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Gajendra Kumar T. Agarwal v. ITO ITAT ‘G’ Bench, Mumbai Before D. Manmohan (VP) and Pramodkumar (AM) ITA No. 1798/Mum./2010 A.Y.: 2006-07. Decided on: 31-5-2011 Counsel for assessee/revenue: S. L. Jain/ Pavan Vaid

Sections 43(5), 72, 73 — Assessee is entitled to set off the loss incurred in the business of dealing in derivatives in the assessment years prior to A.Y. 2006-07 against the profits earned in the same business in the A.Y. 2006-07 and later assessment years.

Facts:
During the A.Y. 2006-07 the assessee earned profit of Rs.1,91,48,060 from dealing in derivatives. He had brought forward losses, for A.Y. 2001-02 to 2005-06, from this activity amounting to Rs.4,68,75,320. The assessee in his return of income claimed set-off of brought forward losses against the current years profit and the balance amount of losses amounting to Rs.2,77,27,260 was claimed to have been carried forward to subsequent years. The set-off and also the carry forward as claimed was allowed. Subsequently, the CIT was of the view that the setoff granted by the AO rendered the assessment order erroneous and prejudicial to the interest of the Revenue to the extent of carry forward of losses. The CIT, in view of the amendment to S. 43(5) which he held to be prospective, declined the set-off of past losses (which he considered to be as speculative in nature) in dealing in derivatives against the profits in dealing in derivatives in the current year (which were considered to be non-speculative).

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:
(1) The business loss, speculative or nonspeculative, incurred by an assessee in one assessment year can be set off against the profits of the same business, speculative or non-speculative, or any other business in the same category.

(2) The ratio of the decision of the Supreme Court in the case of CIT v. Manmohan Das, (59 ITR 699) (SC) read with the ratio of the decision of the Bombay High Court in the case of Western Oil Distributing Ltd. v. CIT, (126 ITR 497) (Bom.) is an authority for the following significant propositions viz.:

(a) Whether a particular business loss, speculative or non-speculative, incurred by the assessee in an earlier year is eligible for set-off against business income in a subsequent year, is to be taken in the course of proceedings in the subsequent assessment year, i.e., the assessment year in which set-off is claimed;

(b) Section 73(2) confers a statutory right upon the assessee who sustains a loss of profits in any year in any business, profession or vocation to carry forward the loss as is not set off under sub-section (1) to the following year, and to set it off against his profits and gains, if any, from the same business for that year. Once this statutory right is recognised, it is a natural corollary of that recognition that when an assessee incurs a loss in a business, speculative or non-speculative, in any year, such loss has to be, subject to the fulfilment of other pre-conditions, to be set off against profits of the same business in subsequent year;

(c) In the course of proceedings of the subsequent assessment year, i.e., the assessment year in which set-off of loss is claimed, it is open to even decide the true nature and character of loss incurred in the earlier relevant assessment year. Even a finding about the nature of loss, in the assessment year in which loss is incurred, does not bind the assessee, and that aspect of the matter can be decided afresh in the course of proceedings in the assessment year in which set-off is claimed.

(3) The question whether the losses incurred in dealing in derivatives are eligible for set-off has to be determined as per the law prevailing in the year of set-off. As in the year of set-off, derivatives transactions are not, pursuant to the amendment to section 43(5), treated as ‘speculative transactions’, the losses incurred prior to the amendment have to be treated as normal business losses and are eligible for setoff against all business income in accordance with section 72.

(4) The provisions of carry forward and set-off are to be construed in a manner so as not to defeat the plain and unambiguous intention of the Legislature. This amendment was to provide relief to the taxpayers and is to be viewed as beneficial provisions, as such, one cannot possibly proceed on the basis that the object of making amendment in section 43(5) was to kill the brought forward losses of dealing in derivatives or make them ineligible for being set off against the profits of the same business in subsequent years. Whatever may be the characterisation of income for the purpose of intra-assessment year set-off in the relevant assessment year, and irrespective of the fact that such a characterisation has achieved finality in assessment, the losses and profits from dealing in derivatives must be characterised on a uniform basis in the assessment year in which set-off is claimed.

The Tribunal allowed the appeal filed by the assessee and held that there was no infirmity in the AO granting set-off and the order of the AO could not be held to be erroneous and prejudicial to the interest of the Revenue. The revision proceedings were quashed.

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ITO v. Laxmi Jewel Pvt. Ltd. ITAT Mumbai Bench Before R. V. Easwar (President) and B. Ramakotaiah (AM) ITA No. 2165/Mum./2010 A.Y.: 2004-05. Decided on: 29-4-2011 Counsel for revenue/assessee: Shravankumar/K. A. Vaidyalingam

CBDT Instruction No. 3/2011, dated 9-2-2011 — CBDT Circular fixing monetary limits for filing appeals by the Department applies to pending appeals as well.

Facts:
This was an appeal filed by the Revenue against the order of the CIT(A) directing the AO to allow deduction u/s.10A amounting to Rs.5,78,432 in respect of interest income, which according to the AO was not derived from the business or profession. On behalf of the assessee, relying on the decision of the Bombay High Court in the case of CIT v. Madhukar K. Inamdar, (318 ITR 149) (Bom.) and also on the ratio of the decision of the Delhi High Court in the case of CIT v. Delhi Race Club Ltd., (ITA No. 128 of 2008 dated 3-3-2011), it was argued that the tax effect is only Rs.2,07,512 and as per Instruction No. 3/2011, the Revenue should not contest appeal up to Rs.3,00,000.

Held:
Considering the similar situation where tax limits were modified by the CBDT Instruction No. 5 of 2008, the Jurisdictional High Court in the case of CIT v. Madhukar Inamdar, (HUF) (supra) held that the Circular will be applicable to the cases pending before the Court either for admission or for final disposal.

The Tribunal dismissed the appeal filed by the Revenue on issue of tax effect involved.

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(2011) 22 STR 429 (Tri.-Bang.) Bharat Fritz Werner Ltd. v. CCEx., Bangalore.

CENVAT credit of Service tax — Input services — Architect Services and Interior Decorator services, Authorised Service Stations, Real Estate Agent Service and Stock-Broker Services — Credit of Service tax paid on above services could not be denied as they were directly or indirectly used for purpose of business.

Facts:
? The appellants had availed CENVAT credit of Service tax on Architect Services and Interior Decorator Services, Authorised Service Stations, Real Estate Agent Service and Stock- Broker’s Services. The lower authorities issued a show-cause notice denying credit to the appellant on the ground that as per Rule 2(1)(ii) of the CENVAT Credit Rules, input service would include any services used by them directly or indirectly in relation to the ‘manufacture of final products and clearance of final products’.

? The appellants contended that the services received by them were in respect of the premises used for the marketing programmes. Repair and maintenance of vehicle services were used by their staff and stockbroker services were used for the purpose of enhancement of their business.

? The definition of ‘input service’ means any service

“used by the manufacturer, whether directly or indirectly, in or in relation to the manufacture of final products and clearance of final products from the place of removal”.

And includes services used in relation to setting up, modernisation, renovation or repairs of a factory, premises of provider of output service or an office relating to such factory or premises, storage up to the place of removal, procurement of inputs, storage up to the place of removal and outward transportation up to the place of removal.

? According to the Department, the said services rendered outside the manufacturing premises cannot be considered as used by them directly or indirectly for manufacturing final products. The goods manufactured by the appellant were at the factory and hence the services availed by them outside the factory premises cannot be considered as input services.

Held:
It was held that the services rendered by the appellant were directly or indirectly used for the purpose of their business and hence, credit could not be denied.

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(2011) 22 STR 428 (Tri.-Delhi) CCEx., Jaipur-I v. Unimax Granites (P) Ltd.

Refund of CENVAT credit of Service tax under Notification 5/2006-CE(N.T.) — Documents for claiming refund — Photocopy of shipping bill and AR-1 return submitted and not attested by the Customs Officer that goods in fact exported —Attestation by the Customs Officer not required.

Facts:
? The respondents are 100% EOU and availing CENVAT credit on services availed by them. Being an exporter, they are not eligible for utilising CENVAT credit, however, under Rule 5 of the CENVAT Credit Rules, they filed a refund claim. Along with the refund application they submitted AR-1 and shipping bills before the adjudicating authority, who on examination granted the refund.

? Against the said refund claim, the Revenue was in appeal as the photocopy of the shipping bill and AR-1 return were not duly certified by the Customs Officer, but were attested by the respondents themselves.

? The respondent submitted that the said documents were duly certified by the Customs Officer showing that the goods had been exported by them.

Held:
It was concluded that as per the Notification, the attestation of these documents is not required and the refund claim was allowed.

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(2011) 22 STR 421 (Tri.-Delhi) Punjab Engineering College v. CCEx., Chandigarh.

Consulting Engineer’s Service — Liability of educational institution — Appellant is an engineering college providing technical assistance to the needy in respect of technical aspects by its engineering faculty — No evidence that appellant institute was an engineering consultant providing engineering consultancy service.

Facts:
The appellant being an engineering college provided technical assistance to the needy in respect of technical aspects by its engineering faculty. The Commissioner illustrated the meaning of ‘scientific or technical consultancy’ and ‘consulting engineering services’ in the review order. An institution providing scientific or technical advice or such assistance falls under the purview of ‘scientific or technical consultancy service’, similarly engineering services provided by a commercial establishment fall under ‘Engineering Consultancy’.

Held:
The appellant’s institute is not said to be an ‘engineering consultant’. Service tax is levied on value of economic services which are commercially feasible and are consumed by the recipient with a clear object to pay for commercial services. The appellant does not serve such purpose and cannot be brought in the fold of taxation in disguise. Setting aside the review order, the appeal was allowed.

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(2011) 22 STR 400 (Tri.-Bang.) Phoenix IT Solutions Ltd. v. CCEx., Visakhapatnam.

Electricity Call Centre, Customer Service Centre, Computerised Collection Centre, Watch and Ward and Route Rider Service — Business Auxiliary Services v. Business Support Services — Business Auxiliary service as service rendered on behalf of electricity company/department.

Billing and Accounting — Energy audit — Consumer indexing — Business Support Services.

Demand — Limitation — Period involved from 1-7-2003 to 30-9-2006 — Appellant did not approach Department till 1-3-2006 — Classification changed by the Tribunal — Matter remanded to adjudicating authority for fresh consideration and determination of tax liability and penalty imposable.

Classification of Services — Business Auxiliary Services — Business Support Services — Support Services to Business or commerce (BSS) provided in relation to business or commerce while Business Auxiliary Services provided on behalf of the client.

Facts:

The appellant was engaged in providing services such as Electricity Call Centre, Customer Service Centre and Computerised Collection Centre services to electricity companies and electricity departments. The appellant relied on Notification No. 8/2003-ST, which exempted call centre service. However, the Department demanded payment of tax under Business Auxiliary Service.

The Department investigated and on verification of the records understood that the appellant had rendered the following taxable services:

Operating and maintaining the Electricity Call Centre, Customer Service Centre, Computerised Collection Centre, Energy Audit, Consumer Indexing, Watch and Ward and Route Rider service, Billing and Software maintenance services.

The Department took a view that the said activities would fall under Business Auxiliary Service and the assessee was liable to levy of Service tax with interest as applicable.

The learned advocate on behalf of the appellant challenged the same on the following grounds:

Correctness of classification of services made in the Order-in-Original
Limitation
Imposition of penalty

Held:

Call Centre activities: The activities of registration of complaints/monitoring of complaints, collection of payments, accounting for the same and management of accounts and complaints cannot be called as call centre activities.

Registering of complaints and collection of bills: Once the appellant deals with the customer, he is acting on behalf of the electricity company/ department and therefore classification of services provided by the appellant may be classified under Business Auxiliary Service and not under BSS.

Business Support Services: Billing and Accounting, Energy Audit and Consumer indexing services fall under Business Support Services.

Extended period of limitation: It is a statutory obligation on part of every service provider to see whether the service rendered by him is liable to Service tax and make declaration to the Department. There is no indication to show whether the appellant had sought clarification from the Department or obtained any legal opinion as regards liability to Service tax. It has to be noted that even on 3-3-2006, when the application was made, the appellant had not indicated all the activities undertaken by them. Therefore, invocation of extended period was upheld.

Penalty: Since the Commissioner had imposed penalty, but not quantified the same, the order was held defective to that effect.

In view of the fact that in some cases, classification had changed, in some cases, the assessee’s claim was accepted and the demand as such was to be re-quantified, the matter was remanded for fresh consideration and determination of duty liability and imposition of penalty.

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(2011) 22 STR 368 (Tri.-Delhi) CCEx., Chandigarh v. Super Music International.

CENVAT credit — Input used in manufacture of exempted intermediate product, which in turn used in final product cleared on duty payment — Credit of duty cannot be denied on such inputs — CBEC Manual binding on Department — Credit allowed.

Facts:
Respondents were in the business of manufacture of blank/unrecorded cassettes and were availing CENVAT credit facility. One of the inputs used by them was art-paper and gum-base paper which was converted into inlay cards and stickers used in the manufacture of cassettes. Inlay cards as well as stickers are fully exempt from duty. The dispute arose regarding eligibility of CENVAT credit on art-paper and gum-base paper.

According to the Revenue, since art-paper and gum-base paper are directly used in the manufacture of inlay cards and stickers, which are exempt from payment of duty, are not eligible for CENVAT credit even if the inlay cards and stickers manufactured from these inputs are used in the factory for manufacture of cassettes, whereas according to the assessee inlay cards as well as stickers are not finished products but intermediate products used in the manufacture of final product and therefore, CENVAT credit on art-paper and gum-base paper would be eligible for taking credit. Cenvat credit of duty on inputs used in the manufacture of intermediate product would be available even if the intermediate product is exempt from duty as long as the intermediate product is used in the manufacture of finished goods on which duty is paid. Further, a reference to the CBEC’s Excise Manual of supplementary instructions was made by the Tribunal, wherein the issue regarding availment of CENVAT Credit on intermediate products is discussed.

Held:
Applying the ratio of the Supreme Court judgement in the case of Escorts Ltd. v. CCE, Delhi-2004 (171) E.L.T. 145 (SC), it was held that CENVAT credit shall be admissible in respect of the amount of inputs contained in any of the bye-product and similarly credit shall not be denied if the inputs are used in any intermediate product. Although the intermediate goods are exempt from payment of duty and that the inputs are used in or in relation to the manufacture of final products, whether directly or indirectly. It was held that in case there is no reference of a particular issue in the Act/Rules, inference can be drawn from the CBEC’s Excise Manual and the said instructions will be binding on all Central Excise officers and applicable to all situations. The Revenue’s appeal was dismissed.

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(2011) 22 STR 361 (Tri.-Bang.) — CCEx. & Cus. (Appeals), Tirupati v. Kores (India) Ltd.

Refund of CENVAT credit — Well-settled law that amount of credit lying unutilised on account of closure of factory can be refunded — Rule 5 of the CENVAT Credit Rules, 2004.

Facts:
The respondents took CENVAT credit on capital goods and claimed refund of the amount on the ground that the factory was closed and they would not be able to utilise the balance in the said account. The lower authority rejected the refund claim stating that it would amount to non-payment of duty on capital goods which is not permissible and further there is no provision regarding refund of unutilised credit under Rule 5 of the CENVAT Credit Rules or even section 11B of the Central Excise Act. The respondents approached the Commissioner (Appeals). The Commissioner (Appeals) held that only the refund of unutilised credit is asked for, hence, it does not amount to refund of duty paid on capital goods.

Held:
Referring to a number of case laws and relying on the decision in the case of UOI v. Slovak India Trading Co. Pvt. Ltd., 2008 (10) STR 101 (Kar.), it was held that when the amount lying in the CENVAT credit account cannot be utilised, then the assessees are entitled for cash refund and the Revenue’s appeal was accordingly rejected.

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(2011) 22 STR 351 (Tri.-Chennai) — T. V. Ramesh v. CCEx., Madurai.

Penalty — Enhancement of mandatory penalty in revision order which was passed after passing of order-in-appeal against the original adjudication order — Revenue stating that Commissioner in revision proceedings not informed of appeal proceedings — Commissioner in revisionary proceedings not justified in enhancing such penalty — Enhancement quashed.

Facts:
The Commissioner (Appeals) upheld the order of the original authority, as the same related to imposition of penalty u/s. 78. Meanwhile, the Commissioner issued a notice enhancing the imposition of penalty. The appellant had not brought to the notice of the Commissioner that the same order of the original authority was challenged before the Commissioner (Appeals).

The Commissioner had issued the order after passing of the said order by the Commissioner (Appeals).

Held:
The Commissioner was not made aware of the appeal proceedings before the Commissioner (Appeals) against the original order. The Commissioner (Appeals) set aside the penalty u/s. 76 and upheld the penalty u/s. 78. In the light of these facts, the Commissioner was held as not justified enhancing the penalty and the appeal was allowed by quashing enhanced penalty.

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(2011) 22 STR 342 (Tri.-Bang.) — MTR Foods Ltd. v. CCEx., Bangalore.

CENVAT credit of Service tax can be availed on CHA services engaged by the appellant for export of its products.

Facts:
? The appellants engaged services of Clearing House Agent (CHA) for export of their goods. They were disallowed availment of CENVAT credit of Service tax paid on services rendered by CHA on the ground that the said service does not fall under the category of ‘input service’ and that the service does not relate to ‘business activities’. CHA services are rendered beyond the place of removal.

? Relying on the case of CCE, Nagpur v. UltraTech Cement Ltd., [2010 (20) STR 577 (Bom.)], the appellants inter alia contended that Service tax paid on services required for the activities relating to business could not be denied CENVAT credit. In the case of Rolex Rings (P) Ltd. 2008 (230) ELT 569 (Tri.), it was held that CHA and surveyors’ services are utilised at the time of export of goods and it could be concluded that the place of removal in case of exported goods is the port area. The ownership of the goods remains with the seller till the port area, it can be safely held that all the services availed by the exporter till the port area are required to be considered as ‘input service’ inasmuch as the same are clearly related to the business activities. Activities relating to business are covered by the definition of input service and admittedly CHA and surveyors services are relating to the export business.

Held:
The issue involved in the case is settled in many decisions which followed the decision in the case of Rolex Rings P. Ltd. (supra). Further, the judgment in the case of UltraTech Cement (supra) squarely covers the issue. Where the sale takes place at the destination point and the ownership of the goods remains with the seller till the delivery of the goods, the place of removal would get extended to the destination point and the credit of Service tax paid on the transportation up to such place of sale would be admissible. The Commissioner (Appeals) went beyond the scope of show-cause notice while concluding that some goods exported by the assessee were exempted goods and the appellants could not have availed CENVAT credit on the activities relating to such goods. Thus, the appeal was allowed.

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(2011) 22 STR 282 (Tri.-Mumbai) — Indian Oil Corporation Ltd. v. CCE, Mumbai-II.

Goods Transport Agency (GTA) service — Benefit of abatement of 75% under Notification No. 1/2006- ST cannot be denied to the appellant.

Facts:
The appellant being a service recipient has availed CENVAT credit on inputs, capital goods and input services and had taken benefit of Notification No. 1/2006. Benefit of Notification No. 1/2006-ST and 12/2003-ST was denied to the appellants on the ground that:

? Inadmissible exemption was availed under Notification No. 1/2006-ST.

? As per the Notification, 75% abatement of the taxable value under GTA service can be availed on the condition that the service provider has not availed CENVAT credit on inputs, capital goods and input services used for providing the service.

Held:
The Tribunal held that the restriction as to admissibility of abatement with respect to non-availment of CENVAT credit applies to the service provider. The assessee being service recipient of GTA service is entitled to abatement and hence, appeal was allowed.

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(2011) 22 STR 257 (Ori.) — Utkal Builders Ltd. v. Union of India.

Constitutional validity of Service tax — Levy on renting of immovable property service held valid.

Facts:
The petitioner filed a writ application declaring the provisions, i.e., section 65(90a) read with section 65(105)(zzzz) of the Finance Act, 1994 as null and void and ultra vires the Constitution of India.

The arguments of the petitioner were as under:

(i) The petitioner relied on the case of Home Solution Retail India Ltd. v. Union of India and Others, 2009 (14) STR 433 (Del.) which stated that renting of immovable property was not a taxable service by itself. The amendment made to section 65(105)(zzzz) as amended by the Finance Act, 2010 does not remedy the constitutional infirmity as held by the Delhi High Court.

(ii) The contention of the petitioner clearly distinguished between ‘property-based service’ and ‘performance-based service’. Any service connected with ‘renting of immovable property’ would fall within the ambit of Service tax. However, whether renting would constitute a taxable service or not, especially when there was no value addition by the service provider, it could not be regarded as service.

(iii) The Revenue placed reliance on the judgment of the Punjab and Haryana High Court in the case of M/s. Shubh Timb Steels Ltd. v. Union of India and Another, wherein the challenge to the levy of Service tax on ‘renting activity’ was and turned down by the Court. They further contended that in Tamil Nadu Kalyana Mandapam Association v. Union of India and Others, (2004) 5 SCC 632 it was clearly held that services rendered by ‘mandap’ were termed as ‘property-based services’ and currently, renting itself is deemed as taxable services due to the retrospective amendment from 1st June, 2007 on renting of immovable property service.

Held:
The definition of ‘taxable service’ includes the activity of renting, for use in the course or furtherance of business or commerce with the introduction of the Finance Act, 2011. Although challenge is made to the amendment made by the Finance Act, 2010 with retrospective effect, the nature of transaction made by the petitioner with its tenant clearly amounts to renting of an immovable property for the purpose of business or commerce. Service tax is clearly leviable thereon. The Court held a considered view that the renting of immovable property itself is clearly covered by section 65(90a) of the Act and that the Delhi High Court did not discuss its scope and impact in the case of Home Solution Retail India Ltd.’s case (supra) and the entire focus was on the amendment of section 65(105(zzzz) of the Finance Act. It is a well-settled principle of law that if a judgment proceeds without taking note of the relevant provisions of law, it cannot be held to have correctly decided the case. The amendment is clearly clarificatory in nature and the Parliament possessed requisite competence to declare it retrospective. The writ was dismissed accordingly.

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PROSECUTION UNDER SERVICE TAX

Preliminary

Sections 88 to 92 of the Finance Act, 1994 (the Act) provided for prosecution for certain offences, such as failure to furnish prescribed returns, false statement in verification, abetment of false return, etc. These provisions were omitted by the Finance (No. 2) Act, 1998 w.e.f. 16-10-1998. However, through the Finance Act, 2011, amendments have been made to introduce prosecution provisions by enacting a new section 89 under FA. Further, sections 9A, 9AA, 9B, 9E and 34A of the Central Excise Act, 1944 (‘CEA’) have been made applicable to Service tax. These provisions together constitute the provisions relating to prosecution under Service tax, which are discussed hereafter.

Prosecution provisions Offences punishable

The punishable offences specified in section 89(1) of the Act are as under:

(a) Provision of taxable services or receipt of any taxable services where the recipient is liable to pay Service tax, without an invoice issued in accordance with the provisions of the Act or the Rules made hereunder;

(b) availment and utilisation of credit without actual receipt of taxable service or excisable goods either fully or partially in violation of the Act or Credit Rules;

(d) failure to supply information or supply of false information;

(e) failure to pay to the Government any amount collected as Service tax beyond a period of six months from the date on which such payment became due.

2.2 Quantum of punishment

In absence of ‘special and adequate reasons’ to be recorded in the judgment of the Court the punishment mentioned in Sr. Nos. 1 and 3 above, cannot be reduced below six months. The following grounds would not be considered ‘special and adequate reasons’ in terms of section 89(3) of the Act:

(a) conviction of the accused for the first time for an offence under the Act;

(b) payment of penalty or any other action taken for the same act which constitutes the offence

(c) the fact that the accused was not the principal offender and was acting merely as a secondary party in the commission of the offence.

(d) The age of the accused.

Sanction

Prosecution can be initiated only with prior approval of the Chief Commissioner of Central Excise (CCCE).

Central Excise Sections provisions made applicable to Service tax

The provisions of sections 9A 9AA, 9B, 9E and 34A of CEA which have been made applicable to Service tax are briefly explained as under:

(a) The offences would be ‘non-cognisable’ i.e., an offence in which a police officer has no authority to arrest without a warrant. Further the CCCE is also empowered to compound the offences on payment of the compounding amount as may be prescribed (section 9A of CEA).

(b) If an offence is committed by a company (which includes a firm), the persons liable to be proceeded against and punished are:

(i) the company;
(ii) every person, who at the time the offence was committed, was in charge of, and was responsible to, the company for the conduct of the business, except where he proves that the offence was committed without his knowledge or that he had exercised all due diligence to prevent the commission of such offence; and
(iii) any director (who in relation to a firm means a partner), manager, secretary or other officer of the company with whose consent or connivance or because of neglect attributable to whom the offence has been committed. (section 9AA of CEA)

(c) The Court is empowered to publish the name, place of business, etc. of person convicted under the Act (section 9B of CEA)

(d) In case of a person who is less than 18 years of age, the Court, under certain circumstances, is empowered to release the accused on probation of good conduct u.s 360 of the Code of Criminal Procedure, 1973 or to release the offenders on probation under the Probation of Offenders Act, 1958. (section 9B of CEA)

(e) The imposition of penalty would not prevent infliction of other punishment on the offender. (section 34A of CEA)

Dept. clarifications vide Circular No. 140/9/2011-TRU, dated 12-5-2011

Relevant extracts from the Dept. Circular are given hereafter for reference:

Para 2
Prosecution provision was introduced this year, in Chapter V of the Finance Act, 1994, as part of a compliance philosophy involving rationalisation of penal provisions. Encouraging voluntary compliance and introduction of penalties based on the gravity of offences are some important principles which guide the changes made this year in the penal provisions governing Service tax. While minor technical omissions or commissions have been made punishable with simple penal measures, prosecution is meant to contain and tackle certain specified serious violations. Accordingly, it is imperative for the field formations, in particular the sanctioning authority, to implement the prosecution provision keeping in view the overall compliance philosophy. Since the objective of the prosecution provision is mainly to develop a holistic compliance culture among the taxpayers, it is expected that the instructions will be followed in letter and spirit.

Para 4
Clause (a) of section 89(1) of the Finance Act, 1994 is meant to apply, inter alia, where services have been provided without issuance of invoice in accordance with the prescribed provisions. In terms of Rule 4A of the Service Tax Rules, 1994, invoice is required to be issued inter alia within 14 days from the date of completion of the taxable service. Here, it should be noted that the emphasis in the prosecution provision is on the non-issuance of invoice within the prescribed period, rather than non-mention of the technical details in the invoice that have no bearing on the determination of tax liability.

Para 5
In the case of services where the recipient is liable to pay tax on reverse-charge basis, similar obligation has been cast on the service recipient, though the invoices are issued by the service provider. It is clarified that the date of provision of service shall be determined in terms of the Point of Taxation Rules, 2011. In the case of persons liable to pay tax on reverse-charge basis, the date of provision of service shall be the date of payment, except in the case of associated enterprises receiving services from abroad where the date shall be earlier of the date of credit in the books of accounts or the date of payment. It is at this stage that the transaction must be accounted for. Thus the service receiver, liable to pay tax on reverse-charge basis is required to ensure that the invoice is available at the time the payment is made or at least received within 14 days thereafter and in the case of associated enterprises, invoice should be available with the service receiver at the time of credit in the books of accounts or the date of payment towards the service received.

Para 7
Clause (b) of section 89(1) of the Finance Act, 1994 refers to the availment and utilisation of the credit of taxes paid without actual receipt of taxable service or excisable goods. It may be noted that in order to constitute an offence under this clause the taxpayer must both avail as well as utilise the credit without having actually received the goods or the service. The clause is not meant to apply to situations where an invoice has been issued for a service yet to be provided on which due tax has been paid. It is only meant for such invoices that are typically known as ‘fake’ where the tax has not been paid at the so-called service provider’s end or where the provider stated in the invoice is non-existent. It will also cover situations where the value of the service stated in the invoice and/or tax thereon have been altered with a view to avail Cenvat credit in excess of the amount originally stated. While calculating the monetary limit for the purpose of launching prosecution, the value shall be the amount availed as credit in excess of the amount originally stated in the invoice.

Para 8

Clause (c) of section 89(1) of the Finance Act, 1994 is based on similar provision in the Central Excise law. It should be noted that the offence in relation to maintenance of false books of accounts or failure to supply the required information or supplying of false information, should in material particulars have a bearing on the tax liability. Mere expression of opinions shall not be covered by the said clause. Supplying false information, in response to summons, will also be covered under this provision.

Para 9

Clause (d) of section 89(1) of the Finance Act, 1994 will apply only when the amount has been collected as Service tax. It is not meant to apply to mere non-payment of Service tax when due. This provision would be attracted when the amount was reflected in the invoices as Service tax, service receiver has already made the payment and the period of six months has elapsed from the date on which the service provider was required to pay the tax to the Central Government. Where the service receiver has made part payment, the service provider will be punishable to the extent he has failed to deposit the tax due to the Government.

Para 11

Section 9C of the Central Excise Act, 1944, which is made applicable to the Finance Act, 1994, provides that in any prosecution for an offence, existence of culpable mental state shall be presumed by the Court. Therefore each offence described in section 89(1) of the Finance Act, 1994, has an inherent mens rea. Delinquency by the defaulter of Service tax itself establishes his ‘guilt’. If the accused claims that he did not have guilty mind, it is for him to prove the same beyond reasonable doubt. Thus “burden of proof regarding non-existence of ‘mens rea’ is on the accused.

Para 13

Sanction for prosecution has to be accorded by the Chief Commissioner of Central Excise in terms of the section 89(4) of the Finance Act, 1994. In accordance with Notification 3/2004 -ST dated 11th March 2004, the Director General of Central Excise Intelligence (DGCEI) can exercise the power of the Chief Commissioner of Central Excise, throughout India.

Para 14

The Board has decided that monetary limit for prosecution will be Rupees Ten Lakh in the case of offences specified in section 89(1) of the Finance Act, 1994 to ensure better utilisation of manpower, time and resources of the field formations. Therefore, where an offence specified in section 89(1) involves an amount of less than Rupees Ten Lakh, such case need not be considered for launching prosecution. However the monetary limit will not apply in the case of repeat offence.

Para 15

Provisions relating to prosecution are to be exercised with due diligence, caution and responsibility after carefully weighing all the facts on record. Prosecution should not be launched merely on matters of technicalities. Evidence regarding the specified offence should be beyond reasonable doubt, to obtain conviction. The sanctioning authority should record detailed reasons for its decision to sanction or not to sanction prosecution, on file.

Para 16

Prosecution proceedings in a Court of law are to be generally initiated after departmental adjudication of an offence has been completed, although there is no legal bar against launch of prosecution before adjudication. Generally, the adjudicator should indicate whether a case is fit for prosecution, though this is not a necessary pre-condition. To launch prosecution against top management of the company, sufficient and clear evidence to show their direct involvement in the offence is required. Once prosecution is sanctioned, complaint should be filed in the appropriate court immediately. If the complaint could not be filed for any reason, the matter should be immediately reported to the authority that sanctioned the prosecution.

Para 17

Instructions and guidelines issued by the Central Board of Excise and Customs (CBEC) from time to time, regarding prosecution under Central Excise law, will also be applicable to Service tax, to the extent they are harmonious with the provisions of the Finance Act, 1994 and instructions contained in this Circular for carrying out prosecution under Service tax law.

4. Guidelines for launching prosecution issued by CBEC under Central Excise (Circular No. 33/80 CX 6. Dated 26-7-1980 read with CBEC Circular No. 15/90 – CX 6, dated 9-8-1990.)

(i) Prosecution should be launched with the final approval of the Principal Collector after the case has been carefully examined by the Collector in the light of the guidelines.

(ii) Prosecution should not be launched in cases of technical nature, or where in the additional claim of duty is based totally on a difference of interpretation of law. Before launching any prosecution, it is necessary that the Department should have evidence to prove that the person, company or individual had guilty knowledge of the offence, or had fraudulent intention to commit the offence, or in any manner possessed mens rea (mental element) which would indicate his guilt. It follows, therefore, that in the case of public limited companies, prosecution should not be launched indiscriminately against all the Directors of the company but it should be restricted to only against such of the Directors like the Managing Director, Director in charge of Marketing and Sales, Director (Finance) and other executives who are in charge of day-to-day operation of the factory. The intention should be to restrict the prosecution only to those who have taken active part in commit-ting the duty evasion or connived at it. For this purpose, the Collectors should go through the case file and satisfy themselves that only those Chairman/Managing Directors/Directors/Partners/ Executives/Officials against whom reasonable evidence exists of their involvement in duty evasion, should be proceeded against while launching the prosecution. For example, Nominee Directors of financial institutions, who are not concerned with day-to-day matters, should not be prosecuted unless there is very definite evidence to the contrary. Prosecution should be launched only against those Directors/Officials, etc., who are found to have guilty knowledge, fraudulent intention, or mens rea necessary to bind them to criminal liability.

(iii)    In order to avoid prosecution in minor cases, a monetary limit of Rs. 10,000 was prescribed in the instructions contained in Board’s letter F. No. 208/6/M-77-CX 6, dated 26-7-1980. Based on experience, and in order not to fritter away the limited man-power and time of the Department on too many petty cases, it has now been decided to enhance this limit to Rs.1 lakh. (See Note Below) But in the case of habitual offenders, the total amount of duty involved in various offences may be taken into account while deciding whether prosecution is called for. Moreover, if there is evidence to show that the person or the company has been systematically engaged in evasion over a period of time and evidence to prove mala fides is available, prosecution should be considered irrespective of the monetary limit.

(iv)    One of the important considerations for deciding whether prosecution should launched is the availability of adequate evidence. Prosecution should be launched against top management when there is adequate evidence/ material to show their involvement in the offence.

(v)    Persons liable to prosecution should not normally be arrested unless their immediate arest is necessary. Arrest should be made with the approval of the Assistant Collector or the senior-most officer available. Cases of arrest should be reported at the earliest opportunity to the Collector, who will consider whether the case is a fit one for prosecution.

(vi) Decision on prosecution should be taken immediately on completion of the adjudication proceedings.

(vii) Prosecution should normally be launched immediately after adjudication has been completed. However, if the party deliberately de-lays completion of adjudication proceedings, prosecution may be launched even during the pendency of the adjudication proceedings if it is apprehended that undue delay would weaken the Department’s case.

(viii) Prosecution should not be kept in abeyance on the ground that the party has gone in appeal/revision. However, in order to ensure that the proceedings in appeal/revision are not unduly delayed because the case records are required for purposes of prosecution, a parallel file containing copies of the essential documents relating to adjudication should be maintained. It is necessary to reiterate that in order to avoid delays, the Collector should indicate at the time of passing the adjudication order itself whether he considers the case is fit for prosecution so that it should be further processed for being sent to the Principal Collector for sanction.

Applicability of prosecution provisions
Section 89 of the Act has become operative upon enactment of the Finance Act, 2011 on 8-4-2011. Hence, it would appear that prosecution provisions would apply to offences committed on or after 8-4-2011.

In this regard, useful reference can be made to precedents under income tax. In the context of section 276C which was inserted w.e.f. 1-10-1975, it has been held in a number of cases that the said section would not apply to an offence committed prior to that date.

Time limit for launching prosecution
The Economic Offences (Inapplicability of Limitation) Act provides that there is no time limit for launching prosecution in case of offences under some specified Acts. Further, limitation bar contained in Criminal Procedure Code, is not applicable to offences under Central Excise, Service Tax and Customs Law.

It would appear that there is no time limit for launching prosecution under Service tax.

Note: The monetary limit has been enhanced to Rs.25 lakh vide CBEC Circular dated 12-12-1997.

Few judicial considerations are as under:

? In Devchand Kalyan Tandel v. State of Gujarat, 89 ELT 433 (SC) it was held that in case of economic offences, the Courts should not take lenient view, as stringent measures are necessary in case of economic offences. (In this case, there was lapse of 13 years between the occurrence and the date of judgment.)

? In V. K. Agarwal v. Vasantraj, (1988) 3 SCC 467 and A. A. Mulla v. State of Maharashtra, 1997 AIR SCW 63, the Supreme Court declined to stop further proceedings on the matter though the matters had become very old. (In this case, the case was already filed long ago i.e., in 1969).

Procedures relating to prosecution

The CBE&C has clarified that prosecution can be approved only by the CCCE in terms of section 89(4) of CEA throughout India.

Some judicial and other considerations are as under:

? Appeal against sanction of prosecution cannot be filed with CEGAT — [Jagatjit Industrial Ltd. v. CCE, (1993) 67 ELT 878 (CEGAT)]

? Decision to grant sanction for prosecution is merely an administrative act. No hearing is necessary. Prima facie, authority sanctioning prosecution should be satisfied that an offence is committed. Even exoneration by disciplinary authority (in excise and customs matters, it means departmental adjudication) is also not relevant [Supdt. of Police (CBI) v. Deepak Chowdhary, (1995) 6 SCC 225, the same view in State of Maharashtra v. Ishmal Piraji Kalpatri, AIR 1996 SC 722.]

? Opportunity of personal hearing is not required to be given before grant of sanction of the Commissioner to file criminal prosecution — [Assistant Commissioner v. Velliappa Textiles, (2003) 157 ELT 369 (SC 3-member Bench).]

? Decision to prosecute does not involve ex-ercise of any quasi-judicial power, [Praveen Kumar R. Jain v. Chief Judicial Magistrate, Dindigul, 1995 (79) ELT 353 (Mad. HC).]

? Specific approval for launching prosecution is required. Mere signing on file by the Chief Commissioner would not mean that he has applied his mind and granted approval. If prior approval of the Chief Commissioner is not obtained, prosecution cannot continue and accused has to be acquitted. – [UOI v. Greaves Ltd., (2002) 139 ELT 34 (CEGAT)].

? In CIT v. Camco Colour Co., (2002) 254 ITR 565 (Bom. HC), it was held that monetary limit prescribed is a policy decision with a view to reduce litigation and the same is binding on the Revenue.

? The CBE&C has clarified that when action is launched under the Central Excise Act, action under Indian Penal Code, 1860 should also be launched, wherever found feasible — [CBE&C Circular No. 178/12/1996, dated 28-2-1996.]

Compounding of offences
Section 9A(2) of CEA, provides that any offence under CEA can be compounded by the CCCE. Such compounding can be done either before or after the institution of prosecution. Procedure for compounding has been prescribed in the Central Excise (Compounding of Offences) Rules, 2005 and Guidelines for Compounding have been issued vide MF (DR) Circular No. 54/2005-Cus, dated 30-12-2005. Since, section 9A of CEA has been made applicable to Service tax, the Rules/Guidelines and precedents under Central Excise would be relevant for Service tax.

Some judicial considerations are as under:

? In Vinod Kumar Agarwal v. UOI, (2008) 223 ELT 19 (Bom HC DB), it was held that compound-ing under the Customs Act cannot result in discharge of offences under other Acts like IPC.

? In Maharashtra Power Development Corpn. Ltd. v. Dabhol Power Company, (2004) 52 SCL 224 (Bom HC DB), it was held that if the offence is compounded, it is as if no offence had even been committed in the first place.

? In P. P. Varkey v. STO, (1999) 114 STC 251 (Ker. HC), it was held that once the offence is compounded, penalty or prosecution proceedings cannot be taken for the same offence.

? In S. Viswanathan v. State of Kerala, (1999) 113 STC 182 (Ker HC DB), it was held that once the matter is compounded, neither the Department nor the assessee can challenge the compounding order.

? A person having agreed to the composition of offence is not entitled to challenge the said proceedings by filing appeal. [S. V. Bagi v. State of Karnataka, (1992) 87 STC 138 (Karn HC FB) — followed in Sakharia Bandhu v. ADCCT (1999) 112 STC 449 (Karn HC DB).]

9. Conclusion
Service tax law has evolved as a law based on voluntary compliance. In this backdrop, re-introduction of prosecution provisions is a retrograde step. One does understand that there may have been many cases of tax evasion detected by the Tax Dept. However, the same is no justification for re-introduction of prosecution provisions, inasmuch as there are wide powers for the tax administration under the existing tax structure and other laws to deal with such cases and impose stiff penalties.

Overall, the provisions are too harsh, and are likely to be misused by the authorities causing severe harassment to taxpayers. In particular, non-issue of tax invoice by a service provider being specified as an offence, is totally unjustified. Further, non-issue of tax invoice as per the Service Tax Rules by a service provider based outside and its non-issue to be treated as an offence at the end of service recipient in India, is unprecedented and needs to be done away with.

It is suggested that a monetary limit of tax evaded amount of Rs. 1 crore need to be prescribed for a judicious implementation of prosecution provisions and minimise hardships to small and medium taxpayers.

shailesh.kwebmaker

(2011) TIOL 330 ITAT-Mum. DCIT v. Telco Dadajee Dhackjee Ltd. MA No. 509/Mum./2010 A.Y.: 1998-1999. Dated: 11-3-2011

Sections 254(2), 254(4) and 255 — No miscellaneous application lies against the order of the Third Member since as per the scheme of Sections 254(1), 254(2) and 255 every case adjudicated by the Third Member should go back to the regular Bench for final decision.

Facts:
The appeal filed by the assessee was originally heard by the Division Bench. Upon there being a difference of opinion between the two Members who originally heard the appeal, the points of difference were referred to the Third Member u/s. 255(4) of the Act. The Third Member answered both the questions referred to him in favour of the assessee.

Against the order of the Third Member, the Revenue filed a miscellaneous application on the ground that there were mistakes apparent from the record which require rectification.

Held:
(1) The decision rendered by the Third Member is one which does not finally dispose of the appeal till the point or points are decided according to the opinion of the majority of the Members for which another order is to be passed by the Tribunal and it is this order which finally disposes of the appeal. An application u/s.254(2) would lie only when that order is passed and not before.

(2) When there is a difference between the Members while disposing of the appeal it cannot be said that the appeal has been finally disposed of. The point of difference has to be referred to the President of the Tribunal for nominating a Third Member. The Third Member hears the parties on the point of difference and renders his decision. His decision creates the majority view, but it is not a final order disposing of the appeal because he is not seized of the other points in the appeal, if any, on which there was no difference of opinion between the Members who heard the appeal originally. Even if there were no other points in the appeal, still his order is not one finally disposing of the appeal. S/s. (4) of section 255 requires that after the opinion of the Third Member, the point of difference ‘shall be decided’ according to the majority opinion and this clearly suggests that a final order has to be passed disposing of the appeal in its entirety which order alone would be an order passed by the Tribunal u/s.254(1).

(3) In the present case the Revenue has missed the distinction between a finding on a point of difference and the final order of the Tribunal u/s.254(1).

(4 ) The decision of the Third Member is not a final order disposing of the entire appeal as contemplated by section 254(1), it is difficult to appreciate how an application would lie u/s. 254(2) against his decision.

The miscellaneous application filed by the Revenue was held to be not maintainable.

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Anupam kher & the profession of acting

Excerpts from interview With anupam kher

Most of us know Anupam Kher as an actor par excellence. Mr. Kher is renowned for his versatile acting, both in the world of theatre and films and his stage is truly the whole world. What many of us may not know is his love and commitment to the profession of acting that has culminated in starting an acting school called ‘ACTOR PREPARES’. The school, founded in 2005, now operates in Mumbai, Chandigarh, Chennai and the UK with a mission to prepare competent and professionally committed actors, skilled in every aspect of an actor’s art and craft – physical, mental and emotional. It lays the foundation for a self-fulfilling and meaningful career as a performer.

On a warm Monday afternoon of June 11, 2012, we (Ameet Patel and Nandita Parekh) had the rare opportunity to meet with Anupam Kher to understand from him the profession of acting, the commitment required, the opportunities and challenges and the future of the profession. We share with you, his thoughts, as communicated to us . . . . . .

Unfortunately, we cannot share with you the eloquence with which he dealt with each question and the warmth with which he received us in his ever-busy schedule.

BCAJ – Is ‘performing arts’ just an art or a profession?

Anupam Kher (AK) – To me, performing arts, be it dancing, singing, acting – is a profes-sion. Art is an expression of one’s emotions, one’s feelings and to that end, everyone is an artist. All of us have drawn pictures as children, but that does not make any of us professional artists. Similarly, most people will have an ability to dance or sing or even act – but that does not make them professional performers. One of the differences is that a professional artist shares his work or his art with others, and pursues it as the main purpose of his life. For a professional artist his art is not just an expression of his emotions, but a driving force of his life, a source of livelihood combined with a compelling need to share. To this end, I am of the view that performing arts in general and acting in particular is definitely a profession that needs specialised skills, training and orientation.

BCAJ As I understand, the acting school founded by you – ‘Actor Prepares’ is committed to helping talented individuals become professional actors. How much of the acting profession as you see around you has gone through some professional training? And is it very different in other countries in Europe or the USA?

AK -We are a young country; we got our independence in 1947. Before that for 200 years we were ruled by the British and before that by the Mughals. Yet, if you see, art in its various forms is an integral part of our culture and the early architecture – the carving of Ajanta, the miniature paintings . . . . all depict scenes of dancing, singing and other forms of performing arts. Each state has its own folk art and thus, we are a culturally rich country in terms of various forms of performing arts that have been handed down from earlier eras. As a country, we have given to the world the earliest available book on acting and stage craft called the ‘Natya Shastra’, written somewhere between 200 BC and 200 AD. In the early periods after independence, the country had many priorities – agricultural reforms, industrial reforms, poverty eradication, education and so on – acting and performing arts were clearly not a national priority. On the other hand, the people of the country were hungry for entertainment and were ready to lap up anything that was given to them as ‘entertainment’. The audience was not discerning, and hence, we have a situation that many of the movies made in the early post-independence era, we may enjoy today due to nostalgic reasons, but find that the acting skills were often non-existent. In these last 60 odd years, there must be over 20,000 actors who have appeared in our films. How many are remembered for their acting skills? Hardly 10-12, a number we can count on our fingertips. This was mainly because cinema was the primary source of entertainment; the only other option being ‘khetiwadi’ programmes on black and white TV or a once a week show such as ‘Chhayageet’. Watching a movie every weekend was almost a religion for seekers of entertainment during this skewed demand-supply situation. In such a situation, most actors did not have any formal training – professionally trained actors were few and far in between, I being one of them. Interestingly, performing artists in the music and dance space always went through rigorous training, primarily because of the classical forms and schools of music and dance . . . . Or perhaps because it was easier for the audience, however undemanding, to distinguish the good from the bad in these art forms. Today, the scenario has dramatically changed. With globalisation, people in India have a wide choice in the area of entertainment, from multiplexes to multitude of TV channels and live performances by world-renowned artists. So, the person who used to sit at the edge of the seat and watch a movie, today sits back in his chair and says “Okay, let me see what you have!” The audience today is discerning and demanding and that has created a need for professionalism in the performing arts. The ‘fluke’ artists will no longer hold centre stage – the future clearly belongs to actors who are not only trained to be good actors, but are also professional and disciplined in their conduct.

BCAJ -What are the macro changes that are likely to impact the profession of acting?

AK It is only 8-9 years back that cinema was given the status of ‘industry’ by the Government of India. Till that time, the Government did not even recognise cinema as an industry. With this recognition, there is a sea change in the way the movie industry is viewed. The access to commercial financing, the corporatisation within the cinema industry, the international platform for screening Indian movies – all this has led to professionalism all around. This includes the technology used, the distribution systems, the pricing and also, the acting. Otherwise, till recently, anyone with a trace of talent believed that ‘I too can act’. And, perhaps that is somewhat true – because I believe that anyone who can lie, can act; for lying is the first form of acting. So, most of us can act!

BCAJ -On that note, we would like to know how do you deal with situations where you are required to act in a role or propagate a message that you don’t personally subscribe to. Does this create a conflict in your mind? And if so, how do you deal with it?

AK Acting always requires you to portray yourself as a person you are not. It is my job as an actor to represent the character that I am required to portray. When I am Dinanath or Asgar Ali in a movie, that is not who I am. Anupam Kher the actor is not the same as Anupam Kher the person. When I fight against corruption and go on stage with Anna Hazare – that is me as a person. Thus, an actor will play roles that are different from what he stands for, what he may be as a person – and, in my mind, there is no conflict in this respect. Acting is part of my life, it is not my life. (For us, at BCAS, Anupam Kher who voluntarily and readily agreed to speak to demotivated CA students after a very dismal examination result and helped them regain their self confidence – is Anupam Kher, the person!)

BCAJ -An actor has a great influence on the audience and to that end a greater social responsibility. In that light, does it matter what kind of roles you choose to do?

AK – A movie or a play is entertainment, not education – it is not good, not bad, just entertainment. The meaning that a viewer derives from the movie is his prerogative. Also, an anti- hero or a villain is required to show the contrast. A ‘Raam’ is viewed in comparison to a ‘Raavan’; without ‘Raavan’, ‘Raam’ has limited significance. I do not think that people judge an actor by the roles he plays. The well-known villains of the Indian film industry are some of the best individuals that I have come across and I believe they are well respected by society. I have played a diverse set of roles and not restricted myself to the role of a hero or a villain or a comedian. There are nine emotions and as an actor it is important for me to express a variety of emotions – for that it is important to do different roles.

BCAJ – Do you think that there is adequate mentoring in your profession for the newcomers that helps them to clearly understand the distinction between their real life and their reel life?

AK – While acting is a profession, cinema is an industry. It is for each actor to determine his personal philosophy on how he wants to treat his reel life and real life – there is no reason for any mentoring in that respect. A profession requires training – and with that training how you pursue your profession, whose guidance you seek and who you choose as your role models is your personal choice.

BCAJ – Actors have a capacity to create a significant public influence and opinion. The profession of acting trains you to communicate very effectively with your audience and hence, gives you an ability to reach out to a vast audience effectively. But, on the other hand, the private acts of a well-known personality are also minutely examined by the public. Do you think there is a need for actors to conduct them-selves any differently in their private lives?

AK – Well, as a chartered accountant you too have an influence on the public, and so does a leading doctor or a lawyer. It is for each person to decide how he wants to conduct himself in his personal life, irrespective of whether or not he has the ability to influence others. As actors, perhaps we are more conscious of the image that we create of ourselves – but that does not make us any different from others. We all have to conduct ourselves in a manner that suits our conscience, our value system. Also, at a different level, no one forces you to watch a movie – it is a choice that you have. So, the kind of movies you choose to watch is entirely your choice.

BCAJ – Earlier you mentioned that a professional actor needs to be disciplined. We as outsiders often hear that movies get delayed due to the inability of the actors to live up to their committed schedules. Any views?

AK – I thought we were to talk about performing arts as a profession – this is a question on individual behavioural traits. However, when you hear that an actor did not meet his schedule there could be a variety of reasons, like the payment that was committed to him is not made, that a number of times when he has blocked his time for a producer there have been last-minute cancellations from the producer’s side and so on. I do not believe that without a valid reason or a serious constraint any actor would not adhere to his commitment, as he too is interested in a timely release of the movie. Further, the time discipline that was not very important till recently is now becoming of paramount importance due to corporatisation of the movie industry and the manner in which it is financed. The word of mouth agreement has been replaced by crisply worded contracts that run into 20-30 pages and there are consequences of not meeting the commitments made. Internationally this has been the practice for a long period now, but in India, we are seeing this now.

BCAJ – Is there adequate opportunity for a new-comer who wants to enter the profession of acting to learn or to acquire structured training? We know that you have founded a school of acting, but are there adequate such institutions? Is there room for consolidation of training, larger institutes and accreditation?

There are many acting schools and many of them are fraud institutions. We are masters at replicating and selling something that has no value. But ultimately the institutes that will draw students are the ones that provide honest, sincere training and make a long-term commitment to training. The product that comes out of the school is the strongest evidence of the quality of training. Also, today’s newcomers have an ability to learn quickly and to gather knowledge and training from a variety of sources. So, the courses that required 3-4 years earlier can now be taught in months. This Internet and Google age has made information easy to seek but has taken away the sense of wonder from today’s generation.

An acting school is not just about teaching the acting skills. It is education and all education teaches primarily one thing – the ability to distinguish the right from the wrong and the good from the bad. Thus, a good acting school also helps an actor make better decisions and choices. Also, training is not something that happens at the beginning of your professional career – it is something you go back to every time you realise the need for further enhancement to your skills. It is an ongoing process to an actor’s career and very often, the persons who seek training have already acted in plays, in TV shows/serials and movies.

I believe that every individual, whether an actor or not, gets at least one chance that will materially change his life – if he is able to rise up to that chance and seize the opportunity when it is knocking at his door, he will have a different future than when he lets that one chance pass.

BCAJ – What is the future of the profession?

AK – I firmly believe that this is the golden era for professional actors. The audience is educated and has an appetite for a wide range of movies. Earlier, the movies were all made on a standard theme and dialogues such as ‘maine mere haathonse kheer banaayi hai’ ‘kaash tere pita aaj jinda hote’ became so clichéd and predictable. Today, we have movies like Shanghai, Kahaani and A Wednesday that appeal to the audience. The audience is intelligent and appreciates good cinema, good acting. Further, globalisation has also had a big impact on the acting profession. Many Indian movies are screened across the globe and that has created, for some actors, opportunities to work in international films with very credible directors and production houses. This is definitely the most exciting period for an actor who wants to make a mark. But, it is also a period where an actor will have to work hard and display a high level of sincerity and commitment to the profession.

As we ended our meeting, we realised the common string that runs between the acting profession and our profession. A professional actor benefits from training, just as a good articleship makes a world of a difference to a chartered accountant. Further, training imparted at the beginning of the career is not enough – there is a need for ‘Continuing Professional Education’. The times have changed and globalisation has had an impact on the profession of acting, just as it has had on the profession of chartered accountancy. For some, the world has opened up, for others there is a dismal future – for it is in these time that the destiny of a professional, be it a chartered accountant or an actor, will be defined by his training, his hard work, his commitment and most of all, his ability to recognise and seize that one chance that offers him a very different future!

shailesh.kwebmaker

The Everyday Architect

The word ‘architecture’ always and immediately brings to mind subjects like real estate, home, high-rises, heritage and monuments. However this is sadly a very limited view on architecture, and one could also say a misguided understanding of what ‘architecture’ means. As an extension to this limited and partly faulty understanding of ‘architecture’, the architect remains to be a technician of sorts — someone who has technical knowledge of certain subjects and who uses that to the best of his capacity to ‘make buildings’. In a more romantic understanding the architect tends to be the maverick artist who has put together marvels and embodiments of beauty in brick and stone or concrete and steel. In more contemporary times, where real estate is the only logic to urban development and financial graphs have crazy rises and drastic falls, architect remains only a service-provider in most cases. He, and sometimes she, is expected to make sure the size of the kitchen or work-station is correct to an optimum, the light falls in the right direction, the water drains well, there is some fancy play of colours and materials which can be discussed as the creative quotient of the project and finally a building should ‘look good and sassy’ in advertisements for the people on the street. The architect’s job is done, he can move to the next project and reproduce the same set of correct applications, with a change of some ‘creative’ inputs, and buildings can be rubber-stamped one after the other, still looking different as every exterior is made just to do that — look different!

Having said this, one can also look at the use of the word ‘architect’ — Jawaharlal Nehru is referred to as the ‘architect’ of modern India, or Dr. B. R. Ambedkar is the ‘architect’ of India’s Constitution, or Mahatma Gandhi is the ‘architect’ of India’s struggle to freedom from British rule. In all these cases, the term ‘architect’ is no technician, is no maverick artist, is no façade designer; the architect, clearly in all these instances, is someone who has shouldered responsibility and has been the shape-giver to important ideas — modern nation, constitution and a movement. The term is not engineer of modern India or doctor of the freedom movement, but ‘architect’ is the idea that is used. So then what defines an architect? What job does an architect do? What role does he perform in society? And the answer to all these will depend on — What is architecture?

Architecture is surely a profession at one point, with the architect a trained and licensed professional who is expected to provide a certain set of services to the best of his capacity. However, architecture is also a discipline — it is a subject with its own history, its theory and its ideas on issues of space, beauty, cultural interventions, role within a social set-up, cultural implications, etc. Architecture deals with making of buildings, but it is much beyond the building — architecture is a broad field of ideas and practices. Architecture has always had historians and theorists, critics and writers who discuss architecture and challenge the contemporary practices of their times. So the realm of ideas and thoughts, theories and critical propositions also makes up the world of architecture. Just as the knowledge of materials and plumbing is important to architecture, so is the awareness of issues and theories that challenge the field is very important. One can say, that from nuts and bolts to the realm of dreams, architecture has to deal with it all.

Architects also work within their own peer pressures. The architect trained in a particular set of ideas and principles of design, is also living and working in particular contexts. Contexts are made up of cultural images, political inclinations, social relationships that you may or may not agree with. These contexts and the architect’s training generates influences on the design board where decisions are judged against popular imaginations, economic constraints, hyped practices like vaastu, personal convictions or lack of it, and desires or aspirations of clients. The studio of the architect is a complex combination of strains and stresses, desires and convictions. Who is the architect addressing his/her questions and designs to – the client, the user (who she/he may never meet), the fraternity, the critic, the economic demands, space crunch, real estate wars, technicians that supply plumbing and electricity? As much as this dilemma is a reality of conditions, and as much as we realise how architecture stretches much beyond making a ‘good building’, the question is not simply a technical issue of how many questions and demands an architect can answer satisfactorily. The point that needs investigation is — what is the idea of architecture that we as thinkers and professionals in the field of architecture subscribe to. Do we understand our responsibility towards ‘architecture’ itself, to begin with?

Architecture is a realm where imaginations and values will have to be resolved. How do universal values of humanity translate into architectural values and imaginations? To acknowledge that architecture operates as the physical fabric within which our homes, neighbourhoods and cities are defined is very crucial. This physical fabric constructs the way we imagine our world, and this physical fabric is inherently visual and material — we see it and we feel it. The visual as well as the material is always a coded logic — if the Mughals used white marble it was to imagine the sense of beauty within the sense of grandeur that political and pristine, making the political an aspect of technology and geometry; if the new stock of corporate towers feel the need to shine in the hot sun as they shoot to crazy heights, tallness and brightness mean something — aspirations to unashamedly compete, rather make competition a value and loudness of domination a virtue is what this architecture signals. Is then at times the patron, the developer, the client the real designer, the real architect? Is then the architect simply a handmaiden to the forces that make his profession possible? But then can the architect simply moan his status in the chain and continue being the handmaiden? Does architecture have the power to reject and change that which is given and practised in the world? Or does architecture simply mirror the culture and society that produces it?

Architecture is a condition much more than a building here and a building there. Architecture, especially with the world taking an urban turn is the site where ideas and cultures are shaped and human societies are constantly shaping and re-shaping. Architecture is no stage for the drama of life, but a constant game-player in this scenario. Architecture, as a dynamic set of ideas and elements, is part of the narrative that we call culture and socio-political world. Whether new buildings are built, or some old ones are conserved, and some others are lost in time, or whether housing in the avatar of slums is demolished — architecture is constantly shaping and redefining itself. One of the most crucial aspects of architecture — Space, is one of the most cov-eted and discussed subject. Space of the family or the space in your colony or mohalla, or the space from where hawkers are thrown out in the name of discipline or beautification, or the space of mills converted to tall apartment blocks — are the versions of space that architecture choreographs and gives it a logic and a language. The architect can be the handmaiden and provide an architectural language that feeds into the popular idea of life and the world provided today by globalization and capitalism, else that architect can use his skills and language of architecture to challenge the dominant ideas. With the design of better homes, flush with appliances and its interiors designed with high-end materials, does family life automatically become better and more affectionate? The idea of architecture constantly weaves through all these situations and events; then is architecture a physical structure any longer or is it just about events and reactions? The sociality of life, as much as it is embedded in architecture, also seems disjointed from the generally and commonly appreciated properties of architecture.

Does the idea of architecture — a discursive field of knowledge on the one hand, a profession on the other — accommodate the notion of ethics? Ethics here is not an issue of morality, but one of integrated principles and convictions guided by vision and a critical understanding of the world and life. Principles are not meant to be stringent and unchanging, but they are guidelines that can be adequately and appropriately changed, redefined and interrogated. Convictions need not be misunderstood as rigid belief, but convictions is a tool box of imaginations and critical argumentation that is built up through a keen observation of life and culture, and a constantly reworked understanding of one’s own field. Visions are not dogmatic and cast-in-stone diagrams, but they should be projections of ideas that can generate a dialogue and argument, that can make us see the world with fresh eyes but not forget that we come from a past that is loaded with dreams and nightmares. Ethics of architecture help us build arguments and methods towards a world, a city that is other wise a chaotic mix of loud voices — demolitions, developments, change, preserve, conserve, beautify. These words for most of us are only images and not concepts that mean certain real-life situations. These words will become valuable ideas to be discussed and debated when a sense of ethics is the basis for their existence.

Architectural ethics are not about which colour looks good, or which building has a fancier façade than the other, but architectural ethics is a way to our understanding of what world and society do we wish to live in. Can we talk of sustainable environments and economies while we view the hawker on the roadside only as a nuisance? Hawking is an essentially urban condition, that produces a set of urban values and conditions, which are also part of existing economic networks. But hawking is also an understanding of values in space, the architecture of reuse and repair. Are gated communities with taller and taller high-rises packed behind tall compound walls and gates the future of living? Have we not enjoyed mohallas and padas where sharing spaces with neighbours and shopkeepers was a way family and city life developed? A sense of architectural ethics will give us ways in which we can innovatively address some old issues. To question the idea of architecture is central to establishing relationships in a society and understanding them. No human life, and no human social or cultural group lives in isolation — with our different eating habits and different religious preferences, we still are a species that needs exchange and interaction with others who are not like yourself to survive a wholesome life.

Architectural ethics of sharing space, understanding quotients of privacy and openness is very important to a healthy social world-space.

Whether we look at questions of women and social space, or issues of caste and cultural space, or theatre and the traditions of space and costume, or whether we simply evaluate how we perceive shared and public space like a railway station in Mumbai or a park or a maidan, we will realise that architecture deals with aspects of value and ethics as much as it deals with scale, colour and materials. The architect is the builder, he is the thinker, he is also often a philosopher — but in the world of today this bleeding of different roles is also the cause for dilemmas and confusions. But these dilemmas need to be occasions for asking questions and thinking — where new meanings for architecture could be discovered, debated and argued. The new meanings will provide new occasions and new tools for the architect to work with. As long as a sense of ethics and values in architecture is understood, the architect can remodel his profession and his field, with growing understanding and an evolving vision.

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Challenges Faced by Professional Firms

The accountancy profession and the legal profession are intertwined. The services rendered by these professions overlap to a large extent. Moreover, when a lawyer is involved in a major corporate takeover transaction, he depends on the financial structure evolved by a chartered accountant and when a chartered accountant is considering and advising on a major financial transaction he would undoubtedly need help and assistance from a lawyer to ensure compliance of legal requirements in the transaction. Shri Gopaldas P. Kapadia, the first President of the Institute of Chartered Accountants of India, who is recognised as the father of the accountancy profession in India always maintained that the accountancy profession and the legal profession are sister professions. He even expressed a dream that at some point of time the two professions would merge under a common umbrella.

In the context of the changes in the business pattern in India during the last two decades both the professions are required to work shoulder to shoulder acting as supplement to the services rendered by each other.

Over the past few years, we have witnessed unprecedented economic advancement and growth, which has resulted in the globalisation of the world’s economies and has opened up the world’s economies. This wave of globalisation and economic progress has resulted in huge opportunities and potential for businesses to expand their footprint all over the world. This, coupled with the rapid growth of the Internet has resulted in a truly global market place. It has literally resulted in a ‘world without borders’. India has been at the centre stage of this economic revolution over the past decade. Over the years, India has witnessed a large amount of both inbound and outbound foreign investments. Today, leading companies from all over the world are either in India, or are queuing up to enter. Similarly, numerous Indian businesses have acquired or are acquiring businesses outside the country. Over and above this, with the inflow and outflow of investments, businesses have begun to scale up and have today reached enormous sizes, scales that could not have ever been imagined a few years ago. All of this has resulted in a huge demand for professional services. The changing economy has resulted in a complete change in the operating dynamics of professionals. I propose to deal with some of the common issues and challenges faced by law and accountancy professional firms in today’s changing times.

The role of a professional has evolved dramatically over the past few years and is far different from what it used to be a few years ago. The increase in demand for professional services has resulted in a very large growth in the professional service space. Every day, there are new entrants in the sector, resulting in intense competition. With the increasing demand of professional services, professionals are facing new challenges and new burdens every day.

Earlier, whilst any professional had to contend with a certain limited number of issues, the number of issues faced by them today have increased greatly. This can be attributed to various factors. With economic progress, business transactions are becoming more and more complex by the day. Businesses are becoming more competitive and focussed on factors like growth, performance, etc. Further, the ever-changing economic landscape and globalisation have resulted in new and complex legislations and regulations being introduced by lawmakers.

As a result, the need for professional advice on business transactions or on legislations has become ever increasing. This has therefore resulted in a great demand for services of professionals and more so for accountants and lawyers. This great demand for the services of professionals has resulted in an unprecedented number of new entrants into both the professions, which has resulted in an increase in competition amongst professionals themselves. Whilst, the entry of an increasing number of professionals in any field is always welcome, it has triggered intense competition amongst rival firms. It may be argued that with the present growth in the economy, there is enough space for a large number of new upcoming professionals to enter into the professions and grow. But at the same time, it is interesting to note that the increasing competition has resulted in various issues, which professionals may not have faced earlier.

Some of the major issues faced by a professional (whether a lawyer or a chartered accountant), in carrying on his profession today are:

(i) Professional ethics

(ii) Professional responsibility;

(iii) Professional liability;

(iv) Building and retaining teams;

(v) Keeping abreast with the latest updates;

(vi) Advertising/promoting services;

Let us now examine these issues in detail.

(i) Professional ethics

Both the legal and the accountancy professions have their own rules of professional ethics. The Chartered Accountants Act, 1949 and the Regulations made thereunder prescribe certain rules in this behalf. Similarly, the Advocates Act, 1961 and the Bar Council Regulations govern the legal profession. Professional ethics are codes of practice that have been laid down by bodies governing the profession to ensure that the highest standards of integrity and professionalism are maintained in the profession. Each professional organisation must ensure that the ethics and codes laid down in that profession are followed. A professional is a person who is specially trained and possesses specialised skills and knowledge. He must, in providing his services, adhere to the highest standards of ethics to ensure that not only the interests of his client are safeguarded but also that standard of his profession are maintained. Some of the virtues that fall within the ambit of professional ethics are virtues like honesty, integrity, transparency, etc. Of late, various incidents have come to light where leading professionals from large professional service firms have been caught committing certain acts in the course of their professional duties which go against the very basic canon of their profession and against the basic virtues of professional ethics. At this juncture, one would question as to why would a professional who is associated with a multi-national firm at a very senior level, become involved in such acts. The answer to that question is quite simple. With increasing competition amongst professionals, clients often try to pressurise a professional to commit acts or give them advice as per their needs. The professional, in the fear of losing the business of the client, is likely to buckle down under the pressure of the client and do whatever is required of him to retain such a client. This sort of pressure often leads to professionals committing various acts which are against the very basic guidelines/codes that are governing them. Though it is important in today’s time to retain clients and expand, a professional must never forget his duties and must always carry out the same within the prescribed boundaries.

ii) Professional responsibility

Similarly, professionals have a responsibility to their clients. They must act in a responsible manner and must ensure that there is no breach of fiduciary duties on their part whilst dealing with clients. In a large firm, where there are a large number of partners and senior associates, it is possible that the firm may, unknowingly take up an assignments, which is conflicting in interest with some other assignment being handled by the firm. Such a situation must be avoided and the firm must take steps and build systems to ensure that there is no conflict of interest between the firms’ clients. Another important aspect that a firm must safeguard is confidentiality of clients’ information. A firm must ensure that the clients information that has been provided to it must be kept confidential and that the same should not ever be revealed by any person, save and except in the manner prescribed under law or authorised by the client.

(iii) Professional liability

A professional in exercising his duties and advising his clients, must always exercise due care and caution and ensure that he has fulfilled his duties to the best of his ability. A professional must ensure that he has considered and reviewed all possible scenarios before advising the client. Professionals, being experts in their respective fields, are liable to their clients for any act of negligence on their part. A client comes to a professional because a professional is an expert in the field and that he possesses specialised knowledge. At the same time, since a professional is an expert in his field, he must ensure that he takes greater care and caution when advising his client as compared to an ordinary person. A professional would thus be responsible to his client in the event that a client suffers and harm or prejudice as a result of any act of negligence on the part of the professional.

(iv) Building and retaining teams

With increasing competition amongst professionals today, a major challenge faced by firms is that of attracting and retaining the best manpower. Over the years, the number of persons entering various professions has greatly increased. This has resulted in a huge pool of manpower being made available to firms to choose from. Even then, there is an intense competition amongst firms to select the best talent that is available. Firms today invest huge amount of time, effort and money in training associates to ensure that they are able to offer best services to the clients. However, with increasing competition and increasing amount of work, there is always a dearth of good talent that is available at any time. Competing firms are always looking out for good talent. A firm must ensure that it retains good talent by not only offering good remuneration but by also providing a good working environment.

(v) Updated knowledge
As stated above, with the ever-changing economic climate and with new developments taking place practically on a daily basis, it is important for professionals to always keep themselves updated and abreast with all the latest developments in their fields. With the advent of technology, it has become relatively simple and easy for one to keep updated with the latest developments at all times. Referring to and using tools like the Internet, e-mail, news media, academic journals, etc., are helpful in ensuring that one is updated with the ever-changing situation in ones profession at all times.

(vi) Advertising

The increasing demand for professional services and the increase in the number of professionals offering such services has resulted in intense competition amongst rival professionals. In India, till date, both the legal and accountancy professions have restrictions on advertising, which by and large restrict professionals from advertising their services. Recently, Bar Council of India which governs the legal profession has allowed lawyer/law firms to set up websites but with limited information. Of late, we have also witnessed a large number of professional firms being associated with various events organised by various bodies, chambers, societies, etc. now whereby representatives of such firm make presentations/speak at such events. Another practice that is gaining quick popularity amongst professionals is of publishing articles/research papers/reports across various media like newspapers, journals, magazines and on the Internet.

From the above, we can see the number of common issues and challenges faced by both the professions in todays times. Whilst, the picture is rosy and there is great potential on the horizon for both the professions, the professions of lawyers and chartered accountants have largely benefited by the recent upturn of economy and increase of high-value business transactions. Both the professions have been working as complimentary to each other and as a result, the client gets the advantage of double expertise. Let us hope this sangam will get stronger day by day.

Before I end, I would like to refer to one recent trend which I consider to be against the interest of the clients and may even term it as dangerous. Some chartered accountant firms have been keeping lawyers on their role and try to render legal services to the clients including drafting of complicated documents while some law firms have recruited chartered accountants on their staff, with a view to extend the services to be offered to the clients. It is felt that the junior-level assistance availed in this way may not do proper justice to the clients and is even likely to affect the quality of the services needed in a particular case. It would be in the ultimate benefit of the clients if each profession sticks to its own expertise without trying to encroach upon the field of the other.

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Professionaly Speaking…

The Australian Council of Professions defines a profession as: ‘A disciplined group of individuals who adhere to high ethical standards and uphold themselves to, and are accepted by, the public as possessing special knowledge and skills in a widely recognised, organised body of learning derived from education and training at a high level, and who are prepared to exercise this knowledge and these skills in the interest of others.’ On a lesser idealistic plane, a profession is an occupation, which necessitates widespread training and study, and generally has a professional association, ethical code and the procedure of certification or licensing.

Classically, there were three recognised professions – divinity, medicine and law (not considering the oldest profession of the world!) Over a period, with the development of specialised bodies of knowledge and technology, other occupations came to be recognised as professions or started claiming the status of profession. It is a process of evolution and today in the expanded meaning of profession, one would include many other occupations although they may not possess all the characteristics of a profession. In that sense, professionalism is a matter of attitude.

Professionals enjoy a high status and esteem, because the society considers the work that they do, functions that they perform as vital and valuable to the society.

Professionals and professional associations often have a power – power to regulate members of the profession and guard and protect their area of specialisation. To that extent, an organised profession is monopolistic. This is often considered necessary to maintain the high standards of learning, expertise and capability to exercise the profession.

Till about 50 years back, the line between profession and business was clear and well understood. In the recent years, this line is becoming increasingly hazy and blurred. There could be many reasons for this. A profession renders services where it has a monopoly as well as services that even a person who is not a member of the profession renders. A professional rendering unregulated service finds competing in such an environment a disadvantage and knowingly or unknowingly crosses the `Laxman Rekha’. With technological advances the investment required for exercising the profession has increased manifold. This is particularly true with the profession of medicine where expensive equipment plays a major role in diagnosis and at times even in the treatment.

Often the equipment has a short life due to obsolescence. This makes the medical professional or the institutes engaging them think on the lines of business rather than profession. Possibly due to this, the way the professions are excised today has also changed. In the past, a professional practised individually or in small partnerships.

Today, mammoth organisations of professionals or those engaging professionals are dominating. This is a reality of the ever-changing world. What one needs to ensure is that while the size and the type of organisations change, the profession retains its high ethical standards. Traditionally, there has always been a wide variance between earnings even within a profession. In a lighter vein, there were always two types of `outstanding lawyers’ – those who excelled in their profession and those who stood outside the courtrooms to solicit clients. This is true with all professions.

On a serious note, this gap is only increasing. One needs to debate whether this is desirable, is it inevitable or it is the market’s way of enabling the talented younger members of the profession to gain a foothold by charging lower fees. As professionals, we often tend to stay in the ivory tower forgetting what is society’s perception about our profession, what the society expects and what the profession offers or delivers. It is a fact that professionals today enjoy a diminished level of respect and esteem. True, every profession has a few black sheep whose behaviour gives a bad name to the whole profession inspite of exemplary work by the majority. Consider the recent TV episode of Satyamev Jayate hosted by Amir Khan.

While the viewers felt that the programme depicted the reality, there is a muted outrage within the medical profession. Certainly, all medical professionals are not engaged in unethical practices. But all professions need to introspect whether the black sheep amongst us are increasing in numbers and do we need to do something about it. Do professional bodies need to strengthen their disciplinary mechanism?

It is a matter of pride that amongst various professions, Chartered Accountants have a very sound and effective disciplinary mechanism. A weak self-regulation will sooner or later prompt the government to assume the power of regulation. In a globalised world competition has become the key word. Agreements or arrangements promoting monopolies or curtailing competition are struck down as illegal. World Trade Organisation (WTO) agreements, domestic laws on the subject foster competition.

These will pose challenges before professions. For example, whether recommended schedule of fees breaches the Competition law? Internationally these aspects are being debated. Traditionally, professionals did not advertise or market their services, in many jurisdictions they were prohibited from charging success-based fees, sharing fees with even members of allied professions. Today, these restrictions are being questioned. Increasingly, professionals are facing action under various Consumer Protection Laws.

Professions need to think about these issues. We believe that there is a common thread running through various professions. A few years back BCAS even attempted to form an organisation of various professions. We feel that it is necessary to give a thought to various issues facing professionals. With this objective in mind, we bring this issue to you with two articles, one from Mr. M. L. Bhakta a respected advocate and solicitor and one from Mr. Kaiwan Mehta a renowned architect.

We also bring you an interview with Mr. Anupam Kher who may not fit into the classical definition of a professional but is a professional in true sense. Going forward we hope to bring to you periodically, articles dealing with issues faced by professionals.

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Life And Death

The cycle of birth, life and death goes on. What is born has to die. Both birth and death are not in our hands at all. As Saigal sang in good old days . . .

(Readers are requested to listen to excellent rendering of this ghazal by K. L. Saigal)

Both birth and death are not in our hands. But having been born, it is better to do something in our lives, instead of wasting it and lamenting when our end comes that I have not done anything worthwhile in my life. Bhagvad Gita says . . .

Even if Gita says that rebirth is always there, we cannot postpone living, hoping to catch up with life in the next birth. We have to consider that we are not playing the first inning of a test match, where a second inning is possible, but are playing an ODI knowing that there is no second inning and overs too are limited.

The basic question is: ‘how must one live’? Should we follow the policy of ‘eat, drink and be merry’? That would not have been the purpose of life. The scriptures tell us that to be born as a human being is very fortuitous — a rare happening and one cannot waste this priceless gift of God.

“You don’t get to choose how you are going to die, You can only decide how you are going to live” — Joan Baez

Oddly many times one finds the right answer, of all the things, in film songs! One remembers the song written by Sahir Ludhianvi and sung by Mukesh.

We must live a life that brings true happiness to us and all around us. In this journey, we will meet several cotravellers who need our help. Helping does not necessarily have to be in terms of money. One only needs richness of the heart. As we go along, we must wipe the tears of those who are suffering and bring back happiness in their lives. Even a smile can make someone’s day. Let us lead a life whereby, people will remember when we are no more. The objective of living should be:

I recollect the words found in the diary of a young girl who died in a house collapse in an earthquake.

“Life is short

Make it sweet

Keep not all the flowers

For the grave”

Many times attachment to our family members holds us back from serving others. One remembers the lines sung by Mukesh in that unforgettable duet he sung with Sudha Malhotra.

We have to remember that a good life is one that is used in serving others. True happiness comes from selfless service. Therefore, lead a life, so that when death comes there are no regrets, as we have lived a life of service with a smile.

This is a small poem written in the last letter of Ensign Heiichi Okabe, a Japanese Kamikaze (Suicide Bomber) pilot to his family before he left for his last suicide bombing flight to crash his bomb, laden plane on an American battleship in the last stages of the second World War:

“Like cherry blossoms

In the springs

Let us fall

Clean and radiant”

Let us then learn to live and die like a cherry blossom flower.

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Circular No. 3/2012, dated 12-6-2012 giving gist of the official amendments to the Finance Bill, 2012.

Circular No. 3/2012, dated 12th June, 2012 giving gist of the official amendments to the Finance Bill, 2012 as reflected in the Finance Act, 2012 (Act No. 23 of 2012) which was enacted on 28th May, 2012

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Notification No. 20/2012, dated 12-6-2012 — DTAA between India and Nepal notified.

The Double Tax Avoidance Agreement signed between Nepal and India on 27th November, 2011 has been notified to be entered into force on 16th March, 2012. The treaty shall apply from 1st April, 2013 in India.

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Notification No. 21/2012 [F. No. 142/10/2012- SO(TPL], dated 13-6-2012.

The following specified payments can be made after 1st July, 2012 without deduction of tax at source u/s.194J of the Act: Payment by a person for acquisition of software from another resident person, where —

(i) the software is acquired in a subsequent transfer and the transferor has transferred the software without any modification,

(ii) tax has been deducted — (a) u/s.194J on payment for any previous transfer of such software; or (b) u/s.195 on payment for any previous transfer of such software from a non-resident, and

(iii) the transferee obtains a declaration from the transferor that the tax has been deducted either under sub-clause (a) or (b) of clause (ii) along with the Permanent Account Number of the transferor.

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CBDT has issued a clarification [F. No. 500/111/2009-FTD-1(Pt.)], dated 29-5-2012.

The CBDT has issued a clarification [F. No. 500/111/2009-FTD-1(Pt.)], dated 29-5-2012 stating that in case where assessment proceedings have been completed u/s.143(3) of the Act, before the first day of April, 2012, and no notice for reassessment has been issued prior to that date, then such cases shall not be reopened u/s.147/148 of the Act on account of the clarificatory amendments in section 2(14), section 2(47), section 9 and section 195 introduced by the Finance Act, 2012. However, assessment or any other order which stand validated due to the said clarificatory amendments in the Finance Act 2012 would of course be enforced. Copy of the letter is available on www.bcasonline. org.

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India has entered into a Tax Information Exchange Agreement (TIEA) with Bahrain for sharing of information.

India has entered into a Tax Information Exchange Agreement (TIEA) with Bahrain for sharing of information, including banking information between the tax authorities of the two countries. The Agreement was signed on 1st June, 2012.

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Notification No. 19/2012 (F. No. 506/69/81- FTD.1), dated 24-5-2012.

Amendments to Article 11 of India-Japan Double Tax Avoidance Agreement have been notified. The amendment is effective from 1st April, 2012.

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The Finance Bill, 2012.

The Finance Bill 2012, received the Presidential Assent on 28th May, 2012.

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Circular No. 2/2012 [F. No. 142-01-2012- SO(TPL)], dated 22-5-2012 regarding Explanatory notes to the provisions of the Finance Act, 2011.

Copy of the Circular available on www.bcasonline. org

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Notification No. 18/2012 (F. No. 142/5/2012- TPL), dated 23-5-2012 — Income-tax (6th Amendment) Rules, 2012 — Insertion of Rule 10AB.

For the purpose of computation of arm’s length price, section 92C(1) of the Act provided for five methods and the sixth method was ‘such other method as may be prescribed by the Board’.

Rule 10AB is inserted to provide the ‘other method’. Rule 10AB shall come into force with effect from 1st April, 2012 and shall apply to A.Y. 2012-13 and subsequent years.

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Direct Tax Instruction No. 4/2012, dated 25- 5-2012 — F. No. 225/34/2011-ITA.II — Instructions for processing of returns of A.Y. 2011-12 — Steps to clear backlog.

The Board has decided to withdraw Instruction No. 01/2012 issued on 2nd February, 2012 on the above subject with immediate effect. The following decisions have been taken in this regard:

(i) In all returns (ITR-1 to ITR-6), where the difference between the TDS claim and matching TDS amount reported in AS-26 data does not exceed Rs.5,000, the TDS claim may be accepted without verification.

(ii) Where there is zero TDS matching, TDS credit shall be allowed only after due verification.

(iii) Where there are TDS claims with invalid TAN, the TDS credit for such claims is not to be allowed.

(iv) In all other cases TDS credit shall be allowed after due verification.

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Seminar on Finance Act, 2012 — Direct Tax Provisions

Seminar on Finance Act, 2012 — Direct Tax Provisions

This seminar was organised by the Taxation Committee on Saturday 9th June, 2012 at Walchand Hirachand Hall, IMC. The faculty Kishor Karia, Pradip Kapasi, and Sanjeev Pandit analysed threadbare various changes in the direct tax provisions enacted by the Finance Act, 2012. The programme received enthusiastic response from the participants who gained immensely from the wealth of knowledge and experience shared by the learned faculties.

Release of BCAS Referencer 2012-13

The most awaited Golden Jubilee Collector’s Edition of the BCAS Referencer for the year 2012-13 was released on Thursday, 14th June, 2012 at Swatantrya Veer Savarkar Rashtriya Smarak, Shivaji Park at the hands of our Past Presidents Narayan Varma, Pradyumna Shah and Arvind Dalal. The release was followed by a musical programme on the theme of ‘Kal, Aaj aur Kal’ where the artists regaled audience of over 400 with melodious and memorable songs from films of Raj Kapoor, Rishi Kapoor and Ranbir Kapoor.

6th Residential Study Course on Service Tax & VAT

The Indirect Taxes and Allied Laws Committee organised this 6th Residential Study Course on Service Tax & VAT from 22nd June to 24th June, 2012 at Rio Resort, Goa that was attended by nearly 150 participants from various parts of India including Hyderabad, Mumbai, Ahmedabad, Secunderabad, Chennai, Jaipur and Pune. L to R: Kishor Karia (Speaker), Pradip Thanawala (President), Gautam Nayak (Speaker) and Saurabh Shah Front Row: L to R – Deepak Shah, Narayan Varma (Past President), Pradyumna Shah (Past President), Arvind Dalal (Past President), Rajesh Shah, Pradip Thanawala (President), Pranay Marfatia. Behind Row: L to R – Rajeev Shah, Naushad Panjwani, Yatin Desai, Narayan Pasari Sunil Gabhawalla, Chartered Accountant, presented paper on ‘Concept of Negative List based Taxation of Services, Important Definitions, Exclusions and Exemptions’. Adv. P. K. Sahu presented paper on ‘Sale vs. Service — Overlap of VAT and Service Tax’.

Case Studies in POT Rules, Valuation of Services and Bundled Services were presented jointly by Sunil Gabhawalla, Chartered Accountant and A. R. Krishnan, Chartered Accountant.

Adv. K. Vaitheeswaran presented a paper on ‘Indirect Tax Issues in Real Estate Industry’.

A. R. Krishnan, Chartered Accountant also presented a paper on ‘Analysis of Place of Provision of Services Rules’.

The participants gained immensely from the wealth of knowledge and experi-ence shared by the learned faculty at this residential study course. n

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Jal Erach Dastur Students’ Annual Day:

Jal Erach Dastur Students’ Annual Day celebration was organised on Saturday, 26th May 2012 at the Navinbhai Thakkar Auditorium of Shri Vile Parle Gujarati Mandal, Vile Parle (East), Mumbai-400057.

The event commenced with Saraswati Vandana followed by welcome address by President Pradip Thanawala. Chairman Mayur Nayak commended the efforts put in by students in organising this event. He briefed about various activities of the students undertaken by the BCAS. He welcomed the Key Note Speaker Padmashri T. N. Manoharan, past president of the ICAI. The key-note speaker made a very inspiring presentation with the help of Power point. The topic was ‘Transcending the challenges’. The talk was motivational and inspirational. He touched upon various topics such as values of life, setting goals, managing time, putting hard work, focusing on the career, sacrificing unimportant things and distractions, keeping physical, emotional and mental balance, maintaining highest standards in profession, etc. There were three competitions, namely Essay Writing, Elocution and Quiz.

1. Essay competition

46 students took part in the Essay competition; three essays were selected for printing in the BCA journal. The judges for the Essay Competition were Mihir Sheth, core group member and member of the HR Committee, Vipin Batavia, Past President of the Chamber of Tax Consultant and member of the HR Committee and Sangeeta Pandit, core group member. The winners were (1) Rohan Shah (2) Rushab Vora (3) Chhaya Joshi 2. Elocution competition The Elocution Competition was organised under the auspices of Smt. Chandanben Maganlal Bhatt Foundation. Mukesh Bhatt from the said Foundation graced the occasion and presented trophies to the winners. 31 students took part in the Elocution competition. After the elimination round, finally eight participants competed on the Annual Day for the 1st, 2nd and 3rd positions. It was a close competition as all of them did a good job. The judges for the elimination round of Elocution competition were, Ashok Solanki, Aliasgar Kherodawala and Vijay Bhatt. The judges for the final round were TV actor Sumeet Raghavan, Rajesh Muni, Past President and Stanny Pinto, an academician.
The winners of the Elocution competition were:

First Prize – Utsav Shah – Rashmin Sanghvi & Associates
Second Prize – Shweta Agarwal
Third Prize -Shweta Mishra – PHD & Associates

3. Quiz competition 45 students took part in the Quiz competition. Four teams comprising two students each were selected for the final round. The Quiz competition was hosted by the Ashish Fafadia in his inimitable style. He made even the audience to participate in the quiz.

The winners of the Quiz competition were:

First – Murtaza Bootwala – B.D. Jokhakar & Co.- Prize Riken Patel C.M. Gabhawala & Co.
Second – Ashish Shukla – M.B. Nayak & Co.Prize Ashwini Shah M.B. Nayak & Co.
Third – Bhuma Iyer -R.R. Muni & Co. Prize Sonal Pilwankar R.R. Muni & Co.

This year more than 400 students registered and about 50 principals and parents witnessed the talent presented by students. The event was compered by Shweta Agarwal and Nishad Vora and was well supported by Khusboo Shah. The event concluded with a sumptuous and delicious dinner.

Students left for home with lots of learning, fun and rich experience.

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Indians among world’s happiest people.

Despite economic woes, wars, conflicts and natural disasters the world is a happier place today than it was four years ago and Indonesians, Indians and Mexicans seem to be the most contented people on the planet. More than three-quarters of people around the globe who were questioned in an international poll said they were happy with their lives and nearly a quarter described themselves as very happy.

“The world is a happier place today and we can actually measure it because we have been tracking it,” said John Wright, senior vice-president of Ipsos Global, which has surveyed the happiness of more than 18,000 people in 24 countries since 2007. But he added that expectations of why people are happy should be carefully weighed. “It is not just about the economy and their well being. It is about a whole series of other factors that make them who they are today.”

Brazil and Turkey rounded out the top five happiest nations, while Hungary, South Korea, Russia, Spain and Italy had the fewest number of happy people. Perhaps proving that money can’t buy happiness, residents of some of the world biggest economic powers, including the United States, Canada and Britain, fell in the middle of the happiness scale. “Sometimes the greatest happiness is a cooked meal or a roof over your head,” he explained. “Relationships remain the No. 1 reason around the world where people say they have invested happiness and maybe in those cultures family has a much greater degree of impact.”

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White lies on black money.

Estimates of ‘black money’ generated in the Indian economy vary: from rather minuscule amounts of a couple of billion dollars to more unbelievable numbers. The Union finance ministry issued a white paper on the subject that highlighted various measures of black money and what needs to be done to curb its generation. The analysis carried out in it does not represent anything new; it certainly does not give a road map for handling this problem.

In India, the easy fixes to curb tax evasion and the generation of black money have all been exhausted: there will be few, if any, taxpayers who try and evade what they owe the government. The tax administration is robust enough to detect and capture evasion by these citizens. The problem lies elsewhere.

The white paper itself illustrates these issues. Three examples can be highlighted. The issue of taxation of wealth generated in the businesses linked to exploitation of natural resources such as mining, hydrocarbons, telecom and other related sectors; the problem of income in “vulnerable” sectors such as real estate and, finally, the issue of political willpower required to make a difference. In each of these, this government has been an abject failure.

Consider the natural resources sector first. The problem lies in the vast discretionary powers enjoyed in allocating these resources. From spectrum allocation to that of issuing mining licences, there has been little or no transparency. The result is that there are inbuilt drivers to generate illicit wealth. If anything, this government is complicit in this process: it is deeply unhappy with auctions as a process to allocate these resources. In a firstcome- first-served process, there is ample scope for corrupt practices. Clearly, it has to address that issue before it can even argue that natural resource allocation processes are a problem. In fact, the sector can only be dubbed as a ‘politically exposed sector’.

In case of ‘vulnerable’ sectors such as real estate, the cause and effect are mixed: real estate is both a recipient and a generator of black money. Illicit gains made elsewhere can be parked in residential and commercial property without much fear of tax enforcers. But that is just one part of the problem. The high taxes — stamp duty is a prime example — levied make evasion a worthwhile chase. And high stamp duty being an important source of revenue for many states ensures that undervalued transactions are a norm and not an exception.

Finally, this government lacks the willpower to deter potential tax evaders — the big fish that is. The surest way to do so will be to disclose the names of evaders that are available with the government. Given that our politicians are sure to figure on such a list, confidentiality of agreements with other governments and, hold your breath, human rights of tax evaders (page 68 of the white paper) come in the way of public disclosures. This is difficult to believe.

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Don’t blame Greece for our problems.

In the gloomy economic environs of a falling rupee, slowing economy and a general drift of things, an easy way to shirk responsibility would be to lay the blame at Greece’s door. Former ICICI Bank chairman N. Vaghul would strongly recommend not to rummage through the ruins of the Athenian economic Acropolis to explain our problems away.

“No one is going to believe if we say our problems are because of Greece. Our problems are self-inflicted”, says the celebrated banker, reasoning that the “root cause of India’s troubles lies in a decline in its values”.

“It isn’t a question of some fiscal, inflation or some other problem like a fall in the value of the rupee. It doesn’t have to do with the change in recent times in our tastes with regard to music, clothes, marriage or some social mores. Those are irrelevant. What is hurting is that our core values are disappearing and it has been six decades of decline with the political, economic and industrial leaderships dropping in integrity,” he says. Blending his characteristic wit with banking analogy, Vaghul says,

“the root cause of our financial crisis is that we have created derivatives without underlying assets,” referring to the decline in values in all spheres of life. Holding forth on the importance of upright leadership at an event here to remember banking stalwart and former SBI chairman R. K. Talwar, Vaghul said work ethics ought to be the cornerstone on which to build careers and industry and that the decline in values witnessed all around reminded one of the importance of the philosophy of those like Talwar, who thought everyone was an instrument of the divine.

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Corporate anonymity — Incorporation with limited liability is a privilege. It should not include anonymity.

Limited liability — A commercial venture that protects its shareholders from personal bankruptcy —is one of the greatest wealth-creating inventions of all time. The law allows companies to borrow money, to take risks and to make contracts as if they were people, but without the human beings who own it going bust if things go wrong, as they would in an unlimited partnership.

Limited liability allowed Elizabethan adventurers to finance voyages to spice islands; it allows Silicon Valley technologists now to make similarly risky bets. But limited liability is a concession — something granted by society because it has a clear purpose. It is unclear why in parts of the world anonymity became part of the deal. Efforts to withdraw that unjustified perk deserve to succeed. In dozens of jurisdictions, from the British Virgin Islands to Delaware, it is possible to register a company while hiding or disguising the ultimate beneficial owner.

This is of great use to wrongdoers, and a huge headache for those who pursue them. Anonymously owned companies can buy property, make deals (and renege on them), launch intimidating lawsuits, manipulate tenders — and disappear when the going gets tough. Those who seek redress run into baffling bureaucracy and a legal morass. Seeking real names and addresses means dealing with lawyers and accountants who see it as their job to shield their clients from nosy outsiders.

Owning up

Reform ought to be simple. Anyone registering a limited company should have to declare the names of the real people who ultimately own it, wherever they are, and report any changes.

Lying about this should be a crime. Some dodgy places will try to hold out. But anti-money-laundering rules show international co-operation can work. You can no longer open an account at a respectable bank merely with a suitcase of cash. Let the same apply to starting a limited company.

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How to declutter your mind.

By life overloads our senses with a barrage of sensations: information, sights, sounds and choices. We have portable devices that inform, entertain, update and connect. We are not designed to deal with so much information all at once. The noise keeps us from focussing on what matters, keeping us disconnected from the big picture.

Breath: Take a few deep breaths and relax. Concentrate on your breathing as it comes in and goes out of your body. This has a calming effect and allows other thoughts to float away.

Write it down: Pen down your thoughts. It helps to get them on paper and off your mind. This keeps your head from being filled with everything you need to do and remember. List and prioritise: Tasks that are critical to do today, tasks that you need to do in the next 1-2 weeks — prioritise what’s urgent and important.

Eliminate: Now that you’ve identified the essential, identify what’s not essential and eliminate those items. It declutters your mind really fast.

Decide now: List the things which you are yet to decide. Stop procrastinating and tackle them. Do a physical activity: Spending some physical energy clears the mind. Reduce TV time: It fills your head with noise. By reducing it, you will find that you have time for the more important things in life.

Take a break: Short breaks during work hours will help you feel more re-energised and fresh. Go slow: Life is not a race all the time. Do things one at a time. Relax and move at your own pace. As a result, your mind is less hassled.

Forgive and forget: Harbouring negative emotions of anger and frustration only add to the mental stress.

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Time for change — The country needs a new government, under a new leader.

The second UPA government is observing its third anniversary. The second of those three years saw rampant and large-scale corruption emerge as a hot-button issue. The third and latest year has been disastrous for the economy. So the two principal attributes credited to Prime Minister Manmohan Singh — as a man of probity and as the author of economic reforms — have ceased to be political assets for the government. At the heart of the government’s problems is the dyarchy that prevails, something which the Westminster system of parliamentary government is simply not equipped to deal with. Political power rests with Sonia Gandhi, and she therefore has an important say in what must happen. In practice, therefore, the prime minister serves so long as he enjoys her confidence, and he has to consult her on ministerial appointments. More importantly, he cannot dispense with any of them if he so chooses. This fundamentally undermines his authority in the Cabinet, a situation which many ministers have exploited to thumb their noses at him.

Many other things are wrong with this government. For a start, its leading lights are simply too old. The prime minister will be 80 in a few months, while the foreign minister is already 80. Mr. Mukherjee is 77, and Mr. Antony 71. Among those exercising the sovereign functions of the state, only Mr. Chidambaram (67) is below 70. In the Cabinet as a whole, 15 of 34 ministers are 70 or older. Any government with so many old people, who have little to look forward to other than political survival for a few more years, is likely to be short on energy and initiatives, and tied to old ways of thinking. It also matters that most of the stalwarts in the Cabinet are political lightweights who have no real clout with voters in their states.

A lightweight prime minister has around him a bunch of other lightweights. This may have to do with the nature of the Congress party — if it is to be protected and preserved as family property, the party’s only real vote-getters must be from the Gandhi family; and young ministers like Jyotiraditya Scindia and Sachin Pilot cannot be allowed to flower too early or they might outshine Rahul Gandhi. It is frequently said that the bane of this government has been its recalcitrant allies. Perhaps, but how much of the failure to carry them along rests with the Congress? How often has the UPA actually met as an alliance? Why does it not have a common minimum programme, which everyone has agreed on? Why is there no effective system of discussion and consultation? Is it simply because the leading lights of the UPA lack political ability — the prime minister is reticent if not retiring, the home minister gets people’s backs up, and the finance minister has too much on his plate to focus on anything in particular? In any case, the ministerial mathematics tells its own story: 28 out of 34 Cabinet posts are with the Congress, as also all seven positions of minister of state with independent charge; that’s a score of 35 out of 41. Of the six posts with five allies, the government has got almost unstinting support from Sharad Pawar’s Nationalist Congress, Farooq Abdullah’s National Conference and Ajit Singh’s Rashtriya Lok Dal. When push came to shove, the Dravida Munnetra Kazhagam too played along, even allowing its Cabinet representation to shrink. The sole problem case can be said to be Mamata Banerjee. Is this really an unmanageable situation, or a failure of management?

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Lionising the indicted — Politics must reconnect with respect for law, propriety.

In Punjab, the declared killer of a former state chief minister is honoured by those speaking in the name of a whole community. In Tamil Nadu, Andimuthu Raja returns to his home state as a conquering hero, after having had to resign as communications minister and then spending 15 months in jail. In the first case, the killer is awaiting execution, while in the second the trial is still to get under way.

In that sense, the two are on different planes. But it is necessary to ask whether the Dravida Munnetra Kazhagam (DMK) is no better than some of the Akali factions when they cock a defiant snook at the law. It was left to the General who led Operation Bluestar to express his unhappiness at a memorial being built in memory of those killed by soldiers during Bluestar, since those killed included terrorists and armed separatists.

As for Mr. Raja, he is technically innocent, since no court has declared him guilty, but he has been indicted in no uncertain terms, as a simple reading of the Comptroller and Auditor General’s (CAG’s) report on the telecoms scam shows. He twisted the principle of ‘first-come-first-served’ by fixing arbitrary cut-off dates and other criteria in such a manner as to make the ultimate choice of licensees completely arbitrary, and therefore devoid of principle. Even when it came to simple paperwork, he gave licences to companies that did not qualify or were not eligible because they had not given the prescribed information or the prescribed documentation in time. Whether he committed any crime is something that is yet to be determined, as also the question of any quid pro quo. But on the evidence already set forth, it is clear that Mr. Raja is not someone who should be getting lionised by any serious political party, given that his handling of a ministerial portfolio did not set standards worthy of emulation. That the DMK has chosen to lionise such a person tells the country that politics in Tamil Nadu is as disconnected from propriety as it is in Punjab.

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White paper on Black Money:

Generation of black money and its stashing abroad in the tax havens and offshore financial centres has dominated discussion and debate in the Parliament and in public forum in recent years. In the White Paper on Black Money recently laid before the Parliament this problem and its complexities have been discussed in detail. In this report para 5.2.75 deals with ‘Enhancing the Accountability of Auditors’ which reads as under.

“5.2.75 Unlike many developed countries, Auditors in India have not been requisitely accountable, resulting in frequent undermining of this important aspect. Apart from recent cases of distortionary corporate governance involving highly reputed firms, cases are detected regularly by the regulatory authorities where the Auditors have failed to point out gross violations and even blatant misrepresentations. In the absence of adequate effective provisions, the Auditors are hardly ever held accountable for these lapses. Another aspect of this problem is the way in which a firm opts for an Auditor in this environment of low accountability and prevalent evasion, since a strict Auditor ready to blow the whistle can hardly expect to thrive amidst competitors, many of whom may be more than willing to co-operate and compromise at different levels. As a result, a very important regulatory tool is virtually losing its role in contributing towards greater compliance. There will be need in future to look into various aspects of the functioning and regulation of the role of Auditors and various other professionals verifying the declarations and statements made by firms and ensure that there are adequate safeguards and sufficient accountability of such professionals.”

Such sweeping remarks about our profession in an official document laid before the Parliament indicate the present thinking in the minds of these who govern and regulate our profession. Members of ICAI should adequately respond to such remarks.

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EAC opinion – Revenue recognition in case of construction contracts

Facts:

A public sector company (‘company’), listed in the stock exchanges, is engaged in the field of engineering, manufacture of equipments, erection & commissioning of power projects. In power project business, the contracts received by the company are either Engineering, Procurement and Construction (EPC) contracts or Boiler, Turbine and Generator (BTG) Packages, where civil works and Balance of Plant (BOP) package items are not in the scope. The normal execution period of a contract ranges between 3 to 5 years. The scope of the contract includes supply of equipments, erection, commissioning, ensuring guarantee output from the machines, completing the trial operation and synchronising the plant to the grid.

The company has stated that long-term construction contracts are obtained by the company’s marketing wing which allocates the scope and value to various manufacturing units and regions/ sites for execution. The units/regions bill the customers based on Billing Break Up (BBU) agreed with the customers.

The accounting policy of the company for revenue recognition in respect of construction contracts is on percentage completion method based on percentage of actual cost incurred up to the reporting date to the total estimated cost of the contracts. Actual cost incurred up to reporting period is worked out on actual cost incurred for each contract in respect of items manufactured and physically dispatched to the project site. Further, in power sector regions/sites, actual cost incurred towards engineering, commissioning, etc. by region/site is considered for working out percentage of completion for revenue recognition. Items like steel, cement and bought-outs directly supplied from supplier to project site and billed to the customer are also considered as part of actual cost incurred for working out percentage of completion for revenue recognition.

Query

On the above facts, the company has sought the opinion of the EAC: (a) whether the practice of cost of manufactured items dispatched to project site alone being considered as ‘cost incurred’ without considering the cost of raw material in stocks, works in progress at the plant, finished goods at stores as cost incurred is in line with the revenue recognition principle as per AS-7?, (b) In case of erection sites, whether the cost of cement and steel procured and delivered at the project site, specific to the project, in respect of which billing has been done as per the BBU agreed with the customer can be considered as ‘cost incurred’ in working out the percentage of completion as per AS-7 and whether the same is in line with the revenue recognition principle as per AS-7?, and (c) Whether change in estimated revenue and estimated cost in respect of long-term contracts executed over a longer period needs to be disclosed as ‘change in estimate’ as per AS-5?

Opinion:

After considering paragraphs 21, 29 and 30 of AS-7, the Committee is of the view that determination of contract costs incurred for calculating stage of completion depends upon the performance of contract activity rather than mere incurrence of cost. Costs that relate to future activity are to be recognised as ‘work in progress’. Accordingly a judgment is to be exercised by the management while determining the contract costs incurred considering various factors, such as terms and specifications of the contract, identifiability with the contact, achievement of milestone in relation to the contract, etc.

In view of the above, the practice of the company to consider the cost of manufactured items dispatched to the project site alone as ‘cost incurred’ is not correct, since mere event of dispatch can not be considered as a completion of a stage and may not trigger revenue recognition.

As regards steel and cement procured and delivered at the contract site and billed to the customer cannot trigger considering a cost as ‘contract cost incurred’. These items are general in nature for a construction activity and cannot be said to be specific for a project even though supplied directly to the contract site. Accordingly, this should be considered for determining ‘contract cost incurred’ only when these have been used/ applied for performance of contract activity. Till that time, these should be considered as ‘work in progress’.

Change in estimate on account of changes in estimated contract revenue and costs should be disclosed in accordance with AS-5 read with AS-7. Accordingly, the effect of change in estimated contract revenue and cost which has or is expected to have a material effect in the current period or subsequent periods needs to be disclosed. However, if it is impracticable to quantify the amount of change, the fact should be disclosed. [Please refer pages 1825 to 1830 of C.A. Journal, June, 2012]

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Section 37(1) — Whether payments towards noncompete fees can be claimed as deferred revenue expenditure — Held, Yes.

31. (2011) 131 ITD 385 (Chennai) Orchid Chemicals & Pharmaceuticals Ltd. v. ACIT A.Y.: 2003-04. Dated: 18-6-2010

Section 37(1) — Whether payments towards non-compete fees can be claimed as deferred revenue expenditure — Held, Yes.

Facts:

The assessee was engaged in the business of manufacture and export of bulk drugs and other pharmaceuticals. The assessee in the previous year paid a sum of Rs.24 crore to three of the parties for acquiring the Intellectual property rights, brands and drug licences. The above payment also included a sum of Rs.2 crore paid towards non-compete clause. The assessee claimed the above expense as revenue expenditure. The Assessing Officer refused the claim on the basis that the expenditure incurred for non-compete agreement was for a fairly long period of four years and as it was of enduring nature, it cannot be treated as revenue. On appeal the Commissioner (Appeals) upheld the order. The assessee thus appealed to the Tribunal. The assessee raised additional grounds which were alternative to other grounds. The assessee contended that the sum paid may be allowed as deferred revenue expenditure or alternatively depreciation on the same should be allowed.

Held:

(1) The payment made for non-compete fee cannot certainly be treated as revenue expenditure in view of decisions in the case of Hatsum Agro Products Ltd. (ITA No. 1200/Mad./1999, dated 27th July, 2005), Asianet Communications (P) Ltd. (ITA No. 4437/Mad./2004, dated 3th January, 2005) (ITA No. 615/Mad./1999, dated 10th February, 2005) and Act India Ltd. No doubt section 28(va) of the Act considers a receipt of non-compete fee as income but it would not by itself lead to a conclusion that any payment of like nature would be on revenue account only. (2) Further, relying on the decision of the Apex Court in the case of Madras Industrial Investment Corporation Ltd. (225 ITR 802) (SC), the expenses should be held in the nature of deferred revenue expenses since the noncompete agreement precluded the sellers from engaging in a competing activity for a period of four years. (3) Hence, the payment made for non-compete fee should be allowed as deferred revenue expenses over a period of four years.

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CENVAT credit — Bills of entry showing address of some other unit but goods received at the factory — Credit cannot be denied even if it was not claimed immediately on receipt of goods and even if the address not mentioned on the bill of entry.

43. (2012) 26 STR 395 (Tri.-Mumbai) SGS India Pvt. Ltd.

CENVAT credit — Bills of entry showing address of some other unit but goods received at the factory — Credit cannot be denied even if it was not claimed immediately on receipt of goods and even if the address not mentioned on the bill of entry.

Facts:

The appellant received goods at the factory, however, the bills of entry showed the address of their head office. Moreover, the credit was claimed after a span of one year. The Department relying on the case of Marmagoa Steel Ltd. (2004) 178 ELT 480 (T) denied the credit on two grounds: the address of the factory was not mentioned in the bills of entry and the credit was supposed to be claimed immediately on receipt of goods.

Held:

The case on which the Department was relying had been reversed by the Bombay High Court and such reversal has been affirmed by the Supreme Court 229 ELT 481 (SC). The credit cannot be denied to the appellant merely on the ground that credit was not taken immediately. The Tribunal further observed that not taking credit immediately affected the assessee more than the Revenue.

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Construction services — Construction completed before the introduction of Service tax on such services — However, completion certificate obtained by the appellant after the introduction of the levy — Held, it is a very small part of the contract and for that reason Service tax cannot be demanded.

42. (2012) 26 STR 367 (Tri.-Del.) Ashokumar Jain v. CCE, Indore.

Construction services — Construction completed before the introduction of Service tax on such services — However, completion certificate obtained by the appellant after the introduction of the levy — Held, it is a very small part of the contract and for that reason Service tax cannot be demanded.

Facts:

The appellant was a construction service provider (a civil contractor). The appellant had undertaken a works contract of constructing 10 flats prior to levy of Service tax. However, the payment was realised post levy of Service tax on construction services. The Department levied Service tax on the amount received post the introduction of the levy by the appellant.

Held:

The construction was completed long before Service tax was imposed on construction services. Even if the procuring completion certificate was the responsibility of the appellant, it was a very small part of the contract. For this reason, Service tax could not be levied.

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Penalty — Service tax registration not obtained and Service tax not paid — However, the details of commission paid available in the balance sheet — The details were submitted as soon as asked by the Department — Substantial portion of Service tax paid — Nonpayment not considered as wilful — Penalty set aside.

41. (2012) 26 STR 359 (Tri.-Del.) DCM Textiles v. CCE, Gurgaon.

Penalty — Service tax registration not obtained and Service tax not paid — However, the details of commission paid available in the balance sheet — The details were submitted as soon as asked by the Department — Substantial portion of Service tax paid — Non-payment not considered as wilful — Penalty set aside.

Facts:

The appellant a manufacturer of cotton yarn, for procuring export orders, paid commission to various agents located in different countries. No Service tax was paid on the same under reverse charge. The Department levied penalties along with tax and interest. The appellant pleaded that non-payment of taxes was due to bona fide belief that services rendered by foreign agents are not taxable within India. The Commissioner (Appeals) upheld the levy of penalty.

Held:

To levy penalty u/s.78, it is necessary to prove the mala fide intention of the assessee. In the present case, the appellant disclosed all the relevant information in the balance sheet. Moreover, all the requisite details were provided on being asked by the Department. Relying on Cosmic Dye Chemical 75 ELT 721 (SC), the Tribunal held that the appellant had disclosed all the information and therefore, penalty u/s.78 could not be imposed.

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Cenvat credit — Service tax on group medical insurance policy — Mandatory requirement — Held, though a welfare measure, is in relation to business as defined in the definition of ‘input service’ — Eligible as credit.

40. (2012) 26 STR 383 (Kar.) CCE, LTU, Bangalore v. Micro Labs Ltd.

Cenvat credit — Service tax on group medical insurance policy — Mandatory requirement — Held, though a welfare measure, is in relation to business as defined in the definition of ‘input service’ — Eligible as credit.

Facts:

The respondent claimed credit of Service tax paid on group medical insurance. It was mandatory on the part of the respondent u/s.38 of the Employees State Insurance Act, 1948. The credit was denied on the ground that insurance service was not specified in the definition of ‘input service’.

Held:

Merely because the service is not specified in the definition, credit cannot be denied. Service tax on all those services which have been utilised by the assessee directly or indirectly in or in relation to the manufacture of the final products is eligible as CENVAT credit. Employee Mediclaim Insurance though a welfare measure, is a statutory obligation which the assessee needs to obey. CENVAT credit admissible.

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VAT on Builders and Developers

Introduction

The historical background of works contract is very interesting. In a landmark judgment in the case of Gannon Dunkerley & Co. (9 STC 353) the Supreme Court held that it is the transaction of ‘sale’ within the meaning of the Sale of Goods Act, which can be covered by Sales tax legislations. It was held that the transactions of sale, which are completed by delivery, are sale transactions as per the Sale of Goods Act and such transactions can only be taxable under sales tax laws. Where there is a composite contract, like supply of materials and application of labour, it becomes a works contract transaction and cannot be covered by Sales tax legislations. After the above judgment, for number of years, the transactions of works contracts remained outside the scope of Sales tax legislations. It is in the year 1983, the Constitution was amended (46th Amendment), whereby, for enabling levy of Sales tax, deemed sale category was inserted. This was done by insertion of clause (29A) in Article 366 of the Constitution of India. One of such deemed sales category is ‘works contract’ transaction.

After getting powers to levy Sales tax on works contract transactions, States including Maharashtra made legislations for levy of Sales tax on works contract transactions. In Maharashtra, there was a separate Maharashtra Works Contract Act, 1989. Under the above Act, an issue arose, as to whether tax can be attracted on builders & developers, who come up with their own projects and while the construction is in progress, enters into agreement for sale of premises. In the DDQs issued at that time, it was held that such agreements cannot be liable under the Works Contract Act. Reference can be made to the DDQ in case of Unity Developer & Paranjape Builders (DDQ 1188/C/40/ Adm-12, dated 10-3-1988). It was held that there is no employer-contractor relationship between buyer of premises and builder. G. G. Goyal Chartered Accountant C. B. Thakar Advocate VAT Similar position is also repeated in DDQ in the case of M/s. Rehab Housing Pvt. Ltd. & Larsen & Toubro Ltd. (JV) (WC-2003/ DDQ-11/Adm-12/B-276, dated 28-6-2004). In this DDQ, the issue was about constructing tenements for contractee, where price was composite for land and construction. It was held that this is a contract for immoveable property and not covered by the Works Contract Act.

Change in situation

From 1-4-2005, the Works Contract Act is merged into the MVAT Act, 2002 and works contract transactions are covered by the said MVAT Act, 2002. However, still the above situation prevailed and there was no attempt to levy tax on builders & developers. However, in 2005, the Supreme Court delivered judgment in case of K. Raheja Construction (141 STC 298) (SC). In this case, noting that there is separate value for land and separate value for construction, the Supreme Court held the developer as liable to works contract. After the judgment in the case of K. Raheja Construction (141 STC 298) (SC), the VAT authorities held a view that ‘Under Construction Contracts’ are liable to VAT as works contract. The definition of works contract was introduced in the MVAT Act, 2002 on 20-6-2006. Thereafter, the Commissioner of Sales Tax issued Circular 12T of 2007, dated 7-2-2007 explaining that builders & developers, coming up with their own project but entering into agreements for sale of premises, when the construction is under progress, will be works contract transactions and accordingly liability as works contract will be required to be discharged under the MVAT Act, 2002. It was further explained that if the agreement is after completion of construction, then such agreements will not be covered.

In other words, ‘under construction contracts/ agreements’ were stated to be taxable under the MVAT Act, 2002.

Matter before Bombay High Court After the above development, writ petitions were filed before the Bombay High Court challenging the above interpretation and proposed levy. The High Court has recently decided the said controversy by way of judgment in the case of the Maharashtra Chamber of Housing Industry & Ors. (51 VST 168). The short facts and gist of arguments before the High Court can be noted as under: On behalf of petitioners (a) The amendment in definition of ‘sale’ is unconstitutional, if it is contemplating to levy tax on immovable property. (b) It was shown that the provisions refer to conveyance of land or interest in land, which means immovable property. It was also argued that in works contract the property should pass while executing the contract and not after completion. In case of premises, property passes after construction and conveyance and hence it is a sale of immovable property and not execution of works contract. (c) The works contract contemplates two elements i.e., labour and materials. If third element like land is involved, there is no works contract under Sales tax laws. (d) It was argued that there is no transfer of property to individual buyer of premises, but it is transferred to society by conveyance. Under the above circumstances, no works contract for individual buyers. Provisions of the Maharashtra Ownership Flats (Regulations of the Promotion of Construction, Sale, Management and Transfer) Act, 1963 (MOFA) and Model Agreement thereunder, were also referred to. (e) Unlike in the case of K. Raheja (cited supra), in case of agreement under MOFA, there is no separate price for land/construction and hence transaction cannot amount to works contract. (f) Under the MVAT Rules, 2005, there is Rule 58(1A) to grant deduction towards cost of land.

However, deduction is restricted to 70% of contract value. It was argued to be unconstitutional, as, if land value is exceeding 70%, it will amount to levy of tax on land value, which is not permissible.

On behalf of Government

(a) There is no restriction that if land is involved, the State cannot isolate sale of goods from such contract.

(b) There can be various species of contract and ‘under construction agreement for premises’ is one such specie.

(c) The main argument of the Government was that as per the MOFA Act and Model agreement, buyer gets protection from various aspects like builder cannot change plan, no mortgage of land, etc. Therefore, citing stamp duty judgments, it was argued that construction, after entering into agreement, till completion, will amount to works contract.

(d) Rule 58(1A) is only for measurement of tax and hence not unconstitutional.

Judgment of High Court

The High Court, after considering the above arguments, held that under construction contract is works contract and VAT can be attracted on the same. The main thrust of judgment is that by making agreement under MOFA, buyer gets some interest in the said flat/premises. The Construction thereafter is therefore works contract. The reasoning of the High Court can be noted as under:

“29. In enacting the provisions of the MOFA, the State Legislature was constrained to in-tervene, in order to protect purchasers from the abuses and malpractices which had arisen in the course of the promotion of and in the construction, sale, management and transfer of flats on ownership basis. The State Legislature has imposed norms of disclosure upon promoters. The Act imposes statutory obligations. The manner in which payments are to be made is structured by the Legislature. As a result of the statutory provisions, an agreement which is governed by the MOFA is not an agreement simplicitor involving an ordinary contract under which a flat purchaser has agreed to take a flat from a developer, but is a contract which is impressed with statutory rights and obligations. The Act imposes restrictions upon a developer in carrying out alterations or additions once plans are disclosed, without the consent of the flat purchaser. Once an agreement for sale is executed, the promoter is restrained from creating a mortgage or charge upon the flat or in the land, without the consent of the purchaser. The Act contains a specific stipulation that if a mortgage or charge is created without consent of purchasers, it shall not affect the right and interest of such persons. There is hence a statutory recognition of the right and interest created in favour of the purchaser upon the execution of a MOFA agreement.

Having regard to this statutory scheme, it is not possible to accept the submission that a contract involving an agreement to sell a flat within the purview of the MOFA is an agreement for sale of immovable property simplicitor. The agreement is impressed with obligations which are cast upon the promoter by the Legislature and with the rights which the law confers upon flat purchasers.”

Holding the above view, the High Court held that ‘Under Construction Contract/Agreements’ will be covered under the MVAT Act, 2002.

Conclusion

Therefore, as on today the State can levy tax on under construction agreements. However, matter is subject to the Supreme Court. It can be noted here that similar controversy in relation to the Karnataka State is already before the larger Bench of the Supreme Court in the case of Larsen & Toubro Limited and Another v. State of Karnataka and Another, (17 VST 460) (SC). Therefore, the ultimate fate will depend upon the Supreme Court judgment.

shailesh.kwebmaker

CONCEPT OF MUTUALITY

Relevance under Service tax

Though
the concept of ‘mutuality’ has been a subject-matter of extensive
judicial considerations under the Income tax Act and Sales tax laws, it
has been tested judicially to a very limited extent under Service tax.

However,
it assumed significance in the context of Club or Association Service,
the category introduced w.e.f. June 16, 2005, more particularly in the
context of co-operative societies, trade associations and clubs.

The
following Explanation was inserted at the end of section 65(105) of the
Finance Act, 1994 (Act) w.e.f. May 01, 2006: “For the purpose of this
section, taxable service includes any taxable service provided or to be
provided by any unincorporated association or body of persons to a
member thereof, for cash, deferred payment or any other valuable
consideration.” Attention is particularly invited to the following
Explanation inserted to newly introduced section 65B(44) of the Act
which now defines ‘service’ effective from July 01, 2012: “
…………………….

Explanation 2 — For the purpose of
this Chapter, — (a) An unincorporated association or a body of persons,
as the case may be, and a member thereof shall be treated as distinct
persons. ……………”

General concept

It is
widely known that no person can make a profit out of himself. The old
adage that a penny saved is a penny earned may be a lesson in household
economics, but not for tax purposes, since money saved cannot be treated
as taxable income. It is this principle, which is extended to a group
of persons in respect of dealings among themselves. This was set out by
the House of Lords in Styles v. New York Life Insurance Co., (1889) 2 TC
460 (HL). It was clarified by the Privy Council in English and Scottish
Joint Co-operative Wholesale Society Ltd. v. Commissioner of
Agricultural Income-tax, (1948) 16 ITR 270 (PC), that mutuality
principle will have application only if there is identity of interest as
between contributors and beneficiaries. It was the lack of such a
substantial identity between the participants, with depositor
shareholders forming a class distinct from the borrowing beneficiaries,
that the principle of mutuality was not accepted for tax purposes for a
Nidhi Company (a mutual benefit society recognised u/s.620A of the
Companies Act, 1956) in CIT v. Kumbakonam Mutual Benefit Fund Ltd.,
(1964) 53 ITR 241 (SC).

Distinction between Members’ Club/Association and Proprietary Club/Association

(i)
The concept of mutuality and distinction between ‘Members’ Clubs’ and
‘Proprietary Clubs’ has been discussed in detail in a 6-Member Supreme
Court Ruling viz. Joint CTO v. Young Men’s Indian Association, (1970) 26
STC 241 (SC). (‘YMIA’) The relevant extract of discussion is set out
hereafter for reference.

If a members’ club, even though a
distinct legal entity, acts only as an agent for its members in the
matter of supply of various preparations and articles to them, no sale
would be involved as the element of transfer would be completely absent.
Members are joint owners of all the club properties. Proprietary clubs
stand on a different footing. The members are not owners of or
interested in the property of the club. To show the difference of
characteristics between Members’ Club and Proprietary Club, the Supreme
Court held that where every member is a shareholder and every
shareholder is a member, then the same would be called a Members’ Club.

In
a Members’ Club what is essential is that the holding of the property
by the agent or trustee must be holding for and on behalf of and not a
holding antagonistic to the members of the club. (ii) In CIT v. Bankipur
Club Ltd., (1997) 226 ITR 97 (SC), it was held by the Supreme Court
that there must be complete identity between contributors and
participators. If this requirement is fulfilled, it is immaterial, what
particular form the association takes. Trading between persons
associating together in this way does not give rise to profits which are
chargeable to tax. Facilities were offered only as a matter of
convenience for the use of the members. (iii) It was further held in
Chelmsford Club v. CIT, (2000) 243 ITR 89 (SC) that the surplus from the
activities of a club is excluded from the levy of the income-tax.

Applicability to a co-operative society

Where
a co-operative society deals solely with its members, right to
recognition for exemption on grounds of mutuality has been recognised
under income-tax in the following High Court rulings:

CIT v. Apsara Co-operative Housing Society Ltd., (1993) 204 ITR 662 (Cal.);
CIT v. Adarsh Co-operative Housing Society Ltd., (1995) 213 ITR 677 (Guj.) and;
Director of Income-Tax v. All India Oriental Bank of Commerce and Welfare Society, (2003) 130 Taxman 575 (Del.).

Judicial considerations under Service tax

The
Service tax authorities had issued show-cause notices to various clubs
demanding Service tax under the service category ‘Mandap Keeper’ on the
ground that the clubs have allowed the members to hold parties for
social functions. Two of such clubs disputed the levy before the
Calcutta High Court viz.:

Dalhousie Institute v. AC, (2005) 180 ELT 18 (Cal.).
Saturday
Club Ltd. v. AC, (2005) 180 ELT 437 (Cal.). In Saturday Club’s case, a
members’ club permitted occupation of club space by any member or his
family members or his guest for a function by constructing a mandap.

On the principle of mutuality, there cannot be

(a) any sale to oneself,
(b) any service to oneself or
(c) any profit out of oneself.

Therefore,
the Calcutta High Court held that the same principle of mutuality would
apply to income-tax, Sales tax and Service tax in the following words:
“Income tax is applicable if there is an income. Sales tax is applicable
if there is a sale. Service tax is applicable if there is a service.
All three will be applicable in a case of transaction between two
parties.

Therefore, principally there should be existence of two
sides/entities for having transaction as against consideration. In a
members’ club there is no question of two sides. ‘members’ and ‘club’
both are the same entity. One may be called as principal while the other
may be called as agent, therefore, such transaction in between
themselves cannot be recorded as income, sale or service as per
applicability of the revenue tax of the country. Hence, I do not find it
is prudent to say that members’ club is liable to pay service tax in
allowing its members to use its space as ‘mandap’.”

While
quashing the proceedings, the High Court referred to the decisions in
the case of Chelmsford Club v. CIT, (2000) 243 ITR 89 (SC) & CIT v.
Bankipur Club Ltd., (1997) 226 ITR 97 (SC)

Principles laid down by the Calcutta High Court under Service tax

(a)
The principles laid down by the Calcutta High Court in Saturday Club
& Dalhousie Institute discussed above have been followed in a large
number of subsequently decided cases. Some of these are:

Sports Club of Gujarat Ltd. v. UOI, (2010) 20 STR 17 (Guj.)
Karnavati Club Ltd. v. UOI, (2010) 20 STR 169 (Guj.)
CST v. Delhi Gymkhana Club Ltd., (2009) 18 STT 227 (CESTAT-New Delhi)
Ahmedabad Management Association v. CST, (2009) 14 STR 171 (Tri.-Ahd.) and
India International Centre v. CST, (2007) 7 STR 235 (Tri.-Delhi)

(b)In CST v. Delhi Gymkhana Club Ltd., (2009) 18 STT 227 (New Delhi-CESTAT) the Tribunal observed:

“using of facilities of club, cannot be said to be acting as its clients and hence, in respect of services provided to its members, a club would not be liable to pay Service tax in the category of club or association service.”

The Revenue’s appeal against the above ruling was dismissed by the Delhi High Court on technical grounds. It needs to be noted that, Explanation inserted at the end of section 65(105) of the Act w.e.f. May 01, 2006, has not been discussed in the aforesaid ruling.

Recent judgment in Ranchi Club Ltd. v. CCE & ST, (2012) 26 STR 401 (JHAR)

Background

A writ petition was preferred by Ranchi Club Limited for declaration that the Club was not covered under the Act and, therefore, was not liable to pay Service tax under ‘Mandap Keeper Service’ or under the ‘Club or Association Service’ categories and prayed for order of prohibition against Central Excise Division, Ranchi from enforcing any of the provisions of the Act.

Contention of the petitioner

Petitioner is a club which is a registered company under the Companies Act, 1956 and is giving service to its members but the club is formed on the principle of mutuality and, therefore, any transaction by the club with its member is not a transaction between two parties. When the club is dealing with its member, it is not a separate and distinct individual. It was submitted that in identical facts and circumstances, however, in the matter of imposition of sales tax, when the club was expressly included in the statutory definition of ‘dealer’ under the Madras General Sales Tax Act, 1959, so as to bring the club within the purview of taxing statute of the Madras Sales Tax, the Supreme Court, in YMIA case, considered the definition of the ‘dealer’ by which the club was declared as a ‘dealer’. The Court considered the definition of ‘sale’ as given in the Act of 1959 and Explanation-I appended to section 2(n), specifically declaring ‘sale’ or ‘supply or distribution of goods by a club’ to its members whether or not in the course of business to be a ‘deemed sale’ for the purpose of the said Act. In that situation, the Supreme Court considered the issue that when the club is rendering service or selling any commodity to its members for a consideration, whether that amounts to sale or not. The Supreme Court held that it is a mutuality which constitutes the club and, therefore, sale by a club to its members and its services rendered to the members, is not a sale by the club to its members. In sum and substance, the ratio is that for a transaction of sale, there must be two persons in view of this judgment as well as in view of the Full Bench judgment of this Court delivered in the petitioner’s own case i.e., Tax v. Ranchi Club Limited, (1992) 1 PLJR 252 (PAT) (FB) (‘Ranchi Club’). The Full Bench considering the identical issue in the matter of imposition of income-tax observed that no one can earn profit out of himself on the basis of principle of mutuality and held that income-tax cannot be imposed on the transaction of the club with its members.

With the help of these two judgments, it was submitted that the petitioner was a club and was rendering services to its members and the same principle of mutuality applied to the facts of the case in view of the reason that the language in the provisions of the Madras General Sales Tax Act, 1959 and the provisions under the Income-tax Act are pari materia with the provisions which are sought to be applied against the writ petitioner for levy of Service tax.

Contentions of the Department

The Department submitted that the sale has its own meaning and the service is entirely different transaction which cannot be equated with the sale in any manner. They relied upon the book ‘Principles of Statutory Interpretation’ by G. P. Singh, the then Chief Justice, M.P. High Court (3rd edition), wherein there is reference to a case wherein Bhagwati J observed that, for construction of fiscal statute and determination of liability of the subject to tax, one must refer to the strict letters of law. It was submitted that the statutory provisions are very clear which are sections 65(25a), 65(105)(zzze) as well as Explanation appended to section 65. It was also submitted that when the language of section is absolutely clear, then the meaning of the statute in fiscal matter should be given according to the language and words used in the section and cannot be interpreted on the basis of some ideology or some impressions or with the help of some other enactments. Each of the taxing statute may have its own definition and meaning and they are required to be given effect to, irrespective of the fact that meaning of the same word in different statute has been given differently. It was further submitted that the Supreme Court in the situation of imposition of Sales tax may have held that there cannot be sale by oneself to oneself and himself to himself, but the club can certainly render the service to its members and tax is on the service and the members are paying for the service to the club and, therefore, it is a service for consideration rendered by the club and is liable for tax.

Observations of the High Court

The question which was considered by the Supreme Court in YMIA case was that whether the supply of various preparations by each club to its members involves a transaction of sale within the meaning of the Sale of Goods Act, 1930. In para 15 of the judgement, the High Court quoted the Supreme Court as under:

“Thus in spite of the definition contained in section 2(n) read with Explanation 1 of the Act, if there is no transfer of property from one to another there is no sale which would be exigible to tax. If the club even though a distinct legal entity is only acting as an agent for its members in matter of supply of various preparations to them, no sale would be involved as the element of transfer would be completely absent. This position has been rightly accepted even in the previous decision of this Court”.

The Supreme Court held so after considering the English Law also and observed that the law in England has always been that members’ clubs to which category the clubs in the present case belong cannot be made subject to the provisions of the Licensing Acts concerning sale because the members are joint owners of all the club property including the excisable liquor. The supply of liquor to a member at a fixed price by the club cannot be regarded to be a sale. With regard to incorporated clubs a distinction has been drawn. Where such a club has all the characteristics of a members’ club consistent with its incorporation, that is to say, where every member is a shareholder and every shareholder is a member, no licence need to be taken if liquor is supplied only to the members. If some of the shareholders are not members or some of the members are not shareholders that would be the case of a Proprietary Club and would involve sale. Proprietary clubs stand on a different footing. The members are not owners of or interested in the property of the club. The Supreme Court observed that the above view was accepted by various High Courts in India. The Supreme Court, relying upon other judgments held that members’ club is only structurally a company and it did not carry on trade or business so as to attract the corporation profit tax. Therefore, in spite of specific inclusion of the club in the definition of the dealer in the Madras General Sales Tax Act, 1959, the Supreme Court categorically held that , there cannot be transaction of transfer of property.

The Full Bench of the Patna High Court in the case of the petitioner itself (Ranchi Club case) after finding that the club was a limited company incorporated under the Indian Companies Act, considered various clauses of the main objects of the club and relying upon various judgments, observed as under:

Therefore, by applying the principle of mutuality, members’ clubs always claim exemption in respect of surplus accruing to them out of the contributions received by the clubs from their members. But this principle cannot have any application in respect of surplus received from non-members. It is not difficult to conceive in case where one and the same concern may indulge in activities which are partly mutual and non-mutual. True, keeping in view the principle of mutuality, the surplus accruing to a members’ Club from the subscription charges received from its members cannot be said to be income within the meaning of the Act. But, if such receipts are from sources other than the members, then can it still be said that such receipts are not taxable in the hands of the club? The answer is obvious. No exemption can be claimed in respect of such receipts on the plea of mutuality. To illustrate, a members’ club may have income by way of interest, security, house property, capital gains and income from other sources. But such income cannot be said to be arising out of the surplus of the receipts from the members of the club. “

Conclusion by the High Court

“It is true that sale and service are two different and distinct transactions. The sale entails transfer of property, whereas in service, there is no transfer of property. However, the basic feature common in both transactions requires existence of the two parties; in the matter of sale, the seller and buyer, and in the matter of service, service provider and service receiver. Since the issue whether there are two persons or two legal entities in the activities of the Members’ Club has been already considered and decided by the Supreme Court as well as by the Full Bench of this Court in the cases referred above, therefore, this issue is no more res integra and issue is to be answered in favour of the writ petitioner and it can be held that in view of the mutuality and in view of the activities of the club, if club provides any service to its members, may be in any form including as mandap keeper, then it is not a service by one to another in the light of the decisions referred above as foundational facts of existence of two legal entities in such transaction is missing.” (para 18)

Taxability of mutual concerns (up to 30-6-2012)

a) According to one school of thought, the scheme of Service tax envisages a contractual relationship between the service provider and service receiver. Under a service contract, money flows from the service receiver and service is rendered by the service provider. The Courts have held that relationship between a mutual association and its members is governed by the principle of mutuality and is not one between two different entities. When a facility or amenity is provided to the members, it is so done by the members to themselves through the medium of their agent, the association. There cannot be an independent commercial transaction between a principal and his agent. Therefore, the very scheme of service tax is not applicable to the relationship between the members’ association and its members. Hence, the club or association service category (introduced w.e.f. June 16, 2005) would not apply to mutual concerns.

The ruling of the Jharkhand High Court in Ranchi Club discussed above strongly supports this view and more importantly it has considered the Explanation inserted at the end of section 65(105) of the Act w.e.f. May 01, 2006 to nullify the Calcutta High Court rulings of Saturday Club (supra) and Dalhousie Institute (supra).

b) According to another school of thought, the Calcutta High Court ruling in Saturday Club & Dalhousie Institute case discussed earlier was in the context of Mandap Keeper Services wherein the relevant taxable service definition u/s. 65(105) of the Act, the service recipient was specified as ‘Client’. However, under the club or association service category, the relevant taxable service definition u/s.65(105)(zzze) of the Act, the service recipient is specified as ‘members’.

The distinction made by the Government is reinforced, if one closely examines, the taxable services definitions of all the newly introduced taxable services through the Finance Act, 2005 which clearly demonstrates that in the context of club or association services ‘members’ have been specified as service recipients liable to tax. Hence the ratio of Saturday Club’s case would not apply in the context of mutual concerns like club, associations, etc. The aforesaid view is reinforced by the insertion of Explanation at the end of section 65 of the Act w.e.f. May 01, 2006.

c) Though principle of mutuality is relevant, it would appear that taxability of mutual concerns under Service tax remains a highly contentious and litigative issue.

Taxability of mutual concerns under the ‘negative list’ based taxation of services (w.e.f. July 01, 2012)

The terminology employed in Explanation 2 inserted in section 65B(44) of the Act which defines ‘Service’ is identical to that employed in Explanation to section 65(105) of the Act (up to June 30, 2012). Hence, it would appear that, principles of mutuality upheld by the Calcutta High Court in Saturday Club and Dalhousie Institute and the Jharkhand High Court in Ranchi Club, would continue to be relevant.

Further, under Sales tax a constitutional amendment was carried out, to enable States to levy sales tax on sale of goods by a club or association to its members. The same has not been carried out for Service tax.

However, it needs to be expressly noted that the is-sue is likely to be subject of extensive litigations.

shailesh.kwebmaker

Release of Publication on Digest of Full Bench Decisions of Central Information Commission

BCAS Foundation jointly with Public Concern for Governance Trust (PCGT) released the publication on 26th June, 2012 at Kitab Khana, Mumbai at the hands of Ratnakar Gaikwad, State Chief Information Commissioner. The publication is the result of joint efforts by Ambrose Jude D’Cruz, Anil K. Asher, Advocate and Notary and Narayan K. Varma, Chartered Accountant.

Also present at the occasion were Pradip Thanawala and Pradeep Shah, Trustees, BCAS Foundation and Julio Ribeiro, Chairman, PCGT along with other well-wishers of BCAS Foundation and PCGT.

The publication will help the RTI applicants/activists to better equip themselves and will benefit the society at large. The book is available for sale at BCAS office. L to R: Ambrose Jude D’Cruz, Pradip Thanawala (President), Ratnakar Gaikwad (State Chief Information Commissioner), Julio Ribeiro, Pradeep Shah and Anil Asher.

In March 2010 two NGOs viz. Public Concern for Governance Trust and BCAS Foundation published a book under the title ‘Right To Information – A Route To Good Governance’. All 2,000 copies printed are exhausted. I have a desire to revise the same and publish a revised and an enlarged edition of it, especially because the book is being appreciated by many who went through the same. However, due to my ill health since last ten months, I have not been able to progress on it. Hopefully, I shall soon do it. Many citizens are filing applications under the RTI Act. As PIOs and FAAs are still reluctant to part with the information, many Second Appeals are being filed before the CIC and SCIC. Many aspects of the law are not settled. Important law points are referred to a full bench for decision. Thus these decisions have a persuasive value. Hence in the meantime, above two NGOs decided to publish this “Digest of Full Bench Decisions of CIC”.

Idea to publish this Digest was given to me by RTI activist and The Central Information Commissioner, Mr. Shailesh Gandhi. We then requested Mr. Ambrose Jude D’Cruz, Government Law College student to prepare this digest. He has taken lot of pain and had lot of interaction with Mr. Anil K. Asher and me. Finally he handed over the text for publication early this month. Mr. Anil K. Asher, advocate and RTI activist who, with his sister, Mrs. Hema Sampat and Narayan Varma runs RTI Clinic at BCAS on the 2nd, 3rd and 4th Saturday every month since 2004, has thoroughly gone through the text, given good comments and revised text, drafted Head notes and notes wherever necessary.

I have glanced through the text more than twice and final copy and prepared the contents. Full Bench decisions have been digested in a simple manner for easy understanding. An attempt has been made to compile these decisions for better appreciation of the provisions of the RTI Act. Where any party has filed writ petition in High Court / Supreme Court suitable note at the end of the case digested has been added. Any reader who may like to peruse the relevant full decision may do so on website www.cic.gov.in as per case reference given at the end of each case.

51 Decisions of full bench of CIC delivered from 2007 to 2011 have been digested in this publication. There is not a single F.B. decision on CIC website in 2012 till this date. We have also digested one full bench decision of Maharashtra State Information Commission, [Case No.52] wherein a very important law point was raised before the Maharashtra State Information Commission.

On CIC website there are 60 decisions listed. 9 of them are not digested here for the reasons printed elsewhere in this publication. Thus, digested cases number 52.

Playing cards have 52 cards (excluding Jokers). Our number of Digest of CIC decisions is also 52. But these are not playing cards, these are “paying” cards (decisions). On behalf of two NGOs and myself, we record our appreciation to Mr. Ambrose D’Cruz and Mr. Anil K. Asher for the pains taken by them to prepare this Digest of CIC’s Full Bench decisions. As noted by Mr. Shailesh Gandhi, the decisions of Full Bench of CIC shall have lot of persuasive value to the RTI applicants for submissions before PIO, FAA and the Commissioner. Each decision appears on fresh page.

Blanks at the end of many decisions may be used to update by the readers for making Notes. In case if any decision is confirmed or reversed by the courts subsequently, same may be noted.

We are confident that this publication will be useful not only to the RTI activists, Public Information Officers and First Appellate Authorities and various Public authorities, but also to Information Commissions in proper understanding of the various provisions of the Right to Information Act and quick disposal of the cases. Suggestions and opinions will be highly appreciated and duly acknowledged. We shall feel amply rewarded if the publication containing the digest of full bench decisions of the CIC succeeds in changing the mindset of Indian bureaucracy and help RTI activists in guiding the citizens in procuring the information. I am happy to note that both NGOs publishing this book have agreed to fix price to cover the cost incurred by them. I hope this book enhances the achievement of RTI objectives. R2i jai ho! Narayan Varma

Message of Shailesh Gandhi, Central Information Commissioner

PCGT and BCAS are two of the leading organizations which have consistently supported Right to Information. I congratulate them on coming out with a very useful publication for all RTI users. They are publishing the digest of full bench decisions of the Central Information Commission, which could prove a very useful reference for users and Information Commissioners. Decisions given by Information Commissions have great persuasive value. RTI users could use these to persuade PIOs, First Appellate Authorities and Commissions to part with information. Full bench decisions of the Commission are generally accepted when they define certain principles, and over the next few years we will have built enough precedence in favour of transparency. I am aware Shri Narayan Varma has put in a lot of his commitment and time to getting this project together. He is one of the stalwarts of the RTI movement. I wish this project all success and am sure we will see many more useful contributions from PCGT and BCAS to further RTI. Love Shailesh All my emails are in Public domain. Mera Bharat Mahaan…Nahi Hai, Per Yeh Dosh Mera Hai.

Message of Ratnakar Gaikwad, State Chief Information Commissioner

I am extremely happy to know that PCGT and BCAS Foundation are to release publication “Digest of FULL BENCH DECISIONS OF Central Information Commission” on 26th June, 2012. Undoubtedly, PCGT and BCAS Foundation have been doing pioneering work in the spread of RTI. Since, there are still many grey areas in RTI, it is in fitness of things that a publication containing Digest of FULL BENCH DECISIONS OF Central Information Commission is being released. This publication I am sure it will go a long way in throwing light and bringing clarity on many issues for various stake holders in the field of RTI. I would like to place record my high appreciation for the tremendous contribution being made by Shri Narayan Varma, and it is mainly due to his initiative that this project has materialized. I wish this unique initiative all the success and look forward to many such initiatives and contributions from PCGT and BCAS in the field to RTI. n

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Special Marriage Act

Introduction

The Special Marriage Act, 1954, as the name suggests is an Act to provide for a special mode of marriage. Any person in India can marry under this Act, irrespective of their religion or faith. They can also get married according to any religious ceremonies or customs which they prefer, but if they wish to be governered by the Act then they need to get their marriage registered under this Act. However, in addition to providing for a special form of marriage, this Act also changes certain conventional succession patterns. It provides a very important deviation from the generally understood testamentary and nontestamentary succession for people married under this Act. That is what makes this Act important.

Earlier, the Act also had provisions for registering the marriages of Indian citizens residing abroad. However, by virtue of the enactment of the Foreign Marriage Act, 1969, those provisions have been deleted from the Special Marriage Act.

Applicability of the Act

This Act applies to:

(a) Any person, irrespective of religion.

(b) Hindus, Buddhists, Jains, Sikhs, who get their marriage registered under the Act.

(d) Inter-caste marriages registered under the Act. For instance, a Hindu marrying a Muslim or a Parsi marrying a Jain. Conditions for Special Marriage A marriage can be registered under this Act irrespective of anything contrary contained in any other law relating to marriages.

The following conditions must be fulfilled:

(a) Neither party must have a living spouse. Thus, bigamy is not permissible.

(b) Each of the parties:(i) must be capable of giving a valid consent to the marriage and must be of sound mind. (ii) though capable of giving such valid consent, must not suffer from mental disorder which would render the person unfit for marriage and the protection of children. (iii) must not be subject to recurrent attacks of insanity.

(d) One of the important conditions for registering a marriage is that the parties must not be related to each other within degrees of prohibited relationship. The Act lays down a list of relatives in relation to a person who are treated as within degrees of prohibited relationship. For instance, a man and his mother’s sister’s daughter (i.e., his cousin sister) cannot get married. However, if a custom governing at least one of the parties permits a marriage between the degrees of prohibited relationship, then the marriage may be permissible. For instance, in some religions, a person is permitted to marry his/her cousin.
All the above conditions are cumulative.

Process of Special Marriage

Whoever intends to get his marriage solemnised under the Act, must first give a Notice to the appropriate Marriage Officer. The Marriage Officer shall record the Notice received by him and enter a copy of the same in the Marriage Notice Book maintained by him.

If any person has any objection to the marriage, then he can object only on grounds that one of the conditions (specified above) are not fulfilled.

The marriage can be solemnised after 30 days from the Notice. The Marriage Officer shall issue a Certificate of Marriage which is conclusive evidence that the marriage has been solemnised under the Act and that all formalities specified therein have been complied with.

Any marriage which has been performed by a ceremony in any other form, e.g., marriage between two Hindus or two Muslims, etc., may also be registered under the Act. Thus, already married couples can get their marriages registered under this Act. Once they get their marriage so registered, it would be deemed to be a marriage solemnised under the Act and all children born after the date of marriage ceremony shall be deemed to always have been legitimate children. The names of such children are also required to be entered into the Marriage Register Book. Effect of marriage on HUF Section 19 of the Act prescribes that any member of a Hindu Undivided Family who gets married under this Act automatically severs his ties with the HUF. Thus, if a Hindu, Buddhist, Sikh or Jain gets married under the Act, then he ceases to be a member of his HUF. He need not go in for a partition since the marriage itself severs his relationship with his family.

He cannot even subsequently raise a plea for partitioning the joint family property since by getting married under the Act he automatically gets separated from the HUF.

However, this provision of section 19 should be read subject to section 21-A of the Act. This section provides that where the marriage solemnised under this Act takes place between a person of Hindu, Buddhist, Sikh or Jaina religion with a person who is also of Hindu, Buddhist, Sikh or Jain religion, then section 19 shall not apply. Thus, the severance from an HUF would take place only if a Hindu marries a non- Hindu.

Succession to property

Section 21 of the Special Marriage Act is by far the most important provision. It changes the normal succession pattern laid down by law in case of any person whose marriage is registered under the Act. It states that the Act overrides the provisions of the Indian Succession Act, 1925 with respect to its application to members of certain communities. The succession to property of any person whose marriage is solemnised under the Act and to the property of any child of such marriage shall be regulated by the Indian Succession Act, 1925. Thus, it removes the bar imposed by the Indian Succession Act, 1925, not only for the couple married under the Act, but also for the children born out of such wedlock.

Wills by Muslims

The biggest impact of section 21 is in the case of Muslims. The Muslim Law prevents a Muslim from bequeathing his whole property in a will and allows him to make a will only qua 1/3rd of his estate. He can bequeath more than 1/3rd of his property if his heirs give consent to the same. However, the impact of a Muslim getting married under this Act is that the Indian Succession Act would apply to all cases of testamentary succession (i.e., through will) or intestate succession (i.e., without will) of such a Muslim. Hence, by merely solemnising or registering an already conducted marriage under this Act, a Muslim couple can bequeath their entire property in accordance with their wishes and not be bound by their personal Muslim Law restriction of 1/3rd or property.

This view has been upheld by the Bombay High Court in the case of Sayeeda Shakur Khan v. Sajid Phaniband, 2006 (5) Bom. C.R. 7. In this case, a Muslim couple got married as per Mohammedan Law. They once again got their marriage solemnised under the Act after a few years. On the death of the husband an issue arose amongst his heirs as to whether the succession should be as per Muslim Law? A single Judge of the Bombay High Court held that because the marriage of the deceased was registered under the Act, all succession would be as per the Indian Succession Act, 1925 and not as per the Muslim Law. It also held that such a person is entitled to bequeath his entire property and not just 1/3rd as per Muslim Law. This view was also held by the Bombay High Court in the case Bilquis Zakiuddin Bandookwala v. Shehnaz Shabbir Bandukwala, RP No. 41 of 2010 (Bom). It held that intestate succession of a Muslim marrying under the Act would be governed by sections 31-40 of the Indian Succession Act, whereas his testate succession would be governed by sections 57-58 of the Indian Succession Act.

Does a will of a Muslim require a probate?

Another question before the High Court in Sayeeda Shakur Khan v. Sajid Phaniband, 2006 (5) Bom. C.R. 7 was whether the will of such a Muslim requires a probate? It held that once the Indian Succession Act applies to a Muslim, then all the provisions of the Act would apply with equal force. Section 57 of this Act provides that any will by Hindus, Buddhists, Sikhs, Jains in the places within the local jurisdiction of the High Courts of Bombay, Calcutta and Madras requires a probate. However, since the Special Marriage Act removes all restrictions for people married under the Act, the High Court held that the will of a Muslim requires a probate.

However, in the case of Bilquis Zakiuddin Bandookwala v. Shehnaz Shabbir Bandukwala, R.P. No. 41 of 2010 (Bom.), another Single Judge of the Bombay High Court has taken an exactly contrary view after considering the earlier judgment. The Court referred to section 58 of the Indian Succession Act which states that section 57 requiring a probate shall not apply to property of any Mohammedan. It also referred to section 213 of the Indian Succession Act which provides that an executor or a legatee cannot establish any right in a Court for which probate is not granted. However, section 213(2) exempts Muslims from this section. The Judge held that section 21 of the Special Marriage Act and sections 57, 58, 213(2) of the Indian Succession Act must be read together and reconciled. Since section 213(2) exempts Muslims from probates, there is no need for a Muslim to get a probate even if he is married under the Special Marriage Act.

Thus, there is a judicial controversy over whether or not a Muslim’s will needs a probate. However, since the second decision is later and has considered the earlier decision, reliance may be placed upon the same.

Role of a CA/Auditor

Normally, a CA in his capacity as an Auditor is not directly involved with wills and succession issues. Nevertheless, an Auditor can provide value added services to his clients if he is aware of the law in this respect. He can be of great assistance to his clients in cases of succession planning and estate planning.

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Will — Evidence — Genuineness of will — Attesting witness — Requirement of law — Evidence Act, section 68.

[ Bahadur Singh v. Pooransingh & Ors., AIR 2012 Rajasthan 74]

In an application for grant of probate of the will, the issue arose as to genuineness of the will. The respondent Pooran Singh through his father and natural guardian Shishupal Singh had filed an application before the Trial Court seeking probate of the will executed by Joothar Singh in favour of Pooran Singh. It was submitted before the Court that so far as genuineness of the will was concerned, it created a suspicion, since most of the witnesses were illiterate, they did not know the contents of the will and that they being either relatives or acquaintance of the said Shishupal Singh, the possibility could not be denied that they had put their thumb marks below the said writing at the instance of Shishupal Singh. The Court observed that concerned witness Shri Tarachand in whose handwritings the said will was written had specifically stated in his evidence that he had written as per the direction of Joothar Singh and in presence of the witnesses Hari Singh, Raghunath Singh, Shishupal Singh and others.

He had also stated that after the writing was over, he had read over the same to Joothar Singh and thereafter Joothar Singh and the witnesses had put their thumb marks. Apart from the fact that other witnesses Hari Singh, Brij Singh, Raghunath Singh and Shishupal Singh have corroborated the said version, no such suggestion was put to them in their respective cross-examination that the thumb mark of Joothar Singh was obtained on plain paper and the writing thereon was made subsequently by Tarachand or Shishupal Singh and thumb marks of other witnesses were also put subsequently.

There is no requirement of law that the attesting witness should know the contents of the will. The only requirement is that the testator of the will should put his signature or thumb mark, as the case may be, in presence of two or more witnesses and that the said witnesses also should put their signatures in presence of the testator.

In the instant case, the said witness had stated that Joothar Singh had put his thumb mark below the said writing of the will and they had also put their respective thumb marks and signatures on the said will. Therefore, in absence of any substantial defence put up in the evidence by the defendants, the suspicion raised in the present appeal could not be said to be well founded.

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Will — Settlement deed or Will — Joint Will or Joint Mutual Will — Succession Act, 1925 — Section 2(4).

[ Narayani & Anr. v. Sreedharan, AIR 2012 Kerala 72]

The issue arose for consideration in the matter as to whether the document in question was a will or a settlement. The Court observed that if by execution of the document right is transferred in praesenti, it can only be treated as a settlement deed.

On the other hand, if no right is transferred in praesenti and by execution of deed, provision is made only for transfer of the right, after the death of either or both of the executants, it could only be treated as a will. Where two executants of the deed who were husband and wife and it was provided in the deed that it was jointly agreed by the executants that they shall jointly possess the properties and enjoy them jointly during their lifetime and that, on the death of any one of them the properties are still available, then the surviving executant shall possess the same absolutely with the right of alienation and that if on the death of the surviving executant, the properties are available, they shall go to their children, the deed was a will and not settlement deed. Though the deed provided that the properties shall ultimately go to the children, there was no transfer of right, in praesenti in their favour. So also though it was provided that on the death of one of the executants, properties shall go to the surviving executant, it is subject to the availability of the properties on the death of either of the executants. There was no transfer of the right of one of the executants, during his/her life time to the other.

Thus, there was no transfer of any right in praesenti on the other executants. The Court further observed that a joint will is a single testamentary instrument constituting or containing the will of two or more persons based on an agreement to make a conjoint will. Two or more persons can make a joint will, which, if properly executed by each so far as his property is concerned, is as much his will. That will comes into effect on his death. Joint wills are revocable at any time by either of the testators during the life of either or after the death of one of them by the survivor. If the joint will is executed in pursuance of an agreement or contract between the executants to dispose of their property to each other or to a third person in a particular mode or manner and reciprocal in their provisions, it is a joint and mutual will. In a mutual will there is an agreement that neither of the testator shall have power to revoke it.

The surviving testator receives benefits from the document under the mutual will and hence the survivor is not entitled to revoke the will after the death of the testator as the deceased had agreed in pursuance of the agreement and hope and trust that the will be adhered to by the survivor. As the will takes effect only on the death of the testator, both the testators during their lifetime together can revoke or modify the mutual will. But on the death of one of the testators, the surviving testator is not competent to revoke the mutual will.

Where recitals in the will showed that though it was executed jointly by the husband and wife, there was no mutual agreement between them to divest their individual right and to vest his or her right in the other and it only provides that during their lifetime the properties shall be jointly possessed and enjoyed together and that on the death of one of the executants, if the properties are available, they shall go to the surviving executant to be enjoyed absolutely with even the power of alienation, it would be a joint will and not joint and mutual will, because it was clear that there was no divesting of the rights of the other executant and vesting of that right on first executant. It was more so as the will did not provide that executants have no right of revocation.

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Transfer — Transfer for benefit of unborn person — Transfer of Property Act, section 13.

[ Sridhar & Anr. v. N. Revanna & Ors., AIR 2012 Karnataka 79]

The appellants were minors when they instituted the suit through their natural guardian, their paternal grandmother. The case of the plaintiffs was that the suit properties were the self-acquired properties of their great-grandfather, Muniswamappa. He had, by three separate registered gift deeds dated 5-6-1957, one executed in favour of his wife Akkayamma and two in favour of his grandson Revenna (R) defendant in the suit, gifted the suit properties. It was further stated that the properties were in the occupation of tenants. Muniswamappa and his wife Akkayamma expired in the year 1960 and 1961, respectively. It is the case of the plaintiffs that under the gift deeds, neither Akkayamma nor Revanna had any right to alienate the suit properties as they were conferred with a limited interest to enjoy the properties during their lifetime and thereafter the properties were to devolve on the plaintiffs. Notwithstanding this limitation, the defendant No. 1

— Revanna had proceeded to alienate the suit properties under sale deeds in favour of the defendant Nos. 2 to 5. It is the case of the plaintiffs that such alienations were void and did not bind the plaintiffs. It was their case that they had a vested right immediately on their birth. The first plaintiff was born prior to the said sale deeds. The plaintiffs, therefore, alleged that the defendant Nos. 2 to 5 in collusion with the tenants in occupation of the suit properties were seeking to occupy the properties and to illegally demolish the same and therefore the plaintiffs would be deprived of their legitimate right and had proceeded to file a civil suit.

The Court observed that where the suit property was bequeathed by virtue of a gift deed by the donor in favour of his grandson ‘R’ and his unborn brothers and thereafter property was to devolve upon the male children of the grandson ‘R’, it could be said that gift deed created a life interest in favour of ‘R’ and since he did not have a brother, the property absolutely devolved upon the male children of ‘R’ i.e., the plaintiffs. Further ‘R’ had only life interest in the suit property and he had no right to alienate the same.

As soon the plaintiffs were born, ‘R’ would lose the right to alienate the property as an interest is created in favour of the plaintiffs under the gift deeds which would be a prohibition for ‘R’ to alienate the property. The fact that ‘R’ had executed the sale deed in favour of the defendants would be immaterial. Plaintiffs were born prior to the sale transaction. If that be so, the property stood vested in the plaintiffs on their birth. Thus the property devolved on the plaintiffs immediately after the lifetime of ‘R’ since there were no other persons, who were capable of deriving such interest. The plea that ‘R’ and defendant purchasers had acted on the basis of the same would not absolve the defendants of their conduct as being illegal, since it was clearly against the law and there can be no estoppels against statute, nor can the defendants plead equity on that ground. The condition against the alienation imposed in the gift deed was not void. The plaintiffs consequently were held entitled to sale consideration received by ‘R’ under the sale deeds. The Court however declined the claim of the plaintiffs to recover the property.

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Tax on land and building — Towers for wireless communication system cannot be construed as building — Karnataka Municipal Corporation Act, (14 of 1977) section 2(1A).

[Wireless — TT Info Services Ltd. v. State of Karnataka & Ors., AIR 2012 (NOC) 180 (Kar.)]

The appellants herein who are the licensees under the provisions of the Telegraph Act, 1885 for providing telecommunication services to the general public had approached the Court by writ petitions. The petitioners had called in question the demands raised against the petitioners by the respective local bodies. The demands had been raised in respect of the erection of the base trans-receiver station. The contention on behalf of the petitioners therein was that the municipal authorities/local bodies have no authority to make physical demand in respect of the telecommunication towers installed.

The Court observed that the ‘structure’ which is the subject-matter in the instant case is considered, it is a metal pole or tower to which the antenna is attached and has the backup system at its base. No doubt, it would have to be fastened to the roof of the building or embedded to the land with concrete base, nuts, bolts and the height of the pole may vary from case to case. Such structure though may suggest an element of permanency, it does not belong to the genus of the type previously mentioned in the section defining the building. If the phrase used was ‘other structures’, the term would have been wider to include other structures without reference to the first part of the section. But when it states ‘other such structure’, the structure in question will have to be of nature of the items mentioned in the first part of the section. Therefore, the tower/post which is not relatable to the items mentioned in the first part cannot be construed as a building to bring it within the sweep of section 94 of the Karnataka Municipalities Act 1964, section 103(b) (i) of the Karnataka Municipal Corporations Act, 1976 and section 64 of the Karnataka Panchayath Raj Act, 1993.

The above provisions indicate that apart from the other specific items for which power to tax has been provided, the power is also to impose tax on land and building alone. In fact, in the Karnataka Municipalities Act, 1964, the provision for tax on advertisements is exhaustive and includes ‘post’ and ‘structure’ and the term ‘structure’ has been explained further, but it only relates to advertisement. This in fact indicates that the telecommunication structure has not been indicated separately, nor does it get included in the definition of ‘building’. Therefore, the Court held that the telecommunication tower/post was not liable to tax under the existing power available to impose tax on ‘land’ and ‘buildings’.

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Cyber warfare — the next level

About this write-up

This write-up is about a new type of worm/malware, which was in the news recently. The worm called Flamer attracted a lot of hype and media attention given the speculation regarding its likely impact. This write-up is an attempt to cull out some key takeaways for benefit of the readers.

Background

Cyberspace is no longer a benign place to surf. Viruses are getting increasingly nasty and complex over the years. But while worms were traditionally being used by hackers and cybercriminals either to display their prowess or steal information and money, it appears now that even nation–states are backing such crimes to target countries – a trend popularly known as cyber espionage and cyber warfare.

Cyber warfare – the next level – Flamer worm

Circa 2010, news reports started appearing about a new type of a worm i.e., Stuxnet1. What was different about this worm was that it was the first of its kind i.e., the level of complexity, its apparent motive and the intended victims were not the ‘usual’ businesses or gullible individuals. On the contrary, experts believed that this was a ‘first’ – a worm written by a sovereign nation with the sole purpose of disrupting infrastructure facilities in another territory. It was also a ‘first’ because the worm was no longer attacking the zeros and ones (computer code), this time it was attacking the devices that were controlled by these zeros and ones – with a view to disrupt their functionality. There was the nagging feeling . . . . . . the type you get when somebody really bad/capable of doing nasty thing says . . . . I’ll be back (like Arnold Schwarzenegger in Terminator). It was (painfully) obvious that Stuxnet wasn’t the last word on the topic and things were likely to heat up . . . . very soon . . . . Coming back to the present day, that nagging feeling has become a reality – Stuxnet appeared in 2010, Duqu surfaced in 2011. Sometime around May 20122, security experts started issuing warnings about the ‘Flamer’ worm aka W32. Flamer or sKyWIper.

Threat assessment

A senior analyst at a leading security firm, sharing his view on the subject reveals that this is the most sophisticated threat he has ever seen. The same security firm had undertaken a detailed analysis of the ground-breaking Stuxnet virus, which ‘purportedly’ targeted Iran’s nuclear enrichment facilities two years ago, sending some of their centrifuges spinning out of control. The preliminary results shared by the senior analyst suggested that Flamer appeared to be even more complex than Stuxnet, and that it was an incredibly clever, comprehensive ‘spying programme’.

Grapevine reports suggest, “Flamer is a backdoor worm that goes looking for very specific information. It scrapes a mass of information from any infected machine and then sends it, without the user having any idea what is going on. The amount of information it can send is huge”.

Components identified3

A number of components of the threat have been retrieved and are currently being analysed. Several of the components have been written in such a way that they do not appear overtly malicious. Some of the components identified as malicious are:
• advnetcfg.ocx (0.6MB) (backdoor component)
• ccalc32.sys (RCA Encrypted Config file)
• mssecmgr.sys (6MB) (main compression component, LUA interpreter, SHH, SQL library)
• msglu32.ocx (1.6 MB) (Steals data from images and documents
• boot32drv.sys (~1kb) (Config file)
• nteps32.ocx (0.8MB) (performs screen capture)

This time it is different The one thing that everyone is sure about is that Stuxnet, Duqu and Flamer are definitely in another class than your typical spyware or fake antivirus threat. Experts universally agree that this complex software required a coding team and could not be achieved by a lone wolf coder. The complexity of the task has led many to presume only a nation-state would have the resources. Just as is being speculated in case of Stuxnet. It is interesting to note that unlike Duqu, Stuxnet and Flamer have the ability to infect systems via USB key, thus allowing them entry into facilities that are isolated from the Internet. They also use the same printer-driver vulnerability to spread within the local network. While all three worms are similar in the sense that all three are seriously modular (i.e., in a way that lets their command and control servers add or update functionality at any time), Flamer is definitely a step up.

Here is why: According to Kaspersky researchers, a Stuxnet infestation takes just 500KB of space, as against this, Flamer is an out-and-out giant at 20MB. Part of Flamer’s size involves the use of many thirdparty code libraries, prefab modules that handle tasks like managing databases and interpreting script code. Neither Stuxnet nor Duqu rely on third-party modules.

Given its size, Flamer is smart enough to mask its download impact. It is downloaded in multiple sessions. This is done to avoid giving itself away. In this respect, it is far more intelligent than its predecessors.

Stuxnet and Duqu used stolen digital signatures to fool antivirus softwares. Unlike these, Flamer doesn’t use a digital signature. Instead, Flamer uses some unique techniques for self-protection, chief among them is the ability to recognize over 100 antivirus installations and modify its behaviour accordingly. It uses five different encryption methods, three different compression techniques, at least five different file formats (and some proprietary formats too) and special code injection techniques.

Although Flamer is not concealed by a rootkit, it uses a series of tricks to stay hidden and stealthily export stolen data. One of its most amazing capabilities is the creation of a file on the USB stick simply named ‘.’ (dot). Even if the short name for this file is HUB001.DAT, the long name is set to ‘.’, which is interpreted by Windows as the current directory. This makes the OS unable to read the contents of the file or even display it. A closer look inside the file reveals that it is encrypted with a substitution algorithm.

Flamer is definitely complex. In one of the earlier reports on this threat, a security expert noted that it has at least 20 modules, most of which are still being investigated. Another expert remarked that one of its smaller modules is over 70,000 lines of C decompiled code and contains over 170 encrypted strings. As for what it does, you might better ask what doesn’t it do. Just about any kind of espionage you can imagine is handled by one of Flamer’s modules.

Flamer has very advanced functionality to steal information and to propagate. Using this toolkit, multiple exploits and propagation methods can be freely configured by the attackers. Information gathering from a large network of infected computers was never crafted as carefully as has been done in Flamer.

Stuxnet relied on an unprecedented four zero-day attacks to penetrate systems and Duqu managed with just one zero-day attack. Flamer didn’t use any zero-day attacks.

Stuxnet and Duqu infestations automatically self-destructed after a set time; Flamer can self-destruct, but only upon receiving the auto-destruct code from its masters.

It’s worth noting that Flamer doesn’t necessarily do any of the things described above, not even replicate to other systems, unless it’s told to do so by its Command and Control servers. This combined with the fact that it uses many standard commercial modules has helped it get past behaviour and reputation-based detection systems (i.e., our commonly used antivirus systems).

It’s a live program that communicates back to its master. It asks, where should I go? What should I do now?

Experts say that Flamer is most likely capable to use all of the computers’ functionalities for its goals. It covers all major possibilities to gather intelligence, including keyboard, screen, micro-phone, storage devices, network, wifi, Bluetooth, USB and system processes.

To state simply, once a system is infected, Flamer begins a complex set of operations, including sniffing the network traffic, taking screenshots, recording audio conversations, intercepting the keyboard, and so on so forth.

Sounds just like a cold war (fiction) scenario — where highly trained, deep cover ‘sleeper’ agents were inserted deep inside enemy territory to attack the enemy from within. Takes me back to some of my favourite movies……..Salt, Killers, The impossible spy…….

Readers who are interested in more technical information may also look up the following:

http://www.symantec.com/security_respons/writeup.jsp?docid=2012-053007-0702-99&om_ rssid=sr-mixed30days

http://blogs.mcafee.com/mcafee-labs/jumping-in-to-the-flames-of-skywiper

http://www.mcafee.com/threat-intelligence/mal-ware/default.aspx?id=1195098

h t t p : / / w w w . f – s e c u r e . c o m / w e b l o g / archives/00002371.html

http://www.kaspersky.com/about/news/virus/2012/Kaspersky_Lab_and_ITU_Research_ Reveals_New_Advanced_Cyber_Threat

http://www.mcafee.com/us/about/skywiper. aspx

http://www.crysys.hu/skywiper/skywiper.pdf4

It would be a cliché to say, that this is not the last we have heard about this worm or that cyber warfare is now gaining momentum and therefore expect to read and hear more on this topic.

1. Read Cyber warfare – the next level – BCAJ October 2010

2. Unconfirmed reports suggest
Flamer was first reported as early as 2007

3. Source: www.symantec.com

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Succession — Female Hindu dying intestate — Heirs related to an intestate by full blood shall be preferred to heir related to half blood — Hindu Succession Act, 1956, sections 15 and 18.

[Heera Lal v. Smt. Tijiabai (since deceased) by L/ Rs, AIR 2012 (NOC) 189 (M.P)]

One Dwarka Prasad and plaintiffs Smt. Tijiabai and Smt. Dipiyabai were born out of the wedlock from the first wife of Ramratan. From the second wife of Ramratan the defendant No. 1 Heera Lal (step brother) was born, the defendant No. 2 Vinod Kumar is the son of defendant No. 1 Heera Lal.

The suit of the plaintiffs which was filed long back on 5-12-1985 is that the suit property was owned by Dwarka Prasad who had died in the year 1938 and after his death his widow Kalawati possessed the suit property and on coming into force of the Hindu Succession Act, 1956 Kalawati became the absolute owner. No child was born out of wedlock of Dwarka and Kalawati and after the death of Kalawati, the plaintiffs who are the sisters of Dwarka Prasad became Bhumiswami of the suit property because the property in dispute devolved on them. Further, it had been pleaded by the plaintiffs that the defendant Heeralal was making yearly payment of the agricultural produce, but the same had been stopped by him with effect from 1978. Thereafter the plaintiffs submitted necessary application to get their names mutated in the Revenue record to which the objections were submitted by the defendants 1 and 2. However, the Revenue Court directed to mutate the names of plaintiffs in the Revenue record which was assailed by defendants by filing appeal, but it was also dismissed. Hence a suit for possession had been filed by the plaintiffs.

The Court observed that the disputed property fell in the share of Dwarka Prasad in the family partition which took place during lifetime of their father Ramratan. Thus, Dwarka Prasad was the sole owner of the suit property till he died in the year 1938.

The plaintiffs are the real sisters of Dwarka Prasad and the defendant No. 1 Heera Lal is his step-brother. Since admittedly Kalawati (widow of Dwarka Prasad) having died leaving behind no issue, according to section 16 of the Act of 1956, her right would devolve under Rule 1 among the heirs specified in s.s (1) of section 15. Since Kalawati and Dwarka Prasad did not have any sons, daughters including children of any predeced son or daughter and Dwarka Prasad already having died during the lifetime of Kalawati, the right in the disputed property would devolve in the heirs according to Rule 2 of section 16. But, in the present case there is no heir in terms of Rule 2, hence the devolution of property would take place in accordance to Rule 3 of section 16. According to this rule, the property of the intestate female Hindu would devolve upon the heirs referred to in clauses (b), (d) and (e) of s.s (1) and s.s (2) of section 15 of the Act of 1956, which shall be in the same order and according to the same rules as would have applied if the property had been the father’s or the mother’s or the husband’s, as the case may be, and such person had died intestate in respect thereof immediately after the intestate’s death.

The property in dispute was of Dwarka Prasad and Kalawati inherited the disputed property from her husband and since there is no heir of Kalawati mentioned in the category 15(1)(a) of the Act of 1956, the property would devolve upon the heirs of her husband. If section 16(3) and section 15(1) (b) and class II of the Schedule to section 8 are kept in juxtaposition to each other and are read conjointly on the touchstone and anvil of the settled position of the law, the plaintiffs being the real sisters of Dwarka Prasad, the entire property in dispute of Kalawati would devolve on them.

It is true that the defendant No. 1 Heera Lal is the step-brother of Kalawati’s husband Dwarka Prasad but he is half blood brother of plaintiffs. Section 18 of the Act of 1956 provides that the heir of full blood have preferential right over half blood. According to this section the heirs related to an intestate by full blood shall be preferred to heir related by half blood, if the nature of relationship is the same in every other respect and therefore the plaintiffs being the real sisters of Dwarka Prasad have preferential right over the defendant No. 1 Heera Lal who is the heir related by half blood of Dwarka Prasad.

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Revenue Recognition

Revenue has been defined as income that arises in
the ordinary course of activities of the entity i.e., from sale of goods
or services. Ind AS 18 on Revenue Recognition prescribes certain
general principles for revenue recognition from transactions involving
sale of goods, rendering of services and the use of entity’s assets that
generate fees such as royalties, dividend and interest. Revenue is
recognised when it is probable that economic benefits of the transaction
will flow to an entity and costs are identifiable and can be measured
reliably. In this article, we aim to understand certain key principles
of revenue recognition prescribed under Ind AS 18 in case of multiple
element arrangements, customer loyalty programmes, transfer of assets
from customers and sale on extended credit terms by way of examples.
Multiple deliverable contracts:

Companies at times offer a broad range
of products and services to its customers. These arrangements are
sometimes negotiated with the customer through a single contract which
contains multiple deliverables that are separately identifiable and have
stand-alone value to the customer, for example an automobile company
sells vehicles to a customer along with an optional extended warranty of
three years for a composite price. In accounting for revenue in case of
multiple deliverable arrangements the company should identify
‘separately identifiable components’ for which revenue is recognised at
varied points of time as per the contract. The consideration for these
separate elements should be allocated on a fair value basis using either
the ‘Fair value method’ or the ‘Relative fair value method’. Under the
fair value method, the revenue equivalent to the fair value of all
undelivered contract is deferred, and the difference between total
contract price and deferred revenue is recognised as revenue on
delivered components. Under the relative fair value method, the total
contract price is allocated to each contract deliverable in the ratio of
their fair values as a percentage to the aggregate fair values of all
individual contract deliverables.

Let us consider the concept of
multiple deliverable arrangements by way of an example — Example 1:
Multiple deliverables A company sells a vehicle along with a contract
for an optional three-year extended warranty bundled along with it for a
contract value of INR 570,000. The fair value of the extended warranty
services is INR 60,000. The fair value of the vehicle without the
extended warranty services is INR 540,000. The entire consideration is
required to be paid upfront.
Relative fair value method

Step 1: The above contract can be broken into the following identifiable components:

Step 2: Allocation of revenue based on their relative fair values — Contract value: INR 570,000

It
may be noted here that the aggregate fair value of delivered components
is INR 600,000 while the aggregate contract price is INR 570,000. As
such, there is a discount of 5% (i.e., 30,000/ 600,000) on the overall
contract as compared to its market price. Under the relative fair value
method, this discount of 5% is applied to each deliverable for revenue
recognition purposes. As such, the consideration allocated to vehicle is
INR 513,000 (i.e., 95% of INR 540,000) and that allocated to extended
warranty is INR 57,000 (i.e., 95% of INR 60,000).

Fair value method

It
may be noted here that under the fair value method, the consideration
allocated to the undelivered component is its entire fair value and the
remaining contract price is allocated to the delivered component. As
such, the consideration allocated to the extended warranty (i.e.,
undelivered component) shall be INR 60,000 while the remaining
consideration of INR 510,000 (i.e., INR 570,000 — INR 60,000) shall be
allocated to the sale of vehicle.

Customer loyalty programmes:

A
range of businesses, such as supermarkets, retailers, airlines,
telecommunication operators, credit card providers and hotels offer
customer loyalty programmes, which comprise of loyalty points or ‘award
credits’. Such award credits or loyalty points may be linked to
individual purchases or groups of purchases, or to continued custom over
a specified period. The customer usually redeems these award credits
for free or discounted goods or services.

For a programme to be accounted as a customer loyalty programme, it needs to contain two essential features:

— the entity (seller) grants award credits to a customer as part of a sales transaction; and

—
subject to meeting any other conditions, the customer can redeem the
award credits for free or discounted goods or services in the future.

For
instance, a customer receives a complimentary product with every tenth
product bought from the entity (seller). As the customer purchases each
of the first ten products, they are earning the right to receive a free
good in the future, i.e., each sales transaction earns the customer
credits that go towards free goods in the future.

In accounting
for customer loyalty programmes the company estimates the fair value of
the award credits, generated through its loyalty programmes. The
consideration (for goods sold on which award credits are issued) is
allocated to the award credits based on either the fair value method or
the relative fair value method (as discussed above). Revenue is
recognised for the delivered goods based on the sale consideration
allocated to the goods sold while the sale consideration allocated to
the award credits are recognised when the award credits are redeemed.

Let us understand the above principles with the help of an example —

Example
2: Customer loyalty programmes Company Q runs a loyalty scheme that
rewards customers’ spend at its stores. As per the scheme, customers are
granted 10 award credits for every INR 100 spent in Q’s store.
Customers can redeem their accumulated points towards a discount on the
price of a new product in Q’s stores. The loyalty points are valid for
three years.

During 2012, Q had sales of INR 1,000,000 and
accordingly granted 100,000 loyalty points to its customers. The
management expected only 80,000 loyalty points to be redeemed and that
the cost per point redeemed would be INR 0.8 per point. The management
has adopted fair value method for allocation of consideration to the
multiple deliverables i.e., initial sale of goods and award credits. Q
records the following entries in 2012 in relation to the loyalty points
granted in 2012:

Redemption of award credits in Year 1

During
2012, 30,000 points were redeemed, and at the end of the reporting
period, management still expected a total of 80,000 points to be
redeemed, i.e., a further 50,000 points will be redeemed over the next
two years.

At the end of the reporting period, the balance of
the deferred revenue is INR 40,000 [(50,000/ 80,000) x 64,000].
Therefore, the difference in the deferred revenue balance is recognised
as revenue for the year.

Redemption in year 2: change in estimates

During 2013, 35,000 points are redeemed, and at the end of the year management expects a total of 85,000 points to be redeemed, i.e., an increase of 5,000 over the original estimate. The redemption rate is revised based on the new total expected redemptions. As such, at the end of year 2, 20,000 award credits would remain outstanding i.e., 85,000 – 30,000 – 35,000, after considering the revised total award credits to be utilised and actual redemption of award credits.

At the end of the year, the balance of deferred revenue for 20,000 loyalty points shall be INR 15,059 [(20,000/85,000) x 64,000] which shall represent the closing balance in deferred revenue account. The differential amount in deferred rev-enue account of INR 24,941 (i.e., 64,000 – 24,000 – 15,059) shall be transferred to revenue. Q records the following entry in 2013 in relation to the loyalty points granted in 2012:

Alternatively, on a cumulative basis INR 48,941 is released from deferred revenue account to revenue, which can be calculated as (65,000/85,000) x 64,000.

The remaining balance in deferred revenue account of INR 15,059 shall be recognised as revenue in the year 2014.

Transfer of assets from customers:

Ind AS 18 provides guidance on transfer of property, plant and equipment (or cash for its acquisition) for entities that receive such assets from their customers in return for ongoing supply of goods or services. As such, the principles contained hereunder do not apply to gratuitous transfers of assets i.e., transfer of assets without consideration. Further, the guidance also cannot be applied to transfers that are in the nature of government grants or those covered under the service concession arrangements.

If it is concluded that the company has obtained control over the asset transferred by the customer, the company should recognise (debit) the transferred asset as its own asset (though it may not have the ownership). The corresponding impact of the transfer should be recognised as either revenue or deferred revenue, depending upon the obligations assumed by the company in lieu of the transferred asset.

Timing of revenue recognition

In determining the timing of revenue recognition, the entity (recipient) considers:

what performance obligations it has as a result of receiving the customer contribution;

whether these performance obligations should be separated for revenue recognition purposes; and

when revenue related to each separately identifiable performance obligation should be recognised.

The accounting for transfer of assets from customers involves an analysis whether the control over the transferred asset is obtained by the company and if the control is transferred the asset will be recognised in the company’s balance sheet. The company is required to determine the obligations assumed by the company in lieu of the transfer of control over the transferred asset and if the above-mentioned obligations are in the nature of ongoing services, then revenue attributable to those obligations is deferred and recognised as the underlying services are rendered and obligations fulfilled where as to the extent that the obligations are fulfilled at the inception of the contract, revenue shall be recognised upfront. The assets transferred by the customer shall be depreciated over the useful life of the asset.

Let us understand the above principles with the help of an example

Example 3: Transfer of assets from customers

Company M enters into an agreement with Company N to outsource some of its manufacturing process. As part of the arrangement, Company M will transfer its machinery to Company N.

Based on a report submitted by independent valuer, the fair value of assets transferred is INR 100,000. Initially, Company N must use the equipment to provide the service required by the outsourcing agreement. Company N is responsible for maintaining the equipment and replacing it when it decides to do so. The useful life of the equipment is 5 years. The outsourcing agreement requires service to be provided for 5 years for a fixed price of INR 30,000 per year, which is lower than the price that Company N would have charged if the equipment had not been transferred. In such case the fixed price would have been INR 50,000 per annum.

Pursuant to a detailed analysis, Company N determines that the control over the equipment is transferred in its favour. Hence, Company N would have to initially recognise the asset at its fair value in accordance with Ind AS 16. Further, Company N would also have to recognise the revenue over the period of the services performed i.e., over 5 years. (Refer Table 1)

Table 1: Recognition of Revenue over Period
of Service Performed

INR

Particulars

Year 1

Year 2

Year 3

Year 4

Year
5

Asset A/c

Dr.

100,000

To Deferred Revenue A/c

(100,000)

(Being transfer of control over the assets from
customer in lieu of rendering ongoing services)

Bank A/c

Dr.

30,000

Deferred Revenue A/c

Dr.

20,000

(100,000/5)

To Revenue

(50,000)

(Being revenue recognised)

Depreciation A/c

Dr.

20,000

To Accumulated Depreciation

(20,000)

(Being depreciation provided over 5 years)

Extended credit terms:
When payment for goods sold or services rendered is deferred beyond the normal credit terms, and the company does not charge a market interest rate, the arrangement effectively constitutes a sale with financing arrangement and revenue should be recognised at the current cash price. The length of normal credit terms depends on the industry and economic environment in which the company operates.

Example 4: Sale on extended credit terms

Company K sells equipment to Company L for a total consideration of INR 1,000,000. The payment for this sale is deferred over a period of five years with regular payments of INR 200,000 each year to be made by Company L to Company K. No interest is charged by Company K to Company L and the normal credit terms of Company K are four months from the date of sale. The current cash price for the goods sold is INR 758,157. Considering the current cash price and the five annual payments of INR 200,000, the effective interest rate on the transaction works out to 10% p.a.

The sale by Company K to Company L is on deferred payment basis and beyond its normal credit terms. The total consideration under the terms of the arrangement is INR 1,000,000. However, revenue should be recognised at the current cash price i.e., the price at which the goods will be sold without such extended credit terms. The difference between the current cash price and the total consideration should be recognised as finance income over the extended credit period.

Accordingly, the revenue on the date of the transaction shall be recognised at its current cash price of INR 758,157. The difference INR 241,843 (i.e., INR 1,000,000 – INR 758,157) will be recognised as finance income over the period of the contract using the effective interest rate method.

The recognition of finance income based on effective interest rate of 10% is computed as shown in Table 2

Table 2: Recognition of Finance Income based on Effective Interest

Year

Opening Value

Interest

Payments

Closing Value

(A)

(B) = (A * 10%)

(C)

(D)=(A+B+C)

Year 1

7,58,157

75,816

-2,00,000

6,33,973

Year 2

6,33,973

63,397

-2,00,000

4,97,370

Year 3

4,97,370

49,737

-2,00,000

3,47,107

Year 4

3,47,107

34,711

-2,00,000

1,81,818

Year 5

1,81,818

18,182

-2,00,000

Total interest

241,843

Journal entries

INR

Particulars

Year 1

Year 2

Year 3

Year 4

Year 5

Debtors A/c

Dr.

758,157

To Sales A/c

(758,157)

(Being revenue recognised)

Debtor A/c

Dr.

75,816

63,397

49,737

34,711

18,182

To Finance Income

(75,816)

(63,397)

(49,737)

(34,711)

(18,182)

(Being finance income
recognised over the extended credit period)

Bank A/c

Dr.

200,000

To Debtor A/c

(200,000)

(Being amount collected from debtors)

Summary:

Revenue recognition principles prescribed under Ind AS 18 and discussed in this article vary significantly from the currently applicable AS 9 – Revenue Recognition. The application of these principles will require significant judgment in several aspects while preparing an entity’s financial statement.

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Deduction u/s.80-IB(10): Income from developing and building housing project: Land not owned by assessee: All other conditions satisfied: Assessee entitled to deduction u/s.80-IB(10).

35. Deduction u/s.80-IB(10): Income from developing and building housing project: Land not owned by assessee: All other conditions satisfied: Assessee entitled to deduction u/s.80-IB(10).

[CIT v. Radhe Developers, 249 CTR 393 (Guj.)]

The assessee entered into a development agreement with the owners of the land for a housing project. The assessee claimed deduction u/s.80- IB(10) of the Income-tax Act, 1961. The Assessing Officer rejected the claim on the ground that the assessee was not the owner of the land. The Tribunal allowed the assessee’s claim. The Tribunal held that for deduction u/s.80-IB(10) of the Act it is not necessary that the assessee must be the owner of the land. The Tribunal also held that even otherwise looking to the provisions of section 2(47) of the Act, r/w section 53A of the Transfer of the Property Act, by virtue of the development agreement and the agreement to sell, the assessee had, for the purpose of incometax, become the owner of the land.

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

“Terms and conditions of development agreement showed that assessee had taken full responsibility for execution of the projects and the resultant profits or loss belonged to the assessee in entirety and all other conditions of section 80-IB(10) being satisfied, deduction u/s.80-IB(10) could not be disallowed to assessee on the ground that the land under development projects was not owned by the assessee and in some cases development permission was granted in the name of original land owners.”

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Charitable purpose: Sections 2(15) and 80G(5): Recognition u/s.80G(5): Objects of assessee-trust include conduct of periodical meetings on professional subjects and publishing and selling books/booklets on professional subjects: Activities are charitable in nature and cannot be construed to be in the nature of trade or commerce or business: Assessee is entitled to approval u/s.80G(5).

34. Charitable purpose: Sections 2(15) and 80G(5): Recognition u/s.80G(5): Objects of assessee-trust include conduct of periodical meetings on professional subjects and publishing and selling books/booklets on professional subjects: Activities are charitable in nature and cannot be construed to be in the nature of trade or commerce or business: Assessee is entitled to approval u/s.80G(5).

[DI v. The Chartered Accountants Study Circle, 250 CTR 70 (Mad.)

The objects of the assessee-trust included conduct of periodical meetings on professional subjects, publishing books, booklets, etc., on professional subjects i.e., bank audit, tax audit, etc., and selling the same. The assessee filed an application in Form 10G to the Director of IT (Exemption), Chennai for grant of renewal u/s.80G of the Income-tax Act, 1961. The application was rejected on the ground that the assessee was publishing and selling books of professional interest to be used as a reference material by the general public as well as the professionals in respect of bank audit, tax audit, etc., and its activities are commercial in nature and will fall within the amended provision of section 2(15) of the Act. The Tribunal allowed the assessee’s appeal.

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

“Activities of the assessee-trust in publishing and selling books of professional interest which are meant to be used as reference material by the general public as well as the professionals in respect of bank audit, tax audit, etc., cannot be construed as commercial activities and, therefore, the assessee-trust was entitled to approval u/s.80G(5) of the Act.”

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Capital gain: Computation: Sections 48 and 49, and section 7 of the Wealth-tax Act, 1957: A.Y. 1992-93: Cost with reference to certain modes of acquisition: Sale of jewellery inherited from son: Fair market value of jewellery as on 1-4-1974 should be arrived at by reverse indexation, from fair market value as on 31-3-1989 on basis of which Revenue had imposed Wealth Tax upon assessee: Reverse indexation is not to be done from date of sale held in December 1991 based on sale price.

33. Capital gain: Computation: Sections 48 and 49, and section 7 of the Wealth-tax Act, 1957: A.Y. 1992-93: Cost with reference to certain modes of acquisition: Sale of jewellery inherited from son: Fair market value of jewellery as on 1-4-1974 should be arrived at by reverse indexation, from fair market value as on 31-3-1989 on basis of which Revenue had imposed Wealth Tax upon assessee: Reverse indexation is not to be done from date of sale held in December 1991 based on sale price.

[Deceased Shantadevi Gaekwad v. Dy. CIT, (2012) 22 Taxman.com 30 (Guj.)]

In the month of December, 1991, the assessee had sold certain jewellery which she inherited from her son. The assessee herself gave a declaration of fair market value of the selfsame jewellery as on 31-3-1989 based on the report of a registered valuer for the purpose of the Wealth-tax Act and the Assessing Officer had accepted the said valuation. Further the assessee for calculation of the capital gains arising from sale of the aforesaid jewellery worked out the fair market value of the jewellery as on 1-4-1974 by following the method of reverse indexation. She adopted the base as the fair market value of the jewellery worked out as on 31-3-1989 on the basis of valuation done by the registered valuer. The Tribunal held that fair market value of the jewellery as on 1-4-1974 should be arrived at by reverse indexation from the date of sale held in December, 1991 based on the sale price and not from the fair market value as on 31-3-1989.

On appeal by the assessee, the Gujarat High Court reversed the decision of the Tribunal and held as under:

“(i) According to provisions contained in sections 48 and 49, 1-4-1974 should be treated to be the date in the instant case on which the jewellery was deemed to have been acquired by the assessee. There is no dispute that although the jewellery was transferred in the month of December, 1991, the assessee herself gave a declaration of fair market value of the selfsame jewellery as on 31-3-1989 based on the report of a registered valuer for the purpose of the Wealth-tax Act as required under the said Act. It is admitted position that the Assessing Officer has accepted the said valuation and has not disputed the same for the purpose of the Wealth-tax Act.

(ii) There is also no dispute that both the assessee and the Revenue agreed before the Tribunal that the method of reverse indexation should be the appropriate one for the purpose of ascertaining the fair market valuation of the jewellery as on 1-4-1974.

(iii) There is substance in the contention of the assessee that the Revenue having accepted the valuation of the same jewellery given by her as on 31-3-1989 as correct valuation for the purpose of the Wealth-tax Act, there is no reason why the same valuation should not be treated to be a reliable base for the purpose of computing the capital gain under the Income-tax Act by the process of reverse indexation. There is no reason to disbelieve the valuation given by the assessee under the Wealth-tax Act as on 31-3-1989 based on the valuation assessed by a registered valuer in terms of the said statute. The Revenue having accepted the said valuation for the purpose of the Wealth-tax Act is precluded from disputing the correctness of the selfsame valuation for the purpose of assessment of capital gain, as the factor of ‘fair market value’ is decisive for the purpose of both the Wealth-tax Act and in ascertaining the cost of acquisition under the Income-tax Act.

(iv) Therefore, there was no justification for disbelieving the valuation of the selfsame jewellery given by the assessee as on 31-3-1989 for the purpose of Wealth-tax Act.

(v) Therefore, the order passed by the Tribunal was liable to be set aside. The Assessing Officer was to be directed to recalculate the capital gain by adopting reverse indexation based on valuation of jewellery given by the assessee as on 31-3-1989 for the purpose of Wealth-tax Act.”

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(i) On facts, lump-sum turn-key contract was a composite indivisible contract; and hence, the consortium was to be taxed as an AOP. (ii) As two consortium members had come together for gain, composite contract was awarded to the consortium (and not to individual members), an AOP was formed and mere internal division of responsibility or separate payment cannot undo the AOP. (iii) Work done outside India and supply of equipment and spares outside India were inextricably linked with the work of c<

16. Linde AG, In re
(2012) 19 Taxmann.com 238
(AAR — New Delhi)
Section 2(31) of Income-tax Act Dated: 20-3-2012
Before P. K. Balasubramanyan (Chairman) & V. K. Shridhar (Member)

On facts, lump-sum turn-key contract was a composite indivisible contract; and hence, the consortium was to be taxed as an AOP.

As two consortium members had come together for gain, composite contract was awarded to the consortium (and not to individual members), an AOP was formed and mere internal division of responsibility or separate payment cannot undo the AOP.

Work done outside India and supply of equipment and spares outside India were inextricably linked with the work of consortium. Since the contract was indivisible and awarded to an AOP, payment receivable therefore was taxable in India.

Facts:

ONGC issued a tender for supply of a plant on lumpsum turn-key basis. The bidders were required to provide services for design, engineering, procurement, construction, installation, commissioning and handing over of the plant on turn-key basis. Two foreign companies entered into an MOU to bid jointly as a consortium. Thereafter, they also executed an ‘Internal Consortium Agreement’. The bid of the consortium was accepted by ONGC. Pursuant to the bid, ONGC entered into contract with the consortium. In terms of contract, the consortium had various rights and was subject to various obligations. The contract did not assign any individual role to the members of the consortium and the payments were also to be made to the consortium.

The applicant contended as follows. The agreement entered into by the members was a divisible contract and the respective scope of work, obligations and consideration of each member were clearly identified.

he obligations of the applicant were divisible in three parts: (i) supply of design, engineering of equipment, materials; (ii) fabrication, procurement and supply of equipment and material outside India; and (iii) supervision of installation, testing and commissioning of the equipment, materials at site in India.

The offshore activities are not taxable in India.

In terms of Article 5(2)(i) of India-Germany DTAA, PE would come into existence only after the equipment reached site in India.

Relying on Ishikawajima-Harima Heavy Industries v. Director of IT, (2007) 288 ITR 408 (SC), the contract should be split into separate parts and obligations of each consortium member should be considered independent from that of the other consortium member. Further, in terms of CIT v. Hyundai Heavy Industries Co. Ltd., (2007) 291 ITR 482 (SC), income from offshore active were not taxable in India. The tax authority contended as follows.

When the rights and obligations under the contract were that of the consortium, splitting up of a lump-sum turn-key contract only for taxation purpose would be artificial, particularly, if Explanation 2 to section 9(2) of Income-tax Act (which was inserted with retrospective effect) is considered.

The responsibility for establishing the project was that of the consortium. The consortium remained liable even after commissioning. Accordingly, consortium should be treated as an AOP.

The contract does not mention offshore or onshore supply of services, nor does it specify that title to the machinery shall pass on high seas or in the country of origin. The consortium’s risk continued until commissioning, testing, etc. Accordingly, the title to the machinery does not pass offshore. Ruling: The AAR observed and held as follows.

As regards divisibility of contract:

In Vodafone International Holdings B. V. v. Union of India, (2012) 341 ITR 1 (SC), the Supreme Court held that section 9(1)(i) of the Income-tax Act is not a ‘look through’ provision and the Revenue/ Court should ‘look at’ the transaction as a whole and should not adopt a dissecting approach to ascertain the legal nature of the transaction.

A contract for sale of goods is different from that for erection and commissioning of plant since the latter also involves designing and engineering.

The situs of an erection contract should be the place where the plant is to be erected.

Internal consortium agreement is only an internal arrangement between the members and the MOU cannot supersede or override the contract.

On holistic reading of the contract, it is an indivisible contract containing rights and obligations of ONGC and the consortium. As regards taxability of consortium as AOP:

This was a case of two co-adventures coming together for promotion of a joint enterprise with a view to make a gain. Composite contract was awarded to the consortium (and not to individual members) for the whole work and payment was to also be made only to the consortium. Hence, the consortium was to be taxed as an AOP.

The internal division of responsibility by the members, recognition of such division by ONGC or making of separate payments by ONGC to the two members cannot undo the formation of AOP. As regards taxability of work done outside India:

The contract is an indivisible whole. Even if a significant part of design and engineering work is done outside India, it cannot be viewed in isolation and apart from the contract since it is inextricably linked with the work of erection and commissioning undertaken by the consortium. Having regard to an indivisible contract and existence of an AOP, amount receivable in respect of design and engineering is liable to be taxed in India. As regards taxability of supply of equipment and spares outside India:

Since the contract is indivisible and the consortium is to be taxed as an AOP, amount receivable in respect of supply of equipment, material and spares outside India is liable to be taxed in India.

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Having regard to MFN clause under India-France DTAA, scope of services can be restricted to that under India-USA DTAA. However, since India-USA DTAA does not include ‘managerial services’ in FIS whereas India-French DTAA includes the same in FTS, the restricted scope cannot supply in case of ‘managerial services’.

15. Mersen India Private Limited In re (2012) 20 Taxmann.com 475 (AAR) Article 5, 7, 13(4) of India-France DTAA
Decided on: 16-4-2012
Before P. K. Balasubramanyan (Chairman) Present for the appellant: Chythanaya K. K. Present for the Department: Shweta Mishra

Having regard to MFN clause under India-France DTAA, scope of services can be restricted to that under India-USA DTAA. However, since India-USA DTAA does not include ‘managerial services’ in FIS whereas India-French DTAA includes the same in FTS, the restricted scope cannot supply in case of ‘managerial services’.

Facts:

The applicant Indian company (‘ICo’) was whollyowned subsidiary of a French company. The parent French company had another wholly-owned French subsidiary company (‘FrenchCo’). ICo entered into ‘Services Agreement’ with FrenchCo under which, FrenchCo was to provide certain services to ICo and ICo was to reimburse the expenses incurred by FrenchCo for providing these services. In addition to the expenses, ICo was to pay 5% of the reimbursed amount. The payment was to be remitted to France, net of withholding tax and withholding tax, if any, was to be borne by ICo. ICo had also entered into another agreement with FrenchCo which, however, was not the subjectmatter of ruling. ICo sought the ruling of AAR in respect of the taxability of the payments made to FrenchCo and particularly whether they were FTS in terms of Article 13(4) of India-France DTAA (read with the Protocol), or business profits in terms of Article 7 and, if they were business profits, whether they would be taxable as FrenchCo did not have a PE in India in terms of Article 5. Protocol to India-France DTAA contains MFN clause (Paragraph 7) and provides that if India enters into DTAA with an OECD country after 1st September 1989, and the scope or rate of tax under that DTAA is more restricted than that under India-France DTAA, the scope or rate of tax under India-France DTAA would also be restricted. India entered into DTAA with the USA on 12 September 1989 whereunder the scope of services was restricted by inclusion of the phrase ‘make available’. Hence, ICo contended that though India-France DTAA does not contain ‘make available’, the protocol to India-France DTAA should be considered to determine whether the payment is FTS. However, the tax authority contended that only lower rate of tax should be considered and the scope cannot be narrowed by considering the protocol.

Held:

The AAR observed and held as follows. l The fact of the transactions being undertaken on arm’s-length basis should be verified to determine whether income can still be attributed to PE. l In the absence of the phrase ‘make available’ in India-France DTAA, the concept may be borrowed from India-USA DTAA. However, as only technical and consultancy services are covered in India-USA DTAA, the concept of ‘make available’ can apply only in respect of those services. Since Article 13 of India-France DTAA also includes ‘managerial services’, and since it does not stipulate that they should be ‘made available’, the payments for ‘managerial services’ would be taxable as FTS. l Since ‘managerial services’ are specifically dealt with under Article 13, question of treating them as business profits under Article 7 does not arise.

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(i) Composite contract for installation and commissioning project cannot be split into parts for the purpose of taxation. (ii) Several consortium members who had come together for earning income, and the composite contract was awarded to the consortium. Hence, the consortium was liable to be taxed as an AOP.

14. Alstom Transport SA (AAR No. 958 of 2010) 5(Unreported) Section 2(31) of Income-tax Act Dated: 7-6-2012
Before P. K. Balasubramanyan (Chairman)
Present for the appellant: N. Venkatraman, Satish Aggarwal, Akhil Sambhan,
Vinay Aggarwal, Atul Awasthi,
Present for the Department: Bhupinderjit Kumar

Composite contract for installation and commissioning project cannot be split into parts for the purpose of taxation.

Several consortium members who had come together for earning income, and the composite contract was awarded to the consortium. Hence, the consortium was liable to be taxed as an AOP.

Facts:

Bangalore Metro Rail Corporation Limited (‘BMRC’) floated a tender for design, manufacture, supply, installation, testing and commissioning of signalling/ train control and communication systems.

The applicant was a tax resident of France (‘FrenchCo’). FrenchCo, together with several other companies, entered into a consortium agreement, which was executed and registered in India. The agreement mentioned that the members were to: co-operate on an exclusive basis to submit a joint tender to BMRC; to negotiate with BMRC to secure the contract; not to take up any additional work in respect of the work for which the tender was floated; to be jointly and severally bound by the terms of the tender; and to be jointly and severally liable to BMRC for all obligations under the contract.

The obligations of FrenchCo under the contract pertained to off-shore supply of plant and spares and off-shore designing and training of operating and maintenance personnel. FrenchCo sought ruling of AAR on the issue whether, the amounts received by FrenchCo as a member of the consortium, for the supply of plant and off-shore services were chargeable to tax in India in terms of Income-tax Act and India-France DTAA.

Ruling:

The AAR observed and held as follows. A contract should be read as a whole in the context of the object sought to be achieved and it cannot be split into different parts for the purpose of taxation. The tender floated by BMRC was a composite tender, the bid submitted by the consortium was for the work tendered and the contract between BMRC and the consortium was for installation and commissioning of signaling and communication system. Such contract cannot be split into separate parts.
In Vodafone International Holdings B. V. v. Union of India, (2012) 341 ITR 1 (SC), the Supreme Court held that section 9(1)(i) of Income-tax Act is not a ‘look through’ provision and the Revenue/Court should ‘look at’ the transaction as a whole and should not adopt a dissecting approach to ascertain the legal nature of the transaction. Thus, impliedly, the Supreme Court has disapproved/overruled the approach adopted in Ishikawajima-Harima Heavy Industries v. Director of IT, (2007) 288 ITR 408 (SC).
The consortium members came together for executing the project, were jointly and severally liable for performance of the obligations and their common object and purpose for coming together was to earn income. Hence, the consortium was to be taxed as an AOP. The division of obligation amongst members could not alter the status that was acquired while entering into the contract since the legal rights and obligations arising out of and undertaken under the contract would determine the status of the consortium.
Entire income under the contract was taxable in the hands of the consortium as on AOP.

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Indian subsidiary performing functions in India, which, in its absence, the parent would have been required to perform, constituted PE.

13. Aramex International Logistics (P) Ltd. In re
(2012) 22 Taxmann.com 74 (AAR)
Article 5 of India-Singapore DTAA
1Dated: 7-6-2012
Before P. K. Balasubramanyan (Chairman)
Present for the appellant: P. J. Pardiwala, Ravi
Praksh, Abhinav Ashwin, Karina Haum
Present for the Department: Shishir Srivastava

Indian subsidiary performing functions in India, which, in its absence, the parent would have been required to perform, constituted PE of the parent and consequently, income was attributable to the PE.

Facts:

The applicant was a company incorporated in, and tax resident of Singapore (‘SingCo’). SingCo was a member of a Group of companies, which were engaged in door-to-door express shipments and related transport services. A Group company incorporated in Bermuda (‘BermudaCo’) had a wholly owned subsidiary in India (‘IndCo’). BermudaCo had business arrangement with IndCo for inbound and outbound movement of packages within India. SingCo entered into agreement with IndCo for carrying on the business arrangement originally carried on by BermudaCo. The agreement was on principal-to-principal basis.

In terms of the agreement:

(i) IndCo was non-exclusive agent of SingCo for transportation of packages in India.

(ii) IndCo had full discretion to open offices in India at its own expense. However, it was not to act on behalf of SingCo.

(iii) SingCo was responsible for transportation of packages throughout the world (outside India) and IndCo was not permitted to engage any service provider for rendering services outside India.

(iv) IndCo was also involved in domestic transportation of packages where the Group network was not used.

(v) Roughly, one-third income of IndCo was from its arrangement with SingCo.

(vi) SingCo was responsible for transportation of packages throughout the world (outside India) and IndCo was not permitted to engage any service provider for rendering services outside India.

(vii) SingCo was charging fees for providing certain support functions to IndCo. The issues raised before AAR were: l Whether, in terms of India-Singapore DTAA, IndCo constituted PE of SingCo in India? l Whether the receipts from outbound and inbound consignments were attributable to PE? l If the transactions between SingCo and IndCo were on arm’s-length basis, whether income could still be attributed to the PE? l If IndCo did not constitute PE, whether the fees received for support functions could be regarded as FTS under India-Singapore DTAA?

Held:

The AAR observed and held as follows.

PE is a place of business which enables a nonresident to carry on a part of its business in another country. SingCo cannot carry on its business, unless it makes arrangement for delivery of packages in India, either directly or through another entity. IndCo performed several functions such as obtaining orders, collecting and transporting packages to a specified destination, etc., which, otherwise, SingCo/Group would be required to perform. Hence, under Article 5(1) of India-Singapore DTAA, IndCo would constitute PE of SingCo/ Group in India. l Further, IndCo secures orders in India for the Group and also has right to conclude contracts for the express shipments business of the Group. Hence, under Article 5(8) of India- Singapore DTAA, it is agency PE of the Group. The exception under Article 5(10) of India- Singapore DTAA would not apply merely by describing IndCo as an independent entity or a non-exclusive agent when the Group is carrying on its business in India through IndCo.
Since SingCo has a PE, income attributable to the PE is taxable in India and hence, payments made by IndCo to SingCo were subject to withholding of tax.
The fact of the transactions being undertaken on arm’s-length basis should be verified to determine whether income can still be attributed to PE.

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Order No. [F. No. 225/124/2012/ITA.II], dated 20-6-2012 — Order extending due date for filing Form 49C for F.Y. 2011-12.

Rule 114DA of the Income-tax Rules read with Circular No. 5, dated 6-2-2012, provided that Liaison Office in India should electronically file Form 49C, within 60 days from the end of financial year. The CBDT has extended the due date of filing Form 49C for the financial year 2011-12, up to 30th September, 2012. For the financial year 2011-12, Form 49C can be filed in ‘paper mode’ instead of filing it electronically with digital signatures.

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AMENDMENTS IN DIRECT TAX PROVISIONS BY THE FINANCE ACT, 2012

1. Background:

The Finance Minister presented the Budget
for the year 2012-13 on 16th March, 2012, and introduced the Finance
Bill, 2012, containing 154 clauses. Out of these, 113 clauses relate to
‘Direct Taxes’ and other 41 clauses relate to ‘Indirect Taxes’. There
was heated discussion on the various provisions of the Bill which
included over 30 amendments in various sections of the Income-tax Act
with retrospective effect. There was lot of protest in India and abroad
as most of these amendments would affect non-residents and will have
adverse effect on global trade. Inspite of this protest, the Government
could manage to get through the legislation with some changes. The
Finance Act, 2012, containing 119 sections relating to Direct Taxes is
now passed by both Houses of the Parliament and received the assent of
the President on 28-5-2012. Originally, the existing Income-tax Act was
to be replaced by the Direct Taxes Code (DTC) w.e.f. 1-4-2012. Since the
implementation of DTC is delayed, we will have to live with the
existing Income-tax Act for one more year. Some of the amendments made
by the Finance Act, 2012, will give some relief in the computation of
Income and Tax. However, some of the amendments, which have
retrospective and retroactive effect, will make the life of taxpayers
miserable.

In particular, the retrospective amendments of some
of the sections of the Income-tax Act will increase the tax burden of
non-resident assessees and also increase their compliance cost. In this
respect, the tax litigation will also increase in the coming year. In
this article, the amendments made in the Incometax Act, Wealth-tax Act
and Securities Transaction Tax are discussed.

2. Rates of income tax, surcharge and education cess:

2.1
Relief in income tax: The tax slabs for individuals, HUF, AOP, BOI,
etc. have been made more beneficial. The exemption limit for these
assessees have been raised from Rs.1.80 lac to Rs.2 lac. As a result of
the revision of the exemption limit and realignment of some of the
slabs, tax liability of this category of assessees for A.Y. 2013-14 will
be less by Rs.2,000 in respect of income up to Rs.8 lac. In respect of
income above Rs.8 lac the reduction of the tax will be of Rs.22,000. For
senior citizens and very senior citizens there is no change in tax
payable on income up to Rs.8 lac. If the income is more than Rs.8 lac
the reduction in the tax liability in their cases will be of Rs.20,000.

2.2 Rates of income tax:

(i)
For individuals, HUF, AOP, BOI and Artificial Juridical person, as
stated above, the threshold limit of basic exemption has been increased
for A.Y. 2013-14. Individuals above the age of 60 years are treated as
‘Senior Citizens’ and those above the age of 80 years are treated as
‘Very Senior Citizens’. The rates of tax for A.Y. 2012-13 and A.Y.
2013-14 are as under:

(a) Rates in A.Y. 2012-13 (Accounting Year ending 31-3-2012)

(b) Rates in A.Y. 2013-14 (Accounting Year ending 31-3-2013)

No
surcharge is payable for A.Y. 2012-13 and 2013-14. However, education
cess of 3% (2+1) of the tax is payable for both the years.

(ii)
The following table gives comparative figures of tax payable by
individuals, HUF, AOP, BOI, etc. in A.Y. 2012-13 and A.Y. 2013-14.

The above tax is to be increased by 3% of tax for education cess.

(a) Tax payable in A.Y. 2012-13 (Accounting Year ending 31-3-2012)

(b) Tax payable in A.Y. 2013-14 (Accounting Year ending 31-3-2013)

The
concessional rate of 15% plus applicable surcharge and education cess
which was provided for A.Y. 2012-13 has been continued for A.Y. 2013-14
also.

(vii) Rate of Alternate Minimum Tax (AMT)

The
rate of tax 18.5% plus education cess of 3% of tax which was payable as
AMT on income of LLP for A.Y. 2012-13 is now payable by all assessee,
other than a company, i.e., LLP, firm, individual, HUF, AOB, BOI, etc.
in A.Y. 2013-14. No surcharge is payable on AMT.

2.3 Surcharge on income tax:

(i)
As in A.Y. 2012-13, no surcharge is payable by non-corporate assessees
i.e., individuals, HUF, AOP, BOI, Firm LLP, co-operative societies, etc.
in A.Y. 2013-14. In the case of a company the rate of surcharge, if
income exceeds Rs.1 Cr, is 5% of income tax. As regards MAT u/s.115JB,
if the book profit exceeds Rs.1 Cr., rate of surcharge is 5%.

(ii) As regards TDS and TCS, no surcharge is required to be added to the rates of TDS or TCS.

(iii) In the case of dividend distribution tax u/s.115O and 115R the rate of surcharge on tax (i.e., 15%) is 5% of the tax.

(iv)
In the case of foreign companies, the rate of surcharge on income tax
is 2% of tax if the taxable income of the company exceeds Rs.1 Cr.
Similarly, the rate of surcharge on tax to be deducted u/s.195 in case
of foreign company is 2% of the tax if the income from which tax is
deductible at source exceeds Rs.1 Cr. 2.4 Education cess: As in earlier
years, education cess of 3% (including 1% higher education cess) of
income tax and surcharge (if applicable) is payable by all assesses
(Residents or non-residents). No education cess is applicable on TDS or
TCS from payments to all residents (including companies). However, if
tax is deducted from payments made to

(a) foreign companies,

(b) non-residents or

(c)
on salary payments to residents or non-residents, education cess at 3%
of the tax and surcharge (if applicable) is to be deducted.

3. Tax Deduction and Collection at Source (TDS and TCS):

3.1 Section 193: At
present, no tax is required to be deducted at source if interest
payable to a resident individual on debentures issued by a listed
company does not exceed Rs.2,500 in a year. This limit is increased to
Rs.5,000 w.e.f. 1-7-2012. This concession will now apply to debentures
issued by unlisted public companies as well as to interest payable to
resident HUF. The existing exemption in respect of interest paid on
debentures issued by listed companies which are held in Demat Account
will continue without any limit. The amendment in this section comes
into force on 1-7-2012.

3.2 Section 194J — TDS from fees
from professional or technical services: This section is now amended
w.e.f. 1-7-2012. It will now be necessary for a company to deduct tax at
source from any remuneration, fees or commission paid or payable to a
director, if no tax is deductible u/s.192 under the head salary. The
rate for TDS is 10%. It may be noted that the manner in which the
section is amended indicates that this deduction is to be made
irrespective of the quantum of such payment in the year. As regards
professional fees, technical service fees, royalty, etc. to which this
section applies it is provided that tax is to be deducted only if
payment under each head exceeds Rs.30,000 in the financial year.
Therefore, in case of payment of fees to non-executive directors and
independent directors as ‘Director’s Fees’, the tax at 10% will be
deductible even if the total payment in the F.Y. is less than Rs.30,000
to each of them.

3.3 Section 194LA:

At present TDS from compensation on compulsory acquisition of immovable property at 10% is required to be made if compensation amount exceeds Rs.1 lac. This will now be required to be made if the compensation amount exceeds Rs.2 lac w.e.f. 1-7-2012.

3.4 Section 194LC:

This is a new section inserted in the Income-tax Act w.e.f. 1-7-2012. It provides for deduction of tax at the concessional rate of 5% plus applicable surcharge and education cess, in respect of interest paid to a non-resident, other than a foreign company. This interest should relate to monies borrowed by an Indian company from the non-resident at any time on or after 1-7-2012 and before 1-7-2015 in foreign currency from a source outside India. This borrowing should be (i) under a loan agreement or (ii) by way of issue of long- term infrastructure bonds approved by the Central Government. Further, the rate of such interest should not exceed the rate approved by the Government for this purpose.

3.5 Section 201 — Failure to deduct tax at source:

U/s.201, a person can be deemed to be an assessee in default in respect of non/short deduction of tax at source. The AO can pass order for this purpose within a period of four years from the end of the financial year in a case where no returns for tax deducted at source have been filed. Section 201 is amended with retrospective effect from 1st April, 2010, to extend the time limit for passing the order u/s.201(1) for non/short deduction of tax from 4 years to 6 years from the end of the F.Y. in which payment is made or credit is given.

3.6 Section 206C — Tax Collection at Source (TCS):

This section provides for collection of tax at source from sale of alcoholic liquor, tendu leaves, timber, forest products, scrap, etc. at the rates ranging from 1% to 5% of the sale price. The scope of this provision for TCS is extended w.e.f. 1-7-2012 as under.

i) In respect of sale of minerals, being coal or lignite or iron ore, tax is to be collected by the seller at the rate of 1% of the sale price.

ii) However, such tax is not to be collected if the purchase of such goods listed in section 206C(i) is made by the buyer for the purpose of manufacturing, processing or producing articles or things or for the purposes of generation of power. For this purpose the buyer of such goods has to give a declaration in Form No. 37C.

iii) In order to reduce the quantum of cash trans-actions in bullion or jewellery sector and for curbing the flow of unaccounted money in the trading system, it is now provided that the seller of bullion or jewellery shall collect from the buyer tax at the rate of 1% of the sale consideration. For this purpose it is provided that the collection of the above tax of 1% shall be made if the sale price in cash exceeds the following amounts:

a. For bullion, if the sale price exceeds Rs.2 lac. It may be noted that for this purpose definition of ‘Bullion’ does not include coin or any other article weighing ten grams or less.

b. For jewellery, if the sale price exceeds Rs.5 lac.

iii) It may be noted that this tax will be collected from the buyer even if the buyer has purchased bullion or jewellery for personal use or for manufacture or processing the same for his business. Further, it appears that persons who purchase bullion or jewellery for personal use will not be able to get credit for the tax collected at source because there will be no corresponding income from sale of bul-lion or jewellery in respect of which such credit for tax can be claimed. Further, the person making such payment for purchase of bullion or jewellery in cash will have to prove the source from which such cash is paid.

iv) There are certain consequential amendments made in section 206C on the same lines as in section 201 . According to these amendments, if the seller, who is required to collect tax under this section fails to do so, he will not be deemed to be in default if he can establish that the buyer has filed his return u/s.139 and paid tax on his income after considering the goods purchased by him. Consequential provision for reduction in the period for which interest is payable u/s.206C is also made.

3.7 No Advance tax payable by senior citizens u/s.207:

This section provides for payment of Advance Tax in instalments. It is now provided, w.e.f. 1-4- 2012, that a senior citizen who has no income from business or profession will not be required to pay any Advance Tax.

4. Exemptions and deductions:

4.1 Charitable trust:

Section 2(15) provides that if the object of advancement of general public utility involves carrying on of any activity in the nature of trade, commerce or business, etc. and the aggregate value of the receipts from such activity exceeds Rs.25 lac, the trust will not be considered as charitable trust. New s.s (8) has been inserted in section 13 and a proviso has been added in section 10(23C), with retrospective effect from A.Y. 2009- 10, to provide that the trust or institution will not be granted exemption only for the year in which such receipts exceed Rs.25 lac. Such loss of exemption in that year will not affect the registration of the trust or institution u/s.12AA. The exemption can be claimed in subsequent years when such receipts do not exceed Rs.25 lac.

4.2 Section 10(10D) — Deduction of life insurance premium:

At present, any sum received under a life insurance policy, including bonus, but excluding amount re-ceived under Keyman Insurance policy, is exempt, provided the premium amount does not exceed 20% of the actual capital sum assured in any year during the policy period. Now, this limit is reduced to 10% in the case of an insurance policy issued on or after 1st April, 2012. Similar amendment is made u/s.80C, whereby it is provided that deduction in respect of life insurance premium, etc. in the case of insurance policies issued on or after 1st April, 2012 shall be avail-able only in respect of premium not exceeding 10% of the actual capital sum assured. It may be noted that in respect of life insurance premium paid on policies issued before 31-3-2012, the old limit of 20% of actual capital sum assured will apply.

‘Actual capital sum assured’ is also defined to mean the minimum amount assured under the policy on happening of the specified event at any time during the term of the policy, and excluding the value of any premiums agreed to be returned and benefit of bonus or otherwise over and above the sum actually assured. This is done to ensure that life insurance products are not designed to circumvent the prescribed limit by varying the capital sum as-sured from year to year. This amendment comes into force from A.Y. 2013-14 (Accounting Year end-ing on 31-3-2013).

4.3 Section 10(23FB) — Venture Capital Company (VCC) and Venture Capital Funds (VCF):

i) This section has been amended w.e.f. A.Y. 2013-14. Simultaneously, section 115U has also been amended. Section 10(23FB) provides that a VCC or VCF registered with SEBI and deriving income from investment in a Venture Capital Undertaking (VCU) is exempt from tax. VCU is presently defined to mean such domestic company whose shares are not listed in a recognised stock exchange in India and which is engaged in any one of the nine specified businesses. VCC and VCF registered with SEBI are granted a pass-through status and the income in the hands of the investor is taxed in the like manner and to the same extent as if the investment was directly made by the investor in the VCU.

ii) The sectoral restriction that the VCU should be engaged in only the nine specified businesses is now removed. The definition of VCU is now amended to cover any undertaking referred to in SEBI (Venture Capital Funds) Regulations, 1996. As such VCC and VCF will be exempt from tax, irrespective of the nature of business carried out by the VCU, as long as it satisfies the conditions imposed by SEBI.

iii) At present, the income received by any VCC/ VCF from VCU, is taxed on receipt basis in the hands of the investor and hence could result in deferral of taxation till the income is distributed to the investor. It is now provided that the income accruing to VCC/ VCF will be taxable in the hands of the investor on accrual basis.

4.4 Section 10(23BBH):

This new section is inserted w.e.f. 1-4-2013 to pro-vide for exemption from tax in the case of income of the Prasar Bharati (Broadcasting Corporation of India) from A.Y. 2013-14.

4.5 Section 10(48):

This is a new provision made w.e.f. A.Y. 2012-13 (1-4-2011 to 31-3-2012). This section provides for exemption in respect of any income of a foreign company received in India, in Indian currency, on account of sale of crude oil to any person in India. This is subject to the conditions that (i) the receipt of money is under an agreement which is entered into by the Central Government or approved by it the foreign company, and the arrangement or agreement has been notified by the Central Govern-ment and (iii) the receipt of the money is the only activity carried out by the foreign company in India. This provision is introduced in view of the mecha-nism devised by the Government to make payment to certain foreign companies in Indian currency for import of crude oil (e.g., from Iran).

4.6 Section 40(a)(ia):

This section provides for disallowance of payment to a resident if tax required to be deducted there from has not been deducted by the assessee. By amendment of this section it is provided that if the assessee establishes that the resident payee (de-ductee) has paid tax on this income before furnish-ing his return of income, the expenditure shall not be disallowed under this section. This amendment is made from A.Y. 2013-14 (Accounting Year 2012-13). Consequential amendment is made in section 201 to provide, w.e.f. 1-7-2012, that the payer shall not be deemed to be in default if he can prove that the payee has furnished his return u/s.139 and paid tax on such amount. However, the payer will have to pay interest from the due date till the date of filing return by the payee. This being a beneficial provision, it should be made applicable to earlier years also. This will reduce litigation on this issue. It will be pos-sible to argue that the above beneficial amendment will have retrospective effect in view of decision of CIT v. Virgin Creations, ITA No. 302 of 2011 (Calcutta High Court) in respect of similar amendment in the section by the Finance Act, 2010.

4.7 Section 80C:

As discussed in Para 4.2 above, section 80C is amended to provide that the deduction of LIP in respect of life policy taken out on or after 1-4-2012 shall be restricted to 10% of the capital value assured.

4.8 Section 80CCG:

This is a new section inserted w.e.f. A.Y. 2013-14 (Accounting Year 1-4-2012 to 31-3-2013) and provides as under:

i) The deduction under this section can be claimed by an Individual who is a resident, if he acquires listed equity shares in accordance with the scheme to be notified by the Government. The assessee will be allowed deduction of 50% of the amount invested subject to the limit of deduction of Rs.25,000 in the computation of income for the year of investment. It may be noted that this deduction is not allowable to an HUF.

ii) The above deduction is subject to the following conditions:

a) The gross total income of the assessee for the relevant assessment year should not exceed Rs.10 lac.
b) The assessee should make the above investment in retail category specified in the scheme.

c) The above investment should be in listed equity shares as specified under the scheme.

d) There will be locking period of 3 years for such investment.

iii) If the assessee fails to comply with any of the above conditions in any year, the amount of deduction allowed in earlier years will be taxable in that year.

4.9 Section 80D:

Under this section deduction up to Rs.15,000 is allowed to an assessee (individual or HUF) for premium paid on mediclaim insurance policy. For senior citizens the limit for deduction is Rs.20,000. Now it is provided that, effective from Accounting Year 2012-13, if the assessee makes payment up to Rs.5,000 in a year for preventive health check-up, deduction will be allowed within the above ceiling limit. Further, age limit for senior citizens is reduced from 65 years to 60 years. It is suggested that this deduction upto Rs.5,000 should have been allowed over and above the existing ceiling limit of Rs.15,000 or Rs.20,000. The limits of Rs.15,000/20,000 were fixed in the year 2000 and deserve to be enhanced due to increase in medical cost and consequential increase in insurance premium.

4.10 Sections 80G and 80GGA:

Deduction for donation of Rs.10000 or more under these sections will not be allowed if the same is paid in cash. This provision will apply to donations made in the Accounting Year 2012-13 onwards.

4.11 Section 80IA(4)(iv):

Under this section an industrial undertaking engaged in the business of generation and distribution of power and allied activities is entitled to tax holiday for 10 years if such undertaking begins its activities on or before 31-3-2012. This date is now extended to 31-3-2013.

4.12 Interest from bank exempt u/s.80TTA:

This is a new section which has been introduced effective from A.Y. 2013-14 (accounting year ending 31-3-2013). Under this section, in the case an individual or HUF, interest from savings bank account with a bank, co- operative bank or post office bank up to Rs.10000 will not be taxable. This provision will not apply to interest on fixed deposit with banks.

4.13 Section 115-O:

At present, dividend distributed by a company out of the dividend received from its subsidiary company, which has paid Dividend Distribution Tax, is not liable to Dividend Distribution Tax once again. For this purpose, the dividend receiving company should not be a subsidiary of any other company. By amendment of this section, effective from 1-7-2012, the condition that “the company is not a subsidiary of any other company” has now been removed. Therefore, any domestic company (whether it is a holding company or a subsidiary company) receiving dividend from its subsidiary or step down subsidiary company and declaring dividend in the same year out of such dividend amount will be allowed to reduce the amount of such dividend for determining the liability to Dividend Distribution Tax if the subsidiary or step down subsidiary company has paid Dividend Distribution Tax that is payable.

5. Income from business or profession:

5.1 Section 32(1)(iia):

At present, an assessee engaged in the business of manufacture or production of any article or thing is entitled to additional depreciation of 20% of the cost of the new plant and machinery in the year of acquisition. From A.Y. 2013-14, this benefit is now extended to an assessee engaged in the business of generation or generation and distribution of power.

5.2 Section 35(2AB):

According to the existing provisions of section 35 (2AB) weighted deduction at 200% of expenditure on approved in-house research and development by a company engaged in the business of biotechnology or in the manufacture of specified articles is allow-able up to 31-3-2012. This benefit is now extended up to 31-3-2017.

5.3 Section 35AD:

i) Investment-linked deduction of 100% of capital expenditure (excluding expenditure incurred for land, goodwill or financial instrument) is allowed for certain specified businesses. In the list of specified businesses, there are at present 8 types of businesses. With effect from 1-4-2012, 3 new businesses have been added to this list. These 3 businesses re-late to setting up and operating (a) inland container depot, or container freight station, (b) warehousing facility for storage of sugar and (c) bee-keeping and production of honey beeswax which commence operations on or after 1-4-2012.

ii) Further, the above investment-linked deduction is now enhanced to 150% of the capital expenditure incurred on or after 1st April, 2012 in respect of certain specified businesses which commence operations on or after 1-4-2012. These specified businesses are setting up and operating (a) cold-chain facility warehousing facility for agricultural produce, (c) building and operating a hospital with at least 100 beds, (d) developing and building affordable housing project and (e) production of fertiliser in India.

iii) Further, it is provided that an assessee who builds a hotel of two-star or above category as classified by the Central Government and subsequently, continuing to own the hotel, transfers the operation thereof, the assessee shall be deemed to be engaged in specified business and will be eligible to claim deduction u/s.35AD. This amendment has been made with effect from A.Y. 2011-12.

5.4 New sections 35CCC and 35CCD:

These two new sections are inserted effective from A.Y. 2013-14. They provide as under:

i. Section 35CCC provides that when an assessee incurs any capital or revenue expenditure for agricultural extension project notified by the CBDT, he will be allowed deduction of 150% of such expenditure.

ii. Section 35CCD provides that where a company incurs expenditure (other than expenditure on any land or building) on any skill development project notified by the CBDT, it will be allowed deduction of 150% of such expenditure.

5.5 Presumptive taxation:

Section 44AD provides for presumptive taxation in respect of non-corporate assessees carrying on specified businesses and having a total turnover of less than Rs.60 lac. Under this section 8% of the total turnover is deemed to be the income from business subject to certain conditions. It is now provided that this section will not apply to a person having income from (i) a profession, (ii) commission or brokerage or (iii) any agency business. This amendment is made effective A.Y. 2011-12. Further, the limit of Rs.60 lac for total turnover is increased to Rs.1 crore w.e.f. A.Y. 2013-14 (Accounting Year 2012-13).

5.6 Section 44AB:

The limit of turnover/gross receipts for tax audit u/s.44AB has also been increased for business to Rs.1 Cr. And for profession to Rs.25 lac w.e.f. A.Y. 2013-14 as discussed in Para 17.2 below:

6. Capital gains:

6.1 Section 47(vii):

This section is amended w.e.f. A.Y. 2013-14. It is now provided that when a subsidiary company amalgamates with a holding company, the requirement of the issue of shares of the amalgamated company on amalgamation will not apply.

6.2 Section 49:

At present, there is no provision to treat the cost of assets of a proprietary concern, converted into a company, or a firm converted into a company as the cost of the assets in the case of the company. It is now provided, w.e.f. A.Y. 1999 -2000, that the cost of assets on conversion of a proprietary concern or a firm into a company u/s.47(xiii), or 47 (xiv), in the hands of the company shall be the same as in the hands of the converting enterprise. Similarly, when an unlisted company is converted into LLP u/s.47(xiiib), the cost assets in the case of the company shall be treated as cost in the case of the LLP.

6.3 Section 50D:

This is a new section inserted w.e.f. A.Y. 2013-14. It provides that where the consideration received or accrued for transfer of a capital asset is not ascertainable or cannot be determined, then the fair market value of the said asset shall be deemed to be the full value of the consideration on the date of transfer for computing the capital gain. This situation may arise in a case where the capital asset is transferred in exchange of another capital asset.

6.4 Section 54B:

At present, the benefit of exemption from capital gain on sale of agricultural land is available to the assessee on reinvestment of such capital gain for purchase of another new agricultural land within two years. One of the conditions is that the land should have been used by the assessee or his parent for agricultural purposes. This provision is amended, w.e.f. A.Y. 2013-14, to provide that even if such land was used by the HUF, in which the as-sessee or his parent was a member, this exemption can be claimed.

6.5 Section 54GB:

This is a new section which is inserted w.e.f. A.Y. 2013-14 to provide that if an Individual or HUF makes capital gains on sale of a residential house or plot, he can claim exemption from Capital Gains Tax if he invests the net consideration in equity shares of a new SME company. Such SME company is required to invest this amount in purchase of new plant and machinery. This exemption can be claimed subject to the following conditions.

i) The investee company should qualify as a small or medium enterprise under the Micro, Small and Medium Enterprises Act, 2006. (SME).

ii) The company should be engaged in the business of manufacture of an article or a thing.

iii) SME company should be incorporated within the period from 1st of April of the year in which capital gain arises to the assessee and before the due date for filing the return by the assessee u/s.139(1).

iv) The assessee should hold more than 50% of the share capital or the voting right after the subscription in the shares of a SME company.

v) The assessee will not be able to transfer the above shares for a period of 5 years.

vi) The company will have to utilise the amount invested by the assessee in the purchase of new plant and machinery. If the entire amount is not so invested before the due date of filing the return of income by the assessee u/s.139, then the company will have to deposit the amount in the scheme to be notified by the Central Government.

vii) The above new plant and machinery acquired by the company cannot be sold for a period of 5 years.

viii) The above scheme of exemption granted in respect of capital gains on sale of residential property will remain in force up to 31-3-2017.

The above conditions prescribed in the new section are very harsh. This section should have allowed the investment in existing SME company for the purpose of exemption. Further, investment in LLP, which satisfies the condition of SME enterprises, should also be permitted. The restricted time limit for acquiring new plant and machinery will create difficulties and, therefore, it should have been provided that the SME company should be allowed to make such investment in new plant and machinery within a period of 18 months from the date on which the assessee makes the investment in its equity shares. The period of 5 years for retaining the equity shares is too long and should have been reduced to 3 years. Similarly, lock-in-period for plant and machinery acquired by the SME company should be reduced from 5 years to 3 years.

6.6 Section 55A — Reference to Valuation Officer:

This section is amended w.e.f. 1-7-2012. Under this section, the AO can make a reference to the Valuation Officer with a view to ascertain the fair market value of the capital asset. At present, such reference can be made when the AO is of the view that the value disclosed by the assessee is less than the fair market value. In some cases it is held that when the assessee exercises his option to substitute fair market value of the capital asset as on 1-4-1981, for the cost of the asset, and if the AO is of the view that such market value as declared by the assessee was more, he cannot make a reference to the Valuation Officer. To overcome this position, this amendment provides that w.e.f. 1-7-2012 the AO can make such reference to the Valuation Officer. This amended provision will apply w.e.f. 1 -7-2012 but will have retroactive effect, inasmuch as, the AO can make such a reference to the Valuation Officer in respect of all pending assessments of earlier years.

6.7 Securities Transaction Tax (STT):

i) Section 98 of the Finance (No. 2) Act, 2004, providing for rates of STT has been amended w.e.f. 1-7-2012. The revised rates of STT in Cash Delivery Segment are reduced from 0.125% to 0.1%. Therefore, in the case of delivery-based transaction relating to equity shares of a company or units of equity ori-ented fund of a mutual fund entered into through a recognised Stock Exchange, the STT payable by a purchaser is reduced from 0.125% to 0.1% and a seller is reduced from 0.125% to 0.1% w.e.f. 1-7-2012.

ii) In order to encourage unlisted companies to get them listed in recognised Stock Exchange, it is now provided that sale of unlisted equity shares by any holder of such shares, under an offer for sale to the public included in an Initial Public Offer (IPO), if subsequently such shares are listed on the recognised Stock Exchange, will be liable for pay-ment of STT at 0.2%. If such STT is paid, long-term capital gain on such sales will be exempt from tax and tax on short-term capital gain will be payable at concessional rate of 15% u/s.111A.

7. Income from other sources:

7.1 Section 56(2)(vii):

Under this section any gift exceeding Rs.50,000 in any year received by an Individual or HUF on or after 1-10-2009 is taxable as income from other sources, subject to certain exceptions. One of the exceptions is about gift received from relatives of the individual as defined. Similar exemption is not given in respect of gifts from members of HUF. It is now provided, w.e.f. 1-10-2009, that gifts received by HUF from its members will be exempt. However, if such a gift is given by a member to such HUF, income from the property gifted will be clubbed with the income of the member u/s.64(2). In order to mitigate hardship experienced in practical life it is suggested that the following relationship should have been covered in the definition of relatives.

i. Gifts by HUF to its members

ii. Gifts to an Individual by any lineal descendant of a brother or sister of the Individual or his/ her spouse (i.e., gift by a nephew or niece to an uncle or aunt). Similar provision is made in section 314(214)(h) of DTC Bill, 2010.

7.2 Section 56(2)(viib):

This is a new provision inserted from the A.Y. 2013-14. It is now provided that where a closely held company issues shares to a resident, for amount received in excess of the fair market value of the shares, it will be deemed to be the income of the company under the head ‘Income from other Sources’. The fair market value for this purpose is the higher of the value arrived at on the basis of the method to be prescribed or the value as substantiated by the company to the satisfaction of the Assessing Officer. The company can substantiate the value based on the value of the tangible and intangible assets and various types of commercial rights as stated in the section.

This provision will not apply to amounts received by a venture capital undertaking from a venture capital fund or a venture capital company. Further, this provision will not apply to amount received from non-resident, a foreign company or from a class of persons as may be notified by the Government. The provision appears to have been made with a view to ensure that excessive amount, representing revenue payment, is not received in the form of share premium and does not escape taxation.

7.3 Section 68:

This section deals with taxation of cash credits. The section is amended w.e.f. A.Y. 2013-14. This section now provides that in the case of a closely held company, if the amount credited in the name of a resident is by way of share application money, share capital, share premium or any such amount, by whatever name called, and the explanation offered for the credit is not considered to be satis-factory, such amount will be considered as income of the company. However, if the person (being a resident) in whose name the amount is credited offers explanation about the source and nature of the amount credited and such explanation is found to be satisfactory by the Assessing Officer this Section shall not apply. In the event of failure to do so, the entire amount credited will be taxed at the rate of 30% plus applicable surcharge and Education cess in the hands of the company.

This provision does not apply to amount received from a venture capital fund or a venture capital company. It will also not apply to the amount received from a non-resident or a foreign company.

7.4 Section 115BBD:

At present, this section provides that rate of tax, for dividend received by an Indian company from a foreign company in which it has share holding of 26% or more, is 15% for A.Y. 2012-13. This concession has been extended for one more year i.e., A.Y. 2013-14.

7.5 Section 115BBE:

This is a new section inserted from A.Y. 2013-14. The section provides that unexplained amounts treated as income (i) u/s.68 cash credits, (ii) u/s.69 unexplained investment, (iii) u/s.69A unexplained money, bullion, jewellery or other valuable articles, u/s.69B amount of investments, expenditure on jewellery, bullion or other valuable articles not fully disclosed in books, (v) u/s.69C — Unexplained expenditure, and (vi) u/s.69D — Amount borrowed or repaid on a Hundi in cash, will now be taxed at a flat rate of 30% plus applicable surcharge and education cess. No deduction for any expenditure or allowance will be allowed against such income.

8. Minimum Alternate Tax (MAT) (section 115JB):

8.1 Section 115JB is amended w.e.f. 1-4-2001 (A.Y. 2001-02) to provide that in the case of the income arising from life insurance business the tax under this section will not be payable. In other words, MAT provisions will not apply from A.Y. 2001-02 onwards in respect of income from life insurance business.

8.2 (i) The section is amended w.e.f. A.Y. 2013 -14 to provide that in the case of a company, such as insurance, banking, electricity company, etc., for which the Form of Profit & Loss A/c. and Balance Sheet is prescribed in the Act governing such com-panies, the book profit shall be determined on the basis of the Form of Profit & Loss A/c. prescribed under that Act. Further, it is provided that in respect of companies to which the Companies Act applies, the book profit will be computed on the basis of the revised format of Schedule VI.

ii) By another amendment of this section effective from A.Y. 2013-14, it is now provided that the book profit will be increased by the amount standing to the credit of revaluation reserve relating to reval-ued asset which has been discarded or disposed of, if the same is not credited to the Profit & Los A/c. This amendment is in order to cover cases in which revaluation reserve is directly transferred to general reserve on disposal of asset resulting in the gain that is not being included in the computation of book profits up to now.

9. Alternate Minimum Tax (AMT)

9.1 Sections 115JC to 115JE for levy of AMT on ad-justed total income of LLP have now been extended to other non-corporate assessees such as individual, HUF, AOP, BOI, Firm, etc. w.e.f. A.Y. 2013-14. New section 115JEE has also been added from A.Y. 2013-14.

9.2 Provision for AMT was made last year for income of LLP w.e.f. A.Y. 2012- 13 in sections 115JC to 115JE. Now section 115JC is replaced by a new section and other sections 115JD to 115JE have been amended w.e.f. A.Y. 2013-14. A new section 115JEE is also inserted. The effect of these amendments is as under.

i) The provisions of section 115JC will now apply to LLP and all other non-corporate assessees i.e., individual, HUF, AOP, BOI, Firm, etc. As provided in section 115JC the assessees will have to obtain audit report in the prescribed form before the due date.

ii) In the case of an individual, HUF, AOP, BOI or Artificial Juridical person, AMT will not be payable if the adjusted total income does not exceed Rs.20 lac. (section 115JEE)

iii) AMT is payable at 18.5% plus applicable surcharge and education cess of the adjusted total income if the amount of such tax is more than the tax payable on the total income computed under other provisions of the Income-tax Act.

iv) Adjusted total income is defined to mean the total income computed under the Income-tax Act increased by (a) deductions claimed under Chapter VIA (section C) i.e., 80HH to 80 RRB (other than section 80P) and (b) deduction claimed u/s.10AA (SEZ income).

v) Other provisions of sections (a) section 115JD for tax credit for AMT paid for 10 years, (b) Section 115JE applicability of other sections of the Income-tax Act and (c) Section 115JF— Definitions will continue to apply to LLP and also to other non-corporate assessees to whom sections 115JC and 115JEE for payment of AMT apply.

10. Specified domestic transactions:

Section 40A(2) of the Income-tax Act empowers the AO to disallow payment to a related person for expenditure, if he considers that such expenditure is excessive or unreasonable, having regard to the fair market value of the goods, services or facilities for which such payment is made and claimed as a deduction in the computation of income. Similarly, sections 10AA, 80A, 80IA, 80IB, etc. provide that if there are any transactions of purchases, sales, etc. between two related persons, the AO can ap-ply the test of fair market value and make adjust-ments in the computation of income. In all these sections, the concept of ‘fair market value’ has not been specifically explained. Therefore, the Supreme Court in the case of CIT v. Glaxo Smithkline Asia (P) Ltd., 195 Taxman 35 (SC) observed that in order to reduce litigation, sections 40A(2) and 80IA(10) need to be amended to empower the AO to make adjustments to the income declared by the assessee, having regard to the market value of the transac-tions between related parties, by applying any of the generally accepted methods for determination of Arm’s- Length Price (ALP), including methods provided under Transfer Pricing Regulations. In view of the above, amendments are made in sec-tions 40A(2), 10AA, 80A and 80IA to provide that the ‘Specified domestic transactions’ will now be subject to Transfer Pricing Regulations contained in sections 92, 92BA to 92F — from A.Y. 2013-14 (Accounting Year 1-4-2012 to 31-3-2013). In brief, the effect of these provisions, from A.Y. 2013-14 (1-4-2012 to 31-3-2013) onwards will be as under.

10.1 The term ‘specified domestic transaction’ is defined in new section 92BA to mean the following transactions, other than the international transactions:

a) Any expenditure in respect of which payment has been made or to be made to a person referred to in section 40A(2)(b). This will include remuneration, commission, rent, interest, etc. paid to a related person as well as purchases made from such person.

b) Any transaction referred to in section 80A.

c) Any transfer of goods or services referred to in section 80IA(8).

d) Any business transacted between the assessee and other person as referred to in section 80IA(10).

e) Any transaction, referred to in any other section under Chapter VI-A or section 10AA, to which provisions of sections 80IA(8) or 80IA (10) are applicable.

f) Any other transaction as may be prescribed by Rules by the CBDT.

10.2 It is also provided that the Transfer Pricing provisions will not apply if the aggregate amount relating to the above transactions entered into by the assessee, in the relevant accounting year, does not exceed Rs.5 crore. It is not clear from the word-ing of the above section whether such aggregate amount is to be worked out by considering the amount of expenditure, purchases, sales, etc. under all the above sections taken together or whether the aggregate amount under each section i.e., 40A(2), 80A, 80IA, 10AA, etc. is to be separately worked out in order to determine the limit of Rs.5 crore provided in the section.

10.3 Section 40A(2):

This section provides for disallowance of revenue expenditure incurred by the assessee. The section does not apply to any revenue or capital receipt or to capital expenditure. Further, the section does not apply to any revenue expenditure which is capita-lised. Under this section, if any payment is made or to be made for any revenue expenditure to any ‘Related Person’, the AO can disallow that part of the expenditure which he considers to be excessive or unreasonable, having regard to the fair market value of the goods, services or facilities for which such payment is made and claimed as a deduction in computing the income. This section applies to the computation of ‘Income from Business or Profession’ and ‘Income from other Sources’. This section is now amended to provide that the fair market value for any payment to which the concept of specified domestic transaction applies shall be determined on the basis of arm’s-length price concept as provided in sections 92C and 92F(ii).

10.4 Section 80A:

Section 80A(6) refers to transfer of any goods or services held for the purposes of the undertaking, unit, enterprise, or eligible business to any other business carried on by the assessee. It also refers to transfer of goods or services held for the pur-poses of any other business of the assessee to the undertaking, unit, enterprise or eligible business. If the consideration for such transfer is not at the market value, then the AO can substitute the market value of the goods or services for such transfer. The expression ‘Market Value’ is defined in the Explanation to mean the price that such goods or services would fetch, if they were sold in the open market, subject to statutory or regulatory restrictions. This Explanation is now amended w.e.f. A.Y. 2013-14 to provide that the expression ‘Market Value’ in relation to specified domestic transactions shall now mean, in relation to any goods or services sold, supplied or acquired, the ‘Arm’s-length price’ as defined in section 92F(ii). It may be noted that this section applies to transfer of goods or services from one undertaking, unit or business owned by the assessee to another undertaking, unit or business owned by the same assessee.

10.5 Section 80IA:

S.s (8) and s.s (10) of this section are amended w.e.f. A.Y. 2013-14 as under.

i) Section 80IA(8):

This provision refers to transfer of goods or services held for the purposes of the eligible business to any other business of the assessee. The section also refers to transfer of goods or services from any other business of the assessee to any eligible business. For this purpose, the expression ‘eligible business’ means business carried on by any indus-trial undertaking owned by the assessee carrying on business of infrastructure development, generation of power, telecommunication services, etc. as listed in section 80IA(4), for which 100% deduction is given u/s.80IA. Section 80IA(8) provides that transfer of goods or services between eligible business under-taking and other undertakings of the assessee shall be at market value. Now, it is provided that such transfers should be made at arm’s-length price as defined by the provisions of section 92F(ii).

ii) Section 80IA(10):

This section provides that where it appears to the AO that, owing to the close connection between the assessee carrying on the eligible business and any other person, the course of business between them is so arranged that the profits of the eligible business for which 100% deduction is allowed u/s.80IA is shown at a figure higher than the ordinary profits in such business, the AO can recompute the profits of the eligible business for deduction u/s.80IA. The section is now amended to provide that, if the above arrangement between closely related parties involves specified domestic transactions, the AO shall compute the profit of the eligible business having regard to the arm’s-length price concept as defined in section 92F(ii).

iii) Other sections:

It may be noted that the provisions of section 80IA(8) and 80IA(10) apply to certain other sections of the Income-tax Act also. These sections provide for deduction of income derived from various specified activities. In respect of transactions with related parties for claiming deduction from income, the above concept of arm’s-length price as applicable to specified domestic transactions will apply.

10.6 Since the concept of arm’s-length price is now extended to section 80IA(8) and 80IA(10), this concept will apply to transactions between related parties in computing income under the following sections:

Section 10AA: Income from newly established units in SEZ.

Section 80IAB: Income of an undertaking or enterprise engaged in the development of SEZ.

Section 80IB: Income from certain industrial undertakings and housing projects, etc. (other than infrastructure development undertakings).

Section 80IC: Income from certain undertakings set up in certain States such as Sikkim, Himachal Pradesh, Uttarakhand, North-Eastern States, etc.

Section 80ID: Income from hotels and convention centres set up in National Capital Territory of Delhi, and Districts of Faridabad, Gurgaon, Gautam Buddhha Nagar and Ghaziabad and other specified districts having ‘World Heritage
Site’.

Section 80IE: Income from eligible business undertakings in North-Eastern States.

10.7 Other transactions:

The CBDT has been given power to prescribe, by Rules, other domestic transactions to which the above provisions will apply.

10.8 Effect of application of arm’s-length price concept:

As stated above, the concept of arm’s-length price (ALP) is now to be applied to certain domestic trans-actions. In view of this, the assessee who enters into specified domestic transactions will have to comply with the following sections w.e.f. A.Y. 2013-14.

i) Section 92: This section deals with computation of income from international transactions. It is now extended, w.e.f. A.Y. 2013-14, to specified domestic transactions. Therefore, the concept of ALP which was applicable to international transactions up to now will now apply to specified domestic transactions also. S.s (2A) inserted in this section now provides that any allowance for an expenditure or interest or allocation of any cost, expense or income in relation to specified domestic transactions shall be computed having regard to the ALP.

ii) Section 92C: This section deals with computa-tion of ALP in relation to international transactions. As stated above, this concept is now extended to specified domestic transactions. The section pro-vides for six alternate methods for determination of ALP.

iii) Section 92CA: This section provides for reference by AO to the Transfer Pricing Officer (TPO). Such reference is to be made if the aggregate value of international transactions exceed Rs.5 cr. The TPO is given wide powers. The order passed by the TPO is binding on the AO and the AO has to complete the assessment in conformity with the order of the TPO. This section has now been amended and it is now provided that such reference is to be made by the AO to the TPO even in cases where the assessee has entered into specified domestic transactions. Since section 92BA states that transactions with related parties aggregating Rs.5 Cr. or more will be considered as specified domestic transactions, all cases in which these transactions are involved will have to be referred to the TPO.

iv) Section 92D: This section provides for maintenance and keeping of information and documents by persons entering into international transactions. This section is made applicable to specified domestic transactions. Therefore, all assessees who enter into specified domestic transactions, as stated above, will have to maintain the information and documents specified in this section. It may be noted that these records and documents will have to be maintained w.e.f. 1-4-2012, in the manner prescribed in Rule 10D.

v) Section 92E: This section requires that an as-sessee entering into international transactions has to obtain report from a Chartered Accountant in the prescribed form No. 3CEB before the due date for filing the return of income. This requirement is now extended to specified domestic transactions from the A.Y. 2013-14 (Accounting Year 1-4-2012 to 31-3-2013).

vi) Section 92F: This section gives definition of certain terms. The following definitions are relevant in the context of specified domestic transactions.

a. ‘Arm’s-length price’: This term means a price which is applied or proposed to be applied in a transaction between persons other than associated enterprises, in uncontrolled conditions.

b. ‘Transaction’: This term includes an arrangement, understanding or action in concert, whether or not it is formal or in writing or whether or not it is intended to be enforceable by legal proceedings.

vii) Penalty u/s.271 and 271AA: By amendment of Explanation 7 of section 271, it is now provided that penalty under that section will be leviable in respect of amount disallowed out of the above specified domestic transactions u/s.92C(4). Similarly, penalt 2% of the amount can also be levied u/s.271AA for not maintaining records u/s.92D or not reporting such transactions u/s.92E or furnishing incorrect information.

11. Taxation of non-residents:

Some of the sections dealing with taxation of non-residents have been amended with retrospective effect. These amendments will have far reaching effect. While presenting the Budget the Finance Minister has not made any mention about these far -reaching changes affecting non-residents in his Budget Speech. However, in the Explanatory Memorandum attached to the Finance Bill, 2012, the reasons for these retrospective amendments have been explained.

The effect of these amendments with retrospective effect will be that cases of many assesses may be reopened and they may be required to pay tax, interest or penalty for last 16 years. It appears that these amendments provide for taxing gain on sale of shares in foreign countries and therefore, the time limit of 16 years for reopening the assessments will apply to such transactions. It is, therefore, necessary that a specific provision should have been made that no interest or penalty will be payable if tax levied as a result this retrospective amendment is paid by the assessee. It may be noted that when sections 28 and 80HHC were amended by the Taxation Laws (amendment) Act, 2005, with retrospective effect, CBDT issued a Circular No. 2/2005 on 17-1-2006. In this Circular the tax authorities were directed not to levy any interest or penalty if tax levied due to these retrospective amendments was paid. The Circular also provided that the tax due as a result of the retrospective amendment can be paid in five equal yearly instalments. No interest was payable on such instalments. Let us hope that the CBDT issues similar Circular in respect of the tax payable as a result of these retrospective amendments made by the Finance Act, 2012.

11.3 Section 2(14):

This section defines that term ‘Capital asset’ to mean ‘Property’ of any kind held by an assessee, whether or not connected with his business or profession. However, assets in the nature of stock-in-trade, personal effects, agricultural land, etc. are excluded from this definition. Now, Explanation has been added w.e.f. 1-4-1962 to clarify that ‘property’ shall include and shall be deemed to have always included any rights in or in relation to an Indian company, including right of management or control or any other rights. This will mean that the term, ‘Capital asset’ shall now include a tangible as well as intangible property.

11.4 Section 2(47):

This section defines the word ‘Transfer’ in relation to a capital asset. This is an inclusive definition and includes transfer of a capital asset by way of sale, exchange, relinquishment, or extinguishment of rights in the asset, compulsory acquisition of the asset, etc. Now a new Explanation is added w.e.f. 1-4-1962 to clarify that the word ‘Transfer’ shall include, and shall be deemed to have always included, disposing of, parting with an asset or any interest therein, or creating any interest in any asset, directly, indirectly, absolutely, conditionally, voluntarily or involuntarily. Such transfer may be by agreement made in India or outside India. This is irrespective of the fact that such transfer has been characterised as being effected, dependent upon or following from the transfer of shares of an Indian or foreign company. This will show that if any interest is created in the shares of an Indian or foreign company by agreement or even an action, it will be considered as a ‘transfer’ of capital asset u/s.2(47).

11.5 Section 9:

This section explains when income is deemed to ac-crue or arise in India in the case of a non-resident. The scope of this section is widened by addition of Explanation 4 and 5 below section 9(1)(i) w.e.f. 1-4-1962 as under:

i) In section 9(1)(i) it is stated that any income shall be deemed to accrue or arise if it accrues or arises, directly or indirectly ‘Through’ or ‘From’ (a) any business connection in India, (b) any property in India (c) any asset or source of Income in India or (d) the transfer of a capital asset situated in India. Now, it is clarified in Explanation 4 that the word ‘Through’ in the above section shall mean and include (w.e.f. 1-4 -1962) — ‘by means of’, ‘in consequence of’ or ‘by reason of’. This explanation appears to have been introduced with retrospective effect to counter the decision of the Supreme Court in ‘Vodafone’ case which was against the Income-tax Department.

ii) Similarly, Explanation 5 clarifies with retrospective effect from 1-4-1962 that an asset or capital asset being any share or interest in a foreign company shall be deemed to be situated in India if such share or interest derives, directly or indirectly, its value substantially from the assets located in India. It may be noted that the concept of holding interest in substantial value of assets located in India has not been explained or defined in this Explanation. This concept is explained in various other sections in the Income tax in different manner. This will be evident from reference to substantial interest in the following sections.

a. Section 2(32): While defining ‘person having substantial interest in the company’ it is stated that if a person holds 20% or more of voting power it is considered as substantial interest.

b. Section 40A(2): Under this section the provisions of transfer pricing are now made applicable in respect of domestic transactions. In the definition of related party, the concept of substantial interest in a company is to be determined by applying the test of 20% or more voting power.

c. Section 79: For carry forward and set-off of losses of a closely held company, the concept of holding at least 50% holding of shares by shareholders who were shareholders on the last day of the year in which loss was incurred has been provided.

In view of the above, for determination of the tax liability on transfer of shares in a foreign company the concept of holding substantial interest in the value of assets located in India should have been clearly defined. Further, the section refers to share on interest in a foreign company which derives (directly or indirectly) its value substantially from the assets located in India. The word ‘value’ is also required to be defined otherwise there will be confusion as to whether the word ‘value’ refers to ‘book value’ or ‘market value’.

11.6 Section 9(1)(vi) — Royalty:

This Section provides that income by way of royalty earned by a non-resident is deemed to be income accruing or arising in India under the circumstances explained in this section. The concept of royalty for this purpose is now expanded, with retrospective effect from 1-6-1976 as under:

i) New Explanation 4 is now added to provide that the transfer of any rights in respect of any right, property or information includes all or any right for use or right to use computer software (including granting of a licence) irrespective of the medium through which such right is transferred.

ii) New Explanation 5 now provides that ‘Royalty’ includes consideration in respect of any right, prop-erty or information, whether or not (a) the posses-sion or control of such right, etc. is with the payer such right, etc. is used directly by the payer, or the location of such right, etc. is in India.

iii) New Explanation 6 now provides that the expression ‘Process’ used in section 9(1)(vi), in-cludes transmission by satellite (including up-linking, amplification, conversion for down-linking of any signal), cable, optic-fiber or by any other similar technology. This is irrespective of the fact whether such process is a secret process or otherwise. It ap-pears that this provision has been made to over rule the decision of the Delhi High Court in the case of Aasia Satellite Telecommunication Co. Ltd. v. DIT, 332 ITR 340 (Del.).

The above amendments with retrospective effect from 1-6-1976 will create lot of practical difficulties. It is possible that the Tax Department may consider part of purchase consideration for software paid to a non-resident as royalty payment. This amendment, read with amendment of section 195, with retrospective effect from 1-4-1962, will create greater hardship to tax payers, as it will be impossible to comply with TDS provisions in respect of such payments made to non-residents in earlier years. It is also possible that the AO may invoke provisions of section 40(a)(i) and disallow such payment made to non-residential and claimed as revenue expenditure by the assessee in the earlier years.

It may, however, be noted that if any such payment is made to a non- resident in a country with which there is DTAA, the provisions in DTAA, if favourable, will apply in preference to the above provision.

11.7 Sections 90 and 90A:

Section 90 empowers the Central Government to enter into agreements with any foreign country or a specified territory for Double Taxation Relief (DTAA). Section 90A empowers the Government to enter into similar agreements with certain specified/ notified association in specified territories. Both these sections are amended as under:

i) New s.s (2A) is inserted w.e.f. 1-4-2013 (A.Y. 2013-14) in section 90 to provide that the provisions of new sections 95 to 102 dealing with General Anti-Avoidance Rule (GAAR) will be applicable even if the provisions of DTAA are more favourable to the assessee. In other words, where GAAR is invoked, the assessee cannot seek protection of beneficial provisions of DTAA. Similar amendment is made in section 90A also.

ii) New s.s (4) is inserted in section 90 w.e.f. 1-4-2013 (A.Y. 2013-2014) to provide that a non-resident cannot claim benefit of DTAA unless a certificate in the Form prescribed by the CBDT is obtained from the foreign country with which the Indian Govern-ment has entered into the DTAA. In this certificate such foreign country will have to certify the place of residence of the non-resident and such other particulars which the Indian Tax Department may require to decide whether the benefit claimed under a particular DTAA is available to the non-resident assessee. Similar amendment is made in section 90A.

iii) New Explanation 3 is inserted in section 90 w.e.f. 1-10-2009 to provide that any meaning as-signed through Notification u/s.90(3) to a term used in DTAA shall be effective from the date of coming into force of the applicable DTAA. Similar amend-ment is made in section 90A w.e.f. 1-6-2006.

11.8 Section 195:

This section provides for deduction of tax at source (TDS) in the case of payments made to non-residents. This section is now amended with retro-spective effect from 1-4-1962. By this amendment it is provided in the new Explanation-2 that the obligation to comply with TDS provisions will apply, with retrospective effect, to all persons whether resident or non-resident. So far section 195 was understood to put the obligation for TDS on residents and non-residents who have a permanent establishment in India and who make payments to non-residents of Income taxable under the Income-tax Act. Now, w.e.f. 1-4-1962, the obligation is extended to a non-resident person who has (a) residence or place of business or business connection in India, or (b) any other presence in any manner whatsoever in India. It may be noted that the obligation for deducting tax at source (TDS) is never made under Chapter XVII of the Income-tax Act (sections 192 to 194, 194A to 194CC and 195) with retrospective effect. All these provisions for TDS, whenever introduced or amended, are from prospective dates to enable the payer to comply with the same. Even in the Finance Act, 2012, such provisions for TDS or amendments are made in sections 193, 194E, 194J, 194LA, 194LC and 195(7) only w.e.f. 1-7-2012. However, only Explanation 2 has been inserted in section 195(1) with retrospective effect from 1-4-1962. By putting such obligation to deduct tax on certain non-residents who were not covered by the section earlier will create practical difficulties for them. It may not be possible to deduct tax from payments covered by section 195 for earlier years and they may be saddled with huge Interest liabilities and other penal conse-quences under the Income-tax Act. TDS provisions in Chapter XVII puts an obligation on the payer of any amount to collect tax due by the payee and pay to the Government. This obligation is in the nature of vicarious liability. It is a well-settled principle of law that such vicarious liability cannot be saddled on a person with retrospective effect.

ii) New s.s (7) has been inserted in section 195 w.e.f. 1-7-2012. By this amendment it is provided that the CBDT may, by Notification specify a class of persons or cases where the person responsible for paying to a non-resident, any sum, whether, chargeable to tax or not, can make an application to the AO to determine the appropriate proportion of sum chargeable to tax. On such determination tax will be deductible u/s.195(1) on that portion of the amount. Such determination by the AO may be by a general order applicable to all similar payments or may be specific order applicable to one specific transaction.

11.9 Section 163:

This section provides for liability of an ‘Agent’ of a non-resident to pay the tax or meet with obligations of a non-resident for whom he is recognised as an agent under this section. For this purpose an employee of the non-resident, (b) a person who has any business connection with the non-resident, (c) a person from or through whom the non-resident receives any income, (d) a person who is the trustee of the non-resident or (e) a person (resident or non-resident) who has acquired by way of transfer a capital asset in India. The section provides for certain limitations on the vicarious li-ability of the agent. Section 149 provides that AO has to give notice to the person whom he wants to treat as agent of a non-resident. The time limit for giving such notice was 2 years from the end of the assessment year for which he wants to treat that person as agent u/s.163. This time limit is now extended to 4 years w.e.f. 1-7-2012. It is also pro-vided, by this amendment, that such notice can be given for any assessment year prior to A.Y. 2012-13. In other words, the AO can give such notice to any person to treat him as agent of a non-resident in respect of income assessable in the case of a non-resident for A.Y. 2008-09, after 1-7-2012 but before 31-3-2013. This amendment appears to have been made to recover tax from Vodafone by treating it as agent of the non-resident company in respect of capital gain alleged to have been made on transfer of shares of a non-resident company to another non-resident company. This tax is now proposed to be levied in respect of such transactions as a result of retrospective amendments of sections 2(14), 2(47), 9 and 195 as discussed above.

11.10 Section 119 of the Finance Act, 2012:

This section provides for validation of demands raised under the Income-tax Act in certain cases in respect of income accruing or arising, through or from a transfer of capital asset situated in India, in consequence of the transfer of shares of a foreign company or in consequence of an agreement or otherwise in a foreign country. This section also states that any notice sent or taxes levied, demanded, assessed, imposed, collected or recovered during any period prior to 1-4 -2012 shall be deemed to have been validly made. Such notice or levy of tax, etc. shall not be called in question on the ground that the tax was not chargeable. This cannot be challenged even on the ground that it is a tax on capital gains arising out of transactions which have taken place in a foreign country. This section will operate notwithstanding anything contained in any judgment, decree or order of any Court, Tribunal or any Authority. It appears that this section is inserted in the Finance Act to ensure that taxes collected in the Vodafone case or other similar cases are not required to be refunded. A question may arise about validity of such a provision for retention of taxes collected from certain assesses by the Govern-ment when any Court judgment or decree directs that such tax should be refunded to the assessee. Another question will arise whether the Government will be liable to pay interest on such amount retained under the validation provision if ultimately the Government has to refund the amount after some years of litigation.

11.11 Section 115A:

This section is amended with effect from 1-7-2012. It is provided that the rate at which Income tax shall be payable in the case of a non-resident, other than a foreign company, in respect of interest received from an Indian company engaged in specified in-frastructure activities, in respect of loan given in foreign currency under an agreement approved by the Government between 1-7-2012 to 30-6-2015, shall be taxable @ 5%. This tax shall be subject to deduction at source u/s.194LC w.e.f. 1-7-2012.

11.12 Section 115BBA:

This section is amended effective from A.Y. 2013-14 to provide that a non-resident, entertainer, such as a theatre, radio, television artist and musician, from performance in India will be taxable at 20% of gross receipts. It is also provided that in the case of a non-resident sports association, tax will be payable at 20% of gross receipts instead of 10% which is the existing rate. Consequential amendments have also been made for the purpose of TDS on these payments u/s.194E w.e.f. 1-7-2012.

11.13 Tax on long-term capital gain:

Section 112 has been amended from A.Y. 2013 -14 to provide that, in the case of a non -resident or a foreign company, capital gains tax payable on transfer of a long-term capital asset, being shares or securities which are not listed on the Stock Ex-change shall be 10%. For this purpose the long-term capital gain is to be computed without indexation or without taking advantage of foreign currency rate differences provided in section 48.

12. Transfer pricing provisions:

In order to widen the scope of transfer pricing pro-visions and to clarify certain issues, the following sections are amended. Some of these amendments have retrospective effect.

12.1 Section 92B:

This section gives the meaning of ‘International Transaction’. This section is now amended with retrospective effect from 1-4-2002. By this amendment, it is provided that the expression ‘International Transaction’ shall include —

i) the purchase, sale, transfer, lease or use of tangible property, including building, transportation vehicle, machinery, equipment, tools, plant, furniture, commodity and any other article or thing.

ii) the purchase, sale, transfer, lease or use of intangible property, including transfer of owner-ship or the provision for use of rights regarding land, copyrights, patents, trademarks, licences, franchises, customer list, marketing channel, brand, commercial secret, know-how, industrial property right, exterior design or practical and new design or any business or commercial rights of similar nature.

iii) capital financing, including any type of long-term or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment receivable or any other debt arising during the course of business.

iv) provision of services, including provision of mar-ket research, market development, marketing management, administration, technical service, repairs, design, consultation, agency, scientific research, legal or accounting service.

v) a transaction of business restructuring or reorganisation, entered into by an enterprise with an associated enterprise, irrespective of the fact that it has a bearing on the profit, income, losses, or assets of such enterprise at the time of the transaction or at future date.

Further, the expression ‘Intangible Property’ has also been defined w.e.f. 1-4-2002 to include 12 items listed in the amended section. This refers to various types of intangible properties related to marketing, technology, artistic, data processing, engineering, customer, control, human capital, location, goodwill and similar items which derive their value from intellectual content rather than physical attributes.

12.2 Section 92C:

i) This section deals with computation of arm’s-length price. In section 92C(1) six methods are provided for determination of ALP. Section 92C(2) states that the most appropriate method for this purpose shall be determined as provided in the Rules 10B and 10C framed by the CBDT. The second proviso to this section is now amended w.e.f. A.Y. 2013-14 to provide that if the variation between the ALP determined under the section and the price at which the international transaction has actually been undertaken does not exceed such percentage not exceeding 3% of the latter, as may be notified by the Government. Earlier this margin was ±5% which has now been restricted to ±3%.

ii) Further, section 92C is amended by insertion of s.s (2A) with retrospective effect from 1-4-2002. The amendment is stated to be of a clarificatory nature. The effect of this amendment is that, in respect of first proviso to section 92C(2), as it stood before its substitution by the Finance (No. 2) Act, 2009, the tolerance band of 5% is not to be taken as a standard deduction while computing ALP. However, it is also clarified that already concluded assessment proceedings should not be a reopened or rectified on the ground of retrospective amendment.

iii) Section 92C(2) is also amended with retrospective effect from 1-10-2009. This amendment clarifies that the second proviso to section 92C(2) shall also be applicable to all proceedings which were pending as on 1-10-2009 i.e., the date on which the second proviso, as inserted by the Finance (No. 2) Act, 2009, came into force.

iv) It may be noted that, as stated above, section 92C now applies to specified domestic transactions also from A.Y. 2013-14.

12.3 Section 92CA:

i) This section deals with reference by the AO to the Transfer Pricing Officer (TPO) in specified cases involving Transfer Pricing issues. S.s (2B) has now been inserted with retrospective effect from 1-6- 2002. It is provided by this amendment that if the assessee has not furnished the audit report u/s.92E in respect of an international transaction and such transaction comes to the notice of the TPO, during the course of proceedings before him, it will be possible for the TPO to consider this transaction as if it has been referred to him by the AO It is also provided in new sub-section (2C) that the AO shall not have power to reopen or rectify any assessment proceedings which have been completed before 1-7-2012.

ii) As stated above, this section is now applicable to specified domestic transactions from A.Y. 2013-14. This will mean that assesses who have entered into specified domestic transaction exceeding Rs.5 Cr. in the accounting year 2012-13 onwards will have to appear before the AO as well as the TPO.

13. Advance Pricing Agreement:

Advance Pricing Agreement (APA) mechanism is introduced by new sections 92CC and 92CD inserted in the Income-tax Act, w.e.f. 1-7-2012. This provision is similar to Clause 118 of the DTC Bill, 2010. This provision is introduced to provide certainty to the international transactions and will reduce litigation relating to transfer pricing issues. Section 92CC gives power to the CBDT to enter into an APA, with any person, determining arm’s-length price.

13.1 In brief, the provisions of section 92CC are as under:

i) The CBDT, with the approval of the Central Government, can enter into an APA with any person (assessee) determining the arm’s-length price or specifying the manner in which such ALP is to be determined. This APA will relate to an international transaction to be entered into by that person.

ii) The manner in which ALP is to be determined in the above APA may include any of the methods referred to in section 92C(1) or any other method, with such adjustments or variations, as the assessee and the CBDT agree upon.

iii) Once APA is entered into by the CBDT with the assessee, the ALP for the international transaction, stated in APA, will be determined on that basis and the AO cannot invoke the provisions of sections 92C and 92CA.

iv) APA referred to above shall be valid for such period not exceeding 5 years as specified in the APA.

v) The above APA shall be binding on (a) the person in whose case and in respect of the transaction stated in the APA and (b) the Income tax Authorities in respect of the party to the APA for the transaction specified therein.

vi) The above APA shall not be binding if there is change in the law or facts relating to the APA.

vii) The CBDT, with the approval of the Govern-ment, can declare the APA as void abinitio, if it finds that the APA has been obtained by the assessee by fraud or misrepresentation of facts.

viii) If the APA is declared as void by the CBDT, all the provisions of the Act shall apply as if such agreement was not entered into. For the purpose of taking any action against the assessee, in view of the cancellation of APA, the period from the date of the APA to the date of its cancellation will not be counted for determining the limitation period.

ix) The CBDT will prescribe a scheme for the pro-cedure to be followed for entering into the APA.

13.2 The effect of the APA entered into by an as-sessee is explained in the new section 92CD as under:

i) Where APA has been entered into by an assessee, the Income-tax return which pertains to a previous year covered under the above agreement and is already filed, the assessee has to file a modified return of income u/s.139 in accordance with and limited to the APA. This modified return has to be filed within 3 months from the end of the month in which APA is entered into.

ii) Once the modified return of income is filed, the AO will have to assess, reassess or recompute the income, irrespective of the fact whether the assessment/reassessment proceedings are over or not, in accordance with the APA.

iii) Where the assessment proceedings are completed, the reassessment proceedings are to be completed within one year from the end of the financial year in which modified return of income is filed. If the assessment proceedings are pending, the period of limitation for completion of these proceedings will be extended by 12 months.

13.3 Considering the wording of sections 92CC and 92CD and the intention of the legislation, it will be possible for any assessee, who has already entered into international transactions in the earlier years, to approach the CBDT after 1-7-2012 to enter into APA in respect of such transactions already entered into in the past. This will enable the assessee to apply to the AO that the pending assessments may be completed on the basis of APA. It appears that even if any appeals are pending for any of the earlier years, the assessee will be entitled to withdraw the appeals and approach the AO to make reassessment or recomputation of income for those years in ac-cordance with APA. For this purpose, the assessee should ensure that the APA covers all the earlier years for which disputes are pending.

13.4 Since the transfer pricing provisions have now been extended to ‘Specified Domestic Transactions’ also, it will be in the interest of the assessee and the Tax Department that the above provisions for Advance Pricing Agreement are extended to ‘Specified Domestic Transactions’ also. This will reduce litigation on the question of determination of arm’s-length pricing issues which will arise in relation to such domestic transactions.

14. General Anti-Avoidance Rule (GAAR):

14.1 This is a new concept introduced in the Income-tax Act by the Finance Act, 2012. Very wide powers are given to the Tax Authorities by these provisions. In new Chapter X-A, sections 95 to 102 have been inserted. In para 154 of the Budget Speech, while introducing the Finance Bill, 2012, the Finance Minister has stated that “I propose to introduce a General Anti-Avoidance Rule (GAAR) in order to counter aggressive tax avoidance schemes, while ensuring that it is used only in appropriate cases, enabling review by a GAAR panel.

14.2 The reasons for introducing GAAR provisions in the Income-tax Act are explained in the Explanatory Notes attached to the Finance Bill, 2012.

14.3 There was large-scale opposition to the introduction of this provision in the form suggested in the Finance Bill, 2012, and the DTC Bill, 2010, pending consideration of the Parliament. This opposition was voiced by various trade and industry bodies in India and abroad. The Finance Minister responded to the various suggestions made by members of the Parliament and various trade and industry bodies while replying to the debate in the Parliament on 7th May 2012.

14.4 GAAR provisions:

For the reasons stated by the Finance Minister, special provisions relating to GAAR have been made in sections 95 to 102 in the Income-tax Act from A.Y. 2014-15 (Accounting Year ending 31-3-2014) and onwards. These provisions apply to all assesses (residents or non-resident) in respect of their transactions in India as well as abroad. Very wide powers are given to the tax authorities to disregard any agreement, arrangement or any claim for expenditure, deduction or relief. These provisions, broadly stated are discussed below.

14.5 Section 95:

This section provides that an arrangement entered into by an assessee may be declared to be an impermissible avoidance arrangement. The tax arising from such declaration by the tax authorities, will be determined subject to provisions of sections 96 to 102. It is also stated in this section that the provisions of sections 96 to 102 may be applied to any step, or a part of the arrangement as they are applicable to the entire arrangement.

14.6 Impermissible Avoidance Arrangement (section 96):

i) Section 96 explains the meaning of Impermissible Avoidance Arrangement to mean an arrangement, the main purpose or one of the main purposes of which is to obtain a tax benefit and it —

a. Creates rights or obligations which would not ordinarily be created between persons dealing at arm’s length.

b. Results, directly or indirectly, in misuse or abuse of the provisions of the Income-tax Act.

c. Lacks commercial substance, or is deemed to lack commercial substance u/s.97, or

d. is entered into or carried out, by means, or in a manner, which are not ordinarily employed for bona fide purposes.

ii) The Finance Bill, 2012, provided in the section that an arrangement whereby there is any tax benefit to the assessee shall be presumed to have been entered into or carried out for the main purpose of obtaining tax benefits, unless the assessee proved otherwise. It will be noticed that this was a very heavy burden cast on the assessee. However, this requirement has now been deleted and, as declared by the Finance Minister, the onus of proof is now on the Department who has to establish that the arrangement is to avoid tax before initiating the proceedings under these provisions.

14.7 Lack of commercial substance (section 97):

i) Section 97 explains the concept of lack of com-mercial substance in an arrangement entered into by the assessee. It states that an arrangement shall be deemed to lack commercial substance if —

a) The substance or effect of the arrangement, as a whole, is inconsistent with, or differs significantly from, the form of its individual steps or a part of such steps.

b) It involves or includes

— Round-trip financing
— An accommodation party,
— Elements that have the effect of offsetting or canceling each other, or
— A transaction which is conducted through one or more persons and disguises the value, location, source, ownership or control of funds which is the subject matter of such transaction, or

c) It involves the location of an asset or a transaction or the place of residence of any party which is without any substantial commercial purpose. In other words, the particular location is disclosed only to obtain tax benefit for a party.

ii) For the above purpose, it is provided that round-trip financing includes any arrangement in which through a series of transactions —

a) Funds are transferred among the parties to the arrangement, and
b) Such transactions do not have any substantial commercial purpose other than obtaining tax benefit.

iii) It is further stated that the above view will be taken by the Tax Authorities without having regard to the following.

a) Whether or not the funds involved in the round-trip financing can be traced to any funds transferred to, or received by, any party in connection with the arrangement,

b) The time or sequence in which the funds involved in the round trip financing are transferred or received, or

c) The means by, manner in, or mode through which funds involved in the round-trip financing are transferred or received.

iv) The party to such an arrangement shall be treated as ‘Accommodating Party’ whether or not such party is connected with the other parties to the arrangement, if the main purpose of, direct or indirect, participation of such party with the arrangement is to obtain, direct or indirect, tax benefit under the Income-tax Act.

v) It is clarified in the section that the following factor shall not be taken into consideration for determining whether there is commercial substance in the arrangement:

   a. The period or time for which the arrangement exists.
   b. The fact of payment of taxes, directly or indirectly, under the arrangement.
   c. The fact that an exist route, including transfer of any activity, business or operations, is provided by the arrangement.

14.8    Consequence of impermissible avoidance arrangement (section 98):

Under the newly inserted section 144BA, the Commissioner has been empowered to declare any arrangement as an impermissible avoidance arrangement. Section 98 states that if any arrangement is declared as impermissible, then the consequences, in relation to tax or the arrangement shall be determined in such manner as is deemed appropriate in the circumstances of the case. This will include denial of tax benefit or any benefit under applicable DTAA. The following is the illustrative list of conse-quences and it is provided that the same will not be limited to the list:

i) Disregarding, combining or re-characterising any step in, or part or whole of the impermissible avoidance arrangement;

ii) Treating, the impermissible avoidance arrangement as if it had not been entered into or carried out;

iii) Disregarding any accommodating party or treating any accommodating party and any other party as one and the same person;

iv) Deeming persons who are connected persons in relation to each other to be one and the same person;

v) Re-allocating between the parties to the ar-rangement, (a) any accrual or receipt of a capital or revenue nature or (b) any expenditure, deduction, relief or rebate;

vi) Treating (a) the place of residence of any party to the arrangement or (b) situs of an asset or of a transaction at a place other than the place or location of the transaction stated under the arrangement.

vii) Considering or looking thorough any arrangement by disregarding any corporate structure.

viii ) It is also clarified that for the above purpose that Tax Authorities may re-characterise (a) any equity into debt or any debt into equity, (b) any accrual or receipt of capital nature may be treated as of revenue nature or vice versa or (c) any expenditure, deduction, relief or rebate may be re-characterised.

14.9 Section 99:

This section provides for treatment of connected person and accommodating party. The section provides that for the purposes of sections 95 to 102, for determining whether a tax benefit exists —

i)The parties who are connected person, in relation to each other, may be treated as one and the same person.

ii) Any accommodating party may be disregarded.

iii) Such accommodating party and any other party may be treated as one and the same person.

iv) The arrangement may be considered or looked through by disregarding any corporate structure.

14.10 It is further provided in section 100 that the provisions of sections 95 to 102 shall apply in addition to, or in lieu of, any other basis for determination of tax liability. Section 101 gives power to the CBDT to prescribe the guidelines and lay down conditions for application of sections 95 to 102 relating to the General Anti-Avoidance Rules (GAAR). Let us hope that these guidelines will specify the type of arrangements and transactions in relation to which alone the Tax Authorities have to invoke the provision of GAAR. Further, it is necessary to specify that if the tax benefit sought to be obtained by any arrangement is say Rs.5 crore or more in a year, then only the Tax Authorities will invoke these powers.

14.11 Section 102:

This section defines words or expressions used in sections 95 to 102 as stated above.

14.12 Section 144BA:

Procedure for declaring an arrangement as impress-ible u/s.95 to u/s.102 is given in this section. This section will come into force from A.Y. 2014-15.

i) The Assessing Officer can make a reference to the Commissioner for invoking GAAR and on re-ceipt of reference the Commissioner shall hear the taxpayer. If he is not satisfied by the submissions of taxpayer and is of the opinion that GAAR provi-sions are to be invoked, he has to refer the matter to an ‘Approving Panel’. In case the assessee does not object or reply, the Commissioner shall make determination as to whether the arrangement is an impermissible avoidance arrangement or not.

ii) The Approving Panel has to dispose of the ref-erence within a period of six months from the end of the month in which the reference was received from the Commissioner.

iii) The Approving Panel shall either declare an arrangement to be impermissible or declare it not to be so after examining material and getting further inquiry to be made. It can issue such directions as it thinks fit. It can also decide the year or years for which such an arrangement will be considered as impermissible. It has to give hearing to the assessee before taking any decision in the matter.

iv) The Assessing Officer will determine conse-quences of such a positive declaration of arrangement as impermissible avoidance arrangement.

v) The final order, in case any consequences of GAAR is determined, shall be passed by the AO only after approval by the Commissioner and, thereafter, first appeal against such order shall lie to the Ap-pellate Tribunal.

vi) The period taken by the proceedings before the Commissioner and the Approving Panel shall be excluded from time limitation for completion of assessment.

vii) The CBDT has to constitute an ‘Approving Panel’ consisting of not less than three members. Out of these three members, two members shall be of the rank of Commissioners of Income-tax and one member shall be an officer of the Indian Legal Service of the rank of Joint Secretary or above to the Central Government. It is not clear from these provisions whether the CBDT will appoint only one Approving Panel for the whole of the country or there will be separate Panels in each State. Considering the work load and considering the convenience of the assessees it is necessary to have one such Panel in each State.

viii) In addition to the above, it is provided that the CBDT has to prescribe a scheme for efficient functioning of the Approving Panel and expeditious disposal of the references made to it.

ix) Appeal against order of assessment passed under the GAAR provisions after approval by the appropriate authority is to be filed directly with the ITA Tribunal and not before the CIT(A). Section 144C relating to reference before DRT does not apply to this assessment order and, therefore, no reference can be made to DRT when GAAR provisions are invoked.

14.13 The above GAAR provisions will have far-reaching consequences for assessees engaged in the business with Indian or foreign parties. GAAR is not restricted to only business transactions. Therefore, all other assessees who are engaged in business or profession or who have no income from business or profession will be affected by these provisions. It appears that any assessee having any arrangement, agreement, or transaction with an associated person will have to take care that the same is at arm’s-length consideration. In particular, an assessee will have to consider the implications of GAAR while (a) executing a will or trust, (b) entering into partner-ship or forming LLP, (c) taking controlling interest in a company, (d) carrying out amalgamation of two or more companies, (e) effecting demerger of a company, (f) entering into a consortium or joint venture, (g) entering into foreign collaboration, or acquiring an Indian or foreign company. It may be noted that this is only an illustrative list and there may be other transactions which may attract GAAR provisions.

14.14 From the wording of the above provisions of sections 95 to 102 and 144BA it appears that the provisions of GAAR can be invoked in respect of an arrangement made prior to 1-4-2013. The CIT or the Approving Panel can hold any such arrangement entered into prior to 1-4-2013 as impermissible and direct the AO to make adjustments in the computation of income or tax in the A.Y. 2014-15 or any year thereafter. As stated in para 15.15 of the report of the Standing Committee on Finance on the DTC Bill, 2010, it would be fair to apply GAAR provisions prospectively, so that it is not made applicable to existing arrangements/transactions. It may be noted that no such provision is made in sections 95 to 102 and 144BA and, therefore, it can be presumed that the above GAAR provisions will have retroactive effect.

14.15 In section 101 it is stated that the CBDT will issue guidelines to provide for the circumstances under which GAAR should be invoked. Let us hope that these guidelines will specify that GAAR provisions will apply to all arrangements or transactions entered into after 1-4-2013 and also the type of arrangements or transactions to which GAAR will apply. It is also necessary to specify that GAAR provisions will be invoked if the tax sought to be avoided is more than Rs.5 crore, in any one year. This is also suggested by the Standing Committee on Finance in their report on the DTC Bill, 2010. As regards the procedure for invoking GAAR, section 144BA(4) provides that if the CIT agrees with the view of the AO to invoke GAAR, he should refer the matter to an Approving Panel. U/s.144BA(14) it is provided that the CBDT will appoint an Approving Panel consisting of two members of the level of Commissioners and one Law Officer. As suggested by the above Standing Committee in their report on the DTC Bill, 2010, such Panel should consist of a Chief Commissioner and two independent technical persons.

15. Assessment, reassessment and appeals:

15.1 Section 139 — Return of income:

i) This section is amended from A.Y. 2012-13 (Ac-counting Year ending 31-3-2012). The amendment now requires that a resident and ordinarily resident, who is otherwise not required to furnish a return of income, will be required to furnish his return of income before the due date for filing the return in the following cases:

a) If the person has any asset located outside India. This will mean that if the person owns any immovable property outside India, any shares in a foreign company, any bank account or other assets outside India, he will have to file return even if the total income is below the taxable limit.

b) If the person has any financial interest in any entity in a foreign country. This will mean that if the person is a beneficiary in any specific or any discretionary foreign trust, he will have to file his return of income whether he has received any benefit from the trust or not.

c)If the person has signing authority in any account located outside India.

ii) The above provision applies to a company, firm, individual, HUF or any non-corporate entity who is a resident and ordinarily resident. Such person will have to file return of income for the accounting year 1-4-2011 to 31-3-2012 (A.Y. 2012-13) and onwards. It may be noted that in a case where the person (whether resident or non-resident) has taxable income in India, he will have to give information about the above items in the form of return of income prescribed for A.Y. 2012-13.
iii) At present, the due date for furnishing the return of income in the case of an assessee, being a company is required to file Transfer Pricing Re-port u/s.92E, is 30th November. It is now provided that the extended time limit up to 30th November will apply to all assessees who are required to fileTransfer Pricing Report u/s.92E. This amendment will come into force from A.Y. 2012-13.

15.2 Section 143 — Procedure for assessment:

At present, the return is required to be processed u/s.143(1) even if the case is selected for scrutiny. The section is now amended, effective from 1-7-2012, to provide that if the case is selected for scrutiny, the AO is not required to process the return of income u/s.143(1). This will mean that if the person has claimed refund in the return of income and his case is taken up for scrutiny, the refund if due, will be issued only after completion of assessment u/s.143(3).

15.3 Section 144C — Reference to DRP:

i) This section is amended with retrospective effect from 1-10-2009. Under this section when the AO wants to make a variation in the income or loss, as a result of order passed by a Transfer Pricing Officer u/s.92CA(3), he has to pass a draft assessment order. If the assessee objects to the variation, he has to refer the matter to the Dispute Resolution Panel (DRP) u/s.144C. The DRP has power to confirm, reduce or enhance the assessment. There was a controversy as to whether this power of enhancement includes power to consider any other matter arising out of the assessment proceedings relating to the draft assessment order. To clarify this doubt, this section is now amended w.e.f. 1-10-2009 to provide that the DRP can consider any other mater relating to the draft assessment order while enhancing the variation. It may be noted that this amendment does not clarify whether the DRP can consider any other matter brought to its notice by the assessee which has the effect of reducing the income or increasing the loss.

ii) Further, it is also clarified that the enhance-ment in time limit for computation of assessment, provided in this section 144C(13), will apply to time limit provided u/s.153 as well as u/s.153B w.e.f. 1-10-2009.

iii) It may be noted that from A.Y. 2013-14, cases in which specified domestic transactions are there will now be referred to TPO. Therefore, the above procedure of making draft order and reference to
DRP will apply in such cases also.

15.4 Sections 147 and 149 — Reassessment of income:

These two sections dealing with income-escaping assessment and time limit for reopening assessment have been amended w.e.f. 1-7-2012. These amendments will apply to any assessment year beginning on or before 1-4-2012. The effect of these amendments is as shown in Table on the next page.

i) At present, the time limit for reopening assessments is 6 years. In a case where assessment is made u/s.143(3) and the income-escaping assessment is not due to failure of the assessee to disclose fully and truly all material facts necessary for assessment for that year, the time limit for reopening is 4 years. This time limit is now enhanced in specified cases.

ii) It is now provided that if the income in relation to any asset (including financial interest in any entity) located outside India, chargeable to tax, has escaped assessment for any year, the time limit for reopening the assessment shall be 16 years. For this purpose, where a person is found to have any asset or any financial interest in any entity located outside India, shall be deemed to be a case where income chargeable to tax has escaped assessment. This provision will apply to a resident or a non-resident. In the coming years, this provision will have far-reaching implications.

iii) It is now provided that if a person has failed to furnish the Transfer Pricing Report u/s.92E in respect of any international transaction, income shall be deemed to have escaped assessment. In such a case the AO can send notice for reopening assessment within the prescribed period.

iv) Similar amendments are made in the Wealth Tax Act also.

v) Reading the above provisions, it appears that in a transaction similar to the case of the famous VODAFONE the assessments of a foreign company which has made taxable capital gains or other income can be reopened for 16 years instead of 6 years as in such cases some assets will be located outside India.

15.5 Sections 153 and 153B — Time limit for completion of assessments:

These sections are amended w.e.f. 1-7-2012. At present, the time limit for completion of assessment or reassessment proceedings is 21 months. In a case where reference is made to the Transfer Pricing Officer, the time limit for completion of assessment is 33 months. This time limit is extended as under:

15.6 Sections 153A and 153C — Assessment in case of search or requisition:

These sections are amended w.e.f. 1-7-2012. Sections 153A and 153C of the Act lay down the procedure for assessment/reassessment in case of search or requisition. Presently, the notice for filing of returns of income and assessment thereof has to be given for six assessment years preceding the previous year in which the search was conducted or requisi-tion made.

It is now provided that the Central Government can notify cases or class of cases where the Assessing Officer shall not be required to issue notice for initia-tion of assessment/reassessment proceedings for six preceding assessment years and proceedings may only be taken up for the assessment year relevant to the year of search or requisition.

15.7 Sections 154 and 156:

i) These sections have been amended w.e.f. 1-7-2012. A statement of tax deduction at source is processed u/s.200A and an intimation is sent to the deductor as provided u/s.200A(1). At present, there is no provision for rectification or appeal against the said intimation.

ii) It is now provided that any mistake apparent from the record in the intimation issued u/s.200A shall be rectifiable u/s.154. It is also provided that the intimation issued u/s.200A shall also be deemed to be a notice of demand u/s.156 and an appeal can be filed with the Commissioner of Income-tax (Appeals) u/s.246A.

iii) In actual practice there is considerable delay in passing order u/s.154 for rectification of mistake in any order passed by the AO It is, therefore, sug-gested that section 246A should be amended to provide that if rectification order is not passed by the AO within 6 months of filing such application the assessee will have a right to file appeal to the CIT(A). It may be noted that similar provision is made in clause 178 of the DTC Bill, 2010.

15.8 Section 245C — Settlement Commission:

Sections 245C dealing with application for settlement of cases has been amended w.e.f. 1-7-2012. At present, an application can be filed before the Settlement Commission u/s.245C by a related person who has substantial interest of more than 20% of the profits of the business at any time during the previous year. Now, it is provided that the substan-tial interest should exist on the date of search and not at any time during the previous year.

15.9 Section 245N: Authority for Advance Ruling (AAR)

This Section is amended w.e.f. 1-4-2013 (A.Y. 2013-14). By this amendment it is provided that an assessee can approach the AAR for determination or decision whether an arrangement which is proposed to be undertaken by any person (resident or non-resident) is an impermissible arrangement as provided in sections 95 to 102. This will enable the person enter-ing into an arrangement to get an Advance Ruling from AAR if he apprehends that the AO may invoke GAAR provisions during assessment proceedings. As suggested earlier, this provision should be made available to persons entering into specified domestic transactions u/s.92BA.

15.10 Section 245Q — Fees for filing application for Advance Ruling:

Fees for filing an application before the Authority for Advance Ruling is increased from Rs.2500 to Rs.10000 w.e.f. 1-7-2012. The CBDT is now given power to increase or reduce the amount of fees from time to time by prescribing the necessary rule for this purpose.

15.11 Section 246A — Appealable orders before CIT(A):

The list of orders against which appeals can be filed before the CIT(A) has now been expanded. Now appeals can be filed before the CIT(A) against the following orders:

i) The tax deductor can file appeal on after 1-7-2012 against the intimation issued u/s.200A relat-ing to short deduction of tax at source.

ii) The assessee can file appeal against the order passed by the AO u/s.153A in search cases if such order is not passed in pursuance of the directions of the DRP. This will be effective from 1-10-2009.

iii) The assessee can file appeal against the order of assessment or reassessment passed under new section 92CD(2) after furnishing the modified return based on the Advance Pricing Agreement as provided in the new section 92CC. This is effective from 1-7-2012.

iv) Penalty order passed under new section 271 AAB where search has been initiated. This is effec-tive from 1-7-2012.

15.12 Section 253 — Appeals before ITA Tribunal:

i) The following amendment is made w.e.f. 1-4-2013:

Any order passed by the AO u/s.143(3), 147, 153A or 153C in pursuance of the order passed by the CIT u/s.144BA(12) in accordance with the directions by the Approving Panel or the CIT, declaring any ar-rangement as impermissible avoidance arrangement, is appealable directly to the ITA Tribunal.

ii) The following amendments are made with reference to DRP cases:

a) The directions given by the DRP in the case of a foreign company or any person in whose case variation in the income arises due to order of the Transfer Pricing Officer are binding on the Assessing Officer. It is now provided that the Assessing Officer can also file an appeal before the ITA Tribunal against an order passed in pursuance of directions of the DRP in respect of objections filed on or after 1st July, 2012.

b) The Assessing Officer or the assessee is entitled to file memorandum of cross objections on receipt of notice that an appeal has been filed by the other party.

c) Any order passed u/s.153A or 153C in pursuance of directions of the DRP shall be directly appeal-able to the ITA Tribunal w.e.f. 1st October, 2009. Presently, such appeals are being filed with the Commissioner (Appeals).

15.13 Section 292CC — Authorisation and assessment in case of search or requisition:

This is a new section inserted w.e.f. 1-4-1976 to clarify the procedure for authorisation and assessment in certain cases of search or requisition. In the case of CIT v. Smt. Vandana Verma, 330 ITR 533 (All.) it was held that if search warrant is in the name of more than one person, then assessment cannot be made individually in the absence of any search warrant in the individual name. To overcome this judgment, it is now provided in this new section, with retrospective effect from 1-4-1976, that where a search warrant has been issued mentioning names of more than one persons, the assessment/reassessment can be made separately in the name of each of the persons mentioned in such search warrant.

16. Penalties and prosecution:

16.1 Section 234E — Fees for delay in furnishing TDS/TCS statement:

This is a new section which has been inserted w.e.f. 1-7-2012. At present, section 272A provides for penalty of Rs.100 per day for delay in furnishing TDS/TCS statement within the time prescribed in section 200(3) or 206C(3). Newly inserted section 234E now provides for levy of fees of Rs.200 for every day of the delay in furnishing TDS/TCS state-ments. However, the total fee shall not be more than the amount of tax deductible/collectable for the quarter for which the TDS/TCS statement is delayed. The fee is to be paid before the delivery of the TDS/TCS statements. Consequently levy or penalty provided in section 272A(2)(k) is deleted. However, new section 271H has been added to levy of penalty under certain circumstances as discussed in Para 16.5 below. It may be noted that no appeal against levy of fees payable u/s.234E is provided in section 246A.

16.2 Section 271 — Penalty for concealment — Amendment w.e.f. 1-4-2013:

The transfer pricing regulations are extended to specified domestic transactions entered into by domestic related parties. If any amount is added or disallowed, based on the arm’s- length price determined by the Assessing Officer, it is now provided that such addition/disallowance shall be deemed to represent the income in respect of which particulars have been concealed or inaccurate particulars have been furnished as provided in Explanation 7 to section 271(1) and it is liable to penalty accordingly.

16.3 Section 271AA — Penalty for failure to report, etc. of International and specified domestic transactions:

i) Amendment w.e.f. 1-7-2012

At present, there is no penalty for non-reporting of an international transaction in the report filed u/s.92E or maintaining or furnishing or incorrect information of documents.

Therefore, a levy of penalty at the rate of 2% of the value of the international transaction is provided, if the taxpayer

   a) fails to keep and maintain prescribed information and documents u/s.92D(1) or (2)
   b) fails to report any international transaction u/s.92E, or
   c) maintains or furnishes any incorrect information or documents.
   ii) Amendment w.e.f. 1-4-2013

The above provision for levy of penalty u/s.271AA will apply if there is failure to comply with the above requirements in the case of domestic transactions also from A.Y. 2013-14.

16.4 Section 271G — Penalty for failure to furnish information or documents u/s.92D — w.e.f. 1-4-2013:

At present, section 271G provides for levy of penalty at 2% of the value of transaction for failure to furnish information or documents u/s.92D which requires maintenance of certain information and documents in the prescribed proforma by the persons entering into an international transaction. This penal provision will now apply to persons entering into specified domestic transactions for such failure effective from A.Y. 2013-14.

16.5 Section 271H: Penalty for failure to furnish TDS/TCS statements:

This is a new section which has been inserted w.e.f. 1-7-2012. In addition to fees payable under the newly inserted section 234E, section 271H also provides for penalty for not furnishing quarterly TDS statements within the prescribed time limit or penalty for furnishing incorrect information such as PAN of the deductee or amount of TDS deducted, etc. in the statements to be filed u/s.200 (3) or 206C(3). A penalty ranging from Rs.10,000 to Rs.1,00,000 is leviable for these failures. No appeal against the levy of this penalty is provided u/s.246A.

It is also provided that no such penalty will be levied if the deductor delivers the statement within a year from the due date and the person has paid the tax along with fees and interest before delivering the statement.

16.6 Sections 271AAA and 271AAB — Penalty on undisclosed income found in the course of search:

i) At present, penalty in the case of search initiated on or after 1st June, 2007 is not liviable u/s.271AAA subject to certain conditions, such as:

   a) the assessee admits the undisclosed income in a statement u/s.132(4) recorded during the search,
   b) he specifies the manner in which such income has been derived, and
   c) he pays the tax together with interest, if any, in respect of such income.

Now, section 271AAA will not apply to search initi-ated on or after 1st July, 2012.

ii) Newly inserted section 271 AAB now provides for levy of penalty on undisclosed income of specified previous years where search has been initiated on or after 1st July, 2012 as under:

   a) If the assessee admits undisclosed income during the course of search in a statement u/s.132(4), specifies the manner in which such income has been derived, pays the tax with interest on such income and furnishes return of income declaring such income, penalty shall be 10% of undisclosed income.
   b) If undisclosed income is not so admitted during the course of search, but disclosed in the return of income filed after the search and he pays the tax with interest, penalty shall be 20% of undisclosed income.
   c) In other cases, the minimum penalty shall be 30% subject to maximum of 90% of the undisclosed income.

16.7 Prosecution provisions — Sections 276C, 276CC, 277, 277A, 278 and 280A to 280D:

The effect of these amendments w.e.f. 1-7-2012 shall be as under:

i) Section 276C — Wilful attempt to evade tax:

At present, if the amount of tax sought to be evaded exceeds Rs.1 lac, the punishment is rigorous imprisonment for minimum of 6 months and maximum of 7 years. The limit of Rs.1 lac is now raised to Rs.25 lac.

In other cases, the rigorous imprisonment period is 3 months minimum and 3 years maximum. The period of 3 years is now reduced to 2 years.

ii) Section 276CC — Failure to furnish Returns of Income:

In this section also amendments similar to amendments in section 276C as stated in para (i) above are made.

iii) Section 277 — False Statement in Verification:

In this section also amendments similar to amendments in section 276C as stated in para (i) above are made.

iv) Section 277A — Falsification of Books of Accounts or Documents:

In this section the maximum term of imprisonment has been reduced from 3 years to 2 years.

v) Section 278 — Abetment of False Return of Income and Statements:

In this section also amendments similar to amendments in section 276C as stated in (i) above are made.

(vi) Sections 280A to 280D:

These new sections have been inserted w.e.f. 1-7-2012 with a view to appoint Special Courts to try specified offences under the Income-tax Act. It appears that these new provisions are made to strengthen the prosecution mechanism and expe-dite the disposal of prosecution cases under the Income-tax Act. In brief these provisions deal with the following matters:

a. Providing for constitution of Special Courts for trial of offences under the Act.

b. Application of summons trial for offences under the Act to expedite prosecution proceedings as the procedures in summons trial are simpler and less time consuming. The provision for summons trials will apply to offences where the maximum term of Imprisonment does not exceed 2 years.

c. Providing for appointment of public prosecutors.

17. Other amendments:
17.1 Senior citizens:
In various sections of the Income-tax Act the age limit for senior citizens was fixed at 65 years. This has now been reduced to 60 years w.e.f. A.Y. 2013-14 (Accounting Year 2012-13).

17.2 Tax audit:
Section 40AB provides that an assessee carrying on business or profession has to get the accounts audited by a Chartered Accountant if the turnover or gross receipts exceed Rs.60 lac in the case of business or exceeds Rs.15 lac in the case of profession. The limit of turnover or gross receipts for this purpose has now been increased to Rs.1 crore in the case of business or Rs.25 lac in the case of profession. Further, date for obtaining tax audit report which is 30th September has been changed to the due date of filing return of income u/s.139(1) as applicable to the assessee. The amendment increasing the limit for turnover/gross receipts will come into force from A.Y. 2013-14 (Accounting Year 2012-13).

17.3 Section 115VG — Computation of daily tonnage income for shipping companies:

This section is amended w.e.f. A.Y. 2013-14. The Tonnage Tax Scheme for shipping companies was introduced by the Finance Act, 2005. This section provides for taxation of income of a shipping company on presumptive basis. Under this scheme, the operating profit of a shipping company is determined on the basis of tonnage capacity of its ships. The rates of daily tonnage income specified in the section have not been changed since 2005. By this amendment these rates are enhanced as under:

17.4 Section 209 — Advance tax calculation:

At present, for the purpose of calculation of advance tax liability, tax deductible or collectable at source was required to be reduced even though the tax was actually not deducted. Therefore, in such cases, there was no interest liability. Now it is provided that unless such tax is actually deducted, the advance tax liability. This amendment is made w.e.f. 1-4-2012.

17.5 Section 234D — Interest on excess refund:

This section is amended w.e.f. 1-6-2003. This section was inserted by the Finance Act, 2003, w.e.f. 1-6-2003 to enable the Government to recover amount of excessive refund granted u/s.143(1). The section provides for levy of simple interest at the rate of ½% for every month or part thereof on the excess amount of refund granted u/s.143(1) if, on regular assessment, it is found to be excessive. Interest is payable for the period starting from the date of refund to the date of regular assessment.

The Delhi High Court in DIT v. Jacabs Civil Incorporated, (2011) 330 ITR 578 held that this provision will apply from the A.Y. 2004-05 and no interest is payable for the earlier assessment years. To overcome this decision, it is now provided that interest shall be payable u/s.234D on excess refund for any earlier assessment years if the proceedings in respect of such assessment are completed after 1-6-2003.

Wealth Tax Act :

Section 2(ea) — Definition of ‘Assets’:

At present, any residential unit allotted to officers, employees or whole-time directors is exempt from wealth tax if the gross annual salary of such person is less than Rs.5 lac. This limit of gross annul salary is increased to Rs.10 lac. This amendment is effec-tive from A.Y. 2013-14.

Section 17 — Wealth-escaping assessment:

This section is amended w.e.f. 1-7-2012 — It is now provided in this section that if any person is found to have any asset or financial interest in any entity located outside India, it will be deemed to be a case where net wealth chargeable to tax has escaped as-sessment. In such cases the wealth tax assessment can be reopened by the AO within 16 years.

Section 17A — Time limit for completion of assessment and reassessment:

This section is amended w.e.f. 1-7-2012. As discussed earlier, while considering the amendments in sections 153 and 153B of the Income tax, this amendment has the effect of increasing the time limit by 3 months for completion of assessment/reassessment proceedings.

Section 45:

This section provides for exemption from wealth tax to section 25 companies, co-operative societies, social clubs, recognised political parties, mutual funds, etc. This list is now expanded to provide that the ‘Reserve Bank of India’ will not be liable to pay wealth tax w.e.f. 1-4-1957.

To sum up:

19.1 From the above discussion, it will be evident that the amendments made in the Income-tax Act by this Budget are the most controversial. In par-ticular, the amendments affecting non -residents which have retrospective and retroactive effect will affect our relationship with many foreign countries and will affect our global trade. The Finance Minister has quoted in his Budget Speech Shakespear’s immortal words “I must be cruel only to be kind”. Reading the provisions relating to amendments in the Income-tax Act, one can say that this year he has been ‘Cruel’ with the non-resident taxpayers. Hopefully he may become ‘kind’ next year.

19.2 In his Budget speech, the Finance Minister has stated that his proposals relating the Direct Taxes will result in a net revenue loss of Rs.4,500 Cr. in the year and the proposals relating to Indirect Taxes will yield net revenue gain of Rs.45940 Cr. However, from his post-budget speeches before various trade bodies indicate that retrospective amendments in the Income-tax Act itself will yield revenue of about Rs.40000 Cr. Considering the stakes involved, it is evident that in the coming years we will witness a long-drawn tax litigation relating to interpretation of the retrospective amendments in the Income-tax Act.

19.3 Another provision which is likely to create lot of hardship to resident as well as non-resident tax-payer is about GAAR. It is true that the implementation of GAAR has been postponed to next year, there is apprehension that the Tax Department may hold arrangements made prior to 1-4-2013 as impermissible and make adjustments in the income for the year 1-4-2013 to 31-3-2014 and subsequent years. In other words, GAAR provisions may have retroactive effect. From the wording of GAAR provisions it is evident that it will now be difficult for resident as well as non-resident tax-payers to take any major decisions about the structure of any business transaction. Even the tax consultants will find it difficult to advise their clients about structuring or restructuring any business transaction. If the Government does not come out with a taxpayer-friendly Guidance Note, taking into consideration the business realities, the fear above invocation of GAAR will continue in the minds of all taxpayers and their tax consultants.

19.4 Another controversial provision which has been made this year relates to specified domestic transactions. By extending the scope of Transfer pricing provisions to these transactions, the compliance cost of the assessee will increase. At present no adequate data about domestic comparable prices is available in our country, and therefore, it will be difficult for assesses to maintain transfer pricing records and documents for this purpose. Since the provisions have been made effective from 1 -4-2012, many assesses may not be well equipped to maintain these records in this year. Since every case in which specified domestic transactions are entered into will be referred to the TPO, the entire assessment proceedings will become lengthy and time consuming. This will also increase compliance cost.

19.5 It is true that the tax burden of individuals, HUF, etc. has been reduced and some beneficial provisions have been introduced to remove some practical difficulties. But, it can be stated that these efforts are only half-hearted and there are many areas in which the taxpayers will have to face many practical difficulties.

19.6 The DTC Bill, 2010, is pending before the Par-liament. The report of the Standing Committee on Finance is also laid before the Parliament. This Bill was to be implemented from 1-4-2012. However, due to the delay in the legislative process it is stated that DTC will now be passed in the next session of the Parliament and will be made effective from 1-4-2013. In view of this, it is not clear why such controversial amendments are made this year in the last year of the life of the present Income-tax Act. By the time the taxpayers grasp the implications of these amend-ments, the new provisions of DTC will come into force from next year. When it became evident in the beginning of this year that DTC may be postponed by one year, it was felt that in this Budget some minimal amendments will be made in the Income-tax Act as and by way of parting gift to the taxpayer. But, after reading the controversial amendments in the Income-tax Act in this Budget, the taxpayers have felt that this Act has given a parting kick to the taxpayers in the last year of its existence.

Acknowledgement:

S. M. Jhaveri, Chartered Accountant has assisted the author in the preparation of this article.

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No. VAT 1512/C.R. 46/Taxation-1, dated 31-5-2012.

This Notification rescinds with effect from the 1st April 2012, the earlier Notification, No. VAT 1507/CR- 44/Taxation-1, dated the 6th December 2007.

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Notifications w.r.t. Schedule D: No. VAT 1511/C.R. 142(1)/Taxation-1, dated 16-5-2012. No. VAT 1511/C.R. 142(2)/Taxation-1, dated 16-5-2012. No. VAT 1511/C.R. 142(3)/Taxation-1, dated 16-5-2012

While by the first Notification changes are effected in entries in Schedule D effective from 1-6-2012, by the second Notification, areas and periods covered under Entry No. 5 of Schedule D and by the third Notification, areas and periods covered under Entry No. 10 of Schedule D are notified. All the notifications are effective from 1-6-2012.

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No. VAT 1512/CR-61/Taxation-1, dated 1-6-2012.

Act No. VIII has been gazetted on 25th April, 2012 and changes have been made in the MVAT Act vide Notification No. VAT-1512/CR-61, the Taxation-1. Consequential amendments are made in the MVAT Rules, 2005 by this Notification.

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Notification w.r.t. Schedule A: No. VAT 1512/C.R. 62/Taxation-1, dated 30-5-2012.

By this Notification changes are effected in Entry 59 in Schedule A: Raisins & Currants Nil Rates of tax : Period extended up to 31st May, 2013.

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Compounding of Offences under the Service Tax — Notification No. 17/2012-ST.

Service Tax (Compounding of Offences) Rules, 2012 have been introduced by which section 9A of the Central Excise Act, 1944 has been made applicable to Service Tax Law vide section 83 of the Finance Act, 1994.

Accordingly, an application for compounding of offences and getting immunity from prosecution may be made, either before or after the institution of prosecution. Rules also prescribe forms, procedure, authorities, fixation of amount and powers to grant and withdraw immunity granted from prosecution.

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Settlement of Cases under the Service Tax Law — Notification No. 16/2012-Service Tax.

The Central Government has introduced Service Tax (Settlement of Cases) Rules, 2012 by which sections 31, 32 and 32A to P of the Central Excise Act, 1944 made applicable to Service Tax Law vide section 83 of the Finance Act, 1994 laying down the provisions of making application for the settlement of cases. The rules also prescribe form, manner of provisional attachment of property, etc.

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Rate of Tax – Entries in Schedule – Speakers for Car Stereos – Are Accessories of Car Stereos – Taxable as Electronic Goods and Not as Sound Transmitting Equipment – Entries 55 and 134 of Schedule I of the Kerala General Sales Tax Act, 1963.

10. State of Kerala v. Sigma Inc, (2011) 42 VST 47 (ker)

Rate of Tax – Entries in Schedule – Speakers for Car Stereos – Are Accessories of Car Stereos – Taxable as Electronic Goods and Not as Sound Transmitting Equipment – Entries 55 and 134 of Schedule I of the Kerala General Sales Tax Act, 1963.

Facts

The dealer sold car stereos with or without speakers which was taxed @8% as electronic goods under Schedule Entry I 55 of the Act, whereas on sale of speakers without stereos, the tax was levied at 12% as sound transmitting equipment including loud speakers covered by the Entry 134 of Schedule I of the Act. The Tribunal allowed the appeal and held that speakers when sold without car stereos are also electronic goods taxable at 8% under Entry 55 of Schedule I. The Department filed revision petition before the Kerala High Court against the impugned order of the Tribunal.

Held

Under Entry 134 of Schedule I, ‘Sound Transmitting Equipment Including Loud Speakers are covered. The Department admitted that car stereos are not covered by Entry 134 and are covered by the general Entry 55 relating to electronic goods. The speakers suitable for attachment of car stereos will also be covered by Entry 55 of the Schedule I being accessories to electronic goods. The loud speakers which are not accessories to any electronic items like stereo, car stereos and radios are covered by Entry 55 and liable to tax @8%. The HC accordingly dismissed the revision petition filed by the Department.

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Rectification of Mistakes – Re-appreciation of Evidence on Records – Not Permissible – S. 37 of the Rajasthan Sales Tax Act, 1994.

9. Assistant Commercial Taxes Officer v. Makkad Plastic, (2011) 42 VST 1 SC

Rectification of Mistakes – Re-appreciation of Evidence on Records – Not Permissible – S. 37 of the Rajasthan Sales Tax Act, 1994.

Facts

The Rajasthan Sales Tax Board, in an appeal filed by the Department, against the order in appeal passed, had allowed the appeal and upheld the assessment order passed by the assessing authority and confirmed the levy of tax at a higher rate as well as penalty. The Board, thereafter, upon application for rectification of mistake filed by the dealer, deleted the penalty, by passing order of rectification of mistake u/s. 37 of the Act. The Department filed revision petition, before the Rajasthan High Court against such order for rectification of mistake, which was dismissed by the High Court. The Department filed appeal before the SC against the judgment of the Rajasthan High Court.

Held

Under Section 37 of the Act, the Board has the power to rectify any mistake which is apparent on record, which is neither a power of review or nor is it akin to the power of revision. But it is only a power to rectify a mistake apparent on the face of the record for which a re-appreciation of the entire records is neither possible nor called for. While passing the subsequent rectification order, the Board had exceeded its jurisdiction by re-appreciating the evidence on record and held that there was no malafide intention on the part of the dealer for tax evasion. The SC set aside the orders passed by the Rajasthan High Court as well as the subsequent order for rectification of mistake passed by the Board and upheld the assessment order passed by the assessing authorities.

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Rent-a-cab service — Respondent having contract for making available various vehicles on request on hire to army — Held not liable for Service tax as the services similar to rent-a-cab scheme operator services, but not the same.

44. (2012) 26 STR 219 (Tri.-Del.) CCE, Meerut-II v. Sapan Mehrotra.

Rent-a-cab service — Respondent having contract for making available various vehicles on request on hire to army — Held not liable for Service tax as the services similar to rent-a-cab scheme operator services, but not the same.

Facts:

The respondent had a contract with the Indian Army. The respondent was responsible for making available various means of transport such as buses, taxis, etc. on hire basis. The charges were defined in the contract. The Department levied Service tax considering the same as ‘rent-a-cab scheme operator service’ as the contract was for fairly long period. The CCE (appeals) held that the services of the respondent were not in the nature of rent-a-cab and therefore, set aside the demand of the Department. Against the Departmental appeal, the respondent argued that the vehicles were not given at disposal of the Indian Army and the services were similar to taxi services. The only difference was that the contract was for a longer period which is the prerequisite of rendering such services prescribed by the Indian Army. Moreover, the turnover in certain years was less than the basic threshold limit prescribed in Notification No. 6/2005, dated 1-3-2005.

Held:

The facts of the case were similar to that of taxi operator in the street. Such services were not liable to Service tax. Only the rates were for a fairly long duration, but the vehicles were not put at disposal of the army for a long duration. The appeal of the Department was dismissed.

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GAPs in GAAP — Accounting for Rate Regulated Activities

Many governments establish regulatory mechanisms to govern pricing of essential services such as electricity, water, transportation, etc. Such mechanisms endeavour to maintain a balance between protecting the consumers from unreasonable prices and allowing the providers of the services to earn a fair return. These rate-regulation mechanisms result in significant accounting issues for service providers.

Company X, the owner of electricity transmission infrastructure and related assets, has been licensed for twenty years to operate a transmission system in a particular jurisdiction. Only one operator is authorised to manage and operate the transmission system. Company X charges its customers for access to the network at prices that must be approved by the regulator. Pricing structures are defined in the law and related guidelines, and are determined on a ‘cost plus’ basis that is based on budget estimates. Once approved, prices are published and apply to all customers. Prices are not negotiable with individual customers. Prices are set to allow Company X to achieve a fair return on its invested capital and to recover all reasonable costs incurred. At the end of each year, Company X reports to the regulator deviations between the actual and budgeted results. If the regulator approves the differences as ‘reasonable costs’, they are included in the determination of rates for future periods. The key question is that, can an entity recognise this difference which it would attempt to recover through rates for future periods as assets and liabilities?

To deal with this issue, the International Accounting Standards Board (IASB) was working on the proposed IFRS for Rate Regulated Activities. Though the IASB paused its project, the ICAI recently issued the Guidance Note on Accounting for Rate Regulated Activities (GN). It is stated that the GN will apply both under the Indian GAAP and IFRS-converged standards (Ind-AS). Since the GN is still to be cleared by the National Advisory Committee on Accounting Standards (NACAS), the ICAI has not announced its applicability date. The GN applies to those activities of an entity which meet both of the following criteria:

(i) The regulator establishes the price the entity must charge its customers for the goods or services the entity provides, and that price binds the customers.

(ii) The price established by regulation (the rate) is designed to recover the specific costs the entity incurs in providing the regulated goods or services and to earn a specified return (costof- service regulation). The specified return could be a minimum or range and need not be a fixed or guaranteed return. The GN defines the ‘costof- service’ regulation as ‘a form of regulation for setting up an entity’s prices (rates) in which there is a cause-and-effect relationship between the entity’s specific costs and its revenues.’ However, the GN does not deal with regulatory mechanisms which prescribe rates based on targeted or assumed costs, such as industry averages, rather than the entity’s specific costs.

GN acknowledges that the rate regulation of an entity’s business activities creates operational and accounting situations which would not have arisen in the absence of such regulation. With cost-ofservice regulation, there is a direct linkage between the costs that an entity is expected to incur and its expected revenue as the rates are set to allow the entity to recover its expected costs. However, there can be a significant time lag between incurrence of costs by the entity and their recovery through tariffs. Recovery of certain costs may be provided for by regulation either before or after the costs are incurred. Rate regulations are enforceable and, therefore, may create legal rights and obligations for the entity.

The GN requires an entity to recognise regulatory assets and regulatory liabilities. Regulatory assets represent an entity’s right to recover specific previously incurred costs and to earn a specified return, from an aggregate customer base. Regulatory liabilities represent an entity’s obligation to refund previously collected amount and to pay a specified return. The following paragraphs explain the reasons provided in the GN for recognition of rate regulated assets and liabilities.

(1) The Framework, defines an ‘asset’ as follows: “An asset is a resource controlled by the enterprise as a result of past events from which future economic benefits are expected to flow to the enterprise.” In a cost-of-service regulation, the resource is the right conferred by the regulator whereby the costs incurred by the entity result in future cash flows. In such cases, incurrence of costs creates an enforceable right to set rates at a level that permits the entity to recover those costs, plus a specified return, from an aggregate customer base. For example, if the regulator has approved certain additions to be made by the entity in its assets base during the tariff period, which would be added to the asset base for tariff setting, the entity upon making such additions obtains the right to recover the costs and return as provided in the regulatory framework though the actual recovery through rates may take place in the future. While adjustment of future rates is the mechanism the regulator uses to implement its regulation, the right in itself is a resource arising as a result of past events and from which future cash inflows are expected.

(2) The cause-and-effect relationship between an entity’s costs and its rate-based revenue demonstrates that an asset exists. In this case, the entity’s right that arises as a result of regulation relates to identifiable future cash flows linked to costs it previously incurred, rather than a general expectation of future cash flows based on the existence of predictable demand. The binding regulations/orders of the regulator for recovery of incurred costs together with the actual incurrence of costs by the entity would satisfy the definition of asset as per the Framework since the entity’s right (to recover amounts through future rate adjustments) constitutes a resource arising as a result of past events (incurrence of costs permitted by the regulator for recovery from customers) from which future economic benefits are expected to flow (increased cash flows through rate adjustments).

(3) As regards the ‘control’ criterion in the definition of an asset as per the Framework, it may be argued that though the entity has a right to recover the costs incurred, it does not control the same since it cannot force individual customers to purchase goods or services in future. In this regard, it may be mentioned that the rate regulation governs the entity’s relationship with its customer base as a whole and therefore creates a present right to recover the costs incurred from an aggregate customer base. Although the individual members of that group may change over time, the relationship the regulator oversees is between the entity and the group. The regulator has the authority to permit the entity to set rates at a level that will ensure that the entity receives the expected cash flows from the customers’ base as a whole. Further, the Framework states that control over the future economic benefits is sufficient for an asset to exist, even in the absence of legal rights. The key notion is that the entity has access to a resource and can limit others’ access to that resource which is satisfied in case of the right provided by the regulator to recover incurred costs through future rate adjustments. Any issues regarding recoverability of the amounts should not affect the recognition of the right in the financial statements though they certainly merit consideration in its measurement.

4. The Framework defines a liability as ‘a present obligation of the enterprise arising from past events, the settlement of which is expected to result in an outflow from the entity of resources embodying economic benefits.’ In cost-of-service regulation, an obligation arises because of a requirement to refund to customers excess amounts collected in previous periods. In such cases, collecting amounts in excess of costs and the allowed return creates an obligation to return the excess collection to the aggregate customer base. For example, if the tariffs initially set assume a certain level of costs towards energy purchased but the actual costs incurred by the entity are less than such assumed levels, the entity would be obliged to make a refund following the ‘truing up’ exercise by the regulator. Such obligation is a present obligation relating to amounts the entity has already collected from customers owed to the entity’s customer base as a whole, not to individual customers. It is not a possible future obligation because the regulator has the authority to ensure that future cash flows from the customer base as a whole would be reduced to refund amounts previously collected. The obligation exists even though its amount may be uncertain. An economic obligation is something that results in reduced cash inflows, directly or indirectly, as well as something that results in increased cash outflows. Obligations link the entity with what it has to do because obligations are enforceable against the entity by legal or equivalent means.

Potential inconsistency with Framework

The IASB has been working on proposed IFRS for Rate Regulated Activities, since 2008. It issued an exposure draft of proposed IFRS in July 2009; however, it has not been finalised till date and the project has been paused. One key reason for the delay arises from strong view that regulatory assets and regulatory liabilities do not meet the definition of an asset and liability under the IASB Framework for Preparation and Presentation of Financial Statements. The proponents of this view make the following arguments:

1) One of the essential characteristics of a regulatory regime is that entities entering it get access to a large customer base in a market that requires a significant investment in infrastructure (i.e., natural ‘barriers to access’). In return, the entity agrees to accept the ‘economic burden’ of having to comply with operating conditions, one of which is the requirement to have the prices of the goods or services it delivers approved by the regulator. This ‘economic burden’ does not lead to a recognisable liability on day one, but may require the recognition of a liability if it leads to contracts becoming onerous as defined by AS-29 Provisions, Contingent Liabilities and Contingent Assets. Under Indian GAAP, any price paid to receive the right to operate in this regulated market will meet the definition of an intangible asset. However, if the regulator allows an entity to increase its future prices, this is not creating a separate asset, but granting the entity relief from the ‘economic burden’ of its operating conditions to put them partly in the same position as an entity in an unregulated market and allowing them to generate a normal return.

2) A cause-and-effect relationship between a cost incurred and future rate increases may not be sufficient enough to justify the recognition of an asset, as this would apply to every entity reconsidering price setting for future periods based upon current year’s performance. For example, Widget Limited (the company) is
‘widget maker.’ It is not involved in rate regulated activity and does not have one-to-one contract with customers. The company is a dominant market participant having some monopolistic features. The company believes that it has incurred too many raw material costs in the current period. The company may make business decision to increase the price for transactions beginning the next year. The question is whether it is appropriate to recognise the incremental increase in sales price multiplied by the expected volume of sales for next year given that the link/reason the dominant market participant increased its price was because this year’s costs were too high (and therefore this year’s ‘reasonable profit’ expected by equity holders was not achieved).

3) To support recognition of regulatory assets/ liabilities, the GN argues that the regulator negotiates rates on behalf of the whole customer base and a regulated entity therefore is comparable to an entity negotiating future prices with a specific customer, thereby binding both the entity and the customer. However, the contrary view is that rate regulation is a condition of the entity’s entry into the regulated market (i.e., a condition of the operating license) and does not create a separate asset. The entity has control over the right to operate in the regulated market, not over the future behaviour of its customers. Since the regulator did not guarantee the future recovery of any costs incurred, an asset controlled by the entity is not being created.

The Framework for Preparation and Presentation of Financial Statements under Indian GAAP is similar to that under IFRS. Therefore, one may argue that the GN is not in accordance with the Indian Framework, which is the base document and serves as a guiding principle in drafting of standards.

Conclusion

Whilst the author does not believe that the existing asset and liability definitions are met, one can understand why the standard-setter considered the recognition of regulatory assets and regulatory liabilities for entities that meet certain conditions, to provide decision-useful information. The author believes that the only way this can be done under the existing Framework is to state that the proposals in the GN are a departure from the Framework, and to provide clear guidance on the scope of the standard and to prohibit analogising. While all entities have the right to increase or decrease future prices, regulated entities have the following characteristics to justify a departure from the Framework: (a) Their prices and operational decisions are restricted and governed by the law and require regulatory approval.

The economic impact of the regulation is to ensure that the regulated entity earns a specified return. (c) As noted in the GN, the regulator does act on behalf of the aggregate customer base with respect to price. Most importantly, the author believes a departure from the Framework is justified because the requirements would result in financial information that presents the economic effects of the regulation — that the entity will achieve a specified return.

A perusal of publicly available Indian GAAP financial statements of few companies engaged in power distribution indicates that they have recognised regulatory assets/ regulatory liabilities. From an Indian GAAP perspective, the Guidance Note is not expected to have any significant impact on these companies and would not change anything (other than legitimising current accounting practice). Therefore the author believes that the standard-setters should not have issued the Guidance Note in the first place and should actively participate in the ongoing effort of the IASB in developing a global standard for rate regulation.

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The Ministry of Corporate Affairs has vide General Circular No. 10, dated 21st May 2012 issued Guidelines for declaring a financial institution as a Public Financial Institution.

Full version of the Circular can be accessed at MCA website

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Ministry issues general clarification on Cost Accounting and Cost Audit Order.

By General Circular No. 12/2012, dated 4th June 2012 the Ministry has issued general clarifications on Cost Accounting Records and Cost Audit Order No. 52/26/CAB-2010, dated 2nd May, 2011. It shall be applicable as under:

(a) For all companies wherein their products/activities are already covered under any of the erstwhile industry-specific Cost Accounting Records Rules and meeting with the threshold limits mentioned in the said Cost Audit Orders — in respect of each financial year commencing on or after the 1st day of April, 2011 i.e., from the financial year 2011-12 onwards.

(b) For all companies wherein their products/activities are for the first time covered under any of the revised industry-specific Cost Accounting Records Rules, and meeting with the threshold limits mentioned in the said Cost Audit Orders — in respect of each financial year commencing on or after the 7th December, 2011 i.e., from the financial year 2012-13 (including calendar year 2012) onwards.

In case of companies engaged in production, processing, manufacturing or mining of multiple products/activities, if any of their products/activities are not covered under the industry-specific Cost Accounting Records Rules, but are covered under the Companies (Cost Accounting Records) Rules, 2011 notified vide GSR 429(E), dated June 3, 2011 and wherein such products/activities are not covered under cost audit vide cost audit orders dated June 30, 2011 and January 24, 2012; such companies shall be required to file compliance report with the Central Government in accordance with the clarifications given vide para

(a) of the MCA’s General Circular No. 68/2011, dated 30-11-2011.

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Ministry grants exemption from Mandatory Cost Audit to all units located in specified zones.

Vide General Circular No. 11/2012, dated 25th May 2012, the Ministry of Corporate Affairs has issued clarification regarding the coverage of the Cost Accounting Records and Cost Audit by granting exemption from Mandatory Cost Audit to units located in the specified zones.

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Ministry extends time limit for filing Form 11 for F.Y. 2011-12.

Vide Circular dated 6th June 2012 the Ministry has extended the time limit for filing the mandatory Form 11(LLP) from 60 days to 90 days for the financial year ending 31-3-2012 effective 31st May 2012.

Full version of the Circular can be accessed on http://www.mca.gov.in/Ministry/pdf/General_Circular_ No_13_2012.pdf

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Limited Liability Partnerships integrated on MCA21.

The Ministry of Corporate Affairs, has integrated the Limited Liability Partnership (LLP) under the platform of MCA21. As a result all state of the art services like credit card payment, online banking from six banks, payment through NEFT from any bank and host of other services will now be available for them.

Accordingly, all LLP forms except forms to be filed by Foreign LLP shall be processed and approved by respective Registrar of Companies (ROCs) of concerned state. The forms to be filed by foreign LLPs shall be processed and approved by the ROC, Delhi & Haryana.

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Cost Audit Reports and Compliance Reports to be filed after 30th June 2012 in new XBRL formats.

Ministry of Corporate Affairs has mandated the cost auditors and the companies to file Cost Audit Reports (Form-I) and Compliance Reports (Form-A) for the year 2011-12 onwards (including the overdue reports relating to any previous year) in XBRL mode.

Therefore, filing of existing Form I – Cost Audit Report and Form A – Compliance Report shall not be allowed till 30-6-2012 by which time the new XBRL mode of filing will be ready and enabled.

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Company Law Forms changing where new Schedule VI is applicable.

Currently Form 23AC, Form 23ACA, Form 23AC-XBRL and Form 23ACA-XBRL cannot be filed by those companies whose financial year is starting on or after 1-4-2011 as Revised Schedule VI is applicable for such period.

New e-forms are undergoing revision to align with the Revised Schedule VI and new forms would be updated shortly.

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A.P. (DIR Series) Circular No. 132, dated 8-6-2012 — Money Transfer Service Scheme.

Presently, a single individual beneficiary can receive for personal e up to 12 remittances not exceeding INR156,614 each in a calendar year. This Circular has increased the number of remittances that an individual can receive from 12 to 30.

Thus, an individual can now receive for personal use up to 30 remittances each, not exceeding US INR156,614 in a calendar year.

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A.P. (DIR Series) Circular No. 131, dated 31-5-2012 — Overseas Direct Investments by Indian Party — Online Reporting of Overseas Direct Investment in Form ODI.

Presently, although banks can generate the UIN online for overseas investments under the Automatic Route, reporting of subsequent remittances for overseas investments under the Automatic Route as well as the Approval Route could be done online in Part II of Form ODI only after receipt of the letter from RBI confirming the UIN.

This Circular states that, in the case of overseas investments under the Automatic Route, UIN will be communicated through an auto-generated e-mail sent to the email-id made available by the Authorised Dealer/Indian Party. This auto-generated e-mail giving the details of UIN allotted to the JV/WOS will be treated as confirmation of allotment of UIN, and no separate letter will be issued with effect from June 1, 2012 by RBI, either to the Indian Party or to the Authorised Dealer. Subsequent remittances are to be reported online in Part II of form ODI, only after receipt of the e-mail communication/ confirmation conveying the UIN.

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The Ministry of Corporate Affairs has decided to impose fees with effect from 22nd July 2012 on certain e-forms.

The Ministry of Corporate Affairs has decided to impose fees with effect from 22nd July, 2012 on certain e-forms to be filed with the ROC, RD or MCA (HQ) where at present no fee is prescribed. Fees will be applicable among others for Form 23B — being information by statutory Auditors to the Registrar of Companies Act u/s.224(1)(a) and Form 24A — Application to RD for Appointment of Auditors u/s.224(3) and others.

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Sections 28, 145 — Project completion method — In the case of an assessee following project completion method, receipts by way of sale of TDR, which TDR has direct nexus with the project undertaken, can be brought to tax only in the year in which the project is completed.

16. Pushpa Construction Co. v. ITO ITAT ‘C’ Bench, Mumbai
Before J. Sudhakar Reddy (AM) and R. S. Padvekar (JM)
ITA No. 193/Mum./2010

A.Y.: 2006-07. Decided on: 25-4-2012 Counsel for assessee/revenue: Vipul B. Joshi/ A. C. Tejpal

Sections 28, 145 — Project completion method — In the case of an assessee following project completion method, receipts by way of sale of TDR, which TDR has direct nexus with the project undertaken, can be brought to tax only in the year in which the project is completed.

Facts:

The assessee, a partnership firm, engaged in construction activity especially the Slum Rehabilitation Programme (SRA Scheme) launched by the Government of Maharashtra, had undertaken two projects of slum rehabilitation, during the financial year 2005-06, which were not completed as on 31-3-2006. The assessee was following project completion method of accounting.

During the financial year 2005-06, the assessee sold TDR allotted to it by BMC, which TDR was directly linked to the projects undertaken by the assessee, for a consideration of Rs.2,67,29,626. Since the projects were not complete as on 31-3-2006, this amount was reflected in the balance sheet as on 31- 3-2006 as advance. The Assessing Officer (AO) rejected the contentions of the assessee and brought to tax the entire amount as income of the assessee for A.Y. 2006-07. Aggrieved, the assessee preferred an appeal where it was also submitted that the entire sale proceeds of TDR totalling to Rs.6,90,26,192 were reflected in the P & L Account for A.Y. 2008-09 and surplus income of Rs.2,78,59,939 was offered. The CIT(A) confirmed the order of the AO. Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:

The Tribunal noted that admittedly the two slum rehabilitation projects were not completed in A.Y. 2006-07 and also that the TDR in quesetion had direct nexus with the two projects undertaken by the assessee. It found that the contention of the assessee is supported by the decision of the jurisdictional High Court in the case of CIT Central I, Mumbai v. Chembur Trade Corporation, (ITA No. 3179 of 2009) order dated 14-9-2011 and also the decision of Mumbai Bench of ITAT in the case of ACIT v. Skylark Building, 48 SOT 306 (Mum.) and also that the assessee has offered the amounts in A.Y. 2008- 09 when the projects were completed.

The Tribunal accepted the contention of the assessee and restored the matter back to the file of the AO with a direction to verify whether the assessee has offered sale consideration of TDR in question in A.Y. 2008-09. If it has so offered, then the same should not be taxed in A.Y. 2006- 07.

The Tribunal allowed the appeal filed by the assessee.

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Section 54 — Exemption from capital gains tax provided the amount is invested in purchase or construction of a flat within the prescribed time period — Held that (1) booking of the flat with the builder is to be treated as construction of flat; (2) the extended period u/s.139(4) has to be considered for the purposes of utilisation of the capital gain amount.

15. Kishore H. Galaiya v. ITO ITAT ‘A’ Bench, Mumbai Before B. R. Mittal (JM) and Rajendra Singh (AM) ITA No. 7326/Mum./2010 A.Y.: 2006-07 Decided on: 13-6-2012 Counsel for assessee/revenue: Bhavesh Doshi/K. R. Vasudevan

Section 54 — Exemption from capital gains tax provided the amount is invested in purchase or construction of a flat within the prescribed time period — Held that (1) booking of the flat with the builder is to be treated as construction of flat; the extended period u/s.139(4) has to be considered for the purposes of utilisation of the capital gain amount.

Facts:

The assessee along with his wife was joint and equal owner of the property being a residential flat at Mumbai which had been purchased by them in April 2002 for a consideration of Rs.21 lac. The flat was sold by them on 7-3-2006 for a consideration of Rs.45 lac in which the share of the assessee was Rs.22 lac. The assessee computed the long term capital gain from sale of the flat after deducting the indexed cost of acquisition at Rs.9.98 lac. The assessee purchased another flat jointly along with his wife for a total consideration of Rs.35 lac. The assessee had made total payment of Rs.14.62 lac till 16-2-2009. The assessee, therefore, claimed that he was entitled to claim exemption u/s.54 of the Act as the capital gain had been invested in the new residential flat. The claim for exemption was denied by the AO because the assessee: Failed to deposit the balance amount in the account in any of the specified bank as required u/s.54 and utilise the same in accordance with the scheme framed by the Government; and
Could not produce evidence regarding taking possession of the new flat. On appeal, the CIT(A) confirmed the disallowance made by the AO. Before the Tribunal, the Revenue strongly supported the orders of the authorities below.

Held:

The Tribunal noted that the assessee had booked the new flat with the builder and as per agreement, the assessee was to make payment in instalments and the builder was to hand over the possession of the flat after construction. Based on the clarification of the CBDT vide its Circular No. 472, dated 16-12-1993 read with Circular No. 471 dated, 15-10-1986 and the decision of the Mumbai Bench of the Tribunal in the case of ACIT v. Smt. Sunder Kaur Sujan Singh Gadh, (3 SOT 206), the Tribunal noted that the case of the assessee was to be considered as construction of new residential house and not purchase of a flat. Thus, the Tribunal held that in case the assessee had invested the capital gains in construction of a new residential house within a period of three years, this should be treated as sufficient compliance of the provisions of section 54. According to it, it was not necessary that the possession of the flat should also be taken within the period of three years. For the purpose, it relied on the decision of the Bombay High Court in the case of CIT v. Mrs. Hilla J. B. Wadia, (216 ITR 376). As regards the default pointed out by the authorities below regarding non-deposit of unutilised amount of capital gain in the Capital Gain Account Scheme, the Tribunal noted the submission of the assessee that it was only due to ignorance of law and intention of the assessee was always to utilise the amount for construction of flat and the assessee had kept the amount in the savings bank account which was utilised towards the construction of flat. According to the Tribunal, this was only a technical default and on this ground alone the claim of exemption cannot be denied, particularly when the amount had been actually utilised for the construction of residential house and not for any other purpose. The view was supported by the decision of the Jodhpur Bench of the Tribunal in the case of Jagan Nath Singh Lodha v. ITO, (85 TTJ 173). The Tribunal also agreed with the assessee’s contention that the due date of filing of return of income u/s.139(1) has to be construed with respect to the due date of section 139(4) as the s.s (4) provides for the extended period for filing return as an exception to the section 139(1) and considering this, there was no default as the entire amount of capital gain had been invested within the due date u/s.139(4). For the purpose, reliance was placed on the judgment of the Punjab and Haryana High Court in the case of Ms. Jagrity Aggarwal (339 ITR 610).

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(1) Section 54F — Exemption of long-term capital gains where sales consideration is invested in purchase of a house — Whether purchase of house jointly with spouse is eligible — Held, Yes. (2) Section 94(7) — Purchase of units and sale thereof at loss after earning dividend — If date of tender of cheque for purchase of shares was considered as the date of purchase, then the sale was not within three months of purchase — Whether the provisions of section 94(7) attracted — Held, No.

14. Vasudeo Pandurang Ginde v. ITO ITAT ‘F’ Bench, Mumbai
Before Vijay Pal Rao (JM) and N. K. Billaiya (AM)
ITA No. 4285/Mum./2009
A.Y.: 2004-05. Decided on: 6-6-2012
Counsel for assessee/revenue: C. N. Vaze/ Rajan

Section 54F — Exemption of long-term capital gains where sales consideration is invested in purchase of a house — Whether purchase of house jointly with spouse is eligible — Held, Yes.

Section 94(7) — Purchase of units and sale thereof at loss after earning dividend — If date of tender of cheque for purchase of shares was considered as the date of purchase, then the sale was not within three months of purchase
— Whether the provisions of section 94(7) attracted — Held, No.

Facts:

(1) The assessee had made long-term capital gain on sale of shares. The sales proceeds were invested in purchase of row house and exemption u/s.54F was claimed. One of the grounds on which the exemption was denied by the AO was that the house purchased by the assessee was in the joint name of his wife.

(2) The assessee had purchased units of mutual funds of Rs.3 crore on 26-12-2003. On the very same date, the assessee received a dividend of Rs.1.16 crore. On 29-3-2004, the assessee redeemed the units for Rs.1.7 crore and thereby booked a shortterm capital loss of Rs.1.3 crore. The AO found that the cheque of Rs.3 crore for the purchase of units was actually realised on 30-12-2003 and therefore, according to him, the period of holding before the redemption of the said units on 29-3-2004 was only 88 days i.e., less than 3 months. Therefore, according to him, the transaction was hit by the provisions of section 94(7) of the Act. The AO was also of the view that the entire transaction of sale and purchase of mutual fund units was nothing but a colourable device for setting off of the capital gains arising on sale of shares. Accordingly, the set off of short term capital loss claimed by the assessee was denied. On appeal the CIT(A) confirmed the denial of exemption u/s.54F. While on the issue regarding applicability of section 94(7) he noted that the provisions of section 94(7) lays down three cumulative conditions, the non-fulfilment of any one of the conditions would result into non applicability of section 94(7). Thus, if the date of the purchase as claimed by the AO was 30-12-2003, then it cannot be said that the units were purchased within three months prior to the record date because the record date was 26-12-2003 when the dividend was declared. Thus, one of the conditions essential for application of section 94(7) is not fulfilled. Secondly, the CIT(A) noted that the mutual fund had accepted 26-12-2003 as the date on which the units were allotted to the assessee. Based on the said date, the second conditions viz. that the units are sold within a period of three months was also not fulfilled. Accordingly, it was held that the provisions of section 94(7) were not applicable. As regards the point raised by the AO that the entire transaction was a colourable device, the CIT(A) relying on the decision of the Bombay High Court in the case of CIT v. Walfort Share & Stock Brokers Pvt. Ltd., Appeal No. 18 of 2006 held that as the conditions of section 94(7) have not been fulfilled, no disallowance was permissible.

Held:

(1) The Tribunal noted that the total consideration for the house had been met by the assessee. According to it the assessee had added the name of his wife only for the sake of convenience. It also drew support from the provisions of section 45 of the Transfer of Property Act which provides that the share in the property will depend on the amount contributed towards the purchase consideration. Further, relying on the decisions listed below, the Tribunal held that since the total consideration for the house had been paid by the assessee, the exemption cannot be denied on this ground.

The decisions relied on are as under: ITO v. Arvind T. Thakkar in ITA No. 7338/Mum./2005 vide order dated 29-4-2011;
Ravinder Kumar Arora v. ACIT in ITA No. 4998/ Del./2010 vide order dated 11-3-2011; and
DIT v. Mrs. Jennifer Bhide, (2011) 15 Taxmann 82 (Kar.). (2) As regards section 94(7) The Tribunal noted that the whole issue revolved around the date of purchase of units. The Tribunal agreed with the findings of the CIT(A) and the appeal filed by the Revenue was dismissed.

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Sections 40(a)(ia), 194H — Commission retained by credit card companies out of amounts paid to merchant establishment is not liable for deduction of tax at source u/s.194H.

13. DCIT v. Vah Magna Retail (P) Ltd.
ITAT ‘B’ Bench, Hyderabad
Before D. Karunakararao (AM) and Saktijit Dey (JM)
ITA No. 905/Hyd./2011
A.Y.: 2007-08. Decided on: 10-4-2012
Counsel for revenue/assessee: Dr. B. V. Prasad Reddy/None

Sections 40(a)(ia), 194H — Commission retained by credit card companies out of amounts paid to merchant establishment is not liable for deduction of tax at source u/s.194H.

Facts:

The assessee-company, engaged in business of direct retail trading in consumer goods, had claimed a deduction of Rs.16,34,000 on account of commission paid to credit card companies, which amount was disallowed by the AO u/s.40(a)(ia) on the ground that assessee failed to deduct tax at source u/s.194H of the Act. Aggrieved the assessee preferred an appeal to the CIT(A) where it contended that the assesee only receives payment from bank/credit card companeis after deduction of commission thereon, and thus, this is only in the nature of a post facto accounting and does not involve any payment or credit to the account of the banks or any other account before making such payment by the assessee. The CIT(A) accepted the claim of the assessee for deduction of Rs.16,34,000 and observed as follows: “9.8 On going through the nature of transactions, I find considerable merit in the contention of the appellant 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 transaction for the bank. The sale made on the basis of a credit card is clearly a transaction of the merchants 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/brokerage for acting on behalf of the merchant establishment. Accordingly, concluding that there was no requirement for making TDS on the ‘Commission retained by the credit card companies, the disallowance of Rs.16,34,000 is deleted . . . . .” Aggrieved, the Revenue preferred an appeal to the Tribunal.

Held:

The Tribunal found no infirmity in the reasoning given by the CIT(A). It upheld the order passed by the CIT(A). The Tribunal dismissed the appeal filed by the Revenue.

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Section 14A — Disallowance u/s.14A applies to partner’s share of profits in a firm — ‘Depreciation’ is not an expenditure but an allowance, hence the same cannot be disallowed u/s.14A.

12. Vishnu Anant Mahajan v. ACIT
ITAT Special Bench, Ahmedabad
Before G. E. Veerabhadrappa (President),
G. C. Gupta (VP) and K. G. Bhansal (AM)
ITA No. 3002/Ahd./2009
A.Y.: 2006-07. Decided on: 25-5-2012
Counsel for assessee/revenue: Sunil H. Talati/S. K. Gupta with Kartarsingh

Section 14A — Disallowance u/s.14A applies to partner’s share of profits in a firm — ‘Depreciation’ is not an expenditure but an allowance, hence the same cannot be disallowed u/s.14A.

Facts:

The assessee, a partner in the firm, derived income by way of remuneration and interest from the firm in addition to the share of profits in the firm which was exempt u/s.10(2A). Apart from the income from the firm, the assessee also had income under the head house property, capital gains, interest income and dividend income. The assessee had suo motu disallowed 1/10th of depreciation allowance of motor car. The Assessing Officer (AO) disallowed expenditure u/s.14A. Aggrieved, the assessee preferred an appeal to the CIT(A) who held that since the share of profits from the firm is exempt u/s.10(2A), expenditure was required to be disallowed u/s.14A. Since the assessee derived 76% of professional income as share from firm and balance 24% by way of remuneration and interest income, the CIT(A) allocated the expenses to income not includible in total income u/s.10(2A). Thus, business income by way of remuneration and interest from firm was taxed in the hands of the assessee u/s.28(v) after allowing 24% of the expenditure. 76% of the expenditure was disallowed. Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:

A firm is not a separate entity under the general law, whereas under the Income-tax Act, it is a separate entity distinct from its partners. Remuneration and interest on capital of partners is allowed as a deduction to the firm and the same are taxable in the hands of the partners u/s.28(v), whereas the profits of the firm, after deducting remuneration to partners and interest on capital of partners, are taxed in the hands of the firm. The partners do not pay tax on the share of profits from the firm since the same are exempt u/s.10(2A). Section 10(2A) provides that the share of partner shall not be included in his total income, hence it is not possible to hold that share of profit is not excluded from the total income of the partner because the firm has already been taxed thereon. Since share of profits are excluded from the total income of the partner, section 14A would apply and any expenditure incurred to earn the share of profits needs to be disallowed. In the case of Hoshang D. Nanavati v. ACIT, (ITA No. 3567/Mum./2007 for A.Y. 2003-04, order dated 18-3- 2011), while considering the question as to whether depreciation is an expenditure or not, it has been held that section 14A deals only with the expenditure and not any statutory allowance admissible to the assessee. A statutory allowance u/s.32 is not an expenditure. Being in agreement with the decision of the DB in the case of Hoshang Nanavati (supra), the SB held that depreciation cannot be disallowed u/s.14A.

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Business expenditure: TDS: Disallowance: Non-resident: Sections 9 and 40(a)(i): A.Y. 2007-08: Income deemed to accrue or arise in India: Business connection not established: Mere entry in books of account of Indian payer does not mean that non-resident received payment in India: No income accrued in India: Tax need not be deducted at source: Expenditure not disallowable.

32. Business expenditure: TDS: Disallowance: Non-resident: Sections 9 and 40(a)(i): A.Y. 2007-08: Income deemed to accrue or arise in India: Business connection not established: Mere entry in books of account of Indian payer does not mean that non-resident received payment in India: No income accrued in India: Tax need not be deducted at source: Expenditure not disallowable.

[CIT v. EON Technology P. Ltd., 343 ITR 366 (Del.)]

The assessee-company was engaged in the business of development and export of software. In the A.Y. 2007-08, the assessee paid commission to its parent company in the U.K. on the sales and amounts realised on export contracts procured by it for the assessee and the same was claimed as deduction. The Assessing Officer held that the U.K. company had a business connection in India and that commission income had accrued and arisen in India when credit entries were made in the books of the assessee in favour of the U.K. company and the income towards commission was received in India. He held that the assessee was liable to deduct tax at source and as there was failure to do so, disallowed the expenditure u/s.40(a)(i) of the Income-tax Act, 1961. The Commissioner (A) held that the ‘business connection’ was not established and allowed the assessee’s claim. The Tribunal upheld the decision of the Commissioner (A).

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

“(i) The Assessing Officer did not elaborate or had not discussed on what basis he had come to the conclusion that ‘business connection’ as envisaged u/s.9(1)(i) existed. The assessee had submitted that the U.K. company was a non-resident company and did not have any permanent establishment in India. The U.K. company was not rendering any service or performing any activity in India itself. These facts were not and could not be disputed.

(ii) The stand of the Revenue was contrary to the two Circulars issued by the CBDT in which it was clearly held that when a non-resident agent operates outside the country, no part of his income arises in India, and since payment was remitted directly abroad, merely because an entry in the books of account was made, it did not mean that the non-resident had received any payment in India.

(iii) The Assessing Officer did not make out a case of business connection as stipulated in section 9(1)(i) of the Act. He had not made any foundation or basis for holding that there was business connection and, therefore, section 9(1)(i) of the Act was applicable.

(iv) The Appellate Authorities, on the basis of material on record, had rightly held that ‘business connection’ was not established.”

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Business expenditure: Capital or revenue: A.Y. 2003-04: Assessee tenant in premises contributed to reconstruction cost of premises with understanding that it will continue as tenant at the same rent: Expenditure is revenue expenditure.

31. Business expenditure: Capital or revenue: A.Y. 2003-04: Assessee tenant in premises contributed to reconstruction cost of premises with understanding that it will continue as tenant at the same rent: Expenditure is revenue expenditure.

[CIT v. Talathi and Panthaky Associated P. Ltd., 343 ITR 309 (Bom.)]

The assessee was a tenant of 5000 sq.ft. in a building which was declared as unsafe. The assessee contributed Rs.1.5 crore for reconstruction of the building with the understanding that it will continue as a tenant at Rs.11,300 per month. In the A.Y. 2003-04, the assessee claimed the deduction of the said expenditure of Rs.1.5 crore. The Assessing Officer disallowed the claim holding that it is capital expenditure. The CIT(A) and the Tribunal allowed the assessee’s claim.

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

“(i) The assessee had not incurred any expenditure of capital nature. The expenditure did not result in the acquisition of a capital asset by the assessee. The assessee continued as before to be a tenant in respect of the premises.

(ii) By contributing an amount of Rs.1.5 crore towards the construction or, as the case may be, renovation of the existing structure, the assessee obtained a commercial advantage of securing tenancy of an equivalent area of premises at the same rent as before. Since there was no acquisition of a capital asset and the occupation of the assessee continued in the character of a tenancy, the expenditure could not be regarded as being of a capital nature.

(iii) The cost of repair/reconstruction of the tenanted premises was of a revenue nature and was allowable as and by way of deduction.”

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Appellate Tribunal: Adjournment: Section 255, Rule 32 of Income-tax (Appellate Tribunal) Rules, 1963: Where a case is adjourned by Tribunal by giving a last opportunity to counsel for assessee, same can be adjourned again on the next date, if sufficient or reasonable cause exists on that day.

30. Appellate Tribunal: Adjournment: Section 255, Rule 32 of Income-tax (Appellate Tribunal) Rules, 1963: Where a case is adjourned by Tribunal by giving a last opportunity to counsel for assessee, same can be adjourned again on the next date, if sufficient or reasonable cause exists on that day.

[Mehru Electrical and Engg. (P) Ltd. v. CIT, (2012) 22 Taxman.com 45 (Raj.)]

The assessee’s appeal before the Tribunal was fixed for hearing on 11-1-2010 and at the request of the counsel for the assessee, hearing of the case was adjourned to 9-2-2010 giving him a last opportunity. However, the counsel for the assessee moved an application before the Tribunal for adjournment of the case in advance on 8-2-2010 on the ground that he was going to Mumbai for some urgent work. On 9-2-2010 the Tribunal rejected the application for adjournment. It further heard the counsel for the Revenue ex parte and allowed the appeal of the Revenue. On appeal to High Court, the assessee contended, inter alia, that

(i) from the order of the Tribunal it was clear that adjournment application was rejected only on the ground that a last opportunity was granted to counsel for the assessee to argue the appeal, and

(ii) even if a last opportunity was granted on last date, it did not mean that on sufficient ground the case could not be adjourned again. The Rajasthan High Court allowed the assessee’s appeal and held as under: “(i) From the proceedings of the Tribunal dated 11-1-2010, it is clear that last opportunity was given and the case was adjourned for 9-2- 2010. Application for adjournment was filed on 8-2-2010, which was put up for consideration before the Tribunal on 9-2-2010. From the application, it appears that counsel for the assessee had to go to Mumbai due to some urgent work. No one was present on behalf of the assessee. The Tribunal, in absence of counsel for the assessee, rejected the adjournment application. (ii) Ordinarily it is not incumbent on the part of the Tribunal to adjourn the case again when a last opportunity had already been granted to the counsel for the assessee. However, there may be number of circumstances where adjournment becomes necessary in the interest of justice. If counsel for the assessee had to go for some urgent work to Mumbai and an application for adjournment was moved in advance, then in the interest of justice a short adjournment should have been granted. If number of opportunities had already been afforded to the counsel for the assessee, then adjournment could have been granted on payment of cost.

(iii) The Tribunal has not assigned any reason as to whether reason mentioned in the application for adjournment constituted sufficient cause for adjournment or not. Even if a last opportunity is granted and case is fixed for hearing and sufficient cause is shown on the date fixed for hearing, then the case can be adjourned and it should be adjourned in the interest of justice. In these circumstances, the Tribunal committed an illegality in rejecting the application for adjournment and in deciding the appeal ex parte.

(iv) Therefore, the ex parte order passed by the Tribunal deserved to be set aside. The case was to be remitted back to the Tribunal for decision afresh on merits.”

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Appeal to High Court: Power and scope: Section 260A: Jurisdiction to reassess: Question can be raised for the first time before the High Court.

29. Appeal to High Court: Power and scope: Section 260A: Jurisdiction to reassess: Question can be raised for the first time before the High Court.

[Mukti Properties P. Ltd. v. CIT, 344 ITR 177 (Cal.)]

The assessee had not raised the issue as regards the jurisdiction to reassess before the Assessing Officer, Commissioner (A) or the Tribunal. For the first time the assessee raised the issue before the High Court in appeal u/s.260A of the Income-tax Act, 1961.

The Calcutta High Court admitted the question and held as under:

“A pure question of law which goes to the very root of the jurisdiction and further initiation of the proceedings can be raised at any stage, even at the stage of appeal to the Supreme Court.”

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Business expenditure — Banks — The provisions of clause (viia) of section 36(1) relating to the deduction on account of the provision for bad and doubtful debt(s) are distinct and independent of the provisions of section 36(1) (vii) relating to allowance of the bad debts — The scheduled commercial banks would continue to get the full benefit of the writeoff of the irrecoverable debt(s) u/s.36(1)(vii) in addition to the benefit of deduction for the provision made for bad and doubtful debt(s) u/s<

[Catholic Syrian Bank Ltd. v. CIT, (2012) 343 ITR 270 (SC)]

The
assessee, a scheduled bank, filed its return of income for the A.Y.
2002-03 on October 24, 2002, declaring total income of Rs.61,15,610. The
return was processed u/s.143(1), and eligible refund was issued in
favour of the assessee. However, the Assessing Officer issued notice
u/s.143(2) to the assessee, after which the assessment was completed.
Inter alia, the Assessing Officer, while dealing, u/s.143(3), with the
claim of the assessee for bad debts of Rs.12,65,95,770, noticed that the
argument put forward on behalf of the assessee, that the deduction
allowable u/s.36(1) (vii) is independent of deduction u/s.36(1)(viia),
could not be accepted. Consequently, he observed that the assessee
having a provision of Rs.15,01,29,990 for bad and doubtful debts
u/s.36(1)(viia), could not claim the amount of Rs.12,65,95,770 as
deduction on account of bad debts because the bad debts did not exceed
the credit balance in the provision for bad and doubtful debts account
and also the requirements of clause (v) of s.s (2) of section 36 were
not satisfied. Therefore, the assessee’s claim for deduction of bad
debts written off from the account books was disallowed. This amount was
added back to the taxable income of the assessee, for which a demand
notice and challan was accordingly issued. This order of the Assessing
Officer dated January 24, 2005, was challenged in appeal by the assessee
on various grounds.

The Commissioner of Income-tax (Appeals)
vide his order dated April 7, 2006, partly allowed the appeal,
particularly in relation to the claim of the appellantbank for bad
debts. Relying upon the judgment of a Division Bench of the Kerala High
Court in the case of South Indian Bank Ltd. v. CIT, (2003) 262 ITR 579
(Ker.), the Commissioner of Income-tax (Appeals) held that the claim of
the appellant was fully supported by the said decision and since the
entire bad debts written off by the bank u/s.36(1)(vii) were pertaining
to urban branches only and not to the provision made for rural brances
u/s.36(1)(viia), it was entitled to the deduction of the full claimed
amount of Rs.12,65,95,770. Consequently, he directed deletion of the
said amount.

Being aggrieved from the order of the Commissioner
of Income-tax (Appeals), the Revenue as well as the assessee filed
appeal before the Income Tax Appellate Tribunal, Cochin. Vide its order
dated April 16, 2007, while relying upon the judgment of the
jurisdictional High Court in the case of South Indian Bank Ltd. (supra),
the Income Tax Appellate Tribunal dismissed the appeal of the Revenue
on this issue and also granted certain other benefits to the assessee in
relation to other items.

However, the Department of Income-tax,
being dissatisfied with the order of the Income Tax Appellate Tribunal
in the A.Y. 2002-03, filed an appeal before the High Court u/s.260A of
the Act.

The Division Bench of the High Court of Kerala at
Ernakulam hearing the batch of appeals against the order of the Income
Tax Appellate Tribunal expressed the view that the judgment of that
Court in the case of South Indian Bank (supra) was not a correct
exposition of law. While dissenting therefrom, the Bench directed the
matter to be placed before a Full Bench of the High Court.

Vide
its judgment dated December 16, 2009, the Full Bench not only answered
the question of law but even decided the case on the merits. While
setting aside the view taken by the Division Bench in South Indian Bank
(supra) and also the concurrent view taken by the Commissioner of
Income-tax (Appeals) and the Income Tax Appellate Tribunal, the Full
Bench of the High Court held as under (page 181 of 326 ITR):

“What
is clear from the above is that provision for bad and doubtful debts
normally is not an allowable deduction and what is allowable under the
main clause is bad debt actually written off. However, so far as banks
to which clause (viia) applies are concerned, they are entitled to claim
deduction of provision u/ss.(viia), but at the same time when bad debts
written off is also claimed deduction under clause (vii), the same will
be allowed as a deduction only to the extent it is in excess of the
provision created and allowed as a deduction under clause (viia). It is
worthwhile to note that deduction u/s.36(1)(vii) is subject to s.s (2)
of section 36 which in clause (v) specifically states that any bad debt
written off should be claimed as a deduction only after debiting it to
the provision created for bad and doubtful debts. What is clear from the
above provisions is that though the respondent-banks are entitled to
claim deduction of provision for bad and doubtful debts in terms of
clause (viia), such banks are entitled to deduction of bad debt actually
written off only to the extent it is in excess of the provision created
and allowed as deduction under clause (viia). Further, in order to
qualify for deduction of bad debt written off the requirement of section
36(2)(v) is that such amount should be debited to the provision created
under clause (viia) of section 36(1). Therefore, we are of the view
that the distinction drawn by the Division Bench in the South Indian
Bank’s case between the bad debts written off in respect of advances
made by rural branches and bad debts pertaining to advances made by
other branches does not exist and is not visualised under the proviso to
section 36(1)(vii). We, therefore, hold that the said decision of this
Court does not lay down the correct interpretation of the provisions of
the Act. Admittedly, all the respondent-assessees have claimed and have
been allowed deduction of provision in terms of clause (viia) of the
Act. Therefore, when they claim deduction of bad debt written off in the
previous year by virtue of the proviso to section 36(1)(vii), they are
entitled to claim deduction of such bad debt only to the extent it
exceeds the provision created and allowed as deduction under clause
(viia) of the Act.

In the normal course we should answer the
question referred to us by the Division Bench and send back the appeals
to the Division Bench to decide the appeals consistent with the Full
Bench Decision. However, since this is the only issue that arises in the
appeals, we feel it would be only an empty formality to send back the
matter to the Division Bench for disposal of appeals consistent with our
judgment. In order to avoid unnecessary posting of appeals before the
Division Bench, we allow the appeals by setting aside the orders of the
Tribunal and by restoring the assessments confirmed in first appeals.”

Dissatisfied
from the judgment of the Full Bench of the Kerala High Court, the
assessee filed the appeals before the Supreme Court purely on question
of law.

The Supreme Court held that the income of an assessee
carrying on a business or profession has to be assessed in accordance
with the scheme contained in Part D of Chapter IV dealing with heads of
income. Section 28 of the Act deals with the chargeability of income to
tax under the head ‘Profits and gains of business or profession’. All
‘other deductions’ available to an assessee under this head of income
are dealt with u/s.36 of the Act which opens with the words ‘the
deduction provided for in the following clauses shall be allowed in
respect of matters dealt with therein, in computing the income referred
to in section 28’. In other words, for the purposes of computing the
income chargeable to tax, beside specific deductions, ‘other deductions’
postulated in different clauses of section 36 are to be allowed by the
Assessing Officer, in accordance with law.

Section 36(1)(vii) and 36(1)(viia) provide for such deductions, which are to be permitted, in accordance with the language of these provisions. A bare reading of these provisions shows that sections 36(1) and 36(1)(viia) are separate items of deduction. These are independent provisions and, therefore, cannot be intermingled or read into each other. It is a settled canon of interpretation of fiscal statutes that they need to be construed strictly and on their plain reading.

The provision of section 36(1)(vii) would come into play in the grant of deductions, subject to the limitation contained in section 36(2) of the Act. Any bad debt or part thereof, which is written off as irrecoverable in the accounts of the assessee for the previous year is the deduction which the assessee would be entitled to get, provided he satisfies the requirements of section 36(2) of the Act. Allowing of deduction of bad debts is controlled by the provisions of section 36(2). The argument advanced on behalf of the Revenue is that it would amount to allowing a double deduction if the provisions of section 36(1)(vii) and 36(1)(viia) are permitted to operate independently. There is no doubt that a statute is normally not construed to provide for a double benefit unless it is specifically so stipulated or is clear from the scheme of the Act. As far as the question of double benefit is concerned, the Legislature in its wisdom introduced section 36(2)(v) by the Finance Act, 1985, with effect from April 1, 1985. Section 36(2)(v) concerns itself as a check for claim of any double deduction and has to be read in conjunction with section 36(1)(viia) of the Act. It requires the assessee to debit the amount of such debt or part thereof in the previous year to the provision made for that purpose.

The Supreme Court, referring to the Circular Nos. 258, dated 14-6-1979, 421, dated 12-6-1988, 464, dated 18-7-1986 and the objects and reasons for the Finance Act, 1986, held that clear legislative intent of the relevant provisions and unambiguous language of the Circulars with reference to the amendments to section 36 of the Act demonstrate that the deduction on account of provision for bad and doubtful debts u/s.36(1)(viia) is distinct and independent of the provisions of section 36(1)(vii) relating to allowance of the bad debts. The legislative intent was to encourage rural advances and the making of provisions for bad debts in relation to such rural branches. Another material aspect of the functioning of such banks is that their rural branches were practically treated as a distinct business, though ultimately these advances would form part of the books of accounts of the principal or head office branch. According to the Supreme Court the Circulars in question show a trend of encouraging rural business and for providing greater deductions. The purpose of granting such deductions would stand frustrated if these deductions are implicitly neutralised against other independent deductions specifically provided under the provisions of the Act.

The Supreme Court further held that the language of section 36(1)(vii) of the Act is unambiguous and does not admit of two interpretations. It applies to all banks, commercial or rural, scheduled or unscheduled. It gives a benefit to the assessee to claim a deduction on any bad debt or part thereof, which is written off as irrecoverable in the amounts of the assessee for the previous year. This benefit is subject only to section 36(2) of the Act. It is obligatory upon the assessee to prove to the Assessing Officer that the case satisfies the ingredients of section 36(1)(vii) on the one hand and that it satisfies the requirements stated in section 36(2) of the Act on the other. The proviso to section 36(1)(vii) does not, in absolute terms, control the application of this provision as it comes into operation only when the case of the assessee is one which falls squarely u/s.36(1)(viia) of the Act. The Supreme Court noticed that the Explanation to section 36(1)(vii), introduced by the Finance Act, 2001, had to be examined in conjunction with the principal section. The Explanation specifically excluded any provision for bad and doubtful debts made in the account of the assessee from the ambit and scope of ‘any bad debt, or part thereof, written off as irrecoverable in the accounts of the assessee’. Thus, the concept of making a provision for bad and doubtful debts would fall outside the scope of section 36(1)(vii) simpliciter. The proviso, would have to be read with the provisions of section 36(1)(viia) of the Act. Once the bad debt is actually written off as irrecoverable and the requirements of section 36(2) satisfied, then, it would not be permissible to deny such deduction on the apprehension of double deduction under the provisions of section 36(1)(viia) and the proviso to section 36(1)(vii). According to the Supreme Court this did not appear to be the intention of the framers of law. The scheduled and non-scheduled commercial banks would continue to get the full benefit of write-off of the irrecoverable debts u/s.36(1)(vii) in addition to the benefit of deduction of bad and doubtful debts u/s.36(1)(viia). Mere provision for bad and doubtful debts may not be allowable, but in the case of a rural advance, the same, in terms of section 36(1)(viia)(a), may be allowable without insisting on an actual write-off.

The Supreme Court observed that as per the proviso to clause (vii), the deduction on account of the actual write-off of bad debts would be limited to the excess of the amount written off over the amount of the provision which had already been allowed under clause (viia). According to the Supreme Court the proviso by and large protects the interests of the Revenue. In case of rural advances which are covered by clause (viia), there would be no double deduction. The proviso, in its terms, limits its application to the case of a bank to which clause (viia)applies. Indisputably, clause (viia)(a) applies only to rural advances.

The Supreme Court further observed that as far as foreign banks are concerned, u/s.36(1)(viia)(b) and as far as public finance institutions or State financial corporations or State industrial investment corporations are concerned, u/s.36(1)(viia)(c), they do not have rural branches. The Supreme Court therefore inferred that the proviso is self-indicative that its application is to bad debts arising out of rural advances.

In a concurring judgment, the Chief Justice held that u/s.36(1)(vii) of the Income-tax Act, 1961, the taxpayer carrying on business is entitled to a deduction, in the computation of taxable profits, of the amount of any debt which is established to have become a bad debt during the previous year, subject to certain conditions. However, a mere provision for bad and doubtful debt(s) is not allowed as a deduction in the computation of taxable profits. In order to promote rural banking and in order to assist the scheduled commercial banks in making adequate provisions from their current profits to provide for risks in relation to their rural advances, the Finance Act inserted clause (viia) in relation to their rural advances, the Finance Act inserted clause (viia) in s.s (1) of section 36 to provide for a deduction, in the computation of taxable profits of all scheduled commercial banks, in respect of provisions made by them for bad and doubtful debt(s) relating to advances made by their rural branches. The deduction is limited to a specified percentage of the aggregate average advances made by the rural branches computed in the manner prescribed by the Income-tax Rules, 1962. Thus, the provisions of clause (viia) of section 36(1) relating to the deduction on account of the provision for bad and doubtful debt(s) is distinct and independent of the provisions of section 36(1)(vii) relating to allowance of the bad debts. In other wards, the scheduled commercial banks would continue to get the full benefit of the write-off of the irrecoverable debt(s) u/s.36(1)(vii) in addition to the benefit of deduction for the provision made for bad and doubtful debt(s) u/s.36(1)(viia). A reading of the Circulars issued by Central Board of Direct Taxes indicates that normally a deduction for bad debt(s) can be allowed only if the debt is written off in the books as bad debt(s). No deduction is allowable in respect of a mere provision for bad and doubtful debt(s). But in the case of rural advances, a deduction would be allowed even in respect of a mere provision without insisting on an actual write-off. However, this may result in double allowance in the sense that in respect of the same rural advance the bank may get allowance on the basis of clause (viia) and also on the basis of accrual write-off under clause (vii). This situation is taken care of by the proviso to clause (vii) which limits the allowance on the basis of the actual write-off to the excess, if any, of the write-off over the amount standing to the credit of the account created under clause (viia).

Note: The Court incidentally considered whether, when findings recorded in the other assessment year are accepted by the Revenue, it should be permitted to question the correctness of the same in the subsequent years. The relevant portion of the judgment is extracted below:

The applicant has contended that as the similar claims had been decided in favour of the banks for the A.Ys. 1991-92 to 1993-94 by the Special Bench of the Income Tax Appellate Tribunal, which had not been challenged by the Department, as such, the issue had attained finality and could not be disturbed in the subsequent years.

The above contention of the appellant-banks does not impress us at all. Merely because the orders of the Special Bench of the Income Tax Appellate Tribunal were not assailed in appeal by the Department itself, this would not take away the right of the Revenue to question the correctness of the orders of assessment, particularly when a question of law is involved. There is no doubt that the earlier orders of the Commissioner of Income-tax (Appeals) had merged into the judgment of the Special Bench of the Income Tax Appellate Tribunal and attained finality for that relevant year. Equally, it is true that though the Full Bench judgment of that very Court in the case of South Indian Bank (supra), it did not notice any of the contentions before and principles stated by the Special Bench of the Income Tax Appellate Tribunal in its impugned judgment. As already noticed, the questions raised in the present appeal go to the very root of the matter and are questions of law in relation to interpretation of sections 36(1)(vii) and 36(1)(viia) read with section 36(2) of the Act. Thus, without any hesitation, we reject the contention of the appellant-banks that the findings recorded in the earlier A.Ys. 1991-92 to 1993-94 would be binding on the Department for subsequent years as well.

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Section 26 — Income of co-owners of house property — Cannot be assessed as income of an association of persons (AOP) in spite of the fact that a return was filed in the legal status of AOP.

30. (2011) 131 ITD 377 (Mum.) Sujeer Properties (AOP) v. ITO A.Y.: 2002-03. Dated: 28-1-2011

Section 26 — Income of co-owners of house property — Cannot be assessed as income of an association of persons (AOP) in spite of the fact that a return was filed in the legal status of AOP.

Facts:

A particular house property was co-owned by five persons. A return of income was filed by the association of persons (AOP) of these five persons declaring NIL income and claiming that income is to be assessed in the hands of the respective coowners of the building as share of each co-owners is predetermined. The assessment of AOP was subsequently reopened since the AO observed that the assessee had not paid any municipal taxes but had claimed the same in computation of house property. Before the ITAT, the assessee argued that in view of clear provisions of section 26, there was no question of first ascertaining the property income in the hands of the AOP and then ascertaining the share in the hands of each co-owner. He further argued that the entire exercise of filing of return of AOP was an entirely infructuous exercise and had no income tax implications at all. The DR argued that since the assessee had not taken up this plea of nontaxability while filing the original return, the same cannot be taken up before the Tribunal.

Held:

(1) Since the plea of non-taxability of income is a purely legal ground which does not require any further investigation of facts, there is no bar on dealing with the said plea.

(2) Further, there is a merit in the argument that the very act of filing return of income by the AOP as far as co-ownership of house property is concerned has no income tax implications. This is because the income from house property is to be taxed as per sections 22 to 26. There is no support for the proposition that annual value of the property is to be determined in the course of the AOP itself. So far as the income from house property is concerned, the Act does not envisage that annual value of the co-owned property, upon being determined in the assessment of the AOP, is to be divided amongst the co-owners in predetermined ratio.

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Section 12A of the Income-tax Act, 1961 — Registration under charitable institutions — Trust formed for propagating the knowledge of Vedas cannot be said to be benefiting only a particular community — Registration cannot be denied on this ground.

29. 2011) 131 ITD 370 (Cochin) Kasyapa Veda Research Foundation v. CIT A.Y.: 2008-09. Dated: 28-4-2011

Section 12A of the Income-tax Act, 1961 — Registration under charitable institutions — Trust formed for propagating the knowledge of Vedas cannot be said to be benefiting only a particular community — Registration cannot be denied on this ground.

Facts:

The assessee-trust filed an application u/s.12A of the Income-tax Act, 1961 seeking registration as a charitable trust. It was formed for preaching and propagating the knowledge of Vedas. The Commissioner of Income-tax was of the opinion that the trust was not benefiting the public at large and was confined to only the Hindu community. He thus cancelled registration u/s.12A of the Income-tax Act. He further passed an order declaring the trust as religious trust.

Held:

There is a very thin line of difference so as to identify whether the nature of activity is a charitable one or a religious one. The assessee-trust was formed to propagate and spread the knowledge of Vedas and Vedanta amongst the public so that they can change their living habits and take the necessary steps for the betterment of humanity. This would not only help the common public to improve their current status but also would enhance their ability to think about the humanity as a whole. The overall appeal of Vedas and its contents are universal and a representation of religious scriptures. The whole purpose of imparting education in Vedas is to promote the behavioural patterns of the people. Also as mentioned in the Trust deed, the other activities are pure charitable in nature. Thus, the assessee-trust was thus allowed a status of charitable trust.

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Section 11 of the Income-tax Act — Accumulation @ 15% should be calculated on the gross income and before deducting other expenses.

28. (2011) 131 ITD 335 (Luck.) Krishi Utpadan Mandi Samiti v. DCIT A.Y.: 2006-07. Dated: 7-6-2010

Section 11 of the Income-tax Act — Accumulation 15% should be calculated on the gross income and before deducting other expenses.

Facts:

The assessee-trust has earned total receipts of Rs. 1.32 crore as per their books of accounts. As per the provisions of section 11 of the Act, it accumulated 15% of the receipts and claimed as an exemption. However, the AO computed exemption @ 15% after deducting administrative expenses.

Held:

According to section 11(a) of the Act, income derived from the property held by the trust and applied for religious or charitable purposes will be exempt. Where any income is accumulated, exemption to the extent of fifteen percentage of the said income will be available. The assessee-trust calculated the exemption on the basis of gross income received from the property. As per the AO and the CIT(A) the exemption should be calculated after deducting the expenses incurred for charitable purposes. Relying on the decision of CIT v. Programme for Community Organisation, (248 ITR 1) (SC) it was held that the exemption of 15% must be taken on the gross income and not on net income as determined for income tax purposes.

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Section 22 r.w.s 28(1) — Principle of res judicata though not applicable to income tax proceedings, principle of consistency applicable and in absence of any change of circumstances or non-consideration of material facts or statutory provisions, Department cannot change the stand taken in earlier years.

27. (2011) 131 ITD 171 (Luck.)ACIT v. Harbilas Cold Storage and Food ProductsA.Y.: 2006-07. Dated: 12-11-2010

Section 22 r.w.s 28(1) — Principle of res judicata though not applicable to income tax proceedings, principle of consistency is applicable and in absence of any change of circumstances or non-consideration of material facts or statutory provisions, Department cannot change the stand taken in earlier years.

Facts:

(1) The assessee was engaged in carrying on business of running cold storage till 1989. Thereafter, the assessee made some alterations and additions in cold storage building and rented out certain portions for use as warehouse and office.

(2) The rent income was offered by the assessee as income under the head income from house property and the same was accepted by the Department in all earlier assessment years. Further, there was no change in facts in the year under consideration as compared to earlier years.

(3) However for the assessment year under consideration, the AO treated the income as profits and gains from business and profession on the ground that the assessee was not just letting property, but also providing various facilities.

(4) On appeal filed by the assessee, the CIT(A) held that the income is chargeable under the head income from house property only, thus allowing the appeal filed by the assessee.

(5) Against the order of the CIT(A), the Department filed appeal before the Tribunal.

Held:

(1) Though principle of res judicata is not applicable in tax proceedings, the principle of consistency is applicable as held by the Supreme Court in the case of Radhasoami Satsang (100 CTR 267) and the Jurisdictional High Court in case of Goel Builders (supra).

(2) Where an issue is decided either in one manner or other and the same has not been challenged by either of the parties, it would not be appropriate to change the position in subsequent years.

(3) The Department has got the right to depart from its earlier practice only on change of circumstances or non-consideration of material facts or statutory provisions.

(4) In the present case, no new facts have been brought on record by the AO so as to justify departure from the earlier stand taken by the Department.

(5) Thus, appeal of the Revenue was dismissed.

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Reassessment: Sections 143(3), 147 and 148: A.Y. 2004-05: Original assessment u/s.143(3): Notice u/s.148 beyond 4 years: No allegation in the reasons of failure on the part of the assessee to state fully and truly all material facts necessary for assessment: Reopening not valid.

38. Reassessment: Sections 143(3), 147 and 148: A.Y. 2004-05: Original assessment u/s.143(3): Notice u/s.148 beyond 4 years: No allegation in the reasons of failure on the part of the assessee to state fully and truly all material facts necessary for assessment: Reopening not valid.

[Shriram Foundry Ltd. v. Dy. CIT, 250 CTR 116 (Bom.)]

For the A.Y. 2004-05, the original assessment was made u/s.143(3) of the Income-tax Act, 1961. Subsequently, on 10-2-2011 i.e., beyond the period of 4 years, the Assessing Officer issued notice u/s.148 for reopening the assessment. The reasons recorded for reopening are as under: “You have claimed a melting loss in excess of 7.24%, which is higher than what is found in the similar line of business. So the melting loss earlier allowed is excess.” Objections filed by the assessee were rejected. Thereafter the assessee filed a writ petition challenging the reopening.

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

“(i) The original assessment was completed u/s.143(3). The assessment is sought to be reopened beyond a period of 4 years from the end of the relevant assessment year. The jurisdictional condition is that in such case, before an assessment can be validly reopened, there must be a failure on the part of the assessee to state fully and truly all the material facts necessary for the assessment.

(ii) There is no such allegation in the reasons which have been disclosed to the assessee. The Assessing Officer has purported to reopen the assessment only recording that according to him the melting loss of 7.24% which was claimed by the assessee is higher than what is found in a similar line of business. This ex facie would amount merely to a change of opinion.

(iii) The reopening of the assessment u/s.148 is not valid. The consequential assessment order dated 30-12-2011 would have to be quashed and set aside.”

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