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Month: May

S. 163, and India — Japan Treaty

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New Page 16 Masuzawa Punjab Silk Ltd. v.
ACIT

(113 TTJ 878) (Asr)

A.Y. : 2000-01. Dated : 4-12-2007

S. 163 and India-Japan Treaty.



l
Salaries including perquisites provided to NR technical personnel deputed
to Indian JVCO to provide erection and installation services are chargeable to
tax u/s.9(1)(ii) of the Act. In the circumstances of the case, Indian JVCO can
be regarded as an agent of the expatriates u/s.163(1)(c) and u/s.163(1)(b) of
the Act.


l
Reimbursement of actual travel expenses of employees are exempt u/s.10(14).


 


Facts :




(1) MCL (A company of Japan — herein Japco) entered into
joint venture agreement with another Indian company. The joint venture was
carried through the assessee-company. In terms of the joint venture agreement,
Japco had agreed to supply certain equipments which hitherto were used by Japco
at Japan.

(2) The plant at Japan was discontinued and the equipments
were dismantled for the purpose of refurbishing and installation at the
premises of the assessee-company. In terms of the agreement, Japco had
obligation to refurbish and install the equipments and to ensure that the
plant provided certain minimum production of specified quality.

(3) In terms of the overall arrangement, the Japanese
company had to provide certain technical personnel during the stage of
erection, installation, commissioning as also during the initial years of
plant operation.

(4) During the set-up phase of plant, the responsibility of
meeting cost of the technical personnel was that of Japco.

During the first and the second year of operation of the
plant, the assessee company had obligation to pay certain consolidated charge
towards providing of personnel by Japco. The assessee also had to meet the
cost of travel and accommodation of such personnel. The employees however were
to continue to be employees of Japco and their salary was to be paid by Japco.

(5) During post-installation period, two engineers,
residents of Japan, had stayed in India for a longer duration. The duration
had elongated because the production was not of desired quantity and quality.
In terms of the agreement, the assessee had paid for travel of the employees
and provided accommodation to them. Salary of these two engineers was paid at
Japan by Japco.

(6) It was common ground that the engineers were liable to
tax in India in respect of services rendered in India in view of their long
stay in India. Also, engineers were admittedly employees of Japco and salary
to them was paid by Japco at Japan.

(7) There was difference of opinion on true scope and
interpretation of the agreement as to who was responsible to bear cost of
salary. The assessee’s contention was that since the basic obligation of
setting up plant was of Japco, the cost obligation was of Japco, as the plant
was not set up as desired. As against that, the Department’s contention was
that even during pre set-up period, the assessee had obligation to meet cost
of certain engineers and for the years under reference, and for the two
engineers covered by the notice u/s.163, the assessee was obliged to meet the
cost of such personnel.

(8) The assessee had remitted certain amount to Japco and
had deducted tax at source by treating it to be remittance towards fees for
technical services. The tax so deducted was duly paid. In addition to such
compliance, the Department was seeking to treat the assessee as an agent
u/s.163 in respect of salary taxation of two engineers who were employees of
Japco, on the ground that their salary burden was ultimately borne by the
assessee.

(9) The AO passed order u/s.163 and held the assessee to be
an agent in relation to two engineers. The assessee was held to be an agent
u/s.163(1)(c), on the ground that the assessee was a person from or through
whom the non-resident engineers were in receipt of the income indirectly.

(10) The assessee was also held to be an agent
u/s.163(1)(b), on the ground that the assessee had business connection with
Japco which was carrying on business in India through the medium of the
assessee company.

 


Held :



l
On factual front, the Tribunal concurred with the Department that the assessee
was responsible for meeting the cost of two engineers for whom it was held to
be an agent u/s.163.


l
The Tribunal also concurred with the lower authorities and held that the
assessee was rightly held to be agent of two non-resident engineers.


l
In the view of the Tribunal, provisions of S. 163(1)(c) are wide enough to
cover income earned directly or indirectly. Though the two engineers deputed
by Japco were employees of Japco, salary received by non-resident engineers
was for services rendered to the assessee and therefore the salary income can
be said to have been received by non-resident engineers through the assessee
who was obliged to meet the cost of such personnel.


l
The Tribunal also concurred with the lower authorities that the assessee can
also be treated as an agent u/s.163(1)(b), on the ground that the assessee had
business connection with the non-resident. The Tribunal held that Japco had
agreed to provide exclusive marketing support and also had equity
participation in the capital of the assessee-company.


l
Apart from proportionate salary, the housing accommodation provided by the
assessee to the non-resident engineers was held chargea

India USA Treaty — Article 12(4) of India-US treaty — Scope of fees for included services

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New Page 15 ICICI Bank Ltd. v.
DCIT (20 SOT 453) (Mum.)

A.Y. : 1997-98. Dated : 9-10-2007

India-USA Treaty.

 

Amount remitted to credit rating agency for the purpose of
obtaining rating in respect of issue of Floating Rate Euro Notes (FRENs) is not
fees for included services in terms of Article 12(4) of India-US treaty and is
therefore not chargeable to tax in India.

 

Facts :

The assessee bank appointed Moody’s Investor Services (MIS),
a credit rating agency of the USA, for the purpose of obtaining rating in
respect of one of its FRENs issues. MIS rendered rating services outside India.
The assessee remitted fees towards such services without deducting tax at
source. The contention of the assessee was that the amount represented charges
towards commercial services chargeable as business income and since the services
were rendered outside India, the same was not chargeable to tax in India.

The AO held that the amount was chargeable to tax in India,
as the same represented fees for technical services covered by S. 9(1)(vii)(b)
of the Act. The AO also concluded that services were covered by Article 12 of
the DTAA and hence payment was subject to withholding tax obligation in India.

 

Before the Tribunal, the assessee submitted that rating is
required to be done as per international practice for the benefit of investors
and no technical skill or process was transferred to the assessee. The assessee
relied on the following decisions to support its contention that payments for
rating services were not fees for included services and hence were not liable to
taxation in India :

1. Raymond Ltd. v. DCIT, (86 ITD 791) (Mum.)

2. Wockhardt Life Science Ltd. [IT Appeal No. 3625 (Mum.)
of 2000]

3. Gujarat Ambuja Cements Ltd. v. DCIT, (2 SOT 784)
(Mum.)

4. Bajaj Auto v. DCIT, [IT Appeal Nos. 2662 and 2663
(Mum.) of 2000]

5. Wipro Ltd. v. ITO, (1 SOT 758) (Bang.)

6. Mc Kinsey & Co. Inc (Philippines) v. ADIT, (99
ITD 549) (Mum.)

 


The assessee also relied on Memorandum of Understanding to
India-US DTAA on the scope for fees for included services as also on example VII
given in the said protocol to support the contention that commercial services
were not fees for included services and were not covered by Article 12 of the
treaty.

 

Held :



l
The Tribunal observed that the rating services were commercial services. In
view of the Tribunal, though skill, expertise, know-how were used by the
service provider for rendering services, the service was not technical in
nature. Also, skill, expertise or know how was not made available to the
assessee, so as to get covered by the scope of fees for included services.


l
The Tribunal referred to and relied on decision of Mumbai Tribunal in the case
of Raymonds and that in case of McKinsey to support that the concept of ‘make
available’ requires that the person acquiring the service is enabled to apply
the technology in his own right to the exclusion of the service provider.


l
Since the amount was not chargeable to tax in India, the assessee had no
obligation to deduct tax at source u/s.195 of the Act.


 


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India Mauritius Treaty — Payment for liasoning with legal and financial advisors — commercial services — Not royalty

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New Page 14 Spice Telecom v.
IPO (113 TTJ 502) (Bang.)

A.Y. : 2001-02. Dated : 3-2-2006

India-Mauritius Treaty



l
Payment for liasing with legal and financial advisors and negotiations with
vendors and financial institutions for vendor loans and long-term project
finance are commercial services not liable to source taxation in India as
royalty.


l
Providing of information constitutes royalty if information has perpetual
or extended use. Suggestions on ways and means on the basis of
data/information collected by the assessee itself is not royalty.


 


Facts :

(1) The assessee was engaged in the business of providing
telecommunication services. For this purpose, it entered into technical and
operating service agreement with one M/s. Distacom of Mauritius [herein Mauco].
Mauco had an obligation of providing certain know-how and other support
services.

 

(2) The assessee-company remitted certain amounts to Mauco on
account of :

(a) Provision of expertise and training on the
technological aspect of mobile telephony business;

(b) Provision of advisory and support services in respect
of financial and operational aspects of business.

 


(3) The assessee deducted tax at source in respect of payment
covered by 2(a) above by treating it to be payment of royalty. In respect of
payment covered by 2(b) above, no tax was deducted on the ground that the same
represented remittance towards commercial services rendered by Mauco outside
India.

 

(4) On further inquiries, it was found that the payment
covered by 2(b) viz. advisory and support services comprised of two
components :

(a) Payment for liaising with legal and financial advisors
and negotiating with vendors and financial institutions for obtaining vendor
credit and long-term project finance.

(b) Providing support for developing sales distribution
channels, promoting brand awareness, promoting customer-care programmes,
formulating marketing strategy, suggestions on pricing strategies billing
systems, etc.

 


(5) The assessee claimed that the remittance covered by para
4 was towards services provided from Mauritius and was not in respect of royalty
payment. The amount was claimed by the assessee to be not chargeable in the
hands of the recipient in view of India-Mauritius treaty which does not have
specific Article dealing with fees for technical services (FTS). The fee was
claimed to be treated at par with any other offshore business income.

 

(6) The Department contended that the payment was pursuant to
the know-how contract and was in respect of grant of know-how or for imparting
information concerning industrial, commercial or scientific knowledge of Mauco
and was therefore chargeable to tax as royalty income.

 

Held :

The Tribunal held :


l
The agreement under reference was for providing of services apart from
providing certain know-how and access to intellectual property rights. The
scope of agreement required Mauco to provide know-how as also give advice and
assistance in technical, administrative, accounting and finance field. Payment
concerning know-how covered by para 2(a) was rightly treated as royalty and
liable to tax as such.


l
The contract for services is different compared to the know-how contract. In
case of any know-how contract, the person uses his already existing knowledge
base and experience which is unrevealed to the public. As against that, in
service contract, the person undertakes to use his customary skills and
executes work himself. In a know-how contract, the supplier has to little
exert while he leverages upon his knowledge and experience, whereas in a
service contract, he undertakes greater level of expenditure of his efforts.


l
Having regard thereto, part of the contract which dealt with legal and
financial advice and negotiations with vendors, financial institutions
represented contract for services. The services were commercial in nature. In
absence of special article in India-Mauritius treaty dealing with fees for
technical services, the amount was chargeable as any other business income.
Since the services were rendered from outside India, the same were not taxable
in India. The payment covered by para 4(a) was held to be not chargeable to
tax in India.


l
As regards the second limb [viz. payment covered by para 4(b) above],
the Tribunal observed that the amount may constitute royalty, depending on the
nature of information and support provided. The Tribunal referred to various
meanings of the term know-how. The Tribunal observed that grant of know-how
will result in access to information which is of perpetual or extended use. As
against that, if Mauco provided support on the basis of facts and information
collected by the assessee, the same would, prima facie, be in the
nature of providing of services, which is not equivalent to grant of access to
know-how. So observing, the Tribunal set aside the matter to ITO to determine
taxability of the payment made in the circumstances gisted at para 4(b).


 


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filing appeal by Revenue: Instruction No. 3 of 2011, dated 9-2-2011 is retrospective: Department must show ‘cascading effect’.

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[CIT v. Varsha Dilip Kohle (Bom.) (Aurangabad Bench); ITA No. 7 of 2010 dated 5-3-2012]

In this appeal filed by the Revenue in the year 2010 the tax amount in dispute was Rs.6,69,770. CBDT Instruction No. 3 of 2011, dated 9-2-2011 prescribed the limit of Rs.10,00,000 for filing an appeal before the High Court u/s.260A of the Income-tax Act, 1961. The High Court observed that since the tax effect does not exceed Rs.10 lakh, the appeal is required to be dismissed in view of the CBDT Instruction No. 3 of 2011, dated 9-2-2011.

The Department contended that (i) as the appeal has been filed prior to the issuance of the Circular, the Circular did not apply; and (ii) as the appeal had a ‘cascading effect’ involved a ‘common principle’, the appeal could not be dismissed in view of the Supreme Court’s verdict in Surya Herbals.

The Bombay High Court dismissed the appeal and held as under: “

(i) In CIT v. Smt. Vijaya V. Kavekar, (Tax Appeal No. 78 of 2007 with Tax Appeal No. 76 of 2007) decided on 29-7-2011, a Division Bench of this Court, while interpreting the very Circular No. 3 of 2011, has held that the Circular has a retrospective operation and instructions contained in the Circular would apply even to the pending cases.

(ii) As regards Surya Herbals case, the appeal does not involve any ‘cascading effect’ as the Department has not shown whether there are other appeals which raise the same point.”

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A. P. (DIR Series) Circular No. 94 dated 1st April, 2013

21. A. P. (DIR Series) Circular No. 94 dated 1st April, 2013

Foreign investment in India by SEBI registered FIIs in Government Securities and Corporate Debt

This circular has revised, with immediate effect, the guidelines relating to investment in Government Securities & Corporate Debts by removing/merging the sub-limit in each category into a single limit. The details of the said revision are as under: –

The above limits are not applicable to Non-Resident Indians and they can invest without any limit in Government Securities as well as corporate debt.

Recent Global Developments in International Taxation – Part II

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In this Article, we have given brief information about the recent developments in U.S.A. in the sphere of international taxation which could be of relevance and use in day to day practice and which would keep the readers abreast with various happenings across the globe in the arena of international taxation. We intend to keep the readers informed about such developments from time to time in future.

United States (i) FAQs released for streamlined procedures for delinquent US taxpayers overseas

The US Internal Revenue Service (IRS) has released frequently asked questions (FAQs) regarding the streamlined filing compliance procedures for nonresident, non-filer taxpayers, which went into effect on 1st September 2012.

The streamlined procedures were introduced to provide US taxpayers residing overseas, including dual citizens, who have not filed US federal income tax returns or Form TD F 90-22.1 (Report of Foreign Bank and Financial Accounts, FBAR) with an opportunity to comply with their tax requirements by filing their delinquent income tax returns for the past 3 years and filing their delinquent FBARs for the past 6 years.

The streamlined procedures are designed for taxpayers who present a low compliance risk, which is generally specified as a tax liability of less than $ 1,500 for each delinquent year.

In addition, the streamlined procedures provide retroactive relief for taxpayers who failed to make a timely election for income deferral on certain foreign retirement and savings plans (e.g., Canadian Registered Retirement Savings Plans) for which relevant treaties allow deferral only if an election is made on a timely basis.

The FAQs include the following clarifications:

• Taxpayers will not be disqualified from admission to the streamlined procedures even if their tax liability exceeds $ 1,500 for any of the 3 years. However, submissions by such taxpayers may be determined to be higher risk, and applicable penalties and an examination may ensue.

• If qualifying taxpayers have been accepted into one of the offshore voluntary disclosure programs (OVDPs) prior to 1st September 2012, they may opt out of the OVDP and request the streamlined procedures

• Qualifying taxpayers may have their case reconsidered under the streamlined procedures even if they have entered into a closing agreement (IRS Form 906) with the IRS under one of the OVDPs. For the streamlined procedures, taxpayers should use IRS Form 1040 (US Individual Income Tax Return), except that taxpayers should use IRS Form 1040X (Amended US Individual Income Tax Return) if they are submitting amended returns for the sole purpose of submitting late-filed IRS Form 8891 (US Information Return for Beneficiaries of Certain Canadian Registered Retirement Plans).

The FAQs indicate a last reviewed or updated date of 27th February 2013.

(ii) IRS issues updated Publication 519 – US Tax Guide for Aliens

The US IRS has released the 2013 revision of Publication 519 (US Tax Guide for Aliens). The publication is dated 7th March 2013 and is intended for use in preparing tax returns for 2012.

Publication 519 provides detailed guidance for resident and non-resident individuals to determine their liability for US federal income tax. Specifically, Publication 519 discusses:

• the rules for determining US residence status (e.g. the US green card test and the US substantial presence test);

• the rules for determining the source of income;

• exclusions from US gross income;

• the rules for determining and computing US tax liability;

• US tax liability for a dual-status tax year (i.e. where an individual has periods of US residence and US non-residence within the same tax year);

• filing information;

• paying tax through withholding tax or estimated tax;

• benefits under US income tax treaties and social security agreements;

• exemptions for employees of foreign governments and international organisations under US tax treaties and US tax law;

• sailing and departure permits for departing aliens; and

• how to get tax help from the IRS. Publication 519 also includes:

• a table of US tax treaties (updated through 31 December 2012);

• appendix A (Tax Treaty Exemption Procedure for Students), which contains the statements non-resident alien students and trainees must file with IRS Form 8233 (Exemption From Withholding on Compensation for Independent (and Certain Dependent) Personal Services of a Non-resident Alien Individual) to claim a tax treaty exemption from withholding of tax on compensation for dependent personal services; and

• appendix B (Tax Treaty Exemption Procedure for Teachers and Researchers), which contains the statements non-resident alien teachers and researchers must file for the same purpose as appendix A. Revised Publication 519 provides information on relevant tax changes for 2012, including:

• increase in the personal exemption amount to $ 3,800;

• disqualification of interest paid on non-registered (bearer) bonds from treatment as portfolio interest that is eligible for exemption from US withholding tax, effective for obligations issued after 18th March 2012;

• extension of the treatment of a regulated investment company (RIC, or mutual fund) as a qualified investment entity (QIE) under The Foreign Investment in Real Property Tax Act of 1980 [FIRPTA] through 2013 for purposes of taxing RIC distributions that are attributable to gains from the sale of US real property interests;

• extension of the withholding exemption on certain interest-related dividends and shortterm capital gain dividends paid by a mutual fund or other RIC through 2013; and

• increase in the withholding rate on effectively connected income of a partnership that is allocable to non-corporate partners to 39.6%.

Additionally, Publication 519 refers to the other IRS publications that are relevant in this context, including:

• Publication 514 (Foreign Tax Credit for Individuals); Publication 515 (Withholding of Tax on Non-resident Aliens and Foreign Entities);

• Publication 597 (Information on the United States-Canada Income Tax Treaty); and

• Publication 901 (US Tax Treaties). Publication 519 is available on the IRS website.

(iii) Public comments requested on cross-border transfer of stocks and securities

The US IRS and the US Treasury Department have issued a notice requesting comments on final regulations (TD 8770, Certain Transfers of Stock or Securities by US Persons to Foreign Corporations and Related Reporting Requirements) and final regulations (TD 8862, Stock Transfer Rules) issued in connection with cross-border transfers of stock and securities. TD 8770 was issued with regulations on the transfer of stocks and securities in international transactions under section 367(a), (b), and (d) of the US Inter nal Revenue Code (IRC) and IRC section 6038B to address:

• the tax treatment of transfers of stocks and securities to foreign persons in outbound reorganisation transactions;

• the terms and conditions for entering a gain recognition agreement (GRA) with the IRS with regard to such transfers;

• the tax treatment of stock transfers under IRC section 351 dealing with incorporation transactions and IRC section 368(a)(1)(B) dealing with stock-for-stock reorganisations; and

• the rules for complying with the notice and information reporting requirements when property is transferred by a US person to a foreign person.

•    TD 8862 was issued with regulations under IRC section 367(b), which is intended to prevent the avoidance of US tax when stock or assets are transferred outside the US taxing jurisdiction pursuant to corporate transactions that would otherwise qualify for tax-free treatment under the IRC.

TD 8862 provides guidance on:

•    the treatment of US-inbound transactions (i.e. repatriation transactions where assets are transferred from a foreign corporation to a US domestic corporation) and foreign-to-foreign transactions (i.e. where stock or assets are transferred between foreign corporations that have US ownership);

•    the tax consequences for the parties to such transactions, including foreign currency aspects; and

•    the requirement that persons who realised income from such transactions file a notice with the IRS.

(iv)    Public comments requested on bilateral safe harbours for transfer pricing

The US IRS has issued a News Release (IR-2013-30) with the announcement that it is seeking public comments regarding the development of a model memorandum of understanding between competent authorities on certain transfer pricing issues. Specifically, the IRS is requesting comments on bilateral safe harbours with regard to arm’s length compensation for routine distribution functions.

On 6th June 2012, the Organization for Economic Co-Operation and Development (OECD) issued a discussion draft on safe harbours as part of its project to improve the administrative aspects of transfer pricing. The discussion draft is entitled “Discussion Draft – Proposed Revision of the Section on Safe Harbours in Chapter IV of the OECD Transfer Pricing Guidelines and Draft Sample Memoranda of Understanding for Competent Authorities to Establish Bilateral Safe Harbour”.

This discussion draft includes proposed revisions of the section on safe harbours in Chapter IV of the Transfer Pricing Guidelines and related sample memoranda of understanding for competent authorities to establish bilateral safe harbours.

The OECD has released public comments to the discussion draft in the form of a report entitled “The Comments Received with respect to the Draft on the Revision of the Safe Harbour Section of the Transfer Pricing Guidelines”

The IRS notes that such safe harbours could support sound tax administration. The IRS requests comments that are highly specific to the issues at hand, to the point of proposing text for draft model agreements involving routine distribution functions.

(v)    Public comments requested on information return for stock ownership of foreign corporations

The US IRS and the US Treasury Department have issued a notice requesting comments on IRS Form 5471 (Information Return of US Persons With Respect to Certain Foreign Corporations) and related schedules.

IRS Form 5471 and the related schedules are used to satisfy the reporting requirements of sections 6038 and 6046 of the US IRC and the regulations issued thereunder, which require US persons to file reports with the IRS if they have certain ownership interests in a foreign corporation.

IRS Form 5471 is required to be filed by any US person who falls into one of the following categories:

•    any US person that has acquired 10% or more of the stock of a foreign corporation (either combined with stock already owned or without regard to such stock);

•    any US person that has control (i.e. has more than a 50% stock ownership, by voting power or value) of a foreign corporation; and

•    any US person who owns 10% of more of the voting stock of a controlled foreign corporation (CFC) or owns any stock in a CFC that is also a captive insurance company.

The term US person generally includes a US citizen or resident, a domestic corporation, a domestic partnership, or an estate or trust other than a foreign estate or trust.

IRS Form 5471 is also required to be filed by any US citizen or resident who is an officer or director of a foreign corporation in which a US person owns or acquires 10% or more of the stock either by voting power or value.

(vi)    IRS issues updated Publication 515 – With-holding of Tax on Non-resident Aliens and Foreign Entities.

The US IRS has released the 2013 revision of Publication 515 (Withholding of Tax on Non-resident Aliens and Foreign Entities). The publication is dated 4 February 2013 and is intended for use in 2013.

Publication 515 provides guidance for withholding agents who pay income to foreign persons, including non-resident aliens, foreign corporations, foreign partnerships, foreign trusts, foreign estates, foreign governments and international organisations.

The topics discussed in Publication 515 include:

•    the persons responsible for withholding (withholding agents);

•    the types of income subject to withholding;

•    the information return and tax return filing obligations of withholding agents;

•    withholding by a partnership on its income effectively connected with a US trade or business that is allocable to its foreign partners;

•    withholding on transfer or distribution of a US real property interest under FIRPTA; and

•    how to get tax help from the IRS.

Revised Publication 515 also contains the following US tax treaty tables:

•    Table 1 lists the withholding rates under US tax treaties on income other than personal service income for 2013 (i.e. interest, dividends, and royalties).

•    Table 2 lists the different types of personal service income that are entitled to an exemption from, or reduction in, withholding under US tax treaties.

•    Table 3 lists US tax treaties (updated through 31 December 2012) with information on where the full text of each treaty and protocol may be found in the IRS Cumulative Bulletin, which is available on the IRS web site.

Revised Publication 515 includes discussion of the new rules regarding:

•    information reporting for interest paid to non-residents on US deposits on or after 1st January 2013

•    exclusion of interest paid on non-registered (bearer) bonds from portfolio interest, effective for obligations issued after 18th March 2012

•    extension of the treatment of a regulated investment company (RIC, or mutual fund) as a qualified investment entity (QIE) under FIRPTA through 2013 for purposes of taxing RIC distributions that are attributable to gains from the sale of US real property interests

•    extension of the withholding exemption on certain interest-related dividends and short-term capital gain dividends paid by a mutual fund or other RIC through 2013

•    increase in the withholding rate for non-corporate partners to 39.6%); and

•    the FATCA withholding requirement for US withholding agents with regard to certain types of payments made to non-participating foreign financial institutions (NPFFIs) beginning in 2014.

Additionally, Publication 515 refers to the other IRS publications that are relevant in this context, including:

•    IRS Publication 15 (Circular E, Employer’s Tax Guide);

•    Publication 15-A (Employer’s Supplemental Tax Guide);

•    Publication 15-B (Employer’s Tax Guide to Fringe Benefits);

•    Publication 51 (Circular A, Agricultural Employer’s Tax Guide);

•    Publication 519 (US Tax Guide for Aliens); and

•    Publication 901 (US Tax Treaties).

Publication 515 is available on the IRS web site at www.irs.gov.

(vii)    IRS issues updated Publication 514 – Foreign Tax Credit for Individuals.

The US IRS has released the 2013 revision of Publication 514 (Foreign Tax Credit for Individuals). The publication is dated 29th January 2013 and is intended for use in preparing 2012 tax returns.

Publication 514 explains the provisions of US federal income tax law that apply to US citizens and resident aliens who paid or accrued taxes to a foreign country on foreign source income and intend to take a US credit or itemised deduction for such taxes. Publication 514 discusses:

•    claiming a credit or deduction for foreign income taxes;

•    benefits of claiming the foreign tax credit (FTC);

•    persons eligible for the FTC;

•    taxes eligible (or not eligible) for the FTC;

•    computation of the FTC, including application of the US basket system;

•    carry-back and carry-over of the FTC;

•    procedures for claiming the FTC; and

•    information on how to obtain tax help from the IRS.

Revised Publication 514 includes information on:

•    new rules for determining who is considered to pay a foreign income tax when the tax is imposed on the combined income of multiple persons; and

•    inclusion of Iraq in the list of countries that participate in international boycotts, with the result that taxpayers may be denied a US FTC for taxes paid to Iraq in addition to taxes paid to the other countries on the list.

Publication 514 also refers to the other IRS publications that are relevant in this context, including IRS Publication 54 (Tax Guide for US Citizens and Resident Aliens Abroad), Publication 519 (US Tax Guide for Aliens), and Publication 570 (Tax Guide for Individuals With Income From US Possessions).

Additionally, Publication 514 provides two examples with filled- in IRS Form 1116, Foreign Tax Credit (Individual, Estate, or Trust). To claim an FTC, it is generally required to file a Form 1116 with the income tax return. A separate Form 1116 is required for taxes paid on certain designated categories of income, including separate basket income, for which a foreign tax credit is claimed.

Publication 514 is available on the IRS web site at www.irs.gov.

(viii)    Proposed regulations issued on gain recognition in cross-border corporate transactions

The US Treasury Department and the IRS have issued proposed regulations (REG-140649-11) regarding gain recognition in cross-border corporate transactions. The regulations propose amendments to the existing rules on failures to file gain recognition agreements (GRAs) and related documents, or to satisfy other reporting obligations, in connection with certain transfers of property to foreign corporations in non-recognition transactions.

Section 367(a) of the US IRC imposes tax on US outbound reorganisations and other corporate transactions that would otherwise qualify for tax-free treatment if undertaken in a domestic context. Section 367(a) permits exceptions in certain cases, however, including the outbound transfer of stock or securities of foreign corporations in cross-border corporate transactions (i.e. incorporations, liquidations, mergers, acquisitions, and other reorganizations). These exceptions generally require the US transferor, among other things, to file a GRA and other related documents under Treasury Regulation section 1.367(a)-8 (the IRC section 367(a) GRA regulations).

IRS section 367(e)(2) further provides exceptions with regard to recognition of gain on a liquidation of an 80%-owned subsidiary into a foreign parent in a transaction described in IRC section 332 (i.e. an US outbound liquidation in the case of a liquidation of a US subsidiary, or a foreign-to-foreign liquidation in the case of a liquidation of a foreign subsidiary).

In addition, under IRC section 6038B and the related regulations, a US transferor of property to a foreign corporation in a non-recognition transaction covered by IRC section 367(a) is required to file IRS Form 926 (Return by a US Transferor of Property to a Foreign Corporation), describing the transferee foreign corporation and the property transferred.

Under the current regulations, a US transferor is subject to full gain recognition under IRC section 367(a)(1) if the US transferor fails to timely file an initial GRA, or to comply in any material respect with the IRC section 367(a) GRA regulations or with the terms of an existing GRA. Relief may be granted if the US transferor demonstrates that its failure was due to reasonable cause and not wilful neglect.

The proposed regulations remove the reasonable cause requirement, and accordingly gain recognition will apply only if the taxpayer’s failure is wilful. The proposed regulations provide guidance on the interpretation of a wilful failure, which will generally be based on the facts and circumstances in each case, and include illustrative examples.

The proposed regulations also eliminate the current requirement that the IRS must respond within 120 days to requests received from taxpayers seeking relief from gain recognition due to non-compliance under IRC section 367. The IRS will no longer be subject to a strict processing time for taxpayer requests in this regard.

The current reasonable cause standard, however, will continue to apply to a US transferor seeking relief from penalty for failure to satisfy the IRC section 6038B reporting requirement. Therefore, a US taxpayer seeking relief from IRC section 6038B penalty will still need to demonstrate that its failure was due to reasonable cause and not wilful neglect.

In addition, the proposed regulations provide rules similar to the rules under the IRC section 367(a) GRA regulations and related IRC section 6038B regulations for failures to file the required documents or statements and failures to comply under the IRC section 367(e)(2) regulations and related section 6038B regulations with respect to liquidation transactions.

The proposed regulations also modify the information that must be reported to the IRS with respect to liquidating distributions under the IRC section 367(e)(2) regulations, including the addition of a requirement to report the basis and fair market value of the property distributed.

The current Treasury Regulation section 1.367(a)–3 also require certain other statements to be filed in connection with certain transfers of stock or securities, but do not provide rules of application for taxpayers who fail to meet these requirements. The proposed regulations incorporate rules in this regard that are similar to the rules that apply with respect to failures to file or failures to comply with the IRC section 367(a) GRA regulations. The proposed regulations are designated Treasury Regulation sections 1.367(a)-3 and -8, 1.367(e)-2, and 1.6038B-1.

The proposed regulations will apply to documents or statements that are required to be filed with a timely filed return on or after the date on which the regulations are published as final, as well as to requests for relief that are submitted on or after the date on which the regulations are published as final.

(ix)    Public comments requested on allocation of interest expenses by foreign corporations engaged in US business

The US IRS and the US Treasury Department have issued a notice requesting comments on final regulations (TD 9465, Determination of Interest Expense Deduction of Foreign Corporations).

The final regulations were issued u/s. 882(c) of the US IRC to provide guidance on the determination of the interest expense deduction for foreign corporations engaged in a trade or business within the United States.

The final regulations adopted, without substantive change, the temporary regulations (TD 9281) issued on this topic. The temporary regulations, among other things, also implemented the views of the US Treasury Department and IRS that were expressed in IRS Notice 2005-53 regarding the operation of the three-step formula used to allocate interest expenses to the United States (see United States-1, News 21st July 2005).

The final regulations made substantial modifications to the three-step formula in Treasury regulation section 1.882-5. In particular, the final regulations increased the fixed-ratio that may be used by foreign banks to compute US-connected liabilities in Step 2 from 93% to 95%.

The final regulations also provided guidance for coordinating the interest allocation rules of Treasury regulation section 1.882-5 with US income tax treaties that, pursuant to the authorised OECD approach (AOA), apply the OECD Transfer Pricing Guidelines, by analogy, in determining the profits of a permanent establishment. The final regulations recognised that an income tax treaty or accompanying documents might provide alternative rules for allocating interest expense to a permanent establishment.

(x)    Final regulations issued on requirements under FATCA

The US Treasury Department and the IRS issued final regulations (TD 9610) on 17th January 2013 to provide guidance on account identification, information reporting, and withholding requirements that the Foreign Account Tax Compliance Act (FATCA) imposes on foreign financial institutions (FFIs), other foreign entities, and US withholding agents.

The final regulations adopt with modifications the proposed regulations (REG-121647-10) issued on 15 February 2012 , and the amendments described in IRS Announcement 2012-42 issued on 24th October 2012. The final regulations are effective 28th January 2013.

The issuance of the final regulations was announced in a Press Release issued by the Treasury Department on 17th January 2013. The Press Release states that the final regulations implement FATCA in the following manners:

•    The final regulations coordinate the obligations for FFIs under the regulations and the intergovernmental agreements in order to reduce administrative burdens for FFIs that operate in multiple jurisdictions.

•    The final regulations phase in over an extended transition period to provide sufficient time for FFIs to develop necessary systems.

•    The final regulations align the regulatory timelines with the timelines described in the intergovernmental agreements to avoid confusion and unnecessary duplicative procedures.

•    The final regulations provide relief from with-holding with respect to certain grandfathered obligations and certain payments made by non-financial entities.

•    The final regulations expand and clarify the treatment of certain categories of low-risk institutions, such as governmental entities and retirement funds.

•    The final regulations permit certain investment entities to be reported by the FFIs with which they hold accounts rather than being required to register as FFIs and report to the IRS.

•    The final regulations clarify the types of passive investment entities that must be identified and reported by FFIs.

•    The final regulations provide more stream-lined registration (which will take place through an online system) and compliance procedures for groups of financial institutions, including commonly managed investment funds.

•    The final regulations provide additional detail regarding FFIs’ obligations to verify their compliance under FATCA.

FATCA was enacted in 2010 as Sections 1471 to 1474 of the US IRC to combat non-compliance by US taxpayers using foreign accounts. FATCA requires FFIs to report to the IRS information about financial accounts held by US taxpayers, or by foreign entities in which US taxpayers hold a substantial ownership interest.

FFIs that do not register and enter into an agreement with the IRS will be subject to withholding on certain types of payments relating to US investments

(xi)    Final regulations issued to prevent tax-avoidance in stock acquisitions by related corporations

The US Treasury Department and the IRS have issued final regulations (TD 9606) to prevent tax-avoidance in connection with stock acquisitions by related corporations under section 304 of the US IRC.

IRC section 304 is intended to prevent the use of stock sales between brother-sister or parent-subsidiary corporations as a means to produce capital gains rather than dividend treatment.

Specifically, IRC section 304(a)(1) provides that, if a corporation (acquiring corporation), in return for property, acquires stock in another corporation (issuing corporation) from a transferor in control of each of the two corporations, property received by the transferor is treated as a distribution in redemption of the stock of the acquiring corporation.

The redemption is then analysed under the tests described in IRC section 302(b), which are intended to distinguish a true stock redemption (treated as a sale) from a distribution of corporate earnings. If none of the tests are met, the transaction is treated as a corporate distribution with possible dividend consequences, rather than as a sales transaction.

In determining the amount of the corporate distribution that is a dividend, the earnings and profits (E&P) of both the acquiring corporation and the issuing corporation are taken into account under IRC section 304(b)(2). IRC section 304(b)(5) limits the amount of E&P of a foreign acquiring corporation that are taken into account for this purpose. Under IRC section 301(c)(2) and (3), if the amount of the distribution exceeds the combined E&P of the acquiring corporation and the issuing corporation, the excess reduces the transferor’s basis in the stock and is treated as a tax-free return of capital to that extent and as gain from a sale of the stock to the extent of any further excess.

It was observed that some taxpayers attempted to artificially eliminate the amount of a distribution constituting a taxable dividend by, for example, having an existing corporation with a positive E&P account form a new corporation with no E&P and having the newly formed corporation (“acquiring corporation”) acquire the stock of an issuing corporation using the capital contributed by the existing corporation (“deemed acquiring corporation”) to form the acquiring corporation.

On 14th June 1988, the Treasury Department and the IRS promulgated Treasury regulation section 1.304-4T (TD 8209) to treat the deemed acquiring corporation as having acquired the stock of the issuing corporation if the deemed acquiring corporation controls the acquiring corporation and the acquiring corporation was created, organised, or funded primarily to avoid the application of IRC section 304 to the deemed acquiring corporation.
    
On 30th December 2009, temporary regulations (TD 9477) and proposed regulations (REG–132232–08) were issued to extend the application of the anti-abuse rule of Treasury regulation section 1.304-4T to a “deemed issuing corporation”. A deemed issuing corporation refers to a corporation that is controlled by an issuing corporation if the issuing corporation is a newly formed corporation having no E&P and the issuing corporation acquired the stock of the deemed issuing corporation in connection with the acquisition of the stock of the issuing corporation by an acquiring corporation with a principal purpose of avoiding the application of IRC section 304 to the deemed issuing corporation. The acquiring corporation then will be treated as acquiring the stock of the deemed issuing corporation subject to the regular IRC section 304 analysis described above.

The final regulations adopt the 2009 temporary regulations without change. The final regulations are designated Treasury regulation section 1.304-4.

The final regulations are effective on 26th December 2012 and apply to acquisitions of stock occurring on or after 29th December 2009.

(xii)    Treaty between US and Norway – IRS releases competent authority agreement regarding source of income

The US IRS has released the official text of the recent competent authority agreement between the United States and Norway.

The agreement clarifies the meaning of the phrases “remuneration described in article 17 (Governmental Functions)” and “payments described in article 19 (Social Security Payments)” as used in the last sentence of article 24(6) (Source of Income) of the 1971 US-Norway Income Tax Treaty.

The first sentence of article 24(6) provides a general source rule for compensation received by an individual for his personal services, under which such compensation is treated as income from sources within a contracting state only if the services are performed in that state.

The last sentence of article 24(6) provides an exception to the general source rule with regard to remuneration described in article 17 and payments described in article 19. Such remuneration is treated as income from sources within a contracting state only if paid by, or from the public funds of, that state.

According to the competent authority agreement, the following understandings have been reached for the purposes of article 24(6):

•    remuneration described in article 17 is limited to income paid by, or from public funds of, one of the contracting states to a citizen of that contracting state, and thus, for example, remuneration that is paid by Norway to a person who is not a citizen of Norway would be subject to the general source rule instead of the exception;

•    payments described in article 19 refers to Social Security payments and other public pensions paid by a contracting state to a resident of the other contracting state or to a US citizen, without regard to the location in which the underlying services are performed;

•    remuneration that is not described in article 17 is subject to the provisions of the applicable article; and

•    the saving clause of article 22(3) (General Rules of Taxation) applies if remuneration described in article 17 is paid by Norway to a citizen of Norway who is also either a US citizen or a US lawful permanent resident (i.e. a green card holder), and the entire amount of the payment will be treated as income from sources without the United States for the purpose of applying article 22(3) (Relief from Double Taxation).

The competent authority agreement was entered into under article 27(2) (Mutual Agreement Procedure) of the Treaty.

[Acknowledgment: We have compiled the above information from the Tax News Service of the IBFD for the period 18-12-2012 to 18-03-2013.]

UK’s drive for competitiveness

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The UK has undertaken a series of changes in its tax policy in recent years with the aim of improving the attractiveness of the UK as a place to do business. These changes are continuing with a key goal of making the UK tax system the most competitive in the G20. This is becoming a reality as a result of a number of measures that have recently been introduced.

The change in tax policy was brought about by the threat that existing UK businesses were considering moving their headquarters outside the UK (referred to as ‘inversions’) and that international businesses were choosing other locations for investment. As a result the UK government has three clear goals in making the changes it has made:

1. To keep existing business activities in the UK (both UK groups and international groups with existing UK businesses);

2. To stimulate new business activity by existing UK businesses; and

3. To attract new business activity to the UK. One of the countries which the UK government is specifically targeting for new investment in the UK is India. Historically, Indian groups have made significant investments into the UK and the UK government is keen for this to continue.

In this article, we will look at the key changes that have been implemented in the UK under the tax reforms and how the UK is positioned today as a holding company and regional hub location.

Perceived “barriers” to the UK’s competitiveness The UK tax regime has traditionally had some key attributes that groups look for in headquarter or holding company jurisdictions. For example, the UK does not, under its domestic tax law, levy withholding tax on dividend distributions paid to overseas investors in UK companies. It also exempts capital gains derived from share disposals from tax.

However, several areas of UK tax law continued to make the UK appear uncompetitive especially when viewed against territories such as Singapore, Ireland and the Netherlands. These included the UK’s comparatively high corporation tax rate, the system of taxing dividends received by UK companies, the taxation of overseas branch profits and the CFC rules.

Foreign profits reform

Reduction in corporation tax rate

The “Corporate Tax Roadmap” released by the HM Treasury in November 2010 set out the plans for the reduction in the corporation tax rate. The rate at that time was set to steadily decline to 22% by 2014. The government has since announced a further reduction to 20% from April 2015. This would make the UK’s main corporation tax rate the lowest in the G20 alongside Russia, Turkey and Saudi Arabia.

Introduction of the UK’s foreign dividend exemption

Prior to the introduction of this new regime, the UK taxed the receipt of foreign dividends with credits potentially available for overseas and withholding tax suffered under the UK’s “double taxation relief” regime. This regime grew increasingly complex – creating an administrative and commercial burden on UK plc, which required reserves and cash to fund shareholder distributions. In many cases, the regime resulted in UK companies having to “top up” corporation tax payable even after taking credits, particularly when the headline UK corporation rate was as high as 30%.

Following representations from business and a consultation period, the UK’s dividend exemption was introduced with effect from 1 July 2009. The system introduced a number of “exempt classes” into which the vast majority of distributions should now fall. The main areas where dividends may still be taxable are if the distribution is itself deductible for overseas tax purposes, or where a distribution is funded from a previous structure designed to erode the UK corporation tax base.

Introduction of the “branch profits exemption”

Another area where the UK was seen as lagging behind other more competitive territories was the taxation of overseas branches of UK companies. As with distributions from overseas companies, the UK taxed the overseas branch profits of UK companies, with a credit for local tax suffered. Again this was a complex regime which often meant that additional UK corporation tax was payable, and impacted a purely commercial decision as to whether it was more efficient to enter a new territory via a branch or an overseas incorporated company.

To remove this barrier the UK authorities introduced an extremely flexible “branch profits exemption” with effect from 2011. Broadly, the regime allows a UK company to elect for its overseas branches to be exempt from UK tax. Electing companies will be exempt from UK tax on branch profits, but will not receive loss relief in respect of branch losses. There are certain conditions which need to be met in order to qualify for the election. For example, the branches must be ‘good’ branches as determined by applying the principles under the CFC rules. Also, if the UK company had taken the benefit of the losses of the branch, these losses must first be offset with taxable profits before the company can elect into the branch exemption rules. The branch profits are calculated using tax treaty principles. With this “optin” system, groups have the choice of applying the regime on a UK company-by-company basis through an election system. This is particularly useful as it allows groups to maintain the “old” position where it makes sense to do so – for example where a UK company has branches, or a majority of branches, with losses or “high tax” profits.

Fundamental relaxation of the UK CFC rules

Compared to the above changes, which could be termed “easy wins”, the relaxation of the UK CFC rules has been the most discussed and involved process. The previous incarnation of these rules was one of the primary drivers behind some of the corporate “inversions” mentioned earlier (where existing UK businesses were moving their headquarters outside the UK), and in some cases prevented overseas groups from viewing the UK as a viable holding or regional holding company jurisdiction. A particular complaint of UK groups was that the rules were applied in a disproportionate manner. In order to tax profits artificially diverted from the UK they also often caught profits generated overseas through genuine commercial operations, i.e., amounting to an effective system of “worldwide taxation” employed by the UK.

After significant consultation, the revised CFC rules are now on the statute book and have taken effect from 1 January 2013. The driving principle behind the new rules is one of “territoriality”. The revised CFC rules have been carefully crafted only to apply to target profits which are shown to have been “artificially diverted” from the UK. Profits which have been generated overseas through genuine economic activities and through activities which pose no risk to the UK corporation tax “base” should be left untaxed by the new UK CFC rules.

The rules remain relatively detailed, but include a wide-range of exemptions from the CFC rules, only one of which has to apply to prevent a CFC charge. As such, we anticipate that a majority of overseas subsidiaries of UK companies should be exempt under the new CFC rules. For overseas trading activities, only where it can be shown that profits have arisen, to a significant extent, due to UK activities (such as key decision makers or developers of intellectual property being in the UK) do we expect to see taxation of profits under the UK CFC provisions.

For interest income, the UK regime includes UK CFC taxation at one quarter of the UK headline corporation tax regime (which would be a rate of 5% by 2015), with the potential for 0% under certain specific conditions.

Whilst the UK has chosen to retain CFC rules and is therefore at a disadvantage compared to other territories which does not have such rules, the practical impact of the UK CFC rules for groups which choose to locate their headquarters or holding or regional holding companies in the UK is likely to be limited to that of compliance going forward.

‘Above the line’ research and development (“R&D”) tax incentive

The UK has had an R&D tax incentive for large companies for over 10 years but following a series of consultations it was decided by the government that a fundamental change is required in order to make the incentive more attractive to innovative businesses. Under the old rules, a ‘super deduction’ was available, i.e. a deduction in addition to that for the qualifying R&D expenditure was available. For example 130% of qualifying expenditure was deductible in certain cases.

Under the new rules, the benefit by way of credit will be ‘above the line’. This will allow the benefit of the R&D relief to be accounted for as a reduction of R&D expenditure within the Profit & Loss account. The associated tax credit is offset against corporation taxes payable.

The change to an above the line credit is being made in order for the benefit of the incentive to be more directly linked to the amount of R&D expenditure and also to show an improved pre -tax profit as a result. By applying the credit against the R&D expense, thus reducing the cost of the R&D in the accounts of the company and reflecting the impact within the pre-tax profit, it is thought that the incentive will have more of an effect in encouraging R&D activity in the UK.

The new credit will be a taxable credit of 10% of qualifying expenditure. The credit will be fully payable to companies which have no corporation tax liability, subject to a cap equivalent to the Pay As You Earn/National Insurance Contributions (PAYE/NIC – employment and social security) liabilities of the company. The new credit will be available for qualifying expenditure incurred on or after April 1, 2013 and will initially be available as an alternative to the current super deduction, before completely replacing the super deduction from April 1, 2016.

This is of great benefit to loss making groups in that they will be able to obtain payment for the credit, subject to the PAYE/NIC cap.

Patent Box

As part of the UK Government’s aim to encourage innovation in the UK and ensure the commercialisation of UK inventions in the UK, a new 10% tax rate has been introduced from 2013 and will apply to Patent Box profits. This is a significant saving as compared to the main headline tax rate of 20% (by 2015).

The relief applies to worldwide profits from pat-ented inventions protected by the UK Intellectual Property Office of the European Patent Office as well as patents granted by other recognised patent offices. It is not only royalties and income from the sale of IP that qualifies for this regime – all profits (less a routine profit and marketing charge) from sales of products which incorporate a patented invention qualify. This is a very broad definition and is intended to ensure that the tax rate of 10% applies to all profits arising from patents and not just the profits attributable to the patent itself.

A company qualifies if it has the ownership (or an exclusive licence) of patents and the company (or the wider group) has performed qualifying development and has the responsibility for and is actively involved in the ongoing decision making concerning the further development and exploitation of the IP. This allows a business to benefit from the regime even where they did not develop the IP originally. This supports the objectives of the Patent Box to encourage continuing development and commercial exploitation of patents by UK businesses.

The new Patent Box provides an attractive opportunity for businesses to reduce the costs associated with the commercial exploitation of patented IP. The regime is flexible and generous and should prompt global businesses to favourably consider using the UK as a place to invest in innovation.

Substantial Shareholdings Exemption (SSE)

The Substantial Shareholdings Exemption (SSE) regime was introduced in 2002. The SSE broadly exempts from UK corporation tax any capital gain on disposals by trading companies or groups, of substantial shareholdings in other trading companies or groups. Generally speaking, ‘trading’ refers to operating companies/groups with an active trade/business. The important point here is that the business should be an operating business with income from its operations (as against a business with minimal operations receiving mainly passive income). However, the legislation has also set out detailed technical conditions for the exemption to apply, and anti-avoidance provisions, all of which must be met. Care in particular cases is therefore needed in order to determine the availability of this relief.

Broadly, there are three sets of conditions which must be satisfied in order to obtain the exemption:

1.    The substantial shareholding requirement – The investing company (the company making the disposal) must own at least 10% of the ordinary share capital of the investee (company whose shares are being disposed) for a continuous period of 12 months preceding the disposal

2.    Conditions relating to the ‘investing’ company/ group, i.e., the company/group making the disposal – The investing company must be a ‘sole trading company’ or a member of a ‘qualifying group’. This condition must be met from the start of the latest 12 months period for which the substantial shareholding requirement (above) is satisfied, until the time of the disposal. It must also be met immediately after the disposal takes place. A ‘sole trading company’ is a company which is not a member of a group, which is carrying on trading activities and whose activities do not to a substantial extent include activities other than trading activities. A ‘qualifying group’ is a group, the activities of whose members, taken together, do not to a substantial extent include activities other than trading activities. Intra-group activities, such as intercompany loans, rental streams or royalty charges are ignored for this purpose. As stated earlier, ‘trading’ here refers to operating companies/groups with an active trade/business, i.e. the business should be an operating business with income from its operations. Whether a company or group is carrying on trading activities requires a consideration of the activities, income, assets, liabilities and people functions of the relevant company/group.

3.    Conditions relating to the ‘investee’ company/ sub-group, i.e., the company/sub-group being disposed of – The investee must have been a ‘qualifying company’ from the start of the latest 12 month period for which the substantial shareholding requirement (above) is satisfied, until the time of the disposal. This condition must also be met immediately after the disposal. A ‘qualifying company’ means a trading company or the holding company of a trading group or a trading sub-group. Broadly, this means that the activities of the company being sold and its 51% subsidiaries (if any) will be considered. To qualify for the exemption, at least one of these companies must be carrying on trading activities. Also, the activities of all the group/subgroup companies, taken together, must not include to a substantial extent activities other than trading activities. As stated earlier, ‘trading’ here refers to operating companies/groups with an active trade/business, i.e. the business should be an operating business with income from its operations. Whether a company or group is carrying on trading activities requires a consideration of the activities, income, assets, liabilities and people functions of the relevant company/group.

Where these conditions are met, gains arising on the disposal of shares will be exempt from corporation tax on chargeable gains. Equally, capital losses arising on such disposals are not allowable. Where there is significant uncertainty on the applicability of the SSE to a proposed transaction, an application can be filed with the UK tax authorities, Her Majesty’s Revenue and Customs (HMRC) to obtain a clearance that the conditions of the SSE would be considered to be met.


General Anti-Abuse Rule (GAAR)

There has been substantial consultation by the UK government on the introduction of a GAAR.

The GAAR is not part of the package of measures (discussed above) which have a key goal of making the UK tax system the most competitive in the G20. While the introduction of a GAAR could be considered to introduce some uncertainty, the government has clearly stated that the aim of the GAAR is to target only artificial and abusive schemes.

In addition, the introduction of the UK GAAR will bring the UK in line with most other European (and other) countries, which already have GAARs.

The government has confirmed that the GAAR should only apply to arrangements which begin after the legislation becomes the law (expected to be by July 2013) and it will apply only to arrangements which pass two tests. Arrangements will pass the first test if one of their main purposes is to obtain a tax advantage, judged objectively. The second test is a reasonableness test which will only be met if the arrangements entered into cannot be regarded as a reasonable course of action, having regard to the consistency of the substantial results of the arrangements with the principles and policy underlying the relevant tax provisions. Tax advantages which are caught by the GAAR will be counteracted on a just and reasonableness basis.

As part of the GAAR being introduced, an advisory panel will be formed which will have two main roles. Firstly, to provide opinions on the potential application of the GAAR, after representations have been made to them, and secondly to approve the guidance which HMRC will prepare on the GAAR.

It is the stated aim that the GAAR should target and counteract only artificial and abusive schemes. On the basis that any tax planning undertaken by Indian businesses generally has commercial substance, the GAAR is not expected to have any significant impact on normal commercial transactions undertaken by Indian groups in the UK.

The UK is ‘open for business’


As mentioned above, the recently announced changes to the UK corporate tax system are part of a package of measures which have been introduced over the last few years. To summarise, the most significant of the changes include:

•    A continued reduction in the UK’s main rate of corporation tax to 20% from 1 April 2015 (the rate is currently 23% and was 30% before April 2008).

•    A Patent Box regime, from 1 April 2013, which will result in qualifying patent box profits being taxed at a significantly reduced rate of only 10%, the aim being to encourage the development and exploitation of patents and other similar intellectual property in the UK.

•    An exemption system for most dividends received by UK companies and for gains made on the sale, by a UK company, of most shareholdings in trading companies.

•    An elective exemption system for overseas activities of a UK company (overseas branches).

•    A reformed controlled foreign companies (CFC) regime which is targeted at only taxing profits that have been artificially diverted from the UK.

•    The introduction of the new ‘above the line’ R&D tax incentive.

These changes have resulted in the UK’s tax system becoming more territorial and making the UK a very attractive location for regional holding and “hub” companies, acquisition companies and publicly listed parent companies, particularly when combined with a number of long standing attractive features, including being the G20 country with the most double tax treaties and the absence of a withholding tax on dividends paid by a UK company.

The UK as a headquarter and holding company jurisdiction

Over the last three years, a number of groups, particularly US groups (for example – Ensco Inter-national and Rowan Companies), have relocated their headquarters to the UK, partly because they understood that there should no longer be adverse UK corporation tax implications from doing so. Other US and non- US groups have also been actively using the UK as a regional holding company jurisdiction, particularly since the structure of the new UK CFC rules has been settled. The interaction between HMRC and these groups has also been encouraging, with HMRC actively engaging in pre-transaction discussions with businesses and offering pre-transaction clearances.

For Indian groups investing overseas, particularly into Europe and the US, the UK is now competitive with other more traditional holding company jurisdictions such as Singapore, Netherlands and Luxembourg. In addition to offering similar benefits in terms of low or zero holding company corporation tax, many groups often have substantial existing operations in the UK. This, combined with the UK’s extensive double tax treaty network, offers plenty of potential for multinationals to use the UK as an efficient regional management and financing hub.

Appeal filing Forms ST-5, ST-6 & ST-7 amended Notification No. 5/2013 – ST dated 10th April, 2013

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By this Notification, Service Tax Rules, 1944 have been amended which may be called Service Tax (Second Amendment) Rules, 2013 effective from 1st June, 2013. Under the amended Rules Form ST-5, ST-6 & ST-7 for filing appeal to Appellate Tribunal have been amended.

MVAT UPDATE

Mvat Notifications
Notification No. VAT-1513/CR-46(1)/Taxation-1 dated 30-03-2013

Vide this notification various amendments have been effected in Schedules A, B, C and D with effect from 01-04-2013.

Notification No VAT.1513/CR 46(7)/Taxation -1 dated 04-04-2013

By this notification, MVAT rate has been increased from 1% to 1.1% for sale of diamonds, articles made of precious metals and precious metal for the financial year 2013-2014. For pearls, precious stones and semiprecious stones, the MVAT rate continues to remain at 1%.

LA BILL XI OF 2013

Introduction of Maharashtra Tax Laws [Levy and Amendment] Bill, 2013, thereby providing amendments to the Maharashtra Stamp Act, the Maharashtra Value Added Tax Act, 2002 and the Maharashtra Tax on Lotteries Act, 2006.

levitra

S. 32 r.w. S. 43(1) : Depreciation allowable on second-hand vehicle on original cost to previous owner

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New Page 1

8 Shashikant Janardan Kulkarni v.
ITO

ITAT Pune Bench SMC, Pune

Before Mukul Shrawati (JM)

ITA No. 1357 /PN/2005

A.Y. : 2001-02. Decided on : 27-4-2007

Counsel for assessee/revenue : Arvind Kulkarni/

Vilas Shinde

S. 32 read with Explanation 3 to S. 43(1) of the Income-tax
Act, 1961 — Depreciation on second-hand vehicle — Previous owner had not used
the vehicle for the purpose of business, nor claimed any depreciation — Vehicle
transferred to the assessee at the original cost to the previous owner — Whether
the present owner justified in claiming depreciation on its original cost to the
previous owner — Held, Yes.

 

Facts :

A vehicle in question was purchased by the assessee’s HUF in
the year 1997 at Rs.3.87 lac. It was brought to the business by the assessee in
his individual capacity in the previous year relevant to the A.Y. 2001-02 at the
original cost of Rs.3.87 lac and depreciation @ 25% was claimed thereon. The
assessee justified his action on the ground that no depreciation was claimed by
the HUF till the time it remained its owner. However, applying Explanation 3 to
S. 43(1) of the Act, the AO held that the assessee had claimed excessive
depreciation by enhancing the cost. He therefore, reduced the cost to Rs.2 lac
and computed the depreciation accordingly. The CIT(A) on appeal confirmed the
AO’s action.

 

Held :

According to the Tribunal, as per Explanation 3 to S. 43(1),
the AO is empowered to substitute the cost of vehicle only if the following two
conditions were satisfied viz. :


à
The asset in question was at any time used by any person for the purpose of
business; and

à
He is satisfied that the assessee had taken resort to a subterfuge or a device
in order to avoid tax or acted fraudulently or the transaction was colourable.

 


It also agreed with the view expressed by the CIT(A) that the
vehicle being three years old, ought to have been subjected to wear and tear.
However, it noted that the applicable provisions did not take into account such
a situation and did not give discretion of any kind to the AO. Thus, since the
vehicle in question had not been used by the HUF for the purpose of business and
no depreciation thereon was claimed in the past on such vehicle, the Tribunal
held that the AO had no jurisdiction to substitute the value by any other
figure.

 

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CENVAT credit of the service tax paid — Input services such as rent-a-cab service, outdoor catering services provided by the manufacturer to its employees working in the factory — held that such services are in relation to manufacture of final product — Hence, eligible input service.

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(2012) 25 STR 428 (Kar.) — CCE, Bangalore v. Bell Ceramics Ltd.

CENVAT credit of the service tax paid — Input services such as rent-a-cab service, outdoor catering services provided by the manufacturer to its employees working in the factory — held that such services are in relation to manufacture of final product — Hence, eligible input service.


Facts:

The appellant claimed Cenvat credit of service tax paid by the appellant under rent-a-cab service and outdoor catering service to transport its employees to the factory and back and to provide food for them. The appellant was of the view that these services fall under input services which were entitled to credit.

Held:

Any service used by the manufacturer whether directly or indirectly in relation to the manufacture of the final product shall be considered to be eligible input service. Hence, CENVAT credit of the same can be availed.

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Policy paralysis causing long-term damage to PSUs

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Imagine a train without an engine. That’s the state of some of the key state-run financial institutions, viz., LIC of India, UTI, SAT, GIC, IRDA, New India Assurance, etc. that are without full-time chief executives, including two where millions of Indians invest their hard-earned money. The state of the government, blamed for policy paralysis, is affecting these vital institutions built over decades, which serve public interest.

Institutions such as Life Insurance Corporation and UTI are trusted household names, and dithering over key appointments in such organisations could send wrong signals apart from affecting their operations. Appointments in the government are an elaborate process, but it is supposed to start on time and ensure that decision-making does not suffer. The absence of chief executives, in some cases fulltime ones, is hurting. This, at a time when the economy is becoming strained, forcing companies to come up with their own solutions. Most of the institutions are stable at this point of time. But leaving these institutions headless may result in certain important decisions getting postponed, which can cause damage in the long term. Indecision can lead to these companies ceding ground to nimble private sector rivals, who are out to capitalise on such opportunities. These are not institutions where investors are looking for quarterly earnings that could keep the management on its toes, but closed ones whose financials are not even known or scrutinised. The absence of key personnel at the regulator may not look as problematic as it is with corporations, but they are vital for markets just as much.

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Health chief warns: Age of safe medicine is ending, says WHO chief

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The world is entering an era where injuries as common as a child’s scratched knee could kill, where patients entering hospital gamble with their lives and where routine operations such as a hip replacement become too dangerous to carry out, the head of the World Health Organisation (WHO) has warned.

There is a global crisis in antibiotics caused by rapidly evolving resistance among microbes responsible for common infections that threaten to turn them into untreatable diseases, said Margaret Chan, director general of WHO.

She said: “Antimicrobial resistance is on the rise in Europe and elsewhere in the world.

We are losing our first-line antimicrobials. “Replacement treatments are more costly, more toxic, need much longer durations of treatment, and may require treatment in intensive care units.

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Mild exercise can cut heart attack risk

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The interheart study shows the link between a sedentary lifestyle and heart problems.

The interheart study in fact focusses a lot on physical activity at leisure that can help control heart problems. “The study shows that people doing any activity can reduce their heart attack risk (compared to those who don’t do any activity at all) by almost 50%,’’ said Dr. Aashish Contractor, who is attached to the Asian Heart Institute in BKC.

“The study says that people who do 30 minutes of activity per week in their leisure time could reduce their heart attack risk by 21%. Those who do 210 minutes of activity per week can reduce the risk by over 44%,’’ he said. Those who pursued activity for 60-180 minutes per week could reduce their risk by 40%. “The Interheart study shows that one need not do fabulously hard work to stay fit. Even small steps — just 30 minutes per week — will help keep your heart healthy.’’ (Source: The Times of India, dated 12-1-2012)

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35% MLAs ‘criminals’, 66% crorepatis — Criminalisation of politics

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More than one third of the politicians elected in the just-concluded assembly polls have criminal cases against them, with Uttar Pradesh MLAs topping the list.

About 35% or 252 of the 690 MLAs elected to the assemblies in UP, Punjab, Uttarakhand, Manipur and Goa have a criminal background, while 66% or 457 of the MLAs are ‘crorepatis’.

The analysis by Association for Democratic Reforms and National Election Watch, based on the affidavits submitted to the Election Commission, also shows that compared to the 2007 assembly polls, there is an over-32% increase in the number of crorepati MLAs and about 8% rise in the number of legislators with a criminal past.

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Risk of ‘cultural revolution’ if no reforms: Wen

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Chinese premier Wen Jiabao warned his Communist colleagues recently that the dark days of the Cultural Revolution (1966-76) would return if political restructuring wasn’t carried out in real earnest.

Wen said much of the economic advancement achieved by China would come undone if political restructuring did not take place. His warning is bound to cause a stir in the Chinese industry, because the Cultural Revolution had tried to purge the country of all capitalist elements.

It was apparent that Wen was using his last press conference before completing the 10-year term till early 2013 to convey some important message to hardcore sections within the party opposed to political reforms.

 “As the economy continues to develop, new problems like income disparities, lack of credibility and corruption have occurred. We must press ahead with economic and political structural reforms, particularly reform in the leadership system of our party and country,” he said. These won’t succeed without the ‘consciousness, support, enthusiasm and creativity’ of the Chinese people, Wen said. (Source: The Times of India, dated 15-3-2012)

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Fast foods — A dangerous addiction

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The Sunita Narain-headed Centre for Science and Environment (CSE), a non-profit organisation, has analysed fast food, checking for fats, carbs, salt and trans-fat. The results are as follows:

Fried potato chips

It has around 33% fats. A standard-sized packet of chips (65-75gm) meets half of your daily fats quota. Unlike in a balanced diet, where 30% calories should come from fats, 50-60% of calories come from fats in chips.

Indian snacks

If you are fond of bhujia with tea, you get high doses of salt and trans-fats, along with a high amount of calories.

Instant noodles

This tasty meal comes with high salt, empty calories. A packet of noodles has around 3 gm of salt; recommended intake is 6 gm per day.

French fries

Fries are laden with fats: 20% of its weight is fats, 1.6% of its weight is trans-fats. By eating a large serving (220 gm), one exceeds the safe limit for trans-fats. Burgers 35% of calories in a veg burger come from fats. In non-veg burgers, 47% calories are from fats.

Carbonated drinks

The 300 ml serving that one drinks with fast food has enough sugar (over 40 gm) to exceed one’s daily sugar quota of 20 gm. After this, forget the cup of tea, one should not even eat fruits.

Fried chicken

A two-piece fried chicken has nearly 60 gm of fats, which is recommended for the whole day. Pizza By far, basic pizzas were found to be healthy compared to other fast foods. They have low levels of salt and fats; levels of trans-fats were also low.

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Fortune names N. R. Narayana Murthy among greatest entrepreneurs

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Infosys co-founder N. R. Narayana Murthy is among the 12 greatest entrepreneurs today, according to a Fortune magazine list. Apple’s late chief Steve Jobs leads the bunch. The list includes Microsoft founder Bill Gates and Facebook chief executive officer Mark Zuckerberg for turning ‘concepts into companies’ and changing the ‘face of business’.

The US publication said as the visionary founder of Infosys, Murthy has built one of the largest companies in India, helping to transform the economy and put it on the world stage. Murthy, 65, proved “India could compete with the world by taking on the software development work that had long been the province of the West; Murthy helped spark the outsourcing revolution that has brought billions of dollars in wealth into the Indian economy and transformed his country into the world’s back-office,” the magazine said.

Fortune cited his lesson that an organisation starting from scratch must coalesce into a team of people with an enduring value system. “It is all about sacrifice today, fulfilment tomorrow,” it quotes Murthy, who is ranked 10th, as saying. “It is all about hard work, lots of frustration, being away from your family, in the hope that some day you will get adequate returns from it.”

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Encyclopaedia Britannica goes out of print, enters digital world

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The oldest English-language encyclopaedia in print is moving solely into the digital age.

The Encyclopaedia Britannica, which has been in continuous print since it was first published in Edinburgh, Scotland in 1768, said on Tuesday it will end publication of its printed editions and continue with digital versions available online. The flagship, 32-volume printed edition, available every two years, was sold for INR85,947. An online subscription costs around INR4,297 per year and the company recently launched a set of apps ranging between INR122 and INR306 per month. The company said it will keep selling print editions until the current stock of around 4,000 sets ran out. It first flirted with digital publishing in the 1970s, published a version for computers in 1981 for LexisNexis subscribers and first posted to the Internet in 1994.

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‘Thank You’ to Income-Tax Department for ruining Indian Economy

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Jaithirth Rao, renowned entrepreneur, expresses deep anguish at the arbitrary manner in which the Income-tax Department is harassing Global BPO companies and raising bogus tax demands, forcing them to relocate their operations to foreign countries like the Philippines and China. This shortsighted approach of the Income-tax Department will ruin the Indian economy, he warns.

Jaithirth Rao, entrepreneurial whiz-kid, has launched a blazing attack on the Income-tax Department for its arbitrary policies which is forcing large bluechip MNCs to shift their BPOs from India to more reasonable countries.

In a thought-provoking article in the Indian Express, Jaithirth Rao spoofs a letter from the Finance Minister of Philippines to the Finance Minister of India ‘thanking’ the latter for the ‘vicious harassment’ that the Income-tax Department has heaped on the Indian IT and BPO industries which has caused a shift of BPO businesses from India to the Philippines.

The Income-tax Department is raising tax demands on captive units of global companies using their global profits as the basis and points out that this one decision alone would cause several of these companies not only to stop growing their Indian subsidiaries, but actually start winding them down.

Jaithirth Rao points out that the Income-tax Department has launched a ‘concerted strategy‘ over the past several years by making frequent and arbitrary changes in rules and says that this has resulted in ‘vicious harassment’ of Indian IT and BPO industries. In sarcastic & death-gallows humour, Jaithirth Rao says that Philippines counts the Indian income-tax authorities amongst its ‘best friends’ and requests that the names of the ‘worthy individuals’ who are behind this ‘wonderful strategy of weakening this labour-intensive Indian industry’ be given so that they can be awarded special ‘Magsaysay Awards’ and be honoured as ‘Friends of the Philippines’.

On a serious note, Jaithirth Rao points out that the Indian income-tax authorities are particularly targeting captive BPO companies, which were till recently being regarded as the ‘poster-boys of Indian I. T. Industry’, by asking them to re-compute their taxable profits based on arbitrary and changing transfer pricing guidelines without adequate safe harbour provisions, which are commonplace in most countries.

While in forums like the WTO, India has been vehemently arguing in favour of free movement of labour and opposing the stand of US political groups that it is not ‘body-shopping’, the Incometax Department has taken the reverse position that revenues from such activities do not constitute ‘service exports’ and that it really is ‘bodyshopping’.

He says that this ‘capricious behaviour’ has resulted in many captive units stopping the growth of their Indian BPO outfits and accelerating the growth of their units in foreign countries.

 He also laments that the Income-tax Department is raising tax demands on captive units of global companies using their global profits as the basis and points out that this one decision alone would cause several of these companies not only to stop growing their Indian subsidiaries, but actually start winding them down.

Jaithirth Rao says these ‘business-unfriendly’ ideas of the Income-tax Department will shrink the Indian BPO industry and while these ‘rapacious tax demands’ will in due course be struck down by the courts, in the meantime, the companies will have to pay up, be out of cash and will be spending their time and money on expensive tax lawyers instead of focussing on their operating businesses. In this unfortunate state of affairs, all BPOs close shop in India and move to the Philippines and China, he says. The Income-tax Department is “determined to wreck one of the few industries where India has achieved world class and where Indian companies are considered formidable operators” and their action of reopening past assessments and raising huge untenable demands by terming ‘service export revenues’ as ‘body shopping revenues’ (despite earlier explicit and emphatic assurances that on-site project implementation revenues would be treated as export income) is forcing large and successful world-class companies to flee India. He says that this flight of capital is making China and Philippines ‘salivate’ at the prospect of global corporations setting up operations in those countries in preference to India.

As opposed to the unreasonable stand adopted by the Income-tax Department, the Revenue in Philippines and China have decided to do exactly the opposite and are reasonable in their tax demands, simple and transparent in their transfer pricing rules and generous in their tax holidays, he says.

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HC notice to CBDT for linking promotions with tax collection

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The Gujarat High Court has issued notices to the chairman of the Central Board of Direct Taxes (CBDT) and Chief Commissioner of Income-tax Department in the state on a petition challenging CBDT’s decision to link promotions and postings of officers with tax collection made by them.

The notices were issued by a division bench of acting Chief Justice Bhaskar Bhattacharya and Justice J. B. Pardiwala while hearing a public interest litigation filed by Prakash Kapadia, chairman of an NGO, Jagega Gujarat Sangharsh Samiti.

The Court has sought an explanation about the circular that stated that promotions of the Incometax officers would depend on achievement of targets (of tax collection).

According to the petitioner, the practice of the Income-tax Department to set annual targets for tax collections and to give incentives to its staff for meeting those targets was hurting the taxpayers. The petitioner has challenged the instruction issued by CBDT chairman on February 7 to all chief commissioners and directors general of I-T to generate more collections.

 The petitioner’s counsel, Rashmin Jani, cited three cases of assessees who have suffered at the hands of tax officers due to this policy. He argued that after issuance of such instructions, the officials have started sending demand notices and passed mala fide orders in order to achieve targets.

The petitioner has also contended that the promise of promotion and posting in plum positions may result in serious prejudice to assessees. He also cited an order by the Bombay High Court quashing similar instructions issued by the CBDT chairman earlier.

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EAC Opinion – Accounting for payments made in respect of land pending execution of conveyance deeds and borrowing costs incurred in respect thereof

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Facts

The Government of India directed a State Port Trust (SPT) to construct a new Port. Accordingly SPT acted as the executing agency and completed a Port. For this, the Government of India provided a sum of Rs.426.11 crore to SPT towards implementation of the Port. The Government of India vide their letter dated 14-2-2002 directed SPT to handover the completed Port to ABC Limited, (‘the company’) which is owned by the Government of India and was incorporated with the specific purpose of corporatising the Port.

The company has stated that the Port has been developed and constructed on land acquired from Government agencies. The total consideration paid for acquisition of land was Rs.24.89 crore. Of which, Rs.14.89 crore was paid by SPT and balance Rs.10 crore was paid by the company. In the financial year 2007-08, the Government of India decided that land be owned by the company and therefore directed the company to pay to SPT the amount of Rs.14.89 crore together with interest of Rs.16.51 crore i.e., totaling Rs.31.40 crore. The company had shown the entire amount of Rs.24.89 crore in its books as ‘Advance for Land’ under the head ‘Loans & Advances’, as nature of title that will accrue to the company was not known at the time of making these payments.

Based on the subsequent development in this regard between the company, the Government and Government agencies involved in this issue, the company expects to get ‘Orders of Alienation of Title’ for the land from the respective vendors of the land in due course of time. The company has informed that the formal transfer of title of the land would be through issuance of ‘Orders of Alienation of Title’ by the transferor Government.

Query

On these facts the company has sought the opinion of EAC that (i) whether the company can capitalise the value of land at Rs.24.89 crore in the financial year 2010-11 with a suitable disclosure in the Notes to Accounts as ‘Pending receipt of formal Orders of Alienation of Title’, and (ii) whether the company can charge the interest of Rs.16.51 crore paid to SPT to its profit and loss account for the financial year 2010-11, as separate line item being extraordinary and non-recurring?

Opinion

After considering paragraphs 17 & 35 of Accounting Standard (AS) 1 ‘Disclosure of Accounting Policies’ and paragraphs 35, 49, 58 & 88 of ‘Framework for the Preparation and Presentation of Financial Statements’ the Committee is of the view that the company should capitalise the total amount of Rs.41.40 crore paid by both the company and SPT as ‘Land’ and not as ‘Advance for Land’ from the date when the company possess the beneficial interest in the land and not in the financial year 2010-11. However, the company should give suitable disclosures to convey to the users of financial statements that the execution of conveyance deeds in favour of the company is in progress. Further, the Government has made reference to a rate of interest as a means to compute final sale consideration of the land. Therefore, the amount so determined is in substance not ‘interest’. So the question of treating interest as revenue expenditure and disclosure of interest paid as an extraordinary item does not arise.

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Disciplinary case

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In the case of ICAI v. CA Ajay Kumar Gupta, the CIT Delhi filed a complaint before ICAI that the member had issued an audit report in Form No. 10CCAC certifying that the assessee had made exports and that it was eligible for deduction u/s.80HHC of Rs.18.32 lac. During the assessment proceedings, the claim for deduction u/s.80HHC was found to be false and the assessee admitted this fact. The assessee’s accounts showed that the sale proceeds for exports were not received during the year within the prescribed period.

 ICAI conducted the enquiry and found the member guilty of professional misconduct under clause (7) of Part I of Second Schedule of the C.A. Act. It recommended to the Delhi High Court that the name of the member be removed from the Register of Members for a period of 3 years.

The defence of the member before the High Court was that he was in practice for 21 years without a single incident of professional misconduct or negligence. He also argued that he could not put up his defence before ICAI properly because he had suffered paralytic attack and the assessee had taken away the file. He submitted that a lenient view may be taken in his case.

The High Court has held as under:

(i) The accountants’ profession occupies a place of pride amongst various professions of the world and makes observance of professional duties and propriety more imperative. When conduct of a member of the profession is contrary to honesty, or opposed to good morals, or is unethical, it is misconduct-warranting consequences indicated in the Statute. A breach of confidence is a stigma not only on the individual concerned, but is also likely to have effect on credibility of the profession as a whole.

(ii) The CA’s explanation that the assessee had taken away the file and that he suffered a paralytic stroke does not inspire any confidence because the relevant documents and information were supplied to him. The assessee accepted the fact that section 80HHC claim was not maintainable during the assessment proceedings. Once it is established that no payment was received against the export, the certificate issued by the CA was false. It is a bogey raised by the CA that he has verified all the documents and only then issued the certificate. On the quantum of punishment, on the one hand, the CA pleads his sickness, has an otherwise unblemished practice of 21 years and incident is old. On the other hand, the misconduct is of serious nature because submitting a false/ bogus certificate to the client to enable him to make false claim of deduction under the Incometax Act, is of serious offence. That the CA made an attempt to dupe the tax authorities and help the assessee to avoid the tax to that extent such a conduct has to be taken seriously.

He accordingly cannot be let off merely by giving him reprimand. Some penalty needs to be imposed so that it acts as deterrent and such professional misconduct is not committed. Weighing the circumstances, the ends of justice would be subserved by removing his name from the Register of Members for a period of six months. (itatonline — 9-3-2012).

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Audit & Auditors under the Companies Bill, 2012

The Companies Bill 2012 (the Bill) was tabled in
the Parliament on 18th December, 2012. The Bill has been undergoing
reviews prior to that and may shortly become an Act. Clauses 139 to 148
under the Chapter X of the Bill deal with “Audit and Auditors”. It would
not be out of place to mention here that the new provisions regarding
Auditing and Auditors will materially change our professional
responsibilities. This article attempts to discuss the criticalities and
the key issues relating to the Chapter in the Bill that deals with our
profession.

Appointment of Auditors [Clause 139]

Key
Provisions The Bill provides that a company will appoint an individual
or a firm as an auditor at its first AGM. Such auditor shall hold the
office till the conclusion of its sixth AGM and thereafter till the
conclusion of every sixth Annual General Meeting. Though the appointment
is for five years, ratification of such appointment is necessary at
every AGM. [Clause 139(1)]

In case of listed companies and
certain other classes of companies to be prescribed compulsory rotation
of audit is provided for a) In case of Individual auditor, after one
term of five years; and b) In case of a firm, after two terms of five
years [Clause 139(2)].

The auditor, after completion of his
term/s, will not be eligible for reappointment for a period of five
years. Also, a firm, which has common partners with the outgoing audit
firm on the date of appointment, cannot be appointed as the auditor of
the company. [Clause 139(2)]

Every company will need to comply
with these requirements within three years from the date when these
provisions come into force. [Clause 139(2)]

Members of the
company may also decide that a) Audit Partner and audit team shall be
rotated after certain interval or b) Audit shall be carried out by joint
auditors. [Clause 139(3)]

RBI and IRDA have powers to regulate
the banking/ insurance companies respectively under the relevant Acts.
Being regulators, these institutions have issued guidelines for
appointment and rotation of auditors. The rotation and the joint audit
requirements enacted by IRDA and RBI, being stricter and by virtue of
special powers given to them in this regard, will prevail over the
provisions of the Bill. In such a case, the appointment criteria will
continue to be as per their respective norms.

An audit firm
(including an LLP) eligible to be appointed should have majority
partners practicing in India qualified for appointment. However, only a
qualified chartered accountant partner will be eligible to sign the
audit report. [Clause 141(2)] Eligibility of an LLP for being appointed
as an auditor is now a part of the Bill. [Clause 139(4)] Under the
Companies Act, 1956 (the Act) a notification was issued to the effect
that an LLP will not be considered as a body corporate for the purpose
of Section 226(3)(a) of the Act. However, doubts were expressed whether
that was sufficient for an LLP to be appointed as an auditor of a
company.

A company may remove the auditor before the expiry of
five year term by passing a special resolution and obtaining prior
approval of the Central Government. [Clause 140(1)]

An auditor
may resign. However, he has to file a statement with ROC and also with
the CAG in case of a company where the appointment of the auditor has
been made by CAG, giving facts and reasons for the resignation [Clause
140(2)].

Comments
Prior to the Bill, the Government
had published the Voluntary Corporate Governance Guidelines in December
2009. According to these Guidelines, rotation of audit firm after five
years was suggested and it provided for compulsory rotation of audit
partner after three years. This entire thought process was aimed towards
providing strict norms of corporate governance and enhancing investor
confidence. However, compulsory rotation of audit partner and
appointment of joint auditors have been left to the discretion of the
members of the company in the Bill. Also, the Bill mandates two terms of
5 years where auditor is a firm as against one term under the above
Guidelines. To that extent, there is dilution from the original
corporate governance norms.

A study of regulatory framework with
regard to appointment of auditors prevailing in various countries shows
that there exists a joint audit system in different forms in many
countries. Joint audit is common in countries like Denmark, Germany,
Switzerland and France. In France, joint audit became a legal
requirement in 1966. All publicly listed companies in France and Denmark
that prepare consolidated (group) financial statements are required to
be audited jointly by two independent auditors and a single audit report
is to be issued. Some mandatory provisions in the Bill in this regard
would have only given boost to the investor sentiments.

Further,
in case of listed companies which have long term audit relationships,
it would be a challenge to cope with a sudden rotation. The new auditor
will have no time for understanding the intricacies of business of the
company. This, in fact, enhances the need for joint audit system prior
to rotating out the existing audit firm and would have provided
continuity and at the same time helped more quality audit firms to
emerge in the country. Nevertheless, the corporate world and auditing
community can come together to take advantage of voluntary provision of
joint audit to overcome these challenges.

As regards the
appointment/reappointment clause in the Bill, existing companies are
required to comply with the regulation within three years. However, the
wording of the clause providing for transition is not clear. Presently,
an auditor is appointed annually. After the enactment of the Bill, the
appointment will take place for 5 years. Hence, the audit firm may be
considered as eligible for appointment for two terms after the
provisions become applicable, since the audit firm will not have
completed the `term’ under clause 139(2)(b) of the Bill though the firm
may have been the auditor of the company for 10 years or more. However,
if we were to go by the spirit and the intent of the Bill, it seems that
the fact that companies are given transition period for three years,
indicates that the firm will not be eligible to be reappointed after
three years post the enactment of the Bill if it has already been the
auditor for 10 years or more.

A question remains whether an
audit firm, which has been the auditor of a company for more than 5
years when the provisions come into force, can be appointed as the
auditor of the company for 5 years at all after? Such appointment will
result in the firm being auditor of the company for more than 10 years
after the transition period. It may be noted that there is no provision
in the Bill to appoint auditor for a period shorter than 5 years. Can
the audit firm, in such a case, issue eligibility certificate under the
Bill?

Considering this, one is not clear how these provisions are going to be implemented in the initial years.

Eligibility, Qualification & Disqualifications of the Auditors [Clause 141]

Key Provisions

A person will not be eligible for appointment as auditor if he, his
relative, or his partner holds any security of or interest in or is
indebted to the company, its subsidiary, holding or associate company or
subsidiary of such holding company.

A person or an audit firm
will be disqualified for appointment if he/it has direct or indirect
business relationships with all types of entities mentioned above.

A
person whose relative is a director or key managerial person by
whatever designation in the company is not eligible for appointment.

A person who is auditor in more than 20 companies will also not be eligible for being appointed as the auditor.

A
person who is convicted by a court of an offence involving fraud is not
eligible for the appointment as auditor for 10 years from the date of
such conviction.

Comments

It is significant to note
that the term used in this clause is “Person”. This term is not defined
in the Bill. In only case of “Business relationship” the term “firm” is
also used. However, in clause 139 the Bill uses the terms “Individual
auditor” and “firm”. Going by the spirit, in my opinion, term “person”
in the context means each individual partner of the firm.

Considering
this, going by the wording of the provisions, it is not clear whether
to attract disqualification to the firm should itself hold any security
or interest etc. in the company? Also, if a partner or his relative is
holding security, whether the firm will be disqualified? Clarification
may be needed on this. Also, where one partner is individually holding
appointment as auditor in more than 20 companies, whether his firm will
be disqualified? Going by the spirit of the clause, this does not seem
to be the case, though the drafting is susceptible to such
interpretation.

Keeping track of whether any relative is holding
any security above rupees one thousand (or the prescribed amount) or is
indebted to the auditee company is going to be extremely difficult. In
case of strained relationship with any of the relatives, a member will
find himself on helpless ground if any of the relatives decides to make
him ineligible for appointment or complains after the signing of audit
report that he was ineligible.

Surprisingly, a person or a
partner whose relative has a business relationship with the auditee
company or its subsidiary, associate etc. is not disqualified. Also, the
clause does not refer to `partner of the firm’ but only to the firm.
Does it mean a partner of a firm can have business relationship with the
company in his individual capacity without the firm attracting
disqualification?

The existing limit of undertaking audit of 20
companies per partner though continues under the Bill, this limit will
now apply while appointing auditors of private companies as well. Under
the Act, this limit is not applicable to private companies. The Bill has
also done away with the sub-limit 10 companies where the paid up share
capital of the company is Rs. 25 lakh or more. It is not clear from the
text of the Bill whether signing of consolidated financial statement in
addition to the stand alone financial statements of the company would be
construed as a separate audit assignment to be covered under the limit
of 20 companies.

The intent of the legislation seems good.
However the drafting of the Clause 141 is highly vulnerable to varied
interpretation (or misuse) . Overall, this clause will require great
amount of deliberations especially from the point of view of severity of
the punishments for violating any of the provisions.

Powers, Duties, Auditing Standards and Reporting Formalities [Clause 143,145,146]

Key Provisions

The
Bill provides that the auditor of a holding company will have right of
access to the records of all its subsidiaries so far as it relates to
consolidation of financial statements.

The Bill also requires the
auditor to report whether he has any reasons to believe that an offence
involving fraud is being or has been committed by any of its officers
or employees. The auditor will have the responsibility to report the
matter to Central Government within the time and manner as may be
prescribed.

At present, the auditor is required to report any
observation with any adverse effect on the functioning of the company in
bold/italics in the audit report. The Bill mandates that such
observation/comments should read at the AGM and can be inspected by any
member.

Currently auditor is required to comment on the internal
control matters and whether such system is commensurate with the size of
the company and nature of its business in respect of purchase of
inventory, fixed assets and for the sale of goods and services. The Bill
requires auditor to comment whether adequate internal financial control
is in place and whether it is operating effectively.

The Bill specifically provides that it is the duty of the auditor to comply with the auditing Standards. [Clause 143(9)].

The
Bill provides for mandatory attendance of auditor’s authorised
representative who is qualified to be appointed as an auditor at the AGM
of the company.

Comments

The right of access to
the auditor to the records of all subsidiaries of the auditee company
for the purposes of consolidation may create certain issues among the
auditors in case the auditor of the subsidiary is different from the
auditor of the holding company.

Requirement of adherence to
auditing standards under the Bill (which was hitherto requirement of
ICAI alone) coupled with the penalties attached for non compliance has
substantially increased the auditors’ responsibility. The cost of audit
will increase and small audits may become unaffordable to both the
company and the auditor.

The scope of audit is materially
broadened with the reporting responsibility on the existence of a fraud.
As per SA240 that deals with the “Auditor’s responsibility relating to
frauds in an audit of financial statements”, the primary responsibility
of prevention and detection of fraud rests with management together with
those charged with governance of the entity. Fraud detections require
an attitude which is inherently different from the at-titude required
for the purpose of an audit. Further, in India in case of audit of
banks, the regulator has prescribed the fraud reporting responsibilities
on the statutory auditor. However, the regulator has given clear
directions with regard to the materiality and corresponding reporting
responsibility to various authorities. The Bill does not state any
materiality limits for the fraud reporting. All these indicate that
auditor has to inform all frauds detected/suspected during course of
audit to the Central Government.

Reporting on effectiveness of
internal control is highly subjective. Any comment thereon in the report
may impact the entity significantly. This will increase the
professional responsibility as well as the liability of the audit firm
very significantly.

Further in respect of reporting on fraud, in
the absence specific guidelines, there is a possibility of difference of
opinion whether any offence involving fraud has taken place. For
example, any strategic investment made by the company that is managed by
relatives of the top management or the Board, or divestment of
investment below market value but much above the cost of acquisition to a
company that is substantially influenced by the relatives of top
management or the board members may be construed to be a fraud. Such
interpretational issues may have to be dealt with very carefully
considering the penalties involved in non compliance of reporting
requirement.

Prohibition of undertaking certain services [Clause 144]

Key Provisions

The
Bill provides stringent norms for independence of the auditors. Under
the Bill, an audit firm will not be able to provide certain services
directly or indirectly to a company where it is appointed as the auditor
or to its holding company or subsidiary

companies. (Clause 144) The prohibited services are as under: –

1.    Accounting and book keeping services

2.    Internal Audit

3.    Management services

4.    Design and implementation of any financial sys-tems

5.    Actuarial services

6.    Rendering of outsourced financial services

7.    Investment banking or advisory services

It
is important to note that the restrictions of undertaking the above
mentioned prohibited services apply not only to the firm undertaking the
audit but to all other connected entities of the firm namely:

i)  All its partners;

i)    Its parent, subsidiary or associate entity; and

ii)   
Any other entity in which the firm or any of its partners has (or can
exercise) significant influence or control or whose name, trade-mark,
brand is used by the firm of any of its partners.

The auditor
will have to comply with the above restrictions before the end of the
first financial year after the enactment of the Bill.

Comments

The
Bill uses term “Management Services” for one of the prohibited
services. Under ICAI standard, the term “Management Consultancy
Services” is used for indicating prohibited service. The term
“Management Consultancy Services” used by ICAI at present specifically
excludes Tax services. In my opinion, though there is minor difference
in the terminology used in the Bill and by ICAI, an auditor will be able
to render services related to Direct Taxes and Indirect Taxes.

Punishment for contraventions [Clause 147]


Key Provisions
If
there are any contraventions of any of the provisions relating to audit
and auditor by the company then the company and every officer in
default will be punishable with a minimum fine of Rs. 10,000 and maximum
of Rs. 5 lakh and/or imprisonment extending up to 1 year. [Clause
147(1)]

In a case the auditor contravenes provisions of clauses
139 or 143 to 145 of the Bill, the auditor may become liable to a
minimum fine of Rs. 25,000, which may extend to Rs. 5 lakh. However, if
it is proved that the contraventions have taken place knowingly or
wilfully with the intent to deceive the company, its shareholders, its
creditors, or tax authorities, the auditor will be punishable with
imprisonment for a term up to one year and minimum fine of Rs. 1 lakh
which may go up to Rs. 25 lakh. [Clause 147(2)]

In the event the
auditor is convicted of intentionally deceiving the company,
shareholder, creditors or tax authorities he will be liable to refund
the remuneration received by him to the company and incur liability to
pay damages to all such persons/ authorities for loss arising out of
incorrect or misleading statements made in his audit report. [Clause
147(3)]

Further, if proved that partner or partners of the audit
firm have acted in a fraudulent manner or abetted or colluded in fraud
then the liability for such act will be that of the firm and the
concerned partners jointly and severally. [Clause 147(s) and Explanation
to Clause 140(5)]

Members or depositors or any class of them are
entitled to claim damages, compensation or demand any suitable action
from/or against audit firm for any improper or misleading statement made
in the audit report. [Clause 245(1)(g)(ii)]

Comments

The
Bill rests a heavy responsibility on the audit profession and the
provisions are open to abuse. Eventually, even if the auditor is able to
prove that his actions were not fraudulent or that he had sufficient
evidence to support his comment in the report he has submitted, the
audit firm carries the risk of damage to reputation on account of
accusations. It is necessary to provide sufficient defense measure for
the auditing community at large.

National Financial Reporting Authority [Clause 132]

The
discussion in regard to audit and auditors cannot be complete without
mentioning the immergence of the new authority National Financial
Reporting Authority (NFRA). The existing advisory committee under the
Act known as NACAS will be replaced by NFRA with much wider powers. It
will a) Make recommendation on formulation and laying down accounting
and auditing standards; b) Monitor and enforce the compliance of
accounting and auditing standards; c) Oversee the quality of service of
the professions associated with ensuring compliances with standards and
suggest measures required for improvement in the quality of service; and
d) Perform such other functions as may be prescribed.

NFRA has
been also entrusted with wide powers such as to investigate suo moto or
on reference made by the Central Government into matters of professional
or other misconduct committed by a chartered accountant or a firm of
chartered accountants. Once NFRA commences investigation, ICAI or any
other body cannot initiate or continue proceedings in such matters. NFRA
will have the same powers as vested in a civil court under Code of
Civil Procedures.

For proven misconduct, NFRA will have power to
levy penalty amounting to not less than Rs. 1 lakh but which may extend
to five times the fees received in a case of an individual and not less
than Rs. 10 lakh but which may extend to ten times in case of a firm.

NFRA
will also have the authority to debar a firm or a member from engaging
in practice as a member of ICAI for a minimum period of six months or
such higher period not exceeding 10 years as may be decided by NFRA.

Comments

NFRA
is authorised to act as a regulator for members registered under the CA
Act. This means it may also take action against the company officials
if they are chartered accountants. With constitution of NFRA, powers of
ICAI in regulating members’ conduct will be diminished.

Excessive Powers to Make Rules

In
spite of having in the Bill stringent regulations relating to the audit
and auditors, the Bill has given powers to the Central Government to
prescribe rules at as many as 19 places in Chapter X alone (in the
entire Bill at 346 places). A summary of provisions where powers to
prescribe rules have been given is as under:

Procedure for selection of auditors [Clause 139(1)]

Eligibility conditions for appointment as auditor [Clause 139(1)]

Classes of companies that require rotation of auditor [Clause 139(2)]

Approval from Central Government for removal of auditor [Clause 140(1)]

Statement by the auditor to be filed with ROC in case of resignation [Clause 140(2)]

The value of security that my be held in auditee company [Clause 141(3)(d)(i)]

Amount up to which auditor may be indebted to auditee company [Clause 141(3)(d)(ii)]

Amount of guarantee that may be given to the company in respect of any third person [Clause 141(3)(d)(iii)]

Nature of business relationship with the company [Clause 141(3)(e)]

Information to be included in the “financial Statements” [Clause 143(2)]

Matters that an audit report should include [Clause 143(3)(j)]

Duties and powers of auditors in respect of branches outside India [Clause 143(8)]

Time limit and manner of reporting of fraud to the Central Government [Clause 143(12)]

Prohibited services by an auditor [Clause 145]

Class of companies that need to maintain Cost re-cords [Clause 148(1)]

Items of cost that should be included in books of account [Clause 148(1)]

Net worth or turnover of the companies that require Cost audit [Clause 148(2)]

Manner of calculating remuneration of a Cost Audi-tor [Clause 148(3)]

Conclusion

It
is necessary for all of us to take serious cognizance of all these
provisions in the Bill. We need to understand the entire direction in
which the legislation is moving and be ready to build necessary
professional expertise as well as safeguards in the interest of the
profession.

Right of Privacy – Instruction issued by Election Commission empowering its officer to randomly and indiscriminately search any vehicle on road – Ultra Vires – Constitution of India Art. 21.

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A Writ Petition (PIL) was filed at the instance of a registered N.G.O. substantially challenging the provisions of Chapters 4 and 5 of the Instructions on Election Expenditure Monitoring (2012) issued by the Election Commission of India under the purported exercise of power under Article 324 of the Constitution of India. According to the Instructions, various teams, such as, flying squad, static surveillance team, expenditure monitoring cell, etc. have been constituted. The teams which have been constituted have been empowered to intercept and search indiscriminately any vehicle or any person/individual at any time. On search, if any cash of more than Rs.2.5 lakh or any other articles, such as, gold, diamonds, etc. are found from the possession of such a person, then the members of the said team have been empowered to interrogate the particular person, and if unexplained cash, without proper documents is found in the possession of any person and is suspected to be used for bribing the voters, it would be seized and action would be taken under the provisions of the law. The Instructions further provide that if cash found is more than Rs.2.5 lakh and no criminality is suspected, i.e., without any election campaign material and no party functionary or worker of the contesting candidates/parties are present in the vehicle, to prove the nexus, then the members of the team would intimate about the recovery of such cash to the Assistant Director of Income Tax in charge of the district. The Assistant Director would depute the Inspector or he himself would reach at the spot for taking appropriate action according to the provisions of the Income Tax Laws.

The Honourable Court observed that powers vested in the Election Commission under Art. 324 (1) of the Constitution of India are wide in nature. The exercise of powers is, however, not without a check. The power has to be exercised with legal circumspection. It is rather more to supplement to the grey areas where no law or legislation is existing and it is necessary to issue directions or pass orders to ensure free and fair poll. The power is complementary and supplemental. It cannot be exercised contrary to the provisions of law, nor should it violate the existing laws.

Action of the authorities in intercepting vehicles indiscriminately on the road at random and then carrying out the search in the hope or nurturing a doubt that the vehicle may contain a cash of more than Rs.2.5 lakh or other articles, without establishment of prima facie grounds or without there being any basis or subjective satisfaction on the part of the authorities would definitely be a violation of the right to privacy of such citizens. If there is a concrete information with the authorities that a vehicle is to pass through a particular route carrying a large amount of currency or other articles like liquor, arms, etc. likely to be used in the election process, then perhaps the authorities may be justified in intercepting the same and effecting the seizure of the same. In the present case, a very unique mode is being adopted. Even if the authorities are satisfied that the cash recovered from a particular individual is not to be used for any election purpose, but still the authorities would inform the Income-tax officials regarding the same for taking appropriate action. This amounts to direct intrusion on the powers of the Income-tax authorities as laid down under Income-tax Act, 1961.

The Honourable Court held that the instruction issued by the Election Commission insofar as it empowers its officers to randomly and indiscriminately search any vehicle on the road and seize cash of Rs.2.5 lakh, if recovered from the vehicle or an individual or a person, as ultra vires being violative of Article 21 of the Constitution and also beyond the powers conferred on the Election Commission. The Court directed the Election Commission that the instructions shall not be implemented and there shall not be any indiscriminate or random search or seizure of any vehicle, unless there is any reliable or credible information with the Election Commission reduced into writing.

Bhagyoday Janparishad (Reg. NGO) through President vs. State of Gujarat thro. CS & Ors. AIR 2013 Gujarat 14

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Recovery of tax – Company in liquidation – First charge – Conflict between State legislation and Central legislation – Central legislation must prevail : Companies Act Section 529A & 530.

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This appeal was directed against the order of the Official Liquidator wherein the present appellant (Commercial Tax, Government of M.P.) had been ranked as a preferential creditor. The appellant contended that in terms of the provisions of section 33C of the Madhya Pradesh General Sales Tax Act, 1958 and section 53 of the M.P. Commercial Tax Act, 1994, any amount of tax/penalty/interest payable by a dealer or other Person under this Act shall be first charge on the property of the dealer or Such person and as such he be treated pari passu with the secured creditors. The claim of the appellant is in the sum of Rs. 1,40,60,422 ; they are sales tax, Central tax and entry tax dues payable by the company (in liquidation) for its Morena unit and Gwalior unit. The appellant is aggrieved by the finding returned by the Official Liquidator that he be ranked as a preferential creditor and not a secured creditor.

The Court observed that the statutory mandate contained in this provision is clear. It starts with a non obstante clause. It clearly states that notwithstanding any thing contained in any other provision of this Act or any other law for the time being in force, the dues of the workmen and debts due to the secured creditors to the extent that such debts rank under clause (c)of the proviso to s/s. (1) of section 529 shall be paid pari passu and in priority to all other debts.

The claims made by the appellant relate to his tax dues which as per his submission would categorise u/s. 53 of the M.P. Commercial Tax Act, 1994. Section 53 of the M.P. Commercial Tax Act,1994 clearly stipulates that this provision is subject to the provision of section 530 of the Companies Act,1956. Section 530 deals with the dues of the company to a Central or a State or a local authority of Revenue, taxes, cesses, etc.

Provisions of section 529A of the Companies Act (a Central legislation) have to override the provisions of section 53of the M.P. Commercial Tax Act of 1994 (a State legislation). Even otherwise section 53 of the Act of 1994 (under which the appellant is claiming his right) clearly specifies that the tax liability will be subject to the provisions of section 530 of the Companies Act; section 530 of the Companies Act has to be read subject to the provisions of section 529A of the said Act. There appears to be no conflict between the State Act and the Central Act. That apart, even if there is a conflict between a State legislation and a Central legislation, the Central legislation must prevail.

Commissioner, Commercial Tax, Government of M.P. vs. Official Liquidator (2012) 56 VST 335 (Del.) (High Court)

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Nomination – Nominee Director – Withdrawal to take effect immediately – Resignation to take effect moment letter is sent: Companies Act, 1956:

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The first accused “M/s. Subhiksha Trading Services Ltd” is a company incorporated under the Companies Act of 1956. The complainant is a banking company. A complaint was filed against a company and its directors for an offence punishable under sec. 138 of the Negotiable Instruments Act, 1881. The petitioner, who was one of the accused, filed a petition u/s. 482 of the Code of Criminal Procedure, 1973, contending that (i) she was a nominee director who had submitted her resignation prior to issuance of the cheque which had been dishonoured; (ii) that the shareholder company which had nominated her to the board of directors of the accused – company had sent the letter of withdrawal to the accused company as well as to the Registrar of Companies, which was acknowledged; (iii) that she had also intimated her resignation to the board of directors of the accused company; and (iv) that there was absence of specific averments as to how she was in charge of day to day affairs of the company;

The Honourable Court observed that under the articles of association, the shareholder company had the right to withdraw its nominee. The moment the nomination was withdrawn, the withdrawal became effective and the nominee director ceased to be a director of the company. From the letter of withdrawal sent to the first accused company and the letter of information sent to the Registrar of Companies, it had been prima facie proved by means of unimpeachable documents that the petitioner was not a nominee director of the first accused company on or after 8th January, 2009. Therefore, she was not liable for punishment u/s. 138 of the 1881 Act for the offence said to have been committed by the company subsequent to the date of withdrawal. The Court further observed that resignation of a director will take effect from the moment the resignation letter is sent and it is later on acknowledged by the company.

The question of resigning from the office of director will arise, only if, the person happens to be a director and not a nominee director. If he is a nominee director, he is primarily responsible for the company which nominated him. He may send his resignation to the company which nominated him and even without any such resignation letter, the company which nominated him will be at liberty to withdraw his nomination. In either event, if a resignation letter is submitted by a nominee director to the company which nominated him, thereafter it is for that company to act upon it and to withdraw the nomination of the nomination of the nominee director. As there is no provision for resignation by the director, there is no provision for withdrawal also in the Companies Act, 1956. But such withdrawal is governed by the memorandum and articles of association.

Renuka Ramanath vs. Yes Bank Ltd. (2012) 174 Comp. Cas 465 (Mad.)

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License or lease – Determination – Distinction : Transfer of Properly Act Sec. 105

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The Petitioner, a Publisher-cum-Chief Editor of a local news paper published from Tirupathi, challenged the legality and validity of the orders passed by the second respondent on 16.03.2012 declining to extend the period of license and requesting the petitioner to vacate the premises under his occupation within three days.

In accordance with the terms of the license, the petitioner was granted permission to carry on the business. Condition No. 5 thereof required the licensee to pay the license fee by the 5th of every succeeding month and non-payment of the license fee entailed cancellation of the license apart from the levy of penalty of 24% p.a. on the arrears of the license fee till the date of payment in full. Condition No. 10 thereof set out that the licensee shall not act to the detriment of the interests of the Devasthanams in any manner. Condition No. 13 reserved the right of access and entry into the licensed premises and to carry out inspection by the Officers and Staff of the T.T.D. Condition No. 15 set out that the license was liable to be cancelled for violation of any of these terms and conditions of the license. The writ petitioner quietly entered upon the demised premises on 04-08-2008 and he was entitled to remain in possession thereof for a period of three years, which was to expire on 03-08-2011, subject of course to his payment of the monthly license fee of Rs. 4,535/-.

The Court observed that section 52 of the Indian Easements Act, defined “license” as, where one person grants to another, or to a definite number of other persons, a right to do, or continue to do, in or upon the immovable property of the grantor, something which would, in the absence of such right, be unlawful, and such right does not amount to an easement or an interest in the property. It is manifestly clear that every license originates in a grant made by one person in favour of another or a definite number of other persons. By implication a license cannot be granted to a fluctuating body of persons who will not be answering the expression of definite number of other persons. Most importantly, what has been granted was only to do something which would in the absence of such grant be unlawful to be done by the other persons. Equally important to notice is the fact that the person to whom the grant is made, does not acquire any right whatsoever, including easementary right or any interest in the property. It can, therefore, be deduced that a grant, which is called license merely authorised the person or persons to whom the grant is made, a right of possession for enjoyment and hence such a right is not juridical possession but amounts to mere occupation.

Possession being a legal concept, one of the most essential ingredients of it is the specification of the actual period of time granted for such occupation. Therefore, a bare license, without anything more is always revocable at the will of the licensor, since the grant itself is limited by a period of time, and the payment of license fee does not by itself create an interest in the licensed property. Consequently, mere acceptance of the license fee even for the periods subsequent to the revocation of the license would not amount to acquisance of the possession of the licensee. It merely amounts to fictional or unreal extension of the period of license without in any manner affecting the rights of the owner from securing eviction of the person or persons to whom the grant is initially made. In law, grantor or the licensor is always liable to be treated to be in possession of the land in question all through the subsistence of the license and even beyond. Hence, it would be open to the licensor to re-enter the premises and reinstate himself once the period of license granted by him expires. This power to re-enter or to reinstate himself is conditioned by not using more force than is actually necessary. As per Section 54 of the Easements Act, the grant of a license may be express or implied from the conduct of the grantor, and Section 60 of the said Act sets out the circumstances when a license can be revoked and Section 61 sets out that such a revocation can be express or even implied. Section 62 listed out nine circumstances when a license is deemed to be revoked.

Of them, Clause (c) clearly discloses that a license is deemed to be revoked when it has been granted for a limited period and the said period expired. Thus, it becomes evident that a license granted for a limited period is deemed to have been revoked upon expiry of the period of grant. Section 63 recognised that, where a license is revoked, the licensee is entitled to a reasonable time to leave the property affected thereby and to remove any goods which he has been allowed to place on such property. What would be the reasonable time required for achieving these objectives is therefore dependent upon the facts and circumstances prevailing in each case. No hard and fast rule can be prescribed in this regard. Section 64 recognised the right of the licensee, when he was evicted without any fault of his by the grantor before he has fully enjoyed, under the license, the right which he was granted, to recover compensation from the grantor, for the breach of the grant.

The term ‘Lease’ has been defined in Section 105 of the Transfer of Property Act, 1882. The expression ‘lease’ normally connotes the preservation of the demised estate put in occupation and enjoyment thereof for a specified period or in perpetuity for consideration; the corpus user thereof does not disappear and at the expiry of the term or on successful termination the same is handed over to the lessor subject to the terms of the contract, either express or implied (see State of Karnataka and others vs. Subhash Rukmayya Guttedar and others (1993) Supp 3 SCC 290).

In juxtaposition, a license confers a right to do or continue to do something in or upon immovable property of grantor which but for the grant of the right, may be unavailable. It creates no estate or interest in the immovable property of the grantor. Thus, the distinction between the ‘lease’ and license’ lies in the interest created in the property demised. It is therefore essential to gather the intention of the parties to an instrument from the terms contained therein and also by scrutinising the same in the light of the surrounding circumstances. The description ascribed by the parties to the terms may, evidence the intention but may not be very decisive. The crucial test, therefore, is whether the instrument is intended to create or not to create an interest in the property which is the subject matter of agreement between the parties. If it is in fact intended to create an interest in the property, it becomes a lease and if it does not, it is a mere license. In determining whether the agreement creates a lease or a license, the test of exclusive possession, though not decisive, is of great significance. Thus, there is no readily available litmus test to distinguish a ‘lease’ as defined in Section 105 of the Transfer of Property Act, from a ‘license’ as defined in Section 52 of the Easements Act, 1882, but the nature and character of the transaction, the terms settled by the parties and the intent of the parties hold the key. Therefore, if an interest in the immovable property entitling the transferee to enjoyment is created it becomes a lease, and if mere permission to use without right to exclusive possession is alone granted, it becomes a license.

The conditions of the grant leave no doubt that the parties have only intended the transaction to be a mere license but not a lease. Particularly, condition No. 13, which reserved the right of entry into the licensed premises and to carry out inspection by the officers and staff of the T.T.D any time during the subsistence of the license makes the position clear that the possession of the licensed premises remained with the second respondent – Devasthanam, all through, and the writ petitioner has only been granted a license to use the premises. Further, the monthly fee, which formed the consideration for the grant, was called as license fee. Right to recall the grant for violation of the terms and conditions, prematurely, is another pointer.

In view of the above it was held that Suit premises was not leased out but granted on license only.

Clarification issued by Board – Binding on officers: Central Excise Tariff Act, 1985

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The petitioners were engaged in the business of manufacturing of plain particle boards and prelaminated particle boards popularly known as ‘Bagasse boards’, which are goods falling under Chapter 44 of the First Schedule to the Central Excise Tariff Act, 1985.

According to the petitioners, bagasse is remains of sugarcane after the juice has been extracted by pressure between rolls of a mill. The Central Government issued a notification u/s. 5A of the Central Excise Act dated 1st March 2006, thereby granting exemption as well as concessional rate of duties for various goods. At Serial No. 82 of the Table of this Notification, “Bagasse boards” are classified at clause (vi) and rate of duty prescribed for these goods is nil.

The petitioner company came to know from the Association that the goods in question were chargeable to nil rate of duty and that other members of the Association at Kolhapur, State of Maharashtra, were allowed to clear these goods at nil rate of duty. Petitioner wrote a letter dated 1st June 2006 requesting the Assistant Commissioner for clarification whether Bagasse boards manufactured by the petitioner were chargeable to nil rate of duty or not. The petitioner did not receive any response from the excise authorities. As there was no reply at the end of the Assistant Commissioner or from any other excise authorities, the petitioner started clearing their goods, namely, bagasse boards at nil rate of duty.

Ultimately, the Additional Commissioner of Central Excise issued a show-cause notice dated 20th June 2007, proposing to recover a sum of Rs. 28,75,624/- as excise duty on the quantities of Bagasse boards cleared by the petitioner company on the ground that the goods were covered under another Notification dated 1st March 2006.

In the course of hearing of Writ Petition, it was pointed out three clarification were issued by the Government of India and the Board, two letters of the C.B.E. & C. addressed to the Chief Commissioner, Hyderabad and the Chief Commissioner, Pune are specifically relied upon by the Commissioner, Central Excise, Pune while allowing benefit to one M/s. Eco Board Industries Limited.

It had been clarified by the Government of India through the Board that benefit of Notification was available to pre-laminated bagasse board, such clarification is binding to all Central Excise Officers and no officer of the Central Excise could take a contrary view, more so, when the Central Excise Officers of Patna, Lucknow, Sholapur, Kolhapur, Pune, Hyderabad, etc. have followed the clarifications and allowed the benefit of exemption for similar products, namely, pre-laminated bagasse board, to manufacturers within their jurisdiction.

The Court observed that firstly, any clarification issued by the Board is binding on the Central Excise Officers who are duty-bound to observe and follow such circulars. Whether Section 37B is referred to in such circular or not is not relevant. The Court quoted the observations made by the Supreme Court in the case of Ranadey Micronutrients vs. Collector of Central Excise 1996 (87) ELT 19 (SC), wherein a circular which was in favour of the assessee issued by the Board was sought to be repudiated by the Central Excise Department on the ground that it was only a letter and not an order issued u/s. 37B. The Apex Court observed in paragraph 13 of the judgment as under:

“There can be no doubt whatsoever, in the circumstances, that the earlier and later circulars were issued by the Board under the provisions of Section 37B, and the fact that they do not so recite does not mean that they do not bind Central Excise Officers or become advisory in character. There can be no doubt whatsoever that after 21st November, 1994, Excise duty could be levied upon micronutrients only under the provisions of Heading 31.05 as “other fertilisers”. If the later circular is contrary to the terms of the statute, it must be withdrawn. While the later circular remains in operation, the Revenue is bound by it and cannot be allowed to plead that it is not valid.”

Therefore, the submission that the letters issued by the Board in the present case were communications answering queries raised by the Commissioners of particular areas and hence, such letters were not binding because they were not issued u/s. 37B is not the correct proposition as canvassed by the Counsel appearing for the Revenue.

When other Central Excise authorities of equal and higher rank have followed and acted as per the clarifications, the Commissioner, Surat, could not have taken a contrary view on the assumption that the clarifications were only letters and not orders u/s. 37B.

If Excise authority of a particular Commissionerate or State refuses to allow benefit of exemption to manufacturers located in that Commissionerate or State but other manufacturers located elsewhere are allowed such exemption, then the same would be in violation of Article 14 of the Constitution of India and also of Article 19(1)(g)of the Constitution of India.

Darshan BoardLam. Ltd vs. UOI 2013 (287) E.L.T. 401 (Guj.)

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Service of notice u/S.143(2)

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Issue for consideration

Section 143
of the Income-tax Act, 1961 (‘the Act’) provides for assessment by an
Assessing Officer (‘AO’) of the tax payable by an assessee for a
particular assessment year. Section 143 is a purely procedural or
machinery section laying down the procedures for making assessment in
various contingencies. Broadly, section 143 prescribes two types of
assessment — ‘summary assessment’ u/s.143(1) and ‘scrutiny assessment’
u/s.143(2).

As the name suggests, under ‘summary assessment’,
the AO makes regular assessment without inquiry and makes adjustments,
if any, to the income, limited to any arithmetical error in the return
or an incorrect claim which is apparent from any information in the
return. Section 143(2) on the other hand provides for regular assessment
after detailed inquiry. Section 143(2)(ii) enables the AO to make a
regular assessment after detailed inquiry.

The proviso to
section 143(2)(ii) of the Act prescribes the service of notice on the
assessee within a particular period as a pre-requisite to enable the AO
to complete an assessment other than summary assessment. The notice
should specify a date and should call upon the assessee either to attend
before the officer on that date or produce or cause to be produced
before the officer, on that date, any evidence which the assessee may
rely upon in support of his return and it is then up to the assessee to
satisfy the officer by producing necessary material that the return is
correct and complete. At present, the proviso to section 143(2)(ii)
specifies six months from the end of the financial year in which the
return is furnished, as the time-limit within which notice needs to be
served on the assessee for valid assessment of his return of income.

Section
143(2)(ii) and the proviso thereto, read as under: “Section 143(2)
Where a return has been furnished u/s.139, or in response to a notice
u/ss.(1) of section 142, the Assessing Officer shall, —
(i) ……..

(ii)
notwithstanding anything contained in clause (i), if he considers it
necessary or expedient to ensure that the assessee has not understated
the income or has not computed excessive loss or has not underpaid the
tax in any manner, serve on the assessee a notice requiring him, on date
to be specified therein, either to attend his office or to produce, or
cause to be produced, any evidence on which the assessee may rely in
support of the return; Provided that no notice under clause (ii) shall
be served on the assessee after the expiry of six months from the end of
the financial year in which the return is furnished.”

The controversy
sought to be discussed here, revolves around the issue as to whether the
expression ‘served’ used in the proviso to section 143(2) (ii) of the
Act needs to be given a literal meaning of ‘actual physical receipt of
notice by the assessee’ or otherwise needs to be construed as giving a
meaning of ‘issue’ of notice by the AO.

The Punjab and Haryana High
Court had an occasion to deal with this issue, holding that the date of
receipt of notice by the assessee was not relevant to determine whether
the notice had been served within the prescribed time, and that the
expression ‘serve’ meant the date of ‘issue of notice’. In deciding the
issue, the Punjab and Haryana High Court specifically dissented with the
findings of other earlier judgments of the Punjab and Haryana High
Court on the subject.

V.R.A. Cotton Mills’ case

The issue came up
recently before the Punjab and Haryana High Court in the case of V.R.A.
Cotton Mills (P) Ltd. v. Union of India and Others, (CWP No. 18193 of
2011) dated 27 September 2011 (reported in www.itatonline.org). V.R.A.
Cotton Mills filed a writ petition challenging the notice dated 30
September 2010 issued by the AO u/s.143(2) for A.Y. 2009-10, on the
ground that the notice was not served within the prescribed time limit
and accordingly, claimed that the initiation of assessment proceedings
by the AO was bad in law. The Court opined that the expressions ‘serve’
and ‘issue’ were interchangeable, relying on the following legal
precedents to construe the expression ‘serve’ as the date of issue of
notice:

  •  Banarsi Debi and Anr. v. ITO, (53 ITR 100);
  • Collector of
    Central Excise v. M/s. M. M. Rubber & Co., (1991 AIR 2141 SC);
  • Bhagwandas Goverdhandas Kedia v. Girdharilal Parshottamdas & Co.,
    (AIR 1966 SC 543); and
  • State of Punjab v. Khemi Ram, (AIR 1970 SC
    214). 

The High Court dissented from its own earlier judgment in the case
of CIT v. AVI-OIL India (P.) Ltd., (323 ITR 242), on the ground that
the legal precedents referred to above were not placed before the Court
in the case of AVI-OIL India (supra) and therefore, the Court, in
ignorance of law, had given literal meaning to the word ‘served’ in that
case. Treating the decision of AVI-OIL India (supra) as per incuriam,
the Court in V.R.A. Cotton Mills case (supra) held that the purpose of
the statute would be better served, only if the expression ‘served’ was
considered as being issue of notice. The Court, in light of the
aforesaid findings, dismissed the writ petition of the assessee and
construed the expression ‘served’ as meaning ‘issue’ of notice.

AVI-OIL
India’s case

This issue had come up earlier before the Punjab and
Haryana High Court in the case of CIT v. AVI-OIL India (P.) Ltd.
(supra).

In that case, the assessee filed its return of income on 29
October 2001 for A.Y. 2001-02 and notice u/s.143(2) was issued on 29
October 2002. The notice server visited the factory premises of the
assesseecompany on 31 October 2002 and as per the report of the notice
server, the office was found closed. The AO then directed the notice
server to serve the notice by affixture. This mode of service of notice
by affixture was challenged in appeal and the Court upheld the decision
of the Tribunal that such service of notice was not in accordance with
section 282 of the Act and Rules as prescribed under the Code of Civil
Procedure, 1908.

In addition, another notice dated 30 October 2002, was
also issued by the AO and sent by Registered post on 30 October 2002.
This notice was served upon the assessee on 1 November 2002. Relying on
the proviso to section 143(2)(ii) of the Act, the assessee-company
submitted that the second notice was non est in law considering that it
was served on the assessee beyond the then prescribed time limit of 12
months from the end of the month in which the return was furnished.

On
perusal of section 143(2) of the Act, the Court held that a notice under
that section is not only to be issued but also has to be served upon
the assessee within the time-limit as provided under the proviso to
section 143(2)(ii) for a valid assessment. The Court further held that
belated service of notice cannot be considered as curable u/s.292B of
the Act, as this section deals with issue of notice and not service of
notice.

In light of these facts, the Court upheld the decision of the
Tribunal of service of notice on the assessee not being a valid service
of notice u/s.143(2).

Observations

Section 143 of the Act corresponds in material particulars to section 23(1) to section 23(3) of the Income-tax Act, 1922 (‘the 1922 Act’). Section 143 has received major overhauls due to changes in the assessment procedures vide Taxation Laws (Amendment) Act, 1970 and Direct Tax Laws (Amendment) Act, 1987. Over the years, amendments have been carried out in the provisions of section 143, to reach its present form. The condition of service of notice on the assessee and the time-limit thereof was introduced in section 143 by the Direct Tax Laws (Amendment) Act, 1987. Circular No. 549, dated 31 October 1989 issued by the Central Board of Direct Taxes (CBDT), 182 ITR 19 (St.), explains the scope of the amendment in the proviso to section 143(2) of the Act, as under:

“5.10 Commencement of proceedings for scrutiny and completion of scrutiny proceedings [s.s (2) and (3) of section 143] —………….

5.12 Since, under the provisions of s.s (1) of new section 143, an assessment is not to be made now, the provisions of s.s (2) and (3) have also been recast and is entirely different from the old provisions…….

5.13 A proviso to s.s (2) provides that a notice under the sub-section can be served on the assessee only during the financial year in which the return in furnished or within six months from the end of the month in which the return in furnished, whichever is later. This means that the Department must serve the said notice on the assessee within this period, if a case is picked up for scrutiny. It follows that if an assessee, after furnishing the return of income does not receive a notice u/s.143(2) from the Department within the aforesaid period, he can take it that the return filed by him has become final and no scrutiny proceedings are to be started in respect of that return.”

The Legislature, by inserting proviso to section 143(2) has intended that if no notice is received by the assessee within the prescribed time-limit, then the assessee can consider that the return filed by him has become final and that no scrutiny proceedings have been started. The notice can only be received on actual service, and therefore the intention seems to have been to place a time-limit for actual service, and not merely for issue, of the notice.

This position is further supported by Circular No. 621, dated 19 December 1991, 195 ITR 154 (St.), which clarifies as under:

“Extending the period of limitation for the service of notice u/ss.(2) of section 143 of the Income-tax Act — 49. Under the existing provisions of section 143 of the Income-tax Act relating to the assessment procedure, no notice u/ss.(2) thereof can be served on the assessee after the expiry of the financial year in which the return is furnished or the expiry of six months form the end of the month in which the return is furnished, whichever is later.

49.1 The aforesaid period of limitation for the service of notice u/ss.(2) of section 143 does not allow sufficient time to the Assessing Officers to select the returns for scrutiny before assessment. Therefore, s.s (2) has been amended to provide that the notice thereunder can be served on the assessee within twelve months from the end of the month in which the return in furnished.”

This interpretation of the proviso to section 143(2)(ii) of the Act is also supported by the enactment of sections 282 and 292BB. Section 282 prescribes the procedure and manner in which service of notice needs to be generally effected under the provisions of the Act and further, section 292BB of the Act vide a legal fiction holds certain notices as valid service of notice under the Act, based on satisfaction of certain conditions.

Further, section 34 of the 1922 Act corresponds to section 148, section 149 and section 150 of the Act (collectively referred to as ‘reassessment provisions’) which deals with procedure and conditions for reassessment of income of the assessee for a particular assessment year. On comparison of the language of section 143(2) of the Act with the reassessment provisions, one finds that the reassessment provisions have used both the expressions ‘issue of notice’ and ‘service of notice’, as against the provisions of section 143(2), which have consistently used only the expression ‘service of notice’.

The decision of the Supreme Court in the case of Banarsi Debi and Anr. v. ITO (supra) relied upon by the High Court in the V.R.A. Cotton Mills’ case (supra) was delivered in the context of section 34 of the 1922 Act. The Apex Court was considering an amendment in section 34 of the 1922 Act vide section 4 of the Amending Act of 1959, which sought to save the validity of notices issued beyond the prescribed period. Since section 34 used the term ‘served’ and not the term ‘issued’ while the amendment sought to cover notices ‘issued’ beyond the prescribed time, the Supreme Court, in that case, held as under:

(1)    The clear intention of the Legislature was to save the validity of notice as well as the assessment from an attack on the ground that the notice was served beyond the prescribed period;

(2)    That intention could be effectuated if a wider meaning was given to the expression ‘issued’, whose dictionary meaning took into account the entire process of sending the notice as well as the service thereof;

(3)    The word ‘issued’ in section 4 of the Amending Act had to be construed as interchangeable with the word ‘served’ or otherwise the amendment would become unworkable.

On perusal of these findings, one notices that the Apex Court confirmed that the expression ‘issue of notice’ had two meanings. The word ‘issue of notice’ was equated to as being ‘service of notice’ in a wider sense and of ‘notice sent’ in a narrower sense. In order to make the section workable and to further the intention of the Legislature of enacting section 4 of the Amending Act, 1959, the Court had to interpret the word ‘issue of notice’ as ‘service of notice’ in a contextual sense.

When the applicability of these findings were sought to be applied to corresponding reassessment provisions of the 1961 Act, the Supreme Court in the case of R. K. Upadhyaya v. Shanabhai P. Patel, (166 ITR 163), distinguished the decision of Banarsi Debi and Anr. v. ITO, (supra) holding that the scheme of the 1961 Act so far as notice for reassessment was concerned was quite different; and that a clear distinction had been made out between the ‘issue of notice’ and ‘service of notice’ under the 1961 Act.

The decision of Banarsi Debi and Anr. v. ITO (supra) was also distinguished by the High Courts in the following decisions on similar lines:

  •     Jai Hanuman Trading Co. Ltd. v. ITO, (110 ITR 36) (P&H) (FB);

  •     CIT v. Sheo Kumari Devi, (157 ITR 13) (Pat) (FB); and

  •     New India Bank Ltd. v. ITO, (136 ITR 679) (Del.)

Further, the following extracts of observations in the context of ‘issue of notice’ and ‘service of notice’ of the Full Bench of the Patna High Court in the case of Sheo Kumar Devi (supra), need to be noted:

“Once the maze of precedents is out of the way, one might as well examine the issue refreshingly on principle. To my mind, the fallacy that seems to have crept in this context is to suggest that (barring some very peculiar or compulsive textual compulsion) in plain ordinary English, the word ‘issue’ and the word ‘serve’ are synonyms or identical in terms. With great respect, it is not so. Their plain dictionary meaning runs directly contrary to any such assumption. No dictionary says that the issuance of an order is necessarily the service of order on a person as well, or in reverse, that the service of an order on a person is the mathematical equivalent to its issuance. In Chamber’s Twentieth Century Dictionary, the relevant meanings given to the word ‘issue’ are act of sending out, to put forth, to put into circulation, to publish, to give out for use. On the other hand, the word ‘serve’ in the same dictionary has been given the meaning, as a term of law, to deliver or present formally, or give effect to. Similarly in the New Illustrated Dictionary, the relevant meaning attributed to the word ‘issue’ is come out, be published, send forth, publish, put into circulation whilst the relevant meanings attributed to the word ‘serve’ are to supply a person with, make legal delivery of (writ, etc.), deliver writ, etc., to a person. Thus it would appear that the words ‘issue’ and ‘serve’ are distinct and separate and the indeed the gap between the two may be wide, both in point of time and place. An order or notice may be issued today, but may be served two years later. An order or notice may be issued at one place and may be served at a point 1,000 or more miles away. An order issued may not require any service at all……. shape of notification…….. Merely because a statute may provide that an order issued should also be properly served subsequently on the person directly affected would not, in my view, in any way render the words ‘issue’ and ‘serve’ as either synonymous or identical. A very peculiar situation in a statute and the compulsion of sound cannon of construc-tion may sometimes require the enlargement or extension of a word to save the legislation from being rendered nugatory. That, indeed, was the situation in Banarsi Debi case (supra).”

On similar lines, the other decisions as relied on by the Court in the case of V.R.A. Cotton Mills (supra) are not relevant in the context of the issue under consideration, since none of these decisions dealt with the expression ‘issue; or ‘service’ of notice.

On the contrary, the following decisions of the High Courts, delivered in the context of section 143(2), upholding the interpretation of service of notice not being synonymous with issue of notice, were not considered by the High Court in the case of V.R.A. Cotton Mills (supra):

  •     CIT v. Shanker Lal Ved Prakash, (300 ITR 243) (Del.) — in this case, the High Court even issued directions to AOs to dispatch notices at least a fortnight before the expiry of the date of limitation;

  •     CIT v. Yamu Industries Ltd., (306 ITR 309) (Del.) — the principles of section 282 were also applied in this case in interpreting the expression ‘service’ of notice;

  •     CIT v. Cebon India Ltd., (34 DTR 119) (P&H);

  •     CIT v. Pawan Gupta and Others, (318 ITR 322) (Del.) and Rajat Gupta v. CIT, (41 DTR 265) (Del.) — In context of block assessment;

  •     CIT v. Bhan Textiles (P) Ltd., (287 ITR 370) (Del.);

  •     CIT v. Vardhman Estate (P) Ltd., (287 ITR 368) (Del.); and

  •     CIT v. Dewan Kraft Systems (P) Ltd., (165 Taxman 139)(Del.).

One also needs to keep in mind that the requirement of service of notice within the specified period, and not issue of notice within that time, has been provided for to ensure that AOs do not show a notice as having been issued at an earlier date, though issued and dispatched much later, as that could have resulted in possible harassment of assessees.

In the light of the above, the better view is that the expression ‘served’ as referred to in section 143(2)(ii) of the Act and its proviso thereof, has to be given literal meaning of ‘actual receipt of notice by the assessee’ as against the meaning of issue of notice. The decision of the Punjab and Haryana High Court in the case of V.R.A. Cotton Mills case (supra), with due respect, therefore requires reconsideration.

Further, the principle of judicial propriety and judicial discipline demanded that the matter in the case of V.R.A. Cotton Mills Ltd. (supra) should have been referred to a Larger Bench of the Punjab and Haryana High Court, more particularly after the fact that the same High Court in the cases of Cebon India (supra) and AVI-OIL India Ltd. (supra) had decided otherwise in the context of section 143(2).

OffShore Transaction of Transfer of Share between Two NRs Resulting in Change in Control & Management of Indian Company —Withholding Tax Obligation and Other Implications

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Part-III
(Continued from last month)
VIH’s obligation to withhold tax — Section 195

3.14 As stated in Part II of this write-up, the Apex Court held that the capital gain in question is not chargeable to tax u/s.9(1)(i) of the Act and as such, question of deduction of TAS does not arise.

3.15 While deciding the issue relating to withholding tax obligation of VIH, the Court analysed the provisions of section 195 and the implications thereof and made certain observations such as: if, in law, the responsibility for payment is on a Non-Resident (NR), the fact that the payment was made under the instructions of NR to its agent/ nominee in India or its PE/Branch Office, will not absolve the Payer of his liability to deduct Tax At Source (TAS) u/s.195; the liability to deduct TAS is different from the assessment under the Act, etc. The Court then took a view that in the present case the transaction is of ‘outright sale’ between two NRs of a capital asset (share) situated outside India and the transaction was entered into on a principal-to-principal basis. Therefore, no liability to deduct TAS arose.

3.15.1 On the issue of withholding tax obligation of VIH, the Court effectively held that since the capital gain arising on transfer of share of CGP is not chargeable to tax in India, question of deduction of TAS u/s.195 does not arise. The Court also further stated that Tax Presence has to be viewed in the context of the transaction that is subjected to tax and not with reference to an entirely unrelated matter. The Tax Presence must be construed in the context, and in a manner that brings the NR assessee under the jurisdiction of the Indian Tax Authorities. The investment made by VG Companies in Bharati did not make all the entities of that group subject to the Indian Income Tax Act and the jurisdiction of the tax authority. The Court also noted that in the present case, the Revenue has failed to establish any connection with section 9(1)(i). Under these circumstances, the Court concluded that section 195 is not applicable.

3.15.2 Even the concurring judgment concludes that there was no obligation on the part of VIH to withhold tax. However, this judgment has gone a step further and considered the issue of applicability of section 195 extra-territorially. After considering the hosts of statutory compliance requirements for a tax deductor, apart from deducting tax and paying to the Government, other provisions relating deduction of TAS, such as 194A, 194C, 194J, etc. and the normal presumption of applicability of the provisions of Indian law to its own territory, this judgment took the view that section 195 is intended to cover only Resident Payers who have presence in India. The tax presence has to be considered in the context of the transaction that is subject to tax and not with reference to entirely unrelated matter. Finally, this judgment interpreted the expression ‘any person responsible for paying’ to mean only person resident in India and accordingly, took a view that section 195 “would apply only if payments made from a resident to another non-resident and not between two non-residents situated outside India”.

Applicability of section 163

3.16 In view of the fact that the transaction relates to transfer of capital asset situated outside India between two NR’s, both the judgments took a view that the VIH cannot be considered as representative assessee for HTIL u/s.163.

Mauritius Tax Treaty

3.17 Since the issue before the Court did not invoke the application of treaty, the majority judgment has not specifically dealt with the impact of Mauritius Tax Treaty in the case under consideration. However, the concurring judgment specifically dealt with the Mauritius Tax Treaty and in that judgment certain observations have also been made in that context after referring to the judgments of the Apex Court in the case of Azadi Bachao Andolan (supra).

 3.17.1 In this judgment, principles laid down in the case of Azadi Bachao Andolan (supra) governing the application of Mauritius Tax Treaty have been reiterated. Accordingly, it is held that in the absence of Limitation of Benefit (LOB) Clause and in the presence of the Circular No. 789, dated 13-4-2000 and the TRC, the Tax Department cannot deny the benefit of Mauritius Tax Treaty to Mauritius companies, on the ground that: principal company (foreign parent) is resident of a third country; or all the funds were received by the Mauritius company from a foreign parent; or the Mauritius subsidiary is controlled/managed by the principle company; or the Mauritius company had no assets or business other than holding the investments/shares in Indian company; or the foreign principal of the Mauritius company had played a dominant role in deciding the time and price of the disinvestment/sale/transfer; or the receipt of sale proceeds by the Mauritius company was ultimately remitted to the foreign principal, etc. Setting-up of a WOS in Mauritius for substantially long-term FDI in India through Mauritius, pursuant to Mauritius Tax Treaty, can never be considered to be set up for tax evasion.

3.17.2 According to this judgment, the LOB and look through provisions cannot be read into Mauritius Tax Treaty. However, the question may arise as to whether the TRC is so conclusive that the Tax Department cannot pierce the veil and look at the substance of the transaction. In this context, the judgment further observed as under (page 102):

 “. . . . . DTAA and Circular No. 789, dated 13-4-2000, in our view, would not preclude the Income-tax Department from denying the tax treaty benefits, if it is established, on facts, that the Mauritius company has been interposed as the owner of the shares in India, at the time of disposal of the shares to a third party, solely with a view to avoid tax without any commercial substance. Tax Department, in such a situation, notwithstanding the fact that the Mauritian company is required to be treated as the beneficial owner of the shares under Circular No. 789 and the Treaty is entitled to look at the entire transaction of sale as a whole and if it is established that the Mauritian company has been interposed as a device, it is open to the Tax Department to discard the device and take into consideration the real transaction between the parties, and the transaction may be subjected to tax. In other words, TRC does not prevent enquiry into a tax fraud, for example, where an OCB is used by an Indian resident for round-tripping or any other illegal activities, nothing prevents the Revenue from looking into special agreements, contracts or arrangements made or effected by Indian resident or the role of the OCB in the entire transaction.”

3.17.3 Referring to the issue of round tripping, based on the reports which are afloat that millions of rupees go out of the country only to be returned as FDI or FII, it is stated that round tripping can take many formats like under-invoicing and over-invoicing of exports and imports. It also involves getting the money out of India, say, Mauritius, and then bring back to India by way of FDI or FII in Indian company. With the idea of tax evasion, one can also incorporate a company off-shore, say, in a Tax Haven, and then create WOS in Mauritius and after obtaining a TRC may invest in India. Large amounts, therefore, can be routed back to India using TRC as a defence. If it is established that such an investment is black money or capital that is hidden, it is nothing but circular movement of capital known as round tripping; then TRC can be ignored, since the transaction is fraudulent and against the national interest.

3.17.4 Accordingly, in view of the above, the concurring judgment takes further view that though the TRC can be accepted as a conclusive evidence for accepting status of residence as well as beneficial ownership for applying the Mauritius Tax Treaty, it can be ignored if the treaty is abused for the fraudulent purpose of evasion of tax.

Conclusion

In view of the above judgment of the Apex Court the following principles governing tax implications of an offshore transaction of transfer of share between two NRs may emerge or get re-iterated:

4.    Section 9(1)(i) of the Act is not a ‘look through’ provision to include the transfer of shares of a foreign company holding shares in an Indian company by treating such transfer as equivalent to transfer of shares of an Indian company on the premise that section 9(1)(i) covers direct and indirect transfer of capital asset. Accordingly, section 9(1)(i) does not cover indirect transfer of capital asset situated in India.

4.1 Section 195(1) is attracted only if the sum in question is chargeable to tax. According to the concurring judgment, in case of a NR Payer, the obligation of withholding tax u/s.195(1) does not arise if NR Payer does not have any tax presence whatsoever in India. For this, support can also be drawn from the observations made in the majority judgment. However, there is no clarity as to the meaning of tax presence in India. It seems that if the entity has tax presence in India that should suffice. If the entity has permanent establishment or branch office, etc. in India, it is desirable to treat the entity as having tax presence in India.

4.1.1 In the concurring judgment, a view is taken that section 195(1) applies only in cases where Resident makes a payment to NR and the same is not applicable to payments between two NRs outside India. This view may have a great persuasive value for the lower authorities/courts. However, it seems advisable not to take recourse to this view to avoid deduction of TAS. This could, of course, be a good defence in case of a default.

4.2 In view of the fact that the transfer in question in the above case was of a capital asset situated outside India, the NR Payer (VIH) was also not to be treated as representative assessee u/s. 163 of the Act.

4.3 There is no conflict between the judgments of the Apex Court in the case of McDowell & Company Ltd. (supra) and the judgment in the case of Azadi Bachao Andolan (supra). In this context, the Court has further held that to decide the issue relating to allegation of tax avoidance/evasion, it is the task of the Court to ascertain the legal nature of the transaction and while doing so, it has to look at the entire transaction as a whole and not to adopt dissecting approach.

4.3.1 In the above context, referring to the majority judgment in the McDowell’s case, the Court reiterated the principle that tax planning may be legitimate provided it is within the frame work of law and it should not be a colourable device.

4.4 Carrying on business by a large business group through subsidiaries under the control of a Holding Company (HC) is a normal method of carrying on business. Setting up of such subsidiaries, even in low-tax jurisdiction, by itself should not be regarded as a device.

4.4.1 Such holding structures give rise to tax issues such as double taxation, tax deferrals, tax avoidance, implication of GAAR, etc. In the absence of an appropriate provision in the statute/treaty regarding the circumstances in which judicial GAAR would apply, when it comes to taxation of a holding structure, at the threshold, the burden is on the Revenue to establish the abuse, in the sense of tax avoidance in the creation and/or use of such structure. For this, the Revenue must apply look at test and the Revenue cannot start with the question as to whether the impugned transaction is a tax deferment/ savings device but it should apply the look at test to ascertain its legal nature.

4.4.2 Holding company, as a shareholder, will have influence on its subsidiaries and in that sense, will be in a persuasive position. However, that cannot reduce the subsidiary or its directors’ puppets. The power of persuasion cannot be construed as a right in legal sense. The decisive criteria is whether the parent company’s management has such steering interference with the subsidiaries core activities that subsidiary can no longer be regarded to perform its activities on the authority of its own directors. The concept of ‘de facto’ control, in genuine cases, conveys a state of being in control without any legal right to such a state.

4.4.3 A case of FDI should be seen in a holistic manner and while doing so, various factors enumerated by the Court should be taken into account. Cases of participative investment should not be construed as tax avoidant/device.

4.5 In transactions of divestment of investment of this type, it becomes necessary for the parties to enter into SPA for various commercial reasons and for recording various terms and to give smooth effect to the transaction.

4.6 When the structure is held to be a device/ tax avoidant on the basis of various tests referred to in para 3.5 of Part II of this write-up, the Revenue would be entitled to ignore this structure and tax the actual entity and to re-characterise the transaction appropriately for that purpose.

4.7 For the purpose of entering into any such transaction efficiently, if more than one routes are available, then it is open to the parties to opt for any one of those routes available to them.

4.8 Under such arrangement, call options to acquire shares of a company cannot be equated with interest in share capital of that company. The legal understanding as to acquisition of shares in Indian company for the purpose of compliance with FDI norms and the commercial understanding of the parties in that respect with regard to the transactions could be different.

4.9 In case of transactions involving the transfer of shares lock, stock and barrel for a lump-sum consideration, the same cannot be broken up into separate individual components or rights, such as right to vote, management rights, controlling rights, etc.

The above principles are, now, subject to the follow-ing proposals contained in the Finance Bill, 2012 and accordingly, the same will have to be read with the final amendments which are expected to be carried out by the Finance Act, 2012.

5.    In the Finance Bill, 2012, stated clarificatory amendments are proposed in various sections such as: Section 2(14) (to clarify that property includes any rights in or in relation to Indian company, including rights of management, control, etc.), section 2(47) (extending the scope of the definition of the term ‘transfer’ to include disposing of or parting with an asset or any interest therein, or creating an interest in any asset in any manner whatsoever, directly or indirectly, etc. even if, transfer of such rights has been characterised as being effected or dependent upon or flowing from transfer of shares of a foreign company) and section 9(1) to effectively provide that the section is a ‘look through’ provision and also to provide that an asset or capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be situated in India if it derives, directly or indirectly, its value substantially from the assets located in India. These amendments are proposed with retrospective effect from 1st April, 1962. These amendments are intended to effectively nullify all the major effects (favourable to the taxpayers) of the judgment of the Apex Court in the above case. Some of these proposals, if enacted in the present form, will also have far-reaching other implications and the same will not necessarily confine to only offshore transactions.

Considering the nature of above proposed amendments and their far-reaching unreasonable consequences and effects, it is difficult to digest that these amendments are clarificatory in nature as claimed by the Government. If the amendments are carried out in the present form, it is likely that the validity of the retrospective effect thereof may come up for questioning. In the past, the Parliament’s power to make retrospective law has been upheld. However, the manner in which these amendments are proposed is matter of serious concern and will have a far-reaching long-term implications in Indian tax jurisprudence. Therefore, we will have to wait and watch as to how this complex constitutional issue gets further developed. But one thing is certain that such an approach of the Government is highly unfair and also raises a question about the respect for rule of law in the tax matters.

5.1 Similarly retrospective amendment is also proposed in section 195 to effectively provide that all persons, including all NRs, will be under an obligation to comply with the requirements of section 195(1). For this purpose, whether the NR has a residence or place of business or business connection in India or any other presence in any manner whatsoever in India or not will not be relevant. Even this amendment, is proposed with retrospective effect from 1st April 1962. One may wonder whether any retrospective amendment of this kind can be made in the provisions dealing with TDS creating an obligation on the ‘person’ to deduct TAS with retrospective effect. The validity of the retrospective provision of this kind could be open to question. Even the validity of prospective operation of the applicability of this provision to NR having no presence whatsoever in India may come up for questioning and will have to be tested on the basis of the principles laid down by the Constitution Bench of the Apex Court in the case of GVK Ind. Ltd. (332 ITR 130). This judgment was analysed by us in this column in the June and July, 2011 issues of this Journal.

5.2 The Finance Bill, 2012 also proposes to introduce set of provisions dealing with the General Anti- Avoidance Rules (GAAR) w.e.f. 1-4-2013. These provisions, inter alia, specifically provide that the period for which the arrangement exists, the fact of payment of taxes, directly or indirectly, under the arrangement in question and the fact that exit route is provided by the arrangement shall not be taken into account for determining whether an arrangement lacks commercial substance or not. It may be noted that this provision was not made in the GAAR proposed in the Direct Tax Code Bill, 2010 (DTC).

The above-referred tests are part of the tests (referred to in para 3.5 of Part II of this write-up) considered by the Apex Court for determining the genuineness of the arrangement of the Hutchison Group in Vodafone’s case to conclude that the arrangement was having commercial substance.

5.3 The introduction of the GAAR provisions will also have a practical impact on the effect and implications of Mauritius Tax Treaty (and, of course, also other such Tax Treaties) and therefore, many of the observations made in the concurring judgment in the above case in that respect will have to be read with the GAAR provisions. It may also be noted that the applicability of the proposed GAAR provisions is not restricted only to offshore transactions, but the same will also apply to all other transactions including domestic transactions. Considering the wide discretionary powers sought to be granted to the assessing authorities, these provisions may also create enormous amount of unintended hardships at the implementation level.

The unrestricted and highly discretionary unguided powers sought to be given to the Government under the provisions relating to GAAR has raised quite a few genuine issues of far-reaching implications and such excess delegation of effectively unguided powers may come up for judicial scrutiny if, such provisions are enacted in the present form.

Vodafone – Part III

5.4 In the context of the manner in which retrospective amendments are proposed in the Finance Bill, 2012 the following observations of the learned authors of the book ‘Nani Palkhivala, The Courtroom Genius’ are worth mentioning:

“……….There is complete absence of any fair-play in the administration of tax laws. If a decision of the court or the tribunal is in favour of the assessee, the relevant statutory provision is promptly amended retrospectively with very little regard for the enormous hardship that it causes to the assessee. One can only conclude with the last passage of the last preface written by Palkhivala:

‘Every Government has a right to levy taxes. But no Government has the right, in the process of extracting tax, to cause misery and harassment to the taxpayer and the gnawing feeling that he is made the victim of the palpable injustice’.”

(Concluded)

Censorship by Didi

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The Trinamool Congress (TMC) ended the 34-year-old rule of the Left Parties in West Bengal and came to power with a thumping majority. Chairperson of the ruling party Ms. Mamata Banerjee – Didi – is known for her simplicity and integrity. She is a poet and painter, and holds Rabindranath Tagore in great esteem. Her views on economic policies are controversial. One may argue and oppose the same, but she’s entitled to her beliefs in a democratic setup that India follows. As Voltaire said, “I may not agree with what you say, but I will defend to the death your right to say it.”

Bengal is considered to be the State of intellectuals. Kolkata has a rich tradition of culture, literature and art. Literature and art thrive when there is freedom – freedom to think and freedom to express. But, under the rule of the present government, it is this freedom that is under attack. It is against the spirit of democracy and the Constitution of India.

Recently, the West Bengal Government headed by Mamata Banerjee issued an order to various government and government-aided libraries, instructing them about the newspapers that could be subscribed to by the libraries. The order banned these libraries from subscribing to all newspapers, except a few which are reportedly controlled by supporters of the ruling party.

The role of media, including newspapers, in dissemination of information is vital. The press plays an important role in the formation of opinions. It is considered the fourth pillar of democracy. Ideally, newspapers should not have any bias. But one cannot ban newspapers having leanings towards certain political parties. It is only when various views, opinions and perspectives are freely expressed that the public can form its own opinion. Every individual has the right to express himself as well as to decide what he wants to read. The ruling government cannot decide what the people should read or think. But whenever there is concentration of power in any government or authority or individual, there is always a danger of attempt being made to curb the freedom of expression.

In 1986, the Queen’s Bench Division (R. vs. Ealing Borough Council, ex. p. Times Newspapers Ltd. (1987) 85 L.G.R. 316) quashed decisions by certain UK councils banning publications of Times Newspapers and News Group Newspapers from public libraries. The court held that the order banning the newspapers was abuse of power under the Public Libraries and Museums Act, 1964 of the UK. The principle applies equally in India. Any edict or order of the government, which curbs this freedom, needs to be opposed and struck down. It is patently against the right to information and freedom of expression.

A few days ago, a professor was arrested for circulating on the Internet a cartoon on TMC supremo Mamata Banerjee. The arrest was defended and justified by the authorities. Political opponents and media were blamed, alleging attempts to malign Mamata Banerjee. There were protests in various quarters opposing the arrest. The professor himself was physically attacked by supporters of TMC. The incident showed how the government is intolerant towards any expression or views, which are not in sync with the government of the day.

Partho Sarothi Ray, an eminent scientist, was arrested recently for allegedly participating in a rally, though he was not present at the venue. His offence – supporting the demand for compensation for the people evicted from slums on the eastern fringes of Kolkata. He had to languish in jail for 10 days before he was freed on bail. Both arrests created a huge public outcry amongst academicians and social activists. Partho Ray stated that his arrest was a clear infringement of the fundamental rights of freedom of expression and freedom to assemble peacefully.

TMC leaders have urged their party workers not to socialise with their political opponents, not even to share a cup of tea, visit their homes or marry a family member of their political opponents. In short, the cadre is directed to boycott political opponents socially.

This trend in West Bengal is bizarre and surely worrying. The state is trying to control what a person should read, what one should think, what one should do in his or her social life. Anybody with a different view and thought is considered an enemy. TMC in its manifesto has stated that its mission is to reconstruct Bengal with a positive attitude, creativity, empathy and always with a human face. The manifesto promised to end Cadre Raj and the party-centric model of governance.

But what we see today is a completely different approach. The attack on freedom of expression is possibly the result of arrogance that comes with power combined with a sense of insecurity.

All over the world, in democratic states, freedom of thought, freedom of expression and right to information are considered sacrosanct. In a civilised democratic society, it is important that people have freedom to think and express without fear. One may or may not accept the other’s point of view, but for a healthy democracy, it is necessary that each one is entitled to his point of view. The West Bengal government, under the leadership of Mamata Banerjee, is attacking just that. This attack, this censorship should end.

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Seva: Humanitarian service is central theme of sikh philosophy

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“The best way to find yourself is to lose yourself in service of others.” — Mahatma Gandhi
The concept of community service or Seva is central to the spirit of the Sikh faith. God is all pervasive, and what better way to realise Him than through service? He is no separate from His creation; so serving Him by serving what He has created is the ultimate duty of every Sikh. The Sikh often prays as did Guru Arjun Dev: ‘As Your servant, I beg for Seva of your people, which is available through good fortune alone.’

Seva or service occupies the central place in Sikhism where no worship is conceivable without Seva. The spirit of service not only creates in one’s heart, love and affection for others, but also helps the person overcome his ego, the main obstacle in the path of spiritual realisation. Service is suggested as a practical way of life for a Sikh, and he is expected, among other things, to meditate on the Name of God and perform service for the welfare of humanity.

Service could be any kind — serving the poor and needy; giving charity, providing food or shelter, helping a person in distress, saving someone in danger or reading the scriptures for his solace or providing services for the common good. These acts are considered far superior to countless sacrificial fires and performance of ceremonies or mere meditation and worldly knowledge, says Bhai Gurudas.

Seva can be rendered in any form through labour, feelings or material means. The first is considered the highest of all and is prescribed for every Sikh.

Dignity of labour is realised the foremost in Guru Ka Langar, the community kitchen, and in serving the Sangat, the holy assembly. Langar is the unique way of combining worship with Seva. One can contribute in cutting of vegetables, cooking of food, distribution of water in

Langar, washing of utensils, cleaning of the premises, taking care of footwear as well as in collection of rations. Langar, therefore, becomes a place of training in voluntary service and helps develop the notion of equality, hospitality and love for human beings. It makes you humble by helping curb your ego. Humility is a special virtue recommended to the Sikhs. It can be acquired through Seva. The Sikh prayer, Ardas, ends with a supplication for the welfare of all, ‘Sarbat da Bhala’. The attitude of compassion should be combined with a practical way of serving God through His creation.

Seva through material means should be a silent and non-personal contribution. It is meant for the welfare of the community and the whole humanity, and should be done in a way as to help dissolve one’s ego. Even in serving others, one serves not the person concerned, but God Himself through him. Even as one feeds the hungry, it has been the customary Sikh practice to pray: “The grain, O God, is your own gift. Only the Seva is mine, which please be gracious enough to accept.”

Service should be rendered without any expectation of reward. Desire for any reward in return turns it into a bargain, and it ceases to be a service. ‘He who serves without reward, he alone attains God’. True Seva, as pro-claimed by the Gurus, must be performed in humility, with purity of intention and without any desire for reward. Service is its own reward that leads to liberation. ‘We get eternal bliss through service of God and merge in the peace of poise,’ says the Guru Granth Sahib.

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CAS-14 — Cost Accounting Standard on pollution control cost.

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The Institute of Cost Accountants of India has issued the Cost Accounting Standard CAS 14 on ‘Pollution Control Cost’ and it deals with principles and methods of determining the pollution control costs. This standard deals with the principles and methods of classification, measurement and assignment of pollution control costs, for determination of cost of product or service, and the presentation and disclosure in cost statements. It is issued with the objective of bringing uniformity and consistency in the principles and methods of determining the pollution control costs with reasonable accuracy. It is to be applied to cost statements which require classification, measurement, assignment, presentation and disclosure of pollution control costs including those requiring attestation.

Full version of the same can be accessed at
http://casbicwai.org/CASB/docs/CASB/CAS_14_Pollution_ Control_Final.pdf

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S. 36(1)(vii) : Unrealisable amount due to a share broker from client allowable as bad debts

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New Page 1

7 ACIT v. Olympia
Securities Ltd.

ITAT ‘G’ Bench, Mumbai

Before K. P. T. Thangal (VP) and

V. K. Gupta (AM)

ITA No. 4053/Mum./2002

A.Y. : 1997-1998. Decided on : 21-12-2006

Counsel for revenue/assessee: T. Shivkumar/

Rajiv Khandelwal

S. 36(1)(vii) of the Income-tax Act, 1961 — Bad
debts — Assessee, a share broker — Payments made towards purchase price of
shares on behalf of client turned bad — Whether allowable as bad debts — Held,
Yes.

 

Per V. K. Gupta :

Facts :

The assessee was a share broker. It had made
certain payments to the stock exchange on the day of settlement in respect of
purchases and sale of shares made through it by its clients. However, the client
failed to make payment and the assessee wrote off Rs.27.04 lacs as bad debts.
According to the AO, the assessee had failed to prove that the debt had become
bad. Accordingly, he disallowed the claim of the assessee, both as bad debts and
as trading loss u/s.28. On appeal, the CIT(A) deleted the addition and held that
the claim of the assessee was allowable both, u/s.36(1)(vii) as bad debts and as
trading loss u/s.28.

 

Before the Tribunal, the Revenue contended that the
assessee had not fulfilled the conditions of S. 36(2) viz., that the
amount claimed as bad debts had not been taken into account in computing the
income of the assessee for the previous year or any other earlier years.
Secondly, unlike banking company or money lender, the brokerage income earned by
the assessee was not of the category of interest on loan, hence, the loss
arising out of non-payment of amount by the clients was a capital loss. Further,
it relied on the decisions of the Mumbai Tribunal in the case of Harshad J.
Choksi and B. N. Khandelwal.

 

Held :

The Tribunal noted that as per the provisions of S.
36(2), the deduction of bad debt or part thereof can be allowed only when such
debt or part thereof has been taken into account in computing the income of
the assessee.

 

According to the Tribunal, the income of any
assessee was not the gross receipts, but it was the excess of gross receipts
over the expenditure. Thus, in the case of share brokers or agents, gross income
by way of brokerage or commission was credited in the profit and loss account
against which the expenses were claimed. To further explain, it gave an
hypothetical example wherein the assessee credits Rs.105 in profit and loss
account and debits the same in the client’s account. Simultaneously, the
assessee debits profit and loss account with Rs.100 being the value of shares,
treating the purchases of shares on behalf of the client as on its own account
and the sale thereof, by including the brokerage amount in the sale price, as
its gross margin. In that situation, according to the Tribunal, all the
conditions of S. 36(2) would stand satisfied as per the Revenue. However,
according to the Tribunal, even the crediting of only gross brokerage amount of
Rs.5 in profit and loss account would reflect the transaction from which it
emerged and the transaction of creating a debt which was taken into account
impliedly or notionally in computing the income of the assessee. Thus, the
Tribunal opined that the conditions of S. 36(2) stand satisfied even in cases
where only income had been credited in the profit and loss account. According to
the Tribunal, the provisions of allowing the claim in case of money-lending or
finance business as provided in S. 36(2) further support the view expressed
above. Since the claim of the assessee was allowed u/s.36(1)(vii), no finding
was given about the allowability of the claim u/s.28 of the Act.

 

Cases referred to:



1. Harshad J. Choksi v. ACIT, (1995) 52
ITD 511

2. ACIT v. B. N. Khandelwal, (2006) 101
TTJ (Mum.) 717



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Alteration to Schedule XIV of Companies Act — Inclusion of intangible assets created under certain circumstances.

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The Ministry of Corporate Affairs has issued a notification dated 17th April 2012 to make alterations in Schedule XIV of the Companies Act pertaining to the rates of depreciation, to insert the category of intangible assets created under Build, Operate and Transfer, Build, Own, Operate and Transfer or any other form of Public-Private Partnership Route. Full version of the Circular can be accessed at

http://www.mca.gov.in/Ministry/notification/pdf/ GSR_(E)_17apr2012.pdf

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Timeline for submission of annual audited financial results for financial year 2011-12.

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SEBI vide its Circular No. CFD/LA/SK/AT/8278/2012, dated 11th April 2012 has given an option to listed entities for submission of financial results for quarter ended F.Y. 2011-12 and in respect of annual audited results for F.Y. 2011-12, to either:

  • Submit limited reviewed Q4 results within 45 days from end of the quarter and thereafter submit annual audited results as soon as they are approved by the Board. (or)
  •  Submit annual audited results within 60 days from the end of the fourth quarter along with Q4 results.

This one-time measure has been taken in view of the difficulty faced in submission of annual financial results along with Q4 results owing to the first-time adoption of the revised Schedule VI.

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Amendments to the Equity Listing Agreement — Change in format for interim disclosure of results.

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The Ministry of Corporate Affairs has vide Circular No. CFD/DIL/4/2012, dated 16-4-2012, revised the format of Balance Sheet under Schedule VI of the Companies Act as was notified in Notification dated 28-2-2011. Pursuant to the same, it has been decided to carry out consequential amendments to listing Agreement regarding interim disclosure of financial results by listed entities to the stock exchange. Full version of the Circular is available on SEBI website at www.sebi.gov.in under the categories ‘Legal Frame and Listing.’

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A.P. (DIR Series) Circular No. 104, dated 4-4- 2012 — Authorised Dealer Category-II — Permission for additional activity and opening of Nostro account.

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1. Issue of foreign exchange pre-paid cards

Presently,
only Authorised Dealers Category-I banks are permitted to issue foreign
exchange pre-paid cards to residents travelling on private/business
visit abroad.

This Circular now permits Authorised Dealers
Category-II also to issue foreign exchange pre-paid cards to residents
travelling on private/business visits abroad, provided:

 (1) AD Category-II adheres to KYC/AML/CFT requirements.

(2) Settlement in respect of foreign exchange prepaid cards is effected through AD Category-I banks.

2. Opening of Nostro Accounts

This Circular permits AD Category-II to open Nostro accounts subject to the following terms and conditions:

(i) Only one Nostro account for each currency must be opened.

(ii)
Balances in the account must be utilised only for the settlement of
remittances sent for permissible purposes and not for the settlement in
respect of foreign exchange prepaid cards.

(iii) Idle balance cannot be maintained in the said account.

(iv) Reporting requirements as prescribed are complied with.

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A.P. (DIR Series) Circular No. 101, dated 2-4-2012 — Overseas Direct Investments — Liberalisation/Rationalisation.

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Presently, an Indian Party requires prior permission of RBI to open, hold and maintain Foreign Currency Account in a foreign country for the purpose of overseas direct investments in that country. This Circular permits an Indian Party to open, hold and maintain Foreign Currency Account (FCA) abroad for the purpose of overseas direct investments without obtaining prior permission from RBI, provided:

(1) The Indian Party is eligible to undertake overseas direct investments.

(2) The host country Regulations require that investments into the country are to be routed through a designated account in that country.

(3) FCA is opened, held and maintained as per the regulations of the host country.

 (4) Remittances sent to the FCA by the Indian party are utilised only for making overseas direct investment into the overseas JV/WOS.

(5) Any amount received in the account by way of dividend and/or other entitlements from the overseas JV/WOS are repatriated to India within 30 days from the date of credit.

 (6) The Indian Party submits details of debits and credits in the FCA on yearly basis to the designated bank along with a certificate from the Statutory Auditors of the Indian party certifying that the FCA was maintained as per the host country laws and applicable FEMA regulations/provisions.

(7) FCA so opened must be closed immediately or within 30 days from the date of disinvestment from overseas JV/WOS or cessation thereof.

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A.P. (DIR Series) Circular No. 100, dated 30-3-2012 — Trade credits for imports into India — Review of all-in-cost ceiling.

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This Circular states that the present all-in-cost ceiling or Trade Credits, as mentioned below, will continue up to September 30, 2012:

Sr.

No.

Average maturity period

All-in-cost over 6 month LIBOR for the respective
currency of borrowing or applicable benchmark

1

Up to one year

350 bps

2

More than 1 year and up to 3 years

350 bps

All-in-cost ceiling will include arranger fee, upfront fee, management fee, handling/processing charges, out-of-pocket and legal expenses, if any.

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A.P. (DIR Series) Circular No. 99, dated 30-3-2012 — External Commercial Borrowings (ECB) Policy — Review of all-in-cost ceiling.

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This Circular states that the present all-in-cost ceiling for ECB, as mentioned below, will continue up to September 30, 2012:

Sr.

Average maturity period

All-in-cost over 6 month No. LIBOR for the respective currency of borrowing or applicable benchmark

1

Three years and
up to five years

350 bps

2

More than five years

550 bps

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A.P. (DIR Series) Circular No. 98, dated 30-3- 2012 — Discontinuation of supplying printed GR forms by Reserve Bank.

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This Circular states that with effect from July 1, 2012, GR forms will only be available online from RBI website www.rbi.org.in at the following link:

“Notification -> FEMA -> Forms -> For Printing of GR Form”.

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Notification No. 15/2012 [F.No. 149/21/2010- S.O. (TPL)]/S.O. 694 (E), dated March 30, 2012 — Income-tax (fourth amendment) Rules, 2012 — Amendment in the New Appendix I.

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Depreciation on windmills installed after March 31, 2012 shall be restricted to 15%.

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Exports — Taxability of profits u/s.28 — Deduction under Chapter VIA — DEPB is ‘cash assistance’ receivable by a person against exports and fall under clause (iiib) of section 28 and is chargeable to tax even before it is transferred by the assessee (in the year of entitlement) and profit on transfer of DEPB fall under clause (iiid) of section 28 and were chargeable to tax in the year of transfer — If the assessee having export turnover of more than Rs.10 crore does not satisfy the two conditio<

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[Topman Exports v. CIT, (2012) 342 ITR 49 (SC)]

During the previous year relevant to the A.Y. 2002- 03, the assessee, a manufacturer and exporter of fabrics and garments, sold the DEPB and DFRC (Duty Free Replenishment Certificate) which had accrued to it on export of its productions. The assessee filed a return for the A.Y. 2002-03 claiming a deduction of Rs.83,69,303 u/s.80HHC of the Act. The Assessing Officer held that if the profit on transfer of the export incentive was deducted from the profits of the assessee, the figure would be a loss and there will be no positive income of the assessee from its export business and the assessee will not be entitled to any deduction u/s.80HHC of the Act as has been held by this Court in IPCA Laboratory Ltd. v. Deputy CIT, (2004) 266 ITR 521 (SC). Aggrieved, the assessee filed an appeal before the Commissioner of Income-tax (Appeals) and contended that the profits on the transfer of DEPB and DFRC were not the sale Kishor Karia Chartered Accountant Atul Jasani Advocate Glimpses of supreme court rulings proceeds of the DEPB and the DFRC amounting to Rs.2,06,84,841 and Rs.1,65,616, respectively, but the difference between the sale value and face value of the DEPB and the DFRC amounting to Rs.14,35,097 and Rs.19,902, respectively, and if these figures of profits on transfer of the DEPB and the DFRC are taken, the income of the assessee would be positive and the assessee would be entitled to the deduction u/s.80HHC of the Act. The Commissioner of Income-tax (Appeals) rejected this contention of the assessee and held that the assessee had received an amount of Rs.2,06,84,841 on sale of the DEPB and an amount of Rs.1,65,612 on sale of the DFRC and the costs of acquisition of the DEPB and the DFRC are to be taken as nil and hence the entire sale proceeds of the DEPB and the DFRC realised by the assessee are to be treated as profits on transfer of the DEPB and the DFRC for working out the deduction u/s.80HHC of the Act and directed the Assessing Officer to work out of the deduction u/s.80HHC of the Act accordingly.

Aggrieved, the assessee filed an appeal before the Income-tax Appellate Tribunal (for short ‘the Tribunal’). A Special Bench of the Tribunal heard the appeal and held that there was a direct relation between the entitlement under the DEPB Scheme and the customs duty component in the cost of imports used in the manufacture of the export products. The Tribunal further held that the DEPB accrues to the exporter soon after export is made and application is filed for the DEPB and the DEPB is a ‘cash assistance’ receivable by the assessee and is covered under clause (iiib) of section 28 of the Act, whereas profit on the transfer of the DEPB takes place on a subsequent date when the DEPB is sold by the assessee and is covered under clause (iiid) of section 28 of the Act. The Tribunal compared the language of section 28(iiib) of the Act in which the expression ‘cash assistance’ is used, with the language of section 28(iiia), (iiid) and (iiie) of the Act in which the expression ‘profit’ is used and held that the words ‘profit on transfer’ in section 28(iiid) and (iiie) of the Act would not represent the entire sale value of the DEPB but the sale value of the DEPB less the face value of the DEPB. With these reasons, the Tribunal set aside the orders of the Assessing Officer and the Commissioner of Incometax (Appeals) and directed the Assessing Officer to compute the deduction u/s.80HHC of the Act accordingly.

Against the judgment and order of the Tribunal, the Commissioner of Income-tax, Mumbai, filed appeal u/s.260A of he Act before the High Court and by the impugned order the High Court disposed of the appeal in terms of the judgment delivered in CIT v. Kalpataru Colours and Chemicals, [ITA(L) 2887 of 2009] (328 ITR 451). In Commissioner of Income-tax v. Kalpataru Colours and Chemicals (supra), the High Court formulated the following two substantial questions of law (page 454 of 328 ITR):

“(a) Whether the Tribunal is justified in holding that the entire amount received on the sale of the Duty Entitlement Pass Book does not represents profits chargeable u/s.28(iiid) of the Income-tax Act, 1961, and that the face value of the Duty Entitlement Pass Book shall be deducted from the sale proceeds?

(b) Whether the Tribunal is justified in holding that the face value of the Duty Entitlement Pass Book is chargeable to tax u/s.28(iiib) at the time of accrual of income, i.e., when the application for Duty Entitlement Pass Book is filed with the competent authority pursuant to the exports made and that the profits on the sale of the Duty Entitlement Pass Book representing the excess of the sale proceeds over the face value is liable to be considered u/s.28(iiid) at the time of sale?”

In its judgment, on the first question of law formulated under (a), the High Court held that the Tribunal was not justified in holding that the entire amount received on the sale of the DEPB does not represent profits chargeable u/s.28(iiid) of the Act and in holding that the face value of the DEPB shall be deducted from the sale proceeds of the DEPB. On the second question of law formulated under (b), the High Court in its judgment did not agree with the Tribunal that the face value of the DEPB is chargeable to tax as income of the assessee u/s.28(iiib) of the Act and instead held that the entirety of sale consideration for transfer of the DEPB would fall within the purview of section 28(iiid) of the Act.

Against the judgment and order of the High Court the assessee appealed before the Supreme Court under Article 136 of the Constitution. The Supreme Court on a reading of the Hand Book on the DEPB and the Export and Import Policy of the Government of India, 1997-2002, observed that it was clear that the objective of the DEPB Scheme was to neutralise the incidence of customs duty on the import content of the export productions. Hence, it had direct nexus with the cost of the imports made by an exporter for manufacturing the export products. The neutralisation of the cost of customs duty under the DEPB Scheme, however, was by granting a duty credit against the export product and this credit could be utilised for paying customs duty on any item which is freely importable. DEPB was issued against the exports to the exporter and was transferable by the exporter.

It was clear from reading of the provisions of section 28 that under clause (iiib) cash assistance (by whatever name called) received or receivable by any person against exports under any scheme of the Government of India is by itself income chargeable to income-tax under the head ‘Profits and gains of business or profession’. DEPB was a kind of assistance given by the Government of India to an exporter to pay customs duty on its imports and it was receivable once exports were made and an application was made by the exporter for the DEPB. The Supreme Court therefore, held that the DEPB was ‘cash assistance’ receivable by a person against exports under the scheme of the Government of India and fell under clause (iiib) of section 28 and was chargeable to Income-tax under the head ‘Profits and gains of business or profession’ even before it was transferred by the assessee.

Under clause (iiid) of section 28, any profit on transfer of the DEPB is chargeable to Income-tax under the head ‘Profits and gains of business or profession’ as an item separate from cash assistance under clause (iiib). The Supreme Court held that the word ‘profit’ meant the gross proceeds of a business transaction less the costs of the transaction.

It was further held that ‘Profits’ therefore, imply a comparison of the value of an asset when the asset is acquired with the value of the asset when the asset is transferred and the difference between the two values is the amount of profit or gain made by a person. As DEPB had a direct nexus with the cost of imports for manufacturing an export product, any amount realised by the assessees over and above the DEPB on transfer of the DEPB would represent profit on the transfer of the DEPB.

The Supreme Court therefore held that while the face value of the DEPB would fall under clause (iiib) of section 28 of the Act, the difference between the sale value and the face value of the DEPB would fall under clause (iiid) of section 28 of the Act and the High Court was not right in taking the view in the impugned judgment that the entire sale proceeds of the DEPB realised on transfer of the DEPB and not just the difference between the sale value and the face value of the DEPB represent profit on transfer of the DEPB.

(i)    The Supreme Court further held that: (i) cost of acquiring the DEPB was not nil, because the person acquired it by paying customs duty on the import content of the export product and the DEPB which accrues to a person against exports had a cost element in it. Accordingly, when the DEPB is sold by a person, his profit on transfer of the DEPB would be the sale value of the DEPB less the face value of DEPB which represents the cost of the DEPB.

(ii)    The DEPB represents part of the cost incurred by a person for manufacture of the export product and hence even where the DEPB is not utilised by the exporter but is transferred to another person, the DEPB continues to remain as a cost to the exporter. When, therefore, the DEPB is transferred by a person, the entire sum received by him on such transfer does not become his profits. It is only the amount that he receives in excess of the DEPB which represents his profits on transfer of the DEPB.

(iii)    If in the same previous year the DEPB accrues to a person and he also earns profit on transfer of the DEPB, the DEPB will be business profits under clause (iiib) and the difference between the sale value and the DEPB (face value) would be the profits on the transfer of the DEPB under clause (iiid) for the same assessment year. Where, however, the DEPB accrues to a person in one previous year and the transfer of the DEPB takes place in a subsequent previous year, then the DEPB will be chargeable as income of the person for the first assessment year chargeable under clause (iiib) of section 28 and the difference between the DEPB credit and the sale value of the DEPB credit would be income in his hands for the subsequent assessment year chargeable under clause (iiid) of section 28.

The Supreme Court then held that s.s (1) of section 80HHC, makes it clear that an assessee engaged in the business of export out of India of any goods or merchandise to which this section applies shall be allowed, in computing his total income, a deduction to the extent of profits referred to in s.s (IB), derived by him from the export of such goods or merchandise. S.s (IB) of section 80HHC gives the percentages of deduction of the profits allowable for the different assessment years from the A.Ys. 2001-02 to 2004-05. S.s (3)(a) of section 80HHC provides that where the exports out of India is of goods or merchandise manufactured or processed by the assessee, the profits derived from such exports shall be the amount which bears to the profits of the business, the same proportion as the export turnover in respect of such goods bears to the total turnover of the business carried on by the assessee.

Explanation (baa) u/s.80HHC states that ‘profits of the business’ in the aforesaid formula means the profits of the business as computed under the head ‘Profits and gains of business or profession’ as reduced by (1) ninety per cent of any sum referred to in clauses (iiia), (iiib), (iiic), (iiid) and (iiie) of section 28 or of any receipts by way of brokerage, commission, interest, rent, charges or any other receipt of similar nature including any such receipts and (2) the profits of any branch office, warehouse or any other establishment of the assessee situated outside India. Thus, ninety per cent, of the DEPB which is ‘cash assistance’ against exports and is covered under clause (iiib) of section 28 will get excluded from the ‘profits of the business’ of the assessee if such DEPB has accrued to the assessee during the previous year. Similarly, if during the same previous year, the assessee has transferred the DEPB and the sale value of such DEPB is more than the face value of the DEPB, the difference between the sale value of the DEPB and the face value of the DEPB will represent the profit on transfer of DEPB covered under clause (iiid) of section 28 and ninety per cent of such profit on transfer of DEPB certificate will get excluded from ‘profits of the business’. But, where the DEPB accrues to the assessee in the first previous year and the assessee transfers the DEPB certificate in the second previous year, only ninety per cent of the profits on transfer of DEPB covered under clause (iiid) and not ninety per cent of the entire sale value including the face value of the DEPB will get excluded from the ‘profits of the business’.

To the figure of profits derived from exports worked out as per the aforesaid formula u/ss. (3) (a) of section 80HHC, the additions as mentioned in first, second, third and fourth proviso u/s.(3) are made to profits derived from exports. Under the first proviso, ninety per cent of the sum referred to in clauses (iiia), (iiib) and (iiic) of section 28 are added in the same proportion as export turnover bears to the total turnover the business carried on by the assessee. In this first proviso, there is no addition of any sum referred to in clause (iiid) or clause (iiie). Hence, profit on transfer of the DEPB or the DFRC are not be added under the first proviso.

The second proviso to s.s (3) of section 80HHC states that in case of an assessee having export turnover not exceeding Rs.10 crore during the previous year, after giving effect to the first proviso, the export profits are to be increased further by the amount which bears to ninety per cent of any sum referred to in clauses (iiid) and (iiie) of section 28, the same proportion as the export turnover bears to the total turnover of the business carried on by the assesses. The third proviso to s.s (3) states that in case of an assessee having export turnover exceeding Rs.10 crore, similar addition of ninety per cent of the sums referred to in clause (iiid) of section 28 only if the asses-see has the necessary and sufficient evidence to prove that (a) he had an option to choose either the duty drawback or the Duty Entitlement Pass Book Scheme, being the Duty Remission Scheme; and (b) the rate of drawback credit attributable to the customs duty was higher than the rate or credit allowable under the Duty Entitlement Pass Book Scheme, being the Duty Remission Scheme. Therefore, if the assessee having export turnover of more than Rs.10 crore does not satisfy these two conditions, he will not be entitled to the addition of profit on transfer of DEPB under the third proviso to s.s (3) of the section 80HHC.

TDS : S. 194C(2) of Income-tax Act, 1961 : Payment to sub-contractors : Assessee a registered co-operative society constituted by truck operators : Contracts with companies for transportation of their goods : Contracts executed by member truck operators :

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17 TDS : S. 194C(2) of Income-tax Act, 1961 : Payment to
sub-contractors : Assessee a registered co-operative society constituted by
truck operators : Contracts with companies for transportation of their goods :
Contracts executed by member truck operators :

Companies make payment to assessee after deduction of tax u/s.194C : Member
truck operators are not sub-contractors : Assessee not required to deduct tax at
source on payment to member truck operators u/s.194C(2)



[CIT v. Ambuja Darla Kashlog Mangu Transport Co-op. Society,
188 Taxman 134 (HP)]

The assessee was a registered co-operative society
constituted by truck operators. It entered into contracts with companies such
as cement manufacturers for transport of their goods. The company, which had
entered into contract with the assessee, deducted tax at source u/s.194C(1) on
payments made to the assessee. Thereafter, the assessee-society paid that
entire amount to its members, who had actually carried the goods, after
deducting a nominal amount of Rs.10 or Rs.20 for administrative expenses known
as ‘parchi charges’ for running of the society. The Assessing Officer held
that the assessee was liable to deduct tax at source from the amount paid to
the members/truck operators in terms of S. 194C(2). The Tribunal held that
since there was no sub-contract between the society and its members, the
provision of S. 194C(2) was not attracted.

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

“(i) The main contention of the Revenue was that since the
assessee had a separate juristic identity and each of the truck operators, who
were members of the assessee, had separate juristic identity, they were
covered within the meaning of S. 194C(2). It was urged by the Revenue that
since the assessee was a person paying a sum to the member-truck operator who
was a resident within the meaning of the Act, TDS was required to be deducted.
That argument did not take into consideration the heading and entire language
of S. 194C(2) which clearly indicates that the payment should be made to the
resident who is a sub-contractor. The concept of a sub-contract is
intrinsically linked with S. 194C(2) and if there is no sub-contract, then the
person is not liable to deduct tax at source, even if payment is being made to
a resident.

(ii) In the instant case, the assessee-society was created
by the transporters themselves who formed the societies or unions with a view
to enter into a contract with companies. The companies entered into contracts
for transportation of goods and materials with the society. However, the
society was nothing more than a conglomeration of the truck operators
themselves and had been created only with a view to make it easy to enter into
a contract with the companies as also to ensure that the work to the
individual truck operators was given strictly in turn, so that every truck
operator had an equal opportunity to carry the goods and earn income. The
society itself did not do the work of transportation. The members of the
society were virtually the owners of the society. It might be true that they
both had separate juristic entities, but the fact remained that the reason for
creation of the society was only to ensure that work was provided to all the
truck operators on an equitable basis. A finding of fact had been rendered by
the authorities that the society was formed with a view to obtain the work of
carriage from the companies since the companies were not ready to enter into a
contract with individual truck operators but had asked them to form a society.

(iii) Admittedly, the society did not retain any profits.
It only retained a nominal amount as ‘parchi charges’ which was used for
meeting the administrative expenses of the society. There was no dispute with
the submission that the society had an independent legal status and was also a
contractor within the meaning of S. 194C. It was also not disputed that the
members had a separate status, but there was no sub-contract between the
society and the members. In fact, if the entire working of the society was
seen, it was apparent that the society had entered into a contract on behalf
of the members. The society was nothing but a collective name for all the
members and the contract entered into by the society was for the benefit of
the constituent members and there was no contract between the society and the
members.


(iv) For the
foregoing reasons, S. 194C(2) was not attracted and the assessee-society was
not liable to deduct tax at source on account of payments made to the truck
owners who were also members of the society.”



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TDS : S. 194A of Income-tax Act, 1961 : Interest other than interest on securities : Once a decree is passed, it is a judgment and order of Court which culminates into final decree being passed which has to be discharged only on payment of amount due unde

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16 TDS : S. 194A of Income-tax Act, 1961 : Interest other
than interest on securities : Once a decree is passed, it is a judgment and
order of Court which culminates into final decree being passed which has to be
discharged only on payment of amount due under said decree : Judgment debtor is
not liable to deduct tax at source on interest component of decree.




[Madhusudan Shrikrishna v. Enkay Exports, 188 Taxman
195 (Bom.)]

In this case the dispute was settled and while passing the
order and decree, the counsel appearing on behalf of defendants raised a query
regarding deduction of TDS on the interest component of the decree.
Apprehension was expressed by the learned counsel appearing on behalf of
defendants that under the provisions of S. 194A of the Income-tax Act, on the
interest component which is payable, tax has to be deducted at source and if
it is not so done, the person who does not deduct tax at source on the
interest component would be liable for prosecution and penal consequences
under the provisions of the Income-tax Act. It was, therefore, submitted that
the defendants had withheld the payment of the amount which is payable to the
Income-tax Department as TDS and a certificate to that effect was also kept
ready.

The Bombay High Court held as under :

“Once a decree is passed, it is a judgment and the order of
the Court, which culminates into final decree being passed which has to be
discharged only on payment of the amount due under the said decree. The
judgment debtor, therefore, cannot deduct tax at source, since it is an order
and direction of the Court and, as such, would not be liable for penal
consequences for non-deduction of the tax due. Tax, if payable, can be decided
by the ITO after the amount is paid to the decree holder. The defendants,
therefore, were not entitled to withhold the payment on the pretext that it
had to be deducted as tax at source. Defendants would, therefore, pay the said
amount to the plaintiff and for that purpose they would not be liable for
non-deduction of tax at source as that issue had to be decided by the
income-tax authorities and if tax was payable, the same would be paid by the
plaintiff.”

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Industrial undertaking : Deduction u/s.80-IA of Income-tax Act, 1961 : A.Y. 2000-01 : Computation of eligible amount to be on the basis of the profits of the eligible unit : Adjustment of loss of other unit not proper : Deductible amount not to exceed the

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15 Industrial undertaking : Deduction u/s.80-IA of Income-tax
Act, 1961 : A.Y. 2000-01 : Computation of eligible amount to be on the basis of
the profits of the eligible unit : Adjustment of loss of other unit not proper :
Deductible amount not to exceed the total income.




[CIT v. Accel Transamatic Systems Ltd., 230 CTR 206
(Ker.)]

The assessee was entitled to deduction u/s.80-I of the
Income-tax Act, 1961. The assessee had two units. In the relevant year i.e.,
A.Y. 2000-01, there was profit from one unit and a loss from the other unit.
The assessee was eligible for deduction of 25% of the profit of the eligible
unit. The assessee computed the eligible amount at Rs.18,12,770 being 25% of
the profit of the first unit and limited the claim for deduction to
Rs.8,51,697 being the total income. The Assessing Officer did not accept the
method of computation adopted by the assessee. The Tribunal accepted the
assessee’s method.

On appeal by the Revenue, the Revenue relied on the
judgment of the Supreme Court in the case of Synco Industries Ltd.; 299 ITR
444 (SC) wherein the disallowance of the claim for deduction was upheld on the
ground that the total income was nil and claimed that the eligible amount
should be computed on the basis of the net figure of first unit after setting
off the loss of the second unit. The Kerala High Court explained the judgment
of the Supreme Court and held as :

“(i) U/s.80A(2) total deduction under Chapter VI-A have to
be limited to the gross total income of the assessee computed under the
provisions of the Act. Therefore, the assessee cannot claim deduction
u/s.80-IA in excess of gross total income computed, no matter eligible amount
may be higher than such income.

(ii) The procedure to be followed for the purpose of
granting deduction u/s.80-IA is to first compute the profits and gains of the
eligible unit and then to determine the eligible deduction therefrom in terms
of S. 80-IA(5). Thereafter, in the computation of total income under the
provisions of the Act, the eligible deduction has to be reduced and if the
total income computed is less than the eligible amount, deduction has to be
limited to such amount.

(iii) Since there have been variations in the total income
computed by virtue of disallowances and later orders of the higher authorities
allowing it, the Assessing Officer is directed to rework the total income and
therefrom allow eligible deduction u/s.80-IA(5) with reference to the profits
of the eligible unit, but limiting it to the total income, if the claimed
amount is higher than such amount.”

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Industrial undertaking : Deduction u/s.80-I of Income-tax Act, 1961 : A.Ys. 1992-93 to 1995-96 and 2000-01 : Computation of eligible amount to be on the basis of the profits of the eligible unit : Adjustment of loss of other unit not proper.

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14 Industrial undertaking : Deduction u/s.80-I of Income-tax
Act, 1961 : A.Ys. 1992-93 to 1995-96 and 2000-01 : Computation of eligible
amount to be on the basis of the profits of the eligible unit : Adjustment of
loss of other unit not proper.




[CIT v. Sona Koyo Steering Systems Ltd., 230 CTR 251
(Del.)]

The assessee was entitled to deduction u/s.80-I of the
Income-tax Act, 1961. The assessee had two units, one making profit and the
other incurring losses. The assessee computed the amount deductible u/s.80-I
on the basis of the profits of the unit making profits ignoring the loss of
the other unit. For the A.Ys. 1992-93 to 1995-96 and 2000-01, the Assessing
Officer did not accept the computation and computed the eligible amount after
setting off the loss of the other unit. The Tribunal allowed the assessee’s
claim.

On appeal by the Revenue, the Revenue relied on the
judgment of the Supreme Court in the case of Synco Industries Ltd.; 299 ITR
444 (SC) wherein the disallowance of the claim for deduction was upheld on the
ground that the total income was nil. The Delhi High Court explained the
judgment of the Supreme Court, upheld the decision of the Tribunal and held as
under :

“(i) In view of S. 80-I(6), the quantum of deduction is to
be computed as if the industrial undertaking were the only source of income of
the assessee during the relevant years. In other words, each industrial
undertaking or unit is to be treated separately and independently. It is only
those industrial undertakings, which have a profit or gain, which would be
considered for computing the deduction. The loss-making industrial undertaking
would not come into the picture at all.

(ii) The plain reading of the provision suggests that the
loss of one such industrial undertaking cannot be set off against the profit
of another such industrial undertaking to arrive at a computation of the
quantum of deduction that is to be allowed to the assessee u/s.80-I(1).”

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Industrial undertaking : Deduction u/s.80-IB of Income-tax Act, 1961 : A.Y. 2001-02 : Sum offered to tax by assessee to cover up certain discrepancies : Is income from industrial undertaking eligible for deduction u/s.80-IB ?

New Page 1

13 Industrial undertaking : Deduction u/s.80-IB of Income-tax
Act, 1961 : A.Y. 2001-02 : Sum offered to tax by assessee to cover up certain
discrepancies : Is income from industrial undertaking eligible for deduction
u/s.80-IB ?




[CIT v. Allied Industries, 229 CTR 462 (HP)]

The assessee was in the business of manufacturing tractors
and automobile components. The assessee was entitled to deduction u/s.80-IB of
the Income-tax Act, 1961. In the course of the assessment proceedings for the
A.Y. 2001-02, the assessee offered a sum of Rs.2,50,000 for taxation to cover
up all discrepancies. The Assessing Officer added the amount but disallowed
the claim for deduction u/s.80-IB in respect of this amount. The Tribunal
allowed the assessee’s claim and held that the amount offered by the assessee
as addition for the purposes of taxation would amount to profits and gains of
business and were entitled for deduction u/s.80-IB.

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

“Additional income surrendered by the assessee firm having
been added to the income of the business itself, is to be considered while
work-ing out deduction u/s.80-IB, in the absence of any finding of any
authority that the said income was derived from any undisclosed source.”

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Company : Book profits : S. 80HHC and S. 115JA of Income-tax Act, 1961 : In case of MAT assessment amount deductible u/s. 80HHC has to be computed on the basis of adjusted book profits and not on basis of profit computed under the normal provisions.

New Page 1

12 Company : Book profits : S. 80HHC and S. 115JA of
Income-tax Act, 1961 : In case of MAT assessment amount deductible u/s. 80HHC
has to be computed on the basis of adjusted book profits and not on basis of
profit computed under the normal provisions.




[CIT v. SPEL Semiconductor Ltd., 188 Taxman 130 (Mad.)]

The assessee-company was engaged in manufacture and sale of
integrated circuits. For the relevant year, the assessment was completed u/s.
115JA. The assessee claimed that the amount deductible u/s.80HHC has to be
computed on the basis of the adjusted book profits and not on the basis of the
profit computed under the normal provisions. The Assessing Officer rejected
the assessee’s claim. The Tribunal allowed the assessee’s claim.

On appeal by the Revenue, the Madras High Court upheld the
decision of the Tribunal following its judgment in the case of CIT v.
Rajanikant Schnelder & Associates (P) Ltd., 302 ITR 22 (Mad.).

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Capital gains : Cost of acquisition : A.Y. 2003-04 : Interest on loan taken for purchase of property : Interest to be included in the cost of acquisition for computing capital gain on sale of property.

New Page 1

11 Capital gains : Cost of acquisition : A.Y. 2003-04 :
Interest on loan taken for purchase of property : Interest to be included in the
cost of acquisition for computing capital gain on sale of property.




[CIT v. Sri Hariram Hotels (P) Ltd.; 229 CTR 455
(Kar.), 188 Taxman 178 (Kar.)]

The assessee company had purchased an immovable property
out of borrowed funds. On sale of the property, for computation of capital
gain the assessee company included the interest on the borrowed funds in the
cost of acquisition of the property. The Assessing Officer held that the
interest on the borrowed funds does not form part of the cost of acquisition.
The Tribunal allowed the assessee’s claim.

On appeal by the Revenue, the Karnataka High Court followed
its decision in the case of CIT v. Maithreyi Pai, 152 ITR 247 (Kar.) and
upheld the decision of the Tribunal.

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Capital receipt or income from other sources : Interest on share capital during pre-operative period : A.Ys. 2001-02 and 2002-03 : Due to legal entanglement with respect to title of land to be acquired for the assessee, share capital contribution put in f

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10 Capital receipt or income from other sources : Interest on
share capital during pre-operative period : A.Ys. 2001-02 and 2002-03 : Due to
legal entanglement with respect to title of land to be acquired for the
assessee, share capital contribution put in fixed deposit with bank : Interest
earned on fixed deposit is capital receipt liable to be set off against
pre-operative expenses : Not income from other sources.




[Indian Oil Panipat Power Consortium Ltd. v. ITO, 230
CTR 199 (Del.)]

Due to legal entanglement with respect to title of land
which was sought to be acquired by the Government for the assessee, share
capital contribution was temporarily put by the assessee in fixed deposit with
bank. Interest earned on fixed deposit in the A.Ys. 2001-02 and 2002-03 was
assessed by the Assessing Officer as income from other sources. The CIT(A)
accepted the stand of the assessee that the interest was in the nature of
capital receipt which was liable to be set off against pre-operative expenses.
The Tribunal reversed the decision of the CIT(A).

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

“(i) The test is whether the activity which is taken up for
setting up of the business and the funds which are generated are inextricably
connected to the setting up of the plant. The clue is perhaps available in S.
3 which states that for newly set up business the previous year shall be the
period beginning with the date of setting up of the business. Therefore, as
per the provisions of S. 4 which is the charging Section, income which arises
to an assessee from the date of setting of the business but prior to
commencement is chargeable to tax depending on whether it is of a revenue
nature or capital receipt. It is clear upon a perusal of the facts as found by
the authorities below that the funds in the form of share capital were infused
for a specific purpose of acquiring land and the development of
infrastructure. Therefore, the interest earned on funds primarily brought for
infusion in the business could not have been classified as income from other
sources.

(ii) Since the income was earned in a period prior to
commencement of business, it was in the nature of capital receipt and hence
was required to be set off against pre-operative expenses.

(iii) On account of the finding of fact returned by the
CIT(A) that the funds infused in the assessee by the joint venture partner
were inextricably linked with the setting up of the plant, the interest earned
by the assessee could not be treated as income from other sources.

(iv) The Tribunal misdirected itself in law in holding that
interest which accrued on funds deployed with the bank could be taxed as
income from other sources and not as capital receipt liable to be set off
against pre-operative expenses.”

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Business expenditure : A.Y. 2004-05 : Premium paid by assessee-firm on keyman insurance policy of partner is business expenditure allowable as deduction.

New Page 1

8 Business expenditure : A.Y. 2004-05 : Premium paid by
assessee-firm on keyman insurance policy of partner is business expenditure
allowable as deduction.




[CIT v. M/s. B. N. Exports (Bom.); ITA No. 2714 of
2009, dated 31-3-2010]

The assessee is a partnership firm. For the A.Y. 2004-05,
the assessee’s claim for deduction of the premium paid by the assessee-firm on
the keyman insurance policy of the partners was disallowed by the Assessing
Officer. The Tribunal allowed the assessee’s claim.

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

“(i) The Circular No. 762, dated 18-2-1998 issued by the
CBDT clarifies the position by stipulating that the premium paid for a keyman
insurance policy is allowable as business expenditure.

(ii) In the present case, on the question whether the
premium which was paid by the firm could have been allowed as business
expenditure, there is a finding of fact by the Tribunal that the firm had not
taken insurance for the personal benefit of the partner, but for the benefit
of the firm, in order to protect itself against the setback that may be caused
on account of the death of the partner.

(iii) The object and purpose of a keyman insurance policy
is to protect the business against the financial setback which may occur, as a
result of a premature death, to the business or professional organisation.
There is no rational basis to confine the allowability of the expenditure
incurred on the premium paid towards such a policy only to a situation where
the policy is in respect of the life of an employee.

(iv) A keyman insurance policy is obtained on the life of a
partner to safeguard the firm against a disruption of the business that may
result due to the premature death of the partner. Therefore, the expenditure
which is laid out for the payment of premium on such a policy is incurred
wholly and exclusively for the purpose of business.”

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Deemed dividend : S. 2(22)(e) of Income-tax Act, 1961 : A.Y. 2003-04 : Loans and advances from one company to another with common shareholder with substantial interest : Deemed dividend to be assessed in the hands of the shareholder and not in the hands o

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9 Deemed dividend : S. 2(22)(e) of Income-tax Act, 1961 :
A.Y. 2003-04 : Loans and advances from one company to another with common
shareholder with substantial interest : Deemed dividend to be assessed in the
hands of the shareholder and not in the hands of the recipient company.




[CIT v. Universal Medicare Pvt. Ltd. (Bom.); ITA No.
2264 of 2009, dated 22-3-2010]

An amount of Rs.32,00,000 was transferred from the bank
account of a company CSPL to the bank account of the assessee in the Chembur
branch of the State Bank of India. There was a common shareholder holding the
number of shares in the two companies as specified in S. 2(22)(e) of the
Income-tax Act, 1961. The amount was misappropriated by an employee of the
assessee and the transaction was not entered in the accounts of the assessee.
The Assessing Officer treated the said amount as deemed dividend u/s.2(22)(e)
of the Act and made the addition of the said amount. The Tribunal held that
the amount was part of a fraud committed on the assessee and the transaction
was not reflected in its books of account. The Tribunal therefore held that S.
2(22)(e) was not applicable. The Tribunal further held that even otherwise,
the amount would have to be taxed in the hands of the shareholder who obtained
the benefit and not in the hands of the assessee-company.

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

“(i) The Tribunal has found that as a matter of fact no
loan or advance was granted to the assessee, since the amount in question had
actually been defalcated and was not reflected in the books of account of the
assessee. Consequently, according to the Tribunal the first requirement of
there being an advance or loan was not fulfilled. In our view, the finding is
a pure finding of fact which does not give rise to any substantial question of
law.

(ii) Even on the second aspect which has weighed with the
Tribunal, we are of the view that the construction which has been placed on
the provisions of S. 2(22)(e) is correct.

(iii) The effect of clause (e) of S. 22 is to broaden the
ambit of the expression ‘dividend’ by including certain payments which the
company has made by way of a loan or advance or payments made on behalf of or
for the individual benefit of a shareholder. The definition does not alter the
legal position that dividend has to be taxed in the hands of the shareholder.
Consequently, in the present case the payment, even assuming that it was a
dividend, would have to taxed not in the hands of the assessee, but in the
hands of the shareholder.”

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TDS : S. 199 : TDS on interest on Deep Discount Bonds — Payment on behalf of ‘owner of security’

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20 TDS : Credit of : S. 199 of Income-tax
Act, 1961 : A.Y. 2002-03 : TDS in relation to interest on Deep Discount Bonds is
required to be treated as payment on behalf of ‘owner of security’ or ‘unit
holder’.


[CIT v. Smt. Sonal Bansal, 167 Taxman 311 (P&H); 215
CTR 65 (P&H)]

On 1-1-2001, the assessee had purchased Deep Discount Bonds
1997 of IDBI at the rate of Rs.9,700 each from one ‘V’ who had originally
purchased the same at the rate of Rs.5,500. On maturity, the IDBI deducted tax
at source of Rs.91,800 on the interest income of Rs.9 lakhs. In the A.Y.
2002-03, the assessee had declared the income of Rs.1,07,140 which included
Rs.60,000 being interest on the said Bonds as the secondary purchaser. The
assessee had also claimed credit of the said tax deducted at source of Rs.91,800
on the said interest of Rs.9 lakhs. The Assessing Officer allowed credit for TDS
of Rs.6,120 only, proportionate to the interest income of Rs.60,000 offered by
the assessee and disallowed the balance. The CIT(A) and the Tribunal allowed the
full claim.

 

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

“(i) A perusal of the provisions of S. 199 shows that any
deduction made of tax at source and paid to the Central Government is required
to be treated as payment of tax on behalf of the person from whose income the
deduction was made. However, with effect from 1-4-1997, amendments were
introduced by Finance Act, 1996, which resulted in addition of words
‘depositor’ or ‘owner of property’ or ‘owner of security’ or ‘unit holder’, as
the case may be. Therefore, it is clear that any deduction made of tax at
source and paid to the Central Government is required to be treated as payment
of tax on behalf of ‘owner of security’ or ‘unit holder’.

(ii) In the instant case, it is obviously the assessee-secondary
purchaser who was owner of security and, therefore, tax deducted at source had
to be regarded as payment made on her behalf. Moreover, certificate u/s.203
had also been issued to the assessee.”

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Refund : S. 119, S. 237 : Belated return for refund : Delay condoned due to genuine hardship to assessee

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19 Refund : Condonation of delay : S. 119 and S. 237 of
Income-tax Act, 1961 : A.Y. 1997-98 : Belated return for refund : Delay should
be necessarily condoned in case of genuine hardship to assessee.






[Pala Marketing Co-operative Society Ltd. v. UOI, 167
Taxman 238 (Ker.)]

The assessee co-operative society was entitled to exemption
u/s.80P of the Income-tax Act, 1961. For the A.Y. 1997-98, the assessee had
filed return of income claiming refund of advance tax and TDS. There was delay
in filing the return as there was delay in audit of the accounts. The Assessing
Officer rejected the return as time-barred and, consequently declined the
refund. The assessee’s application u/s.119(2)(b) for condonation of delay in
filing return was also rejected by the Board.



The Kerala High Court allowed the writ petition filed by the
assessee and held as under :

“(i) If delay is not condoned by the Board u/s. 119(2)(b),
such application cannot be processed u/s.139(1) or u/s.139(4). Therefore, in
order to consider belated return for refund on merits, delay has to be
necessarily condoned by the Board u/s.119(2)(b).

(ii) In S. 119(2)(b), it is stated that if the Board
considers it desirable or expedient for avoiding genuine hardship to the
assessee, it should condone the delay. In other words, what the Board should
consider is hardship to the party if delay is not condoned. The Board should
condone the delay if failure to condone the delay causes genuine hardship to
the assessee, no matter whether the delay in filing return is meticulously
explained or not.

(iii) Strangely, the Board had stated in its order that it
was not possible to investigate (scrutinise) the return of income because the
statutory time limit had already elapsed. It is not clear on what basis that
statement was made, because even in a case where a claim of refund is made,
the Assessing Officer has to examine the liability for Income-tax of the
assessee and refund is made only if tax is not payable or the amount paid is
in excess of the tax, interest, etc., payable.

(iv) The delay in audit by the auditor was not attributable
to the assessee. Besides showing sufficient cause for delay in filing the
return for refund, the assessee had also established its case of genuine
hardship inasmuch as it had suffered losses in the five succeeding years. The
genuine hardship contemplated u/s. 119(2)(b) obviously is financial hardship
caused to the assessee if delay is not condoned. If delay in the instant case
was not condoned, the assessee would be deprived of Rs.10 lakhs and odd, which
it was otherwise not liable to pay by virtue of the exemption u/s.80P.

(v) In the circumstances, impugned order was quashed
declaring the assessee’s entitlement for condonation of delay u/s.119(2)(b)
and, the Assessing Officer was directed to process assessee’s claim for refund
u/s.237 and grant refund to the extent eligible.”









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Charitable trust: Assessee, a marketing committee entitled to registration u/s.12A/12AA and exemption u/s.11

New Page 1

II. Reported :



 


17 Charitable trust : Registration u/s.12A
and u/s.12AA of Income-tax Act, 1961 : Assessee, a marketing committee eligible
for exemption u/s.10(29) : Exemption withdrawn w.e.f. 1-4-2003 : Assessee not
disentitled to registration 12A and 12AA and exemption u/s.11.

[CIT v. Krishi Upaj Mandi Samiti, 215 CTR 54 (MP)]

The assessee, a marketing committee, was entitled to
exemption u/s.10(29) of the Income-tax Act, 1961. The exemption was withdrawn
w.e.f. 1-4-2003. The assessee made application for registration u/s.12A and
u/s.12AA of the Act. The Commissioner rejected the application, on the ground
that the exemption u/s.10(29) has been withdrawn. In appeal the Tribunal
directed the Commissioner to permit the registration.

 

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

“(i) The first contention raised by the counsel for the
appellant is that the intention of the legislature in deleting S. 10(29) and
introduction of S. 10(20) itself shows that the legislature did not want to
extend the benefit of exemption to Krishi Upaj Mandi Samiti. This argument is
without any force because S. 10(20) and S. 10(29) provide for exemption to all
the local authorities and exemption under this section was a blanket exemption
without fulfilling any condition. S. 11 provides for exemption on certain
conditions. Thus, the intention behind the amendment was to remove the blanket
exemption to the local authorities and provide exemption only if they fulfil
the conditions u/s.11.

(ii) As per S. 11, the exemption can be granted to the
marketing committees provided that they spend amount for charitable purposes
as required by S. 11(2). Marketing committees are bound to spend their income
as per S. 39 of the 1972 Adhiniyam and as per said Section, the amount could
be spent only for public amenities like construction of roads, market, etc. S.
2(15) provides that if the amount is spent towards public amenities, it will
be deemed that the amount is spent for charitable purposes. Hence, by virtue
of S. 2(15), it will have to be deemed that the amount spent by the marketing
committees is spent towards public purposes.

(iii) Respondent marketing committees fulfil all the
requirements of S. 11 to get exemption and therefore, are entitled to
registration u/s.12A and u/s.12AA and hence, the Tribunal has rightly allowed
the appeals and set aside the orders passed by the CIT.


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Income from other sources : S. 56, 57 : Interest on borrowed money prior to commencement of business — Deductible u/s 57

New Page 4

18 Income from other sources : S. 56 and S. 57 of Income-tax
Act, 1961 : A.Ys. 1997-98 and 1998-99 : Interest income prior to commencement of
business : Interest on borrowed money could be allowed as deduction.






[CIT v. VGR Foundations, 298 ITR 132 (Mad.)]

The assessee was engaged in the real estate business. It
incurred expenses prior to commencement of business and also earned interest
income from out of the fixed deposits with the bank and the said income had been
set off against the expenses. The Assessing Officer assessed the interest income
as income from other sources, but did not allow any deduction of expenses. The
Tribunal held that the interest on moneys borrowed for the period prior to the
commencement of business could be allowed as deduction from the interest u/s.57
of the Income-tax Act, 1961.



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

“(i) The Tribunal allowed the claim of the assessee by
following its own earlier order and had rightly come to the conclusion that
interest on moneys borrowed for the period prior to the commencement of
business could be allowed as deduction u/s.57 while computing income from
other sources in respect of the interest received.

(ii) The Revenue was unable to give any further materials
or evidence and to furnish information as to whether they had filed any appeal
against the earlier order or not. Therefore there was no error or legal
infirmity in the order of the Tribunal so as to warrant interference. “





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Capital gains : Sale of property received under will : Expenditure on obtaining probate & travel expenses of executors deductible

New Page 1

II. Reported :



 


16 Capital gains : Computation : Deduction :
A.Y. 1996-97 : Sale of property received under will : Expenditure incurred on
obtaining probate and travel expenses of executors are deductible.

[Mrs. June Perrett v. ITO, 298 ITR 268 (Kar); 215 CTR
267 (Kar.)]

In the A.Y. 1996-97, the assessee had sold a property
inherited by her under a will. While computing capital gain, she claimed
deduction of the expenditure incurred on obtaining probate and travel expenses
of executors. The claim was disallowed by the Assessing Officer. Disallowance
was upheld by the Tribunal.

 

On appeal by the assessee, the Karnataka High Court allowed
the claim and held as under :

“(i) While computing the capital gains u/s.48(i) of the
Income-tax Act, 1961, any expenditure incurred wholly and exclusively in
connection with the transfer of the property has to be deducted, and similarly
the cost incurred by the assessee for any improvement thereto is deductible.

(ii) The executors who were residing in London were
required to obtain probate and letters of administration and any expenses
incurred by the executors in order to obtain probate and letters of
administration were to be treated as expenses incurred by them in connection
with the transfer of property in question, since the executors could not sell
the property to any party without letters of administration.

(iii) Similarly, without paying the court fee, no letter of
administration would be issued by the court. Therefore, Rs.1,23,000 paid by
the executors as court fee at the time of obtaining the letters of
administration had to be treated as expenditure incurred in connection with
the transfer of property.”

 


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Capital gains : S.55(2)(b) : Sale of shares acquired before 1-4-1981 held as stock in trade up to 1987 — Market value as on 1-4-1981 is cost of acquisition

New Page 9

II. Reported :

14 Capital gains : Cost of acquisition : S. 55(2)(b) of
Income-tax Act, 1961 : Shares acquired prior to 1-4-1981 and held as stock in
trade up to 2-11-1987 : Sale of shares : Assessee entitled to adopt market value
as on 1-4-1981 as cost of acquisition.

[CIT v. Jannhavi Investments (P) Ltd.; 215 CTR 72 (Bom.)]

The assessee had acquired shares prior to 1-4-1981. Up to
2-11-1987, the shares were held as stock in trade when those were converted into
capital assets. On sale of the shares the assessee claimed the market value of
the shares as on 1-4-1981 as the cost of acquisition relying on the provisions
of S. 55(2)(b) of the Income-tax Act, 1961. The Assessing Officer rejected the
claim, on the ground that the shares were held as stock in trade till 2-11-1987.
Relying on the judgment of the Bombay High Court in the case of Keshavji
Karsondas v. CIT; 207 ITR 737 (Bom.) the Tribunal allowed the assessee’s
claim.

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

“(i) On behalf of the Revenue, it was sought to be
contended that the decision in the case of Keshavji Karsondas is
distinguishable in the facts of the present case. He pointed out that by
Finance Act, 1992, w.e.f. 1993, the mode of computation of income chargeable
under head ‘Capital gain’ had changed and the concept of ‘indexed cost of
acquisition’ had been introduced and defined under Explanation III to the 5th
proviso of S. 48. According to him the concept ‘indexed cost of acquisition’
was calculable on the basis of the cost of acquisition for the first year in
which the asset was held or on the first day of April, 1981, whichever was
later. He drew our further attention to S. 55(2)(b) which related to
calculation of ‘any other capital asset’.

(ii) In our view, there is no substance in the contention
of the Revenue. The amendment of 1993 referred to hereinabove does not in any
way nullify or dilute the ratio as laid down in the case of Keshavji Karsondas.
The cost of acquisition can only be the cost on the date of the actual
acquisition. In the present case, there was no acquisition of shares on
2-11-1987 when the same were converted from stock in trade to a capital
asset.”


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Capital gain : Interest on borrowing for investment in shares to be added to cost of acquisition of shares

New Page 4

15 Capital gains : cost of acquisition : A.Y. 2000-01 :
Interest on capital borrowed for investment in shares is liable to be added to
the cost of acquisition of shares.


[CIT v. Trishul Investments Ltd., 215 CTR 96 (Mad.)]

The assessee company was carrying on business of investment
in shares and securities. In the books of the assessee company, the interest
liability on the borrowed funds was debited. The assessee claimed that the
interest should be included in the cost of acquisition of the shares. The
Assessing Officer rejected the claim. The Tribunal allowed the claim.

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

“(i) The Tribunal correctly held that the interest paid for
acquisition of shares would partake character of cost of share and therefore
the same was rightly capitalised along with the cost of acquisition of shares.
There is no denial regarding the borrowed money for the acquisition of shares
by the assessee. The Tribunal correctly held that the interest payable thereon
should be added to the cost of acquisition of shares. The reasons given by the
Tribunal are based on valid materials and evidence.

(ii) Under these circumstances, we do not find any error or
legal infirmity in the order of the Tribunal so as to warrant interference.”

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Principle of mutuality : Entrance fees, commutation value of subscription for life members received by sports club — Capital Receipt

New Page 1

A. Unreported :

13 Income/capital receipt : Principle of
mutuality : A.Y. 1992-93 : Assessee is a sports club : Entrance fees : Commuted
value of subscription for life members : Is capital receipt not chargeable to
tax as principle of mutuality applies ?

[CIT v. Willingdon Sports Club (Bom.); ITA No. 121 of
2005; dated 18-3-2008 (Not reported)]

The assessee is a sports club. Its members are described as
gymkhana member, corporate member, short-term member all of whom are entitled to
the advantages or privileges of membership of the club except that of being
present or of voting at the general body meetings of the club or of serving on
the general committee and of proposing or seconding for elections as members of
the club. Apart from these members, there are life/founder/ordinary/super number
members. For the A.Y. 1992-93, the Assessing Officer assessed the total income
at Rs.15,75,900. In appeal, the Commissioner (Appeals) noted the two distinct
kind of members and held that the first category of members who were not allowed
to vote during the general body meeting were also not eligible to participate or
share in the surplus of the club on its winding up, and relying on the judgment
of the Bombay High Court in CIT v. WIAA Club; 136 ITR 569 (Bom.), held
that entrance fees and commutation of fees both have to be taken as revenue
receipts and dismissed the appeal. The Tribunal held that the entrance fees is
capital receipt not chargeable to tax in view of the decision in the case of
CIT v. WIAA Club; 136 ITR 569 (Bom.), which has been followed in CIT v.
Diners Business Services Pvt. Ltd.; 263 ITR 139 (Bom.). Accordingly, the
Tribunal allowed the appeal.

 

In appeal by the Revenue, the following questions were
raised :

“(a) Whether on the facts and in the circumstances of the
case and in law, the Tribunal was right in holding that the entrance fees
received by the assessee is capital receipt not chargeable to tax as the
principle of mutuality applies ?

(b) Whether commuted value of subscription for life members
has to be taxed or treated as capital receipts in the light of the decision of
the Bombay High Court in CIT v. WIAA Club, 136 ITR 569 (Bom.) ?”

 


Following the judgment of the Supreme Court in CIT v.
Bankipur Club; 226 ITR 97 (SC), the Bombay High Court held as under :

“(i) The Revenue it appears have based their submission on
the judgment of this Court in CIT v. WIAA Club; 136 ITR 569. The
membership of the club consisted of ordinary members and life members. The
ordinary members were paying entrance fees and annual subscription. The life
members were paying larger entrance fees without any liability to pay annual
subscription. The club was extending similar facilities both to ordinary and
life members. The issue of mutuality was neither argued nor raised or was on
issue before the learned Bench of this Court. It is on the facts there and
without considering the principle of mutuality that the learned Bench
proceeded to hold that the amount paid by the members had two elements in it.
The part of the amount paid was entrance fees which were paid to the club with
a view to acquiring the right to avail of the services and facilities extended
by the club. The other part was a consolidated commuted payment in lieu of
annual subscription. The Court held that that part of the entrance fees which
was a compounded payment for annual subscription would be income and the
balance would be capital receipt. In our opinion, considering the judgment of
the Supreme Court in Bankipur (supra) and the issue of mutuality which
has been raised in the present appeal, the judgment in WIAA Club (supra)
is clearly distinguishable. Even otherwise, in our opinion, it is doubtful
whether it would be correct law considering the judgment in Bankipur (supra).

(ii) From the principles which have been set out above and
more so in the judgment in Bankipur (supra), even if there be temporary
or honorary members who are not entitled to vote, the assessee would not cease
to be governed by the principle of mutuality. Once the assessee is governed by
the principle of mutuality, its income earned would not be income which would
be assessable to tax.

(iii) For the aforesaid reasons, we are of the view that
there is no infirmity in the judgment and consequently the questions as raised
are devoid of merit and consequently appeal dismissed.”


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Exemption — Income not forming part of the total income — Whether State-controlled Committee/Boards and companies constituted to implement the educational policy of the State should be treated as educational institution eligible for exemption u/s.10(22) o

New Page 1

7 Exemption — Income not forming part of the total income —
Whether State-controlled Committee/Boards and companies constituted to implement
the educational policy of the State should be treated as educational institution
eligible for exemption u/s.10(22) of the Act — Matter remanded.


[Assam State Text Book Production And Publication Corporation
Ltd. v. CIT, (2009) 319 ITR 317 (SC)]

In the appeals before the Supreme Court, it was concerned
with the A.Ys. 1981-82 to 1996-97, except the A.Y. 1989-90. The question which
arose before the Assessing Officer was whether the Corporation could be termed
as an ‘educational institution’ in terms of S. 10(22) of the 1961 Act ?
According to the Assessing Officer, since the assessee, during the relevant
years, had income exclusively from publication and selling of textbooks to the
students, exemption u/s.10(22) of the Act, as it stood at the material time, was
not admissible. According to the Assessing Officer, the assessee did not exist
solely for educational purposes, particularly in view of clause 21 of the
memorandum of association which provided for distribution of dividends, hence,
its income was not exempt u/s. 10(22) of the Act. This decision of the Assessing
Officer was upheld by the Commissioner of Income-tax (Appeals). In the Tribunal,
there was a difference of opinion between the Member (Judicial) and the Member
(Accountant). By decision of the majority, it was held that the Corporation was
an educational institution and, consequently, the Corporation was entitled to
the benefit of exemption u/s.10(22) of the Act for the relevant assessment years
in question. However, in appeal filed by the Department, the High Court came to
the conclusion that the income of the Corporation, during the relevant
assessment years, was not exempt, particularly in view of the fact that the
assessee did not exist solely for education purposes; that it did not solely
impart education and that its income during the relevant assessment years was
only from publishing and sale of text-books, which according to the High Court,
constituted a profit-earning activity. Against the said decision, the assessee
has come to the Supreme Court by way of civil appeals.

On going through the records, the Supreme Court found that
the High Court had not taken into account the prior history of the case,
particularly in the context of incorporation of the Corporation under the
Companies Act, 1956, as a Government company. Initially, the assessee was a
State-controlled Committee and Board, which was attached to the Office of the
Director of Public Instruction, State of Assam. It was only in the year 1972,
that the Government company got constituted u/s.617 of the Companies Act, 1956;
that, prior to 1972, the entire funding for the working of the Committee/Board
was done by the State of Assam and that even the ownership of the assets
remained vested in the State of Assam, which stood transferred to the
Corporation in 1972, when it got incorporated under the Companies Act, 1956. The
Supreme Court observed that the assessee was a Government company. It was
controlled by the State of Assam. The aim of the said Corporation was to
implement the State’s policy on education; that, clause 21 of the memorandum and
articles of association provided a return on investment to the State of Assam;
that, in the year 1975, in a similar situation, the Central Board of Direct
Taxes (for short, ‘the CBDT’) had granted exemption u/s.10(22) of the Act, vide
letter dated August 19, 1975, to the Tamil Nadu Text Books Society, which
performed activities similar to those of the assessee. The letter dated August
19, 1975, was referred to in the judgment of the Rajasthan High Court in the
case of CIT v. Rajasthan State Text Book Board reported in (2000) 244 ITR
667. A similar question came up for consideration before the Rajasthan High
Court, namely, whether the Rajasthan State Text Book Board was entitled to
exemption u/s.10(22) of the Income-tax Act, 1961 ?

The Rajasthan High Court in its judgment recited that, under
a similar situation, the CBDT had also extended the benefit of exemption under
10(22) of the Act to the Orissa Secondary Board Education, as reported in
Secondary Board of Education v. ITO, (1972) 86 ITR 408 (Orissa). Following
these circulars/letters issued by the CBDT, the Rajasthan High Court had come to
the conclusion that the assessee in that case, namely, Rajasthan State Text Book
Board, was entitled to claim the benefit of exemption u/s.10(22) of the Act.

The Supreme Court, in view of the above, was of the opinion
that the High Court, in its impugned judgment, had not considered the historical
background in which the Corporation came to be constituted; secondly, the High
Court ought to have considered the source of funding, the sharehold-ing pattern
and aspects, such as return on investment; thirdly, it had not considered the
letters issued by the CBDT which are referred to in the judgment of the
Rajasthan High Court granting benefit of exemption to various Board/Societies in
the country u/s.10(22) of the Act; fourthly, it has failed to consider the
judgments mentioned hereinabove; and lastly, it had failed to consider the
letter of the Central Government dated July, 1973, to the effect that all
State-controlled Educational Committee(s)/Board(s) were constituted to implement
the educational policy of the State(s); consequently, they should be treated as
educational institutions.

For the aforesaid reasons, the Supreme Court was of the view
that, instead of remanding the matter to the High Court, it was appropriate that
the matter was remitted to the Assessing Officer to consider it de novo in the
light of the above.

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Embedded leases : The scope under IFRS is much wider (IFRIC 4)

IFRS

Background:


It is not uncommon for enterprises to have contracts with
service providers for providing goods/services on a dedicated basis to these
enterprises. As certain assets may be dedicated for use only for a particular
enterprise, binding procurement commitments may be provided to the service
provider to the extent of entire production capacity of the assets. In certain
other cases, the enterprise may provide minimum procurement guarantee whereby it
pays a fixed price per unit of shortfall in procurements. Through these
arrangements the service provider is assured of compensation for the capital
cost incurred.

An entity may enter into an arrangement, comprising a
transaction or a series of related transactions, that does not take the legal
form of a lease but conveys a right to use an asset (e.g., an item of
property, plant or equipment) in return for a payment or series of payments.
Examples of arrangements in which one entity (the supplier) may convey such a
right to use an asset to another entity (the purchaser), often together with
related services, include :

(1) Outsourcing arrangements, and

(2) take-or-pay and similar contracts in which purchasers
must make specified payments regardless of whether they take delivery of the
contracted products or services (e.g., a take-or-pay contract to
acquire substantially all of the output of a supplier’s power plant).

Embedded leases :

IFRIC 4 provides guidance on determining whether an
arrangement is or contains a lease. The following example illustrates
take-or-pay contracts that would be classified as embedded lease :

An entity has a contract with its supplier (job worker)
whereby the entity is contractually bound to get 100,000 units of goods
manufactured by the supplier. The supplier has installed dedicated machinery to
manufacture and supply the goods only to serve the entity. The supplier has no
other machinery that can manufacture these goods.

Price terms are as under :

  • For first 100,000 units —
    Rs.3 per unit


  • 100,001 onwards — Re.1
    per unit;


  • In case of any shortfall
    as compared to 100,000 units, a penalty of Rs.2 per unit of shortfall shall be
    levied.







In the above case, the assets are deployed for use only for
the entity. Further, irrespective of the actual purchase from the supplier, the
entity is bound to pay a fixed charge in the form of per unit charge and
penalty, if applicable (Rs.200,000 in the above example i.e., even if the
purchaser does not purchase at all, a penalty on 100,000 units would be levied
at Rs.2 per unit). This fixed charge, in substance, is a lease arrangement where
the supplier’s machinery is taken on lease for a lease rent of Rs.200,000.

Determining whether an arrangement is, or contains, a lease :

Guidance in IFRIC 4 helps the entity to assess if
outsourcing/service contract is a simple supply contract or whether in substance
there is actually a lease embedded in the contract. The assessment whether the
above arrangement is or contains a lease is based on whether :

  • the fulfilment of the
    arrangement is dependent on the use of a specific asset or assets; and


  • the arrangement conveys a
    right to use the asset(s).



Arrangement dependent on use of a specific asset or assets :

For classifying an arrangement as a lease, one needs to
assess whether the arrangement is dependent on the use of a specific/identified
asset. For an arrangement to be determined as an embedded lease, there needs to
be reasonable certainty at inception of the contract that the same asset would
be used throughout the term of the contract. In other words, the asset needs to
be a ‘specified asset’.

The asset may be a ‘specified asset’ either explicitly by way
of a contract or could be identified impliedly, based on the facts and
circumstances of the case.

Specified assets explicitly identified in an arrangement :

An asset may be explicitly specified in the contract when,
for instance, the service provider’s plant/ warehouse is mentioned in the
agreement along with the address. Thus it is reasonably certain that the same
plant/warehouse shall be used throughout the contract period.

Although a specific asset may be explicitly identified in an
arrangement, it is not the subject of a lease if fulfilment of the arrangement
is not dependent on the use of the specified asset.

Specified assets implied in an arrangement :

An asset has been implicitly specified if, for instance, the
supplier owns or leases only one asset with which to fulfil the obligation and
it is not economically feasible or practicable for the supplier to perform its
obligation through the use of alternative assets.

The entity will have to use its judgment in determining
whether it is economically feasible or practicable to perform obligations
through use of alternative assets, based on the facts and circumstance in each
case. Assessing whether the use of alternative asset is economically feasible
and practical will not always be straightforward.

Fulfilment of the contract is dependent on the use of
specified asset :

If the supplier is obliged to deliver a specified quantity of
goods or services and has the right and ability to provide those goods or
services using other assets not specified in the arrangement, then fulfilment of
the arrangement is not dependent on the specified asset and the arrangement does
not contain a lease.

The arrangement conveys a right to use the asset :

An arrangement conveys the right to use the asset if the arrangement conveys to the purchaser (lessee) the right to control the use of the underlying asset. The right to control the use of the underlying asset is conveyed if any one of the following conditions is met?:

    a) The purchaser has the ability or right to oper-ate the asset or direct others to operate the asset in a manner it determines.
    b) The purchaser has the ability or right to control physical access to the underlying asset.
    c) Facts and circumstances indicate that it is re-mote that one or more parties (other than the purchaser) will take more than an insignificant amount of the output or other utility that will be produced or generated by the asset during the term of the arrangement, and the price that the purchaser will pay for the output is not contractually fixed per unit of output, nor equal to the current market price per unit of output. In the conditions (a) and (b) above, the lessee obtains the right to operate the asset or restrict the physical access of third parties to the asset by way of an explicit contract. In such cases, the lessee need not take the entire output generated from the asset for an arrangement to be a lease.

In the condition (c) above, a purchaser controls the usage of an asset and a lease exists only when the purchaser is taking substantially all of the output i.e., others cannot obtain the output from the specified asset.

However, an exemption was incorporated in the condition (c), so that arrangements in which the price is either contractually fixed per unit of output or equal to the market price per unit of output at the time of delivery of the output should not be ac-counted for as leases, since the payments in such arrangements are considered as a consideration only for ‘use of an asset’ and not for the ‘availabil-ity of an asset’. This exemption should be applied narrowly and only for arrangements in which a pur-chaser clearly pays for the actual output. Thus, if any variability is introduced to the price per unit, such an arrangement contains a lease. There is a strong presumption that any variability in the price per unit that depends on the output of the asset means that the arrangement conveys the right to use the asset.

If the arrangement is based upon a specific asset, the entity must determine whether the arrange-ment conveys a right to use the asset, based on the above guidance. It is often a challenge to determine whether a right to use the item has been conveyed. Consider the terms ‘fixed price per unit of output’ or‘current market price per unit of output at the time of delivery’. In practice, interpretations of these terms widely vary. Some entities interpret the term ‘fixed price’ as absolutely fixed with no variance per unit, based on costs or volumes. However, other en-tities accept certain adjusted prices as fixed, such as fixed price per unit adjusted for inflation or a fixed percentage increase, etc.

Typical clauses that indicate a lease arrangement:
An illustrative list of contract features that indicate lease arrangement is as under:

    a) a contract whereby the purchaser agrees to buy the entire output of a specified asset and requires the asset to be operated at full capacity, then there is a strong presumption that the purchaser has effective control over the use of assets and therefore the arrangement contains a lease.
    b) If in case of dedicated assets, any variability is introduced to the price per unit, then such an arrangement contains a lease. There is a strong presumption that any variability in the price per unit that depends on the output of the asset means that the arrangement conveys the right to use the asset.

    c) If in case of dedicated assets, pricing arrangements include a minimum procurement guarantee (i.e., the purchaser shall pay a penalty if procurement is lower than minimum guaranteed volumes), the price cannot be termed as current market price. Hence these would be classified as leases.

Assessing or reassessing whether an arrangement is, or contains, a lease:

Initial assessment:

The assessment of whether an arrangement contains a lease shall be made at the inception of the arrangement on the basis of all of the facts and circumstances.

Subsequent reassessment:

A reassessment of whether the arrangement contains a lease after the inception of the arrangement shall be made only if any one of the following conditions is met:

    i) There is a change in the contractual terms, unless the change only renews or extends the arrangement.
    ii) A renewal option is exercised or an extension is agreed to by the parties to the arrangement, unless the term of the renewal or extension had initially been included in the lease term in accordance with paragraph 4 of IAS 17 — Leases.

    iii) There is a change in the determination of whether fulfilment is dependent on a specified asset.

    iv) There is a substantial change to the asset, for example, a substantial physical change to property, plant or equipment.

A reassessment of an arrangement shall be based on the facts and circumstances as of the date of reassessment, including the remaining term of the arrangement. Changes in estimate (for example, the estimated amount of output to be delivered to the purchaser or other potential purchasers) would not trigger a reassessment.

Classification of embedded leases — operating or finance:
If an arrangement contains a lease as per guidance provided under IFRIC 4, the parties to the arrangement shall apply the requirements of IAS 17 — Leas-es to the lease element of the arrangement.

Separation of lease payments from other elements of the contract:
For the purpose of applying the requirements of IAS 17 — Leases, payments and other consideration required by the arrangement shall be separated at the inception of the arrangement (or upon a reassessment of the arrangement) into those for the lease and those for other elements on the basis of their relative fair values.

In some cases, separating the payments for the lease from payments for other elements in the arrangement will require the purchaser to use an estimation technique. For example, a purchaser may estimate the lease payments by reference to a lease agreement for a comparable asset that contains no other elements, or by estimating the payments for the other elements in the arrangement by reference to comparable agreements and then deducting these payments from the total payments under the arrangement to determine the lease component.

For instance, a contract for warehouse management services, whereby the vendor shall manage a warehouse on a dedicated basis for a single customer against a fixed monthly fees. The inputs of the vendor includes warehouse premises, assets deployed therein and warehouse labour. Thus, the arrangement may contain a lease of warehouse and warehouse assets. The overall consideration shall be separated into lease rentals for warehouse, lease rentals for warehouse assets and consideration for warehouse management (labour). In practice separation of individual components pose significant challenges to entities.

Impracticality in separation of lease components: If a purchaser concludes that it is impracticable to separate the payments reliably, it shall:

    a) in the case of a finance lease, recognise an asset and a liability at an amount equal to the fair value of the specified asset under the lease. Subsequently the liability shall be reduced as payments are made and an imputed finance charge on the liability recognised using the purchaser’s incremental borrowing rate of interest

    b) in the case of an operating lease, treat all payments under the arrangement as lease payments for the purposes of complying with the disclosure requirements (i.e., applicable to disclosures only) of IAS 17 — Leases, but
    i) disclose those payments separately from minimum lease payments of other arrangements that do not include payments for non-lease elements, and

    ii) state that the disclosed payments also include payments for non-lease elements in the arrangement.

Terms of arrangements:

Cancellation clause in embedded lease:

If an arrangement qualifies for recognition as an embedded lease and the arrangement is cancellable, the assets under such arrangement shall be accounted as taken on a cancellable operating lease. Hence the payments made need to be separated between lease payments and other elements of the contract for recognition purposes.

However, as the arrangement is cancellable, the entity need not provide disclosures in relation to the lease.

Absence of binding contract:

If the entity neither contractually require the job worker to use the asset exclusively for the company, neither does it contractually restrict the access of third parties to the asset, nor has obtained any contractual right to operate the asset, such arrangement shall not be classified as a lease. This would be a normal purchase of goods/services.

Thus, it is essential that there should be contractual arrangement that provides the right to use a specified asset. If there is only a mutual understanding between the two contracting parties relating to minimum guarantee commitments or adjustment to price based on level of output, without a binding contract, then it would not be classified as an embedded lease.

Financial statement impact:

Once, an arrangement is covered under IFRIC 4, an entity needs to determine whether the underlying embedded lease is an operating lease or a finance lease in accordance with IAS 17 — Leases and apply the accounting principles as set out in that standard.

    a) Accounting by lessee — Finance lease:

Initial recognition and measurement:

If the arrangement is or contains a finance lease, the lessee shall recognise finance lease as assets and li-abilities in their statements of financial position at amounts equal to the fair value of the leased property or, if lower, the present value of the minimum lease payments, each determined at the inception of the lease.

Subsequent measurement:

As mentioned above, the total lease component shall be separated from the non-lease component.

The lease component in case of finance lease would be further separated into payments towards the lease obligation and interest on lease obligation.

The leased asset is depreciated over the asset’s useful life or over the lease period whichever is shorter.

The payments made would be adjusted against the lease obligation and interest thereon.

Impact on Indian companies on adoption of IFRS?: Indian GAAP does not have specific guidance on embedded leases. Thus, the contract payments are recognised, in most cases, as revenue expen-diture (say, job work expenses) on accrual basis. On adoption of IFRS by the Indian companies, such arrangements may be classified as embedded finance leases. Thus the charge to the income statement would be in the form of depreciation on assets taken on finance lease, interest expense on finance lease obligation and job worker charges; instead of the entire amount being treated as job work charges. This may impact the asset base (as the assets are capitalised) and income statement classification of the lessee.


    b) Accounting by lessor — Finance lease:

Initial recognition and measurement:

Lessor shall derecognise assets given under an em-bedded finance lease in their balance sheet and present them as a receivable at an amount equal to the net investment in the lease.

Subsequent measurement:

As mentioned above, the total lease component shall be separated from the non-lease component. The lease component in case of finance lease would be further separated into payments towards the lease receivable and interest on lease receivable.

The recognition of finance income on lease receivable shall be based on a pattern reflecting a con-stant periodic rate of return on the lessor’s net in-vestment in the finance lease.

The receipts from the lessee would be adjusted against the lease receivable and interest thereon.

Impact on Indian companies on adoption of IFRS?: Indian GAAP does not have specific guidance on em-bedded leases. Thus, the actual contract receipts are recognised, in most cases, as revenue (say, job work income) on accrual basis. On adoption of IFRS by the Indian companies, such arrangements may be classified as embedded finance leases.

Thus, such transactions will be treated as sale of as-set with a corresponding debit to lease receivable asset. Unlike Indian GAAP, there will be no impact on the income statement on account of deprecia-tion on fixed assets as they were never recognised. The receipts out of the lease component received from the lessee shall be adjusted against the lease receivable to the extent of the principal and interest income.

This may significantly impact the fixed asset base (as the fixed assets are not recognised), the timing of revenue recognition and the EBIT (on account of in-terest income on lease receivable) of the lessor.

    c) Accounting by lessee and lessor — Operating lease:

Recognition and measurement:

As mentioned above, the lease component would be recognised separately from the non-lease component. Thus, the lessor and lessee shall recognise lease income/expense separately from other revenue/expense, respectively.

Impact on Indian companies on adoption of IFRS: The lessor shall present lease income separately within revenue from non-lease revenue. Similar presentation would be required by the lessee for its payments. However, this would impact only the in-come statement presentation.

The operating lease payments would be required to be recognised on a straight-line basis. This may lead to additional impact on the profits for the year on account of adoption of IFRS.

First-time adoption of IFRS:

IFRIC 4 shall have to apply retrospectively to all agreements existing as on the date of transition. Hence, entities shall have to assess all agreements existing as on the date of transition, irrespective of the year in which the same has been entered into i.e., either before or after the date of applicability of IFRIC 4.

Conclusion:

An entity can expect significant changes to its balance sheet and income statement due to application of IFRIC 4 and it is thus essential for an entity to carefully evaluate its implications at the time of entering into arrangements with dedicated vendors.

Financial Instruments — Indian corporates need to gear up for significant changes in the accounting landscape

IFRS

In recent times, a lot has been written and discussed in the
various forums regarding the role played by financial instruments-related
accounting standards and the contribution of ‘fair value’ accounting to the
current global liquidity crisis.

Accounting for financial instruments in general and fair
value accounting in particular is a highly complex and judgmental area, and
requires a very high degree of understanding and experience to implement and
interpret the guiding principles as envisaged in those standards.

Accounting for Financial Instruments is a complex exercise in
view of the varied kinds of instruments that are emerging in the market in the
recent past. International Financial Reporting Standards (IFRS) encompassing
IAS-32, IAS-39 and IFRS-7 deal with the principles involved in recognition,
measurement, disclosures and presentation of financial instruments. The
Institute of Chartered Accountants of India (ICAI) has also published Accounting
Standards (AS), viz., AS-30 on ‘Financial Instruments — Recognition and
Measurement’ and AS-31 on ‘Financial Instruments — Presentation’ which has been
pronounced and is made recommendatory from 01.04.2009 and mandatory from
01.04.2011. Further, AS-32 Exposure draft on ‘Financial
instruments — Disclosures’ has also been published in December 2007 issue of the
Chartered Accountant Journal. These are largely similar to their IFRS
counterparts. Thus, whether India converges to IFRS from 2011 or not, accounting
for financial instruments will largely be in accordance with the principles of
IAS-39 and IAS-32 from 1 April 2011.

The use of these standards ushers in the concept of fair
valuation, which records financial instruments at fair value and changes thereon
in reported earnings or within shareholders funds, depending on the nature of
the financial instrument. The impact of these standards shall cover a large
number of captions in a corporate financial statement including receivables,
payables, borrowings, loans and advances given, security deposits, investments
and even certain types of ‘equity’ instruments, thereby having a significant
impact on accounting for routine transactions entered into by companies in the
normal course of business. These impacts necessitate careful consideration by
corporates and their impact is not restricted to finance companies and banks.

Definition and classifications

Under IFRS, a financial instrument has been defined as a contract that gives rise to a financial asset in one entity with a corresponding liability or equity in another entity. Most monetary items will get covered by this definition such as trade receivables/payables, investments in shares/debentures, retention money, trade deposits, derivatives, financial guarantees, and loans and advances.

    Under the present Indian GAAP, Accounting Standard (‘AS’) 13 classifies an investment into long-term and current investment. Long-term investments are required to be recorded at cost, less any permanent diminution. Current investments are recorded at lower of cost or market. Detailed classification exists for banks as per RBI guidelines. Loans and receivables are stated at cost. Interest income on loans is recognised based on time-proportion basis as per the rates mentioned in the underlying loan agreement.

    On the other hand under IFRS, all financial assets are required to be initially classified into four categories, comprising (i) fair value through profit or loss (FVTPL), (ii) held-to-maturity (HTM), (iii) loans and receivables, and (iv) available-for-sale (AFS). All financial assets will have to be recorded at respective fair values at the time of initial recognition.

    Further, IAS-39 requires FVTPL and AFS assets to be measured at fair values at each subsequent reporting period. In case of FVTPL assets, the unrealised gain/loss is recognised in the profit and loss account whereas for AFS investments, it is recognised in equity until actually realised, whereupon it is transferred to the income statement. HTM and loans and receivable assets are reflected at amortised cost using effective interest method. However, the rules for classification of an investment as HTM are extremely stringent and any subsequent decision to sell these investments would result in adverse consequences, whereby all other existing HTM investments would need to be fair valued and there would be restrictions on future classifications.

    Financial liability is classified into two categories, viz., (i) financial liability at fair value through profit or loss (ii) residual category. The initial measurement is at cost, being the fair value of a consideration received, less transaction costs. Financial liabilities at fair value through profit or loss (including trading) liabilities are measured at fair value, and the change is recognised in the income statement for the period. All other (non-trading) liabilities are carried at amortised cost. Entities may elect to classify certain liabilities as ‘fair value through profit and loss’ if the liabilities are incurred to hedge certain related financial assets which are required to be recorded at fair value. In such a case, a fair value designation for the liabilities can be used to set off the fair value changes in the assets — a form of economic hedge accounting, without following the complex hedge accounting designation and effectiveness testing rules.

Derivatives

    The current Accounting Standards in India do not have any specific standard providing guidance on the recognition and valuation of derivatives. Accounting for certain plain vanilla foreign exchange forward contracts is based on AS-11. Certain exchange traded futures and options are accounted as per ‘Guidance Note on Accounting for Equity Index and Equity Stock Futures and Options’. As per this Guidance Note, mark-to-market losses are recognised but gains are ignored. Further, some derivative instruments may be required to be accounted as per the March 2008 announcement of the ICAI, whereby derivative instruments are to be mark to market with the resulting losses required to be recognised in the income statement based on the principles of prudence. Effective 1 April 2011, the treatment for the aforesaid transactions will need to comply with AS-30 issued by the ICAI. As stated earlier, the guidance in AS-30 is consistent with the requirements of IAS-39.

    IAS-39 deals with derivative instruments in a very comprehensive manner. A derivative is defined as a financial instrument or other contract with the following three characteristics, namely,

1) its value changes in response to the change in a specified interest rate, financial instrument price, commodity price, foreign exchange rate, index of prices or rates, credit rating or credit index, or other variable, provided in the case of a non-financial variable that the variable is not specific to a party to the contract (sometimes called the ‘underlying’);

2) it requires no initial net investment or an initial net investment that is smaller than would be required for other types of contracts that would be expected to have a similar response to changes in market factors; and

3) it is settled at a future date. Further all derivatives are recorded on balance sheet at fair value with changes in fair value being recognised in income statement unless it satisfies the hedge accounting criteria. This often results in significant volatility in reported income, which is not seen under the current Indian Accounting Standards.

Apart from stand-alone derivatives,  IAS-39 requires derivatives embedded or  contained in other contracts to be separated and accounted separately. For example, for convertible  bonds an investor will have to account for the equity option component separately  from the host debt contract. The value of the equity option component would be initially credited to equity. The resultant discount on the debt host would be amortised over the period of the debt to reflect the real cost of the debt instrument (based on market rates for non-convertible debt). Similarly, if an Indian entity has a contract for supply of goods/services denominated in Euros, with a counterparty based in a non-Euro zone country (for example, the U.S.), then there is an embedded rupee-Euro forward currency derivative, which will need to be separated from the host contract of supply of goods/ services and valued separately. The requirements for embedded derivatives will significantly enhance the valuation and measurement complexity of such instruments from current practice.
 
Hedge  accounting

As seen above, IAS-39 uses a measurement model that sometimes requires the measurement of assets and liabilities on different basis. This results in an accounting mismatch in profit or loss account, which results in volatility in reported results (and does not reflect the true performance of the Company in the income statement). Consequently the standard permits an entity to selectively measure assets, liabilities, firm commitments and certain forecast transactions on a basis different from that prescribed, or to defer /match the recognition of gains or losses on derivatives using hedge accounting.

The hedge accounting rules under IFRS are quite stringent and narrowly defined. Hedge accounting is permitted if at the inception of the hedge and on an ongoing basis, the expectation is that the hedge will be highly effective in achieving offsetting changes in fair value or cash flows attributable to the hedged  risk during  the period  for which  the of hedge  is designated  and ‘actual’ results  are within the 80-125% range. If the changes  don’t  fall within this  band,  then  the  hedge  is  ineffective and, therefore,  fair value  gains/losses   on the hedging contract   will  have  to be  taken  to  the  income statement. Hedges need to be on specifically identified items as against portfolios and should hedge-specific risks and characteristics identified and documented upfront. Stringent documentation criteria prescribed shall also have to be followed.

Hedge  accounting  is voluntary  and the decision to apply  hedge  accounting   should  be  made  on  a transaction  by transaction  basis. The correct use of hedge accounting  (for example,  designating  foreign currency  forward  contracts  as cash flow hedges  of forecasted  foreign  currency  sales) can ensure  that gains  and  losses  relating  to the  derivatives   are recorded   to reflect  the  economic   rationale   for undertaking  the transaction.  In the absence of hedge accounting,  gains and losses on derivatives  would be recorded  in periods  that may be different  from the periods in which the underlying  transactions  are recorded.

Substance over form

Under Indian GAAP, a financial instrument is v classified as either liability or equity, depending on form  rather  than  substance.

Redeemable preference shares are treated as capital under Schedule VI of the Companies Act,1956, even though in substance it may be a liability. However, under IAS-32, they will get classified as debt in the balance sheet of the issuers, since they meet the characteristic of a liability, i.e., redemption after a fixed period and dividend at a fixed rate. This would result in profit after tax numbers being lower, as preference dividend would be reflected as interest cost. Further, premium on redemption of preference shares will no longer be able to be adjusted in the securities premium account but will have to be recognised as an interest expense in the income statement.

Another significant area of impact would be the accounting for Foreign Currency Convertible Bonds (‘FCCB’). FCCBs are bonds that can be converted into equity by the investors before a certain date, or are repaid at an agreed premium at the end of the tenure. FCCBs (and other debt instruments) may be issued with a structure that allows the borrower to pay the entire interest on the instrument (along with the principal) to the investor only when the bond matures, in the form of a ‘redemption premium’. The Companies Act, 1956, Section 78, permits companies to adjust the redemption premium on debentures just as in equity shares, through the share premium account. This accounting treatment is currently fairly common amongst many Indian companies. This accounting treatment would not be permitted under IFRS, as all cost of issuing an instrument (including the redemption premium) would need to be recorded as interest cost over the life of the debt using the effective interest yield method.

Further, under IFRS, FCCBs will be subjected to split accounting. In accordance with the guidance in IAS-39 on the basis of which the conversion option is separated from the host contract i.e., the debt liability depends on the characteristic of the conversion option. If the conversion option meets the definition of equity, then the fair value of the liability without the conversion option is first determined and the residual amount of proceeds is then allocated to equity. If the conversion option is a derivative (i.e., if the conversion price is determined in a currency other than the functional currency of the Company), the fair value of the derivative is first determined with the residual allocated to the debt amount and the derivative portion is fair valued at every reporting date.

Impairment

In the case of banks, the existing provisions on non-performing assets are based on guidelines laid down by the Reserve Bank of India. IFRS prescribes an impairment model that requires case-by-case (for significant exposures) assessment of the facts and circumstances surrounding the recoverability and timing of the future cash flows relating to the credit exposure. An expectation that all contractual cash flows would not be recovered (or recovered without full future interest applications) will lead to an account being classified as impaired and impairment shall be measured on present value basis using the effective interest rate of the exposure as the discount rate. For groups of loans that share homogenous characteristics (such as mortgage and credit card receivables), impairment can be assessed on a collective basis. General provisions are permissible only to extent that they relate to a specified risk that can be measured reliably and for incurred losses. No provisions are permitted for future or expected losses. Provisioning for standard assets will not be permitted under IFRS.

For investments, a similar analysis is conducted, the key difference being that the fair value of the investment is also considered as an input in addition to the financial! credit standing of the issuer. The application of IAS-39 would also change accounting for items such as financial guarantees. It will affect key ratios and performance indicators for most banks and financial institutions, including capital adequacy ratios.

De-recognition

Under IFRS, de-recognition of financial assets is a complex, multi-layered area with the de-recognition decision dependent largely on whether there has been a transfer of risks and rewards. If the assessment of the transfer of risks and rewards is not conclusive, an assessment of control and the extent of continuing involvement are required to be performed.

Securitisation transactions shall be the most impacted area since most Indian securitisation vehicles are currently structured to meet Indian GAAP de-recognition norms stated under the Guidance Note on Accounting for Securitisation issued byfhe ICAL Substantially, all those securitisation vehicles would collapse into the transferor’s balance sheet and assets would fail the de-recognition test under IFRS. For example, securitisation transactions where credit collaterals are provided/guarantee is provided to cover credit losses in excess of the losses inherent in the portfolio of assets securitised, may not meet the de-recognition principles enunciated in IAS-39. This would lead to more instances of transfers failing the de-recognition criteria, thereby resulting in large balance sheets and capital adequacy requirements, lower return on assets and deferral of gains/losses on such securitisation transactions.

Disclosures

IFRS 7 requires entities to provide detailed disclosures in their financial statements that enable users to evaluate:

a) the significance of financial instruments for the entity’s financial position and performance; and

b) the nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the reporting date, and how the entity manages those risks. On 5 March 2009, the IASB has issued Improving Disclosures about Financial Instruments (Amendments to IFRS 7). The amendments require enhanced disclosures about fair value measurements and liquidity risk.

The disclosures required under IFRS 7 include quantitative as well as qualitative information. There is a significant amendment in IT/reporting systems which shall be required as there is no accounting standard in India corresponding to IFRS 7 requiring such extensive disclosures. The Announcement on ‘Disclosure regarding Derivative Instruments’, issued by the ICAI, requires the following disclosures to be made in the financial statements:

a) categorywise quantitative data about derivative instruments that are outstanding at the balance . sheet date,

b) the purpose, i.e., hedging or speculation, for which such derivative instruments have been acquired, and

c) the foreign currency exposures that are not hedged by a derivative instrument or otherwise.

Netting assets and liabilities will also be less common as the rules will require more conditions to be met before assets and liabilities can be offset. A mere right to set off will not be adequate and needs to be supplemented with a right and an intention to settle on a net basis the assets and liabilities under consideration.

To conclude, the advent of IFRS shall thus represent a significant challenge to preparers, auditors, accountants, regulators and analysts. As the complexity of accounting increases, focus on need for increased education and training on areas relating to the valuation and accounting for financial instruments increases. Accounting for financial instruments will not only lead to a major impact on measurement of results, but also impact the existing functionalities of the IT systems and processes of companies.

Expenditure : Capital or revenue : S. 37 of I. T. Act 1961 : A. Y. 2002-03 : Amount spent on computer software is revenue expenditure.

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  1. Expenditure : Capital or revenue : S. 37 of I. T. Act
    1961 : A. Y. 2002-03 : Amount spent on computer software is revenue
    expenditure.



 


[CIT vs. Varinder Agro Chemicals Ltd.; 309 ITR 272
(P&H)].

For the A. Y. 2002-03, the Assessing Officer disallowed the
claim of the appellant for deduction of the expenditure on acquisition of
computer software holding that it is capital in nature on the ground that
enduring advantage was derived by the assessee by incurring such expenditure.
The Tribunal allowed the assessee’s claim.

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

“There is nothing to show that the software used by the
assessee was of enduring nature and will not become outdated. Since
technology is fast changing and day by day systems are being developed in a
new way, software may be needed like raw material. The view taken by the
Tribunal is certainly a possible view.”

levitra

Assessment : Extension of period of limitation : S. 150 of I. T. Act, 1961 : A. Y. 1993-94 : Grant of probate to assessee would not extend the period.

New Page 1

Assessment : Extension of period of limitation : S. 150
of I. T. Act, 1961 : A. Y. 1993-94 : Grant of probate to assessee would not
extend the period.


Reported :

 

[CIT vs. Smt. Shobha Rani Shah : 309 ITR 263 (P &
H)]

The assessee had received the probate of her mother on
30.11.2000. On the basis of the probate the Assessing Officer issued notice
u/s. 148 of the Income-tax Act, 1961, on 31.03.2005 for the A. Y. 1993-94. The
Assessing Officer held that the period of limitation would not be applicable
in view of the provisions of Section 150 of the Act. The Commissioner
(Appeals) held that the effective date for invoking Section 150(1) was the
date of probate of the mother and consequently held that the notice u/s. 148
was beyond the period of limitation. The Tribunal dismissed the appeal filed
by the Revenue holding as follows :

” . . . . once I have held that no finding or direction
was given by the Hon’ble Judge in his order, the issue of notice u/s. 148 is
to be regulated by Section 149 of the Income-tax Act as in the order passed
by the Hon’ble Judge there is no finding or direction to be basis for a
notice within the extended period u/s. 150(1).”

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

“In the present case, the Tribunal has rightly held that
the grant of probate by the Additional District Judge, Rohtak, had no
consequence to the assessment and that the order dated 30.11.2000, would not
cause the limitation to extend u/s. 150 of the Act.”

levitra

Interest on borrowed funds : Deduction u/s.36(1)(iii) of I. T. Act, 1961: A. Y. 1997-98 : Borrowed funds used for purchase of shares held partly as investment and partly as stock in trade : Shares purchased for acquiring controlling interest in company :

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Interest on borrowed funds : Deduction u/s.36(1)(iii) of
I. T. Act, 1961: A. Y. 1997-98 : Borrowed funds used for purchase of shares
held partly as investment and partly as stock in trade : Shares purchased for
acquiring controlling interest in company : Interest on borrowed funds
allowable as deduction u/s. 36(1)(iii).


 



[CIT vs. Srishti Securities Pvt. Ltd. (Bom); ITA No.
71 of 2006: Dated 22.01.2009].

The assessee had purchased shares out of borrowed funds.
The shares were held partly as investment and partly as stock in trade. The
assessee’s claim for deduction of interest was rejected by the Assessing
Officer on the ground that the primary object of acquiring shares was not to
earn dividend but to acquire controlling interest in the company. The CIT(A)
bifurcated interest on pro rata basis between investment and stock in
trade and allowed the interest attributable to stock in trade. The Tribunal
allowed the assessee’s claim, holding that the interest is allowable u/s.
36(1)(iii).

On appeal by Revenue, the Bombay High Court followed the
judgment in the case of CIT vs. Lokhandwala Construction Industries Ltd.
260 ITR 579 (Bom), concurred with the judgment of the Calcutta High Court
in CIT vs. Rajeeva Lohana Kanoria 208 ITR 616 (Cal) and upheld the
decision of the Tribunal. The High Court held that the interest which was
disallowed to the extent of investment will have to be allowed as held by the
Tribunal.

Editor’s Note :

This related to an assessment year prior to insertion of
S.14A.


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Cash credit : Undisclosed income : S. 68 of I. T. Act, 1961 : Disclosure of diamonds in declaration under VDIS : Subsequent sale of diamonds and receipt of consideration by cheque : Receipts shown in books of account is not undisclosed income.

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Cash credit : Undisclosed income : S. 68 of I. T. Act,
1961 : Disclosure of diamonds in declaration under VDIS : Subsequent sale of
diamonds and receipt of consideration by cheque : Receipts shown in books of
account is not undisclosed income.



 


[CIT vs. Inder V. Nankani (Bom); ITA No. 128 of
2009 : Dated 24.02.2009].

The assessee had disclosed diamonds in a declaration under
VDIS. He subsequently sold the said diamonds and received consideration by
cheque. The amount received was shown in the books of account. The Assessing
Officer treated the sale consideration as undisclosed income and made addition
of the said amount to the total income of the assessee. The Assessing Officer
held that the assessee was unable to prove that he was actually in possession
and ownership of the diamonds. It is the case of the Revenue that these were
hawala transactions which were unearthed on the raid being conducted on the
two chartered accountants. The Tribunal deleted the addition.

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

“i) The entire submission on behalf of the Revenue is
that the first purchaser has in fact sold the diamonds to the second
purchaser whose whereabouts could not be traced and as such, the sale was
fictitious. The question is whether the order of the CIT(A) and ITAT suffers
from any error of law.

ii) In the instant case, admittedly the diamonds were
declared. The declaration was accepted by the Revenue and thereafter, the
assessee had paid the tax. The assessee thereafter had sold the said
diamonds and received consideration which is also disclosed in the books of
account. In these circumstances, the finding recorded by the Tribunal cannot
be faulted, namely, that the assessee had proved the possession of the
jewellery or diamonds at the time of declaration.

iii) In the instant case, the Assessing Officer was given
an opportunity to produce any material in his possession to hold to the
contrary. The Assessing Officer failed to comply with the said direction. In
these circumstances, CIT(A) proceeded to pass the order which order came to
be subsequently affirmed by the ITAT.

iv) The Tribunal in the instant case has held that the
assessee had disclosed the diamonds in his possession at the time of VDIS
declaration which was accepted. Once that be the case and the consideration
received from the purchaser which has not been doubted, the fact that there
is doubt about the second sale, cannot result in making addition in the
hands of the assessee.

v) In our opinion, considering the findings of facts in
the case, this is not a fit case where question of law would arise.”

levitra

Export profit : Deduction u/s. 80HHC of I. T. Act, 1961 : Export turnover and total turnover : Export sale price to be modified as per the approval by the RBI for including in the export turnover.

New Page 1

Export profit : Deduction u/s. 80HHC of I. T. Act, 1961
: Export turnover and total turnover : Export sale price to be modified as per
the approval by the RBI for including in the export turnover.



 


[CIT vs. M/s. Polycot Corporation (Bom); ITA No.
1241 of 2008: Dated 23.01.2009.]

In the appeal filed by the Revenue against the order of the
Tribunal, the Department had raised the following question :

“Whether on the facts and in the circumstances of the
case and law, is the Hon’ble ITAT right in directing the A.O. to compute the
deduction u/s. 80HHC of the Act after the books of account having been
closed/made up with the total export turnover ascertained, holding that the
reduction in the invoice amount having been approved by the RBI, the
original sales price stands modified to this extent and such modified price
only should be included as part of export turnover ?”

The Bombay High Court held as under :

“i) To avail of the benefit of Section 80HHC the proceeds
have to be brought into India within the time prescribed i.e., six
months or such extended period as may be allowed. In the instant case the
RBI granted time up to 30th June, 2001. The proceeds were brought into India
on 30 June, 2001.

ii) Here we may set out the areas of disagreement between
the Revenue and the assessee. It is the contention of the assessee that
while working out total turnover what will have to be considered is the
revenue which has been brought in during the course of that financial year
and if any moneys in respect of export proceeds have come subsequent to the
order of assessment, they will have to be considered in the said financial
year.

iii) The other factual aspect of the matter is that the
buyer proposed deduction in the export price, the respondents agreed to the
same after taking approval of the RBI to the extent of 30%. The respondents
are a totally export oriented unit. Moneys, therefore, in terms of the
approval granted by the RBI were brought in during the period as extended.

iv) The Tribunal in its order observed that once the RBI
has agreed to deduction in the invoice amount, the original sales price
stands modified and such modified price only should be taken as actual
export value. It is further observed that such adjusted export value should
only be included in the export turnover and the total turnover.

v) The contention of the Revenue was that, that should be
excluded from the export turnover.

vi) In our opinion, considering the facts and the
provisions of Section 80HHC, we cannot find fault with the conclusion
arrived at by the learned Tribunal.”

levitra

Business expenditure : Deduction u/s. 37(1) of I. T. Act, 1961 : A. Ys. 1996-97 and 2001-02 : Expenditure on production of films for advertisement of products manufactured by assessee : Is business expenditure allowable u/s. 37(1) ?

New Page 1

Business expenditure : Deduction u/s. 37(1) of I. T.
Act, 1961 : A. Ys. 1996-97 and 2001-02 : Expenditure on production of films
for advertisement of products manufactured by assessee : Is business
expenditure allowable u/s. 37(1) ?



 


[CIT vs. Geoffrey Manners & Co. Ltd. (Bom); ITA No.
789 of 2008: Dated 09.02.2009].

The assessee incurred expenditure on production of films
for the purpose of advertisement for marketing the products manufactured by
it. The Assessing Officer disallowed the claim for deduction of the
expenditure, holding that it is capital in nature. The Tribunal allowed the
claim.

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

“i) A similar issue had come up for consideration before
the Punjab & Haryana High Court in CIT vs. Liberty Group Marketing
Division, 2008 (8) DTR Judgments 28. In that case the assessee had
claimed expenditure incurred on glow signboards, as also T. V. Films. The
expendi-ture was held to be revenue in nature.

ii) In our opinion the correct test to be applied in such
a case would be that if the expenditure is in respect of an ongoing business
of the assessee and there is no enduring benefit, it can be treated as
revenue expenditure. However, if it is in respect of business which is yet
to commence, then the same cannot be treated as revenue expenditure, as
expenditure is on a product yet to be marketed.

iii) The Tribunal on the facts of this case was clearly
within its jurisdiction in holding that the expenditure was by way of
revenue expenditure, as it was in respect of promoting ongoing products of
the assessee herein.”

levitra

Bad debt : Deduction u/s. 36(1)(vii) of I. T. Act, 1961 : After amendment w.e.f. 01.04.1989 it is not obligatory on the part of the assessee to prove that the debt written off is indeed a bad debt for the purpose of deduction u/s. 36(1)(vii).

New Page 1

Unreported :

  1. Bad debt : Deduction u/s.
    36(1)(vii) of I. T. Act, 1961 : After amendment w.e.f. 01.04.1989 it is not
    obligatory on the part of the assessee to prove that the debt written off is
    indeed a bad debt for the purpose of deduction u/s. 36(1)(vii).

 

[DI vs. M/s. Oman International Bank, SAOG (Bom);
ITA No. 114 of 2009; Dated 09.02.2009.]

At the instance of the Revenue the following question was
raised before the Bombay High Court :

“Whether as per the existing provisions even after the
amendment w.e.f. 01.04.1989, is it obligatory on the part of the
assessee to prove that the debt written off by him is indeed a Bad Debt for
the purpose of allowance u/s. 36(1)(vii) ?”

The Bombay High Court answered the question as under :

“The question as framed will have to be answered by
holding that after the amendment it is neither obligatory nor is it a burden
on the assessee to prove that the debt written off by him is indeed a bad
debt as long as it is bona fide and based on commercial wisdom or
expediency.”

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Settlement of cases : Abatement : Ss. 2(45), 245C and 245D(2A) & (2D) of I. T. Act, 1961 : Tax on total income means tax on total income after set-off of carried forward loss : Assessee paid tax correctly : No abatement u/s.245D(2) : Application to be pro

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Settlement of cases : Abatement : Ss. 2(45), 245C and
245D(2A) & (2D) of I. T. Act, 1961 : Tax on total income means tax on total
income after set-off of carried forward loss : Assessee paid tax correctly :
No abatement u/s.245D(2) : Application to be proceeded with.


 


[Govind Builders and Developers vs. ITSC : 309 ITR
167 (Bom)].

On 14.09.2006, the assessee made an application to the
Settlement Commission u/s. 245C of the Income-tax Act, 1961 for settlement of
its case for the A. Y. 2004-05. The returned income for that year was a loss
of Rs. 93,112. The assessee had offered an additional income of Rs.53,57,375
in the settlement application. The assessee was also entitled to carried
forward loss of Rs.93,193 of the A. Y. 2003-04. For the purpose of tax payable
u/s. 245D(2A) the assessee arrived at the aggregate total income of
Rs.51,70,820 after reducing from Rs.53,57,375 the returned loss of Rs.93,112
for the relevant year and the carried forward loss of Rs.93,193 of the A. Y.
2003-04. Accordingly it computed the additional tax payable at Rs.18,55,032
and paid Rs.25,59,932 together with interest on 26.05.2007. This payment was
made in compliance with the provisions of Section 245D(2A) of the Act wherein
the last date for payment was 31.07.2007. The Settlement Commission held that
the carried forward loss was wrongly set off and accordingly there was no
compliance of the provisions of Section 245D(2A) of the Act and therefore
declared that the proceedings abated in accordance with the provisions of
Section 245D(2D) of the Act. On 13.11.2007 the assessee paid the difference as
per the decision of the Settlement Commission.

On a writ petition filed by the assessee challenging the
decision of the Settlement Commission, the Bombay High Court held as under :

“i) Section 245D(2A) is mandatory and the additional tax
had to be paid on or before 31.07.2007. The Commission could not condone the
delay or accept the additional amount after 31.07.2007, as the application
itself would stand rejected by operation of law. Once there was no power
with the Commission itself, it was not possible for the Court to act under
the extraordinary jurisdiction under Article 226 read with Article 227 of
the Constitution of India also.

ii) The Settlement Commission, while considering whether
the tax has been paid as contemplated by Section 245D(2A), has to examine
whether that tax is on the total income as disclosed. The tax payable would
be on the income as set out in Section 2(45) of the Act. The assessee was
entitled to carry forward the loss of Rs.92,370. Therefore, the assessee had
correctly paid the tax. Since the assessee could carry forward the loss of
the preceding assessment year, the finding of the Commission that the tax
was not paid was an error of law apparent on the face of the record.
Therefore the finding that the application has abated had to be set aside
and the application had to be proceeded with.”

levitra

Depreciation : S. 32 of I. T. Act, 1961 : A. Y. 1992-93 : Condition precedent : User of machinery : Machinery installed but found defective : Amounts to user of machi-nery : Assessee entitled to depreciation.

New Page 1

  1. Depreciation : S. 32 of I. T. Act, 1961 : A. Y. 1992-93
    : Condition precedent : User of machinery : Machinery installed but found
    defective : Amounts to user of machi-nery : Assessee entitled to depreciation.



 


[CIT vs. Chamundeshwari Sugar Ltd; 309 ITR 326
(Karn)].

The assessee company was running a sugar factory. For the
A. Y. 1992-93, the assessee company installed pollution control machinery as
per the mandate of the Pollution Control Board. The assessee claimed
depreciation to the extent of the value of the machinery installed. The
Assessing Officer found that the machinery that was installed was found to be
defective during the trial runs, and therefore, held that the machinery was
not used for the purpose of business as required u/s. 32 of the Income-tax
Act, 1961. Accordingly, the Assessing Officer disallowed the claim for
depreciation. The Tribunal allowed the claim of the assessee and held that the
assessee was entitled to depreciation because the machinery was installed and
merely because it did not effectively function that was not a ground to reject
depreciation.

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

“i) The interpretation of ‘used for the purpose of
business’ by the Supreme Court in Liquidator of Pursa Ltd. vs. CIT
(1954) 25 ITR 265 lays down that machinery should be installed. The purport
and object of law relating to depreciation as envisaged u/s. 32 of the
Income-tax Act, 1961, has to be meaningfully interpreted, consistent with
the object. When the assessee bona fide installs any machinery but it
becomes defective and non-functional, it cannot be said that it is not put
to use for the purpose of business.

ii) The assessee was entitled to depreciation on the
pollution control machinery.”

levitra

Capital gains : Exemption u/s. 54 of I. T. Act, 1961 : A. Y. 1996-97 : Purchase of two flats and combined to make one residential unit : Exemption u/s. 54 available

New Page 1

Capital gains : Exemption u/s. 54 of I. T. Act, 1961 :
A. Y. 1996-97 : Purchase of two flats and combined to make one residential
unit : Exemption u/s. 54 available



 


[CIT vs. D. Ananda Basappa; 309 ITR 329 (Karn).]

In October 1995 the assessee sold a residential house for
Rs.2,12,50,000 resulting in long-term capital gain. The assessee purchased two
residential flats adjacent to each other executing two separate registered
sale deeds in respect of two flats situated side by side, on the same day. The
two flats were modified to make it one residential apartment. The assessee
claimed exemption u/s. 54 in respect of investment in the two flats. It was
found by the inspector that the two flats were in the occupation of two
different tenants. The Assessing Officer held that Section 54(1) does not
permit exemption for the purchase of more than one residential premises and
therefore allowed exemption to the extent of purchase of one residential flat.
The Tribunal allowed the assessee’s claim in full.

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

“i) A plain reading of the provisions of section 54(1) of
the Income-tax Act, 1961, discloses that when an individual or Hindu
undivided family sells a residential building or land appurtenant, he can
invest the capital gains for purchase of a residential building to seek
exemption of the capital gains tax. Section 13 of the General Clauses Act,
1897, declares that whenever a singular is used for a word, it is
permissible to include the plural. The expression ‘a’ residential house
should be understood in a sense that the building should be residential in
nature and ‘a’ should not be understood to indicate a singular number.

ii) It was shown by the assessee that the apartments were
situated side by side. The builder had also stated that he had effected
modifications of the flats to make them one unit by opening the door in
between the two apartments. The fact that at the time when the Inspector
inspected the premises, the flats were occupied by two different tenants was
not a ground to hold that the apartment was not one residential unit. The
fact that the assessee could have purchased both the flats in one single
sale deed or could have narrated the purchase of two premises as one unit in
the sale deed was not a ground to hold that the assessee had no intention to
purchase two flats as one unit. The assessee was entitled to the exemption
u/s. 54.”

levitra

Disclosures regarding provisions for liabilities (as per AS-29)

2. Nestle India Ltd. — (31-12-2009)

From Notes to Accounts :
The Company has created a contingency provision of Rs.457,181 thousands (previous year Rs.325,882 thousands) for various contingencies resulting mainly from matters, which are under litigation/dispute and other uncertainties requiring management judgment. The Company has also reversed/utilised contingency provision of Rs.133,980 thousands (previous year Rs.20,966 thousands) due to the satisfactory settlement of certain disputes for which provision was no longer required. The details of classwise provisions are given below :

Notes:
(a) `Litigations and related disputes — represents estimates made mainly for probable claims arising out of litigations/disputes pending with authorities under various statutes (i.e., Income Tax, Excise Duty, Service Tax, Sales and Purchase Tax, etc.). The provability and the timing of the outflow with regard to these matters depend on the ultimate settlement/conclusion with the relevant authorities.

(b) Others — include estimates made for products sold by the Company which are covered under free replacement warranty on becoming unfit for human consumption during the prescribed shelf life, investments held by the employee benefit trusts and other uncertainties requiring management judgment. The timing and probability of outflow with regard to these matters will depend on the external environment and the consequent decision/conclusion by the management.

3. Fulford India Ltd. — (31-12-2009)

From Notes to Accounts :

Provisions, Contingent Liabilities and Contingent Assets Disclosure for the year December 31, 2009 :

The Company has an understanding with trade associations, based on prevailing trade practices, for the replacement of its date-expired and damaged products upon return of such products subject to certain terms and conditions. With effect from the current financial year; the Company has also opted to replace such products by way of credit notes issued. Provision for replacement of such products of the Company is made, based on the best estimates of the management taking into consideration the type of products sold, the likely returns and the costs required to be incurred for such replacements.

The movement in the provision for such costs is as under :


4. Pfizer Ltd. — (30-11-2009)

From Notes to Accounts :

Personnel-related provisions :

Personnel-related provision at the beginning of the year have been settled based on completion of negotiations and execution of the new contract.

The Company has made provision for pending   assessment in respect of duties and other levies, the outflow of which would depend on the outcome of the respective events.

The movement in the above provisions are summarised as under :

Section B : Assurance Statement for Sustainability Reporting : Infosys Technologies Ltd.

Compiler’s Note :

    Sustainability Reporting is a global development which is fast gaining importance and momentum in India. Infosys Technologies Ltd. has published its first Sustainability Report for 2007-08 which presents an account of economic performance, innovations in solutions, services and products, environmental initiatives, people engagement, and social responsibility in accordance with the Global Reporting Initiative (GRI) framework. An Assurance Statement on the same was also obtained by the company. The same is reproduced below. (Names of the firm/s giving the report have been omitted).

Introduction

    XYZ has been commissioned by the management of Infosys Technologies Limited (‘Infosys’) to carry out an assurance engagement on the Infosys Sustainability Report, 2007-08 (‘the Report’).

    Infosys is responsible for the collection, analysis, aggregation and presentation of information within the Report. Our responsibility in performing this work is to the management of Infosys only and in accordance with terms of reference agreed with the Company. XYZ disclaims any liability or responsibility to a third party for decisions, whether investment or otherwise, based upon this assurance statement.

Scope of Assurance :

    The scope of work agreed upon with Infosys includes the following :

  • The full Report as well as references made in the Report to the annual report and corporate website;

  •  Review of the Report against Global Reporting Initiative (GRI) Sustainability Reporting Guidelines, 2006 and confirmation of the application level;

  •  Reporting boundary as set out in the Report;

  • Visits to the Infosys head-office in Bangalore and two development centres in India.

    The verification was carried out between April and July 2008.

Independence

    XYZ did not provide any services to Infosys during 2007-08 that could conflict with the independence of our work. XYZ was not involved in the preparation of any statements or data included in the Report except for this Assurance Statement.

Verification Methodology

    Our assurance engagement was planned and carried out in accordance with the XYZ Protocol for Verification of Sustainability Reporting, which is based both on the GRI Guidelines and the AA1000 Assurance Standard. XYZ took a risk-based approach throughout the assurance engagement, concentrating on the issues that we believe are most material for both Infosys and its stakeholders.

    As part of the verification we have :

  •  Challenged the sustainability-related statements and claims made in the Report and assessed the robustness of the data management system, information flow and controls;

  • Examined and reviewed documents, data and other information made available to XYZ by Infosys;

  • Visited the head-office and two development centres located in Banagalore and Chennai;

  • Conducted interview with 42 representatives (including data owners and decision-makers from different divisions and functions) of Infosys;

  • Performed sample-based audits of the mechanisms for implementing the Company’s own sustainability-related policies, as described in the Report;

  • Performed sample-based review of processes for determining material issues to be included in the Report.

  • Performed sample-based audits of the processes for generating, gathering and managing the quantitative and qualitative data included in the Report;

  •  Reviewed the process of acquiring information and economic/financial data from the company’s 2007-08 certified consolidated Balance Sheet.

Conclusions

    In XYZ’s opinion, the Infosys Sustainability Report 2007-08 provides a fair representation of the Company’s policies, strategies, management systems, initiatives and projects. The Report meets the general content and quality requirements of the GRI Sustainability Reporting Guidelines, 2006, and XYZ confirms that the GRI requirements for application Level ‘A+’ have been met.

Materiality : Infosys has demonstrated a formal approach to assessing material aspects and indicators for reporting. XYZ recommends that Infosys identifies more indicators, other than GRI indicators, representing material issues for the Information Technology (IT) sector, and that they are incorporated in the future sustainability strategy.

 Completeness : Within the reporting boundary defined by Infosys, we do not believe that the Report omits relevant information that would influence stakeholder assessments of decisions or that reflect significant economic, environmental and social impacts.

Accuracy : XYZ has not found material inaccuracies in the data verified or instances where data is presented in a way which significantly affects the comparability of data.

Neutrality : XYZ considers that the information contained in the Report is balanced. The emphasis on various topics in the Report is proportionate to their relative materiality.

 Comparability : XYZ recognises that this is the first Sustainability Report published by Infosys, and we commend the Company for its commitment to reporting accurate and comparable data. The Report clearly states that for many indicators, especially the Environment Health and Safety (EHS) indicators, the reported information will be the baseline.

Responsiveness : Infosys demonstrates an active commitment to dialogue on sustainability issues with stakeholders. The expectations expressed by stakeholders through different engagement channels have generally been addressed in the Report.

Opportunities for Improvement

The following is an excerpt from the observations and opportunities reported back to the management of Infosys. However, these do not affect our conclusions on the Report, and they are indeed generally consistent with the management objectives already in place.

(b) An internal verification mechanism should be developed to further improve the reliability of data as well as help improve internal communication on sustainability reporting.

(b) Systems and processes should be strengthened to better facilitate reporting on global operations.

(b) The materiality assessment approach should be further developed and refined to identify appropriate indicators for all material issued identified.

Extracts from Certificate on Corporate Governance

New Page 1Section B :
Miscellaneous

Extracts from Certificate on Corporate Governance

Based on such a review and to the best of our information and
according to the explanations given to us, in our opinion, the Company has
complied with the conditions of Corporate Governance as stipulated in Clause 49
of the Listing Agreement of the Stock Exchange of India, except the following :

I. The Company has not applied certain Accounting Standards
as referred to Para 3(d) of our Audit Report dated 31st July 2007;

II. Two complaints of shareholders could not be resolved by
the Company within a reasonable time period of 1 month.


Since the relevant records were not made available to us, we
are unable to comment on the disclosure of all the pecuniary relationships and
transactions of the Company with the Directors.


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Substantial question of law — Whether the assessee was entitled to deduction u/s.80-IA of the Act on the amount of entire eligible income without reducing the amount of export incentives from the same.

New Page 1

6 Substantial question of law — Whether the assessee was
entitled to deduction u/s.80-IA of the Act on the amount of entire eligible
income without reducing the amount of export incentives from the same.


[ACIT v. Neo Sack P. Ltd., (2009) 319 ITR 124 (SC)]

The High Court dismissed the appeal on the aforesaid question
holding that it did not arise from the order of the Tribunal and therefore could
not be made a subject matter of appeal u/s.260A of the Act. On appeal, the
Supreme Court was of the view that the question raised was an important question
of law arising for interpretation of S. 80-IA of the Act. The said question was
neither answered by the Tribunal nor by the High Court. The Supreme Court
therefore granted liberty to the Department to move to the High Court and raise
the issue specifically and in case the High Court found that the answer to the
above question needed factual finding(s), it may remit the case to the Tribunal
for disposal on merits in accordance with law.

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Supreme Court — Special Leave Petition — Order passed by the High Court should be a speaking order — Matter remanded.

New Page 1

5 Supreme Court — Special Leave Petition — Order passed by
the High Court should be a speaking order — Matter remanded.


[Speed Lines P. Ltd. v. CIT, (2009) 316 ITR 102 (SC)]

The High Court had dismissed an appeal filed u/s. 260A of the
Act holding that no substantial question of law arose for its consideration. On
a special leave to the Supreme Court, the order of the High Court was set aside
by the Supreme Court since the order of the High Court was a non-speaking. The
matter was remitted to the High Court for fresh consideration on merits.

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Penalty — Concealment of income — Matter remanded to the High Court since it had relied upon its earlier decision which, though approved by the Supreme Court in some other matter, was later held to not lay down the correct law by Larger Bench of the Supre

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4 Penalty — Concealment of income — Matter remanded to the
High Court since it had relied upon its earlier decision which, though approved
by the Supreme Court in some other matter, was later held to not lay down the
correct law by Larger Bench of the Supreme Court.


[CIT v. Atul Mohan Bindal, (2009) 317 ITR 1 (sc)]

Atul Mohan Bindal, the assessee, filed return of his income
for the A.Y. 2002-03, declaring his total income at Rs.1,98,50,021. In the
assessment proceedings u/s.143, a notice along with questionnaire was issued to
him by the Assessing Officer. Pursuant thereto, the assessee attended the
assessment proceedings and furnished the requisite details. During the
assessment proceedings, it transpired that the assessee worked with M/s. DHL
International(S) Pte. Ltd., Singapore, during the previous year and was paid
salary in Singapore amounting to US $ 36,680.79 equivalent to Rs. 17,81,952. The
assessee explained that an amount of US $ 8199.87 (Rs.3,98,350) was deducted as
tax from the aforesaid salary income and having paid tax on salary income earned
in Singapore, he was of the view that the said income was not liable to be
included in the total income in India. He, however, offered salary income of
Rs.17,81,952 to be included in his total income. The assessee was also found to
have received an amount of Rs. 5,00,000 from his erstwhile employer M/s.
Honey-well International (India) Pvt. Ltd. in the previous year. His explanation
was that the said amount was exempted u/s.10(10B) of the Act being retrenchment
compensation. According to the Assessing Officer, that amount could not be
exempted u/s.10(10B), as the assessee was not a workman. The assessee also
earned interest income of Rs.22,812 from Bank of India, which was not included
by him in the total income but he offered for tax the said amount. The AO,
accordingly, added Rs.17,81,952, Rs.5,00,000 and Rs. 22,812 to the income
declared by the assessee in the return and assessed the total income of the
assessee at Rs.2,21,54,785. Penalty proceeding u/s. 271(1)(c) were initiated
separately and penalty of Rs.7,75,211 was imposed.

The assessee accepted the order of assessment but challenged
the order of penalty in appeal before the Commissioner of Income-tax (Appeals).

The Commissioner of Income-tax (Appeals) allowed the appeal
and set aside the order of penalty. The Commissioner of Income-tax (Appeals)
held that the assessee has neither concealed the particulars of his income, nor
furnished any inaccurate particulars thereof.

The Tribunal upheld the order of the Commissioner of
Income-tax (Appeals).

The Delhi High Court considered the question whether the
Assessing Officer had recorded a valid satisfaction for initiating penalty
proceedings u/s.271(1)(c) of the Act. Inter alia, relying upon a decision of
that Court in CIT v. Ram Commercial Enterprises Ltd., (2000) 246 ITR 568 (Delhi)
and noticing that Ram Commercial Enterprises had been approved by the Supreme
Court in Dilip N. Shroff v. Joint CIT, (2007) 291 ITR 519 (SC) and T. Ashok Pai
v. CIT, (2007) 292 ITR 11, held that from the reading of the assessment order,
it was not discernible as to why the AO chose to initiate proceedings against
the assessee and under which part of S. 271(1)(c). The High Court, therefore,
accepted the view of the Tribunal and the Commissioner of Income-tax (Appeals)
and dismissed the appeal of the Revenue with cost of Rs.5,000.

On an appeal, the Supreme Court held that a close look at S.
271(1)(c) and Explanation 1 appended thereto would show that in the course of
any proceedings under the Act, inter alia, if the Assessing Officer is satisfied
that a person has concealed the particulars of his income or furnished
inaccurate particulars of such income, such person may be directed to pay
penalty. The quantum of penalty is prescribed in clause (iii). Explanation 1,
appended to S. 271(1) provides that if that person fails to offer an explanation
or the explanation offered by such person is found to be false or the
explanation offered by him is not substantiated and he fails to prove that such
explanation is bona fide and that all the facts relating to the same and
material to the computation of his total income have been disclosed by him, for
the purposes of S. 271(1)(c), the amount added or disallowed in computing the
total income is deemed to represent the concealed income. The penalty spoken of
in S. 271(1)(c) is neither criminal nor quasi-criminal but a civil liability;
albeit a strict liability. Such liability being civil in nature, mens rea is not
essential.

The Supreme Court further held that insofar as the present
case was concerned, as noticed above, the High Court had relied upon its earlier
decision in Ram Commercial Enterprises Ltd. (2000) 246 ITR 568 (Delhi) which is
said to have been approved by the Supreme Court in Dilip N. Shroff (2007) 291
ITR 519. However, Dilip N. Shroff (2007) 291 ITR 519 was held to be not laying
down good law in Dharamendra Textile (2008) 306 ITR 277 (SC) and Dharmendra
Textile was explained by the Supreme Court in Rajasthan Spinning and Weaving
Mills (2009) 8 Scale 231. According to the Supreme Court the matter therefore
needed to be reconsidered by the High Court in the light of its decisions in
Dharmendra Textile (2008) 306 ITR 277 (SC) and Rajasthan Spinning and Weaving
Mills (2009) 8 Scale 231.

The Supreme Court therefore allowed the appeal and the
judgment of the High Court of Delhi was set aside. The matter was remitted back
to the High Court for fresh consideration and decision as indicated above.



Notes :

(i) The assessee had chosen not
to appear.

(ii) Also see judgment in the
case of Reliance Petroproducts Pvt. Ltd. (322 ITR 1 — SC) analysed in ‘Closements’.


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Kar Vivad Samadhan Scheme, 1998 — What is conclusive is the order passed U/ss.(1) of S. 90 of the Scheme determining the sum payable under the Scheme and the terms ‘direct tax enactment’ or ‘indirect tax enactment’ or ‘any other law for the time being in

New Page 1

6. Kar Vivad Samadhan Scheme, 1998 — What is
conclusive is the order passed U/ss.(1) of S. 90 of the Scheme determining the
sum payable under the Scheme and the terms ‘direct tax enactment’ or ‘indirect
tax enactment’ or ‘any other law for the time being in force’ refer only to
those statutes under which the order had been passed. Immunity is only in
respect of institution of any proceeding for prosecution of any offence under
direct tax enactment or indirect tax enactment or from imposition of penalty
under any of such enactments.


[ Master Cables P. Ltd. v. State of Kerala and
Anr., (2008) 296 ITR 8 (SC)]

The appellant was engaged in the business of manufacture and
sale of insulated electrical cable. It was registered under the Kerala General
Sales Tax Act, 1963 (for short, ‘the Act’). Assessment proceedings in respect of
the A.Ys. 1995-96 and 1996-97 were completed relying upon or on the basis of the
books of account maintained by it. An inspection, however, was carried out in
the premises of the appellant. A certain amount of unaccounted production and
sale of goods was found. The appellant admittedly took recourse to the
provisions of the Kar Vivad Samadhan Scheme. Declaration made by it thereunder
was accepted. By an order dated January 14, 2003, the earlier assessment order
was set aside. The appellant filed an appeal before the Kerala Sales Tax
Appellate Tribunal. The matter was remitted to the Deputy Commissioner for its
re-examination. By an order dated May 20, 2003, the assessment in respect of the
A.Y. 1996-97 was set aside. The said authority directed reassessment for the
year 1995-96 by an order dated November 7, 2003. Questioning the said orders,
appeals were filed by the appellant before the Tribunal, which by reason of a
common judgment dated December 21, 2005, were dismissed. Two sales tax revisions
were filed thereagainst before the High Court, which by reason of the impugned
judgment had been dismissed. Before the Supreme Court it was contended by the
appellant that having regard to the provisions of Ss.(3) of S. 90 of the Scheme,
the term ‘any other law for the time being in force’ must be given a wide
meaning, so as to cover not only the direct tax or indirect tax envisaged
thereunder, but also the sales tax laws of the State in the light of the
provisions of clause (3) of Article 286 of the Constitution of India and
sub-clauses (c) and (d) of clause (29A) of Article 366 thereof. After
considering the provision of S. 90(3) and S. 91 of the Kar Vivad Samadhan
Scheme, the Supreme Court held that what is conclusive is the order passed U/ss.(1)
of S. 90 of the Scheme determining the sum payable under the Scheme. The terms
‘direct tax enactment’ or ‘indirect tax enactment’ or ‘any other law for the
time being in force’ refer only to those statutes under which the order had been
passed. Immunity is in respect of institution of any proceeding for prosecution
of any offence under direct tax enactment or indirect tax enactment or from
imposition of penalty under any of such enactments. The terms ‘direct tax
enactment’ and ‘indirect tax enactment’ have been defined u/s.87(h) and 87(j) of
the Scheme. Admittedly, the case of the appellant did not come within the
purview thereof. The amplitude of the provisions of the Scheme having been
extended only to the enactments made by Parliament, having regard to the
constitutional scheme contained in Article 246 of Constitution of India, the
same cannot be extended to assessment of sales tax under a State legislation.
The legislative field to enact a law relating to sales tax is within the
exclusive domain of a State Legislature in terms of entry 54, List II of the
Seventh Schedule to the Constitution of India. The Supreme Court held that once
it is found that a statutory authority had the jurisdiction to reopen a
proceeding or set aside the order of the assessing authority, only the higher
authorities can interfere therewith. Only because the appellant had taken
recourse to the Scheme, the same would not attract either Ss.(3) of S. 90 of the
Scheme or S. 91 thereof, so as to cover a subject which is within an exclusive
domain of the State Legislature. The appeal was therefore dismissed.

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Charitable purpose — Charitable Institution — Statutory body established for the predominant purpose of development of minor ports the management of which is with the State Government and where there is no profit motive covered within the meaning of the w

New Page 1

5 Charitable purpose — Charitable Institution
— Statutory body established for the predominant purpose of development of minor
ports the management of which is with the State Government and where there is no
profit motive covered within the meaning of the words any other object of
general public utility in S. 2(15) of the Act and is entitled to registration
u/s.12A


[ CIT v. Gujarat Maritime Board, (2007) 295
ITR 561 (SC)]

The Gujarat Maritime Board is a statutory authority
constituted u/s.3(2) of the Gujarat Maritime Board Act, 1981. The Board was
registered as ‘local authority’ in terms of definition u/s.3(31) of the General
Clauses Act, 1897, and was availing of exemption as local authority u/s.10(20)
of the 1961 Act. By the Finance Act, 2002, an Explanation was added in S. 10(20)
of the Income-tax Act, by which ‘local authority’ was defined. It gave a
restricted meaning to the words ‘local authority’. By reason of the said
Explanation, the expression ‘local authority’ was confined to panchayats,
municipality, municipal committee, district board and cantonment board. Thus,
the Maritime Board did not come within the definition of the expression ‘local
authority’. Under the circumstances, the Gujarat Maritime Board made an
application to the Commissioner for registering it (Board) as a ‘charitable
institution’ as defined u/s.2(15) of the Income-tax Act, 1961. Accordingly, they
claimed exemption as charitable institution in respect of income derived from
their profit/business u/s.11 of the 1961 Act. This has been denied by the
Department. One of the objections raised on behalf of the Department was that
the Gujarat Maritime Board was not entitled to the benefit of S. 11 of the 1961
Act, as the said Board was not a trust under the Public Trusts Act and,
therefore, it was not entitled to claim registration u/s.12A of the 1961 Act.
The Department’s case was that the Maritime Board was a statutory authority. It
was the case of the Department that the Board was performing statutory
functions. Development of minor ports in the State of Gujarat cannot be termed
as the work undertaken for charitable purposes and in the circumstances the
Commissioner rejected the Board’s application u/s.12A of the 1961 Act. On an
appeal, after perusal of number of decisions which have interpreted the words in
S. 2(15), namely, ‘any other object of general public utility’, the Supreme
Court held that the said expression is of the widest connotation. The word
‘general’ in the said expression means pertaining to a whole class. Therefore,
advancement of any object of benefit to the public or a section of the public as
distinguished from benefit to an individual or a group of individuals would be
charitable purpose. The said expression would prima facie include all
objects which promote the welfare of the general public. It cannot be said that
a purpose would cease to be charitable even if public welfare is intended to be
served. If the primary purpose and the predominant object are to promote the
welfare of the general public, the purpose would be charitable. When an object
is to promote or protect the interest of a particular trade or industry, that
object becomes an object of public utility, but not so if it seeks to promote
the interest of those who conduct the said trade or industry. If the primary or
predominant object of an institution is charitable, any other object which might
not be charitable, but which is ancillary or incidental to the dominant purpose,
would not prevent the institution from being a valid charity. According to the
Supreme Court, the present case was squarely covered by its judgment in the case
of CIT v. Andhra Pradesh State Road Transport Corporation, (1986) 159 ITR
1 (SC), in which it has been held that since the Corporation was established for
the purpose of providing efficient transport system, having no profit motive,
through it earns income in the process, it is not liable to Income-tax. The
Supreme Court further observed that under the scheme of S. 11(1) of the 1961
Act, the source of income must be held under trust or under other legal
obligation. Applying the said test, it was clear that the Gujarat Maritime Board
was under legal obligation to apply the income which arose directly and
substantially from the business held under trust for the development of minor
ports in the State of Gujarat. Therefore, they were entitled to be registered as
‘charitable trust’ u/s.12A of the 1961 Act.

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ACC LTD. — (31-12-2007)

New Page 1ACC LTD. — (31-12-2007)

From Notes to Accounts :

There are no Micro, Small and Medium Enterprises, as defined
in the Micro, Small and Medium Enterprises Development Act, 2006 to whom the
Company owes dues on account of principal amount together with interest and
accordingly no additional disclosures have been made.

The above information regarding Micro, Small and Medium
Enterprises has been determined to the extent such parties have been identified
on the basis of information available with the Company. This has been relied
upon by the auditors.


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FULFORD (INDIA) LTD. — (31-12-2007)

New Page 1FULFORD (INDIA) LTD. — (31-12-2007)

From Notes to Accounts :

The Company has not received any intimation from the
suppliers regarding status under the Micro, Small and Medium Enterprises
Development Act, 2006 (the act) and hence disclosure regarding :

(a) Amount due and outstanding to suppliers as at the end
of accounting year;

(b) Interest paid during the year;

(c) Interest payable at the end of the accounting year, and

(d) Interest accrued and unpaid at the end of the
accounting year, has not been provided.


The Company is making efforts to get the confirmations from
the suppliers as regards their status under the Act.


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Honeywell Automation India Ltd. — (31-12-2007)

New Page 1HONEYWELL AUTOMATION INDIA LTD. — (31-12-2007)

From Notes to Accounts :

Disclosure in accordance with Section 22 of the Micro, Small
and Medium Enterprises Development Act, 2006 :

Particulars

Amount (Rs.
‘000)

(a) Principal amount remaining unpaid and

206,945

Interest due
thereon

—

(b) Interest
paid in terms of Section 16

—

(c) Interest due and payable for the period of delay in
payment

—

(d) Interest accrued and remaining unpaid

—

(e) Interest due and payable even in succeeding years

—

The Company has compiled the above information based on
verbal confirmations from suppliers. As at the year end, no supplier has
intimated the Company about its status as a Micro or Small Enterprise or its
registration under the Micro, Small and Medium Enterprises Development Act,
2006.

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MRF LTD. — (30-9-2007)

New Page 1MRF LTD. — (30-9-2007)

From
Schedules :

A. Current
Liabilities :

Rs. crore

Rs. crore

Sundry Creditors :

Outstanding dues of Micro Enterprises & Small Enterprises
(Note 5)

3.30

1.50

Outstanding dues of creditors other than Micro
Enterprises & Small Enterprises

411.68

370.73


From Notes to Accounts :




8. There are no delays in the payment of dues to micro,
small and medium enterprises, to the extent such parties have been identified
on the basis of information available with the Group. Previous year’s figures
stated in Schedule 8 represent amounts due to small-scale industrial
undertakings.



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HINDUSTAN UNILEVER LTD.

New Page 1HINDUSTAN UNILEVER LTD.

— (31-12-2007)

From Schedule :

Sundry Creditors (Refer Note 21)

From Notes to Accounts :

There are no Micro and Small Enterprises, to whom the Company
owes dues, which are outstanding for more than 45 days as at 31st December,
2007. This information as required to be disclosed under the Micro, Small and
Medium Enterprises Development Act, 2006 has been determined to the extent such
parties have been identified on the basis of information available with the
Company.

&

HONEYWELL AUTOMATION INDIA LTD. — (31-12-2007)


From Notes to Accounts :

Disclosure in accordance with Section 22 of the Micro, Small
and Medium Enterprises Development Act, 2006 :

Particulars

Amount (Rs.
‘000)

(a) Principal amount remaining unpaid and

206,945

Interest due
thereon

—

(b) Interest
paid in terms of Section 16

—

(c) Interest due and payable for the period of delay in
payment

—

(d) Interest accrued and remaining unpaid

—

(e) Interest due and payable even in succeeding years

—

The Company has compiled the above information based on
verbal confirmations from suppliers. As at the year end, no supplier has
intimated the Company about its status as a Micro or Small Enterprise or its
registration under the Micro, Small and Medium Enterprises Development Act,
2006.

levitra

S & S Power Switchgear Ltd.

New Page 1S & S POWER SWITCHGEAR LTD.

— (30-9-2007)

From Notes to Accounts :

7. The Company is in the process of identifying the
small-scale units and Micro, Small and Medium Enterprises and hence :

(a) Interest, if any, payable as per Interest on Delayed
Payment to Small Scale and Ancillary Industrial Undertakings Ordinance, 1993
and the Micro, Small and Medium Enterprises Development Act, 2006 is not
ascertainable, and

(b) Amount payable to small-scale units is not
ascertainable.


From Auditors’ Report :



(g) Subject to the foregoing, in our opinion and to the
best of our information and according to the explanations given to us, the
said financial statements read along with the notes thereon, subject to the
dues to the small-scale industry units (Refer Note 7 of Schedule 15), give
the information required by the Companies Act, 1956, in the manner so required
and give a true and fair view in conformity with the accounting principle
generally accepted in India.



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Abbott India Ltd. — (30-11-2007)

New Page 1ABBOTT INDIA LTD. — (30-11-2007)

From Schedules :

A. Current Liabilities :

 
Rupees in millions
As at 30-11-2006 Rupees in millions

Sundry Creditors :

Due to Micro & Small Enterprises (Refer Note B 27 —
Schedule 16)

—
 —

Others†
308.4
286.6

† Previous year includes an amount of Rs.36.7 million due to
small-scale industrial undertakings.



From Notes to Accounts :




(a) An amount of Rs.4.4 million and Nil was due and
outstanding to suppliers as at the end of the accounting year on account of
Principal and Interest, respectively.

(b) No interest was paid during the year.

(c) No interest is payable at the end of the year other
than interest under the Micro, Small and Medium Enterprises Development Act,
2006.

(d) No amount of interest was accrued and unpaid at the end
of the accounting year.

The above information and that given in Schedule 10 —
‘Current Liabilities and Provisions’ regarding Micro, Small and Medium
Enterprises has been determined to the extent such parties have been
identified on the basis of information available with the Company. This has
been relied upon by the auditors.



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Income from undisclosed sources — Should be taxed in the year of receipt — Matter remanded for fresh adjudication.

New Page 1

Glimpses of Supreme Court Rulings

Kishor Karia
Chartered Accountant
Atul Jasani
Advocate

8 Income from undisclosed sources — Should be taxed in the
year of receipt — Matter remanded for fresh adjudication.

[Fifth Avenue v. CIT, (2009) 319 ITR 132 (SC)]

The appellant, a registered partnership firm consisted of 15
partners. The firm was being managed by three partners by name, Irfan Razak, K.
Rahman Khan and Sadath Ali Khan. The firm constructed a commercial complex known
as ‘Fifth Avenue’ consisting of ground + three floors. The building consisted of
82 commercial shops. The building was under construction till the end of
January, 1993. Different shops were sold by the firm under different sale deeds
to several buyers. On January 5, 1993, exercising the powers u/s.132 of the
Income-tax Act, M/s. India Builders Corporation (which was also a partnership
firm) was searched. During the search, a document pertaining to the
appellant-firm was seized. Based on the documents seized during the search
conducted in the premises of one of the partners of the appellant-firm, the
proceedings were initiated. According to the Revenue, while selling different
portions of the building apart from the sale consideration shown in the sale
deeds, the firm had also received additional sale consideration by cash which
had not been accounted and the consideration shown in the sale deeds were
received by the firm through cheques. An enquiry was conducted and the Assessing
Officer held that the unaccounted income of the assessee-firm had to be brought
to tax. Accordingly, the appellant-firm was called upon to pay tax
Rs.1,52,49,240 and also ordered for separate penalty proceedings u/s.271(1)(c)
of the Act challenging the order passed by the Assessing Officer. The appellant-assessee
filed an appeal before the Commissioner of Income-tax (Appeals). The
Commissioner of Income-tax (Appeals) after hearing the parties allowed the
appeal on the ground that the document seized was not while conducting a search
on the premises of the assessee and there was nothing to show that unaccounted
money was received by the firm and that the computer printout could not be
linked with the transaction pertaining to the appellant. Therefore, the appeal
filed by the assessee was allowed by the Commissioner of Income-tax (Appeals),
against which, the Revenue took up the matter in appeal before the Tribunal,
Bangalore Bench. The Tribunal, Bangalore Bench, after examining the legality and
the correctness of the order passed by the Assessing Officer and so also the
order passed by the Commissioner of Income-tax (Appeals) came to the conclusion
that even though the document was seized from the premises of a partner of the
appellant-firm — India Builders Corporation, as the document was pertaining to
the appellant-firm and that the seizure of the document from the premises of
India Builders Corporation had not been denied by the appellant-firm,
considering the provisions of S. 3(18) of the General Clauses Act and also the
presumption attached u/s.132(4A) of the Income-tax Act, held that the partners
of the appellant-firm have received unaccounted money in cash and the same had
to be brought into assessment. According to the Tribunal, the statement of Mr.
Ziaulla Sheriff disclosed that he was a partner of 10% share and his son, Yunuz
Zia, was also a partner of 10% share and Irfan Razack was the main partner
managing the affair of the firm and that Irfan Razak was examined on February
24, 1993. In his evidence he had denied the receipt of cash on behalf of the
appellant-firm, but he had admitted the contents of the seized printout
material. Relying upon the evidence of Irfan Razak, the Tribunal came to the
conclusion that the partners of the firm accepted the contents of the printout
taken from the computer in respect of the appellant-firm from India Builders
Corporation and, therefore, came to the conclusion that the Commissioner of
Income-tax (Appeals) has committed an error in allowing the appeal. Accordingly,
the order passed by the Commissioner of Income-tax (Appeals) was set aside and
the order passed by the Assessing Officer was restored.

The Karnataka High Court in the appeal filed before it held
that even though the appellant-firm’s premises was not searched, when an
important document was seized by the authorities from the premises of the
partners of the appellant-firm, it was for the appellant to show that the
appellant or any of its partners did not receive such money by way of cash which
had not been disclosed in the return filed by the appellant. When the appellant
was contending that it had not received cash from the purchasers and that the
sale consideration shown in the sale deeds alone was paid to the appellant, the
onus was on the appellant to examine its partners to dispel such contentions.
When the appellant had admitted the seizure of the documents in question from
the premises of its partners, Ziaulla Sheriff and Yunus Zia, it was for them to
explain that this particular document was not pertaining to the partnership
concern of the appellant and it is also for them to show under that
circumstances the said document was in possession of its partners and similarly
it was for them to show the said document had nothing to do with the business
activities of the appellant. It was held that the Tribunal was justified in
reversing the finding of the Commissioner of Income-tax (Appeals).

The High Court however noted that the Tribunal while
considering the matter pertaining to penalty proceedings initiated u/s.272(1)(c)
of the Income-tax Act had remanded the matter to the Assessing Officer to
ascertain and give a finding whether the entire unaccounted money of
Rs.2,32,28,173 was received in the A.Y. 1993-94 and whether the same was
received by the partners of the appellant-firm on different dates and that the
amount so received had to be spread over based on the actual receipt of the
money in different assessment years. Relying upon the order of the Tribunal
rendered in penalty proceedings, it was contended before the High Court that
even in quantum appeal, the matter had to be reconsidered by the Assessing
Officer in order to ascertain whether the amount of Rs.2,32,28,173 was received
by the partners of the firm during the A.Y. 1993-94 or not.

The High Court observed that the search material showed that
payments were made on different dates. The High Court found that the entire
unaccounted money had been brought into tax for the A.Y. 1993-94, which in fact
was not fully correct. The High Court was therefore, of the view that the order
passed by the Assessing Officer had to be set aside and the matter had to be
remanded to the Assessing Officer to find out whether Rs.2,32,28,173 was
received by the partners of the appellant-firm during the A.Y. 1993-94 or not,
and based on such finding, the assessment had to be completed. The High Court
held that it was for the appellant and his partners to explain and produce
relevant documents before the Assessing Officer to show that when and how the
aforesaid amount of Rs.2,32,28,173 was received by them. If the partners of the
appellant-firm were unable to produce any material evidence, then it was for the
Assessing Officer to complete the assessment, treating that the amount had been
received by the partners of the appellant-firm during the A.Y. 1993-94 only. The High Court further held that in view of the assessment being set aside,
at the request of the assessee, the assessee would not raise any question of
limitation.

In an
appeal before the Supreme Court it was con-tended by the appellant that the
High Court had failed to answer the question as to whether the amount allegedly
paid by the purchasers on different dates to the managing partners of the firm
could be brought to tax in the hands of the appellant firm. The Supreme Court
found merit in the contention of the appellant, but as the other question was
remanded by the High Court to the Assessing Officer, the Supreme Court also
remanded the issue to the Assessing Officer for fresh consideration in accordance
with law.

Estate duty — Valuation of goodwill — Super Profits method — There is no hard and fast rule regarding multiplier to be applied for evaluating goodwill — Value would depend on the nature of business and prevailing market conditions — Property passing on de

New Page 1

10 Estate duty — Valuation of goodwill — Super Profits method
— There is no hard and fast rule regarding multiplier to be applied for
evaluating goodwill — Value would depend on the nature of business and
prevailing market conditions — Property passing on death — Claim pending
adjudication on date of death — Not a property available at the time of death.


[Controller of Estate Deputy v. Nalini V. Saraf, (2009) 319
ITR 303 (SC)]

One V. G. Saraf passed away on October 18, 1984. He was a
partner in M/s. Saraf Trading Corporation, a partnership firm carrying on
business as commission agents and exporters of tea. It exported tea to U.S.S.R.
The firm was constituted under deed of partnership dated November 27, 1963. The
firm had three partners. The deceased had fifty per cent share in profit and
loss. On September 16, 1981, the firm was reconstituted with the admission of
one more partner and a minor. The Assistant Controller of Estate Duty, inter
alia, held that for determining the value of goodwill, there were two methods of
valuation, namely, super profits method and total capitalisation method. The
Assistant Controller
preferred the super profits method. Applying the super profits method, the
Assistant Controller applied the multiplier of three years’ purchase, whereas
the assessee-respondent contended that 3X was excessive. The Assistant
Controller further held that refund of income-tax, which became due after the
demise of V. G. Saraf, constituted property of the deceased, which was also
disputed by the legal representatives of the deceased.

On the facts, the Tribunal found that at the relevant time,
the market conditions in the U.S.S.R. were not congenial; that there was huge
volatility in the tea export business even otherwise; and in the circumstances,
the Tribunal applied the multiplier of one year’s purchase instead of three
years’ purchase. This finding was upheld by the High Court.

The Supreme Court noted that in this case, the method was not
in dispute. The Supreme Court held that there was no hard and fast rule
regarding the multiplier to be applied for evaluating the goodwill of the firm.
It all depended on the nature of the business and the prevailing market
conditions. Hence, the Supreme Court was of the view that this aspect was a pure
question of fact and did not call for interference by the Supreme Court.

On the question as to whether the refund in question, which became payable
after the death, the Tribunal and the High Court concurrently held that the
refund had not become due (crystallised) on October 18, 1984, when V. G. Saraf
passed away. In fact, on that day, the claim for refund under the Act was
pending adjudication. Such refund stood determined only after the deceased.
Hence, the Supreme Court held that such refund could not be considered to be a
property available at the time of the death.

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Rectification of mistake — Whether power subsidy received by an assessee is revenue receipt or capital receipt has to be decided on the facts of each case after examining the scheme of subsidy and therefore cannot be a subject matter of rectification on t

New Page 1

9 Rectification of mistake — Whether power subsidy received
by an assessee is revenue receipt or capital receipt has to be decided on the
facts of each case after examining the scheme of subsidy and therefore cannot be
a subject matter of rectification on the basis of some subsequent decision of
the Supreme Court.


[Mepco Industries Ltd. v. CIT, (2009) 319 ITR 208 (SC)]

The appellant, engaged in the business of manufacture of
potassium chlorates, had its factory in the Union Territory of Pondicherry. The
appellant received power subsidy for two years, which it initially offered as
revenue receipt in its return of income. In the petition filed u/s.264 of the
Act, the assessee pleaded that the subsidy amount was a capital receipt, hence
not liable to be taxed, and accordingly, it sought revision of the assessment
orders for the A.Ys. 1993-94 and 1994-95. In the revision petitions, the
appellant had pleaded that the subsidy amount was a capital receipt, and for
that purpose, it relied upon the judgment of the Supreme Court in the case of
CIT v. P. J. Chemicals Ltd. reported in (1994) 210 ITR 830. The revision
petitions filed by the appellant u/s.264 of the Act stood allowed by the
Commissioner of Income-tax by order dated April 30, 1997. Subsequent to the said
order, on September 19, 1997, the Supreme Court in the case of Sahney Steel and
Press Works Ltd. (1997) 228 ITR 253 held that incentive subsidy admissible to
Sahney Steel and Press Works Limited was a revenue receipt, and hence, it was
liable to taxed u/s.28 of the Act. This decision was based on a detailed
examination of the subsidy scheme formulated by the Government of Andhra
Pradesh. It stated that incentives would not be available unless and until
production had commenced. In that matter, the Supreme Court found that
incentives were given by refund of sales tax and by subsidy on power consumed
for production. In short, on the facts and circumstances of that case, the
Supreme Court had come to the conclusion that the incentives were production
incentives in the sense that the assessee was entitled to incentives only after
entering into production. It was also clarified that the scheme was not to make
any payment directly or indirectly for setting up the industries.

Following the said judgment of the Supreme Court in the case
of Sahney Steel and Press Works Ltd. (1997) 228 ITR 253, delivered on September
19, 1997, the Commissioner of Income-tax passed an order of rectification dated
March 30, 1998. The only ground on which the rectification was sought to be made
by the Commissioner of Income-tax was that power tariff subsidy given to the
appellant herein was admissible only after commencement of production.
Consequently, according to the Commissioner of Income-tax, power tariff subsidy
constituted operational subsidies, they were not capital subsidies, and in the
circumstances, applying the ratio of judgment of this Court in the case of
Sahney Steel and Press Works Ltd. (1997) 228 ITR 253, the Commissioner of
Income-tax sought to rectify its earlier order dated April 30, 1997, by invoking
S. 154 of the Act. Aggrieved by the said order, the appellant filed writ
petitions before the Madras High Court, which took the view that, in view of the
subsequent decision of this Court, in the case of Sahney Steel and Press Works
Ltd. (1997) 228 ITR 253, the Department was entitled to invoke S. 154 of the Act
and that the Commissioner was right in treating the receipt of subsidies as a
revenue receipt. This decision of the learned single Judge was affirmed by the
Division Bench of the Madras High Court.

On appeal by special leave, the Supreme Court held that on
the facts of the present case, it was of the view that the present case involved
change of opinion. The Supreme Court observed that the Government grants
different types of subsidies to the entrepreneurs. The subsidy in Sahney Steel
and Press Works Ltd. (1997) 228 ITR 253 (SC) was an incentive subsidy linked to
production. In fact, in Sahney Steel and Press Works Ltd. (1997) 228 ITR 253
(SC) (at page 257), the Court categorically stated that the scheme in hand was
an incentive scheme and it was not a scheme for setting up the industries. In
the said case, the salient features of the scheme were examined and it was
noticed that the scheme formulated by the Government of Andhra Pradesh was
admissible only after the commencement of production. The Supreme Court held
that in income-tax matters, one has to examine the nature of the item in
question, which would depend on the facts of each case. In the present case, it
was concerned with power subsidy, whereas in the case of CIT v. Ponni Sugars
and Chemicals Ltd. reported in (2008) 306 ITR 392, the subsidy given by the
Government was for repaying loans. Therefore, in each case, one has to examine
the nature of subsidy. This exercise cannot be undertaken u/s.154 of the Act.
There is one more reason why S. 154 in the present case was not invokable by the
Department. Originally, the Commissioner of Income-tax, while passing orders
u/s.264 of the Act on April 30, 1997, had taken the view that the subsidy in
question was a capital receipt not taxable under the Act. After the judgment of
the Supreme Court in Sahney Steel and Press Works Ltd. (1997) 228 ITR 253, the
Commissioner of Income-tax took the view that the subsidy in question was a
revenue receipt. Therefore, according to the Supreme Court, the case before it
was a classic illustration of change of opinion.

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Companies — MAT — Provision for bad and doubtful debts is not for meeting liability and cannot be added back in computing ‘book profits’ under Section 115JA(2)(c).

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10.  Companies — MAT — Provision for bad and doubtful
debts is not for meeting liability and cannot be added back in computing ‘book
profits’ under Section 115JA(2)(c).


 

[CIT vs. HCL Comnet Systems and Services Ltd.,
(2008) 305 ITR 409 (SC)].

The assessee-company was engaged in trading in data
communication equipment and satellite communication services. During the
course of assessment proceedings, the Assessing Officer found that the
assessee had debited an amount of Rs.92,15,187 on account of bad debts to the
profit and loss account. However, on the ground that it was a provision for
bad and doubtful debts, the Assessing Officer added the aforestated amount to
the book profits as per Explanation (c) to Section 115JA of the Act.

On appeal, the Commissioner of Income-tax (Appeals) allowed
the assessee’s appeal. That decision of the Commissioner of Income-tax
(Appeals) stood affirmed by the Tribunal and also by the High Court.

On further appeal by the Revenue, the Supreme Court held
that the Assessing Officer does not have the jurisdiction to go beyond the net
profit shown in the profit and loss account except to the extent provided in
the Explanation. The Assessing Officer has to make adjustment permissible
under the Explanation given in Section 115JA of the 1961 Act.

The said Explanation has provided six items, viz.,
item Nos. (a) to (f), which if debited to the profit and loss account can be
added back to the net profit for computing the book profit.

Item (c) deals with amount(s) set aside as provision made
for meeting liabilities, other than ascertained liabilities. The assessee’s
case would, therefore, fall within the ambit of item (c) only if the amount is
set aside as provision; the provision is made for meeting a liability; and the
provision should be for other than an ascertained liability, i.e., it
should be for an unascertained liability. The Supreme Court observed that
there are two types of ‘debt’. A debt payable by the assessee is different
from a debt receivable by the assessee. A debt is payable by the assessee
where the assessee has to pay the amount to others, whereas the debt
receivable by the assessee is an amount which the assessee has to receive from
others. In the present case, the ‘debt’ under consideration was a ‘debt
receivable’ by the assessee. The provision for bad and doubtful debt,
therefore, is made to cover up the probable diminution in the value of the
asset, i.e., debt which is an amount receivable by the assessee.
Therefore, such a provision cannot be said to be a provision for a liability,
because even if a debt is not recoverable, no liability could be fastened upon
the assessee. In the present case, the debt is the amount receivable by the
assessee and not any liability payable by the assessee and, therefore, any
provision made towards irrecoverability of the debt cannot be said to be a
provision for liability. The Supreme Court therefore was of the view that item
(c) of the Explanation was not attracted to the facts of the present case. In
the circumstances, the Assessing Officer was not justified in adding back the
provision for doubtful debts of Rs.92,15,187 under clause (c) of the
Explanation to Section 115JA of the 1961 Act.

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Export Business — Deduction U/s. 80 HHC — For the Assessment Year 1990-91, Section 80 HHC(3) statutorily fixes the quantum of deduction on the basis of proportion of business profits under the head ‘Profits and gains of business or profession’, irrespecti

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9.  Export Business — Deduction U/s. 80 HHC — For the
Assessment Year 1990-91, Section 80 HHC(3) statutorily fixes the quantum of
deduction on the basis of proportion of business profits under the head ‘Profits
and gains of business or profession’, irrespective of what could strictly be
described as profits derived from export of goods out of India.


 

[Modyset P. Ltd. vs. CIT (2008) 305 ITR 276 (SC)].

The asessee, a limited company, purchased 105 computers for
Rs.90,91,063. It exported them and realised export sales of Rs.90,91,063.
There was no export profit during the relevant assessment year 1990-91. The
Income-tax Officer allowed the claim of deduction under Section 80HHC at
Rs.15,81,389 as the total business income of the assessee stood at
Rs.55,31,941 by applying the ratio in terms of Section 80HH(3)(b) as follows :

Export Profits = 90,91,063 x 55,31,941

3,18,01,941

The Commissioner of Income-tax revised the aforesaid
assessment order in exercise of his powers under Section 263 denying the
deduction under Section 80 HHC, holding that Section 80 HHC confers the
benefit only on those assessees who have not only carried on the export
business, but who have also derived profits on such business. On an appeal,
the Tribunal allowed the assessee’s appeal following the decision of its Delhi
Special Bench in International Research Park Laboratories Ltd. vs. Asst.
CIT [(1995) 212 ITR (AT) 1], in which it was held that profits need not be
earned in the export business alone to claim special deduction under Section
80 HHC. On a reference by the Revenue, the Karnataka High Court following the
decision of the Supreme Court in Ipca Laboratory Ltd. vs. Dy CIT
[(2004) 266 ITR 521] held that since the assessee had not earned profits from
export sales during the year in question, the assessee was not entitled for
deduction under Section 80 HHC. On an appeal to the Supreme Court by the
assessee, it was held that the eligibility for deduction is contemplated by
Section 80 HHC(1), whereas the quantum of deduction is determined under
Section 80 HHC(3). In the matter of determining the quantum of deduction, the
‘principle of proportionality’ applied. There are two situations which are
covered by Section 80HHC (3), namely, turnover only from export sales and
secondly turnover from composite sales (domestic and export business). In both
cases the formula applied as under :

Section 80 HHC concession = export profit =

Profits of business x Export turnover

Total turnover

The Supreme Court on facts held that the calculation had
been correctly done by the Income-tax Officer. The Supreme Court further held
that the High Court had erred in relying upon the judgment in case of Ipaca
Laboratories Ltd., inasmuch as the provisions as applicable in that case were
for the assessment year 1996-97 which were different from the provisions for
the assessment year 1990-91 with which it was concerned and that for the
relevant assessment year the CBDT Circular No. 564 indicated that Section
80HHC (3) statutorily fixes the quantum of deduction on the basis of a
proportion of business profits under the head ‘Profits and gains of business
or profession’, irrespective of what could strictly be described as profits
derived from export of goods out of India. According to the Supreme Court, the
Circular supported its above reasoning. The Supreme Court however, clarified
that the above reasoning was strictly applicable to the law as it stood during
the relevant assessment year.

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Rectification — Mistake apparent from record — Failure to apply judgment of jurisdictional High Court is a mistake apparent from record.

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8. Rectification — Mistake apparent from record — Failure
to apply judgment of jurisdictional High Court is a mistake apparent from
record.


    [ACIT vs. Saurashtra Kutch Stock Exchange Ltd., (2008) 305 ITR 227 (SC)].

    The assessee, Saurashtra Kutch Stock Exchange Ltd., a company registered under Section 25 of the Act made an application on 10-02-1992 for registration under Section 12A of the Act. The assessee filed its return of income for the assessment year 1996-97, declaring nil income claiming exemption u/s. 11 of the Act, though it had not been registered u/s. 12A of the Act. The return was processed u/s. 143(1)(a) of the Act. On 07-11-1997 a notice was issued to the assessee u/s. 154 to show cause why the exemption granted u/s. 11 should not be withdrawn. In reply it was stated that as it had made an application for registration it was entitled to exemption u/s.11 of the Act. Meanwhile, the CIT on 20-02-1998 granted registration to the assessee on condition that the eligibility regarding exemption u/s. 11 of the Act would be examined by the A. O. for the each assessment year. In an order dated 03-12-1999 passed u/s. 143(3) of the Act, the A. O. rejected the claim of exemption u/s. 11 of the Act. The CIT(A) rejected the appeal of the assessee. The Tribunal also dismissed the appeal of the assessee. The assessee filed a miscellaneous application u/s. 254(2) of the Act to rectify the error committed by the Tribunal in the decision rendered by it in appeal. The Tribunal allowed the miscellaneous application and recalled its earlier order passed in appeal. For allowing the application, the Tribunal relied upon the decision of the jurisdictional High Court.

    Dissatisfied with the order passed by the Tribunal in miscellaneous application, the Revenue filed a writ petition which was dismissed by the High Court. On an appeal, the Supreme Court first considered as to what is a mistake apparent from record. After noting the precedent, the Supreme Court held that a patent, manifest and self-evident error which does not require elaborate discussion of evidence or argument to establish it, can be said to be an error apparent on the face of the record and can be corrected while exercising certiorari jurisdiction. An error cannot be said to be apparent on the face of the record if one has to travel beyond the record to see whether the judgment is correct or not. An error apparent on the face of the record means an error which strikes on mere looking and does not need a long drawn out process of reasoning on points where there may conceivably be two opinions. Such error should not require any extraneous matter to show its incorrectness. To put it differently, it should be so manifest and clear that no Court would permit it to remain on record. If the view accepted by the Court in the original judgment is one of possible views, the case cannot be said to be covered by an error apparent on the face of the record.

    The Supreme Court thereafter considered as to whether non-consideration of a decision of a jurisdictional Court or of the Supreme Court can be said to be a mistake apparent from record.

    The Supreme Court held that it was well settled that a judicial decision acts retrospectively. Accordingly to Blackstonian theory, it is not the function of the Court to pronounce a ‘new rule’, but to maintain and expound the ‘old one’. In other words, Judges do not make law, they only discover or find the correct law. The law has always been the same. If a subsequent decision alters the earlier one, it (the latest decision) does not make new law. It only discovers the correct principle of law which has to be applied retrospectively. To put it differently, even where an earlier decision of the Court operated for quite some time, the decision rendered later on would have retrospective effect clarifying the legal position which was earlier not correctly understood.

    The Supreme Court held that in the present case, according to the assessee, the Tribunal decided the matter on October 27, 2000. Hiralal Bhagwati was decided a few months prior to that decision by the jurisdictional High Court, in which it was held that a trust could claim exemption under Section 11, but it was not brought to the attention of the Tribunal. In the circumstances, the Tribunal had not committed any error of law or of jurisdiction in exercising power under sub-Section (2) of Section 254 of the Act and in rectifying the ‘mistake apparent from the record’. Since no error was committed by the Tribunal in rectifying the mistake, the High Court was not wrong in confirming the said order. Both the orders, therefore, in the opinion of the Supreme Court, were strictly in consonance with law and no interference was called for.

Money Makes the world go round

Editorial

The last month has witnessed some big-ticket entertainment,
coming not only from a cricket league but also from the spectacle of a Union
Minister and a powerful cricket czar exchanging public blows in relation to the
affairs of the league, resulting in the revelation of various alleged
malpractices being indulged in the organisation of the tournament. Various other
public personalities and organizations have also been dragged into the fight,
with their actions also coming under the public scanner. The last month also
witnessed the arrest of a senior income tax official at Thane, while in the
process of collecting bribes; the official seeking to implicate her senior. What
is the connection between the two events?

Both these happenings are evidence of the fact that the urge
to make money at any cost has permeated all spheres of our society and resulted
in the debasement of the functioning of various organisations and institutions.
The IPL has generated tons of money for the organisation (and others?), and, in
the bargain, seems to have attracted all sorts of malpractices to generate
further funds. The allegations indicate that the IPL seems to have been run as a
closed club to generate unimaginable sums of money for those who were fortunate
enough to be close to the organisers. The fight seems to have been caused by the
desire on the part of the organisers to keep gatecrashers out of the party.

Over the years, unfortunately, one has seen politics becoming
a highly profitable business, just as organised crime has always been highly
profitable. The unimaginable amounts that a politician—the son of a labourer—had
earned during his short stint as Chief Minister of a mineral-rich state, would
put most businessmen to shame, and would probably suffice to meet the needs of
quite a few generations. The mind-boggling amounts which some bureaucrats and
tax officials are rumoured to demand and earn in a year far exceed an entire
lifetime’s earnings of most people. Entertainment and sports are now big money
spinners, and the combination of the two, which the IPL represents, is a highly
potent mixture. No wonder IPL has attracted the attention of businessmen,
politicians and, as rumoured, perhaps even the underworld.

As the old song goes, “Money makes the World go Round”. It is
true that money greases the wheels of business and commerce. Nobody disputes
that everybody requires a certain amount of money to lead a decent life. Making
money is fine, so long as it is not at the cost of throwing values to the winds.
The problem really arises when the greed for money overtakes all other human
emotions and values and the pursuit of money is seen as an end in itself, and
not as a means to achieve the end of leading a quality life.

Unfortunately, in India, the general values of life seem to
be taking a backseat more and more to the business of making money at any cost.
Corruption is just one offshoot of this trend. Power is seen to be associated
with money. A person with money power believes that the law can be manipulated
to his advantage to serve his own ends. While the common man is invariably
harassed for minor transgressions of the law, even major violations are swept
under the carpet if the right influence is exercised. Are we therefore
unfortunately metamorphing into an unequal society, with different rules for the
haves and the have-nots? This has the potential to create unrest and
dissatisfaction, which could create difficulties for the entire country.

For truly sustainable progress and development, it is
essential that every person has equal opportunity, and is treated equally under
the law. For proper functioning of civilised society, enforcement of laws has to
be evenhanded and firm—having laws which are selectively enforced is a sureshot
recipe for chaos. Only a society which rewards merit and innovation can progress
in the long run.

A related question is whether we, as a generation, are guilty
of not doing enough to impart true education to our succeeding generations,
thereby increasing the potential for chaos? With children more and more exposed
to the outside world, the influence of parents (or grandparents) over children
is not as much as it used to be in the past. Extra efforts are required to
counteract stronger negative external influences. Our education system, being
based on secular ideals, does not make any attempt to inculcate human values in
our children. These values are to be found in all religions—respect for others’
lives, property, etc. In running down religion in the name of secularism, are we
doing ourselves a disservice? The products of our education system may be
wizards at making money—but have they been brought up with values conducive to
being members of a civilised and peaceful society, where everybody can live in
harmony?

Each one of us needs to take some time out to think—are we
merely enjoying the fruits of our forefathers’ efforts, or are we making efforts
to contribute to a value-based society, so that our successors too will be able
to live in a better world? In what way can each of us contribute to restoring a
sense of values in society collectively?

Gautam Nayak

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TDS Compliance

Editorial

The best way to ensure
statutory compliance is to make the process as simple as possible, so that the
person who has to comply with the law, finds it less burdensome to comply with,
rather than undergoing penalty for non-compliance. Unfortunately, as witnessed
by the recent amendments in tax deduction at source (TDS) procedures, the CBDT
is seeking to make compliance so cumbersome that it makes the compliance
extremely onerous, if not impossible for most tax deductors.

All these years, the CBDT has
failed miserably in its attempts to ensure that there was proper compliance with
TDS provisions, and that tax collection by way of TDS matched with tax credit
given for TDS. This was on account of the complicated and ambiguous provisions,
which made the law difficult for most tax deductors to understand, and the
manner in which the law was administered, with many tax officers not fully
conversant with the correct provisions of law. Poor tax administration caused
revenue leakages in the system.

Realising that it was unable to
set its own house in order, the CBDT now seems to be going to the other extreme
of casting the entire burden of creating the data, on the tax deductors. This is
acceptable to some extent, given the benefits of computerisation that would flow
to tax deductors and deductees. But the extent of compliance being cast now
makes it so onerous, that it would require almost every business to hire
additional people to comply with such requirements, the total number of people
required probably exceeding the size of the entire Income Tax Department.

The requirements of Form 24C
seem to reveal a mindset of the CBDT, that businesses are in existence only to
comply with the requirements of the tax authorities. It would be almost
impossible to compile the monthly data in the manner sought. Just to give an
example, details of total payments to contractors during the month have to be
given, including those from which taxes have not been deducted. Payments to
contractors may be debited to printing & stationery, travel & conveyance,
advertisement, staff welfare and dozens of other accounts. To identify and
compute the monthly value of such payments and others every quarter would
involve more work than that required for filing the return of income !

Is this a financial stimulus
package being thought up of by the CBDT to create employment ? It will certainly
have the opposite effect, as businesses already suffering from eroded
profitability will not be able to bear the burden. Maybe taxes could be reduced
on businesses to ease the burden, by reduction of the size of the Income Tax
Department, given the extent to which its functions are being outsourced.

The increasing scope of
mandatory e-payments and e-filing also makes one wonder whether the CBDT is
aware of the ground realities in this country, where most places do not even
have continuous electric power to run their computers, or where internet
connectivity is often irregular. Outside Mumbai, one often hears narratives of
how all details were filled in and payment or uploading was about to be done,
when there was a power or internet or website failure, necessitating initiation
of the entire process again after power or connectivity was restored.

Only 30 banks permit e-payment
of taxes. What about those deductors who have their accounts with other banks ?
Many people prefer not to have internet banking, on account of their fear of
fraud.

Under such circumstances, it
would perhaps have been far better to make e-payments and e-filing optional
rather than mandatory. The least that one would expect is to keep such e-payment
or e-filing as simple as possible, so that it is easy to comply with, given the
constraints that we suffer from.

The worst part of the
amendments is the new rule 37BA providing that credit for TDS would be granted
on the basis of the returns filed by tax deductors and reflected in the TIN
system, instead of on the basis of TDS certificates. Today, it is well-known
that on account of various flaws in the system, the credit appearing in the TIN
system rarely reflects more than 50% of the TDS deducted from a taxpayer as
evidenced by TDS certificates. The major culprits for such failure are
nationalised banks and Government Departments, which do not comply with the
requirements or do so incorrectly. There is no provision for a taxpayer to
penalise or force a tax deductor to file his TDS returns correctly. When the tax
authorities, with their powers to penalise and prosecute, have not been able to
enforce proper TDS compliance, how can a mere taxpayer without any powers ensure
this ?

Such a provision amounts to
cheating a taxpayer of the legitimate taxes contributed by him, for no fault of
his. It amounts to expropriation of taxpayers’ money by the Government over and
above the taxes that it has recovered. One understands that even today, a
sizeable amount of taxes paid to the Government has not been credited to
accounts of taxpayers but is lying in suspense, on account of incorrect PAN,
other details, etc., mentioned by tax deductors or banks. The CBDT cannot escape
its responsibility to come out with a better scheme to ensure that every
taxpayer gets credit for all taxes deducted from his income, besides all taxes
paid by him.

Gautam Nayak

 

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E-filing, e-payment and e-TDS — Successful ?

Editorial

The Income Tax Department does not seem to believe in the
proverb ‘Act in haste, repent at leisure’. All its recent actions show that it
believes in introducing new procedures in a hurry without creating the necessary
infrastructure for it, without learning from its past mistakes, and without
regard to the enormous difficulties to taxpayers. It believes that keeping quiet
about the problems caused by premature introduction of such initiatives can
enable it to claim its initiatives to have been a success — forget about
taxpayers who suffer the brunt of such problems !


The new PAN numbers were introduced without the necessary
infrastructure in place, resulting in non-allotment of PAN, mismatched PAN cards
and allotment of multiple PAN numbers.

When e-filing of TDS returns was introduced, along with the
Tax Information Network (TIN), we were informed that all data relating to TDS
and payment of taxes would be captured by the system, doing away with the need
for issue of physical TDS certificates and the need for filing challans along
with the returns of income. The reality, as many taxpayers have found to their
dismay, is that the TIN displays only a part of the tax deducted at source from
their receipts, and that correction of data captured by TIN is an extremely
difficult task. To top it all, their legitimate refunds are held up on account
of such system problems, due to the CBDT insisting that credit for TDS should be
granted only on the basis of the TIN figures, and not on the basis of physical
TDS certificates, as provided by law. Many taxpayers were slapped with huge
demands, instead of the large refunds due to them. A few taxpayers were
fortunate to receive their refunds after approaching the Ombudsman (one such
order is reproduced on page 163).

With e-filing of returns, we were told that this would speed
up the processing of returns and issue of refunds. The reality we find is that
the processing of returns filed for assessment year 2007-08 has barely begun,
though by now, the processing of such returns should have been completed.

We now have a situation where taxpayers who want to file
their TDS returns are told that such returns will not be accepted unless the
returns contain a minimum percentage of PANs of deductees. No groundwork has
been done to ensure that all deductees necessarily obtain and furnish their PANs,
no provisions have been made to enable deductors to force deductees to obtain
and furnish PANs, and yet deductors are prevented from complying with their
statutory obligations ! All this, merely by issue of a press release ! To top it
all, it is highly likely that penalties would be levied on such deductors who
are unable to file their TDS returns for no fault of their own.

As if this were not enough, we now have mandatory e-payment
of taxes for certain categories of taxpayers from 1st April 2008, for corporates,
and individuals and partnership firms who were liable to tax audit in the
earlier year. Banks are still unprepared for such large e-payments. It takes at
least 20 days to activate this e-payment facility with most of the banks. Many
banks refuse to open an account if such account is merely intended to be used
for e-payment of taxes. This would in effect force taxpayers to change their
longstanding bankers, though they may be fully satisfied with their services.

One individual taxpayer, who pays advance tax of about Rs.50
lakhs in each instalment, and who approached one of the nationalised banks which
is authorised for such e-payments, was flabbergasted to discover that the bank
would accept e-payment of a maximum amount of Rs 5 lakhs in a day. He is still
trying to figure out how he can make his advance tax payments !

The Society has made a representation regarding the
difficulties being faced by taxpayers in complying with e-payment at such short
notice (reproduced on page 245), but does the Income Tax Department ever heed
any advice or take into account the difficulties of taxpayers? In this
consumer-centric age, should not the voice of taxpayers be heard and respected
by the Income Tax Department, which depends upon taxpayers for all its
revenues ?

One thought that payment of taxes and filing of tax returns
were sacrosanct duties of taxpayers. It however appears that the Income Tax
Department, which is resorting to such initiatives to conceal its own internal
deficiencies and problems, is putting hurdles in the way of taxpayers who wish
to comply with their obligations. A strange situation indeed !

Let us hope that the Income Tax Department realises the need to consult
taxpayers and their representatives, take into account the various difficulties
being faced, provide the necessary infrastructure and enabling legislation, and
then undertake new initiatives. This alone will lead to real success of such
initiatives !

Gautam Nayak

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The issuance of IFRS standards in India

Accounting Standards

The International Financial Reporting Standards (IFRS)
roadmap issued by the Ministry of Corporate Affairs (MCA) stated that the IFRS
standards would be submitted to the MCA by 30 April 2010. It is widely believed
that The Institute of Chartered Accountants of India (ICAI) would facilitate the
notification of the IFRS standards in the Companies Accounting Standard Rules
through the National Advisory Committee on Accounting Standards (NACAS).

As per the roadmap issued by the MCA, there shall be two
separate sets of accounting standards u/s.211(3C) of the Companies Act, 1956.
The first set shall comprise the Indian Accounting Standards which are converged
with the IFRS and apply to the specified class of companies. The second set
shall comprise the existing Indian Accounting Standards and apply only to the
companies not covered in any of the phases of the roadmap or till the date of
applicability of IFRS for companies covered in
later phases.

Under IFRS, there are 29 International Accounting Standards (IAS)
and 9 IFRS, 11 Standing Interpretations Committee (SIC) interpretations and 16
International Financial Reporting Interpretations Committee (IFRIC)
interpretations, a total of 65. At the end of March, more than 40 of these
promulgations were not yet issued by the Institute of Chartered Accountants of
India.

Under the circumstances, corporate entities have raised
questions on how the commitment made in the roadmap can be achieved. More
importantly, entities do not know if they should start preparing for IFRS as
issued by the International Accounting Standards Board (IASB) or there will be
certain changes/exceptions to those standards. If there are changes, what will
those changes be ? Particularly, what is not clear is, whether Indian companies
will be able to use all the options allowed under IFRS or ICAI/MCA shall remove
certain options while adopting IFRS in India. For example, under IFRS, IAS-19
provides a number of alternatives to account for actuarial gains and losses,
such as the corridor approach, full recognition to income statement, full
recognition to reserves instead of the income statement. In India, it may be
possible that some of these alternatives may not be allowed.

The author is not in agreement that the alternative
accounting available under IFRS should be eliminated. This would not provide a
level playing field to Indian entities vis-à-vis international companies which
will have this benefit. It may be noted that Australia introduced IFRS
initially by eliminating multiple alternatives under IFRS. However, at a later
date they realised that this was not workable and reverted back to a full IFRS
providing all the options available under IFRS to Australian companies.

Considering the number of pending standards, there is a clear
need to significantly accelerate the process of issuing the IFRS standards. Any
time provided for public exposure will further delay the issuance of these
standards. Currently issuance and notification of standards happens on a
standard by standard basis. This process, if followed for IFRS, will take a long
time and there is no way that the 30 April deadline would be met. To smoothen
the process, the ICAI/NACAS should expose and notify all standards at one go.


For companies covered by the convergence roadmap, we may mention that it is
more of an operational issue and the ICAI/NACAS/MCA will resolve the  same
in due course. The Indian Government is committed to achieve convergence with
IFRS in  India. Thus, entities should not slow down their conversion
efforts.

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