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Month: July

MITC Rolling Mills P. Ltd. vs ACIT ITAT “B” Banch, Mumbai Before D. Manmohan, (V.P.) and Rajendra, (A. M.) ITA No.2789/Mum/2012 Assessment Year: 2009-10. Decided on 13.05.2013 Counsel for Assessee/Revenue: T. M. Gosher / Mohit Jain

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Section 32(1)(iia) – Additional depreciation on Plant and Machinery – Where the plant and machineries were put into use for less than 180 days in the year of installation and hence, disentitled the assessee to the 50% of the additional amount of depreciation, the assessee was entitled to the balance 50% of the additional depreciation in the subsequent year.
Facts:
The assessee was engaged in the business of manufacture and sale of iron and steel. Assessee installed certain new plant and machinery after September, 2007. For the previous year relevant to A. Y. 2008-09 the plant and machinery having been put to operation for less than 180 days the assessee claimed only 50% of the additional depreciation and the balance 50% was claimed in the previous year relevant to A. Y. 2009-10, which is the year under appeal. The AO as well as the CIT(A) were of the opinion that the assessee was not entitled to claim balance 50% deprecation in the subsequent year u/s. 32(1)(iia) of the Act. The case of the assessee was that it is a onetime incentive allowed to the assessee under the Act where the object was to encourage establishment of industries and hence, balance 50% was allowable in the year under consideration.

Held:
The tribunal placed reliance upon the following decisions of the Delhi tribunal:

i. DCIT vs. Cosmo Films Ltd. 139 ITD 628

ii. ACIT vs. Sil Investment Ltd. 54 SOT 54

The tribunal noted that as per the Delhi tribunal, there was no restriction on allowing balance of one time incentive in the subsequent year if the provisions are constructed reasonably, liberally and in a purposive manner. According to it, the additional benefit was intended to give impetus to industrialisation and in that direction the assessee was entitled to get the benefit in full when there was no restriction in the statute to deny the benefit of balance 50% when the new plant and machinery was acquired and put to use for less than 180 days in the immediately preceding year. Accordingly, it was held that the assessee was entitled to depreciation in the subsequent year if the entire depreciation was not allowed in the first year of installation.

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Apollo Tyres vs. DCIT ITAT Cochin Bench Before N. R. S. Ganesan (JM) and B. R. Baskaran (AM) ITA No. 31/Coch/2010 A.Y.: 2006-07. Decided on: 29th May, 2013. Counsel for assessee/revenue: Percy J. Pardiwala, T. P. Ostwal and Indra Anand, Madhur Agarwal/M. Anil Kumar

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Section 40(a)(ia) – Section 40(a)(ia) does not envisage a situation where there was short deduction/lesser deduction as in case of section 201(1A) and therefore in case of short/lesser deduction of tax, the entire expenditure whose genuineness was not doubted by the AO cannot be disallowed.

Facts:
The assessee made payments on which tax deductible at source was deducted at a rate lower than the rate at which tax ought to have been deducted. The short deduction was due to surcharge not being considered in some cases and in some cases rate applicable to sub-contractors was applied instead of applying the rate for payment to contractors. The AO disallowed a sum of Rs. 68,68,556 u/s. 40(a)(ia) of the Act.

Aggrieved the assessee preferred an appeal to CIT(A) who confirmed the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:
The Tribunal after having considered the provisions of section 40(a)(ia) and section 201(1A) of the Act held as follows :

In section 201(1A) the legislature intended to levy interest even in case of short deduction of tax. In other words, if any part of the tax which was required to be deducted was found to be not deducted then interest u/s. 201(1A) can be levied in respect of that part of the amount which was not deducted whereas the language of section 40(a)(ia) does not say that even for short deduction disallowance has to be made proportionately. Therefore, the legislature has clearly envisaged in section 201(1A) for levy of interest on the amount on which tax was not deducted whereas the legislature has omitted to do so in section 40(a)(ia) of the Act. In other words, provisions of section 40(a)(ia) do not enable the AO to disallow any proportionate amount for short deduction or lesser deduction.

The Mumbai Bench found that short deduction of TDS, if any, could have been considered as liability under the Income-tax Act as due from the assessee. Therefore, the disallowance of the entire expenditure, whose genuineness was not doubted by the AO is not justified. A similar view was also taken by the Kolkatta Bench of the Tribunal in the case of CIT vs. S. K. Tekriwal. In this case, on appeal by the revenue, the Calcutta High Court confirmed the order of the Kolkatta Bench of the Tribunal (ITA No. 183 of 2012, GA No. 2069 of 2012 judgment dated 3.12.2012).

Section 40(a)(ia) does not envisage a situation where there was short deduction/lesser deduction as in case of section 201(1A) of the Act. Therefore, in case of short/lesser deduction of tax, the entire expenditure whose genuineness was not doubted by the AO cannot be disallowed.

This ground of appeal was decided in favour of the assessee.

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A. P. (DIR Series) Circular No. 109 dated June 11, 2013

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Processing and Settlement of Export related receipts facilitated by Online Payment Gateways – Enhancement of the value of transaction

Presently, banks can offer facility to repatriate export related remittances by entering into standing arrangements with Online Payment Gateway Service Providers (OPGSP) for export of goods and services for value not exceeding US $ 3,000 per transaction.

This circular has increased this limit from US $ 3,000 to US $ 10,000 per transaction. Hence, banks can now offer facility to repatriate export related remittances by entering into standing arrangements with Online Payment Gateway Service Providers (OPGSP) for export of goods and services for value not exceeding US $ 10,000 per transaction.

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Gift Tax – Deemed Gift – Whether there is deemed gift of bonus shares (retained by the Donee) by the Donor in the year of revocation of gift of shares with proviso that gift shall not include bonus shares? – Matter remanded.

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Satya Nand Munjal vs. CGT (2013) 350 ITR 640(SC)

On 20th February, 1982, the assessee, being the absolute owner of 6000 fully paid up equity shares of the face value of Rs. 25 each of M/s. Hero Cycles (P) Ltd., executed a deed of revocable transfer in favour of M/s. Yogesh Chandran and Brothers Associates (the transferee). Under the deed the assessee could, on completion of 74 months from the date of transfer but before the expiry of 82 months from the said date, exercise the power of revoking the gift. In other words, the assessee left a window of eight months within which the gift could be revoked.

The deed of revocable transfer specifically stated that the gift shall not include any bonus shares or right shares received and/or accruing or coming to the transferee from M/s. Hero Cycles (P) Ltd. (the company) by virtue of ownership or by virtue of the shares gifted by the assessee and standing in the name of the transferee. Effectively therefore, only a gift of 6,000 equity shares was made by the assessee to the transferee.

On 29th September, 1982, the company issued bonus shares and since the transferee was a holder of the gifted equity shares, 4,000 bonus shares of the said company were allotted to the transferee by the company. Similarly, on 31st May, 1986, another 10,000 bonus shares were allotted to the transferee by the company. 

Thereafter, during the window of eight months, the assessee revoked the gift on 15th June, 1988, with the result that the 6,000 shares gifted to the transferee came back to the assessee. However, the 14,000 bonus shares allotted to the transfree while it was the holder of the equity shares of the company continued with the transferee.

Assessment proceedings for the assessment year 1982-83

For the assessment year 1982-83, the Gift-tax Officer passed an assessment order on 17th February 1987, in respect of the assessee. He held that the revocable transaction entered into by the assessee was only for the purpose of reducing the tax liability. As such, it could not be accepted as a valid gift. For arriving at this conclusion, the Assessing Officer relied upon McDowell and Co. Ltd. vs. CTO [1985] 154 ITR 148 (SC). Accordingly, the Assessing Officer, while holding the gift to be void, made the assessment on a protective basis.

Feeling aggrieved by the assessment order, the assessee preferred an appeal before the Commissioner of Gift Tax (Appeals), but found no success. The Commissioner of Gift-tax (Appeals) however, held that since the gift was void, a protective assessment could not be made.

The assessee then preferred a further appeal to the Tribunal and by its order dated 23rd August 1991, allowing the appeal; the Tribunal held that the revocable gift to be valid. It was noted the concept of a revocable transfer by way of gift was recognised by section 6(2) of the Gift-tax Act, 1958 (“the Act”). The value of the gift in such a case was to to calculated in terms of rule 11 of the Gift-tax Rules 1958.

Feeling aggrieved by the decision of the Tribunal, the Revenue took up the matter in appeal before the Punjab and Haryana High Court. By its judgement and order in CGT vs. Satya Nand Munjal [2002] 256 ITR 516 (P&H) the High Court dismissed the appeal and held:

“It is a legitimate attempt on the part of the assessee to save money by following a legal method. If on account of a lacuna in the law or otherwise the assessee is able to avoid payment of tax within the letter of law, it cannot be said that the action is void because it is intended to save payment of tax. So long as the law exists in its present form, the taxpayer is entitled to take its advantage. We find no ground to accept the contention that merely because the gift was made with the purpose of saving on payment of wealth tax, it needs to be ignored.”

Assessment proceedings for the assessment year 1989-90

On 30th January, 1996, the Gift-tax Officer issued a notice to the assessee u/s. 16(1) of the Act to the effect that for the assessment year 1989-90 the gift made by the assessee was chargeable to gift-tax and that it had escaped assessment year. The assessee responded to the notice by simply stating that there is no gift that had escaped assessment.

On 24th March, 1998, the Assessing Officer passed a reassessment order for the assessment year 1989-90. While doing so, he framed two issues for consideration: firstly, whether the transferee becomes the owner of the bonus shares particularly because the shares have been received by it as a result of a revocable transfer; secondly, whether the bonus shares received by the transferee could be described as a benefit by the transferee from the transferred shares.

The Assessing Officer held that the transferee does not become the owner of the gifted shares until the transfer is an irrevocable transfer. Proceedings on this basis, it was held that the 14,000 bonus shares allotted to the transferee were a part and parcel of the gifted shares and the assessee only took back 6,000 shares from the transferee pursuant to the revocable gift. Consequently, it was held that the assessee had surrendered his right to get back 14,000 bonus shares which were treated as a gift by the assessee to the transferee in view of the provisions of section 4(1)(c) of the Act. The assessee was taxed accordingly.

Feeling aggrieved by the reassessment order, the assessee preferred an appeal to the Commissioner of Gift-tax (Appeals). By his order dated 8th September, 1998, the Commissioner held that since there was no regular transfer of the bonus shares, the transferee could not claim any ownership of the shares. The Commissioner also referred to McDowell and Co. Ltd. and held that the assessee had carefully planned his affairs in such a manner as to deprive the Revenue of a substantial amount of gift-tax. The reassessment order was accordingly upheld.

The assessee then took up the matter with the Tribunal which held in its order dated 23rd May, 2000, that in view of the assessment to gift-tax made in respect of the assessee for the assessment year 1982-83, the notice issued u/s. 16(1) of the Act was merely a change of opinion and, as such the reassessment proceedings could not have been taken up. On the merits of the case, it was noted that neither the dividend income on the bonus shares nor their value had been taxed in the hands of the assessee. Consequently, the assessee was liable to succeed on the merits of the case also. The gift-tax reassessment was accordingly quashed by the Tribunal. The Revenue then came up in appeal before the High Court with the following substantial question of law:

“Whether on the facts and in the circumstances of the case, the Income Tax Appellate Tribunal was right in quashing the gift tax assessment in the assessee’s case?”

In the impugned order, the High Court held that the assessee was liable to gift-tax on the value of the bonus shares which were a gift made by the assessee to the transferee. It was held that the bonus shares were income from the original shares by relying upon Escorts Farms (Ramgarh) Ltd. vs. CIT [1996] 222 ITR 509 (SC). Accordingly, the order of the Tribunal was set aside and the reassessment order upheld.

On appeal to the Supreme Court by the assessee, the Supreme Court observed that the fundamental question before the High Court was whether there was in fact a gift of 14,000 bonus shares made by the assessee to the transferee. According to the Supreme Court the answer to this question lay in the interpretation of section 4(1)(c) of the Act, but a perusal of the impugned judgment and order facially indicated that there had been no consideration of the provisions of section 4(1) (c) of the Act.

The submission of the learned counsel for the assessee is that on an interpretation of section 4(1)(c) of the Act, it could not be said by any stretch of imagination, that the assessee had made a gift of 14,000 bonus shares to the transferee in the previous year relevant to the assessment year 1989-90.

The Supreme Court however, was not inclined to decide this issue finally since it did not have the view of the High Court on the interpretation of section 4(1)(c) of the Act. Nor did it have the view of the High Court on the applicability or otherwise of the principle laid down in McDowell and Co. Ltd.

As far as the applicability of Escorts Farms is concerned, the Supreme Court observed that the question that arose for consideration in that case was the determination of the cost of acquisition of the original shares when bonus shares are subsequently issued. That is the second part of section 4(1)(c) of the Act and that question would arise (if at all) only after finding is given by the High Court on the first part of section 4(1)(c) of the Act.

Under the circumstances, the Supreme Court remanded the matter for de novo consideration by the High Court keeping in mind the provisions of section 4(1)(c) of the Act as well as the orders passed in the case of the assessee for the assessment year 1982-83.

Depreciation – Assessee is entitled to depreciation in respect of vehicles financed by it but registered in the name of third parties and is eligible to claim it at a higher rate where such vehicles are used in the business of running on hire.

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I.C.D.S. Ltd. vs. CIT & Anr. (2013) 350 ITR 527 (SC)

The assessee a public limited company, classified by the Reserve Bank of India (RBI) as a non-banking finance company was engaged in the business of hire purchase, leasing and real estate, etc. The vehicles, on which depreciation was claimed, were stated to have been purchased by the assessee against direct payment to the manufactures. The assessee as a part of its business, leased out their vehicles to its customers and therefore, had no physical affiliation with the vehicles. In fact, lesse were registered as the owners of the vehicles, in the certificate of registration issued under the Motor Vehicles Act, 1988 (hereinafter referred to as “the MV Act”).

In its return of income for the relevant assessment years, the assessee claimed, among other heads, depreciation in relation to certain assets, (additions made to the trucks) which, as explained above, had been financed by the assessee but registered in the name of third parties. The assessee also claimed depreciation at the higher rate on the ground that the vehicles were used in the business of running on hire.

The Assessing Officer disallowed claims, both of depreciation and higher rate, on the ground that the assessee’s use of these vehicles was only by way of leasing out to other and not as actual user of the vehicles in the business of running them on hire. It had merely financed the purchase of these assets and was neither the owner nor used of these assets. Aggrieved, the assessee preferred appeals to the Commissioner of Income-tax (Appeals). In so far as the question of depreciation at normal rate was concerned, the Commissioner (Appeals) agreed with the assessee. However, the assessee’s claim for depreciation at higher rate did not find favour with the Commissioner.

Being aggrieved, both the assessee and the Revenue carried the matter further in appeal before the Income-tax Appellate Tribunal (for short “the Tribunal”). The Tribunal agreed with the assessee on both the counts.

Being aggrieved, the Revenue preferred an appeal to the Bombay High Court u/s. 260A of the Act. The High Court framed the following substantial questions of law for its adjudication :

“Whether the appellant (assessee) is the owner of the vehicles which are leased out by it to its customers and whether the appellant (assessee) is entitled to the higher rate of depreciation on the said vehicles, on the ground that they were hired out to the appellant’s customers.”

Answering both the questions in favour of the Revenue, the High Court held that in view of the fact that the vehicles were not registered in the name of the assessee, and that the assessee had only financed the transaction, it could not be held to be the owner of the vehicles, and thus, was not entitled do claim depreciation in respect of these vehicles.

On an appeal to the Supreme Court by the assessee, it was held that the provision on depreciation in the Act reads that the asset must be “owned, wholly or partly, by the assessee and used for the purposes of the business”. Therefore, it imposes a twin requirement of “ownership” and “usage for business” for a successful claim u/s. 32 of the Act.

Before the Supreme Court, the Revenue attacked both legs of this portion of the section by contending: (i) that the assessee is not the owner of the vehicles in question, and (ii) that the assessee did not use these trucks in the course of its business. It was argued that depreciation can be claimed by an assessee only in a case where the assessee is both the owner and user of the asset.

The Supreme Court dealt with the second contention before considering the first. The Revenue argued before the Supreme Court that since the lessees were actually using the vehicles, they were the ones entitled to claim depreciation and not the assessee. The Supreme Court was not persuaded to agree with the argument. According to the Supreme Court, the section requires that the assessee must use the asset for the “purposes of business”. It does not mandate usage of the asset by the assessee itself. As long as the asset is utilised for the purpose of business of the assessee, the requirement of section 32 will stand satisfied notwithstanding non-usage of the asset itself by the assessee. The Supreme Court held that in the present case, the assessee was a leasing company which leased out trucks that it purchased. Therefore, on a combined reading of section 2(13) and section 2(24) of the Act, the income derived from leasing of the trucks would be business income or income derived in the course of business, and has been so assessed. Hence, it fulfilled the aforesaid second requirement of section 32 of the Act, viz., that the asset must be used in the course of business. The assessee did use the vehicles in the courses of its leasing business. In the opinion of the Supreme Court, the fact that the trucks themselves were not used the assessee was irrelevant for the purpose of the section.

Dealing with the first requirement, i.e., the issue of ownership, the Supreme Court held that no depreciation allowance is granted in respect of any capital expenditure which the assessee may be obliged to incur on the property of other. Therefore, the entire case hangs on the question of ownership. If the assessee is the owner of the vehicles, then he will be entitled to the claim on depreciation, otherwise, not.

The Supreme Court noted that definitions of ‘owner’, ‘ownership’ and ‘own’ given in Black’s Law Dictionary (Sixth Edition) and observed that these definitions essentially made ownership a function of legal right or title against the rest of the world. However, as seen therein, it is “nomen generalissimum, and its meaning is to be gathered from the connection in which it is used, and from the subject-matter to which it is applied.”

According to the Supreme Court scrutiny of the material facts at hand raised a presumption of ownership in favour of the assessee. The vehicle, along with its keys, was delivered to the assessee upon which, the lease agreement was entered into by the assessee with the customer.

The Supreme Court noted that the Revenue’s objection to the claim of the assessee was founded on the lease agreement. It argued that at the end of the lease period, the ownership of the vehicle is transferred to the lessee at a nominal value not exceeding 1 per cent of the original cost of the vehicle, making the assessee in effect a financier. However, the Supreme Court was not persuaded to agree with the Revenue. According to the Supreme Court as long as the assessee had a right to retain the legal title of the vehicle against the rest of the world, it would be the owner of the vehicle in the eyes of law. A scrutiny of the sale agreement could not be the basis of raising question against the ownership of the vehicle. The clues qua ownership lie in the lease agreement itself, which clearly pointed in favour of the assessee.

The Supreme Court observed that the only hindrance to the claim of the assessee, which was also the lynchpin of the case of the Revenue, was section 2(30) of the Motor Vehicles Act, which defines ownership as follows:

‘Owner’ means a person in whose name a motor vehicle stands registered, and where such person is a minor, the guardian of such minor, and in relation to a motor vehicle which is the subject or hire-purchase agreement, or a agreement of lease or an agreement of a hypothecation, the person in possession of the vehicle under that agreement.”

The Supreme Court noted that the general open-ing words of the aforesaid section 2(30) say that the owner of a motor vehicle is the one in whose name it is registered, which, in the present case, is the lessee. The subsequent specific statement on leasing agreements states that in respect of a vehicle given on lease, the lessee who is in possession shall be the owner. The Revenue before the Supreme Court thus, argued that in case of ownership of vehicles, the test of ownership is the registration and certification. Since the certificates were in the name of the lessee, they would be the legal owners of the vehicles and the ones entitled to claim deprecation. Therefore, the general and specific statements on ownership construe ownership in favour of the lessee, and, hence, were in favour of the Revenue.

According to the Supreme Court, there was no merit in the Revenue’s arguments for more than one reason:

(i)    Section 2(30) is a deeming provision that creates a legal fiction of ownership in favour of lessee only for the purpose of the Motor Vehicles Act. It defines ownership for the subsequent provisions of the Motor Vehicles Act, not for the purpose of law in general. It serves more as a guide to what terms in the Motor Vehicles Act mean. Therefore, if the Motor Vehicles Act at any point uses the term owner in any section, it means the one in whose name the vehicle is registered and in the case of a lease agreement, the lessee. That is all. It is not a statement of law on ownership in general. Perhaps, the repository of a general statement law on ownership may be the Sale of Goods Act;

ii)    Section 2(30) of the Motor Vehicles Act must be read in consonance with s/s. (4) and (5) of section 51 of the Motor Vehicles Act. The Motor Vehicles Act in terms of s/s. (4) and (5) of section 51 mandates that during the period of lease, the vehicle be registered, in the certificate of registration, in the name of the lessee and, on conclusion of the lease period, the vehicle be registered in the name of the lessor as owner. The section leaves no choice to the lessor but to allow the vehicle to be registered in the name of the lessee. Thus, no inference can be drawn from the registration certificate as to ownership of the legal title of the vehicle; and

(iii)    If the lessee was in fact the owner, he would have claimed depreciation on the vehicles, which, as specifically recorded in the order of the Appellate Tribunal, was not done. It would be a strange situation to have no claim of depreciation in case of particular depreciable asset due to a vacuum of ownership. The entire lease rent received by the assessee is assessed as business income in its hands and the entire lease rent paid by the lessee has been treated as deductible revenue expenditure in the hands of the leassee. This reaffirms the posision that the assessee is in fact that owner of the vehicle, in so far as section 32 of the Act is concerned.

Therefore, in the facts of the present case, the Supreme Court held that the lessor, i.e., the assessee was the owner of the vehicles. As the owner, it used the assets in the course of its business, satisfying both requirements of section 32 of the Act, and, hence, was entitled to claim depreciation in respect of additions made to the trucks, which were leased out.

With regard to the claim of the assessee for a higher rate of depreciation, the Supreme Court held that the import of the same term “purposes of business”, used in the second proviso to section 32(1) of the Act gained significance. According to the Supreme Court the interpretation of these words would not be any different from that which it ascribed to them earlier, u/s. 32(1) of the Act. Therefore, the assessee fulfilled even the requirements for a claim of a higher rate of depreciation, and hence, was entitled to the same.

In this regard, the Supreme Court inter alia endorsed the following observations of the Tribunal, which clinched the issue in favour of the assessee.

“15. The Central Board of Direct Taxes, vide Circular No.652, dated 14th June, 1993, has clarified that the higher rate of 40 per cent in case of lorries, etc., plying on hire shall not apply if the vehicle is used in a non-hiring business of the assessee. This circular cannot be read out of its context to deny higher appreciation in case of leased vehicles when the actual use in hiring business.

Perhaps, the author meant that when the actual use of the vehicle is in hire business, it is entitled for depreciation at a higher rate.”

Search and seizure – Block Assessment – Undisclosed Income – If the search is conducted after the expiry of the due date of filing return, payment of advance tax or deduction of tax at source is irrelevant in construing the intention of the assessee to disclose income – The ‘disclosure of income’ is disclosure of total income in a valid return u/s. 139.

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CIT vs. A. R. Enterprises, (2013) 350 ITR 489 (SC)

The assessee firm came into existence on 25th June 1992. On 23rd February, 1996, a search operation u/s. 132 of the Act was carried out at the premises of another concern, viz., M/s. A.R. Mercantile P. Ltd. During the course of the search, certain books and documents pertaining to the assessee, i.e., M/s. A.R. Enterprises, were seized. On scrutiny, the Assessing Officer found that though the assessee had taxable income for the assessment year 1995-96, no return of income had been filed (due to be filed on or before 31st October, 1995) till the date of the search. Based on the material seized by virtue of the aforesaid search, the Assessing Officer was satisfied that the assessee had not disclosed its income pertaining to the assessment year 1995-96. Accordingly (without recording any reasons for his satisfaction), he initiated action u/s. 158BD of the Act requiring the assessee to file its return of income. The assessee, after filing return for the block period (ten years preceding the previous years), which covered the assessment years 1993-94 to 1995- 96, pointed out that it had already filed returns for the assessment years 1993-94 and 1994-95. It objected to action initiated under Chapter XTV-B of the Act on the ground that in relation to the assessment year 1995-96, advance tax had already been paid in three installments and, therefore, income for that period could not be deemed to be undisclosed.

Rejecting the plea of the assessee, the Assessing Officer formed the opinion that the assessee had failed to file the return as on the date of search, and the seized documents did show income, which had not been or would not have been declared. Accordingly, he proceeded to compute the total undisclosed income for the block period 1993-94 to 1995-96 (up to the date of search), treating the income returned by the assessee for the period 1995-96 as nil, as stipulated in section 158BB(1)(c) of the Act.

Against the said order, the assessee preferred an appeal before the Tribunal. Accepting the stand of the assessee, the Tribunal allowed the appeal, and held that having paid the advance tax, the assessee had disclosed his income for the relevant assessment year.

Aggrieved, the Revenue preferred an appeal before the High Court of Madras u/s. 260A of the Act, questioning the validity of the order of the Tribunal.

Before the High Court, the stand of the Revenue was that since the return for the assessment year 1995-96 had not filed by the due date, by filing the return after the search, the assessee could not escape the consequences as stipulated in Chapter XIV-B of the Act. It was contended that payment of advance tax by itself did not establish the intention to disclose the income.

The Revenue’s plea did not find favour with the High Court. It observed that payment of advance tax itself necessarily implies disclosure of the income on which the advance is paid.

The short question for consideration before the Supreme Court was therefore whether payment of advance tax by an assessee would by itself tantamount to disclosure of income for the relevant assessment year and whether such income can be treated as undisclosed income for the purpose of application of Chapter XIV-B of the Act?

The Supreme Court held that “undisclosed income” is defined by section 158B as that income “which has not been or would not have been disclosed for the purposes of this Act”. The Legislature has chosen to define “undisclosed income” in terms of income not disclosed, without providing any definition of “disclosure” of income in the first place. The Supreme Court was of the view that the only way of disclosing income, on the part of an assessee, is through filing of a return, as stipulated in the Act, and, therefore, an “undisclosed income” signifies income not stated in the return filed. According to the Supreme Court, it seemed that the Legislature had clearly carved out two scenarios for income to be deemed as undisclosed : (i) where the income has clearly not been disclosed, and (ii) where the income would not have been disclosed. If a situation is covered by any one of the two, income would be undisclosed in the eyes of the Act and, hence, subject to the machinery provisions of Chapter XIV-B. The second category viz, where income would not have been disclosed, contemplates the likelihood of disclosure, it is a presumption of the intention of the assessee since in concluding that as assessee would or would not have disclosed income, one is ipso facto making a statement with respect to whether or not the assessee possessed the intention to do the same. To gauge this, however, reliance must be placed on the surrounding facts and circumstances of the case.

One such fact, as claimed by the the assessee, is the payment of advance tax. However, in the opinion of the Supreme Court, the degree of its material significance depended on the time at which the search is conducted in relation to the due date for filing return. Depending on which side of the due date the search was conducted, material significance of payment of advance taxes vacillated in construing the intention of the assessee. If the search was conducted after the expiry of the due date for filing return, payment of advance tax was irrelevant in construing the intention of the assessee to disclose income. Such a situation would find place which the first category carved out by section 158B of the Act, i.e. where income has clearly not been disclosed. The existence of an intention to disclose did not arise since, as held earlier, the opportunity of disclosure had lapsed, i.e., through filing or return of income by the due date. If, on the other hand, search was conducted prior to the due date for filing return, the opportunity to disclose income or, in other words, to file return and disclose income still existed. In which case, payment of advance tax may be a material fact for deciding whether an assessee intended to disclose. An assessee is entitled to make the legitimate claim that even though the search or the documents recovered, show an income earned by him, he has paid advance tax for the relevant assessment year and has an opportunity to declare the total income, in the return of income, which he would file by the due date. Hence, the fulcrum of such a decision is the due date for filing of return of income visà- vis date of search. Payment of advance tax may be a relevant factor in construing the intention to disclose income or filing return as long as the assessee continues to have an opportunity to file return and disclose his income and not past the due date of filing return. Therefore, there can be no generic rule as to the significance of payment of advance tax in construing the intention of disclosure of income. The same depends on the facts of the case, and hinges on the positioning of the search operations qua the due date for filing returns.

Thus, according to the Supreme Court, the question that whether payment of advance by an assessee per se is tantamount to disclosure of total income, for the relevant assessment year, at the very outset had to be answered in the negative. On further scrutiny, according to the Supreme Court there was yet another reason to opine so. Payment of advance tax and filing of return are functions of completely different notions of income i.e. estimated income and total income respectively. The payment of advance tax is based on an estimation of the total income that is chargeable to tax and not on the total income itself. According to section 209(1)(a), the assessee shall first estimate his “current income” and thereafter pay income tax calculated on this estimated income on the rates in force in the relevant financial year. This income is an estimation that is made by the assessee and may not be the exact income, which may ultimately be declared u/s. 139 and assessed u/s. 143. The payment of advance tax does not absolve an assessee from obligation to file return disclosing total income u/s. 139. Hence, the ‘disclosure of income’ is the disclosure of the total income in a valid return u/ s. 139, subject to assessment and chargeable to tax under the provisions of the Act.

The Supreme Court noted that in the instant case, after the search was conducted on 23rd February 1996, it was found that for the assessment year 1995-96, the assessee had not filed its return of income by the due date. It was only when the block proceedings were initiated by the Assessing Officer, that the assessee filed its return for the said assessment year on 11th July, 1996 u/s. 158BC showing its total income at Rs. 7,02,768. The Supreme Court held that since the assessee had not filed its return of income by the due date, the Assessing Officer was correct in assuming that the assessee would not have disclosed its total income.

Note 1: During the course of hearing, the counsel for the assessee relying upon the decision in Asst. CIT vs. Hotel Blue Moon (2010) 321 ITR 362 (SC) for the first time contended that the Revenue did not have jurisdiction to invoke Chapter XIV-B against the assessee as the Assessing Officer had not recorded his satisfaction that any undisclosed income belonged to the assessee or that the assessee did not have the intention to disclose their income before initiating proceeding u/s. 158BD. The Supreme Court however was unable to appreciate the submission since the same was never urged before the High Court and the Tribunal and refrained from making any observations on it.

Note 2: In CIT vs. Nachammai [C.A. No.2580 of 2010], a companion appeal, the issue was whether tax deduction at source amounts to disclosure of income. The Supreme Court held that since the tax to be deducted at source is also computed on the estimated income of an assessee for the relevant financial year, such deduction cannot result in the disclosure of total income.

Deemed Registration and Time Limit for Disposal of Application for Registration of Charitable Trusts u/s.12AA

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Issue for Consideration
Every charitable or religious trust, seeking exemption of its income under the provisions of sections 11 and 12 of the Income Tax Act, 1961, is required to be registered with the Commissioner of Income Tax u/s. 12AA. The procedure for such registration is laid down in section 12AA. S/s. (2) of section 12AA provides that every order, granting or refusing registration by the Commissioner, shall be passed before the expiry of 6 months from the end of the month in which the application u/s. 12A, made by the trust, was received by him.

Since the section does not specifically mention the consequences of non-disposal of the application by the Commissioner within the specified time limit, a controversy has arisen as to what would be the consequences in such a situation. One view is that the trust shall not be made to suffer for the inaction of the Commissioner and the registration shall be deemed to have been granted. The other view is that the trust shall not be granted the exemption from tax, since the same is not registered. One more view is that the time limit prescribed in section 12AA is not mandatory and the Commissioner can and should proceed with the application and take appropriate decision even after the expiry of the time limit and such decision shall have retrospective effect. While the Allahabad High Court has taken the view that in the event of such failure to pass an order, within the specified time by the Commissioner, registration shall be deemed to have been granted u/s. 12AA, as the time limit provided in the section is mandatory and no decision on the application can be taken on expiry of the time limit thereafter, a contrary view has been taken by the Madras and Orissa High Courts to the effect that such a time limit is not mandatory, and that non-disposal of the application shall not result in the deemed registration of the trust and till such time as registration is granted, the trust shall be treated as not registered and non-registration of the trust shall result in denial of the exemption from tax so however the Commissioner shall pass the appropriate orders on the application of the assessee at the earliest though after the expiry of the prescribed time. In short, according to the latest view, the registration cannot be deemed to have been granted and the Commissioner is empowered to deal with and should deal with the application even after the expiry of the time specified in section 12AA.

Society for the Promotion of Education Adventure Sport’s case:

The issue came up before the Allahabad High Court in the case of Society for the Promotion of Education Adventure Sport & Conservation of Environment vs. CIT 216 CTR (All) 167.

The assessee was a society running a school, whose income was entitled to exemption u/s. 10(22). On omission of section 10(22), it applied for registration u/s. 12A. No decision however was taken by the Commissioner on its application within the time limit of 6 months fixed by section 12AA (2), and in fact, no decision was taken, even after a lapse of almost 5 years. On account of such delay, large tax demands were raised on the assessee. The assessee filed a writ petition in the Allahabad High Court challenging the tax demands.

On behalf of the assessee, it was contended that the registration
should be deemed to have been granted after the expiry of the period
prescribed u/s. 12AA(2), if no decision had been taken on the
application for registration. Reliance was placed on various decisions
of the Allahabad High Court, which had held that where an application
for extension of time was moved, but was not decided, it would be deemed
to have been allowed; that given the fact that the CIT was required to
give an opportunity to the applicant before refusing registration and
that reasons for refusal were required to be given by the CIT in his
order, the absence of any such opportunity and the order of the CIT
should be taken to mean that he had not found any reason for refusing
registration;, that the legislative intent wasevident by the fact that the order of the CIT granting registration, was not appealable by the Income Tax Department and that the laches and lapses on the part of the Income tax Department could not be to its own advantage by treating the application for registration as rejected.

On behalf of the Department, reliance was placed on a decision of the Supreme Court in the case of Chet Ram Vashisht vs. Municipal Corporation AIR 1981 SC 653, where the Court examined the effect of the failure on the part of the Delhi Municipal Corporation to decide an application for sanction to a layout plan within the period specified in section 313(3) of the Delhi Municipal Corporation Act, 1957.

The Allahabad High Court observed that what had to be examined was the consequence of such a long delay on the part of the Income tax authorities in not deciding the assesssee’s application for registration. It noted that admittedly after the statutory limitation, the CIT would become functus officio, and he could not, on expiry of the time limit, thereafter pass any order either allowing or rejecting the registration. Obviously, the application could not be allowed to be treated as perpetually undecided. Therefore, the key question, in the opinion of the court, was whether upon lapse of the six-month period without any decision, the application for registration should be treated as rejected or it should be treated as allowed.

The Allahabad High Court distinguished the Supreme Court decision cited on behalf of the revenue, in Chet Ram Vashist’s case (supra), by pointing out that the said decision dealt with a different statute and that one of the important aspects considered by the Supreme Court for taking view in that case that the sanction of the layout was mandatory and could not be deemed to have been granted on expiry of the time limit, was the purpose and objective behind of the provision requiring sanction of the layout plans. The High Court noted that under the relevant provision of the said statute, there was involved an element of public interest, namely, to prevent unplanned and haphazard development or construction to the detriment of the public and any sanction or deemed sanction of a layout plan entailing constructions being carried out, would create an irreversible situation. The Allahabad High Court noted that in the case before it, there was no such element of public interest in the case before it under the provisions of section 12A; that taking a view that non-consideration of the registration application within the time limit would result in deemed registration might, at the worst, cause loss of some revenue or income tax, payable by that individual trust.

The Allahabad High Court compared the act of non-disposal of an application with a situation where the assessing authority failed to make assessment or reassessment within the prescribed limitation, which also led occasionally to loss of revenue from that individual assessee. It observed that taking the contrary view and holding that not taking of a decision within the time limit was of no consequence would leave the assessee totally at the mercy of the tax authorities, as the assessee had not been provided any remedy under the Act against non-decision by the Commissioner on an application by the assessee.

The Allahabad High Court observed that taking the view of deemed registration did not create any irreversible situation, because the CIT had the power to cancel registration u/s. 12AA(3) if he was satisfied that the objects of such trust were not genuine or the activities were not being carried out in accordance with its objects and the only drawback might be that such cancellation would operate only prospectively. The deemed registration, in the court’s view, furthered the object and purpose of the statutory provision.

Considering the pros and cons of the two views, the Allahabad High Court held that the non-consideration of the application for registration within the time fixed by section 12AA(2) led to the deemed grant of registration as there was no good reason to make the assessee suffer merely because the Income Tax Department was not able to keep its officers under check and control and take timely decisions in such simple matters such as consideration of applications for registration, even within the long six-month period provided by section 12AA(2).

The Allahabad High Court therefore directed the Commissioner to treat the assessee as an institution approved and registered u/s. 12AA, to recompute its income by applying the provisions of section 11, and to issue a formal certificate of approval forthwith.

Sheela Christian Charitable Trust’s case:
The issue later also came up before the Madras High Court in the case of CIT vs. Sheela Christian Charitable Trust 354 ITR 478 (Mad).

In this case, the trust created in August 2003, made a delayed application for registration u/s. 12AA in August 2005 without a specific request for condonation of delay being filed. It had not filed the accounts since its inception along with the application. Since details of activities and copy of accounts were not filed with the Commissioner, he merely lodged the application and did not process the same. A second application was made in April 2007, seeking retrospective registration from April 2005. This application was rejected by the Commissioner. On appeal, the Tribunal set aside the order of the Commissioner and remitted the matter back to the Commissioner to decide the matter afresh, after giving opportunity to the assessee.

The Commissioner, as directed by the tribunal, gave an opportunity to the assessee and considered the matter afresh. This time the Commissioner granted the registration to the trust but with prospective effect. He rejected the assessee’s request to grant registration with effect from April 2005, holding that there was no just and reasonable cause for delay in filing the application.

On appeal to the Tribunal, the Tribunal held that so far as condonation of delay was concerned, a pragmatic approach should be adopted and substantial cause of justice should not be denied merely on pedantic reasons. The Tribunal noted that the order granting or refusing registration should have been passed before the expiry of 6 months from the end of the month in which the application was received, and since the Commissioner kept the application pending beyond the permitted time, and it was neither accepted nor rejected within the period of 6 months, the registration should be assumed to have been granted. Reliance was placed by the Tribunal on the decision of the Allahabad High Court in the case of Society for Promo-tion of Education Adventure Sport and Conservation of Environment (supra). It therefore held that the original application of August 2005 was to be treated as accepted, and registration u/s. 12AA should be deemed to have been granted to the trust.

On behalf of the Department, on appeal against the said order of the tribunal, it was argued before the Madras High Court that the Tribunal ought to have held that the trust could not agitate the inaction of the Commissioner on its earlier application in a subsequent application filed by it for registration u/s. 12AA. It was further contended that the tribunal erred in holding that there was a deemed registration by relying on the decisions of the Orissa High Court in the case of Srikhetra, A. C. Bhakti-Vedanta Swami Charitable Trust vs. Asst. CIT (2006) 2 OLR 75 and of the Madras High Court in the case of Anjuman-E-Khyrkhah-E-Aam 354 ITR 474, for the proposition that there was no concept of deemed registration u/s. 12AA(2).

The Madras High Court analysed the provisions of section 12AA(2) and the decision of the Orissa High Court referred to above. It agreed with the Orissa High Court that the time frame laid down u/s. 12AA(2) was only directory and not mandatory and that the Commissioner could pass an order even after the expiry of the statutory time limit. It observed that section 12AA(1)(b)(i) and (ii) made it clear that there was a statutory mandate imposed on the Commissioner to pass an order in writing either registering the trust or refusing to register the trust. It noted that the Madras high court in Anjuman’s case (supra), where the Commissioner had passed an order on the last day of the time limit neither accepting nor rejecting the application but lodging the complaint instead, had rejected the concept of deemed registration and remitted the matter back to the Commissioner to afford an opportunity of hearing to the trust and to decide the matter afresh.

In view of the above, and noting that the counsel for the trust also fairly submitted to the Court that there was no question of “deemed registration” and that the matter be remitted back to the Commissioner for consideration of the matter afresh, the Madras High Court held that non-consideration of the registration application, within the prescribed time, did not amount to “deemed registration” of the trust. The Madras High Court therefore set aside the matter and remitted it back to the Commissioner for consideration of the application afresh, to pass orders after affording sufficient opportunity to the trust.

This decision of the Madras High Court was also followed by it in a subsequent decision in the case of CIT vs. Karimangalam Onriya Pengal Semipu Amaipu Ltd 354 ITR 483, where also a similar concession was given by the counsel for the trust and there also, the Madras High Court remitted the matter back to the Commissioner for consideration afresh.

Observations

The decisions of the Madras High Court seem to have been significantly influenced by the decision of the Orissa High Court in Bhakti-Vedanta Swami Charitable Trust’s case. In that case, the delayed application was made in August 2004, but was claimed to have been misplaced by the tax authorities and was made significantly without a request for condonation of delay. The Orissa High Court observed in that case, as under:

“In our view, the period of 6 months as provided in s/s. (2) of section 12AA is not mandatory. Though the word “shall” has been used, but it is well known that to ascertain whether a provision is mandatory or not, the expression “shall” is not always decisive. It is also well known that whether a statutory provision is mandatory or directory has to be ascertained not only from the wording of the statute, but also from the nature and design of the statute and the purpose which it seeks to achieve. Herein the time-frame under s/s. (2) of section 12AA of the Act has been so provided to exclude any delay or lethargic approach in the matter of dealing with such appli-cation. Since the consequence for non-compliance with the said timeframe has not been spelt out in the statute, this Court cannot hold that the said time limit is mandatory in nature, nor the period of six months has been couched in negative words. Most of the time, negative words indicate a mandatory intent. This Court is also of the opinion that when public duty is to be performed by the public authorities, the time limit which is granted by the statute is normally not mandatory but is directory in the absence of any clear statutory intent to the contrary. See Montréal Street Railway Company vs. Normandin AIR 1917 PC 142. Here, there is no such express statutory intent, nor does it follow from necessary implication.”

In this case, the Orissa High Court directed the authorities to complete the statutory exercise of deciding on the application within a period of six months from the date of the court order, and that if the registration was granted, it would relate back to the date of application. The court also levied costs on the officer for his careless attitude taken and the misleading stand taken before the court by the Department.

The Orissa High Court proceeded on the basis that the task being performed by the Commissioner was a public duty, and therefore took the view that it did that no time limit could be laid down in such a situation. On the other hand, the Allahabad High Court rightly distinguished the process of registration for a trust and noted that in such process, there was merely a tax liability of an individual trust involved, and no public element or public interest involved.

If one would take the decision of the Orissa High Court to its logical conclusion, it would mean that in every case where the time limit was exceeded, the trust would have to approach the High Courts for extending the time limits, since the Commissioner would take the stand that he cannot pass an order once the time limit has expired under the law. This would create untold difficulty for such trusts, for no fault of theirs.

The Orissa High Court decision also ignores the fact that the statute has expressly laid down a time limit for disposal of the application for registration — whereas the High Court’s view seems to be that such a time limit cannot be laid down, but is merely a guidance. As against this, the Allahabad High Court has rightly tried to sub- serve the purpose of laying down the time limit by the legislature, which is to avoid undue delays in processing of applications, which was the norm earlier.

A note may also be taken of the following observations in the decision of the Special Bench of the Income Tax Appellate Tribunal in the case of Bhagwad Swarup Shri Shri Devraha Baba Memorial Shri Hari Parmarth Dham Trust vs. Commissioner of Income Tax 111 ITD 175, while upholding the concept of deemed registration on failure to pass an order within the specified period:

“If the application for registration is to abate because the CIT did not pass an order thereon and the assessee is asked to file another application again that would be putting, the assessee to the grind all over again for no fault of his. That consequence should be avoided. If the application is to be treated as pending, then again the CIT would be getting an extended period of limitation which the section does not allow. Further, it would be uncertain as to how long the period can be extended. The assessee cannot be kept waiting to the end of time. If it is held that the application must be deemed to have been refused, obviously the assessee must be in a position to file an appeal against the refusal to the Tribunal but it will not be able to do so in the absence of a written order containing the reasons for refusal; the appeal remedy would be rendered illusory. That consequence cannot be countenanced. Therefore by a process of exclusion, the conclusion is that the CIT must be deemed to have allowed the registration if he has not passed any order within the time prescribed. That way, the rights of the Department are also protected in the sense that it would be open to the CIT to cancel the deemed registration by invoking s/s. (3) to section 12AA, if it is otherwise permitted and the procedure prescribed therefor is followed. The assessee, if aggrieved by the cancellation of registration, has a right to appeal to the Tribunal u/s. 253(1)(c)…..

It would be incongruous to hold that while the condition that the trust or charitable institution must be registered with the CIT is mandatory or absolute, the provision that the CIT shall pass an order thereon within six months from the end of

the month in which the application was filed is merely directory, leaving it to the convenience of the CIT to pass the order at any time he likes disregarding the time-limit prescribed. That would introduce an element of uncertainty and con-fusion in the administration of the Act and may even compel trusts or institutions claiming exemption u/s. 11 to invoke Art. 226 of the Constitution. Such consequences have to be avoided. The assessments of the trust or charitable institution may in the meantime be completed rejecting the claim for exemption on the ground that it is not registered, even though the trust/charitable institution is found by the AO to satisfy the other conditions such as application of income, investment of the funds and so on. In other words, by not passing the order within the time-limit, the claim of the trust/charitable institution can be frustrated, albeit unintentionally. There is no good ground shown, nor does any appear to exist in the scheme of the Act, to hold that the time-limit within which the CIT has to pass an order on the application for registration of the trust or institution is merely directory. It is not merely a question of prejudice being caused to the assessee, but it is something which goes to the very root of good administration and obedience to the law. It could not have been the intention of the law that the CIT could pass the order granting or refusing registration at any time. Any provision has to be so interpreted as to advance the cause and suppress the mischief.”

The one thing that is clear is that an assessee cannot be altogether denied the benefit of tax exemption on account of the laches of the Commissioner in dealing with the assessee’s application in time; he also cannot refuse to pass an order on the application on the ground that the law prevents him in doing so after the statutorily prescribed time. In short he cannot take benefit of his lapses by inflicting punishment on the assessee. Even under the view of the Orissa and Madras High Courts, not so favourable to the assessees, the need for the Commissioner to dispose the application remaining undisposed, is not dispensed with. The courts have clearly hauled up the authorities for their inaction by awarding the costs and have directed the authorities to dispose the application within the extended time after affording opportunity to the assessee. Importantly, the courts have held that the decision of the authorities when taken shall have retrospective effect, thereby ensuring that no undue harm is caused to the assessee for no fault of his. What perhaps remains to be ensured is that the tax demand, if any, in the intervening period is not pursued and enforced and the assessee is saved the trouble of moving the courts to make the Commissioner act on his application.

The purposive interpretation adopted by the Allahabad High Court, that registration should be deemed to have been granted, however, seems to be the far better and practical view of the matter, fulfilling both the requirements of the provision and its intention. The view is strengthened by the presence of the Proviso to section 12AA(1) which provides for giving an opportunity of hearing to the assesseee, by the Commissioner, before rejecting his application for registration which in turn clearly conveys that the denial of registration on account of non disposal of application is altogether ruled out. This view has the effect of satisfying the law abiding assessee who has made the application in time and is otherwise equitous in as much as the law provides for no condonation of delay in application of the assessee.

Appeal to Appellate Tribunal – Third Member – Formulation point of differences and thereafter to decide: [Customs Act. 1962 Section 129 C(5)]

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Amod Stampings P. Ltd. vs. Commissioner of Customs 2013 (289) ELT 421 (Guj.)

The questions of law that arose in this tax appeal was, can any order be passed by a majority, which includes the third member, when the third member admittedly holds that:

“I find that no specific point of difference has been placed before me. It appears from ‘DIFFERENCE OF OPINION’ framed by the Regular Bench that I have to concur with one of the member”

The facts are not disputed that there was difference of opinion between two learned members of the Division Bench. In view of section 129C(5) of the Customs Act, 1962 in case of difference of opinion between two members of the tribunal, the point of difference of opinion was required to be stated by the members and thereafter the matter was to be decided by a third member. The opinion of the third member would form part of the majority decision. In the facts of the present case, when the learned third member of the tribunal before whom the matter went, the differing member had not framed the point of difference of opinion. When the matter was being heard by learned third member, in his judgment, he recorded that no specific point of difference has been placed before him.

Once the learned third member found that point of difference of opinion has not been formulated by the two members of the Bench then the learned third member was required to send the matter back to the Division Bench for formulating the point of difference of opinion and only after the point of difference of opinion was formulated, decide that question. The learned third member could not say that though difference of opinion has not been framed, he has to agree or disagree with the member and accordingly he has agreed with the judicial member. The approach of the learned third member was not correct in law and he was required to send the matter back to the Bench of the two members who had differed, for formulation of the point of difference of opinion afresh so that question can be considered and decided by the learned third member.

A Division Bench of this Court in Colourtex vs. Union of India [2006 (198) ELT 169 (Guj.)] has held that exact difference has to be formulated by members of the Division Bench of the Tribunal and it is not open to them to formulate a question as to whether the appeal is to be rejected or remanded for a fresh decision for determination of duty, confiscation and penalty etc. In the present case, the question formulated by the Division Bench does not specify the requirement of s/s. (5) of section 129C of the Act. Therefore, the order passed by learned third member as well as the difference of opinion expressed, generally, by differing members without precise formulation of the point of difference cannot be entertained. The appeal was allowed. The matter was remanded to the differing members of the Tribunal to formulate point of difference in a manner required under the law and thereafter refer the matter to learned third member for decision.

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Appeal to Appellate Tribunal – Pronouncement of the order – Gist of decision should be pronounced: Appeal to High Court – NTT – The High Court has no power to entertain an appeal, even though notification not yet issued by Govt. to set up NTT. (Customs Act 1962 S.130)

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Commissioner Of Customs (SEA), Chennai vs. C.P. Aqua Culture (India) P. Ltd. (2013) (290) ELT 202 (Mad.)

The appeal of the first respondent, a private company was posted for hearing before the Appellate Tribunal on 04-06-2009 and after hearing the detailed arguments from both sides, the Appellate Tribunal pronounced the order in the open Court allowing the appeal and the gist of the said pronouncement was recorded and signed by the Members on 04-06-2009 but the matter was entrusted to the Member (Technical) for drafting a detailed order giving the reasons. Subsequently, vide internal note dated 22-06-2009, the matter was posted for re-hearing on 30-06-2009. As against the same, the first respondent Company filed the Writ Petition seeking a direction to the Appellate Tribunal to pass the detailed order in line with the pronouncement made in the open Court and gist of decision recorded and signed on 04-06-2009.

The learned single Judge, on consideration of the submissions made by the learned counsel for the parties and the materials placed on record, allowed the Writ Petition directing the Appellate Tribunal to pass a detailed order in the appeal filed by the first respondent in consonance with the gist of the decision pronounced, recorded, signed and dated in open Court on 04-06-2009 within 15 days from the date of receipt of the order. Feeling aggrieved, the Department preferred a Writ Appeal.

The main contention of the learned counsel representing the Department was that the Tribunal immediately after hearing the appeal on 04-06- 2009 observed that “appeal allowed” without recording the gist of the order, and according to him, it is only the formal expression of the Tribunal to allow the appeal in the open Court without dictating any reasoned order and such an oral order announced in open Court, but not followed by a detailed written order giving reasons, is not a valid order in the eyes of the law. He further submitted that the note dated 22-06-2009 given by the Technical Member for re-hearing of the appeal was accepted by the Vice President (Judicial Member) and, therefore, prayed for interference of this Court and also sought for directions to the Tribunal to rehear the appeal as the gist of the order was not passed by it on 04-06-2009.

The Hon’ble Court observed that though the order was pronounced in the open Court on 04-06-2009 as “Appeal allowed” and last hearing date was recorded as 04-06-2009, an endorsement has been made by the Vice-President to the Member (Technical) to the effect “for orders please” from which it is clear that the matter was entrusted to the Member (Technical) for drafting a detailed order. Therefore, there cannot be any dispute that 04-06-2009 is the last date of hearing.

The Tribunal simply held “appeal allowed” without recording even the gist of the decision and, therefore, the same cannot be termed as a decision or order or judgment of the Tribunal.

The Hon’ble Court further observed that the circumstances leading to the filing of the appeal were not as per the provisions of the Act or Rules. The other issue before the Court was whether the High Court had the power to entertain an appeal against the order of the Appellate Tribunal.

The unamended section 130 of the Customs Act speaks about appeal to High Court. It enables the aggrieved person to file an appeal to the High Court against the order passed by the Appellate Tribunal on or after the 1st day of July, 2003. But it is pertinent to note that by virtue of enactment of the National Tax Tribunal Act, 2005 (49 of 2005), several provisions of the Act were omitted including section 130. This section was omitted by section 30 and schedule, part VI with effect from 28-12-2005. Therefore, from the date of omission of Section 130, the jurisdiction of the High Court is excluded.

Though the learned counsel for the first respondent tried to convince the Bench that notification is yet to be issued, the Act is very clear that the jurisdiction of the High Court was excluded from 28-12-2005.

There is no dispute that the High Courts in India have inherent and plenary powers, and as a court of record the High Courts have unlimited jurisdiction including the jurisdiction to determine their own powers. However, the said principle has to be decided with the specific provisions in the enactment and in the light of the scheme of the Act, particularly in this case, in view of enactment of Act 49 of 2005 by virtue of which the jurisdiction of the High Court u/s. 130 of the Act has been ousted, it would not be possible to hold that in spite of the abovementioned statutory provisions, the High Court is free to entertain appeal against the order passed by the Appellate Tribunal.

The Hon’ble Court held that the High Court had no power to entertain an appeal filed against the order of the Tribunal and if the parties were aggrieved, they should have approached the Hon’ble Supreme Court by way of appeal u/s. 130-E of the Customs Act instead of resorting to invoke Article 226 of the Constitution of India when the jurisdiction of this Court has been ousted by Act 49 of 2005 from 28-12-2005.

The Division Bench thus held that the learned single Judge ought not to have entertained the Writ Petition.

The Writ Appeal was allowed.

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Y. P. Trivedi vs. JCIT ITAT Mumbai `G’ Bench Before Vijay Pal Rao (JM) and Rajendra (AM) ITA No. 5994/Mum/2010 A.Y.: 2005-06. Decided on: 11th July, 2012. Counsel for assessee/revenue: Usha Dalal/A K Nayak

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Delay in filing appeal due to CA’s fault is bonafide and must be condoned. Courts should take a lenient view on the matter of condonation of delay provided the explanation and the reason for delay is bonafide and not merely a device to cover an ulterior purpose or an attempt to save limitation in an underhand way.

Facts: The appeal filed by the assessee before the Tribunal was delayed by 496 days. The assessee filed an application for condonation of delay as well as affidavit of the assessee and his CA explaining the reasons for delay in filing the appeal. It was explained that the CA of the assessee on receiving the order of CIT(A) gave it to the person maintain records of appeal matters for taking photocopy and sending to assessee’s office for filing appeal. The said order got mixed up with other papers and the appeal could not be filed in time. Upon the same being noticed the appeal was filed after tracing the order. It was submitted that the delay is neither deliberate nor willful but due to misplacement of the order in the office of the CA and therefore, it was a bonafide mistake. Relying on the decision of the SC in the case of Collector, Land Acquisition v. Mst. Kajiji (167 ITR 471)(SC) it was contended that Justice oriented approach has to be taken by the Court while deciding the matter of condonation and the case should be decided on merits and not on technicalities.

Held: The Tribunal observed that the facts of the case do not suggest that the assessee had acted in a malafide manner or the reasons explained is only a device to cover an ulterior purpose. It is settled proposition of law that the Court should take a lenient view on the matter of condonation of delay. However, the explanation and the reason for delay must be bonafide and not merely a device to cover an ulterior purpose or an attempt to save limitation in an underhand way. The Court should be liberal in construing the sufficient cause and should lean in favour of such party. Whenever substantial Justice and technical considerations are opposed to each other, cause of substantial Justice has to be preferred.

Since the appeal could not be filed due to bonafide mistake and inadvertence, the Tribunal, in the interest of Justice, condoned the delay in filing the appeal.

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(2013) 87 DTR 346 (Bang) Tata Teleservices Ltd. vs. DCIT A.Y.: 2006-07 to 2008-09 Dated: 27th November 2012

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Section 194H – Service fees against credit cards is not commission and hence provisions of section 194H not applicable

Facts:
The assessee, a company engaged in the business of telecom services has arrangement with several banks whereby the customers of the assessee holding credit card can make payment for services utilised by them through credit card. When a customer makes payment by credit card, bank processes payment after retaining fees for processing payment. The Assessing Officer treated such processing charges as commission and raised demands u/s. 201(1) and 201(1A). The CIT(A) rejected the Assessing Officers stand and upheld the claim of the assessee. The Department went into appeal.

Held:
The Honourable Tribunal held that commission paid to the credit card companies cannot be considered as falling within the purview of section 194H. Even though the definition of the term “commission or brokerage” used in the said section is an inclusive definition, it is clear that the liability to make TDS under the said section arises only when a person acts on behalf of another person. In the case of commission retained by the credit card companies however, it cannot be said that the bank acts on behalf of the merchant establishment or that even the merchant establishment conducts the transactions for the bank. The sale made on the basis of a credit card is clearly a transaction of the merchant establishment only and the credit card company only facilitates the electronic payment, for a certain charge. The commission retained by the credit card company is therefore in the nature of normal bank charges and not in the nature of commission or brokerage for acting on behalf of the merchant establishment.

Thus there is no requirement for making TDS on the commission retained by the credit card companies since payments to bank on account of utilisation of credit card facilities would be in the nature of bank charges and not commission within meaning of section 194H.

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[2012] 134 ITD 463 (Mum.) Siam Commercial Bank PCL vs. DCIT (International taxation)-2(1), Mumbai A.Y. 2000-2001 Date of Order – 25th February 2011

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Section 5 – Accrual of income – Discounting charges of next year shall not accrue as income in current year. Section 36(1)(vii) – Section 36(1)(viia) – Claim of bad debts is to be restricted by amount of opening balance in ‘provision for bad and doubtful debts’ account instead of closing balance and then deduction u/s. 36(1)(viia) is to be allowed

Facts I:
The assessee, a foreign bank, following mercantile system of accounting did not offer discount received on bills discounted which were relating to period after 31-03-2000, for A.Y. 2000-01. The same was brought under tax by A.O. in A.Y. 2000-01.

Held I:
The period of bill is relevant as it requires the divesting of funds by the lender for such period entailing the incurring of interest expenditure for such period. The quantum of discounting charges has direct nexus with the due date of the bill, which, in turn, determines the period for which the bank is deprived of its funds in discounting the bill. As the interest cost, of funds invested, for the subsequent year shall not become deductible in the current year, naturally the corresponding income in the form of discounting charges for the next year shall also not accrue as income in the current year.

Facts II:
For A.Y. 2000-01, the assessee claimed deduction of Rs. 1,57,46,917/- for bad debts u/s. 36(1)(vii), being the amount of bad debts written off in current year at Rs. 1,88,87,553/- less provision allowed u/s. 36(1)(viia) of A.Y. 1999-2000 at Rs. 31,40,636/-. It also claimed separate deduction in respect of provision for bad and doubtful debts of Rs. 35,02,564/- made during the current year. The AO held that the bad debts deduction should be allowed only in excess of the balance at the end of the year and not at the beginning of the year.

Held II:
In each year ordinarily there are two types of deductions, viz., firstly on account of provision made at the end of the current year by limiting it to the adjusted total income for the year and secondly the amount of bad debts actually written off. The Commissioner (Appeals) was justified in directing the AO to restrict the claim of bad debts by the amount of opening balance in the provision for bad and doubtful debts account as at the beginning of the instead of closing balance and then allowing deduction u/s. 36(1)(viia).
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(2012) 134 ITD 269 (Visakha) Transstory (India) Ltd. vs. ITO Assessment Year: 2006-07 Date of order: 14th July, 2011

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Section 80 IA – Assessee was acting through joint venture and consortium for executing eligible contracts, whether eligible to claim deduction u/s 80 IA. Joint venture was only a de jure contractor but the assessee was a de facto contractor – Joint venture or the consortium was only a paper entity and has not executed any contract itself – Assessee is entitled for the deductions u/s. 80-IA(4) on the profit earned from the execution of the work awarded to JV and consortium.

Facts:
The assessee is a company and it formed joint venture named “Navayuga Transtoy (JV)” which bid for the contract. The Irrigation Department of Andhra Pradesh awarded the contract to JV, which became entitled to execute works worth Rs. 664.50 crore. As per the terms of the JV, the assessee was to execute 40 per cent of the work in the JV, the other constituent partner was to execute 60 per cent of the works awarded. Both the constituent partners of the JV raised bills on the JV for quantity of work as certified by technical consultant appointed by the State Government. The JV in turn raised a consolidated bill on the Irrigation Department of Andhra Pradesh Government without making any additions. The Irrigation Department makes the payments to the JV, which shares the payment in accordance with the bills raised by each. The JV files its IT returns separately but does not claim any deduction u/s. 80-IA(4).

The assessee had also formed a consortium along with one M/s Corporation Transtroy, OJSC, Moscow, with the understanding that the assessee would execute 100 per cent of the works which were awarded to the consortium by the Government of Karnataka. During the year assessee executed works valued worth Rs. 31.09 crore. The assessee claimed deduction u/s. 80- IA(4) on the profits derived out of the aforesaid works. But it was disallowed by the AO on the ground that the work was not awarded to the assessee.

Held:
The joint venture and consortium was formed to obtain contract from Government Bodies. As per the joint venture, the project awarded to the joint venture was to be executed by the joint venturers or the constituents. Once the project was awarded to the joint venture or consortium it was to be executed by venturers or constituents in the ratio agreed upon by them. It was the assessee who executed the work contract or project given to the joint venture. Whatever bills were raised by the assessee for the work executed on JV and consortium, the joint venture and consortium in turn raised the further bill of the same amount to the Government. Whatever payment was received by the joint venture, it was accordingly transferred to their constituents. The joint venture is an independent identity and has filed the return of income and was also assessed to tax but neither offered any profit/ income earned nor claimed any exemption/deduction u/s. 80 IA. The joint venture was contractor only as per law, in factual terms the assessee was the contractor. All other conditions u/s. 80IA have been fulfilled. The dispute arose only with the fact of the contract being awarded only to the joint venture and not the assessee and therefore the assessee was not allowed the deduction. U/s. 80-IA the legislature has also used the word consortium of such companies meaning thereby the legislature was aware about the object of formation of consortium and joint venture. Therefore, the mere formation of the consortium or joint venture for obtaining a contract cannot debar the venture from claiming exemption.

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Software Technology Park: Exemption u/s. 10A: A. Y. 2003-04: Approval by Director of Software Parks of India is valid: Approval by Inter-Ministerial Standing Committee not necessary:

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CIT vs. Technovate E Solutions P. Ltd.; 354 ITR 110 (Del):

For the A. Y. 2003-04, the assessee claimed exemption u/s. 10A and furnished a registration issued by a director of the Software Technology Parks of India in support of the claim. The Assessing Officer rejected the claim on the ground that the approval of the director of the Software Technology Parks of India was not a valid approval from a specified authority. He held that only the Inter-Ministerial Standing Committee was competent to grant approval to units functioning within the Software Technology Park for the purposes of exemption u/s. 10A. The Tribunal allowed the assessee’s claim.

On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:

i) The CBDT in Instruction No. 1 of 2006, dated 31-03- 2006, clarified that the claim of deduction u/s. 10A should not be denied to the software technology park units only on the ground that the approval/ registration to such units had been granted by the Director of Software Technology Parks of India. In the Instruction, the Board also made a reference to the Inter-Ministerial communication dated 23-03-2006, issued by the Secretary, Minister of  Communications and Technologies to the effect that the approvals issued by the director of the Software Technology Parks of India had the authority of the Inter-Ministerial Standing Committee and that all approvals granted by director of the Software Technology Parks of India were, therefore, deemed to be valid.

ii) The position was also clear from a letter dated 6th May, 2009, issued by the Board to the Joint Secretary, Minister of Commerce and Industry wherein a distinction had been drawn between the provisions of sections 10A and 10B and in which it had been clarified that a unit approved by a director under the Software Technology Park Scheme would be allowed exemption only u/s. 10A as a software technology park unit and not u/s. 10B as 100% export oriented unit.

iii) Therefore, approval granted by the director of the Software Technology Parks of India would be deemed to be valid in as much as the directors were functioning under the delegated authority of the Inter-Ministerial Standing Committee.

iv) Thus the Tribunal was right in coming to the conclusion that the approval granted by the director of the Software Technology Parks of India was sufficient approval so as to satisfy the conditions relating to approvals u/s. 10A.”

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Reassessment: Reason to believe: Change of opinion: S/s. 147 and 148: A. Y. 2007-08: Information regarding bogus companies engaged in providing accommodation entries to which assessee was allegedly a beneficiary was in possession of AO while making assessment u/s. 143(3): In response to query raised by AO the assessee furnished all information including alleged accommodation entry providers with their confirmations: Subsequent notice u/s. 148 and the consequent reassessment are not valid:

Pardesi Developers & Infrastructure (P) Ltd. vs. CIT: 258 CTR 411 (Del):

For the A. Y. 2007-08, the assessment was originally completed by an order u/s. 143(3) dated 30-12-2009. Subsequently, a notice u/s. 148 dated 30-08-2011 was issued for reopening the assessment. The Delhi High Court allowed the writ petition challenging the notice and held as under:

“i) It is an admitted position that the information regarding the alleged accommodation entry providers had been circulated to all the AOs on 30-04-2009 which included the AO of the assessee. In other words, the AO of the assessee had received the said information with regard to the alleged accommodation- entry providing companies. Thereafter, on 09-11-2009, the assessee furnished a reply to the questioner which had been issued on 18-02-2009. In that reply, the assessee gave details of share capital raised by the assessee. These details included the sums received from the alleged accommodationentry providers. Along with the said reply dated 09-11-2009, confirmations from the said parties were also furnished. A similar reply was again furnished on 27-11-2009. Despite the furnishing of these details, the AO, in order to further verify and confirm the said facts, issued notices u/s. 133(6) to the said companies directly, on 27-30th November 2009. All the concerned parties responded to those notices and affirmed their respective confirmations, which they had earlier provided to the AO. It is only subsequent thereto that the assessment was framed.

ii) In the backdrop of these facts, it is difficult to believe the plea taken in the purported reasons that the said information was “neither available with the Department nor did the assessee disclose the same at the time of assessment proceedings”. From the aforesaid facts it is clear that the information was available with the Department and it had been circulated to all the AOs. There is nothing to show that the AO did not receive the said information. And, there is nothing to show that the AO had not applied his mind to the information received by him. On the contrary, it is apparent because he was mindful of the said information that he issued notices u/s. 133(6) directly to the parties to confirm the factum of application of shares and the source of funds of such shares.

iii) Therefore, the very foundation of the notice u/s. 148 is not established even ex facie. Consequently, it cannot be said that the AO had the requisite belief u/s.147 and, as a consequence, the impugned notice dated 30-08-2011 and the order on objections dated 03-08-2012 are liable to be quashed.”

Reassessment: S/s. 147 and 148: A. Y. 2000-01: Notice u/s. 148 at the instance of the audit party: Not valid:

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Gujarat Fluorochemicals Ltd. vs. ACIT; 353 ITR 398 (Guj):

For the A. Y. 2000-01, the assessment was originally completed u/s. 143(3). Subsequently, a notice u/s. 148 was issued at the instance of the audit party.

The Gujarat High Court allowed the writ petition filed by the assessee challenging the validity of the notice and held as under:

“i) Though an audit objection may serve as information, on the basis of which the Income-tax Officer can act, ultimate action must depend directly and solely on the formation of belief by the Income-tax Officer on his own.

ii) It was contended on behalf of the assessee that the Assessing Officer held no independent belief that income chargeable to tax had escaped assessment. He submitted that the Assessing Officer was under compulsion by the audit party to issue for reopening of assessment though she herself held a firm belief that no income had escaped assessment. The assessing Officer in her affidavit did not deny this.

iii) In the affidavit what was vaguely stated was that the Department was apprehensive about the source of information on the basis of which such averments were made. Inter-departmental correspondence was strictly confidential. On a direction from the Court the Revenue made a candid statement that the file containing exchanges between the Assessing Officer and the audit party was not traceable.

iv) The Revenue not having either denied the clear averments of the asessee made in the petition on oath nor having produced the original files to demonstrate the independent formation of the opinion by the Assessing Officer though sufficient time was made available, the issue stood firmly concluded in favour of the assessee. The reassessment notice was not valid.”

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Income: Lottery: Sections 2(24)(ix) and 115BB : Assessee was allotted a Contessa car as the first prize under the National Savings Scheme: Not a lottery: Not income liable to tax:

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CIT vs. Dr. S. P. Suguna Seelan; 353 ITR 391 (Mad):

The assessee was allotted a Contessa car as the first prize under the National Savings Scheme. The Assessing Officer treated the prize as winnings from lotteries within the meaning of section 2(24) (ix), 1961, and subjected to the special rate u/s. 115BB. The Tribunal held that the prize won by the assessee was not covered by section 2(24)(ix) and allowed the assessee’s appeal.

On appeal by the Revenue, the Madras High Court upheld the decision of the Tribunal and held as under:

“The car won by the assessee on draw of lots under the incentive scheme of the National Savings Scheme was not a lottery and was not liable to tax.”

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Nature of Inter-State Lease Transaction vis-À-vis normal inter-state sale

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VAT

An important issue arose before the Maharashtra Sales Tax
Tribunal in respect of nature of interstate lease transaction in the case of
Thermax Babcock & Wilcox Ltd. (S.A. 1285 of 2003, dated 14-12-2009). The facts
are that M/s. RIL entered into a lease transaction for lease of boiler with M/s.
RUPL. Both parties are located in Gujarat. M/s. RUPL placed order on M/s. T of
Pune for supply of boiler component. The unloading place was RIL in Gujarat. The
period involved was 1997-98. M/s. T collected ‘C’ Form from RUPL. In the
assessment of T, tax at 4% was levied on the above supply value under the CST
Act, 1956. The appellant, M/s. T was agitating the levy of tax on the ground
that his supplies to RUPL are in the course of inter-state lease and the period
being prior to 11-5-2002, tax is not attracted. It was submitted that the lease
transactions are brought in the CST Act from 11-5-2002 and hence the levy of tax
in case of the appellant was argued to be illegal and unlawful.

Thus the issue before the Tribunal was whether the
transaction of M/s. T to supply boiler parts to M/s. RUPL, who has leased boiler
to M/s. RIL, amounts to inter-state lease transaction. The gist of arguments of
the appellant may be noted as under :

    (a) There was a tripartite agreement between the T, RUPL and RIL.

    (b) There was a lease agreement between RUPL and RIL by which the lessor, RUPL, agreed to purchase the goods (auxiliary boiler) from the appellant (M/s. T) and lease it out to RIL (lessee). The lease agreement between RUPL and RIL has identified M/s. T as a manufacturer and supplier of required goods as per the specification and design agreed upon.

    (c) RUPL has placed the purchase order pursuant to lease agreement between RUPL and RIL and accordingly the goods manufactured by the appellant (M/s. T) have been moved from Pune to Jamnagar (Gujarat). These goods were dispatched to RIL, Jamnagar A/c RUPL who was described as consignee.

    (d) When the manufacturer dispatched the goods to the consignee ‘RIL A/c RUPL’ and handed over the goods to the common carrier, according to M/s. T, the right to use the goods got transferred to the consignee, RIL.

    (e) Since these transactions involved inter-state movement from Maharashtra to Gujarat, it was an inter-state lease transaction, not liable to tax, being effected prior to the amendment in the Central Sales Tax Act, 1956 to this effect.

    (f) According to M/s. T, the facts and the ratio laid down in the case of M/s. ITC Classic Finance & Services v. Commissioner of Commercial Tax, Andhra Pradesh, (97 STC 337) are similar to those present in the case of the appellant, and therefore, prayer was made to delete the tax levied on inter-state lease transactions @ 4% against declarations in Form ‘C’, which were issued as a matter of abundant caution.

The M.S.T. Tribunal examined the above arguments in light of
legal position about inter-state sales transactions, as well as nature of the
lease transaction. Citing the judgments in the case of M/s. Magnese Ore India
Ltd. (37 STC 489) & M/s. Mohmad Sirajuddin (36 STC 136) (SC), the Tribunal
observed as under in relation to the inter-state lease transaction :

“That the following conditions must be fulfilled before the
sale can be said to take place in the course of inter-state trade;


1. There is a contract of sale, which contains a
stipulation express or implied, regarding the movement of the goods from one
state to another.

2. In pursuance of that agreement, the goods in fact move
from one state to another.

3. Ultimately a concluded sale takes place in the state
where the goods are sent, which must be different from the state from which
the goods moved.


If these conditions are complied with, then by virtue of S. 9
of the Central Act, it is the state from which the goods moved which will be
competent to levy the tax under the provision of the Central Act.”

The M.S.T. Tribunal also referred to the judgments cited by
the appellant viz. M/s. ITC Classic Finance & Services (97 STC 330) and M/s.
Srei International Finance Ltd. (16 VST 193). In this respect, the M.S.T.
Tribunal observed that in these judgments the issue was about lease charges
charged by respective parties. The Tribunal observed that in the present case,
the amount charged by the appellant is for supply of goods and not for leasing
of goods. Therefore, the M.S.T. Tribunal held that these judgments are not
applicable to the present case.

The Tribunal noted the factual position as under :

  • The appellant is a
    manufacturer and supplier of boilers and its parts.


  • It is an admitted fact
    that RUPL entered into an agreement to lease out the goods required by RIL,
    and this lease agreement was signed on 6-6-1997.


  • This lease agreement was
    between RUPL and RIL and not with the appellant M/s. T.


  • As per this lease
    agreement, the lessor (RUPL) agreed to give and the lessee (RIL) agreed to
    take on lease diverse equipment, details and aggregated amount whereof was
    specified in Schedule-I attached to that agreement on the terms and conditions
    mentioned therein.


  • As per this lease
    agreement the lessor (RUPL) agreed to transfer the right to use by way of
    lease and RIL (lessee) agreed to take on lease the equipment to be operated
    under the supervision and the technical assistance of RUPL.


  • The lease agreement has
    identified M/s. T as a vendor who was to manufacture and supply auxiliary
    boilers at particular value.

  •     The Schedule-I also referred to purchase order No. 22960-EE-MBB001-MA, dated 2nd August, 1997, which appears at Sr. No. 45 along with other vendors who were also identified as manufactures and suppliers of various parts and components for installing power plant at Jamnagar for RIL.
  •     The total value of entire lease agreement was at a much higher amount than the sale value of goods by the appellant.
  •     The Schedule 2 indicated that after the installation of power plant, RUPL was entitled to receive monthly lease at particular amount from RIL, with whom lease agreement was made.

Based on the above facts, the Tribunal held that RUPL becomes owner of goods after supply by M/s. T. RUPL has leased the goods as his goods. Therefore, the transaction by M/s. T was pure and simple normal sale for supply of goods and not a lease transaction. Accordingly, the Tribunal rejected the arguments of the appellant holding as under :

    1. The agreement between the appellant and RUPL was not a lease agreement which stipulated handing over the possession of goods for absolute use.

    2. There was an agreement which is reflected in the purchase order placed by RUPL, which proves that the agreement was for transfer of property in the goods and not transfer of right to use the goods as contemplated under the Lease Act.

    3. RUPL has to first acquire the property in goods by way of purchase from the appellant to become absolute owner of property and then only RUPL becomes legally competent to lease out this property and not otherwise. When RUPL acquired the property in goods, inter-state sale got concluded, which was effected by the appellant (M/s. T). The Tribunal observed that M/s. T has failed to establish inextricable link.

Accordingly, the M.S.T. Tribunal held that the leasing is between RUPL and RIL which is a separate transaction. The sale by M/s. T to RUPL is normal sale liable to tax and as such the Tribunal confirmed the levy of tax under the CST Act, 1956.

InterState Sale — Judicial Interpretation vis-à-vis delivery of goods

InterState Sale — Judicial Interpretation vis-à-vis delivery of goods :

    InterState sale transactions are covered by the Central Sales Tax Act, 1956 (CST Act). The nature of interState sale has been defined in Section 3 of the CST Act. In fact there are two sub-sections namely 3(a) and 3(b). Section 3(a) covers direct interState sale involving movement of goods from one State to another State. Section 3(b) covers interState sale transaction effected by transfer of documents of title to goods during the movement of goods from one State to another State. The discussion here is in respect of nature of sale covered by Section 3(a).

    Section 3(a) is reproduced below for ready reference.

    “S.3. When is a sale or purchase of goods said to take place in the course of interState trade of commerce — A sale or purchase of goods shall be deemed to take place in the course of inter-State trade or commerce if the sale or purchase occasions the movement of goods from one State to another; or …”

    Thus a sale occasioning movement of goods from one State to another State is covered by above sub-Section. However whether there is movement of goods from one State to another State, so as to be covered by Section 3(a), is required to be ascertained from facts of the case. Where the vendor dispatches the goods to the buyer in other State there is not much difficulty. However when there is no direct dispatch proof the difficulty arises. For example, a buyer from another State has taken delivery from the vendor at his premises. Whether such transactions will be interState or intra State raises an issue. Such issue has to be decided based on relevant other documents/circumstances. There are certain decisions by various forums to ascertain the correct position. Reference can be made to following few judgments for looking further into the subject.

Nivea Time (108 STC 6) (Bom.) :

    The observations of the Bombay High Court on nature of interState sale are as under :

    “8. Section 3 of the Central Sales Tax Act, 1956 lays down when a sale or purchase of goods is said to take place in the course of interState trade or commerce. It says :

    “A sale or purchase of goods shall be deemed to take place in the course of interState trade or commerce if the sale or purchase —

    (a) occasions the movement of goods from one State to another; or

    (b) is effected by a transfer of documents of title to the goods during their movement from one State to another.”

    In this case, we are concerned with sale or purchase falling under clause (a).

    9. It is well-settled by now by a catena of decisions of the Supreme Court that a sale can be said to have taken place in the course of interState trade under clause (a) of Section 3, if it can be shown that the sale has occasioned the movement of goods from one State to another. A sale in the course of interState trade has three essentials : (i) there must be a sale; (ii) the goods must actually be moved from one State to another; and (iii) the sale and movement of the goods must be part of the same transaction. The word ‘occasions’ is used as a verb and means to cause to be the immediate cause thereof. There has to be a direct nexus between the sale and the movement of the goods from one State to another. In other words, the movement should be an incident of and necessitated by the contract of sale and be interlinked with the sale of goods.”

    In this case there was no direct dispatch proof. However the buyer was from other State and goods purchased were meant for factory in other State. The Hon’ble High Court held transaction as interState sale.

English Electric Company of India Ltd. vs. Deputy Commercial Tax Officer [1976] (38 STC 475) (SC)

    In this case, the Supreme Court observed as under :

    ‘…. – If there is a conceivable link between the movement of the goods and the buyer’s contract, and if in the course of interState movement the goods move only to reach the buyer, in satisfaction of his contract of purchase and such a nexus is otherwise inexplicable, then the sale or purchase of the specific or ascertained goods ought to be deemed to have taken place in the course of interState trade or commerce as such a sale or purchase occasioned the movement of the goods from one State to another ….”

    From the above judgments it becomes clear that unless a link between dispatch and pre-existing sale is established, no interState sale can take place. The movement is to be cause and effect of such sale. In light of the above judgments for practical purposes following aspects of a transaction are looked into;

    (a) There must be pre existing sale from a buyer from other State.

    (b) The goods should be ascertained qua such pre existing sale to fulfil the requirement of such sale.

    (c) The said goods should be moved to other State. It is necessary that same goods in the same quality and the same quantity are moved to other State.

    (d) The same goods should be delivered to buyer so as to complete the interState sale.

    (e) Once the above criteria are fulfilled, then even if delivery is local, the transaction will be interState sale.

    Who moves the goods ? It is not very much important. Link between sale and movement is relevant. Therefore, even if local delivery is given but if goods are to be taken to other State by buyer it will be interState sale. However to comply with the conditions of Section 3(a), following proof should be preserved :

    a) Purchase order from the buyer stating that the goods are meant for his place in other State and he will move the goods to such place.

    b) Confirmation from the buyer that the goods are taken to such place.

If the above evidence is available it will be interState sale. However, if such evidence is lacking, then the transaction will be a local sale transaction.

Saraswathi Agencies    (21 VST 200) Mad.

In this case the link between the sale and movement was missing, though buyer was from other State. The transaction was held to be local sale. The gist of the said judgment is as under.

“In order to come under the category of interState sale, the sale should be to a purchaser outside the State and there should be movement of goods from one State to another. In case the movement of goods from one State to another was occasioned on account of the agreement entered into between the seller and the purchaser, the sale is a sale in the course of interState trade attracting the provisions of the Central Sales Tax Act, 1956. But when the actual movement of goods was at the instance of the purchaser and the part played by the dealer was: only delivery of the articles at the place of business of the dealer, it cannot be said that there was an interState sale warranting payment of Central sales tax. The dealer should have undertaken the task of supplying the articles in the business place of the purchaser in different States for the purpose of the, Central Sales Tax Act. Therefore the paramount consideration in the matter of interState sale is the contract as well as the movement of goods.

The petitioner, a dealer in electrical goods, wet grinders, pumpsets, etc., for the assessment year 1994 – 95 reported nil total and taxable turnover under the CST Act. The Assessing Officer fourtd that the sale in favour of purchasers from Kerala; Karnataka and Andhra Pradesh were not shown in the accounts. Accordingly, the assessing authority considered those sales as interState sales. The petitioner appealed before the Appellate Assistant Commissioner who confirmed the assessment. THe Appellate Tribunal was also of the opinion that the bills having been raised in the name of tli.”e consumers from other States, the transactions were interState sales liable for payment of tax under the Central Sales Tax Act. On writ petition, the Madras High Court held;

If purchasers from neighbouring States came to Chennai and made purchases from the dealer in Chennai and took articles to their home State on their own, it could not be said that there was an element of interState sale in the transaction. There was no evidence to show that the petitioner itself had dispatched the goods through lorry service to the Sta tes of Karna taka, Kerala and And hra Pradesh. No evidence was found in the assessment order to show such dispatch by the dealer. It was the consistent case of the dealer that the goods were delivered at Chennai only, though the purchasers were from the neighbouring States. There was no obligation on the part of the petitioner to transport those articles to the actual place of the purchasers. Unless and until it was proved that the products were actually delivered by the dealer in the respective States as shown in the bills, it could not be said that the transaction was an interState trade.

In the absence of any such positive material evidencing interState sale, the sales as found in the assessment order could not be termed to be sales in the course of interState trade warranting payment of tax under the Central Sales Tax Act.

Burden  of Proof:

Commissioner of Sales Tax, V.P., Lucknow  vs. Suresh  Chand Jain (70 STC 45)(SC) :

In this case the Hon’ble Supreme Court dealing with the facts given below, also dealt with issue of burden of proof. The Honble Supreme Court observed as under:

“The respondent, a dealer carrying on business in tendu leaves in U.P., had claimed from the very beginning that he had effected only local sales of the tendu leaves, that he had not effected any sales of tendu leaves in the course of inter-State trade, that he had never applied to the Forest Department for issue of form T.P. IV and no such forms were issued to him, and that the tendu leaves were never booked by him through railway or trucks for places outside U.P. The Appellate Tribunal found nothing to discredit the version of the dealer. The Tribunal had also taken notice of T.P. form IV which did not relate to sale but was a permit or certificate regarding the validity of nikasi of tendu leaves from the forest. The Tribunal accepted the claim of the dealer and held that the sales in question were not inter-State sales. On revision, the High Court found no material to interfere. On a petition for special leave filed by the Department:

The Supreme Court  dismissing the petition held that the Tribunal applied the correct principle of law, viz., that the condition precedent for imposing sales tax under the Central Sales Tax Act, 1956,was that the goods must move out of the State in pursuance of some contract entered into between the seller and the purchaser.

A sale can be said to be in the course of inter-State trade only if two conditions concur, uiz., (i) a sale of goods and (ii) a transport of those goods from one State to another. Unless both these conditions were satisfied, there could be no sale in the course of inter-State trade. There must be evidence that the transportation was occasioned by the contract and as a result goods moved out of the bargain between the parties, from one State to another.

The onus lies on the Revenue to disprove the contention of the dealer that a sale is a local sale and to show that it is an inter-State sale.”

Thus burden to prove a particular fact lies on the party who alleges otherwise. In fact there are number of rulings in relation to this issue. The above are indicative to look a little more into the subject.

Determination of value of goods and value of services — Domain of contracting parties

Trademark/Brand registered in India and nurtured and used in business in India represents property situated in India — Capital gain arising on its transfer taxable in India.

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New Page 2

11 Fosters Australia Ltd., In re


170 Taxman 341 (AAR)

S. 9(1)(i) of the Act

India-Australia Treaty

A.Y. : 2007-08. Dated : 9-5-2008

 

Issues :



l
Trademark/Brand registered in India and nurtured and used in business in India
represents property situated in India. Capital gain arising on transfer of
such property is taxable in India in the hands of non-resident transferor,
irrespective of the situs of the execution of contract and irrespective of
situs of delivery of such IPR.


l
Gain arising on transfer of technology and intellectual property in the form
of technology manuals, brewing IP, process, etc. vesting in NR transferor
abroad and delivered outside India is not taxable in India.


l
The assessee can rely on independent valuation report for determination of
that part of the composite consideration which is taxable in India.


 


Facts :

The applicant Australian Company (herein called FAL or Ausco)
was engaged in the business of brewing, processing, marketing and promoting and
selling beer products in Australia and abroad. Ausco owned various brands
including Foster’s brand and related logo which were in use in the marketing of
products. The technology and know-how, including recipe and brewing
specifications, were also owned by Ausco.

Ausco had registered its brand ‘Foster’ in India in the year
1993. Later on, some further brands were also registered in India.

Somewhere in 1997, Ausco entered into Brand Licence Agreement
with Foster India (ICO), a Group Company in India. Entire share capital of ICO
was held by companies in Mauritius which in turn were held by another group
company in Mauritius called Dismin. ICO was given an exclusive right to use
various brands of Ausco and was also given access to brewing technology and
know-how. For such licence, ICO was paying royalty after deducting suitable tax
at source.

On 4-8-2006, Ausco and Dismin entered into Sale & Purchase
(S&P) Agreement with SAB Miller Ltd., a UK Company, (herein SAB). The S&P was a
composite agreement for sale of Mauritius companies which held shares of ICO by
Dismin and sale by Ausco of trademarks, brand and assignment of contract for
grant of exclusive and perpetual licence in respect of brewing technology for
the territory of India. For all these (including for shares of ICO) items, SAB
was required to pay a sum of US $ 120 M.

In terms of the S&P Agreement, SAB UK nominated SKOL India,
subsidiary of SAB Group as the entity which purchased all the assets which were
subject matter of the S&P Agreement. The S&P Agreement was actually implemented
by execution of certain definitive agreements which included transfer of shares
by Dismin of its holding in the other Mauritius companies which held shares of
ICO. Ausco executed assignment agreement in September 2006 for transfer of
brands and trademark for use by SKOL in the territory of India. It also gave
perpetual licence for use of brewing intellectual property by delivery of
brewing manual and other related literature also for use within territory of
India. The assignment agreement was executed in Australia. It was claimed that
all deliverables in terms of the agreement were given to SKOL at Australia. A
nominal consideration of US $ 100 was stated to be the consideration of
assignment.

The applicant Ausco filed application before the AAR, seeking
advance ruling on the question whether receipt arising to it from the transfer
of its right, title and interest in and to the trademarks, brand IP and for
grant of exclusive perpetual licence of brewing technology was taxable in India.
The other related question raised before the AAR was that if the amount was held
taxable, whether the applicant was required to pay tax on the gain computed,
based on consideration as per independent valuation obtained by the applicant.

At the outset, the applicant’s counsel made it clear that
taxability of income arising from transfer of shares effected by Dismin (Mauco)
was not an issue before AAR.

 

On the aspect of non-taxability of gain arising from transfer
of brand and technology IPR, the applicant contended that these intangibles were
located at the domicile of the owner (i.e., at Australia). The applicant
relied on the terms of original brand licence agreement of 1997 signed by it
with ICO to contend that soon upon contemplated change of ICO’s ownership, the
licence agreement stood terminated. As a consequence, the assets reverted back
and were not situated in India as on the date on which
the same were transferred to SKOL. The applicant also contended that since
assets situated outside India stood transferred outside India, no part of
capital gains was chargeable to tax in India. By relying on decision of the
Supreme Court in the case of CIT v. Finlay Mills Ltd., (AIR 1951 SC 464),
it was the claim of the applicant that registration of trademark was merely for
protection of IPR and did not impact the situs or location of IPR. The assessee
also relied on AAR ruling in the case of Pfizer Corporation, in. Re
(2004) (271 ITR 101). In this case, Pfizer Corporation had granted access and
licence of technology use and trademark to another group company in India. The
licence agreement was terminated by paying compensation to ICO. After such
termination, Pfizer Corporation had transferred technology dossier to a Danish
company. The AAR had in that case accepted Pfizer’s contention that this
represented transfer of asset located outside India.



Applicability of Regulation 17(6) in processing the work items.

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Vide Circular No 10/2013 dated 8th May 2013, the Ministry of Corporate Affairs has amended the Regulation 17(6) Of Companies Regulations, 1956 which read as “the Registrar shall not keep any document pending for approval and registration or for taking on record or for rejection or otherwise for more than 120 days from date of filing excluding the cases in which an approval from the Central Government or Regional Director or Company Law Board or any other competent authority is required.”

to

“with the approval of Competent Authority, henceforth under the provisions of Regulation 17(6) of the Companies Act, 1956, ad hoc work items may be created to extend the validity of the work beyond the time limits prescribed under the Regulation by the ROC concerned.

The ROC concerned shall record the specific reasons for creating the ad-hoc item. Details of the adhoc work items, reasons for creation shall be intimated to the RD every fortnight.”

For full version of the circularhttp://www.mca.gov. in/Ministry/pdf/General_Circular_10_2013.pdf

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Proposed Accounting for Leases – Will it Impact Business Operating Models?

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On 16th May 2013, the IASB issued an exposure draft (ED) on Leases. This is the second exposure draft issued after much internal and external deliberation by the IASB.

The leases project is one of the joint projects between the FASB and IASB which has been a focus area for the boards. The ED proposes fundamental changes to the existing lease accounting and is aimed to bring most leases on balance sheet for lessees. The first exposure draft was issued in September 2010 and since then, there have been various IASB meetings and public consultations. The second exposure draft is open for comments until September 2013. It introduces a dual-model approach for lease accounting, which would have a significant impact on the classification of leases, as well as the pattern and presentation of lease expense and income.

In this article, we will discuss some of the fundamental changes that are proposed in the Leases exposure draft.

Identification of leases
The ED defines a lease as “a contract that conveys the right to use an asset (the underlying asset) for a period of time in exchange for consideration”. An entity would determine whether a contract contains or is a lease by assessing whether:

(a) fulfillment of the contract depends on the use of an identified asset; and
(b) the contract conveys the right to control the use of the identified asset for a period of time in exchange for consideration.

A contract conveys the right to control the use of an identified asset if the customer has both the ability to direct the use and receive the benefits from use of the identified asset throughout the term of This definition encompasses the embedded leases concept currently under IFRIC 4. Hence arrangements which are not structured as leases but include an identified asset where the customer can direct the use and receive benefits will be considered leases. However, the ED puts a greater focus on the customer’s ability to direct the use of the underlying asset which means that contracts in which the customer uses substantially all of the output of an asset, but does not control its operations may not fall under the lease definition.

Lease term
The determination of the lease term is based on the non-cancellable period of the lease, together with any optional renewal periods which the lessee has a significant economic incentive to exercise and periods covered by a termination option, if the lessee has a significant economic incentive not to terminate. The proposals include many factors for an entity to consider which are contract-based, asset-based, entitybased and market-based such as the amount of lease payments in the secondary period, location of the asset, financial consequences of termination, market rentals, etc for determination of the lease term. Again, there are no bright lines for the term ‘significant economic incentive’.

These proposals are a significant change as the lease term is a crucial estimate in determining the classification and accounting for the lease.

Classification – Type A and Type B leases
The ED identifies two types of leases – Type A and Type B. These are in some ways akin to current finance lease and operating lease models under IAS 17 Leases. The classification criteria would be based on the nature of the underlying asset and the extent to which the asset is consumed by the lessee over the lease term.

If the underlying asset is not property (i.e. not land and/or a building), it is classified as a Type A lease, unless the lease term is for an insignificant part of the total economic life of the underlying asset or the present value of the lease payments is insignificant relative to the fair value of the underlying asset. An underlying asset that is property (i.e. land and/or a building), is classified as a Type B lease, unless the lease term is for the major part of the remaining economic life of the underlying asset or the present value of the lease payments accounts for substantially all of the fair value of the underlying asset.

However, in all cases, if the lessee has a significant economic incentive to exercise an option within the lease to purchase the underlying asset, then the lease is classified as a Type A lease.

The terms ‘insignificant’, ‘major part’ and ‘significant economic incentive’ are not defined in the ED and there are no explicit bright lines or threshold percentages to make this assessment.

In effect, most leases other than property would be Type A leases and most leases of property would be Type B leases unless the above presumptions are rebutted.

Example
Company A enters into a 2-year lease contract for an item of equipment which has a total economic life of 10 years. The lease does not contain any renewal, purchase, or termination options. The lease payments of Rs. 1000 per year are made at the end of the period, their present value is calculated at Rs. 1,735 using a discount rate of 10%. The fair value of the equipment is Rs. 5,500 at the date of inception of the lease.

This lease would be classified as a Type A lease since it is not property and the lease term is considered more than an insignificant part of the total economic life (20%) and the present value of lease payments is more than insignificant relative to the fair value of the equipment (31.5%).

This lease would have been classified as an operating lease under the existing principles of IAS 17. However, the Type A classification will lead to much different accounting under the ED proposals.

Accounting by lessee
In a Type A lease, the lessee would recognise a lease liability, initially measured at the present value of future lease payments, and also a right-of-use (ROU) asset measured at the amount of initial measurement of lease liability plus any initial direct costs and payments made at or before the commencement date less any lease incentives received. Subsequently, the lessee would measure the lease liability at amortised cost using the effective interest rate method and the ROU asset at cost less accumulated amortisation – generally on a straightline basis. The lessee would present amortisation of the ROU asset and interest expense on the lease liability as separate expenses on the statement of profit or loss. The ROU asset will be presented under property, plant and equipment as a separate category (bifurcated further between Type A and Type B leases residual assets).

Continuing the example above, the lessee would have recognised a lease liability and a ROU asset of Rs. 1,735. In year 1, the amortisation expense would be Rs. 867 (1735/2) and interest expense of Rs. 174 (1735*10%). In year 2, the amortisation expense would be Rs. 867 and interest expense of Rs. 91 ((1735+174- 1000)*10%). The cash outflow of Rs. 1000 will be reduced from the lease liability. Thus, under the Type A model, the lessee would see a front loading of the lease expense.

In a Type B lease, the lessee would follow the approach for Type A leases for initial measurement. Subsequently, the lessee would calculate amortisation of the ROU asset as a balancing figure, such that the total lease cost would be recognised on a straight-line basis over the lease term and would be presented as total lease cost (amortisation plus interest expense) as a single line item in the income statement. Hence, considering the example above, under the Type B model, in year 1, the lessee would record a total expense of 1000 split between interest expense of Rs. 174 and ROU amortisation of Rs. 826. This will effectively result in a straight-line recognition of the lease expense over the lease period.

Accounting by lessor
In a type A lease, on commencement, the lessor would derecognise the underlying asset and recognise a lease receivable, representing its right to receive lease payments as well as a residual asset, representing its interest in the underlying asset at the end of the lease term. The total profit i.e. difference between the fair value of the asset and the carrying amount of the asset (if any) will be divided between upfront profit and unearned profit. Upfront profit will be recognised at the lease commencement and is calculated as total profit multiplied to the proportion that the present value of the lease payments divided by the fair value of the underlying asset.

The lease receivable would initially be measured at the present value of future lease payments. The lessor would measure the lease receivable at amortised cost using the effective interest rate method. In addition, the lease receivable will be tested for impairment under IAS 39 Financial Instruments: Recognition and Measurement. The lessor would also be required to re measure the lease receivable to reflect any changes to the lease payments or to the discount rate. Such re measurement may be triggered due to a change in lease term, lessee having or no longer having a significant economic incentive to exercise purchase option, etc .

The residual asset would be measured at the present value of the amount that the lessor expects to derive from the underlying asset at the end of the lease term, discounted at the rate that the lessor charges the lessee adjusted for the present value of expected variable lease payments. In the balance sheet, the residual asset is presented as net residual asset after reducing the unearned profit. Subsequently the residual asset will be accreted with interest over the lease period. Also, this residual asset is subject to impairment provisions under IAS 36.

This accounting under Type A leases for the lessor is much more complex than the existing finance lease accounting model.

Continuing the example above, consider the following additional facts: the carrying amount of the equipment in lessor’s books is Rs. 5,000 on the inception of the lease. The lessor estimates that the future value of the equipment at the end of the lease term would be Rs 4,555 (the present value using 10% discount rate would be Rs. 3,765). The following entry would be recorded in the lessor’s books at commencement:

Lease receivable Dr. 1,735
Gross residual asset Dr. 3,765*
Equipment Cr. 5,000
Unearned profit Cr. 342
(500-158)
Gain on lease of equipment Cr. 158
((5500-5000)*(1735/5500))

*Rs. 3423 (3765-342) is the net residual asset to be presented in the balance sheet.

In Year 1, lessor would receive a cash flow of Rs. 1000 of which Rs. 174 (1735*10%) would be recorded as interest income and Rs. 826 would be reduced from the lease receivable. Also, the lessor will book interest income on accretion of the residual asset Rs. 375 (3765 x10%).

For Type B leases, the lessor would follow an accounting model similar to that of an operating lease per existing IAS 17 and would continue to recognise the underlying asset in its balance sheet and recognise the lease income on a straight line basis over the lease term. However, there are proposed additional disclosures requirements for lessors’ of Type B leases compared to current GAAP.

Exemption for Short-term leases

The ED gives the option to entities to elect not to apply the new accounting model to short-term leases. A short-term lease is a lease that has a maximum possible term under the contract including any renewal options of less than 12 months and does not contain any purchase options for the lessee to buy the underlying asset. Under this option, lessees and lessors would only recognise lease expense/income on a straight line basis.

Impact

The new proposals will have a significant impact on the future of lease accounting. Entities will need to reexamine lease identification and classification as per new proposals. Moreover, recognising new assets and liabilities will impact key financial performance metrics. Management will need to make new estimates and judgments. Some of these estimates and judgments need to be reassessed at each balance sheet date giving rise to volatility in the balance sheet. The new proposals may also impact the way lease contracts are structured. This ED does not propose an effective date but it is unlikely to be effective before 1st January 2017.

Integrated Reporting

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If we think that it’s only financial reporting that has seen substantial changes in the last 5 years, initiatives around better, more effective communication about an organisation’s sustainability and value creation through corporate reporting weren’t left far behind. As accountants, our professional responsibility primarily revolves around preparation, review and analysis of financial information. The management of an entity has even greater responsibility when it comes to communicating with shareholders and other stakeholders about how they are managing the business, how they are using the resources available to them and, above all, how they are creating value not just for its shareholders but for the environment at large in which it operates.

In this direction, a major milestone was achieved in April this year. The International Integrated Reporting Council (IIRC) issued a consultation draft of the International Integrated Reporting Framework (the ‘Framework’). The IIRC is a global coalition of companies, investors, regulators, standard setters and other key stakeholders. The main aim of the IIRC is to create a globally accepted integrated reporting framework and to make integrated reporting a globally accepted corporate reporting norm.

The Integrated Reporting (or IR) Framework sets out the purpose, provides guidance and outlines how businesses can better explain how they create, sustain and increase their value in the short, medium and long term. The aim is also to enhance accountability and stewardship and support integrated thinking and decision making in the wake of increasing challenges to traditional business models.

What is IR?
IR is defined as a process that results in communication by an organisation, most visibly a periodic integrated report, about value creation over time. It aims to communicate the ‘integrated thinking’ through which management applies a collective understanding of the full complexity of value creation to investors and other stakeholders. An integrated report is a concise communication about how an organization’s strategy, governance, performance and prospects, in the context of its external environment, lead to the creation of value over the short, medium and long term. The length of these time frames will be decided by each the organisation differently with reference to its business strategy, investment cycles, and its stakeholders’ needs and expectations. Accordingly, there is no set answer for establishing the length for each term.

IR is intended to be a continuous process and to be most effective should connect with other elements of an organisation’s external communication, e.g. financial statements or sustainability report.

IIRC identifies those charged with governance as having the ultimate responsibility of the IR. On the other side, key audience is the providers of financial capital. At the same time, it is accepted that IR benefits all external parties interested in an organisation’s ability to create value over time, including employees, customers, suppliers, business partners, local communities, legislators, regulators, and policy-makers. It is important to note that the purpose of an integrated report is not to measure the value of an organisation or of all the capitals, but rather to provide information that enables the intended report users to assess the ability of the organisation to create value over time.

To lend further credibility to the IR process, organisations may seek independent, external assurance to enhance the credibility of their reports. The Framework provides reporting criteria against which organisations and assurance providers assess a report’s adherence; it does not yet provide the protocols for performing assurance engagements.

IR Framework
The purpose of the Framework is to assist organisations with the process of IR. In particular, the Framework establishes Guiding Principles and Content Elements that govern the overall content of an integrated report, helping organisations determine how best to express their unique value creation story in a meaningful and transparent way.

The Framework sets out six guiding principles to help preparers determine the structure of the integrated report.

These are:

• Strategic focus and future orientation
• Connectivity of information
• Stakeholder responsiveness
• Materiality and conciseness
• Reliability and completeness
• Consistency and comparability

An integrated report is structured by answering the following questions for each of its seven content elements:

• Organizational overview and external environment: What does the organisation do and what are the circumstances under which it operates?

• Governance: How does the organisation’s governance structure support its ability to create value in the short, medium and long term?

• Opportunities and risks: What are the specific opportunities and risks that affect the organization’s ability to create value over the short, medium and long term and how is the organization dealing with them?

• Strategy and resource allocation: Where does the organisation want to go and how does it intend to get there?

• Business model: What is the organisation’s business model and to what extent is it resilient?

• Performance: To what extent has the organisation achieved its strategic objectives and what are its outcomes in terms of effects on the capital?

• Future outlook: What challenges and uncertainties is the organisation likely to encounter in pursuing its strategy, and what are the potential implications for its business model and its future performance?

Pilot Programme

IR is a new concept and is in its formative stage. The IIRC acknowledges this fact. Accordingly, in order to construct and test its thoughts around the Framework, the IIRC began a Pilot Programme in October 2011. This programme was soon joined in by over 90 businesses and 30 investor organisations from around the globe. Some of the business network participants are Tata Steel, Kirloskar Brothers Limited, Unilever, The Coca- Cola Company, HSBC, Microsoft Corporation, and Prudential Financial among others. [Source: www.theiirc.org]. Version 1.0 of the Framework is expected to be published in December 2013, much before the end of the Programme in September 2014, thereby allowing participants time to test the Framework during their following reporting cycle. This will also enable the IIRC to assess IR outcomes and complete its work.

IR is still a voluntary initiative so why bother now?

Well, the key results of the Pilot Programme speak for themselves. 95% of participants find that integrated reporting provides a clearer view of the business model and increases board focus on the right KPIs; 93% feel it leads to the better data quality collection, greater focus on sustainability issues, development of improved cross-functional working processes and breaking down silos between teams; and 88% agreed that IR leads to improvements in business decision making.

Currently, the industry participation is led by financial services, while more than 50% of the geographical spread is accounted for by Europe as these were the worst affected during the financial crisis. Sustainability concerns may have sowed the seeds of the IR on a global scale, but the trends emerging from the Pilot Programme provide enough evidence of much wider benefits to the organisations and their stakeholders – now and in the future.

Let’s prepare for a world of valued corporate reporting!

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GAP in GAAP – Accounting for Associates

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Background: An entity is an investor in an associate in accordance with AS 23 Accounting for Investments in Associates in Consolidated Financial Statements. The investor accounts for its interest in the associate using the equity method in AS 23. The investor enters into a lease agreement with the associate, classified as a finance lease under AS 19 Leases. The gain on the lease transaction exceeds the carrying amount of the investor’s investment in the associate.

The author notes two views for the accounting for the gain elimination:

View A: The gain from the transaction is eliminated only to the extent that it does not exceed the carrying amount of the investor’s interest in the associate. This view is by analogy to AS 23.18 where an entity’s share of losses of an associate ceases to be recognised when the investment carrying amount is reduced to zero. Paragraph 18 of AS 23 states “If, under the equity method, an investor’s share of losses of an associate equals or exceeds the carrying amount of the investment, the investor ordinarily discontinues recognising the share of further losses and the investment is reported at nil value.”

View B: All the investor’s share of the gain is eliminated. This view is supported by AS 23.13, which states that gains/losses from transactions are recognised only to the extent of the unrelated investors’ interests in the associate. Paragraph 13 states “In using equity method for accounting for investment in an associate, unrealised profits and losses resulting from transactions between the investor and the associate should be eliminated to the extent of the investor’s interest in the associate.”

Author supports View B. The second question therefore is – how should the gains to be eliminated, in excess of the carrying amount of the interest in the associate? Two methods are identified:

Method 1: As deferred income

Method 2: As a deduction from the related asset recognised by the investor.

Author supports Method 1, because ‘deferred income’ shows the nature of the eliminated gains and it would enable users to readily obtain information about the amount of eliminated gains in excess of the investors interest in the associate.

Author’s Recommendation: Author considers that AS 23 lacks guidance on the accounting for the elimination of any gain in excess of the carrying amount of the investment. The Institute of Chartered Accountants of India may consider amending AS 23 via a narrow-scope amendment to add specific guidance on how to account for the corresponding entry for the eliminated gain in excess of the carrying amount of the investor’s interest in the associate.

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TS-187-ITAT-2013(Del) Convergys Customer Management Group Inc. vs. ADIT A.Ys: 2006-07 & 2008-09, Dated: 10.05.2013

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India-US DTAA – Frequent visits of employees of FCo to premises of Indian subsidiary (IndCo), their having a “fixed place” at their disposal and their occupying key positions in IndCo constituted PE of FCo in India, which was practically the projection of FCo’s business in India. On facts, profit to be attributed to Indian PE was to be calculated based on formulary apportionment.

Facts:
Convergys Customer Management Group Inc (FCo) provides information technology (IT) enabled customer management services by utilising its advanced information system capabilities, human resource management skills and industry experience. FCo has a subsidiary in India, IndCo, which provides IT-enabled call centre/back office support services to FCo on a principal-to-principal basis.
FCo claimed that it procured from ICo services on a principal-to-principal basis and FCo’s business was not carried out in India. Furthermore, substantial risks of business such as market, price, R&D, service liability risks etc., vested with FCo outside India. Additionally, there was no tax liability as procurement of services was akin to purchasing goods/merchandise and, accordingly, the benefit of the PE exclusion for purchase/preparatory or auxiliary function should also be available.
The Tax Authority alleged that FCo, in its activities in India through its employees and subsidiary, satisfied the requirement of a fixed place, services and also a Dependant Agent PE (DAPE) in India. For the purposes of attributing profits, the Tax Authority recomputed the taxable income by allocating global revenue in proportion to the number of employees. On appeal, CIT(A) agreed with the Tax Authority that a fixed place PE was constituted. On attribution of profits, the CIT(A) however held that no further profits can be attributed to FCo’s PE as the transfer pricing (TP) study of IndCo supported that ICo was remunerated at ALP.
Both FCo and the Tax Authority appealed before the Tribunal.

Held:
On existence of a PE

Considering the entirety of facts, the view of CIT(A) on fixed place PE was upheld for the following reasons:
FCo’s employees frequently visited the premises of IndCo to provide supervision, direction and control over the business operations of IndCo. Accordingly, such employees had a “fixed place” at their disposal. IndCo was practically the projection of FCo’s business in India and IndCo carried out its business under the control and guidance of FCo, without assuming any significant risk in relation to such functions. FCo has also provided certain assets/software on “free of cost” basis to IndCo.

On attribution of profits
An overall attribution of profits to the PE is a TP issue and no further profits can be attributed once an arm’s length price has been determined for IndCo, as TP analysis subsumes the risk profile of the alleged PE. Thus, there can however be further attribution if it is found that PE has risk profile which is not captured in IndCo TP analysis.

The correct approach thereafter to arrive at the profits attributable to the PE is to compute global operating income percentage of a particular line of business as per annual report of FCo and applying such percentage to the end customer revenue with regard to contracts/projects, where services are procured from IndCo. The amount arrived at is the operating income from Indian operations and such operating income is to be reduced by the profit before tax of IndCo. This residual profit which represents income of FCo is to be apportioned to the US and India. Profit attributable to the PE should be estimated on residual profits.

levitra

“Other Income” – Article 21- Whether Items of Income Not Taxable Under Other Articles (6 to 20) of a Tax Treaty would be Assessable Under “Other Income” Article?

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1. Background

1.1 Quite often, an item of income may not be taxed under Articles 6 to 20 of a Tax Treaty due to application of distributive rules agreed between the two Contracting States. For example, an item of income may not be taxable as “Business Profits” under Article 7 or as “Shipping or Aircraft Profits” under Article 8 or as “Fees for Technical Services” (FTS) under Article 12 of a Tax treaty either because the income does not satisfy the definition of FTS as contained in that Treaty or it does not satisfy other conditionalities stipulated in Article 12 e.g., it may not meet the test of “make available concept” embedded in a particular treaty. The item of income may also not be taxable due to various exclusions/exemptions contained in the respective Articles. Similarly, an item of Business Income may not be taxable in the Source Country (say, India) under Article 7 of the applicable Tax treaty, as the Non-Resident (NR) Assessee does not have a Permanent Establishment (PE) in India as defined in Article 5 of the Tax Treaty. In such cases, a question arises whether such an item of income would be assessable to tax as “Other Income” under Article 21 (or the corresponding Article of the applicable Tax Treaty.)

1.2 In such cases, the Tax Department argues that even if the income of a NR is not taxable in India under Article 7 as business profits or under Article 12 as fees for technical services, such income is still taxable in India as ‘Other Income’ under Article 21.

1.3 The Department’s interpretation of the scope of Article 21 is that when taxability fails under all articles of the applicable tax treaty, the taxability automatically arises under this article. In other words, for example, when a business profit is not taxable under Article 7, it is taxable under Article 21 which in turn gives right to the Source State to tax it as per its domestic tax laws.

In this article, we shall examine the limited aspect of the scope of Article 21 and the judicial interpretation thereof. We shall focus on the applicability of article 21 on “Other Income” vis-à-vis income dealt with by other articles of a tax treaty.

2. Text of “Other Income” – Article 21 of OECD MC

“21(1): Items of Income of a Resident of a Contracting State, wherever arising, not dealt with in the foregoing articles of this Convention shall be taxable only in that State.”

Paragraph 2 is not reproduced, as it is not relevant for the purpose of our discussion. Paragraph 1 of Article 21 of UN Model Convention is identical to that Article 21(1) of OECD MC.

The dispute centers around the correct interpretation of the words “not dealt with” contained in Para 1 of Article 21, as reproduced above.

3. Essar Oil Ltd. vs DCIT 2005-TII-24-ITAT-MUMINTL

The controversy was analyzed and discussed at length in this case in the context of Article 8 of India-Singapore DTAA.

3.1 Facts of the Case: The assessee, a resident company had taken a tanker on voyage charter basis from a non-resident company (HMPL) based in Singapore for transportation of petroleum products from the port of Chennai to the port of Hazira, both in India. The AO held that the assessee had defaulted in not deducting TDS while making payment since it did not operate in international waters and had a PE in India and so protection under Article 8 would not be available. Also, section 44B would be applicable in case of the non-resident company. The same was upheld by the CIT(A).

3.2 Decision: After elaborate discussion, the Tribunal decided the issue in favour of the assessee, by observing as follows:

“38. We do not also agree with the argument of the revenue that income of HMPL is straight away covered by article 23 of Singapore DTAA. Article 23 of Singapore DTAA deals with income not expressly mentioned elsewhere in the DTAA. It deals with items of income which are not expressly mentioned in the foregoing articles of the said agreement may be taxed in accordance with the taxation laws of the Contracting States.

39. Prof. Klaus Vogel, the authority on the subject, has again held that the application of the residuary provision in article 23 is very narrow and it is generally applied to such residual receipts or income such as social insurance, annuity arising out of previous contributions, maintenance payments to relatives, accident benefit payments, income from so-called derivatives, lottery winnings and income from gambling, etc. Article 23 does not cover income arising out of business. In the present case, the income earned by M/s. HMPL is income earned out of business. Income earned by an assessee out of shipping operations is invariably business income which is recognised by the provisions of Indian Income-tax Act itself. Even according to the assessing authority, if the assessee falls under article 23 of the Singapore DTAA, the assessee is governed by provisions of section 44B of the Incometax Act, 1961. The heading given to section 44B is – “Special provision for computing profits and gains of shipping business in the case of non-residents”. The Act itself provides that income earned out of shipping business by a non-resident is to be considered as profits and gains and it is for that reason the taxability of such profit has been brought u/s. 44B which is brought under Part D of Chapter IV of the Income-tax Act, 1961. Part D deals with computation of income under the head ‘Profits and gains of business or profession’ in sections 28 to 44DA. The income attributable to operations carried out by M/s. HMPL is nothing but germane to the regular business of shipping carried on by it. Therefore, by the basic concept of Indian income taxation itself is that such income is ‘income from business’. (Emphasis supplied)

4 0. ….

41. Even if, for the sake of arguments one holds that the case is not covered by article 8 of Singapore DTAA, still it does not preclude the assessee to claim the immunity under article 7. The income attributable to the Singapore shipping company is business profit and de hors article 8, the case is still coming under article 7 of the DTAA which deals with the taxability of business profit. Article 8 is a specific provision over and above the general provision of business profits provided in article 7. If the case of the assessee does not fall under the specific provision of article 8, still, the assessee could not be deprived of the benefit already available to it under the general provisions of article 7. Only for the reason that the assessee does not come under article 8, the assessee could not be placed under a lesser advantage than article 7. ………..Article 8 provides for a specific benefit carved out of the general benefit given in article 7. Therefore, if the special benefit of article 8 is not available, let the matter be closed there. One cannot go further and cannot say that the assessee is not even entitled for the benefit of article 7.

42. Therefore, we hold that the profit attributable to M/s. HMPL was in the nature of business income and business income is covered by article 7 of DTAA even if the assessee is driven out of article 8.”

4. DCIT vs. Andaman Sea Food Pvt. Ltd. 2012-TII- 67-ITAT-KOL-INTL

The controversy was again analyzed and discussed at length in this case in the context of Article 23 of India-Singapore DTAA.

4.1 Facts of the Case: In this case, the assessee did not deduct tax at source from Consultancy Charges to the Singapore based NR. The CIT(A) held that the consultancy fees paid by the assessee to the NR was not covered by the scope of the expression ‘fees for technical services’ under Article 12 of the DTAA; that since the NR did not have any PE in India, the income of the assessee was also not taxable as ‘business profits’ in India. The Tax Department argued that even if the income was not taxable in India under Article 7 as business profits or under Article 12 as fees for technical services, still the amounts were taxable as other income under Article 23 of India-Singapore DTAA.

4.2 Decision: After elaborate discussion, the Tribunal decided the issue in favour of the assessee, as follows:

a)    With regard to the Department’s Contention that the amount paid to the Non-resident fell within the category of the “other sum”, the Tribunal noted that “the CIT(A) had stated that “Section 40(a)(i) of the Income-tax Act provides that in computing income of an assessee under the head ‘profits and gains of business’, deduction will not be allowed for any expenditure being royalty, fees for technical services and other sum chargeable under the Act, if it is payable outside India, or in India to a non resident, and on which tax is deductible at source under Chapter XVII B and such tax has not been deducted”, and it was in this context that the CIT(A) noted that though the fee paid was not covered by fees for technical services, it could fall under the head ‘other sum’ but since the said other sum was not chargeable to tax in India, the assessee did not have any tax withholding obligation. This classification of income was not in the context of treaty classification but in the context of, what he believed to be, two categories of income referred to under section 40(a)(i), i.e. ‘royalties and fees for technical services’ and ‘other sums chargeable to tax’……………… What is material is that the expression ‘other income’ was used in the context of mandate of Section 40(a)(i) and not in the context of treaty classification of income.” (Emphasis Supplied).

b)    With regard to the Department’s argument that “consultancy charges, brokerage, com-mission, and incomes of like nature which are covered by the expression “other sums” as stated in Section 40(a)(i) and chargeable to tax in India as per the Income Tax Act, and also are squarely covered by Article 23 of the India Singapore tax treaty, the Tribunal observed that “This argument proceeds on the fallacious assumption that ‘other sums’ u/s. 40(a)(i) constitutes an income which is not chargeable under the specific provisions of different articles of India Singapore tax treaty, whereas not only this expression ‘other income’ is to be read in conjunction with the words immediately following the expression ‘chargeable under the provisions of this (i.e. the Income-tax Act 1961) Act’, it is important to bear in mind that this expression, i.e. ‘other sums, also covers all types of incomes other than (a) interest, and (ii) royalties and fees for technical services. Even business profits are covered by the expression ‘other sums chargeable under the provisions of the Act’ so far as the provisions of section 40(a)(i) and section 195 are concerned and, therefore, going by this logic, even a business income, when not taxable under article 7, can always be taxed under article 23. That is clearly an absurd result.”

c)    The Tribunal further observed that “A tax treaty assigns taxing rights of various types of income to the source state upon fulfill-ment of conditions laid down in respective clauses of the treaty. When these conditions are satisfied, the source state gets the right to tax the same, but when those conditions are not satisfied, the source state does not have the taxing right in respect of the said income. When a tax treaty does not assign taxation rights of a particular kind of income to the source state under the treaty provision dealing with that particular kind of income, such taxability cannot also be invoked under the residuary provisions of Article 23 either. The interpretation canvassed by the learned Departmental Representative, if accepted, will render allocation of taxing rights under a treaty redundant. In any case, to suggest that consultancy charges, brokerage and commission can be taxed under article 23, as has been suggested by the learned Departmental Representative, overlooks the fact that these incomes can indeed be taxed under article 7, article 12 or article 14 when conditions laid down in the respective articles are satisfied.” (Emphasis Supplied)

d)    The Tribunal held that “It is also important to bear in mind the fact that article 23 begins with the words ‘items of income not expressly covered’ by provisions of Articles 6-22. There-fore, it is not the fact of taxability under articles 6-22 which leads to taxability under article 23, but the fact of income of that nature not being covered by articles 6-22 which can lead to taxability under article 23. There could be many such items of income which are not covered by these specific treaty provisions, such as alimony, lottery income, gambling income, rent paid by resident of a contracting state for the use of an immovable property in a third state, and damages (other than for loss of income covered by articles 6-22) etc. In our humble understanding, therefore, article 23 does not apply to items of income which can be classified under sections 6-22 whether or not taxable under these articles, and the income from consultancy charges is covered by Article 7, Article 12 or Article 14 when conditions laid down therein are satisfied. Learned Departmental Representative’s argument, emphatic and enthusiastic as it was, lacks legally sustainable merits and is contrary to the scheme of the tax treaty.” (Emphasis Supplied).

e)    The Tribunal referred to and relied upon certain observations of the AAR in the case of Gearbulk AG – 318 ITR 66 (AAR) (2009-TII-09-ARA-INTL), discussed below.

5.    ADIT vs. Mediterranean Shipping Co., S.A. [2012] 27 taxmann.com 77:

5.1  Facts of the case:

•    Assessee was a Swiss company engaged in the business of operations of ships in the international waters through chartered ships. During the A.Y. 2003-04, the assessee had total collection of freight to the tune of Rs. 295.63 crore on which a sum of Rs. 9.33 crore was paid towards the tax liability. In its return of income, however, the assessee declared ‘nil’ income on the ground that there was no article in the Indo-Swiss treaty dealing specifically with taxability of shipping profit; that article 7 of the treaty, dealing with the business profits, specifically excluded profits from the operation of ships in international traffic; that article 22 of the treaty, dealing with other income, subjected shipping profits to tax only in the State of residence, i.e., the Switzerland. Accordingly, the stand of the assessee was that the international shipping profits was not taxable in India and the entire tax of Rs. 9.33 crore paid was liable to be refunded.

•    The Assessing Officer, however, rejected the stand of the assessee relying upon the CBDT Circular No. 333, dated 02-04-1982 whereby it was clarified that where there is no specific provision in the agreement, it is the basic law, i.e., the Indian Income-tax Act which will govern the taxation of the income. Accordingly, the shipping profits of the assessee were held taxable under section 44B of the Income-tax Act at the rate of 7.5 per cent of the total freight collection of Rs. 295.63 crore.

•    On appeal by the assessee, the Commissioner (Appeals) upheld the claim of the assessee that article 22 applied to the profits earned from shipping business in question. The Commissioner (Appeals), however, proceeded to determine as to whether the case of the assessee was covered under article 22(2), which provides for an exception to the applicability of article 22. Under sub- article (2) of article 22 it is provided, inter alia, that provisions of article 22(1) shall not apply to income if the recipient of such income, being a resident of contracting state, carries on business in the other contracting State through a PE therein and the right or property in respect of which income is paid is effectively connected with such PE. After referring to the relevant clauses of the agreement of assessee with MSC, the Commissioner (Appeals) held MSC to be assessee’s PE in India.

•    After holding MSC to be assessee’s PE in India, the Commissioner (Appeals) proceeded to examine as to whether the shipping prof-its derived from operation of ships were effectively connected with said PE; and held that they were not. Accordingly, the Commissioner (Appeals) held that article 22(1) was applicable in the case of the assessee and, therefore, the profits from shipping business was taxable in Switzerland and not in India.

5.2 Decision:

The Tribunal decided the issue in favor of the assessee. The Tribunal observed and held as under:

“A reading of article 22 especially paragraph 1 thereof makes it clear that the items of income of a resident of a contracting State, i.e., Switzerland which are not dealt with in the foregoing articles of the Indo-Swiss treaty shall be taxable only that State. In the instant case, the assessee company being a resident of Switzerland, the income, wherever arising, would fall within the scope of the residuary article 22 if the same is not dealt with in any other articles of the treaty.

The question, therefore, is whether the shipping profits are dealt with in any other articles of the Indo-Swiss treaty or not. The contention raised by the revenue is that by agreeing to exclude the shipping profits from article 8 as well as article 7 of the Indo-Swiss treaty, India and Switzerland had agreed to leave the shipping profits to be taxed by each State according to its domestic law and this undisputed position prevailing up to 2001 did not change as a result of introduction of article 22 of the treaty with effect from 01-04-2001. The contention cannot be agreed with. It is held that as a result of introduction of article 22, the items of income not dealt with in the other articles of the Indo-Swiss treaty are covered in the residuary article 22 and their taxability is governed by the said article with effect from 01-04-2001. Articles 7 and 8 of the treaty, therefore, cannot be relied upon to say that by agreeing to exclude the shipping profits from said articles, the shipping profits are left to be taxed by each contracting State according to its domestic law. It is no doubt true that this was the position prior to introduction of article 22 in the Indo-Swiss treaty in the year 2001 but the same was altered as a result of introduction of the said article inasmuch as it become necessary to find out as to whether shipping profits have been dealt with in any other article of the treaty. Mere exclusion of shipping profits from the scope of treaty could have resulted in leaving the same to be taxed by the concerned contracting State according to its domestic law prior to introduction of article 22. However, such exclusion alone will not take it out of the scope of article 22 unless it is established that the shipping profits have been dealt within any other article of the treaty. The language of article 22(1) in this regard is plain and simple and the requirement for application of the said article is explicitly clear. [Para 33]

In order to say that a particular item of income has been dealt with, it is necessary that the relevant article must state whether Switzerland or India or both have a right to tax such item of income. Vesting of such jurisdiction must positively and explicitly stated and it cannot be inferred by implication as sought to be contended by the revenue relying upon articles 7 and 8 of the treaty. The mere exclusion of international shipping profit from article 7 can-not be regarded as an item of income dealt with by the said article as envisaged in article 22(1). The expression ‘dealt with’ contemplates a positive action and such positive action in the instant context would be when there is an article categorically stating the source of country or the country of residence or both have a right to tax that item of income. The fact that the expression used in article 22(1) of the Indo-Swiss treaty is ‘dealt with’ vis-a-vis the expression ‘mentioned’ used in some other treaties clearly demonstrates that the expression ‘dealt with’ is some thing more than a mere mention of such income in the article. The international shipping profits can at the most be said to have mentioned in article 7 but the same cannot be said to have been dealt with in the said article. [Para 35]

Up to assessment year 2001-02, international ship-ping profits no doubt were being taxed under the domestic laws as per the provisions of section 44B. However, it was not because of the exclusion contained in Article 7 that India was vested with the authority to tax such international shipping profit but it was because there was no other article in the Indo-Swiss treaty dealing with international shipping profits which could override the provisions of section 44B in terms of section 90(2) being more beneficial to the assessee. This position, however, has changed as a result of introduction of article 22 in the Indo-Swiss treaty which now governs the international shipping profits not being dealt with specifically by any other article of the treaty and if the provisions of article 22 are beneficial to the assessee, the same are bound to prevail over the provisions of section 44B. [Para 41]

It is held that the item of income in question, i.e., international shipping profit cannot be said to be dealt with in any other articles of the Indo- Swiss treaty and the taxability of the said income, thus, is governed by residuary article 22 introduced in the treaty with effect from 01-04-2002. [Para 48]”

We may mention that Article 8 of the Indo-Swiss DTAA has been amended vide Notification dated 27-12-2011 to include Shipping Profits within its scope and accordingly, the controversy no longer survives.

6.    AAR Ruling in the case of Gearbulk AG – 318 ITR 66 (AAR) (2009-TII-09-ARA-INTL)

6.1 Similar issue arose in the case of Gearbulk AG, a Shipping Company, in the context of India-Switzerland DTAA. In this case, the Applicant, a Swiss Company, had income from Shipping Business. At the relevant point in time, Article 8 of India-Switzerland DTAA dealt with only profits from the operation of Aircraft and did not deal with profits from Operation of Ships. The issue before the AAR was whether tax-ability of such Shipping Profits was governed by Article 7 of India – Swiss DTAA or whether the same was taxable in India in terms of “Other Income” – Article 22 of the Treaty.

6.2 After discussing the meaning of the expression ‘deal with’ as given in various dictionaries, the AAR held in favor of the revenue. The AAR held that the Freight Income received by the Applicant is liable to be taxed in India under the provisions of the Income-tax Act and that such income is not covered by he provisions of Indo-Swiss DTAA.

7.    ACIT vs. Viceroy Hotels Ltd. Hyderabad 2011-TII-97-ITAT-HYD-INTL

7.1 In this case, the assessee, engaged in the business of running a Five Star Hotel by the name of “VICEROY”, was being converted into Marriott Chain Hotel under the franchisee granted by the International Licensing Company SARL (Marriott USA). To meet the standard for Marriott Group, the assessee embarked upon an expansion programme by way of adding new blocks in the hotel and also upgradation by way of bringing about interior and exterior changes, landscaping etc. For this purpose the assessee entered into four separate and independent agreements with one Anthony Corbett & As-sociates of UK; Marriott International Design &    Constructions of USA; Bensly Design Group International Construction Company Ltd., Thailand and Lim Hong Lian of Singapore.

7.2 With regard to payment of landscape architectural consultancy services to a Thai Company, the issue arose whether in the absence of an Article relating to fee for technical services in the India-Thailand DTAA, services of landscape architectural consultancy can be taxed under the residuary Article 22 of the DTAA.

7.3 With regard to non deduction of tax at source on the amount paid to M/s. Bensly Design, Thailand which is engaged in the business of landscape architectural consultancy, the lower authorities were of the opinion that though the DTAA does not clearly spell out the taxation of fees for technical services, the amount paid by the assessee to M/s Bensly group would fall within the purview of article 22 of the Agreement which is residuary clause dealing with other income not expressly dealt in other articles of DTAA.

7.4 According to lower authorities, the services rendered by Bensly group do not constitute professional or independent personal services under article 14 of the DTAA between India and Kingdom of Thailand. Without prejudice to this, the A.O. observed that even if the payments made to the NR is treated as fees for professional services or independent activities within the meaning of article 14 of the DTAA, then also such fees can be taxed under the IT Act. It is because, the exemption provided under article 14 is available only to such payments that are not borne by an enterprise or a PE situated in India. In the present case, the payment has been made by an enterprise situated in India and accordingly, the non-resident company is not entitled to claim any exemption on the strength of Article 14 of the DTAA.

7.5 The A.O. also stated that the instruction con-tained in CBDT circular No. 333 (F.506/42/81-FTD) dated 02-04-1982 is in effect complementary to Article 22 of the DTAA which provide that where there is no specific provision under the DTAA, it is the basic law which will govern the taxation of the income of the non-resident. Following the aforesaid stand, the A.O. invoked provision of section 9(1) r.w.s. 115A(1)(b)(B) of the IT Act and treated the entire fees as income chargeable to tax in India since all the expenses of the NR were reimbursed by the assessee deductor. The A.O. further stated that the agreement under which the technical services are rendered is neither approved by the central govt. nor does it relate to a matter included in the industrial policy and hence the deductor should have deducted tax at source at the rate of 40% plus surcharge as prescribed in the relevant Finance Act for any other income arising to a non resident company in India and since the deductor had failed to discharge its statutory obligation, the assessee was treated as an assessee in default.

7.6 According to the assessee, as there is no PE for M/s Bensly Design, Thailand in India, and no foreign employee stayed in India for more than 90 days, the CIT (A) should have exempted the business profit of the company from taxation in India. Under Article 7 of the DTAA income earned by a NR in India under the head business, can be taxed in India only if the NR has a PE in India. If the business is carried on through employees and if those employees stay in India for less than 183 days in the case of Thailand, there will be no PE in India and the corresponding business profit of the NR becomes non taxable. According to the assessee, as per Indo-Thai DTAA, there is no article in the relevant DTAA dealing with fees for technical services, there is only an article dealing with royalties, and of course, there is an article dealing with business profits. The A.O. wrongly applied the residuary Article 22 and taxed the income arising in India for the Thai company at the rate of 40%.

7.7 The Tribunal negatived the contentions of the Tax Department and held, “The fees paid to M/s Bensly Design, Thailand for rendering services of landscape architectural consultancy is not covered as per the DTAA since there is no article in the relevant DTAA dealing with this nature of payments. There is only one article dealing with Royalties and another dealing with business profit. Under Article 7 of the DTAA, income earned by a non resident in India under the head ‘business’ can be taxed in India only if the non-resident has a permanent establishment in India. In this case, the business was carried on through employees and there is no record that these employees stayed in India for more than 183 days. Accordingly there is no PE in India and corresponding business profit of non-resident cannot be taxed in India and provision of section 195 is not applicable.”

8.    Credit Suisse (Singapore) Ltd. vs. ADIT – 2012-TII-214-ITAT-MUM-INTL

8.1 In this case, the assessee company incorporated in Singapore and a tax resident there was registered with SEBI as a sub-account of Credit Suisse. The assessee had inter alia, conducted portfolio investments in Indian securities. The assessee had shown net short-term capital loss from sale of shares and sale of shares underlying FCCBs besides gains from exchange traded derivative contracts. The net resultant gains were claimed as exempt under Article 13(4) of the tax treaty. The dividend income was also claimed as exempt u/s. 10(34).

8.2 The assessee also claimed that gains made by it from cancellation of forward contracts were not chargeable to tax. The assessee claimed that the foreign exchange forward contracts were entered to hedge its exposures in respect of its Indian Investments being shares/exchange traded derivative contracts; that being an FII sub-account, in view of the provisions of Section 115AD, wherein the transactions in underlying assets against which the foreign exchange forward cover contracts were entered into, were taxed as ‘capital gains’, the foreign exchange forward cover contracts also took on the color of their underlying assets, being capital assets. Consequently, the gains realised from cancellation of such forward cover contracts had to be regarded as capital gains, which were not liable to tax in India as per Article 13(4) of the tax treaty. It was claimed that although these gains could be taxed as business profits since the assessee did not have a PE in India, the same could not be taxed in India.

The AO rejected the assessee’s explanation and held that the transaction in forward purchase of foreign exchange and settlement could not be said to be resulting in capital gains as the same was never held by the assessee as capital asset but was meant to be settled by price difference. Also, as the assessee was not eligible to carry on business in India as per SEBI regulations, the income arising from settlement of forward contracts could not be treated as business income. Thus, the AO held that the assessee’s income from cancellation of foreign exchange forward contracts was neither capital gains income nor business income but ‘income from other sources’ under Article 23 of the tax treaty. However, the Tribunal, relying on the decisions in the case of Citicorp Investment Bank (Singapore) Ltd. vs. Dy. Director of Income Tax (International Taxation)(2012-TII-86-ITAT-MUM-INTL) and Citicorp Banking Corporation, Bahrain vs. Addl. Director of Income Tax (International Taxation) (2011-TII-40- ITAT-MUM-INTL), held that gains arising from early settlement of forward foreign exchange contract has to be treated as capital gain and that the A.O. and the DRP were not justified in treating the said gain as ‘income from other sources’.

8.3 We may mention that the Tribunal, while deciding the issue in favour of the assessee, did not discuss the controversy of application of Article 23 vis-à-vis application of Article 7 or Article 13 of India – Singapore DTAA.

9.    Lanka Hydraulic Institute Ltd (2011-TII-09-ARA-INTL)

9.1 In this case, the applicant, a Tax Resident of Sri Lanka, had sought an advance ruling from the Authority on the taxability of the payment received under its contract with WAPCOS and in the absence of a specific article for the taxation of fees for technical services, in the India-Sri Lanka DTAA, whether this payment would be governed by Article 7 of the tax treaty which dealt with taxation of business profits.

9.2 The AAR held, without much discussion and reasoning, as follows:

“It is true that the treaty does not contain a specific article for the taxation of fees for technical services. In that event reference is to be made to Article 22 of the Tax Treaty which reads as follows:

‘Item of income of a resident of a Contract-ing State which are not expressly mentioned in the foregoing Article of this Agreement in respect of which he is subject to tax in that state shall be taxable only in that state.’

Accordingly, the fees for technical services shall be governed by Article 22 of the Tax Treaty and not as per Article 7 of the Tax Treaty which deals with taxation of business profits.”

We may mention that, effectively the Ruling was in favor of the Sri Lankan Applicant since Indo-Sri Lankan DTAA provides that income falling under the scope of Article 22 shall be taxable only in the state of the Resident i.e. in Sri Lanka. However, since the income in question was essentially in the nature of Business Profits, in our humble opinion, in the absence of FTS Article in Indo-Sri Lankan DTAA, such income should be taxable in accordance with provisions of Article 7 and not in accordance with provisions of Article 22 of the DTAA. Thus, in principle, we are not in agreement with the aforesaid AAR Ruling.

9.3 Following its Ruling in the case of Lanka Hydraulic Institute Ltd (2011-TII-09-ARA-INTL), similar view was taken by the AAR in case of XYZ (AAR Nos. 886 to 911, 913 to 924, 927, 929 and 930 of 2010)(2012) 20 taxmann.com 88 (AAR); and held that in absence of FTS Article, services would get covered by “Other Income” Article. In this case the income was in the nature of inspection, verification, testing and certification services (IVTC).

In our humble opinion, both the AAR Rulings mentioned herein above are not in accordance with Principles of Interpretation of Tax Treaties and require reconsideration.

10.    Conclusion

In some Indian DTAAs, under Article 21 exclusive right of taxation is given to source state like Brazil, United Mexican States, Namibia and South Africa. In few Indian DTAAs, Right of taxation is in accordance with laws of the respective Contracting States/both the contracting states like in case of Singapore and Italy. India’s DTAAs with Greece, Netherlands and Libya does not contain ‘Other Income’ Article. In many other Indian DTAAs, Primary right of taxation to ‘State of Residence’ and Correlative right to the ‘State of Source’. In such cases, issue regarding applicability of Article 7 instead of Article 21, is of great relevance.

The issue is yet to be tested before the higher judiciary. However, in our humble view, the analysis and reasoning advanced by the Tribunal in the case of DCIT vs. Andaman Sea Food Pvt. Ltd appears to be very sound and in accordance with well accepted principles of Interpretation of Tax Treaties and is worth following.

Order No.A/700-703/13/ (STB/C-I dated 15/03/2013) Commissioner of Service tax, Mumbai vs. TCS.E-Serve Ltd.

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Whether service tax is payable under reverse charge on the amount paid for using international private leased circuit provided from abroad?

Facts:
Appellant provided call centre services, computerised data processing services etc. to customers in India and abroad and accordingly was registered under Business Auxiliary Services and Business Support Services. Appellant used international private leased circuit service provided by a Singapore company and as such paid charges to the foreign company. The dispute related to whether service tax was payable u/s. 66A for availing the said lease circuit/telecommunication service from abroad. The Appellant contested the levy on the ground that the service provider was not a “telegraph authority” as per definition of the term contained in section 65(111) and thus did not provide taxable service for the provisions relating to telecommunication service. Further, CBEC vide its circular 137/21/2011 dated 15-07-2011 clarified to the effect that foreign vendors being not licensed under Indian Telegraph Act were not covered by section 65(109a). Appellant placed reliance on Karvy Consultants Ltd. 2006 (1) STR 7 (AP) which dealt with a similar situation in the context of banking and other financial service. It was contended that under GST Act of Singapore, telecommunication service including international leased circuit line or network, if provided from a place in Singapore to a place outside Singapore, was treated as a taxable supply but qualified for zero rating. Hence, the same could not be subjected to tax in India. The revenue strongly contended that the service in question was specified in section 65(105) and the provider of service was licensed to provide such service under the Singapore Telecommunication Act. Further, section 66A created a deeming fiction and thus, the foreign service provider not being a telegraph authority should not come in the way of enforcing the said section. The circular/letter referred above being internal correspondence between the Board and the field formation would not have any binding force and reliance was placed by the revenue on Unitech Ltd. 2008 (12) STR 752 wherein on architect’s service received from a commercial concern abroad, reverse charge applicability was upheld.

Held:
Service tax was leviable u/s. 66 of the Act on taxable services referred to in section 65(105). Consequently, service tax was leviable u/s. 66A only in case of taxable services as covered by section 65(105). Thus, if a service was not covered by section 65(105), it could neither be liable u/s. 66 nor u/s. 66A. Thus for a leased circuit service to be taxable as per section 65(105) read with 65(111), the foreign service provider who was not a telegraph authority as defined under the law was not liable u/s. 66 or u/s. 66A. This legal position was evident from the Board’s clarification vide its above cited letter of 15-07-2011. The Bench also relied on the ratio of Andhra Pradesh High Court in Karvy Consultants Ltd. (supra) wherein it was held that in order that NBFC would be covered under net of service tax as banking and financial service provider, mere registration as NBFC was not enough but its principal business should be of receiving deposits/ lending. Further, the facts obtained in the case of Unitech Ltd. (supra), were also distinguished and the appeal was allowed on merits.
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2013 (30) STR 369 (Tri. – Bang) Balarami Reddy & Co. vs. Commissioner of Central Excise, Hyderabad

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Whether the order-in-original sent by speed post considered proper service?

Facts:
An order dated 26-09-2008 was issued to the appellant vide speed post. The appellant, on nonreceipt of the said order, collected the same from the Superintendent of Central Excise on 06-01-2010 and filed an appeal with the Commissioner (Appeals) on 05-02-2010. The appellate authority took the view that the order must have been served on the assessee as early as September 2008 and consequently the appeal was dismissed considering it heavily time-barred.

Held:
The Hon. Tribunal held that, the copy of the order-in-original was sent to the assessee by speed post whereas the legal requirement was to send it by registered post with acknowledgement due. Dispatch of order-in-original by speed post was not in accordance with section 37C of the Central Excise Act, 1944 and thus, the impugned order was set aside.
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2013 (30) STR 385 (Tri-Del.) Sarvashaktiman Traders Pvt. Ltd. vs. Commissioner of Central Excise, Kanpur

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What will be the date of receipt for the purpose of payment of service tax? – cheque was received on 04-01-2007, deposited in bank on 05-02-2007 and service tax paid on 05-03-2007.

Facts:
The appellant provided business auxiliary services. For the services provided till December, 2006, the bills were raised in December, 2006 but the payment was received in January and the cheque deposited in the bank on 05-02-2007; as such the service tax was paid on 05-03-2007. The original adjudicating authority imposed penalties u/s. 76, 77 and 78 of the Finance Act, 1994. On appeal against the above order, Commissioner (Appeals) set aside the penalty imposed u/s. 78 and 77 but upheld penalty u/s. 76.

Held:
The Tribunal held that, section 76 provided for imposition of penalty where the person liable to pay service tax in accordance of section 68 failed to pay such tax. In the present case, although the cheque was received on 04-01-2007, the same was actually deposited in the bank on 05-02-2007 and thus, it was to be considered as if the consideration was received in the month of February itself, requiring them to deposit the tax in March, 2007. There being no delay in depositing the service tax, penalty u/s. 76 was set aside with consequential relief.
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2013 (30) STR 402( Tri.-Kolkata) Reliance Telecom Ltd. vs. Commissioner of Service Tax, Kolkata

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Whether service tax is applicable on MRP of RCV (Recharge Coupons Vouchers) or on amount actually received from distributors after reduction of their commission?

Facts:
The appellant provided telecommunication service and charged their customers for the services to be provided by them as per the value of the recharge vouchers (RCV) purchased. While arriving at the taxable value, the appellant deducted the discount offered to their distributors from the value of the voucher and contended that it had service tax liability only to the extent of the amount received by them. As per section 67 of the Act, the value of any taxable service ought to be the gross amount charged by the service provider for such service provided or to be provided by him and thus, service tax was payable on the amount charged or consideration received by them from the distributors. The appellant further submitted that there was a clear principal to principal relationship between them and the distributors. Hence, service tax was payable on the discounted price and not on the MRP printed on the RCV’s. According to the revenue, since the RCV’s were sold on MRP, they were treated as OTC (over the counter) goods in the market and issuance of receipt for OTC goods being rarely practiced, production of the document in support of the allegation that RCV’s were sold on MRP was not feasible.

Held:
As per the provisions of section 67, if the provision of service is for a consideration in money, then the taxable value was the gross amount charged by the service provider for such service provided or to be provided by him and thus, the service was provided to the consumer and not to the distributor. The Tribunal further held that, where it was established that the charges collected from the consumers in lieu of the RCV’s was a service charge and not a sale, it was automatically established that the amount deducted by the dealer was nothing but commission to be included in the taxable income of the Appellant and thus, directed the appellant to pre-deposit 25% of the demand.
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2013 (30) STR 371 (Tri-Del.) Pooja Forge Lab vs. Commissioner of Central Excise, Faridabad

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Whether CENVAT credit of service tax paid on GTA services is available where the appellant has entered into Free on Road (FOR) contract with the customers?

Facts:
The appellant was engaged in the manufacture of nuts and bolts, wire equipment etc. and entered into an FOR contract with their customers. As such, the transportation of the said goods being the responsibility of the appellant, they paid service tax under GTA and claimed CENVAT on the same. The Revenue contended that with the amendment in the definition of input services with effect from 01-04-2008 the appellant was not entitled to avail the credit.

The appellant contended that their sales were on FOR basis and, as such, place of removal gets extended to the buyer’s premises. They produced on record the purchase order as also the invoices along with a Chartered Accountant’s certificate in support of their claim and relied upon Ambuja Cements Ltd. vs. Union of India reported at [2009 (236) ELT 431 (P & H)] where the Board’s Circular of 2007 was examined and it was held that they were entitled to the benefit of CENVAT credit of service tax paid on the GTA services.

Held:
There was no justifiable reason to uphold the finding of the lower authorities where the Chartered Accountant’s certificate stated to the effect that sale was on FOR basis and all the expenses incurred up to the buyer’s premises formed part of the cost of final product. Further, the appellant were the owners of the goods up to the place of delivery i.e. the buyers’ premises and as such the GTA services so availed by them, were to be treated as input service and, thus, they were entitled to the credit.

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2013 (30) STR 357 (Tri.-Ahmd.) Oracle Granito Ltd. vs. Commissioner of Central Excise, Ahmedabad

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Whether CENVAT credit is allowed on service tax paid in respect of renting of immovable property used for displaying finished goods?

Facts:
The appellants were manufacturers of vitrified tiles and availed CENVAT credit of duty paid on inputs, capital goods and input services in accordance with the CENVAT Credit Rules, 2004. The appellants also availed CENVAT of service tax paid of Rs. 1,11,240/- on the rent charged at the premises used for facilitating display of the appellants’ goods. The department disallowed the credit and levied interest and penalties. The Commissioner (Appeals) upheld the order. The appellants contended that, the property taken on rent for the purpose of displaying its vitrified tiles were in line of its business and relied on Bharat Fritz Werner Ltd. 2011 (22) STR 429 (Tri.- Bang) and Micro Labs Ltd. 2012 (26) STR 383 (Kar.) = 2011 (270) ELT 156 (Kar.).

The ld. Respondent contended that, in the present case, the appellants failed to demonstrate that the amount of service tax paid by them was included in the final value of the products manufactured and cleared by them which has to be satisfied by the Appellant.

Held:
It was undisputed that the properties were taken on rent by the appellants for display of vitrified tiles and that the service provider had discharged the service tax under the category of renting of immovable property services. Further, the appellants also produced the chartered accountant’s certificate and thus, the services were utilised by the appellants for the purpose of enhancement of their business. Also, since the services were directly or indirectly used for the purpose of their business, credit could not be denied.

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2013 (30) STR. 435 (Tri.-Delhi) Bhavik vs. Commissioner of Central Excise, Jaipur- I

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Whether service tax under reverse charge is applicable on the services of erection & commissioning of an imported machinery by foreign party’s technicians where no separate consideration was mentioned in the agreement towards installation?

Facts:
The appellant imported textile machinery form Japan, Italy etc. under a contract with the foreign exporter and discharged duty thereon. The agreement also included installation and erection to be done by the foreign supplier who would send his technical persons to do the job.

Revenue initiated the proceedings on the installation and erections done by foreign technical personnel and confirmed the demand of Rs. 37,35,730/- for the period post 18-04-2006 on the basis of the valuation done with recourse to Notification No. 19/2003-ST dated 21-08-2003 and Notification No. 1/2006-ST dated 01-03-2006 along with imposition of penalties u/s. 76 and 78. The appellant contended that the foreign exporter had office in India in which case service tax liability would not fall upon the recipient of services. Also, they had discharged customs duty on the entire value of the textile machinery and that the notifications referred to by the Commissioner were optional granting abatement to the persons who are otherwise liable to pay the service tax. The revenue stated that payment of customs duty on the value of the goods has got nothing to do with the payment of service tax. The said duties were separate duties and the appellant was liable to pay service tax on that part of the value of contract which related to the services provided by the foreign persons. They further contended that the adjudicating authority was correct in arriving at the value of services in terms of said notifications.

Held:
The Hon. Tribunal, granting stay unconditionally, held that, there being only one contract between the appellant and the foreign supplier, such supply of textile machinery included the work of installation, erection and commissioning. Further, customs duty was paid on the entire value in the agreement and as such, it was not proper to artificially segregate it into two parts i.e. value of the machinery and value of services. Further, the adoption of notification for arriving at the artificial deemed value of the services was also not proper inasmuch as the said notification provided option to the assessee to seek abatement of 67% in the value of services for payment of service tax and the same have no applicability to the facts of the present case.

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2013-TIOL-789-CESTAT-MUM Ane Industries Pvt. Ltd./Shri Gagandeep Singh vs. Commissioner of Central Excise, Mumbai.

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Whether interest amount would accrue on credit taken but not utilised?
Facts:
The appellant rendered services of mining and availed ineligible CENVAT credit to the extent of Rs. 47,79,078/- but did not utilise the same. Interest and penalties were confirmed. The appellant relied on the case of Bill Forge Pvt. Ltd. 2012 (26) STR 204 (Cal) where it was held that interest liability would not accrue if there was no liability to pay duty.

Held:
The Hon. Tribunal relying on the Supreme Court’s decision in Ind-Swift Laboratories Ltd. 2011 (265) ELT 3 (SC) held that that there was no difference between the expression “credit taken” and “credit utilised” for the purpose of recovery of wrongly availed credit in terms of Rule 14 of the CENVAT Credit Rules, 2004 and accordingly ordered deposit of Rs. 15 lakh.

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2013-TIOL-734-CESTAT-MUM M/s. GMMCO Ltd. vs. CCE, Nagpur

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When VAT is payable on a transaction, whether service tax is payable? Held, No. Pre-deposit stayed.

Facts:
The appellant was engaged in renting of earthmoving equipment such as caterpillar, excavators, etc. to various customers and discharged VAT liability on the same. The department contended that the effective possession and control was with the appellant as emerging from the agreement with one of their customer and thus, the transaction was one of “Supply of Tangible Goods” service liable to service tax. The appellant contended that the activity undertaken by them was one of leasing on which VAT liability was to be discharged as per the Maharashtra Value Added Tax Act, 2002. They also relied on Circular MF (DR) 224/1/2008-TRU dated 29/02/2008 and on the case of G. S. Lamba & Sons vs. State of A.P. 2012-TIOL-49-HC-AP-CT in support of their claim.

Held:
On perusal of the agreement entered into by the appellant and applying the ratio in the decision of G. S. Lamba & Sons (supra), it was held that the transaction prima facie was for “transfer of right to use” which was deemed to be ‘sale’ and not “supply of tangible goods for use service” and as such, full waiver of pre-deposit was granted.

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2013-TIOL-441-HC-DEL-ST Commissioner of Central Excise and Service Tax v. Simplex Infrastructure and Foundary Works.

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Whether the term ‘firm’ also included a private limited company for the purpose of the definition of Consulting Engineer? Held, No.

Facts
The Appellant contended that the respondents; a private limited company was included in the definition of Consulting Engineers having recourse to section 3(42) of the General Clauses Act, 1897 which defined the term ‘person’ to include any company or association or body of individuals whether incorporated or not.

Held:
The Hon. High Court dismissing the appeal held that the definition prior to 01-05-2006 included the term firm only and only post 01-05-2006, the term body corporate was introduced. Further, reliance was also not placed on the definition of person in section 3(42) of the General Clauses Act was incorrect, as nowhere the term ‘person’ was used in the definition of “Consulting Engineer”.

[Note: This decision did not consider and is opposed to the decision in case of M. N. Dastur & Co. Ltd. vs. UOI 2006 (4) ST R 3 (Cal)]

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When Can an Open Offer be Avoided? – Supreme Court Decides

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The Supreme Court recently had an occasion to
render an interesting decision (Nirma Industries Limited vs. SEBI
((2013) 33 Taxmann.com 333(SC), dated 9th May 2013) on the Takeover
Regulations. It examined the very rationale of the Regulations. In
particular, the question was when could a person taking over a listed
company avoid an open offer? More specifically, having already paid the
promoters for acquiring the controlling interest in a company, can the
acquirer avoid paying the public for their shares? Can the acquirer be
allowed to withdraw if he later finds that the value of the shares was
substantially lower than he was supposedly aware of?

This
decision has drawn a lot of controversy and criticism. It has been said
that the acquirer, having already suffered by getting over valued
promoters shares, should not be made to suffer again by being required
to acquire shares of the public. Partly this owes to certain peculiar
facts and legal interpretation on certain issues which the Court upheld.
Partly also because it is said that the law creates certain hurdles and
then punishes the acquirer for not being able to cross them. But mainly
on certain substantive grounds. I respectfully differ with contrary
views on certain aspects and submit that the Supreme Court has rightly
required the acquirer to comply with its obligations to the public. The
few areas of legal ambiguity have also been rightly interpreted by the
Court.

The facts are indeed peculiar and on a first glance raise
certain sympathy too. To summarise, certain lenders (collectively
referred herein as “Nirma”) granted certain loans to the promoters of a
listed company (“the Company”) against security of shares of the
Company. When there was default in repayment, Nirma exercised the pledge
and acquired the shares. This resulted in trigger of requirement of
open offer which Nirma initiated. However, on later investigation, Nirma
found that there were allegedly serious misappropriations, etc. in the
Company. Nirma applied to SEBI for grant of exemption from making an
open offer or other alternate reliefs. SEBI refused. The Securities
Appellate Tribunal (“SAT”) upheld this decision. On appeal, the Supreme
Court too upheld the decision. Now, let us consider the background of
the law, then the more detailed facts, the decision of the Supreme Court
and the areas of contention.

What do the Takeover Regulations provide?

The
Takeover Regulations, since their inception, are based on a particular
concept. Whoever acquires a listed company (control or substantial
shares in it) ought to also acquire further shares from the public. The
principle behind this is that members of the public invest in the shares
of such company based on the existing promoter group. If another group
replaces the existing group, the public should have a chance to exit
with them. The other objective is to provide the public shareholders an
opportunity to sell their shares at least at the same price as the
exiting promoters. Curiously, despite several rounds of amendments, the
public shareholders are given step-fatherly treatment in one important
aspect. While the Promoters can sell 100% of their shares at a
particular price, the public shareholders cannot. Only 26% (earlier 20%)
of the share capital needs to be acquired from the public.

What happened in this case?

Nirma
lent a certain sum of money to promoters (“the Promoters”) of the
Company against pledge of shares of the Company. The promoters
defaulted. Nirma exercised the pledge and acquired the pledged shares
that triggered the open offer requirements. Nirma made an open offer at
the prescribed price to the public. However, because of findings of
multiple audits, Nirma realised that there were allegedly huge
misappropriations, understatement of liabilities, etc. Consequently, the
value of the shares was far lower than the open offer price.

Nirma
requested SEBI that it should not be required to make the open offer to
the public. Alternatively, the open offer could be at a lower than the
prescribed price nearer to the actual valuation if the alleged
misappropriations, etc. were factored in the valuation.

SEBI
rejected this request. Nirma appealed to SAT which too rejected it.
Nirma appealed to the Supreme Court, which also dismissed the appeal on
grounds discussed in the succeeding paragraphs.

Grounds why Supreme Court rejected the plea for exemption

Nirma
raised several contentions. One set of them was on legal issues. It
contended that SEBI did have general powers to grant exemption that SEBI
said it did not have. The other set of contentions was that if SEBI had
powers, the facts of the case had enough merits that SEBI ought to have
granted the exemption. The Supreme Court rejected both the contentions.

The first contention was that SEBI did have generic powers to
grant exemption. The specific grounds listed in the Regulations were, it
was contended, not exhaustive and, further, SEBI did not have power to
grant exemption on grounds similar to the specified ones but had broader
powers. The Regulations provided for three grounds for withdrawal of
open offer. First was that statutory approvals for making of the open
offer were refused. Second was that the sole acquirer, being a natural
person, had died. The third clause was “such circumstances as in the
opinion of the Board merits withdrawal”.

The contention of Nirma
was that (since the first two grounds did not apply here) SEBI had wide
and unrestricted powers under the residuary powers under the third
ground. SEBI, however, contended that its powers were ejusdem generis
the earlier powers. The present circumstances were not such that could
place pari materia with the earlier grounds and hence exemption could
not be considered.

The Supreme Court noted that Regulation 27 first provides that “No public offer, once made, shall be withdrawn”.
The exceptions to this thus shall be strictly construed. It also held
that the residuary power to grant exemption had to be considered ejusdem
generis the earlier powers. Since such powers conceived of a practical
impossibility of the open offer going further, the residuary power of
SEBI has also to be restricted to those other situations where the there
was similar practical impossibility. It held that the present
circumstances did not have any such practical impossibility. Nirma had
contended that an earlier specific ground that was deleted ought to have
been considered. This deleted ground provided that the open offer could
be withdrawn in case there was a competing bid. However, the Court
rejected this contention too.

The Supreme Court observed as follows:-

“Applying the aforesaid tests, we have no hesitation in accepting the conclusions reached by SAT that clause (b) and (c) referred to circumstances which pertain to a class, category or genus, that the common thread which runs through them is the impossibility in carrying out the public offer. Therefore, the term “such circumstances” in clause (d) would also be restricted to situation which would make it impossible for the acquirer to perform the public offer. The discretion has been left to the Board by the legislature realising that it is impossible to anticipate all the circumstances that may arise making it impossible to complete a public offer. Therefore, certain amount of discretion has been left with the Board to determine as to whether the circumstances fall within the realm of impossibility as visualised under sub- clause (b) and (c). In the present case, we are not satisfied that circumstances are such which would make it impossible for the acquirer to perform the public offer. The possibility that the acquirer would end-up making loses instead of generating a huge profit would not bring the situation within the realm of impossibility.”

Even on the issue whether the facts warranted exemption on generic grounds, if SEBI indeed had such powers, the Supreme Court answered in the negative. The Court held that Nirma’s real reason for seeking withdrawal was for avoiding economic losses. However, such a ground could not be permitted at the cost of the public shareholders. The Court noted that there were several red flags in the Company such as litigations against the Company, etc. and Nirma took the decision to acquire the shares fully conscious of these. Hence, such ground was also rejected.

The other major ground on general legal principles that a fraud vitiated any contract or obligation was also rejected.

The Court also refused to grant downward revision of price nearer to the value had the alleged siphoning off/understatement of liabilities, etc. were taken into account.

Criticism and support of the decision

The decision has been criticised on certain grounds. It was suggested the Court ought to have interpreted the powers of SEBI broadly and not applied the principle of ejusdem generis. Even if this principle was applied, it ought to have taken a broader view and taken into account the deleted ground also. All in all, it should have held that SEBI did have powers to grant withdrawal.

On merits too, criticism was made that the offeror was already subjected to loss on account of having acquired the shares from the promoters through pledge. Forcing the acquirer to suffer further loss was unfair and also resulted in unintended benefit to the public shareholders. The acquirer was victim of fraud and should not have been victimised further.

It is also stated that the law does not permit extensive due diligence by acquirers because of restrictions in Regulations relating to insider trading. In such a situation where an acquirer is handicapped, he should not be forced to carry out an acquisition when later investigation does throw up a fraud that could have been found through earlier due diligence.

It is submitted that while the circumstances were peculiar, the acquirer cannot escape the liability of making an open offer. This was a case where the acquirer acquired control and not merely 3substantial quantity of shares. The directors representing the erstwhile promoters resigned and Independent Directors were appointed. Further, though the acquisition was really in the form of exercise of pledge, it was a conscious act. Though not specified, it appears to me that these shares could have been immediately sold in the market at the then prevailing higher market price. However, the acquirer proceeded to carry out further investigations that revealed the hidden losses.

Further, effectively, the acquirer acquired shares of the erstwhile promoters but did not want to carry out the inevitable next step of acquiring shares of the public. In effect, the promoters did get money through original lending and exercise of pledge. Having acquired the controlling interest, the acquirer could not avoid the open offer that came as a package deal with it.

It is submitted that permitting exemption from making an open offer would have been a bad precedent and opened litigation in future cases where acquirers would come before SEBI on several pretexts seeking exemption and even benefitting from the sheer delay. It would be extremely unfair to allow acquisition of a controlling interest without making the public offer.

One may also recollect that the public shareholders even otherwise suffer from an inequity in takeover of companies. The promoters get to sell all their shares while only 26% (earlier 20%) of the public shareholding is to be acquired under an open offer.

Perhaps what is needed is change in law relating to pledge of shares. It is true that pledges are subject to misuse since an acquisition may be disguised as a pledge. Usually, however, financial lenders are not interested in acquiring control of a company. Thus, there is a case for amending the law to give some relief. For example, an exemption could be granted in cases where pledge is exercised but the shares so acquired are sold by way of auction within a time frame. The acquirer of shares through such sale would be required to make an open offer. If the lender does not sell within the time frame, the lender should be required to make an open offer.

Land Acquisition Rehabilitation and Resettlement Bill, 2011

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Introduction
The Land Acquisition Act, 1894 (“the Act”) provides for instances when the Government can compulsorily acquire private land for public purposes and for companies. It also provides for the manner of compensation and other incidental matters in this connection. The provisions of the Act have been found to be inadequate in addressing certain issues related to the exercise of the statutory powers of the State for involuntary acquisition of private land and property. The Act does not address the issues of rehabilitation and resettlement of the affected persons and their families. The definition of the crucial term “public purposes” is very wide and is often the subject-matter of great dispute. There have been multiple amendments to the Land Acquisition Act, 1894 not only by the Central Government but also by the State Governments. Further, there has been heightened public concern on land acquisition, especially multi-cropped irrigated land and there is no central law to adequately deal with the issues of rehabilitation and resettlement of displaced persons. As land acquisition and rehabilitation and resettlement need to be seen as two sides of the same coin, a single integrated law to deal with the issues of land acquisition and rehabilitation and resettlement was necessary.

Accordingly, to have a unified legislation dealing with acquisition of land, to provide for just and fair compensation and make adequate provisions for rehabilitation and resettlement mechanism for the affected persons and their families, the Land Acquisition Rehabilitation and Resettlement Bill, 2011 (“the Bill”) was introduced in Parliament. The Bill thus provides for repealing and replacing the Land Acquisition Act, 1894 with broad provisions for adequate rehabilitation and resettlement mechanism for the project affected persons and their families. An important milestone was crossed by the Bill when the Government managed a broad all-party consensus on this crucial legislation. Hence, let us look at some of the salient provisions of this very important Law relating to land acquisition.

Applicability of the Bill

The provisions relating to land acquisition, rehabilitation and resettlement, shall apply, when the Government acquires land,—

(a) for its own use, hold and control; or

(b) with the purpose to transfer it for the use of private companies for public purpose (including Public Private Partnership projects but not including national or state highway projects); or

(c) on the request of private companies for immediate and declared use by such companies of land for public purposes.

The provisions relating to rehabilitation and resettlement shall also apply in cases where,—

(a) a private company purchases or acquires land, equal to or more than 100 acres in rural areas or equal to or more than 50 acres in urban areas, through private negotiations with the owner of the land;

(b) a private company requests the Government for acquisition of a part of an area so identified for a public purpose:

The Bill does not apply to certain land acquisition Acts, such as:

(a) The Ancient Monuments and Archaeological Sites and Remains Act, 1958
(b) The Atomic Energy Act, 1962
(c) The Metro Railways (Construction of Works) Act, 1978
(d) The National Highways Act, 1956
(e) The Special Economic Zones Act, 2005
(f) The Electricity Act, 2003
(g) The Railways Act, 1989

Determination of Social Impact and Public Purpose

Whenever the Government intends to acquire land for a public purpose, it shall carry out a Social Impact Assessment study in consultation with the Gram Sabha in rural areas or an equivalent body in urban areas, in the affected area in such manner and within such time as may be prescribed.

Public Purpose has been defined to include the provision of land for:

(a) strategic defence purposes/national security /safety of the people;

(b) railways, highways, ports, power and irrigation purposes for use by Government and public sector companies or corporations;

(c) project affected people;

(d) planned development of villages or any site in the urban area or provision of land for residential purposes for the weaker sections or the provision of land for Government administered educational, agricultural, health and research schemes or institutions;

(e) residential purposes to the poor or landless or to persons residing in areas affected by natural calamities, or to persons displaced by reason of the implementation of any Government scheme

(f) the provision of land in the public interest for any other use or in case of PPPs (Public Private Partnership) projects with the prior consent of at least 80% of the project affected people

(g) the provision of land in the public interest for private companies for the production of goods for public or provision of public services with the prior consent of at least 80% of the project affected people. However, if public sector companies want the land for similar uses then the 80% consent condition does not apply.

To ensure food security, multi-crop irrigated land shall be acquired only as a last resort. An equivalent area of culturable wasteland shall be developed, if multi-crop land is acquired. In districts where net sown area is less than 50% of the total geographical area, no more than 10% of the net sown area of the district will be acquired. The Social Impact Assessment study shall include all the following:

(a) assessment of nature of public interest involved;

(b) estimation of affected families and the number of families among them likely to be displaced;

(c) study of socio-economic impact upon the families residing in the adjoining area of the land acquired;

(d) extent of lands, public and private, houses, settlements and other common properties likely to be affected by the proposed acquisition;

(e) whether the extent of land proposed for acquisition is the absolute bare-minimum extent needed for the project;

(f) whether land acquisition at an alternate place has been considered and found not feasible;

(g) study of social impact from the project

It remains to be seen whether such a Study delays the land acquisition process. The Study should be evaluated by an independent multi-disciplinary expert group constituted by the Government.

If the land sought to be acquired is 100 acres or more, then the Government must constitute a Committee to examine the land acquisition proposals. It would be headed by the Chief Secretary of State/ Union Territory. The role of the Committee would be to ensure the following:

(a) there is a legitimate and bona fide public purpose for the proposed acquisition which necessitates the acquisition of the land identified;

(b) the public purpose referred shall on a balance of convenience and in the long term, be in the larger public interest so as to justify the social impact as determined by the Social Impact Assessment that has been carried out;

(c) only the minimum area of land required for the project is proposed to be acquired;

(d) the Collector of the district, where the acquisition of land is proposed, has explored the possibilities of—

(i) acquisition of waste, degraded or barren lands and found that acquiring such waste, degraded or barren lands is not feasible;

(ii) acquisition of agricultural land, especially land under assured irrigation, is only as a demonstrable last resort.

Acquisition Process

Whenever it appears to the Government that land in any area is required or likely to be required for any public purpose, a preliminary notification to that effect along with details of the land to be acquired in rural and urban areas shall be published.

The notification shall also contain a statement on the nature of the public purpose involved, reasons necessitating the displacement of affected persons, summary of the Social Impact Assessment Report and particulars of the Administrator appointed for the purposes of rehabilitation and resettlement.

No person shall make any transaction or cause any transaction of land specified in the preliminary notification or create any encumbrances on such land from the date of publication of such notification till such time as the proceedings under this Chapter are completed.

Where a preliminary notification u/s. 11 is not issued within 12 months from the date of appraisal of the Social Impact Assessment report submitted by the Expert Committee, then, such report shall be deemed to have lapsed and a fresh Social Impact Assessment shall be required to be undertaken prior to the acquisition proceeding.

Where no declaration is made u/s. 19 within twelve months from the date of preliminary notification, then such preliminary notification shall be deemed to have been rescinded.

Any person interested in any land which has been notified, may object within 60 days from the date of the publication of the preliminary notification.

The decision of the Government on the objections made shall be final.

Upon the publication of the preliminary notification by the Collector, the Administrator for Rehabilitation and Resettlement shall conduct a survey and undertake a census of the affected families.

The Administrator shall, based on the survey and census, prepare a draft Rehabilitation and Resettlement Scheme as prescribed, which shall include particulars of the rehabilitation and resettlement entitlements of each land owner and landless whose livelihoods are primarily dependent on the lands being acquired. The same shall be open to suggestions /objections in a public hearing. The Administrator shall, on completion of public hearing submit the draft Scheme for Rehabilitation and Resettlement along with a specific report on the claims and objections raised in the public hearing to the Collector.

The Collector shall review the draft Scheme submitted by the Administrator with the Rehabilitation and Resettlement Committee at the Project level. He shall submit the draft Rehabilitation and Resettlement Scheme with his suggestions to the Commissioner Rehabilitation and Resettlement for approval of the Scheme.

When the Government is satisfied that any particular land is needed for a public purpose, a declaration shall be made to that effect, along with a declaration of an area identified as the ‘resettlement area’ for the purposes of rehabilitation and resettlement of the affected families. The declaration shall be conclusive evidence that the land is required for a public purpose and, after making such declaration, the appropriate Government may acquire the land in such manner as specified under this Act.

The Collector shall thereupon cause the land to be marked out and measured, and if no plan has been made thereof, a plan to be made of the same. The Collector shall also make an award of—

(a)    the true area of the land;

b) the compensation as determined along with Rehabilitation and Resettlement award as determined; and

(c)    the apportionment of the said compensation among all the persons believed to be interested in the land.

The Collector shall make an award within 2 years from the date of publication of the declaration and if no award is made within that period, the entire proceedings for the acquisition of the land shall lapse.

Market value of land

The Collector shall adopt the following criteria in assessing and determining the market value of the land, namely:

(a)    the minimum land value, if any, specified in the Indian Stamp Act, 1899 for the registration of sale deeds or agreements to sell, as the case may be, in the area, where the land is situated; or

(b)    the average sale price for similar type of land situated in the nearest village or nearest vicinity area. The average sale price shall be determined taking into account the sale deeds or the agreements to sell registered for similar type of area in the near village or near vicinity area during immediately preceding 3 years of the year in which such acquisition of land is proposed to be made. For this purpose, 50% of the sale deeds in which the highest sale price has been mentioned shall be taken into account.

whichever is higher:

The market value calculated as per sub-section (1) shall be multiplied by a specified factor. For instance, it is 2 in rural land, 1 in urban area land, etc. Thus, only value in rural areas is doubled.

The Collector having determined the market value of the land to be acquired shall calculate the total amount of compensation to be paid to the land owner (whose land has been acquired) by including all assets attached to the land. For determining the market value of the building and other immovable property attached to the land, the Collector may use the services of an Engineer/Other Specialists. Similarly, for assessing the value of crops, trees, plants, attached to the land, the Collector can use the services of an experienced person in the field of agriculture, etc.

The Collector having determined the total compensation to be paid, shall, to arrive at the final award, impose a ‘Solatium ’ amount equivalent to 100% of the compensation amount. The solatium amount shall be in addition to the compensation payable to any person whose land has been acquired. Thus, it is like an additional compensation.

The provisions of the Income- tax Act are also relevant in this respect. Section 45(4) of the Act provides that where capital gains arises from the compulsory acquisition of a capital asset under any law, then the compensation awarded in the first instance shall be taxable in the year of award. If the same is enhanced subsequently, then the enhancement amount would be taxable in the year of receipt by the assessee.

R&R Provisions

The Bill contains provisions for Rehabilitation and Resettlement of Project Affected People (PAP) in case of an acquisition.

The Government may appoint an Administrator for carrying out the R&R provisions. The Government may also appoint a Commissioner for R&R. He may be appointed for supervising the formulation of R&R Schemes and for their proper implementation.

In case the land is purchased privately and is more than or equal to 100 acres within rural areas or is more than or equal to 50 acres in urban areas, then the permission of the Commissioner is required. Thus, the obligation to rehabilitate for private acquisition is only if the area acquired is 50 acres or more.

A Land Acquisition and Rehabilitation and Resettlement Authority would be established for settling any disputes relating to acquisition, compensation and R&R. This would be headed by a sitting/retired High Court Judge.

Temporary Acquisition

Whenever it appears to the Government that the temporary occupation and use of any waste or arable land are needed for any public purpose, or for a company, the appropriate Government may direct the Collector to procure the occupation and use of the same for such terms as it shall think fit, not exceeding 3 years from the commencement of such occupation.

The compensation may be either in a gross sum of money, or by monthly or other periodical payments, as shall be agreed upon in writing between him and such persons respectively.

In case the Collector and the persons interested differ as to the sufficiency of the compensation or apportionment thereof, the Collector shall refer such difference to the decision of the Land Acquisition and Rehabilitation and Resettlement Authority

Other Important Provisions

Any award for land acquisition is exempt from stamp duty.

If any land or part thereof acquired remains unutilised for a period of 10 years from the date of taking over the possession, the same shall return to the Land Bank of the Government by reversion. Whenever the ownership of any land acquired under this Act is transferred to any person for a consideration, without any development having taken place on such land, 20% of the appreciated land value shall be shared amongst the persons from whom the lands were acquired or their heirs, in proportion to the value at which the lands.

Comparison with the Act

A broad comparison of the Act vis-à-vis the Bill reveals the key differences as shown in the table:

Conclusion

The Bill is one of the most important recent laws in the real estate sector. It would have far reaching implications and consequences. Hence, it becomes essential to carefully study and understand this Law.

Service of Notice – Presumption Rebuttable – Endorsement as “Refused” – The respondent as the plaintiff filed suit alleging that the defendant was a monthly tenant. [Section 114 (e) Evidence Act]

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Kanak Pramanik vs. Indrajit Bandopadhya AIR 2013 Calcutta 60

Defendant defaulted in payment of rent and accordingly plaintiff sent a notice u/s. 106 of the Transfer of Property Act under registered post with A/D asking the defendant to quit and vacate the suit premises on expiry of the month of Agrahayan 1395 B. S. The defendant refused to accept such notice and did not also vacate the suit premises. Accordingly, the suit for ejectment and recovery of khas possession with consequential reliefs was filed.

The Appellant/defendant contested the said suit by filing a written statement denying the material allegations of the plaint and contending inter alia that the defendant was a tenant under the plaintiff’s father Haripada Banerjee and that on the death of Haripada Banerjee, all his heirs became joint landlords and that the plaintiff was not the sole landlord and had no authority to file said ejectment suit as the sole landlord. It was further alleged that defendant did not receive any notice and that plaintiff managed to obtain a postal endorsement “refused” in collusion with postal peon.

The Trial Court framed several issues including an issue as to whether there was relationship of landlord and tenant between the parties and whether the notice u/s. 106 of the Transfer of Property Act was legal, valid and sufficient and was duly served upon the defendant. After hearing the Trial Court decreed the suit for ejectment observing that the defendant was a tenant under the plaintiff and that the notice u/s. 106 of the Transfer of Property Act was legal, valid and sufficient and that on account of refusal on the part of the defendant to accept the same it amounted to good service.

The Hon’ble Court observed that now it is settled law that once a notice is sent under registered post with A/D with proper stamp and proper address and is returned with an endorsement of the postal peon “refused” then there is a presumption of tender and refusal amounting to a good service of notice. However, said presumption is rebuttable. If the addressee denies said tender and alleged refusal on his part in his pleadings as well as in his evidence and the same is found believable to the Courts then the presumption of service will be deemed to be sufficiently rebutted. In that case, the onus will shift back to the addressor for proving such alleged tender and refusal by calling the postal peon to the witness box.

In the case in hand, admittedly the appellant tenant took specific plea not only in his written statement but also in his evidence that there was no tender of said notice to him by the postal peon and as such there was no question of refusal on his part to accept the same. The Courts below, however, refused to accept his version on the ground that he did not file any document to show that he was present in his office on that day. The respondent landlord has also admitted that the appellant tenant was an employee of the Government mint at Alipur. It also came out from evidence that the defendant remained absent from the suit shop room during the working period of the working days and that a barber shop was run therein through his employee Gour Chandra Pramanik. A Government employee is expected to be in his office during the office hours in a working day, in absence of any evidence to the contrary. Neither of the parties produced any evidence to show that on the relevant date of alleged tender or alleged refusal the appellant tenant was present in the said suit shop by not going to his office.

During hearing the learned counsel for the appellant tenant drew the attention of the Court to the cross-examination of the appellant landlord wherein he categorically stated that the postal peon told him that he went to the defendant’s shop room but he did not meet with him. According to the counsel, said admission of the plaintiff coupled with denial on the part of the appellant tenant belied the story of alleged tender by the postal peon to the defendant or refusal on the part of the defendant.

Section 106 of the Transfer of Property Act requires that notice to quit has to be sent either by post to the party or be tendered or delivered personally to such party or to one of his family members or servants at his residence/place of business or if such tender or delivery is not practicable, it be affixed to a conspicuous part of the property. In the case in hand, only one notice to quit was sent to the appellant tenant under registered post with A/D. It returned with the endorsement of the postal peon “refused”. The appellant tenant took specific plea not only in his written statement but also in his evidence that the postal peon did not tender any notice to him and accordingly there was no question of refusal on his part to accept the same. It also came out from evidence that the suit premises is a barber shop being run by appellant tenant through an employee Gour Chandra Pramanik. As such even in the absence of the appellant tenant if the postal peon tendered the notice to his employee Gour Chandra Pramanik to be refused to be accepted by Gour still it might amount to refusal on the part of the tenant treating it to be good service of notice. But there is no evidence to that effect also from the side of the respondent landlord. Rather the appellant tenant also examined said employee Gour Chandra Pramanik who categorically stated that on the relevant date i.e. 17-10-1988 postal peon did not visit said barber shop for service of the notice nor to speak of tendering the same to him. Said evidence remained unshaken in spite of cross-examination. In view of the aforesaid evidence on record it is palpable that the appellant tenant was able to rebut the presumption of due service in view of postal endorsement “refused” on the envelope of notice and that it was a duty of the respondent landlord to produce the postal peon on the dock to discharge the burden of proving the service of the notice.

Proper service of notice to quit is the very backbone of a suit of ejectment filed under the Transfer of Property Act. In this case, the deemed service of notice in view of postal endorsement “refused” is found to be not acceptable. As such, the Ejectment Decrees passed by learned Courts below banking on said deemed service of notice were not sustainable in law. As a result, the appeal was allowed.

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Partnership firm – Legal entity – Income-tax Return (Income Tax Act, 1961 Section 184)

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PBR Select Infra Projects, Rep by Partner vs. Commissioner of Tenders and Anr. AIR 2013 NOC 126 AP

The Hon’ble Court observed that for the limited purpose of the Act, a firm is conferred legal recognition as an entity and the Act made its assessment compulsory. But, I do not find any conceivable reason why the Income-tax returns of such a firm shall not be made use of by its partners for the purpose of satisfying the prequalification criteria of a tender document. Even if individual partners are liable for getting their individual incomes separately assessed u/s. 10 of the Act, in the absence of any legal bar under the provisions of the Act, there can be no reason for preventing a partner of a partnership firm from filing the Income-tax returns of the firm for the purpose of showing his turnover, financial capacity and other requirements as prescribed by the tender conditions.

The Court observed that the fiction introduced in section 184 of the Act, whereby a legal status is conferred on a partnership firm, cannot be extended to destroy the legal relationship between the partners and the firm. Such a water-tight compartment can be presumed only when the question of compliance with the requirement of section 184 of the Act arises. For instance, where a firm was not assessed under the Act and its partners who got their individual incomes assessed separately plead that the assessments in their individual capacity shall be deemed to be the assessment of the firm, section 184 can be pressed into service to negate such stand of the partners. But once the firm is assessed under the Act, such assessment would, enure to the benefit of its partners for the purposes such as the present one, where proof of assessment of the tenderer is required.

With regard to the second submission, respondent No. 3 filed the VAT clearance for the immediately preceding year in which the tender was called. However, along with the VAT clearance certificate dated 21-01-2011, respondent No. 3 has filed the VAT Returns Report dated 27-01-2012 of the Commercial Tax Department for the period from December 2010 to December 2011. This Report needs to be read along with the VAT clearance certificate dated 21-01-2011. None of the respondents have disputed the authenticity of the VAT Returns Report, which were up to December 2011, i.e., a couple of months prior to the issuance of the tender notification. In this view of the matter, the tender conditions is duly satisfied and hence the technical bid of respondent No. 3 is not liable for rejection on a hyper-technical ground that the formal latest VAT clearance certificate was not filed by him.

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Foreign Judgement – Insolvency proceedings – Initiation of in India directly without any testing or filtration provided in CPC for execution of foreign decree in India – Not permissible: [Code of Civil Procedure 1908 section. 13, 14, 44A].

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Abraaj Investment Management Ltd vs. Neville Tuli & Ors. AIR 2013 (NOC) 91 (Bom.)

The CPC provides specific provisions for execution of the decree passed by the court in reciprocating territory. The reciprocating territory means the territory as is defined u/s. 44-A of the CPC. It is clear even from the specific provision that any foreign judgment or decree cannot be put for execution unless there is reciprocating agreement or treaty as contemplated. The national or international treaties and or conventions and or agreements have their own value for the purposes of inter-border transactions and various such jurisdictional aspects. Everything is under control of the respective provisions of the respective States and the countries. Nothing is free and or no one can take any steps in any country without the sanction/ permission and or the filtrations so contemplated under the respective acts of the country. Section 13 of CPC contemplates when a foreign judgment shall be conclusive so that appropriate suits and or proceedings can be initiated by the concerned court/ parties in India. It provides the procedure to be followed before accepting the foreign judgment’s conclusiveness. It also means the merits of such judgments. Section 14 of CPC contemplates presumption so far as the foreign judgments are concerned. Section 114 of the Evidence Act deals with the presumptive value, even of the foreign judgment. The concept of presumption itself means that it is always rebuttable if a case is made out. Therefore, merely because it is a foreign judgment and or decree, that itself is not conclusive judgment for the purpose of final execution in India. Both required pre-testing or pre-filtrations as provided under the CPC and other relevant laws and rules. There are no provisions whereby any party/person can directly invoke the insolvency Act, based upon such foreign ex-parte judgment/decree. Even the foreign award cannot be executed in such fashion in India. It is also subject to the procedural filtration and the challenge.

The concept of execution of any decree and or order is different than initiation of the insolvency action based upon the decree or order. If these two concepts are totally different then it is difficult to accept the submission that for the initiation of the insolvency proceedings, no steps or permission and or the filtrations is necessary, as there are no specific boundaries or rules to restrict the same.

Once the insolvency notice is issued and if not complied with, the consequences are quite disastrous. The Insolvency Act provides various consequences in case the party in spite of service of insolvency notice failed to comply with the same. The act of insolvency in the commercial world has its own effect to destroy and or hamper the name, fame and the market and the business. Once the act of insolvency is committed, the declaration will be “for all the debtors” though action was initiated by the party for recovery of their respective monetary claims. The concept of “action in rem” and its effect just cannot be overlooked even at this stage, while considering the scheme of the insolvency Act.

In view of the Insolvency Act, the officer/official assignee based upon the averments made by the decree holder and believing the certified copies and or copies of the foreign judgment and or decree thought it to be correct and binding even on merit and issued the insolvency notice. The debtor after receipt of the same if failed to comply with the same, asked to face the consequences. For execution of a foreign decree, the filtration is provided and it is difficult for the party to execute the foreign judgment and or decree in India without following the procedure of law how the official assignee can initiate insolvency notice straightway on the basis of such foreign judgment by treating the same to be a final decree or order passed by the foreign court. Admittedly, there is nothing under the Insolvency Act and or CPC which permit and or entitles any one to put such foreign decree or judgment as the basis for initiating the insolvency proceedings in such fashion. If there are no provisions there is no permission. The Indian Court under the Insolvency Act is not empowered and or authorised to initiate insolvency proceedings in such fashion directly on the basis of the foreign judgment and or order.

The Court observed that such initiation of insolvency proceedings based upon a foreign judgment and or decree directly without any testing and or filtration as available for execution of the foreign decree in India will create more complications because of its various multifaceted problems and the situations. The initiation of such proceedings itself is not sufficient.

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Accountability

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The ancient Romans had a tradition: whenever one of their engineers constructed an arch, as the capstone was hoisted into place, the engineer assumed accountability for his work in the most profound way possible: he stood under the arch. (Quoting Michael Armstrong)

We talk of accountability of government and government agencies, public companies and NGOs. Then there is accountability of individuals – those working in a group or team as well as in their individual capacity. Accountability of an individual is not restricted only to his work but extends to his family and the social circle within which he moves.

At times accountability is fixed by law, rules and regulations. This can be considered as the statutory accountability. In every civilised society there are regulators appointed under various statutes which seek accountability from organisations and individuals. There regulators oversee that organisations and individuals remain accountable.

When it comes to governments and organisations (commercial or otherwise), transparency in their affairs often brings about better accountability. That has been the genesis of ‘Right to Information’. Generally, when governments and organisations have to disclose more, their policies, decisions and actions are such that they become more accountable. After all, sunlight is the best disinfectant!

It is also a fact that the scope of statutory accountability in various fields has been increasing. This is true of various professions, professionals as well as organisations. May be this is due to the fact that there is an attempt from those accountable to limit their accountability.

An auditor may feel that he is accountable only to the shareholders to whom he reports. But today, he is accountable, responsible and liable not only to the shareholders, but also to many other stakeholders like potential investors, lenders, employees of the company and many more.

When CAG questions decisions and actions of the Government, his powers and jurisdiction are questioned and thus avoiding accountability.

Political parties talk of being accountable to people, serving the people. But when it comes to being transparent about their affairs, these parties take shelter behind technicalities. All major political parties are united in opposing the recent order of the Central Information Commission holding political parties as ‘Public Authorities’ and ordering them to disclose information. There is even the talk of promulgating an Ordinance to amend the Right to Information Act to keep the political parties outside the purview of the RTI.

Often, there is a conflict (either perceived or real) while doing one’s duty when one is accountable in more than one way or to those whose interests may be conflicting. Such a conflict is not unique to one profession but it may arise in various situations. For example, a bureaucrat or a police officer is accountable to his political master, his colleagues and also to the public (not necessarily in that order). Given our system, one can imagine the plight of an honest government servant. This may happen to a lawyer, a chartered accountant, an independent director, or for that matter any person. These are tricky situations where one needs to reason, reconcile, muster courage and above all, listen to one’s conscience. Certainly, this is not easy.

Accountability of media – whether it is the print media or the electronic media – is another area which raises a lot of debate. No doubt, the media has played a yeoman role in drawing public attention to scams, corruption, and the plight of people who have suffered injustice. Media depends on news and at times on creating news, sensationalising events and conducting trial by media under the garb of debates. The controversy raised by Radia tapes which disclosed the role played by some senior journalists in government affairs or promoting certain industrial houses is still fresh in mind. Freedom of speech and expression is of utmost importance and media plays and has an important role in safeguarding that. It can do that only if the media itself is accountable and takes that accountability seriously.

Rules and regulations may impose accountability. But the true accountability is “the quality or state of being accountable; especially: an obligation or willingness to accept responsibility or to account for one’s actions”. (http://www.merriam-webster.com/dictionary/accountability) It is a state of mind, a sense of doing one’s duty with clear conscience.

In this Special Issue, we bring you articles from respected persons from various fields – Mr. S. E. Dastur, Senior Advocate, Padmashree Mr. T. N. Manoharan, past President of our Institute and Mr. Jaideep Bose, Editorial Director, the Times of India dealing with the issue of accountability and duty. My special thanks to each of them for sharing their thoughts. This month, the features – Namaskar, Accounting World and RTI also deal, directly or indirectly, with the issue of accountability.

With this issue of the Journal, I pass the baton to Mr. Anil Sathe who will take over as the Editor of this Journal.

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Laxman Rekha – Accountability

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At his best, man is the noblest of all animals, separated from law and justice he is the worst’. —Aristotle.
The issues for us are:
• what do we mean by ‘Laxman Rekha’. Is it an imaginary line or does it prescribe the limits of human behaviour ?
• why is it prescribed only for humans ? and
• what are the consequences of crossing the ‘laxman rekha’ ?

I don’t have the answers but will still make an attempt to share my thoughts on these perennial issues. In my view, ‘laxman rekha’ is meant for us humans because we have the capacity to think and act. Other creations act according to their nature as they don’t have the faculty of thinking.

‘Laxman Rekha’ I believe is a code of conduct for us — human beings – laid down by us as members of society.

Whenever a person crosses the ‘laxman rekha’, he/she faces the consequences – our epics and history depicts this. For example :

• When Bali – a very learned and powerful ruler crossed it by co-habiting with his brother’s wife – and usurping his kingdom, he met his end at the hands of Ram.

• Aahilya for wrongly and not wilfully crossing the ‘laxman rekha’, became a stone and had to wait for Ram to revive her.

• Sita had to go through ‘ágni pariksha’ and suffer separation from Ram for crossing the ‘laxman rekha’.

• Draupadi crossed the ‘laxman rekha’ of a ‘good host’ when she called Duryodhan ‘andhi ka beta andha’ and she sowed the seeds of war – Mahabharat.

• Clinton crossed the ‘laxman rekha’ for his immoral behaviour and was impeached. He apologised and survived but the damage he did to the office of the President survives. The blemish hasn’t gone away despite his services to society.

• Cancer survivor and cancer care evangelist Lance Armstrong – super cyclist and super hero – the man whom fame and fortune favoured, confesses to the use of drugs and paid a big price – loss of respect.

• Walmart, the largest retailer in the world has been charged for violation of Foreign Corrupt Practices Act for indulging in bribery and corruption in Mexico. This has resulted in Walmart initiating investigations in India and China. Newspapers report that some officers, vendors and consultants have been suspended in India and expansion of Bharti Walmart is on hold — the result – loss of reputation and business, and possibility of prosecution in the USA.

• Ramalinga Raju – the founder of Satyam suffered in prison for over two years and is facing a host of civil and criminal cases.

• Recently, our Law minister had to resign for interfering with investigation reports.

The list is metaphorically unending.

It is a fact that the pain of leaders and icons crossing the ‘laxman rekha’ for the followers becomes personal – which makes the followers revolt both mentally and physically.

Consequences of crossing the ‘laxman rekha’ are visible in society today – the cancer of corruption is having disastrous consequences on governance and economic and social environment and behaviour. The way our parliamentarians (leaders) behave in parliament – exhibits a kind of violence which is abhorring. The tragedy that it is that these very leaders ask us not to indulge in violence and remain within ‘laxman rekha’. They forget it is not words but actions which are emulated by people. Parliament is a forum created to discuss, debate and decide and not for storming into the well and tearing bills being tabled. It is a forum created to create laws and not break laws. Our leaders have probably forgotten the maxim: ‘lead by example’.

All this violence of crossing the ‘laxman rekha’ is for us to feel – Society is on tenterhooks and explosive. At the drop of a hat we have strikes, dharnas and violence – which I reiterate are nothing but consequences of crossing the ‘laxman rekha’. We are experiencing violence of all kinds — we have become intolerant and are sacrificing our right to express the banning of books, art, people and movies that is not only adversely impacting us, but will also affect future generations. Salman Rushdie christens the present environment as ‘cultural emergency’. Shobhaa De says ‘we are living in the republic of hate and nightmares’. We as a nation cross the ‘laxman rekha’ when we stifle ‘freedom of speech’, a fundamental right guaranteed by the constitution. We are giving up the concept of – ‘live and let live’. Any time whether at home or at office or as citizen the moment, I indulge in ‘you have no right’, I am crossing the ‘laxman rekha’ of tolerance and this crossing leads to strife. Believe me, the ‘right to express’ includes the ‘right to dissent’ Mr. Manish Tewari, our Minister for Information and Broadcasting affirms that :

‘Freedom of expression must include right to offend’.

‘Laxman rekha’ is not only for sinners or saints or for those in power but is also for us – the normal – the householder, the office goer and the entrepreneur – who despite corruption value ‘values’.

It is a sad fact that we are unconsciously imbibing the culture of conflict, crime and corruption and I dare say all of us are directly or indirectly have contributed to it and are affected and impacted by this. We are impatient and intolerant. We need to remember that today’s leaders have risen from amongst us. We in India and probably people across the world have crossed the ‘Laxman rekha’ – the result is unrest. Let us not forget that all crimes – social or economic – represent crossing the ‘laxman rekha’. For example:

• The Chief Minister of a State – a beloved leader – wants her driver to be whipped for being 15 minutes late – the Times of India of 08-02-2013.
• Khaps in Haryana and Punjab have mandated and ensured that a couple though married be separated because marriage between the two castes to which they belong is not permitted by custom.
• Minister of a State is said to be involved in the murder of a police officer.
• Members of a state assembly are charged with assaulting a police officer. The questions we have to ask ourselves are :
• Is this the secular India we gave ourselves and was dreamt by the leaders who drafted our Constitution
• Is this non – tolerant environment that we want to live in and leave for our children.

The issue is: if this is what we don’t want, then what should we do to contain this and bring back the culture of love, compassion and confidence in law to live within the ‘laxman rekha’ and be happy.

I believe ‘laxman rekha’ is the litmus test of accountability not only for the society but for each one individually. Hence , it is for us as members of society to lay down, modify or reject the norms. We are the ones who cross or maintain the ‘laxman rekha’. Being an optimist, I believe that there is a ray of hope because there is a silent revolt against the present environment of corruption and intolerance. Ministers are resigning apparently because of intolerant behaviour of a chief minister. The recent protests against corruption and misbehaviour (rape) are instances of this resurgence. People and press are talking about ‘ethical values’. We also now have the Right to Information Act – which is bringing transparency in governance and probably instilling some ‘fear of retribution’ in those who govern – the powerful. It was Kahlil Gibran who said:

‘Life without freedom is like a body without a soul and freedom without thought is like a confused spirit’.

To bring ‘laxman rekha’ back in society, let us join this silent movement by contributing to it both ‘time and money’. Gandhi had resilience. It was his faith in our desire and need for freedom that gave us freedom. Let us develop ‘resilience’ and return to ‘values’ even despite having been bent and battered. Let us revive the spirit to live by ‘values’ by living ‘values’. This will be our legacy to the young and coming generations.

Let us do and we can. Let us not cross ‘laxman rekha’. Let us bring back ‘accountability’.

Clarification on Multi Brand Retail Trading Dated June 6, 2013

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Paragraph 6.2.16.5 of ‘Circular 1 of 2013-Consolidated FDI Policy’

The
Department of Industrial Policy & Promotion (DIPP) has issued a
clarification in the form of FAQ on queries of prospective
investors/stakeholders on FDI policy for multi-brand retail trading.
These clarifications are in respect of Paragraph 6.2.16.5 of ‘Circular 1
of 2013-Consolidated FDI Policy’.

A. P. (DIR Series) Circular No. 108 dated June 11, 2013

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Press note 2 (2013 Series) – D/o IPP F. No. 5/3/2005-FC.I Dated June 03, 2013

A. P. (DIR Series) Circular No. 107 dated June 4, 2013

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Import of Gold by Nominated Banks / Agencies

Presently, banks can import gold on consignment basis only to meet the genuine needs of exporters of gold jewellery.

This circular provides that, with immediate effect: –

1. Along with banks, all nominated agencies/premier /star trading houses can import gold on consignment basis only to meet the genuine needs of exporters of gold jewellery.

2. Except in the case of import of gold to meet the needs of exporters of gold jewellery, all Letters of Credit (LC) opened by banks/nominated agencies for import of gold under all categories will only be on 100 % cash margin basis and all imports of gold have to be compulsorily on Documents against Payment (DP) basis.

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A. P. (DIR Series) Circular No. 106 dated May 23, 2013

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Liberalised Remittance Scheme for Resident Individuals – Reporting

Presently, banks are required to submit LRS data in hard copy as well as through the Online Returns Filing System (ORFS) of RBI.

This circular provides that henceforth, i.e. LRS data for 30th June, 2013 and subsequent months have to be uploaded in ORFS on or before the 5th of the following month. Where there is no data to be furnished, banks must to upload ‘nil’ figures in the ORFS system.

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A. P. (DIR Series) Circular No. 105 dated May 20, 2013

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Export of Goods and Software – Realisation and Repatriation of export proceeds – Liberalisation

Presently, exporters were permitted to realise and repatriate the full value of goods or software exported up to 31st March, 2013 within twelve months from the date of export.

This circular provides that exporters are required to realise and repatriate the full value of goods or software exported up to 30th September, 2013 within nine months from the date of export. However, there are no changes in the provisions with respect to period of realisation and repatriation of the full export value of goods or software exported by a unit situated in a Special Economic Zone (SEZ) as well as exports made to warehouses established outside India.

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S. 69C—If there is a dispute of the source of the expenditure, then addition can be made u/s.69C — Merely because labour charges are shown as outstanding cannot be a ground to make addition u/s.69C.

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New Page 1

(Full text of the following Tribunal decisions are available
at the Society’s office on written request. For members desiring that the
Society mails a copy to them, Rs.30 per decision will be charged for
photocopying and postage.)



14 Muscovite Construction v. ACIT
ITAT ‘I’ Bench, Mumbai
Before R. S. Padvekar (JM) and Rajendra Singh (AM)
ITA No. 2856/Mum./2009
A.Y. : 2005-06. Decided on : 21-5-2010
Counsel for assessee/revenue : C. N. Vaze/Rajnesh Dev Buvman.

S. 69C—If there is a dispute of the source of the
expenditure, then addition can be made u/s.69C — Merely because labour charges
are shown as outstanding cannot be a ground to make addition u/s.69C.

Per R. S. Padvekar :

Facts :

The assessee was carrying on business of civil construction
contract work and labour contract. It filed its return of income declaring an
income of Rs.14,29,579. In the course of assessment proceedings the Assessing
Officer (AO) noticed that the assessee had debited labour charges of Rs.1.10
crores in the P & L Account and in the balance sheet out of the said expenditure
a sum of Rs.54,56,235 was shown as outstanding. The outstanding labour charges
were for the months of Jan, Feb and March 2005. In response to the show cause
notice issued by the AO asking the assessee to explain why outstanding labour
charges/ wages should not be treated as unexplained, the assessee submitted that
it was facing a financial crunch in the business and the break-up of monthly
wages in respect of each type of labour like carpenter, mason, etc. was
furnished. The AO, not being satisfied with the explanation furnished, added the
amount of Rs.54,56,235 as unexplained expenditure u/s.69C.

Aggrieved the assessee preferred an appeal to the CIT(A) who
upheld the action of the AO.

Aggrieved the assessee preferred an appeal to the Tribunal.

Held :

The Tribunal noted that nothing has been brought on record by
the AO to show that the assessee has used the money which was not reflected in
the books of account. It also noted that in the immediate next year the assessee
has paid the outstanding wages/labour charges and also that in the assessment
order for A.Y. 2006-07 the AO has discussed the issue. The Tribunal held that as
per the language used by the Legislature in S. 69C, if there is a dispute of the
source of the expenditure, then the addition can be made. Since the payment of
outstanding wages has been accepted by the AO in the next year, hence no
addition can be made u/s.69C of the Act. It also noted that it was not that the
expenditure was bogus or non-genuine and the AO has also not examined any of the
labourers to support his case. It held that merely because labour charges are
shown as outstanding that cannot be a ground to make the addition u/s.69C.

The Tribunal deleted the addition and decided the ground in
favour of the assessee.

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S. 73—Any speculation loss computed for A.Y. 2006-07 and later assessment years alone would be hit by the amendment made w.e.f. 1-4-2006 by the Finance Act, 2005 to S. 73(4)— Limit of carry forward of subsequent assessment years applies only to such loss.

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New Page 1

(Full text of the following Tribunal decisions are available
at the Society’s office on written request. For members desiring that the
Society mails a copy to them, Rs.30 per decision will be charged for
photocopying and postage.)



13 Virendra Kumar Jain v. ACIT
ITAT ‘B’ Bench, Mumbai
Before R. V. Easwar (Sr. VP) and
A. L. Gehlot (AM)
ITA No. 1009/Mum./2010
A.Y. : 2006-07. Decided on : 31-5-2010

Counsel for assessee/revenue : Vijay Mehta/ K. K. Das

 

S. 73—Any speculation loss computed for A.Y. 2006-07 and
later assessment years alone would be hit by the amendment made w.e.f. 1-4-2006
by the Finance Act, 2005 to S. 73(4)— Limit of carry forward of subsequent
assessment years applies only to such loss.

Per R. V. Easwar :

Facts :

In A.Y. 2001-02 the assessee suffered a speculation loss of
Rs.4,55,30,494 which loss was allowed to be carried forward to subsequent years
u/s.73(2) of the Act. In the return filed for A.Y. 2006-07 the assessee claimed
that speculation loss brought forward from A.Y. 2001-02 should be set off
against speculation profits for the A.Y. 2006-07. The Assessing Officer (AO)
denied the claim of the assessee on the ground that u/s.73(4) no loss shall be
carried forward for more than four assessment years immediately succeeding the
assessment year for which it was first computed. He held that speculation loss
for A.Y. 2001-02 cannot be carried forward beyond A.Y. 2005-06.

Aggrieved the assessee preferred an appeal to CIT(A) who
upheld the action of the AO.

Aggrieved the assessee preferred an appeal to the Tribunal.

Held :

It is a settled rule of interpretation that a vested right
can be taken away only by express language or by necessary implication. This is
settled by the decision of the Privy Council in Delhi Cloth & General Mills
Company Ltd. v. CIT, AIR 1927 (PC) 242 and the same has been cited with approval
by the Supreme Court in the case of Jose Dacosta v. Bascora Sadashiv Sinai
Narcomin, AIR (1975) SC 1843. The assessee had a vested right to carry forward
the speculation loss for a period of eight assessment years as per S. 73(4) as
it stood before the amendment made by the Finance Act, 2005. That such a right
is a vested right cannot be doubted after the judgment of the Supreme Court in
the case of CIT v. Shah Sadiq & Sons, 166 ITR 102 (SC). In S. 73(4) or in any
other provision there is no express language or any implication to the effect
that the right of the assessee to carry forward the speculation loss for a
period of eight subsequent assessment years has been taken away.

Any speculation loss computed for the A.Y. 2006-07 and later
assessment years alone would be hit by the amendment and such loss can be
carried forward only for four subsequent assessment years. The vested right of
the assessee has not been taken away.

The amendment made by The Finance Act, 2005 w.e.f. 1-4-2006
is merely to substitute the words ‘four assessment years’ for the words ‘eight
assessment years’ in Ss.(4) of S. 73. Ss.(4) of S. 73 refers only to the loss to
be carried forward to the subsequent years. It does not say anything about the
set-off of the speculation loss brought forward from the earlier years. There is
a distinction between a loss brought forward from the earlier years and a loss
to be carried forward to the subsequent years. The sub-section deals only with
the speculation loss to be carried forward to the subsequent years and in the
very nature of the things, it cannot apply to speculation loss quantified in any
assessment year before the A.Y. 2006-07.

The Tribunal made a reference to the Income-tax Rules
prescribing form of return of income and noted that the form in ITR 4 makes a
distinction between loss brought forward and loss to be carried forward. It held
that since in the present case it was concerned with the assessee’s right to set
off the brought forward speculation losses against speculation profits for A.Y.
2006-07, Ss.(4) of S. 73 has no application.

The Tribunal allowed the appeal filed by the assessee.

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Income-tax Act, 1961 — S. 28(iv) and S. 41(1) — Whether reduction in the liability availed by the assessee on the basis of One Time Settlement Scheme in respect of its outstanding term loans is to be treated as taxable u/s.28(iv) or u/s.41(1) — Held, No.

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New Page 1

Part B — Unreported Decisions

(Full texts of the following Tribunal decisions are available at the
Society’s office on written request. For members desiring that the Society mails
a copy to them, Rs.30 per decision will be charged for photocopying and
postage.)



17. Accelerated Freez & Drying Co. Ltd. v. Dy.
CIT



ITAT Cochin

Before Dr. O. K. Narayanan (AM) and

N. Vijayakumaran (JM)

ITA No. 971/Coch./2008

A.Y. : 2005-06. Decided on : 5-5-2009

Counsel for assessee/revenue : R. Sreenivasan/

C. Karthikeyan Nair

Income-tax Act, 1961 — S. 28(iv) and S. 41(1) — Whether
reduction in the liability availed by the assessee on the basis of One Time
Settlement Scheme in respect of its outstanding term loans is to be treated as
taxable u/s.28(iv) or u/s.41(1) — Held, No.

 

Per Dr. O. K. Narayanan :

Facts :

The assessee company, engaged in the business of sea food
exports, had availed term loans from three banks, viz. ICICI Bank Ltd.,
Standard Chartered Bank Ltd., and Sumitomo Mitsui Banking Corporation,
Hongkong. These term loans were availed by the assessee for the purpose of
acquiring capital assets to be deployed in the manufacturing system of the
assessee company. Due to bad financial position the assessee defaulted on
payment of installments and interest. The total amount of loans that remained
payable to the banks amounted to Rs.3486.03 lakhs.

 

During the previous year relevant to the assessment year
under appeal, the assessee reached an agreement with the three bankers for One
Time Settlement (OTS) of its loan liability whereby the loan liability of
Rs.3486.03 lakhs was settled on payment of Rs.2450 lakhs resulting in a waiver
of loan amount of Rs.1036.03 lakhs. This principal amount of loan waived by
the banks was credited by the assessee to General Reserve Account and was not
offered for tax.

 

The AO held that waiver resulted in earning gain for the
assessee company in the course of carrying on of its business. He further held
that u/s.2(24)(i) both ‘profits’ and also ‘gains’ are income; it is a mandate
of S. 28 to levy income-tax not only on the profits of the business but even
on the gains of a business. He, therefore, held that In the light of the
definitions attributed to the expressions ‘income’ and ‘gains’, the waiver
benefit enjoyed by the assessee company should be treated as income of the
assessee from business. The AO relied on a decision of the Supreme Court (SC)
in the case of T. V. Sundaram Iyengar & Sons. He, accordingly, included the
amount of Rs.1036.03 lakhs in computation of assessable income under the head
‘Income from Business’.

 

The CIT(A) held that waiver amount was rightly charged
u/s.28(iv) of the Act. She also observed that the decision of the SC in the
case of T. V. Sundaram Iyengar & Sons is analogous in facts and the ratio of
the said decision was applicable to the assessee’s case. She dismissed the
appeal.

 

Aggrieved, the assessee preferred an appeal to the
Tribunal.

 

Held :

The Tribunal stated that the facts of the assessee’s case
are quite different from the facts considered by the SC in the case of T. V.
Sundaram Iyengar and Sons Ltd. and therefore the said decision does not become
applicable to the present case of the assessee.

 

The Tribunal noted that the Bombay High Court while
delivering its judgment in the case of Solid Containers Ltd. has not dissented
in any way from the earlier decision in the case of Mahindra and Mahindra Ltd.
It observed that in the case of Solid Containers Ltd. the Court has reiterated
the ratio laid down in the judgment of the High Court of Bombay in the case of
Mahindra and Mahindra Ltd., that the loan availed for acquiring capital
assets, when waived, cannot be treated as assessable income. Therefore, it
held that it is not possible to hold that as far as the loan waiver of capital
account is concerned, the decision of the Bombay High Court in the case of
Solid Containers Ltd. clashes with the judgment of the same court in the case
of Mahindra and Mahindra Ltd.

 

The Tribunal held that since the loan waiver amount
credited by the assessee in its general reserve account is covered by the
judgment of the Bombay High Court in the case of Mahindra and Mahindra Ltd.,
the said waiver amount cannot be held as taxable.

 

The Tribunal noted that the SC has in the case of Polyflex
(India) Pvt. Ltd. examined the constitution of S. 41(1) and categorically
ruled that the words ‘remission or cessation thereof’ apply only to a trading
liability. Since the term loans availed by the assessee from the three banks
were not in the nature of trading liability but were in the nature of capital
liability, it held that the waiver thereof would not become income u/s.41(1)
on the ground of remission or cessation thereof. It also noted that the
assessee never had the benefit of deduction of the term loan availed by it
from the banks on capital account. Also, the term loans availed were not in
the nature of any loss or expenditure. Therefore, it held that S. 41(1) had no
application to the present case.

 

The Tribunal found the issue raised to be squarely covered
by the judgment of SC in the case of Polyflex (India) Pvt. Ltd., the decision
of the Bombay High Court in the case of Mahindra and Mahindra Ltd., decision
of the Delhi High Court in the case of Phool Chand Jiwan Ram and the decision
of the jurisdictional High Court in the case of Cochin Co. Ltd.

Income-tax Act, 1961 — S. 40(a)(ia) and S. 194H — Whether trade discount allowed to a customer constitutes commission liable for deduction of tax u/s.194H — Held, No

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New Page 1

Part B — Unreported Decisions

(Full texts of the following Tribunal decisions are available at the
Society’s office on written request. For members desiring that the Society mails
a copy to them, Rs.30 per decision will be charged for photocopying and
postage.)



16. S. D. Pharmacy Pvt. Ltd.

v. Dy. CIT



ITAT Cochin

Before Dr. O. K. Narayanan (AM) and

N. Vijayakumaran (JM)

ITA No. 948/Coch./2008

A.Y. : 2005-06. Decided on : 5-5-2009

Counsel for assessee/revenue : R. Sreenivasan/

V. M. Thyagarajan

Income-tax Act, 1961 — S. 40(a)(ia) and S. 194H — Whether
trade discount allowed to a customer constitutes commission liable for
deduction of tax u/s.194H — Held, No.

 

Per Dr. O. K. Narayanan :

Facts :

The assessee company was engaged in the business of
manufacture and sale of ayurvedic products. In the course of assessment
proceedings the AO noticed that the total sales of the assessee were
Rs.4,82,12,960 and corresponding trade discount amounted to Rs.1,42,43,565.
This trade discount was given to four concerns of which one was a sister
concern of the assessee. The amount of trade discount to the sister concern
was Rs.1,34,24,839 since the major sales of the assessee were to its sister
concern.

 

The AO disallowed the amount of trade discount of
Rs.1,42,43,565 u/s.40(a)(ia) since he held that the discount fell within the
ambit of S. 194H of the Act and since the assessee had not deducted tax at
source the same was not allowable.

 

The CIT(A) confirmed the action of the AO.

 

On an appeal by the assessee to the Tribunal it was pointed
out to the Tribunal that the products sold were billed at gross amount and
trade discount was given at the rate of 50% or 30% or 17.20%, as the case may
be. Trade discount allowed was reduced from the gross invoice value and net
amount was shown as net price payable by the parties. Sales tax was collected
on the net amount so payable by the parties. In the accounts, the customer’s
account was debited with the net amount and the amount of trade discount was
debited to Trade Discount A/c which was transferred to the debit of Trading
Account. Sales turnover was a gross amount. The property in the goods passed
to the customer on delivery of the goods. It is only the net amount which was
receivable from the customer for the goods sold. Reliance, on behalf of the
assessee, was placed on the decision of Delhi Bench of the Tribunal in the
case of Mother Dairy India Ltd.

 

Held :

The Tribunal found this to be a case of outright sale on a
principal to principal basis at the net amount. The trade discount was held to
be margin that the dealers could enjoy in retail trade. The Tribunal noted
that there was nothing on record to show that dealers and buyers were not
acting on their own behalf and since the sales were made on principal to
principal basis there was no question of assessee paying any commission or
brokerage or similar amounts to parties for the services rendered by them. The
Tribunal also took note of the fact that the assessee was not crediting the
discount to the account of the customer/dealer but was directly debiting it to
Trade Discount A/c.

 

The Tribunal following the ratio of the decision of the
Kerala High Court in the case of M. S. Hameed and Ors. held that since the
assessee was not making any payment of commission or brokerage to the parties
nor was it crediting the accounts of the parties for similar amounts there was
no occasion to deduct the tax as contemplated u/s.194H.

 

The Tribunal also noted that the Kerala High Court has in
the case of Kerala Stamp Vendors Association held that discount given on price
by the seller to the purchaser cannot be termed as ‘commission’ or ‘brokerage’
for services rendered in the course of buying and selling of goods as the act
of buying does not constitute rendering of any service.

 

Considering the facts and following the ratio of the two
decisions of Kerala High Court the Tribunal held that trade discount debited
by the assessee in its accounts is not covered by the provisions of S. 194H of
the Act. Since there was no liability on the part of the assessee to deduct
any tax on the amount of trade discount given to its dealers the disallowance
of Rs.1,42,43,565 was deleted.

 

Cases referred :



(1) Mother Dairy India Ltd. v. ITO, ITA No.
2975/Del./2008 dated 12-12-2008

(2) M. S. Hameed and Ors. v. Director of State
Lotteries and Ors., 249 ITR 186 (Ker.)

(3) Kerala Stamp Vendors Association v. Office of the
Accountant-General and Ors., (282 ITR 7) (Ker.)

 

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S. 2(22)(e) : Balance in share premium account cannot be considered as part of accumulated profit.

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New Page 1

(Full texts of the following Tribunal decisions are available
at the Society’s office on written request. For members desiring that the
Society mails a copy to them, Rs.30 per decision will be charged for
photocopying and postage.)




17 DCIT v. MAIPO India Limited


ITAT ‘A’ Bench, New Delhi

Before R. V. Easwar (VP) and

K. D. Ranjan (AM)

ITA No. 2266/Del./2005.

A.Y. : 1996-97. Decided on : 7-3-2008

Counsels for revenue/assessee : A. K. Singh/

Rano Jain

S. 2(22)(e) of the Income-tax Act, 1961 — Deemed dividend —
Whether balance in share premium account can be considered as part of
accumulated profit — Held, No.

 

Per R. V. Easwar :

Facts :

The assessee had received an advance of Rs.25.43 lacs from
another company ‘G’, wherein it held 40% of the shares. Before the year end, the
assessee had repaid the sum of Rs.14.31 lacs. The AO assessed the balanced sum
of Rs.11.12 lacs u/s.2(22)(e) of the Act. In the books of G, the aggregate sum
of reserves and surplus of Rs.1.95 crore included the sum of Rs. 1.9 crore of
share premium. The issue was whether the balance in share premium account could
be considered as accumulated profit.

 

According to the Revenue, Explanation 2 to S. 2(22)(e) did
not provide for exclusion of capital profit expressly, and secondly, unlike
other clauses of S. 2(22) which contained the expression ‘whether capitalised or
not’, clause (e) did not contain the said expression. Therefore, it was
contended by it that the balance in share premium account was part of
accumulated profit.

 

Held :

The Tribunal noted that as per the provision in the Companies
Act, 1956, application of the proceeds of the share premium account, for
purposes other than those given in S. 78 of the Companies Act, was treated as a
reduction of the company’s share capital. The said purposes were :



  • To pay up fully paid-up bonus shares;



  • To write off preliminary expenses;



  •  To write off share issue expenses;



  • To pay premium on redemption of redeemable shares/debentures;



  • To purchase its own shares/securities.


 


The above position was also confirmed by the Apex Court in
the case of Allahabad Bank Ltd. Thus, according to the Tribunal, not only was
there a prohibition on the distribution of the share premium account as dividend
under the Companies Act, but the same was treated as part of the share capital
of the company. Further, relying on another decision of the Apex Court in the
case of Urmila Ramesh, it observed that the expression ‘whether capitalised or
not’ (as referred to by the Revenue in its submission), could have an
application only where the profits are capable of being capitalised. The same
were not applicable where the receipts in question formed part of the share
capital.

 

Based on the above and also relying on the ratio of the
decision of the Apex Court in the case of P. K. Badiani, the Tribunal upheld the
decision of the CIT(A) and dismissed the appeal filed by the Revenue.

 

Cases referred to :



(1) CIT v. Allahabad Bank Ltd., AIR 1969 SC 1058
(SC)

(2) CIT v. Urmila Ramesh, (1998) 230 ITR 422 (SC)

(3) P. K. Badiani v. CIT, (1976) 105 ITR 642 (SC)


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After the stimulus phase-out – Govt errs in focusing only on financing current account deficit.

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The US Federal Reserve has dropped clear hints that its long phase of quantitative easing, in which it bought bonds in an “open-ended” manner, will come to an end. It will not cease abruptly – which is why it is now being called a “tapering”. However, even the prospect that the end of the Fed’s massive stimulus, which flushed global markets with liquidity, is on the horizon has been enough to cause jitters among investors. The question that many should now ask is: what will be the medium-term fallout of the shift in the Fed’s stance? In particular, how will it affect emerging markets – especially India? So far, under the influence of easy money, the stock market index in India has run up 4,000 points to around 19,000; bond markets, too, were long buoyed by one-way inputs. The Sensex has taken a few losses. But it’s the debt market that has seen the real action, with well over $3 billion of foreign money flowing out of Indian government bonds in the last two weeks. The rupee, in its recent rapid depreciation to close to 59 against the dollar, has suffered a fate similar to the currencies of other growthchallenged emerging market countries – both Brazil and South Africa have seen their currencies hit a four-year low against the dollar. India, however, has a particularly large current account deficit, around five per cent of GDP, making it particularly dependent on foreign investors being willing to take on emerging market risk so that their inflows finance India’s imports.

Finance Minister P Chidambaram spoke obliquely about this situation when he called for a “longterm view” on the part of investors, and promised more reform that would address the problem. There weren’t too many details on offer, but even the broad hints that Mr Chidambaram dropped suggest the government is looking at the problem primarily from a limited perspective of financing the current account gap, without addressing the fundamental cause of the deficit. He referenced, in particular, the reviewing of caps on foreign direct investment (FDI) in various sectors. Meanwhile, the Securities and Exchange Board of India raised investment limits for long-term foreign investors in government debt by another $5 billion to $30 billion. These two measures are, broadly, more of the same approach that the government has tried so far. They are not in and of themselves a problem, and should even be welcomed. But measures to promote FDI and FII holding of debt merely paper over the current account deficit problem – they do not solve it. As long as there is an imbalance on India’s books with the rest of the world, these steps will never be enough.

The focus on financing the current account deficit is, thus, the wrong focus. What is needed instead is to boost exports, and to improve India’s macroeconomic fundamentals. The latter is complicated by the fact that the effects of the end of quantitative easing elsewhere may well upset India’s monetary schedule, making the Reserve Bank of India less likely to reduce interest rates. The space to do so has to be provided from somewhere, however, and thus fiscal correction must accelerate – allowing borrowing rates to come down and investment to rise. Without that, investment-led growth – as well as consumption in rate-sensitive sectors like automobiles, real estate and so on – will not recover. Meanwhile, the lopsided balance of trade shows the need for fundamental reform. A good proportion of the current account deficit, for example, is due to imports of pulses and cooking oil. Pushing foodgrain-specific food security will make this problem worse, not better. And promoting exports will need basic labour law reform. This is where the government should be looking.

(Source: The Business Standard dated 14.06.2013)
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Simple Encryption Software Can Keep Govt Snoops at Bay

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Despite vast surveillance operations, governments will not be able to detect every suspicious interaction that takes place on phone and internet network. By using encryption software that is readily available off the shelf, citizens can make it very difficult for government agencies to snoop in on their phone conversations or even messages exchanged over the internet.

So, electronic surveillance programmes, such as the US government’s PRISM — through which it clandestinely keeps a tab on people around the world by gathering data from several corporations —and India’s Central Monitoring System, can do very little if users are determined to go Concerns about governments invading into the privacy of its citizens have come to the fore after classified documents about the PRISM programme were leaked to the media by Edward Snowden, a former American intelligence officer and technical contractor.

The leaked documents revealed that several large technology companies, including Microsoft, Yahoo, Google, Facebook and Apple, participated in the programme and gave US authorities access to their data. In India, the government began rolling out its Central Monitoring System in April. The system gives the National Investigation Agency, as well as other investigating authorities, access to everything that happens over India’s telecommunications networks, including phone calls, text messages and social media conversations. But such indepth surveillance programmes could end up achieving very little of what they were set up for in the first place. They could also be misused.

Experts have pointed out that users can employ encryption software like TrueCrypt to hide data from everyone other than the intended recipient. Also, IP addresses, which give away the computer’s or mobile device’s location, can be hidden using Tor, a free software that redirects internet traffic through thousands of proxy computers before it reaches its final destination. Other options include www.encryptfiles.net, where users can encrypt files that they send over email, and free and easily accessible tools such as Steganos Lock-Note, Gpg4win and SendInc.

(Source: The Economic Times dated 13-06-2013)
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Rupee responses – Address the current account deficit with concrete steps

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Given recent tendencies, it was only a matter of time before the rupee fell below its previous low, touched a little under a year ago. When the downward trend first began in August 2011 and then intensified later that year, there was a strong opinion that the Reserve Bank of India (RBI) should take on the responsibility of containing the decline. Many stakeholders, including, prominently, companies that had borrowed large sums abroad, were taking a beating because they had not hedged their foreign currency exposures. The costs of a large depreciation are unquestionably high – but, as the experience of several countries teaches, probably not as high as the costs imposed by a failed defence of the currency. This was the RBI’s position during that episode and remains its stance during the current one, as articulated by RBI Governor D Subbarao recently. And it is a legitimate one. The trigger for the recent bout of depreciation was the statement by the chairman of the US Federal Reserve, Ben Bernanke, that they would have to start thinking of rolling back liquidity now that macroeconomic conditions were showing signs of improving. In a global marketplace buoyed by successive infusions of liquidity over the past four years, this statement signalled a return to normalcy in the US monetary policy stance and a consequent revaluation of the dollar. All currencies were devalued by the markets as a consequence. There is absolutely no case for any country to draw down its foreign exchange reserves to defend its currency against the dollar in these circumstances. This would simply add to the vulnerability of the currency to persistent pressure. And stakeholders seem to have accepted this: there is far less clamour to resist the depreciation.

However, even though there are global forces at work here, the contribution of domestic factors should not be underplayed. While all currencies are depreciating against the dollar, the ones that have declined the most are from countries with large current account deficits. India is, unfortunately, a leader in this category and looks like it will remain so for a while. Despite all the public handwringing about the size of the current account deficit, very little has actually been done to rein it in. While domestic fuel prices are gradually being corrected, consumers are yet to pay the full rupee price of diesel and liquefied petroleum gas for domestic use. Measures have been taken to dampen demand for gold, but these are widely perceived to be misdirected and unlikely to have any real impact. And on the mineral front, little has been done to revive the once substantial iron ore exports, while the country’s power sector will remain dependent on imported coal for some time to come. All of these will combine to keep the current account deficit at dangerous levels, with the inevitable downward pressure on the rupee. The risks of a spiral between currency depreciation, a widening current account deficit due to more expensive critical imports and declining capital inflows due to lower dollar returns are tangible. Rather than trying futilely to talk the rupee up, the government needs to take credible actions to address each of the threats of the current account deficit. Even if they take some time to have an impact, the signalling effect will be worth something.

(Source: The Business Standard dated 17-06-2013)
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Interests in conflict – Coal probe shows business in politics needs to be tackled

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The Central Bureau of Investigation on Tuesday raided, and registered a first information report against, two Congress politicians. They are Naveen Jindal, who owns Jindal Steel and Power Ltd (JSPL) and is a member of the Lok Sabha; and the Andhra film maker-turned-Rajya Sabha member Dasari Narayana Rao, once minister of state for coal. Essentially, a company in Mr Jindal’s group is alleged to have bought, through an intermediary company, shares in Mr Rao’s Saubhagya Media at prices more than three times the market rate. The difference, it is being argued, was the payment for allowing the allocation of several captive coal mines to JSPL’s operations, which vastly helped that company’s bottom line. On the one hand, this is a fairly straightforward accusation of corruption and bribery; if it is proved, there exist laws to deal with it. On the other hand, it throws up further knotty questions. After all, it is worth noting that Mr Jindal and Mr Rao were both men of business – and both were from the same party. Nor are they alone; an increasing number of members of Parliament (MPs) are businessmen who have entered politics, or senior politicians who have extensive business interests in either their own names or in those of close associates and family members. In this case, if an attempt was indeed made to pay off Mr Rao, it was thought possible to try and conceal it under the cloak of regular business transactions. Matters can get even worse when the direct pay-offs are replaced with more complex transactions – perhaps business favours of one sort or another, or crucial information. Yet India’s thinking on conflict-of-interest issues remains sadly backward.

This is not to say that India has no regulations on the books. Lok Sabha members, for example, are expected to declare their assets and liabilities – if not their actual interests. Before joining a debate, an MP is expected to declare all personal or pecuniary interests in the matter at hand. Ministers are forbidden to have any connections with businesses that are related to the work they conduct for the government. The Rajya Sabha maintains a register of members’ interests, which includes lists of consultancies and majority shareholdings, but it is far from exhaustive. It is not made public. The primary check on any overlap between business and political interests of an MP is his or her fellow parliamentarians – Lok Sabha members’ votes can be “challenged” by another member if a conflict of interest is perceived; the House ethics committee is expected to investigate any declarations of conflict.

The sad truth, however, is these genteel systems have not evolved enough to match the rapidly changing ways in which administrative processes can be subverted. Even in the United States, where a substantial ethics staff examines declared interests of Congress members and federal employees to discover conflicts and require divestiture of officials’ holdings, loopholes are regularly discovered – most recently, regarding insider trading. In India, no declarations or challenges have been issued in many years. Meanwhile, the Election Commission is supposed to take up complaints of unethical behaviour by ministers; it has long failed to do so, or even to make the Rajya Sabha’s book of interests public – which might have made Mr Jindal and Mr Rao more cautious. The mechanisms exist, but it seems they do so only on paper. If there are loopholes in the current regulatory system, they need to be plugged. Politicians and bureaucrats need to realise public opinion will not sit by while the regulatory system rusts.

(Source: The Business Standard dated 13-06-2013)
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Infosys’ N.R. Murthy’s Second coming – at risk as Infosys

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If one were to analyse the initial reactions to the news that NR Narayana Murthy was returning to Infosys, with son in tow, it has been sharply divided. The company’s stock price went up following the announcement, reflecting investor perceptions; and there are those who believe that the founder’s return will help the company find its bearings again. There are others who think it is not a great idea to bring back a 67-year-old to take executive leadership, and that tagging on his son as executive assistant doesn’t make it any better-surely there must be people in Infosys who can at least be competent executive assistants!

No one so far has looked at it from Mr Murthy’s perspective; he is probably committing himself to a busier schedule and a knottier set of problems than he might have wanted at this stage, risking a reputation built over a lifetime, and perhaps also disrupting whatever career plans his son might have had. On the other hand, you could argue that Mr Murthy had no choice-he created today’s situation by pushing into leadership positions people who should not have been there, he did so for the wrong reasons (the company’s founders were playing a silly and irresponsible game of round-robin!), and he watched while the company lost touch with the market and also lost key human resources.

So can he make it work a second time? Comparisons with Steve Jobs are not relevant, except to the extent that both are/were inspirational leaders. Apple is built around unique products, and Jobs was their creator, while Infosys is a service organisation. Comparisons with Sachin Tendulkar, of the kind that Mr Murthy unfortunately made, are even worse-the cricketer’s batting average today is way short of what it used to be. But it is a net positive that there is no one in the company with Mr Murthy’s external stature, so he could perhaps win over customers more effectively than others can. It helps that he is nothing if not a relentless salesman who knows how to pitch to the audience of the moment, internal as well as external, and that is a good starting point for a fresh innings.

The big risk is that an old warhorse tries the same old business tricks that he knows, but they don’t work in a changed environment. And the fact is that the business situation today is radically different from the world full of opportunities that presented itself to Infosys in the second half of the 1990s, with unique cost and other advantages for an Indian firm. New US visa regulations are being debated that could put a huge spanner in the works of India’s software service exporters. Competition has got way more difficult, some of India’s cost advantages have been neutralised, the old business models will not work today, and Infosys simply does not have the halo it once enjoyed-so that both employees and customers now look at the company differently. The further problem is that the old-new chairman may be unwilling to rock the managerial boat, and to get tough with people who have been with him for half a lifetime. Finally, India’s tech companies, for all their vaunted reputations, have not always been great at service delivery.

The lesson this whole episode drives home is that, even if you can build a successful company, it is an altogether different challenge to prevent it from becoming a shooting star. How do you keep a company successful through different business cycles, changing market realities and successive generations of technology? The answers have to go beyond the personalities of a company’s founders.

(Source: Weekend Ruminations by T.N. Ninan in Business Standard dated 08-06-2013).
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A country for scandal? – What do IPL and Ranbaxy tell us?

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Pillorying the government of the day for pervasive
corruption is the easy thing to do, whereas it might just be an escapist
option. It helps those of us who are neither in politics nor in the
government to pretend that we are not tainted, and therefore have the
right to point fingers at politicians, who we assume are not. The truth,
as recent events have brought home forcefully, is that corruption has
permeated fields that have nothing to do with politics and government.

The
cricket establishment is a disgrace, and now suspected of far worse
than the misdemeanors of the Indian Olympic Association, for which that
body has suffered the deserved misfortune of being thrown out of the
international Olympic movement. If it is spot fixing in cricket, it has
been widespread doping in wrestling; problems persist in half a dozen
sports bodies, whose recognition the government has withheld. You could
argue that it is politicians who mostly run the sports bodies, except
that none of the people around Mr Kalmadi were from the world of
politics. In any case, the cricket boss is a businessman.

And
what does one make of Ranbaxy – once a poster boy for the emerging
India, but which now stands exposed for falsifying its research results,
and then selling what must presumably be described as adulterated drugs
to unsuspecting consumers, at home and abroad? The US authorities have
slapped a penalty of half a billion dollars (about Rs 2,800 crore), but
where have India’s own drug authorities been all this while? What about
the criminal liability of all those who were in the company and part of
the fraud? What is the responsibility of the company’s directors of the
time, including many well-known worthies – who, according to the
whistle-blower, chose to ignore the red flag that he waved?

The
building collapse that killed 1,100 hapless garment workers in
Bangladesh has undermined that country’s $20-billion garment export
industry, and raised systemic questions about building regulation. At
home, now that Wockhardt too has run into trouble with the US
authorities, what is the message to the world about India’s drug
industry – seen not so long ago as a global winner? When fraudulent
accounting at Satyam cast an international shadow on India’s IT services
sector, the damage was contained because the other companies in the
field were squeaky clean and Satyam itself was quickly sanitised through
changes of management and ownership. Ranbaxy casts a darker shadow,
because faking drugs is a more lethal business than faking accounts –
though bogus financials too can cause suicides, as the Saradha mess in
West Bengal shows. The older of the two billionaire brothers who sold
the company five years ago (and now run hospitals) has pleaded an angry
innocence because five years have passed since he stepped out of the
company, but the faking of research results was taking place on his
watch, and liability for that is independent of whether the Japanese who
bought the company in 2008 did proper due diligence.

No
system-wide questions are answered by doing nothing. If the canker is
widespread, there have to be systemic solutions. An obvious step is to
come down hard on anyone who is caught, as a lesson to everyone else.
System legitimacy suffers only when businessmen find ways of avoiding
being brought to justice. But perhaps the worst outcome would be to
treat this as just one more kind of reality TV, for nightly
entertainment. All troubling questions can be evaded if we just watch
Arnab Goswami shout at, hector and pillory his “guests” for an hour
every night, for thereby we’ve earned our absolution!

(Source: Weekend Ruminations by T.N. Ninan in Business Standard dated 25-05-2013)
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Investor Education and Protection Fund ( Uploading of Information regarding unpaid and unclaimed amounts lying with Companies) Rules, 2012

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The Ministry of Finance vide Investor Education and Protection Fund (Uploading of Information regarding unpaid and unclaimed amounts lying with Companies) Rules, 2012 dated 10-05-2012, requires every Company to file Form 5INV the details regarding unclaimed and unpaid dividends as per provisions of section 205 of the Companies Act, 1956. This information is required to be filed every year within a period of 90 days after holding the AGM or the date on which it should have been held as per the provisions of section 166 of the Act and every year thereafter till completion of the 7 years period.

E-mails have been sent to Companies not complying with the same alongwith the note that in case the amounts lying unpaid is NIL, the same is to be submitted at the following link http://www.iepf.gov. in/IEPFWebProject/jsps/iepf/SubmitDetails.jsp.

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Power of ROCs to obtain declaration/ affidavits from subscribers/first directors at the time of incorporation

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Vide Circular No. 11/2013 dated 29th May 2013, the Ministry of Corporate Affairs has given the power to the ROC to obtain declaration/affidavits from subscribers/ first Directors at the time of incorporation to ensure that Companies raise monies in accordance with provisions of Companies Act/Deposit Rules. The affidavits/declarations may also be asked when Company changes its objects Clause to the effect that Company/Directors shall not accept deposits unless the applicable provisions of Companies Act, 1956, RBI Act, 1934 and SEBI Act, 1992 and rules/ directions/regulations made thereunder are duly complied.
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What constitutes ‘teaching in or by educational institutions’ under Article 12(5)(c) of India-USA DTAA ?

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Part C — Tribunal & International Tax Decisions



  1. Sri Ramachandra Educational and Health Trust

(2009 TIOL 13 ARA IT) (AAR)

Article 12(5)(c) read with MOU, India-USA DTAA; S. 9, S.
195, Income-tax Act

Dated : 29-5-2009

Issue :

What constitutes ‘teaching in or by educational
institutions’ under Article 12(5)(c) of India-USA DTAA ?

 

Facts :

The applicant was registered u/s.12AA of Income-tax Act. It
had two institutions — a medical college (which was a deemed university) and a
hospital (which was a university hospital). The applicant had executed an
agreement with an American medical institution (‘US Med’) for transfer of
knowledge and experience in the field of medical sciences. US Med was a
tax-exempt entity in USA. The applicant applied to AAR for determination of
the issue whether, having regard to Article 12(5) of India-USA DTAA, the
applicant would be required to deduct tax at source u/s.195 on the annual fee
payable to US Med, especially when both the payer and the payee are not liable
to tax in their respective countries.

 

The applicant stated that :



  •  US Med
    would be rendering the services from USA. Being non-resident, it was not
    liable to tax u/s.9 of the Act in respect of services rendered in USA.



  •  As the
    payments were for teaching in or by educational institution, they would be
    excluded from Article 12(5)(c) of India-USA DTAA. The applicant supported
    this proposition with examples 10 & 11 in the MOU appended to India-USA DTAA
    in respect of fees for included services in Article 12 (‘the MOU’).



  •  As US Med
    was not liable to tax in India, the applicant had no obligation to deduct
    tax at source.


The tax authorities stated that :



  •  Though
    the applicant was exempt u/s.12AA, US Med was not so exempt under the Act.



  •  Fees
    payable by the applicant to US Med fall within the purview of S. 9(1)(vii)
    of the Act, read with the explanation below S. 9(2).



  •  The fee
    paid was described as ‘annual alliance development
    administrative/maintenance fee’, which showed that it was not wholly for
    teaching in or by educational institution. Hence, the payment was outside
    the purview of Article 12(5)(c) of India-USA DTAA.



  •  Correspondence from US Med showed that tuition fee paid was to be covered
    under ‘program deliverables’, which showed that the consideration was paid
    for making available technical knowledge, experience, skill, know-how or
    processes. As such, it was covered under Article 12(4) and example 10 of the
    MOU explaining the scope of exemption for teaching in educational
    institutions.


 


The AAR noted that, US revenue authorities had granted
exemption to US Med under US Revenue Code. It was also noted that US Med was
an incorporated entity which was exempt from tax in USA and as such, it could
invoke provisions of DTAA. The tax authorities did not dispute this position1.

 

The AAR observed that, as the question of tax deduction
would arise only if income is chargeable to tax, it was necessary to ascertain
the taxability of the fees paid. For this purpose, the AAR reviewed the
agreement. It observed that :



  •  US Med
    was to provide educational and teaching services.



  •  Specific
    services were to be agreed and decided in annual plan. These services were
    termed ‘deliverables’ for which fixed annual fee was to be paid.



  •  Additional services were termed ‘additional deliverables’ for which
    additional payment was to be made.



  •  US Med
    had granted non-exclusive, non-transferable licence to the applicant for use
    of copyright, trade mark, trade secrets, patent, etc. (‘intellectual
    property’) owned by it. The AAR observed that though the agreement clarified
    that no royalty was to be paid for use of Intellectual Property, the
    substances of the arrangement was to the contrary.



  •  Based on
    information provided by the applicant, the AAR noted that following actual
    activities were conducted during the years 2004 to 2006.



  •  Various
    programmes and workshops called ‘CME Programmes (comprising medical
    education).



  •  Faculty
    student exchanges where the applicant’s representatives were deputed to US
    Med for doing clerkship.



  •  Tele-medicine, which was a continuing program of monthly tele-medical
    education, e-learning and providing help in applicant’s institution-building
    through programmes in education, clinical care and research.


The AAR then referred to Article 12 of DTAA and examples 10
and 11 of the MOU appended to DTAA. It also referred to the legal definitions
of the terms ‘technical’ and ‘teaching’. It observed that the terms were
defined in their widest sense. The AAR then discussed examples 10 and 11 of
the MOU as also the connotations of the terms ‘technical’ and ‘teaching’.

Held :

The AAR stated that as clear picture of the activity and
payments did not emerge from the facts, it would lay down broad guidelines. In
respect of each of the activities, the AAR held that :



  • Workshops and seminars are conducted from time to time. Generally, the speakers are from US Med. Medical teachers and professional from different places participated in these events. However, it was not known whether the workshops and seminars had any connection to a particular course conducted by the medical college of the applicant and whether it was meant for the benefit of students. These activities could be covered in Article 12(S)(c) : only if faculty from US Med participated in them; some of the participants benefiting from the activities were pursuing medical courses in the applicant’s institution; and seminar/workshop has substantial connection with the course of studies in the college.

  • Tuition fees paid in respect of scholars deputed to complete course in USA were covered by example 10 of the MOU and consequently, were covered under Article 12(S)(c). Accordingly, they were excluded from the purview of fees for included services.

  • Tele-conferencing and e-Iearning were part of teaching methodology. Hence, payments made for them would qualify for exclusion under Article 12(S)(c).

  •  Payment to faculty for teaching through tele-conferencing and e-learning would be covered under Article 12(S)(c).

  • Consideration for use of intellectual property would not be covered under Article 12(5)(c)2.

The AAR held that as the applicant made lump sum payment for various services, it was not possible for AAR to relate the payment to individual services which are exempt and those which relate to consideration for use of IPR. In the light of the above observations, AAR declined to give a ruling to the effect that the applicant was not at all liable to deduct tax at source in respect of payments to US Med and hence directed applicant to make an application before the tax authorities for determination of appropriate portion chargeable to tax in India.

On facts, the assessee is an employer responsible for tax deduction u/s.192.

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Part C — Tribunal & International Tax Decisions






  1. Dolphin Drilling Ltd. v.
    ACIT



[2009] 121 TTJ (Del.) 433

S. 10(6)(viii), S. 40(a)(i), S. 40(a)(iii), S. 192, S. 195,
Income-tax Act

A.Y. : 2004-2005. Dated : 30-1-2009

Issue :

  • On facts,
    the assessee is an employer responsible for tax deduction u/s.192.

  • Amount paid to non-resident
    towards reimbursement of employees’ salaries disbursed as an agent is not
    subject to tax withholding u/s.195.




 


Facts :

The assessee was a UK company (‘UKCo’). UKCo had entered
into a contract with ONGC to charter duly manned deep water drilling rig
together. UKCo entered into contract with another group company in Norway for
procuring crew to operate the drillship. As per the agreement with the
Norwegian company, the Norwegian company was to procure/supply crew. Norwegian
company was to disburse the salary of the crew. UKCo was to, reimburse the
salary of the crew and also pay 5% of the reimbursed amount as handling fee to
the Norwegian company.

 

Additionally, UKCo also paid fixed fees to Norway Company
towards meeting personnel, office, administration and other costs. The crew
were employees of UKCo. UKCo had issued appointment letters to the crew and
UKCo was responsible to secure work permits and security passes for crew as
well as to provide housing and transportation to crew. UKCo also deducted tax
at source u/s.192 of the Act from the income of the crew after considering
exemption u/s.10(6)(viii) of the Act and deposited the same with the
Government.

 

UKCo deducted tax u/s.195 on the fixed fee and the handling
fee paid to Norwegian company.

 

The AO held that the amount reimbursed by UKCo to Norwegian
company for disbursement of crew salaries was ‘fees for technical services’
and hence, tax should have been deducted u/s.195 on the entire amount. Since
the tax was not deducted, the AO disallowed the payment u/s.40(a)(i) of the
Act.

On appeal, CIT(A) confirmed the order of the AO.

 

Held :

The Tribunal held that the obligation for payment of
salaries to the crew was of UKCo and Norwegian company disbursed the salaries
only for the convenience of the parties.

 

The reimbursement of crew salaries was chargeable under the
head ‘Salaries’ and hence, the payments would not be covered u/s.40(a)(i) but
would be covered by S. 40(a)(iii). Since S. 10(6)(viii) exempts remuneration
for employment on a foreign ship if total stay in India does not exceed 90
days, tax would not be deductible in case of employees whose stay did not
exceed 90 days.


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S. 271(1)(c) : Denial of claim for deduction resulting into higher assessed income cannot be ground for imposition of penalty

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(Full texts of the following Tribunal decisions are available
at the Society’s office on written request. For members desiring that the
Society mails a copy to them, Rs.30 per decision will be charged for
photocopying and postage.)



16 Nasu Properties Pvt. Ltd. v. ITO


ITAT ‘I’ Bench, Mumbai

Before K. C. Singhal (JM) and

D. K. Srivastava (AM)

ITA Nos. 1160 and 1161/Mum./2006

A.Ys. : 2000-01 and 2001-02. Decided on : 21-1-2008

Counsels for assessee/revenue : Jayesh Dadia/Ashima Gupta

S. 271(1)(c) of the Income-tax Act, 1961 — Penalty for
concealment of income — Claim for deduction denied resulting into higher
assessed income — Whether AO justified in imposing penalty — Held, No.

 

Per D. K. Srivastava :

Facts :

The assessee’s claim for deduction of Rs.5 lacs towards
diminution in the value of investment was disallowed by the AO and confirmed in
appeal by the CIT(A) as well as the Tribunal.

 

In response to the show-cause notice with reference to the
penalty u/s.271(1)(c), the assessee contended that full facts necessary for the
assessment were disclosed in the return of income filed. Therefore, it did not
amount to concealment of income. However, the AO levied the penalty which was
confirmed by the CIT(A).

 

Held :

The Tribunal noted that the assessee had furnished all the
relevant particulars in its return of income. Thus, the charge of furnishing of
inaccurate particulars of income by the assessee was not established. According
to it, simply because the Departmental authorities had not accepted the claim of
the assessee or the assessee had lost appeals filed against the orders of the
Departmental authorities, dismissing the claim of the assessee, cannot ipso
facto lead to the establishment of charge of furnishing of any inaccurate
particulars of income. Accordingly, the penalty levied was cancelled by the
Tribunal.

 

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Indian company engaged Chinese company for testing of bauxite and providing test reports— Testing done entirely in China—Issue of taxability of payment by Indian company for services—Held : (i) After amendment to S. 9, irrespective of the place of utilisa

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16 Ashapura
Minechem Ltd. v.
ADIT
(2010) 5 Taxman.com 57 (Mum-ITAT)
Article 7, 12(4) of India-China DTAA
S. 9, S. 195 of Income-tax Act
Dated : 21-5-2010


 

Indian company
engaged Chinese company for testing of bauxite and providing test reports—
Testing done entirely in China—Issue of taxability of payment by Indian company
for services—Held : (i) After amendment to S. 9, irrespective of the place of
utilisation or rendition and territorial nexus, payment was chargeable as FTS
under Income-tax Act; and (ii) As per source rule under India-China DTAA, place
of rendition is not material and FTS is deemed to accrue in country where payer
is resident.

Facts :

The taxpayer
was an Indian company (‘IndCo’), in the process of building an alumina refinery.
It engaged a Chinese company (‘ChinaCo’) for testing of bauxite to be mined by
IndCo in India. ChinaCo was to test bauxite in its laboratories in China and
prepare test reports so that IndCo could define the process parameters for
processing of bauxite. The test reports were to provide complete chemical
composition of bauxite, performance tests, etc. IndCo agreed to pay certain
payment to ChinaCo for these services.

According to
IndCo : testing charges were in the nature of business profits subject to
Article 7 of India-China DTAA; ChinaCo did not have any PE in India; and hence,
no taxes were required to be withheld u/s.195. Accordingly, it applied for
certificate for no withholding of tax.

According to
the tax authorities, the payments were for services and were taxable as ‘Fees
for Technical Services’ (FTS).

The CIT(A)
upheld the order of the tax authority.

The Tribunal
referred to and relied on its earlier order in case of Hindalco Industries Ltd
v. ACIT, (2005) 94 ITD 242 (Mum.) which laid down certain principles of
interpretation of tax treaties, stating that the language used in a tax treaty
need not be examined in literal sense and a departure from plain meaning is
permissible where the context so requires.

Held :

The Tribunal held that :

  • As regards taxability
    under the Income-tax Act :

  • Payments received by
    ChinaCo were covered within the definition of FTS under the Income-tax Act.

  • In light of the amendment
    to S. 9 by the Finance Act, 2010, the legal proposition regarding utilisation,
    rendition and territorial nexus is no longer good in law. Income of ChinaCo
    for services rendered to IndCo is taxable as FTS under the Income-tax Act.

  • As
    regards taxability under India-China DTAA :

  • The definition of FTS
    covers payments for provision of managerial, technical or consultancy
    services by a resident of one country in the other country. The expression
    ‘provision of services’ is not defined or elaborated anywhere in the tax
    treaty.

  • As per the source rule,
    FTS will be deemed to have accrued in the country where the payer is a
    resident and place of rendition of technical services is not material.

  • Literal interpretation
    of definition of FTS to mean rendition of service would render the source
    rule meaningless.

  • Literal interpretation
    to a tax treaty, which renders treaty provisions unworkable and which is
    contrary to the clear and unambiguous scheme of the treaty, has to be
    avoided.

  • he payments made to
    ChinaCo were taxable as FTS under India-China DTAA as well as under the
    Income-tax Act and hence, IndiaCo was liable to deduct tax from these
    payments.

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UK company had contractual obligation to provide repair and overhaul support and components to an Indian aircraft operator—maintained stock of components with Indian operator—consideration from Indian company for repair and overhaul and use, or right to u

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15 Airlines Rotables Ltd v. Jt. DIT (Unreported)
ITA No. 3254/Mum./2006
Article 5, 7, 13 of India-UK DTAA
A.Y. : 1998-99. Dated : 21-5-2010

 

UK company had contractual obligation to provide repair and
overhaul support and components to an Indian aircraft operator—maintained stock
of components with Indian operator—consideration from Indian company for repair
and overhaul and use, or right to use, of component—repair and overhaul of
component only outside India. Held : (i) UKCo did not have PE in India; (ii)
even if PE, no profit could be attributed to that PE; (iii) stock maintained
with Indian company was not for delivery on behalf of UK companY—even if Indian
company assumed to be agent, no agency PE constituted.

Facts :

The taxpayer was a company incorporated in the UK (‘UKCo’),
and a tax resident of the UK. Principal business of UKCo was to provide spares
and component support to aircraft operators. UKCo entered into an agreement with
an Indian company (‘IndCo’) for providing certain support services for aircraft
operated by IndCo. Under the agreement, UKCo was required to repair or overhaul
a component when IndCo discovered that such components had become operationally
unserviceable. In such case, UKCo was also required to provide replacement of
the component. UKCo was also required to ensure that airworthiness directives in
respect of such component (whether replaced, repaired or overhauled) were fully
complied with. The consideration received by UKCo comprised two parts. One, for
repair and overhaul of the component. Two, for use or right to use, replacement
component. To ensure timely availability of the component, UKCo maintained stock
of replacement component at the operational bases of IndCo in India and also in
the UK at its depot. IndCo was forbidden from loaning, pledging, selling,
exchanging or encumbering any items from the stock.

Before the AO, UKCo contended that it did not have any PE in
India and hence, its business profits were not taxable in India. However, the AO
inferred that the stores staff of IndCo was acting as agent of UKCo and since
UKCo maintained stock of goods in India, in terms of Article 5.4(b) read with
Article 5.5 of India-UK DTAA, PE of UKCo came into existence. The AO estimated
10% of gross receipts of UKCo as profits attributable to PE.

The CIT(A) concurred with the view of the AO.

The Tribunal observed that in terms of Article 5(1) (i.e.,
the basic rule), a PE is said to exist in the other contracting state when an
enterprise of one of the contracting state has a fixed place of the business in
that contracting state through which the business of the enterprise is wholly or
partly carried out. There are three criteria embedded in this definition (i)
physical criterion (i.e., existence of physical location); (ii) subjective
criterion (i.e., right to use that place); and (iii) functionality criterion
(i.e., carrying out of business through that place). Only when these three
criteria are satisfied, a PE can come into existence.

Thus, it is necessary that for PE to exist not only should
there be a physical location through which the business of the foreign
enterprise is carried out, but also that such place should be at its disposal.

Held :

The Tribunal held that :




  • Even though
    the stock of UKCo was stored at a specified physical location, it was under
    the control of IndCo and UKCo did not have any place at its disposal in the
    sense that it could carry out its business from that place. As the physical
    location was under the control of IndCo, UKCo did not have any place at its
    disposal. Thus, it cannot be said to constitute PE of UKCo in India.

  • Even if there is a PE,
    only profit attributable to that PE can be taxed in India. Hence, as entire
    repair and overhaul work was done outside India, no part of the profit could
    be taxed in India.

  • A dependent agent PE
    (‘DAPE’) under Article 5(4)(b) of India-UK DTAA can come into existence only
    when business of UKCo is carried through that DAPE. It would be absurd to
    contend that IndCo is dependant agent of UKCo, which the tax authorities have
    not established. Even if IndCo is regarded as an agent, the maintenance of
    stock by it was for IndCo’s business. Further, even if it is assumed that
    IndCo is an agent, it would be an independent agent. Also, it maintained the
    stock for stand by use and not for delivery on behalf of UKCo. Therefore, UKCo
    does not have PE in India.

  • As part of the
    consideration pertains to use, or right to use, of components, taxability
    under Article 13(3)(b) (i.e., ‘equipment royalty’) should be examined.
    Non-taxability under Article 7 would still require consideration of
    application of Article 13. As these aspects had not been heard by the lower
    authorities, the matter was remanded to the CIT(A) for limited adjudication
    only on this aspect.



levitra

Indian company purchasing shares of another Indian company from non-resident—Non-resident assessed to tax—AO treated Indian company as agent and also assessed tax in its hands—Held : (i) withholding tax u/s.195 is not a bar to order u/s.163; (ii) there is

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14 Hindalco Industrial Ltd v.
DCIT
AIT 2010 211 ITAT-Mum.
S. 163 of Income-tax Act
A.Y. : 2001-02. Dated : 14-5-2010


Indian company purchasing shares of another Indian company
from non-resident—Non-resident assessed to tax—AO treated Indian company as
agent and also assessed tax in its hands—Held : (i) withholding tax u/s.195 is
not a bar to order u/s.163; (ii) there is no time limit u/s.163; and (iii) same
income cannot be assessed simultaneously in hands of non-resident as well as
agent.

Facts :

The taxpayer was an Indian company (‘IndCo’). IndCo purchased
shares of another Indian company from a foreign company. the foreign company was
a non-resident in terms of the Income-tax Act. The non-resident applied to the
AO u/s.197 of the Income-tax Act for lower withholding tax on the sale proceeds
of the shares. The AO issued certificate for lower withholding tax. Based on
this certificate, IndCo withheld and deposited the tax. Pursuant to the transfer
of the shares, the non-resident was chargeable to capital gains tax.

The non-resident furnished the return of its income. In the
course of assessment, the AO while assessing the non-resident, also issued
notice u/s.163 of the Income-tax Act to IndCo as representative assessee of the
non-resident, because the non-resident was in receipt of income from IndCo.
IndCo contended before the AO that as per the scheme and intent of the
Income-tax Act and particularly the provisions of S. 160(1)(i) read with S.
161(1), S. 162 and S. 163, no person could be treated as ‘Agent’, in relation to
a non-resident after the expiry of previous year corresponding to the assessment
year in question. The AO however, treated IndCo as Agent on the basis of plain
reading of S. 163(1), S. 160(1)(i) and S. 149(3).

The CIT(A) dismissed the appeal of IndCo.

Held :

The Tribunal held that :

  • The non-resident received
    income from IndCo. Therefore S. 163(1)(c) was attracted. Liability is not
    fastened on the representative assessee merely on passing of order u/s.163.

  • The fact that the agent
    had withheld tax u/s.195 cannot be a bar to pass order u/s.163.

  • The Income-tax Act does
    not contemplate any time limit for initiating proceeding u/s.163. The purpose
    of S. 163 is to secure payment of taxes by the non-resident. The proceedings
    were also not time-barred under the
    Income-tax Act. Hence order u/s.163 was valid.

  • In a similar issue in
    Saipem UK Ltd v. DDIT, (2008) 298 ITR (AT) 113 (Mum.), the Mumbai Tribunal has
    held that the same income cannot be assessed simultaneously in the hands of
    the non-resident as well as the agent, since such double taxation militates
    against the cardinal principles of taxation. Hence, once the assessment in the
    case of principal becomes final, the assessment of the same income in the
    hands of the agent cannot be made. Therefore the assessment of capital gain of
    the non-resident in the hands of IndCo was not proper.



levitra

Mauritius company performing contract for transportation and installation of platforms to be used in mineral oil exploration—Part of income pertained to activities carried on outside India— Whether entire income taxable in India—Income under presumptive t

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13 JDIT v. J. Ray McDermott Eastern Hemisphere Ltd.
(2010) TII 41 ITAT (Mum.-INTL)
Article 4 of India-Mauritius DTAA;
S. 5, S. 9(1)(i), S. 44BB of Income-tax Act
A.Y. : 2003-04. Dated : 30-4-2010

Mauritius company performing contract for transportation and
installation of platforms to be used in mineral oil exploration—Part of income
pertained to activities carried on outside India— Whether entire income taxable
in India—Income under presumptive tax provision can be taxed only if it is
otherwise chargeable to tax.

Facts :

MCo, a tax resident of Mauritius, undertook and executed a
contract for transportation and installation for certain well platform projects
to be used in mineral oil exploration. The contract was undertaken and performed
with an Indian company. Certain portion of the receipts of MCo pertained to work
carried on outside India.

While furnishing its return of income, MCo did not offer the
receipts pertaining to the work carried on outside India on the ground that in
terms of Explanation (a) to S. 9(1)(i) of the Income-tax Act, they were not
chargeable to tax. MCo also contended that, alternatively, such receipts cannot
be attributed to its PE in India.

While assessing the income, the AO held that : income
pertained to work to be carried out in India; source of income is related to
work to be carried out in India; and hence the entire receipts are taxable in
India. Further, S. 44BB does not distinguish between income for activities
carried on in India and for those carried on outside India.

The CIT(A) reversed the order.

The Tribunal relied on the decision on Saipem SPA v. DCIT,
(2004) 88 ITD 213 (Delhi ITAT) and McDermott ETPM Inc v. DCIT, (2005) 92 ITD 385
(Mumbai ITAT).

Held :

The Tribunal held that :

  • Only the income which is
    reasonably attributable to operations carried on in India is taxable in India.

  • Income computed on
    presumptive basis can be taxed in India only if it is otherwise chargeable
    under the provisions of the Income-tax Act.



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Whether a liaison office in India involved in collecting and transmitting of information for a Korean company would, by virtue of Article 5(4) of India-Korea DTAA, not constitute a PE ?

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Part C — Tribunal & International Tax Decisions



  1. M/s. K. T. Corporation

(2009 TIOL 12 ARA IT) (AAR)

Articles 5(1), 5(2), 5(4), 13,

India-Korea DTAA;

S. 9(1)(vi)/(vii), Income-tax Act

Dated : 29-5-2009

Issue :

Whether a liaison office in India involved in collecting
and transmitting of information for a Korean company would, by virtue of
Article 5(4) of India-Korea DTAA, not constitute a PE ?

 

Facts :

The applicant was a Korean company (‘KorCo’). KorCo had
obtained RBI’s permission for opening a liaison office (‘the LO’) in India for
the sole purpose of acting as a communication channel between the head office
and companies in India. While granting its permission, RBI had stipulated
various conditions and parameters subject to which the LO was to function.

 

The issue before the AAR was whether the LO of KorCo would
constitute its PE in India. Together with its application, KorCo had furnished
copy a Reciprocal Carrier Service Agreement (‘RCSA’), which it had executed
with an Indian company (‘IndCo’) after opening of its LO. Both KorCo and IndCo
were telecom carriers/resellers and had agreed to provide inter-connection
services to each other. IndCo was to provide and maintain connecting
facilities in India and KorCo was to do the same outside India. Each party was
to raise invoice on the other party in respect of the traffic terminated on
its side during each calendar month.

 

On the merits of the application, the tax authorities had
commented that the applicant had not sought ruling on the question of
taxability of payment made by IndCo to KorCo but had sought ruling only on the
limited issue whether the LO would constitute a PE. The tax authorities
mentioned that unless the applicant furnishes its reply on the following four
specific questions, it was not possible to conclude the issue :

(i) What was the role of LO in pre-bid survey carried out
before entering into the Agreement ?

(ii) How was the feasibility report prepared, did the LO
play any role in it ?

(iii) Were the employees of the LO involved in the
technical analysis of the project ?

(iv) Is the LO involved in the technical analysis of the
project or the execution of any part of the contract ?

 



Further, the tax authorities contended that independent of
the issue under consideration, the payments received by KorCo from IndCo were
taxable u/s. 9(1)(vi)/(vii) of the Act and Article 13 of India-Korea DTAA3.


 

By a supplementary statement of facts, KorCo furnished
information on the questions raised by the tax authorities. It submitted that
the LO was to act only as a communication channel within the restrictions
imposed by RBI. While it was a fixed place of business, its purpose was only
to collect information and to carry out preparatory and auxiliary activities
such as :

(i) Holding of seminars/conferences.

(ii) Receiving trade inquires from customers.

(iii) Advertising about the technology used by the
applicant in its wired/wireless services and replying to queries of
customers.

(iv) Collecting feedback from perspective customers.

 


The LO had not played any role in the pre-bid survey nor
had it involved itself in the technical analysis of any project before KorCo
executed agreement with IndCo. The applicant also furnished affidavit of the
general manager of the LO to this effect. The affidavit also stated that the
LO did not have permission/authority to conclude, nor had it executed, any
trade contract. Similarly, LO did not procure any order nor did it conclude
any negotiation. The counsel for the applicant emphasised that the LO was only
a representative office acting within the restrictions imposed by RBI and had
not undertaken any trading activity, nor had it executed any business
contract, nor had it rendered consultancy or any other services. Thus, the LO
was not a fixed place of business through which the business of KorCo was
wholly or partly carried on but it was a fixed place which had undertaken only
preparatory or auxiliary work. Hence, it could not be regarded as a PE under
Article 5(1), 5(2) read with clauses (d), (e) and (f) of Article 5(4) of
India-Korea DTAA.

 

Held :

The AAR referred to : paragraphs 1, 2 and 4 of Article 5 of
India-Korea DTAA; definition of ‘liaison office’ as per FEMA; the permitted
activities for a liaison office as per FEMA; and legal definition of the term
‘auxiliary’.

 

The AAR expressed its view that collecting information for
an enterprise by a liaison office can be considered to be an auxiliary
activity unless collection of information is primary purpose of the
enterprise. In case of KorCo, collection of information was not its primary
purpose and hence, collecting and transmitting of information by the LO to the
Head office was auxiliary activity particularly when the LO had no connection
with telecom services and network and the contracts related thereto. Hence, LO
could not be considered as PE in terms of Article 5(4)(d), (e) of India-Korea
DTAA. The AAR supported its view with certain extracts from the commentary on
OECD Model Convention, which inter alia, stated that the decisive criterion is
whether the activity of fixed place of business in itself was an essential and
significant part of the activity of the enterprise as a whole.

 

The AAR held that, as per the facts available, the LO had not performed ‘core business activity’ but had confined itself only to preparatory and auxiliary activity and as such the LO was covered within the exclusion in Clauses (e) and (f) of Article 5(4) of India-Korea DTAA. Hence, it could not be regarded as a PE in terms of Article 5(1). Reliance in this regard was made by the AAR on the Supreme Court’s decision in DIT (International Taxation) v. Morgan Stanley and Co Inc, (2007) 292 ITR 416 (SC) and Delhi High Court’s decision in UAE Exchange Centre v. UOI, (2009) 223 CTR 250 (Del.).

S. 148 : When time limit for issuance of notice u/s.143(2) not expired, notice u/s.148 invalid.

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(Full texts of the following Tribunal decisions are available
at the Society’s office on written request. For members desiring that the
Society mails a copy to them, Rs.30 per decision will be charged for
photocopying and postage.)




15 B. R. Industries v. ITO


ITAT ‘A’ Bench, Jaipur

Before I. C. Sudhir (JM) and B. P. Jain (AM)

ITA No. 988/J.P./2006

A.Y. : 2003-04. Decided on : 31-12-2007

Counsels for assessee/revenue : Mahendra Gargieya/L. R. Meena

S. 148 of the Income-tax Act, 1961 — Validity of issuance of
Notice — When time limit for issuance of notice u/s.143(2) had not expired,
whether Assessing Officer was justified in issuing notice u/s. 148 — Held, No.

 

Per B. P. Jain :

Facts :

The assessee had filed return of income on 2-12-2003, which
was processed u/s.143(1)(a) on 10-3-2004. Thereafter a notice u/s.148 was issued
on 8-4-2004 and served on 9-4-2004. The assessee was also served a notice
u/s.143(2) on 29-7-2005. The assessee challenged the validity of the notice
u/s.148 of the Act which was rejected by the AO and the CIT(A) as well.

 

The assessee contended that once the AO was having the
statutory time available with it for the issuance and service of a notice
u/s.143(2), during the pendency and availability of such time, he could not have
issued the notice u/s.148. The original return of income was filed on 2-12-2003
and as per the proviso below S. 143(2) of the Act, such a notice could have been
issued validly on or before 31-12-2004. The AO however, without waiting until
the expiry of the said period i.e., up to 31-12-2004, issued a notice
u/s.148 on 8-4-2004.

 

Held :

The Tribunal agreed with the assessee that when the statutory
time limit was a available with the AO for issuance of notice u/s.143(2) of the
Act, then the notice u/s.148 cannot be issued during the pendency of the
proceedings. Further, it observed that the notice u/s.143(2) could be served
within 12 months from the end of the month in which the return was furnished as
per proviso to S. 143(2) of the Act and since in the present case, the notice
u/s.143(2) was served on 29-7-2005 i.e., after the expiry of 12 months
from the end of the month in which the return was furnished, the same was also
not valid. Further, relying on the decisions listed below, the Tribunal allowed
the appeal of the assessee.

 

Cases referred to :



(1) DCIT v. Krishan Lal Leela, 34 TW 40 (Jp)

(2) R. B. Securities Ltd. v. JCIT, 141 Taxman 49
(Digest) (Del.)

(3) Bapa Lal Exports Co. v. JCIT, (2007) 289 ITR 371
(Mad.)

(4) KLM Royal Dutch Airlines v. ADI, (2007) 159
Taxman 191 (Del.)

 


levitra

S. 23(1)(b) : Stamp duty and brokerage paid by the landlord allowable as deduction from rent received.

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(Full texts of the following Tribunal decisions are available
at the Society’s office on written request. For members desiring that the
Society mails a copy to them, Rs.30 per decision will be charged for
photocopying and postage.)


14 Govind S. Singhania v. ITO

ITAT ‘K’ Bench, Mumbai

Before R. K. Gupta (JM) and

V. K. Gupta (AM)

ITA No. 4581/Mum./2006

A.Y. : 2002-03. Decided : on 3-4-2008

Counsels for assessee/revenue : Vijay Mehta/

L. K. Agarwal

 

S. 23(1)(b) of the Income-tax Act, 1961 — Income from house
property — Annual letting value — Whether Stamp Duty and brokerage paid by the
landlord-assessee allowable as deduction from the rent received — Held, Yes.

 

Per V. K. Gupta :

Facts :

The assessee gave his premises at Mittal Towers on lease and
incurred expenses of Rs.30,000 for Stamp Duty and Rs.85,000 for payment of
brokerage on account of renewal of Lease Agreement. The Assessing Officer,
however, held that the expenses were not allowable against the income from house
property, because the expenses allowable therefrom had been specified by the
Legislature and these expenses did not fall in that category. On appeal, the
CIT(A) also, confirmed the action of the Assessing Officer.

 

The assessee contended before the Tribunal that without
incurring these expenses, he could not have earned the rental income, because
Stamp Duty had to be paid as per the provisions of the Stamp Duty Act, which was
a mandatory requirement and since the premises was let out through the broker,
there was also an obligation on the part of the assessee to pay the brokerage.
The assessee further contended that he could have asked the tenant to pay the
same and adjust the same from the rent and in that event the assessee would have
got only net rent.

Held :

The Tribunal agreed with the assessee that without incurring
these expenses, the assessee would not have earned the rental income. It further
noted that the assessee had computed the annual letting value u/s.23(1)(b) of
the Act. Hence, according to it, such rent had to be net of these expenses. The
Tribunal also found substance in the alternative argument of the assessee that
had these expenses been borne by the tenant, then only the net amount would have
been the annual letting value within the meaning of S. 23(1)(b) of the Act.
Further, the case laws relied on by the assessee (listed below) also support
this view. In this view of the matter, the Tribunal held that the annual letting
value should be taken net of Stamp Duty and brokerage paid by the assessee.

Cases referred to :



(1) Varma Family Trust v. Sixth ITO, 7 ITD 392
(Mum.)

(2) Sharmila Tagore v. JCIT, 93 TTJ 483 (Mum.)

(3) Realty Finance & Leaseing (P) Ltd. v. ITO, 5 SOT
348 (Mum.)

(4) Nandita Banerjee v. ITO, (ITA. No.
1360/Mum./2000) dated 8-4-2004.

 


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Salary income of an expatriate who partly rendered services in India and partly outside India not chargeable to tax in India in respect of proportionate period for which services performed outside India

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13 DCIT v.
Mr. Erick Moroux C/o. Air France and Others

(2008) (TIOL 145 ITAT Del.)

S. 9(1)(ii) of the Act

A.Y. : 2001-02. Dated : 15-2-2008

Issues :



l
Salary income of an expatriate who partly rendered services in India and
partly outside India would not be chargeable to tax in India in respect of
proportionate period for which services are performed outside India.


l
Contribution towards social securities and other funds in terms of labour law
regulations in France represents diversion of salary at source and is not
taxable in India.


 


Facts :

The assessee, an employee of Air France, was posted in India
since August 2000. For the year under reference, he was R but NOR. In terms of
his employment agreement, apart from rendering services in India, the assessee
was also required to supervise operations in France as well as in South Asia.
The employment agreement itself contemplated that about 20% of the time of the
assessee would be for operations outside India.

 

For the year under reference, the assessee was outside India
for a period of 19 days. The assessee claimed that the salary attributable to
the period for which he rendered services outside India was not taxable in
India.

The Department rejected the claim primarily on the ground
that the assessee provided no evidence of the service that he rendered while
being outside India. The Department also relied on the Explanation to S.
9(1)(ii) inserted with effect from A.Y. 2000-01 to contend that the salary for
period outside India was salary for leave/rest period and hence taxable in terms
of amended S. 9(1)(ii).

The second controversy was about deduction/exclusion in
respect of contributions made towards various schemes in France. The assessee
had made mandatory contributions towards various social security schemes for
health insurance, for retirement scheme, for pension scheme, insurance coverage
for long illness and for widowhood, etc. in France. These amounts were claimed
to be non-chargeable on the ground that the same represented diversion of income
at source.

The Department rejected the contention by holding that the
payments were in the nature of application akin to the payment of provident fund
or some such investment schemes applicable in India.

Held :



l
The ITAT accepted the assessee’s contention that salary attributable to
service outside India was not taxable in India. The ITAT relied on Special
Bench decision in the case Air France viz. J. Calle and Others, (ITA
5921 to 5929/Del). In the view of ITAT, the fact that the employment contract
mandated the assessee to oversee operations outside India coupled with the
assessee’s actual presence outside India did amply support the claim of the
assessee.


 


The Tribunal also held that the amended explanation to S.
9(1)(ii) was not applicable, as the period of absence from India was neither
rest period, nor leave period.

 

The ITAT relied on earlier decision of the Mumbai Tribunal in
the case of Gallotti Raoul v. ACIT, (1997) (61 ITD 453) to hold that
since there was no discretion available to the assessee with regard to statutory
deduction, such contribution was a diversion of income by overriding title and
cannot be brought to tax.

 

The Tribunal noted the following observations from the
decision of Galloti Raoul (supra) and concurred with them.

“The concept of such compulsory contribution to social
security is not prevalent in India. Unlike the schemes in India which are saving
schemes, the scheme of social security is not a saving scheme, but a scheme to
protect the French nationals from various calamities. From this point of view,
the amount that was contributed to the social security organisation was a
diversion of income by overriding title at the stage of earning point itself.
The affiliation being compulsory, making the social security organisation an
earning partner alongside of the assessee i.e., assessee earned not only
for himself, but also for the social security organisation. The assessee had no
right over it at all and thereby no domain on it. Hence the social security
charges were to be deducted from the salary income as a prior charge by
overriding title and it would be only the net salary after such deduction that
should be treated as gross salary within the meaning of S. 16.”

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Refund : S. 119, S. 240 and S. 244A of Income-tax Act, 1961 : A.Ys. 1998-99 and 1999-00 : Refund payable consequent on appeal : Application not necessary : Assessee entitled to interest on refund : Chief Commissioner has no power to deny interest on groun

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Reported :

34 Refund : S. 119, S. 240 and S. 244A of Income-tax Act,
1961 : A.Ys. 1998-99 and 1999-00 : Refund payable consequent on appeal :
Application not necessary : Assessee entitled to interest on refund : Chief
Commissioner has no power to deny interest on ground of delay in filing revised
return.

[S. Thigarajan and ors. v. ACIT, 322 ITR 581 (Kar.)]

In respect of the A.Ys. 1998-99 and 1999-00, the Deputy
Commissioner (TDS) held that the shares allotted to the assessee employees were
perquisites and tax had to be deducted on their value. Therefore, the employer
deducted tax and remitted it to the Department, and issued revised Form No. 16
to the assessee employees for claiming credit for the deduction. This was
followed by the assessee filing revised returns, though beyond the time
stipulated u/s.139. The order of the Deputy Commissioner was reversed by the
Tribunal. The Assistant Commissioner gave effect to the order of the Tribunal
and directed the assesses to claim credit of the TDS by filing Form No. 16, as
the employer was not entitled to the Refund of TDS. The assesses filed revised
return with a request to refund the TDS amount. The assesses also filed
applications to condone the delay in preferring the revised returns. In exercise
of the jurisdiction u/s.119(2)(b) of the Income-tax Act, 1961, the Chief
Commissioner condoned the delay, but declined admissible interest on the ground
that the claims were belated and the petitioners had forgone their claims.

The Karnataka High Court allowed the writ petition filed by
the assessee petitioners held as under :

“(i) The first and the second revised returns along with
the application to condone the delay in filing the same, were rendered
infructuous, by the law declared in the matter of allotment of shares to the
employees, not being a perquisite, attracting TDS. Hence, the question of
exercise of jurisdiction u/s.119(2)(b) of the Act did not arise. The order of
the Chief Commissioner was arbitrary, without jurisdiction and illegal and as
a consequence the orders of the Assistant Commissioner, giving effect to the
orders of the Chief Commissioner were unsustainable. They were liable to be
quashed.

(ii) Where a refund is due to the assessee consequent on an
Appellate Order, an obligation is cast on the Revenue u/s.240, to effect the
refund without the assessee having to claim it. U/s.244A, the Revenue is bound
to pay interest at one-half percent on the amount of refund.

(iii) It is no doubt true that the Revenue had the benefit
of the monies belonging to the petitioners, up to the date of refund, and
there are a catena of decisions of the Apex Court over payment of compounded
interest on refund, which the petitioners are entitled to press into service.
Without, however going into the merits or demerits of the quantum of interest
or compounding either quarterly or half-yearly, the request of interest at 18%
per annum compounded monthly, is kept open for consideration by the first
respondent, to be decided within a period of four weeks from today and effect
payment immediately thereafter.”

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KVSS 1998 : Rectification u/s.154 of Income-tax Act, 1961 : A.Y. 1993-94 : During the pendency of appeal before the Tribunal the assessee preferred an application under KVSS 1998 : After issue of certificate under KVSS a rectification order demanding addi

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Reported :

33 KVSS 1998 : Rectification u/s.154 of Income-tax Act, 1961
: A.Y. 1993-94 : During the pendency of appeal before the Tribunal the assessee
preferred an application under KVSS 1998 : After issue of certificate under KVSS
a rectification order demanding additional interest u/s.234B cannot be validly
made.

[CIT v. Goel Lottery Centre, 323 ITR 262 (All.)]

During the pendency of appeal before the Tribunal for the A.Y.
1993-94, the assessee preferred an application under KVSS 1998. Pursuant thereto
the designated authority issued certificate u/s.90 of the KVSS 1998. Thereafter,
on 31-3-2000 the Deputy Commissioner passed an order of rectification u/s.154 of
the Income-tax Act, 1961 and raised an additional demand of interest u/s.234B.
According to him the demand of interest calculated earlier was low. The
Commissioner (Appeals) set aside the order and this was upheld by the Tribunal.

On appeal by the Revenue, the Allahabad High Court upheld the
decision of the Tribunal and held as under :

“(i) In view of the provisions of the Finance (No. 2) Act,
1998, which lays down the Kar Vivad Samadhan Scheme, it is apparent that the
order passed u/s.90(1) determining the sum payable under the Scheme shall be
conclusive in respect of all the matters stated therein and no matter covered
by such order shall be reopened in any other proceeding under the direct tax
enactment or indirect tax enactment or under any other law for the time being
in force. It further contemplates that only in a case where the certificate is
found to be false, the designated authority at any stage can withdraw the
same.

(ii) After the issue of the certificate u/s.90 of the KVSS
1998, the assessing authority had no authority to sit over the certificate.
The rectification was not permissible.”

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Industrial undertaking : Deduction u/s.80-IA of Income-tax Act, 1961 : A.Y. 2005-06 : Computation : Adjustment of brought forward losses and depreciation set off in earlier years : Only the losses of the years beginning from the initial assessment year ar

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Reported :

32 Industrial undertaking : Deduction u/s.80-IA of Income-tax
Act, 1961 : A.Y. 2005-06 : Computation : Adjustment of brought forward losses
and depreciation set off in earlier years : Only the losses of the years
beginning from the initial assessment year are to be brought forward and not the
losses of the earlier year which have been already set off against other income
of the assessee.

[Velayudhaswamy Spinning Mills (P) Ltd. v. ACIT, 231
CTR 368 (Mad.)]

For the A.Y. 2005-06, the assessee had claimed a deduction of
Rs.1,70,76,945 u/s.80-IA of the Income-tax Act, 1961. The Assessing Officer
disallowed the claim on the ground that the eligible income is a negative
figure. CIT(A) allowed the claim and held that since the A.Y. 2005-06 is the
initial assessment year, unabsorbed depreciation and the losses of earlier
years, which had already been absorbed, cannot be notionally carried forward and
taken into consideration for computing deduction u/s.80-IA. The Tribunal
reversed the order of the CIT(A) and restored the order of the Assessing
Officer.

On appeal by the assessee, the Madras High Court reversed the
decision of the Tribunal and held as under :

“Losses and depreciation of the years earlier to the
initial assessment year which have already been absorbed against profits of
other businesses cannot be notionally brought forward and set off against the
profits of the eligible business for computing the deduction u/s.80-IA.”

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Depreciation : Business expenditure : S. 32 and S. 37 of Income-tax Act, 1961 : A.Y. 1994-95 : Closure of business due to riots : Closure for reasons beyond control of assessee : Assessee entitled to depreciation and business expenditure.

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Reported :

30 Depreciation : Business expenditure : S. 32 and S. 37 of
Income-tax Act, 1961 : A.Y. 1994-95 : Closure of business due to riots : Closure
for reasons beyond control of assessee : Assessee entitled to depreciation and
business expenditure.

[CIT v. Blend Well Bottles P. Ltd., 323 ITR 18 (Kar.)]

The assessee was engaged in the manufacture and sale of
Indian-made foreign liquor. In the financial year ending 31-3-1994 the assessee
had not carried on the manufacturing activities as the business was closed on
account of local problems. The Assessing Officer therefore disallowed the claim
for depreciation for the A.Y. 1994-95. The Tribunal allowed the assessee’s claim
and held that the assessee is entitled to depreciation and business expenditure.

On appeal by the Revenue, the Karnataka High Court upheld the
decision of the Tribunal and held as under :

“(i) The business premises of the assessee were situated in
Punjab. On account of riots and other activities in the place, where the
factory of the assessee was situated, the assessee was forced to close down
the activity till peace was restored in the locality. This fact was not
disputed by the Revenue.

(ii) If for reasons which were beyond the control of the
assessee, its business activities were closed, such a closure could not be
treated as a closure with an intention to close the business once for all and
such closure had to be treated as an act of God or vis major. The assessee
would be entitled to claim depreciation as well as business expenditure u/s.32
and u/s.37 of the Income-tax Act, 1961, respectively.”

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Industrial undertaking : Deduction u/s.80-IA of Income-tax Act, 1961 : A.Y. 2003-04 : Trial production in A.Y. 1998-99 and commercial production in A.Y. 1999-00 : Therefore initial assessment year is the A.Y. 1999-00 in which there was commercial producti

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Reported :

31 Industrial undertaking : Deduction u/s.80-IA of Income-tax
Act, 1961 : A.Y. 2003-04 : Trial production in A.Y. 1998-99 and commercial
production in A.Y. 1999-00 : Therefore initial assessment year is the A.Y.
1999-00 in which there was commercial production and not the A.Y. 1998-99 in
which there was only trial production : Therefore, the assessee is entitled to
100% deduction u/s.80-IA in the A.Y. 2003-04.

[CIT v. Nestor Pharmaceuticals Ltd., 231 CTR 337
(Del.)]

In the Goa unit of the assessee’s industrial undertaking
there was trial production in the A.Y. 1998-99 and the commercial production
commenced in the A.Y. 1999-00. Therefore, the assessee claimed that the initial
assessment year is the A.Y. 1999-00 and accordingly claimed 100% deduction
u/s.80-IA of the Income-tax Act, 1961 in the A.Y. 2003-04. The Assessing Officer
was of the view that the initial assessment year is the A.Y. 1998-99 in which
there was trial production and accordingly restricted the deduction to 30%. The
Tribunal allowed the assessee’s claim.

On appeal by the Revenue, the Delhi High Court upheld the
decision of the Tribunal and held as under :

“(i) Initial assessment year for the purpose of S. 80-IA is
the assessment year relevant to the previous year in which the commercial
production is started and not the A.Y. in which there was only a trial
production.

(ii) There was only a trial production in the A.Y. 1998-99
and commercial and full-fledged production commenced only in the A.Y. 1999-00.
Merely the trial production will not be regarded as beginning to manufacture
or produce articles. The Tribunal was therefore justified in holding that the
benefit of Section would be allowed in the year in which commercial production
started i.e., A.Y. 1999-00 and, therefore, would be extendable up to the A.Y.
2003-04.”

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Assessment : Notice u/s.143(2) of Income-tax Act, 1961 : A.Y. 1997-98 : A valid notice u/s.143(2) can be issued only after the AO examines the return filed by the assessee.

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Reported :

29 Assessment : Notice u/s.143(2) of Income-tax Act, 1961 :
A.Y. 1997-98 : A valid notice u/s.143(2) can be issued only after the AO
examines the return filed by the assessee.

[DIT v. Society for Worldwide Inter Bank Financial,
Telecommunications, 323 ITR 249 (Del.)]

In an appeal against the assessment order u/s. 143(3) of the
Income-tax Act, 1961 for the A.Y. 1997-98 the Tribunal found that the assessee
had filed the return of income on 27-3-2000, whereas the notice u/s.143(2) was
issued on 23-3-2000 i.e., before filing the return of income. The Tribunal
therefore held that the notice was invalid and hence the consequential
assessment order is invalid.

In appeal before the Delhi High Court, the Revenue contended
for the first time that the notice was issued on March 27, 2000 and not on March
23, 2000. The High Court upheld the decision of the Tribunal and held as under :

“(i) In the memorandum of appeal, the Revenue had stated
that the return was filed by the assessee on March 27, 2000 and the notice
u/s.143(2) was served upon the authorised representative of the assessee by
hand when the authorised representative of the assessee came and filed return
and that the date of the notice was mistakenly mentioned as March 23, 2000.

(ii) Even if it was true, the notice was served on the
authorised representative simultaneously on his filing the return, which
clearly indicated that the notice was ready even prior to the filing of the
return.

(iii) The provisions of S. 143(2) make it clear that the
notice could only be served after the Assessing Officer had examined the
return filed by the assessee. Thus, even if the statement of the Assessing
Officer is taken at face value, it would amount to gross violation of the
scheme of S. 143(2) of the Act.

(iv) That being the case, no interference with the impugned
order is called for.”

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Appellate Tribunal : Powers and duty : A.Y. 1990-91 : Assessee filed cross-objections in appeal filed by Revenue : Revenue’s appeal dismissed without considering cross-objections of assessee : Cross-objections should be disposed of on merits.

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Reported :

28 Appellate Tribunal : Powers and duty : A.Y. 1990-91 :
Assessee filed cross-objections in appeal filed by Revenue : Revenue’s appeal
dismissed without considering cross-objections of assessee : Cross-objections
should be disposed of on merits.

[Ram Ji Dass and Co. v. CIT, 323 ITR 505 (P&H)]

In an appeal filed by the Revenue before the Tribunal the
assessee had preferred cross-objections. The Tribunal dismissed the appeal filed
by the Revenue but the cross objections of the assessee were not considered on
merits. Therefore the assessee applied for recalling the order and requested for
decision on the cross-objections on merits. The Tribunal rejected the
application observing that the Tribunal had already dismissed the appeal of the
Revenue and that while deciding the Revenue’s appeal the Tribunal had already
considered the question relating to the rate of profits and had upheld it and it
could not be re-examined thereafter in the assessee’s cross objections.

On reference at the instance of the assessee, the Punjab and
Haryana High Court held that the cross-objections of the assessee were required
to be heard and decided on merits.

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Disallowance of loss u/s.94(7) of Income-tax Act, 1961 : A.Y. 2004-05 : The conditions spelt out in clauses (a), (b) and (c) are cumulative and not alternative : Purchase of units within a period of less than three months from the record date, but sale be

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Unreported

26 Disallowance of loss u/s.94(7) of Income-tax Act, 1961 :
A.Y. 2004-05 : The conditions spelt out in clauses (a), (b) and (c) are
cumulative and not alternative : Purchase of units within a period of less than
three months from the record date, but sale beyond a period of three months :
Loss cannot be ignored.

[CIT v. Smt. Alka Bhosle (Bom.), ITA No. 2656 of 2009
dated 9-6-2010]

In the previous year relevant to the A.Y. 2004-05 the
assessee had purchased certain units within a period of less than three months
from the record date, but the units were sold beyond a period of three months
from the record date. The Tribunal held that the provisions of S. 94(7) of the Income-tax Act, 1961 are not applicable and there would be no disallowance of loss.

In the appeal filed by the Revenue, the following question
was raised :

“Whether on the facts and in the circumstances of the case
and in law, the ITAT was right in holding that clauses (a), (b) and (c) of S.
94(7) of the Income-tax Act, 1961, are to be satisfied independently or
cumulatively ?”

The Bombay High Court upheld the decision of the Tribunal and
held as under :

“(i) The question that falls for consideration is as to
whether the conditions spelt out in clauses (a), (b) and (c) of Ss.(7) are
cumulative.

(ii) The contention of the Revenue is that though the units
were, as a matter of fact, sold beyond a period of three months of the record
date, the provisions of S. 94(7) would apply since they were acquired within a
period of three months from the record date.

(iii) There is no merit in the submission. Ss.(7) of S. 94
spelt out three requirements; these being (i) The purchase or acquisition of
any of the securities or units should take place within a period of three
months prior to the record date; (ii) The sale or transfer should take place
within a period of three months after the record date; and (iii) The dividend
or income received or receivable should be exempt. In the event that these
three conditions are fulfilled, the loss, if any, arising from the purchase or
sale of securities or units has to be ignored for the purpose of computing the
income chargeable to tax, to the extent such loss does not exceed the amount
of dividend or income received or receivable.

(iv) Ex-facie, all the three conditions that are spelt out
in clauses (a), (b) and (c) of Ss.(7), must be fulfilled before the
consequence that is envisaged in the Section comes into force. The conditions
prescribed in clauses (a), (b) and (c) of Ss.(7) are intended to be cumulative
in nature.

(v) In the present case, the sale of the units has taken
place after the expiry of a period of three months from the record date.
Hence, the second condition spelt out for the applicability of Ss.(7) would
not come into force.

(vi) In the circumstances, the appeal by the Revenue is
lacking in merit and does not raise any substantial question of law. The
appeal is accordingly dismissed.”

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Appellate Tribunal : Power and duty : Third proviso to S. 254(2A) of Income-tax Act, 1961 : The Tribunal has power to grant stay of recovery for a period of 365 days only : The Tribunal is therefore under a bounden duty and obligation to ensure that the a

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Reported :

27 Appellate Tribunal : Power and duty : Third proviso to S.
254(2A) of Income-tax Act, 1961 : The Tribunal has power to grant stay of
recovery for a period of 365 days only : The Tribunal is therefore under a
bounden duty and obligation to ensure that the appeal is disposed of within that
period: Fact that same issue was pending before the Special Bench cannot be a
reason for the Tribunal not to dispose of the appeal.

[Jethmal Faujimal Soni v. ITAT, 231 CTR 332 (Bom.)]

In an appeal preferred by the assessee before the Tribunal,
the assessee’s application for stay of recovery was allowed by the Tribunal and
the recovery was stayed for a period of six months. On a subsequent application
the stay was extended by a further period of six months. The hearing of the
appeal was adjourned from time to time for the reason that the issue in the
appeal was pending before the Special Bench. The Tribunal rejected the third
application for stay dated 4-11-2009 for the reason that the third proviso to S.
254(2A) of the Income-tax Act, 1961 prohibits the Tribunal from granting such
stay.

On a writ petition filed by the assessee, the Bombay High
Court directed the Tribunal to dispose of the appeal within a period of four
months. The counsel appearing on behalf of the Revenue informed the Court that
the Revenue shall not take any coercive steps for enforcing the demand during
that period. The High Court held as under :

“(i) A stringent provision is made by the third proviso to
S. 254(2A), as a result of which even if the delay in disposing of the appeal
is not attributable to the assessee, the stay has to stand vacated in any
event upon the lapse of a period of three hundred and sixty-five days. Having
regard to the nature of the provision which has been enacted by the
Parliament, the Tribunal is under a bounden duty and obligation to ensure that
the appeal is disposed of, so as not to result in prejudice to the assessee,
particularly in a situation like the present where no fault could be found
with the conduct of the assessee.

(ii) The fact that an issue was pending before the Special
Bench was not a reason for the Tribunal not to dispose of the appeal,
particularly since the consequence of the inability of the Tribunal to do so
would result in vacating of the order of stay, which was passed originally in
favour of the assessee.

(iii) It is unfortunate that the Tribunal simply adjourned
the appeal merely on the ground of the pendency of an identical issue before
the Special Bench. The state of affairs which has come to pass could well have
been avoided by the appeal being taken up for final disposal.”

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S. 239 & S. 140 : Return claiming refund signed by authorised signatory other than managing director : Defective return : Assessee to be given opportunity to cure defect

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36  Refund : S. 239 and S. 140 of Income-tax Act, 1961 :
A.Ys. 2000-01 to 2002-03 : Return claiming refund signed by authorised signatory
other than managing director : Defective return : Refund is not to be rejected :
Assessee to be given opportunity to cure defective return.


[Hind Samachar Ltd., 169 Taxman 302 (P&H)]

For the A. Ys. 2000-01 to 2002-03, the assessee company had
filed returns of income claming refund. The verification of the returns was
signed by one ‘K’ who was neither the managing director, nor the director of the
assessee company, but was authorised to sign by a board resolution. The
Assessing Officer processed the returns u/s.143(1) of the Income-tax Act, 1961
and computed the refund payable to the assessee. Subsequently he issued notices
u/s.154 requiring the assessee to justify the genuineness of the returns in view
of the fact that ‘K’ who had signed the verification in returns did not fall in
the category of persons authorised to sign the return u/s.140(c). In response,
the assessee submitted that owing to an impass going on in the board of
directors of the company, a resolution was passed duly authorising ‘K’ to sign
and file the returns on behalf of the assessee and further, that the non-signing
of the returns by the managing director or any other director was at best a
curable defect. The assessee prayed for an opportunity to rectify the defect.
The assessee company also filed fresh returns duly signed by the managing
director and pleaded that the defects stood rectified. The Assessing Officer
rejected the assessee’s plea and held that the returns earlier filed were
invalid and accordingly withdrew the refund earlier allowed. The Commissioner
(Appeals) reversed the said order holding that if the returns were not signed by
the person mentioned in S. 140, it was only a curable defect. While giving
effect to the order of the Commissioner (Appeals), the Assessing Officer
rejected the plea of the assessee that the defect has been cured by filing new
return forms duly signed by the managing director on the ground that the same
were filed beyond the time permissible under the Act. Accordingly, the Assessing
Officer refused to grant refund.

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

“(i) The return is required to be signed mandatorily by the
managing director of the company and in his absence, due to certain reasons,
by the director thereof.

(ii) S. 139(9) specifies the circumstances in which a
return would be regarded as a defective return. The list of defects mentioned
in the Explanation thereof is illustrative and not exhaustive.

(iii) S. 292B provides that no return of income shall be
invalid merely by reason of any mistake, defect or omission, if such return
is, in substance and effect, in conformity with or according to the intent and
purpose of the Act. The Section has applicability to those cases where purely
technical objection without substance arises in a case of a return of income.
S. 139(9) contains a non obstante clause, namely, ‘notwithstanding
anything contained in any other provision of this Act’ and would, therefore,
override the other provisions of the Act including S. 292B. If any curable
defect is noticed in the return, the Assessing Officer is required to provide
an opportunity to the assessee to rectify the same within the stipulated time
and in a case where any of the specified defects is not removed within the
time allowed u/s. 139(9), the return shall be treated as an invalid or non
est return.

(iv) However, a different situation would arise where a
return is not at all signed and verified. The question of rectifying of defect
in such a situation does not arise as the defect goes to the very root and
jurisdiction of the validity of the return.

(v) In the instant case, the return was signed by an
employee, who had been duly authorised by a resolution of the board to do so,
as there was litigation going on between the management. Thus the return was
not signed by the person authorised u/s.140(c). However, the return was got
signed and verified by the managing director and was filed along with a letter
dated 13-10-2003. Even on an opportunity provided by the Assessing Officer to
remove the defect in pursuance to the order of the Commissioner (Appeals), the
managing director attended the office of the Assessing Officer on 8-3-2005 and
signed the verification of the return. In such circumstances, the return filed
by the assessee could not be treated to be invalid or non est return.

(vi) The Assessing Officer, having failed to raise any issue
with regard to the plea of S. 239 at appropriate stage and the Commissioner
(Appeals) having remanded the case for purposes of getting the defect cured and
to give effect to that order, could not raise a new plea inconsistent with the
remand order. Still further, in the instant case, the provisions of S. 240 would
be attracted whereunder an obligation is cast upon the Revenue to refund the
amount to the assessee without having to make any claim in that regard in case
of refund arising on account of appeal or other proceedings under the Act.”

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National Tax Tribunal — Petitions to be heard after the amendments in the provisions of the Act were made.

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15 National Tax Tribunal — Petitions to be heard after the
amendments in the provisions of the Act were made.


[Sandeep Goyal v. UOI, (2008) 298 ITR 10 (SC)]

The Supreme Court noted the various provisions which were
under challenge in the petitions filed and the contents of the affidavit filed
by the Union of India stating that it would make appropriate amendments in the
Act in this regard. The Supreme Court was of the view that it would be proper to
examine the matter after such amendments as the Government may think appropriate
are made. Liberty was granted to mention the matter for listing after the
amendments in the provisions were made.

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Additional non statutory disclosures in Annual Reports

From Published Accounts

Compiler’s Note :


Infosys has over the years been a pioneer in providing
additional relevant information in its annual reports. Keeping up with the same,
the company has, in its annual report for 2010, given (as additional
information), an Intangible Assets Score Card which makes a very interesting
reading. The same is reproduced below.

1 Infosys Technologies Ltd. — (31-3-2010)

Additional information :

Intangible assets score sheet :

We caution investors that this data is provided only as
additional information to them. We are not responsible for any direct, indirect
or consequential losses suffered by any person using this data.

From the 1840s to the early 1990s, a corporate’s value was
mainly driven by its tangible assets — values presented in the corporate Balance
Sheet. The managements of companies valued these resources and linked all their
performance goals and matrices to these assets — Return on investment and
capital turnover ratio. The market capitalisation of companies also followed the
value of tangible assets shown in the Balance Sheet with the difference seldom
being above 25%. In the latter half of the 1990s, the relationship between
market value and tangible asset value changed dramatically. By early 2000, the
book value of the assets represented less than 15% of the total market value. In
short, intangible assets are the key drivers of market value in this new
economy.

A knowledge-intensive company leverages know-how, innovation
and reputation to achieve success in the marketplace. Hence, these attributes
should be measured and improved upon year after year to ensure continual
success. Managing a knowledge organisation necessitates a focus on the critical
issues of organisational adaptation, survival, and competence in the face of
ever-increasing, discontinuous environmental change. The profitability of a
knowledge firm depends on its ability to leverage the learnability of its
professionals, and to enhance the reusability of their knowledge and expertise.
The intangible assets of a company include its brand, its ability to attract,
develop and nurture a cadre of competent professionals, and its ability to
attract and retain marquee clients.

Intangible assets :

The intangible assets of a company can be classified into
four major categories: human resources, intellectual property assets, internal
assets and external assets.

Human resources :

Human resources represent the collective expertise,
innovation, leadership, entrepreneurship and managerial skills of the employees
of an organisation.

Intellectual property assets :

Intellectual property assets include know-how, copyrights,
patents, products and tools that are owned by a corporation. These assets are
valued based on their commercial potential. A corporation can derive its
revenues from licensing these assets to outside users.

Internal assets :

Internal assets are systems, technologies, methodologies,
processes and tools that are specific to an organisation. These assets give the
organisation a unique advantage over its competitors in the marketplace. These
assets are not licensed to outsiders. Examples of internal assets include
methodologies for assessing risk, methodologies for managing projects, risk
policies and communication systems.

External assets :

External assets are market-related intangibles that enhance
the fitness of an organisation for succeeding in the marketplace. Examples are
customer loyalty (reflected by the repeat business of the company) and brand
value.

The score sheet :

We published models for valuing two of our most important
intangible assets — human resources and the ‘Infosys’ brand. This score sheet is
broadly adopted from the intangible asset score sheet provided in the book
titled, The New Organisational Wealth, written by Dr. Karl-Erik Sveiby and
published by Berrett-Koehler Publishers Inc., San Francisco. We believe such
representation of intangible assets provides a tool to our investors for
evaluating our market-worthiness.

Clients :

The growth in revenue is 3% this year, compared to 12% in the
previous year (in US $). Our most valuable intangible asset is our client base.
Marquee clients or image-enhancing clients contributed 50% of revenues during
the year. They gave stability to our revenues and also reduced our marketing
costs.

The high percentage 97.3% of revenues from repeat orders
during the current year is an indication of the satisfaction and loyalty of our
clients. The largest client contributed 4.6% to our revenue, compared to 6.9%
during the previous year. The top 5 and 10 clients contributed around 16.4% and
26.2% to our revenue, respectively, compared to 18.0% and 27.7%, respectively,
during the previous year. Our strategy is to increase our client base and,
thereby reduce the risk of depending on a few large clients.

During the year, we added 141 new clients compared to 156 in
the previous year. We derived revenue from customers located in 66 countries
against 67 countries in the previous year. Sales per client grew by around 3.7%
from US $8.05 million in the previous year to US $8.35 million this year. Days
Sales Outstanding (DSO) was 59 days this year compared to 62 days in the
previous year.

Organisation :

During the current year, we invested around 2.58% of the
value-added (2.37% of revenues) on technology infrastructure, and around 2.09%
of the value-added (1.93% of revenues) on R&D activities.

A young, fast-growing organisation requires efficiency in the
area of support services. The average age of support employees is 30.4 years, as
against the previous year’s average age of 29.6 years. The sales per support
staff has come down during the year compared to the previous year and the
proportion of support staff to the total organisational staff, has improved over
the previous year.

People :

We are in a people-oriented business. We added 27,639 employees this year on gross basis (net 8,946) from 28,231 (net 13,663) in the previous year. We added 4,895 laterals this year against 5,796 in the previous year. The education index of employees has gone up substantially to 2,96,586 from 2,72,644. This reflects the quality of our employees. Our employee strength comprises people from 83 nationalities March 31, 2010. The average age of employees as at March 31, 2010 was 27. Attrition was 13.4% for this year compared to 11.1% in the previous year (excluding subsidiaries).

Notes:

  •     Marquee or image-enhancing clients are those who enhance the company’s market-worthiness, typically, Global 1,000 clients. They are often reference clients for us.

  •     Sales per client is calculated by dividing total revenue by the total number of clients.

  •     Repeat business revenue is the revenue during the current year from those clients who contributed to our revenue during the previous year too.

  •     Value-added statement is the revenue less payment to all outside resources. The statement is provided in the value-added statement section of this document.

  •     Technology investment includes all investments in hardware and software, while total investment in the organisation is the investment in our fixed assets.

  •     The average proportion of support staff is the average number of support staff to average total staff strength.

  •     Sales per support staff is our revenue divided by the average number of support staff (support staff excludes technical support staff).

The education index is shown as at the year end, with primary education calculated as 1, secondary education as 2 and tertiary education as 3.

Toolings classified as Inventories (pending receipt of opinion from EAC of ICAI)

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  1. Toolings classified as Inventories (pending receipt of
    opinion from EAC of ICAI)


Vesuvius India Ltd. — (31-12-2008)

From Accounting Policies :

Inventories :

Toolings are considered as inventories and are amortised on
a straight-line basis over a period of three years based on their estimated
useful lives. The Company’s statutory auditors are of the view that such
toolings are in the nature of moulds that are used in the production of
finished goods and hence should be classified as fixed assets and depreciated
over their estimated useful lives of three years. The company is in the
process of obtaining the opinion of the Expert Advisory Committee of the
Institute of Chartered Accountants of India regarding appropriate
classification and accounting of such toolings considering their nature.

 

Had the toolings been classified as fixed assets, the gross
block and net block of fixed assets would have been higher by Rs.140,560
thousand (Previous year Rs.106,881 thousand) and Rs.47,917 thousand (Previous
year Rs.42,564 thousand) respectively, while inventories would have been lower
by Rs.47,917 thousand (Previous year Rs.42,564 thousand).

 

Consequently, the depreciation charge for the year would
have been higher by Rs.26,893 thousand (Previous year Rs.24,961 thousand) and
the tolling charges would have been lower by Rs.26,893 thousand (Previous year
Rs.24,961 thousand).

 

The provisions for current tax and deferred tax release for
the year would have been higher by Rs.2,435 thousand (Previous year Rs.2,451
thousand) and Rs.2,435 thousand respectively. Deferred tax charge for the
previous year would have been lower by Rs.2,451 thousand. Considering the
amount of income taxes deposited by the Company, there will be no dues towards
interest under the provisions of the Income-tax Act, 1961 had these
adjustments been recognised.

 

From Auditors’ Report :

We draw attention to Note 1(iv) on Schedule 14 to the
financial statements. As explained in the note, the Company has classified
toolings as inventory which is being amortised over their estimated useful
lives of 3 years. In our opinion such toolings are fixed assets and should be
depreciated over their useful lives as explained in the aforesaid Note. Had
the toolings been classified as fixed assets, gross block and net block of
fixed assets would have been higher by Rs.140,560 thousand (Previous year
Rs.106,881 thousand) and Rs.47,917 thousand (Previous year Rs.42,564 thousand)
respectively, which inventories would have been lower by Rs.47,917 thousand
(Previous year Rs.42,564 thousand). Consequently, the depreciation charge for
the year would have been higher by Rs.26,893 thousand (Previous year Rs.24,961
thousand) and the tooling charges would have been lower by an equivalent
amount. However, there is no impact on the profit after tax.

 

In view of the significance of the matter, we believe that
the divergent views on the matter need to be resolved through reference to the
Expert Advisory Committee (EAC) of the Institute of Chartered Accountants of
India. The Company is in the process of making such a reference. Accordingly,
the opinion expressed in paragraph 5 below should be considered pending
reference of the matter to the EAC and the confirmation by the EAC of the
classification and accounting followed by the Company.

 

From Directors’ Report :

Difference in opinion expressed by Auditors in para 4(f) of
their Report to Members of the Company dated February 24, 2009 relate to
classification of toolings which according to the Auditors should be
classified under fixed assets. The Company is consistently following the
normal industry practice of classifying them as inventory. In either case
there is no impact on profits after tax.


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Scheme of arrangement with High Court approvals

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  1. Scheme of arrangement with High Court approvals


Nestle India Ltd. — (31-12-2008)

From Notes to Accounts :

During the calendar year 2007, the Company had sought
approval of the Delhi High Court under Sections 391 to 394 of the Companies
Act, 1956 for a Scheme of Arrangement (‘Scheme’) between the Company and its
shareholders and creditors. The Scheme envisaged utilisation of following
amounts for payment to the shareholders, subject to applicable taxes :

(i) An amount of Rs.432,363 thousands as lying in the
Share Premium Account of the Company; and

(ii) An amount of Rs.430,857 thousands from the General
Reserve Account of the Company, which was voluntarily transferred by the
Company in excess of the prescribed 10% of the profits of the Company in
accordance with the provisions of the Companies (Transfer of Profit to
Reserves) Rules, 1975 during the financial years 1981 to 1996.

 


The equity shareholders supported the Scheme at a meeting
held on May 3, 2007 as per directions of the Delhi High Court. Subsequently,
the Delhi High Court vide its Order dated September 30, 2008 sanctioned the
aforesaid Scheme and the Scheme became effective from October 31, 2008 after
filing of the certified copy of the aforesaid Order with the Registrar of
Companies NCT of Delhi and Haryana. Thereafter as per the Scheme, after
deducting applicable corporate dividend tax for the aggregate amount of
Rs.863,220 thousands credited to the Profit and Loss Account, a Special
Dividend of Rs.7.50 (Rupees seven and paise fifty only) per share calculated
by dividing the net amount by the outstanding 96,415,716 equity shares of face
value of Rs.10 each and rounding it off to the nearest half Rupee, was paid on
November 26, 2008 to those shareholders whose name appeared in the Register of
Members/Beneficial Owners on November 17, 2008.

 

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Transactions covered u/s 297 of the Companies Act, 1956

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1. Transactions covered u/s 297 of the Companies Act, 1956

Avaya Global Connect Ltd. — (30-9-2008)

 From Notes to Accounts :

    In respect of contracts for the provision/supply of services/goods, with a private company in which a Director of the Company is Director, the Company is of the view that the provisions of Section 297 of the Companies Act, 1956 are not applicable. However, as a matter of abundant caution, the Board of Directors of the Company in their meeting held on 26th October, 2007 resolved to make an application seeking the approval of the Central Government.

     

    Pursuant to above, Company has filed application under section 621(A) for compounding of offence committed under section 297 of the Companies Act, 1956, for the transactions entered in 2006-07 and in 2007-08 (upto February 24, 2008) for which approval is pending. The Company has obtained Central Government approval for entering into transactions with the above mentioned Company from the date of approval February 25, 2008 to September 30, 1010.

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Disclosures regarding Premium payable on redemption of FCCB

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Section B : Miscellaneous


5 Disclosures regarding Premium payable on redemption of FCCB

WOCKHARDT LTD. — (31-12-2007)

From Notes to Accounts :



(d) 108,500 (previous year — 108,500) Zero-coupon Foreign
Currency Convertible Bonds of USD 1,000 each are :

(i) Convertible by the holders at any time on or after
November 24, 2004 but prior to close of business on September 25, 2009. Each
bond will be converted into 94.265 fully paid-up equity shares with par
value of Rs.5 per share at a fixed price of Rs.486.075 per share.


(ii) redeemable, in whole but not in part, at the option
of the Company at any time on or after October 25, 2007, but not less than
seven business days prior to maturity date i.e., October 25, 2009,
subject to the fulfillment of certain terms and obtaining requisite
approvals.


(iii) redeemable on maturity date at 129.578 percent of
its principal amount, if not redeemed or converted earlier.


 



The bonds are considered as monetary liability. The bonds are
redeemable only if there is no conversion of the bonds earlier. Hence the
payment of premium on redemption is contingent in nature, the outcome of which
is dependent on uncertain future events. Hence no provision is considered
necessary, nor has it been made in the accounts in respect of such premium
amounting to a maximum of Rs.775.98 million. (Previous Year — Rs.581.74 million)

 

From Auditors’ Report :

Without qualifying our opinion, we state that the financial
statements are without provision for premium payable on 108,500 Zero-Coupon
Foreign Currency Convertible bonds of USD 1000 each [refer note 30(d) to the
financial statements] as the premium payable on redemption which is contingent
upon a future uncertain event, namely, the redemption of such bonds is presently
not determinable.

 

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Scheme of arrangement for transfer of amalgamation reserve to restructuring reserve and one-time restructuring costs adjusted

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Section B : Miscellaneous



4 Scheme of arrangement for transfer of
amalgamation reserve to restructuring reserve and one-time restructuring costs
adjusted

GILLETTE INDIA LTD. — (30-6-2007)

From Notes to Accounts :

Consequent upon the scheme of arrangement u/s. 391 of the
Companies Act, 1956 as approved by the shareholders and confirmed by the Hon’ble
High Court of Rajasthan a sum of Rs.85,00,000 was transferred from the
amalgamation Reserve forming part of the Capital Reserves of the Company to a
Reconstruction Reserve Account. Further, vide a clarification dated December 4,
2006, the Hon’ble High Court has clarified that the transfer of expenses to the
Reconstruction Reserve Account should be gross of tax.

 

A detailed break-up of Rs.65 22 74 068 as has been utilised
towards the Business Restructuring expenses up to June 30, 2007 is given below :


One-time expenditure for the restructuring
Maximum amount as sanctioned by the Court
Actual expenses upto June 30, 2007
  Rs. Rs.

Employee separation, Relocation and related costs 		536000000 490835509

Costs associated with change in Go to Market and Distribution model 		212000000 139415791
Estimated value of
asset write down w.r.t.
the restructure		 43500000 8117433

Transition costs including travel/ training/ communication and other related
costs 		35000000 13905335

Other miscellaneous restructuring items including contingencies 		23500000 —

Total 		850000000 652274068

 

The said Business Restructuring is expected to be completed
during the next financial year.

 

From Auditors’ Report :

Attention is invited to Note B2 of the Schedule 18 annexed to
and forming part of the financial statements regarding charging off of Business
Restructuring expenses to Capital Reserve. Pursuant to the approval given by the
High Court of Rajasthan dated August 22, 2006 and December 04, 2006 to the
Scheme of Arrangement filed by the Company under Section 391 of the Companies
Act, 1956, in respect of charging off of ‘business restructuring expenses —
gross of tax’ to the capital reserve; the Company has been permitted to transfer
an amount of up to Rs.8500.00 lakhs from the Capital Reserve to a
‘Reconstruction Reserve Account’. The total expenses charged off to
Reconstruction Reserve Account for the period from January 01, 2006 to June 30,
2007 amounted to Rs.6522.74 lakhs. Had the restructuring expenses not been
adjusted to Capital Reserve under the order of the High Court of Rajasthan and
debited to the Profit and Loss Account as per the generally accepted accounting
principles, the net profit after tax (inclusive of the effect of deferred tax)
would have been lower and the Capital Reserve been higher for the period from
January 01, 2006 to June 30, 2007 by Rs.5538.72 lakhs.

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Straight-lining of lease rent pursuant to clarification by EAC of ICAI

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Section B : Miscellaneous


 3 Straight-lining of lease rent pursuant to
clarification by EAC of ICAI


 

BATA INDIA LTD. — (31-12-2007)

From Notes to Accounts :

Pursuant to clarification issued by Expert Advisory Committee
of Institute of Chartered Accountants of India on Accounting Standard-19 on
Leases on recognition of operating lease rent expense, the Company has decided
to recognise the scheduled rent increases over the lease term on a straight-line
basis in respect of all lease rent agreements entered on or after April 1, 2001
and still in force. The total impact in respect of these agreements till
December 31, 2006 of Rs.29,712 (Net of deferred tax impact of Rs.2,540) is
disclosed as ‘Prior period item’ in Schedule-21 in accordance with Accounting
Standard-5 on ‘Net Profit or Loss for the Period, Prior Period items and Changes
in Accounting Policies’.

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Qualifications in certificate on corporate governance

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Section B : Miscellaneous


2 Qualifications in certificate on corporate governance

BATA INDIA LTD. — (31-12-2007)

In our opinion and to the best of our information and
according to the explanations given to us, subject to the following :

1. Chairman of Audit Committee Meeting Mr. V. Narayanan was
not present in the Annual General Meeting held on 27th June 2007.

2. Code of conduct and quarterly results are not available
on the website of the company.


We certify that the Company has complied with the conditions
of Corporate Governance as stipulated in the above-mentioned Listing Agreement.

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S. 80IB : Customs duty drawback derived from business of industrial undertaking is entitled to deduction

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34 Industrial undertaking : Deduction u/s.
80-IB of Income-tax Act, 1961 : A.Y. 2001-02 : Customs duty drawback derived
from business of industrial undertaking is entitled to deduction u/s.80-IB.


[CIT v. ELTEK SGS P. Ltd., 300 ITR 6 (Del.)]

The assessee was engaged in the business of processing prawns
and other seafood which it had exported. For the A.Y. 2001-02, the Assessing
Officer disallowed the claim for deduction of Customs Duty drawback of
Rs.42,92,725 u/s.80-IB of the Income-tax Act, 1961 by relying on the judgment of
the Supreme Court in CIT v. Sterling Foods, 237 ITR 579 (SC) which was
concerned with S. 80HH of the Act. The Tribunal allowed the claim for deduction.

 

On appeal by the Revenue, the Delhi High Court upheld the
decision of the Tribunal and held as under :

“(i) There is a material difference between the language
used in S. 80HH and S. 80-IB of the Income-tax Act, 1961. While S. 80HH
requires that the profits and gains should be derived from the industrial
undertaking, S. 80-IB of the Act requires that the profits and gains should be
derived from any business of the industrial undertaking. In other words, there
need not necessarily be a direct nexus between the activity of an industrial
undertaking and the profits and gains. The source of the duty drawback is the
business of the industrial undertaking which is to manufacture and export
goods out of raw material that is imported and on which Customs Duty is paid.
The entitlement for duty drawback arises from S. 75(1) of the Customs Act,
1962, read with the relevant notification issued by the Central Government in
that regard.

(ii) An assessee would be entitled to special deduction
u/s.80-IB in respect of Customs Duty drawback.”

S. 147 : A completed assessment cannot be reopened merely on the basis of suspicion

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35 Reassessment : S. 147 of Income-tax Act,
1961 : A.Y. 1989-90 : A completed assessment cannot be reopened merely on the
basis of suspicion : Reason to believe v/s reason to suspect.


[CIT v. Smt. Paramjit Kaur, 168 Taxman 39 (P&H)]

For the A.Y. 1989-90, the assessment was completed u/s.143(3)
of the Income-tax Act, 1961. On receiving the information from the Department’s
survey wing that the assessee had prepared a demand draft, which was not
accounted for in the books of account, the Assessing Officer issued a notice to
the assessee u/s.148 and completed the reassessment u/s.147 by adding the amount
of the draft to the income of the assessee. The Tribunal held that since the
Assessing Officer had failed to incorporate material and its satisfaction for
reopening the assessment, the same was invalid.

 

On appeal by the Revenue, the Punjab and Haryana High Court
upheld the decision of the Tribunal and held as under :

“(i) In the instant case, it was undisputed that the
Assessing Officer had initiated reassessment proceedings on the basis of
information received from the survey circle that the assessee had got prepared
a demand draft which was not accounted for in the books of account of the
assessee. But the Assessing Officer had not examined and corroborated the
information received from the survey circle before recording his own
satisfaction of escaped income and initiating reassessment proceedings. The
Assessing Officer had, thus, acted only on the basis of suspicion and it could
not be said that the same was based on belief that the income chargeable to
tax had escaped assessment. The Assessing Officer has to act on the basis of
‘reason to believe’ and not on ‘reason to suspect’.

(ii) The Tribunal had, thus, rightly concluded that the
Assessing Officer had failed to incorporate the material and his satisfaction
for reopening the assessment and, therefore, the issuance of notice u/s.148
for reassessment proceedings was not valid.”

 


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S. 28(iv) : Notional interest on interest free deposit can not be treated as benefit or perquisite

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33 Income : Business income : S. 28(iv) read
with S. 23 of Income-tax Act, 1961 : A.Ys. 1995-96 and 2000-01 : Assessee
received interest-free deposit in respect of shops given on rent : Notional
interest on interest-free deposit can-not be treated as benefit or perquisite
u/s. 28(iv) : Notional interest not income.


[CIT v. Asian Hotels Ltd., 168 Taxman 59 (Del.)]

 

The assessee company had received interest-free deposit in
respect of shops given on rent. For the A.Ys. 1995-96 and 2000-01, the Assessing
Officer added notional interest on the said deposit to the assessee’s income on
the ground that by accepting the interest-free deposit, benefit had accrued to
the assessee, which was chargeable to tax u/s.28(iv) of the Income-tax Act,
1961. The Tribunal deleted the addition and held that notional interest on the
interest-free deposit received by the assessee in respect of a shop let on rent
was neither taxable as business profit u/s.28(iv), nor as income from house
property u/s.23(1)(a).

 

On appeal by the Revenue, the Delhi High Court upheld the
decision of the Tribunal and held as under :

“(i) A plain reading of the provisions of S. 28(iv)
indicates that the question of any notional interest on an interest-free
deposit being added to the income of an assessee on the basis that it may have
been earned by the assessee if placed as fixed deposit, does not arise. S.
28(iv) is concerned with business income and is distinct and different from
income from house property. It talks of the value of any benefit on perquisite
whether convertible into money or not from the business or the exercise of a
profession.

(ii) S. 23(1)(a) is relevant for determining the income
from house property and concerns determination of the annual letting value of
such property. That provision talks of the sum for which the property might
reasonably be expected to let from year to year. This contemplates the
possible rent that the property might fetch and not certainly the interest on
fixed deposit that may be placed by the tenant with the landlord in connection
with the letting out of such property. It must be remembered that in a taxing
statute, it would be unsafe for the Court to go beyond the letter of the law
and try to read into the provision more than what is already provided for. The
attempt by the Revenue to draw an analogy from the Wealth-tax Act, 1957 was
also to no avail. It is an admitted position that there is a specific
provision in the Wealth-tax Act, which provides for considering of a notional
interest, whereas S. 23(1)(a) contains no such specific provision.”

 


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S. 80P(2)(a)(i) : Co-operative Society carrying on banking business : Interest on loans to nominal members is entitled to deduction.

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32  Co-operative Society : Deduction u/s. 80P(2)(a)(i)
of Income-tax Act, 1961 : A.Y. 1999-00 : Co-operative Society carrying on
banking business : Interest on loans to nominal members is entitled to
deduction.



[CIT v. Punjab State Co-operative Bank Ltd., 300 ITR
24 (P&H)]

The assessee was a co-operative society carrying on the
business of banking and extending credit facilities to its members and nominal
members. For the A.Y. 1999-00, the Assessing Officer disallowed the claim for
deduction u/s.80(2)(a)(i) of the Income-tax Act, 1961 in respect of interest
derived from the loans advanced to the nominal members. The Tribunal allowed
the claim.

 

On appeal by the Revenue, the Punjab and Haryana High Court
upheld the decision of the Tribunal and held as under :

“(i) The provisions of S. 80P of the Income-tax Act,
1961, were introduced with a view to encouraging and promoting the growth of
the co-operative sector in the economic life of the country and in pursuance
of the declared policy of the Government. The different heads of exemption
enumerated in the Section are separate and distinct heads and are to be
treated as such. Clause (a)(i) of Ss.(2) of S. 80P talks of a co-operative
society engaged in carrying on the business of banking or providing credit
facilities to its members. The carrying on of the business of banking by a
co-operative society or providing credit facilities to its members are two
different types of activities which are covered under this sub-clause. The
word ‘or’ used in this sub-clause cannot be read as ‘and’. If the literal
reading of the whole of a Section or sub-section or a clause is quite clear
and there is no ambiguity, then the plain meaning to the Section should be
given effect and the word ‘or’ should not be read as ‘and’. Any interest
income received by the co-operative society engaged in carrying on the
business of banking activities from its members or non-members is liable for
exemption under this sub-clause.

(ii) A nominal member who had become a member of the
society after its registration on payment of the prescribed fees as per
bye-laws of the society, would also be considered as a member of the society
as per the definition given under the Co-operative Societies Act. In any
case, it made no difference whether the income was derived from the loan
advanced to the nominal members or members or otherwise to a third party,
because every income of interest derived by a co-operative banking society
from the banking activity was entitled to special deduction u/s.80P.”

Capital gains — In a case where computation provision cannot apply, such a case would not fall within S. 45 — Artex Manufacturing’s case distinguished on facts.

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  1. Capital gains — In a case where computation provision
    cannot apply, such a case would not fall within S. 45 — Artex Manufacturing’s
    case distinguished on facts    .

[PNB Finance Ltd. v. CIT, (2008) 307 ITR 75 (SC)]

 

The Punjab National Bank Ltd. was set up in 1895 in an area
which now falls in Pakistan. It was nationalised as Punjab National Bank (PNB)
by the Banking Companies (Acquisition and Transfer of Undertaking) Act, 1970.
On July 19, 1969 PNB Ltd. the appellant herein, on nationalisation received
compensation of Rs.10.20 crores. This compensation was calculated on the basis
of capitalisation of last 5 years’ profits. The said compensation was received
during the accounting year ending December 31, 1969, corresponding to the A.Y.
1970-71. During the A.Y. 1970-71, the appellant had to compute capital gains
u/s.48 by deducting from the sale consideration the cost of acquisition as
increased by the cost of improvement and expenses incurred in connection with
the transfer. Under the law then prevailing, the assessee could index the cost
of acquisition. A return was filed in this case by the assessee showing an
income of Rs.2,03,364.

 

The assessee in the course of assessment proceedings
submitted that he had an option u/s.55(2)(i) of having the value ascertained
as on January 1, 1954, whichever is higher, but could not exercise it as the
cost of acquisition in this case was not computable. In the alternative, the
assessee submitted the fair market value of the undertaking as on January 1,
1954. By letter dated September 30, 1970, the assessee claimed a capital loss.

 

The Assessing Officer, however, proceeded to hold on the
basis of capitalisation of the last 5 years’ profits the capital gains of
Rs.1,65,34,709.

 

Aggrieved by the decision of the Assessing Officer, the
matter was carried in appeal by the assessee to the Appellate Assistant
Commissioner who came to the conclusion that, in this case, it was not
possible to allocate the full value of the consideration received
(compensation) amounting to Rs.10.20 crores between various assets of the
undertaking and, consequently, it was not possible to determine the cost of
acquisition and cost of improvement under the provisions of S. 48 of the 1961
Act and since computation was inextrically linked with the charging provisions
u/s.45 of the said Act it was not possible to tax the tax the surplus, if any,
u/s.45 of the 1961 Act. Aggrieved by the decision of the Commissioner, the
Department went by way of appeal to the Tribunal which took the view that, in
this case, since the assessee had exercised its option for substitution of the
fair market value of the undertaking as on January 1, 1954, it was not open to
the assessee to contend that the cost of acquisition was not computable and,
therefore, the Assessing Officer was right in arriving at the figure of
capital gains fixed by him at Rs.1,65,34,709.

 

For the first time, relying upon S. 41(2), the High Court
dismissed the reference initiated at the behest of the assessee.

 

On an appeal, the Supreme Court held that as regards
applicability of S. 45, three tests are required to be applied. The first test
is that any surplus accruing on transfer of capital assets is chargeable to
tax in the previous year in which transfer took place. In this case, transfer
took place on July 18, 1969. The second test which needs to be applied is the
test of allocation/attribution. This test is spelt out in the judgment of this
Court in Mugneeram Bangur and Co. (Land Department) (1965) 57 ITR 299. This
test applies to a slump transaction. The object behind this test is to find
out whether the slump price was capable of being attributable to individual
assets, which is also known as itemwise earmarking. The third test is that
there is a conceptual difference between an undertaking and its components.
Plant machinery and dead stock are individual items of an undertaking. A
business undertaking can consist of not only tangible items but also
intangible items like, goodwill, manpower, tenancy rights and value of banking
licence. However, the cost of such items (intangibles) is not determinable. In
the case of CIT v. B. C. Sriniwasa Setty reported in [1981] 128 ITR
294, this Court held that S. 45 charges the profits or gains arising from the
transfer of a capital asset to Income-tax. In other words it charges surplus
which arises on the transfer of a capital asset in terms of appreciation of
capital value of that asset. In the said judgment, this Court held that the
‘asset’ must be one which falls within the contemplation of S. 45. It is
further held that, the charging Section and the computation provisions
together constitute an integrated code and when in a case the computation
provisions cannot apply, such a case would not fall within S. 45. In the
present case, the banking undertaking, inter alia, included intangible
assets like goodwill, tenancy rights, manpower and value of banking licence.
On the facts, the Supreme Court found that itemwise earmarking was not
possible. On the facts, it was found that the compensation (sale
consideration) of Rs.10.20 crores was not allocable item-wise as was the case
in Artex Manufacturing Co. (1997) 227 ITR 260. For the aforestated reasons,
the Supreme Court held that on the facts and circumstances of this case, which
concerned A.Y. 1970-71, it was not possible to compute capital gain and,
therefore, the said amount of Rs.10.20 crores was not taxable under Setion 45
of the 1961 Act. Accordingly, the impugned judgment was set aside. The Supreme
Court however, observed that in this case S. 55(2)(i) did not operationalise.
U/s.55(2), the fair market value as on January 1, 1954, could have substituted
the figure of cost of acquisition provided the figures of both ‘cost of
acquisition’ and ‘fair market value as on January 1, 1954’ were ascertainable.

Capital or Revenue — If the object of the subsidy scheme is to enable the assessee to run the business more profitably the receipt is on revenue account — if the object of the assistance under subsidy scheme is to enable the assessee to set up a new unit

New Page 1


 

  1. Capital or Revenue — If the object of the subsidy scheme is
    to enable the assessee to run the business more profitably the receipt is on
    revenue account — if the object of the assistance under subsidy scheme is to
    enable the assessee to set up a new unit or expand its existing unit, then the
    receipt is on capital account.



[CIT v. Ponni Sugars and Chemicals Ltd. (and other
connected appeals), (2008) 306 ITR 392 (SC)]

 

Co-operative Society — Deduction u/s.80P — Assessing
Authority should examine as to whether the society is engaged in its business
of banking or providing credit facilities to its members.

 

The Supreme Court was mainly concerned with the following
two questions in a batch of civil appeals, namely :

(i) Whether the incentive subsidy received by the
assessee is a capital receipt not includible in the total income ?

(ii) Whether the assessee was entitled to exemption
u/s.80P(2)(a)(i) of the Income-tax Act, 1961, in respect of the interest
received from the members of the society ?

 


For convenience the Supreme Court considered the 1980
scheme which was almost identical to 1987, 1988 and 1993 schemes. The dispute
pertained to the A.Y. 1986-87. In matter considered by the Supreme Court both
the above questions arose for determination. The incentives conferred under
that scheme were two-fold. First, in the nature of a higher free-sale sugar
quota and, second, in allowing the manufacturer to collect excise duty on the
sale price of the free-sale sugar in excess of the normal quota, but pay to
the Government only the excise duty payable on the price of levy sugar.

 

The Supreme Court observed that four factors existed in the
said schemes, which were as follows :

(i) Benefit of the incentive subsidy was available only
to new units and to substantially expanded units, not to supplement the
trade receipts.

(ii) The minimum investment specified was Rs.4 crores for
new units and Rs.2 crores for expansion units.

(iii) Increase in the free-sale sugar quota depended upon
increase in the production capacity.

(iv) The benefit of the scheme had to be utilised only
for repayment of term loans.

 


The main controversy arose in these cases because of the
reason that the incentive were given through the mechanism of price
differential and the duty differential. According to the Department, price and
costs are essential items that are basic to the profit making process and any
price related mechanism would normally be presumed to be revenue in nature. On
the other hand, according to the assessee, what was relevant to decide the
character of the incentive was the purpose test and not the mechanism of
payment.

 

According to the Supreme Court, the above controversy could
be resolved if it applied the test laid down in its judgment in the case of
Sahney Steel and Press Works Ltd. According to the Supreme Court the test to
be applied was that the character of the receipt in the hands of the assessee
had to be determined with respect to the purpose for which the subsidy was
given. The point of time at which the subsidy is paid is not relevant. The
source is immaterial. The form of subsidy is immaterial. If the object of the
subsidy scheme was to enable the assessee to run the business more profitably
then the receipt is on revenue account. On the other hand, if the object of
the assistance under subsidy scheme was to enable the assessee to set up a new
unit or to expand the existing unit then the receipt of the subsidy was on
capital account.

 

The Supreme Court referred to the decision of the House of
Lords in the case of Seaham Harbour Dock Co. v. Crook, (1931) 16 TC
333. In that case the Harbour Dock Co. had applied for grants from the
Unemployment Grants Committee from funds appropriated by Parliament. The said
grants were paid as the work progressed. The payments were made several times
for some years. The Dock Co. had undertaken the work of extension of its
docks. The extended dock was for relieving the unemployment. The main purpose
was relief from unemployment. Therefore, the House of Lords held that the
financial assistance given to the company for dock extension cannot be
regarded as a trade receipt.

 

The Supreme Court observed that the aforesaid judgment of
the House of Lords showed that the source of payment or the form in which the
subsidy is paid or the mechanism through which it is paid is immaterial and
what is relevant is the purpose for payment of assistance.

 

Applying the above tests to the facts of the present case
and keeping in mind the object behind the payment of the incentive subsidy,
the Supreme Court was satisfied that payment received by the assessee under
the scheme was not in the course of a trade, but was of capital nature.

Interest — Waiver of interest u/s.220(2) — Case of genuine hardship — Merely because a person has large assets could not per se lead to the conclusion that he would never be in difficulty as he can sell those assets and pay the amount of interest levied —

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  1. Interest — Waiver of interest u/s.220(2) — Case of genuine
    hardship — Merely because a person has large assets could not per se
    lead to the conclusion that he would never be in difficulty as he can sell
    those assets and pay the amount of interest levied — When a request has been
    made to dispose of the seized assets and appropriate proceeds towards taxes,
    why the request was not acceded to should be gone into by the Commissioner.



[B. M. Malani v. CIT, (2008) 306 ITR 196 (SC)]

 

The appellant had been carrying on money-lending business
and trading in shares and securities. On or about September 4, 1994, a raid
was conducted in his residential premises by the authorities in exercise of
their powers u/s.132 of the Income-tax Act, 1961 (for short, ‘the Act’).
Amongst others, shares worth market value of Rs.61.38 lakhs and a demand draft
worth Rs.10 lakhs in the name of PAN Clothing Company Limited were seized. By
a letter dated December 15, 1994, a declaration was made by the appellant in
terms of Ss.(4) of S. 132 of the Act, by reason whereof he opted to pay taxes
from out of the seized shares and securities stating that the shares be
expeditiously disposed of and the sale proceeds therefrom be appropriated
towards taxes. The said request of the appellant was not acceded to.

 

The Income-tax Department demanded and recovered a sum of
Rs.40 lakhs in between the period January and March, 1995, for the A.Y.
1991-92 to 1994-95.

 

The appellant filed an application in terms of Ss.(1) of S.
245C before the Settlement Commission on January 2, 1996, whereupon an order
was passed by the Settlement Commission on December 2, 1999. The demand draft
drawn in the name of PAN Clothing Company Limited worth Rs.10 lakhs which was
seized during the course of search was encashed by the Income-tax Department
in July, 2000, after the same was got revalidated.

 

By an order dated March 8, 2002, the Income-tax Officer,
Ward-10(1), Hyderabad, levied interest for a sum of Rs.31,41,106 u/s.220(2) of
the Act for the A.Ys. 1990-91 to 1995-96.

 

The appellant thereafter filed an application for waiver of
interest on diverse dates, i.e., April 3, 2002, May 14, 2002, and
September 16, 2002. The same was rejected by the Commissioner of Income-tax by
reason of an order dated November 26, 2002, opining that the appellant did not
satisfy all the three conditions which were required for allowing a waiver
petition. The High Court dismissed the writ petition filed by the appellant.
On an appeal to the Supreme Court, it was held that for interpretation of the
aforementioned provision, the principle of purposive construction should be
resorted to. Levy of interest although is statutory in nature, inter alia is
for recompensating the Revenue from loss suffered by non-deposit of tax by the
assessee within the time specified therefor. The said principle should also be
applied for the purpose of determining as to whether any hardship had been
caused or not. A genuine hardship would, inter alia, mean a genuine
difficulty. That per se would not lead to a conclusion that a person
having large assets would never be in difficulty as he can sell those assets
and pay the amount of interest levied.

 

The Supreme Court further held that the Commissioner has
the discretion not to accede to the request of the assessee, but that
discretion must be judiciously exercised. He has to arrive at a satisfaction
that the three conditions laid down therein have been fulfilled before passing
an order waiving interest.

 

According to the Supreme Court, compulsion to pay any
unjust dues per se would cause hardship. But a question, however, would
further arise as to whether the default in payment of the amount was due to
circumstances beyond the control of the assessee.

 

The Supreme Court was of the view that, unfortunately, this
aspect of the matter had not been considered by the learned Commissioner and
the High Court in its proper perspective. The Supreme Court observed that the
Department had taken the plea that unless the amount of tax due was
ascertainable, the securities could not have been sold and the demand draft
could not have been encashed. The Supreme Court held that the same logic would
apply to the case of the assessee in regard to levy of interest also. It is
one thing to say that the levy of interest on the ground of non-payment of
correct amount of tax by itself can be a ground for non-acceding to the
request of the assessee as the levy is a statutory one, but it is another
thing to say that the said factor shall not be taken into consideration at all
for the purpose of exercise of the discretionary jurisdiction on the part of
the Commissioner. The appellant volunteered that the securities be sold. Why
the said request of the appellant could not be acceded to has not been
explained.

 

The Supreme Court observed that as the offer was voluntary,
the authorities of the Department subject to any statutory interdict could
have considered the request of the appellant. It was probably in the interest
of the Revenue itself to realise its dues. Whether this could be done in law
or not has not been gone into. The same ground, however, was not available to
the appellant in respect of the demand draft, as in relation thereto no such
request was made.

 

The Supreme Court was of the opinion that interests of
justice would be sub-served if the impugned judgment was set aside and the
matter was remitted to the Commissioner of Income-tax for consideration of the
matter afresh. The appeal was allowed accordingly.

Block assessment : Ss. 158BC and 143(2) of I. T. Act, 1961 : Where the returned income is not accepted in the block assessment, service of notice u/s. 143(2) is necessary. Failure to serve notice u/s. 143(2) would render the block assessment invalid.

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34. Block assessment : Ss. 158BC and 143(2) of I. T. Act,
1961 : Where the returned income is not accepted in the block assessment,
service of notice u/s. 143(2) is necessary. Failure to serve notice u/s. 143(2)
would render the block assessment invalid.

[CIT vs. Pawan Gupta, 223 CTR 487 (Del).]

In this case the Delhi High Court held as under : 

“i) S. 143(2) is a mandatory provision whether one looks
at it from the standpoint of a regular assessment or from the standpoint of
an assessment under Chapter XIV-B.

ii) S. 143(2) has no application in a situation where the
AO, on receipt of return of undisclosed income in Form No. 2B, is satisfied
with the same as reflecting the true state of affairs and no further
information or explanation is called for from the assessee.

iii) However, where the AO is not inclined to accept the
return of undisclosed income filed by the assessee, the procedure prescribed
in Section 143(2) has to be followed. If an assessment order is passed in
such a situation without issuing a notice u/s. 143(2), it would be invalid
and not merely irregular.”

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