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Imprisonment And Penalty Under Rera Realty Firm’s Directors, Partners And Officers, Beware!

BACKGROUND OF REAL ESTATE LAW

Real estate business, perceived to be non-transparent, is now
required to fall in line with stringent requirements of the Real Estate (Regulation
and Development) Act, 2016 (“RERA”)
.

Under RERA, real estate companies are required to furnish
exhaustive particulars to the regulator. Some of these are:

  Promoters to do prior registration of
projects with the regulator before advertising, booking or selling apartments;

   Each phase of a project must be registered
separately as a standalone;

   Every application for completion certificate
should have minute details, including past project details, delivery status and
legal cases pending against the promoter;

   Developer must be ready with approval and
commencement certificate, sanctioned plan and project details at all times.

Offences under RERA will attract serious consequences
including imprisonment in some cases. This is intended to deter promoters,
directors, partners and officers of the real estate concerns from indulging in
financial malpractices and cheating.

Recently, promoters of a well-known realty company were
arrested by the Economic Offences Wing (EOW) of the Delhi Police for alleged
fraud in their real estate project in which Rs. 363 crore were collected from
customers. It is alleged that the promoters siphoned Rs. 200 crore off their
project and stashed the same abroad. They have also been accused of duping
buyers who booked flats in their residential project.  

Nearing 1 May 2017, the implementation date of RERA,
the government notified the remaining sections of RERA on 19 April 2017. This
has put an end to the speculation about extension of implementation deadline.
Thus, RERA is viewed as a positive step and shows the government’s firm resolve
to protect home buyers’ interest.

RERA – A NEW LAW

RERA is a new legislation. Most of its provisions came into
force on 1 May 20161. Remaining provisions came into force on 1 May
20172. Thus, now all provisions are notified and the entire Act has
come into force by 1 May 2017. The following are the provisions that were
notified on 19 April to come into force on 1 May 2017. [The others were earlier
notified and came into force a year earlier on 1 May 2016].

(i)   Sections 3 to 10: Registration of real estate
projects and registrationof real estate agents.

(ii)  Sections 11 to 18: Functions and duties of
promoter.

(iii)  Section 19: Rights and duties of allottees

(iv) Section 40: Recovery of interest or penalty or
compensation and enforcement of order

(v)  Sections 59 to 70: Offences, penalties and
adjudication

(vi) Section 79: Bar of jurisdiction

(vii) Section 80: Cognisance of offences.

Section 69 of RERA which [has come into force on 1 May 2017]
deals with the liability of promoters, directors, partners and officers of the
realty companies, firms and other non-individual entities, came into force on 1
May, 2017.

Since RERA is new, its provisions including section 69 would
need to be interpreted on the basis of similarly worded provisions of other
legislations. For example, section 42 of the Foreign Exchange Management
Act, 1969 (FEMA
) shows that the same is identically worded and corresponds
to section 69 of RERA. Accordingly, provisions of section 69 may be interpreted
by relying on the propositions concluded in the decisions rendered u/s. 42 of
FEMA or similarly worded sections in other laws.

 

1   See Notification
No. SO 1544 (E) [F No. O-17034/18/2009-11] dated
26 April, 2016

2   See
Notification No. 1216(E) [F No. O-17034/275/2017-H] dated
19 April, 2017

Offences under RERA are punishable under Chapter VIII thereof
(sections 59-68). The gist of the penal provisions is given below.

Sr

Description of offence

Penal consequence

1

Violation of section
3 requiring prior registration of the real estate project

Penalty upto 10% of
the estimated project cost

2

Continuing violation
of section 3

Imprisonment upto 3 years and/or
fine upto further 10% of the estimated project cost

3

Providing false
information or failure to apply for registration alongwith documents
specified under section 4

Penalty upto 5% of
the estimated project cost

4

Failure to comply
with other provisions (i.E. Other than section 3 and 4)

Penalty upto 5% of
the estimated project cost

5

Real estate agent’s
failure to do prior registration or comply with the functions specified in
section 10(2)

Penalty @10,000/-
per day of default with the ceiling of 5% of cost of apartment / land /
building

6

Promoter’s failure
to comply with orders of Authority

Penalty upto 5% of
the estimated project cost

7

Promoter’s failure
to comply with Tribunal’s Order

Imprisonment upto 3 years and/or
fine upto 10% of the estimated project cost

8

Real estate agent’s
failure to
comply with orders of the Authority

Penalty upto 5% of
the estimated cost of plot/apartment/building

9

Real estate agent’s
failure to comply with Tribunal’s order

Imprisonment upto 1 year and/or
fine upto 10% of the estimated cost of plot/apartment/building

10

Allottee’s failure
to comply with orders of Authority

Penalty upto 5% of
estimated cost of the plot/apartment/building

11

Allottee’s failure
to comply with Tribunal’s Order

Imprisonment upto 1 year and/or
fine upto 10% of the estimated cost of the plot/apartment/building

The persons liable to punishment would often involve
companies, partnership firms and association of individuals. As will be seen
from the abovementioned gist, the punishment is by way of stiff fine and in
four cases, also by way of imprisonment.

A partnership firm is merely a compendious description of its
partners. However, a company is a juristic entity distinct from its
shareholders1. In case of a partnership, it may also be difficult to
link any partner directly with the offence committed by the firm. For this
reason, in the provisions of a statute dealing with offences, partnership firms
are treated as companies. In section 69, this is evident from the Explanation
which is extracted here:

________________________________________

1   Bacha F. Guzdar vs.
CIT (1955) 27 ITR 1 (SC)

Explanation
— For the purpose of this section—

(i)  “Company” means any body corporate and
includes a firm or association of individuals; and

(ii) “Director”, in relation to a firm, means a
partner in the firm.”

In terms of the Explanation to section 69, a company
means a body corporate and includes a firm or association of individuals; and a
director in relation to a firm, means a partner in the firm. A firm is not a
distinct legal entity and, prima facie, proceedings cannot be initiated
against a firm. Under the Explanation, however, a firm is regarded as a
company for the purposes of this section and therefore, proceedings against a
firm would be valid.

It may be noted that the definition of “company” is inclusive
in nature and could be interpreted in wider manner so as to include even other
entities and persons.

GIST OF SECTION 69 OF RERA

Before section 69 is analysed in detail, it would be better
to review the gist of its provisions.

Section 69 deals with the offences committed by firms,
companies and association of individuals. A company has been defined to include
a firm or association of individuals for the purposes of this section. In terms
of section 69(1) and 69(2), therefore, the persons who are liable to be charged
with the offence committed by the company, firm, association, etc. would
include the following persons:

  A person in charge of the business of the
company, firm, association, etc.;

   A person who is responsible to the company,
firm, association, etc. for the conduct of its business;  

   Director of the company;

   Partner of the firm;

   Secretary of the company;

   Manager of the company, firm, association, etc.;

   Any other officer of the company, firm,
association, etc.

If an offence under RERA is committed by a company, firm,
association, etc., both, the person in charge of the company firm,
association, etc. and the company, firm, association, etc. are
deemed to be guilty of such offence. The person charged with the offence,
however, will not be liable to punishment if he proves that the offence was
committed without his knowledge or that he had exercised all due diligence to
prevent commission of such offence. Where the offence has been committed by a
company with the consent or connivance of, or is attributed to any neglect of
secretary, director, manager or any other person in charge of the business of
the company, such person will also be deemed to be guilty of the offence and
liable to be proceeded against and punished accordingly.

RATIONALE UNDERLYING SECTION 69

Since a company is not a physical person, the pain of
punishment cannot be inflicted on it. Unlike an individual, the company does
not have mind that can be guilty of criminal intent. Hence, for a company,
punishment under RERA is not practical. It is, therefore, necessary to punish
the functionaries of the company, association, etc. whose duties,
responsibilities and conduct represent the policy of the company.

The Joint Committee of Parliament had also discussed the
spirit and content of the various clauses in the Bill (which was eventually
enacted into the repealed FERA) pertaining to vicarious liability of the
functionaries of company, etc. The following observations made by the
Joint Committee are enlightening:

“…..in corporations also, extent
of vicarious liability cannot be extended beyond the acts which are punishable
with fines. First, a clear distinction should
be made between vicarious liability of the master for acts of the servant, and
imputation of the actions of a person in the employment, or acting on behalf of
the Corporation
which are properly imputable to the latter. Imputed liability is not vicarious but original
liability.
The principles of vicarious responsibility has been developed in
the law of tort, because it has seemed socially and economically necessary to
hold the master – and that it is in many cases a corporation liable vis-à-vis
third parties for acts committed within his sphere of operations. The master is held liable to recover against his
servant.
The law of tort is, however, concerned with the economic
adjustment of burdens and risks, and the principle of vicarious liability is
applicable to the criminal law only in so far as the criminal law is
approximated to the objectives of the law of tort i.e. where the law is
essentially concerned with the enforcement of certain objective standards of
conduct, through the imposition of fines, rather than with the individual guilt
of a person. This point to the area of strict responsibility which is largely,
though not entirely, co-extensive with the area of so-called public welfare
offences”. [Emphasis supplied]

PERSONS LIABLE TO IMPRISONMENT AND/OR FINE

A reference to the Explanation to section 69 of RERA
shows that the provisions of section 69 are applicable to the persons in charge
of the business of or responsible to the companies, partnership firms, body
corporates and any other associations of individuals. The word “includes”
in the definition of the “company” given in the Explanation seems to
expand the sweep of section 69 so as to also cover the other non-individual
entities, such as, trust, society, etc. Directors, partners, managers,
secretaries and other officers of the company, body corporate, associations of
individuals, trusts, societies, etc. would be covered by section 69 provided
any such person was regarded as “in charge of” or “responsible to”
the company for the conduct of its business. While the company would be primarily
liable for the consequences of the offence committed by it under RERA, the
director, partner, manager, secretary, other officer and functionaries of the
company, partnership, associations of persons, trust, society, etc.
would be vicariously liable for the offences committed under RERA by the
primary offender. Indeed, the charge of vicarious liability u/s. 69 can be
fastened on such functionary only after establishing that he was in charge of
or responsible to the company for the conduct of its business at the time
when the offence
was committed by the company. A review of various
provisions of RERA shows that the business in real estate sector conducted in
the form of non-individual entities, such as, a company, a partnership firm,
AOP, trust, society, etc. would attract the vicarious liability provided
u/s. 69. Thus, the following persons connected with the real estate business
would be covered under the wide sweep of the vicarious liability provided u/s.
69 of RERA and would be punishable with fine and/or imprisonment, as the case
may be.

   Promoters, directors, partners and officers
of realty companies, firms, etc., and builders, developers, etc.
engaged in the real estate business

   Companies, firms and association, etc.
in the business of Real estate agents

   Allottees of the plots, apartment, and
buildings

   Architects

   Engineers

   Various entities defined as “person
in section 2 [zg]

All the abovementioned persons concerned with or engaged in
the real estate business in the form of company, partnership firm, AOP,
society, trust and other non-individual entities and the functionaries of such
entities are covered under the wide sweep of section 69 of RERA and would be
punishable with fine and/or imprisonment, as the case may be.

Accordingly, show cause notices for the offence under RERA
may be issued to such functionaries in addition to the show cause notice issued
to the non-individual entities, i.e., company, partnership firm, AOP, trust,
society, etc.

LIABILITY OF THE PERSON-IN-CHARGEOF THE COMPANY, FIRM, ETC.

Section 69(1) deals with the directors, senior executives and
employees of the company and partners and key officers of partnership firms,
associations of individuals, etc. who are in charge of or responsible to
the company, firm, etc. for the conduct of its business. Where an
offence has been committed by a company under RERA, apart from the company
being liable for such offence, the person who was in charge of or was responsible
to the company for the conduct of its business at the time of such offence
is also liable to the penal consequences of the offence. The offence may be of
any provision of RERA. Indeed, the deeming provision that the offence has been
committed by such person is a matter of presumption. Such presumption can be
rebutted by establishing that the offence was committed without the knowledge
of the person or that he had exercised all due diligence to prevent the
commission of such offence. It is settled law1 that a person, who
has failed to carry out a statutory obligation, cannot be punished unless he
either acted deliberately in defiance of law or was guilty of conduct
contumacious or dishonest or that he acted in conscious disregard of his
obligations.

In Girdharilal Gupta vs. D. N. Mehta2, a
leading case on vicarious liability, it has been held by the Supreme Court that
such provision [Corresponding to section 69(1)] is a highly penal provision
since it makes the person in charge of or responsible to the company for the
conduct of its business, vicariously liable for the offence committed by the
company. Therefore, this section must be construed strictly. In other words, to
charge a person with vicarious liability for the impugned offence committed by a
company, it is necessary for the Department to establish the following:

__________________________________________________________

1   Hindustan Steel Ltd
v. State of Orissa (1972) 83 ITR 26 (SC).

2    AIR
1971 SC 28

   at the time the offence was committed by the
company, the person was in charge of or was responsible to the company for the
conduct of the business of the company; or

   the offence was committed with the consent or
connivance of the person; or

  the offence was attributable to the neglect
of the person.

“PERSON-IN-CHARGE” –
CONNOTATION OF

The material expression in section 69(1) is the “person
in-charge of”
. Connotation of this expression was examined by the Supreme Court in Girdharilal Gupta vs.
D. N. Mehta3.
This expression has been explained by the
Supreme Court in following words.

“A person ‘in-charge’ must mean the person in overall control of the
day-to-day business of the company
. This inference follows from the
wordings of s/s. (2). It mentions director, who may be a party to the policy
being followed by the company and yet not be
in-charge of the business of the company
. Further, it mentions manager, who
usually is in charge of the business but not in overall charge. Similarly, the
other officers may be in charge of only some part of business”. (Emphasis
supplied)

In this connection, one may also note the decision of the
Delhi High Court in Umesh Modi vs. Dy Director4 in which
distinction has been drawn between the directors in charge of day to day
affairs of the company’s business and other directors who are not.

A person cannot be convicted of the offence merely because
he, as a partner, has a right to participate in the firm’s business under the
terms of the Partnership Deed5. When a person in charge of business
goes abroad, it would not mean that he ceases to be in charge, unless it is
established that he gave up the charge in favour of another person.

Similarly, it is only that partner/director who is in charge
of or responsible to the firm/company who could be made liable u/s. 69 and,
therefore, those partners who had not signed the relevant documents, say,
regarding exports, could not be visited with penalty concerning the offence
pertaining to export transactions6.

__________________________________________________

3   AIR 1971 SC 2162

4   [2015] 130 SCL 621
(Del)

5   State of Karnataka
vs. Pratap Chand (1981) 128 ITR 573 (SC).

6   Sofi
Carpets vs. Directorate of Enforcement (1990) 50 Taxman 439 (FERAB).

In the undernoted case1, a company was found
guilty of contravention of FERA. Adjudication proceedings were initiated
against the company and also against the appellant in his capacity as a
director. On investigation, it was found that the bank certificate furnished
during the investigation showed that another director was exclusively in charge
of the company’s accounts. This certificate was, however, not brought on
record. The matter was remanded for identifying the director who was in charge
of and was responsible to the company for the conduct of its business. The
expression “person in charge of and was responsible to the company”, was
interpreted threadbare in the undernoted case2 in which it was held
that the expressions “in charge of” and “responsible to” are
synonymous. A person in charge of the business was, thus, always responsible
therefor3.

DISTINCTIVE FEATURE OF SECTION 69

However, the said proposition is not applicable to section 69
of RERA because of the word “or” between the two expressions “was in charge
of
” and “was responsible to” in section 69(1). To this extent, section
69 is different from the corresponding provisions in other laws, such as,
section 42 of FEMA, section 62 of Prohibition of Benami Property
Transactions Act, 1988
. In those Acts, the word between the said two
expressions is “and” whereas in section 69 of RERA, it is “or” between the said
two expressions.

JOINT AND SEVERAL LIABILITY OF THE COMPANY AND THE PERSON-IN-CHARGE

The words “as well as” in section 69(1) clearly suggest that
the liability for the offence committed by the company is joint and several as
between the company and its director, partner or functionary who, at the time
the offence was committed, was in charge of and responsible to the company,
firm, etc. for the conduct of its business.

Accordingly, it would not be proper for the person charged
with the offence u/s. 69(1) to argue that the company should be charged first
and that his being charged for the same offence was conditional upon the
company being first so charged. This argument does not appear tenable because
the section does not lay down any condition that the person-in-charge of the
company cannot be separately charged for the offence committed by the company
when the company itself was not prosecuted. From the words “as well as”, it is
clear that each such person or any one of them may be charged separately or
alongwith the company, the only requirement for the same being that there
should be a finding that the offence was committed by the company4.

______________________________________________________

1   Biren N. Shah v. DE
(1999) 104 Taxman 496 (FERAB).

2   N. Sasikala v.
Enforcement Officer (1998) 93 CC 355 (Mad).

3   ANZ
Grindlays Bank, Bombay v. Directorate of Enforcement (1999) Cr LJ 2970 (Bom).

In the undernoted case5, the appellant was
mother–general of a registered society running a convent. She was charged with
contravention of certain FERA provision. On appeal, it was held that the
appellant could not be proceeded against for transactions made on behalf of a
registered society unless the society was found guilty of the contravention.
Similarly6, if the charge against the company itself was not
established, none of the directors of the company could be held liable.Thus, it
would be irrational to charge a person mentioned in that section with vicarious
liability independent of the proceedings to first charge the company for the
offence.

In Raman Narula vs. Director7, the Delhi
High Court has held that where no factual basis was laid by the Directorate for
alleging that the noticee was in-charge of and responsible to the company for
conduct of its business, he could not be held vicariously liable for the
alleged contravention by the company.

BURDEN OF PROOF – ON THE DEPARTMENT

A reading of section 69(1), the Proviso to section
69(1) and section 69(2) offers an interesting review of “burden of proof”.

Section 69(1) shows that the burden of proof is on the
Department to establish the following:

  The company, firm, etc. has committed
offence of any provisions of RERA.

  At the time the offence was committed, the
person charged with the offence was in charge of the company, firm, etc.
or

   At the time the offence was committed, the
person was responsible to the company, firm, etc. for the conduct of its
business.

__________________________________________________________________________________________________

4   Sheoratan Agarwal
v. State of M P AIR 1984 SC 1824 (rendered in the context of the analogous
provisions of section 10 of the Essential Commodities Act, 1955). Per contra:
Union of India v. Annamalai (1987) 11 ECC 240 (Mad).

5   Nambibai Mary v.
Directorate of Enforcement (1990) 50 Taxman 534 (FERAB).
11          N Sasikala v. Enforcement Officer
(1998) 93 CC 355 (Mad).

6   Shirin Sabbir
Rangwala (Mrs) v. Directorate of Enforcement (1991) 55 Taxman 39 (FERAB);
Nowrosjee Wadia Sons (P) Ltd v. Directorate of Enforcement (1999) 106 Taxman
551 (FERAB); Rakesh Jain v UoI [2015] 53 Taxmann.com 133 (Del).

7     [2014] 216 SCL
120 (Del)

Unless the Department discharges the burden of proving the above
facts, the Department’s action u/s. 69(1) would be ab initio void1.

As regards the nature of
the burden of proof under the Proviso to section 69(1) and u/s. 69(2), a
reference may be made to the relevant synopsis headings (infra).

In the undernoted case2,
Special Director called the petitioner for personal hearing. Petitioner filed
writ petition contending that he had no role with regard to remittances and
receipts of foreign exchange in the conduct of IPL in 2009 in South Africa and
that a separate committee was set up to administer IPL with a separate bank
account to be operated by the Treasurer. On these facts, it was held that as
far as opening and operating bank account of IPL and obtaining permission of
Reserve Bank for making remittances or receipts of foreign exchange was
concerned, the petitioner was not in charge of and responsible for such
operational matters. Accordingly, it was considered necessary for adjudicating
authority to form the opinion whether the petitioner was at all covered by the
substantive part of section 42(1) of FEMA [section 69(1)].

Likewise, in the undernoted case3, the appellant
contended that he was not aware of the transaction in question as he was not
looking after day to day affairs of the company. The Department failed to prove
that the appellant was in charge of affairs of the company and he was also
looking after day to day affairs of the company including the transaction in
question. It was also noted that similar penalty on other directors was set
aside by the High Court. Accordingly, the penalty imposed on the appellant was
also set aside.

PRIVATE AGREEMENT – CANNOT OVERRIDE THE STATUTORY PROVISION

In the undernoted case4, there was a change in
ownership and management of a company pursuant to an agreement. The agreement
provided that all personal liabilities attached to the office of the managing
director or director will continue to be the personal liabilities of the
directors under whose charge the offence was committed and the incoming
directors were not responsible for the offence committed prior to the takeover.
On appeal by the incoming directors who contested the charge, it was held that
such term in the agreement cannot absolve the company and the present
management merely because the offence was committed before the present
management took over. It was held that the terms of the agreement could not
override statutory provisions as there is no estoppel against statute.

_____________________________________________________________________________________________________________________________

1   See Sayed Wahid vs.
Director of Enforcement (1988) 37 Taxman 16 (FERAB); See Also: Kavita Dogra vs.
Director (2014) 126 SCL 182 (Del).

2   Shashank Vyanktesh
Manohar vs. Union of India (2013) 122 SCL 317 (Bom)

3   Sanjay Dalmia vs.
Special Director (2014) 123 SCl 311 (ATFFE).

4   Iyer & Sons Pvt
Ltd vs. Directorate of Enforcement (1990) 53 Taxman 160 (FERAB).

EXERCISE OF DUE DILIGENCE – PROVISO GIVES BENEFIT OF DOUBT

In the undernoted case5, the Chairman of the appellant
company had given power-of-attorney to conduct the company’s business at the
time when contravention of a FERA provision took place. It was held that though
the Chairman would come within the meaning of “a person in charge of and
responsible to the company
” for the conduct of its business at the time of
the contravention, he was entitled to the benefit of the Proviso to
section 68(1) [corresponding to the Proviso to section 69(1)] since he
had exercised all due diligence to prevent the contravention.

LIABILITY UNDER SECTION 69 IS NOT ABSOLUTE

In the undernoted case6 , the Supreme Court has
once again observed that while deciding the matter, it is open for the Court to
consider that the liability of the person is vicarious or that the offence was
committed without his knowledge or neglect.

Thus, even if the documents relied upon indicate that the
offence was committed, it would not be a ground for denying a person inspection
of all such documents7 .

ILLUSTRATIVE CASES

Having regard to the principles discussed above, some
illustrative cases may be reviewed in which the person-in-charge argued on
various grounds that he cannot be charged for the offence committed by the
company.

DIRECTOR

Director of a company may
be held liable by virtue of section 69(2) if the offence was committed with his
connivance and he had actively acquiesced in the commission of the offence1.
Likewise, where the Director was duty-bound to supervise the sale of foreign
currency which was physically handled by his subordinate, the director can be
held liable for the offence arising from such sale2.

_____________________________________________________________________

5   Pheroze Kudianavala
Pvt Ltd vs. Directorate of Enforcement (1991) 54
Taxman 164 (FERAB)

6   AIR 1971 SC 2162;
see also: Lalit Kumar Modi vs. Special Director (2014) 125 SCL 330 (Bom).

7   Lalit
Kumar Modi vs. Special Director  (2014)
125 SCL 330 (Bom); Shashank Vyanktesh Manohar vs. Union of India (2013) 122 SCL
317 (Bom)

The nature of liability of a director is merely vicarious.
Accordingly, a director cannot be held guilty3 without first, the
company being held guilty and that, too, after adducing reasons for invoking
his vicarious liability.

Section 69(1) extends the liability, by a deeming fiction,
only to such directors who, at the relevant time, were in charge of or were
responsible to the company for the conduct of its business. In the undernoted
case4, petitioners had ceased to be directors by the company on 14
November, 1997. This was disclosed in Form No. 32 filed with the Registrar of
Companies. The export proceeds were to be realised by the company for the year
ended 31 March 2008. It was held by the Delhi High Court that the contravention
in respect of such export receivable could take place only after 31 March 2008
by which time the petitioners ceased to be directors of the company. On this
ground, the submission of the petitioners (that the proceeding against them was
not sustainable in law), was accepted by the Delhi High Court by relying on the
decision of the Supreme Court in S.M.S. Pharmaceuticals Ltd vs. Neeta Bhalla5.

However, in ANZ Grindlays Bank Ltd vs. Director6,
the Supreme Court has held that even if the company cannot be punished, it does
not mean that the persons referred to u/s. 68(1), (2) of FERA [section 69(1),
(2)] cannot also be punished. Indeed, a Director who had ceased to be a
director as evidenced by form No. 32, cannot be said to be in charge of the
affairs of the company or responsible for the conduct of its business in
respect of the transactions after he ceased to be a director7.

_____________________________________________________________________________

1   Directorate of
Enforcement v. South India Viscose Ltd (1990) 50 Taxman 501 (FERAB).

2   Travels &
Rental (P) Ltd v. Director (2009) 92 SCL 211 (ATFE)

3   C R Das Gupta v.
Special Director (2000) 112 Taxman 608 (FERAB); Eupharma Laboratories Ltd v.
Enforcement Directorate (2000) 110 Taxman 469 (FERAB); Nowrosjee Wadia &
Sons P Ltd v. Director of Enforcement (1999) 106 Taxman 55‘; S P Singh v.
Director of Enforcement (1990) 104 Taxman 503 (FERAB).

4   Bhupendra V. Shah v.
Union of India – WP(C) 19881 of 2004, WP(C) 26 and WP(C) 1038 of 2005 decided
by Delhi High Court on 26 March 2010; M M Shah v. Dy Director (2010 104 SCL 79
(Bom)

5   (2005) 8 SCC 89.

6   (2005) 58 SCL 350
(SC).

7   Bhupendra
V. Shah v. Union of India (WP/C 19881/04 decided on 26-3-2010 by Delhi High
Court); M. M. Shah v. Dy Director (2010) 104 SCL 79 (Bom)

It is possible in some cases that a director is merely
concerned with laying down the policy for the company’s business and is not
concerned with the day to day or operational matters of the company. This
aspect was examined by the Allahabad High court in R. K. Khandelwal vs.
State
8. In this decision, Allahabad High Court has observed that
there can be directors who merely lay down the policy and are not concerned
with the day to day working of the company.

Accordingly, the mere fact that a person is a director of the
company does not automatically make him liable for the offence committed by the
company particularly when the other ingredients of section 69(1) are not
established so as to make him vicariously liable. In this respect, a reference
may also be made to the Supreme Court decision in S M S Pharmaceuticals Ltd
vs. Neeta Bhalla9
. In this case, the Supreme Court has
categorically held that the vicarious liability is cast on persons who may have
something to do with the transaction complained of and not on the basis of
merely holding a designation or office. It would depend on the role he plays
and not on his designation or status. The said decision was rendered in respect
of section 141 of the Negotiable Instruments Act but was held by the Bombay
High Court as applicable to section 42 of FEMA [section 69] as the wordings of
both the provisions are in pari uthoriz [see: Shashank Vyanktesh
Manohar vs. Union
10 ].

MANAGING DIRECTOR

Normally, managing director is appointed by an agreement with
the company or by a resolution of the company or by the company’s Memorandum and
Articles of Association. These are the sources from which the managing director
derives the powers of management entrusted to him. Thus, if the managing
director is to be charged for the offence committed by the company, it would
not be sufficient for the Department to merely make an allegation to that
effect without anything more. For charging the managing director with the
vicarious liability u/s. 69(1), first of all, the burden of proof must be
discharged by the Department by adducing appropriate evidence. If, however, the
Department fails to bring sufficient evidence to discharge such burden, the
managing director cannot be charged for the offence committed by the company11.
Where, however, the Managing Director was dutybound to supervise the sale of foreign
currency which was physically handled by his subordinate, the Managing Director
can be held liable for the offence concerning such sale1 .

_______________________________________________________

8   [1964] 62 A L J 625

9   [2005] 63 SCL 93
(SC)

10  [2013] 37
taxmann.com 151 (Bom), para 35]

11   E
Merck (I) Ltd v. Director of Enforcement (1988) 39 Taxman 47 (FERAB).

However, a reference may be made to another decision2 in
which managing directors of two companies which were charged with contravention
of FERA were deemed guilty of such contravention in terms of section 68(1)
[section 69(1)].

EX-DIRECTOR

In the undernoted case3, the company and its
ex-director were charged for failure to repatriate export proceeds. On appeal
by the ex-director, it was held that penalty on ex-director was justified since
he did not take reasonable steps to repatriate export proceeds. It was
particularly observed that he had not sought intervention of Indian and Russian
diplomatic authorities in time in respect of export proceeds receivable from
Russia.

In a similar situation, it was held by the Delhi High Court4
that the ex-director was not vicariously liable where there was no evidence to
show in what manner she was responsible to the company for the conduct of its
business. Where the show cause notice on the ex-director was served at the
address of the company at the time when he had ceased to be a director, it was
held that such service was not proper service and the Order based on such
improper service was unsustainable in law5.

NON-EXECUTIVE DIRECTOR

Can a director of the company who is not in full time
employment and who is not involved in the day-to-day management of the company
be charged with contravention by invoking section 69(2)? Having regard to the
aforesaid discussion on the principles of the burden of proof u/s. 69(2), the
answer is ‘no’. This answer has greater relevance to the professional
directors, independent directors and the nominees of the financial
institutions. The proposition that such director, simpliciter cannot be charged
with the offence committed by the company is fortified by the undernoted
decision of the Calcutta High Court6.

PROFESSIONAL/NOMINEE DIRECTOR

In the undernoted case7, the Bombay High Court
held that nominee/professional director cannot be vicariously held liable for
acts of commission or omission of subordinates.

1   Travels &
Rentals (P) Ltd v. Director (2009) 92 SCL 211 (ATFE)

2   Telco
Ltd v. Special Directorate of Enforcement (1991) 55 Taxman 85 (FERAB).

3   Dheklapara Tea
Company Ltd v. DE (1998) 100 Taxman 470 (FERAB).

4   Kavita Dogra v DoE
[2014] 126 SCL 182 (Del)

5   Shailendra Swarup v
Special Director [2015] 54 taxmann.com 79 (Del)

6   Bhagwati Prasad Khaitan v.
Special Director of Enforcement (1977) CrLJ 1821 (Cal).

PROPRIETOR

Business concerns are often floated in the names which may
not contain proprietor’s name. Ostensibly, therefore, the show cause notice may
be issued in the name of the concern as also in the name of the proprietor. The
moot point, however, is whether it was in order to invoke section 68(1) of FERA
[corresponding to 69(1)] at all? This question has been examined in the
undernoted case8 in which it was held that a proprietary concern and
its proprietor both are same. Hence, section 68(1) [section 69(1)] cannot be
invoked in case of a proprietary concern.

PARTNER

Can a partner be charged for the offence committed by the
firm? The answer appears to be ‘yes’. In principle and by analogy, vicarious
liability could be extended to contravention by partnership firms2.
However, having regard to the Explanation defining the “company” and
“director”, coupled with the Proviso to section 69(1), a partner cannot
be charged unless the following two conditions are fulfilled.

Firstly, the Department has discharged the following
triple-burden of proof.

  The partnership had committed offence of any
provision of RERA;

   At the time when the offence was committed,
the partner was in charge of the business of partnership; or

   At the time the offence was committed, the
partner was responsible to the partnership firm for the conduct of its
business.

Secondly, the partner was unable to prove that the
offence was committed without his knowledge or that he had exercised all due
diligence to prevent commission of the offence. Thus, where the non-resident
partners were fully aware of the affairs of the appellant firm as also the
affairs of the foreign buyers who were related to them, such non-resident
partners can be held vicariously liable for the offence10. On the
other hand, where the non-resident partner was employed abroad and had not
taken part in the day to day affairs of the firm, he could not be held liable
for the offence committed by the firm1

_____________________________________________________________________________________________

7   M M Shah v. Dy
Director (2010) 104 SCL 79 (Bom)

8   Apex Exports &
Baljeet Singh v. DE (1997) 92 Taxman 452 (FERAB).

9   Brij Trading Co. v
Enforcement Directorate (2014) 126 SCL 118 (Del)

10  Simertex v.
Director (2006) 69 SCL 177 (ATFE).

.

Assuming that the Department succeeds in discharging such
triple-burden of proof, still if the partner is able to rebut the charge in
terms of the Proviso, he cannot be punished2. Thus, penalty cannot
always be imposed on managing partner3.

However, where the firm is penalised for the offence, the
partners of the firm cannot be penalised again for the same offence since
partnership firm is just a compendious description for the partners
constituting the firm and the firm does not exist independently of the partners
particularly for the purposes for imputing the penal liability4.

In the undernoted case5, a partnership firm was
charged with failure to repatriate export proceeds. On investigation, it was
found that the partner in charge had taken “reasonable steps” to repatriate
export proceeds. On appeal, it was confirmed that reasonable steps were taken
to repatriate the export proceeds. It was held that reasonable steps taken by the
partner should be regarded as reasonable steps taken by the firm. It was also
held that, once the finding was reached that one partner had taken reasonable
steps to repatriate export proceeds, the charge cannot be sustained either
against the firm or against any other partner. The fact that the firm was
already penalised is also a factor to be weighed while deciding the liability
of partners under this section6.

In the last-mentioned case, the Court examined the
phraseology of section 140 of the Customs Act which was in pari uthoriz
with the relevant FERA provision (corresponding to section 69).

_____________________________________________________________________________

1   United Enterprises
v. Special Director (2002) 35 SCL 273 (ATFE)

2   Agarwal Trading Co
v. Asst Collector of Customs AIR 1972 SC 648; Girdhari Lal Gupta v. D N Mehta
AIR 1971 SC 28.

3   SRC Exports (P) Ltd
v. Director of Enforcement (2000) 112 Taxman 142
(FERAB); See also: Chhabra Handicrafts v. Deputy Director (2000) 111 Taxman 138
(FERAB).

4   K B.S.H. Export
House v. Director of Enforcement (1988) 41 Taxman 138 (FERAB). Tarak Nath Sen
v. Union of India AIR 1975 CAL 337; Mohan, Prop. Kandan Mohan Exports v.
Director (2009) 95 SCL 58 (ATFE);

     Jagmohan Tandon v.
Director (2003) 46 SCL 273 (ATFE); Garments India Exporters v. Director (2005)
62 SCL 276 (ATFE); Hathibhai Bulakhidas v. Director (2002) 36 SCL 764 (FERAB).

5   Lakshmi Garments v.
DE (1996) 86 Taxman 259 (FERAB).

6   Tarak Nath Sen v.
Union AIR 1975 Cal 337.

It may be noted that the nature of liability of a partner is
merely vicarious. Accordingly, a partner cannot be held guilty without the firm
being held guilty and that, too, after adducing proper reasons for invoking the
vicarious liability7.

SLEEPING PARTNER

Sleeping partners cannot be held liable for the offence
committed by the firm and penalties cannot be imposed on them8.

POWER-OF-ATTORNEY HOLDER

In case of proprietary concerns, it is usual for the
proprietor to delegate certain functions of business to others who are not his
employees but who act as his agents and act on his behalf in terms of the
power-of-attorney executed by the proprietor in their favour.

All acts of the holder of the power-of-attorney are done by
him in his capacity as mere agent of the proprietor. The responsibility for all
acts done by the agent rests on the proprietor. Accordingly, the concept of
joint and several liability cannot be invoked in such cases to fasten vicarious
liability u/s. 69(1) on the power-of-attorney holder9. However,
where the power-of-attorney holder is in full control of business of a
non-resident, he would be vicariously liable for the offence10.

EXPORT MANAGER – NOT A PERSON IN-CHARGE OF THE COMPANY

Generally, the show cause notice alleging non-repatriation of
export proceeds is issued to the export manager on the premise that he was the
person in charge of the export business. Is it possible for the export manager
to argue that he was not the person in charge of the business? This question
was considered in the undernoted case11. In that case, a company
applied for permission to export certain machinery for participating in an
exhibition in USA. The permission was given on the condition that the machinery
will be re-imported. The company failed to re-import the machinery pursuant to
which the show cause notice was issued charging the company, its director and
the export-manager for the alleged contravention. Penalty was imposed on all
the three. While the company and its director paid the penalty, the
export-manager contended that he was not the person in charge of the company’s
affairs and accordingly, he could not be considered guilty even for abetment.

It was observed that in view of the provisions of section
68(2) of RERA [section 69(2)] the export manager could be held guilty only
if
it was proved that the offence was committed with his consent or
connivance or was attributable to neglect on his part. It was also observed
that when the company had a managing director in charge of the company’s affairs,
the other functionaries could not be considered to be in-charge of the
company’s affairs. Accordingly, the penalty levied on the export manager was
set aside.

________________________________________________________________

7   Sumangal Enterprises
v. DE (1999) 104 Taxman 489 (FERAB).

8   Chhabra Handicrafts
v. Dy Director (2000) 111 Taxman 138 (FERAB).

9   Rajathi Agencies v.
Director of Enforcement (1988) 39 Taxman 56 (FERAB).

10  Simertex v. Director
(2006) 69 SCL 177 (ATFE)

11  R K Caprihan v.
Director of Enforcement (1988) 38 Taxman 23 (FERAB).

LEGAL REPRESENTATIVE

The liability u/s. 69(1) is on the person who, at the time
the offence was committed, was in charge of or was responsible to the company
for the conduct of its business. It is extremely arguable whether the legal
representatives of such person can be held liable by imputing such vicarious
liability. The tenor of section 69 also does not appear to suggest that if
there is any offence of any provisions of the Act by father, his legal
representatives would be vicariously liable for the same. This issue was
examined by the Madras High Court1 where a sole proprietor was
charged for some offence. The proprietor’s sons had no interest in the
proprietary business of their father and had never taken part in its management
or control during the lifetime of their father. Accordingly, they argued that
they cannot be regarded as “the person in charge of and responsible for the
conduct of the business of” the proprietary concern. The lower authorities held
the sons liable for the offence which was alleged to have been committed by
their father. While deleting the penalty, the Court made the following
observations:

“There
is no provision in the Foreign Exchange Regulation Act that, if there is any
contravention of the provisions of the Act by the father, his legal
representatives would be vicariously liable and responsible for the same. The application of the doctrine of vicarious
liability in the criminal law may be described as actuated by necessity rather
than desirability.
Criminal responsibility is generally regarded as being
essentially personal in character and it is with considerable diffidence that
the principle is accepted whereby a man may be found guilty and punished for an
offence which is actually committed by another.

One
member of a family is not vicariously liable for acts of another member merely
because of the family relationship
. Thus one spouse is not liable for the
torts of the other, nor the parent for the
torts of the child if nothing more than relationship appears in the case.

 

___________________________________________________________________________________________________

1   P N P Thulkarunai
& Co v. Director, Enforcement Directorate (1969) 39 CC 101 (Mad).

 

Thus, the doctrine of vicarious
liability is not of general application in the field of statutory crimes.

They are no doubt heirs of their
father. But when they succeeded to the estate of their father, they formed
themselves into a partnership business. They never partook of any interest in
the sole proprietorship concern of their father. [Emphasis supplied]

WHEN DOES THE BURDEN OF PROOF SHIFT FROM THE DEPARTMENT?

The Proviso to section 69(1) deals with this issue.
Its language signifies two things.

Firstly, for invoking the Proviso, the
Department must discharge the initial burden of proof in terms of section
69(1). Thus, where there was no evidence to show in what manner the director
was responsible to the company for the conduct of its business and the facts
relevant to the director were not discussed in the Order, it was held that the
Department had failed to make out a case for vicarious liability2. Secondly,
only after the Department discharges the burden of proof, the same would shift
to the person charged. The burden of proof so shifted is, however, rebuttable
and hence it is open to the person charged to prove the existence of any of the following two facts:

  The offence was committed without his
knowledge; or

  He had exercised due diligence to prevent the
commission of the offence.

It has been held3 that a mere averment that the
company had exercised due diligence or that the offence was committed without
the knowledge of the company or the officers responsible for the conduct of the
business would not suffice to establish a defence under the Proviso to
section 42(1) of FEMA [corresponding to Proviso to section 69(1)]. In
the absence of proper disclosure of the internal arrangements made by the
company to ensure proper conduct of the business according to the guidelines
framed, it was held that there indeed was failure to discharge the burden under
the Proviso to section 42(1) of FEMA [corresponding to Proviso to
section 69(1)].

__________________________________________________________

2   Kavita Dogra v. DoE
[2014] 126 SCL 182(Del)

3    V.
S. Ubhaykar v. Special Director (2012) 112 SCL 114 (Bom)

CONSIDERATIONS RELEVANT FOR SHIFTING THE BURDEN

What considerations should weigh the authorities for
ascertaining whether the person has discharged the burden which shifted to him
in terms of the Proviso? This question was considered by the Supreme
Court1.

The Supreme Court held, among others, that in case of a
partnership firm, acting partner would be liable for the offence committed by
the firm and unless the acting partner proves that he was not aware of the
offence or that he had exercised due diligence to prevent it and the fact that
when the offence was committed, he was out of India would be of no avail.

MITIGATING FACTORS-MAY RESCUE PROMOTER, DIRECTOR, PARTNER,
ETC.

In the undernoted case2, the appellant guest-house
had accepted rupees from foreigners in contravention of FERA. The partner and
manager of the guest-house were penalised u/s. 68(1), (2) of FERA [section
69(1), (2)]. The appellant pleaded that there was no mala fide
intention. The penalty against the partner was set aside in terms of the Proviso
to section 68(1) of FERA [Proviso to section 69(1)] on the ground
that he was not aware that the contravention was committed. Penalty on the
manager, too, was set aside on the basis of the following mitigating factors.

  Contravention occurred unwittingly and
without awareness of the contravention.

  The Department did not dispute that the
appellant fully co-operated with the Department.

  There was no past history of contravention,
this being the first and the only one.

   Appellant had not benefitted from the
contravention.

  Appellant’s averment – that had he known the
correct legal requirement, he would have certainly complied with the same – was
not disputed by the Department.

It was observed that if all offenders are treated alike
without giving due weightage to the honest conduct of some of them, it may make
even honest persons dishonest.

______________________________________________________________________

1   Giridharilal Gupta
vs. D N Mehta AIR 1971 SC 28.

2   Sangam Guest House
vs. Dy Director [2002] 35 SCL 20 (ATFE)

Delhi High Court3 has held that mere fact that in
the opportunity notice given to the appellant, it was stated that the appellant
was in charge of and responsible for the day to day functioning is not enough
to discharge the initial burden cast on the Department to prove so. In that
case, neither in the order of Special Director nor of the Appellate Tribunal,
there was any finding that the appellant was in charge of and was responsible
for the day to day working of the company.

OFFENCE COMMITTED WITH CONNIVANCE OF PROMOTER, DIRECTOR,
PARTNER OR OFFICER

While section 69(1) deals with the persons who, at the time
of contravention, are in charge of or responsible to the company for the
conduct of its business, section 69(2) imposes liability on a functionary who
is a director, partner, manager, secretary or other officer. However, the
Department is required to prove not only the fact that the functionary
proceeded against was a director, partner etc. but also the fact that the
offence was committed either with the consent or connivance of such functionary
or is attributable to any neglect on his part. Unless both these facts are
established, the functionary would not be liable for punishment. Thus, in the
undernoted case4, a company was found guilty of receiving payment in
rupees from non-resident. The investigation showed that the payment was
received by the appellant. The adjudicating officer charged the appellant u/s.
68(2) of FERA [section 69(2)] on the ground that contravention took place with
his consent. On appeal, the finding of the adjudicating officer was confirmed
that the contravention took place with his consent so as to attract section
68(2). [section 69(2)].

NATURE OF BURDEN OF PROOF ON THE DEPARTMENT

The language of section 69(2) suggests that the burden of
proving the consent, connivance or neglect of the functionary lies on the
Department.

HOW WILL THE DEPARTMENT DISCHARGE SUCH BURDEN?

As regards “connivance”, it would be necessary for the
Department to establish that the offence was committed in the circumstances
showing that but for the reticence of the functionary, it was possible for him
to prevent the commission of such offence.

____________________________________________________________________________________

3   Parag Dalmia vs.
Special Director (2012) 115 SCL 57 (Del)

4   Bhupinder Singh vs.
DE [1997] 95 Taxman 315 (FERAB)

As regards “neglect”, the Department must first
ascertain as to what is the spectrum of the duties of director, partner,
officer, etc. This can be done by examining the letter of his appointment,
agreement, the resolution, etc. from which he derived the powers
exercised by him in discharge of his duties. Thereafter, the Department will
have to adduce evidence that it was possible for the functionary to do an act
in discharge of the duties assigned to him which in fact he did not.

SUMMATION : TWO ISSUES

While summing up the discussion on the liability of
promoters, directors, partners and officers of the realty companies, firms,
association, etc. following two issues deserve some further thought.

First, what is the distinction between the provisions
of section 69(1) and section 69(2)?

Second, is there any possibility of the peculiarly
structured real estate transactions triggering the provisions of Prohibition of
Benami Property Transactions Act, 1988 that came into force
retrospectively from 19 May 1988 ?

As regards the first issue, the principal distinction is that
u/s. 69(1), the burden of proof lies on the Department. Once the Department
discharges it, the Proviso shifts the burden to the person vicariously
charged with the offence.

On the other hand, section 69(2) casts the burden of proof on
the Department without the opportunity of shifting the same to the functionary
of the company vicariously charged thereunder.

As regards the
applicability of Prohibition of Benami Property Transactions Act, 1988,
one may note the following.

Real estate developers across India are currently in a
quandary over how to deal with properties they have aggregated over the years through
proxies.

Because of restrictive land ceiling laws, it was common for
real estate developers to amass land holdings through proxies—normally through
firms not directly controlled
or owned but funded by way of loan or subscription to share capital.

Despite the Benami Transactions (Prohibition) Act being
in force from 1988, not much attention was paid to the parcels of land acquired
by developers through proxies because the law had no implementing agency until
now and hence was rarely applied.

With the income-tax department now starting to crack the whip
on the transactions in which the actual beneficiary is different from the
registered owner, many real estate developers across India who have structured
the transactions through land aggregators are in a quandary.

In the run-up to 2016 November amendment to the benami law,
many real estate developers hurriedly “reversed” benami transactions by
transferring properties back to themselves from their proxies who previously
held them. But under the amended law, such ‘re-transfers’ are banned with
retrospective effect.

Of the 72 sections of the amended Benami Act, only
three came into force last year; the rest were made effective from 19 May 1988
through the 2016 November amendment.

Real estate developers claim that their acquisitions through
proxies should not be treated in the same manner as any other transaction aimed
at tax evasion or concealment of wealth. According to them, proxies were used
only to get past restrictive land ceiling laws.

Under the amended Benami law, people involved in benami
transactions face up to seven years in jail and confiscation of properties
without compensation.

The aim of the Benami Act is to curb black money. Real
estate developers will be in difficulty if it is used to take on land
aggregation through proxies.

If it can be established that the motive for
creating multiple ownership in land aggregation was not to avoid tax, hopefully
the government may not bracket such transactions with benami transactions.

Clarifications on Security Deposits And Key Management Personnel

Presentation of Security
Deposits

An
electricity distribution company collects security deposit at the time of issue
of electricity connection, which is refundable when the connection is
surrendered. The entity expects that most of the customers will not surrender
their connection. A question was raised to the Ind AS Transition Facilitation
Group (ITFG) whether such a security deposit shall be classified as a ‘current
liability’ or a ‘non-current liability’ in the books of the electricity
company?

The
ITFG at the first instance concluded that the security deposit should be
presented as current liability on the basis of Paragraph 69 of Ind AS 1,
Presentation of Financial Statement, which states as under:

“An
entity shall classify a liability as current when:

a)  it
expects to settle the liability in its normal operating cycle;

b)  it
holds the liability primarily for the purpose of trading;

c)  the
liability is due to be settled within twelve months after the reporting period;
or

d)  it
does not have an unconditional right to defer settlement of the liability for
at least twelve months after the reporting period”

The
ITFG opined “Although it is expected that most of the customers will not
surrender their connection and the deposit need not be refunded, but
surrendering of the connection is a condition that is not within the control of
the entity. Hence, the electricity company does not have a right to defer the
refund of deposit. The expectation of the company that it will not be settled
within 12 months is not relevant to classify the liability as a non-current
liability. Accordingly, the said security deposits should be classified as a
current liability in the books of the electricity company.”

However,
subsequently the ITFG withdrew the above guidance. Among other matters, the
ITFG stated that the concept of current and non-current classification already
existed under Indian GAAP and is not new to Ind AS. Hence, there is no need for
transition group guidance on the matter. Rather, the classification should be
based on Ind AS 1 and Ind AS compliant Schedule III principles. Some may argue
that by withdrawing the guidance, ITFG is permitting electricity companies to
present the security deposit as non-current. The supporters of this view
believe that in withdrawing the guidance, the ITFG must have focussed on the
substance of the arrangement, and the redemption pattern, which indicates that
the security deposit was non-current.

Author’s
View on some related matters

Pursuant
to the above change, electricity and similar companies, for example, a company
that provides gas connection or water supply, would classify security deposits
received from the customers as current or non-current liability based on
estimated redemption pattern. This view would generally apply in limited
circumstances such as in monopolistic or oligopolistic situations where choices
available to the consumer to change the service provider are highly limited.
This view should not apply by analogy in all cases. For example, in the case of
security deposit received by a consumer goods company from
retailers/distributors, the classification of security deposits would continue
to be current.

The
other question not addressed by the ITFG is whether the security deposits, once
presented as non-current needs to be discounted to its present value followed
by subsequent unwinding of the discount. One view is that discounting would be
required. On initial discounting, the security deposit would be stated at its
present value. The difference between the amount of security deposit received
and the present value will be treated as deferred income. The deferred income
will be credited to the P&L income, generally on a straight line basis to
reflect the true value of the goods or services provided to the customer. On
the other hand, the unwinding of the discounting will result in the security
deposit being reflected at its original value just before redemption. The
unwinding will be done on an effective interest rate method and the consequent
financial expense will be debited to P&L. The accounting will result in a
mis-match in the P&L as the deferred income is recognised on a straight
line basis whereas the financial expense is recognised on an effective interest
rate basis.

The
author’s view is that the new guidance (viz., non-current presentation of
deposit by electricity and similar companies) arising from withdrawal of old
ITFG view is relevant only for presentation in the balance sheet. Recognition
and measurement of security deposits, including those accepted by the
electricity and similar companies, would continue to be governed by Ind AS 109 Financial
Instruments
principles. Consequently, the author believes that there is no
need to discount the security deposits.

WHETHER INDEPENDENT DIRECTORS ARE KEY MANAGEMENT
PERSONNEL?

Whether
independent directors should be considered as key management personnel (KMP)
under Ind AS 24 Related Party Disclosures?

Authors’
View

Ind
AS 24 defines the term ‘key management personnel’ as “the persons having
authority and responsibility for planning, directing and controlling the
activities of the entity directly or indirectly, including any director (whether
executive or otherwise
) of that entity.”

Under
Indian GAAP, AS 18 Related Party Disclosures excludes non-executive
directors from the definition of KMP. However, under Ind AS, it is quite clear
that all directors  whether  Executive or Non-executive will generally be
considered as KMP. Furthermore, the Companies Act, 2013, prescribes very
onerous responsibilities for independent directors. These responsibilities
include taking executive responsibilities. This includes authority and
responsibility for planning, directing and controlling the activities of the
entity. Hence, independent directors are KMP under Ind AS 24.

ITFG may provide
appropriate guidance on this matter.

[2016] 68 taxmann.com 147 (New Delhi-CESTAT) – Commissioner of Central Excise, Delhi- III vs. Fiamm Minda Automotive Ltd.

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The manufacturer is eligible to take CENVAT credit of service tax, inadvertently paid by job worker whose activities are exempt from service tax.

Facts
The Respondent Manufacturer availed CENVAT credit of service tax charged and collected by the job workers. CENVAT credit was denied contending that such services were not liable to service tax.

Held
Tribunal observed that job workers were registered with service tax department and paid service tax which was accepted and retained as statutory dues by department. Also proper invoices evidencing service tax payment were issued. It was therefore held that when service tax is paid by the service provider and the CENVAT credit thereof is availed by recipient of service in conformity with statutory provisions, such credit cannot be denied at recipient’s end merely on the ground that activities were exempt from service tax.

2016 (42) STR 247 (All.) Prosper Build Home Pvt. Ltd. vs. Union of India

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Department cannot initiate proceedings for recovery of disputed dues without adjudication.

Facts
The petitioner admitted liability of service tax on specified transactions during the recording of statement. Consequently, the petitioner was arrested for non-deposit of service tax vide section 89(1)(d) of the Finance Act, 1994 i.e. for failure to deposit service tax collected beyond a period of six months from the due date. After the due process of prosecution, bail was granted and an interim order was passed directing a deposit of 25% of entire outstanding. On obtaining legal advice post prosecution it was known that service tax was not liable on material supplied free of cost. The said fact was represented to the department. However, ignoring the submissions and on the basis of statements recorded, department started adopting coercive methods to recover disputed dues. Therefore the present writ petition is filed objecting recovery of service tax by department without formal adjudication u/s. 73 of the Finance Act, 1994. The revenue contended that the matter is still under investigation and the process to issue SCN was under contemplation.

Held
The High Court held that since there was no assessment order against the petitioner, he cannot be forced to pay an amount merely because he admitted the service tax liability in statements recorded. Department has the liberty to initiate appropriate action for recovery only after service tax liability is confirmed vide adjudication order and is not deposited. In case the petitioner misuses or does not comply with the terms of bail order or interim order, department can apply for cancellation of the bail order or vacation of the interim order.

[2016-TIOL-1105-CESTAT-HYD] Commissioner C& CE & ST, Hyderabad vs. State Bank of Hyderabad

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When excess payment made is not in dispute, denial of adjustment against subsequent liability on a mere procedural lapse and strict interpretation is not justified.

Facts
The Assessee made an excess payment of service tax in the month of October 2007, June and September, 2008 and adjusted the same in the months of April, July and October 2008 without following the procedure provided under Rule 6(4A) and 6(4B) of the Service Tax Rules, 1994. The department contended that since the amount was adjusted suo-motto without intimating and being in excess of the prescribed limit, the same was recoverable with interest and penalties. Commissioner (Appeals) dropped the demand and the Revenue is in Appeal.

Held

The Tribunal noted the undisputed fact of excess payment of service tax which is required to be adjusted against the liability for subsequent period. It was held that Rule 6(1A) of the Service Tax Rules, 1994 provides for adjustment of service tax paid in advance. Similarly Rule 6(3) of the said rules cannot be given a narrow interpretation of adjustment only at the time of refund to the client. Thus non-observance of a procedure is only technical lapse and therefore condonable. It was further held that refund can be claimed of the excess paid in which case interest is also payable to the assessee. When one opts for adjustment so as to eliminate the hassles of refund by foregoing the interest, strict interpretation and denying adjustment would result in unjust enrichment of the revenue which can never be the intention of the Rule.

[2016-TIOL-947-CESTAT-MUM] M/s Electronica Finance Ltd. vs. Commissioner of Central Excise, Pune-III

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In case of a Hire-Purchase contract the taxable event is the date of entering into the contract, installment payments are only obligations of the hirer.

Facts
The Appellant is engaged in lease financial business and has discharged service tax at the applicable rate prevailing on the date of entering into the hire purchase agreement. The department contends that service tax is payable at the rate prevalent when the lease rental is being paid and accordingly there is a demand for the differential service tax liability. It was argued that service tax liability is factored in the EMI that is fixed for their client and therefore the applicable rate is the rate prevailing on the date of the agreement only.

Held
The Tribunal relied upon the decision in the case of Art Leasing Ltd vs. CCE [2007 (8) STR 162 wherein it is held that the installment payments are only obligations of the hirer whereas the taxable event occurs when the contract is entered into. Therefore the contention that service is continued to be provided during the payment of installments is not correct. Accordingly it was held that rate of service tax will be the rate prevalent on the date of contract and the demand for differential liability is set aside.

(Note: The ratio of the aforesaid decision may be applied to the applicability of Rule 5 of the Point of Taxation Rules, 2011 wherein, in case of new services and new levies where the payment is received after the applicability of the new levy, the new rate is made applicable. As per the aforesaid decision, if the taxable event occurs prior to the applicability of the new levy, new rate cannot be made applicable merely because the payment is received later.)

[2016-TIOL-1035-CESTAT-HYD] M/s Aster Pvt. Ltd vs. CC & CE, Hyderabad-III

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II. Tribunal

Failure to intimate the department under Rule 6(3A) of the CENVAT Credit Rules is a mere procedural lapse and denial of benefit of proportionate reversal of credit is not justified.

Facts
The Appellant is a manufacturer availing the benefit of Notification No. 6/2006-CE and clearing goods at a NIL rate of duty. A show cause notice was issued demanding 10%/5% of the value of exempted goods under Rule 6(3)(i) of the CENVAT Credit Rules, 2004 (CCR) on the contention that common inputs and input services were used in the manufacture of exempted and dutiable goods and no separate accounts were maintained. It was argued that assessees not maintaining separate accounts have two options under the CCR i.e. either pay 5% or 10% of the value of exempted goods or do a proportionate reversal of CENVAT credit on inputs and input services attributable to manufacture of exempted goods as per the formula prescribed under Rule 6(3A) of CCR. The second option being beneficial was chosen and credit was reversed. The department argued that no intimation was provided as required under Rule 6(3A) of the CCR and therefore they were bound to pay as per the first option.

Held
The Tribunal observed that sub-rule 6(3) provides for two options and it was noted that Rule 6(3A) of the CCR did not provide that failure to intimate would make the assessee lose the choice of a proportionate reversal of credit. It was held that failure to intimate would not automatically result in application of Rule 6(3)(i) and such a procedural lapse was condonable and denial of a substantive right was unjustified. Further the revenue’s plea of remanding the matter was also rejected on the ground that the amount of credit proportionately reversed along with interest formed a part of the reply to the show cause notice and the same was never disputed.

(Note: Readers may note that Notification No. 13/2016-CE(N.T) has inserted a new sub-rule (3AA) in the CENVAT Credit Rules, 2004 effective from 01/04/2016 providing that on failure to exercise the option under sub-rule 6(3) and follow the procedure provided under sub-rule 6(3A), the Central Excise officer may allow the assessee to follow the procedure and pay the proportionate amount on payment of interest @ 15% from the due date of payment, till the date of payment thereof. Accordingly intimation to the department now appears mandatory.)

2016 (42) S.T.R. 6 (Kar.) C.C.E. & S.T. vs. Mangalore Refinery & Petrochemicals Ltd.

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The Court is bound by an earlier decision of its co-ordinate Bench even if such decision was not challenged by Revenue due to its policy decision

Facts
Facts In a dispute relating to availment of CENVAT credit on certain services, the Respondent assessee relied on the earlier judgement of co-ordinate Bench of the Court which upheld the availability of credit. The department contended that since the amount involved in the said judgement was below the monetary ceiling prescribed, no appeal was filed against it. Therefore the said judgement has no value of precedence and the Court should decide the present dispute afresh.

Held
The Court rejected the argument of the department and held that a decision attains finality in absence of any challenge before higher Court. Reason for nonchallenging has no relevance and accordingly dismissed the appeal filed.

[2016] 68 taxmann.com 180 (Madras HC) – Eveready Industries India Ltd. vs. CESTAT

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Once refund is granted under section 11B, it cannot be said to be “erroneous refund” in terms of section 11A of Central Excise Act and recourse available for recovery of such refund is only by way of following procedure laid down in section 35E of the Act and not section 11A.

Facts
The final assessment was completed and refund was determined. The assessee filed application for refund but was granted refund under section 11B only for part of the amount. However, thereafter, by invoking section 11A of the Central Excise Act, 1944, the very same Assistant Commissioner, who sanctioned refund earlier, issued Show Cause Notice followed by order directing recovery of refund sanctioned. This order for recovery of refund was confirmed by Commissioner (Appeals) as well as the Tribunal. Before the High Court, it was contended that refund application is allowed under section 11B and department has not followed procedure laid down by section 35E (2) of Central Excise Act, 1944 therefore it is not open for department to take recourse u/s. 11A. The department contended that where there is erroneous refund, the same can always be recovered by initiating proceedings u/s. 11A without taking recourse to section 35E.

Held

The High Court held that a careful look at the scheme of sections 11A, 11B and 35E would show that an application for refund is not to be dealt with merely as an administrative act. Section 11B is a complete code in itself. Hence, power exercised u/s. 11B is that of an adjudicating authority and order passed is certainly one of adjudication. Therefore, it must be presumed that before according sanction for refund, an adjudicating authority had actually followed the procedure under section 11B and passed an order of adjudication. Section 11A(1) prescribes the procedure for recovery of any duty of excise, which is erroneously refunded. The power u/s. 35E is not actually to correct any error directly on the part of an adjudicating authority. This power is available only for directing the competent authority to take the matter to the Commissioner (Appeals).

Hon’ble High Court made reference to its own judgment in case of Madurai Power Corpn. vs. Dy. CCE 2008 (229) ELT 521, where Court had occasion to consider interplay between section 11A and section 35E of Central Excise Act, 1944. It held that no one can have a quarrel with the proposition that sections 35E and 11A operate in different fields and are invoked for different purposes. However if the department’s interpretation of section 11A is accepted, it would lead to a situation of recognizing power of recovery in a subordinate authority when refund is already granted by a superior authority after adjudication, which is obviously not the legislative intent. It was held that harmonious reading of provisions of sections 11A and 35E indicates that section 11A does not contemplate overriding section 35E. Hence once refund application is allowed u/s. 11B, such refund cannot be said to be erroneous refund in terms of section 11A (1). The recourse available for recovery of refund sanctioned in terms of section 11B is therefore to follow procedure laid down in section 35E and not section 11A.

[2016] 68 taxmann.com 156 (Madras HC) – S. L. Lumax Ltd. vs. Commissioner of Central Excise, Chennai-IV Commissionerate

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Benefit of CENVAT credit cannot be denied to assessee once the depreciation mistakenly claimed under income tax law on same duty component is given up by assessee. Tribunal cannot modify the Order-in-Original to the extent it is not appealed by the department before Commissioner (Appeals).

Facts
Appellant utilised MODVAT credit of duty paid on import of machinery in 1999 and also claimed depreciation in respect of same duty component in their income tax returns for that year and subsequent years. After detection of this mistake in 2002, all income tax returns were revised but for one year in which the time limit for filing of revised return had expired. Therefore, in the said year, a rectification application was made u/s. 154 of the Income Tax Act along with revised computation and depreciation claim was given up. Income Tax Department accepted the revised return for other years, but rejected the rectification application. The attempt of filing a rectification application was allowed by Commissioner Income Tax (Appeals) on 30/04/2005, but on further appeals by aggrieved parties, it failed upto the Supreme Court. In the proceedings under central excise law, show cause notice was issued denying claim of MODVAT credit. However, in the Order-in-Original, it was held that they would be eligible for credit after the date of acceptance of withdrawal of depreciation by the department i.e. filing of revised return or as the case may be date of order of Commissioner Income Tax (Appeals) accepting the claim for rectification application u/s. 154 (30/04/2005) and ordered recovery of credit accordingly. No appeal was preferred by the Excise Authorities against the said Order-in-Original. However, against the recovery of MODVAT credit, appellant filed the appeal. The appeal was allowed by Commissioner (Appeals), but department preferred an appeal before Tribunal. The Tribunal allowed the department’s appeal and restored the Order-in-Original and also modified the portion by which assessee was held as entitled to CENVAT credit from 30/04/2005. The Appellant preferred appeal before High Court raising a substantial question of law as to whether the Tribunal was justified in restoring Order-In-Original directing recovery of MODVAT credit by disregarding the admitted fact that claim for depreciation was given up under income tax law.

Held
Hon’ble High Court observed that the appellant started up with a claim for two benefits and ended up losing both the benefits. It is only after the detection by the department, an attempt was made to withdraw one of the two benefits. The mistake was explained on the ground that its head office and factory are located in different States. It was held that once the claim for depreciation under Income Tax Act was given up, the benefit of MODVAT credit cannot be denied. It further held that order of Tribunal modifying the Order-in-Original to the extent it allowed credit after 30/04/2005 is also not correct as the said order was not appealed against by the department before Commissioner (Appeals). As regards the year in which appellant gave up depreciation but lost legal battle with Income Tax Department, the Original Authority is directed to work out the amount of depreciation given up for the purpose of finding out the extent to which benefit is available.

[2016] 68 taxmann.com 286 (Kerala HC) – Kanjirappilly Amusement Park & Hotels (P.) Ltd. vs. Union of India.

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Removal of sub-clause (j) of section 66D i.e. Negative List resulting in levy of service tax on “access to amusement facilities and admission to entertainment events” does not amount to parliament encroaching upon Entry 62 of List II of Constitution.

Facts
The issue before the High Court was whether the removal of “admission and access to entertainment event and amusement facilities” [section 66D(j) of the Finance Act, 1994] from the Negative List of ‘Services’ by an amendment made by Finance Act 2015 and the consequent levy of service tax on such activity would result in the Union Parliament trenching upon the exclusive field assigned to the State, under Entry 62 List II of the Seventh Schedule of the Constitution of India. It was argued that resort to the residuary entry can be had only when it is found that the object of tax is not available in any of the other entries in List II and List III. Further there can be no service element found, since what the petitioners offer is amusement and entertainment and what the recipients get is also amusement and entertainment, which clearly is covered by Entry 62. Under Kerala Local Authorities Entertainments Tax Act, 1961 the levy of tax is with reference to the price for admission to any entertainment at the prescribed rates. The measure applicable to amusement parks is also provided based on the investment and area in which such park is situated at the rates fixed by the local authority within the range of rates provided in the table. Hence the activity is already taxed by the States. Further before legislative competence of the Parliament can be traced to the residuary entry, the legislative incompetence of the State Legislature has to be clearly established. The Petitioners broadly relied upon the following decisions:

a. Single Judge of this Court in Kerala Classified Hotels & Resorts Association vs. Union of India [2013] 35 taxmann.com 568 (Ker.), which was affirmed by a Division Bench in Union of India vs. Kerala Bar Hotels Association [2014] 51 taxmann.com 365 (Ker.).

b. Decision of the High Court of Madras in Mediaone Global Entertainment vs. Chief CCE [2013] 36 taxmann.com 57. The respondents sought dismissal of the writ petitions on the ground of “aspect theory” and there being two distinguishable aspects involved, one the services offered by the petitioners and the other the amusements and entertainments enjoyed by the entrants.

Held

The fact that admission/access to entertainment events and amusement facilities are included in the negative list itself is a pointer that the same partakes a service and the Parliament initially exempted it from the levy. When it is argued that the amusement and entertainment is offered, the corollary is that what is offered for amusement for a fee is essentially a service offered for consideration. There is also definitely an element of service in providing a facility, which would result in the enjoyment of an activity capable of being termed as an amusement or entertainment for a fee. Union Parliament therefore has the legislative competence to tax the aspect of service in an amusement park. The argument that the field being entirely occupied by Entry 62 List II, as the Entertainments Tax Act of the State provides a measure of tax based on the investment made and the area covered; which takes in the entire facilities offered and the same having been taxed by the State and therefore there could be no further tax levied on the service i.e. the provision of such facilities, was not accepted by the Court. Relying upon State of W.B. vs. Kesoram Industries Ltd. [2004] 10 SCC 201, the Court held that the Courts have been cautioned not to mix up the object of taxation and the measure employed. Further Relying upon All-India Federation of Tax Practitioners vs. Union of India [2007] 7 SCC 527 and Federation of Hotel & Restaurant Association of India vs. UOI [1989] 46 Taxman 47 (SC,) the Court held that the Supreme Court has time and again, after the Finance Act, 1994 came into force, upheld the tax levied on ‘services’ as being available to the Parliament under the residuary clause. In such circumstances, it cannot at all be said that the field is entirely covered by Entry 62 List II. Amusements are covered by Entry 62 List II and the aspect of ‘service’ involved when the facilities for amusement are offered for a price cannot be ignored. The Decision of Single Bench and Division Bench in the case of Kerala Classified Hotels & Resorts Association (supra) to the extent they dealt with constitutional validity of service tax on supply of food in restaurant by way of service in the context of Article 366(29A)(f) was distinguished on the ground that there is no question of a deeming provision being employed in the present case. Also the Court did not concur with Madras High Court to the extent it expressed a view in Mediaone Global Entertainment’s case (supra) that what is not taxable under section 66B is “tax on admission to entertainment events or access to amusement facilities”, the reason being, “tax on admission or entry of such events is covered in the State List, which is subjected to Entertainment Tax”. In this regard the Court held that Parliament is quite aware of their power. This is because even dehors inclusion in the Negative List the Parliament would not be able to trench upon the field specifically set apart for the States under List II. Therefore, the Negative List also did not refer to ‘amusement’ but tax on admission on entry of such events quite understanding the power to levy service tax on such facilities offered by one to another for a consideration. However, the High Court refrained from referring the matter to a Division Bench on the ground that the issue dealt with in the said case and in the instant cases is on different subjects and distinct transactions.

Note:
In Godfrey Philips India Ltd., the Apex Court held that luxuries is an activity of enjoyment. It further held that tax on luxury could only be levied on an activity and cannot be on goods or items of luxury. ‘Service’ also refers to “an activity”. In the present case also, the High Court expressed a view that ‘amusements’ refer to ‘activities’. However, apparently it did not examine the proposition as to whether, activities of amusement can be said to fall under Entry 62 List II, on the same reasoning as given by Supreme Court in Godfrey’s case, stating that no such ground was raised before it.

[2016-TIOL-824-HC-MAD-ST] N Bala Baskar vs. Union of India and Others

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I. High Court

The service receiver to whom the burden of tax is ultimately passed on is not entitled to challenge the levy as the liability is imposed on the service provider. Further in case of a joint development agreement, the land owner and the third parties avail of construction services from the builder.

Facts
The petitioner has entered into a joint development agreement with one of the Respondents for the property owned by him and his siblings for construction of a Residential Complex. 65% of the built up area is to be handed over to the petitioner against conveyance of 35% of undivided share of land. In terms of the agreement, the builder viz. one of the respondents issued a letter demanding service tax and VAT. A writ petition is filed challenging the payment of service tax on a mere exchange of property and the provisions of section 66B and 66E(b) of the Finance Act, 1994 and thereafter the prayer was modified to challenge only the circular No 151/2/2012 dated 10/02/2012 and the recommendations of the TRU dated 20/01/2016.

Held
The Hon. High Court held that the writ petition is not maintainable as the law makes the service provider liable to pay service tax and it is open for him to either pass on the burden or not. After having entered into an agreement for development and accepting the burden of service tax to the extent liable, the petitioner cannot now challenge the circulars imposing an obligation upon persons who have entered into such contracts. If the person to whom the burden is ultimately passed is allowed to challenge a levy, the same will lead to a disastrous consequence considering the number of consumers. Further it was also noted that the agreement for development gave rise to a bouquet of rights for the builder, one was construction of an area, a part of which could be sold to third parties along with undivided share of land. The petitioner did not stand on a different footing than those persons except that the consideration was paid in the form of undivided share of land and not by cash and therefore the petition was dismissed.

“Glass wall” vis-à-vis Construction Contract

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 Introduction

Under Sales Tax Laws, there are certain
provisions whereby a dealer can discharge his tax liability by way of a
simple method, called ‘composition scheme’, instead of the regular
method of working out liability to pay tax. Such ‘composition scheme/s’
are normally designed for smooth sailing, particularly in relation to
works contracts.

However, sometimes a method, which looks simple
and easy, may become very heavy and burdensome, just because of its
interpretation. Dealer/s opting for compositions scheme/s have to be
very careful. One recent judgment on interpretation of a ‘construction
contract’ may be an example.

Construction Contract

Under
erstwhile Maharashtra Works Contract Act,1989, a composition scheme of
5% was announced for ‘Construction Contract/s’. In other words, if the
contract executed by the contractor was covered by a notified
construction contract, then the contractor could adopt this composition
scheme, attracting a composition rate of 5%.

Notification

The
relevant notification, notifying ‘construction contract’ under Works
Contract Act, was dated 8.3.2000, which is reproduced below for ready
reference:

“Notification No.WCA -25.00/C.R.-39/Taxation-1 dated the 8 th March,2000.

In
exercise of the powers conferred by sub-section (1) of Section 6A of
the Maharashtra Sales Tax on the Transfer of Property in Goods involved
in the Execution of Works Contracts (Re-enacted) Act, 1989 (Mah.XXXVI of
1989), the Government of Maharashtra hereby notifies the following
contracts to be the construction contracts for the purpose of
sub-section (1) of the said section 6A, namely: –

A. Contracts for construction of –

 (1)
Building, (2) Roads, (3) Runways, (4) Bridges, Flyover bridges, Railway
overbridges, (5) Dams, (6) Tunnels, (7) Canals, (8) Barrages, (9)
diversions, (10) Rail tracks, (11) Causeways, Subways, Spillways, (12)
Water supply schemes, (13) Sewerage Works, (14) Drainage works, (15)
Swimming pools, (16) Water purification plants.

B. Any
contract incidental or ancillary to the contracts mentioned in paragraph
A above, if such contracts are awarded and executed before the
completion of the said contracts mentioned in A above.”

A look
at the above notification shows that two categories of transactions were
covered by above notification. One category was Part (A), which was
relating to main activity of construction, and, the other category i.e.
Part (B) covered incidental contracts to above main contract, subject to
the condition that they should be executed prior to completion of main
contract.

Controversy in case of Permasteelisa (India) Pvt. Ltd. (Sales Tax Reference No.55 of 2014 dated 6.5.2016) (BHC)

The facts leading to above judgment are noted by the Hon. High Court in para (4) of judgment as under:

“4
The Applicant is a Private Limited Company incorporated under the
Companies Act, 1956. It is also a registered dealer under the MVAT Act.
The Applicant is engaged in activity of fixation of glass walls. It is
the case of the Applicant that these glass walls also known as curtain
walls are used in the construction of modern buildings. These glass
walls are permanent walls and are constructed instead of usual brick
walls. In the modern age of architecture these glass walls have replaced
the traditional brick walls and many buildings are constructed and
developed using glass walls. If the glass walls are erected for a
building, then brick walls are not required as these glass walls have
all the characteristics of traditional brick walls as a result of which
there are modern high rise buildings and skyscrapers. In applying the
rates as applicable under the Work Contracts Act, the Applicant has
relied upon the Notification dated 8 March 2000 in terms of which
certain contracts specified therein are identified as construction
contract eligible for beneficial rate of tax. According to the
Applicant, the activities it undertakes are in respect of construction
contracts or contracts incidental or ancillary to the construction
contracts as set out in the Notification dated 8 March 2000 and it has
raised invoices and filed returns accordingly.”

Contention of dealer

As
the Maharashtra Sales Tax Appellate Tribunal, held that the activity
undertaken by the dealer did not fall within the said notification of
‘construction contract’, the dealer preferred a reference to Bombay High
Court and submitted that the glass walls are replacing traditional
bricks walls.

The arguments were two fold. One, it was a
contract for construction of building covered by Part A. In the
alternative, it was argued that it was covered by Part B as an
incidental contract. The meaning of ‘building’ in Development Control
Regulation for Greater Mumbai,1991 (DCR) was cited. Further literature
was submitted explaining the “glass walls” concept. On behalf of
department the submission was that the contract for glass walls was
neither a building construction contract nor incidental contract.

Observation of High Court

Hon. High Court referred to the contract terms for given transaction. In para 12 the Hon. High Court observed as under.

“12.
We are of the view that the contracts for construction of glass walls
executed by the Applicant would not constitute ‘contracts for
construction of buildings’ as mentioned in paragraph ‘A’ of the
Notification dated 8 March 2000 nor would they constitute contracts
incidental or ancillary to any contract as mentioned in paragraph ‘B’ of
the Notification dated 8 March 2000 issued under section 6A(I) of the
Works Contract Act and would not be covered by the said Notification. In
the judgment and order dated 9 July 2010 of the Tribunal in Second
Appeal No.106 of 2007, the case of the Applicant is interalia recorded.
In paragraph 3 it is stated as follows: “…

The work is carried out as under:

“i) Contract for structural glazing is entered into on completion of foundation and plinth.

ii) O n signing of the contracts intensive planning and designing is undertaken by Architect and Structural Engineers.

 iii) A luminum, silicon and glass of the desired prescription is ordered.

iv) U pon completion of 5th Slab, structural glazing commences from the bottom i.e. first slab.

v) Structural glazing gets completed along with concrete construction.

vi) I nstead of convention brick wall, glass walls are used.

vii)
Structural glazing of the building is something without `brick walls’.
Instead of “brick wall” a “glass wall” is constructed.

It is
further recorded in paragraph 4 that in respect of the assessment, the
Applicant’s case was that it had undertaken the contract of fabrication
and erection of structural glazing works and the work of aluminum
glazing contract would qualify as a construction contract made for
building liable to composition rate of tax. Being aggrieved by the
Assessment Order passed by the Sales Tax Officer, the Applicant had
filed an Appeal before the Deputy Sales Tax Commissioner (Appeals) and
in the order dated 1 November 2006, the Commissioner of Sales Tax
(Appeals) has recorded that the Applicant contended that “he is a dealer
dealing in structural glazing aluminum cladding, doors and windows and
doors of buildings in Corporate Offices.”

After referring to
further judgments cited and an order of Advance Ruling in Karnataka on
the very same activity, in para 17 the Hon. High Court concluded its
decision as under:

“17 The fabricated structural glazings
prepared by the Applicant are transported to the site by the Applicant
and affixed on the exterior portion of the building, which building is
constructed by the building contractor who is a third party. There is no
dispute that Applicant is not a building contractor, in that, it is not
in the business of construction and erection of buildings. The activity
of affixing glass and erecting glass walls with aluminium frame work
requires an altogether different expertise, and is ordinarily
sub-contracted by the building contractor. The contention that some of
the walls in the building are not required to be constructed by laying
bricks and they are substituted by affixing the glass would not carry
the case of the Applicant further. We are also unable to accept the
contention that the work of the Applicant would be covered under the
term “incidental or ancillary activity to the construction of the
building” as that would have to have a direct nexus to the construction
of the building itself. Therefore, the alternative argument that the
contract would get covered by paragraph B of the said Notification which
includes incidental or ancillary contract to the contract of
construction also cannot be accepted. What meaning is to be attached to
the word “building” as mentioned in the Notification would have to be
determined considering the facts and circumstances of each case. In our
view, the reliance on the definition of ‘building’ in the Regulation
2(3)(11) of DCR is misplaced and would not assist the Applicant in any
manner. That definition is in the context and purposes of DCR and cannot
be imported and applied in the facts and circumstances of the present
case.”

The Hon. High Court has rejected the plea of the dealer about its contract being covered by category of Construction contract.

Conclusion

While
effecting the transaction, a dealer contemplates liability by making
reference to available provisions. The composition schemes are meant for
easy method of working of tax liability on works contracts. The dealer
may not be seeking any tax saving, but basically looks at an easy and
smooth method of working.

Under above circumstances, if the
dealer is caught in litigation in regard to interpretation litigation,
it may cost him heavily as the tax liability may exceed even his profit
margin.

It is pertinent to note that under present MVAT Act also
there is almost a similar notification for ‘construction contracts’.
Dealers will have to interpret its scope in terms of this judgment. It
may be suggested that the Government should clarify the scope of such
notifications in more specific terms so that dealers (contractors) can
compute their liability with certainty.

WITHDRAWAL OF AN APPEAL

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Right of Appeal

It has been clearly laid down by the Apex Court from time to time that the right of appeal is a matter of substantive right and this right becomes vested in a party when the proceedings are first initiated, even before a decision is given in the matter. Such a right cannot be taken away except by express enactment or necessary intendment.

In this regard, some judicial considerations are as under :

  • In Janaradan Reddy vs. The State, AIR 1951 SC 124 and in Ganpat Rai vs. Agarwal Chamber of Commerce Ltd, AIR 1952 SC 409, Supreme Court upheld the principle that a right of appeal is not merely a matter of procedure but it is a matter of substantive right.
  • An intention to interfere with or to impair or imperil such a vested right cannot be presumed unless such intention is clearly manifested by express words or necessary implication [Hoosein Kasam Dada (India) Limited vs. State of Madhya Pradesh & Others (1983) 13 ELT 1277 (SC)].
  • At various instances different courts including the Apex Court has decided that if the right of appeal is vested and the assessee chooses not to exercise that right and later on files a special leave petition, then in such a case the authority may refuse to undertake the matter and reject the case and instruct the assessee to proceed only through the appeal route [Alembic Glass Industries Ltd. vs. UOI (1998) 97 ELT 28 (SC)]
  • Right of appeal is creature of the statute and can never be termed as an inherent right. Example of inherent right is filing a suit provided the same is not barred by limitation. Appeal right is conferred by the statute but one thing important here is that while conferring the right of appeal, the statute may impose certain restrictions such as limitation or pre – deposit of penalty or limiting the area of appeal to questions of law etc. Such limitations as specified in the statute shall be strictly followed [Raj Kumar Shivhare vs. Asstt. Director, Directorate of Enforcement (2010) 253 ELT 3 (SC)] ? R ight of appeal is a substantive right that is provided by the statute and it automatically vests in the aggrieved party. Therefore all the rights it carries with it that in itself means that such a right cannot be negated or taken away. [CCE & CU vs. Met India Ltd. (2010) 20 STR 560 (GUJ)]
  • Though right of appeal is statutory right under the Central Excise Act 1944 but it is not an absolute right and hence is bound by the provisions of section 35F. [Vibha Fluid Systems Engineering Pvt. Ltd. vs. UOI (2013) 287 ELT 29 (GUJ)]

The result of an appeal filed by an aggrieved person can be:

  • Affirmed: where the reviewing court agrees with the result of the lower court’s ruling(s) or
  • Reversed: Where the reviewing court disagrees with the result of the lower court’s rulings(s), and overturns their decision or
  • Remanded: where the reviewing court sends the case back to the lower court.

Can an appeal once filed be withdrawn?

Though, it is generally well settled that right of appeal by an aggrieved person is to be construed liberally, there is very limited clarity on the issue as to whether an appeal once filed by an aggrieved person can be withdrawn.

Neither the Central Excise Act 1944 / Customs Act, 1962 / Finance Act, 1994 nor the Rules made under therespective statutes nor the CEGAT (Procedure) Rules, 1982 contain any specific provision to permit an aggrieved person to withdraw his appeal, either with the permission of the appellate authority or without such permission. This issue becomes very important inasmuch appellate authorities are vested with powers of enhancement of demands and hence usually due caution is exercised by appellate authorities while entertaining such requests, from aggrieved persons.

One would wonder as to why an aggrieved person would want to withdraw an appeal after it is filed. Some examples / situations are given hereafter for ease of understanding:

a) Cases where there are mistakes apparent for record in an order passed by adjudicating authority / appellate authority against which an application for rectification is filed but the same is not disposed off. Hence, an appeal is filed, to protect the interest of the aggrieved person. Subsequent to the filing of appeal, relief is granted in rectification.

b) A services exporter has substantial unutilised CENVAT credit and is uncertain as to its utilisation against service tax payable on taxable services that may be provided in future. Hence, refund for unutilised CENVAT credit is applied for, which is rejected. In order to protect his interest, an appeal is filed. However, subsequent to the filing of appeal, the said services exporter has local transactions where service tax is payable. Issues arise in such cases as to whether an appeal filed can be withdrawn and service tax payable on local transactions be set off against unutilised CENVAT credit.

Some Judicial Considerations under Indirect Taxes

  • When this question came up in Mahindra Mills Ltd. vs. CCE (1987) 31 ELT 295 (Special Bench – New Delhi),] the Tribunal held that while the parties have no absolute right of withdrawal of the appeal, the request therefor was being allowed in the circumstances of that case.
  • When a similar request came from the appellant in another case (after considerable arguments had been heard for the appellant) a majority of the members held in the case of MRF Ltd vs. CCE (1987) 32 ELT 588 (Special Bench – New Delhi) that in the circumstances of that case the request for withdrawal must be declined, while the minority opinion was that it may be granted.
  • In a later decision in Jenson and Nicholson (India) Ltd. vs. CCE (1989) 41 ELT 665 (Special Bench – New Delhi), the Tribunal held that the powers of the Appellate Tribunal are similar to the powers of an Appellate Court in the Code of Civil Procedure. Hence the Tribunal has the right (though under no specified rule) to grant permission to the appellant to withdraw his appeal. [in this regard reliance was placed on Hukumchand Mills vs. IT Commissioner Bombay – AIR 1967 SC 455 and New India Life Assurance Co. Ltd. vs. IT Commissioner, Bombay – AIR 1958 Bombay 143].
  • The facts in Ramakrishnan Steel Industries Ltd. vs. Superintendent – (1993) 66 ELT 563 (MAD) were rather unusual. When the appeal by the department before the Tribunal was pending the department intimated the assessee that it had been decided to withdraw the appeal and directing the assessee to pay in accordance with the order of the Collector (Appeals) against which order the appeal to the Tribunal had been preferred by the department. The assessee duly complied and intimated the Tribunal also of the same and intimated they have no objection to the appeal being allowed to be withdrawn. But somehow the department had failed to intimate the Tribunal of its decision to withdraw the appeal. Hence, the Tribunal decided the appeal on merits by allowing the appeal of the department. The High Court set aside the order of the Tribunal holding that the decision to withdraw the appeal having been taken by the authority who had earlier ordered the filing of the appeal, the department was stopped from going back on the decision to withdraw when the assessee had, in pursuance of the communication, taken the necessary action to comply with the request therein about payment of duty.
  • In Ralson Carbon vs. CCE (1999) 108 ELT 608 (CEGAT – New Delhi) the Tribunal permitted withdrawal on the basis of declaration under Kar Vivad Samadhan Scheme (KVSS).

A peculiar situation arose for consideration in Shiv Herbal Research Lab. P. Ltd vs. CCE & CU (2002) 139 ELT 133 (Tri – Mumbai). In that said case the appellant intimated the Tribunal that they had filed a declaration under KVSS and the appeal may be treated as withdrawn. Accordingly the Tribunal permitted withdrawal of the appeal. Evidently the appeal was dismissed as withdrawn. Later the appellant applied for restoration of the appeal pointing out that “an order u/s. 90(4) of the Finance Act 1998 for full and final settlement under the KVSS has not been passed”. The Tribunal declined to restore the appeal though the factual situation of certificate u/s. 90(2) not having been issued does not appear to have been controverter or disbelieved.

Judicial Considerations under Income Tax
In respect of proceedings under the Income Tax Act, it was held by the Supreme Court, in CIT vs. Rai Bahadur Hardutroy Motilal Chamaria (1967) 66 ITR 433 (SC) that an appellant having once filed an appeal, cannot withdraw the same. In fact the Calcutta High Court held in Bhartia Steel and Engineering Co. P. Ltd. vs. ITO (1974) 97 ITR 154 (CAL) that even if the Tribunal had dismissed an appeal as withdrawn, the said order would be a nullity as having been passed without jurisdiction and the appeal will have to be treated as pending.

Conclusion

In the absence of specific provisions for withdrawal of an appeal under the Indirect Tax Laws (Service tax, Central Excise & Customs), practical issues / difficulties are faced by aggrieved persons, in particular. This issue needs to be addressed through amendments, in the Indirect Tax statutes / CESTAT (Procedures) Rules, 1982, as considered appropriate.

Income Tax Officer vs. Kondal Reddy Mandal Reddy ITAT ‘B’ Bench, Hyderabad Before P. Madhavi Devi (JM) and B. Ramakotaiah (AM) ITA No. 848/Hyd/2015 A.Y.: 2010-11. Date of Order: 13th May, 2016 Counsel for Revenue / Assessee: B.R. Ramesh / K.C. Devdas

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Section 50C and 54F – For the purpose of exemption u/s. 54F the consideration determined as per section 50C is to be adopted – For exemption entire investment in new house to be considered irrespective of source of funds
Facts

The issue before the Tribunal was whether the actual sale consideration mentioned in the sale deed or the deemed sale consideration u/s. 50C is to be adopted for allowing the deduction u/s. 54F.

During the assessment proceedings under section 143(3) of the Act, the A.O. observed that the assessee had sold a plot of land for a consideration of Rs.20 lakh as per sale deed while vendees had paid the stamp duty, registration charges etc., on the value of Rs.89.6 lakh. Therefore, he invoked the provisions of section 50C and brought the difference of Rs.69.6 lakh to tax as the capital gains. Against the same, the assessee claimed deduction u/s. 54F qua the investment of Rs.1.37 crore made by him for construction of a residential house. The A.O. however, held that the sale consideration of Rs.20 lakh mentioned in the sale deed alone was eligible for exemption under section 54F and not deemed consideration arrived at by invoking the provisions of section 50C. On appeal, the CIT(A) agreed with the assessee.

Being aggrieved, the revenue appealed before the Tribunal and placed reliance upon two court decisions in support of its contention that the “full value of the sale consideration” as mentioned in Section 54F refers to the “consideration” actually received by the assessee and not the deemed consideration received under section 50C. The cases relied upon were as under
• CIT vs. George Henderson & Co. Ltd. 66 ITR 622 (SC);
• CIT vs. Smt. Nilofer L Singh 309 ITR 233 (Del.)

Held

The Tribunal relied on the decision of the Mumbai tribunal in the case of Raj Babbar vs. ITO (56 SOT 1) and of the Karnataka High Court in the case of Gouli Mahadevappa vs. ITO (356 ITR 90). As held in the said decisions, the Tribunal observed that when the capital gain is assessed on notional basis, the entire amount invested, should get benefit of deduction irrespective of the fact that the funds from other sources were utilised for new residential house. Thus, in the case of the assessee, the sum of Rs. 1.37 crore invested was eligible for benefit u/s 54F and not the sum of Rs. 20 lakh as contended by the revenue. According to the Tribunal, the decision relied upon by the revenue in the case of George Henderson & Co. Ltd. and Nilofer L Singh were distinguishable on facts. Accordingly, the appeal filed by the revenue was dismissed and the order of the CIT(A) was upheld.

Baberwad Shiksha Samiti vs. CIT (Exemption) ITAT Jaipur Bench Before T. R. Meena (AM) and Laliet Kumar (JM) ITA No. 487/JP/2015 A.Y.: 2010-11. Date of Order: 12th February, 2016 Counsel for Assessee / Revenue: Mahendra Gargieya / D. S. Kothari & Ajay Malik

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Section 263 – Where the AO has accepted the claims by the assessee after making proper inquiry, the CIT cannot proceed to revise the order by holding another possible view.
Facts

The assessee, running educational institutes, had filed its return of income on 25.01.2011 declaring nil income. It had claimed exemption under section 10(23) (iiiad) and section 11. The assessment was completed under section 143(3) by the AO at the returned income. According to the CIT (Exemption) the order of the AO was erroneous and prejudicial to the interest of the revenue for the following reasons:

a) The assessee had applied for registration u/s 12A on 04.02.2011 and it was not registered u/s 12AA before completion of assessment;

b) The assessee had not included in its gross receipt the sum of Rs. 51.05 lakh received from the State Government on account of students’ scholarship. If the said amount is added to the total receipts declared by the assessee, the gross receipts were more than Rs. 1 crore and thus, the assessee won’t be eligible to claim exemption u/s 10(23)(iiiad);

c) The assessee was not entitled to depreciation of Rs. 7.62 lakh as the capital expenditure incurred by the assessee was already allowed in the year of purchase of assets as application of income;

The assessee claimed that the order passed by the AO was not erroneous and prejudicial to the interest of the revenue for the following reasons:

a) Proviso to section 12A(2) inserted w.e.f. 01.10.2014 provides that where registration has been granted to the trust u/s 12AA, then the provision of section 11 and 12 shall apply in respect of any income derived from the property held under trust of any assessment years for which assessment proceedings are pending before the AO as on the date of such registration. The assessee claimed, since it is a beneficial proviso which is to remove the un-intended hardship, the proviso has a retrospective effect;

b) Scholarship amount was received for disbursement to the students whose names were given by the Government. The assessee cannot retain any part of the scholarship for its benefit and any amount remaining unclaimed has to be returned back to the Government. The assessee was merely acting as a conduit. After examination of this issue the AO had allowed exemption u/s 10(23)(iiiad);

c) The assessee had not claimed any capital expenditure as application of income in as much as in all earlier years, the assessee had claimed exemption u/s 10(23) (iiiad). Even otherwise also, the assessee claimed that u/s 11, both, depreciation as well as capital expenditure are allowable citing several decisions;

However, the CIT(Exemption) did not agree with the assessee and restored the matter back to the AO for making proper enquiry. According to him the benefit under proviso to section 12A(2) inserted w.e.f. 01.10.2014 cannot be given to the assessee who has filed application for registration on 04.02.2011. As regards scholarship – according to him since the assessee had not fully disbursed the scholarship amount by the year end, the said receipt was includible in the gross receipts of the assessee. Thus, according to him, the assessee was not entitled to claim exemption u/s 10(23)(iiiad) as its gross receipt exceeded Rs. 1 crore. As regards depreciation, the CIT(Exemption) relied on the Supreme Court decisions in the cases of Escorts Ltd. vs. Union of India (199 ITR 43) and Lissie Medical Institutions vs. CIT (348 ITR 43) and held that it was a double deduction on the same assets.

Held

The Tribunal noted that before assessing the income of the assessee u/s 143(3 )a detailed questionnaire was issued by the AO and the assessee had furnished requisite details / information / accounts, etc. Thus, according to the Tribunal, the AO had concluded the matter after making detailed inquiry. Further, the Tribunal noted that on the issues raised by the CIT, there are decisions by the courts as well as the ITAT which have decided the matter in favour of the assessee. Thus, according to the Tribunal, the AO had formed one of the views while the CIT (Exemption) had formed another view on same facts and circumstances and therefore, change of opinion was not permissible under the law. Hence, the Tribunal set aside the order of the CIT(Exemption) and allowed the appeal of the assessee.

[2016] 157 ITD 626 (Delhi Trib.) Chander Shekhar Aggarwal vs. Asst. CIT A.Y. 2011-12. Date of Order:11th January, 2016

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Section 199, read with Section 198 and rule 37BA of the Income-tax Rules, 1962 – Clause (ii) of Rule 37BA(3) has no applicability where assessee follows cash system of accounting. Consequently the said assessee, following cash basis, is entitled to credit of entire amount of TDS being offered as income even though the amount in respect of which tax is deducted is not received and therefore not offered as income.

Facts

The assessee was following cash method of accounting. The assessee had declared income of about Rs. 9 crore in the return filed for the relevant assessment year. The assessee had claimed credit of tax deducted at source (TDS) of Rs. 80 lakh.

The AO allowed the credit of TDS of Rs. 71 lakh only and disallowed the credit of balance TDS even though the balance TDS was offered as income by the assessee.

The CIT-(A) upheld the order of the AO. She held that the credit of TDS was to be allowed in terms of rule 37BA(2) and as such, the credit would be allowable on pro rata basis in the year in which the certificate was issued and also in future where balance of such income was found to be assessable as per the mandate of section 199. Any amount which had not been assessed in any year but referred in the TDS certificate could not be claimed u/s. 199.

On second appeal before the Tribunal, the following was held

Held

Sub-section (1) of section 199 provides that any deduction made in accordance with the foregoing provisions of this Chapter and paid to the Central Government shall be treated as a payment of tax on behalf of the person from whose income tax deduction was made. Also, section 198 provides that all sums deducted in accordance with Chapter XVII-B shall, for the purposes of computing the income of an assessee, be deemed to be income received. The admitted facts of the instant case are that the TDS has been offered as income by the assessee in his return of income.

The tax deducted by the deductor on behalf of the assessee and offered as income by the assessee in his return of income is to be allowed as credit in the year of deduction of tax. Rule 37BA provides that credit for TDS should be allowed in the year in which income is assessable. Further clause (ii) of rule 37BA(3) provides that where tax has been deducted at source and paid to the Central Government and the income is assessable over a number of years, credit for tax deducted at source shall be allowed across those years in the same proportion in which the income is assessable to tax. This rule is only applicable where entire compensation is received in advance, but the same is not assessable to tax in that year and is assessable in a number of years. However, such rule has no applicability, where assessee follows cash system of accounting.

This can be supported from the illustration that suppose an assessee, who is following cash system of accounting, raises an invoice of Rs. 100 in respect of which deductor deducts tax of Rs. 10 and deposits to the account of the Central Government. Accordingly the assessee would offer an income of Rs. 100 and claim TDS of Rs. 10. However, in the opinion of the revenue, the assessee would not be entitled to credit of the entire TDS of Rs. 10 but would be entitled to proportionate credit only. Now assume that Rs. 90 is never paid to the assessee by the deductor. In such circumstances, Rs. 9 which was deducted as TDS by the deductor would never be available for credit to the assessee though the said sum stands duly deposited to the account of the Central Government.

Rule 37BA(3) cannot be interpreted so as to say that tax deducted by the deductor and deposited to the account of the Central Government is though income of the assessee but is not eligible for credit of TDS in the year when such TDS was offered as income. This view is otherwise also not in accordance with the provisions contained in sections 198 and 199. The proposition as laid out by the Commissioner (Appeals), therefore, cannot be countenanced.

In view of the aforesaid, the assessee would be entitled to credit of the entire TDS offered as income by him in his return of income.

(2016) 134 DTR 113 (Mum) Sunil Gavaskar vs. ITO A.Ys.: 2001-02 & 2002-03 Date of Order: 16th March, 2016

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Section 80RR : Income earned as a cricket commentator by the assessee is income earned from the exercise of profession of sportsman.
Facts

The assessee had received income in the form of foreign remittances, on which deduction was claimed u/s 80RR, in pursuance to an agreement, dated 10th May, 1999 with M/s ESPN Star Sports for rendering services on an exclusive basis as a presenter, reporter and commentator and various other allied services described in the said agreement. The CIT(A) rejected the claim of the assessee on the ground that this deduction is available to a person who is sportsman or a person belonging to any one of the categories as mentioned in the said section and the income must be derived as a result of carrying out that very activity only. But in the case of assessee, since assessee was no more a sportsman or a cricketer and in any case since the impugned income was not earned as a result of playing cricket, and therefore, the assessee was not eligible to claim the deduction u/s 80RR.

Held

Since, the term sportsman has not been defined in the Act and the impugned provisions are beneficial provisions intending to provide the benefits to the public at large, therefore, it would be appropriate to analyse the expression sportsman as is used commonly by the society in generic sense. The Tribunal referred to the meaning of the term sportsman in Wikipedia and from that definition, it noted that the term sportsman may also be used to describe a former player who continues to remain associated and engaged, for the promotion of the related sport activities. The facts of the case are that the assessee has been undoubtedly a cricketer of international stature. It has been shown before the Tribunal that the assessee has been playing cricket matches in India and abroad, even after he had stopped playing tournaments of international and national levels.

Thus, the term sportsman includes not only persons who actively played in the field in the impugned year but also a person who had been actively playing in the field in earlier years and thereafter, he continued to remain associated with the related sport and promoted the same sport, but from outside the field. The Tribunal relied on the fact that in section 80RR, it has been no where mentioned that the sportsman should be the person who is currently playing in the field or the person earning income directly from playing in the field only. Thus, the broader objective of section 80RR is met if the term sportsman is defined in a wider sense, as seems to have been intended by the legislature also. In this backdrop, it can certainly be said that the assessee was a sportsman during the year for the purpose of section 80RR.

Any income derived by the sportsman during the course of his profession which arise out of core activity (i.e. activity of playing in the field), and also other subsidiary & allied activities which are linked to and have nexus with the core activity of the sports, should also be included in the scope of the income eligible for deduction u/s 80RR. The Tribunal proceeded to clarify that any type of income which has remote or no connection with or which is independent of the core activity would not be covered in this section. Further, those activities which go beyond the parameters of profession and take the shape of business activities shall also not fall in the scope of income derived during the course of profession in the context of section 80RR. The

Tribunal concluded that the impugned income had been derived by the assessee in the exercise of his profession as a ‘sportsman’ and allowed the claim of the assessee

[2016] 69 taxmann.com 122 (Kolkata – Trib.) New Alignment vs. ITO ITA No. 504/Kol/2014 A.Y.: 2010-11 Date of Order: 6th April, 2016

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Section 40(a)(ia) – Second proviso to section 40(a)(ia) inserted by Finance Act, 2012 is declaratory and curative in nature, and therefore, should be given retrospective effect from the date from which sub-clause (ia) of section 40(a) was inserted by the Finance Act, 2004.

Facts

The assessee firm, engaged in business as civil contractor, paid labour charges amounting to Rs. 1,27,44,615 without deducting tax at source u/s. 194C of the Act. Since the income-tax was not deducted at source, the Assessing Officer (AO) invoked the provisions of section 40(a)(ia) of the Act and disallowed the sum of Rs. 1,27,44,615.

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

Aggrieved, the assessee preferred an appeal to the Tribunal where it contended that in view of the amendment to the provisions of section 40(a)(ia) of the Act by insertion of the second proviso, the AO be directed to verify if the payees have declared the receipt from the assessee in their return of income and if they have so declared then the addition u/s. 40(a)(ia) of the Act be deleted by the AO.

Held

The Tribunal having noted the provisions of section 201, second proviso inserted to the section 40(a)(ia) and the justification of the amendment of section 40(a)(ia) as given by the Explanatory Memorandum while introducing the Finance Bill, 2012 observed that the provisions of section 40(a)(ia) of the Act are meant to ensure that the assessees perform their obligation to deduct tax at source in accordance with the provisions of the Act. Such compliance will ensure revenue collection without much hassle. When the object sought to be achieved by those provisions are found to be achieved, it would be unjust to disallow legitimate business expenses of an assessee. Despite collection of taxes due, if disallowance of genuine business expenses is made then that would be unjust enrichment on the part of the Government as the payee would have also paid the taxes on such income. In order to remove this anomaly, this amendment has been introduced. The Tribunal noted that the disallowance is not to be made subject to satisfaction of the conditions mentioned in the second proviso.

Keeping in view the purpose behind the introduction of the second proviso, the Tribunal held that the second proviso can be said to be declaratory and curative in nature and therefore, should be given retrospective effect from 1st April, 2005 being the date from which sub-clause (ia) of section 40(a) was inserted by the Finance (No.2) Act, 2004. The Tribunal also observed that the Delhi High Court has in the case of CIT vs. Ansal Land Mark Township (P.) Ltd. [2015] 61 taxmann.com 45 has taken a view that the insertion of the second proviso to section 40(a)(ia) of the Act is retrospective and will apply from 1.4.2005.

The alternative prayer made on behalf of the assessee to remain the issue to the AO for verification as to whether payees have included the receipts from the assessee in their returns of income in terms of the decision referred to above was accepted.

This ground of the appeal filed by the assessee was allowed.

[2016] 69 taxmann.com 244 (Pune – Trib.) Cooper Corporation (P.) Ltd. vs. DCIT A.Y.: 2008-09 Date of order: 29th April, 2016

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Section 37 – Foreign exchange fluctuation loss on outstanding foreign currency loan, taken with a view Section 37 – Foreign exchange fluctuation loss on outstanding foreign currency loan, taken with a view to save interest costs, is an allowable revenue expenditure.to save interest costs, is an allowable revenue expenditure.

Facts

The assessee company was engaged in foundry business, manufacturing cylinder liners/heads, flywheels and other automobile components, etc. The assessee had in earlier years taken loans from Corporation Bank, IDBI Bank and Bank of Maharashtra in Indian currency for the purposes of acquisition of fixed assets and windmills, etc. which were purchased in India. These loans were bearing interest @ 12% to 14% p.a. In order to save on interest costs, these term loans were converted over a period of years into foreign exchange loans where interest rate was chargeable from 6% to 7% p.a.

In the return of income the assessee had claimed a deduction of Rs. 1,39,98,945 on account of devaluation of Indian currency qua foreign currency on outstanding foreign currency loans u/s. 37(1) of the Act. The Assessing Officer (AO) disallowed this sum of Rs. 1,39,98,945 on the ground that it was merely a notional loss and not an actual loss incurred by the assessee. The AO further observed that even presuming that increased liability for repayment of foreign currency loans have been saddled on the assessee, still the same will be capital in nature since the impugned loans were obtained for acquiring capital assets.

Aggrieved, the assessee preferred an appeal to the CIT(A) who granted partial relief of Rs. 37,92,087 on account of foreign currency fluctuation loss arising on loans found by him to be connected to revenue items like bill discounting, debtors, etc. Foreign exchange fluctuation loss in respect of loan taken for purpose of acquiring capital assets was not allowed as a deduction.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held

The Tribunal noted that – (i) the assessee entered into the agreement with lenders to convert the loan in foreign currency to gain advantage of savings in interest; (ii) there is no dispute that the acquisition of capital assets / expansion of projects, etc from the term loans taken are already complete and the assets so acquired have been put to use; (iii) there is no adverse finding from the Revenue about the correctness of accounts or the assessee on the touchstone of section 145 of the Act – in other words, the profits / gains from the business have admittedly been computed in accordance with the generally accepted accounting practices and guidelines notified; (iv) loss occasioned from foreign currency loans so converted is a post facto event subsequent to capital assets having been put to use. The Tribunal observed that the assessee had applied Accounting Standard-11 which it was mandatorily required to follow. It also noted that the provisions of section 43A would not apply since the assets were not acquired from out of India.

The Tribunal held that in the absence of applicability of section 43A of the Act to the facts of the case and in the absence of any other provision of the Act dealing with the issue, claim of exchange fluctuation loss in revenue account by the assessee in accordance with the generally accepted accounting practices and mandatory accounting standards notified by the ICAI and also in conformity with CBDT notification cannot be faulted. In the light of the fact that conversion in foreign currency loans which led to impugned loss, were dictated by revenue consideration towards saving interest costs, etc., the Tribunal stated that it had no hesitation in coming to the conclusion that loss being on revenue account was an allowable expenditure u/s. 37(1) of the Act.

This ground of appeal filed by the assessee was allowed.

The Commissioner of Income Tax I, Pune vs. Gera Developments Private Limited, Pune. [INCOME TAX APPEAL NO. 2171 OF 2013 dt 29/2/2016 Bombay High court.]

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[Gera Developments Private Limited, Pune vs. CIT -I, Pune . ITA No. 33/PN/2012 ; Bench : A ; dated 08/03/2013 ; A Y: 2007- 2008. Pune ITAT ]

Revision – Erroneous and Prejudicial to the Revenue – Application of mind is important – No discussion in asst order would not ipso facto lead to the conclusion that the Assessing Officer did not apply his mind : Section 263

The assessee filed its return of income declaring total income of Rs.19.97 crore. Amongst the issues which arose for consideration during the assessment proceedings were:

i) whether the consideration of Rs.41 Crore received on transfer of development right is to be taxed in the subject assessment year or not;

ii) whether an amount of Rs.68.24 lakh should be allowed as warranty expenses.

The Assessing Officer on issue of transfer of development right held that the amount of Rs. 41 crore received by the assessee was subject to performance of certain obligation relating to environmental clearance and in the absence of performing the obligation, the amounts had to be returned. On consideration of facts, the Assessing Officer held that an amount of Rs. 5.86 crore could alone be taxed in the subject assessment year and the balance amount of Rs. 35.14 crore were considered as deposit. So far as the warranty expenses are concerned, the Assessing Officer called for various details and justification for claiming warranty expenses. The assessee to this by filing a reply and on satisfaction, the Assessing Officer allowed the warranty expenses as claimed in the assessment order.

The CIT in exercise of his power u/s. 263 of the Act, held that the conclusion of the Assessing Officer on the above 2 issues namely transfer of development right and warranty expenses is erroneous and prejudicial to the interest of the Revenue. Moreover, the Commissioner also held that set off of short term capital loss without taking into account Section 94 of the Act was also erroneous and prejudicial to the interest of the Revenue. The CIT directed the Assessing Officer to complete the assessment proceedings in accordance with law as discussed in his order.

Being aggrieved, the assessee appealed to ITAT . The grievance of the assessee was that the asst order of the Assessing Officer was not erroneous nor prejudicial to the interest of the Revenue on the following three issues.

(a) Consideration received as transfer of Development Right.

(b) Warranty expenses and

(c) Set off of short term capital loss.

So far as issue (a) above is concerned the Assessment Order, on consideration of all facts, records the conclusion that out of an amount of Rs.41 crore received, an amount of Rs.35.14 crore was in the nature of deposit as the receipt was subject to environmental clearance. Only Rs. 5.86 crore could be treated as income for the subject assessment year. In view of above, the ITAT held that asst. order cannot be treated as erroneous. So far as the issue (b) above with regard to warranty expenses is concerned, the ITAT held that the questions were posed during the assessment proceedings to the assessee. The same were responded to by the assessee justifying the warranty expenses claimed. On satisfaction, the Assessing Officer accepted the claim of expenditure made by assessee. Thus a view was taken that it cannot be said to erroneous.

So far as issue (c) above with regard to the set off of the short term capital loss is concerned, the ITAT upheld the order dated 31/10/2011 of the Commissioner of Income Tax holding the same is erroneous and prejudicial to the Revenue. The Revenue being aggrieved by the order of the ITAT insofar as it set aside the order dated 31/10/2011 of the Commissioner of Income Tax i.e. on issues (a) and (b) above viz. taxability of consideration received on transfer of development right and allowing of warranty expenses.

The Hon’ble Court observed with regard to issue (a) i.e. taxability of the transfer of development right, that the ITAT records findings of Assessing Officer in detail from which it is evident that the Assessing Officer applied his mind to the above claim and on the basis of the facts before him, came to the conclusion that an amount of Rs.5.86 crore out of Rs. 41 crore received could alone be subjected to the tax as income during the subject assessment year. The balance amount Rs.35.14 crore has to be treated as deposit as the same is subject to being refunded in the absence of the environmental clearance. Thus, the Assessing Officer has taken a view/formed an opinion on the facts before him and such a opinion cannot be said to be an erroneousas it does not proceed on the incorrect assumption of facts or law and the view taken is a possible view. Therefore, as held by the Apex Court in Malabar Industrial Co. Ltd vs. Commissioner of Income Tax, 243 ITR page 83 where two views are possible and the Income Tax Officer has taken one view with which the Commissioner of the Income Tax does not agree, cannot be treated as an erroneous order prejudicial to the interests of the Revenue, unless the view taken by the Income Tax Officer is itself unsustainable in law.

So far as issue (b) i.e. warranty expenses claimed by the assessee is concerned, the court observed that the ITAT has recorded the fact that a specific query with regard to the same was made by the Assessing Officer during the assessment proceedings. This query was responded to by the assessee justifying the warranty expenses. The Assessing Officer being satisfied with regard to the justification offered, allowed the claim of warranty expenses as made by the assessee. It was thus clear that the Assessing Officer had considered the issue by raising questions during the assessment proceedings. The mere fact that it does not fall for discussion in the assessment order would not ipso facto lead to the conclusion that the Assessing Officer did not apply his mind. It is clear that if the Assessing Officer is satisfied with the response of the assessee on the issue and drops the likely addition, it cannot be said to be non application of mind to the issue arising before the Assessing Officer. In fact this issue was a subject matter of the consideration by the Court in the Commissioner of Income Tax 8 V/s. M/s. Fine Jewellery (India) Ltd., Income Tax Appeal No. 296 of 2013 dt 03rd February, 2015. Thus to hold that if a query is raised during the assessment proceedings and responded to by the assessee, the mere fact that it has not been dealt with in the assessment order would not lead to a conclusion that the Assessing Officer has not applied his mind to the issues.

Thus on the issues (a) and (b) viz. consideration received on transfer of development right and warranty expenses are concerned, the impugned order of the ITAT has applied the principle of law laid down in Malabar Industrial Co. Ltd (supra) and M/s. Fine Jewellery (India) Ltd. (supra). Thus, appeal is dismissed.

Director of Income Tax(IT)-I vs. M/s Credit Lyonnais [Income Tax Appeal No.2120 of 2013 dt 22/2/2016; Bombay High Court.]

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[M/s.Credit Lyonnais (through their successors : Calyon Bank) vs. The Asstt. Director of Income-tax (IT ) – 1(2) Mumbai. ITA no. 9596/Mum/2004 & 214/ Mum/2005: Asst.Year 2001-2002]

TDS – Sub arranger fees and commission paid to non resident – nature of commission / brokerage – Circular No.786 dated 7th February 2000 – Not liable to deduct TDS u/s. 195 :

Amortization of expenditure – Entries in books of account are not determinative or conclusive :

During the A Y: 2001-02, the Assessee was appointed by State Bank of India (SBI) as an arranger for mobilizing deposits in its India Millennium Deposits Scheme (IMDS). In turn, Assessee was entitled to appoint sub-arrangers for mobilizing IMDs both inside and outside India. The assessee explained that it mobilized deposits worth Rs.1235.8 crore and SBI accordingly provided it a long term deposit of Rs.617.9 crore for a period of 5 years. Besides, the assessee received a sum of Rs.22.19 crore from SBI as arranger fees and commission. It in turn paid an amount of Rs.37.07 crore to the sub-arrangers by way of sub-arranger fees and commission. An amount of Rs.26.75 crore out of Rs.37.07 crore was paid by way of sub-arranger fees and commission to non-residents. However, the assessee had failed to deduct tax at source on Rs.26.75 crore paid to non-residents as sub-arranger fees and commission. Therefore, the Assessing Officer invoked section 40(a)(i) of the Act for failing to deduct tax u/s. 195 to disallow the expenditure on the ground that this payment to non-resident sub-arranger was in the nature of fees for technical services u/s. 9(1)(vii) of the Act.

In Appeal, the CIT(A) held that the amount paid to the nonresident sub-arranger was in the nature of commission / brokerage and not fees for technical services in terms of section 9(1)(vii) of the Act.

Being aggrieved by the order of CIT(A), the Revenue filed an appeal to Tribunal. The Tribunal by relying upon the Circular No.786 dated 7th February, 2000 held that the amount paid to the non-resident sub-arrangers is in the nature of commission / brokerage and was not chargeable to tax in their hands. Consequently section 195 of the Act would have no application, thus upheld the deletion of the disallowance u/s. 40(a)(i) of the Act passed by the CIT(A).

The Tribunal further analyzed the nature of services being rendered by the sub-arrangers to the assessee and in the context of section 9(1)(vii) of the Act viz. whether these services are managerial, technical and consultancy services. whether these services are managerial, technical and consultancy services. The services could not be sort technical. So far as the managerial services are concerned, the impugned order relied on the decision of the Apex Court in the case of R. Dalmia vs. CIT, New Delhi, 106 ITR 895 wherein the Apex Court has held that the words “person concerned in the management of the business” would mean a person not only directly participates or engages in the management of the business but also one who indirectly controls its management through the managerial staff, from behind the scenes. Management includes the act of managing by direction, or regulation or administration or control or superintendence of the business. In the present case, the Tribunal, on examination of the services rendered by the sub-arrangers to the assessee concluded that the services rendered in obtaining deposits of IMD Scheme could not be considered to be management services. In the above view, the Tribunal upheld the order of the CIT(A) and held that there could be no application of provisions of section 40(a)(i) read with section 195 of the Act in the present facts

The Revenue filed an appeal before the High Court challenging the order of ITAT . The Hon’ble court observed that section 195 of the Act obliges a person responsible for paying to non-resident any sum chargeable to tax under the Act, to deduct tax at the time of payment or at the time of credit to such non-resident. In terms of section 5 of the Act, a non-resident is chargeable to tax received or deemed to be received in India or accrued or arising in India. Section 9 of the Act describes income which is deemed to accrue or arise in India. The impugned order examined the nature of fees in the context of section 9(1) (vii) of the Act to hold that it is not a technical service as defined therein. This view of the Tribunal in the context of the services being rendered by the sub-arrangers is a factual determination and is a possible view, not shown to be perverse or arbitrary. Moreover, the services are admittedly rendered by the non-resident sub-arrangers outside India. In such a case, there is no occasion for any income accruing or arising to the non-resident in India. The services of the non-resident sub-arrangers of attracting deposit to IMDS Scheme is carried out entirely outside India. As held by the Apex Court in the case of CIT, A.P. vs. Toshoku Ltd., 125 ITR 525, no income can be said to accrue or arise in India where payment is made for service by non-resident outside India. The CBDT had issued a Circular No.786 of 2000 dated 7th February 2000 reiterating the view of the Apex Court in Toshoku Ltd.’s case (supra). In the above view, as no income has accrued or arisen to the non-resident sub-arrangers in India, the question of deduction of tax u/s. 195 of the Act will not arise. Question of law raised on this issue was accordingly dismissed.

The other question of law raised was in regards to amortization of expenditure . Assessee received a sum of Rs.22.19 crore as fees and commission from SBI for services rendered as arranger. The Assessee had in turn paid an amount of Rs.37.07 crore by way of sub-arranger fes and commission to the subarrangers appointed. In the above view, the Assessee claimed as expenditure an amount of Rs.14.87 crore to determine its taxable income for the subject Assessment Year. However, in its books of account, the Assessee amortized the above expenditure of Rs.14.87 crore over a period of five years and for the subject A Y, only debited Rs.99.16 lakh to its profit and loss account. The Assessing Officer did not dispute that expenditure had been incurred for business purposes. However, in his assessment order it was held that the expenditure of Rs.14.87 crore had been amortized over a period of five years in the books of account i.e. in line thereto, a deduction only to the extent of Rs.99.16 lakh was allowable in the subject Assessment Year.

Being aggrieved, the Assessee carried the issue in appeal to the CIT(A). The CIT(A) upheld the order of the Assessing Officer . Being aggrieved, the Assessee carried the issue in Appeal to the Tribunal. The Tribunal, considered the decision of the Apex Court in the case of Madras Industrial Investment Corporation Ltd. v/s. CIT, 225 ITR 802 and earlier decision of the Supreme Court in the case of India Cements Ltd. vs. CIT, 60 ITR 52 to conclude that the expenditure incurred by making payment to sub-arrangers was the amounts spent in collecting deposits under the IMD Scheme and it was deductible in its entirety in the year of expenditure.

The Hon’ble court observed that the issue is no longer res integra in view of the decision of the Apex Court in Taparia Tools Ltd. vs. Joint CIT, 372 ITR 605 (SC). In the aforesaid case, the issue for consideration was whether the liability to pay interest is allowable as deduction in the first year itself or it be spread over for a period of five years. The High Court had on application of the principle of matching concept upheld the view of the Assessing Officer to spread the interest paid in the very first year over a period of five years because the term of the debt was five years and the Assessee therein had itself in its books of account amortized the interest over a period of five years. In Appeal, the Apex Court while reversing the decision of High Court held that normally the ordinary rule is that the Revenue expenditure incurred in a particular year is to be allowed in the year of expenditure and the Revenue cannot deny a claim for entire expenditure as deduction made by the Assessee. However, the apex Court also held that in case the expenditure is shown over a number of years and so claimed while determining its income, then it would open to Revenue only on the principles of matching concept to deal with the submission as the Assessee. It is not so in this case. The Apex Court held that once the return has been filed making a particular claim, then the Assessing Officer was bound to carry out assessment by applying provisions of the Act and he could not go beyond the return. The Apex Court made reference to the decision in the case of Kedarnath Jute Manufacturing Co.Ltd. vs. CIT, 82 ITR 363 to hold that entries in books of account are not determinative or conclusive for the purpose of determining whether or not a particular income is chargeable to tax under the Act. This had to be determined only on the basis of the provisions contained in the Act. In this case, in its return of income the Assessee had claimed the entire expenditure of Rs.14.87 crores in the subject assessment year. The expenditure was to be allowed.

The Commissioner of Income-Tax-3 vs. M/s. Parrys (Eastern) Pvt Ltd [Income Tax Appeal No. 2220 OF 2013; dt 18/2/2016 (Bombay High court )]

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(The IT O 3(2)(4), vs. Parrys (Eastern) P.Ltd. I.T.A. No. 26/Mum/2011; Bench: C ; A Y: 2005-06 ; dt : 13.2.2013)

Capital gain -Deeming fiction u/s 50 is restricted only to the mode of computation of capital gains contained in sections 48 and 49 of the Act.

The assessee had disclosed an amount of Rs.7.12 crore as deemed short term capital gain u/s. 50 of the Act. This deemed short term capital gain arose on account of the sale of depreciable assets. This deemed short term capital gain was set off against brought forward long term capital losses and unabsorbed depreciation. The Assessing Officer passed an order u /s 143(3) of the Act holding that in view of section 74 of the Act, such set off on short term capital gain against the long term capital gain is not permitted. Thus, he disallowed the set off of brought forward long term capital loss and unabsorbed depreciation against the deemed short term capital.

In appeal, the CIT[A] allowed the assessee’s appeal holding that the issue stand concluded by the decision of High Court in the case of CIT vs. ACE Builders(P) Ltd reported in 281 ITR 210(Bom).

On further appeal by the Revenue, the Tribunal by the impugned order upheld the order passed by the CIT(A) by placing reliance upon the decision of this Court in the case of ACE Builders(P) Ltd(supra) and by following its own order in the case of Komac Investments and Finance Pvt Ltd vs. Income Tax Officer 132 ITD 290. On further appeal the Revenue contended that in view of the clear mandate of Section 74 of the Act, no set off of the carry forward long term capital loss against the deemed short term capital gain u/s. 50 of the Act is permissible..

The Hon. High Court, observed that the issue stands concluded by the decision of this Court in ACE Builders(P) Ltd (supra) in favour of the Assessee. The deeming fiction u/s. 50 is restricted only to the mode of computation of capital gains contained in Sections 48 and 49 of the Act. It does not change the character of the capital gain from that of being a long term capital gain into a short term capital gain for purpose other than Section 50 of the Act. Thus, the assessee was entitled to claim set off as the amount of Rs.7.12 Crore arising out of sale of depreciable assets which are admittedly on sale of assets held for a period to which long term capital gain apply. Thus for purposes of Section 74 of the Act, the deemed short term capital gain continues to be long term capital gain. It was also observed that the Revenue has accepted the decision the Tribunal in Komac Investments and Finance Pvt Ltd (supra), as no information was provided as to whether any appeal being filed from that order. Therefore, no substantial questions of law arise for consideration , Appeal was dismissed.

TDS: DTAA- Business expenditure- Disallowance u/s. 40(a)(i)- A. Y. 2001-02- Assessee paid administrative fee to its US-AE- Assessing Officer disallowed same for not deducting TDS- As condition of TDS-deduction was only applicable on payment to non-resident and not applicable on payment to resident for relevant period, it created discrimination- consequently, assessee would get benefit of DTAA and, therefore, action of Assessing Officer was not justified-

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CIT vs. Herbalife International India (P.) Ltd.; [2016] 69 taxmann.com 205 (Delhi)

Assessee paid administrative fee to its US-AE for availing various services like data processing services, accounting, financial and planning services etc. In the A. Y. 2001-02, the Assessing Officer disallowed said payment on ground that said payment was fee for technical service warranting deduction of TDS which assessee did not deduct. The Tribunal allowed the assessee’s claim. On appeal by the Revenue, the Delhi High Court upheld the decision of the Tribunal and held as under:

“i) A rticle 26(3) of India-USA DTAA states that for the purpose of determining the taxable profits of a resident of a contracting state (India), the payment of interest, royalty and other disbursements paid to resident of other contracting state (USA) shall be deductible under the same conditions that apply to such payment being made to a resident of India. The expression other disbursements occurring in said article 26(3) is wide enough to encompass the administrative fee paid by the assessee to its US-AE.

ii) Section 40(a)(i), as it was during the assessment year in question i.e. 2001-02, did not provide for deduction of TDS where the payment was made in India. The requirement of deduction of TDS on payments made in India to residents was inserted, for the first time by way of clause (ia) to section 40(a) with effect from 1st April 2005.
 
iii) A s far as payment to a non-resident is concerned, section 40(a)(i) as it stood at the relevant time mandated that if no TDS is deducted at the time of making such payment, it will not be allowed as deduction while computing the taxable profits of the payer. No such consequence was envisaged in terms of section 40 (a)(i) as it stood as far as payment to a resident was concerned. This, therefore, attracts the non-discrimination rule under article 26(3). The object of article 26(3) was to ensure non-discrimination in the condition of deductibility of the payment in the hands of the payer where the payee is either a resident or a non-resident. That object would get defeated as a result of the discrimination brought about qua nonresident by requiring the TDS to be deducted while making payment of FTS.

iv) As per section 90(2), the provisions of the DTAA would prevail over the Act unless the Act is more beneficial to the assessee. Therefore, except to the extent a provision of the Act is more beneficial to the Assessee, the DTAA will override the Act. This is irrespective of whether the Act contains a provision that corresponds to the treaty provision.

v) In view of above, it is held that section 40(a)(i) is discriminatory and, therefore, not applicable in terms of article 26(3) of the Indo-US DTAA . Consequently, the administrative fee paid by the assessee to its AE is allowed.”

TDS: Business expenditure- Disallowance u/s. 40(a)(i)- A. Ys. 2007-08 and 2008-09- Payment of commission to non-resident agent- Commission not income deemed to accrue or arise in India- Tax need not be deducted at source- Disallowance of expenditure u/s. 40(a)(i) not justified-

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CIT vs. Gujarat Reclaim and Rubber Products Ltd..; 383 ITR 236 (Bom):

In the A. Ys. 2007-08 and 2008-09, the assessee had made payment of commission to non-resident agents in respect of sales made outside India. The Assessing Officer disallowed the claim for deduction u/s. 40(a)(i) of the Income-tax Act, 1961 for failure to deduct tax at source. The basis of disallowance was that Circular No. 23 of 1969 and 786 of 2000 issued by the CBDT which had clarified that commission paid to non-resident agent for sale does not give rise to income chargeable to tax in India had been withdrawn by Circular No. 7 dated 22/10/2009. The Tribunal allowed the assesee’s claim and held that the provisions of section 40(a)(i) would have no application for the two assessment years under consideration. On appeal filed by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:

“i) The circular of 1969 was admittedly in force during the two assessment years. It was only subsequently i.e. on 22/10/2009 that the circular of 1969 and its reiteration as found in Circular No. 786 of 2000 were withdrawn. However, such subsequent withdrawal of an earlier circular cannot have retrospective operation.

ii) Hence no tax was deductible at source and no disallowance of expenditure could be made u/s. 40(a)(i).”

Housing Project- Deduction u/s. 80-IB(10) – A. Y. 2010-11- Two flats in project exceeding specified dimension- Assessee entitled to deduction in respect of other flats not exceeding specified dimension-

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CIT vs. Elegant Estates; 383 ITR 49 (Mad);

In the A. Y. 2010-11, the assessee had claimed deduction u/s. 80-IB(10) of the Act in respect of the housing project. The Assessing Officer found that the assessee had built two flats measuring 1572 sq. ft. and 1653 sq. ft. respectively. Therefore he disallowed the entire claim for deduction. The Tribunal held that the assessee would be disqualified for the deduction proportionately, only in respect of the two flats of area exceeding 1500 sq. ft. but would be entitled to deduction in respect of the other flats which measured less than 1500 sq. ft.

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

“i) The language used in section 80-IB(10) does not bar a deduction claim altogether if some of the units sold exceed the specified dimensions.

ii) The Tribunal was right in holding that the assessee was entitled to deduction u/s. 80-IB(10) with respect to income from flats measuring less than 1500 sq. ft. limit and would not be entitled to deduction with respect to the income from the two flats exceeding the limit of 1500 sq. ft. when the assessee had considered all the flats as forming part of a single project on interpretation of the provisions of section 80-IB(10)(c).

iii) The order passed by the Appellate Tribunal was correct in the eye of law and the contentions raised on behalf of the Department could not be countenanced.”

Tea Development allowance- Section 33AB- A. Y. 2000-01- Composite income: Deduction to be allowed from total composite income derived from growing and manufacturing tea- Rule 8 shall apply thereafter to apportion resultant income-

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Singlo (India) Tea Ltd. vs. CIT; 382 ITR 537 (Cal):

The assessee company was engaged in the business of growing, manufacturing and selling tea. In the A. Y. 2000-01, the assessee had claimed deduction of tea development allowance u/s. 33AB of the Act at the rate of 20% on the composite income of Rs. 25,54,855/-. The Assessing Officer held that the deduction u/s. 33AB has to be allowed only from the non-agricultural component of the composite income determined under rule 8. The Tribunal upheld the decision of the Assessing Officer.

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

“The deduction u/s. 33AB is to be allowed from the total composite income derived from growing and manufacturing tea and only after such deduction is made, shall rule 8(1) be applied to apportion the resultant income into 60% agricultural income, not taxable under the Act and balance 40% taxable under the Act.”

Charitable purpose- S/s. 2(15), 12A of I. T. Act 1961- A. Y. 2009-10- Premises let for running educational institutions- Auditorium let out to outsiders for commercial purpose- Incidental to principal object of promotion of educational activities- Will not fall in category of “advancement of any other object of general public utility” in section 2(15)- Cancellation of registration not justified-

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DIT vs. Lala Lajpatrai Memorial Trust; 383 ITR 345 (Bom)

The assessee is a charitable trust with the object of “advancement of education” and was registered u/s. 12A of the Income-tax Act, 1961. The main object of the trust was promotion of education. The assessee trust owned a plot of land having a building consisting of an auditorium on the ground floor and class rooms from second to seventh floors. This building was let out to an educational institute which conducts junior college, senior college, law college, etc., and sixth and seventh floors were let out to run a management institute. The assesee claimed exemption of the income received by it from letting out the premises. A show cause notice was issued calling upon the assessee to explain why the rents received should not be treated as falling under the category of “any other object of general public utility” attracting the first proviso to section 2(15) of the Act. The assessee trust claimed that the object of its establishment was “advancement of education” which fell within the definition of charitable purpose as defined u/s. 2(15) of the Act. The assessee relied on Circular No. 11 of 2008 dated 19/12/2008 contending that the first proviso to section 2(15) would not be attracted to its case. The Director of Income-tax withdrew the registration of the assessee. The Appellate Tribunal set aside the order withdrawing the registration.

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

“i) The letting out of the premises was in consonance with the objects of the trust which was to conduct colleges and schools and achieve advancement of education.

ii) Admittedly, the premises were let out on a nominal rent. The Director of Income-tax had overlooked that the principal purpose for which the premises was let out was for conducting educational activity. There was no material before the authority to show that the sixth and seventh floors were used for any other purpose which was not an educational purpose. The service charges received in respect of the sixth and seventh floors were on account of educational purpose.

iii) Letting out of the auditorium was not the dominant object of the assessee and admittedly, the auditorium was incidentally let out to outsiders for commercial purposes. Letting out was incidental and not the principal activity of the assesee. The first proviso to section 2(15) would not be attracted. In the course of letting out, the assessee had incurred expenses for electricity and air conditioners.

iv) Under these circumstances, separate books of account could not be insisted upon as the activity became part and parcel of the educational activities carried out by the assessee and the benefit of exemption u/s. 11(4A) could not be denied. There was no fault with the order passed by the Appellate tribunal.”

Capital gains- Transfer- S/s. 45(1), (4) – A. Y. 1992- 93- Conversion of firm to company- Takeover of business of firm with assets by private limited company with same partners as shareholders in same proportion: Subsequent revaluation of assets- No dissolution of partnership- No consideration accrued or received on transfer of assets: Transaction not transfer giving rise to capital gains-

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CADD Centre vs. ACIT; 383 ITR 258 (Mad)

The assessee was a firm with two partners having equal shares. A private limited company was formed on 21/11/1991 and took over the business of the firm and its assets. The assets were revalued on 30/11/1991. The partners immediately before succession became the shareholders in the same proportion as in the capital account of the firm on the date of succession. For the A. Y. 1992-93, the Assessing Officer concluded that the transfer of the business assets of the firm to the company constituted distribution of assets which gave rise to capital gains taxable u/s. 45(4) of the Income-tax Act, 1961. The Tribunal upheld the decision of the Assessing Officer. On appeal by the assessee, the Madras High Court upheld the decision of the Tribunal and held as under:

“i) When firm is transformed into a company, there is no distribution of assets and no transfer of capital assets as contemplated by section 45(1) of the Income-tax Act, 1961.

ii) There is no authority for the proposition that even in cases where the subsisting partners of a firm transfer assets to a company, there would be a transfer, covered under the expression “or otherwise in section 45(4). When a firm is transformed into a company with no change in the number of partners and the extent of property, there is no transfer of assets involved and hence there is no liability to pay tax on capital gains.

iii) There was no transfer of assets because
(a) no consideration was received or accrued on transfer of assets from the firm to the company,
(b) the firm had only revalued its assets which did not amount to transfer,
(c) the provision of section 45(4) of the Act, was applicable only when the firm was dissolved. The vesting of the property in the company was not consequent or incidental to a transfer.”

Appeal to High Court- Section 260A- Competency of appeal- Decision of Tribunal following earlier decision- No appeal from earlier decision- No affidavit explaining reasons: Appeal not competent-

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CIT vs. Gujarat Reclaim and Rubber Products Ltd..; 383 ITR 236 (Bom):

Dealing with the competency of the Appeal before the High Court u/s. 160A of the Income-tax Act, 1961, the Bombay High Court held as under:

“i) Where the issue in controversy stands settled by decisions of High Courts or the Tribunal in any other case and the Department has accepted that decision the Department ought not to agitate the issue further unless there is some cogent justification such as change in law or some later decision of a higher forum.

ii) In such cases appropriately the appeal memo itself must specify the reason for preferring an appeal failing which at least before admission the officer concerned should file an affidavit pointing out the reasons for filing the appeal. It is only when the court is satisfied with the reasons given, that the merits of the issue need be examined of purposes of admission.”

Appeal to Appellate Tribunal- No appearance by assessee’s counsel on date of hearing due to death in family- Refusal by Tribunal to grant adjournment and matter decided on merits: Violation of principles of natural justice- Order of Tribunal quashed and direction to decide matter on merits after hearing parties-

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Zuari Global Ltd. vs. Princ. CIT; 383 ITR 171(Bom):

In an appeal before the Tribunal filed by the assessee, the assessee’s counsel could not appear on the date of hearing owing to a death in his family. The Tribunal refused to grant an adjournment and proceeded to decide the matter on merits. On appeal by the assessee, the Bombay High Court set aside the decision of the Tribunal and held as under:

“i) Considering that the assessee was not unnecessarily delaying the matter and as on the relevant date there was justifiable reason which prevented counsel for the assessee from being present before the Tribunal, the Tribunal was not justified to refuse an adjournment. Failure to grant a short adjournment has resulted in passing the order in breach of the principle of natural justice.

ii) The order of the Tribunal is quashed and set aside. The tribunal is directed to decide the appeals afresh after hearing the parties in accordance with law.”

Business Expenditure – Provision for interest in terms of compromise agreement with bank is an ascertained liability.

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CIT v. Modern Spinners Ltd. (2016) 382 ITR 472 (SC)

The assessee filed a return for the assessment year 1995- 96 on Novembr 24, 1995, declaring a loss of Rs.57,99,781. During the course of the assessment proceedings, the Assessing Officer specifically required the assessee to show cause why the provision of interest of Rs.49.23 lakh should not be disallowed as the provision amounted to unascertained liability. After granting opportunity to the assessee, the deduction for the said amount of interest was disallowed by the Assessing Officer. Against this order, the assessee preferred an appeal which was also dismissed by the Commissioner of Income Tax (Appeals). The view taken by the Assessing Officer as well as the Commissioner of Income Tax (Appeals), was set aside by the Income-tax Appellate Tribunal upon appeal by the assessee.

The Tribunal held that the assessee had provided interest liability only at the rate of 10 per cent which was as per the compromise agreement with the bank and not as per the original terms and conditions of loan. Therefore, it could not be treated to be a contingent liability, rather it was an ascertained liability. According to the Tribunal the assessee could not be penalized for claiming less interest liability.

The High Court dismissed the appeal of the Revenue holding that it was not an unilateral act on the part of the assessee but was a bilateral consented action on behalf of the parties which was of binding in terms of the agreement and as such it could not be termed as an unascertained liability.

On further appeal by the Revenue to the Supreme Court it was held that the matter was covered against the Revenue by the judgment of the Supreme Court in Taparia Ltd. vs. Joint CIT [2015] 372 ITR 605 (SC).

Export – Special Deduction – Computation of deduction u/s. 80HHC – 90% of the net commission (and not gross) has to be reduced from the profits of the business for determining deduction under section 80HHC.

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Veejay Marketing vs. CIT [2016] 382 ITR 395 (SC)

While completing the assessment for the assessment years 1993-94 and 1994-95 u/s. 143(3) of the Act, the Assessing Officer found that the assessee had reduced 90 per cent of the net commission while working out the profits of business under the Explanation (baa) to section 80HHC of the Act.

The Assessing Officer held that 90 per cent of gross commission receipts had to be deducted from the profits of the business and accordingly, allowed deductions under section 80HHC for the said assessment years on that basis.

Aggrieved against the said orders of the Assessing officer, the assessee filed appeals before the Commissioner of Income Tax (Appeals). The Appellate authority held that only 90 per cent of the net commission had to be deducted from the profit of the business and accordingly, directed the Assessing Officer to redo the exercise.

Against the said orders of the Commissioner of Income Tax (Appeals), the Revenue preferred appeals before the Income-tax Appellate Tribunal.

The Income-tax Appellate Tribunal, by following the decision of the Income-tax Appellate Tribunal, Delhi Bench ‘E’ (Special Bench) in Lalsons Enterprises vs. Deputy CIT [2004] 89 ITD 25 (Delhi) [SB], held that only 90 per cent of the net commission had to be reduced from the profit of the business for determining deduction under section 80HHC of the Act.

Against the said order of the Tribunal, the Revenue filed the appeals before the High Court.

By following the ratio laid down in the CIT vs. Chinnapandi [2006] 282 ITR 389 (Mad), in which it was held that 90% of the gross interest had to be reduced from the profits of the business for determining deduction under section 80HHC, the High Court held that the reasons given by the Tribunal in the impugned order were not sustainable. Accordingly, the order of the Tribunal was set aside.

On appeal to the Supreme Court, it was held that these cases were covered by the decision in ACG Associated Capsules Private Ltd. (Formerly Associated Capsules Private Ltd.) vs. CIT [2012] 343 ITR 89 (SC). Accordingly, the issue arising in the appeal was answered in favour of the assessee and against the Revenue. The Supreme Court allowed the appeals and the order of the High Court was set aside and the matter was remanded to the Assessing Officer for a fresh consideration.,

Refund –When an amount though found refundable to the assessee is utilised by the Department, interest is payable u/s. 244(1A) for the period of such utilization.

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CIT v. Jyotsna Holding P. Ltd. [2016] 382 ITR 451 (SC)

The
Supreme Court took note of the facts in respect of the assessment year 1987-88
(similar fact situation appeared in respects of all three assessment years viz.
1985-86, 1986-87 and 1987-88.) For the assessment year 1987- 88, the respondent
filed its return on the basis of self tax assessment made by it and paid a sum
of Rs.3,23,68,834 on September 12, 1987. The assessment was made u/s. 143(3) by
the assessing authority on March 28, 1988, as per which an amount of
Rs.2,03,29,841 was found refunable to the respondent/assessee. Instead of
immediate refund of this amount, the assessing authority ordered that the same
would be adjusted against the demand for the year 1986-87. It was ultimately
adjusted on July 25, 1991. The question that arose, in these circumstances, was
as to whether the assessee would be entitled to interest on the aforesaid
amount which was kept by the Revenue for the period from March 28, 1988 to July
25, 1991. The assessee claimed the interest, which request was rejected by
Assessing Officer. However, the Commissioner of Income-tax (Appeals) allowed
the appeal of the assessee against the order of the Assessing Officer by
invoking the provisions of section 244(1A) of the Income-tax Act and held that
the interest was payable on the aforesaid amount. This order was upheld by the
Income-tax Appellate Tribunal as well as by the High Court.

On appeal, the
Supreme Court after going through the order of High Court did not find anything
wrong with the same. According to the Supreme Court the amount in question,
though found refundable to the assessee, was utilized by the Department and,
therefore, interest was payable u/s. 244(1A) of the Income-tax Act.

WRITE – BACK OF LOANS – SECTIONS 41 (1) & 28 (iv)

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ISSUE FOR CONSIDERATION

On account of the inability to repay a borrower, may write-back a part of the
amount due or the full amount so due, in pursuance of the negotiations with the
lender or otherwise. It is usual to come across cases of write back of
liability towards repayment of loans taken by an assesssee in the course of his
business. The amount so written back is credited to the profit & loss
account of the year of write back or is credited to the reserves.

Important issues arise, under the income-tax law, concerning the treatment and
taxability of the amount written back. Will such a write back attract the
provisions of section 41 (1) of the Act and be taxed in the hands of the
assesssee in the year of write back? Alternatively, will the write back attract
the provisions of section 28 (i) or (iv) of the Act and be taxed in the hands
of the assesssee? Whether the fact that the borrowings were made for the
purposes of acquiring a capital asset, make any difference to liability for
taxation? Whether it can be said that the write back does not represent any
benefit or a perquisite for the assessment and is hence not taxable?

Conflicting decisions are rendered by the courts over a period of years
requiring us to take a fresh view of the issues on hand. Recently, the Madras
High Court has taken a view that the amount of loan written back by the
borrower is taxable in his hands in contrast to its own decision delivered a
few years ago.

Iskraemeco Regent Ltd ‘s case.

The issue arose in the case of Iskraemeco Regent Ltd. vs. CIT, 331 ITR 317
(Mad.). In that case the assessee, engaged in the business of manufacturing
energy meters, obtained a term loan from State Bank Of India for the purchase
of capital assets, both by way of import as well as in the local market. The
company also procured credit facility, through cash credit account, for import
of capital assets as well as for meeting the working capital requirements.

The assessee was declared a sick industrial company by the BIFR, which had
sanctioned a scheme for its revival, and in pursuance thereto, the State Bank
of India waived the outstanding dues of principal amount of about Rs.5 crores
and the interest outstanding for a sum of about Rs. 2 crores under the one time
settlement scheme. The assessee credited the waiver of principal amount to the
“Capital Reserve Account” in the balance sheet treating it as capital
in nature and the waiver of interest was credited to its “Profit and Loss
Account” for the financial year ending 31.03.2001 corresponding to the
assessment year 2001-02.

The assessee filed its return declaring its total income assessable at Rs.
45,160 after setting off the carried forward business losses and unabsorbed
depreciation. The AO in assessing the total income added the amounts of loan
and interest waived under the head business income by applying the provisions
of section 41(1) and section 28(iv) of the Act.

The appeals filed by the
assessee, before the Commissioner of Income Tax (Appeals) and the Tribunal,
were dismissed on the ground that the issue in appeal was no longer res integra
in as much as the same had already been concluded by the judgment in CIT vs.
T.V. Sundaram Iyengar & Sons Ltd., 222 ITR 344(SC). Aggrieved by the order
of the tribunal, the assessee preferred an appeal to the high court by raising
the following substantial questions of law;

  • “Whether the learned
    Tribunal misdirected itself in law, and it adopted a wholly erroneous
    approach, in interpreting the provisions of Section 28(iv) of the
    Income-tax Act, 1961, to hold that the sum of Rs.5,07,78,410/-
    representing the principal loan amount, waived by the bank under the One
    Time Settlement Scheme (OTS), and credited by the appellant assessee to
    its Capital Reserve Account, in its Balance Sheet drawn as at 31st March,
    2001, is assessable to tax as a revenue receipt in the assessment for the
    assessment year 2001-02; and whether the findings of the learned Tribunal
    to this effect were wholly unreasonable, based on irrelevant
    considerations, contrary to the facts and evidence on record and/or
    otherwise perverse?
  • Whether the decision of the
    Hon’ble Supreme Court in CIT vs. T.V.Sundaram Iyengar & Sons Ltd.
    [1996] 222 ITR 344, applied by the learned Tribunal in passing its said
    impugned order dated 26th March, 2010, has any application whatsoever, in
    the facts and circumstances of the instant case, and particularly in
    relation to section 28(iv) of the said Act?
  • Whether on a correct
    interpretation of section 28(iv) of the Income Tax Act, 1961, the Tribunal
    ought to have held that the principal amount of loan waived by the Bank
    under the OTS, not being a trading liability and also not being a
    “benefit or perquisite, whether convertible into money or not”,
    the expression used in the said section, did not constitute revenue
    receipt and/or business income of the appellant assessee assessable to tax
    in its assessment for the assessment year 2001-02?
  • Whether ………….
  • Whether
    …………….. 

On behalf
of the assessee it was submitted that:—

  • it was not in dispute that
    the assessee had obtained loan from the State Bank of India for the purchase
    of fixed assets, both within the country and outside the country, which
    were admittedly capital assets. It was a pure loan transaction and the
    same could never be termed as a trading transaction.
  • the loan was obtained for
    the purchase of capital assets and the waiver amounted to a capital
    receipt and not a revenue receipt.
  • it was not involved in any
    business involving the transaction of money lending .
  • the AO had not gone behind
    the loan arrangement and the loan arrangement in its entirety was not
    obliterated by the waiver, considering the fact that the assessee had paid
    a sum of Rs. 5 crores from the date of receipt of the loan.
  • a grave error was committed
    in mechanically applying the judgment rendered by the apex court in T.V.
    Sundaram Iyengar & Sons Ltd.’s case (supra ) without appreciating the
    factual scenario that the loan had been obtained towards the purchase of
    capital assets and not for a business transaction. The facts involved in
    the judgment referred above disclosed that the transaction therein was a
    trading transaction as against the facts involved in the assessee’s case.
  • reliance was placed on the
    decisions in the cases of Mahindra & Mahindra Ltd. vs. CIT, 261 ITR
    501(Bom.), CIT v. Alchemic (P.) Ltd., 130 ITR 168 and CIT vs. Mafatlal
    Gangabhai & Co. (P.) Ltd.219 ITR 644 (SC).
  • relying on the decision in
    the case of Solid Containers Ltd. vs. Dy. CIT, 308 ITR 417 it was
    submitted that, in a case where a transaction involved a purchase related
    to capital assets, a waiver made of the loan taken for the said purchase
    would not constitute a business receipt.
  • the reasoning of the
    authorities that, section 28(iv) of the Act was applicable to a money
    transaction was totally misconceived and contrary to the provision itself.
    Section 28(iv) provided for chargeability of profits and gains of business
    or profession with relation to the value of any benefit or perquisite
    arising out of business or the exercise of profession and therefore the
    same would not include a money transaction. Since in the present case on
    hand, the transaction involved a loan transaction, being a transaction of
    money, section 28(iv) had no application.
  • Section 41(1) also did not
    apply as it mandated that there had to be an actual allowance or deduction
    made for the purpose of computing under the said section. In as much as
    there was no allowance or deduction in the present case on hand, the
    question of application of section 41(1) also did not arise for
    consideration.
  • in support of the
    contentions, the company placed reliance on the following judgments, CIT
    vs. P. Ganesa Chettiar, 133 ITR 103 (Mad.), CIT vs. A.V.M. Ltd., 146 ITR
    355 , Alchemic Pvt. Ltd.’s case (supra), Mafatlal Gangabhai & Co. (P.)
    Ltd.’s case (supra ) and Dy. CIT v. Garden Silk Mills Ltd., 320 ITR 720
    (Guj.) to submit that section 28(iv) had no application to a money
    transaction. In so far as the scope of section 41(1) was concerned, the
    judgments in Polyflex (India) (P.) Ltd. vs. CIT, 257 ITR 343 (SC) and
    Tirunelveli Motor Bus Service Co. (P.) Ltd. vs. CIT, 78 ITR 55 (SC) were
    relied upon by the company. the combOn behalf of the Revenue it was
    submitted that:—ined reading of section 41(1) and section 28(iv) showed
    that the words “whether in cash or any other manner” as found in
    s. 41(1) had not been incorporated in section 28(iv) which was indicative
    of the fact that section 28(iv) did not cover a cash transaction.

On behalf
of the Revenue it was submitted that:

  • the appellate authorities
    had not rejected the company’s appeal on application of section 28(iv) but
    was on application of section 28(i)of the Act and therefore, the findings
    rendered by the authorities below had to be seen in the context of the
    provisions contained in section 28(i) of the Act.
  • the ratio laid down by the
    apex court in T.V. Sundaram Iyengar & Sons Ltd.’s case (supra), held
    good and had been followed in CIT vs. Rajasthan Golden Transport Co. (P.)
    Ltd., 249 ITR 723, CIT v. Sundaram Industries Ltd., 253 ITR 396, CIT vs.
    Aries Advertising (P.) Ltd., 255 ITR 510 and the authorities below had
    rightly applied the same in rejecting the case of the assessee.
  • it was not in dispute that
    the amount had been borrowed by the assessee for the purpose of his
    business and once the said amount was used for business, the question as
    to whether it had been used for the purchase of capital assets or revenue
    receipts was immaterial. The assessee having become richer by the
    settlement, the said transaction would partake the character of the income
    assessable to tax. Even assuming an amount was utilised towards the
    capital assets, it would take the character of a revenue receipt,
    subsequently. The borrowal and waiver were in the course of business
    during carrying on of which the benefit accrued to the assessee and hence
    was taxable. If the amount was received in pursuance to a business or a
    contractual liability, then it was taxable as income.
  • relying on Jay Engg. Works
    Ltd. v. CIT, 311 ITR 299 it was submitted that the facts involved in the
    cases relied upon by the assessee company were different and that some of
    the judgments had been rendered prior to the decision in the case of T.V.
    Sundaram Iyengar & Sons Ltd.’s (supra). The Madras high court after
    considering the submissions of the parties to the dispute observed and
    held that;-
  •  the assessee was not
    trading in money transactions. A grant of loan by a bank could not be
    termed as a trading transaction and it could not also be construed to be
    in the course of business. Indisputably, the assessee obtained the loan
    for the purpose of investing in its capital assets. The facts involved in
    the present case were totally different than the facts involved in T.V.
    Sundaram Iyengar & Sons Ltd.’s case (supra). What had been done in the
    present case was a mere waiver of loan. There was no change of character
    with regard to the original receipt which was capital in nature into that
    of a trading transaction. There was a marked difference between a loan and
    a security deposit.  
  • every deposit of money would
    not constitute a trading receipt. Even though a receipt might be in
    connection with the business, it could not be said that every such receipt
    was a trading receipt. Therefore, the amount referable to the loans
    obtained by the assessee towards the purchase of its capital asset would
    not constitute a trading receipt. The finding of the court had been
    fortified by the judgment of this Court in A.V.M. Ltd.’s case (supra).
  • the same contention had been
    raised on behalf of the revenue before the Bombay High Court in Solid
    Containers Ltd.’s case (supra), by relying upon the judgment rendered in
    T.V. Sundaram Iyengar & Sons Ltd.’s case (supra), however, in the said
    case, a finding was given that the money was received by the assessee in
    the course of carrying on his business and the agreement was completely
    obliterated and the loan in its entirety was completely waived and the
    loan itself was taken for a trading activity and on waiving it was
    retained in business by the assessee. In the said judgment, the court had
    distinguished its earlier judgment rendered in Mahindra & Mahindra
    Ltd.’s case (supra) by highlighting that in the facts of the Solid
    Container’s case, there was a trading transaction and the money received
    was used towards a business transaction and accordingly the ratio laid
    down in. T.V. Sundaram Iyengar & Sons Ltd.’s case (supra) was
    applicable.
  • therefore, the above said
    facts indicated that the ratio laid down in T.V. Sundaram Iyengar &
    Sons Ltd.’s case (supra) had no application at all to the facts and
    circumstances of the present case on hand. Hence, the authorities below
    had wrongly applied the ratio laid down in T.V. Sundaram Iyengar &
    Sons Ltd.’s case (supra) and the orders passed by them could not be
    sustained. In the matter of applicability or otherwise of section 28(iv)
    and 41(1), the court deemed it fit to give its views even though the
    Revenue had conceded that the said provisions did not apply to the present
    case. It observed that;-
  • Section 28(iv) of the Act
    dealt with the benefit or perquisite received in kind. Such a benefit or
    perquisite received in kind other than in cash would be an income as
    defined u/s. 2(24) of the Act. In other words, to any transaction which
    involved money, section 28(iv) had no application.
  • the transaction in the
    present case being a loan transaction having no application with respect
    to section 28(iv), the same could not be termed as an income within the
    purview of section 2(24) of the said Act. In other words, in as much as
    section 28(iv) was not applicable to the transactions on hand, it could
    not be termed as income which could be made taxable as receipt. A receipt
    which did not have any character of an income being that of a loan could
    not be made eligible to tax. 

Section 41(1) could apply only to
a trading liability. A loan received for the purpose of capital asset would not
constitute a trading liability.

Ramaniyam Homes P Ltd .’s case,

The issue once again arose recently before the Madras High Court, in the Tax
Case (Appeal) No.278 of 2014, in the case of CIT v. Ramaniyam Homes P Ltd., in
an appeal filed u/s 260-A of the Act. In that case, the assessee filed a return
of income for the assessment year 2006-07 admitting a total loss of
Rs.2,42,20,780. It was found by the AO that the assessee was indebted to the
Indian Bank which bank, vide a letter dated 15.2.2006, had mooted a proposal
for a one time settlement requiring the company to pay Rs.10.50 crore on or
before 30.4.2006 against which the company paid only a sum of Rs.93,89,000 by
that date.

The AO appears to have held that the One Time Settlement Scheme was accepted by
the assessee during the year and the interest waived was taxable u/s 41(1) of
the Act and the balance was taxable u/s 28(iv) of the Act. The CIT(Appeals)
held that the mere acceptance of the conditional offer of the bank under the
One Time Settlement Scheme, without complying with the substantive part of the
terms and conditions, would not give a vested right of waiver and therefore,
interest waived to the extent of Rs.1.68 Crores was not exigible to tax u/
s.41(1) and consequently, he deleted the addition of Rs.1,67,74,868. On the
issue of addition u/s 28(iv), he followed the decision in the case of Iskraemeco
Regent Limited vs. CIT, (supra) and held that Section 28(iv) had no application
to cases involving waiver of principal amounts of loans. In the appeal of the
Revenue, on the issue of the deletion of the principal portion of the term loan
waived by the bank, the Tribunal held in para 12 of its order that the term
loan had admittedly been used by the assessee for acquiring capital assets and
following the decision of the jurisdictional Madras high court in the case of
Iskraemeco Regent Limited(supra) it confirmed the order of the first appellate
authority.

In the appeal by the revenue to the high court, the following substantial
questions of law were raised therein:-

• ” Whether on the facts and in the circumstances of the case, the Income
Tax Appellate Tribunal was right in holding that the amount representing the
principal loan amount waived by the bank under the one time settlement scheme
which the assessee received during the course of its business is not exigible
to tax?
• Whether on the facts and in the circumstances of the case, the Income Tax
Appellate Tribunal ought to have seen that the waiver of principal amount would
constitute income falling under Section 28(iv) of the Income Tax Act being the
benefit arising for the business?”

The Revenue invited attention to the definition of the expressions
“income” and “total income” u/s. (24) and (45) of section 2
and the provisions of the charging section 4 as well as the relevant provisions
of sections 28(iv), 41(1) and 59. It was contended that the principal amount of
loan waived by the bank under the one time settlement was a taxable receipt
coming within the definition of the expression “income” by relying
upon the decisions in cases of CIT vs. T.V.Sundaram Iyengar & Sons Ltd. 222
ITR 344(SC), Solid Containers Ltd. vs. DCIT, 308 ITR 417 (Bom.), Logitronics P
Ltd. v. CIT,333 ITR 386 and Rollatainers Ltd. vs. CIT, 339 ITR 54.

In so far as the decision in Iskraemeco Regent Limited was concerned, it was
submitted that the Supreme Court had already granted leave to the Department
and the decision was the subject matter of Civil Appeal No.5751 of 2011, on the
file of the Supreme Court, and the Court was entitled to consider the issue
independently. At the outset, the Madras high court examined the decision in
Iskraemeco Regent Limited, since the appellate authorities had merely followed
the said decision. The court found that in the said decision it was held that a
loan transaction had no application with respect to s.28(iv) of the Act and
that the same could not be termed as an income within the purview of section
2(24).The Madras high court thereafter examined the statutory provisions and
also the decisions relied upon by the contesting parties in support of their
respective submissions. The Madras high court in particular examined the
decisions in the cases of T.V. Sundram Iyengar & Sons Ltd. (SC), Solid
Containers Ltd.(Bom), Mahindra & Mahindra (Bom.) and Logitronics P.
Ltd.(Del.) and Rollatainers Ltd. (Del).

The court noted that the law as expounded by the Delhi High Court appeared to
be that if a loan had been taken for acquiring a capital asset, waiver thereof
would not amount to any income exigible to tax and if the loan was taken for
trading purposes and was also treated as such from the beginning in the books
of account, the waiver thereof might result in the income, more so when it was
transferred to the profit and loss account. Having noted so, the court observed
that;

  • the Delhi High Court, both in
    Logitronics as well as in Rollatainers cases, did not take note of one fallacy
    in the reasoning given in paragraph 27.1 of the decision of the Madras high
    court rendered in Iskraemeco Regent Limited’s case.
  • in paragraph 27.1 of the
    decision in Iskraemeco Regent Limited’s case, it was held that s.28(iv)
    spoke only about a benefit or perquisite received in kind and that
    therefore, it had no application to any transaction involving money which
    was actually based upon the decision of the Bombay High Court in Mahindra
    & Mahindra Ltd.(supra), which, in turn, had relied upon the decision
    of the Delhi High Court in the case of Ravinder Singh vs. C.I.T.205 I.T.R.
    353.
  • with great respect, the
    above reasoning did not appear to be correct in the light of the express
    language of section 28(iv). What was treated as income chargeable to
    income tax under the head ‘profits and gains of business or profession’
    u/s 28(iv), was “the value of any benefit or perquisite, whether
    convertible into money or not, arising from business or the exercise of a
    profession.”
  • therefore, it was not the
    actual receipt of money, but the receipt of a benefit or perquisite, which
    had a monetary value, whether such benefit or perquisite was convertible
    into money or not, which was what was covered by section 28(iv). For
    instance, if a gift voucher was issued, enabling the holder of the voucher
    to have a dinner in a restaurant, it was a benefit or perquisite, which
    had a monetary value. If the holder of the voucher was entitled to
    transfer it to someone else for a monetary consideration, it became a
    perquisite, convertible in to money. Irrespective of whether it was
    convertible into money or not, to attract section 28(iv) it was sufficient
    that it had a monetary value.
  • a monetary transaction, in
    the true sense of the term, can also have a value.
  • we do not know why it should
    not happen in the case of waiver of a part of the loan. Therefore, the
    finding recorded in paragraph 27.1 of the decision in Iskraemeco Regent
    Limited that Section 28(iv) had no application to any transaction, which
    involved money, was a sweeping statement and might not stand in the light
    of the express language of section 28(iv).
  • in our considered view, the
    waiver of a portion of the loan would certainly tantamount to the value of
    a benefit. The benefit might not arise from “the business” of
    the assessee. But, it certainly arose from “business”.
  • the absence of the prefix
    “the” to the word “business” made a world of
    difference. The Madras high court thereafter dealt with the issue of the
    distinction, sought to be made, between the waiver of a portion of the
    loan taken for the purpose of acquiring capital assets on the one hand and
    the waiver of a portion of the loan taken for the purpose of trading
    activities on the other hand. In the context, it held that;-
  • in so far as accounting
    practices were concerned, no such distinction existed. Irrespective of the
    purpose for which, a loan was availed by an assessee, the amount of loan
    was always treated as a liability and it got reflected in the balance
    sheet as such. When a repayment was made in monthly, quarterly, half
    yearly or yearly installments, the payment was divided into two
    components, one relating to interest and another relating to a portion of
    the principal. To the extent of the principal repaid, the liability as
    reflected in the balance sheet got reduced. The interest paid on the
    principal amount of loan, would be allowed as deduction, in computing the
    income under the head “profits and gains of business or
    profession”, as per the provisions of the Act.
  • Section 36(1)(iii) made a
    distinction where under the amount of interest paid in respect of capital
    borrowed for the purpose of business or profession was allowed as
    deduction, in computing the income referred to in section 28. But, the
    proviso there under stated that any amount of interest paid in respect of
    capital borrowed for acquisition of an asset for extension of existing
    business or profession, whether capitalised in the books of account or not
    for any period beginning from the date on which the capital was borrowed
    for the acquisition of the asset, till the date on which such asset was
    put to use, should not be allowed as deduction.
  • therefore, it was clear that
    the moment the asset was put to use, then the interest paid in respect of
    the capital borrowed for acquiring the asset, could be allowed as
    deduction. When the loan amount borrowed for acquiring an asset got wiped
    off by repayment, two entries were made in the books of account, one in
    the profit and loss account where payments were entered and another in the
    balance sheet where the amount of un repaid loan was reflected on the side
    of the liability.
  • when a portion of the loan
    was reduced, not by repayment, but by the lender writing it off (either
    under a one time settlement scheme or otherwise), only one entry got into
    the books, as a natural entry. A double entry system of accounting would
    not permit of one entry. Therefore, when a portion of the loan was waived,
    the total amount of loan shown on the liabilities side of the balance
    sheet was reduced and the amount shown as capital reserves, was increased
    to the extent of waiver. Alternatively, the amount representing the waived
    portion of the loan was shown as a capital receipt in the profit and loss
    account itself.
  • these aspects had not been
    taken note of in Iskraemeco Regent Ltd.
  •  
  • In view of the above, the
    Madras High court decided the issue in favour of the Revenue and the
    appeal filed by the Revenue was allowed without any costs.

Observations

The issue
under consideration, of the write back of loans, has over the years turned
rotten and worse, has produced many off shoots. The sheer size of the quantum
involving this issue is another reason for addressing it at the earliest.
Settlement between the lenders and the borrowers is an everyday phenomenon and
the issues arising there from require to be handled with care importantly, due
to the fact that the borrower involved is admittedly in a precarious financial
health that can be worsened by the additional tax borrowings that may not have
been intended by the legislature.

It is time proper that a clear guideline is provided by the CBDT as regards the
Revenue’s understanding of the subject and its desired tax treatment. This
clarification is necessary in view of the fact that varied stands have been
taken by the Revenue before the courts in different cases. It is also most
desired that the apex court addresses the issue, at the earliest, in view of
the conflicting stands of the high courts, sometimes of the same high court, as
is seen by the conflicting decision of the Madras High Court and to an extent
of the Bombay High Court.

A classic case is the case of a company which has
been declared sick, under a statue, by the Board of Industrial & Financial
Reconstruction. The Board on one side mandates the lenders to compromise their
dues, in the interest of the financial health of the company, but, on the other
side, rests on the fringe when it comes to saving a sick company from
consequences of tax, directly arising out of the reliefs granted by it. We are
of the firm view that the relief from taxation should be granted in respect of
a sick company as has been done by some courts even where the CBDT has resisted
the tax relief before the BIFR.

Section 41(1) of the Act brings to tax the value of a benefit in respect of a
trading liability accruing to an assesssee by way of remission or cessation
thereof. The said section also seeks to tax the amount obtained by an
assesssee, in cash or otherwise in respect of a loss or an expenditure. In both
the cases, the charge of tax is attracted provided an allowance or deduction
has been granted to the assesssee. A charge once attracted, is placed in the
year of relief. By and large, the issues about the applicability of section
41(1) are settled. An understanding seems to have been reached that no
liability to tax arises unless an allowance or deduction has been granted to an
assesssee and subsequent thereto a relief has been obtained by him or a benefit
has accrued to him. Obviously in a case of a loan taken, the provisions of
s.41(1) should not be attracted unless the issue involves the settlement of an
interest, on the loan taken, for which a deduction was allowed.

Section 28(i) provides that the profits or gains of any business or profession
which was carried on during the year shall be chargeable to income tax under
the head “profits and gains of business or profession”. Section
28(iv) brings to tax the value of any benefit or perquisite, whether
convertible into money or not arising from business or the exercise of a
profession. The issue of taxation of a write back of a loan mainly revolves
around application of section 28. The questions that arise, in addressing the
issue are;

  •  Whether a relief from
    repayment of loan taken can be held to be profits or gains of business
    carried on during the year? In other words, can a loan be said to have
    been taken by the person in the ordinary course of his business where he
    is not engaged in the business of granting of loans and advances? Will
    such a transaction be treated as a trading transaction?
  • Will it make any difference
    whether the loan was taken for the purpose of acquiring a capital asset or
    was taken for meeting the working capital requirements of the business?
  • Will the relief, if any,
    resulting on settlement be construed as a benefit or a perquisite arising
    from the business?
  • Has the apex court in the
    case of T.V.Sundaram Iyengar & Sons Ltd (supra) held that a write back
    of loan shall be liable to be taxed as business income and that too only
    where it was taken for the purposes of meeting a trading liability?

For the sake of brevity, we place our views on each of the above issues,
so identified, instead of referring and analyzing the entire case law on the
subject including the facts of the said T.V.Sundaram Iyengar & Sons Ltd
(supra)’s case . A reader however is advised to do so.

Section 28(i) brings to tax profits or gains from business carried on during
the year. Unless the profits arise from the business that was carried on during
the year, a charge under section 28(i) fails. An ordinary businessman, not
engaged in the business of money lending, etc, cannot be said to be engaged in
the business of receiving or granting loans and therefore no profits can be
said to have arisen from such a business. The Act makes a clear distinction
between an ordinary business and the business of granting any loans or advances
for the purposes of section 36(2) and section 73, for example. Accordingly, a
waiver of loan and it’s consequential write back cannot be said to be
representing any profits and gains arising from the business carried on during
the year. This finding should hold true in respect of all businessmen other
than the one engaged in the business of receiving and granting loans. The
transactions of loans are on capital account only and holding it otherwise will
lead to a situation where under a write off of an irrecoverable loan, advanced
in the past, will have to be allowed as a deduction in all cases. A loan taken
is a thing with which a person does his business; he carries on his business
with the funds borrowed. He does not deal in them; his business is that of
dealing in things other than the funds borrowed. He is a user of funds and not
a dealer of funds. He does not derive any profits from such funds nor is he
expected to derive any and rather derives profits from optimum use of such
funds in his business.

Once it is accepted that an ordinary businessman obtains a loan for the purpose
of carrying on his business, it is natural to accept that the purpose of loan
would not make any difference. Unless a loan is inextricably linked to the
regular business and its customers, it is not possible to hold that a purpose
for which a loan was taken will have any material bearing on its eventual
transaction. With great respect, we beg to differ with the view which seeks to
make a distinction, for the purposes of taxation, on the basis of the purpose
for which a loan is taken. In our opinion, the purpose for which a loan is
taken is immaterial unless the assesssee is in the business of dealing in loans
or the loan taken is inextricably linked to his business deal. The Madras high
court is spot on in the case of Ramaniyam Homes P.Ltd. (supra) when it
concludes on this aspect of the issue by holding that there is no difference
between a loan taken for the purpose of a capital asset or for meeting working
capital requirements.

Section 28(iv) reads as: “the value of any benefit or perquisite, whether
convertible into money or not, arising from business or the exercise of a
profession.” From a reading, it is noticed that a benefit or a perquisite
should arise from business and if so it would be taxable whether its value can
be converted into money or not. The twin conditions are cumulative in nature
and both of them require satisfaction before a charge of taxation is attracted.
The use of the expression “whether convertible into money or not”
clearly indicate that the benefit or perquisite is the one which is capable of
being converted into cash but is certainly not the cash itself. Had it been so
then the expression would have been “whether received in cash or in
kind”. Section 41(1) explicitly uses the expression ‘whether in cash or in
any other manner”. The intention of the legislature is adequately
communicated by the use of appropriate expression; the intention being to bring
to tax such benefit or perquisite i.e. received in kind irrespective of its
possibility to convert in money or not. Again, the use of the term ‘value’,
supports such an interpretation in as much as cash carries the same value and
therefore does not require any prefix. Even otherwise can a remission in a loan
liability ever be construed as a benefit or perquisite and be considered to
have arisen from a business are the questions that remain open for being
addressed before a charge u/s 28(iv) is completed.

An interesting aspect of section 28(iv) is brought out by the Madras High Court
in paragraph 39 of the decision in the case of Ramaniyam Homes P Ltd.’s
(supra). The Madras High Court, in the context of applicability of section
28(iv), held that a benefit might not arise from “the business” of
the assesssee but it certainly arose from “business” and the absence
of the prefix “the” to the word “business” made a world of
difference. It seems that the court would have taken a different view had the
prefix “the” before the word “business” been placed in
section 28(iv). Had that been so the court would have concluded that the waiver
of loan did not attract the provisions of section 28(iv)!! In our very
respectful opinion, the logic supplied requires a reconsideration. The court
has failed to appreciate that the benefit or perquisite, for application of
section 28(iv), has to be from a business even though not from the specific business.
In the absence of any other business, the question of attracting section 28(iv)
does not arise at all. Even otherwise the legislative intent does not seem to
support such an interpretation which is evident from a bare reading of section
28(i) and section 28(va) which has consciously used the prefix “any’
before the term expression “business” to convey the wider scope of
the provisions.

 The apex court in the case of T.V.Sundaram Iyengar & Sons Ltd (supra)
has neither, explicitly nor implicitly, stated that a loan on being written
back would attain the character of income. It was a case wherein the assessee
had received deposits from it’s customers for the purposes of the trading
transactions carried on with the customers . The said deposits or a part of it
got adjusted against regular trading transactions and the excess balance
remaining with the assessee was carried in the balance sheet as the liability
to creditors. On a later day it was found that the said excess balance so
obtained from the customers was not repayable and the company wrote back the
said liability by crediting the same to the profit & loss account. It is in
such facts that the Supreme Court held that a write back of such non-repayable
deposits were to be treated as business income.

It is a settled position of law that every receipt need not be an income even
though the amount may be received as a part of the business activity of the
assesssee. It is also a settled position in law that a receipt, originally of a
capital nature, will not change its character merely by a lapse of time subject
to an exception in respect of an amount received in the course of a trading
activity, for example, advances received from a customer or a deposit received
from a contractor or a customer or a supplier or margin money received for
security of performance by the customer. An act of borrowing a loan is not a
trading transaction in that manner.

In exceptional cases a receipt originally of a capital nature would, with lapse
of time, attain the character of an income. It is this principle of law which
was propounded in the case of Jay’s- The Jewellers Ltd, 1947 (29 TC 274) (KB)
that was followed by the Supreme Court in the case of Karamchand Thapar Sons
222 ITR 112 (SC) and was reconfirmed in the case of T.V.Sundaram Iyengar &
Sons Ltd (supra). The Supreme Court in the said case of T.V.Sundaram Iyengar
& Sons Ltd (supra) had clearly restricted the application of the exception
to the case of an amount received as a part of the trading operations where a trading
liability was incurred out of an ordinary trading transaction. In our opinion,
a transaction of a loan borrowed for the purposes of funding a trading activity
can never be considered as a transaction that could be covered by the above
mentioned tests laid down by the Supreme Court. An ordinary loan, at its
inception, is of a capital character and retains its character even with the
flux of time it does not change even where it was later on waived.

Another important part of the facts in the case of T.V.Sundaram Iyengar &
Sons Ltd (supra) was that in the said case the unclaimed deposit representing
excess balance was credited to the profit & loss account of the company and
it is this fact which had influenced the Supreme Court when it observed that
“when the assessee itself had treated the money as its own money and taken
the amount to its profit & loss account then the amounts were assessable in
the hands of the assessee”. It appears that all those decisions of the
courts require a reconsideration wherein the courts relying on the ratio of the
decision in the case of T.V.Sundaram Iyengar & Sons Ltd (supra) held that a
waiver of an ordinary loan was to be treated as income. The high courts had
failed to notice that in all such cases before them the amount received did not
have any trading character which was so in the case of T.V.Sundaram Iyengar
& Sons Ltd (supra).

 Attention of the reader is invited to the following pertinent
observations of the author on page 1095 of the 10th edition of Kanga &
Palkhivala’s The Law and Practice of Income Tax in the context of the ratio of
the decision in the case of T.V. Sundaram Iyengar & Sons Ltd (supra).

“The Supreme Court erroneously held that crediting deposits that had been
given by the parties to a profit and loss account after they had reminded
unclaimed for a long period of time, would definitely be trade surplus and part
of assessee’s taxable income. Surprisingly, the court did not even refer to the
statutory provisions of section 41(1). It failed to note that unless the
assesssee had claimed an allowance or deduction in respect of a loss of
expenditure or trading liability, the subsequent cessation of liability would
not attract section 41(1)”. Also see the later decision of the Supreme
Court in the case of Kesaria Tea, 254 ITR 434.

The Supreme Court in a later decision in the case of Travancore Rubber, 243 ITR
158 has reconciled the legal position and reemphasised that unless a different
quality is imprinted on the receipt by a subsequent event, a receipt which is
not in the first instance a trading receipt cannot become a trading receipt by
any subsequent process. Under the circumstances it is very respectfully
observed that the decisions delivered by different high courts simply relying
on the ratio of the decision in the case of T.V.Sundaram Iyengar & Sons Ltd
(supra) require a fresh application of mind.

RULES FOR INTERPRETATION OF TAX STATUTES – PAR T – III

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Introduction
In the April and May issues of the BCAJ I had discussed the basic rules of interpretation of tax statutes and have tried to explain some rules with binding precedents. Other rules / concepts are dealt with hereunder and hereafter.

1. Rules of Consistency, Resjudicata & Estoppel :

The principle of consistency is a principle of equity and would not override
the clear provisions of law. It is well accepted that each assessment year is
separate and if a particular aspect was not objected to in one year, it would
not fetter the Assessing Officer from correcting the same in a subsequent year
as the principles of res judicata are not applicable to tax proceedings. In Radhasaomi
Satsang the Supreme Court held that (page 329 of 193-ITR) : “where a
fundamental aspect permeating through the different assessment years has been
found as a fact one way or the other and parties have allowed that position to
be sustained by not challenging the order, it would not be at all appropriate
to allow the position to be changed in a subsequent year”. As is apparent
from the said decision, the rule of consistency has limited application – where
a fundamental aspect permeates through several assessment years; the said
aspect has been found as a fact one way or the other; and the parties have not
challenged the said finding and allowed the position to sustain over the years.
Clearly, the said principle will have no application where the position
canvassed militates against an express provision of law as held by Delhi High
Court in Honey Enterprises vs. C.I.T. (2016) 381-ITR-258 at 278.

 1.1. In Radhasaomi itself, the Supreme Court acknowledged that there is
no res judicata, as regards assessment orders, and assessments for one year may
not bind the officer for the next year. This is consistent with the view of the
Supreme Court that there is no such thing as res judicata in income-tax
matters’ (Raja Bahadur Visheshwara Singh vs. CIT (1961) 41-ITR- 685 (SC); AIR
1961 SC 1062). Similarly, erroneous or mistaken views cannot fetter the
authorities into repeating them, by application of a rule such as estoppel, for
the reason that being an equitable principle, it has to yield to the mandate of
law. A deeper reflection would show that blind adherence to the rule of
consistency would lead to anomalous results, for the reason that it would
endanger the unequal application of laws, and direct the tax authorities to
adopt varied interpretations, to suit individual assessees, subjective to their
convenience – a result at once debilitating and destructive of the rule of law.
The rule of consistency cannot be of inflexible application.

1.2. Res judicata does not apply in matters pertaining to tax for different
assessment years because res judicata applies to debar courts from entertaining
issues on the same cause of action whereas the cause of action for each
assessment year is distinct. The courts will generally adopt an earlier
pronouncement of the law or a conclusion of fact unless there is a new ground
urged or a material change in the factual position. The reason why courts have
held parties to the opinion expressed in a decision in one assessment year to
the same opinion in a subsequent year is not because of any principle of res
judicata but because of the theory of precedent or precedential value of the
earlier pronouncement. Where the facts and law in a subsequent assessment year
are the same, no authority whether quasi-judicial or judicial can generally be
permitted to take a different view. This mandate is subject only to the usual
gateways of distinguishing the earlier decision or where the earlier decision
is per incuriam. However, these are fetters only on a co-ordinate Bench, which,
failing the possibility of availing of either of these gateways, may yet differ
with the view expressed and refer the matter to a Bench of superior
jurisdiction. In tax cases relating to a subsequent year involving the same
issues as in the earlier year, the court can differ from the view expressed if
the case is distinguishable as per incuriam, as held by the Apex Court in
Bharat Sanchar Nigam Ltd. vs. Union of India (2006) 282-ITR-273 (SC) at
276-277.

1.3. Estoppel normally means estopped from re agitating same issue. However,
it is settled position in law that there cannot be an estoppel against a
statute. There is no provision in the statute which permits a compromise
assessment. The above position was indicated by the apex court in Union of
India vs. Banwari Lal Agarwal (1999) 238-ITR-461 (S.C.).

2. Actus Curiae Neminem gravabit :

An act of the Court should not prejudice anyone and the maxim actus curiae
neminem gravabit is squarely applicable. It is the duty of the Court to see
that the process of the court is not abused and if the court’s process has been
abused by making a statement and the same court is made aware of it, especially
a writ court, it can always recall its own order, for the concession which
forms the base is erroneous. It is a well settled proposition of law that no
tax payer should suffer on account of inadvertent omission or mistake of an
authority, because to do justice is inherent and dispensation of justice should
not suffer. It is equally well settled that any order on concession has no binding
effect and there is no waiver or estoppel against statue.

3. Same word in different statues :

In interpreting a taxing statute, the doctrine of “aspect”
legislation must be kept in mind. It is a basic canon of interpretation that
each statute defines the expressions used in it and that definition should not
be used for interpreting any other statute unless in any other cognate statute
there is no definition, and the extrapolation would be justified as held by
Kerala High Court in All Kerala Chartered Accountants’ Association vs. Union of
India & Others (2002) 258-ITR-679 at 680. “A particular word occurring
in one section of the Act having a particular object, cannot carry the same
meaning when used in a different section of the same Act, which is enacted for
a different purpose. In other words, one word occurring in different sections
of the same Act can have different meanings, if the objects of the two sections
are different and they operate in different fields as held by the Supreme Court
in J.C.I.T. vs. Saheli Leasing and Industries Ltd. (2010) 324-ITR-170 at 171.

 “The words and expressions defined in one statute as judicially
interpreted do not afford a guide to the construction of the same words or
expressions in another statute unless both the statutes are pari materia
legislations or it is specifically provided in one statute to give the same
meaning to the words as defined in another satute as held in Jagatram Ahuja vs.
C.I.T. (2000) 246-ITR-609 at 610 (SC).

4. Rules to yield to the Act :

Rules are made by the prescribed authority, while Act is enacted by the
Legislature, hence rules are subservient to the Act and cannot override the
Act. If there is conflict the Act would prevail over the rules. Rules are
subordinate legislation. Subordinate legislation does not carry the same degree
of immunity as enjoyed by a statute passed by a competent Legislature.
Subordinate legislation may be questioned on any of the grounds on which
plenary legislation is questioned; in addition, it may also be questioned on
the ground that it does not conform to the statute under which it is made. It
may further be questioned in the ground that it is inconsistent with the
provisions of the Act, or that it is contrary to some other statute applicable
in the same subject-matter. It may be struck down as arbitrary or contrary to
the statute if it fails to take into account vital facts which expressly or by
necessary implication are required to be taken into account by the statute or
the Constitution. Subordinate legislation can also be questioned on the ground
that it is manifestly arbitrary and unjust. It can also be questioned on the
ground that it violates article 14 of the Constitution of India as held in J.
K. Industries Ltd. and Another vs. Union of India (2008) 297-ITR-176 at
178-179.

5. Literal Interpretation & Casus Omissus :

The principles of interpretation are well-settled :
(i) a statute has to be read as a whole and the effort should be to give full
effect to all the provisions;
(ii) interpretation should not render any provision redundant or nugatory;
(iii) the provisions should be read harmoniously so as to give effect to all
the provisions;
(iv) if some provision specifically deals with a subject-matter, the general
provision or a residual provision cannot be invoked for that subject as held in
C.I.T. vs. Roadmaster Industries of India (P) Ltd. (2009) 315-ITR-66 (P&H).
Except where there is a specific provision of the Income-tax Act which
derogates from any other statutory law or personal law, the provision will have
to be considered in the light of the relevant branches of law as held in C.I.T.
vs. Bagyalakshmi & Co. (1965) 55-ITR-660 (SC).

5.1. When the language of a statute is clear and unambiguous, the courts are to
interpret the same in its literal sense and not to give a meaning which would
cause violence to the provisions of the statute, as held in Britania Industries
Ltd. vs. C.I.T. (2005) 278-ITR-546 at 547 (SC). It is a well settled principle
of law that the court cannot read anything into a statutory provision or a
stipulated condition which is plain and unambiguous. A statute is an edict of
the Legislature. The language employed in a statute is the determinative factor
of legislative intention. While interpreting a provision the court only
interprets the law and cannot legislate it. If a provision of law is misused
and subjected to the abuse of process of law, it is for the Legislature to
amend, modify or repeal it, if deemed necessary. Legislative casus omissus
cannot be supplied by judicial interpretative process.

A casus omissus ought not to be created by interpretation, save in some case of
strong necessity” as held in Union of India vs. Dharmendra Textiles
Processors and Others (2008) 306-ITR-277 at page 278 (SC).

5.2. I f the construction of a statutory provision on its plain reading leads
to a clear meaning, such a construction has to be adopted without any external
aid as held in C.I.T. vs. Rajasthan Financial Corporation (2007) 295-ITR-195
(Raj F.B.). A taxing statute is to be construed strictly : in a taxing statute
one has to look merely at what is said in the relevant provision. There is no
presumption as to a tax. Nothing is to be read in, nothing is to be implied.
There is no room for any intendment. There is no equity about a tax. In
interpreting a taxing statute the court must look squarely at the words of the
statute and interpret them. Considerations of hardship, injustice and equity
are entirely out of place in interpreting a taxing statute as held in Ajmera
Housing Corporation and Another vs. C.I.T. (2010) 326-ITR-642 (SC).

5.3. In construing a contract, the terms and conditions thereof are to be read
as a whole. A contract must be construed keeping in view the intention of the
parties. No doubt, the applicability of the tax laws would depend upon the
nature of the contract, but the same should not be construed keeping in view
the taxing provisions as held in Ishikawajima – Harima Heavy Industries Ltd.
vs. Director of Income-tax (2007) 288-ITR-408 (SC). The provisions of a section
have to be interpreted on their plain language and not on the basis of
apprehension of the Department. 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 held in Catholic Syrian Bank Ltd. vs. C.I.T. (2012)
343-ITR-270 (SC). Where any deduction is admissible under two Sections and
there is no specific provision of denial of double deduction, deduction under
both the sections can be claimed and deserves to be allowed.

5.4. It is cardinal principle of interpretation that a construction resulting
in unreasonably harsh and absurd results must be avoided. The cardinal
principle of tax law that the law to be applied has to be the law in force in
the assessment year is qualified by an exception when it is provided expressly
or by necessary implication. That the law which is in force in the assessment
year would prevail is not an absolute principle and exception can be either
express or implied by necessary implication as held in C.I.T. vs. Sarkar
Builders (2015) 375-ITR-392 (SC)

5.5. The cardinal rule of construction of statutes is to read the statute
literally that is, by giving to the words used by legislature their ordinary
natural and grammatical meaning. If, however, such a reading leads to absurdity
and the words are susceptible of another meaning the Court may adopt the same.
But if no such alternative construction is possible, the Court must adopt the
ordinary rule of literal interpretation. It is well known rule of
interpretation of statutes that the text and the context of the entire Act must
be looked into while interpreting any of the expressions used in a statute The
Courts must look to the object, which the statute seeks to achieve while interpreting
any of the provisions of the Act. A purposive approach for interpreting the Act
is necessary.

5.6. It is a settled principle of rule of interpretation that the Court cannot
read any words which are not mentioned in the Section nor can substitute any
words in place of those mentioned in the section and at the same time cannot
ignore the words mentioned in the section. Equally well settled rule of
interpretation is that if the language of statute is plain, simple, clear and
unambiguous then the words of statute have to be interpreted by giving them
their natural meaning as observed in Smita Subhash Sawant vs. Jagdeshwari
Jagdish Amin AIR 2016 S.C. 1409 at 1416.

6. Interpretations – favourable to the tax payer to be adopted.

It is
well settled, if two interpretations are possible, then invariably the court
would adopt that interpretation which is in favour of the taxpayer and against
the Revenue as held in Pradip J. Mehta vs. C.I.T. (2008) 300-ITR-231 (SC).
While dealing with a taxing provision, the principle of ‘strict interpretation’
should be applied. The court shall not interpret the statutory provision in
such a manner which would create an additional fiscal burden on a person. It
would never be done by invoking the provisions of another Act, which are not
attracted. It is also trite that while two interpretations are possible, the
court ordinarily would interpret the provisions in favour of a taxpayer and
against the Revenue as held in Sneh Enterprises vs. Commissioner of Customs
(2006) 7-SCC-714.

7. Doctrine of Ejusdem generis :

Birds of the same feather fly to-gether. The rule of ejusdem generis is applied
where the words or language of which in a section is in continuation and where
the general words are followed by specific words that relates to a specific
class or category. The Supreme Court in the case of C.I.T. vs. Mcdowel and
Company Ltd. (2010 AIR SCW 2634) held : “The principle of statutory
interpretation is well known and well settled that when particular words
pertaining to a class, category or genus are followed by general words are
construed as limited to things of the same kind as those specified. This rule
is known as the rule of ejusdem generis. It applies when :

(1) the statute contains an enumeration of specific words;
(2) the subjects of enumeration constitute a class or category;
(3) that class or category is not exhausted by the enumeration;
(4) the general terms follow the enumeration; and
(5) there is no indication of a different legislative intent. The maxim ejusdem
generis is attracted where the words preceding the general words pertain to
class genus and not a heterogeneous collection of items as held in the case of
Housing Board, Haryana (AIR 1996 SC 434). Same view has been iterated in Union
of India vs. Alok Kumar AIR 2010 S.C. 2735.

7.1. General words in a statute must receive general construction. This is,
however, subject to the exception that if the subject-matter of the statute or
the context in which the words are used, so requires a restrictive meaning is
in permissible to the words to know the intention of the Legislature. When a
restrictive meaning is given to general words, the two rules often applied are
noscitur a sociis and ejusdem generis. Noscitur a sociis literally means that
the meaning of the word is to be judged by the company it keeps. When two or
more words which are susceptible of analogous meaning are coupled together,
they are understood to be used in their cognate sense. The expression ejusdem
generis – “of the same kind or nature” – signifies a principle of
construction whereby words in a statute which are otherwise wide but are
associated in the text with more limited words are, by implication given a
restricted operation and are limited to matters of the same class of genus as preceding
them.

8. “Mutatis Mutandis” & “As if” :

Earl Jowitt’s ‘The Dictionary of English Law 1959) defines ‘mutatis mutandis’
as ‘with the necessary changes in points of detail’. Black’s Law Dictionary
(Revised 4th Edn, 1968) defines ‘mutatis mutandis’ as ‘with the necessary
changes in points of detail, meaning that matters or things are generally the
same, but to be altered when necessary, as to names, offices, and the like…..
‘Extension of an earlier Act mutatis mutandis to a later Act, brings in the idea
of adaptation, but so far only as it is necessary for the purpose, making a
change without altering the essential nature of the things changed, subject of
course to express provisions made in the later Act. It is necessary to read and
to construe the two Acts together as if the two Acts are one and while doing so
to give effect to the provisions of the Act which is a later one in preference
to the provisions of the Principal Act wherever the Act has manifested an
intention to modify the Principal Act.

8.1. “The expression “mutatis mutandis” itself implies
applicability of any provision with necessary changes in points of detail. The
phrase “mutatis mutandis” implies that a provision contained in other
part of the statute or other statutes would have application as it is with
certain changes in points of detail as held in R.S.I.D.I. Corpn. vs. Diamond
and Gen Development Corporation Ltd. AIR 2013 SC 1241.

8.2. The expression “as if”, is used to make one applicable in
respect of the other. The words “as if” create a legal fiction. By
it, when a person is “deemed to be” something, the only meaning
possible is that, while in reality he is not that something, but for the
purposes of the Act of legislature he is required to be treated that something,
and not otherwise. It is a well settled rule of interpretation that, in
construing the scope of a legal fiction, it would be proper and even necessary,
to assume all those facts on the basis of which alone, such fiction can
operate. The words “as if”, in fact show the distinction between two
things and, such words must be used only for a limited purpose. They further
show that a legal fiction must be limited to the purpose for which it was
created. “The statute says that you must imagine a certain state of affairs;
it does not say that having done so, you must cause or permit your imagination
to boggle when it comes to the inevitable corollaries of that state of
affairs”. “It is now axiomatic that when a legal fiction is
incorporated in a statute, the court has to ascertain for what purpose the
fiction is created. After ascertaining the purpose, full effect must be given
to the statutory fiction and it should be carried to its logical conclusion.
The court has to assume all the facts and consequences which are incidental or
inevitable corollaries to giving effect to the fiction. The legal effect of the
words ‘as if he were’ in the definition of owner in section 3(n) of the
Nationalisation Act read with section 2(1) of the Mines Act is that although
the petitioners were not the owners, they being the contractors for the working
of the mine in question, were to be treated as such though, in fact, they were
not so”, as held in Rajasthan State Industrial Development and Investment
Corporation vs. Diamond and Gem Development Corporation Ltd. AIR-2013-1241 at
1251.

9. Approbate and Reprobate :

A party cannot be permitted to “blow hot-blow cold”, “fast and
loose” or “approbate and reprobate”. Where one knowingly accepts
the benefits of a contract, or conveyance, or of an order, he is estopped from
denying the validity of, or the binding effect of such contract, or conveyance,
or order upon himself. This rule is applied to ensure equity, however, it must
not be applied in such a manner, so as to violate the principles of, what is
right and, of good conscience. It is evident that the doctrine of election is
based on the rule of estoppel the principle that one cannot approbate and
reprobate is inherent in it. The doctrine of estoppel by election is one among
the species of estoppels in pais (or equitable estoppel), which is a rule of
equity. By this law, a person may be precluded, by way of his actions, or
conduct, or silence when it is his duty to speak, from asserting a right which
he would have otherwise had.

10. Legal Fiction – Deeming Provision :

Legislature is competent to create a legal fiction, for the purpose of assuming
existence of a fact which does not really exist. In interpreting the provision
creating a legal fiction, the Court is to ascertain for what purpose the
fiction is created and after ascertaining this, the Court is to assume all
those facts and consequences which are incidental or inevitable corollaries to
the giving effect to the fiction. This Court in Delhi Cloth and General Mills
Company Limited vs. State of Rajasthan : (AIR 1996 SC 2930) held that what can
be deemed to exist under a legal fiction are facts and not legal consequences
which do not flow from the law as it stands. When a statute enacts that
something shall be deemed to have been done, which in fact and in truth was not
done, the Court is entitled and bound to ascertain for what purposes and
between what persons the statutory fiction is to be resorted to.

10.1. It would be quite wrong to carry this fiction beyond its originally
intended purpose so as to deem a person in fact lawfully here not to be here at
all. The intention of a deeming provision, in laying down a hypothesis shall be
carried so far as necessary to achieve the legislative purpose but no further.
“When a Statute enacts that something shall be deemed to have been done,
which, in fact and truth was not done, the Court is entitled and bound to
ascertain for what purposes and between what persons the statutory fiction is
to be resorted to”. “If you are bidden to treat an imaginary state of
affairs as real, you must surely, unless prohibited from doing so, also imagine
as real the consequences and incidents, which, if the putative state of affairs
had in fact existed, must inevitably have flowed from or accompanied it…. The Statute
says that you must imagine a certain state of affairs; it does not say that
having done so, you must cause or permit your imagination to boggle when it
comes to the inevitable corollaries of that state of affairs”. In The
Bengal immunity Co.Ltd. vs. State of Bihar and Others AIR 1955 SC 661, the
majority in the Constitution Bench have opined that legal fictions are created
only for some definite purpose.

10.2. In State of Tamil Nadu vs. Arooran Sugars Ltd. AIR 1997 SC 1815 : the
Constitution Bench, while dealing with the deeming provision in a statute,
ruled that the role of a provision in a statute creating legal fiction is well
settled, and eventually, it was held that when a statute creates a legal
fiction saying that something shall be deemed to have been done which in fact
and truth has not been done, the Court has to examine and ascertain as to for
what purpose and between which persons such a statutory fiction is to be
resorted to and thereafter, the courts have to give full effect to such a statutory
fiction and it has to be carried to its logical conclusion. The principle that
can be culled out is that it is the bounden duty of the court to ascertain for
what purpose the legal fiction has been created. It is also the duty of the
court to imagine the fiction with all real consequences and instances unless
prohibited from doing so. That apart, the use of the term ‘deemed’ has to be
read in its context and further the fullest logical purpose and import are to
be understood. It is because in modern legislation, the term ‘deemed’ has been
used for manifold purposes. The object of the legislature has to be kept in
mind.

Need to show urgency and build consensus

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The GST Bill, India’s biggest indirect tax reform since independence is awaiting a nod, from the Rajya Sabha. The Bill which seeks to replace a slew of Central and State levies, will really transform a country of 1.3 billion people into an Indian union at least as far as trade and commerce is concerned.

This government came to power on the promise of substantial economic reforms. It has completed two years in office and while there is intent not much has been achieved in terms of “ease of doing business” on the ground. The Finance Act, 2016, which received the assent of the President on 14th May, is a mixed bag.There are quite a few amendments in the said Act which will increase problems for the taxpayer as well as litigation, both of which the Prime Minister had vowed, to reduce if not eliminate. In regard to its promise to curb the menace of black money, the record of this government is not very encouraging. Its effort at bringing black money stashed abroad into India by way of the Black Money Act did not succeed, and the Income Declaration Scheme, contained in the Finance Act, 2016 might meet the same fate.

The disappointment of trade and industry caused by the failure to meet expectations in regard to direct taxes can totally be obliterated by the Rajya Sabha passing the GST Bill. The Lok Sabha passed this Bill in May 2015, and it is absolutely imperative that the upper house of the Parliament gives its assent to this Bill as well as the Constitution Amendment Bill. For GST to become a reality, it needs to be ratified by half of the 29 states, which in itself will be a huge task.

 It is widely accepted that GST will reduce costs of production, logistics costs, and transaction costs and thereby make Indian goods far more competitive. On account of the complex structure of indirect taxes where the power to legislate is with the states, it results in huge bottlenecks affecting movement of goods. This can change to a great extent with GST.

Initially, the States opposed the Bill on account of possible loss of revenue. The government has already agreed to compensate the states and this issue would no longer be a hindrance. Many of the issues raised were only with an object to stall the passage of the bill. Primarily, there were three issues raised by the major opposition Party in the Rajya Sabha. These were abolition of the 1% tax on the interstate movement of goods, the constitution of the dispute resolution body, and setting a cap in the Constitution on the tax rate.

These appear now to have been largely met. The standard rate of 18% which would apply to a majority of goods and the concessional rate of 12% would meet the principal objections of the Congress. An absolute cap on rate of GST is not very easy to accept. Except for profession tax, the Constitution does not fix a limit on any other tax, including the large number of taxes that the GST will replace. Other objections, if any, are not insurmountable.

With everyone in agreement with the fact that the GST Bill will benefit the consumer, it is time that political parties rose above political posturing, attempts to score brownie points over each other and put national interest to the forefront. It is obvious that a bill with the magnitude of implications that the GST Bill has, is bound to face some teething problems. The wrinkles can certainly be ironed out as the GST Act gets implemented.

On its part, the government must make a very sincere attempt to bring all political parties on board. It must strive to build consensus. The recent assembly results would probably serve as a shot in the arm for the ruling Party.

The regional parties, while they would always strive to protect their regional interest, will also probably realise that it is advisable for them to do business with the ruling combine. It is likely that with deft political management,the regional parties will support the passing of the Bill. Even if their support comes with a political price the government must endeavour to pass the GST Bill in the Rajya Sabha. According to experts, a simplified single tax regime will improve compliance and can certainly improve revenue collections over a period of time. This Bill is the litmus tests for the Modi government. Its passage will make the Indian citizen believe that the government means business and will also send a signal to investors all over the globe that this government has the will to convert intent into reality. “Acche din” may then truly be here.

Awareness

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In every person, there is an inherently present ‘awareness’. In fact an
element of ‘awareness’ is there in everything in this universe. However,
in every one, the degree of ‘awareness’ differs widely. Awareness at
its very basic level is crude and gross. As we go higher on the
evolution graph, the level of awareness increases. A tree is more aware
than a stone and an animal is more aware than a tree. In the human
being, who is at the top of the evolution graph, this awareness is the
highest. However, between one human being and another human being, there
is always a difference in the degree of awareness. In every individual
also, his or her level of awareness is different at different age and
time. As the level of awareness increases, an individual becomes
sensitive towards finer aspects of life. At the lower level, the
awareness is mostly physical like that of hunger, thirst, sex impulse
etc. As awareness increases, and becomes more subtle an individual
becomes :

  • more sensitive and perceptive
  • leans more towards finer aspects of life like music, art and natural beauty, etc.
  • Compassionate and practices empathy and
  • Perceives and experiences sublime emotions of love, surrender and oneness.

When
an individual reaches a higher level of awareness which is possible
only for a human being, he or she actually touches the shores of
Divinity. The greatness of men like Swami Vivekananda, Mahatma Gandhi
and Albert Einstein was due to their higher level of awareness compared
to that of a normal human being.

This Divine Awareness is the
power that protects us, shows us the way, and lights our path. It is our
best friend, philosopher guide and well wisher. Being ‘aware’ of this
‘awareness’ is the key to a happy life.

One experiences this
awareness only when the mind that is pure, calm and stable. Only in such
a state of mind, one can intensely feel the presence of that Supreme
Power we call `Divinity’. The degree or the intensity of the experience
of this Divine Awareness varies according to the state of one’s mind
which changes all the time. However, having felt it’s presence, one
should then try not to ever lose or let it dim. Whenever, one feels that
this Awareness is dimming, one needs to contemplate and seek reason for
the change and take conscious steps to restore the experienced
awareness. We need to give the experience of Divine Awareness, the
utmost importance and create a conducive environment for Awareness to
continuously improve its intensity. The means of doing this may differ
from person to person. Some may find swadhyaya, satsang etc. helpful,
for others music or meditation may be useful. Whatever the means be, our
purpose should be to increase our level of awareness in our life.

For
professionals like us, this awareness is of utmost importance. It
prevents us from making mistakes, it shows us the way to avoid pitfalls
and achieve success and happiness in every walk of life.

Awareness gives meaning to our life and yields liberation. Salutations to ‘Awareness’ residing in every being.

THE FINANCE ACT, 2016

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1. Back ground:

The Finance Minister, Shri Arun Jaitley, presented his third Budget with the Finance Bill, 2016, in the Lok Sabha on 29th February, 2016. After some discussions, the Parliament has passed the Budget with some amendments. The President has given his assent to the Finance Act, 2016, on 14th May, 2016. There are in all 241 Sections in the Finance Act, 2016, which include 115 sections which deal with amendments in the Income tax Act, 1961. The Finance Minister has divided his tax proposals in nine categories such as (i) Relief to small tax payers (ii) Measures to boost growth and employment generation (iii) Incentivising domestic value addition to help Make in India (iv) Measures for moving towards a pensioned society (v) Measures for promoting affordable housing (vi) Additional resource mobilization for agriculture, rural economy and clean environment (vii) Reducing litigation and providing certainty in taxation (viii) Simplification and rationalization of taxation and (ix) Use of Technology for creating accountability.

1.1 It will be noticed that one of the objectives stated above is “Reducing Litigation and providing certainty in taxation.” In this context, Paragraphs 163 to 165 of the Budget Speech outline his “Dispute Resolution Scheme”.

1.2 One of the important features of this year’s Budget is that a “Income Declaration Scheme, 2016,” has been announced in Sections 181 to 199 of the Finance Act, 2016. .

1.3 In Para 187 of the Budget Speech he has stated that the Direct Tax Proposals will result in revenue loss of Rs.1,060 Cr., and Indirect Tax Proposals will yield additional revenue of Rs.20,670 Cr. Thus the net revenue gain from this year’s proposals will be of Rs.19,610 Cr.

1.4 In this article some of the important amendments made in the Income tax Act by the Finance Act, 2016, have been discussed. These amendments have only prospective effect.

2. Rates of taxes:

2.1 There are no changes in the tax slabs, rates of Income tax or rates of education cess for all categories of assesses, other than companies. As per the announcement made earlier, in this Budget a beginning to reduce the corporate rates in a phased manner has been made. In the case of an Individual, HUF, AOP and BOI whose total income is more than Rs. 1 crore, the surcharge has been increased from 12% to 15%. This has been done to tax the super rich Individuals, HUF etc. There is no change in rate of surcharge in other cases.

In the case of a Resident Individual having total income not exceeding Rs. 5 Lakh Rebate Upto Rs. 2,000/- or tax payable whichever is less is allowable upto A.Y. 2016- 17. This Rebate in now increased upto Rs. 5,000/- or tax payable, whichever is less, for A.Y. 2017-18.

2.2 The surcharge on income tax will be as under in A.Y. 2016-17 and 2017-18:

Note: The rate of surcharge on Dividend Distribution Tax u/s 115- 0, Tax payable on Buy back of Shares u/s 115-QA and Income Distribution tax payable by M.F u/s 115R is 12% as in earlier years.

The existing rate of 3% of Education Cess (including Secondary and Higher Secondary Education Cess) on Income tax and Surcharge will continue in A.Y. 2017-18.

2.3 In view of the above, the effective maximum marginal rate of tax
(including Surcharge and Education Cess) will be as under in A.Y. 2017 – 18:




2.4 I n the case of a Domestic Company, which is newly set up on or after 1.3.2016, engaged in the business of Manufacture or Production and Research in relation to, or distribution of articles manufactured or produced by it, the rate of Income tax for A.Y. 2017-18 will be 25% plus applicable surcharge and education cess. This will be subject to following conditions stated in new section 115 BA

(i) Such company shall not be entitled to claim deduction u/s 10AA, 32(1)(iia), 32 AC, 32AD, 33AB, 33ABA, 35(1)(ii), (iia), (iii), (2AA), 2(AB), 35AC, 35AD, 35CCC, 35CCD as well as under Chapter VIA Part C i.e. sections 80H, to 80RRB (excluding section 80 JJAA).

(ii) Such company will not be entitled to claim set off of loss carried forward from earlier years if the same is attributed to the above deductions. Such carried forward loss shall be deemed to have been allowed and will not be allowed in any subsequent year.

(iii) Depreciation u/s 32 {other than u/s 32(1)(iia)} shall be deducted in the manner as may be prescribed.

(iv) The above concessional rate u/s 115 BA will be available at the option of the assessee company. Such option is to be exercised before the due date for filing Return of Income for the first year after incorporation of the company. Further, such option once exercised, cannot be withdrawn by the company in any subsequent year.

2.5 A new section 115 BBDA has been inserted w.e.f. A.Y. 2017-18 (F.Y 2016-17). This section provides that in the case of any resident individual, HUF or a Firm (including LLP) if the total income for A.Y. 2017-18 and onwards includes Dividend from domestic company or companies, in excess of Rs. 10 Lakh, the dividend upto Rs 10 Lakh will be exempt u/s 10(34) but the excess over Rs 10 Lakh will be chargeable to tax at the rate of 10% plus applicable surcharge and education cess. It is also provided that no deduction in respect of any expenditure or allowance or set off of loss shall be allowed under any provision of the Income tax Act against such dividend.

2.6 Section 115JB is amended from A.Y:2017-18 to provide that in the case of a Company located in International Financial Services Centre and deriving its income solely in convertible Foreign Exchange, the MAT u/s 115JB shall be chargeable at the rate of 9% instead of 18.5%.

3. Tax deduction at source:

3.1 The Income tax Simplification Committee, under the Chairmanship of Justice R.V. Easwar, has suggested in its Interim Report that the provisions relating to tax deduction at source (TDS) should be simplified.

The committee has suggested higher threshold limits and lower rates for TDS in respect of payment u/s 193 to 194 LD. The Finance Minister has accepted this recommendation only partially and amended various sections of the Income tax Act for TDS w.e.f. 1.6.2016 as under:

(i) Revision in Threshold Limit for tds unde r variou s sections.

(ii) Revision in Rates of tds under various Sections

(iii) Provision for TDS under Section 194 K (Income in respect of Units) and section 194L (Payment of compensation on acquisition of capital Asset) deleted w.e.f. 1.6.2016.

3.2 The provisions for issue of certificates for lower or non-deduction of tax at source by an assessing officer u/s 197 have been extended with effect from 1st June, 2016, to cover income payable to a unit holder in respect of units of alternate investment funds (AIFs Category I or II), which is subject to TDS u/s 194LBB, and income payable to a resident investor in respect of investment in a securitization trust, which is subject to TDS u/s 194LBC.

3.3 The provision for non- deduction of TDS on issue of a declaration u/s 197A, has been extended to cover payments of rent, on which tax is deductible u/s 194-I, with effect from 1st June, 2016.

3.4 Section 206AA provides for higher rate of TDS at either the prescribed rate or at the rate of 20%, whichever is higher, if the payee does not furnish his Permanent Account Number to the payer. There has been litigation as to whether this provision applies to foreign companies and non-residents. With effect from 1st June, 2016, the provisions of this section will not apply to a foreign company or to a non-resident in respect of payment of interest on long-term bonds referred to in Section 194 LC or any other payment subject to prescribed conditions. The Finance Minister has announced that any payment to Non-Resident will not attract the higher rate of TDS (i.e 20%) u/s 206AA if any alternate document, as may be prescribed, is furnished.

3.5 TAX COLLECTION AT SOURCE (TCS ): Section 206C has been amended w.e.f. 1.6.2016 to provide as under:

(i) u/s 206C (1D), at present, tax is to be collected by seller of bullion or jewellery at 1% if the payment is made by the purchaser of bullion (exceeding Rs 2 Lakh) or Jewellery (exceeding Rs. 5 Lakh).

(ii) The above requirement of TCS is now enlarged from 1.6.2016 to the effect that the seller will have to collect tax @ 1% if purchase of any other goods or services for amount exceeding Rs 2,00,000/- is made and the purchaser / service receiver makes payment for the same in cash. It may be noted that this provision will not apply to payments by such class of buyers who comply with the conditions as may be prescribed. It is also provided that the above requirement of TCS will not apply where tax is required to be deducted at source by the payer under chapter XVII-B of the Income tax Act.

(iii) New clause (IF) added in this section provides that w.e.f. 1.6.2016 seller of a Motor Vehicle of the value exceeding 10 Lacs will have to collect from the buyer tax @ 1% of the sale consideration. This provision for TCS will apply even if payment for purchase of Motor vehicle is made by cheque.

(iv) The above provisions have been made to enable the Government to bring high value transactions in the tax net.

4. Exemptions and Deductions:

In order to give benefit to assessees certain amendments are made in the Income tax Act as under:

4.1 Section 10 – Income not included in total income: This section is amended from A.Y. 2017-18 (F.Y. 2016-17) as under:

(i) SECTION 10(12A) – This is a new provision. At present deduction is available for contribution made to National Pension Scheme (NPS) u/s 80 CCD. Withdrawal of such contribution along with the accumulated income from the NPS on account of closure or opting out of NPS is taxable in the year of withdrawal if deduction was claimed in the earlier years.

It is now provided that out of any such withdrawal from NPS, 40% of the amount will be exempt u/s 10(12A). However, the whole amount received by the nominee on death of the assessee under the circumstances referred to in section 80CCD (3) (a) shall be exempt from tax. Section 80CCD (3) is also amended for this purpose.

(ii) SECTION 10(13) – At present, any payment from an approved superannuation fund to an employee on his retirement is exempt from tax. The scope of this exemption is now extended by new subclause (v) to transfer of an amount to the account of the assessee under NPS as referred to in section 80CCD and notified by the Government.

(iii) SECTION 10(15) – At present, interest on Gold Deposit Bonds issued under Gold Deposit Scheme 1999 is exempt. It is now provides that interest on Deposit Certificates issued under the Gold Monetization Scheme, 2015, will also be exempt from tax.

A consequential amendment is made in section 2(14) that such Deposit Certificates issued under the above scheme will not be considered as a Capital Asset. Therefore, any gain on transfer of such Deposit Certificates will also be exempt from Capital Gains tax.

(iv) SECTION 10(23FC) – At present interest received by a Business Trust from a Special Purpose Vehicle is exempt from tax. It is now provided that Dividend received by such Trust from a Specified Domestic Company as referred to in the newly inserted clause (7) of section 115-0 will also be exempt from tax.

(v) SECTION 10(38) – This section grants exemption from tax in respect of long – term capital gain from transfer of equity share where STT is paid. It is now provided that in respect of long term capital gain arising from transfer of equity shares through a recognized Stock Exchange Located in International Financial Service Centre (IFSC), where consideration is received in Foreign Currency, the condition for payment of STT will not apply.

(vi) SECTION 10(48A) – This is a new provision. It is now provided that income of a Foreign Company on account of storage of Crude Oil in India and sale of such Crude Oil to any person resident in India will not be taxable. This is subject to terms and conditions of the agreement entered into with the Central Government.

(vii) SECTION 10(50) – This is a new provision. It provides that income arising from specified services as stated in chapter VIII (Sections 160 to 177) of the Finance Act, 2016, shall be exempt from tax. Chapter VIII deals with “Equalization Levy”. This provision will be applicable after the above Chapter VIII of the Finance Act, 2016 comes into force.

4.2 SECTION 10AA – DEDUCTION TO SEZ UNITS : This section grants 100% deduction to income of newly established units in SEZ (i.e eligible business) which begin activity of manufacture, production or rendering services on or after 1.4.2006. This is subject to conditions provided in section 10AA. Now a sun-set clause is added in this section whereby such Units which commence such eligible business on or after 1.4.2021 will not be able to claim deduction under section 10AA.

4.3 SECTION 17 – PERQUISITES: At present, u/s 17(2)(vii) contribution to approved Superannuation Fund by the employee upto Rs. 1 Lakh is exempt from tax. This limit is now increased to Rs.1.5 Lakh from A.Y. 2017 – 18.

4.4 SECTION 80EE – DEDUCTION FOR INTEREST ON LOAN FOR RESIDENTIAL HOUSE: The existing section 80EE granted deduction for interest on housing loan to a limited extent. This section is replaced w.e.f. A.Y. 2017-18 to provide for deduction upto Rs. 50,000/- in respect of interest on Housing Loan taken by an individual from the Financial Institution or Housing Finance Company if the following conditions are complied with.

(i) Loan should be sanctioned during 1.4.2016 to 31.3.2017.

(ii) Loan amount should not exceed Rs.35 Lakh and the value of the Residential House should not exceed Rs 50 Lakh.

(iii) The assessee should not own any other Residential House on the date of sanction of the Loan.

(iv) The above deduction can be claimed in A.Y. 2017- 18 and in subsequent years.

It may be noted that the above deduction can be claimed even if the Residential House is not for self occupation and is let out. Further, the above deduction can be claimed in addition to deduction of interest upto Rs. 30,000/- (Rs 2 Lakh in specified cases) allowable for interest on housing loan for self-occupied residential house property.

4.5 SECTION 80GG – DEDUCTION FOR RENT : At present, an assessee can claim deduction for expenditure incurred on Rent for Residential House occupied by himself if he is not in receipt of House Rent Allowance from his employer subject to certain conditions. This deduction is limited to Rs 2,000/- P.M. or 25% of total income or actual rent paid in excess of 10% of total income whichever is less. The above limit of Rs 2,000/- P.M. is now increased to Rs 5,000/- P.M. effective from A.Y. 2017-18.

4.6 SECTION 80-IA – DEDUCTION TO INFRASTRUCTURE UNDERTAKINGS: Section 80 – 1A(4) grants exemption to infrastructure undertakings subject to certain conditions. It is now provided that this exemption will not be available to an undertaking which starts the development or operation and maintenance of the infrastructure facility on or after 1.4.2017.

4.7 SECTION 80 – IA B – DEDUCTION TO INDUSTRIAL UNDERTAKING: By amendment of this section it is provided that the provisions of Section 80-IAB shall not apply to an assessee, being a Developer, where the development of SEZ begins on or after 1.4.2017.

4.8 SECTION 80 – IAC – THE INCENTIVES FOR START UPS:

(i) With a view to providing an impetus to start-ups and facilitate their growth in the initial phase of their business, this new section is inserted w.e.f. A.Y. 2017-18. It provides for 100% deduction of the profits and gains derived by an Eligible Start-UP (Company or LLP) from a business involving Innovation, Development, Deployment or Commercialization of new products, processes or services driven by technology or intellectual property. This deduction is available at the option of the assessee for any three consecutive assessment years out of five years starting from the date of incorporation.

(ii) Eligible start-up means a company or LLP incorporated between 1.4.2016 to 31.3.2019. The turnover of the business should be less than Rs 25 Crores in any of the years between 1.4.2016 to 31.3.2021. Further, such company / LLP should hold a certificate for eligible business from the Inter Ministerial Board of Certification.

(iii) It is necessary to ensure that such start-up is not formed by splitting up or reconstruction of a business already in existence or by transfer of machinery or plant previously used for any other purpose, subject to certain exceptions provided in the section.

(iv) With a view to encourage an Individual or HUF to invest in such a start-up company or LLP, section 50 GB has been amended to grant exemption from Capital Gain Tax if the capital gain on sale of Residential House is invested in such a company or LLP. Similarly, a new section 54 EE has been inserted to grant deduction upto Rs. 50 Lacs if investment is made in such a company or LLP out of capital gain arising on transfer of long term specified asset.

4.9 SECTION 80 – IB – DEDUCTION TO CERTAIN INDUSTRIAL UNDERTAKINGS:
The deduction granted to certain specified Industrial Undertakings stated in Section 80 – 1B(9)(ii),(iv) and (v) will be discontinued in respect of Industrial undertakings started on or after 1.4.2017.

4.10 SECTION 80 – IBA – DEDUCTION TO CERTAIN HOUSING PROJECTS

This is a new section which provides for 100% deduction in respect of profits and gains of eligible Housing Projects of Affordable Residential Units from A.Y. 2017-18. The section applies to assessees engaged in developing and building Housing Projects approved by the competent Authority after 1.6. 2016 but before 1.4.2019. This deduction is subject to following conditions:

(i) The project is completed within a period of three years from the date on which the building plan of such project is first approved and it shall be deemed to have been completed only when certificate of completion of project is obtained from the Competent Authority.

(ii) The built-up area of the shops and commercial establishments does not exceed 3% of the aggregate built up area.

(iii) If the project is located in Delhi, Mumbai, Chennai or Kolkata or within 25 km from the municipal limits of these cities:

(a) It is on a plot of land measuring not less than 1000 sq. meters

(b) The residential unit does not exceed 30 square meters and

(c) The project utilizes not less than 90% of the floor area ratio permissible in respect of the plot of land.

(iv) If the project is located in any other area:

(a) It is on a plot of land measuring not less than 2,000 sq. meters

(b) The residential unit does not exceed 60 square meters and

(c) The project utilizes not less than 80% of the floor area ratio permissible in respect of the plot of land.

(v) In both above cases the project is the only project on the land specified above.

(vi) The assessee maintains separate books of account.

(vii) If the housing project is not completed within the specified period of three years, deduction availed in the earlier years will be taxed in the year in which the period of completion expires. The definitions, of certain terms such as ‘housing project’, ’ built-up area’ etc. are also given in section 80-IBA(6)

(viii) The benefit under this section is not available to a person who executes the Housing Project as a works contract awarded by any other person (including any state or Central Government)

4.11 SECTION 80JJAA – INCENTIVE FOR EMPLOYMENT GENERATION:

At present, an assessee engaged in manufacture of goods in a factory can claim deduction of 30% of additional wages paid to new regular workmen for 3 assessment years. This deduction can be claimed in respect of additional wages paid to a workman employed for 300 days or more in the relevant year. Further, there should be an increase of at least 10% in the existing workforce employed on the last date of the preceding year. The existing section will apply in A.Y. 2016-17 and earlier years. New Section 80JJAA has been inserted w.e.f. AY 2017-18.

This new section applies to all assesses who are required to get their accounts audited u/s 44AB. The deduction allowable is 30% of additional employee cost for a period of 3 assessment years from the year in which such additional employment is provided. This deduction is subject to the following conditions:

(i) The business should not be formed by splitting up, or the reconstruction of an existing business.

(ii) The business should not be acquired by the assessee by way of transfer from any other business or as a result of any business reorganization.

(iii) Additional employee cost means total emoluments paid to additional employees employed during the year. However, in the first year of a new business, emoluments paid or payable to employees employed during the previous year shall be deemed to be the additional employee cost. Accordingly, deduction will be allowed on that basis in such a case.

(iv) No deduction will be available in case of existing business, if there is no increase in number of employees during the year as compared to number of employees employed on the last day of the preceding year or the emoluments are paid otherwise than by an account payee cheque or account payee bank draft or by use of electronic clearing system.

(v) Additional employee would not include employee whose total emoluments are more than Rs. 25,000 per month or an employee whose entire contribution under Employees’ Pension Scheme notified in accordance with Employees’ Provident Fund and Miscellaneous Provisions Act, 1952, is paid by the Government or if an employee has been employed for less than 240 days in a year or the employee does not participate in recognized provident fund.

(vi) Emoluments means all payments made to the regular employees. This does not include contribution to P.F., Pension Fund or other statutory funds. Similarly, it does not include lump-sum payable to employee on termination of service, Superannuation, Voluntary Retirement etc.

(vii) The assessee will have to furnish Audit Report from a Chartered Accountant in the prescribed form.

4.12 FOURTH SCHEDULE – PART A: Rule 8 of this Schedule is amended from A.Y:2017-18 to grant exemption to the employee if the entire balance standing to the credit of the employee in a recognized Provident Fund is transferred to his account in the National Pension Scheme referred to in Section 80CCD.

5. CHARITABLE TRUSTS:

5.1 A new chapter XII – EB (Sections 115 TD, 115 TE and 115TF) has been inserted in the Income tax Act effective from 1.6.2016. The provisions of these sections are very harsh and are likely to create great hardship to trustees of charitable trusts. In the Explanatory Memorandum to Finance Bill, 2016, it is explained that “there is no provision in the Income tax Act which ensure that the corpus and asset base of a trust accreted over a period of time, with promise of it being used for charitable purpose, continues to be utilized for charitable purposes. In the absence of a clear provision, it is always possible for charitable trusts to transfer assets to a non-charitable trust. In order to ensure that the intended purpose of exemption availed by the trust or institution is achieved, a specific provision in the Act is required for imposing a levy in the nature of an Exist Tax which is attracted when the charitable organization is converted into a non-charitable organization”. It appears that the stringent provisions in section 115TD to 115 TF have been inserted to achieve this objective. This is another blow to charitable trusts. Since these sections apply to all trusts and institutions registered u/s 12A/12AA which claim exemption u/s 10(23C) or 11, they will apply to all charitable or religious trusts claiming exemption u/s 11 and education institutions, hospitals etc., claiming exemption u/s 10(23C).

5.2 Broadly stated these sections provide as under:

(i) A trust or an institution shall be deemed to have been converted into any form not eligible for registration u/s 12AA in a previous year, if,

(a) The registration granted to it u/s 12AA has been cancelled; or

(b) It has adopted or undertaken modification of its objects which do not conform to the conditions of registration and it has not applied for fresh registration u/s 12AA in the said previous year; or has filed application for fresh registration u/s 12AA but the said application has been rejected.

(ii) Under the Section 115TD, it has been provided that the accretion in income (accreted income) of the trust or institution will be taxable on

(a) Conversion of trust or institution into a form not eligible for registration u/s 12 AA, or

(b) On merger into an entity not having similar objects and registered u/s 12AA, or

(c) On non-distribution of assets on dissolution to any charitable institution registered u/s 12AA or approved u/s 10(23C) within a period of twelve months from end of month of dissolution. The accreted income will be the amount of aggregate of total assets as reduced by the liability as on the specified date.

(iii) The assets and the liability of the charitable organization which has been transferred to another charitable organization within specified time would be excluded while calculating the accreted income. Similarly, any asset which is directly acquired out of Agricultural Income of the Trust or institution will be excluded while computing accreted income. It is not clear whether Agricultural Land Settled in Trust or received by the Trust by way of Donation will be excluded from such computation.

(iv) Any asset acquired by the Trust or Institution during the period before registration is granted u/s 12A / 12AA and no benefit u/s 11 has been enjoyed during this period, will be excluded from the above computation of accreted income.

(v) The method of valuation of such assets / liability will be prescribed by Rules.

(vi) The accreted income will be taxable at the maximum marginal rate (i.e. 30% plus applicable surcharge and education cess) in addition to any income chargeable to tax in the hands of the entity. This tax will be the final tax for which no credit can be taken by the trust or institution or any other person, and like any other additional tax, it will be leviable even if the trust or institution does not have any other income chargeable to tax in the relevant previous year.

(vii) The principal officer or trustee of the trust has to deposit the above tax within 14 days of the due date as under:

(a) Date on which the time limit to file appeal to the Tribunal u/s 253 against order cancelling Registration u/s 12AA expires if no appeal is filed.

(b) If such appeal is filed but the Tribunal confirms such cancellation, the date on which Tribunal order is received.

(c) Date of merger of the trust with an entity which is not registered u/s 12A / 12 AA

(d) When the period of 12 months end from the date of dissolution of trust if the assets are not transferred to an entity registered u/s 12A / 12AA.

(viii) Section 115 TE provides that if there is delay in payment of the above Exist Tax, the person responsible for payment of such tax will have to pay interest at the rate of 1% P.M. or part of the month.

5.3 Section 115TF provides that the principal officer or any trustee of the trust will considered as assessee in default if the above tax and interest is not paid before the due date. In other words, they can be made personally responsible for payment of such tax and interest. It is also provided that the non-charitable entity with which the trust has merged or to whom the assets of the trust are transferred will also be liable to pay the above exist tax and interest. However, the liability of such an entity will be limited to the value of the assets of the trust transferred to such entity.

6. INCOME FROM HOUSE PROPERTY:

6.1 Under Section 24 (b) interest paid on loan taken on or after 1-4-1999 for acquiring or constructing a residential house for self occupation is allowed as deduction subject to the limit of Rs.2 Lakh. This deduction is available provided the acquisition or construction is completed within 3 years from the end of the financial year in which loan was taken. By amendment of this section this period is now extended to 5 years from A.Y. 2017-18.

6.2 Existing Sections 25A, 25AA and 25B dealing with taxation of unrealised rent are now consolidated into a new section 25A from A.Y. 2017-18. The new section provides that arrears of rent or amount of unrealised rent which is received by the assessee in subsequent years shall be chargeable to tax as income of the financial year in which such rent is received. This amount will be taxable in the year of receipt whether the assessee is owner of the property or not. The assessee will be entitled to claim deduction of 30% of such arrears of rent which is taxable on receipt basis.

7. INCOME FROM BUSINESS OR PROFESSION:

7.1 INCOME-SECTION 2(24)(XVIII ): The definition of “income” u/s 2(24) was widened by insertion of clause (xviii) last year. Under this definition any receipt from the Government or any authority, body or agency in the form of subsidy, grant etc., is considered as income. However, if any subsidy, grant etc., is required to be deducted from the cost of any asset under Explanation (10) of section 43(1) is not considered as income. Amendment in the section, effective from A.Y.2017-18, now provides that any subsidy or grant by the Central Government for the purpose of the corpus of a trust or institution established by the Central Government or the State Government will not be considered as income. It may be noted that u/s 2(24) (xviii) no destinction is made between Government Grants of a capital nature and revenue grants. From the wording of the section it is not clear as to whether subsidy or grant received to set up any business or to complete a project will be exempt as held by the Supreme Court in the case of Sahney Steel and Press Works Ltd vs. CIT (228 ITR 253). Further, from the amendment made this year, it is not clear whether subsidy or grant by a State Government for the purpose of corpus of a trust or Institution established by the Government will be exempt.

7.2 NON-COMPETE FEES RECEIVABLE BY A PROFESSIONAL – SECTION 28(VA): At present a Noncompete Fees receivable in cash or kind is chargeable to tax in the case of a person carrying on a Business u/s 28(va). This section is amended w.e.f. A.Y. 2017-18 to extend this provision to a person carrying on a profession. Consequential amendment is also made in section 55 to treat cost of acquisition or cost of improvement as ‘NIL’ in the case of right to carry on any profession. In view of this, any amount received on account of transfer of right to carry on any profession will be taxable as capital gains.

7.3 ADDITIONAL DEPRECIATION – SECTION 32(1)(IIA ) : At present benefit of Additional Depreciation at 20% of actual cost of new plant and machinery is available to the assessee engaged in generation or generation and distribution of power. It is now provided that from A.Y. 2017-18 the benefit can be claimed also by an assessee engaged in Generation, Transmission or Distribution of power.

7.4 INVESTMENT ALLOWANCE – SECTION 32 AC : This section was amended by the Finance (No.2) Act, 2014 w.e.f. A.Y 2015-16. At present it provides for deduction of 15% of cost of new plant and machinery acquired and installed during the year if the total cost of such plant & machinery is more than Rs.25 crore. From reading the section it was not clear whether the benefit of the section can be claimed only if the plant or machinery is purchased and installed in the same year. By amendment of this section, effective from A.Y. 2016-17, it is now provided that even if the plant or machinery is acquired in one yare but installed in a subsequent year, the benefit of deduction can be claimed in the year of installation. Therefore, if the new plant or machinery is acquired in an earlier year but installed on or before 31.3.2017, deduction can be claimed in the year of installation.

7.5 WEIGHTED DEDUCTION FOR SPECIFIED PURPOSES:

In line with the Government policy for reduction of rates of taxes in a phased manner and reduction of incentives provided in the Income tax Act, section 35,35AC, 35AD, 35CCC and 35CCD have been amended w.e.f. A.Y 2018- 19 as under:

7.6 EXPENDITURE FOR OBTAINING RIGHT TO USE SPECTRUM – SECTION 35ABA: (i) This is a new section inserted w.e.f. A.Y. 2017-18. It provides for deduction for capital expenditure incurred for acquiring any right to use spectrum for telecommunication services. The actual amount paid will be allowed to be spread over the period of right to use the license and allowed as a deduction in each year. This deduction will be allowed starting from the year in which the spectrum fee is paid. If such fee is paid before the business to operate telecommunication services is started, deduction will be allowed from the year in which business commences. It is also provided that provisions of section 35ABB(2) to (8) relating to transfer of licence, amalgamation and demerger will apply to spectrum also.

(ii) It is also provided that if deduction is claimed and granted for part of the capital expenditure, as stated above, in any year, the same will be withdrawn in any subsequent year if there is failure to comply with any of the provisions of this section. Such withdrawal can be made by rectification of the earlier assessments u/s 154.

7.7 DEDUCTION FOR EXPENDITURE ON SPECIFIED BUSINESS – SECTION 35AD: (i) At present, deduction of 100% of capital expenditure is allowed in the case of an assessee engaged in certain

specified business listed in section 35AD(8). In respect of business listed in section 35AD (i),(ii),(v), (vii) and (viii) such deduction is allowed at 150% of the capital expenditure. From A.Y. 2018-19 such expenditure will be allowed at 100% only.

(ii) Further, the list of specified business in section 35AD(8) has been expanded. By this amendment, effective from A.Y. 2018-19, capital expenditure in the business of “Developing or Maintaining and Operating or Developing, Maintaining and Operating a new Infrastructure facility” which commences operation on or after 1.4.2017 will be entitled to the benefit u/s 35AD. This is subject to the condition that such business is owned by (i) an Indian Company or a consortium of such companies or by an authority or a board or corporation or any other body established or constituted under any Central or State Act and (ii) such entity has entered into an agreement with the Central or State Government or Local authority or any Statutory body Developing, Maintaining etc., of the new Infrastructure facility.

7.8 NBFC – DEDUCTION FOR PROVISION FOR DOUBTFUL DEBTS – SECTION 36(1),(VIIIA )
Deduction for provision for Bad and Doubtful Debts is allowed at present to Banks u/s 36(1)(viiia) subject to certain conditions. This benefit is now extended to a NBFC also. This amendment is effective from A.Y. 2017- 18. This deduction cannot exceed 5% of the total income computed before making deduction under this section and deduction under Chapter VI A.

7.9 DISALLOWANCE OF EQUALISATION LEVY – SECTION 40(a): This is a new provision which is effective from 1.6.2016. Chapter VIII of the Finance Act, 2016, provides for payment of Equalisation Levy on certain payments to Non-Residents for specified services. Now, section 40(a)(ib) provides that if this Levy is not deposited with the Government before the due date for filing Return of Income u/s 139(1), deduction for the payment to Non- Resident will not be allowed to the assessee. If the above Levy is deposited after the such due date for filing Return of Income, the deduction for the payment to Non-Resident will be allowed in the year of deposit of this Levy with the Government.

7.10 DEDUCTION ON ACTUAL PAYMENT – SECTION 43B: This section is amended w.e.f. A.Y. 2017- 18 to provide that any amount payable to Indian Railways for use of Railway Assets will be allowed only in the year in which actual payment is made. However, if such actual payment is made before the due date for filing the Return of Income u/s 139(1), for the year in which it was payable, deduction will be allowed in the year in which the amount was payable. This provision will apply to rent payable in premises of Indian Railways taken on rent or such similar transactions.

7.11 TAX AUDIT – SECTION 44AB: At present a person carrying a profession is required to get his accounts audited if his gross receipts exceed Rs.25 Lakh in any Financial Year. This limit is increased to Rs.50 Lakh from A.Y. 2017-18. In a case where the profits are not declared in accordance with provisions of section 44AD (Business) or 44ADA (Profession) the assessee will have to get the accounts audited u/s 44AB irrespective of the amount of turnover or gross receipts.

7.12 PRESUMPTIVE BASIS OF COMPUTING BUSINESS INCOME – SECTION 44AD:

(i) This section provides for computation of Business Income in the case of an eligible assessee engaged in eligible business at 8% of total turnover or gross receipts in any financial year. For this purpose the limit for turnover or gross receipts was Rs. 1 Cr. This has now been increased to Rs. 2 Cr., from A.Y. 2017-18.

(ii) Section 44AD (2) provides that in the case of a Firm / LLP declaring profit on presumptive basis, deduction for salary and interest paid by the Firm / LLP to its partners is allowable. This provision is deleted w.e.f. AY. 2017-18. Hence no such deduction will be allowed. It may be noted that the partner will have to pay tax on such salary or interest received from the Firm/LLP.

(iii) Section 44AD(4) is replaced by another section 44AD(4) from A.Y. 2017-18. It is now provided that any eligible person who carries on eligible business and declares profit at 8% or more of total turnover or gross receipts for any year in accordance with this section, but does not declare profit on such presumptive basis in any of the five subsequent years, shall not be eligible to claim the benefit of taxation on presumptive basis under this section for 5 subsequent assessment years. In view of this, such assessee will be required to maintain books as provided in section 44AA and get the accounts audited u/s 44AB.

7.13 PRESUMPTIVE BASIS OF COMPUTING INCOME FROM PROFESSION – SECTION 44ADA:

(i) This is a new provision which will come into force from A.Y. 2017-18. This provision will benefit resident professionals who carry on the profession on a small scale and the yearly gross receipts are less than Rs. 50 Lacs. Broadly stated the provisions of the new section 44ADA are as under:

a) The section is applicable to every resident assessee who is engaged in any profession covered by section 44AA(1) i.e. legal, medical, engineering, architectural, accountancy, technical consultancy, interior decoration or any other profession as is notified by the Board in the Official Gazette. The Explanatory Memorandum states that this section is applicable only to individuals, HUF and partnership firms (excluding LLPs). However the wording of the Section makes it clear that it applies to all resident assesses.

b) Presumptive profit shall be 50% of the total gross receipts or sum claimed to have been earned from such profession, whichever is higher.

c) Deductions under sections 30 to 38 shall be deemed to have been allowed and no further deduction under these sections will be allowed.

d) The written down value of any asset used for the purpose of profession shall be deemed to have been calculated as if the depreciation is claimed and allowed as a deduction.

e) The assessee is required to maintain books of account and also get them audited if he declares profit below 50% of the gross receipts.

(ii) It may be noted from the above that there is no provision in Section 44ADA for deduction of salary and interest paid by a Firm or LLP to its partners. Therefore, if a professional Firm/LLP offers 50% of its gross receipts for tax under this section, the partners will have to pay tax on salary and interest received by the partners.

(iii) It may be noted that Justice Easwar Committee has suggested in its report that taxation of income on presumptive basis is popular with small business entities as they are not required to maintain books or get their accounts audited. The committee has, therefore, suggested that this scheme should be extended to persons engaged in the profession. In para 5.1 of their report it is stated that “the committee recommends the introduction of a presumptive income scheme whereby income from profession will be estimated to be thirty three and one-third (33 1/3%) of the total receipts in the previous year. The benefit of this scheme will be restricted to professionals whose total receipts do not exceed one crore rupees during the financial year”. From the provisions of new section 44ADA it will be noticed that the above recommendation has been partly implemented.

(iv) A question for consideration is whether remuneration and interest on capital received by a partner of a firm or LLP engaged in any profession can be considered as income from the profession within the meaning of section 44 ADA. It is possible to take a view that this is income from profession as section 28(v) provides that “any interest, salary, bonus, commission or remuneration, by whatever name called, due to, or received by, a partner of a firm from such firm” shall be chargeable under the head “Profits and gains of Business or Profession”. Even in the Income tax Return Form such Interest and Remuneration received by a partner from the firm is to be shown under the head profits and gains from business or profession. Therefore, if a professional has received total interest and remuneration of Rs.25 Lakh and Rs.15 lakh as share of profit from the professional firm in which he is a partner and he has no other income under the head profits and gains from business or profession, he can offer Rs.12.5 Lakh for tax u/s 44ADA.

7.14 INCOME FROM PATENTS – SECTION 115BBF:

This is a new section which provides for taxation of Royalty from Patents at a concessional rate of 10% from A.Y. 2017-18. The new section provides as under:

(i) If the total income of the eligible assessee includes any income by way of Royalty in respect of Patent developed and registered in India, tax on such Royalty shall be payable at the Rate of 10% plus applicable surcharge and education cess.

(ii) Such tax will be payable on the gross amount of Royalty. No expenditure incurred for this purpose shall be allowed against the Royalty Income or any other income.

(iii) For this purpose the Eligible assessee is defined to mean a person resident in India who is the true and first Inventor of the invention and whose name is entered on the Patent Register as a Patentee in accordance with the Patents Act. Further, a person being the true and first Inventor of the invention will be considered as an eligible assessee, where more than one persons are registered as Patentees under the Patents Act in respect of the Patent.

(iv) Explanation to the section defines the expressions Developed, Patent, Patentee, Patented Article, Royalty etc.

(v) The eligible assessee has to exercise option, if he wants to take benefit of this section, in the prescribed manner before the due date for filing Return of Income u/s 139(1) for the relevant year.

(vi) If the eligible assessee who has opted to claim the benefit of this section does not offer for taxation such Royalty income in accordance with this section, he will not be able to take benefit of this section in subsequent 5 assessment years.

(vii) The above Royalty Income shall not be included in the “Book Profit” computation u/s 115JB. Similarly, any expenditure relatable to Royalty income will not be deductible from such “Book Profit”.

7.15 CARRY FORWARD OF LOSS – SECTIONS 73A(2) AND 80: At present Section 73A (2) provides that carry forward of Loss incurred in any business specified in section 35AD(8)(C) is allowable for set-off against income of any specified business in subsequent year. Section 80 is amended w.e.f. A.Y. 2016-17 to provide that such carry forward of Loss u/s 73A(2) will be allowed only if the Return of Income for the year in which loss is incurred is filed before the due date u/s 139(1).

8. INCOME FROM OTHER SOURCES – SECTION 56(2)(vii):
Section 56(2)(vii) provides for levy of tax an Individual or HUF in respect of any asset received without consideration or for inadequate consideration. Second Proviso to this section provides for certain exceptions whereby the said section does not apply to certain transactions. The scope of this proviso is now extended w.e.f. A.Y. 2017-18 to receipt by individual or HUF of shares of-

(i) A successor Co-op. Bank in a business reorganization in lieu of shares of a predecessor co-op. Bank (Section 47(vicb).

(ii) A resulting company pursuant to a scheme of Demerger (Section 47(vid).

(iii) An amalgamated company pursuant to a scheme of amalgamation (Section 47 (vii).

9 CAPITAL GAINS:

9.1 DEFINITIONS – SECTION 2 (14) AND 2(42A):

(i) Section 2(14) defining “Capital Asset” is amended from A.Y. 2016-17 to state that Deposit Certificates issued under Gold Monetization Scheme, 2015, will not be considered as Capital Asset for fax purposes.

(ii) Section 2(42A) defines the term “Short-term Capital Asset”. This definition is amended from A.Y. 2017-18 to provided that shares (equity or preference) of a non-listed company will be treated as short-term capital asset if they are held for less than 24 Months. It may be noted that prior to 10.7.2014, this period was 12 months. It was increased to 36 months by the Finance (No.2) Act, 2014 w.e.f. 11.7.2014. Now, this period is reduced to 24 Months from 1.4.2016.

9.2 SOVEREIGN GOLD BONDS – SECTION 47 (VIIC ):
It is now provided from A.Y. 2017-18 that any gain made by an Individual on redemption of Sovereign Gold Bonds issued by RBI shall not be chargeable as capital gains.

9.3 CONVERSION OF A COMPANY INTO LLP – SECTION 47(XIII B):
The exemption from capital gains given to a private or a public unlisted company u/s 47 (xiiib) is subject to several conditions. One of the conditions, at present, is that the total sales, turnover or gross receipts in a business of the company in any of the three preceding years does not exceed Rs. 60 Lacs.

Instead of removing this condition or increasing the limit of turnover, a new condition is now added from A.Y. 2017- 18. It is now provided that total value of the assets, as appearing in the books of account of the company, in any of the three preceding years, does not exceed `5 Crores. This will prevent many small investment or property companies from converting themselves into LLP.

9.4 UNITS OF MUTUAL FUNDS – SECTION 47(XIX): Capital Gain arising on transfer of units in a consolidated plan of a M.F. Scheme in consideration of allotment of units in consolidated plan of that scheme will not be chargeable to tax from A.Y. 2017-18.

9.5 MODE OF COMPUTATION OF CAPITAL GAIN – SECTION 48: This section which deals with computation of capital gain is amended from A-Y 2017-18 as under:

(i) For computing long term capital gain on transfer of Sovereign Gold Bonds issued by RBI it will now be possible to consider indexed cost as cost of acquisition.

(ii) In the case of a non-resident assessee, for computing capital gain on redemption of Rupee Denominated Bond of an Indian company subscribed by him, the gain arising on account of appreciation of Rupee against a Foreign Currency shall be ignored.

9.6 COST OF CERTAIN ASSETS – SECTION 49: Section 49 provides for determination of cost of acquisition of certain Assets. By amendment of this section it is provided, from A.Y. 2017-18, that in respect of any asset declared under the “Income Declaration Scheme, 2016” Under Chapter IX of the Finance Act, 2016, the fair market value of the Asset as on 1.6.2016 shall be deemed to be the cost of acquisition for the purpose of computing capital gain on transfer of that asset.

9.7 FULL VALUE OF CONSIDERATION – SECTION 50C: This section is amended from A.Y.2017-18 to bring it in line with the provisions of section 43CA. This amendment is based on the recommendation of Justice R. Easwar Committee Report (Para 6.2). At present, Stamp Duty valuation as on the date of transfer of immovable property is compared with the consideration recorded in the transfer document. It is now provided that if the date of the agreement for sale and the date of actual transfer of the property is different, the stamp duty valuation on the date of Agreement for sale will be considered for the purpose of section. This is subject to the condition that the amount of the consideration or a part there of has been received by the seller by way of an account payee cheque or draft or by use of electronic clearing system through a bank on or before the date of the Agreement for sale.

9.8 EXEMPTION ON REINVESTMENT OF CAPITAL GAIN – SECTION 54 EE AND 54 GB: As discussed in Para 4.8 above, new section 54EE and amendment in section 54GB provides for exemption upto `50 Lacs if the capital gain on transfer of specified assets are invested in startup company or LLP. These provisions come into force from A.Y. 2017-18. Broadly stated these provisions are as under:

(i) Section 54EE Provides that if whole or part of capital gain arising from transfer of a long term capital asset (original asset) is invested within 6 months, from the date of such transfer, in a longterm Specified Asset, the assessee can claim exemption in respect of such capital gain. For this purpose the “Specified Asset” is defined to mean unit or units issued before 1.4.2109 by such Fund as may be notified by the Central Government. The Explanatory Memorandum to Finance Bill, 2016, states that it is proposed to establish a Fund of Funds to finance the start-ups. The following are certain conditions for claiming this exemption.

(a) Investment in long term specified asset should not exceed `50 lakh during a financial year. In case where the investment is made in two financial years, for the capital gains of the same year, the aggregate investment which qualifies for exemption from capital gain will not exceed Rs. 50 lakh.

(b) The long term specified asset is not transferred by the assessee for a period of three years from the date of its acquisition. The assessee does not take any loan or advance against the security of such long term specified asset. In a case where the assessee takes a loan or an advance against security of long term specified asset, it shall be deemed that the assessee has transferred the long term specified asset on the date of taking the loan or an advance.

(e) If the assessee, within a period of three years from the date of its acquisition, transfers that long term specified asset or takes a loan or an advance against security of such long term specified asset, the amount of capital gain which is allowed as exempt u/s 54EE will be charged to tax under the head “Capital Gains” as gain relating to long term capital asset of the previous year in which the long term capital asset was transferred.

(ii) Section 54GB, at present, grants exemption to an Individual or HUF in respect of long term capital gain arising on transfer of a Residential property (House or a Plot of Land) if the net consideration is utilized for subscription in equity shares of an eligible company. This provision will not apply to transfer of a residential property after 31.3.2017. By amendment of this section it is now provided that this exemption will be available to an Individual or HUF if net consideration on transfer of Residential property (Land, Building or both) is invested in an “Eligible Start Up” company or LLP. The term “Eligible Start-up” has been given the same meaning as in Explanation below section 80-IAC(4). (Refer Para 4.8 above). The above investment is to be made before the due date for filing the Return of Income. The above concession is not available if the transfer of Residential property is made after 31.3.2019. It may be noted that other conditions in existing section 54GB will apply to the above Investment also.

(iii) It may be noted that an Individual or HUF who is claiming exemption u/s 54 or 54F on transfer of a long term Capital Asset (including a Residential House) can claim deduction u/s 54EC (Investment in Bonds upto Rs. 50 Lakh) as well as u/s 54EE Investment in specified units (upto Rs. 50 Lakh) and u/s 54GB (Investment in eligible start up without any limit). If we read sections 54EC, 54EE and 54GB it will be noticed that no restriction is put in any of these sections that claim for deduction on reinvestment can be made under any one section only. Therefore, if an individual / HUF sells his Residential House, he can claim deduction u/s 54EC (upto Rs. 50 Lakh), u/s 54EE (up to Rs. 50 Lakh), u/s 54GB (without limit) as well as u/s 54 for purchase of another Residential House.

9.9 TAX ON SHORT -TERM CAPITAL GAIN – SECTION 111A: At present, this section provides for levy of tax on short-term Capital Gain at 15% from transfer of equity shares where STT is paid. By amendment of this section from A.Y. 2017-18 it is provided that in respect of short-term capital gain arising from transfer of equity shares through a Recognized Stock Exchange located in International Financial Service Centre (IFSC) where consideration is received in Foreign Currency, the condition for payment of STT will not apply.

9.10 TAX ON LONG – TERM CAPITA L GAIN – SECTION 112: At present, the tax on long – term capital gain on transfer of unlisted securities in the case of nonresident u/s 112 (1)(a) (iii) is chargeable at the rate of 10% if benefit of first and second proviso to section 48 is not taken. There was a doubt whether the word “Securities” include shares in a company. In order to clarify the position this section is amended from A.Y. 2017-18 to provide that long term Capital Gain from transfer of shares of a closely held company (whether public or private) shall be chargeable to tax at 10% if benefit of first and second proviso to section 48 is not claimed.

10. MINIMUM ALTERNATE TAX (MAT) – SECTION 115JB:

Applicability of MAT to foreign companies has been a burning issue. In line with the recommendations of the Justice A.P. Shah Committee, section 115JB is amended to provide that the provisions of section 115JB shall not be applicable to a foreign company if

(i) The assessee is a resident of a country or a specified territory with which India has an agreement referred to in section 90(1) or an agreement u/s 90A(1) and the assessee does not have a permanent establishment in India in accordance with the provisions of the relevant Agreement; or

(ii) The assessee is a resident of a country with which India does not have an agreement under the above referred sections and is not required to seek registration under any law for the time being in force relating to companies.

This amendment is made effective retrospectively from A.Y. 2001-02.

11. DIVIDEND DISTRIBUTION TAX (DDT) – SECTION 115-O:

(i) At present, under the specific taxation regime for business trusts, a tax pass through status is given to Real Estate Investment Trust (REITs) and Infrastructure Investment Trust (INVITS). However, a Special Purpose Vehicle, being a company, which is held by these business trusts, pays normal corporate tax and also suffers dividend distribution tax (DDT) while distributing the income to the business trusts being a shareholder.

(ii) It is now provided by amendment of section 115-0 w.e.f. 1.6.2016 that no DDT will be levied in respect of distribution of dividend by an SPV to the business trust. The exemption from levy of DDT will only be in the cases where the business trust holds 100% of the share capital of the SPV excluding the share capital other than that which is required to be held by any other person as part of any direction of the Government or any regulatory authority or specific requirement of any law to this effect or which is held by Government or Government bodies. The exemption from the levy of DDT will only be in respect of dividends paid out of current income after the date when the business trust acquires the shareholding of the SPV as referred to above. Such dividend received by the business trust and its investor will not be taxable in the hands of trust or investors as provided in the amended sections 10(23FC) & 10(23FD). The dividends paid out of accumulated and current profits upto this date will be liable for levy of DDT as and when any dividend out of these profits is distributed by the company either to the business trust or any other shareholder.

(iii) It is further provided in section 115-0(8) that no DDT will be levied on a company, being a unit located in an International Financial Services Centre, deriving income solely in convertible foreign exchange, for any assessment year on any amount of dividend declared, or paid by such company on or after 1 April, 2017 out of its current income, either in the hands of the company or the person receiving such dividend.

12. TAX ON BUY BACK OF SHARES:

(i) At present section 115QA of the Act provides that income distributed on account of buy back of unlisted shares by a company is subject to the levy of additional Income-tax at 20%. The distributed income has been defined in the section to mean the consideration paid by the company on buy back of shares as reduced by the amount which was received by the company, for issue of such shares. Buy-back has been defined to mean the purchase by a company of its own shares in accordance with the provisions of section 77A of the Companies Act, 1956.

(ii) It is now provided w.e.f. 1.6.2016 that section 115QA will apply to any buy back of unlisted shares undertaken by the company in accordance with the law in force relating to companies. Accordingly, it will also cover buy-back of shares under any of the provisions of the Companies Act, 1956 and the Companies Act, 2013. It is further provided that for the purpose of computing distributed income, the amount received by a company in respect of the shares being bought back shall be determined in the prescribed manner. These Rules may provide the manner of determination of the amount in various circumstances including shares being issued under tax neutral reorganizations and in different tranches as stated in the Explanatory Memorandum.

13. SECURITIZATION TRUSTS – CHAPTER XII EA :

(i) Chapter XII EA was added by the Finance Act, 2013, effective from A.Y. 2014-15. Under these provisions it was provided that: (a) A ny income of Securitisation Trust will be exempt u/s 10 (23DA), (b) Income received by the Investor any securitized debt instrument or securities issed by such trust will be exempt u/s 10(35A), and (c) The Trust was required to pay additional Income tax on distributed income u/s 115TA (25% in the case of Individual / HUF and 30% in case of others). There were other procedural provisions in sections 115TA to 115TC.

(ii) Section 115 TA is amended w.e.f 1.6.2016. New Section 115TCA has been inserted from A.Y. 2017-18. It is now provided that the current tax regime for Securitization Trust and its investors, will be discontinued for the distribution made by Securitisation Trust with effect from 1 June, 2016, and will be substituted by a new regime with effective from A.Y 2017-18. This effectively grants pass through status to the Securitisation Trust. The new regime will apply to a Securitisation Trust being an SPV defined under SEBI (Public Offer and Listing of Securitised Debt Instrument) Regulations, 2008 or SPV as defined in the guidelines on securitization of standard assets issued by RBI or a trust setup by a securitization company or a reconstruction company in accordance with the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 or guidelines or directions issued by the RBI (SARFAE SI Act).

(iii) The income of Securitisation Trust will continue to be exempt section under 10(23DA) which is also amended to effectively define the term securitization. The income accrued or received from the Securitisation Trust will be taxable in the hands of investor in the same manner and to the same extent as it would have happened had the investor made investment directly in the underlying assets and not through the trust. Consequential amendment is made in section 10(35A). The payment made by Securitisation Trust will be subject to tax deduction at source u/s 194LBC at the rate of 25% in case of payment to resident investors who are individual or HUF and @ 30% in case of others. In case of payments to non-resident investors, the deduction of tax will be at rates in force. The facility for the investors to obtain lower or nil deduction of tax certificate will be available. The trust will also provide breakup regarding nature and proportion of its income to the investors and also to the prescribed income-tax authority.

14. TAXATION OF NON-RESIDENTS:

(i) PLACE OF EFFECTIVE MANAGEMENT (POEM) – SECTION 6:

(a) The concept of treating a foreign company as resident in India if its place of effective management is in India was introduced by the Finance Act, 2015 and was to become effective from Assessment Year 2016-17. Under this concept, foreign companies will be considered as resident in India if its POEM is in India. The Finance Minister has now recognized that before introducing this concept, its ramifications need to be analyzed in detail. Accordingly, the implementation of concept of POEM has been deferred by one year and the same will now be applicable from Assessment year 2017-18.

(b) A new section115JH is inserted to empower the Government to issue notification to provide detailed transition mechanism for companies incorporated outside India, which due to implementation of POEM, will be assessed for the first time as resident in India. The notification will be issued to bring clarity on issues relating to computation of income, treatment of unabsorbed depreciation, set off or carry forward of losses, applicability of transfer pricing provisions, etc., applicable to such foreign companies considered to be resident in India.

(ii) INCOME DEEMED TO ACCRUE OR ARISE IN INDIA – SECTION 9(1)(I)

A new clause has been inserted in Explanation 1, providing that no income shall be deemed to accrue or arise in India to a foreign company engaged in mining of diamonds, through or from activities confined to display of uncut and unassorted diamonds in any notified special zone. This amendment is effective from Assessment Year 2016-17.

(iii) FUND MANAGER’S ACTIVITIES – SECTION 9A:

(a) This section lays down the conditions under which a fund manager based in India does not constitute a business connection of the foreign investment fund. One of the conditions is that the fund is a resident of a country or a specified territory with which India has entered into a double taxation avoidance agreement. This condition is now modified effective from A.Y. 2017-18 by extending it to funds established, incorporated or registered in a notified specified territory.

(b) Another condition is that the fund should not carry on or control and manage, directly or indirectly, any business in India or from India. This condition is now modified to apply only to a fund carrying on, or controlling and managing, any business in India.

(iv) REFERENCE TO TRANSFER PRICING OFFICER (TPO) – SECTION 92CA : At present where a reference has been made by the A.O. to a TPO, the TPO has to pass the order at least 60 days prior to the date of limitation u/s 153/153 B for passing the assessment or reassessment order. Section 92CA has been amended w.e.f. 1.6.2016 to extend this period in cases where the period of limitation available to the TPO for passing the order is less than 60 days, to a period of 60 days, if the assessment proceedings were stayed by an order or injunction of any court, or a reference was made for exchange of information by the Competent Authority under a double taxation avoidance agreement.

(v) MAINTENANCE OF RECORDS – SECTION 92D: This section requires every person who has entered into an international transaction to keep and maintain such information and documents in respect thereof as may be prescribed. A requirement is now introduced for a constituent entity of an International Group to keep and maintain such information and documents in respect of an international group as may be prescribed, and to furnish such information and documents in such a manner, on or before the date, as may be prescribed. Failure to furnish such information and documents will attract a penalty of Rs. 5,00,000 u/s 271AA unless reasonable cause is shown u/s 273B.

15. REPORT RELATING TO INTERNATIONAL GROUP :

(i) Section 286 is a new section inserted from A.Y. 2017-18. The OECD in Action Plan 13 of the BEPS Project has recommended a standardized approach to transfer pricing documentation to be adopted by various Countries. Pursuant to this recommendation, this section is inserted to provide for a specific reporting system in respect of country- by country (CbC) reporting. This system is a three-tier structure with (i) a master file containing standardized information relevant for all members of an International Group; (ii) a local file referring specifically to material transactions of the local taxpayer; and (iii) a CbC report containing certain information relating to the global allocation of the International Group’s income and taxes paid together with certain indicators of the location of economic activity within the group.

(ii) This section provides that every Constituent Entity, resident in India if it is constituent of an International Group and every parent entity or the alternate reporting entity, resident in India, has to furnish report in the prescribed form to the prescribed authority before the due date for filing return of Income u/s 139(1). The manner in which report is to be submitted is provided in the section.

(iii) Penalties are prescribed in section 271GB for nonfurnishing of the information by an entity which is obligated to furnish as also for knowingly providing inaccurate information in the report.

16. EQUALIZATION LEVY:

Chapter VIII (Sections 163 to 180) of the Finance Act, 2016, provides for Equalization Levy on Non-Residents. This Chapter will come into force on the date to be notified by the Central Government. In order to overcome the challenges of typical direct tax issues relating to e-commerce i.e characterization of nature of payments, establishing a nexus between a taxable transaction, activity and a taxing jurisdiction and keeping in view the recommendations of OECD in respect of Action 1 – Addressing the Tax Challenges of Digital Economy, of the BEPS Project, this new chapter is inserted. The chapter is a complete code for charge of Equalisation Levy, its collection, recovery, furnishing statements, processing Statements, Rectification of Mistakes, charge of interest for delayed payment, penalty for non-compliance with the provisions, Appeals to CIT(A) and ITA Tribunal, Prosecution, Power of Government to frame Rules etc. The provisions for Equalisation Levy can be briefly stated as under:

(i) The Equalisation Levy is at 6% of the amount of consideration for specified services received or receivable b y a non-resident (not having a PE in India) from a resident carrying on a business or profession or from a non-resident having a PE in India (Payer).

(ii) The specified services are (a) Online advertisement; (b) Any provision for digital advertising space; (c) Any other facility or service for the purpose of online advertisement; and (d) Any other services as may be notified.

(iii) Simultaneously with the introduction of this chapter for Equalisation levy, section 10(50) has been inserted to provide exemption to income arising from the above-mentioned specified services chargeable to Equalisation Levy.

(iv) The payer is obliged to deduct the Equalisation Levy from the amount paid or payable to a nonresident in respect of such specified services at 6% if the aggregate amount of consideration for the same in a previous year exceeds Rs.1 lakh.

(v) In addition, section 40(a)(ib) is inserted to provide that the expenses incurred by a payer towards specified services chargeable to Equalisation Levy shall not be allowed as deduction in case of failure to deduct and deposit the same to the credit of Central Government before the due date as explained in Para 7.9 above.

(vi) This Chapter extends to the whole of India except the State of Jammu and Kashmir.

17. ASSESSMENTS AND REASSESSMENTS:

(i) JURISDICTION OF ASSESSING OFFICER – SECTION 124: This section is amended from 1.6.2016. It is now provided that u/s 124(3) no person will be entitled to call into question the jurisdiction of A.O. after the expiry of one month from the date on which notice u/s 153A(1) or 153C(2) is served or after completion of assessment whichever is earlier. This provision is in line with the existing provision in section 124(3) which applies to objection to jurisdiction of A.O. when return u/s 139 is filed or notice u/s 142(1) or 143(2) is issued.

(ii) POWER TO CALL FOR INFORMATION – SECTION 133C: This section is amended from 1.6.2016. It is now provided that when information or document is received in response to any notice u/s 133C(1) the prescribed authority can process the same and available outcome will be forwarded to A.O.

(iii) HEARING BY A.O. – SECTION 2 (23C): This clause is inserted from 1.6.2016 to provide that notices for hearing can be given by electronic mode and communication of data and Documents can be made by electronic mode.

(iv) FILING INCOME TAX RETURN – SECTION 139: At present an Individual, HUF, AOP and BOI is required to file return of income before the due date if the total income, without considering deductions under Chapter VI-A, exceeds the maximum amount which is not chargeable to tax. It is now provided in the sixth proviso to section 139 (1) that income from long term capital gains exempt u/s 10(38) shall also be added to the total income for determining the threshold limit for determining whether the assessee is required to file the return of income.

(v) BELATED FILING OF RETURN OF INCOME – SECTION 139(4): The existing section 139(4) is replaced by new section 139(4) from A.Y. 2017- 18. It is now provided that if an assessee has not furnished his Return of Income before due date u/s 139(1), he can file the same at any time before the end of the relevant assessment year or before completion of assessment whichever is earlier.

(vi) REVISED RETURN – SECTION 139(5): The existing Section 139(5) is replaced by new section 139(5) from A.Y. 2017-18. At present a revised return can be filed u/s 139(5), only if the return originally filed is before the due date u/s 139(1). Such a revised return can be filed before the expiry of one year from the end of the relevant assessment year or completion of assessment, whichever is earlier. It is now provided that a belated return filed pursuant to section 139(4), can also be similarly revised within the time limit given above.

(vii) DEFECTIVE RETURN – SECTION 139(9): This section is amended from A.Y. 2017 – 18. At present a return of income will be treated as defective if self-assessment tax and interest payable u/s 140A is not paid before the date of furnishing the return. Now clause (aa) of the Explanation to section 139(9) has been deleted and hence a return will now not be treated as defective merely because self-assessment tax and interest thereon is not paid before the date of furnishing the return.

(viii) ADJUSTMENT TO RETURNED INCOME – SECTION 143(1): This section is now amended from A.Y. 2017-18. The scope of adjustments that can be made at the time of processing the Return of Income u/s 143(1) has been expanded to cover the following items:

(a) Disallowance of loss claimed, if return for the year for which loss has been claimed was furnished beyond the due date specified in section 139(1).

(b) Disallowance of expenditure indicated in tax audit report but not considered in the Return of Income

(c) Disallowance of deduction claimed u/s 10AA, 80-IA, 80-IAB, 80-IB, 80-IC, 80-ID or 80-IE, if the return has been filed beyond the due date specified in section 139(1).

(d) Addition of income due to mismatch in income as reflected in the return of income and as appearing in Form 26AS or Form 16A or Form 16.

The above adjustments will be made based on information available on the record of the tax department either physically or electronically. However, no adjustment will be made without intimating the assessee about such adjustment in writing or in electronic mode and giving him a time of 30 days to respond. The adjustment will be made only after considering the response received or after the lapse of 30 days in case no response is received.

(ix) PROCESSING OF RETURN OF INCOME – SECTION 143(ID): This section is amended w.e.f. A.Y. 2017-18. It is now provided that the processing of the Return of Income u/s 143(1) will not be necessary within one year if notice u/s 143(2) is issued. However, such Return of Income shall be processed u/s 143(1) before assessment order u/s 143(3) is passed.

(x) INCOME ESCAPING ASSESSMENT – SECTION 147: This section has been amended from 1.6.2016. New clause (ca) has been added in Explanation 2 to section 147. The amendment provides that income shall be deemed to have escaped assessment if, on the basis of the information received u/s 133C(2), it is noticed by the A.O that the income exceeds the maximum amount not chargeable to tax or where the assessee had understated the income or has claimed excessive loss, deduction, allowance or relief in the return.

(xi) LIMITATION FOR COMPLETING ASSESSMENT OR REASSESSMENT – SECTION 153
The existing section 153 has been replaced by a new section 153 from 1.6.2016. This new section provides as under:

(a) The time limit for completion of assessment has now been reduced as under:
• For order u/s 143 and section 144 – from the existing two years to twenty one months from the end of the assessment year in which the income was first assessable.
• For order u/s 147 – from the existing one year to nine months from the end of the financial year in which the notice u/s 148 was served.
• For giving effect to order passed u/s 254, 263, 264, setting aside or cancelling an assessment – from the existing one year to nine months from the end of the financial year in which the order is received or passed by the designated Commissioner.

(b) The period for completing the assessment shall be extended by one year where reference has been made to the Transfer pricing Officer u/s 92CA,

(c) At present, there is no time limit for giving effect to an order passed u/s 250 or 254 or 260 or 262 or 263 or 264. Now it is provided that action under the above section shall be completed within three months from the end of the month in which order is received or passed by the designated Commissioner. Additional time of six months may be granted to the Assessing Officer by the Principal Commissioner or the Commissioner, based on reasons submitted in writing, if the Commissioner is satisfied that the delay is for reasons beyond the control of the Assessing Officer.

(d) At present there is no time limit for completion of assessment, reassessment or re-computation in consequence of or to give effect to any finding or direction contained in an order under the above mentioned sections or in an order of any court in a proceeding otherwise than by way of appeal or reference under the Act. Now such order giving effect should be passed on or before the expiry of twelve months from the end of the month in which such order is received by the designated Commissioner.

(e) Similarly, in case of assessment made on a partner of a firm in consequence of an assessment made on the firm u/s 147, the time limit is now introduced. Accordingly, the assessment of the partner shall be completed within twelve months from the end of the month in which the assessment order in case of the firm is passed.

In calculating the above time limit, the time or the period referred to in Explanation 1 of section 153(9) shall be excluded.

(f) For cases pending on 1st June, 2016, the time limit for taking requisite action (in case of (c), (d) and (e) above will be 31st March, 2017 or twelve months from the end of the month in which such order is received, whichever is later.

(g) The existing Section 153 shall aply to any order of assessment, reassessment or recomputation made before 1/6/2016.

(xii) LIMITATION FOR COMPLETION OF ASSESSMENT IN SEARCH CASES – SECTION 153B:

The existing Section 153B is replaced by new Section 153B w.e.f. 1.6.2016. The old section 153B shall apply in relation to any order of assessment, reassessment or re-computation is made on or before 31.5.2016. The new section 153B provides for reduction in time limit for completion of assessment, reassessment etc., in case of a search u/s 153 A or 153C as under:

(a) In each assessment year falling within the six years referred to in section 153A(1)(b) or assessment year in which search is conducted u/s 132 or requisition is made u/s 132A – from two years to twenty one months from the end of the financial year in which the last of the authorization for search or requisition was executed:

(b) In case of other persons referred to in section 153C, to twenty one months (from the existing two years) from the end of the financial year in which the last of the authorization for search or requisition was executed or nine months (from the existing one year) from the end of the financial year in which the books of account or documents or assets seized or requisitioned are handed over u/s 153C to the Assessing Office having jurisdiction over such person, whichever is later.

(c) In case where reference is made to the Transfer Pricing Officer u/s 92CA, the period of limitation as given above will be extended by a period of twelve months.

(d) In calculating the above time limit, the time or the period referred to in Explanation 1 of section 153B(3) shall be excluded.

18. PAYMENT OF TAXES AND INTEREST:

18.1 ADVANCE TAX PAYMENT – SECTION 211: (i) The provisions of Section 211 have been amended from 1.6.2016. Now, all non-corporate assesses, who are liable to pay advance tax, will have to pay such tax in 4 installments as applicable to corporate assesses instead of 3 installments. The installments for advance tax payment are as follows:

(i) Eligible assesses referred to in section 44AD opting for computation of profits and gains of business on presumptive basis are required to pay the entire advance tax in one installment on or before 15th March of the financial year. No similar exception has been given for eligible professionals covered under presumptive taxation u/s 44ADA.

(ii) The provisions of section 234C in respect of interest payable for deferment of advance tax have been amended to bring them in line with the provisions of section 211 of the Act. Interest u/s 234C will be levied at 1% p.m. for 3 months on shortfall of advance tax paid as compared with the amount payable as per the above installments in case of all assesses (except the eligible assesses u/s 44AD). However, no interest will be levied if the advance tax paid is more than 12% (For 15th June instalment) and more than 36% (For 15th September instalment).

(iii) A new exception is now provided that interest u/s 234C will not be levied in case of assesses having income chargeable under the head ‘profits and Gains of business or Profession’ for the first time. These assesses will be required to pay the whole amount of tax payable in the remaining installments of advance tax which are due after they commence business or by 31st March of the financial year if no installments are due.

18.2 INTEREST ON REFUNDS – SECTION 244A:

(i) Section 244A granting interest on refunds to assesses has been amended w.e.f. 1.6.2016 to provide that in case where the return of income is filed after the due date as per section 139(1), then interest on refund out of TDS, TCS and advancetax will be granted only from the date of filing the return and not from 1st April of the assessment year.

(ii) It is further provided that an assessee will be entitled to interest on refund of self-assessment tax paid u/s 140A of the Act from the date of payment to tax or date of filing the return, whichever is later up to the date on which the refund is granted.

(iii) It is also provided that an assessee will be entitled to additional interest on refund arising on giving effect to an appellate / revisionary order which has been passed beyond a time limit of 3 months from the end of the month of receipt of the appellate / revisionary order by the Commissioner. It is further clarified that if an extension is granted by the Principal Commissioner / Commissioner for giving effect to the appellate/ revisionary order, then the additional interest will be granted from the expiry of the extended period. The Principal Commissioner / Commissioner may extend the period for giving effect to the appellate / revisionary order up to 6 months. The additional interest on such refunds will be calculated at the rate of 3% p.a. from the date following the date of expiry of the specified time limit upto the date of granting the refund. Effectively, the assessee will be entitled to interest in such cases at the rate of 9% p.a. against the normal rate of 6% p.a for delay in giving effect to an appellate order beyond the specified time limit.

18.3 RECOMMENDATION OF JUSTICE R. EASHWAR COMMITTEE: It may be noted that this committee had made two recommendations as under

(i) The tax payer should be allowed automatic stay on payment of 7.5% of disputed taxes till the first appeal is decided. In cases of High-Pitched assessments, it may be difficult for the assessee to pay even 7.5% of the disputed demand. In such cases he can approach the CIT(A) and request stay of the entire demand. No such amendment is made in the Act. However, CBDT has modified the Instruction No. 1914 of 21.3.1996 on 29.2.2016 directing assessing officers to grant stay till the disposed of first appeal on payment of 15% of disputed tax subject to certain conditions.

(ii) As regards interest on delayed refunds the committee has suggested that section 244A may be amended to provide that interest of 1% P.M. should be paid if the refund is delayed up to 3 months and interest at 1.5% P.M. should be paid if the delay is more than 3 months. It will be noticed that this recommendation is only partly accepted while amending section 244A.

19. APPEALS AND REVISION:

19.1 APPEAL BY DEPARTMENT – SECTION 253(2A): Section 253(2A) has been amended from 1.6.2016. Now, it will not be possible for the Department to file appeal before ITA Tribunal against the order passed pursuant to the directions of Dispute Resolution panel (DRP).

19.2 RECTIFICATION OF ORDER OF ITA TRIBUNA L – SECTION 254: At present the ITA Tribunal can rectify any mistake in its order which is apparent from the records within 4 years of the date of the order. This period is now reduced to 6 months from the end of the month in which the order is passed. This amendment is effective from 1.6.2016. Although it is not clarified in the Finance Act, 2016, it is presumed that this amendment will apply to orders passed on or after 1.6.2016.

19.3 SINGLE MEMBER CASES – SECTION 255(3): This section is amended from 1.6.2016 to provide that a Single Member Bench of ITA Tribunal may dispose of any case where assessed income does not exceed Rs. 50 Lacs. At present, this limit is Rs. 15 Lakh which has now been increased to Rs. 50 Lakh.

20. DISPUTED TAX SETTLEMENT SCHEME – SECTIONS 197 TO 208 OF THE FINANCE ACT, 2016:

20.1 The Finance Minister has, in his Budget speech on 29th February 2016, stated that the tax litigation in our country is a scourge for a tax friendly regime and creates an environment of distrust in addition to increasing the compliance cost of the tax payer and administrative cost of the Government. He has also stated that there are over 3 Lac tax cases pending with the commissioner of Income tax (Appeals) with disputed amount of tax of about 5.5 Lac Crores. In order to reduce these appeals before the first appellate authority he has announced a new scheme called “ Dispute Resolution Scheme -2016” Two separate Schemes are announced in this Budget, one for settlement of disputed taxes under Income tax and wealth tax Act and the other for disputed taxes under Indirect Tax Laws.

20.2 In chapter X of the Finance Act, 2016, (Act), Sections 201 to 211 Provide for “The Direct Tax Dispute Resolution Scheme – 2016”. Similarly, Chapter XI (Sections 212 to 218) of the Act provides for “The Indirect Tax Dispute Resolution Scheme – 2016”.

20.3 THE SCHEME:

(i) The Direct Tax Dispute Resolution Scheme 2016 (Scheme) will come into force on 1st June, 2016. This scheme will enable all assesses whose assessments under the Income tax Act or the wealth tax have been completed for any assessment year and whose appeals are pending before the Commissioners of Income tax (Appeals) as on 29.2.2016 to settle the tax dispute. The scheme also applies to those assesses in whose case any disputed additions are made as a result of retrospective amendments made in the Income tax or wealth tax Act and whose appeals are pending before the CIT(A), ITA Tribunal, High Court, Supreme Court or before any other authority.

(ii) Section 202 of the Finance Act provides that the assessee who wants to settle the tax dispute pending before the concerned appellate authority as on 29.02.2016, can make a declaration in the prescribed Form on or after 01.06.2016 but before the date to be notified by the Central Government. In the case of an assessee in whose case the assessment or reassessment is made in the normal course and not due to any retrospective amendment, and the appeal is pending before CIT (A) as on 29.02.2016, the tax dispute can be settled as under:-

(a) If the disputed tax does not exceed `10 Lacs for the relevant assessment year, the assessee can settle the same on payment of such tax and interest due upto the date of assessment or reassessment.

(b) If the disputed tax exceeds ` 10 Lacs for the relevant assessment year, the dispute can be settled on payment of such tax with 25% of minimum penalty leviable and interest upto the date of assessment or reassessment. It is difficult to understand why minimum penalty is required to be paid when the disputed addition may not be for concealment or inaccurate furnishing of particulars of income.

(c) In the case of appeal against the levy of penalty, the assessee can settle the dispute by payment of 25% of minimum penalty leviable on the income as finally determined.

(iii) In a case where the disputed tax demand relates to addition made in the assessment or reassessment order made as a result of any retrospective amendment in the Income tax or wealth tax Act, the dispute can be settled at the level of any appellate proceedings (i.e. CIT(A), ITA Tribunal, High Court etc.) by payment of disputed tax. No interest or penalty will be payable in such a case.

20.4 PROCEDURE FOR DECLARATION:

(i) The declaration for settlement of disputed tax for which appeal is pending before CIT(A) is to be filed in the prescribed form with the particulars as may be prescribed to the Designated Authority. The Principal Commissioner will notify the Designated Authority who shall not be below the rank of commissioner of Income tax. Once this declaration is filed for settlement of a tax dispute for a particular year, the appeal pending before the CIT (A) for that year will be treated as withdrawn.

(ii) In the case where the tax dispute is in respect of any addition made as a result of retrospective amendment, the assessee can file the declaration in the prescribed form with the designated authority. The assessee will have to withdraw the pending appeal for that year before CIT (A), ITA Tribunal, High Court, Supreme Court or other Authority after obtaining leave of the Court or Authority whereever required. If any proceedings for the disputed tax are initiated for arbitration, conciliation or mediation or under an agreement entered into by India with any other country for protection of Investment or otherwise, the assessee will have to withdraw the same. Proof of withdrawal of such appeal or such other proceedings will have to be furnished by the assessee with the declaration. Further, the declarant will have to furnish an undertaking in the prescribed form waiving his right to seek or pursue any remedy or any claim for the disputed tax under any agreement.

(iii) It is also provided that if (a) any material particulars furnished by the declarant are found to be false at any stage, (b) the declarant violates any of the conditions of the scheme or (c) the declarant acts in a manner which is not in accordance with the undertaking given by him as stated above, the declaration made under the scheme will be considered as void. In this event all proceedings including appeals, will be deemed to be revived.

20.5 PAYMENT OF DISPUTED TAX:

(i) On receipt of the declaration from the assessee the Designated Authority will determine the amount payable by the declarant under the scheme within 60 days. He will have to issue a certificate in the prescribed form giving particulars of tax, interest, penalty etc., payable by the Declarant.

(ii) The Declarant will have to pay the amount determined by the Designated Authority within 30 days of the receipt of the Certificate. He will have to send the intimation about the payment and produce proof of payment of the above amount. Upon receipt of this intimation and proof of payment, the Designated Authority will have to pass an order that the declarant has paid the disputed tax under the scheme. Once this order is passed it will be conclusive about the settlement of disputed tax and such matter cannot be re-opened in any proceedings under the Income tax or Wealth tax Act or under any other law or agreement.

(iii) Once this order is passed, the Designated Authority shall grant immunity to the declarant as under:

(a) Immunity from instituting any proceedings for offence under the Income tax or Wealth tax Act.

(b) Immunity from imposition or waiver of any penalty or interest under the income tax or wealth tax Act. In other words, the difference between interest or penalty chargeable under the normal provisions of the Income tax or wealth tax Act and the interest or penalty charged under the scheme cannot be recovered from the declarant.

It is also provided that any amount of tax, interest or penalty paid under the Scheme will not be refundable under any circumstances.

20.6 WHO CAN MAKE A DECLARATION:

(i) Section 208 of the Finance Act provides that in the following cases declaration under the Scheme for settlement of disputed taxes cannot be made.

(a) In relation to assessment year for which assessment or reassessment under Section 153A or 153C of the Income tax Act or Section 37A or 37B of the Wealth tax Act is made.

(b) In relation to assessment year for which assessment or reassessment has been made after a survey has been conducted under section 133A of the Income tax Act or 38A of the Wealth tax Act and the disputed tax has a bearing on findings in such survey.

(c) In relation to assessment year in respect of which prosecution has been instituted on or before the date of making the declaration under the scheme.

(d) If the disputed tax relates to undisclosed income from any source located outside India or undisclosed asset located outside India.

(e) In relation to assessment year where assessment or reassessment is made on the basis of information received by the Government under the Agreements under section 90 or 90A of the Income tax Act.

(f) Declaration cannot be made by following persons.

• If an order of detention has been made under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974.

• If prosecution has been initiated under the Indian Penal Code, The Unlawful Activities (Prevention) Act, 1967, the Narcotic Drugs and Psychotropic Substances Act, 1985. The Prevention of Corruption Act, 1988 or for purposes of enforcement of any civil liability.

(g) Declaration cannot be made by a person who is notified u/s. 3 of the Special Court (Trial or Offences Relating to Transactions in Securities) Act, 1992.

20.7 GENERAL:

(i) The Act authorizes the Central Government to issue directions or orders to the authorities for the proper administration of the scheme. The Act also provides that if any difficulty arises in giving effect to any of the provisions of the scheme, the Central Government can pass an order to remove such difficulty. Such order cannot be passed after expiry of 2 years i.e after 31.5.2018. Central Government is also authorized to notify the Rules for carrying out the provisions of the scheme and also prescribe the Forms for making Declaration, for certificate to be granted by the Designated Authority and for such other matters for which the rules are required to be made under the scheme.

(ii) In 1998 similar attempt was made to reduce tax litigation through “Kar Vivad Samadhan Scheme” which was introduced by the Finance (No:2) Act, 1998. This year, similar attempt is made to reduce tax litigation through this Scheme. One objection that can be raised is with regard to levy of penalty when the disputed tax is more than Rs.10 Lakh. There is no logic in levying such a penalty. Even if the assessee is not successful in the appeal before CIT(A), his liability will be for payment of disputed tax and interest. Penalty is not automatic. The disputed addition or disallowance may be due to interpretation of some provision in the tax law for which no penalty is leviable. Therefore, in case where disputed tax is more than Rs.10 Lakh, the assessee will not like to take benefit of the scheme and to that extent litigation will not be reduced.

(iii) As stated earlier, section 202 of the Finance Act provides that declaration can be filed for settlement of disputed taxes only in respect of an appeal pending before CIT (A). There is no reason for restricting this benefit to appeal pending before the first appellate authority. This scheme should have been made applicable to appeals filed by the assessee before ITA Tribunal, High Court or the Supreme Court which are pending on 29.02.2016. If this provision had been extended to all such appeals, pending litigation before all such judicial authorities would have been reduced.

(iv) The provision in section 202 of the Finance Act relating to settlement of disputed taxes levied due to retrospective amendment in the Income tax and Wealth tax Act is very fair and reasonable. In such cases only tax is payable and no interest or penalty is payable. This provision is made with a view to settle the disputed taxes levied due to retrospective amendment made in section 9 by the Finance Act, 2012. This related to taxation as a result of acquisition of interest by a Non-Resident in a company owning assets in India. (Cases like VODAFONE, CAIRN and others). However, there are some other sections such as sections 14A, 37, 40 etc., where retrospective amendments have been made. It appears that it will be possible to take advantage of the scheme if appeals on these issues are pending before any Appellate Authority or Court as on 29.2.2016.

(v) It may be noted that last year the CBDT had made one attempt to reduce the tax litigation by issue of Circular No. 21/2015 dated 10/12/2015 whereby appeals filed by the Income tax Department where disputed taxes were below certain level were withdrawn with retrospective effect. This year the Government has issued this scheme whereby assesses can settle the demand for disputed taxes and thus reduce the tax litigation.

21. PENALTIES AND PROSECUTION:

21.1 Sections 98 to 110 of the Finance Act, 2016, make major amendments in Penalty provisions under the Income tax Act. In Para 166 of his Budget Speech the Finance Minister has explained the new Scheme for levy of penalty.

21.2 EXISTING PENALTY PROVISIONS FOR CONCEALMENT .

(i) At present, Section 271 of the Income tax Act (Act) provides for levy of penalty for concealment of income or for furnishing inaccurate particulars of income at the rate of 100% of tax which may extend to 300%. The Assessing Officer (AO) has discretion in the matter of levy of penalty. There are 8 Explanations in the Section to explain the circumstances under which a particular income will be considered as concealment of income or when the assessee will be deemed to have furnished inaccurate particulars of Income. Various clauses of this section have been considered and interpreted by the various High Courts and the Supreme Court in various judgements. The law relating to levy of penalty appeared to be more or less settled by now. How far these judgements will apply to the new Scheme for levy of penalty will depend on the manner in which officers administer the new provisions.

(ii) Recently, Income tax Simplification Committee (Justice Eashwar Committee) has submitted its Report. In para 26.1 of its Report the committee has considered the provisions of sections 271 and 273B and made certain suggestions. These suggestions have been made with a view to reduce tax litigation. If we consider the amendments made by the Finance Act, 2016, it will become evident that these suggestions are only partly implemented.

21.3 NEW SECTION 270A (UNDER REPORTING OF INCOME)

(i) It is now provided that existing Section 271 shall apply upto Assessment Year 2016-17. For A.Y. 2017-18 and onwards new sections 270A and 270AA have been added. The provisions of these sections are as under.

(ii) Section 270A authorizes an Assessing Officer, CIT (A), Commissioner or Principal Commissioner to levy penalty at the rate of 50% of tax in case where the assessee has “Under Reported” his income. In cases where the assessee has “Misreported” his income the penalty of 200% of tax will be levied. It may be noted that u/s 271, although the minimum penalty was 100% of tax and maximum penalty was 300% of tax, in most of the cases only minimum penalty of 100% was levied.

(iii) Section 270A(2) provides that the assessee will be considered to have “Under Reported” his income (a) If Income assessed is greater than income determined under section 143(1) (a) i.e Income as per Return of Income, or if Income assessed is greater than the maximum amount not chargeable to tax, if Return of Income is not filed by the assessee, (b) If Income assessed or deemed book profit u/s 115JB/115JC is greater than the income assessed or reassessed immediately before such assessment, (c) If Book Profit assessed u/s 115JB / 115 JC is greater than Book Profit determined u/s 143(1)(a) or Book Profit assessed u/s 115JB/115JC, if no return of income is filed by the assessee or (d) If Income assessed or reassessed has the effect of reducing loss declared or such loss is converted into income.

(iv) In all the above cases the difference between the income assessed or reassessed and the income computed u/s 143(1)(a) will be considered as Under Reported income and penalty at 50% of tax will be levied. If the loss declared by the assessee is reduced or converted into income the difference will be liable to penalty @ 50% of tax. The concept of income concealed or furnishing of inaccurate particulars of income, which existed u/s 271, is now given up under the new section 270A.

(v) In a case where Section 115JB / 115JC is applicable the amount of Under Reported income will be worked out by applying the formula given in the section. This can be explained by the following illustration.

In the above case Under Reported Income u/s 270A will be Rs. 3,00,000/- (Rs. 2,00,000+ Rs.1,00,000/-)

(vi) Section 270A(4) provides that where any addition was made in the computation of total income in any earlier year and no penalty was levied on such addition in that year, and the assessee contends that any receipt, deposit or investment made in a subsequent year has come out of such addition made in earlier year, the assessing officer can consider such receipt, deposit or investment as under reported income. This provision is on the same lines as existing Explanation (2) of Section 271.

(vii) Section 270A (6) provides that no penalty will be levied in respect of any Under Reported Income where (a) the assessee offers an explanation and the Income tax Authority is satisfied that the explanation is bona fide and all material facts have been disclosed, (b) Such Under Reported income is determined on the basis of an estimate, if the accounts are correct and complete but the method employed is such that the income cannot be properly deduced there from (c) The addition is on the basis of estimate and the assessee has, on his own, estimated a lower amount of addition or disallowance on the same issue and has included such amount in the computation of his income and disclosed all the facts material to the addition or disallowance, (d) Addition is made under Transfer pricing provisions but the assessee had maintained information and documents as prescribed under section 92D, declared the international transaction under Chapter X and disclosed all material facts relating to the transaction or (e) The undisclosed income is on account of a search operation and penalty is leviable under section 271 AAB.

21.4 NEW SECTION 270A (MISREPORTIN G OF INCOME):

(i) A s stated earlier, the penalty on Unreported Income in consequence of Misreporting of Income will be 200% of the tax on such Misreported Income. Section 270A (9) provides that the assessee will be considered to have Misreported his income due to (a) Misrepresentation or suppression of facts (b) Failure to record investments in the books of account (c) Claim of expenditure not substantiated by any evidence (d) Recording of any false entry in the books of account, (e) Failure to record any receipt in books of account having a bearing on total income or (f) Failure to report any International transaction or any transaction deemed to be an International transaction or any specified domestic transaction, to which provisions of Chapter X apply.

(ii) It may be noted that disputes may arise due to the wording of the above clauses in Section 270A(9). Clause (b) refers to Investments not recorded in books of account. In the case of an Individual or HUF it may so happen that certain genuine Investments may have been debited to personal Capital Account and may not appear separately in the books of account. If the assessee is declaring income from such Investments regularly, there is no reason to consider cost of Investments not recorded in books as Misreporting of Income. If the income from such Investment is declared, there is no Under Reporting much less Misreporting of Income. Moreover, when the Investment is debited to Capital Account it cannot be said that the same is not recorded in the books.

(iii) Similarly, clause (c) above states that expenditure claimed for which there is no evidence will be treated as Misreporting of Income. It is not clear as to what will be considered as an adequate evidence for this purpose. Disputes will arise on the question about adequacy of the evidence for this purpose.

(iv) Section 270A (10) provides that for the purpose of levy of penalty as a result of Under Reporting or Misreporting of income amount of tax on such income will be calculated on notional basis according to the Formula given in that Section.

(v) It is pertinent to note that there is no provision similar to Section 270A(6), as discussed in Para 21.3 (vii) above, whereby the assessee can offer an explanation about his bona fides for omission to disclose any amount of income which the tax authority wants to consider as Misreporting of Income . In other words, before the A.O. comes to the conclusion that there is misreporting of income on any of the grounds stated in Para (i) above, there is no provision to give an opportunity to the assessee to offer explanation as provided in section 270A(6). The assesses will have to litigate on such matters as absence of such a provision is against principles of the natural justice.

21.5 IMMUNITY FROM PENALTY AND PROSECUTION (SECTION 270AA ):

(i) New Section 270AA has been inserted in the Income tax Act w.e.f. assessment year 2017-18 to grant immunity from imposition of penalty and initiation of prosecution in certain circumstances. Under this section an assessee can make an application to the A.O. to grant immunity from imposition of penalty under Section 270A and initiation of prosecution proceedings under Section 276C. or 276CC. For this purpose the following conditions will have to be complied with by the assessee:-

(a) Tax and Interest payable as per the assessment order u/s 143(3) or reassessment order u/s 147 should be paid before the period specified in the Notice of Demand.

(b) No Appeal against the above order should be filed before CIT(A).

(c) The application for immunity should be filed within one month of the end of the month in which the above assessment order is received. This application is to be made in the prescribed form.

(ii) It may be noted that the power to grant immunity under this section is given to the AO only with reference to penalty leviable u/s 270A (7) @ 50% of Tax for Under Reporting of Income. If the addition or disallowance is made in the assessment or reassessment order on the ground of Misreporting of Income as explained u/s 270A(9) and where penalty is @ 200% of Tax, no such immunity u/s 270AA can be granted. To this extent this provision in section 270AA is very unfair.

(iii) After the A.O. receives the application for grant of immunity, he will have to pass an order accepting or rejecting the application within one month from the end of the month when such application is received. If he accepts the application, no penalty u/s 270A will be levied and no prosecution u/s 276C or 276CC will be initiated. If the A.O. wants to reject the application he will have to give an opportunity to the assessee of being heard. If the A.O. rejects the application, the assessee can file an appeal before CIT(A) against the assessment / reassessment order. For this purpose the time taken for making the application to the AO and the time taken by A.O. in passing the order for rejection of the application will be excluded in computing the period of limitation u/s 249 for filing appeal to CIT(A).

(iv) The order passed by the A.O. accepting or rejecting the application shall be treated as final. If the A.O. has accepted the application by his order u/s 270AA(4), no appeal before CIT(A) or revision application before CIT can be filed against the assessment or reassessment order.

(v) It may be noted that the A.O. is given discretion to accept or reject the application. This appears to be an absolute power given to the same officer who has passed the assessment order. There are no guidelines as to when the application can be rejected. There is no provision for appeal against the order rejecting the application for immunity. To this extent this provision is unfair.

(vi) As stated in (ii) above the above application for immunity can be filed only in respect of additions / disallowances made due to Under Reporting of Income where penalty is of 50% of Tax. No such application can be made if the additions/ disallowances are for Misreporting of Income where penalty is of 200% of Tax. There is no clarity in Section 270AA about a situation where in any assessment / reassessment order some additions / disallowances are for Under Reporting of Income and some additions / disallowances are for Misreporting of Income. Question arises whether the application for immunity u/s 270AA can be made in such a case for getting immunity. If so, whether such application will be for items added/ disallowed for Under Reported Income only and whether the assessee can file appeal to CIT(A) only with reference to items added / disallowed on the ground of Misreporting of Income. If this is the position, then a question will arise whether the assessee will have to revise the appeal petition later on in respect of addition / disallowance made for items of Under Reported Income if the application for immunity is rejected. If the intention of the Government is to reduce litigation and grant immunity from penalty and prosecution the benefit of Section 270 AA should have been given to all assessee where additions / disallowances are made for Under Reporting or Misreporting of Income.

21.6 PENALTY FOR FAILURE TO MAINTAIN INFORMATION AND DOCUMENTS (SECTION 271 AA ): This section has been amended w.e.f. A/Y: 2017-18 to provide that if the assessee fails to furnish the information and documents as required under Section 92D(4), the prescribed authority can levy penalty of Rs.5 Lakh. It may be noted that Under Section 92D(4) a constituent entity of an International Group is required to maintain certain information and documents in the prescribed manner and furnish the same to the prescribed authority before the due date as provided in that section.

21.7 PENALTY WHERE SEARCH HAS BEEN INITIATED (SECTION 271AA B):

Section 271AAB provides for levy of penalty in which search has been conducted on or after 1.7.2012. Specific rates are provided u/s 271AAB(1) (a),(b) and (c). Amendment made in this section, effective from A.Y. 2017-18, is in clause (c). Here the rate of minimum penalty is 30% and maximum penalty is 90% of the Undisclosed Income. This will now be a flat rate of 60% of Undisclosed Income from A.Y. 2017-18. Further, it is also provided that no penalty u/s 270 A shall be levied on undisclosed income where penalty u/s 271 AAB (1) is leviable.

21.8 PENALTY FOR FAILURE TO FURNISH REPORT U/S. 286 (NEW SECTION 271 GB): A new Section 286 has been added from A.Y 2017-18 providing for furnishing of report in respect of International Group. New 271 GB has been added effective from A.Y. 2017-18 to provide for penalty for non compliance of Section 286 as under.

(i) If any Reporting Entity referred to in section 286 fails to furnish report referred to in Section 286(2) before the due date, the Prescribed Authority can levy penalty at Rs.5,000/- per day if the delay in upto one month and at Rs.15,000/- per day if the failure continues beyond one month.

(ii) If any Reporting Entity fails to produce the information or documents within the period allowed u/s 286(6), the prescribed authority can levy penalty at Rs.5,000/- per every day when the default continues. If this default continues even after the above order levying penalty is passed, the prescribed authority can levy penalty at the rate of Rs.50,000/- per day if the default continues even after service of the first penalty orders.

(iii) If any Reporting Entity Knowingly furnishes inaccurate information in the Report required to be furnished u/s 286(2) the prescribed authority can levy penalty of Rs.5 Lakh.

21.9 PENALTY FOR FAILURE TO FURNISH INFORMATION, STATEMENTS ETC (SECTION 272A): Section 272 A provides for levy of penalty of Rs. 10,000/- for each failure or default to answer the questions raised by an Income tax Authority, refusal to sign any statement or failure to attend and give evidence or produce books or documents as required u/s 131(1). The scope of this section is now extended by amendment of the section from A.Y. 2017-18. It is now provided that penalty of Rs. 10,000/- for each default or failure to comply with a notice issued u/s 142(1), 143(2) or 142(2A) can be levied by the Income tax Authority.

21.10 POWER TO REDUCE OR WAIVE PENALTY IN CERTAIN CASES (SECTION 273A):

This section empowers the Principal Commissioner or the commissioner of Income tax to reduce or waive penalty levied u/s 271 of the Income tax Act. This power is extended to penalty levied u/s 270A also w.e.f. A.Y. 2017-18. Further, new subsection (4A) has been added in this section from 1/6/2016 to provide that the Principal Commissioner or Commissioner shall pass the order accepting or rejecting the application for waiver or reduction of penalty within a period of one year from the end of the month when application is made by the assessee. As regards all applications for waiver or reduction of penalty pending as on 1.6.2016, the Principal Commissioner or Commissioner shall pass the order accepting or rejecting the application on or before 31.5.2017. The Principal Commissioner or the Commissioner shall have to give hearing to the assessee before passing the above order.

21.11 POWER TO GRANT IMMUNITY FROM PENALTY BY PRINCIPAL COMMISSIONER OR COMMISSIONER (SECTION 273 AA ): This section has been amended w.e.f. 1.6.2016. As in section 273A, the Principal Commissioner or the Commissioner is now required to pass the order accepting or rejecting the application for grant of immunity from levy of penalty within one year from the end of the month in which the assessee has made the application for such immunity. As regards pending applications as on 1.6.2016, the Principal Commissioner or the Commissioner has to pass orders accepting or rejecting the application on or before 31.5.2017.

21.12 GENERAL:
(i) From the above discussion it is evident that the existing concept of levying penalty u/s 271 for concealment of income or furnishing of inaccurate particulars of income is now given up. New Section 270A, which will replace Section 271 from 1.4.2016, introduces a new concept of “Under Reporting of Income” and “Misreporting of Income”. Considering the way these two terms are explained in the new Section 270A, it appears that there will be a thin line of distinction between the two in respect some of the items of additions and disallowances. Since the penalty with respect to Under Reporting of Income is 50% and the penalty with respect of Misreporting of income is 200%, the A.O. will try to bring as many items of additions / disallowances under the head Misreporting of Income. Questions of interpretation will arise and tax litigation on this issue may increase.

(ii) As stated earlier, the recommendation of Justice Eshwar Committee has not been fully implemented while drafting the new Section 270A. The committee has specifically stated that no penalty should be levied where the A.O. takes a view which is different from the bona fide view adopted by the assessee on any issue involving the interpretation of any provision and is supported by any judicial ruling. It is unfortunate that this concept is not introduced in the new section 270A.

22. OTHER PROVISONS :

22.1 TAX ON DEEMED INCOME U/S 68 – SEC 115 BBE

Section 115 BBE is amended w.e.f. A.Y 2017-18. At present this section provides that deemed income u/s 68, 69, 69A, 69B, 69C and 69D is taxable at the rate of 30%. Further, no deduction for any expenditure or allowance relatable to such income is allowed. It is now provided that no set off of any loss shall be allowable from such deemed income u/s 68, 69, 69A to 69D.

22.2 ASSESSEE DEEMED TO BE IN DEFAULT – SECTION 220: Section 220 provides that an assessee shall be deemed to be in default if the taxes due are not paid. Interest is payable u/s 220(2) for the delay in payment of tax. If the assessee applies for waiver or reduction of interest to the Commissioner u/s 220(2A), the same can be waived or reduced. Section 220(2A) is now amended, effective from 1.6.2016, to provide that the commissioner should pass the order accepting or rejecting such application within a period of 12 months of the end of the month when application for waiver or reduction of interest is made. In respect of all pending applications, the order will have to be passed by the commissioner on or before 31.5.2017.

22.3 PROVISION TO GIVE BANK GUARANTEE – SECTION 281B:

(i) At present, the AO may provisionally attach an assessee’s property if he considers it necessary for protecting revenue’s interest during the pendency of assessment or reassessment proceedings. Section 281B is amended w.e.f. 1.6.2016.

(ii) Based on Justice Easwar Committee’s recommendation, this amendment provides that the assessee may provide bank guarantee of sufficient amount. In such a case the AO has to revoke the provisional attachment if the guarantee is for more than the fair market value of the property attached or it is sufficient to meet the revenue’s interest. The AO may refer to the Valuation Officer for valuing the property. The AO should pass an order revoking provisional attachment within 15 days from the date of receipt of the bank guarantee or within 45 days if reference is made to Valuation Officer. The AO may invoke the bank guarantee if the assessee fails to pay tax demand or if he fails to renew or furnish new bank guarantee at least 15 days prior to the expiry of the bank guarantee.

22.4 AUTHENTICATION OF NOTICE – SECTION 282A: To facilitate e-assessment, it has now been provided from 1.6.2016 that the notice and other documents issued by the department can be either in paper form or in electronic form. The detailed procedures for this purpose will be prescribed.

22.5 SECURITIES TRANSACTION TAX (STT ): Section 98 of the Finance (No.2) Act, 2004 has been amended w.e.f. 1.6.2016. The present rate of 0.017% STT on sale of option on securities, where option is not exercised, is increased to 0.05%. It is also provided that STT will not be payable on securities transactions entered into on a recognized Stock Exchange located in International Financial Service Centre.

23. THE INCOME DECLARATION SCHEME – 2016:

23.1 As stated by the Finance Minister in Para 159 to 161 of his Budget Speech, in Chapter IX (Sections 178 to 196) of the Finance Act, 2016, “The Income Declaration Scheme, 2016”, has been announced. This scheme is akin to a Voluntary Disclosure Scheme. The scheme will come into force on 1st June, 2016. The declaration for undisclosed domestic income or assets can be made in the prescribed form within 4 months i.e on or before 30th September, 2016. The tax at the rate of 30% of the disclosed income will be payable with surcharge called Krishi Kalyan Surcharge at 7.5% and penalty at 7.5%. Hence, total amount payable will be 45% of the income declared by the assessee under the scheme. This tax, surcharge and penalty will be payable within two months (i.e. on or before 30th November, 2016)

23.2 WHO CAN MAKE DECLARATION UNDER THE SCHEME:

Any Individual, HUF, AOP, BOI, Firm, LLP or company can make a declaration of undisclosed income or assets during the specified period (1.6.2016 to 30.09.2016). However, Section 193 of the Finance Act, Provides that the provisions of the Scheme shall not apply to following persons.

(i) Any person in respect of whom an order of detention has been made under the Conservation of Foreign Exchange and Prevention of Smuggling Activities Act, 1974.

(ii) Any person in respect of whom prosecution has been launched for an offence punishable under Chapter IX or Chapter XVII of the Indian Penal Code, the Narcotic Drugs and Psychotropic Substances Act, 1985, the Unlawful Activities (Prevention) Act 1967 and the Prevention of Corruption Act, 1988.

(iii) Any person who is notified u/s 3 of the Special Court (Trial of Offences Relating to Transactions in Securities) Act, 1992.

(iv) The scheme is not applicable in relation to any undisclosed foreign income and asset which is chargeable to tax under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015.

(v) Any undisclosed income chargeable to tax under the Income tax Act for any previous year relevant to Assessment Year A. Y. 2016-17 or earlier years where (a) N otice u/s 142, 143(2), 148, 153A or 153C of the Income tax Act has been issued and the assessment for that year is pending (b) Search u/s 132 or requisition u/s 132A or survey u/s 133A of the Income tax Act has been made in the previous year and notices u/s 143(2), 153A or 153 C have not been issued and the time limit for issue of such notices has not expired and (c) Information has been received by the competent authority under an agreement entered into by the Government u/s 90 or 90A of the Income tax Act in respect of such undisclosed asset.

23.3 WHICH INCOME OR ASSETS CAN BE DECLARED:

Section 180 of the Act provides that every eligible person can make declaration under the Scheme in respect of the undisclosed income earned in any year prior to 1.4.2016. For this purpose income which can be disclosed will be as under.

(i) Income for which the person has failed to furnish return of income u/s 139 of the Income tax Act.

(ii) Income which the person has failed to disclose in the return filed before 1.6.2016.

(iii) Income which has escaped assessment by reason of the failure on the part of the person to furnish return of income or to disclose fully and truly all material facts.

(iv) Where such undisclosed income is held in the form of investment in any asset, the fair market value of such asset as at 1.6.2016 shall be deemed to be the undisclosed income. For the purpose of determination of Fair Market Value of such assets, CBDT has been authorized to prescribe the Rules.

(v) No deduction for any expenditure or allowance shall be allowed against the income which is disclosed under the Scheme.

23.4 MANNER OF DECLARATION:

(i) The declaration under the Scheme is to be made in the prescribed Form. The same is to be submitted to the Principal Commissioner of Income tax or the Commissioner of Income tax who is authorized to receive the same. The declaration is to be signed by the authorized person as provided in Section 183 of the Finance Act. A person who has made a declaration under the scheme cannot make another declaration of his income or income of any other person. If such second declaration is made it will be considered as void. It is also provided that if a declaration under the scheme has been made by misrepresentation or suppression of facts, such declaration shall be treated a void.

(ii) As stated earlier, the tax (including Surcharge and penalty) of 45% of the income declared is to be paid on or before 30.11.2016. The proof of such payment will have to be filed before the due date. If this payment is not made, the declaration will be considered as void. In this case, if any tax is deposited, the same will not be refunded. If the declaration is considered as void, the amount declared by the person will be deemed to be income of the declarant and will be added to the other income of the declarant and assessed under the Income tax Act. If the declarant has paid the tax, Surcharge and penalty due as per the declaration before the due date, the income so disclosed will not be added to the income of any year. There will be no scrutiny or enquiry regarding such income under the Income tax or the Wealth tax Act.

(iii) The declarant shall not be entitled to reopen any assessment or reassessment made under the Income tax or Wealth tax Act or claim any set off or relief in any appeal, reference or other proceedings in relation to such assessment or reassessment. In other words, declaration under the scheme shall not affect the finality of completed assessments.

23.5 IMMUNITY:

(i) The scheme provides for immunity from proceedings under other Acts as under:

(a) Provisions of Benami Transactions (Prohibition) Act, 1988, shall not apply in respect of the assets declared even if such assets exist in the name of ‘Binamidar’.

(b) No Wealth tax shall be payable under the Wealth tax Act in respect of any undisclosed cash, Bank Deposits, bullion, jewellery, investments or any other asset declared under the scheme.

(c) No prosecution will be launched against the declarant under the Scheme in respect of any income/asset declared under the Income tax or Wealth tax Act.

(iii) It is also provided that nothing contained in the declaration made under the Scheme shall be admissible as evidence against the declarant under any other law for the purpose of any proceedings relating to imposition of penalty or for the purposes of prosecution under the Income tax or Wealth tax Act.

(iv) It may be noted that no immunity is provided in the scheme from proceedings under the Foreign Exchange Management Act, Money Laundering Act, Indian Penal Code or any other Act.

23.6 GENERAL:

(i) Section 195 of the Finance Act provides that if any difficulty arises in giving effect to the provisions of the Scheme, the Central Government can pass an order to remove such difficulty. Such order cannot be passed after the expiry of 2 years i.e. after 31.5.2018. Section 196 of the Finance Act authorizes the Government to notify the Rules for carrying out the provisions of the scheme and also prescribe the Form for making the declaration under the scheme.

(ii) Last year an Amnesty Scheme under the Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015, was announced. Under this Scheme it is reported that 644 persons declared income of about Rs.4,164 crore, and paid tax of about Rs.2,428.40 crore.

(iii) In the Finance Act, 2016 in order to give one time opportunity to persons to declare undisclosed domestic income and assets this disclosure scheme has been announced. It appears that under this Scheme the declarant will have to disclose income and specify the year in which it was earned. Further, there is a provision in the scheme that any person in whose case notice u/s 142(1), 143(2), 148, 153A or 153C is issued for any year, and assessment is pending, such person cannot declare undisclosed income of that year. This will be a great impediment in the success of the scheme. It appears that the scheme is announced by the Government with all good intentions. It will be advisable for the persons who have not complied with the provisions of the Income tax Act or the Wealth tax Act to come forward and take advantage of the scheme and buy peace.

24. TO SUM UP:

24.1 The Finance Minister has taken some steps towards his declared objective of granting relief to small tax payers, granting incentives for promotion of affordable housing, reducing tax litigation, affording onetime opportunity to declare undisclosed domestic income and assets etc. In some of the areas the efforts are half hearted and the assessees may not get full advantage from the provisions made in the Financial Act.

24.2 Justice Easwar Committee appointed to make recommendations for simplification of Income tax provisions has submitted its report. Some of the amendments made in the Income tax Act are based on these recommendations. It is rather unfortunate that these recommendations are only partly implemented in this Budget.

24.3 Last year the Government made an attempt to address the issue relating to undisclosed income and assets in Foreign Countries. A “Black Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015” was passed. This year the Finance Act contains “The Income Declaration Scheme, 2016”. Under this Scheme one time opportunity is given to those persons who have not declared their domestic income or assets in the past. 45% tax (including surcharge and penalty) is payable on such undisclosed income. There are some conditions in the scheme which may be difficult to comply with. CBDT has issued some clarifications on various issues. It is reported that the last year’s scheme for declaration of undisclosed Foreign Income and Assets did not get adequate response. Let us hope that the scheme announced this year for declaration of undisclosed domestic income and assets gets adequate response.

24.4 Another step taken by the Finance Minister relates to reduction in tax litigation. For this purpose “Dispute Resolution Scheme – 2016” has been announced. This scheme is similar to “Kar Vivad Samadhen Scheme”, which was introduced in 1998. This scheme is limited to settlement of tax disputes pending on 29.2.2016 before CIT (A). It does not cover tax disputes before ITA Tribunal, High Court or the Supreme Court. Here also the provision for payment of notional penalty @ 25% where disputed tax exceeds Rs. 10 Lakh will be an impediment in the success of the scheme. This Scheme covers Settlement of tax disputes due to retrospective amendments made in the Income tax Act. For such cases tax disputes pending before any appellate authority can be settled on payment of only disputed tax. Interest and penalty will be waived. It will be possible for assessees to settle tax disputes relating to retrospective amendments made in section 9, 14A, 37, 40, etc.

24.5 The introduction of a new chapter XII – EB (Section 115 TD to 115 TF) effective from 1.6.2016 to levy ‘Exit Tax’ on Charitable Trusts is a big blow on Charitable Trusts. In our country Charitable Trusts are working to supplement the work of the Government in the field of education, medical relief, eradication of poverty, relief during calamities such as drought, earthquake etc. For this reason, exemption is given to such charitable trusts: In recent years it is noticed that the provisions relating to the exemption to such trusts are being made more complicated. The attempt of the tax administration is to see how best this benefit to charitable trusts is denied. By levy of “Exit Tax” on cancellation of registration u/s 12AA is one such step. It is the general experience of such trusts that section 12AA Registration is being cancelled on some technical grounds and the trusts have to litigate on this issue. If, ‘Exit Tax’ is levied on cancellation of Registration u/s 12AA, the trustees of such trusts will be put to great hardship.

24.6 Another major amendment made this year is about change in the concept for levy of penalty. The concept of concealment of Income or furnishing of inaccurate particulars of income for levy of penalty is now given up. Now, penalty will be leviable if there is a difference between the assessed income and declared income. Such difference will be divided into two parts viz. “Under Reporting” and “Misreporting” of income. There is a thin line of distinction between the two. This new concept will invite litigation about interpretation whether there is “Under Reporting” where penalty is 50% of tax or “Misreporting” where penalty is 200% of tax. The old concept of concealment or furnishing of inaccurate particulars of income for levy of penalty has been interpreted in several judgments of the High Courts and the Supreme Court in last more than 6 decades. The law on the subject was well settled. This new concept of “Under Reporting” and “Misreporting” introduced this year will unsettle the settled law and assessees will have to face fresh litigation.

24.7 Welcome provision introduced this year on the recommendation of Justice Easwar Committee relates to extension of concept of presumptive taxation in cases of small professionals earning gross receipts not exceeding Rs. 50 Lakh. They will not be required to maintain accounts if they offer 50% of Gross Receipts as their income. Justice Easwar Committee had suggested limit of gross receipts at Rs. 1 Crore and presumptive income at 33 1/3%. This suggestion is only partly implemented. This provision will go a long way in resolving tax disputes in cases of small professionals.

24.8 Taking an overall view of the amendments made this year in the Income tax Act, one can compliment the Finance Minister for his sympathetic approach to the tax payers. Some of the amendments are really tax payer friendly as they grant relief to small tax payers. He has taken measures to promote affordable housing and to boost growth and employment generation.

24.9 While concluding his Budget Speech he has observed in Para 188 and 189 as under:

“188. This Budget is being presented amidst global and domestic headwinds. There are several challenges. We see them as opportunities. I have outlined the agenda of our Government to “Transform India” for the benefit of the farmers, the poor and the vulnerable.

“189. It is said that “Champions are made from something they have deep inside of them – a desire, a dream, a vision. We have a desire to provide socio-economic security to every Indian, especially the farmers, the poor, and the vulnerable; we have a dream to see a more prosperous India, and vision to “Transform India”.

Let us hope he is able to achieve his goal with the cooperation of all citizens of the country.

Advance Tax – Interest – Under the provisions of section 234B, the moment an assessee who is liable to pay advance tax has failed to pay such tax or where the advance tax paid by such an assessee is less than 90 per cent of the assessed tax, the assessee becomes liable to pay simple interest at the rate of one per cent for every month or part of the month – Form No.ITNS150 which is a form for determination of tax payable including interest is to be treated as a part of the assessment order.

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CIT vs. Bhagat Construction Co. Pvt. Ltd.. [2016] 383 ITR 9 (SC)

The
Supreme Court noted that on the facts of the case, it was an admitted
position that the assessment order dated March 29, 1995 of the Assistant
Commissioner of Income –Tax , New Delhi, did not not contain any
direction for the payment of interest. The appellate order merely stated
that interest was payable u/s. 234B of the Income-tax Act, 1961. In the
first round, before the Income-tax Appellate Tribunal, the Income-tax
Appellate Tribunal’s attention was not drawn to the payment of interest
at all.

On an application made, the Income-tax Appellate
Tribunal by its order dated November 12, 2002, specifically held that
since no direction had actually been given in the assessment order for
payment of interest, the assessee’s case would be covered by the
decision of the Supreme Court reported in CIT vs. Ranchi Club Ltd.
[2001] 247 ITR 209 (SC).

In an appeal to the High Court of Delhi
u/s. 260A of the Act, the impugned judgment dated July 23, 2003 merely
reiterated that the issue involved in the appeal had been decided by the
judgment in CIT vs. Ranchi Club Ltd. [2001] 247 ITR 209 (SC) referred
to above.

Before the Supreme Court the Revenue relied upon the
decision in Kalyankumar Ray vs. CIT (1991) 191 ITR 634 (SC) to contend
that the interest u/s. 234B is, in any case, part of Form I.T.N.S. 150
which is not only signed by the Assessing Officer but is really part of
the assessment order itself. It was submitted that the judgment in
Ranchi Club Ltd.’s case (supra) was distinguishable inasmuch as it arose
only in a writ petition and arose in the context of best judgment
assessment whereas on the facts of the present case, there was a
shortfall of advance tax that was paid, which, therefore, led to the
automatic levy of interest u/s. 234B. In addition, it was argued that
not only was section 234B a provision which was parasitic in nature, in
that, it applied the moment there was shortfall of advance tax or income
tax payable under the Act but that it was compensatory in nature.
Countering this submission, the counsel appearing for the respondent
assessee, supported the judgment of the Income-tax Appellate Tribunal
and the High Court by stating that the judgment in Ranchi Club Ltd.’s
case (supra) squarely covered the facts of this case.

According
to the Supreme Court, there was no need to go into the various
submissions made by Revenue as the appeal could be disposed of on a
short ground. The Supreme Court noted that In a three-judges Bench
decision, viz., Kalyankumar Ray v. CIT (supra) it took note of a similar
submission made by the assessee in that case and repelled it as
follows:

“In this context, one may take notice of the fact that
initially, rule 15(2) of the Income-tax Rules prescribed Form 8, a sheet
containing the computation of the tax, though there was no form
prescribed for the assessment of the income. This sub-rule was dropped
in 1964. Thereafter, the matter had been governed by Departmental
instructions. Under these, two forms are in vogue. One is the form of,
what is described as, the ‘assessment order’, (I.T. 30 or I.T. N.S. 65).
The other is what is described the ‘Income Tax Computation Form’ or
‘Form for Assessment or Tax/Refund’ (I.T.N.S. 150). The practice is that
after the ‘assessment order’ is made by the Income-tax Officer, the tax
is calculated and the necessary columns of I.T.N.S. 150 are filled up
showing the net amount payable in respect of the assessment year. This
form is generally prepared by the staff but is checked and signed or
initialed by the Income-tax Officer and the notice of demand follows
thereafter. The statute does not in terms require the service of the
assessment order or the other form on the assessee and contemplates only
the service of a notice of demand. It seems that while the ‘assessment
order’ used to be generally sent to the assessee, the other form was
retained on file and a copy occasionally sent to the assessee. I.T.N.S.
150 is also a form for determination of tax payable and when it is
signed or initialed by the Income-tax Officer it is certainly an order
in writing by the Income-tax Officer determining the tax payable within
the meaning of section 143(3). It may be, as stated in CIT vs. Himalaya
Drug Co. [1982] 135 ITR 368 (All), is only a tax calculation form for
Departmental purposes as it also contains columns and code numbers to
facilitate computerization of the particulars contained therein for
statistical purposes but this does not detract from its being considered
as an order in writing determining the sum payable by the assessee. We
are unable to see why this document, which is also in writing and which
has received the imprimatur of the Income-tax Officer should not be
treated as part of the assessment order in the wider sense in which the
expression has to be understood in the context of section 143(3). There
is no dispute in the present case that the Income-tax Officer has signed
the form I.T.N.S. 150. We therefore, think that the statutory provision
has been duly complied with and that the assessment order was not in
any manner vitiated.”

The Supreme Court also noted that its judgment in the Ranchi Club Ltd.’s case (supra) was a one line order which merely stated:

“We
have heard learned counsel for the appellant. We find no merit in the
appeals. The civil appeals are dismissed. No order as to costs”.

The
Supreme Court observed that the High Court judgment which was affirmed
by it as aforesaid arose in the context of a challenge to the vires of
sections 234A and 234B of the Act. After repelling the challenge to the
vires of the two sections, the High Court found that interest had been
levied on tax payable after assessment and not on the tax as per the
return. Following this court’s judgment in J.K. Synthetics Ltd. vs.
Commercial Taxes Officer [1994] 94 STC 422 (SC), the High Court had held
that the assessee was not supposed to pay interest on the amount of tax
which may be assessed in a regular assessment u/s. 143(3) or best
judgment under section 144 as he was not supposed to know or anticipate
that his return of income would not be accepted. The High Court further
held that interest was payable in future only after the dues were
finally determined.

The Supreme Court further observed that
under the provisions of section 234B, the moment an assessee who is
liable to pay advance tax has failed to pay such tax or where the
advance tax paid by such an assessee is less than 90 per cent of the
assessed tax, the assessee becomes liable to pay simple interest at the
rate of one per cent for every month or part of the month.

The
Supreme Court therefore held that the counsel for the Revenue was right
in stating that levy of such interest was automatic when the conditions
of section 234B were met.

According to the Supreme Court, the
facts of the present case were squarely covered by the decision
contained in Kalyankumar Ray’s case (supra) inasmuch as it was
undisputed that Form I.T.N.S. 150 contained a calculation of interest
payable on the tax assessed. This being the case, it was clear that as
per the said judgment this Form must be treated as part of the
assessment order in the wider sense in which the expression had to be
understood in the context of section 143, which was referred to in
Explanation 1 to section 234B.

This being the case, the Supreme Court set aside the judgment of the High Court and allowed the appeal of the Revenue.

[2016] 68 taxmann.com 336 (Chennai – Trib.) DCIT vs. Alstom T & D India Ltd A.Ys.: 2001-02, 2003-04 and 2004-05, Date of Order: 31st March, 2016

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Section 9, 40(a)(i) of the Act – to fall within the second exception provided in section 9(1)(vii) (b) of the Act, the source of income, and not the receipt, should be situated outside India.
Facts

The Taxpayer, an Indian company, was engaged in the business of manufacture of heavy electrical equipment. The Taxpayer had developed prototypes of certain equipment. As per the standards prescribed by the industry regulatory body, prototype development could be complete only after performance of certain design tests on the equipment. These tests were to be performed by an accredited international testing laboratory. The Taxpayer could not have exported the equipment to the international market unless these tests were completed and the results were benchmarked to the standards prescribed. Accordingly, the Taxpayer engaged an international testing laboratory for testing the prototypes and paid testing charges.

The Taxpayer remitted the testing charges to the laboratory without withholding tax.

In the course of the assessment, the AO invoked provisions of section 40(a)(i) of the Act and disallowed the payment. In appeal, CIT(A) relied on decisions in Havells India Ltd v ACIT 47 SOT 61 (URO) (Del) and held that the payment was covered by the second exception in section 9(1)(vii)(b) of the Act and hence, income accrued or arose in India. Consequently, tax was not required to be withheld from the payment. The tax department filed further appeal to the ITAT.

Held

  • Section 9(1)(vii)(b) provides for two exceptions. First exception is where the payment is made is respect of services utilized for business or profession carried on outside India. Second exception requires utilization of services for earning any income from source outside India.
  • For falling within the first exception, it is not sufficient to prove that the services are not utilised for business activities of production in India, but it is furthernecessary for to show that the technical services are utilised in a business carried on outside India. Nothing was brought on record to support this.
  • Without prejudice, the Taxpayer was concluding the export contracts in India. The products were manufactured in India and exported from India in fulfillment of the export contracts. Therefore, the Source of income was created when the export contracts were concluded.
  • Though the importer of the products was situated outside India, the importer was merely the source of money received.
  • The second exception in section 9(1)(vii)(b) requires the source of income, and not the receipt, to be outside India.
  • Since this condition was not satisfied, the payment was taxable in India.

MVAT Rules Amendment (3rd Amendment), 2016

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Notificaiton VAT 1516/CR 64/Taxation -1 dated 29.04.2016

Maharashtra Government has notified further amendments in the Maharashtra Value Added Tax Rules, 2005 with effect from 26.04.2016

MVAT Rules Amendment (2nd Amendment), 2016

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Notificaiton VAT 1516/CR -52/Taxation-1 Dated 22.04.2016

Maharashtra Government has notified amendments in the Maharashtra Value Added Tax Rules, 2005 with effect from 01.04.2016.

Changes in : Rates of tax under the Mvat Act, Modifications in the Composition Schemes, Entry Tax on slabs of marbles and granites

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Trade Circular 9T of 2016 dated 22.04.2016

Schedule A & C of the Maharashtra Value Added Tax Act, 2002 have been amended, the revision in the tax rates and amendments to MVAT schedule entries are explained in this Circular. The Composition Schemes have been modified. Details of the amendments and amendments to the Schedule under the Maharashtra Tax on Entry of goods into Local Areas Act,2002 are explained in the this Circular.

Settlement of Arrears in Dispute under the various Acts administered by the Sales Tax Department

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Trade Circular 10T of 2016 dated 03.05.2016

To unlock the arrears pending at appellate forum under various Acts administered by the Maharashtra Sales Tax Department, “The Maharashtra Settlement of Arrears in Dispute Acts,2016” is passed with a view to provide the settlement of arrears in dispute. Salient features and related procedural aspects are explained in this Circular.

Profession Tax – Exemption of late fee to the Government aided educational institutions.

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Trade Circular 11T of 2016 dated 06.05.2016

This Circular explains the conditions and procedure granting exemption for late fees payable by educational institutions which receive grant- in -aid from State government which have not filed PT e-returns though PT for the said returns period has been deducted and paid in the Government treasury for all return periods starting from 01.04.2006 to 31.03.2016 if e returns for such periods are filed up to 30.6.2016.

Profession Tax Enrolment Amnesty Scheme 2016

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Trade Circular 12T of 2016 dated 06.05.2016

Government of Maharashtra has declared Amnesty Scheme for persons who have not obtained Enrollment Certificate yet. Accordingly, if a person makes an application for enrolment during the period from 1.4.2016 to 30.9.2016 or his application for enrolment is pending on 1.4.2016 and if enrolment certificate is obtained under the “Professional Tax Enrolment Amnesty Scheme 2016” then Profession tax and Interest prior to 1.4.2013 will be waived in full and penalty u/s. 5(5) of the Profession Tax Act, 1975 will not be imposed. Detailed procedure has been explained in this Circular.

Grant of Administrative Relief

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Trade Circular 13T of 2016 dated 06.05.2016

This Circular explains amendments in the authorities to whom application for administrative relief is to be made.

Amendments to Acts, Rules and Notifications to give effect of Budget Proposals

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Trade Circular 14T of 2016 dated 07.05.2016

To give effect of Budget proposals for the year 2016-17 a bill (Legislative Assembly Bill No. XVIII of 2016) to amend various Acts, administered by the Sales Tax Department has been passed by the legislature and has received assent of the Governor on 26.04.2016. The Act (Maharashtra Act No.XV of 2016) is published in the Maharashtra Government gazette dated 26.04.2016. In this Circular, all the amendments have been explained in detail.

Registration- Permanent Place of Residence- Documents required as proof

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Trade Circular 15T of 2016 dated 09.05.2016

By this Circular, regarding proof of permanent place of registration, more relaxation has been provided by allowing to submit any two documents from the list of 13 documents specified in Trade Circular 7T of 2015 & 4T of 2016 as proof permanent residential place at the time of registration.

Designation of Wednesday as Taxpayers’ Day

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Trade Circular 17T of 2016 dated 09.05.2016

Maharashtra Vat department has designated one day of the week viz. the Wednesday (2pm to 5pm) as Taxpayers’ Day wherein Zonal/Divisional/Unit heads of all offices will meet the taxpayers/other stakeholders in their chamber without any prior appointments in order to address their grievances relating to sales tax expeditiously.

SAP based new registration functionality

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MVAT UPDATES

Trade Circular 18T of 2016 dated 24.05.2016

Maharashtra VAT department is implementing new SAP based system in phased manner. In this Circular, changes in the process of registration, free billing software, transition issues relating to registration and about providing help from offices have been explained. The new functionality of registration based on SAP will go LIVE after 3 pm of 25.05.2016.

No Service Tax on pilgrimage to Haj Mansarovar from 01.07.2012 to 19.08.2014

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Notification No. 25/2016 dated 17.05.2016

Service Tax on Services provided by the specified organisation in respect of a religious pilgrimage facilitated by the Ministry of External Affairs of the Government of lndia, under bilateral arrangement is not required to be paid for the period commencing on and from the 1st day of July, 2012 and ending with the 19th day of August, 2014.

Extension to file Service Tax Return upto 29.042016

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SERVICE TAX UPDATES

Order No. 01/2016-ST dated 25.04.2016

Due to difficulties faced by the Service Tax Assessees in accessing Service Tax Applications, CBEC vide this Order has extended time to file Service Tax Return (ST-3) for the period 01.102015 to 31.03.2016 upto 29-04-2016.

State of Tamil Nadu vs. M/s. Plastic Craft Industries, [2013] 66 VST 62 (Mad).

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Central Sales Tax- Sales Price-Excise Duty Paid on Past Transaction – In absence of Evidence of Its Collection-Does Not Form Part of Sale Price- Section 2(h) of The Central Sales Tax Act, 1956.

Facts
The assesse manufacturer of plastic components did not charge excise duty on certain transaction of sales on a bonafide belief that it is not payable. However, later on paid excise duty after taking licence under Central Excise provisions but did not collected the same from the buyers. The department based on proceedings from the excise authority, levied tax on excise duty paid by the dealer for past transactions although not collected from buyers. On appeal tribunal allowed appeal against which the department filed revision petition before the Madras High Court.

Held
As per definition of sale price contained in section 2(h) of the CST Act, what is charged as consideration alone could be considered as turnover of sales. Admittedly, the fact is, on the date of sale, the petitioner had collected as sale consideration and did not collect excise duty paid by it from the buyers and no evidence was available subsequent to payment of excise duty whether the portion of such payment had been passed over to the customer as a part of consideration. Therefore, the excise duty paid by the dealer and not collected from the customer cannot form part of sales turnover for levy of tax. Accordingly, the High Court dismissed the revision petition filed by the department and confirmed the order of the Tribunal.

State of AP vs. M/s. Sree Akkamamba Textiles Ltd. [2013] 66 VST 37 (AP).

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Central Sales Tax – Inter-State Sale or Stock Transfer-Dispatch of Goods to Branch Outside the State to Agents/Branch- In Absence of Documentary Evidence of Prior Contract – Is Stock Transfer. Section 6A of The Central Sales Tax Act, 1956.

FACTS
M/s. Akkamamba Textiles Ltd., Tanuku was manufacturing, selling and transferring the cotton yarn and waste. It was finally assessed by the C.T.O., Tanuku-I circle, for assessment year 1993-94, under Central Sales Tax Act, 1956. The assessing authority had allowed exemption on inter-state stock transfer to its Maharashtra (Bombay and Ichalkaranji), West Bengal and Tamil Nadu based four selling depot-agents under section 6A of the CST Act upon production of requisite Forms. The Deputy Commissioner (CT), Eluru Division, took up suo moto revision of the CTO ‘s order, disallowing exemption as turnover, relating to the sales said to have been made through depots, branch in Maharashtra, West Bengal and Tamil Nadu on certain grounds. Aggrieved by the aforesaid revision orders of the Deputy Commissioner (CT), Eluru division, the dealer preferred appeal before the Tribunal. The Tribunal allowed the appeal and remanded the matter to the DC (CT), Eluru, to give fair and reasonable opportunity to the appellantsassessee. In pursuance of these remand orders, the revisional authority passed consequential orders levying tax once again on the disputed turnovers under section 3(a) of the CST Act. Aggrieved of these orders the dealer preferred another appeal before the STAT , A.P. This time the appeals were allowed in favour of the assesse holding that these disputed transactions are not inter-state sales but are mere stock transfers to the four non-resident selling depot agents. The department filed revision before the Andhra Pradesh High Court.

HELD

In the considered opinion of the high court, the questions of law said to have been arisen are not the questions of law in as much as all the questions relate to the finding of facts. The assessing authority, after examination of returns filed by the dealer and on scrutiny of the books of accounts, granted exemption relating to depot/branch transfer of cotton yarn made from Tanuku to Maharashtra (Bombay-Ichalkaranji), West Bengal and Tamil Nadu and allowed the exemption of the turnovers in exercise of the powers conferred u/s. 6A of the CST Act. The tribunal also recorded finding of facts and stated in its order that the revisional authority had reversed the order of the dealer merely on surmises and conjecture without citing specific instances and without any additional material. The finding of facts recorded by the tribunal is not challenged before the High Court. Accordingly, the High Court held that there is no question of law that is required to be answered, thus dismissed the revision petitions filed by the department and confirmed the order of tribunal allowing claim of stock transfer under section 6A of the CST Act.

2016 (41) STR 330 (A.A.R.) North American Coal corporation India Pvt Ltd.

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Salary paid to the secondment employees in terms of employment agreement is not liable for service tax.
Facts

The applicant is a subsidiary (Indian) of the foreign (US) company. It required services of a consultant who was in employment with the foreign company. Accordingly, a tripartite agreement was entered between employee, Indian company and US company for usage of the services of the employee by the Indian company for a particular term. During the consultants’ stay in India, he is to be treated as an employee of the Indian company while his social security interests continue to be taken care of by the foreign company. After the advent of the negative list, all earlier definitions got obliterated and new definition of ‘service’ was enacted under section 65(44) wherein service provided by an employee to the employer in the course of employment was granted exclusion from the definition of service. Social security costs were not reimbursed by the Indian company to the US company. Department contended that social security expenditure incurred by foreign company amounts to consideration paid by the applicant for employing the consultant and shall not be covered by the exclusion. Further, RBI circular was relied upon.

Held
The agreement explicitly mentioned that the consultant would be considered as an employee of the Indian company during his stay in India although his social security interests shall be borne by the US company. No salary was received from the US company during his stay in India and hence salary granted by Indian company and US company were mutually exclusive. In view of the clear provision, service of the consultant cannot be regarded as otherwise than a service provided by employee to the employer even though social security costs were paid by the US company. RBI circular is irrelevant for interpretation of the term ‘service’. Indian company is not liable to service tax on salary and allowances paid to the employee in terms of employment agreement.

[2016-TIOL-14-ARA-ST] M/s Akqa Media India P. Ltd

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In absence of any legal/contractual obligation to pay volume discounts which is purely gratuitous and discretionary on the part of media owners, such receipts are not exigible to service tax.

Facts
The Applicant intends to provide services of an advertising agency providing professional services to the advertisers in relation to placement of advertisements in various media. They propose to follow two business models- viz. placement of advertisement on behalf of the advertiser wherein they would raise an invoice on the advertiser charging service tax on the agency commission and secondly engage in buying and selling of advertising inventory on its own account wherein the applicant charges a consolidated amount which includes the cost to the media owner and their margin. They could also entail incentive/volume discount from the media owners. The question before the authority was whether the incentive/ volume discount received in both the above business models is liable for service tax.

Held
The Authority noted the definition of ‘service’ provided u/s. 65B(44) of the Finance Act, 1994 and stated that there has to be a nexus between activity and consideration. The term “activity for a consideration” involves an element of a contractual relationship which could be express or implied. The revenue has no evidence to indicate that an activity was undertaken resulting in giving volume discount by the media owner especially when the choice of selecting the media owner was of the advertiser. Further it was held 43 that volume discount is gratuitous and there is no legal/ contractual obligation to give such discounts and therefore the incidental receipt of incentives/volume discounts are not liable to service tax.

[2016] 68 taxmann.com 280 (Mumbai-CESTAT) – Magarpatta Township Development & Construction Co. Ltd. vs. Commissioner of Central Excise, Pune-III

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When TDS liability of foreign service provider is borne by service recipient and the service provider is paid entire consideration as per the contract, such TDS component would not constitute consideration for service.
Facts

Appellant received services of a foreign architect for designing and planning of various commercial buildings and service tax liability was discharged on actual consideration paid. As regards TDS liability under the income tax law, in respect of consideration paid to foreign architect, it was borne by the appellant as determined by the terms of agreement. Service tax demand was raised on said TDS component by contending that the TDS would also form part of consideration.

Held

On perusal of the agreement between the appellant and the foreign architect, it was found that the gross amount charged was exclusive of TDS. It was noted that the erstwhile Rule 7 of Service Tax (Determination of Value) Rules, 2006 clearly stated that actual consultant charges needs to be taxed. Hon’ble Tribunal observed that combined reading of erstwhile section 67 of Finance Act, 1994 and the said Rule 7 indicates that amount billed by the service provider is liable for service tax. In present case, when it was found that service tax was paid on entire invoice amount and nothing was on record to provide that TDS component was collected from foreign architect, it was held that TDS liability borne by appellant and paid out of its own pocket cannot constitute consideration for service and accordingly there is no service tax liability.

[2016] 68 taxmann.com 280 (Mumbai-CESTAT) – Lavino Kapur Cottons (P.) Ltd. vs. Commissioner of Central Excise, Thane-II

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Once the refund is allowed by Commissioner (Appeals) by speaking order, it is not open to adjudicating authority to revisit the refund claim on merits
Facts

The Appellant filed 3 refund claims of unutilized CENVAT credit availed on input services in terms of Rule 5 of the CENVAT credit Rules, 2004. The said claims were consequential refund claims arising out of Order-in- Appeal wherein the Commissioner (Appeals) had ordered the Original Authority to grant refund. The claim was rejected by the adjudicating authority on the ground that they failed to declare in their ER-2 Returns the details of availment of CENVAT credit on input services and also failed to furnish the documents in support of their claim. It was contended that matter was remanded back with a direction to sanction refund claim and thus it was not within the power of the adjudicating authority to revisit the case and reject refund claim without filing any appeal to higher appellate authority. The First Appellate authority upheld the order rejecting the refund. Aggrieved by the same, the present appeal is filed.

Held

Hon’ble Tribunal observed that Commissioner (Appeals) had passed a speaking order granting refund and nothing was left for the lower authority to revisit the merits of the case. It was held that the lower authorities did not follow the judicial discipline as without contesting the order of Commissioner (Appeals) before higher judicial authority, it was not open for them to reject the refund claims by again getting into the merits of the case when the same is already dealt with by the superior authority. Appeal was therefore allowed.

2016 (42) S.T.R., 50 (Tri. Mumbai) C.S.T., Mumbai-I vs. Bluechip Corporate Investment Centre Ltd.

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The amount received as consideration should be considered as cum-tax amount unless the amount of tax is recovered separately.
Facts

The respondent received commission on the sale of bonds of RBI. No service tax was charged on the commission amount. The adjudicating authority confirmed the demand of service tax considering the commission received as inclusive of service tax. The department filed an appeal contesting that no evidence was provided to prove that amount received was inclusive of service tax and the decision in the case of Agro Industries Ltd vs. Commissioner of Central Excise 2007 (210) E.L.T. 183 (SC) was relied upon and it was provided that the judgement in case of Advantage Media Consultant-2008 (10) S.T.R. 49 (Tri-Mumbai) was incorrectly relied by first appellate authority.

Held
Tribunal observed that service tax was not separately charged on the commission during the relevant time and since Supreme Court has dismissed the department’s appeal against the judgement in case of Advantage Media Consultant-2008 (10) S.T.R. 49 (Tri-Mumbai), the Revenue’s appeal is devoid of merits and accordingly dismissed the appeal.

Whether payment of transaction charges to stock exchange amounts TO FTS – SecTION 194J – Part – I

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INTRODUCTION

1. Section 194J, in substance, requires every
person [with some exceptions] responsible for paying [Payer] to a resident
[Payee] to deduct tax at source [TDS] from payment of any sum by way of `fees
for professional services’, `fees for technical services’, etc,. at the time of
payment or credit of such sum to the account of the Payee as provided in Sec.
194 J (1) at the specified rate. There are some exceptions/ relaxations from
this requirement with which we are not concerned in this write-up. For the sake
of convenience, reference to TDS requirement at the time of credit is ignored.

1.1 For the above purpose, ‘fees for technical services’ [FTS], has the same
meaning as given in Explanation 2 to section 9 (1)(vii) [said Explanation].
This Explanation effectively defines FTS as consideration paid for rendering of
any managerial, technical or consultancy service. This definition has some
further inclusions and exclusions with which we are not concerned in this
write-up. As such, TDS requirement is required to be complied with while making
payment of FTS by the Payer as provided in section 194J (1). There is also
corresponding provision contained in section 40 (a)(ia), which provides for
disallowance of expenditure incurred by way of FTS in the event of TDS default
u/s. 194J, wherein also some relaxations are provided with which we are not
concerned in this write-up. Section 194J is also amended to cover payments of
`royalty’ within it’s scope by the Taxation Laws (Amendment) Act, 2006 [w.e.f. 13/07/2006]
with which also we are not concerned in this write-up.

1.2 For the above purpose, in the context of payments for different types of
expenses , meaning of the expression FTS under the said Explanation has come-up
for interpretation before the courts/tribunal from time to time.

1.3 The Madras High Court, in the case of Skycell Communications Ltd.
(Skycell’s case) reported in 251 ITR 53 had an occasion to consider meaning of
the expression FTS in the context of payment for availing cellular telephone
services wherein, the Court has taken a view that such payment is made in order
to have the facility of communication with others and in such cases, the Payer
does not contract to receive the technical services [TS]. He agrees to pay for
the use of air time. This judgment also supports the view that mere collection
of a fee for the use of standard facility available for all those willing to
pay for it does not amount to FTS. The fact that the service provider has
installed sophisticated technical equipment in the exchange to ensure
connectivity to its subscriber, does not on that score, make it a provision for
TS. Whatever applies to cellular mobile phone services, also applies to fixed
line telephone services. Neither service can be regarded as TS for the purpose
of Sec. 194J. Similarly, the internet is very much a product of technology
which cannot be provided without installation of sophisticated equipments and
cannot be used by the subscribers without the use of telephone mobile or fixed
lines. On that score, every subscriber of internet service provider cannot be
regarded as having entered into contract for availing TS . According to the
High Court, the provisions of the Act must be construed in the background of
the realities of day to day life in which the products of technology play an
important role in making life smoother and more convenient. In fact, the Court
also found the view of the Revenue applying TDS requirement to subscribers of
telephone as grossly unreasonable. This view of the Madras High Court has been
followed in other cases by the courts/ benches of tribunal. As such, the
general view which emerged was that if a standard facility is provided through
usage of machine or technology, it should not be termed as rendering of TS and
the payments for the same should not be regarded as FTS for the purpose of TDS
u/s. 194 J .

1.4 Further, in the context of payments made to MTNL/BSNL by the companies
engaged in the business of providing cellular telephone services to their
subscribers for providing use of facilities for interconnection between the two
networks at inter connection points known as ports, the Delhi High Court in the
case of Bharti Cellular Ltd and connected appeals [319 ITR 139] took the view
that, the expression TS used in the definition of FTS was not be construed in
the abstract and general sense but in the narrower sense as it is circumscribed
by the expressions ‘managerial service’ and ‘consultancy service’ in the
definition of FTS which have a definite human element attached to them. As
such, according to the Court, the expression TS would have reference to only
technical service rendered by human, it would not include any service provided
by machines or robots. Therefore, according to the Court, payment of
interconnection charges/port access charges could not be regarded as FTS. With
this judgment, in this context, the view started getting acceptance that for
the purpose of rendering TS, the presence of human intervention is crucial and
therefore, as long as there is no human intervention in a service, it cannot be
treated as TS as contemplated in the definition of FTS given in the said
Explanation. This view is also followed in other cases. The issue with regard
to this requirement of presence of human intervention in the provision of TS
got largely settled with the judgment of the Apex Court in the case of Bharti
Cellular Ltd. and other cases [390 ITR 239]. In this case, the Court dealt with
the judgment of the Delhi High Court in the case of Bharti Cellular Ltd
[supra]. In these cases, the Apex Court remitted back the matters to the
Assessing Officers [AO] with the direction that in each case, the AO should
examine a technical expert from the side of the department and to decide,
whether any human intervention was involved in the provision of interconnection
services. In this judgment, the Apex Court also gave certain directions to CBDT
to issue directions to the AOs to examine and bring necessary technical
evidences on record in such cases before deciding the issue and not to proceed
only on the basis of contracts placed before them. From this judgment of the
Apex Court, it would appear that the principle laid down by the Delhi High
Court, in restricting the scope of the expression TS that it should necessarily
involve human intervention, got effectively approved. This view is also
followed in other cases by the Tribunal. Accordingly, the view emerged is that
the element of human intervention, interface or application of human mind or
direct or indirect involvement of human endeavor is necessary for any service
to be regarded as the provision of TS within the definition of the FTS. As
such, what constitutes technical service essentially becomes a question of fact
to be examined in each case. Therefore, to an extent, uncertainty remains in
dealing with this issue.

1.4.1 Subsequently, the CBDT issued Instruction No. 5/2011 dtd 30th March, 2011
in which, by referring to the judgment of the Apex Court in the case of Bharti
Cellular Ltd [supra], directing the AOs. / Transfer Pricing Officers that they
should frame assessments only after bringing on record appropriate technical
evidence that may be required in a case for this purpose and should not proceed
only by the contracts between the parties.

1.4.2 With the above position, with regard to the requirement of human
intervention for providing TS as contemplated in the definition of FTS, further
issue with regard to degree of human involvement became relevant for
consideration. In this context, the issue really faced is whether presence of
incidental/ insignificant human involvement or interface could make an
arrangement provision of TS.As such, in this context, a debate started that is
it a question of more or less of human involvement or is it a question of
presence or absence of human involvement. Generally, in this context, it was
believed that the incidental / insignificant human involvement should not make
the service as TS within the definition of FTS. This view gets support from the
decisions of the Tribunal. However, the Agra bench of the Tribunal in the case
of Metro and Metro [(2014) 29 ITR (trib) 772] took a different view that the
question is not of extent of human involvement but it is the question of either
presence or absence of human involvement. The correctness of this view is
seriously doubted in the profession. But this decision kept this further issue
alive.

1.5 In the context of the meaning of the expression TS in the definition of
expression FTS, the issue was also under debate as to whether the transaction charges
paid to Stock Exchange by its members to transact the business of trading in
securities could be regarded as FTS. This issue was decided by the Bombay High
Court against the assessee in the case of Kotak Securities Ltd [340 ITR 333].
However, the action of the AO in disallowing this expenditure u/s. 40(a)(ia)
was not upheld by the High Court for the reasons stated in the judgment.

1.6 The issue referred to in para 1.5 as to whether payment of such transaction
charges would constitute FTS for the purpose of TDS u/s. 194J and consequent
effect of section 40(a)(ia) for the assessment year in question, dealt with by
the Bombay High Court in the case referred to in the para 1.5 above, recently
came-up for consideration before the Apex Court and has now got resolved.
Considering the importance of this judgment and the other implications thereof,
it is thought fit to analyse the same in this column.

CIT vs. Kotak Securities
Ltd .- 340 ITR 333 (Bom)

2. In the above case, the relevant brief facts were: The assessee company was
engaged in the business of share broking, depositories, etc. The trading in
securities were carried out through recognized Stock Exchanges such as Bombay
Stock Exchange (BSE), National Stock Exchange of India (NSE), etc. The Stock Exchanges
regulate members’ activities like entering into, making, performance and
termination of contracts including contracts between members or between a
member and its constituents or between a member and a person, who is not a
member and the consequences of default, etc. For the purpose of facilitating
such trading activities, the BSE had devised the BSE On-Line Trading (BOLT )
system. Similar system is also devised by the NSE. For the purpose of
convenience, the Court decided to deal with BOLT system devised by the BSE.
This system provides for totally automated screen- based trading in securities
and facilitates the member- brokers to trade in securities from the trade
workstation installed in their offices which has replaced the earlier system of
assembling in the trading ring for carrying out this activity. The BOLT system
provides all the data that is necessary to the intending buyer and intending
seller of the securities and when the best buy order is matched with the best
sell order, the transaction is concluded which is followed by necessary
documentation. Under this system, the trading in securities is conducted in an
anonymous enviornment in such a manner that the buyers and sellers of the
securities do not know the names of each other and the same is revealed only
after the deal is finally settled. Settlement of transactions in securities
entered into by the members is done as per the procedure adopted by the stock
exchange which is continuously updated from time to time. The trading and
settlement activities are closely monitored in BSE by a system known as BSE
online surveillance system [BOSS]. As such, for the purpose of settling the
transactions entered in to by the members, delivery of securities and connected
matters, appropriate mechanism is provided by the Stock Exchange which is
governed by the relevant rules and regulations provided under the bye-laws of
the BSE. For the purpose of providing this facility of entering into trading in
securities, etc. through the BOLT system, the transaction charges are levied by
the BSE on the members, who enter into such transaction.

2.1 T he assessee company had furnished Return of Income for the Asst. Year.
2005-06 and during the relevant previous year, the assessee had paid to the BSE
an amount of Rs. 5,17,65,182 towards the transaction charges without deducting
any tax. During the assessment proceeding, the AO took the view that the
transaction charges paid by the assessee were in the nature of FTS covered u/s.
194J and therefore, the assessee was liable to deduct tax and the tax having
not being deducted, the AO disallowed the entire expenditure of transaction
charges u/s. 40(a)(ia). The first appellant authority took the view that the
Stock Exchange is not merely a mute spectator providing only physical
infrastructure to the members but it was a supervisor, overseer, manager,
controller, settlor and arbitrator over the security trading done through it
which necessarily had vital inputs and ingredients of rendering managerial
services and accordingly, confirmed the action of the AO However, the tribunal
took the view that the Stock Exchange does not render any managerial, technical
or consultancy service and the assessee was not required to deduct any tax u/s.
194J from the payment of transaction charges and consequently, provisions of
section 40(a)(ia) are not attracted. Accordingly, the disallowance made by the
AO was deleted. On these facts, the issue as to applicability of Sec. 194J to
the payment of transaction charges and consequent applicability of Sec.
40(a)(ia) came up before the Bombay High Court at the instance of Revenue. In
substance, the issue before the Court was whether the transaction charges paid
by the assessee company could be regarded as FTS covered u/s. 194J for the
purpose of making TDS and consequent disallowance u/s. 40(a)(ia).

2.2 Before the Court, on behalf of the Revenue, it was, interalia, contented
that the Stock Exchange through the BOLT system provides a trading platform
which is highly sophisticated and constantly monitored and managed by the
managerial staff of the Stock Exchange and hence, the services rendered by the
Exchange are TS covered u/s. 194J and since the assessee has failed to make
TDS, the AO was justified in disallowing the expenditure under Sec. 40(a)(ia).
On the other hand, on behalf of the assessee, it was, interalia, contented that
transaction charges paid by the assessee for the use of a system provided by
the Stock Exchange. The BOLT system, like the ATM system provided by the banks,
does neither envisage a contract for rendering technical services nor a
contract for rendering managerial services, but merely a contract for usage of
BOLT system. Mere fact that the BOLT system itself is a device set-up by using
high technology, in the absence of a contract for rendering technical services,
cannot be a ground to hold that payments of transaction charges are FTS u/s.
194J. As such, provisions of section 40 (a)(ia) are not applicable, there being
no liability to deduct tax u/s. 194J.

2.3 For the purpose of deciding the issue, the Court referred to the relevant
part of the provisions of section 194J(1) and the said Explanation as it stood
at the relevant time and noted that the plain reading of the provision shows
that the expression FTS includes rendering of any managerial services and the
question is, by providing the BOLT system for trading in securities whether the
Stock Exchange renders managerial services to its members. The Court also noted
that, the Tribunal as well as the counsel for the assessee strongly relied on
the judgment in Skycell’s case (supra), wherein it was held that the cellular
mobile service provider does not render any technical service though high
technology is involved in the cellular mobile phone and therefore, section 194J
is not attracted.

2.4 The Court then stated that the judgment of Madras High Court in Skycell’s
case is distinguishable on facts. In that case, the subscriber who had
subscribed to the network was required to pay for the air time used by the
subscriber at the rates fixed by the service provider. In the facts of that
case, the High Court took the view that the contract between the subscriber and
the service provider was to provide mobile communication network and the
subscriber was neither concerned with the technology involved in this process
nor was he concerned with the services rendered by the managerial staff in
keeping the cellular mobile phone activated. As such, the contract between the
customer and the service provider was not to receive any technical or managerial
service and the customer was only concerned with the facility of being able to
communicate with others on payment of charges. Accordingly, in that case, there
was no linkage between the contract for providing a medium of communication
through the cellular mobile phone and the technical and managerial service
rendered by the service provider in keeping the cellular mobile phone
activated.

2.4.1 The Court then proceeded to distinguish the facts of the case of the
assessee as compared to the facts before the Madras High Court in Skycell’s
case and for that purpose stated as under [pages 340-341]:

“. . … in the
present case, there is direct linkage between the managerial services rendered
and the transaction charges levied by the stock exchange. The BOLT system
provided by the Bombay Stock Exchange is a complete platform containing the
entire spectrum of trading in securities. The BOLT system not merely provides
the live connection between prospective purchasers and prospective sellers of
the respective securities / derivatives together with the rates at which they
are willing to buy or sell the securities, but also provides a mechanism for
concluding the transaction between the two parties. The BOLT system withholds
the identity of the two contracting parties, namely, the buyer and the seller
of the respective securities/ derivatives. Under the screen-based BOLT system,
the entire trading system is managed and monitored right from the stage of
providing the platform for the prospective buyers/sellers of the securities /
derivatives till the date the deal struck between the two parties are finally
settled in all respects. The very object of establishing the stock exchanges is
to regulate the transactions in securities and to prevent undesirable
speculation in the transactions. To achieve this goal, the stock exchange
continuously upgrades its BOLT system so that the transactions carried on
through that system inspire confidence in the general public and that the
transactions are settled smoothly and expeditiously. Thus, the entire trading
in securities is managed by the Bombay Stock Exchange through the BOLT system
provided by the stock exchange.

Unlike in the case of cellular mobile phones
where the user of the cellular telephone is at the discretion of the subscriber
and the service provider is not regulating user of the cellular mobile phone by
the subscriber, in the case of the BOLT system, the user of the system is
restricted to the trading in securities and the same is completely regulated by
the stock exchange. If during the course of trading, it is found that a member
is indulging in malpractices the stock exchange is empowered to suspend the
member broker apart from making him liable for various other consequences.
Thus, the decision of the Madras High Court in the case of Skycell [2001] 251
ITR 53(Mad) is totally distinguishable on facts and the Income-tax Appellate
Tribunal was in error in applying the ratio laid down therein to the facts of
the present case.”

2.5 Further, the Court rejected the contention raised on behalf of the assessee
that there was no contract to render technical/ managerial services in the
present case and stated that the very object of providing BOLT system is to
provide complete platform for carrying out these activities. It is only if a
member trades through the BOLT system, it is required to pay transaction
charges depending upon the volume of trading. Once the trading through BOLT
system takes place, the member is assured that the contracting party is a
genuine buyer or seller, as the case may be, and that the price offered by the
opposite party would be in consonance with the norms laid down by the Stock
Exchange and the transaction would be settled effectively and expeditiously.
According to the Court, the measure of levying the transaction charges is not
relevant and the fact that transaction charge is based on the value of the
transaction and not on the volume is not determinative of the fact as to
whether managerial services are rendered or not.

2.6 Proceeding further, in support of the view that the case is covered u/s.
194 J, the Court further observed as under [page 342]: “Unless the stock
exchange constantly monitors the transactions relating to the sale or purchase
of the securities right from the stage when the two contracting parties
interact through the BOLT system, it would be impossible to ensure safety of
the market. When there is considerable variation in the price of the securities
offered to be sold or purchased the in-built system alerts and remedial measures
are taken immediately so that no panic situation arises in the stock market.
With a view to regulate the trading in securities, the stock exchange provides
risk management and surveillance to the stock brokers to ensure the safety of
the market. The surveillance function involves price monitoring, exposure of
the members, rumour verification on a daily basis and take remedial actions
like reduction of filters, imposition of special margin, transferring scrips on
a trade to trade settlement basis, suspension of scrips/members, etc. These are
some of the identified managerial services rendered by the stock exchange for
which transaction charges are levied. ”

2.6.1 In support of the above, the Court further pointed out as under [page
342]: “The fact that the BOLT system provided by the stock exchange has
in-built automatic safeguards which automatically gives alert signal if the
fluctuation in the prices of the securities exceed a particular limit
prescribed by the stock exchange does not mean that the managerial services are
not rendered, because , firstly, the in-built mechanism in the BOLT system
itself is a part of the managerial service rendered by the stock exchange and,
secondly, even the in-built mechanism provided in the system is varied or
altered by the stock exchange depending upon the circumstances encountered
during the course of rendering managerial services.”

2.7 Rejecting the argument that the BOLT system is like the ATM system provided
by the banks, the Court stated that no trading activity is carried on at the
ATM like under the BOLT system under which the activity is
monitored/regulated/managed by the Stock Exchange.

2.8 Considering the above, on the issue of applicability of section 194J, the
Court finally held as under [pages 342-343]: “In the result, we hold that
when the stock exchanges are established under the Securities Contracts
(Regulation) Act, 1956, with a view to prevent undesirable transactions in
securities by regulating the business of dealing in shares, it is obvious that the
stock exchanges have to manage the entire trading activity carried on by its
members and accordingly managerial services are rendered by the stock
exchanges. Therefore, in the fact of the present case, the transaction charges
were paid by the assessee to the stock exchange for rendering the managerial
services which constitutes fees for technical services u/s. 194J read with
Explanation 2 to section 9(1)(vii) of the Act and hence the assessee was liable
to deduct tax at source before crediting the transaction charges to the account
of the stock exchange. ”

2.8.1 From the above, it would appear that the Court took the view that, the
Stock Exchange is rendering managerial services. According to the Court, the
in-built mechanism in the BOLT system is itself a part of managerial services
rendered by the Stock Exchange and even such in-built mechanism provided, is
varied or altered as per the need during the course of rendering managerial
service. As such, the payment of transaction charges is FTS, as the definition
of FTS includes consideration for managerial services and accordingly, the same
is covered by section 194J.

2.9 The Court then dealt with the issue of disallowance u/s. 40(a)(ia). After
considering the object of the introduction of section 40(a)(ia) as explained in
CBDT circular No/ 5 dtd 15th July, 2005, the Court noted that during the period
1995-2005, neither the assessee made TDS from the payment of transaction
charges nor the Revenue raised any objection or initiated any proceedings for
default in making TDS. The Court, under the circumstances, felt that nearly for
a decade both the parties proceeded on the footing that section 194J is not
attracted. Under the circumstances, according to the Court, no fault can be
found with the assessee for not making TDS u/s. 194J for the assessment year in
question [Asst Year 2005-06].The Court also noted that from the Asst Year
2006-07, the assessee has started deducting tax from such payments, though not
as FTS but as royalty. The Court also noted that, presumably, the Revenue has
not suffered any loss for non- deduction of tax as the Stock Exchange has
discharged its tax liability for that year. On these facts, the Court took the
view that no action can be taken u/s. 40(a)(ia) and held as under [page 343]:

” In any event, in the facts of the present case, in view of the
undisputed decade old practice, the assessee had bona fide reason to believe
that the tax was not deductible at source u/s. 194J of the Act and, therefore,
the Assessing Officer was not justified in invoking section 40(a)(ia) of the
Act and disallowing the business expenditure by way of transaction charges
incurred by the assessee.”

2.10 From the above, it is worth noting that though the Court held that the
payment of transaction charges constitutes FTS covered u/s. 194J, under
peculiar circumstances, the Court also took a fair view that disallowance u/s.
40(a)(ia) cannot be made as both the Revenue and the assessee were under the
bona fide belief for nearly a decade that the tax was not required to be
deducted.

[2016-TIOL-1104-CESTAT-MUM] Benzy Tours & Travels Pvt. Ltd vs. Commissioner of Service Tax, Mumbai-I

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The provisions of section 11B of the Central Excise Act, 1944 applies to every case of refund irrespective of the fact that the payment is made without authority of law.
Facts

The Appellant wrongly paid service tax and made an application for refund. The refund claim was rejected stating that it was filed beyond one year from the relevant date as provided under section 11B of the Central Excise Act, 1944. It was argued that the payment made was without authority of law and therefore was not barred by limitation.

Held

The Tribunal noted that in every case of refund the amount is refundable only where it is not payable, accordingly the section will not apply for the reason that it is neither service tax nor excise duty. If this is accepted then section 11B will stand redundant. Therefore it was held that when payment is made under a particular head such as service tax, excise duty etc. the subsequent refund of the amount not payable should be treated as refund of service tax / duty only and therefore the time limitation provided under section 11B shall apply.

Note: (Readers may note that the decision has distinguished the decision of Geojit BNP Paribas Financial Services Ltd [2015-TIOL-1602-HC-KERALA-ST] reported in August-2015 issue of BCAJ, decision of Madhvi Procon P. Ltd [2015-TIOL- 87-CESTAT-AHM, Jyotsana D.Patel [2014-52 taxmann.com 255 (Mumbai-CESTAT )] referred to in February 2015 issue of BCAJ).

[2015] 56 taxmann.com 381 (Karnataka) CCE & ST vs. Mukund Ltd.

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CENVAT credit on raw material cannot be denied to manufacturer of final product, even if such raw material is used in another factory belonging to another assessee, provided, the CENVAT able input is used for common share under alliance agreement between such manufacturer and assessee and is for a continuous process of manufacturing dutiable goods.

Facts:
The assessee and two other companies entered into a “strategic alliance agreement” for the production of steel through integrated steel plant (ISP). ISP was producing the envisaged product. A supplier having its plant next to ISP, supplied oxygen and nitrogen in pipelines which was used as a raw material in ISP. The assessee used the said items as raw material and availed full CENVAT credit based on duty paid invoices although a part thereof was used by one of the alliance parties to manufacture certain items. The revenue alleged that since a portion of gases was being diverted to alliance Partner who was using the same to manufacture the products in its company, assessee would lose the benefit of CENVAT credit to that extent.

Held:
The High Court observed that by the Strategic Alliance Agreement, the corporate entities had entered into a joint venture agreement to manufacture steel products. It was also observed from the records that whatever was manufactured by the other alliance partner in the ratio agreed to between the parties was finally made over to the assessee for manufacture of final product. Thus, though there are three separate units with separate registrations, the entire raw material is being converted into final dutiable product in continuous; inter connected and integrated process conforming to the definition of a single factory u/s. 2(f) of the Central Excise Act. Relying upon the decision of High Court in the case of Vikram Cements vs. CCE [2006] 3 STT 230, the Court reiterated that a manufacturing unit can have one or more units to manufacture intermediary raw materials to manufacture a final product and dismissing revenue’s appeal held that CENVAT cannot be denied on the ground that credit is being availed by one factory and material inputs are used by three factories, because the CENVAT able input is being used for common share and continuous purpose of manufacturing dutiable goods.

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[2015] 56 taxmann.com 383 (Andhra Pradesh) Star Enterprise vs. Jt. Commissioner, CCE&ST

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Where the appeals against the Order-in -Original are dismissed by First and Second Appellate Authorities as time-barred, the writ Courts cannot accept a challenge to the very same order, as it would unsettle a legally settled position.

Facts:
The petitioner filed an appeal before first and second appellate authority, but both the authorities refused to entertain the same as they were presented not only beyond the period of limitation prescribed therefor, but also beyond the condonable period. Therefore, a writ petition was filed before High Court asking for a writ of mandamus declaring the levy of service tax on the works undertaken by the petitioner as illegal, arbitrary, amounting to double taxation and consequently setting aside the original order.

Held:
Relying upon decision dated 29.01.2015 in the case of M/s. Resolute Electronics (P.) Ltd. vs. Union of India Writ Petition No. 1409 of 2015 and Supreme Court decision in the case of Singh Enterprises vs. CCE [2008] 12 STT 21, the High Court held that after availing remedy unsuccessfully before another Court, it is not legally permissible to accept challenge to the same order under writ jurisdiction as it would result in unsettling a legally settled position. It was further held that when appellate authority has already decided the matter against the petitioner, the writ Court is debarred from doing so particularly, when the appellate authorities’ orders are not challenged in the writ jurisdiction.

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2015 (38) STR 12 (Cal.) Solux Galfab Pvt. Ltd. vs. Commissioner of Service Tax.

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The ex-parte order can be set aside if sufficient cause for delay in filing the appeal is made out. Length of delay is immaterial, sufficient cause for delay is material.

Facts:
The petitioner filed an appeal along with application of condonation for delay of 21 days before the CESTAT . The Tribunal decided the application ex-parte and dismissed the appeal. After which a miscellaneous application was filed for restoration thereof and application for condonation of delay. The Tribunal misconstrued the application as a review application and recorded that sufficient cause for delay was not shown and dismissed the appeal. Therefore the present writ is filed.

Held:
The Hon’ble High Court held that the length of delay is immaterial, sufficient cause for such delay is of prime importance. Rather than finding fault with the application for condonation of delay, the Tribunal should encourage the litigation to be decided on merits and should not act harshly. The Tribunal invoked Rule 41 of the CESTAT (Procedure) Rules, 1982 for review as against Rule 20 of the said Rules which provides for setting aside ex parte order if sufficient cause is shown. The order was a set aside with a direction to fix up the date of hearing.

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Nature of Lease Transaction of Cranes

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Introduction
The identification of lease transaction is a vexed issue. The sale by “transfer of right to use goods” (Lease) is provided by a deeming clause in Article 366 (29A) of Constitution of India. However, there is no definition of the nature of lease transaction in constitution or in the respective sales tax laws. Therefore, its nature is required to be determined in light of decided cases. The controversy remains alive till the issue reaches the Supreme Court.

The decisions are also based on facts of each case.

BSNL case

One of the important judgments on the issue is of Supreme Court in case of Bharat Sanchar Nigam Limited (145 STC 91). In this judgment, the Hon’ble Supreme Court has specified criteria for deciding the nature of lease transaction. The said criteria can be reproduced below.

“98. To constitute a transaction for the transfer of the right to use the goods, the transaction must have the following attributes:

(a) There must be goods available for delivery;

(b) There must be a consensus ad idem as to the identity of the goods;

(c) The transferee should have a legal right to use the goods consequently all legal consequences of such use including any permissions or licenses required therefore should be available to the transferee;

(d)For the period during which the transferee has such legal right, it has to be the exclusion to the transferor – this is the necessary concomitant of the plain language of the statute – viz., a “transfer of the right to use” and not merely a licence to use the goods;

(e) Having transferred the right to use the goods during the period for which it is to be transferred, the owner cannot again transfer the same rights to others.”

However, in spite of such clear criteria laid down by highest court, the litigation continues.

Case of crane
There are commercial transactions where work is carried out by parties, with use of cranes. It is but natural that the customer who employees the crane owner will request /direct the crane owner to operate the crane as he requires. However, such transactions are being attempted to be classified as lease transactions by the state sales tax authorities.

Recently, there is judgment of the Hon’ble Bombay High Court in relation to such controversy.

Commissioner of Sales Tax vs. General Cranes
This judgment is given by the Hon’ble Bombay High Court on 21st April 2015 in Sales Tax Reference No. 5 Of 2009 In Reference To Application No. 72 Of 2005.

The facts in this case, as noted by the Hon’ble Bombay High Court, are as under.

“The facts, in brief, giving rise to the present Reference are as under:

The respondent is registered under the Lease Act and is engaged in carrying on the business of hiring of cranes. The respondent had filed an application under section 8 of the Lease Act for determination of question as to whether he would fall under the term of “dealer” under the Maharashtra Sales Tax on the Transfer of Right to use any goods for any purpose Act, 1985 (hereinafter referred to as the ‘Lease Tax Act’) along with Section 52 of the Bombay Sales Tax Act, 1959. The Additional Commissioner while dealing with the said application held that the respondents would fall within the definition of a ‘dealer’ and as such, the transaction entered into by him with M/s. Offshore Hook-Up & Construction Services (I) Pvt. Ltd. would be governed by the provisions of the said Act and as such taxable. Being aggrieved thereby, an Appeal came to be preferred. The learned Tribunal reversed the finding of the learned Additional Commissioner and held that the transaction entered into between the respondent and M/s. Offshore Hook-Up & Construction Services (I) Pvt. Ltd. would not amount to sale as defined u/s. 2(10) of the Lease Act.”

In subsequent paras, the Hon’ble High Court has reproduced certain relevant portion from the agreement between the parties. Thereafter, the Hon’ble High Court has referred to the definition and provisions of the Lease Act.

More particularly, the Hon’ble High Court has relied upon the judgment in case of BSNL (cited supra) and Rashtriya Ispat Nigam Limited 126 STC 114 (SC).

After analysing facts and legal position, the Hon’ble High Court observed as under, about nature of transaction:

“As already discussed hereinabove, the learned Tribunal has extensively reproduced the terms of contract which are also been reproduced by us hereinabove. Perusal of the terms of contract would reveal that as per the contract, the driver, cleaner, diesel and oil was to be provided by the respondent. So also, transportation of accessories was to be done by the respondent. It can further be seen that there is no provision in the contract that the legal consequences such as permissions or licences were to be transferred to the transferee. The ultimate control over the crane retained with the respondent. We find that the learned Tribunal, applying the judgment of Apex Court, has rightly construed that the transaction which were entered into by the respondent with Offshore Hook Up & Construction Services (I) Pvt. Ltd. would not fall within the meaning of Lease Act and the respondent was not a dealer within the meaning of definition of section 2(4) of the Lease Act.”

Thus, the Hon’ble High Court decided that there is no transfer of right to use goods and the judgment given by the Hon’ble Tribunal is correct as per facts and law.

The concept of effective control is also discussed by Hon’ble High Court in above para. Though the judgment is in relation to cranes it can apply with equal force to other such vehicles like, buses, etc. Therefore, the above judgment will be a guiding judgment for similar transactions.

Conclusion:
It seems as though, that the dealers have to wage a long struggle to get the correct position of Law decided. And this is happening due to fact that there is no definition of the ‘nature of lease transaction’. The parameters considered by different courts further add to the controversy. Therefore, it will be useful if a statutory definition of relevant terms is provided in the Law itself. Hopefully, due care will be taken in the drafting of GST Law.

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OVERLAP OF CUSTOMS DUTY AND SERVICE TAX

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Background
In the context of indirect taxation, overlap of taxes is one of the major areas of concern inasmuch as it has a cascading effect and increases the transaction costs. While, overlap of service tax and VAT or service tax and excise duty is a subject of extensive deliberations and judicial considerations, less attention has been given to overlap of customs duty and service tax. However, actually this has a significant implication inasmuch as basic customs duty is not eligible for the benefit of CENVAT credit (only CVD equivalent to excise duty is entitled to CENVAT credit). Hence, the issue is analysed below.

Relevant Statutory Provisions

Service Tax – Reverse Charge Mechanism: effective from July 01, 2012

• Section 68 of the Finance Act, as amended (Act)

“Every person providing taxable service to any person shall pay service tax at the rate specified in section 66B in such manner and within such period as may be prescribed.

Notwithstanding anything contained in sub-section (1), in respect of such taxable services as may be notified by the Central Government in the Official Gazette, the service tax thereon shall be paid by such person and in such manner as may be prescribed at the rate specified in section 66B and all the provisions of this Chapter shall apply to such person as if he is the person liable for paying the service tax in relation to such service.

Provided that the Central Government may notify the service and the extent of service tax which shall be payable by such person and the provisions of this Chapter shall apply to such person to the extent so specified and the remaining part of the service tax shall be paid by the service provider.”

• Notification No. 30/2012-ST dated 20/6/12.

In case of the following services notified as specified services, the service recipient is held as the person liable for payment of service tax to the Government.

“Taxable services provided or agreed to be provided by:

(i) to (x) ……………

(xi) Taxable service provided or agreed to be provided by any person which is located in a non-taxable territory and received by any person located in the taxable territory.”

• Relevant extracts from Customs Valuation (Determination of Price of Imported Goods) Rules, 2007 (‘CVR’) issued in terms of Customs Act, 1962 – Rule 10 – Cost and Services

“(1) In determining the transaction value, there shall be added to the price actually paid or payable for the imported goods, —

(a) the following to the extent they are incurred by the buyer but are not included in the price actually paid or payable for the imported goods, namely:-

(i) commissions and brokerage except buying commissions;

(ii) the cost of containers which are treated as being one for customs purposes with the goods in question;

(iii) the cost of packing whether for labour or materials;

(b) The value apportioned as appropriate of the following goods and services where supplied directly or indirectly by the buyer free of charge or at reduced cost for use in connection with the production and sale for export of imported goods, to the extent that such value has not been included in the price actually paid or payable, namely:-

(i) materials, components, parts and similar items incorporated in the imported goods;

(ii) tools, dies, moulds and similar items used in the production of the imported goods;

(iii) materials consumed in the production of the imported goods;

(iv) engineering, development, art work, design work, and plans and sketches undertaken elsewhere than in India and necessary for the production of the imported goods;

(c) royalties and license fees related to the imported goods that the buyer is required to pay, directly or indirectly, as a condition of the sale of the goods being valued to the extent that such royalties and fees are not included in the price actually paid or payable;

(d) the value of any part of the proceeds of any subsequent resale, disposal or use of the imported goods that accrues, directly or indirectly, to the seller;

(e) all other payments actually made or to be made as a condition of sale of the imported goods, by the buyer to the seller or by the buyer to a third party to satisfy an obligation of the seller to the extent that such payments are not included in the price actually paid or payable.

Explanation.- Where the royalty, license fee or any other payment for a process, whether patented or otherwise, is includible referred to in clauses (c) and (e), such charges shall be added to the price actually paid or payable for the imported goods, notwithstanding the fact that such goods may be subjected to the said process after importation of such goods.

(2) For the purposes of sub-section (1) of section 14 of the Customs Act, 1962 (52 of 1962) and these rules, the value of the imported goods shall be the value of such goods, for delivery at the time and place of importation and shall include –

a) The cost of transport of the imported goods to the place of importation;

b) Loading, unloading and handling charges associated with the delivery of the imported goods at the place of importation; and

c) The cost of insurance;

Provided that –

(i) Where the cost of transport referred to in clause (a) is not ascertainable, such cost shall be twenty per cent of the free on board value of the goods;

(ii) The charges referred to in clause (b) shall be one per cent of the free on board value of the goods plus the cost of transport referred to in clause (a) plus the cost of insurance referred to in clause (c);

(iii) Where the cost referred to in clause (c) is not ascertainable, such cost shall be 1.125% of free on board value of the goods;

…………….”

Double taxation of services and intangible rights related payments by importers of goods to foreign entities

As per CVR, the value of services and intangible rights is required to be added to the transaction value of imported goods, for the purpose of levy of customs duty. At the same time such payments (consideration) for services and intangible rights are also liable to service tax under reverse charge. Thus, there is an issue of double taxation.

In particular, as per Rule 10(1)(c) & (e) of CVR, the following is required to be added to the price actually paid or payable for the imported goods while determining the transaction value.

“Royalties and license fees related to the imported goods that the buyer is required to pay, directly or indirectly, as a condition of the sale of the goods being valued, to the extent that such royalties and fees are not included in the price actually paid or payable.

All other payments actually made or to be made as a condition of sale of the imported goods, by the buyer to the seller or by the buyer to a third party to satisfy an obligation of the seller to the extent that such payments are not included in the price actually paid or payable.

Explanation:- Where the royalty, license fee or any other payment for a process, whether patented or otherwise, is includible referred to in clauses (a) and (b), such charges shall be added to the price actually paid or payable for the imported goods, notwithstanding the fact that such goods may be subjected to the said process after importation of such goods.
Issues pertaining to indian companies entering into business arrangements with foreign entities arise for consideration. Such arrangements are mainly done to use brand/reputation, intellectual property rights, product and business expertise etc. of foreign entities and sell products supplied/approved by them in indian market. Such arrangements are made in different legal forms like joint venture, franchise, license, distributor etc. under the said arrangements, indian companies are obliged to maintain prescribed standards of business, pay for value of goods being imported and are also required to make payments to foreign partner for services and intangible rights which are identified by various names like franchise/license fee, marketing/advertising fee, agents fee/commission, renewal fee, reimbursements of travel etc.

While Custom authorities relates all the above direct or indirect payments related to services and intangible rights like royalty, license fee etc. to supply of goods and hold them liable to Customs duty, service tax authorities treat such payments as consideration for services and hold indian companies liable to pay service tax under reverse Charge mechanism.

Thus,  indian  companies  are  exposed  to  the  burden of double taxation of Customs duty as well as service tax.   this   increases   the   transaction   costs   of   indian businesses substantially.

Government has in its wisdom, sought to address this issue in some specific cases. E.g.:

•    When transfer of right to use imported/locally pro- cured packaged software or canned software is passed on to the buyer, Government has exempted CVD/Central excise duty on consideration for such transfer of right to use, provided service tax is paid on the same (Ref: Notification No. 25/2011- Cus. dated 01.03.2011 and 14/2011-Ce dated 24.03.2011). Conversely, service tax was exempt- ed when CVD/Excise duty was paid (Ref: Notifica- tion no. 34/2012 – St, dated 20.06.2012).

•    IPR service providers were exempted from service tax equivalent to amount of cess payable on the transfer of technology under the provisions of the r & d Cess act, 1986 so as to avoid double taxa- tion of both service tax and r & d Cess (ref not no. 17/ 2004-St., dated 10.09.2004).

Mumbai CESTAT Ruling in united shippers lTD vs. csT (2015) 37 STR 1043 (Tri – Mumbai)

Issue before CESTAT

“Whether barge (shipping) charges collected towards transportation of the imported goods from the mother vessel anchored at Bombay floating Lights to dharmatar jetty where the goods were unloaded, which forms part of the transaction value of the imported goods can be once again levied to service tax under the category of cargo handling services?”

Contentions of the Appellants

•    The activity of transshipment of import and export cargo, from the mother vessels to the jetty and vice versa, is carried out by the barges (termed as daughter vessels) on account of the draft not permitting the mother vessels to travel until the jetty at  minor  ports. the  appellant  submitted  that  it  is a settled position in law that such transshipment of cargo from the mother vessel to the jetty is to be treated as a continuation of the journey of the goods in the import stream into india, as upheld in South India Corporation (Agencies) Ltd. vs. Collector of Customs and Ors. (1987) 30 E.L.T. 100 (Cal); Turner Morrison and Co. Ltd. vs. Asstt. Col- lector of Cus. for Exports (II) (1999) 110 E.L.T. 484 Cal.) and Collector of Customs, Ahmedabad vs. Shipping Corporation of India Ltd. (1987) 29 E.L.T. 182 (tribunal).

•    The freight amount charged to the customer for the barge transportation of goods from the mother vessel to the jetty forms a part of the assessable value of the imported goods, for the purpose of computation of Customs duty. the inclusion of the freight amount has been explicitly mandated by the amendments effected to section 14 of the Customs act, 1962 read with CVr these amendments were made in order to overcome the decision in Ispat In- dustries Ltd. vs. Commissioner of Customs, Mum- bai (2006) [202 E.L.T. 561 (S.C.)] and ensure the position in law which had always been intended by the Legislature, and accordingly the said po- sition would equally apply for the period prior to 2007. therefore, the value of the transportation by transshipment is treated as an intrinsic part of the value of a goods transaction and the said amount therefore, cannot attract the levy of service tax si- multaneously as being in the nature of consideration for provision of services. reference is made to the decision in Escotel Mobile Communications Ltd. vs. Union of India (2004) [177 E.L.T. 99 (Ker.)] wherein it was held that, based on the “aspect theory”, the same transaction could be exigible to different taxes in its different aspects – in that case, the issuance of a Sim card to a subscriber could be equally liable to sales tax and service tax at the same time. this view was challenged before the Hon’ble Supreme Court in BSNL vs. UOI (2006) [2S.T.R. 161 (SC)] in which the aforesaid finding of the high Court was overruled, and it was categorically held that the aspect theory would not apply to enable the value of the goods to be included in the rendition of services or vice versa. In the present case, the freight charged for the barge transpor- tation of the goods from the mother vessel to the jetty is includible in the assessable value on which customs duties are levied. Applying the rationale laid down in the aforesaid ruling of the Hon’ble Su- preme Court, once the freight has already rightly suffered customs duties as a part of the value of the goods being imported, a dual levy of service tax cannot also be imposed on the same freight amount, and the demand on this basis cannot sustain. Further, it was submitted that this activity of transportation of goods from the mother vessel to the jetty is earned out before the goods crosses the customs frontier of india and consequently, will be construed to be undertaken while the goods are still in the import stream and prior to the successful completion of the process of importation of the goods into india. [Garden Silk Mills vs. Union of India, (1999) 113 E.L.T. 358 (S.C.)] reliance was also placed on the decision of the Hon’ble Supreme Court in the case of Hotel Ashoka vs. Asst. Commr. of Commercial Taxes (2012) [276 E.L.T. 433 (S.C.)], wherein it held that an activity of sale of items in the duty free zone of an airport will not attract the levy of Vat, even though such sale is actually taking place within the physical territory of india, as such goods had not crossed the customs frontier of india to form a part of the mass of goods meant for consumption in india and had therefore not been imported into india. it was therefore, submitted that taxing the transshipment of the goods in the present case will tantamount to levying service tax on an activity of import of goods, which is impermissible in law.

Contentions of the Revenue

It appears that transport of cargo by barges from the mother vessels had taken place when the mother vessels  were  at  mumbai  floating  Light/inner anchorage  of mumbai Port trust, i.e. when the vessels were already in india. Therefore, there does not appear any legal bar to levy service tax on the services provided in relation to the cargo transported by the barges from the mother vessels to  the jetty.  It  would  also  not  be  correct  to  say  that it would amount to double taxation. The levy of cus- toms duty and service tax are under separate enact- ments. In the case of CST, Bangalore vs. Lincoln He- lios (India) Ltd. (2011) 23 STR 112 (Kar.), the hon’ble high Court has held that excise duty is levied on the aspect of manufacture and service tax is levied on the aspect of services rendered. Therefore, it will not amount to payment of tax twice.

In the said case, the facts were not in dispute. the as- sessee undertook not only manufacture and sale of its products, it also erected and commissioned the finished products.  The  customer  was  charged  for  the  services rendered as well as the value for manufactured products. admittedly, up to 20/06/2003 no service tax was leviable on erection and commission work. It was only subjected to tax from 01/07/2003.

The assessee paid the excise duty on the value of the product notwithstanding the services rendered. it is in that context, they were contending that there cannot be levy of tax under two parliamentary legislations. however, the excise duty was levied on the aspect of manufacture and service tax is levied on the aspect of services rendered. Therefore it will not amount to payment of tax twice. After contesting the matter before the tribunal, the assessee paid the service tax and interest thereon. Moreover, the commissioning installation and erection work was brought to service tax only from 01/07/2003. It was during the transitional period and the benefit of doubt existing in the mind of the assessee was given to him. Since it constitutes a reasonable cause for not paying the service tax in view of Section 80, the Court held that the tribunal was justified in interfering with the levy of penalty and in setting aside the same and there was no infirmity in the order passed by the tribunal.

 Observations of CESTAT
•    As regards the first issue, since the transaction in- volves a customs transaction and a service trans- action, it is necessary to decide where the customs transaction ends and the service transaction begins.  the  issue  as  to  what  constitutes  “imports” has been settled by the hon’ble apex Court in the case of Garden Silk mills Ltd. (supra), wherein the following was observed:

“Truly speaking, the imposition of import duty, by an large, results in a condition which must be ful- filled before the goods can be brought inside the customs barriers, i.e. before they form part of the mass of the goods within the country.

It would appear to us that the import of the goods into india would commence when the same cross into the territorial waters but continues when the goods become part of the mass of goods within the country; the taxable event being reached at the time when the goods reach the customs barriers and the bill of entry for home consumption is filed.”

Thus  when  the  goods  are  being  transported  by the barges from the mother vessel to the jetty on- shore, that activity is part of the import transaction of bringing the goods into india from a place outside india. the question of rendering any service in respect of such goods by way of cargo handling or otherwise can take place only after the customs transaction is completed. therefore, the question of levying to service tax on the transportation by barges from the question of levying to service tax the transportation by barges from the mother vessel to the jetty onshore, would not arise at all since the said activity is part of the import transaction leviable to import duty and we hold accordingly. [para 5.2]

•    This is also evident from the fact that Section 14 of the CVR were amended to specifically include barge charges and handling charges in the trans- action value  of the imported goods vide  finance act, 2007 to overcome the adverse decision in the case of ispat industries (supra). Section 14 was substituted “to specifically provide that transaction value of imported goods shall include, in addition to the price, any amount paid or payable for costs and services, including commissions, … cost of transportation to the place of importation, insurance, unloading and handling charges to the extent and in the manner specified in the rules made in this regard”.

These  amended  provisions  came  into  force  with effect from 10/10/07. CBEC has also clarified vide Circular 34/2009, dated 30-11-2009 that “the issue of ineligibility of barge charges in the value (of imported goods) will be governed by the provisions of Section 14 of the Customs act, 1962 read with CVR for the assessment arising in the period from 10/10/07 onwards.”

Thus  the  question  of  demand  of  service  tax  on barge charges and the handling charges connected therewith would not arise at all with effect from 10-10-2007 as they form an integral part of the transaction value for levy of customs duty. Even fo the period prior 10-10-2007, the same position would apply for the reason that the import trans- action is complete only when the goods reach the customs barriers and the bill of entry for home consumption is field. [Para 5.3]

•    As regards the observations of Karnataka High Court relied by the revenue, it was observed that in the Lincoln helio case, the only question of law considered by the hon’ble high Court was whether setting aside the penalty by the tribunal was correct when the demand of service tax and interest was upheld and the assessee did not contest the levy.  These  are  not  the  issues  before  us  nor  is there any remote connection with the facts of the case before us. It is a settled position in law as held by the hon’ble apex Court in al noori tobacco Products india Ltd. case [2004 (170) eLt 175 (SC)] that the ratio of a decision can be applied only if the facts are identical. A slight or a material change in the facts could lead to an entirely different conclusion. [Para 5.7]

Conclusion
In light of the foregoing, it is very clear that, there is      an exposure to overlap of customs duty & service tax, more particularly, in cases of payments made to foreign entities by indian importers. the mumbai CESTAT ruling discussed earlier does lay down a sound principle in the context of the facts of that case. However, exposure to litigation even in such cases continues. Further, mandatory pre-deposit provisions causes hardship to the assesses in such cases as well. the impact of overlap of customs duty and service tax assumes significance, again in the backdrop of the increased rate of service  tax to 14% (which could go up with 2% Swatch Bharat Cess) and imminent introduction of GST. hence, it is felt that this issue needs to be speedily addressed by the Government so as to ensure that transaction cost of indian importers is not unduly burdened rendering them globally uncompetitive.

IMPORTANT AMENDMENTS IN SERVICE TAX BY FINANCE AC T, 2015

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Introduction
The Finance Bill 2015 was enacted with effect from May 14, 2015. The amended service tax provisions are a mixed bag of provisions with a few new exemptions on one hand and amending the definition of service, withdrawal of exemptions and narrowing down the scope of the Negative List on the other with a view to widen the tax base. This is further complemented by enhancing the tax rate as well. From the modest estimate of Rs. 500 crore in the year of its introduction in 1994, service tax estimate for the current fiscal is augmented to Rs. 2.10,000 crore. Some of the significant amendments made by the Finance Act, 2015 are briefly discussed herein below:-

Rate of tax
Service tax rate increased from 12.36% to 14% subsuming Education Cess and Secondary & Higher Education Cess with effect from June 01,2015.

Swachh Bharat Cess @ 2% to be levied on all or any of the taxable services and its effective date is yet to be notified.

The following services which are taxed at a specified rate are revised as follows with effect from June 01,2015

• Booking of air tickets by air travel agent
A. Domestic bookings:- 0.7%
B. International bookings:- 1.4%

• Life insurance service
A. F irst year:- 3.5%
B. Subsequent year:- 1.75%

• Money changing service
A. gross amount of currency exchange :- 0.14% or for amount upto Rs 1,00,000/- minimum Rs.35

B. gross amount of currency exchange :- Rs 140 and 0.07% for amount exceeding Rs 1,00,000/- and upto Rs 10,00,000/-

C. gross amount of currency exchange :- Rs 770 and 0.014% for amount exceeding maximum Rs 7000/- Rs 10,00,000/-

• Service provided by lottery distributor and selling agent

A. R s. [8200] on every Rs.10 lakh (or part of Rs.10 lakh) of aggregate face value of lottery tickets printed by the organising State for a draw.
B. R s. [12800] on every Rs. 10 lakh (or part of Rs 10 lakh) of aggregate face value of lottery tickets printed by the organizing State for a draw

Amendment in Definition of ‘Service’
Explanation-2 to the definition of service is amended to exclude the following transactions from the expression transaction in money or actionable claim.

Activity by a lottery distributor or a selling agent in relation to promotion, marketing, selling, organising, or facilitating in organising lottery. Accordingly the terms lottery distributor and selling agent are suitably defined under clause 31A of section 65B(44) to mean “a person appointed or authorised by a State for the purposes of promoting, marketing, selling or facilitating in organising lottery of any kind, in any manner, organised by such State in accordance with the provisions of the Lotteries (Regulation) Act, 1998.” Consequently the entry in the negative list i.e. entry 66D(i) is also amended as discussed below:

Activity by a foreman of chit fund for conducting or organising a chit. This amendment is brought about to counter the effect of the decision of the Delhi High Court in the case of Delhi Chit Fund Association V. Union of India [2013] 32 taxmann.com 332(Delhi) holding that activity by a foreman in relation to the chit fund business being a service in relation to transaction in money is not liable for service tax. Further, the SLP filed by the department against the said decision was also dismissed by the Supreme Court. Thus this amendment explicitly states the desire of the legislature to treat such activities by a foreman of a chit fund as not a transaction in money.

Negative List
The Negative List is reviewed and pruned in order to widen the tax base as discussed below:

Effective from June 01,2015
• Any contract work or job work carried out in relation to manufacture or production of alcoholic liquor is now taxable. Accordingly, the expression “process amounting to manufacture” defined under section 65B(40) has been suitably amended to exclude any process amounting to manufacture of alcoholic liquor for human consumption from the definition. (The Seventh Schedule to the Constitution of India List-II, specifically authorizes the State Government to levy tax on the manufacture or production of alcoholic liquor and thus whether this levy is constitutionally valid may be a debatable issue in the future) [section 66D (f)].

• The expression betting, gambling or lottery has been revisited to exclude any service by way of promotion, marketing, organising, selling or facilitating the organizing of lottery by a lottery distributor or selling agent. Hence promotion, marketing, organising of lottery is now taxable. The term betting and gambling finds a place in entries 34 and 62 of the State list. The power to levy tax by the Central Government in relation to promotion, marketing, organising of games of chance including lottery was taxed under the erstwhile section 65(105)(zzzzn) and it was challenged in a writ petition filed by Future Gaming Solutions Pvt. Ltd 2015(37) STR 65 (Sikkim). The Hon’ble High Court while declaring the said section 65(105)(zzzzn) ultra vires held that it is the exclusive legislative domain of the State legislature to levy tax of any nature on lotteries by virtue of entry 62 of List II to the Seventh Schedule. It was also noted that, though Entry 40 of List 1 includes lotteries organised by Government of India or a Government of a State as a field of legislation, the power to regulate does not include power to tax. Therefore, though Parliament alone has enacted Lotteries (Regulation) Act,1998 under entry 40, taxing powers have been conferred on the State only as envisaged under entries 34 and 62 of List II to Seventh Schedule. Thus, in terms of the above decision, it appears that the Finance Act, 2015 has gone beyond its powers under the Constitution by excluding the promotion or marketing or organising of lottery from the negative list.

• Services by way of admission to entertainment events or access to amusement facilities are now taxable. Accordingly, admission to amusement parks, theme parks, water parks, etc. is liable for service tax. Also, entry into entertainment events like music concerts, non-recognised sporting events, award functions, pageants are also liable for service tax. Entertainment Tax is levied by the State Government on various amusement facilities and entertainment events. This levy may lead to double taxation and with the service tax rate of 14%, may result in making such activities exorbitantly priced. [Section 66D(j)]. It may be noted here however that when the amount charged for the entertainment events (not amusement events) is less than INR 500 then they shall continue to be exempted from service tax. Similarly, admission to exhibition of films, circus, dance or theatrical performances and recognized sporting events have also been exempted and this is without any limit under entry 47 of Mega Exemption Notification 25/2012-ST. In reference thereof, the term “recognised sporting event” is defined in clause (zab) of para 2 of the Mega Exemption Notification 25/2012-ST as “any sporting event where the participating team or individual represent any district, state, zone or country; covered under entry 11.

Government services: effective from a date to be notified

Presently, support services provided by the Government or Local authority to business entities are liable for service tax.   Service tax now applies   to all services provided by the Government or Local authority to business entities.  however,  the  liability is to be discharged by the business entities under reverse charge mechanism. however, the services provided by the Government or Local authorities to its citizens not being business entities continue to remain under the negative List and continue to be non-taxable. Further, with the increased involvement of the private sector in rendering services which were once in the exclusive domain of the Government, the change may provide a level playing field to both the private and the public players [section 66d(a)(iv)]. In this context, the term ‘Government’ is now defined in clause 26A of section 65B for the first time as follows:

“Government means the Departments of the Central Government, a State  Government  and  its Departments and a Union territory and its Departments, but shall not include any entity, whether created by a statute or otherwise, the accounts of which are not required to be kept in accordance with article 150 of the Constitution or the rules made thereunder”

In terms of this provision therefore, all corporations formed under the Government statute or autonomous bodies or public sector undertakings incorporated under Companies act including boards or regulatory authorities do not qualify to be considered ‘Government’ whereas all Central Government ministries and departments working thereunder, [for instance   department   of   income   tax,   department of Company affairs etc.] various State Government and their departments, union territories and their departments are part of the expression Government. “Local authority” also is not covered by this expression, however, it is already defined under clause 31 of the said  section  65B.  further,  the  term  Governmental Authority is also defined under clause (s) of the Mega Exemption Notification 25/2012-ST which is relevant for interpreting the exemption, if any, available in this regard under the said notification.

(Note: it is expected that the Government may notify the list of services in this context).

Valuation:

Reimbursements:
Section 67 is amended to include any reimbursable expenditure or cost incurred by the service provider and charged in the course of providing or agreeing to provide a taxable service except in such circumstances, and subject to such conditions, as may be prescribed. the inclusion of reimbursable expenditure as a part of the gross value of taxable service under rule 5(1) of  the  Service  tax  (determination  of  value)  rules, 2006 (Valuation Rules) was always a subject matter of litigation and controversy. the Landmark judgment of delhi high Court in the case of Intercontinental Consultants and Technocrats Pvt. Ltd. [2012-TIOL- 966-HC-DEL-ST] held that rule 5(1) of the Valuation rules is ultra vires section 67. to counter the effect of the judgment, the amendment to section 67 itself is made by including reimbursable expenditure as a part of the value of the taxable service, post may 14,  2015.  thus  litigation  process  will  be  kept  alive. nevertheless, double taxation is likely to arise in many cases unless appropriate conditions are prescribed.

Lottery distributor or selling agent:
Section 67 is also amended to include any amount retained by the lottery distributor or selling agent from the gross sale amount of the lottery tickets in addition to the fee or commission, or the discount received, which is the difference between the face value of the lottery ticket and the price at which the distributor or selling agent gets such ticket.

Exemptions

Withdrawal of Exemptions
•    Various exemptions for services provided to Government, Local authority or Governmental authority vide entry 12 are withdrawn and only selective services like construction, erection, commissioning, etc. of historical monument, archaeological sites, canals, dams, irrigation works, pipelines for water supply/treatment etc. remain exempt.

•    Exemption vide entry 13 for construction, erection, commissioning or installation of original works pertaining to airport and port also stands withdrawn.

•    Exemption in respect of transportation service available for food stuff in general by road, rail or vessel vide entry 20 and 21 has been suitably pruned to exempt only transportation of milk, salt and food grains, including flours, pulses and rice.

•    The exemption to services provided by mutual fund agents/distributor to asset management company vide entry 29 is now withdrawn and the activity is now taxable (as they used to be till 30th june, 2012) and the asset management companies are liable to  discharge  service  tax  under  reverse  Charge mechanism. It is pertinent to note that, since the tax is finally paid by the asset management companies or  the  mutual  funds,  exemption  ought  to  have been extended to the sub-distributors and sub- agents providing services to the main distributors and agents on the lines of exemption in respect of  sub-brokers  of  stock  brokers.  Further,  effect is felt by distributors on account of the amended definition of output service with effect from 01-07- 2012 whereby the service in respect of which the recipient is liable to pay entire service tax liability, such service is not  considered  output  service.  in such a scenario, service tax charged by sub- distributors on their commission cannot be taken credit of by the distributors. on account of this provision, therefore, services of sub-distributors are required to be exempted or else same service gets  taxed  twice.  this  may  be  unintended  and therefore needs to be taken care of.

•    Services by an artist in folk or classical music, dance or theatre, excluding services provided by the artist as a brand ambassador was exempt under entry 16. however where the consideration charged for such performances exceed rs. 1 lakh, the same is now taxable.
(Entry number refers to Notification 25/2012-ST)

?    New Exemptions
Certain specific services which were hitherto liable for service tax, are now exempted from service tax. the list consists of the following:-

Notification 6/2015-ST
•    Entry into museum, zoo, national park, wildlife sanctuary, tiger reserve or zoo.
•    Services by way of pre-conditioning, pre-cooling, ripening, waxing, retail, packing, labelling of fruits and vegetables which do not alter its essential characteristics.
•    Services by operator of Common Effluent Treatment Plant by way of treatment of effluent.
•    Service provided by way of exhibition of movie by an exhibitor to the distributor or an association of persons consisting of the exhibitor as one of its members.
•    Services of life insurance business provided under ‘Varishtha Pension Bima Yojana’.

Notification 12/2015-ST
•    Exemption  is  provided  to  services  of  general insurance under the Pradhan mantri Suraksha Bima Yojna, services of life insurance under the Pradhan Mantri Jeevan Jyoti Bima Yojana and Pradhan Mantri Jan Dhan Yojana.
•    Services by way of collection of contribution under Atal Pension Yojana (APY).

Rationalisation of abatements

  •     Uniform abatement rate of 70% of the value of service in relation to transport of goods by rail, road and vessel are prescribed effective from 01-04-2015. Similarly, the conditions in respect of non-availability of CenVat credit on inputs, capital goods and input services is also now applicable to all, regardless of  the  mode  of  transport.  the  direct  impact  of  this amendment is already felt by the users of rail services for transportation of cargo. in order to be eligible for  the  CenVat  credit  of  inputs,  capital  goods  and input services, the railways have begun charging full rate of service tax and are foregoing the abatement option. the users in many cases are unable to take CenVat  credit  and  thus  the  cost  of  availing  the transport service of railways has suddenly shot up substantially and which is further impacted by the increased rate of 14%.

  • ?    The  transport  of  passengers  by  air  in  higher  class has become dearer since the abatement has been reduced from 60% to 40%.

  •     Abatement of 70% available for services provided in relation to chit has now been withdrawn.

Service Tax Rules: Aggregator Model

    One of the significant amendments carried out under the  finance act,  2015  is  the  levy  of  service  tax  on e-commerce transactions under aggregator model. The term ‘Aggregator’ is defined under the Service tax rules clause 2(aa) as “a person who owns and manages a web based software application and by means of the application and a communication device enables a potential customer to connect with persons providing service of a particular kind under the brand name or trade name of the aggregator”. the terms “brand name” and “trade name” are also defined under the Rules. The liability to discharge service tax is on the aggregator under reverse charge mechanism. thus, it is assumed that the aggregator is the service receiver. it is also provided that if the aggregator does not have presence in the taxable territory, the person representing the aggregator would discharge the liability or the aggregator would appoint a person for discharging tax liability.  the amendment clearly sets out intention of the legislature to levy service tax on certain formats in e-commerce space. accordingly, companies providing services by acting as an aggregator like travel portals, cab services, food portals etc. would be hit by this amendment irrespective of their establishments being in the non- taxable or taxable territory.

CENVAT Credit

Time  limit  for  availing  CENVAT  credit  is  extended from  six  months  to  one  year.  therefore,  the  issue faced by many assessees on account of amendment made by Finance (No.2) Act,2014 is to a significant extent resolved, as credit can be availed by the end of a period of one year from the date of invoice. for example, if credit was missed out to be availed on an input service of invoice dated may 15, 2014 and if this was noticed only in january,2015, the credit was not available in terms of proviso to rule 4(7) of CENVAT Credit  rules,  2004  (CCR,  2004).  However  in  terms of the amended provision, the said missed out credit would be available in the month of april, 2015.

CENVAT   credit  for  service  tax  paid  under  partial reverse charge is immediately available on payment of service tax to the Government. thus the condition in respect of allowing CenVat credit only after payment is made to the vendor, being a mere contractual arrangement is now done away with.

CENVAT   credit   wrongly   availed   and   utilised   or erroneously refunded is recoverable with interest as per  rule  14  of  the  CenVat  credit  rules,2004.the said rule 14 is amended from march 1, 2015 now to provide for recovery of CenVat credit wrongly availed or  erroneously  refunded  and  also  CenVat  credit wrongly availed and utilised or erroneously refunded with interest. additionally, sub rule (2) thereof provides for  the  “first  in  first  out”  method  for  computing  the amount of credit wrongly utilised on monthly basis. in the prescribed method, an assessee is required to first utilize the opening balance of a month. thereafter, one has to utilise the admissible credit availed for the said month and lastly the inadmissible credit availed is to be calculated for utilisation and thus arrive at an amount of  aggregate  credit  wrongly  utilised.  the  prescribed computation method thus determines credit to be treated as “availed and utilised” for levying interest thereon.

Penal provisions

In an attempt to encourage voluntary tax  compliance and reduce litigation, the Government has considerably reduced penalties under service tax and aligned them with Central excise law:-

    Section 76 providing for a levy of penalty in cases of short payment or non-payment of service tax, however not involving fraud, collusion or willful misstatement or suppression of facts or contravention of the provisions of the act is amended to provide as follows:-

•    Maximum penalty not exceeding 10% of the amount of service tax.
•    No penalty is leviable if service tax along with interest is paid within 30 days of service of show cause notice.
•    Reduced penalty of 25% of the penalty imposed has been prescribed when service tax is paid with interest and reduced penalty within 30 days of  the receipt of the adjudication order or within 30 days of the date of the appellate order in cases where the amount of service tax is increased at the appellate stage or court level. Thus, at appellate or court level, the time limit prescribed for payment of service tax with interest and/or penalty is now provided with reference to the date of order in place of communication of the order, thus reducing the time to such extent.

Section 78 providing for a levy of penalty for a wilful intent to evade service tax is amended to provide as follows:-
•    Penalty equals 100% of the service tax amount.
•    Reduced penalty of 15% is leviable if service tax along with  interest  and  such  reduced  penalty  is paid within 30 days of service of show cause notice.
•    Reduced penalty of 25% of the penalty imposed has been prescribed on payment of service tax, interest and reduced penalty within 30 days of the receipt of the adjudication order or within 30 days of the date of the appellate order in cases where the amount of service tax is increased/modified at the appellate stage or court level. thus, at appellate or court level, the time limit prescribed for payment of service tax with interest and/or penalty is now provided with reference to the date of the order in place of communication of the order, thus reducing the time to such extent.

Section 73(4A) triggered pursuant to any audit, investigation or verification providing for a reduced penalty in case where true and complete details of transactions are recorded in the books of account is now omitted. however, a saving clause is inserted under the said section 78, for the period between 08-04-2011 and 14-05-2015  [both  days  inclusive]  to prescribe a penalty @ 50% of the service tax determined, if the details of such transactions are recorded in the specified records.

Transitory Provisions

In order to provide benefit of reduced penalty to cases where a show cause notice has been issued u/s. 73(1) or under the proviso thereto, but no order has been passed under section 73(2) before 14-05-2015, section 78B is inserted to provide that the period of 30 days for closure of proceedings on the payment of service tax, interest and penalty is to be counted from 14-05-2015 i.e. the date of enactment of the finance act,2015.

Omission of Non-obstante Clause-Section 80

In a significant move, non-obstante clause of section 80 providing powers to condone penalty is omitted   at the end of twenty one years of the existence of service   tax.   Therefore,   penalty   is   now   invocable notwithstanding genuine cause or difficulty of the tax payers and no action will be considered bonafide.

Few Concerns

Threshold Limit
The  service  tax  rate  has  been  increased  to  14%  in order to prepare the trade and industry for GST-one of the biggest taxation reforms in india. However, commensurate increase has not been brought about in the threshold limit and the same has remained constant at Rs. 10 lakh which may affect small and marginal service providers.

CENVAT Credit
There  has  also  been  a  conscious  effort  made  to broaden the base of service tax by pruning the negative list and the exemption notification as a precursor to GST. However, one of the basic aims for the introduction of GST is to provide seamless credit across value chains, but the CENVAT credit provisions have not been accordingly expanded leading to increased cost pressures for trade and industry.

Balance in education Cess & Secondary and higher education Cess account

The service tax rate of 14% has subsumed the education cess and higher education cess. however, whether the balance of education cess and higher education cess paid on inputs, input services and capital goods lying unutilised on the date the new service tax rate is applicable will be available to the service providers for discharging service tax liability is a question which has remained unanswered. In case of Central Excise vide Notification No.12/2015 Central excise (n.t.), it is provided that credit of education Cess and Secondary and higher education Cess paid on inputs or capital goods received in factory on or after 01-03-2015 can be utilised for payment of duty of excise. Similarly, credit balance of 50% of these Cesses paid on capital goods received in the factory of manufacturer as  well  as  input  services  received  during  F.Y.  2014-15 also  can  be  utilised  for  payment  of  excise  duty.   Thus, the intent of the legislation is clear that balances in the Cess accounts of the earlier period are not allowed to be used for duty payment. Further, similar notification is not issued as yet for service providers. in the scenario, the issue of use of credit of cesses remains questionable until the issue of such notification.

(note:  reference  to  sections  made  in  the  article  refer  to  the provisions of the Finance Act,1994 unless otherwise specified)

Some of the aspects included above may require detailed analysis. Such discussion will be covered under regular service tax feature of BCAJ from time to time hereafter.

Prema G. Sanghvi vs. ITO ITAT Mumbai `C’ Bench Before R. C. Sharma (AM) and Sanjay Garg (JM) ITA No. 2109 /M/2011 Assessment Year: 2007-08. Decided on: 13th February, 2015. Counsel for assessee/revenue: Chetan Karia/ Premanand J.

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Section 56(2)(vi) – Payment of alimony amount by the ex-husband to his wife is nothing more than a gift and is exempt under the proviso to section 56(2)(vi).

Facts:
The assessee was a legally wedded wife of Mr. Zaun. The said marriage was performed as per the Hindu customary rights. The said marriage was dissolved on 20.06.1978 as per the provisions of Hindu Marriage Act. During the year under consideration the assessee received Rs. 73,60,787 from her ex-husband Mr. Siguar Erich Zaun, a German citizen. The assessee claimed the said amount to have been received as alimony on divorce with her husband and the same was claimed as exempt. The Assessing Officer (AO) however, held the said amount as taxable under the head `Income from Other Sources’.

Aggrieved, the assessee preferred an appeal to the CIT(A) who observed that the divorce granted by the City Civil Court is recognised by German law. Mr. Zuan had applied to German Court for approval of divorce already granted by City Civil Court. German court granted divorce on 17.07.2001. There was no evidence of any claim before the German court regarding alimony at the time of recognition of her divorce with her husband. The order of the German court did not have any reference of payment of alimony. Alimony was paid after a gap of five years. Since on the date of receiving the amount there was no relationship between assessee and Mr. Zaun, he held that the amount received by the assessee from Mr. Zaun was chargeable to tax u/s. 56(2)(vi) of the Act.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:
Under the Hindu Law, a wife has a pre-existing right of maintenance and alimony. The said right exists even after divorce from the husband. So far the granting of divorce under the German Law is concerned, the CIT(A) has discussed at length about the German Law relating to marriage and divorces and thereafter has concluded that even under the German Law, the maintenance can be claimed, if any of the spouse is unable to maintain himself/herself. He has further held that under the German Law spouses are free to arrange for the financial consequences only in case of an eventual divorce possibly by way of prenatal agreement. However, the CIT(A) has not discussed, if there is any bar in paying alimony by the husband to his wife in lieu of her maintenance for the whole life.

In the proviso to section 56(2)(vi) any sum received from a relative is exempt from tax. In the definition of relative, the receipt from whom is exempt under the Act, inter alia not only the spouse but the brother and sister of the spouse have also been included. As we have observed above that the maintenance or alimony is paid by the husband to his wife in recognition of her pre-existing right, whether marriage relationship is still continuing or has been dissolved, does not bar the payment of alimony by the ex-husband, to the divorced wife. Under such type of circumstances, in our view, in the definition of spouse, exspouse is also included except where there is an evidence that the payment is not made as a gift or an alimony but for some other consideration or by virtue of some other transaction. In the absence of any such evidence, the payment of alimony amount by the ex-husband to his wife is nothing more than a gift and is exempt under proviso to section 56(2)(vi) of the Act.

The appeal filed by assessee was allowed.

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Paramount Health Services (TPA) Pvt. Ltd. vs. DCIT ITAT Mumbai `C’ Bench Before R. C. Sharma (AM) and Sanjay Garg (JM) ITA No. 5400/M/2013& 5269/M/2013 Assessment Year: 2010-11. Decided on: 13th February, 2015. Counsel for assessee / revenue: Rajesh S. Shah & Nalin Gandhi / Narendra Kumar Chand

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Section 40(a)(ia) – Disallowance u/s. 40(a)(ia) is not attracted if the payment on which tax has not been deducted at source has not been claimed as an item of deductible expenditure.

Facts:
The Assessing Officer (AO) while assessing the total income of the assessee disallowed a sum of Rs. 85,05,05,515, being payments by the assessee to various hospitals without deduction of tax at source u/s. 194J of the Act, by invoking the provisions of s. 40(a)(ia) of the Act.

Aggrieved, the assessee preferred an appeal to the CIT(A) who restricted the addition to Rs. 10,65,669 and deleted the remaining addition of Rs. 84,94,39,847 on the basis of certificates submitted by the payee hospitals u/s. 197 of the Act.

Aggrieved, the assessee preferred an appeal to the Tribunal and contended that the assessee had not claimed these payments as expenditure, hence there was no question of disallowance of any expenditure. Once an expenditure has not been claimed, no question of disallowance of the same can arise.

Held:
The Tribunal noted that in the assessee’s own case for assessment year 2009-10 vide ITA No. 2188/M/2013 dated 25.07.2014 the Tribunal, after detailed discussion, has observed as under –

“7. Though the assessee is under the obligation to deduct tax at source u/s. 194J however, the consequential liability is only u/s. 201 and 201(1A) and the disallowance u/s. 40(a)(ia) cannot be automatic when the assessee has not claimed this payment as expenditure against the income. The assessee has shown the income, only the service charges receivable from insurance companies for rendering services as 3rd party administrator and not having any margin or profit element in the payment received from the insurers for the purpose of remitting to the hospitals to settle medical claim of the insured. Therefore, when the said payment has not been claimed as expenditure incurred for earning the income by the assessee then the provisions of section 40(a)(ia) is not attracted for non deduction of tax at source in respect of the said payment. Following the decisions of the Tribunal as relied upon by the assessee and discussion above we hold that no disallowance can be made under section 40(a)(ia) in respect of the payment in question. Accordingly the ground raised in assessee’s appeal is allowed and ground raised in the revenue’s appeal is dismissed.”

The Tribunal, following the above stated observations, decided the issue in favor of the assessee and directed the lower authorities to delete the disallowance.

The appeal filed by assessee was allowed.

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DCIT vs. Godrej Oil Palm Ltd. (now merged with Godrej Agrovet Ltd.) ITAT Mumbai `G’ Bench Before Vijay Pal Rao (JM) and B. R. KBaskaran (AM) ITA No. 5098 /Mum/2013 Assessment Year: 2011-12. Decided on: 14th January, 2015. Counsel for revenue / assessee: R. N. D’Souza / Akram Khan, Taher Khokhawala

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Section 115JAA – MAT credit has to be given against gross tax payable exclusive of surcharge/cess and only after the MAT credit tax liability, the surcharge and cess has to be calculated.

Facts:
The Assessing Officer (AO) computed the gross tax liability by granting MAT credit against tax liability inclusive of surcharge and cess.

Aggrieved, the assessee preferred an appeal before CIT(A) and contended that MAT credit has to be given against gross tax payable exclusive of surcharge and cess. The CIT(A) allowed the appeal preferred by the assessee.

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held:
The Tribunal observed that an identical issue has been considered by the co-ordinate Bench in the case of Wyeth Limited vs. ACIT (ITA No. 6682/Mum/2011 vide order dated 09.01.2015). The Tribunal had, in the case of Wyeth Limited (supra), following the decision of the Allahabad High Court in the case of CIT vs. Vacment India (394 ITR 304)(All), directed the AO to allow the MAT credit against the tax liability payable before surcharge and education cess or alternatively the amount of MAT credit should be inclusive of surcharge and education cess and then allow the credit against the tax payable inclusive of surcharge and education cess.

Following the earlier order of co-ordinate Bench in the case of Wyeth Limited (supra), the Tribunal upheld the order of CIT(A).

The appeal filed by revenue was dismissed.

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Certain specified services exempted Notification No. 12/2015-Service tax-dated 30 04 2015

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By this Notification, the following services are exempted from whole of the service tax :
1) Services of life insurance business provided under Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY);
2) Services of life insurance business provided under Pradhan Mantri Jan Dhan Yojana (PMJDY);
3) Services of general insurance business provided under Pradhan Mantri Suraksha Bima Yojana (PMSBY);
4) Services by way of collection of contribution under Atal Pension Yojana (APY).

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Definition of Chit Find removed Notification No. 13/2015-Service taxdated 19-05-2015

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The Central Govt. had withdrawn abatement in relation to Chit Fund vide Notification No. 8/2015 dated 1st March, 2015 & thereby made consideration received by Chit Fund fully taxable w.e.f. 01 04 2015. Now by this Notification, the Central Govt. has completely removed the definition given in the Principal Abatement Notification No. 26/2012 dated 20th June, 2012.

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Service tax rate of 14% applicable from 01-06- 2015 Notification No. 14/2015 – Service Tax- dated 19-05-2015

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Finance Minister while presenting the Budget, 2015 had increased the rate of service tax from 12.36 % to flat 14%. However, the date from which the new rate would be applicable was not announced. On 19th May, vide this Notification, Finance Ministry has announced that the new service tax rate of 14% will be applicable from 1st June, 2015.

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(2015) 118 DTR (Mumbai) (Trib) 227 ITO vs. Vinay P. Karve (L/H of Late Mrs. Asha Pramila Wagle) A.Y.: 2005–06 Dated: 12.09.2014

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Sections 4, 45 & 56: Compensation received by assessee under settlement for withdrawing criminal complaint for fraud constitutes capital receipt.

Facts:
The assessee was a non-resident domiciled in France. The estate of the assessee’s late father consisted of shares of certain companies which were held in joint name of the assessee’s late father either with the assessee or with the brother of the assessee. In order to transfer such shares in the name of the assessee and to manage the affairs in India the assessee had executed a general power of attorney in favour of her friend ‘R’.

During the previous year relevant to A.Y. 2003-04, ‘R’ sold the shares for Rs. 93,70,135/- and deposited sum of Rs. 60,32,000/- in the bank account of the assessee. These facts were not in the knowledge of the assessee at all.

After realising the foul play and cheating on the part of ‘R’, the assessee sent a legal notice to R and filed criminal complaint against R before the Additional Chief Metropolitan Magistrate. As a result of such complaint, the police conducted enquiry and investigation into whole matter and gave prima facie findings that ‘R’ fraudulently sold these shares and have cheated the assessee. On filing of the findings of the police with the Magistrate, ‘R’ sought to settle the dispute and come forward with settlement agreement dated 31st March 2004, wherein she offered to pay Rs.1,20,00,000/- on the terms that the assessee would withdraw all the complaints filed against ‘R’.

As per the terms of the settlement agreement out of the total compensation, Rs. 33,38,135/- was towards the balance consideration of shares, and the balance lump sum amount of Rs. 86,61,865/- was for other disputes and differences. The above balance consideration was inclusive of the compensation of Rs.15,00,000/- which was on account of fraudulent sale of land situated in Alibaug.

While filing the return, the assessee allocated a substantial portion of compensation received, i.e. Rs. 1,01,97,000/- as compensation attributable to dispute relating to shares being a principal dispute (excluding compensation relating to land and other miscellaneous disputes). The assessee claimed that since she gave up her claim regarding to shares in the previous year relevant to the A.Y. 2005-06, i.e. the year in which settlement took place, the entire capital gain arising on account of initial sum of Rs. 60,32,000/- deposited in her account and allocated compensation of Rs.1,01,97,000/- was taxable in A.Y. 2005-06 but was claimed to be exempt as per Article 14(6) of the Indo-France DTAA .

The AO held that amount of Rs. 60,32,000/- received by the assessee in lieu of transfer of shares is taxable as capital gain in the A.Y. 2003-04 as it was accepted by ‘R’ that shares were actually sold in the A.Y. 2003-04. The compensation of Rs.1,20,00,000/- was taxed under the head ‘Income from Other Sources’ as in the settlement agreement there was no mention regarding agreeing on the compensation for high rise in the market price of the shares and the same cannot be attributed to transfer of shares. The AO held that if at all any capital gain is to be taxed, then same is to be taxed in the A.Y. 2003-04 and compensation received by the assessee will be taxable in the A.Y. 2005-06.

The CIT(A) held that the matter was settled in the year 2004-05 and therefore for the purpose of section 45 the shares transferred in the A.Y. 2005-06 and not in A.Y. 2003- 04. The stand taken by the assessee was accepted by the CIT(A) and a sum of Rs.1,01,97,000/- was considered to be consideration for misappropriation of shares by fraud and unfair means.

Held:
From the records and the impugned order, it is an admitted fact that in this case, no dispute other than the dispute relating to shares and land was involved. Thus, for the purpose of taxability/assessability of sum of Rs. 1.20 crore, the amount of Rs. 33,38,135, and Rs. 15 lakh has to be segregated, because, the sum of Rs. 33,38,135, pertains to transaction of shares which is to be assessed and taxed under the head capital gains, which in the present case is admittedly not taxable by virtue of Article-14(6).

Regarding balance amount of Rs. 71,61,865/-, the said amount cannot be taxed under the head capital gain as it was clearly specified that only Rs. 33,38,135/- was towards sale of shares and there cannot be any inference that the balance amount was also in lieu of shares, for the reason that at the time of settlement of agreement, the market value of these shares was very high. Further, nothing was brought on record to establish that balance amount was towards compensation for change in market value from date of sale and upto the date of settlement.

The balance compensation of Rs. 71,61,865/- was on account of personal damage done by ‘R’. The settlement has been agreed only to withdraw the police complaint and criminal case filed in the Court of Chief Metropolitan Magistrate. Under the given circumstances and facts the compensation is capital receipt and hence it cannot be taxed as it is beyond the purview of charging section.

Further, such compensation cannot be taxed under the head Income From Other Sources as nowhere it was mentioned that it was towards interest on delayed payment of shares sold in the year 2002. It has been received only towards damage for breach of trust or fraud and which has no co-relation with sale of shares and therefore compensation received cannot be taxed under any heads of income.

Thus, the sum of Rs. 71,61,865, cannot be taxed under the charging provision, as the same is compensation in the form of capital receipt.

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(2015) 117 DTR 99 (Pune) Chakrabarty Medical Centre vs. TRO A.Y.: 2008-09 Dated: 30.01.2015

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i. Section 45 – Where partners of the firm introduced land and building as their capital contribution to firm by way of transfer to partner’s capital account but not by way of registered conveyance deed, capital gains arising on sale of said property was taxable in the hands of assessee-firm.

ii. Section 54EC – Where sale consideration of property belonging to assessee-firm was credited directly in hands of partners of firm and specified bonds were also purchased in names of those partners, still assesseefirm would be entitled to claim benefit of deduction u/s. 54EC.

Facts:

i. The assessee-firm was having three partners. The land and hospital building was owned by the two partners individually before the formation of the assessee-firm in year 1992. The partners of firm introduced the said hospital building and land as their capital contribution.

The assessee-firm carried out its operation from the hospital premises after its formation. Subsequently, assessee-firm sold said land and building and earned short-term capital gain of Rs. 1,64,76,685/-.

The assessee firm contended that there was no transfer of the ownership to the assessee firm by the partners even though the land and hospital building was introduced as a capital contribution. Further, even if the immovable property is introduced by the partners towards their capital contribution but same must be by way of proper conveyance deed registered under the Indian Registration Act.

The Assessing Officer having rejected assessee’s explanation, brought to tax the short-term capital gain in the hands of the assessee-firm. The Commissioner (Appeals) confirmed the order of the Assessing Officer. Aggreived, the assessee appealed before the Tribunal.

ii. Against the capital gains which was offered to tax by the partners in their individual capacity, the exemption was claimed u/s. 54EC with respect to the investments in Rural Electrification Bonds by them. Upon shifting of taxability from partners to the partnership firm by the AO, the assessee-firm alternatively claimed that exemption u/s. 54EC be allowed to the assessee-firm.

The sale consideration received on sale of above land and building was directly credited to the Bank accounts of the two partners out of which both the partners invested the in notified bonds in terms of section 54EC. The firm, subsequent to sale of above land and building, was dissolved. Therefore, it was contended that whatever is invested by the partners on their individual names is in fact from the funds of the assets of the assessee firm which was sold out.

Held:
i. The Tribunal placed reliance on the case of K. D. Pandey vs. CWT 108 ITR 214 (All) wherein on identical issue it was observed that under the provisions of section 239 of the Indian Contract Act and section 14 of the Indian Partnership Act for the purpose of bringing the separate properties of a partner into the stock of the firm it is not necessary to have recourse to any written document at all, that as soon as a partner intends that his separate properties should become partnership properties and they are treated as such, then by virtue of the provisions of the Contract Act and the Partnership Act, the properties become the properties of the firm and that this result is not prohibited by any provision in the Transfer of Property Act or the Indian Registration Act.

Therefore the Tribunal held that Capital gains arising on sale of land and building which were introduced by the partners as their capital contribution to the assessee-firm is taxable in the hands of the firm and not in the hands of the said partners irrespective of the fact that the transfer of the said property by the partners to the assessee-firm was not made by way of registered conveyance deed.

ii. There is no dispute on the legal position that the investment made by two partners on their individual names in the notified bonds is otherwise eligible investment for getting the exemption from the taxable capital gain u/s. 54EC.

As per the well-settled law, partnership is not a legal entity in strict sense and in all the movable and immovable assets which are held by the partnership, there is an interest of every partner though not specifically defined in terms of their shares.

On perusal of the language used in section 54EC, it is provided that the assessee has to make the investment within a period of six months in the notified securities after the date of transfer of capital asset. The words used in section 54EC are – ‘the assessee has invested the whole or any part of capital gains in the long-term specified asset’. As already held that the property which was sold out, it was property of the assesseefirm and hence, the capital gain is taxable in the hands of the assessee-firm.

At the same time even though the bonds are purchased on the names of the two partners, it can be said that irrespective of the way, how the sale consideration was credited to the bank accounts of two partners, but the benefit of section 54EC cannot be deprived to the assessee-firm. As admittedly, even on the dissolution of the firm the assessee as a partner has a right to get back their capital as per the final valuation done on the date of dissolution or otherwise. Accordingly, the exemption u/s. 54EC was allowed to the assessee-firm in respect of notified bonds purchased by its partners.

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(2015) 117 DTR 340 (Del) Jindal Steel & Power Ltd. vs. ACIT A.Y.: 2008-09 Dated: 25.03.2015

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Proviso to section 254(2A) & 276C – the Tribunal has power to stay proceedings initiated by the assessing officer by issuing show-cause notice for launching prosecution u/s. 276C(1) during pendency of appeals against orders wherein the additions were made and penalty was levied.

Facts:
In the instant case, appeals in respect of the order passed u/s. 263 as well as the order u/s.143(3) pursuant to said order u/s. 263 are pending for disposal before the Tribunal. Besides this, appeal is also pending before the Tribunal against the levy of penalty u/s. 271(1)(c).

In the meantime, Assessing Officer has issued showcause notice to the assessee for initiating prosecution proceedings u/s. 276C(1) in respect of the additions made in the assessment.

The assessee filed the application for stay of launching of prosecution proceedings before the Tribunal.

Held:
From reading of proviso to section 254(2A) it is apparent that “the Tribunal can pass an order of stay in any proceedings relating to an appeal filed u/s. 253(1)”. This phrase mandates that this power is not confined to a case where the appeal is pending before the Tribunal but also extends to any proceedings relating to an appeal pending before it.

The appeals pending relate to the validity of the order passed by the CIT u/s. 263 in consequence of which the additions have been made by the AO in the assessment order passed subsequent to that. It is also not denied that the appeal is also pending in respect of the penalty imposed u/s. 271(1)(c).

Until and unless the additions as well as the penalty are sustained, it cannot be said whether there was an attempt to evade tax or not or whether this attempt was wilful or not. Steps taken by the AO for launching of the prosecution proceedings u/s. 276C(1) depend on the outcome of the appeals pending before this Tribunal.

The Tribunal noted that there is no limitation prescribed for launching the prosecution proceedings u/s. 276C(1). Therefore, when the order of the Tribunal will have a bearing on the prosecution proceedings, the Tribunal opined that there will not be any loss if the prosecution proceedings are not launched immediately but kept pending till the outcome of the order of the Tribunal. The Tribunal further opined that it is not a case where the prosecution proceedings have already been launched before the criminal Court. Had the prosecution proceedings already been launched before the criminal Court, the Tribunal would not have any jurisdiction to entertain such petition filed by the assessee. Since in this case the Revenue has not launched so far the prosecution against the assessee in any criminal Court, the Tribunal granted stay against the launching of prosecution proceedings.

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(2015) 115 DTR 99 (Del) ITO vs. Modipon Ltd. A.Y.: 2005-06 Dated: 09.01.2015

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Section 50C – Enhancement in circle rates between the date of agreement to sell and date of sale deed not relevant.

Facts:
The assessee sold a plot of land vide agreement to sell, dated 27th May 2004, for consideration of Rs. 2,62,08,000/-. The agreement to sell was duly registered on the same date. On the said date, the circle rate was Rs.13,000/- per sq mt. However, on the date of execution of sale-deed, i.e. 16th September 2004, the circle-rate enhanced to Rs. 20,000/- per sq mt resulting into stamp duty value of Rs. 4,03,20,000/-.

The assessee computed the capital gains on the basis of the circle rate on the date of agreement to sell and not the circle rate on the date of execution of sale deed.

However, the A.O. did not accept the above computation and he computed capital gains on the basis of circle rate prevailing on the date of execution of sales deed, i.e Rs. 20,000/- and enhanced the capital gains by the difference of Rs.1,41,12,000/-.

On further appeal, the CIT(A) upheld the A.O.’s view on the ground that the “agreement to sell” may bind the parties inter-se but does not override the statutory provision of section 50C as are applicable on the “date of transfer”; which in the instant case had been 16th September 2004.

Held:
It was held that the enhancement in the circle rate from Rs.13,000/- to Rs.20,000/- per sq mt was beyond the control of the assessee (seller). It is also not the case of the revenue, that the buyer has given more than the consideration that has been accepted by the parties when they executed the agreement to sale.

Further, reliance was placed on the Supreme Court’s decision in Sanjeev Lal Etc. vs. CIT (2014) 269 CTR 1 wherein it was held that the question whether the entire property can be said to have been sold at the time when an agreement to sell is entered into has to be answered in the negative in normal circumstances. However, looking at the provisions of section 2(47) which defines the word ‘transfer’ in relation to a capital asset, one can say that if a right in the property is extinguished by execution of an agreement to sell, the capital asset can be deemed to have been transferred.

Having regard to the above factual and judicial position, the additions made by A.O. were deleted.

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Transfer pricing- Section 92C-A. Y. 2007-08- Arm’s length interest rate for loan advanced to foreign subsidiary by Indian company should be computed based on market determined interest rate applicable to currency in which loan has to be repaid

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CIT vs. Cotton Naturals (I) (P.) Ltd.; [2015] 55 taxmann. com 523 (Delhi):

The assessee, an Indian company, was one of the leading manufacturers of rider apparel. It had incorporated a subsidiary company in United States for undertaking distribution and marketing activities for the products manufactured by it and advanced loan to its subsidiary and received interest at the rate of 4%. It applied CUP method and claimed rate of 4% to be comparable with the export packing credit rate obtained from independent banks in India. The TPO opined that what was to be considered was the prevalent interest that could have been earned by advancing a loan to an unrelated party in India with the same financial health as that of the tax payer’s subsidiary. The TPO further noted that while deciding the interest rate that may be charged on receivables from AE’s, Libor rate for calculating interest was not proper and instead of US rate, Indian rate was to be adopted. Finally, the TPO held that interest rate at 14% would be fair and reasonable. DRP granted partial relief in the form of reduction in rate of interest to 12.20%, recording that the loan was given on fixed rate of interest out of shareholder funds and the Prime Lending Rate (PLR, for short) fixed by the Reserve Bank of India, ranged from 10.25% to 10.75% in April, 2006 to 12.25% to 12.50% in March, 2007. The Tribunal agreed with assessee in view of earlier year’s decision of Tribunal.

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

“Arm’s length interest rate for loan advanced to foreign subsidiary by Indian company should be computed based on market determined interest rate applicable to currency in which loan has to be repaid. Interest rates should not be computed on basis of interest payable on currency or legal tender of place or country of residence of either party. There is no justification or a cogent reason for applying PLR for outbound loan transactions where Indian parent has advanced loan to an AE abroad. Parameters cannot be different for outbound and inbound loans and a similar reasoning applies to both inbound and outbound loans.”

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Search and seizure- Assessment- Section 153 A of- A. Y. 2008-09- No addition can be made in respect of an unabated assessment which has become final if no incriminating material is found during the search

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CIT vs. Continental Warehousing Corporation (Bom) TA No. 523 of 2013: dated 21/04/2015: www.itatonline.org:

In this case the Bombay High Court had to consider as to whether scope of assessment u/s. 153A of the Incometax Act, 1961 in respect of completed assessments is limited to only undisclosed income and undisclosed assets detected during search.

The High Court held as under:

“(i) On a plain reading of section 153A of the Incometax Act, it becomes clear that on initiation of the proceedings u/s. 153A, it is only the assessment/ reassessment proceedings that are pending on the date of conducting search u/s. 132 or making requisition u/s. 132A of the Act stand abated and not the assessments/reassessments already finalised for those assessment years covered u/s. 153A of the Act. By a circular No. 8 of 2003 dated 18-9-2003 (263 ITR (St) 61 at 107) the CBDT has clarified that on initiation of proceedings u/s. 153A, the proceedings pending in appeal, revision or rectification proceedings against finalised assessment/ reassessment shall not abate. It is only because, the finalised assessments/reassessments do not abate, the appeal revision or rectification pending against finalised assessment/reassessments would not abate. Therefore, the argument of the revenue, that on initiation of proceedings u/s. 153A, the assessments/ reassessments finalised for the assessment years covered u/s. 153A of the Income-tax Act stand abated cannot be accepted. Similarly on annulment of assessment made u/s. 153A (1) what stands revived is the pending assessment / reassessment proceedings which stood abated as per section 153A(1).

ii) Once it is held that the assessment has attained finality, then the AO while passing the independent assessment order u/s. 153A read with section 143 (3) of the I.T. Act could not have disturbed the assessment / reassessment order which has attained finality, unless the materials gathered in the course of the proceedings u/s. 153A of the Income-tax Act establish that the reliefs granted under the finalised assessment/ reassessment were contrary to the facts unearthed during the course of section 153A proceedings. If there is nothing on record to suggest that any material was unearthed during the search or during the 153A proceedings, the AO while passing order u/s. 153A read with section 143(3) cannot disturb the assessment order.”

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Reassessment: S/s. 143(1), 147 and 148- A. Y. 2010-11- Reopening of assessment, even in case of intimation u/s. 143(1), on the ground that a specific aspect requires verification is not permissible

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Nivi Trading Limited vs. UOI (Bom) W. P. No. 2314 of 2015 dated 07/04/2015: www.itatonline.org

For the A. Y. 2010-11, the return of income was accepted u/s. 143(1) of the Income-tax Act, 1961. Subsequently, a notice u/s. 148 was issued on the ground that a specific aspect requires verification. The assessee filed a writ petition and challenged the notice.

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

“(i) The assessee filed a return of income which could have been subjected to verification and scrutiny and in terms of the applicable law and sections in the Income-tax Act, 1961 itself. However, if this notice has been issued in the present case and on the footing that the income chargeable to tax has escaped assessment during the course of the assessment proceedings, then, we would not go by the stand taken by the Revenue and on affidavit. It is too late now to urge that there was no assessment and therefore no question arises of reopening thereof. In the light of the language of the notice itself, it would not be proper for us and to permit the Revenue to raise such a plea.

(ii) In the present case, the AO does not state that any income chargeable to tax has escaped assessment. All that the Revenue desires is verification of certain details and pertaining to the gift. That is not founded on the belief that any income which is chargeable to tax has escaped assessment and hence, such verification is necessary. That belief is not recorded and which alone would enable the Assessing Officer to proceed. Thus, the reasons must be founded on the satisfaction of the AO that income chargeable to tax has escaped assessment. Once that is not to be found, then, we are not in a position to sustain the impugned notice (Smt. Maniben Valji Shah (2006) 283 ITR 453 and Prashant S. Joshi and Anr. vIncome Tax Officer (2010) 324 ITR 154 referred)”

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ITAT- Power to grant stay beyond 365 days- S. 254(2A)- The Third Proviso which restricts the power of the ITAT to grant stay beyond 365 days “even if the delay in disposing of the appeal is not attributable to the assessee” is arbitrary, unreasonable and discriminatory. It is struck down as violative of Article 14. The ITAT has the power to extend stay even beyond 365 days

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Pepsi Foods Pvt. Ltd. vs. ACIT (Del); W. P. No. 1334 of 2015 dated 19/05/2015:www.itatonline.org:

The third proviso to section 254(2A) was amended by the Finance Act, 2008, with effect from 01/10/2008 to provide that the Tribunal shall not have the power to grant stay of demand for a period exceeding 365 days “even if the delay in disposing of the appeal is not attributable to the assessee”. The said amendment was inserted to overcome the judgement of the Bombay High Court in Narang Overseas Private Limited vs. ITAT 295 ITR 22(Bom). The Petitioners filed a Writ Petition to challenge the said amended third proviso to section 254(2A) on the ground that it is arbitrary and contrary to the provisions of the Article 14 of the Constitution of India.

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

“i) U /s. 254, there are several conditions which have been stipulated with respect to the power of the Tribunal to grant stay of demand. First of all, as per the first proviso to Section 254(2A), a stay order could be passed for a period not exceeding 180 days and the Tribunal should dispose of the appeal within that period. The second proviso stipulates that in case the appeal is not disposed of within the period of 180 days, if the delay in disposing of the appeal is not attributable to the assessee, the Tribunal has the power to extend the stay for a period not exceeding 365 days in aggregate. Once again, the Tribunal is directed to dispose of the appeal within the said period of stay. The third proviso, as it stands today, stipulates that if the appeal is not disposed of within the period of 365 days, then the order of stay shall stand vacated, even if the delay in disposing of the appeal is not attributable to the assessee.

ii) While it could be argued that the condition that the stay order could be extended beyond a period of 180 days only if the delay in disposing of the appeal was not attributable to the assessee was a reasonable condition on the power of the Tribunal to grant an order of stay, it can, by no stretch of imagination, be argued that where the assessee is not responsible for the delay in the disposal of the appeal, yet the Tribunal has no power to extend the stay beyond the period of 365 days. The intention of the legislature, which has been made explicit by insertion of the words – ‘even if the delay in disposing of the appeal is not attributable to the assessee’– renders the right of appeal granted to the assessee by the statute to be illusory for no fault on the part of the assessee. The stay, which was available to him prior to the 365 days having passed, is snatched away simply because the Tribunal has, for whatever reason, not attributable to the assessee, been unable to dispose of the appeal. Take the case of delay being caused in the disposal of the appeal on the part of the revenue. Even in that case, the stay would stand vacated on the expiry of 365 days. This is despite the fact that the stay was granted by the Tribunal, in the first instance, upon considering the prima facie merits of the case through a reasoned order;

iii) The petitioners are correct in their submission that unequals have been treated equally. Assessees who, after having obtained stay orders and by their conduct delay the appeal proceedings, have been treated in the same manner in which assessees, who have not, in any way, delayed the proceedings in the appeal. The two classes of assessees are distinct and cannot be clubbed together. This clubbing together has led to hostile discrimination against the assessees to whom the delay is not attributable. It is for this reason that we find that the insertion of the expression – ‘even if the delay in disposing of the appeal is not attributable to the assessee’– by virtue of the Finance Act, 2008, violates the non-discrimination clause of Article 14 of the Constitution of India. The object that appeals should be heard expeditiously and that assesses should not misuse the stay orders granted in their favour by adopting delaying tactics is not at all achieved by the provision as it stands. On the contrary, the clubbing together of ‘well behaved’ assesses and those who cause delay in the appeal proceedings is itself violative of Article 14 of the Constitution and has no nexus or connection with the object sought to be achieved. The said expression introduced by the Finance Act, 2008 is, therefore, struck down as being violative of Article 14 of the Constitution of India.

iv) This would revert us to the position of law as interpreted by the Bombay High Court in Narang Overseas (supra), with which we are in full agreement. Consequently, we hold that, where the delay in disposing of the appeal is not attributable to the assessee, the Tribunal has the power to grant extension of stay beyond 365 days in deserving cases.”

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Effective date for mega exemption and abatement Notification No. 15 & 16 of 2015 dated 19-05- 2015

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By these notifications, effective date of applicability of amendments in the Mega Exemption Notification relating to services by way of job work on alcoholic liquors for human consumption; and Services by way of right to admission to exhibition of film, circus, dance or theatrical performances, sporting event, is notified as 1st June, 2015.

Further effective date of applicability of changes in abatement rates of Service Tax for Air Travel Agent, Life Insurance Business, Foreign Exchange Brokers and Distributor & Selling Agent of Lottery is also notified as 1st June, 2015.

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Housing project- Special deduction u/s. 80- IB(10)- A. Y. 2004-05: Not necessary that assesee has to develop flats: Residential area- Built-up area- Definition- Car park area not includible

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CIT vs. Subba Reddy (HUF); 373 ITR 103 (Mad):

The assessee is a promoter, claimed deduction u/s. 80- IB(10) of the Income-tax Act, 1961 on the housing project for the A. Y. 2004-05. The Assessing Officer denied the claim on two counts, viz., (i) that the assessee had not developed the flats, and (ii) that out of 66 flats constructed, the built up area of 25 flats exceeded the prescribed maximum limit of 1,500 sq. ft. if the car park area of 220 sq. ft. was included. The Commissioner (Appeals) allowed the deduction u/s. 80-IB(10) holding that the provisions of section 80-IB(10) did not warrant ownership of land. As regards car park area, he held that there was no definition for the term ‘common area” in the Act. He held that the car park area has to be treated as common area. Accordingly, he held that the assessee had not come under any of the disqualifications prescribed u/s. 80-IB(10). The Tribunal confirmed the order of the Commissioner (Appeals).

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

“i) The assessee was entitled to the benefit of the claim u/s. 80-IB(10) even though the assessee was not a developer but only a builder.

ii) In the absence of any specific definition of the term “built-up area” during the relevant period, the reasoning of the Commissioner (Appeals), which was confirmed by the Tribunal was justified. Nevertheless, section 80-IB(10) speaks about the residential unit having a maximum built up area of 1,500 sq. ft. to claim deduction. Even u/s. 80-IB(14)(a), which comes into effect from April 1, 2005, “built-up area is defined as inner measurements of the residential unit at the floor level, including the projections and balconies, as increased by the thickness of the walls, meaning thereby, the actual residential portion of the property. It clearly states that it will not include common areas shared with other residential units. Thus, there was no justification in including the car park in the definition of the built-up area of the residential unit for the purpose of determining the maximum built-up area.”

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DTAA between India and Mauritius- Assessee, a Mauritius based company was engaged in business of telecasting TV channels- Assessee carried out entire activities from Mauritius and all contracts were concluded in Mauritius- Only activity which was carried out in India was incidental or auxiliary/preparatory in nature which was carried out in a routine manner as per direction of assessee without application of mind: In aforesaid circumstances, assessee’s agent did not have any PE in India and, co<

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DIT vs. B4U International Holdings Ltd.: [2015] 57 taxmann.com 146 (Bom)

The assessee is a Mauritius based company. The Revenue proceeded against it on the footing that it is engaged in the business of telecasting of TV channels such as B4U Music, MCM, etc. It is the case of the Revenue that the income of the assessee from India consisted of collections from time slots given to advertisers from India through its agents. The assessee claimed that it did not have any permanent establishment in India and has no tax liability in India. The Assessing Officer did not accept this contention of the assessee and held that affiliated entities of the assessee are basically an extension in India and constitute a permanent establishment of the assessee within the meaning of Article 5 of the DTAA . The Commissioner of Income Tax (Appeals) Mumbai, partly allowed the appeal in some cases and held that the entity in India cannot be treated as an independent agent of the assessee. Alternatively, and assuming that it could be treated as such if a dependent agent is paid remuneration at arm’s length, further proceedings cannot be taxed in India. The Tribunal upheld the decision of the Commissioner (Appeals).

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

“Assessee carried out entire activities from Mauritius and all contracts were concluded in Mauritius. It was also undisputed that only activity which was carried out in India was incidental or auxiliary/preparatory in nature which was carried out in a routine manner as per direction of assessee without application of mind. In aforesaid circumstances, assessee’s agent did not have any PE in India and, consequently, amount in question could not be brought to tax in India.”

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Capital or revenue receipt- A. Y. 1996-97- Noncompete fee- Goodwill- Assessee transferring technical know-how and other advantages to joint venture company- Payment in lieu of restrictive covenants as to manufacture- Assessee continuing business using its own logo, trade name- No intention to acquire goodwill of assessee- Non-compete fee received is capital in nature

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CIT vs. Hackbridge Hewittic and Easun Ltd.; 373 ITR 109 (Mad):

The assessee had two divisions: a transformer division manufacturing power transformers, and a tap changer division. It entered into an agreement with a German Company to sell plant and machinery of its tap changer division. Under the agreement, it undertook not to engage either directly or indirectly in the manufacture of the existing range of products. For the A. Y. 1996- 97, the assessee received a sum of Rs. 6.89 crore as a consideration for cessation of manufacturing activity. The Assessing Officer held that the receipt should be attributed to transfer of goodwill and restrictive covenants. Accordingly, he brought to tax the capital gains on the transfer of goodwill to the extent of Rs. 403.89 lakh adopting the cost of acquisition at Nil. The Commissioner (Appeals) deleted the addition holding that there was no element of goodwill in the agreement entered into by the assessee with the German company and the entire receipt should be attributed to restrictive covenants/noncompete fee. The Tribunal confirmed the decision of the Commissioner (Appeals).

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

“i) The assessee transferred the technical know-how and other advantages to the joint venture company consisting of the assessee and the German company and the assessee continued its business using its own logo, trade name, licenses, permits and approval under an agreement with another company. The Tribunal held that there was no intention to acquire the goodwill of the assessee and, therefore, the non-compete fee received by the assessee could not be treated as payment for goodwill taxable as income. Section 55(2) (a) of the Income-tax Act, 1961, came into effect in the year 1998-99, whereas the assessment year in question was 1996-97. Therefore, there was no basis to fall back on section 55(2). The non-compete fee received by the assessee was capital in nature.”

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Business income vs. Income from house property- A. Ys. 2004-05, 2005-06, 2007-08 and 2009- 10- Assessee letting out godowns and warehouses to manufacturers, traders and companies carrying on warehousing business- Income is assessable as business income

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CIT vs. NDR Warehousing Pvt. Ltd; 372 ITR 690 (Mad):

The assessee was engaged in the business of warehousing, handling and transport business. For the A.Ys. 2004-05, 2005-06, 2007-08 and 2009-10, the assessee showed the income from letting out of buildings and godowns as income from business. The Assessing Officer treated the income as income from house property. The assessee contended that its activity was not merely letting out of the warehouses but storage of goods with provision of several auxiliary services such as pest control, rodent control and preventive measures against decay of goods stored due to vagaries of moisture and temperature, fungus formation, etc., besides security and protection of the goods stored. The Commissioner (Appeals) allowed the assessee’s claim and held that the assessee carried out the activity in an organised business manner. These activities were more than mere letting out of the godowns for tenancy. The Department itself had accepted in the past that the income from warehousing was assessable as income from business. The Tribunal upheld the decision of the Commissioner (Appeals).

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

“i) T he Commissioner (Appeals) as well as the Tribunal had not only gone into the objects clauses of the memorandum of association of the assessee but also into individual aspects of the business to come to the conclusion that it was a case of warehousing business and, therefore, the income would fall under the head “Business income”.

ii) T hus, the income of the asessee from letting out its warehouses was chargeable under the head “Income from business” and not under the head “Income from house property”.

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Assessment – Intimation – Prima Facie Adjustments – Additional tax – Retrospective amendment made in 1993 was only clarificatory of the position that existed in 1989 and was valid but 143(1A) could be invoked only where it was found in facts that the lesser amount stated in the return filed by the assessee was a result of an attempt to avoid tax lawfully payable by the assessee.

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CIT & Ors. vs. Sati Oil Udyog Ltd. & Anr. (2015) 372 ITR 746 (SC)

The assessee, in its annual return for the assessment years 1989-90 and 1991-92, showed a loss of Rs.1,94,13,40 and Rs. 1,80,22,480 respectively. By an assessment order dated 14th December, 1992, the Assessing Officer levied an additional tax u/s. 143(1A) of Rs. 5,62,490 and Rs. 8,09,290, respectively, for the two assessment years in question calculated in the manner provided in the section.

Being aggrieved by the order dated 14th December, 1992, the respondent filed two separate writ petitions to declare the provisions of section 143(1A) as ultra vires and, consequently, prayed for the quashing of the order dated 14th December, 1992. The learned single judge who heard the two petitions upheld section 143(1A) as amended in 1993 prospectively but held that in so far as it operated with effect from 1989 on losses made by companies, the section is arbitrary and unreasonable and would, therefore, have to be struck down. The Division Bench agreed with single judge and dismissed the two writ appeals before it.

The Supreme Court held that on a cursory reading of the provision, it was clear that the object of section 143(1A) was the prevention of evasion of tax. By the introduction of this provision, persons who has filed returns in which they have sought to evade the tax properly payable by them is meant to have a deterrent effect and a hefty amount of 20% as additional income-tax is payable on the difference between what is declared in the return and what is assessed to tax.

The Supreme Court observed that a plain reading of the provision as it originally stood referred to the total income. Further, it was settled law that the word “income” would include within it both profits as well as losses. The Supreme Court further held that even on a reading of section 143(1)(a) which is referred to in section 143(1A), a loss is envisaged as being declared in a return made u/s. 139. It was clear, therefore, that the retrospective amendment made in 1993 would only be clarificatory of the position that existed in 1989 itself.

According to the Supreme Court, all assessees were put on notice in 1989 itself that the expression “income” contained in section 143(1A) would be wide enough to include losses also. That being the case, on facts there was in fact no retrospective imposition of additional tax–such tax was imposable on losses as well from 1989 itself.

In the present case, the question that therefore arose before the Supreme Court also as to whether bona fide assesses are caught within the net of section 143(1A).

The Supreme Court after referring to its decisions in CIT vs. Hindustan Electric Graphites Ltd. (2000) 243 ITR 48(SC), Asst. CIT vs. J.K. Synthetics Ltd (2001) 251 ITR 200 (SC) and K. P. Varghese vs. ITO 131 ITR 579 (SC); held that section 143(1A) could only be invoked where it was found on facts that the lesser amount stated in the return filed by the assessee was a result of an attempt to evade tax lawfully payable by the assessee. The burden of proving that the assessee had so attempted to evade tax was on the Revenue which could be discharged by the Revenue by establishing facts and circumstances from which a reasonable inference can be drawn that the assessee had, in fact, attempted to evade tax lawfully payable by it. Subject to the aforesaid construction of section 143(1A), the Supreme Court upheld the retrospective clarificatory amendment of the said section and allowed the appeals.

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Upfront payment of interest on debentures in one year – the year of deductibility– Part I

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Introduction

1.1 Sizeable debt funds are being raised by the corporates through the issue of debentures. To make the issue of debentures attractive, such debentures are issued with different terms. Sometimes debentures are issued at a discount with nominal or lower rate of interest. At times, the debentures are issued at par for a fixed period with specified interest rate, but the option is also given to the debenture holders for upfront payment of present value of interest on debentures in the very first year for the entire period of debentures. In such cases, the accounting treatment of such interest is guided by the accounting principles, and generally the expenditure on interest is spread over the life of the debentures on an appropriate basis.

1.2 The expenditure of revenue nature incurred on issue of such debentures generally qualifies for deduction u/s. 37(1) of the Income-tax Act, 1961 (the Act). Section 36(1)(iii) of the Act grants deduction of interest on capital borrowed for business purpose. Accordingly, interest on such debentures should generally qualify for deduction u/s. 36(1)(iii) of the Act, subject to certain exceptions with which we are not concerned in this write-up.

1.3 In the past,for the assessees following mercantile system of accounting, the issue was under debate with regard to the year of deductibility of interest under the Act, in cases where the upfront payment of present value of interest on debenture is made in the very first year for the entire period of debentures and for accounting purpose, such interest is amortised over the redemption period of debentures in the books of account.

1.4 Earlier, the issue with regard to deductibility of discount on issue of debentures under the Act came up for consideration before the courts. Finally, the Apex Court in the case of Madras Industrial Investment Corporation Ltd [225 ITR 802 – Madras Industrial Investment’s case] settled the controversy with regard to deductibility of such discount and the year of its deductibility. In this case, the Apex Court, on the facts of that case, held that the discount on issue of debentures constitutes revenue expenditure. The Court further held that, although a liability of such expenditure has been incurred in the year of issue of debenture, this is a continuing liability which stretches over the period for which the debentures were issued and therefore, the liability spreads over such period. Accordingly, the deduction of such expenditure will also be spread over on a proportionate basis during the tenure of the debentures. The Court also noted that this view is in conformity with the accounting practice in which such discount is amortised over the redemption period of debentures. It may be noted that in this case, initially, the assessee itself had claimed deduction on proportionate basis and subsequently, changed it’s position in this respect. We had analysed this judgment in this column in the July, 1998 issue of the journal.

1.5 Recently, the issue with regard to the year of deductibility of upfront payment of interest in the first year of the tenure of debentures referred to in para 1.3 above came up for consideration before the Apex Court in the case of Taparia Tools Ltd. and the Court has decided this issue. Considering the importance and usefulness of this judgment, it is thought fit to consider the same in this column.

Taparia Tools Ltd. vs. JCIT – 260 ITR 102 [Bom.]

2.1 The issue referred to in para 1.3 above came up before the Bombay High Court in the above case. In this case, the brief facts were: the assessee was following mercantile system of accounting and it had issued non-convertible debentures of the face value of Rs. 100 each aggregating Rs. 600 lakh on a private placement basis. Under the terms of issue,effectively, as noted by the Court,the debenture holders were entitled to receive interest periodically on half yearly basis @ 18% p.a. for five years. Alternatively, the debenture holders had the option to receive one year upfront payment of Rs. 55 per debenture immediately on allotment. The debentures were redeemable at a premium of Rs. 10 per debenture in one installment any time after the end of fifth year from the date of allotment but, not later than the seventh year from that date.

2.1.1 The company made allotment of debentures to six parties on two different dates. On 29th March, 1996, the allotment was made to one party for which the company had received Rs. 495 lakh and on 19th June, 1996, the company had made an allotment to five parties for which the company had received Rs. 100 lakh from one party and Rs. 1.25 lakh each from the other four parties. Out of six parties, two lenders exercised the option to receive upfront payment. Accordingly, upfront payment of Rs. 2,72,25,000 became payable to one party (who was allotted debentures of the face value of Rs. 495 lakh) on 29th March, 1996 and Rs. 55 lakh became payable to another party (who was allotted debentures of the face value of Rs. 100 lakh)on 19th June, 1996. The other four debenture holders holding debentures of the aggregate face value of Rs. 5 lakh opted for payment of interest periodically as per the terms of issue of debentures. In the books of account, the assessee had shown the upfront payment of interest of both the years as ‘deferred revenue expenditure’ to be written off over a period of five years. Similarly, the premium of Rs. 60 lakh payable on redemption of debentures was also proportionately debited to each year’s profit and loss account and credited as reserve on the liability side of the balance sheet. Even for tax purpose, the claim by deduction of this premium payable on redemption was spread over the life of the debentures.

2.1.2 For the purpose of furnishing return of income for the assessment year 1996-97, the assessee claimed entire upfront payment of interest of Rs. 2,72,25,000 as deduction and similarly, in the Return of income from the assessment year 1997- 98, the full deduction of Rs. 55 lakh paid upfront was claimed as deduction. For both the years, the deduction was disallowed by the Assessing Officer (AO) on the ground that liability for the full amount regarding discounted interest paid upfront has not been incurred in the respective accounting years and the approximate income which the assessee would have earned by utilisation of Rs. 595 lakh (Rs. 495 lakh and Rs. 100 lakh) borrowed was not offered for taxation. Relying on the judgment of the Apex Court in Madras Industrial Investment’s case, the AO spread over the deduction of interest expenditure over a period of five years and worked out the amount of deduction of interest by applying appropriate discount rate for the assessment year 1996-97 [Rs. 74,250 – for three days (annual amount being Rs. 89,10,000) as against the claim of Rs. 2,72,25,000]. For the assessment year 1997-98 also, similar approach was adopted. It seems that in subsequent years, deduction was allowed on this basis. On first appeal, for the Assessment Year 1996-97, the Commissioner of Income-tax (Appeals) [CIT (A)] took the view that the entire scheme was made to avoid tax and the upfront payment was repayment of capital out of the total borrowing and accordingly, the actual borrowing for the assessment year 1996-97 was only Rs. 2,22,75,000 (and not Rs. 495 lakh). For this, the CIT(A) also relied on the judgment of the Apex Court in the case of McDowell & Company Ltd. [154 ITR 148 – McDowell’s case]. Based on this, the CIT(A) allowed deduction on this reduced amount of borrowing for three days. The Tribunal set aside the order of CIT(A) and restored the order of the AO.

2.2    It seems that similar views were taken for the assessment years 1997-98 and subsequent years. It also seems that appeals for three assessment years (1996-97 to 1998-99) were filed by the assessee  as  well  as  the  revenue  before  the Bombay high Court. details of the other years are not available. Appeals of the Revenue were filed on the ground that the upfront payment represented repayment of borrowed capital and therefore, the assessee was entitled to deduction u/s. 36(1)(iii) only on the net amount of rs. 2,22,75,000.

2.3    On the above facts, the matters came-up before the Bombay high Court, and the high Court, it seems, dealt with the appeals by first taking the appeal for the assessment year 1996-97 as the base. It seems that in the assessee’s appeals, large number of questions were raised  before  the Court. however, the high Court framed the following substantial question of law for its decision [Page 107]:

“Whether, on the facts and circumstances of the case and in law, the tribunal was right in holding that, even though the liability of payment of interest stood liquidated in the first year itself, such liability had to be allowed on a spread over basis over the life of the debentures?”

2.4    On behalf of the assessee, it was, inter alia, contended that the upfront payment of Rs. 55 per debenture on 29th march, 1996 was on account of interest and the CIT(a) wrongly treated the payment   of   Rs.   55   per   debenture   on   capital account.  the terms of issue of debentures in this respect are very clear. for accounting purpose, the assessee has debited 1/5th of Rs. 55 for five years in profit and loss account but, for the purpose of determining deductibility of the amount under the act one has to go by the year in which the liability arises under the terms of issue of debentures, and for that purpose, the treatment in the books of account is irrelevant.  The assessee is following mercantile system of accounting and under the terms of issue, the liability arose in the first year itself and therefore, deductibility thereof  cannot be spread over the five years as erroneously done by the ao. It was further contended that it was not open to the revenue to tamper with the terms of issue and therefore, the ao was wrong in spreading the deduction over the five years. Such spreadover in five years amounts to altering the terms and conditions of the issue of debentures which was not permissible. It was also pointed out that, had the assessee not claimed the deduction in the very first year, the Revenue could have denied deduction in the second and subsequent years  on the ground that no liability accrued in those years and no amount was also paid during those years.   The  method  of  determining  the  quantum for allowing the deduction on a spreadover basis adopted by the revenue was also questioned.

2.4.1    It was further contended that the judgment of the apex Court in the case of madras industrial investment’s case did not apply to the facts of the case  of  the  assessee.  this  was  distinguished  on various grounds which, inter alia, include: in that case, the Court was concerned with the concept of premium payable at the time of redemption and in this case, although the assesse is liable to pay 10% premium at the time of redemption, that has been claimed on the basis of tests laid down in that case and,therefore, in this case, we are not concerned with the deductibility of such premium. Present case is concerned with the deductibility of upfront payment of interest which became payable in the very first year ending on 31st march, 1996. it was further pointed out that in madras industrial investment’s case, the premium amount was payable after five years and therefore, the apex Court has allowed amortisation whereas in this case, the liability to pay interest arose in the very first year and that is also discharged in the first year itself. Furthermore, in that case the liability was a continuing liability which is not the case in this case. From the judgment of the apex Court in that case, it would appear that the option was with the assessee to claim deduction in the very first year when it discharged the accrued liability or to spread it over for five years. As such, according to the learned counsel appearing on behalf of the assessee, the judgment of the Apex Court in the madras industrial investment’s case had no application to the facts of the present case. A reliance was also placed on the judgment of the Bombay high Court in the case of Buckau Wolf new india engineering Works Ltd. [157 ITR 751] in which case, the amount was payable in installments and yet, the high Court took the view that the deduction for the entire amount should be given in the first year because the liability was accrued in the first year.

2.4.2    It was also pointed out that @ 55 per debenture, the assessee was required to pay Rs. 4,45,50,000 interest in five years but by paying upfront amount of Rs. 2,72,25,000 it has been able to save a payment of interest to the extent of Rs. 1,73,25,000.  While spreading over the deduction,even the revenue is ultimately allowing deduction of Rs. 4,45,50,000 as against the claim of deduction of Rs.2,72,25,000 made by the assessee. It was also contended that the Revenue has wrongly invoked the judgment of the apex Court in mcdowell’s case.

2.4.3    The  learned  counsel  for  the  assessee  further contended that under the terms of issue, the lenders were free to opt for interest on half yearly basis @ 18% per annum for five years (i.e. in aggregate  Rs.  90  per  debenture)  or  to  receive upfront  payment  of  Rs.  55  per  debenture  in  the year of allotment itself.  Therefore, the lenders had a right to receive discounted amount of interest in the first year under the second option. In other words, by making upfront payment of Rs. 55 per debenture, the assessee has brought the present value  of  rs.  90  to  Rs.  55  which  is  nothing  but discounted value of the interest otherwise payable in five years. Under the first option, the assessee would  have  paid  Rs.  89,10,000  every  year  for  a period of five years on this amount of borrowing. however, by making upfront payment of discounted value of interest amounting to Rs. 2,72,25,000,the assessee  got  rid  of  the  annual  liability  of  Rs. 89,10,000 for five years. It was also contended that the  revenue  has  accepted  that  upfront  payment of Rs. 55 per debenture was revenue expenditure and by spreading over the amount of deduction, the  revenue  allows  deduction  of  rs.  89,10,000 per year for a period of five years aggregating the  amount  to  Rs.  4,45,50,000  as  against  the assessee’s claim of deduction of Rs. 2,72,25,000 in the first year. Therefore, there is no loss to the revenue. As such, the only question which the ao was required to decide was whether the liability to pay interest was incurred in the first year itself or not, and if so, the assessee was entitled to obtain full deduction in the first year.

2.4.4    It  was  also  pointed  out  that  the  tribunal  has proceeded on the footing that the entire measure was adopted because the assessee had surplus income whereas the concerned lender had brought forward losses. In this respect, it was contended that the court should not take into account extraneous factors while deciding the claim of the assessee.

2.4.5    Referring to the judgment of the Apex Court in the case of tuticorin alkali Chemicals and fertilizers Ltd. [227 itr 172 – tuticorin’s case], it was further contended that the deduction of expenditure under the act does not depend on what the assessee debits in its accounts but, it depends on the provisions of the law.  Therefore, in this case, the fact that the assessee has not debited the full amount to profit and loss account in the first year itself cannot be the ground for its disallowance in that  year. The  tax  cannot  be  levied  on  the  basis of entries made  by  an  assessee  in  its  books  of account.

2.4.6    It was also contended that the tribunal has erred in introducing matching concept to the effect that the expenditure must relate to the income in the assessment year and the benefit was spread over for a period of five years and therefore, the expenditure must also be spread over. According to the learned counsel, since the  liability  in  this case is incurred in the first year itself, the assesseee was entitled to full deduction in that year and, therefore, the question of co-relating the expenditure to income/ benefit for five years does not arise.  For this, the reliance was placed on the judgment of the Apex Court in the case of Mysore Spinning and mfg. Co. Ltd. [61 itr 572].

2.5    On  behalf  of  the  revenue,  it  was,  inter  alia, contended that the option given to the lenders refers to upfront one-time payment and it does not speak of interest. the upfront payment of Rs. 55 per debenture, as against the amount of Rs. 90, was made to get the benefit of differential amount of Rs. 45 for a period of five years and therefore, the ao was right in spreading the expenses over that period. If the argument of the assessee for deduction of the full amount in the first year is accepted, then the computation of income will stand distorted, because the assesse got the benefit of Rs. 45 for five years. Upfront payment of  Rs.  55  was  on  account  of  advance  payment of interest in the first year for five years. As such, the principle laid down by the apex Court in the madras industrial investment’s case was squarely applicable to the facts of the case of the assessee. It was also contended that under both the options, the interest was payable every six months and therefore, the amortisation principle was applicable to  both  the  options.  Therefore,  even  Rs.  55  per debenture was payable by way of interest for five years which was paid by the assessee in the first year and therefore, the ao was right in applying the principle of amortisation in this case.

2.5.1    Supporting the appeals filed by  the  Revenue,  the learned counsel appearing on behalf of the revenue,  further  contended  that,  as  against  the amount  of  Rs.  4,95,00,000  borrowed  on  29th march, 1996, on the same day, an amount of Rs. 2,72,25,000 was repaid in the name of upfront payment of interest and therefore, the actual borrowed capital left with the assesse was only Rs. 2,22,75,000 which was used for the purpose of business. Since part of the borrowed capital was refunded to the subscribers on the same date, the actual borrowed capital remaining was the net amount and the tribunal has failed to appreciate this factual positon. as such, the assessee was entitled to claim deduction u/s. 36(1)(iii) for interest only on Rs. 2,22,75,000.

2.5.2.1 It was also contended that the entire scheme of issue of non-convertible debenture was devised to defeat the collection of tax revenue. In the present case, the assessee has not paid the discounted value of interest, but has repaid part of the face value of the debenture itself under the garb of upfront payment of interest at present value. therefore, the tribunal has erred in giving spread over and granting deduction of Rs. 4,45,50,000 @ 18% per annum for five years on the gross amount (i.e. Rs.4,95,00,000) of debentures.

2.6    After considering the contentions raised on behalf of both the sides, the Court proceeded to decide the question referred to in para 2.3.  For this purpose, at the outset, the Court noted the following relevant terms of the issue of debentures [Page115]:

“3(a) Each debenture shall carry interest at the rate of 2%. Per annum above the prime lending rate and the interest shall be payable half-yearly.
(b)    Each debenture shall carry interest at the rate of  Rs.  55  per  debenture,  payable  up-front  within thirty days of the exercise of option or from the date of allotment, whichever is earlier”.

These  terms  were  not  accepted  by  the  lenders.
The final terms of the issue were as follows:

“2.  Terms of the issue:
(a)    Up-front fee – the debenture shall carry up- front fee at the rate of Rs. 55 per debenture payable up-front immediately on allotment.
(b)    Redemption  period  –  the  debenture  shall be redeemed at a premium of 10 per cent, i.e.,  Rs.10  per  debenture,  in  one  instalment any time after the end of the fifth year from the date of allotment, but not later than the seventh year from the date of allotment.”

2.6.1    The Court then briefly referred to the facts of the present case and stated that the question which arises for determination in this case is whether Rs.  55  per  debenture  (total  –  Rs.  2,72,25,000) deductible in the first year of allotment or that expenditure was to be apportioned over the period of five years, which is the life of the debenture. The Court also noted that the assesse is following the mercantile system of accounting on the basis of which the assessee has made a claim for the full amount in the first year itself whereas the Revenue has treated this as deferred revenue expenditure (DRE)  and  apportioned  the  expenditure  for  five years. The Court then stated that for the purpose of deciding this issue, two concepts are required to be borne in mind, viz., matching and discount rate.

2.6.2    The   Court   then   proceeded   to   consider   the ‘matching concept’ referred to in above para.  for this purpose, the Court noted that the mercantile system of accounting is based on accrual. under this system, book profits are liable to be taxed. The profits earned and credited in the books of account constitute the basis of computation of income.  the  system  postulates  the  taxation  of monies that are due and payable by the parties to whom they are debited. explaining the effect  of the ‘matching concept’ in the mercantile system of accounting, the Court observed as under [Page no. 116]:
“…….therefore,  under  the  mercantile  system  of accounting, in order to determine the net income of an accounting year, the revenue and other incomes are matched with the cost of resources consumed (expenses). under the mercantile system of accounting, this matching is required to be done on accrual basis. under this matching concept, revenue and income earned during an accounting period, irrespective of actual cash in- flow, is required to be compared with expenses incurred during the same period, irrespective of actual out-flow of cash. In this case, the assesse is following the mercantile system of accounting. this matching concept is very relevant to compute taxable income particularly in cases involving dre. it has been recognised by numerous judgments…    ”

2.6.2.1    The Court then referred to the judgment of the apex Court in the case of Calcutta Co. Ltd. [37 ITR 1] and stated that, in that case, the Court had held that the expression ‘profits or gains’ used in section 10(1) of the income-tax act, 1922 [similar to section 28(i) of the act] should be understood in its commercial sense and there can be no computation of such profits and gains until the expenditure, which is necessary for the purpose of  earning  receipts  is  deducted  therefrom.  the Court then noted that in that case the apex Court had applied the ‘matching concept’ and allowed the deduction of an expenditure required to be incurred in subsequent period on an estimated basis which related to the income that was already accounted on the ground that otherwise it was not possible to compute profits and gains. The Court then stated that this concept is also applied by the apex Court in the case of madras industrial investment’s case and for that purpose the Court noted the following observations from the head notes of that case [Page 117]:

“Ordinarily, revenue expenditure which is incurred wholly and exclusively for thepurpose of business must be allowed in its entirety in the year in which, it is incurred. it cannot be spread over a number of years even if the assessee has written it off in his books, over a period of years. However, the facts may justify an assessee who has incurred expenditure in a particular year to spread and claim it over a period of ensuing years. in fact, allowing the entire expenditure in one year might give a very distorted picture of the profits of a particular year. Issuing debentures is an instance where, although the assesse has incurred the liability to pay the discount in the year of issue of debentures, the payment is to secure a benefit over  a  number  of  years.  There  is  a  continuing benefit to the business of the company over the entire  period.  the  liability  should,  therefore,  be spread over the period of the debentures”.

2.6.2.2    The Court then stated that the ‘matching concept’ is also covered by section 36(1)(iii) read with section 43(2), which defines the word ‘paid’ to include incurred according to the method of accounting. Both these sections are part of the provisions relating to computation of business income. Interest on monies borrowed for business purposes is an expenditure in the business, which is deductible under section 36(1)(iii).   the Court then pointed out that for claiming deduction u/s. 36(1)(iii), the necessary conditions are: the capital must have been borrowed; it must have been borrowed for business purpose and the interest must have been paid i.e., actually paid or incurred in accordance with the method of accounting followed by the assessee.

2.6.2.3    Referring to the facts of the case of the assessee, the Court noted that the assessee got the benefit of the borrowed money for a period of five years and if the ‘matching concept’ is not applied, the profits get distorted. In this context the Court then observed as under [Page 118]:

“……for  the  year  ending  march  31,  1996,  the assessee has submitted that it has incurred an expenditure  amounting  to  rs.  2,72,25,000  as and by way of interest deductible under section 36(1)(iii) of the income-tax act. however, in the annual accounts, the said amount is not debited to the profit and loss account. It is interesting     to note from the profit and loss account for the year ending March 31, 1996, that profit after tax  was  rs.1,86,34,016.  now  if  the  expenditure incurred was Rs. 2,72,25,000 as submitted by the assessee then the assessee could never have earned the said profit of Rs. 1,86,34,016. This is how the profit got distorted. In the annual report, the assessee has conceded that Rs. 2,72,25,000 was deferred revenue expenditure to be written off over five years. In his order, the Assessing Officer has recorded a finding of fact which categorically brings out the ‘matching concept’. he has stated that for the accounting year March 31, 1996, profit after  tax  increased  to  Rs.  1,86,34,016  from  rs. 50 lakhs in the last year ending march 31, 1995. Therefore, the Assessing Officer was right in apportioning the expenditure at 18 per cent. per annum on Rs. 495 lakhs amounting to Rs.74,259 for three days because only then the estimated expenditure   could   match   with   income   of   Rs. 1,86,34,016…    ”

2.6.2.4    Considering the above referred accounting treatment and the accounting profit for the year ending 31st march, 1996, the Court stated that the  assessee  has  shown  Rs.  2,72,25,000  as deferred  revenue  expenditure  and   according to the Court, this expenditure, though paid, was not incurred in the year ending 31st march, 1996 and the expenditure incurred in that year was Rs. 74,250. in this context, the Court further observed as under [Page 118]:
“… What we would like to emphasise is that, therefore, ordinarily revenue expenditure incurred only and exclusively for business purposes must be allowed in its entirety in the year in which it    is incurred. However, in a given case, like the present one, the facts may justify the Assessing Officer to spread the expenditure over the life    of the debentures because allowing the entire expenditure in one year might give a distorted picture of the profit of a particular year…    ”

2.6.2.5    Considering the overall facts of the assessee, the Court took the view that the assessee has received the borrowed funds for a period of five years and it is a continuing benefit to the business of the assessee over the entire period of debentures and therefore, the liability was required to be spread over the period of debentures.  the Court also noted that the assessee itself has applied    a ‘matching concept’ qua the claim of premium payable on redemption of debentures. As such,  in this very case, the  assessee  has  invoked  the ‘matching concept’ qua premium but not for interest.

2.7    The Court then proceeded to consider the second concept, viz., discount rate. in this context, the Court noted that the ao had taken a view that the upfront payment made by the assessee had to be discounted as these payments represent present value of the interest liability and were deferred revenue  expenditure.  For  this  purpose,  the  ao applied 18% as the discount rate which was effectively based on one of the options available for payment of interest over a period of five years. On this basis, the ao determined the annual liability  of  interest  at  Rs.  89,10,000  in  respect of borrowing of Rs. 495 lakh and Rs. 18 lakh in respect  of  borrowing  of  Rs.  100  lakh.    on  this basis, the ao allowed deduction of Rs. 74,250 for three days for the assessment year 1996-97 and Rs. 1,03,20,410 for the assessment year 1997-98 (i.e. Rs. 89,10,000 for the first set of debenture and Rs. 14,10,410 for the second set of debenture on a proportionate basis for part of the financial year 1996-97). in the subsequent years,it seems, the ao had allowed deduction on this basis for the full year.   The assessee had questioned the discount rate applied by the ao for determining the amount of deduction. After considering the factual position, the Court did not find any defect in the method of determining the amount of deduction adopted by the ao.

2.8    After considering both the above concepts, viz., ‘matching concept’ and discount rate, the Court stated that if they are kept in mind, the matter stands resolved in law.  For this purpose, the Court then analysed the annual accounts of three years under appeal and noted that in each of the years, the assessee has treated the upfront payments made in the first year as deferred expenditure and written off the same on  that  basis  during the life of the debentures. After analysing these annual accounts for three years, the Court also noticed that even this method continued in the subsequent accounting years upto 31st march, 2001 and finally, the debentures were repaid during the accounting year 2001-02.

2.8.1    Based on the analysis of the above referred annual accounts, the Court noted that this analysis indicates two things. Firstly, in the accounts, the upfront payment has been written off over the period of debentures by creating an asset in respect thereof on the basis that interest for five years is paid in advance in the first year. Secondly, the accounts show that the premium payable by the assessee on redemption was Rs. 60 lakh and in each year, 20% thereof has been charged to the profit and loss account. On this basis, the Court felt that the acceptance  of  claim  of  deduction of the full amount in the first year would result into distortion.

2.9    The   Court   then   noted   the   contention   of   the assessee that good accounting is not necessarily correct law.   For this, on behalf of the assessee, apart from the other authorities, heavy reliance was placed on the judgment of the Apex Court in tuticorin’s case to contend that the deduction of expenses in computation of income under the act does not depend on its accounting treatment but  depends  on  the  provisions  of  the  law.  For this, the Court considered the relevant provisions contained in section 36(1)(iii) read with section 43(2) and stated that, from this, it would  be  clear that question of allowance permitted to be deducted under the head profits and gains would differ according to the system of accounting adopted by the assessee.  For this purpose, one has to estimate the expenditure by applying the ‘matching concept’ and a proper discount rate. Referring to the judgment of the Apex Court in the case of A. Krishnaswamy Mudaliar [53 ITR 122], the Court stated that profits of the business should be determined according to the ordinary principles of commercial accounting so far as they are applicable.  The Court then stated that there is no merit in the argument advanced on behalf of the assessee that good accounting is not necessarily good law.

2.10    Finally, explaining the effect of judgment in tuticorin’s  case,the  Court  held  as  under  [Page 125]:
“………one of the points which arose for determination was whether interest received by the assessee on short-term deposits during pre-commencement of business could be capitalised as accretion to capital and, therefore, nontaxable.   Therefore,  in  the  case,  the  issue  was on the nature of the receipt. Hence, that case  has no application. On the contrary, it has been held that the accounting principles are relevant for ascertainment of profits made by a company or for ascertainment of value of assets of the company but, not for determining the nature of receipt. Therefore, the said judgment supports the view which we have taken as in this case,  we are concerned with computation of income.

It is important to note that the deferred revenue expenditure is of revenue nature but, because of its special features, it is spread over a number of years during which the benefit of expenditure is expected to arise to the business. on the facts, we hold that the liability was a continuing liability to pay interest spread over for a period of five years…    ”

2.11    In view of the above, the Court took the view that the ao was right in spreading the deduction over the period of five years which was the life of the debentures. Accordingly, the Court decided the question referred to in para 2.2. above in favour of the revenue and against the assessee.

2.12    On the above basis, appeals of the assessee for all  the  three  years  were  dismissed.   the  Court also noted that the three appeals preferred by the  revenue,  relate  to  the  ground  that  upfront payments represented repayment of borrowed capital and therefore, the assessee was not entitled to deduction u/s. 36(1)(iii) in respect thereof. In this respect, the Court clarified that the AO has recorded the finding of fact that the upfront payments were on revenue account and that has been confirmed by the Tribunal and therefore, the Court has decided these matters on the basis of that finding of fact. Accordingly, on this basis, the Court preferred not to answer the questions raised in the three appeals filed by the Revenue.

Payment of Ransom or Protection money and section 37

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Issue for Consideration
An expenditure laid out or expended wholly and exclusively for the purposes of business or profession is allowed as a deduction, u/s. 37, in computing the income chargeable under the head ‘Profits and Gains of Business or Profession’, provided such an expenditure is not in the nature of a capital expenditure or a personal expenditure of the assessee and is not of the nature covered by section 30 to 36 of the Act.

The expenditure, though incurred for the purposes of business, shall be deemed to have not been incurred for the purposes of business, where the expenditure is incurred for a purpose which is an offence or which is prohibited by law. No deduction or allowance, therefore can be made in respect of such an expenditure by virtue of Explanation 1 to section 37(1) of the Act.

It is not uncommon for a businessman to make certain payments in the course of his business, the payment of which might be an offence or prohibited by law. Several cases of payments of fines and penalties for violation of law are the examples that immediately come to mind. Such payments largely would be the cases of expenditure that would be hit by the Explanation 1 to section 37(1) and would stand to be disallowed in computing the Total Income.

Cases often arise wherein a businessman, for the purposes of his safety or for safeguarding his business, is required to make certain payments to either the police or security guards or to the gangsters or even to the kidnappers. Such payments, when made to the police or security guards are known as “Security Charges”, when made to gangsters are known as “Protection Money” and as “Ransom” when paid to kidnappers.

Issue arises in the context of Allowance or Deduction when such payment, i.e., security charges or protection money or ransom is made. Whether such payments, though made for business purposes, would be liable for disallowance on the ground of it being construed as an expenditure incurred for a purpose which is an offence or is prohibited by law. Conflicting views of the High Courts highlight the controversial nature of the issue under consideration.

M. S. Swam inathan’s case
Before the Karnataka High Court in the case of CIT vs. M. S. Swaminathan, 236 CTR 559, the Revenue had raised the following question for consideration of the high court in an appeal filed by it – “ whether the payment made to local police and local rowdies can be an allowable expenditure as a business expenditure ?

“In the said case, a sum of Rs. 86,000 was claimed as expenditure for money paid to local police and local goons towards the maintenance of the two theatres run by the assessee, viz., Vinayaka Touring Talkies and Sri Krishna Theatre. The expenditure of Rs. 86,000 claimed was disallowed by the AO. The CIT(A), in an appeal filed by the assessee, concurred with the view expressed by the AO and dismissed his appeal. Aggrieved by the same, the assessee filed the second appeal before the tribunal, which allowed the appeal in part, by allowing deduction of Rs. 50,000 as against Rs. 86,000 claimed. Being aggrieved by the same, the appeal was filed by the Revenue before the High Court.

On hearing the rival contentions, the Karnataka High Court allowed the appeal of the Revenue for disallowing the claim of the expenditure by holding as under;

“If any payment is made towards the security, towards the business of the assessee, such amount is an allowable deduction, as the amount spent for the maintenance of peace and law and order in the business premises of the assessee as he was running two cinema theatres. But the amount spent in the instant case claimed by the assessee is towards payment made to the police and rowdies. If any payment is made to the police illegally, it amounts to bribe and such illegal gratification cannot be considered as an allowable deduction and similarly, if any amount is paid to a rowdy as a precautionary measure to see that he shall not cause any disturbance in the theatre run by the assessee, the same is also an amount paid illegally for which no deduction can be allowed by the Department. If the assessee had spent the money for the purpose of security, we would have to concur with the view of the Tribunal. However, in the instant case, the payment has been made to the police and rowdies to keep them away from the business premises which payment be held as illegal and such illegal payment cannot be an allowable deduction.”

Khemchand Motilal Jain, Tobacco Products (P.) Ltd.’s case
The issue arose in the case of CIT vs. Khemchand Motilal Jain, Tobacco Products (P.) Ltd. 340 ITR 99 (MP) before the Madhya Pradesh High Court. In that case, the assessee company was engaged in manufacturing and sale of bidis. One Mr. Sukhnandan Jain was a whole-time director of the assessee-company and was looking after the purchase, sales and manufacturing of bidis. During his business tour in August 1987 to Sagar for purchase of tendu leaves, he was kidnapped for ransom by a dacoit gang headed by Raju Bhatnagar. Immediately, a complaint and FIR were lodged with Sagar Police. The assessee company awaited the action of the police but the police was unsuccessful in getting Mr. Sukhnandan Jain released from the clutches of the dacoit. Ultimately after 20 days, a sum of Rs. 5,50,000 was paid by way of ransom for the release of Mr. Sukhnandan Jain. On the same day of payment of the ransom, Mr. Sukhnandan Jain was released by the dacoits.

The company claimed a deduction of the ransom amount as business expenditure. The AO disallowed the claim of the assessee company on the ground that the ransom money paid to the kidnappers was not an expenditure incidental to business. On appeal, the CIT (Appeals) allowed the claim of the assessee. The Tribunal confirmed the finding of the CIT (Appeals). On appeal, the Revenue contended that the amount of ransom could not have been claimed by way of expenditure as the Explanation to sub-section (1) of section 37 prohibits such expenditure. The Tribunal referred the following question to the Court :“Whether on the facts and in the circumstances of the case, the Tribunal was justified in law in holding that the amount of Rs. 5,50,000 paid as ransom money to the kidnappers of one of the Directors was an allowable deduction under section 37(1) of the Income-tax Act,1961?”

Before the High Court, the Revenue submitted that the amount of ransom could not have been claimed by way of expenditure as the Explanation of sub-section (1) of section 37 of the Income-tax Act, 1961 prohibited allowance of such an expenditure. It was submitted that the payment of any amount which was prohibited by law was not a business expenditure and it could not be allowed as an expenditure.

The amicus curiae, and the assessee company supported the orders passed by the appellate authorities and submitted that the payment of ransom was an allowable expenditure. It was pleaded that the amount was paid to the dacoits to get Mr. Sukhnandan Jain, who was on business tour and who was working as the director of the company, released from the dacoit. It was contended that the aforesaid amount was rightly claimed as an expenditure of business. It was insisted that at the relevant time, Mr. Sukhnandan Jain was on a business tour and was staying at a Government Rest House at Sagar, from where he was kidnapped.

The assessee company, in support of its claim, relied upon the judgments in cases of Sassoon J. David & Co. (P.) Ltd. vs. CIT, Bombay 118 ITR 261 and CIT West Bengal, Calcutta vs. Karam Chand Thapar and Brothers (P.) Ltd, 157 ITR 212(Cal.) and Addl. CIT vs. Kuber Singh Bhagwandas, 118 ITR 379(MP).

The  madhya  Pradesh  high  Court  extensively  quoted with approval the findings of the appellate authorities in respect  of  the   contribution  of  Mr.  Sukhnandan  Jain  to the business of the company, his need to travel for the purposes of business, the business exigency for payment of ransom money and the compulsion thereof. The court noted that from the perusal of the facts, it was apparent that  Sukhnandan  jain  was  conducting  business  tour for the company and was staying at a government rest house and the visit was to meet one Bihari Lal for the procurement of quality tendu leaves and it was during the  business  tour,  that  he  was  kidnapped.  The  court further noted that for a period of near about 20 days after lodging a report to the police, when all the efforts of the police were unsuccessful, the company made payment of  ransom  amount  of  Rs.  5,50,000  to  the  kidnappers and ultimately on the same day, Sukhnandan jain was released from the clutches of the dacoits and that both the appellate authorities had found that it was a business expenditure while allowing the claim.

The  court  referred  to  the  provisions  of   explanation  of sub-section (1) of section 37, for determining whether the expenditure could have been disallowed under that provision of the act. It also examined the provisions of section 364a of the indian Penal Code which provided that kidnapping a person for a ransom was a criminal offence. It noted that the aforesaid section 364A provided that kidnapping a person for ransom was an offence and any person doing so or compelling to pay, was liable for punishment as provided in the section, but nowhere it was provided that to save a life of the person if a ransom was paid, it would amount to an offence. No provision was brought to the notice of the court that the payment of ransom was prohibited by any law and in absence of it, the Explanation of sub-section (1) of section 37 was not applicable in the case of the assessee company.

The  madhya  Pradesh  high  Court,  after  analysing  the decisions cited by the assessee company, observed that in the case before the court, Mr. Sukhnandan Jain was on business tour and was staying at a government rest house from where he was kidnapped and to get him released, the amount was paid to the dacoits as ransom money. It thereafter held as under; “If the respondents to save his life paid the aforesaid amount, then the aforesaid amount cannot be treated as an action which was prohibited under the law. No provision could be brought to our notice that payment of ransom is an offence. In absence of which, the contention of the petitioner that it is prohibited under Explanation of section 37(1) of the Income-tax Act has no substance. The entire tour of Sukhnandan Jain was for purchase of tendu leaves of quality and for this purpose he was on business tour and during his business tour, he was kidnapped and for his release the aforesaid amount was paid.”

The high Court accordingly held that the ransom amount was an allowable business expenditure.

Observations
The  bitter  reality  of  the  day  is  that  people  do  have  to regularly cough up money, against their will, for securing the safety of their business or lives or both. in some cases. the payments are made to ensure continuity of the business. In many cases, the payments are not only involuntary but may not be authorised by the law, as well. Such payments are forced by the goons or the guardians of the law and at times by the framers of the law. Barring a very limited section of the society, no one cherishes such payments but are seen, nonetheless to be acquiescing to such extortions in the interest of survival. Cases are available wherein a citizen has to resort to imaginary ways to meet such demands by generating cash from one’s accounted funds. In most of the cases, even approaching the authorities, entrusted with the task of protecting and ensuring the safety of the citizens, involves an extra and additional cost. Therefore, it brings additional pains where such expenditure incurred against one’s will is not allowed as a deduction in computing the total income. On disallowance of the claim, it becomes a case of a double whammy for the businessman.

The Government, instead of ensuring  that its citizens are not extorted to pay money against their will by securing their safety, by booking the extortionists, has, to add insult to the injury, legislated the said Explanation to section 37(1) for providing that such an expenditure is disallowable.

Section 37 of the income-tax act provides for allowance of an expenditure that has been wholly and exclusively incurred for the purposes of the business of the assessee. It is a settled position in law that the expression “wholly and exclusively” does not mean “necessarily”. An expenditure maybe incurred by than assessee without there being a dire necessity for incurring such an expenditure and such an expenditure will not be disallowed once it is shown that the same has been incurred for the purposes of business of the assessee. It is for the assessee to decide whether any expenditure should be incurred in the course of his business or not. Such an expenditure may be incurred voluntarily and without any necessity. Once an expenditure is incurred for promoting the business and to earn profits, the assessee can claim deduction even though there is no compelling necessity to incur such expenditure.

In order to decide whether a payment of money or incurring of expenditure is for the purpose of the business and is an allowable expenditure or not, the test to be applied is that of ‘commercial expediency’. If the payment or expenditure is incurred to facilitate the carrying on of the business of the assessee and is supported by commercial expediency, it does not matter that the payment is voluntary or that it also enures to the benefit of a third party.

An expenditure otherwise allowable u/s. 37, in terms of the tests discussed above, would still be disallowed if  the same is incurred for a purpose which is an offence  or is prohibited by law, in which event the expenditure  so incurred shall be deemed to be not for the purposes of   business   or   profession.   The   purpose   behind   an expenditure assumes a great importance; where the purpose is an offence, the disallowance would take place.

An offence, as per the dictionary, in the context, is an illegal act; a transgression or misdemeanour. accordingly, an expenditure incurred for the purpose which is illegal cannot be allowed under the act. Similarly, an expenditure incurred for achieving a purpose that is prohibited by law would not be allowed a deduction. It appears that there  is very little difference between a purpose which is an offence and a purpose which is prohibited by law. In the context of explanation to section37 (1), one is therefore required to examine whether the payment is being made for a purpose which is prohibited by law.

Ensuring security of the business or of the business personnel, is an essential function of any business and therefore, payment of security charges would neither be an offence nor prohibited by law. We are afraid that the objective of the payee or his purpose behind demanding, collecting or receiving the payment is an  irrelevant  factor while applying the test of explanation 1 to section 37(1), the application of which is qua the payer and is limited to his purpose, as long as the purpose behind his expenditure is not an offence or prohibited by law.

Taking this understanding to the second level of payment of protection money, to a gangster, such a payment should not be disallowed as long as paying such an amount is not an offence under the indian Penal Code or any other law. It is true that for a gangster, demanding protection money or extorting money for not causing any damage, is an offence that is punishable under the indian Penal Code. His offence, however, need not necessarily be the offence of the payer assessee. The objectives and the purposes are different and cannot be equated.

Likewise, payment of ransom for securing the release to a kidnapper is not an offence or is not prohibited under any law. So, however, demanding a ransom is a serious crime that is punishable in law. Accordingly, the payment of ransom shall not be liable for any disallowance, simply on application of explanation 1 to section 37(1).

At the same time, it is significant to note that a payment to a police officer is an offence and is also prohibited by law if the same amounts to bribing him. however, an official payment to the Police Department, for security,  is not an offence and is not liable for disallowance. In Swaminathan’s case (supra), it is not clear that what was the nature of payment to the police. Was it a bribe? if yes, it was liable for disallowance.

Many  years  back,  the  mumbai  tribunal  in  the  case  of Pranav Construction Company, 61 T1TJ 45, held that payments made by a builder of “protection money” to tapories and hawkers was allowable as deduction on being satisfied about the genuineness of the expenditure. The   tribunal   held   that   the   builders   engaged   in construction activities were vulnerable to danger such as extortion, haftas, etc. and unless, they obliged, it would be impossible for them to conduct business.

The view of the madhya Pradesh high Court, in the case of Khemchand Motilal Jain’s case (supra), that payment of ransom for securing the release of the director was not an  expenditure for a purpose that was an offence   or was prohibited by law and was therefore not hit by the explanation 1 to section 37(1) is the correct view in law.

THE FINANCE ACT – 2015 DIRECT TAX PROVISIONS

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1. Background

1.1 The Finance Minister, Shri Arun Jaitley, presented his second budget in the Lok Sabha on 28th February, 2015. After some discussions, both the houses of Parliament have passed the Finance bill with some amendments in the Finance Bill, 2015, and the same has received presidential assent on 14th May, 2015. There are 80 sections in the Finance Act dealing with amendments in direct tax provisions.

1.2 In Paras 96 to 98 of his budget speech he has referred to certain steps which the Government proposes to take in the field of Indirect Taxes and Corporate Taxation, in the coming years. These are

(a) Expediting the process to legislate Goods and Services Tax (GST)
(b) Reduce the corporate tax to 25% over the next four years and phase out exemptions and incentives.

1.3 I n Para 99 of his budget speech he has enumerated the themes adopted by him for his tax proposals as under;

“99. While finalizing my tax proposals, I have adopted certain broad themes, which include;

A Measures to curb black money;
B Job creation through revival of growth and investment and promotion of domestic manufacturing and ‘Make in India’.
C Minimum government and maximum governance to improve the ease of doing business;
D Benefits to middle class taxpayers;
E Improving the quality of life and public health through Swachch Bharat initiatives; and
F Stand alone proposals to maximize benefits to the economy”

1.4 It may be noted that another major step in this year’s budget is about abolition of wealth tax from A.Y. 2016-17. The justification for this is given in Para 113 of the budget speech as under;

“113. My next proposal is regarding minimum government and maximum governance with focus on ease of doing business and simplification of Tax Procedures without compromising on tax revenues. The total wealth tax collection in the country was Rs. 1,008 Crore in 2013-14. Should a tax which leads to high cost of collection and a low yield be continued or should it be replaced with a low cost and higher yield tax? The rich and wealthy must pay more tax than the less affluent ones. I have therefore decided to abolish the wealth tax and replace it with an additional surcharge of 2% on the super-rich with a taxable income of over Rs. 1 Crore. This will lead to tax simplification and enable the Department to focus more on ensuring tax compliance and widening the tax base. As against a tax sacrifice of Rs. 1,008 Crore, through these measures the Department would be collecting about Rs. 9,000 Crore from the 2% additional surcharge. Further, to track the wealth held by individuals and entities, the information regarding the assets which are currently required to be furnished in wealth-tax return will be captured in the income tax returns. This will ensure that the abolition of wealth tax does not lead to escape of any income from the tax net”.

1.5 While concluding his budget speech, he has stated that the Direct Tax proposals will result in revenue loss of Rs. 8,315 Crore. As compared to this, his Indirect Tax proposals will yield estimated revenue of Rs. 23,383 Crore. Thus the net revenue gain will be about Rs. 15,068 Crore.

1.6 I n this article some of the important amendments made to the Income-tax Act by the Finance Act, 2015, have been discussed. It may be noted that the amendments, as in last year’s Finance Act, have only prospective effect i.e., will operate for assessment year 2016-17, unless specifically provided

2. Rates of Taxes

2.1 I n view of the changes in threshold limits made by the Finance (No.2) Act, 2014, the exemption limit for Individuals, HUF, AOP as well as the rates of tax remain unchanged.The rates of income tax in the case of corporate and non-corporate assessees in A.Y. 2015-16 and A.Y.: 2016-17 will be the same.

2.2 T herefore, in the case of an Individual, HUF, AOP, BOI etc., the rates of Income-tax for A.Y. 2015-16 and A.Y. 2016-17 will be as under:

Note: Rebate of Tax – A Resident Individual having total income not exceeding Rs. 5 lakh, will get Rebate upto Rs. 2,000/- or tax payable, whichever is less u/s. 87A.

2.3 A s stated earlier, due to abolition of wealth tax from A.Y. 2016-17, the rate of Surcharge on tax has been increased from 10% to 12% for Super Rich assessees. This increased surcharge will be charged as under from A.Y. 2016-17.

(i) I n the case of an Individual, HUF, AOP etc. the rate of surcharge on tax will be 12% if the total income of the assessee exceeds Rs.1 crore.
(ii) In the case of a firm, LLP, Co-operative Society and a Local Authority the rate of Surcharge on tax will be 12% if the total income exceeds Rs.1 crore.
(iii)In the case of a domestic company the rate of surcharge on tax will be as under:
(a) I f the total income exceeds Rs.1 crore but does not exceed Rs.10 crore the rate of surcharge will be 7%.
(b) I f the total income exceeds Rs.10 crore, the rate of surcharge will be 12%.
(iv) I n the case of a foreign company there is no increase in the rate of surcharge on tax. Hence, the existing rate which is 2% in respect of total income between Rs.1 crore and 10 crore and 5% in respect of total income exceeding Rs.10 crore will continue.
(v) T he rate of surcharge on Dividend Distribution Tax u/s. 115-0, Tax on Buy Back of shares u/s. 115 QA, Income Distribution Tax payable by Mutual Funds u/s. 115R, and Income Distribution Tax payable by Securitisation Trusts u/s. 115 TA will be 12%.

2.4 T he existing rate of 3% for Education Cess (including Secondary and Higher Secondary Education Cess) on Income tax and surcharge will continue in A.Y. 2016-17.

2.5 T he effective maximum marginal rate of tax (including Surcharge and Education Cess ) will be as under for A.Y. 2016 – 17.

3. Tax Deduction at Source:

3.1 Section 192: At present, the person responsible for paying salary has to depend upon the evidence and particulars furnished by the employee in respect of deduction, exemptions and set-off of loss claimed by the employee while deducting tax at source. There is no guidance available about the evidence or particulars to be collected. Therefore, s/s. (2D) is inserted from 1.6.2015 to provide that the person responsible for deduction of tax will have to get particulars, evidence etc. about the deduction claimed from the salary in the Form which will be prescribed in the Rules.

3.2 Section 192A: This is a new section inserted from 1.6.2015. In the case of an employee participating in a Recognised Provident Fund (RPF), the accumulated balance to his credit in his PF account is excluded from his total income if Rule 8 of Part A of Schedule IV is applicable. If this Rule does not apply, the trustees of RPF are required to deduct tax at source. The Trustees of P.F. sometimes find it difficult to determine the rate of tax for TDS. To resolve this issue, section 192A provides that, at the time of payment of the accumulated balance due to the employee, trustees shall deduct income-tax at the rate of ten per cent. If the employee fails to furnish his PAN to the trustees, tax shall be deducted at the maximum marginal rate. Tax is not deductible under this section where the aggregate amount of withdrawal is less than Rs. 30,000/- or where the employee furnishes a selfdeclaration in the prescribed Form 15G/15H that tax on his estimated total income would be nil.

3.3 Section 194A: This section has been amended from 1.6.2015. The effect of this amendment is as under:

(i)    A co-operative Bank will have to deduct tax at source from interest paid or payable on time deposit made by its member. This deduction is to be made if the amount of the interest exceeds Rs.10,000/-. however, no such deduction will be required to be made on interest paid or payable on time deposit by a co-operative society. Similarly, a primary agricultural society, a primary credit society, a Co-operative land mortgage bank, or a Co-operative land development bank will not be required to deduct tax at source from interest payment. the  amendment  to  section  194a(3)(v)  sets  at  rest  the controversy created by a recent decision of the Bombay high Court.

(ii)    Hitherto, there was no tdS from interest paid by a Bank  on  recurring  deposits.  now,  tax  will  be  required to be deducted by the bank in respect of interest on recurring deposit also.( amendment to explantion 1 of section 194 a).

(iii)    At present, the threshold limit of exemption from tdS provisions apply to interest credited or paid by a branch on an individual basis in the case of a bank, Co- operative bank or a public company engaged in long- term housing finance. It is now provided that the TDS provisions u/s. 194a with reference to interest credited or paid by such entities as a whole will apply if the entity has adopted core banking solutions. in other words, in such cases, total interest paid or payable by all branches will have to be considered for determining the threshold limit of exemption.

(iv)    Interest paid on compensation amount awarded by the motor accident Claim tribunal (MACT) shall now be liable to TDS u/s. 194a only at the time of payment of interest, if the aggregate amount of such payment during the financial year exceeds Rs. 50,000/-. Hence, as per the amended provision, there will be no withholding of tax at the time when such interest is credited.

3.4    Section  194C:   This  section  is  amended  from 1.6.2015. at present, payment to a transporter carrying on the business of plying, hiring, or leasing of goods carriages is not subject to TDS u/s. 194C if the transporter furnishes his Pan to the payer. Now, this exemption will be available only to such transporterwho owns ten or less goods carriages at any time during the previous year and also furnishes a declaration to that effect to the payer along with his Pan.

3.5    Section  194-I:   This  section  is  amended  from 1.6.2015. It is now provided that tax will not be deducted u/s. 194-I from rent paid or payable to a Business trust (real  estate  investment  trust)  in  respect  of  any  real estate asset as referred to in section 10(23fCa) owned directly by such business trust.

3.6    Section 194 LBA: This section is amended from 1.6.2015. Section 194LBA was inserted by the finance (no.2) act, 2014, w.e.f. 1.10.2014 to provide for deduction of tax @10% from income referred to in section 115ua (i.e.  interest  income  received  by  a  Business trust  from SPV)  distributed  to  a  resident  unit  holder.  in  the  case of  non-resident  unit  holder  the  rate  of  TDS  was  5% plus applicable Surcharge and education  Cess.  By an amendment of this section, the scope of this TDS provision is extended to income of Business trust from renting, leasing or letting out any real estate asset owned by it distributed to its unit holder. it is now provided that, in the case of a resident unit holder the rate of TDS will be 10% and in the case of a non-resident unit holder,  tax will be deductible at the applicable rate if the distribution of income is from income referred to in section 10 (23FCA) i.e., rental from the real estate asset.

3.7    Section 194 LBB: This is a new section inserted from1.6.2015. this section provides for deduction of tax @10% from income distributed to persons holding units issued by “investment fund” (refer section 115 uB) out of income other than that referred to in section 10(23fBB) (i.e. income of investment fund  other than income from business or profession).

3.8    Section  194  LD: This  section  was  inserted  by the finance act, 2013, w.e.f. 1.6.2013. under this section, tax is required to be deducted at concessional rate of 5% from interest payable to foreign institutional investors or Qualified Foreign Investors on Government Securities or rupees denominated Bonds of any indian Company. This concessional rate was applicable on interest payable during  the  period  1.6.2013  to  1.6.2015.  this  will  now continue in respect of interest payable till 1.7.2017.

3.9    Section  195:    This  section  is  amended  from 1.6.2015. Section 195(1) requires any person responsible for paying to a non-resident any interest or other sum chargeable under the provisions of this act  to  deduct tax from such payment. At  present,  such  person  has to furnish the information relating to payment of any sum in form 15Ca. now, section 195(6) is amended to provide for furnishing of information, whether or not such remittances are chargeable to tax, in such form as may be  prescribed.  this  will  cast  an  onerous  obligation  on payers. Section 271-I has been introduced to provide for a penalty of Rs.1,00,000/-, if the person required to furnish information under this section fails to furnish such information or furnishes inaccurate particulars. this is a new provision for levy of penalty.

3.10    Section   197A:      This   section   is   amended from1.6.2015 to provide as under:

(i)    Section 194da provides for deduction of tax at source at the rate of 2% from payments made under life insurance policy, which is chargeable to tax if the amount is rs. 1,00,000/- or more. it is now provided that tax shall not be deducted, if  the recipient of the payment on which tax is deductible furnishes to the payer a self-declaration in the prescribed form no.15G/15h declaring that the tax on his estimated total income for the relevant previous year would be nil.

(ii)    Similarly, as stated in Para 3.2 above, it is now provided that tax shall not be deducted u/s. 192a if a salaried employee withdrawing the accumulated balance from P.f. a/c gives a self-declaration in form no.15G/15h.

3.11    Section   203A:       This   section   is   amended from1.6.2015 to provide that the requirement of obtaining and quoting of TAN shall not apply to the persons as notified by the Central Government. This is in order to reduce the compliance burden for those individuals or huf who are not liable for audit u/s. 44aB or for one time transaction such as single transaction of acquisition of immovable property by an individual or huf, on which tax is deductible.

4.    Exemptions and Deductions:

In order to give certain benefits to middle class taxpayers and with a view to encourage savings and to promote health care among individual taxpayers, the following amendments are made in various sections of the income -tax act.

4.1    Section 80C: at present, section 80C (2) (vill) of the income-tax act provides that any subscription to   a scheme notified by the Central Government will be eligible for deduction in the case of an individual or huf. By Notification No.9/2015 dated 21-1-2015, a scheme for the welfare of the girl child under the SukanyaSarmiddhi Account Rules, 2014, has been notified. In view of this, amendment is made in section 80Cfrom1-4-2015. under this amendment any deposit by any individual, in the name of girl child of that individual or by legal guardian of the girl child as specified in the scheme will be eligible for deduction u/s. 80C within the overall limit of Rs.1.50 lakh as provided in that section. an amendment is also made to provide u/s. 10(11A) to grant exemption to the individual in respect of interest on the deposit under the above scheme or for the amount withdrawn from such deposit. Since this amendment comes into effect from
a.y. 2015 – 16 any such deposit made on or before 31-3- 2015 will be eligible for this deduction.

4.2    Section  80CCC:     This  section  provides  for deduction in the case of an individual in respect of contribution to any annuity Plan of LiC or any other insurer for receiving pension from the fund set up under a  pension  scheme  upto  Rs.1  lakh.    this  limit  is  now raised to Rs. 1.50 lakh froma.y. 2016-17. it may be noted that u/s. 80CCe an overall cap of Rs. 1.50 lakh for such deduction is provided for contribution u/s. 80C, 80CCC and 80CCd(1).  There is no amendment to raise this limit.

4.3    Section   80CCD:  this   section   provides   that an individual contributing to national Pension Scheme (NPS) can claim deduction upto 10% of salary, in the case of an employee or 10% of the gross total income in other cases subject to a cap of Rs.1 lakh u/s. 80CCD(1A). However, this deduction is subject to overall ceiling limit  of  Rs.1.50  lakh  u/s.  80CCe.    it  is  now  provided from A.Y. 2016-17 that the cap of Rs.1 lakh u/s. 80CCD(1A) be removed.

With a view to encourage individuals to contribute towards NPS, it is now provided, by insertion of section 80CCD(1B), that an additional deduction upto Rs.50,000/- will be allowed if the individual contributes to NPS.  this deduction will be allowed even if it exceeds 10% limit in respect of salary income (for employees) or gross total income  (for  others).  Further,  this  deduction  will  be  over and  above  the  ceiling  limit  of  Rs.1.50  lakh  provided u/s. 80CCe relating to deduction u/s. 80C, 80CCC and 80CCD(1). therefore, with proper planning of investments in PF, PPF, LIP, savings certificates etc. (section 80C), annuity Plan of LIC or other insurers (section 80CCC) and contribution to NPS (section 80CCD) an assessee can claim deduction upto Rs.2 lakh under these sections.

4.4    Section 80D: this section provides for deduction for premium paid for mediclaim policies for self, family members and Parents of the individual. Similarly, similar deduction for premium paid by huf for mediclaim polices of members of huf is allowed. the present limits for such deduction is Rs.15,000/- and for Senior Citizens it is Rs. 20,000/-.  these  limits  are  now  raised  from   A.Y.  2016- 17and a further provision is made for deduction of actual medical expenses under certain circumstances.  the new provisions are as under.

(i)    In view of continuous rise in the cost of medical expenditure, the limit of deduction is raised from Rs.15,000/-  to  Rs.  25,000/-  in  case  of  premium  for mediclaim policy for individual and his family members. Similarly, in the case of huf such deduction for premium on mediclaim policies for members of huf is also raised from Rs.15,000/- to Rs. 25,000/-. In the case of a Senior Citizen the deduction for premium on mediclaim policies is raised from Rs.20,000/- to Rs. 30,000/-.

(ii)    In the case of very Senior Citizens (i.e 80 years and above), it may not be possible to get a mediclaim policy and they cannot get benefit of the above deduction. therefore, as a welfare measure, it is now provided that deduction upto Rs.30,000/-   will be allowed for medical expenditure in respect of very senior citizens if no mediclaim policy is taken out.  The aggregate expenditure available for deduction in the case of an individual/huf  for premium on mediclaim policy and expenditure on medical expenditure for parent or family member who is a very senior citizen shall not exceed Rs. 30,000/-.

4.5    Section   80   DDB:This   section   provides   for deduction   for   expenditure   incurred   by   a   resident individual or huf for medical treatment of certain chronic and protracted diseases. It is provided that the expenditure in the case of individual should be in respect of medical treatment of himself or his dependant relative and in the case of huf it should for any member of HUF.   The  medical  treatment  should  be  for  a  disease specified in Rule 11DD and should be supported by a certificate from an authorised Doctor in a Govt. Hospital. at  present,  the  deduction  allowable  is  upto  Rs.  60,000 if the medical treatment is of a Senior Citizen and in other  cases  deduction  is  allowed  upto  Rs.  40,000/-. In view of the difficulties experienced in obtaining certificate from a specialised doctor in a Govt. Hospital, the section is now amended to provide that the assessee should obtain prescription from a specialized doctor as  may  be  prescribed.  further,  in  the  case  of  medical treatment of a very senior citizen the ceiling for deduction of   expenditure   is   now   raised   from   Rs.   60,000/-   to Rs. 80,000/- from A.Y. 2016-17.

4.6    Section  80DD:  This  section  provides  that  a resident individual or huf can claim deduction for (i) expenditure for medical treatment (including nursing), training and rehabilitation of a dependant relative suffering from specified disability or (ii) any amount paid to LIC or other insurer in respect of a scheme for the maintenance of a disabled dependant relative. At present, this deduction can be claimed upto Rs.50,000/- in the case of medical treatment for specified disability and upto rs.1 lakh in the case of medical treatment for severe disability as defined in the section. In view of rising costs of medical treatment, these limits have been raised, by amendment of this section, from A.Y. 2016-17 from Rs.50,000/- to Rs.75,000/- (for disability) and from Rs.1 lakh to Rs.1,25,000/- (for Severe disability).

4.7    Section 80U: this section provides for deduction of Rs.50,000/- in the case of a resident individual suffering from a specified Disability. If such individual is suffering from specified Severe Disability deduction of Rs.1 lakh is allowed. in view of rising costs of special needs of disabled persons, these limits are now raised from A.Y. 2016-17 from Rs. 50,000/- to Rs.75,000/- (for disability) and from Rs.1 lakh to Rs.1,25,000/- (for Severe disability).

4.8    Section 80G: this section provides for deduction of amounts contributed by way of donations to various institutions  set  up  for  charitable  purposes.  this  section has been amended as under:-
(i)    Two   funds,   namely,   “Swachh   Bharat   Kosh”   and “Clean  Ganga  fund”  have  been  established  by  the Central Government. With a view to encourage people to participate in this national effort, section 80G is amended from A.Y. 2015-16 to provide that deduction of 100% of the donation to any of these funds will be allowed. Since this amendment has been made from A.Y. 2015-16,  such donation made upto 31-3-2015 will be eligible for deduction under the amended section. it may be noted that such donation made by a company in pursuance of Corporate  Social  responsibility  (CSR)  expenditure  u/s. 135(5) of the Companies act, 2013, will not qualify for this deduction. it may be noted that section 10(23C) has been amended from A.Y. 2015-16 to provide that income of “Swachh Bharat Kosh” and “Clean Ganga fund” will be exempt from income tax.

(ii)    By another amendment to section 80G from a.y. 2016- 17  donation  made  to  “the  national  fund  for  control  of drug abuse” will now be eligible to 100% deduction.

4.9    Section 80 JJAA: This section is amended from A.Y. 2016-17. this section allows deduction to an indian Company deriving profit from manufacturing of goods in a factory. This benefit is now extended to non-corporate assessees  also.  The  quantum  of  deduction  allowed  is equal to 30% of additional wages paid to new regular workmen employed by the assessee in such factory in the previous year. this deduction can be claimed for 3 assessment years. At present, additional wages for this purpose has been defined to mean wages paid to new regular  workmen  in  excess  of  100  workmen.  This  limit is now reduced to 50. It is also clarified that the above benefit will not be granted where factory is acquired by way of transfer from any other person or as a result of any business reorganisation.

5.    Investment Fund:
a  new  Chapter XII – FB has been added in the income tax act from A.Y. 2016-17. Special provisions relating to  tax  on  income  of  “investment  funds”  and  income received from such funds are made in sections 115 UB, 10 (23 FBA) and 10 (23FFB) of the act.   In brief, these provisions are as under:

5.1    “Investment fund” means any fund established or incorporated in india in the form of a trust, Company, LLP or a body corporate which has been granted certificate of registration as a Category I or a Category II alternate investment fund (AIF) and is regulated under SEBI (AIF) regulations, 2012.

5.2    In order to rationalise the taxation of Category –i and Category-ii AIFS (i.e. investment funds) section 115uB  provides  for  a  special  tax  regime.  The  taxation of income of such investment funds and their investors shall be in accordance with the provisions applicable to such funds irrespective of whether they are set up as a trust, company, or LLP etc. the salient features of these provisions are as under:

(i)    Income of a person, being a unit holder of an investment fund, out of investments made by the investment fund shall be chargeable to income-tax in the same manner as if it was the income accruing or arising to, or received by, such unit holder.

(ii)    Income in the hands of investment fund, other than income from profits and gains of business, shall be exempt from tax. The income in the nature of profits and gains of business or profession shall be taxable in the case of investment fund.

(iii)    Income in the hands of investor which is of the same nature as income by way of profits and gain of business at investment fund level shall be exempt.

(iv)    Where any income, other than income which is taxable at investment fund level, is payable to a unit holder by an investment fund, the fund shall deduct income-tax at the rate of 10%.

(v)    The income paid or credited by the investment fund shall be deemed to be of the same nature and in the same proportion in the hands of the unit holder as if it had been received by, or had accrued or arisen to, the investment fund.

(vi)    If in any year there is a loss at the fund level either current loss or the loss which remained to be set off, the loss shall not be allowed to be passed through to the investors but would be carried over at fund level to be set off against income of the next year in accordance with the provisions of Chapter Vi of the income-tax act.

(vii)    The provisions of Chapter Xii-d (dividend distribution tax) or Chapter Xii-e (tax on distributed income) shall not apply to the income paid by an investment fund to its unit holders.

(viii)    The income received by the investment fund would be exempt from TDS requirement. this would be provided by issue of appropriate notification u/s. 197A(1F) of the act subsequently.

(ix)    It shall be mandatory for the investment fund to file its return of income.  The investment fund shall also provide to the prescribed income-tax authority and the investors, the details of various components of income, etc. for the purposes of the scheme.

6.    Business Trusts:

6.1    This  was  a  new  concept  introduced  by  the finance (no.2) act, 2014 w.e.f. A.Y. 2015-16.  new chapter XII FA (Section 115 UA) was inserted in the income-tax Act, w.e.f. 1.10.2014. The definition of the term “Business trust”  is  now  amended  in  section  2(13a)  from  a.y. 2016-17 to mean a trust registered as an “infrastructure investment trust” (inVitS) or a real estate investment trust” (reit), under the relevant SeBi regulations, the units of which are required to be listed on a recognised Stock exchange, in accordance with the SeBi regulations. in brief, at present the following is the taxation position of the trust.

Out any real estate asset owned directly by the reit, by granting exemption to the reit u/s. 10(23fCa) and taxing such income in the hands of the unit holder, by amending section 115ua(3) to provide that the distributed income, of the nature referred to in section 10(23fCa), received by a unit holder during the previous year shall be deemed to be the income of the unit holder and shall be charged to tax as his income of the previous year. Consequential amendments have been made in relation to tdS provisions in sections 1941 and 194LBa, which are effective from 1st june, 2015.

6.5    In view of the above amendments from A.Y. 2016- 17, the taxation structure of reit and its unit holders shall be as under:

(i)    Any income of reit by way of renting or leasing or letting out any real estate asset owned directly by such business trust shall be exempt;

(ii)    The distributed income or any part thereof, received by a unit holder from the reit, which is in the nature of income by way of renting or leasing or letting out any real estate asset owned directly by such reit, shall be deemed to be income of such unit holder and shall be charged to tax.
 
6.2    Section 47(xvii) Currently provides that the
 
(iii)    The reit shall effect tdS on rental income allowed to be passed through. in case of resident unit holder, tax shall be deducted @ 10%, and in case of distribution
 
Transfer of shares of a Special Purpose Vehicle (SPV) to a Business trust by a share holder (Sponsor) in exchange of units allotted by the trust to the share holder is not considered as a transfer for the purpose of capital gains in the hands of the share holder. Section 10(38) has now been amended to provide that the long term capital gain from transfer or such units will be exempt. Section 111a has also been amended to provide that short term capital gains arising on transfer of such units of a Business trust shall be charged to tax at the rate of fifteen per cent.

6.3    Therefore,   units   received   by   a   ‘Sponsor’  in exchange of shares of a SPV, are now at par with other units of a Business trust.  further, Stt is now chargeable on sale of unlisted units of a Business trust under an offer for Sale. therefore, Sale of such unit in an offer for sale will qualify for exemption u/s. 10(38) and the concessional rate of tax in respect of short term capital gains u/s. 111A.

6.4    reit has been granted pass through status also in respect of income by way of renting or leasing or letting
to non-resident unit holder, the tax shall be deducted at applicable rate.

(iv)    No deduction of tax at source shall be made u/s. 194- 1 of the act, where the income by way of rent is credited or paid to such business trust, in respect of any real estate asset held directly by such reit (Business trust)

7.    Charitable Trusts:

7.1    Section 2(15): The Definition of “charitable purpose” in the section has been amended from A/Y:2016- 17 as under:-

(i)    “yoga” is now recognised as a charitable purpose. hence any charitable trust for promotion of “yoga” can now claim exemption u/s. 11 to 13 of the income tax act.

(ii)    Under the existing provisions of section 2(15) if a charitable trust having “any other object of general public utility”, carries on any activity in the nature of trade, commerce or business, or any activity of rendering any service in relation to the above for a consideration, will lose the exemption u/s. 11 if the total receipts from such activities is more than Rs. 25 lakh. By amendment of this section, it is now provided that such a trust will not lose its exemption if:

(a)    Such activity is undertaken in the course of actual carrying out of such advancement of any other object of general public utility; and

(b)    The aggregate receipts from such activities, during the previous year, do not exceed 20% of the total receipts of the trust.

(c)    This  amendment  will  create  a  fresh  round  of litigation for charitable trusts. the limit of 20% will affect small charitable instituitions adversely.

7.2    Section 11 provides that a charitable trust should apply at least 85% of its income for charitable or religious purposes. if it is not possible to do so, it can apply the balance  of  unspent  amount  in  the  next  year.  for  this purpose, the trust can write a simple letter to a.o. before the due date for filing the return u/s. 139(1). It is now provided from a/y: 2016-17 that the trust can exercise such option only by filing the prescribed from before the due date for filing the return of income.

7.3    Section 11 also provides that if a trust is not able to apply 85% of the income or any part of the same it can apply for accumulation of such unspent amount for 5 years. For this purpose the trustees have to file an accumulation application in Form No.10. No specific time limit is fixed in the Act. The Supreme Court in CIT vs. Nagpur Hotel Owners Association (247ITR201) held that Form 10 can be filed at any time before completion of the assessment. now, by amendment of section 11 from A.Y. :2016-17, it is provided that form no.10 should be filed before due date for filing Return u/s. 139(1). By amendment of section 13 it is also provided that if the return  of  income  as  well  application  in  form  10  is  not filed before the due date provided in section 139(1), the benefit of accumulation will not be available.

7.4    A university or educational institution, hospital or other Institution which is wholly or substantially financed by the Government and which is exempt u/s. 10(23C) (iiiab) or (iiiac) is not required to mandatorily file its return of income. By amendment of section 139(4C), it is now provided that these entities will have to mandatorily file return of income from A.Y. 2016-17.

7.5    Section 10(23C)(vi) and (via) provides that educational institutions or hospital specified in section 10(23C)(iiiab) to (iiiae) have to  obtain  approval  from the prescribed authority. If this approval is denied there  is at present no specific  remedy.  Section  253(1)  is now amended from 1.6.2015 to provided that appeal to ITA Tribunal can be filed against any order for denying such approval.

8.    Income from business or profession:

8.1    Income: The definition of “Income” in section 2(24) has now been widened by insertion of clause (xviii) in section 2(24) from A.Y 2016-17. Under this definition, any receipt from the central or state Government or any authority, body or agency in the form of any assistance in the form of subsidy, grant, cash incentive, duty drawback, waiver, concession or reimbursement in cash or kind will be considered as income. however, if any subsidy, grant etc is required to be deducted from the cost of any asset under explanation (10) to section 43(1), the same will not be considered as income.

From the wording of the above definition it will be seen that no distinction has been made between Government Grants which are of a capital nature and which are in the nature  of  revenue  grant.  The  Supreme  Court  and  the various high Courts have held that subsidy received from Government as an incentive to set up an industry is a capital subsidy not liable to tax. In the case of Sahney Steel & Press Works Ltd vs. CIT (2281TR 253), the Supreme Court has held that subsidy given to set up the business or to complete a project will be considered as a Capital receipt not liable to tax. In view of the above amendment assessees will have to enter into fresh litigation about taxability of subsidy received from the Government.

8.2    Additional Depreciation : at present, additional depreciation of 20% is allowed in respect of new plant and machinery (other than ships and aircraft) installed  by an assessee engaged in the business of manufacture or production or in the business of generation as well   as generation and distribution of power u/s. 32(1) (iia). There was no clarity about deduction in the event of Plant & machinery installed and put to use for less than 180 days. By amendment of section 32(1) from A.Y. 2016-17  it is now provided that in such a case 10% of additional depreciation will be allowed in the year if the new plant & machinery is used for less than 180 days and the balance of 10% will be allowed in the subsequent year.

8.3    Backward Area Incentive: a special incentive is given by way of additional depreciation at the rate of 35% (instead of 20%) in respect of new plant & machinery (other than ships and aircraft) acquired and installed during  the  period  1.4.2015  to  31.3.2020. this  incentive will be available to new plant & machinery installed in  the notified backward area of Andhra Pradesh, Bihar, telangana  and  West  Bengal.  in  this  case  also,  if  the new plant and machinery is used for less than 180 days, 17.5% additional depreciation will be allowed in the first year and balance 17.5% additional depreciation will be allowed in the next year.

8.4    Investment Allowance: A new section 32 ad has been inserted from a.y. 2016 – 17 providing for deduction of one time investment allowance in respect of newly established undertaking for  manufacture or production in the notified backward areas of Andhra Pradesh, Bihar, telangana  and  West  Bengal.  This  deduction  will  be  at 15% of the actual cost of the new asset (other than office equipments, vehicles etc.) acquired and installed in the new undertaking during the period 1.4.2015 to 31.3.2020. this deduction is allowable in the year of installation of new plant and machinery and isin addition to depreciation (including additional depreciation) allowable u/s. 32 and investment allowance allowable u/s. 32AC. It is also provided that if the above plant and machinery is sold or transferred within 5 years from the date of installation, otherwise than in connection with amalgamation, demerger or business  re-organisation  (section  47  (xiii), (xiii b), or (xiv), the amount of deduction allowed u/s. 32ad shall be taxable as income of the year of sale or transfer.

8.5    Section 35(2AB): under this section a company can claim deduction of 200% of the expenditure on scientific research by way of in house research and development facility.  For this purpose, the company has to comply with certain formalities. One of the requirements is to get the accounts maintained for this research facility audited. This requirement is now modified from A.Y. 2016-17 and its is provided that the company should fulfill such conditions with regard to maintenance of accounts and audit and furnishing the reports as may be prescribed by the rule.

8.6    Section 36:  this section is amended from A.Y. 2016-17 as under

(i)    Section 36(1) (iii) provides for deduction of interest paid on funds borrowed for the purposes of business.
It is provided in this section that  interest  paid  in  respect of amount borrowed for acquisition of asset for extension of existing business shall not be allowed. By amendment  of  this  section  the  words  “for  extension  of existing business or profession” have now been deleted. the  effect  of  this  amendment  is  that  interest  paid  for acquisition of any asset for the business or profession from the date of purchase to the date it is put to use,   will not be allowed. it appears that this amendment is made to bring this provision in line with income Computation and disclosure Standard (ICDS IX) relating to “Borrowing Costs”.

(ii)    Section 36(1) (vii) dealing with allowance of Bad debits is also amended to provide that an amount of any debt or part thereof is considered as income under any ICDS issued u/s. 145(2) without recording in the  books of accounts, it will be possible to claim deduction for such amount in the year in which such debt becomes irrecoverable.  thus,  if  the  a.o.  makes  any  addition  in the computation of income from business under ICDS IV  dealing  with  “revenue  recognition”  and  no  entry  is made in the books of accounts, deduction u/s. 36(1) (vii) can be claimed in any subsequent year when the debt representing such amount becomes irrecoverable.

(iii)    Section 36(1)(xvii):  this provision  added in section 36(1) provides for deduction  of  expenditure  incurred  by a co-operative society engaged in the business of manufacturing of sugar for purchase of sugarcane at a price which is equal to or less than the price approved by the Government.

9.    Income computation and disclosure standards (ICDS):

9.1    Section 145 of the income-tax act (act) dealing with “method of accounting” was amended by the finance act, 1995, effective from a.y. 1997- 98. the concept of Tax Accounting Standards was introduced for the first time by this amendment. this section has been amended by the finance (no.2) act, 2014, effective from 1.4.2015.  By this amendment, the concept of computation of income from “Business or Profession” and “income from other Sources” are required to be computed in accordance with “income Computation and disclosure Standards” (ICDS) notified by the Central Government. In brief, section 145 is divided into three parts as under.

(i)    Income under the heads “income from Business or Profession” and “income from other sources” shall be
    computed in accordance with either (a) cash or (b) mercantile system of accounting regularly adopted by the assessee.

(ii)    The  Central  Government  shall  notify  ICDS  to  be followed by the assessee for computation of income from the above two sources.

 
(iii)    The assessing officer (A.O) can make a best judgment assessment u/s. 144 of the act by estimating the income if the provisions of section 145 are not complied with by the assessee.

9.2    On 25.1.1996, the Central Government notified two accounting Standards viz. (i) disclosure of accounting Polices and (ii) disclosure of Prior period and extra ordinary items and Changes in accounting Policies”. these  standards  were  required  to  be  followed  by  the assessee while maintaining its books of account.   These two standards were more or less on the same lines as AS-1 and AS-5 issued by the institute of Chartered accountants of  india  (ICAI).  Thereafter,  for  about  two  decades,  no information and make the adjustments while computing the taxable income from these two sources. If the required information is not furnished by the assessee, the A.O. can make the best judgment assessment u/s. 144 of the Act.
 
Accounting Standards were notified u/s. 145(2) of the Act.

9.3    CBDT has now notified 10 Accounting Standards u/s.  145(2)  on  31/3/2015.  this  Standards  are  called “income Computation and disclosure Standards” (iCdS). The notification u/s. 145(2) states that ICDS will have   to be followed by the assessee following mercantile system of accounting for the purpose of computing income chargeable to tax under the head “Profits and Gains of Business or Profession” and “income from other sources”. This Notification comes into force with effect from 1/4/2015 i.e. a/y:2016-17 (f.y:2015-16).

9.4    The Ten ICDS notified u/s. 145(2) of the Act and the corresponding aS issued by iCai and ind – aS as notified under the companies Act, 2013, are as under:

9.5    It may be noted that ICDS issued u/s 145(2) of the act only provide that income from Business/Profession or income from other sources should be computed in accordance  with  the  standards  ICDS.  Therefore,  the assessee will have to maintain its accounts in accordance with applicable AS issued by ICAI or IND – AS notified under the Companies act. if there is any difference between the accounting results and the requirements of applicable ICDS, the assessee will have to make adjustments while computing its taxable income from the above two sources while filing its Return of Income. If this is not done, the a.o. can call upon the assessee to furnish the required information     and    make     the     adjustments     while     computing the taxable income from these two sources. if the required information is not furnished by the assessee, the a.o. can make    the    best    judgment    assessment    u/s.    144    of    the    Act.

 
9.6    It may be noted that the amended section 145 (3) of the Act provides that if the A.O. is not satisfied about the correctness or completeness of the accounts of the assessee or where the method of accounting as provided in section 145(1), i.e. either cash or mercantile has not been regularly followed by the assessee or income has not been computed in accordance with the requirements of ICDS, he can make a best judgment assessment. In fact, the standards notified are “computation “ standards and not accounting standards.there is no mandate that the assessee should maintain accounts which comply with iCdS. in view of this, in the case of a company, no adjustment can be made in the computation of Book Profits u/s. 115JB of the Act if the accounts are prepared in accordance with the applicable accounting Standards and the Provisions of of the Companies act. in other words, ICDS do not apply for computation of Book Profits u/s 115jB of the act.

9.7    In the preamble of all the ten ICDS it is stated that in case of conflict between the provisions of the income tax act and ICDS, the provisions of the act shall prevail to that extent.  To take an example, if a provision for any tax, duty, cess or fee etc. is made and the same is in accordance with any ICDS, deduction will not be allowable unless actual payment is made as provided in section 43B of the act. Similar will be the position where provisions of section 40(a)(i) or 40 (a)(ia) are applicable.

10.    Minimum Alternate Tax (MAT)

During the last over a year there has been an extensive debate  aboutcertain  provisions  of  section  115JB  which levies tax on Book Profits. By amendment of this Section from A.Y. 2016-17, the Government has tried to deal with some of the issues in brief, these amendments are as under.

(i)    Income  accruing  or  arising  to  a  foreign  Company from (i) Capital Gains arising on transactions in securities or  (ii)  interest.   royalty  or  fees  for  technical  Services chargeable at the concessional rates specified in Chapter Xii, after deduction of expenses relatable to such income (i.e. net income), shall not form part of Book Profits u/s. 115  jB.  this  provision  will  apply  if  the  tax  payable  on such net income is less than the tax payable at the rate specified u/s. 115JB

(ii)    Share of a company in the income of aoP or Boi on which tax is payable u/s. 86, after deduction of expenditure relatable to such income, shall not be included in the computation of Book Profit u/s. 115JB. This will benefit companies which have entered into joint venture and income of the j.V. is taxed as AOP.

(iii)    Notional Gain or notional loss on transfer of capital asset,  being  shares  in  SPV  to  a  Business  trust,    in exchange of units allotted by such trust, as referred to in section 47 (xvii), shall not be considered in the computation of Book Profits u/s. 115JB. Similarly, notional gain or  loss resulting from any change in carrying amount of the said units or gain or loss on transfer of units referred to in section 47(xvii) will be excluded from the computation of Book Profits u/s. 115JB. It may be noted that certain adjustments, as provided in the amended section for computation of cost of shares or units, have to be made in computing the notional gain or loss on such transfer  of shares or units.

11.    Capital Gains:

11.1    Sections 2(42a), 47 and 49 have been amended from  a.y.  2016–17.  The  amendments  in  the  sections provide that consolidation of two or more similar schemes of mutual  funds  under  the  process  of  consolidation  of schemes of mutual funds in accordance with SEBI (mutual funds) regulations, 1996 will not be treated as a transfer.  the consolidation should be of similar schemes i.e. two or more schemes of an equity oriented fund or two or more schemes of a non-equity oriented fund. Consequently, section 2 (42A) and section 49 relating to the period of holding and cost of acquisition, respectively, have been amended to provide that the cost of acquisition of the units of the consolidated scheme shall be the cost of the units in the consolidating scheme and the period of holding of the units of the consolidated scheme shall include the period for which the units in the consolidating scheme were held by the assessee.

11.2    The provisions of section 49 have been amended from A.Y. 2016-17 to provide that the cost of acquisition of a capital asset acquired by a resulting company in      a scheme of demerger shall be the cost for which the demerged company acquired the  asset  as  increased by the cost of improvement incurred by the demerged company. Consequently, the period of holding of the capital asset by the demerged company will be considered in the hands of the resulting company u/s. 2 (42a).

11.3    Section 49 has been amended from A.Y. 2016-
17 to provide that cost of acquisition of shares of a company  acquired  by  a  non-resident  on  redemption  of Global  depository  receipts  (GDR)  referred  to  in  section 115AC (1)(b) shall be the price of the shares quoted on the recognised Stock exchange on the date on which request for such redemption is made. A consequential amendment is made in section 2(42A) to provide that the period of holding of such shares shall be reckoned from the date on which such request for redemption of Gdr is made.

12.    Domestic Transfer Pricing:

At present, section 92BA can be invoked only if the aggregate of transactions, to which the provision applies exceeds  Rs.5 Crore.  this limit is now increased to Rs. 20 Crore from a.y. 2016-17.

13.    Deferment of applicability of general anti-avoidance rule (GAAR):

Sections 95 to 102 (chapter X-a) dealing with provisions of Gaar were to come into force from a.y. 2016-17 (i.e. accounting year 1-4-2015 to 31-3-2016 and onwards). in order to accelerate the momentum in investment (Para 109 of the speech of the finance minister) the applicability of Gaar has been postponed to a.y. 2018 – 19 (i.e from accounting year 1.4.2017 to 31.3.2018 and onwards).

14.    Measures to curb black money:

14.1    One of the broad themes adopted by the finance  minister  in  the  finance  Bill  was  to  curb  black money. Provisions of the income-tax act 1961, were felt to be inadequate as regards to achieve this objective. In the opinion of the finance minister it required stringent measures, which he summarised in in Paras 103 to 105 of his budget speech.

14.2    To achieve the above objective, the Parliament has    passed  the  Black  money“  undisclosed  foreign income and assets (imposition of tax) act, 2015”.   this act has come into force from 1.4.2015 (A.Y. 2016-17). Suitable amendments are also made in Prevention of   money-   laundering  act,   2002,   foreign   exchange management act, 1999 and other relevant acts. Since the said act is an independent legislation, the same is being mentioned in this article and not analysed.

15.    Furnishing of returns, assessment and reassessment:

15.1    Section 139 has been amended from a.y. 2016- 17  to  provide  that  a  resident  (other  than  notordinarily resident in india) who is not required to furnish his return as his income is below taxable limit or for any other reasons will now be required to file his return of income mandatorily before the due date. this amended provision will apply if the assessee –

(i)    Holds, as beneficial owner or otherwise, any asset (including any financial interest in any entity) located outside india or has signing authority in any account loaded outside india, or,

(ii)    Is a beneficiary of any asset (including any financial interest in any entity) located outside india.

It is also provided that if the assessee is a beneficiary of any asset located out of India, will not be required to file return under the above provision if income from such asset is includible in the income of the person referred to in (i) above under the provisions of the act.

15.2    In section 139, it is now provided that every “Investment Fund” shall file its return of income from A.Y. 2016-17.

15.3    In the form of return of income, from a.y. 2016- 17, the assessee will be required to give details of assets
of prescribed nature and value held by him as a beneficial owner or otherwise or as a beneficiary. This will mean that details  of  assets  of  a  trust  in  which  the  assessee  is  a beneficiary will have to be disclosed.

15.4    Section 151 is amended to provide that notice u/s. 148 can be issued by an Assessing Officer, after the expiry of a period of four years from the end of the relevant assessment year, only after the sanction of Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner. In any other case, where Assessing Officer is below the rank of the Joint Commissioner, sanction of joint Commissioner is required.

16.    Appeals and Revision:

16.1    A new procedure for non-filling an appeal by the Commissioner before the income tax appellate tribunal (itat)tribunal against the order of the CIT (a) for avoiding multiple litigation has been introduced from 1.6.2015 in section 158 aa.

This Procedure is as under:

(i)    If a question of law decided by the CIT (a) is in favour of the assessee and the identical question of law is pending before the Supreme Court either by way of an appeal or by way of a Special Leave Petition in case of the same assessee for any other year and the Commissioner receives an acceptance from the assessee that the question of law is identical to the one which is pending before the Apex Court, he need not file before ITAT.

(ii)    On receipt of the acceptance from the assessee, the Assessing Officer will apply to the ITAT stating that an appeal against the order of CIT (a) on a question of law may be filed within 60 days of receipt of the order of the Supreme Court.

(iii)    If no acceptance is received from the assessee, the Commissioner will proceed to file an appeal before the ITAT.

(iv)    If the order of the CIT(a) is not in conformity with Supreme Court order, the Commissioner will file an appeal against the CIT(a)’s order, within 60 days of receipt of Supreme Court order.

It may be noted that similar facility is already given to the assessee in section 158A.

16.2    As stated earlier any order rejecting the application for approval of an educational institution or hospital u/s. 10(23C) can be challenged in appeal before ita tribunal from 1/6/2015.

16.3    A single member bench of the itat can now dispose of any case where the income assessed by the Assessing Officer does not exceed Rs.15 lakh. Earlier this limit was Rs. 5 lakh.  this amendment in section 255 from 1/6/2015.

16.4    At present, the CIT is empowered to revise u/s. 263 the order passed by the Assessing Officer, if it is erroneous and prejudicial to the interest of the revenue. The section does not provide for the meaning of the words ‘erroneous and prejudicial to the interest of the revenue’. Explanation 2 is added in section 263(1) from 1.6.2015  to provide that an order passed by the Assessing Officer shall be deemed to be erroneous and prejudicial to the interest of revenue, if in the opinion of the CIT:-

(i)    The  order  is  passed  without  making  inquiries  or verification which should have been made;

(ii)    The order is passed allowing any relief without inquiring into the claim;

(iii)    The order has not been made in accordance with any order, direction or instruction issued by the Board u/s. 119; or

(iv)    The order has not been passed in accordance with any decision which is prejudicial to the assessee, rendered by the jurisdictional High Court or Supreme Court in the case of the assessee or any other person.

From  the  above  explanation,  it  will  be  noticed  that  very wide powers are given to CIT to revise the order passed by A.O. the extent of enquiry or verification is a very subjective matter.  thus,  any assessment order passed by the A.O. will not become final for 2 years during which it can be revised by CIT on any of the above grounds. CIT may try to revise the order of A.O if A.O is not able to reopen the assessment u/s. 147 on some technical or other ground.

17.    Settlement Commission:

Chapter XIX-A deals with settlement of cases. Several amendments have been made in some of the sections in this Chapter from 1.6.2015. Consequential changes have also been made in a few other sections. The important amendments are as under:
(i)    For   an   assessee   to   approach   the   Settlement Commission u/s. 245a, it was necessary that a notice u/s. 148 was received for every assessment year for which the application was to be made. this provision is amended to provide that where a notice u/s. 148 is issued for any assessment year, the assessee can approach the Settlement Commission for other assessment years even if notice u/s. 148 for such other assessment years has not been issued if return of income for such other assessment years has been furnished u/s. 139 of the act or in response to notice u/s. 142 of the act.

(ii)    In Section 245A(b), the explanation is amended to provide that a proceeding for assessment or reassessment referred to in clause (i) or clause (iii) or clause (iiia) for any assessment year shall be deemed to have commenced from the date on which a return of income is furnished u/s. 139 or in response to notice u/s. 142 and concluded on the date on which the assessment is made or on the expiry of two years from the end of relevant assessment year, in a case where no assessment is made.

(iii)    The provision for time limit for rectification of an order assed by the Settlement Commission has been revised.

(iv)    Section 245h is amended to provide that while granting immunity to the applicant from prosecution, the Settlement Commission must record its reasons in writing.

(v)    245K is amended to ensure that in respect of an individual who has made an application to the Settlement Commission u/s. 245C, any entity controlled by such person is also barred from making an application to the Settlement Commission. Hitherto, only the concerned person was prevented from making another application to the Settlement Commission. Now, entities controlled by such a person will also be prevented. The situations when an entity will be considered to be controlled by the applicant are provided in the explanation inserted after section 245K(2).

(vi)    Section 132B is amended to allow the assets seized from an assessee u/s. 132 or requisitioned u/s. 132a to be adjusted against the liability arising on an application made to the Settlement Commission u/s. 245C.

Sub-section (2A) is inserted in section 234B to levy interest on the shortfall, if any, that may arise in the advance tax on account of an application made u/s. 245C. The interest would be calculated from the 1st april of the assessment year and ending on the date of making the application. Similarly, interest would also be payable on the additional shortfall, if any, arising on the basis of an order passed u/s. 245d for the period from 1st day of april of the assessment year and ending on the date of the order.

18.    Taxation of non-residents:

18.1    Section 6 of the income-tax act has been amended from A.Y. 2015–16 to provide that in the case  of an individual who is a citizen of india and a member of a crew of a foreign bound ship leaving india, the period of stay in india shall be determined as prescribed in the rules.  The  earlier  explanation  (now  renumbered  as explanation 1 applied only to indian Ship.

18.2    Section 6 has been further amended from a.y. 2016-17. Under the existing provisions, a company is said to be resident in india in any previous year, if:

a)    It is an indian company; or

b)    During that year, the control and management of its affairs is situated wholly in india.

Therefore, currently, a foreign company which is partially or wholly controlled abroad is to be regarded as non- resident in india. now section 6, has introduced the concept of ‘Place of effective management’ (Poem), in substitution of the existing provisions of requiring the control and management of affairs to be situated wholly india. In view of the above, provisions of this section has been amended to provide that a company shall be said to be resident in india in any previous year, if;

a)    It is an indian company; or

b)    Its place of effective management, in that year, is in india. (it may be noted that in the finance Bill, 2015, the proposal was to provide that the company will be resident in india if Poem is “at any time” in that year is in india.  the words “at any time” in india have been dropped while passing the finance act.)

Further, POEM has been defined to mean a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance,  made.  this is a far reaching amendment as a number of indian Companies have foreign subsidiaries and what would be considered as POEM in such cases will be a subject matter of litigation. if any foreign company becomes resident in india, it will have to comply with the various provisions of the income-tax Act such as filing return of income, getting accounts audited u/s. 44aB, complying with tdS provisions etc.

18.3    Explanation 5 to section 9(1) provides that an asset being any share or interest in a foreign company or entity shall be deemed to have been situated in india if it derives, directly or indirectly, its value substantially from assets located in india.  The word “substantially”   in the explanation was not defined. In order to clarify the position, new explanation (6) is added from A.Y. 2016-17 to provide as under

(i)    If the value of assets (tangible on intangible) situated in india exceeds Rs.10 crore and represents at least 50% of the value of total assets of the foreign company as on valuation date (without deduction of any liabilities) it will be deemed that the interest in the foreign company is substantially from assets in india.

(ii)    the  valuation  date  shall  be  the  last  day  of  the accounting period preceding the date of transfer or the date of transfer in case the book value of assets on the date of transfer exceeds book value as on the last day of the accounting period by 15%.

(iii)    The taxation of gains arising on transfer of share or interest deriving directly or indirectly its value substantially from assets located in india will be on proportional basis and the method for determination of such proportion shall be  provided  in  the  rules. To  avoid  hardship  in  genuine cases, exemption is available in certain transfers subject to fulfillment of prescribed conditions.

Moreover, to keep a track of such offshore transactions, an obligation has been cast on the indian concern to furnish information in respect of off-shore transactions resulting into modification of its control or ownership structure. any non-compliance in this regards by the india concern would attract penalty of Rs.5 lakhs or 2% of transaction value, as the case may be.

18.4    At  present,  income  arising  to  foreign  Portfolio investors   (‘FPIS’)   from   transactions   in   securities   is treated as capital gains. however, the provisions of the act did notadequately address the apprehension of fund managers, resulting in a large number of offshore funds choosing to locate their investment managers outside india. therefore, new section 9a is inserted in the income tax act from A.Y.2016-17 for providing clarity on issues relating to business connection/permanent establishment and residential status of offshore funds. in order to facilitate location of fund managers of off-shore funds in India, this section now provides that, subject to fulfillment of certain conditions by the fund and the fund manager:

(i)    The tax liability in respect of income arising to the fund from investment in india would be neutral to the fact as to whether the investment is made directly by the fund or through engagement of fund manager located in india;

(ii)    Income of the fund from the investments outside india would not be taxable in india solely on the basis that the   fund   management   activity   in   respect   of   such investments have been undertaken through a fund manager located in india;

(iii)    In the case of an eligible investment fund, the fund management activity carried out through an eligible fund manager acting on behalf of such fund shall not constitute business connection in india of the said fund;

(iv)    An eligible investment fund shall not be said to be resident in india merely because the eligible fund manager undertaking fund management activities on its behalf is located in India, subject to certain conditions.

(v)    The term “Eligible Investment Fund” is defined in section  9a(3)  and  the  term  “eligible  fund  manager”  is defined in section 9A(4).

Further,  every  eligible  investment  fund  shall,  in  respect of its activities in financial year, furnish within ninety days from the end of the financial year, a statement in the prescribed form to the prescribed income-tax authority containing information relating to the fulfillment of the conditions or any information or document which may be prescribed. In case of non-furnishing of the prescribed information  or  document  or  statement,  penalty  of  Rs.5 lakh shall be leviable on the fund.

18.5    Under the provisions of Securities Contracts (regulation) (Stock exchanges and Clearing Corporations) Regulations, 2012 (SECC) notified by SEBI, the Clearing Corporations are mandated to establish a fund, called Core  Settlement  Guarantee  fund  (Core  SGF)  for  each segment of each recognised stock exchange to guarantee the settlement of trades executed in respective segments of the exchange. under the existing provisions, income by way of contributions to the investor Protection fund set up by recognised stock exchanges in india, or by commodity exchanges in india or by a depository is exempt from taxation.  on  similar  lines,  the  income  of  the  Core  SGF arising from contribution received and investment made by the fund and from the penalties imposed by the Clearing Corporation subject to similar conditions as provided  in  case  of  investor  Protection  fund  set  up  by a recognised stock exchange or a commodity exchange or a depository will now be exempt u/s. 10(23ee) from A.Y. 2016-17.

However, where any amount standing to the credit of the fund and not charged to income-tax during any previous year is shared, either wholly or in part with the specified persons, the whole of the amount so shared shall be deemed to be the income of the previous year in which such amount is shared.

The specified person for this purpose is defined to mean any recognised clearing corporation which establishes and maintains the Core Settlement Guarantee fund and the recognised stock exchange being the shareholder of such clearing corporation.

18.6    The  CBDT,  in  its  Circular  no.740  dated  17/4/1996 had clarified that branch of a foreign company in India is a separate entity for the purpose of taxation under the act and accordingly tdS provisions would apply along with separate taxation of interest paid to head office or other branches of the non-resident, which would be chargeable to tax in india.

Considering that there are several disputes on the issue which are pending and likely to arise in future, section 9 is amended form a.y. 2016-17 to provide that, in the case of a non-resident, being a person engaged in the business of banking, any interest payable by the permanent establishment in india of such non-resident to the head office or any permanent establishment or any other part of such non-resident outside india shall be deemed to accrue or arise in india and shall be chargeable to tax   in addition to any income attributable to the permanent establishment in india and the permanent establishment in india shall be deemed to be a person separate and independent of the non-resident person of which it is a permanent establishment and the provisions of the act relating to computation of total income, determination of tax and collection and recovery would apply. Accordingly, the PE in india shall be obligated to deduct tax at source on any interest payable to either the head office or any other branch or PE, etc. of the non-resident outside india. Further,  non-deduction  would  result  in  disallowance  of interest claimed as expenditure by the PE and may also attract levy of interest and penalty in accordance with relevant provisions of the act.

18.7    Section 115a (1)(b) has been amended from a.y. 2016-17  to  provide  that  the  rate  of  tax  on  royalty  or fees for technical Services received by a non-resident or a foreign Company shall now be 10% instead of 25%.

18.8    Section 91(1) of the income-tax act provides for relief in respect of income-tax on the income which is taxed in india as well as in the country with which there is no double taxation avoidance agreement (DTAA).   it provides that an indian resident is entitled to a deduction from the india income-tax of a sum calculated on such doubly taxed income, at the indian rate of tax or the rate of said country, whichever is lower. in case of countries with which india has entered into an agreement for the purposes of avoidance of double taxation u/s. 90 or section 90A, a relief in respect of income-tax on doubly taxed income is available as per the respective dtaas. the  income-tax  act  does  not  provide  the  manner  for granting credit of taxes paid in any country outside india. accordingly, Section 295(2) is amended from 1.6.2015 to provide that CBDT may make rules to provide the procedure for granting relief or deduction, of any income-tax paid in any country or specified territory outside india, u/ss. 90,90A or 91, against the income-tax payable under the act.

19.    Restrictions    about    Appointment Tax Auditors:

19.1    Assessees are, under various  provisions  of  the act, required to obtain and/or furnish  the  reports and certificates from an ‘accountant’. At present, the term “accountant” is defined in theExplanation below section 288(2) to mean a chartered accountant within the meaning of the Chartered accountants act, 1949. From 1.6.2015 this definition has been amended. The amended definition defines the term ‘accountant’ to mean a chartered accountant as defined in section 2(1)(b) of the Chartered accountants act, 1949 who holds a valid certificate of practice u/s. 6(1) of that Act. The definition specifically excludes the following chartered Accountants for purposes of Tax Audit and certification.

(1)    Where the assessee is a company – any person who is not eligible for appointment as an auditor of the said company in accordance with the provisions of section 141(3) of the Companies act, 2013;
(2)    Where the assessee is a person other than a company –

(i)    Where the assessee is an individual, firm or association of persons or hindu undivided family – the assessee himself or any partner of the firm, or member of the association or the family;
(ii)    Where the assessee is a trust or institution, any person referred to in clauses (a), (b), (c) and (cc) of section 13(3) of the act;

(iii)    Where the assessee is any person other  than  those referred to in (i) and (ii) above any person who is competent to verify the return u/s. 139 in accordance with the provisions of section 140;

(iv)    Any relative of any of the persons referred to in (i), (ii) and (iii) above;

(v)    An officer or employee of the assessee;

(vi)    An individual who is a partner, or who is in employment of an officer or employee of the assessee;

(vii)    An individual who himself or his relative or his partner

(a)    Is holding any security of or interest in, the assessee;

however, the relative may hold security or interest in the assessee of the face value up to Rs. 1,00,000/-.
(b)    Is indebted to the assessee;

however, the relative may be indebted to the assessee for an amount upto Rs.1,00,000/-.

(c)    Has given a guarantee or provided any security in connection with the indebtedness of any third party to the assessee;

However, the relative may give guarantee or provide any security in connection with the indebtedness of any third person to the assessee for an amount up to Rs.1,00,000/.

(viii)    Any person who, whether directly or indirectly, has business relationship with the assessee of such nature as may be prescribed;

(ix)    A person who has been convicted by a court of an offence involving fraud and a period of ten years has not elapsed from the date of such conviction.

19.2    For this purpose, the term ‘relative’ in relation to an individual  is defined to mean (a) spouse of the individual;
(b) Brother or sister of the individual; (c) brother or sister of the spouse of the individual; (d) any lineal ascendant or descendant of the individual; (e) any lineal ascendant or descendant of the spouse of the individual; (f) spouse of the person referred to in clause (b), (c), (d) or (e) above; or
(g) Any lineal ascendant or descendant of a brother or sister of either the individual or of the spouse of the individual.

19.3    The above disqualification will apply only to professional assignment as tax auditor or assignment for Certification of financial statements for tax purposes. It may be noted that disqualification noted in Para 19.1 (2) above is on similar lines as provided in Section 141(3) of the Companies act, 2013. As the amended provisions come into force from 1.6.2015, many non-corporate assessees will have to change their tax auditors for auditing the accounts for the accounting year 2014-15 if the existing tax auditor is to be considered as disqualified under amended explanation as stated in Para 19.1 (2) above. It may be noted that the above disqualification does not apply to representation by a Chartered accountant before tax authorities.

19.4    Sub-section (4) of section 288 has been amended to provide that a person who has become insolvent or has been convicted by a court for an offence involving fraud, shall be disqualified to represent an assessee for a period of ten years from the date of conviction.

20.    Penalties :

20.1    Section 271: (i) under the  existing  provisions of this section penalty for concealment of income or furnishing inaccurate particulars of income is levied on the “amount of tax sought to be evaded”, which has been defined, inter alia, as the difference between the tax due on the income assessed and the tax which would have been chargeable had such total income been reduced by the amount of concealed income.

(ii)    There was no clarity on the computation of amount of tax sought to be evaded, where the concealment of income or furnishing inaccurate particulars of income occurred in the computation of income under the other provisions whereas the book profits u/s. 115JB remained unchanged.  further, in the case of CIT vs.  Nalwa Sons Investments Ltd. [327 ITR 543 (Del)], it was held that penalty u/s. 271(1)(c) cannot be levied in cases where the concealment of income occurred under the income computed under general provisions but the tax was paid under  the    provisions  of  sections  115JB,  where  there was no addition to the Book Profit. The SLP against the judgment of the Delhi High Court was dismissed by the Supreme Court.

(iii)    In order to deal with such cases, it is now provided from A.Y. 2016-17 that the amount of tax sought to be evaded shall be the summation of tax sought to be evaded under the general provisions and the tax sought to  be  evaded  under  the    provisions  of  section  115JB. However, if an addition on any issue is considered both under the general provisions and also u/s. 115JB, then such amount shall not be considered in computing tax sought to be evaded under provisions of section 115JB or 115JC.  Further, in a case where the provisions of section 115 JB are not applicable, the computation of tax sought to be evaded under the provisions of section 115JB shall be ignored.

20.2    Sections 269SS/269T and 271D / 271E:
(i)    Sections  269SS  and  269t,    at  present,  prohibit acceptance  of  loan  or  deposit  in  excess  of  Rs.20,000/- by any person or repayment of loan or deposit in excess of Rs.20,000/- by any person in cash. The scope of both these sections has been enlarged by amendments in these sections from 1.6.2015. This amendment in section 269SS extends its scope to specified items. In brief, this section will also apply to any sum of money received or receivable as advance or otherwise in relation to an immovable property, whether or not the transfer takes place.   Similar   amendment   in   section   269T  prohibits repayment of advance in relation to transfer of an immovable property, whether or not the transfer takes place. With these amendments, any advance given or repaid in cash, where such advance exceeds Rs. 20,000/- in immovable property transactions will contravene the provisions of  Section 269SS or 269T.

(ii)    Section 271D and 271E levying penalty of a sum equivalent to the amount received or paid in cash in contravention     of     269SS  and  269T has  now  been extended to the above transactions relating to immovable properties from 1.6.2015.

20.3    Section 271 FAB: under new section 9A(5), an eligible investment fund is required to furnish a statement, information or document within the prescribed time. if this is not furnished, this new section inserted from A.Y. 2016- 17 provides for levy ofpenalty of Rs.5,00,000/-

20.4    Section 271 GA: new Section 285A provides for furnishing information/document by an indian Concern. if this is not done in accordance with the prescribed rules, penalty @ 2% of the value of the transaction as specified in the section can be levied under this new section from A.Y. 2016-17. in any other case of default u/s. 285 A, penalty of Rs.5,00,000/- can be levied.

20.5    Section   271   –   I   :   This   is   a   new   section inserted from 1.6.2015. It provides for levy of penalty of Rs.1,00,000/- if the information required u/s. 195 (6) is not furnished or inaccurate information is furnished.

20.6    Section  272A:   this  section  is  amended  from 1.6.2015. under the existing provisions, Government deductors/collectors are allowed to pay TDS / TCS through book  entry.    rules  30  and  rule  37CA  of  the  income- tax Rules required the Paying Officer to furnish Form 24G detailing the deduction / collection and adjustment. There are no penal consequences for non-furnishing of the said information.

With a view to enforce compliance for reporting of payment through book entry of TDS/TCS, sections 200 (2a) and section 206(3a) are inserted requiring furnishing of the prescribed information for TDS / TCS by the Government dedicators / collectors concerned. Section 272a has been suitably amended to extend levy of penalty of Rs. 100/- for every day of delay in filing the requisite statement under section 200(2a) and 206(3a) in respect of tdS / tCS which shall not exceed the amount of tax.

21.    Other Provisions

21.1    Interest payable u/s. 234B: in case of increase in the assessed income on reassessment u/s. 147 or 153A, currently interest u/s. 234B is chargeable from the date of the regular assessment up to the date of reassessment. Section 234B has now been amended from 1/6/2015to provide that such interest would be chargeable from 1st april of the relevant assessment year up to the date of reassessment on the additional tax liability.

21.2    Section  285A:  this  is  a  new  section  inserted from a.y. 2016-17. It is provided in this section that where any share of or interest in a foreign company or entity, derives directly or indirectly, its value substantially from assets located  in india (refer section 9(1)(i) explanation 5, the indian concern owning such assets shall furnish such information as may be prescribed within the prescribed time limit.

21.3    Wealth Tax Act: Section 3 of the wealth – tax has been amended. it is provided there in that net Wealth shall not be changed to wealth-tax with effect from a.y. 2016-17. Thus, assessees will have to file return of wealth tax in respect of net Wealth as at 31.3.2015 and no such return will be required to be filed from next year.

22.    To sum up:

22.1    From the above discussion it is evident that the finance  minister  has  lived  upto  his  promise  made  last year that all major amendments in the Income tax Act will be only prospective. This year one major step taken for tax reforms relates to Goods and Service tax (GST).  The necessary legislation, as a first step, is passed in the Lok Sabha. It is expected to be cleared in the Rajya Sabha during  the  year.  Let  us  hope  that  GSt  is  implemented from 1/4/2016 as promised by the Government.

22.2    In the last year’s Budget Speech an assurance was given that direct tax Code Bill, 2010, which lapsed, will be revived after consultation with the stakeholders. It is surprising that in this year’s budget speech the finance minister has stated in Para 129 of his Speech that now there is no need for revival of dtC.

In view of this, we will have to live with the present income-tax act with so many sections, sub-sections, clauses, provisos, explanations etc. and many different interpretations leading to unending litigation.

22.3    Another  important  step  taken  by  the  finance minister is to address the burning issue about Black money. he has listed steps taken and proposed to be taken in Para 103 of his Budget Speech. in order to tackle the  issue  relating  to  Black  money  stacked  in  foreign Countries  Black  money  “undisclosed  foreign  income and  assets  (imposition  of  tax)  act,  2015”,  has  been passed. Harsh penalty and prosecution provisions are made in this legislation. if this act was made applicable to persons holding foreign assets exceeding rs.1 crore small assesses would not have been put to any hardship.

22.4    The  finance  minister  has  tried  to  show  some sympathy so far as personal taxation is concerned. he has also given some benefit to the salaried employees by increasing the exemption limit for the transport allowance from   Rs.800/-   per   month   to   Rs.1,600/-   per   month. However, if we consider the other procedural provisions of the income-tax act, very wide powers are given to assessing officers and commissioners. This will be evident from the amendments relating to taxation of charitable trusts where compliance cost to trusts  will  increase  and the responsibility of trustees, who generally render honorary service, will increase. further, amendments in section 263 will give wide powers to Commissioners to revise the orders of the assessing officers. Thus, cases in which the assessments cannot be reopened by the assessing officers will be reopened through this route. again, the finance minister, while abolishing the Wealth tax  act,  has  stated  that  to  track  the  wealth  held  by individuals and entities, information regarding the assets which are currently required to be furnished in wealth tax return will be captured in the income tax return. This will show that compliance cost of getting valuation of assets, which were subject to wealth tax, will not reduce. Further, this information will have to be given by firms, AOP, etc. who were outside the wealth tax provision. Let us hope that this requirement of disclosing assets in the income tax return is introduced only in cases where the value of such assets exceed the specified limit and is restricted to only those who were otherwise liable to the wealth tax. If this is not done, all taxpayers, whether small or big, will have to get valuation of assets done for disclosing in the income tax return.

22.5    The concept of minimum alternative tax (mat) was introduced for the first time by the Finance Act, 1987 effective from A/Y:1988-89.  The finance minister at that time explained that many Companies were not paying any tax or paying nominal tax but were showing large profits in the published accounts and paying dividend to shareholders. This was because they were availing of tax incentives and reducing taxable profits as compared to book profits. For this reason, tax on Book Profits (MAT) was introduced. It was always understood that these provisions   (sections   115J,   115JA  or   115JB)   applied to domestic Companies. In last couple of years, the tax  department  has  started  applying  mat  provisions  to foreign Companies (in particular FIIS) although they are not required to prepare accounts under the Companies act,   1956.   in   view   of   the   loud   protest   by   foreign Companies, the finance act has made only halfhearted attempt   to   amend   section   115JB   from  A/Y :2016-17. Earlier year’s issues, involving huge tax demands which are under litigation, are now being considered by an expert Committee.   The ideal way of handling the issue was  to  declare  that  section  115JB  does  not  apply  to foreign Companies which have no P.E. in india.

22.6    One disturbing feature relates to notification issued u/s. 145(2) requiring assesses carrying on business or profession or having income from other sources to comply with “income Computation and disclosure Standards” (iCdS) from A/Y:2016-17. Since accounts are required to be prepared according to Accounting Standards notified by the Government under the Companies and ICDS notified u/s. 145(2) are different in some important areas there will be lot of confusion while  computing  taxable  income.     This  will  lead  to unending litigation.

22.7    Another area of concern is about the provisions relating  to  disclosure  of  foreign  income  and  foreign assets  in  the  return  of  income. These  provisions  also apply  to  residents  who  have  no  taxable  income.   This new provision read with the new legislation Black money “undisclosed foreign income and assets (imposition of tax) act, 2015” which has come into force from A/Y:2016-17 will create lot of confusion and hardships. Some asessees who are not aware of these provisions will suffer harsh penalty and prosecution proceedings.

22.8    The   finance   minister   has   assured   that   the amendments made in the act will not put small assesses to any hardship. While concluding his speech he has stated as under:-

“To conclude, it is no secret that expectations of this Budget have been high. . In this speech, I think I have clearly outlined not only what we are going to do immediately, but also a roadmap for the future.

I think I can genuinely stake, for our Government, a claim of intellectual honesty. We have been consistent in what we have said, and what we are doing. We are committed, to achieving what we have been voted to power for: Change, growth, jobs and genuine, effective upliftment of the poor and the under-privileged. This will be in the spirit of the Upanishad-inspired mantra:

Om Sarve Bhavantu Sukhinah, Sarve Santu Nir-Aamayaah, Sarve Bhandraanni Pashyantu,
Maa Kashcid-Dukkha-Bhaag-Bhavet,
Om Shaantih Shaantih Shaantih!

(OM! May All Be Happy, May All Be Free From Illness, May All See What is Beneficial, May No One Suffer)”

Let us hope, the present Government is able to achieve its goal and make our life happier.

An avoidable complication

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The last two decades have been extremely challenging for the Indian accountant. With the Indian economy being gradually liberalised, global accounting practices reached the Indian shores. As foreign investors started investing in Indian businesses, there was a growing demand for Indian accounting to converge to International Financial Reporting Standards (IFRS). While everyone realised that this was inevitable in the long run, the change from a historical cost convention to a fair value system which is significantly different is beset with problems. In order to harmonise IFRS to India specific situations, Ind AS-the Indian version of IFRS was mooted. It was however felt that Indian businesses were ill-equipped to adopt even Ind AS. It was therefore decided to adopt a calibrated approach and with effect from 1st April 2016, adoption of Ind AS, was made mandatory for listed companies, while others were permitted to follow the accounting standards applicable to them as prescribed either by the relevant statute or those formulated by the accounting regulator, Institute of Chartered Accountants of India (ICAI). It then became apparent that identically placed entities following two distinct accounting systems would show different book results. In order to ensure that these entities paid the same tax, ”Tax Accounting Standards” as they were then called were thought of.

Thus, the objective of these standards was to modify the book profit in the process of computation of income. It was universally accepted that it was impractical for any business entity to maintain two sets of accounts – one for reporting to stakeholders and the other for paying tax. The tax accounting standards were expected to bridge that gap. However, somewhere along the way, that objective seems to have been totally lost sight of.

The committee that was formed for this purpose made its recommendations by way of a report and tax accounting standards were placed for comment is in the public domain. To what extent the responses from the public were considered is a matter of debate. Finally, ten “Income Computation and Disclosure standards” ICDS were notified by the government and they came into effect from accounting year commencing from 1st April 2015, relevant to assessment year 2016-17. As notified today, the standards will create a host of complications.

Firstly, these standards require “disclosure” of policies followed. They apply to all assessees following the mercantile method of accounting and having income under the head “profits and gains of business” or “income from other sources “. These are not accounting standards but computation standards. Therefore, the place of disclosure is a matter of debate. It must be remembered that the amended section 145 gives a power to the assessing authority to make a best judgment assessment in case of non-compliance. It was thus essential that these standards were precise and comprehensive to the extent possible which they do not appear to be.

Secondly, these standards completely exclude those following cash method of accounting. While this will certainly give relief to those assessees who follow only the cash method, it could cause complications when under the same head, two different methods are followed for two different sources. The standards should have addressed situations arising in this scenario.

Thirdly, it is provided that wherever the computation standards are in conflict with the provisions of the Income -tax Act (the Act), the provisions of the Act would prevail. While this sounds to be perfectly acceptable, it could create significant controversy. It is a well-established proposition that the Supreme Court interprets the law, as it always stood. Given the Indian judicial system, it could be close to two decades for a particular provision to be finally interpreted by the apex court. In a situation like this, if income is computed on the basis of ICDS and the same is in harmony with the law as it stood at the time, but subsequently the law is interpreted differently by the apex court, then it would create great difficulty. One would possibly say that this is the position even today. But now there would be two prescriptions to be interpreted under the same statute. The Act and ICDS themselves.

Finally, one needs to consider the effect of the transitional provisions. In a couple of standards namely construction contracts and revenue recognition, the transition provisions are extremely harsh. They would apply to unfinished contracts entered into before 31st March 2015, where the assessee was following completed contract method, but now is forced to follow percentage completion. This would create a substantial liability in the year of transition i.e., assessment year 2016-17.

In fact, a preliminary study of ICDS seems to suggest that the cost of compliance will increase significantly. Though the standards do not require maintenance of separate sets of books as the computation is of taxable income and not book profit, the prescriptions are such that a virtually parallel separate record will have to be maintained by each entity of some size. With the current attitude of revenue officials being what it is, one is really concerned about the litigation that will ensue.

The way the standards have been drafted, the objective seems to be to garner maximum revenue at the earliest. It may have been easier to recommend some adjustments to book profit to take care of some of the issues thrown up. If that could be achieved, Income Computation and Disclosure standards were possibly unnecessary. If this was not feasible then the issues arising out of Ind AS, in regard to computation of income ought to have been addressed, comprehensively. The ICDS as notified will only increase litigation.

The last but not the least, power to formulate standards affecting taxable income is virtually power to amend the law without going to the Parliament. One wonders how desirable this is.

If the government is serious about promoting their pet theme of ease of doing business, like GAAR, ICDS in their present form certainly need a rethink.

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The Eternal Life

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Do you want an eternal life? Do you aspire to live forever? This is not an easy question to answer. One must think a lot before giving the answer.

This story is attributed to Alexander the Great. Like all highly ambitious persons, Alexander, the emperor, was seeking Eternal Life. He was directed to a reknowned Indian Sage. The sage told him about a magical tree which grew on the shores of a lake, far away, hidden deep inside the forests, which could be reached only after crossing several mountain ranges. Eating the fruit of that tree gave eternal life. Alexander set off, taking the directions from the sage. After travelling for seven days and seven nights, he reached that lake and found the magical tree with the fruits. As he was about to eat one, a voice called him and cautioned him “Do not eat the fruit”. Alexander was amazed to find that it was a crocodile and that the lake was teeming with crocodiles. “We have eaten the fruit and are miserable. How much so ever we may wish, we cannot die. We have become old, disabled, have nothing to live for and yet we cannot die. Do not make the same mistake we had made. Otherwise you will have an eternally miserable life, cursing this day when you ate this fruit”. Alexander realized the wisdom of the words of the crocodile. He no longer wanted eternal life. His quest was over. He returned back without eating the fruit.

The question we have to ask ourselves is ‘Do we want eternal life?’ or we would be happier with a few good years?

Let us imagine the life of a caged bird, alone in the cage. The cage may be made of gold and he would be getting the best of food and care from the lady who lovingly kept him as a pet. He would not be wanting anything; anything except freedom to fly in the open sky and meet and mingle with the other birds of his tribe. Would the bird prefer a hundred years of such caged life, or would he rather be satisfied with just a few years of life in the open, flying soaring high up above in the sky. No question. The bird would surely love to be out of the cage, and flying high. No matter the life in the open world would carry with it its own perils. He would have to face hunger, illness, brave all kinds of weather and even run the risk of falling prey to predator birds. But it would be better than a purposeless eternal life.

All this leads us to the conclusion that endless life is not a boon, but a curse; a life which is totally protected, cut off from all risks and also human contacts is worthless. Further, to lead a good life, one requires challenges to meet and goals to achieve. One requires someone to share both, happiness and sorrow. As they say “a ship is safe in the harbour, but that is not what it is meant for”. The captain of a ship would be far happier sailing the seven seas, fighting wild winds, weathering thunderous storms and facing turbulent waves than merely sitting in the harbour. So it is with our lives. What one really seeks is not just a long life, but a good and a meaningful life, even if it be short. I am reminded of the words of Philip James Bailey:

“We live in deeds, not years
In thought, not breath
We should count time by heart throbs
He most lives, who thinks most
Feels the noblest, acts the best”
But still one may aspire to live eternally, though not in a physical form. It is well said that “to live in the Hearts of Men, is not to Die”. One would certainly aspire to live in the hearts of men for a long time by one’s noble deeds.

We then have to decide, that whatever may be our remaining life span, we will live a purposeful, meaningful life, we shall strive to achieve great goals and make the best use of our lives. We will leave our footprints on the sands of time. Maybe then, even when we die a physical death, we shall continue to live in the hearts of our fellow human beings and have a truly eternal life. We can then attain the state described in the bhajan of Jain Muni Shri Anandghanji:

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Coparcenary Property – Right of daughters – Daughter born prior to 9-9-2005 has right to file suit for partition: Hindu Succession Act section 6-

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Babu Dagadau Awari vs. Baby W/o Namdeo Lagad & Ors AIR 2015 (NOC) 446 (Bom) (HC)

The suit was filed by respondent No. 1 – Smt. Baby for partition of Hindu joint family properties and for possession of her share from the properties. The suit was filed in respect of four agricultural lands and three house properties.

The applicant/defendant No. 1 is the father of plaintiff. Defendant Nos. 2 to 4 are also daughters of present applicant. It was contended by the plaintiff that the suit properties are the ancestral properties though they are in the hands of defendant No.1. It was contended that, in view of amendment made in Hindu Succession Act, the plaintiff needs to be treated as coparcener along with defendant No. 1 and other defendants and she has right to claim partition and possession of her share.

The Court relied on the following observations made by this Court in case of Vaishali Satish Ganorkar and Anr. vs. Satish Keshaorao Ganorkar & Ors (2012) (3) Mh. L.J. 669 “14. It may be mentioned, therefore, that ipso facto upon the passing of the Amendment Act all the daughters of a coparcener in a co-parcenary or a joint HUF do not become coparceners. The daughters who are born after such dates would certainly be coparceners by virtue of birth, but for a daughter who was born prior to the coming into force of the Amendment Act she would be a coparcener only upon a devolution of interest in coparcenary property taking place.”

Thus, the Court held that plaintiff has right to file suit for relief of partition in respect of co-parcenary properties though she was born prior to 09-09-2005 and the trial Court had not committed any error in rejecting the application filed by the applicant. In the result, the application stands dismissed.

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Appeal – Abatement– Death of defendant during pendency of appeal – Failure to bring his legal representative on record – Appeal would abate against deceased defendant CPC, C.22 R. 4

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Naveen Shanker Lokure vs. Nascimento Milgares Pereira & Ors AIR 2015 (NOC) 156 (Bom) (HC)

The original plaintiffs namely Jose Francisco Pereira and his wife Ana Francisca Dias had filed the said suit for a declaration that they were exclusive owners in possession of the property allegedly purchased by the defendants no. 1 and 2 namely Shankar Krishnappa Lokure and Shivagundappa Krishnappa Lokure from the defendant no. 3, Aniquinha Maria Apolonia Dias.

By judgment and order dated 29/04/1999, the said suit was dismissed. Plaintiffs filed Regular Civil Appeal No. 70/1999 against the judgment and decree of the trial Judge.

The original defendant no. 3 had died during the pendency of the suit and her legal representatives, namely Mrs. Catherina Ana Dias, along with other legal representatives were brought on record, in the said suit. However, the legal representative Mrs. Catherina Ana Dias had also expired during the pendency of the suit on 23/09/1994. However, her heirs were not brought on record. However, since the husband of the said Mrs. Catherina, namely Francisco Rosario Dias was already on record, there was no abatement of the suit.

In the Regular Civil Appeal No. 70/1999, the deceased Mrs. Catherina Dias was, however, impleaded as the respondent no. 7, as if she was alive. During the pendency of the said Regular Civil Appeal, the husband of the said deceased Catherina Dias, namely Francisco Rosario Dias impleaded as respondent no. 6, died on 01/02/2002. The legal representatives of the deceased Francisco Rosario Dias were not brought on record, in the said Regular Civil Appeal No. 70/1999. Thus the Regular Civil Appeal No. 70/1999, has been decided against two dead persons.

The learned Senior Counsel for the plaintiffs submits that the plaintiffs were not aware of the death of the said parties. In the circumstances above, it appears that in the Regular Civil Appeal No. 70/1999, the decree is passed in ignorance of death of two of the defendants/respondents, the respondent no. 7 having died during the pendency of the suit and the respondent no. 6 having died during the pendency of the said appeal, due to which the appeal had abated against the dead persons.

The High Court observed that in Second Appeal against such a decree, the court cannot itself set aside the abatement nor can it affirm the decree passed by the lower appellate Court. The proper course in such a case is to set aside the ineffective decree passed by the lower appellate Court and remand the case to the court where abatement has taken place leaving the parties to take necessary steps to have the effect of abatement set aside if they so desire and if they can satisfy the Court that parties are entitled to get the abatement set aside under law.

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Appeal High Court – Stricture against Department – Direction to replace advocates in old matters – Otherwise High Court would dispose old matters in their absence

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Commissioner of Central Excise, Thane II vs. Milton Polyplas (I) P. Ltd. (2015) 318 ELT 47 (Bom.)(HC)

In the Central Excise Appeals, the Hon’ble Court noted that the system of filing of Appeals and arguing them has undergone a drastic change. Now, each Commissionerate exercises discretion and chooses to engage an Advocate from a list of Advocates, for representing them. Any such Advocate practicing in this Court and authorised by the concerned Commissionerate to file the Appeal, keeps track of the same and argues it. The vakalatnama to act, appear and plead on behalf of these Commissioners located at various places, thus emanates from the said Commissionerates. At several Commissioners’ offices, there is a legal cell headed by an Assistant Commissioner level officer and either he or the staff of such cell keeps track of the cases pertaining to that Commissionerate, in addition to the Advocate engaged by that Commissionerate.

The Court observed that on several occasions, there is no indication as to who will argue the Appeals on behalf of the Commissioners. It was informed that some nodal officers were present in Court. However, the court cannot take note of their presence. The court is concerned with the Advocates, who have been engaged and authorised to argue cases.

The Advocates regularly appearing before the court informed the Bench that the concerned Commissionerate has not taken any decision as to who should replace one Mr. T. C. Kaushik and thereafter argue the Appeal.

The Hon’ble Court further remarked that when complaints are made, that old matters are not being taken up and given priority, then, firstly the Revenue/State should put its house in order. There are many old matters pending and for more than 10 years that have serious revenue implications. In the circumstances, the court directed the registry to send a copy of this order to the Office of the Chief Commissioner, Central Excise and Customs of each Commissionerate. The Court further observed that the high level officers may apply their mind so as to enable the Court to take up the old Appeals for hearing and disposal. Immediate steps should be taken to replace the old Advocates or else the court will be constrained to dispose off the matters in their absence.

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NEGATIVE REVENUE

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Many of the current business models are highly disruptive, and also throw up interesting accounting challenges from time to time. One of those challenges is with respect to accounting for consideration paid to a customer and the accounting of negative revenue.

Query
Pay Gate runs a website which provides a market place for vendors to sell their merchandise to different buyers. The buyers can open a wallet on Pay Gate by paying cash or using a debit/credit card and then use that wallet to buy goods through that website from vendors. Pay Gate earns a commission from the vendor for every sale made. Pay Gate is desperately seeking to expand in the market and hence provides a sizable cash back incentive to buyers. The commission earned from vendors is much lower than the cash back incentive to buyers. Consequently the overall revenue earned by Pay Gate is negative. How is such revenue presented?

Author’s Response
Many such interesting issues have emerged since the issuance of IFRS 15 Revenue from Contracts with Customers. These issues have gained urgency in India because it makes IFRS 15 (Ind AS 115) mandatory with immediate effect. These issues and the following discussions would be also relevant for Indian GAAP purposes. The Joint Transition Resource Group for Revenue Recognition (TRG) discussed a number of implementation issues on IFRS 15, including the one raised in the query above.

Under IFRS 15, an entity is required to determine if a consideration that it pays a customer is for a distinct good or service. Consider a manufacturer sells to its customer (eg Retailer) certain goods and earns revenue. It also pays the Retailer a fee for prominent display of those goods. Because the payment to the Retailer is not for a distinct good or service, the manufacturer will reduce the fee paid from the revenue it earns from the Retailer.

In the above example, if the Manufacturer paid to the Customer (who is also an advertiser) for carrying a huge advertisement on an advertising space it owns outside the retail outlet, this would be treated as a distinct service received from the customer. Consequently, revenue would be presented gross and the fee paid to the customer (advertiser) would be treated as an advertising expenditure. IFRS 15 also has another interesting concept, where the customer’s customer is also treated as the customer of the entity. Consider the manufacturer sells to its customer (the Retailer) certain goods, and those goods carry some cash coupons which the final buyer (Retailer’s customer) redeems with the manufacturer. Because under IFRS 15, a customer’s customer is the customer of the entity, revenue would be presented net of the cash coupon amount.

TRG members did not agree on whether the new standards are clear as to whether the requirements will also apply to all payments made to any customer of an entity’s customer outside the distribution chain. For example, in an arrangement with a principal, an agent and an end-customer, TRG members agreed it was not clear whether the agent’s fee would have to be reduced for any consideration that the agent may pay to the end-customer (i.e., its customer’s (the principle’s) customer). Some agents may also conclude that they have two customers –the principal and the endcustomer- in such arrangements. TRG members agreed that agent will need to evaluate their facts and circumstances to determine whether payments made to an end-customer will be treated as a reduction of revenue or a marketing expense. TRG member observed that there is currently diversity in practice on this issue and that it may continue under the new standards, absent further application guidance.

On negative revenue, TRG members felt that if negative revenue is determined on an overall customer relationship basis, one view is that entities should present negative revenue as performance obligations are satisfied. An alternative view is that entities should reduce cumulative customer revenue to zero and reclassified the remaining negative revenue as expenses in the period such determination is made.

If
negative revenue is determined based on a specific contract, potential
views are (a) entities should present negative revenue as performance
obligation are satisfied or (b) entities should reclassify negative
revenue as expenses in the period determined. The latter would not
result in negative revenue on a specific customer contract. If
determined on a specific contract basis, there would likely be far fewer
instance of negative revenue given payments to a customer won’t be
linked to a specific revenue contract in many, if not most, cases.

Overall,
in the query raised above, the author believes that multiple views are
possible at this juncture, absent further application guidance:

1.
Disclose revenue as a negative number, on the basis that consideration
received from a customer should be reduced by a payment made to a
customer or a customers’ customer for goods and services that is not
distinct.

2. Disclose revenue at the gross amount and the
consideration paid to the buyers in the fact pattern be treated as a
marketing expense incurred for acquiring eye balls.

3. Disclose
revenue at a zero sum, and present the excess of cash back incentive
paid to buyers over revenue as a marketing expense. This is done on the
basis that revenue is a reward and should not be a negative number.

The author recommends that the ICAI interact with the TRG group and ensure that an amicable view is reached.

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Agilisys IT Services India P. Ltd. vs. ITO TS-257-ITAT-2015 (Mum) A.Y.: 2003-04, Dated: 29.04.2015

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Sections. 10B, 92C, the Act – as legislative intent behind section 10B is to provide incentive to EOUs to bring foreign exchange into India, benefit cannot be allowed in case of suo moto transfer pricing adjustment since foreign exchange is not brought into India.

Facts:
The taxpayer was an Indian Company. The taxpayer was engaged in the business of development and export of software. It was registered as a 100% EOU eligible to claim tax holiday benefit u/s. 10B of the Act. While filing transfer pricing report in Form 3CEB, the taxpayer made suo moto transfer pricing adjustment in respect of its sale transactions with its associated enterprises (AEs). It did not make corresponding adjustment in books of account. Further, it also did not receive the adjusted amount from its AEs in foreign exchange. However, it claimed the tax holiday benefit u/s. 10B on the enhanced amount.

TPO accepted the adjustment made by the taxpayer. However, the AO did not allow tax holiday benefit on the suo moto adjustment amount.

Held:
The first proviso to section 92C(4) of the Act provides that, in case of enhancement of income consequent to determination of the arm’s length price by the Tax Authority, the tax holiday benefit is not to be allowed in respect of the enhanced income.

Though the Act is silent in respect of suo moto adjustment by the taxpayer, section 92C cannot be read in an isolated manner but must be read in consonance with the tax holiday provisions under consideration.

The legislative intent of section 10B is to give incentive to a 100% EOU. The tax holiday benefit is provided only when the convertible foreign exchange money is brought into India within stipulated period. If the tax holiday benefit were to be allowed to the taxpayer because there is no enhancement by the TPO, then every taxpayer would underprice sale with AEs, make suo moto adjustment and claim tax holiday benefit without bringing foreign exchange into India.

Having regard to the legislative intent, the taxpayer cannot be permitted to stretch the benevolent provision to avail the benefit which the Legislature never intended to provide.

On a harmonious reading of the provisions of the ITL and considering the intent of the Legislature, the Taxpayer is not entitled to claim deduction in respect of the amount of voluntary TP adjustment.

In I Gate Global Solutions Ltd [112 TTJ 1002 (2007)] the Bangalore Tribunal held that the relevant provision to disallow tax holiday benefit does not apply where the transfer pricing adjustment is made on suo moto basis by the taxpayer. However that decision had not considered the relevant tax holiday provision and the legislative intent and therefore, is distinguishable.

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Section 92C, 37(1), the Act – authority of TPO is limited to determination of ALP and not determination of actual provision of services; such determination and deductibility of expenditure u/s. 37(1) is in exclusive domain of the AO.

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Facts:
The taxpayer was an Indian Company. The taxpayer had made certain commission payment to its AEs and had benchmarked the transactions under TNMM. The TPO rejected application of TNMM. Considering the transaction as intra-group service, TPO proceeded to determine the ALP under CUP method. After seeking and considering the details from the taxpayer, the TPO concluded that the taxpayer failed to provide any evidence of an independent transaction between unrelated parties, failed to explain the functions performed by the AE, and failed to provide documentary evidence for necessity of payment of such commission. Accordingly, TPO determined the ALP as Nil. Accordingly, the AO added entire commission paid by the taxpayer to its AEs. The DRP confirmed the action of the AO.

Held:
The TPO computed ALP at Nil and the AO made the addition without independently examining the deductibility or otherwise of commission in terms of section 37(1).

In CIT vs. Cushman & Wakefield (India) (P.) Ltd. [2014] 367 ITR 730, the Delhi High Court has held that the authority of the TPO is limited to conducting transfer pricing analysis for determining the ALP of an international transaction and not to decide if such services existed or benefits accrued to the taxpayer. Such determination is in exclusive domain of the AO.

Accordingly, assessment order was set aside and matter was remanded to the AO/TPO for deciding it in conformity with the law laid down by the jurisdictional High Court.

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