	New technologies	Keeping pace with emerging risks	– Identify, assess and manage risks associated with new products, business practices and technologies used by lawyers.
17	Reliance on third parties and group-wide compliance	Partnering with reliable entities	– Ensure third parties have a good reputation and are regulated, supervised and monitored.
			– Confirm that third parties have measures in place to comply with CDD and record-keeping requirements.
			– Obtain necessary CDD information from third parties and ensure availability of identification data and documentation upon request.
20	Suspicious transaction reporting	Identifying and reporting suspicious activity	– Familiarise yourself with the requirements for reporting suspicious transactions in the relevant jurisdiction.
			– Report suspicions of criminal or terrorist activity to the FIU-IND as per requirements.

These guidelines, based on the specific recommendations, provide suggested actions for CA professionals to follow in order to comply with the new PMLA rules and effectively prevent money laundering activities. Each recommendation highlights the key consideration, its relevance and the suggested actions to be taken by CAs to fulfil their obligations under the new rule.

ETHICAL CONSIDERATIONS AND CONCERNS

As with any new rule, the implementation of the amended PMLA raises several ethical considerations and concerns that the CA professionals need to navigate. One such consideration is the delicate balance between client confidentiality and reporting obligations. Professionals often face the challenge of deciding when and how to disclose information while upholding the privacy and trust of their clients. One may come across a suspicious transaction involving a client but revealing that information could potentially breach the client’s confidentiality. Striking the right balance requires a deep understanding of the legal framework and clear guidelines. Not to mention the significant effort and investment in conducting thorough due diligence on clients, monitoring transactions and maintaining records.

The enhanced requirements and extensive documentation can be time-consuming and resource-intensive, which requires professionals to allocate sufficient resources to meet these obligations while also ensuring the smooth functioning of their practice.

Importantly, the potential for bias and subjective interpretation in identifying suspicious transactions is also a valid concern. Professionals must ensure they approach their work with objectivity and avoid unintended biases. This can be particularly challenging in cases where transactions may appear suspicious based on subjective criteria. For instance, two professionals may have different interpretations of a transaction’s suspicious nature, leading to inconsistent reporting. Clear guidelines, regular training and collaboration with industry peers can help address this concern.

In light of the new obligations, the CA professionals should equip themselves in the following ways and prepare for the coming days:

The inclusion of professionals like CAs under the PMLA is a significant and welcome development in the fight against money laundering. This expansion of their role emphasises the critical responsibility they hold as warriors safeguarding the financial integrity of the nation. Despite the criticisms surrounding the lower contribution of accountants in terms of STRs compared to other contributors in the global scenario, it remains crucial to strike a balance between compliance efforts and conviction rates in India as the regulatory landscape evolves to combat financial crimes. For instance, although all DNFBPs are required to report suspicious activity reports (SARs), there is underreporting from higher-risk sectors such as trust and company service providers, lawyers and accountants in the UK. It is key to achieving the objective of ensuring that heightened compliance measures effectively translate into successful convictions without imposing an excessive burden on professionals.

The upcoming FATF assessment in 2023 will shed light on the effectiveness of the new notification in addressing financial crimes in India. It is imperative for CA professionals to step up their game by staying updated on compliance regulations, embracing technology and fostering a strong ethical framework. This expanded role signifies a crucial step towards curbing money laundering in India, reinforcing the collective effort to preserve the integrity of our financial system and protecting the interests of our nation.

REFERENCES

1. A Lawyer’s Guide to Detecting and Preventing Money Laundering October 2014, A collaborative publication of the International Bar Association, the American Bar Association, and the Council of Bars and Law Societies of Europe.

2. https://www.nortonrosefulbright.com/en-au/knowledge/publications/bae065f5/tranche-2

3. Anti-money laundering, 2nd edition by IFAC.

4. Extending the Reach: CAs, CMAs and CSs brought under the ambit of PMLA reporting entities by Dr (CA) Durgesh Pandey.

5. https://legal.thomsonreuters.com/en/insights/articles/what-is-a-suspicious-activity-report

6. Requiring Lawyers to Submit Suspicious Transaction Reports: Implementation Issues and Current International Trends by George V. Carmona, Chief of Party, ROLE – USAID

7. Guideline: Accountants Complying with the Anti-Money Laundering and Countering Financing of Terrorism Act 2009, March 2018, published by New Zealand Government

8. https://fintrac-canafe.canada.ca/re-ed/accts-eng

9. https://ec.europa.eu/commission/presscorner/detail/en/MEMO_13_64

10. https://alessa.com/blog/compliance-with-bank-secrecy-act-aml-requirements/

11. https://cfatf-gafic.org/index.php/documents/fatf-40r/388-fatf-recommendation-22-dnfbps-customer-due-diligence

12. https://www.cfatf-gafic.org/index.php/documents/fatf-40r/395-fatf-recommendation-29-financial-intelligence-units

13. https://www.rupanjanade.com/post/the-role-of-professionals-under-the-redefined-pmla

BCAJ Admin

वसुधैव कुटुम्बकम् | अहोरूपमहो ध्वनि: |

Friends, in the present article, we will discuss two well-known shlokas. The first one is:

अयं निज: परो वेति गणना लघुचेतसाम् |

उदारचरितानां तु वसुधैव कुटुम्बकम् ||

Literal meaning —

‘This person is mine, while this person is a stranger — this type of thinking is that of narrow-minded people. On the other hand, for people with liberal thinking, the whole earth (world) is one family.

This is a great message from our rich Indian culture. Our philosophy is ‘inclusive’ and not ‘exclusive’. No other
country or community has ever thought of treating all the people in the world as family members. This thought is deeply rooted in Indian hearts. Of late, due to vicious politics, people are promoting or encouraging communalism, separatism, a divide between two sects, two groups, two ideologies, etc. They have vested interests in it. Our ancient sages never thought along these lines.

Indians never invaded any country. Indians won over others through their trade, quality products, education, and above all, honesty and affection. We had no specific religion, no single founder, and no single religious book. We were never possessive about anything. Knowledge was freely available to all. In ancient literature, Dharma referred to one’s duty and not to the ‘religion’ as we understand it today.

There was not even the concept of belonging to the family. That is the joint family system or in modern times, thanks to tax laws, popularly known as ‘HUF’. That is why there was no concept of ‘Will’ in our culture. Nothing belonged to anyone personally.

That is also the reason why and how we Indians accommodated and absorbed even the invaders of the country — despite their cruelty and narrow-minded attitude.

The ‘world family’ is not our hypocrisy or ‘agenda’. All sages and saints not only preached it but practised it. It came naturally to them. Society harassed the saints, they still gave back to society everything with love and affection. This is possible only when we consider all of them as our family members. That should give rise to mutual love, affection, and cordiality.

Swami Vivekanand won the hearts of all present at the Chicago World Religious Congress with just two words — ‘My brothers and sisters of America’. These words can be uttered only by a firm believer in the principle of ‘Vasudhaiva Kutumbakam’. Needless to say that Vasudha (earth) includes the whole of nature — trees, animals, birds, and everything!

We worship nature — trees, rivers, ocean, mountains, animals, and so on. People are realising its importance now — when they shout about ‘environment’.

Sant Dnyaneshwar’s prayer Passayadaan (पसायदान) is full of this feeling of वसुधैव कुटुम्बकम्.

Let us reinforce this great principle and become a real “Vishwa-guru”

अहोरूपमहो ध्वनि: |

Full shloka reads as follows:

उष्ट्राणां च विवाहेषु गीतं गायन्ति गर्दभा: |

परस्परं प्रशंसन्ति अहोरूपम् अहो ध्वनि: ||

Once at a wedding function of Camels (उष्ट्र), Donkeys (गर्दभ) were singing. Both were praising each other.

Donkeys said about Camels – ‘what a handsome appearance’. Camels reciprocated by saying ‘what a melodious voice’.

In today’s world, mediocre things become popular since the high taste of the elite class has deteriorated and diluted. In reality shows on TV channels, praise is showered on each other in ‘superlative’ words. Modern dances, which are in the nature of acrobatics, suppress the real classical dances. The loud orchestras have suppressed classical music. The same is the position in other arts and literature. So also, in politics, mediocre leaders put up big banners for self-promotion. The honest and dedicated leaders who have a genuine desire to do something good for society and who put in genuine efforts are often side-lined.

Such mediocre and inefficient people have no identity of their own, no talent, no recognition. They stay in mobs and they form a ‘Mutual Admiration Club’.

That is nothing but ‘अहोरूपमहो ध्वनि: |

BCAJ Admin

Taxpayers’ Charter – Implement It in Letter and Spirit (Respect Begets Respect)

One would like to visit a place often where one gets respect. More than what we are treated with, “how” we are treated is important. And therefore, one would shudder to go to a Police Station. However, some people have a similar feeling while visiting the Income tax office. The trust deficit between the Income-tax department and the taxpayer is so high that both suspect and disrespect each other. Respect for the fellow human being is the cardinal principle of a civilized society. However, it is not to be found while dealing with some government agencies.

In this connection, the first two declarations of the Taxpayers’ Charter by the Income-tax Department¹, which was issued on 13th August, 2020, deserve our attention.

https://incometaxindia.gov.in/Documents/taxpayer-charter.pdf

They are as follows:

“The Income Tax Department is committed to:

1. Provide fair, courteous, and reasonable treatment

The Department shall provide prompt, courteous, and professional assistance in all dealings with the taxpayer.

2. Treat taxpayer as honest

The Department shall treat every taxpayer as honest unless there is a reason to believe otherwise.”

In all, there are 14 declarations in the Taxpayers’ Charter. However, even if the first two declarations cited above are implemented in letter and spirit, they can help to reduce the trust deficit to a great extent.

When one looks at the language of the notices or summons issued by the Income-tax department, one feels that much needs to be done to implement these two declarations in the Charter. Of late, summons are sent by the Investigation Wing of the Income-tax department even to non-residents who have been living abroad for ages, seeking details of their worldwide affairs without jurisdiction. Moreover, the notices threaten to levy a penalty for non-attendance and contain a direction not to leave the officer’s chamber until permitted to do so. Such an attitude creates fear and causes reluctance in nonresidents in even venturing into obtaining a PAN in India. Notices from the Income-tax department use unfriendly language and end with a threat to levy a penalty for noncompliance. The tone of the communication from the Income-tax department is that taxpayers are suspected tax evaders. These attitudes need to be changed with soft skills training for officers on the approach to taxpayers.

It is worth noting the remarks made by the Prime Minister while launching the Taxpayers’ Charter – “it is a significant step where the taxpayer is now assured of fair, courteous and rational behaviour.” He said the charter takes care of maintaining the dignity and sensitivity of the taxpayer and that is based on a trust factor and that the assessee cannot be merely doubted without a basis. Many steps have been taken by the Government to improve taxpayers’ services, such as the use of technology, faceless assessments, faceless appeals, etc.; however, much more remains to be done.

The experience of the taxpayer is quite dismal when it comes to fair and reasonable treatment by the Incometax department. High-pitched assessments, withholding of refunds, denial of exemptions/deductions, reopening of assessments without making base papers available to taxpayers, adjustment of refunds against unverified past demands, past incorrect demands reappearing time and again, and the absence of accountability on the part of tax officials remain painful experiences of taxpayers, even today. The levy of a high penalty (Rs. Ten Lakh) under the Black Money Act for mere failure to disclose (in respect of a legitimate transaction) a foreign asset or signatory of a foreign bank account, etc., by an Indian resident cannot be justified as fair and reasonable on any count. Some overzealous Assessing Officers want to tax anything and everything, as there is no accountability if they are found to have gone overboard.

The powers given by the recent insertions in section 245 of the Income-tax Act are prone to misuse and harmful to taxpayers. The amended provisions allow tax authorities to withhold refunds on the basis that they are anticipating some demand to arise in future upon the conclusion of pending assessment proceedings. In any case, refunds of higher amounts are invariably delayed or withheld without any valid reason; the amended provision will legitimatise the right of tax officials to delay refunds.

Backdoor assumption of powers by the CBDT?

Many sections, e.g., section 115BAB, sections 206C(1G/H), 194-O, 194Q, 194R, 194S, etc., are amended to assume powers by the CBDT to issue binding guidelines on the taxpayers and tax officials. So far, guidelines issued by the Income-tax department were biding only on the officers. However, under the new provisions, guidelines issued by the CBDT shall be binding on both taxpayers and IT officials. Even though these guidelines need to be approved by the Parliament, it hardly makes a difference. There is a fear that officials will assume powers to amend the law in the name of clarifications, etc. The glaring example is FAQ 4 of Circular 12/2022 issued in the context of S.194R, which states that the cost of a free medicine sample given by a pharma company to a doctor with the narration ‘Not for Sale’ can be considered as a ‘benefit’/‘perquisite’ provided to the doctor and hence the pharma company providing free samples needs to deduct TDS under section 194R. This interpretation of the tax department may not stand the test of judicial scrutiny. However, till such time, the taxpayer will be bound by it, as it is a part of the binding guideline. Such provisions are clearly against the spirit of the Taxpayers’ Charter, which aims to be people-centric and public-friendly.

Unfortunately, one can still see the grip of bureaucracy over law-making. The laws are framed for outliers/exceptions. In the name of plugging loopholes, court rulings in favour of taxpayers are nullified by legislative amendments, citing legislative intent, which may not be true. This calls for a complete change of mindset in policymaking and advising.

Two other important declarations in the Taxpayers’ Charter are (i) Providing a Just and Fair Tax System and (ii) Reducing the Cost of Compliance. When one looks at both of these declarations, one cannot help but feel that the ground-level reality is far from the promises in the Charters.

Let us hope that the Income-tax officials will implement the Taxpayers’ Charter in the spirit of “Transparent Taxation — Honouring the Honest”, the underlying theme announced by the PM while launching the structural reforms platform of Faceless Assessment, Faceless Appeal and Taxpayers’ Charter. Needless to add, every rule, law, and policy has to be people-centric and publicfriendly, rather than process and power-centric.

New Criminal Laws in the New Year

One major development on the judicial front is the enactment of three new criminal laws, to replace the colonial-era criminal laws. The focus of the earlier laws was to levy penalties, whereas the focus of the new laws is to give justice to the victim. The three New Laws are: (1) The Bharatiya Nyaya Sanhita, 2023 (replacing the “Indian Penal Code, 1860”) (2) The Bharatiya Nagarik Suraksha Sanhita, 2023 [ replacing The Code of Criminal Procedure, (CrPC) 1973] and (3) The Bharatiya Sakshya Adhiniyam, 2023 (replacing the “Indian Evidence Act, 1872”).

The laws are not only named in Bharatiya style but claimed to be Bharatiya in spirit to keep pace with the current times and get rid of the colonial mindset. The new laws provide penalties for crimes such as terrorism, mob lynching, and offences jeopardising national security. The new laws will have a far-reaching impact on internal security and law and order situation in India. However, to make these laws more effective, judicial reforms need to be undertaken at the earliest.

Let us hope that Bharat ushers in the New Year with a progressive, positive, and pragmatic mindset, leaving behind a colonial legacy!

Wish you a happy and prosperous 2024!

BCAJ Admin

Key Amendments to SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015

SEBI had issued Consultation Papers in November 2022 and February 2023 for amending the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. SEBI had invited comments on these consultation papers and finally issued the amendments by way of Notification No. SEBI/LAD-NRO/GN/2023/131 dated 14th June, 2023. These amendments majorly relate to enhancing disclosure and governance requirements of listed entities.

EFFECTIVE DATE OF THE AMENDMENTS

The amendments are effective on the 30th day of publication in the official gazette i.e., 14th July, 2023, except for some of the requirements which were effective from 14th June, 2023, e.g., approval requirements in case of sale, lease or disposal of an undertaking outside scheme of arrangement.

The objective of this article is to provide an overview of the key amendments and provide the brief analysis of the amendments. Reference should be made to SEBI notification dated 14th June, 2023, and amended SEBI LODR Regulations, 2015 for a detailed understanding of the entire set of amendments.

TIMELINE FOR SUBMISSION OF FINANCIAL RESULTS SUBSEQUENT TO THE FIRST-TIME LISTING

Clause (j) has been added to the Regulation 33(3) of Chapter IV, Obligations of a listed entity which has listed its specified securities and non-convertible debt securities, to provide clarity on the submission of financial results for the entity listed for the first time. The entity subsequent to the listing, is required to submit its financial results for the quarter or the financial year immediately succeeding the period for which the financial statements have been disclosed in the offer document for the initial public offer, as per the below timeline:

period specified in Regulation 33(3)(a) i.e., within 45 days from the end of each quarter other than the last quarter; or
period specified in Regulation 33(3)(d) i.e., within 60 days from the end of the Financial Year (in case of the March quarter);
within 21 days from the date of listing;

Whichever is later.

This amendment is applicable to the issuers whose public issues open on or after these regulations come into effect.

DISCLOSURE OF MATERIAL EVENTS/INFORMATION UNDER REGULATIONS 30 – INTRODUCTION OF QUANTITATIVE CRITERIA FOR DETERMINING MATERIALITY

The qualitative criteria governing disclosure of material events/information as per Regulation 30(4) is where the omission in discourse of such event/information is likely to result in:

discontinuing or altering an event or information already available publicly; or
significant market reaction if the said omission came to light at a later date.

Sub-regulation (4) of Regulation 30 has been amended and new quantitative criteria by way of threshold has been included for determining the materiality of events/ information as below:

The omission of an event or information, whose value or the expected impact in terms of value, exceeds the lower of the following:

2 per cent of the turnover as per the last audited consolidated financial statements of the listed entity;
2 per cent of the net worth as per the last audited consolidated financial statements of the listed entity except in case the arithmetic value of the net worth is negative;
5 per cent of the average of absolute value of profit or loss after tax, as per the last 3 audited consolidated financial statements of the listed entity.

The thresholds are based on the last audited consolidated financial statements of the listed entity. Considering that the present financial year is the first year of applicability, the thresholds will need to be determined based on the consolidated financial statements as on 31st March, 2023. In case of profit related parameters, average needs to be computed for the last three financial years i.e., 2022-23, 2021-22, 2020-21.

Turnover has been defined under Companies Act, 2013 as the gross amount of revenue recognised in the profit and loss account from the sale, supply, or distribution of goods or on account of services rendered, or both, by a company during a financial year.

‘Absolute value of profit or loss after tax’ means to take absolute figures of profit / loss i.e., without netting off in case the company has losses in any of the financial year. The threshold for profit/loss is to be computed by taking the absolute values of profit or loss after tax, for the immediately preceding three financial years.

The amended regulations require the materiality policy to be framed in a manner so as to assist the relevant employees in identifying potential material events or information. The listed entity will have to ensure that the policy formulated by the listed entity for determining the materiality cannot dilute any requirement specified under the provisions of these regulations, and is required to assist the relevant employees in identifying any potential material event or information and reporting the same to authorised KMP for determining the materiality of such events or information and for making necessary disclosures to the stock exchange.

The new quantitative threshold would require listed entities to make timely disclosures of material information without exercising their judgement on whether they are required to be disclosed.

TIME PERIOD FOR DISCLOSURE OF MATERIAL EVENTS/ INFORMATION:

The disclosure of the material event or information to the stock exchange is required to be not later than the following:

30 minutes from the closure of Board Meeting where the decision regarding the event/ information is taken.
12 hours from the occurrence of event or information if such event or information emanates from within the listed entity.
24 hours from the occurrence of event or information if such event or information emanates NOT within the listed entity.

In case of delay in such disclosure, explanation for the same need to be disclosed. In case the timelines for the disclosure of events are specified in Part A of Schedule III of the regulations, such timelines need to be followed.

AMENDMENT IN PART A OF SCHEDULE III OF THE REGULATIONS IN RELATION TO EVENTS WHICH NEEDS TO BE DISCLOSED BASIS THE GUIDELINES FOR MATERIALITY

The following events have been added which need disclosure basis the guidelines for materiality:

Arrangements for strategic, technical, manufacturing, or marketing tie-up.
Adoption of new line(s) of business.
Closure of operation of any unit, division or subsidiary (in entirety or in piecemeal).
Pendency of any litigation(s) or dispute(s) or the outcome thereof which may have an impact on the listed entity.
Frauds or defaults by employees of the listed entity which has or may have an impact on the listed entity.
Delay or default in the payment of fines, penalties, dues, etc. to any regulatory, statutory, enforcement or judicial authority.

DISCLOSURE OF EVENTS/INFORMATION IRRESPECTIVE OF MATERIALITY

Para A of Part A of Schedule III has been amended to include certain events which need to be disclosed to the Stock Exchange(s) without any application of guidelines for materiality as specified in Regulation 30(4) as follows:

A. Events relating to fraud/ default in repayment / arrest of certain persons

The following events need to be disclosed:

Fraud or defaults by a listed entity, its promoter, director, key managerial personnel, senior management or subsidiary; or
Arrest of key managerial personnel, senior management, promoter or director of the listed entity, whether occurred within India or abroad.

‘Fraud’ is defined under Regulation 2(1)(c) of Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003. ‘Default’ means non-payment of the interest or principal amount in full on the date when the debt has become due and payable.

In the case of revolving facilities like cash credit, an entity would be considered to be in ‘default’ if the outstanding balance remains continuously in excess of the sanctioned limit or drawing power, whichever is lower, for more than thirty days.

Default by a promoter, director, key managerial personnel, senior management, subsidiary means the default which has or may have an impact on the listed entity.

B. Event relating to restructuring / amalgamation (Amendments have been highlighted in bold)

The following events need to be disclosed:

Details relating to acquisition(s) (including agreement to acquire), Scheme of Arrangement (amalgamation, merger, demerger or restructuring), sale or disposal of any unit(s), division(s), whole or substantially the whole of the undertaking(s) or subsidiary of the listed entity, sale of stake in associate company of the listed entity or any other restructuring.

C. Events relating to resignation of certain persons

The following needs to be disclosed to the Stock Exchange(s) within 7 days from the date resignation comes into effect:

resignation of key managerial personnel, senior management, Compliance Officer or director other than an independent director,
the letter of resignation along with detailed reasons for the resignation.

D. Events relating to non-availability of certain persons

The following needs to be disclosed to the Stock Exchange(s):

The event where MD or CEO was indisposed or unavailable to fulfil the requirements of the role in a regular manner for more than 45 days in any rolling period of 90 days.
Reason for such indisposition or unavailability.

E. Event relating to voluntary revision of financial statements or Directors’ report

Voluntary revision of financial statements or the report of the board of directors of the listed entity under section 131 of the Companies Act, 2013.

Communication/ order from regulatory, statutory, enforcement or judicial authority – Disclosure under Regulation 30 (13).

Action(s) initiated, or orders passed by all regulatory, statutory, enforcement authority or judicial bodies against the listed entity or its directors, KMPs, senior management, promoter or subsidiary, in relation to the listed entity requires disclosure. The following events require disclosure:

search or seizure; or
reopening of accounts under section 130 of the Companies Act, 2013; or
investigation under the provisions of Chapter XIV of the Companies Act, 2013;

In case of an action/order, the following details pertaining to the actions initiated, taken or orders passed will be required to be disclosed within 24 hours:

(i) name of the authority; (ii) nature and details of the action(s) taken, initiated or order(s) passed; (iii) date of receipt of direction or order, including any ad-interim or interim orders, or any other communication from the authority; (iv) details of the violation(s)/contravention(s) committed or alleged to be committed; (v) impact on financial, operation or other activities of the listed entity, quantifiable in monetary terms to the extent possible.

Action(s) taken, or orders passed by any of the above mentioned authority against the listed entity or its directors, KMPs, senior management, promoter or subsidiary, in relation to the listed entity, is also required to be disclosed; following details are required:

(i) suspension; (ii) imposition of fine or penalty; (iii) settlement of proceedings; (iv) debarment; (v) disqualification; (vi) closure of operations; (vii) sanctions imposed; (viii) warning or caution; or any other similar action(s) by whatever name called.

Disclosure of Agreements impacting listed entities – New regulation

A new Regulation 30A has been inserted in Chapter IV, Obligations of a listed entity which has listed its specified securities & non-convertible debt securities which requires disclosures of agreements specified in the newly inserted clause 5A of para A of part A of schedule III. There are numerous agreements that are entered into by shareholders e.g., SHAs, SPAs, performance related agreements etc. These may be entered into between investors, joint venture partners, family members etc. These agreements may or may not be having the listed entity as a party or even a confirming party. However, these agreements pertain to management or control of the listed entity and therefore, may require disclosure in terms of Clause 5A.

Who is required to make the above disclosures?

If the shareholders, promoters, promoter group entities, related parties, directors, key managerial personnel and employees of a listed entity or of its holding, subsidiary and associate company are parties to the above-mentioned agreement and the listed entity is not a party to such agreement.

The above mentioned person needs to inform the listed entity about the agreement within 2 working days of entering into such agreements or signing an agreement to enter into such agreements. In case the above agreements subsist on the date of notification of clause 5A to para A of part A of schedule III, then the above mentioned person needs to make disclosure to the listed entity on that date only. The listed entity in turn is required to disclose the information to the stock exchange and on its website within the timelines specified by the Board.

Information/ agreements specified in clause 5A of part A of Schedule III

Agreements entered into by the shareholders, promoters, promoter group entities, related parties, directors, key managerial personnel, employees of the listed entity or of its holding, subsidiary or associate company, among themselves or with the listed entity or with a third party, solely or jointly, which, either directly or indirectly or potentially or whose purpose and effect is to, impact the management or control of the listed entity or impose any restriction or create any liability upon the listed entity, need to be disclosed to the Stock Exchanges, including disclosure of any rescission, amendment or alteration of such agreements thereto, whether or not the listed entity is a party to such agreements:

Disclosure of such information in Annual Report for FY 2022-23 and FY 2023-24

Number of agreements that subsist as on the date of notification of clause 5A to para A of part A of schedule III, their salient features, including the link to the webpage where the complete details of such agreements are available.

Information disclosed under clause 5A of paragraph A of Part A of Schedule III needs to be disclosed in the Annual Report.

This amendment seeks to address information disparity and increases transparency and will also enable the listed entity to be made aware of the obligations that have been imposed upon it by the parties to such agreements.

Circumstances in which disclosure of such information to stock exchange is not required

If such agreements entered into by a listed entity in the normal course of business unless:

they, either directly or indirectly or potentially or whose purpose and effect is to impact the management or control of the listed entity; or
they are required to be disclosed in terms of any other provisions of the LODR Regulations.

The term “directly or indirectly” includes agreements creating obligations on the parties to such agreements to ensure that listed entities shall or shall not act in a particular manner.

BUSINESS RESPONSIBILITY AND SUSTAINABILITY REPORT (BRSR) – MANDATORY REASONABLE ASSURANCE

Vide Circular No. SEBI/HO/CFD/CFD-SEC-2/P/CIR/2023/122 dated 12th July, 2023, SEBI has mandated reporting of ESG disclosures by top 1000 listed companies (by market capitalisation) from FY 2023-24 onwards in the revised BRSR format. The revised format has added some additional questions in Section C, Principle Wise Performance Disclosures besides making some Leadership indicators as Essential Indicators. To enhance the reliability of disclosures in BRSR, SEBI has mandated the reasonable assurance of BRSR Core to top 150 listed entities (by market capitalisation) from FY 2023-24 onwards which will be extended to top 1000 listed entities (by market capitalisation) by FY 2026-27 in a phased manner vide amendment in Regulation 34(2)(f) of SEBI (Listing Obligations and Disclosure Requirement) Regulations, 2015 (LODR Regulations). BRSR core is a subset of BRSR.

In addition, KPIs for value chain needs to be disclosed by the top 250 listed entities (by market capitalisation) from FY 2024-25 on a comply-or-explain basis. Limited assurance on the same is required to be obtained with effect from FY 2025-26. For this purpose, the value chain encompasses the top upstream and downstream partners of a listed entity, cumulatively comprising 75 per cent of its purchases / sales (by value) respectively. SEBI also released a set of FAQs wherein it provided an indicative list of activities which the assurance provider cannot undertake besides clarifying that assurance of BRSR Core is profession agnostic.

Regulators and Investors are increasingly focussing on the ESG disclosures and their accuracy. Companies need to gear up for providing adequate information in their sustainability report. As reporting and assurance of sustainability related disclosures evolves audit committees have a critical role to play in expanding their existing oversight responsibilities for financial reporting and compliance to sustainability-related disclosures.

REPORTED INFORMATION IN THE MAINSTREAM MEDIA – NEW REQUIREMENT

Regulation 30 (11) of SEBI (LODR) Regulation, 2015 had been amended requiring top 100 and 250 listed companies to confirm, clarify or deny any reported event or information in the mainstream media which is not general in nature and which indicates that rumours of an impending specific material event or information, in terms of the provisions of LODR regulation, are circulating amongst the investing public, as soon as reasonably possible and not later than twenty four hours from the reporting of the event or information. If the listed entity confirms the reported event or information, it shall also provide the current stage of such event or information. SEBI has also defined what constituted mainstream media in that Notification vide amendment in Regulation 2 (1)(ra).

Recently, SEBI vide Notification dated 9th October, 2023, has omitted the timelines and deferred the applicability of the above-mentioned provisions indefinitely. The three industry associations, viz. ASSOCHAM, CII and FICCI, have come together to form Industry Standards Forum (ISF) under the aegis of the Stock Exchanges on a pilot basis. ISF has taken up verification of market rumours as one of the pilot projects for formulating standards. The effective date for the aforesaid requirement would be specified by the SEBI, after reviewing the standards submitted by ISF¹.

1 . Source: SEBI Board Meeting - Extension of timeline for verification of market rumours by listed entities – Amendment to the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.

WAY FORWARD

The Amendment Regulations have attempted to strengthen corporate governance standards and disclosure requirements of listed companies. These changes reflect SEBI’s commitment to create a more robust regulatory framework and promote investor confidence. The changes introduced can be considered as a step in the right direction as it has the effect of empowering the shareholders of listed companies by way of enhanced transparency and additional disclosures.

BCAJ Admin

Residential Status of Individuals – Interplay With Tax Treaty

INTRODUCTION

This article is the second part of a series of articles on Income-tax and FEMA issues related to NRIs. The first article in the series focused on various issues related to the residence of individuals under the Income-tax Act, 1961 (‘the Act’). In this article, the author seeks to analyse some of the key issues related to the determination of the residential status of an individual under a tax treaty (‘DTAA’). Some of the issues covered in this article would be an interplay of tax residency under the tax treaty with the Act, the applicability of the treaty conditions to not ordinarily residents, tie breaker rule under tax treaty in case of dual residency, the role of tax residency certificate and split residency.

BACKGROUND

Article 1 of a DTAA typically provides the scope to whom it applies. For example, Article 1 of the India — Singapore DTAA provides as follows,

“This Agreement shall apply to persons who are residents of one or both of the Contracting States.”

Therefore, in order to apply the provisions of the DTAA, one needs to be a resident of at least one of the Contracting States which are party to the relevant DTAA. If one does not satisfy Article 1, i.e., if one is not a resident of either of the Contracting States to DTAA, the provisions of the DTAA do not apply¹. Therefore, the Article on Residential status is considered to be a gateway to a DTAA. Usually, Article 4 of the DTAA deals with residential status. While the broad structure and language of Article 4 in most DTAAs is similar, there are a few nuances in some DTAAs and therefore, it is advisable to check the language of the respective DTAA for determining the residential status. For example, the definition of ‘resident’ for the purposes of the DTAA in the India — Greece DTAA and India — Libya DTAA is not provided as a separate article but is a part of Article 2 dealing with the definition of various terms.

1. There are certain exceptions to this rule — application of the article on Mutual Agreement Procedure, application of the nationality Non-Discrimination article and application of non-territorial taxation of dividends.

DTAAs are agreements between Contracting States or jurisdictions, distributing the taxing rights amongst themselves. The distributive articles in the DTAA provide the rules for distributing the income between the country where the income is earned or paid (considered as source country) and the country of residence. Therefore, it is important to analyse, which country is the country of source and which country is the country of residence before one analyses the other articles of the DTAA.

In the subsequent paragraphs, the various issues of the article dealing with treaty residence have been discussed.

Generally, Article 4 of the DTAA, dealing with residence, contains 3 paragraphs — the first para deals with the specific definition of the term ‘resident’ for the purposes of the DTAA, the second para deals with the tie-breaker rule in case an individual is considered as resident of both the Contracting States in a particular DTAA and the third para deals with the tie-breaker rule in case a person, other than an individual is considered as resident of both the Contracting States in a particular DTAA.

ARTICLE 4(1) — INTERPLAY WITH DOMESTIC TAX LAW

Article 4(1) of the DTAA generally provides the rule for determining the residential status of a person. Article 4(1) of the OECD Model Convention 2017 provides as follows,

“For the purposes of this Convention, the term “resident of a Contracting State” means any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature, and also includes that State and any political subdivision or local authority thereof as well as a recognised pension fund of that State. This term, however, does not include any person who is liable to tax in that State in respect only of income from sources in that State or capital situated therein.”

The UN Model Convention 2021 has similar language, except that it includes a person who is liable to tax in a Contracting State by virtue of its place of incorporation as well. Similarly, the US Model Convention 2016 also includes a person who is liable to tax in a Contracting State on account of citizenship.

Language of Article 4(1) of India’s DTAAs

In respect of the major DTAAs entered into by India, most of the DTAAs follow the OECD Model Convention², whereas some of the DTAAs³ entered into by India only refer to the person being a resident under the respective domestic law without giving reference to the reason for such residence such as domicile, etc.

2 India’s DTAAs with Mauritius, the Netherlands, France, Germany, UK, UAE (in respect of Indian resident), Spain, South Africa, Japan, Portugal, Brazil and Canada.
3 India’s DTAAs with Singapore and Australia.

With the exception of the DTAAs with the UAE and Kuwait, Article 4(1) of all the major DTAAs entered into by India refers to the definition of residence under the domestic tax law to determine the residential status under the relevant DTAA. In other words, if one is considered a resident of a particular jurisdiction under the domestic tax law of that jurisdiction, such a person would also be considered as a resident of that jurisdiction for the purposes of the tax treaty.

As the UAE and Kuwait did not impose tax on individuals, the DTAAs entered into by India with these jurisdictions provided for a number of days stay in the respective jurisdiction for an individual to be considered as a resident of that jurisdiction for the purposes of the DTAA. For example, Article 4(1) of the India — UAE DTAA provides,

“For the purposes of this Agreement, the term ‘resident of a Contracting State’ means:

(a) In the case of India: any person who, under the laws of India, is liable to tax therein by reason of his domicile, residence, place of management or any other criterion of a similar nature. This term, however, does not include any person who is liable to tax in India in respect only of income from sources in India.

(b) In the case of the United Arab Emirates: an individual who is present in the UAE for a period or periods totalling in the aggregate at least 183 days in the calendar year concerned, and a company which is incorporated in the UAE and which is managed and controlled wholly in UAE.”

Recently, the UAE introduced criteria for individuals to be considered as tax residents of the UAE. As per Cabinet Decision No. 85 of 2022 with Ministerial Decision No. 27 of 2023, individuals would be considered as tax residents of the UAE if they meet any one of the following conditions:

(a) The principal place of residence as well as the centre of financial and personal interests is situated in the UAE; or

(b) The individual was physically present in the UAE for a period of 183 days or more during a consecutive 12-month period; or

(c) The individual was physically present in the UAE for a period of 90 days or more in a consecutive 12-month period and the individual is a UAE national, UAE resident, or citizen of a GCC country and has a permanent place of residence in the UAE or business in the UAE.

While the UAE does not have a personal income tax, the compliance of above conditions is necessary for obtaining a tax residency certificate. As the India — UAE DTAA does not give reference to the domestic tax law of the UAE for determining treaty residence in the case of individuals and provides an objective number of days stay in the UAE criteria, there could be a scenario wherein a person is resident of the UAE under the domestic law but does not satisfy the test under the DTAA.

For example, Mr. A, a UAE national with a permanent home in the UAE, is in the UAE for 100 days during a particular year. As he satisfies the 90-day period specified in the Cabinet Decision, he would be considered a tax resident of the UAE under UAE laws. However, such a person may not be considered as a resident of the UAE for the purposes of the tax treaty as he is in the UAE for less than 183 days, leading to a peculiar mismatch.

Therefore, it is extremely important for one to read the exact language of the article while determining the tax residence of that DTAA.

Liable to tax

Article 4(1) of the DTAA treats a person as a treaty resident if he is ‘liable to tax’ as a resident under the respective domestic tax law. In this regard, there has been a significant controversy in respect of the interpretation of the term ‘liable to tax’. There have been a plethora of decisions on this issue, especially in the context of the India — UAE DTAA. The question before the courts was whether a person who is a resident of the UAE, which did not have a tax law, was liable to tax in the UAE as a resident and, therefore, eligible for the benefits of the India — UAE DTAA.

The AAR in the case of Cyril Eugene Periera vs. CIT (1999) 154 CTR 281, held that as the taxpayer has no liability to pay tax in the UAE, he cannot be considered to be liable to tax in the UAE and, therefore, not eligible for the benefits of the India — UAE DTAA. However, the AAR in the cases of Mohsinally Alimohammed Rafik, In re (1995) 213 ITR 317 and Abdul Razak A. Meman, In re (2005) 276 ITR 306, has distinguished between ‘subject to tax’ and ‘liable to tax’ and has held that so long as there exists, sufficient nexus between the taxpayer and the jurisdiction, and so long as the jurisdiction has the right to tax such taxpayer (even though it may not choose to do so), such taxpayer would be considered as a resident of that jurisdiction. This view has also been upheld by the Supreme Court in the case of Union of India vs. Azadi Bachao Andolan (2003) 263 ITR 706 and interpreted specifically by the Mumbai ITAT in the case of ADIT vs. Green Emirate Shipping & Travels (2006) 286 ITR 60. It may be noted that the distinction between liable to tax and subject to tax is also provided by the OECD in its Model Commentary to the Convention.

While this issue was somewhat settled, the controversy has once again reignited by the introduction of the meaning of ‘liable to tax’ given by the Finance Act 2020. Section 2(29A) of the Act, as introduced by the Finance Act 2020, provides as follows,

““liable to tax”, in relation to a person and with reference to a country, means that there is an income-tax liability on such person under the law of that country for the time being in force and shall include a person who has subsequently been exempted from such liability under the law of that country;”

Therefore, the Act now provides that a person is liable to tax if there is tax liability on such a person even though such person may not necessarily be subject to tax, on account of an exemption in that jurisdiction. One may argue that the definition under the Act should have no consequence to a term under the DTAA. However, Article 3(2) of the OECD Model (as is present in most Indian DTAAs) provides that unless the context otherwise requires, a term not defined in the DTAA can be interpreted under the domestic tax law of the jurisdiction. Further, Explanation 4 to section 90 of the Act provides as follows:

“Explanation 4.—For the removal of doubts, it is hereby declared that where any term used in an agreement entered into under sub-section (1) is defined under the said agreement, the said term shall have the same meaning as assigned to it in the agreement; and where the term is not defined in the said agreement, but defined in the Act, it shall have the same meaning as assigned to it in the Act and explanation, if any, given to it by the Central Government.”

In other words, unless the context otherwise requires, the meaning of a term under the Act may be used to interpret the meaning of the same term under the DTAA as well if such term is not already defined in the DTAA. Now, the question of whether, in a particular case, what would be the context and whether the context in the DTAA requires another meaning than as provided in the Act is a topic in itself and would need to be examined by the courts.

The main issue to be addressed is whether an individual resident of the UAE would now be considered as a resident of UAE under the India — UAE DTAA. In this regard, it is important to note that the decisions mentioned above are in respect of the DTAA before it was amended in 2007. Prior to its modification, Article 4(1) of the DTAA defined the term ‘resident’ as one who was liable to tax under domestic law by reason of residence, domicile, etc. However, the present DTAA, as discussed above, refers to objective criteria of number of days stay in the UAE and therefore, this controversy may not be relevant to the India — UAE DTAA.

This controversy, however, may be relevant for the interpretation of the DTAAs wherein there is no tax on individuals, and the residence article in the DTAA gives reference to the domestic tax law.

TAX RESIDENCY CERTIFICATE (‘TRC’)

The question arises is whether a TRC would be sufficient for an individual to claim the benefit of the tax treaty. There are certain judicial precedents, especially in the context of the India — Mauritius DTAA, by virtue of the CBDT Circular No. 789 dated 13th April, 2000, that TRC is sufficient to claim the benefit of the DTAA. In the view of the author, while a TRC issued by the tax authorities of a particular jurisdiction would be sufficient to claim that the person is a resident, the taxpayer may still need to satisfy other tests, including anti-avoidance rules in the Act and DTAA to claim the benefit of the DTAA along with the TRC. Section 90(4) of the Act, which requires TRC to be obtained to provide the benefit of the DTAA, simply states that a person is not entitled to treaty benefit in the absence of a TRC, and it does not state that TRC is the only condition for obtaining treaty benefit.

Further, one may also need to evaluate the TRC as well as the specific language of Article 4(1) in the relevant DTAA before concluding that TRC is sufficient to claim treaty residence. For example, if the UAE authorities provide a TRC stating that the person is a taxpayer under the domestic provisions of the UAE, such TRC may not even satisfy the treaty residence conditions, depending on the facts and circumstances.

The Cabinet Decision, as discussed above, recognises this particular issue and states that if the relevant DTAA between UAE and a particular jurisdiction specifies criteria for the determination of treaty residency, the TRC would need to be issued to the individual considering such criteria and not the general criteria provided in the UAE domestic law.

Now, another question that arises is whether the benefit of the DTAA (assuming that other measures for obtaining the benefit are satisfied) can be granted even in the absence of a TRC. In this case, one may refer to the Ahmedabad Tribunal in the case of Skaps Industries India (P.) Ltd. vs. ITO [2018] 94 taxmann.com 448, wherein it was held as follows,

“9. Whatever may have been the intention of the lawmakers and whatever the words employed in Section 90(4) may prima facie suggest, the ground reality is that as the things stand now, this provision cannot be construed as a limitation to the superiority of treaty over the domestic law. It can only be pressed into service as a provision beneficial to the assessee. The manner in which it can be construed as a beneficial provision to the assessee is that once this provision is complied with in the sense that the assessee furnishes the tax residency certificate in the prescribed format, the Assessing Officer is denuded of the powers to requisition further details in support of the claim of the assessee for the related treaty benefits. …..

10….. Our research did not indicate any judicial precedent which has approved the interpretation in the manner sought to be canvassed before us i.e. Section 90(4) being treated as a limitation to the treaty superiority contemplated under section 90(2), and that issue is an open issue as on now. In the light of this position, and in the light of our foregoing analysis which leads us to the conclusion that Section 90(4), in the absence of a non-obstante clause, cannot be read as a limitation to the treaty superiority under Section 90(2), we are of the considered view that an eligible assessee cannot be declined the treaty protection under section 90(2) on the ground that the said assessee has not been able to furnish a Tax Residency Certificate in the prescribed form.”

Therefore, the ITAT held that section 90(4) of the Act does not override the DTAA. In a recent decision, the Hyderabad Tribunal in the case of Sreenivasa Reddy Cheemalamarri vs. ITO [2020] TS-158-ITAT-2020 has also followed the ruling of the Ahmedabad Tribunal of Skaps (supra). A similar view has also been taken by the Hyderabad ITAT in the cases of Vamsee Krishna Kundurthi vs. ITO (2021) 190 ITD 68 and Ranjit Kumar Vuppu vs. ITO (2021) 190 ITD 455.

In the case of individuals, the treaty residence for most of the major DTAAs is linked to residential status under domestic tax law and the number of days stay is a condition for determining the residential status under most domestic tax laws. Therefore, one may be able to substantiate on the basis of documents such as a passport which provide the number of days stay in a particular jurisdiction. However, a Chartered Accountant issuing a certificate under Form 15CB may not be able to take such a position as the form specifically asks one to state whether TRC has been obtained.

SECOND SENTENCE OF ARTICLE 4(1)

The second sentence of Article 4(1) of the OECD/ UN Model Convention excludes a person, as being a resident of a particular jurisdiction under the DTAA, who is liable to tax only in respect of income from sources in that jurisdiction. This sentence is found in only a few major DTAAs entered into by India⁴.

4. India’s DTAAs with Germany, UK, USA, UAE, Australia, Spain, South Africa and Portugal.

The objective of this sentence is to exclude those taxpayers as being treaty residents of a particular jurisdiction, wherein they are not subject to comprehensive taxation. The first question which arises is whether the second sentence would apply in the case of a person who is a resident of a country, which follows a territorial basis of taxation, i.e. income is taxed in that country only when received in or remitted to that country. For example, Mr. A is a tax resident of State A, which follows a territorial basis of taxation, like Singapore [although India — Singapore DTAA does not contain the second sentence of Article 4(1)]. If India — State A DTAA contains the second sentence in Article 4(1), the question that arises is whether Mr. A would be considered as a resident of State A for the purposes of the DTAA. In this regard, in the view of the author, the objective of the second sentence is to exclude individuals who are not subject to comprehensive tax liability and not to exclude countries where the tax system is territorial. In other words, so long as Mr. A is subject to comprehensive taxation in State A, the second sentence should not apply and Mr. A should be considered as a treaty resident of State A for the DTAA. The OECD Commentary also states the same view⁵.

5. Refer Para 8.3 of the OECD Model Commentary on Article 4, 2017.

An interesting decision on this would be the recent Hyderabad ITAT decision in the case of Jenendra Kumar Jain vs. ITO (2023) 147 taxmmann.com 320. In the said case, the taxpayer, who was transferred from India to the USA during the year, opted to be taxed as a ‘resident alien’ under USA domestic tax law, i.e. only income from sources in the USA would be taxable in the USA. In this regard, the ITAT held that as the taxpayer was taxed in the USA, not on the basis of residence but on the basis of source, such taxpayer would not be considered as a resident of the USA for the purposes of the India — USA DTAA.

The next question which arises is whether the second sentence would apply in the case of an individual who is considered as a not ordinarily resident (‘RNOR’) under section 6(6) of the Act. For example, whether a person would be considered as a resident of India under the DTAA and thus can access the Indian DTAAs when such a person is considered as a deemed resident but RNOR of India under section 6(1A) of the Act. In the view of the author, the second sentence does not apply in the case of an RNOR as the RNOR is not liable to tax only in respect of sources in India. Such a person may be taxable on worldwide income, if such income is, say, earned through a profession which is set up in India.

Another interesting issue arises is whether the second sentence applies in the case of third-country DTAAs after the application of a tie-breaker rule (explained in detail in the subsequent paras). Let us take the example of Mr. A, who is a resident of India and the UK under the respective domestic tax laws and is considered as a resident of the UK under the tie-breaker rule in Article 4(2) of the India — UK DTAA. In case Mr. A earns income from a third country, say Australia, the question arises is whether the India — Australia DTAA can be applied. In this regard, para 8.2 of the OECD Model Commentary on Article 4, 2017, provides as follows,

“…It also excludes companies and other persons who are not subject to comprehensive liability to tax in a Contracting State because these persons, whilst being residents of that State under that State’s tax law, are considered to be residents of another State pursuant to a treaty between these two States….”

Therefore, the OECD suggests that in the above example, as India would not be able to tax the entire income (being the loser State in the tie-breaker test under the India —UK DTAA), Mr. A would not be subject to comprehensive taxation in India and therefore, one cannot apply the India — Australia DTAA or any other Indian DTAAs which contain the second sentence in Article 4(1).

However, this view of the OECD has been discarded by various experts. In the view of the author as well, the above view may not be the correct view as the residential status in the DTAA is only ‘for the purposes of the Convention’ and therefore, cannot be applied for any other purpose. As also explained in the first part of this series, the tie-breaker test has no relevance to residential status under the Act, and a person resident under the Act will continue being a resident under the Act even if such person is considered as a resident of another jurisdiction under a DTAA. In the above example, Mr. A continues to be a resident of India under the Act⁶ as well and, therefore, should be eligible to access Indian DTAAs.

6. In contrast with the domestic tax law of Canada and UK wherein domestic residency is amended if under the tie-breaker rule in a DTAA, the taxpayer is considered as resident of another jurisdiction.

ARTICLE 4(2) – TIE-BREAKER TEST

If an individual is a resident of both the Contracting States to a DTAA under the respective domestic tax laws (and therefore, under Article 4(1) of the DTAA), one would need to determine treaty residency by applying the tie-breaker rule. Article 4(2) provides in the case of a dual resident; the treaty residency would be determined as follows:

A. The jurisdiction in which the taxpayer has a permanent home available to him (‘permanent home test’),

B. If he has a permanent home in both jurisdictions, the jurisdiction with which his personal and economic relations are closer (centre of vital interests) (‘centre of vital interests test’),

C. If his centre of vital interest cannot be determined, or if he does not have a permanent home in either jurisdiction, the jurisdiction in which he has a habitual abode (‘habitual abode test’),

D. If he has a habitual abode in both or neither jurisdiction, the jurisdiction of which he is a national (‘nationality test’),

E. If he is a national of both or neither jurisdiction, the jurisdiction as mutually agreed by the competent authorities of both jurisdictions.

The language of Article 4(2) is clear regarding the order to be followed while determining the treaty residency in the case of dual residents. It is important to note that some of the conditions are subjective in nature and are used to determine which jurisdiction has a closer tie to the taxpayer. Therefore, one needs to consider all the facts holistically and carefully while applying the various tie-breaker tests to determine treaty residence in such situations.

PERMANENT HOME TEST

Generally, a permanent home test is satisfied if the taxpayer has a place of residence available to him in a particular jurisdiction. The availability of the home cannot be for a short period but needs to be for a long time to be considered as permanent. However, the OECD Commentary as well as a plethora of judgements have held that it is not necessary that the home should be owned by the taxpayer. Even a home taken on rent would be considered as a permanent home of the taxpayer if he has a right to use such a property at his convenience. Similarly, the parents’ property would also be considered as a permanent home as the taxpayer would have a right to stay at the said property. Another example could be that of a hotel. While generally, a hotel may not be considered a permanent home, if the facts suggest that accommodation would always be available to the taxpayer as a matter of right, it may be considered a permanent home. On the other hand, even if a person owns a particular residential property in a particular jurisdiction, it may not be considered a permanent home if the taxpayer has given the said property on rent and the taxpayer does not have the right to use the property at any given time⁷.

7. Refer para 13 of OECD Model Commentary on Article 4, 2017.

CENTRE OF VITAL INTERESTS TEST

The centre of Vital Interests generally refers to the social and economic connections of the taxpayer to a particular jurisdiction. Examples of social interests would be where the family of the taxpayer is located, where the children of the taxpayer attend school, and where his friends are. Similarly, examples of economic interests would be a place of employment, a place where major assets are kept, etc. This is a difficult test to substantiate as there is a significant amount of subjectivity involved. Moreover, there could be situations wherein the personal interests may be located in a particular jurisdiction, whereas the economic interests may be located in the other jurisdiction. In such a situation, one may not be able to conclude the tie-breaker test on the basis of the centre of vital interests test as no specific weightage is given to either of the nature of interests.

HABITUAL ABODE TEST

The habitual abode test is another subjective test that seeks to determine where the taxpayer seeks to reside for a longer period. This could be on the basis of the number of days stay (if the difference in the number of days stay is significantly at variation between the jurisdictions) or on the intention of the taxpayer to spend a longer period of time. An example given in the OECD Model Commentary is that of a vacation home in a particular jurisdiction and the main property of residence in another jurisdiction. In such a situation, the jurisdiction where the vacation home is situated may not be considered to be the habitual abode of the taxpayer as the stay in such a property would always be for a limited period of time.

NATIONALITY TEST

Given the subjectivity involved in the other tie-breaker tests, in most situations, practically, the tiebreaker is determined by the jurisdiction where the taxpayer is a national. As India does not accept dual citizenship, the question of a taxpayer being a national of both jurisdictions and therefore, having the residential status be determined mutually by the competent authorities does not arise.

Timing of application of the tie-breaker tests

Having understood some of the nuances of the various tie-breaker tests, it is important to analyse the timing of the application of the tie-breaker tests, i.e. at what point in time does the tie-breaker test have to be applied? Unlike the basic residence test based on the number of days, which applies in respect of a particular year, as the tie-breaker tests are driven by facts which are subjective and can change, this question of timing of application gains significant relevance.

Let us take the example of Mr. A who moved from India to Singapore in October 2023 as he got a job in Singapore. Let us assume that for the period October to March, Mr. A, who has not sold his house in India, is staying in various hotels in Singapore and he takes an apartment on rent in the month of March 2024 after selling his property in India. Now, if Mr. A is a tax resident of India and Singapore and one is applying the tie-breaker rule, one may arrive at a different conclusion on treaty residence depending on when the tie-breaker rule is applied. For example, if one applies in October 2023, he has a permanent home only in India, whereas if one applies in March 2024, he has a permanent home only in Singapore. In the author’s view, one would need to apply the tie-breaker rule when one is seeking to tax the income, i.e. when the income is earned or received, as the case may be. This would be in line with the application of the DTAA as a whole, which would need to be applied when one is taxing the said income, as DTAAs allocate the taxing rights between the jurisdictions.

Split Residency

The above example is a classic case of split residency wherein a person can be considered as a resident of different jurisdictions within the same fiscal year. This issue is also common where the tax year differs in the jurisdictions involved. For example, India follows April to March as the tax year, whereas Singapore follows January to December. Let us take the example of Mr. A, who moved to Singapore for the purpose of employment along with his family in January 2023. He has not come back to India after moving to Singapore. He qualifies as a tax resident of Singapore for the calendar year 2023 under the domestic tax law. He has a permanent home only in Singapore. In such a situation, Mr. A qualifies as a tax resident of India for the period April 2022 to March 2023 and as a tax resident of Singapore for the period January 2023 to December 2023. In such a situation, in respect of income earned till December 2022, Mr. A is a resident of India and not of Singapore, and therefore, in such a scenario, Mr. A is a treaty resident of India under the India — Singapore DTAA for the period April 2022 to December 2022. In respect of the income earned from January 2023 to March 2023, Mr. A will be considered as a resident of India as well as Singapore under the domestic tax law. However, as he has a permanent home available only in Singapore, he would be considered as a treaty resident of Singapore during such a period. Therefore, for income earned from April 2022 till December 2022, Mr. A is a treaty resident of India, whereas from January 2023 till March 2023, he is a treaty resident of Singapore.

This principle of split residency finds support in the OECD Model Commentary⁸ as well as various judicial precedents⁹.

8. Refer Para 10 of the OECD Model Commentary on Article 4, 2017.
9. Refer the decisions of the Delhi ITAT in the case of Sameer Malhotra (2023) 146 taxmann.com 158 and of the Bangalore ITAT in the case of Shri Kumar Sanjeev Ranjan (2019) 104 taxmann.com 183.

CONCLUSION

The above discussions only strengthen the case that one cannot determine the residential status under the Act as well as the DTAA together, as while the definitions may be linked to each other, there are certain nuances wherein there is divergence in applying the principles. For example, the concept of split residency does not apply to residential status under the Act. Similarly, under the Act, the residential status of a person does not change depending on the income, whereas in the case of a treaty, the treaty residence may be different for each stream of income (in many cases for the same stream of income as well) depending on the timing of application of the treaty residence. Further, each DTAA has its own unique nuances and language used and therefore, it is important that one analyses the specific language of the treaty while interpreting the same.

BCAJ Admin

Tech Mantra

This time we present a few nifty productivity tips for
Accountants – from the must-haves to the exotic. Each tool
has its advantages and some are those which you simply
cannot do without!

SENDTHISFILE.COM

Very often, we need to send
large files to colleagues, friends or family. They may be
image files or video files or just pdf files. Sometimes, it may
be large medical reports which need to be sent to a doctor
abroad for a second opinion. Most of the email clients
cannot handle file sizes of more than 20-25 MB at a time –
gmail has a limit of 25MB for attachments.
www.sendthisfile.com comes to the rescue. This is a very
simple but powerful utility which helps us send large files. You
just need to logon, create an account – yes it is free – and send
your file. As simple as that! What it does, is that it uploads the
files to a secure server, and sends the link of the uploaded
file to the email recipient. The email recipient just has to click
on the link, and she can download the file directly. So neither
your email account nor the recipient’s email account is used,
except for a brief line communicating the link.
It works pretty efficiently. The speed of the uploads and
downloads depends on the total no. of files that you have
transferred. The first time, it goes at full speed and then,
as your traffic increases, the speed slows down. However,
the counter is re-set every month for your account. So the
first file which you send in any month is super-fast and the
speed keeps deteriorating as you send more and more
files. Also, you can send only one file at a time. The other
limitation is that the recipient can download the file that you
have sent, only 3 times. And the file is held on their servers
only for 3 days. But in spite of all these limitations, it works
extremely well for most users without any problems.
If you go for a paid account, these limitations are eliminated.
Besides, it offers encryption of the data also, just in case
there are peeping toms around! Check it out the next time
you are stuck with a LARGE file to send or receive. http://
www.sendthisfile.com is a great transporter of large files!

NEEDTOMEET.COM

When you wish to organise a meeting of 3 or more people,
it is a challenge to check with each one about their available
timings and trying to synchronise a meet. Needtomeet.
com is a simple tool that helps you effortlessly find a
time to meet. The design principle used in creating this
service is simplicity. Meetings can be created in just three
simple steps. There is no need to register for an account
or provide any information not pertinent to the task. The
unique calendar interface allows you to select meeting
times in an intuitive and user-friendly manner and to see at
a glance which times work best for your group.
You can setup a meeting in just 3 simple steps:
1 Define a meeting and select available times. The
site gives you a link which you then send across to the
prospective attendees.
2 Attendees indicate their availability by clicking on the
link.
3 Find the best time to meet when the majority are
available!
So go ahead – schedule that meeting, organise that
event, book that trip, or set up that conference – all with
the convenience of a few clicks and an easy to use and
uncluttered interface.

IRFANVIEW

One of the best and lightest image viewers
that I have come across is Irfanview –
available free at irfanview.com
IrfanView is very fast, small, compact and innovative and
hence, very popular too. It is very simple for beginners and
powerful for professionals. It creates new and/or interesting
features in its own way. You need no knowledge of any
graphic programs when you use Irfanview. Just download
it, install it and run it – as simple as that. The variety of
graphic files it can handle, is to be seen to be believed. And
coupled with the Plugins / Addons available, it can manage
multimedia audio and video files too.

Although primarily it is a viewer, it gives some basic but
powerful image editing options too – you can adjust the
brightness, contrast and color of your image at the touch
of a button with a visual preview online. Rotation and
giving special effects to your images like a professional,
is a breeze. Format conversion, is as simple as clicking on
Save As, and re-sizing your large camera images before
uploading online, is child’s play. The batch-processing
mode helps you run several repetitive tasks, like re-sizing
of hundreds of photos, in a single click.
An added bonus is that you can play slide-shows of your
favorite pictures and also play movies in a large range of
formats – which used to be a daunting task for the lay user.
Capturing snapshots of your screen, running the multiimage
viewer, flipping images – one can go on and on. All
this, and much more, is available in a very light, easy to
use, intuitively designed interface.
Now, go ahead, be a PRO at image viewing and editing
with Irfanview.

MOVING EXCEL SHEETS – VERY EASY !!

Moving Right Next Door!
As I’m sure we all know, you can rearrange worksheets in
an MS Excel file with a simple click-hold-and-drag of the
sheet tab.

But, did you know that you can also move
worksheets from one workbook to another
using the same method? No? Well, the
good news is, you can, and it’s really as
easy as it sounds.
First, open both workbooks. (The one with the worksheet
and the one to which the worksheet needs to be relocated).
Next, arrange your workbooks side by side.
Next, you need to click and hold the sheet tab to be moved.
Now, still holding down the left mouse button, drag the
sheet tab into the other file.
You’ll see the small triangle that appears when a sheet is
moved, so you can tell where it will be located.
When it’s where you need it to be, simply release the
mouse button.
Voila!
The sheet is moved from one workbook to another. No
fuss, no muss!

BCAJ Admin

RECENT DECISIONS PART B: VAT

The Addi. Commissioner of Sales Tax vs.
Benchmark Engineering Pvt Ltd.(Bom H.C) –
Judgment dated 28th November, 2018
Whether VAT can be levied on Service Tax,
Separately collected, even when the VAT is paid
under Composition Scheme?

FACTS

The appeal related to the period 2005-2006. The substantial
question of law referred to the Hon’ble High Court was
whether the Tribunal was justified in holding that for
determining the Composition amount in lieu of amount of
tax payable in respect of Works Contract Sales, the amount
of Service Tax charged separately in the invoice will not be
included in total contract value?

HELD

The Hon’ble Court upheld the judgment of the Tribunal
which had observed that the amount of Service Tax charged
separately in the invoice will not be included in total contract
value for the purpose of levy of VAT. The Hon’ble Court
referred to Trade Circular No.6T dated 14.05.2015 issued
by the Commissioner of Sales Tax, Maharashtra State which
had informed the trade that the Government had accepted
the judgment of the Tribunal in the case of Sujata Painters
wherein it was held that the Service Tax could not formed
part of Sale Price u/s.2(25) of the MVAT Act, in a transaction
wherein the sale price is determined subject to Rule 58 of
the MVAT Rules and is not liable to VAT. The Court said,
once the State had accepted the decision of the Tribunal in
the case of Sujata Painters by issuing Trade Circular and
pointing out that so far as the period prior to 01.04.2015 was
concerned, the Department had accepted the order of the
Tribunal that Service Tax would not form part of the Sale price
and informed the trade, the same would bar the Revenue
from taking a contrary view. The Court further said that the
State has to apply law uniformly to all the assesses. The
AGP had drawn the attention of the Court to the appeal on
similar issue, involved in the case of Technocrat Engineers,
and submitted that the same had already been admitted by
the Hon’ble Court. However, the Court refused to accept his
submissions stating that aforesaid Circular No.16 of 2015
was not pointed out to the Court at the time of admission of
that appeal.

Deepak Fertilisers And Petrochemicals
Corporation Ltd. vs. State of Maharashtra and
Others (Bom H.C.) – Judgment dated
26th June, 2018
Whether the Trade Circulars issued by the
Commissioner of Sales Tax, Maharashtra State can
controll the substantive notifications?

FACTS

The Petitioner was engaged in the manufacture and sale of
fertilisers and for the purpose of manufacture of fertilisers,
purchased natural gas from GAIL. The natural gas was
either utilised as fuel or as an input in the manufacture
and processing of fertilisers and chemicals. The rate of tax
applicable to the natural gas prior to 30th June 2017 was
13.5% under the MVAT Act,2002. However, Input Tax Credit
was available under that Act above 3%. Thus, the effective
rate on natural gas under that Act, was 3%. The Goods and
Service Tax was introduced on 1st July 2017. The natural
gas along with some other few goods was left outside the
coverage of the GST Act and VAT and CST continued to be
levied on the same. With effect from 1st July 2017, when any
person purchased natural gas domestically, the seller would
collect full tax from him @ 13.5% and since the person was
no longer a dealer under the 2002 Act due to the section
16(6A), he could not claim setoff or refund of the input tax
collected from him. Furthermore, he would be liable to pay
goods and service tax on his outputs at the full rate since the
GST Act only provided for ITC of goods and Service Tax paid
and not of value added tax paid. Hence, the effective rate
after 1st July 2017 got increased to 13.5%. The Government
of Maharashtra in exercise of its powers conferred u/s. 9(1)
of the MVAT Act issued a Notification dated 24th August
2017 adding Entry 16 in Schedule “B” to the MVAT Act, by
which the sale of natural gas to a registered dealer, subject
to the condition mentioned in the notification, was eligible
for a lower rate of VAT @ 3%. To avail the benefit of the
reduced rate of 3%, the purchasing dealer was required to
be certified by the Joint Commissioner. Queries were raised
to the Commissioner of Sales Tax whether the benefits
given under the Notification dated 24th August, 2017 were
available to the tax payers registered under the GST Act.
The Commissioner issued trade Circular No.39T dated 8th
September 2017 clarifying that the benefits of notifications dated 24th August 2017 would also be available to taxable
persons registered under the GST Act. Subsequently, by
Notification dated October 13, 2017, an explanation to
entry 16 of Schedule “B” of the MVAT Act was amended
with effect from 14th October 2017 to the effect that the
benefit of the Entry 16 in Schedule “B” shall be available to
a registered taxable person under the GST Act. However,
by Trade Circular No.3T of 2018 dated 16th January 2018 it
was clarified that manufacturers – buyers who did not hold
registration certificate under the MVAT Act on or after 1st
July 2017 either due to cancellation of registration certificate
or due to the deeming provision relating to cancellation of
registration certificate u/s. 16(6A) of the MVAT Act, shall
not be entitled for the benefits of the reduced rate of 3% in
respect of use of natural gas in manufacturing, for the period
24th August 2017 to 13th October 2017. Writ Petitions were
filed contending that Notification dated 13th October 2017
should be given effect to and operated from 24th August 2017
because Trade Circular No.3T of 2018 dated 16th October
2018 and the addenda dated 13th January 2018 enabled
recovery of VAT in excess of 3%.

HELD
Writ Petitions were dismissed holding that the language of
the Notifications issued was clear. The circulars were for
internal guidance or clarification of queries of the trade and
officials, but their language could not control the substantive
notifications.

Vishat Diagnostic Pvt Ltd. vs. State of
Maharashtra and Others (VAT Appeal Nos. 425
and 567 of 2017 (MSTT) – Judgment dated
30th November, 2018
Whether the words ‘on the body’ appearing in the
Entry for “Drug’ in the MVAT Act, 2002 exclude the

diagnostic kits used in the laboratory for testing of
blood etc., from the coverage of that entry and sent
the same to the residuary entry?

FACTS
The appellant was dealing in diagnostic reagents which were
used in laboratories in the diagnosis of the diseases like
diabetes, cancer etc.. The Advance Ruling Authority (ARA)
had relied upon the words ‘on the body’ appearing in Entry
No. C-29 (a) which was for drugs and held that the same
were falling under the residuary entry liable to tax @12.5%. It
was the contention of ARA that the words ‘on the body’ were
inserted in the said entry consequent to the judgment of the
Hon’ble Bombay High Court in the case of Merind Ltd. The
introduction of the said words in the Entry under the MVAT
Act was conscious. The legislature intended to exclude such
products which are used outside the human body i.e. in the
laboratory.

HELD
Hon’ble Maharashtra Sales Tax Tribunal relied on the
several judgments of the Apex Court, more particularly,
on the judgment in the case of Rajendra Prasad Yadav
and Others vs. State of M.P. and others (1997) 6 SCC
678 dated 09/07/1997 were in it was held that it is settled
principal of interpretation that all the provisions should be
harmoniously interpreted to give effect to all the provisions
and no part thereof rendered surplusage or otiose. Thus,
the words ‘diagnosis’ and ‘on the body’ were harmoniously
construed by the Hon’ble Tribunal. The Tribunal also relied
on the certificates issued by the competent authorities which
averred that there is no such product which can be used for
the purpose of diagnosis on the body of a person as held by
the ARA. The Hon’ble Tribunal gave liberal meaning to the
words ‘on the body’ and held that the diagnostic kits sold by
the appellant were covered by the entry for Drugs attracting
tax @5% and not 12.5%.

BCAJ Admin

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