March Archives

‘SWATCHH HELL’

Four
men and four women died together. They were taken before Lord Yama, who does
ultimate justice to every human being after death. Depending upon the good or
bad work done in their lives, he sends them either to heaven or to hell. All
eight of them were pretty sure that they would go to heaven since they had done
a lot of genuine social service in their lives.

He
called the first gentleman and asked him about his deeds on earth. He said, ‘Lord,
I dedicated my entire life to spread education among common people. I founded
many educational institutions and made available value-based education in a
selfless manner. I received many honours from people as well as from the
government. I never accepted any capitation fees for admission. Thousands of
students still express their sense of gratitude to me.’

Lord
Yama asked his office administration about their views in the matter. The
secretary in Yama’s office said one of the trusts of this gentleman had
submitted his tax return two days late. Otherwise, he said, whatever was said
by the gentleman was true.

Instantly,
Lord Yama shouted ‘Send him to hell!’ The poor gentleman tried to explain that
the delay was due to circumstances beyond his control as there was an accident
in the trust’s office. But nobody heard his pleas.

The
second gentleman and a woman were doctors by profession and had been running a
charitable hospital for poor and indigent patients. They did not do any private
practice but only provided genuine health services to tribal people and needy
patients.

The
administration reported to the Lord that their audit report was not filed on
time in one of the years. The law had been changed, but Lord Yama sent them
also to hell. There was no question of hearing their arguments and requests.

Likewise,
all the others who really worked selflessly to serve the poor, the handicapped
and mentally retarded people, supporting destitute women, serving those
suffering from terminal diseases, orphans, preserving the environment and so
on, who had done many socially needed and beneficial things, had failed to
submit some form or other in the prescribed time. Obviously, all of them were
sent to hell.

Lord
Yama’s secretary declared: ‘Doing genuine social work hardly matters to us. How
many lives you saved is not important. Rather, you interfered with the work of
Yamadoots (Yama’s servants). How many poor people or unfortunate children and
women you helped is none of our concern. Even if people suffer or die, it is of
no consequence to us. You should submit all forms in time. We will never
condone any delay.’

Then,
he was overheard sharing a secret, that Lord Yama really wanted some genuine,
good social workers in hell. But he felt that these eight persons were not
enough. To encourage more people to go to hell, he pressured the Minister to
introduce the procedure of re-registration for all the charitable trusts and
their renewal every five years.

It is
reported that many trustees have either died of heart attack or committed
suicide after hearing of this new procedure. And it is believed that they are
also taking their respective CAs along with them!

I’m
sure this will facilitate the process of ‘Swatchh Hell’!

shailesh.kwebmaker

TRANSMISSION OF TENANCY

INTRODUCTION

One of the biggest
questions that invariably crops up when preparing a Will is, ‘Can I bequeath my
tenanted property?’ This is especially true in a city like Mumbai where
tenanted properties are very valuable. Tenanted property could be in the form
of residential flats or commercial properties. A person can make a Will for any
and every asset that he owns. Hence, the issue which arises is, can a person
bequeath a property of which he is only a tenant? In the State of Maharashtra,
the provisions of the Maharashtra Rent Control Act, 1999 (the Act) are also
relevant. Let us analyse this important issue in more detail.

RENT ACT
PROVISIONS

Section 7(15) of the Act defines the
term ‘tenant’ as any person by whom rent is payable for any premises. Further,
when the tenant dies, the term includes:

(a) in the case of residential tenanted
premises, any member of his family who is residing with the tenant at the time
of his death; or

(b) in the case of a tenanted premises
which is used for educational, business, trade or storage purposes, any member
of his family who, at the time of the tenant’s death, is using the premises for
such purpose.

Moreover, in the absence of any family
member of the tenant, any heir of the tenant as may be decided by the Court in
the absence of any agreement will be the tenant. These provisions are
applicable to transmission of tenancy by the original tenant as well as by any
subsequent tenants.

The term family has not been defined
under the Act and, hence, the general definition of the term would have to be
taken. It is a term which is open to very wide interpretation and is quite
elastic. The Bombay High Court in Ramubai vs. Jiyaram Sharma, AIR 1964
Bom 96, has held that the term family would mean all those who are
connected by blood relationship or marriage, married / unmarried / widowed
daughters, widows of predeceased heirs, etc. The Black’s Law Dictionary
defines the term as those who live in the same household subject to general
management and control of the head. Another definition is a group of blood
relatives and all the relations who descend from a common ancestor, or who
spring from a common root, i.e., a group of kindred persons. Hence, it is a
very generic term.

From the above definition of the term
tenant under the Act, it is very clear that only those family members of the
tenant who are residing with him would be entitled to his tenancy after his
demise. It is also relevant to note that the family members need not
necessarily be legal heirs of the tenant and the legal heirs would get the
tenancy only in the absence of any family members and that, too, on
determination by a competent Court. Residing with the tenant means that the
family members must stay, eat and sleep in the same house as the tenant. This
is a question of fact as to whether or not a family member can be said to be
residing with the deceased tenant.

However, in the case of non-residential
premises, the family members must be using the property along with the tenant.
Thus, in case of such premises it is not necessary that they reside with the
tenant but they must use the premises for the purposes for which the tenant was
using the same. In the case of Pushpa Rani and Ors. vs. Bhagwanti Devi,
AIR 1994 SC 774, the Supreme Court held that when a tenant dies, it is
the person who continued in occupation of and carried on business in the
business premises alone with whom the landlord should deal and other heirs must
be held to have surrendered their right of tenancy.

The Supreme Court in the case of Vasant
Pratap Pandit vs. Dr. Anant Trimbak Sabnis, 1994 SCC (3) 481 has held
that the legislative prescription of this provision of the Act is first to give
protection to the members of the family of the tenant residing with him at the
time of his death. The basis for this is that when a tenant is in occupation of
premises, the tenancy is taken by him not only for his own benefit but also for
the benefit of the members of the family residing with him. Therefore, when the
tenant dies, protection should be extended to the members of the family who
were participants in the benefit of the tenancy and for whose needs as well the
tenancy was originally taken by the tenant. It is for this object that the
legislature has, irrespective of the fact whether such members are ‘heirs’ in
the strict sense of the term or not, given them the first priority to be
treated as tenants. All the heirs are liable to be excluded if any other member
of the family was staying with the tenant at the time of his death.

The Bombay High Court was faced with an
interesting question in the case of Vasant Sadashiv Joshi vs. Yeshwant
Shankar Barve, WP 2371/1997. Here, the tenant resided in a premises
along with his brother. The tenant and his brother were part of an HUF. After
the tenant’s death, the brother’s son contended that since the family members
were recognised as tenants, the joint family itself should also be recognised
as a tenant. The High Court negated this plea and held that the term only
included a single person as a tenant and it was not possible that every member
of the HUF would become a tenant. It held that when a landlord grants a tenancy
it is a contract of tenancy as entered into with a specific person (tenant).
The landlord expects fulfilment of legal obligations from the tenant. The law,
therefore, does not envisage that the landlord would be required to deal with
all members of the joint family.

Similarly, in Vimalabai Keshav
Gokhale vs. Avinash Krishnaji Binjewale, 2004 (1) Bom CR 839, the High
Court rejected the contention that the Bombay Rent Act would enable each and
every member of the tenant’s family to claim an independent right in respect of
the tenancy and held that any member would mean ‘any one member.’

The Bombay High Court in Urmi
Deepak Kadia vs. State of Maharashtra, 2015(6) Bom CR 354 considered
whether the Maharashtra Rent Control Act was contrary to the Hindu Succession
Act, 1956 since it provided protection only to those heirs of the deceased who
at the time of his demise were staying with him and not to others. It held that
the field covered by two laws was not the same but entirely different. The Rent
Act sought to prevent exploitation of tenants and ensured a reasonable return
for investment in properties by landlords. In some contingencies u/s 7(15) of
the Rent Act, certain heirs were unable to succeed to a statutory tenancy. To
this extent, a departure was made from the general law. In such circumstances,
the observations of the Apex Court in Vasant Pratap’s case (Supra)
were decisive. Hence, it concluded that the Rent Act did not interfere with the
Hindu Succession Act.

HEIRS OF
TENANT SUCCEED IN ABSENCE OF FAMILY MEMBERS

The Act further provides that in the
absence of family members, it is the heirs of the tenant who would succeed to
the tenanted premises. The term heirs has not been defined under the Act and
hence one needs to have recourse to the usually understood meaning. The Supreme
Court in the case of Vasant Pratap (Supra) has dealt with the
definition of the term heirs. It means the persons who are appointed by law to
succeed to the estate in case of intestacy. It means a person who succeeds,
under law, to an estate in lands, tenements, or hereditaments, upon the death
of his ancestor, by descent and right of relationship. The term is used to
designate a successor to property either by Will or by law. The Court further
held that a deceased person’s ‘heirs at law’ are those who succeed to his
estate by inheritance under law, in the absence of a Will.

The Supreme Court in the case of Ganesh
Trivedi vs. Sundar Devi (2002) 2 SCC 329 had held that the brother of a
male tenant would be his heir. However, an interesting question arose in Durga
Prasad vs. Narayan Ram Chandaani (D) Thr. Lr. CA 1305/2017 (SC) as to
whether the brother of a married female tenant could be treated as her legal
heir and thus become the tenant after her demise? In this case before the
Supreme Court, a person had taken a residential property on rent. After his
demise his son became the tenant and after his son’s demise, his
daughter-in-law became the tenant. The question arose as to who would become
the tenant on her demise as she did not have any children. Her brother claimed
that he was a part of the deceased tenant’s family and hence he should inherit
the property. This was a property located in UP, so the Apex Court considered
the provisions of the U.P. Rent Act. Under that Act, the heirs of a tenant residing
with him succeed to the premises on the tenant’s death.

The Supreme Court held that the
question falling for consideration was whether the brother of the tenant was an
heir under the U.P. Rent Act. Since the term heir was not defined under the
Act, it held that heir was a person who inherited by law. Section 3(1)(f) of
the Hindu Succession Act, 1956 defined an heir to mean any person, male or
female, who was entitled to succeed to the property of an intestate under the
Act. The word heir had to be given the same meaning as would be applicable to
the general law of succession. The deceased tenant being a Hindu female, the
devolution of tenancy would be determined u/s 15 of the Hindu Succession Act.
Sub-section (2) of section 15 carved out an exception to the general scheme and
order of succession of a Hindu female dying intestate without leaving any
children. If such a woman has inherited property from her husband /
father-in-law, then the property devolved upon her husband’s heirs. The Apex Court
held that since she did not have any children and the tenancy in question had
come from the tenant’s father-in-law to her husband and from her husband to the
tenant, the exception contained in section 15(2) of the Hindu Succession Act
would apply. Accordingly, since her brother was not an heir of her husband, he
was not entitled to succeed to the tenancy in question.

CAN THE TENANT
MAKE A WILL?

This brings us to the important
question of whether a tenant can will away his tenanted premises? In the case
of Gian Devi Anand vs. Jeevan Kumar, (1985) 2 SCC 683, a
Constitution Bench of the Supreme Court held that the rule of heritability
(capable of being inherited) extends to statutory tenancy of commercial as well
as residential premises in States where there is no explicit provision to the
contrary under the Rent Act and tenancy rights are to devolve according to the
ordinary law of succession, unless otherwise provided in the statute. In Bhavarlal
Labhchand Shah vs. Kanaiyalal Nathalal Intawala, referring to the
Bombay Rent Control Act, 1974, it was held that a tenant of a non-residential
premises cannot bequeath under a Will his right to such tenancy in favour of a
person who is a stranger, not being a member of the family, carrying on
business. In State of West Bengal vs. Kailash Chandra Kapur, (1997) 2 SCC
387, it was held that in the absence of any contrary covenants in the
lease deed or the law, a Will in respect of leasehold rights in a land can be
executed by a lessee in favour of a stranger.

Hence, if the Rent Control laws of a
State so provide, then a tenant cannot make a Will for his tenanted premises.
In that event, the tenancy would pass on only in accordance with the Rent
Control Act. This proposition is also supported by the Supreme Court’s decision
in the case of Vasant Pratap (Supra). In that case, the tenant
made a Will of her property in favour of her nephew. This was opposed by her
sister’s grandson who was staying with the tenant at the time of her death. The
Apex Court held that normally speaking, tenancy right would be heritable but if
the right to inherit had been restricted by legislation, then the same would
apply. It held that if the word ‘heir’ in the Rent Act was to be interpreted to
include a ‘legatee under a Will’, then even a stranger may have to be inducted
as a tenant for there is no embargo upon a stranger being a legatee under a
Will. This obviously was not the intention of the legislature. Accordingly, it
was held that a bequest could not be made in respect of a tenanted property.

The Supreme Court’s decision in the
case of Gaiv Dinshaw Irani vs. Tehmtan Irani, (2014) 8 SCC 294
succinctly sums up the position after considering all previous decisions on
this issue:

‘…in general
tenancies are to be regulated by the governing legislation, which favour that
tenancy be transferred only to family members of the deceased original tenant.
However, in light of the majority decision of the Constitution Bench in Gian
Devi vs. Jeevan Kumar (Supra), the position which emerges
is that in absence of any specific provisions, general laws of succession to
apply, this position is further cemented by the decision of this Court in State
of West Bengal vs. Kailash Chandra Kapur (Supra) which has allowed
the disposal of tenancy rights of Government owned land in favour of a stranger
by means of a Will in the absence of any specific clause or provisions.’

CONCLUSION

The law as it stands in the State of
Maharashtra is very clear. A tenancy cannot be bequeathed by way of a Will. It
would pass only in accordance with the Rent Act. However, the position in other
States needs to be seen under the respective Rent Acts, if any.

shailesh.kwebmaker

UNCERTAINTY OVER INCOME TAX TREATMENTS

Ind
AS 12 Uncertainty over Income Tax Treatments (Appendix C) is effective
for the financial years beginning 1^st April, 2019. An ‘uncertain tax
treatment’ is a tax treatment for which there is uncertainty over whether the
relevant taxation authority will accept the tax treatment under tax law. For
example, an entity’s decision not to submit any income tax filing in a tax
jurisdiction, or not to include particular income in taxable profit, is an
uncertain tax treatment if its acceptability is uncertain under tax law.

Uncertain
tax treatments generally occur where there is uncertainty as to the meaning of
the law, or to the applicability of the law to a particular transaction, or
both. For example, the tax legislation may allow the deduction of research and
development expenditure, but there may be disagreement as to whether a specific
item of expenditure falls within the definition of eligible research and
development costs in the legislation. In some cases, it may not be clear how
tax law applies to a particular transaction, if at all.

One
of the questions that was not clear in Appendix C was with respect to the presentation
of uncertain tax liabilities / assets. Whether, in its statement of financial
position, an entity is required to present uncertain tax liabilities as current
(or deferred) tax liabilities or, instead, within another line item such as
provisions? A similar question could arise regarding uncertain tax assets.

The
presentation of uncertainty over income tax treatments is very sensitive as it
may lead the Income-tax authorities to draw conclusions on the entities’
conclusion over the outcome of the uncertainty, or may provide information that
may lead to an investigation. Therefore, given a choice, entities would like to
combine uncertain tax provisions with another line item such as provisions.

AUTHOR’S RESPONSE

The
following points are relevant to respond to the question:

(i)
uncertain tax liabilities or assets
recognised applying Appendix C are liabilities (or assets) for current tax as
defined in Ind AS 12 Income Taxes, or deferred tax liabilities, or
assets as defined in Ind AS 12; and

(ii)
neither Ind AS 12 nor Appendix C
contain requirements on the presentation of uncertain tax liabilities or
assets. Therefore, the presentation requirements in Ind AS 1 Presentation of
Financial Statements apply. Paragraph 54 of Ind AS 1 states that ‘the
statement of financial position shall include line items that present:… (n)
liabilities and assets for current tax, as defined in Ind AS 12; (o) deferred
tax liabilities and deferred tax assets, as defined in Ind AS 12…’

Therefore,
applying Ind AS 1, an entity is required to present uncertain tax liabilities
as current tax liabilities (paragraph 54[n]) or deferred tax liabilities
(paragraph 54[o]); and uncertain tax assets as current tax assets (paragraph
54[n]), or deferred tax assets (paragraph 54[o]).

Similarly,
Ind AS Schedule III to the Companies Act 2013 requires separate
presentation of current tax asset, current tax liability, deferred tax asset
and deferred tax liability. Additionally, General Instruction No. 2 for
preparation of financial statements of a company required to comply with Ind AS
clarifies that the requirements of Ind AS will prevail over Schedule III, if
there are any inconsistencies.

In
particular, one should note that:

(a)
when there is uncertainty over
income tax treatments, Appendix C specifies how an entity reflects any effects
of that uncertainty in calculating current or deferred tax in accordance with
Ind AS 12. Paragraph 4 of Appendix C states (emphasis added):

‘This
Appendix clarifies how to apply the recognition and measurement requirements in
Ind AS 12 when there is uncertainty over
income tax treatments. In such a circumstance, an entity shall recognise and
measure its current or deferred tax asset or liability applying the
requirements in Ind AS 12 based on taxable profit (tax loss), tax bases,
unused tax losses, unused tax credits and tax rates determined applying this
Appendix.’

(b)
An entity therefore applies
Appendix C in determining taxable profit (tax loss), tax bases, unused tax
losses, unused tax credits and tax rates when there is uncertainty over income
tax treatments. These amounts are in turn used to determine current / deferred
tax applying Ind AS 12, which in turn flow through to be current / deferred tax
liabilities if the amounts relate to the current or prior periods but are
unpaid / unreversed.

(c)
Appendix C requires an entity to
reflect the effect of uncertainty in determining taxable profit, tax rates,
etc. when it concludes that it is not probable that the taxation authority will
accept an uncertain tax treatment (paragraph 11 of Appendix C). Consequently,
the taxable profit on which current tax, as defined in Ind AS 12, is calculated
is the taxable profit that reflects any uncertainty applying Appendix C. The
definition of current tax in paragraph 5 of Ind AS 12 does not limit the
taxable profit (tax loss) used in determining current tax to the amount
reported in an entity’s income tax filings. Instead, the definition refers to
(emphasis added) ‘the amount of income taxes payable (recoverable) in respect
of the taxable profit (tax loss) for the period’.

(d)
Paragraph 54 of Ind AS 1 states:

‘The
statement of financial position shall include line items that present the
following amounts:…

(l)
provisions;…

(n)
liabilities and assets for current tax, as defined in Ind AS 12 Income Taxes;

(o)
deferred tax liabilities and deferred tax assets, as defined in Ind AS 12;…’

Particularly,
requirements in paragraphs 54(n) and 54(o) of Ind AS 1 will preclude an entity
from presenting some elements of income tax within another line in the
statement of financial position, such as provisions. In particular, paragraph
29 of Ind AS 1 states ‘…an entity shall present separately items of a
dissimilar nature or function unless they are immaterial’. Paragraph 57 of
Ind AS 1 states that ‘…paragraph 54 simply lists items that are sufficiently
different in nature or function to warrant separate presentation in the
statement of financial position.’ Consequently, liabilities for current
(or deferred) tax as defined in Ind AS 12 are sufficiently different in nature
or function from other line items listed in paragraph 54 to warrant presenting
such liabilities separately in their own line item (if material).

CONCLUSION

When
there is uncertainty over income tax treatments, paragraph 4 of Appendix C
requires an entity to ‘recognise and measure its current or deferred tax asset
or liability applying the requirements in Ind AS 12 based on taxable profit
(tax loss), tax bases, unused tax losses, unused tax credits and tax rates determined
applying Appendix C’. Paragraph 5 of Ind AS 12 Income Taxes defines:

(1)
current tax as the amount of income
taxes payable (recoverable) in respect of the taxable profit (tax loss) for a
period; and

(2)
deferred tax liabilities (or
assets) as the amounts of income taxes payable (recoverable) in future periods
in respect of taxable (deductible) temporary differences and, in the case of
deferred tax assets, the carry forward of unused tax losses and credits.

Consequently,
uncertain tax liabilities or assets recognised applying Appendix C are
liabilities (or assets) for current tax as defined in Ind AS 12, or deferred
tax liabilities or assets as defined in Ind AS 12.

Neither
Ind AS 12 nor Appendix C contains requirements on the presentation of uncertain
tax liabilities or assets. Therefore, the presentation requirements in Ind AS 1
apply. Paragraph 54 of Ind AS 1 states that ‘the statement of financial
position shall include line items that present:… (n) liabilities and assets for
current tax, as defined in Ind AS 12; (o) deferred tax liabilities and deferred
tax assets, as defined in Ind AS 12…’.

Paragraph
57 of Ind AS 1 states that paragraph 54 ‘lists items that are sufficiently
different in nature or function to warrant separate presentation in the
statement of financial position’. Paragraph 29 requires an entity to ‘present
separately items of a dissimilar nature or function unless they are
immaterial’.

Accordingly, applying
Ind AS 1, an entity is required to present uncertain tax liabilities as current
tax liabilities (paragraph 54[n]) or deferred tax liabilities (paragraph
54[o]); and uncertain tax assets as current tax assets (paragraph 54[n]) or
deferred tax assets (paragraph 54[o]).

shailesh.kwebmaker

Settlement of cases – Section 245C of ITA, 1961 – Black Money Act, 2015 – Jurisdiction of Settlement Commission – Undisclosed income of non-resident Indians – Charge under Black Money Act only from A.Y. 2016-17 – Pending reassessment proceedings order of Settlement Commission for A.Y. 2004-05 to 2015-16 – Order of Settlement Commission is valid

47. Principal CIT vs.
IT Settlement Commission; [2020] 420 ITR 149
(Guj.) Date of order: 8^th
November, 2019 A.Ys.: 2004-05 to
2015-16

Settlement of cases –
Section 245C of ITA, 1961 – Black Money Act, 2015 – Jurisdiction of Settlement
Commission – Undisclosed income of non-resident Indians – Charge under Black
Money Act only from A.Y. 2016-17 – Pending reassessment proceedings order of
Settlement Commission for A.Y. 2004-05 to 2015-16 – Order of Settlement
Commission is valid

A search and seizure operation came to
be carried out at the residential and business premises of the B group of
companies of which the assessees were directors. Pursuant to the search,
notices under sections 148 and 153A of the Income-tax Act, 1961 were issued to
the three assessees for the A.Ys. 2005-06 to 2013-14, 2004-05 to 2015-16, and
2004-05 to 2015-16, respectively. In response thereto, the assessees filed
income tax returns disclosing undisclosed foreign income and assets.
Thereafter, they filed separate applications u/s 245C of the 1961 Act before
the Settlement Commission disclosing additional undisclosed foreign income and
assets. The Settlement Commission passed an order on 30^thJanuary,
2019 settling the cases and granting reliefs. On 18^th February,
2019, the A.O. passed orders giving effect to the order of the Settlement
Commission and determined the additional tax payable and issued notices of
demand u/s 156 of the Act on the same day. Each of the assessees paid the
additional tax payable.

On a writ petition filed by the Department
on 30^th May, 2019 challenging the orders passed by the Settlement
Commission as without jurisdiction since the Settlement Commission had no
jurisdiction to pass an order under the 1961 Act in relation to undisclosed
foreign income and assets covered under the 2015 Act, the Gujarat High Court
dismissed the petition and held as under:

‘i) On a conjoint reading of sections 3 and 2(9)
of the Black Money (Undisclosed Foreign Income and Assets) and Imposition of
tax Act, 2015, it is clear that undisclosed foreign income or assets become
chargeable to tax from the A.Y. 2016-17. However, when undisclosed foreign
assets become chargeable to tax from the A.Y. 2016-17 onwards, the date of
acquisition of such assets may relate to any assessment year prior to the A.Y.
2016-17. Therefore, even after the coming into force of the 2015 Act, insofar
as assessment years prior to the A.Y. 2016-17 are concerned, the undisclosed
foreign income would be chargeable to tax under the relevant provisions of the
Income-tax Act, 1961.

ii) What sub-section (3) of section 4 of the 2015
Act provides is that what is included as income and asset under the 2015 Act
cannot be included in the total income under the 1961 Act. The said sub-section
does not contain a non obstante clause ousting the applicability of the
1961 Act, insofar as undisclosed foreign income and assets are concerned. The
2015 Act is a taxing statute and provides for stringent penalties and
prosecution and it is by now well settled that a taxing statute must be
interpreted in the light of what is clearly expressed. The second proviso
to section 147 of the 1961 Act does away with the limitation of four years as
provided in the first proviso to section 147 in the case of undisclosed
foreign income. By virtue of clause (c) of sub-section (1) of section 149, the
time limit for reopening of assessments has been extended to sixteen years in
respect of any asset, including financial interest in any entity located
outside India, so that the bar applies for periods beyond sixteen years in such
cases. Clearly, therefore, the scheme of the Income-tax Act, 1961 is not meant
to tax only disclosed foreign income but also undisclosed foreign income.

iii) It was an admitted position that the
residential status of two of the assessees was non-resident for the A.Y.
2016-17 and for the third for the A.Y. 2014-15 onwards. Thus, when the 2015 Act
came into force, the assessees were not residents. It could not be said that
the assessees fell within the ambit of the expression ‘assessee’ as defined
under clause (2) of section 2 of the 2015 Act as it stood prior to its
amendment by the Finance (No. 2) Act of 2019. The expression ‘assessee’ was
amended on 1^st August, 2019, albeit with retrospective effect
from 1^st July, 2015, and as on the date when the Settlement
Commission passed the order, namely, 30^thJanuary, 2019, the
assessees were not ‘assessees’ within the meaning of such expression as
contemplated u/s 2(2) of the 2015 Act and were, therefore, not covered by the
provisions of that Act. The search proceedings were conducted after the 2015
Act came into force and, consequently, the notices under sections 148 and 153A
of the 1961 Act were also issued after the 2015 Act came into force. The fact
that these notices under sections 148 and 153A of the 1961 Act were issued in
respect of undisclosed foreign income or assets could be substantiated on a
perusal of the reasons recorded for reopening the assessment for the A.Y.
2000-01.

The Revenue authorities were well aware
of the fact that the provisions of the 2015 Act covered undisclosed foreign
income only from the A.Y. 2016-17 onwards and, therefore, categorically
submitted to the jurisdiction of the Settlement Commission and requested it to
proceed further pursuant to the applications made by the assessees u/s 245C of
the Income-tax Act, 1961. It was only for this reason that notices under the
2015 Act were issued only for the A.Ys. 2017-18 and 2018-19. The A.O. had
issued notices under sections 148 and 153A of the 1961 Act for different
assessment years. Therefore, proceedings for assessment or reassessment as
contemplated under clauses (i) and (iiia) of the Explanation to clause (b) of
section 245A had commenced and were pending before the A.O. when the
applications u/s 245C of the 1961 Act came to be made. Therefore, the
requirements of the provisions of section 245C of the 1961 Act were duly
satisfied when the applications thereunder came to be made by the assessees.
Upon receipt of the applications made u/s 245C of the 1961 Act, the Settlement
Commission proceeded further in accordance with the provisions of section 245D
of the 1961 Act. At the stage when it was brought to its notice that notices
u/s 10 of the 2015 Act had been issued to the assessees, the Settlement
Commission gave ample opportunity to the Revenue to decide what course of
action it wanted to adopt, and it was the Revenue which categorically invited
an order from the Settlement Commission in respect of the undisclosed foreign
income and assets disclosed before it.

The record of the case showed that the
requirements of section 245D of the 1961 Act had been duly satisfied prior to
the passing of the order u/s 245D(4). The proceedings before the Settlement
Commission were taken in connection with notices issued under sections 148 and
153A of the 1961 Act and it was, therefore, that the Settlement Commission had
the jurisdiction to decide the applications u/s 245C of that Act, which related
to the proceedings in respect of those notices. If it was the case of the
Revenue that the undisclosed foreign income and assets of the assessees were
covered by the provisions of the 2015 Act, the notices under sections 148 and
153A of the 1961 Act, which mainly related to undisclosed foreign income, ought
to have been withdrawn and proceedings ought to have been initiated under the
relevant provisions of the 2015 Act. The Settlement Commission had the
jurisdiction to decide the applications u/s 245C.

iv) The Settlement Commission, after considering
the material on record, had given a finding of fact to the effect that there
was a full and true disclosure made by the assessees and that there was no
wilful attempt to conceal material facts. If for the reason that issues which
pertained to past periods could not be reconciled due to lack of further
evidence, the assessees, with a view to bring about a settlement, agreed to pay
a higher amount as proposed by the Revenue, it certainly could not be termed a
revision of the original disclosure made u/s 245C of the 1961 Act, inasmuch as,
there was no further disclosure but an acceptance of additional liability based
on the disclosure already made before the Settlement Commission.

v) Another aspect of the matter was that it was
an admitted position that prior to the presentation of the writ petition, the
order of the Settlement Commission came to be fully implemented. This was not
mentioned in the writ petition. Therefore, there was suppression of material
facts. The order passed by the Settlement Commission was valid.’

shailesh.kwebmaker

Refund – Withholding of refund – Sections 143(2) and 241A of ITA, 1961 – Discretion of A.O. – Scope of section 241A – A.O. must apply his mind before withholding refund – Mere issue of notice for scrutiny assessment for a later assessment year not a ground for withholding refund

46. Maple Logistic P.
Ltd. vs. Principal CIT; [2020] 420 ITR 258
(Del.) Date of order: 14^th
October, 2019 A.Ys.: 2017-18 and
2018-19

Refund – Withholding
of refund – Sections 143(2) and 241A of ITA, 1961 – Discretion of A.O. – Scope
of section 241A – A.O. must apply his mind before withholding refund – Mere
issue of notice for scrutiny assessment for a later assessment year not a
ground for withholding refund

The petitioner, by way of writ petition
under Articles 226 and 227 of the Constitution of India, sought a writ in the
nature of mandamus directing the respondent to refund the income tax
amount on account of excess deduction of tax at source in respect of the
assessment years 2017-18 and 2018-19 and other consequential directions to
adjust the outstanding amount of tax deducted at source and the goods and
services tax payable by the petitioner-company against the pending refund
amount without charging of any interest for the delayed payments. The Delhi
High Court allowed the writ petition and held as under:

‘i) U/s 241A of the Income-tax Act, 1961 the
legislative intent is clear and explicit. The processing of return cannot be
kept in abeyance merely because a notice has been issued u/s 143(2) of the Act.
Post-amendment, sub-section (1D) of section 143 is inapplicable to returns
furnished for the assessment year commencing on or after 1^stApril,
2017. The only provision that empowers the A.O. to withhold the refund in a
given case at present is section 241A. Now refunds can be withheld only in
accordance with this provision. The provision is applicable to such cases where
refund is found to be due to the assessee under the provisions of sub-section
(1) of section 143, and also a notice has been issued under sub-section (2) of
section 143 in respect of such returns. However, this does not mean that in
every case where a notice has been issued under sub-section (2) of section 143
and the case of the assessee is selected for scrutiny assessment, the
determined refund has to be withheld. The Legislature has not intended to
withhold the refunds just because scrutiny assessment is pending. If such had
been the intent, section 241A would have been worded so. On the contrary,
section 241A enjoins the A.O. to process the determined refunds, subject to the
caveat envisaged u/s 241A.

ii) The language of section 241A envisages that
the provision is not resorted to merely for the reason that the case of the
assessee is selected for scrutiny assessment. Sufficient checks and balances
have been built in under the provision and have to be given due consideration
and meaning. An order u/s 241A should be transparent and reflect due
application of mind. The A.O. is duty-bound to process the refunds where they
are determined. He cannot deny the refund in every case where a notice has been
issued under sub-section (2) of section 143. The discretion vested with the
A.O. has to be exercised judiciously and is conditioned and channelised. Merely
because a scrutiny notice has been issued that should not weigh with the A.O.
to withhold the refund. The A.O. has to apply his mind judiciously and such
application of mind has to be found in the reasons which are to be recorded in
writing. He must make an objective assessment of all the relevant circumstances
that would fall within the realm of ‘adversely affecting the Revenue’. The
power of the A.O. has been outlined and defined in terms of section 241A and he
must proceed giving due regard to the fact that the refund has been determined.

iii) The fact that notice u/s 143(2) has been
issued would obviously be a relevant factor, but that cannot be used to
ritualistically deny refunds. The A.O. is required to apply his mind and
evaluate all the relevant factors before deciding the request for refund of
tax. Such an exercise cannot be treated to be an empty formality and requires
the A.O. to take into consideration all the relevant factors. The relevant
factors, to state a few, would be the prima facie view on the grounds
for the issuance of notice u/s 143(2), the amount of tax liability that the
scrutiny assessment may eventually result in vis-a-vis the amount of tax refund
due to the assessee, the creditworthiness or financial standing of the assessee,
and all factors which address the concern of recovery of revenue in doubtful
cases. Therefore, merely because a notice has been issued u/s 143(2), it is not
a sufficient ground to withhold refund u/s 241A and the order denying refund on
this ground alone would be laconic. Additionally, the reasons which are to be
recorded in writing have to also be approved by the Principal Commissioner, or
Commissioner, as the case may be, and this should be done objectively.

iv) The reasons relied upon by the Revenue to
justify the withholding of refund were lacking in reasoning. Except for
reproducing the wording of section 241A of the Act, they did not state anything
more. The order withholding the refund was not valid.’

shailesh.kwebmaker

Reassessment – Sections 147 and 148 of ITA, 1961 – Validity of notice u/s 148 – Conditions precedent for notice – Amount assessed in block assessment – Addition of amount deleted by Commissioner (Appeals) – Notice to reassess same amount not valid

45. Audhut Timblo vs.
ACIT; [2020] 420 ITR 62 (Bom.) Date of order: 27^th
November, 2019 A.Ys.: 2002-03

Reassessment
– Sections 147 and 148 of ITA, 1961 – Validity of notice u/s 148 – Conditions
precedent for notice – Amount assessed in block assessment – Addition of amount
deleted by Commissioner (Appeals) – Notice to reassess same amount not valid

Pursuant to a search
action u/s 132 of the Income-tax Act, 1961, block assessment order u/s 158BC
was passed by the A.O. on 27^th September, 2002 making an addition of
Rs. 10.33 crores as unexplained cash credits. The Commissioner (Appeals), by an
order dated 13^th July, 2006, deleted the addition of Rs. 10.33
crores. On 13^th September, 2006, the Department appealed against the
order of the Commissioner to the Appellate Tribunal. On 18^th
October, 2006, the Department issued notice invoking the provisions of section
147 / 148 of the Act stating that this very income of Rs. 10.33 crores had
escaped assessment and therefore reassessment or reopening of assessment was
proposed for the A.Y. 2002-03.

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

‘i) The A.O. can reopen an assessment only in
accordance with the express provisions in section 147 / 148 of the Income-tax
Act, 1961. Section 147 clothes the A.O. with jurisdiction to reopen an
assessment on satisfaction of the following: (a) the A.O. must have reason to
believe that (b) income chargeable to tax has escaped assessment and (c) in
cases where the assessment sought to be reopened is beyond the period of four
years from the end of the relevant assessment year, then an additional
condition is to be satisfied, viz., there must be failure on the part of the
assessee to fully and truly disclose all material facts necessary for assessment.

ii) Since there was full disclosure and, in fact,
the amount had even become the subject matter of the assessment both u/s 158BC
and u/s 143(3), there could have been no reason to believe that the income
chargeable to tax had indeed escaped assessment. The notice of reassessment was
not valid.’

shailesh.kwebmaker

Penalty – Concealment of income – Search and seizure – Immunity from penalty – Effect of section 271AAA of ITA, 1961 – Assessee admitting undisclosed income during search proceedings and explaining source – No inquiry regarding manner in which income was earned – Immunity cannot be denied because of absence of such explanation

44. Principal CIT vs. Patdi Commercial and Investment Ltd.; [2020] 420 ITR 308 (Guj.) Date of order: 17^th September, 2019 A.Y.: 2011-12

Penalty – Concealment
of income – Search and seizure – Immunity from penalty – Effect of section
271AAA of ITA, 1961 – Assessee admitting undisclosed income during search
proceedings and explaining source – No inquiry regarding manner in which income
was earned – Immunity cannot be denied because of absence of such explanation

The Tribunal deleted the penalty u/s
271AAA of the Income-tax Act, 1961. On appeal by the Revenue, the Gujarat High
Court upheld the decision of the Tribunal and held as under:

‘i) Section 271AAA of the Income-tax Act, 1961
provides for penalty in cases of search. Sub-section (2) specifies that such
penalty will not be imposed if the following three conditions are satisfied:
(i) in the course of the search, in a statement under sub-section (4) of
section 132, the assessee admits the undisclosed income and specifies the
manner in which such income has been derived; (ii) the assessee substantiates
the manner in which the undisclosed income was derived; and (iii) pays the tax
together with interest, if any, in respect of the undisclosed income. In
accordance with the settled legal position, where the Revenue has failed to
question the assessee while recording the statement u/s 132(4) of the Act as
regards the manner of deriving such income, it cannot raise a presumption
regarding it.

ii) Both the Commissioner (Appeals) as well as
the Tribunal had recorded concurrent findings of fact that during the course of
search the director of the assessee company had admitted undisclosed income of
Rs. 15 crores as unaccounted cash receivable for the year under consideration,
i.e., F.Y. 2010-11. The director of the assessee in his statement had explained
that the income was earned out of booking / selling shops and had specified the
buildings. Thereafter, the assessee could not be blamed for not substantiating
the manner in which the disclosed income was derived. The cancellation of
penalty by the Tribunal was justified.’

shailesh.kwebmaker

Capital gains – Unexplained investment – Sections 50C and 69 of ITA, 1961 – Sale of immovable property – Difference between stamp value and value shown in sale deed – Effect of section 50C – Presumption that stamp value is real one – Section 50C enacts a legal fiction – Section 50C cannot be applied to make addition u/s 69

43. Gayatri
Enterprises vs. ITO; [2020] 420 ITR 15
(Guj.) Date of order: 20^th
August, 2019 A.Y.: 2011-12

Capital gains – Unexplained
investment – Sections 50C and 69 of ITA, 1961 – Sale of immovable property –
Difference between stamp value and value shown in sale deed – Effect of section
50C – Presumption that stamp value is real one – Section 50C enacts a legal
fiction – Section 50C cannot be applied to make addition u/s 69

The assessee purchased a piece of land.
He disclosed the transaction in his returns for the A.Y. 2011-12. This was
accepted by the A.O. Subsequently, the order was set aside in revision and an
addition was made to his income u/s 69 of the Income-tax Act, 1961 on the
ground that there was a difference between the value of the land shown in the
sale deed and the stamp duty value. The order of revision was upheld by the
Tribunal.

The Gujarat High Court allowed the
appeal filed by the assessee and held as under:

‘i) Section 50C was introduced in the Income-tax
Act, 1961 by the Finance Act, 2002 with effect from 1^st April, 2003
for substituting the valuation done for the stamp valuation purposes as the
full value of the consideration in place of the consideration shown by the
transferor of the capital asset, being land or building, and, accordingly,
calculating the capital gains u/s 48. Under section 50C when the stamp duty
valuation of a property is higher than the apparent sale consideration shown in
the instrument of transfer, the onus to prove that the fair market value of the
property is lower than such valuation by the stamp valuation authority is on
the assessee who can reasonably discharge this onus by submitting necessary
material before the A.O., such as valuation by an approved valuer. Thereafter,
the onus shifts to the A.O. to show that the material submitted by the assessee
about the fair market value of the property is false or not reliable. Section
50C enacts a legal fiction which is confined to what is stated in the
provision. The provisions of section 50C cannot be applied for the purpose of
making an addition u/s 69.

ii) Section 50C will apply to the seller of the
property and not to the purchaser. Section 69B does not permit an inference to
be drawn from the circumstances surrounding a transaction of sale of property
that the purchaser of the property must have paid more than what was actually
recorded in his books of accounts for the simple reason that such an inference
could be very subjective and could involve the dangerous consequence of a
notional or fictional income being brought to tax contrary to the strict
provisions of Article 265 of the Constitution of India which must be
“taxes on income other than agricultural income”.

iii) There was nothing on record to indicate what
the price of the land was at the relevant time. Even otherwise, it was a pure
question of fact. Apart from the fact that the price of the land was different
from that recited in the sale deed unless it was established on record by the
Department that, as a matter of fact, the consideration as alleged by the
Department did pass to the seller from the purchaser, it could not be said that
the Department had any right to make any additions. The addition was
not justified.’

shailesh.kwebmaker

Business expenditure – Disallowance u/s 40(a)(ia) of ITA, 1961 – Payments liable to deduction of tax at source – Charges paid by assessee to banks for providing credit card processing services – Bank not rendering services in nature of agency – Charges paid to bank not in nature of commission within meaning of section 194H – Disallowance u/s 40(a)(ia) not warranted

42. Principal CIT vs.
Hotel Leela Venture Ltd.; [2020] 420 ITR 385
(Bom.) Date of order: 18^th
December, 2018 A.Y.: 2009-10

Business expenditure
– Disallowance u/s 40(a)(ia) of ITA, 1961 – Payments liable to deduction of tax
at source – Charges paid by assessee to banks for providing credit card
processing services – Bank not rendering services in nature of agency – Charges
paid to bank not in nature of commission within meaning of section 194H –
Disallowance u/s 40(a)(ia) not warranted

The assessee was in the hospitality
business. For the A.Y. 2009-10, the A.O. found that the assessee had not
deducted tax u/s 194H of the Income-tax Act, 1961 on payments made by it to
banks for processing of credit card transactions and disallowed the
corresponding expenditure u/s 40(a)(ia).

The Commissioner (Appeals) deleted the
disallowance and the Tribunal upheld his order.

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

‘i) The Tribunal had not committed any error in holding
that the bank did not act as an agent of the assessee while it processed the
credit card payments and, therefore, the charges collected by the bank for such
services did not amount to commission within the meaning of section 194H. The
Tribunal was justified in upholding the deletion of disallowance made u/s
40(a)(ia) by the Commissioner (Appeals).

ii) No question of law arose.’

shailesh.kwebmaker

Assessment – Notice u/s 143(2) of ITA, 1961 – Limitation – Date of filing of original return u/s 139(1) has to be considered for purpose of computing period of limitation under sub-section (2) of section 143 and not date on which defects actually came to be removed u/s 139(9)

41. Kunal Structure
(India) (P) Ltd. vs. Dy. CIT; [2020] 113
taxmann.com 577 (Guj.) Date of order: 24^th
October, 2019

Assessment – Notice
u/s 143(2) of ITA, 1961 – Limitation – Date of filing of original return u/s
139(1) has to be considered for purpose of computing period of limitation under
sub-section (2) of section 143 and not date on which defects actually came to
be removed u/s 139(9)

The petitioner is a company registered
under the Companies Act, 2013. For the A.Y. 2016-17, the petitioner had filed
its return of income u/s 139(1) of the Income-tax Act, 1961 on 10^th
September, 2016. Thereafter, the petitioner received an intimation of defective
return u/s 139(9) on 17^th June, 2017. The petitioner received a
reminder on 5^th July, 2017 granting him an extension of 15 days to
comply with the notice issued u/s 139(9) of the Act and accordingly, the time
limit for removal of the defects u/s 139(9) of the Act stood extended till 20^th
July, 2017. The petitioner removed the defects on 7^th July, 2017
within the time granted. Subsequently, the return was processed under
sub-section (1) of section 143 of the Act on 12^th August, 2017,
wherein the date of original return is shown to be 10^th September,
2016. Thereafter, the impugned notice u/s 143(2) of the Act came to be issued
on 9^th August, 2018, informing the petitioner that the return of
income filed by it for A.Y. 2016-17 on 7^thJuly, 2017 has been
selected for scrutiny calling upon the petitioner to produce any evidence on
which it may rely in support of its return of income.

The petitioner filed a writ petition
under Articles 226 and 227 of the Constitution of India and challenged the
notice u/s 143(2) dated 9^th August, 2018 and the proceedings
initiated pursuant thereto. The Gujarat High Court allowed the writ petition
and held as under:

‘i) On a plain reading of sub-section (2) of
section 143 of the Act, it is apparent that the notice u/s 143(2) must be
served on the assessee within a period of six months from the end of the
financial year in which such return is furnished. Thus, if, after furnishing a
return of income, the assessee does not receive a notice under sub-section (2)
of section 143 of the Act within the period referred to in the sub-section, the
assessee is entitled to presume that the return has become final and no
scrutiny proceedings are to be started in respect of that return. It is only
after the issuance of notice under sub-section (2) of section 143 of the Act
that the A.O. can proceed further under sub-section (3) thereof to make an
assessment order. Therefore, the notice u/s 143(2) of the Act is a statutory
notice, upon issuance of which the A.O. assumes jurisdiction to frame the
scrutiny assessment under sub-section (3) of section 143 of the Act.
Consequently, if such notice is not issued within the period specified in
sub-section (2) of section 143 of the Act, viz., before the expiry of six months
from the end of the financial year in which the return is furnished, it is not
permissible for the A.O. to proceed further with the assessment.

ii) In the facts of the present case, the
petitioner filed its return of income under sub-section (1) of section 139 of
the Act on 10^th September, 2016. Since the return was defective, the
petitioner was called upon to remove such defects, which came to be removed on
7^th July, 2017, that is, within the time allowed by the A.O.
Therefore, upon such defects being removed, the return would relate back to the
date of filing of the original return, that is, 10^th September, 2016
and consequently the limitation for issuance of notice under sub-section (2) of
section 143 of the Act would be 30^th September, 2017, viz., six
months from the end of the financial year in which the return under sub-section
(1) of section 139 came to be filed. In the present case, it is an admitted
position that the impugned notice under sub-section (2) of section 143 of the
Act has been issued on 9^th August, 2018, which is much beyond the
period of limitation for issuance of such notice as envisaged under that
sub-section. The impugned notice, therefore, is clearly barred by limitation
and cannot be sustained.

iii) For the foregoing reasons, the petition
succeeds and is, accordingly, allowed. The impugned notice dated 9^thAugust,
2018 issued under sub-section (2) of section 143 of the Act and all proceedings
taken pursuant thereto are hereby quashed and set aside.’

shailesh.kwebmaker

Appellate Tribunal – Powers of (scope of order) – Section 254 r/w/s/ 144 of ITA, 1961 – Where remand made by Tribunal to A.O. was a complete and wholesale remand for framing a fresh assessment, A.O. could not deny to evaluate fresh claim raised by assessee during remand assessment proceedings

40. Curewel
(India) Ltd. vs. ITO; [2020] 113
taxmann.com 583 (Delhi) Date of order:
28^th November, 2019 A.Y.: 2002-03

Appellate Tribunal – Powers of (scope of order) – Section 254 r/w/s/ 144
of ITA, 1961 – Where remand made by Tribunal to A.O. was a complete and
wholesale remand for framing a fresh assessment, A.O. could not deny to
evaluate fresh claim raised by assessee during remand assessment proceedings

For the A.Y.
2002-03, the A.O. passed best judgment assessment u/s 144 of the Income-tax
Act, 1961 without examining the books of accounts of the assessee. The Tribunal
set aside the said assessment and remanded the matter to the A.O. to pass a
fresh order after considering the documents and submissions of the assessee.
During remand assessment, the assessee raised a fresh claim regarding
non-taxability of income arising from write-off of liability by Canara Bank
which was earlier offered as taxable income. The A.O. rejected the said claim
holding that in remand proceedings the assessee could not raise a fresh claim.

The
Commissioner (Appeal) and the Tribunal upheld the decision of the A.O.

The Delhi High
Court allowed the appeal filed by the assessee and held as under:

‘i) The remand made by the
Tribunal to the A.O. vide order dated 10^th March, 2011 was a
complete and wholesale remand for framing a fresh assessment. The remand was
not limited in its scope and was occasioned upon the Tribunal finding the
approach of the A.O. and the CIT(A) to be excessive, harsh and arbitrary. The
earlier assessment had been framed on the basis of best judgment without
examining the books of accounts of the assessee, which the assessee has claimed
were available.

ii) That being the position, the
A.O. ought to have evaluated the claim made by the assessee for write-off of
liability by Canara Bank in its favour amounting to Rs. 1,36,45,525 and should
not have rejected the same merely on the ground of it being raised for the
first time. The reliance placed by the Tribunal on Saheli Synthetics (P)
Ltd. (Supra) is misplaced in the light of the scope and nature of
remand in the present case. The findings returned by the Tribunal in paragraphs
8, 9 and 12 of the impugned order are erroneous since the Tribunal has not
appreciated the scope and nature of the remand ordered by it by its earlier
order dated 10^th March, 2011.

iii) We, therefore, answer the
questions framed aforesaid in favour of the assessee and set aside the impugned
order. Since the A.O. has not evaluated the appellant’s claim regarding
non-taxability of income arising from write-off of liability by Canara Bank in
its favour amounting to Rs. 1,36,45,525 on merits, we remand the matter back to
the A.O. for evaluation of the said claim on its own merits.’

shailesh.kwebmaker

Rakesh Kumar Agarwal vs. ACIT-24(1); [ITA. No. 2881/Mum/2015; Date of order: 14th May, 2015; A.Y.: 2010-11; Mum. ITAT] Section 263 – Revision of orders prejudicial to Revenue – No revenue loss – Assessment was completed after detailed inquiry – Revision on same issue is not valid

17. The Pr. CIT-10 vs. Rakesh Kumar
Agarwal [Income tax Appeal No. 1740 of 2017] Date of order: 22^nd January
2020 (Bombay High Court)

Rakesh Kumar Agarwal vs. ACIT-24(1);
[ITA. No. 2881/Mum/2015; Date of order: 14^th May, 2015; A.Y.:
2010-11; Mum. ITAT]

Section 263 – Revision of orders
prejudicial to Revenue – No revenue loss – Assessment was completed after
detailed inquiry – Revision on same issue is not valid

The assessee is a builder and sells
plots of land on short-term as well as on long-term basis. For the A.Y. under
consideration, the assessee filed a return of income showing total income of
Rs. 7,47,25,768. During the assessment proceedings u/s 143 (3) of the Act, the
A.O. inquired into the accounts of the assessee and analysed the various claims
that had been made. The assessment proceedings were concluded by determining
the total assessed income of the assessee at Rs. 7,66,68,582.

However, the CIT invoked jurisdiction
u/s 263 of the Act on various discrepancies in the assessment order. Taking the
view that the order was erroneous inasmuch as it was prejudicial to the
interest of Revenue, the Commissioner of Income Tax set aside the assessment
order u/s 263 of the Act and directed the A.O. to pass a fresh order in the
light of the discussions made in the order passed u/s 263.

Aggrieved by this, the assessee
preferred an appeal before the Tribunal. The Tribunal took the view that the
CIT was not justified in invoking jurisdiction u/s 263 of the Act and set aside
the said order, allowing the appeal. Of the three issues, the Tribunal held
that the first issue did not result in any revenue loss and, therefore,
assumption of jurisdiction u/s 263 of the Act was not justified.

On the second issue relating to
non-disclosure of unaccounted cash of Rs. 6,85,000, the Tribunal held that the
said amount was already disclosed in the return of income filed by the
assessee. The said sum of Rs. 6.85 lakhs is part of the gross total amount of
Rs. 7,83,17,777. At the end of the assessment, the said amount was taxed by the
A.O. under the head ‘income from other sources’. Therefore, the Tribunal stated
that the Commissioner of Income Tax was not justified in treating the said
amount as part of undisclosed income and assuming jurisdiction u/s 263 when it
was already disclosed and assessed.

On the third issue, as regards
applicability of section 45(2), the Tribunal noticed that the CIT had accepted
applicability of the said provision and, therefore, it was held that there is
no error in the order of the A.O.

The Tribunal further held that an
inquiry was made by the A.O. into the disclosures made during the course of the
assessment proceedings by the assessee. When the issue was inquired into by the
A.O., the Commissioner ought not to have invoked jurisdiction u/s 263 of the
Act.

Being aggrieved by the order of the
ITAT, the Revenue filed an appeal to the High Court. The Court held that on a
thorough consideration of the matter and considering the provisions of section
263 of the Act, the impugned order passed by the Tribunal does not suffer from
any error or infirmity to warrant interference. The Department’s appeal was
dismissed.

shailesh.kwebmaker

ANALYSIS OF RECENT COMPOUNDING ORDERS

Here
is an analysis of some interesting compounding orders passed by the Reserve
Bank of India in the month of December, 2019 and uploaded on the website¹.
This article refers mainly to the regulatory provisions as existing at the time
of offence. Changes in regulatory provisions are noted in the comments section.

FOREIGN
DIRECT INVESTMENT (FDI)

A.
Utkarsh CoreInvest Ltd.

Date
of order: 18^th November, 2019

Regulation:
FEMA 20/2000-RB [Foreign Exchange Management (Transfer or Issue of Security by
a Person Resident Outside India) Regulations, 2000] and FEMA 20(R)/2017 (dated
7^th November, 2017)

ISSUE

FDI
in Indian company engaged in business of investing in other companies and
taking on record transfer of shares of an Indian company between two
non-residents.

FACTS

Issue
1

(i) The applicant company was engaged in the business of micro finance.

(ii) Subsequently, it was issued license to set up a small finance bank
wherein one of the conditions stipulated that the applicant company should be
registered as an NBFC-CIC after transfer of its micro-finance business to the
bank.

(iii) Accordingly, the applicant company applied to RBI for
registering itself as an NBFC-CIC in December, 2016 and incorporated a
subsidiary company to which it transferred the micro-finance business in
January, 2017.

(iv) At the time of filing its application for license to set up a
small finance bank, the applicant company had foreign shareholding of around
84.1%. In order to bring the foreign shareholding below 50%, the applicant
company raised equity capital (by way of rights issue) which was offered to
both resident and non-resident shareholders in November, 2017. The applicant company
received FDI amounting to Rs. 28,68,95,310 at the same time which was not
permissible under the extant FEMA 20(R).

(v) Subsequently, in March, 2018, FDI up to 100% under automatic route
was allowed in investing companies registered as NBFCs with RBI.

Issue 2

(a) In August, 2017, International Finance Corporation (IFC), a
non-resident entity, had transferred 42,69,726 shares of the applicant company
amounting to Rs. 55,50,64,380, to another non-resident entity which was
recorded in the books of the applicant company without obtaining prior approval
of the Government.

(b) The Government of India, MoF, DEA, while according its approval for
another transaction in October, 2018 which involved share transfer between two
non-resident entities had, vide its letter dated 22^nd October, 2018,
advised the applicant company to approach RBI for compounding for ‘past foreign
investments made in UMFL, including share transfers among non-residents,
without GoI approval’.

Regulatory
provisions

Regulation 16(B)(5) of FEMA 20(R) in
November, 2017 states that ‘Foreign investment into an Indian company,
engaged only in the activity of investing in the capital of other Indian
company/ies, will require prior approval of the Government. A core investment
company (CIC) will have to additionally follow the Reserve Bank’s regulatory
framework for CICs’.

The above regulation was amended in March,
2018 which allowed foreign investment up to 100% under automatic route in
investing companies registered as NBFCs with RBI.

Regulation 4 of the erstwhile FEMA 20, which
stated that ‘Save as otherwise provided in the Act, or rules or regulations
made thereunder, an Indian entity shall not issue any security to a person
resident outside India or shall not record in its books any transfer of
security from or to such person.’

CONTRAVENTION

Nature
of default

Amount
involved
(in INR)

Time
period of default

Receiving
FDI in Indian company which is engaged in investing in capital of other
companies

Rs.
28,68,95,310

Seven
months approx.

Taking
on record share transfer between two non-residents when foreign investment
itself was not permitted

Rs.
55,50,64,380

Total

Rs.
84,19,59,690

Compounding
penalty

A compounding penalty of Rs.
43,09,797 was levied.

Comments

It is interesting to note that
generally transfer of shares between two non-residents is not subject to any
reporting requirement by the Indian company. Form FC-TRS regarding reporting
transfer of shares of an Indian company is required to be filed only when
either the transferor or the transferee is an Indian resident. Thus, any
transfer of shares between resident to non-resident or vice versa is required
to be reported in Form FC-TRS but not any transfer of shares between two
non-residents.

However, where FDI itself is not
permitted under the 100% automatic route and is subject to prior approval of
the Government, any transfer of shares between two non-residents would also be
subject to prior approval. Hence, Indian companies engaged in sectors where
prior approval of Government is required should be cautious and ensure that any
transfer of shares between two non-residents is undertaken only after obtaining
prior approval of Government.

B. M/s Star
Health and Allied Insurance Co. Ltd.

Date of order:
29^th November, 2019

Regulation: FEMA
20(R)/2017 [Foreign Exchange Management (Transfer or Issue of Security by a
Person Resident Outside India) Regulations, 2017]

ISSUE

Delay in allotment of shares
within 60 days of receipt of share capital.

FACTS

(i) Applicant company is engaged in the business of non-life insurance.

(ii) It received FDI from two Mauritian companies amounting to Rs.
30,50,00,079 in December, 2018.

(iii) Shares were allotted by the applicant company to the above
shareholders after a delay of three months and ten days (approximately) beyond
the stipulated time of 60 days from the date of receipt of the consideration.

Regulatory
provision

Paragraph 2(2) of Schedule I to
Notification No. FEMA 20(R)/2017-RB, states that capital instruments shall be
issued to the person resident outside India making such investment within 60
days from the date of receipt of the consideration.

Contravention

The amount of contravention is Rs
30,50,00,079 and the period of contravention three months and ten days.

Compounding
penalty

A compounding penalty of Rs.
15,75,000 was levied.

Comments

The above order highlights the
fact that RBI is taking a serious view of contraventions relating to delay in
allotment of shares to foreign investors. Hence, it is absolutely critical that
in respect of foreign investment, shares should be allotted within the
prescribed period of 60 days as per erstwhile FEMA-20(R) and even under the new
Foreign Exchange Management (Mode of Payment and Reporting of Non-Debt Instruments) Regulations, 2019
effective from 17^th October, 2019.

EXPORT
OF GOODS AND SERVICES

C. H.F. Metal
Art Private Limited and Azoy Bansal

Date of order: 5^th
November, 2019

Regulation: FEMA
23/2000-RB [Foreign Exchange Management (Export of Goods and Services)
Regulations, 2000] and FEMA 23R/2015-RB [Foreign Exchange Management (Export of
Goods and Services) Regulations, 2015]

ISSUE

(i) Failure to export goods within the prescribed
period of one year from the date of receipt of advance.

(ii) Failure to realise export proceeds within the
stipulated time period.

(iii) Contravention deemed to have been
committed by director who was in charge of the company at the time of
contravention.

FACTS

The applicant company is engaged in the
business of minting and supply of precious metal coins and bars, as well as
high quality medals, gifts and promotional items in non-precious metals.

The company received certain export advances
between January, 2008 and July, 2011 amounting to Rs. 6,30,79,984 but was
unable to make exports within the prescribed time limit. However, the company
has adjusted the export advances against subsequent exports made during the
period from August, 2013 to June, 2014.

The company could not realise export proceeds
against certain exports amounting to Rs 10,58,50,346 within the prescribed time
period 2014-2018.

Regulatory provisions

Regulation 16 of Notification No. FEMA
23/2000- RB, where an exporter receives advance payment (with or without
interest) from a buyer outside India, the exporter shall be under an obligation
to ensure that the shipment of goods is made within one year from the date of
receipt of advance payment.

Regulation 9 of Notification No. FEMA 23/2000-
RB and FEMA 23(R), the amount representing the full export value of goods or
software exported shall be realised and repatriated to India within nine months
from the date of export.

Section 42(1) of FEMA states that, ‘Where a
person committing a contravention of any of the provisions of this Act or of
any rule, direction or order made thereunder is a company, every person who, at
the time the contravention was committed, was in charge of, and was responsible
to, the company for the conduct of the business of the company as well as the
company, shall be deemed to be guilty of the contravention and shall be liable
to be proceeded against and punished accordingly’.

CONTRAVENTION

Relevant
Provision

Nature
of default

Amount
involved
(in INR)

Time
period of default

Regulation
16 of FEMA 23/2000-RB

Failure
to export the goods within a period of one year from the date of receipt of
advance

Rs.
6,30,79,984

11
months to 4.6 years

Regulation
9 of FEMA 23/2000-RB & FEMA 23(R)

Failure
to realise export proceeds within stipulated time period

Rs.
10,58,50,346

One
day to seven months

Section
42(1) of FEMA

Being
director of company which committed above contravention of FEMA

Rs.
16,89,30,330

11
months to 4.6 years and one day to seven months

Compounding
penalty

Compounding penalty of Rs.
10,32,998 was levied on the company and Rs. 1,03,300 on the director
personally.

Comments

In the instant case, the company
had committed contravention by not exporting goods against advance received
within the prescribed time frame and also by not receiving payment for exports
within the prescribed time. However, the director who was in charge of the
company was also deemed to be guilty u/s 42(1) of FEMA and hence compounding
penalties were levied both on the company as well as the director in respect of
the contraventions. Accordingly, going forward, especially in cases of export
of goods, it is advisable that directors of companies are extremely vigilant
and ensure that their company adheres to the prescribed time lines failing
which both the company as well as the directors would be personally liable for
any contravention.

BORROWING
OR LENDING IN FOREIGN EXCHANGE

D. M/s Tulsea
Pictures Private Limited

Date of order:
28^th November, 2019

Regulation: FEMA
4/2000-RB [Foreign Exchange Management (Borrowing or Lending in Foreign
Exchange) Regulations, 2000]

ISSUE

(i) Borrowings from NRI without issuance of NCDs through public offer.

(ii) Utilising borrowed funds for other than business purposes.

FACTS

The applicant company appointed an NRI as one
of the directors on its board.

The company raised a loan of Rs. 32,96,432
from the NRI director to meet its day-to-day expenses and other liabilities.

The loan in INR had been availed from the NRI
without issuing non-convertible debentures (NCD) through public offer.

Out of the aforesaid amount, the applicant
company had utilised Rs. 5,98,670 for paying the lease rentals for a
residential premise taken for the NRI director and for meeting day-to-day
expenses.

The company was granted permission to convert
the loan amount into equity, subject to lender’s consent and adherence to FDI /
pricing norms for such conversion and reporting requirements.

The company allotted 55,056 equity shares to
the director on 5^th July, 2018 against the outstanding loan amount
of Rs. 26,97,762.

Regulatory
provisions

Regulation 5(1)(i) of Notification No. FEMA
4/2000-RB inter alia states as under:

‘Subject to the
provisions of sub-regulations (2) and (3), a company incorporated in India may
borrow in rupees on repatriation or non- repatriation basis, from a
non-resident Indian or a person of Indian origin resident outside India or an
overseas corporate body (OCB), by way of investment in non-convertible
debentures (NCDs) subject to the following conditions:

i. the issue of Non-convertible Debentures
(NCDs) is made by public offer;…’

Regulation 6 of
Notification No. FEMA 4/2000-RB states that no person resident in India who
has borrowed in rupees from a person resident outside India shall use such
borrowed funds for any purpose except in his own business.

CONTRAVENTION

Relevant
Para of FEMA 4 Regulation

Nature
of default

Amount
involved

(in
INR)

Time
period of default

Regulation
5(1)(i) of Notification No. FEMA 4/2000-RB

Issue
1:
Borrowings from NRI without issuance of NCDs through public offer

Issue
1:

Rs.
32,96,432

Approximately
7 years

Regulation
6 of Notification No. FEMA 4/2000-RB

Issue
2:
Utilising borrowed funds for purpose other than business

Issue
2:

Rs.
5,98,670

Approximately
7 years

Compounding
penalty

A compounding penalty of Rs.
1,29,213 was levied.

Comments

It is important to note that
borrowings in INR by an Indian company from its NRI director, even though
permissible under the Companies Act, 2013, is not permissible under FEMA
regulations. Under FEMA, INR borrowings from NRIs are permitted only through
issuance of NCDs made by public offer under both repatriation as well as
non-repatriation route.

OVERSEAS
DIRECT INVESTMENT (ODI)

E. Ms Pratibha
Agrawal

Date of order:
11^thNovember, 2019

Regulation: FEMA
120/2004 [Foreign Exchange Management (Transfer or Issue of any Foreign
Security) Regulations, 2004]

ISSUE

Acquisition of foreign securities
by way of gift from a person resident in India.

FACTS

The applicant was a resident individual and
the spouse of a senior management employee of Sterlite Industries India Limited
from 2001 to 2008.

The senior employee was offered 8,000 shares
of Vedanta Resources Plc, London, in March, 2004 to be issued in two tranches.
The first tranche of 4,000 shares was allotted in March, 2004 and second in
February, 2005.

The consideration paid for the shares allotted
in the second tranche was equivalent to face value, i.e., USD 400 (INR 17,532).

Out of the 4,000 shares of the second
tranche, the senior employee gifted 3,000 to the applicant (Ms. Pratibha
Agrawal) and, accordingly, share certificates for these 3,000 shares were
issued in the name of the applicant.

Regulatory
provisions

As per Regulation 22(1)(i), read
with Regulation 3, a person resident in India being an individual may acquire
foreign securities by way of gift only from a person resident outside India and
not from another Indian resident.

CONTRAVENTION

Relevant
Para of FEMA 120 Regulation

Nature
of default

Amount
involved
(in INR)

Time
period of default

Regulation
22(1)(i)

Acquisition
of foreign securities by way of gift from a person resident in India

Rs.
22,49,232

Approximately
13 years

Compounding
penalty

Compounding penalty of Rs. 66,869
was levied.

Comments

In view of the peculiar language
of FEMA 120, it is advisable that appropriate care is taken in respect of gifts
of shares of foreign companies between residents and non-residents. Under the
existing provisions, an Indian resident can acquire shares by way of gift from
only a non-resident and not from a resident.

F. Masibus
Automation and Instrumentation Pvt. Ltd.

Date of order:
26^th November, 2019

Regulation: FEMA
120/2004 [Foreign Exchange Management (Transfer or Issue of any Foreign
Security) Regulations, 2004]

ISSUES

(i) Sending remittances to overseas company without submitting Annual
Performance Report (APR);

(ii) Delay in submission of duly completed Part I of the Form ODI;

(iii) Overseas investment undertaken by a method of funding not
prescribed;

(iv) Delayed receipt of proof of investment;

(v) Delayed submission of APRs;

(vi) Disinvestment from the overseas entity without obtaining fair
valuation certificate prior to its divestment;

(vii) Disinvestment undertaken from the overseas entity when it had
outstanding loans;

(viii) Disinvestment without
prior approval of RBI when it was not eligible under the automatic route.

FACTS

The applicant is engaged in the business of
manufacturing of electrical equipment, wiring devices, fittings, etc.

The applicant remitted SGD 990 on 4^th
July, 2008 towards 99% stake in the overseas JV, viz., Masibus Automation and
Instrumentation (Singapore) Pte. Ltd. in Singapore.

Subsequently, the applicant undertook ODI of
SGD 5,000 on 4^th July, 2008 by way of payment by the director of the
applicant company in cash during his visit abroad.

The applicant had sent seven remittances
aggregating SGD 52,000 in 2010-11 without submitting APR.

Further, the applicant submitted Part I of
Form ODI with delay on 11^th January, 2018 in respect of remittance
of SGD 5,000 made through the director on 4^th July, 2008.

Share certificate for the aforesaid
remittance of SGD 990 made in July, 2008 was received with delay (i.e. beyond
the prescribed period of six months under FEMA 120) on 8^th
September, 2014.

The applicant submitted APRs for the years
ending 2009 to 2012 with delay on 12^th January, 2018.

Disinvestment from the overseas entity was
undertaken on 11^th April, 2012 without obtaining fair valuation
certificate and when it had outstanding loans.

Accordingly, as the applicant had outstanding
loans, it was not eligible to undertake the disinvestment under the automatic
route and should have sought prior approval of RBI before disinvestment.

Regulatory
provisions

Regulations 6(2)(iv), 6(2)(vi), 6(3), 15(i),
15(iii), 16(1)(iii), 16(1)(iv), 16(3) of FEMA 120.

CONTRAVENTION

Relevant
Para of FEMA 120 Regulation

Nature
of default

Amount
involved (in INR)

Time
period of default

Regulation
6(2)(iv)

Making
overseas remittances towards share capital without submitting APR of the
overseas entity

Rs. 18,46,500

Five
years

Regulation
6(2)(vi)

Overseas
investment made through director in cash was treated as investment of Indian
company, hence Indian company ought to have filed Part I of Form ODI for
making remittance. There was delay in submission of Part I of the Form ODI in
respect of the
above investment

Rs.
1,60,600

4^th
July, 2008 to
11^th January, 2018

Regulation
6(3)

Overseas
investment undertaken through cash payment made by director is not a
prescribed method of funding

Rs.
1,60,600

4^th
July, 2008 to
13^th May, 2019

Regulation
15(i)

Proof of
investment made in overseas entity should be received and filed with RBI
within six months of making remittance. There was delay in providing share
certificate to RBI in respect of overseas remittances made

Rs.
31,799

4^th
July, 2008
to 8^th September, 2014

Regulation15(iii)

APR of
the overseas entity based on its audited accounts has to be filed annually on
or before 31^st December. Applicant delayed submission of APR in
respect of its
overseas entity

Not
applicable

1^stJuly, 2013 to
21^st September, 2018

Regulation
16(1)(iii)

Any
divestment of overseas entity has to be undertaken at a price which is not
less than its fair value as certified by CA / CPA based on last audited
financials of overseas entity. In the instant case, applicant divested its
overseas entity without obtaining its fair valuation certificate from CA /
CPA

Rs.
31,799

11^th
April, 2012 to
13^th May, 2019

Regulation
16(1)(iv)

An
Indian party can undertake divestment of its overseas entity only when the
overseas entity does not have any amount payable to Indian entity. In the
instant case, the applicant had undertaken disinvestment of the overseas
entity when it still had outstanding loans payable to it

Rs.
23,56,703

11^th
April, 2012 to
13^th May, 2019

Regulation
16(3)

Indian
entity wanting to divest its overseas entity which has any amount payable to
it would need prior approval of RBI before undertaking divestment. In the
instant case, the applicant undertook disinvestment without prior approval of
RBI when not eligible under automatic route

Rs.
23,91,521

11^th
April, 2012 to
13^th May, 2019

Compounding
penalty

Compounding penalty of Rs.
3,61,126 was levied.

Comments

In view of numerous compliances
prescribed under FEMA 120 in respect of overseas investments, it is essential
that adequate care is taken by every Indian entity in respect of its overseas
investment. Specific care should be taken to ensure that overseas investment by
any Indian entity is routed only through Indian banking channels and not made
in cash by any person visiting overseas.

Further, Regulation 16(1)(iv) of
FEMA 120 states that at the time of divestment, the Indian party should not
have any outstanding dues by way of dividend, technical know-how fees, royalty,
consultancy, commission or other entitlements and / or export proceeds from the
overseas JV or WOS. This includes any amount due, including loan payable by the
overseas entity to an Indian entity. Hence, appropriate care should be taken to
ensure that the overseas entity does not have any amount payable to an Indian
entity at the time of its disinvestment.

G. Essar Steel
India Ltd.

Date of order:
22^ndNovember, 2019

Regulation: FEMA
120/2004 [Foreign Exchange Management (Transfer or Issue of any Foreign Security)
Regulations, 2004]

ISSUES

(i) Effecting remittance without prior approval of RBI when the Indian
party (IP) was under investigation by the Department of Revenue Intelligence
(DRI);

(ii) Delayed submission of APRs;

(iii) Disinvestment without obtaining valuation.

FACTS

The applicant company set up a wholly-owned
subsidiary (WOS), Essar Steel Overseas Ltd., in Mauritius by remitting USD 1
(INR 47) on 7^th August, 2010.

Since the applicant company was under
investigation by the DRI at the time of effecting the remittance, it was not
eligible to make ODI under the automatic route.

The WOS was later liquidated on 9^th
March, 2012 and no valuation was done as required. The transactions were taken
on record on 14^th August, 2019.

Further, the applicant had reported Annual
Performance Reports (APRs) for the accounting years 2011 and 2012 with a delay
on 15^thJune, 2013 and 17^thDecember, 2013.

Regulatory
provisions

Regulation 6(2)(iii) of FEMA 120 provides
that Overseas Direct Investment under automatic route is permitted in certain
cases provided ‘the Indian party is not on the Reserve Bank’s exporters
caution list / list of defaulters to the banking system circulated by the
Reserve Bank, or under investigation by any investigation / enforcement agency
or regulatory body.’

Regulation 15(iii) of FEMA 120 states that, ‘An
Indian Party which has acquired foreign security in terms of the Regulation in
Part I shall submit to the Reserve Bank, through the designated Authorised
Dealer, every year on or before a specified date, an Annual Performance Report
(APR) in Part III of Form ODI in respect of each JV or WOS outside India…’. The specified date for filing APR currently
is on or before 31^st December every year.

Regulation 16(1) provides that an Indian
party may disinvest to a person resident outside India subject to the following
conditions:

• (iii)
if the shares are not listed on the stock exchange and the shares are
disinvested by a private arrangement, the share price is not less than the
value certified by a Chartered Accountant / Certified Public Accountant as the
fair value of the shares based on the latest audited financial statements of
the JV / WOS.

CONTRAVENTION

Relevant
Para of FEMA 120 Regulation

Nature
of default

Amount
involved (in INR)

Time
period of default

Regulation

6(2)(iii)

Effecting
remittance and incorporating overseas entity under the automatic route
without obtaining prior approval of RBI when the Indian Party (IP) was under
investigation by DRI

Rs.
47

Seven
years five months, to nine years and one month, approximately

Regulation
15(iii)

Delayed
submission of APRs

Regulation
16(1)

Disinvestment
of the overseas entity without obtaining fair valuation certificate from CA /
CPA at the time of disinvestment

Compounding
penalty

A compounding penalty of Rs. 83
was levied.

Comments

In the instant case, as the
applicant was under investigation by DRI and the Enforcement Directorate (DoE)
in Mumbai and Ahmedabad, the RBI had sought a No-Objection Certificate from the
DoE before proceeding with the compounding application. However, as no reply
was received from the DoE, RBI proceeded for the compounding without prejudice
to any other action which may be taken by the authority under any other laws.
Thus, RBI compounded the above contravention even though it did not receive any
NOC from the DoE.

Besides, Indian entities wishing
to make overseas investments should understand that if there is any
investigation pending against them by any regulatory body or investigation
agency, they cannot make an overseas investment under the automatic route and
need to obtain prior approval of RBI before making such investment.

shailesh.kwebmaker

THE MCA CONSULTATION PAPER

The MCA paper examining the existing provisions and
seeking to make suitable amendments to enhance Audit Independence and
Accountability has been under discussion. Nineteen pages have laid out a
certain thought pattern and invited comments on questions arising out of that
thought pattern.

Over
the years, regulators, government, the corporate sector and auditors have not
been able to solve fundamental core issues about audit and auditors. Some beat
around the bush, others are infected by vested interests, some import and
impose a model from elsewhere, and so on.

Two
functions describe an auditor – a watchdog (or a sniffer dog if you wish) and a
judge – when he carries out the function of oversight and gives a considered
opinion after taking into account a number of factors respectively.

Looking
at complete independence, it’s not achievable because the client decides the
fees of the auditor for reporting on the client’s financial information.
Independence can only be brought to a level where the auditor’s objectivity is
not affected. Secondly, independence is a personal trait and two auditors under
the same circumstances may act differently.

The
paper bundles the two mammoth topics of Independence and Accountability into 19
pages (four are a reproduction from standards without giving any credit) and
believes that these are the only questions there ought to be. For example, an
auditor of a private non-public interest entity cannot be evaluated by the same
yardsticks as auditors of a public interest entity like IL&FS unless one is
absurdly socialist.

The
paper carries a whiff of ‘we have made up our mind’ when it asks questions
based on its thought pattern, which itself needs questioning. It is piecemeal,
not thought-through, has a flavour of control and seems to aim for a quick fix
without getting to the bottom of the whole problem. While urgency is critical,
not dealing with the root cause will only delay the cure. Such papers call for
‘comments’ but never publish what is received, what is accepted, what is
rejected and why. Therefore, they seem more like a ‘procedural formality’ or
‘consultation in appearance’ rather than an exploration of fundamental
problems. For such an important topic as Independence and Accountability,
the MCA should have a country-wide deliberation directly with 30 to 50 firms,
auditees and regulators rather than sending a questionnaire and seeking answers
to questions that it has framed in its (limited) wisdom.

In spite of the Prime Minister talking of creating the
next big 4 firms out of India, there is literally nothing that is being done
either at the strategic or the tactical level by the MCA. The paper has little
vision to offer on this front when auditors actually vet a large part of India’s
economic interests. The question asked is whether or not auditor groups need to
be essentially and substantially Indian? In fact, the MCA paper mocks this idea
by asking whether there are firms outside of the big four who can even carry
out large audits. If MCA had bothered to add up the loss of value and tagged
each debacle to the auditors at that time, they wouldn’t have asked this
question.

The
paper should have mentioned the need to create an ‘ecosystem’ that will
cultivate and protect objectivity. What should auditors do when they report
what should be reported or when they resign and then the auditee files a legal
case for losing market cap? The MCA has no answers, and no questions either,
about this.

Here is one fundamental issue that the paper avoids:
non-audit fees charged by group / network entities of the audit firms to the
clients in spite of a 30-page-long explicit mention in the NFRA Report 1 / 2019
dated 12th December, 2019. What about non-audit fees taken by audit networks
from group entities of an audit client? Perhaps we have come to a situation
where an auditor will need to give his own related party disclosure to the MCA,
to the Board and even to shareholders!

One can answer the questions in the MCA consultation
paper. But one wonders whether they are complete, whether they target the core
issues and whether an objective exploratory discussion is possible in the
spirit of partnership for nation-building!

Raman
Jokhakar

Editor

shailesh.kwebmaker

GST IMPLICATIONS ON BUSINESS RESTRUCTURING

INTRODUCTION

In changing
business dynamics, business restructuring has become a norm whereby businesses
undertake activities of merger – wherein two or more entities come together to
form a new entity, resulting in the old entities ceasing to exist; or
amalgamation – wherein one or more entities are subsumed into an existing
entity such that the subsumed entities cease to exist. The next mode of
business restructuring is de-merger, where only specific business divisions are
transferred to a new entity, or are sold to an existing entity. When the above
activities are undertaken as a corporate, the same are governed by the
provisions under the Companies Act, 1956 (now 2013). In the non-corporate
sector, the restructuring transactions are generally undertaken by way of business
transfer arrangements, lease, leave and license and so on, which may not be
governed under any other statute.

Generally, a
business transaction is structured in such a manner that there is transfer of
assets and liabilities as per the terms of the transfer of the business or part
thereof which is being transferred to the transferee. However, this transaction
has its own set of challenges under GST, ranging from whether the transaction
would be liable to GST u/s 9, liability of transferor and transferee in case of
such transfers, input tax credit implications, registration implications, etc.

In this article, we
will try to decode the above aspects and the issues which revolve around
business restructuring.

TAXABILITY
OF CONSIDERATION RECEIVED FOR BUSINESS RESTRUCTURING TRANSACTIONS

An important aspect
which needs to be looked into while dealing with business restructuring
transactions under GST is whether or not the consideration received for the
said transaction attracts levy of GST u/s 9. This is very important since the
consideration involved is substantial and the applicability of GST on such
transactions may be a game-breaker. To analyse the same, one needs to analyse
from two different perspectives, one being whether transfer of business can be treated
as supply of goods, or supply of services or not, and the second being whether
or not the same can be treated as being in the course or furtherance of
business?

Let us first
discuss whether the activity of sale of business, as part of business restructuring,
can be treated as sale of goods, or sale of services, or none of the two. For
this let us refer to the definition of goods as defined u/s 2(52) of the CGST
Act which is reproduced below for ready reference:

‘goods’ means
every kind of movable property other than money and securities but includes
actionable claim, growing crops, grass and things attached to or forming part
of the land which are agreed to be severed before supply or under a contract of
supply;

On going through
the above definition of goods, it is evident that for any item to be classified
as goods it has to be movable property. Therefore, the question that needs to
be analysed is whether or not a business unit is a movable property. While the
term ‘movable property’ has not been defined under the GST law, one can refer
to the decisions under the pre-GST regime which specifically dealt with this
issue. In this context, reference may be made to the decision in the case of Shri
Ram Sahai vs. CST [1963 (14) STC 275 (Allahabad HC)] wherein the
Hon’ble High Court held that ‘business’ is not a movable property and therefore
it is not covered within the meaning of ‘goods’.

Similarly, in a
recent decision the Hon’ble Andhra High Court in the case of Paradise
Food Court vs. State of Telangana [Writ Petition No. 2167 of 2017] had
held as under:

‘16. Two
important things are to be noted from the definition part of the Statute. (i)
The first is that the sale of a business as such is not covered either by the
charging Section, viz., Section 4(1) or by the definition of the expression
goods. While the sale of a business may
necessarily include a sale of the assets (as well as liabilities) of the
business, the expression business is not included in the definition of the
expression goods under Section 2(16).’

While the above
decisions were in the context of the sales tax / VAT regime, it is important to
note that the definition of goods was similarly worded and, therefore, the
principles laid down by the above judgments should continue to apply even under
GST. For these reasons, it can be concluded that the activity of business
restructuring, by way of amalgamation, merger, de-merger or transfer of
business unit, cannot be treated as supply of goods for the purpose of GST.

We shall now
proceed to analyse whether sale of business, as a part of business
restructuring, can be treated as supply of services. For this, let us refer to
the definition of service as provided u/s 2(102) of the CGST Act, 2017 which is
reproduced below for ready reference:

‘services’ means
anything other than goods, money and
securities but includes activities relating to the use of money or its
conversion by cash or by any other mode, from one form, currency or
denomination, to another form, currency or denomination for which a separate
consideration is charged;

On going through the above, it is evident that service has been very
loosely defined under GST. A literal reading of the definition indicates that
anything which is not classifiable as goods would be service. However, the
question that needs to be analysed is whether such literal interpretation of
the definition of supply can be done or not, or whether one needs to refer to
purposive interpretation. It would be relevant to refer to two decisions of the
Supreme Court to understand when purposive interpretation can be resorted to:

(i) Periyar & Pareekanni Rubbers
Limited vs. State of Kerala [2008 (13) VST 538 (SC)]

28. Tax
liability of the business concern is not in dispute. Correctness of the orders
of assessment is also not under challenge. The Tribunal or for that matter the
High Court were, therefore, not concerned with the liability fastened upon the
dealer. The only question was as to what extent the appellant was liable
therefor. It is impossible for the legislature to envisage all situations. Recourse to statutory interpretations therefore
should be done in such a manner so as to give effect to the object and purport
thereof. The doctrine of purposive construction should, for the said purpose,
be taken recourse to.

(ii) Tata Consultancy Services Limited vs.
State of Andhra Pradesh [2004 (178) ELT (022) SC]

68. It is now
well settled that when an expression is capable of more than one meaning, the
Court would attempt to resolve that ambiguity in a manner consistent with the
purpose of the provisions and with regard to consequences of the alternative
constructions.

See Clark
&Tokeley Ltd. (t/a Spellbrook) vs. Oakes [1998 (4) All ER 353].

69. In Inland
Revenue Commissioners vs. Trustees of Sir John Aird’s Settlement [1984] Ch. 382,
it is stated:

Two methods of
statutory interpretation have at times been adopted by the court. One,
sometimes called literalist, is to make a meticulous examination of the precise
words used. The other, sometimes called purposive, is to consider the object of
the relevant provision in the light of the other provisions of the Act – the
general intendment of the provisions. They are not mutually exclusive and both
have their part to play even in the interpretation of a taxing statute.

70. Although
normally a taxing statute is to be strictly construed, but when the statutory
provision is reasonable akin to only one meaning, the principles of strict
construction may not be adhered to.

[See Commnr.
of Central Excise, Pondicherry vs. M/s Acer India Ltd., 2004 (8) SCALE 169].

As can be seen from
the above, the need to resort to purposive interpretation arises only when the
literal interpretation results in ambiguity. It would therefore need to be
analysed as to whether according a transaction of business restructuring by way
of amalgamation, merger, de-merger or transfer of business assets as supply of
service would lead to absurdity? In general, depending on the terms of each
agreement, a transaction for business restructuring by any of the means referred
above would generally include transfer of assets, liabilities, employees, etc.
It would be difficult to perceive as to how a transaction, which involves
transfer of assets, liabilities, human resources, etc., would constitute
service, especially when there are identified elements of goods, transactions
in money, etc., involved. In other words, merely because all the above items
are sold as a bundle making the transaction take the character of a business
unit and going by the literal interpretation, since the transfer of business
unit is not classifiable as goods, it should be classified as service. This is
where the ambiguity / absurdity comes into the picture. Schedule II only deems
transactions of temporary transfer of right to use goods as service. This is
because in case of temporary transfer, the goods revert back to the owners. But
it is not the case here as the items being transferred would not revert back to
the owners. It is for this reason that such business restructuring activity
cannot be classified as service as well.

It may also be
relevant to note that notification 12/2017 – CT (Rate) exempts services by way
of transfer of a going concern, as a whole or an independent part thereof, from
levy of GST. However, merely because there is an entry in exemption
notification would not mean that the transaction was upfront liable to levy of
tax. However, if the entry is treated as valid, it would mean that the
transferor has made an exempt supply and, therefore, trigger the applicability
of the provisions of section 17(2) r/w/rule 42 / 43 of the CGST Rules.

Liability of
transferor vis-à-vis transferee – in case of
transfer of business by sale, gift, lease, leave and license, hire or in any
other manner whatsoever

In case of business
restructuring transactions, there is also a change of ownership. Section 85(1)
deals with liability to pay tax in such cases where the business restructuring
results in transfer of business by sale, gift, lease, leave and license, hire
or in any other manner whatsoever. The section provides that in case of
transfer of business, there shall be joint and several liability of the
transferor as well as the transferee to pay tax up to the time of such
transfer, whether determined prior to or subsequent to the said transfer.

Therefore, what needs to be analysed first is what is meant by the term
‘transfer of business’. This has been analysed by the Supreme Court in the case
of State of Karnataka vs. Shreyas Papers Private Limited [Civil Appeal
3170-3173 of 2000] while dealing with the scope of section 15(1) of the
Karnataka Sales Tax Act, 1957. In this case, the Court held that business is an
activity directed with a certain purpose, more often towards promoting income
or profit. Mere transfer of one or more species of assets does not bring about
the transfer of ownership of the business, which requires that the business be
sold as a going concern. The above view has been followed in multiple instances
wherein the Court has held that transfer of specific business assets cannot be
treated as transfer of business in itself. One may refer to the decisions in
the cases of Rana Girders Limited vs. UOI [2013 (295) ELT 12 (SC)],
Lamifab Industries vs. UOI [2015 (326) ELT 674 (Guj.)], Chandra Dyeing &
Printing Mills Private Limited vs. UOI [2018 (361) ELT 254 (Guj.)], Krishna
Lifestyle Technologies Limited vs. Union of India [2009 (16) STR 669 (Bom.)].

When comparing with
the provision under the Central Excise Act, 1944 (section 11), one important
distinction which comes to mind is that the proviso of section 11
required that the transferee should have succeeded in the business of the
transferor. This aspect was dealt with by the High Court in the case of Krishna
Lifestyle Technologies (Supra) where the Court held as follows:

‘16. Succession
therefore has a recognised connotation. The tests of change of ownership,
integrity, identity and continuity of a business have to be satisfied before it
can be said that a person succeeded to the business. The business carried on by
the transferee must be the same business and further it must be continuation of
the original business either wholly or in part. It would thus be clear from the
above that these tests will have to be met before it can be said that a person
has succeeded to a business. This would require the facts to be investigated as
to whether there has been transfer of the whole of the business or part of the
business and succession to the original business by the transferee.’

While the
provisions under GST do not require succession in interest by the transferee,
it remains to be seen whether the condition shall still be continued to be
applicable under GST, considering the decision in the case of Shreyas
Papers (Supra) wherein the Supreme Court has brought in the concept of
transfer of business as a going concern though no specific provisions were
contained in the Karnataka Sales Tax Act.

It would also be
relevant to note that there are instances where the business is transferred by
State Financial Corporations after taking over control of defaulting borrowers.
The statute under which the State Financial Corporations were incorporated
provided that in case of sale of such assets, though the sale would have been
executed by the State Financial Corporation, it would have been deemed that the
sale was being done by the defaulting borrowers and, therefore, the liability
to pay tax up to the date of transfer shall be on the transferee (refer Macson
Marbles Private Limited vs. UOI [2003 (158) ELT 424 (SC)].

Treatment of
Input Tax Credit in case of transfer of business, amalgamation, merger,
de-merger, etc.

Another GST aspect which revolves around the above set of transactions,
apart from the attached transfer of liability to the transferee, is the
permission to transfer the balance lying in the electronic credit ledger of the
transferor. Section 18(3) provides that in case of change in constitution of a
registered person on account of sale, merger, de-merger, amalgamation, lease or
transfer of business with specific provision for transfer of liabilities, the
taxable person shall be allowed to transfer the input tax credit which remains
unutilised in his credit ledger in such manner as may be prescribed. The manner
has been prescribed u/r 41 of the CGST Rules. While the provisions are silent
w.r.t. the manner of determining the credit appropriable to the transferee, it
provides that in the case of de-merger the input tax credit shall be
appropriated in the ratio of value of assets of new units as specified in the
de-merger scheme. However, in all other cases there is no method prescribed for
appropriating input tax credit. The only requirements prescribed for the
transfer of balance lying in electronic credit ledger are:

(1) A copy of the chartered accountant’s
certificate certifying that the sale, merger, de-merger, amalgamation, lease or
transfer of business has been done with a specific provision for transfer of
liabilities;

(2) Furnishing of Form GST ITC-02 by the
transferor which shall be accepted by the transferee on the common portal; and

(3) Accounting for the inputs and capital goods so
transferred by the transferee in his books of accounts.

REGISTRATION
IMPLICATIONS IN CASE OF BUSINESS RESTRUCTURING

In case of
transactions of amalgamation or merger, one needs to take note of the fact that
there are two different dates, namely, the effective date from which the scheme
would be given effect (which has to be indicated while filing the application
for the amalgamation or merger) and, second, the date of order, when the scheme
is approved by the Court or Tribunal. Generally, the effective date precedes
the order date and under the Income-tax Act, while till the time the order is
received both companies continue to have separate existence, the receipt of the
order requires them to re-file their tax returns as the company which has
merged or amalgamated into the other company has ceased to exist.

However, it is not
so under the GST regime. Section 87(2) specifically provides that the companies
party to a scheme shall continue to be treated as distinct companies till the
date of receipt of the order, and the registration certificate of the
amalgamated or merged company shall be cancelled only with effect from the date
of the order approving the scheme. This specific provision will help in dealing
with the following situations:

(A) Supply of goods or services, or both, between
the companies which are part of the scheme, and

(B) Supply of goods or services, or both, by the
said companies to other persons who are not part of the scheme.

This would imply
that till the date of the order approving the scheme is received, each of the
companies party to the scheme shall continue to comply with the various
provisions of the law, including filing of periodic tax returns, annual returns
and reconciliation statements prescribed u/s 35.

Similarly, section
22(4) provides that any new company which comes into existence in pursuance of
an order of a Court or Tribunal, as the case may be, shall be liable to get
registered with effect from the date on which the Registrar of Companies issues
a certificate of incorporation giving effect to such order.

Therefore, in case of amalgamation /
merger, one needs to take the registration aspect very seriously, to the extent
that upon receipt of approval of the scheme, the application for cancellation
of certificate of registration of the company which ceases to exist in view of
the order, and the application for fresh registration of the company which
comes into existence, is done within the prescribed time limits, and all future
supplies are made / received under the registration certificate of the
continuing company / new company and the use of the GSTIN of the company which
ceases to exist is discontinued with immediate effect.

shailesh.kwebmaker

Sections 11, 12, 139, 148 – A failure on the part of the Trust to file its return of income u/s 139(4A) cannot lead to withdrawal of exemption under sections 11 and 12 – Having filed a return of income u/s 139, subsequently, where a return is furnished in response to notice u/s 148, it replaces the return filed u/s 139, including section 139(4A), and all the other provisions of the Act including sections 11 and 12 are applicable – There was no time limit prescribed for submission of return of income and audit report in respect of a Trust whose income before claiming the exemption exceeded the basic exemption limit Clause (ba) to Section 12A, which prescribes time limit for submission of return of income and audit report to be time available u/s 139(1), is effective from A.Y. 2018-19 and is prospective in its application

23. [2019] 202 TTJ (Del.) 928 United Educational Society vs. JCIT ITA Nos.
3674 & 3675/Del/2017 and 2733 & 2734/Del/2018 A.Ys.: 2006-2007 to 2009-2010 Date of order: 28^th June, 2019

Sections 11, 12, 139, 148 – A failure on
the part of the Trust to file its return of income u/s 139(4A) cannot lead to
withdrawal of exemption under sections 11 and 12 – Having filed a return of
income u/s 139, subsequently, where a return is furnished in response to notice
u/s 148, it replaces the return filed u/s 139, including section 139(4A), and
all the other provisions of the Act including sections 11 and 12 are applicable
– There was no time limit prescribed for submission of return of income and
audit report in respect of a Trust whose income before claiming the exemption
exceeded the basic exemption limit

Clause (ba) to Section 12A, which
prescribes time limit for submission of return of income and audit report to be
time available u/s 139(1), is effective from A.Y. 2018-19 and is prospective in
its application

FACTS

The assessee was an educational society. The
A.O. had received information about huge investments made by the society in
land and building; however, no return of income had been filed. The A.O. issued
notice u/s 148, in response to which the assessee filed return of income
showing ‘nil’ income after application of section 11. There were two sets of
financial statements prepared, one for the purpose of obtaining loan and
another filed along with the return. In view of this, the A.O. ordered a
special audit to be carried out u/s 142(2A). Based on the report of the special
auditor, the A.O. made a computation of the total income of the society by
disallowing the benefit of exemption u/s 11. The income was assessed under the
head ‘Profits & Gains of Business or Profession’ and the assessee was
assessed in the status of an AOP.

Aggrieved, the assessee preferred an appeal
to the CIT(A) who gave partial relief to the assessee.

Still aggrieved, the assessee preferred an
appeal to the Tribunal.

HELD

The A.O. had denied the benefit of exemption
of section 11 to the assessee on account of the fact that the assessee had not
filed its return of income pursuant to section 139(4A). The assessee was a
society which had been granted registration u/s 12A; it engaged in activities
which were within the meaning of charitable purpose, and once so registered,
the computation of income had to be made in accordance with the provisions of
sections 11 and 12.

The fact that the assessee had filed its
return in response to notice issued u/s 148 and not under the provisions of
section 139(4A) cannot be a reason for not granting the benefit of exemption.
Once a return of income is submitted under the provisions of section 148, it
replaces the return filed u/s 139 and all other provisions of the Act,
including sections 11 and 12, become applicable as if it was a return filed
under the provisions of section 139. For a return filed under the provisions of
section 148, the relevant provisions of section 139 have to be applied along
with the procedure for assessment and computation of income, without
restricting it to exclude any procedure. Therefore, the trust was entitled to
claim the exemption u/s 11 in computation of income.

Clause (b) of section 12A mandates that
provisions of sections 11 and 12 shall not apply unless the accounts are
audited and a return is filed along with the audited accounts. Thus, as and
when computation was done these conditions had to be complied with. The issue
of whether or not the return was filed in time is not relevant for clause (b)
of section 12A.

The Finance Act, 2017 has amended section
12A and a new clause has been inserted specifying the time limit in case of such
trusts to furnish their return of income and audit report within the time
specified in section 139(4A). These provisions are prospectively applicable
from A.Y. 2018-19 onwards and cannot be treated as clarificatory amendments.

Note: Clause (ba) to section 12A as inserted
by the Finance Act, 2017 prescribes that the return of income and tax audit
report has to be submitted by a trust within the time provided by section
139(1). Consequently, the ratio of this decision will not apply post
insertion of clause (ba), i.e. for assessment years 2017-18 and thereafter.

The grounds of appeal filed by the assessee
were allowed.

shailesh.kwebmaker

JOSH OF CAN ACHIEVE : A KALEIDOSCOPIC VIEW

Stories inspire generations, have built civilizations and adorn cultures. Stories of valour, imagination, determination, and all that the human spirit is about! As we celebrate 50 years, BCAJ thought of bringing to you such stories – stories of people from diverse backgrounds and circumstances woven together into a colourful Kaleidoscope.

The stories below are of Chartered Accountants. Some did CA and went off running in another direction, chasing their chosen dream. Some belonged to a strong family tradition and yet went ahead to do CA. Some, in spite of ‘the impossible’ staring at them, went for their dream called CA. Some climbed mountains of difficulties every day and jumped off into an orbit of a new life they aspired to lead.

A true celebration is about the Human Spirit. No wall, no resistance, not even time can stop what is bound to happen. We had to write about them in this last issue of the 50th Volume. In these stories we celebrate colours and hues, dimensions and diversity, turbulence and triumph, barriers and dreams. And that is akin to the BCAJ journey. It is said: Man never made any material as resilient as the human spirit (Bernard Williams).

Each story is a unique jewel tied to a common thread of being a proud CA. CA stands for Chartered Accountant, but these stories give it a new meaning of Can Achieve! We hope you enjoy the stories of a vegetable vendor’s son, a third-generation violinist, a rickshaw driver’s daughter topping the exam, a bomb blast victim, five generations of CAs, an illiterate farmer’s son staying in slums to chase his dream and more! That is the JOSH! Hope you enjoy these GOLDEN NUGGETS as we close the Golden Year!

DIFFICULTIES ARE MEANT TO ROUSE, NOT DISCOURAGE

She changed his life for ever

In the late 1990s, there was a man who carried vegetables in a basket on his head and went from building to building in Dadar/Matunga, hawking his wares. He came from an illiterate family and had migrated from Mhow in Uttar Pradesh. He somehow made ends meet and sent his children to the Hindi-medium municipal school near by.

When his eldest son Moti completed his Seventh standard, he had to leave – because there was no further class in that school. The boy got admitted to the Eighth class at Shri Dayanand Balak Vidyalaya, run by the Arya Samaj in Matunga. Still studying in Hindi medium, something snapped in Moti’s mind. He realised that if he wanted to rise above poverty and to live a better life, he would have to get a proper education. Rather than grumbling about the dark, he started hunting for the lamp of knowledge. He searched for the company of the more studious boys who concentrated on their books.

Where could they find the place to study at late hours after school? Believe it or not, in the “gaps between buildings”! In those days, not all buildings had compound walls and there used to be a distance of eight to ten feet (or even more) between buildings. It was in these gaps that the boys sat to study. If there was insufficient light there, they would go across to the nearby garden and sit under the streetlights. His efforts bore fruit and he passed his SSC with 85% marks.

Once this milestone had been crossed, a “Guru Maa” entered his life in the shape of Ms Sulabha Joshi, a teacher. She used to interact with the boy and his family while buying vegetables from them. When Moti told her that he had passed his SSC and wanted to pursue further studies, she took him under her wings. She lived in a bungalow in Dadar and used to give tuitions. She asked him to join her other students. She would not charge him – and, wonder of wonders, she would also teach him English and Maths.

He took admission at the nearby Ruparel College so that he would be close to home and help in the family’s vegetable business. While at college he also did a software course (it was the rage at that time). Things moved very quickly after that. He soon realised that although software was “popular”, it would not be as paying in the long run. Ms Joshi helped him make a decision. As he was good at accounts, he considered doing his CA. He joined S.S. Ganpule & Co. for his articleship and started studying very hard. He passed his Inter at the first attempt; later, due to ill health he lost a year and a half, but he cleared the CA final in 2005.

It has been rather smooth sailing after that. He has worked with several leading companies, including Sharda Worldwide Exports, Bharti Airtel and Tata Power (for eight years) and joined Ion-Exchange (India) Ltd. as Senior Manager (Taxation) in July, 2018.

As the BCAJ spoke to him, Mr. Motichand Gupta said that he is a happily married man today with two daughters and a son; he has moved into a bigger house in Sanpada and lives there with his parents.

How could a person who was facing tough challenges overcome them and emerge successful? When he was finishing school, Mr. Motichand recalled, he realised that if he wanted to improve his station in life, if he wanted himself and also his family to lead a better life, then he had to choose the right path and work hard in that direction.

He could see that the software course that he was doing at that time, even though it was the most popular and sought-after, would not prove beneficial in the long run. He felt it could turn out to be just a fad (as it happened). So right then he chose something that would be longer-lasting and would help lift him and his family and help them lead a better life.

“I could overcome my challenges because I identified my goal and pursued it despite my circumstances, despite ill health and the loss of a year and a half. Finally, I was able to succeed.” Clearly, a firm resolve, accompanied by hard work, helped him overcome all challenges and to succeed.

A THIRD GENERATION VIOLINIST CAN BE A FIRST GENERATION CA

CA is like armour for her

Imagine a little girl growing up in a house where there were only two kinds of sound, birdsong and the notes emanating from the strings of violins. Any other child (especially one of today’s generation) would have covered her ears and stomped out of the house. But this one didn’t. She went with the flow, picking up a violin when she was just three years old and, after a lot of practice and riyaaz, debuted on stage at 8 and gave her first solo performance at just 13. Nandini Shankar, a young, vivacious and outspoken violinist – is also a Chartered Accountant!

Granddaughter of the legendary Dr. N. Rajam, Padma Bhushan and India’s best-known living violinist, she is the daughter of Chemical Engineer Shankar Devraj and ace violinist Dr. Sangeeta Shankar. It goes without saying that her sister Ragini Shankar is also a violinist.

After completing high school, Nandini had to make a decision, should she pursue engineering, medicine, law or something else? At that time, sane counsel (her own, she insists!) prevailed and she decided to go for commerce. It would not take up too much of her time, she would be able to continue her riyaaz and also tour the country (and the world) with her family and other troupes.

In retrospect, it was a very good decision, she says. While studying for and passing her CA in 2016 (she passed all her CA exams at the first attempt), she was also doing her M.A. in Music at SNDT University and passed that in 2017.
But even during those days and nights of books, notes, tests, studies and exams, she seldom missed her riyaaz and was always game for performances both in India and abroad. (Ms Nandini practises Hindustani classical music associated with the Gwalior gharana.)

Soon, Nandini landed a very good job with Kotak Wealth and life seemed settled. But there was something that was gnawing at her. She was in the midst of an existential dilemma. Coincidentally, something else happened at that time – she was offered an appointment to the faculty for music production at Whistling Woods International established by film-maker Subhash Ghai (the Tata Institute of Social Sciences is associated with Whistling Woods which offers a graduate degree in music).

So, three ‘M’s came to describe her life – music, more music and money! Something had to give. Anyone else would have given up music, but Nandini chose to give up money (her profession as a CA) and devote herself to music full time, both teaching and performing.

Nandini told the BCAJ that the best important part of doing CA was that it has given her an “armour”: Now, she says, no one can ever trick her or forage off her so far as money matters are concerned. She knows her money inside out! And it is a great help to a professional like her. Too many of her ilk have been victims of conmen and tricksters. She is immersed in her music today, but what will happen some years down the line? That’s a question to which she has no answer right now.

She says: “CA is academically tougher. It is intellectually stimulating and practising it makes you wiser. Had I not been involved with music and only been a CA, I would probably have done very well because I think I have a knack of interacting with people… Just follow your passion. Find the middle path. It would help CAs if they take a break from their work and turn to the arts, go for painting, dancing, music, theatre or anything to keep their creativity alive. These are natural expressions. CAs can also enjoy the beauty of the arts.”

Since she is associated with a film-making company, would she like a “body double” that would help her to be at two places at the same time – one on the stage giving a recital; and another sitting with balance sheets, P&L statements and the like?

“No, I would love to have a ‘mind double’ so that I can pursue both my careers simultaneously!” Nandini exclaims.

THE HUMAN SPIRIT IS STRONGER THEN ANYTHING THAT CAN HAPPEN TO IT

Tearing their books into two

Almost everybody in the world of Chartered Accountancy knows that Ms Prema Jayakumar, the daughter of an autorickshaw driver in Malad, Mumbai, topped the all-India CA exams conducted by the ICAI in January, 2013. Along with her, Dhanraj, her younger brother aged just 22 then, also cleared the exam. Those with good memories will also recall that she had stood second in Bombay University’s B.Com. exam, scoring 90% marks; that she did her articleship with Kishore Seth and Company in Borivli; and that she also gave tuitions to several B.Com. students all over the city (she usually left home at 6.30 am and returned by 10.30 or 11 at night).

BCAJ spoke to her to find out some interesting details about her which not everybody knows. Soon after the brother-sister duo started studying for the CA entrance exams, they struck up a novel idea to control the cost of their education. Since the books were quite expensive, they tore them into two halves – then, while the sister studied the first half, the brother took up the second half; and then they exchanged their halves. Thus the two managed not to tax their indigent parents too much.

Prema recalls that she and the family faced a lot of hardships while they were studying but they had never complained. Their parents supported them to the best of their abilities, making several sacrifices to ensure that the children were never disheartened. (Their father, Jayakumar, now 60 years old, had come to Bombay from Tamil Nadu in the 1960s and after working in a mill for some time, started driving an autorickshaw to earn a living. Their mother also worked for some time, then started paying full attention to the CAs-to-be.)

After the announcement of the results, several companies were virtually falling over each other to offer her a job. She was keen on working at a bank (preferably at the RBI), and when Indian Bank offered her an appointment letter on the spot, with a choice to work in Mumbai or in Chennai, she gladly accepted it.
Now happily married, Prema lives with her husband in Chennai and recently gave birth to a baby boy. Her parents are back in their village in Tamil Nadu, living a happier life, far from the maddening crowd of Mumbai.

Despite agreeing to a brief chat for this piece earlier, her brother CA Dhanraj suddenly clammed up when it was time to speak. Perhaps it was stage-fright, perhaps it was nerves, or panic, but the young 28-year-old apologised.

One can see that the two siblings overcame massive adversity. And Chartered Accountancy was the result of their efforts and cause of their new life.

THERE ARE TWO WAYS OF MEETING DIFFICULTIES: YOU ALTER DIFFICULTIES, OR YOU ALTER YOURSELF TO MEET THEM

From soil to slum to Sr. GM

Most city dwellers rarely encounter a “son of the soil”. If you are one of them, Mr. Kisan Daule is the man to meet. He is a real “son of the soil” – and a chartered accountant to boot. Here is the story he told BCAJ about his journey. The eldest son of unlettered farmers from Rajuri village in Junnar taluka of Pune district, Kisan could see his parents struggle with the elements, especially the weather gods, to eke out a living and put food on the table; of course, there was no table in their mud hut. But there was a fire in his father’s belly which made him goad his eldest son to somehow get an education (“at least become a graduate,” he said).

Fate decided to lend a hand; but Kisan had to go through the toughest of times before the gods finally smiled on him. He studied at the local Marathi school but after he passed his SSC, he was totally blank. What now? Stumped, he came to Bombay where a brother (working at the CTO on a very low salary) lived with his family in a Wadala slum.

It was July when he came to Bombay and junior college admissions had closed. He was simply turned away. Then he learned about Vikas Night High School in Kannamwar Nagar, Vikhroli. The Principal saw his zeal and gave him admission, even though the first-term exams were already over. Kisan studied like a maniac. Since he was good in accounts, he did very well and passed the XIth, and then the HSC exam with 68% marks.

Kisan recalls that even though he faced enormous hardships, living in a slum, in unclean and contagious surroundings, with no facilities for studies, no peace of mind, no money, no ambition and no encouragement, there were a few people who did help him along. His brother gave him a roof, his brother-in-law gave him some financial help and even the villagers of Rajuri pooled in their resources and sent him some money.

The Principal of Vikas Night School was clearly the “hero” of his story, because he saw Kisan’s resolve and determination and showed him a direction – “go for B.Com.”, he said. The youngster did just that and joined the N.G. Acharya and D.K. Marathe College in Chembur. Although he had already passed away when the youngster passed his HSC, his father’s wish was soon fulfilled and his eldest son became a graduate.

It was then that Kisan met another benefactor, Prof. Ramesh Iyer, Accountancy Professor at the college. Prof. Iyer was impressed by his accountancy skills and suggested that he should become a chartered accountant. Kisan knew absolutely nothing about chartered accountancy. Prof. Iyer explained its salient points and told him to join articleship. So he joined A.R. Krishnan & Co. in 1990.

Kisan recalls his first day at office. He had been told to attend the telephone. Mr. Krishnan himself called from another line, whereupon the new articled clerk picked up the phone and mechanically said, “Mr. Krishnan has gone out.” Mr. Krishnan laughed out loud! After completing his CA, Kisan continued with Mr. Iyer. “My entire growth happened in those seven years (with
Mr. Iyer).”

Destiny beckoned him once again. He joined Transworld Shipping as a junior executive in February, 1998. When he left 20 years later, he did so as Senior General Manager. That, in short, is the story of the man behind K.Y. Daule & Co., Chartered Accountants.

On January 26, 1998, Kisan Daule was felicitated by his old school and the entire Rajuri village for being the first CA from among the real “sons of the soil”. Had his father been alive on that day, he says wistfully, “he would have been the happiest man alive.”

SURMOUNTING DIFFICULTIES WITH A SMILE MAKES HEROES

A continuing miracle

Few people in the community of chartered accountants in Bombay city know that over 80% of the Income-Tax Offices are differently-abled-friendly. They have ramps for wheelchairs, proper ingress and egress for them and, to top it all, they even have a separate parking area for those who drive up in special vehicles. It’s not that they have never bothered to find out, but the truth is that they always took it for granted that there were bound to be arrangements for those not as able as the rest.

As it turns out, it was a pleasant surprise even for Mr. Chirag Chauhan whose mobility is assisted by a wheelchair and who drives a vehicle specially adapted for him when he visits the IT offices whether at Bandra or at Churchgate.

It was a soothing realisation for him. But that is leapfrogging his story by more than a decade. For, it was on July 11, 2006 that he became a victim of the series of bomb blasts in the city’s local trains. Rendered a paraplegic and paralysed below the waist at the age of 21, it was a miracle that he survived. And how! Today, his life is a continuing miracle: He has his own practice in suburban Kandivli; with friends he set up the website which offers innumerable services, such as finding the nearest CA, CS, lawyer, finance or any other professional; answering queries related to taxation, company formation and other needs. This site guides visitors to more than 4,000 CAs and has over 26,000 visitors. Mr. Chirag’s website hosts scores of articles, several of them written by him and neatly and systematically archived.

Interestingly, he recalls that one of his first articles, “How to save tax”, had received more than 35 lakh hits (that’s 3.5 million!) and, in a way, opened his eyes to the immense potential of the internet.

After the blast that has come to redefine his life, he had to struggle hard with his own body which would not heed his commands. But thanks to a loving mother, a devoted sister, a persevering physiotherapist and doctors and friends who would not let him wallow in self-pity (“Why me?” he often asked himself), Mr. Chirag completed his CA. He was with A.J. Shah & Co. at the time of the blast and fondly remembers Ms Nandita Parikh, the first women CA rank-holder in India, who encouraged him to resume his studies.

But that was easier said than done. It took two long years of painful rehabilitation (physical as well as psychological) for him to finally get back to his books. He had already cleared the first two exams (PE1 and PE2). Goaded on by those close to him, he decided to go for self-study and then appeared for the PE3 exam. He passed in the first attempt and became a CA in 2009. And then his life changed once again.

He worked with a CA firm for six months but the daily journey by autorickshaw from Kandivli to Chembur was a dampener, especially during the monsoons. A job switch saw him joining internal audit at Kotak Mahindra Bank. He soon adjusted to his discomforts and, before long, bought a car; he drove all the way to Lonavala, reassessed his abilities and came back convinced that he could live a life quite close to that of anyone else. But… there was a certain restlessness. So he quit his job and started his own practice. He remembers first client – the local newspaper vendor. That man is still his client and he helped spread the word around. His practice started to flourish and today, he says, “I am normal… my work-life balance is perfect.” Touché!

Chirag is active on all social media platforms. He has met the Prime Minister of the country and has over 8,000 followers. But one of the best things about him is that he has an infectious (and sometimes mischievous!) smile.

CAN CA BE PART OF DNA?

Five Generations and Eleven CAs!

Mr. Brij Mohan Chaturvedi, a leading CA practising in Bombay, belongs to a family that boasts of not two or three but full five generations in the same profession. This sounds too good to be true, so he pulls out a chart, complete with names and photographs, and explains the relationship between the generations.

The eldest, the late Bishambar Nath Chaturvedi, was the man who started the trend. He hailed from a family of Sanskrit scholars and was one of the first men from Mathura to do his graduation in English. He became a registered accountant in 1925 after working as an apprentice under one Irani & Co., an audit firm in Delhi. His two sons, the late Amar Nath and Dina Nath, also became CAs. In the third generation, the late Amar Nath’s three sons, Brij Mohan, the late Madan Mohan and Subodh, followed suit. Another of Bishambar Nath’s grandsons (his daughter’s son), Srikant, also became a CA.

In the fourth generation, the late Madan Mohan’s sons, Apurva and Rishabh, did not let down the team and passed their CA. One more CA in the fourth generation came in the shape of Tina Pankaj Chaturvedi (she is the daughter of the late Amar Nath’s daughter).

Finally, the latest. Mohini Gagan Chaturvedi, Mr. Brij Mohan Chaturvedi’s daughter’s daughter, passed her CA final in November, 2017, thus becoming the fifth generation of the Chaturvedi family to take up the profession. Thus, a total of 11 members from the Chaturvedi family are CAs.

No one forced the Chaturvedi boys and girls to do their CA. It just so happened that since the patriarch of the family and his sons were all CAs, the women of the household could see the benefits that the profession brought and came to believe that anyone who did their CA would be assured of a comfortable and respectable life.

As simple as that. Few women of the first and the second generation were well-read, most of them having studied only up to middle school, but they were suffused with great native wisdom. They didn’t want the youngsters to go astray. They would mockingly gnash their teeth and tell the children, “Study! Learn something! Then you will be able to occupy the chair of your father, otherwise you won’t even become office boys!”

Sitting in his plush office at Nariman Point in Bombay today, Mr. Brij Mohan Chaturvedi is proud that his family owns the world record of having five generations in the same profession. This is a record that he claims for himself as a right; it has not been officially conferred by any organisation. He has approached the people handling the Guinness Book of World Records but is yet to receive any certificate from them. Nor has he received any official recognition from the American Institute of CPAs, or the Institute of Chartered Accountants of England or Wales; nor, for the matter of that, from the Institute of Chartered Accountants of India. Almost all of them appear to be prevaricating, claiming that they don’t keep records of their members by way of family trees.

However, that doesn’t deter Mr. Chaturvedi in any way. The cheerful and ebullient gentleman appears incredulous about the fact that he belongs to such an illustrious family and is happy that the Indian media has been kind to him. The claim to fame of his family has been splashed in several newspapers and he is thankful for the coverage as he awaits the official world recognition that he believes is due to his family.

Post Script: Mr. Brij Mohan Chaturvedi claims that although his grandfather, the late Bishambar Nath Chaturvedi, has eleven direct descendants in the profession, at least nine of the children of his brothers and sisters (grandsons, great granddaughters and great grandsons) have also qualified as chartered accountants. That makes a total of 20 chartered accountants in one family.

NOT HAPPY WITH BEING A CA, HE WENT ON TO WIN A NATIONAL AWARD FOR PLAYING THE MAHATMA

Roller-coaster ride for this CA

Life has been a roller-coaster ride for Mr. Darshan Jariwala who has donned many hats during an illustrious career in theatre, films and television. Aged 60 today, he recalls that he bowed before the typical middle-class family’s “goal” to get a good education that would stand him in good stead.

Ironically, he got the CA degree but it seems to have got him neither bread nor butter. Instead, it was his acting prowess that saw him going places and earning some money for jam! He won the 2007 National Award for Best Supporting Actor for playing the Mahatma in the film Gandhi, My Father (2007). Apart from the Mahatma, he also played the eponymous role in Narsinh Mehta, a hugely successful Gujarati television serial. That made him one of the most successful Gujarati actors. Roles in films, on television and the stage chased him and he could pick and choose. He also acted in English films, TV serials and plays.

Born in 1958 into a family with artistic leanings (his mother also did theatre and worked for All India Radio; her brother was the celebrated film star, the late Sanjeev Kumar), he worked in theatre till 1976.

He became a CA in 1983-84 and then branched into financial services and even started practising; simultaneously, he was studying for the company secretary (CS) exam, but never appeared for the final. Along the way, he had a brush with the National Stock Exchange, too.

“But then I realised that I was not cut out for these things. My dalliance with acting was still going on, but it was only as late as in 1998 that I took the decision to concentrate on acting and not to do anything else.” What the world of chartered accountancy lost, the acting world gained.

Actually, he admits, he had burnt his fingers with the other pursuits that he had followed till 1998. The challenge was to resume earning and restore his financial well-being. God was kind to him. Thankfully, work had always been abundant because of his constant association with theatre. And those who valued quality came to him and offered him roles. “It was left to me to make the choice. It has been a good journey since the last twenty years or so.”

Darshanbhai believes that being a CA he is able to approach problems in a more analytical manner and is able to identify the right perspective to tackle them. “I do believe that certain of my faculties have been sharpened because of my doing chartered accountancy… Unfortunately, I never failed. If I had been an academic dud, maybe I would have been happier and a more credible actor than I am right now!” After he gave up all other work to concentrate on acting, he became financially comfortable and had no occasion to regret the shift.

Returning to the world of chartered accountancy, he makes a perspicacious statement when he says that, earlier, CAs were supposed to be watchdogs and not bloodhounds. But now the responsibilities of CAs so far as compliance was concerned had increased manifold. “I have always struggled with that particular credo, ‘certifying the true and fair view’. I think when you talk of fair sense, your personal set of ethics does come into the picture… You have to make the choice, are you going to stick to your charter of probity and maybe starve, or…?”

As Vice-President of the Cine Artistes’ Association (the actor’s union), he points out that many of its members receive their payments only 90 to 115 days after shooting. But in the meanwhile they are supposed to pay (professional) service tax as well as GST soon after raising their bills. They have to make these payments out of their pockets, pending receipt from the respective producers.

“We have started a movement to contact each production house and make them realise that payment has to be made within the GST deadline period. We don’t want to go out of pocket… We are asking producers to pay at least 25% of the invoice value in the first 30 days and the rest in the usual course. They (producers) have also to think about the fate of the technicians. We are willing to listen to their problems, because their broadcasters have to pay them… Perhaps we can do it in a tripartite manner.

“I am actively promoting information about personal tax returns, the Income-Tax Act and so on for our members; information on how to save tax, plan tax… obtain insurance. We have to take care of everything. We are doing workshops on these subjects.”

Darshanbhai says he will wholeheartedly welcome the assistance of the Bombay Chartered Accountants’ Society in organising such workshops.

FROM A BAREFOOT UNDERGRADUATE, TO M.COM., TO CA, TO PH.D., TO TRIATHLON – AND IT’S STILL NOT OVER YET!

We are told Dr. Ravindra Khairnar brought bad luck to the family the day he was born. His father suffered a grievous injury in both hands and virtually lost their use. His father’s brother continued with the family’s small tailoring shop. They lived in a dilapidated house in a poor neighbourhood. Between them, the two brothers had eight children: six daughters and two sons. Feeding all those mouths was not easy.

With his father unable to work, his mother joined Khandesh Mills as a labourer. To make things worse, Ravi’s father often went AWOL. He would disappear for weeks; when he did return, he was of no help in running the household. Ravi had to drop out of school after completing his Fourth standard.

Next to the family’s tailoring shop was a typing class whose owner often asked the little boy to run errands for him. Sometimes, he was asked to mind the shop. The boy fiddled with the typewriters to pass the time. A few years later, someone advised him to appear for the SSC examination externally. He went for it. And after a lot of effort he managed to pass. At the same time, he worked in the tailoring shop for 12 to 14 hours to supplement the family’s income.

And then the first miracle in his life occurred. When Ravi joined high school for the 12th Standard, he wore chappals for the first time in his life. He had been barefoot all his life. He still had little time for his studies. Working the pedal of the sewing machine resulted in his legs getting swollen. But he continued working and studying and finally completed his graduation.

That little typing class next door had both English and Marathi typewriters. Ravi learnt typing on his own and also a bit of stenography. In 1986, immediately after graduation, he got a temporary job as a steno-typist for two years in United Western Bank. But the tailoring continued. Simultaneously, he started preparing for his M.Com. (externally).

That was when the second miracle occurred. He secured the 2nd rank in the M.Com. exam of Pune University in 1988. He was still working at the tailoring shop, enduring the pain in his legs.

By now he was a steno-typist and joined the office of M.V. Joshi, a chartered accountant who shared his office with Mr Desai who was an eminent lawyer in Jalgaon. The lawyer had a great flair for drafting in English and Ravi was always ready with his pencil and notebook. It is another matter that Mr Desai was short-tempered. But that turned into a blessing because although he was scolded even for a minor spelling mistake, it polished Ravi’s English.

Then he learned about a cousin who lived in a slum area in Mulund, Bombay, with his sister. The brother-sister duo had lost their parents in early childhood. The brother had done his CA but one day he suddenly passed away. A relative (who also lived in Mulund) met Ravi at a family function in Jalgaon and suggested that he should try and do his CA.

The young Ravi was sceptical at first. But he saw reason and joined M.V. Joshi, CA, as an articled clerk on a stipend of Rs. 400 (more than the mandatory Rs. 150 per month). He gave up the bank job but did not stop working at the tailoring shop. Mr Joshi encouraged him to appear before the Income Tax authorities for scrutiny and other proceedings. This exposure gave him a lot of confidence.

Ravi could never afford reference books for his studies. He relied only on the study material at the Institute. Many articled trainees in Jalgaon used to attend coaching classes in Pune. But this young man could not do so. His evenings were spent in the tailoring shop.

And then the third miracle occurred, albeit in a round-about way, thanks to his tailoring skill. The family shop was the only one in Jalgaon that stitched coats. Several rich, well-to-do people were among its clients. One of them was a certain Mr Barve who was well connected in influential circles. He observed Ravindra’s struggles and saw how difficult it was for him to study in his dilapidated house.

To aggravate matters, Ravindra was married before his final CA exam and even had a baby girl. Mr Barve invited him to stay in his house at Pune for a month before the exams. Soon, this became a regular feature; he would go to Pune and stay there for a month before the group exam. Incidentally, he had never had even a cup of tea in a hotel before passing his CA! There was just no question of eating outside. He would carry provisions and cook for himself. But he cleared all the groups of intermediate and final CA without failing even once.

What after CA? His principal and benefactor, Mr Joshi, offered him assignments of charitable trusts, schools, etc., which were far from remunerative (such assignments are not remunerative even today!). But Ravindra was thrilled and started his “office” below the staircase of an old chawl in Jalgaon.

Today, miracle number four, Ravindra has a two-storeyed office of his own.

Despite the odds, he has got all his sisters and brother married. The greatest pleasure in his life is that he could build a good house and own a small piece of agricultural land where his parents spend their old age happily. Ravindra also likes farming and his parents are completely contented looking at the achievements of their son Ravindra.

All good stories should end at this point. But that’s not the case with Ravindra Khairnar.

In 2016, he earned a doctorate in taxation from North Maharashtra University, Jalgaon. His Ph.D. thesis is titled, “A study of Public Trusts in Jalgaon District with special reference to Finance and Operations”.

If that was miracle number five, here is the next one.
A well-know social and political leader, Mrs. Pratibha Patil, and her husband were popular figures in Jalgaon. She was a Member of Parliament and he a businessman. Whenever any dignitaries came visiting, they would call Ravindra to lend a helping hand. They had a lot of affection for him.

This was when the sixth miracle occurred. The Patils’ CA was becoming too old to handle work. On learning that Ravindra had already started practising as a CA, they handed over all their work to him.

When Mrs. Pratibha Patil became the President of India, Ravindra took the Western India Regional Council members to meet her. A photograph taken on the occasion appeared on the cover page of the CA journal that month.

But the story continues. And so do the miracles.

Ravindra had developed varicose veins because of his constant work on the sewing machine. As soon as he could, he underwent surgery to alleviate the pain. And then he turned to athletics!

Recently, he completed 9 marathons and the triathlon. In this, participants have to run 21 kilometres, cycle 90 kilometres and swim 2 kilometres in quick succession. Ravindra completed the feat in Hyderabad recently. He is now eyeing the Olympics in the veterans’ category (50 to 60 years). But that is some time away. At present, he has set his sights on representing India in the annual Ironman World Championship organised by the World Triathlon Corporation at Hawaii.

When he completes that championship, that will be miracle number seven. And, Ravindra says, he will then be on seventh heaven.

He is married with a son and two daughters. The elder one, who is doing her CA, is married to a CA
from Thane. But despite all the miracles he has wrought, Ravindra Khairnar still remains a humble, unassuming and low-profile man, always willing to help others.

Kaleidoscopic inputs provided by Ramesh Iyer, Raman Jokhakar, Sanjeev Pandit, Anmol Purohit, Mihir Sheth and C.N. Vaze.

shailesh.kwebmaker

AUDITOR RESIGNATION – PRESCRIPTIONS AND RESPONSIBILITIES

INTRODUCTION

Auditing is the core area of competence of a
Chartered Accountant. Audit of financial statements of public interest entities
such as listed companies, government companies, banks and insurance companies
is an exclusive domain area entrusted to our profession. The underlying trust
in assigning this responsibility to the members and firms (referred to as
“auditor” henceforth in this article) registered with the Institute of
Chartered Accountants of India (ICAI) needs to be preserved by diligent
discharge of our duties associated with such a responsibility. Audit of a
public interest entity should be accepted not merely as a professional opportunity
but with a sense of pride in safeguarding the stakeholder’s interest by
authenticating the financial statements audited. Viewed from this perspective,
it is a matter of concern that during the year 2018 numerous mid-term
resignations by statutory auditors of listed companies (hereinafter referred to
as “auditor”) were reported. No doubt, an auditor is legally entitled to resign
as per law under certain circumstances. However, the large number of
resignations occurring in recent times has become a cause of concern among the
stakeholders. In this article, all aspects relating to an auditor’s resignation
are dealt with for assimilation of the readers of the journal of the BCAS.

CHALLENGING ENVIRONMENT

With the passage of time, business practices
are getting complicated and the environment is quite challenging. New laws
envisaging stringent compliance mechanisms are demanding more time, attention
and cost for enforcing compliance. The business methodologies and practices are
becoming vulnerable to manipulation and the individual value system is
degenerating due to greed, on account of which many frauds and scams are
occurring. Cases of mismanagement and flouting of governance norms are getting
reported in the corporate world, where it is least expected. This also leads to
widening the gap between expectations of the stakeholders as against
performance by an auditor. Beginning with the Satyam case and followed by many
other scams including Nirav Modi’s case associated with Punjab National Bank
and till the current on-going investigation in the IL&FS group cases, the
accountability of the auditor who has attested the financial statements in
those cases has been the subject matter of scrutiny. In the Satyam case, the
auditor was banned by SEBI from auditing listed entities for two years. The
Companies Act, 2013 and the Chartered Accountants Act, 1949 provide for
stringent consequences if an auditor is found guilty in discharging his onerous
task. The Companies Act, 2013 has vested the right of class action suits in favour
of the shareholders posing a threat not only to management but to the auditor
as well. Hitherto, only a signing partner was liable for any consequence for
misdeed, but now, even the firm can suffer the consequences for lapses in the
discharge of the audit function—Section147(5).

LEGISLATIVE AND REGULATORY PRESCRIPTIONS

The provisions of section 139 of the
Companies Act, 2013 deal with the appointment of auditors. Rotation of every
individual auditor after a 5-year term and audit firms after two consecutive
terms of 5 years each is stipulated. The law lays down a procedure not only for
removal but also for resignation of an Auditor. But, either of this can be done
only by adhering to the procedure laid down in The Companies Act, 2013 read
with the Companies (Audit and Auditors) Rules, 2014. According to sub-section
(2) of section 140 of the Companies Act, 2013 the auditor who has resigned from
a company shall file within a period of 30 days from the date of resignation a
statement in Form ADT-3 with the company and the Registrar of Companies. In the
case of a government company or any other company owned or controlled by any of
the governments, the auditor shall also file such a statement with the
Comptroller and Auditor-General of India. The said form, apart from seeking the
basic details about the company and the auditors, requires reasons for
resignation and any other facts relevant to the resignation. Failure to submit
such a statement attracts a levy of penalty of Rs. 50,000 or an amount equal to
the remuneration of the auditor, whichever is less, and in case of continuing
failure, with a further penalty of Rs. 500 per each day after the first during
which the failure continues, subject to a maximum of Rs. 5 lakh.

Based on the
recommendations of the Kotak Committee on Corporate Governance many changes
have been made to the Listing Obligations and Disclosure Requirements (LODR)
and these have been made effective in a phased manner from 2018 onwards. The
changes encompass matters that relate to disclosure of auditor credentials,
audit fee, reasons for resignation of auditors as indicated below:

“The notice being sent to shareholders for
an annual general meeting, where the statutory auditor(s) is/are proposed to be
appointed/re-appointed shall include the following disclosures as a part of the
explanatory statement to the notice:

(a) Proposed fees payable to the statutory
auditor(s) along with terms of appointment and in case of a new auditor, any
material changes in the fee payable to such auditor from that paid to the
outgoing auditor along with the rationale for such change

(b) Basis of recommendation for appointment
including the details in relation to and credentials of the statutory
auditor(s) proposed to be appointed.

In case of resignation of the auditor of the
listed entity, detailed reasons for resignation of auditor, as given by the
said auditor, shall be disclosed by the listed entities to the stock exchanges
as soon as possible but not later than twenty-four hours of receipt of such reasons
from the auditor.”

CIRCUMSTANCES WHEN A RESIGNATION IS WARRANTED

Before accepting an engagement as auditor to
an entity, the auditor is expected to evaluate diligently about the entity, the
scope of the mandate, the resources (time, manpower and competence) available
to execute the audit and then take a conscious call to accept or not to accept
the engagement. After accepting an audit engagement, it is generally perceived
that the auditor would carry out the mandate adhering to the Standards and Ethical
framework governing the profession and issue an audit report with or without
modification. Resigning or withdrawing from an engagement to perform audit of
financial statements without issuing an audit report is an exceptional
situation and therefore needs to be backed by justifiable reasons and should
not be based on flimsy grounds.

An auditor entrusted with the engagement to
perform audit is required to comply with the requirements of SQC 1 in
performing audits, reviews of historical financial information and for other
assurance and related services engagements. As part of this responsibility, an
auditor should establish policies and procedures designed to provide reasonable
assurance that independence can be maintained. The auditor needs to evaluate
circumstances and relationships that pose threats to independence and to take
appropriate action to eliminate those threats or, reduce them to an acceptable
level by applying safeguards or if considered appropriate, to withdraw from the
engagement (Paras 18 & 22). Where the auditor obtains information that
would have caused to decline an engagement if that information would have been
available earlier: In such a situation, the auditor may examine if withdrawal
from the engagement or both from the engagement and the client relationship is
appropriate (Paras 34 & 35).

The overall objectives of the independent
auditor and the conduct of an audit in accordance with Standards on Auditing
are dealt with in SA 200. In case reasonable assurance cannot be obtained and a
qualified opinion in the auditor’s report is insufficient in the circumstances
for the purposes of reporting to the intended users of the financial
statements, the SAs require to disclaim an opinion or withdraw from the
engagement, where withdrawal is legally permitted (Para 12). If an objective in
a relevant SA cannot be achieved, the auditor shall evaluate whether it
prevents him from achieving the overall objective of the audit and then decide
either to modify the auditor’s opinion or to withdraw from the engagement (Para
24).

According to SA 210, agreeing to the Terms
of Audit Engagements, if the auditor is unable to agree to a change in the
terms of the audit engagement and is not permitted by the management to
continue the original audit engagement, the auditor shall withdraw from the
audit engagement where permissible as per law or regulation (Para 17). SA 220
on Quality Control for an Audit of Financial Statements provides that if the
engagement partner is unable to resolve the threat to independence with
reference to the policies and procedures that apply to the audit engagement, if
considered appropriate, the auditor can withdraw from the audit engagement
(Para 11 and A6). Where the applicable law or regulation does not permit
withdrawal of the auditor from the engagement, disclosure shall be made through
a public report of circumstances that have arisen that would have otherwise led
to the auditor to withdraw (Para A7).

If, as a result of a misstatement resulting
from fraud or suspected fraud, the auditor encounters exceptional circumstances
that bring into question the auditor’s ability to the perform the audit, the
Standard suggests the withdrawal from the engagement as one of the options,
subject to following certain procedures and measures — SA 240, the Auditor’s
Responsibilities relating to Fraud in an Audit of Financial Statements (Paras
38, A53, to A56). Again, when management or those charged with governance do
not take the remedial action that the auditor considers appropriate in the
circumstances, even when the non-compliance is not material to the financial
statements, the auditor can consider withdrawal from the engagement if
necessary. If such withdrawal is prohibited, the auditor may consider
alternative actions, including describing the non-compliance in the “Other
Matters” paragraph in the auditor’s report — SA 250, Consideration of Laws and
Regulations in an Audit of Financial Statements (Para A18). In a situation
where the two-way communication between the auditor and those charged with
governance is not adequate and the situation cannot be resolved, one of the
options available to the auditor is to withdraw from the engagement, if not
prohibited under the applicable law or regulation — SA 260 (Revised),
Communication with those charged with Governance (Para A53).

SA 705, dealing with “Modifications to the
Opinion in the Independent Auditor’s Report”, establishes requirements and
provides guidance in determining whether there is a need for the auditor to
consider a qualification or disclaimer of opinion or, as may be required in
some cases, to withdraw from the engagement where it is legally permissible –
SA 315, Identifying and Assessing the Risks of Material Misstatements Through
Understanding the Entity and its Environment (Para A108). Concerns about the
competence, integrity, ethical values or diligence of management, or about its
commitment to or enforcement of these, may cause the auditor to conclude that
the risk of management misrepresentation in the financial statements is such
that an audit cannot be conducted. In such a case, the auditor may consider,
where possible, withdrawing from the engagement, unless those charged with
governance put in place appropriate corrective measures — SA 580, Written
Representations (Para A24).If the auditor is unable to obtain sufficient
appropriate audit evidence, then the auditor is expected to determine the
implications thereof to decide whether to qualify the opinion or to resign. If
the auditor concludes that the possible effects on the financial statements of
undetected misstatements, if any, could be both material and pervasive and a
qualification of the opinion would be inadequate to communicate the gravity of
the situation, the auditor shall resign if not prohibited by law or regulation.
In the event of resignation not being practicable or possible, the auditor
shall disclaim an opinion on the financial statements —SA 705, Modifications to
the Opinion in the Independent Auditor’s Report (Paras 13, 14, A13 to A15).

In a rare circumstance where the auditor is
unable to withdraw from an engagement even though the possible effect of an
inability to obtain sufficient audit evidence due to limitation on the scope of
the audit is pervasive, the auditor may consider it necessary to include in
“other matter paragraph” in the auditor’s report a statement to explain why it is not possible for the
auditor to withdraw from the engagement — SA 706, Emphasis of Matter Paragraphs
and Other Matter Paragraphs in the Independent Auditor’s Report (Para A10).
Similarly, if the auditor concludes that a material misstatement exists in
other information obtained prior to the date of the auditor’s report and the
other information is not corrected after communicating with those charged with
governance, the auditor shall take appropriate action. One option in such a
situation is withdrawing from the engagement, especially when the circumstances
surrounding the refusal to correct the material misstatement of the other
information casts such doubt on the integrity of the management and those
charged with governance as to call into question the reliability of
representations obtained from them during the audit. In case of certain
entities, such as Central or State governments and related government entities,
withdrawal from the engagement may not be possible. In such cases, the auditor
may issue a report to the legislature providing details of the matter or may
take other appropriate actions.

The Code of Ethics requires an auditor to
consider resigning/withdrawing from an engagement when the auditor is able to
conclude that the expectation or requirement envisaged by the Code of Ethics
cannot be fulfilled and there is no other option but to resign. It is also
possible that an auditor expresses inability to continue as statutory auditor
due to overdue past audit fees and disagreement on fees for future services. In
case the auditor cannot legally continue as auditor, then withdrawal becomes
inevitable. There could also be an unavoidable circumstance beyond the control
of the auditor due to which continuing the engagement is ruled out.

TIMING OF RESIGNATION

As the resignation of an auditor from an
audit engagement is not a matter of routine and since it is not a recurring
act, it is difficult to suggest as to when is the appropriate time for
resignation. But considering the immense faith that the various stakeholders
including the regulators and shareholders have reposed on the profession, an
auditor must be abundantly cautious not to exercise this right in a casual
manner and that, too, when the audit is almost complete. Unless the situation
is grave and the circumstances adequately justify it, the resignation option
should be avoided. Instead, a disclaimer of opinion and adequate disclosures on
the circumstances that have resulted in such a disclaimer can be reported.

The ICAI has issued “Implementation Guide on
Resignation/Withdrawal” wherein the following guidance is given in this regard:

“16. The auditor is therefore advised,
particularly in case of listed entities, to comply as below:

(a) In case an
auditor has signed all the quarters (either limited review or audit) of a
financial year, except the last quarter, then the auditor has to finalise the
audit report for the said financial year before resignation.

(b) In other cases, the auditor should resign after
issuing limited review/audit report for the previous quarter with respect to
the date of resignation.

(c) To the extent information is
not provided to the auditor or the management imposes a scope limitation, the
auditor should provide an appropriate disclaimer in the audit report.”

DISCIPLINARY/ REGULATORY PROCEEDINGS AGAINST AN AUDITOR

Even when called in for questioning in a
later proceeding, the auditor should be able to defend with the proper documentation
done and with the audit evidence gathered and maintained prior to issuing the
audit report. It is possible that an auditor is called in the disciplinary
proceedings of the ICAI or in an appropriate proceeding by a regulator such as
SEBI or RBI. The auditor is required to respond and submit in a systematic
manner all the working papers that would explain the execution of the audit
engagement stage by stage, strictly adhering to the SQC 1, SAs and Code of
Ethics. An auditor must demonstrate that in a given situation how a
professional judgement was made based on proper reasoning and prudence and that
any other auditor in the same set of facts and circumstances could not have
reached a different conclusion. In my experience as Chairman of the Disciplinary
Committee of ICAI and subsequently as a member of the Appellate authority, I
have come across cases with simple charges wherein the auditor was held guilty
for want of proper working papers and documentation. On the other hand, there
have been complex cases with serious charges levelled but finally the auditor
was acquitted on the strength of the working papers, audit evidence and proper
documentation which demonstrated that the standard auditing procedure was
meticulously followed and professional scepticism and judgement were duly
exercised.

Even those who sit in judgment on the
professional conduct of an auditor must not judge the conduct based on
subsequent developments pertaining to the entity that have taken place post
signing of the audit report. They must evaluate the case based on the circumstances,
facts and records as were available to the auditor at the time of signing the
audit report and by verifying whether the applicable SAs and Ethical framework
were followed and due professional judgement was exercised. It is easy to hold
anyone guilty in hindsight but that would defeat the very purpose of fairness
and justice while reaching a conclusion on the performance of a professional.
It must also be appreciated that audit is not an investigation and an audit
cannot unearth all kinds of frauds that have been perpetrated upon an entity.
At the same time, an auditor cannot claim protection on this general premise in
all cases of fraud because, if proper audit process is planned and executed
with professional scepticism it is possible to find out certain types of
misstatements arising out of frauds. If a fraud, which could have been
unearthed by following standard audit procedures and exercise of professional
scepticism, was not detected on account of gross negligence or dereliction of
duty, then an auditor cannot defend on the generic ground that audit is not an
investigation. On the other hand, if there are instances of fraud which could
not have been detected even after proper conduct of audit procedure and best
practices then the auditor cannot be held guilty in such a case and needs to be
exonerated.

COMMUNICATION AND DOCUMENTATION

When
circumstances compel an auditor to contemplate resignation from an audit
engagement, he must communicate with the appropriate level of management and,
where appropriate, with those charged with the governance, and, where
considered necessary, inform the circumstances, evaluation on the implications
thereof and the conclusions drawn. The auditor may even seek time from the
Audit Committee Chairman and explain to him the circumstances and seek his
intervention either directly or through the Audit Committee. Once a
communication is so given by the auditor, the management and, where
appropriate, those charged with the governance should respond to the said
communication within a reasonable period of time. Management and those charged
with the governance that are put on notice should also take necessary steps to
remedy the situation and communicate the same to the auditor. The auditor
should evaluate the response received and then review his earlier conclusions
impacting the decision of resignation. Thereafter, either he may drop the
decision to resign and continue with the engagement in accordance with the
Standards and Ethical Code or he may persist with his earlier decision to
resign, in which case he must comply with the procedure prescribed by filing
the relevant Form ADT 3 as indicated above.

The Implementation Guide issued by ICAI
further delineates the effective mode of communication of the resignation and
the relevant portion is given herein below:

“19 Further, the auditor is also advised to
include the following in the letter of resignation, as applicable:

(a) If the withdrawal or resignation results from
an inability to obtain sufficient appropriate audit evidence, the reasons for
that inability;

(b) The possible effects on the financial
statements of undetected misstatements, if any, could be both material and
pervasive;

(c) If the matter is related to a material
misstatement of the financial statements that relates to specific amounts in
the financial statements (including quantitative disclosures), the auditor
should include a description and qualification of the financial effects of the
misstatement, unless impracticable

(d) If the withdrawal or resignation results
from the inability of the auditor/the firm to complete the engagement due to bona
fide reasons;

(e) The fact that the circumstances leading to
withdrawal or resignation from the engagement were communicated to an
appropriate level of management and, where appropriate, to those charged with
governance;

(f) The response from the management or those
charged with governance on the written communication made by the auditor. If
response is not received, state the fact

(g) Prior to resignation, the last
audit/limited review report issued by the auditor.”

According to the Code of Ethics, any auditor
newly appointed by an entity, prior to accepting the position as auditor, is
required to communicate with the previous auditor (clause 8 of Part I of the First
Schedule to the Chartered Accountants, Act, 1949).The objective behind such a
pre-requisite is that the incoming auditor will have an opportunity to know
from his predecessor the circumstances that resulted in the change so that he
can take necessary steps to protect his independence and professional dignity,
besides adopting caution in safeguarding the interest of the stakeholders. In
view of this, the auditor who has resigned should respond to the communication
received from the new auditor promptly, furnishing the reasons that caused his
resignation. The auditor should share a copy of the resignation letter stating
the reasons as submitted to the Registrar of Companies.

The
auditor who has resigned should maintain the relevant documentation in order to
demonstrate compliance with the requirements of the Implementation Guide issued
by ICAI, SAs, SQC 1 and the Code of Ethics for a period of 7 years from the
date of resignation.

Conclusion

No doubt, the present business environment
is transforming into a VUCA world, implying that there is Volatility,
Uncertainty, Complexity and Ambiguity (VUCA)! In such an environment, it is
truly a challenge for an auditor to discharge the duties associated with
assurance and to function by upholding
standards and values as the risk matrix is escalating. Nevertheless, we must
believe that challenges are given only to those who have the ability to handle
them. We must also remember that if one auditor resigns without signing a
financial statement, such financial statement will be ultimately signed by
another auditor, of course, after taking necessary measures and steps to
complete the audit engagement in accordance with the Standards and Ethical
Framework. Therefore, before exercising the right to resign, an auditor should
explore the possibility of due discussion/communication with the management and
those charged with governance so as to secure their support and co-operation
for the smooth conduct of the audit without compromising on independence. An
auditor should also examine the possibility of giving a modified report with a
qualified opinion or adverse opinion or disclaimer of opinion instead of
resigning.

As discussed above the right to resign by following proper
procedures, is vested with the auditor under the law. At the same time, an
auditor’s resignation should not give an impression to the society that there
is an abdication of the duties attached to an audit responsibility. Needless to
say, audit should not be perceived as just an opportunity but it should be
viewed as a challenging responsibility and handled with due care and
caution. A profession like ours owes it
to society to possess the courage of conviction to perform our role as an
auditor in the best interest of the stakeholders in order to establish an
unblemished track record for posterity to inherit.

shailesh.kwebmaker

INTERVIEW – CHAIRMAN AND CEO OF THE INSTITUTE OF INTERNAL AUDITORS

BCAJ interviewed Mr. Naohiro Mouri [NM], Chairman and Mr. Richard Chambers [RC], Gobal President & CEO of the Institute of Internal Auditors, USA (IIA). In the following pages we present excerpts from the full interview. The aim of the interview was to understand individual stories and experiences of these two professionals and also to get a perspective on the emerging global internal audit canvas.

In this interview Mouri San and Richard speak to BCAJ Editor Raman Jokhakar and Nandita Parekh about their life experiences, their understanding of the Internal Audit profession around the world, corporate failures and role of internal audit, rebranding internal audit, future competencies, millennial generation and the profession of internal audit.

If you can recall and share your early professional journey and share with us 2 or 3 career milestones/experiences that shaped you? What is it that made you commit to a career in Internal Auditing and what other options did you consider?

(NM): I did not originally want to become an internal auditor. I started as an external auditor. I studied accounting in school and my career path was to become a CPA and then getting into one of the external audit firms. I passed CPA, and I became an auditor with Arthur Andersen. I thought it was the greatest profession in the world. But, as the second year passed, I became senior. Come third year, I was feeling a little complacent.

I started looking outside and took an offer to become a controller of a French bank operating in Tokyo, to replace someone who was to retire. I had no prior banking experience. So I went in and the bank was gracious enough to put me through two months’ training across different parts of the bank such as trading, settlement, credit, finance and compliance, legal etc. After two months, my boss called me up and said, “Mouri, your training is about to finish. But, the gentleman who is supposed to retire, decided not to retire. You have two choices. You either have to leave the bank or you start the internal audit department”.

I was very happy doing what I was doing, I did not want to leave the bank. So, I decided to just become the internal auditor and that was actually the beginning of my internal audit career. It turned out that it was the best opportunity for me because internal audit is different in each and every engagement. I’ve changed organisations – from French Bank to German Bank to American Bank and now I’m in insurance. But I have always been in internal audit and it always just excites me every day coming into the office.

(RC): You asked for two or three kinds of milestones that then ended up shaping the course of my career. And so, what I’ll probably do is sort of fast forward.

I came out of college and went into internal audit 43 years ago. So I have been in this profession for a long time. I worked in the US government – I was an auditor for over 20 years for the army – civilian auditor of the US Army. Then I spent some time in the US Postal Service where I was a Deputy Inspector General and then the Inspector General of the state-owned company The Tennessee Valley Authority, which is the largest producer of electricity in the United States. And then I had the opportunity to retire rather young. I was 47 years, and I took a retirement, had an opportunity to do that because of some wrinkles in the law governing civil service employment in the United States. So that was a really important milestone because at that point, I had to decide what was I going to do with the rest of my life because while I retired, I knew it was really more of a career change.

The President of the IIA at that time was a gentleman named Bill Bishop, who was quite an icon in the history of the IIA and he convinced me that I come to Florida and work at the IIA sort of the equivalent of the Chief Operations Officer. First, I was a little reluctant because I thought, okay, I have been in government. I am not sure, I want to go into a not-for-profit Association. But he was very persuasive. So the next thing I knew, we packed up and moved to Florida and I joined the IIA. That was in the year 2001. Three years later, he passed away very suddenly. It was a sad time for IIA. But it was time for me to think about doing something different and so, I took a reverse career path. Most people come out of college with an accounting degree like Mouri and they go into the public accounting field and then maybe later, they do internal audit. I spent my life doing internal audit and then, when I was 50 years old, I joined PwC. I spent five years with PwC in the United States and became the national practice leader for internal audit advisory services which was part of the internal audit practice that PwC had. So, that was the second milestone.

And then the third one was, at the end of my time at PwC, the IIA Board asked me to come back as the CEO; that was 10 years ago. So, I was back in the role of being a leader in this profession along with our Chairman. I served as a spokesman for IIA and a champion for internal audit in the world. So those are three milestones that just sort of jumped out at me, that sort of say – how did I get from there to here.

Richard, this questions is for you. You have been a prolific writer, speaker, two books, blogs for eight – nine years now, videos. How did you develop this art of communicating and being, sort of, the cheerleader for the profession of internal audit? And, being so disciplined to be able to publish week after week.

(RC): Actually, next month will be the 10th year that we put in the blog. So it’s been quite a journey. The last time I looked, we were already over 400 blogs since we started. When I wrote that first blog in February of 2009, I remember it was about the crisis, the impact of the financial crisis on internal audit. And I don’t think, I said then to myself, I am doing something that I will be doing for the next decade. But what I found was that members of our profession around the world starve for very contemporary, informal, short, digestible perspectives on things that are going on… Last year, I think, the blog was read more than 250,000 times. So it is an important way to communicate in the 21st century and then if you take the blog and leverage on social media, it has a wide reach and readership.

The books, I don’t know that I really ever expected I will write a book.

But way back in 2013, the Internal Audit Foundation, our publishing arm, came to me and said, you know, your blogs have been very popular, why don’t you share some perspectives via a book. I thought, I don’t know what I have to really share? But then, I started thinking that I have the privilege of being in this profession for 40 years. I started thinking what really I have to do, is a sort of package of these major lessons I have learnt in the course of 40 years into a book. We called it Lessons Learned on the Audit Trail. We published it and that is a very popular book. Then a couple of years later, the Internal Audit Foundation sensing that the first book had gone really well, came back and said “Would you write another book” and that is how this one – the second book, the Trusted Advisors book came about. I really sort of picked up where the first book left off (because I concluded “Lessons Learned on the Audit Trail” by talking about what does it take to be a Trusted Advisor in the 21st century).

After the book “Lessons Learned on the Audit Trail” was published, I really started reflecting and I thought that I had over-simplified the message about what does it take to be a Trusted Advisor. So we went back, we did some research, we gathered perspectives from Chief Audit Executives around the world and then we put this second book together “Trusted Advisors”, which was even more popular than the first.

We are now in the process of refreshing the first book “The Lessons Learned on the Audit Trail” because the last five years have taught us a lot about the speed of risk and how risk dynamics can change everything that an internal auditor needs to focus on. So the title of the refreshed edition is the Speed of Risk: Lessons on the Audit Trail. So we go back and we talk about some of those lessons that we explored in the first book and we overlay on it the impact that a dynamic risk environment has. We talk about auditing culture, we talk about the importance of innovation and how do you audit. It has been in process. That book will be out in March 2019.

The image of an internal auditor is often perceived to be uninspiring. How do you feel this image that people perceive should undergo a makeover? Is there anything that’s happening in this direction?

(RC): Oh! I think it starts with those of us in the profession. You know, like every profession, there probably are stereotypes about internal audit. But again, you can go to a lot of companies and they don’t see those stereotypes at all because their internal audit is alive, it’s vibrant, it’s dynamic, gets involved, engaged in all the key risks of the organisation. So I think, it’s up to each one of us in this profession worldwide, to make this profession not only meaningful for us but to be able to convey what the potential and the opportunity is, so that our boards and management and even the people in the organisation who are audited, begin to appreciate what internal audit really is. It has evolved, it’s gone beyond the bean counting. I say in the 21st century, we have to know how to do more than count the beans. We have to know how they’re marketed, how they’re grown, how they’re harvested, how they’re marketed, to know everything about the life cycle of beans. We have to know how they’re marketed, how they’re grown, how they’re harvested, to know everything about the life cycle of beans. And we have to be able to convey that in a way that gets people excited.

So, related to this, is a question – Does the name “internal auditor” do any disservice to the profession because there is a connotation of an auditor primarily being an accountant? The impression is that internal auditors are an extension of the accounting profession. There have been attempts to rename the profession as risk advisors or risk professionals or GRC professionals. Any views that you have – what is there in a name or how does it matter?

(NM): I have my personal view on this originally. To me, the name convention doesn’t really matter. What matters is what we do. Even if you are called internal auditor, if you are actually being very innovative, if you are providing value to your board or the committee in the senior management, doesn’t really matter to them. I have seen different name conventions like management reviews, the audit and risk reviews and different connotations. But you know, at the end of the day, if you are actually doing what is considered as bean counting, as opposed to helping the business, protecting the organisation, being strategic, being innovative, trying to do more with less, they will actually see it through, no matter how it’s called. So that’s just my opinion about the name convention.

(RC): I agree100%. I mean, you could change the name of an airline pilot to aircraft navigation engineer but it’s still an airline pilot, right? I think, what we really need to be doing is – we need to be focusing on what does it mean to be an internal auditor. You simply say, we are going to rebrand what we do, not rebrand who we are. But we are going to elevate the level of service that we provide. So I would like to think where we are going to be the Apple of the future.

Coming to internal audit, unlike in statutory audit or an external audit, there is no legal mandate to have an internal audit. Do you think this is an impediment to the work of an internal auditor? Should there be legal force given to the position of an internal auditor?

(RC): IIA has taken the position and I happen to personally agree strongly with that, that licensing of internal auditors, somehow creating a licensed profession, is not really in the best interest of the organisations. We very rarely find any statutes or regulations that license the person who’s the CFO in the organisation or license the other professionals, Chief Risk Officer and others. Organisations, particularly publicly traded organisations or corporations, I think should be free to decide how to manage their affairs, without the long arm of government reaching in and saying – No, here’s what you have to do – here are the credentials or the skills or the qualifications. Now, we were very big proponent of listing agencies, stock exchanges, and others saying – if you’re going to be traded on an exchange, you need to have an internal audit function. I don’t think we have a problem, even seeing government regulations saying that organisations and companies should have an internal audit function. But it’s getting into it, it’s sort of mandating, who can do it and who can’t and what qualifications and credentials, because I have seen how that gets stuck in the past. If we had something like that 20 years ago, it would be mandating that in order to be internal auditors, you have to be accountants and yet today, only a fraction of what internal audit does, has any relationship to accounting. So I think, the profession needs to be live and to evolve and companies should be free to decide how they’re going to resource it.

(NM): Internal audit is a management tool to self-regulate itself, self-correct itself, find the problem by your own and correct it so that companies’ sustainability is maintained. It is a wonderful training ground for anyone who actually wants to learn about organisations – how they make money, how they lose money, what is the control that needs to actually exist. So, a number of companies use internal audit to actually put people in for training for few years and put them back to the business, to take more senior level roles. Such free flow of people is important for internal audit and for the organisation.

You know, as the world around us is changing, the competencies and skill sets that internal auditors need to own has changed tremendously. So, what are the few things that the future internal auditor must add to his bucket of competencies, to remain relevant. I am talking of survival, I am not even talking of success.

(NM): So, future is now already and this is one of the Richard’s comments. I took it from his slide. But not just the internet, now everything is on smart phone. No one goes to the bank branch anymore. Banking transactions to travel booking to buying insurance, everything is done by phone and laptop! How do we actually deal with this situation as an internal auditor?

First, you have to be extraordinary and able to work across the organisation. Earlier, there were IT auditors (called EDP auditors) and Business Auditors and Financial Auditors within internal Audit. Now the lines have been blurred because there is no process existing without technology. Thus, today’s internal auditor needs to operate across all areas, technology being an important skill to have.

Facilitation skills, because audit is all about Listening, Thinking, and Communicating. So, you have to really facilitate the conversation that goes on. And in many organisations, once you start to incorporate self-assessment process as part of the audit process, you have to facilitate the discussion. When you talk about the agile process, the scrum meeting – you have to actually chair the scrum meeting and bring the information now from your auditee or risk management or compliance, legal, finance. All this actually helps to make the internal audit better, right? So that is the second characteristic or the skills you need to have – facilitation skills.

And finally, analytical ability of course, to think in-depth about what is the root cause of the problem? Why is it happening? Because if you don’t actually get the root cause right and if you just remediate superficially, the problem will come back. We don’t want that to happen because we actually embrace remediation. We need to kill that root cause and then move on. So those three things that I would actually think, that’s really the skill sets necessary,

(RC): I speak a lot these days about the importance of internal auditors being able to provide foresight. The profession, the origins of internal audit was totally behind – in the past. What happened last year? Were the records maintained correctly? Were controls adequate? But it was in the past.

Then as the profession evolved, we became more adept at talking about the present. Okay. Here are things that we see now, that need to be corrected. But as I look to the future, we are really going to have to be able to look to the future because the things that happened yesterday are yesterday, they’re not the things that we seek. I spoke earlier this week and I said, you know, you seek out experts for the future, not for the past. So I think, internal auditors as a profession and as individuals are going to have to become much more adept looking forward. We speak a lot about what are the threats that artificial intelligence presents to our profession. I often say, if you’re only providing hindsight, that’s something artificial intelligence can easily do. If you are only providing hindsight and insight, you are still likely threatened by artificial intelligence and some of the other technology that’s coming. The things that will make it more difficult for you to be disintermediated, are your ability to leverage your professional knowledge, your professional judgment and to give the organisation perspectives about what the future holds.

This question is about recent corporate failures and the role of internal audit. Couple of lessons that both of you may want to share for the internal auditors, seeing what has happened in the UK, in Europe, and of course, America, and closer home to IL&FS in India – Anything that internal auditors need to wake up to and learn from?

(RC): I shared my message this week and I talk about it a lot. The five scariest words in the English language are “where were the internal auditors?” And it almost always comes when there’s a major scandal or collapse or calamity. It may have nothing to do with the internal auditors. But somebody will ask a question and say, well, where were the internal persons?

First of all, I would say internal auditors can audit anything, but they cannot audit everything. Okay? So we always need to keep that in mind that it is perfectly plausible that a big collapse or scandal or fraud can occur. That internal audit was focusing on all the right things and just didn’t see it. I mean, we cannot audit everything unless you’re willing to give us thousands of people. Study after study has been done looking at what contributes what, which risks are the most lethal when it comes to shareholder value. It’s not financial risk. People think, Oh! well – financial reporting fraud is what kills companies. It’s not compliance risks. Those risks together account for fewer than 20% of decline in shareholder value. It is strategic risks, it is business risks, sometimes even operational risks. it is companies that don’t see what’s coming ahead. And that is where I think, get back to internal audit, being there to help the management identify what are the things that could cause the failures and the calamities to occur. Now, some of the examples you find in Europe and others elsewhere. Some of those were compliance failures, some of those were frauds that occurred. But you know what, if you look deep enough, you’re going to find that it was culture, it was culture in the organisation. It was culture in the organisation that caused the compliance failures or the fraud or all the other things that took the company down. The compliance failure or the financial reporting fraud was symptomatic of a bigger issue. And that’s where internal audit always has to have insight.

There is a lot of talk about engaging with the millennials, the younger minds. As a profession, how would we attract the most creative, the most difficult to engage with talent within the profession?

(NM): Please watch my video, it is for you millennials. Because we were trying to make it very simple, trying to relate to building the career by using the analogy of constructing the building. So, it was actually, essentially targeting for millennials, to really understand the concept of, how important the standards are, how important that certification programme is, in what sort of thing that internal auditors do? So, please watch my video.

(RC): In the interest of time, let me just say, we over-analyse sometimes what differentiates generations. I think, millennials are a lot more like baby boomers of my generation than they are different. I think, we have a lot of the same kinds of the interests. I can tell you, we were very ambitious too. When I was a young adult, people of my generation felt like we should own the world. I think, that’s a natural kind of phenomenon. One of my daughters falls into that millennial category. These are people that are motivated by a purpose. They don’t just want a job for money, they want a purpose. There’s no greater opportunity to serve a purpose than to be an internal auditor and to exercise your craft to make things better. So I think, millennials will be attracted and are being attracted to internal audit. And I think that’s something we will continue to work on.

(You can see the unedited interview on the BCAS You Tube channel.)

shailesh.kwebmaker

52ND RESIDENTIAL REFRESHER COURSE (RRC) — THE KUMBH OF KNOWLEDGE

The calendar year 2019 started on a high note with the Residential Refresher Course of The Bombay Chartered Accountants’ Society being experienced in its 52nd ‘avatar’ at Agra from the 3rd to 6th January, 2019. The pioneering flagship event of BCAS is in the truest sense – an annual pilgrimage for CA practitioners. The two-pronged differentiators of a) being an acknowledged knowledge platform and b) being relevant with changing times, has been the hallmark of BCAS-RRC for the last six decades.

The edge of knowledge was at its fullest display at the 52nd edition. The depth of technical content, the multi-faceted integrated approach to burning issues, the experience of professional stalwarts and the actionable knowledge insights, ensured the participants remained in a ‘state of awe’ throughout.

The BCAS-RRC platform has also been a close witness to the changing landscape of the accountancy profession since the RRC was first introduced. The format has consistently evolved itself to stay relevant and continues to add maximum value to its participants in contemporary times. The mere survival of the idea for six decades, is in itself a testimony to the adaptiveness and spirit. The 52nd edition continued its evolutionary journey and many ‘firsts’ were experienced. A four-and-half hour panel discussion on integrated issues, full-day presentation papers on Practice Management, video insights by internationally renowned practice management gurus, networking session for youth members were some of the most-appreciated ‘firsts’.

The auspiciousness of lighting the lamp kick-started the proceedings with opening thoughts by President BCAS, CA. Sunil Gabhawalla and Chairman, Seminar and Membership Development Committee, CA. Narayan Pasari. The tone for the next four days was firmly seeded in this address by the President and the Chairman. A galaxy of Past Presidents of BCAS graced the opening session.

Swiftly after announcing the inauguration of the RRC, the participants experienced a superlative panel discussion on Contemporary and Burning issues with a 360-degree perspective on Direct Tax, Indirect Tax and Accounting. The panel discussion was curated in the form of case studies that were posed by Moderator and Past President CA. Chetan Shah along with President CA. Sunil Gabhawalla to the three elite panellists being CA. Pradip Kapasi (Past President BCAS) dealing with direct tax aspects, Adv. K. Vaitheeswaran dealing with indirect taxes and CA. Sudhir Soni dealing with accounting aspects. The holistic approach of the panel discussion covering three subjects left the participants satiated to a great extent but at the same time they had the urge to imbibe more. In the words of CA. Nina Kapasi, it was truly a ‘Triveni Sangam of Gyan’.

The second-day promised to be a blockbuster day with the entire day being dedicated to Practice Management. With razor sharp focused topics, the day lived up to its expectations and enabled participants with ‘How-to-do and What-we-do’. The day was modulated into various sessions each dealing with a specific aspect of (i) Client Servicing being facilitated by CA. Vaibhav Manek, Technology and Human Resources being briefed by Past President CA. Ameet Patel, Networking and Mergers by Past President CA. Shariq Contractor, Succession Planning by CA. Nilesh Vikamsey and Ethics by none other than CA. Jayant Gokhale. The five stalwarts akin to ‘pandavas’ ably bridged the multi-faceted domain of Practice Management and opened the minds of the participants to newer ideas and reinforced the values that practitioners needs to stand by. International experts Mr. Lee Frederiksen and Mr. August Aquila also shared their insights on topics through a video snippet. These 6 sessions were chaired by our regular participant CA. Nilima Joshi and Past Presidents CA. Mayur Nayak, CA. Narayan Pasari, CA. Rajesh Muni, CA. Pranay Marfatia and CA. Ashok Dhere. The participants unwinded the day with singing and live karaoke.

The third-day was vintage direct tax group discussion on case studies with paper writer CA. Milin Mehta stirring the thought-process of the participants with immersive case studies. The session was chaired by Past President CA. Anil Sathe. The presentation paper on recent developments in auditing and accounting was presented by CA. Khurshed Pastakia. This session was chaired by Vice President CA. Manish Sampat. These sessions were chaired by Vice President CA. Manish Sampat and Past President CA. Anil Sathe. The day also allowed participants to visit the famed Taj Mahal and bask in glory of India’s history. Participants networked at the Taj while being awestruck with the monument and framed themselves in a lot of group pictures. Memory will be etched for a long time.

The ultimate day came to be calling with a focused group discussion and paper solving in Indirect Taxes by paper-writer Adv. V. Raghuraman. The session was chaired by Past President CA. Deepak Shah. A presentation paper by CA. Anup Shah on succession and estate planning was cherry on the cake. This session was chaired by our regular participant CA. Phalguna Kumar.

The closing session ended by Vote of Thanks to the Speakers, Participants, Hotel Management, the BCAS Staff, and of course the members of the organising team of the Seminar & Membership Development Committee who worked on this event over last 8 months and made it perfect for the participants at Agra. Chairman CA. Narayan Pasari invited the new participants at the RRC to share their insights and their experience to the audience where they described about the knowledge they gathered over the four days and how warmly the BCAS RRC was.

Past President CA. Uday Sathaye, while speaking at the vote of thanks, praised the history of Agra and the remembrance of RRC with his superlative poem in Hindi. The Kumbh of Knowledge has turned a chapter and the
quest for excellence continues until we meet next at the 2020 RRC.

shailesh.kwebmaker

THE LIGHT ELEMENTS

Always India

Saffron, white and green,

What does it, to you, mean?

You must be proud,

Shout out aloud,

Ye Indians arise,

Let’s reach for the skies

All you gals
and guys!

There will always be an India,

While there are village lanes,

Wherever there are grazing deer

Or noisy,
jam-packed trains!

There will always be an India,

While there’s a crowded street;

Wherever there’s a saint and seer

Or dirt and dust
and heat!

We shall, ere long, have an India,

Where all can read and write;

Let’s vow to lead them, now and here,

From darkness
into light!

Let’s look forward to an India,

Where drunkenness is past;

Gulp down your fruit-juice, not your beer

To break your
morning fast!

Very soon, we’ll have an India,

Where the people are well fed;

Bidding goodbye to yesteryear:

With none hungry
to bed!

There will, one day, be an India,

Where disease is abolished, and,

right from the womb to the bier,

its nationals
well nourished!

One day, we shall have an India,

Which is aglow with health,

Where no one has any idea

Of an untimely
death!

There will always be an India,

Her people well clad and shod;

In all their doings, most sincere

Protect them all,
dear God!

There will always be an India,

Where oppression is dead;

Where the people laugh, from ear to ear,

With a roof above their head!

Before long, we’ll have an India,

Where unemployment’s gone;

With factories working in top gear,

And fields
bursting with corn!

We’ll, very soon have an India,

Where discipline pervades;

There’s something in the atmosphere,

So that
lawlessness fades!

There will, one day, be an India,

Where lawbreaking’s outlawed;

No doubt, it does sound very queer,

So, help us all,
oh Lord!

There will always be an India,

Democratic to the core;

Of tolerance the pioneer

And for all, an open door!

At all times, we’ll have an India,

Secular in each pore,

Outshouting the communal jeer

With an almighty
roar!

There will always be an India,

And India shall succeed;

With people, hailing from front and rear,

Of every caste
and creed!

There will always be an India,

United we’ll remain;

All communities will cohere

To seek their
common gain!

There will always be an India,

And harmony subsist;

No one can, at all, engineer

A conflict in its
midst!

There will always be an India,

Where amity shall reign;

Whether you are a mountaineer

Or living in the
plain!

There will always be, in India,

A pluralist structure,

From Kanyakumari to Kashmir

A well-blended culture!

There will always be, in India,

Different ethnic groups composed,

Ever ready to Volunteer

To Share Each other’s woes!

There will always be an India,

Cosmopolitan in mould;

But, all throughout, you’ll overhear:

“We’re one in the national goal!”

There will always be an India,

Non-violent we shall stay;

A quality we will revere

Along life’s crowded way!

May there, one day, be an India,

With poverty banished,

Where life has ceased, to be severe,

And destitution vanished!

There will always be an India,

And India shall progress,

If we resolve, this very year,

To ban all strife and stress!

There will always be an India,

And India shall flourish;

With peace and plenty, far and near,

As much as you can wish!

We shall shortly have an India,

Sweet-smelling as a rose;

That scene will, very often, appear,

Where milk and honey flows!

There will, one day, be an India,

Where hard work is the norm;

We’ll show the whole world that we are

A people that can perform!

There will always be an India,

Where good faith counts a lot;

In work, you can’t be insincere

But give it all you’ve got!

There shall, ere long, be an India,

With waste down to zero;

Where he, who leads the life austere,

Is the nation’s real hero!

There will one day, be an India,

Where dues are paid on time;

No sum remaining in arrear

Right to the smallest dime!

Ere long, we shall have an India,

Where corruption’s absent,

Where payments made are not 2-tier

And everything upfront!

There will always be an India,

Where charters we have signed

That, to principles, we shall adhere

To benefit
mankind!

There will always be an India,

Where truth shall hold its sway,

A land where you’ll constantly hear:

“Satyam eve
jayate”!

There will always be an India,

With honesty at heart,

And nothing causing it to veer

From the straight
and narrow path!

There will always be an India,

Its integrity unstained;

Our honour we shall ne’er besmear,

But keep it well
sustained!

There will always be an India,

Its people, so simple and kind;

No sophisticated veneer

And with no axe to grind!

There will always be an India,

Hospitably inclined;

E’en the poorest keen to feed ya

Though they
themselves haven’t dined!

There will always be, in India,

People generous to a fault,

Who , like Santa Claus’s reindeer,

Give gifts at
every halt!

There will always be an India,

With goodwill everywhere;

No mud, another’s face to smear

Just genuine,
heartfelt care!

There will always be an India,

Where joyousness you’ll find;

Where misery is just a mere

Invention of the
mind!

There will always be an India,

Where merriment abounds;

Where the people couldn’t be happier

And smiles
outnumber frowns!

There will always be an India,

Where human rights rank high,

Where none may treat them with a sneer:

All must, with
them, comply!

Reproduced from BCAJ, 2001

shailesh.kwebmaker

ACCOUNTING OF DIVIDEND DISTRIBUTION TAX

Started as “Accounting Standards” in
August, 2001. Dolphy Dsouza was the first contributor and had at that time
“agreed to write a series of eight articles on AS 16 to AS 23”. However, till
date – to the joy of the readers – continues as the sole contributor giving the
most important aspects of accounting standards. The feature got a suffix to its
name in July, 2002 – gap in GAAPs – and was called “Accounting Standards: Gap
in GAAPs”. Since the arrival of Ind AS it is renamed as at present.

This monthly feature carries
clarifications, commentary, comparison, and seeks to clarify about accounting
concepts and practices. The author says, “Accounting was never a debated topic
in India as much as tax is. Hopefully, my feature has a small hand in bringing
accounting to the centre stage” He shared another secret benefit: “People know
me because they have seen an unusual name in the BCA Journal for the last 18
years. I once even got a hefty hotel
discount, as the hotel owner was a CA and an avid reader of the BCAJ!”

ACCOUNTING OF DIVIDEND DISTRIBUTION TAX

Prior to 1^st June, 1997,
companies used to pay dividend to their shareholders after withholding tax at
prescribed rates. The shareholders were allowed to use tax deducted by the
company against tax payable on their own income. Collection of tax from
individual shareholders in this manner was cumbersome and involved a lot of
paper work. To make dividend taxation more efficient, the government introduced
the concept of dividend distribution tax (DDT). Key provisions related to DDT
are given below:

(a) Under DDT, each company distributing dividend
needs to pay DDT at stated rate to the government. Consequently, dividend
income will be tax free in the hands of shareholders.

(b) DDT is payable even if no income-tax is payable
on the total income, e.g., a company that is exempt from tax on its entire
income will still pay DDT.

(c) DDT is payable within fourteen
days from the date of (i) declaration of any dividend, (ii) distribution of any
dividend, or (iii) payment of any dividend, whichever is earliest.

(d) DDT paid by a company in this manner is treated
as the final payment of tax in respect of dividend and no further credit
therefore can be claimed either by the company or by the recipient of dividend.
However, dividend received is tax free in the hand of all recipients (both
Indian/ foreign).

(e) Only dividend received from domestic companies
is exempt in the hands of recipient. Dividend received from overseas companies
which do not pay DDT is taxable in the hands of recipient, except for the
impact of double tax relief treaties, if any.

(f) No DDT is required to be paid by the ultimate
parent on distribution of profits arising from dividend income earned by it
from its subsidiaries. However, no such exemption is available for dividend
income earned from investment in associates/ joint ventures or other companies.
Also, no exemption is available to a parent which is subsidiary of another
company.

DDT accounting under Ind AS 12 involves
certain issues. The most important issue is that for the entity paying
dividend, whether DDT is an income-tax covered within the scope of Ind AS 12?
Will DDT be an equity adjustment or a P&L charge or this is an accounting policy
choice?

Consider that in the structure below,
company B distributes dividend to its equity shareholders, i.e., company A and
pays DDT thereon.

For DDT accounting in SFS and CFS of B, one
may consider paragraphs 52A/ 52B and 65A of Ind AS 12.

“52A In
some jurisdictions, income taxes are payable at a higher or lower rate if part
or all of the net profit or retained earnings is paid out as a dividend to
shareholders of the entity. In some other jurisdictions, income taxes may be
refundable or payable if part or all of the net profit or retained earnings is
paid out as a dividend to shareholders of the entity. In these circumstances,
current and deferred tax assets and liabilities are measured at the tax rate
applicable to undistributed profits.

52B In
the circumstances described in paragraph 52A, the income tax consequences of
dividends are recognised when a liability to pay the dividend is recognised.
The income tax consequences of dividends are more directly linked to past
transactions or events than to distributions to owners. Therefore, the income
tax consequences of dividends are recognised in profit or loss for the period
as required by paragraph 58 except to the extent that the income tax
consequences of dividends arise from the circumstances described in paragraph
58(a) and (b).”

“65A. When
an entity pays dividends to its shareholders, it may be required to pay a
portion of the dividends to taxation authorities on behalf of shareholders. In
many jurisdictions, this amount is referred to as a withholding tax. Such an
amount paid or payable to taxation authorities is charged to equity as a part
of the dividends.”

One may argue that DDT is in substance a
portion of dividend paid to taxation authorities on behalf of shareholders. The
government’s objective for introduction of DDT was not to levy differential tax
on profits distributed by a company. Rather, its intention is to make tax
collection process on dividends more efficient. DDT is payable only if
dividends are distributed to shareholders and its introduction was coupled with
abolition of tax payable on dividend. DDT in substance does not adjust the
corporate tax rate, and is a payment to equity holders in their capacity as
equity holders. This aspect is also recognised in the IASB framework. Thus, DDT
is not in the nature of income-taxes under paragraphs 52A and 52B. Rather, it
is covered under paragraph 65A. Hence, in the SFS and CFS of company B, the DDT
charge will be to equity. The Accounting Standards Board (ASB) of the ICAI has
issued a FAQ regarding DDT accounting. The FAQ confirms this position with
regard to accounting SFS and CFS of company B. However, this position is very
contentious globally and there is a strong argument to treat DDT as an
additional tax in substance. Therefore, though there is no difference in the
Ind AS and IFRS standard on DDT, the practice applied in India may be different
from the practice applied globally.

In the SFS of the company receiving
dividend, i.e., company A, net dividend
received is recognised as income. In CFS of company A, there is no dividend
distribution to an outsider. Rather, funds are being transferred from one
entity to another within the same group, resulting in DDT pay-out to an entity
(tax authority) outside the group. Hence, in the CFS of company A, DDT cannot
be treated as equity adjustment; rather, it is charged to profit or loss.

If company B as well as company A pay
dividend in the same year, company B will pay DDT on dividend distributed.
Under the income-tax laws, DDT paid by company B is allowed as set off against
the DDT liability of company A, resulting in reduction of company A’s DDT
liability to this extent. In this scenario, an issue arises how should the
company A treat DDT paid by company B in its CFS?

One view is that DDT paid relates to company
B’s dividend. From a group perspective, for transferring cash from one entity
to another, cash/tax was paid to the tax authorities. Hence, it should be
charged to P&L in company A’s CFS. The other view is that due to offset mechanism,
no DDT in substance was paid on dividend distributed by company B. Rather,
company A has paid DDT on its dividend distribution to its shareholders. Hence,
DDT should be charged to equity in company A’s CFS to the extent of offset
available.

The ITFG has clarified that second view
should be followed. Under this view, the following table explains the amount to
be charged to P&L and to equity in company A’s CFS:

Scenario 1

DDT paid by B

A’s DDT liability

Offset used by A

Equity charge in A’s CFS

P&L charge in A’s CFS

30,000

Nil

30,000

20,000

10,000

III

30,000

40,000

30,000

30,000 + 10,000

Nil

The above is a simple example where both
parent and subsidiary pay dividends concurrently. It may so happen that a subsidiary has
distributable profits, but will distribute those, beyond the current financial
year. In such a case, in parent’s CFS, a
DTL should be recognised at the reporting date in respect of DDT payable on
dividend expected to be distributed by the subsidiary in near future. Absent
offset benefit, the corresponding amount is charged as expense to P&L.
However, there is no direct requirement related to recognition of asset toward
offset available.

Considering the above, the ITFG (Bulletin 9)
has stated that at the reporting date, the parent in its CFS will recognise DTL
in respect of DDT payable on dividend to be distributed by subsidiary. The
corresponding amount is charged to P&L. In the next reporting period, on
payment of dividend by both entities and realisation of offset, the parent will
credit P&L and debit the amount to equity. Effectively, the ITFG views
require DDT on expected distribution to be charged to P&L in the first
reporting period which will be reversed in the immediate next period. The
authors believe that the ITFG view does not reflect substance of the
arrangement. Moreover, such an approach will create an unwarranted volatility
in P&L for two reporting periods which should be avoided. The standard
requires creation of a DTA if there is a tax planning opportunity in place. If
the parent company has a strategy in place to distribute dividends to its
shareholders out of the dividends it receives from its subsidiaries, within the
same year, then it will be able to save on the DDT. Consequently, corresponding
to the DTL, an equivalent DTA should also be recognised in the first reporting
period. We recommend that ITFG may reconsider its views on the matter.

ITFG (Bulletin 18) has subsequently changed
its position and clarified that accounting treatment of DDT credit depends on
whether or not it is probable that the parent will be able to utilise the same
for set off against its liability to pay DDT. This assessment can be made only
by considering the particular facts and circumstances of each case including
the parent’s policy regarding dividends, historical record of payment of
dividends by the parent, availability of distributable profit and cash,
etc. The revised ITFG position is a step
in the right direction.

In light of the ITFG 18, a few important
questions and clarifications are given below:

Firstly, whether the ITFG
is mandatory? The answer to this would depend upon an assessment of whether the
ITFG interpretation reflects a reasonable and globally acceptable
interpretation of the standard. The view in ITFG 18, is in my opinion a
reasonable and correct interpretation, and should therefore be considered
mandatory.

Secondly, when changing the
practice to comply with ITFG 18, would it be a change in estimate or change in
policy or an error? In line with global
practice with respect to issuance of IFRICs from time to time the author
believes that the change is a change in an estimate rather than a change in an
accounting policy or an error.

Lastly, should the ITFG be
implemented as soon as it is issued? This is more of a practical issue. It may
not always be possible for entities to comply with an ITFG in the accounts of
the quarter in which it is issued.
Nonetheless, entities should give effect to the ITFG in the following
quarter.

shailesh.kwebmaker

INTERCEPTION, INSPECTION, DETENTION OR SEIZURE, CONFISCATION

GST law had
promised to usher in a host of reforms on hastle free movement goods across the
country. Some of the promising features of GST involved abolition of
check-posts, common way bill management systems, uniformity in law enforcement
across the country thus boosting business efficiency in logistics. This has certainly
freed business enterprises from shackles of traditional law enforcement and is
on course to digitization of enforcement to improve the administrative
effectiveness and minimise hurdles to trade and commerce.

In-transit
inspection plays a critical role in law enforcement. Interception, detention
and seizure provisions of the GST law perform the function of administrating
law on a real-time basis to check tax evasion during movement of goods. Section
68 of Chapter XIV contains enforcement provisions and grants wide powers to the
tax administration. Active tax enforcement not only detects tax evasion but
also acts as a deterrent. This article is an attempt to elaborate provisions in
detail and identify the critical areas one needs to address in such matters.

GENERAL UNDERSTANDING OF INTERCEPTION, DETENTION & SEIZURE

‘Interception’ is generally understood as the act of preventing someone or
something from continuing to a destination. Black’s Law dictionary states: “the
term usually refers to covert reception by a law enforcement agency” and P
Ramanatha Iyer’s Law Lexicon states interception as “seize, catch or
stop (letter etc.) in transmit”.

‘Detention’ is understood as the act of taking custody over someone or
something. Black’s law dictionary states “the act or an instance of holding a
person in custody; confinement or compulsory delay”; Law Lexicon states
“the action of detaining, the keeping in confinement or custody, a keeping from
going on or proceeding”.

‘Seizure’ is understood as the act of capturing or confiscating something by
force (i.e. against the will of the person having possession). Black’s Law
states “the act or an instance of taking possession of a person or property by
legal right or process, esp, in constitutional law, a confiscation or arrest
that may interfere with a person’s reasonable expectation of privacy; Law
Lexicon explains seizure as taking possession of property by an officer
under legal process.

‘Confiscation’ means permanent deprivation of property by order of a court of
competent authority (Law Lexicon). Black’s Law states “seizure of
property for the public treasury”.

One would observe
from the ensuing paragraphs, that each term represents a different stage in a
proceeding and the rigours increase as the stage progresses. For eg.
Interception requires a simple reporting and release of goods but as soon the
goods are proposed for detention and seizure, the intensity of the powers of
the officer increasing. Same goes with once the goods enter confiscation
proceedings, the power of the officers over the goods are more stringent than
in cases of detention. Rights and obligations of the officer and the tax payer
are different at each level of the proceeding and hence one needs to be mindful
of the stage of the proceedings while addressing the questions of the officer.

IN-TRANSIT DOCUMENTATION U/S. 68(1) R/W RULE 138A

Section 68 provides
for carrying specified documents/ devices along with the conveyance of
consignment during the transportation of goods. The section empowers the
‘proper officer’ to intercept the conveyance at any place and require
the ‘person in charge’ of the conveyance to produce the prescribed
documents/devices for verification and allow inspection of goods. The term
proper officer has been defined to mean the officer who has been assigned the
powers of interception by the respective Commissioners of the CGST/SGST. While
determining the proper officer care should be taken that the said officer has
territorial and functional jurisdiction at the point of interception. ‘Person
in charge’ of conveyance has not been defined and should be understood as
referring to the transporter and driver of the conveyance performing the
movement of goods.

Rule 138A (inserted
w.e.f. 30-08-2017) provides for the requirement of carrying a tax invoice, bill
of supply, bill of entry or delivery challan and e-way bill (as applicable). In
terms of section 138A(5), the Commissioner in special cases is permitted to
waive the requirement of e-way bill. The contents of a tax invoice, bill of
supply, delivery challan and e-way bill are prescribed in Rule 46, 46A and 49.
In addition to the said manual documents, e-way bill requirements as generated
from the common portal were mandated vide Notification 27/2017-CT dt.
30.08.2017 w.e.f. from 01/02/2018 but ultimately implemented from 01-04-2018.
Certain States (like Karnataka) implemented these provisions even prior to the
Centre invoking the E-way bill provisions for intra-state transactions.

INTERCEPTING POWERS U/S. 68(2) R/W RULE 138 B

Section 68(2) r/w
Rule 138B grants the powers to the Commissioner or proper officer to intercept
any conveyance for verification of the e-way bill for all inter-state and
intra-state movement. Physical verification of the intercepted vehicle should
be carried out only by empowered officers. In terms of CBIC Circular
3/3/2017-GST dt. 05.07.2017, the Inspector of Central Tax and his superiors
have been granted powers of interception. The proviso of the said rule states
that in case of receipt of any specific information of tax evasion, physical
verification of the conveyance can be carried out by any other officer after
obtaining necessary approval from the Commissioner.

INSPECTING POWERS U/S. 68(2) R/W RILE 138 C

Section 68(2) r/w
Rule 138C requires that every inspection of goods in transit would have to be
recorded online by the proper officer within 24 hours of inspection and the
final report recorded within 3 days of inspection (in Form EWB-03). Sub rule
(2) states that where any physical verification of goods has been performed
during transit in one State or in any other State, no further physical
verification of the said conveyance should be carried out again in the State
unless specific information of evasion is available with the officer
subsequently. Rule 138D specifies that the detention of the vehicle for the
purpose of inspection should not exceed 30 minutes and the transporter can
upload the details in cases where the detention is beyond 30 minutes.

DETENTION & SEIZURE POWERS U/S.129

The proper officer
is empowered to detain the conveyance and the goods during its transit in case
of any contravention of the provisions of the Act (report of detention in Form
EWB-04). The detention proceedings require issuance of a notice, seeking a
reply and concluding the proceeding by way of a detention/seizure order. In
terms of the CBIC Circular dt 05.07.2017 (supra) detention powers can be
exercised only by the Asst/Dy. Commissioner of Central Tax. The goods would be
released by the proper officer only on payment of the applicable tax and
penalty or submission of a security in prescribed form.

The said section
also prescribes the procedure to be adopted on detention of the goods in
transit. In this regard, CBIC has issued circulars (Circular 41/15/2018-GST dt.
13-04-2018; No 49/23/2018-GST dt. 21-06-2018 and No 64/38/2018-GST dt.
14-09-2018) which specify the detailed procedure and forms to the followed
(MOV-01 to MOV-11) by the Central Tax officers in matters of interception,
inspection and detention. Key points emerging from the Circular are as follows:

The jurisdictional
Commissioner or the designated proper officer is permitted to conduct
interception and inspection of conveyances within the jurisdictional area
specified by the Commissioner. One should verify whether the locational
Commissionerate of the region has issued any such trade notice assigning
functional/ geographical jurisdiction.

The proper officer believes
that the movement of goods is with an intention of evading tax, he may directly
invoke section 130 where a fine in lieu of compensation may be imposed.

Where an order is passed
under the CGST Act, a corresponding order shall also be passed under the
respective State laws as well.

Demand of the tax, penalty,
fine or other charges would be uploaded on the electronic liability register
and in case of unregistered persons a temporary ID would be created for
discharge of the liability posted on the common portal.

In cases of multiple
consignments, only goods or conveyance in respect of which there is violation
of the provisions of the Act should be detained while the rest of the
consignment should be permitted to be released by the proper officer.

Consignment of goods should
not be detained where there are clerical errors such as spelling mistakes in
name of consignor/ee, PIN code, locality, document number of e-way bill,
vehicle number, etc. in cases of clerical errors, a maximum penalty of Rs. 500
each under respective law could be imposed.

Section 129 does not
mandate payment of tax in all cases and the owner of goods scan exercise the
option of furnishing a security (in prescribed form and a bond supported by a
bank guarantee equal to amount payable).

CONFISCATION POWERS U/S.130

In cases where the
proper officer has formed the view that any of the five circumstances exists,
the goods are liable for confiscation – where any person:

i. Supplies or receives goods in contravention
of the provisions of Act/ rules with intention of tax evasion

ii. Does not account for goods liable for paying
tax

iii. Supplies goods without obtaining a
registration number

iv. Contravenes any provision of the Act with
intention of tax evasion

v. Uses any conveyance as means of transport for
tax evasion unless the owner of the conveyance has no knowledge of this action

The fine legal
difference between detention and confiscation is that detention is invoked only
on suspicion over tax evasion whereas confiscation require reasons beyond doubt
that the goods are a result of tax evasion [Kerala High Court in Indus
Towers vs. Asst. State Tax officer 2018 (1) TMI 1313]

In terms of the
CBIC Circular dt 05.07.2017 (supra) confiscation powers can be exercised only
by the Asst/Dy Commissioner of Central Tax. In cases of confiscation, the title
over the goods shall vest upon the Government and the owner of the goods cannot
exercise any rights over the goods. Whenever any confiscation of goods is
ordered, the owner of the goods has the option to pay a fine in lieu of
confiscation which shall not exceed the market value of goods confiscated less
the tax chargeable thereon, and shall in no case be less than the amount
specified u/s. 129. In cases of confiscation of the conveyance itself, the fine
shall not exceed the tax payable on the goods under conveyance.

APPROPRIATE TAX ADMINISTRATION

Though GST has been
built on a national platform, legislative powers under IGST, CGST and SGST Act
have certain inherent geographical limitations. In addition to that, the Centre
and State have notified the respective workforce for administration. It would
be thus important to identify the ‘proper officer’ having geographical
jurisdiction over goods under transit.

We can take an
example of a case where goods under inter-state movement from Kerala (KL) to
Delhi (DL) are intercepted by a State officer in Maharashtra (MH) and detained
for lack of proper documentation. Whether the intercepting officer in MH could
be considered as the ‘proper officer’ for interception, detention, seizure,
inspection and adjudication of the goods under movement which is an inter-state
supply from KL to DL? The practical experience thus far is that the State
officers detain the goods and direct the assessee to open a temporary ID in
their State and discharge the taxes as if it is an intra-state sale within MH.

Primarily, three
theories can exist (A) Only Origin State authorities have jurisdiction over
interception; or (B) All state authorities (including origin and destination
state) have jurisdiction over the goods under transit as long as the goods are
physically present in their state boundaries during exercise of powers or (C)
While state authorities have powers of interception, the final assessment of
the tax involved would be made by the officer in the State of origin based on
the detention report.

A) Geographical
jurisdiction

Article 246A(1)
empower both the Centre and State to make laws pertaining to goods and service
tax imposed by the Union or State. 246A(2) grants exclusive powers to Centre to
legislate on matters of inter-state trade of commerce. Article 286 places a
clear embargo on the State to impose a tax on supply of goods or services ‘outside
a State’ and or ‘in course of import or export of goods or services’.
Article 258 provides for the Union to confer powers to the State or its
officers either conditionally or unconditionally, with consent of the President
of India and the Governor of the respective State, in relation to any matter to
which the Executive of the Union extends. Where such powers have been conferred
by the Union to the State, administration costs attributable to the staff
empowered would be payable by the Centre to State. The IGST has not invoked
Article 258 but empowered the State workforce through statutory provisions.

In terms of Article
286(2), the Centre has been placed with the responsibility to formulate the
principles of determining where the supply takes place. It is in exercise of
these powers that the IGST Act has formulated provisions for ascertaining the
character of supply (i.e. intra-state vs. inter-state) based on the place of
supply of such services: Chapter IV and V of the IGST Act read together answer
(a) the characterisation of the supply (inter-state or intra-state); and (b)
where locus of the supply. This is broadly akin to the provisions of section 3,
4 and 5 of the Central Sales Tax Act, 1956 (CST law).

In the context of
administration, the GST council has decided that Centre & State’s
administration would be a unified force. Discussions on cross empowerment in
GST council involved five options which were discussed at length and the fifth
option attained consensus only in the 9^th GST Council meeting (para
28 of minutes of meeting). The key thrust of the decisions where (a) Unified
tax payer and administration interface;(b) Allocation of tax payer base between
the Centre and State based on statistical data for administering the CGST/SGST
Acts (b) Concurrent enforcement powers to Centre & State on entire value
chain based on intelligence inputs of respective field formations; (c) Powers
under IGST law to be cross empowered on the same basis as that of CGST/ SGST
Act. However, Centre has exclusive powers to administer issues around ‘place of
supply’, ‘export’, ‘imports’ etc. These decisions were translated into the CGST
and SGST Act as follows:

Section 6 of CGST/ SGST
cross empowers the corresponding officer as per the allocation criteria agreed
at the GST Council (stated above). Further, it has been agreed that where an officer
has initiated any proceeding on a subject matter under an Act, no proceeding
shall be initiated by the officer of the corresponding administration on the
same subject. This ensured that unified interface was maintained.

In respect of the IGST Act,
section 20 does not borrow the cross-empowerment provisions of the CGST Act.
The IGST Act has a different mechanism of empowerment of both Central/ State
officers. Section 3 grants powers to central tax officers for exercise of all
powers of the Act. The CBIC has issued Circulars No. 3/3/2017dt 05.07.2017
assigning powers to the Central Tax Officers. Section 4 also authorises
officers appointed under the State GST Acts as proper officers under the IGST
Act subject to exceptions and conditions of the GST Council.

The Commissioner of the
State would have thus issued appropriate notifications under their respective
State laws assigning the jurisdiction of enforcement action to the officers and
by virtue of the said notification, they would acquire enforcement jurisdiction
even under the IGST Act. Therefore State officers who are empowered under the
State GST to perform enforcement activity would also be empowered to perform
the enforcement function under the IGST Act.

We may recollect
that CST law empowered the ‘appropriate state’ from where the movement of goods
commenced to collect and enforce payment of tax through their general sales tax
law (Section 9). This enabled the origin state to acquire jurisdiction on
inter-state sale movement and enforcement action. Transit states acquired
enforcement jurisdiction over such inter-state movement through transit pass
and way bill provisions which setup a presumption that the goods have been sold
within the State on failure to produce such documentation. The IGST Act is on a
different footing. Firstly, States do not have the same autonomous powers akin
to section 9(2) of CST Act in matters of collection and enforcement provisions.
The IGST Act is a self-sufficient Act containing its own collection and enforcement
provisions. Secondly, IGST Act has limited itself to appointing the State
officers as proper officers for the purpose the IGST Act (section 4) rather
adopting the provisions of the respective State law. Thirdly, IGST does not
provide for any presumption as to the sale of goods within a state in the
absence of any prescriptive documentation. In other words, the character of the
transaction being an inter-state transaction does not get altered during the
process of detention and/or seizure and tax due on such transaction should be
assessed from the Origin State. Even in case there is a dispute on the
inter-state character, the Centre has exclusive domain over examining its
nature in view of Article 286(2) and the decision of the 9th GST Council meeting.

The following
overall inferences can be formed from above analysis:

Power of legislation is
distinct from the power of administration and it is not necessary that the
power of legislation and enforcement are with the same authority (eg. CST Act).
The administrative provisions of IGST act are self-contained in the said
enactment itself.

IGST Act only borrows the
work force of the State for implementing the Act. State work force is required
to follow the Circulars, Notifications of the CBIC / Central Tax office while
exercising their powers under the IGST Act. The statutory powers are not
sourced from the State legislation independently like section 9(2) of the CST
law (refer discussion below).

There is no specific
notification or circular issued under the IGST Act assigning the functions and
territorial limits to the State workforce. In the absence of a specific
notification or circular one may view that (a) each state workforce would
operate within the respective State boundaries and the role assigned by the
State Commissioner (enforcement, vigilance, audit, range, etc) in that boundary
would operate equally for the IGST Act or (b) the State workforce would have
pan India powers on inter-state transactions and would exercise these powers
under IGST law in the absence of any geographical limits over the officers
under the IGST law. The former seems to be a more plausible approach to
resolving the issue on jurisdiction.

The power of collection on
inter-state supplies from State X lies with the Centre. However, State X in
terms of Article 286 is precluded over imposing tax on supplies occurring in
all other States or in import/ export transactions. Therefore intercepting
officers in State X should refrain imposing any tax on inter-state movement u/s. 129.

Coming to the issue
taken up earlier, MH State should not be considered as the ‘proper officer’ for
the inter-state movement from KL to DL as the jurisdiction of administration is
between the Centre/ State workforce operating from the State of Kerala. An
alternative view would be that the IGST Act being a pan Indian enactment has
borrowed the State officers across India for the purpose of enforcement in
their respective geographical area. MH State may not have administrative power
over the ‘transaction of supply’ but it could have powers over the ‘goods under
movement’ for the limited purpose of interception, inspection, detention and
seizure.

Though the above
powers of interception, detention and release would be exercised by the MH
officer under the IGST Act, the final assessment of the liability on the goods
will have to take place at the Origin State (KL) either by the Central/ State
administration depending on the allocation.

FUNCTIONAL JURISDICTION

Section 2(91) defines the proper officer to mean the person who has been
assigned the function by the Commissioner. CBEC has in its Circular No.
3/3/2017-GST dt. 05-07-2017 designated the Inspector of Central Tax with powers
of interception and the Asst./Dy. Commissioner of Central Tax with the powers
of adjudication over the matter of release of goods u/s. 129. These powers
would be exercised by the respective officers within the confines of the
geography assigned to the said officers. It is expected that similar
Circulars/notifications are issued by the respective State Commissioners
assigning the functional jurisdiction to their officers. Therefore, one would
have to carefully peruse the relevant notification/ circulars under the States
for consideration to establish the function and geographical jurisdiction over
a particular transaction/goods.

OVERALL SCHEME OF SECTION 129

Some important
questions arise on the overall scheme of section 129:

Whether
proceedings u/s. 129 is interim in nature and subject to the final assessment
in the hands of
the supplier?

Section 129
provides for detention, seizure and release of goods by following a prescribed
procedure of issuance of a notice, seeking a reply and furnishing a release
order. A key feature is that it permits release of the goods on furnishing a
security in the prescribed form, indicating that the goods are being released
on a provisional basis and the assessment would be finalised subsequently. But
the provision subsequently goes on to state that on payment of the amount, all
proceedings in respect of the notice would deemed to the concluded. There seems
to be a divergence in the way the provisions are drafted. One theory suggests
that the proceedings are interim in nature and subject to its finalisation
before the assessing authority who would take cognizance of the entire
proceeding u/s. 64, 73, 74 and complete the assessment of the supplier taking
into account the report of the inspecting authority. This was the manner in
which the VAT law was also being enforced across States. The other theory
suggests that the proceedings are conclusive and no further action needs to be
taken at the assessing officer’s end on the subject matter. Now there could be
instances where the supplier would have already reported the transaction in its
GSTR-3B/GSTR-1 and discharged the applicable taxes. If the goods in transit are
subjected to the said provisions and cleared on payment of applicable tax and
penalty, it would result in a double taxation of the very same goods which
clearly does not seem to be the intent of law. It appears to the author that
the scope of section 68 r/w 129 is to examine the completeness of documents and
provide information to the assessing authority, which could be obtained only
from real time enforcement, for finalisation of the assessment and not just to
conclude the entire proceeding at the place of interception. The term
‘contravention’ in section 129 should be understood contextually on with
reference to the compliance of documentation during the movement of goods and
not beyond that. The author believes that all these proceedings would finally
culminate by way of an assessment u/s. 64, 73 or 74.

How do we
harmoniously apply the penalty imposable u/s. 129 vs. 122(1) (i), (ii), (xiv),
(xv), (xviii) vs. 122(2) : specific vs. general : lower vs. higher penalty?

Both section 129
and 122 are penal provisions imposing penalty for offences under the Act. There
is an overlap of the scope of the said sections resulting in ambiguity. The
said sections are briefly extracted below

Section 129

Section 122(1) (i), (ii), (xiv), (xv),
(xviii)

Section 122(2)

Penalty for contravention of goods in
transit

Specific Penalties for movement of goods
without invoice/ documents, evasion of tax, goods liable for confiscation,
etc

Penalty where tax has not been paid or
short paid

100% of tax payable (in case of exempted
goods – 2% of value of goods) (OR)

50% of value of goods less tax paid (5%
in case of exempted goods)

Penalty of 10,000 or 100% of tax evaded
w.e.h.

Penalty of Rs. 10,000 or 10% of the tax
due w.e.h.

The field
formations are consistently applying the provisions which results in a higher
collection without assessing the applicable section under which penalty are
imposable. While certainly section 129 is specific to cases where goods are in
transit, section 122 also provides for cases of imposition of penalty where
goods are transported without cover of documents. One possible resolution to
this conflict may be as follows:

Section 129 is specific to
cases of non-compliance identified during transit and section 122(1)
applies only to cases where the transportation has completed and the
non-compliance is identified after the goods have reached their
destination (say the registered premises)

Section 122(1) is narrower
in its scope in so far as it requires tax to be evaded for its application.
There could be cases where goods have reached the destination without
appropriate documents but duly accounted for in the books of accounts. In such
cases, section 129 cannot be imposed and section 122(1) would apply to cases
involving tax evasion.

Section 122(2) on the other
hand being a general provision for penalty should not apply since section
122(1) and 129 are more specific contenders on this subject matter

PRACTICAL ISSUES ON INTERCEPTION / INSPECTION / DETENTION & SEIZURE

Apart from the
legal analysis, the trade and community are facing multiple challenges at the
ground level on matters of such matters. The issues are tabulated below for
easy reference:

S No	Issue	Possible resolution
1	E-way bill not containing key particulars such as Invoice No., Taxable value, Tax , etc OR E-way bill not generated	Supreme Court in Guljag Industries (below) has stated that mens-rea need not be examined in cases of statutory offences. Therefore, tax & penalty can be imposed u/s 129 equivalent to the tax in cases of such violations. Recent decision of MP High Court in Gati Kintetsu Express Pvt ltd vs. CCT 2018 (15) GSTL 310 affirmed penalty in case of violation and distinguished Allahabad High Court’s decision in VSL Alloys (India) Pvt Ltd vs. State of UP 2018 (5) TMI 455.
2	E-way bill & Invoice is valid and containing accurate particulars but quantity reported is higher than the physical quantity in the conveyance (due to evaporation, wastage, water content, etc)	Taxable quantity/value being higher than the physical quantity, there is no short payment of tax and hence detention would be incorrect. At the most in case where there is an error, general penalty of Rs. 25,000/- may be imposed for discrepancies.
3	E-way bill is valid and generated but invoice/ delivery challan is not carried along with consignment – all particulars in e-way bill match with consignment	Rule 138A and CBEC Circular require both the self-generated document (invoice/delivery challan) and e-way bill to be carried. E-way bill is a system generated document containing all particulars of the invoice and a verifiable/non-destructible document and hence superior in status vis-à-vis the invoice. Ideally no penalty should be imposed in such scenarios.
4	E-way bill not reconciling with the some valuation particulars of Invoice – such as Taxable Value, Tax etc but matching with other particulars	Officers may disregard the e–way bill entirely and state that conveyance is without e-way bill in which case the entire penalty would be imposable. Alternatively, if it is established that e-way bill relates to the very same consignment, then possibly e-way bill would be considered for examination, ignoring the invoice and the physical verification would be performed accordingly. Any excess stock/ value above the e-way bill may be subject to penalty.

5 & 6	Delivery challan & e-way bill issued and officer contesting that Invoice should be issued (OR) Wrong Tax Type recorded in the E-way bill & Invoice i.e. IGST instead of CGST/SGST	Intercepting officer is only required to assess with the prescribed documents are being carried and they reconcile with the physical movment of goods. Any dispute on the type of documentation, etc., is not with the domain of intercepting officer and is for the assesing authority to examine and take a legal position on that front.
7	Goods sent on approval and at particular location for sale within the six months time limit but e-way has expired	This is a tricky issue. Whether goods sent on approval and retained by the recipient for approval for six months are required to be under a live e-way bill. While one may say that this is incorrect another argument would be that goods should be either under a live e-way bill or at the registered presmises of the supplier and hence registration should be obtained for places where goods are temporarily stored.
8	Alternative/ Wrong route adopted by the transporter but e-way bill valid	Not a contravention of any provision and section 129 cannot be invoked unless the officer is establish tax evasion.
9	Difference between invoice date : e-way bill date (could range from few months to year) especially in case of goods consigned after auction	Inspecting officers are intercepting goods where invoice is significantly prior to e-way bill. Section 31 permits invoice to be raised on or before removal of goods. A tax invoice is a permanent document & does not have any expiry date unlike e-way bill which has is a temporary document. Therefore, such action is incorrect in law.
10	Owner of goods – Ex-works/ FOB contracts, etc.	Section 129 requires the owner to come forward for the entire proceedings. There have been cases where the officer has rejected the purchaser from hearing the matter. There have been cases where the officer has called upon the purchaser rather than the seller since the purchaser resides in the same State. This is a challenge since ownership is differently understood from the term supplier and recipient.
11	Whether inspecting officer can question the veracity of the delivery address (eg. Delivery at a fourth location not belonging to the customer)	Section 129 is invoked only where there is a contravention of provisions during movement of goods. Being tax paid goods, there is nothing which is further payable irrespective of the destination of goods. Unless there is specific information of tax evasion, the officer cannot question the veracity of the delivery address.
12	Multiple consignment – detain only goods in respect of violation : multiple invoice vs. multiple quantity	CBIC circular (supra) states that in case of multiple consignments, detention proceedings should be applied only on the consignment under which there is a violation. In certain cases where an invoice has multiple line items and the discrepancy is only with respect to one line item, equity demands that detention proceedings should be restricted only to the said line item in respect of which there is a violation and the rest of the consignment should be related without any delay.
13	Officers not accepting the security for release of goods u/s. 129	This is clearly violation of statutory mandate by the Officers.

S No

Issue

Possible resolution

E-way bill not containing key particulars such as
Invoice No., Taxable value, Tax , etc OR E-way bill not generated

Supreme Court in Guljag Industries (below) has
stated that mens-rea need not be examined in cases of statutory offences.
Therefore, tax & penalty can be imposed u/s 129 equivalent to the tax in
cases of such violations. Recent decision of MP High Court in Gati
Kintetsu Express Pvt ltd vs. CCT 2018 (15) GSTL 310 affirmed penalty in
case of violation and distinguished Allahabad High Court’s decision in VSL
Alloys (India) Pvt Ltd vs. State of UP 2018 (5) TMI 455.

E-way bill & Invoice is valid and containing
accurate particulars but quantity reported is higher than the physical
quantity in the conveyance (due to evaporation, wastage, water content, etc)

Taxable quantity/value being higher than the physical
quantity, there is no short payment of tax and hence detention would be
incorrect. At the most in case where there is an error, general penalty of
Rs. 25,000/- may be imposed for discrepancies.

E-way bill is valid and generated but invoice/ delivery
challan is not carried along with consignment – all particulars in e-way bill
match with consignment

Rule 138A and CBEC Circular require both the
self-generated document (invoice/delivery challan) and e-way bill to be
carried. E-way bill is a system generated document containing all particulars
of the invoice and a verifiable/non-destructible document and hence superior
in status vis-à-vis the invoice. Ideally no penalty should be imposed in such
scenarios.

E-way bill not reconciling with the some valuation
particulars of Invoice – such as Taxable Value, Tax etc but matching with
other particulars

Officers may disregard the e–way bill entirely and
state that conveyance is without e-way bill in which case the entire penalty
would be imposable. Alternatively, if it is established that e-way bill
relates to the very same consignment, then possibly e-way bill would be
considered for examination, ignoring the invoice and the physical
verification would be performed accordingly. Any excess stock/ value above
the e-way bill may be subject to penalty.

5 & 6

Delivery challan & e-way bill issued and officer contesting
that Invoice should be issued (OR) Wrong Tax Type recorded in the E-way bill
& Invoice i.e. IGST instead of CGST/SGST

Intercepting officer is only required to assess with
the prescribed documents are being carried and they reconcile with the physical
movment of goods. Any dispute on the type of documentation, etc., is not with
the domain of intercepting officer and is for the assesing authority to
examine and take a legal position on that front.

Goods sent on approval and at particular location for
sale within the six months time limit but e-way has expired

This is a tricky issue. Whether goods sent on approval
and retained by the recipient for approval for six months are required to be
under a live e-way bill. While one may say that this is incorrect another
argument would be that goods should be either under a live e-way bill or at
the registered presmises of the supplier and hence registration should be
obtained for places where goods are temporarily stored.

Alternative/ Wrong route adopted by the transporter but
e-way bill valid

Not a contravention of any provision and section 129
cannot be invoked unless the officer is establish tax evasion.

Difference between invoice date : e-way bill date
(could range from few months to year) especially in case of goods consigned
after auction

Inspecting officers are intercepting goods where
invoice is significantly prior to e-way bill. Section 31 permits invoice to
be raised on or before removal of goods. A tax invoice is a permanent
document & does not have any expiry date unlike e-way bill which has is a
temporary document. Therefore, such action is incorrect in law.

Owner of goods – Ex-works/ FOB contracts, etc.

Section 129 requires the owner to come forward for the
entire proceedings. There have been cases where the officer has rejected the
purchaser from hearing the matter. There have been cases where the officer
has called upon the purchaser rather than the seller since the purchaser
resides in the same State. This is a challenge since ownership is differently
understood from the term supplier and recipient.

Whether inspecting officer can question the veracity of
the delivery address (eg. Delivery at a fourth location not belonging to the
customer)

Section 129 is invoked only where there is a
contravention of provisions during movement of goods. Being tax paid goods,
there is nothing which is further payable irrespective of the destination of
goods. Unless there is specific information of tax evasion, the officer
cannot question the veracity of the delivery address.

Multiple consignment – detain only goods in respect of
violation : multiple invoice vs. multiple quantity

CBIC circular (supra) states that in case of multiple
consignments, detention proceedings should be applied only on the consignment
under which there is a violation. In certain cases where an invoice has
multiple line items and the discrepancy is only with respect to one line
item, equity demands that detention proceedings should be restricted only to
the said line item in respect of which there is a violation and the rest of
the consignment should be related without any delay.

Officers not accepting the security for release of
goods u/s. 129

This is clearly violation of statutory mandate by the
Officers.

SOME LEGAL PRECEDENTS

Some judicial
precedents on this subject are as follows:

Failure to report material
particulars on the statutory documents under movement is a statutory offence.
Penalty is for this statutory offence and there is no question of proving of
intention or of mens-rea as the same is excluded from the category of essential
element for imposing penalty. Guljag Industries vs. CTO [2007] 9 VST 1 (SC).

Declaration uploaded on the
website after the detention of goods does not absolve the penalty of the
assessee. The time of declaration is critical. Asst. State Tax officer vs.
Indus Towers Ltd 2018 (7) TMI 1181(Ker-HC)

Squad / enforcement
officers cannot detain goods over dispute on HSN/ classification. This is under
the domain of the assessing authority. At the most, the squad officer could
report this discrepancy to the assessing authority for further action at their
end. Jeyyam Global Foods (P) Ltd., vs. UOI 2019 (2) TMI 124 (Mad-HC)

Supreme Court CST vs. PT
Enterprises (2000) 117 STC 315 (SC) – The inspecting authority has the
powers to question the valuation of the goods under the Madhya Pradesh Sales
Tax Act. This decision was rendered in view of the specific requirement that
inspecting authority could detain goods in case of evasion on the value of goods.

CONCLUSION

Provisions of
interception, detention and seizure are open ended giving wide powers to the
officer. This could result in dual taxation of the very same goods without any
input tax credit in the hands of the recipient. Moreover, diverse practices are
being followed among the field formations across the country leading to
inequities in application of law. Certain legal provisions are overlapping
giving choices to the administration over the subject goods and the inclination
of the administration is to choose a stricter provision thereby making the other
provision practically redundant. There
are multiple challenges on the front of administration, appeal, etc., which
needs to be addressed both at the macro and micro level by the GST council.
Therefore, it is imperative that the GST council and the Government take
proactive steps in cleansing the entire scheme in order to bring uniformity in
implementation of law across the country.

shailesh.kwebmaker

DEBT OF GRATITUDE

We are profoundly grateful to the members of the Editorial Board for their long and consistent years of guidance and single-minded dedication. Editorial Board was first formed in 1990. It consists of past editors and committed contributors. The Board deals with policy matters and serves as a brainstorming platform and a sounding board for the Editor. The Board also gives valuable critique to ensure that the Journal runs on basic principles and yet evolves with time.

Kishor B. Karia

Member since
November, 1990
till date

Ashok K. Dhere

Member since
November, 1990
till date

Kahan Chand Narang

Member since
August, 2000
till date

Gautam S. Nayak Member since
August, 2003 till date

Sanjeev R. Pandit

Member since
August, 2004 to
July, 2006 &
August, 2007 till date

Anil J. Sathe

Member since
August, 2004 to
July, 2009 &
August, 2011 till date

Anup P. Shah

Member since
August, 2008

Raman H. Jokhakar

Editor
Member since
August, 2016

Pooja Punjabi

Convenor of Journal Committee

Namrata Dedhia

Convenor of Journal Committee

Akshata Kapadia

Convenor of Journal Committee

Sunil B. Gabhawalla

Ex Officio

Manish Sampat

Ex Officio

shailesh.kwebmaker

BCAJ FEATURES

Features are the bedrock of the BCAJ. Some features report
and digest. Some others explain and analyse. Some provide inspiration or probe
unfairness in laws. The following list gives the statistics of continuing
features that are more than five years old:

Feature

Started in the Year

Number of years

Tribunal
News

1969-70

In
the High Courts

1971–72

From
Published Accounts

1980-81

Controversies

1981-82

Closements

1982-83

Miscellanea

1984-85

Is
It Fair

1996-97

Allied
Laws

1996-97

International
Taxation

1997-98

Corporate
Law Corner

1988-89 to 2006 &

2015-16 till date

Glimpses
of Supreme Court Rulings

2001-02

Ind
AS / IGAAP – Interpretation & Practical Application

2001-02

Light
Elements

1995-96 to 2004

2006-07 to 2012

2014-15

2017 till date

Laws
& Business

2002-03

Namaskaar

2002-03

Right
to Information

2004-05

Securities
Laws

2006-07

VAT
(Sales Tax Corner)

1995-96

Indirect
Taxes – Recent Decisions

2009-10

Ethics
& You

2012-13

shailesh.kwebmaker

LANRUOJ TNATNUOCCA DERETRAHC YABMOB EHT (JACB)

SPECIAL EDITORIAL

We bring you a special edition of the JACB journal.
The January, 2019 editorial carried these words of wisdom:

“Friends, the word of the year declared by two prominent dictionaries recently gives it away: Toxic and Misinformation. Both words articulate the stark realities of our times ….”.

This feature is based on the above theme.

If you have any comments/views on this feature please feel free to draft a mail to us, and keep it in your draft folder. Even if you send it, it makes no difference. To quote George Bernard Shaw, “The single biggest problem in communication is the illusion that it has taken place”.

Happy Golden Jubilee reading!
*ditor

*E Edited

GOLDEN CONTENTS AND ITS ECONOMIC IMPACT – EXTRACTS FROM WHITE PAPER

JACB brought to its esteemed readers Golden Contents over the course of the last twelve months to commemorate its golden jubilee. We have been overwhelmed with the responses received thereby encouraging us to come out with a white paper. We provide below extracts from the white paper that will shortly be published in full in resplendent colors. You may place orders for the same at
your own risk.

Abstract of White Paper – “Golden Contents and Its Economic Impact”

Introduction

Economic development is understood in many different ways but it is clear that there has always been a close correlation and vital linkage between human endeavor and civilisation’s economic relationships.

Golden Contents and Its Direct and Indirect Impacts

Cost Effective

No making charges on golden content

Economic Impact

Since the golden content cannot be used as a collateral to raise high-cost loans, subscribers have benefited significantly by not paying huge interest costs on such non-availed loans. There is significant social benefit too since these non-availed funds can now be utilised by banks to provide loans to critical sectors of the economy.
This in turn leads to economy, efficiency and transparency in functioning of our financial institutions and markets and reinforces investor confidence, thereby reducing the cost of capital and boosting private consumption expenditure and private investment positively impacting economic growth rates.This is expected to add 50 basis points to the economy’s GDP growth rate on a secular basis over the next 5 years. Tax revenues are also expected to increase marginally, in line with the contributory increase to GDP.

Conclusion

The velocity of an economy is limited by the speed at which innovation can take place. The Golden Contents, a path-breaking innovation, is expected to propel the economy towards its potential growth trajectory.

QUOTE OF THE MONTH

FROM THE DESK OF THE PRESIDENT

Subscribers to our JACB journal receive mailers “From the Desk of the President” much before they get to see the printed version of it in the journal. Readers have all along been eager to know what exactly is in that desk.
What we got from the desk of the President:

Old calculator (not functioning).
A blue ballpoint pen (functioning).
Income tax ready reckoner (AY 1987-88).
JACB journal (April, 2001 without front cover).
Old spectacle case of a former president.
(sd/- Forensic auditors)

KNOW YOUR JOURNAL

The BCA Journal is also available in two formats, offering twin benefits.

GOLDEN CONTENT INTERVIEW: EMINENT PERSONALITY, YOUNGEST CA

JACB: Tell us a bit about yourself.

MM: I am CA Mutandis…..Mutatis Mutandis. Youngest CA. 83 years old.

JACB: How do you see the profession developing?

MM: Nemo debet esse judex in propria qusa. (No one can be a judge in his own cause)

JACB: Huh! Could you please share your views on ethics in profession?

MM: Ubi jus, ibi officium (Where there is a right, there is also a duty)

JACB: What are your views on usage of fair values in financial reporting?

MM: Nemo tenetur ad impossible. (No one is required to do what is impossible)

JACB: Sir, your responses using legal maxims makes it very difficult for me to understand. Since when did you get into this habit?

MM: Ab initio.

JACB: I do not understand what you are saying sir.

MM: Ignorantia legis jurisneminem excusat.

JACB: ***&%…..How long do you think we can go on like this?

MM: Ceteres paribus, in praesenti.

JACB: I better close this, Sir. Thank you very much for sparing your valuable time. In closing could you explain in plain English how you claim to be the youngest CA when you are claiming super senior citizen tax benefits.

MM: I cleared yesterday…. CA Results were announced yesterday you see.

TAX PLANNING – HOW TO SAVE TAXES (INDIVIDUAL ASSESSEES)

Resign from high-paying job and one saves taxes on income under the head salaries. The tax savings will be on monthly fixed salary, bonuses, perquisites, as well as on stock options.
If one has a second house, demolish it (if it is say an apartment on the 14th floor, we do understand you have a challenge) that is self-occupied so that you do not pay tax on notional income. Note: Our sympathies are with those who took our advice and demolished their second home considering the interim budget proposals. But take heart, it is just an interim budget.
We have refrained from providing any inputs for Business income since we understand all have expertise in saving taxes under the income head of business and professional income.
Attend AGMs of companies where you hold shares and vociferously protest dividend payments and exercise your right to disapprove board-recommended dividends. You save dividend taxes at 10% if your dividend income was expected to be above threshold.

GLIMPSES FROM SUPREME COURT

In Camera – In this issue we bring you photographs shot from various angles from different perspectives and using drones that provide good glimpses from the Supreme Court.

*ditorial note: Glimpse photos not published since the matter is sub-judice.

NAMASKAAR

FROM UNPUBLISHED ACCOUNTS

Compilation From Notes
Basis of Preparation of Financial Statements

These financial statements are prepared in accordance with the whims and fancies of our management under the historical cost convention on accrual basis except for most transactions and events that are reported on a convenience accounting basis.

Use of Judgments and Assumptions

The preparation of financial statements in conformity with the applicable accounting framework requires management to make estimates, judgments and assumptions. Management has made an assumption that users of financial statements can easily be tricked into believing the contents of the financial statements.
Management estimates used in the preparation of financial statements are aimed at underestimating expenses and liabilities and overestimating income and assets.

Disclosures

Included in land is a large parcel of land amounting to Rs. 14,000 crore measured using the revaluation model that actually belongs to our neighbouring company.
The fair valuation of our assets is based on stooping to levels that are lower than Level 3.
We have not disclosed many liabilities as well as contingent liabilities considering the material impact that it could have on our investors’ well-being and on the health of their investment portfolio.

NEW FEATURES THAT WE EXPECT TO INRODUCE SHORTLY IN YOUR JOURNAL

Birth Taxation
Inheritance Taxation
Inter-planetary Taxation
Internal audit of statutory audit
Independence movement of Independent Directors
And more!!!

JACB GOLDEN JUBILEE SPECIAL ANNOUNCEMENT

shailesh.kwebmaker

Section 40A(3) – No Disallowance u/s. 40A(3) when genuineness of the transaction is not doubted and incurring of such cash expenses was necessary as part of business expediency.

37. [2018] 66 ITR (Trib.) 371 (Delhi-Trib.) KGL
Networks (P) Ltd. vs. ACIT ITA No.:
301/Del./2018 A.Y.:
2014-2015 Dated: 2^nd July, 2018

Section 40A(3) – No Disallowance u/s.
40A(3) when genuineness of the transaction is not doubted and incurring of such
cash expenses was necessary as part of business expediency.

FACTS

The assessee-company
was a clearing and forwarding agent and had made payments to various reputed
airlines. The Assessing Officer (AO) noted from the tax audit report that the
assessee-company had incurred expenditure amounting to Rs.8,17,807/- in cash.
The A.O. accordingly disallowed the same in light of section 40A(3), being in
excess of Rs. 20,000/-.

The assessee-company challenged the addition
before the Ld. CIT(A) stating that payments were made to various reputed
airlines whose PAN had been duly submitted. The genuineness of the payment was
not doubted, therefore, no disallowance could be made u/s. 40A(3) of the Act.
The CIT(A), however, did not accept the contention of assessee-company and
noted that Rule 6DD had been amended in 2008. The CIT(A) held that the Rule in
its present form does not include any such circumstances like business
expediency or exceptional circumstances, under which, such cash payments could
be made as a business expenditure u/s. 40A(3).

Aggrieved by the order, Assessee Company filed
appeal to ITAT.

HELD

The
Tribunal relied on the decision of Attar Singh Gurmukh Singh vs. ITO (1991)
191 ITR 667 (SC) wherein it was held that section 40A(3) of the Income-tax
Act, 1961, is not arbitrary and does not amount to a restriction on the fundamental
right to carry on business. Consideration of business expediency and other
relevant factors are not excluded. Genuine and bonafide transactions are
not taken out of the sweep of the section. It will be clear from the provisions
of section 40A(3) and Rule 6DD that they are intended to regulate business
transactions and to prevent the use of unaccounted money or reduce the chances
to use black money for business transactions. The contention of the assessee
that owing to business expediency, obligation and exigency, the assessee had to
make cash payment for purchase of goods so essential for carrying on of his
business, was also not disputed by the AO.

It was also held that the primary object of
enacting section 40A(3) was twofold, firstly, putting a check on trading
transactions with a mind to evade the liability to tax on income earned out of
such transaction and, secondly, to inculcate the banking habits amongst the
business community. The ITAT concluded that Even though there was an amendment
in Rule 6DD of I.T. Rules as is noted by the Ld. CIT(A), but in section 40A(3)
of the I.T. Act, 1961 itself, an exception is provided on account of nature and
extent of banking facilities available, consideration of business expediency
and other relevant factors. The nature of business of assessee-company and the
agency carried on by the assessee-company on behalf of others clearly showed
that for business expediency in the line of business of assessee-company,
sometimes cash payments were made to complete the work on behalf of Principal.

The
assessee-company, under such compelling reasons, made payments in cash. The AO
and CIT(A) had not doubted the identity of the payee and the genuineness of the
transaction in the matter. The source of payment was also not doubted by the
authorities. ITAT mainly relied on the decision of ITAT, Delhi in the case of ACIT
vs. Marigold Merchandise (P) Ltd (ITA No. 5170/Del./2014).

Thus, in the
opinion of the ITAT no disallowance u/s. 40A(3) could be made when genuineness
of the transaction was not doubted and incurring of such expenses was necessary
as part of business expediency.

shailesh.kwebmaker

Section 40(a)(ia) – No Disallowance u/s. 40(a)(ia) for non-deduction of TDS u/s. 194C if no oral or written contract between the contractor and contractee.

36. [2018] 66 ITR (Trib.) 525 (Vizag. – Trib.) ACIT vs.
A. Kasivishwanadhan ITA No.:
138/Viz/2017 A.Y.:
2012-13 Dated: 20^th July, 2018

Section 40(a)(ia) – No Disallowance u/s.
40(a)(ia) for non-deduction of TDS u/s. 194C if no oral or written contract
between the contractor and contractee.

FACTS

In this case assessee was engaged in the business
which required large labour force within short notice of time. Assessee had
incurred labour expenses and payments were made through maistries who procured
the labour as per the need of the assessee. The Assessing Officer (AO) inferred
that there is a principal/agent relationship between the assessee and Maistry
and the transactions were in the nature of supply of labour contract and
accordingly held that such payments are liable for deduction of tax at source
u/s. 194C of Act. Since the assessee had not deducted TDS on labour charges,
the AO disallowed the expenditure u/s. 40(a)(ia) of Act.

Aggrieved by
the order of the AO, the assessee appealed before the CIT(A). The assessee
submitted before the CIT(A) that there was no agreement written or oral between
the assessee and the maistries and in the absence of any contract between both
the parties, it cannot be construed that there exists any principal agent
relationship/contract between them. The Assessee argued that the maistries were
not the labour contractors and they were randomly the first among the group of
few people claiming to be the leader of that group. They procured the labour
along with them as when required and for the sake of convenience, the assessee
made the payments to one of the maistries or group leader who in turn
distributed the payments to the rest of the group members. There was no implied
or express contract for supply of labour between the assessee and the maistry.
Thus there was no contract and the question of deduction of tax at source did
not arise. The CIT(A) observed that the labour maistries were not the labour
contractors and the payments made to labour maistries did not bear the
character of contract payment as contemplated u/s.194C of Act, accordingly held
that the payments made to the maistries did not attract deduction of tax at
source u/s. 194C of the Act and accordingly directed the AO to delete the
addition.

Aggrieved by the order, revenue filed appeal
to ITAT.

HELD

The Tribunal concluded that the assessee was
engaged in labour oriented industry which required labour at irregular
intervals yet urgently. It was not convenient to find individual labourers and
hence, the assessee identified some of the maistries or group leaders to
procure the labour who can work as per the requirement of the job. As stated by
the AR, the group leaders were only responsible for procuring the labour and
work was done under the assessee’s personal supervision. There was no written
or oral agreement or contract between the maistries and the assessee for
getting the work done through the maistry or to supply the labour as it was a
general practice used for convenience of obtaining distant labourers. Neither
there was a contract for supply of labour nor there was contract for getting
the work done through labour by the assessee with the maistries. The AO simply
considered the payments made to the group leaders and landed in a presumption
that there was contract in existence for supply of labour between the maistries
and the assessee. The AO did not examine the maistries before coming to such
conclusion. As per the provisions of section 194C of the Act, there must be
contract for deduction of TDS including supply of labour for carrying out any
work.

Thus, in the
opinion of the ITAT No Disallowance u/s. 40(a)(ia) for non deduction of TDS
u/s. 194C if no oral or written contract exist between the contractor and
contractee.

shailesh.kwebmaker

Section 153A – Copies of sale deeds of land found during the course of search operation which were already considered by the AO while framing the assessment u/s. 143(3) cannot be considered as incriminating material and, therefore, the assessment framed u/s. 153A on the basis of the contents of the same sale deeds is bad in law.

35. [2019] 197 TTJ 502 (Delhi – Trib.) Lord Krishna
Dwellers (P) Ltd vs. DCIT ITA No.:
5294/Del/2013 A.Y.: 2006-07. Dated: 17^th December, 2018.

Section 153A – Copies of sale deeds of land
found during the course of search operation which were already considered by
the AO while framing the assessment u/s. 143(3) cannot be considered as
incriminating material and, therefore, the assessment framed u/s. 153A on the
basis of the contents of the same sale deeds is bad in law.

FACTS

A search operation
was conducted at the premises of the assessee on 21.01.2011. Original return of
income was filed on 21.11.2006 and the assessment was framed u/s. 143(3) of the
Act vide order dated 13.05.2008. During the course of original assessment
proceedings the details of vendors from whom the land was purchased during the
F.Y. 2005-06 alongwith copies of land deed were furnished for verification.
After considering all this, the Assessing Officer framed the assessment. The
same sale deeds were found during the course of search operation and on the
basis of the very same sale deeds, the Assessing Officer came to the conclusion
that an amount of Rs.1.05 crore has been paid to various persons in cash.

Aggrieved by
the assessment order, the assessee preferred an appeal to the CIT(A). The
CIT(A) confirmed the same.

HELD

The Tribunal
held that the sale deeds, transactions when duly recorded in the regular books
of account, could not be considered as incriminating material found during the
course of search operation. It was not the case of the Revenue that if the
search and seizure operation had not been conducted, the Revenue could never
have come to know that the assesse had entered into various purchase
transactions of land. The contention of the Departmental Representative that
though the deeds were before the AO, but he examined the deeds only to
ascertain the circle rate vis a vis the transaction rate and never went into
the cash transactions reflected in the land deed was not acceptable. Once a
document is filed before the AO during the course of search proceedings it is
assumed that he has gone through the contents of those documents and has
verified the same.

The copies of sale deed filed by the revenue
were the same which were considered by the AO while framing assessment u/s.
143(3). Therefore the assessment framed u/s. 153A was bad in law and was
quashed.

shailesh.kwebmaker

Section 54F r.w.s 50 – Deeming fiction of section 50 cannot be extended to the deduction allowable u/s. 54F and therefore, assessee is entitled for deduction u/s. 54F on the capital gains arising on the sale of depreciable assets as these assets were held for a period of more than thirty-six months.

34. [2019] 197 TTJ 583 (Mumbai – Trib.) DCIT vs.
Hrishikesh D. Pai ITA No.:
2766/Mum/2017 A.Y.:
2012-13 Dated: 26^th September, 2018

Section 54F r.w.s 50 – Deeming fiction of
section 50 cannot be extended to the deduction allowable u/s. 54F and
therefore, assessee is entitled for deduction u/s. 54F on the capital gains
arising on the sale of depreciable assets as these assets were held for a
period of more than thirty-six months.

FACTS

The assessee, a doctor by profession, had
sold a property, which was used by him for commercial purposes for his clinic and
on which depreciation was also claimed u/s. 32. The said property was held by
the assessee for a period of more than thirty six months before being sold.
Further, the assessee had purchased a new residential flat from the
consideration received from sale of the above property. The assessee claimed
deduction under section 54F on the capital gains arising from the sale of
aforesaid property.

The Assessing Officer treated the aforesaid
property as short-term capital assets within the deeming provision of section
50 and held that the assessee was not entitled for deduction u/s. 54F with
respect to short-term capital gains arising on sale of such short term capital
assets, as the deduction u/s. 54F was available only on the long-term capital
gains arising from transfer of long-term capital assets.

Aggrieved by the assessment order, the
assessee preferred an appeal to the CIT(A). The CIT(A) allowed the deduction
u/s. 54F to the assessee. Being aggrieved by the CIT(A) order, the Revenue
filed an appeal before the Tribunal.

HELD

The Tribunal
held that section 50 created a deeming fiction by modifying provisions of
sections 48 and 49 for the purposes of computation of capital gains chargeable
to tax u/s. 45 with
respect to the depreciable assets forming part of block of assets and there was
nothing in section 50 which could suggest that deeming fiction was to be
extended beyond what was stated in provisions of section 50 and it couldnot be
extended to deduction allowable to the assessee u/s. 54F which was an independent section operating in
altogether different field.

Thus, the assessee was entitled for
deduction u/s. 54F on the capital gains arising on the sale of depreciable
assets being commercial property.

In view of the aforesaid, the appeal filed
by the revenue deserved to be dismissed.

shailesh.kwebmaker

Section 23 – Assessee is entitled to claim benefit u/s. 23(1)(c) if assessee intended to let out property and took efforts in letting out of property and the property remained vacant despite such efforts made by the assessee.

33.
[2019] 101 taxmann.com 45 (Delhi-Trib.) Priyankanki Singh Sood vs. ACIT ITA No.: 6698/Del./2015 A.Y.: 2012-13 Dated: 13^th December, 2018

Section 23 – Assessee is entitled to claim
benefit u/s. 23(1)(c) if assessee intended to let out property and took efforts
in letting out of property and the property remained vacant despite such
efforts made by the assessee.

FACTS

In the course
of assessment proceedings, the Assessing Officer (AO) observed that the assessee
owned a property at Madras and that the assesse had not offered any income
under the head `Income from House Property’ in respect of the said house
property at Madras. The AO considered the annual value of the property to be
the sum for which the property might reasonably be expected to be let out and
after allowing standard deduction of 30% as per provisions of section 24(a) of
the Act, he made an addition of Rs. 49,849 under the head income from house
property.

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

Aggrieved, the assessee preferred an appeal
to the Tribunal,

HELD

The Tribunal
noted that the assessee purchased the said property in 1980 and the same was
continuously let out upto assessment year 2001-02 and thereafter from
assessment year 2002-03, suitable tenant could not be found and hence the
property remained vacant. The Tribunal observed that section 23(1)(c) was
attracted only upon fulfilment of the three conditions cumulatively. Upon cumulative
satisfaction of the three conditions the amount received or receivable shall be
deemed to be the annual value. The three conditions, according to the Tribunal,
are-

– the property or part thereof must be let; and

– it should have been vacant during the whole
or any part of the previous year; and

– owing to such
vacancy the actual rent received or receivable by the owner in respect thereof
should be less than the sum referred to in the clause

Further, the Tribunal also observed that
clause (c) would not apply in situations where the property was not let out at
all during the previous years or even if let out was not vacant during whole or
any part of the previous year.

The Tribunal observed that the property at
Madras which was in dispute remained vacant after assessment year 2002-03 till
date. The Tribunal noted that since the property could not be let out due to
inherent defects and the property remained vacant, the assessee had rightly
applied section 23(1)(c) of the Act. The said property after being vacant also
was not under self-occupation of the assessee. Further, it was not the case of
the revenue that the property was not let out prior to assessment year 2002-03.
Under the circumstances, the Tribunal, following the decision of the co-ordinate
bench in Premsudha Exports (P.) Ltd. vs. ACIT [2008] 110 ITD 158 (Mum.)
held that the assessee was entitled to benefit u/s. 23(1)(c) of the Act. The
appeal filed by the assessee was allowed.

shailesh.kwebmaker

CBDT Circulars – CBDT Circular No. 3 of 2018 dated 11th July, 2018 which specifies the revised monetary limits for filing appeal by the department before Income-tax Appellate Tribunal, High Courts and SLPs/appeals before the Supreme Court is applicable even in respect of the appeals filed prior to the date of circular

32.
[2019] 101 taxmann.com 248 (Ahmedabad-Trib.) DCIT vs. Shashiben Rajendra Makhijani ITA No.: 254 and 255/Ahd./2016 A.Y.: 2009-10 and 2010-11 Dated: 17^th December, 2018

CBDT Circulars – CBDT Circular No. 3 of
2018 dated 11^th July, 2018 which specifies the revised monetary
limits for filing appeal by the department before Income-tax Appellate
Tribunal, High Courts and SLPs/appeals before the Supreme Court is applicable
even in respect of the appeals filed prior to the date of circular

FACTS

During the course of appellate proceedings,
the assessee submitted that the appeals filed by the revenue were to be
dismissed on account of low tax effect in view of the CBDT Circular No. 3 of
2018 dated 11^th July, 2018.

HELD

The Tribunal observed that, indeed, the tax
effect in the instant appeals was less than the limit of Rs. 20 lakh prescribed
by CBDT Circular No. 3 of 2018 dated 11^th July, 2018. The Tribunal
observed the assessee’s case was not covered within the exemption clause,
clause (10) of the said CBDT Circular and since tax effect was less than Rs. 20
lakh, the appeals were held to be not maintainable.

shailesh.kwebmaker

Section 56(2)(vii)(b) – Agricultural land falls within the definition of immovable property and covered within the scope of section 56(2)(vii)(b) irrespective of whether the same falls within the definition of capital asset u/s. 2(14) of the Act or otherwise.

This is the first
and oldest monthly feature of the BCAJ. Even before the BCAJ started, when
there were no means to obtain ITAT judgments – BCAS sent important judgments as
‘bulletins’. In fact, BCAJ has its origins in Tribunal Judgments. The first
BCAJ of January, 1969 contained full text of three judgments.

We are told that the first convenor of
the journal committee, B C Parikh used to collect and select the decisions to
be published for first decade or so. Ashok Dhere, under his guidance compiled
it for nearly five years till he got transferred to a new column Excise Law
Corner. Jagdish D Shah started to contribute from 1983 and it read “condensed
by Jagdish D Shah” indicating that full text was compressed. Jagdish D Shah was
joined over the years by Shailesh Kamdar (for 11 years), Pranav Sayta (for 6
years) amongst others. Jagdish T Punjabi joined in 2008-09; Bhadresh Doshi in
2009-10 till 2018. Devendra Jain and Tejaswini Ghag started to contribute from
2018. Jagdish D Shah remains a contributor for more than thirty years now.

While Part A covered Reported Decisions,
Part B carried unreported decisions that came from various sources. Dhishat
Mehta and Geeta Jani joined in 2007-08 to pen Part C containing International
tax decisions.

The decisions earlier were sourced from
counsels and CAs that required follow up and regular contact. Special bench
decisions were published in full. The compiling of this feature starts with the
process of identifying tribunal decisions from a number of sources. Selection
of cases is done on a number of grounds: relevance to readers, case not
repeating a settled ratio, and the rationale adopted by the bench members.

What keeps the contributors going for so
many years: “Contributing monthly keeps our academic journey going. It keeps
our quest for knowledge alive”; “it is a joy to work as a team and contributing
to the profession” were some of the answers. No wonder that the features
section since inception of the BCAJ starts with the Tribunal News!

31. [2019] 101 taxmann.com 391 (Jaipur-Trib.) ITO vs.
Trilok Chand Sain ITA No.:
499/Jp./2018 A.Y.:
2014-15 Dated: 7^th January, 2019

Section 56(2)(vii)(b) – Agricultural land
falls within the definition of immovable property and covered within the scope
of section 56(2)(vii)(b) irrespective of whether the same falls within the
definition of capital asset u/s. 2(14) of the Act or otherwise.

FACTS

The assessee, an individual, purchased three
plots of land and claimed that the said plots of land did not fall within the
definition of capital asset as per section 2(14) of the Income-tax Act, 1961
(“the Act”). The Assessing Officer (AO) invoked provisions of section
56(2)(vii)(b) of the Act and made addition of Rs. 1,51,06,224 being the difference
between the sale consideration as per the sale deed and the value determined by
the stamp valuation authority.

Aggrieved, the assessee preferred an appeal
to the CIT(A). The CIT(A) held that land in question being agricultural land is
not a capital asset and the said transaction of purchase of land did not
attract the provisions of section 56(2)(vii)(b) of the Act. He further held
that the assessee was in the business of sale/purchase of property and the land
so purchased was his stock-in-trade and since the stock-in-trade is also
excluded from the definition of capital asset, provisions of section
56(2)(vii)(b) of the Act were not applicable. He deleted the addition of Rs.
1,51,06,224 made to the total income of the assessee.

Aggrieved, the Revenue preferred an appeal
to the Tribunal.

HELD

Section 56(2)(vii)(b) refers to any
immovable property and the same is not limited to any particular nature of
immovable property. The Tribunal also held that the section refers to
`immovable property’ which by its grammatical meaning would mean all and any
property which is immovable in nature i.e. attached to or forming part of earth
surface. The issue as to whether such agricultural land falls in the definition
of capital asset u/s. 2(14) or whether such agricultural land is part of
stock-in-trade could not be read into the definition of any immovable property
used in the context of section 56(2)(vii)(b) of the Act and is therefore not
relevant.

The appeal filed by the Revenue was
dismissed by the Tribunal.

shailesh.kwebmaker

Section 56(2)(vii) – Provisions do not apply to rights shares offered on a proportionate basis even if the offer price is less than the FMV of the shares.

10.
Asst. CIT vs. Subhodh Menon (Mumbai) Members: R. C. Sharma (A. M.) and Ram Lal Negi (J. M.)
ITA No.: 676/Mum/2015 A. Y.: 2010-11. Dated: 7^th Decmber, 2018
Counsel for Revenue / Assessee: Tejveer
Singh and Abhijeet Deshmukh / S.E. Dastur

Section 56(2)(vii) –
Provisions do not apply to rights shares offered on a proportionate basis even
if the offer price is less than the FMV of the shares.

FACTS

The assessee was an executive director of
Dorf Ketal Chemicals India Pvt. Ltd. (“Dorf Ketal”). He filed his return of
income showing total income of Rs. 25.04 crore (revised). On 28.01.2010 the assessee acquired 20,94,032
shares in Dorf Ketal @ Rs.100/- per share i.e. @ face value for a consideration
of Rs.20.94 crore. According to the A.O., under Rule 11UA(c), the fair market
value of the share of Dorf Ketal was Rs.1,438.64. Therefore, the difference in
share value was brought to tax u/s. 56(2)(vii)(c) and the total income was
assessed at Rs. 326.32 crore. According to the AO, the assessee being a
salaried employee, the shares allotted to him could also be treated as
perquisite or profit in lieu of salary u/s. 17. Reliance was placed on the
ratio laid down by the Bombay High Court in the case of CIT vs D. R. Pathak (99
ITR 14). The CIT(A) on appeal, relying
on the decision of the Mumbai tribunal in the case of Sudhir Menon HUF vs.
Asst. CIT (I.T.A. No. 4887/Mum/2013 dated 12.03.2014) held in favour of the
assessee. Being aggrieved, the revenue
appealed before the Tribunal.

Before the Tribunal, the revenue justified
the order of the AO and contended that:

The assessee has not disputed the valuation of
the shares at Rs.1,538.64 per share as on 31,03.2009, which was in accordance
with the Rules. As regards argument of the assessee that after the date of the
issue of fresh shares, the valuation of the shares has been drastically reduced
with inclusion of the new contribution of share capital, according to the revenue, the share value of
the company has to be valued as on date of issue or prior to the issue date to
determine the fair market value;

The assessee was offered 21,78,204 shares at
face value of Rs. 100. However, he accepted only 20,94,032 shares. Thus,
according to the revenue, there has been disproportionate allotment in the case
of the assessee and thus the decision of the Mumbai Tribunal in the case of
Sudhir Menon HUF, relied on by the CIT(A), was distinguishable;

The provisions of section 56(2)(vii) are in the
nature of anti-abuse provisions and therefore should be interpreted strictly.
For the purpose, it relied on the Circular No. 1/2011 dated 6^th
April, 2011 and the decisions of the Hyderabad Tribunal in case of Rain Cement
Limited vs. DC IT (2017 1 NYPTTJ 362) and Kolkata Tribunal in the case of
Instrumentarium Corporation Ltd. (2016 (7) TMI 760 – ITAT Kolkata);

HELD

According to the Tribunal, the issue under
consideration was squarely covered by the order of the Mumbai Tribunal in the
case of Sudhir Menon HUF. As held under
the said decision, the Tribunal held that the provisions of section
56(2)(vii)(c) is not applicable to the facts and circumstances of the
appellant’s case.

As regards contention of
“disproportionate allotment” raised by the revenue, according to the
Tribunal, it is only when a higher than the proportionate allotment is received
by a shareholder, the provisions of section 56(2)(vii) get attracted. In the
instant case, the assessee applied for and was allotted a lesser than the
proportionate shares offered to him and his shareholding reduced from 34.57% to
33.30%.

The Tribunal further noted that the
transaction of issue of shares was carried out to comply with a covenant in the
loan agreement with the bank to fund the acquisition of the business by the subsidiary
in USA. Thus, the shares were issued by Dorf Ketal for a bonafide reason and as
a matter of business exigency. As per Circular No.1/2011 explaining the
provision of section 56(2)(vii) and relied on by the revenue, “the
intention was not to tax transactions carried out in the normal course of
business or trade, the profit of which are taxable under the specific
head of income”. Thus, the Circular supports the assessee’s case.

As regards the
alternated contention of the AO that the same should be considered for
taxability as perquisite u/s. 17, the tribunal held that the provisions of
section 17 do not apply to the shares allotted by Dorf Ketal to the assessee,
as the shares were not allotted to the assessee in his capacity of being an
employee of the company. The shares were offered and allotted to the assessee
by virtue of the assessee being a shareholder of the company. Therefore the
provisions of section 17 were not applicable. For the purpose, the Tribunal
referred to the Board Circular No. 710 dated 24^th July, 1995 which
provides that where shares are offered by a company to a shareholder, who
happens to be an employee of the company, at the same price as have been
offered to other shareholders or the general public, there will be no perquisite
in the shareholder’s hands. In the instant case, the Tribunal noted that the
shares were offered to the assessee and other shareholders at a uniform rate of
Rs. 100 and therefore, the difference between the fair market value and issue
price cannot be brought to tax as a perquisite u/s. 17.

In the result, the appeal filed by the
revenue was dismissed.

shailesh.kwebmaker

INSOLVENCY & BANKRUPTCY CODE, 2016 – SC’S BOOSTER SHOTS

It was started in September, 2002 with
Anup P Shah as its author. He continues to eloquently pen it every month since
then. BCAJ had several features on tax and accounting but very little of Law.
As auditors and advisors, CAs need to have a good working knowledge of laws
which impact business. Each article provided audit steps after covering the
legal aspects. The idea behind the feature is to educate CAs and even
businessmen about laws which impact a business and hence, the name “Laws &
Business”. Anup started writing on different laws and then moved on to
different legal issues. One notable change: When he started he was CA. Anup
Shah and now he is Dr. Anup P Shah.

You are about to read the 196^th
contribution. So far the column has covered 82 Laws and 164 legal issues. Two
editions of compilation of Laws and Business have been published by BCAS. When
we asked the author, what keeps him going after sixteen years of monthly
writing: “Writing crystallizes thinking – while readers may benefit from the
Feature, I get a larger benefit since before one can write on a subject, one
must study and analyse it thoroughly. In addition, the desire to learn new
legal issues and a zeal to write keeps the keyboard pounding!” Soon the feature will hit a double century!

Insolvency & Bankruptcy
Code, 2016 – SC’s Booster Shots

Introduction

Rarely has a law witnessed
as many legal challenges in its initial years as the Insolvency &
Bankruptcy Code, 2016 (“Code”) has! Although, the Code is less
than three years old, it has seen numerous battles not just at the NCLT level
but even at the Supreme Court. In addition, the Code itself has been amended
many times to address changing circumstances and in response to Court
decisions. Hence, it has been an evolving legislation. Promoters of companies
under insolvency resolution have tried resorting to judicial forums to prevent
losing control over their companies but Courts have been wary of allowing their
pleas. However, each time the Code has emerged stronger and more robust than
before. In the last few months, the Supreme Court has on three occasions,
delivered landmark decisions, which have helped uphold the validity of the
Code. Let us examine these decisions of the Apex Court in the context of the
Code.

Case-1: Swiss Ribbons (P.) Ltd. vs. UOI,
[2019] 101 taxmann.com 389 (SC)

The Supreme Court by its
Order dated 25^th January 2019, upheld the Insolvency and Bankruptcy
Code, 2016 in its entirety with some minor adjustments. This case was not fact
based since it involved a challenge to the Constitutional validity of the Code.
Some of the salient features of this path breaking decision are discussed
below. The main thrust of the petitioner’s argument was that the Code suffered
from various Constitutional infirmities and arbitrariness and hence, deserved
to be struck down. The Court held the primary focus of the legislation was to
ensure revival and continuation of the corporate debtor by protecting the
corporate debtor from its own management and from a corporate death by
liquidation. The Code was thus a beneficial legislation which put the corporate
debtor back on its feet and was not a mere recovery legislation for creditors.
The interests of the corporate debtor had, therefore, been bifurcated and
separated from that of its promoters / those who were in management. Thus, the
Corporate Insolvency Resolution Process (“CIRP”) was not
adversarial to the corporate debtor but, in fact, protective of its interests.

It observed that in the
working of the Code, the flow of financial resource to the commercial sector in
India had increased exponentially as a result of financial debts being repaid.
Approximately 3300 cases were disposed of by the NCLT based on out-of-court
settlements between corporate debtors and creditors which themselves involved
claims amounting to over Rs. 1,20,390 crore. The experiment conducted in
enacting the Code was proving to be largely successful.

Distinction between Operational and Financial
Creditors is Valid

It was argued that the
distinction between operational and financial creditors was Constitutionally
invalid and nowhere in the world was such an artificial bifurcation found. It
was quite likely that since operational creditors were often unsecured (e.g.,
creditors for goods and services) as compared to financial creditors (e.g.,
banks, NBFCs, etc.,) who may be secured, there might not be enough funds left
behind for the operational creditors after paying off the financial creditors.
Further, it was contended that operational creditors had no right to vote as
compared to financial creditors who alone could vote. Moreover, a financial
creditor could trigger a resolution application under the Code merely on a
default taking place. However, in the case of an operational creditor even if a
default takes place and an application is filed before the NCLT, the same would
be rejected if the debtor can prove that a dispute exists with the operational
creditor.

The Court noted that the
reason for differentiating between financial debts, which were secured, and
operational debts, which were unsecured, was in the relative importance of the
two types of debts when it comes to the objects sought to be achieved by the
Code. Giving priority to financial debts owed to banks and lenders would
increase the availability of finance, reduce the cost of capital, promote
entrepreneurship and lead to faster economic growth. The Government also will
be a beneficiary of this process as the economic growth will increase revenues.
Financial creditors from the very beginning are involved with assessing the
viability of the corporate debtor. They can, and therefore do, engage in
restructuring of the loan as well as reorganisation of the corporate debtor’s
business when there is financial stress, which are the things operational
creditors do not and cannot do. Financial creditors help in preserving the
corporate debtor as a going concern, while ensuring maximum recovery for all
creditors being the objective of the Code, and hence, are clearly different
from operational creditors and therefore, there is obviously an intelligible
differentia between the two which has a direct relation to the objects sought
to be achieved by the Code.

Further, the NCLAT has,
while looking into viability and feasibility of resolution plans that are
approved by the committee of creditors, always examined whether operational
creditors are given roughly the same treatment as financial creditors, and if
not, such plans are either rejected or modified so that the operational
creditors’ rights are safeguarded. Moreover, a resolution plan cannot pass
muster u/s. 30(2)(b) read with section 31 unless a minimum payment is made to
operational creditors, being not less than liquidation value.

The Regulations framed under
the Code have been amended to expressly provide that a resolution plan shall
now include a statement as to how it has dealt with the interests of all
stakeholders, including financial creditors and operational creditors, of the
corporate debtor. This further strengthens the rights of operational creditors
by statutorily incorporating the principle of fair and equitable dealing of
operational creditors’ rights, together with priority in payment over financial
creditors.

Hence,
the Court concluded that no discrimination resulted since it was demonstrated
that there was an intelligible differentia which separated the two kinds of
creditors.

Section12A withdrawal of CIRP

In the
past, there have been instances where on account of settlement between the
applicant creditor and the corporate debtor, judicial permission for withdrawal
of the CIRP was required. The Supreme Court, under Article 142 of the
Constitution, passed orders allowing withdrawal of applications after the
creditors’ applications had been admitted by the NCLT. Thus, without
approaching the Supreme Court, it was not possible to withdraw an application
even if both parties consented to the same – Lokhandwala Kataria
Construction P Ltd vs. Nisus Finance and Investment Managers LLP,
CA No. 9279/2017 (SC) and Mothers Pride Dairy P Ltd vs. Portrait
Advertising and Marketing P Ltd, CA No. 9286/2017 (SC).

To remedy this situation,
section 12A was inserted in the Code which allows for the withdrawal of an
insolvency petition filed against a corporate debtor if 90% of the Committee of
Creditors (CoC) approve such a withdrawal. It was argued that this section gave
unbridled and uncanalised power to the CoC to reject legitimate settlements
between creditors and corporate debtors. The Apex Court held that once the CIRP
was triggered, the proceeding became a proceeding in rem, i.e., a collective
proceeding, which could not be terminated by an individual creditor. All
financial creditors have to come together to allow such withdrawal as,
ordinarily, an omnibus settlement involving all creditors ought, ideally, to be
entered into. This explained why 90%, which was substantially all the financial
creditors, have to grant their approval to an individual withdrawal or
settlement. In any case, the figure of 90%, pertained to the domain of
legislative policy. The Court further pointed out that there was an additional
safeguard by way of section 60 of the Code, which provided that if the CoC
arbitrarily rejected a just settlement and/or withdrawal claim, the NCLT, and
thereafter, the NCLAT could always set aside such a decision. Thus, the Court
upheld section 12A of the Code.

Role of RP

The
Court did not find merit in the plea that the resolution professional was given
adjudicating powers under the Code. It held that he was given an administrative
role as opposed to quasi-judicial powers. The Court distinguished between the
role of a resolution professional who had an administrative role versus a
liquidator who had a quasi-judicial role. Thus, the resolution professional was
only a facilitator of the resolution process, whose administrative functions
were overseen by the CoC and ultimately by the NCLT.

Section 29A: Relief to ‘Related Party’

A multi-fold attack was
raised against section 29A which disentitled certain persons to act as
resolution applicants. Firstly, it was stated that the vested rights of
erstwhile promoters to participate in the recovery process of a corporate
debtor were impaired by a retrospective application of section 29A. It was
contended that section 29A was contrary to the object sought to be achieved by
the Code, in particular, speedy resolution process as it would inevitably lead
to challenges before the NCLT and NCLAT, which would slow down and delay the
CIRP. In particular, so far as section 29A(c) was concerned, a blanket ban on
participation of all promoters of corporate debtors, without any mechanism to
weed out those who are unscrupulous and have brought the company to the ground,
as against persons who are efficient managers, but who have not been able to
pay their debts due to various other reasons, would not only be manifestly
arbitrary, but also be treating unequals as equals. Also, maximisation of value
of assets was an important goal to be achieved in the resolution process and section 29A was contrary to such a goal since an
erstwhile promoter, who may outbid all other applicants and may have the best
resolution plan, would be kept, thereby impairing the object of maximisation of
value of assets. Another argument which was made was that under the Code, a
person’s account may be classified as an NPA in accordance with the guidelines
of the RBI, despite him not being a wilful defaulter. Lastly, persons who may
be related parties in the sense that they may be relatives of the erstwhile
promoters were also debarred, despite the fact that they may have no business
connection with the erstwhile promoters who have been rendered ineligible by
section 29A.

The Supreme Court held that
the Code was not retrospective in application and hence, it was clear that no
vested right of the promoters was taken away by the application of section 29A. The Court held that it must be borne in
mind that section 29A had been enacted in the larger public interest and to
facilitate effective corporate governance. The Parliament rectified a loophole
which allowed a back-door entry to erstwhile managements in the CIRP. Hence,
the Court upheld the validity of section 29A. However, it held that the mere
fact that somebody happened to be a relative of an ineligible person was not
good enough to oust such person from becoming a resolution applicant, if he was
otherwise qualified. In the absence of showing that such a person was connected
with the business activity of the ineligible resolution applicant, such a person
could not automatically be disqualified. Hence, the expressions related party
and relative contained in the Code would disqualify only those persons who were
connected with the business activity of the resolution applicant.

Ultimately, the Supreme Court
upheld the validity of the Code in its entirety with a minor tweak for
relatives / related parties!

Case-2: Arcelor Mittal India Private
Limited vs. Satish Kumar Gupta, (2018) 150 SCL 354 (SC)

This decision pertained to
the bid for Essar Steel India Ltd. 29A of the Code contains several
disqualifications for bidders, one of which is that a person would not be
eligible to submit a resolution plan, if such person, or one acting jointly or
in concert with such person was disqualified. In this case, there were two
bidders – the erstwhile promoters and another resolution applicant. It so
happened that both the promoters as well as the resolution applicant were
disqualified by virtue of the various clauses of section 29A. Hence, both of
them modified their shareholding structures and reapproached the NCLT. The
issue finally reached the Supreme Court as to whether both these bidders were
eligible to bid?

The Court adopted a
purposive interpretation of the section and held that the legislative intention
was to rope in all persons who may be acting in concert with the person
submitting a resolution plan. The opening lines of section 29A of the Code
referred to a de facto as opposed to a de jure position of the
persons mentioned therein. This was a typical instance of a “see through
provision”, so that one was able to arrive at persons who were actually in
“control”, whether jointly, or in concert, with other persons. A wooden,
literal, interpretation would obviously not permit a tearing of the corporate
veil when it came to the “person” whose eligibility was to be
considered. However, a purposeful and contextual interpretation was necessary.
While a shareholder is a separate legal entity from the company where he holds
shares, for verifying the resolution plan, it is imperative to lift the
corporate veil and ascertain the constituents who make up the Company. The
Court upheld the doctrine of piercing the corporate veil as enshrined in LIC
of India vs. Escorts Ltd (1986) 1 SCC 264 and distinguished the legal
personality concept of Soloman’s case. It observed that a slew of
judgments has held that where a statute itself lifts the corporate veil, or
where protection of public interest is of paramount importance, or where a
company has been formed to evade obligations imposed by the law, the court will
disregard the corporate veil.

The Court held that seen
from the wide language used in the section, any understanding, even if it is
informal, and even if it is to indirectly cooperate to exercise control over a
target company, is included in the definition of persons acting in concert and
it is not merely restricted to cases of formal joint venture agreements. The
stage at which ineligibility is to be examined is when the resolution plan was
submitted by a resolution applicant. So long as a person or persons acting in
concert, directly or indirectly, can positively influence, in any manner,
management or policy decisions, they could be said to be “in control”. The
expression “control”, in section 29A, denotes only positive control, which
means that the mere power to block special resolutions of a company cannot
amount to control. The Supreme Court also examined the decision of the SAT in the case of Shubhkam Ventures vs. SEBI (Appeal No. 8 of 2009
decided on15.1.2010) which had taken a similar view.

The Court held that since
section 29A is a see-through provision, great care must be taken to ensure that
persons who are in charge of the corporate debtor for whom such resolution plan
is made, do not come back in some other form to regain control of the company
without first paying off its debts. One of the persons mentioned in section 29A
who is ineligible to act as an resolution applicant is a person prohibited by
SEBI from either trading in securities or accessing the securities market. The
Court held that it was clear that it was clear that if a person was prohibited
by a regulator of the securities market in a foreign country from trading in
securities or accessing the securities market, the disability would equally
apply.

Lastly, the court dealt
with the timeline for completing a CIRP. The time limit for completion of the
CIRP as laid down in section 12 of the Code is a period of 180 days from the
date of admission of the application by the NCLT. This is extendable by a
maximum period of 90 days only if 66% of the CoC approve of the same and the
NCLT agrees to the same. If no resolution takes place within such period of 270
days, then the only option is to liquidate the corporate debtor. The Supreme
Court held that the timelines mentioned in the Code are mandatory and cannot be
extended. Nevertheless, the Court also relied on a legal maxim, Actus curiae
neminem gravabit – the act of the Court shall harm no man. Accordingly, it
held that where a resolution plan is upheld by the NCLAT, either by way of
allowing or dismissing an appeal before it, the period of time taken in
litigation ought to be excluded.

Ultimately, the Supreme
Court held that both the applicants were ineligible under the Code but
exercising its special powers under Article 142 it granted one more opportunity
to them to pay off the NPAs of their related parties and then resubmit their
bids.

Case-3: Brilliant Alloys P Ltd vs. S Rajagopal, SLP
No. 31557 / 2018, Order dated 14-12-2018

Section 12A of the Code
allows for the withdrawal of an insolvency petition filed against a corporate
debtor if 90% of the Committee of Creditors (CoC) approve such a withdrawal.
However, Reg. 30A of the Insolvency and Bankruptcy Board of India (Insolvency
Resolution Process for Corporate Persons) Regulations, 2016 provides that an
application for withdrawal u/s. 12A shall be submitted to the resolution
professional before the issue of invitation for expression of interest. Hence,
a question arises as to whether if the debtor and creditor agree to it, can the
petition be withdrawn even after the expression of interest has been issued?

The Supreme Court allowed
the withdrawal and held, that this Regulation has to be read along with the
main provision section 12A which contained no such stipulation. Accordingly,
this stipulation could only be construed as directory depending on the facts of
each case.

Conclusion

The
Supreme Court has time and again stepped in to protect and augment the Code. It
has endeavoured to preserve the basic fabric of the Code and to uphold its
provisions. However, at the same time it has made amendments where it felt a
change was required. The Code is a complicated and intricate legislation dealing
with an extremely complex subject and hence, such an evolution is expected.
However, it is heartening to note that the Apex Court has been up to the
challenge and has done it in a very timely manner. The Supreme Court decisions
have acted as a booster shot in the arm to the Code. The success of the Code
can be best summed up by the Supreme Court’s observations in Swiss Ribbons
(supra), “The defaulter’s paradise is lost. in its place, the economy’s
rightful position has been regained.”

shailesh.kwebmaker

IS IT FAIR TO DENY BENEFIT OF TAX DEDUCTED AT SOURCE (TDS) IN ABSENCE OF SUCH TDS IN FORM 26AS

BACKGROUND

Section 199(1) of the Income Tax Act 1961 permits
claim of Tax Deduction at Source (TDS) when such payment is made to credit of
the Central Government. However, instances have come to the notice of several
persons including tax authorities that in spite of the fact that

deductor has deducted tax at source and payment
thereof is not made to the credit of Central Government ( Consequently this
will not reflect in the TDS return of the deductor and as such will not further
reflect in 26AS of the deductee)

deductor has deducted tax at source and payment
thereof made to the credit of Central Government but such deductor has
defaulted in filing TDS Return ( Consequently this will not reflect in 26AS
of the deductee)

PROBLEM

Presently in either of the situations mentioned in
the preceding paragraph, deductee is denied benefit of TDS since in either case
such TDS does not reflect in 26AS of the deductee. With the electronic filing
of Income tax Returns being mandatory in respect of most of the assessees, deductee
( Assessee filing Return of Income) does not get credit of such TDS when return
of Income is processed by CPC . This results in

Either reduction in Refund Claimed in the
Return of Income

or results in a demand when Return was filed claiming
no refund.

UNFAIRNESS

1. Reduction
in the refund claimed or resulting demand, consequent upon non- granting of
credit of TDS (either not paid / return of TDS not filed) is unfair for the
deductee because such demand remains as outstanding demand on the CPC Website
and such demands get adjusted with future refunds due to the assessee
(Deductee).

2. In a
situation where Tax is deducted but not deposited, section 205 of the Income
Tax Act, 1961 comes to the rescue of the deductee. The said section reads as
under :

Head Note of the Section: Bar against direct demand on
assessee.

205. Where tax is deductible at the source under
[the foregoing provisions of this Chapter], the assessee shall not be called
upon to pay the tax himself to the extent to which tax has been deducted from
that income.

3. If we
paraphrase the above mentioned section, we can note that following ingredients
will emerge namely:

Tax is deductible from the deductee

Such Tax is deducted from the income

Assessee shall not be called upon to pay the
tax himself to the extent of such tax deduction

4. To
reiterate the rights of the Assessee in such situations, CBDT has issued
directions to the field officers vide reference number 275/29/2014-IT-(B) dated
01-06-2015. The relevant extracts are reproduced here:

Grievances have been received by the Board
from many taxpayers that in their cases the deductor has deducted tax at source
from payments made to them in accordance with the provisions of Chapter-XVII of
the Income-tax Act, 1961 (hereafter ‘the Act’) but has failed to deposit the
same into the Government account leading to denial of credit of such deduction
of tax to these taxpayers and consequent raising of demand.

As per section 199 of the Act credit of Tax
Deducted at Source is given to the person only if it is paid to the Central
Government Account. However, as per section 205 of the Act, the assessee shall
not be called upon to pay the tax to the extent the tax has been deducted from
his income where the tax is deductible at source under the provisions of
Chapter- XVII. Thus, the Act puts a bar on direct demand against the assessee
in such cases and the demand on account of tax credit mismatch cannot be
enforced coercively.

5. It
appears that above mentioned instruction was not observed by the field officers
(Reasons well known) and hence CBDT again has issued an office
memorandum on 11-03-2016 (OFFICE MEMORANDUM F.NO.275/29/2014-IT (B), DATED
11-3-2016). Relevant Extracts of the said Memorandum reads as under :

Vide letter of even number dated
1-6-2015, the Board had issued directions to the field officers that in case of
an assessee whose tax has been deducted at source but not deposited to the
Government’s account by the deductor, the deductee assessee shall not be called
upon to pay the demand to the extent tax has been deducted from his income. It
was further specified that section 205 of the Income-tax Act, 1961 puts a bar
on direct demand against the assessee in such cases and the demand on account
of tax credit mismatch in such situations cannot be enforced coercively.

However, instances have come to the notice of
the Board that these directions are not being strictly followed by the field
officers.

In view of the above, the Board hereby reiterates
the instructions contained in its letter dated 1-6-2015 and directs the
assessing officers not to enforce demands created on account of mismatch of
credit due to non-payment of TDS amount to the credit of the Government by the
deductor. These instructions may be brought to the notice of all assessing
officers in your Region for compliance.

CONCLUSION FROM
THE ABOVE

Thus, one will note from the above two
clarifications from CBDT that demand arising out of the situation of Tax
Deducted and not deposited, demand cannot be enforced from the assessee.

However, till date, the issue of TDS
being deducted, not deposited with central government by the deductor and
deductee ( Assessee) claiming such TDS and consequent refund in the return of
Income, is still not addressed by CBDT in spite of the fact that above
instruction/ office memorandum has been released .

SOLUTION

In the light of above, relevant rules should
authorise assessee to

Ask CPC to Block such demand from further
adjustment on the website and for the purpose a specific option be permitted to
be included in case of mismatch of TDS such as “TDS Mismatch since TDS
Deducted but not deposited by the deductor”

Assessee is permitted to send a proof of Tax
Deduction by the deductor (If Available) as a response to outstanding tax (TDS)
demand.

Besides relevant Rules should provide for a
proof of deduction to be submitted to the deductee on a Quarterly basis which
will substantiate a claim of the deductee that TDS is deducted since
entire hypothesis of the section 205 is based on the fact that “Tax is deducted”.
This is essential since deductor is an agent of Income Tax Department and as
such there is a privity between Tax department and the deductor which is
unfortunately lacking between deductor and deductee.

Lastly a deductee may be permitted
to lodge an online query when such deduction is not reflecting as a credit in
26AS against such deductors. A deductee will have to at least obtain a PAN and
TAN of the persons he deals with to lodge such queries.

shailesh.kwebmaker

APPLICABILITY OF MONEY LAUNDERING LAW TO SECURITIES LAWS VIOLATIONS

This was launched in April, 2006 by
Jayant Thakur. The aim of this column was to introduce Securities laws to the
readers. After covering the basics, the aim was changed to cover updates along
with analysis. Selection of topics and analysis is done on the basis of
relevance to accounting and tax aspects.
New laws, court and SAT decisions are covered in this space. Jayant
Thakur says: ”Writing this feature helps and even forces me to read each
development and analyse it for readers, thus adding to my knowledge too.” Well,
reading it gives the same effect too!

APPLICABILITY OF MONEY LAUNDERING LAW TO SECURITIES LAWS VIOLATIONS

There was a recent report in the media that
action against certain persons, who allegedly carried out price manipulation on
stock exchanges, was initiated under money laundering laws. If found guilty,
such persons would face additional and stringent punishment that could actually
be more than the punishment for even the original violation.

This is an eye
opener over how a few forgotten and dormant provisions can be used to levy fairly
serious criminal punishment in connection with violations of Securities Laws.
The parties face at least three years prison, and this is in addition to all
the action of penalty, debarment, prosecution, etc., they may face under
Securities Laws.

What can also be seen is that such action is
possible not just for price manipulation, but even for violation of several
other Securities Laws such as insider trading, takeovers, etc., and also for a
wide variety of corporate frauds under the Companies Act, 2013.

This raises several issues. What are these
provisions in money laundering laws that provide for punishment for such
securities and corporate laws? What type of such securities laws violations and
corporate frauds are covered? What is the additional criteria that makes such a
securities/corporate laws violation into a money laundering laws violation too?
Is it possible that the mere fact of indulging in such a violation will most
certainly result into violation of money laundering law? And thus, effectively,
result in double punishment?

WHAT IS ‘MONEY LAUNDERING’?

Money laundering is often confused with
laundering for tax purpose whereby money on which income-tax has not been paid
(‘black money’) is laundered and brought into books (ie converted into ‘white
money’). Money laundering, as defined and described under the Prevention of
Money Laundering Act, 2001 (“the Act”), is different. It is converting money
earned from certain serious crimes into money shown as earned in other manner.
For example, money earned through selling narcotic substances is shown as
monies earned from, say, sale of steel. The tainted money thus becomes
untainted. This camouflaging constitutes the offence of money laundering.
Interestingly, income-tax may be paid on such earnings. Just the source gets
camouflaged – or rather changed into a different colour. The punishment for such conversion – i.e., money
laundering – could be in the range of least 3 years prison upto 7 or even 10
years. This is apart from fine that may be levied.

WHAT ARE THE ‘CRIMES’ COVERED?

The Act lists certain crimes in respect of
which, the act of disguising the proceeds of such crimes is considered to be
the offence of money laundering. Hence, it is necessary to understand and list
what are such crimes.

Originally, the intention appears to list
only certain serious crimes such as drug dealing, terrorism, arms dealing, etc.
However, over the years, many more crimes have been added. Now the
offences/violations under various laws that are covered are in the hundreds.
Many of such crimes are what are referred to as white-collar crimes. In this
article, we will focus on four of them – insider trading, price
manipulation/fraud in securities markets, takeovers of companies and related
and corporate frauds. As we will see, these categories themselves have multiple
sub-categories.

Insider
trading

This
includes things like dealing in securities on the basis of unpublished price
sensitive information, sharing of such information, etc. The provisions
relating to insider trading are quite broadly defined. These include who are
‘insiders’, what is price sensitive information, what type of transactions or
actions deemed to be insider trading, etc.

Price
manipulation/fraud

Broadly stated, this includes manipulating
price of securities on stock exchanges, indulging in various types of unfair
practices, fraud, etc. These offences are defined generally and to add to that,
a long list of specific items has been listed which are deemed to fall under
this category.

Substantial
Acquisition of Shares and takeovers

The SEBI Takeover Regulations provide for
certain provisions to keep a check on change of control in a company. These are
broadly two. One is acquisition of shares or voting rights beyond a particular
limit without making an open offer. The second is acquiring shares beyond
certain specified limits without making disclosures.

Corporate
frauds

U/s. 447,
recently introduced vide the Companies Act, 2013, several types of acts/omissions
are deemed to be frauds and punishable under that provision quite strictly.
Once again, the main section 447 describes frauds very widely and generally. If
an act or omission falls under this description, it is fraud. However, there
are several other provisions under the Act that deem certain acts/omissions as
frauds u/s. 447.

Others

There are many
other white collar offences listed as specified offences for the purposes of
money laundering. It is possible that in many cases, corporate frauds or
securities related frauds may get covered in such other categories too.
However, this article focuses on the four items listed above.

THE SPECIFIED OFFENCE HAS TO BE PROVED FIRST

The first step has to be to prove the
original offence itself. For example, there has to be an offence of, say, price
manipulation. It is only when this offence is proved that there can be any
question of alleging that there was money laundering.

THERE HAS TO BE PROCEEDS OF SUCH OFFENCES

Money laundering obviously cannot exist without there
being some proceeds of such crime. In case of price manipulation, for example,
the profits made through such dealings is the proceeds of crime.

WHEN AND HOW WOULD SUCH OFFENCES ALSO RESULT IN MONEY LAUNDERING?

The offender may make some earnings from any
of the specified acts. If he shows these earnings as derived from a different
source, he would have committed the offence of money laundering.

PROVING THAT THERE HAS BEEN MONEY LAUNDERING

To determine whether the offence of money laundering has
taken place, a clear link would has to be established between the proceeds of
crime and the earnings/assets that were shown after such disguising.

DIFFICULTIES IN PROVING MONEY LAUNDERING IN CASE OF SECURITIES/ CORPORATE OFFENCES

It
is difficult enough to prove securities/corporate offences but let us say that
is done. The question, however, is how does one prove that (i) such person has
earned money from such offences (ii) he has disguised the proceeds of such
offences?

The difficulties are particularly compounded
in case of securities/corporate offences. In most of such cases, even if the
income is shown without any modification of source, proving money laundering
would be difficult. This is explained by several examples below.

Take a case, however, first of a case where
it may be possible to prove money laundering. Take a case of price manipulation
by the so-called ‘operator’. Such person may indulge in price manipulation in
shares. He enters into false transactions that result in rise of the price of
the shares. He is paid ‘fees’ for carrying out such activity. He records it as
fees for some other ‘consultancy’ or the like. Underlying papers show that he
did receive such fees and that it was disguised as having come from other
legitimate source. The offence of money laundering is thus proved.

However, take an example of a CFO who comes
to know that his employer company is going to declare good financial results.
He buys the shares at a particular price and then, after the news become public
and the price of the shares rise, he sells the shares at a higher price. The
offence of insider trading might be easily proved here. However, how does one
prove the offence of money laundering here? The CFO may have shown the income
as from capital gains in his books of accounts and tax returns. There is no
disguising involved here.

Similar is the case of price manipulation
where profits are made by buying shares at a low price, then indulging in price
manipulation/fraud, and then selling at a high price. Even if the offence of
price manipulation/fraud is proved, the income is still arising from gains on
sale of shares.

Violation of SEBI Takeover Regulations may
also have similar issues.

Then there is a
whole long list of frauds falling generally u/s. 447 and in many of such cases
too, such issues may arise.

WHAT IS THE PUNISHMENT?

The punishment
for money laundering is stringent. Generally stated, the punishment may range
from three years to seven years imprisonment. In effect, it calls for
punishment that is more strict than even the original offence.

CONCLUSION

It is possible
that the recent invoking of money laundering law in such white collar crimes is
to make an example in serious cases. This would create an added disincentive on
such people and also people who help them in disguising their earnings.
However, these white collar offences are large in number and varying in
intensity. In most cases, even the punishment for the original offence is
relatively mild. Often, a token penalty is levied. If the law relating to money
laundering is frequently used, then the consequences would be far more serious.
I submit that the list of offences covered here should be narrowed down only to
serious cases and there should be added conditions to be satisfied to invoke
the provisions relating to money laundering.

shailesh.kwebmaker

PACKAGE SCHEME OF INCENTIVES – PROPORTIONATE INCENTIVES VIS-À-VIS RETROSPECTIVE EFFECT TO SECTION 93 OF THE MVAT ACT

This feature started as Sales Tax corner
in 1995-96. The first contributors to write it were Govind G Goyal and C B
Thakar. The feature was started with the intention to spread awareness about
Indirect Taxes, and more particularly sales tax as excise duty was covered by
another column titled Excise Duty Spectrum. Sales tax was replaced by VAT in
2005 and so the feature explained the new law initially. Later it was renamed
as VAT.

The
feature covers contemporary issues under VAT. It is an analytical feature where
a topic or an issue under it is selected and discussed in light of available
decisions from the highest court to the tribunals. Authors give a conclusion at
the end and offer their views. When we asked them what keeps them going they
said: “As we travel for speaking engagements across the country, we receive
positive feedback and that has been the major source of motivation for us”.
Talking about BCAJ@50, Govind Goyal said, “Its journey must continue with same
zeal, with same enthusiasm in pursuit of such a noble cause of sharing &
spreading knowledge.”

Package Scheme of Incentives –
Proportionate Incentives vis-à-vis retrospective effect to section 93 of the MVAT Act

Introduction

Under MVAT era there were
incentive schemes, for backward area units,
announced by the State Government from time to time, which were also
known as Package Scheme of Incentives (PSI). The incentives used to be given to
new units as well as for the expansion of the existing unit. The unit enjoying
original benefits under the PSI may have carried out expansion and therefore
may also become eligible for further PSI benefits by separate certificate for
expansion.

Under the 1993 PSI, the
units, who got the Entitlement Certificate for expansion, took benefit on the
whole production of the unit. While the Government was contemplating only
proportionate exemption i.e. in the ratio of production from exempted unit as
compared to total production.

However, the Hon. Bombay
High Court in case of Pee Vee Textile Ltd. (26 VST 281)(Bom)
ruled that once the unit holds Entitlement certificate even only for Expansion,
till the unit is entitled to take the benefit for total production and no pro
rata working is applicable.

Amendment in MVAT Act

Having above back ground,
Government of Maharashtra amended the MVAT Act, 2002 and inserted section 93
and 93A in the MVAT Act in 2009 with retrospective effect from 1^st
April 2005.

By the
above amendment, the Government prescribed the Scheme for pro rata
benefit in relation to Expansion. This amendment was retrospective and hence it
was challenged before the Bombay High Court. The Hon. Bombay High Court
delivered judgment in case of Jindal Poly Films Ltd. (63 VST 67)(Bom)
in which it was held that legislature has power to amend the position
retrospectively and hence the retrospective amendment was upheld. In view of
above it was general feeling that there are no chances to avoid pro rata
working of benefits from 1.4.2005.

However, recently there is
a judgment from the Hon. Bombay High Court in relation to above issue wherein
in spite of above position laid down earlier Hon. High Court has given
favorable judgment. The reference is to the judgment in case of Finolex
Industries Ltd. (MVAT A.No.61 of 2017 dt.29.10.2018).

Facts in above case

The facts, narrated by the
Hon. High Court in the judgment, may we read as follows:-

“3. The Appellant Company,
in the year 1994, has made a fixed capital investment of Rs.329.5 crore,
thereby creating a new manufacturing factory in Ratnagiri (hereinafter referred
to as “Ratnagiri Factory”) for manufacturing of PVC Resins and also PVC Pipes.
The said factory claimed the benefits of the Package Scheme of Incentives which
was prevailing at the relevant time, known as PSI 1988 and an eligibility
certificate under Part I of the 1988 Scheme was granted to the appellant by
SICOM qua its Ratnagiri unit. By virtue of the said eligibility
certificate, the appellant was held eligible for maximum entitlement of sales
tax incentives of Rs. 313,03,07,000/- by way of exemption. The said eligibility
certificate was valid for a period of 10 years from 4^th April 1994
to 30^th April 2004. On the basis of the said eligibility
certificate, the Sales Tax Department also issued an entitlement certificate on
25^th April 1994 to the appellant and both the certificates mentioned
the production capacity as 1,30,000 metric tonnes. The said eligibility
certificate expressly described the unit of the appellant as “Pioneer Unit”. In
the year 1993, a new Package Scheme of Incentives substituted the existing
Package Scheme of Incentives. The appellant made a further investment in its
Ratnagiri unit to the tune of Rs.208.89 crore in August 2002 and accordingly,
the existing capacity of PVC Resins and extruded products like pipes, flared up
from 1,30,000 metric tonnes to 2 lakh metric tonnes per annum. The appellant,
accordingly, made an application for availment of necessary incentives in terms
of 1993 Package Scheme of Incentives vide application dated 8^th
October 2002. Accordingly, on 10^th February 2003, a fresh
eligibility certificate was issued to the appellant in the capacity as Pioneer
Unit by SICOM. The said certificate issued on 11^th February 2003 was
valid for 106 months i.e. from 1^st August 2002 to 31^st
May 2011 and the eligibility certificate issued in favour of the appellant for
additional fixed capital investment of Rs. 20889.76 lakhs for village Ranpar,
District Ratnagiri was made subject to review/ monitoring every year. Certain
conditions were stipulated in the said eligibility certificate which included
the condition of automatic curtailment of the eligibility certificate from the point
of time when the total sales tax incentives admissible under the Scheme are
availed of, or exceed the limits as specific in the 1993 Package Scheme of
Incentives i.e. on attaining 69.93% of the gross value of Fixed Capital
Investment actually made subject to a ceiling of Rs. 20889.70 lakh i.e.
Rs.14,608.17 lakh or from the date from which the certificate of entitlement is
either cancelled or revoked, whichever event occurred earlier.

4. The certificate of
Entitlement issued in favour of the appellant on 21^st October 2002
by SICOM did not incorporate any condition whatsoever that availment of
incentives should be on proportionate basis of increase in production capacity
to the additional investment. The consequential certificate of entitlement
dated 10^th February 2003 issued by the Sales Tax Department,
according to the appellant, also does not in any condition stipulating that the
appellant should avail the incentives on a proportionate basis of increase in
production capacity of additional investment. It is the specific case of the
appellant that for the Financial Years 2005-06, 2006-07, 2007-08 and 2008-09
and in particular, for the Financial Year 2005-06 in respect of which the
present Appeal is filed, the appellant relied upon the eligibility certificate
and the Entitlement certificate issued in its favour and claimed complete
exemption from taxes for the entire turnover of sales made by it from Ratnagiri
unit. It is the case of the appellant that it fully satisfied all the
conditions of exemption imposed under the notification dated 1^st
April 2005 issued under the MVAT Act 2002 and necessary declarations were also
duly made on the invoice as required in the notification. As such, the
appellant exhausted the eligible quantum of benefit under the entitlement
certificate in the month of March 2009 itself. The appellant also claimed a
refund of tax paid on purchases in terms of Rule 78 of the MVAT Rules 2005 for
the period from 4^th February 2006 to 1^stMarch 2006 and
accordingly, the respondent granted provisional refund to the appellant
amounting to Rs. 5,65,39,588/.

Perusal of the chronology
of events would further reveal that on 22^nd February 2013, an
assessment order was passed by the Assessing Authority for the disputed period
2005-06.

In the assessment order,
the Assessing Authority applied the provisions of section 93 of the MVAT 2002
as retrospectively substituted by Maharashtra Act No.XXII of 2009 and only
allowed the exemption to the extent of prorate turnover of 35%. The assessing
authority rejected the claim of 100% exemption without applying prorate factor
on the ground that the dealer has not produced any books of accounts and has
not identified the goods manufactured by old and new units and there was no
identification of goods. Resultantly, the appellant was assessed to VAT Tax at
Rs. 6,07,82,694/- and the claim was verified and finally allowed at
Rs.10,30,85,904/and it was held that the assessment had resulted in excess
amount which was refunded to the dealer. For the remaining amount, a demand
notice was served on
the appellant.”

The
argument of the appellant was that since the benefits are already exhausted and
it has started paying tax subsequent to exhaustion and that there is no
periodicity available for taking benefit of modified working, the retrospective
amendment should not be made applicable to it.

On the part of Government
the argument was that the law should be applied as already upheld by the Hon.
Bombay High Court and only pro rata benefit should be granted,
irrespective of the consequences.

The Hon. Bombay High Court
has held that in the above specific circumstances the position should not be
disturbed. Hon. High Court concluded the position in following words.

“26. The findings recorded by the First
Appellate Authority as well as the Tribunal is amiss the legal position laid
down by the Hon’ble High Court in ACC Ltd Vs. State of Maharashtra (supra),
wherein it was categorically held that the expansion made by the existing
pioneer unit which specified conditions under para 3.12(b) will not be hit by
expansion under para 8.1(i)(c). The amendments made by Maharashtra Act No. XXII
of 2009 will not apply to units whose Cumulative Quantum of Benefits have been
fully utilized before expiry of the eligibility period even if the incentive is
computed in terms of amended Section 93 of the MVAT Act, 2002.

The amendment inserted by
Act No. XXII of 2009 would only govern those units where the Cumulative Quantum
of Benefits has not yet lapsed without full utilization and is in the process
of being availed. The eligibility availed under Section 93(1) is computed for a
particular year and if there is excess availment, then, the benefits can be
withdrawn. The challenge to the constitutional validity of Act No. XXII of 2009
was rejected by a Division Bench of this court in case of Jindal Poly Films
(supra) which is upheld by the Hon’ble Apex Court and thus, upholding the
retrospectively of the said amending enactment. The amendment of Section 93(1)
being retrospective in the sense would make the provision applicable to the
unit set up before the date of the said amendment, but in respect of sales
which are made by such unit on or after 27^th August 2009. Since the
appellant has already exhausted the benefits of exemption before 27^th
August 2009, the appellant cannot be deprived of the said benefits in light of
Section 93A which was inserted with effect from 27^th April 2009. The
amendment, thus would not apply to the sales already made between 1^st
April 2005 and 28^th August 2009. A retrospectively of a statute has
to be tested in the backdrop of its nature. A statute is not said to be
retrospective in operation merely because a part of the requisite for its
operation is drawn from a time antecedent to its passing. A situation which
takes away or impairs any vested right acquired under the existing law or which
creates a new obligation or imposes a new liability will be treated as
retrospective. If the amendment which is made on 27^thAugust 2009
applied to a unit to deprive it of all the exemptions of sale after 27^thAugust
2009, then, the amendment would affect such vested right and not merely a
future or contingent right and it would be retrospective in operation. The
industrial unit like the appellant which has been set up before 27^th
August 2009 and fulfilled all the requirements of the scheme, which was
prevailing, relating to enjoyment of certain sales tax benefits and if it had
fulfilled all the requirements of the scheme, then, a vested right is created
in favour of the unit to avail the exemption for a specified period and if on
the basis of an amendment which deprives the unit of all such benefits, it
would be retrospective in operation and would be against the spirit of a taxing
statute.”

Thus, favorable position is
available inspite of retrospective amendment.

Conclusion

The judgment gives much
required relief to the backward area units. In fact many units have suffered
financially due to retrospective amendment. This judgment will save many of
such units and they will not be affected by the retrospective amendment. This is
good judgment considering the basic intention of the Scheme. This judgment will
also be guiding judgment in relation to retrospective amendments, where
applicable and where not applicable.

shailesh.kwebmaker

BOOK-PROFIT FOR PAYMENTS TO PARTNERS – SECTION 40(B)

The column “Controversies” was started
in January, 1980, with Vilas K. Shah and Rajan R. Vora as the initial
contributors. Harish N Motiwalla took over from 1985-86 to 1993-94. Pradip
Kapasi contributed from May, 1992, and has not stopped rolling out controversy
after controversy till today. That is 27 years of monthly contributions. Gautam
S Nayak joined as co-author in April, 1996 and is now an experienced
‘controversialist’ for 23 years. Their unbeaten partnership is perhaps the
longest under BCAJ! The authors have been bringing out a new controversy every
month, month after month. So far, they would have brought out a record 275
controversies. Bhadresh Doshi joined them in June, 2018.

This is not a digesting feature, but an
ANALYTICAL FEATURE. The process starts with identifying a suitable controversy
where there are two conflicting views on a legal issue which are not settled by
the Supreme Court. Currently forum based or subject based issues are covered.
Pradip Kapasi says: “The authors, in the initial years used to ‘conclude’ the
issue, under consideration, in the end which practice for long has been
substituted with the authors offering their comments in the form of
‘observations’ leaving the debate open for readers.”

In the era of law driven by judgements,
the authors bring observations, record decisions, and also alternative
contentions that help resolve or reconcile controversies. In answer to the
question – what keeps them going – Pradipbhai said: “At an early age, the
feature taught that no view, even of the high court, is final and that there is
always another view which at times can be a better view.” Gautambhai answered
thus: “Writing this column is time consuming, but exhilarating, as one has to
consider all aspects of the issue thoroughly, while giving the observations.
After writing on an issue, one becomes completely aware of all the nuances of
the issue, as well as case laws on the subject, which definitely helps in one’s
practice, when one comes across similar issues.”

Book-Profit for payments to
partners –
Section 40(b)

ISSUE FOR CONSIDERATION

Section 40(b)
limits the deduction, in the hands of a firm, in respect of expenditure on
specified kinds of payments to partners. Clause(1) of section 40(b) prohibits
the deduction for payment of remuneration to a partner who is not a working
partner. Clause(2) provides that a deduction for payment of remuneration to a
working partner is allowed in accordance with the terms of the partnership
deed. Clause (5) has the effect of limiting the deduction for remuneration to
working partners, to the specified percentage of the “book-profit” of the firm.

“Remuneration”
includes any payment of salary, bonus, commission or remuneration by whatever
name called. The term “book-profit” is defined exhaustively by
Explanation 3 to section 40(b) which reads as under “Explanation 3-For the
purpose of this clause, ”book-profit” means the net profit, as shown in the
profit and loss account for the relevant previous year, computed in the manner
laid down in Chapter IV-D as increased by the aggregate amount of the
remuneration paid or payable to all the partners of the firm if such amount has
been deduced while computing the net profit”

‘Book-Profit’, as
per Explanation 3, means the net profit as per the profit and loss account of
the relevant year, computed in the manner laid down in Chapter IV-D. The
requirement to take net profit as shown in profit and loss account is quite
simple, but the requirement to compute the same in the manner laid down in
Chapter IV-D has been the subject matter of debate.

It is usual to
come across cases wherein the profit and loss account is credited with receipts
such as interest, rent, dividend, capital gains and such other income, which
may or may not have any relationship to the business of the firm. It is in such
cases that an issue arises while computing the Book-Profit of the firm, wherein
the firm is required to ascertain as to whether the interest and such other receipts
credited to profit and loss account are required to be excluded from the net
profit or not to arrive at the figure of the book-profit.

Conflicting
decisions of the high court are available on the subject of determination of
the book-profit for the purpose of section 40(b) of the Act. While the Calcutta
high court has favoured the acceptance of the net profit as per the profit and
loss account as representing the book-profit, the Rajasthan high court has
recently ordered for exclusion of such receipts from the net profit.

MD SERAJUDDIN
& Bros.’ CASE

The issue arose
before the Calcutta High Court in the case of
Md. Serajuddin & Bros. vs. CIT, 24 taxmann.com 46 (Cal.). In
that case, the assessee, a partnership firm, filed its return of income for the
relevant assessment years 1995-96 to 1998-99 by claiming deduction for
remuneration paid to partners which was calculated on the basis of the net
profit of the firm as per the profit & loss account of the year, which inter
alia included the credits for consultancy fees, interest on bank deposits,
profit on disposal of assets and interest on advance tax, which had been shown
as income under the head ‘other sources’. The returned income was accepted by
the Assessing Officer on issue of the intimation u/s. 143(1)(a). Subsequently,
the AO held that the income by way of consultancy fees, interest on bank
deposit, profit on disposal of assets and interest on advance tax, which had
been shown as income under the head ‘other sources’, could not be considered as
part of the book profit for the purpose of computation of allowable partners’
remuneration. He recomputed the deduction for remuneration by reworking the
book profit and disallowed the excess remuneration by applying the provisions
of section 40(b) of the Act. The Commissioner (Appeals) rejected the appeal of
the assessee. On further appeal, the Tribunal, without giving any reasonable
opportunity to the assessee, dismissed the appeal.

The High Court
admitted the appeals of the assessee firm on the following substantial question
of law on the issue under consideration, besides a few other aspects of the
issue not germane for the discussion :-

“Whether and
in any event, on a proper construction of the provisions of Section 40(b)(v)
and explanation 3 thereto, book profit comprises the entire net profit as shown
in the profit and loss account or only profit and gains of business assessed
under Chapter IV-D?”

On behalf of
the assessee firm, it was highlighted that for the purpose of Explanation 3 to
section 40(b)(v), the appellant had taken into consideration its net profit as
shown in the profit and loss account, which included consultancy fees, interest
on bank and company deposits, profit on disposal of cars used in the business
and interest on refund of advance tax paid and other items of incomes, which
were shown in the return under heading ‘income from other sources’. In support
of its action, it was submitted that;

the said Explanation 3 of section 40(b)(v)
provides for taking the net profit as shown in the profit and loss account and
not the profit computed under the head ‘profit and gains of business or
profession’;

unlike Explanation (baa) to section 80HHC
and section 33AB, both of which mentioned profit as computed under the head
‘profit and gains of business or profession’, Explanation 3 to Section 40(b)(v)
did not refer to any head of income and instead mentioned ‘net profit as shown
in the profit and loss account’;

had the intention been to restrict the
deduction only to the profit computed under the head ‘profits and gains of
business or profession’, the expression used in Explanation (baa) to section
80HHC and section 33AB would have also found place in Explanation 3 to section
40(b).

that none of the sections 30 to 43D, of part
IV –D, provided for exclusion of any item of income because it did not fall
under the head of ‘profits and gains of business or profession’.

the reasons for making the computation
provisions of Chapter IV-D applicable for computing the book profit was only to
ensure that all deductions had been allowed, as otherwise an assessee might
compute the book profit at a higher figure and thereby claim a higher amount by
way of remuneration for the purpose of deduction.

the quantum of deduction in computing income
under the head ‘profits and gains of business or profession’ ought be computed
with reference to the income falling under all the heads of income, including
the head ‘income from other sources’.

the decision of the Supreme Court in case of
Apollo Tyres Ltd. vs. CIT, 255 ITR 273 confirmed that the decision as to
which item of income should be taken into account for computing the quantum of
deduction, depended upon the language of the statutory provision allowing the
deduction.

The Revenue, in
response, contended that the assessee himself had offered the receipts in
question under the head ‘income from other sources’; that from a plain reading
of section 40(b)(v) r.w. Explanation 3 thereto, it was manifestly clear that
the term ‘book profit’ meant only that net profit which was computed in the
manner laid down in Chapter IV-D of the Act, which chapter dealt only with the
profit and gains of business or profession, and did not include profits
chargeable under Chapter IV-F under the head ‘income from other sources’; that
in a taxing statue, the words of the statue were to be interpreted strictly;
that section 40(b)(v), Explanation 3 made it abundantly clear that the net
profit had to be computed in the manner laid down in Chapter IV-D and such
profit did not include profit referred to in Chapter IV-F of the Act.

The Calcutta
High Court, on due consideration of the rival contentions, held that chapter
IV-D nowhere provided that the method of accounting for the purpose of
ascertaining net profit should consider the income from business alone and not
from other sources; section 29 provided for the manner of computing the income
from profits and gains of business or profession which had to be done as
provided u/s. 30 to 43D; by virtue of section 5 of the said Act, the total
income of any previous year, included all income from whatever source derived;
for the purpose of section 40(b)(v) read with Explanation there could not be
separate method of accounting for ascertaining net profit and/or book-profit;
the said section nowhere provided that the net profit as shown in the profit
and loss account should be the profit computed under the head profits and gains
of business or profession, only.

The Calcutta
High Court, citing the following paragraphs from the decision of the Supreme
court in the case of Apollo Tyres Ltd.(supra) , observed that the said
decision provided for an appropriate guidance on the point as to what should be
done in order to ascertain the net profit in case of the nature before the
court.

“Sub-section
(1A) of section 115J does not empower the Assessing Officer to embark upon a
fresh inquiry in regard to the entries made in the books of account of the
company. The said sub-section, as a matter of fact, mandates the company to
maintain its account in accordance with the requirements of the Companies Act
which mandate, according to us, is bodily lifted from the Companies Act into
the Income-tax Act for the limited purpose of making the said account so
maintained as a basis for computing the company’s income for levy of
income-tax. Beyond that, we do not think that the said sub-section empowers the
authority under the Income-tax Act to probe into the accounts accepted by the
authorities under the Companies Act. If the statute mandates that income
prepared in accordance with the Companies Act shall be deemed income for the
purpose of section 115J of the Act, then it should be that income which is
acceptable to the authorities under the Companies Act. There cannot be two
incomes one for the purpose of the Companies Act and another for the purpose of
income-tax both maintained under the same Act. If the Legislature intended the
Assessing Officer to reassess the company’s income, then it would have stated
in section 115J that “income of the company as accepted by the Assessing
Officer”. In the absence of the same and on the language of section 115J,
it will have to held that view taken by the Tribunal is correct and the High
Court has erred in reversing the said view of the Tribunal.”

“The fact that it is shown under a
different head of income would not deprive the company of its benefit under
section 32AB so long as it is held that the investment in the units of the UTI
by the assessee-company is in the course of its “eligible business”.
Therefore, in our opinion, the dividend income earned by the assessee-company
from its investment in the UTI should be included in computing the profits of
eligible business under section 32AB of
the Act.”

Relying heavily
on the findings of the apex court, the Calcutta High Court held that once the
income from other sources was included in the profit and loss account, to
ascertain the net profit qua book-profit for computation of the
remuneration of the partners, the same could not be discarded for the purposes
of computing the deductible amount of remuneration to partners. The appeal of
the assessee firm was thus allowed and the orders of the lower authorities were
set aside.

ALLEN CAREER INSTITUTE’S CASE

Recently, the
issue again arose before the Rajasthan High Court in the case of CIT vs.
Allen Career Institute. 94 taxmann.com 157. In this case, the Rajasthan
High Court, admitting the Revenue’s appeals, framed the following substantial
questions of law:

“Whether
in the facts and circumstances of the case the ITAT is justified in considering
the interest as part of the book profit in contravention of Section 40(b) i.e
as per Section 40(b) the book profit has to be computed in the manner laid down
in Chapter-IV D?”

“Whether
the Tribunal was legally justified in deleting the disallowance of
Rs.2,30,00,796/- made on account of remuneration to partners by taking the
interest earned on FDRs as part of book profit and business income under
Section 28 specifically when it was “Income from other sources” and
contrary to Section 40(b), Explanation 3 and Section 40(b) (v) (2)?”

On behalf of
the Revenue it was contended that Chapter IV-D, consisting of section 28 to 44,
provided for computation of the income under the head profits and gains of
business or profession; that the investment in the FDRs was not made as a
business necessity, without which the business of the assessee could not be
run, and, in fact, the FDRs were made out of the surplus funds available with
the assessee, and the income from bank FDRs could not be said to be business
income and was to be treated as income from other sources.

On behalf of
the assessee, it was contended that the interest income from the FDRs, credited
to the profit & loss account, should not be excluded from the net profit
for the purposes of determining the quantum of deduction in respect of the
payment of remuneration to the partners while applying the provisions of
section 40(b). Reliance was placed on the decisions in the case of CIT vs.
J.J. Industries, 358 ITR 531 (Guj.) and Md. Serajuddin & Bros. vs.
CIT, (supra) and Apollo Tyres Ltd. vs. CIT(supra). In addition, the
decision in the case of CIT vs. Hycron India Ltd. 308 ITR 251 (Raj.),
was relied upon to contend that the expression “profits and gains” as
used in section 2(24), had a wider expression, and was not confined to
“profits and gains of business or profession”. Further, the language
of section 10B, again, provides for exemption, with respect to any
“profits and gains” derived by the assessee, and was not confined to
“profits and gains of business and profession” as provided u/s. IV-D.
That ‘profit’ was an elastic and ambiguous word, often properly used in more
than one sense; its meaning in a written instrument was governed by the
intention of the parties appearing therein, but any accurate definition thereof
must always include, the element of gain. The meaning of word “gain”
has been given as acquisition, and has no other meaning. Gain was something
obtained or acquired, and was not limited to pecuniary gain. The word
“profit”, as ordinarily used, means the gain made upon any business
or investment. “Profits” is capable of numerous constructions, and
for any given use, its meaning must be derived from the context. In addition,
it was contended that had the intention been to limit the scope of the term
‘profit’ to the income determined under the head profits and gains of business
or profession, then it would have been so done as was done in the case of
section 115J of the Act.

The Rajasthan
High Court rejected the contentions of the assesse made in support of inclusion
of the income from interest and other sources for the purposes of computing the
quantum of the deduction in respect of the remuneration paid to partners,
holding that the interest and other income taxable under the head ‘income from
other sources’ was not to form part of the book profits for the purposes of section
40(b) of the Act, and was therefore required to be excluded from the net profit
as per the profit & loss account.

OBSERVATIONS

Section 14
requires the total income to be classified into five different heads of income
for the purpose of charge of income tax. Subject to such classification, the
total income of an assessee remains unchanged. The charge of the tax is on the
total income of the firm, and is not changed on account of its classification
into different heads of income.

There are
several provisions in the Income Tax Act, for grant of relief or otherwise,
where the legislature has used such language that expressly refers to the
income computed under the head ‘profits and gains from business and
profession’. For example, the benefit of deduction u/s. 10B is not restricted
to the income computed under the head ‘profits and gains from business and
profession’ but is allowed in respect of the ‘profits and gains’. Again,
section 115JB deals with the profit and loss account of an assessee in its entirety,
and covers the profit of the company as shown by the profit and loss account,
without restricting the same to the income of business. Explanation 3 also
employs a similar terminology while defining the term “book-profit” to mean the
net profit as shown in the profit and loss account for the relevant previous
year. In contrast, the provisions of section 33AB and section 80 HHC restrict
the relief to profits computed under the head ‘profits and gains of business or
profession’.

The use of the
words “computed in the manner laid down in Chapter IV-D” in Explanation
3 that follows the words ‘net profit, as per profit & loss account for
the relevant previous year’ may not presently change the amount of net
profit for the following reasons;

Unlike adjustments to book-profit required
to be made u/s. 115JB for MAT, no specific guidelines are provided in section
40(b) for adjusting the net profit. Reference may also be made to provisions of
section 33AB and section 80HHC, which expressly provide for restricting the
relief to profits computed under the head ‘profits and gains of business or
profession’ .

Chapter IV-D by itself cannot be considered
to provide any help in the matter of computation of book profit. Any attempt to
compute the book profit by applying all and sundry provisions of Chapter IV-D
would lead to a “book-profit” that would be devoid of any reality and may
result in allowing remuneration in excess of even the net profit of the firm.

Explanation 3 requires the net profit to be
increased by the amount of remuneration paid to partners of the firm. This
specific requirement is an example of an adjustment expressly provided by the
legislature to the net profit for quantification of the remuneration payable.

Needless to say that any attempt to exclude
certain receipts from net profit will have to be followed by the exclusion of
the expenditure incurred for earning such income. Such an exercise may be
extremely difficult and if attempted, may reflect inaccurate results.

None of the provisions for allowing deduction u/s.
30 to 43D of Chapter IV-D contains a provision that restricts the deduction
thereunder to the profits computed under the head ‘profits and gains of
business or profession’. There cannot be a separate method of accounting for
ascertaining net profit/book-profit and therefore, any income, if credited to
profit and loss account, should be eligible to be classified as book profit.

Ordinarily
unless otherwise provided, an income, even though computed under the different
heads of income, would not cease to be the income of the business more so where
the objective of the assessee such as a firm or company is to carry on business
for the entity.

The issue under
consideration has also been addressed by the Gujarat High Court in the case of CIT
vs. J.J.Industries, (supra), wherein the court allowed the deduction of
remuneration to partners calculated on net profit that included receipts of
interest and a few other items taxed under the head ‘ income from other
sources’.

The term
“profits and gains” used in section 2(24), clause(i) is wide enough to include
all the receipts of an assessee firm, and its scope need not be restricted to
the ‘profits and gains of business or profession’. Profit is an ambivalent and
multi-faceted term which connotes different meanings at different times and in
different contexts. The Supreme Court, in the case of Apollo Tyres Ltd.
(supra), clarified that the true meaning of the ‘profit’ should be gathered
with reference to the intention of the legislature in enacting the particular
provision. Any attempt to ascribe a general and all purpose meaning to the term
“profit” should be avoided and only such a meaning that fits into the context
should be supplied. The Rajasthan high court in fact, in the case of Hycron
India Ltd (supra), in a different context, has held that the term ‘profits
and gains’ need not necessarily be confined to ‘profits and gains of business
or profession’.

Attention is
invited to the decisions of the Jaipur bench of the tribunal in the case of S.P.
Equipment & Services 36 SOT 325, and Allen Career Institution 37 DTR 379
and the Madras High Court in the case of Sri Venkateshwara Photo Studio,
33 taxmann.com 360 and the Rajkot Bench in the case of Sheth
Brothers, 99 TTJ189 and the Mumbai Bench in the case of Suresh A. Shroff &
Co., 27 taxmann.com 291, all of which have held that, for the purpose of
computing the deduction for payment of remuneration to partners in the hands of
the firm, the items of income credited to the profit & loss account should
not be excluded, even where such items have otherwise been taxed under the head
‘income from other sources’.

The better view
therefore is the one propounded by the Calcutta & the Gujarat High Courts
that takes into consideration the larger meaning of the ‘profits & gains’
which fits into the context of section 40(b) and takes into consideration the
method of accounting employed by the firm for determining the net profit of the
firm.

The case for
inclusion of interest and such other receipts in the book profit is stronger in
cases where such receipts have been taxed under the head ‘profits and gains of
business or profession’. In such cases, there should not be any opposition from
the AO, who has otherwise accepted the character of such receipts as a business
income and assessed and brought to tax such receipts under the head ‘profits
and gains from business and profession’.

There is no
leakage or very little leakage of revenue in the whole exercise, in as much as
what is allowed in the hands of the firm is taxed in the hands of the partners.
Further what is disallowed in the hands of the firm is to be excluded from the
income of the partners. All of this is made clear by the express provisions of section28(v) of the Act.

shailesh.kwebmaker

Taxability of interest of NPAs in case of NBFCs

The column “Closements” commenced in
May, 1981, with Rajan Vora as the initial contributor who carried it till
1990-91. From August, 1988, Kishor Karia became a co-contributor to
“Closements”, and he continues to contribute 31 years later. R P Chitale had
joined in from 1990-91 to 2007-08. Atul Jasani joined the panel of contributors
from July 2008 and continues till date.

This
column covers a Supreme Court decision and provides an in-depth analysis and
implications.

Taxability of interest of NPAs in case of NBFCs

Introduction

1.1 In case of an assessee following Mercantile
System of Accounting [i.e. accrual basis of accounting], the taxability of
interest on ‘sticky loans’ or ‘doubtful advances’, not recognised as revenue in
the books of account , has been a matter of debate and litigation under the
Income-tax Act [ the Act] for a long time under different circumstances/
scenario.

1.2 In case of Banks, Non-Banking Financial
companies [NBFCs] etc., which are also engaged in the business of lending
money, the accounting treatment of Non-Performing Assets [NPAs] and interest
thereon is governed by the norms set by the Reserve Bank of India [RBI- RBI
norms]. Under such norms, such entities are required to make provisions for
NPAs and are also mandated to not to recognise the interest on such NPAs as
revenue in the accounts.

1.3 Subject to specific provisions in the Act,
the provision for such NPAs is not deductible in computing income under the
head “Profits and gains of business or profession’ [Business Income] in case of
such entities as held by the Apex Court in the case of Southern Technology
Ltd [(2010)- 320 ITR 577] – Southern Technology’s case. However, the
taxability of interest on such NPAs not recognised as revenue in the accounts
as per the RBI norms in case of NBFCs [which are not covered by section 43D]
has been a matter of debate and litigation as the same are not protected by the
provisions of section 43D of the Act
[applicable to Banks, Public Financial Institutions, Housing Finance Public
Companies etc] which effectively provides that such interest is taxable either
in the year of recognition in the accounts or in the year of actual receipt,
whichever is earlier. Co-operative Banks [ except in specified cases] are also
now covered within the scope of Sec 43D from assessment year 2018-19. The
Revenue, usually takes the view that such interest is taxable under the
Mercantile System of Accounting [Mercantile System] as income having accrued in
the relevant year on time basis, notwithstanding the fact that the principal
amount of loan itself is doubtful of recovery [i.e. NPA] and the NBFCs are
mandatorily required not to recognise such interest as revenue in the accounts
under the RBI norms. The Delhi High Court in the case of Vasisth Chay Vyapar
Ltd has taken a favourable view on this issue and similar view is also
taken in other cases by the High Courts [Mahila Seva Sahakari Bank Ltd
(2007) 395 ITR 324(Guj), Brahmaputra Capital & financial Services Ltd
(2011) 335 ITR 182 (Del), etc]. However, the Revenue is contesting this
view.

1.4 The issue referred to in para 1.3 above had
come-up before the Apex Court in the context of Delhi High Court judgment
referred to in para 1.3 above and other appeals filed by the Revenue involving
the similar issue and the issue is now decided by the Apex Court and therefore,
it is thought fit to consider the same in this column.

CIT
vs. Vasisth Chay Vyapar Ltd [(2011) 330 ITR 440 (Del)]

2.1 Before the Delhi High Court, various
appeals pertaining to different assessment years of the same assessee had
come-up involving common issue. In the above case, the assessee company was
NBFC and accordingly, was governed by the Directions of the RBI and was
required to follow the RBI norms.

2.2 In the above case, the brief facts were:
the assessee had advanced Inter Corporate Deposit (ICD) to Shaw Wallace Company
(SWC) and on account of default of the payment of interest by SWC, under the
RBI norms, the ICD had become NPA and was accordingly, treated as such by the
assessee. The interest income on the ICD was recognised on accrual basis and
offered to tax for the assessment years 1995-96, 1996-97. For the subsequent
years, the interest income on ICD was not recognised under the RBI norms and
the same was also not offered to tax. Factually, the interest on the ICD was
also not received until the assessment year 2006-07. The SWC was passing
through adverse financial crisis and winding up petitions were also pending
against the SWC in the court. As such, the recovery of the amount of ICD itself
was uncertain and substantially doubtful.

2.2.1 On the above facts, the Assessing Officer
(AO) took the view that the interest on ICD had accrued to the assessee under
the Mercantile System and accordingly, added to the income of the assessee. The
first Appellant Authority also affirmed the order of the AO. For this, the
Revenue held the view that: the provisions of the RBI Act, 1934 (RBI Act) read
with the NBFCs Prudential Norms. (Reserve Bank) Directions, 1998 (RBI norms)
can not override the provisions of the Act under which the amount of interest
was taxable as accrued under the Mercantile System and is accordingly, taxable
u/s. 5 of the Act; and as such, the interest in question is taxable in
respective years. When the matter came-up before the Tribunal, the view was
taken that the provisions of section 45Q of the RBI Act overrides the provisions of the Income-tax Act and
the action of the assessee not recognising income from ICD, following RBI
norms, was correct and in accordance with the law. Accordingly, the Tribunal held that in terms of section 145 of the
Act, no addition could be made in respect of such unrealised interest on the
ICD which was admittedly NPA.

2.3 Under the above mentioned circumstances,
the issue came-up before the Delhi High Court at the instance of the Revenue
viz. ‘whether the Tribunal erred in law and on the merits by deleting the
addition of income made as interest earned on the loan advanced to SWC by
considering the interest as doubtful and unrealisable.

2.3.1 On behalf of the Revenue, the views held by
the Revenue [referred to in para 2.2.1] was reiterated. It was also contended
that the liability under the Act is governed by the provisions of the Act and
merely because for accounting purposes, the assessee had to follow the RBI norms, it would not mean that the
assessee was not liable to show the interest income which had accrued to the
assessee under the Mercantile System and was exigible to tax under the Act. For
this, the reliance was placed on the judgment of the Apex Court in Southern
Technology’s case (supra) which, according to the Revenue, supports this
position.

2.3.2 On the other hand, on
behalf of the assessee, it was, inter-alia, contended that: as per the
provisions of section 45Q of the RBI Act
[which has non-obstante clause], interest income on such NPA is required to be
recognised as per the RBI norms and as held by the Apex Court in TRO vs
Custodian, Special Court Act. 1992 [(2007) 293 ITR 369] where an Act makes
provision with non-obstante clause that would override the provisions of all
other Acts; the chargeable Business Income has to be determined as per the
method of accounting consistently followed by the assessee; as per the relevant
provisions of Companies Act, as well as section 145 of the Act, it was incumbent upon the assessee to confirm to the
mandatory accounting method and follow those standards; the system of
accounting consistently followed by the assessee was in conformity with those
accounting standards which, inter-alia, provided not to recognise
interest on such NPA, in view of the uncertainty of ultimate collection due to
tight and precarious financial position of the borrower [i.e. SWC]. For this,
specific reference was also made to the Accounting Standard 9 [AS 9] issued by
the Institute of Chartered Accountants of India [ICAI]. Relying on certain
judgments of different High Courts [such as Elgi Finance Ltd [(2017) 293 ITR
357(Mad) etc], it was also further contended that the courts have held that
even under the Mercantile System, it is illusionary to take credit for interest
where the principal itself is doubtful of recovery. It is further contended
that the courts have also recognised the theory of ‘real income’ and held that
notwithstanding that the assessee may be following Mercantile System, the
assessee could only be taxed on ’real income’ and not on any
hypothetical/illusionary income. For this, reference was made to the judgments
of the Apex Court in the cases of UCO Bank [(1999) 237 ITR 889], Shoorji
Vallabhdas & Co [(1962) 46 ITR 144] and Godhra Electricity Co Ltd
[(1997) 225 ITR 746]. It was also pointed out that relying on this ‘real
income’ theory, the Delhi High Court has also held that interest on sticky
loans, where recovery of the principal was doubtful, could not be said to have
accrued even under the Mercantile System and accordingly, such notional
interest could not be taxed as income of the assessee. For this, reference was
made to the two judgments of the Delhi High Court viz. Goyal M. G, Gases (P)
Ltd [(2008) 303 ITR 159] and Eicher Ltd [(2010) 320 ITR 410]

2.4 After noting the facts of the case and
contentions raised on behalf of both the sides, the Court proceeded to decide
the issue. For this purpose, the Court first referred to the provisions of
section 45Q of the RBI Act [under the caption ‘Chapter III- B to override other
laws’] which effectively provides that the provisions of Chapter III-B shall
have effect notwithstanding anything inconsistent therewith contained in any
other law for the time being in force or any instrument having effect by virtue
of any such law. The Court then also noted as under (pg 448):

“It is not
in dispute that on the application of the aforesaid provisions of the RBI and
the directions, the ICD advanced to M/s. Shaw Wallace by the assessee herein
had become NPA. It is also not in dispute that the assessee–company being NBFC
is bound by the aforesaid provisions. Therefore, under the aforesaid provisions,
it was mandatory on the part of the assessee not to recognize the interest on
the ICD as income having regard to the recognized accounting principles. The
accounting principles which the assessee is indubitably bound to follow are
AS-9……”

2.4.1 The Court also noted the provisions of AS 9
contained in para 9 dealing with effect of uncertainty on revenue recognition.

2.4.2 The Court then noted that in the above
scenario, it has to examine the strength in the submission made on behalf of
the Revenue that whether it can still be held that the income in the form of
interest though not received had still accrued to the assessee under the
provisions of the Act and was therefore exigible to tax.

2.4.3 In the above background, the Court decided
to first consider the issue of taxability in the context of the Act and for
that purpose to examine whether, under the given circumstances, interest on ICD
has accrued to the assessee. In this context, after referring to the factual
position with regard to the ICD [referred to in para 2.2 above], the Court,
concluded as under (pg 449):

“…These
circumstances, led to an uncertainty in so far as recovery of interest was
concerned, as a result of the aforesaid precarious financial position of Shaw
Wallace. What to talk of interest, even the principal amount itself had become
doubtful to recover. In this scenario it was legitimate move to infer that
interest income thereupon has not “accrued”. We are in agreement with the
submission of Mr. Vohra on this count, supported by various decisions of
different High Courts including this court which has already been referred to
above.”

2.4.4 Having considered the position with regard
to accrual of interest under the Act as above, the Court further explained the
effect of RBI norms as under (pg 449):

” In the instant case, the assessee-company
being NBFC is governed by the provisions of the RBI Act. In such a case,
interest income cannot be said to have accrued to the assessee having regard to
the provisions of section 45Q of the RBI Act and Prudential Norms issued by the
RBI in exercise of its statutory powers. As per these norms, the ICD had become
NPA and on such NPA where the interest was not received and possibility of
recovery was almost nil, it could not be treated to have been accrued in favour
of the assessee.”

2.4.5 The
Court then noted the argument raised on behalf of the Revenue that the case of
the assessee was to be dealt with for the purpose of taxability under the
provisions of the Act and not under the RBI Act, which was concerned with the
accounting method that the assessee was supposed to follow and in that respect,
the reliance placed by the Revenue on the judgment of the Apex Court in Southern
Technology’s case (supra). In this context, the Court noted that, no doubt,
in the first blush, that judgment gives an indication that the Apex Court has
held that the RBI Act does not override the provisions of the Act. However, on
a closure examination in the context in which the issue had arisen before the
Apex Court and certain observations of the Apex Court in that case, shows that
this proposition advanced on behalf of the Revenue may not be entirely correct.
In that case, primarily the Apex Court was dealing with the issue of
deductibility of provisions for NPA as bad debt u/s. 37 (1)(vii) of the Act and
many of the observations of the Apex Court should be read in that context.
However, in that case itself, the Apex Court has made a distinction with regard
to ‘income recognition’ and held that income had to be recognized in terms of
RBI norms, even though the same deviated from Mercantile System and/or section
145 of the Act. In this context, the Court, inter-alia, noted the following
observations of the Apex Court in that case (pgs 451/452):

“At the
outset, we may state that the in essence RBI Directions 1998 are
prudential/provisioning norms issued by the RBI under Chapter III-B of the RBI
Act, 1934. These norms deal essentially with income recognition. They force the
NBFCs to disclose the amount of NPA in their financial accounts. They force the
NBFCs to reflect ‘true and correct’ profits. By virtue of section 45Q, an
overriding effect is given to the Directions 1998 vis-à-vis ‘income
recognition’ principles in the Companies Act, 1956. These Directions constitute
a code by itself. However, these Directions 1998 and the Income-tax Act operate
in different areas. These Directions 1998 have nothing to do with computation
of taxable income. These Directions cannot overrule the ‘permissible
deductions’ or ‘their exclusion’ under the Income-tax Act. The inconsistency
between these Directions and Companies Act is only in the matter of income
recognition and presentation of financial statements. The accounting policies
adopted by an NBFC cannot determine the taxable income. It is well settled that
the accounting policies followed by a company can be changed unless the
Assessing Officer comes to the conclusion that such change would result in
understatement of profits. However, here is the case where the Assessing
Officer has to follow the RBI Directions 1998 in view of section 45Q of the RBI
Act. Hence, as far as income recognition is concerned, section 145 of the
Income-tax Act has no role to play in the present dispute. “

2.4.6 After referring to the above referred
observations of the Apex Court in Southern Technology’s case (supra) and
deciding the issue in favour of the assessee, the Court further stated as under
(pg 452):

“We have also noticed the other line of cases wherein the Supreme Court
itself has held that when there is a provision in other enactment which
contains a non obstante clause, that would override the provisions of the
Income-tax Act. TRO v. Custodian, Special Court Act, 1992 [2007] 293 ITR 369
(SC) is one such case apart from other cases of different High Courts. When the
judgment of the Supreme Court in Southern Technology [2010] 320 ITR 577 is read in manner we have
read, it becomes easy to reconcile the ratio of Southern Technology with TRO v. Custodian, Special Court Act,
[1992] [2007] 293 ITR 369 (SC). Thus viewed from any angle, the decision of the
Tribunal appears to be correct in law. The question of law is thus decided
against the Revenue and in favour of the assessee. As a result, all these appeals are
dismissed.”

CIT vs. Vasistha Chay Vyapar Ltd – [(2019) 410 ITR
244 (SC)]

3.1 At the instance of the Revenue, the above
judgment of the Delhi High Court came up for consideration before the Apex
Court [being Civil Appeal No 5811 of 2012]. Many other appeals [such as appeal
in the Mahila Seva Sahakari Bank Ltd [(2017) 395 ITR 324 (Guj), Brahmaputra
Capital & Financial Services Ltd (2011)335 ITR 182 (Del), etc]
involving similar issue filed by the Revenue were also simultaneously dealt with by the Apex Court while deciding
this common issue.

3.2 Having considered the judgments under
appeal, the Apex Court, agreed with the same and held as under (pg 246):

” Having
gone through the impugned judgment in the aforesaid appeals, we are of the view
that the consideration of the question has been given a full and meaningful reasoning
and we agree with the same.

As a result, all the aforesaid appeals are
dismissed. . . .”

Conclusion.

4.1 In view of the above judgment of the
Apex Court, affirming the judgment of Delhi High Court referred to in para 2
above and other similar judgments involving the same issue, the position is now
settled that interest on NPAs not recognised in the accounts following the RBI
norms cannot be taxed on the ground that the assessee is following Mercantile
System of accounting. The judgment also clearly supports the view that under
such circumstances, interest of NPAs cannot be said to have accrued and
accordingly, can not taxed by invoking the provisions of section 5 of the Act.

4.1.1 Apart from this, the judgment of Delhi High
Court referred to in para 2 above having been affirmed and in that judgment,
relying on the observations of the Apex Court in Southern Technology’s case
[referred to in para 2.4.5 read with the observations referred to para 2.4.6],
the Delhi High Court has, effectively, expressed the view that the provisions
of section 45Q of the RBI Act and the RBI norms override the provisions of the
Act in this respect, and therefore also, such interest on NPA is not taxable
under the Act. In this context, the subsequent judgment of the Punjab &
Haryana High Court in the case of Ludhiana Central Co-op Bank Ltd [(2009)410
ITR 72] is also useful in which the High Court, after considering these
judgments, has clearly taken a view that section 45Q of the RBI Act has overriding effect and therefore,
such interest cannot be held to have accrued under the Act.

4.1.2 In
cases not governed by the RBI norms also, the observations in the Delhi High
Court judgment [referred to in para 2.4.3 above] should be useful in cases of interest on ‘sticky loans’ not
recognised in accounts, if the principle amount of loan itself is genuinely
doubtful of recovery, particularly due to precarious financial condition of the
borrower.

Effect of ICDS

4.2 From the Asst. Year. 2017-18, Business
income and ‘Income from Other Sources’ [Other Income] is required to be
computed in accordance with the provisions made in Income Computation and
Disclosure Standards [ICDS] notified u/s. 145 (2) of the Act. ICDS IV [Revenue
Recognition] also deals with recognition of interest as revenue in para 8. In
this context, answer to question no 13, given in Circular No 10/2017, dtd
23/3/2017 issued by the CBDT is worth
noting and the same is reproduced hereunder:

Question 13:
The condition of reasonable certainty of ultimate collection is not laid down
for taxation of interest, royalty and dividend. Whether the taxpayer is obliged
to account for such income even when the collection thereof is uncertain?

Answer: As
a principle, interest accrues on time basis and royalty accrues on the basis of
contractual terms. Subsequent non recovery in either cases can be claimed as
deduction in view of amendment to Section 36 (1) (vii). Further, the provision
of the Act (e.g. Section 43D) shall prevail over the provisions of ICDS.

4.2.1 The validity of some of the provisions of
different ICDS was challenged before the Delhi High Court in the case of Chamber
of Tax Consultants vs. UOI [(2018) 400 ITR 178 – CTC’s case]. Many of these
provisions of ICDS were held to be ultra vires the Act by the High
Court. Most of these invalidated provisions have been re-validated with
retrospective effect by various amendments made by the Finance Act, 2018 with
which we are not concerned in this write-up.

4.2.2 One
of the items under challenge before the Delhi Court in CTC’s case (supra)
was para 8.1 of the ICDS IV [Revenue Recognition] which provides that interest
shall accrue on time basis to be determined in the specified manner. The main
contention against this provisions was that in case of NBFCs also the interest
would become taxable on this accrual basis, even though such interest is not
recoverable [i.e. because of NPA status of the loan]. The deduction, if any, in
respect of the same can be claimed only u/s. 36(1)(vii) in respect of such
interest [which become the debt] as bad debt in the year in which the amount of
such debt or part thereof becomes irrecoverable without recording the same in
the books
of account.

4.2.3 In
the above context, the counter affidavit filed by the Revenue was as follows
(pgs 211/212):

“The
petitioners completely ignore the fact that this very provision of the ICDS
have been given approval by the highest legislative body, i.e., Parliament by
making an amendment to section 36(1)(vii) of the Act with effect from April 1,
2016 by Finance Act, 2015. The petitioners for furthering their point have
erroneously mentioned that the second proviso to section 36(1)(vii) casts an
additional burden on the assessee to prove that the debt is established to have
become due. In fact, a provision which is for the benefit of the assessees is
being projected to be a provision which is against the interests of
the assessee.

The ICDS
does not in any way wish to alter the well laid down principles of real income
by the Hon’ble Supreme Court, but is actually ensuring that there is a trace
available of the income which is foregone on this concept. Therefore, if there
is an interest income which is not likely to be realized is written off by the
assessee in the very same year immediately on its recognition (and even without
passing through its books), then it would be first recognised as revenue and
then allowed as a deduction under section 36(1)(vii) of the Act, including in
the case of NBFCs. However, in this process, the tax Department would have
information about the income which is so written off and keep a track of the
said sum then realised. Therefore, there is no enlargement of scope of income
or any deviation from the principles laid down by the hon’ble Supreme Court.”

4.2.4 In
view of the above, the Delhi High Court in CTC’s case (supra), while
rejecting the contention raised on behalf of the Petitioner, concluded as under
on this issue (pg 212) :

“Since
there is no challenge to section 36(1)(vii), para 8(1) of ICDS IV cannot be
held to be ultra vires the Act. This is to create a mechanism of tracking
unrecognized interest amounts for future taxability, if so accrued. In fact the
practice of moving debts which the bank or NBFC considers irrecoverable to a
suspense account is a practice which makes the organizations lose track of the
same. The justification by the respondent clearly demonstrates that this is a
matter of a larger policy and has the backing of Parliament with the enactment
of section 36(1)(vii). The reasoning given by the respondent stands to logic.
It has not been demonstrated by the petitioner that para 8(1) of ICDS IV is
contrary to any judgment of the Supreme Court, or any other court.”

4.2.5 Since the Delhi High Court in CTC’s case (supra) accepted the justification of the Revenue,
more so due to amendment made in the provisions of section 36(1)(vii), the High
Court took the view that para 8.1 of ICDS IV cannot be held to be ultra vires
the Act and it has not been demonstrated by the Petitioners that para 8.1 of
ICDS IV is contrary to any judgment of the Apex Court, or any other court. In
view of this, there is no amendment in the Act in this respect and accordingly,
interest income should continue to be governed by this provision of the ICDS.

4.2.6 In view of the judgment of
the Apex Court [referred to in para 3 above] affirming the judgment of the
Delhi High Court [referred to in para 2 above], it is worth exploring to raise
a contention that the said para 8.1 of ICDS is now contrary to the judgment of
the Apex Court. Apart from this, such interest on NPAs cannot be regarded as
accrued as held by the Apex Court and therefore, such interest cannot be
treated as accrued on time basis as contemplated in the ICDS and cannot be
taxed. Additionally, such interest, arguably, can not be taxed also on the
ground that the provisions of RBI Act[ read with RBI norms]overrides the
provisions of the Act as mentioned in para 4.1.1 above. Also due to the fact that the counter affidavit
of the Revenue before the Delhi High Court in CTC’s case (supra)
[referred to in para 4.2.3 above] specifically states that ICDS does not in any
way wish to alter the well laid down principles of real income by the Apex
Court, but is actually ensuring that there is a trace available of the income,
which is foregone in this concept, arguably, applying the real income theory,
such interest income should also not be considered as taxable. This contention should also be available to
the cases referred to in para 4.1.2 above.It may also be noted that, in cases
where interest income is assessable as Other Income, there is no specific
provision to claim deduction of income assessed under ICDS on time basis when
it becomes irrecoverable and this fact has not been considered by the Delhi
High Court in CTC’s case (supra) while dealing with the issue relating
to the said para 8.1 of ICDS IV.

shailesh.kwebmaker

Section 92C: Transfer pricing – Notional interest on Redemption of preference shares money paid to Associated enterprises- transfer pricing adjustments by re-characterising was held to be not legal Corporate guarantee commission – No comparison can be made between guarantees issued by commercial banks as against a corporate guarantee issued by a holding company for benefit of its AE

18.
CIT-6 vs. Aegis Limited [Income tax Appeal no 1248 of 2016 , Dated: 28^th
January, 2019 (Bombay High Court)].

[Aegis Limited vs. ACIT-5(1); dated
27/07/2015; ITA. No 1213/Mum/2014, AY: 2009-10; Bench : K, Mum. ITAT ]

Section 92C: Transfer pricing – Notional
interest on Redemption of preference shares
money paid to Associated enterprises- transfer pricing adjustments by
re-characterising was held to be not legal

Corporate guarantee commission – No
comparison can be made between guarantees issued by commercial banks as against
a corporate guarantee issued by a holding company for benefit of its AE

The assessee subscribed to redeemable
preference shares of its AE and also redeemed some of these shares at par. The
assessee’s case had been that subscription of preference shares does not impact
profit & loss account or taxable income or any corresponding expense
resulting into deduction in the hands of the assessee. Redemption of preference
shares at par represents an uncontrolled price for shares, based on a
comparison with such uncontrolled transaction price and, therefore, such
redemption of preference share should be considered at arms length from Indian
transfer pricing prospective.

During the course of transfer pricing
proceedings, the TPO observed that the preference shares are equivalent to
interest free loan and in an uncontrolled third party scenario, interest would
be charged on such an amount, as these are not in the nature of business
advances. After making reference to FINMMDA guidelines and conducting enquires
from CRISIL u/s. 133(6), he assumed the credit ratings of the AE to be BBB(-)
and on the basis of bond rate information obtained from CRISIL, he determined
the rate of interest at 15.41% and computed the adjustment of Rs. 59,90,19,794/.
The DRP agreed that the TPO’s re-characterisations approach into loan and
charging of interest thereon is correct. However, they did not agree with the
TPO’s approach of imputing the interest using credit rating and Indian bond
yield. They instead directed the Assessing Officer to charge interest rate as
charged by the assessee which was at 13.78% and thereby also directed to add
markup of 1.65%, for risks. They directed the adjustment to made
accordingly.

Being aggrieved
with the DRP order, the assessee filed an appeal to the ITAT. The Tribunal find
that the TPO /Assessing Officer cannot disregarded any apparent transaction and
substitute it, without any material of exception circumstance highlighting that
assessee has tried to conceal the real transaction or some sham transaction has
been unearthed. The TPO cannot question the commercial expediency of the
transaction entered into by the assessee unless there are evidence and
circumstances to doubt. Here it is a case of investment in shares and it cannot
be given different colour so as to expand the scope of transfer pricing
adjustments by re-characterising it as interest free loan. Now, whether in a
third party scenario, if an independent enterprise subscribes to a share, can
it be characterise as loan. If not, then this transaction also cannot be
inferred as loan. The Co-ordinate Benches of the Tribunal have been
consistently holding that subscription of shares cannot be characterises as
loan and therefore no interest should be imputed by treating it as a loan.
Accordingly, the adjustment of interest made by the A.O was deleted.

Being aggrieved
with the ITAT order, the revenue filed an appeal to the High Court. The Court
observed that, we are broadly in
agreement with the view of the Tribunal. The facts on record would suggest that
the assessee had entered into a transaction of purchase and sale of shares of
an AE. Nothing is brought on record by the Revenue to suggest that the transaction
was sham.

In absence of any
material on record, the TPO could not have treated such transaction as a loan
and charged interest thereon on notional basis. Accordingly this ground was
dismissed. Next Ground is adjustment made by TPO in connection with the
corporate guarantee given by the assessee in favour of its AE.

The Tribunal
restricted subject addition to 1% guarantee commission relying upon other
decisions of the Tribunal along similar lines. The TPO had, however, added 5%
by way of commission. Being aggrieved with
the ITAT order, the revenue filed an appeal to the High Court. The Court relied
on the judgment of this Court in the case of Commissioner of Income-tax,
Mumbai v. Everest Kento Cylinders Ltd. [2015] 58 taxmann.com 254 wherein it
has been held that there is a
substantial difference between a bank guarantee and a corporate guarantee.

The ITAT
observed that, the Tribunal applied a
lower percentage of commission in the present case considering that, what the
assessee had provided was a corporate guarantee and not a bank guarantee. The
Revenue appeal was dismissed.

shailesh.kwebmaker

Section 37(1) : Business expenditure–Capital or revenue-Non-compete fee –Allowable as revenue expenditure

17.
Pr CIT-3 vs. Six Sigma Gases India Pvt. Ltd [ ITA no 1259 of 2016 Dated:
28^th January, 2019 (Bombay High Court)].

[Six Sigma Gases India Pvt. Ltd vs..
ACIT-3(3); dated 09/09/2015 ; AY:
2006-07 ITA. No 3441/Mum/2012,
Bench : E ; Mum. ITAT ]

Section 37(1) : Business
expenditure–Capital or revenue-Non-compete fee –Allowable as revenue
expenditure

The assessee is a Private Limited
Company. During the year the assessee had entered into a non-compete agreement
with the original promoter of the Company under which in lieu of payment of
Rs.2.06 crore (rounded off), the promoter would not engage himself in the same
business for a period of five years. Incidentally, the business of the company
was of manufacture of oxygen gases.

The A.O did not
allow the entire expenditure as claimed by the assessee but treated it as
differed revenue expenditure to be spanned over five years period. By the
impugned order, the CIT(A) confirmed the action of the AO.

Being aggrieved
with the CIT (A) order, the assessee filed an appeal to the Tribunal. The
Tribunal by the impugned judgment held in favour of the assessee relying upon
and referring to the decision of this Court in the case of The CIT-1,
Mumbai vs. Everest Advertising Pvt. Ltd., Mumbai dated 14th December, 2012
rendered in Income Tax Appeal No. 6539 of 2010 wherein the Hon’ble
High Court has held that “…..the object of making payment was to derive an
advantage by eliminating the competition over a period of three years and the
said period cannot be considered as sufficiently long period so as to ward off
competition from Mr. Kapadia for a long time in future or forever so as to hold
that benefit of enduring nature is received from such payment. The Tribunal has
recorded a finding that exit of Mr. Kapadia would have immediate impact on the
business of the assessee-company and in order to protect the business interest
the assessee had paid the said amount to ward off the competition…..”

The Revenue
argued that, under the agreement, the assessee would avoid competition from the
erstwhile promoter for a period of five years. The assessee thus acquired an
enduring benefit. The expenditure should have been treated as a capital
expenditure.

The assessee submitted that, the
assessee did not receive any enduring benefit out of the agreement. Under the
non-compete agreement, the asssessee had received a immediate benefit by
avoiding the possible competition from the original promoters of the Company.

Being aggrieved with the ITAT order,
the revenue filed an appeal to the High Court. The Court find that the Madras
High Court in the case of Asianet Communications Ltd. vs. CIT, Chennai
reported in 257 Taxman 473 also treated the expenditure as revenue in
nature in a case where the non compete agreement was for a period of five yers
holding that the same did not result into any enduring benefit to the assessee.
Similar view was expressed by the same Court in the case of Carborandum
Universal Ltd. vs. Joint Commissioner of Income-tax, Special Range-I, Chennai,
reported in [2012] 26 taxmann.com 268. It can thus be seen that, looking to
the nature of non-compete agreement, as also the duration thereof, the Courts
have recognised such expenditure as Revenue expenditure. In the present case,
the assessee had subject agreement with the promoter of the Company to avoid
immediate competition. The business of the assessee company continue. No new
business was acquired. The benefit therefore was held by the Tribunal
instantaneous.

Accordingly appeal of revenue was
dismissed.

shailesh.kwebmaker

Section 263 : Commissioner- Revision – Book profit – only power vested upon the Revenue authorities is the power of examining whether the books of accounts are certified by the authorities under the Companies Act – Revision was not valid. [Section 115JB]

It
started in January, 1971 as “High Court News”. Dinesh Vyas, Advocate, started
it and it contained unreported decisions of Bombay High Court only. Between
January, 1976 and April, 1984, it was contributed by V H Patil, Advocate as “In
the Courts”. The baton was passed to Keshav B Bhujle in May, 1984 and he
carries it even today – and that’s 35 years of month on month contribution.
Ajay Singh joined in 2016-17 by penning Part B – Unreported Decisions.

16.
The Pr. CIT-1 vs. Family Investment Pvt. Ltd [ Income tax Appeal no:
1669 of 2016 Dated: 28^th January, 2019 (Bombay High
Court)].

[Family Investment Pvt. Ltd vs. The Pr.
CIT-9; dated 02/12/2015 ; ITA. No 1945/Mum/2015, AY:2010-11; Bench
F Mum. ITAT]

Section 263 : Commissioner- Revision – Book
profit – only power vested upon the Revenue authorities is the power of
examining whether the books of accounts are certified by the authorities under
the Companies Act – Revision was not valid. [Section 115JB]

The assessee-company is engaged in the
business of dealing in shares and securities under the Portfolio Management
Scheme. While framing the assessment order u/s. 143(3) of the Act, the A.O
observed that 15% of Book Profit is less than the tax payable on the income assessed
under the normal provision of the Act, provisions of section 115JB of the Act
will not apply. Hence, for the purpose of taxation, total income shall be taken
as per the normal provisions of the Act. This order did not find favour with
the Principal CIT who vide notice u/s. 263 of the Act dated 22^nd
September, 2014 sought to set aside the assessment order holding it to be
erroneous and prejudicial to the interest of the Revenue.

Being aggrieved
with the Pr.CIT order, the assessee filed an appeal to the Tribunal. The
Tribunal held that it can be seen that the only power vested upon the Revenue
authorities is the power of examining whether the books of accounts are
certified by the authorities under the Companies Act. It is not the case of the
Pr. CIT that the books of account have not been properly certified by the
authorities under the Companies Act, therefore the observations of the Pr. CIT
is not acceptable. The second contention of the Principal CIT is that the AO
has not examined this issue during the course of the assessment proceedings.

The Court observed that vide letter dated 7^th
December, 2012, the assessee has furnished (a) ledger account of donation u/s.
80G alongwith donation receipts (b) copy of acknowledgement of return of income
and balance sheet and profit and loss account of Shantilal Shanghvi Foundation
alongwith all its schedule. Thus, it can be seen that in response to a specific
query, the assessee has filed all the related details alongwith supporting
evidences. Therefore, it cannot be said that the AO has not examined this issue
during the course of assessment proceedings. The AO has thoroughly examined the
claim, therefore ITAT set aside the order of the Principal CIT.

Being aggrieved with the ITAT order,
the Revenue filed an appeal to the High Court. The Court observed that on
perusal of the documents on record with the assistance of the learned counsel
for the parties would show that the Tribunal proceeded to allow the appeal
principally on two grounds.

Apart from these observations of the
Tribunal, independently the court observed that during the year under
consideration the assessee had committed to a total donation of Rs.12.75 crore,
out of which Rs.10.25 crore was actually donated during the period relevant to
the assessment year in question. Out of the remaining Rs. 2.50 crore, Rs. 2
crore was donated in the next year, but even before the date of closing of the
account of the present year and remaining Rs.50 lakh was donated shortly after
that. In view of such facts, we do not see any reasons to interfere.

The court also took the note of the
fact that the decision of the Supreme Court in case of Apollo Tyres is referred
to larger bench. In the result, appeal is dismissed.

shailesh.kwebmaker

Section 194C and 194-I – TDS – Works contract/rent – Assessee refining crude oil and selling petroleum products – Agreement with another company for transportation of goods – Agreement stipulating proper maintenance of trucks – Not conclusive – Payment covered by section 194C and not section 194-I

58. CIT(TDS) vs. Indian Oil Corporation
Ltd.; 410 ITR 106 (Uttarakhand) Date of order: 6^th March, 2018

Section 194C and 194-I – TDS – Works
contract/rent – Assessee refining crude oil and selling petroleum products –
Agreement with another company for transportation of goods – Agreement
stipulating proper maintenance of trucks – Not conclusive – Payment covered by
section 194C and not section 194-I

The assessee-company was engaged in refining
crude oil and storing, distributing and selling the petroleum products and for
this purpose required tank trucks for road transportation of bulk petroleum
products from its various storage points to customers or other storage points.
For this purpose, it entered in to an agreement with another company which was
operating trucks. The assesse deducted tax at source u/s. 194C of the Act in
respect of payments to the said company.

The Commissioner (Appeals) held that the tax
was deductible u/s. 194C and not u/s. 194-I. The Tribunal upheld this. On
appeal by the Revenue, the Uttarakhand High Court upheld the decision of the
Tribunal and held as under:

“i) Modern transportation contracts are fairly
complex having regard to various requirements, which fall to be fulfilled by
the contracting parties. Conditions like maintaining the tank trucks in sound
mechanical condition and having all the fittings up to the standards laid down
by the company from time to time would not make it a contract for use.

ii) The tenor of the contract showed that the
parties to the contract understood the agreement as one where the carrier would
be paid transport charges and that too for the shortest route travelled by it
in the course of transporting the goods of the assessee from one point to
another. It unambiguously ruled out payment of idle charges. It also made it
clear that there was no entitlement in the carrier to any payment dehors the
actual transporting of the goods.

iii) The carrier under the contract was
undoubtedly obliged to maintain the requisite number of trucks of a particular
type subject to various restrictions and conditions, but it was under the
obligation to operate the trucks for the purpose of transporting the goods
belonging to the assesse. Therefore, use of the words “exclusive right to use
the truck” found in clause 1 and also in clause 6(e) would not by itself be
decisive of the matter. Even after the amendment to the Explanation u/s. 194-I,
the case would not fall within its scope as it was a case of a contract for
transport of goods and, therefore, a contract of work within the meaning of
section 194C and not one which fell within the Explanation to section 194-I,
namely use of plant by the assessee.”

shailesh.kwebmaker

Sections 9, 147 and 148 of ITA 1961 and Article 11 of DTAA between India and Mauritius – Reassessment – Income – Deemed to accrue or arise in India (Interest) – Where Assessing Officer, during assessment had accepted claim of assessee that it was entitled to benefit of India Mauritius DTAA, assessment could not have been reopened on ground that assessee did not carry out bona fide banking activities in Mauritius

57. HSBC Bank (Mauritius) Ltd. vs. Dy. CIT;
[2019] 101 taxmann.com 206 (Bom) Date of order: 14^th January, 2019 A. Y. 2011-12

Sections 9, 147 and 148 of ITA 1961 and
Article 11 of DTAA between India and Mauritius – Reassessment – Income – Deemed
to accrue or arise in India (Interest) – Where Assessing Officer, during
assessment had accepted claim of assessee that it was entitled to benefit of
India Mauritius DTAA, assessment could not have been reopened on ground that
assessee did not carry out bona fide banking activities in Mauritius

The assessee was a Banking Company
registered under the laws of Mauritius. For the A. Y. 2011-12, the assessee
filed its return of income declaring nil income. In the return, the assessee
had shown interest income of Rs. 238.01 crores and claimed the same to be
exempt from tax in India. This amount comprised of income on securities of Rs.
94.57 crore and interest income on External Commercial Borrowings (ECB) of Rs.
143.43 crore. According to the assessee, such income was not taxable in India
by virtue of DTAA between India and Mauritius. The Assessing Officer on
scrutiny, passed order u/s. 143(3) in which he added a sum of Rs.94.57 crore to
the total income of the assessee by rejecting the assessee’s claim of such
income on securities not being taxable in India. He however did not disturb the
assessee’s claim of interest income on ECB being not taxable. After four years,
the Assessing Officer issued notice to reopen assessment in case of assessee on
ground that banking activities carried out by assessee locally in Mauritius
were for namesake and assessee had failed to make true and full disclosure
regarding its beneficial ownership status. The assessee on being supplied
reasons for reopening assessment raised objections to the notice of reopening
of assessment. The Assessing Officer, however, rejected said objections.

The assessee filed writ petition and
challenged the validity of reopening. The Bombay High Court allowed the writ
petition filed by the assessee and held as under:

“i) The perusal of the reasons recorded by the
Assessing Officer would show that the only ground on which the notice of
reopening of assessment is issued was the assessee’s claim of exemption of
interest income which in turn was based on DTAA between India and Mauritius.
According to the Assessing Officer, the assessee had attempted to misuse the
DTAA since according to him, the assessee did not carry out banking business in
the said country.

ii) In this context, it is noted that the entire
claim had come up for consideration before the Assessing Officer during the
original scrutiny assessment. During such assessment, the Assessing Officer had
noted the assessee’s claim of exemption of interest on ECB made in the return
filed. In written query dated 21/10/2013, the Assessing Officer had asked the
assessee to explain several issues and called for documents.

iii) It was after detailed examination that the
Assessing Officer passed the order of assessment on 28/01/2016 in which he
disallowed the assessee’s claim of exempt interest of Rs. 94.57 crore which
related to interest on securities. He, however, did not tamper with the
assessee’s claim of exempt interest of Rs. 143.43 crore which was interest on ECB.
Thus, the entire issue was minutely examined by the Assessing Officer during
the original scrutiny assessment. To the extent, the Assessing Officer was not
satisfied with the assessee’s claim of exempt interest, the same was
disallowed. However, in the context of assessee’s claim of exempt interest of
Rs. 143.43 crore, by virtue of DTAA between India and Mauritius, the Assessing
Officer accepted the same.

iv) This very issue now the Assessing Officer
wants to re-examine during the process of reassessment. For multiple reasons,
same would be wholly impermissible. Firstly, as noted, the entire issue is a
scrutinised issue. This would be based on mere change of opinion and would be
impressible as held by series of judgments of the various Courts.

v) Quite apart, the impugned notice has been
issued beyond the period of four years from the end of relevant assessment
year. There is nothing in the reasons recorded to suggest that there was any
failure on the part of the assessee to disclose truly and fully all material
facts which led to the income chargeable to tax escaping assessment. In fact,
the perusal of the reasons would show that the Assessing Officer was merely
proceeding on the material already on record. Even on this ground, the impugned
notice should be set aside.

vi) In the result, the impugned notice is set
aside. Petition is allowed and disposed of accordingly.”

shailesh.kwebmaker

Section 144, 147 and 148 – Reassessment – Service of notice u/s. 148 – Notice sent to old address – Assessee’s returns for earlier years already on file and reflecting new address – Issue of notice at old address mechanically – Notice and order of reassessment and consequential attachment of bank accounts – Liable to be quashed

56. Veena Devi Karnani vs. ITO; 410 ITR 23
(Del) Date of order: 14^th September,
2018 A. Y. 2010-11

Section 144, 147 and 148 – Reassessment –
Service of notice u/s. 148 – Notice sent to old address – Assessee’s returns
for earlier years already on file and reflecting new address – Issue of notice
at old address mechanically – Notice and order of reassessment and
consequential attachment of bank accounts – Liable to be quashed

In the F. Y. 2010-11, the assessee shifted
her residence and filed returns of income under the same permanent account
number and e-mail ID. The returns disclosed the changed address. For the A. Y.
2010-11, the Assessing Officer sent a series of notices u/s. 148 of the Act for
reopening the assessment to the assessee’s old address. As there was no
response, the reassessment was completed on best judgment basis and an ex-parte
order was passed u/s. 144 read with 147. Upon issuance of an attachment order
to satisfy the demand raised in the reassessment order, the assessee filed a
writ petition contending that the reassessment proceedings were a nullity
because the notice was never served upon her and that the Assessing Officer did
not comply with the provisions of Rule 127 of the Income-tax Rules, 1962 which
stipulated examining the permanent account number database or the subsequent
years returns to ascertain the correct address of the assessee.

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

“i) Rule 127(2) states that the addresses to
which a notice or summons or requisition or order or any other communication
may be delivered or transmitted shall be either available in the permanent
account number database of the assesse or the address available in the
income-tax return to which the communication relates or the address available
in the last income-tax return filed by the assesse. All these options have to
be resorted to by the concerned authority, in this case the Assessing Officer.

ii) When the Assessing Officer issued the
reassessment notice on December 13, 2013, he was under a duty to access the
available permanent account number database of the addressee or the address
available in the income-tax return to which the communication related or the
address available in the last return filed by the addressee. The return for the
A. Ys. 2011-12 and 2012-13 had already been filed on 22/02/2012 and 13/12/2012
respectively, reflecting the changed address but with the same permanent
account number and before the same Assessing Officer.

iii) The Assessing Officer had omitted to access
the changed permanent account number database and had mechanically sent notices
to the old address of the assessee. The subsequent notices u/s. 142(1) were
also sent to the old address and the reassessment proceedings were completed on
best judgment basis. The Assessing Officer had mechanically proceeded on the
information supplied to him by the bank without following the correct procedure
in law and had failed to ensure that the reassessment notice was issued
properly and served at the correct address in the manner known to law.

iv) The reassessment notice issued u/s. 148, the
subsequent order u/s. 144 r.w.s. 147 and the consequential action of attachment
of the assessee’s bank accounts were quashed.”

shailesh.kwebmaker

Section 5 – Income – Accrual of income – Telecommunication service provider – Payments received on prepaid cards – Liability to be discharged at future date – To the extent of unutilised talk time payment did not accrue as income in year of sale – Unutilised amount is revenue receipt when talk time is actually used or in case of cards that lapsed on date when cards lapsed

55. CIT vs. Shyam Telelink Ltd.; 410 ITR 31
(Del) Date of order: 15^th November,
2018 A. Ys. 2003-04, 20004-05 and 2009-10

Section 5 – Income – Accrual of income –
Telecommunication service provider – Payments received on prepaid cards –
Liability to be discharged at future date – To the extent of unutilised talk
time payment did not accrue as income in year of sale – Unutilised amount is
revenue receipt when talk time is actually used or in case of cards that lapsed
on date when cards lapsed

The assessee provides basic
telecommunication services and had both prepaid and post paid subscribers. The
prepaid subscribers were billed on the basis of actual talk time. According to
the Department, in respect of the prepaid cards, the assessee was to account
for and include the entire amount paid on the date of purchase of the prepaid
cards by the subscribers and the date of purchase of the prepaid card was the
date when the income accrued to the assessee.

However, the assesse recognised the revenue
on prepaid cards on the basis of the actual usage and carried forward the
unutilised amount outstanding on the prepaid cards, if any, at the end of the
financial year to the next year. The unutilised amount was treated as advance
in the balance sheet and recognised as revenue in the subsequent year, when the
talk time was actually used or was exhausted when the cards lapsed on expiry of
stipulated time.

The Tribunal held that the amount received
on the sale of prepaid cards to the extent of unutilised talk time did not
accrue as income in the year of sale. On appeal by the Revenue, the Delhi High
Court upheld the decision of the Tribunal and held as under:

“i) The payments made on account of the prepaid
cards by the subscribers was an advance subject to the assesse providing basic
telecommunication services as promised, failing which the unutilised amount was
required to be refunded to the prepaid subscribers. The apportionment of the
prepaid amount was contingent upon the assessee performing its obligation and
rendering services to the prepaid customers as per the terms. If the assesse
failed to perform the services as promised, it was under an obligation to
refund the advance payment received under the ordinary law of contract or
special enactments, such as Consumer Protection Act, 1986.

ii) The Tribunal was right in
holding that the amount received on the sale of prepaid cards to the extent of
unutilised talk time did not accrue as income in the year of sale. In the case
of prepaid cards that lapsed, the unutilised amount had to be treated as income
or receipt of the assessee on the date when the cards had lapsed. The Assessing
Officer was to compute the assessees income accordingly while he gave effect to
the order of the Tribunal.”

shailesh.kwebmaker

Section 80P(1), (2)(a)(i) – Co-operative society – Co-operative bank – Deduction u/s. 80P(1), (2)(a)(i) – Income from sale of goods for public distribution system of State Government – Ancillary activity of credit society – Entitled to deduction

54. Kodumudi Growers Co-operative Bank Ltd.
vs. ITO; 410 ITR 218 (Mad) Date of order: 31^st October, 2018 A. Y. 2005-06: Ss. 80P(1), (2)(a)(i) of ITA 1961:

Section
80P(1), (2)(a)(i) – Co-operative
society – Co-operative bank – Deduction u/s. 80P(1), (2)(a)(i) – Income from
sale of goods for public distribution system of State Government – Ancillary
activity of credit society – Entitled to deduction

The assessee-society was in the business of
banking and provided credit facilities to its members. For the A. Y. 2005-06 it
filed Nil return. The Assessing Officer computed the assessee’s income at Rs.
22,16,211/- of which a sum of Rs. 2,55,118/- represented income on account of sale
of goods for the public distribution system of the Government of Tamil Nadu.
The Assessing Officer was of the view that such activity was not related to the
assessee’s banking activity and held that the income that arise therefrom was
not allowable as deduction u/s. 80P(2)(a) of the Income-tax Act, 1961
(hereinafter for the sake of brevity referred to as the “Act”) but
included such income for consideration in the overall deduction allowable u/s.
80P(2)(c)(ii) which amounted to Rs. 50,000/-.

The Commissioner (Appeals) and the Tribunal
upheld the decision of the Assessing Officer.

The Madras High Court allowed the appeal
filed by the assessee and held as under:

“i) The activity undertaken by the assesse was
not one which it was not authorized to do. The assessee was entitled to
distribute the items under the public distribution system. The bye-laws
themselves provided for such an activity as an ancillary activity by the
assesse. Furthermore, the assesse was bound by the directives issued by the
Government as well as the Registrar of Co-operative Societies. The fair price
shops were opened based on the directions opened by the Government as
communicated by the Registrar of Co-operative Societies and the District
Collector. Therefore, the activity done by the assesse could not be truncated
from the activity as a credit society and the authorities below had committed
an error in denying the special deduction.

ii) The assessee was entitled to the benefit of
deduction u/s. 80P(1) r.w.s. 80P(2)(a)(i).

iii) The tax appeal is allowed. The orders passed
by the authorities below are set aside and the substantial question of law is
answered in favour of the assessee. The Assessing Officer is directed to extend
the benefit of deduction u/s. 80P(1) r.w.s. 80P(2)(a)(i) to the
appellant/assessee.”

shailesh.kwebmaker

Business income or long-term capital gain – Income from shares and securities held for period beyond 12 months – Investments whether made from borrowed funds or own funds of assessee – No distinction made in circular issued by CBDT – Department bound by circular – Profit is long term capital gain

53. Principal CIT vs. Hardik Bharat Patel;
410 ITR 202 (Bom): Date of order: 19^th November,
2018 A. Y. 2008-09

Business income or long-term capital gain –
Income from shares and securities held for period beyond 12 months –
Investments whether made from borrowed funds or own funds of assessee – No
distinction made in circular issued by CBDT – Department bound by circular –
Profit is long term capital gain

For the A. Y. 2008-09, the Tribunal directed
the Assessing Officer to treat the profit of the assessee that arose out of the
frequent and voluminous transactions initiated with borrowed funds in shares as
“long term capital gains” instead of as business income following its order for
the earlier assessment year. The Department filed appeal before the High Court
and contended that the amount invested in shares by the assessee was out of
borrowed funds and therefore, the profit was to be treated as business income
and not as long-term capital gains. The Bombay High Court upheld the decision
of the Tribunal and held as under:

“i) According to Circular No. 6 of 2016 dated
February 29, 2016, issued by the CBDT, with regard to the taxability of surplus
on sale of shares and securities, whether as capital gains or business income
in the case of long term holding of shares and securities beyond 12 months, the
assessee has an option to treat the income from sale of listed shares and
securities as income arising under the head “Long-term capital gains”. However,
the stand once taken by the assessee would not be subject to change and
consistently the income on the sale of securities which are held as investment
would continue to be taxed as long-term capital gains or business income as
opted by the assessee. The circular makes no distinction whether the
investments made in shares were out of borrowed funds or out of its own funds.

ii) The Department was bound by Circular No. 6
of 2016 dated February 29, 2016 issued by the CBDT and the distinction which
had been sought to be made by the Department could not override the circular
which made no distinction whether the investments made in shares were out of
borrowed funds or out of the assessee’s own funds. No substantial question of
law. Hence not entertained.”

shailesh.kwebmaker

Section 37 (1) and 41 (1) – A. Business expenditure – Allowability of (Illegal payment) – Where assessee had purchased oil from Iraq and payments were made by an agent, there being no evidence to suggest that assessee had made any illegal commission payment to Oil Market Organisation of Iraqi Government as alleged in Volckar Committee Report, Tribunal’s order allowing payment for purchase of oil was to be upheld

52. CIT-LTU vs. Reliance Industries Ltd.;
[2019] 102 taxmann.com 142 (Bom) Date of order: 15^th January, 2019

Section 37 (1) and 41 (1) – A. Business expenditure – Allowability of
(Illegal payment) – Where assessee had purchased oil from Iraq and payments
were made by an agent, there being no evidence to suggest that assessee had
made any illegal commission payment to Oil Market Organisation of Iraqi
Government as alleged in Volckar Committee Report, Tribunal’s order allowing
payment for purchase of oil was to be upheld

The assessee claimed deduction towards the
payment for purchase of oil. The Assessing Officer’s case was that assessee had
paid illegal commission for purchase of such oil to State Oil Marketing
Organisation and therefore, such expenditure was not allowable.

The Commissioner (Appeals), while reversing
the disallowance made by the Assessing Officer, observed that there was no
evidence that the assessee had paid any such illegal commission. He noted that
except for the Volcker Committee Report, there was no other evidence for making
such addition. He noted that even in the said report, there was no finding that
the assessee had made illegal payment and it appeared that the payments were
made by an agent and there was no evidence to suggest that the assessee had
made any illegal commission payment to Iraq Government. The Tribunal confirmed
the view of Commissioner (Appeals).

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

“The entire issue is based on appreciation
of materials on record and is a factual issue. No question of law arises.”

B. Deemed income u/s. 41(1) – Remission or
cessation of trading liability (Claim for deduction) – Where on account of
attack on World Trade Centre, financial market, collapsed and market value of
bonds issued by assessee was brought down below their face value and, hence,
assessee purchased its own bonds and extinguished them, profit gained in
buy-back process could not be taxable u/s. 41(1) as assessee had not claimed
deduction of trading liability in any earlier year

The assessee had issued foreign currency
bonds in the years 1996 and 1997. On account of the attack on World Trade
Centre at USA on 11/09/2001, financial market collapsed and the investors of
debentures and bonds started selling them which in turn brought down the market
price of such bonds and debentures which were traded in the market at a value
less than the face value. The assessee purchased such bonds and extinguished
them. In the process of buy back, the assessee gained a sum of Rs. 38.80 crore.
The Assessing Officer treated such amount assessable to tax in terms of section
41(1).

The Commissioner (Appeals) and the Tribunal,
however, deleted the same. The Tribunal in its detail discussion came to the
conclusion that the liability arising out of the issuance of bonds was not a
trading liability and therefore, section 41(1) would have no applicability.

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

“i) There
is no error in the view taken by the Tribunal. Sub-section (1) of section 41 provides
that where an allowance or deduction has been made in the assessment for any
year in respect of loss, expenditure or trading liability incurred by the
assessee and subsequently, during any previous year, such liability ceases, the
same would be treated as the assessee’s income chargeable to tax as income for
previous year under which subject extinguishment took place. The foremost
requirement for applicability of sub-section (1) of section 41, therefore, is
that the assessee has claimed any allowance or deduction which has been granted
in any year in respect of any loss, expenditure or trading liability. In the
present case, the revenue has not established these basic facts. In other
words, it is not even the case of the revenue that in the process of issuing
the bonds, the assessee had claimed deduction of any trading liability in any
year. Any extinguishment of such liability would not give rise to applicability
of sub-section (1) to section 41.

ii) For
applicability of section 41(1), it is a sine qua non that there should
be an allowance or deduction claimed by the assessee in any assessment year in
respect of loss, expenditure or trading liability incurred by the assessee.
Then, subsequently, during any previous year, if the creditor remits or waives
any such liability, then the assessee is liable to pay tax under section 41.
This question, therefore, does not require any consideration.”

shailesh.kwebmaker

Section 37 (1) – Business expenditure – Rule of consistency – Expenditure claimed and allowed against professional income in earlier years and subsequent years – Allocation of expenditure between capital gains and professional business income in year in question – Not proper

51. Principal CIT vs. Quest Investment Advisors
Pvt. Ltd.; 409 ITR 545 (Bom) Date of order: 28^th
June, 2018 A. Y. 2008-10

Section
37 (1) – Business expenditure – Rule of consistency – Expenditure claimed and
allowed against professional income in earlier years and subsequent years –
Allocation of expenditure between capital gains and professional business
income in year in question – Not proper

For
the A. Y. 2008-09, the assesse filed return of income declaring professional
income of Rs. 1.31 crore and short term capital gains of Rs. 6 crore. As was
the practice for the earlier years and accepted by the Department, all the
expenses were set off against the professional business income. However, for
the relevant year, the Assessing Officer allocated the expenditure between
earnings of capital gains and professional income and disallowed an expenditure
of Rs. 88.05 lakh claimed by the assesse against professional income. The
Tribunal found that the authorities had consistently over the years for 10
years prior to the A. Ys. 2007-08 and 2008-09 and for the four subsequent
years, accepted the principle that all the expenses which had been incurred
were attributable entirely to earning professional income without allocation of
any amount to capital gains, and applying the principle of consistency the
Tribunal allowed the appeal filed by the assessee.

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

“i) For the earlier 10 years and 4
subsequent years the entire expenditure had been allowed against the business
income and no expenditure was allocated to capital gains. Once the principle
was accepted and consistently applied and followed, the Department was bound by
it. The basis for the change in practice should have been mentioned by the
Department, if it had wanted to change the practice without any change in law
or facts therein, either in its order or pointed out when the Tribunal passed
the order.

ii) Therefore, the Tribunal’s allowing the
assessee’s appeal on the principle of consistency could not be faulted as it
was in accord with the Supreme Court decision.”

shailesh.kwebmaker

Articles 5, 7 of India-Italy DTAA; Section 9 of IT Act – Where liaison office was involved in strategic business decision making in India including price negotiation and agreement finalisation, liaison office would constitute fixed place PE. Employees of a group entity in India carrying on core sale related activities, results in the emergence of a Dependent Agency PE in India

[2019] 101 taxmann.com 402 (Delhi – Trib.) 25.
ITA No: 6892 (Delhi) of 2017 GE Nuovo Pignone SPA vs. DCIT Date of Order: 1^st January, 2019 A.Y.: 2009-10

Articles 5, 7 of India-Italy DTAA; Section
9 of IT Act – Where liaison office was involved in strategic business decision
making in India including price negotiation and agreement finalisation, liaison
office would constitute fixed place PE. Employees of a group entity in India
carrying on core sale related activities, results in the emergence of a
Dependent Agency PE in India

FACTS

The Taxpayer, an
Italian company and part of an MNE (GE) group was engaged in the business of
supplying key equipment for oil and gas industry across the globe. One of the entities of the Taxpayer’s MNE
group (US Co) had set up a liaison office (LO) in India to act as a
communication channel with the customers in India. Further, the MNE group had
an Indian entity (ICo) which provided marketing support services to the group
companies including the Taxpayer in India. During
the relevant year, Taxpayer earned income from onshore services and as well as
offshore supply of spare parts and equipment to customers in India. However,
only income from onshore services was offered to tax as Fees for technical
services(FTS) in its return of income. Income from offshore supplies was not
offered to tax on the grounds that there was no business connection or PE in
India.

A survey was conducted at the premises of the LO of the group entity.
During the scrutiny proceedings, the AO relied on various documents and
correspondences found during the survey pertaining to the Taxpayer as well as
other entities of the MNE group. AO also made an enquiry about the sales made
by various entities of the Taxpayer group in India, employees/expatriates of
the group working from the LO premises and their roles and responsibilities.

From the material
collected during such survey and post survey enquiry, AO noted that various
expatriates of the group carried on overall business of the group, including
that of Taxpayer in India, Further the documents revealed that the employees of
ICo and expatriates in India had active involvement in conclusion of sale
contracts on behalf of the group entities of the MNE group including Taxpayer
in India

Based on this
evidence, AO held that Taxpayer had business connection in India with a fixed
place PE at the LO premises and Agency PE in the form of ICo. Aggrieved by the
draft assessment order, Taxpayer filed objections before the DRP.

The DRP upheld AO’s
order. Aggrieved, the Taxpayer appealed before the Tribunal.

HELD

Article 5 of India-Italy
DTAA describes a PE as a place which is used by a foreign enterprise for
carrying on business in India with some kind of regularity or permanence.

Basis the following facts,
Tribunal concluded that Taxpayer had a fixed place PE in India at LO’s
premises.

Taxpayer deputed an expatriate employee,
designated as ‘Oil and Gas, India Country Leader’ to India, who worked at the
LO premises along with active assistance of ICo’s employees in India.

The expatriate along with the support of
employees of ICo undertook activities like finalisation of contracts, strategic
decision making and negotiating sale prices with Indian customers from the
premises of LO. This fact was supported by the Tribunal decision² in
case of another member-company of the group. Thus, the role of the LO was not
limited merely to preparatory or auxiliary activities.Thus LO resulted in a
Fixed place PE in India.

Further, the Taxpayer did not make any off
the shelf sales to its customers in India. The sales were made on the basis of
prior contracts finalized in India. These contracts were negotiated and
finalized by the expatriates along with ICo’s employees in India.

Thus, the expatriates/ ICo created an agency
PE in terms of Article 5(4) of India-Italy DTAA for the Taxpayer in India.

________________________________

2. GE Energy Parts Inc vs. Addl DIT [2017] 78
taxmann.com 2 (Delhi-Trib)

shailesh.kwebmaker

Article 12 and Protocol to India-Belgium DTAA; Article 12, India-Portugal DTAA – due to MFN Clause in Protocol to India-Belgium DTAA, scope of FTS was to be restricted to that under India-Portugal DTAA and ‘make available’ condition was to be read into – as IT support services provided by a Belgian company did not ‘make available’ knowledge, experience, etc., the receipts were not in the nature of FTS.

24.
[2019] 101 taxmann.com 94 [Delhi – Trib] ITA No: 123 (Delhi) of 2015 Soregam SA vs. DDIT Date of Order: 30^th November, 2018 A.Ys.: 2011-12

Article 12 and
Protocol to India-Belgium DTAA; Article 12, India-Portugal DTAA – due to MFN
Clause in Protocol to India-Belgium DTAA, scope of FTS was to be restricted to
that under India-Portugal DTAA and ‘make available’ condition was to be read
into – as IT support services provided by a Belgian company did not ‘make
available’ knowledge, experience, etc., the receipts were not in the nature of
FTS.

FACTS

The Taxpayer a tax
resident of Belgium was engaged in the business of providing IT support
services to its group entities. The Taxpayer had provided such services to its
group entity in India and received consideration in respect thereof. The
Taxpayer furnished its return of income declaring NIL income and claimed refund
of tax withheld by the Indian group company.

The AO held that the entire income received by the Taxpayer for
providing IT support services was taxable in India as Fees for Technical
Services (FTS) under the DTAA.

Aggrieved, Taxpayer appealed before the DRP. The DRP held that having
regard to the Most Favoured Nation (MFN) clause in the protocol to
India-Belgium DTAA, the definition of FTS in Article 12 of India-Portugal DTAA
(which was restricted in scope) would apply. The DRP however, held that the
Taxpayer satisfied the ‘make available condition’ and hence, the receipt was
taxable as FTS in India. Aggrieved, the Taxpayer appealed before the Tribunal.

HELD

Article 12(3)(b) of
India-Belgium DTAA defines FTS. It includes payment for services of a
managerial, technical or consultancy nature. Protocol to India-Belgium DTAA
provides that if India enters into a treaty with an OECD country after 1^st
January, 1990 under which, it agrees to a lower rate of tax, or agrees to
restrict the scope of FTS, then, the same rate or scope shall also be
applicable under India-Belgium DTAA.

Subsequent to 01 January
1990, India entered into DTAA with Portugal, which is a member-country of OECD.
Under India-Portugal DTAA, scope of FTS is restricted by incorporating ‘make
available’ condition. Hence, in terms of Protocol to India-Belgium DTAA, this
restricted scope of FTS was to be read into definition of FTS under Article 12
of India-Belgium DTAA

The Taxpayer had provided
IT support services from outside India. No personnel of the Taxpayer had
visited India in connection with these services. The Taxpayer had not trained
any employee of Indian group company while providing these services. In the
order, neither the AO nor the DRP had specified how knowledge, experience, etc.
was made available nor did they mention how employees of India group company
could have utilised the experience gained by them.

Accordingly, IT support
services provided by the Taxpayer did not fall within the ambit of FTS under
Article 12 of India-Belgium DTAA, read with Article 12 of India-Portugal DTAA.

shailesh.kwebmaker

Article 23(3), India-Thailand DTAA – credit of tax that would have been payable on dividend paid by Thai subsidiary in Thailand, but for the exemption granted, could be claimed as credit against tax payable in India on the dividend.

23.
ITA Nos: 4347 to 4350/Del/2016 Polyplex Corporation Ltd vs. ACIT A.Ys.: 2010-11 to 2013-14, Date of Order: 24^th January, 2019

Article 23(3), India-Thailand DTAA – credit
of tax that would have been payable on dividend paid by Thai subsidiary in
Thailand, but for the exemption granted, could be claimed as credit against tax
payable in India on the dividend.

FACTS

The Taxpayer was an
Indian company, which had a wholly owned subsidiary in Thailand (“Thai Co”).
During the relevant years, Thai Co declared and paid dividend to the Taxpayer.
In terms of the Investment Promotion Act in Thailand, such dividend was not
laible to tax in Thailand..Taxpayer claimed tax sparing credit¹
against the taxes payable in India on the dividend income.

AO noted that the
dividend was exempt in Thailand in terms of Investment Promotion Act. As
provisions of a tax treaty provide tax benefit in respect of income which was
doubly taxed and not for tax which was not paid at all, it was concluded by AO
that the tax credit claimed could not be granted.

____________________________________

1. Article 23(3) provided that for the
purposes of foreign tax credit in India, “the term “Thai tax payable” shall be deemed
to include any amount which would have been payable as Thai tax for any year
but for an exemption or reduction of tax granted for that year”.

The CIT(A) upheld
the order of the AO.

HELD

The Tribunal observed that
tax sparing credit under Article 23(3) of India-Thailand DTAA could be availed
by the Taxpayer if dividend received by the Taxpayer was, in the first place,
taxable in the hands of the Taxpayer in Thailand, but was not taxed owing to an
exemption under the provisions of Investment Promotion Act or of the Revenue
Code of Thailand.

From perusal of Revenue
Code and Investment Promotion Act, it was noted that while the dividend would
have been otherwise taxable at 10%, it qualified for exemption under Investment
Promotion Act. Hence, tax sparing credit was allowable. However, any such
credit is further subject to limitation of ordinary credit, i.e. it cannot
exceed the amount of tax payable in India.

In the facts of the
case, the tax sparing credit of 10%
claimed by the Taxpayer was less than the tax payable in India on dividend at
30%. Acoordingly, whereas, the Taxpayer
was eligible for claiming such credit..

shailesh.kwebmaker

INTERVIEW – N. R. NARAYANA MURTHY

In celebration of its 50th Volume, the BCAJ has brought a series of interviews with people of eminence, those whom we can look up to as outstanding professionals.

The fifth interview in this series features Mr N. R. Narayana Murthy, co-founder of Infosys, one of the top ten Indian companies by market capitalisation. Mr Murthy is known for his entrepreneurial journey of setting up a hugely successful IT company in the times of anti-business government controls. He is perhaps better known as a fine human being and someone who brings ideas that India needs the most. He guides several companies as Board member and numerous educational and philanthropic institutions such as INSEAD, Cornell University, etc. He is well known for a committee he headed on Corporate Governance. Integrity, character, simplicity and discipline are some of the values his life exemplifies. He was awarded Padma Vibhushan, the second highest civilian award for ‘exceptional and distinguished service’. He continues to inspire professionals, entrepreneurs and youth. Considering his time constraints, BCAJ sent him five questions to receive written answers from him. We hope you enjoy these pearls from this oyster of a man.

Values in Business: If you can tell us about the factors that helped build a strong value system personally and at Infosys. Were there instances in your formative years that left a strong impression? What steps did you take to ensure that it stayed deep and strong?

A community makes the desired economic progress with equity and dignity for all only when every member of the community follows a certain code of conduct agreed upon after detailed consultation with experts in a society. Such a set of norms for behaviour is what is termed a value system. Such a set of norms enhances the trust and confidence of each member of the community in every other member of the community and in the value system. When there are lacunae in this set of norms, it is the duty of the elite, the rich, the powerful and the influential people to fight and change the norms. This task cannot be taken up by the weak, the poor and the marginal people.

When confidence and trust are high in the set of norms in a community, then such a community faces no bottlenecks to progress like corruption, nepotism, and inefficiency. Therefore, progress is likely to be fast in such a community.

There were several events which taught us, at Infosys, the importance of values. We learned from each instance and bettered ourselves.

The best instrument a leader has to instill a good value system is leadership by example, walking the talk and practising the precept. Employees are watching a leader every minute they are in contact with him or her. They want to imitate him or her since he or she is a powerful role model for them. It is very important for our corporate leaders to demonstrate their compliance with the agreed upon values in every transaction. It is also necessary for the leaders of capitalism in India to practice self-restraint in arrogating for themselves a disproportionate percentage of the fruits of labour in a corporation.

Fairness, transparency and accountability in senior management compensation are a must. They have to lead an austere life shunning vulgar display of wealth and power if they want capitalism to become strong in India.

The leaders have to tell stories from their own company where they ensured that good values indeed succeeded and how they made sacrifices to overcome huge problems they faced using the right methods.

Financial Figures: As a leader of Infosys – you would have to deal with numbers all the time – what was it that you always looked at from what may seem like a maze – your tools and rules?

Being an engineer, I have been a numbers man all my life. I am also comfortable in connecting the 50,000 feet bird’s eye view of the world with the ground level worm’s eye view of the world. In other words, I am comfortable both with strategy formulation and overseeing a detailed execution plan to achieve the strategy. That is why our annual strategy conference has been called (right from the early days) as STRAP (Strategy and Action Plan). Strategy takes a week to formulate but implementing that strategy successfully takes 3 years.

This country has made a science of lack of integrity, nepotism, ignoring meritocracy, poor work ethic, lack of discipline, corruption, putting the interest of an individual ahead of the country, and not caring for the commons. Unless a leader like Mahatma Gandhi emerges to lead cultural transformation, I do not see India can redeem her pledge to the founding fathers.

Therefore, in running a company, it is first important to decide what your strategy is. My strategy has always been to bring innovation in every function of the organisation to differentiate ourselves from our competitors to provide a better value to our customers, charge 20% to 25% higher prices, and obtain industry-leading operating margins (this was true as long as I was the Executive Chairman of the company till 2011; I do not know what it is now). Every business has about 5 to 7 levers that you can tweak to achieve your objectives. I focused my attention only on the US GAAP figures since our revenue was 98% from abroad. Some of the parameters I looked at were: revenue growth (on-site and off-shore), utilisation of professionals (on-site and off-shore), ratios of the number of senior, middle and junior people on-site and off-shore, spend on sub-contractors, gross margins (on-site and off-shore), cost of business enabler functions as a percentage of revenue, per-capita revenue productivity, per-capita after-tax dollars added, number of innovations added, cost per innovation and ratio of after-tax dollars to cost in dollars of such innovation, attrition, brand and compliance.

Corporate Governance: You headed the SEBI committee. In light of all that is going on (IL&FS, ICICI, NPA mess, economic offenders getting away) – How do you see the state of Corporate Governance in India today? More specifically the role of Executive Directors, Independent Directors and Auditors in particular – what are we still missing?

While SEBI has done a good job in attempting to improve corporate governance standards in India, the Indian culture has not allowed their efforts to succeed as much as they would want. The primary requirement for sustainable Indian economic growth to ensure that the poorest child in the remotest part of the country has decent access to education, healthcare, nutrition and opportunity for betterment is the cultural transformation of the country. This country has made a science of lack of integrity, nepotism, ignoring meritocracy, poor work ethic, lack of discipline, corruption, putting the interest of an individual ahead of the country, and not caring for the commons. Unless a leader like Mahatma Gandhi emerges to lead cultural transformation, I do not see India can redeem her pledge to the founding fathers.

The value of independent directors and success of governance depends on a courageous, value-based, tough, intelligent, detail-oriented and hard-working chairman who leads by example. Such people are rare in this country. Unless there is a non-executive chairman who has the attributes that I spoke about earlier and whose stature is high enough that the CEO operates under his or her governance instructions, governance is unlikely to succeed. The companies where the board is subservient to the CEO will sooner or later fail as we have seen what happened in many well-known companies in India.

How do we improve the quality of independent directors? There must be a school established by SEBI to teach the basics of governance and business (various sectors of the economy) to those who want to be independent directors. Only those who obtain 80% marks in an examination conducted by an international professional body should be given licence to practice as independent directors. This certification should be valid for just five years and the independent directors should be recertified once in five years. When there is an issue of misgovernance in a company, the certificates of all the independent directors including the chairman should be withdrawn for ten years and they should be punished very severely. Those directors who are found not guilty should get recertified.

Success: How do you define and see success? Has it changed over the years and how?

Success to me is the ability to bring a smile onto the face of people when you enter a room. They smile not because you are rich, powerful, beautiful but because you are for them. I follow the following words of Ralph Waldo Emerson :

“To laugh often and much; to win the respect of intelligent people and the affection of children; to earn the appreciation of honest critics and endure the betrayal of false friends; to appreciate beauty; to find the best in others; to leave the world a bit better, whether by a healthy child, a garden patch, or a redeemed social condition; to know even one life has breathed easier because you have lived. This is to have succeeded.”

If one were to find you on a nice and easy day – what would you be doing at home, Sir?

I would be reading a book on mathematics or physics or computer science and listening to music – Western classical, Carnatic classical, Hindi and Kannada film songs.

shailesh.kwebmaker

BCA JOURNAL @50 – HISTORY OF THE LAST 10 YEARS

The
Bombay Chartered Accountant Journal (BCAJ) is the only offering of the the
Bombay Chartered Accountants’ Society (BCAS) that reaches members and
subscribers every month. Contributed entirely by volunteers, it has been doing
so for the past fifty years. From the days of cyclostyled bulletins in 1950 to
bi-monthly printed bulletins as a source of Tribunal decisions in 1962 to the
first printed and bound Journal in 1969 of 40 pages at a subscription of Rs.
18/year, the BCAJ has blazed the trail over these fifty years.

History
of the first forty years of the BCAJ was published in the July 2009 (40^th
Year of the BCAJ) by the then Editor Gautam Nayak. In the same vein, this piece
seeks to give a snapshot of the last ten years.

THE FIFTH DECADE
(2009-10 TO 2018-19)

This
decade saw four Editors – Gautam Nayak (till July, 2010), Sanjeev R. Pandit
(2010-11 to 2012-13) Anil J. Sathe (2013-14 to 2016-17) and this writer since July, 2017.

This
decade saw numerous and frequent changes. It saw amendments to company law in
the aftermath of Satyam fraud, settling down of VAT regimes across India and
end of State Sales Tax, XBRL, Citizens Charter by the tax department,
establishing of Income tax Ombudsman, strengthening of RTI, proliferation of
ERPs, Vodafone dispute and retrospective amendments, thrust on Corporate
Governance, FCRA amendments, increasing size of service tax law, Digital
Certification, Cloud Computing, focus on family-managed companies in a
globalising economy, Stock Options, Companies Act revamp and a new 2013 Act,
Transfer Pricing, CAs practising under LLP, Competition Law, FATCA and CRS,
BEPS, NCAS, AAR, GAAR, CSR, Ind AS, IBC, GST, NFRA and such other changes.

New features

New
features that were started in this decade included Risk containing case
studies by Dr. Vishnu Kanhere from May, 2009. It contained practical content,
as risk management was the buzz word. SAP and Fraud was written by
Chetan Dalal from October, 2009, which was an extension of his earlier series
on fraud detection. This was to arm the CAs with tools to use in an ERP
environment. Auditing Standards by Bhavesh Dhupelia and Shabbir
Readymadewala highlighted important points of the revised standards on auditing
and their practical impact. In 2009-10, BCAJ started a feature called Indirect
Taxes – Recent Decisions penned by Bakul Modi and Puloma Dalal. In
2012-13 – Ethics and You penned by C. N. Vaze was started to address the
need to keep the focus on ethics in a light yet effective manner. A new feature
Student Forum with a view to encourage the next generation was started
with contributions from students. With opening up of the economy, more global
reporting and the imminence of IFRS coming to India – Jamil Khatri and Akeel
Master wrote regularly in a feature titled IFRS. A column to cover
building blocks of the evolving GST law was started under the title Decoding
GST by Sunil B. Gabhawalla, Rishabh Sanghvi and Parth Shah. Statistically
Speaking was introduced to draw attention to some key indicators with Parth
Shah and Akshata Kapadia as first compilers. In July, 2018, a bi-monthly series
Tech Mantra was started with Yazdi Tantra as its contributor. FEMA
Focus was started in October, 2018 to bring out brief analysis of changes
in foreign exchange law including compounding orders authored by Bhaumik Goda
and Saumya Sheth. All other features such as Tribunal News, In the High Courts,
From Published Accounts, VAT and others continued as usual.

Articles

The
articles that appeared showcased burning issues of the times. Rotation of
Auditors in the aftermath of Satyam fraud by P. N. Shah; articles on Female
Rights in HUF by M. L. Bhakta; articles on IPR laws by Aditya Thakkar are few
of the examples. A series of six articles on M&A was contributed by Krishna
Chaturvedi and Vijay Iyer as M&A was the flavour of the time. A series on
Transfer Pricing was also carried out considering its increasing importance.
Family-managed companies going the professional way and double-dip recession by
Rajaram Ajgaonkar; Lawyers Duties and Accountability by Senior Advocate S. E.
Dastur brought about matters beyond the regular tax and audit subjects.
Articles by Sriraman Parthasarthy on audit were especially noteworthy, as they
covered contemporary issues with usable content. N. M. Ranka wrote a series
articles titled Rules of Interpretation of Tax Statutes. Building the Firm of
the Future by Dr. Lee Fredericksen was an especially admired article giving
numerous graphical data points.

The
young Shantanu Gawade, age 14 years, spoke at BCAS and his talk on “Ethical
Hacking and Cybercrimes” was published in the form of a report in the December,
2011 issue.

Editorials and Other Content

Editorials
continued to speak objectively, emphatically, and fearlessly. A number of
cartoons were brought out during this decade too – depicting what words couldn’t
have. Every feature writer and President – whether writing their monthly page
or digesting cases or giving commentary on cases or laws – did so with purpose
and passion, some summarising, others detailing or analysing – each one doing
it with exactitude and calibre.

Digital Push: BCAJONLINE.ORG

Reading
a professional journal in print format has remained in vogue. However, a
digital platform has its own benefits. A CD containing Journals from 2000 to
2011 was brought out earlier. A web version was thought imperative. The Journal
got its dedicated website in April, 2014, containing full text of all journals
published since the year 2000. This facilitated search of the Journals for
specific topics or authors or articles. A flip book version was also started in
April, 2017.

Printer

BCAJ
was printed since 1970 by Vijay Mudran run by Madhav Kanitkar, who after 40
years of association with the BCAS was not only a well wisher but also
complemented the editor with his observations. He would make numerous
suggestions and took great care of the BCAJ. In February, 2010 BCAJ switched to
Spenta Multimedia when Vijay Mudran suddenly discontinued their operations.
Along with the change of the printer BCAJ reviewed its font size, cover page,
and structure to ensure that these were contemporary and more reader friendly.

Interviews

The
July, 2010 Annual Special Issue carried an interview of Justice Ajit P. Shah
pertaining to law and the legal system and challenges before the judiciary such
as judicial appointments, tribunalisation, arbitration and mediation, RTI, and
the criminal justice system. The July, 2012 Annual Special Issue covered an
interview of film star Anupam Kher, who shared his professional journey and
lessons learnt along the way. The golden jubilee year 2018-19 saw six
interviews described later.

GST

As the
advent of GST was becoming imminent, numerous articles around model GST law to
GST/VAT in other countries were brought out. Welcome GST articles carried the
theme to bring readers abreast with the grandest tax change India was to see.

July,
2017 marked the arrival of Goods and Services Tax. BCAJ decided to carry its
Annual July Special Issue containing 21 Articles on GST without any of the
regular features. This was perhaps done only once earlier in 1993. More than
19,000 copies (including normal subscription) of this Special Issue were
printed and several subscribers booked additional copies in advance. The issue
was released at the hands of the Hon. Union Cabinet Minister Piyush Goyal, a Chartered
Accountant. This was the highest circulation number of the Journal.

Surveys

A
survey on Practice Management was conducted in October, 2015, on a number of
data points of fee scales, billable hours, gross fees, profit per partner,
etc., comparing these with similar figures in the USA. This was perhaps the
first one of its kind in the Journal. Another survey was conducted on Practice
Management in August, 2018 and the results printed in September, 2018. BCAJ
also carried out a Survey on BCAJ itself, to obtain data points on reader
expectations in January, 2018. 95% of respondents answered YES to the question
on satisfaction with overall coverage of topics. 50.5% respondents spent more
than two hours reading the journal every month. Heartening indeed!

Subscription

The
BCAJ cover price has remained the same in all the 10 years: Rs. 1200 per year
or Rs. 100 per copy. This was nothing short of remarkable. This is possible
solely because of consistent voluntary contributions by several professionals
over the years. Members and readers have always remained the centre point and
focus of the Journal.

Losses

In
these ten years, BCAJ lost its biggest supporters: past editor Bhupendra V.
Dalal (2014), publisher Narayan K. Varma (2015) and contributor to 50 plus
Namaskaars Pradeep A. Shah (2017).

Books developed from BCAJ
content

The
BCAJ churns out vast amounts of content. Four books took shape out of the BCAJ
articles series – “Laws and Business” (by Anup P. Shah), “Novel and
Conventional Methods of Audit, Investigation and Fraud Detection” (by Chetan
Dalal), Namaskaar ki Bhet (in two parts in 2011 and 2015) and an E book “Rules
of Interpretation of Tax Statutes” (by N. M. Ranka).

Annual special issues, best article & best feature awards

Year	Theme of Annual Special Issue	Best Article and Awardee/s	Best Feature and Awardee/s
2009	40^th Year of the BCAJ	Kirit S. Sanghvi for “Simplicity and Complexity”	Jayant M. Thakur for “Securities Laws”
2010	Profession the way forward	H. Padamchand Khincha & B.R. Sudheendra for “Carry forward and set off of MAT Credit u/s.115JAA- Allowability in the hands of the amalgamated company- A Case Study”	Jamil Khatri & Akeel Master for “IFRS”
2011	Family managed businesses	Atiff Khan for “ Understanding Islamic Finance”	Pradip Kapasi & Gautam Nayak for “Controversies”
2012	Professionals	Ajit Korde CIT for “What does Settlement mean”	Govind Goyal & C.B. Thakkar for “VAT”
2013	Accountability of Professions	Sriraman Parthasarathy for “Auditor Dilemma”	Bakul Mody and Puloma D. Dalal for “Service Tax”
2014	Future of India –perspectives of the youth	Ankit V. Shah & Tarunkumar Singhal for “Power of the tribunal to stay demand beyond 365 days”.	Bhavesh Dhupelia, Shabbir Readymadewala & Vijay Mathur for “Auditing standards”.
2015	Ethics	Yogesh Thar & Anjali Agarwal for “Domestic Transfer Pricing”	C.N. Vaze for “Ethics and You”
2016	Expectations	Aditya Thakkar for “Territorial jurisdiction Infringement of Copyright and/or trademark”	Keshav Bhujle for “In the High Courts”
2017	GST	Gautam Nayak & Pradip N. Kapasi for “Demonetisation-Some Tax issues”	Anup P. Shah for “Laws and Business”
2018	Audit & Assurance	Akeel Master and Rupali Adhikari Sawant for “Artificial Intelligence Embracing Technology – New Age Audit Approach”	Sunil Gabhawalla, Rishabh Singhvi & Parth Shah for “Decoding GST”

Year

Theme of Annual Special Issue

Best Article and Awardee/s

Best Feature and Awardee/s

2009

40^th
Year of the BCAJ

Kirit S. Sanghvi for “Simplicity and Complexity”

Jayant
M. Thakur for “Securities Laws”

2010

Profession
the way forward

H.
Padamchand Khincha & B.R. Sudheendra for “Carry forward and set off of
MAT Credit u/s.115JAA- Allowability in the hands of the amalgamated company-
A Case Study”

Jamil
Khatri & Akeel Master for “IFRS”

2011

Family
managed businesses

Atiff
Khan for “ Understanding Islamic Finance”

Pradip
Kapasi & Gautam Nayak for “Controversies”

2012

Professionals

Ajit
Korde CIT for “What does Settlement mean”

Govind
Goyal & C.B. Thakkar for “VAT”

2013

Accountability
of Professions

Sriraman Parthasarathy for “Auditor Dilemma”

Bakul
Mody and Puloma D. Dalal for
“Service Tax”

2014

Future
of India –perspectives of the youth

Ankit
V. Shah & Tarunkumar Singhal for “Power of the tribunal to stay demand
beyond 365 days”.

Bhavesh
Dhupelia, Shabbir Readymadewala & Vijay Mathur for “Auditing
standards”.

2015

Ethics

Yogesh
Thar & Anjali Agarwal for “Domestic Transfer Pricing”

C.N.
Vaze for “Ethics and You”

2016

Expectations

Aditya
Thakkar for “Territorial jurisdiction Infringement of Copyright and/or
trademark”

Keshav
Bhujle for “In the High Courts”

2017

GST

Gautam
Nayak & Pradip N. Kapasi for “Demonetisation-Some Tax issues”

Anup
P. Shah for “Laws and Business”

2018

Audit
& Assurance

Akeel
Master and Rupali Adhikari Sawant for “Artificial Intelligence Embracing
Technology – New Age Audit Approach”

Sunil
Gabhawalla, Rishabh Singhvi & Parth Shah for “Decoding GST”

Golden year – 2018-19

Unlike
in the past, special content was featured all through the year as GOLDEN
CONTENTS. BCAJ interviewed eminent professionals Y. H. Malegam and Zia Mody;
investor Rakesh Jhunjhunwala; Tata Group Director Ishaat Hussain, tech
entrepreneur N. R. Narayana Murthy and the leadership of Institute of Internal
Auditors, Naohiro Mouri and Richard Chambers. Volume 50 carried 6 interviews,
31 Special Articles, 6 View and Counterview, a survey, Kaleidoscope on CAs,
Spoof, Blast from the Past and this article on history under the Golden
Contents. Articles ranged from Succession, Audit, Investments, Insolvency Law,
GST, CSR, musings, to auditor resignations amongst others. The Survey on
Practice Management ranked key challenges faced by practitioners. View and
Counterviews brought out two sides of current topics such as NFRA, Fair Value
Accounting, etc.

BCAJ
will publish a Digital version of the entire Golden Contents in the free access
section of the website – to commemorate the fabulous fifty years.

Spirit of BCAJ: Volunteering

The
Journal is run on a pro bono basis by professionals committed to the
cause of BCAS by volunteering to share their knowledge with their fraternity.
The Journal Committee is the only committee of the BCAS that meets every month
to review the Journal and to brainstorm and review the content. The Editorial
Board meets quarterly or more to review policies and larger themes. The yearly
Marathon Meeting of all feature writers of the Journal is generally held in
January to review yearly statistics and analysis and to give a critique on the year
gone by. As you will read in the following pages, people have been contributors
for 10-15-20 to over 30 years sharing knowledge and giving time, month on
month, year on year. We salute them all!

shailesh.kwebmaker

MAY THE GOLDEN GLOW GROW

The 50^th Volume is culminating
with this issue, but another extraordinary journey of the BCA Journal starts
next month. The task of the BCAJ will never end. Golden content will end with
this issue, but the glow must continue. Some things have no end – time, service
to fellow humans and quest for knowledge. Hope you will enjoy reading the
special content this issue carries.

As I was preparing and compiling material
contained in the following pages I was overwhelmed by the volunteers, who have
contributed month on month for years on end. Only one thing stands out –
commitment. I got to speak to several of the feature writers, and their central
objective was – how to benefit the readers! Just as this Sanskrit poetry says

Let
us always remember,

Let
us repeatedly speak out:

Our
duty is to do good to humanity.

The
Journal through its work of spreading knowledge serves the nation. Each one can
only serve a part, and that part is part of the whole. That way we serve the
whole. Do read the poem Jal Dastur, wrote in 2001 titled Always India in 43
verses. Our endeavour should be to build and serve the nation which is still
young but stands on the bedrock of the oldest living civilisation.

Our BCA
Journal in these fifty years has created a vast Vaangmay (a body of content/knowledge). It has presented Vichaar (thought, counsel, consideration of mater), Vishleshan (Analysis),
Vivechan (examining deeply, critical evaluation), Vaktavya (a statement fit for saying), Vistaar (elaboration and
detailing), Vitaran (Transference or distribution of knowledge), provided Vikalpa (alternatives), shown
a Vidhi (process,
of how to go about), which has resulted in
Vardhan (foster, increase) of
capabilities of the readers. This has led to Vidvatta , Vitta and Vinay (Scholarship, wealth and humility).

Thank
you, contributors! BCAJ is an example of owners working and workers owning. As
you will read below each column, contributors have truly owned their column and
therefore the journal, and have worked so hard year after year, month on month pro
bono.

The
difference between past and future is that future is not known and yet it is
arriving for sure. Future is coming faster than we are going towards it. What
will BCAJ be like at 75? Will BCAJ have AI as its editor? Perhaps one might be
able to take a capsule of the journal and it will transfer and register all of
the content in a reader’s brain! Or we might have a wearable and we will be
able to see and simulate various propositions given in the Journal simply by
thinking about it! It’s more likely that domains will be embedded in technology
and not otherwise. Perhaps there will be BCAJ Alexa whom you can speak to and
ask what you want? Who knows? But one thing is for sure that the essence of the
Journal will always be to share and serve. No matter what is in store for us,
we will cross every challenge and cover the distance:

Everything we have learnt will surely become
less useful with time. We will have to learn more but that learning will last
for lesser and lesser time. The ratio of relearning will be based on unlearning
/ past accumulation. Professionals will then be transformational officers –
transforming themselves faster and certainly more than transforming
others. That way of growing will be the
real golden glow! May it continue to grow!

Raman Jokhakar

Editor

shailesh.kwebmaker

FRIENDSHIP

It was launched in January, 2003, with a
purpose to express the need for balance in a CA’s life. It is meant to cover
topics that are strictly non technical and non professional but high on deeper
aspects of life such as values and spirituality. The first Namaskar was written
by Narayan Varma and since then countless people belonging to a wide spectrum
of backgrounds have written Namaskaars.

Two compilations of Namaskaars titled
Namaskar ki Bhet were published in 2011 and 2015 respectively. BCAJ owes a shaashtang
namaskar (full prostration) to Pradip A Shah who has written more than fifty
Namaskars. K C Narang has been reviewing them for a long time. To the
contributors – past, present and future – our Namaskaars!

FRIENDSHIP

Sukha ke saba saathi, Dukha me na koy goes a popular Hindi song meaning – All give you company in your
happiness but in your adversity, all shun away!

The English proverb – ‘A friend in need
is a friend indeed’ is often quoted. But this ‘friendship’ has got another
angle in today’s materialistic world of competition, ego and one-upmanship.

About three to four generations back, the
intellectual middle-class lacked resources. They were struggling to settle in
cities after coming from villages and small towns. Most of the successful people
today in industry, films, performing arts or even in civil or corporate
services, have come from average financial background. They struggled together
to come up in life. They willingly shared their difficulties, doubts and
anxieties. They helped each other and there was an unwritten bond between them.
They suffered and rejoiced together.

Many of the business fields and professional
careers were virgin or untapped. Therefore, everybody had a scope to grow as
virtually there was no competition. The author believes that even today
opportunities are available to everyone as the cake is growing. However, some
of us perceive differently.

However, in last two or three decades,
middle-class has arrived at a different level. By and large, they are
resourceful. There is competition in every sphere of operation. In addition due
to technology, people have become isolated like islands. Now the ‘friendship’
is mainly on social media.

Ego, envy, jealousy and competition have
replaced love, affection and understanding. Competition is fierce. The real
questions are :

Whether one rejoices in the
success and achievements of another person?

Does one really feel happy
when one learns about another’s progress?

For example :

There was a group of poets who were very
close to each other. One of them got nominated for a national award. The other
members of the group virtually abandoned him. As luck would have it, he did not
receive the award (as some other nominee got it!) all the members of the group
again joined him!

In another instance three friends and
colleagues working under a not-so-good boss helped each other in work and in
solving issues. However, when one of them got promoted, the other two were
upset! They stopped helping him. Is this friendship!

This has become a common occurrence.
Although in public, we praise a winner or achiever, in private, we often
criticise him or comment on his defects. We may even express surprise as to how
he succeeded although, he did not deserve it!

Today’s scene is so vitiated that doubts are
always expressed about the sanctity of success. When an award or honour is
conferred, people feel ‘it is managed?’ They believe that it is
more attributable to factors other than merit.

There are instances where even a mentor is jealous
about his disciple’s success; and even father is jealous of his son. Sibling
rivalry has always existed and is more pronounced today.

In this situation, it is difficult to find a
person who stands by you in difficulty and shares your pain and pleasure – a
real `well-wisher’.

In Sanskrit Subhashit, one of the
attributes of a good friend is the one who really rejoices in your success!
Hence in the author’s view one is blessed to have a friend and one must always
reckon and remember the good old saying :

‘to
have a friend be a friend’

shailesh.kwebmaker

Counsel for Assessee/Revenue: Lalchand Choudhary/Vijay Kumar Soni Section 24(a) – Rental income earned by a co-operative society for letting out the building terrace is assessable under the head ‘Income from House Property’ and is entitled to deduction u/s. 24(a).

11.
Citi Centre Premises Co-Op. Society Ltd.
vs. Income Tax Officer (Mumbai) Member:
A.K. Garodia (A. M.) ITA No.: 3029 and 3030 / Mum / 18 A.Y.:
2013-14 and 2014-15 Dated: 1^st February, 2019

Counsel for Assessee/Revenue: Lalchand
Choudhary/Vijay Kumar Soni Section 24(a) – Rental income earned by a
co-operative society for letting out the building terrace is
assessable under the head ‘Income from House Property’ and is entitled to
deduction u/s. 24(a).

FACTS

The contention of the assessee before the
Tribunal was that rental income earned by a co-operative society, the assessee,
for letting out the building terrace and permitting erection and installing of
cell phone towers thereon in the building owned by it was assessable under the
head ‘Income from House Property’ and not as ‘Income from other sources’ as
assessed by the AO. Therefore, the assesse claimed, it was entitled to
deduction u/s. 24(a).

According to the AO, for assessing an income
earned in respect of a property as an income from house property, the property
in question should be fit for habitation.
According to him an open plot/ terrace cannot be termed as house
property as it is the common amenity for use of members of the assessee society
and cannot be used for habitation.

HELD

According to
the Tribunal, the facts in the case of the assessee were identical with the
facts in the case of Matru Ashish Co-operative Housing Society Ltd., vs. ITO
[27 taxmann.com 169] before the Mumbai Tribunal. As held in the said case, the tribunal held
that income from letting out of the terrace was to be assessed under the head
‘income from house property’ subject to deduction u/s. 24, as against income
from other sources, as assessed by the AO.

In the result the appeal filed by the assessee
was allowed.

shailesh.kwebmaker

47 Charitable purpose – Charitable institution – Exemption u/s. 11 r.w.s. 2(15) – A. Ys. 2010-11 and 2011-12 – Society created by RBI to assist banks and financial institutions – Finding by Tribunal that assessee carried out an object of general public utility and was not engaged in trade – Assessee entitled to exemption

Principal CIT (Exemptions) vs. Institute of Development and Research in Banking Technology; 400 ITR 66 (T & AP):

The assessee was a society registered at the instance of the Reserve Bank of India (RBI) for the purpose of assisting banks and financial institutions, for the improvement of their performance. The assessee also offered M. Tech courses and Ph. D degrees in banking. It claimed exemption u/s. 11 of the Act, for the A. Ys. 2010-11 and 2011-12. The Assessing Officer rejected the claim. The Tribunal found that the assesee was carrying out an object of general public utility. It held that the assessee was not carrying on an activity in the nature of any trade, commerce or business. The Tribunal also pointed out that the charging of a fee by the assessee was not with profit motive and that therefore, merely because the assessee derived income it could not be held to be carrying on an activity in the nature of trade, commerce or business. It granted the exemption to the assessee. On appeal by the Revenue, the Telangana and Andhra Pradesh High Court upheld the decision of the Tribunal and held as under:

“i) The assessee was created by the Reserve Bank of India for the improvement of the performance of banks and the financial sector of the country, ultimately to have a bearing upon the economy of the country. Hence it was an institution established for an object of public utility.

ii) The Tribunal had found that it was not carrying on any activity in the nature of trade. It was therefore entitled to exemption u/s. 11 for the A. Ys. 2010-11 and 2011-12.”

shailesh.kwebmaker

46 Cash credit – Section 68 – A. Y. 2005-06 – Amount claimed to be long-term capital gains – Evidence of contract and payments through banks – Tribunal wrong in disregarding entire evidence and sustaining addition on sole basis of late recording on demat passbook – Addition u/s. 68 not justified

Ms. Amita Bansal vs. CIT; 400 ITR 324 (All):

Assessee is an individual. For the A. Y. an addition of Rs. 11,77,000 was made which according to the assessee was long term capital gain on sale of 11,000 share of a company. The Assessing Officer disbelieved the long term capital gain and made a corresponding addition of Rs. 11,77,000 u/s. 68 of the Income-tax Act, 1961(hereinafter for the sake of brevity referred to as the “Act”). On appeal, the assessee adduced evidence in the shape of contract notes/bill receipt, payments made through banking channels, contract notes and copies of pass book of its demat account in support of its claim and asserted its claim of long term capital gain as genuine and correct. The Commissioner (Appeals) after a detailed examination of the case of the assessee and evidence adduced by the assessee including the entries in the demat account passbook, the evidence of the broker firms through whom the transactions were made, and the contract note dated November 10, 2003, allowed the appeal. The Tribunal restored the addition on the sole ground of purchase of shares having been recorded late in the demat account of the assessee.

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

“i) An order recorded on a review of only a part of the evidence and ignoring the remaining evidence cannot be regarded as conclusively determining the question of fact raised before the Tribunal.

ii) Although the fact of the purchase transaction being recorded late in the demat passbook raised a doubt as to its genuineness and this evidence was relevant to the issue, there existed other evidence, adduced by the assessee in this case, in the shape of contract notes, bank transactions pertaining to payment for purchase and sale of shares and other material relied on by the Commissioner (Appeals). The Tribunal had also not specifically dealt with the findings recorded by the Commissioner (Appeals).

iii) In view of this, the finding of the Tribunal and the consequential order could not be sustained. The addition could not be made.”

shailesh.kwebmaker

Derived or not Derived From …….. ……

ISSUE FOR CONSIDERATION
In the annals of the Income-tax Act, no controversy is buried for ever. Like a hydra, it raises its head at the first available opportunity. One such controversy is about the eligibility for an incentive deduction of interest, received on deposits made in the course of an activity of an under taking or a business, the income of which is otherwise eligible for deduction. Whether such an interest is derived from the eligible activity or business and therefore, qualifies for a deduction or not is an issue which refuses to die down and comes up with regularity before the courts, in varied circumstances, with interesting facets.

At a time when the import of the issue has been fairly understood and addressed by the law makers and the practitioners and was believed to have been settled, it has resurfaced with beautiful facts. The recent decision of the Bombay High Court on the subject has revived the controversy with an immortal life span.

CYBER PEARL’S CASE
The issue recently came up for consideration in the case of Cyber Pearl IT Park Pvt. Ltd. vs. ITO, 399 ITR 310 before the Madras High Court in the context of section 80IAB for A.Y. 2009-10. The assessee in that case was engaged in the business of developing and leasing of Information Technology parks. For the assessment year 2009-10, the assessee claimed deduction u/s. 80-IAB of the Act to the extent of Rs. 4,20,59,087 which included a sum of Rs. 2,52,04,544 representing interest which the assessee had earned from security deposits from persons who had taken on lease the facilities set up in the parks. In form 10CCB filed by the assessee, the claim for deduction u/s. 80-IAB was restricted to a sum of Rs. 1,68,54,543. Based on this, the Assessing Officer passed an order u/s. 143(3) of the Act, restricting the deduction to a sum of Rs. 1,68,54,543 and treating the sum of Rs. 2,52,04,544, which was interest received by the assessee from security deposits given by the lessees as income from other sources. The CIT(A) confirmed the order of the AO and the Tribunal rejected the assessee’s claim for deduction qua the balance sum, i.e. Rs. 2,52,04,544 on two grounds: (a) that via auditor’s certificate issued in form 10CCB, the claim u/s. 80-IAB had been restricted to Rs. 1,68,54,543, (b) that the interest received from security deposit in the sum of Rs. 2,52,04,544 had “no direct nexus” with the industrial undertaking.

On further appeal to the High Court, the assessee contended the following:

–    the Tribunal did not appreciate the fact that in the income tax return filed by the assessee, the entire amount, of Rs. 4,20,59,087 was claimed as a deduction. The learned counsel submitted that because the mere fact that Form 10CCB restricted the claim to a sum of Rs. 1,68,54,543 could not be a ground for denying the deduction, which the assessee could otherwise claim as a matter of right u/s. 80-IAB.
–   the interest derived from the security deposit upon its investment in fixed deposits with the bank, was income, which was derived from business of developing a Special Economic Zone and therefore, was amenable to deduction u/s. 80-IAB.
–   the issue was settled in favour of deduction by the Bombay High Court in CIT vs. Jagdishprasad M. Joshi, 318 ITR 420 (Bom).

In response on the other hand, the Revenue made the following submissions.
–    for the interest earned from security deposits, to be amenable to deduction u/s. 80-IAB, it should have a “direct nexus” with the subject activity, which was, the business of developing a special economic zone.
–    only those profits and/or gains, which were derived by an undertaking or an enterprise from “any” business of developing a Special Economic Zone, would come within the purview of section 80-IAB.
–   in the following cases, the courts have held that the deduction was not eligible:

(i)   CIT vs. A.S. Nizar Ahmed and Co., 259 ITR 244 (Mad)
(ii)   CIT vs. Menon Impex P. Ltd., 259 ITR 403 (Mad)
(iii)   Pandian Chemicals Ltd. vs. CIT, 262 ITR 278 (SC)
(iv)   CIT vs. Shri Ram Honda Power Equip, 289 ITR 475 (Delhi)
(v)   Dollar Apparels vs. ITO, 294 ITR 484 (Mad)
(vi)   Sakthi Footwear vs. Asst. CIT(No.1), 317 ITR 194 (Mad)
(vii)   CIT vs. Mereena Creations, 330 ITR 199 (Delhi) and
(viii)   CIT vs. Tamil Nadu Dairy Development Corpo.Ltd., 216 ITR 535 (Mad).

The High Court, on an analysis of provisions of section 80-IAB, observed that an assessee was entitled to a deduction of the profits and gains derived by an undertaking or an enterprise from the business of developing a special economic zone. On examination of the decision of the Supreme Court in Pandian Chemicals Ltd.’s case (supra), and applying it to the case before it, the court observed as under;
– Pandian Chemicals Ltd. was a case for deduction u/s. 80-HH in respect of interest on deposits with Electricity Board for supply of electricity to industrial undertaking and the issue therein was whether such interest could be construed to be profits and gains ‘derived’ from an industrial undertaking and were eligible for deduction.
– the Supreme Court rejected the claim of the assessee by observing that the term ‘derived’ concerned itself with effective source of income only and did not embrace the income by way of interest on deposits made, which was a
secondary source.

–    only such income was eligible for deduction which had a direct or immediate nexus with the industrial undertaking.
–   the term ‘derived from’ had a narrower meaning than the term ‘attributable to’ and excluded from its scope the income with secondary or indirect source as was explained by various decisions of the apex court including in the cases of Cambay Electric Supply Industrial Co. Ltd., 113 ITR 84 (SC) and Raja Bahadur Kamakhaya Narain Singh, 16 ITR 325 (PC) and Sterling Foods, 237 ITR 579(SC).
–    the Madras High Court in the case of Menon Impex P. Ltd. 259 ITR 403 denied the deduction us. 10A by holding that interest on deposits made for obtaining letter of credit was not ‘derived from’ the undertaking carrying on the business of export.
–    the contention of the assessee that the decisions cited by the Revenue did not deal with the provisions of
section 80-IBA of the Act was to be rejected as the provisions of section 80-IBA were found to be para materia with the provisions dealt with in those cases, as all of them were concerned with the true meaning of the term ‘derived from’ whose width and amplitude was narrower in scope than the term “attributable to”.
–    once it was found that income was from a secondary source, it fell outside the purview of desired activity, which in the case before them was the business of developing a Special Economic Zone.

In deciding the case, in favour of the Revenue, the court was unable to persuade itself to agree with the decision of the Bombay High Court in the case of CIT vs. Jagdishprasad M. Joshi, 318 ITR 421 which had taken a contrary view on the subject of deduction of interest.

JAGDISHPRASAD JOSHI’S CASE
The issue had come up for consideration before the Bombay High Court in the case of CIT vs. Jagdishprasad M. Joshi, 318 ITR 421 in the context of section 80-IA for A.Y. 1997-98.

In that case, the court was asked to address the following substantial question of law; “Whether, on the facts and in the circumstances of the case and in law, the Tribunal was right in allowing the appeal of the assessee holding that the interest income earned by the assessee on fixed deposits with the bank and other interest income are eligible for deduction u/s. 80-IA of the Income-tax Act, 1961 ?”

On behalf of the Revenue, a strong reliance was placed upon the judgement of the Supreme Court in the case of Pandian Chemicals Ltd.(supra) and also the judgement of the Madras High Court in the same case reported in 233 ITR 497.

On behalf of the assessee, equally strong reliance was placed on the judgement of the Delhi High Court in the case of CIT vs. Eltek SGS P. Ltd.,300 ITR 6, wherein the Delhi High Court had considered the very same issue, and in the process examined the applicability of the judgement relied upon by the Revenue, and the court in Eltek’s case. The Delhi High Court had distinguished the language employed under sections 80-IB and 80-HH and had observed as under :
“ That apart s. 80-IB of the Act does not use the expression ‘profits and gains derived from an industrial undertaking’ as used in s. 80-HH of the Act but uses the expression ‘profits and gains derived from any business referred to in sub-section’..

A perusal of the above would show that there is a material difference between the language used in s. 80-HH of the Act and s. 80-IB of the Act. While s. 80-HH requires that the profits and gains should be derived from the industrial undertaking, s. 80-IB of the Act requires that the profits and gains should be derived from any business of the industrial undertaking. In other words, there need not necessarily be a direct nexus between the activity of an industrial undertaking and the profits and gains.

Learned counsel for the Revenue also drew our attention to Pandian Chemicals Ltd. vs. CIT, 262 ITR 278 (SC). However, on a reading of the judgement we find that also deals with s. 80-HH of the Act and does not lay down any principle different from Sterling Foods, 237 ITR 579 (SC). Reliance has been placed on Cambay Electric Supply Industrial Co. Ltd., 113 ITR 84 (SC) and the decision seems to suggest, as we have held above, that the expression ‘derived from an industrial undertaking’ is a step removed from the business of the industrial undertaking.”

The Bombay High Court dismissed the appeals, approving the decision of the Tribunal, holding that no substantial question of law arose in the appeal of the Revenue. The deduction allowed u/s. 80-IA to the assessee was upheld.

OBSERVATIONS
A few largely undisputed understandings, in the context of the issue under consideration, of the eligibility of an income from interest or any other receipt, are listed as under:
–   the term ‘attributable to’ is wider in its scope than the term ‘derived from’,
– the
term ‘attributable to’ is wider in its scope than the term ‘derived from’,
which has a limited scope of inclusion.
–    the term ‘attributable to’ usually includes in its scope, a secondary and indirect source of income, besides the primary and the derived source of income.
–    as against the above, the term ‘derived from’ means a direct source and may include a source which is intricately linked to the main activity which is eligible for deduction.
–    the difference between the two terms is fairly addressed to, explained and understood, not leaving much scope for assigning a new meaning.

It is also understood that the term ‘derived from’, is capable of encompassing within its scope, such income or receipts which can also be construed to be the primary source of the eligible activity or is found to be intricately and inseparably linked thereto.

Under the circumstances, whether a particular receipt or an income is derived from or not and is eligible for the deduction or not are always the questions of fact and no strait-jacket formula can be supplied for the same.

The legislature has from time to time enacted provisions for conferring incentives for promoting the preferred or the desired activities or businesses, over a period of almost a century. Obviously, the language employed in the multitude of sections and provisions varies and thereby, it has become extremely difficult to apply the ratio of one decision to the facts of another case, as a precedent. A little difference in the language employed by the legislature invites disputes, leading to a cleavage of judicial views as is seen by the present controversy under discussion. At times, it becomes very difficult to resolve an issue simply on the basis of the language alone, even where the provisions are otherwise required to be construed liberally, in favour of the tax payers.

An attempt has been made to list down a few of the examples of the language used in the different provisions of chapter VI-A and sections 10 A to 10 C of the Act.
–    Profits and gains derived from an industrial undertaking.
–    Profits and gains derived from the business of a hotel or a ship.
–    Profits and gains derived from a small scale industry.
–    Profits and gains derived from a business of …..
–   Profits and gains derived from execution of a Housing Project.
–    Profits and gains derived from exports.
–    Profits and gains derived from services.
–    Profits and gains derived from such business.
–    Profits and gains derived from an undertaking or an enterprise from any business of …..
–    100% of the profits.
–   Profits and gains derived by an undertaking from exports.

The list, though not exhaustive, highlights the possibility of supplying different meanings based on the difference in the language employed by the legislature. The major difference that has emerged in the recent years is between the following three terminologies:
–    Profits and gains derived from an undertaking .
–    Profits and gains derived from an undertaking or an enterprise from any business of …..
–   Profits and gains derived from a business of …..

The rules of interpretation provide that each word, or the omission thereof, should be assigned a specific meaning and should be believed to be inserted or omitted by the legislature with a purpose. Nothing should be believed to be meaningless. Applying this canon of interpretation, the Delhi High Court in the case of Eltek SGS P. Ltd. 300 ITR 006, in the context of section 80 IB, refused to follow the decisions in the cases of Cambay Electric Supply Industrial Co. Ltd. (supra), Sterling Foods (supra) and Pandian Chemicals Ltd. (supra) and Ritesh Industries, 274 ITR 324 (Delhi), by distinguishing the language used in sections 80 HH and 80 I from that used in section 80- IB of the Act. The High Court chose to strengthen its case by referring to the decision of the Gujarat High Court in the case of Indian Gelatin and Chemical Ltd. 275 ITR 284 (Guj). As noted earlier, in respect of income from interest, the Bombay High Court in Jagdishprasad’s case has followed the decision of the Delhi High Court in Eltek’s case in respect of duty drawback.

It is crucial to appreciate the difference in the language in section 80HH, section 80-I and section 80-IB of the Act. The language used in section 80-IB of the Act is a clear departure from the language used in section 80-HH and section 80-I of the Act. It is this choice of words that makes all the difference to the controversy that we are concerned with.

The court in Eltek’s case found it to be not necessary to go as far as the Gujarat High Court had done in coming to the conclusion that duty drawback was profit or gain derived from the business of an industrial undertaking. It was sufficient for the Court to stick to the language used in section 80-IB of the Act and come to the conclusion that duty drawback was profit or gain derived from the business of an industrial undertaking. The language used in section 80-IB of the Act, though not as broad as the expression ‘attributable to’ referred to by the Supreme Court in Sterling Foods and Cambay Electric’s cases is also not as narrow as the expression ‘derived from’. The expression “derived from the business of an industrial undertaking” is somewhere in between.

The distinction between the language employed in two different provisions has been noticed favourably by the courts in the judgements in the cases of Dharampal Premchand Ltd., 317 ITR 353 (Delhi) and Kashmir Tubes, 85 Taxmann.com 299 (J &K). In contrast, the Punjab & Haryana High Court following Liberty India, 317 ITR 258 (SC), has denied the deduction in spite of being informed about the difference in the language employed in the two provisions. [Raj Overseas, 317 ITR 215 and Jai Bharat Gums, 321 ITR 36].

A serious note needs to be taken of the decision of the Jammu & Kashmir High Court in the case of Asian Cement Industries, 261 CTR 561 wherein the court on a combined reading of section 80-IB(1) with section 80-IB(4), in the context of interest, held that nothing turned on the difference in language between the sections 80HH and 80IB and that the law laid down by the Supreme court in the cases of Sterling Foods (supra) and Pandian Chemicals Ltd. (supra) applied to section 80-IB as well. Similarly, the Uttarakhand High Court in the case of Conventional Fasteners, 88 Taxmann.com 163 held that the difference noted by the High Court in Eltek and Jagdishprasad’s cases was not of relevance and the ratio of the Supreme Court’s decisions continued to apply, in spite of the difference in language of the provisions.

Lastly, a careful reference may be made to the Supreme Court decision in the case of Meghalaya Steels, Ltd., 383 ITR 217 for a better understanding of the subject on hand. A duty drawback or refund of excise duty or receipt of an insurance claim or sale proceeds of scrap and such other receipts has obviously a better case for qualifying for deductions.

The better view appears to be that the use of different languages and terminologies in some of the provisions has the effect of expanding the scope of such provisions for including such incomes that may otherwise be derived from secondary source of the activity; more so, on account of the accepted position in law that an incentive provision should be construed in a manner that allows the benefit, than that denies the benefit. _

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Introduction Of Group Taxation Regime – A Key To Ease Of Doing Business In India?

It is an undisputed fact that economic growth and tax legislation are inextricably linked together. This would concurrently boost tax revenues and bring debt ratios under control.

An excessively complex tax legislation has an adverse impact on the investment climate of the country. Laws which are unnecessary, unclear, ineffective and disjointed generate an expendable burden on the economy. Even the Guiding Principles for Regulatory Quality and Performance, endorsed by Organisation for Economic Co-operation and Development (OECD) member countries, advised governments to “minimise the aggregate regulatory burden on those affected as an explicit objective, to lessen administrative costs for citizens and businesses”, and to “measure the aggregate burdens while also taking account of the benefits of regulation”.

In the recent Indian context, ‘Make in India’ which is a major new national programme of the Government of India, designed to facilitate investment and build best in class manufacturing infrastructure among other things in the country. The primary objective of this initiative is to attract investments from across the globe and strengthen India’s economic growth. This programme is also aimed at improving India’s rank on the ‘Ease of Doing Business’ index by eliminating the unnecessary laws and regulations, making bureaucratic processes easier, making the government more transparent, responsive and accountable. Though India has jumped up 30 notches and entered the top 100 rankings on the World Bank’s ‘Ease of Doing Business’ index, thanks to major improvements in indicators such as resolving insolvency, paying taxes, protecting minority investors and getting credit, it still has a long way to go, standing at ranking of 100 out of 190 surveyed countries. A review of the application of tax policies and tax laws in the context of global best practices and implement measures for reforms required in tax administration to enhance its effectiveness and efficiency, is the need of the hour for India. This article discusses the concept of Group Taxation Regime, a suggested effective tax reform, in line with the global best practices which could help India provide some policy support to investors and achieve its political, social and economic objectives.

GROUP TAXATION REGIME

A company diversifies into other fields of business as a part of its strategy. As a part of their strategy, the companies incorporate subsidiary companies with different business objectives due to regulatory requirement, ensure corporate governance or to invite fresh capital from other shareholders. Some businesses have a medium to long gestation period as a company takes time to establish its strategies, markets, financers. The idea of group taxation is to reduce the burden on the holding company as it may be required to inject funds into a loss making company without any reduction in corporate tax. Also, the holding company shall receive a return on its investment only when the subsidiary becomes profitable.

The group taxation regime has been adopted by several countries viz, (a) Australia; (b) Belgium (c) Denmark (d) France (e) Germany (f) Italy (g) New Zealand (h) Spain (i) United Kingdom; and (j) United States of America.

A group taxation regime permits a group of related companies to be treated as a single taxpayer. Group taxation is designed to reduce the effect that the separate existence of related companies has on the aggregate tax liability of the group. The principles under the group taxation regime for income tax purposes are discussed below:
– the assets and liabilities of the subsidiary companies are treated as assets and liabilities of the head company;
– transactions undertaken by the subsidiary companies of the group are treated as transactions of the head company;
– the head company is liable to pay instalments on behalf of the
consolidated group based upon income derived by all members of the consolidated
group;

– intra-group
transactions are ignored (for example, management fees paid between group
members are not deductible nor assessable for income tax purposes);

– the
head company is liable for the income tax-related liabilities of the
consolidated group that relate to the period of consolidation. However, joint
and several liability is imposed on members of the group in the event that the
head entity defaults;

– eliminate
income and loss recognition on intragroup transactions by providing for deferral
until after the group is terminated or the group member involved leaves the
group; and

– permit
the offset of losses of one group member against the profits of a related group
member.

Unlike many countries, India does not have a system to consolidate the tax reporting of a group of companies or to offset the profits and losses of the members of a group of companies. The introduction of a system of group taxation would constitute a fundamental change to the Indian tax system. Such a regime could lead to significant benefits like (a) economic efficiency by better aligning the unit of taxation with integrated companies within a group (b) reduce compliance costs for taxpayers as groups of companies would have to apply a single set of tax rules across and deal with only one tax administration; (c) make certain compliance driven tax provisions like specified domestic transfer pricing redundant; (d) give flexibility to organise business activities and engage in internal restructurings and asset transfers without worrying about triggering a net tax; and (e) reduce the cost the government incurs in administration of the tax system including litigation cost.

The specific provisions of group taxation framework vary from country to country. The significant provisions relating to the regime are highlighted below:

Eligible Head of tax group (parent): The group tax consolidation laws in most countries consider a domestic company or a permanent establishment of a foreign company who is assessed to tax as per the domestic laws as an eligible parent company. Most of the countries restrict the definition of group companies to resident companies only and non-resident companies are excluded from this relief.

Group company eligibility: Group taxation includes all legal entities within a group of taxable entities. The criteria is that a company is deemed to control another company if, on the first day of the tax year for which the consolidated regime applies, it satisfies certain requirements. In Spain, the controlling company must directly or indirectly hold at least 75% of the other company’s share capital. In France, at least 95% of the share capital and voting rights of the company must be held, directly or indirectly, by the French company. In New Zealand, a group of resident companies that have 100% common ownership can be considered for consolidated group regime. The subsidiary company will be deemed to be 100% owned by the parent if the requisite degree of control is met as per the provisions of the group tax regime. The total income/ loss of the subsidiary company will be included in group taxation, even if the parent does not own 100% of a subsidiary. Prima facie, this advantage is given to the holding company of being able to utilise the losses of the subsidiary company although it does not own all the subsidiary’s shares. The minority shareholders will not be able to claim a group relief as they do not meet the requite control requirement. However, if the losses to be set off are restricted to percentage of shareholding, then it would mean that the loss making company in the group will be left with losses that cannot be set off immediately and can only be utilised against the company’s future profits.

Hence, in such scenarios, agreements, if any, made between shareholders may also be important. In several binding international rulings, it has been concluded that even if a company has the majority of the voting rights or the majority of the capital, joint taxation may still be denied due to agreement between shareholders. For instance, a minority shareholder has a veto on important decisions in the company, the majority shareholder cannot be jointly taxed with its subsidiary. For illustration, in Denmark the tax consolidation regime provides for a cross-border tax consolidation option based on an “all-or-none principle”, which means that (i) either all foreign group entities are included in the Danish tax consolidation group or (ii) none of them are. In case of a veto power provided and exercised by the minority shareholder vide an agreement may cause hindrance for applicability of the group taxation regime for the entire group. In India, companies having 100% shareholding must only be covered within the group tax regime to avoid disparity between shareholders.

Minimum Term: The minimum term for opting for group taxation differs country to country. In Denmark, the minimum period is 10 years, in France and Germany, the minimum period is 5 years. In Italy, Spain and USA, there is no requirement to opt for a minimum period. In India, having a minimum term of 5 years – 10 years would provide consistency and stability in the tax approach adopted by the group and as well as to the Revenue authorities from an assessment point of view.

Net operating loss: In all group relief provisions, only the current year losses and tax depreciation of group companies are available for set-off against the profits of the other companies in the group. In case of subsidiaries that are acquired, no consideration needs to be given to whether the items are post or pre-acquisition as only the current year losses and tax depreciation are available for relief.

1.Worldwide Corporate Tax Guide, 2017
2. BDO Joint Taxation in Denmark
3. IBFD Country Tax Laws

Exiting the group: A group member may exit the group at any point of time without terminating the group. A company will automatically exit the group as a result of liquidation or sale or merger or if the ownership requirements are not met. On exit, the adjustments made at the consolidated level maybe reassessed according to the standard rules and may give rise to additional tax liability in the hands of the exiting company. The exiting group member’s net operating loss carry forwards realised during the consolidation period would remain with the group. The losses generated while being a member of the consolidated group are transferred to the group and cannot be carried forward at the level of the exiting company when assessing its future taxable income. In France, the question was raised whether the exiting company should be compensated for the losses surrendered to the group. The Supreme Court of France ruled that the compensation given by a parent company to a loss making company subsidiary that exits a group does not constitute taxable income. Correspondingly, the payment is not a deductible expense of the parent company.

In light of the aforesaid provisions, it can be safely stated with the introduction of group taxation regime, the compliance burden would reduce for companies as intra group taxation would be disregarded and only the ‘real income’ would be taxed. It would also promote stability in corporate structures in India and attract foreign investment in India. The Revenue authorities may be at a disadvantage due to loss of revenue due to setting off of income by way of intra group transactions. However, this is fairly insignificant as compared to the advantages that the introduction of this regime would have to offer. The introduction of a group taxation regime would be a welcome move by the Government and will allow the exchequer to tax the real income which is in line with International tax practices. For illustration, if A Co (holding company) has a profit of Rs. 2 million and A Co’s wholly owned subsidiaries B Co and C Co have a loss of Rs. 0.5 million each. With the introduction of group taxation the real income of A Co i.e Rs. 1 million (2-0.5-0.5) would be liable to tax in India.

Currently, with the Indian Revenue authorities being well integrated with the wave of automation and digitisation lead by the current Government, the Revenue authorities can keep a real time tab on filings being made in different jurisdictions. For illustration, a company having a head office in jurisdiction X and subsidiaries in various jurisdictions like Y and Z would have to file separate return of income in each of the jurisdictions for each entity. The group taxation regime would require only the holding company to file its return of income in the jurisdiction where its head office is situated. This would lead to reduction in compliance burden for the corporates. Also, the Revenue authorities of the concerned jurisdiction i.e. Y and Z could view the filings made in jurisdiction X. With easy accessibility of records and integration of the tax systems, a robust infrastructure system is put in place by the tax administrators which makes it feasible to implement the group taxation regime and provide ‘ache din’ to the corporates.

As aptly quoted by Edward VI, the King of England and Ireland, “I wish that the superfluous and tedious statutes were brought into one sum together, and made more plain and short”. We wait with baited breath for India to bridge the gap between its tax legislation and simplify them to further boost economic growth.

REFERENCES
–    BDO, Joint Taxation in Denmark
–   Ernst & Young, Implementation of Group Taxation in South Africa
–   IBFD, Group taxation laws
–    India Brand Equity Foundation
–    Length of a tax legislation a measure of complexity – Office of Tax Simplification, UK
–   Pre and Post Budget Representations, 2017
–    Tax Administration Reform Commission Reports
–    When laws become too complex, Review by UK Parliamentary Counsel
–   Worldwide Corporate Tax Guide, 2017 _

4. IBFD Group Taxation in France

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17 Section 32 read with Explanation 3 – Expenditure incurred on construction of road on Built, Operate and Transfer (“BOT”) basis gives rise to an intangible asset in the form of right to operate the road and collect toll charges, which is in the nature of licence or akin to licence as well as a business or commercial right as envisaged u/s. 32(1) read with Explanation 3 and hence assessee is eligible to claim depreciation on said intangible asset.

ACIT vs. Progressive Constructions Ltd.
(2018) 161 DTR (Hyd)(SB) 289
ITA No:1845/Hyd/2014
A.Y.:2011-12
Date of Order: 14th February, 2017

FACTS

The assessee
had entered into a Concession Agreement (“C.A.”) with the Government of India
for four laning of National Highway No. 9 on BOT basis. As per this agreement
the assessee was to complete the work at its own cost and maintain the same for
a period of 11 years and seven months. The assessee had incurred a sum of
Rs.214 crores for the said project. The only right allowed to the assessee was
to operate the highway for the concession period of 11 years and 7 months and
to collect toll charges from the vehicles using the highway.

During the
assessment proceedings, it was noticed that depreciation at the rate of 25% was
claimed by the assessee on opening written down value of built, operate and
transfer (BOT) highway of Rs 40,07,94,526. The assessee had completed the
construction in financial year 2008-09 and had claimed depreciation @ 10% on
the said asset treating it as building. However from assessment year 2010-11,
assessee had started treating the asset as an intangible asset in terms of
section 32(1)(ii) of the Act. However, the AO disallowed the claim of
depreciation on the basis that assessee is not the owner of the asset and also
assessee has not maintained consistency in its claim of depreciation.

Thus, being
aggrieved by the disallowance of depreciation, an appeal was preferred before
CIT(A). The CIT(A) noting that the claim of depreciation being allowed by the
Tribunal in case of said assessee in preceding previous year, allowed the claim
of depreciation in the impugned assessment year. Aggrieved by the CIT(A)’s
order, the Department preferred an appeal before ITAT. A Special Bench was
constituted to dispose the appeal filed by the Department against the order of
CIT(A). The only point under consideration before Special Bench was whether the
expenditure incurred for construction of road under BOT contract with
Government gives rise to an asset and if so, whether it is an intangible asset
or tangible asset.

HELD

The assessee
had incurred expenses of Rs 214 crores and Government of India was not obliged
to reimburse the cost incurred. Thus, the only way in which the assessee can
recoup the cost incurred was to operate the bridge during the concession period
of 11 years and seven months and collect toll thereon. Thus, by investing such
huge sum of Rs 214 crores, the assessee had obtained a valuable business right
to operate the project facility and collect toll charges.This right in form of operating the project and collecting the toll is an intangible asset created by
the assessee by incurring expenses of Rs 214 crores.

It is necessary
now to examine whether such intangible asset comes within the scope and ambit
of section 32(1)(ii).It is the claim of assessee that the right acquired under
C.A to operate the project facility and collect toll charges is in the nature
of licence. Since licence is not defined under the Income-tax Act 1961, the
definition of licence under the Indian Easements Act, 1882 has to be seen. If
the facts of the present case are examined vis-a-vis the definition of licence
under the Indian Easements Act, 1882, it is clear that assessee has only been
granted a limited right by virtue of C.A. to execute and operate the project
during the concession period, on expiry of which the project/ project facility
will revert back to the Government. What the Government of India has granted to
the assessee is the right to use the project site during the concession period
and in the absence of such right, it would have been unlawful on the part of
the concessionaire to do or continue to do anything on such property. However,
the right granted to the concessionaire has not created any right, title or
interest over the property. The right granted by the Government of India to the
assessee under the C.A. has a license permitting the assessee to do certain
acts and deeds which otherwise would have been unlawful or not possible to do
in the absence of the C.A. Thus, the right granted to the assessee under the
C.A. to operate the project / project facility and collect toll charges is a
license or akin to license, hence, being an intangible asset is eligible for
depreciation u/s. 32(1)(ii) of the Act.

Even assuming
that the right granted under the C.A. is not a license or akin to license, it
requires examination whether it can still be considered as an intangible asset
as described u/s. 32(1)(ii) of the Act. The Hon’ble Supreme Court in CIT vs.
Smifs Securities (2012) 348 ITR 302 after interpreting the definition of
intangible asset as provided in Explanation 3 to section 32(1), while opining
that principle of ejusdem generis would strictly apply in interpreting
the definition of intangible asset as provided by Explanation 3(b) of section
32, at the same time, held that even applying the said principle ‘goodwill’
would fall under the expression “any other business or commercial rights
of similar nature”. Thus, as could be seen, even though, ‘goodwill’ is not
one of the specifically identifiable assets preceding the expressing “any
other business or commercial rights of similar nature”, however, the
Hon’ble Supreme Court held that ‘goodwill’ will come within the expression
“any other business or commercial rights of similar nature”.
Therefore, the contention of the learned Senior Standing Counsel that to come
within the expression “any other business or commercial rights of similar
nature” the intangible asset should be akin to any one of the specifically
identifiable assets is not a correct interpretation of the statutory
provisions. It has been held by the Hon’ble Delhi High Court in case of Areva
T&D India Ltd. that the legislature did not intend to provide for
depreciation only in respect of specified intangible assets but also to other
categories of intangible assets which were neither visible nor possible to
exhaustively enumerate. It also observed that any intangible assets which are
invaluable and result in smoothly carrying on the business of the assessee
would come within the expression “any other business or commercial rights of
similar nature”. Thus, the right to operate the toll road and collect toll
charges is a business or commercial right as envisaged u/s. 32(1)(ii) read with
Explanation 3(b).

Further the
assessee neither in the preceding assessment years nor in the impugned
assessment year has claimed the expenditure (amount invested/ expenses
incurred) as deferred revenue expenditure, hence there is no scope to examine
whether the expenditure could have been amortized over the concession period in
terms of CBDT Circular No. 9 of 2014 dated 23rd April, 2014. The aforesaid CBDT
circular is for the benefit of the assessee and such benefits shall be granted
only if the assessee claims it. The benefit of the circular cannot be thrust
upon the assessee if it is not claimed.

Thus the right
granted to the assessee to operate the road and collect toll is a licence or
akin to licence as well as a business or commercial right as envisaged u/s.
32(1) read with Explanation 3 and hence, assessee is eligible to claim
depreciation on said intangible asset.

shailesh.kwebmaker

GST

8. [2018-TIOL-04-HC-ALL-GST] M/s. Continental India Pvt. Ltd. and Another vs. Union of India

Respondents directed to re-open the GST portal for filing Trans-1 on account of failure of system on the due date.

FACTS
The petitioner seeks a writ of mandamus directing the GST council   respondent no. 2 to make recommendations to the State Government to extend the time period for filing of GST Tran-1, because his application was not entertained on the last date i.e. 27.12.2017 and application is complete for the necessary transactional credit. It was stated that despite several efforts the GST system did not respond as a result the petitioner is likely to suffer loss.

HELD
The High Court directed the Respondents to reopen the portal within two weeks from the date of the decision. In the event they do not do so, they will entertain the application of the petitioner manually and pass orders on it after due verification of the credits as claimed. The Court will also ensure that the petitioner is allowed to pay its taxes on the regular electronic system also which is being maintained for use of the credit likely to be considered for the petitioner. _

shailesh.kwebmaker

Deposition in Investigation Proccedings – Binding effect

Introduction

Under fiscal
statutes, there are provisions for investigation. Such provisions were there
under Bombay Sales Tax Act, 1959 also.

Normally, when investigation action takes place, a statement (also referred to as deposition) is recorded during the course of investigation. The intention of such deposition is to get the facts recorded which can be used further for assessments and for raising liability, if applicable. However, practical experience shows that under heavy pressure and threats, etc., the contents get recorded (admitted) in favour of revenue. In other words, the concerned dealer/party is forcibly made to admit tax evasion and thus commitment is taken for discharging the liability.

The issue arises whether such statement is binding in the course of assessment.

There are various instances where the parties have retracted the statements and judiciary has approved such retraction. Normally, such retraction is required to be done immediately and as early as possible after giving the statement. It should also be supported by reasonable ground for retraction. However, in spite of above general position, it can still be said that the statement given during investigation is not binding, if by circumstances and facts, it can be shown that the statement is factually incorrect. And under such circumstances, even late retraction or no retraction is also not an issue. In other words, inspite of admission in statement or deposition, if the factual position is shown to be different with satisfactory supporting, then the judiciary will certainly take into account such a changed position.

Judgement in case of Trilok Enterprises (VAT SA No.136 to 138 of 2011 dt.19.7.2017).

Recently, Hon. M.S.T. Tribunal had an occasion to deal with such an issue in above judgement. The facts as recorded by the Tribunal are as under:

“2. The appellant, a person not registered under Bombay Sales Tax Act, 1959 was visited by officers of Enforcement Branch, Mumbai on 21.01.1997. During the visit, no books of accounts found, however, details of Bank transactions were found which show that during 1994-95, 1995-96 and 1996-97, large amounts were deposited and withdrawn from the bank account. A statement of the appellant was obtained by Enforcement Officer. In this statement the appellant, viz. Bharat Deepchand Vora, proprietor of M/s.Trilok Enterprises, appears to have admitted that he has done trading with M/s. Gurjar Steel, so also business on commission basis in Iron and Steel during that period. The rate of commission is stated as 10 paise. The enforcement branch, treating the appellant as unregistered dealer, issued him notices for assessment for those three years period. The appellant is assessed on the basis of a statement of sales, furnished by him. The appellant appears to have filed return and deposited some tax with the same. The assessment orders were challenged by the appellant before the 1st Appellate authority. Main contention of the appellant was that, he has not done any business of sales and purchases, during those periods. The First appellate authority, vide its order dated 17.6.2000, had been pleased to set aside the assessment orders and remanded the matters to assessing authority, with a direction to assess the appellant afresh. On remand, it is stated, that the assessing officer gave opportunity of hearing to the appellant, and again he has passed identical assessment orders, as per earlier orders passed by him. The appellant appears to have maintained his stand in reassessment after remand that he has not done any business of buying and selling during relevant period. The assessing officer however, has assessed the appellant on the basis of record available before him and he has levied tax, interest and penalty. Against that order, passed after remand, the appellant had filed first appeal, which was dismissed on merit, by the first appellate authority, by the order impugned by the appellant in the instant appeal.”

On merits, on behalf of appellant, it was argued that the party has not done any business of sale/purchase but only financial transactions. It was argued that no sales or purchases have been established. It was further argued that mere statement before the officer of Enforcement cannot be allowed to form a basis for determining sales/purchase transaction particularly in absence of other cogent, reliable and trustworthy evidence. It was further brought to notice of Tribunal that the statement was obtained under threat. The returns filing and payments were also under threat of prosecution.

On behalf of the Revenue, the star argument was that since the appellant himself has admitted sale/purchase in the deposition and by filing returns and payment, there was no need for revenue to further bring any supporting material.

Hon. Tribunal examined the factual position vis-à-vis legal position. In para 15 & 16, Hon. Tribunal made remarks about the effect of deposition. The relevant paras are reproduced for ready reference.

“15. Now if we carefully look at this statement and the statement made by the appellant before the visiting officer at the time of visit admittedly books of accounts were not found. Firstly it is unlikely that a dealer having such a volume of trading would not maintain any books of accounts. Further he certainly does not know the changes in the rate of tax S. S. Patta from 1% to 4% and it is unlikely that he would calculate the interest exactly up to the date, and would show that the same is payable. Thus, though it is signed by the appellant, in all probability, it is a statement prepared by somebody else and not by the appellant and signature of the appellant appears to have been obtained on the same.

16. If we look at the bank statement available on record, it will be seen that firstly there has been no attempt to match the same with the list of bills mentioned above. Secondly, it is seen, that the appellant has deposited amounts in cash and has issued cheques to M/s.Gurjar Steel. In this statement before investigating officer, he had stated that he was dealing with Gurjar Steel. If cheques are issued to Gurjar Steel, at the most there could have been purchases from Gurjar Steel, who was a registered dealer. Admittedly bank account of Gurjar Steel was provisionally attached by the department for recovery of the dues, but subsequently the attachment was withdrawn. If the appellant had made payment by cheques to Gurjar Steel, who is registered dealer, there was no reason for not showing these transactions as purchases as that would have been instances of resale in the hands of appellant and would not have attracted any liability for payment of tax. It does not appear from the record that department has made any attempt to confirm the genuineness of the transactions from M/s. Gurjar Steel or from any other party, despite the fact that matter was remanded back by the first appellate authority with direction to bring additional material on record to establish the factum of sales. The assessing officer, without considering these directions appears to have passed same order on remand.”

In para 19, the Hon. Tribunal has made reference to judgement of the Hon. Supreme Court about relevance of statement, in the following words.

“19. In CBI vs. V. C. Shukla and others (1988) 3 SCC 410, Hon’ble S. C. while speaking about relevancy of evidence u/s.34 of Evidence Act has observed, that first part of section 34 speaks about relevance of entry in the books of account as evidence, and the second part speaks in a negative way, of its evidentiary value for charging a person with a liability. To make an entry relevant thereunder it must be shown that it has been made in a book, that book is book of account and that books of account has been regularly kept in the course of business. Even if, the above requirements are fulfilled and the entry becomes admissible as relevant evidence, still the statement made therein shall not alone be sufficient to accept it as substantive evidence to charge any person with liability of paying tax.”

Observing that there is no independent evidence gathered by the revenue to establish sale/purchase transactions, the Tribunal held that the levy of sales tax on alleged sales in instant appeal is unsustainable. Accordingly, the Tribunal allowed the appeals by quashing assessment orders.

CONCLUSION
The above legal position laid down by the Tribunal will also be relevant under other fiscal laws. The sum and substance is that the tax can be levied only if there are established taxable transactions and not merely on admission. Therefore, in due cases, the parties are entitled to demonstrate their non-liability inspite of any wrong admission made in assessment or in investigation proceeding. Ultimately, the correct legal position will prevail. _

shailesh.kwebmaker

IGST Framework – Constitutional Aspects

This article is limited to examining the Integrated Goods and Service Tax (‘IGST’) framework in the backdrop of the provisions of Indian Constitution. Specific case studies/ challenges arising under the IGST law would be examined in a separate article.

CONCEPT OF IGST UNDER THE INDIAN CONSTITUTIONAL SCHEME
The Indian constitutional system possess features of a federation with strong unitary elements making it a ‘Union of States’. On these lines, Article 246 of the Indian Constitution provides for the demarcation of legislative powers between the Union and States, with residuary powers resting with the Union. In the context of fiscal powers, the legislative lists clearly demarcate the fields of legislation between the Union and the States and restricts each of them from encroaching the other’s arena. This constitutional set up posed a mammoth task for policy and law makers in designing a suitable GST model for India; ultimately leading to the promulgation of the 101st Constitutional Amendment.

DEVIATION FROM THE CONSTITUTIONAL SCHEME PREVALENT UNTIL NOW
The taxation scheme prevalent after the 101st Constitutional Amendment is a fundamental departure from the mutual exclusivity of fiscal powers between the Union and the States. The policy makers were faced with a tight balancing act of harmonising the tax structure in India across States on the one hand and retaining their constitutional independence on fiscal matters on the other. Instead of granting mutually exclusive taxing powers to Governments by creating specific entries in their respective list of the Seventh Schedule to the Constitution, it was decided to confer parallel/ simultaneous powers (not part of the Concurrent List) through a specific article in 246A. The Union and the respective States would legislate and the corresponding Governments would administer the laws within their respective territory. A parallel power structure was a conscious attempt to ensure harmony in fiscal decisions among the Union and Group of States.

This gave rise to the next challenge over addressing the geographical jurisdiction of States specifically over transaction such as inter state transactions, export, import etc having an element of another geography. It also leads to a supplementary issue of revenue allocation between the States on such transactions. To avoid the tax chaos prevalent in the Pre Central Sales Tax period, ie multiple States seeking to tax the same transaction on the claim that one of many aspects of a sale transaction occurred in their State (such as delivery, transfer of property, etc), which resulted in overlap in taxation on the same event, the Parliament was placed with the responsibility of laying down a robust law governing principles over the jurisdiction of transaction between the States, Dispute Resolution and also international transactions. The idea of implementation of IGST model in India was mooted to tackle this particular problem.

ECONOMICS BEHIND THE IGST LAW
Economically speaking, IGST is a bridge enabling flow of the SGST component of revenue from the Supplier State to Recipient State. Under the erstwhile origin based scheme of CST/ VAT, the State collecting the tax at the point of origination retained the revenue arising from such sale, contrary to the principle of taxing consumption. On this count, it hampered the consuming state to give any tax credit on inter-state purchases and resulted in CST being loaded on the purchase costs.

The GST law, which is guided by consumption (elaborated later) has adopted a modified version of taxing such transactions enabling the flow of revenue to the State of Consumption. The broad modalities are as follows:

– Inter-state supplier will collect the IGST and remit it after adjusting available credit of IGST, CGST and SGST on his purchases

– Supplier state will transfer to the Union Government the credit of SGST payment, if any, used in payment of IGST

– Union Government would apportion the SGST component to the State in which the consumption of the supply takes place (place of supply)

– Importing consumer will consume the goods or services in the State and the State would be entitled to retain revenue on this consumption (B2C transactions)

– Importing dealer will claim credit of IGST while discharging his output tax liability in his own state (B2B transactions) and the chain would continue until final consumption either in the same State or else-where.

Prior to venturing into the IGST laws and the specific provisions, it would be appropriate to understand the basic concepts/ definitions of the IGST Law which would have to be applied to IGST transactions. The concepts are sequentially examined.

1. Territorial Jurisdiction v/s Extra-territorial Nexus

Section 1 of the IGST Act defines the extent of the law and states that the Act extends to the whole of India except to the State of Jammu and Kashmir. With the Integrated Goods and Services Tax (Extension to Jammu and Kashmir) Ordinance 2017, the words “except Jammu and Kashmir were omitted”. This Ordinance came into force w.e.f. 08-07-2017.

Without examining the scope of the term India and its statutory extensions, it would be important to examine the legislative limits of the enactment. The general principle, flowing from the sovereignty of States, is that laws made by one State can have no operation in another State. An issue arises in case of transactions which are said to be undertaken wholly or partly outside India. In the context of Income tax Act, 1922 a challenge was made to the vires of the then section 4(1)(b)(ii) of the said Act which imposed income tax on a branch of the assesse which earned income outside of British India. The Privy Council examined pari-materia provisions of the Article 245(2) (in the Government of India Act, 1935) and upheld the imposition stating:

“The resulting general conception as to the scope of Income tax is that given a sufficient territorial connection between the person sought to be charged and the country seeking to tax him Income-tax may properly extend to that person in respect of his foreign income.”

Subsequently, the Hon’ble Supreme Court in Electronics Corporation vs. CIT & Anr 1989 AIR 1707 (SC) was examining whether technical services provided abroad could be taxed in India on the ground of extra-territorial applicability of law. The Court upheld the doctrine that territorial nexus is an essential ingredient for exercising jurisdiction over a transaction though it left the parameters of determination of nexus slightly open ended.

Subsequently, on a reference made in the above case to the constitutional bench in 2017 (48) S.T.R. 177 (S.C.) GVK Industries Ltd vs. Income tax Officer wherein the Court made detailed observations on the inter-play between territorial limits and exterritorial operation of a law. Furthering the case in Electronics Corporation of India, the Court set down four extreme views for consideration on the proposition of ‘nexus’:

i.   Rigid view – State would have powers if “aspects or causes that occur, arise or exist, or may be expected to do so, solely within India”.
ii.   Slightly liberal view – State would have powers if the event had significant or sufficient impact on or effect in or consequence for India
iii.   Even more liberal view – State would have powers as long as some impact or nexus with India is established or expected
iv.   Extreme view – State has powers to legislate for any territory without any limits.

The Court also explained the contextual meaning of the terms for purpose of application of the nexus theory:

– “aspects or causes”
events, things, phenomena (howsoever commonplace they may be), resources, actions or transactions, and the like, in the social, political, economic, cultural, biological, environmental or physical spheres, that occur, arise, exist or may be expected to do so, naturally or on account of some human agency.

– “extra-territorial aspects or causes”
aspects or causes that occur, arise, or exist, or may be expected to do so, outside the territory of India

[1] [1948] 16 ITR 240
(PC) PRIVY COUNCIL Wallace Brothers & Co., Ltd. v.Commissioner of
Income-tax

[1] Article 245(2)
holds that any statute would not be declared invalid on the ground of
extra-territorial operation

– “nexus with India”, “impact on India”, “effect in India”, “effect on India”, “consequence for India” or “impact on or nexus with India”

any impact(s)on, or effect(s) in, or consequences for, or expected impact(s) on, or effect(s) in, or consequence(s) for : (a) the territory of India, or any part of India; or (b) the interests of, welfare of, wellbeing of or security of inhabitants of India, and Indians in general, that arise on account of aspects or causes.

The Court finally held that the Parliament is certainly restricted from enacting laws with respect to extra-territorial aspects or causes which are not expected to have any direct or indirect tangible / intangible impact to the territory of India. The Court had also strongly refuted the reliance on Article 245(2) and distinguished extra-territorial ‘applicability’ from extra-territorial ‘operation’ of law.

2. Territorial Aspects Theory

Furthering the point of the Court, we may now dissect the law to identify the ‘aspects’ the IGST law adopted in its structure:
•   Supply of Goods or services
•   Location of supplier
•   Place of supply which is inter-dependent on certain elements of a transaction
•   Location of recipient

In applying the territorial aspect theory, it may be fruitful to understand the conceptual role of each of these aspects in the GST law and look for clues which lead to a reasonable answer on the territorial nexus:

a) Scope of Supply (Section 7 of CGST law) – while this is popularly referred as the definition of supply or as the ‘taxable event’, the placement and the verbiage do not clearly suggest so. In fact, the specific inclusion of ‘import of services’ within the scope perhaps may provide an indication that this provision also somewhere examines the situs.

b) Location of Supplier (Section 8 and 9 of IGST Law) – this phrase assists in deciding the location of the supplier of goods or services. It plays a role in deciding the character of the transaction (inter-state or intra-state). Generally speaking, it is the supplier who is the taxable person in GST and the jurisdiction exercised by Central & State authorities is based on his location.

While the location of supplier of goods has not been defined, the location of supplier of services has been defined. The definition states the location would generally be the place for which registration has been obtained. As it is defined, place of business refers to a physical and sufficiently permanent structures for which registration is obtained. It also states that where a service has been rendered from a fixed establishment, the said fixed establishment would be termed as the location of supplier. In case of such multiple establishments, the establishment most concerned may be considered as the location. In the absence of any such location, the usual place of residence of the supplier. In effect, the said concept fixes the situs of the ‘from’ location of a supply of goods or services. It identifies the origination of a supply which is relevant for the purpose of collection of taxes.

c) Place of Supply (Section 10-13 of IGST Law) – Place of supply represents the place of consumption (place of supply is a misnomer). In the context of goods, the IGST law is guided by the destination of goods to ascertain the place of supply except in stray cases where a destination cannot be pointed to a particular location (such as supply of goods on board a conveyance). Services, being an intangible activity cannot be fixed to a destination; but being an economic activity, it is generally presumed that the location of the recipient is its place of consumption (except for transaction where consumption can be clearly tagged to a location say immovable property services, etc.). Even in the context of cross border transactions, goods and services are generally considered as consumed at their destination or location of recipient of registered person.

The Place of supply is also a proxy for the State which would be entitled to the SGST component of the revenue in terms of the Apportionment and Settlement Provisions of IGST Law (Section 17(2)(2) of IGST Law). This is significant from two counts (a) it enables transfer of GST revenue to the State of consumption; (b) enables the State to maintain the value added tax chain (in B2B transactions). Therefore, the place of supply determines the place of consumption (as per law) and the geography which is entitled to the revenue on account of its consumption. It is on this principle that exports are zero-rated as the place of consumption is said to occur outside India. Similarly, imports are taxed under reverse charge provisions on the basis that the place of consumption is in India. The IGST has pivoted on the place of supply for identification of consumption and assigning the revenues to the jurisdiction in which the consumption has taken place.

d) Location of Recipient (Section 2(14) of IGST Law) – This aspect of a supply transaction is primarily inter-twined into the place of supply provisions for services. It is generally assumed internationally that services are consumed at the location where the recipient is located and registered. Where the services are consumed at an establishment elsewhere, the location of such establishment would be considered as the place of consumption. The location of recipient enables the law makers to fix the place of consumption of services.

GST is a fiscal law aimed at garnering revenues for a State. Among the four aspects stated above, it appears that the Place of Supply (i.e. consumption) assumes significant importance in the scheme of things. Though the place of the supplier is the point of ‘collection’ of taxes from the taxable person, it ultimately narrows down to the place of supply of every transaction. Even if a supplier state has collected taxes, it cannot retain this revenue and would have to transfer it to the account of the state where the ultimately consumption takes place. In the context of services, the State in which the recipient is located which would be entitled to revenue on this transaction.

Even placing an eye on export of goods and services, one gets a view that destination of such activity drives the benefits of zero-rating. In the context of import of services, the law makers through a provision of reverse charge directed the State of consumption itself to collect and retain the tax on such transactions.

In order to further cement one’s view on this proposition (having ramifications on cross border trade and commerce), it may be useful to extract further clues from the law on this front:
•   Proviso to section 5 of the IGST law carves out an exception from applicability of IGST law on imported goods until they cross the custom borders for home consumption. Therefore, even if goods arrive at the customs port for purpose of transhipment to another country, the IGST law refrains from taxing such transactions on the destination principle. Circular No. 33/2017-Cus dt. 01.08.2017 clarifies in the context of High seas transactions that only the last buyer of the chain would be required to pay IGST.
•   One may also test an out and out transaction from a State territory perspective and possibly extrapolate this to the Central law to examine international territorial aspects. Say A stationed in Mumbai buys goods from Madhya Pradesh and asks the transporter in Madhya Pradesh to directly deliver the same to a customer in Gujarat. Even-though the dealer is located in Maharashtra, the law makers have excluded this transaction from the purview of MH-GST and brought the same under the IGST law. Looking at it from a MH GST perspective (also see Article 286), this transaction would be an ‘outside State’ transaction for Maharashtra inspite of the supplier being located in Maharashtra. The limited point which emerges is that the location of the supplier is not a conclusive aspect for territorial nexus. Applying this at an international scenario, IGST law should also not tax goods movement from China to Singapore merely because the supplier is located in India. Now it seems simple for goods, it becomes slightly more complex for merchanting services in the absence of a physical trail of events.
•   While the law has placed dependence on the location of the supplier and recipient to identify the trail, in which case, it may be considered as import of services coupled with export of services, in cases where the services can be demonstrated to have been supplied outside India and consumed outside India, can these proxies result in a tax liability or will it amount to an extra-territorial jurisdiction?.
•   Under the IGST law, there is a residual clause (section 7(5)(c)) which deems a transaction as an inter-state transaction if it is neither classified as intra-state nor inter-state. Importantly, the clause uses the phrase ‘in the taxable territory’ implying that some aspect of the transaction (specifically the place of supply) should take place in the taxable territory for the law to apply. Simple example could be of services being delivered to off shore structures in the exclusive economic zone which would be termed as inter state supply on this count since the place of consumption is attached to the structure located therein.
•   In the context of cross border transactions (incl. tax on United Nation Organisations, and similar institutions), emphasis has been to tax the inward supply into India in the hands of the recipient. Inward supply refers to ‘receipt of goods or services’. Unless the goods or services are strictly received by the recipient of such supply, the transactions cannot be taxed in India.

In summary, among all the aspects of a transaction, is seems evident that the place of supply drives the taxability and among all aspects, the legislature intends tax on only transactions where the place of supply is in India. The location of the supplier though important in law for operation of law, it is only for the limited purpose of collection of tax. A transaction can be considered as extra-territorial if the place of supply is outside its fiscal limits.

3. Meaning of India

“India” has been defined in section 2(56) of the CGST Act (reference from Section 2(24) of the IGST Act) to mean the territory of India as referred to in Article 1 of the Constitution, its territorial waters, seabed and sub-soil underlying such waters, continental shelf, exclusive economic zone or any other maritime zone as referred to in the Territorial Waters, Continental Shelf, Exclusive Economic Zone and other Maritime Zones Act, 1976 (80 of 1976) (Maritime Zones Act) , and the air space above its territory and territorial waters .

As per Article 1 of the Indian Constitution, India is defined as a Union of the territories of the State and Union Territories specified in the First Schedule of the said constitution. India exercises sovereign rights over this land mass. International UN convention has laid down principles for defining the territorial jurisdiction over international waters extending beyond the land mass of coastal States. Part V of the said convention (specifically article 57 and 60) specifically grant India exclusive jurisdiction in matters of customs, fiscal, health, safety, etc over the artificial islands, installation / structures for explorative and research activities in such zone. In line with the international UN Conventions, the aforesaid Act was legislated in 1976 giving India specific powers over these Maritime zones.

Section 7 of the Maritime Zones Act grants powers to India to exercise sovereign rights over the exclusive economic in line with the rights and limitations under the UN convention. Sub-section (7) grants powers to the Central Government to notify any enactment to extend over this territory and the area would be considered as part of India under the enactment.

A question arises on whether the Central Government has to necessarily issue a notification under the IGST law for it extend to the exclusive economic zone (similar to the Customs Act) or is the definition of India spreading its wings over to such maritime zones itself sufficient. Section 7 and 8 of the Maritime Zones Act, 1976 empowered India to exercise exclusive rights for specific purposes enlisted therein (such as exploration, research, etc). Sub-clause (6) of the said sections grant powers to the Central Government to extend any enactment for the time being in force to such maritime zones. The Customs Act 1962, Excise Act 1944 contained respective notifications extending itself to the said zones. However, the Central Sales Tax Act, 1956 (CST) did not contain such notifications on this aspect. A challenge was made in the Gujarat High Court on the applicability of CST on transactions which were moved to the off-shore rigs in the exclusive economic zone. The High Court in Larsen & Toubro vs. Union of India (2011) 45 VST 361 (Guj) struck down the imposition on the ground that no such notification has been issued under the CST law and the enactment cannot extend to such areas until such effect is given. In the context of service tax, the Bombay High Court in Greatship (India) Ltd. vs. CST, Mumbai 2015 (39) S.T.R. 754 (Bom.) was interpreting a subsequent notification which enlarged a preceding notification with respect to the exclusive economic zone. Since the preceding notification was limited to services rendered to off-shore rigs, services by off-shore rigs was held as not taxable. The Court stated that the subsequent notification both services to or by off-shore rigs or vessels cannot be read as clarificatory.

However, it may be noted that the above propositions held good in the context of the specific laws. It can be argued that no such notification is required under the CGST/ IGST law for the Act to apply to such maritime zones on account of the following reasons:

•   The Parliament has itself defined the extent of India’s area in the enactment to spread to such maritime zones, which power it derives under Article 297(3) of the Constitution
•   The Central Government has been empowered to extend an enactment for the law which is in force at the time of enactment of the Maritime Zones Act, for obvious reasons to avoid a legislative amendment to laws prevailing at that time. Subsequent enactments which itself covers such areas need not depend on a notification for its applicability
•   The Customs law had a restricted meaning to ‘India’ to its territorial waters and hence warranted such a notification. However, the IGST law itself expands its definition to such maritime zones. When Act itself has defined India, it need not seek any support from a delegated legislation to give effect unless the enactment states so.
•   The Maritime Zones Act and the UNCLOS itself state that India can exercise ‘sovereign rights’ for specific purposes which also includes in itself taxation rights provided it is limited to the specific purposes.

Therefore, the decision of the Gujarat High Court in Larsen & Toubro’s case can be distinguished in the context of the GST Law.

4. Applicability of the above Concepts

We would apply the above concepts in a merchanting trade transaction. Assuming the IGST law has to be applied on A located in Maharashtra (India), certain variants have been tabulated and the possible views have been provided:

[3] The said Act was
legislated drawing powers from Article 297 of the Indian Constitution which
stated inter-alia that all resources of exclusive economic zone vest with the
Union of India

[4] Geneva Conventions
on Territorial Sea and Contiguous Zone, Continental Shelf and High Sea, and the
United Nations Conventions on the Law of the Sea (UNCLOS) which was adopted on
29 April 1958 and 10 December 1982

No	Scenario – Supply of Goods	Taxability	Reasoning
1	Goods purchased from UK and directly shipped to USA from UK	Neither purchase nor sale transaction is taxable on extra-territorial grounds. Of course, additional customs duty equivalent to IGST can be imposed u/s.3(7) of the Customs Tariff Act, 1975	‘Place of Supply’ – Aspect and impact of law is outside India and hence outside the scope of IGST Law. Moreover, proviso to section 5(1) of IGST law excludes its applicability until the goods are imported into India (i.e. territorial waters)
2	Goods purchased from UK and transferred by endorsement in High Seas (beyond 200 Nautical Miles) to a person outside India	Neither purchase nor sale transaction is taxable on extra-territorial grounds.	Same as above, with additional reliance from the Customs Circular 33/2017 dt. 01.08.2017 which states that High Sea Sales are not taxable and it is only the last buyer in the chain who clears the goods at the customs station that would subject to tax.
3	Goods purchased from UK and document to title of goods was transferred while the goods are within 12 nautical miles from India	Neither purchase nor is taxable on account of proviso to section 5(1) of the IGST Law. One cannot take the plea of extra-territorial levy	Place of supply may be said to be in India but the proviso to section 5(1) excludes such transactions from the purview of IGST law. The customs law on the other hand imposes the duty (incl. IGST) only at the time of custom clearance. Above customs circular supports this position.
4	Goods purchased from UK and document to title of goods was transferred to a person in India while goods in continental shelf	Same as above	Same as above. Moreover, rights of taxation under the Maritime law is limited to explorative activities only.
5	Goods purchased from UK and document of title of goods transferred to a person in India while the goods are under customs bonding	Same as above	Same as 3. Customs law has exclusive rights to tax this transaction. Until the goods form part of home consumption, IGST law has no powers to tax this transaction. Customs Circular No. 46/2017-Cus dt. 24.11.2017 has failed to articulate the tax position clearly (refer note below).
6	Goods purchased from UK and re-exported to Singapore while under customs bonding	Same as above	Same as 3. Section 69 of the Customs law permits re-export of warehoused goods without payment of import duty.

Scenario – Supply of Goods

Taxability

Reasoning

Goods purchased from UK and directly shipped to USA
from UK

Neither purchase nor sale transaction is taxable on
extra-territorial grounds.

Of course, additional customs duty equivalent to IGST
can be imposed u/s.3(7) of the Customs Tariff Act, 1975

‘Place of Supply’ – Aspect and impact of law is
outside India and hence outside the scope of IGST Law. Moreover, proviso to section 5(1) of IGST
law excludes its applicability until the goods are imported into India (i.e.
territorial waters)

Goods purchased from UK and transferred by
endorsement in High Seas (beyond 200 Nautical Miles) to a person outside
India

Neither purchase nor sale transaction is taxable on
extra-territorial grounds.

Same as above, with additional reliance from the
Customs Circular 33/2017 dt. 01.08.2017 which states that High Sea Sales are
not taxable and it is only the last buyer in the chain who clears the goods at
the customs station that would subject to tax.

Goods purchased from UK and document to title of
goods was transferred while the goods are within 12 nautical miles from India

Neither purchase nor is taxable on account of proviso
to section 5(1) of the IGST Law. One
cannot take the plea of extra-territorial levy

Place of supply may be said to be in India but the
proviso to section 5(1) excludes such transactions from the purview of IGST
law. The customs law on the other hand
imposes the duty (incl. IGST) only at the time of custom clearance. Above customs circular supports this
position.

Goods purchased from UK and document to title of
goods was transferred to a person in India while goods in continental shelf

Same as above

Same as above.
Moreover, rights of taxation under the Maritime law is limited to
explorative activities only.

Goods purchased from UK and document of title of
goods transferred to a person in India while the goods are under customs
bonding

Same as above

Same as 3.
Customs law has exclusive rights to tax this transaction. Until the goods form part of home
consumption, IGST law has no powers to tax this transaction. Customs Circular No. 46/2017-Cus dt.
24.11.2017 has failed to articulate the tax position clearly (refer note
below).

Goods purchased from UK and re-exported to Singapore
while under customs bonding

Same as above

Same as 3.
Section 69 of the Customs law permits re-export of warehoused goods
without payment of import duty.

Note – CBEC Circular 46/2017-Cus has taken a contradictory stance while clarifying the taxability of Bond to Bond Transfers.

In short, the said Circular states that sales while the goods are under bonding are subject to IGST in the hands of the seller in terms of section 7(2) read with section 20 on the entire sale price. Further, the customs duty applicable on import transaction would be payable at the time of ex-bonding of goods for home consumption. The circular is incorrect in its interpretation on account of the following:

• The circular failed to appreciate the presence of proviso to section 5(1) of the IGST law which excludes the applicability of GST until clearance of home consumption of such goods
• It has also lost sight of its preceding Circular No. 11/2010-Cus., dated 3-6-2010 which categorically states that the levy of custom duty is fixed at the time of import and filing of the into-bond bill of entry and deferred until ex-bonding of such goods.

Incidentally, the Finance Bill, 2018 has proposed an amendment to the Customs Tariff Act, 1975 which requires that additional customs duty (in the form of IGST) in case of bonded goods would be calculated on the last transaction value of such goods prior to de-bonding (ie purchase consideration of the last buyer). Use of last transaction value as the basis of collection of IGST, by implication, affirms the stand that only the last buyer of the chain is liable to pay IGST. The law does not intend to tax the intermediate transactions under the IGST law. It is a case of deferment of payment of tax until clearance of such goods for home consumption.

5. Implications from this conclusion

It should be appreciated that the IGST model is a novel idea for implementation of GST. Many federations across the globe have struggled to implement a hybrid model. India has taken the bold step of implementing such a model in the form of a IGST law. The Centre is given more importance in this scheme. It would receive its share of revenue (CGST component) one way or the other. The tussle would be on the SGST component wherein each State may claim to be the Consumption State and extract a share of the IGST revenue. While the industry would hope that it is not transported back to the pre-CST period, certain pockets of the IGST law would require intervention of the Courts, else the tax payer would be sandwiched in this tussle for tax revenue. Other detailed aspects of the law would be examined in a subsequent article. _

shailesh.kwebmaker

GST on Re-development of Society Building, SRA and JDA – Part II

In Part-I, we discussed the taxability of
Development Rights and Re-development of Co-operative Housing Society
Buildings. In this part, we shall discuss the issue of taxability of
Transferable Development Rights, Slum Rehabilitation Projects and Land Development
Agreements, popularly known as Joint Development Agreements (‘JDA’) under GST.

Taxability of Transferable Development Rights
(‘TDR’)

Taxability of TDR can be examined in two
different situations:

– When
granted by a local authority

– When
sold by one developer to another

a. Taxability of TDR when granted by a local authority:

Let us examine the taxability of TDR granted
by a local authority in pursuance of Development Control Regulations (‘DCR’).
In lieu of the area relinquished or surrendered by the owner of the land, the
Government allows construction of additional built-up area. The landowner can
use extra built-up area, either himself or transfer it to another who is in
need of the extra built-up area for an agreed sum of money. TDR is, thus, an
instrument issued by the government authorities which gives the right to person
to build over and above the permissible Floor Space Index (FSI) within the
permissible limit of DCR. The TDR certificates can also be traded in the market
for cash. Developers purchase and utilise them for increasing their development
rights.

Against this factual background, it is to be
considered whether TDR is ‘goods’ or ‘services’ and whether the ‘supply’
thereof is taxable under the GST laws or not.

FSI vs. TDR

Not all development rights are TDR as grant
and use of FSI is development right, a specie of right in land embedded in the
same piece and parcel of land and cannot be divested to another piece of land
to load development potential on it. FSI is not transferable for use of
development on another piece of land unlike TDR which is transferable for use
on any other piece of land and therefore tradable by its very name and nature.
Secondly, TDR is initiated and issued by a local authority unlike FSI which a
private land owner also owns or possess as incorporeal right in his land with development potential as per prevailing town planning or DCR.

Is TDR an ‘Immovable Property’?

We shall now examine whether TDR or right to
obtain extra FSI is an ‘immovable property’ or not. The expression ‘immovable
property’ has not been defined under the GST law. It is, therefore, relevant to
note the definition of ‘immovable property’ under other enactments. Some of
these enactments are General Clauses Act, 1897, Transfer of Property Act, 1882,
Maharashtra Stamp Act, Registration Act, 1908, The Real Estate (Regulation and
Development) Act, 2016. The definition of ‘immovable property’ contained these
legislations are given in the previous article and hence not repeated here.

A perusal of the definitions in the
aforesaid enactments would show that they are more or less similar. Thus, the
definition of “immovable property” not only includes land but also the benefit
arising out of land and the things attached to the earth or permanently
fastened to anything attached to the earth. The scope of the term ‘immovable
property’ is not restricted to mere land or a building but extends even to the
benefits arising out of land.

The “benefit to arise of land” is that
benefit whose origin can be traced to existence of land. It owes its source to
land. Such benefit is inextricably linked to land.

The expression “development right” is not
defined in DCR issued under the Maharashtra Regional and Town Planning Act,
1966. However, a careful perusal and harmonious reading of various provisions
of the DCR as also various judicial pronouncements show the artificial manner
in which ‘development rights’ are carved out of the land. This would
establish that ‘development rights’ are the ‘rights in immovable property’.

In Chheda Housing Development
Corporation vs. Bibijan Shaikh Farid – (2007) 3 Mah LJ 402, the
Division Bench of the Hon’ble Bombay High Court has held that “FSI/TDR being
a benefit arising from the land, consequently must be held to be immovable
property and an Agreement for use of TDR consequently can be specifically
enforced, unless it is established that compensation in money would be an
adequate relief”.

After having explained that FSI / TDR is a
right in immovable property, the next issue to be addressed is whether the
transfer of such right is liable to GST or not.

Is TDR/FSI ‘goods’ or ‘service’?

GST is a levy on supply of goods or services
or both for a consideration by a person in the course or furtherance of
business.

Section 2(52) of the CGST Act defines
“Goods” as under:

“S.2(52)
“goods” means every kind of movable property other than money and securities
but includes actionable claim, growing crops, grass and things attached to or
forming part of the land which are agreed to be severed before supply or under
a contract of supply”

A perusal of section 2(52) would show that
it is an exhaustive definition. It includes every kind of movable property
including actionable claims. It also includes growing crops, grass and things
attached to or forming part of the land provided they are agreed to be severed
before supply or under a contract of supply. It does not include money and
securities.

Section 2(102) of CGST Act defines
“services” as under:

“S.2(102)
“services” means anything other than goods, money and securities but includes
activities relating to the use of money or its conversion by cash or by any
other mode, from one form, currency or denomination, to another form, currency
or denomination for which a separate consideration is charged”.

A perusal of the definition of “services”
would show that it is an exhaustive definition and it encompasses anything
other than goods. Just because it includes anything other than goods, does it
mean it can include anything which normally not understood as service? Can it
include living beings? Answer is no. Though the expression “services” means
anything other than goods, it cannot include anything which is not normally
understood as service. Service is never understood to include property. Though service is defined under indirect tax
laws, it is defined in certain other laws. These definitions were considered by
the Hon’ble Gauhati High Court in Magus Construction (P.) Ltd. vs. UOI
[2008] (11) STR 225, wherein it has explained the meaning of the word
“service”. After considering the definition of ‘services’ in various enactments
like MRTP Act, 1969, Consumer Protection Act, 1986, FEMA, 1999, amongst other
enactments, the Hon’ble High Court observed that “…one can safely define
‘service’ as an act of helpful activity, an act of doing something useful,
rendering assistance or help. Service does not involve supply of goods;
‘service’ rather connotes transformation of use/user of goods as a result of
voluntary intervention of ‘service provider’ and is an intangible commodity in
the form of human effort”.

Therefore, the expression ‘services’ as
defined in section 2 (102) of the CGST Act cannot include ‘immovable property’.
Therefore, transfer of immovable property or right in immovable property cannot
be treated as supply of service.

Section 7(2) of the CGST Act reads as under:

“S.7(2)
Notwithstanding anything contained in sub-section (1),––

(a) activities or
transactions specified in Schedule III; or

(b) such
activities or transactions undertaken by the Central Government, a State
Government or any local authority in which they are engaged as public
authorities, as may be notified by the Government on the recommendations of the
Council, shall be treated neither as a supply of goods nor a supply of
services.”

Serial no. 5 of Schedule III of the CGST
Act specifying activities or
transactions which shall be treated neither as a supply of goods nor a supply
of service reads as under:

“5. Sale of land
and, subject to clause (b) of paragraph 5 of Schedule II, sale of building.”

Therefore, by virtue of section 7(2) read
with Schedule III, sale of land and sale of building are treated neither as
supply of goods nor as supply of services. Issue is “can one state that as
serial no. 5 of Schedule III uses the expression “land” and “building”, the
benefit of this entry is not available to right in land or building?” The
answer is no. We have already explained that transfer of immovable property is
not liable for GST as it is neither goods nor service. Immovable property, by
definition, includes even right in immovable property. Therefore, just because right in immovable
property has not been specifically stated in Schedule III, it doesn’t mean that
they are liable for GST. It is a well-settled legal principle that exemption
doesn’t pre-suppose a charge.

Even otherwise, the expression “land” and
“building” in Schedule III includes even right in land/building. This is
evident from Entry 18 of List II of Seventh Schedule of The Constitution read
with Entry 49 of the same list.

It is, therefore, viewed that TDR/FSI is
neither ‘goods’ nor ‘services’ and hence, cannot be subjected to levy of GST.

Can TDR be considered as an ‘Actionable
Claim’?

The entire issue of the ‘taxability of TDR’
can be looked at from a different perspective also.

TDR is a right which has been conferred by
the Government. It is transferrable by endorsement and delivery. When it is
transferred and can be used on any other land, there is no connection with any
particular land. TDR can change many hands before it is used in a particular
land for availing construction right.

Section 3 of the Transfer of Property Act,
1882, defines ‘actionable claim’ as “a claim to any debt, other than the
debt secured by mortgage of immovable property or by hypothecation or pledge of
movable property or to beneficial interest in movable property.” It means
that any beneficial interest in a movable property is actionable claim if the
same is not in the possession of the claimant. ‘Movable property’ has been
defined in section 3 (36) of the General Clauses Act, 1897, as ‘property of any
description except immovable property’. TDR is not a right in respect of an
“immovable property” as defined in section 3 (26) of the General Clauses Act
1897, and, therefore, it is a beneficial interest arising out of a “movable
property” as per the section 3 (36) of the Act. This right is intangible, and
it cannot be said that it is capable of being in physical possession of anyone.
Any movable property that can be possessed, can be handed over by the owner to
another for use. But in case of intangible property, the right to use such
property can be transferred by an agreement and the transferee can enforce the
right, in case of dispute, by going to the Court. Therefore, TDR should be
construed as an actionable claim. Therefore, its arrangements are transactions
in actionable claims. Support can be taken from the Apex Court’s decisions in Sunrise
Associates vs. Government of NCT of Delhi, 2006 (145) STC 576 (SC) and
Vikas Sales ([1996] 102 STC 106 (SC)) (1996) 4 SCC 433.

Applying the ratio of Sunrise Associates’
case (supra), it can be construed that TDR is an intangible valuable
right which can be sold and purchased independent of land and should be
considered as an actionable claim. Actionable claim is also out of the scope of
supply in terms of paragraphs 6 of Schedule III of the CGST Act. Accordingly,
GST is not payable by any person when he transfers TDR to another.

In view of the above, TDR whether as
‘immovable property’ or ‘actionable claim’ remains outside the scope of
levy of GST.

Leviability of GST in case of Slum
Rehabilitation Authority (SRA) Projects

In case of slum encroached private land, the landlord approaches the Slum Rehabilitation Authority (SRA), a
governmental authority covered under Article 243W of the Constitution which
declares the land as slum land and issues order for rehabilitation of slum
dwellers (in pursuance of DCR 33(10) of Brihan Mumbai Municipal Corporation,
and similar regulations in other metropolitan cities). The landlord approaches
a developer to develop the land and SRA grant extra FSI to the developer for
construction of rehabilitation of slum dwellers as per DCR. The developer
constructs a building for slum dwellers and another for landlord including free
sale area and for himself to recover the cost of construction. As an incentive
to construct building for slum dwellers, SRA may issue TDR in form of DRC
(Development Right Certificate) which can be used on another plot or even may
be sold in open market by endorsement and delivery. Registration of document of
transfer of DRC with local authority is a regulatory requirement. Stamp duty is
paid for transfer of TDR as moveable property but is not required to be
registered under Registration Act as conveyance. Over and above this, the
developer may pay cash consideration to the landlord.

In another scenario, the land may belong
to the Government that has been encroached upon by
the slum dwellers. In such a case, the Developer may agree to develop the land,
construct the building for the slum dwellers and allotment of units therein
free of cost to the slum dwellers in terms of the agreement entered into with
SRA. As against this, the Developer would be granted TDR as may be permitted by
the town planning regulations on the recommendations of SRA which can be
exploited by the Developer to construct another building, the units in which
can be freely sold by him. The Developer may even decide to sell TDR in open
market.

A perusal of the regulations relating to
slum rehabilitation schemes would show that it is an integral scheme. The
developer is required to carry out the work of construction of tenements for
slum-dwellers. Some portion of the built-up area is also allotted to the Land
Owner as per terms of DA. The remaining constructed area belongs to the
developer which is freely saleable by the Developer to recover the cost of
construction of the entire project alongwith his margin for the risk and
reward.

Therefore, it is a single contract for
construction under an integral scheme. The entire supply involves
consideration. Just because the scheme states that certain share in the
built-up area is to be handed over free of cost to slum dwellers and land
owner, it is not free in the legal sense. There is consideration for the
built-up area handed over to all them. It is to be noted that the FSI / TDR
that is sanctioned to the developer would enable him to construct units out of
which portion of it is available to him as freely saleable area. Alternatively,
the developer would be able to sell TDR in open market and monetize the same.
Once an area is declared as slum area and SRA frames slum rehabilitation
scheme, Regulation 33(10) of DCR is required to be followed. Once the
redevelopment / construction is carried out in accordance with Regulation
33(10), there are various conditions to be fulfilled. Therefore, different
events cannot be broken to ascertain the GST liability. The supply is only one.
Section 2(31) of the CGST Act defines ‘consideration’, the relevant portion of
which is reproduced below:

“S.2(31)
“consideration” in relation to the supply of goods or services or both
includes––

(a) any payment
made or to be made, whether in money or otherwise, in respect of, in response
to, or for the inducement of, the supply of goods or services or both, whether
by the recipient or by any other person but shall not include any subsidy given
by the Central Government or a State Government;

(b) the
monetary value of any act or forbearance, in respect of, in response to, or for
the inducement of, the supply of goods or services or both, whether by the
recipient or by any other person but shall not include any subsidy given by the
Central Government or a State Government”.

The above would show that consideration is
linked to supply. The expression consideration should not be read in isolation
of supply and scope of supply should not be read independent of the word
consideration. Consideration can move even from third person as per the
definition of consideration as given in section 2(31). This concept is also
recognized u/s. 2(d) of the Indian Contract Act, 1872.

Whether the landlord can be considered to
have made any supply in the above case and whether the free of cost area
allotted by the developer to the landlord in the newly constructed building
(with or without additional cash payment to the landlord) would constitute
‘consideration’ in the eyes of law?

In the first scenario, the landowner whose
land has been encroached by the slum dwellers engages the developer to
construct a building for rehabilitation of the slum dwellers as mandated by the
authorities to make the rest of the land free from such encumbrance and another
building or buildings which is to be shared by the developer and landlord in
agreed manner. Effectively, the land owner is sharing his land with the
developer as against which the constructed area is being shared between them as
per the terms of DA. Hence, landowner is transferring his ownership right in
the land for area of construction of his share as well as construction of the
building required for rehabilitation of the slum dwellers. Transfer of land is
specifically excluded from the meaning of supply on which GST is not payable.
However, the building constructed by developer for landlord is in form of works
contract service, depending on the, terms of contract that whether the land is
transferred to the developer or mere development right is granted. In the first
case, the service may be termed as Construction Service covered in Entry 5(b)
of Schedule II of CGST Act and in later case, it may be termed as Works
Contract Service covered in Entry 6(a) of the same Schedule.

Alternatively, it can be argued that the
Developer constructing building for Landlord and slum dwellers is, in lieu of,
free sale area received by Developer. Viewed from this angle, the consideration
is the market value of land portion received by the Developer and GST is
payable. In this scenario, if the development right is considered taxable under
GST, the land owner may issue invoice for transfer of development right. Based
on this, the developer shall be entitled to avail ITC against under constructed
flats sold from free sale area.

In case of Government land, TDR is issued
against construction of building for slum dwellers which may be encashed by
selling the same in open market. In such a case, the realized value of TDR may
be liable as consideration for construction of SRA building.

In the case of Sumer Corporation vs.
State of Maharashtra – (2017) 82 Taxmann.Com 369 (Bombay), the Hon’ble
High Court has held TDR to be a valuable consideration equivalent to money.
However, we may here hasten to add that the Hon’ble High Court has, with due
respect, not examined certain broader issues as accepted by itself in the
judgment. The Hon’ble Court has confined itself only to finding out whether
consideration was present or not and have held that TDR is a consideration for
the Works Contract Services.

Nevertheless, one may be adopt a
conservative view and apply the ratio of the decision of the Hon’ble High Court
supra. If the TDR is used on the same plot of land to construct a
building for the land owner, slum dwellers and free sale area for the
developer, it can be said that the consideration received from free sale area
shall cover the consideration for the entire works contract for slum
rehabilitation and the landowner’s portion. It may be pointed out here that SRA
being covered by Article 243W of the Constitution, neither SRA nor the
Developer will be liable to GST in respect of issue of TDR by SRA.

In view of the entire transaction being
single supply, it is possible to avail full input tax credit on entire
construction and set off against the sale of under constructed flats.

Leviability of GST on Joint Development
Agreement (JDA)

JDA signifies a landlord entering into
Development Agreement with a Developer to develop his land having development
potential (FSI) and JV is formed. The landlord contribute his land into JV and
transfer the same by virtue of JDA or promise to convey the land to the society
of the purchasers of flats as may be formed by the JV. The landlord may have a
passive or active role in JV. In most of the cases, landowner is not having any
active role in the venture except giving his land for construction through this
arrangement. Contribution in form of land is a form of sale of land and outside
the scope of GST. Even when the development right is granted instead of
transfer of land per se, it is normally in form of available FSI of the
same plot of land on which it is consumed. Grant of FSI is certainly the right
arising out of the land and even on better footing than TDR which is
transferrable. Thus, grant of development right is outside the scope of GST.

We may, however, hasten to say here that the
joint control of the partners over a venture is the essential criterion for
considering such association as joint venture. The landowner has no role to
play after handing over the land to the developer for construction, whether the
revenue is shared or developed area is shared between the owner and the
developer. Hence, there is no joint venture between the landowner and the
developer. The landowner is giving up part ownership of the land to the
developer in exchange for getting share in revenue of constructed area.

Generally, two models are in vogue in case
of JDA between the landowners and a Developer, viz:

1. Revenue Sharing Model

2. Area Sharing Model.

a) Revenue Sharing Model:

In case of a landlord entering into Joint
Development Agreement with Developer wherein development right of the land is
granted to JDA for exploiting full potential of land on the following terms and
conditions:

– Value
of land (FSI value) is credited to the landlord’s capital account;

– All
expense from plan approval to construction cost, supervision, etc. is to be
borne by JDA to be funded by the Developer. In most of the cases landlord has
no further role to play;

– Upon completion of construction, net profit will
be shared between the Landlord and Developer in agreed ratio.

b) Area sharing Model:

Alternative structure of the transaction is
that the landlord appoints the developer by transfer of development right of
the entire portion of the land and in turn the developer agrees to give agreed
percentage of constructed area to the landlord. Balance area shall be retained
and sold in open market by the Developer.

Can the relationship between the landlord
and the developer in area sharing model be considered as ‘barter’ so as to
constitute ‘supply’ and attract the levy of GST ?

In area sharing model, the landowner is
giving development right to the developer in exchange for getting share of
constructed area (works contract service). This is a case of barter. Taking
conservative view, both the landlord and developer will be required to pay GST,
however albeit with entitlement of input tax credit.

However, in case the developer is obliged to
give constructed area to the landlord against the part ownership of land under
the terms of JDA, both the transactions are outside the ambit of GST.

In revenue sharing model, no service is
provided by the developer or JV to the landlord. In fact, the JV sell the flats
and the revenue is to be distributed between the developer and the landlord in
the agreed ratio. The amount received by the landlord is towards sale /
transfer of land which is outside the scope of GST as per Sch. III of CGST Act.
Hence, no GST liability can arise on revenue sharing model.

Time of payment of GST on supply of under
on development right – NN. 4/2018 CT (Rate) dtd. 25.1.2018

By virtue of this notification, the
liability of payment of CGST is deferred from the date of supply of development
rights, i.e. date of entering into DA/JDA to date of grant of possession or
right in the constructed complex by entering into conveyance deed or similar
instrument (eg. Allotment letter). However, the notification can be said to be
a facilitation measure. The developer is not prevented from making payment even
before grant of such possession and avail input credit of the same against the
sale of under constructed units.

Conclusion:

From the indirect tax perspective, the
issues plaguing the Real Estate/Construction Sector are varied and complex. We
have made an attempt to deal with certain crucial issues and shed light on the
legal position and principles set by the judiciary.

What is required is a very critical
examination of the issues and the interpretation of relevant statutory
provisions in light of the principles of the law settled by various judicial
pronouncements. Needless to say, the readers may apply the views expressed in
this article based on the fact of this case and after obtaining expert opinion.
_

shailesh.kwebmaker

55 TDS – Section 194J – A. Ys. 2009-10 to 2012-13 – Fees for professional and technical services – Scope of section 194J – State Development Authority newly constituted getting its work done through another existing unit – Reimbursement of expenses by State Development Authority – Not payment of fees – Tax not deductible at source

Princ. CIT vs. H. P. Bus Stand Management and Development Authority; 400 ITR 451 (HP):

The assessee, the H. P. Bus Stand Management and Development Authority, an entity established for development and management of bus stands within the State of Himachal Pradesh, was established w.e.f. April 1, 2000. Prior thereto, such work was being carried out by the State Road Transport Corporation itself. Since the assesee had no independent establishment and infrastructure of its own to carry out the objects, a decision was taken to have the same executed through the employees of the Corporation. This arrangement was to continue till such time as the assessee developed its own infrastructure. Since ongoing projects were required to be executed, which was so done in public interest, as per the arrangement arrived at, certain payments were released by the assessee in favour of the Corporation. The expenditure was to be shared by way of reimbursement. Since the assesee did not deduct any amount in terms of section 194J of the Act, with respect to the amount paid to the Corporation, the Assessing Officer disallowed the deduction of the amount paid to the Corporation for failure to deduct tax at source. The Commissioner (Appeal) and the Tribunal deleted the addition.

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

“i) The
arrangement arrived at between the two entities could not be said to be that of
rendering professional services. No legal, medical, engineering, architectural
consultancy, technical consultancy, accountancy, nature of interior decoration
or development was to be rendered by the Corporation. Similarly, no service,
which could be termed to be technical service, was provided by the corporation
to the Development Authority, so also no managerial, technical or consultancy
services were provided.

ii) The arrangement was
simple. The staff of the corporation was to carry out the work of development and management of the
Development Authority till such time as, the assessee developed its
infrastructure and the expenditure so incurred by the Corporation was to be
apportioned on agreed terms. It was only pursuant to such arrangement, that the
assessee disbursed the payment to the Corporation and no amount of tax was
required to be deducted at source on the payment.” _

shailesh.kwebmaker

54 Special deduction u/s. 80-IA – A. Y. 2008-09 – Development or operation and maintenance of infrastructure facility – Scope – Deduction is profit linked – Ownership of undertaking is not important – Successor in business can claim deduction

Kanan Devan Hills Plantation Co. P. Ltd. vs. ACIT; 400 ITR 43 (Ker):

The assessee took over the going concern, a tea estate with all its incidental business. A power distribution system with a network of transmission lines was part of that acquisition. The assessee maintained that in 2007-08, it renovated and modernised the transmission lines by investing huge amounts. So for the A. Y. 2008-09, it claimed tax benefits u/s. 80-IA of the Income-tax Act, 1961. The Assessing Officer disallowed the claim for deduction u/s. 80-IA of the Act. Commissioner (Appeals) and the Tribunal upheld the disallowance.

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

“i) Section 80-IA applies to an “undertaking” referred to clause (ii) or clause (iv) or clause (vi) of sub-section (4) if it fulfills the enumerated conditions. The assessee’s undertaking fell in clause (iv) of sub-section (4). In accordance with the conditions stipulated, the assessee ought not to have formed the undertaking by splitting up or reconstructing an existing business. Here there was neither splitting up nor reconstructing the existing business. The assessee had produced an audited certificate that the written down value of the plant and machinery as on April 1, 2004 was Rs. 89,39,340. It claimed that it spent for the A. Y. 2008-09 Rs. 50.31 lakhs to renovate and modernise its transmission network. So, the amount spent was over 50% of the then existing establishment book value. The undertaking squarely fell u/s. 80-IA(4)(iv)(c) of the Act.

ii) The renovation or modernisation, admittedly took place between April 1, 2004 and March 31, 2011. In the circumstances the Assessing Officer’s disallowing Rs. 58,91,000 u/s. 80-IA of the Act, as affirmed by the appellate authority and the Tribunal, could not be sustained. So we answer the question of law in the assessee’s favour. As a corollary, we set aside the Tribunal’s impugned order and allow the appeal.”

shailesh.kwebmaker

53 Reassessment – Sections 147 and 148- A. Y. 2008-09 – Notice on ground that shareholders of company were fictitious persons – Shareholders other public registered companies – Notice based on testimony of two individuals who had not been cross-examined – Notice not valid

Princ. CIT vs. Paradise Inland Shipping P. Ltd.; 400 ITR 439 (Bom):

For the A. Y. 2008-09, the assessment of the assessee company was reopened on the ground that the shareholders of the assessee – company were fictitious persons. The Commissioner (Appeals) and the Tribunal held that the reopening was not valid.

On appeal by the Revenue, the Bombay High Court upheld the decision of the Tribunal and held as under:
“i) The notice of reassessment had been issued on the ground that the shareholders of the assessee-company were fictitious persons. The shareholders were other companies. The documents which had been produced were basically from public offices, which maintain records of companies. The documents also included the assessment orders of such companies for the three preceding years. Besides the documents also included the registration of the companies which disclosed their registered addresses.

ii) The Commissioner (Appeals) as well as the Tribunal on the basis of the appreciation of the evidence on record, concurrently came to the conclusion that the existence of the companies was based on documents produced from public records.

iii) The Revenue was seeking to rely upon the statements recorded of two persons who had admittedly not been subjected to cross-examination. Hence the question of remanding the matter for re-examination of such persons would not at all be justified. The notice was not valid and had to be quashed. The appeal stands rejected.”

shailesh.kwebmaker

52 Penalty – Concealment of income – Section 271(1)(c) – A. Y. 2009-10 – Claim for deduction – Difference of opinion among High Courts regarding admissibility of claim – Particulars regarding claim furnished – No concealment of income – Penalty cannot be levied

Principal CIT vs. Manzoor Ahmed Walvir; 400 ITR 89 (J&K):

For the A. Y. 2009-10, the assessee had made a claim and had disclosed the relevant facts. The claim involved the interpretation of section 40(a)(ia) of the Act, and in particular the word “payable. There were different judgments of the High Courts both in favour of the assessee and against the assessee. The claim was disallowed by the Assessing Officer. On that basis, the Assessing Officer also imposed penalty u/s. 271(1)(c) of the Act for concealment of income. The Tribunal deleted the penalty.

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

“i) There had been disallowance by interpreting the word “payable” in section 40(a)(ia) to include payments made during the year. Some High Courts had taken the view that the expression “payable” did not include amounts paid, while others had taken the view that the expression “payable” included amounts paid during the year. The Supreme Court finally resolved the controversy in Palam Gas Services vs. CIT; 394 ITR 300 (SC) holding that the expression “payable” included not only the amounts which remained payable at the end of the year, but also the amounts paid during the year.

ii) When the assessee made the claim, this issue was debatable and, therefore, in so far as the deduction of tax at source on amounts paid was concerned, the position was that, while it could be made the subject of disallowance, it could not form the basis for imposing a penalty. The deletion of penalty by the Tribunal was justified.”

shailesh.kwebmaker

51 Loss – Carry forward and set off – Section 72(1) – A. Y. 2005-06 – Loss of current year and carried forward loss of earlier year from non-speculative business can be set off against profit of speculative business of current year

CIT vs. Ramshree Steels Pvt. Ltd.; 400 ITR 61 (All)

The assessee filed Nil return for A. Y. 2005-06, after setting off loss of the earlier year to the extent of profit. The Assessing Officer computed the total income at Rs. 2,17,46,490, treating the share trading business as speculative profit to an amount of Rs. 3,84,09,932. The Commissioner (Appeals) enhanced the income and held that the amount of Rs. 3,84,09,932 was to be taxed and the business loss of Rs. 1,66,63,443 was to be carried forward after verification by the assessing authority. The Tribunal allowed the assessee’s appeal and directed the Assessing Officer to allow the set off of loss from non-speculative business against profit from speculative business.

On appeal by the Revenue, the Department contended that section 72(1) provided that the non-speculative business loss could be set off against “profit and gains, if any, of any business or profession” carried on by the assessee and was assessable in that assessment year, and when it could not be so set off, it should be carried forward to the following assessment year.

The Allahabad High Court upheld the decision of the Tribunal and held as under:

“The order of the Tribunal, based on material facts and supported by the decisions of Supreme Court and the High Court, need not be interfered with. The appeal filed by the Department is accordingly dismissed.”

shailesh.kwebmaker

50 Recovery of Tax – Company in liquidation – Liabilities of directors – Section 179 – A. Ys. 2006-07 to 2011-12 – Assessee was a director of private limited company – She filed instant writ petition contending that order passed against her u/s. 179(1) was without jurisdiction because no effort was made by revenue to recover tax dues from defaulting private limited company – Held: Assessing Officer can exercise jurisdiction u/s. 179(1) against assessee only when it fails to recover its dues from Private Limited Company, in which assessee is a director – Such jurisdictional requirement cannot be said to be satisfied by a mere statement in impugned order that recovery proceedings had been conducted against defaulting private limited company – Since, in instant case, show cause notice u/s. 179(1) did not indicate or give any particulars in respect of steps taken by department to recover tax dues from defaulting private limited company, impugned order was to be set aside

Madhavi Kerkar vs. ACIT; [2018] 90 taxmann.com 55 (Bom)

The assessee was a director of private limited company. The Assessing Officer passed an order u/s. 179(1) against her for recovery of the tax dues of the company from her. She filed a writ petition challenging the validity of the said order u/s. 179(1). According to the assessee, in terms of section 179(1) the revenue was clothed with jurisdiction to proceed against directors of a private limited company to recover its dues only where the tax dues of the Private Limited Company could not be recovered from it. It was the case of the assessee that no effort was made to recover the tax dues from the defaulting private limited company.

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

“i) The revenue would acquire/get jurisdiction to proceed against the directors of the delinquent Private Limited Company only after it has failed to recover its dues from the Private Limited Company, in which the assessee is a director. This is a condition precedent for the Assessing Officer to exercise jurisdiction u/s. 179 (1) against the director of the delinquent company. The jurisdictional requirement cannot be said to be satisfied by a mere statement in the impugned order that the recovery proceedings had been conducted against the defaulting Private Limited Company but it had failed to recover its dues. The above statement should be supported by mentioning briefly the types of efforts made and its results.

ii) Therefore, appropriately, the notice to show cause issued u/s. 179 (1) to the directors of the delinquent Private Limited Company must indicate albeit, briefly, the steps taken to recover the tax dues and its failure. In cases where the notice does not indicate the same and the assessee raises the objection of jurisdiction on the above account, then the assessee must be informed of the basis of the Assessing Officer exercising jurisdiction and the notice’/directors response, if any, should be considered in the order passed u/s. 179 (1) of the Act.

iii) In this case the show-cause notice u/s. 179 (1) did not indicate or give any particulars in respect of the steps taken by the department to recover the tax dues of the defaulting Private Limited Company and its failure. The assessee in response to the above notice, questioned the jurisdiction of the revenue to issue the notice u/s. 179 (1) and sought details of the steps taken by the department to recover tax dues from the defaulting Private Limited Company. In fact, in its reply, the assessee pointed out that the defaulting company had assets of over Rs.100 crore.

iv) Admittedly, in this case no particulars of steps taken to recover the dues from the defaulting company were communicated to the assessee nor indicated in the impugned order. In this case except a statement that recovery proceedings against the defaulting assessee had failed, no particulars of the same are indicated, so as to enable the assessee to object to it on facts. In the above view, the impugned order is set aside.”

shailesh.kwebmaker

49 Income – Expenditure – Sections 2(24) and 36(1)(v) : A. Ys. 2002-03 and 2003-04 – Grant received from Government – Assessee a sick unit, receiving grant for disbursement of voluntary retirement payments – Grant received by assessee from Government cannot be treated as income – Payment to employees towards voluntary retirement scheme from grant allowable as deduction – Payment of gratuity from fund granted by Government is deductible u/s. 36(1)(v)

Scooters India Ltd. vs. CIT; 399 ITR 559 (All):

The assessee, a company owned by the Government of India, manufactured and marketed three wheelers. The assessee was a sick unit and was implementing revival or rehabilitation approved by the Board for Industrial and Financial Reconstruction. The Government of India remitted a grant out of the national renewal fund for implementation of a voluntary retirement scheme. Payment was made by the assessee to the employees towards the voluntary retirement scheme out of the grant. For the A. Y. 2002-03, the assessee furnished the return showing income at Rs. 2,51,25,472 for the current year and setting off part of brought forward losses against the income. The Assessing Officer treated the grant as income of the assessee and disallowed the expenditure incurred by it on voluntary retirement scheme and also disallowed gratuity. The Commissioner (Appeals) and the Tribunal confirmed this.

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

“i) The grant or subsidy was forwarded by the Government of India to help the assessee in its revival by making payment to employees towards voluntary retirement scheme. It was a voluntary remittance fund by the Government of India to the assessee. The Department failed to show anything so as to bring “grant” or “subsidy” it within any particular clause of section 2(24) of the Act. The amount of grant received by the assessee from the Government of India could not be treated as income.

ii) The payment to employees towards voluntary retirement scheme was to be allowed. The narrow interpretation straining language of section 36(1)(v) of the Act so as to deny deduction to the assessee should not be followed since the objective of the fund was achieved. The payment of gratuity was to be allowed.”

shailesh.kwebmaker

48 Export business – Special deduction u/s. 10B – A. Y. 2008-09 – Gains derived from fluctuation in foreign exchange rate – Receipt on account of export – Is in nature of income from export – Entitled to deduction u/s. 10B

Princ. CIT vs. Asahi Songwon Colors Ltd.; 400 ITR 138 (Guj):

For the A. Y. 2008-09, the Assessing Officer disallowed the deduction u/s. 10B of the Act, on profits arising due to the foreign exchange rate fluctuation on the ground that it was not income derived from the Industrial undertaking. The Commissioner (Appeals) deleted the disallowance and the deletion was confirmed by the Tribunal.

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

“i) The income or loss due to fluctuation in the exchange rate of foreign currency that arose out of the export business of the assessee did not lose the character of income from assessee’s export business. Deduction u/s. 10B was permissible if profit and gains were derived from export. The exact remittance in connection with such export depended on the precise exchange rate at the time when the amount was remitted.

ii) The receipt was on account of the export made, and therefore, the fluctuation thereof must also be said to have arisen out of the export business. Merely because of fluctuation in the international currencies, the income did not get divested of the character of income from export business.
iii) Therefore, the Tribunal did not commit any error in deleting the addition made on account of fluctuation in foreign exchange rates from the deduction u/s. 10B. No question of law arose.”

shailesh.kwebmaker

TaxFunwithBCAS

Budget is not merely a financial event
but an emotion in India. It evokes vociferous and often acrimonious discussions
across the country and one cannot even dream of social media not being
bombarded with Budget related posts and forwards. This year the Taxation
Committee of the BCAS tried to make the Budget-2018 even more interesting and
engaging by inviting members to post humorous/witty/out of the box messages
relating to the Budget, on any of the three Social Media websites – Facebook,
Twitter, LinkedIn where @bcasglobal has a presence – using the hashtag
‘#TaxFunwithBCAS’. And thanks to all our followers, we received an overwhelming
response to this initiative. As
informed, we are truly glad to publish some of the popular ones in our BCA
Journal, given below.

1) Sunil Gabhawalla? @sbgco Feb 6

Equity and tax can need strangers. But
do they need to be enemies? Mr. Dastur at his witty best TaxFunwithBCAS @bcasglobal

2) Ameet Patel?
@patelameet Feb 1

Confused. Whether to watch TV and
listen to experts commenting on the Budget without having read it or To
download the budget and read it myself first. Budget2018withBCAS
@bcasglobal TaxFunwithBCAS

3) Naman Shrimal?
@CANamanShrimal Feb 1

5 lakh WiFi spots for benefit of 5
crore rural citizens… Now please don’t bother us with irrelevant demands like
water, food, road and safety !!! taxfunwithBCAS
JSCO budget2018

4) Paras Gandhi?
@Parasgandhi69 Feb 1

2 min silence for cryptocurrency
holders bitcoincrash jiocoin Budget2018 Budget2018WithTaxmann
TaxFunwithBCAS

5) Rutvik Sanghvi?
@zanyrutvik Feb 1

After zandu balm and Bata shoes, it’s
now time for Hawai chappals. Hope the company tries suing the FM. It’ll be fun
to see the arguments. Budget2018withBCAS
TaxFunwithBCAS @bcasglobal

6) Siddharth Banwat? @sidbanwat Feb 1

TaxFunwithBCAS
– Post Budget 2018
Resolution – Let’s become part of rural population to get benefit of good
governance

7) Ameet Patel?
@patelameet Feb 1

Will the FM bring a tax on corruption?
Will the FM reduce tax on honesty? @bcasglobal
Budget2018withBCAS TaxFunwithBCAS _

shailesh.kwebmaker

The PNB Saga

The Punjab National Bank (PNB) scam involving Rs. 11,400 crore became public about a fortnight back and still continues to be in focus in the media, both electronic and print. Apart from PNB fraud, instances of frauds are being reported in other banks as well. Multiple investigating agencies have suddenly woken up and have started investigations. Premises of companies directly connected as well as related entities are being raided, properties are being seized or attached and several persons have been arrested, while the main players have already fled the country.

The Finance Minister, Mr. Arun Jaitley, while speaking at the Economic Times Global Business Summit, said ‘(there are) at least multiple layers of auditing system which either chose to look the other way or do a casual job’. He blamed the bank management, the regulator and the auditors. However, as the Minister under whom the regulator and the banks operate, he was not ready to accept any responsibility. He, in fact, said politicians are made accountable while regulators are not. He seems to have forgotten the political interference in the functioning of banks, particularly in sanctioning of loans. Reserve Bank of India has described the fraud as `a case of operational risk arising out of delinquent behaviour by the bank’s employees’. Others have called it a ‘system failure’.

Mr. Jaitley’s remarks, particularly blaming auditors, have generated sharp reactions from the profession. Mr. Jaitley, while blaming the auditors, did not consider the third possibility that the auditors did their job as was required of them, but yet the frauds happened. Obviously, in such a case the auditors cannot and should not be accused of ‘looking the other way’ or ‘doing a casual job’. However, the fact is that whenever there is rise in crime or atrocities against women, do people not ask “What was the police doing”? On the same logic, when there are massive frauds in the banks carried on for years, is it unreasonable if stakeholders question the efficacy of the audit process?

As a profession, we cannot do what Jaitley brazenly did – refuse to accept any responsibility. On the other hand, we need to look into increasing the effectiveness of audits. If the profession cannot provide a reasonable assurance as expected by the stakeholders, the future of the profession itself would be at stake.

It is surprising that the Letters of Undertaking issued through SWIFT messaging did not form part of the Core Banking Solutions (CBS). Reserve Bank of India had issued instructions to the banks pointing out this weakness, but it appears no follow up was done. None of the audits appear to have even considered this and consequently felt the need to modify their procedures to check the transactions. It is surprising that foreign branches of the Indian Banks in whose favour LoU were issued did not realise that these were not in accordance with the guidelines of the Reserve Bank of India. All these questions and many more need answers. At this stage, one can only hope that the enquiry is swift (pun not intended), thorough and impartial.

While the blame game is on, the Reserve Bank of India has appointed an Expert Committee. It is a matter of pride that the Committee is headed by a senior chartered accountant – Mr. Y. H. Malegam. The Committee will, inter alia, look into the reasons for high divergence observed in asset classification and provisioning by banks vis-à-vis the RBI’s supervisory assessment, and the steps needed to prevent it.

Today, audit assignments have become rather onerous. The businesses have grown manifold in size, operations are spread across nations and have become extremely complex. Add to that the changes that take place with great speed in the nature of business. There is pressure to complete the audit within a short period and to keep the cost of audit low. Accounting standards have become complex and are changing rather frequently. Pressure on managements to show progress quarter on quarter has increased the chances of manipulation of the financial statements at the instance of those charged with governance. In this scenario, auditor has an unenviable job to do.

Traditionally, where volume of transactions is large, auditors have depended on sampling techniques, including some rather sophisticated ones. Possibly, with data analytics, artificial intelligence, machine learning, the way we carry out audit may further change substantially in the future. With technology, the auditor will be able to draw far better conclusions than those based on sample checking. Machine learning may lead to development of models for predicting accounting frauds and possibility of the misstatements in the financial statements. Technology will not only be able to process a very large amount of data, but its true potential is in its ability to predict risk and future events. The auditors will have to be far more tech savvy, employ specialists and draw conclusions based on data processed using modern technology.

Internationally, businesses have started experimenting with artificial intelligence and machine learning. The professions have also started making large investments in these new technologies. It may take a while for smaller firms to be able to afford the use of these technologies. But, the past experience indicates that what was thought rather unaffordable, has, in a very short period, become easily affordable. DVD writers, mobile telephony, Internet are just some examples of technology becoming affordable.

But in spite of technological developments, one will still have human ingenuity, which will try and beat the system and we will have another scam like that of Harshad Mehta or PNB!! Let us hope that the profession in the meantime enhances its skill sets so that it can play a role in mitigating such risk.

shailesh.kwebmaker

Meditation: A panacea to many ills. But how to meditate?

Fortunately, today everyone is aware of what Meditation is and what its benefits are.

And the benefits are so many and all of them are really so fantastic, that it is recommended that everyone on this earth should meditate every day for whatever time possible.

This, in my view, will definitely increase the global peace to a much higher level, automatically.

However, one question which most people ask is, (What to do? I try a lot to meditate but it does not happen. My mind keeps wandering here, there and everywhere)

Answer to this question is very simple and i.e. in Meditation you don’t do anything.

Paradoxically, in our life, we are so much used of constantly doing something or the other that the moment we sit for meditation, our mind very naturally starts wandering, here, there and everywhere. And that is how we feel that we are not able to do meditation.

Meditation, in fact, is non-doing, so that our mind which is constantly having a traffic of thoughts even while we are asleep, gets some rest which is so much essential for it, to pull itself, in a balanced state for the duration for which we live on this earth.

Actually, most health problems which people experience on this earth such as BP, Sugar, Arthritis, spondylitis, hypertension, depression are basically psychosomatic problems, that is, all these are mind-related problems.

That means, all these health problems occur when the mind of the person concerned has been at discomfort for an unreasonably long time.

Really speaking, it’s not difficult to meditate. It only needs some practice with total awareness and consciousness. Therefore, for those of you, who may like to meditate and experience its benefits, I thought of writing this post and share the process for traveling the “journey from doing to non-doing” which goes like this.

Whenever you wish to meditate, sit comfortably, keeping your back straight and your eyes closed. Then, take few deep long breaths in and out, feeling that your body and mind are slowly getting relaxed.

Now just follow two steps one after the other for as much time as you feel like.

1. With your eyes closed, remember every person, one by one, who has helped you in one way or the other in your life right from your childhood days. And then keep on thanking them in your heart with great sense of deep gratitude. Keep on doing so, as long as you feel like.

2. Now switch to the 2nd step and that is, remember every person right from your childhood days who may have hurt you in some way or the other in your life. And just forgive them in your heart one by one, as most people make mistakes out of ignorance.

Likewise, it is also possible that you too may have hurt or harmed some people in your life knowingly or unknowingly. Seek forgiveness from them for your wrong deeds. It is possible that some of these people may not be around, it doesn’t really matter.

Just follow the above two steps for as long as you feel like. And when you feel complete, just thank the Almighty and wish well-being, peace, prosperity, bliss, happiness for everyone on this earth and move on.

I am sure, this will facilitate your progress on the path of meditation and you will start enjoying benefits of meditation, equanimity of mind being one of them.

Wishing you a life full of peace, prosperity, bliss and happiness.

shailesh.kwebmaker

Changing Face Of Practice Management

Generalisations
can be grossly misleading, but this one I will still make. We as Chartered
Accountants love to complain and project ourselves as victims. We genuinely
believe that we are tirelessly slogging away for unappreciative and
unresponsive clients. I find this a self-defeatist attitude stemming from a
lack of enjoyment and pride in the job we are doing. If there is a real problem
then let us fix it. As they say, if you are not lighting any candles, don’t
complain about being in the dark.

To fix the
problem, we need to ask some basic questions. As individuals, we often ponder
over some existential questions, but fail to ask similar questions relating to
our professional existence:

– What is the
purpose of our existence and why are we making all these efforts?

– Where do we
see ourselves in the next 5/10 years and what efforts are we making towards
that end?

– How do our
clients and others see us?

These and
similar core questions will help us decide the strategy for managing our
professional practice.

Size Matters

Over the last
few decades, businesses have evolved and have got far more complex on the
backbone of technology. Indeed, the technology revolution has permitted
businesses to assume structural changes and scales never contemplated or thought
feasible before.

The unfortunate truth is that Chartered
Accountancy(CA) firms have not evolved at the same pace. The records of ICAI
shows that less than 10 % of the Indian CA firms are more than 4 partners
strong and hence most often incapable of providing the full range of
professional service to their clients.

Professional
firms have a choice; to either remain small and create a niche for themselves
or build scale and become a one-stop shop for their clients. A firm where
partners individually would create a niche for themselves, but the firm
collectively would cater to the full range of services. The reality however, is
that firms have chosen to remain small for all the wrong reasons. The chief
reasons are – unwillingness to give up the name, protecting tenancy rights,
fear of losing independence, etc.

Firms that
remain small get into the vicious cycle, often unable to retain clients that
are growing both in scale and in complexity.

Clients that
are growing, face ever more complexity in terms of their structure, operations
and compliance needs. This throws up tremendous opportunities for the CA firms
that have adapted to changing environment. Clients do not look for
one-dimensional solutions from the perspective of audit or tax or corporate
law, but from a comprehensive business viewpoint. The professional (even if he
is operating in a niche area) must therefore develop the competence to look at
the client problem in a holistic manner, thereby providing value to the client.

Perhaps, the
only way to build expertise over diverse areas of practice, each having its own
complexities, is to build scale, induct talent, and recognise that it is no
longer possible for a professional to have expert knowledge in all areas of
professional practice. Firms should also think of building multi-disciplinary
teams and collaborate with other professionals, such as lawyers, cost
accountants, information technology professionals, management graduates, etc.

Think
Strategically

Scale can be
achieved only if the CA firms think strategically and professionalise the way
they manage their practice, which is entirely different from rendering
professional services to clients. Many CA firms have grown up as family run
businesses, where the control and decision-making vests with the person who
started the practice and at best is handed down to family members. Outsiders
have very little chance of taking the leadership position and this creates a
serious impediment to attracting talent and consequently professionalising the
firm.

CA firms
compete in the professional space in two distinct areas: 1) To attract clients;
and 2) Recruit and retain competent staff. Perhaps, in a growing economy such
as India, attracting clients is a lesser problem. The bigger challenge and
determinant of success is the ability to attract, develop, retain & deploy
competent staff.

Today, the
Indian economy is doing well and the rising tide has lifted up all boats. It is
the right time to invest in internal competencies, put in place robust
processes and build scale, as that alone will help provide consistent quality
and value to the client, even when, inevitably, the tide turns. As Warren
Buffet said, “it is only when the tide goes down that you find out who is
swimming naked”.

Eventually,
clients will pay based on their perception of the value they have received.
Goods are consumed but services are experienced. In order to win client loyalty
and enhance reputation, CA firms will have to focus on customer experience. It
is said that: Satisfaction = Perception – Expectation. When a
client gives an assignment, he has certain expectations as to the quality of
service he ought to receive. At the end of the assignment, if the client
perceives that his total experience is better than his initial expectation,
then his satisfaction quotient remains high. In other words, if one can deliver
more than what was expected by the client, it helps cement relationships. One
of the best compliments is when a client introduces you as one who “delivers
more than what he promises”.

Standardisation
to leverage growth

CA firms need
to standardise their processes and procedures for rendering professional
services. Even complex assignments can be broken down to simple executable
steps. These steps can be standardised and templates/checklists can be prepared
for their execution. This would help in delegation of work, resulting in
improved efficiency in its execution. Of course, professional work requires
intellectual application and cannot and should not be totally standardised. However,
the portion that can be standardised – and most often this is the major portion
of the total work – should be standardised, so that the senior team can focus
on the critical issues where the actual value addition happens.

As the firm grows, standardisation also helps
maintain service standards and consistency in the stand and position taken by
the firm across locations and across partners in technical, legal, statutory
and operational matters.

Linked to
standardisation is institution building and positioning of the firm. A client
operating from multiple locations is happy to deal with a firm that can support
him in all the locations, but would necessarily expect the same service level.
Standardisation gives him that look and feel of consistency and assurance that,
across locations and partners, the service level will remain the same.

Professional
firms do rely on the individual brilliance and charisma of their partners.
However, to ensure continuity and to achieve smooth succession, it is important
to give confidence to the client that the firm, as an institution, will deliver
quality service in a predictable manner on a consistent basis. As Aristotle
said, “We are what we repeatedly do. Excellence, then, is not an act, but a
habit”.

We have
unfortunately seen many examples of reputed firms headed by highly respected
professionals wither away once that professional has completed his innings. One
of the critical requirements of growth is to build trust and confidence in the
institution, and not just in a particular individual. Standardisation goes a
long way in institution building.

Focus on
training and quality

CA firms are
integral part of the knowledge economy and can deliver quality service only if
they have trained, competent and motivated staff. Firms that intend to grow and
remain relevant will have no choice but to invest in their human resources.
Partners can leverage their ability to execute more work by delegating it to
competent trained juniors. Standardisation of work coupled with regular training
of staff would help a CA firm reach its full potential.

In order to
reap the maximum benefit of training, one has to create an atmosphere where
staff can work at their optimum level. High salary is only one facet of
motivation. If the staff has independence, challenging work, and a nurturing
environment, it will go a long way in retaining talent. A formal unbiased
appraisal system with 360 degree feedback mechanism, coupled with mentoring,
would help staff understand the expectations of the firm and do course
correction, when required. It would also help in the partners understanding the
aspirations, expectations and problems faced by the staff, creating a virtuous
circle. A well-defined path for rising in the ranks of the firm would provide
motivation and a sense of belonging.

The staff
members constantly deal with the staff of the client and often gain invaluable
insights relating to client expectations, opportunities for new work and
weaknesses in delivery of service. Honest feedback from the staff would be of
immense value in initiating remedial and even strategic decisions.

A formal Human Resource (HR) approach will
ensure that all issues relating to staff are formally and systematically
managed. This will ensure that small irritants are addressed promptly without
festering into deeper problems. It will also result in a feedback system, where
information will flow both ways from management to staff and vice versa.

It is a common
complaint of CA firms that there is tremendous resistance from clients to fee
increases, and there is a hanging sword of losing assignments to fellow
professionals willing to work at a lower fee. There may be some truth in this,
but the fact remains that most clients do not change their CA unless there are
compelling reasons to do so, and fees is rarely one of them. CA firms should
focus on enhancing the quality of their service by knowledge building and
thereby raising the bar on efficiency. If the firm renders service at the
highest level of professional expertise, fees should never be a problem. The
problem is when CA firms demand premium fees without building on quality and
excellence.

Position your
firm

Further, the CA
firm should be clear about the area of practice that it intends to occupy and
the value proposition that it brings to the table. The operational strategy,
the pricing decision, the HR policies will all flow from this understanding.

David H.
Maister discusses a very interesting concept in his book entitled “Managing the
Professional Service Firm”. The services that professional firms render can be
broadly classified as:

Brains (Expertise) practice: Hire us because we
are smart.Generally,
these are non-recurring assignments where the stakes are high and the client is
willing to pay a premium price, but wants the highest level of professional
expertise. The execution of the assignment would typically require intense
involvement of the partner and lightning quick response time. The assignment
would require innovative, out of the box thinking with minimal scope of
standardisation and downward delegation.

Grey Hair (Experience) practice: Hire us because
we have been through this before: Most medium and small CA firms fall under this
category. They have the experience and have done similar assignments many times
over. It could be statutory audit or other recurring work like filing a tax
return or attending a scrutiny assessment. Each assignment may have its unique
features, requiring partner time, but also a large component that can be
standardised and delegated.The clients may believe that they can get the same
level of service or in any case have the same end result achieved by going to
another professional firm. Relationship, trust and comfort levels of the client
play a major role in ensuring an enduring relationship.

Procedural (Efficiency) practice: Hire us because
we know how to do this and can deliver it efficiently: This practice could be akin to
business process outsourcing. Companies may want to transfer certain processes
to a professional firm as they may have dedicated and trained staff to do these
functions. These assignments would be repetitive and would necessarily need to
be standardised, with only exceptional matters required to be escalated to
seniors or partners’ attention. Profitability would be achieved by increasing
operational efficiency and quick turnaround would be the name of the game.

Firms that
carry out “Efficiency work” cannot expect the fee scales of the “Expertise”
firms. However, they could achieve the same level of earnings by improving
internal efficiencies, standardising, streamlining processes, and putting in
place quality review systems to ensure that mistakes are minimised and/or
detected early. It is not that any one of the above areas of practice is
preferable to the other and a CA firm may be in more than one of the above
spaces. The point is that the strategies, focus and approach would necessarily
have to be different for each of the above-mentioned areas.

Managing
knowledge

Professional
firms generate a great deal of knowledge material, which perhaps is one of
their most valuable assets. Yet, most often, there is no well-defined system or
process to manage this knowledge base efficiently without compromising
security. As the firm grows, the same research work or knowledge material
prepared by one partner/team is likely to be duplicated by other partners and
other locations. This results in not just inefficiency, but also exposes the
firm to risk due to different partners potentially taking a different position
on the same technical point. Managing knowledge and creating a structure where
this knowledge is assimilated, stored, updated and shared by all partners and
senior staff, easily and seamlessly can become a differentiator between a
successful firm and just any other firm.

Adopting technology

We are living
in times of technology revolution and yet many CA firms have failed to
adequately harness the power of technology. Size and scale would give CA firms
the ability to invest in technology that enables them to leverage their
professional expertise many times over. It would enable them to computerise and
delegate the repetitive tasks or tasks that require data mining and computer
aided analytics, leaving time to concentrate on matters requiring professional
acumen. In addition, technology can be used to analyse information and generate
reports in ways not possible until now, both with regard to client servicing
and practice management. Of course, technology poses its own threats and hence,
every upgradation should address concerns about data security.

CA firms should
make innovative use of technology to stay ahead of the curve and not
grudgingly, because it is no longer possible to function without it.

Think Global

In times where
the world has become a village, CA firms cannot remain local when practically
all their clients – big or small- have international connects. They will have
to maintain a global perspective, while enhancing their local expertise, so
that they can advice local businesses looking to expand globally and global
businesses looking to come to India.

Perhaps, the
obvious choice is to become part of an international network or association.
This sends a strong and clear message that your firm has the reach and connects
to handle cross border transactions.

Being part of
an international association gives the firm a chance to interact with other
professional firms from all over the world and imbibe the best of professional
practices across countries and continents. It gives an understanding that there
are many paths to professional excellence and it is for each firm to choose the
path that most suits its local environment and specific growth aspirations.

Attending the
meetings of the international association also provides an opportunity to bond
closely with fellow professionals and develop close friendships. This helps
both parties to understand the capabilities, practice standards and ethical
values followed by the respective firms. Clients often look up to a CA as a
confidant and a guide for all their problems and needs.

The CA firm can
recommend a reliable foreign firm in an alien jurisdiction with much greater
confidence, when it has interacted with the partners of such firm personally.
Such an international association also creates a framework for doing joint assignments requiring professional expertise in multiple geographical
locations. Working together is much
easier and rewarding, when parties know each other at a personal level.

The truth is
that, insular domestic practice will fall short of client needs and expectation
and will struggle to
remain relevant.

To sum up

We are living
in exciting times where the environment in which we operate is constantly
changing. This throws up tremendous opportunities; but to capture them, CA
firms will have to take strategic decisions, be proactive and willing to
constantly adapt and innovate. The future will belong to those who break free
from old dogmas and are willing to constantly challenge themselves to achieve
excellence. _

shailesh.kwebmaker

When Negligence/Lapses Become Knowing Frauds? Lesson From The Price Waterhouse Order

SEBI’s Order – whether and when mere
negligence amounts to connivance to fraud?

SEBI’s order in Price Waterhouse’s case (of
10^th January 2018) is a worrisome precedent not just for auditors,
but also for almost every person associated with securities markets including
independent directors and CFOs from whom certain standards of care are expected
in the discharge of their duties. The issues are :

1. When can a person be held
to have committed fraud?

2. Does not holding a person
guilty of fraud require a much higher and stricter benchmark of proving `mens
rea’ (i.e. guilty mind/wilful act) beyond reasonable doubt? SEBI has
held that in case of auditors, under certain circumstances proving `mens rea’
is not required.

Let us put this in a different way. What
would be the consequence to a person who has exercised less than `due care’
whilst performing his duties? The issue is : Would he be liable of negligence
or fraud? This is because the consequences for both would be different and they
can be more severe for fraud.

SEBI has effectively held that a series of
such negligent acts would amount to fraud under certain circumstances. This is
by applying a lower benchmark and test of ‘preponderance of probabilities’,
instead of proving mens rea beyond reasonable doubt.

The effect of this is far reaching. Take
another category, that is directors/independent directors. The Companies Act,
2013 and the SEBI LODR Regulations both provide for comprehensive duties of
directors. Will a director who performs his duties short of `due care’ be held
to have participated in `fraud’.

SEBI’s order is of course under challenge
and it could be some time before a final resolution as to whether the findings
in the order are upheld or reversed. However, considering that SEBI has relied
on relevant rulings of the Supreme Court and the Bombay High Court, it will be
necessary to examine the findings in the order and the reasoning for the
punishment. Needless to emphasise, for the purpose of this article, the
findings in the SEBI’s order are presumed to be true and the focus is on the
principles enunciated.

Brief background

While the Satyam case is widely known, SEBI
summarises some of its findings in the order. It is stated that a more than Rs.
5000 crore shown as cash/bank balances in balance sheet of Satyam was
non-existent and hence fraudulently stated. Similarly, the revenues and profits
too were overstated for several years, which resulted in over statement of
cash/bank balances. The question before SEBI was : whether the auditors were
aware of such falsification and connived with the management? or whether their
non-detection of such falsification was on account of being merely negligent?

Negligence vs. connivance

Why does it matter whether the role of the
auditors of Satyam (“the Auditors”) was of being merely negligent or whether
they had connived in such falsification? When SEBI initiated action against the
auditors, seeking to, inter alia, debar them from acting as auditors for
a specified period, the jurisdiction of SEBI to act against auditors was
challenged before the Bombay High Court. It was contended that only the
Institute of Chartered Accountants of India could act against auditors who are
chartered accountants, for not carrying out their duties in accordance with
professional standards, and not SEBI. However, the Bombay High Court rejected
this argument, but with a condition. It effectively held that if it was a mere
case of not adhering to prescribed professional standards while carrying out
the audit, SEBI may not have any jurisdiction. However, if it could be shown
that the auditors had knowingly participated or connived in the fraud, then
SEBI could have jurisdiction.

The Bombay High Court observed in Price
Waterhouse & Co. vs. SEBI ([2010] 103 SCL 96 (Bom.)), “If it is
unearthed during inquiry before SEBI that a particular Chartered Accountant in
connivance and in collusion with the Officers/Directors of the Company has
concocted false accounts, in our view, there is no reason as to why to protect
the interests of investors and regulate the securities market, such a person
cannot be prevented from dealing with the auditing of such a public listed Company.”

It further said, “In a given case, if
ultimately it is found that there was only some omission without any mens rea
or connivance with anyone in any manner, naturally on the basis of such
evidence the SEBI cannot give any further directions.” Thus, it is not
enough to show that the auditors had not followed the prescribed professional
standards but it is also necessary to establish that they had done this in
connivance with and in collusion with the management.

Supreme Court on “connivance” vs.
“negligence”

In SEBI vs. Kishore R. Ajmera ([2016] 66
taxmann.com 288 (SC)), the Supreme Court had examined this issue in context
of role of stock brokers vis-à-vis acts of their clients. Stock brokers
too have to follow certain norms and code of conduct. Stock brokers are of
course, unlike auditors, registered and regulated directly by SEBI. The
observations and conclusions of the Court on when negligence becomes connivance
are applicable in the present case too. The Court observed as follows (emphasis
supplied):

“Direct proof of
such meeting of minds elsewhere would rarely be forthcoming. The test, in our considered view, is one of
preponderance of probabilities so far as adjudication of civil liability
arising out of violation of the Act or the provisions of the Regulations framed
thereunder is concerned. Prosecution under Section 24 of the Act for violation
of the provisions of any of the Regulations, of course, has to be on the basis
of proof beyond reasonable doubt. ……Upto an
extent such conduct on the part of the brokers/sub-brokers can be attributed to
negligence occasioned by lack of due care and caution. Beyond the same,
persistent trading would show a deliberate intention to play the market.”

The Court thus laid down certain important
criteria. Firstly, it made a distinction between proceedings for adjudication
of civil liability and for prosecution. The present case, it may be
recollected, was not of prosecution. The Court said that the criteria here is
`preponderance of possibilities’. It also generally explained that to some extent,
a default can be attributed to negligence. But persistence of negligence will
show a deliberate intention to do so. This is the criteria SEBI applied in
SEBI’s Order.

How did SEBI hold the auditors to have acted
in connivance with management?

SEBI found that the Auditors had not carried
out the audit in accordance with the prescribed standards. The issue is : Does
this amount to mere negligence or does this amount to acting this in connivance
with the management? SEBI examined the audit process followed from time to time
and made the following pertinent observations and conclusions:

1. “There can be only two
reasons for such a casual approach to statutory audit – either complacency
or complicity.”

2. “I find that while the
Noticees have justified their acts by selectively quoting from various AAS, the
marked departures from the spelt-out Auditing standards and Guidance Notes are
too stark to ascribe the colossal lapses on the part of auditors to mere
negligence. It is inconceivable that the attitude of professional skepticism
was missing in the entire exercise spanning over 8 long years.”

3. ?”All these factors turn the needle of suspicion away from negligence
to one of acquiescence and complicity on the part of the auditors.”

4. “The preceding paragraphs
have unambiguously shown that there has been a total abdication by the auditors
of their duty to follow the minimum standards of diligence and care expected
from a statutory auditor, which compels me to draw an inference of malafide and
involvement on their part.

5. “The auditors were well
aware of the consequences of their omissions which would make such accumulated
and aggregated acts of gross negligence scale up to an act of commission of
fraud for the purposes of the SEBI Act and the SEBI (PFUTP) Regulations.”

Making the above observations, and recording
a finding of repetitive non-observance of certain professional auditing
standards, SEBI held that the acts/omissions were not merely negligence but
amounted to connivance in the commission of fraud. It thus issued directions of
debarment, disgorgement of fees, etc. against the Auditors.

Conclusion and relevance for other persons
associated with the securities markets

Though this is not the first case to be
dealt with in this manner, it is obvious, considering the detailed analysis and
the stakes involved, that those involved with listed companies are being
closely examined. Further, the principles now well settled will surely be
followed in future cases.

There are many persons – some registered
with SEBI and some not – who may need to take note of this. Any person who is
expected to observe some standards of behaviour whilst performing his duties in
relation to securities markets will have to take, if one may say, a little more
than `due care’.

Directors of companies, particularly
independent directors, are one such group of persons. The Companies Act, 2013
and the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015
prescribe the role of the Board/directors/independent directors in great detail.
A director may not have actually participated in a fraud, but if he does not
perform his duty with diligence expected of a person of his
background/expertise and if this happens repeatedly, he may be subject to such
action by SEBI.

Registered intermediaries of various types
such as stock brokers, portfolio managers, investment advisors, etc. all
too would have cause for concern.

Compliance Officers and CFOs are yet another
category who have a prescribed role under various SEBI Regulations. Defaults by
them may make them subject to action by SEBI.

Needless to emphasise, much will also depend
on the facts of the case.

It needs to be reiterated for emphasis
that, for initiating prosecution, a higher standard of proving mens rea beyond
reasonable doubt is still required. However, the consequences of SEBI orders of
debarment/disgorgement by itself can be harsh enough in terms of loss of
livelihood, monetary loss and loss of reputation. _

shailesh.kwebmaker

Companies Act: Operation Delyening

Introduction

A bariatric surgeon is one who cuts away
layers of fat from an obese person in order to have a slimmer structure. The
Ministry of Corporate Affairs (“MCA”) has also donned the role of such a
surgeon by trimming away vertical layers of subsidiaries (or step-down
subsidiaries) in order to present a leaner and clearer corporate structure. Its
scalpel for this highly impactful operation was the Companies (Amendment
Act), 2017 to the Companies Act, 2013 (“the Act”) coupled with the
Rules issued under the Act. The Amendment Act has introduced several changes to
the Act but the one which had the most disruptive effect is in fact not a part
of the Amendment Act. Initially, the Amendment Bill had decided against
restricting vertical layers of subsidiaries but subsequently on account of the
action against shell firms and other similar events, the MCA decided to retain
the restriction in the Amendment Act. Thus, the Amendment Act does not amend
the existing position in the Companies Act, 2013 of restricting the number of
layers of vertical subsidiaries.

Amendment

The original definition of section 2(87) of the Act which defined the
term “subsidiary” provided that a subsidiary in relation to a
company, which was the holding company, meant one in which the holding company
controlled the composition of the board of directors or exercised or controlled
more than half the total share capital either on its own or together with its
subsidiaries. The definition as it stood had generated several problems since
even a passive investor, e.g., a private equity investor, who owned more than
50% of the total share capital but not 50% of the total voting power was
treated as the holding company of the investee company. This created unique
problems for several investors and investees alike.

This definition was amended by the Amendment
Act to replace total share capital with total voting power.
Hence, the Amendment restores the old position, i.e., in order to be treated as
a subsidiary, the holding company must control more than 50% of the total
voting power and not merely 50% of the total capital. Accordingly, all shares
not carrying voting rights, e.g., non-voting shares, preference shares, etc.,
would be ignored while determining whether there is a holding-subsidiary
relationship between 2 companies.

The proviso to this definition provides that
such classes of holding companies as may be prescribed by the MCA shall not
have more than the prescribed number of layers of subsidiaries. The Companies
(Amendment) Bill, 2016 sought to delete this proviso and permit holding
companies to have as many layers as they desired. However, when the Bill was
passed by the Lok Sabha this deletion was dropped, i.e., the original position
of restriction in number of layers of subsidiaries, was retained.

Rules

Pursuant to the proviso being retained, the
MCA notified the Companies (Restriction on Number of Layers) Rules,
2017 (“the Rules”) on 20^thSeptember 2017. The Rules
provide that on and from 20^th September 2017, a company cannot have
more than 2 layers of subsidiaries. A layer in relation to a holding company
has been defined to mean one or more subsidiaries. A layer thus, is a vertical
layer of a subsidiary. However, in computing the limit of 2 layers, 1 layer
comprising of one or more wholly owned subsidiaries is excluded. Thus, the
total number of layers which a company can have is 1 + 2 = 3, i.e., 1 layer of
wholly owned subsidiaries + 2 layers of other subsidiaries which may or may not
be wholly owned. For instance, HCo has 5 wholly owned subsidiaries – A to E.
All of these would constitute 1 layer which would be exempted. Each of these
wholly owned subsidiaries can now incorporate 2 vertical layers, e.g., A can
incorporate A1 and A1, in turn, can have A2. A1 and A2 would constitute 2
vertical layers in relation to HCo. However, A2 cannot incorporate A3 since
that would mean that HCo would violate the prescribed limits. It may be noted
that the restriction is on vertical layers and not horizontal subsidiaries.
Thus, in the above example, instead of 5 subsidiaries, A to E, HCo can have
many more direct subsidiaries (whether 100% or less), say, A to Z. However, the
number of step-down subsidiaries would be limited as per the Rules.

Section 2(87) provides that company includes
a body corporate and hence, the definition of subsidiary would even encompass a
foreign body corporate which is a subsidiary of the Indian holding company.
Also, a subsidiary in the form of a Limited Liability Partnership, being a body
corporate, would be covered.

Gateways

The Rules do not apply to the following
types of companies:

(a) a Bank

(b) a Systemically Important
Non-Banking Finance Company, i.e., NBFCs whose asset size is of Rs. 500 cr. or
more as per its last audited balance sheet.

(d) a Government Company

The Rules provide grandfathering to existing
layers of subsidiaries even if they are in excess of the limits prescribed by
the Rules. For availing of this protection, holding companies were required to
file a prescribed return with the Registrar of Companies latest by 17^thFebruary
2018. The protection further provided that after the commencement of the Rules,
such a holding company cannot have any additional layers over and above those
which have been grandfathered. Further, if the existing layers are reduced
after the commencement of the Rules, then it cannot have new layers over and
above the limit prescribed by the Rules. To give an illustration, HCo had 5
layers of subsidiaries prior to the enactment of the Rules. These layers would
be protected by the grandfathering provisions and can continue. However, HCo
cannot incorporate any fresh 6^th layer of subsidiary.If HCo were to
sell the shares of one of the subsidiaries and be left with 4 layers then it
cannot now incorporate any fresh layer of subsidiaries since that would again
violate the provisions of the Rules, but it can continue with the 4 layers
which have been grandfathered.

Another exemption provided by the Rules is
that the limit of 2 layers would not affect a company from acquiring a company
incorporated abroad which already has subsidiaries beyond 2 layers and these
are allowed under the laws of such foreign country. However, this exemption is not provided if such a
foreign company desires to subsequently set up multiple layers of foreign
subsidiaries. Thus, it would not be possible to have multiple foreign layers
even if the foreign laws were to permit them.

Impact Analysis

The Rules would severely impact the creation
of Special Purpose Vehicles (“SPVs”) which are very prevalent especially
in sectors such as, infrastructure, real estate, roads, etc. In these
sectors, it is a common practice to have multiple layers for different
projects. For instance, a real estate company may have 2 subsidiaries, one for
commercial projects and one for residential. Within each of them, there may be
holding companies for different regions, e.g., one for Mumbai, one for Delhi,
one for Chennai, etc. Under each regional holding company, there may be
an SPV for a specific project. The benefit of a layered structure is that it
facilitates value unlocking at multiple levels. A strategic investor/project
partner can invest at the SPV level. A financial investor who is interested
only in residential projects in Mumbai can invest at the Mumbai layer level
since he would then get access to all the projects in Mumbai. Similarly,
investors could invest at the residential level or even at the corporate level.Such
structuring would be constrained by the limit on the layers. Also, in a case
where the 1^st layer is not of wholly owned subsidiaries, the limit
would be of only 2 layers and not 1+2 =3.

Another area which would be affected is that
of outbound investment. It is quite common for Indian companies to have
multiple layers when investing abroad. For instance, an Indian company may have
an Intermediate Holding Company (IHC) in a tax haven, followed by a Regional
Holding Company (RHC) say, one in a European country for housing all European
ventures and another in an African country for all African ventures. Under the
RHC would be the countrywise SPVs. These layers would now also have to toe the line
laid down under the Rules. However, on a related note, the Reserve Bank of
India also does not easily approve of multi-layered structures for outbound
investments involving the use of multiple layers of foreign SPVs. Thus, the
Companies Act restrictions and the RBI’s views under the Foreign Exchange
Management Act are now similar.

Same Difference

A similar restriction already existed in
section186 (similar to section 372/372A of the Companies Act, 1956) of the Act.
According to this section, a company cannot make an investment through more
than two layers of investment companies. Thus, any company, desiring to make an
investment, can do so either directly or through an investment company or
through one investment company followed by a 2^nd layer of investment
company. However, it cannot have a 3^rdlayer of investment company
under the 2^nd layer of the investment company.

It may be noted that the prohibition is on
having more than 2 layers of investment companies and hence, we need to
ascertain what constitutes an investment company? The section
defines an ‘investment company’ to mean a company whose principal
business is acquisition of shares, debentures or securities.

Secondly, it must be a company whose principal
business is acquisition of securities. What is principal business has now
been defined by the Amendment Act. According to these tests, a principal
business is defined if it satisfies the following conditions as per its audited
accounts:

(i) Its assets in the form of
investment in shares, debentures or other securities constitute not less than
50% of its total assets; OR

(ii) Its income from investment
business constitutes not less than 50% of its gross income.

The Act expressly provides that the
restriction on two layers of investment companies even applies to an NBFC whose
principal business is acquisition of securities.

The investor company could be an investment
or an operating company, but it cannot route its investment via more than 2
layers of investment companies. If the investment is routed through an
operating company or one whose principal business is not acquisition of
securities, then the restriction u/s. 186 on 2 layers would not apply.

The prohibition on making investments only
through a maximum of two layers of investment companies will not affect the
following two cases:

(i) a company from acquiring any other company incorporated in a
country outside India if such other company has investment subsidiaries beyond
two layers as per the laws of such country; or

(ii) a subsidiary company from having any investment subsidiary for
the purposes of meeting the requirements under any law or under any rule or
regulation framed under any law for the time being in force.

Certain
Government companies have also been exempted from this provision.

The Rules u/s. 2(87) provide that they are
not in derogation to the exemptions contained u/s. 186(1). Thus, the Rules
would apply equally to an investment company as long as they are not in
derogation of the proviso to section 186(1).

One may compare the restrictions contained
in section 186 vs. section 2(87) as follows:

Details

Section 186

Section 2(87)

Restriction on

More than 2 layers of investment companies

More than 2 layers of subsidiaries

Applies to

All companies, including NBFCs but excluding certain
Government companies.

All companies other than banks, NBFCs, insurance companies,
Government companies.

Type of layers prohibited

Only investment companies – not applicable to operating
companies

All types of subsidiaries, whether operating or investment.

Companies or body corporates?

Only companies

All types of subsidiaries, whether companies or body
corporates.

Effective from

1^st April 2014

20th September 2017, the date from which the Rules were notified.

Conclusion

India Inc. is going to find it tough to
grapple with these provisions more so when it is used to having multiple
layers. The objective seems to be to cut through the opacity haze of multiple
layers and provide more transparency to the regulators to find out who is the
real investor. Clearly, thin is in!! _

shailesh.kwebmaker

Companies (Amendment) Act, 2017 – Important Amendments Which Have Relevance From Audit

In the first part, I have covered
definitions along with its impact and also reasons/ background for such
amendments. In this article, I propose to cover amendments which are of
importance and relevance from Audit of small and medium-sized companies and issues
one may face while carrying their audit. I have thus avoided matters applicable
to listed companies

I. Public deposits:

Provisions in brief prior to Amendment	Provisions after Amendment	Impact / Implications/ Remarks
Presently, companies are required to deposit an amount of not less than 15% of the deposits maturing during the financial year and financial year next following which is to be kept in a Scheduled Bank and called as Deposit Repayment Reserve Account. ( Section 73)	Companies Amendment Act 2017 (CAA 2017) now provides that an amount of not less than 20% of the deposits maturing during the following financial year is to be kept in a Scheduled Bank and called as Deposit Repayment Reserve Account.	Companies Law Committee ( CLC/ Committee) Observations in Para 5.1 of the report are self-explanatory which read as under : The Committee felt that though the provision was a safeguard for depositors, it would increase the cost of borrowing for the company as well as lock-up a high percentage of the borrowed sums. Accordingly, the requirement for the amount to be deposited and kept in a scheduled bank in a financial year should be changed to not less than twenty percent of the amount of deposits maturing during that financial year, which would mitigate the difficulties of companies, while continuing with reasonable safeguards for the depositors who have to receive money on maturity of their deposits. Currently Rule 13 of Companies (Acceptance of Deposits) Rules, 2014 provides that amount of deposit pursuant to these rules shall not fall below fifteen per cent. of the amount of deposits maturing, until the end of the current financial year and the next financial year. This provision in the case of larger deposit accepting companies required huge amount to be blocked in deposits since it required two financial years to be considered for maintenance of liquid assets . Thus amendment made now will help in reducing the financial burden of deposit accepting companies especially in the falling interest rate scenario.
Presently, companies accepting deposits are required to get the deposits insured.	This requirement is done away with.	CLC Observations in Para 5.2 of the report are self-explanatory which read as under : It was also noted by the Committee that as on date none of the insurance companies is offering such insurance products. Considering the above situation, the provisions of Section 73(2) (d) along with relevant Rules are omitted.
Presently, companies accepting deposits are required to certify that the company has not committed any default in the repayment of deposits accepted either before or after the commencement of this Act or payment of interest on such deposits.( Section 73)	CAA 2017 provides that companies accepting deposits are required to certify that the company has not committed any default in the repayment of deposits accepted either before or after the commencement of this Act or payment of interest on such deposits and where a default had occurred, the company has made good the default and a period of five years has elapsed since the date of making good the default.	Thus post-amendment, Company can accept deposits after 5 years from the date of making good such default (In repayment of deposit and/or interest). CLC Observations in Para 5.3 of the report are self-explanatory which read as under : The Committee noted that imposing a lifelong ban for a default anytime in the past would be harsh. Therefore, it was recommended that the prohibition on accepting further deposits should apply indefinitely only to a company that had not rectified/made good earlier defaults. However, in case a company had made good an earlier default in the repayment of deposits and the payment of interest due thereon, then it should be allowed to accept further deposits after a period of five years from the date it repaid the earlier defaulting amounts with full disclosures.
Currently, deposits accepted and interest thereon, which remained unpaid at the commencement of Companies Act, 2013 was required to be paid within one year or before the expiry of the stipulated period, whichever was earlier. ( Section 74)	CAA 2017 now provides that such amounts shall be repaid within three years or before the expiry of the stipulated period, whichever was earlier.	Under Companies Act 2013, deposits are allowed to be accepted by only eligible companies and this has put lot of restrictions on the companies which had accepted deposits under Companies Act 1956 . To overcome the difficulties faced by such companies, repayment is now permitted up to 3 years or maturity , whichever is earlier.
Currently, Section 76A(1)(a) provides that in respect of contraventions of Section 73 or 76, the company shall, in addition to the payment of the amount of deposit or part thereof and the interest due, be punishable with fine which shall not be less than one crore rupees but which may extend to ten crore rupees;	CAA 2017 provides that a company will be punishable with a fine of one crore rupees or twice the amount of deposit accepted by the company, whichever is lower.	Normally, rules of Penalty require that Penalty be imposed with reference to the quantum of offence committed. Thus flat penalties provided under the current provisions were disproportionate to the offence committed and hence this amendment seeks to correlate penalty with the underlying deposit.
Currently, it is provided that an officer of the company who is in default shall be punishable with imprisonment or fine.	Now it is provided that an officer of the company who is in default shall be punishable with imprisonment and fine.	In the process, the offence has been made non-compoundable.

Provisions in brief prior to Amendment

Provisions after Amendment

Impact / Implications/ Remarks

Presently,
companies are required to deposit an amount of not less than 15% of the
deposits maturing during the financial year and financial year next following
which is to be kept in a Scheduled Bank and called as Deposit Repayment
Reserve Account. ( Section 73)

Companies
Amendment Act 2017 (CAA 2017) now provides that an amount of not less than
20% of the deposits maturing during the following financial year is to be
kept in a Scheduled Bank and called as Deposit Repayment Reserve Account.

Companies
Law Committee ( CLC/ Committee) Observations in Para 5.1 of the report are
self-explanatory which read as under :

The
Committee felt that though the provision was a safeguard for depositors, it
would increase the cost of borrowing for the company as well as lock-up a
high percentage of the borrowed sums. Accordingly, the requirement for the
amount to be deposited and kept in a scheduled bank in a financial year
should be changed to not less than twenty percent of the amount of deposits
maturing during that financial year, which would mitigate the difficulties of
companies, while continuing with reasonable safeguards for the depositors who
have to receive money on maturity of their deposits.

Currently
Rule 13 of Companies (Acceptance of Deposits) Rules, 2014 provides that
amount of deposit pursuant to these rules shall not fall below fifteen per
cent. of the amount of deposits maturing, until the end of the current
financial year and the next financial year.

This
provision in the case of larger deposit accepting companies required huge amount
to be blocked in deposits since it required two financial years to be
considered for maintenance of liquid assets . Thus amendment made now will
help in reducing the financial burden of deposit accepting companies
especially in the falling interest rate scenario.

Presently,
companies accepting deposits are required to get the deposits insured.

This
requirement is done away with.

CLC
Observations in Para 5.2 of the report are self-explanatory which read as
under :

It
was also noted by the Committee that as on date none of the insurance
companies is offering such insurance products.

Considering
the above situation, the provisions of Section 73(2) (d) along with relevant
Rules are omitted.

Presently,
companies accepting deposits are required to certify that the company has not
committed any default in the repayment of deposits accepted either before or
after the commencement of this Act or payment of interest on such deposits.(
Section 73)

CAA
2017 provides that companies accepting deposits are required to certify that
the company has not committed any default in the repayment of deposits
accepted either before or after the commencement of this Act or payment of
interest on such deposits and where a default had occurred, the company
has made good the default and a period of five years has elapsed since
the date of making good the default.

Thus
post-amendment, Company can accept deposits after 5 years from the date of
making good such default (In repayment of deposit and/or interest).

CLC
Observations in Para 5.3 of the report are self-explanatory which read as
under :

The
Committee noted that imposing a lifelong ban for a default anytime in the
past would be harsh. Therefore, it was recommended that the prohibition on
accepting further deposits should apply indefinitely only to a company that
had not rectified/made good earlier defaults.

However,
in case a company had made good an earlier default in the repayment of
deposits and the payment of interest due thereon, then it should be allowed
to accept further deposits after a period of five years from the date it
repaid the earlier defaulting amounts with full disclosures.

Currently,
deposits accepted and interest thereon, which remained unpaid at the commencement
of Companies Act, 2013 was required to be paid within one year or before the
expiry of the stipulated period, whichever was earlier. ( Section 74)

CAA
2017 now provides that such amounts shall be repaid within three years or
before the expiry of the stipulated period, whichever was earlier.

Under
Companies Act 2013, deposits are allowed to be accepted by only eligible
companies and this has put lot of restrictions on the companies which had
accepted deposits under Companies Act 1956 .

To
overcome the difficulties faced by such companies, repayment is now permitted
up to 3 years or maturity , whichever is earlier.

Currently,
Section 76A(1)(a) provides that in respect of contraventions of Section 73 or
76, the company shall, in addition to the payment of the amount of deposit or
part thereof and the interest due, be punishable with fine which shall not be
less than one crore rupees but which may extend to ten crore rupees;

CAA
2017 provides that a company will be punishable with a fine of one crore
rupees or twice the amount of deposit accepted by the company, whichever is
lower.

Normally,
rules of Penalty require that Penalty be imposed with reference to the
quantum of offence committed. Thus flat penalties provided under the current
provisions were disproportionate to the offence committed and hence this
amendment seeks to correlate penalty with the underlying deposit.

Currently,
it is provided that an officer of the company who is in default shall be
punishable with imprisonment or fine.

Now
it is provided that an officer of the company who is in default shall be
punishable with imprisonment and fine.

In
the process, the offence has been made non-compoundable.

II. Registration and
Satisfaction of Charges:

Provisions
in brief prior to Amendment

Provisions
after Amendment

Impact
/ Implications/ Remarks

Currently,
the charge holder can register the charge only in case the company fails to
do so within the period specified in section 77, which is 300 days.

CAA
2017 now provides that the person in whose favor the charge has been created
can file the charge on the expiry of 30 days from the creation of charge
where a company (borrower) fails to file such charge

This
amendment is welcome from the point of view of the lender.

Primary
obligation for registration was with the borrower u/s 77 which allowed
creation of charge up to 300 days on payment of additional fees. After such
period, application for condonation was required to be done by the company or
any other person interested in such charge. It was felt that the wordings of
the present section required a waiting period up to 300 days for creation of
charge by the lender. But in the process the charge remained to be registered
and as such loan under the charge remained unsecured. This anomaly is sought
to be removed by this amendment.

A
company was required to report satisfaction of charge within a period of 30
days from the date of such satisfaction failing which an application for
condonation of delay had to be made before the Regional Director.( Section
82)

The
company can now report satisfaction of charge within a period of 300 days.

This
amendment now brings reporting period of satisfaction in line with creation
of charge and as such a welcome measure.

III. Annual Returns to be filed by the Companies:

Provisions
in brief prior to Amendment

Provisions
after Amendment

Impact
/ Implications/ Remarks

Section
92(1) Every company shall prepare a return (hereinafter referred to as the
annual return) in the prescribed form containing the particulars as they
stood on the close of the financial year regarding—

(j)details,
as may be prescribed, in respect of shares held by or on behalf of the
Foreign Institutional Investors indicating their names, addresses, countries
of incorporation, registration, and percentage of shareholding held by them;

Provided
that in relation to One Person Company and small company, the annual return
shall be signed by the company secretary, or where there is no company
secretary, by the director of the company.

Section
92(1):

(a)
clause (c) shall be omitted;

(b)
in clause (j), the words “indicating their names, addresses, countries
of incorporation, registration, and percentage of shareholding held by
them” shall be omitted;

“Provided
further that the Central Government may prescribe abridged form of annual
return for One Person Company, small Company and such other class or classes
of companies as may be prescribed”;

The
details related to disclosing indebtedness and details with respect to
name, address, country of incorporation etc. of FII in the annual return of
the company are also omitted.

It
is further provided that the Central Government may prescribe the abridged
form of annual return for One Person Company (‘OPC’), Small Company and such
other class or classes of companies as may be prescribed.

This
amendment thus seeks to achieve an objective of avoiding duplication of
information.

Further
proviso when implemented will achieve simplicity in the case of companies
proposed to be covered in the proviso.

Section
92(3)

An
extract of the annual return in such form as may be prescribed shall form
part of the Board‘s report.

Section
92(3)

Every company shall place a copy of the
annual return on the website of the company if any, and the web-link of such
annual return shall be disclosed in the Board’s report.”

CAA
2017 has omitted the requirement of MGT-9 i.e. extract of annual return to
form part of the Board’s Report. The copy of annual return shall now be
uploaded on the website of the company if any, and its link shall be
disclosed in the Board’s report.

This
amendment was largely guided by the fact that report of the Board of Directors
was becoming very much lengthier and expensive especially for the listed
companies.

Time
limit of 270 days within which annual return could be filed on payment of the
additional fee has been done away with. It is further provided that a company
can file the annual return with ROC at any time on payment of a prescribed
additional fee.

All
the measures proposed hereinabove are expected to simplify Annual Return
filing process and avoid duplication of information.

;

IV. Dividend:

Provisions in brief prior to Amendment	Provisions after Amendment	Impact / Implications/ Remarks
Presently dividend can be paid u/s 123(1) from : Current Year Profits or Accumulated Profits or from a and b above or From money provided by Central or State Governments pursuant to a guarantee given	A proviso is added as under : “Provided that in computing profits any amount representing unrealized gains, notional gains or revaluation of assets and any changes in carrying amount of an asset or of a liability on measurement of the asset or the liability at fair value shall be excluded; Reserves are clarified as “free reserves” so as to bring clarity as to the source of the dividend.	Consequent upon Ind AS Applicability to Phase I and Phase II companies, this amendment is clarificatory and a welcome measure. This has become essential since one of the sources for payment of dividend is free reserves and definition of free reserves under Section 2 (43) excludes unrealised or notional gains and l credits to such reserves on account of measurement of assets and liabilities at fair value. Thus primary source of reserves being profits are also sought to be brought in line with definition of free reserves for the purpose of determination of distributable profits.
Section 123 (3)The Board of Directors of a company may declare interim dividend during any financial year out of the surplus in the profit and loss account and out of profits of the financial year in which such interim dividend is sought to be declared: Provided that in case the company has incurred a loss during the current financial year up to the end of the quarter immediately preceding the date of declaration of interim dividend, such interim dividend shall not be declared at a rate higher than the	Section 123 (3) The Board of Directors of a company may declare interim dividend during any financial year or at any time during the period from closure of financial year till holding of the annual general meeting out of the surplus in the profit and loss account or out of profits of the financial year for which such interim dividend is sought to be declared or out of profits generated in the financial year till the quarter preceding the date of declaration of the interim dividend:	Dividends are usually payable for a financial year after the final accounts are ready and the amount of distributable profits is available. The dividend for a financial year of the company (which is called ‘final dividend’) is payable only if it is declared by the company at its annual general meeting on the recommendation of the Board of directors. Sometimes dividends are also paid by the Board of directors between two annual general meetings without declaring them at an annual general meeting
average dividends declared by the company during the immediately preceding three financial years.	Provided that in case the company has incurred a loss during the current financial year up to the end of the quarter immediately preceding the date of declaration of interim dividend, such interim dividend shall not be declared at a rate higher than the average dividends declared by the company during immediately preceding three financial years.”	(which is called ‘interim dividend’). [Source: Monograph on Dividend by ICSI ] Thus it is now clarified that Interim dividend will not only mean dividend paid during the financial year but also dividend declared from the closure of financial year till holding of an AGM.

Provisions in brief prior to Amendment

Provisions after Amendment

Impact / Implications/ Remarks

Presently
dividend can be paid u/s 123(1) from :

Current
Year Profits or

Accumulated
Profits or

from
a and b above or

From
money provided by Central or State Governments pursuant to a guarantee given

A
proviso is added as under :

“Provided
that in computing profits any amount representing unrealized gains, notional
gains or revaluation of assets and any changes in carrying amount of an asset
or of a liability on measurement of the asset or the liability at fair value
shall be excluded;

Reserves
are clarified as “free reserves” so
as to bring clarity as to the source of the dividend.

Consequent
upon Ind AS Applicability to Phase I and Phase II companies, this amendment
is clarificatory and a welcome measure.

This
has become essential since one of the sources for payment of dividend is free
reserves and definition of free reserves under Section 2 (43) excludes
unrealised or notional gains and l credits to such reserves on account of
measurement of assets and liabilities at fair value. Thus primary source of
reserves being profits are also sought to be brought in line with definition
of free reserves for the purpose of determination of distributable
profits.

Section
123 (3)The Board of Directors of a company may declare interim dividend
during any financial year out of the surplus in the profit and loss account
and out of profits of the financial year in which such interim dividend is
sought to be declared:

Provided
that in case the company has incurred a loss during the current financial
year up to the end of the quarter immediately preceding the date of
declaration of interim dividend, such interim dividend shall not be declared
at a rate higher than the

Section
123 (3) The Board of Directors of a company may declare interim dividend
during any financial year or at any time during the period from closure of
financial year till holding of the annual general meeting out of the surplus
in the profit and loss account or out of profits of the financial year for
which such interim dividend is sought to be declared or out of profits
generated in the financial year till the quarter preceding the date of
declaration of the interim dividend:

Dividends
are usually payable for a financial year after the final accounts are ready
and the amount of distributable profits is available. The dividend for a
financial year of the company (which is called ‘final dividend’) is payable
only if it is declared by the company at its annual general meeting on the
recommendation of the Board of directors. Sometimes dividends are also paid
by the Board of directors between two annual general meetings without
declaring them at an annual general meeting

average
dividends declared by the company during the immediately preceding three
financial years.

(which is called ‘interim dividend’).

[Source:
Monograph on Dividend by ICSI ]

Thus
it is now clarified that Interim dividend will not only mean dividend paid during
the financial year but also dividend declared from the closure of financial
year till holding of an AGM.

V. Financial Statements:

Provisions in brief prior to Amendment	Provisions after Amendment	Impact / Implications/ Remarks
Section 129(3)- ‘Where a company has one or more subsidiaries, it shall, in addition to financial statements provided under sub-section (2), prepare a consolidated financial statement of the company and of all the subsidiaries in the same form and manner as that of its own which shall also be laid before the annual general meeting of the company along with the laying of its financial statement under sub-section (2):	Revised Section 129(3)- “Where a company has one or more subsidiaries or associate companies, it shall, in addition to financial statements provided under sub-section (2), prepare a consolidated financial statement of the company and of all the subsidiaries and associate companies in the same form and manner as that of its own and in accordance with applicable accounting standards, which shall also be laid before the annual general meeting of the company along with the laying of its financial statement under sub-section (2):	As regards consolidation of accounts, main concern related to the inclusion of associate companies in absence of the specific provisions. This concern now is addressed and consolidation will have to be done even if there is no subsidiary. The consolidated financial statement of the company, its subsidiaries and associates should be in accordance with the applicable accounting standards which is now specifically provided in the section itself.

Explanation.—For the purposes of this subsection, the word ?subsidiary? shall include associate company and joint venture.	This explanation stands deleted after the amendment	This amendment is consequential to the changes mentioned hereinabove.

Provisions in brief prior to Amendment

Provisions after Amendment

Impact / Implications/ Remarks

Section
129(3)-

‘Where
a company has one or more subsidiaries, it shall, in addition to financial
statements provided under sub-section (2), prepare a consolidated financial
statement of the company and of all the subsidiaries in the same form and
manner as that of its own which shall also be laid before the annual general
meeting of the company along with the laying of its financial statement under
sub-section (2):

Revised
Section 129(3)-

“Where
a company has one or more subsidiaries or associate companies, it shall, in
addition to financial statements provided under sub-section (2), prepare a
consolidated financial statement of the company and of all the subsidiaries
and associate companies in the same form and manner as that of its own and in
accordance with applicable accounting standards, which shall also be laid
before the annual general meeting of the company along with the laying of its
financial statement under sub-section (2):

As
regards consolidation of accounts, main concern related to the inclusion of
associate companies in absence of the specific provisions. This concern now
is addressed and consolidation will have to be done even if there is no
subsidiary.

The
consolidated financial statement of the company, its subsidiaries and
associates should be in accordance with the applicable accounting standards
which is now specifically provided in the section itself.

Explanation.—For the purposes of this
subsection, the word ?subsidiary?
shall include associate company and joint venture.

This
explanation stands deleted after the amendment

This
amendment is consequential to the changes mentioned hereinabove.

VI. Reopening of Accounts:

Provisions in brief prior to Amendment	Provisions after Amendment	Impact / Implications/ Remarks
Existing Sec 130 of the Act provides that reopening can be done on the basis of an order from court or tribunal. The said section provides that court or tribunal will give a notice to various regulatory authorities and will take into consideration representations made by such regulatory authorities. However, the said section did not provide for an opportunity of representing to any other concerned party.	CAA, 2017 has now amended the said section to give an opportunity to other persons concerned of making a representation before an order is passed by the tribunal or court.	Presently in the case of reopening, notice was required to be given to various regulatory authorities and court or tribunal is required to take into consideration representations of such regulatory authorities . Surprisingly it did not provide for representation to persons concerned such as auditors even though court/ tribunal had an inherent power to give notice to any other interested parties. This amendment will remove this anomaly since it is now provided in the section itself.

Existing section did not provide the time limit up to which reopening could be done	CAA, 2017 now provides that reopening cannot be done for a period earlier than 8 financial years immediately preceding the current financial year unless Central Government has given a direction under Section 128(5) for maintaining the accounts for a longer period.	Section 128(5) provides for the period for which books are required to be maintained which cannot go beyond 8 financial years immediately preceding current financial year except with the permission of the Central Government. Thus the amendment seeks to align the period of maintenance of books of accounts with the reopening.

Provisions in brief prior to Amendment

Provisions after Amendment

Impact / Implications/ Remarks

Existing
Sec 130 of the Act provides that reopening can be done on the basis of an
order from court or tribunal. The said section provides that court or
tribunal will give a notice to various regulatory authorities and will take
into consideration representations made by such regulatory authorities. However,
the said section did not provide for an opportunity of representing to any
other concerned party.

CAA,
2017 has now amended the said section to give an opportunity to other persons
concerned of making a representation before an order is passed by the
tribunal or court.

Presently
in the case of reopening, notice was required to be given to various
regulatory authorities and court or tribunal is required to take into
consideration representations of such regulatory authorities . Surprisingly
it did not provide for representation to persons concerned such as auditors
even though court/ tribunal had an inherent power to give notice to any other
interested parties. This amendment
will remove this anomaly since it is now provided in the section itself.

Existing
section did not provide the time limit up to which reopening could be done

CAA,
2017 now provides that reopening cannot be done for a period earlier than 8
financial years immediately preceding the current financial year unless
Central Government has given a direction under Section 128(5) for maintaining
the accounts for a longer period.

Section
128(5) provides for the period for which books are required to be maintained
which cannot go beyond 8 financial years immediately preceding current
financial year except with the permission of the Central Government.

Thus
the amendment seeks to align the period of maintenance of books of accounts
with the reopening.

VII. Financial Statements, Board’s report etc.:

Provisions in brief prior to Amendment	Provisions after Amendment	Impact / Implications/ Remarks
The financial statement, including consolidated financial statement, if any, shall be approved by the Board of Directors before they are signed on behalf of the Board at least by the chairperson of the company where he is authorised by the Board or by two directors out of which one shall be managing director and the Chief Executive Officer, if he is a director in the company, the Chief Financial Officer and the company secretary of the company, wherever they are appointed, or in the case of a One Person Company, only by one director, for submission to the auditor for his report thereon.( Section 134)	The financial statement, including consolidated financial statement, if any, shall be approved by the Board of Directors before they are signed on behalf of the Board by the chairperson of the company where he is authorised by the Board or by two directors out of which one shall be managing director, if any, and the Chief Executive Officer, the Chief Financial Officer and the company secretary of the company, wherever they are appointed, or in the case of One Person Company, only by one director, for submission to the auditor for his report thereon .	The amendment provides that the Chief Executive Officer shall sign the financial statements irrespective of the fact whether he is a director or not because Chief Executive Officer is a Key Managerial Personnel, and is responsible for the overall management of the company. Further, since the appointment of a managing director is not mandatory for all companies, it is proposed to insert the words “if any”, after the words “managing director”.

Presently extract of Annual Return is required to be annexed to the Board’s Report. ( Section 134)	Now annual return is to be placed on the website and web address is required to be mentioned in the Board’s report.	The Requirement of having an extract of Annual return (Form MGT-9) has been done away with by placing the copy of annual return on the website of the company (if any) and the web address/ link is to be provided. As mentioned in the Annual Return part above, this seeks to avoid duplication and voluminous information which was associated with report of the Board of Directors.

Right of member to copies of audited financial statement [ Section 136(1) ] A copy of the financial statements, including consolidated financial statements, if any, auditor‘s report and every other document required by law to be annexed or attached to the financial statements, which are to be laid before a company in its general meeting, shall be sent to every member of the company, to every trustee for the debenture-holder of any debentures issued by the company, and to all persons other than such member or trustee, being the person so entitled, not less than 21 days before the date of the meeting:	A provision is now made for a situation where the required copies are sent less than 21 days before the date of the meeting. Accordingly, If the copies of the documents are sent less than 21 days before the date of the meeting, they shall, notwithstanding that fact, be deemed to have been duly sent if it is so agreed by members— (a) holding, if the company has a share capital, majority in number entitled to vote and who represent not less than 95% of such part of the paid-up share capital of the company as gives a right to vote at the meeting; or (b) having, if the company has no share capital, not less than 95% of the total voting power exercisable at the meeting:	Amendment to sub-section (1) of section 136 provides that copies of audited financial statements and other documents may be sent at shorter notice if ninety-five percent of members entitled to vote at the meeting agree for the same. Section 101 of the Act provides that the consent of members holding at least ninety-five percent of the voting power be obtained to call a general meeting at a notice shorter than twenty-one days. For circulation of annual accounts to members, the MCA had clarified by way of a circular dated 21^stJuly 2015 that the shorter notice period would also apply to the circulation of annual accounts. It is now provided in the Amendment Bill itself.

Appointment and Ratification: It was provided that every company shall, at the first annual general meeting, appoint an individual or a firm as an auditor who shall hold office from the conclusion of that meeting till the conclusion of its sixth annual general meeting and thereafter till the conclusion of every sixth meeting. It was further required that the company shall place the matter relating to such appointment for ratification by members at every annual general meeting.( Section 139)	The requirement to place the matter relating to such appointment for ratification by members at every annual general meeting has been removed.	In view of this amendment, controversy as to whether the form is required to be filed with ROC after every ratification stands resolved. Besides, inconsistency between removal (which required Special Resolution and Central Government Approval) and non ratification (which required only Board Approval) stands resolved.

Resignation of auditor: The penalty for non-filing of the return of resignation with the Registrar made the auditor punishable with fine, not less than fifty thousand rupees but which may extend to five lakh rupees.( Section 140)	The penalty for non-filing of the return of resignation with the Registrar shall now make the auditor punishable with fine not be less than fifty thousand rupees or the remuneration of the auditor, whichever is less.	This form filing requirement was to be complied by the Auditor who was resigning. (Form ADT 3).

Eligibility : Presently, it was provided in Section 141(3)(i) as under: The following persons shall not be eligible for appointment as an auditor of a company, namely:- (i) any person whose subsidiary or associate company or any other form of entity, is engaged as on the date of appointment in consulting and specialised services as provided in section 144.	In section 141 of the principal Act, in sub-section (3), for clause (i), the following clause shall be substituted namely:- (i) a person who, directly or indirectly, renders any service referred to in Section 144 to the company or its holding company or its subsidiary company. Explanation.—For the purposes of this clause, the term “directly or indirectly” shall have the meaning assigned to it in the Explanation to section 144.‘	Existing provisions were not very happily worded and gave an impression that Auditor could not provide services referred to in Section 144 to any other company. Amendment now made makes it clear that such services are not to be provided to auditee company or its holding or subsidiary company.
Access to the records : Presently the proviso to Section 143(1) reads as under : Provided that the auditor of a company which is a holding company shall also have the right of access to the records of all its subsidiaries in so far as it relates to the consolidation of its financial statements with that of its subsidiaries.	(i) in sub-section (1), in the proviso, for the words “its subsidiaries”, at both the places, the words “its subsidiaries and associate companies” shall be substituted;	The change now made will enable auditors of the holding company to have right to access records of associate companies. As associate includes, Joint Venture (JV), access will now be available to the records of JVs also.
Internal Financial Controls: Presently as per the provisions of Section 143(3)(i) auditor is required to report : whether the company has adequate internal financial controls system in place and the operating effectiveness of such controls.	Amendment provides as under: in sub-section (3), in clause (i) for the words “internal financial controls system”, the words “internal financial controls with reference to financial statements” shall be substituted;	This amendment is in pursuance of the suggestion of Companies Law Committee in Para 10.11which are worth noting: Section 143 (3) (i) requires the auditor to state in his report whether the company has adequate internal financial controls system in place and the operating effectiveness of such controls. This has to be read with Section 134 (5) (e) on the Directors’ Responsibility Statement which also defines internal financial controls, and Rule 8(5)(viii) of Companies (Accounts) Rules, 2014. Rule 10A of the Company (Audit and Auditors) Rules, 2014, makes the requirement under Section 143(3)(i) optional for FY 14-15 and is mandatory from FY 15-16 onwards. It has been expressed that auditing internal financial control systems by auditors would be an onerous responsibility. It was also expressed that their responsibility should be limited to the auditing of the systems with respect to financial statements only and that this cannot be compared with the responsibility of directors which is wider and can be discharged as they have other resources like internal auditors, etc. who can be used for this purpose. In this regard, the Committee recommended that the reporting obligations of auditors should be with reference to the financial statements. Thus this amendment is now brought in line with the Guidance Note issued by ICAI.

Provisions in brief prior to Amendment

Provisions after Amendment

Impact / Implications/ Remarks

The
financial statement, including consolidated financial statement, if any,
shall be approved by the Board of Directors before they are signed on behalf
of the Board at least by the chairperson of the company where he is
authorised by the Board or by two directors out of which one shall be
managing director and the Chief Executive Officer, if he is a director in the
company, the Chief Financial Officer and the company secretary of the
company, wherever they are appointed, or in the case of a One Person Company,
only by one director, for submission to the auditor for his report thereon.(
Section 134)

The
financial statement, including consolidated financial statement, if any,
shall be approved by the Board of Directors before they are signed on behalf
of the Board by the chairperson of the company where he is authorised by the
Board or by two directors out of which one shall be managing director, if
any, and the Chief Executive Officer, the Chief Financial Officer and the
company secretary of the company, wherever they are appointed, or in the case
of One Person Company, only by one director, for submission to the auditor
for his report thereon .

The
amendment provides that the Chief Executive Officer shall sign the financial
statements irrespective of the fact whether he is a director or not because
Chief Executive Officer is a Key Managerial Personnel, and is responsible for
the overall management of the company. Further, since the appointment of a
managing director is not mandatory for all companies, it is proposed to
insert the words “if any”, after the words “managing director”.

Presently
extract of Annual Return is required to be annexed to the Board’s Report. (
Section 134)

Now
annual return is to be placed on the website and web address is required to
be mentioned in the Board’s report.

The
Requirement of having an extract of Annual return (Form MGT-9) has been done
away with by placing the copy of annual return on the website of the company
(if any) and the web address/ link is to be provided. As mentioned in the
Annual Return part above, this seeks to avoid duplication and voluminous
information which was associated with report of the Board of Directors.

Right
of member to copies of audited financial statement [ Section 136(1) ]

A
copy of the financial statements, including consolidated financial
statements, if any, auditor‘s report and every other document required by law
to be annexed or attached to the financial statements, which are to be laid
before a company in its general meeting, shall be sent to every member of the
company, to every trustee for the debenture-holder of any debentures issued
by the company, and to all persons other than such member or trustee, being
the person so entitled, not less than 21 days before the date of the meeting:

A
provision is now made for a situation where the required copies are sent less
than 21 days before the date of the meeting. Accordingly, If the copies of
the documents are sent less than 21 days before the date of the meeting, they
shall, notwithstanding that fact, be deemed to have been duly sent if it is
so agreed by members—

(a)
holding, if the company has a share capital, majority in number entitled to
vote and who represent not less than 95% of such part of the paid-up share
capital of the company as gives a right to vote at the meeting; or

(b)
having, if the company has no share capital, not less than 95% of the total
voting power exercisable at the meeting:

Amendment
to sub-section (1) of section 136 provides that copies of audited financial
statements and other documents may be sent at shorter notice if ninety-five
percent of members entitled to vote at the meeting agree for the same.

Section
101 of the Act provides that the consent of members holding at least
ninety-five percent of the voting power be obtained to call a general meeting
at a notice shorter than twenty-one days.

For
circulation of annual accounts to members, the MCA had clarified by way of a
circular dated 21^stJuly 2015 that the shorter notice period would
also apply to the circulation of annual accounts. It is now provided in the
Amendment Bill itself.

Appointment
and Ratification:

It
was provided that every company shall, at the first annual general meeting,
appoint an individual or a firm as an auditor who shall hold office from the
conclusion of that meeting till the conclusion of its sixth annual general
meeting and thereafter till the conclusion of every sixth meeting.

It
was further required that the company shall place the matter relating to such
appointment for ratification by members at

every
annual general meeting.( Section 139)

The
requirement to place the matter

relating
to such appointment for

ratification
by members at every annual general meeting has been removed.

In
view of this amendment, controversy as to whether the form is required to be
filed with ROC after every ratification stands resolved.

Besides,
inconsistency between removal (which required Special Resolution and Central
Government Approval) and non ratification (which required only Board
Approval) stands resolved.

Resignation
of auditor:

The
penalty for non-filing of the return of resignation with the Registrar made
the auditor punishable with fine, not less than fifty thousand rupees but
which may extend to five lakh rupees.( Section 140)

The
penalty for non-filing of the return of resignation with the Registrar shall
now make the auditor punishable with fine not be less than fifty thousand
rupees or the remuneration of the auditor,

whichever
is less.

This
form filing requirement was to be complied by the Auditor who was resigning.
(Form ADT 3).

Eligibility
:

Presently,
it was provided in Section 141(3)(i) as under: The following persons shall
not be eligible for appointment as an auditor of a company, namely:-

(i)
any person whose subsidiary or associate company or any other form of entity,
is engaged as on the date of appointment in consulting and specialised
services as provided in section 144.

In
section 141 of the principal Act, in sub-section (3), for clause (i), the
following clause shall be substituted namely:-

(i)
a person who, directly or indirectly, renders any service referred to in
Section 144 to the company or its holding company or its subsidiary company.

Explanation.—For
the purposes of this clause, the term “directly or indirectly”
shall have the meaning assigned to it in the Explanation to section 144.‘

Existing
provisions were not very happily worded and gave an impression that Auditor
could not provide services referred to in Section 144 to any other company.

Amendment
now made makes it clear that such services are not to be provided to auditee
company or its holding or subsidiary company.

Access
to the records :

Presently
the proviso to Section 143(1) reads as under :

Provided
that the auditor of a company which is a holding company shall also have the
right of access to the records of all its subsidiaries in so far as it relates
to the consolidation of its financial statements with that of its
subsidiaries.

(i)
in sub-section (1), in the proviso, for the words “its
subsidiaries”, at both the places, the words “its subsidiaries and
associate companies” shall be substituted;

The
change now made will enable auditors of the holding company to have right to access records of
associate companies.

As
associate includes, Joint Venture (JV), access will now be available to the
records of JVs also.

Internal
Financial Controls:

Presently
as per the provisions of Section 143(3)(i) auditor is required to report :

whether
the company has adequate internal financial controls system in place and the
operating effectiveness of such controls.

Amendment
provides as under:

in
sub-section (3), in clause (i) for the words “internal financial
controls system”, the words “internal financial controls with
reference to financial statements” shall be substituted;

This
amendment is in pursuance of the suggestion of Companies Law Committee in
Para 10.11which are worth noting:

Section
143 (3) (i) requires the auditor to state in his report whether the company
has adequate internal financial controls system in place and the operating
effectiveness of such controls. This has to be read with Section 134 (5) (e)
on the Directors’ Responsibility Statement which also defines internal
financial controls, and Rule 8(5)(viii) of Companies (Accounts) Rules, 2014.
Rule 10A of the Company (Audit and Auditors) Rules, 2014, makes the
requirement under Section 143(3)(i) optional for FY 14-15 and is mandatory
from FY 15-16 onwards. It has been expressed that auditing internal financial
control systems by auditors would be an onerous responsibility. It was also
expressed that their responsibility should be limited to the auditing of the
systems with respect to financial statements only and that this cannot be
compared with the responsibility of directors which is wider and can be
discharged as they have other resources like internal auditors, etc. who can
be used for this purpose. In this regard, the Committee recommended that the
reporting obligations of auditors should be with reference to the financial
statements.

Thus
this amendment is now brought in line with the Guidance Note issued by
ICAI.

VIII: Corporate Social Responsibility (CSR) (Section 135):

Provisions in brief prior to Amendment	Provisions after Amendment	Impact / Implications/ Remarks
Applicability : Every company having net worth of rupees five hundred crore or more, or turnover of rupees one thousand crore or more or a net profit of rupees five crore or more during any financial year shall constitute a Corporate Social Responsibility Committee of the Board consisting of three or more directors, out of which at least one director shall be an Independent Director.	In section 135 of the principal Act,— in sub-section (1) – (a) for the words “any financial year”, the words “the immediately preceding financial year” shall be substituted; (b) the following proviso shall be inserted, namely:— “Provided that where a company is not required to appoint an independent director under sub-section (4) of section 149, it shall have in its Corporate Social Responsibility Committee two or more directors.”;	Eligibility criteria for the purpose of constituting the corporate social responsibility committee and incurring expenditure towards CSR is proposed to be calculated based on immediately preceding financial year. Currently this eligibility is decided based on preceding three financial years. In case of a company which is not required to appoint an Independent Director and such company is required to appoint CSR Committee, such committee can be constituted with two or more directors.

Provisions in brief prior to Amendment

Provisions after Amendment

Impact / Implications/ Remarks

Applicability
:

Every
company having net worth of rupees five hundred crore or more, or turnover of
rupees one thousand crore or more or a net profit of rupees five crore or
more during any financial year shall constitute a Corporate Social
Responsibility Committee of the Board consisting of three or more directors,
out of which at least one director shall be an Independent Director.

In
section 135 of the principal Act,—

in
sub-section (1) –

(a)
for the words “any financial year”, the words “the immediately
preceding financial year” shall be substituted;

(b)
the following proviso shall be inserted, namely:—

“Provided
that where a company is not required to appoint an independent director under
sub-section (4) of section 149, it shall have in its Corporate Social
Responsibility Committee two or more directors.”;

Eligibility
criteria for the purpose of constituting the corporate social responsibility
committee and incurring expenditure towards CSR is proposed to be calculated
based on immediately preceding financial year. Currently this eligibility is
decided based on preceding three financial years.

In
case of a company which is not required to appoint an Independent Director
and such company is required to appoint CSR Committee, such committee can be
constituted with two or more directors.

IX: Remuneration of Managerial Persons (Section 197):

Provisions in brief prior to Amendment	Provisions after Amendment	Impact / Implications/ Remarks
Remuneration of Managerial Personnel ( Section 197)
First Proviso to Subsection 1 allowed the company in general meeting ( with the approval of the Central Government) to authorise the payment of remuneration exceeding 11% of the net profits of the company, subject to provisions of Schedule V.	The requirement of taking approval from Central Government has been done away with.	CLC has observed in Para 13.5 of the report as under : Currently, the law in countries like the US, the UK and Switzerland, does not require the company to approach government authorities for approving remuneration payable to their managerial personnel, even in a scenario where they have losses or inadequate profits and empowers the Board of the companies to decide the remuneration payable to Directors. Further, the Committee also recommended that the requirement for government approval may be omitted altogether, and necessary safeguards in the form of additional disclosures, audit, higher penalties, etc. may be prescribed instead. Keeping in line this philosophy, Approval of Central Government is dispensed with and Special Resolution is replaced in the place.
Second Proviso allowed companies to pass ordinary resolution in general meeting and prescribe remuneration in excess of limits specified therein.	The second proviso has been amended by replacing ordinary resolution by special resolution	This amendment is consequential.
	Additionally a third proviso has been inserted which provides that, where the company has defaulted in payment of dues to any bank or public financial institution or non-convertible debenture holders or any other secured creditor, the prior approval of the bank or public financial institution concerned or the non-convertible debenture holders or other secured creditor, as the case may be, shall be obtained by the company before obtaining the approval in the general meeting.	Equity demands that parties affected by any decision should be consulted prior to taking of such decisions. Although most lenders have such clauses as a part of their agreement, legal compulsion was lacking which is now provided for in the section itself.
Sub Section 3 : Provided that in case a company had no profits or its profits were inadequate, the company could not pay to its directors, including any managing or whole-time director or manager, by way of remuneration any sum exclusive of any fees payable to directors under sub-section (5) except in accordance with the provisions of Schedule V and if it was not able to comply with such provisions, with the previous approval of the Central Government.	the words “and if it is not able to comply with such provisions, with the previous approval of the Central Government” shall be omitted.	This amendment is consequential.
Sub Section 9: If any director draws or receives, directly or indirectly, by way of remuneration any such sums in excess of the limit prescribed by this section or without the prior sanction of the Central Government, where it is required, he shall refund such sums to the company and until such sum is refunded, hold it in trust for the company.	Sub Section 9 is amended as under: If any director draws or receives, directly or indirectly, by way of remuneration any such sums in excess of the limit prescribed by this section or without approval required under this section, he shall refund such sums to the company, within two years or such lesser period as may be allowed by the company, and until such sum is refunded, hold it in trust for the company.”;	Period of Recovery in the event of excess remuneration now stands extended to 2 years subject to passing of Special Resolution. Existing section did not provide for any time limit within which such excess remuneration paid was to be recovered.
Sub Section 10: The company shall not waive the recovery of any sum refundable to it under sub-section (9) unless permitted by the Central Government	Sub Section 10 The company shall not waive the recovery of any sum refundable to it under sub-section (9) unless approved by the company by special resolution within two years from the date the sum becomes refundable	Presently, act did not provide time limit within which refund of excess remuneration was to be made. This amendment is consequential to the amendment made in the previous clause.
	Proviso inserted : Provided that where the company has defaulted in payment of dues to any bank or public financial institution or non-convertible debenture holders or any other secured creditor, the prior approval of the bank or public financial institution concerned or the non-convertible debenture holders or other secured creditor, as the case may be, shall be obtained by the company before obtaining approval of such waiver.	Equity demands that parties affected by any decision should be consulted prior to taking of such decisions. Although most lenders have such clauses as a part of their agreement, legal compulsion was lacking which is now provided for in the section itself.
Sub Section 11: In cases where Schedule V is applicable on grounds of no profits or inadequate profits, any provision relating to the remuneration of any director which purports to increase or has the effect of increasing the amount thereof, whether the provision be contained in the company‘s memorandum or articles, or in an agreement entered into by it, or in any resolution passed by the company in general meeting or its Board, shall not have any effect unless such increase is in accordance with the conditions specified in that Schedule and if such conditions are not being complied, the approval of the Central Government had been obtained.	Sub Section 11: the words “and if such conditions are not being complied, the approval of the Central Government had been obtained” shall be omitted;	Thus in such cases, special resolution of the company in general meeting will suffice. The theme of the law makers now seems to be shifting to the self regulation rather than government approvals.
	Sub Section 16: The auditor of the company shall, in his report under section 143, make a statement as to whether the remuneration paid by the company to its directors is in accordance with the provisions of this section, whether remuneration paid to any director is in excess of the limit laid down under this section and give such other details as may be prescribed.	Presently clause xi of CARO 2015 has mandated for this reporting which is now brought under the provisions of the act. This will possibly lead to duplication of reporting unless MCA clarifies the position .
	Sub Section 17: On and from the commencement of the Companies (Amendment) Act, 2017, any application made to the Central Government under the provisions of this section [as it stood before such commencement], which is pending with that Government shall abate, and the company shall, within one year of such commencement, obtain the approval in accordance with the provisions of this section, as so amended.”	This provision is enabling provision which deals with approvals pending as on the date of the commencement of new section. This also shows lesser indulgence of the government in the approval process.

Provisions in brief prior to Amendment

Provisions after Amendment

Impact / Implications/ Remarks

Remuneration
of Managerial Personnel ( Section 197)

First
Proviso to Subsection 1 allowed the
company in general meeting ( with the approval of the Central Government) to
authorise the payment of remuneration exceeding 11% of the net profits of the
company, subject to provisions of Schedule V.

The
requirement of taking approval from Central Government has been done away
with.

CLC
has observed in Para 13.5 of the report as under :

Currently,
the law in countries like the US, the UK and Switzerland, does not require
the company to approach government authorities for approving remuneration
payable to their managerial personnel, even in a scenario where they have
losses or inadequate profits and empowers the Board of the companies to
decide the remuneration payable to Directors.

Further,
the Committee also recommended that the requirement for government approval
may be omitted altogether, and necessary safeguards in the form of additional
disclosures, audit, higher penalties, etc. may be prescribed instead.

Keeping
in line this philosophy, Approval of Central Government is dispensed with and
Special Resolution is replaced in the place.

Second
Proviso allowed companies to pass
ordinary resolution in general meeting and prescribe remuneration in excess
of limits specified therein.

The
second proviso has been amended by replacing ordinary resolution by special
resolution

This
amendment is consequential.

Additionally
a third proviso has been inserted which provides that, where the company has defaulted in
payment of dues to any bank or public financial institution or non-convertible
debenture holders or any other secured creditor, the prior approval of the
bank or public financial institution concerned or the non-convertible
debenture holders or other secured creditor, as the case may be, shall be
obtained by the company before obtaining the approval in the general meeting.

Equity
demands that parties affected by any decision should be consulted prior to
taking of such decisions. Although most lenders have such clauses as a part
of their agreement, legal compulsion was lacking which is now provided for in
the section itself.

Sub
Section 3 :

Provided
that in case a company had no profits or its profits were inadequate, the
company could not pay to its directors, including any managing or whole-time

director
or manager, by way of remuneration any sum exclusive of any fees payable to
directors under sub-section (5) except in accordance with the provisions of
Schedule V and if it was not able to comply with such provisions, with the
previous approval of the Central Government.

the
words “and if it is not able to comply with such provisions, with the
previous approval of the Central Government” shall be omitted.

This
amendment is consequential.

Sub
Section 9:

If
any director draws or receives, directly or indirectly, by way of
remuneration any such sums in excess of the limit prescribed by this section
or without the prior sanction of the Central Government, where it is
required, he shall refund such sums to the company and until such sum
is refunded, hold it in trust for the company.

Sub
Section 9 is amended as under:

If
any director draws or receives, directly or indirectly, by way of

remuneration
any such sums in excess of the limit prescribed by this section or without approval
required under this section, he shall refund such sums to the

company,
within two years or such lesser period as may be allowed by the company,
and until such sum is refunded, hold it in trust for the company.”;

Period
of Recovery in the event of excess remuneration now stands extended to 2 years
subject to passing of Special Resolution. Existing section did not provide
for any time limit within which such excess remuneration paid was to be
recovered.

Sub
Section 10:

The
company shall not waive the recovery of any sum refundable to it under
sub-section (9) unless permitted by the Central Government

Sub
Section 10

The
company shall not waive the recovery of any sum refundable to it under
sub-section (9) unless approved by the company by special resolution within
two years from the date the sum becomes refundable

Presently,
act did not provide time limit within which refund of excess remuneration was
to be made. This amendment is consequential to the amendment made in the
previous clause.

Proviso
inserted :

Provided
that where the company has defaulted in payment of dues to any bank or public
financial institution or non-convertible debenture holders or any other
secured creditor, the prior approval of the bank or public financial
institution concerned or the non-convertible debenture holders or other
secured creditor, as the case may be, shall be obtained by the company before
obtaining approval of such waiver.

Sub
Section 11:

In
cases where Schedule V is applicable on grounds of no profits or inadequate
profits, any provision relating to the remuneration of any director which
purports to increase or has the effect of increasing the amount thereof,
whether the provision be contained in the company‘s memorandum or articles,
or in an agreement entered into by it, or in any resolution passed by the
company in general meeting or its Board, shall not have any effect unless
such increase is in accordance with the conditions specified in that Schedule
and if such conditions are not being complied, the approval of the Central
Government had been obtained.

Sub
Section 11:

the
words “and
if such conditions are not being complied, the approval of the Central
Government had been obtained” shall be omitted;

Thus
in such cases, special resolution of the company in general meeting will
suffice. The theme of the law makers now seems to be shifting to the self
regulation rather than government approvals.

Sub
Section 16:

The
auditor of the company shall, in his report under section 143, make a
statement as to whether the remuneration paid by the company to its directors
is in accordance with the provisions of this section, whether remuneration
paid to any director is in excess of the limit laid down under this

section
and give such other details as may be prescribed.

Presently
clause xi of CARO 2015 has mandated for this reporting which is now
brought under the provisions of the act.
This will possibly lead to duplication of reporting unless MCA
clarifies the position .

Sub
Section 17:

On
and from the commencement of the Companies (Amendment) Act, 2017, any
application made to the Central Government under the provisions of this
section [as it stood before such commencement], which is pending with that
Government shall abate, and the company shall, within one year of such
commencement, obtain the approval in accordance with the provisions of this
section, as so amended.”

This
provision is enabling provision which deals with approvals pending as on the
date of the commencement of new section. This also shows lesser indulgence of the government in the
approval process.

X: Calculation of Profits (Section 198):

Provisions in brief prior to Amendment	Provisions after Amendment	Impact / Implications/ Remarks
Section 198 : Calculation of profits.		Section 198 : Calculation of profits.
(3) In making the computation aforesaid, credit shall not be given for the following sums, namely:— (a) profits, by way of premium on shares or debentures of the company, which are issued or sold by the company;	(3) In making the computation aforesaid, credit shall not be given for the following sums, namely:— (a) profits, by way of premium on shares or debentures of the company, which are issued or sold by the company unless the company is an investment company as referred to in clause (a) of the Explanation to section 186	CLC in Para 13.9 observed as under: Section 198(4) requires that while calculating profits for managerial remuneration, the profits on sale of investments be deducted. The Committee agreed to the argument that Investment Companies, whose principal business was sale and purchase of investments, would not be using the correct profit figures, and may need to comply with the requirements of Schedule V to pay remuneration to its managerial personnel. It was recommended, that specific provisions for such companies be incorporated in the Act.
	3) In making the computation aforesaid, credit shall not be given for the following sums, namely:— “(f) any amount representing unrealised gains, notional gains or revaluation of assets.”;	This clause is newly added consequent upon Ind AS applicability to the companies. In Para 13.7 of its report, CLC observed as under: The Committee examined Section 198 as to whether it has outlived its utility in current times where the Accounting Standards prescribe a robust framework for the determination of yearly profit or loss for the company, and the possibility of using the net profit before tax as presented in the financial statements, for basing the determination of managerial remuneration. Alternative formulations were considered, but found to be more complex, and further the present formulation is well accepted. Therefore, no change, other than on account of requirement of Ind AS, was recommended. This amendment is consistent with the amendment related to distributable profits for the purposes of dividends discussed above under Dividends.
(4) In making the computation aforesaid, the following sums shall be deducted, namely: (l) the excess of expenditure over income, which had arisen in computing the net profits in accordance with this section in any year which begins at or after the commencement of this Act, in so far as such excess has not been deducted in any subsequent year preceding the year in respect of which the net profits have to be ascertained; ( Portion marked in bold is omitted after amendment)	(4) In making the computation aforesaid, the following sums shall be deducted, namely: (l) the excess of expenditure over income, which had arisen in computing the net profits in accordance with this section in any year which begins at or after the commencement of this Act, in so far as such excess has not been deducted in any subsequent year preceding the year in respect of which the net profits have to be ascertained;	CLC in Para 13.8 has observed as under : Section 198(4)(l) mandates the deduction of ‘brought forward losses’ of the company while calculating the net profit, for the purpose of computing managerial remuneration in the subsequent years. However, the clause did not provide for the deduction of brought forward losses of the years prior to the commencement of the Act, which may be an inadvertent omission. Thus amendment now made has amended Section 198(4)(l), to include brought forward losses of the years subsequent to the enactment of the Companies (Amendment) Act, 1960 and inadvertent omission existing is corrected .

Provisions in brief prior to Amendment

Provisions after Amendment

Impact / Implications/ Remarks

Section
198 : Calculation of profits.

(3)
In making the computation aforesaid, credit shall not be given for the
following sums, namely:—

(a)
profits, by way of premium on shares or debentures of the company, which are
issued or sold by the company;

(3)
In making the computation aforesaid, credit shall not be given for the
following sums, namely:—

(a)
profits, by way of premium on shares or debentures of the company, which are
issued or sold by the company unless the company is an investment company as
referred to in clause (a) of the Explanation to section 186

CLC
in Para 13.9 observed as under:

Section
198(4) requires that while calculating profits for managerial remuneration,
the profits on sale of investments be deducted. The Committee agreed to the
argument that Investment Companies, whose principal business was sale and
purchase of investments, would not be using the correct profit figures, and
may need to comply with the requirements of Schedule V to pay remuneration to
its managerial personnel. It was recommended, that specific provisions for
such companies be incorporated in the Act.

3)
In making the computation aforesaid, credit shall not be given for the
following sums, namely:—

“(f)
any amount representing unrealised gains, notional gains or revaluation of
assets.”;

This
clause is newly added consequent upon Ind AS applicability to the companies.

In
Para 13.7 of its report, CLC observed as under:

The
Committee examined Section 198 as to whether it has outlived its utility in current times where the
Accounting Standards prescribe a robust framework for the determination of
yearly profit or loss for the company, and the possibility of using the net
profit before tax as presented in the financial statements, for basing the determination
of managerial remuneration. Alternative formulations were considered, but
found to be more complex, and further the present formulation is well
accepted. Therefore, no change, other than on account of requirement of
Ind AS, was recommended.

This
amendment is consistent with the amendment related to distributable profits
for the purposes of dividends discussed above under Dividends.

(4)
In making the computation aforesaid, the following sums shall be deducted,
namely:

(l)
the excess of expenditure over income, which had arisen in computing the net
profits in accordance with this section in any year which begins at or
after the commencement of this Act, in so far as such excess has not been
deducted in any subsequent year preceding the year in respect of which
the net profits have to be ascertained;

(
Portion marked in bold is omitted after amendment)

(4)
In making the computation aforesaid, the following sums shall be deducted,
namely:

CLC
in Para 13.8 has observed as under :

Section
198(4)(l) mandates the deduction of ‘brought forward losses’ of the company
while calculating the net profit, for the purpose of computing managerial
remuneration in the subsequent years. However, the clause did not provide for
the deduction of brought forward losses of the years prior to the
commencement of the Act, which may be an inadvertent omission. Thus amendment now made has amended
Section 198(4)(l), to include brought forward losses of the years subsequent
to the enactment of the Companies (Amendment) Act, 1960 and inadvertent
omission existing is corrected .

If one looks at the amendments discussed
hereinabove, various difficulties which were experienced at the time of
implementation of the provisions are sought to be removed. Amendments are made
to clarify the position which was ambiguous. Some of the provisions which were
inconsistent when read with the Rules are amended so as to bring these
inconsistencies to an end and thus an objective of rectifying omissions and
inconsistencies is largely achieved. _

shailesh.kwebmaker

Impact of Ind AS 115 on Real Estate Companies

An Exposure draft namely Ind AS 115 Revenue from Contracts with
Customers is awaiting approval by the Ministry of Corporate Affairs. There is uncertainty on the effective date of
the Standard, but it may apply as early as from accounting periods beginning on
or after 1 April, 2018. In this article,
we discuss the impact of Ind AS 115 on real estate companies, particularly in
the context of development and sale of multi-unit residential or commercial
property before the entity constructs the property.

Ind AS 115 specifies the requirements an entity must apply to measure
and recognise revenue and the associated costs. The core principle of the
standard is that an entity will recognise revenue when it transfers control of
the underlying goods and services to a customer. The principles in Ind AS 115
are applied using the following five steps:

1. Identify the contract with a customer

2. Identify the performance obligations in the contract

3. Determine the transaction price

4. Allocate the transaction price to the performance obligations

5. Recognise revenue when or as the entity satisfies each performance
obligation.

Ind AS 115 requires recognition of revenue when or as the entity
satisfies each performance obligation. This requirement is one of the key
hurdles for real estate companies. Currently, the Guidance Note on
Accounting for Real Estate Transactions (GN) requires real estate companies
to apply the percentage of completion method.

Under Ind AS 115, an entity will have to evaluate whether it satisfies
the performance obligation to its customer at the time of delivery of the real
estate unit or over time as the construction is in progress. If an entity
cannot demonstrate that the performance obligation is satisfied over time, it
will not be able to recognis e revenue over time. In simpler terms, the entity
will have to record real estate sales on the completed contract method, instead
of the percentage of completion method (POCM).

Satisfaction of
performance obligations

An entity recognises revenue only when it satisfies a performance
obligation by transferring control of a promised good or service to a customer.
Control may be transferred at a point in time or over time. Control of the good
or service refers to the ability to direct its use and to obtain substantially
all of its remaining benefits. Control also means the ability to prevent other
entities from directing the use of and receiving the benefit from a good or
service. The benefits of an asset are the potential cash flows (inflows or
savings in outflows) that can be obtained directly or indirectly in many ways,
such as by:

a) using the asset to produce goods or provide services;

b) using the asset to enhance the value of other assets;

c) using the asset to settle liabilities or reduce expenses;

d) selling or exchanging the asset;

e) pledging the asset to secure a loan; and

f) holding the asset.

The control model is different from the ‘risks and rewards’ model in
current Ind AS 18 and the GN. As per the GN, the completion of revenue
recognition process is usually identified when the following conditions are
satisfied.

a) the entity has transferred to the buyer the significant risks and
rewards of ownership of the real estate;

b) the entity retains neither
continuing managerial involvement to the degree usually associated with
ownership nor effective control over the real estate sold;

c) the amount of revenue can be measured reliably;

d) it is probable that the economic benefits associated with the
transaction will flow to the entity; and

e) the costs incurred or to be incurred in respect of the transaction
can be measured reliably.

The differences in the model may result in different accounting
outcomes.

Performance
obligations satisfied over time

An entity transfers control of a good or service over time, rather than
at a point in time when any of the following criteria are met:

1) The customer simultaneously receives and consumes the benefits
provided by the entity’s performance as the entity performs. For example, when
cleaning services are provided, the customer simultaneously receives and
consumes the benefits.

2) The entity’s performance creates or enhances an asset that the
customer controls as the asset is created or enhanced. For example, an entity
constructs an equipment for the customer at the customer’s site.

3) The entity’s performance does not create an asset with an
alternative use to the entity and the entity has an enforceable right to
payment for performance completed to date.

The first criterion is not applicable because the entity’s performance
creates an asset, i.e., the real estate unit that is not consumed immediately.
The second and the third criteria are discussed below. The Standard contains
requirements on when performance obligations are satisfied over time. When a
performance obligation is not satisfied over time, it will be deemed to have
been satisfied at a point in time.

Customer
controls asset as it is created or enhanced

The second criterion in which control of a good or service is
transferred over time, is where the customer controls the asset as it is being
created or enhanced. For example, many construction contracts contain clauses
indicating that the customer owns any work-in-progress as the contracted item
is being built. In many jurisdictions, the individual units of an apartment
block are only accessible by the purchaser on completion or near completion.
However, the standard does not restrict the definition of control to the
purchaser’s ability to access and use (i.e., live in) the apartment. In Ind AS
115.33, the standard specifies: The benefits of an asset are the potential cash
flows (inflows or savings in outflows) that can be obtained directly or
indirectly in many ways, such as by:

a) using the asset to produce goods or provide services (including
public services);

b) using the asset to enhance the value of other assets;

c) using the asset to settle liabilities or reduce expenses;

d) selling or exchanging the asset;

e) pledging the asset to secure a loan; and

f) holding the asset.

In some jurisdictions, it may be possible to pledge, sell or exchange
the unfinished apartment. Careful consideration will be required of the
specific facts and circumstances. The September 2017 Update of IFRIC, discusses
this issue in detail, and concluded that the second criterion is not fulfilled
in most developments of a multi-unit complex. Consequently, PCOM cannot be
applied in such cases. Particularly, the IFRIC emphasised the following:

1) In applying the second criterion, it is important to apply the
requirements for control to the asset that the entity’s performance creates or
enhances. In a contract for the sale of a real estate unit that the entity
constructs, the asset created is the real estate unit itself. It is not, for
example, the right to obtain the real estate unit in the future. The right to
sell or pledge this right is not evidence of control of the real estate unit
itself.

2) The entity’s performance creates the real estate unit under
construction. Accordingly, the entity assesses whether, as the unit is being
constructed, the customer has the ability to direct the use of, and obtain
substantially all of the remaining benefits from, the part-constructed real estate
unit. The Committee observed the following:

a) although the customer can resell or pledge its contractual right to
the real estate unit under construction, it is unable to sell the real estate
unit itself without holding legal title to it;

b) the customer has no ability to direct the construction or
structural design of the real estate unit as the unit is constructed, nor can
it use the part-constructed real estate unit in any other way;

c) the customer’s legal title (together with other customers) to replace
the entity, only in the event of the entity’s failure to perform as promised,
is protective in nature and is not indicative of control.

d) the customer’s exposure to changes in the market value of the real
estate unit may indicate that the customer has the ability to obtain
substantially all of the remaining benefits from the real estate unit. However,
it does not give the customer the ability to direct use of the unit as it is
constructed.

Thus, the customer does not control the part-constructed unit. In
simpler terms, the performance obligation is satisfied when the real estate
entity delivers the constructed unit to the customer. At that point in time the
real estate entity recognises revenue.

Asset with no
alternative use and right to payment

The third situation in which control is transferred over time has the
following two requirements that must both be met:

–The
entity’s performance does not create an asset with alternative use to the
entity.

– The
entity has an enforceable right to payment for performance completed to date.

Asset with no
alternative use

An asset created by an entity has no alternative use if the entity is
either restricted contractually or practically from readily directing the asset
to another use (e.g., selling it to a different customer). A contractual
restriction on an entity’s ability to direct an asset for another use must be
substantive. In other words, a buyer could enforce its rights to the promised
asset if the entity sought to sell the unit to a different buyer. In contrast,
a contractual restriction may not be substantive if the entity could instead
sell a different unit to the buyer without breaching the contract or incurring
significant additional costs. Furthermore, a practical limitation exists if an
entity would incur significant economic losses to direct the unit for another
use. A significant economic loss may arise when significant costs are incurred
to redesign or modify a unit or when the unit is sold at a significantly
reduced price.

Enforceable
right to payment for performance completed to date

An entity has an enforceable right to payment for performance completed
to date if, at any time during the contract term, the entity would be entitled
to an amount that at least compensates it for work already performed. This
right to payment, whether by contract or by law, must be present, even in
instances in which the buyer can terminate the contract for reasons other than
the entity’s failure to perform as promised. The entity’s right to payment by
contract should not be contradictory to any law of the land.

Many real estate companies sell real estate on a small down payment,
followed by the rest of the payment being made at the time of delivery of the
real estate; for example, a 20:80 scheme, wherein 20% of the consideration is
paid upfront on booking, followed by 80% payment on delivery of the unit. The
customer can walk away without making the rest of the payment, if he is not
interested in taking delivery of the unit. Such real estate contracts do not
meet the criterion of enforceable right to payment for performance completed to
date.

To meet this criterion, the amount to which an entity is entitled must
approximate the selling price of the goods or services transferred to date,
including a reasonable profit margin. The standard clarifies that including a
payment schedule in a contract does not, by itself, indicate that the entity
has an enforceable right to payment for performance completed to date. The
entity needs to examine information that may contradict the payment schedule
and may represent the entity’s actual right to payment for performance
completed to date (e.g., an entity’s legal right to continue to perform and
enforce payment by the buyer if a contract is terminated without cause).

In some contracts, a customer may have a right to terminate the contract
only at specified times during the life of the contract or the customer might
not have any right to terminate the contract. If a customer acts to terminate a
contract without having the right to terminate the contract at that time
(including when a customer fails to perform its obligations as promised), the
contract (or other laws) might entitle the entity to continue to transfer to
the customer the goods or services promised in the contract and require the
customer to pay the consideration promised in exchange for those goods or
services. In those circumstances, an entity has a right to payment for
performance completed to date, because the entity has a right to continue to
perform its obligations in accordance with the contract and to require the
customer to perform its obligations (which include paying the promised
consideration).

Conclusion

In light of the requirements of Ind AS 115, many real estate companies
in India may not qualify for POCM. However, the third criterion discussed above
is a small window available for real estate companies in India to achieve POCM
recognition. To qualify for POCM recognition, real estate companies should
ensure that they have a contractual right to collect payment from the customer
for work completed to date and that the contractual right is not in
contradiction with any law of the land. _

shailesh.kwebmaker

26 Sections 9, 44BB, 44DA and 115A of the Act – Prospecting for or extraction or production of mineral oil is not technical services – therefore, payments for rendering of services for extraction or production of mineral oil as sub-contractor would not be FTS – since payment was received by non-resident Taxpayer from another non-resident for services in connection with prospecting for extraction or production of mineral oil, such payments would be covered by section 44BB.

[2018] 89 taxmann.com 416 (Mumbai – Trib.)
Production Testing Services Inc vs. DCIT
A.Y.: 2011-12, Date of Order: 27th October, 2017

Facts

ONGC had awarded a contract for providing
certain services to a company incorporated in Scotland and having a project
office in Mumbai (“F Co”). F Co, in turn, sub-contracted the work to the
Taxpayer, which was a non-resident. The Taxpayer received certain payments from
F Co. The Taxpayer offered the receipts to tax u/s.44BB of the Act.

The AO held that since F Co was providing
services to ONGC, the Taxpayer who was sub-contracted the said work by F Co was
indirectly performing the services for ONGC. The AO further held that services were
technical services provided by the Taxpayer for prospecting extraction or
production of mineral Oil. The AO also noted that as per the TDS certificates,
tax was withheld u/s. 194J (which, inter alia, applies in case of FTS).
Accordingly, the AO treated the receipts as ‘fees for technical services’
(“FTS”) u/s. 115A of the Act.

DRP upheld the findings of the AO.

Held

– Perusal
of the contract showed that the contractor was solely responsible for the
performance of the contract. The contract further stated that if the contractor
engaged any sub-contractor for performing the contract, then the sub-contractor
shall be under the complete control of the contractor and that there shall not
be any contractual relationship between such sub-contractor and ONGC.

– Thus,
the Taxpayer, who was engaged as a sub-contractor, had nothing to do with ONGC.
Therefore, the AO and DRP were wrong in holding that the amount received by the
Taxpayer for rendering services were indirectly received from ONGC. Hence, the
payments were received by the Taxpayer from FCo.

– In Oil & Natural Gas Corpn. Ltd. vs. CIT
[2015] 376 ITR 306/233 Taxman 495/59 taxmann.com 1, the Supreme Court has
held that prospecting for extraction or production of mineral oil is not to be
treated as technical services for the purpose of Explanation 2 of 9(1)(vii),
and such activity would be covered by section 44BB.

– Section
115A(b) presupposes existence of FTS, therefore, the payments received for
rendering of services for extraction or production of mineral oil by the
Taxpayer would not fall within the ambit of FTS. Since the pre-condition for
invoking of section 115A is missing, the same would not be attracted.

– The
contention of the Taxpayer that it had received the payments for rendering the
services from F Co, which was a foreign company, had merit. Since the receipts
of the Taxpayer were from F Co, and not from Government or an Indian concern,
the provisions of section 115A and section 44DA were excluded.

– Section
44BB has special and specific provisions for computing profits and gains of a
non-resident in connection with the business of providing services or
facilities in connection with or supplying plant and machinery on hire used or
to be used in the prospecting for or extraction or production of mineral oils.
Hence, the services provided by the Taxpayer in connection with extraction or
production of mineral oil were covered by section 44BB. _

shailesh.kwebmaker

25 Section 9 of the Act and Article 12 of India-USA DTAA – payments to USA subsidiary towards provision of inputs for new product development including market survey expenses in USA, being FIS under Article 12(4), were taxable in India; remittances to an employee towards expenses of overseas representative offices were not taxable in India.

[2018] 89
taxmann.com 445 (Chennai – Trib.)

Tractors &
Farm Equipment Ltd. vs. ACIT

A.Y. 2006-07,
Date of Order: 27^th September, 2017

Facts

The Taxpayer
was engaged in manufacture and sale of tractors and farm equipment. It had
established a subsidiary In USA (“US Co”) for sale of tractors in USA. The
Taxpayer had entered into agreement with US Co to provide assistance for
promoting sale of tractors through advertisement, to provide market inputs to
enable increased sale of its tractors and maintain stock. The Taxpayer was
reimbursing promotional activity expenses to US Co on the basis of supporting
documents. The Taxpayer had also set up overseas representative offices in
London, Vienna and Belgrade for sale of tractors and had remitted funds towards
reimbursement of expenses to overseas representative office. The remittances
were made to the account of an employee of the Taxpayer. The employee had
periodically submitted detailed accounts with supporting documents in respect
of expenses incurred.

The Taxpayer contended that none of the
payments made to US Co were fee for technical/consultancy services. Further,
they being reimbursements, there was no element of profit. Hence, the
remittances were not taxable in India.

The AO
held that as the Taxpayer did not withhold tax while making payments to US Co
and overseas representative offices, such payments were to be disallowed u/s.
40(a)(i) of the Act.

With respect to payment to overseas
representative office, the Taxpayer contended that the payment was merely a
reimbursement towards periodic maintenance expenses incurred by the
representative office and hence, was not taxable in India.

The
CIT(A) confirmed the order of the AO in respect of payments made to US Co but
deleted disallowance in respect of payments made to overseas representative
offices.

Held

– The
Taxpayer had paid US Co for expenses for two kinds of services. One, sales
promotion and two, market development.

– As
per Distribution Agreement between the Taxpayer and US Co, the payments were
made “to provide inputs for new Product Development – Improvements in the
present range of products” to US Co “towards the market survey expenses to be
incurred in USA”. Thus, these payments were towards services rendered by US Co
to provide inputs for new product development including market survey in USA.
Such services were covered within the definition of ‘Fees for included
services’ in Article 12(4) of DTAA.

– The
debit note issued by US Co showed that reimbursement was for expenses incurred
towards detailed review of specifications of compact tractors, obtaining
feedback of dealers/end users, consulting experts/professional engineers
regarding current use and future requirements and evolving broad specifications
for a new range of compact utility models. The debit note also supports the
fact that the services fell within the definition of ‘Fees for included
services’ in Article 12(4) of DTAA.

– As
regards remittance towards expenses of overseas representative offices, the AO
had neither doubted the genuineness of the expenditure nor had he brought any
material on record for supporting disallowance. Merely because the employee
acted as an authorized signatory in another entity, does not mean that the
payment was not towards reimbursement of expenses of overseas offices of the
Taxpayer.

shailesh.kwebmaker

24 Sections 5(2), 9, 15, 90(2), 192(2) of the Act; Article 16 of India-USA DTAA – if employee is non-resident and no part of services under employment are performed in India, salary is not subject to withholding in India; employer can consider foreign tax credit at the stage of withholding tax.

AR No 1299 of 2012
Texas Instruments (India) Pvt. Ltd., In re
A.Ys.: 2011-12 and 2012-13, Date of Order: 29th January, 2018

Facts

The applicant, was an Indian entity which
had sent an employee on an assignment to the USA for two years. During that
period the employee was on payroll with its group entity in the USA (US Co).
While he was in USA, though the employee had not rendered any service in India,
for fulfilling his personal obligations, he received part of the salary in
India from the applicant.

In respect of financial year 2011-12 the
employee would have been a non-resident (“NR”)
in India and for financial year 2012-13 he would have been a resident in
India.

The employee would be resident in the USA
for the calendar years 2010, 2011 and 2012 as per the US domestic laws.
Accordingly, his global income, including salary paid in India, would be taxable
in USA.

The applicant sought ruling of AAR on the
following questions.

Question 1: Whether the Applicant is obliged
to withhold taxes on the salary paid in India to the employee in financial year
2011-12, when the employee qualified as an NR in India;

Question 2: Whether the Indian employer can
consider claim of foreign tax credit (“FTC”) at withholding stage in respect of
the taxes paid in the USA by the employee in financial year 2012-13 when he
would be a resident in India.

The applicant contended as follows before
the AAR.

As regards question 1

– In
terms of section 5(2) of the Act, the scope of total income of a non-resident
comprises income received in India, including salary received by the employee
in India. However, it is to be computed in terms of section 2(45) of the Act, after providing
reliefs, such as, treaty reliefs. Hence, first the taxability of salary needs
to be determined and then the availability of treaty benefit for computing the
taxable total income.

– Since
no services were rendered in India, salary for employment exercised in the USA
would not accrue in India. This is supported by the provisions of section 15
read with explanation to section 9(1)(ii) of the Act, decision in DIT vs.
Sri Prahlad Vijendra Rao (ITA No 838/ 2009) and decision in CIT vs.
Avtar Singh Wadhwan [2001] 247 ITR 260 (Bom) and commentary by Professor
Klaus Vogel on Article 15 of the OECD Model Convention

– U/s.
90 of the Act, the employee is entitled to adopt either the provisions of the
Act or India-USA DTAA, whichever is more beneficial. As per Article 16 of DTAA,
the salary received by a USA resident in respect of employment is taxable only
in USA since the employment is not exercised in India. Hence, though the salary
was to be paid in India, , it would not be taxable in India.

– U/s.
192 of the Act, an employer is required to withhold taxes only if salary is
chargeable to tax in India. Also, as per section 192 read with section 2(10) of
the Act, taxes are required to be withheld considering the average rate of tax,
which is determined by dividing income-tax on total income by the total income.
In the instant case, as the total income with respect to salary paid in India
would not be chargeable to tax in India, the average rate of tax will work out
to Nil.

As regards question 2

– The
employee would be a resident in India for financial year 2012-13. Hence, in
terms of Article 25 of India-USA DTAA he will be entitled to claim FTC on taxes
paid in USA.

– Section
192(2) of the Act provides that an employee working under more than one
employer during any financial year can furnish details of salary and TDS to one
of the employers, and such employer is obliged to consider the same while
arriving at the quantum of total taxes to be withheld.

– Since
withholding tax provisions apply only to the extent of actual tax liability,
the treaty relief should be available to the employee at the tax withholding
stage without having to wait to seek this relief only at the time of filing
return of income.

– Hence,
relying on decisions in British Gas India Private Limited (AAR/725/2006)
and Coromandel Fertilizers Ltd [1991] 187 ITR 673 (AP), the Indian
employer would be required to consider FTC while arriving at the taxes to be
withheld at source in India.

The tax authority contended as follows before the AAR.

As regards question 1

– U/s.
5(2) of the Act, any income (which includes salary) received in India is liable
to tax in India. Hence, it will be subject to withholding tax. Salary due from
an employer in India is chargeable to tax in India and its payment will trigger
withholding tax obligations in India.

– An
Indian employment contract is an evidence of employer-employee relationship in
India. If the employer is an Indian entity, the employment is considered to be
exercised in India. Place where services are actually rendered or where the
employee is physically present is not relevant.

As regards question 2

– Grant
of claim of FTC involves interpretation of the articles of DTAA and examination
of satisfaction of other conditions, such as, actual payment of taxes in USA,
attribution of tax to income, etc. Only tax authority would have such
expertise. An employer would neither have the opportunity nor such expertise to
carry out such exercise at the time of withholding tax at source. From
financial year 2012-13, there is an additional requirement for obtaining a Tax
Residency Certificate (“TRC”) in order to avail Treaty benefits.

– Further,
section 192 of the Act does not provide for allowing FTC at the withholding
stage. Hence, the Indian employer cannot give benefit of FTC at the time of
withholding tax.

Held

As regards question 1

– U/s.
4 of the Act, income tax is to be charged in accordance with, and subject to,
provisions of the Act, on the total income of a taxpayer. The total income
chargeable to tax for a non-resident is subject to other provisions of the Act.

– The
judicial decisions cited by the Indian employer, and decision in Utanka Roy
vs. DIT (International Taxation) (2017) 390 ITR 109 (Cal), have held that,
the actual place of rendering services is the key test in determining place of
accrual of salary to a non-resident, and that salary received in respect of
services rendered outside India has to be considered as being earned outside India.
Since the employee was rendering services in the USA during FY 2011-12, the
salary accrued to him in USA and not in India.

– Whether
the employer was an Indian entity or not was immaterial and the only material
point for consideration is the place where the services were rendered. This is
also supported by the Commentary by Klaus Vogel on Article 15 and Explanation
to section 9(1)(ii) of the Act.

– Further,
even as per the provisions of Article 16 of DTAA, any income from services
rendered in USA would be chargeable to tax in USA. Thus, applying section 90 of
the Act, the beneficial provisions of the DTAA would prevail.

– Accordingly,
as the employment was exercised in the USA, the salary did not accrue in India.
Therefore, the Indian employer is not required to withhold taxes on the portion
of salary paid in India to its NR employee.

As regards question 2

– Under
Article 25 of India-USA DTAA, the employee is entitled to benefit of claim of
FTC.

– U/s.
192(2) of the Act, in respect of payments received by an employee from more
than one employer, the employee could furnish details of salary paid and tax
deducted to one of the employers, who would then be required to consider the
same at the time of withholding tax.

– Although,
the machinery provisions of the Act do not provide for claim of FTC at
withholding stage, the judicial decisions cited by the applicant had held that
FTC can be considered by the Indian employer at the withholding stage. Thus,
the Indian employer could consider the same while computing withholding tax.

– However,
while the Indian employer can consider FTC at the time of withholding tax, it
is also obligated to exercise due diligence in satisfying itself about the
details of period of residence, TRC, details of income earned and taxes
deducted, the period of income, etc., before doing so.

– If
the tax authority believes that the Indian employer has failed in carrying out
such due diligence, it may take appropriate action under the Act.

shailesh.kwebmaker

23 Articles 5, 7 of Indo-Swiss DTAA – Referral fee received by Dubai branch of a Swiss company from its India branch for referring an Indian resident client was ‘commission’ – since such fee was not attributable to PE in India of the Taxpayer, it was not taxable in India.

[2018] 90 taxmann.com 181 (Mumbai – Trib.)
DCIT vs. Credit Suisse AG
A.Y.: 2011-12, Date od Order: 9th February, 2018

ACTS
The Taxpayer was an entity incorporated in, and tax-resident of, Switzerland. The Taxpayer was a member of a global banking group providing various financial services globally. With permission of RBI, the Taxpayer had established a branch in India (“India Branch”). The Taxpayer also had a branch in Dubai. (“Dubai Branch”).

Dubai Branch had referred an Indian resident client to India Branch. India Branch handled the assignment and in accordance with global policy of the group, paid half of the fee to Dubai Branch as referral fee. The Taxpayer contended that referral fee received by Dubai Branch was ‘business income’. Since Dubai Branch did not have a PE in India, in terms of Article 5 of Indo-Swiss DTAA fee was not liable to tax in India. According to the AO, since the referral fee was payable in connection with a transaction between India Branch and referred client, it was in the nature of ‘fee for technical services’ and not ‘business income’. Hence, in terms of section 5(2)(b), read with section 9(1)(i) of the Act, referral fee was taxable in India since it was deemed to accrue or arise in India.

According to the DRP, Dubai Branch referred the client and it had no PE in India. Such income could not be attributed to activity of India Branch1.

HELD
– Mere fact that the fee was payable by India Branch to Dubai Branch, after execution of the work was no ground to determine the nature of the payment.

– In concluding that the ‘referral fee’ is in the nature of ‘commission’ to be taxed as ‘business income’ and not as ‘fees for technical services’ the DRP has referred and relied upon the decisions in Cushman & Wakefield (S) Pte. Ltd., 305 ITR 208(AAR) and CLSA Ltd., vs. ITO (International Taxation), 56 SOT 254(Mum) by the DRP. The tax authority has not brought any contrary decision.

– The tax authority has not countered the contention of the Taxpayer that Dubai Branch had no PE in India and also that PE in India of the Taxpayer, i.e., India Branch, had no role to play in the performance of the referral activity in question.
– Since the referral activity was undertaken outside India, and since PE of the Taxpayer had no role to play in the referral activity, the referral fee earned by Dubai Branch could not be considered to be attributable to PE in India of the Taxpayer. Therefore, the DRP was right in applying Article 7 of Indo-Swiss DTAA and holding the referral fee as non-taxable in India.

1 Though the decision has not made any mention, it may be noted that Article 7(1) of Indo-Swiss DTAA contains only limited force of attraction.

shailesh.kwebmaker

11 Section 263 – Fringe Benefit Tax is not “tax” as defined in section 2(43) and cannot be disallowed u/s. 40(a)(v) or added back to “Book Profits” u/s. 115JB. Consequently, even if there is lack of inquiry by the AO and the assessment order is “erroneous” under Explanation 2 to section 263, the order is not “prejudicial to the interest of the revenue”.

Rashtriya Chemicals & Fertilizers Ltd. vs. CIT (Mumbai)
Members : Joginder Singh (JM) and Manoj Kumar Aggarwal (AM)
ITA No.: 3625/Mum/2017
A.Y.: 2012-13.
Date of Order: 14th February, 2018.
Counsel for assessee / revenue: Ketan K. Ved / Narendra Singh Jangpangi

FACTS

The total income of the assessee, engaged as
manufacturer of fertilizers and chemical products was assessed to be Rs.198.12
crores under normal provisions and Rs.365.02 crores u/s. 115JB as against
returned income of Rs.193.66 Crores & Rs.365.02 Crores under normal
provisions and u/s. 115JB respectively.

Subsequently, the said assessment order was
subjected to exercise of revisional jurisdiction u/s. 263 by CIT on the
premises that corresponding adjustment of certain employee benefits expenses of
Rs.11.91 Crores being tax borne by the assessee on deemed perquisites on the
value of accommodation provided to employees and which were not admissible u/s.
40(a)(v), was omitted to be carried out while arriving at book profits u/s.
115JB. Therefore, the order being erroneous and prejudicial to the interest of
the revenue, required revision u/s. 263. After providing due opportunity of
being heard to the assessee, CIT directed the AO to re-compute Minimum
Alternative Tax [MAT] u/s. 115JB and raise demand against the assessee for the
same.

Aggrieved by the directions of Ld. CIT, the
assessee has by way of the appeal, challenged invocation of revisional
jurisdiction u/s. 263.

HELD

The Tribunal observed that the said item of
expenditure viz. taxes borne by the assessee on deemed perquisites on the value
of accommodation provided to the employees was not allowable to assessee while
arriving at income under normal provisions in terms of provisions of section
40(a)(v) and the assessee himself, has added the same while computing income
under the normal provisions.

The Tribunal noticed that computation of
‘Book Profits’ was neither provided by the assessee during hearing before the
AO nor discussed in any manner. In the quantum order, the AO picked up the
figures of ‘Book Profits’ as per ‘Return of Income’ without applying any mind thereupon
and adopted the same as such without any iota of discussion in the quantum
assessment order. The Tribunal was of the opinion that, prima facie, this is a
case of ‘no inquiry’ by AO and not the case of ‘inadequate inquiry’ or ‘Lack of
Inquiry’ or ‘adoption of one of the possible views’. The statutory provisions
as contained in section 263 including Explanation-2 create a deeming fiction
that the order of Assessing Officer shall be deemed to be erroneous in so far
as it is prejudicial to the interests of the revenue if, in the opinion of CIT
the order is passed without making inquiries or verification which should have
been made.

The Tribunal observed that the only question
which survives for consideration is whether the omission to carry out the stated
adjustment in the Book profits as envisaged by CIT has made the quantum order
erroneous and prejudicial to the interest of the revenue and whether the stated
adjustment was tenable in law or not?

The Tribunal noted that computation of Book
Profits u/s.115JB has to be in the manner as provided in Explanation-1 to
section 115JB. The Minimum Alternative Tax [MAT] provisions as contained in
section 115JB, as per well-settled law, are a complete code in itself and
create a deeming fiction which is to be construed strictly and therefore,
whatever computations / adjustments are to be made, they are to be made
strictly in accordance with the provisions provided in the code itself. The
clause (a) of Explanation-1 envisages add-back of the amount of Income Tax paid
or payable and the provision therefor while arriving at Book Profits. Further,
in terms of Explanation-2 to section 115JB, the amount of Income Tax
specifically includes the components mentioned therein. The Tribunal noticed the legislative intent
for introducing Explanation 2 from the Explanatory Memorandum to the Finance
Bill, 2008.

Taxes borne by the assessee on non-monetary
perquisites provided to employees forms part of Employee Benefit cost and akin
to Fringe Benefit Tax since they are certainly not below the line items since
the same are expressly disallowed u/s. 40(a)(v) and the same do not constitute
Income Tax for the assessee in terms of Explanation-2. The Tribunal observed
that this view is fortified by the judgment of Tribunal rendered in ITO vs.
Vintage Distillers Ltd. [130 TTJ 79] where the Tribunal has taken the view
that the term ‘tax’ was much wider term than the term ‘Income Tax’ since the
former, as per amended definition of ‘tax’ as provided in section 2(43)
included not only Income Tax but also Super Tax & Fringe Benefit Tax.
Therefore, without there being any corresponding amendment in the definition of
Income Tax as provided in Explanation-2 to section 115JB, Fringe Benefit Tax
was not required to be added back while arriving at Book Profits u/s. 115JB.
Similar view has been expressed in another judgement of Tribunal titled as Reliance
Industries Ltd Vs. ACIT [ITA No. 5769/M/2013 dated 16/09/2015] where the
Tribunal took a view that ‘Wealth Tax’ did not form part of Income Tax and therefore,
could not be added back to arrive at Book Profits since the adjustment thereof
was not envisaged by the statutory provisions.

The Tribunal held that the adjustment of
impugned item as suggested by CIT was not legally tenable in law which leads to
inevitable conclusion that the omission to carry out the said adjustment did
not result into any loss of revenue. Therefore, one of the prime condition viz.
prejudicial to interest of revenue to invoke the revisional jurisdiction under
the provisions of section 263 has remained unfulfilled and therefore, the
impugned order could not be sustained in law.

The Tribunal set aside the order
passed. The appeal filed by the assessee
was allowed.

shailesh.kwebmaker

10 Section 54 – If agreement for purchase of residential flat is made and the entire amount is paid within three years from the date of sale, the basic requirement for claiming relief u/s. 54(1) of the Act is taken as fulfilled.

Seema Sabharwal vs. ITO (Mumbai)
Members : Sanjay Garg (JM) and Annapurna Gupta (AM)
ITA No. 272/Chd/2017
A.Y.: 2013-14. Date of Order: 5th February, 2018.
Counsel for assessee / revenue: M. S. Vohra / Manjit Singh

In a case where agreement is entered into
and amount paid within the period mentioned in section 54, the claim for relief
cannot be denied on the ground that as per the agreement with the builder, the
house was to be completed within 4 years, whereas, as per provisions of section
54 of the Act, the house should have been constructed within 3 years from the
date of transfer of original asset.

The procedural and enabling provisions of
s/s. (2) cannot be strictly construed to impose strict limitations on the
assessee and in default thereof to deny him the benefit of exemption
provisions. If assessee at the time of
assessment proceedings proves that he has already invested the capital gains on
the purchase / construction of the new residential house within the stipulated
period, the benefit under the substantive provisions of section 54(1) cannot be
denied to the assessee.

FACTS

The assessee sold a residential flat on
17.9.2012 for a consideration of Rs. 5,20,00,000. Long term capital gain arising on sale of
this flat was Rs. 2,97,78,977. The
Assessing Officer (AO) noticed that the assessee had claimed exemption for Rs.
3,00,00,000 on account of investment in another flat on 11.9.2014. On perusal of the purchase deed, the AO
noticed that the assessee was to get possession of the flat on or before
August, 2016. The AO concluded that the
assessee had only purchased the right to purchase the flat which was proposed
to be given after 4 years from the date of transfer in August 2016. He held that the conditions of section 54 had
not been complied with and, therefore, he denied the claim of Rs. 2,97,78,977.

Aggrieved, the assessee preferred an appeal
to the CIT(A) where it contended that in various cases it has been held that if
assessee invests capital gains in a house which is under construction and due
to some reasons, the possession is delivered late to the assessee, even then
the investment of the amount will be considered towards the purchase /
consideration of the house and that the assessee will be eligible to claim
deduction u/s. 54 of the Act.

The CIT(A) held that the case laws relied
upon were distinguishable and were relating to claim of deduction u/s. 54F and
not under section 54 as is the present case.
He held that while section 54F requires that the investment is to be
made, section 54 requires the purchase / construction to be completed. He
further observed that even the assessee was supposed to deposit the proceeds
from the sale of house property in specified scheme / capital gains account,
however, the assessee in this case did not deposit the same in the capital gain
account / scheme with the bank rather the assessee had deposited the amount in
FDRs. The assessee had failed to comply with the conditions stipulated u/s.
54(2) of the Act. He confirmed the action
of the AO.

Aggrieved, the assessee preferred an appeal
to the Tribunal.

HELD

The Tribunal observed that various courts
have held that if the assessee invests the amount in purchase / construction of
building within the stipulated period and the construction is in progress, then
the benefits of exemptions, cannot be denied to the assessee. Reliance in this respect can be placed on the
decision of the jurisdictional High Court of Punjab & Haryana in the case
of Mrs. Madhu Kaul vs. CIT, ITA No. 89 of 1999 vide order dated 17.1.2014
and further on the decision of the Calcutta High Court in the case of CIT
vs. Bharati C. Kothari (2000) 160 CTR 165 and also on the decisions of the
various co-ordinate Benches of the Tribunal.

On going through the provisions of sections
54 and 54F of the Act, the Tribunal did not find any such distinction as drawn
by CIT(A) or any such dissimilarity in the wordings of the provisions from
which any such conclusion can be drawn that u/s. 54F of the Act the investment
is to be considered and/or that u/s. 54 off the Act, the house must be
completed within the stipulated period of three years or that investment is not
to be considered.

It observed that the decision of the
Calcutta High Court has categorically held that if the agreement for purchase
of residential flat is made and the entire amount is paid within three years
from the date of sale, the basic requirement for claiming relief u/s. 54(1) of
the Act is to be taken as fulfilled. The
Tribunal held that this issue is squarely covered in favor of the assessee by
the various decisions of the Hon’ble High Court.

As regards non-deposit of the amount in
capital gains account scheme before the due date for filing of return u/s.
139(1) of the Act, the Tribunal held that sub-section (1) of section 54 is a
substantive provision enacted with the purposes of promoting purchase /
construction of residential houses. However, sub-section (2) of section 54 is
an enabling provision which provides that the assessee should deposit the
amount earned from capital gains in a scheme framed in this respect by the
Central Government till the amount is invested for the purchase / construction
of the residential house. This
provision, according to the Tribunal, has been enacted to gather the real
intention of the assessee to invest the amount in purchase / construction of a
residential house.

S/s. (2) puts an embargo on the assessee to
casually claim the benefit of section 54 at the time of assessment, without
there being any act done to show his real intention of purchasing / constructing
a new residential unit. S/s. (2) governs the conduct of the assessee that the
assessee should put the amount of capital gains in an account in any such bank
or institution specifically notified in this respect and that the return of the
assessee should be accompanied by submitting a proof of such deposit, hence,
s/s. (2) is an enabling provision which governs the act of the assessee, who
intends to claim the benefit of exemption provisions of section 54.

The enabling provision of s/s. (2) cannot
abridge or modify the substantive rights given vide sub-section (1) of section
54 of the Act, otherwise, the real purpose of substantive provision i.e. s/s.
(1) will get defeated. The primary goal of exemption provisions of section 54
is to promote housing. The procedural
and enabling provisions of s/s.(2) thus cannot be strictly construed to impose
strict limitations on the assessee and in default thereof to deny him the
benefit of exemption provisions.

The Tribunal held that if the assessee at
the time of assessment proceedings, proves that he has already invested the
capital gains on the purchase / construction of the new residential house
within the stipulated period, the benefit under substantive provisions of
section 54(1) cannot be denied to the assessee.
Any different or otherwise strict construction of s/s. (2) will defeat
the very purpose and object of the exemption provisions of section 54 of the
Act. The Tribunal observed that this
view is fortified by the decision of the Karnataka High Court in the case of CIT
vs. Shri K. Ramachandra Rao, ITA No. 47 of 2014 c/w ITA No. 46/2014, ITA No.
494/2013 and ITA No. 495/2013, decided vide order dated 14.7.2014 where the
High Court has directly dealt with this issue while interpreting the identical worded
provisions of section
54F(2) of the Act.

Since the assessee had invested the amount
and had complied with the requirement of substantive provisions, the Tribunal
held that the assessee is entitled to the claim of exemption u/s. 54 of the
Act.

The appeal filed by the assessee was
allowed.

shailesh.kwebmaker

22. TS-40-ITAT-2017(Del) Net app B.V vs. DDIT A.Ys.: 2008-09 and 2010-11, Date of Order: 16th October, 2016

Article 5 of India-Netherlands DTAA – Indian subsidiary
rendering certain services to its parent, carries on subsidiary’s own business
in India and does not result in PE trigger for parent in India. Mere fact that
subsidiary and parent have common directors does not result in exercise of control
by the parent on the subsidiary

Facts

Taxpayer, a Netherlands Company (FCo), was engaged in the
business of –

– Sale of storage system equipment and products
including embedded software

– Sale of subscriptions

– Installation, warranty and professional
services with respect to data migration, data integration and disaster recovery
services.

FCo sold goods and services in India through third party
distributors who were appointed on non-exclusive basis. Further, FCo had a
subsidiary in India (ICo), which rendered certain services to the FCo pursuant
to a “commission agent agreement (CAA)”. In terms of CAA, services rendered by
ICo included, marketing and sales support services, assistance in organising
trade shows and pre sales marketing, etc.

Assessing Officer (AO) contended that (a) FCo had a business
connection in India and hence its income in India was chargeable to tax under
the Act; (b) marketing activities being the core business activities of FCo
were carried on by ICo in India. Without such activities of ICo supply/services
by FCo was not possible in India; (c) ICo acted as sales office in India and
hence created a Permanent Establishment (PE) for FCo in India under
India-Netherlands DTAA; (d) Alternatively, ICo had the power to conclude
contracts on behalf of FCo in India as both the entities have common directors
and hence created a dependent Agent PE (DAPE) in India.

FCo contended that the sales in India were carried on by it
through independent distributors. Further, ICo did not have an authority to
conclude contracts on behalf of FCo in India nor did it maintain any stock of
goods on behalf of FCo. ICo derived income from other activities in its own
rights such as IT and ITEs services and hence was not economically dependent on
FCo. Merely because FCo and ICo have common directors does not result in DAPE
in India.

FCo also contended that ICo was merely a service provider and
its employees were working under ICo’s own control and instruction. ICo did not
result in a fixed place PE or Agency PE of FCo in India. Without prejudice, the
activities carried on by ICo are preparatory and auxiliary and hence does not
result in tax presence in India.

Held

– Services rendered by ICo to FCo, results in a
business connection for FCo in India and thus income of FCo is subject to tax
in India under the Act. One will have to thus evaluate taxability under the
DTAA.

– A subsidiary company by itself does not
constitute a PE. None of the employees of the FCo are present in India nor are
the personnel or employees of FCo visit India. ICo is a separate legal entity
and has its own board of directors, premises, employees, contract, etc. and the
employees work under the control and supervision of ICo in India and not the
FCo. No evidence has been furnished to show that ICo carries on business of FCo
in India.

– In terms of the CAA, ICo is required to
merely inform FCo if any orders are placed by the customer in India. It would
then be the sole discretion of FCo to accept or reject it. Further, ICo has no authority to bind FCo in relation
to any orders received by it.

– ICo is merely a service provider to FCo and
carries on its own business. It cannot be considered as carrying on the
business of FCo in India.

– Common directors of FCo and ICo are not
engaged in the day to day activities, negotiation of contracts, marketing
function in India on behalf of the FCo. Nothing has been brought on record to
show that ICo was subject to detailed instruction and control of FCo. Merely
the fact that the directors are common does not result in exercise in control
by FCo over ICo.

– The revenue streams of ICo also clearly
suggests that it does not derive its income wholly or substantially from FCo,
but from other group entities as well. Thus ICo does not qualify as a dependent
agent of FCo.

shailesh.kwebmaker

21. TS-701-ITAT-2016(Chny) Sical Logisticts Ltd. vs. ACIT(IT) A.Ys.: 2002-03 to 2005-06, Date of Order: 14th December, 2016

Article 12 of DTAA, Section 9(1)(vi) and 172 of the Act –
Payment made for hiring of vessel on time charter basis does not involve
control and possession of the vessel and does not amount to “equipment
royalty”. Hire charges are covered by section 172 and not subject to withholding
u/s. 195

Facts

The Taxpayer, an Indian company, was engaged in carrying on
the business of transporting coal. Taxpayer had hired the vessels owned by
Foreign Shipping Companies (FCo) for transporting the cargo on a time charter
basis and paid hire charges to FCo without withholding taxes thereon.

The Captain/Master of the vessel, crew and other staff of the
ship were controlled by the ship owner, i.e FCo. The repairs and maintenance as
well as the insurance of the vessel was taken care of by FCo. Taxpayer merely
intimated FCo about the availability of the cargo and from where to where the
cargo had to be moved.

Taxpayer argued that payments made to FCo was for
transportation of goods and hence covered u/s. 172 of the Act, which is a
complete code in itself and hence there is no requirement to withhold taxes
u/s. 195 of the Act.

AO contended that the charges paid by the Taxpayer were on
account of the use and hire of the ship and hence, it amounts to royalty within
the meaning of section 9(1)(vi) of the Act and Article 12 of DTAA and hence
subject to withholding u/s. 195 of the Act. Accordingly, AO disallowed the hire
charges paid to FCo for failure to withhold taxes by holding that section 172
is not applicable in respect of hire charges paid to FCo.

Aggrieved by the order of AO, the Taxpayer appealed before
CIT(A), who upheld the order of AO, Taxpayer thus appealed before the Tribunal

Held

– In the case of Asia Satellite
Telecommunication Co. Ltd. vs. DCIT (332 ITR 340), it was held that for
payment to qualify as equipment royalty’, possession and control are over the
equipment is essential. In the present case, the Taxpayer has neither control
nor possession over the vessel. As noted, the captain/master and the crew were
instructed, directed and were under control of FCo and not the Taxpayer.

– One needs to differentiate between ‘letting
the asset’ and ‘use of asset’ by the owner for providing services. In the
present case, hire charges paid to FCo was for services of moving the goods by
a fully manned ship. It was not for letting the vessel, Taxpayer only had the
right to utilise the space in the vessel and was not authorised to operate or
exercise control over the vessel.

– In the present case, FCo did not enjoy any dedicated
berthing facility. Further, the vessel was in Indian waters only for a short
duration and hence does not result in a PE in India. Reliance of AO on Madras
HC ruling in the case of Poompuhar Shipping Corporation (360 ITR 257) is
wrongly placed as Madras HC was concerned with a case where the Taxpayer had a
facility of berthing at an Indian port guaranteed for foreign ship chartered
leading to creation of Permanent Establishment (PE) for the Taxpayer.

– Thus payment of hire charges does
not amount to royalty under the Act as well as DTAA. The hire charges paid to FCo is covered by section 172 of the Act.

shailesh.kwebmaker

20. TS-7-ITAT-2017(Ahd)-TP ACIT vs. Veer Gems A.Y: 2008-09, Date of Order: 3rd January, 2017

Section 92A of the Act – Reference to “management, control
and capital’ in section 92A(1) is to be understood based on the illustrations
provided u/s. 92A(2) alone – A partnership firm is not controlled by an
individual and hence Clause (j) of section 92A(2) dealing with control by
common individuals and those relatives, does not apply to the facts of the
present case

Facts

Taxpayer, an Indian partnership firm and tax resident of
India, was engaged in the business of manufacture and sale, of polished diamonds
both in India and outside India. The partners of the Taxpayer firm were three
brothers (along with their wives and sons).

During the year under consideration, the Taxpayer firm had
entered into certain international transactions with a Belgian entity (FCo).
FCo was owned and controlled by fourth brother (along with his wife and son) of
the partners of Taxpayer firm.

Assessing Officer (AO) contended that since FCo is controlled
by another brother of the partners, it is to be treated as Associated Enterprises
(AE) in terms of section 92A(2) of the Act and, accordingly, made a reference
to the Transfer Pricing Officer (TPO) to determine the arm’s length price (ALP)
of the transactions entered by Taxpayer with FCo . Thereby, the TPO made an ALP
adjustment u/s. 92CA(3) of the Act.

Aggrieved by the order of the TPO, the Taxpayer appealed to
Commissioner of Income-tax (Appeals) i.e. CIT(A).CIT(A) without discussing the
primary issue of the existence of an AE relationship in terms of section 92A of
the Act, proceeded to examine the correctness of the ALP and deleted the
impugned adjustment.

Aggrieved by the order of CIT(A), revenue appealed before the
Tribunal. Additionally, Taxpayer also appealed before the Tribunal.

Held

Section 92A(1) of the Act provides that an enterprise, in
relation to the other enterprise, would be regarded as AE if, the enterprise
participates, directly or indirectly, in the management or control or capital
of the other enterprise or if the persons who participate in management, control
or capital of both the enterprises are common.

Section
92A(2) of the Act only provides illustrations of the cases in
which an enterprise participates in management, capital or
control of another enterprise.

– The terms ‘participation’, ‘management’, and
‘control’ are not defined under the Act. One has to thus take recourse to
sub-section (2) to section 92A of the Act which gives practical illustrations,
to understand the meaning of ‘participation in management or capital or
control’. These illustrations are exhaustive and not illustrative.

– Section 92A(2) governs the operation of
section 92A(1) by controlling the definition of participation in management or
capital or control by one of the enterprises in the other enterprise. If a form
of participation in management, capital or control is not recognised by section
92A(2), it does not result in enterprises being treated as AEs.

– Even if one enterprise ends up having a de
facto or even de jure participation in the management, capital, or control of
the other enterprises, the two enterprises cannot be said to be AEs, unless
such participation in management, capital or control is covered by section
92A(2). Tribunal relied on Orchid Pharma Ltd vs. DCIT [(2016) 76 taxmann.com
63 (Chennai)] and Page Industries Ltd vs. DCIT [(2016) 159 ITD 680
(Bang)]

– Clause (j) of section 92A(2) which is
relevant in the present fact pattern provides that two enterprises are to be
treated as AE if one enterprise is controlled by an individual and the other
enterprise is also controlled by such individual or his relative or jointly by
such individual and relative of such individual. In the present case, since the
Taxpayer is a partnership concern, it cannot be said to be controlled by an ‘individual’
and consequentially clause (j) cannot be invoked in the present case.

– Even though a certain degree of control may
actually be exercised by these enterprises over each other due to relationships
of the persons owning the enterprises, that itself is not sufficient to hold
the two enterprises as AEs.

– Taxpayer and FCo are thus not to be treated
as AEs.

shailesh.kwebmaker

Sale In The Course Of Import Vis-À-Vis Works Contract

Introduction

Under Sales Tax Laws, sales effected in the course of import
are exempt. The protection is given by Article 286 of the Constitution of
India. The nature of sale in the course of import is defined in section 5(2) of
the CST Act, 1956 which is as under;

“(2) A sale or purchase of goods
shall be deemed to take place in the course of the import of the goods into the
territory of India only if the sale or purchase either occasions such import or
is effected by a transfer of documents of title to the goods before the goods
have crossed the customs frontiers of India.”

It can be seen that there are two limbs in above
section. The first limb covers the sale
which occasions the import. The second
limb covers sales which are effected by transfer of documents of title to goods
before the goods cross Customs Frontiers of India.

In relation to first limb, there are a number of precedents.
There are cases, where importer has committed sale of goods to be imported, to
its buyer and the actual import is made after such commitment. The first sale
by foreign seller to importer is occasioning the import and hence covered by
first limb. However, it is also possible that the sale made by importer to the
local buyer after import can be covered by the said first limb. However, the
issue is debatable and depends upon facts of each case.

After the 46^th amendment to the Constitution, the
works contract sales are also brought in taxable net under sales tax laws.
Issue arises as to whether the theory of sale in the course of import, more
particularly sale to local buyer, after import, can be covered within first
limb of section 5(2) of the CST Act.

Inextricable link

For claiming sale to local buyer after import, as covered by
first limb as sale in the course of import, it is necessary that there is
inextricable link between import and local sale. In other words, it is required
to be seen whether the import and local sale after import are interlinked.
There are number of criteria to decide inextricable link.

Judgment of Supreme Court

Recently, the Hon’ble Supreme Court had an occasion to decide
such an issue. The judgment is in case of Commissioner, Delhi Value Added
Tax vs. ABB Ltd. (91 VST 188). The short facts of the case noted by the
Hon’ble Supreme Court are as under;

“3. Before adverting to the main issue as to whether the High
Court judgment is correct in law as well as in facts or not, it would be
appropriate to notice some of the relevant facts. The respondent is a Public
Limited Company engaged, inter alia, in manufacture and sale of
engineering goods including power distribution system and SCADA system. It
appears to be a market leader in power and automation technologies. It is a
subsidiary of ABB Ltd., Zurich Switzerland which has operational presence in
over 100 countries and employs around 1,30,000 personnel. On 15.05.2003 DMRC
invited tenders for supply, installation, testing and commissioning of traction
electrification, power supply, power distribution and SCADA system for Line 3
Barakhamba Road-Connaught Place-Dwarka Section of the DMRC. Respondent
responded.

4. DMRC short listed the respondent and then executed
the contract under which the respondent had to provide transformers,
switch-gears, High Voltage Cables, SCADA system and also complete electrical solution,
including control room for operation of metro trains on the concerned Section.
The Bid Document contained detailed bill of goods, quantities and
specifications for the goods, sources (i.e, name of the manufacturer/brand),
detailed terms and conditions requiring approval of sub-contractors/ suppliers
and testing. The goods as also the components of works required certification
as well as acceptance. The NIT required both, Technical Bid and Financial Bid.
Besides the quotation of lumpsum price for the entire scope of work the Bid
Document required individual breakup of price of goods and other details. Bid
submitted by the respondent finally culminated into a contract on 04.08.2004.
The contract document comprised of Special Conditions of Contract, General
Conditions of Contract etc.”

The Delhi sales tax authorities held that there was no link
between the import and contract between DMRC (contractee) and supplier of goods
i.e. ABB Ltd (importer). In other words the claim of sale, in the course
import, by ABB Ltd to DMRC under works contract was disallowed.

Hon’ble Delhi High Court, after going through the contract
allowed the transaction as sale in the course of import and accordingly held it
exempt. Before the Supreme Court, similar arguments were repeated. In
particular, sales tax department relied upon judgment in case of M/s Binani
Brothers Pvt Ltd (1974)1 SC 459. The Hon’ble High Court has allowed the
claim based on judgment in case of K. G. Khosla & Co AIR 1966 SC 1216.
The Hon’ble Supreme Court dealt with this argument elaborately with
reference to above judgments. The observation of the Hon’ble Supreme Court are
as under :-

“12. For analysing the main contention advanced on
behalf of the appellant that the present case is identical to that of the
assessee in the case of Binani Bros. (supra), we have examined
the facts of Binani Bros. (supra) with meticulous care. In para
13 of that judgment the most peculiar and conspicuous aspect of K.G. Khosla
case (supra) was noticed and highlighted that “under the contract of
sale the goods were liable to be rejected after a further inspection by the
buyer in India.” In the same paragraph it was further highlighted with the help
of a quotation from K.G. Khosla case (supra) that movement of
goods imported to India was in pursuance of the conditions of the contract
between the assessee and the Director General of Supplies. There was no
possibility of such goods being used by the assessee for any other purpose. In
the next paragraph of the Report the peculiar facts of Binani Bros. (supra)
were highlighted in the following words, “….. the sale by the petitioner to the
DGS&D did not occasion the import. It was purchase made by the petitioner
from the foreign sellers which occasioned the import of the goods”. In paragraph
16 it was further pointed out that there was no obligation on the DGS&D to
procure import licences for the petitioner.

13. There is no difficulty in holding that Binani
Bros. (supra) did not differ with the earlier judgment of a
Constitution Bench in the case of K.G. Khosla (supra). A careful
analysis of the facts in Binani Bros. (supra) leads to a
conclusion that the case of West Bengal Sales Tax authorities in that matter
that there were two sales involved in the transactions in question, one by the
foreign seller to the assessee and the second by the assessee to the DGS&D,
because there was no privity of contract between the DGS&D and the foreign
sellers, was accepted mainly because the assessee was found entitled to supply
the goods to any person, even other than DGS&D because there was no
specification of the goods in such a way as to render it useable only by the
DGS&D. This was coupled with the fact that the latter had imposed no
obligation on the assessee to supply the goods only to itself. Further, there
were no obligations of testing and approving the goods during the course of
manufacture or for that matter, even at a later stage with a right of
rejection. Such a right of rejecting the specific goods in the present case is
identical to the similar right in respect of goods in K.G. Khosla case (supra).
Hence we are unable to accept the main contention of the appellant that this
case is similar to that of Binani Bros (supra). To the contrary, we
agree with the reasonings of the High Court for coming to the view that the
present case is fit to be governed by the ratio laid down in K.G. Khosla’s
case (supra).

14. The legal principles enunciated in K.G. Khosla (supra)
have been reiterated in State of Maharashtra vs. Embee Corporation, Bombay
and stand supported by the judgment in the case of Deputy Commissioner of
Agricultural Income Tax and Sales Tax, Ernakulam vs. Indian Explosives Ltd.,
as well as in Indure Ltd. and Anr. vs. CTO & Ors. In these cases,
sale in course of imports was accepted without requiring privity of contract
between the foreign supplier and the ultimate consumer in India.”

Conclusion

Thus, the Hon’ble Supreme Court allowed the
claim. From the above judgment it becomes clear that the transactions falling
under ‘works contract’ are also eligible for exempted sale as Sale in the
course of import. The judgment will be useful for future guidance on the issue.

shailesh.kwebmaker

Transfer of Cenvat Credit in Merger & Amalgamation – Recent Amendment

Transfer of CENVAT Credit – Existing Provisions under Rule 10
of CENVAT Credit Rules, 2004 (‘CCR’)

If a manufacturer of the final products shifts his factory to
another site or the factory is transferred on account of change in ownership or
on account of sale, merger, amalgamation, lease or transfer of the factory to a
joint venture with the specific provision for transfer of liabilities of such
factory then, the manufacturer shall be allowed to transfer the CENVAT credit
lying unutilised in his account to such transferred, sold, merged, leased or
amalgamated factory.

If a provider of output service shifts or transfers his
business on account of change in ownership or on account of sale, merger,
amalgamation, lease or transfer of the business to a joint venture with the
specific provision for transfer of liabilities of such business then, the
provider of output service shall be allowed to transfer the CENVAT credit lying
unutilised in his account to such transferred, sold, merged, leased or
amalgamated business.

The transfer of the CENVAT credit under sub–rules (1) and (2)
shall be allowed only if the stock of inputs as such or in process, or the
capital goods is also transferred along with the factory or business premises
to the new site or ownership and the inputs, or capital goods, on which credit
has been availed of are duly accounted for to the satisfaction of the Deputy
Commissioner of Central Excise or as the case may be, the Assistant
Commissioner of Central Excise

Amendment in Rule 10 of CCR vide Notification No. 4/2017 –
CE(NT) dated 02/02/2017

In Rule 10 of the said rules, after sub-rule (3), the
following sub-rule shall be inserted, namely :-

(4) “Subject to the provisions contained in sub-rule
(3), the transfer of the CENVAT credit shall be allowed within a period of
three months from the date of receipt of application by the Deputy Commissioner
of Central Excise or Assistant Commissioner of Central Excise, as the case may
be:

Provided that the period specified in this sub-rule may, on
sufficient cause being shown and reasons to be recorded in writing, be extended
by the Principal Commissioner of Central Excise or Commissioner of Central
Excise, as the case may be, for a further period not exceeding six months.”

Brief Analysis of the amendment

Rule 10 of CCR contains specific provisions for transfer of
unutilised CENVAT credit, in cases where, a manufacturer or a service provider
shifts his factory/premises to another site or transfers his business, on
account of sale, merger, amalgamation, lease etc. The transfer of credit
in such cases is allowed on the condition that the stocks of inputs and capital
goods are transferred as well. Further, the said inputs or capital goods, on
which credit has been availed, need to be duly accounted for to the
satisfaction of the concerned authorities.

Based on practical experience of central excise and service
tax administration, it is noticed that invariably attempts are made by Central
Excise department to raise frivolous objections and deny transfer of unutilized
CENVAT credit in case of business restructuring generally resulting in hardship
and avoidable litigation.

In particular, provisions under Rule 10 of CCR have led to
several disputes. The departmental authorities insist that prior permission is
required for transfer of unutilised CENVAT credit, while the tax payers take a
position that mere intimation was sufficient to transfer the unutilised credit.

Some relevant judicial considerations are given hereafter for
reference:

In Hewlett Packard (I) Sales vs. CC (2008) 6 STR 155; 211
ELT 263 (CESTAT), it has been held that prior permission of AC / DC is not
required for transfer of credit relying on Solaris Biochemicals vs. CCE
(2005) 179 ELT 216 (CESTAT) – followed in Kiran Pondy Chems vs. CCE
(2009) 239 ELT 192 (CESTAT SMB); Flex Art Foil P Ltd. vs. CCE (2010) 260 ELT
261 (CESTAT) [view upheld in CC vs. Hewlett Packard India Sales Ltd.
(2012) 279 ELT 203 (Karn HC DB).]

In CCE vs. Amar Traders (2008) 222 ELT 400 (CESTAT SMB),
assessee had taken CENVAT credit after intimating about merger and stock
(without seeking any permission). It was held that assessee is eligible for
CENVAT credit of duty paid on stock.

Rulings which have held that permission is not required to
transfer the balance credit – [CCE vs. Tata Auto Components Systems (2011)
33 STT 294; 277 ELT 318 (Karn HC DB); Om Glass Works vs. CCE (2012) 279 ELT 313
(CESTAT SMB).]

In CCE vs. Nagarjuna Agrichem (2008) 222 ELT 232 (CESTAT
SMB), it was observed that Rule 10 does not lay down any condition for
seeking permission from authorities.

In most of the judicial cases, relating to transfer of
unutilized CENVAT credit in case of business structuring, the matter has been
decided in favour of tax payers.

Under this backdrop, a new sub-rule 4 has been inserted with
effect from 02/02/2017 in Rule 10 of CCR, to provide that transfer of
unutilised CENVAT credit shall be allowed by the jurisdictional authorities
within 3 months (to be further extended by 6 months on sufficient cause being
shown) from the date of receipt of application by the manufacturer or service
provider.

The wordings of this newly introduced clause, indicates that
the unutilised CENVAT credit cannot be utilised by the new entity/unit unless
express written approval is received from the concerned authorities.

Some Practical Issues from the amendment

a) It is likely to increase the compliance
procedures for tax payers who have multiple premises/factories and consequently
multiple registrations under central excise and service tax. This could also
lead to an overall delay in the entire process, with the various jurisdictional
authorities disposing off applications at different times.

b) Pending
approval from the concerned authorities or in a case where the application is
rejected by the authorities, there could be situations where the new
entity/unit has to discharge the output tax liability of both the current
operations as well as new operations which may have to be paid in cash without
being able to utilise CENVAT credit of the transferor entity/ factory. This
could pose severe working capital constraints.

c) There could be a scenario where the authorities
do not issue the formal approval within the prescribed time. In such a case,
the amendment is silent as to whether or not, transfer of unutilised CENVAT
credit would automatically stand permitted after the expiry of the prescribed
time period.

Conclusion

Mergers and amalgamations are a very common phenomenon in the
fast changing business environment globally as well as in India. Hence, it is
essential that in order to promote the cause of “ease of doing business”, the
relevant tax laws are business friendly so as to encourage smooth & easy
business restructuring. The amendment made in Rule 10 of CCR with effect from
02/02/2017, could result in long drawn litigations and create uncertainty as
regards entitlement to the benefit of unutilised CENVAT credit at the end of
transferor company or entity, by the transferee company or entity.

In light of the foregoing, the following is recommended:

Appropriate clarifications need to be issued by
CBEC to address practical issues arising from the amendment so as to avoid
hardships to tax payers, in case of business restructuring. In order to encourage
mergers and amalgamations and business restructuring generally and also to
promote the cause of “ease of doing business”, transfer of unutilised CENVAT
credit may be permitted provisionally, pending disposal of application for
transfer of credit based on an undertaking that can be given by the transferor
company or entity to safeguard interest of revenue. While finalising GST
legislation, it should be ensured that these concerns are appropriately addressed.

shailesh.kwebmaker

Welcome GST Indian GST: Goods and Services Tax – Overview & Framework

1. Introduction

1.1. Goods and Services Tax (“GST”) is a
landmark indirect tax reform knocking at our doors. The framework for the
proposed GST Law is provided through the Constitution (101st) Amendment Act,
2016. Section 12 of the said Act dealing with the constitution of the GST
Council was notified on 12.09.2016 and the balance sections of the said Act
have been notified with effect from 16.09.2016 vide Notification No. F. No.
31011/07/2014-SO (ST). In view of sections 17 and 19 of the said Amendment Act,
many of the existing indirect taxes can continue only up to a period of one
year from the above notified date i.e. Existing levies like central excise
duty, value added tax, central sales tax, etc. cannot continue after
16.09.2017. The Union Finance Minister has therefore reiterated the commitment
to introduce GST w.e.f. 01.07.2017.

1.2. In June 2016, the Empowered Committee of
the State Finance Ministers released a draft of the proposed GST Law for public
comments. Based on the public comments received, the GST Council Secretariat
released a revised draft of the proposed GST Law for education of the trade.
The revised draft of the proposed GST Law is the basis of this article.

2. Dual Model of GST

2.1. GST is proposed to be a comprehensive
indirect tax levy on manufacture, sale and consumption of goods as well as on
the services at a national level. In an utopian situation, the tax has to be a
singular tax on all supplies with a uniform rate and seamless credits for taxes
paid at the earlier stage. The current distinction between goods and services
and between concepts of manufacture, sale, deemed sales, etc. should be
subsumed in such a utopian GST.

2.2. However, considering the federal structure
of India, the Empowered Committee of State Finance Ministers have worked out a
dual GST model for India. In this model, both the Central and the State
Governments would levy Central GST (“CGST”) and State GST (“SGST”) respectively
on the same comprehensive base of all supplies, thus eliminating the
distinction between goods and services for the purpose of levy of tax.

3. Destination Based Consumption Tax

3.1. Since the State Governments would also
have jurisdiction to levy tax on supplies, the need for addressing issues
related to interstate supplies arises. GST is designed to be a destination
based consumption tax and therefore in case of interstate supplies, the tax on
the interstate supply must accrue to the destination State. This would also
enable seamless flow of credit in case of interstate supplies for business
purposes.

3.2. Extending the principle of destination
based consumption tax, supplies imported into the country would attract GST
whereas supplies exported from the country need to be zero rated (i.e. not
liable for payment of GST with unfettered input credit).

3.3. To enable a smooth implementation of the
above propositions, the interstate supplies, imports and exports are governed
by an Integrated GST(“IGST”). The IGST rate is proposed to be determined by
considering the CGST and SGST Rates. Effectively, in IGST, there would be two
components i.e. CGST and SGST, out of which, the portion of CGST will be held
by the Central Government and the portion of SGST will be transferred to the
destination State Government. Thus, for IGST, the Central Government will work
as a clearing house for the states where consumption takes place. IGST will
also enable smooth flow of credits between the origin and the destination
States.

3.4. In order to ensure smooth flow of credit
and reduce the documentation requirements, IGST is proposed not only on
interstate sales but also on interstate supplies including branch transfers.

4. Salient Features of Constitution
Amendment Act

4.1. The term ‘GST’ is defined in Article
366(12A) of the Constitution of India to mean “any tax on supply of goods or
services or both except taxes on supply of the alcoholic liquor for human
consumption”.

4.2. Article 366(26A) of the Constitution of
India provides that “services means anything other than goods”.

4.3. Various Central and State taxes will be
subsumed in GST. All goods and services, except alcoholic liquor for human
consumption, will be brought under the purview of GST. Petroleum and petroleum
products (Crude Petroleum, Petrol, Diesel, and ATF) have also been brought
under GST. However, it has also been specifically provided that petroleum and
petroleum products shall not be subject to the levy of GST till a date to be
notified. Till such time Petroleum products will continue to attract excise
duty.

4.4. Article 246A of the Constitution is
inserted in the main body of the Indian Constitution after Article 246 to
empower both the Centre and State to legislate on a common matter i.e. Goods
and Service Tax. The power to make laws on Inter-state transactions has been
kept exclusively with the Central Government.

4.5. Article 279A of the Constitution has been
introduced for creation of Goods and Service Tax Council, a constitutional body
which will be a joint forum of the Central and the State Governments. This
Council will make recommendations to both the Central and State Government on
important issues like tax rates, exemptions, threshold limits, disputes
resolution for GST. The GST Council is envisaged as a recommendatory body with
the Union Finance Minister as Chairperson, Minister in charge of Finance or
Taxation or any other Minister nominated by the each State Government as
members and Union Minister of the State in charge of Revenue as Member of the
GST Council.

5. Legislation – Draft GST Laws

5.1. The dual GST model would be implemented
through multiple statutes:

– An enactment by the Centre to govern the
collection and administration of CGST

– An enactment by each of the States to govern
the collection and administration of SGST

– An enactment by the Centre to govern the
collection and administration of IGST

– An enactment by the Centre to govern the
collection and administration of Cess earmarked for grant of compensation to the
States for revenue loss on account of implementation of GST.

5.2. While there would be multiple statutes for
collection and administration of different variations/components of the GST, it
is expected that the basic features of law such as chargeability, definition of
taxable event and taxable person, measure of levy including valuation
provisions, basis of classification etc. would be uniform across these
statutes. For the said purpose, the GST Council will recommend a draft
legislation for adoption by the State Governments. The GST Council is likely to
finalise the said draft GST Law very soon. However, full autonomy would be
available to the respective State Governments to deviate from the suggested
draft legislations, if there is a need for the same.

6. Provisions relating to Levy and
Collection

6.1. The
levy of tax on intrastate supply of goods and/or services is governed by the
CGST/ SGST Act whereas the levy of tax on inter-state supply of goods and/or
services is governed by the IGST Act.

6.2. Therefore,
the classification of a supply as intrastate supply or interstate supply
becomes paramount to determine the applicable taxes. This classification is
based on the combination of “location of supplier” and the “place of supply”
and is provided under the IGST Act. The provisions are tabulated below for
ready reference:

Nature of supply

Interstate

Intra state

Goods

Location of the supplier and
the place of supply are in different state

Location of the supplier and
the place of supply are in the same state

Services

Location of supplier and
place of supply in different state

Location of supplier and
place of supply in same state

6.3. It may be noted that the above
classification is subject to certain exceptions provided under the IGST Act.

7. Supply

7.1. The term “supply” is defined u/s. 3 of the
CGST/SGST Act. The said definition also applies to the IGST Law. The said
supply can be either taxable supply or an exempted supply.

7.2. All forms of supply like sale, transfer,
barter, exchange, license, rental, lease or disposal and importation of
services are made liable for GST. However, it is important that such supplies
should be for a consideration and that the supplies should be in the course of
or furtherance of business or commerce.

7.3. In addition to supplies for consideration,
Section 3(1) also includes supplies mentioned in Schedule-I without a
consideration. Notable inclusions in Schedule-I are as under:

– Permanent transfer/disposal of business
assets, in cases where input tax credit has been availed

– Supply of goods and/or services between
branches or between related persons

– Supply of goods by principal to agent and vice-versa

– Importation of services from overseas
branches

8. Valuation & Rate/s of Tax

8.1. In general, GST would be payable on the
value of supply. While the general provision u/s. 15 states that the value of
supply shall be the transaction value, the same is subject to the following
conditions:

– Supplier and recipient of supply not
related

– Price is the sole consideration.

8.2. The proposed GST Rate would be determined
based on the principle of Revenue Neutral Rates (RNR). ‘Revenue Neutral Rates’
(RNR) in layman terms, is the rate that allows the Central and States to
sustain the current revenue from tax collections.

8.3. Based on the announcements made by the GST
Council, the following broad classifications of rates are proposed in upcoming
regime of GST:

– Nil Rate for essential goods and services

– Merit Rate for essential goods – 5%

– Lower Standard Rate for goods and services –
12%

– Standard Rate (RNR) for goods and services in
general – 18%

– Demerit Rate for goods – 28%

– Special rate for precious metals – yet to be
decided.

8.4. In addition to the above, certain goods
classified under the 28% rate may also bear a cess which will enable the
compensation to be paid by the Centre to the Revenue loosing States.

9. Exemptions & Composition Scheme

9.1. Most of the exemptions currently available
will be phased out. However, section 11 of the Act permits the Government to
grant exemptions through the issuance of notifications. Further, certain goods
and supplies may be covered under the NIL rate under the Schedule

9.2. A
basic threshold exemption limit of Rs. 20 lakh has been provided.
Further, in order to facilitate small tax payers, an optional composition
scheme has been prescribed for persons having aggregate turnover of up to Rs.
50 lakh. The composition option is not available to the following persons:

– Service Providers

– Persons making inter-state supplies

9.3. The Composition scheme is subject to
various conditions. The supplier is not eligible to claim the credit nor is he
entitled to collect the tax from the customer. Further, the customer is not
eligible for any credits of the composition amount.

9.4. The following table explains the minimum
amount of tax payable under composition scheme:

Type of
suppliers

Minimum CGST

Minimum SGST

Total

Manufacturers

2.5%

Traders

Service Providers

Not eligible

10. Time of Supply

10.1. The liability to pay tax arises at the time
of supply. The following provisions are relevant in this regard.

Section

Provisions

Time of supply of goods

Time of supply of services

Change in rate of tax for
goods and services

10.2. In general, the liability to pay GST arises
on the raising of invoice or receipt of payment whichever is earlier. However,
it is also provided that in case where the invoice is not issued within the
prescribed time, the date on which the invoice is required to be issued will
trigger the GST Liability.

11. Place of Supply for Goods

11.1. Section 7 of the IGST Act defines the place
of supply of goods other than imported and exported goods. The said provisions
are fundamentally different from the current provisions since they are based on
the destination principle rather than the origin principle.

11.2. The following table summarises the place of
supply of goods as defined under the GST Act and under the IGST Act:

Situation

Place of Supply as per
Section 7 of IGST Act

Supply involving movement of
goods

Location of termination of
movement for delivery

Supply by way of transfer of
documents of title

Principal place of business
of the buyer

Supply not involving movement of goods

Location of goods

Goods assembled or installed
at site

Place of installation or
assembly

Goods supplied on board of
conveyance

Location at which goods are
taken on board

11.3. Similarly, the place of supply for imported
/ exported goods is provided u/s. 8 of the IGST Act. The provisions are simple
and are therefore tabulated below for ready reference :

Nature of Goods

Place of Supply

Imported Goods

Location of Importer

Exported Goods

Location outside India

12. Place of Supply for Services

12.1. The concept of IGST serves multiple
objectives. Since the services are essentially intangible in nature, the place
of supply rules for services are drafted considering these objectives in
mind. Further to the above objectives,
the place of supply rules under IGST also need to deal with situations of
supplies amongst two or more States, where also the guiding principle is
ensuring a seamless flow of credits amongst businesses and transfer of tax to
the correct State of Consumption.

12.2. The following table summarises the
provisions in regard to the place of supply of services. It may be noted that
if the location of service recipient is not available on records, the location
of supplier will be considered in cases where the place of supply is the
location of recipient of service.

Nature of Supply of Service	Supplier- recipient in India (R2R)	Either of supplier or recipient is outside India
General Rule	Location of Service recipient	Location of Service Recipient	Location of Service Recipient
Immovable property	Location of Immoveable Property	Location of Immoveable Property	Location of Immoveable Property
Performance based service	Location of Service Recipient	Location of Service Recipient	Place of Performance of Service
Training and performance	Location of Service Recipient	Place of Performance	Place of Performance
Admission to an event or park	Location of the Event	Location of the Event	Location of the Event
Organization of events etc.	Location of service recipient	Place where event is actually held	Place where the event is held
Transportation of goods	Location of service recipient	Place where goods are handed over their transportation	Destination of Goods
Transportation of passengers	Location of service recipient	Place where passenger embarks on the conveyance for a continuous journey	Place where passenger embarks on the conveyance for a continuous journey
Services on board a conveyance	First Scheduled Point of Departure	First Scheduled Point of Departure	First Scheduled Point of Departure
Telecommunication services	Various situations to determine the location of subscriber	Various situations to determine the location of subscriber	Location of Recipient
Banking & Financial Services including stock broking	Location of service recipient on the records of service provider	Location of service recipient on the records of service provider	Location of Supplier for account related services. Location of Recipient in other cases
Insurance	Location of service recipient	Location of service recipient	Location of service recipient
Advertisement services to Government etc.	Not Applicable	• Meant for identifiable state- POS would be that state • Multiple States- POS all such states and value to be attributed to each of them	Not Applicable
Intermediary	Location of Recipient	Location of Recipient	Location of Supplier
Hiring of means of transport	Location of Recipient	Location of Recipient	Location of Supplier
Online information and database access or retrieval service	Location of Recipient	Location of Recipient	Location of Recipient

Nature of Supply of Service

Supplier- recipient in
India (R2R)

Either of
supplier or recipient is outside India

Business to Business
Cases (B2B)

Business to Customer Cases
(B2C)

General Rule

Location of Service
recipient

Location of Service
Recipient

Immovable property

Location of Immoveable
Property

Performance based service

Location of

Service Recipient

Location of

Service

Recipient

Place of Performance of
Service

Training and performance

Location of

Service Recipient

Place of Performance

Place of

Performance

Admission to an event or
park

Location of the Event

Organization of events etc.

Location of service
recipient

Place where event is
actually held

Place where the event is
held

Transportation of goods

Location of service
recipient

Place where goods are handed
over their

transportation

Destination of Goods

Transportation of passengers

Location of service
recipient

Place where passenger
embarks on the conveyance for a continuous journey

Services on board a
conveyance

First Scheduled Point of
Departure

First

Scheduled Point of Departure

First Scheduled Point of
Departure

Telecommunication services

Various situations to
determine the location of subscriber

Various

situations to determine the
location of subscriber

Location of Recipient

Banking & Financial
Services including stock broking

Location of service
recipient on the records of service provider

Location of Supplier for
account related services.

Location of Recipient in
other cases

Insurance

Location of service
recipient

Location of

service recipient

Location of service
recipient

Advertisement services to
Government etc.

Not Applicable

• Meant for identifiable state- POS would be that state

• Multiple States- POS all such states and value to be attributed
to each of them

Not Applicable

Intermediary

Location of Recipient

Location of Supplier

Hiring of means of transport

Location of Recipient

Location of Supplier

Online information and
database access or retrieval service

Location of Recipient

13. Input Tax Credit

13.1. Input Tax Credit mechanism is the core of
the GST Regime. The provisions of input tax credit are contained in section 16
of the Act. The salient features thereof are as under:

– Input Tax credit will be allowed only to
registered persons

– On registration, credit would also be
available for inputs and finished goods lying in stock on the date of
registration.

– Credit to be calculated based on generally
accepted accounting principles as may be prescribed.

– Proportionate credit in case certain goods
are used for business as well as non-business purposes

– Certain cases of ineligible input tax credit
are also prescribed.

13.2. Some examples of ineligible credits are
provided below for ready reference

– Motor vehicles unless used for transportation
of goods

– Food and Beverages unless the same is used
for the purposes of further business in F&B

– Employee related goods/ services

– Goods/ services resulting in construction of
immovable property for self-consumption

– GST paid under the composition scheme

– Goods for personal consumption

– Goods lost, destroyed, stolen, written off or
disposed off by way of gifts or free samples

13.3. Fungibility of credit: The rules relating to
fungibility of credits and priority of adjustment are as under

13.3.1. The input tax credit on account of IGST during
a tax period shall first be utilised towards payment of IGST; the amount
remaining, if any, shall be utilised towards the payment of CGST and SGST, in
that order.

13.3.2. The input tax credit on account of CGST during
a tax period shall first be utilised towards payment of CGST; the amount
remaining, if any, shall be utilised towards the payment of IGST.

13.3.3. The input tax credit on account of SGST during
a tax period shall first be utilised towards payment of SGST; the amount
remaining, if any, shall be utilised towards the payment of IGST.

13.3.4. No input tax credit on account of CGST shall be
utilised towards payment of SGST.

13.3.5. No input tax credit on account of SGST shall be
utilised towards payment of CGST.

13.4. Section 16(2) of the Act also prescribes for
certain documentation before the credit can be claimed, such as possession of
tax invoice, goods/ service should have been received, tax has been actually
paid by the supplier and return has been furnished under the applicable
section. Similarly, it is also stated that the payment of tax by cash or credit
by the supplier is necessary to claim credit. Similarly, it is important that
the payment is made to the service provider within a period of 3 months.

14. Procedural Aspects

14.1. Under the GST Law, credits will be available
on the basis of online matching of credits. Towards that goal in mind, a
detailed procedure has been prescribed for periodic filing of statements,
online matching and submission of returns. The following chart explains the
process as a bird’s eye view.

14.2. Elaborate rules are also prescribed for
payment of taxes, grant of refunds, assessment, audits, demands and
enforcement. Further, penal provisions are also prescribed for various offences
listed under the proposed Act.

15. Transitional Provisions

15.1. The model GST Law contains various
provisions dealing with transition related issues. The said provisions deal
with migration of registrations of existing taxpayers into the GST Regime and
thereafter deal with issues relating to credits, payment of taxes and certain
procedures.

16. Anti Profiteering Measure

16.1. Sensing the risk of GST resulting in
widespread inflation, the Government has introduced an anti profiteering
provision under the Model GST Law. Accordingly, it is proposed that an
authority shall be set up to investigate such cases and impose penalties as
deemed fit.

17. Conclusion

17.1. The
proposed GST Law presents a unique opportunity to professionals to provide
quality services to clients. The BCAJ proposes to carry detailed articles analysing
each of the sections of the proposed GST Law. This article is a precursor to
such a detailed in depth analysis which will be carried in subsequent issues.

shailesh.kwebmaker

46. Appellate Tribunal – Power to enhance – Tribunal has no power to enhance assessment

Fidelity Shares and Securities Ltd. vs. Dy. CIT; 390 ITR
267 (Guj):

Dealing with the scope of the power of the Tribunal under the
Income-tax Act, 1961 the Gujarat High Couirt held as under:

“The Tribunal has no power under
the Income-tax Act, 1961 to enhance assessment.”

shailesh.kwebmaker

Depreciation on Non-Compete Fees

Issue for Consideration

Depreciation is allowable u/s. 32(1) on buildings, machinery,
plant or furniture, being tangible assets, and on know-how, patents,
copyrights, trade marks, licences, franchises or any other business or
commercial rights of similar nature, being intangible assets acquired on or
after 1^stApril 1998. At times, under an agreement for acquisition
of shares or acquisition of a business or on cessation of employment of an
employee, the seller, its promoters or the employee may be paid a non-compete
consideration, in addition to the sale consideration. The agreement for such
non-compete would generally provide that the payee shall refrain from carrying
on a competing business for a certain number of years.

The issue has arisen before the High Courts as to whether such
non-compete fee constitutes an intangible asset of the payer, which is eligible
for depreciation u/s. 32(1). While the Delhi High Court has held that such
non-compete fee is not an intangible asset eligible for depreciation, the
Karnataka and the Madras High Courts have held that the rights acquired on
payment of a non-compete fee are intangible assets eligible for depreciation.

Sharp Business System’s case

The issue had come up before the Delhi High Court in the case
of Sharp Business System vs. CIT 211 Taxman 576.

In this case, the assessee was a joint-venture between Sharp
Corporation and L & T. It used to import, market and sell electronic office
products and equipments in India. During the relevant year, it paid Rs. 3 crore
to L & T as consideration for the latter not setting up or undertaking or
assisting in setting up or undertaking any business in India of selling,
marketing and trade of electronic office products for a period of 7 years. In
the accounts of the assessee, this amount was treated as a deferred revenue
expenditure and written off over the period of 7 years. In the return of
income, the entire sum paid was claimed as a revenue expenditure, on the ground
that the payment facilitated its business and did not enhance or alter the fixed
capital.

The assessing officer disallowed the deduction on account of
non-compete fee, on the ground that it conferred a capital advantage of
enduring value. The Commissioner(Appeals) rejected the assessee’s appeal, and
also rejected the alternative contention of the assessee for allowance of the
depreciation on such payment.

On further appeal, the Tribunal also rejected the contention
that the non-compete fee constituted revenue expenditure, holding that the
payment made by the assessee was not to increase the profitability, but to
establish itself in the market and acquire market share, as the period of 7
years was quite long, during which any new company could establish its
reputation and acquire a reasonable market share. It held that by keeping L &
T away from the same business, the assessee hoped to acquire a good market
share. The Tribunal also rejected the assessee’s claim for depreciation on
intangible asset.

Before the High Court, on
behalf of the assessee, besides arguing that the expenditure was of a revenue
nature, it was argued that the Tribunal was wrong in concluding that the right
to trade freely in the market was not an asset, and did not qualify for
depreciation u/s. 32. Reliance was placed on section 32(1)(ii) for the
proposition that intangible assets used for the business were eligible for
depreciation. It was argued that once it was held that the assessee had
acquired an advantage in the capital field, denial of depreciation amounted to
an inconsistent approach.

Reliance was also placed on behalf of the assessee on the
decision of the Supreme Court in the case of Techno Shares and Stocks Ltd
vs. CIT 327 ITR 323, where the Supreme Court had held that holding of a
membership card of the stock exchange amounted to acquisition of an intangible
asset, which qualified for depreciation u/s. 32(1)(ii). On a similar reasoning,
it was argued that the right acquired by the assessee for itself after payment
of the non-compete fee was akin to a license or other similar rights, on which
depreciation had to be given. Reliance was also placed on the decision of the
Delhi High Court in the case of CIT vs. Hindustan Coca-Cola Beverages (P)
Ltd 331 ITR 192, where it was held that intangible advantages all assets in
the form of know-how, trade style, goodwill, etc. were depreciable
assets.

On behalf of the revenue, it was argued that the question of
allowability of depreciation did not arise at all, because the business or
commercial rights of similar nature could not be said to arise overnight on
account of payment of non-compete fee. Besides, the payment did not result in
any intangible asset akin to a patent or intellectual property right.
Therefore, it was claimed that the non-compete agreement did not create an
asset of intangible nature or kind which qualified for depreciation.

While holding that the payment amounted to a capital
expenditure, given the fact that the arrangement was to endure for a
substantial period of 7 years, the Delhi High Court considered whether an
expenditure conferring a capital advantage was necessarily depreciable. It
observed that as was evident from section 32(1)(ii), depreciation could be
allowed in respect of intangible assets. Parliament had spelt out the nature of
such assets by explicit reference to know-how, patents, copyrights, trademarks,
licences and franchises. It noted that so far as patents, copyrights,
trademarks, licences and franchises are concerned, though they were intangible
assets, the law recognised through various enactments that specific
intellectual property rights flowed from them.

According to the Delhi High Court, licences were derivatives
and often were the means of conferring such intellectual property rights. The
enjoyment of such intellectual property right implied exclusion of others, who
did not own or have license to such rights, from using them in any manner
whatsoever. Similarly, in the matter of franchises and know-how, the primary
brand or intellectual process owner owns the exclusive right to produce, retail
and distribute the products and the advantages flowing from such brand or
intellectual process owner, but for the grant of such know-how rights or
franchises. In other words, the species of intellectual property like rights or
advantages led to the definitive assertion of a right in rem.

Referring to the Supreme Court decision in the case of Techno
Shares and Stocks(supra), the Delhi High Court was of the view that the
Supreme Court had clearly limited its scope while holding that the right to
membership of the stock exchange was in the nature of any other business or
commercial right, which was an intangible asset, by clarifying that the
judgement of the court was strictly confined to the right to membership
conferred upon the member under the BSE membership card during the relevant
assessment years. According to the Delhi High Court, that ruling was therefore
concerned with an extremely limited controversy, i.e. depreciability of stock
exchange membership. In the view of the Delhi High Court, the membership rights
of a stock exchange was held to be akin to a license, because it enabled the
member to access the stock exchange for the duration of the membership, and
therefore it conferred a business advantage, which was an asset and clearly an intangible asset.

While analysing the question of whether the non-compete right
of the kind acquired by the assessee against L&T for 7 years amounted to a
depreciable intangible asset, the Delhi High Court observed that each of the
species of rights spelt out in section 32(1)(ii), i.e. know-how, patent,
copyright, trademark, license of franchise or any other right of a similar kind
conferred a business or commercial right, which amounted to an intangible
asset. The nature of these rights clearly spelt out an element of exclusivity,
which enured to the assessee as a sequel to the ownership. In other words, if
it was not for the ownership of the intellectual property or know-how or
license or franchise, it would be unable to either access the advantage or
assert the right and the nature of the right mentioned spelt out in the
provision as against the world at large, in legal parlance, in rem.

According to the Delhi High Court, in the case of a
non-compete agreement or covenant, the advantage was a restricted one in point
of time. It did not necessarily, and in the facts of the case before the Delhi
High Court, according to the court, did not confer any exclusive right to carry
on the primary business activity. The right could be asserted in the present
case only against L&T, and was therefore a right in personam.

The Delhi High Court further observed that another way of
looking at the issue was whether such rights could be treated or transferred, a
proposition fully supported by the controlling object clause, i.e. intangible
asset. Every species of rights spelt out expressly by the statute, i.e. of the
intellectual property right and other advantages such as know-how, franchise,
license, et cetera and even those considered by the courts, such as
goodwill, could be said to be transferable. Such was not the case with an
agreement not to compete, which was purely personal.

The Delhi High Court therefore held that the words “similar
business or commercial rights” had to necessarily result in an intangible asset
against the entire world, which could be asserted as such, to qualify for
depreciation u/s. 32(1)(ii). Accordingly, it was held that the non-compete
payment made by the assessee did not result in an intangible asset eligible for
depreciation.

Ingersoll Rand International Ind Ltd.’s case

The issue came up again before the Karnataka High Court in
the case of CIT vs. Ingersoll Rand International Ind. Ltd. 227 Taxman 176
(Mag).

In this case, the assessee was engaged in the business of
security and access control systems integration. During the relevant year, it
entered into a business purchase agreement with another company, Dolphin,
whereby it purchased the business of Dolphin for a consideration of Rs. 11.71
crore. The purchase consideration included a sum of Rs. 54.43 lakh paid to the
promoter as non-compete fees, and a sum of Rs. 43.55 lakh paid to him for
purchase of patents. The promoter was also appointed as the Vice President and
Company Head of the assessee through a contract of employment.

Out of the total consideration of Rs. 11.71 crore,
non-compete fees and patents were shown as assets in the books of account of
the assessee, and the balance amount was shown as goodwill. The payment of
non-compete fee was treated as a revenue expenditure in the computation of
total income, though capitalised in the books of account. The assessee also
claimed depreciation on the patents in the computation of its income, though it
did not claim depreciation on goodwill.

The assessing officer held that the non-compete fee was
capital in nature and disallowed it. The Commissioner(Appeals), while holding
that the non-compete fee was in the nature of capital expenditure, also held
that it was not eligible for depreciation. The Tribunal, while upholding the
view that the non-compete fee was in the nature of capital expenditure, held
that it was in the nature of a business or commercial right, and that depreciation
was allowable on such an asset.

Before the Karnataka High Court, on behalf of the revenue, it
was argued that non-compete fee did not constitute a commercial or a business
right for allowing depreciation u/s. 32(1)(ii). It was argued that in order to
claim depreciation, the assessee should own and use the asset in the business,
and that this user test was not satisfied in this case. It was therefore argued
that non-compete fee could not be classified as an asset, and now depreciation
could be allowed thereon.

On behalf of the assessee, it was argued that by virtue of
payment of the non-compete fee, the assessee could carry on business without
any competition for the limited period, which in turn resulted in an advantage
to the business, and as that advantage conferred on it a commercial and
business right, once it was held to be of the nature of capital expenditure,
the assessee was entitled to depreciation u/s. 32(1)(ii).

The Karnataka High Court referred to the decisions of the
Delhi High Court in the case of Hindustan Coca-Cola Beverages (P) Ltd.
(supra) and Areva T & D India Ltd.vs. Dy CIT 345 ITR 421 to
understand the meaning of the term “any other business or commercial rights of
a similar nature”. It further referred to the decision of the Madras High Court
in the case of Pentasoft Technologies Ltd vs. Dy CIT 222 Taxman 209,
where the Madras High Court had held that a non-compete fee amounted to an
intangible asset eligible for depreciation, and the decision of the Delhi High
Court in the case of Sharp Business System (supra).

The Karnataka High Court, while analysing the provisions of
section 32(1)(ii), noted that in the definition of intangible assets, any other business or commercial rights of
similar nature were included. Therefore, such rights need not answer the
description of know-how, patents, copyrights, trademarks, licenses, or
franchises, but must be of similar nature as those assets, namely know-how, etc.
According to the Karnataka High Court, the fact that after the specified intangible
assets, the words “business or commercial rights of similar nature” had been
additionally used, clearly demonstrated that the legislature did not intend to
provide for depreciation only in respect of specified intangible assets, but
also to other categories of intangible assets, which were neither feasible nor
possible to exhaustively enumerate.

The Karnataka High Court noted that the words “similar
nature” carried a significant expression. The Supreme Court, in the case of Nat
Steel Equipment (P) Ltd vs. Collector of Central Excise AIR 1988 SC 631,
had held that the word similar did not mean identical, but meant corresponding
to resembling to in many respects, somewhat like or having a general likeness.
According to the Karnataka High Court, therefore, what was to be seen was what
the nature of intangible assets was, which would constitute business or
commercial rights to be eligible for depreciation.

The Karnataka High Court noted that the intangible assets
enumerated in section 32(1)(ii) effectively conferred a right upon an assessee
for carrying on of business more efficiently, by utilising an available
knowledge or by carrying on a business to the exclusion of another assessee. A
non-compete right represented a right, under which one person was prohibited
from competing in business with another for a stipulated period. It would be
the right of the person to carry on the business in competition, but for such
agreement of non-compete. The right acquired under a non-compete agreement was
a right for which a valuable consideration was paid. The right was acquired to
ensure that the recipient of the non-compete fee did not compete in any manner
with the business with which he was earlier associated.

According to the Karnataka High Court, the object of
acquiring a know-how, patent, copyright, trademark, license, or franchise was
to carry on business against rivals in the same business in a more efficient manner,
or in the best possible manner. The object of entering into a non-compete
agreement was also the same, i.e., to carry on business in a more efficient
manner by avoiding competition, at least for a limited period of time. On
payment of non-compete, the payer acquired a bundle of rights, such as
restricting the receiver directly or indirectly from participating in the
business, which was similar to the business being acquired, from directly or
indirectly suggesting or influencing clients or customers of the existing
business or any other person either not to do business with the person to whom
he has paid the non-compete fee, or the person receiving the non-compete fee is
prohibited from doing business with the person who was directly or indirectly in competition with the business, which was
being acquired. The right was acquired for carrying on the business, and
therefore it was a business right.

The right by way of non-compete was acquired essentially for
trade and commerce, and therefore qualified as a commercial right. Such a right
could be transferred to any other person, in the sense that the acquirer got
the right to enforce the performance of the terms of agreement under which a
person was restrained from competing. When a businessman paid money to another
businessman for restraining the other businessman from competing with the
assessee, he got a vested right, which would be enforced under law, and without
that, other businessmen could compete with the first businessman. By payment of
non-compete fee, the businessman got a right which was a kind of monopoly to
run his business without bothering about the competition.

The Karnataka High Court noted that the non-compete fee was
paid for a definite period. The idea behind this was that, by that time, the
business would stand firmly on its own footing, and could sustain later on.
This clearly showed that a commercial right came into existence, whenever the
assessee made a payment of non-compete fee. Therefore, according to the
Karnataka High Court, the right which the assessee acquired on payment of
non-compete fee conferred in him a commercial or business right, which was
similar in nature to know-how, patents, copyrights, trademarks, licenses and
franchises, which unambiguously fell within the category of an intangible
asset. The right to carry on business without competition had an economic
interest and a money value.

In the view of the Karnataka High Court, the doctrine of ejusdem
generis would come into operation. The non-compete fee vested right in the
assessee to carry on business without competition, which in turn conferred a
commercial right to carry on a business smoothly. Once such expenditure was
held to be capital in nature, consequently, the assessee was entitled to the
depreciation provided u/s. 32(1)(ii). The Karnataka High Court therefore held
that the assessee was entitled to depreciation on the non-compete fee.

A similar view was taken earlier by the Madras High Court in Pentasoft
Technologies’ case (supra), though in that case the non-compete payment was
for restraint on use of trade mark, copyright, etc.

Observations

One makes a payment, in the course of business either for
meeting an expenditure or for acquiring an asset or a right. An expenditure can
be either in the revenue field or in the field of capital. Where a revenue
expenditure is incurred, no asset can be said to have been acquired and hence
no depreciation is allowable. When a capital expenditure results in acquisition
of an asset that is eligible for depreciation, the payer will be entitled to
depreciation. Besides, being an owner of the asset, it is essential that the
owner uses the asset and such user is for the purposes of business. On
satisfaction of these tests, a valid claim for depreciation is made that cannot
be frustrated for ambiguous reasons.

Any payment made, in the course of business, not resulting in
acquisition of a tangible asset generally should be for acquiring some right or
removing some disability and when seen to be resulting in to a business or commercial
right should, without hesitation, be classified as an intangible asset, in view
of the two landmark decisions of the apex court in the case of Techno Shares
and Smifs Securites. It is inconceivable that a businessman would make a
payment that does not endow him with business rights or, in the alternative,
saves him from some disability that facilitates the conduct of his business
efficiently. Looked at from this angle,
any non revenue payment results in acquiring a business right, provided it does
not result in acquisition of a tangible asset.

The principle of user of an asset, in the context of an
intangible asset, will have to be viewed differently. In the context, it will
also include a case of preventing another person from using it against the
assessee and therefore a non-user by the others, on payment, should be viewed
as the user by the assessee. The authorities or the courts should appreciate
this aspect or the character of the intangible asset while dealing with the
concept of user.

A business or commercial right of a similar nature is vast
enough to cover a good number of cases, where the payer, on payment, is seen to
be facilitating the efficient conduct of business, by use or by non-user by the
payee. A know-how, license, franchise, etc. are cases where the payer is
enabled to carry on business with the protection of law or of the payee.
Similarly, on payment of non-compete consideration, the payer acquires a
protection from the payee for carrying on his business without competition.

Both the Delhi and Karnataka High Courts seem to have adopted
the principle of ejusdem generis, to arrive at diametrically opposite views.
While the Delhi High Court was of the view that a right obtained under a
non-compete agreement was not akin to trademarks, copyrights, licences, etc.,
the Karnataka High Court was of the view that such right is similar in nature,
as both facilitate carrying on of business more smoothly.

The distinction between the right in rem and in personam
perhaps is not relevant or conclusive in deciding the issue whether an
asset is depreciable or not. Neither the law nor the courts require that a
right in an asset should be against the world before a valid depreciation is
allowed. In the case of Techno Shares & Stocks (supra), while the
Bombay High Court had earlier held that the membership rights of the Bombay
Stock Exchange was not an intangible asset eligible for depreciation, not being
similar to other rights specified in section 32(1)(ii), the Supreme Court took
a contrary view on the same principle of ejusdem generis, holding that such
membership right was similar to a licence, since it permitted a member to carry
on trading on the exchange. This was notwithstanding the fact that such right
was a personal permission granted to the member under the bye-laws of the
exchange, and therefore not transferable. In a similar manner, a right of
non-compete, though not strictly transferable, can still be an intangible
asset.

Therefore, though the Supreme Court may have observed that the
ratio of its decision applied only to a case of membership rights of the Bombay
Stock Exchange, the principles on the basis of which the case was decided,
would apply equally for other payments under which a right to carry on a
business is acquired, though non transferable. Interestingly, the Karnataka
High Court has found such rights to be transferable by the payer for a
consideration and has noted that the transferee should be in a position to
enforce such rights against the payee.

Similarly, in the case of CIT vs. Smifs Securities Ltd 348
ITR 302 (SC), the Supreme Court held that goodwill arising on amalgamation
of companies was an intangible asset eligible for depreciation. This was
notwithstanding the fact that such a goodwill arose only to the amalgamated
company, and was not on account of any transferable asset which can be put to
any specific use.

From the two decisions of the Supreme Court on the subject of
depreciable intangible assets, it is therefore clear that the Supreme Court has
taken a broader view of the term, by permitting depreciation on business and
commercial rights, in cases where the payment
permitted smoother functioning of the business, holding that such rights
were similar to the specified rights, such as trademarks, copyrights, licences,
etc.

Therefore, the better view seems to be that
rights acquired under a non-compete agreement are intangible assets, eligible
for depreciation u/s. 32(1(ii).

shailesh.kwebmaker

Second Income Disclosure Scheme – 2016

I. Background

1.1 On 8^th
November, 2016, the Central Government demonetised Rs. 500/1000 Currency Notes
(Old Notes). New Currency Notes of Rs.
500/2000 have been issued to replace the old Currency Notes. Old Currency Notes
of Rs. 500/1000 could be deposited in the bank account of the person holding
such old notes between 10^th November to 30^th December,
2016. Once the old notes are deposited in the Bank Account of the person he
will have to explain the source of such deposit to the Income tax Authorities
. The Government has stated in its
public announcements that an Individual or HUF may be holding some such old
notes out of their savings and kept them for household needs. Therefore, a
public assurance has been given that the Income tax Department will not inquire
about the source of such deposits if the total deposit during the above period
is less than Rs.2.5 lakh.

1.2 The
government felt that if large cash in the form of Old Notes was kept by some
persons out of their unaccounted income then they should pay tax at higher
rates and should also pay penalty when they deposit such cash in their Bank
Accounts. To achieve this objective the parliament enacted “The Taxation
(Second Amendment) Act 2016”. The Amendment Act amends some of the provisions
of the Income tax Act and the Finance Act, 2016. The above amendments provide
the Second Income Disclosure Scheme in the form of “Taxation and Investment
Regime for Pradhan Mantri Garib Kalyan Yojna, 2016”. In this Article some of the important
amendments by this Act and the Second Income Disclosure Scheme are discussed.

2. The Second Disclosure Scheme:

2.1 First Disclosure Scheme:

The Finance Act, 2016 enacted on 14/5/2016, contained “The
Income Declaration Scheme, 2016”. This Scheme allowed any person to declare his
undisclosed income (Indian assets, including cash) of earlier years during the
period 1/6/2016 to 30/09/2016. Under this Scheme the declarant was required to
file declaration about valuation of undisclosed Indian assets and pay tax of
45% (including surcharge and penalty) in instalments. It is stated that assets
worth about Rs.67000 crore were disclosed under this scheme before 30/09/2016.

2.2 Second Income Disclosure Scheme:

In order to give one more
opportunity to persons holding old currency notes the present scheme is
introduced. Sections 199A to 199R are inserted in the Finance Act, 2016. These
sections provide for a new Scheme called “Taxation and Investment Regime for
Pradhan Mantri Garib Kalyan Yojna, 2016”. The provisions of this Scheme are on
the same lines as the earlier Income Declaration Scheme, 2016, which ended on
30/09/2016. The Scheme has come into force on 17^th December, 2016
and will come to an end on 31^st March, 2017. Some of the important
provisions of the Scheme are discussed below:-

2.3 Declaration under the Scheme:

(i) U/s. 199C any person may make a declaration in
the prescribed Form No.1 during the period 17-12-2016 to 31-3-2017 as notified
by Notifications dated 16.12.2016. This declaration is to be made for any
undisclosed income held in the form of cash or deposit in any account
maintained with a specified entity. Thus the benefit of this Scheme can be
taken by an Individual, HUF, Firm, AOP, Company or any person whether Resident
or Non-Resident.

(ii) The
income chargeable to tax under the Income tax can be declared under the Scheme
if it relates to F.Y:2016-17 and earlier years. The above declaration can be
made in respect of the above undisclosed income which is held in cash or
deposit in a specified entity as under –

(a) Reserve Bank of India

(b) Any Scheduled Bank (including Co-operative
Bank)

(d) Any other Entity notified by the Central
Government.

No deduction will be allowed for any expenditure, allowance,
loss etc. from such income.

(iii) The amount of Undisclosed Income declared in
accordance with the Scheme shall not be included in the income of the declarant
for any assessment year. In other words, immunity is given under the Income-tax
Act and the Wealth Tax Act. In the Press Note issued by the Government on
16.12.2016 it is clarified that the above declaration shall not be admissible
as evidence in any proceedings under the Income tax Act, Wealth tax Act,
Central Excise Act, Companies Act, etc. However, no immunity will be
available under any criminal proceedings under the Indian Penal Code,
Prevention of Corruption Act, prohibition of Benami Property Transactions Act etc.,
as mentioned in section 199.0 of the Finance Act, 2016.

2.4 Tax Payable on such Income:

Sections 199D and 199E provide for payment of tax, cess,
penalty etc. It is provided that the person making the Declaration u/s.
199C shall have to pay tax, cess and penalty that is an aggregate of 49.90% of
the income declared under the Scheme as under:

(i) 30% of Undisclosed income by way of tax

(ii) 33% of above tax (i.e. 9.9%) by way of
Pradhan Mantri Garib Kalyan Cess.

(iii) 10% of undisclosed income by way of Penalty

2.5 Interest Free Deposit:

The declarant under the Scheme has also to deposit 25% of the
undisclosed income in the “Pradhan Mantri Garib Kalyan Deposit Scheme, 2016” as
provided in section 199F. This deposit will be for 4 years and no interest
shall be paid to the declarant on this deposit.

2.6 Time for payment of Tax and Deposit (Section 199H)

The above Tax, Cess and Penalty is to be paid before filing
the Declaration u/s. 199C. Similarly, the above Interest Free Deposit is to be
made before filing the Declaration u/s. 199C. The Declaration along with proof
of payment of tax etc. and proof of deposit is to be filed before 31^stMarch, 2017. Any amount of tax, cess or penalty paid under the scheme is
not refundable.

2.7 By a Notification dated 16.12.2016, the
CBDT has notified the “Taxation and Investment Regime for Pradhan Mantri Garib
Kalyan Yojana Rules, 2016”. These Rules have come into force on 16.12.2016.
Briefly stated, these Rules provide as under:

(i) The declaration of undisclosed income for F.Y.
2016-17 and earlier years held in the form of cash or deposit with the
specified entity stated in Para 2.3 above can be made in Form No.1 during the
period. 17.12.2016 to 31.3.2017.

(ii) It may be noted that in Form No.1 the declarant
has to give particulars of Name, Address, PAN, Income declared, the details of
such income held in cash or deposit with specified entity, Tax, cess and
penalty payable, date of such payment, details of Interest free Deposit of 25%
of declared income made u/s. 199 F etc.

(iii) The above tax, cess and penalty is to be paid
and Interest Free Deposit is to be made before filing the declaration in Form No.1.

(iv) The Declaration is to be furnished to the
designated Principal CIT or CIT electronically or in print form physically

(v) If the declarant finds any mistake in the
declaration filed earlier, there is a provision to file a revised declaration
on or before 31.3.2017.

(vi) The Principal CIT or CIT will have to issue a
certificate in Form No.2 within 30 days from the end of the month in which
valid declaration is filed.

2.8 From the above, it
is evident that under this scheme a person can make declaration about the
undisclosed income held in cash or deposits with specified entities. The
declaration cannot be made if the declarant is holding such income in any other
form such as jewellery, ornaments, or immovable properties etc. This
undisclosed income may be relating to any year i.e. F.Y. 2016-17 or earlier
years. Therefore, the Scheme does not refer to only cash in the form of Rs.
500/- and Rs. 1000/- notes deposited in the Bank Account between the period
10.11.2016 to 30.12.2016. Such income may have been deposited in the bank or
with other specified entity prior to 10.11.2016 or even between 31.12.2016 to
31.03.2017. Hence, if a person has earned income in F.Y. 2015-16 or any earlier
year, which has been held in cash or deposited in the bank, but not disclosed
in the Income tax Return, he can make a declaration under this Second Income
Disclosure Scheme on or before 31.3.2017. He will have to pay 49.90% by way of
tax, Cess and penalty and make interest free deposit of 25% of such income for
4 years.

2.9 By another
Notification dated 16.12.2016, the Central Government has issued the “Pradhan
Mantri Garib Kalyan Deposit Scheme, 2016”. This scheme has come into force on
17.12.2016 and is valid upto 31.3.2017. Briefly stated, this scheme provides as
under:

(i) The Scheme applies to persons making
declaration of undisclosed income under the Second Income Disclosure Scheme.
Under this Scheme 25% of undisclosed income is required to be deposited in the
interest free deposit for 4 years.

(ii) This deposit is to be made with the
Authorised Bank in Form No.II giving particulars of Name, Address, PAN, etc.
in cash, cheque or by electronic transfer drawn in favour of Authorised Bank.
The amount is to be deposited in multiples of Rs.100/-.

(iii) The above deposit is to be made before the
declaration of undisclosed income u/s. 199C of the Finance Act, 2016 is filed.

(iv) The certificate of holding of Deposit will be
issued to the declarant in Form No.1 as holder of Bond Ledger Account with
R.B.I.

(v) Bond Holder can appoint one or more Nominees
to receive the refund in the event of his death in Form No.III. Such nomination
can be cancelled in Form No.IV and another nominee can be appointed.

(vi) No interest is payable on the above deposit.
The Bond issued by the RBI for the above Deposit is not transferable and cannot
be traded in the market. In view of this the declarant may not be able to take
a loan against the mortgage of this Bond.

(vii) The amount of the deposit under the scheme
will be refunded by RBI after 4 years on the date of maturity.

2.10 Persons who cannot make a Declaration under the Scheme:

Section 199-O provides that the following persons cannot make
the Declaration under the above Scheme.

(i) Any person in respect of whom an order of detention
has been made under the conservation of Foreign Exchange and Prevention of
Smuggling Activities Act, 1974. Certain exceptions are provided in section
199-O (a).

(ii) Any person in respect of whom prosecution for
an offence punishable under Chapter IX or Chapter XVII of the Indian Penal
Code, the Narcotic Drugs and Psychotropic Substances Act, 1988, the Prohibition
of Benami Property Transactions Act, 1988 and the Prevention of Money
Laundering Act, 2002 has been launched.

(iii) Any person notified u/s. 3 of the Special Court
(Trial of Offence Relating to Transactions in Securities) Act, 1992.

(iv) The Scheme is not applicable to any undisclosed
foreign income and asset which is chargeable to tax under the Black Money
(Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015.

2.11 Other Procedural Provisions:

Sections 199G, 199J, 199L, 199M, 199N, 199P to 199R deal with
certain procedural matters as under:-

(i) Person who can sign the declaration (section
199G)

(ii) Undisclosed Income declared under the Scheme
not to affect any concluded assessments (section 199J)

(iii) Declaration not admissible as evidence in other
proceedings (section 199L)

(iv) Declaration will be treated as void if it is
made by misrepresentation of facts (section 199M)

(v) Provisions of Chapter XV, sections 119, 138 and
189 of the Income-tax Act to apply to proceedings under the Scheme (section
199N).

(vi) Benefit, concession, immunity etc. under
the Scheme available to declarant only (section 199P).

(vii) Central Government will have power to remove
difficulties under the Scheme within 2 years (section 199Q).

(viii) Power to make Rules for administration of the
Scheme given to Central Government (section 199R).

3. Some Clarifications by CBDT:

By a circular dated 18.1.2017, CBDT has issued some
clarifications about the above Scheme. Some of the important clarifications are
as under:

(i) Where a notice u/s. 142(1), 143(2), 148, 153A
or 153C of the Income-tax Act is issued by the ITO for any year, the assessee can
make a declaration under the scheme for that year.

(ii) A person against whom a search or survey
operation is initiated will be eligible to file a declaration under the Scheme
in respect of undisclosed income represented in the form of cash or deposits
with Banks, Post Office etc.

(iii) Undisclosed income utilised for repayment of an
overdraft, cash credit or loan account maintained with a bank can be declared
under this scheme.

(iv) Cash sized in any search and seizure action by
the department can be adjusted against payment of tax, surcharge and penalty
(i.e. 49.9%) payable under the scheme. For this purpose the person from whom
cash in seized will have to make application to the department. However, this
seized amount of cash cannot be adjusted against the Deposit of 25% to be made
under the Pradhan Mantri Garib Kalyan Deposit Scheme.

(v) If Mr. “A” has given advance in cash out of
undisclosed income for purchase of goods (other than immovable property) or
services to Mr. B, who has deposited the money in his Bank Account, and later
on “B” has returned the money as goods are not supplied or services are not
rendered, Mr. “A” can declare the undisclosed income under the scheme.

4. To Sum up

4.1 We should
congratulate the Government for the bold step taken to demonetise old high
value currency notes. This is a right step to deal with the problem of black
money, corruption, fake currency in circulation etc. .

4.2 The Government
recognised that the existing Income tax Act did not permit tax authorities to
levy any penalty on persons who would convert large amount of black money
through banking channel. Therefore, the Taxation (second amendment) Act 2016
was passed and section 115BBE was amended and section 271 AAC for levy of
penalty was introduced.

However, small income earners who had some high value notes
kept at home out of their savings to meet expenditure in emergency cannot be
considered as holding their unaccounted income. The Government had promised
that if such persons deposit in their Bank Account amount upto Rs. 2.50 lakh no
enquiry will be made by the tax Department. This promise has not been honoured
while passing this Amendment Act. It is, therefore, necessary that the CBDT
issues a Circular to the officers not to raise any doubt if an assessee gives
an explanation that amount upto Rs. 2.5 lakh is deposited out of household
savings.

4.3 The Second Income
Disclosure Scheme is welcome. Persons holding unaccounted money in cash will
take advantage of this scheme as the tax rate is 49.9%, and 25% of the amount
is blocked for 4 years in Interest Free Bonds. However, persons who decide to
offer such amount in their Return of Income for the current year will be at a
disadvantage as they will have to pay tax, surcharge and education cess u/s. 115BBE
at 77.25% of such income.

4.4 It may be noted that under the First Income Disclosure
Scheme announced in May, 2016, immunity was granted from proceedings under the
provisions of (i) Benami Transactions (Prohibition) Act, 1988, (ii) Foreign
Exchange Management Act, (iii) Money Laundering Act, (iv) Indian Penal Code etc.

There was also an assurance that the secrecy will be
maintained about the contents of the Declaration under the Scheme. It is
unfortunate that the present Scheme does not provide for such immunity or
secrecy. Therefore, the assessees will have to be very careful while making the
Declaration under the Scheme.

4.5 It appears that the Second Income Disclosure Scheme as
announced by the Government is with all good intentions. It is advisable for
the persons who hold unaccounted money in cash to come forward and take
advantage of the Scheme and buy peace. Let us hope that this Scheme gets the
desired response.

4.6 The amendment in section 115BBE punishes
those assessees in whose cases additions are made for cash credits, unexplained
investments, unexplained expenses etc. Tax rate is now increased from
30% to 60%. Further, there will be additional burden of 15% surcharge and 6%
penalty. Such cases have no relationship with demonetisation of high value
currency. It is difficult to understand the reason for which such additional
burden is put on such assessees.

shailesh.kwebmaker

An Incremental Budget

When the Finance Minister
presented the Finance Bill 2017, expectations ran high. The country had just
started recovering from the after-shocks of a momentous demonetisation decision
taken by the government. There is an on-going heated debate as to the benefits
of demonetisation and the problems caused by it. However, there was a virtual
unanimity among professionals that there would be provisions in the Finance
Bill which would, apply some smoothing balm to tax payers and attempt to
relieve the pain caused by demonetisation. Some felt that the budget would take
the battle against black money forward.

In this backdrop the budget
presented by Finance Minister could at the best be described as an `incremental
budget’. There were no big bang announcements. The tax rate has been marginally
lowered both for individuals and small corporates. Some of the controversies
and problems arising on account of interpretations of provisions in regard to
the real estate sector have been sought to be addressed. Two amendments, one
exempting notional income in respect of unsold flats for one year and the other
legislating a scheme for taxing capital gains arising out of joint development
or similar agreements are welcome provisions. However, the provision for
limiting the set-off of interest in regard to funds borrowed for acquisition of
premises is rather surprising. On the one hand the government continuously
states that it wants to give a fillip to the beleaguered real estate industry,
it is sought to legislate a provision which would act as a disincentive. There
are two reasons why I consider the provision to be retrograde. Firstly, if
interest paid by the borrower is permitted to be set off against other income
and is therefore a cost for the government, this interest constitutes income in
the hands of a lender who would normally be a bank or a financial institution.
This interest would suffer tax in the hands of the recipient. Therefore the denial
does not seem to be justified particularly in cases where the premises are let.
Secondly, this is incongruous with the reduction in the holding period in
respect of land and building from 36 months to 24 months for terming the asset
as a long-term asset. Therefore on the one hand, the government wants to
promote the sale of real estate and on the other, it seeks to deny set-off
during the period that the taxpayer holds this asset as an investment.

The government’s intent of
disciplining and regulating charitable trusts continues. Henceforth those
trusts which do not file their returns of income in time will be denied the
benefit of exemption. Further, if one charitable trust makes a corpus donation
to another, then such donation will not be treated as application of income in
the hands of the donor trust. This restriction already applies to
expenditure/donations out of accumulated income, it will now apply to all
donations by a charitable trust. While the disciplining of charitable trusts is
welcome, the attempt to regulate political parties and their funding is rather
half-hearted. While the threshold of cash donations has been reduced to
Rs.2000, one wonders whether it will be really effective given the way
political parties fund their expenditure. As far as the electoral bond concept
is concerned, the system remains opaque. It is true that donors do not want to
be identified with political parties. The fact is if they are so identified
they may receive benefits or be harassed depending on their affiliation is the
real cause of concern. The only plus point of the electoral bond scheme is that
the acquisition will be from accounted money. Let us hope that this is only a
beginning and these provisions are tweaked in future to make political funding
more transparent. The only solace is that like all other taxpayers, even
political parties would be required to file their returns by the due date
failing which they will also stand to lose their exemption.

There are two provisions for
which one would give negative marks to the Finance Minister. The first is the
deletion of the provision which requires the reasons recorded by an officer
before initiating a search to be disclosed to a judicial forum. The reason for
such deletion (which is with retrospective effect from 1^stApril,
1962) is that when disclosed, such reasons give
public the name of whistle-blowers whose security is then under some
threat. Firstly, there could have been some mechanism built-in to avoid
disclosing the name of the informant to the public, while making the reason
available. Secondly, the fact that such disclosure results in a threat to the
person concerned, is a reflection of the position of rule of law in this
country. If reasons are not disclosed, it may result in wrongful use of power to
search and survey which are an invasion of the privacy of a taxpayer and if
unjustified are an unnecessary harassment for him. One hopes that the Finance
Minister takes a serious re-look at these provisions. Secondly, the provision
for seeking to penalise an authorised representative for “incorrect
information” is also uncalled for. There are enough provisions in the Act to
punish a person who deliberately attempts to mislead the Department. One feels
that given the way the bureaucracy functions on the ground, this provision may
be misused to harass professionals. In any case these representatives normally
belong to professions who already have an established disciplinary mechanism.

The Finance Bill contains steps
to ensure that the intent of the government to make the economy cashless is
taken forward. There are disincentives by way of disallowance for cash
expenditure with the limits being lowered in most cases. The most significant
amendment is however the restriction of any transaction beyond the threshold
limit of Rupees three lakh in cash. An infringement of this provision attracts
a penalty equivalent to the amount of the transaction. This is a very important
provision and one really needs to wait and watch as to what effect it has.

In all, the budget presented did
not have very many surprises. Possibly, once the effects of demonetisation are
fully known, and the quantum of tax at the government is able to garner on
account of the drive against black money is established, the Finance Minister
would have more leeway in the next budget which would be the penultimate for
this government. Till then let us keep our fingers crossed!

shailesh.kwebmaker

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