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Month: March

Article 11 India-Luxembourg DTAA – Assessee, having satisfied that it is not a conduit entity, is entitled to the benefits under DTAA and considering commercial and economic substance.

15. [2025] 170 taxmann.com 475 (Delhi – Trib.)

SC Lowy P.I. (LUX) S.A.R.L. vs. ACIT

ITA No: 3568 (Delhi) of 2023

A.Y.: 2021-22

Dated: 30th December, 2024

Article 11 India-Luxembourg DTAA – Assessee, having satisfied that it is not a conduit entity, is entitled to the benefits under DTAA and considering commercial and economic substance.

FACTS

Assessee is a Limited Liability Company and a tax resident of Luxembourg. The Assessee is a subsidiary of a Cayman Island entity and a step-down subsidiary of an offshore fund located in the Cayman Islands. The Assessee is registered as a Category II – Foreign Portfolio Investor registered with SEBI, who has invested in corporate bonds and pass-through certificates of securitization trust.

It offered the interest income from bonds at 10% under Article 11 and claimed treaty benefits with respect to business income and capital gains under Article 7 and Article 13(6) of DTAA, respectively.

The AO verified the financial statements, SEBI registration, and Articles of Association to conclude that the real owner of the income is the ultimate Parent located in the Cayman Islands, with whom India does not have DTAA. The entire holding structure involves treaty shopping, and a TRC is insufficient to claim treaty benefits and beneficial ownership of income. Therefore, the AO denied the tax benefits under DTAA and taxed the interest income from bonds and securitization trusts at 40% and short-term gains at 30%.

The DRP upheld the action of the AO.

Aggrieved by the final order, the Assessee appealed to ITAT.

HELD

  •  The Assessee has provided a valid TRC and satisfied the conditions prescribed under Article 29 dealing with the limitation of benefits. Having not raised any red flags on the TRC, the revenue cannot overlook the TRC without bringing any evidence to prove that the entity exists as a conduit. The Delhi High Court, in Tiger Global International III Holdings [2024] 165 taxmann.com 850 (Delhi), has held that revenue can look beyond TRC only in case of tax fraud, sham transactions or illegal activities.
  •  The Assessee was incorporated as an investment holding company in Luxembourg, and it has been in existence since 2015 and invested in distressed assets. As a Category – II FPI, it invested in securitization trust/corporate bonds in FY 2018-19. Its geographical concentration shows that it had only 14% investment in India, and the remaining investments were spread across jurisdictions.
  •  The Assessee had paid taxes and filed returns in Luxembourg with respect to income earned from Indiaand other jurisdictions. Substantial operational costs, includes consulting fees, litigation fees, professional charges, and administrative expenses, are incurred in Luxembourg.
  •  The Assessee is in existence to date and continues to hold the investments. This substantiates that they control the assets and the income thereon for their own account; hence, they cannot be regarded as a conduit entity. The AO did not bring any evidence to support his views and presumptions.
  •  The genuineness of the entity is substantiated through various activities, and it operated as a stand-alone entity without depending on its holding company.

The limitation of benefits under Article 29 as amended by Multilateral Instruments (Article 7) requires bringing on record the relevant facts andcircumstances to prove that the principal purpose of arrangements and transactions is only for the purpose of taking treaty benefit. The Revenue, without any cogent materials, failed to establish that the assessee is a conduit entity. Therefore, the benefits of the treaty cannot be denied.

Article 8 of India-USA DTAA – Whether code sharing revenue falls under the scope of ‘operations of aircraft’ and is entitled to relief under the DTAA.

14. [2024] 169 taxmann.com 8 (Mumbai – Trib.)

Delta Air Lines, Inc. vs. ACIT (International Taxation)

ITA No: 235 (Mum.) of 2022

A.Y.: 2018-19

Dated: 7th November 2024

Article 8 of India-USA DTAA – Whether code sharing revenue falls under the scope of ‘operations of aircraft’ and is entitled to relief under the DTAA.

FACTS

The Assessee, a tax resident of the USA, was engaged in the business of aircraft operations in international traffic. It had established a branch office in India, a permanent establishment that was admitted to facilitate the booking of air passenger tickets and freights. The Assessee had three streams of international journey income, namely (i) transportation using their own aircraft, (ii) transportation with a combination of own aircraft and third-party carriers vide code sharing arrangements for one or more parts of the journey, and (iii) entire transportation using third party carriers under code-sharing arrangements.

The Assessee filed NIL return of income claiming benefits under Article 8 of the DTAA. The AO denied the Article 8 benefit w.r.t second and third stream of income, stating income under code sharing cannot be regarded as derived from the operation of aircraft in international traffic. Further, AO was of the view that code sharing arrangements cannot be regarded as a space or a slot charter.

The Ld. DRP and Ld. AO followed the order of the coordinate bench in Assesse’s own case for AY 2010-11 [2015] 57 taxmann.com 1 (Mumbai) to uphold the denial of the treaty benefit qua code-share revenue. The reasoning that was adopted in earlier ITAT ruling, as also by DRP, was as under:

  •  The taxpayer must derive profit from the operation of an aircraft in international traffic as an owner/charter/lessor of the aircraft.
  •  In the case of a code-sharing arrangement, the taxpayer’s activities were only the booking of tickets, and the actual transport of passengers was carried out by a third-party airline. The same cannot hence be regarded as profits derived from international traffic carried out by the assessee.
  • Activities directly linked to the transport of passengers by the Assessee would only fall under the ambit of Article 8(2)(b). Since the transportation is carried on by other airlines, and it cannot be regarded as having direct nexus with activities carried on by the Assessee; hence, the activity relating to transportation by other airlines cannot fall under Article 8(2)(b).
  •  The ruling of the coordinate bench of the tribunal in the case of MISC Berhard [2014] 47 taxmann.com 50 (Mumbai) is not applicable to the case on hand. The MISC (supra) case dealt with revenue earned from feeder vessels, which was used to transport cargo from the Indian Port to the Hub Port and for further transportation by the third party than to mother vessels for the final destination. In the case of Assessee, there are no such instances of transporting to the hub port and then to the final destination. Since the ruling was rendered in the context of India-UK DTAA, the same cannot be applied to India-US DTAA.
  •  The code-sharing arrangement cannot be regarded as slot/space charter for qualifying under Article 8(2) as the assessee does not have exclusivity over space or flights booked.

HELD

On further appeal, the co-ordinate bench dissented with their earlier ruling on account of subsequent judicial developments and ruled in favour of the taxpayer basis the following:

  • The Bombay High Court in Balaji Shipping [2012] 24 taxmann.com 229 (Bombay) held that slot chartering by shipping companies for transportation by third-party shippers could fall under the scope of Article 9 of India-UK DTAA. The High Court held that both the following scenarios were covered under Article 9 i.e., (i) use of a third-party ship for movement between a port in India to the hub port and then for the final destination and (ii) use of a third-party ship for transport from the port in India to the final destination.
  • The Bombay High Court in APL Co. Pte. Ltd [2016] 75 taxmann.com 32 (Bombay) has applied the ruling of Balaji Shipping (supra) while interpreting the India-Singapore DTAA since both treaties’ wordings are parimateria. Therefore, this will have a binding effect when the wording of various treaties is similar. Although the passengers are transported through other airlines, the Assessee issues the tickets up to the final destination. The code-sharing arrangements facilitate the Assessee in providing services to specific destinations where they do not operate. Therefore, applying the Balaji Shipping (supra) ratio rendered in the context of shipping income receipts from code-sharing arrangements is entitled to benefit under Article 8 of DTAA.
  • When the assessee books a seat on a third-party airline through a code-sharing arrangement, it could be regarded as a charter of space in the aircraft, and the entire aircraft need not be chartered.
  • The codes used by the Assessee for booking tickets in third-party airlines are unique to them and are used for partial or complete journeys. This establishes the link between transportation by a third party and the operations of the Assessee, and they transport the passenger on behalf of the Assessee.

Sec. 28: Where during search at residential premises of director of assessee-company, AO found that assessee had made out of books sales and added entire undisclosed sales to income of assessee, however, Commissioner (Appeals) restricted same to profit element embedded therein estimated at rate of 8 per cent of sales, since revenue had not given any basis to justify applying higher rate of net profit at 12.5 per cent instead of 8 per cent, addition restricted by Commissioner (Appeals) to 8 per cent of sales was to be upheld. Also, Commissioner (Appeals) failed to give benefit of income surrendered by assessee voluntarily against addition confirmed by him on account of unaccounted sales, Assessing Officer was to be directed to grant assessee benefit of income surrendered by assessee against addition confirmed by Commissioner (Appeals).

84. ACIT vs. Conor Granito (P.) Ltd

[2024] 116 ITR(T) 479 (Rajkot – Trib.)

ITA NO.: 143 (RJT) OF 2021

CO NO.: 01 (RJT) OF 2022

A.Y.: 2019-20

Dated: 12th January, 2024

Sec. 28: Where during search at residential premises of director of assessee-company, AO found that assessee had made out of books sales and added entire undisclosed sales to income of assessee, however, Commissioner (Appeals) restricted same to profit element embedded therein estimated at rate of 8 per cent of sales, since revenue had not given any basis to justify applying higher rate of net profit at 12.5 per cent instead of 8 per cent, addition restricted by Commissioner (Appeals) to 8 per cent of sales was to be upheld. Also, Commissioner (Appeals) failed to give benefit of income surrendered by assessee voluntarily against addition confirmed by him on account of unaccounted sales, Assessing Officer was to be directed to grant assessee benefit of income surrendered by assessee against addition confirmed by Commissioner (Appeals).

FACTS

During search at the residential premises of the director of the assessee-company, various incriminating material by way of WhatsApp message / images were discovered and on analysis of the same, it was discovered that the assessee had made out of books sales which during the impugned year amounted to ₹2,35,42,980/-. The Assessing Officer added entire undisclosed sales to the income of the assessee. The ld.CIT(A), however, restricted the same to the profit element embedded therein estimated at the rate of @ 8 per cent of the sales.

Aggrieved, the revenue filed an appeal and assessee filed cross objections before the Tribunal –

HELD

ITAT observed that the contention of the Revenue was that the ld.CIT(A) ought to have applied 12.5 per cent net profit rate instead of 8 per cent. However, the Revenue had not given any basis to justify applying higher rate of net profit at 12.5 per cent.

ITAT held that net profit to be applied was to be at justifiable rate depending upon nature of the business and other facts. It should not be an ad hoc rate and there has to be a reasonable basis for applying a particular net profit rate in each case. The DR had not supported his contention of applying 12.5 per cent GP rate with any reasonable basis. ITAT held that profit rate specified in the decision of Hon’ble Gujarat High Court in the case of CIT vs. Simit P. Sheth, [2013] 356 ITR 451 as cited by DR could not be justifiable rate in assessee’s case as the nature of activities of both the assessees were not identical.

Therefore, ITAT did not find any merit in the contentions of the DR that the ld.CIT(A) ought to have applied a net profit of 12.5 per cent in the present case. The ground raised by the Revenue was accordingly rejected.

Thus, the appeal of the Revenue was dismissed.

With respect to Cross Objections filed by the assessee, the ld.CIT(A) had failed to give benefit of the income surrendered by the assessee voluntarily against addition confirmed by him on account of unaccounted sales.

In the light of the same, ITAT directed the assessing officer to grant assessee the benefit of the income surrendered of ₹15 lakhs against the addition confirmed by the ld.CIT(A).

The Cross Objection was accordingly allowed.

Sec. 69A: Assessee deposited cash during demonetisation period of `10.75 lakhs which was recorded in his books of account and source of cash deposits was also maintained by assessee. However, Assessing Officer made addition as unexplained money under section 69A and taxed same under section 115BBE. ITAT held that Assessing Officer was not correct in invoking provisions of section 69A and charging tax under section 115BBE as assessee had recorded in his books of accounts and also explained source of such cash deposits.

83. Dipak Balubhai Patel (HUF) vs. ITO

[2024] 115ITR(T) 624 (Ahmedabad- Trib.)

ITA NO.:942(AHD) OF 2023

AY.: 2017-18

Dated: 22nd August, 2024

Sec. 69A: Assessee deposited cash during demonetisation period of `10.75 lakhs which was recorded in his books of account and source of cash deposits was also maintained by assessee. However, Assessing Officer made addition as unexplained money under section 69A and taxed same under section 115BBE. ITAT held that Assessing Officer was not correct in invoking provisions of section 69A and charging tax under section 115BBE as assessee had recorded in his books of accounts and also explained source of such cash deposits.

FACTS

The assessee was a HUF who derived income from House Property and Income from Other Sources. The case was selected for scrutiny assessment and the Assessing Officer found that assessee deposited a sum of ₹10,75,000/- during demonetisation period and issued show cause notice to explain the source of cash deposit.

The assessee explained the source of cash deposit as withdrawal from four other banks accounts of the assesse and the said deposits were duly reflected in his Return of Income. Further since assessee did not have any business income, therefore he had not filed the Profit and Loss Account and Balance Sheet along with Return of Income. However, the assessee filed the same before the
Assessing Officer along with cash book, wherein cash on hand as on 1st April, 2016 as opening balance was ₹10,09,933/-, which was deposited during demonetisation period.

However, Assessing Officer rejected the Books of Accounts by stating that assessee had shown Closing Cash on hand as zero in return of income filed for the A.Y. 2016-17, and in the Cash Book of F.Y. 2016-17 i.e. A.Y. 2017-18, assessee has shown Opening Balance to the tune of ₹10,09,933/- which was not justifiable and therefore made addition as unexplained money u/s. 69A of the Act.

Aggrieved against the addition, the assessee filed an appeal before CIT(A) who confirmed the additions by observing that during the previous 3 years, except 2 or 3 instances, all withdrawals were less than ₹10,000 and the appellant claimed that the withdrawals were preserved during last 3 years in his hand and were deposited in the year under consideration.

Since 95 per cent of the withdrawals were less than ₹10,000, CIT(A) observed that as per common sense these cash withdrawals were for day to day expenses and if the appellant had so much of cash with him then what was the need for frequent withdrawals of ₹5,000 and ₹10,000. The CIT(A) relied on decisions of CIT vs. Durga Prasad More [1971] 82 ITR 540 (SC) and Sumati Dayal vs. CIT [1995] 214 ITR 801 (SC) where the Supreme Court has laid down Human Probability test as one of the important test in order to check genuineness of the transactions entered into the books of account of the assesses. Hence it was held by CIT(A) that the appellant failed to satisfactorily explain the source of ₹10,75,000 cash deposited in the bank account and the assessing officer was correct in treating this amount as unexplained cash under section 69A.

The appellant being aggrieved with the order of the CIT(Appeals) filed an appeal before the ITAT.

HELD

The ITAT observed that during the assessment proceedings, the Assessing Officer had rejected the explanation offered by the assessee as the assesse had showed closing cash on hand as Nil in the Return of Income but in the cash book showed the opening balance for A.Y. 2017-18 to the tune of ₹10,09,933/-.

The ITAT further observed that the assessee had filed copies of previous three years Form 26AS, ITR, Statement of Income, Profit and Loss account and Balance Sheet before CIT(A)and further explained that rental income was offered to tax with appropriate TDS u/s. 194I of the Act which was reflecting in Form 26AS records. Since the assessee was a Senior Citizen, he withdrew and kept substantial balance in his bank accounts for emergency medical needs. However, after declaration of the demonetization period, the assessee deposited the withdrawal amounts from his other bank accounts.

The ITAT observed that Assessing Officer erroneously treated cash deposits as unexplained cash and also invoked Section 115BBE of the Act and charged at 60 per cent rate which was not applicable to the present case since the cash deposits were reflected in the books of accounts maintained by the assessee. The ITAT relied on decision in case of Balwinder Kumar ([2023] 151 taxmann.com 338 (Amritsar – Trib.)) and Sri Sriram Manchukonda (2021 TaxCorp (AT.) 91806 Visakhapatnam ITAT) wherein co-ordinate Bench of the Tribunal held in favour of the assessee.

Respectfully following the above judicial precedents, ITAT observed that the addition made by AO u/s. 69A will be applicable only when the assessee is found to be the owner of any money etc. which is not recorded in the books of accounts maintained by him and any explanation offered by the assessee is not satisfactory in the opinion of the Assessing Officer.

ITAT observed that in the present case, the assessee had recorded the cash deposits in his books of accounts and source of cash deposits during demonetization period were also been maintained by the assessee. Therefore, ITAT held that the A.O. was not correct in invoking provisions of Section 69A of the Act and charging tax u/s. 115BBE of the Act. Thus the addition made by the Assessing Officer were deleted.

In the result, the appeal filed by the Assessee was allowed.

S. 127–Where the case of the assesse was transferred from one AO to another AO in a different city / locality / place, PCIT was under a statutory obligation to give an opportunity of being heard to the assessee.

82. Amit Kumar Gupta vs. ITO

(2025) 171 taxmann.com 16 (Raipur Trib)

ITA Nos.: 404 & 405 (Rpr) of 2024

A.Ys.: 2011-12 & 2012-13

Dated: 13th January, 2025

S. 127–Where the case of the assesse was transferred from one AO to another AO in a different city / locality / place, PCIT was under a statutory obligation to give an opportunity of being heard to the assessee.

FACTS

During the relevant year, the assessee had made cash deposits amounting to ₹17,05,824 into his bank account but did not file his income tax return. Based on the information gathered from NMS / ITS module, the AO (ITO-1, Ambikapur) initiated proceedings under section 147 by issuing notice under section 148 dated 23rd March, 2018. Thereafter, pursuant to an order under section 127 dated 7.9.2018 passed by PCIT-1, Bilaspur, the assessee’s case was transferred from ITO-1 Ambikapur to ITO-3, Korba. Since the assessee did not come forth with any explanation in response to notice under section 142(1), the AO taxed the entire cash deposit as unexplained money under section 69A vide his order under section 144 read with section 147 dated 16th December, 2018.

The assessee challenged the assessment order before CIT(A), inter alia, on the ground that PCIT had transferred his case from one ITO to another ITO without affording any opportunity of being heard as required under section 127. CIT(A) dismissed the appeal, inter alia, holding that he was not the appropriate forum to challenge the order under section 127 passed by PCIT.

Aggrieved, the assessee filed an appeal before ITAT.

HELD

The Tribunal observed that-

(a) As can be gathered from section 127(3), in a case where the PCIT transfers the case of as assessee from any AO to any other AO and the offices of all such officers are not situated in the same city, locality or place, then he remains under a statutory obligation to give an opportunity of being heard to the assessee and only after recording his reasons for doing so,
transfer such case. In the assessee’s facts, the case had been transferred pursuant to the order of PCIT, Bilaspur dated 7th September, 2018 from ITO-1, Ambikapur to ITO-3, Korba, that is, offices of said officers were not situated in the same city, locality or place, and therefore, on a conjoint reading of section 127(1) / (3), he was obligated to have given an opportunity to the assessee prior to transfer of his case.

(b) CIT(A) was not right in holding that he was not vested with any jurisdiction to deal with the specific challenge raised by the assessee as regards the validity of the assessment order that was framed by the A.Ode-hors a valid assumption of jurisdiction on his part in absence of an order of transfer under section 127 as required per the mandate of law.

Accordingly, the Tribunal restored the matter back to the file of CIT(A) with a direction to adjudicate the challenge of the assessee as regards the validity of the jurisdiction that was assumed by the A.O for framing of the assessment order passed under section 144 read with section. 147 dated 16th December, 2018 de-hors an order of transfer under section 127 as per the mandate of law.

S. 80G – Where the application for final approval under section 80G was rejected due to incorrect section code in the application, the issue was remanded back to the file of CIT(E) to grant final approval under correct provision if assessee-trust was otherwise eligible.

81. Rotary Charity Trust vs. CIT(E)

(2025)170 taxmann.com 797(Mum Trib)

ITA No.: 6133(Mum) of 2024

A.Y.: 2024-25

Dated: 9th January, 2025

S. 80G – Where the application for final approval under section 80G was rejected due to incorrect section code in the application, the issue was remanded back to the file of CIT(E) to grant final approval under correct provision if assessee-trust was otherwise eligible.

FACTS

Assessee was a registered charitable trust incorporated on 25th September, 1996, engaged in promoting various public charitable activities especially providing education to weaker section of the society and to specially-abled children. It made an application for provisional registration under section 80G of the Act, which was granted under clause (iv) of first proviso to section 80G(5) on 4th April, 2022 which was valid for the period starting 4th April, 2022 to AY 2024-25. Subsequently, the assessee filed application in Form 10AB for final registration; in this Form, instead of selecting section code “clause (iii) of first proviso to section 80G(5)”, the assessee inadvertently once again selected “sub-clause (B)of clause (iv) of first proviso to section 80G (5)”.

CIT(E) rejected the application on the ground that the assessee was not fulfilling the stipulated conditions prescribed undersection 80G(5)(iv)(B).

Aggrieved, the assessee filed an appeal before ITAT.

HELD

The Tribunal noted that there was merit in the claim of the assessee that it had selected the wrong section code inadvertently while filing the application for final approval in Form 10AB and it was not given the opportunity of being heard by CIT which otherwise would have allowed the assessee to explain the facts to avoid the rejection.

Following the decision in North Eastern Social Research Centre vs. CIT(E), (2024) 165taxmann.com 12 (Kolkata – Trib.), the Tribunal remitted the issue back to the CIT(E) with a direction to grant final approval under clause (iii) to first proviso to section 80G(5) if the assessee was otherwise found eligible.

S.12AB, 13 — Where the applicant trust was a charitable cum religious trust and its objects were for the benefit of a particular religious community or caste, that is, Jains, it was not entitled to registration under section 12AB.

80. Soudharma Brihad Tapogachchiya Tristutik Jain Sangha Samarpanam vs. CIT(E)

(2025)170 taxmann.com 590 (AhdTrib)

ITA No.:1571 (Ahd) of 2024

A.Y.: N.A.

Dated: 3rd January, 2025

S.12AB, 13 — Where the applicant trust was a charitable cum religious trust and its objects were for the benefit of a particular religious community or caste, that is, Jains, it was not entitled to registration under section 12AB.

The assessee-trust was settled on 5th January, 2023 with objects which required it to follow the principles of Jainism, etc. and was registered with the Assistant / Deputy Charity Commissioner, Ahmedabad. It filed application for registration under section 12AB in Form 10AB on 13th January, 2024 before CIT(E). In this application, the applicant mentioned that it had charitable objects in addition to religious objects.

CIT(E) denied registration under section 12AB on the ground that the assessee was a composite trust and its object was restricted to benefit of a particular religious community or caste, that is, Jains, which was a “specified violation” under clause (d) of Explanation below section 12AB(4) read with section 13(1)(b).

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

FACTS

The Tribunal observed that-

(a) A perusal of the main objects of the trust made it abundantly clear that all the objects were related to religious activities, more particularly relating to “Jain Community” and to propagate “Jainism”, that is, charitable cum religious in nature and was for the benefit of “Jains” which was a specific violation under clauses (c)/ (d) to Explanation to section12AB(4).

(b) In CIT vs. Dawoodi Bohara Jamat, (2014) 364 ITR 31 (SC), the Supreme Court held that section 13(1)(b)(which prescribed the circumstances wherein the exemption would not be available to a religious or charitable trust)was applicable even to a composite trust / institution having both religious and charitable objects. Section 13(1)(b)was required to be read in conjunction with the provisions of sections 11 and 12 towards determination of eligibility of a trust to claim exemption under the aforesaid provisions, while granting registration.

Accordingly, the Tribunal held that the order denying registration to the assessee did not require any interference and dismissed the assessee’s appeal.

While computing long term capital gains, interest on funds borrowed for purchase of property, duly indexed will be allowed as a deduction. Prior to amendment vide Finance Act, 2023 there was no such restriction for excluding the deduction claimed on account of interest paid under Section 24(b) or under the provisions of chapter VIA.

79. DCIT vs. Neville Tuli

ITA No. 3203/Mum./2023

A.Y.: 2013-14

Date of Order: 26th November, 2024

Section: 48

While computing long term capital gains, interest on funds borrowed for purchase of property, duly indexed will be allowed as a deduction. Prior to amendment vide Finance Act, 2023 there was no such restriction for excluding the deduction claimed on account of interest paid under Section 24(b) or under the provisions of chapter VIA.

FACTS

During the previous year relevant to the assessment year under consideration, the assessee sold a property, held by him as a long term capital asset, for a consideration of ₹27 crore. This property was purchased from borrowed funds. While computing long term capital gains arising on sale of this property, the assessee deducted ₹9,90,67,611 being indexed cost of acquisition and ₹3,95,42,739 being indexed cost of interest paid to the bank (this was shown under “indexed cost of improvement”) and offered long term capital gain of ₹13,13,89,649.

The amount of interest claimed as deduction while computing long term capital gains was net of the amount claimed in earlier years under section 24(b) of the Act. In earlier years, interest up to ₹1,50,000 was claimed and was allowed as deduction under section 24(b) of the Act.

In the background of the above facts, the Assessing Officer, in the course of assessment proceedings framed two questions viz. (i) Whether interest paid is a cost of acquisition / cost of improvement; and (ii) whether the benefit of indexation is to be allowed to interest cost. The AO having perused the provisions of section 55 held that interest payment on housing loan cannot be said to be expenditure of a capital nature incurred in making any additions or alterations to the capital asset by the assessee after it became his property. He also held that, on a reading of section 55, it is clearly evident that in no situation does the cost of acquisition involve bringing in any cost incurred after the date of acquisition, unless the cost of improvement and, in the instant case there is no improvement to the property. The AO supported his view by the ratio of the decisions of the Tribunal in the case of V Mahesh, ITO vs. Vikram Sadanand Hoskote [(2017) 18 SOT 130 (Mum.)] and Harish Krishnakkant Bhatt vs. ITO [(2004) 91 ITD 311 (Ahd. Trib.)].

The AO disallowed the sum of ₹3,95,42,739 and added the same to the income of the assessee.

Aggrieved, assessee preferred an appeal to the CIT(A) who during the course of appellate proceedings noted that a similar claim was allowed in earlier years as well. Having considered the relevant provisions of the Act and the judicial precedents on the issue, the CIT(A) allowed the appeal preferred by the assessee.

Aggrieved, revenue preferred an appeal to the Tribunal.

HELD

The Tribunal observed that in earlier assessment years as well, the assessee has claimed similar deduction of interest expenditure under the head income from house property and as cost of acquisition / improvement, which has been continuously allowed by the revenue authorities and therefore rule of consistency is required to be followed.

The Tribunal also noted that the Finance Act, 2023 has w.e.f. 1st April, 2024 amended the provisions of section 48 to provide that the cost of acquisition of the asset or cost of improvement thereto shall not include the deductions claimed on account of interest under clause (b) of section 24 or under the provisions of Chapter VIA. It held that for the period prior to the insertion of the said provision which is applicable w.e.f. 1st April, 2024, no such restriction can be imposed and / or made applicable. The Tribunal noted that the CIT(A) has also taken note of this amendment and has rightly held it to be not clarificatory.

The Tribunal after considering the ratio of various decisions on which reliance was placed on behalf of the assessee held that the interest paid on the borrowed funds for the purchase of property for the period prior to the provision inserted vide Finance Act, 2023 which was made applicable from 1st April, 2024, over and above claimed u/s 24(b) of the Act, would be deductible while computing the capital gains. Thus, we answered the question posed accordingly.

The Tribunal held that the order passed by CIT(A) does not suffer from any perversity, impropriety and / or illegality. It upheld the order passed by CIT(A) and dismissed the appeal filed by the revenue.

For the purpose of computing the ‘tax effect’, in the present case, only the grounds raised by the Revenue having an impact of determination of total income under the normal provisions of the Act ought to be considered for the reason that the Assessee would continue to be assessed under normal provisions of the Act even if all the grounds raised by the Revenue in departmental appeal are assumed to be allowed in favour of the Revenue.

78. ACIT vs. Bennett Property Holdings Company Limited

ITA No. 556/Mum./2024

A.Y.: 2017-18

Date of order: 12th December, 2024

Section: CBDT Circular No. 5 of 2024 dtd. 15th March, 2024 r.w. Circular No. 9 of 2024 dtd 17th September, 2024

For the purpose of computing the ‘tax effect’, in the present case, only the grounds raised by the Revenue having an impact of determination of total income under the normal provisions of the Act ought to be considered for the reason that the Assessee would continue to be assessed under normal provisions of the Act even if all the grounds raised by the Revenue in departmental appeal are assumed to be allowed in favour of the Revenue.

FACTS

For AY 2017-18, the Assessee company, primarily engaged in the business of earning rental income by letting out properties and running business centres, filed original return of income which was subsequently revised. The Assessing Officer (AO), in an order passed under section 143(3), assessed the total income of the Assessee under the normal provisions of the Act at ₹1,20,45,17,348/- and computed Book Profits of the Assessee under Section 115JB of theAct at ₹1,33,19,94,660/-. Since the tax payable on Book Profits was less than the tax payable on the income computed under normal provisions of the Act, the Assessee was assessed to tax under normal provisions of the Act.

Aggrieved by the additions made by the AO while assessing the total income, the assessee preferred an appeal to CIT(A) challenging certain additions / disallowances made under normal provisions of the Act viz. (i) disallowance of ₹6,38,05,371/- under Section 14A of the Act; (ii) addition taking deemed annual letting value of the immovable properties lying vacant during the relevant previous year at ₹23,28,000; and (iii) denial of claim of set off of accumulated loss of ₹12,86,53,730 and unabsorbed depreciation of ₹15,65,15,799 relatable to real estate service undertaking of Banhem Estates & IT Parks Ltd. That demerged into the Assessee pursuant to composite scheme of amalgamation and arrangement approved by the Hon’ble Bombay High Court vide order, dated 2nd December, 2016.

The assessee also challenged the following additions made by the AO while computing the amount of book profits u/s 115JB viz. (i) increase in Book Profits by Extra Depreciation of ₹4,38,18,551; (ii) increase in Book Profits by ₹6,38,05,371 disallowed under Section 14A of the Act by invoking provisions contained in Clause (f) of Explanation 1 to Section 115JB of the Act; and (iii) rejection of Assessee’s claim of substitution of long-term capital gain (computed by taking index cost of acquisition) in place of the profit on sale of capital asset appearing in the statement of Profit & Loss Account for the purpose of computing Book Profits.

The assessee also raised additional grounds seeking credit for TDS in respect of companies / undertakings forming part of composite scheme and also challenged computation of interest under section 234B of the Act.

The appeal preferred by the Assessee was disposed off by the CIT(A)as partly allowed vide order, dated 13th December, 2023. The CIT(A) granted partial relief by (a) deleting the addition made under normal provisions of the Act in respect in respect of deemed rental income estimated at ₹23,28,000/-, and (b) accepting Assessee’s contention that no disallowance of expenses can be made in respect of any exempt income by invoking provisions contained in Section14A read with Rule 8D of the IT Rules while computing Book Profits under Section 115JB of the Act.

Since, both, the Assessee as well as the Revenue were aggrieved by the order passed by the CIT(A), the present cross-appeals were preferred before the Tribunal.

Before the Tribunal, on behalf of the assessee, it was submitted that the Assessee has been assessed under normal provisions of the Act. Even if the grounds raised by the Revenue in relation to the computation of ‘Book Profits’ under Section 115JB of the Act are allowed in favour of the Revenue, the Assessee would be assessed to tax under the normal provisions of the Act. It was submitted that the grounds of appeal raised by the Revenue pertaining to the additions / disallowance made under the normal provisions of the Act carry tax effect below the specified monetary of ₹60 Lacs fixed by Central Board of Direct Taxes(CBDT) for filing Departmental Appeal before the Tribunal limit. Therefore, the appeal preferred by the Revenue should be dismissed as withdrawn in view of Circular No. 5 of 2024, dated 15th March, 2024, read with Circular No. 9 of 2024, dated 17th September, 2024, issued by CBDT.

HELD
The Tribunal noted that the Revenue has preferred appeal challenging the deletion of addition in respect of deemed annual letting income of ₹23,28,000 under normal provisions of the Act. The Revenue has also challenged the relief granted by the CIT(A) by accepting Assessee’s claim that the ‘Book Profits’ could not be increased by ₹6,38,05,371 (being amount disallowed under Section 14A of the Act read with Rule 8D of the IT Rules), by invoking provisions contained in clause (f) of Explanation 1 to Section 115JB of the Act. Thus, the Tribunal observed that Revenue has raised grounds having impact on the computation of income under normal provisions of the Act and the computation of ‘Book Profits’ under Section 115JB of the Act.

The Tribunal perused the Circular No. 5 & 9 of 2024 issued by the CBDT and held that Circular No.5 of 2024, dated 15th March, 2024, when read with Circular No.9 of 2024, dated 17th September, 2024, issued by CBDT clarifies that the monetary limit of ‘tax effect’ for filing departmental appeals before Tribunal has been increased from ₹50 Lakhs to ₹60 Lakhs. It has also been clarified in Circular No. 9 of 2024 that the aforesaid monetary limit for filing the appeal before the Tribunal would also apply to the pending departmental appeals.

The Tribunal held that for the purpose of computing the ‘tax effect’ involved in the present appeal preferred by the Revenue only the grounds raised by the Revenue having an impact of determination of total income under the normal provisions of the Act ought to be considered. This is because the Assessee has been assessed under the normal provisions of the Act and this would continue to be the case even if all the grounds raised by the Revenue (whether related to computation of income under normal provisions of the Act or related to computation of Book Profits under 115JB of the Act) are allowed.

On examination the grounds raised by the Revenue having impact on computation of income under normal provisions of the Act, the Tribunal found that tax effect involved in the present appeal is below the monetary limit of Rs.60 Lakhs fixed by the CBDT for the purpose of filing departmental appeal before the Tribunal.

On perusal of Para 5.1 of Circular No. 5 of 2024 containing the definition of `tax effect’, the Tribunal observed that ‘tax effect’ has been defined to mean the tax on the total income assessed and the tax that would have been chargeable had such total income been reduced by the amount of income in respect of the issues against which appeal is intended to be filed. It held that when computed as aforesaid, the tax effect in the appeal preferred by the Revenue would fall below the specified monetary limit of ₹60 Lakhs for filing departmental appeals. On perusal of the computation submitted by the Assessee the Tribunal found that the tax effect in the appeal preferred by the Revenue would only be ₹5,63,973 for the reason that the Assessee would continue to be assessed under normal provisions of the Act even if all the grounds raised by the Revenue in departmental appeal are assumed to be allowed in favour of the Revenue. Thus, accepting the contention of the Assessee, we dismiss the appeal preferred by the Revenue as ‘withdrawn’ in terms of Circular No.5 & 9 of 2024 issued by CBDT.

Dismissing the appeal under section 249(4) is unsustainable in a case where an assessee who has not filed the return of income has submitted before the AO that its income is exempt from tax and therefore it is not required to pay advance tax.

77. Srirampura Prathamika Krishi Pathina Sahakara Sangha Ltd. vs. ITO

ITA No. 1731/Bang./2024

A.Y.: 2017-18

Date of Order: 9th January, 2025

Section: 249(4)

Dismissing the appeal under section 249(4) is unsustainable in a case where an assessee who has not filed the return of income has submitted before the AO that its income is exempt from tax and therefore it is not required to pay advance tax.

FACTS

The assessee, a primary agricultural credit co-operative society, providing credit facilities to its members and also supplying the items like kerosene, fertilisers, food grains, etc. to its members did not file return of income. The notice u/s 142(1) of the Act was issued on 4th January, 2018 calling for return of income for the assessment year 2017-18 on or before 3rd February, 2018 but the assessee has neither filed any return of income nor filed any submission or response to the above notice.

Further, during the course of assessment proceedings, the AO found that assessee has deposited huge cash into his bank account with CDCC bank Hosadurga. The information has also been called for from the bank u/s 133(6) of the Act and on verification of the same, it was found that the assessee had deposited during the demonetised period a sum of ₹13,82,000/-.

The AO in his assessment order observed that the assessee vide letter dated 5th September, 2019 furnished the details of income and expenditure statement, profit & loss account and cash book. Further, the assessee in the said letter stated that they have exempted income for the financial year 2016-17 and therefore, not filed the income tax return for the said period.

The AO found the submission made by the assessee as not satisfactory and as the assessee had deposited cash in old currencies of denomination of ₹500/- & ₹1,000/-, amounting to ₹13,32,000/- into their bank account, the entire deposits were treated as assessee’s unaccounted income for the assessment year 2017-18 by invoking the provisions of section 69A of the Act and taxed u/s 115BBE of the Act.

Further, as the assessee had audited his books of accounts as per the provisions of the State Co-operative Society Act of Karnataka and the net profit as per income and expenditure statement was amounting to ₹1,13,376/- and hence a sum of ₹1,13,376/- was also considered by the AO as income of the assessee and brought to tax and accordingly, assessed on a total income of ₹14,45,376/-.

Aggrieved by the assessment completed u/s 144 of the Act dated 25th November, 2019, the assessee preferred an appeal before the CIT(A)/NFAC who dismissed the appeal of the assessee on the ground that the assessee had not paid the tax on returned income and the particulars of payment was also not mentioned in column 8 of Form 35. Further, as there was no response to deficiency letter dated 3rd June, 2024,the CIT(A) held that as the assessee has not paid tax on returned income / particulars of payment was not mentioned in column 8 of Form 35, the appeal of the assessee is not maintainable as per section 249(4) of the Act.

Aggrieved, the assessee filed the appeal before the Tribunal.

HELD

It is pertinent to note that section 249(4)(b) of the Act is clear that appeal before the CIT(A) should be admitted only when the assessee has paid an amount equal to the amount of advance tax, which was payable by him. Where the return of income has not been filed the proviso to said section also describe that the assessee will get exemption from this clause, if an application is made before the CIT(A) for not paying an amount equal to the amount of advance tax for any good and sufficient reason to be recorded in writing. The Tribunal noted that in the instant case, the AO in para 6 of the assessment order has observed that the assessee vide letter dated 5th September, 2019 had stated that they have exempted income for the financial year 2016-17 and therefore, not filed the income tax return for the said period. Before the Tribunal, as well, it was submitted that the assessee’s income is exempted and therefore, the question of paying advance tax does not arise in the case of the assessee as no amount is payable by the assessee. Being so, the Tribunal was of the opinion that dismissing the appeal on the grounds that the same is not maintainable as per section 249(4) of the Act is not sustainable as the income of the assessee is exempt from income tax. The assessee is not liable to pay any advance tax even though they have not filed the return of income.

While computing capital gains on slump sale under section 50B r.w.s. 48, transfer expenses are allowable as a deduction. There is no scope of deviation from the statutory provision regarding computation of capital gains in case of slump sale. The first limb i.e. “the expenditure incurred in connection with transfer” cannot be excluded from being claimed as deduction for the purposes of computation u/s 50B.

76. DCIT vs. Larsen and Toubro Ltd.

ITA No. 3369/Mum./2023

A.Y.: 2009-10

Date of Order: 20th December, 2024

Sections: 2(42C), 48, 50B

While computing capital gains on slump sale under section 50B r.w.s. 48, transfer expenses are allowable as a deduction. There is no scope of deviation from the statutory provision regarding computation of capital gains in case of slump sale. The first limb i.e. “the expenditure incurred in connection with transfer” cannot be excluded from being claimed as deduction for the purposes of computation u/s 50B.

FACTS

The Assessing Officer, while reassessing the total income of the assessee, under section 147 of the Act disallowed the sum of ₹27.08 crore claimed by the assessee to be expenditure incurred on transfer while calculation of capital gains on slump sale under section 50B of the Act. The sum of ₹27.09 crore disallowed comprised of Financial Advisory Fee of ₹8.31 crore and other expenses of ₹18.77 crore. The contention of the assessee was that this sum is allowable u/s 48(i) of the Act. These contentions did not find favour with the AO who held that section 50B is a code in itself for computation of capital gains arising on slump sale. Therefore, no other provision other than provision of section 50B shall be applicable.

Aggrieved, the assessee preferred an appeal to CIT(A) who allowed this ground of appeal.

Aggrieved, revenue preferred an appeal to the Tribunal, where on behalf of the assessee, reliance was placed on decision of Delhi High Court in case of free CIT vs. Nitrex Chemicals India Ltd [(2016) 75 taxman.com 282] and also on the decision of coordinate bench of theTribunal in case of Wockhardt Hospitals Ltd vs. ACIT [ITA Nos.7454/MUM/2013 and 7021/Mum./2013 for AY2010-11; Order dated 6th January, 2017], wherein in the context of computation of capital gains arising on slump sale of an undertaking, deduction was allowed in respect of expenditure incurred in connection with such transfer by reference to section 48(i) of the Act..

HELD

There is no scope for deviation from the statutory provision regarding computation of capital gains on slump sale.

Section 48 has two limbs –

(i) expenditure incurred wholly and exclusively in connection with such transfer;

(ii) the cost of acquisition of the asset and the cost of any improvement thereto.

The networth replaces the value as per section 48(ii). However, the first limb, which is, “the expenditure incurred in connection with the transfer”, cannot be excluded from being claimed as deduction for the purposes of computation under section 50B. The Legislature in its wisdom, clearly excludes indexation of such cost of acquisition and cost of improvement, for the purposes of slump sale in Section 50B itself. The Tribunal placed reliance on decision of Delhi High Court in case of PCIT vs. Nitrix Chemicals India Pvt. Ltd [(2016) 75 taxmann.com 282] and held that while computing capital gains arising on slump sale, in accordance with the provisions of section 50B that includes only the networth of the undertaking treating it as a cost of acquisition and cost of improvement without considering the provision of section 48(i), will be in contradiction to the intention of the Legislature.

The Tribunal observed that there is no dispute that the expenditures claimed by the assessee are incurred in connection with the transfer of the business as a going concern. Then, not computing the capital gains of the slump sale in accordance with the provisions of section 50B that require to treat cost of acquisition and cost of improvement and is allowable as a deduction as per section 48 (ii) of the act as net worth of the undertaking, and not to consider the expenditure incurred for the purpose of transfer as per section 48(i) will be in contradiction to the intention of the Legislature. It held that section 50B cannot be read and understood as argued by the Ld.DR, because the computation provision section 48 to the extent applicable to section 50B as mentioned in clause (2) of section 50B would then become ineffective and inapplicable to a slump sale.

The Tribunal did not agree with the arguments made on behalf of the revenue and held them to be not founded on the basic principles of interpretation. The Tribunal upheld the order of the CIT(A) and dismissed the ground of appeal filed by the revenue.

Research Analyst Regulations – Re-Birth

INTRODUCTION

Research Analysts play a very important role as they analyse information on securities and provide recommendations, and investors normally rely on their advice. However, such advice is many times prone to conflicts of interest arising from preparation and dissemination of research reports with vested interest. Such research analysts include independent research analyst, an intermediary that employs any research analyst or research entity that issues any research report.

This led to the need for Research Analyst Regulations way back in 2013 to establish a regulatory framework to ensure impartial reporting, address conflict of interest, improve governance standards, minimise market malpractices, etc. In order to regulate and streamline the activities of individuals and entities offering research analyst (RA) services, The Securities and Exchange Board of India (Research Analysts) Regulations, 2014, were notified on 1st September, 2014. However, every regulation stands the test of time and must be revisited from time to time.

One such instance that required to re-consider the relevance of existing regulatory framework, has been the mismatch in the large investor base vis-à-vis the number of investment advisors (IA) which led to the proliferation of unregistered entities acting as IA’s & RA’s.

It was extremely crucial to place a conducive regulatory framework by simplifying, easing and reducing the registration requirements and cost of compliance for RA’s and bringing in regulatory changes commensurate with the continually evolving nature of their business and the large investor base.

With this backdrop, The Securities and Exchange Board of India (SEBI) has issued amendments to Research Analyst Regulations on 16th December, 2024 and issued operating guidelines vide circular dated January 8, 2025. The recent changes include:

i. registration of part-time research analyst,

ii. appointment of independent compliance officer,

iii. compliance audit requirements,

iv. segregation of research & distribution activities,

v. capping on fees,

vi. qualifications & certification requirements,

vii. deposit requirements,

viii. dual registration requirements, etc.

One of the eye openers has been, who shall be a classified as Research Analyst? Persons providing ‘research services’ for consideration shall only fall within the definition of research analyst.

This implies that research services rendered without any consideration shall be outside the ambit of these regulations.

The key changes outlining the changes in the RA industry are discussed below, most of which are to be implemented by 30th June, 2025, unless specified otherwise:

PART-TIME RESEARCH ANALYSTS

There are many persons who provides research services however their main activity is not that of providing research services. SEBI has now introduced specific provisions for part-time research analysts, acknowledging the diverse professional backgrounds of individuals and not engaged in business / employment related to securities market and does not involve handling/ managing of money / funds of client / person or providing advice / recommendation to any client /person in respect of any products / assets for investment purposes. Further, applicant engaged in in any activity or business or employment permitted by any financial sector regulator or an activity under the purview of statutory self- regulatory organisations such as Institute of Chartered Accountants of India (‘ICAI’), Institute of Company Secretaries of India (ICSI), Institute of Cost Accountants of India (ICMAI) etc. shall be considered eligible for registration as part-time RA.

This shall create more avenues for CA’s providing their statutory services. For example, a CA who shall be engaged in providing security specific recommendations to the client, which is not investor specific, even though as a part of tax planning/tax filing is required to seek registration as a Part time RA. This provision allows for flexibility in the industry, opening opportunities for professionals in other domains to engage in research analysis while adhering to regulatory frameworks. However, one must keep in mind the provisions of Code of Ethics of ICAI before engaging in such assignment.

Part-time RA shall be required to have similar qualification and certification requirements prescribed under RA regulations for full-time RAs. They shall provide an undertaking stating that it shall maintain arms-length relationship between its activity as RA and other activities and shall ensure that its services are clearly segregated from all its other activities at all stages of client engagement and a specific disclaimer may be given to that extent.

The investor should at all times keep in mind that no complaints can be raised to SEBI for the other services provided by a part-time RA.

APPOINTMENT OF COMPLIANCE OFFICER

With the objective of reducing the cost of compliance by having a fulltime compliance officer, Regulation 26 of the RA Regulations allows non-individual research analysts to appoint an independent professional who is a member of professional bodies like ICAI, ICSI, ICMAI, or other bodies specified by SEBI, provided the professional holds the relevant certification from NISM as required by SEBI. However, the principal officer of the firm must submit an undertaking to the SEBI’s Research Analyst Administration and Supervisory Body (RAASB)/SEBI affirming that they will be responsible for ensuring compliance with the Act, regulations, notifications, guidelines, and instructions issued by SEBI or RAASB.

In this case, Practising Chartered Accountants will have better opportunities to be appointed as independent professionals in regulated entities, however, there lacks clarity whether one independent professional CA can be appointed as compliance officer in various RA entities or whether any statutory restrictions as applicable to number of audits permissible by a practising CA shall apply.

COMPLIANCE AUDIT REQUIREMENTS

Regulation 25(3) of the RA Regulations requires RAs or research entities to conduct an annual audit to ensure compliance with the RA Regulations. Practising CAs shall ensure that the audit is completed within six months from the end of financial year and the compliance audit report. Such compliance report along with adverse findings, if any and action taken thereof, duly approved by RA shall be submitted within 1 month from the date of audit report but not later than 31st October.

SEGREGATION OF RESEARCH AND DISTRIBUTION ACTIVITIES

Regulation 26C (5) of the RA Regulations mandates client-level segregation between research and distribution services within the same group or family of a RA or research entity. Furthermore, new clients must choose between receiving research services or distribution services at the time of onboarding. One of the key changes is that Stock broking activities shall not be considered as distribution services for the purposes of this regulation.

Clients are allowed to retain their existing assets under their current research or distribution arrangements without being forced to liquidate or switch them. However, they must comply with the new segregation requirements for any future services provided. The PAN of the client serves as the key control record for identifying and segregating clients at the individual or family level.

A member of ICAI/ICSI/ICMAI or auditor have to confirm compliance with client level segregation requirements within six months from the end of financial year.

While giving such certification, the practising CA shall ensure that for individual clients, the “family” is considered a single entity, and the PANs of all family members are grouped together for segregation purposes. Further verification should be done, whether the client has provided an annual declaration or periodic updation in respect of dependent family members. Further, RAs providing research services exclusively to institutional clients and accredited investors may be exempt from these segregation rules, provided the client signs a waiver acknowledging this.

FEE STRUCTURE AND CLIENT CHARGES

The new regulations outline the maximum fees that research analysts can charge their clients, ensuring transparency in the fee structure and a level playing field for both IA’s & RA’s.

RAs can charge maximum fee of ₹1,51,000 annually per individual or Hindu Undivided Family (HUF) client and exclude non-individual clients, accredited investors, and institutional clients seeking proxy advisory services. For these clients, fees will be negotiated bilaterally and are not subject to the specified caps. RAs may charge fees in advance with the client’s consent, but the advance should not exceed one-quarter of the annual fee. However, statutory charges are not included in this fee cap. The statutory auditor and the compliance auditor shall ensure adherence to these limits during the course of the audits of such research analysts.

i. Changes in Qualification and Certification Requirements

No person can act as an RA without possessing a requisite qualification. SEBI has prescribed minimum qualifications for Research Analysts as under: –

A professional qualification or graduate degree or post-graduate degree or post graduate diploma in finance, accountancy, business management, commerce, economics, capital market, banking, insurance, actuarial science or other financial services from a university or institution recognized by the Central Government or any State Government or a recognised foreign university or institution or association.

Or

A professional qualification by completing a Post Graduate Program in the Securities Market (Research Analysis) from NISM of a duration not less than one year or a professional qualification by obtaining a CFA Charter from the CFA Institute.

One of the major changes as compared to the erstwhile regulations is eliminating the need of having in place a graduate in any discipline with an experience of atleast 5 years in activities relating to financial products or markets or securities or fund or asset or portfolio management.

This change has led to a level playing field for new entrants as well as veterans in this field.

ii. Persons associated with research services shall, at all times, have minimum qualification of a graduate degree in any discipline from a university or institution recognized by the Central Government or any State Government or a recognized foreign university or institution.

iii. An individual registered as research analyst under these regulations, a principal officer of a non-individual research analyst, individuals employed as research analyst, person associated with research services and in case of the research analyst being a partnership firm, the partners thereof if any, who are engaged in providing research services, shall have, at all times, a NISM certification.

This has expanded its scope of bringing within its ambit “Persons Associated with Research Services” to have at all times minimum qualification as well as certification requirements, which shall also include all sales staff, service relationship & client relationship managers, who may not be involved in any research function but by virtue of being associated have to be qualified and certified.

DEPOSIT REQUIREMENTS FOR RESEARCH ANALYSTS

The new regulation has done away with the requirement of having a minimum net worth as it was identified that the RA’s provide research services broadly owing to their understanding and knowledge of the subject and their skills to arrive at a suitable advice/recommendation under a particular circumstance.

Further, the services provided are fee based and not related to management of client fund and securities and no significant infrastructure requirements, hence the concept of maintaining networth may not be aligned with the activities of RA.

To safeguard the interests of investors and enhance the financial credibility of research analysts, SEBI has introduced mandatory deposit requirements with immediate effect and for existing clients by 30 April 2025, based on the number of clients which is detailed as under:

  •  Deposit Structure Based on Numbers of Clients:
  •  0 to 150 clients: ₹1 lakh
  •  151 to 300 clients: ₹2 lakh
  •  301 to 1,000 clients: ₹5 lakh
  •  Over 1,000 clients: ₹10 lakh

This deposit must be maintained in a scheduled bank with a lien in favour of SEBI’s Research Analyst Administration and Supervisory Body (RAASB). This deposit shall be utilized for dues emanating out of arbitration and reconciliation proceedings, if RA fails to pay such dues.

DUAL REGISTRATION: INVESTMENT ADVISER AND RESEARCH ANALYST

SEBI has introduced provisions allowing individuals or firms already registered as Investment Advisers (IAs) to apply for dual registration as RAs subject to maintaining arms-length relationship between its activity as IA and RA and shall ensure that its investment advisory services and research services are clearly segregated from each other.

This provision was introduced considering the overlapping nature of activities under IA & RA services.

PRINCIPAL OFFICER DESIGNATION

The erstwhile Regulations did not mandate the requirement of designation of Principal Officer; however, the need was felt that the overall function of business and operations of non-individual RAs should be looked into by a responsible person.

Also, Regulation 2(1)(oa) of the RA Regulations mandates that if a partnership firm is registered as a research analyst, one of its partners must be designated as the principal officer and where no partner meets the necessary qualification and certification criteria, it must apply for registration as a research analyst in the form of an LLP or a body corporate.

This change must be made by 30th September, 2025, as per the SEBI directive.

USE OF ARTIFICIAL INTELLIGENCE (AI) IN RESEARCH

Any research analyst or research entity using artificial intelligence (AI) tools to provide services to clients is solely responsible for ensuring the security, confidentiality, and integrity of client data and also responsible to disclose the extent of AI tool
usage in their research services to clients and additional disclosures as may be necessary to enable informed decision of continuance or otherwise with the RA.

For existing clients, compliance with this requirement must be met by 30th April, 2025.

Research services provided by research analyst or research entity

Regulation 20(4) of the RA Regulations requires that research services provided by a RA or research entity must be supported by a research report that includes the relevant data and analysis forming the basis of the research. The RA or research entity must maintain a record of such research reports to ensure transparency and accountability.

Research services being provided by research analyst or research entity to any of its clients availing its other services as registered intermediary in another
capacity shall be considered as research services provided ‘for consideration’ even though no fee is charged by such research analyst or research entity directly from the client.

This implies that Research services provided by the research entity, who is also registered with SEBI as stock broker, to the clients availing its stock broking services are considered as research services ‘for consideration.

MODEL PORTFOLIO GUIDELINES

Regulation 2(1)(u) and 2(1)(wa) of the RA Regulations now define research services provided by research analysts to include the recommendation of model portfolios. In order to provide clarity on recommendation in respect of model portfolio by RA’s and to provide for safeguard of model portfolio, the guidelines issued shall ensure recommendations of model portfolio such as minimum disclosures, rationale for recommendations, nomenclature and performance of such recommendations.

The compliance auditor shall ensure as a part of its audit procedures check compliance with obligations set out under the model portfolio guidelines.

DISCLOSURE OF TERMS AND CONDITIONS TO THE CLIENT

Regulation 24(6) of the RA Regulations mandates that RAs or research entities must disclose the terms and conditions of their research services to clients and obtain their consent before providing any services or charging any fees. They should also include the Most Important Terms and Conditions (MITC), notified vide SEBI circular dated 17th February, 2025.

KYC REQUIREMENTS AND RECORD MAINTENANCE

Under Regulation 25(1) of the RA Regulations, RAs or research entities are required to follow Know Your Client (KYC) procedures for fee-paying clients and maintain KYC records as specified by SEBI.

WEBSITE REQUIREMENTS

RA Regulations mandates that RAs or research entities must maintain a functional website that includes specific details as outlined by SEBI.

CONCLUDING REMARKS

The new SEBI guidelines represent a significant step towards improving the transparency and accountability of the research analyst industry in India and also easing regulations to bridge the gap between number of investors vis-à-vis the number Registered RAs.

The change in the business model of research as a function also requires corresponding changes to the regulations to be at pace with the RAs, which include recognition of model portfolios within the definition of research services, introducing the concept of Part-time RAs, eliminating the need for experience, to allow ease of entry and participation of exuberant young minds in the securities market, etc.

Such changes demonstrate that the regulator has been watchful, supportive and in sync with the industry that it regulates while ensuring the investor trust and confidence is retained in the securities market.

Learning Events at BCAS

1. Finance, Corporate & Allied Law Study Circle – REIT n InvIT as Investment avenues held on Thursday, 13th February, 2025 @ Zoom.

CA Harry Parikh explained the concepts of REIT and InvIT, their features, structural overview, eligibility criteria, investment conditions, etc. He highlighted that REIT or InvIT are investment products and not a tax-saving product. He dealt with the decision-making criteria for investing in REIT or InvIT vis-a-vis traditional investment with the help of examples of REITs. He also enlightened on the key differences between Equity vs. Mutual Fund vs. REIT vs. InvIT, and tax implications thereof. He also shared his insights on factors to be considered for investing in REIT.

More than 70 participants enriched out of the masterly analysis of REIT, InvIT as investment avenues.

Youtube Link: https://www.youtube.com/watch?v=GxO-5VpL-xk

2. Public Lecture Meeting on “Union Budget 25 — Indirect Tax Proposals” held on Wednesday, 12th February 2025 @ Zoom.

The lecture meeting on the Union Budget 2025 and its Indirect Tax Proposals, held on 12th February 2025, featured CA Sunil Gabhawalla discussing various amendments in the Finance Bill 2025. He focused primarily on GST provisions while briefly touching upon customs, excise, and service tax amendments.

He began by explaining the concept of ‘input service distributor,’ detailing its position in the pre-GST regime, GST regime until 31st March 2025, and the post-2025 scenario. He highlighted differences in the definition of ‘Input Service Distributor’ (ISD) between the existing and proposed regimes, emphasising the potential for varied interpretations and possible litigations. Using the draft circular issued by the CBIC and other relevant jurisprudence, he illustrated cases falling under the ISD and Cross Charge Mechanisms.

He also examined the impact of retrospective amendments in the GST law, referencing the Hon’ble Supreme Court’s decision in the Safari Retreat’s case and highlighting open issues post-amendment. Further, he discussed issues arising from the amendment that incorporates additional conditions for self-adjustment of taxes based on credit notes. He provided guidance on addressing these issues, especially in light of the mandatory Invoice Management System (IMS) introduced by GSTIN in October 2024. He cited practical examples to highlight various aspects taxpayers should consider when dealing with the IMS mechanism. Additionally, he explained how the proposed track and trace mechanism would complement E-way Bill provisions. The meeting emphasised the government’s intent to gather maximum data and use artificial intelligence to curb tax evasion, leading to increased compliance and affecting the ease of doing business.

Finally, he covered miscellaneous amendments related to ‘local authorities,’ ‘vouchers,’ amendments in Schedule III concerning supplies by SEZ / FTWZ units, and the rationalisation of pre-deposits required under appellate proceedings in disputed orders imposing penalties.

The lecture was attended by approximately 325 participants online.

BCAS Lecture Meetings are high-quality professional development sessions which are open to all to attend and participate. The readers can view the lecture meeting at the below-mentioned link:

Youtube Link: https://www.youtube.com/watch?v=yAzBv4CAHNw

3. Public Lecture Meeting on Direct Tax Provisions of Finance Bill, 2025 held on Thursday 6th February, 2025 @ Yogi Sabhagruh Auditorium Dadar East

The public lecture on Direct Tax Provisions under the Finance Bill 2025 was a comprehensive discussion led by noted tax expert CA Shri Pinakin Desai. The session emphasised the significant changes in income tax slab rates and corresponding rebate provisions, which were perceived positively. The lecture highlighted that this year’s budget prioritises stimulating consumption over infrastructure investment, marking a substantial increase in tax-free slab rates compared to previous years. Notably, there was a significant shift anticipated as taxpayers may transition from the old tax regime to the new one, leading to increased discretionary spending and ultimately contributing to GDP growth.

Shri Pinakin Desai provided insights into several key provisions of the Finance Bill, 2025 analysing changes to tax rates, corporate taxation, TDS rationalisation, and the taxation of charitable trusts. The lecture also discussed new provisions concerning Tax Collection at Source (TCS) and implications for companies undergoing amalgamations. Shri Pinakinbhai’s thorough analysis offered clarity on how these changes would affect various stakeholders and emphasised the need for careful navigation of the new tax landscape.

KEY INSIGHTS

  • Increased Tax-Free Income Thresholds: The new regime allows individuals to earn up to ₹12.75 lakhs without incurring tax, significantly benefiting middle-income taxpayers. This change is expected to uplift the overall spending capacity of households, resulting in higher consumption rates and positively influencing economic growth.
  • Charitable Trust Registration Validity: The extension of the registration period for small charitable trusts from five to ten years represents a significant reduction in administrative burdens for these entities, encouraging more charitable initiatives and financial stability among smaller trusts.
  • Tax Deductions for Rent Payments: The amendment reducing the threshold for tax withholding on rent from ₹2.4 lakhs annually to ₹50,000 monthly for companies is a notable change.
  • Implications of Changes in applicability of Rebate: The decision to disallow rebates for special rate incomes under capital gains could reduce tax relief for many taxpayers, necessitating careful consideration of investment strategies to optimise tax liabilities.
  • Restrictions on Loss Migration: The amendment aims to curb the indefinite extension of loss carry-forwards through repeated amalgamations, ensuring a fair and consistent tax treatment. Previously, amalgamated companies could extend the carry-forward period indefinitely, effectively resetting the 8-year limit with each new amalgamation. The amendment aims to prevent this perpetual “evergreening” of losses. Shri Pinakinbhai explained the impact of this amendment through various illustrations.
  • Non-Resident Tax Incentives: The concessional tax rates for foreign entities providing technology and services to specified manufacturing industries reflect India’s strategy to foster foreign investment in critical sectors such as electronics, enhancing competitive advantages and technological development. A new presumptive taxation scheme introduced for non-residents providing services or technology to Indian companies engaged in the manufacture of electronic goods. Shri Pinakinbhai also highlighted possibility of a drafting error in the proposed legislation, mistakenly suggesting that both payment and receipt of 100 rupees result in a taxable consideration of 200 rupees which should be corrected to align with sections 44B and 44BB, of the Income-tax Act.
  • Extension of time limit for passing Penalty Orders: The time limit for completing penalty orders related to assessment has been changed from 6 months from the month of receiving the order from the tribunal to 6 months from the end of the quarter of receiving the order.
  • Transfer Pricing Assessment: Instead of annual assessments, a block of 3 years for determining the Arm’s Length Price (ALP) is introduced. Once the methodology is settled in the first year, it remains binding for the next two years. Taxpayers can opt for this block assessment, either during or after the Transfer Pricing (TP) assessment. He also mentioned that the effectiveness of these new measures shall depend upon the rules to be prescribed in this regard.
  • Updated Return Filing: The provision now allows updated returns to be filed up to the end of the third or fourth year, with additional taxes of 60 per cent and 70 per cent, respectively. This provision aims to promote compliance by offering a structured approach for taxpayers to rectify errors or omissions, albeit with significant additional tax implications for later filings.

In summary, the lecture delivered by Shri Pinakin Desai provided a detailed analysis of the Finance Bill 2025, shedding light on various changes that will impact individual taxpayers, businesses, and charitable organisations alike. The meeting was attended in person by 450 plus participants and encouraging response of over 26,000+ viewers online.

The readers can view the lecture meeting at the below-mentioned link:

Youtube Link: https://www.youtube.com/watch?v=ncVT3ejAtPA

4. Felicitation of Chartered Accountancy pass-outs of the November 2024 Batch held on Friday, 31st January, 2025 @ IMC.

Milestone 2.0 — Felicitation of newly qualified CAs of the November 2024 batch.

A felicitation event for the newly qualified chartered accountants of the November 2024 batch was held on 31st January, 2025, at the Walchand Hirachand Hall of the Indian Merchant Chambers building at Churchgate by the SMPR Committee. The event was highly successful and close to 400 candidates attended the event. The theme for the event was Milestone 2.0, and the guest and mentor for the event was Past President CA Naushad Panjwani. He guided the participants by taking them through the Japanese concept of Ikigai and drawing parallels to their phase in life where they should aim to find their Ikigai, which would lead them to success and happiness. The participants diligently listened and also provided their perspectives on the matter. Rankers were felicitated first, and they addressed the audience subsequently and shared their experience throughout the journey of becoming a CA. A celebratory cake was cut and then all the successful newly passed CAs were felicitated. The excitement on everyone’s faces was visible, and that is testimony to the success of the event.

5. Indirect Tax Laws Study Circle Meeting held on Friday, 31st January, 2025 @ Zoom.

Group leaders CA G. Sujatha & CA Archana Jain prepared and presented various case studies on Government Supplies and explained the concepts of Central Government, Government Authority, State Government, etc.

The presentation covered the following aspects for detailed discussion:

1. Concept of Supplies by Central Government, State Government, Local Authority.

2. Supplies liable to tax or part of sovereign function.

3. Taxability of charges paid to the Ministry of Corporate Affairs at the time of registration & subsequently do both enjoy the exemption.

4. Detailed discussion on mining rights and other rights associated with land and fees paid for getting rights.

Around 60 participants from all over India benefitted by taking an active part in the discussion. Participants appreciated the efforts of the group leader & group mentor.

6. ITF Study Circle Meeting held on Thursday, 30th January, 2025 @ Zoom.

Group Leaders – CA Nemin Shah and CA Dipika Agarwal

Guidance for Application of Principal Purpose Test under India’s treaties vide CBDT Circular 1/2025 dated 21st January, 2025 (Circular) — Group Leader CA Nemin Shah.

During the session, CA Nemin Shah discussed the context relating to the Principal Purpose Test (PPT). For this, he extensively discussed the basics of MLI and PPT. Another perspective which was discussed was whether PPT was for general anti-avoidance or a specific anti-avoidance. The Group Leader went on to discuss the key points of the Circular, such as the application of PPT is based on an objective assessment of the relevant facts and circumstances, its applicability in cases where the PPT has been incorporated through bilateral negotiations or through MLI, the scope of grandfathering provisions under the treaties which will remain outside the purview of PPT. He went on to discuss the various issues that could arise, such as its applicability to the India-Mauritius tax treaty, which MLI does not cover.

SC Lowy P.I. (Lux) S.A.R.L, Luxembourg v. ACIT [2024] 170 taxmann.com 475 (Del-Tribunal) – Group Leader CA Dipika Agarwal

CA Dipika explained the facts and the arguments of the assessee and revenue. She discussed the Tribunal’s findings. One of the key focus points of the discussion was that it appeared from the Tribunal’s order that PPT was not invoked at the assessment level, but discussed only at the Appellate level. Further,
there was no discussion in the Tribunal’s order for choosing Luxembourg over the Cayman Islands for making investments. The group discussed the implications of the same. The Group Leader went on to discuss the Tribunal’s findings in relation to Tax Residencey Certificate (TRC) and Limitation of Benefits (LOB). With respect to the PPT clause, the assessee’s incorporation in Luxembourg was not for the principal purpose of obtaining tax treaty benefits, as it had substantial investments, which it continues to hold.

7. 22nd Residential Leadership Retreat — Living in Harmony held on Friday, 24th January, 2025 and Saturday, 25th January, 2025 @ Rambhau Mhalgi Prabodhini Keshav Srushti Bhayander (West)

The 22nd Leadership Retreat was held on the theme of `Living in Harmony’ under the guidance and training of Mr M. K. Ramanujam and Mr R Gurumurthy. 27 participants including 6 couples attended, of which, more than 15 participants were attending the Leadership Retreat for the first time.

The key learnings are summarised as follows:

  • Harmony is unity in diversity which brings joy, peace, happiness, satisfaction and fulfilment.
  • One has to focus from zoom in to zoom out. i.e. look at the wider picture from a broad perspective for a higher purpose over a long span and come out of small and micro views. Zooming out is like a compass of values to find the right meaning in life.

To identify challenges, zoom in and use an emotional filter to zoom out.

  • P R E M A: The acronym represented Positive Emotions, Relationship, Engagement.
  • (Karma Yoga), Meaningful Life and Achievement – selfless service for a noble cause. This could be the guiding light.
  • Listen vis-a-vis Silent. Listen with empathy and compassion. Words “Silent” and “Listen” are complementing. So, engage in listening to be silent within and establish connect outside.
  • R A S (Reticular Access Syndrome) explains that whatever one focuses on, expands in the mind. We see the world as we are. So, one can use this to reinforce the attention to important things in life.
  • Nature operates on contrast. Sattva, Rajas and Tamas are like an interplay of darkness and light. The contrast of bright and dark, light and dark, day and night, white and black, happiness and sadness, joy and gloom. Contrast is natural. Negative things help us to appreciate the value of positives. Pain is a warning signal to pause. Self-acceptance guides us to Harmony. Therefore, one can transform from fear to faith, anger to care and work to relax.
  • Practice Harmony by observing without being judgemental.
  • Understand the basic needs, physical, social, spiritual, personal, interpersonal. The needs are distinct from wants. Needs are expressed through feelings. Listen to the feelings. One can understand that anger moves us away, whereas Love and compassion bring us closer to Harmony. Human pursuit (Purushartha) is for Kama, Artha, Dharma & Moksha. The purpose of human life is Moksha, for which doing Kama or pursuing Artha should be based on Dharma, respecting the highest universal values and principles.
  • Like a peel on the surface of a juicy fruit, the outer layer may have an unpleasant taste, but with faith and conviction, one can have the taste of juice and nectar within.
  • Bring inner transformation by working from Gratitude with Empathy & compassion.

In the penultimate session, discussion was on the film Peaceful Warrior and the inspiring message coming out from the film’s dialogues.

In the concluding session, the participants shared the key points of learning from the camp.

8. Fireside Chat on “Return of Trump – What does it mean for America, India and the World” held on Monday, 27th January, 2025 @ BCAS

Speaker: Shri Natwar Gandhi

Moderator: Shri Rashmin Sanghvi

Widespread fear about various executive orders signed by Mr Trump is misplaced as most of them have been challenged and will have to pass the test of constitutional validity.

America has a strong democracy and deep-rooted institutions. No president can make fundamental changes at his will. Even with a majority in Congress and Senate, constitutional changes are not going to be possible in his four-year term.

One can expect him to use tariffs as a negotiating tool to gain trade favours. However, in the long term, it will hurt the US as well as the country on which high tariff is levied because it will lead to higher costs and consumer resistance. That will not augur well for the USA.

The USA will continue to be a dominant world power as long as the majority of trade uses USD as currency for settlement.

Tall claims about taking over some territories should be discounted as election rhetoric.

The US economy, despite popular perception, is doing well, with average household income (even in the most backward area) still much above par with the rest of the world. With the new administration, one can expect business-friendly policies and a return to manufacturing.

It will be difficult to reduce bureaucracy as all policies require ground-level staff to implement. The USA, with its large size and federal structure, will make such reduction only ornamental.

A large deficit close to USD 35 trillion will not curtail any growth initiatives as the world still uses America as its investment and wealth destination.

Despite threats, it will neither be possible nor practicable to deport almost 10 million illegal immigrants out of the US due to procedural and logistic challenges. By rough estimate, the cost and time of that purge will be 1 trillion USD and will take more than 10 years for the current number.

White supremacy lobby will continue to flourish, and borders will see very strong protection to prevent illegal immigrants from entering the USA. Despite that America is likely to become a Hispanic state with so many migrants from Latin America.

Skilled labour will be there to stay as the big business will not be able to operate without them. Hence, despite all the shouting about work visas, they will stay.

9. Webinar on Recent Important Decisions under Income Tax held on Friday, 24th January, 2025 @ Virtual

The Taxation Committee of the Bombay Chartered Accountants’ Society organised a Webinar on Recent Important Decisions under Income Tax.

Adv. Devendra Jain delivered an in-depth presentation on reassessment proceedings. He explained the evolving judicial perspective on reassessment, especially in light of recent amendments and rulings by the Supreme Court and the High Courts. His session provided clarity on the crucial points to be considered while representing matters on reassessment cases.

Adv. Ajay Singh began the session by providing a detailed analysis of key judicial decisions that have significant implications for the interpretation and application of Income tax laws. He highlighted the judgments relating to capital gains, gift tax under section 56(2)(x), reduction of share capital, Condonation of delay in filing forms, interest on IT refund, penalty provisions and share transactions, focusing on their impact on taxpayers and professionals alike. He emphasised the importance of understanding these rulings to develop better compliance and advisory strategies.

The session provided participants with a comprehensive understanding of recent developments in Income tax law and practical insights to navigate legal complexities.

Youtube Link: https://www.youtube.com/watch?v=FlL13OSdCOw

10. 25th Silver Jubilee Course on Double Taxation Avoidance Agreements held from Monday, 2nd December, 2024, to Tuesday, 21st January, 2025 @ Zoom.

The Society successfully conducted its 25th Silver Jubilee Study Course on ‘Double Taxation Avoidance Agreement’ via an online platform spanning from 2nd December, 2024 to 21st January, 2025.

Based on participants’ feedback and consultation with seniors in the Committee, for this 25th Silver Jubilee Course on Double Taxation Avoidance Agreements, BCAS has come up with a unique concept of sharing the recordings of the 24th DTAA Course undertaken in December 2023 as an option to the participants followed by multiple panel discussions. One introductory session on “Overview of International Taxation & DTAAs” and ten panel discussion sessions were planned to take forward the learnings by discussing the intricate and practical issues on the topics of International Taxation, making the course more interactive. Participants were also provided an option to share the queries or issues to the panellists by way of Google form before the respective panel discussion. Eminent tax professionals of the country were the panellists as well as moderators for the series of panel discussions.

All sessions of the course, including last year’s recorded sessions, covered all articles of DTAA, an overview of FEMA / BEPS / MLI / GAAR, Transfer Pricing, Source Rules under the Income Tax Act, 1961, TDS under section 195, Substance v/s Form, and other relevant provisions. The course included complex topics such as Taxation of Specific Structures (e.g., Partnership, Triangular Cases, AOP, etc.) and Selection of Structures.

More than 200 Participants from 15 states spread over 30 cities attended the course which was well-received and appreciated by the participants.

11. Revolutionising CA Practice with Generative AI: Practical Use Cases for Efficiency and Growth held on Thursday, 9th January, 2025 @ Virtual

CA Rahul Bajaj recently led an insightful 2-hour webinar, “Revolutionising CA Practice with Generative AI: Practical Use Cases for Efficiency and Growth,” showcasing how AI can transform Chartered Accountancy practice. The session delved into real-life applications of Generative AI, highlighting its potential to enhance productivity, streamline operations, and improve client servicing. Participants learned how AI can be used to draft professional emails, generate legal documents, automate data entry in Tally, and prepare financial forecasts, all while saving time and reducing errors.

Key takeaways included using AI to create checklists, templates, and peer review documentation like Engagement and Appointment Letters. AI also supports the generation of client training materials, social media content, and even notices, helping firms stay engaged with clients while improving efficiency. By automating repetitive tasks such as bank statement analysis, CAs can focus more on strategic activities, boosting overall productivity.

The session concluded with CA Rahul Bajaj emphasising the importance of integrating AI into CA practices for long-term growth. With tools that enhance accuracy and decision-making, AI is positioning itself as a game-changer, enabling Chartered Accountants to provide higher-value services and streamline their operations for greater success in an increasingly digital world.

The excellent response that the webinar got in terms of enrolment from across various cities of India and from persons of various age groups, as well as the feedback received at the end of the webinar, is testimony to the growing importance and popularity of AI in the CA fraternity.

12. BCAS Turf Cricket Tournament 2025 held on Sunday, 5th January, 2025 @ Andheri Sports Complex, Azad Nagar, Andheri West

The BCAS Turf Cricket Tournament 2025 held on 5th January 2025 at Andheri Sports Complex, was a resounding success, hosting 12 men’s and 2 women’s teams in a thrilling display of sportsmanship and camaraderie.

The tournament was exclusively for CA Members, Students, and BCAS Staff was well received with overwhelming participation.

The format in Men’s category was of four groups of three teams each, which formed the league stages followed by knockout rounds of Quarter-finals (8 teams), Semi-finals (4 teams) and the Finals. The 12 Men’s teams that competed in the Tournament were Bansi Jain Warriors, Bathiya Bravehearts, BYA Titans, CNK Super Strikers, G&S Gladiators, Kirtane & Pandit Maestros, KNAV Smashers, MAS Mavericks, MCS Super Kings, MGB Yoddhas, NPV Challengers and TeaMPC whereas the 2 Women’s teams were NPV Thunderbirds and BCAS Queens.

The tournament was filled with exciting matches, impressive individual performances, fun-filled live commentary and enthusiastic support from the spectators. The 8 teams that qualified for the Men’s quarterfinals were MAS Mavericks, Kirtane & Pandit Maestros, CNK Super Strikers, MGB Yoddhas, G&S Gladiators, NPV Challengers, KNAV Smashers and Bathiya Bravehearts. The Semi Finals were then played between the 4 teams viz. Kirtane & Pandit Maestros vs. NPV Challengers and CNK Super Strikers vs Bathiya Bravehearts.

The day culminated in a nail-biting Men’s final between Bathiya Bravehearts vs Kirtane & Pandit Maestros, with the former emerging victorious whereas BCAS Queens emerged as winners in the Women’s category.

The tournament left a lasting impression on all participants and thus setting the stage for future editions of this exciting event.

13. BCAS Nxt Learning and Development Bootcamp on Idea to IPO: A Beginner’s Guide held on Saturday, 4th January, 2025 in hybrid mode

The Human Resource Development Committee of BCAS organised a BCAS NXT Learning & Development Bootcamp on “Idea to IPO: A Beginner’s Guide” on Saturday, 4th January, 2025. The session was led by Mr Aditya Rathod, a CA Final student, who delivered a comprehensive presentation on the fundamentals and key regulations governing IPO in India. His presentation covered a wide range of topics, including essential definitions, various IPO methods, and an overview of the IPO process and its approach. He also shared practical experiences to help beginner article students navigate the complexities of the IPO Listing Process.

CA Rimple Dedhia, the mentor for the session, provided valuable insights and guidance throughout, offering expert interventions as needed. The boot camp was held in person at the Mehta Chokshi & Shah LLP office and streamed online, with active participation from students across India.

Youtube Link: https://www.youtube.com/watch?v=-WYuPDeOJus&t

14. Series of Sessions on Standards on Auditing and Key Learnings from NFRA Orders held on Friday, 13th December, 2024 to Friday, 3rd January, 2025 @ Zoom

BCAS has always been a pioneer in equipping its members, in particular and other stakeholders at large with the knowledge in the arena of Accounting Standards, Ind AS and Standards on Auditing. The challenge of the auditor is to address the risks posed while providing assurance services within the regulatory framework of ICAI and NFRA. Compliance with Auditing Standards is of utmost importance while carrying out audits.

Considering these challenges that the auditor has to address while performing duties, the Accounting & Auditing Committee organised a well-designed series of virtual sessions covering Auditing standards and Key Learnings from NFRA orders, which should be kept in focus while executing audit assignments along with practical guidance. The Sessions were held on Fridays for 2 hours each, totalling 8 hours.

The main objective of designing this series of sessions was to delve deeply into the subjects affecting the audit fraternity and to provide a platform for the Members in Practice to come together and get the opportunity to have deep insights into the practical challenges which crop up while implementing the complicated standards.

Course Segments: 4 sessions of 2 hours each

Session Topic Speaker
Learnings from recent NFRA Orders Ms Vidhi Sood Secretary, NFRA
Audit Documentation (SA 230) CA Amit Majmudar
SA 600 – Using the work of another auditor (along with the NFRA Circular dated October 03, 2024, regarding responsibilities of the Principal Auditor and Other Auditors in Group Audits CA Pankaj Tiwari
Planning risk assessment and related matters (SA 300, 315, 320 & 330) CA Murtuza Vajihi

The sessions were designed to give practical and case study-based insights to the participants on various topics.

The course was inaugurated with the opening remarks from the Chairman of the Accounting and Auditing Committee CA Abhay Mehta and the President of BCAS, CA Anand Bathiya, both underline the importance of knowledge sharing and the role of the BCAS in conducting such programs. To make the course effective, faculties with specialised knowledge and relevant experience were engaged to give participants practical insights and wholesome experiences.

The course started with the session of Ms Vidhi Sood Secretary, NFRA, where she updated the participants on various NFRA orders, practical examples and issues and learnings from the same.

The session of Audit Documentation SA 230 by CA Amit Majmudar broadly covered the areas pertaining to the Assembly of Audit Files, Key Audit Workpapers and guidance on ICAI Audit Documentation

The Session on SA 600 — Using the work of another auditor by CA Pankaj Tiwari mainly covered existing SA 600 & procedures adopted by the Auditor, various lapses highlighted by NFRA in the audit of CFS, Key elements of Circular issued by NFRA & potential challenges in implementation of the Circular.

The session on Planning Risk Assessment and Related Matters by CA Murtuza Vajihi broadly covered the scope, objective, and documentation of the standard along with practical examples of the standards and also reference to NFRA and QRB learnings on these standards.

The above sessions generated a lot of interactions between the participants and the respective faculties. The course commenced on 13th December, 2024, and ended on 3rd January, 2025. 111 participants attended the Course, and was well received with the overall feedback from the participants was very encouraging.

REPRESENTATIONS AND SOCIAL MEDIA

1. NFRA Representation: Addressing Duplication in Fraud Reporting for Statutory Auditors

BCAS has submitted a representation to the National Financial Reporting Authority (NFRA) regarding the fraud reporting requirements for statutory auditors of regulated entities. The representation highlights the need to eliminate the duplication of reporting to various authorities, aiming to streamline the process and simplify the regulatory framework for entities such as banks, insurance companies, and NBFCs. By reducing redundant reporting, the proposal seeks to create a more efficient and effective regulatory environment.

Readers can read the entire representation by link: https://bit.ly/NFRA-Representation

2. Union Budget 2025: 8th Consecutive Budget by FM Nirmala Sitharaman — BCAS’s Pre-Budget Memorandum Available Online.

As Finance Minister Nirmala Sitharaman presents her 8th consecutive Union Budget, BCAS continues its proactive role in representing the views of its members and the wider community. We are pleased to announce that BCAS has submitted the Pre-Budget Memorandum for the Finance Act 2025-26 to the Union Minister of Finance and the Ministry of Finance, Government of India.

Readers can read the entire representation by link: https://bit.ly/Pre-Budget-Memorandum-2025-26

3. BCAS Reimagine Conference: Exclusive Videos Now on YouTube, with Thousands of Views!

BCAS hosted the ReImagine Conference, a three-day event in January 2024 that explored progressive topics crucial to the professional landscape. With an overwhelming response, the discussions held the potential to shape the future trajectory of our profession.

In line with BCAS’s mission of knowledge dissemination for professional development, the event videos are now available on YouTube, completely free of charge. Featuring a wide range of topics presented by industry experts and professional stalwarts, these videos offer valuable insights for professionals at all levels.

Playlist Titles:

1. Reimagine India – Keynote Address by Padma Bhushan Shri Kumar Mangalam Birla

2. Digital Infrastructure – A Game Changer

3. Reimagine the new age professional firms

4. CFO Round Table – Technology, Innovation and Sustainability

5. Use of AI / Tech-Data as Evidence in Tax Cases – Direct Tax and Indirect Tax

6. Reimagine India’s Capital Market Landscape

7. Changing Corporate Landscape – Professional opportunities

8. The Victorious – A Model for Leadership

9. New Age Wars – Future of the World – Role of Professional

10. One World – One tax – VasudhaivaKutumbakam

11. Ride the Capital Market – Take the Bull by its Horns

12. The Future of Audit Profession

13. One Giant Leap – Start-ups – Importance of Professionals in Start up Journey

14. Interchanging Roles – Practice to CFO, CFO to Practice, CA to Nation Building

15. Reimagine – Closing Ceremony & Vote of Thanks

YouTube link: https://bit.ly/Reimagine-Conference

4. BCAS YouTube Channel Hits 1 Million Views

The BCAS YouTube channel has reached a significant milestone, surpassing 1 million views. Over the years, it has evolved into a valuable resource, offering a wealth of professional content and knowledge. With an expanding collection of open-for-all sessions, the channel continues to serve as a hub for valuable learning. Members who have not yet subscribed are encouraged to do so and stay updated with the latest content.

Youtube Link: https://www.youtube.com/channel/UC3cxrmOi8hRA31LxBEXGpUQ

5. Interactive meeting of managing Committee Members with Dr Harish Mehta and Mr Rajiv Vaishnav

Dr Harish Mehta and Mr Rajiv Vaishnav were invited to interact and share their experience of building and successfully running the NPO with the BCAS Managing Committee members on 8th January, 2025.

Dr Harish Mehta is a founder member and former Chairman of NASSCOM and Rajiv Vaishnav is former President of NASSCOM. They shared experience in building brands, nurturing teams, and growing organizations. During the interaction, Dr. Harish Mehta and Mr. Rajiv Vaishnav appreciated the work done by BCAS and emphasised the importance of valuing volunteers, building trust, and promoting unity, especially during challenging times. They also advised that before making representations to government authorities, it’s essential to gather collective opinions from members.

Dr Mehta autographed copies of his book, “Maverick Effect: The Inside Story of India’s IT Revolution”, for the committee members.

BCAS IN NEWS

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

Recent Developments in GST

A. NOTIFICATIONS

i) Notification No.7/2025-Central Tax dated 23rd January, 2025

By above notification the amendments are made in CGST Rules regarding grant of temporary identification number.

ii) Notification No.8/2025-Central Tax dated 23rd January, 2025

By above notification waiver for late fees for GSTR-9 is provided.

iii) Notification No.9/2025-Central Tax dated 11th February, 2025

By above notification, date of coming into force of rules 2, 8, 24, 27, 32, 37, 38 of the CGST (Amendment) Rules, 2024 is specified.

B. CIRCULARS

(i) Clarification on regularising payment of GST on co-insurance premium — Circular no.244/01/2025-GST dated 28th January, 2025.

By above circular the clarification is given regarding regularizing payment of GST on co-insurance premium apportioned by the lead insurer to the co-insurer and on ceding / re-insurance commission deducted from the reinsurance premium paid by the insurer to the reinsurer.

(ii) Clarification on applicability of GST on certain services — Circular no.245/02/2025-GST dated 28th January, 2025.

By above circular, clarifications regarding applicability of GST on certain services are given.

(iii) Clarification on late fees — Circular no.246/03/2025-GST dated 30th January, 2025.

By above circular, clarification is given about applicability of late fee for delay in furnishing of FORM GSTR-9C.

C. INSTRUCTIONS

(i) The CBIC has issued instruction No.2/2025-GST dated 7th February, 2025 by which instruction is given about procedure to be followed in department appeal filed against interest and/or penalty only, with relation to Section 128A of the CGST Act, 2017.

D. ADVANCE RULINGS

Classification – Instant Mix Flour
Ramdev Food Products Pvt. Ltd. (AAR Order No. GUJ/GAAAR/APPEAL/2025/01 (IN APPLICATION NO. Advance Ruling/SGST&CGST/2021/AR/17) Dated: 22nd January, 2025)(GUJ)

The present appeal was filed against the Advance Ruling No. GUJ/GAAR/R/29/2021 dated 19th July, 2021, passed by the Gujarat Authority for Advance Ruling [GAAR].

The appellant is engaged in the business of manufacture and supply of the below mentioned ten instant mix flours viz.

The process undertaken for manufacturing & selling the above products was explained as under:

“(a) that they purchase food grains and pulses from vendors.

(b) that such food grains/pulses are fumigated and cleaned for removal of wastage.

(c) that food grains/pulses are then grinded and converted into flour.

(d) that flour is sieved for removal of impurities.

(e) that flour is then mixed with other ancillary ingredients such as salt, spices, etc. The proportion of flour in most of the instant mixes is ranging from 70% to 90%.

(f) that flour mix is then subjected to quality inspection and testing.

(g) that flour mix is thereafter packaged and stored for dispatch.”

The table showing constituent components of instant mix flour was also submitted. The constituents included dried Leguminous Vegetable Flours, Rice & Wheat Flours, Additives, Spices etc.

The appellant’s submission was that the instant flour mix retains its identity as flour and therefore they are classifiable under heading 1101, 1102 or 1106, as the case may be, based on the dominant flour component.

With above information, appellant has sought ruling about classification of above products.

The ld. AAR has ruled that above products merits classification at HSN 2106 90 attracting 18 per cent GST as per Sl. No. 23 of Schedule III to the Notification No.01/2017-Central Tax (Rate) dated 28th June, 2017.

The instant appeal was against the above ruling. The appellant reiterated its contentions about products being covered by heading 1101, 1102 or 1106 and liable to tax @ 5 per cent.

The appellant supported its contentions mainly on ground that the instant mix are mixture of flours like Black Gram (Urad Dal) and / or Rice and / or Refined Wheat flour and / or Bengal Gram (Chana Dal) and / or Green Gram (Moong Dal) with addition of very small amount of additives like iodised Salt and / or Sugar and/or Acidity regulator (Citric acid INS 330) and / or Raising agent (Sodium bicarbonate INS 500(ii)) and that it does not contain any spices and hence should be covered as flours under Chapter 11 and liable to GST @ 5 per cent;

The ld. AAAR referred to heading 1101, 1102 and 1106 and also Explanatory notes to HSN in respect of heading 1101 and 1102.

After referring to headings in detail, the ld. AAAR observed that the classification of the product is required to be determined in accordance with the terms of the headings. As per chapter heading 1106, it covers Flour, Meal and Powder of the dried leguminous vegetables of Chapter Heading 07.13 and other specified products. The ld. AAAR further observed that as the products of the appellant contain other ingredients like Iodised salt, Acidity regulator (INS 330), Raising agent (INS 500(ii)) in different proportions, which are not mentioned in the chapter heading 1106 or the relevant explanatory notes of HSN, the said products are not covered under Chapter Heading 1106.

The contention about classification under chapter heading 1101 and 1102 also rejected by the ld. AAAR observing that even if flour improved by adding of small quantity of specified substance remains under such heading the same will not be correct when substances (other than specified substances) are added to the flours with a view to use as ‘food preparations’, and said flour gets excluded from chapter heading 1101 or 1102.

The reliance of appellant on VAT determination order also held not applicable in view of change in classification entries.

Finally, the ld. AAAR approved the classification done by ld. AAR and rejected the appeal.

Exemption – Services to Panchayat / Municipality /State Government

Data Processing Forms P. Ltd. (AAR Order No. GUJ/GAAAR/APPEAL/2025/03 (IN APPLICATION NO. Advance Ruling/SGST&CGST/2022/AR/10) Dated: 22nd January, 2025)(GUJ)

The present appeal was filed against the Advance Ruling No. GUJ/GAAR/R/2022/43 dated 28th September, 2022.

The appellant is engaged in the manufacturing of computer forms, cut sheets, printed forms & is also engaged in trading of printers, cartridges, laptops, barcode stickers, OMR Sheet and educational booklets etc.

The appellant provides below-mentioned services to Gujarat Public Service Commission (GPSC) and Gujarat Panchayat Service Selection Board (GPSSB);

The appellant was of the view that the aforementioned services provided to GPSC and GPSSB are exempt in terms of entries 3 and 3 A of the Notification 12/2017-CT (R) and sought ruling from the ld. AAR. The ld. AAR passed ruling that the appellant is not eligible to the exemption under entry No. 3 and 3A of notification No. 12/2017-CT (R) dated 28th June, 2017 as amended, for supply of service to the Gujarat Panchayat Service Selection Board or to GPSC.

This appeal was against the above ruling of AAR. The main argument of the appellant was that GPSSB is an integral part of Panchayat system & therefore a local authority and it is covered under the provisions of article 243G and entitled for the benefit of entries 3 & 3A of the notification.

Similarly, in respect of GPSC the argument of appellant was that, it is a constitutional body having its own identity and 100% controlled, financed & managed by the State Government and therefore it is ‘State Government’ attracting above entries 3 and 3A.

The ld. AAAR noted that in terms of the entry 3 of notification No. 12/2017-CT (R), as amended, pure services [excluding works contract services or other composite services involving supply of any goods], provided to a Central Government, State Government, Union territory or local authority by way of any activity in relation to any function entrusted to a Panchayat under article 243G or to a Municipality under article 243W of the Constitution of India, are exempt. Similarly, in terms of entry 3A of notification, composite supply of goods and services, in which the value of supply of goods constitutes not more than 25 per cent of the value of the said composite supply provided to the Central Government, State Government or Union territory or local authority by way of any activity in relation to any function entrusted to Panchayat under article 243G or to Municipality under article 243W of the Constitution, are exempt.

The ld. AAAR also noted principle of interpretation that the exemption Notification is required to be interpreted strictly.

The ld. AAAR noted that appellant has relied on the definition of ‘local authority’ u/s 3(31) of the General Clauses Act. The ld. AAAR noted that since the supply to GPSSB is composite supply, it is required to be covered by entry 3A. The ld. AAAR observed that the GPSSB is neither a Central / State Government nor a Union territory. The ld. AAAR also held that it is not local authority as defined u/s.2(69) of the CGST Act. The ld. AAAR held that since the primary condition of the composite services having been provided to a Central Government, State Government, Union territory or local authority is not getting satisfied, the appellant is not eligible for the benefit of the notification and confirmed ruling of AAR about GPSSB.

In respect of GPSC, the ld. AAAR noted the contention of the appellant that GPSC is a constitutional body having its own identity and 100 per cent controlled, financed & managed by the State Government which amounts to ‘State Government’.

In this respect the ld. AAAR referred to definition of term ‘State Government’ under the General Clauses Act, 1897, which reads as under:

“(60) “State Government”, –
(a) as respects anything done before the commencement of the Constitution, shall mean, in a Part A State, the Provincial Government of the corresponding Province, in a Part B State, the authority or person authorised at the relevant date to exercise executive government in the corresponding Acceding State, and in a Part C State, the Central Government;

(b) as respects anything done [after the commencement of the Constitution and before the commencement of the Constitution (Seventh Amendment) Act, 1956], shall mean, in a Part A State, the Governor, in a Part B State, the Rajpramukh, and in a Part C State, the Central Government;

[(c) as respects anything done or to be done after the commencement of the Constitution (Seventh Amendment) Act, 1956, shall mean, in a State, the Governor, and in a Union territory, the Central Government;

and shall, in relation to functions entrusted under article 258A of the Constitution to the Government of India, include the Central Government acting within the scope of the authority given to it under that article];”

The ld. AAAR observed that in view of the above definition, GPSC is not State Government and confirmed ruling of AAR. The judgments cited by the appellant were distinguished. The ld. AAAR rejected the appeal confirming the ruling of ld. AAR.

Classification — “Nonwoven Coated Fabrics”

Om Vinyls Pvt. Ltd. (AAR Order No. GUJ/GAAAR/APPEAL/2024/21 (IN APPLICATION NO. Advance Ruling/SGST&CGST/2023/AR/22) Dated: 6th September, 2024)(Guj)

The applicant explained the nature of the product with manufacturing process as under:

“Nonwoven fabric is manufactured from PVC films, adhesive gum and nonwoven in their factory;

* that manufactured film is ready for further process called lamination / thermoforming;

* that cellular leather cloth/thermoforming is used widely for auto tops [canopy], sports shoe upper by laminating a thin PVC film with another layer of calendered sheeting containing blowing agent with textile backing; that this combination can be expanded in a separate stenter / foaming oven;

* a drum heated to about 180o C is driven & provided with a rubber coloured pressure roller to press the layers together & eliminate trapped air;

* the laminated combination is made to travel inside the heated chambers where the blowing agent is activated & controlled expansion is initiated in the middle calendered film;

* the process matches the standard approved by BIS; that the product is used mainly in outdoor application where the weather condition is uncertain.”

It is informed that components like, PVC resin, DOP / DIN, CPS 52 per cent, CA CO3, Stabilisers, Anti-oxidants, Pigment & Poly propylene are used in the process.

The uses of non-woven fabrics were also mentioned like use as table cover, TV cover, Sofa cover, fridge cover etc.

The appellant has raised following questions.

“1. Whether ‘nonwoven coated fabrics- coated, laminated or impregnated with PVC falls under HSN 56031400?

2. If ‘nonwoven coated fabrics- coated, laminated or impregnated with PVC’

does not fall under HSN 56031400 then it will fall under which heading of chapter 50?

3. If ‘nonwoven coated fabrics -coated, laminated or impregnated with PVC’

does not fall under HSN 56031400 then it will fall under which heading of chapter 39?”

In personal hearing the applicant explained composition of product as under:

“PVC film      55% Rs.12.60
Gum               29% Rs. 6.40
Nonwoven     16% Rs. 3.00
— ———-
Total            100% Rs. 20”

The ld. AAR referred to relevant material under Customs Tariff Act,1975, HSN, Circular etc. and reproduced same in AR.

Upon conjoint reading of the manufacturing process, the section notes, chapter notes, etc., the ld. AAR observed that the nonwoven coated fabrics — coated, laminated or impregnated with PVC, will not fall under chapter 56.

On going through the HSN explanatory notes of chapter 50, the ld. AAR observed that generally speaking chapter 50 covers silk, including mixed textile materials classified as silk, at its various stages of manufacture, from the raw materials to the woven fabrics and it also includes silk worm gut. The ld. AAR also observed that the applicant’s product nonwoven coated fabrics — coated, laminated or impregnated with PVC, is a combination of nonwoven fabrics, adhesive coat and PVC sheet, thereby not meeting the primary requirement for falling under chapter 50. In view of the foregoing, the ld. AAR held that the product of the applicant would not fall within the ambit of chapter 50 also.

After going through the information, the ld. AAR held that since the product of the applicant is a mixture of various constituents, the product is to be classified as if they consisted of the material or component which gives them their essential character. Observing that the major constituent is PVC sheet which is 120 GSM out of the total 240 GSM, the ld. AAR held that the goods of the applicant viz nonwoven coated fabrics — coated, laminated or impregnated with PVC would fall under chapter 39.

About bags, ld. AAR followed circular no. 80/54/2018-GST dated 31st December, 2018 and held that Non-Woven Bags laminated with BOPP would be classifiable as plastic bags under tariff item 3923 and would attract 18 per cent GST.

Accordingly, the ld. AAR passed ruling that the product, nonwoven coated fabrics -coated, laminated or impregnated with PVC will fall under chapter heading 39 and the products [a] table cover, [b] television cover [c] washing machine cover would fall within the ambit of tariff item 392690 and would attract 18 per cent GST, while bags would be classifiable under tariff item 3923 and would attract 18 per cent GST.

CLASSIFICATION – “SLACK ADJUSTERS”

Madras Engineering Industries Pvt. Ltd. (AR Order No. Advance Ruling No.27/ARA/2024 Dated: 5th December, 2024)(TN)

The facts are that M/s. Madras Engineering Industries Private Limited manufactures ‘Slack Adjusters’ and supplies the same to Truck, Bus and Trailer axle manufacturers in India. They supply these slack adjusters for the replacement market through their vast and well spread distribution arrangement.

The applicant further informed that Slack Adjusters under HSN code 87089900 are charged at 28 per cent as they are used for Trucks & Bus applications for both OE fitment and in the aftermarket. It was further informed that Slack Adjusters developed exclusively for trailer axle fitments are classified under HSN Code 87169010 and charged at 18 per cent for both OE fitment and for aftermarket requirements.

The difference between two products was explained as under:

Based on the above background, the applicant asked whether the HSN code followed and whether the GST rate applied for stack adjusters used in the truck and trailer applications is proper or not?

The ld. AAR referred to nature and use of product as under:

“7.1. The applicant is in the business of manufacturing and supplying ‘Slack Adjusters’ used in the braking system of Buses, Trucks and Trailers. Slack Adjuster is a part of a vehicle braking system and hence is an essential safety critical part of the vehicle. Slack adjusters are connected to the brake chamber push rod and Scam Shaft to convert lateral movement of brake chamber pushrod to rotational movement and rotate the S-cam shaft while brakes are applied. This is used to release and bring back the S-cam shaft to its original position when the brakes are applied. These slack adjusters are normally used in heavy vehicles namely, buses and trucks. It is also used in the trailers where the load carried is substantial. The specification of the slack adjusters used in ‘Buses & Trucks’ and in ‘Trailers’ are distinguishable as explained by the applicant.”

In order to arrive at an appropriate classification of the item used in the motor vehicle, the ld. AAR referred to the tariff classification as issued by the CBIC read with its schedules, guided by interpretative rules, section notes, Chapter Notes supported by the Explanatory Notes to the HSN.

In respect of Slack Adjuster for trailer, the ld. AAR referred to the entries for trailer. The ld. AAR observed that, a trailer is a wheeled vehicle attached to another powered vehicle for movement of goods and cargo. HSN 8716 exclusively deals with Trailers, Semi-trailers and other vehicles not mechanically propelled. As the HSN provides for a separate classification for trailers, semi-trailers and other such vehicles, the slack adjusters used exclusively in the braking system of trailers are rightly classified as ‘Parts and accessories of trailers’ under HSN 87169010. Accordingly, the ld. AAR approved classification made by applicant.

Regarding Slack adjusters used in the braking system of Buses and Trucks supplied to both, OEMs and aftermarket Sales, as ‘Parts and accessories of motor vehicles under HSN 87089900, the ld. AAR approved GST rate of 28 per cent.

Thus the ld. AAR upheld slack adjusters used in the braking system of a Trailer supplied to OEMs and aftermarket Sales as ‘Parts and accessories of trailers’ under HSN 87169010 and its GST rate of 18 per cent.

The ld. AAR mentioned that the applicant should ensure to adopt correct classification of the product as the slack adjusters supplied are different for both ‘buses & trucks’ and ‘trailer’ and accordingly allowed AR in favour of applicant.

SALE FROM FTWZ AND REVERSAL OF ITC

Haworth India Pvt. Ltd. (AR Order No. Advance Ruling No.26/ARA/2024 Dated: 5th December, 2024)(TN)

The applicant, M/s. Haworth India Private Ltd. had sought Advance Ruling on the following questions:
“1. In the facts and circumstances of the case, whether the transfer of title of goods by the Applicant to its customers or multiple transfers within the FTWZ would result in bonded warehouse transaction covered under Schedule III of the CGST Act, 2017 r/w CGST Amendment Act, 2018?

2. Whether the Integrated Tax (IGST) Circular No. 3/1/2018 dated 25th May, 2018 is applicable to the present factual situation?”

The questions were earlier decided vide AR dated 20th June, 2023 but the ld. AAAR remanded matter back vide appeal order dated 20th December, 2023 and hence this fresh proceeding. In fresh proceeding, following questions are considered:

“1. Whether in the facts and circumstances the activities and transactions would fall under paragraph 8(a) or 8(b) of Schedule III of CGST Act and remain non-taxable?

2. Whether irrespective of the activities and transactions falling under paragraph 8(a) or 8(b) as aforesaid input tax credit would be available without any reversals since no prescription has been notified for purpose of Explanation (ii) below Section 17(3) of CGST Act?”

The applicant is engaged in manufacture and sale of office furniture under the brand name ‘Haworth’. The applicant imports certain finished goods from its group entities. Applicant sales such imported goods.

The applicant contemplated to operate the import and re-sale transactions from a Free Trade Warehousing Zone (hereinafter referred to as ‘FTWZ’) for operational convenience involving less documentation and swift clearance process so as to expedite project execution. Applicant explained the process of such transaction.

The Applicant secures space in the FTWZ for a fee to store the imported goods from a unit holder. The Applicant executes required lease agreement with the FTWZ unit holder and deposits the goods from the port by filing Bill of Entry (BOE). FTWZ, owned and operated by independent third party, merely clears and warehouses the goods imported. The FTWZ collects warehousing charges from the Applicant.

No import duty is paid on clearance from the port.

The Applicant transfers the title of goods to customer under the cover of an invoice. The customer either clears goods from the FTWZ or may make further transfer of such goods to other customers. The goods continue to remain in FTWZ unit holder till the final customer files BOE and clears goods from FTWZ. The applicant reiterated that multiple transfers are made while goods are lying in FTWZ.

The final customer clears the goods from the FTWZ for home consumption and at this juncture, goods are removed from the warehouse and is taken to the premises of the Customer.

The applicant was of opinion that since FTWZ is equivalent to bonded warehouse, transfers within FTWZ before clearance shall fall under Schedule III of the CGST Act, 2017, thereby not attracting levy under GST.

The applicant was of further opinion that in case of goods deposited in a warehouse, only the person who is ultimately clearing the goods for home consumption is liable to tax and the transferor is not liable to tax on such transfer of warehoused goods.

The applicant also placed reliance on the advance rulings pronounced by Tamil Nadu Advance Ruling Authority in the case of The Bank of Nova Scotia – Order No. 23/AAR/2018 dated 31st December, 2018 -2019-VIL-29-AAR and

Sadesa Commercial Offshore De Macau Limited – Order No. 24/AAR/2018 dated 31st December, 2018 – 2019-VIL-28-AAR.

The ld. AAR examined scheme of ‘warehoused’ goods with reference to provision of GST Act.

After scrutiny of various aspects, in respect of question (1), the ld. AAR observed as under:
“7.23 Under these circumstances, we are of the opinion that a ‘Free Trade

Warehousing Zone’, as the name suggests, is a bonded premises providing warehousing facility, much in parity with the bonded warehouse under the Customs Act. Further, when the goods are imported and brought into a FTWZ unit, they are basically warehoused first and then traded or subjected to other authorized operations as the case may be. We notice that the applicant’s queries for advance ruling in the instant case is restricted to the first stage, i.e., when the imported goods are supplied to any person before they are cleared for home consumption, while they still remain warehoused. Accordingly, we are of the considered opinion that the provisions of 8(a) of Schedule III of the CGST Act, 2017, viz., “Supply of warehoused goods to any person before clearance for home consumption” applies to the instant case.”

Regarding question (2), the ld. AAR examined the provision of Section 17(2) and 17(3) which talks about apportionment of credit in such situations when a taxable person effects taxable supplies as well as exempted supplies. After examining the legal position, the ld. AAR observed as under:

“7.28 Under the facts and circumstances of the case, we are of the considered opinion that reversal of proportionate input tax credit of common inputs/input services/Capital goods is not warranted at the hands of the Applicant in terms of the amended Section 17(3) of the CGST Act, 2017 read with Explanation 3 of Rule 43 of the CGST Rules, 2017, even when the activity/transaction in question is covered under paragraph 8(a) of Schedule III of the CGST Act, 2017, as long as it does not relate to supplies from ‘Duty Free Shops’ at arrival terminal in international airports to the incoming passengers.”

Accordingly, the ld. AAR passed the ruling in favour of applicant.

Goods And Services Tax

HIGH COURT

98. M/S. Atulya Minerals Vs. Commissioner Of State & Others

[2025-Tiol-271-Hc-Orissa-Gst]

Dated: 3rd February, 2025

Rule 86A of CGST Rules 2017- Revenue’s right to block the credit expires on completion of one year when appropriate recovery proceeding is initiated.

FACTS

Pursuant to a judgment dated 10th September, 2024, revenue made a fresh order dated 27th September, 2024 invoking Rule 86A of CGST Rules, 2017. Petitioner challenged the said fresh order which justified appropriation of future input tax credit (ITC) when it becomes available to the petitioner and thus do negative blocking of ITC. The fact of the matter is that Rule 86A of Orissa GST Rules, 2017 allows blocking of electronic ledger for a period of one year. Vide the order passed by Hon. High Court, petitioner was directed to satisfy the authority during the blocking period of maximum one year to show that there did not exist a reason to continue to block the credit. According to the petitioner, the fresh order of the revenue was without any basis. Reliance was placed by petitioner on the view taken by division Bench of Telangana High Court [Laxmi Fine Chemical vs. Assistant Commissioner (2024) 18 Centax 134 (Telangana)] which in turn had considered several precedents.

HELD

Hon. High Court noted that Laxmi Fine Chemical (supra) was a view taken by Telangana High Court prior to the view taken in the above cited orders dated 10th September, 2024 and 23rd September, 2024. Further, revenue’s counsel submitted that the investigation report was already submitted and proceedings were to be initiated. Hence Hon. Bench found no necessity of appropriation for negative blocking as revenue’s right is already reserved to initiate recovery proceedings under section 73 or also under section 74, rather than invoking Rule 86A. Hence, impugned order purporting to justify blocking of future credit was without basis. Referring to Laxmi Fine Chemical (supra), it was held that on initiation of appropriate recovery proceedings, the blocking automatically will come to an end after expiry of one year thereby making available to the dealer to debit the electronic ledger for the available input tax credit.

99. M/s. TTK Healthcare Ltd vs. The Assistant State Tax Officer [Kerala]

[2025-TIOL-224-HC-Kerala-GST]

Dated: 29th November, 2024.

In absence of constitution of the Appellate Tribunal, 10 per cent of the disputed demand directed to be paid in order to defer the recovery and invocation of the bank guarantee; with a condition that the Appeal is filed within one month of Tribunal’s constitution.

FACTS

The petitioner challenged the order under section 129 of the GST law which was upheld by the First Appellate Authority. In absence of non-constitution of the Appellate Tribunal, a second appeal under section 112 of the law cannot be filed. On an apprehension that the bank guarantee furnished for the release of goods will be invoked, the present writ is filed.

HELD

The Court disposed of the writ petition by directing that if 10 per cent of the disputed amount is remitted, any further recovery or invocation of the bank guarantee will be deferred until a final decision is made by the Tribunal. However, the Appeal should be filed within one month of its constitution.

100. Rohan Dyes and Intermediates Ltd vs. Union of India and Ors [Gujarat]

[2025-TIOL-225-HC-AHM-GST]

Dated: 8th January, 2025.

In absence of an opportunity of personal hearing and insufficient verification of data, the order was remanded to the authorities for proper verification of data and provision of a fair hearing.

FACTS

The petitioner was unable to upload Form GST TRAN-1 to claim transitional credit and sought permission from the Court to file the form. After several legal proceedings and the issuance of a circular by CBIC, the Form GST TRAN-1 was filed in October 2022. The Assistant Commissioner questioned the claim and asked for further documentation. After submission of documentation, part of the claim was rejected, citing discrepancies based on the Service Tax Returns for June 2017.

HELD

The High Court noted that there was violation of principles of natural justice as the order was passed without providing an opportunity of being heard and the department failed to provide a reasoned order. Further the order was based on insufficient verification of data. Accordingly, the matter is remanded with a direction of giving a fair hearing and after verification of provisions of law.

101. Kamala Stores and Anr vs. The State of West Bengal and Ors [Calcutta]

[2025-TIOL-277-HC-KOL-GST]

Dated: 6th February, 2025

Considering the bona fides of the petitioner, the delay in filing the appeal was condoned and the Appellate Authority directed to dispose of the case on merits.

FACTS

Petitioner’s appeal was rejected on the ground that the same is barred by limitation. It was stated that without appropriately taking note of the grounds for condonation of delay, the appeal got rejected on the ground that the authority is competent only to condone the delay provided the appeal is filed within the period of one month beyond the time prescribed.

HELD

Petitioner had made the pre-deposit before filing the appeal. There appears to be a delay of 79 days in filing the appeal. Taking into consideration that they are a small partnership firm and there is no lack of bona fide and one does not stand to gain by filing a belated appeal, the Court directed the appellate authority to hear and dispose of the appeal, on merit, upon giving an opportunity of hearing, within a period of eight weeks.

102. BMW India Pvt. Ltd. vs. Appellate Authority for Advance Ruling for the State of Haryana

(2024) 24 Centax 382 (P&H.)

Dated: 12th November, 2024

ITC on demo vehicles used for promotional purpose shall be eligible even if such vehicles are capitalized in the books of accounts and itself are not sold separately.

FACTS

Petitioner was engaged in business of sale of motor vehicles. It was desirous of knowing the eligibility of ITC in respect of demo vehicles used for promotion and approached Authority of Advance Ruling (AAR) for the same. AAR responded in the negative. On further appeal, Appellate Authority of Advance Ruling (AAAR) (respondent) confirmed that such ITC on demo vehicle is not eligible. Aggrieved, by such an order petitioner filed a writ petition before the Hon’ble High Court.

HELD

The Hon’ble High Court relied upon Circular No. 231/25/2024-GST (F. No. CBIC-20001/6/2024-GST) dated 10th September, 2024, which clarified that ITC is admissible on demo vehicles used in the course or furtherance of business. Accordingly, impugned order was quashed and writ petition was disposed of in favour of petitioner.

103. Kshitij Ghildiyal vs. Director General of GST Intelligence, Delhi

(2024) 25 Centax 267 (Del.)

Dated: 16th December, 2024

Arrest made without communicating the grounds in writing to petitioner is illegal and violative of legal procedure and principle of natural justice.

FACTS

Petitioner was a director of a company engaged in e-waste management. A search was conducted at the company’s premises under section 67 of the CGST Act, 2017 and petitioner was taken under judicial custody at respondent’s office on 28th November, 2024 for two days. Petitioner was subsequently arrested on 30th November, 2024 alleging availing fraudulent ITC based on fake invoices without furnishing the grounds of arrest in writing. He was produced before the Chief Judicial Magistrate on 30th November 2024, who remanded him to judicial custody for 13 days. Aggrieved by illegal detention and procedural violations of law, petitioner filed an application before the Hon’ble High Court.

HELD

Hon’ble High Court ruled that failure to provide written grounds of arrest clearly violated Article 22(1) of the Constitution of India and section 69(2) of the CGST Act. The Court relied upon the Supreme Court judgment in the case of Pankaj Bansal vs. Union of India [(2023) 155 taxmann.com 39 (SC)] where it was reaffirmed that written communication of grounds of arrest is mandatory and fundamental. The Court further observed that respondent had committed various other procedure defaults such as irregularities in the issuance of summons, including backdated signatures, delayed DIN generation and illegally detaining for two days at the respondent’s office. Citing all the above stated reasons, the Court declared the petitioner’s arrest illegal and set aside the remand order.

104. Proxima Steel Forge Pvt. Ltd. vs. Union of India

(2024) 24 Centax 294 (P&H.)

Dated 3rd October, 2024.

Subordinate Authority cannot refuse to comply with and question the basis of directions of Appellate Authority.

FACTS

The petitioner filed a refund application of ₹2,02,09,111/-. However, the respondent rejected the claim, citing it as time-barred under Circular No. 157/13/2021-GST [F. NO. CBIC-20006/10/2021], dated 20th July, 2021. The petitioner filed an appeal against such rejection of application. Appellate Authority directed respondent for reconsidering the application on merits. Despite such clear directions of considering the refund application on merits respondent once again rejected the refund application ignoring the direction of Appellate Authority. Aggrieved by such order, petitioner filed an application before Hon’ble High Court.

HELD

Hon’ble High Court held that order passed by respondent dismissing petitioner’s refund application as time barred in spite of clear instructions given by appellate authority for deciding the application on merits, is bad in law. The Court further stated that such actions reflect a failure in the hierarchical structure of GST system which could lead to administrative chaos and evade public trust in appeal process. The Court also emphasized that subordinate officers must comply with appellate decisions to maintain the integrity of the system and prevent unnecessary litigation. The impugned order passed by respondent dated 24th January, 2024 was set aside directing Appellate Authority to appoint another officer to reassess and decide petitioner’s refund application purely on its merits within a stipulated period of two months.

105. Ali K. vs. Additional Director General, DGGI, Kochi

(2024) 24 Centax 283 (Ker.)

Dated: 9th August, 2024

Provisional attachment ought to be automatically vacated and cannot be extended beyond one year by issuing fresh order.

FACTS

The petitioner was a partner of a firm engaged in the business of scrap. A search was conducted at their business premises in November 2020 which resulted in cancellation of the firm’s GST registration. Subsequently, a SCN was issued in 2023 demanding GST alleging that petitioners had availed ITC based on fake invoices. During the pendency of proceedings, the respondent issued an order attaching bank accounts of petitioner and the firm. The petitioners requested the respondent for lifting attachment on conclusion of one year period as per Section 83 of the CGST Act, 2017. However, to safeguard revenue interests, the respondent issued a fresh attachment order on petitioner’s properties. Aggrieved by this action, the petitioners filed a writ petition before the Hon’ble High Court.

HELD

Hon’ble High Court held that courts cannot deviate from the plain meaning of statutory provisions even in the public interest. It was observed that section 83 of the CGST Act, 2017 explicitly limits the period of provisional attachment to one year from the date of initial order. High Court cited Radha Krishan Industries vs. State of Himachal Pradesh — 2021 (48) G.S.T.L. 113 (S.C.) where Supreme Court held that the time-period of provisional attachment under section 83 read with Rule 159 of CGST Rules, 2017 must be strictly interpreted as the same does not permit issue of a fresh attachment order after expiry of maximum period of one year. Accordingly, the Court dismissed the writ petition in favour of petitioner.

106. Sali P. Mathai. Ltd vs. State Tax Officer, State GST Department, Idukki

(2024) 24 Centax 316 (Ker.)

Dated 29th October, 2024

Limitation period of two years does not apply to fresh refund application after rectifying deficiencies when original refund application which was filed in time.

FACTS

Petitioner filed an application for a refund on 5th April, 2021 under section 54 of the CGST Act 2017. Respondent, upon reviewing the application, issued a deficiency memo on 19th April, 2021 highlighting certain discrepancies. In response, petitioner submitted a fresh refund application on 30th September, 2021. However, respondent rejected fresh application stating that two years had already passed and the same was time barred. Aggrieved, petitioner approached the Hon’ble High Court.

HELD

Hon’ble High Court held that Rule 90(3) of the CGST Rules requires a fresh refund application to be filed after rectifying deficiencies, but does not mandate that the period of limitation of two years under section 54(1) of the CGST Act, 2017 should apply to a fresh refund application. Once the original application was filed in time, limitation period cannot apply for subsequent application made after rectification of deficiency. Accordingly, the Court ordered respondent to take cognizance of documents submitted and process the refund application in accordance with the law.

107. A.N. Enterprises vs. Additional Commissioner

(2024) 24 Centax 347 (All.)

Dated: 19th September, 2024.

Goods cannot be detained or seized invoking section 129 of CGST Act merely on the basis of undervaluation of goods unless there is clear evidence of tax evasion, fraud, or misdeclaration.

FACTS

Petitioner was engaged in the business of scrap. It had sold aluminium cables in the normal course of business accompanied by all relevant documents. During transit, the goods were intercepted, and upon physical verification, respondent asserted that the consignment contained PVC Aluminium Mixed Cable (Feeder Cable) instead of aluminium cable. Respondent seized the consignment and initiated proceedings under section 129 of the CGST Act citing undervaluation of goods and made petitioner pay deposit towards penalty without issuing any SCN. On appeal by the petitioner, it was pointed out that Commissioner Commercial Tax had issued a circular on 9th May, 2018 that goods could not be detained on the ground of undervaluation. However, appellate authority supported the order of Additional Commissioner. Petitioner therefore challenged detention order of the respondent based on the ground of undervaluation and for the reason of difference in HSN before Hon’ble High Court.

HELD

Hon’ble High Court observed that almost similar goods were accompanied by all requisite documents and that there was no discrepancy in the HSN Code, quantity or tax rate. The Court emphasized that, as per the Commissioner’s Circular No. 229/1819009 dated 9th May, 2018, goods cannot be detained merely on the grounds of undervaluation. Accordingly, the writ petition was allowed, and the authorities were directed to refund any amount deposited by petitioner.

108. BLA Infrastructure (P.) Ltd. vs. State of Jharkhand

[2025] 171 taxmann.com 187 (Jharkhand)

Dated: 30th January, 2025

When an appeal filed against the order is allowed in favour of the Appellant, a right to receive the 10 per cent pre-deposit is vested in the name of the appellant and the same cannot be retained by the statutory authority citing a limitation period of 2 years under section 54 of the CGST Act which appears to be directory in nature and also is in conflict with Article 137 of the Limitation Act.

FACTS

The petitioner received a Show cause notice alleging the mismatch in GSTR-1 and GSTR-3B, followed by an ex-parte order confirming the demand. Aggrieved by the same, the petitioner preferred an appeal after making a statutory pre-deposit of 10 per cent of the disputed tax amount in terms of Section 107(6)(b) of the Act. After hearing the petitioner and scrutinizing the documents, the appeal was allowed in favour of the petitioner and Form GST APL-04 was issued. The petitioner made an application for a refund of the pre-deposit amount, which was held deficient being beyond the period prescribed under section 54(1) of the Goods & Services Tax Act and hence, aggrieved thereof, the petitioner filed the petition.

HELD

The Hon’ble Court held that there is no dispute to the effect that once a refund is by way of statutory exercise, the same cannot be retained by the State, or the Centre, especially by taking aid of a provision which on the face of it is directory. The language stated in Section 54 is “may make an application before the expiry of 2 years from the relevant date”. The Court also referred to Article 137 of the Limitation Act, 1963, which provides for a 3-year limitation period for filing a Money Suit. Referring to decisions of the Hon’ble Supreme Court using the use of the word ‘may’ and the decision of Hon’ble Madras High Court in the case of Lenovo (India) Pvt. Ltd. vs. Joint Commr. Of Gst (Appeals-1), Chennai 2023 (79) G.S.T.L. 299 (Mad.), as also, taking into consideration that the refund of statutory pre-deposit is a right vested on an assessee after an appeal is allowed in its favour, the Hon’ble Court further held that when the Constitution of India restricts levy of any tax without the authority of law, the retention of the same on the ground of statutory restriction, which is in conflict with the Limitation Act, appears to be being misread by the authorities of the GST Department.

109. Brand Protection Services (P.) Ltd vs. State of Bihar

[2025] 171 taxmann.com 318 (Patna)

Dated: 4th February, 2025.

For filing an appeal, the date of receipt of the order is to be excluded while counting the period of limitation. Also, the period mentioned in section 107(1) cannot be interpreted as 90 days and 30 days for section 107(4) of the CGST Act.

FACTS

The petitioner received a final demand order under section 73(9) on 27th December, 2023, along with a summary order in Form DRC-07. The petitioner filed an appeal in Form GST APL-01 under section 107 after a statutory period of 3 months but within the condonable period of one month on 26th April, 2024, claiming that the delay was due to ill health of the director. Revenue rejected the appeal at the admission stage on the grounds that it was filed beyond the limitation period of three months plus a condonable period of one month (interpreted as 120 days). Petitioner contended that the appellate authority erred in interpreting the limitation period as 120 days instead of four calendar months.

HELD

The Hon’ble Court held that the period of three months mentioned in section 107(1) and a period of one month under section 107(4) cannot be interpreted as a period of 90 days and 30 days respectively. By virtue of section 9 of the General Clauses Act, the date i.e. 27th December, 2023 on which the appellate order was received by the petitioner is liable to be excluded in counting the prescribed period of limitation. The Hon’ble Court referred to a method of computation of a ‘month’ as per Halsbury’s Laws of England, 4th Edn., para 2116, that when the period prescribed is a calendar month running from any arbitrary date the period expires upon the day in the succeeding month corresponding to the date upon which the period starts, save that if the period starts at the end of a calendar month which contains more days than the next succeeding month, the period expires at the end of that succeeding month. The Court also referred to various judicial precedents on the subject matter to conclude that in the present case, three-month periods from the date of receipt of the order of adjudicating authority i.e. 27th December, 2023 expired on 27th December, 2024 and since the appeal was preferred on 26th April, 2024, appellate authority was required to consider cause shown by petitioner to condone delay as petitioner could have preferred an appeal within a further period of one month i.e. 27th April, 2024. The Hon’ble Court thus held that the appeal was preferred within one month after the expiry of the prescribed period of limitation of three months and hence order rejecting the appeal is liable to be set aside.

110. (Andhra Pradesh) Habrik Infra vs. Assistant Commissioner (ST)

[2025] 171 taxmann.com 67

Dated 22nd January, 2025

Order without DIN number or signature is non-est and Invalid.

FACTS

The petitioner was served with an assessment order in Form GST DRC-07. He challenged the said order on various grounds, including that the said order did not contain the signature of the assessing officer and the DIN number. The petitioner relied upon the circular, dated 23rd December, 2019, bearing No.128/47/2019-GST, issued by the C.B.I.C., to submit that the non-mention of a DIN number would mitigate against the validity of such proceedings. He also pointed out that, the question of the effect of non-inclusion of DIN number on proceedings, under the G.S.T. Act, came to be considered by the Hon’ble Supreme Court in the case of Pradeep Goyal vs. Union of India & Ors 2022 (63) G.S.T.L. 286 (SC) in which, after noticing the provisions of the Act and the circular issued by the Central Board of Indirect Taxes and Customs (herein referred to as “C.B.I.C.”), the Hon’ble Supreme Court held that an order, which does not contain a DIN number would be non-est and invalid.

HELD

The Hon’ble Court held that, in view of the aforesaid judgments and the circular issued by the C.B.I.C., the non-mentioning of a DIN number and absence of the signature of the assessing officer in the impugned assessment order, would be liable to be set aside.

111. Addichem Speciality LLP vs. Special Commissioner I, Department of Trade and Taxes

[2025] 171 taxmann.com 315 (Delhi)

Dated: 7th February, 2025.

There is no authority in law to condone the delay in respect of appeals filed beyond the prescribed period of limitation provided by sections 107 (1) and 107 (4) of the CGST Act.

FACTS

The petitioners (in a batch of writ petitions) are registered proprietors / dealers under the CGST Act, each holding different registration number. They were assessed by the respective adjudicating authorities which resulted in certain demands being raised against them and in some instances, their GST registrations also were cancelled. Aggrieved by the cancellation of their GST registrations and the demands imposed, the petitioners filed statutory appeals before the Appellate Authority under section 107 of the CGST. However, those appeals were not entertained and were dismissed due to delay in filing.

HELD

The Hon’ble Court held that it is well settled that once a statute prescribes a specific period of limitation, the Appellate Authority does not inherently hold any power to condone the delay in filing the appeal by invoking the provisions of sections 5 or 29 of the Limitation Act, 1963. The Hon’ble Court relied upon the decision of Apex court in the case of Singh Enterprises vs. Commissioner of Central Excise, Jamshedpur & Ors. [(2008) 3 SCC 70 = 2008 (221) E.L.T. 163 (S.C.)], Commissioner of Customs and Central Excise vs. Hongo (2009) 5 SCC 791 and Garg Enterprises vs. State of UP 2024 (84) G.S.T.L. 78 (All.) in support of the said proposition. It further held that the Supreme Court has observed that the plenary powers of the High Court cannot, in any case, exceed the jurisdictional powers under Article 142 of the Constitution of India 1950, and even the Supreme Court cannot extend the period of limitation de hors the provisions contained in any statutory enactment. The Court further held that the power to condone delay caused in pursuing a statutory remedy would always be dependent upon the statutory provision that governs. The right to seek condonation of delay and invoke the discretionary power inhering in an appellate authority would depend upon whether the statute creates a special and independent regime with respect to limitation or leaves an avenue open for the appellant to invoke the general provisions of the Limitation Act to seek condonation of delay. The facility to seek condonation can be resorted provided the legislation does not construct an independent regime with respect to an appeal being preferred. Once it is found that the legislation incorporates a provision that creates a special period of limitation and proscribes the same being entertained after a terminal date, the general provisions of the Limitation Act would cease to apply.

परोपदेशेपांडित्यम् !

This is one of the most commonly observed aspects of human nature. While advising others, all are ‘scholars’ or ‘wise’ men; but when it comes to own conduct, they very rarely follow it. This is adopted from Hitopadesh (1.103)

परोपदेशेपाण्डित्यम् ‘wisdom’ or ‘scholarliness’ in advising others.

सर्वेषाम्सुकरंनृणाम् Is very easy for all human beings.

धर्मेस्वयमनुष्ठानं  However, when it comes to their own life.

कस्यचित्तुमहात्मन:  Very few great people (महात्मा) do follow those principles.

There is another version of this verse.

परोपदेशवेलायां At the time of advising others.

शिष्टा: सर्वेभवन्तिवै  All act like ‘gentlemen’ or ‘noble’ men.

विस्मरन्तीहशिष्टत्वं However, they forget all that wisdom.

स्वकार्येसमुपस्थिते When it comes to their own work.

This is nothing but hypocrisy. It is observed and experienced in every walk of life.

There are religious leaders who preach great morals in their discourses and sermons. However, in their own lives they are often exposed as greedy people with criminal minds and of loose character. There are number of examples of this type.

Even in day to day life, parents and teachers give lectures to children and students for good behaviour. They will explain the importance of cleanliness, discipline, helping others, chivalry, love for nature, hygienic food, good habits, high tastes and culture, hospitality, service to the nation, service to society, sacrifice, selflessness — so on and so forth. They will tell all the virtues under the sun. However, in own lives, they depict bad habits, cheap conduct, corrupt practices, indiscipline, selfishness, etc.

There is a parallel saying: –

चित्तेवाचिक्रियायां च साधूनामेकरूपता!

Noble people are consistent in what they think, what they speak and what they do. Their thoughts, speech and action reflect one and the same thing. Such persons are indeed very rare, particularly in today’s kaliyuga.

Take our political leaders. They will give long speeches at the top of their voice, full of high values; but they may be scoundrels of the first order! They amass humongous wealth, commit all crimes, harass poor people, adopt corrupt practices. Same is the case with industrialists, businessmen, bosses in offices, bureaucrats, senior professionals. Judges in the courts may punish someone for wrong doing; but they themselves may be committing those things in personal life!

It is also experienced that when you seek help from somebody, he will give you a lecture as to how you should have behaved. However, they won’t help you at all!

Doctors may advise you to avoid all ‘addictions’ but they may not themselves refrain from those addictions. A CA may explain the importance of documentation, financial planning and discipline. However, he may not be maintaining his own accounts, he may be lethargic in paper work; his own finances may be mismanaged! Management of an educational institution may admit students strictly on merits; but for their own children, they may resort to all those undesirable things for getting admission, getting good results in examination, and so on.

Even professional bodies teach ethics but in reality … The less said the better!

Nomination and Remuneration Committee

INTRODUCTION

One of the important committees of the Board of Directors of a listed company is the Nomination and Remuneration Committee (“NRC”). The NRC plays a very important role in the corporate governance of a listed company. Recognising its importance,  the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR”) has prescribed various roles and responsibilities for the NRC. Let us analyse its relevance in the context of a listed entity.

MANDATORY REQUIREMENT UNDER THE ACT’

Under the Act and the LODR, the NRC is a mandatory committee that all listed entities have to constitute. The Companies Act also requires that the following unlisted public companies constitute an NRC:

(i) Public Companies having a paid-up share capital of ₹10 crore or more; or

(ii)Public Companies having a turnover of ₹100 crore or more; or

(iii)Public Companies which have, in aggregate, outstanding loans, debentures and deposits, exceeding ₹50 crore.

The paid-up share capital or turnover or outstanding loans, debentures and deposits, as the case may be, as existing on the last date of the latest audited financial statements shall be taken into account for the above purpose.

However, despite being covered by the above thresholds, the following companies need not constitute an NRC:

(a) a joint venture

(b) a wholly owned subsidiary; and

(c) a dormant company as defined under section 455 of the Act

ADDITIONAL REQUIREMENTS UNDER THE LODR

In addition to the provisions of the Act, the LODR contains certain additional provisions for the NRC. The NRC must comprise of at least 3 directors of which all directors shall be non-executive directors and at least 2/3 of the NRC shall be independent directors. Non-executive directors would mean those directors who are not drawing any remuneration other than director’s sitting fees and commission. Thus, the members of the NRC would be either independent directors or non-executive non-independent directors. The requirement of having 2/3 of the NRC as independent directors is the same as in the case of the Audit Committee. However, unlike in the case of the Audit Committee (where members must be financially literate), there is no further qualification prescribed for the members of the NRC.

The quorum for a meeting of the NRC is either 2 members or 1/3 of the members of the committee, whichever is greater, including at least 1 independent director in attendance. Thus, if there is no independent director in attendance, then an NRC cannot have a meeting.

The LODR requires that the NRC meets at least once in a financial year. Thus, while the Audit Committee must meet once every quarter, the NRC can meet only once in a financial year.

CHAIRPERSON

The Chairperson of the nomination and remuneration committee must be an independent director, this again is the same as in the case of an Audit Committee. However, the Chairperson of the Company’s Board of Directors cannot be appointed as the Chairperson of the NRC but he can be a member of the NRC. This is so irrespective of whether he is an executive or a non-executive director.

The LODR provides that Chairperson of the NRC may be present at the AGM, to answer the shareholders’ queries. However, the Act states that the chairperson of the NRC constituted under this section or, in his absence, any other member of the committee authorised by him in this behalf shall attend the general meetings of the company.

Thus, unlike in the case of the Audit Committee Chairman, it is not mandatory for him to present at the AGM.It is up to the chairperson to decide who shall answer the shareholders’ queries.

ROLE UNDER ACT

The Act requires that the NRC shall identify persons who are qualified to become directors and who may be appointed in senior management in accordance with the criteria laid down, recommend to the Board their appointment and removal and shall specify the manner for effective evaluation of performance of Board, its committees and individual directors to be carried out either by the Board, by the Nomination and Remuneration Committee or by an independent external agency and review its implementation and compliance.

It shall formulate the criteria for determining qualifications, positive attributes and independence of a director and recommend to the Board a policy, relating to the remuneration for the directors, key managerial personnel and other employees. While doing so, the Committee must ensure that—

(a) the level and composition of remuneration is reasonable and sufficient to attract, retain and motivate directors of the quality required to run the company successfully;

(b) relationship of remuneration to performance is clear and meets appropriate performance benchmarks; and

(c) remuneration to directors, key managerial personnel and senior management involves a balance between fixed and incentive pay reflecting short and long-term performance objectives appropriate to the working of the company and its goals:
The policy shall be placed on the website of the company, if any, and the salient features of the policy and changes therein, if any, along with the web address of the policy, if any, shall be disclosed in the report of the Board of Directors.

ROLE UNDER LODR

The responsibilities of the NRC as laid down under the LODR include the following which are in addition to those laid down under the Act:

(a) Formulation of the criteria for determining qualifications, positive attributes and independence of a director – this could also include additional requirements over and above those mandatorily laid down under the Companies Act, 2013 and the LODR. Listed entities are free to prescribe additional criteria for an independent director. For instance, while the Act prescribes 2 terms of a maximum tenure of 5 years per term, many companies prescribe a maximum tenure of 3 years per term.

For every appointment of an independent director, the NRC is required to evaluate the balance of skills, knowledge and experience on the Board and on the basis of such evaluation, prepare a description of the role and capabilities required of an independent director. The person recommended to the Board for appointment as an independent director shall have the capabilities identified in such description.

For the purpose of identifying suitable candidates, the Committee may:

  •  use the services of an external agencies, if required;
  •  consider candidates from a wide range of backgrounds, having due regard to diversity; and
  •  consider the time commitments of the candidates.

(b) Recommending to the board of directors a policy relating to, the remuneration of the directors, key managerial personnel and other employees – in the case of directors, it would include board fees and directors’ commission. In the case of KMPs and other employees, it would include, salary, bonus, variable pay, employee stock option plans, etc.

(c) Formulation of the criteria for evaluation of performance of independent directors and the board of directors – this could include external evaluation, internal questionnaires, surveys, benchmarking, etc.

(d) Devising a policy on diversity of board of directors – this could include diversity in terms of gender, experience, qualifications, etc.

(e) Identifying persons who are qualified to become directors and who may be appointed in senior management in accordance with the criteria laid down, and recommend to the board of directors their appointment and removal. Any vacancy in a director must be filled up by the entity within 3 months.

(f) Whether to extend or continue the term of appointment of the independent director, on the basis of the report of performance evaluation of independent directors.

(g) Recommend to the board, all remuneration, in whatever form, payable to senior management. The LODR now expressly provides that remuneration and sitting fees paid by the listed entity or its subsidiary to its director, key managerial personnel or senior management (except those who are part of promoter) shall not require approval of the audit committee provided that the same is not material.

(h) The appointment / re-appointment of a person, including as a managing director or a whole-time director or a manager, who was earlier rejected by the shareholders at a general meeting, shall be done only with the prior approval of the shareholders. For this purpose, the NRC must provide a detailed explanation and justification for recommending such a person for appointment or re-appointment.

For the above purpose, the term “senior management” meansthose officers and personnel of the listed entity who are members of its core management team, excluding the Board of Directors, and shall also comprise all the members of the management one level below the Chief Executive Officer or Managing Director or Whole Time Director or Manager (including Chief Executive Officer and Manager, in case they are not part of the Boardof Directors) and shall specifically include the functional heads, by whatever name called and the persons identified and designated as Key Managerial Personnel (KMP), other than the board of directors, by the listed entity.

Earlier, the NRC only considered appointment and remuneration of the KMP. KMP under s.203 of the Companies Act, 2013 comprises of the MD, Manager, CEO, Whole-time Director, CFO and Company Secretary. However, now even one level below the KMP is covered within the ambit of the NRC. For instance, if there is a change in Vice-President Finance, then the same would have to be placed before the NRC.

When it comes to the appointment of KMP, the provisions of the LODR and the Companies Act are both relevant and should be kept in mind by the NRC:

(a) A whole-time KMP cannot hold office in more than one company except in its subsidiary company.

(b) A KMP can be a non-executive Director of any other company with the prior permission of his Board of Directors.

(c) S.196 of the Act lays down the requirements for a person to be appointed as an MD. For instance, one of the important requirements is that he must be a resident of India and resident for this purpose has been specifically defined under the Act. Another important requirement is that he must not have been sentenced to imprisonment for any period OR to a fine exceeding Rs. 1,000 for the conviction of any offence under 19 specific Laws, one of them is the Income-tax Act, 1961. For instance, if a person has been convicted for an offence relating to Tax Deducted at Source, he may become ineligible to be appointed as an MD of a company. To appoint such a person, prior approval would be required from the Ministry of Corporate Affairs.

(d) A person can be a Managing Director of maximum 2 companies. However, the 2nd company appointing such person as MD must approve his appointment by a Board resolution with the consent of all the directors present at the meeting.

(e) While fixing the managerial remuneration, the Act provides that the total managerial remuneration payable by a public company, to its directors, including managing director and whole-time director, and its manager in respect of any financial year shall not exceed 11% of the net profits of that company for that financial year computed in the manner laid down in section 198. The Remuneration payable to non-executive directors cannot exceed 1% of the net profits of the company. However, sitting fees payable for attending Board Meetings is not included in this limit, but the maximum fees payable per committee / board meeting cannot exceed ₹1 lakh.

Further, Schedule V to the Act provides for the maximum managerial remuneration in case of a company that has inadequate profits. The NRC must be cognizant of these provisions when it fixes the remuneration of an MD / Whole-time Director, Director, etc.

(f) The Companies Act provides that if the office of any whole-time KMP is vacated, the resulting vacancy shall be filled up by the Board at a meeting of the Board within a period of 6 months from the date of such vacancy. However, the LODR provides that any vacancy in the office of Chief Executive Officer, Managing Director, WholeTime Director or Manager or CFO shall be filled by the listed entity at the earliest and in any case not later than 3 months from the date of such vacancy. The LODR providing a more stringent requirement will override the provisions of the Act.

(g) The Compliance Officer (Company Secretary) of the Company shall be a whole-time employee of the listed entity, not more than one level below the board of directors and shall be designated as a Key Managerial Personnel.

(h) Any vacancy in the office of the Compliance Officer shall be filled by the listed entity within 3 months.

(i) In case of resignation of an independent director of the listed entity, detailed disclosures shall be made to the stock exchanges by the listed entities within 7 days from the date of his resignation. The NRC should ensure that these disclosures are made.

(j) In case of resignation of KMP, senior management, Compliance Officer or director other than an independent director; the letter of resignation along with detailed reasons for the resignation as given by the key managerial personnel, senior management, Compliance Officer or director shall be disclosed to the stock exchanges by the listed entities within 7 days from the date that such resignation comes into effect. The NRC should ensure that these disclosures are made.

The powers of the NRC were scrutinised by the Bombay High Court in the case of Invesco Developing Markets Fund vs. Zee Entertainment Enterprises Ltd. [2022] 232 COMP CASE 20 (Bombay). The Court held that there is no bar on a shareholder to appoint an Independent Director on the Board of a Company. S. 160 of the Act expressly gave powers to a shareholder to appoint a Director even if the same was not appointed by the NRC. The Court held that if this interpretation were upheld a shareholder of a listed company would not only be disabled from proposing Independent Directors, but such disability would extend to all other Directors. Effectively, even a majority shareholder of a listed Company would not be able to appoint a Director without identification by the NRC. The Court held that this was not the intent or purpose of the Act.

ESOP REGULATIONS

In addition to the Act and the LODR, the Securities and Exchange Board of India (Share Based Employee Benefits and Sweat Equity) Regulations, 2021 (“the ESOP Regulations”) also prescribe a role for NRCs of those listed companies that have instituted an ESOP. ESOPs for this purpose, can also be in the form of employee share purchase schemes, stock appreciation rights, etc.

The ESOP Regulations require that a company shall constitute a Compensation Committee for administration and superintendence of the ESOP schemes. However, its NRC can act as this Compensation Committee.

The Compensation Committee shall, inter alia, formulate the detailed terms and conditions of the ESOP schemes. Regulation 5(3) of the ESOP Regulations lays down the terms and conditions of schemes to be formulated by the Compensation Committee.

The Committee must also frame suitable policies and procedures to ensure that there is noviolation of securities laws, including the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 and the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices Relating to the Securities Market) Regulations, 2003.

CORPORATE GOVERNANCE REPORT

The corporate governance contained in the company’s Annual Report must contain the following disclosures regarding the NRC:

(a) brief description of terms of reference;

(b) composition, name of members and chairperson;

(c) meeting and attendance during the year;
(d) performance evaluation criteria for independent directors.

PENALTY

For any contravention of the provisions of Act relating to an NRC, the company shall be liable to a penalty of ₹5 lakhs and every officer of the company who is in default shall be liable to a penalty of ₹1 lakh. The LODR provides a fine of ₹2,000 per day of non-compliance with respect to the constitution of the NRC.

In the case of Max Heights Infrastructure Ltd, Adjudication Order No. Order/BM/GN/2024-25/30529, SEBI’s Adjudication Officer held that under the LODR, at least 2/3 of the directors of the NRC must be independent directors. However, in that case, the one director was incorrectly classified as an Independent Director and hence, the number of independent director was reduced by 1 compared to what it should have been. Hence the independence requirements of nomination and remuneration committee was not fulfilled.

The Registrar of Companies, NCT of Delhi & Haryana has passed an adjudication order (order no.RoC/D/ADJ/2023/Section 178/PFS/2511-2515). The findings were that a company which was a listed public company was mandatorily required to constitute anNRC and its total strength could not be reduced below 3. As far as the role of the NRC was concerned, the same was spelt out under the Act and it was seminal in identifying persons who were suitable for becoming directors in a company, it was also responsible for laying down the criteria qualifications, positive attributes and independence of a director, besides laying down policies for syncing remuneration with the performance benchmarks. Owing to the withdrawal of a nominee director by the holding company, the NRC became dysfunctional as the number of directors fell below 3. The RoC held in spite of this the company did not show any alacrity in reconstituting the NRC. Accordingly, it held that the company and its MD had failed to discharge their obligation under section 178 of the Companies Act 2013 thereby rendering themselves for penal actions.

CONCLUSION

The NRC is a very vital cog in the corporate governance wheel. It is vested with great powers as regards appointment of the Directors, KMP and senior management. It would also act as an important link between the shareholders and management of the company.

Miscellanea

1. TECHNOLOGY AND AI

#Google Claims Its AI Tool Can Beat Math Olympiad Gold Medalists

Google has developed an artificial intelligence (AI) math system that can outwit human gold medalists at the International Mathematical Olympiad (IMO). AlphaGeometry2, the AI problem solver is capable of solving 84 per cent of geometry problems posed in the IMO where the gold-medal winners can only solve 81.8 per cent of the problems on average. IMO problems are known for their difficulty, and solving them requires a deep understanding of mathematical concepts — something which the AI models had not been able to achieve up until now.

Engineered by DeepMind, AlphaGeometry managed to perform at the level of silver medalists in
January last year when it was unveiled. However, a year later, Google claims the performance of its upgraded system had surpassed the level of average gold-medalists.

To enhance the system’s abilities, the California-based company said it extended the original AlphaGeometry language to tackle harder problems involving movements of objects, and problems containing linear equations of angles, ratios, and distances.

“This, together with other additions, has markedly improved the coverage rate of the AlphaGeometry language on IMO 2000-2024 geometry problems from 66 per cent to 88 per cent.”

Despite achieving an incredible 84 per cent efficiency rate in solving tricky math problems, Google said there is still room for improvement.

(Source: www.ndtv.com dated 24th February, 2025)

#Alibaba to invest more than $52 billion in AI over next 3 years

Alibaba opens new tab said on Monday it plans to invest at least 380 billion yuan ($52.44 billion) in its cloud computing and artificial intelligence infrastructure over the next three years.

The Chinese e-commerce giant had said it had plans to invest in the sector. The company had reported revenue of 280.15 billion yuan for the three months ended December 31.

Alibaba said the total investment amount exceeds the company’s spending in AI and cloud computing over the past decade. The company has kicked off 2025 as a winner in China’s AI race, drawing in investors with strategic business deals. Its stock has risen more than 68% this year, as of last close.

Other Chinese firms have also been investing into the sector, with ByteDance, the Chinese owner of TikTok, earmarking over 150 billion yuan in capital expenditure for this year, much of which will be centered on AI

(Source: www.reuters.com dated 24th February, 2025)

2 WORLD NEWS

Tesla in India: Trump says unfair to U.S. if Elon Musk builds factory in India

U.S.A. President Donald Trump has said that if Tesla were to build a factory in India to circumvent that country’s tariffs, it would be “unfair” to the U.S.A. Mr. Trump called out India’s high duty on cars during Prime Minister Narendra Modi’s visit to the U.S. last week but agreed to work towards an early trade deal and resolve their standoff over tariffs.

Tesla’s CEO Elon Musk has long criticised India for having import tariffs of around 100 per cent on EVs which protect local automakers such as Tata Motors in the world’s third largest auto market, where EV adoption is still at a nascent stage.

Mr. Trump said it is “impossible” for Mr. Musk to sell a car in the South Asian nation. “Every country in the world takes advantage of us, and they do it with tariffs… It is impossible to sell a car, practically, in, as an example, India,” he said.

India’s government in March unveiled a new EV policy lowering import taxes substantially to 15% if a carmaker invests at least $500 million and sets up a factory.

Tesla has selected locations for two showrooms in the Indian cities of New Delhi and Mumbai, and posted job ads for 13 mid-level roles in India. It does not currently manufacture any vehicles in India.

Mr. Trump said it would be “unfair” to the U.S. if Mr. Musk did decide to build a factory there. “Now, if he built the factory in India, that’s okay, but that’s unfair to us. It’s very unfair,” Mr. Trump said in the interview. Mr. Trump’s plans for reciprocal tariffs on every country that taxes U.S. imports have raised the risk of a global trade war with American friends and foes.

(Source: www.thehindu.com dated 20th February, 2025)

3. ENVIRONMENT

#Global glacier melt is accelerating, new study finds

Ice loss from the world’s glaciers has accelerated over the past decade, a first-of-its-kind global assessment has found, warning that melting may be faster than previously expected in the coming years and drive sea levels higher.

The assessment published in the journal Nature by an international team of researchers found a sharp increase in melting over the past decade, with around 36 percent more ice lost in the 2012 to 2023 period than in the years from 2000 to 2011.
Michael Zemp, a professor at the University of Zurich and co-author of the study, said the findings were “shocking” if not altogether surprising. Regions with smaller glaciers are losing them faster, and many “will not survive the present century”.

“Hence, we are facing higher sea-level rise until the end of this century than expected before,” Zemp told the AFP news agency, adding that glacier loss would also impact fresh water supplies, particularly in central Asia and the central Andes.

Overall, researchers found that the world’s glaciers have lost around five percent of their volume since the turn of the century, with wide regional differences ranging from a two-percent loss in Antarctica to up to 40 percent in the European Alps. On average, some 273 billion tonnes of ice are being lost per year – equivalent to the world population’s water consumption for 30 years, scientists said.

Martin Siegert, a professor at the University of Exeter who was not involved in the study, said the research was “concerning” because it predicts further glacier losses and could indicate how Antarctica and Greenland’s vast ice sheets react to global warming. “Ice sheets are now losing mass at increasing rates – six times more than 30 years ago – and when they change, we stop talking centimetres and start talking metres,” he said.

Zemp warned that to save the world’s glaciers, “you have to reduce the greenhouse gas emissions, it is as simple and as complicated as that.” “Every tenth of a degree warming that we avoid saves us money, saves us lives, saves us problems,” he said.

(Source: www.aljazeera.com dated 24th February, 2025)

Digital Assurance

The Securities and Exchange Board of India (SEBI) has recently issued a draft circular, dated 3rd February, 2025, requiring digital assurance, of financial statement. The first reaction is that this probably relates to IT-related controls or cyber security. That is not the case. SEBI has separate regulations for the same, e.g., Cyber Security and Cyber Resilience Framework for SEBI-regulated entities.

In the circular relating to digital assurance, SEBI states “As a continuous endeavour to enhance the quality of financial reporting being done by listed companies and in order to provide greater investor protection, it is proposed to mandate a separate report on digital assurance of financial statement. The report will increase transparency, improve disclosure standards and enable better enforcement, and thereby provide greater investor protection and trust in the ecosystem.”

The auditor shall conduct an examination in accordance with the “Technical Guide on Digital Assurance” issued by the Institute of Chartered Accountants of India (ICAI). The report shall be prepared by an auditor (Statutory Auditor or Independent Practitioner) who has subjected himself / herself to the peer review process of the Institute of Chartered Accountants of India and holds a valid certificate issued by the Peer Review Board of the Institute of Chartered Accountants of India.

If SEBI issues the circular, reporting on digital assurance shall be applicable to the Top 100 listed entities by market capitalization from Financial Year 2024-25 onwards i.e. for the period ending on or after 31st March, 2025.

Some examples of external digital information that can be used to corroborate information in the financial statements are the following:

  1. Revenue of an entity can be corroborated with the GST tax portal
  2. Export receivables can be corroborated with the EDPMS report
  3. Import payables can be corroborated with the IDPMS report
  4. Tax deducted at source and advance taxes paid can be corroborated with the traces portal and AIS data
  5. Total contribution to provident fund by employer and employee, can be corroborated with Employee Provident Fund Organization portal
  6. Use of e-way bills to perform a sales cut-off procedure
  7. Traffic data submitted to NHAI can be corroborated with toll revenue.

The ICAIs technical guide was issued some time ago in January 2023. This guide primarily focuses on sources of external audit evidence available and how it can be utilized by the members in their audit procedures. This guide also highlights the importance of reliability and relevance of the source from which the information is being obtained. In addition to using the available source, the members are guided to consider the reliability and relevance of the source and information being used in the audit. This guide also provides various illustrations of available sources of external audit evidence and how they can be used. Some of those examples are given above.

The aforementioned Technical Guide primarily focuses on sources of external audit evidence and information available and how the same can be utilised by the members in their audit procedures. It is noted that the Technical Guide does not require any separate reporting by auditors on these aspects. Further, no responsibility is cast on the management of the listed entity to provide this information obtained from external data repositories to auditors or provide access to such information to auditors. However, rightfully so, SEBI in the draft circular requires management to take responsibility for sharing such information to the auditors of the company.

The ICAI’s stance not to require any separate audit attestation is understandable, because external audit evidence, whether digital or otherwise, is in any case covered under extant auditing standards and audit procedures in the audit of financial statements.

Paragraph 7 of SA 500 requires as under: “When designing and performing audit procedures, the auditor shall consider the relevance and reliability of the information to be used as audit evidence.” Accordingly, the auditor is required to consider the relevance and reliability of information (e.g., information contained in accounting records, information obtained from other sources, information prepared using the work of a management’s expert) which is intended to be used by the auditor as audit evidence.

The reliability of audit evidence is increased when it is obtained from independent sources outside the entity. However, SA 500 rightfully cautions, that there may be exceptions, for e.g., information obtained from an independent external source may not be reliable if the source is not knowledgeable, or a management’s expert may lack objectivity.

According to the Technical Guide, the following factors may be important when considering the relevance and reliability of information obtained from an external information source:

  • The nature and authority of the external information source, including the extent of regulatory oversight (if applicable)
  • The “independence” of the data — is the entity able to influence the information obtained  The competence and reputation of the external information source with respect to the information, including whether, in the auditor’s professional judgement, the information is routinely provided by a source with a track record of providing reliable information
  • The auditor’s past experience with the reliability of the information
  • Market acceptability of the data source
  • Whether the information has been subject to review or verification
  • Whether the information is relevant and suitable for use in the manner in which it is being used, including the age of the information and the nature and strength of the relationship between the information and the entity’s transactions, and, if applicable, the information was developed taking into account the applicable financial reporting framework
  • Alternative information that may contradict the information used
  • The nature and extent of disclaimers or other restrictive language relating to the information obtained
  • Information about the methods used in preparing the information, how the methods are being applied including, where applicable, how models have been used in such application, and the controls over the methods
  • When available, information relevant to considering the appropriateness of assumptions and other data applied by the external information sources in developing the information obtained.

The technical guide emphasises that, the information obtained by the auditor from external sources may reveal inconsistencies with the information obtained by the auditor from other sources (e.g., accounting records, information obtained during the course of audit, etc.). This would help the auditor in performing necessary modifications or additional procedures to resolve the matter. Thus, audit evidence obtained from external sources plays a vital role in the audit process.

SEBI has invited comments and suggestions, by 24th February, 2025. The author submits as follows:

1. There are numerous auditing standards that require an appropriate use of internal and external audit evidence, in the audit of financial statements, to ensure that they are true and fair. The implementation of these standards and the conduct of appropriate audit procedures are also verified by various peer reviewers, including the NFRA reviewers. Therefore, a separate audit report to certify the same is unwarranted and is an extra burden on the auditors.

Precisely for this reason, the Technical Guide of the ICAI does not require any separate audit report. What may be more appropriate under the circumstances, is that the auditors include a summary work paper in their audit file, which will document all the external evidences that they used to audit the financial statements. This in the normal course will be subjected to a review by various peer reviewers.

2.   If the above recommendation is not acceptable to SEBI, they should require the report to be issued by the company’s statutory auditor. It would be incorrect and inappropriate for an independent practitioner to certify the report, as they do not have the same level of knowledge about the client as the statutory auditor. A statutory auditorconducts regular audits, reviews financial statements, and has a deep understanding of a company’s internal controls, compliance framework, and financial history. On the other hand, an independent practitioner, who is engaged for a specific task, lacks this extensive familiarity. For instance, if a company has complex revenue recognition policies, the statutory auditor—being well-versed in past accounting treatments—can provide a more informed certification than an external practitioner with limited exposure to the company’s financial intricacies.

Suppose a company’s revenue figures in its financial statements need to be verified against GST (Goods and Services Tax) returns. The statutory auditor, having audited the company’s financials and tax reconciliations over time, is aware of any past discrepancies, discount or adjustments for returns, or specific reporting nuances, such as aggregating the multiple branches. An independent practitioner, however, would only be reviewing the data at a surface level and may not be aware of historical issues such as classification errors, past rectifications, or timing differences in revenue recognition.

3. The original purpose of digital assurance was to obtain more certification by statutory auditors on various non-GAAP measures in offer documents, which a merchant banker may not be competent, since they are not involved in the audit of financial statements; and may not have a deep understanding of clients databases and controls. Take for example, in the case of Swiggy, there are several non-GAAP measures that are used, such as adjusted EBITDA, quick commerce gross revenue, food delivery gross revenue, etc. Without opining on the relevance of these measures, it is not out of bounds for the statutory auditors to comfort such numbers.

In the offer document, Swiggy also provides industry and market-related data, basis the Redseer Report. Here the merchant banker’s basis their in-house experts or hired consultants should feel comfortable that the source is authoritative, and that it is fairly represented in the offer document, without any cherry-picking of information that suits the issuer, and avoiding those that are adversarial.

Likewise, there could be detailed cost-related data, where comforting by a cost accountant or cost auditor may be appropriate. A geoscientist may be more competent to certify mineral reserves. Information related to attrition rate for services company can be comforted by the statutory auditors, however, since there could be multiple ways of computing the same, the basis of measurement should be clarified by ICAI, so that there is consistency in calculations.

Whilst the merchant bankers are overall responsible for the information contained in the offer document, they should be supported by various professionals. Some of these professionals can be sourced as consultants or employed by the merchant bankers. Information that is closely associated with financial systems and related databases, should be comforted by the statutory auditors. SEBI should ensure that all stakeholders have a collaborative and cooperative approach in this matter, so that the end result is a solid offer document that can form a strong basis for evaluating a company.

Section 148: Reassessment assessment cannot be opened twice for the same reason.

27. SarikaKansal vs. ACIT

[W.P.(C) 7940/2024 & CM APPL. 32747/2024]

Dated: 30th January, 2025

(Del) (HC).] AY 2017-18

Section 148: Reassessment assessment cannot be opened twice for the same reason.

The petitioner challenged to the impugned order under Section 148A(d) of the Act and the impugned notice 148 of the Act. First, that the impugned order has been passed without considering that the information on the basis of which it was the subject matter of reassessment proceedings, which culminated in an order dated 29th March, 2022 passed under Section 147 read with Section 144B of the Act.

The second ground is that the impugned notice is beyond the period of limitation. According to the petitioner, the limitation for issuance of the impugned notice expired on 31st March, 2024.

The grounds on which the petitioner’s assessment is sought to be reopened revolves around transactions, whereby the petitioner had sold 1,70,000 (One Lac Seventy Thousand) shares of a company named Trustline Real Estate Private Limited (hereafter TREPL) to one Mr. Samir Dev Sharma at the rate of ₹42/- per share. The Assessing Officer (hereafter AO) suspects that the said shares were sold at an apparent consideration, which is below the fair market value with an intent to avoid tax.

The petitioner disputes the same and contends that her income for AY 2017-18 has been reassessed for the same reason that she had sold the shares of TREPL at a value, which was less than the fair market value.

Thus, the first and foremost question to be addressed is whether the AO had reopened the assessment for AY 2017-18 for the same reason that has led the AO to pass the impugned order holding that it is a fit case for issuance of the impugned notice.

The petitioner is an individual and there is no dispute that she files her income tax returns regularly. She had filed her return for AY 2017-18 on 2nd August, 2017 declaring her taxable income as ₹74,77,750/-. The said income also included income arising from sale of 1,70,000 (One Lac Seventy Thousand) shares of TREPL at the rate of ₹42/- per share. The petitioner claims that the said rate was settled on the basis of valuation report, whereby the shares of TREPL were valued taking into account its underlying assets including the first and third floor of the property bearing the address A-20, Friends Colony East, New Delhi (hereafter the Friends Colony property). The petitioner’s return was processed under Section 143(1) of the Act.

On 31st March, 2021, the AO issued a notice under Section 148 of the Act, as in force at the material time, calling upon the petitioner to file her return for AY 2017-18 within a period of fifteen days from the date of the said notice. Subsequently, the AO furnished the reasons for reopening the assessment.

It is apparent from perusal of the reasons that the petitioner’s assessment was reopened on the premise that the petitioner as well as certain other companies had sold the shares of TREPL to one Mr. Samir Dev Sharma during the Financial Year 2016-17 at an abysmally low value. During the course of the reassessment proceedings, the AO issued a notice under Section 143(2) read with Section 147 of the Act calling upon certain information including the information that was relevant for determining the market value of the Friends Colony property. The petitioner responded to the said notice and provided the information as sought for. The petitioner had explained that TREPL owns two floors of the Friends Colony property — first and third floors each having covered area of 2,248.44 sq. ft.

The petitioner asserted that the market value of the Friends Colony property, as determined by the government approved valuer, was ₹8,58,90,408/-(Rupees Eight Crores Fifty-eight Lakhs Ninety Thousand Four Hundred and Eight only) and she had also furnished the copies of the valuation report, balance sheet and profit and loss account of TREPL. A letter dated 24th March, 2022 furnished by the petitioner to the AO in response to the notice issued under Section 143(2) of the Act. The explanation as provided by the petitioner was accepted and the AO passed an assessment order dated 29th March, 2022 accepting the petitioner’s returned income.

Now the AO once again issued a notice dated 28th March, 2024 under Section 148A(b) of the Act enclosing therewith an annexure containing information which according to the AO, suggested that the petitioner’s income had escaped assessment and accordingly, called upon the petitioner to show cause why her assessment for AY 17-18 not be opened.
The Court observed that it was apparent from the reasons that the notice under Section 148A(b) of the Act was issued on the assumption that the petitioner had sold the shares of TREPL at an apparent value which was less than its fair value. It is important to note that whereas in the earlier round of proceedings, the AO had reasoned that income amounting to ₹18,91,41,050/- for AY 2017-18 had escaped assessment, the AO now stated that the information available suggested that the income amounting to ₹32,35,81,536/- had escaped assessment. The said view was premised on the basis that the value of the Friends Colony property was ₹32,35,81,536/- and the petitioner had sold the entire Friends Colony property to Mr. Samir Dev Sharma by transferring the shares of TREPL, which owned the said property. It is material to note that this was clearly the subject matter of examination in the previous round of the reassessment proceedings that had commenced by virtue of the notice dated 31st March, 2021 issued under Section 148 of the Act.

The petitioner responded to the notice by a letter dated 10th April, 2024. Once again, the petitioner reiterated that TREPL owned only two floors of the Friends Colony property – first and third floors and each of the said floors measured 2,248 sq.ft.

The petitioner furnished a valuation report which was furnished earlier disclosing the value of the two floors of the Friends Colony property which was owned by TREPL as ₹8,60,00,000/- (Rupees Eight Crores Sixty Lac Only). She reiterated that the fair market value of the shares sold by her and as determined in terms of Rule 11UAA of the Income Tax Rules, 1962 would amount to ₹42/- per share after considering the market value of the two floors of the Friends Colony property. The AO passed the impugned order holding that it is a fit case for issuance of notice under Section 148 of the Act. The impugned order proceeds on the basis that the entire shareholding (25,00,000 shares) of TREPL were transferred to one Mr. Samir Dev Sharma by three persons for a consideration of ₹10,50,00,000/-

The impugned order proceeds on the assumption that TREPL owned the entire Friends Colony property ad-measuring 500 sq. yds. (418.064 sq. mtrs.) and the circle rate in the given area is ₹7,74,000/- per sq. meter. Thus, the value of the immovable property owned by TREPL is ₹32,35,81,536/- and the same had been transferred indirectly by sale of shares of TREPL. The impugned order on the aforesaid basis computes the fair market value of the shares of TREPL sold by the petitioner.

The Hon. Court observed that it is clear that the information on the basis of which the impugned order has been passed was subject matter of examination in the earlier round of reassessment under Section 147 of the Act. The AO’s reason to believe that the petitioner’s income had escaped assessment, which had led to the issuance of notice dated 31st March, 2021, was founded on an assumption that the petitioner had sold the shares of TREPL at a price below its correct value. The notice issued under Section 143(2) of the Act during the said proceedings and the petitioner’s response dated 24th March, 2022 issued to the said notice clearly establishes that the examination revolved around the value of the immovable property held by TREPL (Friends Colony property). The petitioner’s response dated 24th March, 2022 indicates that the petitioner had forwarded the audited balance sheet and the profit and loss account of TREPL and had also explained that TREPL owned only two floors of the Friends Colony property. The AO had examined the said response and accepted the same. Clearly, the impugned order has been passed in respect of the same issue that was subject matter of examination in the earlier round.

The learned counsel for the Revenue contended that there was a difference in the issue involved as the impugned order has been passed on the information that TREPL had owned the entire Friends Colony property. He contended that in the earlier round, the AO had accepted that TREPL held only part of the Friends Colony property, however, information now available suggests that TREPL owns the entire Friends Colony property.

Undisputedly, the impugned order has been passed on the basis that TREPL owns the entire Friends Colony property. However, the same was clearly an issue in the earlier round as well and the petitioner had clearly explained the extent of property owned by TREPL. In her response to the notice dated 28th March, 2024 issued under Section 148A(b) of the Act, the petitioner had reiterated that TREPL owns only two floors of the Friends Colony property and there is no material on record available with the AO to contradict the same. The impugned order does not discuss why the petitioner’s assertion that TREPL owns only two floors of the Friends Colony property had been ignored. The counter affidavit filed on behalf of the Revenue also does not address the said issue. The counter affidavit merely reiterates what is stated in the impugned order.

The Court observed that it is apparent that the impugned order has been passed on surmises without any cogent material to controvert that TREPL owns only two floors of the Friends Colony property and not the entire building at the material time.

The question whether the TREPL owned the entire Friends Colony property is one that is easily verifiable by the AO. However, as noted above, the AO has completely ignored the petitioner’s response to the notice issued under Section 148A(b) of the Act in this regard in the impugned order. Similar approach has also been adopted in the counter affidavit as well.

Section 148A(d) of the Act mandates that the AO is required to pass an order on the basis of record and considering the response to the notice under Section 148A(b) of the Act. In this case, the record indicates that the information on the basis of which the assessment is sought to be reopened was fully examined in the earlier round of reassessment under Section 147 read with Section 144B of the Act. The petitioner’s response clearly stated that TREPL owned only two floors of the Friends Colony property and there is nothing credible on record that controverts it. The impugned order does not even advert to the said issue.

Thus, the impugned order and the impugned notice were quashed and set aside.

Section: 148 — Reassessment — Non-existing entity — notice issued to a non-existing entity post-merger was a substantive illegality and not some procedural violation:

26. City Corporation Limited vs. ACIT Circle – 1 Pune &Ors.

[WP (C) No. 6076 TO 6081 OF 2023]

Dated: 29th January, 2025

(Bom) (HC)] [Assessment Years : 2013-14 to 2019-20]

Section: 148 — Reassessment — Non-existing entity — notice issued to a non-existing entity post-merger was a substantive illegality and not some procedural violation:

The assessee is engaged in constructing and developing infrastructure facilities. In terms of the NCLT’s order dated 27th April, 2020, the CCL got merged with its wholly owned subsidiary “Amanora Future Tower Pvt. Ltd.” (AFTPL), with effect from 1st April, 2018.

By communication dated 27th April, 2020, the Petitioner informed the Income Tax Authority of the merger effective 1st April, 2018. This intimation bore the stamp and endorsement of receipt from the office of the Deputy Commissioner of Income Tax, Circle 1(1), Pune.

In the return filed on behalf of the Respondents, no dispute was raised about receiving this intimation on 27th August, 2020.

On 31st March, 2023, the Assistant Commissioner of Income Tax, Circle 1(1), Pune, issued a notice dated 31st March, 2013 under Section 148 of the Act, to AFTPL seeking to reopen the case in PAN: AAKCA3074H. The Assistant Commissioner obtained approval from the Principal Chief Commissioner of Income Tax to issue notice to “Amanora Future Towers Private Limited (now merged with City Corporation Limited)”.

The Petitioner thereupon instituted the writ Petitions, questioning the impugned notice dated 31st March, 2023, inter alia, on the ground that, post-merger, AFTPL was a non- existing entity. Therefore, no notice under Section 148 of the Act, could have been issued to AFTPL.

The learned counsel for the Petitioner, relied on Principal Commissioner of Income Tax, New Delhi vs. Maruti Suzuki India Ltd. (2019) 107 taxmann.com 375 (SC); Uber India Systems (P.) Ltd. vs. Assistant Commissioner of Income(2024) 168 taxmann.com 200 (Bombay); and Alok Knit Exports Ltd. vs. Deputy Commissioner of Income-tax, Circle 6(1)(1), Mumbai (2021) 130 taxmann.com 457 (Bombay); in support of the contention that the notice issued to a non- existing entity post-merger was a substantive illegality and not some procedural violation. Accordingly, he urged that the impugned notices be quashed and set aside.

The learned counsel for the Respondents, submitted that issuing notices in the name of AFTPL was not illegal. He also submitted that the Principal Commissioner of Income Tax specifically approved the issuance of such notices. It was submitted that the material on record shows that the notice was meant to be served upon the Petitioner. However, due to certain technical glitches, the utility system generated a notice in the name of AFTPL. He said the facts in the present case were like those in Skylight Hospitality LLP vs. Asstt. CIT(2018) 92 taxmann.com 93/254 Taxman 390 (SC). He submitted that, in this case, the Delhi High Court upheld a notice issued to the company that had already merged. Accordingly, it was urged that these Petitions may be dismissed.

The Hon. Court observed that the merger between City Corporation Limited and Amanora Future Towers Private Limited, which was effective from 1st April, 2018, was not disputed. This merger was based on the NCLT’s order dated 27th April, 2020. There was also no dispute about the Petitioner, vide a communication received by the Income Tax Department on 27th August, 2020 informing about the merger effective 1st April, 2018. No dispute was raised about the department not receiving the intimation on 27th August, 2020 or about the department being unaware of the merger. Still, the impugned notices dated 31st March, 2023 under Section 148 of the Act, were issued only in the name of “Amanora Future Towers Private Limited”. The crucial factor being that all such notices were issued to and in the name of ‘Amanora Future Towers Private Limited’

As of the date of the issue of the impugned notices, the noticee ‘Amanora Future Towers Private Limited’ could not have been regarded as a ‘person’ under Section 2(31) of the Act. In fact, that was a non-existent entity. In Maruti Suzuki case the Hon’ble Supreme Court has held that notice issued in the name of a non-existent company is a substantive illegality and not merely a procedural violation of the nature adverted to in Section 292B of the Act.

The Hon. Court noted that in the Maruti Suzuki case, the Hon’ble Supreme Court noted that the merged company had no independent existence after the merger. The Court noted that even though the Assessing Officer was informed of the merged company having ceased to exist due to the approved merger scheme, the jurisdictional notice was issued only in its name. The Court held that the basis on which jurisdiction was invoked was fundamentally at odds with the legal principle that the merged entity ceases to exist upon the approved merger scheme. Participation in the proceedings by the petitioner company into which the merged company had merged or amalgamated could not operate as an estoppel against the law.

Similarly in Ubber India Systems case, the Coordinate Bench held that where by virtue of an order passed by the NCLT, the assessee company stood amalgamated with the petitioner, notice issued under Section 148A(b) and Section 148 to the assessee, which was a non-existent company was illegal, invalid and non-est. Similarly, in Alok Knit Exports Ltd(supra), another Coordinate Bench where the Assessing Officer had committed a fundamental error by issuing notice under Section 148 of the IT Act in the name of an entity which had ceased to exist because of it having merged with the petitioner company, the stand of the Assessing Officer that this was only an error which could be corrected under Section 292B could not be sustained.

The Court observed that in the affidavit filed by the tax department there is a clear admission that the amalgamation of the company was brought to the notice of the Department. The only explanation is that “notice was issued on the non-existing company due to technical glitch in the system wherein no field in the notice u/s 148 of the Act is editable.”

The affidavit states that files were moved proposing notices in the names of both entities, AFTPL and the Petitioner (CCL). There was a reference to seizure proceedings, the two PAN numbers, and the lack of an editable field on this notice. Therefore, it was submitted that the notice was generated on AFTPL’s PAN.

In short, the averments in the affidavit purport to apportion the blame on the department’s utility system. Based upon this, the fundamental error is sought to be passed off as a mere technical glitch.

The Court held that based on the above averments and the arguments, the fundamental error in issuing the impugned notices against a non-existing company despite full knowledge of the merger cannot be condone. The impugned notices, which are non-est cannot be treated as “good” as urged on behalf of the Respondents. In Maruti Suzuki case, the Hon’ble Supreme Court has held that issuing notice in the name of a non-existing company is a substantive illegality and not a mere procedural violation of the nature adverted to in Section 292B of the Act.

The department contention about the facts in the present case being akin to those in Skylight Hospitality LLP case could not be accepted. The Court held that the Special Leave Petition filed by the Skylight Hospitality LLP (supra) against the judgment of the Delhi High Court rejecting its challenge was dismissed in the peculiar facts of the case, which weighed with the Court in concluding that there was merely a clerical mistake within meaning of Section 292B. The Hon’ble Supreme Court held that in Maruti Suzuki case the notice under Section 143(2) under which jurisdiction was assumed by the assessing officer, was issued to a non-existent company. The assessment order was issued against the amalgamating company. “This is a substantive illegality and not a procedural violation of the nature adverted to in Section 292B”.

The Hon. Court also referred to decisions in case of Anokhi Realty (P) Ltd. Vs. Income-tax Officer(2023) 153 taxmann.com 275 (Gujarat); Adani Wilmar Ltd. vs. Assistant Commissioner of Income-tax(2023) 150 taxmann.com 178 (Gujarat) and in the case of Principal Commissioner of Income Tax -7, Delhi vs. Vedanta Limited ITA No. 88 of 2022 decided on 17th January, 2025.

Accordingly, the impugned notices were quashed and set aside.

Statistically Speaking

1. COUNTRIES WHICH RECEIVED THE MOST MONEY FROM INDIA IN BUDGET 2025-26

2. POWERFUL PASSPORTS IN THE WORLD

Rank Country Visa free destinations
1 Singapore 195
2 Japan 193
3 Finland 192
3 France 192
3 Germany 192
3 Italy 192
3 South Korea 192
3 Spain 192
4 Austria 191
4 Denmark 191
India has dropped five places in this year’s rankings, falling from 80th to 85th.

The Indian passport now provides visa-free access to 57 countries
U.S. passport has fallen to ninth place. Currently, U.S. passport holders enjoy visa-free access to 186 destinations.
Pakistan, Yemen, Iraq, Syria, and Afghanistan rank among the bottom five. 
Source: Henley Passport Index 2025

 

3. DIRECT TAX COLLECTIONS FOR F.Y. 2024-25

            (₹ in Crore)
FY 2023-24 (as on 10th February, 2024)
Corporate

Tax (CT)

 Non*- Corporate

Tax (NCT)

 Securities Transaction

Tax (STT)

 Other taxes (OT) Total
Gross Collection 8,74,561 9,30,364 29,808 3,461 18,38,194
Refunds 1,41,132 1,46,321 – 78 2,87,531
Net Collection 7,33,429 7,84,042 29,808 3,384 15,50,663

(₹ in Crore)
FY 2024-25 (as on 10th February, 2025) Percentage growth
Corporate

Tax (CT)

 

 Non*-Corporate

Tax (NCT)

 Securities Transaction

Tax (STT)

 Other taxes (OT) Total Total Growth
Gross Collection 10,08,207 11,28,040 49,201 3,059 21,88,508 19.06%
Refunds 2,29,731 1,80,317 – 57 4,10,105 42.63%
Net Collection 7,78,475 9,47,723 49,201 3,003 17,78,402 14.69% 
Source: Central Board of Direct taxes

 

4. COUNTRIES WITH THE MOST IPOS IN 2024

5. GROWTH IN ELECTRONIC EXPORTS

Letter to the Editor

Dear Sir,

I read the ‘NAMASKAAR’ column with a keen interest. I’m writing to you about the article ‘One’s nature cannot be changed’ in a recent BCA Journal, authored by Mr C N Vaze. I appreciated this column and it has always fascinated me. It has a lot of learning, relearning, and material to introspect and work on oneself to become a better human being.

He has rightly said a lion cannot be expected to eat grass, or a fox will always remain धूर्त… For human beings, I will share a conversation between Lord Brahma and Naradaji, when Lord was seeding this planet with the various species, he would give details of that creation to Naradaji, when it was the turn to create humans, the Lord said about human beings, इसकी प्रवर्ति पानी की तरह नीचे ही गिरने की होगी, नारदजी विस्मय से बोले, प्रभु, ऐसा अनर्थ क्यो कर रहे हैं, ब्रह्मा जी ने उत्तर दिया, इसे मैं एक ऎसी चीज़ दे रहा हूँ, जिसे ये इस्तेमाल करेगा, तो मुझ पर भी राज करेगा, वो था दिमाग, विवेक… We as human beings need to use our विवेक, the biggest blessing bestowed on us, or we will live a life worse than animals and endanger the whole planet. And we should keep changing, and everybody can change; change is constant. Dinosaurs became extinct as they could not change, and tomorrow the human race will become extinct.

COVID-19 did try to give a wake-up call, but what we see today is better not said. I learn from Kabir, Rahim, Tulsidas, and many such saints.

My appreciation to Mr Vaze and the Editorial Team.

With regards

Yatendra Goyal,
Chartered Accountant

Tech Mantra

Some more productivity apps for this edition:

Simple Login – Anti Spam

When you give away your personal email ID online to anyone, there is a good chance that the same would end up with a spammer or a hacker. SimpleLogin acts as a firewall to protect your personal email inbox.

SimpleLogin is an open-source solution to protect your email inbox. It allows you to quickly create a random email address, an alias. All emails sent to that alias are forwarded to your personal email address.

You can use the alias when subscribing to a newsletter, signing up for a new account, or giving your email to someone you don’t trust. Not only an alias can receive emails, it can also send emails. An alias is a full-fledged email address.

Later, you can simply block or delete an alias if it’s too spammy. That’s it!

Android: https://bit.ly/4gjd8dy

 

USB Lockit – Pendrive Password

This app allows you to lock / unlock your USB drives. If you have USB drives with photos, audios, videos, etc. and would like to lock them with a password, this app is for you. Once the drive is locked, nobody can access your files without unlocking it by entering the password!

The locking / unlocking can be done easily, by inserting the USB drive in your phone / Laptop C-Type port and going through 3 quick steps:

1. To lock the USB drive and protects all your files, simply set a PIN and click on LOCK button.

2. To unlock the USB drive and access to all your files, enter your PIN and click on UNLOCK button.

3. To relock the USB drive without entering the PIN every time, just a click on the LOCK button.

ATTENTION: If you lose or forget the PIN, it cannot be recovered. It is advisable to write it in a safe place.

Android : https://bit.ly/3PVFQ9S

Windows : https://www.usblockit.com/

 

Auto Answer Call—Raise to Ear

If you are tired of always having to swipe in order to answer an incoming call, Auto Answer Call lets you answer a call by simply holding your phone to your ear. When your phone rings and the app detects that it is near your ear, it will beep once and automatically answer the call. It’s that simple!

NOTE: The app does not currently work for WhatsApp calls.

It works with your existing call screen / phone app and is very easy to enable and disable. You also have an option to end an ongoing call by turning the phone face down and to automatically turn down the ringer volume once the phone has been picked up.

A very simple and efficient app for daily use – for a small price.

Android : https://bit.ly/3WBPwdn

 

Droid Dashcam – Video Recorder

Convert your phone into a dashcam with Droid Dashcam!

Droid Dashcam is a great driving video recorder (dashboard camera, BlackBox) app for car / vehicle drivers that can continuously record videos in loop mode, add subtitles with needed information directly on those videos and record in the background, auto start recording, and much more.

You can overlay captions directly on the Recording Video file, including Timestamp (Date), Location Address, GPS Coordinates, Speed (based on GPS data), etc. You can continue recording in the background and use other apps that don’t use camera. You can also use the notification panel to start/stop recording while this app is running in the background. You can use any camera for recording (rear / front) but only some devices allow you to choose a camera with a wide-angle lens.

Overall, it is a great app if you will use your dashcam sparingly and do not need it daily.

Android : https://bit.ly/42svgi6

ASS – Movement

Readers may get the impression that it is a donkey’s movement. It is far from that. ASS stands for ‘Anti-Simplification of Statutes’. It is a great movement in the national interest.

There was a country where all laws were very complicated. Certain anti-social elements were pressurising the King to simplify the laws. The King directed his Minister to appoint various committees from time to time to look into the matter.

The Minister after a study over ten to twenty years, prepared a Bill to simplify a particular law relating to revenues. There was a big hue and cry in all circles, even before reading the contents of the Bill. Many could not even digest the idea of simplification.

Certain groups in the kingdom who were like opposition parties and not in favour of the King resisted it vehemently. They felt that it was their duty to protest any proposal made by the King without even knowing what it contained. Many didn’t know what and why they were resisting. There was a huge discontent in many quarters. Therefore, the King appointed 3 special judges to hear the representations of different groups.

Bureaucrats who were asked to draft the simplified law felt that it was unethical to do so. Their thinking was that any law has to be complicated. If a common man knows the law, he may commit lesser defaults and the King will lose revenue on account of fines and penalties.

Expert Committee members demanded the constitution of fresh committees to do a comparative study or cost-benefit analysis. It was difficult for them to survive without being a member of any such committee.

Lawyers had a point for objection. They said many of them would be left with no work, if laws are simplified and there is no litigation. Another strong objection came from the authors and publishers of books, people engaged in preparing CDs of compilation of cases and so on. They said it would create lot of unemployment in the printing industry and also in the distributing agencies.

Those who were in the liaisoning activity could not bear this shock. They said they thrive on the settlement of complicated cases. The Union of employees in the Revenue Department and the Courts realised that many of them would lose their jobs as many establishments would be closed down.

After all this happened, Chartered Accountants were asked about their reaction. They did not participate in the proceedings since their ‘say’ is never heard by anybody, not even by their own subordinates. According to them, ‘Simplification’ ‘Simply a Fiction’. They only expressed that be it simplified or be it complicated, please don’t make us certify any document or sign any report! They said all clients did whatever they liked and CAs are required to endorse all the sins committed by others.

Till the Bill is passed or otherwise, the book publishing business is thriving and there is a boom in seminar business!

ASS-Movement is always successful.

Regulatory Referencer

I. DIRECT TAX: SPOTLIGHT

1. Guidance for application of the Principal Purpose Test (PPT) under India’s Double Taxation Avoidance Agreements — Circular No. 1/2025 dated 21st January, 2025

2. Rule 114DA(1) amended to substitute Form No. 49C and to provide that the said Form be filed within eight months from the end of the financial year — Income-tax (Fourth Amendment) Rules, 2025- Notification No. 14/ 2025 dated 7th February, 2025

II. FEMA READY RECKONER

RBI amends receipt and payment norms for trade transactions between two ACU residents:

The RBI has amended FEMA Notification No. 14(R), the Manner of Receipt and Payment Regulations. It has been now been provided that payment from a resident in the territory of one participant country to a resident in the territory of another participant country for a trade transaction should be through the ACU mechanism, or as per the directions issued by RBI to Authorised Dealers. Here, participant country means Member countries of ACU other than Nepal and Bhutan. Thus, the requirement is now restricted only to residents of these countries and not to suppliers located in these countries. Proviso meant for suppliers to India who are residents of countries other than countries that are participants of ACU has been consequently removed. For all other trade transactions between these countries, the payment can be in INR or any foreign currency.

[NOTIFICATION NO. FEMA 14(R)(1)/2025-RB, dated 4th February, 2025]

RBI announces steps to encourage the use of Indian Rupee and local currencies for settlement of cross-border transactions

The RBI has been focusing on Internationalisation of Indian Rupee since some time. In this process, it keeps amending FEMA notifications. Amendments have been made in FEMA Notification 5(R) — Deposit Regulations, FEMA Notification 10(R) — Foreign Currency Accounts by a person resident in India Regulations and FEMA Notification 395 — Mode of Payment and Reporting of Non-Debt Instruments Regulations. The main amendments are as follows:

i. The Overseas branches of AD banks will be able to open INR accounts for a person resident outside India for settlement of all permissible current account and capital account transactions with a person resident in India.

ii. Persons resident outside India will be able to settle bona fide transactions with other persons resident outside India using the balances in their repatriable INR accounts such as Special Non-resident Rupee (SNRR) account and Special Rupee Vostro Account (SRVA).

iii. Persons resident outside India will be able to use their balances held in repatriable INR accounts for foreign investment, including FDI, in non-debt instruments.

iv. Indian exporters will be able to open accounts in any foreign currency overseas for settlement of trade transactions, including receiving export proceeds and using these proceeds to pay for imports.

[Foreign Exchange Management (Deposit) (Fifth Amendment) Regulations, 2025 — Notification No. FEMA 5(R)(5)/2025-RB, dated 14th January, 2025]

[Foreign Exchange Management (Foreign Currency Accounts by a Person Resident in India) (Fifth Amendment) Regulations, 2025 — Notification No. FEMA 10(R)(5)/2025-RB dated 14th January, 2025]

[Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) (Third Amendment) Regulations, 2025 — Notification No. FEMA 395(3)/2025-RB, dated14th January, 2025]

RBI updates FEMA Master Directions on Foreign Investment, Export of Goods & Services, and Deposits

Over the last few months, the RBI and GOI have amended several FEMA rules and notifications. The changes have now been incorporated in the respective Master Directions. The RBI has issued Updated Master Directions on “Deposits and Accounts”, “Export of Goods and Services”, and “Foreign Investment in India”. There are several clarifications provided in the Master Direction on Foreign Investment in India, some of which are listed below:

  • Indian companies which are Foreign Owned and Controlled (referred to as FOCCs) are permitted to make further investment in an Indian company only as per the FDI provisions. In spirit, these are considered as non-residents and hence they need to comply with FDI provisions to make further investment in India. While all restrictions followed for FOCCs, it was not clear whether certain reliefs which were provided to non-residents for making FDI were available to FOCCs are not. It is not clarified that the reliefs provided to non-residents under NDI Rules while making FDI — like permissibility of swap, deferred consideration, etc. — are also available to FOCCs.
  • With respect to Indian residents who migrate abroad and become non-residents — it has been clarified that the investments will be held by them on a non-repatriable basis.
  • Further, it has been clarified where a non-resident acquires equity instruments by way of transmission on the death of an Indian resident, shall be considered as a non-repatriable investment.
  • The definition of control has been streamlined throughout all provisions.

[Master Direction — Deposits and Accounts; Export of Goods and Services; Foreign Investment in India]

IFSCA notifies IFSCA (Bullion Market) Regulations, 2025 to provide a framework for recognition of bullion exchanges & clearing corporations

The IFSC Authority (IFSCA) has notified IFSCA (Bullion Market) Regulations, 2025 to provide a framework for recognition of bullion exchanges & clearing corporations, and registration of bullion depositories & vault managers. It specifies provisions related to an application for recognition of bullion exchange, conditions for grant of recognition, period of recognition, renewal & withdrawal of recognition. Also, it prescribes the operational framework of bullion exchange and the general obligations of bullion clearing corporations.

[IFSCA Notification F. No. IFSCA/GN/2025/001]

Search and seizure — Assessment in search cases — Precedents — Additions to income cannot be made on data appearing in pen-drive not unearthed during search which does not constitute incriminating material.

89. Principal CIT vs. Vikram Dhirani

[2025] 472 ITR 342 (Del)

A. Y. 2007-08

Date of order: 20th August, 2024

Ss.132 and 153A of ITA 1961

Search and seizure — Assessment in search cases — Precedents — Additions to income cannot be made on data appearing in pen-drive not unearthed during search which does not constitute incriminating material.

In an appeal by the Revenue, on the question whether the Tribunal erred in deleting the addition made to the income of the assessee in the assessment made pursuant to a search u/s. 132 of the Income-tax Act, 1961 for the A. Y. 2007-08, dismissing the appeal, the Delhi High Court held as under:

“i) Since the assessment initiated in respect of the A. Y. 2007-08 was one which had already stood concluded, the Tribunal had held that since the pen-drive and the data appearing thereon having not been unearthed in the course of the search u/s. 132 of the Act, it would not constitute incriminating material. It had consequently followed the view consistently taken by this court.

ii) The assessment was confined to section 153A and consequently the significance of the incriminating material found in the course of the search alone would be the basis for any additions to the income. Since the pen-drive was an article which was not recovered in the course of the search but constituted material which had been obtained by the Department through the exchange of information route, there was no ground to interfere with the view expressed by the Tribunal.”

Offences and Prosecution — Wilful attempt to evade tax — Delay in payment of tax does not amount to evasion of tax — Prosecution not valid:

88. HansaMetallics Ltd. vs. Dy. CIT

[2025] 472 ITR 737 (P&H)

A. Y. 2012-13

Date of order: 22nd January, 2024

S. 276C of ITA 1961

Offences and Prosecution — Wilful attempt to evade tax — Delay in payment of tax does not amount to evasion of tax — Prosecution not valid:

The Assessee filed its return of income for A. Y. 2012-13 on 29th December, 2012 declaring total income at ₹8,20,53,544. As per the return of income, the self-assessment tax was pending. The self-assessment tax was paid belatedly on 10th July, 2013 along with interest.

The Assessing Officer issued a notice dated 11th February, 2014 requiring the Assessee and its directors to show cause as to why the prosecution proceedings u/s. 276C(2) should not be initiated. On the basis of legal opinion sought from the standing counsel of the Income-tax Department, a complaint was filed u/s. 276C read with section 278B of the Act.

Thereafter, the Criminal Court came to the conclusion that a case was made out and charges were framed.

The Assesseecompany and its directors filed a petition for quashing the complaint and all the consequential proceedings arising therefrom. The Assessee’s contention was that there was no evasion of tax at all. Though there was a delay in payment of tax, but the said tax was admitted / acknowledged in the return of income. On the other hand, the Department contended that the Assessee was well within his financial limits to pay the tax at the time of filing return of income, yet it did not choose to pay the tax and thereby caused loss to the revenue.

The Punjab and Haryana High Court allowed the petition and held as follows:

“i) Prosecution u/s. 276C(2) of the Income-tax Act, 1961 read with the other provisions of the Act can only be launched if there was a wilful evasion or attempt at evasion of either tax, penalty or interest. Delay in payment of Income-tax would not amount to evasion of tax.

ii) It was not in dispute that the Income-tax was self assessed and payment thereof was also made, though belatedly. The tax along with interest was paid on July 10, 2013. The show-cause notice for delayed payment was sent only on February 11, 2014 and February 24, 2014 pursuant to which the complaint was instituted. Therefore, by no stretch of imagination could it be held that there was any evasion of tax on the part of the assessees, though there was a delay in the payment of the tax for which interest was paid. The prosection was not valid.”

Investment business — Scope of definition of transfer — Capital loss — Reduction in number of shares and face value of shares remaining same — Change in redeemable value of shares — Extinguishment of rights in shares — No transfer within meaning of s. 2(47).

87. Principal CIT vs. Jupiter Capital Pvt. Ltd.

[2025] 472 ITR 561 (Kar)

A. Y. 2014-15

Date of order: 20th February, 2023

S. 2(47) of ITA 1961

Investment business — Scope of definition of transfer — Capital loss — Reduction in number of shares and face value of shares remaining same — Change in redeemable value of shares — Extinguishment of rights in shares — No transfer within meaning of s. 2(47).

In an appeal by the Revenue,on the question whether the Tribunal was right in setting aside the disallowance of capital loss claimed by the assessee by holding that there was extinguishment of rights of shares when no such extinguishment of rights was made out by the assessee as required under section 2(47) of the Income-tax Act, 1961 and there was no reduction in face value of shares, dismissing the appeal, the Karnataka High Court held as under:

“i) The undisputed facts were that pursuant to the order passed by the High Court of Bombay, number of shares had been reduced to 9,988. The face value of the shares had remained same at ₹10 even after the reduction. The Assessing Officer’s view that the voting power had not changed as the percentage of the assessee’s share of 99.88 per cent. had remained unchanged was untenable because if the shares were transferred at face value, the redeemable value would be ₹99,880 whereas the value of 14,95,44,130 number of shares would have been ₹1,49,54,41,300.

ii) The Tribunal had rightly followed the authority in Karthikeya vs. Sarabhai v. CIT [1997] 228 ITR 163 (SC); (1997) 7 SCC 524; 1997 SCC OnLine SC 152, with regard to meaning of transfer by holding that there was no transfer within the meaning of the expression “transfer” as contained in section 2(47). There was no error in the order of the Tribunal setting aside the disallowance of capital loss claimed by the assessee by holding that there was extinguishment of rights of shares.”

Capital or revenue receipt — Interest on short-term fixed deposit — Capital work-in-progress — Assessee joint venture formed by public sector undertakings to acquire coal mines overseas — Interest earned on fixed deposit of share capital prior to acquisition of coal mines and amounts returned on abandonment of proposal — Interest earned prior to commencement of business on funds brought in form of share capital for specific purpose — Interest received on fixed deposit part of capital cost and to be treated as capital work-in-progress.

86. Principal CIT vs. International Coal Ventures Pvt. Ltd.

[2025] 472 ITR 307 (Del)

A. Ys. 2012-13

Date of order: 20th December, 2024

S.4 of ITA 1961

Capital or revenue receipt — Interest on short-term fixed deposit — Capital work-in-progress — Assessee joint venture formed by public sector undertakings to acquire coal mines overseas — Interest earned on fixed deposit of share capital prior to acquisition of coal mines and amounts returned on abandonment of proposal — Interest earned prior to commencement of business on funds brought in form of share capital for specific purpose — Interest received on fixed deposit part of capital cost and to be treated as capital work-in-progress.

The assessee was a joint-venture company formed by five public sector undertakings, SAIL, CIL, RINL, NMDC and NTPC, for the purpose of ensuring adequate and dependable coal supply for its promoter companies. During the financial year relating to the A. Y. 2012-13, the assessee pursued a proposal to acquire and develop a coal mine overseas and received equity contributions from some of these undertakings. The amounts received from RINL were kept in a fixed deposit with a bank. Subsequently since the proposal for acquisition of the coal mine which was being pursued was abandoned, the assessee refunded the amount received from RINL. Since the assessee had earned interest on the amount received from RINL, it paid interest to RINL which confirmed that the amount received by it was accounted for as income in its hand and tax was paid.

In the appeal by the Revenue, on the question whether interest on funds that were called for and earmarked for a specific purpose of acquiring a coal mine and deposited in the short-term fixed deposit could be construed as incidental to setting up the business of acquisition of a coal mine, dismissing the appeal, the Delhi High Court held as under:

“i) The accounting treatment of capitalising expenses during the preoperative stage of setting up a business, rests on the rationale that the cost incurred for setting up the profit-making apparatus is required to be accounted for as the value of that asset. Such expenditure is incurred for bringing the undertaking into existence. Thus, it would not be apposite to treat such preoperative expenses as revenue expenses since it cannot be matched with the revenue receipts. The amount incurred for construction or acquisition of the asset would necessarily have to be accounted as the cost of that capital asset. This principle applies only in cases where substantial time is required to construct the asset or bring the asset to use. The financial costs for such assets are thus
considered as a part of the intrinsic value of the asset. There is a distinction between the price of an asset and its cost. On the same principles, the amounts received which are directly linked to the
acquisition or construction of the asset, are required to be reduced from the capital cost of the said asset. In one sense, such receipts mitigate the cost of the capital asset and it is essential to reflect the correct cost of the asset.

ii) The Accounting Standard 16 applies to a “qualifying asset”, which is defined as an asset that takes substantial period to get ready for its intended use or sale and also explains that the substantial period of time as contemplated under the standard, primarily depends upon the circumstances of each case. Ordinarily, the same should be considered as twelve months unless a shorter or longer period is justified in the facts and circumstances of the case. It also explains that for estimating this period, “the time which an asset takes technologically or commercially, to get ready for its intended use or sale”, is required to be considered.

iii) Accounting treatment of various items are guided by an overarching principle that final accounts should reflect the true and fair view of the reported entity. In order for a capital value of an asset (which takes a considerable time to bring it to intended use) to be fairly disclosed on historical cost basis, it would be essential to subsume within the cost of the said asset all elements of expenditure, which directly contribute to the cost of that asset. It is for this reason that general administrative cost of an entity which cannot be attributed to a particular asset is not construed as the cost of that asset. But the expenditure that is directly linked to the construction or acquisition of a qualifying asset, is required to be treated as a part of its cost.

iv) If the interest was earned on the amounts which were temporarily kept in fixed deposits in the course of acquisition of the coal mine to set up the assessee’s business, the interest earned would require to be accounted for as the part of the capital value of the business or asset. A caveat was added that such accounting treatment was or would be applicable only if the nature of the asset was such that required time for construction or for putting it in use. Illustratively, the same would be applicable where the asset is to be constructed, developed or is of a nature that required considerable time to bring it to use. In case where a plant is being set up in a factory and the requisite funds for setting up the same are deployed for a period of time, the interest paid on the amount borrowed for the said purpose and interest earned on temporary deposits during the course of deployment are required to be accounted for as a part of the capital costs. This is not true for an off-the-shelf product. Illustratively, if a motor vehicle is purchased from borrowed capital, neither the interest paid nor the interest earned on the funds borrowed for payment of consideration of the same can be accounted for as a part of the cost of the said asset.

v) The assessee was set up to acquire resources to ensure supply of coal and at the material time it was in the process of negotiation for acquiring a coal mine, to set up its business, and thus called for capital from its shareholders for the purpose of payment of the acquisition costs. It was the part of the said funds that were kept in the short-term fixed deposit in the bank for pending payment of the construction. The attempt to acquire the coal mine was aborted and thus the amounts borrowed were repaid to RINL. It was not disputed that the funds in question were not surplus funds of the assessee, the same were called for and were earmarked for acquisition of a coal mine overseas which was to be the assessee’s undertaking as the assessee was formed for the purpose of acquiring and operating a coal mine overseas.

vi) The interest received on borrowed funds, which were temporarily held in interest-bearing deposit, was a part of the capital cost and was required to be capitalised as capital work-in-progress.”

Best judgment assessment — Estimation of gross receipt — Special Audit Report — Relates only to a particular A. Y. — Special Audit Report for earlier year cannot be the basis to conclude following of similar pattern by Assessee in later A. Y. — Disallowance of administrative and entire salary expenditure —Matter remanded to the AO for re-computation of income.

85. World Vision India vs. NFAC

[2025] 472 ITR 564(Mad.)

A. Y. 2018-19

Date of order: 19th December, 2024

Ss. 37, 142(2A) and 144of ITA 1961:

Best judgment assessment — Estimation of gross receipt — Special Audit Report — Relates only to a particular A. Y. — Special Audit Report for earlier year cannot be the basis to conclude following of similar pattern by Assessee in later A. Y. — Disallowance of administrative and entire salary expenditure —Matter remanded to the AO for re-computation of income.

The assessee filed its return of income for AY 2018-19. The said return was selected for scrutiny assessment. The assessment was completed and order dated 14th September, 2021 was passed. In the said order, the Assessing Officer relied upon special audit report dated 2nd June, 2017 as also the assessment orders passed for A. Ys. 2014-15, 2015-16 and 2017-18. The report dated 2nd June, 2017 was prepared u/s. 142(2A) of the Act for AY 2014-15, pursuant to which the assessment orders for AYs 2014-15, 2015-16 and 2017-18 were passed. The orders for AY 2014-15, 2015-16 and 2017-18 were challenged in appeal before the CIT(A).

In the A. Y 2018-19, the Assessing Officer concluded that the Assessee had applied 67 per cent of the gross receipts for charitable purposes and for the balance the Assessee had failed to establish any documents to substantiate that the amount was utilised for charitable purposes and therefore the demand has been confirmed.

The Assessee filed a writ petition challenging the assessment order mainly on the ground that the basis for coming to the conclusion that the Assessee has failed to utilize the amount for charitable purposes is based on the special audit report dated 2nd June, 2017 which was generated for AY 2014-15. The Hon’ble Madras High Court allowed the petition and remanded the matter back to the AO for the re-computation of income and held as follows:

“i) Prima facie reliance on the special audit report u/s. 142(2A) generated for the earlier assessment years could not be a basis to conclude that the similar pattern would have been followed by the assessee during the subsequent assessment years and to do so would amount to assessment by sampling. The special audit report was for the A. Y. 2014-15. In terms of section 142(2A) the special audit report could relate only for a particular assessment year since the expression used is, “if at any stage of the proceedings before him”, the Assessing Officer, having regard to the nature and complexity of the accounts, volume of the accounts, doubts about the correctness of the accounts, multiplicity of transactions in the accounts or specialised nature of business activity of the assessee, and the interests of the Revenue, was of the opinion that it was necessary so to do, he may, with the previous approval of the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner, direct the assessee to get either or both of, (i) getting the accounts audited by an accountant, as defined in sub-section (2) of section 288 , nominated by the competent authority or (b) getting the inventory valued by a cost accountant nominated by the competent authority.

ii) The assessment order indicated that no allowance had been made for the expenses incurred by the assessee towards administrative and salary expenses of the assessee and had only been allowed to accumulate 15 per cent. of the gross receipt. It was the contention of the Department that if no other amount was to be allowed, the Department had to make best judgment assessment u/s. 144. Therefore, the assessment order was set-aside and the matter was remitted back to the Assessing Officer to pass a fresh order on the merits and in accordance with law independently without getting influenced by the special audit report u/s. 142(2A) generated for the A. Y. 2014-15. Since the re-computation of income required a proper consideration, the assessee was directed to give a proper reply with proper evidence explaining the expenses which it sought to exclude.”

Assessment — Faceless assessment — Ex parte assessment order — Notices of demand and penalty — Validity — Notices u/s. 142(1) and 143(2) — Mandatory condition — Failure to serve notices on assessee — Notices sent to unregistered e-mail address though assessment orders for earlier and subsequent A. Ys. sent to correct e-mail address — Reliance on assessee’s permanent account number database or alternate e-mail address cannot substitute for statutory compliance — Procedural irregularities in issuing and serving notices undermine jurisdiction and legality of entire assessment process — Ex parte assessment order and consequent demand, penalty notices quashed — Department given liberty to issue fresh notices if necessary in accordance with law:

84. Neha Bhawsingka vs. UOI

[2025] 472 ITR 335 (Cal)

A. Y. 2022-23

Date of order: 22nd November, 2024

Ss.142(1), 143(2), 144, 144B, 156, 271(1)(d) and 271AAC(1) of ITA 1961

Assessment — Faceless assessment — Ex parte assessment order — Notices of demand and penalty — Validity — Notices u/s. 142(1) and 143(2) — Mandatory condition — Failure to serve notices on assessee — Notices sent to unregistered e-mail address though assessment orders for earlier and subsequent A. Ys. sent to correct e-mail address — Reliance on assessee’s permanent account number database or alternate e-mail address cannot substitute for statutory compliance — Procedural irregularities in issuing and serving notices undermine jurisdiction and legality of entire assessment process — Ex parte assessment order and consequent demand, penalty notices quashed — Department given liberty to issue fresh notices if necessary in accordance with law:

The assessee was in trading business. For the A. Y. 2022-23, an intimation u/s. 143(1) of the Income-tax Act, 1961 was sent to the assessee’s registered e-mail address, confirming that the return was processed without any discrepancies. Similar communications for the earlier A. Ys. 2019-20 to 2021-22 and the subsequent year 2023-24 were also sent to the same registered e-mail address. While accessing the Income-tax portal, the assessee’s tax consultant discovered that several notices, including u/ss. 143(2) and 142(1) and show-cause notices were issued against the assessee for the A. Y. 2022-23 and sent to an unregistered e-mail address. The ex parte assessment order was passed u/s. 144 read with section 144B making disallowances on account of purchases as non-genuine and unsecured loan as unexplained credit u/s. 68. Penalty notices u/ss. 271(1)(d) and 271AAC(1) were also issued.

The assessee filed a writ petition contending that the assessment order and demand notices were vitiated since they were not served at the assessee’s registered e-mail address as required u/s. 282 but were sent to an unregistered e-mail address which was not associated with her. The Calcutta High Court allowed the petition and held as under:

i) The assessment order passed u/s. 144 read with section 144B, the consequent demand notice u/s. 156 and the penalty notices u/s. 271(1)(d) and 271AAC(1) were vitiated due to procedural lapses and non-compliance with statutory provisions. The notices u/s. 143(2) and 142(1) were not served to the assessee at her registered e-mail address as mandated u/s. 282 but were sent to an unregistered e-mail address, thereby depriving the assessee of a fair opportunity to respond, violating the principles of natural justice.

ii) The assessee had a legitimate expectation, arising from consistent past practices, that all communications would be sent to her registered e-mail address. The failure to adhere to this established protocol and the absence of proper service of notices invalidated the subsequent assessment proceedings and the ex parte assessment order passed u/s. 144 and 144B. The Revenue’s reliance on the assessee’s permanent account number database or an alternate e-mail address could not substitute for statutory compliance. Procedural irregularities in issuing and serving notices undermine the jurisdiction and legality of the entire assessment process. The assessment order could not be completed without issuance of a notice u/s. 143(2). Hence, the assessment proceedings and the assessment order without issuing the notice u/s. 143(2) were bad in law.

iii) Accordingly, the assessment order, demand notice and penalty notices were quashed and set aside. The authorities were directed to issue fresh notices, if deemed necessary, strictly adhering to the statutory provisions and ensuring proper service to the assessee.”

Assessment — Faceless assessment — Jurisdiction of NFAC — Exempt income — Jurisdictional AO passing assessment order giving effect to order of Tribunal on issue of disallowance u/s. 14A — Order attaining finality — NFAC cannot continue assessment proceedings in concluded assessment — Assessment Order passed by NFAC set-aside.

83. Religare Enterprises Ltd. vs. NFAC

[2025] 472 ITR 329 (Del)

A. Y. 2013-14

Date of order: 28th November, 2024

Ss. 143(3), 144B and 254 of ITA 1961

Assessment — Faceless assessment — Jurisdiction of NFAC — Exempt income — Jurisdictional AO passing assessment order giving effect to order of Tribunal on issue of disallowance u/s. 14A — Order attaining finality — NFAC cannot continue assessment proceedings in concluded assessment — Assessment Order passed by NFAC set-aside.

The Assessee filed revised return of income for AY 2013-14 declaring total income at ₹2,70,87,75,810. This included income from dividend amounting to ₹4,14,800 which was exempt. The Assessee had not claimed any deduction in respect of expenses amounting to ₹1,83,55,525 u/s. 14A of the Income-tax Act, 1961. The Assessee’s case was selected for scrutiny and an addition of ₹1,93,79,583 was made u/s. 14A of the Act in addition to the amount of ₹1,83,55,525 already disallowed u/s. 14A of the Act. The AO also made disallowances in respect of fines and penalties.

The CIT(A) partly allowed wherein the CIT(A) deleted the additional disallowance made by the AO. In the appeal before the CIT(A), the Assessee had raised an additional ground and claimed allowance of ₹1,83,55,525 which it had not done under the revised return.

The Tribunal remanded the matter regarding disallowance u/s. 14A and disallowance of fines and penalties to the AO for consideration afresh with the direction that the disallowance u/s. 14A was required to be worked out in respect of only those investments which were yielding exempt income. Thereafter, the Assessee filed a Miscellaneous Application requesting that the AO be directed to restrict the disallowance to the extent of exempt income. The Miscellaneous Application was allowed and the Tribunal modified its order and directed that the disallowance u/s. 14A of the Act be restricted to the exempt income.

Pursuant to the aforesaid directions, the Jurisdictional AO passed an order dated 4th February, 2023 to give effect to the directions issued by the Tribunal and restricted the disallowance u/s. 14A to the extent of dividend income. However, the AO did not give any specific findings in respect of fines and penalties. The Assessee also did not file any appeal against the said order.

Thereafter, the National Faceless Assessment Centre (NFAC) issued an intimation informing the Assessee that the assessment would be completed in accordance with the procedure u/s. 144B of the Act. Against this, the Assessee filed its objections for continuing any proceedings pursuant to the order passed by the Tribunal as the Jurisdictional AO had already passed an order to give effect to the order passed by the Tribunal. However, the NFAC passed an order, once again making the same disallowance u/s. 14A and disregarded the directions of the Tribunal. The NFAC also expressly stated that its order would supersede the order of the Jurisdictional AO.

The Assesseefiledwrit petition against the said order of NFAC. The Delhi High Court allowed the writ petition and held as follows:

“i) There is no provision under the Income-tax Act, 1961 for continuing assessment proceedings after an assessment order is passed. Concluded assessments cannot be opened except by recourse to specific provisions including section 147 of the Act.

ii) The issue of disallowance u/s. 14A had stood concluded by the order dated February 4, 2023. The Assessing Officer did not issue any specific findings regarding the fines and penalties amounting to Rs. 35,18,803 and the assessee had not filed any appeal against such decision. Notwithstanding that an order dated February 4, 2023 passed by the jurisdictional Assessing Officer, the National Faceless Assessment Centre had proceeded to pass another order. Although, the jurisdictional Assessing Officer had passed an order giving effect to the order dated February 25, 2021 and the order dated February 25, 2021 as modified by the order dated April 1, 2022 by the Tribunal, the National Faceless Assessment Centre had issued an intimation dated February 15, 2023 informing the assessee that the assessment would be completed in accordance with the procedure u/s. 144B . The assessee had filed its objections for continuing any proceedings pursuant to the order passed by the Tribunal since the jurisdictional Assessing Officer had already passed an order dated February 4, 2023 giving effect to the orders passed by the Tribunal.

iii) The National Faceless Assessment Centre had passed an order dated March 29, 2023 once again reiterating the disallowance of ₹3,60,51,977 made u/s. 14A, which included an additional disallowance of ₹1,93,79,583 which was made by the Assessing Officer in the assessment order dated March 28, 2016. Although, the National Faceless Assessment Centre had found that the order dated April 1, 2022 passed by the Tribunal had confined the disallowance u/s. 14A to ₹4,14,800, such directions were disregarded and had also expressly stated that its order would supersede the order dated February 4, 2023 passed by the jurisdictional Assessing Officer. The order dated February 4, 2023 passed by the jurisdictional Assessing Officer had set out that it was an order to give effect to the order passed by the Tribunal wherein it was held to the effect that after appeal effect income of the assessee (since merged with REL) for the assessment year 2013-14 was recomputed at ₹2,69,43,53,890 under the normal provisions of the Act. Credit for tax deducted at source, advance tax and regular taxes paid were given after verification and interests u/s. 234A, 234B, 234C and 234D were being charged, as applicable.

iv) Therefore, there was no doubt that the proceedings pursuant to the directions issued by the Tribunal stood concluded by the order dated February 4, 2023. The initiation of further proceedings by the National Faceless Assessment Centre pursuant to the orders passed by the Tribunal was without jurisdiction. The assessment order passed u/s. 143(3) read with sections 254 and 144B was set aside.”

Assessment — Order of assessment to give effect to order of Tribunal — Limitation — Commencement of limitation — Receipt of order of Tribunal — Meaning of “received” — Actual receipt of certified copy of the order not necessary — Knowledge of order of Tribunal sufficient.

82. Sunshine Capital Ltd. vs. DCIT

[2025] 472 ITR 293 (Del.)

A. Y. 2008-09

Date of order: 16th April, 2024

Ss.153 and 254 of ITA 1961

Assessment — Order of assessment to give effect to order of Tribunal — Limitation — Commencement of limitation — Receipt of order of Tribunal — Meaning of “received” — Actual receipt of certified copy of the order not necessary — Knowledge of order of Tribunal sufficient.

The case of the Assessee was selected for scrutiny and assessment order u/s. 143(3) of the Income-tax Act, 1961 was passed after making various additions. CIT(A) partly allowed the Assessee’s appeal. The Tribunal, vide its order dated 08-10-2018 remanded the matter to the AO for the purpose of fresh assessment. The Tribunal also deleted the demand reflected on the Income Tax Portal.

Thereafter, the Assessee made several representations from July 2020 to August 2021 to the Department praying for rectification of the error with respect to the demand being reflected on the portal as well as the issue of refund. But there was no action by the Department. Since no reply was received by the Assessee upon representations, the Assessee filed an application in August 2021 in accordance with the Right to Information Act (RTI) to give effect to the order passed by the Tribunal. Pursuant to the RTI application, the AO passed an order in November 2021 wherein it expressed its inability to give appeal effect on the ground that it had not received the order passed by the Tribunal through proper channel. Against this order, the Assessee filed an appeal in December 2021 which came to be disposed vide order passed in January 2022 whereby it was decided that the information provided to the Assessee was adequate.

Thereafter, in February 2022, the Assessee filed an application to the registry of the Tribunal seeking information on service of order passed by the Tribunal. The Assessee was informed by the registry in March 2022 that the order passed by the Tribunal was duly sent to the CIT(Judicial) on 24th August, 2018 for further action. In March 2022, the Assessee also made subsequent representations to rectify the error with respect to the demand reflected on the portal, but to no avail.

The Assessee therefore filed writ petition challenging the inaction on the part of the Department and contended that despite the order passed by the Tribunal being communicated to the concerned authority of the Income tax Department within stipulated time, the Department failed to pass a fresh assessment order. The Delhi High Court allowed the petition and held as follows:

“i) Section 153 of the Income-tax Act, 1961, stipulates that an order for fresh assessment pursuant to an order u/s. 254 or section 263 or section 264 of the Act may be made at any time before the expiry of a period of nine months. The provision further encapsulates that the period has to be calculated from the end of the financial year in which the order u/s. 254 of the Act is received by the authorities mentioned in the section. Regarding the word “received” the language couched in section 260A of the Act is similar to that of section 153(3). The contextual interpretation of the phrase “received” postulates the time when the parties are notified about the pronouncement and are represented at that instant in the open court. The legislative intent behind the enactment of section 254(3) of the Act does not prescribe shifting of the onus of proving the receipt of the order under the provision on the assessee, the expression “is received” used in section 153(3) of the Act cannot mean to extend the limitation till perpetuity. The expression “received” employed in section 153(3) of the Act would not strictly mean that a certified copy of the order of the Tribunal, in the given facts and circumstances, ought to have been necessarily supplied to the concerned authority through an appropriate mechanism devised by the respondents. Further, section 254(3) of the Act casts a duty upon the Tribunal to send the copy of the orders passed under section 254 of the Act to the assessee as well as to the Principal Commissioner or Commissioner. A conspectus of section 254 read with section 153(3) of the Act would reveal that the provisions cannot be made applicable to the detriment of the assessee.

ii) The material on record showed that the Tribunal sent the order of the remand to the Department on October 24, 2018, but the Department denied having received it. It was sufficient to take note of the Tribunal’s stand of sending a copy of the order to the Department. Moreover, the assessee, as early as on July 30, 2020 itself, made the first communication to the Department to give effect to the order in appeal. The record would show that the subsequent representation sent by the assessee on July 9, 2021 to the Department contained all the requisite information of the orders passed by the concerned authorities in the case of the assessee. No concrete steps had been taken by the Department. Except harping upon the word “received”, the Department had not taken any measure to give effect to the order in appeal. Taking into consideration the Tribunal’s response that the concerned order was sent on October 24, 2018, the Department ought to have passed the order to give effect to the order in appeal within twelve months from then. However, that had not been done by the Department till date.

iii) Since the Department had failed to comply with the order of the Tribunal in passing a fresh assessment order within the stipulated time, the writ petition was to be allowed with the directions to the Department to ensure that the demands of quantum amounting to ₹34.70 crores and penalty amounting to ₹33.98 crores being reflected in the Income-tax Business Application portal were removed within two weeks, that the amount of ₹25,44,671 lying with the Department were refunded to the assessee with applicable interest as per law, that the properties of the assessee were released within two weeks of the passing of this judgment, and that the three bank accounts were defreezed by the Department within two weeks.”

Glimpses of Supreme Court Rulings

19. PCIT vs. Jupiter Capital Pvt. Ltd.

(2025) 170 taxmann.com 305 (SC)

Capital gains – Reduction of share capital – The reduction in share capital of the subsidiary company and subsequent proportionate reduction in the shareholding of the Assessee would be squarely covered within the ambit of the expression “sale, exchange or relinquishment of the asset” used in Section 2(47) the Income-tax Act, 1961 – Percentage of shareholding of the assessee in the Company prior to, and post, reduction in Share Capital is not relevant – Loss incurred on erosion of the net worth is allowable as capital loss.

The Respondent-Assessee was a company engaged in the business of investing in shares, leasing, financing and money lending. The Assessee had made an investment in Asianet News Network Pvt. Ltd. (ANNPL), an Indian company engaged in the business of telecasting news, by purchasing 14,95,44,130 shares having face value of ₹10/- each. Thereafter, the Assessee purchased 38,06,758 shares from other parties, thereby increasing its shareholding to 15,33,40,900 shares which constituted 99.88% of the total number of shares of the company, i.e., 15,35,05,750.

The said company incurred losses, as a result of which the net worth of the company got eroded. Subsequently, the company filed a petition before the Bombay High Court for reduction of its share capital to set off the loss against the paid-up equity share capital. The High Court ordered a reduction in the share capital of the company from 15,35,05,750 shares to 10,000 shares. Consequently, the share of the Assessee was reduced proportionately from 15,33,40,900 shares to 9,988 shares. However, the face value of shares remained the same at ₹10 even after the reduction in the share capital. The High Court also directed the company for payment of ₹3,17,83,474/- to the Assessee as a consideration.

During the year, the Assessee claimed long term capital loss accrued on the reduction in share capital from the sale of shares of such company. However, the Assessing Officer while disagreeing with the Assessee’s claim held that reduction in shares of the subsidiary company did not result in the transfer of a capital asset as envisaged in Section 2(47) of the Income-tax Act, 1961. The Assessing Officer took the view that although the number of shares got reduced by virtue of reduction in share capital of the company, yet the face value of each share as well as shareholding pattern remained the same. Hence there was no extinguishment of the rights of the shareholders. Extinguishment of rights would mean that the assessee has parted with those shares or sold off those shares to second party, which was not the case here.

In appeal the CIT(A) vide order dated 14th December, 2017 while distinguishing the facts of the present case from those involved in the decision of the Supreme Court in Kartikeya V. Sarabhai vs. Commissioner of Income Tax (reported in (1997) 7 SCC 524) held that any extinguishment of rights would involve parting the sale of percentage of shares to another party or divesting rights therein. The appeal was therefore dismissed.

However, the ITAT reversed the order passed by the CIT(A) and allowed the appeal filed by the Assessee observing that the decision of the Supreme Court in Kartikeya vs. Sarabhai (supra) was squarely applicable to the facts of the present case. On the account of reduction in number of shares held by the Assessee company in ANNPL, the Assessee has extinguished its right of 15,33,40,900 shares and in lieu thereof, the Assessee received 9,988 shares at ₹10/- each along with an amount of ₹3,17,83,474/-. The Assessee’s claim for capital loss on account of reduction in share capital in ANNPL was therefore allowable.

The Revenue went in appeal before the High Court. The High Court, dismissed the appeal filed by the Revenue and affirmed the order passed by the ITAT, observing that the AO’s view that the voting power of the Assessee had remained unchanged was untenable. The rationale was that if the shares were transferred at face value, the redeemable value would be ₹99,880/- whereas the value of 14,95,44,130 number of shares would have been ₹1,49,54,41,300/. According to the High Court, the ITAT had rightly followed the judgement in the case of Kartikeya V. Sarabhai vs. The Commissioner of Income Tax (supra).

The Supreme Court after having heard the learned ASG appearing for the Revenue, and having gone through the materials on record, were of the view that no error, not to speak of any error of law, was committed by the High Court in passing the impugned order.

According to the Supreme Court, whether reduction of capital amounts to transfer was no longer res integra in view of its decision in Kartikeya V. Sarabhai (supra).

According to the Supreme Court, the following principles are discernible from its aforesaid decision:

a. Section 2(47) of the Income-tax Act, 1961, which is an inclusive definition, inter alia, provides that relinquishment of an asset or extinguishment of any right therein amounts to a transfer of a capital asset. While the taxpayer continues to remain a shareholder of the company even with the reduction of share capital, it could not be accepted that there was no extinguishment of any part of his right as a shareholder qua the company.

b. A company under section 66 of the Companies Act, 2013 has a right to reduce the share capital and one of the modes which could be adopted is to reduce the face value of the preference share.

c. When as a result of the reducing of the face value of the share, the share capital is reduced, the right of the preference shareholder to the dividend or his share capital and the right to share in the distribution of the net assets upon liquidation is extinguished proportionately to the extent of reduction in the capital. Such a reduction of the right of the capital asset clearly amounts to a transfer within the meaning of Section 2(47) of the Income-tax Act, 1961.

The Supreme Court noted that in the present case, the face value per share has remained the same before the reduction of share capital and after the reduction of share capital. However, as the total number of shares have been reduced from 15,35,05,750 to 10,000 and out of this the Assessee was holding 15,33,40,900 shares prior to reduction and 9,988 shares after reduction, it can be said that on account of reduction in the number of shares held by the Assessee in the company, the Assessee has extinguished its right of 15,33,40,900 shares, and in lieu thereof, the Assessee received 9,988 shares at ₹10 each along with an amount of ₹3,17,83,474.

The Supreme Court observed that in the case of Kartikeya v. Sarabhai (supra) it has not made any reference to the percentage of shareholding prior to reduction of share capital and after reduction of share capital. In that case, it was observed that reduction of right in a capital asset would amount to ‘transfer’ under Section 2(47) of the Income-tax Act, 1961. Sale is only one of the modes of transfer envisaged by Section 2(47). Relinquishment of any rights in it, which may not amount to sale, can also be considered as transfer and any profit or gain which arises from the transfer of such capital asset is taxable under Section 45 of the Income-tax Act, 1961.

The Supreme Court noted the decision of a Division Bench of the Gujarat High Court in the case of Commissioner of Income-Tax vs. Jaykrishna Harivallabhdas reported in (1998) 231 ITR 108 where the Court clarified that receipt of some consideration in lieu of the extinguishment of rights is not a condition precedent for the computation of capital gains as envisaged under Section 48 of the Income-tax Act, 1961.

The Supreme Court further noted that in the case of Anarkali Sarabhai vs. CIT reported in (1997) 224 ITR 422, it was observed that the reduction of share capital or redemption of shares is an exception to the Rule contained in Section 77(1) of the Companies Act, 1956 that no company limited by shares shall have the power to buy its own shares. In other words, the
Court held that both reduction of share capital and redemption of shares involve the purchase of its own shares by the company and hence will be included within the meaning of transfer Under Section 2(47) of the Income-tax Act, 1961.

In view of the aforesaid, the Supreme Court held that that the reduction in share capital of the subsidiary company and subsequent proportionate reduction in the shareholding of the Assessee would be squarely covered within the ambit of the expression “sale, exchange or relinquishment of the asset” used in Section 2(47) the Income-tax Act, 1961.

The Supreme Court therefore dismissed the appeal filed by the Revenue authorities.

Note: The judgment of the Supreme Court in the case of Anarkali Sarabhai has been analysed in the column “Closements” in April, 1997 issue of BCAJ.

From The President

Get out of the way!

– Stop micromanaging economic activity!

– Give entrepreneurs and households back their time and mental bandwidth.

– Regulators should hold themselves to the same standards that they expect of regulated entities.

The preface to the Economic Survey 2024-25 resounds with a bold and decisive call for reform. These foundational principles underscore the broader vision through which our nation’s governing dispensation can truly embrace and enable ‘growth through deregulation.’

The core takeaway from this year’s Economic Survey is the imperative need for a substantial rollback of regulatory excesses, as well as a conscious restraint from layering policies with additional operational conditions under the pretext of preventing misuse. More often than not, such over regulation distorts the original intent of policy measures, hampering rather than facilitating economic dynamism. The Survey makes an insightful case for leveraging India’s deeply ingrained social trust structures to attain scale and efficiency, especially
in its closely connected, kinship-based economic landscape. Each chapter of the Survey reinforces the necessity of ‘simplification and deregulation’ wherever feasible. As Chartered Accountants being enablers of commerce and enterprise, such unequivocal directional clarity in favour of effective deregulation is truly a welcome shift.

Encouragingly, early indicators of this ‘growth through deregulation’ vision are already visible. The conceptualisation of a Deregulation Commission, backed by well-defined terms of reference and coordinated efforts between the central and state governments, is a promising step forward. However, the success of this initiative hinges on its substantive execution rather than merely its structural existence. If implemented with true intent and depth, this deregulation drive can significantly bolster the competitiveness of Indian businesses, enabling them to expand and scale with greater ease and speed.

A Budget with Balance and Direction

The month of February commenced with the high-decibel presentation of the Union Budget 2025, accompanied by the introduction of the Finance Bill, 2025. A strong emphasis on driving consumption-led growth was evident, while an impressive balance has been achieved on the fiscal front. The Society hosted two highly engaging Public Lecture Meetings: one on the Direct Tax Provisions under the Finance Bill, 2025 by Shri CA. Pinakin Desai, and another on the Indirect Tax Proposals under the Finance Bill, 2025 by Shri CA. Sunil Gabhawala. Both sessions were well attended and have since garnered over 15,000 views on the Society’s YouTube channel. Additionally, our esteemed BCAS publication on the Analysis of Union Budget 2025-26 is now available for complimentary download via the Society’s website.

The Much-Anticipated Income Tax Bill, 2025 — Simplification in Form and not Substance?

In her Budget speech, the Hon’ble Finance Minister underscored ‘taxation’ as the foremost lever for ‘transformative reform’ within a broader set of six identified reformative pillars. This set the stage — and expectations — for the unveiling of a new Income Tax Bill, which was subsequently introduced in the legislature a week later.

Given that the palimpsest Income Tax Act, 1961 has governed direct taxation for over six decades, the introduction of the new Bill was anticipated to be a landmark moment — one that would bring forth a contemporary, well-calibrated framework equipped with modern concepts to facilitate real ease of compliance and substantive deregulation.

However, upon review of the Income Tax Bill, 2025, it becomes evident that the ‘simplification’ proposed within it is largely cosmetic. The revisions primarily revolve around improved structural organisation through better grouping of sections and chapters, rather than a meaningful reimagining of substantive provisions. While a detailed analysis does reveal a few high-impact potential changes, many appear to stem from drafting inconsistencies rather than deliberate policy shifts. It is reassuring to note that an ongoing review process seeks to address these inconsistencies, but the broader expectation of a comprehensive transformation in our tax statutes remains unmet.

Undoubtedly, rewriting well-entrenched and settled tax principles is a formidable challenge, and in many cases, an undesirable exercise. However, a more ambitious approach could have been undertaken — one that integrates fresh, progressive thinking into our tax framework in alignment with the overarching theme of ‘growth through deregulation’ as articulated in the Economic Survey. Alas, it appears that the journey toward a truly transformative tax regime is yet to be realised, and we must wait longer for substantive change.

Warm Regards,

CA Anand Bathiya

President, Ayodhya, 28th February, 2025

From Published Accounts

COMPILER’S NOTE

Given below are 3 typical ‘Emphasis of Matter’ paragraphs included in the audit reports for the year ended 31st March, 2024.

1. Infosys Ltd

Emphasis of Matter regarding Cybersecurity Incidents

From Audit Report on Consolidated Financial Statements

Emphasis of Matter

As described in note 2.24.2 to the Consolidated Financial Statements, certain costs relating to possible damages or claims relating to a cybersecurity incident in a subsidiary are indeterminable as at the date of this report because of reasons stated in the note. Our opinion is not modified in respect of this matter.

From Notes to Consolidated Financial Statements  Note 2.24.2: McCamish Cybersecurity incident in November 2023

Infosys McCamish Systems (McCamish), a step-down subsidiary of Infosys Limited, experienced a cybersecurity incident resulting in the non-availability of certain applications and systems. McCamish initiated its incident response and engaged cybersecurity and other specialists to assist in its investigation of and response to the incident and remediation and restoration of impacted applications and systems. By 31st December, 2023, McCamish, with external specialists’ assistance, substantially remediated and restored the affected applications and systems. Loss of contracted revenues and costs incurred with respect to remediations, restoration, communication efforts, investigative processes and analysis, legal services and others amounted to $38 million (approximately ₹316 crore). Actions taken by McCamish included investigative analysis conducted by a third-party cybersecurity firm to determine, among other things, whether and the extent to which company or customer data was subject to unauthorized access or exfiltration. McCamish also engaged a third-party eDiscovery vendor in assessing the extent and nature of such data. McCamish in coordination with its third-party eDiscovery vendor has identified corporate customers and individuals whose information was subject to unauthorized access and exfiltration. McCamish’s review process is ongoing. McCamish may incur additional costs including indemnities or damages / claims, which are indeterminable at this time. On 6th March, 2024, a class action complaint was filed in the U.S. District Court for the Northern District of Georgia against McCamish. The complaint arises out of the cybersecurity incident at McCamish initially disclosed on 3rd November, 2023. The complaint was purportedly filed on behalf of all individuals within the United States whose personally identifiable information was exposed to unauthorized third parties as a result of the incident.

2. Indus Towers Ltd

Emphasis of Matter regarding material uncertainty at one of the largest customers and its consequential impact on the company’s business operations

From Audit Report on Consolidated Financial Statements

Emphasis of Matter

Material uncertainty at one of the largest customers of the Company and its consequential impact on the Company’s business operations. We draw attention to note 48 of the consolidated financial statements, which describes the potential impact on business operations, receivables, property, plant and equipment, and financial position of the Company on account of one of the largest customer’s financial conditions and its ability to continue as a going concern. Our opinion is not modified with respect to the above matter.

From Notes to Consolidated Financial Statements’

48. A large customer of the Group accounts for a substantial part of revenue from operations for the quarter and year ended 31st March, 2024, and constitutes a significant part of outstanding trade receivables and unbilled revenue as of 31st March, 2024.

a) The said customer in its latest published unaudited financial results for the quarter and nine months ended 31st December, 2023, had indicated that its ability to continue as a going concern is dependent on its ability to raise additional funds as required, successful negotiations with lenders and vendors for continued support and generation of cash flow from operations that it needs to settle its liabilities as they fall due. The said customer had also disclosed in the aforesaid results that so far it has met all debt obligations to its lenders/ banks and financial institutions along with applicable interest till date. Further, the said customer had disclosed that one of its promoters has confirmed that it would provide financial support to the extent of ₹20,000 Mn to the said customer.

b) The Group, subject to the terms and conditions agreed between the parties, has a secondary pledge over the shares held by one of the customer’s promoters in the Group and a corporate guarantee provided by said customer’s promoter which could be triggered in certain situations and events in the manner agreed between the parties. However, these securities are not adequate to cover the total outstanding with the said customer.

c) During the quarter ended 30th June, 2022, through the quarter ended 30th September, 2022, the said customer had informed the Group that a funding plan was under discussion with its lenders and it had agreed to a payment plan to pay part of the monthly billing till December 2022 and 100% of the amounts billed from January 2023 onwards, which will be adjusted by the Group against the outstanding trade receivables. As regards the dues outstanding as of 31st December, 2022, the customer had agreed to pay the dues between January 2023 and July 2023. However, the said customer has not made the committed payments pertaining to the outstanding amount due as of 31st December, 2022. Based on Stock Exchange filings, the said customer (i) concluded its equity fund raise of ₹1,80,000 Mn through the FPO route on 22nd April, 2024, (ii) at its Board meeting held on 6th April, 2024 has, subject to the approval of the shareholders in the Extra-ordinary General Meeting to be held on 8th May, 2024, approved the issuance of equity share aggregating to ₹20,750 Mn on a preferential basis to one of its promoter group entity, (iii) issued Optionally Convertible Debentures (OCDs) amounting to ₹16,000 Mn to one of its vendors in February 2023 of which ₹14,400 Mn worth of OCDs were converted into equity shares on 23rd March, 2024, and (iv) is actively engaged with its lenders for tying-up the debt funding, which will follow the equity fund raise. The Group is in discussion with the said customer for a revised payment plan pertaining to the outstanding amount due. (d) As the said customer has been paying an amount largely equivalent to monthly billing since January 2023, hence, the Group continues to recognise revenue from operations relating to the said customer for the services rendered. The Group carries an allowance for doubtful receivables of ₹53,853 Mn as of 31st March, 2024 relating to the said customer which covers all overdue outstanding as at 31st March, 2024. (e) Further, as per Ind AS 116 “Leases”, the Group recognises revenue based on straight-lining of rentals over the contractual period and creates revenue equalisation assets in the books of accounts. During the quarter ended 31st December, 2022, the Group had recorded an impairment charge of ₹4,928 Mn relating to the revenue equalisation assets up to September 30, 2022 for the said customer and presented it as an exceptional item in the statement of profit and loss. Further, the Group had stopped recognising revenue equalisation asset on account of straight-lining of lease rentals from 1st October, 2022 onwards due to uncertainty of collection in the distant future. (f) It may be noted that the potential loss of the said customer (whose statutory auditors have reported material uncertainty related to going concern in its report on latest published unaudited results, which was issued before funding as mentioned above) due to its inability to continue as a going concern or the Group’s failure to attract new customers could have an adverse effect on the business, results of operations and financial condition of the Group and amounts receivable (including unbilled revenue) and carrying amount of property, plant and equipment related to the said customer.

3. Career Point Ltd.

Emphasis of Matter regarding legal action uncertainties on amounts receivable by the holding company and a subsidiary

From Audit Report on Consolidated Financial Statements

Emphasis of Matter

We draw attention to

a) Note no 49 of the consolidated financial statements which describes Srajan Capital Limited (‘SCL’), a Subsidiary Company has degraded (sub-standard and doubtful) its loans and advances to various parties as on 31st March, 2024 amounting to ₹ 782.63 lakhs (net of provision of ₹4,567.28 lakhs, including loan to related party of ₹4,397.33 lakhs, fully provided for) (as of 31st March 2023 ₹721.44 lakhs (net of provision of ₹4,507.38 lakhs, including loan to related party of ₹4,397.33 lakhs, fully provided for)). During the financial year ended 31st March, 2024, the related party has made a payment of ₹756.67 lakhs (total ₹1,707.40 lakhs up to 31st March 2024) to SCL against its outstanding dues, which is treated as income by the subsidiary company. The auditor of the SCL has not modified its opinion in this regard.

b) Note no. 38 of the consolidated financial statements which describes the uncertainties relating to legal action pursued by the Holding Company against Rajasthan Skill and Livelihood Development Corporation (RSLDC) before Hon’ble Arbitrator for invocation of bank guarantee of ₹54.22 lakhs by RSLDC and recovery of the outstanding amount of ₹213.41 lakhs (including ₹159.19 lakhs receivable). Based on its assessment of the merits of the case, the management of the Holding Company is of the view that the aforesaid receivable balances are good and recoverable and hence, no adjustment is required as stated in the note no. 38 of the consolidated financial statements for the amount receivable as stated in the said note. Further, in the opinion of the management of the Holding Company, stated amount is good and full recoverable. Our opinion is not modified in respect of above matters.

From Notes to Consolidated Financial Statements

Note No 38

During the earlier years, the Holding Company has received principal amount of 1st instalment of ₹216.90 lakhs from Rajasthan Skill and Livelihoods Development Corporation (RSLDC} for the Deen-DayalUpadhyayaGrameenKaushalyaYojana (DDU-GKY) project, against which the Holding Company had incurred ₹371.75 lakhs and Issued bank guarantee of ₹54.22 lakhs in terms of the agreement signed with RSLDC. During the year ended 31st March, 2022, RSLDC has invoked bank guarantee of ₹54.22 lakhs and has also demanded refund amounting to ₹334.76 lakhs (including interest of ₹117.36 lakhs) on termination of the above-stated project. The Holding Company has pursued the invocation of Bank Guarantee and other receivable of ₹213.41 lakhs (including ₹158.19 lakhs receivable) from RSLDC, before the Hon’ble Rajasthan High Court, Jaipur and the Rajasthan State Commercial Court under section 9 of Arbitration & Conciliation Act, 1996. The Hon’ble Rajasthan High Court, Jaipur Bench has appointed the sole arbitrator in the matter. The Holding Company has submitted its application before the Hon’ble Arbitrator. After submission of statement of defence by RSLDC, evidence and arguments, arbitral judge will pronounce the judgement. Based on its assessment of the merits of the case, the management is of the view that it has a creditable case in its favour and the aforesaid receivable balances are good and fully recoverable and hence, no adjustment is required as demanded by the RSLDC at this stage.

Note no 49

One of the Subsidiary Company Srajan Capital Limited (“SCL”), SCL has degraded (sub-standard and doubtful) its loans and advances to various parties as on 31st March 2024 amounting to ₹782.63 lakhs (net of provision of ₹4,567.28 lakhs, including loan to related party of ₹4,397.33 lakhs, fully provided for)) (as at 31st March 2023 ₹721.44 lakhs (net of provision of ₹4,507.38 lakhs, including loan to related party of ₹4,397.33 lakhs, fully provided for)). During the financial year ended 31st March 2024, the related party has made payment of ₹756.67 lakhs (Total ₹1,707.40 lakhs upto 31st March, 2024) to SCL against its outstanding dues and interest, which is treated as income by SCL

A Chartered Accountant’s Guide to Writing: Debit Procrastination, Credit Guilt

For over 15 years, I’ve juggled tax audits, reconciled financial statements, and answered client queries that range from the existential, Why do I pay so much tax? To the downright bizarre one like …Can I claim my dog’s grooming bill as a business expense?

I’ve survived financial year-end chaos, outsmarted the ever-crashing GST portal (at times), and, like every super working mom, somehow managed to keep my 11-year-old daughter from showing up at school in her PE uniform instead of a Navvari saree for Shivaji Jayanti celebrations. Yet, despite all of this, there is one thing I just haven’t managed to do—write an article.

For years, I have put off writing this article, finding new excuses every time. It has been on my to-do list for ages, just like that one client who always submits documents late but still expects everything to be done on time. I often picture myself writing smart and funny articles like Twinkle Khanna, but instead of bestselling books and popular columns, I have a laptop, a cold cup of masala chai, and an Excel sheet filled with numbers.

Recently, I even attended a writer’s workshop at the Bombay Chartered Accountancy, hoping to discover the writer in me. But every time I sit down in front of a Word document, my mind just goes blank. Every time I see the blinking cursor on a blank page, I feel completely stuck, not knowing where to begin.

As a Chartered Accountant, I live by numbers, spreadsheets, and logic. Writing, on the other hand, demand first and foremost—a topic, emotions, and naturally, some creativity. Numbers follow rules, while words seem to have a mind of their own!

Every time I sit down to write, my brain defaults to financial jargon. Should I start with an opening balance of my thoughts? Or maybe a profit-and-loss statement of my failed attempts? It’s as if my mind cannot function without an Excel sheet.

And just when I manage to gather some thoughts, life intervenes. My daughter needs help finding her debate notes. The doorbell rings because, apparently, Sunday at 3 p.m. is the best time to deliver a courier. A client who hasn’t contacted me in three months suddenly panics over a tax matter and expects an urgent answer, as if tax solutions come with instant gratification.

So, once again, writing takes a backseat…

For years, my writing has been confined to crisp WhatsApp messages, precise emails, engagement letters, and the occasional leave applications each with a clear recipient and a specific purpose. The shift from this structured, transactional writing to something meant for a wider audience, where there’s no fixed reader in mind, feels unsettling. The idea that my words will be out there, open to interpretation, reaction, or even indifference, makes me nervous. Writing in a professional setting is about clarity and brevity while writing for an audience is about connection and impact. Bridging this gap is the challenge and the adventure I now find myself navigating.

Over time, I have realized that writing and filing taxes are more similar than you’d think:

– You know it’s important, but you put it off until the last minute.

– You overthink every detail and are still terrified of making a mistake.

– You compare your work to others and convince yourself you are doing it all wrong.

– You finally submit it, feeling relieved but also paranoid that someone will find an error.

But unlike taxes, where deadlines and penalties force you to get things done, writing has no such enforcement mechanism. Honestly, if the Income Tax Department introduced a fine for incomplete and unwritten articles, I would have clinched the highest taxpayer title!

A Tiny Victory in an Endless Struggle

Here I am, finally putting words on paper. It’s not perfect, but then again, neither are tax laws, and yet they have managed to survive for decades. Maybe writing isn’t about perfection….it’s just about starting!!

So, to my fellow accountants who have been meaning to write but haven’t figured it out yet: If we can navigate the ever-changing world of financial regulations, we can conquer the written word too. After all, both demand:

– Structure

– Analysis

– And the ability to survive last-minute chaos

an expertise that is ingrained in every Chartered Accountant.

Now, if you’ll excuse me, I’m going to celebrate this little victory the best way I know how… by opening an Excel sheet!

1. An inspired writer from the workshop begins her journey in new avatar..

Thank You Letter Summarising the Workshop

To,

BOMBAY CHARTERED ACCOUNTANTS SOCIETY (BCAS)

I am delighted to have attended and learned from the Writers’ Workshop organized by the BCAS on 20th February. The key learning was how to develop or enhance professional writing skills.
Topics Covered:

  1.  Writers and Writing
  2. How to Write for the Profession and the Public
  3. How to Respond to Government Authorities

The session was conducted by experienced and knowledgeable speakers, all of whom are past presidents of BCAS: CA Raman Jokhakar, CA Gautam Nayak, and CA Anil Sathe.

KEY TAKEAWAYS:

  1.  Encouragement for Writing
  2. Importance and Relevance of Writing
  3. Importance of Writing a Book
  4. Techniques of Writing (Structure of Ideas, Express Thoughts Clearly, Create Meaningful Impact)
  5. Essentials of Good Writing
  6. Common Mistakes While Writing

WRITING INSIGHTS:

  1. Writing is a skill. 85 per cent of financial success comes through skills, and 15% through technical knowledge.
  2. Writing is an art.
  3. Writing creates permanent records
  4. Writing brings new and original ideas.
  5. Writing is a reflection of thoughts.
  6. Writing is tool for mental wellness.
  7. Writing is joyful and gives immense satisfaction.
  8. Writing is about crafting words and making an impact; this craft cannot be replaced by technology.
  9. write in simple English.
  10. Make a clear summary.
  11. Write, read, understand, and write what we understood.
  12. Use minimal words, be free from doubts, and unobjectionable.
  13. Say less, but mean more.
  14. State facts, not opinions.
  15. Grammar and punctuation are important.
  16. Use active voice.
  17. If writing is your goal, write for your audience, not for your personal style.
  18. Writing helps us to know history or basics.
  19. The more we read, the better writers we become.
  20. Writing clears our mind and thoughts.
  21. Reading is the other side of writing.
  22. Good reading and good writing go together.

ESSENTIALS OF GOOD WRITING:

  1. Complete Understanding of topic
  2. Command over Language
  3. Target Audience
  4. Research the Subject
  5. Topic should be current and relevant in future
  6. Conclusion: Logical and Rationale

From this workshop, it was evident that traditional skills like writing and reading will always hold importance and be irreplaceable. Rather, the value of these skills will be in high demand. According to one survey, due to over usage of technology, reading and writing skills have been reduced to 40 per cent of their earlier levels.

The workshop was organized in a very planned manner with timely sessions, learning methodology, and practical handouts. It was attended by participants from cities other than Mumbai as well.

A heartfelt thank you to all speakers, coordinators, the Chairman of the Journal Committee, the President, and the support staff. Special thanks for this new initiative by the Journal Committee. We look forward to more such enriching workshops.

Best Regards,

CA Samir Kasvala

Ink & Inspiration: Writers’ Workshop Reflections

The Journal Committee of the BCAS (Bombay Chartered Accountants’ Society) successfully organised a Writers’ Workshop on 20th February 2025 in physical mode at the BCAS Office. This initiative aimed to nurture and enhance the writing skills of members and budding Chartered Accountancy (CA) professionals. Recognising the importance of encouraging young talent, the committee offered concessional registration fees for CA students, ensuring wider participation and fostering a learning culture.

The workshop received an overwhelming response, attracting participants from various states across the country. Attendees expressed their appreciation for the workshop’s well-structured sessions and rich content, which provided practical insights and actionable takeaways to improve their writing capabilities.

Topics were:

  1.  Writer & Writing – CA Raman Jokhakar
  2.  How to Write for the Profession and the Public? – CA Gautam Nayak
  3.  How to Respond to Government Authorities? – CA Anil Sathe

REMINISCENCE….

AN ODE TO WRITER’S WORKSHOP

The music created in the prosody of writings,

BCAS being the concert hall.

Sounding so purposeful and deep

The participants were confident of taking writing as their faithful leap.

The enthusiasm knew no bounds,

The workshop will be weighed for months in pounds.

90+ participants and 3 authentic speakers,

The enrolment had to be closed for more seekers.

Laughter, deep insights and practical aspect,

The participants went inside their minds and started to introspect.

Write, write till your ink finishes,

Paint the paper till you see you own artist.

CA Divya Jokhakar

India Creates History

India created history and a world record with an estimated 66.30 crore devotees taking a dip at the PrayagrajMahaKumbh within 45 days. The scale and grandeur of the MahaKumbhMela was unprecedented. I have personally witnessed the superb arrangements, cleanliness in the Mela and unflinching faith of devotees. Truly, it is surprising that so many people taking a dip in one place did not trigger any pandemic or unrest. Salute and Pranam to the devotion and faith of crores of devotees and Kudos to the government for the success of the MahaKumbh, an event which happened in 144 years and could be witnessed only once in the lifetime of an individual.

Economically, too, this KumbhMela has been a great success. The MahaKumbh festival in Prayagraj has generated over ₹3 lakh crore in business, making it one of India’s largest economic events. Various sectors such as hospitality, transport, and retail have seen significant economic activity, benefiting not only Prayagraj but surrounding regions1.

1 https://economictimes.indiatimes.com

2 https://www.indiabuget.gov.in/economicsurvey/

Along with Prayagraj, Varanasi and Ayodhya witnessed a surge of pilgrims. Thus, we find that religious tourism can be tapped to boost the regional economies and help generate employment.

Let’s turn to other important events that happened during the last 45 days or so.

The change of regime in the USA has begun to change the geo-political scenario the world over. We have already started experiencing the same, with the USA changing its stance on the Ukraine War, taking Europe and the world by surprise. The USA has launched a new Golden Card for immigrants, requiring an investment of USD 5 million. A new tariff war to protect American industries has begun in tune with campaigns during the recently concluded election like “Making America Great Again (MAGA).”

Economic Survey 2024-2025 echoes these global developments and remarks that “lowering the cost of business through deregulation will make a significant contribution to accelerating economic growth and employment amidst unprecedented global challenges.”

The Economic Survey exhorts governments around the country to get out of the way and allow businesses to focus on their core mission to foster innovation and enhance competitiveness. It suggests rolling back of regulations significantly and embracing risk-based regulations. It emphasises changing the operating principle of regulations from ‘guilty until proven innocent’ to ‘innocent until proven guilty’. It is indeed a treat to read the well-researched and pragmatic Economic Survey2. Economic Survey gives the real picture of the economy, the global perspectives/trends and benchmarking; sector and region-specific developments, challenges of the economy and possible solutions, etc. Therefore, it should be published at least one month prior to the Union Budget such that it doesn’t miss the limelight amidst the glare/hype of the Budget Proposals.

THE FINANCE BILL 2025

The editorial of January 2023 titled “The Middle Class Deserves More!” laid a case for much-needed relief to this vital class of the economy post-pandemic. Another editorial of January 2025 titled “Don’t Kill the Golden Goose” also urged the government for a friendly and reasonable tax regime and giving much-needed relief to the middle-class population.

On several occasions, the BCAS has represented and pitched for tax relief to the middle class, especially salaried people, the latest before the Consultative Group on Tax Policy at NITI Aayog, which visited the BCAS office on 10th December, 2024. Well, the BCAS efforts bore fruits, and we have had a historic Budget 2025-2026. The Finance Bill 2025 came with a much-awaited relief to the Middle Class, granting a tax-free income of up to ₹12 lakhs (₹12.75 lakhs to the Salaried Class). It is indeed a bold move to grant tax-free income to about 87 per cent of the taxpayers. Kudos to the Government for this unprecedented decision. There are some other relief measures to the Charitable Trusts, increase in thresholds of TDS and TCS; an increase in the investment and turnover limits for the classification of all MSMEs, etc. The estimated fiscal deficit at 4.4 per cent of GDP is in line with the government’s efforts to reduce it on year on year basis. Economic survey predicts growth of the Indian economy between 6.3 to 6.8 per cent for the FY 2025- 2026, which is quite optimistic when we look at the world average of 3.2 per cent.

THE INCOME TAX BILL 2025

Another significant development is the release of “ The Income Tax Bill 2025”, which is considered an honest attempt to simplify the Income-tax Act, 1961. The critics say, “It is old wine in a new bottle.” For a teetotaler like me, the age of wine may not matter, but for the connoisseur of wine, the age does matter – the older, the better. Technically also, it is good that the Bill only aims at simplifying the language without any substantial changes in the provisions, such that the jurisprudence of over six decades will be helpful in the interpretation of the new Act also. One significant change is the replacement of “Previous Year” and “Assessment Year” with “Tax Year”. This will help AamAdami to understand tax law better.

Even though some of the provisions of the Income-tax Act, 1961 are simplified, as well as some inconsistencies are removed, by and large, many old complex provisions requiring the fulfilment of several conditions and those exposed to ambiguous interpretations still remain. It is believed that the government missed a golden opportunity to make these changes at the bill stage. However, the government, with an open mind, may consider doing so at the time of enactment of the Bill, taking into account suggestions from various stakeholders.

EXCESSIVE FINANCIALISATION

One of the concerned areas of the present economy is potential excessive financialisation. The Economic Survey reports that “When the economy reaches a state of ‘over-finance’, the financial sector would compete with the real sector for resources.” It further adds that “the financial markets must grow in line with, but not faster than, the economy’s capital needs and overall economic growth. As the country undergoes this significant transformation, it is crucial to be aware of the potential vulnerabilities that may arise. Excessive financialisation can hurt the economy. The costs may be particularly high for a low-middle-income country like India.” Uday Kotak, founder and director of Kotak Mahindra Bank, expressed similar concerns about over-financialisation. He said, “Over-financialisation can hurt the Indian economy as investors move their savings into equities without understanding valuations.”

People are investing huge sums in Mutual Funds in various schemes/financial products and through SIPs, which are pumped into the equity market, besides direct investments by retail investors. Thus, we find that large amounts of savings of lower and middle-class people are invested in the stock market and the real sector is deprived of cheap finances. This view is supported by the Economic Survey, which states that “Greater levels of financial engineering can create complex products whose risks are not apparent to the regular consumer. At the same time, these products are designed so that the lenders have little ‘skin in the game’. Ultimately, the proliferation of such products can lead to an event such as the financial crisis of 2008.” It is here that Regulators should be vigilant and introduce checks and balances in the system.

The recent failure of the New India Cooperative Bank Ltd. has again brought auditors to the spotlight. We need to be vigilant and careful in certifying the quality of assets (including loans) and hidden liabilities / exposures clients (especially banks) have in their balance sheets.

To conclude, India is poised to grow at over 6 per cent for the fourth consecutive year, which can be faster if the recommendations of the Economic Survey about deregulation and free hand to Indian entrepreneurs are granted. The Income Tax Bill 2025 has raised hope of simplification and reduced litigation. Let’s hope that the tax administration and regulators abide by and follow the same standards of service and trust as they expect from the taxpayers and regulatees!

Greetings for the holy month of Ramadan and the festival of colours — Holi, Ugadi and GudiPadwa.

Jai Hind!

 

Best Regards,

Dr CA Mayur Nayak

Construction Input Tax Credits

Two recent decisions of the Supreme Court at the close of 2024 have set the direction over the interpretation of “construction credits” which were at the helm of constant controversy under the GST law. While the first decision was rendered in the case of Chief Commissioner of Central Goods and Service Tax vs. Safari Retreats (P) Limited1 (Safari Retreat case) with respect to input tax credit availability to shopping malls, etc., the second decision namely Bharti Airtel Ltd. vs. Commissioner of Central Excise, Pune2 (Bharti Airtel case) was rendered in the context of availability of credit of Telecommunication towers to cellular companies under the Cenvat Credit scheme. The said matter was quickly adopted by the Delhi Court in the case of Bharti Airtel Ltd. vs. Commissioner, CGST Appeals-1, Delhi3 in the context the GST provisions. The GST Council quickly sprung into action by reversing the decision of Safari Retreat case and reaffirming its original intent to exclude land, building and civil structures from the scope of input tax credit. In this article, we would briefly summarise the principles emerging from these decisions and their application to the provisions of section 17(5)(c) and 17(5)(d) of GST law (colloquially be termed as ‘out-sourced / sub-contracted construction’ and ‘in-house construction’ respectively).

1  [2024] 167 taxmann.com 73 (SC)

2  [2024] 168 taxmann.com 489 (SC)

3  [2024] 169 taxmann.com 390 (Delhi)

CONTEXT OF THE ISSUE — BLOCK CREDIT

Extract of section 17(5)(c) and (d) is as under:

“17(5) Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of section 18, input tax credit shall not be available in respect of the following, namely:- ……..

(c) works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service;

(d) goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business…………

Explanation –– For the purposes of clauses (c) and (d), the expression “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property;

Explanation –– For the purposes of this Chapter and Chapter VI, the expression “plant and machinery” means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes-

(i) land, building or any other civil structures;

(ii) telecommunication towers; and

(iii) pipelines laid outside the factory premises.”

A simple reading of the above extract suggests that all goods or services used for construction of an immovable property (except plant and machinery) are barred from input tax credit except when such activity is performed for onward supply of work contract / construction services. Similar provisions existed under the extant CENVAT credit rules and the respective State VAT laws. Despite modern laws being conceptualised on ‘value added tax’ principles, successive administrations have treated construction of immovable capital assets (specifically buildings) as ineligible for input tax credit based on the philosophy that capex buildings did not contribute to the value-addition of the end-product / service. This blockage also provided an attractive opportunity to Government(s) to realise substantial revenues on such construction activity.

The advent of the GST scheme shifted the focus to taxing all business activities and consequently transforming input tax credit from a narrow ‘one-to-one eligibility’ into a wider ‘business level eligibility’. Despite this wider stance, blocking of construction continued in a more regressive form having a larger impact on construction activity, re-emphasising the Government’s resolve to garner tax revenues from this blockage.

Construction intensive industries such as commercial complexes, warehousing/ logistic structures, hospitality buildings, etc., faced significant cost overruns on account of the above provisions. Though these business verticals were rendering output taxable services, substantial financial capital got sucked into GST credit blockage. There was also an onerous burden on such operators to establish that an item was ‘movable’ or ‘plant and machinery’ in order to stake a claim of input tax credit. Being a new law, these terms were being interpreted by field formations (including Advance ruling authorities) based on their personal bias rather than business application. This lead to the pioneer case of Safari Retreat case4, in which the Orissa High Court read down the provisions of section 17(5)(d) for shopping malls, commercial complexes, etc., and granted input tax credit to all construction activity when such complexes were directly used for onward taxable output activity. Sensing a huge revenue loss, the Government jumped into action by agitating its stand before the Supreme Court which ultimately culminated into the now famous Safari retreat case.

4 [2019] 105 taxmann.com 324 (Orissa)

BRIEF OF THE SAFARI RETREAT CASE

The key issue before the Supreme Court was the interpretation of section 17(5)(d) of the CGST Act. While the issue was limited to section 17(5)(d), reference and interpretation was being made to section 17(5)(c) to appreciate the true scope of both clauses. The key propositions/ arguments before the Court were:

Issue 1 – Constitutional challenge to the provisions of section 17(5)(d) on the premise that it violated Article 14 as it discriminated taxpayers onward selling the commercial structures with those leasing the very same structures despite both being liable to tax on their respective outward supply;

Issue 2 – Scope of ‘plant and machinery’ u/s 17(5)(c) and ‘plant or machinery’ u/s 17(5)(d) are different as the term ‘or’ in section 17(5)(d) is a conscious legislative usage de-linking the phrase from the defined term in the Explanation. Therefore, buildings, civil structures, telecommunication towers, etc which were specifically excluded from the definition of ‘plant and machinery’ u/s 17(5)(c) could still be considered as plant in its generic usage u/s 17(5)(d) based on its functionality;

Issue 3 – Condition placed by the phrase ‘on own account’ under section 17(5)(d) excludes suppliers of constructed apartments for sale as well as for lease/ licence. Hence credit was blocked only to cases where the construction was for self-usage and not for onward commercial exploitation.

The Hon’ble Supreme Court examined the legislative setting behind introduction of GST and the inter-play between the provisions of section 17(5)(c)/ (d). In so far as the constitution challenge is concerned, the provisions were clearly held to be valid and within legislative domain, putting to rest questions over the Council’s discretion in denying input tax credit even though the building contributed to generating taxable supplies. While addressing the question of law on the phrase ‘plant or machinery’ u/s 17(5)(d) in contrast to the phrase ‘plant and machinery’ adopted in 17(5)(c), the Court observed that the difference in ‘and’ and ‘or’ is not a legislative error but a conscious choice. Hence, the definition of ‘plant and machinery’ which specifically excluded land, buildings, civil structures would not apply to the phrase ‘plant or machinery’. ‘Plant’ or ‘machinery’ would be understood in generic terms and not by the definition of ‘Plant and machinery’. The Court borrowed the functionality test from the Income tax law5 to hold that if a building was used as a ‘technical structure’ rather than merely a ‘setting’ in which trade is carried on, such building would constitute a plant despite the specific exclusion of buildings in the explanation. It was observed that a plant is an apparatus used by a businessman for carrying on its business and does not include his stock in trade; it include all goods and property, whether movable or immovable, as long as it function as an apparatus in his trade. Since generating station building, hospital, dry dock and ponds were considered as apparatus based on the business functions, a building or a warehouse could also be considered as ‘plant’ within the meaning of Section 17(5)(d) if it served as an essential tool of trade with which business is carried on. However, if it merely serves as a setting or mere occupation, it will not qualify as a ‘plant’. On the third aspect, the court held that section 17(5)(d) blocked credit when the immovable property is used for ‘own account’. Where the construction of immovable property was for ‘other’s account’ and generating revenues which are in the nature specified in clause (2) or (5) of Schedule II, such structure would be eligible for input tax credit. The phrase ‘own account’ covered within its ambit only those cases where the building was for own residential or commercial occupation and not for cases where the building was for onward lease/ license. Accordingly in cases where any building was under construction with intent of generating leasing/ licensing revenue, credit was permissible u/s 17(5)(d) since the building was not constructed for ‘own account’ but for ‘other’s account’.

5 Commissioner of Income-tax vs. Taj Mahal Hotel [1971] 82 ITR 44 (SC); 
Commissioner of Income-tax vs. Anand Theatres [2000] 110 Taxman 338 (SC); 
Commissioner of Income-tax vs. Karnataka Power Corpn. [2000] 112 
Taxman 629 (SC)

RETROSPECTIVE AMENDMENT TO SECTION 17(5)(D)

The Finance Bill 2025 has now introduced an amendment attempting to overturn and rectify the acclaimed error in using the phrase ‘plant or machinery’ in section 17(5)(d) instead of ‘plant and machinery’. The said retrospective amendment (w.e.f. 1st July, 2017) effectively overcomes the decision of the Safari retreat case on the proposition that the term ‘plant or machinery’ is distinct from the term ‘plant and machinery’. Among the two exceptions which were cited by the Supreme Court, the first exception of differentiating ‘plant and machinery’ from ‘plant or machinery’ seems to have now been nullified. While thoughts are developing over challenging this retrospective amendment on the ground of denying vested credit6, probability of achieving a positive result seems to be bleak in view of the review petition filed by the Revenue. The Revenue still acclaims in its review that the use of the term ‘or’ was drafting error and not a legislative choice. De hors the review petition it would be suitable to treat both the clauses at par and apply the specific definition of ‘plant and machinery’ to all its cases.

6 Commissioner of Income-tax vs. Vatika Township (P.) Ltd. [2009] 
178 Taxman 322 (SC) & Tata Motors Ltd. v. State of Maharashtra and Others
 [(2004)5 SCC 783

ANALYSING ‘PLANT AND MACHINERY’

With retrospective amendment proposed w.e.f. 1st July, 2017 term ‘plant and machinery’ is applicable to both in-house construction and sub-contracted construction. The term has an inclusive portion to include apparatus, equipment and machinery and their structural or foundational support but specifically excludes land, building or other civil structures, telecommunication towers and pipelines outside the factory. Under the said definition, generic meanings of apparatus, equipment and machinery would continue to have prominence. The functionality test would still be applied to the fixtures, installations, etc., housed in the civil structures and makes them amenable to be termed as ‘plant and machinery’. What has been now overturned by the retrospective amendment to section 17(5)(d) is that the functionality test which could have been hitherto applied to land/ buildings, civil structures, to shift treat ‘buildings/ civil structures’ as ‘apparatus / equipment’ for a particular business function, is now not available. In view of the specific exclusion to the phrase ‘plant and machinery’, any building / civil structure in whatever form/usage could be excluded from the term plant and machinery. This position which was restrictive only to section 17(5)(c) (i.e. works contract inputs) is not extendable also to section 17(5)(d) (i.e. all goods and services where construction is on own account).

TECHNICALITIES ON THE PHRASE “OWN ACCOUNT”

The other exception to the applicability of the block credit was cases where the construction was ‘not for own account’ but ‘other’s account’. The phrase ‘own account’ has not been dealt with in much detail by the Supreme Court except for the conclusion that construction for onward sale/ lease/ license etc., to third party occupants does not amount ‘construction on own account’. The Court bestowed parity to entry 2 and entry 5(b) of Schedule II by quoting that where under-construction buildings are intended for sale credit is available. Similarly, under-constructed buildings intended for onward lease would also be a construction for ‘other’s account’. An interesting concept of under-construction lease is now evolving based on this observation of the Court.

While a ‘build-to-suit’ model is a classic case to fit into this proposition, many a times the commercial reality is fairly more complex. There may be a change in use of a structure either during construction or after issuance of the occupancy certificate. A strict reading of the clause suggests that only if the intent of lease is established during construction then the credit would be eligible. Where the intent of lease is not established up to occupancy certificate, such credit could be disputable on the sheer ground that construction in such cases would be for own account and not for lease. This is still an emerging area of study and will be engaged by revenue authorities if one argues the point of the construction being for other’s account.

BRIEF OF THE BHARTI AIRTEL CASE(S)

Moving onto the other case of the Supreme Court w.r.t the eligibility of Cenvat Credit of Base Transmission Stations (BTS), Telecommunication Towers, Antennas, Pre-fabricated Shelters (PFBs) etc., based on the argument of whether they are goods a.k.a. movable property. The Court examined the meaning of the phrase ‘immovable property’ under the General Clauses Act 1897 and the Transfer of Property Act, 1882 which include land, benefits arising out of land and things permanently attached or fastened to earth for the beneficial enjoyment of the building or land. In this context, the Court re-affirmed the long-standing principles extracted from series of decisions of the Supreme Court under Central Excise to assess whether a thing was immovable in nature, namely:

  •  Nature of annexation: This test ascertains how firmly a property is attached to the earth. If the property is so attached that it cannot be removed or relocated without causing damage to it, it is an indication that it is immovable.
  •  Object of annexation: If the attachment is for the permanent beneficial enjoyment of the land, the property is to be classified as immovable. Conversely, if the attachment is merely to facilitate the use of the item itself, it is to be treated as movable, even if the attachment is to an immovable property.
  •  Intendment of the parties: The intention behind the attachment, whether express or implied, can be determinative of the nature of the property. If the parties intend that the property in issue is for permanent addition to the immovable property, it will be treated as immovable. If the attachment is not meant to be permanent, it indicates that it is movable.
  •  Functionality Test: If the article is fixed to the ground to enhance the operational efficacy of the article and for making it stable and wobble free, it is an indication that such fixation is for the benefit of the article, such the property is movable.
  •  Permanency Test: If the property can be dismantled and relocated without any damage, the attachment cannot be said to be permanent but temporary and it can be considered to be
    movable.
  •  Marketability Test: If the property, even if attached to the earth or to an immovable property, can be removed and sold in the market, it can be said to be movable.

Applying these tests to the telecommunication towers it was held that the towers were movable in nature and hence goods for the purpose of availment of CENVAT Credit. This rationale was adopted by the Delhi High Court in Bharti Airtel Ltd’s case once again to hold that telecommunication towers are movable in nature and hence the question of applying the definition of plant and machinery as applicable to section 17(5)(d) is irrelevant. The entire BTS/BSS, PFBs, etc. though being attached to earth/building are not for the purpose of beneficial enjoyment of the land/building to which they are attached but for technical reasons and efficient operations. Interestingly, the decision has treated the phrases ‘plant or machinery’ and ‘plant and machinery’ at equivalence and yet rendered that the explicit mention of telecommunication towers under the phrase ‘immovable property’ would not render the telecommunication towers as blocked items for input tax credit. This decision would hold the fort despite the retrospective amendment to the provisions of section 17(5)(d) and go a long way in deciding whether items are movable/ immovable in nature under the GST context. The innumerable advance rulings which have held that air conditioners, lift / elevator installations, electrical/ plumbing fixtures, fire extinguishers, etc., form part of the immovable property would need to be re-visited based on the above tests. In all likelihood the said items would fall outside the scope of immovable property based on the tests carved from the General Clauses Act & the Transfer of Property Act.

COMBINED INTERPRETATIVE DESIGN

Now both these decisions lead to a particular sequence of analysis to be factored before reaching a conclusion on block credits:

The above sequence suggests that entire blocked credit is founded upon the fundamental point of whether the goods or services in question are used for construction of an ‘immovable property’. If this primary test fails, there is absolutely no requirement even to examine the remaining contents of the said provisions. But where one doubts the outcome of this primary test to a particular building/ civil structure, it becomes essential to move to a secondary test of examining whether the same is plant and machinery. Land, buildings and other civil structures may still face the brunt of input tax credit blockage even if they are functionally operating as a ‘apparatus, equipment or machinery’. Interestingly, cases which are prima-facie blocked on account of it being considered as immovable property (other than plant and machinery) u/s 17(5)(d) (i.e. in-house construction) may still be granted input tax credit if they fall under a tertiary test of being construction for ‘onward leasing’ or ‘sale’.

INDUSTRY-WISE APPLICATION OF THE ABOVE SCHEMA

Commercial / Shopping Complexes – The Supreme Court had remanded the matter back to the Orrisa High Court to apply the functionality test in deciding whether such commercial constructions fall within the mischief of section 17(5)(d) (notably cases which covered u/s 17(5)(c) are not within the High Court’s purview and hence must be independently examined). Civil Structure portion of in-house constructions of commercial complexes would now be excludible from the phrase ‘plant and machinery’ (as retrospectively amended) as they fall under the blocked component. The HVAC, electrical / plumbing installations, fire equipment, movable fixtures, hoardings, digital displays, elevators, MLC parking structure, etc., may not be immovable. Even if they are said to be immovable they could be termed as technical equipment, apparatus, machinery and hence fall within the term ‘plant and machinery’ and this component of the construction costs would become eligible for input tax credit. The exclusion in the explanation to plant and machinery would have to be examined restrictively as being only w.r.t. to the ‘land, building, civil structure’ and not with reference to the installations/ fitments housed in such buildings.

Warehouse / Logistic Chains – A typical warehousing contains civil structures, prefabricated shelters, overhead sheets, etc. Certain items (such as foundation, concrete platforms, etc.) would qualify as civil structures and become ineligible for input tax credit. There are also components affixed to said civil structure which are dismantlable and capable of being re-assembled at alternate locations (such as pre-fabricated iron and steel girders, trusses and other structural components which are affixed with nut and bolt system to the civil foundation). One may claim that these are movable in nature based on the nature of annexation test specified above. But on a deeper analysis the object of affixation is for creating a permanent warehousing shed with these items and such affixation results in beneficial enjoyment of the immovable property itself. Moreover, the intent of establishment of the overall outer structure is to function as shelter for storage and would be excluded even if one forcefully argues them as being ‘equipment/ apparatus or machinery’. Therefore, such warehousing structures would form part of immovable property itself and may not be eligible for input tax credit. However, if the case falls under section 17(5)(d) (i.e. in-house construction) and the owner constructs these structures for onward leasing rather than own occupation/ storage, the Safari retreat’s case grants an opportunity to avail input tax credit on the argument of the structure being construction for other purposes and not on own account.

Hotels / Theatres / Convention Centres – The Supreme Court in the Safari retreat case has in its wisdom placed a blanket bar on treating such civil structures as plant u/s 17(5)(d). Be that as it may, the decision in Anand Theatres does not overrule the decision of Taj Hotels in so far as treating sanitary / electrical fittings, installations, fixtures affixed to such premises as being in nature of ‘plant’. Seating arrangements in theatres, sound-proofing panelling, air-conditioning systems, digital screens/ projectors, iron and steel fixtures which are affixed to the immovable property for functional utility need to be tested based on object and mode of affixation. The guiding principle would be to examine whether they are part of the civil structure for better occupation or for technical utility. On both counts of movability and functionality (under the explanation to plant and machinery), many of the above items can be treated as eligible for input tax credit. To reiterate, if the entire premises has been self-constructed with binding intent of onward leasing / licensing or sale, then the construction could termed as being for ‘other’s account’, thus granting a window to argue that the clause itself is not applicable. Challenge arises where certain hotels are leased out under an operator model to large hotel chains (such as Raddisson, etc.). Hotels have a complex formular for payment of fee based on the revenue collections/ occupancy and deduction of certain premises related expenditure. Since models do not fall under the traditional lease model, it would be an uphill task for one to claim that the construction is for ‘others account’.

Port Infrastructure – Port Corporations have developed substantial civil structures in the form of jetty, dock yards, terminals, breakwater walls, etc., which have technical functionality in its field of business. These items being civil in nature could be treated as apparatus / tool to function as port. But the critical counter argument of the revenue is that these are ‘other civil structures’ in the nature of land, building, etc., and hence not eligible. The company in which the phrase ‘civil structure’ is used gives an opportunity to argue that only those items which are immovable and meant for ‘occupancy’ like a building are to be treated as civil structure. The case of the Municipal Corporation of Greater Mumbai vs. Indian Oil Corporation7on storage tanks being termed as things attached to land despite being a technical structure would guide the revenue to pursue that these are in nature of civil structures and hence not eligible for input tax credit to the Port Corporation.

7 1991 SCC (SUPP) 2 18

Factory Constructions – Pre-fabricated structures constituting the walls and sheds of factory structures are part of the overall plant/ machinery. There does not seem to be any doubt on the internal concrete foundations, etc. which are necessary foundational/structural support to the machinery. The external walls / partitions and administrative buildings have been targeted as being ineligible for credit. Strictly speaking, the definition of plant and machinery specifically excludes buildings, civil structures. Though the issue could stand at rest here and credit may be denied, the perspective of these structural being movable needs to be tested. Re-iterating the discussion in the context of warehouses, there is certainly a case for the department to deny stating that the intent of fixation is for permanent enjoyment / occupation of the land and hence constitutes an immovable property.

Co-working spaces / Shared spaces – Internal Fixtures in bare shell civil structures to convert them to co-working space is a common phenomenon. Many of the fixtures are modular in nature and fitted with nuts and bolts (such as cabins, desks, partitions, cupboards, etc.) for enhancement of the workspace. While there are other fixtures which are affixed to the immovable property as a permanent feature. One would have to run a filter of these test and test the movable character of each of the items. The rest which are considered as immovable property and part of the building itself, can be denied even if they are said to be functionally essential for creation of a co-working space.

Residential PG accommodation – Apart from other issues, the unique issue with such accommodation is that the revenue stream is not in the form of a lease rental but akin to hotel models where it is for monthly or short-term basis on a per-bed / room basis. Now the Supreme court states that ‘hotels’ are not plant or machinery. By forming a parallel between PG accommodations and hotels, credit would certainly become a formidable challenge. One argument still prevailing after the retrospective amendment would be in cases where the construction is suited for ‘overall lease as a PG accommodation’ with local municipal licenses evidencing this fact. But where the owner himself operates such business, the operating income being in the nature of short-term accommodation would not permit it to claim credit based on the SC’s decision. Revenue will argue that this is not lease in the sense articulated by the Supreme Court and since the operations of the premises is under the occupation and control of the owner of the premises. Therefore, credit on such structures would fairly deniable.

On an overall basis it is slightly intriguing that business contributing to GST revenue using civil structures are being denied credit. An input in the form of lease rentals which comprises of all the capex cost of a civil structure are eligible but similar inputs where construction has been performed for self-occupation are being termed as ineligible. Is this encouraging unwarranted tweaks to business models merely for availing ITC benefit? These rulings have left an indelible mark on the future of the input tax credit on construction matters and would guide business decisions on account of the sheer volume of ITC involved. The legal fraternity would refer to these decisions time and again to press their respective contentions on a subject matter. The last word on this subject is yet to be told…!!

Part A | Company Law

18. Global One (India) Private Limited.

Registrar of Companies, NCT of New Delhi and Haryana

Adjudication Order No. ROC/D/Adj/Order/203/GLOBAL ONE/5224-5226

Date of Order: 31st January, 2025

Adjudication order for violation of section 203 of the Companies Act 2013(Act): Delay in appointing Whole Time Company Secretary.

FACTS

  •  The Company had earlier filed a compounding application before the Regional Director (NR) for the period starting from 1st November, 2013 to 1st May, 2023 for non-appointment of CS. During the hearing for compounding, it was indicated that for the period starting from 2nd November, 2018, the said default is under adjudication mechanism and accordingly, a separate application has to be filed before the ROC, NCT of Delhi & Haryana.
  •  In the adjudication application filed thereafter, it is stated that due to the financial constraints, the management was unable to find a suitable candidate for the purpose of appointment of Whole Time Company Secretary on Board.
  •  The CS could only be appointed on 1st May, 2023 and accordingly there has been a delay of 1642 days (i.e. from 2nd November, 2018 to 1st May, 2023) in the appointment.
  • Accordingly, a show cause notice for the default was issued to the company and its officer and a response was received to the notice. In its reply, the company put forth its business condition wherein it is submitted that the Company is part of the Orange Business Group i.e. multinational business group from France with Govt. of France. The Company had to carry certain business operations with Videsh Sanchar Nigam Limited (VSNL) but due to VSNL being wound up, this Company also did not pursue the business goals further. The company stated that it was neither carrying any business nor it had any revenue  from business operations so it could not appoint the CS to meet the requirement of the Companies Act. The company also requested for oral hearing in the matter.
  •  The authorised representative who appeared for oral submission in the matter requested to take a lenient view while levying penalty on the company and its officers as company is not making any revenue from its operations since many years.

EXTRACT FROM THE PROVISIONS OF THE ACT IN BRIEF:

Section 203 (Appointment of Key Managerial Personnel):

(1) Every company belonging to such class or classes of companies as may be prescribed shall have the following whole-time key managerial personnel,

(i) managing director, or Chief Executive Officer or manager and in their absence, a whole-time director;

(ii) company secretary; and (iii) Chief Financial Officer:

Provided that an individual shall not be appointed or reappointed as the chairperson of the company, in pursuance of the articles of the company, as well as the managing director or
Chief Executive Officer of the company at the same time after the date of commencement of this Act unless,

(a) the articles of such a company provide otherwise; or

(b) the company does not carry multiple businesses

Provided further that nothing contained in the first proviso shall apply to such class of companies engaged in multiple businesses and which has appointed one or more Chief Executive Officers for each such business as may be notified by the Central Government. ………

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

Rule 8A (Appointment and Remuneration of Managerial Personnel) Rules, 2014.

Rule 8A. Every private company which has a paid-up share capital for ten crore rupees or more shall have a whole-time company secretary.

FINDINGS AND ORDER

The Company has failed to appoint to whole time company secretary for a significant period. There has been a delay of 1642 days (i.e. from 2nd November 2018 to 1st May, 2023) in appointment of CS. Further, the submission of the company to grant any remission in the penalty cannot be considered as the law provides for a fixed penalty. The subject company does not get covered under the purview of small company as defined u/s 2(85) of the Act. Hence, the benefit of section 446B would not be applicable on the company.

Thereafter in exercise of the powers conferred on the AO vide Notification dated 24th March, 2015 and having considered the reply submitted by the subject Company in response to the notice, the following penalty was imposed on the Company and its officers in default under Section 203 of the companies act 2013 for violation as follows:

  •  Penalty on Company of ₹5,00,000 being Maximum Penalty
  •  Penalty on each of the directors subject to Maximum of ₹5,00,000 per director

19. M/s HIND WOOLLEN AND HOSIERY MILLS PRIVATE LIMITED

Registrar of Companies, Chandigarh

Adjudication Order No. ROC CHD/ADJ/ 860 TO 865

Date of Order: 27th November, 2024.

Adjudication Order for Non-disclosure of interest or concern in other body corporate or entities by the Directors in Form MBP-1at the first Board Meeting of the Financial Year as required under the provisions of the Section 184 of the Companies Act 2013.

FACTS OF THE CASE

Registrar of Companies (ROC) or Adjudication Officer (AO) during its inquiry on M/s HWAHMPL under Section 206 of the Companies Act, 2013 found that the directors had failed to disclose their interest or concern in other companies or body corporate, including their shareholding, at the first board meetings for the financial years 2020-21 and 2021-22 and necessary Form MBP-1 was not submitted/filed by the directors to the M/s HWAHMPL.

Thereafter, ROC issued a show-cause notice (SCN)on November 7, 2024 to directors for violation of Section 184 (1) of the Companies Act 2013 read with Companies (Adjudication of Penalties) Rules, 2014. However, directors did not provide any response or communication to the said SCN.

PROVISIONS

Section 184(1): “Every director shall at the first meeting of the Board in which he participates as a director and thereafter at the first meeting of the Board in every financial year or whenever there is any change in the disclosures already made, then at the first Board meeting held after such change, disclose his concern or interest in any company or companies or bodies corporate, firms, or other association of individuals which shall include the shareholding, in such manner as may be prescribed.”

Section 184(4): “If a director of the company contravenes the provisions of sub-section (1) or sub-section (2), such director shall be liable to a penalty of one lakh rupees.”

Section 446B: “Notwithstanding anything contained in this Act, if penalty is payable for non­-compliance of any of the provisions of this Act by a One Person Company, small company, start-up company or Producer Company, or by any of its officer in default, or any other person in respect of such company, then such company, its officer in default or any other person, as the case may be, shall be liable to a penalty which shall not be more than one-half of the penalty specified in such provisions subject to a maximum of two lakh rupees in case of a company and one lakh rupees in case of an officer who is in default or any other person, as the case may be.

Explanation. —For the pit/ poses of this section

(a) “Producer Company” means a company as defined in clause (1) of section 378A;

(b) “start-up company” means a private company incorporated under this Act or under the Companies Act, 1956 and recognised as start-up in accordance with the notification issued by the Central Government in the Department for Promotion of Industry and Internal Trade.”

Rule 3(12) of Companies (Adjudication of Penalties) Rules, 2014 “While adjudging quantum of penalty, the adjudicating officer shall have due regard to the following factors, namely.

a) size of the company

b) nature of business carried on by the company,

c) injury to public interest,

d) nature of the default,’

e) repetition of the default,’

f) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default: and

g) the amount of loss caused to an investor or group of investors or creditors as a result of the default.

Provided that, in no case, the penalty imposed shall be less than the minimum penalty prescribed, if any, under the relevant section of the Act.”

Rule 3(13) of Companies (Adjudication of Penalties) Rules, 2014 which read as under: “In case a fixed sum of penalty is provided for default of a provision, the adjudicating officer shall impose that fixed sum, in case of any default therein.”

ORDER

AO, after having considered the facts and circumstances of the case concluded that the directors of M/s HWAHMPL were liable for penalty as prescribed under section184(4)of the Companies Act 2013 for default made in complying with the requirements.

Hence, AO imposed an aggregate penalty of ₹5,00,000/- (Rupees Five Lakhs Only) i.e. ₹50,000/- (Rupees Fifty Thousand Only) on Each of the Director in default of M/s HWAHMPL for non-disclosure of interest or concern in other bodies corporate or entities at the first Board Meeting held for the Financial year 2020-21 and 2021-22 in form MBP-1 undersection 184 (4) of the Companies Act 2013 read with Section 446B of the Companies Act 2013.

Manufacturing’s Missing Might: India’s Growth Puzzle

Manufacturing’s crucial role in economic prosperity, highlighted by Prof. Kaldor’s research, prompted India to launch multiple initiatives like the National Manufacturing Policy 2011, Make in India and PLI Schemes. However, the sector’s performance remains weak, with manufacturing IIP growing at just 3.1 per cent CAGR (FY 2012–24) and 1.9 per cent (FY 2019–24), well below policy targets of 12–14 per cent. The sector’s GDP share has declined from 16 per cent to 13–14 per cent since the mid-2000s, challenging India’s vision of becoming a high-income nation by 2047 (Viksit Bharat). This underperformance persists despite favourable demographics, strong infrastructure spending, and healthy corporate balance sheets.

THE STRUCTURAL SHIFT: FROM PRODUCTION TO FINANCIALISATION

Manufacturing’s sluggish performance is commonly attributed to ill-defined external factors and reform gaps — a tenuous explanation without rigorous analytics. In contrast, the real reasoning emerges from an analysis of RBI’s comprehensive database, spanning over 2.33 lakh company-years across six decades, which reveals two key trends: Corporates’ declining productive investment and increasing financialisation since the mid-2000s [See Table]. Public Limited Companies (PLCs) experienced a significant shift in asset allocation between 1961 and 2023. The average share of Gross Fixed Assets (GFA) in total assets declined steadily from 70 per cent in the pre-liberalisation period [1961–90] to 55 per cent in recent years [2011–23], while the share of the financial investments surged from 3 per cent to 21 per cent. This trend suggests a notable shift from physical assets to financial ones. Private Limited Companies [Pvt LCs] followed a similar pattern, albeit at a moderate pace. The coincidence of import liberalisation, China’s entry into the WTO in the early 2000s and the subsequent accelerated growth in its exports to India are not merely coincidental. Further, corporates’ liquidity balances in terms of cash, cash equivalents and bank balances show a higher share during the last two decades compared to the first four decades, despite exponential growth in digital payments. The real factors behind these two shifts remain unaddressed and un-analysed.

Table: Non-Govt. Non-Financial Public & Pvt. Ltd Companies’ Financial Ratios as per cent of Total Assets

Sources: RBI: Compendium on Private Corporate Business Sector in India FY1951–2009 and DBIE Database

UNDERSTANDING THE INVESTMENT SLOWDOWN

Despite the increasing need for capital investment in advanced machinery and technology to enhance productivity and value addition in the manufacturing sector, corporate capital deepening has lagged behind expectations. This decline stems significantly from the opaque pricing of mis-invoiced and covert Chinese imports, creating severe uncertainties in cost structures and investment returns that ultimately jeopardise the viability of new manufacturing projects. As a consequence, it fosters assembly-focused operations and reliance on Chinese critical inputs, hindering capital deepening and the associated gains in total factor productivity growth. The corollary fall-out of under-investment in manufacturing is poor skill development and technological progress, and reduced productivity and competitiveness. This contrasts with India’s IT sector, where hands-on experience has driven skill development and success.

These issues are covered in the 145th Parliamentary Standing Committee Report (2018), the Directorate of Revenue Intelligence report (2015), the Global Financial Integrity Report (2019), George Herbert’s Research (2020), and Jha and Truong’s Analysis (2014). Research by Rhodium Group highlights that China can compel its companies to collude, fix prices and manipulate market dynamics to favour its export. No other country’s trade practices receive as frequent media coverage as those of China and its firms for their alleged tax evasion, hawala transactions, under-invoicing, breach of intellectual property rights, dumping, and transhipment. Harvard Prof. Graham Allison described China as the “most protectionist, mercantilist, and predatory major economy in the world.” China’s exploitation of WTO benefits while maintaining non-market practices, its predatory pricing, currency manipulation, various export subsidies, and export of counterfeits have triggered global anger and defensive responses. Some attribute China’s large export subsidies to contributing to China’s large public debt.

The massive gap between official trade data — shown by 19.5 per cent CAGR of Chinese imports [USD] over FY 2002–24 dwarfing India’s 2.6 per cent export CAGR to China coupled with huge volumes of unaccounted covert and mis-invoiced imports, illustrate the scale of predatory trade practices described above and sluggish manufacturing growth and employment. In addition to stifling manufacturing growth and capex, it led to NPA accumulation in the 2010s; drained savings, and hindered both job creation and on-the-job skill development.

Anecdotally, the severe impact of Chinese steel dumping on India’s steel industry is well-documented, with press headlines emphasising its consequences. In contrast, the full extent of the damage to many other industries caused by mis-invoiced and illicit Chinese imports remains largely unarticulated and unexplored.

When corporates face limited opportunities for productive capital investment, they tend to divert funds towards financial assets. The share of financial investment in total assets increased by 2.5 times and 2 times for PLCs and Pvt. LCs, respectively, since the 2000s. (See Table) Anecdotally, RBI’s Financial Stability Report (June 2014) highlighted a striking case of corporate over-financialisation- in FY 2013, the financial income of the top 10 corporates exceeded the treasury income of the top 10 banks.

TRADE CREDIT: DRIVING MANUFACTURING GROWTH FOR VIKSIT BHARAT 2047

A dysfunctional trade credit repayment ecosystem, coupled with massive illicit and mis-invoiced Chinese imports, is severely impacting India’s manufacturing sector. Trade credit, a vital enabler of cash flow, production, and operational continuity, is increasingly hindered by delayed payments and external pressures, stifling its role in driving economic growth. India can address these challenges by learning from successful digital lending models in China and Vietnam, where streamlined trade credit systems process millions of SME loans daily and have significantly strengthened their manufacturing bases. Integrating trade credit platforms with GSTN for real-time monitoring and enforcing payment discipline can create a robust B2B credit ecosystem. This approach can mitigate risks, enhance competitiveness, and position Indian manufacturers more effectively in global value chains.

The impact of this dysfunctional ecosystem is particularly evident in corporate liquidity patterns. Despite the exponential growth in digital payments, companies, especially smaller ones, are forced to maintain higher transactional liquidity levels than in the 1980s and 1990s due to uncertain receivables realisation and inconsistent trade credit availability, further straining their operational efficiency.

NAVIGATING THE PATH FORWARD

Addressing the structural challenges of India’s manufacturing sector requires a two-pronged approach. First, implementing rigorous, frequent, and surprise inspections at ports and airports to combat unscrupulous imports and dumping is crucial. Digital tracking systems should complement this administratively feasible and WTO-compatible strategy, enhanced quality testing infrastructure, and expedited anti-dumping investigations. Second, strengthening India’s trade credit payment ecosystem by learning from successful international models where streamlined trade credit payment discipline and invoice discounting systems have empowered SMEs to overcome financial constraints, boost exports, and improve their position in global value chains through enhanced innovation and productivity. This comprehensive approach can revitalise India’s manufacturing sector, fostering increased capital investment, technological advancement, and sustainable growth.

Evolution of Audit: From Paper to Pixels

In this article, the evolution of audit practices from paper-based documentation to digital platforms is illuminated, highlighting how technology has revolutionized the approach towards Audit. This Article further explains how this transition to electronic documentation (“E-Documentation”) has helped significantly in improving efficiency, accuracy and transparency in audits. It allows for secure storage, easy retrieval and structured organization of audit files, which enhances internal and external review processes. Digital tools like automated resource management, cost management and certain electronic tools streamline the operations, while advanced data analytics techniques for sampling and journal entry testing bolster audit effectiveness by detecting errors and anomalies with greater precision. Embracing these innovations enables audit firms to elevate their practices, moving from routine tasks to insightful analyses, ensuring consistent and efficient audit procedures in the digital age.

“Change is the only constant”, as rightly quoted by Heraclitus, a Greek philosopher. The field of audit has embraced this notion of believing that change has always been by its side.

From handwritten documentation to digital algorithms, the evolution of audit has been a journey “from paper to pixels”. In this article, we explore the advancements that have shaped the audit scope, exploring how technology has upgraded the way audits are conducted and how professionals navigate to understand the audit processes adopted in the digital age.

As industries adapt to the rapid pace of technological advancement, the audit profession has been at the forefront of innovation, embracing digitalisation to revolutionise its practices. From the rigorous scrutiny of paper documents to the swift analysis of digital data, the evolution of audit has been nothing short of extraordinary.

In this article, we will delve into the importance of the article by discussing the following aspects:

  •  The shift from paper-based to digital audit practices.
  •  Evaluating the risk of the client before accepting a new client or an existing client.
  • Facilitating communication between the client and the engagement team.
  •  Advanced tools like data analytics which enhance transparency, accuracy and efficiency.

In the field of auditing, the transition from paper-based processes to digital platforms has resulted in exceptional efficiency, accuracy and transparency.

DIGITALISATION OF AUDIT DOCUMENTATION – “E-DOCUMENTATION”

Before digitalisation, audit documentation was primarily done using physical / paper-based methods. This involved extensive manual processes like paperwork, handwritten notes, printed financial statements and physical files for audit engagement. Auditors would manually document their findings, observations and procedures. The process of compiling and organising audit documentation was labour-intensive and time-consuming. Storage and retrieval of paper-based audit files posed significant challenges in terms of  space, security, confidentiality and maintaining documents in a systematic way. Overall, the pre-digitalisation era of audit documentation relied heavily on manual processes, paper-based records and physical documentation, which were susceptible to inefficiencies, errors and limitations in terms of accessibility and flexibility.

The era of digitalization paved the way for ‘E- documentation’. E- Documentation stands for Electronic Documentation and refers to securing, maintaining confidentiality and storing the documents electronically. This revolutionary change has proved to be significant for all the professionals pursuing the practice of audit.

The introduction of electronic documentation with various accounting and auditing tools, such as Suvit, facilitates the process of audit documentation. This has various built-in features, such as risk evaluation forms, auto-populated workpapers / questionaries, and communications within the audit team and between the audit team and the management. The auditor can analyze the level of risk for a particular audit engagement as well as it shall also help the auditor to design effective audit procedures to be undertaken for the audit engagement. Moreover, the work performed, findings and reports of an auditor right from the audit planning phase to the conclusion phase can be stored for a prolonged period of seven years as per SA 230 and can be retrieved whenever required. This features robust functionality for maintaining compliance with the maker-checker policy. Additionally, it incorporates a mechanism to imprint immutable timestamps, ensuring the integrity and non-editable nature of the records. E-Documentation serves as a trail for all the actions performed by the auditor during an audit.

Some of the merits of E-Documentation are mentioned below:

  •  Internal review

The cloud-based tool can be accessed by the audit team at any point in time. This facilitates smooth review within the audit team and between the audit team and the Subject Matter Experts (‘SMEs).

  •  External review

Due to the storage of documentation in a structured manner, it helps in efficient reviews by the external person as well (such as a peer reviewer, or any other regulatory body). All the relevant information and data related to the entity being audited is stored in a centralised manner. E- Documentation also ensures retrieval for a prolonged period, which enables any person to review the work done at any point in time.

  •  Roll forward

Apart from the merits mentioned above, the documentation stored in the audit file for a particular year can be utilised in subsequent years by rolling it forward. This process involves transferring audit documentation such as audit memos, workpapers, checklists, auditor’s assessment and conclusion from the previous year to subsequent years. This feature facilitates in planning procedures for subsequent year’s audits.

  •  Standard checklists

E-Documentation tool includes checklists designed to facilitate and support auditors’ work. These checklists feature questions related to audit procedures conducted related to various critical areas such as Going concern, impairment of investments / assets, etc. Audit firms can embed/customize standard checklists on Accounting Standards (AS), Auditing Standards, Company Auditor’s Report Order (CARO), 2020, Internal Financial Control, Companies Act, etc., in the software to ensure uniformity across all the engagements / clients. The audit team uses these checklists to document their actual work performed in the respective areas under examination. Further, these checklists also help in ensuring that any important thing in relation to the audit is not missed out.

  •  Restricted access

Further, access to the E-Documentation tool can be restricted to the audit team until and unless access is granted to the extended team members with prior approvals. This ensures privacy, confidentiality and security of sensitive client information and data. Further, since working papers are the property of the auditor, utmost care should be taken so that the independence of the audit is maintained before access is granted to any external member.

EVALUATING RISKS AT THE FIRM LEVEL — CLIENT ONBOARDING

The client acceptance procedures shall be focused on ensuring that the clients who are chosen to serve should represent an appropriate balance of risk and reward. The firm minimises the exposure to high-risk clients by identifying each before accepting any engagement and then determining whether the firm is willing to manage the exposure. Additionally, internal risk evaluations, annual inspections, practice risk assessment and continuous monitoring are all integral for ensuring that when a firm chooses to serve a client, the firm follows the policies and procedures and meets the industry standards. The client acceptance process shall be workflow-driven and shall be dependent on the type of services warranted by the client and the size of the engagement. It must require more than one level of approval (in terms of maker and checker), each of which shall be generated electronically to avoid any bias.

  •  Apart from assessing a new client, it is equally important to assess the existing client relationships / engagements as well. Hence, evaluating client continuance should be a periodic process due to which the risk parameters of an existing client are revalued/reassessed. Further, the client assessment should also be carried out if there is a significant change in the composition of Those Charged with Governance (TCWG).
  •  Engagement acceptance is required to be performed prior to initiating a new engagement, irrespective of whether the firm has continuously performed the engagement for an existing client or will be performed for a new client. The EAF shall be completed and approved prior to the commencement of an engagement.

Hence, the firm should have these kinds of electronic forms which help in assessing the acceptance of a client or an engagement, and if there is any risk on account of any fraud, litigation, etc., against the TCWG / management, then the tool will populate the risk to the engagement team to evaluate the matter in detail.

EFFICIENT ELECTRONIC DATA EXCHANGE BETWEEN THE CLIENTS AND AUDIT TEAM

As mentioned above, in the pre-digitalisation era, exchanging data within the audit team and between the audit team and the client used to be chaos. Various difficulties were faced with respect to its storage and collation; to a certain extent, this might have hampered the overall quality of the audit. However, the digitalisation of the audit processes has led to better work management.

These tools automate the preparation of detailed requirement lists and facilitate secure file sharing, which enables auditors to manage audits effectively. These tools facilitate a collaborative environment for auditors and the client, ensuring real-time progress tracking and simplifying data management. These tools function as centralized digital platforms that manage and organize documents, making it easier for users to locate and access necessary information by arranging documentation within a unified digital repository. It also facilitates the retention of data and information for a prolonged period.

Due to such pioneering change, since the storage of data is now centralized, it has become easier to streamline the audit.

DIGITAL TOOLS

Let us delve into the use of various digital tools and their purpose, which can be used in the audit processes. Maximising audit effectiveness entails harnessing the power of data analytics to transform traditional auditing practices. By integrating sophisticated data analytical tools and techniques, auditors can revolutionize: Resource and cost management; communicating initial audit requirements to the client; selection of samples & vouching and testing of journal entries (JE).

A. RESOURCE MANAGEMENT

Resource management involves planning, allocation and optimisation of resources efficiently to achieve the goals of the firm. Keeping meticulous track of time spent on engagements is pivotal for preserving the trust and transparency vital to professional relationships. The time spent by the audit team and keeping a record of this is of utmost importance. This helps in demonstration of the time spent by partner and manager on engagements which is paramount in ensuring the success and credibility/quality of the overall audit.

This brings a wealth of experience and expertise to the table, which is essential for maintaining high-quality standards throughout the audit process. Their involvement is crucial in overseeing audit procedures meticulously, analyzing financial statements accurately and drawing well-supported audit conclusions.

Moreover, partners and managers play a pivotal role in managing audit risks effectively by identifying potential issues early on and implementing appropriate responses. Their technical knowledge allows them to address complex accounting matters with precision, ensuring compliance with auditing standards and regulatory requirements. Beyond technical aspects, their interaction with clients fosters clear communication, manages expectations and strengthens client relationships.

Additionally, partners and managers provide rigorous review and oversight of audit work performed by junior staff, ensuring thoroughness and accuracy in audit findings. Ultimately, the time invested by partners and managers in audit engagements not only enhances the quality of audits but also upholds the firm’s commitment to integrity, independence and ethical practices in auditing. By aligning costs with the services provided, clients are assured of fair invoicing, reinforcing confidence in the partnership. Moreover, this practice facilitates efficient resource allocation and project management, empowering firms to evaluate process effectiveness, pinpoint areas for enhancement and refine future resource distribution strategies.

B. EFFECTIVE COST MANAGEMENT

The documentation of work conducted during engagements serves multifaceted purposes. It not only provides a detailed record of audit procedures but also furnishes invaluable support for quality control evaluations. Assigning unique job codes to each engagement streamlines this process, simplifying cost analysis and bolstering accountability by correlating time expenditures with specific client projects or internal endeavours. This systematic methodology not only optimises billing procedures but also fortifies project management structures, culminating in an overall improvement of operational efficacy across the organisation.

C. COMMUNICATING INITIAL AUDIT REQUIREMENTS “PREPARED BY THE CLIENT (PBC)”:

“PBC” stands for “Prepared by Client.” This term refers to the documents and schedules that the client prepares and provides to the auditors as part of the audit process. These documents facilitate the auditors’ examination of the Company’s records and support the information presented in the financial statements. This typically includes reports, schedules, listings, vouchers and reconciliations.

Numerous interactions between clients and auditors make it challenging to track all the requirements and communications. To address this, an electronic PBC tool can be adopted to streamline the process. This tool allows the insertion of agreed timelines for data sharing and ensuring deadlines are met. It provides a robust review mechanism and enables task assignment to team members on both the auditor and the client sides. It also helps in improving collaboration and accountability. Importantly, it allows critical issues to be highlighted for partners or managers efficiently.

Adopting an electronic PBC tool enhances transparency and efficiency in the audit process. It ensures all communications and document submissions are tracked accurately, which reduces the risk of oversight.

This technology fosters a more organized and effective audit, leading to better outcomes and smoother operations for both auditors and the client.

D. SAMPLING AND VOUCHING

Diverse sampling methods in auditing, such as statistical, random, systematic, stratified, block, judgmental and haphazard sampling, offer tailored approaches to the auditor. Each method presents distinctive benefits, ensuring comprehensive, effective and efficient audit.

A FEW OF THE SAMPLING METHODS ARE EXPLAINED BELOW:

Statistical sampling: A method of selecting a subset of items from a population using statistical techniques to ensure that the selected subset is representative of the entire population.

Random sampling: A technique where each item in the population has an equal chance of being selected, eliminating bias and ensuring that the sample is representative of the entire population.

Systematic sampling: A method where items are selected at regular intervals from the entire population, starting from a randomly chosen number and then every 10th item of the entire population.

Stratified sampling: A technique where the population is divided into distinctive sub-groups (strata) based on specific characteristics, and samples are extracted from each sub-group to ensure that the selected sub-group is representative of the entire population.

Block sampling: A method where the population is divided into blocks or clusters, and entire blocks / clusters are selected randomly to form the  sample, often used when items within blocks / clusters are more like each other than items in the other blocks / clusters.

Judgmental sampling: A non-random method where the auditor selects items based on professional judgment, often used when specific items are believed to be significant, and the selection will be representative of the entire population.

Haphazard sampling: A non-random method where items are selected without any specific plan or pattern.

Further, for vouching, the audit team can also deploy data analytics, which enhances transaction verification, automates tasks and improves accuracy, thus streamlining processes and conserving resources. Advanced data analytical tools enable efficient cross-referencing of transactions with source documents which further helps in minimising errors.

E. JOURNAL ENTRY (JE) TESTING

JE Testing involves reviewing and verifying the accuracy and validity of financial transactions recorded in the Company’s books of account. Through data-driven approaches, auditors can identify patterns, anomalies and trends within large datasets, allowing for more targeted and efficient sampling methodologies (to a certain extent mentioned in the earlier sections).

Advanced data analytics enable auditors to scrutinise transactions with greater precision, enhance the detection of errors and irregularities, and ensure a more thorough examination of financial transactions, thus providing the outcome efficiently. Further, these data analytical tools help in scrutinising journal entries for accuracy and legitimacy, which facilitates the auditor to flag suspicious entries and provide deeper insights into financial transactions.

VARIOUS TESTS IN JE TESTING ENCOMPASS:

  •  Keyword analysis: Search for specific words or phrases like “bribe” or “charity” within worksheets.
  •  Year-End entries: Analyse journal entries made nearer to year-end dates.
  •  Public holiday entries: Review entries on holidays to detect unusual or large transactions and assess their reasonability.
  •  Weekend entries:Scrutinise entries, especially passed on weekends and evaluate their nature.
  •  Materiality assessment: Review entries above the materiality to identify unusual transactions.
  •  Single entry verification: This means that basic accounting method where each transaction is recorded once rather than using a double-entry system. It is important to ensure that no single entries are mistakenly passed into the books of account.

Incorporating digital tools and data analytics enhances audit effectiveness by optimising resource management, improving cost efficiency and facilitating clear communication of audit requirements. Advanced sampling techniques and JE testing with data analytics further strengthen accuracy and reliability, ensuring thorough scrutiny of financial transactions. These innovations not only streamline processes but also uphold integrity, independence and compliance with auditing standards, ultimately fostering robust audit outcomes and client & regulatory satisfaction.

CONCLUSION

Hence, the suggested tools for audit digitalization and optimization are merely a starting point and not an exhaustive list. These tools exemplify how technology can significantly enhance the audit process, from manual documentation to resource management to risk assessment; effective communication between the client and the engagement team and using Digital tools truly harnesses the benefits of these advancements.

Audit firms and their quality control departments must mandate the use of these digital tools, ensuring consistent, accurate and efficient audit practices.

By embracing these innovations, audit firms can transform their practices from routine tasks to insightful analyses, unlocking new levels of precision and efficiency. The future of auditing is bright and with these tools, firms will be well-equipped to lead the charge into this exciting new era

Key Year End Audit Considerations

Statutory Audit of financial statements is mandatory for all companies under the Companies Act, 2013. Whilst audit process commences well before the close of the financial year, for issuing the audit report attention needs to be paid to certain key matters as at the financial year end. Regulators like SEBI, NFRA, ROC, etc. are also keeping a close watch on the information contained the financial statements and the audit report through inspection of the audit work papers and other documents. The focus areas for the regulators generally cover matters regarding modified audit report, reliance on estimates, fraud risk factors, related party transactions, communication to those charged with governance and compliance with laws and regulations keeping in mind the overarching principle of materiality. Any slippages in these critical areas can make or break the reputation of the audit firms and their personal.

1. INTRODUCTION

Presentation and disclosure in financial statements play an important role in providing transparency to stakeholders. They help users to understand the financial health and performance of a company. Regulators are putting more emphasis on presentation and disclosures in financial statements due to increased stakeholder expectations, higher focus on public interest, and ongoing efforts to enhance global harmonization and prevent financial irregularities and frauds.

In today’s volatile market, every company is grappling with multiple challenges. Uncertainty in laws and regulations and economic volatility have put immense pressure on companies. Whereas earlier the annual reports were a thin booklet, currently, their size has increased manifold, which includes the financial statements and statutory auditors report issued to the members of a company under the Indian Companies Act, 2013 “(the Act”). Further, even though the audit report is addressed to the members since the annual report is mandatorily required to be hosted on the company’s website by listed companies under SEBI guidelines, there is no limit on the public accessibility thereof, making companies more accountable.

Finally, regulators like the Securities and Exchange Board of India (SEBI), Registrar of Companies (RoC), National Financial Reporting Authority (NFRA), etc., are keeping a close watch on the information, especially the audited financial statements and the report thereon which are available in public domain.. These regulators have regulatory powers to conduct inspections to delve into the working papers and documents of an audit firm to check if there is any lacuna in the audit procedures followed by the auditor and whether the auditor has complied with relevant Standards on Auditing (“SAs”).

With the end of the financial year (FY) 2024-25 around the corner, the hustle and bustle of audit have already commenced. This article presents some of the key year-end considerations for the auditors that they should keep in mind while performing the audit.

KEY CONSIDERATIONS PERTAINING TO AUDITOR’S REPORT

On completion of the audit, the auditor is required to issue an audit report to express the audit opinion. The following Standards on Auditing deals with respect to audit conclusions and reporting:

  •  SA 700 (Revised), Forming an Opinion and Reporting on Financial Statements
  •  SA 701, Communicating Key Audit Matters in the Independent Auditor’s Report
  •  SA 705 (Revised), Modifications to the Opinion in the Independent Auditor’s Report
  •  SA 706 (Revised), Emphasis of Matter Paragraphs and Other Matter Paragraphs in the Independent Auditor’s Report
  • SA 720 (Revised), The Auditor’s Responsibilities Relating to Other Information

SA 700 (Revised) prescribes the content of an audit report, which should, at a minimum, be forming part of the audit report. The following are certain issues requiring careful consideration:

A. QUANTIFICATION IN QUALIFICATIONS

It is pertinent to note that pursuant to paragraph 21 of SA 705 (Revised) if there is a material misstatement of the financial statements that relate to specific amounts in the financial statements (including quantitative disclosures in the notes to the financial statements), the auditor is required to include in the Basis for Opinion paragraph a description and quantification of the financial effects of the misstatement, unless impracticable. If it is not practicable to quantify the financial effects, the auditor is required to state that fact in this section. Where an accurate quantification is not possible, but a management estimate is available, the auditor performs such audit tests on those management estimates as are possible and clearly indicates that the amount quantified is based on management’s estimate. If it is impracticable for the auditor to quantify or estimate the effect of the misstatement, this fact needs to be included in the Basis for Modified Opinion paragraph.

Therefore, the auditor needs to quantify the financial effects of the misstatement, and only if it is impracticable, the auditor can include the qualification without quantification. The word ‘impracticable’ is not defined in Standards on Auditing but is commonly understood as ‘after making every reasonable effort’ to do so.

B. OTHER MATTER

As per paragraph 10 of SA 706 (Revised), if the auditor considers it necessary to communicate a matter other than those that are presented or disclosed in the financial statements that, in the auditor’s judgment, is relevant to users’ understanding of the audit, the auditor’s responsibilities or the auditor’s report, the auditor is required to include an “other matter” paragraph in the auditor’s report, provided:

  •  That is not prohibited by law or regulation; and
  •  When SA 701 applies, the matter has not been determined to be a key audit matter to be communicated in the auditor’s report.

An auditor should not include other matter paragraph for matters adequately disclosed in the financial statements. It can be included, for example, to highlight that in case the audit of some of the components of a company has been audited by other auditors, then this fact is required to be presented in the audit report to the consolidated financial statements under the “Other Matters” paragraph. However, in view of the recommendation by NFRA for revision of SA-600 on the lines of ISA 600, it needs to be seen whether the reference to the work of other auditors will be permissible.

C. EMPHASIS OF MATTER VS. QUALIFIED OPINION

Another important area is the use of the ‘Emphasis of matter’ (EOM) paragraph in the auditor’s report.
As per paragraph 8 of SA 706 (Revised), if the  auditor considers it necessary to draw users’ attention to a matter presented or disclosed in the financial statements that, in the auditor’s judgment, is of such importance that it is fundamental to users’ understanding of the financial statements, the auditor should include an Emphasis of Matter paragraph in the auditor’s report provided:

  •  The auditor would not be required to modify the opinion in accordance with SA 705 (Revised) as a result of the matter; and
  •  When SA 701 applies, the matter has not been determined to be a key audit matter to be communicated in the auditor’s report.

EOM paragraph should not be included as a substitute for modification. For example, if the company has not provided adequate requisite disclosures in its financial statements, the auditor should evaluate the requirement to express a qualified opinion on the basis of the requirement of SA 705 (Revised) and should not include an EOM paragraph.

Examples of circumstances where the auditor may consider it necessary to include an Emphasis of Matter paragraph are:

  •  Uncertainty relating to the future outcome of exceptional litigation or regulatory action.
  •  A significant subsequent event that occurs between the date of the financial statements and the date of the auditor’s report.
  •  Early application (where permitted) of a new accounting standard that has a material effect on the financial statements.
  •  A major catastrophe that has had, or continues to have, a significant effect on the entity’s financial position.

KEY CONSIDERATIONS PERTAINING TO ESTIMATES (INCLUDING USING THE WORK OF MANAGEMENT EXPERTS)

The auditor is required to perform adequate procedures to obtain sufficient appropriate audit evidence for estimates and complex transactions. The auditor should maintain documentation in sufficient detail to demonstrate the following:

  •  Competence, capabilities and objectivity of management experts have been determined (the auditor should consider the self-interest threat of the management expert when numerous valuation assignments from other group companies were being performed by the same valuer);
  •  Evaluating for management bias;
  •  Procedures performed in order to determine the reasonableness of the assumptions/methods used by management experts;
  •  Procedures performed by the auditor over management assessment;
  •  Professional judgements made by the auditor in concluding on high-estimate areas;
  •  In case of critical estimates/balances, involve internal experts for determining the appropriateness of the assumptions/methods used for valuation;
  •  In case there are caveats in the valuation report, legal opinions, etc., documentation on how the auditor has dealt with those

KEY CONSIDERATIONS PERTAINING TO COMMUNICATION WITH THOSE CHARGED WITH GOVERNANCE (TCWG)

SA 260 (Revised), Communication with TCWG requires the auditor to communicate significant findings from the audit with those charged with governance. This is another key focus area for the regulators. Some of the key considerations are as follows:

  •  TCWG comprises a Board of Directors, Audit Committee and Management. Communication with the Audit Committee is not sufficient.
  •  Auditors should maintain documented evidence for:

– Communication of the planned scope and timing of the audit with TCWG.

– Minutes (“what and when”) of meeting with the TCGW/Audit Committee, including the team’s conclusion on the matters discussed.

– Accounting/auditing matters discussed with TCWG during the initial planning meeting and their final resolution

  •  Critical matters should be communicated to TCWG, and regular discussions with the management should be documented.
  •  Audit committee presentation contains only management’s estimate/representation, does not include audit procedures performed and auditor’s conclusion
  •  Minimum communication with TCWG to ensure compliance with SA 260

– Auditor Independence

– The Auditor’s Responsibilities in Relation to the Financial Statement Audit

– Planned Scope and Timing of the Audit

– Significant Findings from the Audit, including the auditor’s assessment

– Inquiries with TCWG and response thereto

NFRA recently issued “The Auditor-Audit Committee Interactions Series 1”, which draws the attention of the auditors to the potential questions the Audit Committee / Board of Directors (BoD) may ask them in respect of accounting estimates and judgements. The first in the series in this regard includes aspects pertaining to the audit of Expected Credit Losses (ECL) for financial assets and other items as required by Ind AS 109, Financial Instruments.

SA 260 also requires the auditor to communicate with TCWG about qualitative aspects of the accounting practices, policies and disclosures. The reason behind such a communication is that the views of the auditor would be particularly relevant to TCWG in discharging their responsibilities for oversight of the financial reporting process.

This series put forwards some key questions relating to the following topics which the BoD / Audit Committee may ask the auditor regarding the audit of ECL:

  •  Audit of ECL computation
  •  Test of design and operating effectiveness of control mechanism over recognition and measurement of ECL
  •  Audit of methodology used for ECL computation

KEY CONSIDERATIONS RELATED TO INTERNAL CONTROLS OVER FINANCIAL REPORTING (ICFR)

The auditor has to report under section 143(3) of the Act as to whether the company has adequate internal financial controls in place and the operating effectiveness of such controls. As per the Act, the term ‘internal financial controls’ means the policies and procedures adopted by the company for ensuring the orderly and efficient conduct of its business, including adherence to the company’s policies, the safeguarding of its assets, the prevention and detection of frauds and errors, the accuracy and completeness of the accounting records, and the timely preparation of reliable financial information. The Guidance Note on Audit of Internal Financial Controls Over Financial Reporting states that the auditor’s objective in an audit of internal financial controls over financial reporting is to express an opinion on the effectiveness of the company’s internal financial controls over financial reporting and the procedures in respect thereof are carried out along with an audit of the financial statements. Because a company’s internal controls cannot be considered effective if one or more material weakness exists, to form a basis for expressing an opinion, the auditor must plan and perform the audit to obtain sufficient appropriate evidence to obtain reasonable assurance about whether material weakness exists as of the date specified in management’s assessment.

Some of the key areas which require careful consideration are as follows:

  •  Evaluation of controls over management override as part of entity-level controls; the auditor should maintain adequate documentation and procedures for controls around management override (remain cautious that deviation to the process might be a red flag for management override).
  •  Evaluation of management testing of ICFR is critical, and its impact on ICFR conclusion should be documented. Inquiries with the internal auditor and evaluation of the role of the internal auditor, and a review of internal audit reports and the auditor’s conclusion should also be documented.
  •  Adequate testing/focus even on non-critical areas (e.g. PPE)

KEY CONSIDERATIONS RELATING TO SIGNIFICANT UNUSUAL OR HIGHLY COMPLEX TRANSACTIONS

Material misstatement of financial statements, including fraudulent financial reporting, can arise from significant unusual or highly complex transactions, including situations that pose difficult “substance over form” questions, such as transactions not in the ordinary course of business undertaken with related parties. The Standards on Auditing give particular attention to the accounting for and disclosure of such transactions in the context of the auditor’s identification and assessment of risks of material misstatement, whether due to error or fraud and the auditor’s responses thereto.

The auditors are required to exercise professional judgment and maintain professional skepticism throughout the planning and performance of an audit and, among other things, identify, assess and respond to risks of material misstatement, whether due to fraud or error. Accordingly, the auditor plans and performs an audit with professional skepticism, recognising that circumstances may exist that cause the financial statements to be materially misstated. Maintaining professional skepticism throughout the audit is necessary if the auditor is, for example, to reduce the risks of overlooking unusual circumstances. The auditor is required to:

  •  Evaluate whether information obtained about the entity indicates that one or more fraud risk factors are present; for example:

♦ Significant related party transactions not in the ordinary course of business or with related entities not audited or audited by another firm; and

♦ Significant, unusual, or highly complex transactions, especially those close to period end that pose difficult “substance over form” questions

♦ Inquire of management and others within the entity as appropriate about the existence or suspicion of fraud, including, for example, employees involved in initiating, processing or recording complex or unusual transactions and those who supervise or monitor such employees;

♦ Inquire of management and others within the entity, and perform other risk assessment procedures considered appropriate to obtain an understanding of the controls, if any, that management has established to:

♦ authorise and approve significant transactions and arrangements with related parties; and

♦ authorise and approve significant transactions and arrangements outside the normal course of business;

If the auditor identifies significant transactions outside the normal course of business, inquire management about the nature of these transactions and whether related parties could be involved.

Fraudulent financial reporting often involves management override of controls that otherwise may appear to be operating effectively. Management override of controls or other inappropriate involvement by management in the financial reporting process may involve such techniques as omitting, advancing or delaying recognition in the financial statements of events and transactions that have occurred during the reporting period or engaging in complex transactions that are structured to misrepresent the financial position or financial performance of the entity. The auditor is required to treat the risk of management override of controls as a risk of material misstatement due to fraud and, thus a significant risk.

COMPLIANCE WITH LAWS AND REGULATIONS

Compliance with laws and regulations is a crucial aspect which engages the attention of auditors for which they need to keep in mind the requirements laid down in SA-250. Auditors are primarily concerned with the non-compliance with Laws and Regulations that materially affect financial statements, which includes the following, amongst others:

  •  Form and content of financial statements, including amounts to be reflected and disclosures to be made (Schedule III, Banking Regulation Act, Insurance Act, SEBI Mutual Fund guidelines, etc.)
  •  Conducting of business including licensing and registration (Banks, Mutual Funds, NBFCs, Pharmaceutical companies, fertilizer companies, etc.), which could have potential going concern issues
  •  Operating aspects of the business (Provisioning, valuation, taxation, safety aspects etc.) with possible financial consequences like fines, penalties, etc.

Adequate and appropriate procedures need to be performed to identify instances of non-compliance:

  •  Inquiries with the Management.
  •  Inspecting correspondence with relevant statutory authorities.
  •  Reading the minutes.
  •  Appropriate Control and Substantive procedures for industry-specific requirements like provisioning, valuation, accrual of expenses for retirement benefits, computation of incentives and subsidies etc.

Following are some of the instances of non-compliance which need to be considered in the context of year-end financial reporting:

  •  Non-payment / delayed payment of statutory dues (CARO reporting).
  •  Non-compliance with certain statutory and procedural requirements under various laws in respect of certain transactions or investigations by government departments resulting in fines and penalties or other demands and consequential disclosure of contingent liabilities or making provisions.
  •  Unsupported transactions, especially with related parties.

KEY CONSIDERATIONS PERTAINING TO MATERIALITY

The concept of materiality is the final test which determines the nature and extent of reporting and the issuance of the final opinion in the audit report as to whether the financial statements present a fair view. It helps to determine the material misstatements. As per SA 320, misstatements are material if they, individually or in aggregate, could reasonably be expected to influence the economic decisions of the users taken on the basis of financial statements. Whilst generally materiality is determined on a quantitative basis, in certain situations, misstatements may be qualitatively material, which needs to be kept in mind during year-end reporting as follows:

  •  Transactions resulting in changing loss into profit and vice versa.
  •  Transactions having an impact on compliance with debt covenants (e.g. current ratio, DSCR, etc.)
  •  Transaction has an impact on contractual agreements.
  •  Transaction has an impact on compliance with regulatory provisions.
  •  Transaction has an effect on variable compensation payable to Key Managerial Person.
  •  Transaction resulting in fraud or omission or commission.

The following are the different stages in the calculation of materiality.

  •  Planning Materiality: It is computed as the overall materiality representing a threshold above which the financial statements could be misstated and would affect the economic decision of the user of the financial statements. It depends on the size of the organization, types of transactions, character of management and auditor’s judgement and is set as a percentage of the profit, assets or net worth depending upon the nature of the entity.
  •  Performance Materiality: It is an amount less than overall materiality and acts as a safety buffer to lower the risk of aggregate uncorrected and undetected misstatements, which could be material for overall financial statements.
  •  Specific Materiality: It is established for a class of transactions, account balances and disclosures.

The materiality must be appropriately calculated since that has a bearing on the aggregate uncorrected and undetected misstatements and the consequential impact on the overall audit opinion.

CONCLUSION

Audit of financial statements is no longer about simply issuing an audit report but demonstrating and documenting the conclusions reached in respect of all auditing standards, as applicable to a particular company, especially in respect of matters requiring modification, reliance on estimates, fraud risk factors and related party transactions, amongst others whilst at the same time ensuring compliance of all relevant laws and regulations keeping in mind the overarching principle of materiality. With the constant inspections to which the auditors are exposed, any material deviations, especially in the aforesaid critical areas, can make or break the reputation and hard work built by the audit firms and the individual partners/proprietors and senior audit team members with severe consequences like fines and penalties and debarring the firm from undertaking audits.

Non-Repatriable Investment by NRIs and OCIs under FEMA: An Analysis – Part – 1

This is the 11th Article in the ongoing NRI series dealing with “Non-repatriable Investment by NRIs and OCIs under FEMA — An Analysis.”

Summary

“What cannot be done directly, cannot be done indirectly – Or can it be?”

FEMA’s golden rule has always been that what you cannot do directly, you cannot do indirectly—but then comes Schedule IV, sneaking in like that one friend who always finds a way out. It’s the ultimate legislative exception, allowing NRIs and OCIs to invest in India as if they never left, minus the luxury of an easy exit. Curious? Dive into the fascinating world of non-repatriable investments — you won’t be disappointed (unless, of course, you were hoping to take the money back out quickly!)

INTRODUCTION AND REGULATORY FRAMEWORK

Non-resident investors — including Non-Resident Indians (NRIs), Overseas Citizens of India (OCIs), and even foreign entities — can invest in India under the Foreign Exchange Management Act, 1999 (FEMA). FEMA provides a broad statutory framework, which is supplemented by detailed rules and regulations issued by the government and the Reserve Bank of India (RBI). In particular, the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 (NDI Rules) (issued by the Central Government) and the Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019 (Reporting Regulations) (issued by RBI) lay down the regime for foreign investments in “non-debt instruments.” These are further elaborated in the RBI Master Direction on Foreign Investment in India, which consolidates the rules and is frequently consulted by practitioners.

Under this framework, foreign investment routes are categorised by schedules to the NDI Rules. Of particular interest are Schedule I (Foreign Direct Investment on a repatriation basis), Schedule III (NRI investments under the Portfolio Investment Scheme on a repatriation basis), Schedule IV (NRI / OCI investments on non-repatriation basis), and Schedule VI (Investment in Limited Liability Partnerships). This article focuses on the nuances of non-repatriable investments by NRIs / OCIs under Schedule IV, contrasting them with repatriable investments and other routes. We will examine the legal definitions, eligible instruments, sectoral restrictions, compliance obligations, and the practical implications of choosing the non-repatriation route, with a structured analysis suitable for legal professionals.

DEFINITION OF NRI AND OCI UNDER FEMA; ELIGIBILITY TO INVEST

Non-Resident Indian (NRI) – An NRI is defined in FEMA and the NDI Rules as an individual who is a person resident outside India and is a citizen of India. In essence, Indian citizens who reside abroad (for work, education, or otherwise) become NRIs under FEMA once they cease to be “person resident in India” as per Section 2(w) of FEMA. Notably, this definition excludes foreign citizens, even if they were formerly Indian citizens – such persons are not NRIs for FEMA purposes once they have given up Indian citizenship.

Overseas Citizen of India (OCI) – An OCI for FEMA purposes means an individual resident outside India who is registered as an OCI cardholder under Section 7A of the Citizenship Act, 1955. In practical terms, these are foreign citizens of Indian origin (or their spouses) who have obtained the OCI card. OCIs are a separate category of foreign investors recognized by FEMA, often extending the same investment facilities as NRIs. In summary, NRIs (Indian citizens abroad) and OCIs (foreign citizens of Indian origin) are both eligible to invest in India, subject to the FEMA rules.

Eligible Investors under the Non-Repatriation Route – Schedule IV specifically permits the following persons to invest on a non-repatriation basis):

  •  NRIs (individuals resident outside India who are Indian citizens);
  •  OCIs (individuals resident outside India holding OCI cards);
  •  Any overseas entity (company, trust, partnership firm) incorporated outside India which is owned and controlled by NRIs or OCIs.

This extension to entities owned / controlled by NRIs / OCIs means that even a foreign-incorporated company or trust, if predominantly NRI / OCI-owned, can use the NRI non-repatriation route. However, as discussed later, such entities do not enjoy certain repatriation facilities (like the USD 1 million asset remittance) that individual NRIs do. Moreover, it is important to note that while these NRI / OCI-owned foreign entities are eligible for Schedule IV investments, they cannot invest in an Indian partnership firm or sole proprietorship under this route — only individual NRIs / OCIs can do so in that case.

NRIs and OCIs have broadly two modes to invest in India: (a) on a repatriation basis (where eventual returns can be taken abroad freely), or (b) on a non-repatriation basis (where the investment is treated as a domestic investment and cannot be freely taken out of India). Both modes are legal, but they carry different conditions and implications, as explained below.

WHAT ARE NON-DEBT INSTRUMENTS? – PERMISSIBLE INVESTMENT INSTRUMENTS

Under FEMA, all permissible foreign investments are classified as either debt instruments or non-debt instruments. Our focus is on non-debt instruments, which essentially cover equity and equity-like investments. The NDI Rules define “non-debt instruments” expansively to include:

• Equity instruments of Indian companies – e.g. equity shares, fully and mandatorily convertible debentures, fully and mandatorily convertible preference shares, and share warrants. (These are often referred to simply as “FDI” instruments.)

• Capital participation in LLPs (contributions to the capital of Limited Liability Partnerships).

• All instruments of investment recognized in the FDI policy, as notified by the Government from time to time (a catch-all for any other equity-like instruments).

• Units of Alternative Investment Funds (AIFs), Real Estate Investment Trusts (REITs), and Infrastructure Investment Trusts (InvITs).

• Units of mutual funds or Exchange-Traded Funds (ETFs) that invest more than 50 per cent in equity (i.e. equity-oriented funds).

• The junior-most (equity) tranche of a securitization structure.

• Immovable property in India (acquisition, sale, dealing directly in land and real estate, subject to other regulations).

• Contributions to trusts (depending on the nature of the trust, e.g. venture capital trusts, etc.).

• Depository receipts issued against Indian equity instruments (like ADRs / GDRs).

All the above are considered non-debt instruments. Thus, when an NRI or OCI invests on a non-repatriation basis, it can be in any of these forms. In practice, the most common instruments for NRI / OCI non-repatriable investment are equity shares of companies, capital contributions in LLPs, units of equity-oriented mutual funds, and investment vehicles like AIFs / REITs.

It is important to note that debt instruments (such as NCDs, bonds, and government securities) are governed by a separate set of rules (the Foreign Exchange Management (Debt Instruments) Regulations) and generally fall outside the scope of Schedule IV. NRIs / OCIs can also invest in some debt instruments (for example, NRI investments in certain government securities on a non-repatriation basis are permitted up to a limit, but those are subject to different rules and are not the focus of this article.

REPATRIABLE VS. NON-REPATRIABLE INVESTMENTS: MEANING AND LEGAL DISTINCTION

Repatriable Investment means an investment in India made by a person resident outside India which is eligible to be repatriated out of India, i.e. the investor can bring back the sale proceeds or returns to their home country freely (net of applicable taxes) in foreign currency. In other words, both the dividends/interest (current income) and the capital gains or sale proceeds (capital account) are transferable abroad in a repatriable investment without any ceiling (subject to taxes). Most foreign direct investments (FDI) in India are on a repatriation basis, which is why repatriable NRI investments are treated as foreign investments and counted towards foreign investment caps. For instance, if an NRI invests in an Indian company under Schedule I (FDI route) or Schedule III (portfolio route) on a repatriable basis, it is counted as foreign investment (FDI / FPI), with all attendant rules.

Non-Repatriable Investment means the investment is made by a non-resident, but the sale or maturity proceeds cannot be taken out of India (except to the limited extent allowed). The NDI Rules define it implicitly by saying, “investment on a non-repatriation basis has to be construed accordingly” from the repatriation definition. In simple terms, this means the principal amount invested and any capital gains or sale proceeds must remain in India. The investor cannot freely convert those rupee proceeds into foreign currency and remit abroad. Such investments are essentially treated as domestic investments –— the NDI Rules explicitly deem any investment by an NRI / OCI on a non-repatriation basis to be domestic investment, on par with investments made by residents. This distinction has crucial legal effects: NRI/OCI non-repatriable investments are not counted as foreign investments for regulatory purposes. They do not come under FDI caps or sectoral limits (since they are treated like resident equity). This was confirmed by India’s DPIIT (Department for Promotion of Industry and Internal Trade) in a clarification that downstream investments by a company owned and controlled by NRIs on a non-repatriation basis will not be considered indirect FDI. Effectively, non-repatriable NRI / OCI investments enjoy the flexibility of domestic capital but with the sacrifice of free repatriation rights.

Advantages of Non-Repatriation Route: The non-repatriable route (Schedule IV) offers NRIs and OCIs significant advantages in terms of flexibility and compliance:

  •  No Foreign Investment Caps: Since it is treated as domestic investment, an NRI/OCI can invest without the usual foreign ownership limits. For example, under the portfolio investment route, NRIs cannot exceed 5 per cent in a listed company (10 per cent collectively), but under non-repatriation, there is no such limit — an NRI could potentially acquire a much larger stake in a listed company under Schedule IV (outside the exchange) without breaching FEMA limits. Similarly, total NRI / OCI investment can go beyond 10/24 per cent aggregate because Schedule IV holdings are not counted as foreign at all.
  •  Simplified Compliance: Many of the onerous requirements applicable to FDI – e.g. adherence to pricing guidelines, filing of RBI reports, sectoral conditionalities, mandatory approvals — are relaxed or not applicable for non-repatriable investments (since regulators treat it like a resident’s investment). We detail these compliance relaxations below.
  •  Current income can be freely repatriable: Current income arising from such investments like interest, rent, dividend, etc., is freely repatriable without any limits and is not counted in the $1mn threshold.
  •  Deemed Domestic for Downstream: As noted, if an NRI/OCI-owned Indian entity invests further in India, those downstream investments are not treated as FDI. This can allow greater expansion without triggering indirect foreign investment rules.

Drawbacks of the Non-Repatriation Route: The obvious trade-off is illiquidity from an exchange control perspective. The investor’s capital is locked in India. Specifically:

  •  Inability to Repatriate Capital Freely: The principal amount and any capital gains cannot be freely
    converted and sent abroad. The investor must either reinvest or keep the funds in India (in an NRO account) after exit, subject to a limited annual remittance (discussed later).
  •  Perpetual Rupee Exposure: Since eventual proceeds remain in INR, the investor bears currency risk on the investment indefinitely, which foreign investors might be unwilling to take for large amounts.
  •  Exit Requires Domestic Buyer or Special Approval: To actually get money out, the NRI / OCI may need to convert the investment to repatriable by selling it to an eligible foreign investor or seek RBI permission beyond the allowed limit. This adds a layer of uncertainty for the exit strategy.
  •  Not Suitable for Short-Term Investors: This route is generally suitable for long-term investments (often family investments in family-run businesses, real estate purchases, etc.) where the NRI is not looking to repatriate in the near term. It is less suitable for foreign venture capital or private equity, which typically demand an assured exit path.

INVESTMENT UNDER SCHEDULE IV: PERMITTED INSTRUMENTS AND SECTORAL CONDITIONS

What Schedule IV Allows: Schedule IV of the NDI Rules (titled “Investment by NRI or OCI on the non-repatriation basis”) lays out the scope of investments NRIs / OCIs can make on a non-repatriable basis. In summary, NRIs/OCIs (including their overseas entities) can, without any limit, invest in or purchase the following on a non-repatriation basis:

  •  Equity instruments of Indian companies – listed or unlisted shares, convertible debentures, convertible preference shares, share warrants – without any limit, whether on a stock exchange or off-market.
  •  Units of investment vehicles – units of AIFs, REITs, InvITs or other investment funds — without limit, listed or unlisted.
  •  Contributions to the capital of LLPs – again, without limit, in any LLP (subject to sectoral restrictions discussed below).
  •  Convertible notes of startups – NRIs / OCIs can also subscribe to convertible notes issued by Indian startups, as allowed under the rules, on a non-repatriation basis.

Additionally, Schedule IV explicitly provides that any investment made under this route is deemed to be a domestic investment (i.e. treated at par with resident investments). This means the general FDI conditions of Schedule I do not apply to Schedule IV investments unless specifically mentioned.

Sectoral Restrictions – Prohibited Sectors: Despite the broad freedom, Schedule IV carves out certain prohibited sectors where even NRI / OCI non-repatriable investments are NOT permitted. According to Para 3 of Schedule, an NRI or OCI (including their companies or trusts) shall not invest under non-repatriation in:

  •  Nidhi Company (a type of NBFC doing mutual benefit funds among members);
  •  Companies engaged in agricultural or plantation activities (this covers farming, plantations of tea, coffee, etc., and related agricultural operations);
  •  Real estate business or construction of farmhouses;
  •  Dealing in Transfer of Development Rights (TDRs).

These mirror some of the standard FDI prohibitions, with a key addition: agricultural / plantation is completely off-limits under Schedule IV (whereas under FDI policy, certain agricultural and plantation activities are permitted up to 100 per cent with conditions). The term “real estate business” is defined (by reference to Schedule I) to mean dealing in land and immovable property with a view to earning profit from them (buying and selling land/buildings). Notably, the development of townships, construction of residential or commercial premises, roads or infrastructure, etc., is specifically excluded from the definition of “real estate business”, as is earning rent from property without transfer. So, an NRI / OCI can invest in a construction or development project or purchase property for earning rent on a non-repatriation basis (since that is not considered a “real estate business” for FEMA purposes) but cannot invest in a pure real estate trading company.

Implication – Some Sectors Allowed on Non-Repatriation that are Prohibited for FDI, and vice versa: Because Schedule IV’s prohibited list is somewhat different from Schedule I (FDI) prohibited list, there are interesting differences:

  •  Additional Sectors Open under Schedule IV: Certain sectors like lottery, gambling, casinos, tobacco manufacturing, etc., which are prohibited for any FDI under Schedule I, are not mentioned in Schedule IV’s prohibition list. This may imply that an NRI / OCI could invest in such businesses on a non-repatriation basis. For example, a casino business in India cannot receive any FDI (foreign investor money on a repatriable basis), but it could receive NRI/OCI investment as a domestic investment under Schedule IV. However, such investments may be subject to provisions or prohibitions in various other laws and Statewise restrictions in India, and therefore, one must be careful in making such investments.
  •  From a policy perspective, this leverages the idea that an Indian citizen abroad is still treated akin to a resident for these purposes. Thus, apart from the specific exclusions in Schedule IV, all other sectors (even those barred to foreign investors) are permissible for NRIs / OCIs on non-repatriation. This provides NRIs/OCIs a unique opportunity to invest in sensitive sectors of the economy, which foreigners cannot, theoretically increasing the investment funnel for those sectors via the Indian diaspora.
  •  Conversely, Some Investments Allowed via FDI Are Barred in Non-Repatriation: There are cases where FDI rules are more liberal than the NRI non-repatriable route. A prime example is plantation and agriculture. Under FDI (Schedule I), certain plantation sectors (like tea, coffee, rubber, cardamom, etc.) are allowed 100 per cent foreign investment under the automatic route (with conditions such as mandatory divestment of a certain percentage within time for tea). However, Schedule IV flatly prohibits NRIs from investing in agriculture or plantation without exception. Thus, a foreign company could invest in a tea plantation company on a repatriable basis (counting as FDI), but an NRI cannot invest in the same on a non-repatriable basis, ironically. Another example: Print media — FDI in print media (newspapers / periodicals) is restricted to 26 per cent with Government approval under FDI policy. If an Indian company is in the print media business, an NRI / OCI could still invest on a non-repatriable basis (since Schedule IV’s company restrictions don’t list print media) — meaning potentially up to 100% as domestic investment. However, if the print media business is structured as a partnership firm or proprietorship, Schedule IV (Part B) prohibits NRI investment in it. We see a regulatory quirk: an NRI can invest in a print media company on non-repatriation (domestic equity, no specific cap) but not in a print media partnership firm. These inconsistencies require careful attention when structuring investments.

In summary, NRIs / OCIs have a broader canvas in some respects under Schedule IV, but must be mindful of the specifically forbidden areas. As a rule of thumb, apart from Nidhi, plantation / agriculture, real estate trading, and farmhouses / TDRs, most other activities are allowed. NRIs have leveraged this to invest in real estate development projects, infrastructure, and even sectors like multi-brand retail by ensuring their investments are non-repatriable (thus not triggering the foreign investment prohibitions or caps). On the other hand, they cannot use this route for farming or plantation businesses even if foreign investors could via FDI.

Special Case – Investment by NRIs / OCIs in Border-Sharing Countries: In April 2020, India introduced a rule (now embodied in NDI Rules) that any investment from an entity or citizen of a country that shares a land border with India (e.g. China, Pakistan, Bangladesh, etc.) requires prior Government approval, regardless of sector. This was to curb opportunistic takeovers. This rule applies to NRIs / OCIs as well if they are residents of those countries. However, notably, that restriction is relevant only for investments on a repatriation basis. If an NRI / OCI residing in, say, China or Bangladesh wants to invest under the non-repatriation route, Schedule IV does not impose the same approval requirement. In effect, an NRI/OCI in a neighbouring country can still invest in India as a de facto domestic investor under Schedule IV without going through government approval, whereas the same person investing under a repatriable route would face a clearance hurdle. This exception again underscores the policy view of NRI non-repatriable funds as akin to Indian funds. Whilst permissible, in view of authors, considering the geo-political climate, care and caution need to be exercised. Loophole or policy openness may not be the final answer, as national interest always comes first.

PRICING GUIDELINES AND VALUATION — ARE THEY APPLICABLE?

One significant compliance relief for non-repatriable investments is in pricing regulations. Under FEMA, when foreign investors invest in or exit from Indian companies on a repatriation basis, there are strict pricing guidelines to ensure shares are not issued at an unduly low price or purchased at an unduly high price (to prevent outflow/inflow of value unfairly). For instance, the issue of shares to a foreign investor must typically be at or above fair market value (as per internationally accepted pricing methodology), and transfer from resident to foreign investor cannot be at less than fair value, etc. These pricing restrictions do not apply to investments under Schedule IV. Since Schedule IV investments are treated as domestic, the law does not mandate adherence to the pricing formulae of Schedule I.

Practical effect: Indian companies can issue shares to NRIs / OCIs on a non-repatriation basis at face value or book value or any concessional price they choose, even if that is below the fair market value, without contravening FEMA. Similarly, NRIs/OCIs could potentially buy shares from resident holders at a negotiated price without being bound by the ceiling that would apply if the NRI were a foreign investor on a repatriation basis. This flexibility is often useful in family arrangements or preferential allotments where prices may be deliberately kept low for the NRI (which would otherwise trigger questions under FDI norms). For example, an Indian family-owned company can allot shares to an NRI family member at par value under Schedule IV, even if the fair value is much higher — a practice not allowed if the NRI were taking them on a repatriable basis. The only caution is that the Income Tax Act’s fair value rules (for deemed income on undervalued transactions) might still apply, but from a FEMA standpoint, it’s permissible.

To illustrate, the RBI Master Directions explicitly note that pricing guidelines are not applicable for investments by persons resident outside India on a non-repatriation basis, as those are treated as domestic investments. Thus, NRIs / OCIs have an advantage in valuation flexibility under Schedule IV.

REPORTING AND COMPLIANCE REQUIREMENTS

Another area of divergence is in regulatory reporting. Normally, any foreign investment coming into an Indian company must be reported to RBI (through its authorised bank) via forms on the FIRMS portal (previously Form FC-GPR for new issues, Form FC-TRS for transfers, etc.). However, investments by NRIs / OCIs on a non-repatriation basis do not require filing the typical foreign investment reports like FC-GPR. The rationale is that since these are not counted as foreign investments, the RBI does not need to capture them in its foreign investment data.

Indeed, no RBI reporting is prescribed for a fresh issue / allotment of shares under Schedule IV. An NRI/OCI investing on a non-repatriable basis can be allotted shares without the company filing any form to RBI (By contrast, if the same shares were issued under FDI, a Form SMF/FC-GPR would be required within 30 days.) That said, it is a best practice for the investee company or the NRI to intimate the AD bank in a letter about the receipt of funds and the fact that the shares are issued on a non-repatriation basis. This helps create a record, so that if in future any question arises, the bank/RBI is aware those shares were categorized as non-repatriable from the start.

One exception to the no-reporting rule is when there is a transfer of such shares to a person on a repatriation basis. If an NRI/OCI holding shares on a non-repatriable basis sells or gifts them to a foreign investor or NRI on a repatriable basis, that transaction does trigger reporting (Form FC-TRS) because now those shares are becoming foreign investments. The responsibility for filing the FC-TRS lies on the resident transferor or transferee, as applicable. We will discuss transfers shortly, but in summary: no reporting when NRIs invest non-repatriable initially, but reporting is required when the character of investment changes to repatriable via a transfer.

It’s important to maintain proper records in the company’s books classifying NRI / OCI holdings as non-repatriable. Practitioners note that if a company mistakenly records an NRI’s holding as repatriable FDI and files forms or treats it as a foreign holding in compliance reports, it could lead to regulatory confusion or even penalties. For instance, it might appear the company exceeded an FDI cap when, in reality, the NRI portion should have been excluded. Therefore, both the investor and investee company should internally document the nature of the investment (e.g. through a board resolution noting the shares are issued under Schedule IV, non-repatriation).

In summary, compliance for Schedule IV investments is lighter: no entry-level RBI approvals (it’s an automatic route in all cases), no pricing certification, and no routine filing for allotments. Contrast that with Schedule I investments, where one must comply with valuation norms and file forms within the prescribed time. This ease of doing business is a key attraction of the non-repatriable route for many NRIs.

Mode of Payment and Repatriation of Proceeds

Funding the Investment: An NRI/OCI investing on a non-repatriation basis can fund the investment through any of the standard channels for NRI investments. Permissible modes include:

  •  Inward remittance from abroad through normal banking channels (i.e. sending foreign currency, which is converted to INR for investment).
  •  Payment out of an NRE or FCNR account maintained in India (these are rupee or foreign currency accounts which are repatriable).
  •  Payment out of an NRO account in India (Non-Resident Ordinary account, which holds the NRI’s funds from local sources in INR).

Use of an NRO account is notable — since NRO balances are non-repatriable (beyond the USD 1 million a year), routing payment from NRO naturally aligns with the non-repatriable nature of the investment. But even if funds came from an NRE/FCNR (which are repatriable accounts), once invested under Schedule IV, the money loses its repatriable character for the principal and becomes subject to Schedule IV restrictions.

Credit of Sale / Disinvestment Proceeds: When an NRI / OCI eventually sells the investment or the Indian company liquidates, the sale proceeds must be credited only to the NRO account of the investor. This rule is crucial — it ensures the money remains in the non-resident’s ordinary rupee account (NRO), which is not freely repatriable. Even if the original investment was paid from an NRE account, the exit money cannot go back to NRE; it has to go to an NRO (or a fresh NRO if the investor doesn’t have one). Once in NRO, those funds are under Indian jurisdiction with limited outflow rights.

Repatriation of Proceeds — The USD 1 Million Facility: FEMA does provide a limited facility for NRIs / OCIs to remit out funds from their NRO accounts/sale proceeds under the Remittance of Assets Regulations, 2016. A Non-Resident Indian or PIO is allowed to remit up to USD 1,000,000 (One Million USD) per financial year abroad from an NRO account or from the sale proceeds of assets in India, including capital gain. This is a general limit for all assets combined per person per year. This means an NRI who sold shares that were on a non-repatriable basis can utilise this route to gradually repatriate the money, up to $ 1M (USD One Million) annually. Notably, this facility is only available to individuals (NRIs / PIOs) and not to companies or other entities. So, if an NRI made a large investment and eventually exited, they could take out $1M each year (approximately ₹8.75 crore at current rates) from India. Any amount beyond that in a year would require special RBI approval.

In practice, RBI approval for exceeding the USD 1M cap is rarely granted except in exceptional hardship cases. RBI typically expects the NRI to stagger the remittances within the allowed limit across years. Therefore, investors should plan accordingly if the sums are large – it could take multiple years to fully repatriate the corpus unless they find some other mechanism (like transferring the shares to a repatriable route investor before sale, etc.). It has been observed that RBI is generally not inclined to allow one-time large remittances beyond the automatic limit, emphasizing that the non-repatriable route is meant for money that essentially stays in India with only a slow trickle out.

No $1M facility for foreign entities: As mentioned, if the investor was not an individual but an overseas company or trust owned by NRIs / OCIs, that entity does not qualify as an NRI or PIO under the Remittance of Assets rules. Thus, it cannot directly avail of the $1M automatic repatriation. Such entities would have to apply to RBI for any repatriation, which is uncertain. This is why advisors often recommend that if repatriation might eventually be desired, the investment should be structured in the individual NRI’s name (or at least eventually transferred to the individual NRI before exit). By keeping the investor as a natural person, the exit flexibility using the $1M per year route remains available.

Repatriation of Current Income: Importantly, current income (yield) from the investment is freely repatriable even if the investment itself is non-repatriable. FEMA distinguishes between repatriation of capital versus repatriation of current income such as dividends, interest, or rent. As a general rule, any dividend or interest earned in India by an NRI can be remitted abroad after paying due taxes, irrespective of whether the underlying investment was on a non-repatriation basis. RBI Master Circular confirms that authorised dealers may allow remittance of current income (like dividends, pension, interest, rent) from NRO accounts, subject to CA certification of taxes paid. This means an NRI who invested in shares under Schedule IV can still have the company declare dividends, and the NRI can get those dividends out of India without dipping into the $1M capital remittance limit. Likewise, interest on any NRO deposits of the sale proceeds is repatriable as current income. This provision is a relief because it allows NRIs/OCIs to enjoy returns on their investment globally, even though the principal stays locked.

To summarize, the inflow of funds for non-repatriable investments is flexible (NRE/FCNR/NRO all allowed), but the outflow of funds is tightly controlled. NRIs should channel the exit money into NRO and then plan systematic remittances of up to $1M a year unless they intend to reuse the funds in India. Many simply reinvest in India, treating it as part of their India portfolio.

“And That’s a Wrap… for Now!”

Congratulations! If you’ve made it this far, you’re officially a FEMA warrior—armed with the wisdom of Schedule IV and the art of non-repatriable investments. We’ve explored how NRIs and OCIs can invest in India like residents and enjoy the flexibility that even FDI can’t offer. But wait—what happens when it’s time to exit? Can you sell, transfer, or gift these investments? Will FEMA let you walk away freely, or will it make you fill out just one more RBI form?

All this (and more!) is in Part 2, where we unlock the secrets of transfers, repatriation limits, downstream investments, and compliance puzzles. Stay tuned—because just like FEMA regulations, this story isn’t over yet!

Allied Laws

52. Sunkari Tirumala Rao and Ors. vs. Penki Aruna Kumari

2025 LiveLaw (SC) 99

17th January, 2025

Partnership Firm — Unregistered — Suit instituted by partners for recovery of money from another partner — Suit not maintainable — Registration of Partnership firm compulsory — Mandatory provision. [S. 69, Partnership Act, 1932].

FACTS

The Petitioners (Original Plaintiffs) had instituted a suit for recovery of money in their capacity as the partners of an unregistered partnership firm against the Respondent (Original Defendant), who was also a partner of the said unregistered firm. The Respondent had challenged the maintainability of the said suit on the ground that, as per section 69 of the Partnership Act, 1932 (Act), no suit can be filed by a partner of an unregistered firm. However, the learned Trial Court held that since the partnership firm had not commenced business, the Petitioners were entitled to file a suit for recovery of money under section 69 of the Act. In the revision proceedings before the Hon’ble Andhra Pradesh High Court at Amravati, the Hon’ble Court held that the provisions of section 69 are mandatory in nature, and a suit can only be filed by partners of a registered partnership firm.

Aggrieved, a special leave petition was filed before the Hon’ble Supreme Court.

HELD

The Hon’ble Supreme Court after relying on its earlier decision in the case of Seth Loonkaran Sethiya and Others vs. Mr. Ivan E. John and Others (1977) 1 SCC 379, along with other decisions, reiterated that provisions of section 69 are mandatory in nature and also apply to unregistered partnership firms that have not commenced their business. The Petition was, therefore, dismissed, and the order of the Hon’ble High Court was upheld.

53. Surendra G. Shankar and Anr. vs. Esque Finamark Pvt. Ltd. and Ors.

Civil Appeal No. 928 of 2025 (SC)

22nd January, 2025

Condonation of delay — Appeal — Appellate Court restricted to adjudicate the matter only on the delay aspect — Cannot adjudicate on merits.

FACTS

The Appellants had filed a complaint before the Maharashtra Real Estate Regulatory Authority (RERA) for possession of a flat. The said complaint was filed against the Respondent and one M/s. Macrotech Developers Ltd. (Respondent No. 2). Thereafter, Respondent No. 2 was discharged from the proceedings vide order dated 23rd July, 2019 citing no privity of contract between the Appellant and Macrotech Developers Ltd (Respondent No. 2). Thereafter, a final order was passed on 16th October, 2019 dismissing the complaint of the Appellant. Aggrieved, an appeal was preferred before the RERA Tribunal against the order dated 16th October, 2019. The Appellant also appealed against the order of the RERA dated 23rd July, 2019 (wherein Respondent No. 2 was discharged) along with an application for condonation of delay. However, the RERA Tribunal dismissed the delayed appeal. Thereafter, the appellants filed a second appeal before the Hon’ble Bombay High Court. The Hon’ble Bombay High Court condoned the delay and thereafter proceeded to decide the issue on merits, resulting in the dismissal of the appeal.

Aggrieved, an appeal was filed before the Hon’ble Supreme Court.

HELD

The Hon’ble Supreme Court held that once the Hon’ble High Court had condoned the delay of the Appellant, it ought to have restored the matter back to the file of the RERA Tribunal since the scope of appeal was limited to the condonation of delay. This was further strengthened by the fact that the RERA Tribunal had not commented / adjudicated on merits. Therefore, the decision of the Hon’ble High Court was set aside, and the matter was restored to the file of the RERA Tribunal with a direction to decide the appeal on merits without being prejudiced by the observations made by the Hon’ble High Court. The appeal was, therefore, allowed.

54. Central Bank of India vs. Smt. Prabha Jain and Ors.

2025 LiveLaw (SC) 103

9th January, 2025

Suit Property — Possession Debt Recovery Tribunal — Powers / jurisdiction — Possession can be given only to the borrower or possessor. [S. 17, 34, Securitisation and Reconstruction of Financial Assets and Enforcement of Security Act, 2002; Order VII, Rule 11, Code for Civil Procedure, 1908.].

FACTS

Respondent No. 1 (Ms. Prabha Jain, Original Plaintiff) had instituted a suit for possession of the suit property. According to Ms. Prabha Jain, she had inherited a 1/3rd share in the suit property after the death of her husband in 2008. However, the suit property was illegally sold by one Mr. Sumer Chand Jain (brother of the deceased husband, Appellant / Original Defendant) to one Mr. Parmeshwar Das Prajapati (Appellant / Original Defendant). Thereafter, Mr. Parmeshwar Das Prajapati executed a mortgage deed in favour of Central Bank of India (Appellant-Bank) for obtaining a loan. Thereafter, the Appellant-Bank took over the possession of the suit property under section 13 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security (SARFAESI) Act, 2002 and published an advertisement for putting the suit property on auction. Consequently, Ms. Prabha Jain filed a suit to declare the said sale deed by Sumer Chand Jain to Mr. Parmeshwar Das Prajapati as illegal and to hand over the possession of the suit property to her. The Appellant-Bank, however, challenged the maintainability of the said suit on the ground that as per section 34 of the SARFAESI Act, no civil court has the jurisdiction to entertain any suit or proceedings in respect of matter which Debts Recovery Tribunal (DRT) or the Appellate Tribunal is empowered to. The said contention of the Appellant-Bank was accepted by the learned Civil Court, which was, thereafter, reversed by the Hon’ble Madhya Pradesh High Court.

Aggrieved, an appeal was filed before the Hon’ble Supreme Court by the Appellant-Bank.

HELD

The Hon’ble Madhya Pradesh High Court observed that the Original Plaintiff (Ms. Prabha Jain) had prayed for three reliefs before the learned Civil Court. The first two reliefs related to declaring the sale deed by Sumer Chand Jain to Parmeshwar Das Prajapati and the consequent mortgage deed in favour of Appellant-Bank as invalid. The third relief was with regard to handing over the possession of the suit property back to the Plaintiff. At the outset, the Hon’ble Court observed that the first two reliefs, undisputedly, were under the jurisdiction of a civil court and not under the DRT. With respect to the third relief, the Hon’ble Supreme Court observed that according to section 34 r.w.s. 17(3) of the SARFAESI Act, the DRT has some power to ‘restore’ the suit property to an individual who is a borrower or a possessor of the property. However, in order to ‘restore’ the suit property, Ms. Prabha Jain (Original Plaintiff) was neithera borrower nor a possessor of the suit property when the Appellant-Bank took over the possession of the property. Therefore, the Hon’ble Supreme Court confirmed that DRT had no jurisdiction to entertain the suit, and Ms. Prabha Jain had rightly instituted the suit before the civil court. The Hon’ble Supreme Court further noted that if a plaint/suit is filed before the civil court wherein, the Plaintiff has urged multiples reliefs (as in the present case), and if it is noticed that some of the reliefs are barred by law, then, the Civil Court cannot reject the entire plaint under Order VII, Rule 11 of the Code for Civil Procedure, 1908. In such a scenario, the Civil Court must address the issues / reliefs which are not barred by the law and avoid commenting on issues/reliefs which are barred by law. Before parting ways, the Hon’ble Court opined a need for the Reserve Bank of India to develop a standardised and practical framework for preparing title search reports (by the bank officials) before a loan has been sanctioned by the banks. Further, the Court opined that in the said framework, the liability of the erring bank official who had sanctioned the loan must also be determined.

The appeal was thus allowed.

55. Rakesh Brijal Jain vs. State of Maharashtra

CRA No. 379 of 2016 (Bom)(HC)

21st January, 2025

Offence of money laundering — Punishment for money — laundering — Allowing the Criminal Revision application the Court awarded exemplary cost ₹1 lakh each on complainant and Enforcement Director ( ED) for invoking criminal action and harassing the Developer with criminal action — Breach of agreement – Purchaser and Developer — Law Enforcement Agencies like ED should conduct themselves within parameters of law and that they cannot take law in to their own hands without application of mind and harass citizens. [S. 3, 4, Prevention of Money Laundering Act, 2002; Indian Penal Code 1860, S. 120B, 406, 418, 420]

FACTS

The police station forwarded the charge sheet to the Enforcement Director (ED). The ED lodged a criminal case against a developer. Criminal Revision Application was filed challenging the legality and validity of the order dated August 08, 2014, issuing process passed by the learned Special Judge, Mumbai under the Prevention of Money Laundering Act, 2002. The Criminal Revision Application sought setting aside of the order, principally on the ground that prima facie no offence whatsoever was made out under Sections 406, 418, 420 read with 120B Indian Penal Code, 1860.

HELD

Allowing the petition, the Court held that a mere breach of promise, agreement or contract does not, ipso facto, constitute an offence of criminal breach of trust without there being a clear case of entrustment. Clearly, the allegation / charge under Section 406 of the IPC has no basis. Once it is established that there is no cheating involved under the IPC then there are no proceeds of crime involved under Section 2(1)(u) of PMLA and therefore there is no Money Laundering involved under Section 3 of PMLA in the present case prosecution. ED has not made out any case whatsoever for proceeding against the Applicants before the Court under the PMLA or even under IPC. At the highest, if the complainant is aggrieved due to delay in receiving possession, his remedy lies in a Civil Court under the Sale Agreement, which he has already invoked. No offense of cheating or Money Laundering exists qua the prosecution, and ED has not made out any case whatsoever for proceeding against the Applicants before the Court under the PMLA or even under IPC. ED has supported the complainant’s false case without application of mind or without going through the record delineated hereinabove. The attachment of the two flats and garage purchased by the Applicant is cancelled.

56. Tomorrowland Limited vs. Housing and Urban Development Corporation Limited and Another

2025 LiveLaw (SC) 205

13th February, 2025

Director’s Responsibility — Dishonour of Cheque — Twin conditions — in charge and responsible of management of company. [S. 141, Negotiable Instruments Act, 1881]

FACTS

The case involves a contractual dispute between the Appellant and Respondent regarding the allotment of land for a 5-star hotel at Andrew’s Ganj, New Delhi. In 1990, the Ministry of Urban Development (MUD) decided to develop a 71-acre land parcel in Andrew’s Ganj through HUDCO. HUDCO invited bids, including for a 99-year lease of land to develop a 5-star hotel and an adjacent car park. Tomorrowland emerged as the highest bidder and was issued an allotment letter. Disputes arose between the Tomorrow land (Appellant) and HUDCO (Respondent).

A complaint was lodged against the Appellant and the company’s directors regarding the dishonour of a cheque under the Negotiable Instruments Act, 1881. Seeking to have the complaint quashed, the Appellant approached the High Court, arguing that the said-director had no role in the company’s daily operations and was not a signatory to the cheque in question. However, the High Court declined to intervene, ruling that the matter required further examination. Consequently, the appeal was dismissed, and the Court imposed a monetary cost on the Appellant. Dissatisfied with this decision, the Appellant filed the present appeal before the Hon’ble Supreme Court.

HELD

It was inter alia held that, there are twin requirements under sub-Section (1) of Section 141 of the 1881 Act. In the complaint, it must be alleged that the person who is sought to be held liable by virtue of vicarious liability, at the time when the offence was committed, was in charge of and was responsible to the company for the conduct of the business of the company. A Director who is in charge of the company and a Director who was responsible to the company for the conduct of the business are two different aspects. The requirement of law is that both the ingredients of sub-Section (1) of Section 141 of the 1881 Act must be incorporated in the complaint.

Appeal was allowed.

Learning Events at BCAS

LEARNING EVENTS AT BCAS

1. The webinar on “The (AI)mazing Future of CA Services: Guide to AI & Chat GPT Implementation” conducted by the Technology Initiatives Committee was held on 17th February, 2024, in Online Mode.

The webinar was conducted to provide Chartered Accountants and their teams with invaluable insights into the successful integration of AI in accounting, data analysis, auditing and more.

It began with CA Dungarchand C Jain explaining to the participants the features of ChatGPT — how it works, comparative analysis of GPT-3.5 (free) and GPT-4 (paid) versions, etc. He also explained the limitations of ChatGPT, how to write prompts and additional plugins. The live demonstration of queries posted to ChatGPT and how it could be used for day-to-day operations by a CA firm was well appreciated by the participants.

In the second part, CA Nikunj Shah explained the use of ChatGPT for data analysis, including, trend identification, and anomaly detection, to derive actionable insights from financial data. He further emphasised that AI-driven audit technologies can automate compliance checks, identify potential risks and enhance the accuracy and reliability of audit procedures.

Both the speakers are members of the Technology Initiatives Committee.

The webinar had 235+ participants from more than 40 cities. The webinar ended with a well-deserved vote of thanks to the speakers and all the participants.

2. The workshop on “GST Skilling up – Writing, Responding and Representing” was held on 9th and 16th February, 2024 @ BCAS.

An impressive two-and-a-half-day physical workshop with faculties CA Raman Jokhakar and CA Tejal Mehta was designed to provide practical experience in drafting and representation skills. There were about 35 participants.

The speakers explained how to draft letters / replies / emails in short without using long sentences and being repetitive and using plain and simple language so that what is desired to be conveyed is properly conveyed. They also explained to the participants the dos and don’ts of appearing before a Revenue Officer and how to make their representation impactful.

It also included a mock Role Play where the participants were required to prepare a reply to a Show Cause Notice / ASMT-10 notice and represent their case before a Revenue Officer. At the end of this, the mistakes or shortcomings in their drafting / representation were explained, and how best they could have been avoided.

The participants were issued a Certificate for participating in the workshop.

The faculties were ably supported by CA Vikram Mehta and Shannel Jacinto.

3. Indirect Tax Study Circle Meeting on “GST Case Studies on Place of Supply” was held on 15th February, 2024, in Online Mode.

Group leader CA Rishabh Mishra dealt with the case studies and gave a presentation covering various issues and challenges faced by taxpayers in regard to the Place of Supply under the GST law and was guided by Group Mentor CA Jigar Doshi. The case studies covered the following aspects for a detailed discussion on the place of supply:

  • Separate contracts for the supply of materials and supply of allied services like transportation, insurance, etc., including issues due to cross-fall breach clauses.
  • Testing services in relation to goods sent to India by overseas entities with options of sending the goods back or kept in India. Testing of pre-designed software for holding co. was also discussed.
  • Services of soliciting subscribers to the issue of securities by overseas managers for Indian entities.
  • Place of supply in relation to immovable property in India to a service recipient outside India for the development of 3D models.
  • Turnkey project for design, development, construction, supply, and installation of plant, machines, solar power, packing lines, residential quarters, canteen, guest house, etc.
  • Services of conducting a market survey, assistance in marketing events, advertising policy, appointment of distributors, etc., on cost-plus basis by an Indian Subsidiary to a Foreign Holding company.
  • Works contract services provided by an Indian entity to a foreign entity in a foreign land through outsourcing to another Indian entity with the foreign branch.

4. Felicitation of Young CAs of November 2023 Examination & Fireside Chat on the topic “Get Future Ready” was held on 20th January, 2024, at the BCAS Hall by the Seminar, Public Relations & Membership Development (SPR&MD) Committee.

A special event was organised for the freshly qualified Chartered Accountants of the November 2023 examination under the aegis of the Seminar, Public Relations & Membership Development (SPR&MD) Committee. The event attracted a full house of 150 participants.

The evening commenced with the esteemed speakers addressing the young champions on the subject, ‘Get Future Ready’. The first speaker, Past President of the BCAS, CA Ameet Patel candidly shared his views on a wide range of subjects — how to find the right fit in the initial years, the steps one can take to build on and solidify one’s repertoire, how it’s ok to change tracks if things are not working out, the very critical role that BCAS can play in shaping one’s future, and the importance of networking, developing a hobby, cultivating a passion, etc.

The second speaker, Ms. Dipika Singh spoke about the significance of investing in oneself, owning the room, projecting the right body language, radiating confidence, creating interesting content and posting it on the right platforms, getting noticed in a crowd and creating and nurturing a brand within oneself.

This was then followed by an interesting round of floor questions for both speakers. The evening ended with the felicitation ceremony. Labdhi Sanghvi securing All India Rank 47 was the first to be felicitated and was then invited to share his thoughts. The event showcased the vibrancy of the participants, many of whom showed great interest in signing up to be members of the BCAS.

Link to access the session: https://www.youtube.com/watch?v=U4jUpZ0X4OY&t=870s

5. Full Day Seminar on “Charitable Trusts – A Tax, Regulatory & Management Perspective” held on Friday, 19th January, 2024 @ BCAS

The successful full-day event commenced with a compelling keynote address by Shri C V Pavana Kumar, CIT (Exemptions) Mumbai, setting the tone for the day by addressing the pivotal role of Charitable Trusts in India in societal development, the Department’s technology and tax initiatives, the relevance and context of the recent changes in the tax regime relating to Charitable Trusts, and the importance of navigating the associated challenges by learned professionals and assessee.

It was followed by a power-packed Panel Discussion by CA Anil Sathe, and Mr. Noshir Dadrawala, CA (Dr.) Gautam Shah, moderated by CA Gaurav Save. The session not only provided a practical approach to the Litigation issues regarding Charitable / religious Trusts, but also provided a comprehensive overview of common errors encountered in ITR-7 filings and shed light on challenges pertaining to sections 10B, 10BB and FCRA compliance.

Thereafter, CA Suresh Kejriwal took the participants through the recent amendments to the Foreign Contribution Regulations Act, posing additional cautious compliance responsibilities.

CA (Dr.) Gautam Shah enlightened the gathering about the procedural requirements under the Maharashtra Public Charitable Trusts law and also talked about patiently dealing with the Charity Commissioner’s office.

The participants also benefitted from a comprehensive presentation on the emerging concept of Social Stock Exchange by Mr. Hemant Gupta. He discussed the nitty-gritty, emphasising how this platform can be a game-changer for charitable organizations, providing a new dimension to fundraising and visibility.

The same was followed by an enriching session by Mr. Noshir Dadrawala on Corporate Social Responsibility (CSR) compliance. He coined the mantra “Comply Strictly (by) Rules”, emphasising compliance with CSR provisions and highlighting the far-reaching implications of non-compliance.

The event concluded with an informative presentation by CA Deven B Shah on the maintenance of Books of Accounts by Charitable Organizations in accordance with Rule 17AA of Income Tax Rules, well-equipping the participants with the vital, differentiating aspects thereof.

Each session suitably dealt with and addressed the queries of the participants.

This event was a collaborative effort to empower the charitable sector, offering a holistic perspective on navigating the legal, tax and management intricacies associated with Charitable Organizations in India. We extend our gratitude to all participants, speakers and organizers for contributing to the success of this enriching and informative day.

6. Corporate & Commercial Law Study Circle Meeting “SBO and Demat of securities – Need of the hour” was held on 16th January, 2024, in Online Mode.

Speaker CS Sudhakar Saraswatula addressed the participants on the provisions relating to Significant Beneficial Ownership, as have been notified for Limited Liability Partnerships. He further discussed the inception and rationale behind the SBO provisions and the compliance requirements thereof. Certain challenges faced in the implementation of SBO provisions and its practical approach were also shared.

The discussion further shaped to how private companies other than small companies are also now mandated with the compulsory dematerialisation of securities within the given time frame, along with other related matters such as the holding of securities by the promoters of / issue of securities by unlisted public companies, conversion of share warrants held in physical form, action points for demat of securities by private companies as well as security holders and penal provisions for non-compliance.

7. आDaan-प्रDaan (Season 3) — “Speed mentoring program for Chartered Accountants” was held by the Seminar, Public Relations & Membership Development (SPR&MD) Committee in Online Mode.

Conducted during November and December, the program provided a platform for invaluable guidance and support from 25 mentors, where an impressive 28 mentees engaged in the first round of season 3 — with 17 hailing from 10 different states across India, showcasing the program’s ability to transcend geographical boundaries and empower CAs nationwide.

Throughout the sessions, mentees delved into various aspects of professional life, seeking insights on practice management, people management, growth strategies, guidance for changing careers, essential skill acquisitions, etc. Mentors, drawn from a rich tapestry of practicing Chartered Accountants and industry stalwarts, offered guidance tailored to the mentees’ aspirations and challenges, enabling mentees to navigate critical decision points with confidence and clarity.

The heartwarming display of gratitude through generous donations to the BCAS Foundation by the mentees exemplified the tradition of Guru Dakshina, reinforcing the bond between mentors and mentees in the CA community.

With heartfelt appreciation extended to all participants and mentors, the ‘आDaan-प्रDaan’ initiative continues to pave the way for growth, excellence and collaboration within the profession. The Committee is planning to conduct the second round of season 3 shortly.

Miscellanea

1. TECHNOLOGY

Google joins mission to map methane from space

Tech giant Google is backing a satellite project due to launch in March which will collect data about methane levels around the world. The new satellite will orbit 300 miles around the Earth, 15 times per day. Methane gas is believed by scientists to be a major contributor to global warming because it traps heat.

A lot of methane is produced by farming and waste disposal, but the Google project will focus on methane emissions at oil and gas plants. Firms extracting oil and gas regularly burn or vent methane.

The new project is a collaboration between Google and the Environmental Defense Fund, a non-profit global climate group. The data captured by the satellite will be processed by the tech giant’s artificial intelligence tools and used to generate a methane map aimed at identifying methane leaks on oil and gas infrastructure around the world. But the firm said if it identified a significant leak it would not specifically notify the company which owned the infrastructure responsible for it.

“Our job is to make information available,” it said, adding that “governments and regulators would be among those with access to it and it would be for them to force any changes.” There is no international rule on controlling methane emissions. The EU has agreed to a set of proposals aimed at reducing them, which includes forcing oil and gas operators to repair leaks. In the coal sector, flaring will be banned in member states from 2025.

Google’s map, which will be published on its Earth Engine, will not be in real-time, with data sent back from the satellite every few weeks. In 2017, the European Space Agency launched a similar satellite instrument called Tropomi, which charts the presence of trace gases in the atmosphere, including methane.

It was a mission with a minimum seven-year life span, which means it could end this year. Carbon Mapper,
which uses Tropomi data, released a report in 2022 indicating that the biggest methane plumes were seen in Turkmenistan, Russia, and the US – but cloud cover meant the data did not include Canada or China.

Google said it hoped its project would “fill gaps between existing tools”. Despite various tracking efforts, methane levels remain concerningly high. NASA says levels of the gas have more than doubled in the last 200 years, and that 60 per cent of it is created by human activity.

A major contributor to that percentage is livestock: specifically, cows. Because of the way they digest their food, cow burps and farts contain methane. In 2020, the US Environmental Protection Agency published a report that said a single cow could produce 154-264 pounds of methane gas every year. It added that there were believed to be about 1.5 billion cows raised for their meat worldwide.

“Satellites are great for finding the really big, massive culprits” of methane emissions, said Peter Thorne, professor of physical geography at Maynooth University in Ireland. But detecting more diffuse methane sources, such as those emanating from agriculture, is more difficult, he added.

(Source: bbc.com dated 15th February, 2024)

US FCC makes AI-generated robocalls illegal

The federal agency that regulates communication in the US has made robocalls that use AI-generated voices illegal. The Federal Communications Commission (FCC) announced the move, saying it will take effect immediately.

It gives the state power to prosecute any bad actors behind these calls, the FCC said.

It comes amid a rise in robocalls that have mimicked the voices of celebrities and political candidates. “Bad actors are using AI-generated voices in unsolicited robocalls to extort vulnerable family members, imitate celebrities, and misinform voters,” said FCC chairwoman Jessica Rosenworcel.

“We’re putting the fraudsters behind these robocalls on notice.” The move comes on the heels of an incident last month in which voters in New Hampshire received robocalls impersonating US President Joe Biden ahead of the state’s presidential primary.

The calls encouraged voters not to cast ballots in the primary. An estimated 5,000 to 25,000 were placed. New Hampshire’s attorney general said the calls were linked to two companies in Texas and that a criminal investigation is underway.

The FCC said these calls have the potential to confuse consumers with misinformation by imitating public figures, and in some instances, close family members. The agency added that, while state attorneys general can prosecute companies and individuals behind these calls for crimes like scams or fraud, this latest action makes the use of AI-generated voices in these calls itself illegal.

Deepfakes — which use AI to make video or audio of someone by manipulating their face, body, or voice — have emerged as a major concern around the world at a time when major elections are, or will soon, be underway in countries like the US, UK, and India.

(Source: bbc.com dated 8th February, 2024)

2. ENVIRONMENT

Climate change: Polar bears face starvation threat as ice melts

Some polar bears face starvation as the Arctic Sea ice melts because they are unable to adapt their diets to living on land, scientists have found. The iconic Arctic species normally feed on ringed seals that they catch on ice floes offshore. But as the ice disappears in a warming world, many bears are spending greater amounts of time on shore, eating bird eggs, berries, and grass. However, the animals rapidly lose weight on land, increasing the risk of death.

The polar bear has become the poster child for the growing threat of climate change in the Arctic, but the reality of the impact on this species is complicated. While the number of bears plummeted up to the 1980s, this was mainly due to unsustainable hunting. With greater legal protection, polar bear numbers have risen. But increasing global temperatures are now seen as their biggest threat.

That’s because the frozen Arctic seas are key to their survival. The animals use the sea ice as a platform to hunt ringed seals, which have high concentrations of fat, mostly in late spring and early summer. But during the warmer months, many parts of the Arctic are now increasingly ice-free.

In Western Manitoba where this study was carried out, the ice-free period has increased by three weeks between 1979 and 2015. To understand how the animals survive as the ice disappears, researchers followed the activities of 20 polar bears during the summer months over a three-year period. As well as taking blood samples, and weighing the bears, the animals were fitted with GPS-equipped video camera collars. This allowed the scientists to record the animals’ movements, their activities, and what they ate.

In the ice-free summer months, the bears adopted different strategies to survive, with some essentially resting and conserving their energy. The majority tried to forage for vegetation or berries or swam to see if they could find food. Both approaches failed, with 19 of the 20 bears in the study losing body mass, by up to 11 per cent in some cases. On average, they lost one kilogram per day.

(Source: bbc.com dated 13th February, 2024)

Regulatory Referencer

I. COMPANIES ACT, 2013

1. Notification of norms regarding the listing of equity shares in IFSC by public companies: MCA has notified the Companies (Listing of equity shares in permissible jurisdictions) Rules, 2024. These rules shall apply to unlisted public companies or listed public companies, which issue their securities for listing on permitted stock exchanges in permissible jurisdictions (i.e., IFSC). Permitted exchanges mean India International Exchange and NSE International Exchange. Further, MCA has specified certain companies which shall not be eligible under these rules like Nidhi companies or companies limited by Guarantee. [Notification No. G.S.R. 61(E), dated 24th January, 2024]

II. SEBI

2. AIF norms related to demat holding and appointment of custodian modified: SEBI has modified the Alternative Investment Norms. An amendment has been made in Regulations 15 & 20. A new clause has been added in Regulation 15 which provides the list of situations where an AIF can hold the investment in a non-dematerialised form. This includes investments in instruments and liquidation schemes of AIFs that are not eligible for demat. Further, the norms related to the appointment of custodians have also been modified. [Notification No. SEBI/LAD-NRO/GN/2024/163, dated 5th January, 2024]

3. AIF norms modified to align the same with amended PMLA rules: The Government has amended the Prevention of Money Laundering (Maintenance of Records) Rules, 2005 whereby the threshold limit for determining the beneficial ownership has been revised. Accordingly, the respective changes have been made in the master circular on AIFs. Further, in case an investor who has already been on-boarded to the AIF scheme, doesn’t meet the revised condition, the manager of AIF shall not draw down any further capital contribution until the investor meets the condition. [Circular No. SEBI/HO/AFD/POD1/CIR/2024/2, dated 11th January, 2024]

4. Proposal to float the framework for voluntary freezing/blocking the online access of the trading account: It was noticed that many investors raised issues of suspicious activities in their trading accounts. Therefore, SEBI decided to float the framework for Trading Members to provide the facility of voluntary freezing/blocking the online access of the trading account to their clients on account of suspicious activities on or before 1st April, 2024. It is to be noted that a similar facility of voluntary blocking/ freezing of demat accounts is already available for investors. [Circular No. SEBI/HO/MIRSD/POD-1/P/CIR/2024/4, dated 12th January, 2024]

5. Detailed guidelines regarding holding of investment in demat and appointment of a custodian by an AIF, issued: Earlier, SEBI had notified certain amendments to the AIF regulations. In this regard, the SEBI further specifies that any investment made by an AIF on or after 1st October, 2024 shall be held in demat form only, irrespective of whether an investment is made directly in the investee company or is acquired from another entity. Further, the norms regarding the appointment of a custodian have also been specified. [Circular No. SEBI/HO/AFD/POD/CIR/2024/5, dated 12th January, 2024]

6. Promoters can offer shares to employees in an ‘Offer for Sale ‘through the Stock Exchange Mechanism: As per the extant procedure, an offer for sale (OFS) to employees of the eligible company is happening outside the stock exchange (SE) mechanism. SEBI observed that said procedure is time-consuming & involves additional costs, therefore, it has now decided that the promoters can also offer the shares to employees in OFS through the SE Mechanism. The procedure for OFS to employees through the SE Mechanism is an additional option to the existing procedure of OFS to employees [Circular No. SEBI/HO/MRD/MRD-POD-3/P/CIR/2024/6, dated 23rd January, 2024]

7. Regulatory reporting by Designated Depository Participants (DDPs) and Custodians through SI Portal: The SEBI has reviewed various reports submitted by DDPs and Custodians in order to have uniform compliance standards. Subsequent to the review, SEBI has decided that the reports shall now be submitted on the SEBI Intermediary Portal (SI Portal) by DDPs and Custodians. Such reports include Annual audit reports on internal controls of DDPs, Annual review reports of the systems, procedures & controls of the Custodian, etc. This circular shall be effective from the month ending February 2024. [Circular No. SEBI/HO/AFD/ AFD-SEC-2/P/CIR/2024/8, dated 25th January, 2024]

8. Extension of timeline for complying with provisions relating to verification of market rumours by listed entities: As per Regulation 30(11) of LODR norms, the top 100 listed entities and thereafter, the top 250 listed entities by Market-Cap are required to verify/confirm/deny or clarify market rumours from the date specified by SEBI. In September 2023, SEBI, through a Circular specified 1st February, 2024 as the effective date for the top 100 listed entities and 1st August, 2024 as the effective date for the next top 250 entities. Now, the dates have been extended to 1st June, 2024 for the top 100 listed entities and 1st December, 2024 for the next top 250 listed entities. [Circular No. SEBI/HO/CFD/CFD-POD-2/P/CIR/2024/7, dated 25th January, 2024]

9. Short-selling by all investors: The Securities and Exchange Board of India has issued a circular which allows investors across all categories short-selling, but naked short-selling will not be permitted. Further, all stocks that trade in the futures and options segment are eligible for short-selling. “Short selling” means selling a stock that the seller does not own at the time of trade. Further, institutional investors will not be allowed to do day trading. [SEBI/HO/MRD/MRD-PoD-3/P/CIR/2024/1, dated 5th January, 2024]

DIRECT TAX: SPOTLIGHT

1. Circular explaining the provisions of the Finance Act, 2023. [Circular No. 1 of 2024 dated 23rd January, 2024]

2. CBDT allows trusts / institutions to file audit report in correct Form 10B/10BB Form till 31st March, 2024: Form No. lOB/Form No. lOBB, being Audit report for Trusts were notified vide Notification No.7 of 2023 dated 21st February, 2023, and are applicable for assessment year 2023–24 and subsequent assessment years. Non-furnishing of audit report in the prescribed form 10B/10BB results in denial of exemption u/s 11 or 10(23C) as it is one of the conditions which is required to be satisfied for claim of exemption. It has come to the attention of the CBDT that in a number of cases trusts / institutions have furnished audit report in Form No. lOB, where Form No. 10BB was required to be furnished for the A.Y. 2023–24 and vice versa. CBDT has allowed those trusts / institutions which have furnished audit report on or before 31st October, 2023, in Form No. lOB where Form No. 10BB was applicable and vice-versa, to furnish the audit report in the applicable Form No. lOB/10BB for the assessment year 2023–24, on or before 31st March, 2024. [Circular No. 2 of 2024 dated 5th March, 2024]

3. Clarification on exemption eligibility of inter trust donations: Eligible donations made by a trust / institution to another trust / institution are treated as application for charitable or religious purposes only to the extent of 85 per cent of such donations. Concerns were raised about whether 15 per cent out of amount donated to other trust / institution would be taxable or would be eligible for 15 per cent accumulation since the funds would not be available for investment or application due to prior disbursement. CBDT has clarified that 15 per cent of such donations by the donor trust / institution shall not be required to be invested in specified modes under section 11(5) as the entire amount has been donated to the other trust / institution and is accordingly eligible for exemption. CBDT explained the operation of the exemption provision under different scenarios with a numerical illustration. [Circular No. 3 of 2024 dated 6th March, 2024]

4. Form ITR-6 notified for A.Y. 2024–25 — Income-tax (First Amendment) Rules, 2024. [Notification No. 16/ 2024 dated 24th January, 2024]

5. Central Government has notified that all the provisions of the Agreement between the Government of Republic of India and Government of Samoa for exchange of information with respect to taxes shall be given effect to in the Union of India. [Notification No. 21/ 2024 dated 7th February, 2024]

6. Form ITR-7 notified for A.Y. 2024–25 — Income-tax (Third Amendment) Rules, 2024. [Notification No. 24/ 2024 dated 1st March, 2024]

7. Income tax department has identified certain mismatches between the information received from third parties on interest and dividend income and income tax return filed. In order to reconcile the mismatch, on-screen functionality is made available in the compliance portal of the e-filing website. At present, information relating to mismatches for F.Y. 2021–22 and 2022–23 is displayed on the compliance portal. The on-screen functionality is self-contained and allows the tax payer to reconcile the mismatch on portal itself by furnishing their response. The tax payer who is unable to reconcile the mismatch may consider the option to file updated return. [Press release on Implementation of e-verification scheme, 2021, dated 26th February, 2024]

III. FEMA AND IFSCA REGULATIONS

1. Direct Listing of Equity Shares of Indian Companies on International Exchanges is now allowed

The FEMA Non-debt Instruments (NDI) Rules, 2019 have been amended to introduce the scheme for allowing direct listing of equity shares of companies incorporated in India on International Exchanges. This was in the pipeline for a few years. The enabling provisions under the Companies Act, 2013 were inserted in 2020 which came into effect from 30th October, 2023. Now, the scheme has been notified under the NDI Rules of FEMA as well to finally permit overseas listing. Simultaneously, the MCA has also notified the rules for the same. One special feature is that unlisted public companies which meet certain conditions are also allowed to list their equity shares on overseas exchanges. It should be noted that in this first phase, direct listing has been enabled at the GIFT-IFSC exchanges which will later be extended to overseas exchanges.

[Foreign Exchange Management (Non-debt Instruments) Amendment Rules, 2024 issued by Ministry of Finance dated 24th January, 2024]

[Companies (Listing of equity shares in permissible jurisdictions) Rules, 2024 issued by Ministry of Corporate Affairs dated 24th January, 2024]

2. IFSCA notifies Regulations for Persons providing Payment Services

The IFSCA has notified the IFSCA (Payment Services) Regulations, 2024. These regulations provide a framework for all persons who seek to provide payment services in or from IFSC. It includes detailed guidelines regarding the conditions and requirements for such persons like the procedure for approval, legal form of entity, minimum net worth requirements, special categories of Payment Service providers & rules therefore, documentation & reporting requirements, etc.

[International Financial Services Centres Authority (Payment Services) Regulations, 2024 Notification No. IFSCA/GN/2024/001, dated 29th January, 2024]

Internal Peer Review (Health Check-Up)

Shrikrishna : Arjun, as usual, you are looking weary. What is the matter? Actually, this is your peaceful time. No serious deadlines now.

Arjun : Bhagwan, I agree; the pressure is a little less. My worry is about my health.

Shrikrishna : Why, are you not well?

Arjun : No, that way, everything is all right. But I did my annual health check-up last week.

Shrikrishna : All reports normal?

Arjun : Nothing very serious. But there is some ‘sugar’ found. And BP is also not very normal. The doctor said there’s nothing to worry. But he advised to start medication before it gets serious.

Shrikrishna : So, how many tablets did he prescribed?

Arjun : Four tablets, twice a day! Actually, our profession is so stressful that many of us are sailing in the same boat. Everyone is facing some kind of health issues or the other. Knee pain; insomnia, arthritis, spine problem, and what not!

Shrikrishna : Occupational hazards! Really serious.

Arjun : I don’t see an end to this problem. Helpless! More and more regulatory burdens, low fees, high risks, and no staff. There is a constant struggle for survival.

Shrikrishna : Arjun, I understand your plight. But there is certainly some remedy that can mitigate this problem, if not eliminate it.

Arjun : What is that? Give up practice?

Shrikrishna : No Parth. That cannot be a solution. What I am saying is that just as you do your annual health check-up; why can’t you do the health check-up of your working systems?

Arjun : What do you mean?

Shrikrishna : See, Arjun, your institute already has the peer review system in place. I believe it is mandatory to get your firm peer-reviewed before getting certain large audit assignments.

Arjun : Yes, doing audits of large institutions without your own peer review is a misconduct. Many CAs have taken it lightly and are facing disciplinary action.

Shrikrishna : That’s what I am saying.

Arjun : But getting oneself peer-reviewed is a task in itself.

Shrikrishna : So, why don’t you voluntarily go in for internal peer review? Some knowledgeable friend of yours can come and check your working systems on a regular basis.

Arjun : How exactly?

Shrikrishna : Whether you have firm policies as per SQC 1 i.e., Standard on Quality Control! Whether you have proper documentation to justify the work done by you! Whether you can give scores to your own firm as per the AQMM (Audit Quality Maturity Model). By interpreting the scores, you can decide at which level your firm is (Level 1 to 4). Also, see other regulatory aspects — record keeping, working papers, staff records, statutory compliances, staff training, and other systems.

Arjun : I agree. This will give early signals and reduce vulnerability. It will avoid last-minute running around.

Shrikrishna : It will also bring discipline in working. What you lack is the will-power to do things right.

Arjun : Yes, we do take all this very lightly. We are not pro-active and start digging a well when the house is on fire!

Shrikrishna : That’s it. If your professional stress is reduced, your health may improve.

Arjun : But where do you find such a knowledgeable peer?

Shrikrishna : If you look around, you will definitely find them. Interact with others during your seminars or in study circles and discuss from this angle. It is worth considering and implementing.

Arjun : Great idea! I will surely share this with others.

Thank you, Bhagwan.

! Om Shanti !

Note: This dialogue is based on the need for regular introspection and ‘health check-up’ of the profession.

Interesting Apps

All In One Calculator

This is a free, complete and easy-to-use multi-calculator and converter. Designed with simplicity in mind, it helps you solve everyday problems. From simple or complex calculations, to unit and currency conversions, percentages, proportions, areas, volumes, etc… it does it all. And it does it well!

It encompasses over 75 free calculators and unit converters packed in with a simple or scientific calculator. It is the only calculator you will ever need going forward from now on, on your device.

You may use it for simple or complex calculations and convert units or currencies in the same app. A scientific calculator is included along with editable input and cursor. You can see the calculation history at a glance. Algebra, Geometry, Unit Converters, Currency Converters, Loan and EMI calculators, Health Calculators, Age and Date / Time, Mileage, Ohm’s Law and much more are all included.

It is really an ‘All In One Calculator’ to take care of all your calculating needs. Try it out for free before you decide to buy it!

Charge Meter

This is a very simple app which allows you to identify the efficiency of the charging process on your phone. You can use it to identify the best charger and cable for your phone, check how fast your device is charging with different apps and know how long it takes to charge your phone and when it’s finished. With this app, you can measure the real capacity of your battery along with its temperature.

The premium version gives alerts on when to charge and when to turn off the charging and allows you picture-in-picture mode, home screen widgets and eliminates ads.
If you care for your battery health, Charge Meter is for you!

Tooly: Tiny Tools Collection

Tooly is a very useful app that contains a lot of beneficial features. Whether you are a student, teacher, developer or work in the office, Tooly is the most useful tool app for you. It offers text tools, calculation tools, colors tools , images and other offline tools to make your work easier and simpler.

Tooly consists of six sections, each one of them includes several tools as below :

Text tools: Provides you with a huge number of tools that help you with your texts. You can use stylish fonts to convert your text into a cool text with various types of styles. Additionally, there are multiple other tools including a variety kinds of tools that can change and enhance your text.

Image tools: Contains some helpful tools that can change the structure of your image’s structure. If you want to crop or resize your images or create a rounded photo, these are the tools for you.

Calculation tools: This section has a number of tools organised into five sections. You can use the algebra section to solve simple and complex mathematical calculations. You can use the geometry section to find any area, perimeter, or other shape-related information in 3D bodies or 2D shapes.

Unit converter: This section contains various units of measure, weight, temperature, etc.

Programming tools: This section enables you to create an organised page for your codes using development tools to be used by programmers for brief codes.

Colors tools: This tool provides you with several options to select and replicate colours.

Tooly gathers all these tiny tools you need in one place. A very helpful app for all your basic needs.

Wasavi: Auto Message Scheduler

 

This is a message scheduler which helps you schedule messages for WhatsApp, Viber, Signal and Facebook Messenger. You can automatically send messages with images, connect your chats to your Google Sheets or Cloud, Monitor Chat Groups for topics or follow specific friends, turn messages into tasks, notes and reminders all from your favourite Social Messenger App.

You can also auto-reply messages (including location-based auto-replies), auto-save messages as tasks or notes, schedule messages, follow chats for keywords, topics, links, emails, etc. or even send your WhatsApp messages to Google Sheets! You can even create broadcast lists for your clients.

A very useful scheduling App for daily use.

Allied Laws

50 Late Kalu Gapliya (Through Legal Heirs) vs. Seeta Nathu and others

AIR 2023 (NOC) 820 (MP)(HC)

Date of Order: 8th August, 2023

Evidence — Land Dispute — Ownership — Adoption Deed between Petitioner and father of Respondents — Thumb impression of Respondents suggesting consent — Denial — Application in Trial court for verification of thumb impression by expert – Rejection of application — Failure to show expert aware of thumb impression of Respondents as mandated — Thumb impression unique — Cannot be forged easily — Rejection of application erroneous. [S. 45, 47, Indian Evidence Act, 1872].

FACTS

The Petitioner and Respondent were involved in a legal dispute over land ownership. The Petitioner claimed that he had absolute ownership in the suit property and as such, the recordings of the Respondent’s name in the land revenue records were illegal. The Petitioner, in the Trial court, relied upon an adoption deed entered between him and the erstwhile owner of the suit property (father of Respondents) in order to prove absolute ownership of the suit property. The Petitioner further claimed that the adoption deed consisted of thumb impressions of the Respondents, indicating their consent to the adoption deed. The Respondents, however, in the trial court denied the existence of any such adoption deed and further maintained that they had not put any thumb impression on such alleged adoption deed. Thus, in order to prove the genuineness of the adoption deed, the Petitioner filed an application before the trial court under section 45 of the Indian Evidence Act, 1872 (Evidence Act) for examination of the thumb impression of the Respondents. However, the Ld. Trial court rejected the application, citing the Petitioner’s failure to confirm whether the handwriting expert was familiar with the Respondent’s thumb impressions, as required by section 47 of the Evidence Act.

A Writ petition was filed before the Hon’ble Madhya Pradesh High Court (Indore Bench) challenging the said rejection.

HELD

The Hon’ble Madhya Pradesh High Court observed that in order to verify the thumb impression of the Respondents and to prove the genuineness of the adoption deed thereof, it was necessary to appoint a handwriting expert. Relying on the decision of the Hon’ble Supreme Court in the case of Lachhmi Narain Singh (D) through Lrs and Ors vs. Sarjug Singh (Dead) through Lrs and Ors [AIR 2021 SC 3873], the Hon’ble High Court held that the reasoning given by the Ld. Trial court for rejection of the application of the Petitioner was misplaced. Further, since the thumb impression of every person is different, its forgery is nearly impossible. Thus, it was not necessary for a handwriting expert to be personally aware of the thumb impression of the Respondents. An examination of its correctness can be made regardless. Furthermore, the Hon’ble High court also noted that section 47 of the Evidence Act merely talks about relevancy and it does not control section 45 of the Evidence Act.

The application of the Petitioner before the Ld. Trial court was thus allowed.

51 Ghanshyam Gautam & Anr vs. Late Usha Rani (Through Legal Heirs)

SLP (Criminal) 3289 of 2018

Date of Order: 4th January, 2024

Negotiable Instrument — Conviction — Subsequent settlement between parties — Settlement Deed — Conviction order to be quashed. [S. 138, Negotiable Instruments Act, 1881].

FACTS

The Petitioner and Respondent were involved in a legal dispute which resulted in the conviction of the Petitioner and subsequent sentencing under section 138 of the Negotiable Instruments Act, 1881 (NI ACT) by the Hon’ble Himachal Pradesh High Court (Shimla Bench). The Petitioner filed an appeal before the Hon’ble Supreme Court. However, before the matter was called for hearing before the Hon’ble Court, the parties had already settled their dispute and filed their compromise deed. According to the compromise deed, the Respondent was to receive a stipulated amount as a full and final settlement and was to bear the fine which was imposed by the Ld. Trial court.

HELD

The Hon’ble Supreme Court held since the settlement had been reached between the parties and that the complainant (Respondent) had signed the deed accepting a particular amount in full and final settlement and the fine amount awarded by the Ld. Trial court, the proceedings under Section 138 of the NI Act needed to be quashed.

The appeal was allowed and the order of the Hon’ble Himachal Pradesh High Court was quashed.

52 Revanasiddappa & Anr vs. Mallikarjun & Ors. AIR 2023 Supreme Court 4707

Date of Order: 1st September, 2023

Succession — Children born out of void or voidable marriage — Illegitimacy — Rights in ancestral Property — Illegitimate children on par with legitimate children — Rights in self-acquired property as well as ancestral property — Illegitimate children not a coparcener in the Hindu Mitakshara Joint Family. [S. 11, 16, Hindu Marriage Act, 1955; S. 6, Hindu Succession Act, 1956].

FACTS

The Appellants are illegitimate children of one Shri Shivasharanappa. The Respondents are the first wife and children of Shri Shivasharanappa. The Respondents had filed a suit for partition alleging that the marriage between the first wife (i.e. the Respondent herself) and Shri Shivasharanappa was subsisting when Shri Shivasharanappa married the second wife (i.e. mother of Appellants). The Respondents thus, alleged that since the first marriage was subsisting at the time of the second marriage, the children born out of the second marriage are illegitimate and not entitled to share in the ancestral property. The Hon’ble Supreme Court opined that the matter be referred to a larger bench for consideration.

HELD

The Hon’ble Supreme Court held that an illegitimate child is entitled to both, self-acquired and ancestral property of parents, after ascertaining the rights of such parent as per the mandate prescribed under section 6 of the Hindu Succession Act, 1956. However, such a child does not ipso facto become a coparcener in the Hindu Mitakshara Joint Family which is governed by Mitakshara Law.

53 Late Dhani Ram (Through Legal Heirs) vs. Shiv Singh

AIR 2023 Supreme Court 4787

Date of Order: 6th October, 2023

Will — Mere registration — Cannot dispel all suspicion to genuineness — Witnesses — Unable to confirm whether signed in presence of testatrix — Invalid Will. [S. 63, Indian Succession Act, 1925; S. 68, 71, Indian Evidence Act, 1872].

FACTS

One Mrs. Leela Devi, passed away on 10th December, 1987, with her husband already predeceased. Dhani Ram (Appellant), was Leela Devi’s brother’s son. He claimed ownership of the properties of Leela Devi after her death by relying on a registered Will. Shiv Singh (Respondent), was the son of the brother of the predeceased husband. The Respondent contested the genuineness of the said Will. The Ld. Trial court invalidated the said Will and granted the Respondent possession of the properties. In appeal, however, the Ld. District judge reversed the decision of the Ld. Trial court and validated the Will.

In the second appeal, filed by the Respondent, the Hon’ble Himachal Pradesh High Court again invalidated the Will and thereby, restored the decision of the Ld. Trial Court.

The Appellant filed an appeal before the Hon’ble Supreme Court.

HELD

The Hon’ble Supreme Court observed that the attesting witnesses of the said Will did not fulfil the requirements stipulated under Section 63(c) of the Indian Succession Act, 1925 (ISA) to prove the genuineness and validity of the Will. Both witnesses failed to confirm that they signed the Will in the presence of the testatrix, a key requirement under Section 63(c) of the ISA. Moreover, one witness claimed that the testatrix had signed the Will in his presence, while the other denied the same. The Hon’ble Supreme Court held that the mere registration of a Will does prove its genuineness. Thus, the decision of the Hon’ble Himachal Pradesh High Court was upheld.

The appeal was thus dismissed.

54 Vikrant Kapila and Anr vs. Pankaja Panda and Ors

AIR 2023 Supreme Court 5579

Date of Order: 10th October, 2023

Succession — Testamentary or Intestate Succession — Alleged Will- Existence denied by contesting party — Genuineness of the Will not dealt with at Trial Stage- Straightway assumption of the Will to be genuine by Trial and High court, unacceptable — Remanded back to determine the genuineness of the alleged Will- Subsequently, Trial court to decide whether testamentary or intestate succession. [S. 63, Indian Succession Act, 1925; O. XII R. 6, O. XV R. 1,2 O. 8 R. 5, Code of Civil Procedure Code, 1908; S. 17, 58, 68, Indian Evidence Act, 1872].

FACTS

The Appellant and respondents were involved in a legal dispute over the partition of the suit property through inheritance. The suit property belonged to one Mrs. Sheila Kapila (Hindu woman), who died in the year 1999. The Appellant (grandson of the deceased) averred that the suit property must be divided as per the alleged Will. However, the Respondents (original plaintiff, grandson of the deceased) denied the existence of any such Will and averred that suit property must be divided as per intestate succession (i.e., the principle of devolution). The Ld. Trial court passed an order without conducting a proper trial. In appeal, the Hon’ble Delhi High Court confirmed the decision of the Ld. Trial court on the premise that the Will was genuine and was never contested.

On appeal to the Hon’ble Supreme Court.

HELD

The Hon’ble Supreme Court observed that the order passed by the Ld. Trial court without conducting a proper trial to ascertain the genuineness of Will was unjustified. Further, the Hon’ble court observed that the Ld. Trial court could not have passed an order without conducting a proper trial by taking discretionary jurisdiction under Order XII, Rule 6, read with Order XV, Rule 1 of the Code for Civil Procedure, 1908. Thus, the Hon’ble Supreme Court stated that since there was no explicit admission by the parties contesting the matter regarding the existence of the will, the presumption of the will’s existence made in the order and confirmed by the Hon’ble Delhi High Court was deemed unlawful. The Hon’ble Supreme Court further noted that in order to constitute a valid admission, the same should be unconditional, unequivocal and unambiguous. The matter was thus, remanded back to the Ld. Trial court for fresh adjudication and the order of the Hon’ble High Court was set aside.

Direct Listing of Indian Companies On International Exchanges

INTRODUCTION

New-age Indian companies often had a grouse that they were unable to get a good valuation for certain sunrise sectors in the Indian capital markets. These companies were unable to list on foreign stock exchanges and the only option available for them was to use the ADR / GDR route where Depository Receipts were issued against the Indian shares and these Receipts were listed on stock exchanges in the USA, Singapore, Luxembourg, etc. However, this has not proved to be a very successful model.

Recognising this demand from several of India’s start-up companies, the Indian Government has now permitted Indian companies to directly list their equity shares on certain international stock exchanges. Thus, instead of issuing shares in Rupees, Indian companies can directly issue these in Dollars, Euros, etc. This has become possible due to the Gujarat International Financial Tec-City (“GIFT City”), International Financial Service Centre (IFSC). One of the most salient features of the GIFT City is that any entity set up here would be treated as a Person Resident outside India under the Foreign Exchange Management Act, 1999. Thus, while the GIFT City is physically located in India, it is for all regulatory purposes treated as a foreign territory. Let us understand how Indian companies can now directly list their securities on an international stock exchange.

ENABLING LEGISLATION

S.23(3) of the Companies Act, 2013 was amended to provide that a prescribed class of public companies may issue such class of securities and list them on permitted stock exchanges in permissible foreign jurisdictions as may be prescribed.

In 2021, the International Financial Services Centre Authority or IFSCA (the nodal regulatory authority for the GIFT City, IFSC) notified the International Financial Services Centres Authority (Issuance and Listing of Securities) Regulations, 2021 (“the IFSCA Regulations”). These Regulations govern an initial public offer of securities by an unlisted Indian company as well as a follow-on public offer of securities by a listed Indian company and their subsequent listing on a stock exchange located within the GIFT City IFSC.

Subsequent to this amendment to the Act, the Ministry of Corporate Affairs has notified the Companies (Listing of Equity Shares in Permissible Jurisdictions) Rules, 2024.

The Ministry of Finance has consequently, notified an amendment to the Foreign Exchange Management (Non-Debt Instruments) Rules, 2019 which contains the Direct Listing of Equity Shares of Companies Incorporated in India on International Exchanges Scheme (“the Scheme”). These two Rules put together contain the enabling mechanism for the direct listing of securities in permissible international exchanges.

WHO CAN LIST?

Public limited companies, whether listed or unlisted, are allowed to issue and list their shares on an international exchange. The current Rules only allow unlisted public Indian companies to list their shares on an international exchange. SEBI is in the process of issuing the operational guidelines for listed public Indian companies. Private limited companies are expressly prohibited from listing abroad.

WHAT IS THE ELIGIBILITY CRITERIA?

The Scheme provides that a public Indian company shall be eligible to issue equity shares in permissible jurisdiction, if

(a) the public Indian company, any of its promoters, promoter group or directors or selling shareholders are not debarred from accessing the capital market by the appropriate regulator;

(b) none of the promoters or directors of the public Indian company is a promoter or director of any other Indian company which is debarred from accessing the capital market by the appropriate regulator;

(c) the public Indian company or any of its promoters or directors is not a wilful defaulter;

(d) the public Indian company is not under inspection or investigation under the provisions of the Companies Act, 2013;

(e) none of its promoters or directors is a fugitive economic offender.

WHO IS INELIGIBLE?

In addition, the Rules provide that the following companies would be ineligible:

(a) it is a section 8 company (i.e., a company operating as a charitable foundation) or it is a Nidhi company;

(b) it is a company limited by guarantee and also has share capital;

(c) it has outstanding public deposits;

(d) it has a negative net worth (paid-up share capital + free reserves + securities premium but excluding revaluation reserve, amalgamation reserve, depreciation write-back reserve);

(e) it has defaulted in payment of dues to any bank or public financial institution or non-convertible debenture holder or any other secured creditor or it has made good such default and a period of two years has not yet elapsed;

(f) an application for winding-up / corporate insolvency resolution process is pending;

(g) it has defaulted in filing its Annual Return under the Companies Act or filing its Accounts with the RoC.

ELIGIBLE JURISDICTIONS AND EXCHANGES

As of now, direct listing is only possible in the GIFT City and on any of two international exchanges which are operating within the GIFT City ~ India International Exchange, NSE / International Exchange. It is possible that with the passage of time, more jurisdictions / exchanges would be added. Both the aforesaid exchanges are international exchanges, i.e., shares are listed in terms of foreign currencies and not in INR terms. These international exchanges operate for 20 hours a day!

MECHANISM OF OFFERING

Eligible Indian public companies can make an Initial Public Offering (IPO) or an Offer for Sale (OFS) by its shareholders and get their shares listed on the above exchanges. Similarly, listed companies can make a Follow-On Public Offering (FPO) or an OFS. Listed companies for this purpose mean a company which has listed its equity shares and / or debt instruments on Indian stock exchanges. Hence, even debt-listed companies would be treated as listed companies. It may be noted that the Scheme seems to permit even Private Companies which are debt-listed to opt for direct listing but the Companies Act permits only Public Companies.

The IFSCA Regulations provide that an issuer shall be eligible to make an initial public offer only if:

(a) the issuer has an operating revenue of at least US$ 20 million in the preceding financial year; or

(b) the issuer has an average pre-tax profit, based on consolidated audited accounts, of at least US$ 1 million during the preceding 3 financial years; or

(c) any other eligibility criteria that may be specified by IFSCA.

The issue size shall not be less than USD 15 million or any other amount as may be specified by IFSCA.

In case of an offer for sale, the securities must have been held by the sellers for a period of at least 1 year prior to the date of filing of the draft offer document. Listed Indian companies may avail of a fast-track listing of their shares on the IFSC Stock Exchanges.

The issuer unlisted company must file a Prospectus in e-Form LEAP-1 within 7 days after the same has been finalised and filed with the international stock exchange. The Form will be required to be filed in the MCA-21 Registry electronically for record purposes.

The issuer company would be obliged to follow the Ind AS accounting standards.

The Indian company which issues and lists its equity shares on international exchange must also ensure compliance with other laws relating to the issuance of equity shares, including, the Securities Contracts (Regulation) Act, 1956, the Securities and Exchange Board of India Act, 1992, the Depositories Act, 1996, the Foreign Exchange Management Act, 1999, the Prevention of Money-laundering Act, 2002 and the Companies Act, 2013.

FEMA RESTRICTIONS

The direct listing by the Indian companies would be treated as raising of Foreign Direct Investment (FDI) in Non-Debt Instruments by the issuing Indian company. Hence, the following conditions apply:

  • It cannot be in companies operating in sectors where FDI is prohibited, e.g., tobacco / gambling;
  • It is only up to the sectoral caps, if any, prescribed for FDI, e.g., 49% for FM Radio companies;
  • If issued to a holder who is from a land border country (e.g., China) with India, then his investment would be subject to prior Government Approval;
  • Persons resident in India cannot invest in such securities listed on the international exchange since that would be a case of round-tripping. Thus, LRS would not be possible in direct listing cases;
  • Indian Mutual Funds are not eligible to invest in such direct listing;
  • Existing Indian shareholders can make an OFS of their existing shares under the direct listing scheme;
  • Eligible investors would be NRIs / OCIs / FPIs, etc.;
  • The issue would be counted towards the foreign holding in the issuer company since it is a form of FDI;
  • The Indian company may or may not opt for listing on the Indian exchanges. That is a choice which has been given to the issuer. It has the flexibility of raising both INR and foreign currency-denominated capital.

PRICING OF ISSUES

In the case of an FPO / OFS by an equity-listed company, the direct issue shall be at a price, not less than the price applicable in case of a preferential issue under the SEBI (Issue of Capital and Disclosure Requirement) Regulations. However, if it is an issue by an unlisted public company, the IPO / OFS shall be determined by a book-building process as permitted by the said International Exchange and shall not be less than the fair market value under the FEMA Rules / Regulations. The FEMA Regulations specify that an issue / transfer of shares shall be at a price not less than the fair market value arrived at on an arm’s length pricing on the basis of any internationally accepted valuation methodology. Hence, methods such as DCF, Earnings Multiple, P/E Multiple, Comparable Company, Net Asset Value, etc., may be considered.

TAXATION

Any transfer of prescribed securities by a non-resident on an international exchange located in the GIFT City is not regarded as a transfer u/s. 47 for the purposes of capital gains of the Income-tax Act. For this purpose, Notification No. S.O. 986(E) [NO. 16/2020/F.NO. 370142/22/2019-TPL], DATED 5-3-2020 as amended from time to time, has notified a foreign currency-denominated equity share of a company which is listed on a recognised stock exchange located in any IFSC. Thus, the transfer of such shares by a non-resident would not be subject to capital gains tax in India.

The Indian companies paying dividends on such shares would need to withhold tax at source at rates specified in Treaties or the Act.

CONCLUSION

Direct Listing without listing in India marks an exciting chapter in India’s capital markets. Only time will tell whether this Scheme is a success or does it turn out to be an also-ran like ADRs / GDRs. However, the Government has taken the right step by framing the enabling legislation and the ball is now in the court of the Indian entrepreneurs to seize this opportunity. Maybe as a second step, the floodgates to other exchanges could be opened up. This would be one more step towards full capital convertibility of the Indian Rupee.

Part A : Company Law

19 In the matter of M/S. BESTOW FINISHING SCHOOL PRIVATE LIMITED

REGISTRAR OF COMPANIES, PUNJAB AND CHANDIGARH

Adjudication Order No. ROC CHD/ADJ/682

Date of Order: 14th December, 2023

Adjudication Order for not consecutively numbering the pages of the minute book of the Company: Violation of provisions of Section 118 (1) of the Companies Act, 2013 (CA 2013) read with Secretarial Standard-1 (SS-1) issued by Institute of Company Secretaries (ICSI) on “Meetings of Board of Directors”.

FACTS

Registrar of Companies, Punjab and Chandigarh (‘ROC’) had made an inquiry under Section 206(4) of CA 2013 against M/s. BFSPL. During inquiry proceedings, it was found that the pages of the minutes’ book of the company produced/maintained by the company were not consecutively numbered.

Thereafter, ROC had issued Show Cause Notice (‘SCN’) for violation of section 118(1) of (CA 2013) read with Companies (Adjudication of Penalties) Rules, 2014 to M/s. BFSPL and its directors. No reply or communication was received from M/s. BFSPL and its directors regarding making and maintaining minutes’ book without consecutive numbering of pages.

Further, on the request of M/s. BFSPL for making an oral submission before an Adjudication officer (‘AO’), Mr. SG, Director of M/s. BFSPL was given an opportunity to make an oral submission/representation either personally or through an authorized representative.

Mr. SG appeared and made the following oral submissions:-

i. that M/s. BFSPL is a non-working company and there is no instance of any type of sales/purchase or other activities in the company, there is no inventory or other business activities in the company and the directors have not performed any business since its incorporation,

ii. that they have not received the SCN as he was admitted to the hospital. So, during that time, the SCN might have reached his office,

iii. had agreed orally to pay the penalty if imposed.

Provisions of the Section 118(1) of the CA 2013 read as;

Every company shall cause minutes of the proceedings of every general meeting of any class of shareholders or creditors and every resolution passed by postal ballot and every meeting of its Board of Directors or of every committee of the Board, to be prepared and signed in such manner as may be prescribed and kept within thirty days of the conclusion of every such meeting concerned, or passing of resolution by postal ballot in books kept for that purpose with their pages consecutively numbered.

Whereas Section 118(11) of CA 2013 reads as;

If any default is made in complying with the provisions of this section in respect of any meeting, the company shall be liable to a penalty of twenty-five thousand rupees and every officer of the company who is in default shall be liable to a penalty of five thousand rupees.

HELD

AO after the examination and hearing, held that submission made by Mr. SG was not satisfactory as he has not furnished the proof of hospitalization. Therefore, it was concluded that M/s. BFSPL and its officers in default are liable for penalty as prescribed under Section 118(11) of the CA 2013 read with the Secretarial Standard-1 on meetings of Board of directors for not consecutively numbering the pages of the minutes’ book of M/s. BFSPL.

Accordingly, a penalty was imposed as prescribed under sub-section (11) of Section 118 of the CA 2013. The details of the penalty imposed on M/s BFSPL and officers in default is as under:

Nature of default Violation under CA 2013 Name of person on whom the penalty imposed Penalty imposed
(in ₹)		 Final Penalty imposed i.e. 50 per cent as per Section 446B of CA 2013 being Small Company (in ₹)
Not consecutively numbering the pages of the minutes’ book of Board Meeting Section 118 (1) On company 25,000 12,500
Mr. SG, Director 5,000 2,500
Mr. RA, Director 5,000 2,500

It was further directed that penalty imposed shall be paid through the Ministry of Corporate Affairs portal only.

Residential Status – Whether Employment Includes Self Employment

In the context of determination of the residential status of an individual, a question or dispute arises as to whether for the purposes of Explanation 1(a) section 6(1) of the Income-tax Act, 1961 (“the Act”), the term ‘employment’ in the phrase ‘for the purposes of employment outside India’ includes ‘self-employment’ or not.

In this article, we are discussing certain nuances relating to the above dispute.

A. BACKGROUND

Section 6(1) of the Act deals with the residential status of an individual and provides for alternative physical presence tests for residents in India.

Clause (a) of section 6(1) provides that an individual is said to be resident in India in any previous year if he is in India in that year for a period or periods amounting in all to 182 days or more.

Alternatively, clause (c) of section 6(1) provides that an individual is said to be resident in India in any previous year if he has, within 4 years preceding the relevant year, been in India for a period of 365 days or more and, is in India for a period or periods amounting in all to 60 days or more in the relevant year.

Explanation 1(a) to Section 6(1) extends the period of 60 days to 182 days in case of a citizen of India who has left India in any previous year as a member of the crew of an Indian ship or for the purposes of ‘employment’ outside India.

It is pertinent to note that the original Explanation was inserted by the Finance Act, 1978, w.e.f. 1st April, 1979. At that time, the Explanation only covered a situation wherein a citizen of India was visiting India on a leave or vacation in the previous year and did not cover a situation where an Indian citizen left India for the purpose of employment outside India. The extension of the number of days from 60 to 182 for an Indian citizen leaving India for the purposes of ‘employment’ outside India was first introduced by substituting the Explanation vide the Finance Act, 1982 w.e.f. 1st April, 1982, wherein it now stated as follows:

(a) “Explanation.-In the case of an individual, being a citizen of India,-

Who leaves India in any previous year for the purposes of employment outside India, the provisions of sub-clause (c) shall apply in relation to that year as if for the words “sixty days”, occurring therein, the words “one hundred and eighty-two days” had been substituted;

(b) …”

The scope and effect of the above amendments were explained by the Memorandum to the Finance Bill, 1982, which provided as follows:

“33. Relaxation of tests of “residence” in India….

34….

35. With a view to avoiding hardship in the case of Indian citizens who are employed or engaged in avocations outside India, the Bill seeks to make the following modifications in the tests of “residence” in India: –

(i) ….

(ii)…

(iii) It is proposed to provide that where an individual who is a citizen of India leaves India in any year for the purposes of employment outside India, he will not be treated as a resident in India in that year unless he has been in India in that year for 182 days or more. The effect of this amendment will be that the “test” of residence in (c) above will stand modified to this extent in such cases.” (emphasis added)

Para 7.3 of the CBDT in Circular No. 346 dated 30th June, 1982 has also provided similar reasoning and is reproduced as under: “7.3 With a view to avoiding hardship in the case of Indian citizens, who are employed or engaged in other avocations outside India, the Finance Act has made the following modifications in the tests of residence in India:

1. The provision relating to the maintenance of a dwelling place coupled with a stay in India of 30 days or more referred to in (b) above has been omitted.

2. In the case of Indian citizens who come on a visit to India, the period of 60 days or more referred to in (c) above will be raised to 90 days or more.

3. Where an individual who is a citizen of India leaves India in any year for the purposes of employment outside India, he will not be treated as a resident in India in that year unless he has been in India in that year for 182 days or more. The effect of this amendment will be that the test of residence in (c) above will stand modified to that extent in such cases.”

The Direct Tax Laws (Second Amendment) Act, 1989 substituted the Explanation to section 6(1) w.e.f.
1st April, 1990. However, the language in the amended Explanation is the same as was introduced in 1982 and this limb of the Explanation relates to the substitution of 182 days in case of a citizen of India who has left India in any previous year for the purposes of ‘employment’ outside India, remained the same.

B. WHETHER THE TERM ‘EMPLOYMENT’ INCLUDES THE ‘SELF-EMPLOYMENT’

The moot point is what is meaning of the term ‘employment outside India’ is covered by Explanation 1(a) to Section 6(1).

One view that the Assessing Officers (“AOs”) have been taking is that ‘employment outside India’ covered by the Explanation 1(a) does not include undertaking business by oneself and an assessee will be entitled to the benefit of the Explanation only if such assessee went outside India in the previous year to take up ‘employment’ and not for undertaking business. Under this view, a restrictive meaning is given to the term ‘employment’ to only cover a situation where an employer-employee relationship exists with terms of employment and not a broader meaning.

The other view which assessees have been contending is that the term ‘employment’ in the context of Explanation 1(a) includes self-employment and taking up and continuing business is also ‘employment’ for the purposes of Explanation 1(a) to Section 6(1).

C. JUDICIAL PRECEDENTS

1. CIT vs O. Abdul Razak [2011] 198 Taxman 1 (Kerala)

In this case, the Kerala High Court relying upon the above Circular No. 346 dated 30th June, 1982, has interpreted the term ‘employment’ in wide terms. The relevant findings of the Kerala High Court are as under:

“Similarly the Central Board of Direct Taxes issued Circular No. 346, dated 30-6-1982, which reads as follows:

“7.3 With a view to avoiding hardship in the case of Indian citizens, who are employed or engaged in other avocations outside India, the Finance Act has made the following modifications in the tests of residence in India:

(i) & (ii) ******

(iii) Where an individual who is a citizen of India leaves India in any year for the purposes of employment outside India, he will not be treated as a resident in India in that year unless he has been in India in that year for 182 days or more. The effect of this amendment will be that the test of residence in (c) above will stand modified to that extent in such cases.”

7. What is clear from the above is that no technical meaning is intended for the word “employment” used in the Explanation. In our view, going abroad for the purpose of employment only means that the visit and stay abroad should not be for other purposes such as a tourist, or for medical treatment or for studies or the like. Going abroad for the purpose of employment therefore means going abroad to take up employment or any avocation as referred to in the Circular, which takes in self-employment like business or profession.

So much so, in our view, taking up their own business by the assessee abroad satisfies the condition of going abroad for the purpose of employment covered by Explanation (a) to section 6(1)(c) of the Act. Therefore, we hold that the Tribunal has rightly held that for the purpose of the Explanation, employment includes self-employment like business or profession taken up by the assessee abroad.”

Therefore, the Kerala High Court has held that:

a) No technical meaning is intended for the word “employment” used in Explanation 1(a);

b) Going abroad for the purpose of employment only means that the visit and stay abroad should not be for other purposes such as a tourist, for medical treatment, for studies or the like; and

c) Going abroad for the purpose of employment therefore means going abroad to take up employment or any avocation as referred to in the Circular, which takes in self-employment like business or profession.

2. K. Sambasiva Rao vs. ITO [2014] 42 taxmann.com 115 (Hyd — Trib.)

In this case, the ITAT Hyderabad referred to the decision of the Supreme Court in the case of CBDT vs. Aditya V. Birla [1988] 170 ITR 137 (SC) where in the context of section 80RRA, the SC considered that employment does not mean salaried employment but also includes self-employed/professional work. Further referring to the view expressed by the decision of the Kerala High Court in the case of CIT vs. O. Abdul Razak (supra) and also Circular No.346 of the CBDT, the ITAT held that the assessee’s earnings for consultancy fees from foreign enterprise and visit abroad for rendering consultancy can be considered for the purpose of examining whether the assessee is a resident or not.

3. ACIT vs. Jyotinder Singh Randhawa [2014] 46 taxmann.com 10 (Delhi — Trib.)

The ITAT Delhi, in this case, relating to a professional golfer, while deciding the issue in favour of the assessee held as under:

“7. We thus find that going abroad for the purpose of employment also means going abroad to take up employment or any avocation which takes in self-employment like business or profession. The facts of the present case suggest that the assessee was in self-employment being a professional golfer. We thus do not find reason to deviate from the finding of the Ld. CIT(A) which is based on the decision of the Hon’ble Kerala High Court in the case of O. Abdul Razak (supra) and others that the assessee being a professional golfer is a self-employed professional who carries his talent as a sportsperson by participating in golf tournaments conducted in various countries abroad. For such an Indian citizen in employment outside India the requirement for being treated as resident of India is his stay of 182 days in India in the previous year, as per Explanation (a) to section 6(1)(c) of the I.T. Act 1961.”

Thus, the ITAT Delhi also relying on the decision of the Kerala High Court has held that for the purposes of Explanation 1(a) of Section 6(1), employment would cover self-employed professionals.

4. ACIT vs. Col. Joginder Singh [2014] 45 taxmann.com 567 (Delhi — Trib.)

In this case of an assessee, a retired Government servant, providing consultancy services outside India, while deciding the issue in favour of the assessee, the ITAT Delhi held as follows:

“11. In view of the above, we are of the considered view that the Assessing Officer misinterpreted the provisions of section 6(1)(c) and Explanation (a) attached thereto. On the other hand, the Commissioner of Income Tax(A) rightly held that the assessee has to be treated as non-resident as per Explanation (a) attached to section 6(1)(c) of the Act. The Commissioner of Income Tax (A) also rightly held that in the case of the individual, a citizen of India who left India during the previous year for the purpose of employment outside India and in a peculiar circumstance, when his stay in India during the relevant period was only 68 days which is much less than the period of 182 days as per statutory provisions of the Act, then the assessee cannot be treated as resident of India and his status would be of non-resident Indian for the purpose of levying of tax as per provisions of the Act.”

Thus, in this case, going out of India for the purposes of providing consultancy services, has been considered to be eligible for the extended period of 182 days under Explanation 1(a) to section 6(1).

5. ACIT vs. Nishant Kanodia [2024] 158 taxmann.com 262 (Mumbai — Trib.)

In a recent decision of the ITAT-Mumbai the important facts were as follows:

a) The assessee stayed in India for 176 days and went to Mauritius during the year.

b) From the work permit issued by the Government of Mauritius, it was observed that the assessee went to Mauritius on an occupation permit to stay and work in Mauritius as an investor and not as an employee.

c) It was submitted by the assessee that he went to Mauritius for the purpose of employment, on the post of Strategist – Global Investment of the company (in which he held 100% of the shares) for a period of three years. Therefore, it was claimed that the assessee was a non-resident as per the provisions of section 6(1)(c) read with Explanation 1(a) to section 6(1).

d) The AO held that the assessee left India in the relevant financial year as an ‘Investor’ on a business visa which was usually taken by an investor and not by an employee who leaves India for employment and accordingly, the assessee was not entitled to take benefit of Explanation -1(a) to section 6(1). Therefore, the AO held the residential status of the assessee for the year under consideration to be ‘resident’ as per the provisions of clause (c) of section 6(1) and income received by the assessee from offshore jurisdiction was added to the total income of the assessee.

e) While admitting that the assessee had submitted an employment letter, the AO alleged that as the assessee held 100% of the shares of the employer company, it had considerable control over the affairs of the company and the appointment letter and salary slips submitted were self-serving documents, especially in view of the fact that the permit obtained in Mauritius was not for employment but for business/investor.

f) The Commissioner (Appeals) agreed with the submissions of the assessee and held that the assessee was away from India for the purpose of employment outside India and was accordingly entitled to take the benefit of Explanation -1(a) to section 6(1)(c).

g) On revenue’s appeal, the ITAT, relying on the decision of the Kerala High Court in case of CIT vs. O. Abdul Razak (supra), other ITAT decisions mentioned above and Circular 346 dated 30-6-1982, dismissed the appeal of the Revenue and held as follows:

“14. Therefore, even if the taxpayer has left India for the purpose of business or profession, in the aforesaid decisions, the same has been considered to be for the purpose of employment outside India under Explanation-1(a) to section 6(1) of the Act. Accordingly, even if it is accepted that the assessee went to Mauritius as an Investor in Firstland Holdings Ltd., Mauritius, in which he holds 100% shareholding, we are of the considered view that by applying the ratio of aforesaid decisions the assessee is entitled to claim the benefit of the extended period of 182 days, as provided in Explanation-1(a) to section 6(1) of the Act, for the determination of residential status. Since it is undisputed that the assessee has stayed in India only for a period of 176 days during the year, which is less than 182 days as provided in Explanation 1(a) to section 6(1) of the Act, the assessee has rightly claimed to be a “Non-Resident” during the year for the purpose of the Act. Accordingly, we find no infirmity in the findings of the learned CIT(A) on this issue. As a result, the grounds raised by the Revenue are dismissed.”

D. IMPORTANT CONSIDERATIONS

From the above-mentioned judicial precedents, while taking into consideration ‘employment outside India’ and while considering the benefit of an extended period of 182 days as per Explanation 1(a) to section 6(1) of the Act, the following important points should be kept in mind:

a) The visit and stay abroad should not be for other purposes such as a tourist, or for medical treatment or for studies or the like.

b) ‘Employment’ would include self-employment i.e. acting as Consultant, leaving India for the purpose of business or profession including professional activities of a sportsman, carrying on activities of an investor etc.

c) The status in the Occupation Permit of being an ‘investor’ or not having a permit for employment in a country outside India or having a business visa instead of employment visa, may not be relevant considerations for this purpose. However, depending on the facts of the case, the type of visa obtained may also have persuasive value in the intention of the assessee to stay for a longer duration outside India.

E. OTHER VIEW

There is another point of view, according to which the difference between ‘Employment’ and ‘Business or Profession’ is well known and therefore ‘employment’ should not include ‘self-employment’ i.e. business or professions.

The CBDT Circular cannot travel beyond the scope of section 6 which mentions ‘employment’ and includes in its ambit ‘avocations’, which in turn has been relied upon by the Kerala High Court and ITAT benches.

Interestingly, while the section refers only to ‘employment’, the Memorandum to the Finance Bill as well as the CBDT Circular clearly states that the amendment is seeking to avoid hardship to Indian citizens employed or engaged in other avocations outside India. In our view, given the intention of the legislature to provide the benefit to a person who leaves India permanently or for a long duration, which is clear in the Memorandum to the Finance Bill and the CBDT Circular, this other view of giving a restricted meaning to the term “employment” may not find favour with the courts.

F. CONCLUSION

In view of the Memorandum, CBDT Circular and judicial opinion, it appears to be a settled position that for the purposes of Explanation 1(a) to Section 6(1) of the Act, the term ‘employment’ includes self-employment i.e. carrying on business and profession. However, it is important that the assessee maintains appropriate documentation to substantiate the facts of the case.

Recent Developments in GST

A. NOTIFICATIONS

1. Notification No.01/2024-Central Tax dated 5th January, 2024

The above notification seeks to extend the due date for furnishing return in Form GSTR-3B for the month of November, 2023 till 10th January, 2024, for registered persons in certain districts of Tamil Nadu.

2. Notification No.02/2024-Central Tax dated 5th January, 2024

The above notification seeks to extend the due date for furnishing annual return in Form GSTR-9 & Form GSTR-9C for financial year 2022-2023 till 10th January, 2024, for registered persons in certain districts of Tamil Nadu.

3. Notification No.03/2024-Central Tax dated 5th January, 2024

By above notification, the earlier notification no.30/2023-CT dated 31st July, 2023 which was seeking information on various issues in relation to notified items in said notification like Tobacco and its products, is rescinded with effect from 1st January, 2024.

4. Notification No.04/2024-Central Tax dated 5th January, 2024

By above notification, a special procedure to be followed by registered person engaged in manufacturing of certain goods mentioned in the notification like Pan Masala and tobacco products, is prescribed w.e.f 1st April, 2024.
The information is sought of various items in the given forms.

5. Notification No.05/2024-Central Tax dated 30th January, 2024

By above notification the earlier notification no.2/2017-CT dated 19th June, 2017 which is relating to allotment of authority, is amended and one more Pin code is added in sr.no.83 in Table II.

B. ADVISORY / INSTRUCTIONS

a) The GSTN has issued Advisory dated 15th January, 2024 giving information about introduction of new Tables 14 & 15 in GSTR-1/FF.

b) The GSTN has issued Advisory dated 23rd January, 2024 by which information is given about furnishing of bank account details under Rule 10A of CGST Rules, 2017.

c) The GSTN has also issued Advisory dated 19th January, 2024 giving information about payment through Credit card (CC) / Debit Card (DC) and Unified Payments Interface (UPI).

C. FINANCE ACT, 2024

The Government of India has introduced Finance Bill, 2024 (Bill no.14/2024 dated 1st February, 2024). Amongst others, amendments are proposed in the GST laws in respect of definition of “Input Service Distributor” and in respect of manner of distribution of credit by “Input Service Distributor”. There is also a proposal to introduce section 122A to provide a penalty where the special procedure, prescribed in respect of certain goods, is not followed.

D. ADVANCE RULINGS

53 Local authority vis-à-vis Governmental authority

Indian Hume Pipe Company Ltd.

(A. R. No. UP ADRG 12/2022

dated 23rd September, 2022) (UP)

The applicant, M/s. Indian Hume Pipe Company Ltd. is a registered assessee under GST.

The applicant has sought Advance Ruling on following issues:

“a. Whether the supply of Services by the Applicant to M/s. UTTAR PRADESH JAL NIGAM is covered by Notification No. 15/2021 Central Tax (Rate), dated 18th November, 2021 r/w. Notification No.22/2021- Central Tax (Rate), dated 31st December, 2021.

b. If the supplies as per Question are covered by Notification No. 15/2021- Central Tax (Rate), dated 18th November, 2021, r/w. Notification No. 22/2021- Central Tax (Rate), dated 31st December, 2021, then what is the applicable rate of Tax under the Goods and Services Tax Act, 2017 on such Supplies made w.e.f. 1st January, 2022; and

c. In case the supplies as per Question are not covered by the Notification supra then what is the applicable rate of tax on such supplies under the Goods and Services Tax Act, made w.e.f. 1st January, 2022.”

In support, the applicant submitted that it undertakes Contracts for Construction of Head works, Sumps, Pump Rooms, laying, jointing of pipe line and commissioning and maintenance of the entire work for Water Supply Projects / Sewerage Projects/ Facilities.

It was further submitted that it has been awarded a contract by M/s. Uttar Pradesh Jal Nigam (UPJN) vide Department Letter No. 130/Vividh-13/11 dated 25th February, 2021.

It is informed that UPJN holds PAN AAALU0256C under the Income Tax Act, 1961 and GSTIN 09AAALU0256C320 under the Goods & Services Tax Act, 2017.

The applicant also provided history of establishment of UPJN as under:

“Public Health Engineering Department was created in 1927 to provide drinking water supply and sewerage facilities in Uttar Pradesh. In year 1946, it was rechristened as Local Self Government Engineering Department (LSGED). In 1975, it was converted to Uttar Pradesh Jal Nigam through Uttar Pradesh Water Supply and Sewerage Act, 1975 (ACT no-43, 1975). As per this Act, Jal Nigam has jurisdiction over whole Uttar Pradesh (except Cantonment Area). The basic objective of creating this Corporation is development and regulation of water supply & sewerage services and for matters connected therewith.”

In Notification No. 31/2017 dated 13th October, 2017 the meaning of the terms Governmental Authority and Government Entity is given as under:

“Governmental Authority” means an authority or a board or any other body (i) set up by an Act of Parliament or a State Legislature; or (ii) established by any Government, with 90 per cent or more participation by way of equity or control, to carry out any function entrusted to a Municipality under article 243W of the Constitution or to a Panchayat under article 243 G of the Constitution.

“Government Entity” means an authority or a board or any other body including a society, trust, corporation, i) set up by an Act of Parliament or State Legislature; or ii) established by any Government with 90 per cent or more participation by way of equity or control, to carry out a function entrusted by the Central Government, State Government, Union Territory or a local authority.”

The applicant submitted that the character in PAN denotes the Status of the PAN holder and as the 4th character in the case of UPJN is “L”, it denotes Local Authority.

In GSTIN 09AAALU0256C320 and in the Registration Certificate issued by the GST Department, the UPJN is shown under Local Authority.

It was submitted that UPJN is a Local Authority in light of above facts and hence it is covered by Notification No. 15/2021 Central Tax (Rate) dated 18th November, 2021 r/w. Notification No. 22/2021- Central Tax (Rate), dated 31st December, 2021; wherein Composite supply of works contract as defined in clause (119) of Section 2 of the Central Goods and Services Tax Act, 2017, supplied to Central Government, State Government, Union territory or a local authority are covered for concessional rate of 12 per cent.

Accordingly, it was canvased that the transaction with UPJN is liable to tax under the GST Act @ 12 per cent;

The ld. AAR observed that the questions raised by the applicant require examination as to whether the UPJN is a local authority or not?

The ld. AAR observed that the applicant has arrived at the conclusion that UPJN is local authority on the basis of the 4th character of PAN of UPJN and in GSTIN of UPJN it is shown as ‘local authority’.

The ld. AAR observed that UPJN was created by the Government of Uttar Pradesh by enacting the U.P. Water Supply and Sewerage Act, 1975 (hereinafter referred to as the UPWSS Act). It is a body corporate having perpetual succession and a common seal and capable of suing and being sued in its name. It has power to acquire, hold and dispose of the property.

It has a specific administrative set up including functionalities like Chairman appointed by State Government and has also Nigam Fund deemed to be Local fund. The ld. AAR also referred to the meaning of ‘Local Authority’ given in section 2(69) of CGST Act.

The ld. AAR observed that for the purpose of the GST Laws, any authority legally entitled to or entrusted by the Government with the control or management of a municipal or local fund, qualifies as a “local authority”.

The ld. AAR also referred to meaning of ‘local authority’ contained in Section 3(31) of the General Clauses Act, 1897, which is as under:

“’local authority’ shall mean a municipal committee, district board, body of port Commissioners or other authority legally entitled to, or entrusted by the Government with, the control or management of a municipal or local fund.”

The ld. AAR referred to the judgment of the Hon. Supreme Court in the case of Union of India vs. R.C. Jain (1981) 2 SCC 308 – 1981-VIL-21-SC-MISC wherein the scope of the term local authority under the General Clauses Act is explained.

The ld. AAR observed that so far as UPJN is concerned, it is not satisfying some of the conditions mentioned in above judgment for qualifying as “local authority”.

The ld. AAR also observed that the main requirement to qualify as a local authority is that the authority must be legally entitled to or entrusted by the Government with the control and management of a Municipal or local fund. In the case of UPJN, there is no local fund entrusted by the Government with UPJN.

In view of the above material, the ld. AAR observed that the UPJN is not a ‘local authority’.

The ld. AAR thereafter observed as to whether UPJN is Governmental Authority. In this respect, the ld. AAR referred to Notification no.11/2017 31/2017-Central Tax (Rate) dated 13th October, 2017, which amended the Notification No 11/2017 – Central Tax (Rate) dated 28th June, 2017, in which Governmental Authority is explained as under:

“ix. Governmental Authority” means an authority or a board or any other body, – (i) set up by an Act of Parliament or a State Legislature; or (ii) established by any Government, with 90 per cent, or more participation by way of equity or control, to carry out any function entrusted to a Municipality under article 243W of the Constitution or to a Panchayat under article 243 G of the Constitution.” (iii)”

The ld. AAR observed that UPJN fulfils the condition of being ‘Governmental Authority’ as it is constituted for the development and regulation of water supply and sewerage services in the State of U.P. which is one of the works entrusted under Article 243 W read with Twelfth Schedule of the Constitution of India. Thus, the ld. AAR held that the UPJN is a government authority.

In view of the above, the ld. AAR gave a ruling that UPJN is not covered by Notification no.15/2021-Central Tax (Rate) dated 18th November, 2021 and the contract is liable to tax at 18 per cent from 1st January, 2022.

54 Healthcare Service vis-à-vis Service to Senior Citizen

Snehador Social & Healthcare Support LLP

(A. R. No. 18/WBAAR/2022-23

dated 22nd December, 2022) (WB)

The applicant is engaged in providing services for health care to senior citizens which covers arranging doctors, nurses, taking the clients to any diagnostic centre, supplying oxygen and physical support as per requirement of such senior citizens. For rendering all such services, the applicant runs a membership programme where clients opt for the same as per their requirement. In addition to this, the applicant also provides services to its members for delivery of medicines and grocery items at home, helping with bank work, utility bill payment, etc.

The applicant has made this application under sub section (1) of section 97 of the GST Act and the rules made there under seeking advance ruling as to “whether the services rendered by the applicant for health care to senior citizens at their doorstep comes under exemption category and what will be the classification of such services. Further, if such service is held taxable, then what would be the rate of tax.”

The applicant has elaborately explained the nature of services. Appellant was claiming that he is covered by entry 74 in Notification no.12/2017-CT (Rate) dated 28th June, 2017 which reads as under:

Sl. No. Chapter, Section, Heading, Group or Service Code (Tariff) Description of Services Rate (Per cent.) Condition 74
74 Heading

9993

 Services by way of – (a) health care services by a clinical establishment, an authorised medical practitioner or paramedics; Provided that nothing in this entry shall apply to the services provided by a clinical establishment by way of providing room [other than Intensive Care Unit (ICU)/Critical Care Unit (CCU)/Intensive Cardiac Care Unit (ICCU)/Neonatal Intensive Care Unit (NICU)] having room charges exceeding R5000 per day to a person receiving health care services.

(b) services provided by way of transportation of a patient in an ambulance, other than those specified in (a) above.

 Nil Nil

The ld. AAR noted contention of the applicant. The ld. AAR also referred to the meaning of ‘health care services’, ‘clinical establishment’ and ‘authorized medical practitioner’ as given in Para 2 (zg), 2(s) and 2(k) respectively of Notification No. 12/2017 Central Tax (Rate) dated 28th June, 2017.

The ld. AAR also noted the functions performed by applicant, which are as under:

  • Regular visits by a Personal Care Manager.
  • Home visits by General Physician, Physiotherapist, Clinical Therapist & Nutritionist.
  • Assistance in delivery of monthly grocery & medicine.
  • Utility Bill payments of Tax/ Financial or Legal consultation.
  • Digital assistance or Assistance with plumbers, electricians and repairs.
  • Regular member updates with video clips to be shared with family through individual login on its website.

Further, the applicant provides following services:

  • Accompanying members for essential & social outings.
  • Accompanying members to the Bank & Post Office.
  • Scheduling appointments and accompanying members for doctor consultations.
  • Organising annual health check-ups.
  • Accompanying member on diagnostic tests.
  • Escorting members on personal social outings.
  • Organising social gathering and entertainment programs.
  • Assistance with airport & railway pickup & drop.

In respect of medical services, ld. AAR observed as under:

“Services claimed to have been provided by the applicant also cover assistance in medical emergency and hospitalization which includes ambulance services, regular monitoring during hospitalisation, help with medical insurance and help with discharge formalities. The applicant provides medical and nursing support services at home for critically ill members in the following manner:

  • Procuring and setting up of all medical support equipment required at home.
  • Assisting with nursing support at home.
  • Critical care supervisor to visit home whenever necessary.
  • Scheduling doctor visits whenever necessary.”

After analysing services provided by the applicant as above, the ld. AAR observed that, “the applicant, as we have already discussed, is found to be engaged in providing services to its enrolled members under two limbs. The first one, which is against a consolidated package amount, comprises inter alia of care manager visit for medical checkup, general physician home visit and home delivery of medicine. The other part also covers services by general physicians, nurses and care managers for which the applicant charges separately. The aforesaid services may get covered under health care services as defined in Para 2 (zg) of Notification No. 12/2017 Central Tax (Rate) dated 28th June, 2017. However, supply by way of health care services qualifies for exemption under serial number 74 of Notification No. 12/2017-Central Tax (Rate) dated 28th June, 2017, if the same is provided by a clinical establishment, an authorised medical practitioner or para-medics. Admittedly, the applicant doesn’t fall under any of the aforesaid categories of suppliers and the services provided by the applicant, therefore, fail to qualify as exempted service.”

Accordingly, the ld. AAR held that the given service cannot fall in the exemption category of Sl. No.74 of Notification no.12/2017. The ld. AAR also held that services rendered by the applicant can be termed as ‘human health and social care services” and taxable @ 18per cent vide sr. no.31 of Notification no.11/2017-CT (Rate) dated 28th June, 2017.

55 Healthcare Service vis-à-vis Administration of COVID-19 Vaccine

Krishna Institute of Medical Science Limited

(Order No. AAAR/AP/ (GST)/2022

dated 19th December, 2022) (AP)

The appellant (original applicant) had raised certain questions before the ld. AAR and the ld. AAR has given its ruling in AAR No.04/AP/GST/2022 dated 21st March, 2022 – 2022-VIL-207-AAR. The questions raised by appellant were as under:

“Question: Whether administering of COVID-19 vaccination by hospitals is Supply of Good or Supply of Service?

Question: Whether administering of COVID-19 Vaccine by clinical establishments (Hospitals) qualify as “Health care services” as per Notification No. 12/2017 Central Tax Rate dated 28th June, 2017?

Answer: Administering of COVID-19 vaccination by hospitals is a Composite supply, wherein the principal supply is the ‘sale of vaccine’ and the auxiliary supply is the service of ‘administering the vaccine’ and the total transaction is taxable at the rate of principal supply i.e., 5 per cent.

Question: Whether administering of COVID-19 vaccination by clinical establishment is exempt under GST Act?”

Answer: Administering of COVID-19 Vaccine by clinical establishments (Hospitals) does not qualify under “Health care services” as per Notification No. 12/2017 Central Tax Rate dated 28th June, 2017 and not eligible for exemption.

The appellant has filed an appeal against above AR.

In appeal, appellant made submissions picking up various issues like;

  • The process of vaccination is supply of Service;
  • It is Healthcare services;
  • Why the supply should not be considered as Supply of Goods and elaborate the same.

After analysing the legal position, the ld. AAAR held that in the instant case, the applicant qualifies to be a clinical establishment but, the supply transaction is predominantly of sale of goods and not the service component of healthcare. The Ld. AAAR further observed that the dominant intention of the recipient is the receipt of the vaccine followed by its administration and hence the principal supply is supply of vaccine and not the process of vaccination.

The ld. AAAR held that there is no dispute that the appellant injects medicine in the body of the recipient. Therefore, the ld. AAAR observed that the claim of appellant that there is no transfer of goods is self-contradictory.

Regarding contention that the recipient cannot purchase vaccine, the ld. AAAR held that the purchase is through government regulation, but it cannot be said that it is not purchased. The ld. AAAR also referred to the price tag prescribed in notification by the Central Government, about the vaccine where the GST rate of 5 per cent is mentioned. The Ld. AAAR also referred to meaning of ‘Vaccination’ as under:

“In the present case, the service rendered by the appellant is administration of Covid-19 vaccine which is also called Vaccination or Immunization. In order to find out whether the service of administering a vaccine fits into the “Health Care Services” exempted vide Notification No.12/2017 Central Tax (Rate) dt. 28th June, 2017, we need to understand the term ‘Vaccination’. The definition of Vaccination as per the Centers for Disease Control and Prevention is as follows:

‘The act of introducing a vaccine into the body to produce protection from a specific disease.’

In the light of the above definition it is understood that vaccination provides protection against disease and it is administered before the advent of disease. The above discussed service of administering a vaccine does not fit into the definition of “Health Care Services” as per Notification No.12/2017 Central Tax (Rate) dated 28th June, 2017.”

The ld. AAAR observed that the definition of ‘healthcare service’ starts to post some medical issues but the one taken for protection of the future cannot be considered as healthcare service.

The ld. AAAR, thus, confirmed the AR in following terms:

“Finally, we confirm that exemption is not allowed in the instant case against the claim of the applicant. While validating the decision of the lower authority that taxability of the supply comes under ‘composite supply’, wherein the principal supply is the ‘sale of vaccine’ and the auxiliary supply is the service of ‘administering the vaccine’ and the total transaction is taxable at the rate of principal supply i.e., 5 per cent.’

56 Residential Property vis-à-vis Commercial use – forward charge

Deepak Jain

(AR No. RAJ/AAR/2023-24/14

dated 29th November, 2023) (Raj)

The facts are that Shri Deepak Jain (hereinafter referred to as the “Applicant”) is engaged in providing Professional service of Chartered Accountant and currently Senior Partner in B D Jain & Co. Chartered Accountants. Applicant is currently unregistered under GST Act 2017. Applicant is the owner (along with family members Shri Padam Chand Jain, Smt. Manju Devi Jain and Smt. Samta Jain hereinafter collectively referred to as “Lessor(s)”) of the property situated at J-10, Lal Kothi, Sahakar Marg, Jaipur, Rajasthan 302018 (hereinafter referred to as the Demised Premises). The applicant has entered into lease agreement dated 18th January, 2022 with Back Office IT Solutions Private Limited, which is inter alia engaged in the business of providing comprehensive, independent fund accounting, reporting, and analytics solutions to fund administrators providing administration services to hedge fund industry.

As per terms of the Lease agreement, in consideration of grant of lease to use and possess the aforesaid property, the lessee is required to pay to the applicant a monthly rent of ₹99,125/- (a total of ₹396500/- to the Lessors).

The contention of applicant was that Land use of property is residential as per the Lease deed issued by Jaipur development Authority (JDA), Jaipur, in the respect of the Demised premises.

However, the applicant also clarified that as per the Lease Agreement, the Demised Premises shall be used solely
for commercial purposes by the Lessee i.e. for establishing the branch/office of the Lessee and hence Construction
of property is done for use as commercial purposes only.

Lessee is registered in GST Act and Electricity connection Category of Lessee is “medium industry”.

The applicant has also provided further specification of property. The property is equipped with all requirements for commercial purposes.

The applicant was of the opinion that the renting of residential dwelling is included under RCM services when provided to a registered person. Reference made to notifications No. 04/2022-Central Tax (Rate) dated the 13th July, 2022 and notification No. 05/2022-Central Tax (Rate) dated the 13th July, 2022, which are also reproduced below for ready reference.

Before 18th July, 2022 From 18th July, 2022
Exemption for Renting of Residential Dwellings Services by way of renting of residential dwelling for use as a Residence. Services by way of renting of residential dwelling for use as a residence except where the residential dwelling is rented to a registered person.

Inclusion in list of services under Reverse Charge Mechanism: Following new Entry for Reverse Charge Tax by notification No. 05/2022-Central Tax (Rate) dated 13th July, 2022 inserted with effect from 18th July, 2022 in notification No. 13/2017-Central Tax (Rate), dated 28th June, 2017:

(1) (2) (3) (4)
Sl. No. Category of Supply of Service Supplier of Service Recipient of Service
“5AA Service by way of renting of residential dwelling to a registered person. Any person Any Registered person”;

Based on the above facts following questions were raised.

1. Whether the Demised premises will be covered in the definition of residential dwelling for the purpose of notification No. 05/2022-Central Tax (Rate) dated 13th July, 2022?

2. Out of the following, which are factors important to include in the definition of residential dwelling?

1. Land use of property by local authorities; or

2. Layout of the property, its structure, whether it is designed for usage as a residential unit or a commercial unit; or

3. The purpose for which the dwelling is put to use; or

4. How is the plan of the property sanctioned by the local authorities; or

5. The intention of the developer / owner of the property; or

6. The length of stay intended by the users; or

7. Electricity Bill; and

8. Municipal Tax.

The ld. AAR observed that the definition of Residential dwelling is not mentioned in GST Law. The ld. AAR referred to meaning in Black’s Law Dictionary, as under:

“‘Residential dwelling means living in a certain place permanently or for a considerable length of time’. As per the Merriam Webster dictionary: ‘A shelter (as a house) in which people live’. As per the Oxford dictionary: ‘A house or apartment or other places of residence or a place to live in or building or other places to live in’.”

The ld. AAR observed about important aspects as under:

“Point 4 (a) of the Lease Agreement entered between the Applicant (Lessor) and Lessee i.e. M/s Back Office IT Solutions Pvt. Ltd. (a company incorporated in India within the meaning of Companies Act, 1956), stipulates that the demised premises shall be used solely for commercial purpose by the lessee i.e. for establishing the branch/office.”

Also on perusal of Electricity Bill issued in the name of lessee i.e. Back Office IT Solutions Pvt. Ltd. At J-10, 1 Block, Lal Kothi Scheme, Sahakar Marg, Jaipur for the month of March 2023, it is evident that the electric connection has been issued for commercial purpose.

In view of the above, we have reached the conclusion that the property in question has been leased/rented for commercial use. So even if the use of said property has not been changed by JDA but since the so-called residential dwellings does not remain as such as it is being used for commercial purposes.”

Accordingly, the claim of applicant that it will fall under RCM in hands of lessee is rejected and the effect is that it will fall under forward charge being commercial purpose.

Based on above findings, the ld. AAR ruled as under:

“Q. 1 Whether the Demised premises will be covered in the definition of residential dwelling for the purpose of notification No. 05/2022-Central Tax (Rate) dated 13th July, 2022?

Ans-1. No, the demised premises will not be covered in the definition of residential dwelling in terms of Notification No. 05/2022-Central Tax (Rate) dated 13th July, 2022 as it is being used for commercial use.

Q. 2 Out of the following, which are the factors important to include in the definition of residential dwelling?

Ans-2. The important factors to be included in the definition of Residential Dwelling is the purpose for which the dwelling is put to use and the length of stay intended by the users.”

Goods and Services Tax

I. HIGH COURT

87 Sakthi Fashions vs. Appellate Authority / Additional Commissioner of GST(Appeals-II), Chennai

2024 (80) G.S.T.L 84 (Mad.)

Date of Order: 12th September, 2023

Time period from the application for revocation till the date of rejection shall be excluded while computing the limitation period as per section 107 of CGST Act, 2017 when an appeal is preferred against such order for cancellation of registration.

FACTS

The place of business of the petitioner was inspected and after verification of records, an SCN was issued for cancellation of registration. On failure to respond to the SCN, an Order-in-Original dated 6th February, 2023 was passed for cancellation of registration. Being aggrieved by the order, an application for revocation of cancelled registration was filed on 16th February, 2023 under section 30 of the CGST Act. Thereafter, another SCN was issued on 27th February, 2023. However, the petitioner failed to reply to the same and hence application for revocation of cancelled registration was rejected on 14th March, 2023. Further, an appeal against Order-in-Original was filed on 14th July, 2023 with a delay of 39 days and the same was rejected being time-barred in nature. Aggrieved, the petitioner sought writ petition before the Hon’ble High Court.

HELD

It was held that for the purpose of computing the limitation period as per Section 107 of CGST Act, period from application filed under Section 30 of CGST Act for revocation of cancelled registration to the rejection of said application i.e. from 16th February, 2023 to 14th March, 2023 was to be excluded. The Hon’ble High Court disposed of the writ petition directing the respondents to consider the petitioner’s appeal and pass orders on merits without reference to limitation and in accordance with the law.

88 Maa Kamakhya Trader vs. State of U.P.

2024 (80) G.S.T.L 39 (All.)

Date of Order: 16th October, 2023

Order passed based on invalid notice demanding tax and penalty under section 129(3) of CGST Act ought to be set aside.

FACTS

Petitioner’s vehicle transporting processed “white red betel” was intercepted on 18th September, 2023. It was found that an E-way bill and E-invoice of an incorrect product with different values were produced by the transporter on inspection. As a result, an order for detention was issued in Form GST MOV-06 and a notice in Form GST MOV-07 was issued demanding tax and penalty under section 129(3) of the CGST Act. Subsequently, an order in Form GST MOV-09 was passed. Aggrieved, a writ petition was filed by the petitioner before the Hon’ble High Court on the grounds that the notice issued under section 129(3) demanding both tax and penalty was not appropriate.

HELD

It was held that the impugned order in Form GST MOV-09 was to be quashed since the same was based on an invalid notice demanding tax as well as penalty. Accordingly, the matter was remanded back directing a fresh order to be issued under section 129(1)(a) of the CGST Act within a period of one week after providing an opportunity of hearing to the petitioner.

89 Technosys Security System Pvt. Ltd. vs. Commissioner of Commercial Taxes, Indore

2024 (80) G.S.T.L 4 (M.P.)

Date of Order: 5th December, 2023

The opportunity of a personal hearing should be provided even where it has not been specifically requested by the assessee and an adverse decision has been contemplated against him.

FACTS

Petitioner was issued show cause notices demanding an amount of ₹7.37 crores and ₹10.18 crores in two different cases. Subsequent to the reply filed for the said SCNs, final orders quantifying tax, interest and penalty amounting to ₹9.76 crores and ₹14.56 crores were issued without providing opportunity for personal hearing and in violation of principles of natural justice mandated as per section 75(4) of CGST Act. Aggrieved, a petition was filed before the Hon’ble High Court.

HELD

It was held that the contention of the respondent that section 75(4) of the Act uses the term “opportunity of hearing” and the word ‘personal’ is missing, hence, filing a reply to SCN amounts to an opportunity of hearing; was not sustainable. The Court further relied upon the decision of Allahabad High Court in case M/s. B.L. Pahariya Medical Store (supra) [2023 (77) GSTL 193 (All.)] and held that section 75(4) of CGST Act clearly specifies that opportunity of hearing should be granted where there is a specific request in writing or where any adverse decision is contemplated. Since no opportunity for a personal hearing was granted, impugned orders were liable to be set aside without going into the merits of the case.

90 Prahitha Construction (P.) Ltd vs. UOI

[2024] 159 taxmann.com 437 (Telangana)

Date of Order: 9th February, 2024

Transfer of development rights held amenable to GST and not covered by Entry 5 of Schedule-III of the GST Act. However, Hon. Courts hold that Notification No.4 of 2018 dated 25.01.2018 as amended does not create a charge on the transfer of development rights but only provides for the time of payment of tax. Supply of services of transfer of development rights was always taxable since the introduction of GST.

FACTS

The petitioner a construction company challenged Notification No.4/2018-CT dated 25th January, 2018 (as amended vide Notification No.23/2019 dated 25th January, 2019) imposing GST on a transfer of development rights of land done by land owners under joint development agreement (JDA) contracted as ultra vires the constitution of India. As per the petitioner, the JDAs are normally entered enabling the land owners to sell the land and procure residential or commercial apartments in lieu of such sale and hence the JDAs are to be viewed as conveyance as is expected in other laws. The respondent department referred to the clauses of the agreement to contend that the JDA has a clear indication that there is no outright sale of property in the name of the developer. Rather, it is a case where the conditions would clearly indicate that the ownership and the title rights are all retained by the land owner himself and the only role which the developer has is the execution of JDA so far
as developing land belonging to the land owner is concerned.

HELD

The Hon’ble Court after reading the JDA, observed that there was no outright sale of land being effectuated and the JDA per se cannot be considered merely as a medium adopted by the landowner selling his land and the JDA does not lead to a sale of land by itself. The Court noted that as a result of the petitioner’s investment in the construction activities, the petitioner has a right to realize the money from the sale of developed property, but the eventual transfer of developed / constructed property including undivided share of land in favour of the purchaser of the constructed property will happen only after transfer of the undivided share of land by the landowner by way of sale deed. The Court also observed that the agreement specifically contains a clause to the effect that permissive possession of the developer shall not be construed as delivery of possession in part performance of any agreement to sell under section 53-A of the Transfer of Property Act, 1882 and that JDA contains an obligation that the landowner shall transfer and convey to the developer and / or its nominee(s), the undivided share proportionate to such developer’s share for which completion has been achieved, contemporaneous with the delivery of the landowner’s share by the developer. The Hon’ble Court held that the transfer of ownership from the landowner goes directly to the purchaser of the constructed property and not in favour of the petitioner unless and until the land stands transferred in the name of the Petitioner and hence the same cannot be brought within the ambit of sale.

The Court further held that transferring the development rights does not result in the transfer of ownership rights and the sale of land / transfer of land or undivided share of land would get executed only after the issuance of the completion certificate of the project. Consequently, the services rendered by the petitioner in the execution of JDA prior to the issuance of the completion certificate would thus be amenable to GST.

To conclude, the Hon’ble Court held that the plain reading of the JDA suggests that there are two sets of transactions to be met in its entirety. One is an agreement between the landowner and the petitioner and another is the supply of construction services by the petitioner to the landowners and only thereafter sale of the constructed area to third-party buyers. Both these transactions qualify as ‘supplies ‘and would attract GST subject to clause (b) of paragraph 5 of Schedule II and both these supplies would fall under Section 7 of the GST Act i.e. construction services further read with Entry 5(b) of Schedule II. Under no circumstances can the aforesaid two supplies be termed as the sale of land under Entry 5 of Schedule III. It further held that Notification No.4 of 2018 dated 25th January, 2018 as amended by Notification No.23/2019-Central Tax (Rate), dated 30th September, 2019 does not create a charge on the transfer of development rights but only provides for the time when the tax needs to be paid as the supply of services of transfer of development rights was otherwise always taxable, since the introduction of GST.

91 Veira Electronics (P.) Ltd. vs. State of U.P

[2024] 159 taxmann.com 37 (Allahabad)

Date of Order: 24th January, 2024

The Hon’ble Court refused to entertain a challenge against Notification No. 53/2023-Central Tax dated 2nd November, 2023 on the grounds of discrimination, however, directed the Government to consider including orders passed under section 129 and section 130 in the said notification.

FACTS

The Petitioner challenged Notification No. 53/2023-Central Tax, dated 2nd November, 2023 extending the time limit to file an appeal under section 107 till 31st January, 2024 in certain cases contending that it’s discriminatory for only dealing with the orders passed under sections 73 and 74 and not the orders passed under sections 129 and 130.

HELD

Hon’ble Court refused to issue a writ of mandamus directing the Central Government to include sections 129 and 130 of the Act in the said notification stating that the Government can very well consider adding these two sections in the said notification so that the benefit that has been provided for the orders passed under sections 73 and 74 of the Act can be extended to orders passed under sections 129 and 130 of the Act.

92 Aditri Jewellers vs. Additional Commissioner of CT and GST

[2024] 159 taxmann.com 430 (Orissa)

Date of Order: 30th January 2024

Order passed after 31st March, 2023 allowed the benefit of extended time under Notification No.53/2003-CT dated 21st January, 2023.

The Hon’ble High Court allowed the benefits of Amnesty under Notification No. 53/2023-Central Tax, dated
2nd November, 2023 which extended the time limit to file an appeal under section 107 till 31st January, 2024 in respect of an order passed after 31st March, 2023. The Hon’ble Court relied upon the decision of Hon’ble Patna High Court in the case of Civil Writ Jurisdiction Case No. 17202 of 2023 vide order dated 7th December, 2023.

Note: Readers can also refer to the decision in the case of Nexus Motors (P.) Ltd vs. State of Bihar [2023] 157 taxmann.com 538 (Patna) [30-11-2023].

93 Fairdeal Metals Ltd. vs. Assistant Commissioner of Revenue, State Tax, Bureau of Investigation (NB)

[2024] 159 taxmann.com 158 (Calcutta)

Date of Order: 1st February, 2024

Where the supplier of the assessee was accused of circulating fictitious / bogus Input Tax Credit (ITC) to other parties, however since he had already deposited the said ITC and the assessee was not connected with the allegations levelled against the supplier, the assessee is not held liable for penalty.

FACTS

The petitioner prayed for cancellation of the detention order and subsequent show cause notice and order. The entire proceedings were initiated on the ground that the supplier of the said goods was allegedly involved in receiving and passing on fictitious / bogus ITC to other parties and his company was set up solely for the purpose of circulating bogus ITC. The goods were observed to be of suspicious origin and the purchase was merely a “paper sale” to hide the original supplier with the intention of evading payment of tax. The contention of the department was that the movement of the goods under the cover of such an invalid document is contrary to the provision of section 68(1) of the WBGST Act, 2017, CGST Act, 2017 read with section 20 of the IGST Act, 2017 and Rules framed there under and hence penalty proceedings were initiated. The contention of the petitioner was that he was not supposed to know the antecedents of the Supplier Company.

HELD

The Hon’ble Court noted that though there was an allegation of the non-existence of the supplier company, the input tax credit was already deposited by them before the issuance of the show cause notice to the petitioner. It therefore held that there cannot be said to be an intention to evade the tax. The Court also held that had there been any deficiency on the part of the supplier company to produce relevant documents, registration ought not to have been issued to them. After registration has been issued and tax paid by the supplier company, the allegation made against the supplier company does not stand. The petitioner being in no way connected with any of the allegations that have been levelled against the supplier company, cannot be made liable to pay penalty as has been assessed.

94 Abilities Pistons and Rings Ltd. vs. Additional Commissioner, Circle-2 (Appeal) Commercial Tax

[2024] 159 taxmann.com 326 (Allahabad)

Date of Order: 6th February, 2024

In the case of the import of goods, where the assessee paid IGST @28 per cent but mistakenly missed filling up Part B of the E-Way Bill. Hence mens rea for tax evasion of tax being absent, the order for detention was quashed.

FACTS

In the present case, the goods were imported from China and IGST @ 28 per cent was paid at the time of import. The invoice and the E-Way Bill were accompanying the goods and the description of the goods matched with the invoice. However, Part B of the E-Way Bill was found not filled up at the time of interception. The petitioner filled up particulars in Part B immediately after the interception. In light of the same, the petitioner prayed that intent for evasion of tax was absent.

HELD

The Hon’ble Court allowed the petition and held that there was only technical fault with regard to the non-filling up of Part B of the E-Way Bill, IGST was already paid and no mens rea was present on the part of the petitioner.

Punctuations and Grammar

PUNCTUATIONS AND GRAMMAR

Interpretation of statutes is a work of art and not an exact science. Although we are equipped with a deep legacy of interpretative principles, the derivation of “Intent of legislature” has always been a vexed question. Interpretative skills warrant travelling beyond explicit words to extract the underlying intent. In the process of evolution of a legal word, clause, sentence, sub-section or section, attention is also paid to the punctuation marks in between such sentences to validate the interpretation emerging from the plain wordings. Similarly, the curious question of “AND” being read as “OR” or vice-versa has left many legal luminaries perplexed. The article is an attempt to address both these matters in tandem.

BACKGROUND

The thought about this subject occurred on reading the case of CCE vs. Shapoorji Pallonji1 where the Supreme Court, affirming the decision of the Patna High Court, relied upon punctuation marks to interpret an enactment. The dispute in the case was on the taxability of works contract services rendered to IITs/NITs established under a special enactment of the Government to render educational activities. While there was no dispute on the aspect of Government supervision, the exemption was applicable only if they constituted ‘Governmental Authorities’ under the notification. The definition was first introduced in the exemption notification of 2012 and then underwent a change in 2014, with punctuation playing a critical role in the amendment. The comparison of the unamended and amended definitions is tabulated below:

EXEMPTION NOTIFICATION – 2012 CLARIFICATION NOTIFICATION – 2014
2(s) “governmental authority”’ means a board, or an authority or any other body established with 90% or more participation by way of equity or control by 2(s) “governmental authority” means an authority or a board or any other body;

(i) Set up by an Act of Parliament or a State Legislature; or
Government and set up by an Act of the Parliament or a State Legislature to carry out any function entrusted to a municipality under article 243W of the Constitution; (ii) established by Government,

with 90% or more participation by way of equity or control, to carry out any function entrusted to a municipality under article 243W of the Constitution;

 
1. [2023] 155 taxmann.com 303 (SC) affirming [2016] 67 taxmann.com 218 (Patna)

Naturally, a question emerged whether the phrase “with 90% or more participation…….under article 243W of the Constitution” was applicable to both clauses (i) and (ii) or limited to only clause (ii) of section 2(s). In other words, whether IITs / NITs, which were admittedly set up by an Act of Parliament, were also required to comply with the condition of conducting municipal functions and governed with 90% equity / control. The revenue made out the case that (a) punctuations ought not to be adopted strictly for interpretation of the statute; (b) the phrase “or” should be read as “and” and consequently, the latter part of the definition would apply to both the sub-clauses.

In response, the Patna High Court stated that the phrase “or” is a disjunctive phrase and cannot be read as “and”; hence clause (i) is complete and independent from the latter part of the definition. The Supreme Court affirmed the High Court’s view as follows:

  • The original definition was restricted to only such governmental authorities which satisfied all the three prerequisites of being established under a statute, under 90% control and performing municipal functions of 243W. Because of the unworkability of such a definition, an amendment was introduced to expand its scope. The Court then held that the amendment should not be rendered unproductive by interpreting the amended definition in the same sense;
  • The word “and” or the word “or” are conjunctions with the former being normally conjunctive and the latter being normally disjunctive — unless the terms lead to uncertainty, vagueness or absurdity which warrant alternative interpretation, the law should be read in its ordinary and natural sense without any interchange of words — therefore, clauses (i) and (ii) which are divided by the disjunctive word “or” are independent;
  • Use of semicolon after clause (i) makes the said clause independent and distinct from clause (ii). Clause (ii) on the other hand does not close with a semicolon but with a comma suggesting a continuation of the said clause but this is not so with clause (i). The use of such punctuation was deliberate to overcome the unworkability of the previous definition. Therefore, any interpretation leading to subsistence of the unworkability should be avoided.

One may observe that though punctuations played an important role, the Court has not solely relied upon the use of punctuations. The Court took cognizance of the unworkability of the erstwhile definition and the primary purpose of the amendment. It turned its eye towards the punctuation as a confirmatory note over the intention derived from the amendment. By itself, punctuations could not have been the deciding criteria over the scope of the definition.

It would be interesting to note that the said decision would be binding while analyzing the definition of “governmental authority” as well as “government entity” in the exemption notification for services2 under the GST law. The examination of the said issue can be categorised into three baskets (a) where in many AARs, the semicolon in the said definition was either completely ignored or it was assumed by contending parties that 90 per cent equity / control condition and municipal functions was applicable to both clauses, i.e., governmental authority / entity established under a special Act was required to be subjected to 90 per cent equity / control and performing municipal functions for it fall under the said definition3. The probable reason could be that even if the condition over municipal functions was to be considered as irrelevant as part of the definition of governmental authority / entity, the exemption entry by itself (Entry 3/3A) specified the requirement of the function being part of the constitutional function of Article 243G/W, making such an argument toothless. Moreover, most of the entities performing such municipal functions were under 100 per cent equity / control of the Government and the said condition was inherently satisfied without any ambiguity. (b) In another basket of AARs, where the specific issue was raised, the Patna High Court’s decision was followed and accepted4 by holding that clause (i) of the definition was independent; (c) In the third basket of decisions, it was adversely held that the said matter was under challenge before the Supreme Court and hence, the plain reading ought to be adopted5 — implying that the condition was applicable to both clauses. With this verdict of the Supreme Court, these AARs would need re-consideration and the correct interpretation would have to be applied. The interesting challenge would now arise on the question of binding applicability of such AARs which were rendered on an incorrect premise, especially if the parties to the AAR have not appealed against such decisions. This seemingly settled question would again form fertile ground for litigation under the GST law.

2. Notification 12/2017-CT(R) dated 28th June, 2017
3. RAJASTHAN HOUSING BOARD 2023 (70) G.S.T.L. 95 (A.A.R. - GST - Raj.)
4. NHPC Ltd 2018 (19) G.S.T.L. 349 (A.A.R. - GST)
5. NATIONAL INSTITUTE OF DESIGN 2021 (53) G.S.T.L. 92 (A.A.R. - GST - Guj.); NIRMA UNIVERSITY 2022 (59) G.S.T.L. 437 (A.A.R. - GST - Guj.); National Dairy Development Board [2019] 103 taxmann.com 404 (AAR - GUJARAT)

PURPOSE OF PUNCTUATIONS IN TEXTS

We now turn to the role played by punctuation in English grammar. Punctuation, according to the Oxford Learner’s Dictionary, is defined as “the marks used in writing that divide sentences and phrases”. The Merriam-Webster Dictionary defines punctuation as “the act or practice of inserting standardized marks or signs in written matter to clarify the meaning and separate structural units.” According to the Cambridge Dictionary, the term “punctuation” is defined as “(the use of) special symbols that you add to writing to separate phrases and sentences to show that something is a question, etc.”, and “punctuation is the use of symbols such as full stops or periods, commas, or question marks to divide written words into sentences and clauses”, according to the Collins Dictionary. The role of some punctuations is:

Punctuations Role played
Full stop [.] End of a sentence
Comma [,] Insert a pause into a sentence
Colon [:] Signifies a series or an explanation
Semicolon [;] Indicates two independent clauses
Hyphen [-] Connecting compound words
Parenthesis [( )] Supply further details in a sentence
Apostrophe [‘] Denote some letters omitted
Quotation Marks [“] Denote text speech or words
Ellipsis […] Omission of words or letters, used in quoting texts

It may be noted that the above explanations are not accurate in all circumstances and one may have considered the underlying texture of the sentences rather than directly adopting the above meaning.

IMPORTANCE IN INTERPRETATION OF STATUTES

The golden rule of interpretation (especially in taxing statutes) has always been to interpret the text in simple and literal form without any addition, modification, alteration, etc. Intention of legislation and aids of interpretation should be resorted only in cases of vagueness, absurdity and unworkability. According to GP Singh’s – Principles of Interpretation, in modern statutes, punctuation is a minor element in the construction of a statute and emphasis on punctuation in a carefully punctuated statute should be examined only in cases of doubt.

In a tax case of Shree Durga Distributors vs. State of Karnataka6 the Court was examining whether Dog Feed and Cat Feed were included in the phrase “animal feed” forming part of an entry which read as follows:

“5. Animal feed and feed supplements, namely, processed commodity sold as poultry feed, cattle feed, pig feed, fish feed, fish meal, prawn feed, shrimp feed and feed supplements and mineral mixture concentrates, intended for use as feed supplements including de-oiled cake and wheat bran.”

6. 2007 (212) E.L.T. 12 (S.C.)

The appellant contended that the comma after supplements which specifies a series of products is with reference to “feed supplements” only. The primary term “animal feed” is to be understood in its general sense and ought not to be limited to the list of items following the phrase “feed supplements”. It was contended that there are three parts to this entry (a) animal feed, (b) feed supplements with a list succeeding it, and (c) mineral mixture concentrates. The court refuted the basic premise of the argument by stating that there are only two categories (a) animal feed and feed supplements; (b) mineral mixture concentrates. The first category includes a comma and the word “namely” is applicable to the entire category. The list is exhaustive and since dog / cat feed does not fall into the list, they are not part of the said entry. Moreover, the said entry has two “ands”, with the former completing to the first category and the latter joining the first and second categories.

In another case of the State of Gujarat vs. Reliance Industries7, the Supreme Court examined the significance of commas and full stops in the following section:

“Notwithstanding anything contained in this section, the amount of tax credit in respect of a dealer shall be reduced by the amount of tax calculated at the rate of four percent on the taxable turnover of purchases within the State –

(i) Of taxable goods consigned or dispatched for batch transfer or to his agent outside the State, or

(ii) Of taxable goods which are used as raw materials in the manufacture, or in the packing of goods which are dispatched outside the State in the course of branch transfer or consignment or to his agent outside the State.

(iii) Of fuels used for the manufacture of goods: …”

7. 16 SCC 28 (2017)

In the said facts, a manufacture using fuel was prima-facie covered under both clauses (ii) and (iii), and hence, the revenue claimed that the dealer ought to reverse the input tax credit under both clauses, i.e., twice. The Court analysed all three clauses and observed that the word “or” after clause (ii), makes clause (i) and (ii) as one set and (iii) as a distinct clause. While clauses (i) and (ii) are split by a disjunctive “or” condition, clause (iii) is an independent clause by itself separate from the previous set. Hence, fuels which are used in the manufacture of goods would be subjected to two reversals (4 per cent + 4 per cent), provided the overall reversal does not exceed the input tax credit claim. Here, the court has given due importance to the comma and full stop in clauses (i), (ii) and (iii), respectively. Based on this, it delinked both these clauses from clause (iii) and hence made the same applicable even if the previous clauses were applied.

On the other hand, in the case of Falcon Tyres Ltd vs. State of Karnataka8, the court was examining whether the semicolon after the word “cotton” made the section disjunctive and separate from the main portion. The extract under consideration is below:

“Entry 2 of Second schedule – Agricultural produce including tea, coffee, and cotton.

2(A)(1) ‘agricultural produce or horticultural produce’ shall not include tea, coffee, rubber, cashew, cardamom pepper and cotton; and such produce as has been subjected to any physical, chemical or other process for being made fit for consumption, save mere cleaning, grading, sorting or drying;”

It was contended by the appellant that the semicolon divided the said definition into two parts and the second part was independent and disjunct from the first. Hence, rubber which was though excluded from the first could be included in the second part (being generic in nature) on account of the use of a semicolon. The court rightly rejected the reliance on punctuation on the grounds that the definition was exclusive and “such produce” cannot be meant to include rubber which was otherwise excluded from the definition. In the decisions above, punctuation operated as a guiding factor for courts in interpretation. While words would also take prominence, punctuation only worked as a topping to make the final decision palatable with the intent of the legislature.

8. 6 SCC 530 (2006)

APPLICATION OF ABOVE ANALYSIS

The above brief on punctuation now leads us to live scenarios under GST.

Blocked ITC clause – Section 17(5) is a classic test case to apply the interpretation principles on account of repeated use of punctuation in this long list of blocked credits. As we are aware, the section is an overriding exception to the general rule of allowing input tax credit on all business expenses. The section is exhaustive with semicolons, colons and full stops used in its legislation. Each sub-clause ends with a semicolon except clauses (b), (d) and last clause (i). Whether this observation is of significance may be worth testing.

(5) Notwithstanding anything contained in sub-section (1) of section 16 and subsection (1) of section 18, input tax credit shall not be available in respect of the following, namely:-

(a) Motor Vehicles for transportation of passengers …………..;

(aa) Vessels and aircraft ……………;

(ab) Services of general insurance …………;

(b) the following supply of goods or services or both-

(i) food and beverages, ………. leasing, renting or hiring of motor vehicles, vessels or aircraft referred to in clause (a) or clause (aa) except when used for the purposes specified therein, life insurance and health insurance:

Provided that the input tax credit in respect of such goods or services or both shall be available where an inward supply of such goods or services or both is used by a registered person for making an outward taxable supply of the same category of goods or services or both or as an element of a taxable composite or mixed supply;

(ii) membership of a club, health and fitness centre; and

(iii) travel benefits extended to employees on vacation such as leave or home travel concession:

Provided that the input tax credit in respect of such goods or services or both shall be available, where it is obligatory for an employer to provide the same to its employees under any law for the time being in force.

(c) works contract services when supplied for construction of an immovable property (other than plant and machinery) except where it is an input service for further supply of works contract service;

(d) goods or services or both received by a taxable person for construction of an immovable property (other than plant or machinery) on his own account including when such goods or services or both are used in the course or furtherance of business.

Explanation.––For the purposes of clauses (c) and (d), the expression “construction” includes re-construction, renovation, additions or alterations or repairs, to the extent of capitalisation, to the said immovable property;

(e) goods or services or both on which tax has been paid under section 10;

(f) goods or services or both received by a non-resident taxable person except on goods imported by him;

(fa) goods or services or both received by a taxable person, which are used or intended to be used for activities relating to his obligations under corporate social responsibility referred to in section 135 of the Companies Act, 2013 (18 of 2013);

(g) goods or services or both used for personal consumption;

(h) goods lost, stolen, destroyed, written off or disposed of by way of gift or free samples; and

(i) any tax paid in accordance with the provisions of sections 74, 129 and 130.

Explanation.–– For the purposes of this Chapter and Chapter VI, the expression “plant and machinery” means apparatus, equipment, and machinery fixed to earth by foundation or structural support that are used for making outward supply of goods or services or both and includes such foundation and structural supports but excludes-

(i) land, building or any other civil structures;

(ii) telecommunication towers; and

(iii) pipelines laid outside the factory premises.

Case 1 – Food & beverages clause: At clause (b), one may observe that it is further subdivided into three sub-clauses with a full stop at the end. The first sub-clause of (b) i.e. (i) denies ITC on food and beverages, renting of motor vehicles, etc., and uses the colon punctuation “:” followed by a proviso. The proviso permits, otherwise ineligible, ITC to be claimed if the ITC is used for making an outward supply of the same category of goods or services or as an element of a composite / mixed supply. The question would be whether the proviso which permits ITC is applicable to only clause (b) or even the preceding clauses (a), (aa), (ab). The answer could be simple that the proviso is restricted only to sub-clause (i) of clause (b) and cannot be extended to other clauses. This is purely because each clause ends with a semicolon which signifies that it is independent of the other clauses. The preceding clauses have completed their stipulations by themselves and hence, are not dependent on subsequent clauses for its operation. Moreover, sub-clause (i) of clause (b) ends with a colon and continues into the proviso which subsequently ends with a semicolon, clearly implying that clause (b) is incomplete until the proviso is also considered a part of it. Hence, the benefit of the proviso can be availed only in respect of food, beverages, renting / hiring of motor vehicles if the same are an element of an output supply.

Case 2 – Statutory obligation clause: We can extend this issue to another proviso which succeeds clause (b)(iii). The question of whether the proviso that permits ITC in respect of statutory obligations would extend to all the sub-clauses (i), (ii) and (iii) of clause 17(5)(b) becomes relevant. In other words, whether ITC on canteen facilities which are covered in sub-clause (i) is also eligible if they are provided by factories under a statutory obligation. Applying interpretation principles, an ambiguity over the applicability of the said proviso to clause (b) in its entirety prevails. With the analogy applied in Case 1, the question may seem a difficult issue to address. One may technically state that the benefit of proviso would be restricted only to travel benefits extended by employers to its employees. Fortunately, the CBIC Circular No 172/04/2022-GST9 has stepped in to resolve this conflict and highlighted the true intention of the GST council. It was clarified that the intent of inserting the proviso to 17(5)(b) was to make it applicable to all scenarios of section 17(5)(b) including canteen and rent-a-cab services and not merely restricted to the third clause.

9. dated 6th July, 2022

Case 3 – Immovable Property clause: A very interesting facet arises when we read clauses (c) and (d). Both clauses attempt to restrict input tax credit on construction of immovable property other than plant and / or machinery. While clause (c) permits input tax credit on construction for “plant and machinery”, clause (d) permits such input tax credit when used for “plant or machinery”. The explanation to the said section defines “plant and machinery” and not “plant or machinery”. Naturally, the question arises whether the definition of plant and machinery could be adopted for the phrase plant or machinery.

We may analyse the explanation of the term “plant and machinery” in greater detail to unearth the intent of defining such a phrase. It is apparent, the said phrase has been used in the context of construction activity involving capitalisation to an immovable property. Therefore, the terms “plant and machinery” or “plant or machinery” prima-facie fall under the overall umbrella of “capital goods” as defined under the GST law — i.e., goods which are capitalised in the books of accounts of the assessee. Then why did the legislature choose to define the phrase “plant and machinery” and not “plant or machinery” when both are towards a similar objective? The legislature is always presumed to lay down the law in the most efficient and crisp manner without the use of any futile words unless there is strong necessity / evidence to the contrary. This settled principle provokes the idea that “plant and machinery” is to be treated distinctly from “capital goods”.

The starting point to assess this difference would be to search for such phrases at other instances in the statute and assess such interchangeability. Take, for example, section 18(6) which provides for the reversal of ITC or payment of output tax on supply of “capital goods or plant and machinery”. Noticeably, the legislature has used the phrases “capital goods” and “plant and machinery” in proximity to each other, interjecting a disjunctive word, indicating separate meanings to be assigned to each phrase even though plant and machinery prima-facie appears to be a sub-set of capital goods.

What does this possibly mean? While it is difficult to assign a definitive reason, an answer could be obtained by a comparison of definitions of “capital goods” and “plant and machinery”. Capital goods are defined to mean goods: implying movable property, but “plant and machinery” has been defined to mean equipment, apparatus, etc., which are “fixed to the earth by foundational or structural support”. There would be scenarios where capital goods procured as movables but by way of affixation to the immovable property (such as construction of buildings, etc.) lose their character as movables and become part of an overall immovable property on account of the permanent fixation to earth. The immovable property emerging from the usage of movables would then fall outside the definition of capital goods. Because of losing their character as goods after fixation to earth, it was necessary for the legislature to use a separate phrase alongside capital goods in various instances so that the same treatment could be accorded to such goods akin to movable capital goods. In the absence of any explanation, one could possibly have claimed that the equipment’s on fixation would lose their character of goods and hence, fall outside the definition of “capital goods” even though they are capitalised. This mischief has now been addressed by adding an explanation for the purpose of the entire chapter.

One may recollect the legacy of litigation around the immovability of machinery, equipment, etc., under the Central Excise as well as the Cenvat Rules. Under the Central Excise regime, we have had decisions of assembly / installation of plant and machinery at the site leading to an immovable property on account of the manner and intent of affixation with the land. The apex court’s decision of Sirpur Paper Mills, Triveni Engineering & Indus. Ltd, Solid & Correct Engineering Works, etc., have developed the principles of permanent fixation, cannibalization, for testing the immovability of plant and machinery10. Under the Cenvat Credit Rules, the decisions of Vodafone India Ltd; Indus Towers Limited; Vodafone Essar South Ltd11 have examined whether telecommunication towers which were installed qualified as inputs or capital goods for availment of CENVAT pursuant to installation on an immovable property. On similar lines, decisions in ICL Sugars Limited, SLR Steels, Pipavav Shipyard, etc12 have examined the eligibility of CENVAT of storage tanks, pollution control equipment and overhead cranes based on immovability principles. We also had Tribunal decisions of eligibility of CENVAT in Vandana Global Ltd, Reliance Gas Transportation Infrastructure Ltd13 on foundational support, pipelines, etc., rendered on the principles of immovability. These decisions compelled the legislature to bridge the gap between movables, retaining their characteristics as movable after its usage and movables which lose their characteristics as movables when forming part of immovable property. This gap was bridged by way of this explanation which focuses on such hybrid items which may be movables at the time of receipt / availment but have an end use for business as immovables. Thus, an explanation has been added for the purpose of the entire Chapter of Input tax Credit stating that apparatus, equipment and machinery fixed to the earth either by structural or foundational support would be coined by a specific term “Plant and machinery”. In contradistinction to the phrase “capital goods” which has its emphasis on goods, the emphasis of the term “plant and machinery” has been on the fixation of such goods (a.k.a. capital goods) to the earth and forming part of immovable property. In loose terms, “plant and machinery” is a specified term attributed to those capital goods which are not immovable property, assigning it a distinct identity.

10. 1998 (97) E.L.T. 3 (S.C.); 2000 (120) E.L.T. 273 (S.C.); 2004 (167) E.L.T. 501 (S.C.); 2010 (252) E.L.T. 481 (S.C.)
11. 2015 (40) S.T.R. 422 (Bom.); 2016 (45) S.T.R. J55 (Del.);
12. 2011 (271) E.L.T. 360 (Kar.); 2012 (280) E.L.T. 176 (Kar.); (2023) 4 Centax 246 (Guj.); 
13. 2010 (253) E.L.T. 440 (Tri. - LB) reversed in 2018 (16) G.S.T.L. 462 (Chhattisgarh); 2016 (45) S.T.R. 286 (Tri. - Mumbai)

This theory also fits well while analysing section 29(5) & Rule 40 which uses the phrase “goods held in stock or capital goods or plant and machinery”, again bearing proximity with each other. Explanation to Chapter V of the GST Rules which read as follows:

“Explanation. — For the purposes of this Chapter, –

(1) the expressions ‘capital goods’ shall include ‘plant and machinery’ as defined in the Explanation to section 17”

The explanation specifically includes “plant and machinery” as defined in the explanation to section 17 for the purpose of the availment / reversal of ITC under the GST law. Noticeably, this section has distinguished between “Plant and machinery” and “Plant or machinery”.

Implanting this analysis to section 17(5)(c) and (d) would lead to a better appreciation of the intent of the legislature. One may observe that both phrases are used in parenthesis alongside the construction of an immovable property. We have just understood above that “plant and machinery” refers to those equipment which are affixed as immovable property and “plant or machinery” has no such prescription. On careful consideration, one can note that section 17(5)(c) blocks ITC vis-à-vis the service activity of works contract which results in an immovable property except when such service activity is an input service for outward works contract service. The emphasis is on blockage of the ITC on works contract service resulting in an immovable property. What is delivered by the supplier on rendition of a works contract service is an immovable property. The parenthesis alongside immovable property excludes all “plant and machinery” which fall under the explanation, i.e., fixed to the earth by structural or foundational support and acquire the character of being an immovable property (per settled central excise, cenvat principles). Though they may have been movable at the time of rendition of works contract service and brought to site for installation as immovable property, they form part of immovable property and can avail the benefit of exclusion from
blocked ITC. Typically, turnkey and composite works contract arrangements, where the supply and installation are also performed by the contractor, fall under this clause.

ITC restriction under section 17(5)(d), on the other hand, is not with reference to an act of supply but on the condition of receipt of goods or services which are not forming part of any works contract activity. This is attempted to block ITC where the taxpayer assimilates all goods and services under vivisected arrangements (rather than a composite works contract / turnkey arrangements) with the end use of construction of an immovable property. Since the prescription is with reference to state in which the “goods are received” (in movable form) and then installed on own account by the taxpayer or under separate service contracts, the legislature in its wisdom thought that the general phrase “plant” or “machinery” is more apt rather than specific definition “plant and machinery” under explanation to section 17(5). Implying that the words “plant” or “machinery” needs to be assessed in its generic sense independently at the point of receipt (say factory gate) and the use into an immovable property becomes an event subsequent. While both would be capitalised to the immovable property, the former clause is indicative of turnkey contracts and the latter clause is indicative of vivisected contracts where goods and services are received to the account of the taxpayer and the taxpayer then performs/ assigns the installation separately. Thus, goods or services when procured independently and movable at the time of receipt with subsequent use for construction of immovable property — towards “plant” or “machinery”, may fall outside the scope of section 17(5)(d) even if they are capitalised to immovable property. This convoluted analogy would not hold goods for availment of composite works contract services for “plant and machinery” as buildings, telecommunication towers, pipelines are specifically excluded from the said phrase under plant and machinery.

To summarise, the phrase “plant and machinery” is a specific nomenclature used for hybrid goods which on fixation to earth form an immovable property. They are not necessarily plant and machinery used in its general sense but must be understood strictly based on the explanation. However, “plant” or “machinery” are two distinct words divided by a term “or” which has not been defined in the Act and must be understood independently in its generic sense. Trade parlance use of the word “plant” or even “machinery” would assist in claiming an exclusion from ITC blocked credit under section 17(5)(d). One may tabulate this understanding further:

Term Understanding ITC Testing Condition Installation
Plant and machinery One consolidated phrase bearing a specific nomenclature and well-defined Vis-à-vis receipt of works contract services Part of composite supply of immovable property Equipment, apparatus, etc. fixed to earth
Plant or machinery Generic sense in terms of trade usage with both terms being independent of each other Vis-à-vis at point of receipt of goods / services Goods and services separately received as movables but subsequently used towards immovable property on own account No specific condition as regards manner of fixation

The tabulation indicates that the words “and” and “or” and their interchangeability is not the moot issue here. Rather the moot issue for examination is the entire phrase “plant and machinery” and its applicability to section 17(5)(c)/(d). Had the intent of the legislature been to apply the same meaning, it would have implanted the said phrase in entirety in section 17(5)(d) as well. However, having chosen to adopt a separate phrase on account of past experiences due importance ought to be given to such distinction.

So where does this seemingly zealous interpretation lead to!!! Can the matter of ITC on shopping malls in the case of Safari Retreats14 which is currently pending before the Supreme Court be examined from this perspective? Similarly, whether hotels, cold storages, cinema theatres, etc. which are aggrieved by substantial ITC blockage, claim that the building is a “plant” in a generic sense used for the purpose of business to generate income and hence eligible for ITC credit as part of the exclusion in section 17(5)(d), even-though they are primarily civil constructions and otherwise barred from availment of ITC?

14 2019 (25) G.S.T.L. 341 (Ori.)

In the context of depreciation under income tax we are aware the term “plant” was given a wide import and not just limited to equipment or apparatus which are mechanical or industrial in nature, but also include all goods used by a businessman for the purpose of carrying on his business. We have had cases where anything which facilitates trade or business (apart from stock in trade) or a “tool in trade” was considered as plant irrespective of it being fixed or movable, mechanical or electrical. Income tax law has adopted the “trade parlance” and “functional test” to decide whether an object is a “building” or “plant” or “machinery” i.e., merely a shelter or a tool of running business.

We have the famous case of Taj Mahal Hotels15, where the Court examined whether hotel installations (such as pipelines, electricals, etc.) are plant for the purpose of claim of development rebate (akin to accelerated depreciation). The court affirmed the taxpayers position holding that wide import to the plant would include such installations within its ambit. Subsequently in Anand Theatres16, the court, distinguishing Taj Mahal Hotels, refuted the claim that cinema buildings are plants even though they may be purpose-built. Yet, we have decisions w.r.t. to cold storages in Shree Gopikishan Industries (P.) Ltd. and subsequently in Shri Soneshware Cold Storage17 which distinguished the Anand Theatres decision to hold that from a functionality perspective, a cold storage would be more appropriately classifiable as a plant rather than a mere building. However, in Geetha Hotels P Ltd18, the old principle of Taj Mahal hotels (despite the decision of Anand Theatres) was applied to grant the benefit to the extent of fittings and fixtures which have been installed on the hotel premises. To summarise, we have the case of Navodaya19 where the Tribunal members visited the premises involving a film studio with specialised floorings and equipment and held it to constitute a plant based on the following principles:

  • Functional test is a decisive test.

An item which falls within the category of building cannot be considered to be a plant. Buildings with particular specifications for atmospheric control like moisture or temperature are not plants.

  • In order to find out as to whether a particular item is a plant or not, the meaning which is available in the popular sense, i.e., the people conversant with the subject-matter would attribute to it, has to be taken.
  • The term “plant” would include any article or object, fixed or movable, live or dead, used by a businessman for carrying on his business and it is not necessarily confined to any apparatus which is used for mechanical operations or process or is employed in mechanical or industrial business. The article must have some degree of durability.
  • The building in which the business is carried on cannot be considered to be a plant.
  • The item should be used as a tool of the trade with which the business is carried on. For that purpose, the operations it performs have to be examined.
15. (1971) 82 ITR 44 (SC)
16. 
17. [2003] 131 Taxman 729 (Calcutta) & [2015] 56 taxmann.com 433 (Gujarat)
18. (2000) 243 ITR 192 (SC) 
19. [2016] 67 taxmann.com 180 (SC) affirming [2004] 271 ITR 173/135 Taxman 258 (Ker.)

We, thus, have a see-saw of decisions on this aspect and evidently the functionality of the building would tilt the bar to either side. Yet, one should not lose sight of the contextual setting in which these decisions were rendered under the income tax law vis-à-vis the current subject in hand. There may arise some reluctance to equate these contexts as depreciation was a mandatory requirement under the income tax law but input tax credit is statutory concession of sorts and subjected to legislative discretion. Deriving legislative intent would be a slightly challenging task for taxpayers and courts when it involves external aids of interpretation. Certainly, this would be an emerging area of study and the course taken by the Supreme Court in the Safari retreat’s case would be an interesting wait.

The ultimate takeaway from this analysis would be to recognise the importance of punctuation and grammar very contextually. Alternative interpretational permutations involving punctuation would have to be tested to arrive at the “better interpretation” for the situation. Each alternative would have to be viewed in an unbiased manner and the holistic result should be foreseen prior to concluding the legal position.

Section 43B(h) – The Provisions And Debatable Issues

BACKGROUND

Micro and Small enterprises’ role in developing a country like India is significant. It generates employment opportunities, and rural growth is mainly because of micro and small enterprises. Like all business entities, micro and small enterprises also have various problems. Central and State Governments have always given support and multiple incentives for the growth of micro and small enterprises. Shortage of working capital and effective utilisation of available working capital are two significant problems that micro and small enterprises face. To overcome such a situation, the Government and RBI have provided guidelines for cheap and sufficient working capital finance to micro and small enterprises. However, many micro and small enterprises suffer acute working capital shortages due to delayed payments by buyers of goods and services. Several representations were made to the State and Central Governments for bringing a law to make timely payments to Micro and Small Enterprises mandatory. The Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) was enacted to give relief to such units. Provision was introduced in said Act for payment of interest on delayed payments, and such interest was not allowable as a deduction under the Income Tax Act. Further, statutory auditors of companies were asked to provide an ageing analysis of trade payables to Micro and Small Enterprises. However, such measures did not yield the desired result. Hence, the Honourable Finance Minister introduced section 43B(h) in the Income Tax Act, 1961 through Finance Bill, 2023, to disallow expenses in case of delayed payments to micro and small enterprises. It may be noted that the provisions in section 43B(h) apply only to micro and small enterprises and not medium enterprises. Hence, the discussion in this article is restricted to Micro and Small Enterprises only unless expressly referred to as Medium Enterprises. At present, it is the most debated and burning topic for all assessees engaged in business, and hence, it is necessary to understand the provisions of section 43B(h) of the Income Tax Act, 1961 and to see what are the debatable issues in the said provision.

SECTION 43B(h) OF THE INCOME TAX ACT:

It is necessary first to read the provisions of section 43B(h); hence, the section is reproduced below:

S. 43B. Certain deductions are to be only on actual payment. — Notwithstanding anything contained in any other provision of this Act, a deduction otherwise allowable under this Act in respect of—

(h) any sum payable by the assessee to a micro or small enterprise beyond the time limit specified in section 15 of the Micro, Small and Medium Enterprises Development Act, 2006 (27 of 2006) shall be allowed (irrespective of the previous year in which the liability to pay such sum was incurred by the assessee according to the method of accounting regularly employed by him) only in computing the income referred to in section 28 of that previous year in which such sum is actually paid by him:

It is to be noted that this subsection starts with the words “Notwithstanding anything contained in any other provisions of this Act”. Hence, this is a non-obstante clause, overriding other law provisions.

PROVISIONS OF THE MSME ACT, 2006 RELEVANT TO SECTION 43B(H) OF THE INCOME TAX ACT:

The following terms in the MSMED Act, 2006 are relevant for the correct interpretation of provisions of section 43B(h).

  • Micro enterprise — section 2 (h):

“micro-enterprise” means an enterprise classified as such under sub-clause (i) of clause (a) or sub-clause (i) of clause (b) of sub-section (1) of section 7;

(so we should know what is provided in sub-clause (i) of clause (a) or sub-clause (i) of clause (b) of sub-section (1) of section 7).

  • Small enterprise — Section 2 (m):

“small enterprise” means an enterprise classified as such under sub-clause (ii) of clause (a) or sub-clause (ii) of clause (b) of sub-section (1) of section 7;

CLASSIFICATION OF ENTERPRISES UNDER THE MSME ACT, 2006

The MINISTRY OF MICRO, SMALL AND MEDIUM ENTERPRISES vide notification dated 1st July, 2020, which is applicable from 1st July, 2020, has classified an enterprise as a micro, small or medium enterprise on the basis of the following criteria:

Composite Criteria Investment in Plant & Machinery or Equipment Turnover
Micro Does not exceed ₹1 crore Does not exceed ₹5 crores
Small Above ₹1 crore but does not exceed ₹10 crores Above ₹5 Crores but does not exceed ₹50 crores
Medium Above ₹10 crores but does not exceed ₹50 crores Above ₹50 crores but does not exceed ₹250 crores

It is to be noted that both the conditions are simultaneous as the word “and” is coming between “Investment in Plant and Machinery or equipment” and “Turnover”. It is clarified by Explanation 1 to 7(1) of the MSMED Act that in calculating the value of an investment in plant and machinery or equipment, one has to see WDV as per the Income-tax Act of earlier year and plant and machinery does not include land, building, furniture fixtures, office equipment, vehicles like car, two-wheelers, computers, laptops, the cost of pollution control, research and development, industrial safety devices and such other items as may be specified, by notification.

In the same manner for calculating turnover, you have to exclude export turnover.

(b) The sum payable means when the sum becomes payable or due, which is prescribed in section 15 of the MSME Act, 2006, which is summarised as under.

 

It is important to note that the written agreement includes credit terms mentioned in any manner, either in the agreement or Purchase order or on the invoice or by any other mode of communication in writing like email or letter etc.

(c) Now let us understand what the day of acceptance or deemed acceptance.

(i) “The day of acceptance” means—

• the day of the actual delivery of goods or the rendering of services; or

• where any objection is made in writing by the buyer regarding the acceptance of goods or services within fifteen days or up to a maximum of forty-five days, as the case may be from the day of the delivery of goods or the rendering of services, the day on which the supplier removes such objection;

(ii) “the day of deemed acceptance” means where no objection is made in writing by the buyer regarding acceptance of goods or services within fifteen days or up to a maximum of forty-five days, as the case may be, from the day of the delivery of goods or the rendering of services, the day of the actual delivery of goods or the rendering of services;

Above is the understanding of the applicability of section 43B(h) of the Income-tax Act, 1961, read with relevant MSME Act, 2006 provisions. Now, let us discuss some debatable issues.

DEBATABLE ISSUES:

SR. NO. DEBATABLE ISSUE / MATTER AUTHOR’S VIEWS
1 Whether the amount payable from a trader for purchase of goods or services would be covered u/s 43B(h)? Section 43B(h) says “any sum payable by the assessee to a micro or small enterprise” and if we see the definition of enterprise as per section 2 (e) of MSME Act, 2006, it includes an industrial undertaking engaged in the manufacture or production of goods or
engaged in providing or rendering of service or services. In view of the above definition of enterprise, it does not include trader and hence, the amount payable to trader is not covered u/s 43B(h) of Income-tax Act, 1961. A contrary opinion is that since the definition of supplier includes trader of specific nature, section 43B(h) would be applicable to trader who is buying goods from micro and small enterprises. However, in the author’s view, as section 43B(h) talks about amount payable to Micro or Small Enterprise and as enterprise does not include trader, the purchase of goods from trader will not be covered u/s 43B(h) of Income-tax Act,1961. Moreover, as per Para 2 of Office Memorandum: No. 5/2(2)/2020/E/P&G/POLICY dated 2nd July, 2021 issued by the Central Government, it has been clarified that “The Government has received various representations, and it has been decided to include Retail and wholesale trades as MSMEs and they are allowed to be registered on Udyam Registration Portal. However, benefits to Retail and Wholesale trade MSMEs are to be restricted to Priority Sector Lending only.” Central Government’s office memorandum ¼(1)/2021— P&G Policy, dated 1st September 2021, further clarifies that “the benefit to Retail and wholesale trade MSMEs are restricted up to priority sector landing only and other benefit, including provisions of delayed payment as per MSMED Act, 2006, are excluded”.
2 Would opening balance on 1st April, 2023 remaining unpaid on 31st March, 2024 attract section 43B(h)? In the author’s opinion, provisions of section 43B(h) would not be attracted to the opening balance as on
1st April, 2023, as section 43B(h) is for disallowance of the expense of the relevant previous year and in case of opening balance as on 1st April, 2023; the same is for expense debited in FY 2022–23 or earlier year/s and not in FY 2023–24 which is the year from which the said section 43B(h) is applicable and hence, for expense debited in year(s) before FY 2023–24, section 43B(h) would not be applicable.
3 If the amount for purchase of goods or taking services from micro or small enterprise is outstanding as at the year-end in the books of micro or small enterprise beyond the due date, is the amount disallowable u/s 43B(h)? There is no exception to the applicability of section 43B(h) to Micro and Small Enterprises; hence, in this case, the amount would be disallowed u/s. 43B(h). All paying entities, including Micro and Small Enterprises, are covered. Here, it will be against the objective of bringing this provision into law, i.e., Socio-economic benefit to Micro and Small Enterprises,  but till any amendment is made in the law, as per current provisions, it would apply to buyers who themselves are Micro and Small Enterprises.
4 Whether GST is to be included in purchases or expenses for services for disallowance u/s 43B(h)? Where input credit of GST is claimed, and purchase or expense for services is debited net of GST, it will be disallowed without GST as the expense is debited net of GST. However, where GST input credit is not available for any reason, then, in such cases, disallowance would be with GST as expense or purchase would have been debited inclusive of GST. Where the exempt and taxable sale is mixed and proportionate GST credit is taken, the purchase or expense of services will be disallowed, including GST, to the extent of input GST not claimed, disallowed, or reversed.
5 If goods or services are purchased from unregistered Micro and Small Enterprise, will provisions of section 43B(h) apply to such transactions? Para 2 of the Notification provides that any person who intends to establish a Micro, Small or Medium Enterprise may file Udyam Registration online on the Udyam Registration portal based on self-declaration with no requirement to upload documents, papers, certificates, or proof. The word ‘may’, used in the Notification, indicates that an enterprise does not need to get registered to establish itself as an MSME. However, Section 43B(h) mentions Section 15 of the MSMED  Act, which talks about the delay in payment to a ‘supplier’. Section 2(n) defines “supplier” to mean a micro or small enterprise that has filed a memorandum with authority referred to in Section 8(1) (i.e., Udyam Registration). So, without registration on the Udyam Portal, Section 15 of the MSMED Act may not be invoked for disallowance under Section 43B(h) of the Income-tax Act. Further, it is practically impossible for any buyer to determine whether a particular entity is Micro and Small Enterprises. In such circumstances, the only feasible method to conclude the supplier’s classification is to refer to his Udyam registration. Based on this, if the entity is a trader or a medium enterprise, one can ignore it; if it is not, one can take the information for calculating the disallowance.
6 Is the disallowance under Section 43B applicable if supplies are made before obtaining Udyam registration? Section 43B(h) will not apply with respect to payments for supplies made before the date of Udyam Registration. In such a case, the supplier would be regarded as a micro-enterprise or small enterprise only from the date of obtaining such registration, as Udyam Registration does not operate retrospectively. As per the MSMED Act,
registration is not mandatory, but as per the definition of supplier, it is compulsory to file a memorandum, and hence, instead of the date of registration, the most recent date of submission of the memorandum could be considered.
7 Can the information received in one year, say FY 2023–24, about registration as an MSME, be considered permanent and applicable forever? No. Each year, the status may change due to changes like business or investment in plant and machinery or turnover; hence, every year, information on the status of registration of micro or small enterprises must be verified. The registration needs to be renewed every year.
8 Will 43B(h) apply to an entity following the cash method of accounting? Since there would be no amount outstanding at the year-end in the books of account of creditors where the cash method of accounting is followed, provisions of section 43B(h) will not be applicable.
9 Does Section 43B(h) apply with respect to the amounts due towards the purchase of Capital Goods? Section 43B applies to sums payable in respect of which a deduction is otherwise allowable under this Act. Therefore, Section 43B(h) would apply to amounts payable to micro or small enterprises with respect to the purchase of capital goods for which a 100 per cent deduction is admissible under Sections 30 to 36. For example, the deduction of 100 per cent of capital expenditure under Section 35AD and the deduction of 100 per cent of capital expenditure on scientific research under Section. If a 100 per cent deduction of capital expenditure is not allowable, there would be no disallowance with respect to depreciation on capital goods purchased if the MSE supplier of capital goods is not paid in time. This is because depreciation is not a “sum payable in respect of which deduction is otherwise  allowable”, and depreciation is not
an expense but an allowance different from an expense. What can be disallowed under Section 43B(h) must have the character of a sum payable in respect of which deduction is otherwise allowable. The Courts had taken the view that depreciation cannot be disallowed on the cost of the asset, which was capitalised in books of account, but tax thereon was not deducted under Section 40(a)(i)/(ia) of the Act. Refer Lemnisk (P.) Ltd. vs. Dy. CIT [2022] 141 taxmann.com195 (Bangalore – Trib.). The same stand is taken for disallowance under section 40A(3) prior to its amendment, where it is mentioned explicitly that proportionate depreciation will be disallowed for breach of section 40A(3). As no such reference to disallowance of depreciation is available in 43B(h), one can take the stand that the same is not disallowable u/s 43B(h).
10 Is disallowance attracted if the assessee opts for a presumptive taxation scheme under Section 44AD, Section 44ADA, Section 44AE, etc.? Section 43B(h) begins with a non-obstante clause “notwithstanding anything contained in any other provision of this Act”. Therefore, Section 43B apparently overrides all provisions of the Act, including presumptive taxation under Section 44AD, Section 44ADA, Section 44AE, Section 44BBB and Section 115VA (Tonnage Tax). However, Sections 44AD, 44ADA, 44AE, 44BBB and 115VA also begin with non-obstante clauses as ‘Notwithstanding anything to the contrary contained in Sections 28 to 43C,…….’ Therefore, Section 43B(h) overrides all other provisions of the Act except Sections 44AD, 44AE, 44ADA, 44BBB and 115VA. Thus, Section 43B(h) will not apply to eligible assessee-buyers
who opt for presumptive taxation under Sections 44AD, 44AE, 44ADA, 44BBB or 115VA. When two non-obstante clauses are there, which clause will prevail over the other is an issue. Here, courts have also held that specific will prevail over general in such circumstances. In this case, provisions of section 44AD, 44ADA, 44AE, etc, are specific for particular businesses and provisions of section 43B(h) are generally applicable to all entities; in the author’s view, the specific will prevail over the general.
11 Would disallowance be attracted if provisions are made instead of crediting individual accounts of the trade creditors / suppliers? Provisions represent sums payable in respect of which deduction is otherwise allowable under Section 37(1). Therefore, they would fall within the ambit of Section 43B(h) irrespective of whether the same is credited to the creditor’s individual account or to a common “payable account” or “provisions account” by whatever nomenclature called. What is relevant is the booking of the expense and non-payment or delayed payment to the micro and small enterprise for purchasing goods or taking services.
12 Can disallowance under Section 43B(h) be made while computing book profit for MAT purposes? Section 43B(h) is applicable for calculating a company’s taxable business profits in regular assessment under the Act. It is not applicable for calculating Minimum Alternate Tax under Section 115JB of the Act.
13 What if any charitable trust is not making payment or is making a delayed payment to an MSME? Are such delayed or non-payments disallowable under section 43B(h)? As the income of a charitable trust is governed by section 11 to section 13 and is not taxable under the head business and profession, section  43B(h) does not apply to such a trust since, in the case of a trust, there is no allowance of expense. There is the application of income, which is reduced from the income
(donations). Unlike the applicability of sections 40A(3) and 40a(ia), which has been provided for in section 11, there is no provision in section 11 for treating such amount as non-application of income where provisions of section 43B(h) are applicable.
14 How does one compute investment in plant and machinery and turnover in the first year of operations? It is considered based on a declaration made by the enterprise on its own.
15 If the provision for expenses made on year-end is not paid on the due date, i.e., within 15 days or up to 45 days as specified in section 15 of the MSMED Act, will the said expenses be subject to disallowance u/s 43B(h)? In any business, provisions for certain expenses are made on the last date of the year to match the accrual concept of accounting. Where provision for expense is created like audit fees, legal fees, etc., then in the Author’s view, Section 43B(h) will not apply because payment as per Section 15 of the MSMED Act is to be made within the specified time after acceptance of services or goods. In such cases, payment will be made only after the services are rendered. For example, audit fees would become due for payment only after the audit is done, and therefore, such sum will not be hit by Section 15 of the MSMED Act till the services are rendered. Once the services have been rendered, payment must be made within the time limit from the date of rendering of services.
16 When part payment is made on or before the due date, would the entire expense be disallowed, or will only part of the amount not paid be disallowed? In the Author’s view, if part of the amount is paid on or before the due date, said part would be an allowable expense. The other part, if paid after year-end and if paid late or not paid on or before the due date under MSMED Act, shall be disallowed u/s 43B(h).
17 There is no agreement between the buyer and seller, but the seller, in its invoice, mentioned that the credit allowed is 15 days. Can this be treated as an agreement? Yes, if any written communication, whether on the invoice or through the purchase order, email, or letter, is exchanged between the two parties, then the
same could be treated as an agreement.
18 If an entity is engaged in trading and service providing or manufacturing and trading, will it be treated as an enterprise? One has to see the major activity, and if that activity falls into manufacturing and service, it will be treated as an enterprise. If significant activity is trading, it would not be treated as an enterprise.
19 Whether a proprietorship concern is treated as an enterprise? The definition of “enterprise” states that for an entity to be treated as an enterprise, it should be registered. If a proprietary concern is registered under the MSMED Act under the proprietor’s PAN, then the same will be treated as a registered entity and as an enterprise.
20 If one proprietor has more than one proprietorship concern, can all of them be treated as enterprises eligible as micro or small? In such a scenario, the turnover of all concerns should be calculated together. It has to be established that the major activity is manufacturing and/or service. The criteria of investment and turnover are per requirement for micro or small enterprises, and the proprietor has PAN. Then, one can decide whether such a proprietor is a micro or small enterprise.
21 Can retention money withheld by a buyer and outstanding at the year-end beyond the time limit prescribed u/s 15 of MSMED Act be disallowed u/s 43B(h)? As such, retention money is withheld as per contract and is to be paid after a certain period to fulfil certain conditions. So, it is a security deposit given out of payment received (deemed receipt); hence, retention money is not claimed as an expense, and therefore, it ought not to be disallowed u/s 43B(h) of the Act.
22 If a creditor is registered as a Micro or Small Enterprise on, say,
1st October, 2023, the purchase of goods prior to 1st October, 2023
and remaining unpaid as of
31st March, 2024 will be subject to disallowance u/s 43B(h)?		 Since registration is mandatory, any purchases prior to registration shall not be subject to disallowance u/s 43B(h). As mentioned earlier, at the most, one could consider the date of filing the Memorandum (application for registration) for the purpose of disallowance rather than the date of registration as in the
definition of supplier u/s 15 of MSMED Act, the supplier is defined as the one that has filed a Memorandum.
23 If adjustment entry is passed for receivable against the sale of goods as payment by debiting the creditor account, is it treated as payment for 43B(h)? In the Author’s view, yes, as in section 43B(h), unlike 40A(3), there is no mention of the mode of payment in a specific manner, and in the case of 40A(3) also, it is treated as valid by rule 6DD.
24 Will payments made after the year-end (31st March) but before the due date of filing the return of income be allowed as a deduction? If the payment is made after the year-end (say, 31st March, 2024) but before the due date of filing the return of income, it will be allowed only in the next year, i.e., the year of payment (Y.E. 31st March, 2025) and not the year in which the expenses are incurred. In this respect, this provision differs from other provisions of section 43B.
25 Would delayed payments (beyond the time limit prescribed under the MSMED Act) to any micro and small enterprise within the Financial Year attract disallowance under section 43B(h)? No. The disallowance under section 43B(h) will be attracted only regarding the delayed payment to a micro and small enterprise, which has remained outstanding at the year’s end (i.e., 31st March).

5. CONCLUSION:

Efforts have been made to analyse all the provisions of section 43B(h) of the Income Tax Act, 1961, keeping in mind provisions of the MSMED Act, 2006 and to consider as many issues as may arise in calculating disallowance u/s 43B(h) while preparing statement of income, showing disallowance u/s 43B(h) in form 3CD and assessment/appellate proceedings. With the passage of time, there will likely be protracted litigation revolving around the interpretation and application of this provision since the impact of tax liability on account of disallowance may be more than taxable income without such disallowance. All assessees, professional bodies, etc., expect a notification from CBDT to clarify various debatable issues to reduce litigation and for better understanding. In the author’s opinion, for compliance with any law, shelter of the Income Tax Act should not be taken all the time. It is nothing but a breach of the real income principle. In some cases, tax liabilities are so high that they bring the business of the assessee to an end which is not the objective of the Government. The government cannot help or support MSMEs to grow at the cost of survival of all other types of enterprises, including MSMEs themselves, as they too may be subjected to disallowance u/s 43B(h) of the Income-tax Act, 1961, if they fail to pay within the timeframe for goods or services bought from other MSME.

NFRA Digest

(Editorial Note: Given the increasingly important role played by NFRA in the context of auditing, BCA Journal will be continuing with reporting on NFRA developments. In February 2024, an article was published on the 5 NFRA inspection reports of 2023. This new feature titled NFRA Digest will cover orders, reports, circulars, notifications, rules, inspection reports, discussion papers, etc. BCAJ will cover some of these developments affecting the profession of audit with a view that members and readers can learn from these developments. The aim is to enable members to improve their audit processes and reduce their audit risk by improving quality and governance frameworks mandated by applicable standards and regulatory expectations. In this context, we are pleased to bring this new feature NFRA Digest to our readers, covering NFRA updates. This first few NFRA Digests will carry a condensed coverage of past NFRA publications to bring readers up to speed till December 2023.)

BACKGROUND ABOUT NFRA, ITS POWERS AND DOMAIN

The National Financial Reporting Authority (“NFRA”), constituted on 1st October, 2018 by the Government of India under section 132(1) of the Companies Act, 2013 (“the Act”), is an independent regulator set up to oversee the auditing profession and the Indian Accounting Standards (“Ind AS”) under the Act. Though this section was enacted with the rest of the Act, it was ultimately notified only in 2018, after the PNB scam came to light. NFRA’s functions are laid down by sub-section 2 of section 132 covering:

a. Making recommendations to the Central Government on the formulation and laying down of accounting and auditing policies and standards for adoption by companies or their auditors. Accounting and auditing standards are now to be prescribed by Rules made under the Act by the Central Government, based on the recommendations of the ICAI, in consultation with and after examination of the recommendations of the NFRA;

b. Monitoring and enforcing compliance with accounting and auditing standards in such manner as may be prescribed;

c. Overseeing the quality of service of the professions associated with ensuring compliance with such standards, and suggesting measures required for improvement in the quality of services; and

d. Performing such other functions relating to clauses (a), (b) and (c), as described above, as may be prescribed.

The Central Government has notified the NFRA rules 2018 using its powers under the aforesaid section.

Rule 4 lays down that the NFRA shall protect the public interest and the interest of investors, creditors and others associated with the companies or bodies corporate under NFRA’s purview by establishing high-quality standards of accounting and auditing and exercising effective oversight of accounting functions performed by the companies and bodies corporate and auditing functions performed by auditors.

In addition, sub-section (4) of section 132 vests NFRA with the power to investigate professional misconduct by any auditor of any of these companies. When such misconduct is proved, NFRA is empowered to impose monetary penalties up to 10 times the fees received and also to bar the auditor from being appointed as auditor or internal auditor of any company or body corporate for up to 10 years.

In order to remove any chance of regulatory overlap, the said sub-section very unambiguously provides that where the NFRA has initiated an investigation, no other institute or body shall initiate or continue any proceedings in such matters of misconduct.

Rule 3 specifies what class of companies would fall under the purview of the NFRA. Other rules laydown what procedures should be followed in discharging the functions specified in the Act, 2013, some details about the internal administration of the NFRA, etc.

NFRA’s jurisdiction covers all listed companies, unlisted public companies with either turnover, or share capital or borrowing above certain specified thresholds, all banking, insurance and electricity generation and supply companies, foreign subsidiaries of these entities of certain size, etc.

In addition, the Central Government can make reference to the NFRA, for actions in respect of any other company, or class of companies, in the public interest.

Keeping the above objective in mind, NFRA till31st December, 2023 has issued following:

FRQR REPORTS

The FRQR focuses on the role of preparers, i.e., those responsible for the preparation of financial statements and reports in accordance with the applicable accounting standards. Therefore, the FRQR evaluates how well the Chief Financial Officer, and the rest of the Management, and the Audit Committee, as well as the Board of Directors of the Company, have performed in preparing financial statements that show a true and fair view as required under the Companies Act, and in accordance with the applicable accounting standards.The FRQR concludes with an advisory to the preparers, highlighting the matters that need improvement. In case there are violations of accounting standards and the law that require action to be taken under the law, the matter is reported to the authorities who can take action.

NFRA has issued four such reports so far, and the companies which were reviewed by NFRA include PSP Projects Limited, ISGEC Heavy Engineering Limited, Prabhu Steel Industries Limited and KIOCL Limited.

AQR AND INSPECTION REPORTS

The AQR / Inspection Reports, on the other hand, have the objective of verifying compliance by the Audit Firm with the requirements of Standards on Auditing relevant to the performance of the Engagement. The AQR / Inspection Reports also have the objective of assessing the Quality Control system of the Audit Firm and the extent to which the same has been complied with in the performance of the engagement. NFRA completes his review and publishes the report as mandated by law.

MAJOR OBSERVATIONS BY NFRA IN ITS AQR REPORTS

As stated above, since its inception, NFRA has issued total seven reports which include one Supplementary AQR (“SRQR”). The firms to which such reports are issued include Deloitte Haskins & Sells, LLP, BSR & Associates LLP, Rajendra K Goel&Co. and SRBC & Co LLP.

Major observations include:

• In almost all reports, appointment is considered to be illegal or void due to violation of section 143(3)(e) (subsisting business relationships on the date of appointment) and section 141(3)(i) (provision of non-audit services directly or indirectly) of the Companies Act, 2013.

• Compromise in independence due to non-audit services for substantial fees and absence of Audit Committee approval for such services.

• Violation of SQC-1 and SA 220 by naming two partners as Engagement Partners leading to loss of accountability.

• Not adequately challenging the going concern assumptions.

• Non-determination of the persons comprising those charged with governance (“TCWG”), non-communication of audit matters, independence matters, etc., to TCWG.

• The EQCR, as said to have been carried out, has been shown to have been a complete sham, and has been found to be inadequate or a complete travesty of the EQCR process by appointing the EP himself as its EQCR partner.

• Gross violation of independence requirements due to non-audit services provided technically by a network-firms under the same brand claimed to be different firms but indirectly provided by same network firms.

• Independent Auditor’s Report is misleading due to non-identification of transactions, violative of accounting and auditing standards. The impact is both material and pervasive.

• No satisfactory rebuttal of the presumption of ROMM due to fraud in respect of revenue recognition and management override of controls, ultimately resulting in several violations of applicable provisions of Ind AS and SAs.

• Non-identification and assessment of Risk of Material Misstatements (ROMM) through understanding the entity and its environment, including its internal control. No ROMM procedures performed at the assertion level.

• Non-evaluation of work done by management’s expert.

MAJOR OBSERVATIONS BY NFRA IN ITS INSPECTION REPORTS

NFRA issued Audit Quality Inspection Guidelines in November 2022, which cover the objective, criteria for selection, scope of review, methodology for selection of audit firms and individual audit assignments, the inspection cycle, the inspection reports including its structure and timelines for responses by audit firms. Keeping these guidelines in mind, NFRA has issued five inspection reports from 22nd December to 29th December, 2023. (Refer to BCAJ Articles on Page 21, February 2024, and Page 25 in this issue for summary of major observations.)

ORDERS / DEBARMENTS

Orders are issued generally when irregularities are noticed by some regulators, e.g., Serious Fraud Investigation Officer (SFIO), Securities Exchange Board of India (SEBI), Director General of Income Tax (Investigation), Central Economic Intelligence Bureau (CEIB), Ministry of Finance, Media Reports, Ministry of Corporate Affairs (MCA) regarding irregularities observed by FRRB except in case of DHFL matter wherein NFRA has initiated the investigation on Suo Moto. Orders are normally concluded with debarment, if required and imposition of penalty.

The NFRA orders are generally structured as below:

1. Executive Summary,

2. Introduction & Background,

3. Issue of jurisdiction and procedures,

4. Major lapses in the Audit and Charges in the Show Cause Notice (SCN),

5. Finding on the article of Charges of Professional Misconduct,

6. Penalty & Sanctions.

Section 132(4)(c) of the Act, 2013, provides that NFRA shall, where professional or other misconduct is proved, have the power to make order for:

A. Imposing penalty of (I) not less than one lakh rupee, but which may extend to five times of the fees received, in case of individual and (II) not less than five lakh rupees, but which may extend to ten times of the fees received, in case of firms;

B. Debarring the member or the firm from (I) being appointed as an auditor or internal auditor or undertaking any audit in respect of financial statements or internal audit of the functions and the activities of any company or body corporate or (II) performing any valuation as provided under section 247, for a minimum period of six months or such higher period not exceeding 10 years as may be determined by NFRA.

Considering the above provision of the Act, 2013, NFRA has debarred the individual or firms and imposed penalties in most of the orders. The debarment period of individual professional ranges from six months to 10 years and firms from two to four years. The financial penalties, in the case of individual professional ranges from ₹1 lakh to ₹25 lakhs, and in the case of firms from ₹10 lakhs to ₹200 lakhs.

The upcoming NFRA Digests will cover NFRA orders, circulars, consultation papers, etc., issued till December 2023, to enable the reader to read not just the chronology but their classification under key themes.

From Published Accounts

Compilers’ Note:

Illustration of disclosure and reporting for compliances to be carried out as directed by the Reserve Bank of India (RBI) regarding authorisation to setup payment system by a Subsidiary and strengthening of KYC / AML process of an Associate. The RBI had subsequently imposed restrictions on certain business operations to be carried out by the said Subsidiary and the Associate.

ONE 97 COMMUNICATIONS LIMITED (QUARTER AND 9 MONTHS ENDED 31ST DECEMBER, 2023)

From Notes to Unaudited Consolidated Financial Results

7. Notes given by the subsidiary and associate in their respective Unaudited Special Purpose Interim Condensed Financial Statements/Information:

a) Paytm Payments Services Limited (Subsidiary): “The Company filed an application for authorization to set up Payment System (‘PA application’) under sub-section (1) of Section 5 of the Payment and Settlement Systems Act, 2007 with the Department of Payment and Settlement Systems, Reserve Bank of India (“RBI”) on 8th January, 2021, in response to which, the Company received a letter from the RBI on 25th November, 2022. As per the letter, the Company was required to obtain necessary approval for past downward investment from its parent company, One 97 Communications Limited (“OCL”), in compliance with Foreign Direct Investment (“FDI”) Guidelines and resubmit the PA application within 120 calendar days. Pursuant to the aforesaid, the Company had applied to the requisite government authorities seeking approval for the past downward investment made by OCL on 14th December, 2022, which is still under process. Further, the Company had received an extension of time from RBI, vide its letter dated 23rd March, 2023, for resubmission of the application. As per RBl’s letter, the Company can continue with the online payment aggregation business (except that the Company cannot on board new merchants), while it awaits approval from Government of India (‘GoI’) for past downward investment from OCL into the Company and needs to resubmit the PA application within 15 days of receipt of the approval from GoI and to inform RBI immediately, if any adverse decision is taken by the Gol. Management has assessed that this does not have a material impact on the financial results and the business and revenues since the communication from R.81 is applicable only to on boarding of new merchants. Accordingly, no adjustment has been made in these financial results.”

b) Paytm Payments Bank Limited (Associate): “During FY 2022, pursuant to a supervisory process, RBl directed the Bank to stop the on boarding of new customer’s w.e.f. 11th March, 2022. During FY 2023, RBI appointed an external auditor for conducting a comprehensive systems audit of the Bank. On 21st October, 2022, the Bank received the final report thereof from RBI outlining the need for continued strengthening of IT outsourcing processes and operational risk management, including KYC / AML at the Bank. Pursuant to a supervisory engagement thereafter, RBI recommended remediating action steps (including further steps to be taken by the Bank) in a time-bound manner. The Bank has submitted the compliance to these instructions of RBI. Further, the Bank as per RBl’s communication received in October 2023, is continuously engaged with RBI in closing out of all persisting deficiencies. The Bank is in the process of complying with all remedial actions with respect to the supervisory engagement with the RBI in respect of the above communication and restrictions imposed on onboarding of new customers since 11th March, 2022. The RBI has levied a penalty amounting to ₹ 5.39 Crores on the Bank in respect of above vide RBI order dated12th October, 2023.”

From Auditors’ Report

EMPHASIS OF MATTERS

We draw attention to Note 7(a) to the Financial Results which describes that the Company’s subsidiary application for authorization to set up Payment System, to the Department of Payment and Settlement Systems, Reserve Bank of India (“RBI”), is in process due to the reasons stated in the said note. Accordingly, no adjustment has been made by the management in these Unaudited consolidated financial results. Our conclusion is not modified in respect of this matter.

We draw attention to Note 7(b) to the Financial Results regarding progress on the Comprehensive Systems IT Audit (RBI) report received during the year ended 31st March, 2023, recommending strengthening of KYC/AML at the Paytm Payments Bank Limited, an Associate of the Company. A penalty as stated in the said note has been levied by the RBI and the supervisory engagement with the RBI is still in progress in respect of communications received in October 2023, restrictions imposed on the on boarding of new customers since 11th March, 2022 and compliance with related remedial actions. Our conclusion is not modified in respect of this matter.

Accounting Of Losses in an Associate

BACKGROUND

Hold Co has a 25 per cent investment in Low Co. Hold Co accounts for investment in Low Co as an associate in its consolidated financial statements (CFS) because it has representation on the board of Low Co and exercises significant influence.

Low Co has incurred significant losses, far exceeding the equity of the owners. In the CFS, Hold Co has absorbed its proportion of the losses to the extent of the cost of investment, making it zero, and the remaining unabsorbed losses are not accounted for, as equity-accounted investments cannot be negative. This is in compliance with the requirements of paragraph 38 of Ind AS 28 Investments in Associates and Joint Ventures.

Low Co has prepared its business plan and it requires further capitalisation by all the equity owners in proportion to their shareholding. Hold Co would also like to further invest in Low Co, considering the strategic benefits arising out of investments in Low Co.

Consider the following simple example:

1. Hold Co has 25 per cent equity share in Low Co. Other investors own the remaining 75 per cent equity.

2. Hold Co had invested ₹100 million for the 25 per cent equity shares.

3. At the end of the financial year, Low Co had incurred a cumulative loss of ₹500 million.

4. Hold Co’s share of losses is ₹125 million. In the CFS, Hold Co has absorbed losses to the tune of ₹100 million, and ₹25 million loss remains unabsorbed.

5. Accordingly, the value of the equity-accounted investment in the CFS is zero.

6. Hold Co makes an additional equity investment of R60 million, just a little before the end of the financial year. Other investors contribute their share proportionately.

7. The prospects for Low Co are extremely bright, and there is no objective evidence of any impairment.

ISSUE

What should be the accounting of investment of further equity by Hold Co in Low Co? Should the unabsorbed losses be allocated to the new investment, i.e.

Option 1

Should the unabsorbed losses of ₹25 million be immediately allocated to the new equity investment of ₹60 million, and consequently, the equity accounted investment is determined to be ₹35 million?

or

Option 2

The unabsorbed losses should not be allocated to the new investment, and accordingly, the new investment should be reflected as ₹60 million, and the earlier investment at zero value?

RESPONSE

Accounting Standard References

Ind AS 28 – Investments in Associates and Joint Ventures

Paragraph 3 – Definitions

The equity method is a method of accounting whereby the investment is initially recognised at cost and adjusted thereafter for the post-acquisition change in the investor’s share of the investee’s net assets. The investor’s profit or loss includes its share of the investee’s profit or loss and the investor’s other comprehensive income includes its share of the investee’s other comprehensive income.

10. Under the equity method, on initial recognitionthe investment in an associate or a joint venture is recognised at cost, and the carrying amount is increased or decreased to recognise the investor’s share of the profit or loss of the investee after the date of acquisition. The investor’s share of the investee’s profit or loss is recognised in the investor’s profit or loss. Distributions received from an investee reduce the carrying amount of the investment.

19. When an entity has an investment in an associate, a portion of which is held indirectly through a venture capital organisation, or a mutual fund, unit trust and similar entities including investment-linked insurance funds, the entity may elect to measure that portion of the investment in the associate at fair value through profit or loss in accordance with Ind AS 109 regardless of whether the venture capital organisation has significant influence over that portion of the investment. If the entity makes that election, the entity shall apply the equity method to any remaining portion of its investment in an associate that is not held through a venture capital organisation.

24. If an investment in an associate becomes an investment in a joint venture or an investment in a joint venture becomes an investment in an associate, the entity continues to apply the equity method and does not remeasure the retained interest.

25. If an entity’s ownership interest in an associate or a joint venture is reduced, but the entity continues to apply the equity method, the entity shall reclassify to profit or loss the proportion of the gain or loss that had previously been recognised in other comprehensive income relating to that reduction in ownership interest if that gain or loss would be required to be reclassified to profit or loss on the disposal of the related assets or liabilities.

26. Many of the procedures that are appropriate for the application of the equity method are similar to the consolidation procedures described in Ind AS 110. Furthermore, the concepts underlying the procedures used in accounting for the acquisition of a subsidiary are also adopted in accounting for the acquisition of an investment in an associate or a joint venture.

38. If an entity’s share of losses of an associate or a joint venture equals or exceeds its interest in the associate or joint venture, the entity discontinues recognising its share of further losses.

39. After the entity’s interest is reduced to zero, additional losses are provided for, and a liability is recognised, only to the extent that the entity has incurred legal or constructive obligations or made payments on behalf of the associate or joint venture. If the associate or joint venture subsequently reports profits, the entity resumes recognising its share of those profits only after its
share of the profits equals the share of losses not recognised.

40. After application of the equity method, including recognising the associate’s or joint venture’s losses in accordance with paragraph 38, the entity applies paragraphs 41A-41C to determine whether there is any objective evidence that its net investment in the associate or joint venture is impaired.

AUTHOR’S VIEWS

As per paragraph 38, if an entity’s share of losses of an associate or a joint venture equals or exceeds its interest in the associate or joint venture, the entity discontinues recognising its share of further losses.

As per paragraph 39, after the entity’s interest is reduced to zero, additional losses are provided for, and a liability is recognised, only to the extent that the entity has incurred legal or constructive obligations or made payments on behalf of the associate or joint venture. If the associate or joint venture subsequently reports profits, the entity resumes recognising its share of those profits only after its share of the profits equals the share of losses not recognised.

Since the associate is likely to do very well in future, paragraph 40 is not of any concern.

Unfortunately, the standard does not provide a straightforward solution to the questions raised in the query. There are two possible views, both of which are supported by using analogies from the accounting standard references in Ind AS 28.

Option 1

Under option 1, the entity records the unabsorbed losses of ₹25 million, which is immediately allocated to the new equity investment of ₹60 million, and consequently, the equity-accounted investment at the end of the financial year is determined to be ₹35 million.

In this view, the entire investment in the associate is treated as one equity investment. In other words, a distinction is not made between the initial investment and the subsequent investment.

Option 1 can be supported by the following arguments:

• The definition in paragraph 3, “The equity method is a method of accounting whereby the investment is initially recognised at cost and adjusted thereafter for the post-acquisition change in the investor’s share of the investee’s net assets.” The definition along with paragraph 10 may be interpreted to support Option 1 or 2. One interpretation is that the losses post the acquisition of the associate are to be considered, including any additions made to the investment post the initial acquisition of the associate. In other words, the entire investment in the associate is treated as one, rather than two separate units, one the initial investment and two the subsequent addition.

• Paragraph 25 seems to support a retrospective approach; therefore, on this basis, the past losses would have to be absorbed by the fresh additional investment.

• When fresh investment is made in a subsidiary that has losses beyond the equity value, the losses continue to remain absorbed. If this analogy was used, then Paragraph 26 would require absorption of past losses for the additional investment made in the associate.

Option 2

Under option 2, the unabsorbed losses are not allocated to the new investment, and accordingly, the new investment is reflected as ₹60 million, and the earlier investment of ₹100 million is recorded at zero value.

• The definitions in paragraph 3 and paragraph 10 may be interpreted to mean that each investment in the associate is tracked separately. Therefore, on the second tranche past losses are not absorbed, but only future losses incurred after the acquisition of the second tranche are to be considered.

• Paragraph 19 allows an investment in an associate to be split into two, one for equity accounting and the other for fair value accounting by the venture capitalist and similar entities. Taking support from this, in the given situation, the investment can be split into two for the purpose of absorbing the losses.

• Paragraph 24 supports the continuation of equity accounting, rather than fair valuation of retained interest. Likewise, the additional investment in the associate could be accounted as a separate unit, and past losses shall in no way impact the additional investment made in the associate.

CONCLUSION

The author believes that both views are tenable in the absence of any clarity in the standards. It may also be noted that similar issues arise when an associate is acquired in stages. In such situations, multiple approaches have emerged in practice, such as the cost accumulation approach and the fair value approach. Within the cost accumulation approach, different variations can be applied.

Whichever approach is followed by the entity, appropriate disclosure of the accounting policy applied should be made and the accounting policy chosen should be consistently followed.

Revision under Section 264 of Intimation Issued Under Section 143(1)

ISSUE FOR CONSIDERATION

Section 264 is one of the important provisions under the Act beneficial to the assessee, whereunder the higher authority has been given the power to revise any order passed by the lower authority and pass a revisionary order in favour of the assessee. The CIT or PCIT or CCIT or PCCIT (referred to as CIT hereafter) may, either of his own motion or on an application made by the assessee in this regard, revise any order passed by any authority which is subordinate to him. The CIT has to pass an order as he thinks fit, which cannot be prejudicial to the assessee.

Section 264 reads as under:

“Revision of other orders.

264. (1) In the case of any order other than an order to which section 263 applies passed by an authority subordinate to him, the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner may, either of his own motion or on an application by the assessee for revision, call for the record of any proceeding under this Act in which any such order has been passed and may make such inquiry or cause such inquiry to be made and, subject to the provisions of this Act, may pass such order thereon, not being an order prejudicial to the assessee, as he thinks fit.

(2) The Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner shall not of his own motion revise any order under this section if the order has been made more than one year previously.

(3) In the case of an application for revision under this section by the assessee, the application must be made within one year from the date on which the order in question was communicated to him or the date on which he otherwise came to know of it, whichever is earlier:

Provided that the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner may, if he is satisfied that the assessee was prevented by sufficient cause from making the application within that period, admit an application made after the expiry of that period.

(4) The Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner shall not revise any order under this section in the following cases—

(a) where an appeal against the order lies to the Deputy Commissioner (Appeals) or to the Joint Commissioner (Appeals) or the Commissioner (Appeals) or to the Appellate Tribunal but has not been made and the time within which such appeal may be made has not expired, or, in the case of an appeal to the Joint Commissioner (Appeals) or the Commissioner (Appeals) or to the Appellate Tribunal, the assessee has not waived his right of appeal; or

(b) where the order is pending on an appeal before the Deputy Commissioner (Appeals); or

(c) where the order has been made the subject of an appeal to the Joint Commissioner (Appeals) or the Commissioner (Appeals) or to the Appellate Tribunal.

(5) Every application by an assessee for revision under this section shall be accompanied by a fee of five hundred rupees.

(6) On every application by an assessee for revision under this sub-section, made on or after the 1st day of October, 1998, an order shall be passed within one year from the end of the financial year in which such application is made by the assessee for revision.

Explanation.—In computing the period of limitation for the purposes of this sub-section, the time taken in giving an opportunity to the assessee to be re-heard under the proviso to section 129 and any period during which any proceeding under this section is stayed by an order or injunction of any court shall be excluded.

(7) Notwithstanding anything contained in sub-section (6), an order in revision under sub-section (6) may be passed at any time in consequence of or to give effect to any finding or direction contained in an order of the Appellate Tribunal, the High Court or the Supreme Court.

Explanation 1.—An order by the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner declining to interfere shall, for the purposes of this section, be deemed not to be an order prejudicial to the assessee.

Explanation 2.—For the purposes of this section, the Deputy Commissioner (Appeals) shall be deemed to be an authority subordinate to the Principal Chief Commissioner or Chief Commissioner or Principal Commissioner or Commissioner.”

Thus, the assessee has been provided the benefit of seeking revision of the order passed by the AO under Section 264, but with the condition that such order should not be appealable, or if appealable, then no appeal should have been filed against such order.

Quite often, the issue has arisen as to whether an ‘intimation’ issued under Section 143(1) can be regarded as an ‘order’ for the purposes of Section 264 and can, therefore, be the subject matter of revision under Section 264. The Delhi and Bombay High Courts have taken a view that the order referred to in Section 264 would include an intimation issued under Section 143(1) and, therefore, can be revised. However, the Gujarat, Kerala and Karnataka High Courts have taken a contrary view.

EPCOS Electronic Components SA’s Case

The issue had come up for consideration by the Delhi High Court in the case of EPCOS Electronics Components SA vs. UOI [WP (C) 10417/2018, 10th July, 2019].

In this case, the assessee filed its return of income for the Assessment Year 2014–15 by offering tax @20 per cent on its earnings for the provision of management services to its associated enterprise, EPCOS India Pvt. Ltd. in terms of Article 13 of the Double Taxation Avoidance Agreement entered into between India and Spain. The AO by an intimation dated 10th March, 2016, under Section 143(1) processed the said return of income. Later, the assessee realised that it had failed to claim the lower rate of tax it was eligible for, by virtue of Clause 7 of the Protocol appended to the India-Spain DTAA. Another mistake committed by the assessee was that it paid a surcharge and cess on the tax, which was not required to be paid, as the tax rate under the DTAA was a final rate inclusive of surcharge and cess. This led the assessee to file a revision petition under Section 264 on 16th January, 2017, before the CIT, seeking to revise the order under Section 143(1), claiming it to be prejudicial to the assessee’s interest.

The CIT rejected the application filed by the assessee under Section 264 on the grounds that no amount was payable by the assessee in terms of an intimation under Section 143(1), and therefore, no prejudice was caused to the assessee in terms thereof. Alternatively, the CIT held that the assessee should have filed a revised return claiming the relief so claimed by it in the revision application. Further, it was held by the CIT that Section 264 could not be invoked to rectify the assessee’s own mistakes, if any. Against the said order, the assessee filed a writ petition before the High Court.

The question before the High Court was whether a revision petition under Section 264 was maintainable to rectify the mistake committed by the assessee while filing its return, which had been accepted by the Department by issuing an intimation under Section 143(1). Before the High Court, the assessee relied upon the decision in the case of Vijay Gupta vs. CIT 386 ITR 643 (Delhi) and the revenue relied upon the decision in the case of ACIT vs. Rajesh Jhaveri Stock Brokers Pvt. Ltd. 291 ITR 500 (SC) to urge that an intimation under Section 143(1) could not be treated as an ‘order’ and, therefore, no petition under Section 264 could be maintained against such intimation.

The High Court observed that the decision in Rajesh Jhaveri Stock Brokers Pvt. Ltd. (supra) was in the context of Sections 147 and 148. If the original assessment was under Section 143(3), then the proviso to Section 147 would be attracted, and the procedure prescribed thereunder for re-opening an assessment would have to be followed. On the other hand, if the return had been accepted by the Department by a mere intimation under Section 143(1), then a different set of consequences would ensue, and there would be no requirement for the department if it were to re-open the assessment to follow the procedure it would have had to had the assessment order been passed under Section 143(3). The context of the case before the High Court was totally different. It was not an attempt by the Revenue to re-open the assessment by invoking Sections 147 and 148 but was of the assessee realising the mistake made by it while filing the return of paying a higher rate of tax.

In such a context, the intimation received by the assessee from the AO accepting the return under Section 143(1) would partake the character of an order for the purpose of Section 264, though in the context of Sections 147 and 148, it might have had a different connotation. However, the consistent view of the High Court, as expressed in Vijay Gupta (supra) and the other decisions which have been cited therein, has been that for the purposes of Section 264, a revision petition seeking rectification of the return accepted by the Department in respect of which intimation is sent under Section 143(1) was indeed maintainable.

On this basis, the High Court disagreed with the view expressed by the CIT and held that a revision petition under Section 264 would be maintainable vis-à-vis an intimation under Section 143(1).

A similar view has also been expressed by the Bombay High Court in the cases of Diwaker Tripathi vs. Pr CIT 154 taxmann.com 634 (Bom),Smita Rohit Gupta vs. Pr CIT 459 ITR 369 (Bom) and Aafreen Fatima Fazal Abbas Sayed vs. ACIT, W.P. (L) NO. 6096 OF 2021 dated 8th April, 2021.

Gujarat Gas Trading Co. Ltd.’s Case

The issue again came up for consideration before the Gujarat High Court in the case of Gujarat Gas Trading Co. Ltd. vs. CIT (Special Civil Application No. 2514 of 2011, order dated 7th September, 2016).

In this case, for the Assessment Year 2003–04, the assessee company filed its return of income declaring income of ₹3.31 crores, which included a sum of ₹1.87 crores pertaining to expenses on account of commission which had been disallowed wrongly. These expenses were disallowed under the mistaken belief that the assessee was allowed to claim a deduction of these expenses only upon payment. The return of income of the assessee company was accepted by the AO under Section 143(1) without scrutiny, and the refund claimed was issued.

Having realised the error in not claiming the deduction of expenditure on accrual basis while filing the return, the assessee filed a petition before the CIT under Section 264 on 29th December, 2008, seeking revision of the intimation / order under Section 143(1). In response, the assessee was called upon to produce necessary evidence in support of the date of receipt of the intimation under Section 143(1). Instead of replying, the assessee filed a fresh petition for revision on 13th April, 2009, which was rejected by an order dated 3rd December, 2009, inter-alia, on the grounds that the revision petition was filed after a lapse of about six years. The assessee approached the High Court against the order of dismissal mainly on the ground that it was not provided any opportunity to explain the delay. The High Court directed the CIT to decide the matter afresh after giving an opportunity of hearing to the assessee.

In the revision proceeding which was initiated afresh, the CIT rejected the revision petition on the grounds of delay as well as maintainability. The CIT held that the intimation was not a revisable order. He relied upon the decision of Karnataka High Court in the case of Avasaraja Automation Ltd. vs. DCIT 269 ITR 163 in which it was held that the petition under Section 264
against intimation was not maintainable in view of the deletion of Explanation to Section 143 with effect from 1st June, 1999. The assessee challenged the order of the CIT on both counts by filing a petition before the High Court.

Before the High Court, with respect to the issue of maintainability, the assessee argued that, under Section 264, any order is subject to revision and not only an order of assessment. Even acceptance of assessment without scrutiny and intimation thereof in terms of Section 143(1) was an order of assessment, may be without scrutiny. The assessee also placed reliance upon the following decisions:

i. C. Parikh & Co. vs. CIT 122 ITR 610 (Guj)

ii. Assam Roofing Ltd. vs. CIT 43 taxmann.com 316 (Gauhati)

iii. Ramdev Exports vs. CIT 251 ITR 873

iv. Vijay Gupta vs. CIT (supra)

The revenue contended that the intimation under Section 143(1) was neither an order of assessment nor an order which was capable of revision under Section 264. It was merely an administrative action of intimating the assessee that his return was accepted. The revenue relied upon the amendment made in Section 143(1) with effect from 1st June, 1999, when the explanation was dropped and submitted that, prior to 1st June, 1999, the AO had the power to make prima facie adjustments. Due to this, the intimation under Section 143(1) was deemed to be an order of assessment for the purpose of Section 264. The revenue also relied upon the following decisions where it had been held that an intimation was not capable of being subject to revision under Section 264:

i. CIT vs. K. V. Mankaram and Co. 245 ITR 353 (Ker)

ii. Avasaraja Automation Ltd. vs. DCIT 269 ITR 163 (Kar)

The High Court held that the assessee had failed to explain the delay and, therefore, the order of the CIT not condoning the delay was upheld. The High Court also accepted the view of the CIT that against the intimation under Section 143(1), the revision petition was not maintainable for the following reasons:

• ‘Any order’ referred to in Section 264 was not meant to cover even mere administrative orders without there being any element of deciding any rights of the parties.

• In the case of Rajesh Jhaveri Stock Brokers Pvt. Ltd. (supra), the Supreme Court observed that acknowledgement under Section 143(1) is not done by an AO, but mostly by ministerial staff. It could not be stated that by such intimation, the assessment was done.

• An Explanation was added below Section 143 by the Finance Act, 1991, with effect from 1st October, 1991, which provided that an intimation sent to the assessee shall be deemed to be an order for the purpose of Section 264. This explanation came to be deleted with effect from 1st June, 1999, when Section 143 itself underwent major changes. It could, thus, be seen that during the period when, under subsection (1) of Section 143, the AO had the power of making prima facie adjustments, the legislature provided for an explanation that an intimation sent to the assessee under subsection (1) would be deemed to be an order for the purposes of Section 264. Once, with the amendment of Section 143, such powers were rescinded, a corresponding change was, therefore, made by deleting the explanation and withdrawing the deeming fiction.

The High Court also dealt with each of the decisions which was relied upon by the assessee and distinguished it. The decision in the case of C. Parikh & Co. (supra) was held to be focusing on the question of whose mistake can be corrected by the CIT in revisional powers, whether of the assessee or the AO and did not concern the question whether an intimation was open to revision or not. Similarly, in the case of Ramdev Exports (supra), the question of maintainability of a revision petition against a mere intimation under Section 143(1) did not arise. In the case of Vijay Gupta (supra), before the Commissioner, the assessee had not only challenged the intimation under Section 143(1) but also the rejection of application under Section 154. Thus, these decisions relied upon by the assessee were held to be distinguishable.

OBSERVATIONS

Section 264 is a beneficial provision whereunder the higher authorities have been empowered to pass a revisionary order, not being prejudicial to the assessee, revising the order passed by the lower authorities. The objective of this provision is also to provide a remedy to an assessee when he is aggrieved by any order passed against him, whereby he can approach the higher authority within the given time limit requiring it to pass the revisionary order not prejudicial to him.

The whole controversy under consideration revolves around only one issue, i.e., whether the intimation issued under Section 143(1) upon processing of the return of income filed by the assessee can be considered to be an order. The issue is whether the word ‘order’ used in Section 264 should be interpreted so strictly so as to exclude any other intimation which has not been termed as ‘order’ under the relevant provision of the Act, although it has been generated and issued by the AO, and more particularly when it otherwise determines the total income and tax liability of the assessee.

Firstly, it needs to be appreciated that the term ‘order’ is not defined expressly in the Act. The simple dictionary meaning of the term ‘order’ is an authoritative command or instruction. When the intimation is issued under Section 143(1) upon processing of the return of income filed by the assessee, it is nothing but an official instruction which is issued under the authority of the AO determining the amount of total income and tax liability of the assessee after incorporating necessary adjustments, if any, to the return of income filed. Merely because it has been referred to as ‘intimation’ and not ‘order’ under Section 143(1), it cannot be considered as not falling within the purview of Section 264.

By relying upon the decision of the Supreme Court in the case of Rajesh Jhaveri Stock Brokers Pvt. Ltd. (supra), the revenue has attempted to argue that the intimation is not an assessment order and, therefore, there is no application of mind by the Assessing Officer when such intimation is issued. However, it needs to be appreciated that the provision of Section 264 does not only bring the ‘assessment order’ within its purview but it brings all types of orders within its purview. Therefore, to examine the applicability of Section 264, it is irrelevant to consider the fact that the intimation issued under Section 143(1) is not an assessment order. What is relevant is that it bears all the characteristics of an order, although it is not an assessment order.

The Gujarat High Court has heavily relied upon the omission of Explanation to Section 143 with effect from 1st June, 1999, which had provided that the intimation shall be deemed to be an order for the purpose of Section 264. It has been observed that since the power to make the prima facie adjustment while processing the return of income had been removed, the intimation was no longer regarded to be an order for the purpose of Section 264. However, it needs to be appreciated that in various cases, the Courts have also allowed the assessees to raise fresh claims under Section 264 which were never raised by them in the return of income. Therefore, it was not only prima facie adjustments in respect of which relief could have been sought under Section 264.

Besides, Section 143(1), as amended by the Finance Act 2008 with effect from 1st April, 2008, now permits certain adjustments to be made under six circumstances referred to in clause (a) thereof. The Gujarat High Court decision was rendered for AY 2003–04, at a point of time when no adjustments were permissible under Section 143(1). Therefore, by the logic of the Gujarat High Court itself, an intimation should now be regarded as an order.

An intimation under Section 143(1) is also now an appealable order under Section 246(1)(a) as well as Section 246A(1)(a) with effect from 1st July, 2012. Though it is appealable only if an assessee objects to the adjustments made, the very fact that it is placed at par with other orders clearly brings out the fact that an intimation is now an order.

The heading of Section 263 also refers to “Revision of Other Orders”, and the section itself refers to any order other than an order to which Section 263 applies. This is broad enough to cover an intimation under Section 143(1).

In CIT vs. Anderson Marine & Sons (P) Ltd 266 ITR 694 (Bom), a case relating to AY 2009–10, a year in which adjustments under Section 143(1) were not permissible, the Bombay High Court held that sending of an intimation, being a decision of acceptance of self-assessment, is in the nature of an order passed by the AO for the purposes of Section 263. If so, the same logic should apply to Section 264 as well.

The Delhi High Court in Vijay Gupta’s case rightly pointed out that Circular No.14(XL-35) of 1955, dated 11th April, 1955, which required officers of the Department to assist a taxpayer in every reasonable way, particularly in the matter of claiming and securing reliefs, and Article 265 of the Constitution of India, which prohibited the arbitrary collection of taxes stating that ‘no tax shall be levied or collected except by authority of law’, had not been considered by the CIT while rejecting the revision petition. If this is taken into account, the assessee should not be denied a deduction rightfully allowable in law, merely because it is not claimed in the return of income, on the grounds that the assessee has no remedy under Section 264 against an intimation.

Further, an intimation issued under Section 143(1) is amenable to rectification under Section 154. Therefore, consider a case where the order of rectification has been passed under Section 154, rectifying the intimation issued under Section 143(1), either suo moto or upon an application made by the assessee in this regard. In such a case, the rectification order would fall within the purview of Section 264, it being an ‘order’, upon taking such a strict interpretation, whereas the intimation itself which has been rectified by the said order would not fall within its purview. Thus, such an interpretation leads to an absurd result, which needs to be avoided.

Therefore, at least as the law now stands, thebetter view is that taken by the Delhi and Bombay High Courts considering the intimation issued under Section 143(1) to be in the nature of ‘order’ for the purpose of Section 264.

Glimpses of Supreme Court Rulings

57 Mangalam Publications, Kottayam vs. Commissioner of Income Tax, Kottayam

Civil Appeal Nos. 8580-8582 of 2011

Decided On: 23rd January, 2024

Reassessment — No reason to believe – Dehors the provisional balance sheet for the assessment year 1989-90 submitted before the South Indian Bank for obtaining credit (which was considered to be unreliable by CIT(A) in the earlier year), there were no other material in the possession of the Assessing Officer to come to the conclusion that income of the Assessee for the three assessment years had escaped assessment — The assessment cannot be reopened on a mere change of opinion in as much as the original assessment orders were passed after due scrutiny.

Defective return of income — A defective return cannot be regarded as an invalid return — The Assessing Officer has the discretion to intimate the Assessee about the defect(s) and it is only when the defect(s) are not rectified within the specified period that the Assessing Officer may treat the return as an invalid return. Ascertaining the defects and intimating the same to the Assessee for rectification, are within the realm of discretion of the Assessing Officer — It is for him to exercise the discretion — The burden is on the Assessing Officer — If he does not exercise the discretion, the return of income cannot be construed as a defective return.

The Assessee was a partnership firm at the relevant point of time though it had registered itself as a company since the assessment year 1994-95. The Assessee is carrying on the business of publishing newspaper, weeklies and other periodicals in several languages under the brand name “Mangalam”. Prior to the assessment year 1994-95, the status of the Assessee was that of a firm, being regularly assessed to income tax.

For the assessment year 1990-91, Assessee filed a return of income on 22nd October, 1991 showing a loss of ₹5,99,390.00. Subsequently, the Assessee filed a revised computation showing income at ₹5,63,920.00. Assessee did not file any balance sheet along with the return of income on the ground that books of account were seized by the income tax department (department) in the course of search and seizure operations on3rd December, 1995 and that those books of account were not yet returned. In the assessment proceedings, the Assessing Officer did not accept the contention of the Assessee and made an analysis of the incomings and outgoings of the Assessee for the previous year under consideration. After considering various heads of income and sale of publications, the Assessing Officer made a lump sum addition of ₹1 lakh to the disclosed income vide the assessment order dated 29th January, 1992 passed under Section 143(3) of the Act.

Likewise, for the assessment year 1991-1992, the Assessee did not file any balance sheet along with the return of income for the same reason mentioned for the assessment year 1990-1991. The return of income was filed on 22nd October, 1991 showing a loss of ₹21,66,760.00. As per the revised profit and loss account, the sale proceeds of the publications were shown at ₹8,21,24,873.00. The Assessing Officer scrutinised the net sale proceeds as per the Audit Bureau of Circulation figure and the certified Performance Audit Report. On that basis, the assessing officer accepted the sale proceeds of ₹8,21,24,873.00 as correct being in conformity with the facts and figures available in the Audit Bureau of Circulation report and the Performance Audit Report. After considering the incomings and outgoings of the relevant previous year, the Assessing Officer reworked the aforesaid figures but found that there was a deficiency of ₹29,17,931.00 in the incoming and outgoing statement which the Assessee could not explain. Accordingly, this amount was added to the total income of the Assessee. Further, the Assessee could not produce proper vouchers in respect of a number of items of expenditure. Accordingly, an addition of ₹1,50,000.00 was made to the total income of the Assessee vide the assessment order dated 29th January, 2022 passed under Section 143(3) of the Act.

For the assessment year 1992-1993 also, the Assessee filed the return of income on 7th December, 1992 showing a loss of ₹10,50,000.00. However, a revised return was filed subsequently on 28th January, 1993 showing loss of ₹44,75,212.00. Like the earlier years, Assessee did not maintain books of account and did not file the balance sheet for the same reason. However, the Assessee disclosed total sale proceeds of the weeklies at ₹7,16,95,530.00 and also advertisement receipts to the extent of ₹40 lakhs. The profit was estimated at ₹41,63,500.00 before allowing depreciation. On scrutiny of the performance certificate issued by the Audit Bureau of Circulation, the Assessing Officer observed that total sale proceeds of the weeklies after allowing sale commission came to ₹7,22,94,757.00. Following the profit percentage adopted in earlier years, the Assessing Officer estimated the income from the weeklies and other periodicals at 7.50 per cent before depreciation, adding the estimated advertisement receipts of ₹40 lakhs to the total sale receipts of ₹7,22,94,757.00. The Assessing Officer held that the total receipt from sale of weeklies and periodicals came to ₹7,62,94,757.00. The profit earned before depreciation at the rate of 7.50 per cent on the turnover came to ₹57,22,106.00. In respect of the daily newspaper, the Assessing Officer worked out the loss at ₹22,95,872.00 as against the loss of ₹41,23,500.00 claimed by the Assessee. Taking an overall view of the matter, the Assessing Officer estimated the business income of the Assessee during the assessment year 1992-1993 at ₹10,00,000.00 vide the assessment order dated 26th March, 1993 passed under Section 143(3) of the Act.

For the assessment year 1993-1994, the Assessee had submitted the profit and loss account as well as the balance sheet along with the return of income. While examining the balance sheet, the Assessing Officer noticed that the balance in the capital account of all the partners of the Assessee firm together was ₹1,85,75,455.00 as on 31st March, 1993 whereas the capital of the partners as on 31st December, 1985 was only ₹2,55,117.00. According to the Assessing Officer, none of the partners had any other source of income apart from one of the partners, Smt. Cleramma Vargese, who had a business under the name and style of “Mangalam Finance”. As the income assessed for all the years was found to be not commensurate with the increase in the capital by ₹1,83,20,338.00 (₹1,85,75,455.00 – ₹2,55,117.00) from 1985 to 1993, it was considered necessary to reassess the income of the Assessee as well as that of the partners for the assessment years 1988-1989 to 1993-1994. After obtaining the approval of the Commissioner of Income Tax, Trivandrum, notice under Section 148 of the Act was issued and served upon the Assessee on 29th March, 2000.

In respect of the assessment year 1990-1991, the Assessee informed the Assessing Officer that the return of income filed which culminated in the assessment order dated 29th January, 1992 may be considered as the return in the reassessment proceedings. The Assessing Officer took cognizance of the profit and loss account and the balance sheet filed by the Assessee before the South Indian Bank on the basis of which assessment of income for the assessment years 1988 – 1989 and 1989 – 1990 were completed. Objection of the Assessee that the aforesaid balance sheet was prepared only for the purpose of obtaining loan from the South Indian Bank and therefore could not be relied upon for income tax assessment was brushed aside. The reassessment was made on the basis of the accounts submitted to the South Indian Bank. By the reassessment order dated 21st March, 2002 passed under Section 144/147 of the Act, the Assessing Officer quantified
the total income of the Assessee at ₹29,66,910.00 thereafter order was passed allocating income among the partners.

Likewise, for the assessment year 1991-1992, the Assessing Officer passed a reassessment order dated 21st March, 2002 under Section 144/147 of the Act determining total income at ₹13,91,700.00. Following the same, allocation of income was also made amongst the partners.

In so far assessment year 1992-1993 is concerned, the Assessing Officer passed the reassessment order also on 21st March, 2002 under Section 144/147 of the Act determining the total income of the Assessee at ₹25,06,660.00. Thereafter, the allocation of income was made amongst the partners in the manner indicated in the order of reassessment.

The Assessing Officer had worked out the escaped income for the three assessment years of 1990-91, 1991-92 and 1992-93 at ₹50,96,041.00. This amount was further apportioned between the three assessment years in proportion to the sales declared by the Assessee in the aforesaid assessment years.

Against the aforesaid three reassessment orders for the assessment years 1990-91, 1991-92 and 1992-93, Assessee preferred three appeals before the first appellate authority i.e. Commissioner of Income Tax (Appeals), IV Cochin (briefly “the CIT(A)” hereinafter). Assessee raised the ground that it had disclosed all material facts necessary for completing the assessments. The assessments having been completed under Section 143(3) of the Act, the assessments could not have been reopened after expiry of four years from the end of the relevant assessment year as per the proviso to Section 147 of the Act. It was pointed out that the limitation period for the last of the three assessment years i.e. 1992-93, had expired on 31st March, 1997 whereas the notices under Section 148 of the Act were issued and served on the Assessee only on 29th March, 2000. Therefore, all the three reassessment proceedings were barred by limitation. The Assessee also argued that the alleged income escaping assessment could not be computed on an estimated basis. In the present case, the Assessing Officer had allocated the alleged escaped income for the three assessment years in proportion to the corresponding sales turnover. It was further argued that as per Section 282(2), notice under Section 148 of the Act in the case of a partnership firm was required to be made to a member of the firm. In the present case, the notices were issued to the partnership firm. Therefore, such notices could not be treated as valid.

CIT(A) rejected all the above contentions urged by the Assessee. CIT(A) relied on Section 139(9)(f) of the Act and thereafter held that the Assessee had not furnished the details as per the aforesaid provisions and therefore fell short of the requirements specified therein. Vide the common appellate order dated 26th February, 2004, CIT(A) held that, as the Assessee had failed to disclose all material facts necessary to make assessments, therefore it could not be said that the reassessment proceedings were barred by limitation in terms of the proviso toSection 147. The other two grounds raised by the Assessee were also repelled by the first appellateauthority. Thereafter, CIT(A) made a detailed examination of the factual aspect thereafter it proposed enhancement of the quantum of escaped income. Following thesame, CIT(A) enhanced the assessment by fixing the unexplained income at ₹1,44,02,560.00 for the assessment years 1987-88 to 1993-94 which was thereafter apportioned in respect of the relevant three assessment years.

Thus, as against the total escaped income of ₹50,96,040.00 for the above three assessment years as quantified by the Assessing Officer, CIT(A) enhanced and redetermined such income at ₹68,20,854.00.

The CIT(A), however, in the appellate order had noted that the Assessee had filed its balance sheet as on 31st December, 1985 while filing the return of income for the assessment year 1986-87. The next balance sheet was filed on 31st March, 1993. No balance sheet was filed in the interregnum on the ground that it could not maintain proper books of accounts as the relevant materials were seized by the department in the course of a search and seizure operation and not yet returned. CIT(A) further noted that the Assessing Officer had taken the balance sheet as on 31st March, 1989 filed by the Assessee before the South Indian Bank as the base for reconciling the accounts of the partners. It was noticed that CIT(A) in an earlier appellate order dated 26th March, 2002 for the assessment year 1989-90 in the Assessee’s own case had held that the profit and loss account and the balance sheet furnished to the South Indian Bank were not reliable. CIT(A) in the present proceedings agreed with such finding of his predecessor and held that the unexplained portion, if any, of the increase in capital and current account balance with the Assessee had to be analysed on the basis of the balance sheet filed before the Assessing Officer as on 31st December, 1985 and as on 31st March, 1993.

Aggrieved by the common appellate order passed by the CIT(A) dated 26th February, 2004, Assessee preferred three separate appeals before the Tribunal.

In the three appeals filed by the Assessee, revenue also filed cross objections.

By the common order dated 29th October, 2004, the Tribunal allowed the appeals filed by the Assessee and set aside the orders of reassessment for the three assessment years as affirmed and enhanced by the CIT(A). Tribunal held that the re-examination carried out by the Assessing Officer was not based on any fresh material or evidence. The reassessment orders could not be sustained on the basis of the balance sheet filed by the Assessee before the South Indian Bank because in an earlier appeal of the Assessee itself, CIT(A) had held that such balance sheet and profit and loss account furnished to the bank were not reliable. The original assessments were completed under Section 143(3) of the Act. Therefore, it was not possible to hold that the Assessee had not furnished necessary details for completing the assessments at the time of original assessment. In such circumstances, the Tribunal held that the case of the Assessee squarely fell within the four corners of the proviso to Section 147. Consequently, the reassessments were held to be barred by limitation, thus without jurisdiction. While allowing the appeals of the Assessee, the Tribunal dismissed the cross objections filed by the revenue.

Against the aforesaid common order of the Tribunal, the Respondent preferred three appeals before the High Court under Section 260A of the Act. All the three appeals were allowed by the High Court vide the common order dated 12th October, 2009. According to the High Court, the finding of the Tribunal that the Assessee had disclosed fully and truly all material facts necessary for completion of the original assessments was not tenable. Holding that there was no material before the Tribunal to come to the conclusion that the Assessee had disclosed fully and truly all material facts required for completion of original assessments, the High Court set aside the order of the Tribunal, and remanded the appeals back to the Tribunal to consider the appeals on merit after issuing notice to the parties.

It is against this order that the Assessee filed the special leave petitions which on leave being granted were registered as civil appeals. The related civil appeals were also filed by the partners of the Assessee firm which were dependent on the outcome of the main civil appeals.

The Supreme Court observed that from a reading of the reasons recorded by the Assessing Officer leading to formation of his belief that income of the Assessee had escaped assessment for the assessment years under consideration, the only material which came into possession of the Assessing Officer subsequently was the balance sheet of the Assessee for the assessment year 1989-90 obtained from the South Indian Bank. After obtaining this balance sheet, the Assessing Officer compared the same with the balance sheet and profit loss account of the Assessee for the assessment year 1993-94. On such comparison, the Assessing Officer noticed significant increase in the current and capital accounts of the partners of the Assessee. On that basis, he drew the inference that profit of the Assessee for the three assessment years under consideration would be significantly higher which had escaped assessment. The figure of under assessment was quantified at ₹1,69,92,728.00. Therefore, he recorded that he had reason to believe that due to omission or failure on the part of the Assessee to disclose fully and truly all material facts necessary for the assessments, incomes chargeable to tax for the three assessment years had escaped assessment.

The Supreme Court noted that the Assessee did not submit regular balance sheet and profit and loss account for the three assessment years under consideration on the ground that books of account and other materials/documents of the Assessee were seized by the department in the course of search and seizure operation, which were not yet returned to the Assessee. In the absence of such books etc., it became difficult for the Assessee to maintain year-wise regular books of account etc. However, regular books of account and profit and loss account were filed by the Assessee along with the return of income for the assessment year 1993-94.

According to the Supreme Court, the Assessing Officer culled out the figures discernible from the balance sheet for the assessment year 1989-90 obtained from the South Indian Bank, and compared the same with the balance sheet submitted by the Assessee before the Assessing Officer for the assessment year 1993-94 to arrive at the aforesaid conclusion.

The Supreme Court noted that the Assessee had filed its regular balance sheet as on 31st December, 1985 while filing the return of income for the assessment year 1986-87. The next balance sheet filed was on 31st March, 1993 for the assessment year 1993-94. No balance sheet was filed in the interregnum as according to the Assessee, it could not maintain proper books of account as the relevant materials were seized by the department in the course of a search and seizure operation and not yet returned. It was not possible for it to obtain ledger balances to be brought down for the succeeding accounting years.

As regards to the balance sheet on 31st March, 1989 filed by the Assessee before the South Indian Bank, and which was construed by the Assessing Officer to be the balance sheet of the Assessee for the assessment year 1989-90, the Supreme Court observed that the explanation of the Assessee was that it was prepared on provisional and estimate basis and was submitted before the South Indian Bank for obtaining credit and therefore could not be relied upon in assessment proceedings.

The Supreme Court noted that this balance sheet was also relied upon by the Assessing Officer in the reassessment proceedings of the Assessee for the assessment year 1989-90. In the first appellate proceedings, CIT(A) in its appellate order dated 26th March, 2002 held that such profit and loss account and the balance sheet furnished to the South Indian Bank were not reliable and had discarded the same. That being the position, according to the Supreme Court, the Assessing Officer could not have placed reliance on such a balance sheet submitted by the Assessee allegedly for the assessment year 1989-90 to the South Indian Bank for obtaining credit. Dehors such a balance sheet, there was no other material in the possession of the Assessing Officer to come to the conclusion that income of the Assessee for the three assessment years had escaped assessment.

Further, the Supreme Court observed that Section 139 places an obligation upon every person to furnish voluntarily a return of his total income if such income during the previous year exceeded the maximum amount which is not chargeable to income tax. The Assessee is under further obligation to disclose all material facts necessary for his assessment for that year fully and truly. However, the constitution bench of the Supreme Court in Calcutta Discount Company Limited, has held that while the duty of the Assessee is to disclose fully and truly all primary and relevant facts necessary for assessment, it does not extend beyond this. Once the primary facts are disclosed by the Assessee, the burden shifts onto the Assessing Officer.

According to the Supreme Court, it was not the case of the revenue that the Assessee had made a false declaration. On the basis of the “balance sheet” submitted by the Assessee before the South Indian Bank for obtaining credit which was discarded by the CIT(A) in an earlier appellate proceeding of the Assessee itself, the Assessing Officer upon a comparison of the same with a subsequent balance sheet of the Assessee for the assessment year 1993-94 which was filed by the Assessee and was on record, erroneously concluded that there was escapement of income and initiated reassessment proceedings.

According to the Supreme Court, while framing the initial assessment orders of the Assessee for the three assessment years in question, the Assessing Officer had made an independent analysis of the incomings and outgoings of the Assessee for the relevant previous years and thereafter had passed the assessment orders under Section 143(3) of the Act. An assessment order under Section 143(3) was preceded by notice, enquiry and hearing under Section 142(1), (2) and (3) as well as under Section 143(2). If that be the position and when the Assessee had not made any false declaration, it was nothing but a subsequent subjective analysis of the Assessing Officer that income of the Assessee for the three assessment years was much higher than what was assessed and therefore, had escaped assessment. This was nothing but a mere change of opinion which cannot be a ground for reopening of assessment.

The Supreme Court also dealt with the aspect of defective return. According to the Supreme Court, admittedly, the returns for the three assessment years under consideration were not accompanied by the regular books of account. Though under Sub-section (9)(f) of Section 139, such returns could have been treated as defective returns by the Assessing Officer and the Assessee intimated to remove the defect failing which the returns would have been invalid, however, the materials on record do not indicate that the Assessing Officer had issued any notice to the Assessee bringing to its notice such defect and calling upon the Assessee to rectify the defect within the period as provided under the aforesaid provision. In other words, the Assessing Officer had accepted the returns submitted by the Assessee for the three assessment years under question. The Supreme Court noted that it was the case of the Assessee that though it could not maintain and file regular books of account with the returns in the assessment proceedings for the three assessment years under consideration, nonetheless it had prepared and filed the details of accounts as well as incomings and outgoings of the Assessee etc. for each of the three assessment years which were duly verified and enquired into by the Assessing Officer in the course of the assessment proceedings which culminated in the orders of assessment under Sub-section (3) of Section 143.

According to the Supreme Court, a return filed without the regular balance sheet and profit and loss account may be a defective one but certainly not invalid. A defective return cannot be regarded as an invalid return. The Assessing Officer has the discretion to intimate the Assessee about the defect(s) and it is only when the defect(s) are not rectified within the specified period that the Assessing Officer may treat the return as an invalid return. Ascertaining the defects and intimating the same to the Assessee for rectification, are within the realm of discretion of the Assessing Officer. It is for him to exercise the discretion. The burden is on the Assessing Officer. If he does not exercise the discretion, the return of income cannot be construed as a defective return. As a matter of fact, in none of the three assessment years, the Assessing Officer had issued any declaration that the returns were defective.

The Supreme Court noted that the Assessee has asserted that though it could not file regular books of account along with the returns for the three assessment years under consideration because of seizure by the department, nonetheless the returns of income were accompanied by tentative profit and loss account and other details of income like cash flow statements, statements showing the source and application of funds reflecting the increase in the capital and current accounts of the partners of the Assessee etc., which were duly enquired into by the Assessing Officer in the assessment proceedings.

In view of above, the Supreme Court was of the view that the Tribunal was justified in coming to the conclusion that the reassessments for the three assessment years under consideration were not justified. The High Court had erred in reversing such findings of the Tribunal. Consequently, the Supreme Court set aside the common order of the High Court and restored the common order of the Tribunal dated 29th October, 2004.

Section 148A – Reassessment –Sanction – Non Application of mind.

31 ArunaSurulkar vs. Income Tax Officer,

Ward-19(2)(4),

Writ Petition No. 3503 of 2023 (Bom) (HC)

Date of Order: 22nd January, 2024

Section 148A – Reassessment –Sanction – Non Application of mind.

Petitioner challenged the notice dated 23rd March, 2022 issued under Section 148A(b) of the Act and order dated 22nd April, 2022 passed under Section 148A(d) of the Act, also the consequent notice dated 22nd April, 2022 issued under Section 148 of the Act.

Admittedly, Petitioner did not reply to the initial notice dated 23rd March, 2022 that Petitioner received under Section 148A(b) of the Act. The order passed under Section 148A(d) of the Act, whereby in paragraph 3, it is stated as under:

“3. From the details of transactions as mentioned above, it is seen that there is violation of the provisions of section 50C of the Income Tax Act, 1961. Due to noncompliance, assessee also failed to explain the transaction. Further, on verification of assessee’s return of income for AY 2018-2019, it is seen that differential amount of Rs. 26,44,500/- is not offered for taxation.”

The Petitioner contended that provisions of Section 50C of the Act would apply only to a seller and not the assessee in this case, who is the buyer of the property.
Therefore, it is the petitioner’s case that there has been total non application of mind while issuing this order under Section 148A(d) of the Act. If the sanctioning authority had read the order, he would not have granted the sanction because Section 50C of the Act does not apply to buyers.

The Revenue relies on an affidavit-in-reply filed by Mr. Manish and submits that it was a human error. The Court observed that the said Manish is incompetent to make the statement because it is not the said Manish, who had passed the impugned order. There is also nothing to indicate in the affidavit that Manish made inquiries with the officer Abhishek Kumar Sinha, who passed the impugned order seeking an explanation for reliance on Section 50C of the Act.

The Revenue further contended that the reopening was to provide an opportunity to the assessee of being heard and thus, thoroughly analyse the facts of the case with documentary evidence and the sufficiency or correctness of the material cannot be considered at the stage of reopening. The questions of fact and law are left open tobe investigated and decided by the Assessing Authority and therefore, reopening is valid. The Hon. Court did not accept this stand of Respondents in as much as the Assessing Officer before issuing a notice must have satisfied himself that what he writes makes sense. Even the Principal Commissioner, who granted sanction should have also applied his mind and satisfied himself that the order passed under Section 148A(d) of the Act was being issued correctly by applying mind. It cannot be a mechanical sanction.

The court further observed that there is nothingin the notice to explain as to how, if the transaction amount is less than the stamp duty value, there can be escapement of any income particularly in the hands of a buyer.

In the circumstances, the petition was allowed.

Section 36(1)(iii): Interest free advance to subsidiary – for the purpose of business – allowable.

30 Principal Commissioner of Income Tax-7 vs. ESSEL Infra Projects Ltd. (Former PAN India Paryatan Ltd.)

Income Tax Appeal No. 927 of 2018 (Bom.) (HC)

Date of Order: 31st January, 2024

Section 36(1)(iii): Interest free advance to subsidiary – for the purpose of business – allowable.

The Respondent-Assessee is engaged in the business of operating amusement parks, infrastructure development management and finance activities. Assessee had given a sum of ₹25 crores to PAN India Infrastructure Private Limited, its subsidiary. The Assessing Officer took the view that Assessee had diverted the interest bearing fund by giving interest-free advance and, therefore, the entire interest claim of ₹1,48,10,695 needs to be disallowed. There were also certain other disallowances made by AO.

The Commissioner of Income Tax (Appeals) held that the investment made by Assessee in its subsidiary was in the course of carrying on its business and the interest expenditure is not required to be disallowed. It was held that under Section 36(1)(iii) of the Act, interest paid in respect of capital borrowed for the purpose of business is a permissible deduction in the computation of profits and gains of business or profession and the investment made by Assessee being in the course of carrying on its business, interest expenditure is not required to be disallowed.

This was impugned by the Revenue in the appeal filed before the Income Tax Appellate Tribunal.

The Hon. High Court observed that the Tribunal, on the facts, agreed with the finding arrived at by the CIT(A) that the amount given by Assessee to its subsidiary was for the purpose of business of Assessee. The Tribunal has accepted the factual finding of the CIT(A) that Assessee being engaged in the business of ‘infrastructure development management and finance’ in addition to its ‘amusement park and water park’, has set up the subsidiary to which these funds were provided to take up the infrastructure project on behalf of Assessee. A factual finding has been arrived at that the finance provided to the wholly owned subsidiary was for its business of infrastructure and is used for that purpose. It has accepted that the nexus between the advance of funds and the business of Appellant / Assessee carried out through the subsidiary stood established and hence, no disallowance under Section 36(1)(iii) of the Act was warranted.

The Hon Court relied on the decision in case of Vaman Prestressing Co. Pvt. Ltd. vs. Additional Commissioner of Income Tax- Rg.2(3) &Ors., 2023 SCC OnLineBom. 1947.

Held, no substantial questions of law arise.

The Appeal was dismissed.

Section 11(1A) – Charitable trust – Permission from the Charity Commissioner before disposing of its property.

29 Commissioner of Income Tax (Exemption), Pune vs. Shree Ram Ashram Trust Nashik

ITXA (IT) No. 448 of 2018 (Bom) (HC)

Date of Order: 31st January, 2024

Section 11(1A) – Charitable trust – Permission from the Charity Commissioner before disposing of its property.

The Respondent-Assessee is a public charitable trust. It had entered into an agreement in 1994 with Buildforce Properties Pvt. Ltd. (“Buildforce”) to sell its property. Since, the Assessee was a trust, it needed permission from the Charity Commissioner before disposing of the property. The Charity Commissioner granted permission vide order dated 29th December, 1995, subject to certain conditions. As per the conditions imposed, the Assessee was to complete the sale within one year from the date of the order, the sale consideration of ₹6.30 crores was to be invested in fixed deposits with nationalised bank or scheduled bank or co-operative bank or in any public securities earning higher rate of interest and only the interest was to be utilized for the charitable activities of the trust. As per the Memorandum of Understanding (“MOU”) with Buildforce, symbolic possession was given to Buildforce. As per the MOU, Buildforce was to develop the property. Admittedly, a certain dispute arose between Buildforce and Assessee and a suit came to be filed being Suit No. 2395 of 1998. The suit was settled by filing ‘Consent Terms’ and an order was passed by the Hon’ble High Court on 25th July, 2006, taking the Consent Terms on record subject to appropriate directions/permissions to be granted by the Charity Commissioner. Under the Consent Terms, Assessee agreed to accept a sum of₹6.28 Crores in full and final settlement and transferred the property in favour of the nominee of Buildforce, i.e.,M/s. Dilip Estate & Town Planners Pvt. Ltd. (“Dilip Estate”). Post the order of the Hon’ble High Court, permissions were sought from the Charity Commissioner, who vide an order dated 5th April, 2007, extended the time to complete the transaction. The time to execute the conveyance deed was extended up to 31st May, 2007. A sale deed was executed on 20th April, 2007 for the sale of the property to Dilip Estates. On execution of the sale deed, sale proceeds were received by Assessee, who invested the same with Bank of Baroda and Dena Bank, both nationalized banks. During the course of hearing before the Income Tax Appellate Tribunal (“ITAT”) also the fixed deposits continued and the list was also made available to the ITAT. It was the case of Assessee that when the sale proceeds of capital assets are invested in fixed deposit, then no capital gain is to be assessed in the hands of Assessee in view of the provisions of Section 11(1A) of the Act.

As per clause (a) of Section 11(1A), where Assessee holds capital asset under trust wholly for charitable or religious purpose and the same is transferred, then where whole or any part of net consideration is utilized for acquiring another capital asset, the capital gains arising from the transfer shall be deemed to have been applied to charitable or religious purposes. Depending on whether whole or part of net consideration is so utilized, then so much of capital gains equal to the amount, if any, so exceeds the cost of asset is to be allowed as deduction. Therefore, in the hands of Assessee, where Assessee has sold the capital asset being immovable property which Assessee claims it was holding under trust wholly for charitable or religious purposes, and on its transfer,the sale proceeds are invested in long term investments with banks in FDRs, then no capital gain arises to Assessee.

The Assessing Officer did not accept this stand of Assessee because, according to him, Assessee entered into an agreement with Buildforce in 1994 and the sale deed was executed in favour of its nominee, Dilip Estates only on 20th April, 2007, i.e., after a period of almost 12 years. In this intervening period of 12 years, where the possession of the property was with Buildforce as per the MOU, Assessee was not in possession of the property. Therefore, it cannot be held that the property was being held under trust wholly for charitable or religious purposes. Therefore, Assessee has not fulfilled the requirement of Section 11(1A) of the Act. Hence, Assessee is not entitled to the benefit provided under the said Sub-section.

On appeal, the Commissioner of Income Tax (Appeals) allowed the appeal.

The limited issue that was before the ITAT in the appeal that the Revenue filed was whether Assessee was entitled to claim the benefit under Section 11(1A) of the Act. The ITAT, came to the conclusion that Assessee was entitled to claim the benefit.

On appeal the Revenue – Appellant proposed a following substantial question of law:

“Whether on the facts and circumstances of the present case and in law, the Hon’ble ITAT was correct in allowing Exemption under Section 11(1A) of the Income Tax Act in the instant case, even though the property was not held under Assessee Trust wholly for the charitable/religious purpose?”

The Hon. High court observed that admittedly, Assessee was the owner of the property and the sale deed was executed with Dilip Estates only on 20th April, 2007. Even the Charity Commissioner has accorded his permission for the sale. Once the year of sale is taken to be AY 2008-09, then admittedly, the possession of said property is deemed to have been given in the said assessment year. Once the AO has accepted the plea that transfer took place in AY 2008-09 and assessed income under long term capital gains in the hands of Assessee, the ITAT correctly concluded that it cannot be said that the possession was not transferred in AY 2008-09. Once legal possession has been handed over by Assessee, only in 2008-09, then it is presumed and accepted that the said capital asset was held by Assessee trust wholly for charitable purposes till the date of its sale.

In the circumstance, it was held that no substantial question of law arises.

Appeal of Revenue was dismissed.

Rectification of mistake — Mistake apparent from record — Exemption — Income received by non-resident for service rendered on foreign ship outside India — Not taxable in India even if credited to bank in India — Assessee mistakenly declaring in return salary received for services rendered outside India — Rejection of application for rectification — Failure to apply circular issued by CBDT — Error apparent on face of record — Orders refusing to rectify mistake set aside — Assessee entitled to exemption u/s. 10(6)(viii) — Matter remanded to AO. Appeal to Appellate Tribunal — Rectification of mistake — Failure to apply judicial precedents and circular issued by CBDT — Error apparent on face of record — Tribunal has jurisdiction to rectify.

88 Rajeev Biswas vs. UOI

[2023] 459 ITR 36 (Cal)

A.Y.: 2012-13

Date of Order: 22nd September, 2022

Ss. 10(6)(viii), 154 and 254 of ITA 1961

Rectification of mistake — Mistake apparent from record — Exemption — Income received by non-resident for service rendered on foreign ship outside India — Not taxable in India even if credited to bank in India — Assessee mistakenly declaring in return salary received for services rendered outside India — Rejection of application for rectification — Failure to apply circular issued by CBDT — Error apparent on face of record — Orders refusing to rectify mistake set aside — Assessee entitled to exemption u/s. 10(6)(viii) — Matter remanded to AO.

Appeal to Appellate Tribunal — Rectification of mistake — Failure to apply judicial precedents and circular issued by CBDT — Error apparent on face of record — Tribunal has jurisdiction to rectify.

The assessee was employed outside the Indian territory. For the A.Y. 2012-13, the return filed by the assessee was processed u/s. 143(1) of the Income-tax Act, 1961 computing the tax liability at ₹4,40,070. The Chartered Accountant of the assessee filed a petition for rectification stating that the assessee was a non-resident Indian during the period as he had to stay outside the country due to his employment, that he was outside the country for a total of 210 days during the previous year relating to the A.Y. 2012-13 and the income had been assessed without considering the assessee’s non-resident status. The request was rejected by the Deputy Commissioner (International Taxation) on the ground that there was no mistake apparent from the record.

The assessee preferred an appeal before the Commissioner (Appeals) contending that the Assessing Officer had ignored the revised return filed by the assessee where the income earned by the assessee under the head “Salary” was exempted u/s. 10(6)(viii) of the Act. The Commissioner (Appeals) dismissed the appeal. The Tribunal rejected the assessee’s further appeal on the ground that the issue pertaining to the assessee’s claim for exemption on account of salary income stated to be earned outside India was a debatable issue and the Commissioner (Appeals) was right in rejecting the appeal. The assessee preferred an application for rectification before the Tribunal which it dismissed by order dated5th January, 2018.

The Calcutta High Court allowed the appeal filed by the assessee and held as under:

“i) Circular No. 13 of 2017, dated 11th April, 2017 ([2017] 393 ITR (St.) 91) issued by the CBDT states that salary approved to a non-resident seafarer for service rendered outside India on a foreign ship shall not be included in the total income merely because the salary has been credited in the non-resident external account maintained with an Indian bank by the seafarer. In Circular No. 14 (XL-35), dated 11th April, 1995 the CBDT has directed the Officers of the Department not to take advantage of ignorance of an assessee as to his rights and stated that it is the duty of the Officers of the Department to assist the assessee in every reasonable way, particularly in the matter of claiming and securing reliefs under the Income-tax Act, 1961 and that in this regard the Officers should take the initiative in guiding an assessee where proceedings and other particulars before them indicate that some refund or relief is due to the assessee.

ii) The orders of the Tribunal and the Commissioner (Appeals) were perverse because:

(a) On the date when the Tribunal had passed the initial order dismissing the appeal of the assessee there was a binding decision of the court in Utanka Roy vs. DIT (International Taxation) [2017] 390 ITR 109 (Cal) which the Tribunal could not have ignored. The Tribunal having ignored it there was an error which was apparent on the face of the record. The Tribunal ought to have exercised its power when the rectification application was filed by the assessee but had erroneously rejected it. Therefore, the said order dated 5th January, 2018 also suffered from perversity.

(b) The Assessing Officer failed to note that the assessee was an individual and the return of income was filed by the chartered accountant and the chartered accountant on going through the facts found the mistake which had been committed and immediately filed the revised return which has been duly acknowledged by the Department. Thereafter, the rectification application was filedwhich was dealt with by the Deputy Commissioner of Income-tax, International Taxation which was also rejected. In our considered view the Departmentcould have taken a more reasonable stand, more particularly when the law on the subject is in favour of the assessee.

(c) The Assessing Officer and the Commissioner (Appeals) had ignored Circular No. 13 of 2017, dated 11th April, 2017 and Circular No. 14 (XL-35) dated 11th April, 1995 issued by the CBDT.

iii) The initial order and the order in the miscellaneous application passed by the Tribunal, the orders passed by the Commissioner (Appeals), the Deputy Commissioner (International Taxation), the order of rejection of the application under section 154 passed by the Centralised Processing Centre were quashed. The Assessing Officer was to review the assessment in accordance with law and Circular No. 13 of 2017, dated 11th April, 2017 issued by the Central Board of Direct Taxes and grant relief under section 10(6)(viii) by excluding the income received abroad by the assessee.”

Recovery of tax — Stay of demand pending appeal before CIT(A) — Discretion must be exercised in judicious manner — AO not bound by Departmental instructions.

87 Sudarshan Reddy Kottur vs. ITO

[2023] 458 ITR 750 (Telangana)

A.Y.: 2017-18

Date of Order: 30th January, 2023

S. 220(6) of ITA 1961

Recovery of tax — Stay of demand pending appeal before CIT(A) — Discretion must be exercised in judicious manner — AO not bound by Departmental instructions.

Assesee is an individual. For the A.Y. 2017-18, the assessee had filed return of income on 30th October, 2017 declaring total income of ₹15,02,400. By an order dated 30th March, 2022 passed u/s. 147 r.w.s. 144B of the Income-tax Act, 1961, the Assessing Officer determined the total income at ₹24,89,27,611 and raised the demand. The assessee filed an appeal before the CIT(A) and made an application u/s. 220(6) for stay of demand before the Assessing Officer. By the order dated 16th January, 2023, the Assessing Officer directed the assessee to pay 20 per cent of the demand on or before 25th January, 2023, but at the same time rejected the application for stay of demand.

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

“i) When the Income-tax authority exercises jurisdiction u/s. 220(6) of the Income-tax Act, 1961 he exercises quasi-judicial powers. While exercising quasi-judicial powers, the authority is not bound or confined by Departmental instructions.

ii) From a perusal of the order dated 16th January, 2023, it could be seen that the Income-tax Officer had followed instructions of the CBDT dated 21st March, 1996 to the effect that where an outstanding demand was disputed before the appellate authority, the assessee had to pay 20 per cent of the disputed demand. Accordingly, the assessee was directed to pay 20 per cent of the outstanding demand. There had been no application of mind by the Assessing Officer. The order therefore was not valid.

iii) That being the position, we set aside the order dated 16th January, 2023 and remand the matter back to the Assessing Officer for passing a fresh order in accordance with law after giving due opportunity of hearing to the assessee. This shall be done within a period of six (6) weeks from the date of receipt of a copy of this order. Till the aforesaid period of six (6) weeks, the respondents are directed not to take coercive steps for realising the outstanding demand for the A.Y. 2017-18.”

Reassessment — Notice — New procedure — Effect of decision of Supreme Court in Ashish Agarwal — Liberty available to matters at notice stage — Liberty granted by High Court in assessee’s petition against notice under unamended provision prior to Supreme Court decision — AO issuing second notice but allowing proceedings to lapse — Department cannot proceed for third time invoking liberty granted by Supreme Court — Notices and proceedings quashed.

86 Vellore Institute of Technology vs. ACIT(Exemption)

[2023] 459 ITR 499 (Mad)

A.Y.: 2015-16

Date of Order: 30th June, 2023

Ss. 147, 148, 148A(b) and 148A(d) of ITA 1961

Reassessment — Notice — New procedure — Effect of decision of Supreme Court in Ashish Agarwal — Liberty available to matters at notice stage — Liberty granted by High Court in assessee’s petition against notice under unamended provision prior to Supreme Court decision — AO issuing second notice but allowing proceedings to lapse — Department cannot proceed for third time invoking liberty granted by Supreme Court — Notices and proceedings quashed.

For the A.Y. 2015-16, the Assessing Officer issued notice against the assessee under the unamended provisions of section 148 for reopening the assessment u/s. 147 of the Income-tax Act, 1961. Based on the liberty granted by the court on a writ petition against this notice, the Assessing Officer issued a second notice u/s. 148A(b) which included the details of the information on the basis of which the allegation of escapement of income was made. An order rejecting the objections of the assessee u/s. 148A(d) was passed and notice u/s. 148 was issued. On a writ petition challenging the second notice, the court granted an interim order which stated that while the second notice u/s. 148 could proceed with any decision taken by the Department would be subject to the result of the writ petition. Pursuant to that no notice u/s. 143(2) was issued. Thereafter, based on the decision of the Supreme Court dated 4th May, 2022 in UOI vs. Ashish Agarwal [2022] 444 ITR 1 (SC), the Assessing Officer issued a third notice dated 2nd June, 2022 u/s. 148A(b) and rejected the objections filed by the assessee in his order u/s. 148A(d) stating that the second notice dated 18th April, 2022 was dropped and the first notice u/s. 148 dated 12th April, 2021 which was the subject-matter of the first writ petition filed by the assessee was revived.

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

“i) The distinction between the erstwhile and the new system for reassessment of income that has escaped assessment u/s. 147 of the Income-tax Act, 1961 is that, under the old procedure it was necessary for the Assessing Officer to record reasons on the basis of which a notice u/s. 148 would be issued. The reasons formed the substratum of the proceedings for reassessment. In the new procedure obviating the necessity to record reasons and furnish them to the assessee upon request, the reasons are to be part of the initial notice u/s. 148A(b) and a response thereto is solicited. After hearing the assessee, an order is to be passed u/s. 148A(d) for issuance of notice u/s. 148 after considering the objections raised.

ii) There was no justification for the Department either in law or on fact, to subject the assessee to a third round of reassessment proceedings u/s. 147 merely by invoking the liberty granted in UOI vs. Ashish Agarwal decided on 4th May, 2022. The Department was bound by its decision in full when it dropped the second round of proceedings pursuant to the order of the High Court in the writ petition against the second notice issued under the new procedure. After the passing of the order by the High Court in respect of the second notice, proceedings had been commenced afresh by issuance of a notice u/s. 148A(b) and those proceedings had culminated by issuance of notice u/s. 148 dated 18th April, 2022 pursuant to which no notice u/s. 143(2) had been issued and the proceedings lapsed. The explanation tendered for issuance of a notice under section 148A(b) for the third time on June 2, 2022 was fallacious and unacceptable as the liberty granted by the Supreme Court in its decision dated 4th May, 2022 would be available only in those situations where the matters stood at an initial or preliminary stage of notice for reassessment and not where the proceedings had been carried forward to the stage of passing of order under section 148A(d) and issuance of notice under section 148 .

iii) The Department’s submission that the proceedings initiated pursuant to the first notice stood revived was also factually incorrect as there were material differences between the reasons in the first notice and those in notice u/s. 148A(b) dated 2nd June, 2022. If the third round of proceedings was only a revival of the earlier proceedings, the reasons ought to have been identical but they were not. The notices and consequential proceedings were quashed.”

Reassessment — Initial notice — Order u/s. 148A(d) for issue of notice — Notice u/s. 148 — Validity — Notice based on information from insight portal that assessee had purchased property — Assessee disclosing all details including bank statement in response to notice u/s. 142(1) and duly examined by AO in original assessment — Notices and order for issue of notice set aside.

85 Urban Homes Realty vs. UOI

[2023] 459 ITR 96 (Bom)

A.Y.: 2016-17

Date of Order: 4th July, 2023

Ss. 142(1), 143(3), 147, 148, 148A(b) and 148A(d) of ITA 1961

Reassessment — Initial notice — Order u/s. 148A(d) for issue of notice — Notice u/s. 148 — Validity — Notice based on information from insight portal that assessee had purchased property — Assessee disclosing all details including bank statement in response to notice u/s. 142(1) and duly examined by AO in original assessment — Notices and order for issue of notice set aside.

The assessee was a property developer. For the A.Y. 2016-17, its case was selected for scrutiny for various reasons, one of which was large investment in property. The Assessing Officer stated in his order u/s. 143(3) of the Income-tax Act, 1961 that during the course of assessment proceedings the assessee submitted the details as called for and such details were examined. Thereafter, the Assessing Officer issued an initial notice u/s. 148A(b) on the basis of information from the Insight portal that the assessee had made an investment in a property on account of which income had escaped assessment. The Assessing Officer rejected the assessee’s explanation that all the details in respect of the purchase of the property in question were disclosed in the original scrutiny assessment and passed an order u/s. 148A(d) for issue of notice u/s. 148 and also issued a notice u/s. 148 pursuant thereto.

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

“i) The findings of the Assessing Officer that the issue covered in the scrutiny assessment u/s. 143(3) was not related to verification of source in respect of purchase of property, that the assessee did not furnish relevant bank statement evidencing the payments made for purchase of the property and did not explain the source during the course of issuance of notice u/s. 148A(b) were incorrect. In the notice u/s. 142(1) issued on 24th August, 2018, the assessee was expressly called upon to submit all the details of all the properties purchased with copies of the purchase deed and a copy of statement of the bank account from which the payment was made and the assessee had in its response furnished all the details called for. In his order u/s. 143(3) the Assessing Officer had specifically stated that during the course of assessment proceedings the assessee had submitted various details as called for and that those details were examined and that the data had been verified from the details submitted by the assessee. Therefore, the Assessing Officer was certainly satisfied with all the details provided by the assessee.

ii) In the reply to the notice issued u/s. 148A(b) also, the assessee had given details of the consideration paid for the property and the source of funds. Therefore, the Assessing Officer’s stating in his order u/s. 148A(d) that the assessee did not provide the details or explaining the source was incorrect. Accordingly, the initial notice u/s. 148A(b), the subsequent order u/s. 148A(d) and the consequential notice u/s. 148 were quashed and set aside.”

Reassessment — New procedure — Information that income has escaped assessment — Objection from Comptroller and Auditor General required —Internal audit objection cannot form the basis of reassessment — Reassessment based on change of opinion — Reassessment is impermissible in law.

84 Hasmukh Estates Pvt. Ltd. vs. ACIT

[2023] 459 ITR 524 (Bom)

A.Y.: 2015-16

Date of Order: 8th November, 2023

Ss. 147, 148, 148A(b), 148A(d) and 151 of ITA 1961

Reassessment — New procedure — Information that income has escaped assessment — Objection from Comptroller and Auditor General required —Internal audit objection cannot form the basis of reassessment — Reassessment based on change of opinion — Reassessment is impermissible in law.

The assessee sold a plot of land to one RNL by a registered agreement to sell dated 7th October, 2011 for a consideration of ₹18 crores, the stamp duty value of which was ₹16.5 crores. Due to non-fulfilment of certain obligations on the part of the assessee, the consideration was reduced to ₹12 crores. The case was selected for scrutiny and the assessment order was passed on 26th December, 2017, accepting the consideration of ₹12 crores. The submission of the assessee to the Assessing Officer in the original assessment proceedings in respect of the sale of land was that section 50C of the Act was not applicable as the sale consideration of ₹18 crores was higher than the stamp valuation of ₹16.50 crores.

Thereafter, an audit memo dated 29th March, 2019 was received by the Assessing Officer raising an objection that Petitioner has shown lower amount of sale consideration than value adopted by the Stamp Duty Authority thus, inviting the applicability of Section 50C of the Act to the transaction. Subsequently, the assessee’s case was reopened to tax the difference between the stamp duty value and the sale consideration u/s. 50C of the Act.

The assessee filed a writ petition challenging the reopening of the assessment. The Bombay High Court allowed the petition, quashed the reassessment proceedings and held as follows:

“i) The admitted facts clearly indicated that the information on the basis of which the Assessing Officer issued notice alleging that there was “information” that suggested escapement of income was an internal audit objection. Information is explained in section 148 of the Act to mean “any objection raised by the Comptroller and Auditor General of India” and no one else. Prima facie the information which formed the basis of reopening itself did not fall within the meaning of the term “information” under Explanation 1 to section 148 of the Income-tax Act, 1961, and hence, the reopening was not permissible as it clearly fell within the purview of a “change of opinion” which was impermissible in law.

ii) Consequently, dehors any audit objection by the Comptroller and Auditor General, a view deviating from that which was already taken during the course of issuing original assessment order was nothing but a “change of opinion” which was impermissible under the provisions of the Act.”

Reassessment — Notice for reassessment after 1st April, 2021 — All relevant information provided by assessee prior to original assessment order — AO has no power to review his own order — Query raised by AO answered and accepted during original assessment — Reopening of assessment on mere change of opinion not permissible.

83 Knight Riders Sports Pvt. Ltd. vs. ACIT

[2023] 459 ITR 16 (Bom)

A.Y.: 2016-17

Date of Order: 26th September, 2023

Ss. 142(1), 143(3), 147, 148, 148A(b) and 148A(d) of ITA 1961

Reassessment — Notice for reassessment after 1st April, 2021 — All relevant information provided by assessee prior to original assessment order — AO has no power to review his own order — Query raised by AO answered and accepted during original assessment — Reopening of assessment on mere change of opinion not permissible.

The assessee-company was engaged in the business of operating and running a cricket team in the Indian Premier League. During the assessment proceedings for the A.Y. 2016-17, the Assessing Officer issued various notices u/s. 142(1) of the Income-tax Act, 1961, raising queries, inter alia, regarding foreign payments made and the assessee provided the details. An assessment order u/s. 143(3) of the Act was passed. Thereafter the assessee received notice dated 17th March, 2023, u/s. 148A(b) of the Act alleging that the audit scrutiny of assessment records disclosed payments of consultancy and team management fees to a foreign company and that income was chargeable to tax for the A.Y. 2016-17, had escaped assessment. The Assessing Officer rejected the objections raised by the assessee and passed an order u/s. 148A(d) of the Act, followed by a reassessment notice u/s. 148 of the Act.

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

“i) Reopening of the assessment was not permissible based on change of opinions as the Assessing Officer does not have any power to review his own assessment when during the original assessment the assessee had provided all the relevant information which was considered by the Assessing Officer before passing the assessment order u/s. 143(3) of the Act. Once a query had been raised during the assessment and query had been answered and accepted by the Assessing Officer while passing the assessment order, it followed that the query raised was a subject of consideration of the Assessing Officer while completing the assessment. This would apply even if the assessment order had not specifically dealt with that issue.

ii) The reopening of the assessment was merely on the basis of change of opinion. This change of opinion did not constitute justification to believe that income chargeable to tax had escaped assessment. The notice dated 17th March, 2023, the order dated 30th March, 2023 and the reassessment notice dated 30th March, 2023, were quashed and set aside.”

Offences and Prosecution — Wilful attempt to evade payment of tax — Self assessment tax shown in the return of income but paid late — Penalty levied for delayed payment of tax — Criminal intent of assessee essential — Nothing on record to show deliberate and wilful default of evasion of tax — Complaint and summoning order quashed.

82 Health Bio Tech Ltd. vs. DCIT

[2023] 459 ITR 349 (P&H.)

A.Y.: 2011-12

Date of Order: 14th September, 2023

Ss. 276C(2) and 278B of ITA 1961

Offences and Prosecution — Wilful attempt to evade payment of tax — Self assessment tax shown in the return of income but paid late — Penalty levied for delayed payment of tax — Criminal intent of assessee essential — Nothing on record to show deliberate and wilful default of evasion of tax — Complaint and summoning order quashed.

The assessee, a registered firm, filed its return of income for A.Y. 2011-12 wherein aggregate amount of tax was shown at ₹1,36,20,887. Subsequently, the return of income was revised and the aggregate amount of tax was shown at ₹1,50,81,728. The tax was not paid in time but was paid late. The Department filed a complaint for offence u/s. 276C(2) of the Income-tax Act, 1961 of wilful attempt to evade payment of tax. The trial court admitted the complaint and passed an order summoning the assessee as accused.

The Punjab and Haryana High Court allowed the revision petition filed by the assessee and held as follows:

“i) It was apparently clear from the facts on record, that there was no attempted evasion on the part of the assessee-company. There was undoubtedly delayed payment, but for that penalty had already been levied. While maintaining both these proceedings simultaneously, the one fact that must be present there, that there was or has been a criminal intent in the mind of the accused right from the beginning.

ii) The income tax was self-assessed and payment was also made by the assessee-company, though belatedly. Thus, the question of evasion of tax did not arise in the present facts and circumstances. The facts and circumstances of the case did not reveal that there was a deliberate and wilful default of evasion of tax on the part of the assessee. The complaint and all the consequential proceedings arising therefrom, including the summoning order were quashed.”

Offences and prosecution — Failure to deposit tax deducted at source before due date — Sanction for prosecution — Reasonable cause — Tax deducted at source — Delay to deposit tax deducted at source due to prevalence of pandemic — Assessee depositing tax deducted at source in phased manner with interest though after due date — Reasonable cause for failure — Prosecution orders set aside.

81 D. N. Homes Pvt. Ltd. vs. UOI

[2023] 459 ITR 211 (Orissa)

A.Y.: 2021-22

Date of Order: 13th October, 2023

Ss. 2(35), 276B, 278AA and 278B of the IT Act

Offences and prosecution — Failure to deposit tax deducted at source before due date — Sanction for prosecution — Reasonable cause — Tax deducted at source — Delay to deposit tax deducted at source due to prevalence of pandemic — Assessee depositing tax deducted at source in phased manner with interest though after due date — Reasonable cause for failure — Prosecution orders set aside.

The assessee is a private limited company. As per the TRACES, the assessee deducted tax of ₹2,58,29,945 for F.Y. 2020-21 relevant to A.Y. 2021-22 which was not deposited with the Central Government before the due date. However, the amount was deposited in a phased manner with delay of 31 days to 214 days. The Department filed a complaint against the assessee for an offence u/s. 276B of the Income-tax Act, 1961. The lower Court took cognizance of the offence.

The Orissa High Court allowed the revision petition filed by the assessee and held as under:

“i) The expression “reasonable cause” used in section 278AA of the Income-tax Act, 1961 may not be “sufficient cause” but would have a wider connotation than the expression “sufficient cause”. Therefore, “reasonable cause” for not visiting a person with the penal consequences would have to be considered liberally based on facts of each individual case. The issue of there being a reasonable cause or not is a question of fact and inference of law can be drawn.

ii) The legislative intent would be well discernible on consideration of the provisions of section 201 and section 221 which state that penalty is not leviable when the company proves that the default was for “good and sufficient reasons”, whereas, the expression used in section 278AA is “reasonable cause”. The Legislature has carefully and intentionally used these different expressions in the situations envisaged under those provisions. The intent and purport being to mitigate the hardship that may be caused to genuine and bona fide transactions where the assessee was prevented by cause that is reasonable. Therefore, the court must lean for an interpretation which is consistent with the “object, good sense and fairness” thereby eschew the others which render the provision oppressive and unjust, as otherwise, the very intent of the Legislature would be frustrated.

iii) The expression “reasonable cause” in section 278AA qualifies the penal provision laid under section 276B. Both provisions accordingly are to be read together to ascertain the attractability of the penal provision. In a criminal proceeding by merely showing reasonable cause, an accused can be exonerated and for showing that reasonable cause, the standard of proof of suchfact in support thereof is lighter than the proof in support of good and sufficient reason. A reasonable cause may not necessarily be a good and sufficient reason.

iv) The assessee and its principal officer had deposited the entire tax deducted at source with interest for the delayed deposit before the time of consideration of the matter as to launching of the prosecution u/s. 279(1)of the 1961 Act. The tax deducted at source with interest had been accepted and gone to the State exchequer when by then no loss to the Revenue stood to be viewed.

v) The point for consideration by the authority was not to cull out the justification for delay in depositing the tax deducted at source but was whether to launch the prosecution. Hence, the order u/s. 279(1) passed by the Commissioner (TDS) suffered from the vice of non-consideration of the admitted factual settings as to the existence of reasonable cause for the failure to deposit the tax deducted at source and the complaint was vitiated since the failure was on account of the reasonable cause of the prevalence of covid-19 pandemic.

vi) The order of sanction having been passed without due application of mind and in a mechanical manner and putting the blame upon the assessee and its principal officer for not filing any exemption or relaxation notifications or circulars stood vitiated. Hence, the trial court ought not to have taken cognizance of the offences u/ss. 276B, 2(35) and 278B when even the latter two had no penal provisions and its orders were bad in law and, therefore, set aside.”

Fees for technical services — Make available — Meaning of — Recipient of services should apply technology — Services offered to Indian affiliates — Tribunal holding services to Indian affiliates not fees for technical services as make available test not fulfilled — Agreement between assessee and its affiliate effective for long period — Recipient of services unable to provide same service without recourse to service provider — Not fees for technical services: DTAA between India and Singapore s. 12(4)(b).

80 CIT (International Taxation) vs. Bio-Rad Laboratories (Singapore) Pte. Ltd.

[2023] 459 ITR 5 (Del.)

A.Y.: 2019-20

Date of Order: 3rd October, 2023

S. 260A of ITA 1961

Fees for technical services — Make available — Meaning of — Recipient of services should apply technology — Services offered to Indian affiliates — Tribunal holding services to Indian affiliates not fees for technical services as make available test not fulfilled — Agreement between assessee and its affiliate effective for long period — Recipient of services unable to provide same service without recourse to service provider — Not fees for technical services: DTAA between India and Singapore s. 12(4)(b).

The Tribunal held that the services offered by the assessee to its Indian affiliates did not come within the purview of fees for technical services, as reflected in article 12(4)(b) of the DTAA between India and Singapore, as they did not fulfil the criteria of “make available” test.

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

“i) According to the Tribunal, the agreement between the assessee and its affiliate had been effective from 1st January, 2010, and it had run for a long period. In order to bring the services in question within the ambit of fees for technical services under the Double Taxation Avoidance Agreement, the services would have to satisfy the ”make available” test and such services should enable the person acquiring the services to apply the technology contained therein. The facts on record showed that the recipient of the services was not enabled to provide the same service without recourse to the service provider.

ii) The analysis and conclusion arrived at by the Tribunal were correct.”

Section 92C, read with section 92B, of the Income-tax Act, 1961 — In light of peculiar facts, TPO was correct in recharacterizing part consideration of merger in form of cash and CCD as income. Cash payment was to be treated as deemed loan and ALP for CCD interest was determined at Nil.

14 Dimexon Diamonds Ltd vs. ACIT

[2024] 159 taxmann.com 118 (Mumbai – Trib.)

ITA No: 2429/Mum/2022

A.Ys.: 2018–19

Date of Order: 30th January, 2024

Section 92C, read with section 92B, of the Income-tax Act, 1961 — In light of peculiar facts, TPO was correct in recharacterizing part consideration of merger in form of cash and CCD as income. Cash payment was to be treated as deemed loan and ALP for CCD interest was determined at Nil.

FACTS

DIHPL, an Indian company, was a wholly owned subsidiary of DIHBV, a Netherlands company. Assessee, another Indian company, was a wholly owned subsidiary of DIHPL. DIHPL and the assessee undertook a reverse merger whereby DIHPL merged into the assessee. Assessee discharged following consideration to DIHBV, which held the entire equity capital of DIHPL.

In the transfer pricing report, the assessee disclosed the aforesaid transaction as an international transaction. However, it was stated that the transaction was not required to be benchmarked since pursuant to the implementation of the said scheme of amalgamation, the assessee had neither generated any income nor incurred any expenditure. Without prejudice, the assessee adopted ‘other method’ and placed a third party valuer report to justify consideration.

TPO rejected the valuation report. In particular, TPO: (a) treated cash payment as loan and imputed interest thereon; (b) Disregarded issuance of CCD; and (c) treated ALP of interest as Nil. DRP upheld the order of AO.

Being aggrieved, the assessee appeal to ITAT.

HELD

• Amalgamation results in business restructuring and falls within the definition of international transaction. Each mode of consideration i.e. equity, cash and CCD needs to be examined separately. No adjustment was made by TPO in respect of issuance of equity shares.

• During NCLT proceedings, the assessee submittedthat it would comply with applicable Income Tax law. Thus, even if the scheme is approved by NCLT, the tax department had not waived its right to examine the issue arising out of the scheme of amalgamation. Further, approval of the scheme and computation of ALP are different aspects.

• The valuation report stated that management had decided to give cash consideration to DIHBV as excess cash was available with the assessee. Thus, the valuation report was not prepared scientifically as consideration was determined by management of companies.

• DIHBV was holding the assessee and the other two subsidiaries through DIHPL, After the merger, DIHBV directly held 100 per cent shares of the assessee and the other two subsidiaries through the assessee. Thus, a merger transaction is a mere restatement of the accounts of the subsidiary companies without the actual transfer of any asset and liability by DIHBV.

• ITAT upheld the findings of lower authorities that in substance the transaction is really a relocation of shares and insofar as the parent holding company is concerned nothing has changed in substance.

• Considering the finding in the valuation report that management had excess cash, TPO was correct in holding that the issuance of CCDs and payment of cash of ₹100 crore represents excessive payment.

Section 92C, read with section 92B, of the Income-tax Act, 1961 — Interest-free loan is an international transaction. The nature of advances, whether it is quasi capital in nature or not, must be seen at the time of granting of advance/loan to the subsidiary.

13 Intas Pharmaceuticals Ltd vs. ACIT

[2024] 159 taxmann.com 429

(Ahmedabad —Trib.)

ITA No: 1334/AHD/2017 & Others

A.Ys.: 2009–10 to 2011–12

Date of Order: 31st January, 2024

Section 92C, read with section 92B, of the Income-tax Act, 1961 — Interest-free loan is an international transaction. The nature of advances, whether it is quasi capital in nature or not, must be seen at the time of granting of advance/loan to the subsidiary.

FACTS

Assessee is engaged in the business of manufacturing and trading of pharmaceuticals. It advanced the amount to its AEs for registration of the assessee’s product in overseas territories. Assessee had the option to convert advances into equity. Hence, the assessee considered that the advances were in the nature of quasi capital. Therefore, the assessee did not charge Interest on the same. In the subsequent year, the assessee converted loans given to three of its AEs into equity.

In the course of the assessment, AO made an upward adjustment on account of interest on loans and advances.

In appeal, CIT(A) gave partial relief in respect of advances given to three of the AEs whose loans were converted into equity in the subsequent year. In respect of other foreign AEs, CIT(A) confirmed the upward adjustment on the grounds that loans and advances given to them were not converted into equity.

Being aggrieved, both parties appeal to ITAT.

HELD

Tribunal confirmed the decision of AO and affirmed upward addition for all the loans.

  • In the case of quasi capital, there is an option to convert the loan to equity, however, in the case of a loan, the consideration is received in terms of interest and return of principal amount after a pre-decided deferred period1.

 

  • The nature of advances, whether it is quasi capital in nature or not, must be seen at the time of granting of advance/loan to the subsidiary.
  • In the instant facts, there was nothing to suggest that at the time of advancing the loans to the AEs, such loans were in the nature of quasi-capital. The fact that in the subsequent year, such loans were converted into equity (at the option of the assessee) would not alter the nature of such advance to quasi-capital.

 

  • Following considerations were irrelevant for deciding the issue of charging interest on loan:
  • Advances made were out of commercial expediency.
  • Advanced by the assessee to its AEs are inextricably linked with export sale of finished goods or such advances have yielded the economic benefits to the assessee including increase in export turnover.
  • Advances were given from interest free funds available with the assessee.

____________________________________________

1 Bialkhia Holdings Pvt. Ltd. vs. Additional Commissioner of Income Tax 115 taxmann.com 230 (Surat Tribunal)

If the original return of income is filed within the due date under section 139(1), the carry forward of loss claimed in the revised return filed after the due date under section 139(1) cannot be denied.

63 Khadi Grammodhyog Prathisthan vs. CPC

[2024] 108 ITR(T) 94 (Jodhpur – Trib.)

ITA NO.: 87 (JODH.) OF 2023

A.Y.: 2019-20

Date of Order: 31st July, 2023

If the original return of income is filed within the due date under section 139(1), the carry forward of loss claimed in the revised return filed after the due date under section 139(1) cannot be denied.

FACTS

The assessee filed its original return of income for the assessment year 2019–20 on 30th October, 2019. Thereafter, the assessee revised the return on 15th January, 2020, which was considered by the CPC as the original return and accordingly, it denied the current year loss of ₹3,51,811. Aggrieved by the intimation, the assessee filed an appeal before the CIT(A).

The CIT(A) considered the revised return filed on15th January, 2020 as the original return and that it was filed after the due date u/s 139(1) of the Act which was 31st October, 2019. The CIT(A) sustained the intimation u/s 143(1) and denied the carry forward of current-year losses. The assessee then filed an appeal before the ITAT.

HELD

The ITAT observed that the apple of discord in this appeal was that the assessee had filed its original return of income on 30th October, 2019 which was within the extended due date of filing the return of income u/s 139(1). Thereafter, the assessee revised the return of income on 15th January, 2020 which the CPC considered as an original return filed beyond the due date u/s 139(1) and thereby denied the current year loss of ₹3,51,811.

The ITAT held that the return filed on 15th January, 2020 was not the original return but was a revised one and therefore, the denial of loss was not correct based on the set of facts and evidence available on records. The appeal of the assessee was allowed.

Sec. 271B r.w. Sec. 44AA, 44AB and Sec. 271A: Where Penalty u/s 271A is levied for not maintaining books of accounts u/s 44AA, the assessee could not further be saddled with penalty u/s 271B for failure to get books of accounts, which were not maintained, audited u/s 44AB.

62 Santosh Jain vs. ITO

[2023] 108 ITR(T) 636 (Raipur – Trib.)

ITA NO.: 143, 145 & 147 (RPR) OF 2023

A.Y.: 1993–94 to 1995–96

Date of Order: 24th July 2023

Sec. 271B r.w. Sec. 44AA, 44AB and Sec. 271A: Where Penalty u/s 271A is levied for not maintaining books of accounts u/s 44AA, the assessee could not further be saddled with penalty u/s 271B for failure to get books of accounts, which were not maintained, audited u/s 44AB.

FACTS

The AO imposed the penalties upon the assessee u/s 271A for failure to maintain his books of account and other documents as required u/s 44AA and u/s 271B for failure to get his books of account audited as per provisions of section 44AB.

The assessee filed an appeal before the CIT(A) against the penalty order u/s 271B dated 27th July, 2015 on the averment that as the assessee had been penalized for failure on his part to maintain books of account u/s 271A, the AO was divested from further saddling him with a penalty for getting such non-existing books of accounts audited as per the mandate of law. The CIT(A) upheld the view taken by the AO. Aggrieved, the assessee filed an appeal before the ITAT.

HELD

The ITAT followed the judgment of the Hon’ble High Court of Allahabad in the case of S.K Gupta & Co. [2010] 322 ITR 86 wherein it was observed that the requirement of getting the books of account audited could arise only where the books of account are maintained. It was further observed that if for some reason the assessee had not maintained books of account, then the appropriate provision under which penalty proceedings could be initiated was section 271A of the Act. Accordingly, the ITAT allowed the assessee’s appeal and deleted the penalty levied u/s 271B.

Sec. 68: Where assessee, engaged in financial activities, and the records revealed that the credit entries were repayments of loans, and the third party was not a stranger entity and transactions were transparent and had been found to be routed through banking channel and reported in the return of income by the assessee as well as a third party, addition made under section 68 was to be deleted.

61 ACIT vs. Evermore Stock Brokers (P.) Ltd

[2023] 108 ITR(T) 13 (Delhi – Trib.)

ITA NO.: 5152 (DELHI) OF 2018

A.Y.: 2015–16

Date of Order: 19th September, 2023

Sec. 68: Where assessee, engaged in financial activities, and the records revealed that the credit entries were repayments of loans, and the third party was not a stranger entity and transactions were transparent and had been found to be routed through banking channel and reported in the return of income by the assessee as well as a third party, addition made under section 68 was to be deleted.

FACTS

The assessee was engaged in investments and financial activities and had filed its return of income on 29th September, 2015 declaring total income of ₹96,19,580 for AY 2015–16. The case was selected for limited scrutiny to verify the genuineness of the amount received of ₹47,72,95,676 from M/s. Pioneer Fincon Services Pvt. Ltd. [PFSPL].

The assessee had asserted that the funds were advanced to PFSPL with a view to earn interest on idle funds, rather than obtaining loans and the credit entries appearing in the ledger account of the assessee denote a mere return of pre-existing loans advanced. In the process of such advance of its funds, the assessee also earned the interest of ₹2,39,640 from transactions carried with PFSPL.

To discharge its onus to prove the genuineness of the financial transactions, the assessee submitted the following documents:

i. Assessee’s books of accounts

ii. ledger account of PFSPL as appearing in its books

iii. financial statement of PFSPL

iv. extract of bank statements of both parties to the transaction

The AO, however, alleged that the financial statement of PFSPL does not inspire much confidence in its creditworthiness. The AO issued the summons u/s 131 in the name of the Principal Officer of PFSPL. Shri Sagar Ramdas Bomble attended and submitted that the entity namely PFSPL has been stricken off from the records of the Registrar of Companies and recorded a statement on oath. The AO ultimately concluded that PFSPL is a mere paper company which was used only to route money to the assessee. The AO accordingly considered an amount of R47,72,95,676 as unexplained credit and added the same to the total income of the assessee.

Aggrieved, the assessee filed an appeal before the CIT(A). The CIT(A) observed that the assessee was never required to explain the sources of funds in the bank account of PFSPL. The CIT(A) observed from the recorded statement of Shri Sagar Ramdas Bomble that PFSPL took a loan from the assessee and repaid the same to the assessee within the financial year along with Interest. Receiving interest by the assessee from PFSPL was an indication that the loans were given by the assessee and not vice versa. The CIT(A) was satisfied that the identity of PFSPL was established as it was regularly filing ROI, genuineness of the transactions stands proved by the fact that all transactions were done through banking channels, the account was squared up during the same year and PFSPL paid interest on such transactions to the assessee while deducting tax at source and creditworthiness cannot be judged only from the site of its balance sheet at the year-end. The CIT(A) allowed the appeal and deleted the addition.

Aggrieved by the order, the revenue filed an appeal before the ITAT.

HELD

The ITAT observed that the AO failed to understandthat firstly, the credits represented the repayment of the loan advanced by the assessee and secondly, the outstanding at any point in time was only ₹2.06 crore. The AO had made high-pitched additions onmisplaced assumptions of facts. The transactions were carried out through a banking channel and both the assessee as well as the borrower PFSPL, were regularly assessed to tax. The so-called loans were ultimately repaid by PFSPL and there was no outstanding at the end of the year.

The ITAT observed that the order of the CIT(A) clearly brings out the fact that PFSPL was not a stranger entity to the assessee. PFSPL had availed loans from the assessee on commercial considerations, and the interest paid had been subjected to deduction of tax at source. The presence of the Accountant and CFO of the erstwhile PFSPL reflected cooperation of the borrower with the Revenue Authorities. The ITAT also observed that the repayment and squaring up of loans was an overriding point of significance. The factum of repayment thus also validated the stance of bona fide.

The ITAT held that the facts in the present case thus spoke for itself and there appeared no need to amplify the findings of CIT(A) and the reasoning advanced on behalf of revenue lacked merits. Thus, the appeal of the revenue was dismissed.

Where pursuant to a scheme of arrangement and restructuring, assessee’s shareholding in a company was reduced, long-term capital loss arising to assessee on account of reduction of capital has to be allowed even if no consideration is paid to the assessee.

60 Tata Sons Ltd. vs. CIT

ITA No.: 3468/Mum/2016

A.Y.: 2009-10

Date of Order: 23rd January, 2024

Section: 2(47), section 48 and section 263

Where pursuant to a scheme of arrangement and restructuring, assessee’s shareholding in a company was reduced, long-term capital loss arising to assessee on account of reduction of capital has to be allowed even if no consideration is paid to the assessee.

 FACTS

The assessee-company owned 288,13,17,286 equity shares in TTSL acquired at various points of time, which were held as capital assets.

Since TTSL had incurred substantial loss in the course of its business for providing telecom services, a large part of the paid-up share capital of TTSL was utilized so as to finance / bear the said loss.

In view of such losses, a scheme of arrangement and restructuring between TTSL and its shareholders was entered under sections 100 to 103 of the Companies Act, 1956, which was approved by the High Court.

As per the scheme—

— the equity shares of TTSL of ₹10 each from 634,71,52,316 shares was reduced to 317,35,76,158 shares.

— no consideration was payable to the shareholders in respect of the shares which were to be cancelled.

Consequently, the shareholding of the assessee was also reduced to half.

The assessee claimed such a reduction of capital as long-term capital loss, which was set off against other long-term capital gain.

During the course of assessment proceedings under section 143(3), AO specifically raised the issue relating to the assessee’s claim for allowability of long term capital loss. However, after examining the submissions of the assessee, he allowed such loss.

PCIT initiated revision proceedings under section 263 and held that since no consideration was received by or accrued to the assessee by way of reduction of capital, the computation mechanism provided under section 48 fails and consequently, long term capital loss cannot be worked out.

Aggrieved, the assessee filed an appeal before the Tribunal.

HELD

The Tribunal observed as follows:

(a)  There can be no dispute that there was a loss on the capital account by way of a reduction of capital invested and therefore any loss on the capital account, is a capital loss and not a notional loss.

(b)  If the right of the assessee in the capital asset stands extinguished either upon amalgamation or by reduction of shares, it amounts to the transfer of shares within the meaning of section 2(47) and therefore, computation of capital gains has to be made.

(c)  Following the observations of Gujarat High Court in CIT vs. JaykrishnaHarivallabhdas,(1997) 231 ITR 108 (Guj), it held that even when the assessee has not received any consideration on reduction of capital its investment has reduced resulting into capital loss, while computing the capital gain, such capital loss has to be allowed or set-off against any other capital gain.

Accordingly, the Tribunal held that AO had rightly allowed the computation of long-term capital loss to be set off against the capital gain and consequently, it set aside the order of PCIT under section 263.

No exemption under section 54F is allowable in respect of a building which was predominantly used for religious purposes. Section 54F does not allow pro-rata exemption.

59 ACIT vs. Shri Iqbal Ali Khan

ITA No.: 505 / Hyd / 2020

A.Y.: 2013-14

Date of Order: 12th January, 2024

Section: 54F

No exemption under section 54F is allowable in respect of a building which was predominantly used for religious purposes.

Section 54F does not allow pro-rata exemption.

FACTS

The assessee sold two properties for a total consideration of ₹8.81 crores, resulting in capital gain of ₹7.21 crores.

He claimed exemption under section 54F to the extent of ₹5.47 crores, by constructing a building consisting of ground floor plus three floors in Hyderabad.

The assessee had not taken any municipal permission before starting the construction.

However, subsequently, in the application forregularization dated 31st December, 2015 filed with the municipal authorities, it was stated that the property consisted of a mosque, orphanage school and staff quarters.

The Assessing Officer disallowed the exemption under section 54F.

On appeal, by relying on the remand report and verification / enquiry report of the inspector, CIT(A) held partly in favour of the assessee by allowing pro-rata exemption under section 54F in respect of first, second and third floors.

Aggrieved, the revenue filed an appeal before the Tribunal.

HELD

The Tribunal held that –

(a) the property was predominantly being used for religious purposes, namely, mosque, orphanage school and staff quarters and therefore, it did not fit within the definition of “residential house” as contemplated under section 54F.

(b) Further, there was no evidence to show that the assessee had invested in construction of a residential house and therefore, he was not entitled to any relief under section 54F.

(c) The literal reading of section 54F makes it abundantly clear that there was no scope of grant of pro-rata deduction, more particularly when no provision of residence can be made in a mosque.

Accordingly, the grounds of appeal of the revenue were allowed and the order of the Assessing Officer was upheld by the Tribunal.

 

Where the assessee transferred 62 per cent of the land to a developer in exchange for 38 per cent of the developed area to be constructed over time under an unregistered joint development agreement / irrevocable power of attorney, the transaction was liable to capital gain under section 2(47)(vi) in the year of the agreement.

58 K.P. Muhammed Ali vs. ITO

ITA No.: 1008 / Coch / 2022

A.Y.: 2012-13

Date of Order: 12th January, 2024

Section: 2(47)(v) / (vi)

 

Where the assessee transferred 62 per cent of the land to a developer in exchange for 38 per cent of the developed area to be constructed over time under an unregistered joint development agreement / irrevocable power of attorney, the transaction was liable to capital gain under section 2(47)(vi) in the year of the agreement.

 

FACTS

On 27th June, 2011, the assessee and a developer entered into a Joint Development Agreement (JDA) and a General Power of Attorney (GPA) in respect of a piece of land in Kasaba village for the construction of a residential complex. Both JDA and GPA were not registered.

Under the said agreements, the assessee transferred his rights into 62 per cent of the land in lieu of 38 per cent of the developed area to be constructed over a period of time.

The construction was completed only in 2017. Thereafter, as and when the assessee executed assignment deeds in favour of the various parties who purchased the assessee’s share of apartments, he had declared capital gains in his returns of income for such year(s).

The question before the Tribunal was whether the arrangement can be regarded as transfer under section 2(47) exigible for capital gain in the year of execution of JDA / GPA.

 

HELD

The Tribunal observed that-

(a) Though the assessee fulfilled the other conditions of section 53A of Transfer of Property Act, 1882 as propounded in Chaturbhuj Dwarkadas Kapadia vs. CIT, (2003) 260 ITR 491 (Bom), with effect from 24th September, 2001, section 53A does not recognize unregistered contracts. Hence, section 2(47)(v) would not apply to the facts of the assessee wherein both the JDA and GPA were unregistered.

(b) However, the constraining factor of registration of a contract would not be relevant in the case of section 2(47)(vi) which applies to any agreement or arrangement or a transaction in any other manner which has effect of transferring or enabling the enjoyment of immovable property, as explained in P. George Jacob vs. ITO (in ITA No. 558/Coch/2022, dated 2.3.2023).

(c) It is well-settled that income is to be taxed in the hands of the right person and for the right year, and it is being offered to tax in the hands of another person or year would be of no relevance in law.

The Tribunal held that the transaction between the assessee and developer under JDA / GPA constituted a transfer under section 2(47)(vi) and was liable to capital gain in the year of entering into the agreements.

With regard to the quantification of capital gain, the matter was set aside to the file of the Assessing Officer with an observation that since land in question was acquired prior to 1st April, 2001, fair market value on that date would be considered cost of acquisition (and further indexed under section 48); and sale consideration would be compared to stamp value on transfer date under section 50C.

Recycling Of Wastes – An Accounting Conundrum?

Old mobile phones. Plastic wrapper of a chocolate bar. Used tyres. Most people would think of this kind of detritus as a future landfill, as the bulk of these wastes goes unprocessed. The ever-growing pile of waste is causing irreversible damage to the environment.

But not anymore. Indian lawmakers are waking up and passing / amending Rules under the Environment (Protection) Act, 1986, to enforce Extended Producer Responsibility for certain entities. These Rules cast an obligation on producers / brand owners / importers for environmentally sound management of their products that have reached their end of life and are now considered a waste. Extended Producer Responsibility includes collection / recycling of waste as prescribed in the Rules.

Based on the ‘Polluter-Pays Principle’ the purpose of these Rules is neither to transfer public expenditure to these entities nor to penalise them, but to set appropriate signals in place in the economic system so that environmental costs are incorporated in the decision-making process and hence arrive at sustainable development that is environment-friendly. These Rules have continuously been expanded to cover major categories of wastes and include manufacturers and importers irrespective of the selling technique used, such as dealers, retailers, e-retailers,etc (i.e. producers) and online platforms / market places and supermarkets/retail chains (i.e., brand owners). Following is a high-level summary of some of the key Rules:

These Rules raise certain fundamental questions regarding accounting for the cost of fulfilling the legal obligation to recycle / collect waste. Some of them are discussed below:

WHEN IS THE OBLIGATING EVENT?

A provision under Ind AS 37 is recognised when an entity has a present obligation (legal / constructive) as a result of a past event, it is probable that an outflow of resources embodying economic benefits will be required to settle the obligation and a reliable estimate can be made of the amount of the obligation. If these conditions are not met, no provision should be recognised.

The definition of a legal obligation refers to an obligation that derives from a contract (through its explicit or implicit terms), legislation or other operation of law. It is worth mentioning that the concept of an obligating event is open to interpretation and requires the exercise of significant judgement, as the obligating event is not always easy to identify. The following views are possible in the extant case:

View I – Sale of goods is the obligating event

The proponents of this view believe that the sale of goods is the event which triggers compliance under the Rules. The timing of recognition of the cost of fulfilment should be contemporaneous with the timing of revenue recognition. Provision should be made for all unfulfilled obligations emanating from historical sales as well as sales made during the current year (for which obligation to recycle would occur in subsequent years). The proponents argue as follows:

  • The minimum recycling targets, as summarised above, are generally based on the products ‘placed in the market’ or products ‘purchased / manufactured / imported’ previously. A product is placed on the market when it is made available for the first time on the market, i.e. when it is first supplied for distribution, consumption or use on the market in the course of a commercial activity, whether in return for payment or free of charge. Thus, the placing of a product in the market occurs on its sale to customers. A similar connotation is relevant where products are purchased, imported, etc.

 

  • The Rules aim to recycle end-of-life (i.e., waste) products and reduce the consequential damage to the environment. The expiration of the life of the product and the damage to the environment potentially begins when the customer starts using the products. Accordingly, the sale of products is the foundational tenet of these Rules.
  • Going concern basis envisages that the financial statements would continue for the foreseeable future. Thus, these entities would be economically compelled to incur the cost of recycling of all products sold to date, including sales made in the current year.
  • Analogy can be drawn from a similar situation where a lessor is obligated to return the leased premise in the same state that existed at the inception of the lease. For example, if an entity has erected partitioning in a leasehold building and the partitioning must be removed at the end of the lease term, then provision is made for this cost at the time of putting up the partition wall.

View II – Existence of the producer on the measurement date is the obligating event

This view is based on the premise that the cost associated with the fulfilment of Extended Producer Responsibility is akin to a levy as described in Appendix C to Ind AS 37. Proponents of this view argue that the obligation can be avoided if the entity ceases to exist on the measurement date. Under this approach, any unfulfilled obligation in relation to historical sales should be provided for. No provision is required for sales made in the current year (for which the obligation to recycle would occur in subsequent years). The following are the relevant arguments:

  • A levy is an outflow of resources embodyingeconomic benefits imposed by Governments (including Government agencies) other than those covered under other Ind AS e.g. income taxes under Ind AS 12 and fines or other penalties imposed for legislationbreaches. As long as the payments are required by law, they are generally considered to be imposed by the government.

Under the Rules, the obligation should be met through authorised recycling agencies, which will inter alia provide the certificates of recycled quantity to the entities. Instead of paying a charge directly to the Government for recycling the waste products, the charge would be paid to the Government’s agents. Thus, the payment made for the purchase of certificates from Government authorised recycling agencies is in the nature of a levy. Appendix C is specific guidance for the accounting of levies that builds on the principles of Ind AS 37. Thus, the assessment of the obligating event of wastes should be based on Appendix C to Ind AS 37.

  • Under Appendix C, the obligating event that gives rise to a liability to pay a levy is the activity that triggers the payment of the levy, as identified by the legislation. For example, if the activity that triggers the payment of the levy is the generation of revenue in the current period and the calculation of that levy is based on the revenue that was generated in a previous period, the obligating event for that levy is the generation of revenue in the current period. The generation of revenue in the previous period is necessary, but not sufficient, to create a present obligation.

Under the above Rules, the payment to recyclers will arise only if the producer exists during the measurement period. For example, a producer would be obligated to meet the obligation in FY 2023-2024 only if the producer is in operation in such year. Since the activity that triggers the payment of the levy is the existence of the producer in the current period and the calculation of that levy is based on the products sold in a previous period, the obligating event for that levy is the existence of the entity in the current period. The sale of products in the previous period is not the activity that triggers the payment of the levy but only affects the measurement of the liability.

  • Merely preparing financial statements under the going concern assumption does not imply that the entities have a present obligation to pay a levy triggered by operating in a future period.

Closing entries:

  • It would be appropriate to follow View II. The accounting policy of a listed company provides as follows:

Provision for E-Waste/Plastic-Waste management costs is recognized when the liability in respect of products sold to customers is established in accordance with E-waste Management Rules, 2016, as notified by the Government of India. Initial recognition is based on liability computed based on Extended Producer Responsibility as promulgated in said Rules, including the cost to comply with the said regulation and as reduced by the expected realisation of collectable waste. The Company has assessed the liability to arise on a year-to-year basis.

  • View II would also be in line with global practices such as the European Union’s Directive on Waste Electrical and Electronic Equipment. The Directive prescribes that the cost of waste management for equipment should be borne by producers of that type of equipment that is in the market during the period specified in the applicable legislation. The manufacturers have to contribute to costs in proportion to their respective share of the market by type of equipment.
  • The International Financial Reporting Interpretations Committee (IFRIC), as set up by the International Accounting Standards Board, has issued certain guidance on the manner of recognition of liability under the above Directive. 1IFRIC 6 concludes that the event that triggers liability recognition is participation in the market during the measurement period. The measurement period is a period in which market shares are determined for the purposes of allocating waste management costs. IFRIC 6 states that this date, rather than the date of production of the equipmentor incurrence of costs, is the triggering event for liability
1   IFRIC on Liabilities Arising from Participating in a Specific Market – Waste Electrical and Electronic Equipment

Measurement of obligation

The above Rules mandate entities to purchasecertificates from authorised recyclers to meet their Extended Producer Responsibility. The cost of obligation is derived basis the target quantity multiplied by the rate per unit as agreed with the authorised recycler. For example, if an entity is required to recycle 100MT of plastics and the authorised recycler charges ₹10 per MT; then an expense of INR 1,000 should be recognised at the end of the current year. The amount of unfulfilled obligation, if any, should be classified as a provision in the Balance Sheet.

Closing entries:

  • Making a reliable estimate is one of pre-conditions for recognition of a provision under Ind AS 37. The Standard takes the view that a sufficiently reliable estimate can almost always be made for a provision except for extremely rare cases. In the extremely rare case where no reliable estimate can be made, a liability exists that cannot be recognised.
  • In certain cases, entities face significant challenges in measuring the obligation. These challenges can stem from the non-availability of certificates with the authorised recyclers or the lack of necessary information to estimate the amount of cash outflow required to recycle a particular category of waste. Relevant extracts from the financial statements of a listed company are as follows:

On 21st July, 2022, the Ministry of Environment, Forest and Climate Change issued notification containing Regulations on Extended Producer Responsibility (EPR) for Waste Tyre applicable to Tyre manufacturers and Recyclers. As per the notification, the Company has a present legal obligation as at31st March, 2023, to purchase EPR certificates online from Recyclers of waste tyre registered with the Central Pollution Control Board to fulfil its obligations,which is determined based on a certain percentage of the quantity of tyres manufactured in the year ended 31st March, 2021.

Currently, the modalities of the above regulations are dynamic. They would be fine-tuned in line with the changing requirements, including measurement of obligation and timeline for achieving compliance by tyre manufacturing companies in consultation with the Industry forum of Tyre companies. Accordingly, the Company has not recognised any provision towards EPR obligation for the year ended 31st March, 2023.

Overview of NFRA Inspection Reports of 2023 on Audit Firms– II

This is the second and final article to cover an overview of the first five NFRA inspection reports. The inspection process, timelines and the structure of the inspection reports were covered in the February 2024 issue of The BCAJ on page 21, including the summary of NFRA observations related to governance and leadership structures or lack / non-disclosure thereof, international and domestic network / affiliations. The article also covered issues pointed out by NFRA related to non-audit services provided to audit clients and SQC 1.

This second part is on the remaining observations of NFRA on audit quality control systems, independence, engagement quality control and points arising from the review of engagement files based on selected areas. From these two articles, one will be able to draw practical nuances relating to Standards on Auditing and other applicable laws and regulations.

At the cost of repetition, the purpose of this compilation is to enable auditors and audit firms to understand the focal points and key issues arising from these inspections. By understanding key features, firms can take the necessary steps to be compliant with applicable regulations.

The five reports covered are as below and referred to with the last two digits to identify the reports:

PART B OF REPORTS

The subheadings in all five reports are different in both sequence and content. Excluding leadership, structure, and Independence matters, which are covered in The BCAJ, vide article of February 2024 on page 21, let us consider Documentation, Engagement Quality Control and some observations arising from the review of the audit files.

FIRM WIDE AUDIT QUALITY CONTROL SYSTEM

1) EQCR Partner: The firm’s procedures fall short of SA 220 and SA 230 and the Firm’s Policy. Two samples selected contained incomplete work papers without sufficient evidence of EQC review done. (Para 30, Report No 01)

2) The practice of deleting all review comments should be reviewed as they may constitute a discussion between the Engagement Team and EQCR, which is mandatory under SQC 1 and SA 220. (Para 31, Report No 01)

3) Evidence of performance of EQCR, i.e., the EQCR docket (summary of EQCR work performed) was not made part of the Engagement Management System (EMS). However, EQCR clearance was obtained prior to the issuance of the audit report. This is despite the firm’s Policy of generating the EQCR docket via the EQCR portal to be incorporated in the EMS. (Para 26 & 27, Report No 02)

4) There was an instance of lack of reassessment of audit risk upon finding some suspicious transactions, etc., which was not in accordance with Para 31 of SA 315 and Firm’s Policy Manual. This matter led to reporting under Section 143(12) to the central government, adverse opinion and eventual resignation from audit later that year whereas suspicious transactions were noticed in the second quarter itself. (Para 18–22, Report No 02)

5) Consultation was taken, a decision taken on that basis, but the rationale was not recorded which is not in accordance with Para 56 of SQC1, which is not in accordance with the firm’s own Policy Manual. (Para 30–32 Report No 02)

6) Engagement Management System (EMS) required annual and engagement level independence confirmations. However, EMS permitted access to audit without obtaining the engagement level independence confirmations (which is an additional control), which is in violation of the Audit Firm’s Policy Manual and Para 18 of SQC 1. (Para 17 Report No 02)

7) An Independence compliance audit done by a network firm partner identified that “35% of the Partners, the sole Executive Director, 55% of the Directors and 38% of the Sr. Manager/Managers had not reported the financial relationships, required to be reported in accordance with the Firm’s independence policies”. Such high rates of non-compliance with the firm’s own independence policies were of serious concern to the NFRA. Despite such significant violations, the sample size was reduced compared to the prior year. The firm failed to provide the complete Independence Compliance Audit Report for FY 2020–21. A sample test of five audit engagements revealed that independence confirmations were absent in the case of some members of the engagement team and in some cases, independence declarations were obtained after the issue of the audit report. The Independence Compliance Tool is not aligned with Indian laws. (Para 22–26 Report No 03)

8) EQCR needs to be a partner who is a member of the ICAI as per SA 220 and SQC 1. However, the Firm’s EQCR Policy did not specify that EQCR shall be a member of the ICAI. (Para 23 Report No 04)

9) There is no document explaining the rationale or criteria for the selection of engagement files for internal quality inspection and specific areas for review by the inspection team. (Para 30 Report No 04)

10) Firm persons interviewed by the NFRA inspection team did not have much clarity on how to choose the value of assurance factor for the desired level of testing so far as sampling was concerned. (Para 28 Report No 04)

11) The Firm had a policy of doing background checks of the auditee company from the database of the network entity. In some cases, background check reports were not positive and yet the firm did not carry out alternative tests to assess client integrity for accepting / continuing. The firm’s reliance solely on a single source (network entity database) was found insufficient and not in accordance with Para 28 of SQC 1. (Para 25 Report No 05)

12) No audit documentation was found in relation to the evaluation of the competence and capabilities of the audit firm to undertake the engagement. (Para 27 Report No 05)

13) Audit documentation by EQCR is not fully compliant with Para 25, SA 220. (Para 28 Report No 05). Working papers had no documentation of the work done by EQCR. (Para 30 Report No 05)

AUDIT DOCUMENTATION

1) The firm’s policies and procedures to ensure integrity of its electronic audit documentation were not fully in accordance with the requirements of SQC 1 (Para 77, 79, 80). (Para 13 Report No 01)

2) The audit evidence, which is reviewed and signed as final, can be edited, altered or modified subsequently without affecting the previously provided signoff. While a report gives information about edits, it doesn’t identify the exact changes made in the document. (Para 13 Report No 01). Such weakness can lead to signing a blank folder and then allowing the engagement team to add documents before archival.

3) The electronic documentation system does not meet the requirement of Para 9 of SA 230. Neither the preparer nor reviewer date marks the completion of an audit procedure.

4) The archival process of the firm’s electronic work papers lacks integrity as the copy of the achieved file is editable while it is used for other post-archival purposes and, therefore, does not serve the purpose of audit documentation under Para 3 of SA 230. (Para 15, Report No 1)

5) Audit Work papers can be modified after sign-off. The application supports multiple sign-offs by the same and / or different people. It does not mandate modifier sign-off after the modification. A blank paper after sign-off can be filled out later without affecting sign-off. In the instances sighted by NFRA, there was no evidence of why and when documents were modified and who made and reviewed the changes. This was in non-compliance with Para 79 of SQC 1 and Para 8, 9 and 13 of SA 230. NFRA noted that “sufficient appropriate audit evidences are not obtained before issue of audit report as evidenced from large scale modification of AWPs post issue of audit report and without signing off AWPs after such modification.”(Para 29–30, Report No 3)

6) Signing partner is not the same as Engagement Partner in violation of Para 46 and 56 of SA 700 and 6.b of SQC 1. In FY 2020–21, there were 40 cases where Engagement Partners did not sign the audit reports. (Para 32, Report No 3)

7) The firm needs to put in place policies to deal with complaints and allegations about non-compliance with professional standards, regulatory compliance or legal requirements or the firm’s system of QC to ensure compliance with Para 101 of SQC 1. (Para 34, Report No 3)

8) NFRA desired that there should not be paper files and electronic files and all papers should be scanned and kept in electronic files. (Para 26, Report No 4)

9) Physical files are neither scanned nor incorporated by electronic files via cross-referencing of paper files with electronic files. Files lacked integrity prior to archival. (Para 12, Report No 5)

10) Sources of audit documents — whether from clients, etc., — were not available. This is a potential risk under SA 500, SA 540 and SA 550. (Para 13, Report No 5)

PART C OF REPORTS — NFRA OBSERVATIONS ON REVIEW OF INDIVIDUAL AUDIT FILES

NFRA selected a few Engagement Files for review (Refer to page 21, The BCAJ, February 2024) and selected three significant audit areas in respect of those selected engagements: Revenue, Trade Receivables and Investments.

1) The Audit Engagement team did not document its judgment for not recognising applicable types of revenue, revenue transactions and assertions as a fraud risk as necessitated by SA 240 to determine the risk of material misstatement due to fraud in the audit of revenue. (Para 32, Report No 1)

2) Audit Evidence in respect of year-end balance was not found in work papers and was obtained from the custodian during the course of the NFRA review. (Para 34, Report No 2)

3) Existence Assertion in respect of Investments at year-end, being 1 per cent, was necessary to be obtained at year-end and not obtaining such evidence was not in conformity with the firm’s policy manual and SA 230. (Para 35-36, Report No 2)

4) NFRA appreciated Non-Audit Services (NAS) guidelines voluntarily issued by the firm with effect from 1st April, 2020. At the same time, the firm delivered tax services related to DRP to an audit client in respect of years when such an entity was not an audit client. The firm had in place certain safeguards where the tax and these fell under transitional provisions of its internal NAS Guidelines. (Para 37–42, Report No 2)

5) In the case of two company audits, the financial statements did not disclose full particulars of the loans given, the investment made or guarantee given or security provided and the purpose for which the loan or guarantee or security was proposed to be utilised by the recipient of the loan or guarantee or security, thus not complying with Section 186(4) of the Companies Act 2013. The auditor did not report on it in CARO para (iv) despite its reporting responsibility. (Para 36, Report No 3)

6) Final financial statements (FS) and independent auditors’ report (IAR) were not available on the audit file and the draft FS and IAR that were on the file were different from those on the website of BSE in violation of Para 30 of SA 330. The firm accepted this as an inadvertent error. (Para 37, Report No 3)

7) In respect to 3 out of 5 selected companies, the firm was found deficient in performing appropriate audit evidence in respect to impairment of investments. (Para 38–42, Report No 3)

a. In respect of one auditee company, uponacquisition of a group of companies under Ind AS 103 Business Combinations, the firm relied on a two-year-old valuation report in respect of the subsidiary and did not perform any audit procedures for identification of impairment indicators. There was also no working in respect of how the amount in respect of investment was arrived at.

b. In respect of the same auditee, the firm wrongly concluded that no impairment loss was required to be recognised:

i. On the grounds that the subsidiary was in the process of issuing shares to an unrelated MNC which will increase the share price in the near future.

ii. On the grounds that the subsidiary was a dividend paying company and 100 per cent subsidiary, therefore, it did not perform impairment testing.

iii. Since it involved the work of a valuation specialist engaged by another audit team which audited that subsidiary was not evaluated.

c. In respect of another auditee, the audit firm wrongly presumed a subsidiary as 100 per cent owned whereas it was 84.18 per cent owned. NFRA stated that had the correct percentage of investment been considered, the impairment value would have been material to be recognised. The detailed enterprise value relied upon by the firm was also not available on the audit file.

d. In the case of another auditee, the Firm concluded that no impairment was required to be recognised for the investment in an associate, on the basis that the associate company had issued shares to unrelated market participants at a value higher than the carrying value. However, the Firm did not perform any audit procedure to check that the referred market participants were not related to the auditee company.

8) The Audit Firm’s Information System Audit Team identified certain deficiencies in the IT Control Environment, i.e., Access to Programs and Data, Entity level controls and Period-end Financial Reporting. The audit firm did not issue a modified audit opinion in respect of the IFC report despite these critical inadequacies and deficiencies. The audit file did not contain any work paper concluding that a modified opinion was not required. (Para 40–41, Report No 4)

9) The Engagement Team’s selection of a sample size of only 25 was not commensurate with the risk level. (Para 40–41, Report No 4)

10) ET had planned to obtain a ‘Low’ level of substantive evidence despite the significantly weak IT General Control environment identified by the Information Systems Audit Team. The total monetary value of transaction testing was ₹19.5 crores, which was 2.09 per cent of Total Revenue of ₹930.14 crores. As a result, the ET did not have sufficient appropriate audit evidence to support its unmodified opinion on the financial statements. The Audit Firm’s response was not accepted as it was not in accordance with the SA 530. (Para 44–47, Report No 4)

11) ET did not perform any substantive audit procedure to check the accuracy and correctness of the ‘price details’ applied to the actual invoices generated. (Para 48–49, Report No 4)

12) The entity’s significant accounting policy in respect to the recognition and measurement of revenue at the fair value of the consideration received or receivable was not in accordance with the Ind AS 115. (Para 50–51, Report No 4)

13) The Engagement Team’s audit in respect of verifying and ensuring the entity’s recognition and measurement for impairment loss allowance in accordance with the ECL approach of Ind AS 109 was inadequate and inappropriate (Para 8(a), A13, Para 8(c), A24, A25 and Para19 of SA 5409).

a. The account policy followed was not in accordance with the accounting policy disclosed.

b. The ET did not check how the management had adjusted the historically observed default rates to forward-looking estimates.

a. The entity had not made the disclosures required as per Para 35M and 35N of Ind AS 107 in respect to the credit risk exposure of Trade Receivables.

(Para 52, Report No 4)

14) Invoice-wise matching of customer collections which had an impact on the aging report was not done. This had a direct consequence on the calculation of impairment loss allowance for Trade Receivables. (Para 54, Report No 4)

15) Although the actual PBT benchmark for calculating materiality was significantly lower than planned materiality levels based on the past 3–5 years PBT, the overall materiality and performance materiality were not changed. This was a non-compliance with SA 450. (Para 56–59, Report No 4)

16) While evaluating the impact of misstatements identified during the audit, the ET had, while computing the uncorrected misstatements as a percentage of PBT, considered the number of uncorrected misstatements net of tax instead of gross of tax, leading to erroneous computation of the impact of uncorrected misstatements and the extent of audit procedures. (Para 60, Report
No 4)

17) The audit file did not have the auditee company’s policy on related party transactions. There was no evidence of obtaining a complete list of related parties at the start of the audit and the audit team having verified management assertion that RPT had taken place at arm’s length. The engagement team was, therefore, in violation of SA 550 (Para 24). In one case, the firm also stated that since the RPT were with subsidiaries, they did not pose an elevated risk. NFRA specifically stated that such presumption was not appropriate. (Para 61–63, Report No 4)

18) For evaluating impairment of investments, the audit firm did not independently evaluate significant assumptions of the auditee. Such assumptions of the auditee were found to be not appropriate and in excess. (Para 32, Report No 5)

19) The assessment of the auditor regarding the forward contract to acquire remaining shares from NCI is not separately traceable from the audit file. The disclosures in the financial statements for FY 2020–21 (year reviewed by NFRA) and 2019–20 in respect of the forward contract to acquire additional shares at a future date and the related contingent consideration arrangements are not in compliance with the requirements of Para B64(g) of Ind AS 103. A disclosure of the arrangement and basis of determining contingent consideration was necessary in the CFS of both years. (Para 33–35, Report No 5)

20) There was non-compliance with Section 186 of the Companies Act, 2013 and Companies (Number of layers) Rules as there was no evidence that the auditee met the criteria of CIC-ND-SI NBFC when it had 92 subsidiaries and 52 associates. The audit firm should have reported this in CARO, which was not done. (Para 36–37, Report No 5)

21) The EP failed to consider the possible effects of misstatements on financial statements, which were material and pervasive and, thus, required consideration of Adverse or Disclaimer Opinion as per SA 705. The possible effect was not only confined to investments but also to other balances such as loans and advances, provisions etc., which indicate their pervasiveness. (Para 38–40, Report No 5)

22) An auditee company having 286 subsidiaries out of which 255 were loss-making. Although there were indicators of impairment, the firm had relied on a management representation letter stating that there was no impairment loss and there was no assessment on AWP. (Para 41–42, Report No 5)

23) AWP did not have sufficient appropriate audit evidence of KAM in respect of the going concern assumption. (Para 43–44, Report No 5)

Part D contained a chronology of events. The appendix at the end of each report carried the actual responses given by each firm.

All five inspection reports make a good read considering they are part of the first set. We can expect several more inspection reports in the coming months and years on the next set of audit firms. I am sure the NFRA reports with time will also become uniform and nuanced and an annual summary of all points brought out during a year will make a good collection for users of such inspection reports. We can expect NFRA to receive a ‘follow up action taken’ from audit firms inspected as a desirable outcome.

Decoding Residential Status Under FEMA

INTRODUCTION

This article is the third part of a series on Income Tax and the Foreign Exchange Management Act (FEMA) issues related to NRIs. The first article focused on the provisions of the Income Tax Act, whereas the second one was on the applicability of the treaty on the definition of Residential Status. This article will focus on the definition of Residential status under FEMA regulation.

BACKGROUND

Many professionals get flooded with questions on cross-border transactions day in and day out from their resident and non-resident clients regarding the remittance and capital account transactions to be done by individuals and companies.

FEMA governs the financial aspects of a cross-border transaction. As far as the individuals are concerned, the fundamental issue is determining their residential status under FEMA.

In India, the residential status of an individual is determined under the Income-tax Act as well as under FEMA. People at large get confused in deciding the status under both statutes as the criteria for determination and their impact are pretty different.

We shall try to decode the definition of a RESIDENT under FEMA.

An Individual can be a resident under the Income-tax Act, and a non-resident under FEMA and vice versa. An individual can simultaneously be a non-resident or a resident under both Acts.

Also, under FEMA, a split residency is permitted, meaning a person can be a resident for part of the year and a non-resident for another part and vice versa. However, under the Income-tax Act, a person is either a resident or a non-resident for the entire financial year.

Thus, many permutations and combinations are possible. This leads to further complications in practical application.

The definition of “Resident” for an individual under FEMA is similar to that of erstwhile FERA, as both emphasise on a person’s intention. However, FEMA has included the number of days stay in India (more than 182 days) in the preceding financial year as one of the criteria for determining the residential status.

DEFINITION

A person resident in India is defined u/s 2(v) of FEMA, as follow:

“person resident in India” means —

(i) a person residing in India for more than one hundred and eighty-two days during the course of the preceding financial year but does not include—

(A) a person who has gone out of India or who stays outside India, in either case—

(a) for or on taking up employment outside India, or

(b) for carrying on outside India a business or vocation outside India, or

(c) for any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period;

(B) a person who has come to or stays in India, in either case, otherwise than—

(a) for or on taking up employment in India, or

(b) for carrying on in India a business or vocation in India, or

(c) for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period;

(ii) any person or body corporate registered or incorporated in India,

(iii) an office, branch or agency in India owned or controlled by a person resident outside India,

(iv) an office, branch or agency outside India owned or controlled by a person resident in India;

Whereas,
(w) “person resident outside India” means a person who is not resident in India;

From the above definition, it is clear that section 2(v) defines an individual to be resident in India if he resides in India for more than one hundred and eighty-two days during the course of the preceding financial year, except where he has gone out of India or who stays outside India, (a) for or on taking up employment outside India, or (b) for carrying on outside India a business or vocation outside India, or (c) for any other purpose, in such circumstances as would indicate his intention to stay outside India for an uncertain period. Thus, a person falling under the above exceptions will not be considered a person resident in India even though his stay in India exceeded 182 days in the preceding financial year. This can give rise to a split residency. Consider an individual who leaves India for employment on 1st November, 2023. He can be considered a non-resident under FEMA from that date and would be a resident from 1st April, 2023 till 31st October, 2023. The exceptions will be operative as he is leaving for employment. Hence, although his stay in India during FY 2022-2023 exceeded 183 days, he would be regarded as non-resident w.e.f. 1st November, 2023.

Similarly, in case of a person resident outside India who is coming back to India to take up employment or for carrying on business or vocation in India or for any other purpose, in such circumstances as would indicate his intention to stay in India for an uncertain period, such person would be regarded as a person resident in India from the day he comes to India even if his stay in the preceding financial year in India was less than 183 days.

There is another school of thought, and according to which a person can become non-resident from the date he leaves India for employment, business / vocation or an uncertain period; however, to determine the residential status of an individual returning to India, one has to look at the physical stay of that person in the preceding financial year along with the intentions, such as employment, business / vocation or stay for an uncertain period. This view is applicable in the case of the purchase of immovable property in India as per the Press Release by the Government of India dated 1st February, 2009. As per the said Press Release, to be considered as a person resident in India, a person has not only to satisfy the condition of the period of stay in India (being more than 182 days during the preceding financial year) but also his purpose of stay as well as the type of Indian visa granted to him should indicate the intention to stay in India for an uncertain period.

In this regard, to be eligible, the intention to stay has to be unambiguously established with supporting documentation, including a visa.

Section 7(1) of the Limited Liability Partnership Act, 2008 (LLP Act) stipulates that every LLP should have two designated partners who are individuals, and at least one of them shall be a resident in India. The Explanation further provides that the term “resident in India” means a person who has stayed in India for a period of not less than one hundred and eighty-two days during the immediately preceding year. Thus, an individual must satisfy the 182-day stay criteria to become a designated partner in an LLP.

Determination of the Residential Status of an individual based on his stay in India in the preceding FY may pose serious challenges, as one has to wait for the entire year to become a resident of India that is too subject to stay in the preceding FY of 183 days or more. Therefore, except for buying properties or becoming a designated partner in an LLP, the earlier view seems more practical and workable, i.e., an individual becomes a resident of India from the date he arrives for employment, business/vocation, or stay for an uncertain period.

This view is strengthened by the provisions of Para 7 of Schedule 1 of FEMA Notification 5 (R)/2016 – RB – dated 1st April, 2016, which provides that NRE accounts should be re-designated as resident accounts or the funds held in these accounts may be transferred to the RFC accounts immediately upon the return of the account holder to India for taking up employment or for carrying on business or vocation or for any other purpose indicating intention to stay in India for an uncertain period.

From the above, it is clear that significant focus is being put on the intention of the person going abroad or returning to India.

Thus, we find that determining the residential status of a returning Indian is challenging. One needs to interpret the same in the context in which it is to be determined.

It is interesting to note that section 2(w) of the FEMA defines “person resident outside India” as a person who is not resident in India. Thus, it does not define the term “non-resident”, but for all practical purposes, the term “person resident outside India” is equated to “non-resident of India.” Similarly, the term “Non-Resident of India” (NRI) is not defined in FEMA, but various notifications / Master Directions define the term. For example, Para 2(vi) of the FEMA Notification 5 (R)/2016 – RB – dated 1st April, 2016, as well as defines ‘Non-Resident Indian (NRI)’ as a person resident outside India who is a citizen of India. Rule 2(aj) of the FEMA Non-Debt Instruments Rules, 20191 defines ‘Non-Resident Indian (NRI)’ as an individual resident outside India who is a citizen of India.

1      Also refer Para 2.18 of the Master Direction – Foreign Investment in India RBI/FED/2017-18/60 FED Master Direction No.11/2017-18 dated 4th January, 2018, updated up to 17th March, 2022

ILLUSTRATION

Let’s understand the concept of the Residential Status of an Individual under FEMA with the help of some examples:

1. Mr Raj leaves India for employment on 26th May, 2021. His stay during the preceding Financial Year, i.e., 2020–2021, was 365 days.

Will he be a non-resident as per FEMA?

Answer: Residence for an individual under FEMA has been defined u/s 2(v)(i).

An individual is considered an Indian resident if he has been in India in the preceding financial year for more than 182 days.

To determine the residential status of Mr. Raj as of26th May, 2021, we need to check if in the preceding year, i.e. 2020–21, his stay in India was more than 182 days.

As in preceding year Mr. Raj was in India for more than 182 days; he is a resident of India as on 26th May, 2021 as per FEMA.

However, on 26th May, 2021, Mr Raj went outside India for employment and therefore fell under one of the exclusions in the definition of “person resident in India” hence, he is a Non-resident of India from 26th May, 2021.

2. If Mr Raj returns to India on 31st July, 2023 for employment, what would be his residential status under FEMA for FY 2023–24? (You may assume his stay in India during the FY 2022–2023 period to be less than 182 days).

Answer: To determine the residential status as per FEMA law for the financial year 2023–24, we need to check if his stay in India in the preceding year i.e. 2022–23 was more than 182 days. As in the preceding year, Mr. Raj was in India for less than 183 days. He is a Non-resident as per FEMA till July 2023, after which he shall become a Resident if he intends to stay in India for employment.

However, if Mr Raj intends to buy a property in India, he must complete a stay in India of 183 days or more in the preceding FY. Assuming Mr. Raj’s stay in India during the FY 2023–2024 exceeds 182 days, he can buy a property in the FY 2024–2025.

From the above, it is clear that one needs to apply the test of stay in India as well as the intention of a person depending upon the context for which one determines the residential status.

RESIDENTIAL STATUS OF A STUDENT GOING ABROAD FOR STUDIES

RBI vide its Press Release 2003-2004/710. Circular No. 45 dated 8th December, 20032 has clarified that “taking into account the definition of resident under FEMA and the intention of the student to stay abroad for an uncertain period though not for permanent settlement, it has been decided to treat them henceforth as non-residents from the FEMA angle.” The Circular further clarifies that “as non-residents, students will, in any case, be eligible for receiving remittances from India, as follows: (i) up to USD 100,000 from close relatives from India on self-declaration towards maintenance, which could include remittances towards their studies also, (ii) up to USD 1 million out of sale proceeds / balances in their account maintained with an AD in India, (iii) all other facilities available for NRIs under FEMA, (iv) educational and other loans which were availed (as residents in India) by students would be allowed to continue.”

2      https://www.rbi.org.in/commonman/Upload/English/PressRelease/PDFs/40570.pdf and https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=2763

While taking up studies or further advanced courses, students may have to take up jobs or seek scholarships to supplement income to meet their financial requirements abroad. As they have to earn and learn, their stay for educational purposes gets prolonged than what is intended while leaving India. Thus, the above clarification and NRI status will help students take up jobs and undertake various financial transactions as non-residents without violating FEMA provisions.

A few more examples of residential status are as follows:

 

Sr. No. Purpose Status Reasons
1 A person Leaves India to take up employment for the first time. A person Resident Outside India Since he has left India for employment, he has become non-resident from the day he leaves India.
2 The student leaves for Australia to undertake a Master’s degree course for three years. A person Resident Outside India As per RBI Circular No. 45 dated
8th December, 2003,
3 A person visits India as a tourist. A person Resident Outside India Since he is on a visit for a fixed or specific period.
4 A person goes to Brisbane to participate and represent India. His stay was extended for eight months. A person Resident in India Since he has gone for a fixed period and his coming back is confirmed.
5 A person has gone to the UK. She will return to India after the maternity case of her daughter. A person Resident in India Since the period of stay is definite and not uncertain.
6 A person has taken up American citizenship even though his wife and children are in India. He travels to India to meet his family and is in India for more than 250 days. However, he is employed in the USA and intends to be outside India. A person Resident Outside India Since he has no intention to stay in India for the uncertain period and is employed outside India.
7 A person is serving on board a ship flying the Indian National Flag and has not set up any residence, business, or profession outside India. Person Resident in India A ship with the Indian National Flag is considered a territory of India. He cannot be considered a person who proceeded outside India to take up employment and set up a business or profession.
8 A person employed with an Indian company undertakes export promotion tours to Singapore. He was in Singapore for approximately 201 days. A person Resident in India Since he is employed in India and has not gone to Singapore to take up employment or carry on business for an uncertain period, a visit abroad while exercising employment in India or a business visit cannot make a person non-resident. Also, export promotion tours typically are for a fixed duration; therefore, on all counts, that person will be regarded as a Resident of India.
9 A person leaves India for the US as he received a Green Card but has no employment or business, but he intends to settle or stay there for an uncertain period. A person Resident Outside India The receipt of a Green Card signifies the intention to stay outside India. The said intention is fortified with the person moving to such a country. Therefore, he
will be regarded as
a non-resident from the day he leaves India.
10 A person who is a foreign citizen of non-Indian origin sets up a proprietary concern in India on 1st June, 2019, to carry on business with the intention of settling in India. A person Resident in India Since a person is coming to India to set up Business or Vocation, he will be considered a resident in India.

OVERSEAS CITIZEN OF INDIA (OCI)

Another essential aspect to understand is OCI.

The Constitution of India does not allow holding dual citizenship.

However, to overcome the difficulty for various Indians settled abroad who have taken foreign citizenship (foreign passports), on 2nd December, 2005, the government launched the “Overseas Citizens of India” scheme. Registration as an OCI provides the registrant with a few benefits. An illustrative list is stated below:

 

  • A multiple entry / multi-purpose life-long visa for visiting India.

 

  • OCI may be granted Indian citizenship after five years from the date of registration, provided they stay in India for one year before making the application and are subject to renouncing the citizenship of another country. Employment is allowed to an OCI in all areas except mountaineering, missionary and research work and other work requiring PAP / RAP (PAP – Protected Area Permit, RAP – Restricted Area Permit).

 

A foreign national is eligible for registration as an OCI holder if one falls under any of the below criteria:

  • Who was eligible to become a citizen of India on26th January, 1950** or

 

  • Was a citizen of India on or at any time after26th January, 1950 or

 

  • Belonged to a territory that became part of India after 15th August, 1947

 

  • Person of Indian Origin card holders are deemed to be OCI.

Children and grandchildren, including minor children of the above-referred persons, are also eligible for registration as an OCI, provided their country of citizenship allows the same in some form or other under local laws and are eligible for registration as an OCI.

However, if the applicant had ever been a citizen of Pakistan or Bangladesh, he would not be eligible for registration as an OCI.

  • A spouse of foreign origin of a citizen of India or spouse of foreign origin of an OCI card holder registered and whose marriage has been registered and subsisted for a continuous period of not less than two years immediately preceding the application’s presentation would be eligible to obtain registration as an OCI.

For eligibility for registration as OCI, such spouse shall be subjected to prior security clearance from a competent authority in India.

**Any person who, or whose parents or grandparents were born in India as defined in the Government of India Act, 1935 (as originally enacted), and who was ordinarily residing in any country outside India was eligible to become a citizen of India on 26th January, 1950. AnOCI card holder is eligible to visit India without obtaining a VISA.

PERSON OF INDIAN ORIGIN (PIO)

A PIO means a foreign citizen (except a national of Pakistan, Afghanistan, Bangladesh, China, Iran, Bhutan, Sri Lanka, and Nepal):

  • who at any time held an Indian passport; Or
  • who or either of their parents / grandparents/great grandparents were born and permanently resident in India as defined in the Government of India Act, 1935 and other territories that became part of India thereafter, provided neither was at any time a citizen of any of the countries above (as referred above); Or
  • who is a spouse of a citizen of India or a PIO.

A TRANSITION FROM PIO CARD TO OCI CARD

Earlier, the “PIO Card Scheme” was in place. The PIO card scheme has been withdrawn vide Gazette Notification No. 25024/9/2014 F. I dated 9th January, 2015. Further, vide Gazette Notification No 26011/01/2014IC. I dated 9th January, 2015; all existing PIO card holders are deemed OCI card holders. Therefore, no separate authentication of the existing PIO card as an OCI card is necessary. Henceforth, applicants may only apply for an OCI Card, as the PIO Card scheme no longer exists. Current PIO cardholders may apply for OCI cards instead of their PIO cards.

CONCLUSION

The residential status under FEMA is often misconstrued due to the insertion of a number of days’ conditions, similar to the definition under the Income-tax Act. However, it is essential to note that the impact of residential status under FEMA is from the regulatory perspective, not the revenue perspective. Some situations lead to different residential statuses as explained in the article above; however, from the perspective of FEMA, the person’s intention is of utmost importance. It is also noteworthy that intentions need to be justifiable / verifiable from the documentary evidence such as type of visa, employment letter, hiring of an apartment, etc., and it should not be merely a thought by a person that he intends to stay in or out of the country. If the intention, coupled with the number of days of stay, is examined correctly, the residential status can be obtained for a particular person for a given period. As stated earlier, applying the criteria of stay vs. intentions will be relevant in the context in which one seeks to apply the provisions.

BCAS President CA Chirag Doshi’s Message for the Month of March 2024

Future Ready – Finance Professionals

“If you don’t want to be like everybody, then you have to do what nobody has done. Walk a different path, and you’ll create a new destination for yourself.” — Mahatria Ra

 

Dear BCAS Family,

The future awaits with loads of opportunities for persons / entities who want to be different. If we accept that “knowing what we are and what we are not” is critical, then the time for change is now. The pace at which transformation is taking place in our profession and industries across the world, will not wait for anyone, a person or a firm. Firms that fail to define their identity will have the risk of being overtaken by more disciplined firms or watching their own relevance to clients decline. Whereas the firms that embrace the discipline and have the courage to define what they are and what they do will enjoy growth and success.

Traditionally, strategies have always been a fundamental trade-off between scale and relations. Now, technology allows firms to have both, no matter their size. Along with a new wave of cloud-based services, which are available for rent-based or subscription-based models, it is possible for even small firms to access the benefits of scale without investing heavily in assets themselves. Firms of the future will also need innovative and flexible methods of working that support their teams to solve specific problems and move on quickly. Traditional firms were defined by the assets they owned and controlled. Future firms will be defined by the ecosystems they create, the partnerships and the global reach they possess. The Firms of the Future will see the emergence of new ownership models, too.

The new era demands very different skill set and leadership approaches than what has prevailed for the past 40 years. The leaders of the firms of the Future will not only have to run their current engine—as efficiently as possible, but also create new avenues—tomorrow’s engine—that aligns with dynamic client needs, new competitors and new global economics.

Working for a firm of the future will be very different. Many times, it will feel like an investment banking firm more focused on mission-critical roles. At other times, it will feel like a professional services firm, with its ability to rapidly mobilise its resources. If anything is true of the last ten years in India, it’s that the mountains of change we’ve experienced which have left a big mark on the way corporates do business. Accounting firms have seen notable shifts in how they operate and deliver services.

Various elements are impacting the future age firms:

1: Global resourcing

Global resourcing allows accounting firms to access specialised expertise and talent without local or even national talent constraints and provide better service to their clients. By leveraging global talent, firms can increase efficiency and provide more innovative services to their clients.

2: New service offerings and delivery models

Clients now have new needs and firms have to continuously upgrade their skills and talents to stay competitive and adapt to new models of delivering better and more efficient services. Changes will be seen in the near future as to how firms provide their various advisory services, technology consultancy, data analytics, and other value-added services. Firms may also witness changes in their pricing models.

3: Specialization

Steve Jobs was known for saying, “Do not try to do everything. Do one thing well.” Professional firms will also need to adopt this approach whereby they specialise by industry, region, service, and other niches to secure a competitive advantage over their competitors.

4: Client experience

A stronger client-centric approach that focuses onmeeting every client’s unique needs is the path forward for the firms now. Firms might have to increase their team sizes and skills in the area of client relationships and experience.

5: Work-life balance

With parts of the world experimenting with 4-day work weeks, Firms need to understand their human resources capacity, have transparent agreements with staff, and be able to distribute work in a more balanced manner.

6: Partnership and collaboration

Markets are changing with clients expecting inputs for strategic vision, forward-thinking opinions, thought-provoking solutions and more. It will be difficult for firms to meet these needs. Your clients’ needs will continue evolving, and you must stay relevant. You will have to remember that you cannot do everything by yourself and will have to find partners who can help you solve problems for your clients that you can’t.

The firms in denial about the need for change should examine the following six characteristics:1. Partner / manager comfort zones; 2. Artificial harmony; 3. Overconfidence; 4. Herding instinct; 5. Banking on good intentions; 6. Vested anchoring.

To be on the growth path and lead the professional career with confidence and success, I am providing various questions which Practitioners should plan to address:

– Have you defined who you are, in terms of clients or industries served, services offered and specialities? Also, define who you are not.

– Have you reviewed your list of clients to verify that only “ideal client” are being on boarded?

– Of the services listed on your profiles/website, which ones represent areas in which you have critical clients? In which are you truly differentiator, so much so that you distinguish yourself in the marketplace?

– Any work you transitioned out of your firm because it does not fit your long-term strategy or skills requirements?

– Are you aware of the services of your firm that will continue to have reduced profitability because they offer no real competitive advantage?

– Does your services produce data and information but create no real value?

– Are your team members specifically aligned with your areas of focus so that they quickly grow?

– Do you hold partners accountable for your core strategies? Are they working towards a common goal that is in the firm’s best long-term interest or working to meet individual goals?

In the professional services industry, technology has accelerated the pace of change and enabled faster, more flexible service delivery. Firms of the future will have to embrace the change in every aspect from enhanced client experiences and leveraging technology for efficiency to building a more balanced workplace and innovating around service offerings, which will be critical for firms to adapt if they want to stay competitive and grow. Otherwise, experts predict that by 2025, firms that remain loyal to old ways of working will likely have fallen by the wayside

Leadership Retreat

Our Society organised the Leadership Camp at the Deolali Military Camp area at The Leslie Sawhney Training Centre on “Empowering Relationship”. The major takeaway for me was the 4A principle to resolve various professional and personal conflicts. Avoidance, Acceptance, Analysis and Activation. I would recommend members to look forward to more such events by the Human Resource Development Committee.

57th Residential Refresher Course (RRC)

Our Society just witnessed a remarkable 57th RRC on the theme of “Back to Roots”, which had a traditional flavour with new energies. The nostalgic 18+ RRC’s held earlier at the same location were remembered by our various Past Presidents sharing their views on the concept of RRC. Intense Group and Panel discussions, and the Presentation Papers set the academics rolling. This RRC also set the flavour of the future, with around 50% of participants being youth, bringing new energies and enthusiasm through various ice-breaking activities and team building games, treasure hunts in the midst of mountains of Mahabaleshwar, discussion of global opportunities and much more. I have shared my thoughts on how to be future-ready for professionals with just one desire: we have to be in control of our journey as a professional. I would like to conclude with a relevant quote from Manu Smriti, which is apt for attaining happiness:

सर्वंपरवशंदुःखंसर्वमात्मवशंसुखम्।

एतद्विद्यात्समासेनलक्षणंसुखदुःखयोः॥

Everything that is in another’s control is painful. All that is in self-control is happiness.

 

Best Regards,

Chirag Doshi

President

Section 43B (h) – Kahin Khushi Kahin Gham

Micro, Small and Medium Enterprises (MSME) are the backbone of the Indian economy. The share of MSME Gross Value Added (GVA) in the all-India Gross Domestic Product (GDP) during the years 2019–20, 2020–21 and 2021–22 was 30.5 per cent, 27.2 per cent and 29.2 per cent, respectively. The share of MSME manufacturing output in all India Manufacturing output during the years 2019–20, 2020–21 and 2021–22 was 36.6 per cent, 36.9 per cent and 36.2 per cent, respectively. The share of export of MSME-specified products in all India exports during the years 2020–21, 2021–22 and 2022–23 was 49.4 per cent, 45.0 per cent and 43.6 per cent respectively.1 As of 2nd August, 2023, the total number of persons employed by MSMEs was over 123.6 million people.

1      https://pib.gov.in/PressReleaseIframePage.aspx?PRID=1946375

This shows the importance of the MSME sector in the development of the Indian economy. The government is aware of these facts and hence, has offered a slew of incentives and launched several schemes to help, protect and promote the interests of MSMEs. The schemes / programmes inter alia include the Prime Minister’s Employment Generation Programme (PMEGP), the Credit Guarantee Scheme for Micro and Small Enterprises (CGTMSE), the Micro and Small Enterprises-Cluster Development Programme (MSE-CDP), the Entrepreneurship Skill Development Programme (ESDP), the Procurement and Marketing Support Scheme (PMS) and the National SC/ST Hub (NSSH).

 

However, despite these schemes, the challenges faced by this sector are humungous. Some of the major challenges faced by MSMEs are a constraint of resources in terms of finance, human resources, technology and so on. If only these challenges are addressed, the share of MSMEs in the GDP of the Indian economy can be increased up to 50 per cent from the present 30 per cent or so. One of the advantages of the MSME sector is that it is labour-intensive and generates employment, which can be seen from the above mentioned figures. A cash-rich company is King in any industry, more so for the MSME sector. With the objective of helping Micro and Small Enterprises (Medium Enterprises are excluded) expedite their collections and improve their cash flows, a new clause (h) was introduced in section 43B of the Income-tax Act, 1961, w.e.f. 1st April, 2024. Accordingly, any payment outstanding at the year-end (e.g., 31st March, 2024) and paid beyond the due date prescribed under section 15 of the Micro, Small, and Medium Enterprises Development Act, 2006 (MSMED) is to be allowed as a deduction only in the year of payment. Section 15 of the MSMED Act provides the due date of payment as per the terms of the agreement or 45 days from the date of acceptance or deemed acceptance, whichever is earlier and within 15 days from the date of acceptance or deemed acceptance where there is no agreement2. These timelines are applicable across the board without any exceptions. Thus, payments made by one MSME to another Micro or Small Enterprise would also be subject to provisions of section 43B(h). Industries and businesses have not received these provisions requiring adherence to stringent timelines well for various reasons. The normal payment cycle is six months in some industries, e.g., textiles. Even FEMA provides nine months to realise export proceeds. Ninety days is the normally accepted period for the settlement of dues in various industries. Thus, 45 days is perceived to be too short a period for the settlement of dues of MSMEs.

2      Please refer to the separate Article in this issue of the Journal for the criteria for determining MSME, important provisions under the MSMED Act, 2006 and various issues arising from the amendment of section 43B of the Income-tax Act, 1961.

 

The Memorandum explaining the Finance Bill 2023 justifies the insertion of clause (h) in section 43B as a part of the Socio-Economic Welfare Measures. It states, “To promote timely payments to micro and small enterprises, it is proposed to include payments made to such enterprises within the ambit of section 43B of the Act. Accordingly, it is proposed to insert a new clause (h) in section 43B of the Act to provide that any sum payable by the assessee to a micro or small enterprise beyond the time limit specified in section 15 of the Micro, Small and Medium Enterprises Development (MSMED) Act 2006 shall be allowed as deduction only on actual payment. However, it is also proposed that the proviso to section 43B of the Act shall not apply to such payments.” The proviso to section 43B of the Income-tax Act, 1961, allows deduction on an accrual basis for various items if the amount is paid by the due date of furnishing of the return of income — this exclusion does not apply to micro and small enterprise dues. The reason for this provision seems to be to not grant time beyond what is prescribed under the MSMED Act. Whereas MSMEs should be happy with this provision, some also fear the loss of contracts from big companies, unless they deregister as MSMEs. The protection is available only to an MSME that qualifies as a “supplier” under section 15 of the MSMED Act. A “supplier”, as per section 2(n) of the MSMED Act, is that Micro and Small Enterprise which has filed a memorandum with authority referred to in section 8(1) (i.e., Udyam Registration). Thus, Udhyam Registration is a must to get protection under section 43B(h) of the Income-tax Act, 1961.

Another taxing issue for the tax auditor is to report such disallowances in Form 3CD. It will be extremely difficult to obtain information about the status of all suppliers in a large corporation. This is an additional burden on otherwise stretched tax auditors. Auditors will have to rely on the declarations filed by the MSMEs or representations made by the client. Detailed guidance from the ICAI will be useful to auditors. ICAI should consider how much responsibility be cast on tax auditors, and some portions of the tax audit report should be in the form of declarations / representations by the clients instead of certification of each and every figure by a tax auditor in Form 3CD. Micro and small enterprises should mention their Udyog Registration Number on their invoices, and the buyer or recipient of services should obtain a copy of such certificate on record.

In conclusion, the insertion of clause (h) in section 43B is with good intentions; however, considering varied practices across the industries, the proviso to section 43B, as applicable to other payments, should also be extended to Micro and Small Enterprises, allowing deduction of payments made before the due date of filing of the return. As demanded by various trade associations, the provisions may be deferred by one year so that sufficient time period is available for businesses to align with these provisions.

An amendment of this nature that significantly impacts businesses should be carried out only after consultation with stakeholders.

Election is around the corner, so we do not have a full-fledged budget this year. We await the full budget to be presented by the newly elected Government.

 

Warm Regards,

Mayur Nayak,
Editor

कर्मण्येवाधिकारस्ते मा फलेषु कदाचन | समत्वं योग उच्यते ………..| योग: कर्मसु कौशलम् …|

All the three lines are often quoted like proverbs. All the three lines are from the second chapter of Shreemad– Bhagawad Geeta. The text is as follows:

कर्मण्येवाधिकारस्तेमाफलेषुकदाचन l
माकर्मफलहेतुर्भूर्मातेसङ्गोऽस्त्वकर्मणि l l२.४७ ।।

योगस्थःकुरुकर्माणिसङ्गंत्यक्त्वाधनञ्जय।
सिद्ध्यसिद्ध्योःसमोभूत्वासमत्वंयोगउच्यते ।।२.४८।।

बुद्धियुक्तोजहातीहउभेसुकृतदुष्कृते।
तस्माद्योगाययुज्यस्वयोगःकर्मसुकौशलम्।।२.५० ।।

The word ‘yoga’ is derived from the Sanskrit root yuj (युज्). It means to join or to get connected. Yoga, in simple terms, means to get ourselves connected with God. Get ‘Atman’ (self) connected with ‘Super Atman’ (परमात्मा). This is in all religions / prayers are meant for achieving this goal. The word ‘yoga’ appears very frequently in Geeta. All chapters in the Shreemad-Bhagawad Geeta are also named as some ‘yoga’, e.g., Karma yoga and Bhakti yoga.

The literal meaning of each shloka is as follows:

2.47 – Only performing your duty (work, karma) is in your hands, not its fruit. Therefore, do not do any work to get a particular fruit since it is in God’s hands. At the same time, do not abstain yourself from doing your karma. Never think of stopping your work.

2.48 – Oh. Dhananjay (Arjun), keep doing your duty without attaching to the result or fruit. Be a real yogi (detached). Don’t get excited by success nor get nervous or depressed by failure. This equality of attitude towards success or failure is called ‘yoga’.

2.50 – Such a yogi gets detached from the sin or good work (पुण्य) – bliss – during his life itself. Keep on making efforts to achieve this detachment (yoga). Working without getting attached to the result is the ‘skill’ in the work.

Explanation
People often ask, “If we don’t’ work for success, why work at all?” The true implication is that one should certainly work for success, but success is not in one’s hands. You have no control over it. At the same time, the chances of God giving you success are better only if you do the work sincerely and honestly.

Take our familiar example of appearing for the CA examination! No need to elaborate on it. A doctor should perform surgery for success only; but keeping in mind that the result is not within his hands. This principle applies everywhere — war, sports, research, elections, singing, cooking, scientific activity and so on. Our India’s first Chandrayaan mission failed, but our scientists made it successful the next time. Had they become nervous, no success would have been possible. You can experience this in every walk of life. We CAs argue our case or appeal; but we have no control over the result. Still, we need to keep on fighting. Shrikrishna says, being the God Himself, He has everything within. Still, He needs to keep on doing some work or the other continuously. One cannot remain a single minute without work. If He stops working, everybody will give up work. Since He is the ‘leader’. If all stop working, it is a dangerous situation.

The next two shlokas are more or less an extension of this principle. Bhagwan recommends that everybody should strive to be a yogi – i.e., continuously working without getting attached. A mother rears the child by doing literally anything and everything. If the child is sick,she should attempt to cure him, but she should not expect anything beyond that, e.g. she should not keep on thinking that when the child grows up, he or she will reciprocate by taking care of the mother. A mother’s behaviour is a classic example of karma yoga.

समत्वंयोगउच्यते – Samatva does not mean ‘equality’ in the society as we presently understand. Here, it refers to equality of attitude towards success and failure. Similarly, inयोगःकर्मसुकौशलम्।Kaushalam does not mean merely the skill or dexterity; but the skill in the attitude of ‘not getting attached’.

Therefore, friends, let us try to be yogis int his sense.

Society News

Human Development Study Circle Meeting on
“Business Environment in India – Evolution, Opportunities, Challenges” held on
10th January, 2017

Human Development and Technology Initiatives Committee  (HDTI) of BCAS conducted a Human Development
Study Circle Meeting on “Business Environment in India – Evolution,
Opportunities, and Challenges” on 10th January, 2017 at BCAS
Conference Hall. 

Dr. Anil Naik, a Management Consultant, MBA from IIM Calcutta
and winner of many prestigious awards, having wide experience in Industry and
also visiting faculty at top Management Institutes in India and Abroad, gave
the presentation and covered the following topics- .

1.  Evolution of Business Environment in India
since 1991.

2.  Challenges of the Indian businesses to be seen
for :

• Family Owned & Family Managed Businesses

• Family Owned Professionally Managed Businesses

• Corporate Sector consisting of Indian
Companies, Foreign Companies operating in India and Collaborations of Indian
& Foreign Companies.

3.  He also cited the examples of companies
operating in India like Tata Motors, Kodak, Shapoorji Pallonji, Ballarpur
Industries and Kirloskar, etc.

The major basic issues discussed were:

·        
Major changes in Transportation Industry and
many others.

·        
Factors for success i.e. Adaptability to new
technology, Personality Skills, Pursuing Aspirations etc.

·     Stark realities of dynamic environment – No more
secrets, security is uncertain, Allegiance, Time is short – we need to run fast
to take up right opportunities at right time at great speed, Order of today’s
time is not clear – international business, supremacy of product plays vital
role.

·    India has 16 cultures. Cultural Differences.
Internal Culture of the organisation matters. Asian culture v Globalised
scenario. Adopting right mix of culture is challenge of today’s times.

·        
Business environment is Dynamic, turbulent and
unstable. How to become flexible. Opportunities for organic flexibility,
adaptability, innovation, accepting change and uncertainty are natural state of
things in the current environment.

·        
Ensure that institutions have capacity to serve.
Employees’ skills, motivation and capabilities play an important role.

Inescapable reality of new economy – 1) Seek and create
breakthrough changes. 2) Outsiders see it first 3) Right balance between
incremental improvement and radical innovation 3) Shortage of resources is not
necessarily serious, but shortage of imagination is certainly fatal 4) Nothing
lasts forever under its original momentum 5) Success contains the seed of its
own destruction 6) Primary challenge of leadership today is to create adaptive
organisation which has a built in capability to renew itself over and over
again.

The meeting was very fruitful and the participants benefitted
a lot from the Speaker’s rich experience.

Workshop on Merger & Acquisition held on 27th & 28th
January 2017

Corporate & Allied Laws Committee [‘C&ALC’] organised
a two days’ Workshop on Mergers & Acquisition at Hotel St. Regis, Lower
Parel, Mumbai. The event received an overwhelming response.

86 participants attended the workshop out of which almost 30
participants were from industry. Further, around 32 were outstation
Participants from cities like Ahmedabad, Vadodara, Hyderabad, Chennai and
Nagpur.

CA. Chetan Shah, President, welcomed the participants. CA.
Kanu S. Chokshi, Chairman of C&ALC gave a brief idea on the necessity of
such programme.

The Workshop was inaugurated by Dr. Lalit Kanodia, Chairman,
Datamatics Group. Eminent faculties addressed the participants on the relevant
topics along with their presentations. A 
booklet of the presentations made by various speakers at the workshop was
provided to the participants.  The event
was conceptualised by CA. Naushad Panjwani, Past President of BCAS, with the
help of Dr. Anup Shah. CA. Naushad Panjwani also shared his thoughts on certain
mergers at the said workshop. Advocate Praveen Veera chaired the session on
‘Stamp duty’ and CA. Shrenik Baid shared the dais along with CA. Kanu S.
Chokshi during the session on ‘Accounting Implications’.

The sessions of the said workshop on Merger & Acquisition
are summarised below:

Session I: Keynote Address – “Key negotiating
techniques used by buyers and sellers in a Merger & Acquisition
transaction” by Dr.Lalit Kanodia – Chairman, Datamatics Group.

Dr. Lalit Kanodia

He inaugurated the workshop and shared his practical
experiences in Merger and acquisition.

Session II: Alternative Disputes Resolution in
Merger & Acquisition by CA. Suresh Kotak –Chairman, Kotak Group.


CA. Suresh Kotak

He addressed the participants.& talked about steps taken
in area of ADR

Session III: Stamp Duty by Dr. Anup Shah, CA.
Pravin P. Shah & Co.

 

CA. Anup P. Shah

He covered various implications of  stamp duty under different modes of mergers
& acquisition. He also analysed stamp duty on CD, Debentures, Gift etc.

Session IV: Companies Act & Bankruptcy Law by
Adv. Sharad Abhyankar – Sr. Partner, Khaitan & Co. 

Adv. Sharad Abhyankar

He analysed
transaction charges, some of the procedural aspects and gave a mapping in
Merger & Acquisition. He also gave an overview of Insolvency and bankruptcy
code in relation to Merger & Acquisition.

Session V: SEBI Takeover Regulations by Adv. Akil Hirani –
Managing Partner, Majumdar & Co.


Adv. Akil Hirani

He took the participants through takeover code and insider
trading regulations with respect to, an open offer, in case of Merger &
Acquisition.

Session VI: Legal Due Diligence by Adv. Tushar Ajinkya.

Adv.Tushar Ajinkya

He highlighted the Due Diligence aspects with the typical
structure requirement, key areas to be checked, IPR and litigation issues.

Session VII: Financial due Diligence by CA. Rajesh
Khairajani – KNAV.


CA. Rajesh Khairajani

He touched upon various facets of financial due diligence on
both, buyer and seller side, inter alia, emphasising upon physical verification
of assets in  Merger & Acquisition
deal.

Session VIII: FEMA & Cross Border by CA. T. P. Ostwal,
T. P. Ostwal & Associates.


CA.T. P. Ostwal

He explained salient
features of various treaties of India & Mauritius /Cyprus/Switzerland; and
choice of jurisdiction. He also took 
participants through Automatic route vis-à-vis Approval route;

Session IX: Strategy & Value Creation by
Mr. Sudhir Valia – Executive Director, Sun Pharma.


Mr. Sudhir Valia

He shared his rich experience  in guiding participants as to how to proceed
for Merger & Acquisition.

Session X: Income Tax-Domestic/ International (in case of
cross border) by
CA. Hiten Kotak & CA. Falguni Shah.


CA. Hiten Kotak


CA. Falguni Shah

The speakers explained the funding structures – Key
consideration, recapitalisation and repatriation and indirect transfer and tax
thereon with practical examples.

Session XI: Accounting
Implications by CA. Himanshu Kishnadwala, CNK & Associates.


CA. Himanshu Kishnadwala

He gave an overview of provisions relating to M & A
contained in Companies Act 2013 and SEBI Regulations. He also dealt with the
applicability of Accounting Standard and Ind AS to Merger & Acquisition and
explained Accounting in Merger & Acquisition with an illustration.

Session XII: A typical Merger & Acquisition
process by CA. Sridhar Swamy.

CA. Sridhar Swamy

He explained the nitty-gritty of the Merger & Acquisition
process including identification and understanding buyer, process documents and
presentation to the Management. He also briefly explained legal documentation
in Merger & Acquisition.

Session XIII: Post Merger Integration by CA. Mitil
Chokshi.


CA. Mitil Chokshi

He drew attention of the participants to the difficulties
faced in integration Post Merger, some of the important factors peculiar to
each industry which could result in a possible threat to success of a Merger
& Acquisition deal. He also shared his experience regarding solution on
some of difficulties in Merger & Acquisition deals handled by him.

CA. Manish Reshamawala, Convener, with his untiring efforts
coordinated the programme with the support of CA. Preeti Oza, Convener. The
participants benefitted from the rich experience of the Speakers.

Experts chat @ bcas on “Internal audit 2017: global trends
and outlook” held on 30th January, 2017

An experts chat on “Internal Audit: Global Trends and
Outlook” was held at the BCAS Conference Hall on 30th January, 2017.

The program commenced with the signing of a Memorandum of
Understanding (MOU) between BCAS and the Institute of Internal Auditors –
Bombay Chapter (IIABC). This MOU will enable BCAS and IIABC to jointly
collaborate and develop mutually beneficial programs in the field of internal
audit, projects and activities for its members in the field of internal audit,
as well as to offer members of both parties to attend programs of each other.

President CA. Chetan Shah,
on behalf of BCAS and President CA. Sunil Gaitonde, on behalf of the Institute
of Internal Auditors – Bombay Chapter (IIABC) did the honours.

President CA. Chetan Shah then welcomed Mr. Richard F.
Chambers, the President and Chief Executive Officer of The Institute of
Internal Auditors (IIA), the global professional association and
standard-setting body for internal auditors. The IIA serves more than 1, 85,000
members in over 170 countries and territories and is the internal audit
profession’s most widely recognised advocate, educator, and provider of
standards, guidance, and certifications.

L to R : Mr. Richard F. Chambers in the fireside chat with CA. Nandita Parekh

Mr. Chambers made a detailed presentation on the emerging
trends in internal audit, more particularly, the reporting structure, critical
focus areas, need to understand the audit culture of the organisation,
cyberspace audit, audit of big data. His talk was generously interspersed with
interesting statistics and results of survey done by Internal Audit Foundation,
across various continents and organisations.

Mr. Chambers shared a list of five strategies for every
internal auditor to equip himself with:

·        
Respond to the voice of the customer

·        
Strive for agility

·        
Transform your talents

·        
Revolutionise your processes

·        
Elevate your image’

Mr. Chambers’ presentation was followed by an engaging
fireside chat, which was moderated by CA Nandita Parekh, a senior member of the
Core group with expertise in the area of internal audit.

Mr. Chambers candidly answered questions on matters including
how to earn a seat at the (management) table, need for an internal auditor to
adjust the sails (i.e. the audit scope) to steer through the external and
internal changes, etc.

Questions posed by participants were also answered by Mr.
Chambers.  

The event witnessed an impressive turnout and was also
available for viewing through live streaming. The live streaming facility was
made available to members of IIA and IIABC.

“Public Lecture Meeting on Direct Tax Provisions of the
Finance Bill 2017” held on 7th February, 2017

The 52nd Lecture Meeting of the Society on the
Direct Tax Provisions of the Finance Bill 2017 by Senior Advocate Shri S.E.
Dastur was held at Yogi Sabhagruha, Dadar. This was 29th consecutive
year of address by Shri. S. E. Dastur.

Mr. S. E. Dastur (Speaker)

The lecture meeting was streamed live and was witnessed by
more than 15,000 persons including online viewers. President CA. Chetan Shah
welcomed and introduced the speaker Shri S. E. Dastur citing that his
intellectual charm is what makes this session special. He Shah also touched
upon the concept of liberalisation and digital revolution.

Shri Dastur started his speech by detailing the memories of
the previous budgets since 1948-49. He talked about the Finance Minister’s
speech having laid emphasis on the digital economy. He discussed the various
new insertions in areas of capital gains, changes in assessment and
reassessment procedures. He also explained the concept of primary and secondary
adjustment under transfer pricing.

After covering all significant provisions the eminent speaker
dealt with other amendments. He also covered provisions under the Companies Act
and Accounting Standards, the taxability of carbon credits. He commented on the
amendments to the Search provisions under section 132.

The audience was spell bound by his speech. His lucid
analysis of the provisions benefitted all those who witnessed his presentation.
The meeting ended with a huge round of applause and appreciation by the
participants.

FEMA Study Circle Meeting held on 8th February,
2017

FEMA Study Circle Meeting was held on the topic of
“Investment by Foreign Venture Capital Investor (FVCI) and in Real Estate
Investment Trust (REIT)” on 8th February, 2017 at BCAS Conference
Hall. The meeting was chaired by CA Shabbir Motorwala and led by CA Amit Dhoot,
CA. Monica Wadhwa and CA. Rashmi Shetty. It was great to have such
knowledgeable bench of leaders.

The speakers took participants not only through important
FEMA provisions applicable to Investment by FVCI and REIT but also issues
related to structuring, SEBI registration, important conditions etc.
which gave participants a 360 degree perspective of the subject. They also
explained the advantage of FVCI over FDI.

For investment in REIT, the speaker explained the challenges
why REIT is not yet picking up pace in India and how can India learn from other
countries.

The chairman shared his practical experience which was an
icing on the cake!

CPR workshop with medical camp held on 11th February, 2017

CPR (Cardio Pulmonary Resuscitation) training workshop with
medical camp was held jointly with Asian Heart Institute ( which stood as the
‘India’s Best Private Cardiac Hospital’ for two years in a row) on 11th
February, 2017 at BCAS conference Hall. Around 65 participants including members
and their families availed benefit of the workshop. The medical camp covered
the health checkup for random blood sugar, blood pressure, ECG and consultation
by doctor from Asian Heart Institute.


Participants in the CPR Workshop

The doctors conducted CPR workshop for the participants
enrolled and provided practical training for CPR in case of medical emergency
arising out of cardiac arrest which was very useful for understanding the
subject.

The doctors involved in the workshop were experts in their
field which helped in conducting the workshop successfully.

Report on Three Days 7th Residential Study Course
(RSC) on IndAS held on 16th -18th February, 2017

IndAS is being implemented in India in phases. FY 2016-17 is
the first year of applicability for phase I companies with comparatives for FY
2015-16. Several challenges are being faced by companies in this implementation
effort, more particularly on fair value, financial instruments, business
combinations and so on.

BCAS has always been in the forefront to assist professionals
to face challenges and be equip them to implement such changes. The 7th
BCAS IndAS Residential Study Course was planned by the Accounting and Auditing
Committee to address the implementation challenges being faced as well as to
impart knowledge of implementing IndAS to the professionals to have a smooth
transition for the corporate sector.

The RSC was organised from 16th to 18th
February, 2017 at Ras Resorts, Silvassa. This year’s RSC was structured with
three sessions based on case studies prepared by three eminent professionals
covering different aspects of IndAS implementation. These case studies based
papers involved group discussions through three groups formed amongst the
participants, led by knowledgeable group leaders. There were two more papers
for presentation by eminent faculty which were on other accounting standards
applicable to corporate and non-corporate entities viz. Accounting Standards
for non-IndAS companies and ICDS vs. IndAS. Another unique feature of this
year’s RSC was a Panel Discussion on Ind AS 109 – Financial Instruments –
Implementation Issues.

Immediately after the reporting of the delegates in the
morning, there was a group discussion on the first paper by CA. Arvind Daga on
“Case Studies on Business Combinations/Consolidation”. The case studies were
highlighting the various complexities involved in carrying out accounting for
business combinations and consolidation as well as the evaluation of the
relevant consolidation standard in specific circumstances.

CA. Arvind Daga

Later, post lunch, there was the inaugural session. The
session commenced with the inaugural address by the President of BCAS, CA.
Chetan Shah. He conveyed his satisfaction about the response received to the
course from all over India and was particularly happy to have a strong
participation from industry. Later, the Chairman of the Committee CA. Himanshu
Kishnadwala gave introductory remarks on the design and structure of the course
and the purpose of selection of the topics for group discussion as well as
presentation and panel discussion.

CA. Paresh Clerk

Immediately after the inaugural session, there was the
presentation on the first paper by CA. Arvind Daga, who aptly dealt with the
case studies and also covered the issues raised during the group discussion in
very immaculate manner. Thereafter, CA. Paresh Clerk took the participants
through a Presentation paper on “Accounting Standards for Non-IndAS Companies”,
where he dealt with the major changes in some of the standards to bring them
ont par with IndAS for recognition and measurement.

CA. Anand Subramanian

Second day started with group discussion on paper by  CA. Anand Subramanian on “Case Studies on
Real Estate/Infrastructure Companies”. The case studies highlighted the
intricate issues arising from Service Concession Arrangements as well as
Construction Contracts which is of utmost importance for recognition of revenue
for such companies. Later, he, made a presentation on his paper and shared his
vast experience, which was of immense value to the participants.


CA. Sudhir Soni

Post lunch there was group discussion on paper by CA. Sudhir
Soni on “Case Studies on Revenue Recognition – Impact on Different Sectors”.
The case studies dealt with typical situations in retail and pharma sectors and
also some other related issues.

During the evening at the request of BCAS, the newly elected
President of ICAI, CA. Nilesh Vikamsey addressed the participants’ through
skype, as,  though he would have wished
to, time constraints did not make it feasible for him to be physically present.
The three way Skype call wherein CA. Nilesh Vikamsey, President of BCAS CA.
Chetan Shah and the participants participated live was the first such effort by
BCAS. CA. Chetan Shah welcomed CA. Nilesh Vikamsey and CA. Himanshu Kishnadwala
also updated him about the conference. Later, CA. Nilesh Vikamsey addressed the
participants and briefed them about some IndAS implementation issues and how
ICAI is addressing them.

He also updated the participants regarding the efforts of
ICAI to be partners in nation building and also commended BCAS for its
activities which are complementing the efforts of ICAI towards the profession.

In the evening, there was a brief and crisp presentation on
the case studies by CA. Sudhir Soni which also provided expert insights to the
case studies.


CA. Gautam B. Doshi

Last day commenced with a Presentation on “ICDS Vs IndAS” by
CA. Gautam Doshi. In his immaculate style he provided bird’s eye view of the
major differences between ICDS and IndAS. Though not included in the original
schedule, at the request of the organisers, he also dealt with the impact of
MAT on IndAS financials on the basis of the proposed amendments to Income Tax
Act as per Budget 2017 for corporate preparing IndAS financials for the FY
2016-17.

Last session was a unique one, introduced for the first time
in IndAS RSC, which was Panel discussion on “IndAS 109- Financial Instruments –
Implementation Issues”. The panelists were CA. Gautam Doshi and CA. Charanjit
Attra. The discussion was ably moderated by Ashutosh Pednekar. The session was
appreciated by many participants as the posers which were discussed were very
relevant for banking, finance as well as insurance companies.

The concluding session was presided over by CA. Himanshu
Kishnadwala and he acknowledged contribution of the faculty as well as active
participation of all for the success of the RSC. Some of the participants gave
their views on the course and conveyed their satisfaction at the format and
structure of the course.

Interactive Session with Students for Success in CA Exams
held on 18th February, 2017

HDTI committee jointly with Rajasthan Vidhyarthi Gruh (RVG
Hostel) organised half day programme for students on 18th February
2017 at RVG Hostel, Andheri. Joint Secretary Sunil Gabhawalla welcomed the
participants.

 

L to R: CA. Sunil Gabhawalla, CA. Mukesh Trivedi and CA. Srinivas Joshi

In the first session, CA. Srinivas Joshi discussed about ICAI
Exams with the help of PowerPoint presentation, which included expectation from
students’ and their performance. Being past Central Council member of ICAI, and
having vast first-hand experience as a Member of Examination committee, he
shared in detail, information with insights as to how ICAI exams are conducted,
how confidentiality and professionalism is maintained, what quality and level
of knowledge is expected from students, balanced, consistent and 100 percent
advance study, writing habit, group discussion, problems solving, overcoming
and controlling time wasters, etc. were important guidance factors.

He also guided students on various important topics viz. how
to study, prepare, plan and manage time before the exams, how to actually write
papers, how to ensure success while writing papers and many other important
issues. Students received his presentation very well. Many doubts and incorrect
impressions were cleared.

Second session commenced with personal experience and tips
shared by three successful CAs. Piyush Lohia, Chinmay Dharap and Harshal Gupta
passing with 2nd, 5th and 34th rank
respectively in final exam of ICAI.

Young CA. Mudit Yadav, a success coach, TEDx speaker and a
motivator shared his personal journey from ordinary school and college career
to qualified CA effectively, with emotions and humour. He encouraged all students
to appear and prepare for CA exams with mindset, resolution and planning.

Convenor CA. Mukesh Trivedi proposed vote of thanks and CA.
Bharat Oza presented memento to the speaker.

Overwhelmingly satisfied and better guided, all Students
carried home clarity and insights with positive resolution to succeed in CA
exams.

About 70 students attended the programme.

BCAS joined hands as a knowledge partner with the Finance
and Investment Cell of Narsee Monjee College of Commerce and Economics for
their event “Insight Conclave 2017” held on the 18th & 19th
February 2017.

Insight Conclave 2017, NM College’s first ever business,
finance and economics meeting was held on 18th and 19th
of February 2017. Though it was the first year of the fest, it turned out to be
a huge success on account of its innovative events and outstanding speaker
sessions. BCAS joined hands as a knowledge partner for the Event.

The first day, 18th February, started with
Parliamentary Debate, which was based on the format of the Asian Parliamentary
Debate.This was followed by the main highlight of the day, THE PANEL
DISCUSSION, which was covered by CNBC Awaaz’s show “Pehla Kadam” and anchored
by the host of the show himself, Mr. Anil Singhvi, a CA himself. As the day
progressed, various events based on the lines of Finance and Business like
Moneyball, Newton’s Cradle, Empire and Corporate Restructuring took place.
Alongside, a special session in association with BCAS was organised which was
very well hosted by CA. Ameet Patel, Chairman of Taxation Committee at BCAS.
Apart from this there were eminent speakers from various fields. CA. Vaibhav
Manek talked upon the future of the profession.

The participants was really excited about the event ‘Coffee
with Luminary’, where Mr. Ambareesh Murty, founder and CEO of the online
furniture retail company, Pepper fry and Mr. Mahesh Murthy, the founder of
Pinstorm were invited. The most awaited event THE YOUTUBER’S WAY, had Mr. Sahil
Shah, member of the very famous East India Comedy that was a great end to the
day one of the event.

The second day was amazing, with exciting personalities and
series of Conclave along with brainstorming events awaiting the students. The
events targeted various sectors like the event Airwars which was based on the
pricing strategy of the airline sector. Other than this, an event named
Gaflawas also hosted where the participants had to defend themselves and their
company from the false allegations made against them.The Business Conclave had various
interesting and engrossing segments of which Pioneering Professions was one. It
saw speakers like Mr. Trishneet Arora, CEO of TAC Securities, Mr. Dhruv
Sitwala, two times Asian Billiards Champion and Mr. Neil D’Silva, the global
storyteller. Other segments had the speaker’s discussion on Disruption-is it
the new normal? which was conducted by Mr. Nayan Shah, founder Mayfair Housing
& Jitendra Gupta, founder Citrus Pay.

The day ended with a motivational speech by Ms.
Arunima Sinha, World’s First Amputee to climb Mt. Everest and has also climbed
the seven highest peaks. She described about her ill-fated train trip, the hell
that followed, why she decided to climb the Everest and how it is in the worst
tragedies that the human spirit learns to soar. It was a great motivation for
the students to learn about such life lessons from the heroine herself.

Society News

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Lecture Meeting on Global Services Transformation – Are Indian CA firms insulated? On 21st January 2015


This
lecture meeting was held at the Walchand Hirachand Hall, IMC,
Churchgate, Mumbai. Mr. Milind S. Kothari, Chartered Accountant shared
his insights on various aspects related to Global Services
Transformation and the questions facing Indian CA Firms. He started with
the current scenario based on our Economy, Government initiatives for
the Profession in India comparing it with other countries across the
globe. Challenges faced by the profession were also covered. The
ultimate conclusion was that a step-wise growth plan can lead small
& medium sized firms to a great level. Members present gained
immensely from the knowledge shared by the speaker.

Lecture Meeting on Important Income-tax Decisions of 2014 on 29th January 2015


This
lecture meeting was held at the Walchand Hirachand Hall, IMC,
Churchgate, Mumbai. Mr. Hiro Rai, Advocate covered recent landmark
decisions of the Supreme Court, various High Courts and Tribunals. Apart
from discussing the key inferences from these decisions he also
provided his views on the decisions and its implications for CAs and
other professionals. He covered a wide gamut of issues such as exemption
provisions; prosecution; wealth tax valuation; depreciation; deduction
provisions; parameters for stay applications; Transfer Pricing
applicability and other significant controversies of the past.

Lecture Meeting on Goods and Services tax – Curtain Raiser on 4th February 2015


This
lecture meeting was held at Walchand Hirachand Hall, IMC, Churchgate,
Mumbai. Mr. Satya Poddar, Ph. D. shared his expert knowledge on the
subject of Goods and Service tax. GST being a new tax regime, members
immensely benefitted from this lecture as the speaker covered in depth
the basics of GST, various new concepts under the expected tax regime,
the goals and objectives of the change in GST. How GST impacts all
aspects of business from cash flow, supply chain, pricing, profits and
compliance systems was deliberated upon. He also expressed his view that
taxes should not stand in between the growth. Queries raised by the
members were addressed to their satisfaction. More than 275 Members
present gained immensely from the knowledge shared by the speaker.

Lecture Meeting on “Anger – The Enemy Within” on 13th February 2015

This
lecture meeting was held jointly with The Chamber of Tax Consultants
under the auspices of Amita Memorial Trust at Jai Hind College
Auditorium, Churchgate, Mumbai. Brahmakumari Shivani delivered the talk
on Anger – The Enemy Within. She also taught how anger can be controlled
by just reimagining the scene which one could have created by getting
angry and reacting. According to her one should Say Less, Say Sweet
& Say low and one should make it a motto of life. More than 600
Members present gained immensely from the knowledge shared by the
speaker.

Half Day Workshop on Charitable Trusts on 13th February 2015

BCAS,
jointly with The Chamber of Tax Consultants, organised this workshop at
Jai Hind College, AV Room, Churchgate, Mumbai. The objective of the
workshop was to address various issues under general law and also under
Tax Laws. It has also covered a session on the provisions of the Foreign
Contribution Regulation Act. The following topics were covered at the
Workshop:

Programme on Real Estate Investment Trusts (REITs) & Infrastructure Investment Trusts (InvITs) on 7th February 2015

To
meet the demands of real estate and infrastructure sectors and to
encourage wider investor participation, investment vehicles such as Real
Estate Investment Trusts (REITs) and Infrastructure Investment Trusts
(InvITs) have been evolved. REITs typically offer investors regular
yields coupled with capital appreciation and a liquid method of
investing in real estate. Introduction of a tax framework by MOF is a
step in the right direction.

InvITs would reduce the pressure on
the banking system while also making available fresh equity to finance/
refinance infrastructure projects. Further, they will also assist in
un-locking tied up capital of developers, lowering domestic financial
institutions’ loan exposure and attracting foreign capital.

With
a view to have better understanding of the nuances/ engineering of
these new investment vehicles, the Corporate & Securities Laws
Committee of the Society organised this full day programme at the
Babubhai Chinai Hall, Walchand Hirachand Hall, Indian Merchants’
Chamber, Churchgate, Mumbai 400020, where the following topics were
covered:

Mr.
Nitin Shingala, President of the Society welcomed everyone. Mr. Kanu S.
Chokshi, Chairman of the Corporate & Securities Laws Committee of
the Society briefly introduced the scope of the Programme.

Guest
of Honour, Mr. Sunil Mantri, Chairman & MD, Mantri Realty Ltd.
thereafter shared the industry perspective and expectations on REITs
& InvITs.

Chief Guest, Mr. Ananta Barua, ED, SEBI, gave an overview of the SEBI regulations on the subject and inaugurated the Programme.

The programme was chaired by the eminent personalities mentioned above.

Having
regard to the overwhelming response, 80 participants were accommodated
by the Society for the programme as against the expected 60
participants.

The Programme was coordinated by Ms. Preeti Oza and Mr. Manish Sampat.

Seminar on Permanent Establishment – Critical Aspects on 30th January 2015


International
Taxation Committee of the BCAS organised this seminar at Hotel
Palladium, Lower Parel, Mumbai. Considering the increase in
globalisation, the Concept of Permanent Establishment (PE) has gained
significant importance due to its direct impact on the tax revenues of
the affected countries, both in India and in other countries. The
objective of the workshop was to bring out the importance and the far
reaching implications of the concept of PE and to update members in
practice and working in the industry on the various issues connected
therewith. It is no surprise that litigation on PE issues constitutes
more than 70% of the international tax decisions in the last few years.
The Following Topics were covered at the Seminar:

Introductory Seminar on Fraud Investigation and Forensic Audit on 17th January 2015


Infotech
& 4i Committee of the BCAS organised this seminar at the Walchand
Hirachand Hall, Churchgate, Mumbai. The objective of the seminar was to
open up a new practice area for Chartered Accountants – “Forensic Audit
and Fraud Investigation” which has emerged as one such area that has
received a lot of attention in the past few years. With the Companies
Act 2013 coming into force, there is bound to be an added impetus to
this specialised area which requires training and collaboration with
professionals from diverse fields such as lawyers, computer engineers,
detectives and enforcement specialists. The following topics were
covered at the Seminar:


RTI Workshop on 24th January 2015

The advance RTI workshop held together by PCGT, BCAS and IMC was attended by many RTI activists.the speakers for this workshop were Mr. Shailesh Gandhi (retired Central Information Commissioner) and Mr. Narayan Varma (RTI activist and former president of BCAS). Mr. Gandhi spoke about many personal experiences on RTI when he was the commissioner. he gave an in depth insight as to how the law should be understood to make it favourable to the common man. his knowledge on the topic helped everyone present at the workshop.
Mr. Varma’s experience also made the workshop a memorable one.

Half day event on the launch of publication on Anti-Corruption by Collective Action Project – 6th February 2015 at Mayfair banquets, Mumbai

Collective Action Project’s finale publication titled “Business Case for Anti-corruption in India: Principles, Economics and applications of transparency tools” was launched by Mr. Julio Ribeiro, retd. IPS and Chairman, Public Concern for Governance trust (PCGT) in a half-day event on February 06,   2015   at  Mayfair   Banquets,   Mumbai.  Around thirty representatives from public sector, private sector, academia and civil society were present at the book launch. Mr. Nitin Shingala, BCAS President and Mr. Narayan Varma, an RTI activist and Past President of BCaS, represented BCAS and BCAS foundation in this event.

Mr. Narayan Varma spoke about ways to combat corruption using RTI and shared his experience which benefited the attendees. mr. nitin Shingala, President Bombay Chartered accountants’ Society, was part of the panel discussion titled “Business Case for Anti-corruption in India: Principles, economics and application of transparency tools”.

He said that international conventions in the recent times have disallowed facilitation payment which was acceptable in many developed countries such as  the  uSa.  Post  9/11, G20 nations have started playing an active role to address graft. Talking about the indian legislative scenario, Mr. Shingala said all forms of corruption including money laundering has been adequately addressed in the country’s laws. However, the private sector’s indulgence in corruption is a big concern and legislations to its effect are not in place in india. He said that the private sector corruption needs to be vociferously pushed forward, and for this amending the Prevention of Corruption act (PCA) 1988 is a must.

“Action replay by a legend” – Standard Costing demystified on 6th February, 2015

The Infotech and 4i Committee organised this unique programme, at jai hind College auditorium, Churchgate mumbai where Mr. Narendra P. Sarda, Past President of ICAI, took a crash course of students on Standard Costing. It was a mesmerising event where Mr. Sarda without using any formulae by pure logic explained the fundamentals of Standard Costing and also touched upon marginal Costing. Over 800 students took benefit of this event and many more were turned down as the venue was filled to capacity and many senior members also attended the lecture to revive  old memories. the lecture has been put up on the Web TV (www.bcasonline.tv) and is available freely for the benefit of students.

Society News

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Sixteenth Intensive Study On Double Tax Avoidance Agreements held on 5th December 2015 to 30th January 2016 (6 Saturdays)

Sixteenth Intensive Study Course on DTAA’s was successfully conducted at IMC from 05.12.2015 to 30.01.2016 on six Saturdays from 9.00 am to 6.00 pm having 24 lectures on various articles of the DTAA ’s and other related topics.

In all 67 participants attended the course, of which 2 participants were from Pune and 1 from Hyderabad, 23 participants were members of BCAS and 44 were nonmember participants. The number of male participants was 38 and female participants 29.

The DTAA course was conducted in its unique classroom style set-up with eminent speakers, expert in International Taxation. As per the feedback received from participants, the course was highly appreciated and well received by them.

Wonders of the Night Sky held on 30th January 2016

The event, ‘Wonders of the Night Sky’ took place on the intervening night of 30 and 31 January 2016 at Umbroli village near Badlapur. The event was attended by BCAS members/ non-members and their respective families and friends. People from all age groups converged under the dark sky to observe the celestial beauty in full glory – stars, constellations and planets of our Solar System.

The event was led by the stellar guides from ‘Khagol Mandal’ – one of the biggest amateur astronomer group in Mumbai. Participants were made aware about the history and basic concepts on astronomy – development of astronomy over the centuries, types of stars (red giants, white dwarfs, binary star system), fathoming the gigantic distance between celestial objects (a distance measured in terms of speed of light – around 3 lakh km per second), patterns of stars – constellations or Nakshatras, types of telescopes, etc. During the Q&A session, participants were made aware about the lifecycle of a star, what are black holes and the fact that all of us are made of star dust!

Our stellar guide started unraveling secrets of the night sky. With the help of a Star Wars type laser tool – whose light seems to touch the stars, participants were able to identify and marvel at many constellations such as Cassiopeia, Orion, Virgo, Krittika (Pleiades).

Further, it was a treat to observe some of the brightest stars visible from earth – Sirius, Vega, Capella, Rigel, Betelgeuse and Rohini (Aldebaran). It was breath-taking to observe an open star cluster – where thousands of stars appear together, binary or two star system, Jupiter and its 4 moons, Mars and the beautiful rings of Saturn. Participants also enjoyed observing the moon and its craters in detail. Some of the participants were also given an opportunity to manoeuvre the telescope.

It was a wonderful and a memorable experience observing the night sky for the participants, which has sadly become difficult to experience in our light polluted city.

Intensive Workshop on “Internal Financial Controls, IND AS and Refresher on The Companies Act, 2013”– Coimbatore held on 5th & 6th February 2016

A workshop as it mentions was an intensive workshop, covering various components of an Internal Financial Controls, IND AS Overview and Refresher on the Companies Act, 2013. A workshop well designed keeping in mind the requirements of the New Companies Act, 2013 from the perspective of management compliance and Auditors’ certifications requirements. The Speaker Mr. Zubin Billimoria, Ms. Nandita Parekh and Mr. M. R. Thiagarajan shared their knowledge and experience over a period of 2 full days, in the most practical manner. Every topic was well covered and explained to the participants by way of practical examples well designed to understand the complexities of the Internal Financial control and IND AS in a simplest way.

The workshop held at The Residency, Coimbatore on February 5th and 6th, 2016, was well attended by 33 participants from various Industries and Practice arena and from various locations spread across South India. Speaker Mr. Zubin Billimoria explained the participants on the various nuances of IND AS implementation, Speaker Ms. Nandita Parekh covered the topics like Entity level controls, walkthroughs and testing methodology, Materiality, Financial Statement Assertions reporting on internal controls, etc. in detail and Mr. Thiagarajan explained the amendments to Companies Act, 2013. The interactions between the participants and speaker were commendable and considering the positive feedback received, the future plans for similar workshops in various other cities have already been kicked off.

Interactive presentation on success in CA exams held on 6th February 2016:

Report on interactive session for students’ on Success in CA exams;

ICAI declared the result of Final CA Exams on 16th January and of IPCC on 1st February 2016. Appreciating the need of the students, HDTI Committee of BCAS jointly with Rajasthan Vidhyarthi Gruh organised on 6th February 2016 Saturday, a half a day interactive session on the topic of ‘Success in CA exams’. It was held at the RVG Hostel auditorium.

The objective of this programme was to motivate and encourage the students who missed to succeed in the exams and also to guide them to prepare and perform better in exams. About 190 students took the benefit by attending this programme.

In the first session CA. Mayur Nayak effectively explained, many important points aptly punctuated with humour. He explained the importance of clarity of goal, attitude to win, discipline, consistency, effective time management and how to overcome distractions. He guided them to have Balanced food, effective study and relaxation. He emphasised that harmony of physical, emotional, intellectual and spiritual alignment would help them to face any challenges in life including that of exams.

In the second session CA. Shrinivas Joshi focused on CA exams. He explained at length as to how to prepare with qualitative studies for exams including use of appropriate reference materials. He shared the information that excellent study materials and faculties are available freely to clarify and guide on a variety of subjects covered in the syllabus. He explained at length as to what the examiner expects from the students and also cleared their doubts on misinformation and wrong impressions in the minds of the students about the ICAI exams and its results. He shared the important tips as to how to write the papers and manage time of three hours in exams. He answered all questions raised by the students.

Earlier in the inaugural session, the President welcoming students shared some inspiring real life success stories of some of the people who had braved all the odds and hardships and had successfully achieved their dreams. They received accolades and appreciations.

In this programme, students received excellent guidance, motivation and encouragement. They left the auditorium with greater resolve and determination fully charged.

Study Circle on Service Tax Implication on Redevelopment of Housing Societies – Session II held on 6th February 2016

Indirect Tax Study Circle Meeting was conducted at the IMC on 6th February 2016 to discuss various issues relating to redevelopment of property. The Meeting was led by CA. Shri Jayesh Gogri and chaired by Adv. Shri Badrinarayan L. The meeting was continued from the previous meeting which was conducted in the month of December 2015. Considering the significance of the topic and participation of the members, the meeting was conducted for two full sessions of around 90 min. each. In the first session, members discussed decision of recent decision of Supreme Court in Larsen & Toubro’s case on indivisible works contract. Adv. Badrinarayan addressed the members on intricacies involved in the subject matter for discussion and ratio of the judgment. In the second session, CA. Jayesh Gogri, took the members through various issues listed out for discussion. Presentation prepared by CA. Jayesh Gogri was appreciated by members and was circulated to all. Study Circle received encouraging response from the members and facilitated more than 90 Hours of professional learning, as more than 30 members participated in the meeting.

Lecture meeting on “My Experiments in Universal Love” under the auspices of Amita Memorial Trust held on 11th February 2016

The annual talk held under the auspices of Amita Memorial Trust jointly with Bombay Chartered Accountants’ Society and Chamber of Tax Consultants was held on February 11, 2016.

The speaker for the evening, CA. Rashmin Sanghvi narrated his personal experiences of the past 29 years – experiences of compassion, of service, and most of all, of universal love. Starting from helping street dwellers on Mumbai by giving them blankets on wintery nights, Rashminbhai soon felt the pain of the underprivileged and responded to the pain with strength of conviction and commitment. He took the audience through his work in the areas of educating the slum dwellers, helping the uneducated, underprivileged people become selfsufficient, implementing water management projects in the interiors of Gujarat and mentoring/supporting individuals and NGOs working in these areas. His talk, attended by more than 250 people, created awareness of the vast problems, showed the impact that one person’s love and commitment can make and inspired many to rethink their mission and priorities in life. His simplicity, humility and inner strength left a lasting impression.

The inspired talk ended with remembering CA. Amita (Shah) Momaya, a young member of the BCAS family, who also spread the message of Universal Love during her short but inspiring life. She left this world on January 31, 1987 but continues to spread messages of peace and purpose after 29 years of her departure.

One Day Seminar on “Media and Entertainment Industry” held on 12th February 2016

The Seminar on Media and Entertainment Industry was conducted by the International Taxation Committee of the BCAS on 12 February 2016 at St. Regis Hotel (Palladium Hotel). This seminar was organized jointly with Accounting & Auditing Committee and Indirect Taxation Committee. The speakers at the seminar and the topics covered were as under:

Mr. Jehil Thakkar on Know the industry – current issues – Business models, cash flows, vehicle for investments, etc. (Industry overview and typical situations)

Mr. Sachin Shah on Direct Tax Issues in media and Entertainment Industry, including: Cross border taxation of entertainers, sportsmen and news channel T ransfer pricing provisions, as may be applicable

Mr. Utkarsh Sanghvi on Indirect tax issues in media and entertainment industry, including: Service tax, VAT and customs.

Mr. Koushik Balasubramanian on Accounting & Auditing aspects-Revenue recognition, Multi rights, Valuation etc.

The seminar was attended by more than 50 participants. The seminar became very informative and provided an overview of industry as a whole and detailed technical analysis on taxation, accounting and auditing aspects. The Seminar provided an insight into the industry and focused on the issues faced in the industry and the current trends in respect of the Media and Entertainment industry. The sessions at this seminar were all interactive and generated good amount of debate among the participants and the presenter.

Study Circle on “Liberalisation in foreign direct investment and recent amendments” held on 16th February 2016

CA. Pankaj Bhuta and CA. Natwar Thakrar led the study circle meeting on “Liberalisation in Foreign Direct Investment And Recent Amendments” on 16 February 2016. The group leaders discussed Press Note No. 12 (2015) by which the Government has announced liberalisation policy for FDI in many sectors including Real Estate and LLP. The Group discussed and deliberated about FDI policy qua investment in LLP, definition of “Control” and “Owned” in relation to the LLP, downstream investment by LLP, Investment by NRI etc. In all the participants benefitted immensely with the interactive session.

Lecture Meeting on “Important Case Laws of 2015 on Indirect Taxes” held on 17th February 2016

Lecture Meeting on Important Case Laws of 2015 on Indirect Taxes held on Wednesday, 17th February 2016 at IMC Hall Churchgate Shri. K. Vaitheeswaran dealt with various important case laws of 2015 on Indirect Taxes. He discussed and deliberated upon case laws in the field of Central Excise, Customs, Service Tax and Sales tax. He dealt with intricacies of the cases with an impact analysis.

He explained the concepts of valuation, works contract, Intellectual Property Rights, etc. during the course of his presentation. His experience was well displayed during the question answer session.

Lecture Meeting on “Important Income Tax Decisions of 2015” held on 24th February 2016

Lecture Meeting on Important Income Tax Decisions of 2015 was held on Wednesday, 24th February 2016 at the Jaihind College Auditorium.

Shri. Hiro Rai dealt with the recent Supreme Court rulings upfront payments, income from house property vis-a-vis business income, 80IB(10), penalties, etc, which will have a far reaching impact on various pending/controversial issues. He then discussed certain Bombay High Court decisions on bogus purchases, sale of FSI/TDR and search. He pointed out that the recent amendments to section 263, if not used judiciously, will give wide powers to the Commissioner to reopen and reassess the completed assessment. He ended his talk with certain recent important rulings on Transfer Pricing. The session was truly enthralling.

‘Samvad’ with Hon. Minister, Mrs. Sushma Swaraj

BCAS was invited to present before Mrs. Sushma Swaraj, Cabinet Minister for External Affairs, who was asked by the PM to conduct a ‘Samvaad’ session to receive direct feedback from the Chartered Accountants fraternity on tax matters. She appreciated the points suggested by the Society especially on the attitude of the tax officers towards the assessees. President Raman Jokhakar, Vice President Chetan Shah, Jt. Secretary Sunil Gabhawalla and Co Chairman of Taxation Committee Ameet Patel represented the Society. The Hon. Minister was appreciative of the various points presented on Direct and Indirect Taxation in brief and she reiterated some of the points given by the BCAS team in her concluding remarks. The Society was requested to send those points in summary form through the Hon’ble MP Mr. Kirit Somaiya, who initiated this innovative interactive meeting. The President personally handed over Pre-Budget Memorandum prepared by the BCAS, to the Hon’ble Minister. The Minister mentioned that a meeting such as this one should be held between the CAs and the makers of tax laws so that points could be deliberated in detail.


Study Circle on “Liberalisation in Foreign Direct Investment and Recent Amendments – Session II held on 25th February 2016

Mr. Pankaj Bhuta and Mr. Natwar Thakrar continued the discussion on “LIBERALISATION IN FOREIGN DIRECT INVESTMENT AND RECENT AMENDMENTS”. The group leaders discussed recent amendments notified by the RBI through Notification No. 361 and 362 under which FDI in many sectors have been liberalised. The group discussed and deliberated about amendment in “Investment by a Non-Resident Indian (NRI) on a Stock Exchange on Repatriation basis under the Portfolio Investment Scheme (Schedule 3, FEMA/20 “Investment by a Non-Resident Indian (NRI), on Non-Repatriation basis” (Schedule 4/FEMA20) , FDI in LLP (Schedule 9/FEMA20), FDI in other sectors. The group leader also presented a comparative analysis between the new Notifications and Press Note 12.

Society News

Indirect Tax Laws Study
Circle

 

Meeting on “Goods and Services
Tax–Discussion on various issues on Composite Supply / Mixed Supply, WCT and
Valuation- II” held on 16th January, 2018 at BCAS Conference Hall

 

In continuation of the last meeting,
Indirect Taxation Committee conducted a Study Circle Meeting on “Goods and
Services Tax–Discussion on various issues on Composite Supply / Mixed Supply,
WCT and Valuation- II” at BCAS Conference Hall which was addressed by CA. Bijal
Doshi. The Speaker discussed upon the balance case studies which could not be
covered in the previous meeting and completed the discussions on the subject.

 

The meeting was quite interactive and highly
appreciated by the participants. Participants shared their practical experience
during discussion and benefited a lot from the session.

 

Special Joint Study Circle Meeting on “US
Tax Reforms- Impact of Domestic and International Provisions” held on 22nd
January, 2018 at BCAS Conference Hall

 

International Taxation Committee organised a
Special Joint Study Circle Meeting on 22nd January, 2018 at BCAS
Conference Hall which was addressed by Mr. Shishir Lagu, Mr. Atul Deshmukh and
Mr. Kavit Sanghvi. All the Study Circles and Groups which operate under the
Committee were part of this meeting which had a common interesting topic. The
speakers covered the latest US tax reforms in detail. They also explained the
nuances of the differences in US tax laws due to these reforms and the impact
they can have on the Indian entities which have invested in USA and doing
business there.

 

The meeting was very interactive and the
speakers answered all the queries raised by the participants. The participants
benefitted a lot from the rich experience of the learned speakers.

 

Lecture Meeting on “Implementation &
Issues on E-way Bill-Way Forward” held on 24th January, 2018 at BCAS
Conference Hall

 

Mr. Pramod Bargaje
Dy. Commissioner-LTU4, Mumbai


Mr. Chandrashekhar Thakur,

Dy. Commissioner

Indirect Taxation Committee organised the
captioned Lecture Meeting at BCAS Conference Hall where the eminent faculty
from the GST Department, Govt. of Maharashtra – Shri Pramod Bargaje, Dy.
Commissioner-LTU4, Mumbai, Shri Chandrashekhar Thakur, Dy. Commissioner and
Shri Mukund S. Panhalkar, Asst. Commissioner were invited to address the
members. The objective of the meeting was to spread awareness about the
‘Implementation & Issues on E-way Bill – Way Forward’ and equip the
businesses and professionals with the knowledge, to keep themselves well
prepared for its compliance. The Goods and Services Tax Act was implemented
earlier this year. The Act contains several features, one key anti-evasion
measure amongst these is the E-Way bill reporting system. Recently, the Goods
and Services Tax Council decided to roll out E-way bills for interstate
movement of goods from 1st February 2018 and hence, importance of
this meeting.

 

The speakers enlightened the participants
about the salient constituents of E-Way Bill, issues likely to be encountered
by assessees going forward and the process and procedure to be followed, to
overcome any hindrance in successful implementation of the bill. The faculty
also explained the legal aspects of E-Way Bill and conducted a mock trial of
the actual filing process, to impart practical training to the members.  

 

The meeting was also live streamed for the
participants who could not attend in person. Around 425 participants attended
the meeting including online viewers. It was indeed a very enriching experience
for the participants who benefitted a lot from the meeting.

 

ITF STUDY CIRCLE

 

Meeting on “Select Decisions on
International Tax” held on 30th January, 2018 at BCAS Conference
Hall

 

ITF Study Circle organised a meeting on the
subject which was addressed by CA. Deepak Kanabar. The Speaker briefly gave an
overview of the importance of recent judicial precedents and the ever
increasing controversies over the concept of Permanent Establishment and
Business Connection in India. He took the Group through the following decisions
discussed at length.

 

–   Martrade
Gulf Logistics FZCO-UAE [2017] 88 taxmann.com 102 (Rajkot – ITAT)

– 
  Formula One World
Championship Ltd 2017 – 394 ITR 80 (SC)

–   Production
Resource Group – 2018–89 Taxmann.com 219-AAR

 

There was active participation from the
members present with various nuances of the concept of PE and business
connection being brought out. The attendees benefitted a lot from the session.

 

“GST Summit” at
“Finbridge Expo” held on 3rd and 4th February, 2018.

 

As a part of its ‘Networking’ initiative,
Bombay Chartered Accountants’ Society joined as the “Knowledge Partner for GST
Summit” at the “Finbridge Expo” held on 3rd and 4th February,
2018 at Nehru Centre, Worli. Finbridge Expo is an exhibition and conferences
platform which caters specifically to Financial Services & Technology
industry. They requested the Society to share its expertise on GST with their
participants.

 

On 3rd February 2018, at the
“Finbridge GST Summit”, three of our eminent speakers represented our Society.
Our panel of GST experts addressed on the subjects given below:

 

CA. Shreyas Sangoi shared his expertise on
‘GST on Stock Brokers.’ 

CA. Samir Kapadia gave valuable insights on
‘GST on Financial Services (Excluding Stock Brokers & Banks).’

 

CA. Mandar Telang shared knowledge about
‘GST on Software / Technology Services.‘

 

The Summit received an overwhelming response
from the participants and the visitors with knowledge sharing and enriching
experience gained by them on these GST topics.

 

“Public Lecture Meeting on Direct Tax
Provisions of the Finance Bill 2018” held on 6th February, 2018


Adv. S. E. Dastur


The Public Lecture Meeting of the Society on
the Direct Tax Provisions of the Finance Bill 2018 by Senior Advocate Mr S.E.
Dastur was held at Yogi Sabhagruha on 6th February, 2018. This was
the 30th lecture meeting by him and the 53rd of the
Society. 

 

The lecture meeting was live streamed and
witnessed by more than 12,000 persons including online viewers. The meeting
commenced with the singing of National Anthem. CA. Narayan Pasari, President,
BCAS welcomed and introduced the speaker Mr. S. E. Dastur citing his
intellectual charm that makes this meeting more special. He also touched upon
the Government initiatives on Agricultural Sector, Rural India and Health
Coverage etc. in the Budget Proposals announced by the Finance Minister.

 

CA. Narayan Pasari, commended the
contribution of Mr. S.E.Dastur in making the Budget Lecture Meetings of BCAS so
special, through his insightful analysis year after year. He informed the
gathering that this will be Mr. Dastur’s last budget lecture meeting at BCAS.
The Society also felicitated Mr. Dastur on this occasion. This was followed by
display of a small film on the journey of Lecture Meetings by Mr. S. E. Dastur
over the years and his association with BCAS, which was sheer nostalgia.

 

Mr. Dastur started his speech by detailing
the historical memories of the previous budgets of various FMs since 1948-49.
He talked about the Finance Minister’s speech having emphasis on the various
measures announced in the budget. He also discussed on the various new
insertions/amendments in areas of Long Term Capital Gains, Definition of
Accumulated Profits, Financial Transactions and changes in Assessment &
Reassessment procedures etc. The talk also covered other aspects of the Direct
Tax Provisions i.e. Income from Business and Profession, Amalgamation, Change
in Shareholding, Exemption from Tax under Sec 10 (23C) and Sec 54EE (LTCG),
application for Charitable Purposes, Rationalisation and Transparency etc. which
were part of Finance Minister’s speech.

 

Mr. Dastur gave his explicit views on every
important tax proposal notified under the Finance Bill 2018.

 

The audience were mesmerised by his speech
and benefitted a lot. The meeting ended with a huge round of applause and
appreciation by the participants.

 

HDTI Study Circle

 

Meeting on “Positive Ageing & Geriatric
Medicine” held on 13th February, 2018 at BCAS Conference Hall

 

HDTI Study Circle organised a meeting on
“Positive Ageing & Geriatric Medicine” on 13th February, 2018 at
BCAS Conference Hall which was addressed by Dr. Arvind Pednekar. Dr. Pednekar
gave the presentation on Ageing and Geriatric problems being faced by the old
people with advancing age, be it physical, mental or spiritual. He explained
the causes and effects of old age problems and preventive steps i.e. Exercise,
Yoga and Meditation amongst others to overcome such life threatening
hindrances.

 

Majority of the participants in the meeting
belonged to the middle and old age group. At the end, there was Q&A session
where the Speaker responded to all the queries raised by the participants.

 

The meeting was very interactive and the
participants benefitted a lot from the session.

 

“Analysis of Economic Survey & Budget
2018” held on 15th February, 2018 at BCAS Conference Hall

 

International Economics Study Group under
the aegis of International Taxation Committee conducted a meeting on Analysis
of Economic Survey & Budget 2018 on 15th February, 2018 at
BCAS Conference Hall. The group discussions were led by Group Leaders CA. Kapil
Sanghvi, CA. Harshad Shah, CA. Rashmin Sanghvi & CA. Milan Sangani, who
brought out very interesting perspective on Global and Indian economy and the
challenges facing Indian Economy.

 

The speakers presented their views and findings
on Analysis of Economic Survey & Budget 2018. Some key points of discussion
were: (i) State of Indian Economy-Sweet spot to sudden fall (ii) GDP Growth
trends (iii) Rupee appreciation (iv) India`s decoupling (v) Twin Balance Sheet
challenges (vi) Inflation trend (vii) Oil Price increase (viii) Investment and
saving slowdown (ix) 4 headwinds (hyper globalisation repudiation, pre mature
de industrialisation, human capital regression & agriculture stress).
Adverse impact of climate change on agriculture and concept of export of water
was also explained. The group also deliberated on Modi Care (World`s largest
national health protection scheme), health export trend, agriculture and rural
economy and health & education.

 

The meeting was very informative and the
participants went enriched from the session.

 

Direct Tax Laws Study
Circle

 

Meeting on “Recent Judgements under Direct
Tax laws” held on 22nd February 2018 at BCAS Conference Hall

 

Direct Tax Study Circle organized a meeting
on ‘Recent Judgements under Direct Tax laws’  
at  BCAS Conference Hall addressed
by the Group Leader for the session Adv. Dharan Gandhi.

 

The Speaker mentioned that being tax
professionals, it is utmost important to keep pace with the important decisions
pronounced recently by various judicial authorities and thus briefly gave an
overview of the recent important rulings and decisions as enumerated below:

 

Decision

Issue relating to

– National Travel Service vs. CIT [CA No. 2068-2071/2012
(SC)]

Deemed Dividend

[Section 2(22)(e)]

– IL and FS Energy Development Co. Ltd. 399 ITR 483(Del)

14A disallowance

– H T Media Ltd. vs. PCIT 399 ITR 576(Del)

14A disallowance

– PCIT vs. Ramniwas Ramjivan Kasat 248                             Taxman 484(Guj)

Cap Gain vs Business Income

– CIT vs. Modipon Limited 299 CTR 306(SC)

Allowability of deduction u/s. 43B

–  Rajat B Mehta vs. ITO ITA No. 19/Ahd/2016 (Ahd)

Deduction u/s. 54

–   Paradise Inland Shipping Pvt. Ltd.  400 ITR 439 (Bombay)

Addition u/s. 68

–  Bengal Finance & Investments Pvt. Ltd. ITA 337/2013
(Bom)

14A disallowance vis-a-vis. Book profit
u/s. 115JB

–   CIT vs. Sinhgad Technical Education                  Society 297 CTR 441(SC)

Assessment u/s. 153C

–   CIT vs. Glenmark Pharmaceuticals Ltd. 398
ITR 439(Bom)

Interest u/s. 234B

–   Maharaj Garage & Company vs. CIT 400
ITR 292 (Bombay)

Penalty u/s. 271(1)(c)

–     Sanjay Bimalchand Jain vs. Pr CIT ITA
No. 18/2017 (Bombay)w

Capital gain vs. Business income [Penny
stock]

–     Pr CIT vs. Prem Pal Gandhi ITA 95/2017
(P&H)

Penny stock

 

 

The meeting was quite interactive and the
participants raised many queries which were thoroughly answered by the learned
Speaker.

 

16th Residential Leadership
Retreat held on 23rd and 24th February, 2018

 

HDTI Committee organized its Sixteenth
Residential Retreat on 23rd and 24th February 2018, at
Rambhau Mhalgi Prabodhini (Training Centre) on the theme of ‘Saptapadi of
Happiness in family’ (Seven vows of happiness in family) which was addressed by
Mr. Mahendra Garodiya.

 

Past President
CA. Mayur Nayak in his key note inaugural address remembered Late Shri
Pradeepbhai Shah, the architect of such retreats. He complimented the Chairmen
of the Committee, all these years for this course. Appreciating significance of
such residential workshop for shaping the better values in life, he touched
upon Family and Happiness. Life coach Mahendra Garodiya, an avid reader and
strong follower of philosophy propounded by Chanakya, was ably assisted by
Deepa Garodiya in guiding the participants through important concepts and vows
to be taken by the family. In his study material, following key points were
covered:

 

–   Always
communicate your expectations on core important values of life viz:
Security, adventure, importance, love, growth and contributions. While,
communicating with the spouse and members of the family, it is always better to
be respectful than to be right. The most important to keep in mind is never to
give unsolicited advice.

 

–   Build
a culture of values appreciating interdependence. Always put others
first. Understand before being understood. Be honest and truthful in each
relation. Involve each and every member of the family while taking important
decision.

 

–  Define
Common Goal covering self, spouse and family.

 

–   Dharma
Nishtha: Dharma is not religious ritualism. Understand the core
personality of the self, spouse and family members on parameters of three Gunas
i.e. Rajas, Tamas and Sattva. Understand and appreciate that dharma is root
of happiness, artha is root of dharma, rajya is root of artha, Victory is the
root of rajya, respect is root of victory, therefore one ought to respect
elders and offer service to them.

 

–   Family
Legacy: Understand and appreciate that money is only a means to an end
and not an end in itself. Money can facilitate security, status, enjoyment,
control, opportunity and growth. By giving money for welfare, you get better
rewards

 

–   Growth:
Saptang (Holistic): There are seven dimensions of growth and happiness, Swamy
(Head of the family), Janpad (children and Family members), Dand (Family rules
and behaviours), Mitra (family coach), Kosha (family wealth and culture),
Amatya (supporter to the head of the family) & Durga (family name, fame and
brand). When all these aspects are correctly balanced, they bring in happiness.

 

In the evening on the first day one of the
participants presented nice details of Maharashtra’s folk art Warli painting.
It was followed by audio visual film titled “Down the Memory Lane” featuring
photographs and glimpses of earlier HDTI RRC. It was a tribute to Late Shri
Pradeepbhai Shah and many others who actively participated and encouraged
Leadership retreats.

 

In a concluding session on second day, each
participant exchanged rose with other participant expressing gratitude and
appreciation and carried home beautiful memories of joy and happiness.

 

Interactive session with Students for
“Success in CA Exams” held on 25th February, 2018

 

HDTI Committee jointly with RVG Educational
Foundation organised an Interactive session with Students called “Success in CA
Exams” on 25th February, 2018 at RVG Hostel, Andheri which was
addressed by the speakers CA Mangesh Kinnare and CA. Kartik Iyer.

 

President CA. Narayan Pasari welcomed the
students and inspired them to work sincerely, diligently as CA Students during articleship
and also while preparing or appearing for CA exams. He exhorted that Youth is
the future of our country for the Nation building.

 

In the first session CA. Karthik Iyer shared
his experience and the technique of macro and micro planning as to how to
prepare a time table and study at a time as per one’s own biorhythm. How to
balance between studies of various subjects and avoid distractions. He
suggested to appear for at-least two mock test papers for each subjects before
the exams. This enables the student to evaluate his limitation, speed, and
ensure that he attempts a full paper.

 

In the second session, Mr. Mangesh Kinare,
Member of Central Council of ICAI and Ex-Vice Chairman of Board of Studies and
Ex-Member, Examination Committee shared his views from the perspective of the
Institute. He clarified many doubts of the students and advised them to read
study material and practice manuals of ICAI. He mentioned that the website and
monthly Students Journal of the Institute cover very interesting study material
for the benefit of the students.

Mr. Phaneesh Reddy from Vijayawada who
scored 4th rank in the Final exam of ICAI in November 2017 shared
his views through a video recorded message.

 

The session was very interactive and
speakers gave very useful insights to the students to prepare and excel in the
CA exams

 

Indirect Tax Laws Study
Circle

 

Meeting on “Goods and Service Tax – Clause
by Clause Analysis of E-way Bill Provisions and related FAQs” held on 26th
February, 2018 at BCAS Conference Hall

 

Indirect Tax Laws Circle conducted another
meeting on 26th February, 2018 on the subject “Goods and Service Tax
– Clause by Clause Analysis of E-way Bill Provisions and related FAQs” at BCAS
Conference Hall. The discussions were led by group leaders CA. Saumil Kapadia
and CA. Samir Kasvala under the chairmanship of CA. Janak Vaghani. The speakers
dealt with the clause wise analysis of E-Way Bill provisions and related
queries in depth. Members also shared their practical experience which was
beneficial for one and all present in the meeting. 

 

The meeting was highly appreciated by the
members for the valuable insights given by the speakers. _

BCAJ March 1969

BCAJ March 1970

BCAJ March 1971

BCAJ March 1972