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[Arising from order dated 13th April, 2011 passed by the Income Tax Appellate Tribunal, “B” Bench, Kolkata (Tribunal) in ITA No. 92/Kol/2010 A.Y.: 2005-06. ] Section 28 viz a viz 45: Development agreement – capital gain or income from business:

4 CIT, Kolkata IV vs. M/s Machino Techno Sales Ltd
[ITA no 160 of 2011 Dated: 20th February, 2023, (Cal.) (HC)][Arising from order dated 13th April, 2011 passed by the Income Tax Appellate Tribunal, “B” Bench, Kolkata (Tribunal) in ITA No. 92/Kol/2010
A.Y.: 2005-06. ]

Section 28 viz a viz 45: Development agreement – capital gain or income from business:

The appeal of the Revenue was admitted on the following substantial question of law:-

“Whether the learned Tribunal below committed substantial error of law in holding that the income, derived by way of return from a Development Agreement in favour of the owner of the land, should be treated as capital gain instead of income from business ?”

The Hon court observed that in the absence of any evidence to show that the land purchased by the assessee during 1985/1990 was intended for resale or was converted into stock-in-trade, the earnings of the assessee pursuant to a development agreement entered into with the developer could not be assessed as business income . The court observed that the Tribunal had taken into consideration the factual position which was not disputed by the revenue that the said land and factory shed was used by the assessee as its workshop and was shown as capital asset in its balance-sheet.

Further, the revenue did not dispute the fact that the purchase prices were debited by the assessee under the head ‘land account’. On 13th November, 1994 the assessee entered into a development agreement with the developer under which the assessee in exchange of the land in question was entitled to get 45 per cent of the constructed area and the remaining portion of the land and shed continued to be used by the assesse for its own workshop purchase. The Tribunal noted that no documents have been referred to by the revenue to show that the assessee had treated the asset as stock-in-trade.

On the other hand, the assessee continued to show the land as capital asset even after 1994, which fact was accepted by the department. The Tribunal had distinguished the decisions cited by the revenue by noting the facts of the case that the land was purchased by the assessee during 1985/1990 and used as capital asset for its business purposes and continued to treat the same as capital asset in the accounts. Thus, the Tribunal correctly held that there was no intention on the part of the assessee to enter into an adventure in the nature of trade to deal in the land.

The court observed that in view of the cogent reasons assigned by the Tribunal on the undisputed factual position, there were no grounds to interfere with the order passed by the Tribunal.

Accordingly, the appeal was dismissed and the substantial questions of law were answered against the revenue.

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‘Charitable Purpose’, GPU Category- Post 2008 Amendment – Eligibility for Exemption under Section 11 – Section 2(15) – Part II

INTRODUCTION

4.1 As mentioned in Introduction in Part I of this write-up (BCAJ April, 2023), special provisions dealing with income derived by charitable trusts were present in section 4(3) of the Indian Income-tax Act, 1922 (“1922 Act”). The term “charitable purpose” was defined in the 1922 Act to include relief of the poor, education, medical relief and the advancement of any other object of general public utility. The last limb – ‘advancement of any other object of general public utility’ (“GPU” or “GPU category”) did not contain any conditions which restricted a charitable trust from carrying on business activities.

4.2 As mentioned in Part I of the write up, provisions dealing with charitable trusts were amended from time to time in the Income-tax Act, 1961 (“1961 Act”). As stated in Para 1.3 of Part I, the words ‘not involving the carrying on of any activity for profit’ were added in the GPU category at the time of enactment of the 1961 Act. These words were interpreted by several decisions of the Supreme Court. To reiterate in brief, the Supreme Court in Sole Trustee, Loka Shikshana Trust vs. CIT [1975] 101 ITR 234 (“Loka Shikshana Trust”) held that a GPU category charitable trust should show that its purpose is the advancement of any other object of general public utility and that such purpose does not involve the carrying on of any activity for profit. The Supreme Court in Indian Chamber of Commerce vs. CIT [1975] 101 ITR 796 (SC) (“Indian Chamber”) held that it is not sufficient that a trust has the object of general public utility but the activities of the trust should also not be for profit. The Constitutional bench of the Supreme Court in Surat Art’s case overruled its earlier decision and held that it was the object of general public utility that must not involve the carrying on of any activity for profit and not its advancement or attainment.

4.3 Further amendments, as stated in para 1.4 and 1.5 of Part I of this write up, were made in the 1961 Act from time to time. A significant amendment was made by the Finance Act, 2008 (‘2008 amendment’) whereby a proviso was added to the definition of ‘charitable purpose’ stating that advancement of any other object of general public utility shall not be a charitable purpose if it involves carrying on of any activity in the nature of trade, commerce or business or any activity of rendering service in relation thereto [Commercial Activity/Activities] for a cess or fee or any other consideration irrespective of the nature of use or application, or retention, of the income from such activity. The Finance Minister’s speech at the time of introduction of the 2008 amendment and the CBDT Circular explaining the provisions are referred to at para 1.8 of Part I of this write-up. Subsequently, further amendments were made from time to time specifying that the proviso introduced by the 2008 amendment would not apply if the receipts from activities in the nature of trade, commerce or business are below a specified limit.

ACIT(E) VS. AHMEDABAD URBAN DEVELOPMENT AUTHORITY
(449 ITR 1 -SC)

5.1 As stated in Part I of this write up, appeals were filed before the Supreme Court challenging the decisions of several High Courts. As mentioned in Para 2.1 of Part I, the Supreme Court in the case of ACIT(E) vs. Ahmedabad Urban Development Authority and connected matters (449 ITR 1) divided the assessee into six categories namely – (i) statutory corporations, authorities or bodies, (ii) statutory regulatory bodies/authorities, (iii) trade promotion bodies, councils, associations or organisations, (iv) non-statutory bodies, (v) state cricket associations and (vi) private trusts. The arguments of the Revenue and that of the assessees are summarised in Paras 3.1 to 3.3 Part I of this write up. After considering the contentions of both the sides, Supreme Court proceeded to decide on the issue.

5.2 At the outset, the Supreme Court set out the legislative history of the provisions and the amendments made from time to time so as to determine the intention of the law makers. The Court further observed that the speeches made in the legislature or Parliament can also be looked into for determining the rationale for the amendments. The Court then proceeded to deal with certain contentions raised by the assessees on the general principles and interpretation of the language employed in the proviso to Section 2(15)

5.3 The Court dealt with the assessee’s reliance on CBDT Circular Nos. 11 of 2008 (308 ITR 5 (St.)) and 1 of 2009 (310 ITR 42 (St.)) and the argument that considering the objectives of amendments and binding effect of the Circulars, the 2008 amendment would not affect genuine trusts but only entities operating on commercial lines where the GPU object is only a device to hide the true purpose of trade, commerce or business. The Court distinguished the decisions in the case of Navnit Lal Jhaveri, UCO Bank, etc. which were relied upon by the assessee for the binding effect of the Circular and stated as under [pages 87/88]:

“In the opinion of this court, the views expressed in Keshavji Ravji, Indian Oil Corporation and Ratan Melting and Wire Industries (though the last decision does not cite Navnit Lal Jhaveri), reflect the correct position, i.e., that circulars are binding upon departmental authorities, if they advance a proposition within the framework of the statutory provision. However, if they are contrary to the plain words of a statute, they are not binding. Furthermore, they cannot bind the courts, which have to independently interpret the statute, in their own terms. At best, in such a task, they may be considered as departmental understanding on the subject and have limited persuasive value. At the highest, they are binding on tax administrators and authorities, if they accord with and are not at odds with the statute; at the worst, if they cut down the plain meaning of a statute, or fly on the face of their express terms, they are to be ignored.”

5.3.1 While dealing with the argument of assessees’ being statutory corporations that they are agencies of the ‘State’ and the activities of such corporations cannot be characterised as motivated by profit, the Court observed that every activity resembling commerce cannot be considered per se to be exempt from Union taxation and that the crucial or determinative element is whether performance of a function is actuated by profit motive.

5.3.2 Considering the meaning of the expressions ‘fee, cess or consideration’, the Court stated that they should receive a purposive interpretation and also laid down the following guiding principles as to when a ‘fee, cess or consideration’ would or would not be treated as being towards an Commercial Activity i.e. in the nature of trade, commerce or business [pages 97/98]:

“Fee, cess and any other consideration” has to receive a purposive interpretation, in the present context. If fee or cess or such consideration is collected for the purpose of an activity, by a state department or entity, which is set up by statute, its mandate to collect such amounts cannot be treated as consideration towards trade or business. Therefore, regulatory activity, necessitating fee or cess collection in terms of enacted law, or collection of amounts in furtherance of activities such as education, regulation of profession, etc., are per se not business or commercial in nature. Likewise, statutory boards and authorities, who are under mandate to develop housing, industrial and other estates, including development of residential housing at reasonable or subsidized costs, which might entail charging higher amounts from some section of the beneficiaries, to cross-subsidize the main activity, cannot be characterized as engaging in business. The character of being ‘state’, and such corporations or bodies set up under specific laws (whether by states or the centre) would, therefore, not mean that the amounts are ‘fee’ or ‘cess’ to provide some commercial or business service. In each case, at the same time, the mere nomenclature of the consideration being a “fee” or “cess”, is not conclusive. If the fee or cess, or other consideration is to provide an essential service, in larger public interest, such as water cess or sewage cess or fee, such consideration, received by a statutory body, would not be considered “trade, commerce or business” or service in relation to those. Non-statutory bodies, on the other hand, which may mimic regulatory or development bodies – such as those which promote trade, for a section of business or industry, or are aimed at providing facilities or amenities to improve efficiencies, or platforms to a segment of business, for fee, whether charged by subscription, or specific fee, etc, may not be charitable; when they claim exemption, their cases would require further scrutiny.”

5.3.3 The Court then held that the ‘predominant test’ laid down by the Constitution bench of the Supreme Court in Surat Art’s case would cease to apply after the 2008 amendment. In this context, the Court expressed its views as under [page 101]:

“The paradigm change achieved by Section 2(15) after its amendment in 2008 and as it stands today, is that firstly a GPU charity cannot engage in any activity in the nature of trade, commerce, business or any service in relation to such activities for any consideration (including a statutory fee etc.). This is emphasized in the negative language employed by the main part of Section 2(15). Therefore, the idea of a predominant object among several other objects, is discarded. The prohibition is relieved to a limited extent, by the proviso which carves out the condition by which otherwise prohibited activities can be engaged in by GPU charities.”

In the above context, the Court further explained effect of the amendments from 2008 as under [page 108]:

“….. Thus, the test of the charity being driven by a predominant object is no longer good law. Likewise, the ambiguity with respect to the kind of activities generating profit which could feed the main object and incidental profit- making also is not good law. What instead, the definition under Section 2(15) through its proviso directs and thereby marks a departure from the previous law, is – firstly that if a GPU charity is to engage in any activity in the nature of trade, commerce or business, for consideration it should only be a part of this actual function to attain the GPU objective and, secondly – and the equally important consideration is the imposition of a quantitative standard – i.e., income (fees, cess or other consideration) derived from activity in the nature of trade, business or commerce or service in relation to these three activities, should not exceed the quantitative limit of Rs. 10,00,000 (w.e.f. 01.04.2009), Rs. 25,00,000 (w.e.f. 01.04.2012), and 20% (w.e.f. 01.04.2016) of the total receipts. Lastly, the “ploughing” back of business income to “feed” charity is an irrelevant factor – again emphasizing the prohibition from engaging in trade, commerce or business.”

5.4 The Court then noted the distinction between a case where business undertaking itself is held as a property under trust to which section 11(4) applies and a case where a trust carries on business which is governed by section 11(4A) of the Act.

5.4.1 Considering the distinction between the provisions contained in the section 11(4) and section 11(4A) and after considering certain relevant judicial precedents including its judgment in the case of J K Trust vs. CIT [(1957) 32 ITR 535 (SC)] and summarizing the position in this respect, the Court observed as under [page 105]:

“Therefore, to summarise on the legal position on this – if a property is held under trust, and such property is a business, the case would fall under section 11(4) and not under section 11(4A) of the Act. Section 11(4A) of the Act, would apply only to a case where the business is not held under trust. There is a difference between a property or business held under trust and a business carried on by or on behalf of the trust. This distinction was recognized in Surat Art Silk (supra), which observed that if a business undertaking is held under trust for a charitable purpose, the income from it would be entitled to exemption under section 11(1) of the Act.”

5.4.2 In the context of section11(4A), the Court considered the ratio of its judgment in Thanthi Trust’s case [referred to in para 1.4.2 of part- I] and noted that in the context of interpretation of section 11(4A) as amended w.e.f 1st April, 1992 [the third period referred to therein], it is stated that the provision [i. e. section 11(4A)] requires that for a business income of a trust to be exempt, the business should be incidental to the attainment of objectives of the trust or institution. While explaining the effect of this, the Court stated as under [page 107]:

“The above observations have to be understood in the light of the facts before the court. Thanthi Trust carried on newspaper business which was held under trust. The charitable object of the trust was the imparting of education – which falls under section 2(15) of the Act. The newspaper business was incidental to the attainment of the object of the trust, namely, that of imparting education. This aspect is important, because the aim of the trust was a per se charitable object, not a GPU object. The observations were therefore made, having regard to the fact that the profits of the newspaper business were utilized by the trust for achieving the object of education. In the light of such facts, the carrying on of newspaper business, could be incidental to the object of education- a per se category. The Thanthi Trust (supra) ratio therefore, cannot be extended to cases where the trust carries on business which is not held under trust and whose income is utilized to feed the charitable objects of the trust.”

5.4.3 The Court observed that section 11(4A) of the Act exempts profits and gains of business of a trust or institution provided such business is incidental to the attainment of the objectives of the trust and separate books of accounts are maintained in respect of such business. Having taken a view that the interpretation of that expression in Thanthi Trust was in the context of per se charity [i.e. specific category- education] and not for the GPU category, the Court stated that what then is the interpretation of the expression “incidental” profits, from “business” being “incidental to the attainment of the objectives” of the GPU category [which occurs in Sec 11(4A)]? In this context, interpreting the meaning of the term ‘incidental’, the Court stated as under (page 108):

“….. The proper way of reading reference to the term “incidental” in Section 11(4A) is to interpret it in the light of the sub-clause (i) of proviso to Section 2(15), i.e., that the activity in the nature of business, trade, commerce or service in relation to such activities should be conducted actually in the course of achieving the GPU object, and the income, profit or surplus or gains can then, be logically incidental. The amendment of 2016, inserting sub clause (i) to proviso to Section 2(15) was therefore clarificatory. Thus interpreted, there is no conflict between the definition of charitable purpose and the machinery part of Section 11(4A). Further, the obligation under section 11(4A) to maintain separate books of account in respect of such receipts is to ensure that the quantitative limit imposed by sub-clause (ii) to section 2(15) can be computed and ascertained in an objective manner.”

5.5 For the purpose of concluding on interpretation of definition ‘charitable purpose’ under the Act, the Court observed that charity as defined has a wider meaning where it is the object of the institution which is in focus. As such, the idea of providing services or goods at no consideration, cost or nominal consideration is not confined to the provisions of services or goods without charging anything or charging a token or a nominal amount. Referring to the judgment of Indian Chamber’s case [referred to in para 1.3.2 of part- I of this write-up], the Court also noted that a little surplus may be left over at the end of the year- the broad inhibition against making profit is a good guarantee that the carrying on of an activity is not for profit. In this context, the Court observed as under [pages 109/110]:

“Therefore, pure charity in the sense that the performance of an activity without any consideration is not envisioned under the Act. If one keeps this in mind, what section 2(15) emphasizes is that so long as a GPU’s charity’s object involves activities which also generates profits (incidental, or in other words, while actually carrying out the objectives of GPU, if some profit is generated), it can be granted exemption provided the quantitative limit (of not exceeding 20%) under second proviso to section 2(15) for receipts from such profits, is adhered to”

5.5.1 In the above context, the Court further observed as under [page 110]:

“Yet another manner of looking at the definition together with sections 10(23) and 11 is that for achieving a general public utility object, if the charity involves itself in activities, that entail charging amounts only at cost or marginal mark up over cost, and also derive some profit, the prohibition against carrying on business or service relating to business is not attracted – if the quantum of such profits do not exceed 20% of its overall receipts.”

5.5.2 The Court concluded on the interpretation of this section 2(15) by stating as under [page 110]:

“It may be useful to conclude this section on interpretation with some illustrations. The example of Gandhi Peace Foundation disseminating Mahatma Gandhi’s philosophy (in Surat Art Silk) through museums and exhibitions and publishing his works, for nominal cost, ipso facto is not business. Likewise, providing access to low-cost hostels to weaker segments of society, where the fee or charges recovered cover the costs (including administrative expenditure) plus nominal mark up; or renting marriage halls for low amounts, again with a fee meant to cover costs; or blood bank services, again with fee to cover costs, are not activities in the nature of business. Yet, when the entity concerned charges substantial amounts- over and above the cost it incurs for doing the same work, or work which is part of its object (i.e., publishing an expensive coffee table book on Gandhi, or in the case of the marriage hall, charging significant amounts from those who can afford to pay, by providing extra services, far above the cost-plus nominal markup) such activities are in the nature of trade, commerce, business or service in relation to them. In such case, the receipts from the latter kind of activities where higher amounts are charged, should not exceed the limit indicated by proviso (ii) to section 2(15).”

5.5.3 While arriving at the above conclusion, the Court further stated as under [page 111]:

“In the opinion of this court, the change intended by Parliament through the amendment of section 2(15) was sought to be emphasised and clarified by the amendment of section 10(23C) and the insertion of section 13(8). This was Parliaments’ emphatic way of saying that generally no commercial or business or trading activity ought to be engaged by GPU charities but that in the course of their functioning of carrying out activities of general public utility, they can in a limited manner do so, provided the receipts are within the limit spelt out in clause (ii) of the proviso to section 2(15).”

[To be continued]

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Search and seizure — Block assessment — Undisclosed income — Appeal to CIT (Appeals) — Failure to furnish all material in department’s possession to assessee except documents relied upon — Directions issued to CIT (Appeals).

14 Deepak Talwar vs. Dy. CIT

[2023] 452 ITR 61 (Del.)

A. Ys. 2011-12 to 2017-18

Date of order: 27th January, 2023

Sections 132, 143(3), 153A and 246A of ITA 1961

Search and seizure — Block assessment — Undisclosed income — Appeal to CIT (Appeals) — Failure to furnish all material in department’s possession to assessee except documents relied upon — Directions issued to CIT (Appeals).

Pursuant to a search, the AO passed orders under section 143(3) r.w.s.153A of the Income-tax Act, 1961 for the A. Ys. 2011-12 to 2017-18 making additions and accordingly raising demand. The assessee’s appeal under section 246A was pending before the CIT (Appeals) against such orders. The assessee requested the Department to furnish the material and information in the possession of the Department. That was not done. The assessee filed a writ petition for a direction to that effect.

The Department’s case was that since the documents were voluminous and collating them would involve a long time, the documents relied upon were furnished and if some of them were not furnished they would be furnished shortly and that in respect of the documents which were in the possession of the Department but were not relied upon, there was no legal obligation on its part to furnish them to the assessee.

The Delhi High Court directed the CIT (Appeals) to take a decision in the matter with regards to the documents which, although, in the possession of the Department had not been relied upon and before proceeding further placed on record a list of those documents, whereupon, the assessee would have an opportunity to make a submission, as to the relevance of those documents for the purposes of prosecuting the assessee’s appeal. However, the CIT (Appeals) would not pass a piecemeal order. The order would be composite and would deal with the aforesaid aspect and the merits of the appeal.

shailesh.kwebmaker

Reassessment — DTAA — Effect of section 90 — Tax residency certificate granted by another country — Binding on income-tax authorities in India — Amount not assessable in India under DTAA — Notice of reassessment in respect of such income — Not valid.

13 Blackstone Capital Partners (Singapore) Vi FDI Three Pvt Ltd vs. ACIT (International Taxation)

[2023] 452 ITR 111 (Del)

A. Y. 2016-17

Date of order: 30th January, 2023

Sections 90, 147 and 148 of ITA 1961

Reassessment — DTAA — Effect of section 90 — Tax residency certificate granted by another country — Binding on income-tax authorities in India — Amount not assessable in India under DTAA — Notice of reassessment in respect of such income — Not valid.

The petitioner- Blackstone Capital Partners (Singapore) VI FDI Three Pvt Ltd was a non-resident in India and majority of its directors were residents of Singapore. During the A. Y. 2016-17, the petitioner sold the equity shares purchased in the A. Y. 2014-15. For the A. Y. 2016-17, the petitioner filed the return of income on 29th September, 2016. In terms of the said return of income, the petitioner claimed that the gains earned by it on sale of Agile shares were not taxable in India by virtue of Article 13(4) of the Double Tax Avoidance Agreement entered into and subsisting between India and Singapore based on the Tax Residency Certificate. In its return of income, the petitioner made all the requisite disclosures with regard to the investment and sale of shares like the petitioner was a non-resident in India and majority of its directors were residents of Singapore. The petitioner’s return of income was processed under section 143(1) of the Income-tax Act, 1961 with no demand, on 8th October, 2016. On 31st March, 2021 a notice was issued to the petitioner under section 148 of the Act for the A. Y. 2016-17. The petitioner filed a return of income on 28th April, 2021 and also filed objections which were rejected.

The Petitioner filed a writ petition challenging the notice and the order rejecting the objections. The Delhi High Court allowed the writ petition and held as under:

“i) The core issue that arises for consideration in the present writ petition is whether the respondent-Revenue can go behind the tax residency certificate issued by the other tax jurisdiction and issue reassessment notice u/s. 147 of the Income-tax Act, 1961 to determine issues of residence status, treaty eligibility and legal ownership.

ii) The Income-tax Act, 1961, recognizes and gives effect to Double Taxation Avoidance Agreements. Section 90(2) of the Act stipulates that in case of a non-resident taxpayer with whose country India has a Double Taxation Avoidance Agreement, the provisions of the Act would apply only to the extent they are more beneficial than the provisions of such Agreement. On March 30, 1994, the CBDT issued Circular No. 682 emphasising that any resident of Mauritius deriving income from alienation of shares of an Indian company would be liable to capital gains tax only in Mauritius in accordance with Mauritius tax law and would not have any capital gains tax liability in India. This circular was a clear enunciation of the provisions contained in the Double Taxation Avoidance Agreement, which would have overriding effect over the provisions of sections 4 and 5 of the Act by virtue of section 90. The Supreme Court, in the case of UOI v. Azadi Bachaa Andalon , upheld the validity and efficacy of Circular No. 682 dated March 30, 1994 ([1994] 207 ITR (St.) 7) and Circular No. 789 dated April 13, 2000 ([2000] 243 ITR (St.) 57), issued by the CBDT. The court further held that the certificate of residence is conclusive evidence for determining the status of residence and beneficial ownership of an asset under the Double Taxation Avoidance Agreement.

iii) The assessee had a valid tax residency certificate dated February 3, 2015 from the Inland Revenue Authority of Singapore evidencing that it was a tax resident of Singapore and thereby was eligible to claim tax treaty benefits between India and Singapore. The tax residency certificate is statutorily the only evidence required to be eligible for the benefit under the Double Taxation Avoidance Agreement and the respondent’s attempt to question and go behind the tax residency certificate was wholly contrary to the Government of India’s consistent policy and repeated assurances to foreign investors. In fact, the Inland Revenue Authority of Singapore had granted the assessee the tax residency certificate after a detailed analysis of the documents, and the Indian Revenue authorities could not disregard it as that would be contrary to international law.

iv) Accordingly, the tax residency certificate issued by the other tax jurisdiction was sufficient evidence to claim treaty eligibility, residence status, legal ownership and accordingly the capital gains earned by the assessee was not liable to tax in India. No income chargeable to tax had escaped assessment and the notice of reassessment was not valid.”

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Reassessment — Notice — Initial notice issued in the name of deceased assessee — Invalid — Notice and order under section 148A(d) set aside

12. Prakash Tatoba Toraskar vs. ITO
[2023] 452 ITR 59 (Bom)
Date of order: 10th February, 2023
Sections 147, 148, 148A(b) and 148A(d)
of ITA 1961

Reassessment — Notice — Initial notice issued in the name of deceased assessee — Invalid — Notice and order under section 148A(d) set aside

The AO issued a notice under section 148 of the Income-tax Act, 1961 dated 30th June, 2021for reopening the assessment under section 147 in the name of the assessee who had died on 4th November, 2019.. Pursuant to the judgment in UOI vs. Ashish Agarwal [2022] 444 ITR 1 (SC) the AO treated the notice issued under section 148 in the name of the deceased assessee to be a show-cause notice under section 148A(b). By that time the assessee had died. The legal heir of the the deceased assessee objected and did not participate in the assessment proceedings. The AO passed an order under section 148A(d).

The legal heir filed a writ petition and challenged the reassessment proceedings and the order under section 148A(d). The Bombay High Court allowed the writ petition and held as under:

“i) Notwithstanding the objection having been taken by the legal heir of the deceased assessee, an order u/s. 148A(d) was passed on June 30, 2022. The initial notice issued u/s. 148 and the subsequent communication dated May 20, 2022 purporting to be a notice u/s. 148A(b) were in the name of the deceased assessee. The notice issued u/s. 148 against a dead person would be invalid, unless the legal representatives submit to the jurisdiction of the Assessing Officer without raising any objection.

ii) The petition is allowed. The notice dated June 30, 2021 issued u/s. 148, the communication dated May 20, 2022 purporting to be a notice u/s. 148A(b) and the order dated June 30, 2022 u/s. 148A(d) were set aside.”

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Reassessment — Notice under section 148 — Jurisdiction — Notice issued by officer who had no jurisdiction over the assessee — Notice defective and invalid — Notice and order rejecting objections of the assessee set aside.

11 Ashok Devichand Jain vs. UOI

[2023] 452 ITR 43 (Bom) A. Y.: 2012-13

Date of order: 8th March, 2022

Sections 147 and 148 of ITA 1961

Reassessment — Notice under section 148 — Jurisdiction — Notice issued by officer who had no jurisdiction over the assessee — Notice defective and invalid — Notice and order rejecting objections of the assessee set aside.

The petitioner assesee filed a writ petition challenging a notice dated 30th March, 2019 issued by the Income Tax Officer under section 148 of the Income-tax Act, 1961 for the A. Y. 2012-13 and an order passed on 18th November, 2019 rejecting the petitioner’s objection to reopening on various grounds.

The Bombay High Court allowed the writ petition and held as under:

“i) The primary ground that has been raised is that the Income-tax Officer who issued the notice u/s. 148 of the Act, had no jurisdiction to issue such notice. According to the petitioner as per CBDT Instruction No. 1 of 2011 dated January 31, 2011, where income declared/returned by any non-corporate assessee is up to Rs. 20 lakhs, then the jurisdiction will be of Income-tax Officer and where the income declared/returned by a non-corporate assessee is above Rs. 20 lakhs, the jurisdiction will be of Deputy Commissioner/Assistant Commissioner.

ii) The petitioner has filed return of income of about Rs. 64,34,663 and therefore, the jurisdiction will be that of Deputy Commissioner/Assistant Commissioner and not Income-tax Officer. Mr. Jain submitted that since notice u/s. 148 of the Act has been issued by the Income-tax Officer, and not by the Deputy Commissioner/Assistant Commissioner that is by a person who did not have any jurisdiction over the petitioner, such notice was bad on the count of having been issued by an officer who had no authority in law to issue such notice.

iii) The notice u/s. 148 of the Income-tax Act, 1961 for reopening the assessment u/s. 147 is a jurisdictional notice and any inherent defect therein is not curable.

iv) On the facts that the notice u/s. 148 having been issued by an Income-tax Officer who had no jurisdiction over the assessee had not been issued validly and without authority in law. The notice and the order rejecting the assessee’s objections were set aside.”

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International transactions — Draft assessment order — Limitation — Effect of sections 153 and 144 — Issue of directions by Commissioner has no effect on limitation — Direction of Commissioner does not extend limitation.

10 Pfizer Healthcare India Pvt Ltd vs. Dy. CIT

[2023] 452 ITR 187 (Mad)

A. Y. 2015-16

Date of order: 11th November, 2022

Sections 144, 144C and 153 of ITA 1961

International transactions — Draft assessment order — Limitation — Effect of sections 153 and 144 — Issue of directions by Commissioner has no effect on limitation — Direction of Commissioner does not extend limitation.

The assessee was engaged in the business of manufacture, research, development and export to its group entities. It had filed its return for the A. Y. 2015-16. The time limit for completion of regular assessment in terms of section 153(1) of the Act, being 21 months from the end of the relevant assessment year, was 31st December, 2017. A reference was made to the Transfer Pricing Officer, since the business of the assessee included transactions that related to entities abroad for which a proper determination of arm’s length price was to be made. There was a request by the Transfer Pricing Officer for exchange of information and a reference was made to the competent authority in terms of section 90A of the Act. The reference for exchange of information was made by the Transfer Pricing Officer on 29th October, 2018 and the last of the information sought was received by him on 27th March, 2019. The order of the Transfer Pricing Officer was passed on 24th May, 2019. The draft assessment order dated 26th July, 2019, was passed in terms of section 143(3) r.w.s 144C(1).

The assessee filed a writ petition challenging the draft assessment order. The Madras High Court allowed the writ petition and held as under:

“i) Section 92CA of the Income-tax Act, 1961, is only a machinery provision that provides for the procedure for passing of a transfer pricing order and does not constitute a prescription for computing limitation. Section 153 deals exclusively with limitation and the statutory extensions and exclusions therefrom, as set out under the Explanation thereto. Section 92CA(3A) sets out the specific time periods to be adhered to in completion of the transfer pricing proceedings and works as limitation within the period of overall limitation provided u/s. 153 for the completion of assessment. The limitations set out under sub-section (3A) of section 92CA are to be construed in the context of, and within the overall limitation provided for, u/s. 153. There is no situation contemplated that would alter the limitation set out u/s. 153C save the exclusions set out under Explanation 1 to section 153C itself. The time limits set out under sub-section (3A) of section 92CA are thus subject to the limitation prescribed u/s. 153 that can, under no circumstances, be tampered with.

ii) The second proviso to Explanation 1 to section 153 states that the period of limitation available to the Assessing Officer for making an order of assessment shall be extended to 60 days. The 60 days period, thus, must run from the date of the transfer pricing order to provide for seamless completion of assessment. The transmission of a transfer pricing order from the Transfer Pricing Officer to the Assessing Officer is an internal administrative act and cannot impact statutory limitation, which is the exclusive prerogative of section 153.

iii) Power is granted to the Joint Commissioner to issue directions u/s. 144A for completion of assessment. That provision states that the Joint Commissioner, on his own motion or on reference made to him by the Assessing Officer or assessee, may call for and examine the record of any proceedings in which the assessment is pending. If he considers that having regard to the nature of the case, amount involved or any other reason, it is necessary or expedience to issue directions for the guidance of the Assessing Officer, he may do so and such directions shall be binding upon the Assessing Officer. The issuance of the direction and the communication of such direction by the Joint Commissioner to the Assessing Officer to aid in the completion of assessment is expected to be within the overall limits provided for completion of assessment u/s. 153 and Explanation 1 thereto and nowhere is it contemplated that such reference would extend the limitation.

iv) The last of the information in this case was received by the Transfer Pricing Officer on March 27, 2019, by which time, the time for completion of regular assessment had itself long elapsed, on December 31, 2018. The order was barred by limitation.

v) In the light of the detailed discussion as above, the impugned order of assessment is held to be barred by limitation and is set aside. This writ petition is allowed.”

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Union Budget Receipt Side Movement Trends of Last 20 Years

An analysis of the Abstract of Receipts side of the Union Budget reveals some very interesting macro trends impacting federalism, fiscal prudence and impact of the decisions of Ministry of Finance (both at Centre and states) leadership.

Please see the Tables below which set the stage for study and discussions. Note that the values considered for study are ‘Revised Estimates’ of the completing year, given in the Budget booklet for the upcoming year. The details are:

A) Budget Statement details of Gross Receipts.

All Values are in Rupees Crores.

Abstract of Budget Revenues — Revised Estimates (RE) for the year coming to an end.

Details	RE 2002/03	RE 2012/13	RE 2022/23	CAGR % – 20 Years
REVENUE RECEIPTS
Total Tax Revenue collection (refer Note 1 below)	221918	1038037	3043067	14.00
Calamity Contingency	-1600	-4375	-8000
Share of States	-56141	-291547	-948406	15.18
Centre – Net Tax Revenue (refer Note 2 below)	164177	742115	2086661	13.56
Non Tax Revenue (dividends, profits, receipts of union territories, others)	72759	129713	261751	6.61
Total Centre Revenue Receipts	236936	871828	2348412	12.15
Total Centre Capital Receipts	161779	564148	1842061	12.93
Draw-down of cash		-5150
Total Budget Receipts	398715	1430826	4190473	12.48

RATIOS
1. Share of states in gross tax revenue – %	25.30	28.09	31.17
2. Composition of Total Revenue Receipts
A. Centre Net Revenue Receipt	41.18%	51.87%	49.80%
B. Non Tax Revenue	18.25%	9.07%	6.25%
C. Capital Receipts	40.58%	39.43%	43.96%
3. Taxes contribution to Total Revenue Receipts
Direct Tax
Corporate Tax	44700	358874	835000	15.76
Income Tax	37300	206095	815000	16.67
Expenditure & Wealth Tax	445	866	0
Cumulative Gross Direct Taxes	82445	565835	1650000	16.16
% of Gross Direct Tax to Total Tax Collection	37.15	54.51	54.22
Direct Tax
Customs Duty	45500	164853	210000	7.95
Union Excise Duty	87383	171996	320000
Service Tax	5000	132687	1000
GST	0	0	854000
Cumulative – ED, ST, GST	92383	304683	1175000	13.56
Cumulative Indirect Tax	137883	469536	1385000	12.23
% of Gross Indirect Tax to Total Tax Collection	62.13	45.23	45.51

Details

RE 2002/03

RE 2012/13

RE 2022/23

CAGR % – 20 Years

REVENUE RECEIPTS

Total Tax Revenue collection (refer Note 1 below)

221918

1038037

3043067

14.00

Calamity Contingency

-1600

-4375

-8000

Share of States

-56141

-291547

-948406

15.18

Centre – Net Tax Revenue (refer Note 2 below)

164177

742115

2086661

13.56

Non Tax Revenue (dividends, profits, receipts of union
territories, others)

72759

129713

261751

6.61

Total Centre Revenue Receipts

236936

871828

2348412

12.15

Total Centre Capital Receipts

161779

564148

1842061

12.93

Draw-down of cash

-5150

Total Budget Receipts

398715

1430826

4190473

12.48

RATIOS

1. Share of states in gross
tax revenue – %

25.30

28.09

31.17

2. Composition of Total
Revenue Receipts

A. Centre Net Revenue Receipt

41.18%

51.87%

49.80%

B. Non Tax Revenue

18.25%

9.07%

6.25%

C. Capital Receipts

40.58%

39.43%

43.96%

3. Taxes contribution to
Total Revenue Receipts

Direct Tax

Corporate Tax

44700

358874

835000

15.76

Income Tax

37300

206095

815000

16.67

Expenditure & Wealth Tax

445

866

Cumulative Gross Direct Taxes

82445

565835

1650000

16.16

% of Gross Direct Tax to Total Tax Collection

37.15

54.51

54.22

Direct Tax

Customs Duty

45500

164853

210000

7.95

Union Excise Duty

87383

171996

320000

Service Tax

5000

132687

1000

GST

854000

Cumulative – ED, ST, GST

92383

304683

1175000

13.56

Cumulative Indirect Tax

137883

469536

1385000

12.23

% of Gross Indirect Tax to Total Tax Collection

62.13

45.23

45.51

Notes:

1. Total Tax Revenue Collection = Cumulative Gross Direct Tax Plus Cumulative Indirect Tax plus other minor tax receipts.

2. Centre –– Net Tax Revenue = Total Tax Revenue Collection minus Share of states as per agreed devolution per GST Committee and Finance Commission.

3. RE 2022/23 represents the year of receipt of GST Taxes. Cumulative Indirect Tax = Customs Duty plus Union Excise Duty plus Service Tax plus GST.

4. The above figures are taken from budget documents on a government website. Minor rounding off is ignored for the purpose of this article.

B) 20 Years Trends analysis of Union Budget Receipts side. It needs to be noted that 3 Prime Ministers were in Power at the Centre.

1. The share of states from Central Tax Collection Pool has increased over 20 years, from 25.30 per cent of Gross Tax to 31.17 per cent. This higher devolution of funds is also borne out by the Compound Annual Growth Rate percentage (CAGR %) increase in states share being higher than CAGR % increase in Total Tax Collection by the Centre. This trend is good for India’s federal polity since many crucial spending actions happen at States’ end. GST compensations for 5 years started from July 2017. It has to be seen whether this trend of States percentage share is maintained. In the personal view of the author, the answer is YES.

2. The increase in non-tax revenues is a weak link. It represents dividends, profits etc. That it’s CAGR % growth trajectory is restricted is evident since the growth percentage is just 6.61 per cent. The Central Public Sector Undertakings do not appear to be pulling their weight. It would be interesting to see what these receipts are as a percentage of Capital Invested on Govt of India Undertakings. Perhaps, that’s a separate topic but on the face of it – contrary to tax revenues, the non-tax revenues are not showing desired escalation. Also, the Customs Duty CAGR % growth is quite low, maybe because of high import tariffs in the past and duty rates adjustments under WTO requirements.

3. Gross Direct Tax Growth in CAGR% at 16.16 per cent is faster than Gross Indirect Tax growth at 12.23 per cent. This is also borne out by the percentage of Direct Tax and Indirect Tax to Total Tax Revenue collected. Direct Tax percentage collection is improving and is now higher in percentage terms than Indirect Taxes collection. Interestingly, over 20 years the Direct Tax collection percentage has improved from 37.15 per cent to 54.22 per cent. One may say that Income Tax in India is quite regressive (due to exclusion of income from agriculture) but even then, through the effective use of tax deducted at source / tax collected at source mechanism and computerization, the income tax collections have spurted.

4. It is the belief of many progressive economists that a Nation must have a superior Direct Tax collection than Indirect Tax collection, because Direct Tax is considered egalitarian and equitable since based on income levels while Indirect Tax does not consider income levels but is based on nature of Goods and Services sold. The more the shift to Direct Taxes improved collection, that nation’s tax structure is considered progressive.

5. The Capital Receipts side (mainly in the nature of Borrowings / Debt) has stayed constant over 20 years at between 39 – 44 per cent of Total Central Receipts for the relevant year. Despite almost 3 years of Covid pandemic impact, the Debt taken in India Budget workings has not gone overboard. The high infrastructure spending, the Covid impact slowdown and the Russia / Ukraine war have given India a jolt on inflation. However, we seem to be escaping the banking sector financial security issue. While India is facing a sticky core inflation (mainly imported), it is in much better shape than many other economies – facing concurrent inflation and slowdown and now banking sector instability. This is due to fiscal prudence practiced over 20 years.

6. For the purpose of taking such decadal comparatives (this is a 2 decades’ period) of Budget Receipts – it would help if some improved indexation criteria were released and implemented. The value of the Indian Rupee in 2002/03 is certainly not the same as the value in 2012/13 and 2022/23. Inflation has eaten away a lot of value. For a proper comparative of 2022/23, 2012/13 to 2002/23, an indexed value for both years compared to year 2002/03, would give a much more revealing outcome. Constant and comparative Rupee values for all 3 years 2002/03, 2012/13 and 2022/23 would make this a much more sensible comparative analysis. At indexed values (removing the effect of inflation), the comparatives of the 3 years across 2 decades would yield a much better comparative analysis since numbers value is constant.

shailesh.kwebmaker

Interest under section 201(1A) – TDS – Interest for delay in remitting tax deducted at source – No liability for interest if tax is not deductible at source.

9 Special Tahsildar, Land Acquisition (General) vs. GOI[2023] 451 ITR 484 (Ker)

Date of order: 15th September, 2022

Section 201(1A) of ITA 1961Interest under section 201(1A) – TDS – Interest for delay in remitting tax deducted at source – No liability for interest if tax is not deductible at source.

Special Tahsildar, Land Acquisition (General) paid compensation to persons from whom the land was acquired for establishing the Government Medical College and deducted tax at source from the compensation paid. The tax deducted in the month of January 2014 was paid to the credit of the Government only in the month of June 2014 and the reason for the delay was explained to be the fact that Tahsildar was deputed for election duty during the period January 2014 to May 2014 in connection with the General Elections. However, the AO levied interest under section 201(1A) of the Income-tax Act, 1961.

The Tahsildar filed a writ petition and challenged the demand for interest.

It was then contended on behalf of the Tahsildar that the liability to deduct tax and pay it to the Department is only in respect of sums for which the tax is required to be deducted at source. Since the lands which were the subject matter of acquisition were agricultural lands, which fell outside the definition of capital asset under section 2(14) of the Act, there was no question of deducting tax at source in respect of compensation paid to the land owners and therefore levy of interest under section 201(1A) was unwarranted.

The Department contended that levy of interest under section 201(1A) was statutory and the moment there was delay in payment of tax deducted, interest had to be levied.

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

“i) It is clear from a reading of section 201 of the Income-tax Act, 1961, that the liability to deduct tax arises only when it is required to be deducted under the provisions of the Act. In other words, where there is no liability to deduct tax at source, the mere fact that tax was deducted at source and paid to the Income-tax Department belatedly, cannot give rise to a claim for interest u/s. 201(1A) of the Act. Interest u/s. 201(1A) of the Act is obviously to compensate the Government for the delay in payment of taxes, which are rightfully due to the Government.

ii) Since the Department itself had refunded the amount of tax deducted at source, it could not be said at this point of time that the land in question was not agricultural land falling outside the definition of capital asset u/s. 2(14).

iii) The delay in remitting the amounts deducted as tax at source arose only on account of the fact that the Officer in question was deputed for election duty for the period from January 2014 to May 2014 in connection with the Lok Sabha Elections of 2014. Cumulatively, these facts made it clear that the levy of interest under 201(1A) was wholly unwarranted in the facts and circumstances of this case.”

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Section 115-O read with Dividend Article of DTAA – Dividend Distribution Tax (DDT) rate prescribed under section 115-O cannot be reduced to rate mentioned in Dividend Article of DTAA rate applicable to a non-resident shareholder.

20. DCIT vs. Total Oil India (Pvt) Ltd
[2023] 149 taxmann.com 332 (Mumbai-Trib.) (SB)
[ITA No: 6997/Mum/2019]
A.Y.: 2016-17
Date of order: 20th April, 2023

Section 115-O read with Dividend Article of DTAA – Dividend Distribution Tax (DDT) rate prescribed under section 115-O cannot be reduced to rate mentioned in Dividend Article of DTAA rate applicable to a non-resident shareholder.

FACTS

Taxation of dividend income under the Act has been subject to various amendments from time to time. Pre-1997, classical system of taxation was prevalent wherein the dividends were taxed in the hands of shareholders and companies declaring these dividends were required to withhold taxes on dividend income. From the year 1997 to 2020 (except for April 2002 to March 2003) the classical system was done away with and DDT regime existed. As per this regime, the company declaring dividend was made liable to pay taxes on dividends declared/distributed or paid. Consequently, such dividend income was regarded as exempt in the hands of the shareholders under the ITL. Vide Finance Act, 2020, DDT regime was abolished, and the classical system of taxation was restored.

On the judicial front, various Courts and ITAT have ruled on the DDT issue. Notably, given below are the relevant observations for the present controversy:

The SC in the case of Tata Tea⁴ held that the entirety of income distributed by the company engaged in the business of growing and manufacturing tea is dividend subject to DDT even if it is partially paid out of the exempt agricultural income of the company. A dividend distributed by a company, being a share of its profits declared as distributable among the shareholders, does not partake in the character of profits from which it reaches the hands of the shareholder. Since dividend income is not agricultural income, the same will be chargeable to tax.
Further, the SC in the case of Godrej & Boyce⁵ held that the dividend income was exempt in the hands of the shareholder and, hence, any expense in relation to such exempt income cannot be regarded as deductible. The SC held that tax incidence on dividend income was in the hands of the payer company. A domestic company is liable to pay DDT as a distinct entity and not as an agent of the shareholders. Accordingly, the income is not taxable in the hands of recipient shareholders and, thus, the same did not form part of the total income of the shareholder.
Delhi ITAT in the case of Giesecke & Devrient⁶ and Kolkata ITAT in the case of Indian Oil Petronas Pvt Ltd⁷, held that the DDT rate on dividend paid to non-resident shareholders needs to be restricted to the rates prescribed under the DTAA, if the conditions for DTAA entitlement are satisfied. The Tribunal noted that DDT is effectively a tax on dividend income, the incidence of which needs to be seen from the perspective of the recipient shareholder. Accordingly, the income tax should be charged at the lower of rate specified under the Act or DTAA for the recipient.

4    (2017) 398 ITR  260 (SC)
5    394 ITR 449 (SC),
6    [TS-522-Tribunal-2020]
7    [TS-324-Tribunal-2021(Kol)]

Later, Mumbai ITAT in the case of Total Oil India Pvt Ltd⁸ expressed its apprehensions about the correctness of the Tribunal decisions in the case of Giesecke & Devrient and Indian Oil Petronas Pvt Ltd and directed for the constitution of a Special Bench

Question for consideration before the Special Bench was:

“Where dividend is declared, distributed or paid by a domestic company to a non-resident shareholder(s), which attracts additional income-tax (tax on distributed profits) referred to in section 115-O of the Income-Tax Act,1961 (in short ‘the Act’), whether such additional income-tax payable by the domestic company shall be at the rate mentioned in Section 115-O of the Act or the rate of tax applicable to the non-resident shareholder(s) with reference to such dividend income”

HELD

Though dividend is an income in the hands of the shareholder, taxability need not necessarily be in the hands of the shareholder. The sovereign has the prerogative to tax the dividend, either in the hands of the recipient⁹ of the dividend or otherwise¹⁰.

Section 115-O is a complete code in itself, in so far as levy and collection of tax on distributed profits is concerned. Charge in the form of additional income tax (i.e., DDT) is created on amount declared, distributed or paid by domestic company by way of dividend. Further, DDT is a tax on “distributed profits” and not a tax on “dividend distributed”. The non-obstante nature of provision is an indication that the charge under the DDT provisions is independent and divorced from the concept of “total income” under the ITL.

DDT is liability of the company and not payment on behalf of the shareholders as DDT paid by the company shall be treated as the final payment of tax in respect of the amount declared, distributed or paid as dividends. The fact that no further credit or deduction can be claimed by the company or by any other person also suggests that shareholder does not enter the domain of DDT. The payee’s right to recover excess taxes which are deducted/collected at source or the right of subrogation in the event when payer pays excess over and above what he/she has to pay to the payee, is absent in the entire scheme of DDT provisions under the Act.

8    (ITA No. 6997/Mum/2019)
9    Classical/progressive system
10    Simplistic system where the company which distributes the dividend is required to discharge the tax liability on the sum distributed by way of dividend as an additional income tax on the company itself and consequently such dividend income was exempt in the hands of shareholders

The SC in the case of Tata Tea Co. Ltd¹¹ did not deal with the nature of DDT, i.e., whether it is tax on the company or a tax on the shareholder. Reliance placed by the assessee on the said SC decision to suggest that DDT is a tax paid on behalf of the shareholder is not valid. The decision of SC in Tata Tea (supra) does not support that DDT is tax paid on behalf of the shareholders or that DDT is not the liability of the company. The SC, in that case, upheld the constitutional validity of DDT levy in respect of dividend paid out of that portion of profit of tea manufacturing company which is regarded as agricultural income of the company. The SC held that dividend does not bear the same character as profits from which it is paid and ruled that dividend is included within the definition of ‘income’ under the ITL.
Assessee’s reliance on the SC ruling in case of Godrej & Boyce Mfg. Co Ltd.¹² to contend that DDT is paid on behalf of the shareholder and has to be regarded as payment of liability of the shareholder, discharged by the domestic company paying DDT is also not correct. The observation of the underlying Bombay HC decision regarding the legal characteristics of DDT is that it is tax on a company paying the dividend, is chargeable to tax on its profits as a distinct taxable entity, the domestic company paying DDT does not do so on behalf of the shareholder, and nor does it act as an agent of the shareholder in paying DDT. The conclusion cannot be said to have been diluted or overruled by the SC. The SC by taking a different basis reached the same conclusion that DDT is not a tax paid by the domestic company on behalf of the shareholder.

11    [(2017) 398 ITR  260 (SC)]
12    394 ITR 449

As against above, the Bombay HC in the case of Small Industries Development Bank of India¹³ (SIDBI) held that DDT is not a tax on dividend in the shareholder’s hands but an additional income-tax payable on the company’s profits, more specifically on that part of the profits which is declared, distributed or paid by way of dividend.
Interplay of DDT and DTAA
DTAAs need to be considered from the perspective of the recipients of income, i.e., shareholders. Where DDT paid by the domestic company in India, is a tax on its income distributed and not tax paid on behalf of the shareholder, the domestic company does not enter the domain of DTAA at all.
The DTAAs should specifically provide for treaty benefit in case of DDT levied on domestic company. Illustratively, the protocol to India-Hungary DTAA has extended the treaty protection¹⁴ to DDT wherein it has been stated that when the company paying the dividends is a resident of India then tax on distributed profits shall be deemed to be taxed in the hands of shareholder and will be eligible for reduced tax rate as provided in the DTAA.
Thus, wherever the Contracting States intend to extend the treaty protection to the domestic company paying dividend distribution tax, only then, the domestic company can claim benefit of the DTAA.

13    133 taxmann.com 158
14    Protocol to India-Hungary DTAA provides: “When the company paying the dividends is a resident of India the tax on distributed profits shall be deemed to be taxed in the hands of the shareholders and it shall not exceed 10 per cent of the gross amount of dividend”

shailesh.kwebmaker

Article 28 of India-Malaysia DTAA – Article 28 cannot be invoked if the company is having substance in the form of employees, revenue and is set up for valid business reasons; Article 12 of India-Malaysia DTAA – Sub-licensing payment to a Malaysian company for: (a) Logo Rights; (b) Advertising Privileges; (c) Promotion Activities Rights; and (d) Rights to Complimentary Tickets, in respect of the cricket matches outside India, is not in nature of royalty under Article 12 of India-Malaysia DTAA.

19. ITO vs. Total Sports & Entertainment India Pvt Ltd
[TS-145-ITAT-2023(Mum)]
[ITA No: 5717 & 6129/Mum/2016]
A.Y.: 2014-15
Date of order: 27th March, 2023

Article 28 of India-Malaysia DTAA – Article 28 cannot be invoked if the company is having substance in the form of employees, revenue and is set up for valid business reasons; Article 12 of India-Malaysia DTAA – Sub-licensing payment to a Malaysian company for: (a) Logo Rights; (b) Advertising Privileges; (c) Promotion Activities Rights; and (d) Rights to Complimentary Tickets, in respect of the cricket matches outside India, is not in nature of royalty under Article 12 of India-Malaysia DTAA.

FACTS

Assessee, an Indian company, was engaged in the business of seeking rights sponsorships for any sports and entertainment event. It is a WOS of a Cayman Islands company (Cayman Hold Co). Cayman Hold Co was a holding company of 11 companies around the world including the assessee and a Malaysia company.

Cayman Hold Co had acquired advertisement rights of the Sri Lanka National Cricket Team¹. The rights included: (a) Logo Rights; (b) Advertising Privileges; (c) Promotion Activities Rights; and (d) Rights to Complimentary Tickets. Cayman Hold Co had sub-licensed these rights to the Malaysian company which in turn further sub-licensed them to the assessee.

The Assessee monetized these rights to an Indian company and made sub-licensing payment to Malaysian company without deducting TDS.

Article 28 of India-Malaysia DTAA provides that a person shall not be entitled to its benefits if its affairs were arranged in such a manner as if the main purpose or one of the main purposes was to take the benefits of India-Malaysia DTAA. On the footing that: a) payments were in nature of royalty and b) Malaysian Company was interposed between the assessee and Cayman Hold Co to avail DTAA benefits of India-Malaysia DTAA, AO invoked Article 28 of India-Malaysia DTAA. Accordingly, AO held the assessee to be in default. CIT(A) held that Article 28 was not applicable to case of the assessee. CIT(A) bifurcated the payments in two parts in the ratio of 60:40. He considered 60 per cent of payment as advertisement charges for display of logo and content of billboard and held they were not in nature of royalty. He considered balance 40 per cent of payment as for the use of name ‘official partners’ or ‘official advertisers’ providing links on the website of the assessee and use of various items (which included photographs, etc.) of the teams for promoting products related to the assessee’s clients, and regarded them as royalty. Being aggrieved both parties appealed to ITAT.

HELD

Article 28 of India-Malaysia DTAA

After considering the following facts, the ITAT held the that Malaysian company was not a conduit or paper company set up to avail benefits under India-Malaysia DTAA.

All the senior management team members (CEO, COO, CFO, etc.) were located in Malaysia.
Rights obtained by Hold Co or other companies in the group were generally sub-licensed to the Malaysia company as the head office entity.
Practice of sub-licensing was followed for companies across world and not only for India.
Turnover of the Malaysian company was much higher than the revenue earned by it from the assessee.
The Malaysian company was in existence much prior to the Hold Co and the assessee.
Conclusion could have been different if the entire setup would have been in Cayman Islands and the Malaysian entity would have been a mere name lender in this set of transactions with no role to play.

1. Similar was the arrangement in arrangement in case of sponsorship rights of the West Indies Cricket Team.

ROYALTY TAXATION

ITAT followed Delhi HC judgment in the case of Sahara India Financial Corporation Ltd², in which it was held as follows.
Payment towards various sponsorship rights in respect of ICC tournament was not in connection with the right to use, or by way of consideration for the right to use, any of the three categories³ mentioned in Article 13 of the DTAA.
There was no transfer of, copyright or, the right to use the copyright, flowing to the assessee. Therefore, payment made by the assessee would not fall within article 13(3)(c) of the said DTAA.

2     [2010] 321 ITR 459 (Delhi)
3    (a) any patent, trademark, design or model, plan, secret formula or process;
(b) industrial, commercial or scientific equipment or information concerning industrial, commercial or scientific experience; and
(c) any copyright of literary, artistic or scientific work cinematographic films and films or tapes for radio or television broadcasting.

shailesh.kwebmaker

Important Amendments by the Finance Act, 2023

This article, divided into 4 parts, summarises key amendments carried out to the Income-tax Act, 1961 by the Finance Act, 2023. Due to space constraints, instead of dealing with all amendments, the focus is only on important amendments with a detailed analysis. This will provide the readers with more food for thought on these important amendments. – Editor

PART I | NEW Vs. OLD TAX REGIME w.e.f. AY 2024-25

DINESH S. CHAWLA I ADITI TIBREWALA

Chartered Accountants

“The old order changeth yielding place to new and God fulfils himself in many ways lest one good custom should corrupt the world”.

Lord Alfred Tennyson wrote these famous lines several decades back.

In the present context, the old order in the world of Income tax in India is changing. And it is changing very fast. The new order is here in the form of the “new tax regime”. The new regime that was brought in vide the Finance Act 2020 has already been replaced now by a newer tax regime vide Finance Act 2023.

This article aims at simplifying the newest new tax regime for readers while comparing it with the erstwhile “old” regime.

I. APPLICABILITY AND AMENDMENTS

The Indian Government has introduced an updated new tax regime that will come into effect from AY 2024-25. This new regime can be exercised by Individuals, HUF, AOP (other than co-operative societies), BOI, and AJP (Artificial Juridical Person) under Sec 115BAC.

This new regime is a departure from the erstwhile regime that has been in place for several decades.

The 5 major amendments that affect the common man are:

1. Rebate limit increased from Rs. 5 lakh to Rs. 7 lakh;

2. Tax Slabs updated to 5 slabs with new rates (as given below);

3. Standard deduction for salaried tax payers would now be available even under the new regime;

4. Reduction in the top rate of surcharge from 37% to 25%, bringing the effective tax rate to 39% as compared to the erstwhile 42.74%;

5. Leave encashment limit for non-government salaried employees enhanced to Rs. 25 lakhs.

II. NEW SLABS & RATIONALE

New Tax Regime (Default Regime, w.e.f. AY 2024-25)

As per the amended law, the new regime has become the default regime w.e.f. AY 2024-25. Any taxpayer
who wishes to continue to stay in the old tax regime will have to opt-out of the new regime. In the original avatar of the new tax regime, the situation was exactly the opposite whereby the old regime was the default regime and anyone wanting to opt for the new regime had to do so in the ITR or by way of a separate declaration in case of persons having business/professional income.

The rationale behind the tweaks in the new tax regime is that it is expected to benefit the common-man with 20% lesser tax out-flow due to lower tax rates and streamlining of the tax slabs, when compared to the old regime. The catch here is that taxpayers will have to forego many investment-based deductions and exemptions vis-à-vis the old regime except the following:

1. Standard deduction of INR 50,000 under Sec 16,

2. Transport allowance for specially abled,

3. Conveyance allowance for travelling to work,

4. Exemption on voluntary retirement under Sec 10(10C),

5. Exemption on gratuity under Sec 10(10D),

6. Exemption on leave encashment under Sec 10(10AA),

7. Interest on Home Loan under Sec 24b on let-out property,

8. Investment in Notified Pension Scheme under Sec 80CCD(2),

9. Employer’s contribution to NPS,

10. Contributions to Agni veer Corpus Fund under Sec 80CCH,

11. Deduction on Family Pension Income,

12. Gift up to INR 5,000,

13. Any allowance for travelling for employment or on transfer.

The tax slabs under the new regime under Sec 115BAC(1A) are as follows:

Total Income	Tax Rate
Up to 3 lakh	Nil
From 3 lakh to 6 lakh	5%
From 6 lakh to 9 lakh	10%
From 9 lakh to 12 lakh	15%
From 12 lakh to 15 lakh	20%
Above 15 lakh	30%

Note: Surcharge and Cess will be over and above the tax rates.

Old Tax Regime

The old regime continues to be available to the taxpayers but, as mentioned earlier, they must now opt-in to be covered under this regime. Any taxpayer who has been claiming investment-based deductions may continue to opt for this regime, and may switch back & forth between the new regime and old regime (except for persons with income chargeable under the head “Profits and Gains of Business or Profession” (PGBP) as per their choice, on a yearly basis.

The tax slabs under the old regime are as follows:
Note: Surcharge and Cess will be over and above the tax rates.

Key Differences:

One of the key differences between the new regime and the old regime is the lower tax rates under the new regime. Taxpayers will be able to save money by way of lesser tax outflow, which will come at the cost of foregoing of deductions for investment-based savings.

Under the new regime, the taxpayers will not be able to claim investment-based deductions (Sec 80C, Sec 80D, etc.,) as well as certain exemptions that were available under the old regime. This means that taxpayers will have to pay taxes on their gross income without any deductions, with few exceptions (standard deductions, etc.).

This means that taxpayers will not be able to claim deductions for investments in tax-saving instruments like PPF, NSC, tuition fees for children, life & health insurance premium etc.

Taxpayers will also not be able to claim any deductions for home loan interest payments (in case of SOP), medical expenses, and education expenses, etc.

III. BENEFITS

The new regime has several benefits for taxpayers/tax department. Here are some of the key benefits:

1. Simpler structure (from the department’s perspective): The new regime has a simpler tax structure with lower tax rates. Taxpayers will no longer have to navigate the complex system of tax slabs and deductions that was prevalent under the old tax regime.

2. Lower rates: Under the new regime, taxpayers will be able to save money on taxes as the tax slabs are wider and tax rates are lower than the old regime. This will result in more disposable income (cash availability) for taxpayers.

3. No need for documentation: Since taxpayers are not allowed to claim deductions and exemptions under the new regime, they will no longer have to keep track of various tax-saving investments and deductions.

4. No investment proofs: Under the old regime, taxpayers had to submit investment proofs to claim tax deductions. Under the new regime, taxpayers will not be required to submit any investment proofs, as they are not allowed the deductions.

5. Encourages greater tax compliance: The simpler tax structure and lower tax rates under the new regime will encourage more people to file their tax returns, which will increase the tax base for the government.

6. Higher Rebate: Full tax rebate up to Rs. 25,000 on an income up to Rs. 7 lakh under the new regime, whereas, the rebate is capped at Rs. 12,500 under the old regime up to an income of Rs. 5 lakh. Effectively NIL tax outflow for income up to Rs. 7 lakh.

7. Reduced Surcharge for Individuals: The surcharge rate on income over Rs. 5 crore has been reduced from 37% to 25%. This move will bring down their effective tax rate from 42.74% to 39%.

IV. WHAT SHOULD YOU CHOOSE?

A salaried employee has to choose between the new regime and old regime at the beginning of each Financial Year by communicating in writing to the employer. If an employee fails to do so, then the employer shall deduct tax at source (TDS) as computed under the new regime. However, once the regime (new or old) is opted, it is not clear as to whether any employer will permit an employee to change the option anytime during the year. Therefore, salaried tax payers need to be very careful about what they chose at the beginning of the year.

An Individual who is earning income chargeable under the head “Profits and Gains of Business or Profession” has the option to opt out of the new regime and choose the old regime only once in a lifetime. Once such a taxpayer opts for the old regime, then he can opt out of it only once in his lifetime. Thereafter, it would not be possible to opt back into the old regime again as long as he is earning income under the head PGBP.

WHICH SCHEME IS MORE BENEFICIAL FOR A TAXPAYER?

1. Under the old regime, taxpayers can claim deductions and exemptions to save money (cash flows) on their taxes. However, the tax rates under the old regime are significantly higher than the tax rates under the new regime.

2. Under the new regime, taxpayers will not be able to claim most deductions and exemptions. However, the tax rates are lower, which can result in lower tax outflow, especially for those with lower / no deductions.

3. Taxpayers with lower deductions may benefit from the new regime as the lower tax rates will offset the lack of deductions. On the other hand, taxpayers with significant deductions may find the old regime more beneficial.

4. The parameters to effectively evaluate and select the tax regime (new or old) shall significantly depend on the tax profile of the taxpayer. Whichever regime is more beneficial in terms of better cash flows and their immediate financial needs, the taxpayers can evaluate and get a comparison done from the following link: https://incometaxindia.gov.in/Pages/tools/115bac-tax-calculator-finance-bill-2023.aspx.

5. The above link can also be accessed by scanning the following QR Code

PART II | CHARITABLE TRUTS

GAUTAM NAYAK

Chartered Accountant

In the context of taxation of charitable trusts, there were high expectations from the budget that the rigours of the exemption provisions would be relaxed, in the backdrop of the strict interpretation given to these provisions by the recent Supreme Court decisions in the cases of New Noble Education Society vs CCIT 448 ITR 594 and ACIT vs Ahmedabad Urban Development Authority 449 ITR 1. However, such hopes were dashed to the ground, as no amendment has been made in relation to the issues decided by the Supreme Court – eligibility for exemption of educational institutions, interpretation of the proviso to section 2(15) and the concept of incidental business under section 11(4A). On the other hand, some of the amendments further tighten the noose on charitable trusts, whereby their very survival may be at stake due to small mistakes.

Exemption for Government Bodies

The availability of exemption under section 11 to various government bodies and statutory authorities and boards, was also disputed in the case before the Supreme Court of Ahmedabad Urban Development Authority (supra). While the Supreme Court decided the issue in favour of such bodies, a new section 10(46A) has now been inserted, exempting all income of notified bodies, authorities, Boards, Trusts or Commissions established or constituted by or under a Central or State Act for the purposes of dealing with and satisfying with the need for housing accommodation, planning, development or improvement of cities, towns and villages, regulating or regulating and developing any activity for the benefit of the general public, or regulating any matter for the benefit of the general public, arising out of its objects. The notification is a one-time affair, and not for a limited number of years. Once such a body is notified, its entire income would be exempt, unlike under section 10(46) where only notified incomes are exempt, irrespective of the surplus that it earns without any controversy. Under this section, there is also no restriction on carrying on of any commercial activity, as contained in section 10(46). In case exemption is claimed u/s 10(46A), no exemption can be claimed u/s 10(23C).

Time Limit for Filing Forms for Exercise of Option/Accumulation

Under Clause (2) of explanation 1 to section 11(1), a charitable organisation can opt to spend a part of its unspent income in a subsequent year, if it has not applied 85% of its income during the year. This can be done by filing Form 9A online. Under section 11(2), it can choose to accumulate such unspent income for a period of up to 5 years, by filing Form 10 online. The due date for filing both these forms was the due date specified u/s 139(1) for furnishing the return of income, which is 31st October.

This due date for filing these two forms is now being brought forward by two months, effectively to 31st August. Since this amendment is effective 1st April 2023, it would apply to all filings of such forms after this date, including those for AY 2023-24. Therefore, charitable organisations would now have to keep in mind 3 tax deadlines – 31st August for filing Form No 9A and 10, 30th September for filing audit reports in Form 10B/10BB (in the new formats), and 31st October for filing the return of income.

The ostensible reason for this change is stated in the Explanatory Memorandum to be the difficulty faced by auditors in filling in the audit report, which requires reporting of such amounts accumulated or for which option is exercised, with the audit report having to be filed a month before the due date of filing such forms. Practically, this is unlikely to have been a problem in most cases, as generally auditors would also be the tax consultants who would be filing the forms, or where they are different, would be in co-ordination with the tax consultants.

The purpose could very well have been served by making the due date for filing these forms the same as the due dates for filing the audit reports. Since the figures for accumulation or for the exercise of the option can be determined only on the preparation of the computation of income, which is possible only once the audited figures are frozen, practically the audit for charitable organisations would now have to be completed by 31st August to be able to file these 2 forms by that date.

Of course, in case these forms are filed belatedly, an application can be made to the CCIT/CIT for condonation of delay – refer to CBDT Circular No. 17 dated 11.7.2022.

A similar change is made in section 10(23C) for seeking accumulation of income.

Exemption in Cases of Updated Tax Returns

A charitable trust is entitled to exemption u/s 11 only if it files its return of income within the time stipulated in section 139. An updated tax return can be filed u/s 139(8A) even after a period of 2 years. The Finance Act 2023 has now amended section 12A(1)(b) to provide that the exemption u/s 11 would be available only if the return is filed within the time stipulated under sub-sections (1) or (4) of section 139, i.e. within the due date of filing return or within the time permitted for filing belated return. Effectively, a trust cannot now claim exemption by filing an updated tax return, unless it has filed its original return within the time limits specified in section 139(1) or 139(4).

Exemption for Replenishment of Corpus and Repayment of Borrowings

The Finance Act 2021 had introduced explanation 4 to section 11(1), which provided that application from the corpus for charitable or religious purposes was not to be treated as an application of income in the year of application, but was to be treated as an application of income in the year in which the amount was deposited back in earmarked corpus investments which were permissible modes. Similar provisions were introduced for application from borrowings, where only repayment of the borrowings would be treated as an application of income in the year of repayment.

Such treatment of recoupment of corpus or repayment of loans has now been made subject to various conditions by the Finance Act, 2023 with effect from AY 2023-24 – i) the application not having been for purposes outside India, ii) is not towards the corpus of any other registered trust, iii) has not been made in cash in excess of Rs 10,000, iv) TDS having been deducted if applicable, has been actually paid, or v) has not been for provision of a benefit to a specified person.

Further, such treatment as the application would now be permitted with effect from AY 2023-24, only if the recoupment or repayment has been within 5 years from the end of the year in which the corpus was utilised. The reason stated for this amendment is that availability of an indefinite period for the investment or depositing back to the corpus or repayment of the loan will make the implementation of the provisions quite difficult. However, this time restriction brought in by the Finance Act 2023 would create serious difficulty for trusts who undertake significant capital expenditure by borrowing or utilising the corpus. Recoupment of such large expenditure or repayment of such a large loan may well exceed 5 years, in which case the recoupment or repayment would not qualify to be treated as an application of income, though the income of that year would have been used for this purpose. Such a provision is extremely harsh and will seriously hamper large capital expenditure by charities for their objects. A longer period of around 10 years would perhaps have been more appropriate.

Besides, recoupment or repayment of any amount spent out of corpus or borrowing before 31st March 2021 would also not be eligible to be treated as an application in the year of recoupment or repayment with effect from AY 2023-24. This is to prevent a possible double deduction, as a trust may have claimed such spending as an application of income in the year of spending since there was no such prohibition in earlier years.

Similar amendments have been made in section 10(23C).

Restriction on Application by Way of Donations to Other Trusts

Hitherto, a donation to another charitable organisation by a charitable organisation was regarded as an application of income for charitable purposes. An amendment was made by the Finance Act 2017, effective AY 2018-19, by insertion of explanation 2 to section 11(1) to the effect that a donation towards the corpus of another charitable organisation shall not be treated as an application of income. The Finance Act 2023 has now further sought to discourage donations to other charitable organisations by insertion of clause (iii) to explanation 4 to section 11(1). Henceforth, any amount credited or paid to another charitable organisation, approved under clauses (iv),(v),(vi) or (via) of section 10(23C) or registered under section 12AB, shall be treated as an application for charitable purposes only to the extent of 85% of such amount credited or paid with effect from AY 2024-25.

The Explanatory Memorandum states the justification for the amendment as under:

“3.2 Instances have come to the notice that certain trusts or institutions are trying to defeat the intention of the legislature by forming multiple trusts and accumulating 15% at each layer. By forming multiple trusts and accumulating 15% at each stage, the effective application towards the charitable or religious activities is reduced significantly to a lesser percentage compared to the mandatory requirement of 85%.

3.3 In order to ensure intended application toward charitable or religious purpose, it is proposed that only 85% of the eligible donations made by a trust or institution under the first or the second regime to another trust under the first or second regime shall be treated as application only to the extent of 85% of such donation.”

From the above explanatory memorandum, it is clear that, while the section talks of payments or credits to other trusts, it would apply only to such payments or credits which are by way of donation. The restriction would not apply to medical or educational institutions claiming exemption under clause (iiiab), (iiiac), (iiiad) or (iiiae) of section 10(23C), i.e. those organisations who are wholly or substantially financed by the government or whose gross receipts do not exceed Rs 5 crore, who are not registered u/s 12AB. It will also not apply to donations to charitable organisations, who may have chosen not to be registered u/s 12AB or u/s 10(23C).

This provision would obviously apply only in a situation where the donation is being claimed as an application of income, and would not apply to cases where the donation is not so claimed, on account of it being made out of the corpus, out of past accumulations under section 11(1)(a), etc.

The important question which arises for consideration is whether the balance 15% can be claimed by way of accumulation under section 11(1)(a), or whether such amount would be taxable, not qualifying for exemption under section 11. One view of the matter is that accumulation contemplates a situation of funds being available, which are kept back for spending in the future. If the funds have already been spent, it may not be possible to accumulate such amount u/s 11(1)(a).

The other view is that the 15% amount, though donated, would still qualify for the exemption. Reference may be made to the observations of the Supreme Court in the case of Addl CIT vs A L N Rao Charitable Trust 216 ITR 697, where the Supreme Court considered the nature of accumulation under sections 11(1)(a) and 11(2), as under:

“A mere look at Section 11(1)(a) as it stood at the relevant time clearly shows that out of total income accruing to a trust in the previous year from property held by it wholly for charitable or religious purpose, to the extent the income is applied for such religious or charitable purpose, the same will get out of the tax net but so far as the income which is not so applied during the previous year is concerned at least 25% of such income or Rs.10,000/- whichever is higher, will be permitted to be accumulated for charitable or religious purpose and will also get exempted from the tax net…..If 100 per cent of the accumulated income of the previous year was to be invested under section 11(2) to get exemption from income-tax then the ceiling of 25 per cent or Rs. 10,000, whichever is higher which was available for accumulation of income of the previous year for the trust to earn exemption from income-tax as laid down by section 11(1)(a) would be rendered redundant and the said exemption provision would become otiose. Out of the accumulated income of the previous year an amount of Rs. 10,000 or 25 per cent of the total income from property, whichever is higher, is given exemption from income-tax by section 11(1)(a) itself. That exemption is unfettered and not subject to any conditions. In other words, it is an absolute exemption. If sub-section (2) is so read as suggested by the revenue, what is an absolute and unfettered exemption of accumulated income as guaranteed by section 11(1)(a) would become a restricted exemption as laid down by section 11(2). ….Therefore, if the entire income received by a trust is spent for charitable purposes in India, then it will not be taxable but if there is a saving, i.e., to say an accumulation of 25 per cent or Rs. 10,000, whichever is higher, it will not be included in the taxable income.”

Since 15% of the donation is not considered to be applied for charitable purposes, it should be capable of accumulation, as per this decision.

The first interpretation does seem to be a rather harsh interpretation and does not seem to be supported by the intention behind the amendment, as set out in the Explanatory Memorandum. The figure of 85% also seems to have been derived from the fact that the balance 15% would in any case qualify for exemption under section 11(1)(a).

Consider a situation where a trust having an income of Rs. 100 donates its entire income to other charitable trusts. Had it not spent anything at all, it would have been entitled to the exemption of Rs. 15 under section 11(1)(a). Can it then be taxed on Rs. 15 merely because it has donated its entire income to other trusts? Based on the Explanatory Memorandum rationale, what is sought to be prohibited is the trust claiming accumulation of Rs. 15, and donating Rs. 85 to other trusts, who in turn claim 15% of Rs. 85 as accumulation. A possible view, therefore, seems to be that the trust should be entitled to the 15% accumulation u/s 11(1)(a), even though it has donated its entire income.

Similar amendments have been made in section 10(23C).

Registration u/s 12AB in case of New Trusts

Where a trust has not been registered under section 12AB and is applying for fresh registration, section 12A(1)(ac)(vi) provided that such a trust would have to apply for registration at least one month prior to the commencement of the previous year relevant to the assessment year from which registration was being sought. In such cases, section 12AB(1)(c) provided that such a trust would be granted provisional registration for a period of three years. Subsequently, as per section 12A(1)(ac)(iii), the trust would have to apply for registration 6 months prior to the expiry of a period of provisional registration, or within 6 months of commencement of its activities, whichever is earlier.

The law is now being amended with effect from 1.10.2023 to divide such cases of fresh registration into 2 types – those cases where activities have already commenced before applying for registration, and those cases where activities have not commenced till the time of applying for registration. The position is unchanged for trusts where activities have not yet commenced, with application having to be made one month prior to commencement of the previous year and provisional registration being granted.

In cases where activities have commenced, and such trust has not claimed exemption u/s 11 or 12 or section 10(23C)(iv),(v),(vi) or (via) in any earlier year, such trust can directly seek regular registration by filing Form 10AB, instead of Form 10A. Such trust may be granted registration, after scrutiny by the CIT, for a period of 5 years.

Unfortunately, the problem of a new trust (which has not commenced activities) having to seek registration prior to the commencement of the previous year has not been resolved even after this amendment. Take the case of a trust set up in May 2023. This trust would not be able to get exemption for the previous year 2023-24, since it has not applied one month prior to the commencement of the previous year (by 28th February 2023), a date on which it was not even in existence.

Similar amendments have been made in respect of approvals under clauses (iv),(v),(vi) and (via) of section 10(23C).

Cancellation of Registration u/s 12AB

The Explanation to section 12AB(4) provided for specified violations for which registration could be cancelled. Rule 17A(6) provided that if Form 10A had not been duly filled in by not providing, fully or partly, or by providing false or incorrect information or documents required to be provided, etc., the CIT could cancel the registration after giving an opportunity of being heard. The Finance Act 2023 has now amended section 12AB(4) with effect from 1.4.2023 to add a situation where the application made for registration/provisional registration is not complete or contains false or incorrect information, as a specified violation, which can result in cancellation of registration under section 12AB. In a sense, prior to this amendment, the provision in rule 17A(6) was ultra vires the Act. This amendment, therefore, removes this lacuna.

This provision is however quite harsh, where, for a simple clerical mistake while filling up an online form or forgetting to attach a document, the registration of a trust may be cancelled. Cancellation of registration can have severe consequences, attracting the provisions of Tax on Accreted Income under section 115TD at the maximum marginal rate on the fair market value of the assets of the trust less the liabilities. One can understand this provision applying to a situation where a trust makes a blatantly incorrect statement to falsely obtain registration, but the manner in which this provision is worded, even genuine clerical mistakes can invite the horrors of this provision. One can only wish and hope that this provision is administered with caution and in a liberal manner, whereby it is applied only in the rarest of rare cases.

Deletion of Second and Third Provisos to section 12A(2)

The second and third provisos to section 12A(2) provided a very important protection to charitable entities which had been in existence earlier, but had not applied for registration earlier u/s 12A/12AA/12AB. When such entities made an application for registration, they could not be denied exemption u/s 11 for earlier years for which assessment proceedings were pending, or reassessment proceedings could not be initiated in respect of earlier years on the ground of non-registration of such entity. These two provisos have been deleted by the Finance Act 2023, with effect from 1.4.2023.

The ostensible reason given for such deletion, as explained in the Explanatory Memorandum, is as under:

“4.5 Second, third and fourth proviso to sub-section (2) of section 12A of the Act discussed above have become redundant after the amendment of section 12A of the Act by the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020. Now the trusts and institutions under the second regime are required to apply for provisional registration before the commencement of their activities and therefore there is no need of roll back provisions provided in second and third proviso to sub-section (2) of section 12A of the Act.

4.6 With a view to rationalise the provisions, it is proposed to omit the second, third and fourth proviso to sub-section (2) of section 12A of the Act.”

The statement that these provisions have become redundant does not seem to be justified, as even now, a trust already in existence, which seeks registration for the first time, may desire such exemption for the pending assessment proceedings or protection from reassessment for earlier years. A very important protection for unregistered trusts, which was inserted with a view to encourage them to come forward for registration, has thus been eliminated.

These provisions had been inserted by the Finance (No 2) Act, 2014, which at that time, had explained the rationale as under:

“Non-application of registration for the period prior to the year of registration causes genuine hardship to charitable organisations. Due to absence of registration, tax liability gets attached even though they may otherwise be eligible for exemption and fulfil other substantive conditions. The power of condonation of delay in seeking registration is not available under the section.

In order to provide relief to such trusts and remove hardship in genuine cases, it is proposed to amend section 12A of the Act to provide that in case where a trust or institution has been granted registration under section 12AA of the Act, the benefit of sections 11 and 12 shall be available in respect of any income derived from property held under trust in any assessment proceeding for an earlier assessment year which is pending before the Assessing Officer as on the date of such registration, if the objects and activities of such trust or institution in the relevant earlier assessment year are the same as those on the basis of which such registration has been granted.

Further, it is proposed that no action for reopening of an assessment under section 147 shall be taken by the Assessing Officer in the case of such trust or institution for any assessment year preceding the first assessment year for which the registration applies, merely for the reason that such trust or institution has not obtained the registration under section 12AA for the said assessment year.”

This amendment, therefore, seems to be on account of a change in the approach of the Government towards charitable entities, rather than on account of redundancy.

Extension of Applicability of S.115TD

Section 115TD provides for a tax on accreted income, where a trust has converted into any form not eligible for grant of registration u/s 12AB/10(23C), merged with any entity other than an entity having similar objects and registered u/s 12AB/10(23C), or failed to transfer all its assets on dissolution to any similar entity within 12 months from date of dissolution. By a deeming fiction contained in section 115TD(3), cancellation of registration u/s 12AB/10(23C), and modification of objects without obtaining fresh registration are deemed to be conversion into a form not eligible for grant of registration, and therefore attract the tax on accreted income. The tax on accreted income is at the maximum marginal rate on the fair market value of all the assets less the liabilities of the trust, on the relevant date.

The Finance Act, 2023 has now added one more situation in sub-section (3) with effect from 1.4.2023, where the trust fails to make an application for renewal of its registration u/s 12AB/10(23C) within the time specified in section 12A(1)(ac)(i),(ii) or (iii). Therefore, if a trust now fails to apply for renewal of its registration u/s 12AB at least 6 months prior to the expiry of its 5-year registration or 3-year provisional registration, the provisions of section 115TD would be attracted, and it would have to pay tax at the maximum marginal rate on the fair market value of its net assets.

This is an extremely harsh provision, whereby even a few days’ delay in making an application for renewal of registration can result in wiping out a large part of the assets of the trust. There is no provision for condonation of delay, except by making an application to the CBDT u/s 119. There is also no provision for relaxation of the provisions even if the delay is on account of a reasonable cause.

One can understand the need for such a provision in cases where the trust effectively opts out of registration by not seeking renewal at all – but a mere delay in seeking renewal of registration should not have been subjected to the applicability of section 115TD. Most charitable trusts in India are not professionally managed but are run on a part-time basis as an offshoot of social commitments felt by persons who may be engaged in employment or other vocations. To expect such absolute time discipline from them seems to reflect the Government’s intention of ensuring that only well-managed charitable organisations claim the benefit of the exemption. On the other hand, if an organisation is professionally run in order to be well managed, it would necessarily need to carry on an income-generating activity to meet its expenses, which may be treated as business attracting the proviso to section 2(15)!
Looking at the amendments in recent years and the stand taken in litigations, it appears that the Government seems to view all charitable entities with suspicion. The Government needs to adopt a clear position as regards tax exemption for charitable trusts – whether it wishes to encourage all genuine charitable trusts, which can at times reach far corners of India where even the Government machinery cannot reach, or whether it wishes to restrict the exemptions only to certain large trusts, which it monitors on a regular basis. Accordingly, given the complications introduced in the last few years, it is perhaps now time to decide whether there should be a separate tax exemption regime for small charities, just as there is a separate taxation regime for small businesses.

PART III | SELECT TDS / TCS PROVISIONS

BHAUMIK GODA | SHALIBHADRA SHAH

CHARTERED ACCOUNTANTS

Background

The purpose of TDS/TCS provisions is two-fold a) to enable the government to receive tax in advance simultaneously as the recipient receives payment b) to track a transaction which is a subject matter of taxation. In recent years, major amendments have been made in Chapter XVII of the Income-tax Act, 1961 (Act) dealing with the deduction and collection of taxes.

Finance Act 2023 is no different. Amendments are likely to have far-reaching implications.

Increase in the tax rate on Royalty & FTS for Non-residents

Amendment in brief

Erstwhile Section 115A of the Act provided that royalty & FTS income of Non-residents (NR) shall be taxable in India at the rate of 10% (plus applicable surcharge & cess). Surprisingly, at the time of passing the Finance Bill in Lok Sabha, the rate of tax on royalty & FTS has been increased from the existing 10% to 20% (plus applicable surcharge & cess). A corresponding increase in TDS rates has also been provided in Part II of the First Schedule to FA, 2023. Hence effective 1 April 2023, any payment of royalty or FTS by a resident to a non-resident will invite TDS at the rate of 20% (plus surcharge & cess) under the Act.

Implications

Increase in tax rate

There is a sharp increase in FTS/royalty rate under the Act from 10% to 20% plus cess and surcharge. The amendment does not grandfather existing agreements or arrangements. Accordingly, any payment made after 1st April 2023 will attract a higher TDS rate of 20%. In the case of net of tax arrangements, it is likely to result in additional cash outflow, especially payments made to countries where the DTAA rate provides for a rate higher than 10% (e.g. DTAA of India – USA – 15%; India-UK – 15%; India-Italy -20%). It will impact cost, profitability and project feasibility which perhaps was not factored in by parties at the time of entering the arrangement.

Treaty superiority

With the increase in tax rate from 10% to 20%, the DTAA rate which ranges from 10% to 15% is advantageous. Non-residents will rely upon DTAA benefits to reduce their tax liability in India. The FTS clause in DTAA with Singapore, USA, UK, is narrow as it includes a make-available clause. In other words, even if services are FTS under Act, it needs to be demonstrated that there is a transfer of knowledge and the recipient is enabled to perform services independently without support from the service provider. India’s DTAAs with the Philippines, Thailand etc. do not have an FTS clause. In that case, a view is possible that in the absence of PE in India, FTS payment is not taxable. In the context of royalty, India-Netherland DTAA does not have an equipment royalty clause, India-Ireland DTAA excludes aircraft leasing from the scope of royalty. Supreme Court in the case of Engineering Analysis Centre of Excellence v CIT (2021) 432 ITR 471 held that payment for shrink-wrapped software where the owner retains IP rights is not taxable under DTAA.

Treaty benefit is subject to the satisfaction of numerous qualifying conditions – both under the Act as also under DTAA. Failure to satisfy qualifying conditions will entail a higher TDS rate of 20% [apart from section 201 proceedings and payment of interest under section 201(1A)].

Section 90(4) provides that non-residents to whom DTAA applies, shall not be entitled to claim any relief under DTAA unless a certificate of his being a resident in any country outside India or specified territory outside India, is obtained by him from the Government of that country or specified territory. Ahmedabad ITAT in the case of Skaps Industries India (P.) Ltd v ITO¹ held that requirement to obtain TRC does not override tax treaty. Thus, failure to obtain TRC does not stop non-residents from availing of DTAA benefits. This decision was followed by under noted decisions². In practice, one encounters a number of situations where TRC is not available at the time of remittance – a) Transaction with Vendor is a one-off transaction and the cost of TRC outweighs the cost of services b) TRC is applied for but the Country of Residence takes time to process and issue TRC c) Vendor provides incorporation certificate, VAT certificate and states that his Country does not issue TRC d) TRC is not in the English language. In such situations, case by case call will be required to be taken. Considering the steep rate of 20%, decision-making becomes difficult if the tax liability is on the payer. In case reliance is placed on favourable decisions, the payer must maintain alternative documents which prove that the vendor is a resident of another Contracting State.

1 [2018] 94 taxmann.com 448 (Ahmedabad - Trib.)
2 Ranjit Kumar Vuppu v ITO [2021] 127 taxmann.com 105 (Hyderabad - Trib.); Sreenivasa Reddy Cheemalamarrim (TS-158-ITAT-2020)

On the DTAA front, Article 7 of MLI incorporates Principal Purpose Test (PPT) in DTAA. It provides that benefit under the DTAA shall not be granted in respect of an item of income if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the Agreement. Similarly, India-USA DTAA has a Limitation of Benefits (LOB) clause contained in Article 24 of DTAA; Article 24 of the India-Singapore DTAA contains a Limitation Relief article requiring remittance to be made in Singapore to avail DTAA benefits. It is necessary that the recipient satisfies the stated objective and subjective conditions laid down by DTAA. From a deductor standpoint, some conditions are subjective (e.g. principal purpose of arrangement). It will be difficult to reach objective satisfaction. The payer may obtain declarations to prove that he acted in a bonafide manner.

Section 90(5) mandates NR to provide prescribed information in Form 10F. Notification No 3/2022 dated 16 July 2022 (‘Notification’) requires Form 10F to be furnished electronically and verified in the manner prescribed. NR will be required to log in to the income tax portal and submit Form 10F in digital manner. This will require NR to have PAN in India and also the authorised signatory to have a digital signature. This requirement was deferred for NR not having PAN and who is not required to obtain PAN in India till 30 September 2023³. Read simplicitor, NR having PAN in India – irrespective of the year and purpose for which PAN is obtained, needs to furnish Form 10F in digital format. Practical challenges arise as NR is not comfortable obtaining PAN in India to issue digital Form 10F. A question arises whether NR is not entitled to DTAA benefits if Form 10F is furnished in a manual format as against digital format. For the following reasons, it is arguable that the Notification requiring Form 10F in digital format is bad in law as it amounts to treaty override⁴:

Genesis of the requirement to obtain Form 10F is section 90(5) read with Rule 21AB. Rule 21AB(1) prescribes various information, which is forming part of Form 10F (e.g. Status, Nationality, TIN, Period of TRC, address). Importantly, Rule 21AB(2) provides that the assessee may not be required to provide the information or any part thereof referred to in sub-rule (1) if the information or the part thereof, as the case may be, is contained in TRC.
Thus, if the information contained in Form 10F is contained in TRC, then Form 10F is not required. Most of the TRCs contains prescribed information (the exception being Ireland and Hong Kong which does not contain address). Some information like PAN and status are India specific and accordingly, the absence of such information should not be read as mandating obtaining of Form 10F.
Section 139A read with Rule 114 / Rule 114B does not require NR to obtain PAN if income is not chargeable to tax pursuant to favourable tax treaty. AAR in under noted decisions⁵ has taken a view that the assessee is not required to file the return of income if capital gain income is exempt under India-Mauritius / India – Netherlands DTAA.
Notification requiring digital Form 10F is issued under Rule 131 which in turn is issued under section 295. Notification is not issued under section 90(5) and accordingly cannot override tax treaty.
Article 31 of the Vienna Convention provides that a treaty is to be interpreted “in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose. The domestic legislature cannot override tax treaty.
In spite of section 90(4), the Tribunal has held that TRC is not mandatory if otherwise, NR can prove his residence⁶. A similar conclusion can be drawn for the Form 10F requirement.
Section 206AA prescribed a steep rate of 20% for payment made to a person not having PAN or invalid PAN. The question arose whether section 206AA overrides tax treaties. Tribunal/Court took a unanimous view⁷ that section 206AA cannot override tax treaty. In fact, Delhi High Court in Danisco India (P.) Ltd. v. Union of India [2018] 404 ITR 539 struck down the operation of section 206AA for cases involving tax treaties.
Section 206AA(7) read with Rule 37BC provides that the section is inapplicable if NR provides specified details. Details are identical to ones prescribed in Form 10F. Thus, it can be contended that the Notification mandating digitalization of Form 10F contradicts the provisions of Rule 37BC.

3 [Notification dated 12 December 2022 read with Notification dated 29 March 2022
4 Readers may refer to BCAJ – September 2022 Article – Digitalisation of Form 10F – New Barrier to Claim tax treaty?
5 Dow Agro Sciences Agricultural Products Limited [AAR No. 1123 of 2011 dated 11 January 2016] and Vanenburg Group B.V. (289 ITR 464)
6 Skaps Industries India (P.) Ltd v ITO [2018] 94 taxmann.com 448 (Ahmedabad - Trib.); Ranjit Kumar Vuppu v ITO [2021] 127 taxmann.com 105 (Hyderabad - Trib.)]
7 Infosys Ltd. v DCIT [2022] 140 taxmann.com 600 (Bangalore - Trib.); Nagarjuna Fertilizers & Chemicals Ltd. v. Asstt. CIT [2017] 78 taxmann.com 264 (Hyd.)

• Interplay with Transfer Pricing Provisions

Indian-based conglomerate makes royalty/FTS to its group companies deducting tax at DTAA rate. In the DTAA framework, this rate is subject to the rider that the concessional rate is available only to the extent of arm’s length payment. DTAAs contain following limitation clause:

“Where, by reason of a special relationship between the payer and the beneficial owner or between both of them and some other person, the amount of royalties or fees for technical services paid exceeds the amount which would have been paid in the absence of such relationship, the provisions of this Article shall apply only to the last-mentioned amount. In such case, the excess part of the payments shall remain taxable according to the laws of each Contracting State, due regard being had to the other provisions of this Agreement”.

OECD Commentary states that excess amount shall be taxable in accordance with domestic law. From the Indian context, the excess amount shall be taxable at higher rate of 20%. Following are some illustrative instances of ongoing transfer pricing litigation that is factual and legal in nature:

Benchmarking of royalty payment
Management cross charge – the satisfaction of benefits test, service v/s shareholders function, duplicated cost, and adequate backup documents to prove the performance of the service.
Allocation of group cost – relevance to Indian companies, cost driver, appropriateness of markup charged by AEs.

In case, it is ultimately concluded (in litigation) that the Indian company has paid higher than ALP price, then the Indian company will be liable to pay tax at 20%. Thus, the transfer pricing policy adopted by Companies needs to factor in increased tax risk. The amendment is also likely to have an impact on Advance Pricing Agreement (APA). It typically takes 4-5 years to conclude APAs. Assume the Indian Company pays cost plus 10% to its German AEs. In APA it is concluded that services are low-value services and appropriate ALP is cost plus 5%. In such a case, the Indian Company will have to get an additional 5% back from German AE (secondary adjustment) and pay tax at 20% on excess 5%.

Interplay with section 206AA

Section 206AA provides that person entitled to receive any sum or income or amount, on which tax is deductible under Chapter XVIIB shall furnish his PAN to the person responsible for deducting such tax failing which tax shall be deducted at higher of a) at the rate specified in the relevant provision of this Act b) at the rate or rates in force c) 20%.

Section 2(37A)(iii) defines ‘rates in force’ to mean rate specified in the relevant Finance Act or DTAA rate. It is judicially held that 20% rate prescribed in section 206AA need not be increased by surcharge and cess⁸. Part II to Schedule to Finance Act 2023 specifies a 20% rate which needs to be increased by the cess and a surcharge. Thus, non-submission of PAN in a situation not covered by section 206AA(7) read with Rule 37BC will entail a higher withholding rate.

8 Computer Sciences Corporation India P Ltd v ITO (2017) 77 taxmann.com 306 (Del)

NR obligation to file a return of income

Section 115A(5) provides for exemption from filing return of income to non-residents if the total income of a non-resident consists of only interest, dividend, royalty and/or FTS and the tax deducted is not less than the rate prescribed under Section 115A(1) of the Act. The royalty and FTS rate prescribed in the majority of India’s DTAA is 10%. Prior to the amendment, NRs availing DTAA benefits adopted a position that they are not required to file tax returns in India as the rate at which tax is deducted is not less than 115A rate. Due to an increase in tax rate from 10% to 20%, non-residents availing DTAA benefits will have to file income-tax returns in India.

TDS on benefit or perquisites – Section 194R

Amendment in brief

Section 194R provides that any person responsible for providing to a resident, any benefit or perquisite, whether convertible into money or not, arising from business or the exercise of a profession, by such resident, shall, before providing such benefit or perquisite, as the case may be, to such resident, ensure that tax has been deducted in respect of such benefit or perquisite at the rate of ten percent of the value or aggregate of value of such benefit or perquisite. Explanation 2 to section 194R is inserted by Finance Act 2023 to clarify that the provisions shall apply to any benefit or perquisite whether in cash or in kind or partly in cash and partly in kind.

Implications

Prior to Explanation 2 to section 28(iv), the language of section 194R was identical to section 28(iv). Supreme Court in Mahindra & Mahindra Ltd. vs. CIT [2018] 404 ITR 1 (SC) (‘M&M) held that section 28(iv) does not cover cash benefits. Taking an analogy from it, it was possible to contend that cash benefit does not fall within section 194R. In contrast to this popular view, CBDT in Circular No 12 of 2022 mentioned that provisions of section 194R would be applicable to perquisite or benefit in cash as well. Insertion of Explanation 2 to section 194R gives legislative backing to Circular.

Transactions like performance incentives in cash, gift voucher, prepaid payment instrument like amazon cards etc. will be subject to TDS. The applicability of section 194R to transactions like bad debt and loan waiver is not clear. Section 194R requires a) deductor to ‘provide’ benefit b) benefit to arise to the recipient from business or exercise of the profession. These conditions indicate that both parties agree to the benefit being passed on from one party to another. The word ‘provide’ is used in the sense of direct benefit being passed on. The indirect or consequential benefit is not what is envisaged by the provisions. In case of bad debt, there is no benefit intended to be provided. In fact, the benefit is the consequence of a write-off. In one sense there is no benefit. A write-off is merely an accounting entry as the party would retain his right to recover. Further, there is no valuation mechanism prescribed to value the impugned benefit. Question 4 of Circular No 12 of 2022 does not deal with such a situation.

As regards loan waiver, CBDT Circular No 18 of 2022 has exempted Bank from the applicability of section 194R to loan settlement/waiver. No similar exemption is given to other similarly placed transactions (e.g. loan by NBFC, private parties, parent-subsidiary loans). The rationale for exempting the bank was to give relief to the bank as subjecting it to section 194R would lead to extra cost in addition to the haircut already suffered. It can be argued that other similarly placed assessee should also merit exemption as the legislature cannot distinguish between two similarly placed assessees.

TDS on online Gaming – Section 194BA

In recent times there has been a surge in online gaming. Hence the government proposed to introduce TDS on online gaming with effect from 1 July 2023. Section provides that any person responsible for paying to any person any income by way of winnings from online games shall deduct tax on net winnings in user account computed as per prescribed manner (yet to be prescribed). Tax on net winnings from online games is to be deducted as per rates in force (i.e., 30%+ surcharge + cess). The Section is applicable to all users including non-residents. No threshold limit is provided for TDS. TDS is to be deducted at the time of withdrawal of net winnings from the user account or at the end of the FY in case of net winnings balance in the user account.

Implications

Computation of Net winnings

The section provides for the deduction of tax on net winnings. However, the computation mechanism of TDS is yet to be prescribed. Typically, online gaming requires a user to initially deposit cash in the wallet at the time of registration. This cash deposit can be utilised for playing games. However, such cash deposits are practically non-refundable and users can only withdraw the money out of winnings. Hence a question arises whether the initial cash deposit or losses in games can be permitted to be set off against the winning balance as the section uses the word net winnings. The dictionary meaning of “net” means after adjustment or end result. Thus, the plain language of the section seems to indicate that winnings can be offset against losses. Similarly, cash deposits which are also not refundable should be permitted to be set off against the winnings and tax should be deducted only on net winnings. However, one would have to wait for the computation mechanism which shall be prescribed by the government.

TDS on interest on specified securities – Section 193

The existing clause (ix) of the proviso to Sec. 193 of the Income-tax Act, 1961 (“the Act”) prior to 1st April, 2023 provided that no tax shall be deducted on interest payable on any security issued by a company to a resident payee, where such security is in dematerialised form and is listed on a recognised stock exchange in India in accordance with the Securities Contracts (Regulation) Act, 1956 and the rules made thereunder. However, vide Finance Act 2023, the amendment has been made to omit the above clause with effect from 01-04-2023 and accordingly tax is required to be deducted w.e.f. 1st April, 2023 on interest payable to resident payee on such listed securities issued by a company.

In view of the above amendment and with effect from 1st April, 2023, tax will be deducted on any interest payable / paid on listed NCD held by respective investors.

Prior to the amendment, borrowers were deducting tax on interest payments to non-resident investors. Now, the tax will have to be deducted on the interest paid to resident investors. TDS will not be applicable to investors like insurance companies, mutual funds, National Pension Funds, Government, State Government who are exempt recipient under section 193, section 196, section 197(1E).

TCS on overseas remittances for overseas tour packages and other prupsoes (other than medical and education purposes) – Section 206C

TCS rate on overseas remittance is enhanced to 20% as against the existing rate of 5%. Accordingly, remittances towards overseas tour package or for any other purposes (other than remittances towards medical and educational purposes), TCS shall be collected at the rate of 20% as against earlier 5%. Further in respect of other purposes, the threshold of INR 7 lakhs has also been removed.

TCS will be applicable whenever any foreign payment is made through debit cards, credit cards and travel cards etc. without any threshold limit. This will result in a higher cash outflow for LRS remittance and overseas tour packages. Though the taxpayer will be eligible for a credit of tax collected or claim a refund by filing a return of income, it may lead to blockage of funds till the credit is availed or refund is received.

Concluding Thoughts

One important amendment which was expected by the taxpayers was an extension of the sunset date for concessional rate forming part of section 194LC/194LD. The sunset clause sets in from 1 July 2023. This will make the raising of capital in the form of ECB and other debt instruments costly.

Amendments are likely to have far-reaching implications. An inadvertent slippage is likely to be expensive. It is advisable that tax implication and consequential TDS implications are factored in at the time of entering into a transaction. It is recommended that positions adopted in the past are revalidated on a periodic basis in light of various developments.

PART IV | MUTUAL FUNDS

ANISH THACKER

Chartered Accountant

Introduction

Finance Acts in recent years have had their fair share of amendments which have focused on the financial services sector and in particular, funds, i.e., collective investment schemes. The Securities and Exchange Board of India (SEBI) has permitted various types of collective investment schemes such as Mutual Funds (MFs), Alternative Investment Funds (AIFs), Real Estate Investment Trusts (REITs), Infrastructure Investment Trusts (InvITs), etc. to harness foreign and domestic investment. As these funds are set up with the specific purpose of channelizing investments into particularly designated sectors of the economy, and because these have certain peculiar features, these funds also have their own specific taxation provisions in the Income-tax Act, 1961(the Act). The taxation law as regards these funds continues to evolve with experience. Each Finance Act in recent times, therefore, has contained provisions which have amended the taxation scheme of these funds and their investors.

In this article, the key provisions of the Finance Act, 2023 that deal with Mutual Funds (for the sake of convenience, these are collectively called ‘Mutual Funds’ (admittedly loosely) for the sole purpose of this article only) have been discussed. It is submitted that the law as regards ‘Mutual Funds is still evolving, and one may well see a further amendment to the provisions of the Income-tax Act, 1961 (Act) dealing with ‘Mutual Funds’ going forward.

Amendments Impacting the Taxation of Specified Mutual Funds

The Finance Bill, 2023 (FB 2023), when it was tabled before the Parliament, on 1st February 2023, sought to introduce a deeming fiction, by way of section 50AA in the Act, to characterize the gains on transfer, redemption, or maturity of Market Linked Debentures (MLDs) as ‘short-term capital gains’ (STCG), irrespective of the period for which the MLDs are held⁹.

Such gains are to be computed by reducing the cost of acquisition of such debentures and expenses incurred in connection with the transfer. However, as these are deemed to be ‘short term’, the benefit of indexation is not available while computing such gains.

At the time of moving of the FB 2023 before the houses of the Parliament for discussion, an amendment was made to Section 50AA of the Act¹⁰ whereby it was sought to extend the scope of the special deeming provisions applicable to MLDs to a unit of a Specified Mutual Fund (SMF) purchased on or after 1 April 2023¹¹. A SMF is defined to mean a mutual fund (by whatever name called) of which not more than 35% of total proceeds are invested in the equity shares of domestic companies. The percentage of holding in equity shares of domestic companies is to be computed by using the annual average of the ‘daily averages’ of the holdings unlike in the case of Equity Oriented Funds where to construe a fund as an equity-oriented fund, to calculate the percentage of holdings in equity shares of domestic companies (at least 65%), the annual average of the ‘monthly averages’ has to be used.

9 This article does not deal with the taxation of income from MLDs.
10 The Finance Act 2023 (after incorporating the amendments at the time of moving of the Finance Bill, 2023, has received the assent of the President of India.
11 Unlike in the case of MLDs where the new tax provision applies to existing MLDs already issued, I n case of units of a specified mutual fund, the application is prospective, i.e., section 50 AA of the Act applies only to units of a specified mutual fund acquired on or after 1 April 2023.

One very important point to note here is that the ‘mutual fund’ referred to in section 50 AA of the Act is not merely a ‘mutual fund’ as is commonly understood. Unlike the provisions of section 10(23D) of the Act or section 115R thereof, where a reference can reasonably be drawn that these apply only to a mutual fund registered with the SEBI, section 50AA does not make such a reference. In fact, it uses the expression ‘by whatever name called’ when it defines the term ‘Specified Mutual Fund’ in Explanation (ii) to the said section. A question therefore arises as to what does the expression ‘Specified Mutual Fund’ as contained in this section, bring within its ambit.

The SEBI Mutual Funds Regulations, 1996 (SEBI MF Regulations) define ‘mutual fund in regulation 2 (22q) to mean a fund established in the form of a trust to raise monies through the sale of units to the public or a section of the public under one or more schemes for investing in securities, money market instruments, gold or gold related instruments, silver or silver related instruments, real estate assets and such other assets and instruments as may be specified by the Board from time to time

This definition only covers a trust but does not cover a fund set up as a company. Also, it is unclear as to whether a fund set up outside India is covered by the expression ‘specified mutual fund’ or not. It will thus remain to be seen and debated and indeed litigated, as to what a ‘specified mutual fund’ would include, within its fold. Unfortunately, as this addition to the scope of section 50 AA of the Act was done not at the time of tabling the FB 2023 but later, there is no mention of this in the memorandum explaining the provisions of the FB 2023, which may guide taxpayers as to what position to take in respect of funds other than SEBI registered mutual funds. The Government may therefore be requested to issue guidance in this regard to avoid ambiguity and avoid potential litigation.

Coming back to the nature of the capital gains on the transfer of the units of this specified mutual fund, these are admittedly only ‘deemed’ to be STCG. Considering the judicial precedents¹² in the context of capital gains arising on depreciable assets under a comparable provision (section 50 of the Act), it may be possible to take view that the section 50 AA of the Act merely modifies the method of computation of gains (by denying indexation benefit in case of SMF units) and does not change the ‘long term’ character of the assets mentioned in section 50AA of the Act, (MLD or SMF units) for other purposes like subjecting the gains to a lower rate of tax on long term capital gains, (section 112 of the Act) or roll over capital gains exemption (section 54F) and set off of losses. This is another area where taxpayers will need to take considered decisions on the positions to be taken in their return of income and brace themselves for a potential difference of opinion from their assessing officer (now the Faceless Assessment Centre for most).

Amendments relating to business trusts (REITs/ InvITs) and their unit holders:

Computation of certain distributions to be taxed as “other income” in the hands of business trust unit holders:

Section 115UA of the Act accords a partial ‘pass-through’ status to business trusts in terms of which certain specific incomes (i.e., interest, dividend, and rent) are taxed in the hands of the unit holders on distribution by the business trusts¹³ whereas other incomes are taxed in the hands of the business trust.

12 Illustratively, CIT v. V. S. Demo Co. Ltd (2016)(387 ITR 354)(SC), Smita Conductors v. DCIT (2015)(152 ITD 417)(Mum)
13 Comprising REITs and InvITs

From the memorandum explaining the provisions of the FB 2023, it could be inferred that the intention behind amending the scheme of taxation of business trusts and the unitholders thereof was to take care of a situation where, if a business trust received money by way of repayment of a loan from the Special Purpose Vehicle (SPV) set up to acquire the property, the same arguably, was neither taxable in the hands of the business trust nor in the hands of the unitholders. This was due to the ‘pass through’ mechanism available under the provisions of the Act as they then prevailed.

It was apprehended that the business trusts were using these repayments to distribute money to the unitholders thereby increasing the internal rate of return (IRR) to these unitholders. The said ‘return’ was however ostensibly escaping tax, from the Revenue’s viewpoint.

Accordingly, amendments were proposed to sections 2(24), 115UA and 56(2) to seek to tax the repayment of loans.

The FB 2023 proposed to introduce a new set of provisions whereby any other distributions (such as repayment of debt) by business trusts that presently do not suffer taxation either in the hands of business trust or in the hands of unit holders, will henceforth be taxed as “other income” in the hands of unit holders.

Further, where such distribution is made on redemption of units by business trusts, then the distribution received shall be reduced by the cost of acquisition of the unit(s) to the extent such cost does not exceed the distribution so received.

Stakeholders represented for reconsideration of the proposal – more particularly, in respect of the treatment of redemption proceeds as normal income instead of capital gains.

At the time of the moving of the FB 2023 for discussion, an amendment was proposed to the said section, which has now been enacted, which provides a revamped version of the new provision. The revamped provisions provide the manner of computing the distribution which is taxable as “other income” in the hands of unit holders (referred to as “specified sum”). As per this computation, the “specified sum” shall be the result of ‘A – B – C’, where:

‘A’

Aggregate sum distributed by the business trust during the current Taxable Year (TY) or past TY(s), w.r.t. the unit held by the current unit holder or the old unit holder.

However, the following sum shall not be included in ‘A’:

– Interest or dividend income from the SPV

– Rental income

– Any sum chargeable to tax in the hands of business trusts

‘B’

Issue price of the units

‘C’

Amount charged to tax under this new provision in any past TY(s).

If the result of the above is negative (i.e., where ‘B’ + ‘C’ is more than ‘A’), the “specified sum” shall be deemed to be zero.

The above computation mechanism indicates that specified sum is to be computed by taking into account the distribution made in the past Assessment Years (AY), including the distribution made to the old unit holders who were holding units prior to the current distribution date. Thus, while the levy as per the revamped provision applies prospectively w.e.f. AY 2024-25, the provision has a retroactive impact since it factors the distributions made prior to the previous year relevant to the said assessment year.

Furthermore, at the time of the movement of the FB 2023 for discussion an amendment was proposed, which now finds place in the Act, which omits the proposal of FB 2023 to reduce the cost of acquisition of units by the amount of distribution for computing “other income”. To this extent, the unitholders do get some kind of ‘relief’ (the term is used tongue in cheek, here).

The set of amendments brings forth their own interpretational issues, which can form the subject matter of another detailed article. Also, if we look at the interplay between the provisions of Double Tax Avoidance Agreements (DTAA), certain other interesting issues are likely to emerge.

Since these are not issues that affect a large number of taxpayers, these are not elaborated here. Suffice it to say that again this is not the last, one will hear on this topic.

Notified Sovereign Wealth Fund (SWF) and pension funds to be exempted from the above revamp provision:

The Act provides an exemption to notified SWF and pension funds by way of section 10(23FE), in respect of certain incomes including distribution received from business trusts.

The amended FB 2023, (this provision is now enacted) extends the exemption in respect to “other income” received by notified SWF and pension fund as per the revamped business trust taxation provisions mentioned above. For notified SWFs and pension funds therefore, the provisions discussed above will not apply and the existing exemption regime will continue to apply.

Computation of cost of acquisition of units in business trusts:

The Finance Act 2023 (at the enactment stage, this amendment was moved) introduces a provision to determine the cost of acquisition of units of a business trust. In determining the cost of acquisition any sum received by a unit holder from business trust w.r.t. such units, is to be reduced, except the following sums:

Interest or dividend income from the SPV
Rental income
Any sum not chargeable to tax in the hands of business trusts

Any sum not chargeable to tax in the hands of unit holders under revamped provision.

Furthermore, it provides that where units are received by way of transaction not considered as a transfer for capital gains, the cost of acquisition of such unit shall be computed by reducing the sum received from the business trust (as explained above), whether such sum is received before or after such transaction.

The above provision requires a reduction of all sums received from the business trust even prior to 1 April 2023, and to this extent, the provisions have a retroactive impact.

Amendments to the taxation of funds located in the International Financial Services Centre (IFSC)

Tax exemption for non-residents on distribution of income from Offshore Derivative Instruments (ODIs) issued by an IFSC Banking Unit (IBU)

The endeavor of the provision of exemption under section 10(4D) of the Act has been to provide parity in tax treatment to IFSC Funds as compared to Funds in offshore jurisdictions (of course, the overseas funds typically issue ODIs, popularly called P Notes or participatory notes to offshore investors). These notes are contracts which allow investors a synthetic exposure to income from Indian securities. To hedge the exposure that the funds take on, the funds typically hold the said securities in their own books. The same also applies to an IFSC fund including IFSC Banking units (IBUs). The discussion below is in the context of the IBUs.

Under the ODI contract, the IBU makes investments in permissible Indian securities. Such income may be taxable/ exempt in the hands of IBU as per the provisions of the ACT. The IBU would pass on such income to the ODI holders.

Presently, the income of non-residents on the transfer of ODIs entered with IBU is exempt under the Act. However, there is no similar exemption on the distribution of income to non-resident ODI holders. Resultantly, such distributed income may be taxed twice in India i.e., first when received by the IBU, and second, when the same income is distributed to non-resident ODI holders.

In order to remove double taxation, FB 2023 proposed an exemption to any income distributed on ODI entered with an IBU provided that the same is chargeable to tax in the hands of the IBU.

The condition of chargeability of such income to tax in the hands of IBU could have resulted in practical difficulties for non-residents to claim the exemption. Considering the various representations made on this aspect, the Amended FB 2023 addresses this anomaly by removing the said condition.

Non-applicability of surcharge and cess on income from securities earned by Category III AIFs and investment banking division of an Offshore Banking Unit (OBU) (i.e., “Specified Fund” as per section 10(4D) of the Act)

The Amended FB 2023 intends to remove the burden of surcharge and cess on income from securities earned by a Specified Fund. Under the Act, Specified Fund is inter alia defined to mean a Category III AIFs (which meets specified conditions) and investment banking division of an OBU (meeting specified conditions). In this context, a fact-specific evaluation may be required considering the nature of technical amendments.

The objective of the amendment appears to be to bring the taxation of Specified Funds in IFSC at par with the tax regime applicable for Fund investing from a jurisdiction with which India has a Tax Treaty.

Relocation of an off-shore Fund – Expansion of the definition of ‘Original Fund’

Presently, the Act provides for a tax-neutral relocation of offshore Funds to IFSC [i.e., assets of the Original Fund, or of its wholly owned special purpose vehicle, to a resultant Fund in IFSC] for promoting the Fund Management ecosystem in IFSC.

The definition of ‘Original Fund’ under the Act is now expanded to include:

an investment vehicle, in which Abu Dhabi Investment Authority (ADIA) is the direct or indirect sole shareholder or unit holder or beneficiary or interest holder and such investment vehicle is wholly owned and controlled, directly or indirectly, by ADIA or the Government of Abu Dhabi, or
a Fund notified by the Central Government in the Official Gazette (subject to such conditions as may be specified).

Shares issued by a private company to specified fund located in IFSC will not be subjected to angel taxation i.e., section 56(2) (viib) of the Act.

Prior to the FB 2023, shares issued by a closely held company to non-resident in excess of the company’s prescribed fair market value was not liable to tax in the hands of the closely held company issuing the shares under section 56(2)(viib) of the Act (popularly called by the media and now even more popularly called by most people as “angel tax”). Additionally, angel tax i.e., section 56(2) (viib) of the Act, did not apply with respect to (i) shares issued to a resident being a venture capital fund or a specified fund¹⁴; or (ii) shares issued by a notified start-up.

14 Being a fund established in India which has been granted a certificate of registration as Category I or II AIF and is regulated by Securities and Exchange Board of India (‘SEBI’) or IFSC Authority

FB 2023 extended the provisions of “angel tax” i.e., section 56(2)(viib) of the Act in respect of shares issued by closely held companies to non-residents also with effect from Financial Year 2023-24 i.e. Assessment Year 2024-25.
However, considering that a specified fund located in IFSC is now governed by the International Financial Services Centre Authority (Fund Management) Regulations, 2022, amended FB 2023 provides that shares issued by closely held companies to specified fund located in IFSC governed by said Regulations, 2022 will not be subject to “angel tax” i.e., section 56(2)(viib) even in its expanded avatar, would continue to be not applicable.

Conclusion

At a policy level, the importance of encouragement of collective investment, both domestic and foreign, be it from retail investors, or from private equity or institutional investors, is clearly brought out by repeated encouraging interviews given by senior Government officials to the media. Investors have also positively responded to this encouragement by looking at India’s growth trajectory and growth potential and committing significant investment in sectors where the Government has clearly felt the need for infusion of capital. The Government’s bold initiative of conceiving and developing the International Financial Services Centre has been welcomed, albeit initially with cautious optimism, but investment therein is steadily showing good progress. Investors are already dealing with unpredictable macro-economic and political situations in the recent past. In this situation, they look to the Government for a stable, certain, and unambiguous tax regime supporting the policy decision to encourage collective investment. On its part, the Government has also been giving them its full ear and trying to make the investment climate as conducive to them as possible. Some challenges, however, persist when amendments with rationalization and protection of tax base are made with retroactive effect. This creates some doubt in the minds of the investors. Also, to foster a stable and predictable tax regime, adequate guidance to taxpayers on contentious issues should be regularly published so as to encourage and incentivise tax compliance and result in a consequential increase in the tax base.

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Section145 r.w.s.68 and section 133–where the AO had not found a single defect in assessee’s books of account and enquiry made by him under section 133(6) had been properly explained by the assessee then addition made by the AO on the basis of the difference between amount reflected in books of account and in Form 26AS should be deleted.

9. Shri Jeen Mata Buildcon (P) Ltd vs. ITO

[2022] 97 ITR(T) 706 (Jaipur – Trib.)

ITA No.: 397 (JP.) of 2019

A.Y.: 2013-14

Date: 08th March, 2022

Section145 r.w.s.68 and section 133–where the AO had not found a single defect in assessee’s books of account and enquiry made by him under section 133(6) had been properly explained by the assessee then addition made by the AO on the basis of the difference between amount reflected in books of account and in Form 26AS should be deleted.

FACTS

The assessee was a company engaged in the business of labor contractor supplier with machinery under affordable housing policy for the year under consideration. The assessee company filed its return of income declaring income at Rs. 5,21,007 on 30th March, 2015 through e-filing portal and the same was processed under section 143(1) of the Income-tax Act, 1961. Later on, the case was selected for scrutiny through CASS due to the difference in turnover reflected in Form 26AS and disclosed in books of accounts. During the course of the assessment proceedings, the AO had observed that turnover declared by the assessee for the year under consideration was Rs. 67,84,050. Whereas the turnover reflected in Form 26AS was Rs. 86,62,800

Accordingly, the difference of Rs. 18,78,750/- pertaining to the contract received from M/s Sidhi Vinayak Affordable Homes was added back to the total income of the assessee. The addition was made on the basis of the confirmation received from the said party during the course of the enquiry under section 133(6) of the Income-tax Act. The said party had confirmed that the amount of Rs.18,78,750 was booked in the books of accounts.

In another case, the addition in respect of M/s Bhairav Township Pvt Ltd, the AO had observed that there was a difference between income offered and expense booked. Accordingly, the AO made an addition to the total income of the assessee to the tune of Rs. 15,23,978 being the difference between the expenses booked and income offered.

The CIT (Appeals) had confirmed these two additions made by the AO.

Aggrieved by the order of CIT(A), the assessee filed further appeal before the ITAT.

HELD

The Authorised Representative of the assessee argued that merely because there was a difference in the figures mentioned in Form 26AS and the books of accounts, there cannot be an addition to the returned income when the books of accounts of the assessee were duly audited. The AO had not found any single defect in the books of accounts that had been produced before the AO. Even the inquiry made under section 133(6) had been properly explained by the Authorised Representative of the assessee during the course of the assessment proceedings. The main contentions raised during the course of the assessment proceedings that merely because the other party had booked the expenses, cannot be the reason while making the assessment in the case of the assessee when the contract receipt got reflected in the subsequent year as per the regular method of accounting followed.

The income offered for the parties, M/s Sidhi Vinayak Affordable Homes and M/s Bhairav Township Pvt Ltd in respect of which addition was made, was almost reconciled and offered for tax in the regular books of accounts which was not rejected by the AO. Therefore, it was not required to disturb the books which had been audited by an independent auditor. Thus, the addition made for an amount of Rs. 18,78,750 and Rs. 15,23,978- totalling to Rs. 34,02,728 were deleted.

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Section 40(b) r.w.s 263–Where the assessee-firm had mentioned in its partnership deed that the partners shall be entitled to draw salary to the extent allowable under Income-tax Act but shall be drawing salary to maximum of Rs. 24 lakhs each per annum and accordingly the AO had allowed Rs. 36 lakhs of remuneration paid by assessee-firm to its three partners at the rate of Rs. 12 lakhs each under section 40(b)(v), Commissioner was not justified in invoking revisionary proceedings under section 263 on the basis that such remuneration of partners was not quantified in the partnership deed.

8. H.R. International vs. PCIT
[2022] 97 ITR(T) 129 (Amritsar – Trib.)
ITA No.:675 (ARS.) of 2019
A.Y.: 2015-16
Date of order: 19th May, 2022

Section 40(b) r.w.s 263–Where the assessee-firm had mentioned in its partnership deed that the partners shall be entitled to draw salary to the extent allowable under Income-tax Act but shall be drawing salary to maximum of Rs. 24 lakhs each per annum and accordingly the AO had allowed Rs. 36 lakhs of remuneration paid by assessee-firm to its three partners at the rate of Rs. 12 lakhs each under section 40(b)(v), Commissioner was not justified in invoking revisionary proceedings under section 263 on the basis that such remuneration of partners was not quantified in the partnership deed.

FACTS

The assessee was a partnership firm. While filing its return of income for A.Y. 2015-16, the assessee claimed partner’s remuneration under section 40(b)(v) of the Income-tax Act, 1961 to the extent of Rs. 36 lakh i.e. Rs. 12 lakh for each of its three partners. The original assessment was carried out under section 143(3). The jurisdictional PCIT initiated revisionary proceedings under section 263 of the Income-tax act, 1961. During the course of revisionary proceedings, the PCIT observed that in the partnership deed of the assessee, the partner’s remuneration was not quantified. On the basis of this observation, the PCIT concluded that the assessee was not eligible to get the benefit of section 40(b)(v) in respect of remuneration paid to its three partners and accordingly concluded the revisionary proceedings by holding that the order passed by the AO under section 143(3) was erroneous and prejudicial to the interest of revenue.

Aggrieved by the order of PCIT passed under section 263, the assessee filed further appeal before the ITAT.

HELD

It was observed by the Tribunal that section 263 had two limbs which are erroneous order and prejudicial to the interest of revenue. The assessee in its partnership deed had mentioned that the drawing power of the salary was Rs.24 lakh per annum for each partner. In fact, the salary in excess of Rs. 24 lakh will be disallowed as per section 40(b)(v) of the Income-tax Act, 1961. Accordingly, the Tribunal concluded that it cannot be said that the specific salary was not quantified. Although the assessment order had not pointed out about anything related to partnership deed, during calculation of total income, the said deed was considered and documents were within the record of the proceeding. The remuneration of Rs.12 lakh paid to each of its three partners was within the limit permissible under section 40(b)(v).

The beauty of section 40(b)(v) was that the remuneration to the partner was fully regulated by the book profit. More the book profit, more remuneration of partner will be allowed. So as per the Act, the assessee can claim more remuneration but it will be allowed subjected to provision of section 40(b)(v) of the Act depending upon its book profit.

The PCIT had, during the issuance of notice under section 263 and during the passing of the revision order under the said section, not taken cognizance of the calculation of tax and the benefit of revenue. The revision order passed under section 263 was considered and the Tribunal observed that two opinions were formed by two authorities in the question of acceptance of clause of partnership deed related to partner’s remuneration.

Consequently, it was held that the view of the Assessing Officer being a plausible view could not be considered erroneous or prejudicial to the interest of revenue. Accordingly, the order of the AO cannot be considered erroneous or prejudicial to interest of the revenue.

In result the appeal filed by the assessee was allowed.

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Sum received towards undertaking restrictive covenant of non-imparting service to any other person and not to share associated goodwill of medical practice, being in the nature of non-compete fee, is a capital receipt and not taxable as business or professional income. Non-compete fee related to profession is made taxable only w.e.f. A.Y. 2017-18 and the non-compete fee in relation to profession for period prior to A.Y. 2017-18 would be treated as capital receipt. Changing of Section from 28(va) to 28(i) without confronting the Assessee is a fatal mistake.

7. Nalini Mahajan vs. ACIT
TS-180-ITAT-2023(DEL)
A.Y.: 2014-15
Date of Order: 06th April, 2023
Sections: 28(i), 28(va)

Sum received towards undertaking restrictive covenant of non-imparting service to any other person and not to share associated goodwill of medical practice, being in the nature of non-compete fee, is a capital receipt and not taxable as business or professional income.

Non-compete fee related to profession is made taxable only w.e.f. A.Y. 2017-18 and the non-compete fee in relation to profession for period prior to A.Y. 2017-18 would be treated as capital receipt.

Changing of Section from 28(va) to 28(i) without confronting the Assessee is a fatal mistake.

FACTS

The assessee, a doctor by profession was running a clinic by the name of Mother & Child, New Delhi. On 28th October, 2012, the assessee, executed a `Service Agreement’ with Nova Pulse IVF Clinic Pvt Ltd (“the Company”) whereunder the assessee agreed to be exclusively engaged with the Company for providing her professional services. Under the agreement, the consideration was a fee for her professional services, an amount for exclusive engagement with the Company and an amount for her bringing her associated Goodwill to the Company. During the year under consideration, the assessee received a professional fee and a sum of Rs. 3.20 crore for exclusive engagement with the Company and for bringing her associated Goodwill to the Company. The AO held the sum of. Rs. 3.20 crore to be taxable under section 28(va) of the Act being the value of any benefit or perquisite arising from business or exercise of a profession.

Aggrieved, the assessee preferred an appeal to CIT(A) who confirmed the action of the AO but held that the amount under consideration is chargeable to tax not under section 28(va) but under section 28(i) of the Act. He rejected the plea of the amount under consideration is a capital receipt.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal noted that there is a proper agreement which provides for the non-compete fee/goodwill. The agreement has been turned down by the authorities below as it is a colorable device. This observation, the Tribunal held, is not backed by any proper reasoning. The case laws relating to the proposition is that the Revenue should only look at the agreement and not look through the binding agreements between the parties. The Tribunal further noted that the AO made addition under section 28(va) of the Act. The amendment to bring profession also, into the said clause was brought in w.e.f. A.Y. 2017- 18. Hence, non-compete fee related to profession is made taxable only w.e.f. A.Y. 2017-18 and the non-compete fee in relation to profession for period prior to A.Y. 2017-18 would be treated as capital receipt.

Furthermore, the CIT(A) has changed the section from 28(va) to section 28(i) of the Act without confronting the assessee. The Tribunal held this to be a fatal mistake. The Tribunal held that in view of the decisions of the Supreme Court in the case of Excel Industries [358 ITR 295 (SC)] and in the case of Radhasoami Satsang Saomi Bagh vs CIT [193 ITR 321 (SC)], the assessee also deserves to succeed. Also, on the principle of consistency in as much as for A.Ys. 2013-14, 2015-16 and 2016-17, the same was treated as capital receipt and the same had been accepted by the Revenue.

The Tribunal held that the sum of Rs.3.20 crore received towards undertaking restrictive covenant of non-imparting service to any other person, and not to share associated goodwill of medical practice, being in the nature of non-compete fee is a capital receipt and not taxable under the provisions of the Act. Hence, the assessment by the AO under 28(va) is not sustainable and similarly, the order of the CIT(A) whereby he changed the head from section 28(va) to section 28(i) without confronting the assessee is also not sustainable. The CIT(A)’s view that the same is taxable under the normal professional income is also not sustainable in the background of the aforesaid discussion, the agreement and the case law referred above. The Tribunal decided this ground of appeal in favour of the assessee.

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Provisions of section 68 cannot be invoked as the assessee, offering income under presumptive tax provisions, was not required to maintain books of account.

6. Sunil Gahlot vs. ITO
ITA No. 176/Jodh./2019 (Jodh.-Trib.)
A.Y.: 2015-16
Date of Order: 24th March, 2023
Sections: 44AD, 68, 115BBE

Provisions of section 68 cannot be invoked as the assessee, offering income under presumptive tax provisions, was not required to maintain books of account.

FACTS

The assessee, an individual carrying on trading activity, returned a total income of Rs.2,63,920, under section 44AD of the Act. In the course of scrutiny assessment proceedings, the AO asked the assessee to furnish details of sundry debtors and creditors. The AO made an addition of Rs. 67,743 towards unexplained opening capital balance and Rs. 28,964 for unexplained creditors.

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

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal having noted that the assessee had opted for presumptive taxation under section 44AD of the Act held that the assessee is not required to maintain proper books of accounts. The Tribunal observed that it does not find any merit in the action of the AO calling for the details of sundry creditors and further making addition under section 68 of the Act for unexplained creditors of Rs. 28,964. Since the assessee was not required to maintain books of accounts, the Tribunal deleted the addition under made by the AO under section 68 of the Act towards unexplained sundry creditors.

As regards the addition for opening capital balance of Rs. 67,463, the Tribunal held that it failed to find any merit in the action of the AO because the minimum amount not taxable for the preceding years i.e A.Y. 2014-15 and A.Y. 2013-14 was Rs. 2.00 lakhs and the assessee filed return regularly and having regular source of income from the business and, therefore, it can safely be presumed that he had sufficient accumulated profits to explain the opening capital balance of Rs. 67,463/-. The Tribunal deleted this addition as well.

As regards application of section 115BBE, the Tribunal held that section 115BBE comes into operation only in case of income referred in sections 68/69/69A/69B/69C and 69D of the Act, which is not applicable on the issues raised in the instant case, therefore, there is no justification for invoking the provisions of Section 115BE of the Act.

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An addition made under the Black Money Act cannot be made on a protective basis under the Income-tax Act. This has been so held even though the assessment under section 10(3) of the Black Money Act had not attained finality and was subjudice.

5. DCIT vs. Ashok Kumar Singh
ITA No. 426 & 427/ Del/2022 (Delhi-Trib.)
A.Ys.: 2013-14 and 2014-15
Date of Order: 19th April, 2023
Sections : 68 and 10(3) of the Black Money Act

An addition made under the Black Money Act cannot be made on a protective basis under the Income-tax Act. This has been so held even though the assessment under section 10(3) of the Black Money Act had not attained finality and was subjudice.

FACTS

A search action was carried out on 7th April, 2016 and notices were issued and served upon the assessee. During the course of assessment proceedings certain information was available on the website of International Consortium of Investigative Journalists (ICIJ) regarding Indians having undisclosed foreign companies and assets offshore. Investigation was carried out by the Investigation Wing, Delhi. Information was also received from BVI under Information Exchange Agreement and thereafter information was also received from competent authority of Singapore.

The AO noticed that there were huge credits in the bank accounts, details whereof were received pursuant to Information Exchange Agreements. The AO, in the assessment order, mentioned that the Proceeding under the Black Money (Undisclosed Foreign Income and Assets) and imposition of Tax Act 2015 (“BM Act”) have also been initiated after examining the details / materials (including the information relating to foreign bank accounts which were not disclosed in the returns of income) by issuing notices under section 10(1) of the BM Act, and that the final orders are yet to be passed under the BM Act. The AO also stated that “But, it is also clearly understood that the same income cannot be added twice-(i) once under the Incometax Act and then (ii) in the BM Act, as a measure of abundant precaution, income is assessed protectively in the hands of the assessee under income tax act.”

Aggrieved, the assessee preferred an appeal to the CIT(A) who deleted the addition so made on protective basis.

Aggrieved, the revenue preferred an appeal to the Tribunal where the Revenue conceded that the additions made under the Black Money Act are subjudice before the first appellate authority and to safeguard the interest of revenue protective addition has been made under the IT Act.

HELD

The Tribunal held that once additions have been made under the Black Money Act, the same cannot be made under the IT Act on the same set of facts. The Tribunal held that the deletion of the addition by the CIT(A) does not call for any interference.

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Interest on delayed payment of TDS is compensatory in nature and is allowable as deduction under section 37(1) of the Act.

4. Delhi Cargo Service Centre vs. ACIT
2023 Taxscan (ITAT) 778 (Delhi – Trib.)
A.Y.: 2015-16
Date of order: 24th March, 2023
Sections: 37, 43B

Interest on delayed payment of TDS is compensatory in nature and is allowable as deduction under section 37(1) of the Act.

FACTS

The assessee, a company engaged in cargo handling services at Cargo Terminal – 2, Indira Gandhi International Airport, e-filed its return of income for A.Y. 2015-16 declaring therein a loss of Rs. 13,29,41,858. The AO passed a draft assessment order on 18th December, 2018 under section 143(3) r.w.s. 92C of the Act inter alia proposing an addition of Rs. 1,28,605 under section 43B being late payment towards statutory dues.

Aggrieved, the assessee preferred an application under section 144C(2) before the Dispute Resolution Panel (DRP) objecting to the additions proposed by the AO. Regarding disallowance of Rs.1,28,605 under section 43B, the DRP directed the Ld. AO to examine the evidence and allow to the extent supported by the evidence. The Ld. AO, however maintained the disallowance of interest of Rs. 94,662 paid on late payment of TDS and Rs.26,465 being PF arrear payments as challans in support were not filed.

The AO held that the entire amount pertained to A.Y. other than A.Y. 2015-16 and thus cannot be allowed. Liability for interest being in the nature of penalty, the AO disallowed the same under section 37(1) of the Act.

Aggrieved, the assessee preferred an appeal to the Tribunal where on behalf of the assessee it was contended that the liability for interest incurred by the assessee is compensatory in nature and for this proposition reliance was placed on the decision of Supreme Court in Lachmandas Mathuradas vs. CIT 254 ITR 799 (SC), decision of Hon’ble Madras High Court in Chennai Properties and Investment Ltd. vs. CIT 239 ITR 435 (Mad) and the decisions of Mumbai, Calcutta and Jaipur Benches of the Tribunal.

HELD

The Tribunal observed that the AO proposed the impugned disallowance under section 43B which allows deduction of statutory dues in the year of actual payment irrespective of the year in which the liability was incurred. The case of the assessee all along has been that the impugned interest has been paid in A.Y. 2015-16 and therefore it is an allowable deduction. However, after receipt of the direction of the DRP to verify the evidence of payment and allow the same as deduction, the AO made the impugned disallowance under section 37(1) of the Act assigning the reason that impugned interest liability is penal in nature.

The Tribunal held that the impugned disallowance for the reason assigned now is also not sustainable. It observed that an identical issue arose for consideration before Mumbai Bench of the Tribunal in M/s M L Reality vs. ACIT in ITA No. 796/Mum/2019 and the Tribunal vide its order dated 24th March, 2021 held that interest paid on late payment of TDS is compensatory in nature and is an allowable deduction under section 37(1) of the Act.

The Tribunal following the decision in M L Realty Ltd (supra) and the ratio decidendi of the decisions relied upon by the assessee decided found substance in the contentions of the assessee and decided this ground of appeal in favour of the assessee.

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कामये दुःखतप्तानाम्

(Bhaagwat 9:21)

In Bhagwat Purana (story of 10 incarnations of Bhagwan Vishnu, this story appears, Shukdev (a sage) was narrating the glorious history of Bharat-vansh (dynasty) to King Parikshit. There he described the nobility of King Rantidev. In those days, the kings used to perform yagnas (yagya) – sacrifices in which they used to give away whatever any person wanted. They did not mind even if their treasures got emptied. They used to then rebuild the treasure by conquering other kingdoms. This tradition of earning and giving away everything was indeed very unique and interesting in Indian ancient history. It was a sin if the king could not satisfy anybody.

Once, after he gave away everything, King Rantidev himself faced starvation for 49 days. On 50th day, he could get something to eat. However, just when he was to start eating, some people (Atithi) arrived there with the hope of getting some food, Rantidev sacrificed his food for them. Those people were actually Gods who had come to test Rantidev’s integrity and commitment. They blessed him and asked what he wanted. They were willing to give anything and everything he would ask for (vardaan or boon).

What desire Rantidev expressed is contained in this beautiful shloka (verse). This was a favourite shloka of Gandhiji and so is mine.

– Na twaham kaamaye raajyam

– Na swargam Naapunarbhavam

– Kaamaye Duhkha taptaanaam

– Praninaam Aarti naashanam

Meaning –

I do not desire the kingdom, nor do I want heaven. I do not wish even to get moksha (salvation) i.e., freedom from rebirth! (Then what do I want?)

I wish to relieve the pain of all those who are suffering! I want to wipe the tears of all those who are suffering from any pain or difficulty!

Such was the noble thinking of many kings in our history. Moksha was and is considered the ultimate good thing in one’s life, as per Indian thought or Indian belief. Human life is full of difficulties and sorrow. They say happiness is as small as a grain whereas sorrow is as big as a mountain! So, it was and is considered desirable that one should be free from this cycle of rebirth (punarnbhava).

– (apunarbhava) is the absence of rebirth. So the correct wording is Naapuinarbhava .

Gautam Buddha was a prince (Siddhartha). His father was scrupulously avoiding showing him any negative thing or sorrow in human life. But one day, young Siddhartha saw sufferings – like poverty (beggar), ill-health (a sick man) and a dead man. That very day he renounced everything – his kingdom, his wife and his son – who was then a kid. Siddhartha then got divine knowledge (bodha) after a long penance, and he founded Buddhism. He preached a humanitarian approach and empathy. He dedicated his life to the eradication or alleviation of misery from human life. However, the reality is that it is an endless process. Our saints like Dnyaneshwar and Tukaram dedicated their lives for the same noble cause. That is why we still remember them with reverence.

After Mr. Rockfeller met Swami Vivekananda, he donated his entire wealth for the cause of humanity.

! Our sensitivity backed by action is important.

We also should in some way or the other, depending upon, our ability strive to help needy people who are suffering from misery or pain. All religions preach this very principle. We have such examples even today – like Baba Amte or Dr. Prakash Amte. Their four generations, leaving aside their qualifications, are serving the tribals and animals in the forests. One should emulate these idols in one’s own way. That is the ultimate satisfaction and the real meaningful purpose of life.

We offer our Namaskaar to such noble people!

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From Finance Bill to Finance Act, 2023

(Emerging Trends in Passing the Finance Bills)

The Finance Bill 2023 proposed 120 amendments to the Income-tax Act, 1961. However, the Finance Act, 2023 was eventually passed with 64 amendments to the Finance Bill. The Finance Bill was passed amidst uproar in Parliament without any discussion at all.

These days there is hardly any debate (for various reasons) in Parliament while passing the Finance Bill, with the result that not only amendments proposed by the Finance Bill get passed, but also additional amendments moved by the Government, which are not part of the original Finance Bill, also get passed easily.

It is suggested that provisions of a Finance Bill having significant impacts should be discussed and debated in Parliament or a select committee thereof and/or with various stakeholders, as it is always a good practice to have a consultative process before making significant amendments that have far-reaching impacts. This would prevent piecemeal amendments to the Income-tax Act, which are often carried out to reverse the judgments favouring assesses, or amendments to curb exceptional misuse of provisions by a few.

Recent amendments to the taxation of Charitable Trusts are a classic example of how amendments without a consultative process could result in enormous compliance burden and complexities. These amendments are a death knell to small and medium size trusts doing yeoman services at grassroots levels where the government has failed to reach.

Two significant amendments made by the Finance Act, 2023, which will have far-reaching impact, and which were not part of the original proposals, are:

(i) increase in the rate of TDS on Fees for Technical Services (FTS) and Royalty payments to non-residents from 10% to 20%, and

(ii) Gains on the sale of investments in Debt Mutual Funds to be taxed as short-term capital gains.

As far as TDS rates on FTS and Royalty are concerned, it will result in an increase in the cost of import of technology/services where the payment terms are net of tax, as the burden will be passed on to the Indian entrepreneur. The lower rate prescribed in a tax treaty may apply, but that claim is subject to a host of compliances such as beneficial ownership, obtaining of Tax Residency Certificate, filing form 10F, and/or obtaining PAN, filing of income-tax return in India etc. The amendments to the TDS rates on FTS and Royalty payments to non-residents have been quite frequent and which only shows that government is not sure of what it means by the ease of doing business. The Memorandum explaining provisions of the Finance Bill 2013 stated that the rate is increased from 10% to 25% because most treaties provide rates ranging from 10% to 25%. However, realizing the burden of TDS on Indian entrepreneurs (in cases of “net of tax” payments), the Finance Act 2015 again reduced the rate from 25% to 10%. The rate is again increased from 10% to 20% vide the Finance Act, 2023. These flip flops, that too without any explanation this time, raise doubts about the stability of tax laws in India.

Another significant amendment carried out by the Finance Act, 2023, was the expansion of the scope of section 50AA to specified Mutual Funds which was originally restricted to only Market Linked Debentures. Memorandum explaining the provisions in the Finance Bill, 2023 provided that “In order to tax the capital gains arising from the transfer or redemption or maturity of these securities as short-term capital gains at the applicable rates, it is proposed to insert a new Section 50AA in the Act…”. It then proposed to tax gains on the “Market Linked Debentures” (predominantly in the form of a debt where the returns are linked to market returns) as short-term capital gains at applicable rates, instead of long-term gains @ 10% without indexation. However, vide the Finance Act 2023, this tax treatment is also extended to units of specified mutual funds (having investments in equity shares of 35% or less) acquired on or after 1st April 2023. This change, having a significant impact on the Mutual Fund industry, AMCs, and investors; was not part of the Finance Bill 2023 and hence there is no explanation or stated logic.

Frequent changes in the tax regime defy one of the basic canons of a fair tax system, namely, “Certainty”. And this is not an aberration, but a repeated trend. The same thing happened with the taxation of dividends and the failed experiment with the Fringe Benefits Tax (FBT). With so many changes, the Income-tax Act, 1961 looks like a bridge with innumerable repair patches. To illustrate, there are fifty-nine sections in section 80 series, from 80A to 80U with many subsections, and similar is the case with section 115 series which has almost 108 sections (115A to 115VZC) spanned over fifteen chapters. There are many such provisions in the Income-tax Act, 1961 that have sub-sections, several explanations, provisos, sub-provisos, and so on, with the result that they look like a Banyan tree, where it is difficult to trace their origin. A classic case is section 10(23C) with over 20 provisos, some with their own explanations. We hope that going forward major changes will be made only after proper debate, discussion, and consultation with the stakeholders, that too once in a few years instead of every year, and assessee-friendly decisions are not reversed as a matter of routine.

Best Regards,

Dr. CA Mayur B. Nayak

Editor

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TIME BARRING

Arjun: Oh Lord! Save me!

Shrikrishna: Arey Arjun, you are sweating. Too much heat this year?

Arjun: Yes, Lord. But I didn’t remember you for this heat.

Shrikrishna: Then what for?

Arjun: This burden of Ethics! You say it is for our protection. But after all, it is a very heavy shield to hold continuously in hand. And the armour is often unbearably heavy.

Shrikrishna: True. But you have no option!

Arjun: That also I accept. But tell me, how long do we remain answerable for our work? Is there no time barring – as we have in income tax?

Shrikrishna: There is! But not in the sense that you have in mind. It is not a rigid or blanket limitation of time.

Arjun: Do you mean it is different for different types of misconduct? Like in income tax, we have different time limits depending upon the stakes involved.

Shrikrishna: Why don’t you read the relevant rules? The title of those rules is very long. Difficult to remember.

These rules may be called The Chartered Accountants (Procedure of Investigations of Professional and Other Misconduct and Conduct of Cases) Rules, 2007.

Arjun: Oh! I wonder how you remember this. For a short cut, let us call it as misconduct procedural rules.

Shrikrishna: Fine. See Rule 12.

Time limit on entertaining complaint or information – Where the Director is satisfied that there would be difficulty in securing proper evidence of the alleged misconduct, or that the member or firm against whom the information has been received or the complaint has been filed, would find it difficult to lead evidence to defend himself or itself, as the case may be, on account of the time lag, or that changes have taken place rendering the inquiry procedurally inconvenient or difficult, he may refuse to entertain a complaint or information in respect of any misconduct made more than seven years after the same was alleged to have been committed and submit the same to the Board of Discipline for taking decision on it under sub-section 21A of the Act.

Arjun: This is very vague. How do you decide?

Shrikrishna: Yes. It is a loose type of time barring. There is an important rider. If the production of evidence is difficult or it is otherwise inconvenient to continue the proceeding.

Arjun: But who decides this? Solely at the discretion of the Director?

Shrikrishna: To some extent, yes. But he has to seek the concurrence of the Board of Discipline. He is not the sole person to decide.

Arjun: Oh God! But on what basis he will decide it? How can we keep a record or remember what happened so many years ago?

Shrikrishna: I appreciate this. But Arjun, sometimes the misconduct is very apparent. Self-evident. Not much external document is required.

Arjun: Like what?

Shrikrishna: Like your balance sheet is not tallied at all! Or you have issued a report in an incorrect format; or certain mandatory disclosures not done at all!

Arjun: Oh! I understood. This is horrible. So it is endless!

Shrikrishna: I will tell you an interesting case. I had perhaps already told you earlier.

Arjun: Tell me. Your stories are interesting.

Shrikrishna: One lady’s Will was prepared. She died 12 years after the preparation of the Will.

Arjun: Then what happened?

Shrikrishna: When it was opened after her death, it was found that the CA had signed it as a witness, but there was no signature of that lady at all!

Arjun: Strange! But is it so serious?

Shrikrishna: Obviously. When you sign as a witness, you indirectly state and affirm that the concerned person has signed in your presence. You saw him signing. If you put your sign as a witness without that person’s signature, it is a false statement. It is a lie!

Arjun: But quite often, we put our signatures on balance sheet first and then send it for directors’ to sign.

Shrikrishna: This is very wrong; and dangerous. At the same time, signing as an auditor is different from signing as a witness.

Arjun: Yes, I appreciate that. In short, the sword of a disciplinary case remains hanging on our heads forever!

Shrikrishna: Yes. But remember, try to do things perfect. Take care, so that you don’t have to worry!

Arjun: Agreed! Bhagwan! Thank you.

shailesh.kwebmaker

FOCUS IS THE KEY

In this issue, we cover some interesting websites/apps that improve our focus on the task at hand and improve our productivity.

FREEDOM

Social media, shopping, videos, games…these apps and websites are scientifically engineered to keep you hooked and coming back. The cost to your productivity, ability to focus and general well-being can be staggering. Freedom gives you control.

Freedom is an app and website blocker for Windows, Android, iOS, Mac and Chrome, used by over 2 million people to reclaim focus and productivity. Install Freedom on all your devices, and it will automatically sync your preferences across devices. There is also a Chrome Extension that helps in blanking all your distractions!

You can use Freedom so you can get your work done. Just block what you want, when you want, and be more productive. With Freedom active, you can sit down to work entirely in control of your distractions.

You can start sessions on the fly or schedule your Freedom time in advance. You can plan out sessions that recur daily or weekly.

Freedom users report gaining an average of 2.5 hours of productive time each day. No wonder Freedom is used by people at the world’s best companies and universities.

With Freedom, you can make time for productivity and things that matter most to you. Try it out for free for the first seven sessions before you decide to take the plunge!

Website: https://freedom.to/

POMODORO
In today’s day and age, multi-tasking is a way of life. You will look up and even reply to emails when you are on the phone, answer Whatsapp messages while writing an email or respond to office staff while you are on a Zoom call. If you avoid all these distractive interruptions, you can get more done in less time, with improved focus and better productivity.

The Pomodoro technique comes to our rescue in such cases. The Pomodoro technique is a popular productivity system developed in the late 1980s by Francesco Cirillo. The Pomodoro kitchen timer is a simple timer that rings after 25 minutes. Cirillo used this timer while working to improve his focus and break up his work into manageable blocks of time. The idea is to work with concentration in 25 minutes bites of time and take a 5-minute break. The 5-minute break can be used to stretch out, respond to distractions or just close your eyes and breathe deeply!

If you wish to use the Pomodoro technique online, visit https://pomofocus.io/ and click on Start. You may set tasks for 25 minutes each and set your breaks – short or long. Watch your daily report and log of activities to evaluate the effectiveness of the process.

Many apps allow you to use the Pomodoro technique. One of the popular ones is Pomodoro Timer (https://bit.ly/3JLeH3J) for Android. You define your tasks – make a task list, define a block of time when you will eliminate all distractions, start the timer and work for 25-minute chunks of time. You may repeat this work/break cycle as often as you wish. You can go for daily goal-setting and make each day more productive.

If you want to use the technique on iOS, this website https://zapier.com/blog/best-pomodoro-apps/ gives you a list of the five best Pomodoro timer apps for Apple users. The approach and technique for using are similar, with some interesting add-ons thrown in. I enjoy using the Pomodoro Technique. Sometimes, you may find it challenging to use as instructed. The 25 minutes time length could be disruptive. But even if you don’t stick precisely to the Pomodoro Technique’s time blocks, the underlying principles are really powerful – and the same timer apps can generally accommodate longer (or shorter) work blocks. You may work on it at your convenience and arrive at the optimum blocks that may prove comfortable and effective.

I wish you happy concentrating!

shailesh.kwebmaker

GIFT BY HUF OF IMMOVABLE PROPERTY

INTRODUCTION

Can the Karta of a HUF make a gift of joint family immovable properties? – a question that keeps cropping up time and again. The answer to this is not a simple yes or a no. It is possible but subject to the facts of each case. There have been several important Supreme Court verdicts on this issue that have dealt with different facets of this question. Let us analyse the position on this topic.

BACKGROUND OF A HUF AND ITS KARTA

As is trite, a HUF is a creature of law. Traditionally speaking, a HUF was a joint family belonging to a male ancestor, e.g., a grandfather, father, etc., and consisted of male coparceners and other members. Thus, the sons and grandsons of the person who was the first head of the HUF automatically became coparceners by virtue of being born in that family. A unique feature of a HUF is that the share of a member is fluctuating and ambulatory, which increases on the death of a member and reduces on the birth of a member. A coparcener is a person who acquires an interest in the joint family property by virtue of being born in the family. Earlier, only men could be coparceners. A wife and a person’s mother also could not become a coparcener in a HUF. However, from 2005, all daughters are at par with sons, and they would now become a coparcener in their father’s HUF by virtue of being born in that family. Importantly, this position continues even after her marriage. Hence, alhough she can only be an ordinary member in her husband’s HUF, she can continue to remain a coparcener in her father’s HUF even after her marriage.

A Karta of a HUF is the manager of the HUF and its joint family property. Normally, the father and, in his absence, the senior-most coparcener acts as the Karta of the HUF. The Karta takes all decisions and actions on behalf of the family. He is vested with several powers for the operation and management of the HUF. After 2005, daughters are at par with sons in their father’s HUF and hence, the eldest child of the father, whether male or female, would become the Karta in the father’s HUF. The Delhi High Court’s verdict in Mrs. Sujata Sharma vs. Shri Manu Gupta, CS(OS) 2011/2006, Order dated 22nd December, 2015 is on the same lines.

SUBJECTIVE TEST
While the Karta has been clearly vested with powers of management of the HUF, the position is not so simple when it comes to making gifts of immovable properties belonging to the HUF. He could do so in certain cases, and that too up to a reasonable extent having regard to the wealth of the HUF. Thus, it is something that needs to be vetted on a case-by-case basis and based on the facts of each family.

In Ammathayee vs. Kumaresan, 1967 AIR(SC) 569, it was held that so far as movable ancestral property was concerned, a gift out of affection may be made to a wife, to a daughter and even to a son, provided the gift was within reasonable limits. A gift, for example, of the whole or almost the whole of the ancestral movable property cannot be upheld as a gift through affection.

Only by way of Gift and Not by Will
However, a Karta cannot make a will/testamentary disposition of HUF property even if it is for the benefit of a charity. There have been several instances where a Karta has included HUF property in his Will. HUF property does not belong to the Karta, even though he is the head. It belongs to the joint family. While he can will away his own share in the HUF, he cannot include the HUF property in his Will. The Karta can alienate that only inter vivos, i.e., by way of a gift. This view has been expressed in the cases of Gangi Reddi vs. Tammi Reddi 14 AIR. 1927 PC 80; Sardar Singh vs. Kunj Bihari Lal 9 AIR 1922 PC 261; Jawahar Lal vs. Sri Thakur Radha Gopaljee Maharaj AIR 1945 All 169. This position has been affirmed by the Supreme Court in R.Kuppayee vs. Raja Gounder, 2004 AIR(SC) 1284.

Pious Purposes and Charity
Gifts of HUF immovable property made for family purposes and especially pious purposes are permissible. The Supreme Court in Guramma Bhratar Chanbasappa Deshmukh vs. Mallappa Chanbasappa, 1964 AIR(SC) 510, has held that the expression pious purposes is wide enough, under certain circumstances, to take in charitable purposes though the scope of the latter purposes has nowhere been precisely drawn.

Gift to Daughters and Sisters
The Supreme Court, in the case of Guramma Bhratar (supra), has laid down the principle in relation to gifts by a HUF to daughters and sisters. It held that the Hindu law conferred a right upon a daughter or a sister, as the case may be, to have a share in the family property at the time of partition. That right was lost by efflux of time. But it became crystallized into a moral obligation. The father or his representative could make a valid gift, by way of reasonable provision for the daughter’s maintenance, regard being had to the financial and other relevant circumstances of the HUF. By custom or by convenience, such gifts were made at the time of marriage, but the right of the father or his representative to make such a gift was not confined to the marriage occasion. It was a moral obligation, and it continued to subsist till it was discharged. Marriage was only a customary occasion for such a gift. But the obligation could be discharged at any time, either during the lifetime of the father or thereafter. It was not possible to lay down a hard and fast rule, prescribing the quantitative limits of such a gift as that would depend on the facts of each case and it could only be decided by Courts, regard being had to the overall picture of the extent of the family estate, the number of daughters to be provided for and other paramount charges and other similar circumstances. The manager was within his rights to make a gift of a reasonable extent of the family property for the maintenance of a daughter. It could not be said that the said gift must be made only by one document or only at a single point of time. The validity or the reasonableness of a gift did not depend upon the plurality of documents but on the power of the father to make a gift and the reasonableness of the gift so made. If once the power was granted, and the reasonableness of the gift was not disputed, the fact that two gift deeds were executed instead of one, did not make the gift invalid. Accordingly, in that case, the Supreme Court concluded that where the HUF had many properties and the father gave the daughter only a life-estate in a small extent of land in addition to what had already been given for her maintenance, the gift made by the father was reasonable in the circumstances of that case.

Another important decision on this issue is Kamla Devi vs. Bachhulal Gupta, 1957 AIR(SC) 434, which laid down certain Hindu law principles. It held that it is the imperative, religious duty and a moral obligation of a father, mother or other guardian to give a girl in marriage to a suitable husband; it is a duty that must be fulfilled to prevent degradation and direct spiritual benefit is conferred upon the father by such a marriage. For pious acts, the family can alienate a reasonable portion of the property. If a promise was made of such a gift for or at the time of the marriage, that promise may be fulfilled afterwards and it was not essential to make a gift at the time of the marriage but it, may be made afterwards in fulfilment of the promise.

A corollary of the above decisions would be that the Karta of a HUF cannot make a gift to other members/coparceners. Of course, if all coparceners agree, then a partial partition of the HUF could be done, partial as regards members or properties. Do remember, that while the Income-tax Act may not recognise a partial partition, the Hindu Law yet recognises the same!

Test of reasonableness
The Supreme Court in R. Kuppayee (supra) held that the question as to whether a particular gift was within reasonable limits or not had to be judged according to the status of the family at the time of making a gift, the extent of the immovable property owned by the family and the extent of property gifted. No hard and fast rule prescribing quantitative limits of such a gift could be laid down. The answer to such a question would vary from family to family. Further, the Apex Court laid down that the question of reasonableness or otherwise of the gift made had to be assessed vis-a-vis the total value of the property held by the HUF. Simply because the gifted property was a house, it could not be held that the gift made was not within reasonable limits.

Gift to the wife of Karta not allowed
In Ammathayee (supra), the Apex Court held that as far immovable ancestral property was concerned, the power of gift by the Karta was much more circumscribed than in the case of gift of movable ancestral property. A Hindu managing member had the power to make a gift of ancestral immovable property within reasonable limits for pious purposes, including, in fulfilment of an antenuptial promise made on the occasion of the settlement of the terms of the daughter’s marriage. However, the Court held that it could not extend the scope of the words pious purposes beyond what had already been held in earlier decisions. It held that a gift in favour of a wife by her Karta husband of ancestral immovable property made out of affection must therefore fail, for no such gift was permitted under Hindu Law insofar as immovable ancestral property was concerned. Even the father-in-law, if he had desired to make a gift at the time of the marriage of his daughter-in-law, would not be competent to do so insofar as immovable ancestral property was concerned. A gift by the father-in-law to the daughter-in-law at the time of marriage could by no stretch of reasoning be called a pious purpose, whatever may be the position of a gift by a father to his daughter at the time of her marriage. After marriage, the daughter-in-law became a member of the family of her father-in-law and she would be entitled after marriage in her own right to the ancestral immovable property in certain circumstances, and clearly therefore her case stood on a very different footing from the case of a daughter who was being married and to whom a reasonable gift of ancestral immovable property could be made. A father-in-law would not be entitled to gift ancestral immovable property to a daughter-in-law so as to convert it into her stridhan.

Gift to Strangers not allowed
The Supreme Court, in the case of Guramma Bhratar (supra), held that a gift to a stranger of joint family property by the manager of the family was void.

TAX ON SUCH GIFTS
The recipient/donee of the gift would have to examine the applicability of section 56(2)(x) of the Income-tax Act in her hands and whether the same would be taxed as a receipt of immovable property without adequate consideration. If the gift is received on occasion of the marriage of the donee then there is a statutory exemption under the Act. Further, as explained above, Courts have held that the right of the daughter/sister to receive a share in the family property was a moral obligation. Hence, a gift received towards the same could be said to be for adequate consideration. In addition, certain Tribunal decisions have held that if a HUF consists of such members who are relatives of the donee, then the HUF as a whole also could be treated as a relative u/s 56(2)(x) – Vineenitkumar Rahgavjibhai Bhalodia vs. ITO (2011) 12 ITR 616 (Rajkot); DCIT vs. Ateev V. Gala, ITA No. 1906/Mum/2014 dated 19th April, 2017. However, Gyanchand M. Bardia vs. ITO, ITA No. 1072/Ahm/2016 has taken a contrary view.

Income earned on property gifted by a member to a HUF is subject to clubbing of income in the donor’s hands. However, no such clubbing exists under the Income-tax Act when a HUF gifts immovable property to a daughter/sister. Income earned on such property would be taxed in the hands of the donee only. However, it is also possible that the Department takes the view that this is a partial partition qua the HUF properties, and hence, income should continue to be taxed in the hands of the HUF only.

STAMP DUTY ON SUCH GIFTS
There is no concessional stamp duty when a HUF gifts property to a daughter/sister. Hence, full stamp duty on a gift of immovable property would be paid on such a gift, and the gift deed would have to be duly registered. For instance, under the Maharashtra Stamp Act, 1958, the duty on such a gift would be 5% of the market value. This duty would be further increased by 1% metro cess levied from 1st April, 2022. The concessional duty of Rs. 500 in case of gift of a residential/agricultural property by a father to daughter would not be available since although the gift may be made by the Karta father, it is the HUF’s property and not that of the father which is being gifted. The position could be different if, instead of a gift, the partial partition route is considered. However, the same would depend upon various facts and circumstances.

CONCLUSION
The law relating to HUFs as a whole is complex and often confusing. This is more to do with the fact that there is no codified statute dealing with HUFs, and there are several conflicting decisions on the same issue. The position is further complicated when it comes to ownership and disposal of property by HUFs. Joint families and buyers dealing with them would be well advised to fully consider the legal position particularly in relation to ancestral property. A slip up could prove fatal to the very title of the property!

shailesh.kwebmaker

RIGHT OF ACCUSED TO RECEIVE RELEVANT DOCUMENTS FROM SEBI – SUPREME COURT LAYS DOWN IMPORTANT PRINCIPLES

The Supreme Court has, by a recent decision of 18th January, 2022 (T. Takano vs. SEBI (2022) 135 taxmann.com 252), gave a decision that has an important bearing on the information that SEBI is required to provide to persons accused of wrongdoing in securities markets. It has effectively held that, barring very specific exceptions, SEBI must provide the full investigation report to the person against whom proceedings for debarment, disgorgement, etc., are initiated. There can be only limited exceptions to this general rule, and even in respect of these exceptions, SEBI is required to provide reasons. Where information is not provided, the accused is entitled to demonstrate that the withholding of such information is not valid as they do not meet the criteria laid down by SEBI. In terms of upholding principles of natural justice, transparency and fairness, this decision can be said to be a landmark. Instead of limited disclosure being the rule and full disclosure being the exception, non-disclosure would now be the exception, and comprehensive disclosure would be the general rule. Moreover, the Court has made certain nuanced points on what information SEBI can be said to have relied on or even influenced by. A mere and bald denial that SEBI has not relied on certain documents as a ground for refusal to provide them is also not enough.

A classic bone of contention between SEBI and persons against whom it initiates penal proceedings is whether all the information relied on by SEBI or otherwise relevant to the proceedings has been duly provided to the person accused of violations or not. Principles of natural justice, which do not even have to necessarily be coded in the law in detail, require that all the information that is relied on by SEBI to make accusations needs to be disclosed so that the person can study it and give his response. On request that certain information be provided, while SEBI often does provide relevant information, the response is often that the information or document sought is not relevant or not relied on. At times, also depending on the efforts (and deep pockets!) of such person, this issue is pursued in appeal/writ petition. In some cases, it is seen that the appellate authority/Court requires SEBI to provide the requested information and then provide a reasonable opportunity for the person to respond and also a personal hearing. In some cases, the order is set aside totally or remanded back to SEBI. The important question is what are the guiding principles for deciding whether the information is relevant or relied on and what are exceptions to the rule of full disclosure. The Supreme Court has now comprehensively laid them in this decision, at least as far as most SEBI proceedings are concerned.

BRIEF AND SUMMARIZED FACTS OF THE CASE
This matter concerned Ricoh India Limited, a public listed company. The appellant was the Managing Director for the financial years 2012-13 to 2014-15. The Audit firm, appointed in 2016, expressed reservations over the veracity of the financial statements for the two quarters ending 30th June, 2015 and 30th September, 2015. The company’s Audit Committee appointed a firm to conduct a forensic audit, whose preliminary report was submitted on 20th April, 2016, which the company shared with SEBI with a request to carry out due investigation for fraud, etc. The forensic auditors submitted their final report on 29th November, 2016. SEBI initiated investigations and summoned the then senior management, whom the company also accused of wrongdoings. Thereafter, SEBI passed an interim order cum show cause notice making a finding that certain persons including the appellant were responsible for the misstatements in the financial statements. As far as the appellant was concerned, SEBI stated that the company had restricted the investigation only to the six months ended 30th September, 2015 and not for 2012-13 and later, when the fraud was started when the appellant was the MD. It was also stated that the forensic audit was limited to the half-year ending 30th September, 2015 to “ring-fence the earlier MD & CEO, T. Takano.”. Since SEBI recorded a finding that there was a fraud during this extended period, it passed adverse orders against the appellant and others, debarring them from the securities markets. An independent audit firm was appointed to conduct a detailed forensic audit. The interim order also served as a show cause notice (“SCN”) seeking a response as to why adverse directions, including debarment should not be passed in a final order. The interim order was later confirmed after considering the representations of the appellant. When the appellant appealed to SAT, the order was set aside on various grounds. However, liberty was given to SEBI to issue a fresh SCN on receipt of the final report of the forensic auditor.

SEBI then issued the fresh SCN, which was the cause of contention that finally resulted in the decision by the Supreme Court. To focus on the core issue, which was the subject matter of the decision, the question was whether SEBI was bound to provide a copy of the investigation report as sought by the appellant. SEBI replied that the investigation report could not be provided as it was an ‘internal document’. The appellant filed a writ before the Bombay High Court which held that such investigation report is solely for internal purposes, and relying on the decision of the Supreme Court in Natwar Singh’s case ((2010) 13 SCC 255), concluded that the report does not form the basis of the SCN and hence need not be disclosed. The appellant filed a review petition before the Division Bench, which too was rejected. The appellant then filed a special leave petition before the Supreme Court, resulting in the present decision.

RULING BY THE SUPREME COURT
The Supreme Court reviewed the law relating to how proceedings are to be conducted, particularly under the relevant SEBI PFUTP Regulations. It highlighted the core importance of the investigation report in these provisions and the proceedings thereunder. It also made some very important observations about the documents that would influence an authority’s mind in his decision, even though he may not specifically rely on them. All in all, it is submitted that the Court took a broader and more realistic view of the matter, particularly in the light of fairness, transparency and principles of natural justice.

First, the Court reviewed Regulations 9, 10 and 11 of the SEBI PFUTP Regulations. It noted that the core process laid down by law was fairly simple and clear. SEBI conducts an investigation in case of a suspected violation of securities laws by a person. If such an investigation reveals a violation, then SEBI initiates proceedings and issues an SCN. Regulation 10 specifically states that it is only “after consideration of the (investigation) report, if satisfied that there is a violation of these regulations, and after giving a reasonable opportunity of hearing to the persons concerned, issue such directions or take such action as mentioned in regulation 11 and regulation 12.” (emphasis supplied).

The Court highlighted the importance of the investigation report as the sheer basis for deciding whether or not there is a violation of the Regulations. The penal/adverse directions also arise as the next step. These directions that can be issued under Regulations 11 and 12 are fairly wide and carry grave consequences. Trading of the concerned security can be suspended. Parties may be restrained from accessing the securities markets and dealing in securities. Proceeds of transactions or securities can be impounded/retained. And so on. Thus, as the Court noted, the sequence was as follows: an investigation is conducted; the authority reviews the report of such investigation based on which, if satisfied, it initiates proceedings, grants a hearing; and then issues directions that have serious consequences. It is evident, then, that the investigation report is the core basis for the proceedings and action, and denying the person a copy of it is unjust, unfair and against the principles of natural justice. It is hardly a mere internal document, as SEBI contended.

The Supreme Court highlights three other important points. The argument often put forth is that certain documents sought by the person have not been ‘relied on’ while issuing the SCN, which makes the allegations. Hence, there is no requirement or need to provide such documents. The Court noted a distinction between what documents are relied on and what is relevant to the proceedings, which is a broader term.

Further, the Court noted that there might be documents reviewed by the authority though not ‘relied on’ while issuing the SCN. The nuanced point made by the Supreme Court (for which several precedents were also cited) was that such documents do influence the mind of the authority. That being so, such documents are also relevant and hence need to be provided to the person accused so that he may defend himself.

Then the Court pointed out that a mere bald denial by the authority that it has not relied on the document sought is insufficient. The actual facts would have to be seen.

The Court pointed out that the principles of reliability of evidence, fairness of a trial, and transparency and accountability are relevant for such quasi-judicial proceedings so that such proceedings do not become opaque, without accountability and thus unjust and unfair.

Thus, the Court held that relevant parts of the investigation report need to be shared with the appellant, though bearing in mind certain exceptions as discussed below.

EXCEPTIONS TO THE GENERAL RULE OF PROVIDING ALL RELEVANT DOCUMENTS TO AN ACCUSED
As mentioned earlier, the decision in a way reverses the general practice often seen in such proceedings. Disclosure is almost an exception, and non-disclosure is the general rule. Selective disclosure is commonly seen with requests to provide documents sought for, often rejected. The Court has now said, of course, in the context of the SEBI proceedings under such Regulations, that disclosure ought to be the general rule and non-disclosure has to be only under certain specific exceptions. Even for the exceptions, reasons would have to be provided why those parts are not disclosed. And in such a case, the onus then shifts to the accused, who still can provide convincing reasons why such information said to fall under such exception should still be provided. The Court held that the accused could not seek a roving disclosure of even documents unconnected to the case. The right of third parties may be balanced with the requirements of disclosure. Information of a ‘sensitive nature bearing upon the orderly functioning of the securities markets’ is another exception.

Thus, the Court laid down certain specific exceptions but also kept the authority accountable.

CONCLUSION
This decision will have a significant bearing on how proceedings are conducted by SEBI and would obviously impact not just future proceedings but even presently ongoing proceedings. This decision would also guide appeals before appellate authorities. Accused have far better rights of justice. This decision is thus a boost for transparency and fairness making disclosure the general rule.

shailesh.kwebmaker

DEDUCTIBILITY OF EXPENDITURE INCURRED BY PHARMACEUTICAL COMPANIES FOR PROVIDING FREEBIES TO MEDICAL PRACTITIONERS UNDER SECTION 37 (Part 1)

INTRODUCTION

1.1 Section 37 of the Income-tax Act, 1961 (‘the Act’) grants deduction of any expenditure incurred wholly and exclusively for the purposes of an assessee’s business or profession while determining the income chargeable under the head ‘Profits and gains of business or profession’ provided such expenditure is not of the nature referred to in sections 30 to 36 and is not a capital or a personal expense of the assessee.

1.2 An Explanation (now renumbered as Explanation 1) was inserted by the Finance (No. 2) Act, 1998 in section 37 with retrospective effect from 1st April,1962 [herein after referred to as the said Explanation] to deny deduction or allowance of any expenditure incurred by an assessee for any purpose which is an offence or which is prohibited by law and to clarify that such expenditure shall not be deemed to have been incurred for the purpose of business or profession.

1.3 Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (hereinafter referred to as “MCI Regulations”) prescribe a code of conduct and ethics that are to be adhered to by a medical practitioner. These Regulations prohibit a medical practitioner from aiding, abetting or committing any unethical acts specified in Clause 6. Some of the instances specified in Clause 6 of the MCI Regulations which are treated as unethical include: soliciting of patients; giving, soliciting, receiving or offering to give, solicit or receive any gift, gratuity, commission or bonus in consideration of or return for the referring; and recommending or procuring of any patient for any treatment.

1.4 MCI Regulations were amended and published in the Official Gazette on 14th December, 2009 whereby Clause 6.8 was added to the MCI Regulations prescribing a code of conduct to be adhered to by doctors and professional association of doctors in their relationship with pharmaceutical and allied health sector industry. Clause 6.8 prohibits medical practitioners from accepting from any pharmaceutical or allied health care industry any emoluments in the form of inter alia gifts, travel facilities for vacation or for attending conferences/seminars, hospitality like hotel accommodation, cash or monetary grants. Any act in violation of the aforesaid MCI Regulation could result in sanctions against the medical practitioners ranging from ‘censure’ to removal from the Indian Medical Register or State Medical Register for periods prescribed therein.

1.5 Thereafter, Central Board of Direct Taxes (‘CBDT’) vide its Circular No. 5/2012 dated 1st August, 2012 [hereinafter referred to as the said Circular] clarified that any expense incurred by pharmaceutical and allied health sector industries for distribution of freebies to medical practitioners in violation of the provisions of MCI Regulations shall be inadmissible as deduction u/s 37(1) being an expense prohibited by law.

1.6 In the course of their business, pharmaceutical companies incur expenditure for bearing travel or conference expenses of medical practitioners or giving incentives, gifts and free samples to medical practitioners to create awareness about their products or to increase the sale of their products. Such expenditure being wholly and exclusively for the purpose of business is claimed as a deduction u/s 37 by the pharmaceutical companies. The issue, however, arose as to whether incurring of such expenditure was for an offence or was prohibited by law so as to fall within the scope of the said Explanation, thereby resulting in a denial of deduction of such expenditure. This issue has given rise to considerable litigation and was a subject matter of dispute before different authorities/courts, more so with the issuance of the said Circular by the CBDT.

1.7 Recently, this issue of allowability of claim for deduction of freebies came up before the Supreme Court in the case of Apex Laboratories (P) Ltd. vs. DCIT (2022) 442 ITR 1(SC) which now largely settles this dispute and, therefore it is thought fit to consider in this feature.

CIT VS. KAP SCAN AND DIAGNOSTIC CENTRE P. LTD. (2002) 344 ITR 476 (P&H)

2. In the above case, the brief facts were the assessee was doing the business of CT scan, ultrasound and X-rays and return of income for A.Y. 1997-98 was filed, declaring a loss. The assessee had claimed a deduction of Rs 3,68,400 towards commission stated to have been paid to the practising doctors who referred the patients for various tests. This was disallowed by the Assessing Officer (AO). The claim of such deduction was allowed by the first Appellate Authority. The Tribunal dismissed the further appeal of the Revenue, holding that the commission paid to the doctors was allowable expenditure being a trade practice. As such, at the instance of the Revenue, the issue of deductibility of such commission came up before the High Court.

2.1 Before the High Court, on behalf of the assessee, it was inter alia contended that giving such commission to private doctors for referring the patients for various tests was a trade practice that could not be regarded as illegal. Therefore, the same cannot be disallowed even under the said Explanation inserted by the Finance (No. 2) Act, 1998 with retrospective effect. For this, reliance was placed on the decision of the Allahabad High Court in the case of Pt. Vishwanath Sharma [(2009) 316 ITR 419]. It was further contended that the Revenue had not shown/proved/argued that such commission was an illegal practice. It was also contended that the question of inadmissibility of this deduction u/s 37 was never raised before the Tribunal and hence cannot be raised now for the first time. It seems that this contention was meant to say that this was never raised based on the said Explanation before the Tribunal.

Apart from this, reliance was also placed on the judgment of the Supreme Court in the case of Dr. T. A. Quereshi [(2006) 287 ITR 547] and judgments of High Courts in support of the contentions raised.

It would appear that nobody had appeared for the Revenue.

3. After hearing the assessee’s counsel, the Court noted that the issue was regarding the deductibility of commission paid by the assessee to the Doctors for having referred the business to its diagnostic center. As such, it cannot be said that the point regarding section 37(1) of the Act was never raised earlier though it was only under the said provision.

3.1 For the purpose of considering the other contentions raised on behalf of the assessee, the Court referred to the provisions of Section 37 and the said Explanation as well as the CBDT Circular No 772 dated 23rd December,1998 explaining the reasons for the introduction of the said Explanation and observed as under:

“It, thus, emerges that an assessee would not be entitled to deduction of payments made in contravention of law. Similarly, payments which are opposed to public policy being in the nature of unlawful consideration cannot equally be recognized. It cannot be held that businessmen are entitled to conduct their business even contrary to law and claim deductions of payments as business expenditure, notwithstanding that such payments are illegal or opposed to public policy or have pernicious consequences to the society as a whole.”

3.2 The Court then noted the relevant portion of the MCI Regulations contained in Regulation 6.4 which in substance provides that no physician shall give, solicit, receive or offer to give, solicit or receive any gift, gratuity, commission or bonus in consideration of or return for referring any patient for medical treatment. Having noted this Regulation, the Court stated as under:

“If demanding of such commission was bad, paying it was equally bad. Both were privies to a wrong. Therefore, such commission paid to private doctors was opposed to public policy and should be discouraged. The payment of commission by the assessee for referring patients to it cannot by any stretch of imagination be accepted to be legal or as per public policy. Undoubtedly, it is not a fair practice and has to be termed as against the public policy.”

3.2.1 The Court also noted that Section 23 of the Contract Act equates an agreement or contract opposed to public policy with an agreement or contract forbidden by law.

3.3 Dealing with the judgment of the Supreme Court relied on by the assessee, the Court, while distinguishing the same, stated as under:

“The judgments relied upon by the assessee cannot be of any assistance to the assessee as they are prior to insertion of the Explanation to sub-section (1) of section 37 of the Act. Reference may also be made to the apex court judgment in Dr. T.A. Quereshi’s case [2006] 287 ITR 547 (SC) on which reliance has been placed by the learned counsel for the assessee. The hon’ble Supreme Court in that case was seized of the matter where heroin forming part of the stock of the assessee’s trade was confiscated by the State authorities and the assessee claimed the same to be an allowable deduction. The hon’ble Supreme Court held that seizure and confiscation of such stock-in-trade has to be allowed as a business loss and Explanation to section 37 has nothing to do as that was not a case of business expenditure. Since the present case is not a case of business loss but of business expenditure, that judgment is distinguishable and does not help the assessee.”

3.4 The Court also referred to the judgment of the Allahabad High Court in the case of Pt. Vishwanath Sharma (supra), in which the issue relating to the commission paid to Government doctors for prescribing certain medicines to patients was held as contravening public policy, and the same is inadmissible as a deduction. In this context, the Court stated that no distinction could be made in respect of Government doctors and private doctors.

3.5 Finally, the Court concluded as under:

“Thus, the commission paid to private doctors for referring patients for diagnosis could not be allowed as a business expenditure. The amount which can be allowed as business expenditure has to be legitimate and not unlawful and against public policy.”

CONFEDERATION OF INDIAN PHARMACEUTICAL INDUSTRY VS. CENTRAL BOARD OF DIRECT TAXES (2013) 353 ITR 388 (HP)

4.1 CBDT Circular No. 5/2012 dated 1st August, 2012 [referred to in para 1.5 above] was challenged by the Confederation of Indian Pharmaceutical Industry in a petition filed before the Himachal Pradesh High Court.

4.2 High Court observed that the MCI Regulations was a salutary regulation in the interest of the patients and the general public in light of increasing complaints that the medical practitioners did not prescribe generic medicines but only branded medicines in lieu of gifts and other freebies which were given by pharmaceutical industries.

4.3 High Court rejected the petitioner’s submission that the Circular goes beyond the scope of section 37 and observed as under:

“Shri Vishal Mohan, Advocate, on behalf of the petitioner contends that the circular goes beyond the section itself. We are not in agreement with this submission. The explanation to Section 37(1) makes it clear that any expenditure incurred by an assessee for any purpose which is prohibited by law shall not be deemed to have been incurred for the purpose of business or profession. The sum and substance of the circular is also the same.”

4.4 High Court while upholding the validity of the CBDT Circular concluded as under:

“Therefore, if the assessee satisfies the assessing authority that the expenditure is not in violation of the regulations framed by the medical council then it may legitimately claim a deduction, but it is for the assessee to satisfy the assessing officer that the expense is not in violation of the Medical Council Regulations referred to above.”

MAX HOSPITAL VS. MCI (WP (C) 1334/2013) (DELHI HIGH COURT)

5.1 In this case, the Petitioner filed a writ petition challenging certain observations made against it by the Ethics Committee of the Medical Council of India while deciding an appeal for medical negligence filed against doctors working in the Petitioner’s hospital. Ethics Committee found the doctors to be negligent. Further, the Committee also strongly recommended that the concerned authorities take necessary action on the hospital administration for poor care and infrastructure facilities.

5.2 Before the Court, Petitioner urged that the MCI Regulations and the Ethics Committee of the MCI acting under the MCI Regulations had no jurisdiction to pass any direction or judgment on the infrastructure of any hospital.

5.3 The Medical Council of India filed an affidavit before the Court stating as under:

“That the jurisdiction of MCI is limited only to take action against the registered medical professionals under the Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002 (hereinafter the ‘Ethics Regulations’) and has no jurisdiction to pass any order affecting rights/interests of any Hospital, therefore the MCI could not have passed and has not passed, any order against the petitioner which can be assailed before this Hon’ble Court in writ jurisdiction.”

5.4 High Court taking note of this affidavit quashed the adverse observations made by the Committee and concluded as under:

“It is clearly admitted by the Respondent that it has no jurisdiction to pass any order against the Petitioner hospital under the 2002 Regulations. In fact, it is stated that it has not passed any order against the Petitioner hospital. Thus, I need not go into the question whether the adequate infrastructure facilities for appropriate post-operative care were infact in existence or not in the Petitioner hospital and whether the principles of natural justice had been followed or not while passing the impugned order. Suffice it to say that the observations dated 27.10.2012 made by the Ethics Committee do reflect upon the infrastructure facilities available in the Petitioner hospital and since it had no jurisdiction to go into the same, the observations were uncalled for and cannot be sustained.”

DCIT VS. PHL PHARMA (P) LTD. (2017) 163 ITD 10 (MUM)

6.1 In this case, the brief facts were that the assessee was a pharmaceutical company engaged in the business of providing pharma marketing consultancy and detailing services to develop a mass market for pharma products.

6.2 During the year under consideration, the assessee had incurred certain expenditure claimed by it as deduction u/s 37 of the Act. This expenditure included: (i) expenditure for holding national level seminars/ lectures/ knowledge upgrade courses on new medical research and drugs and inviting doctors to participate in it, (ii) subscription of costly journals, information books, etc., (iii) sponsoring travel and accommodation expenses of doctors for important conferences, (iv) giving to doctors in India small value gift articles such as diaries, pen sets, injection boxes, calendars, table weights, postcard holders, stationery items, etc., containing the logo of the assessee and the name of the medicine advertised to maintain brand memory, and (v) cost of samples distributed through various agents to doctors to prove the efficacy of the drug and to establish the trust of the doctors on quality of drugs.

6.3 Tribunal observed that the Medical Council Regulations applied only to medical practitioners and not to pharmaceutical companies or allied health care sectors. It further noted that the department had not brought anything on record to show that the MCI regulation is meant for the pharmaceutical companies in any manner.

Tribunal also thereafter referred to the decision of the Delhi High Court in Max Hospital vs. MCI (supra) where the Medical Council of India had admitted that action under the MCI Regulations could be taken only against the medical practitioners and not against any hospital or any health care sector. Tribunal observed that once the Medical Council regulation did not have any jurisdiction over pharmaceutical companies, the pharmaceutical companies cannot be said to have committed any offence or violated law by incurring expenditure for sales promotion, giving gifts or distributing free samples to doctors. Consequently, the said Explanation will not disentitle a pharmaceutical company from claiming such expenditure. Tribunal further held that the CBDT Circular had enlarged the scope and applicability of the Medical Council Regulations by making it applicable to the pharmaceutical companies without any enabling provisions under the Income-tax law or the MCI Regulations.

6.4 While dealing with the facts of the case, the Tribunal also held as under [para 10 – page 28]:

“….All the gift articles, as pointed out by the assessee before the authorities below and also before us are very cheap and low cost articles which bears the name of assessee and it is purely for the promotion of its product, brand reminder, etc. These articles cannot be reckoned as freebies given to the doctors. Even the free sample of medicine is only to prove the efficacy and to establish the trust of the doctors on the quality of the drugs. This again cannot be reckoned as freebies given to the doctors but for promotion of its products. The pharmaceutical company, which is engaged in manufacturing and marketing of pharmaceutical products, can promote its sale and brand only by arranging seminars, conferences and thereby creating awareness amongst doctors about the new research in the medical field and therapeutic areas, etc. Every day there are new developments taking place around the world in the area of medicine and therapeutic, hence in order to provide correct diagnosis and treatment of the patients, it is imperative that the doctors should keep themselves updated with the latest developments in the medicine and the main object of such conferences and seminars is to update the doctors of the latest developments, which is beneficial to the doctors in treating the patients as well as the pharmaceutical companies. Further as pointed out and concluded by the learned CIT(A) there is no violation by the assessee in so far as giving any kind of freebies to the medical practitioners. Thus, such kind of expenditures by a pharmaceutical companies are purely for business purpose which has to be allowed as business expenditure and is not impaired by EXPLANATION 1 to section 37(1).”

6.5 While concluding in favour of the assessee, Tribunal also dealt with and distinguished the Himachal Pradesh and Punjab & Haryana High Court’s decisions in the cases of Confederation of Indian Pharmaceutical Industry and Kap Scan & Diagnostic Centre (P) Ltd. relied on by the department. Tribunal noted that the High Court in Confederation’s case while upholding the validity of the said Circular, had also observed that an assessee may claim a deduction of expenditure if it satisfies the assessing authority that the expenditure was not in violation of the MCI Regulations. While dealing with Kap Scan’s case, the Tribunal observed that the High Court, in that case, had held that payment of commission was wrong and was opposed to public policy. Therefore, the ratio of that decision could not be applied to the facts of the present case – there was no violation of any law or anything opposed to public policy in the present case.

6.6 The decision in PHL Pharma’s case was thereafter followed by several benches of the Tribunal and the expenditure claimed by pharmaceutical companies was allowed as a deduction u/s 37 of the Act.

DCIT VS. MACLEODS PHARMACEUTICALS LTD. (2022) 192 ITD 513 (MUM)

7.1 Mumbai bench of the Tribunal in the case of Macleods Pharmaceuticals Ltd. expressed its reservations on the correctness of the decision in PHL Pharma’s case and recommended the constitution of a special bench of three or more members to decide the following question:

“Whether an item of expenditure on account of freebies to medical professionals, which is hit by rule 6.8.1 of Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations, 2002- as amended from time to time, read with section 20A of the Indian Medical Council Act 1956, can be allowed as a deduction under section 37(1) of the Income-tax Act, 1961 read with Explanation thereto, in the hands of the pharmaceutical companies?”

7.2 While making a reference to the special bench, Tribunal, in this case, observed that the interpretation of Explanation to section 37(1) assigned in the CBDT Circular 5/2012 was held to be a correct legal interpretation by the Himachal Pradesh High Court in Confederation of Indian Pharmaceutical Industry’s case. Tribunal rejected the assessee’s submission that the Delhi High Court in Max Hospital’s case had consciously departed from the view taken in Confederation’s case and observed that both the decisions dealt with different issues. Tribunal further observed that as medical professionals cannot lawfully accept freebies in view of the MCI Regulations, any expenditure incurred for giving such freebies is for a ‘purpose which is prohibited by law’, thereby attracting the said Explanation in the hands of pharmaceutical companies. The Tribunal also noted the P&H High Court’s decision in Kap Scan’s case and observed that extending freebies by pharmaceutical companies is wholly illegal and opposed to public policy. Given the above observations, Tribunal was of the view that the ratio laid down in PHL Pharma’s case required reconsideration by a larger bench of the Tribunal.

APEX LABORATORIES (P) LTD. VS. DCIT LTU (MADRAS HIGH COURT) – TAX CASE APPEAL NO. 723 OF 2018

8.1 Assessee, a pharmaceutical company, incurred expenses for distributing gifts and freebies to medical practitioners. According to the assessee, such expenditure was incurred purely for advertising and creating awareness about its manufactured product ‘Zincovit’.

8.2 The assessee’s claim for such expenditure for the A.Y. 2010-11 was rejected by the AO and the Commissioner of Income-tax (Appeals) (‘CIT(A)’). In an appeal preferred by the assessee to the Tribunal against the order of the CIT(A), the Tribunal observed that once the act of receiving gifts or freebies is treated as being unethical and against public policy, the act of giving gifts by pharmaceutical companies or doing such acts to induce doctors to violate the MCI Regulations would also be unethical. Tribunal held that expenditure incurred by the assessee which violated the MCl Regulations is not an allowable expenditure and is hit by the said Explanation. Consequently, Tribunal disallowed the expenditure incurred by the assessee after the MCI Regulations came into force, i.e. 14th December, 2009.

8.2.1 In this case, the Tribunal relied on the judgment of the Himachal Pradesh High Court in the case of the Confederation of Indian Pharmaceutical Industry (supra) and the said Circular of CBDT. In this case, the details of the expenditure incurred by the assessee are not available. However, while deciding this case, the Tribunal also relied on and quoted the relevant part of the order of the Co-ordinate Bench in the assessee’s own case (maybe of earlier year) in which reference to the nature of such expenditure is available. The same mainly consisted of refrigerators, LCD TVs, laptops, gold coins etc. These were stated to be intended to disseminate information to medical practitioners and from them to the ultimate consumers. It was claimed in that year that these expenses are essentially advertisement expenses for creating awareness and to promote sales. It was also explained that its product ‘Zincovit’ is a healthcare supplement and not a pharmaceutical product. In that year, the Tribunal had taken the view that such expenses are hit by the MCI Regulations, prohibiting the distribution of gifts to doctors and medical practitioners. As such, one may presume that even in this case for the A.Y. 2010-11, the nature of expenditure incurred by the assessee may be the same.

8.3 When the matter came up before the High Court at the instance of the assessee, the High Court dismissed the assessee’s appeal holding that no substantial question of law arose in the present case. The Court decided as under:

“… we find that no substantial question of law arises for our consideration in the present case as the findings of facts of the Appellate Authority below are based on relevant Regulations and Amendment thereafter and the expenditure on such items prior to the Amendment have already been allowed in favour of the Assessee and they have been disallowed after 14.12.2009. We find no error in the order passed by the Tribunal.”

[To be continued in Part II]

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Article 12(3), (4) of India-USA DTAA – Fee received by American company for providing customized research services was not chargeable in India as Royalty

3 Everest Global Inc. vs. DDIT [2022] 136 taxmann.com 404 (Delhi) ITA No: 2469/Del/2015, 6137/Del/2015 and 2355/Del/2017 ITAT “D” Bench, Delhi Members: G.S. Pannu, President and C.N. Prasad, JM A.Ys.: 2010-11, 2011-12 and 2012-13; Date of order: 30th March, 2022 Counsel for Assessee/Revenue: Ms. Vandana Bhandari, Adv./ Shri Vijay Kumar Choudhary, Sr. DR

Article 12(3), (4) of India-USA DTAA – Fee received by American company for providing customized research services was not chargeable in India as Royalty

FACTS
The assessee was a company incorporated in the USA. It was in global services advisory and research business. The assessee assisted clients in developing and implementing leading-edge sourcing strategies, including captive outsourced and shared services approaches. The assessee mainly provided two kinds of services
to its clients – published research reports and customized research advisory as per client’s specific requirements.

The published reports were general in nature. They compiled factual information from various secondary sources. The database and server of the assessee were in the USA. The subscribers were granted access to the database through the website upon payment of a fee, which also allowed them to download published reports, annual market updates, white papers, etc. The published reports and database were copyright protected. The subscriber had a non-exclusive, non-transferable right and license to use the published report.

The assessee provided custom research advisory services on topics provided by clients in advance to clients in India. The output of custom research advisory service was provided to clients through emails or presentations. Work orders/invoices for customized research services were generated based on the requirements of clients.

In the course of assessment, the AO concluded that the subscription fee for published reports as well as fee for customized research advisory services was chargeable to tax in India under the head ‘Royalty’. In appeal, CIT(A) affirmed the order of the AO.

The issue before Tribunal pertained to the taxability of fees for customized research advisory services under the head ‘Royalty’.

HELD
The assessee provides custom research advisory services to outsourcing industry clients only on topics provided by them in advance. The output is provided through emails or presentations. These clients are not allowed to use the database of published reports.

The AO and CIT(A) failed to properly consider the facts and mixed up the taxability of published reports and custom research under the head ‘Royalty’.

Article 12(3), as well as clause (a) of Article 12(4), were not applicable to custom research services. Hence, the fee received for such services was not taxable as ‘Royalty’.

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S. 9(1)(vi) of the Act; Article 12 of India-Singapore DTAA – Where clients themselves generated reports using web portal of the assessee, and they did not have access, either to process, or to equipment, of the assessee, income of the assessee was not Royalty, either u/s 9(1)(vi) of the Act, or under Article 12 of India-Singapore DTAA

2 M/s Salesforce.com Singapore Pte vs. Dy. DIT [2022] 137 taxmann.com 3 (Delhi)
ITAT “D” Bench, Delhi Members: N.K. Billaiya, AM and Anubhav Sharma, JM ITA No: 4915/Del/20166, 4916/Del/2016, 6278/Del/2016, 2907/Del/2017, 4299/Del/2017, 8156/Del/2019 and 999/Del/2019 A.Ys.: 2010-11 to 2016-17; Date of order: 25th March, 2022 Counsel for Assessee/Revenue: Shri Ravi Sharma, Adv, Shri Rishabh Malhotra, Adv/Ms. Anupama Anand, CIT- DR

S. 9(1)(vi) of the Act; Article 12 of India-Singapore DTAA – Where clients themselves generated reports using web portal of the assessee, and they did not have access, either to process, or to equipment, of the assessee, income of the assessee was not Royalty, either u/s 9(1)(vi) of the Act, or under Article 12 of India-Singapore DTAA

FACTS
The assessee was a company incorporated in, and a tax resident of Singapore. It was engaged in providing comprehensive Customer Relationship Management (CRM) services to its clients through its CRM application software portal. The clients subscribed to the services which they required. In consideration for the services, the clients were required to pay a subscription fee to the assessee. They could access the portal for the period they had paid the subscription fee.

The clients fed data into a database of the assessee. Thereafter, they were enabled to manage customer accounts, track sales, evaluate marketing campaigns, provide better post-sales service, generate reports and summaries, etc.

The AO concluded that the subscription fee received by the assessee was in the nature of Royalty u/s 9(1)(vi) of the Act and under Article 12 of India-Singapore DTAA. In appeal, CIT(A) held that the services rendered by the assessee were in the nature of imparting information concerning commercial expediency and hence, it was in the nature of royalty.

HELD
The assessee provided CRM services through its portal. All equipment and machines required to provide the services were under the control of the assessee and located outside India. The assessee hosted data, which was fed by the clients, on its portal. All the servers of the assessee were located outside India. The assessee did not have any place of management in India or any personnel in India. Hence, it could not be considered to have a fixed place of business in India.

The assessee provided its clients’ online access to its portal. Using the portal, the clients generated reports.

The clients did not have any control over the equipment belonging to the assessee. In the absence of such control, the contention of the AO that the subscription fee received constituted ‘Royalty’ was not tenable. Further, the assessee did not provide any information concerning industrial, commercial, or scientific experience.

If the services were rendered de hors imparting of knowledge or transfer of any knowledge, experience or skill, then such services did not fall within the ambit of Article 12 of India-Singapore DTAA.

Also, facts in the case of the assessee were distinguishable from those in the case of the AAR decision in Thought Buzz (P) Ltd 346 ITR 345, where that assessee was in the business of gathering and collating data obtained from various sources, which it shared with the users through its report. However, in case of the assessee, the clients generated reports using data fed by them on the portal of the assessee.

The clients did not have access, either to the process, or equipment and machines, of the assessee. Correspondingly, the assessee did not have access to the clients’ data.

Therefore, the subscription fee received by the assessee could not be taxed as royalty, either u/s 9(1)(vi) of the Act, or under Article 12 of India-Singapore DTAA.

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Provisions of Section 56(2)(vii)(c) are not applicable to rights shares issued in case there was no disproportionate allotment by the company and if the transaction was a genuine one, without any intention of tax evasion or tax abuse

9 ITO vs. Rajeev Ratanlal Tulshyan [2021] 92 ITR(T) 332 (Mumbai – Trib.) [ITA No.: 5748 (MUM.) of 2017 Cross Objection No. 118 (Mum.) of 2018 A.Y.: 2014-15; Date of order: 1st October, 2021

Provisions of Section 56(2)(vii)(c) are not applicable to rights shares issued in case there was no disproportionate allotment by the company and if the transaction was a genuine one, without any intention of tax evasion or tax abuse

FACTS
Assessee, a resident individual, was allotted rights shares of a company. In assessment, it was alleged that consideration being less than Fair Market Value (FMV), the difference between the FMV and consideration paid by the assessee would be taxable u/s 56(2)(vii). In the course of appeal, the assessee submitted that the shares were offered on right basis by the company on a proportionate basis to all existing shareholders. The assessee subscribed to the rights issue only to the extent of proportionate offer and no further. He also drew attention to CBDT Circular No. 5 of 2010 dated 3rd June, 2010 which provided that the newly introduced provisions of section 56(2)(vii) were anti-abuse measures. Similarly, CBDT Circular No. 1 of 2011 provided that these provisions were introduced as a counter evasion mechanism to prevent the laundering of unaccounted income. The provisions were intended to extend the tax net to such transactions in kind. The intent was not to tax the transactions entered into in the normal course of business and trade, the profits of which are taxable
under specific head of income. The assessee, inter-alia, relied on the decision of Mumbai Tribunal in Sudhir Menon HUF vs. Asst. CIT [2014] 45 taxmann.com 176/148 ITD 260 (Mum.) wherein it was held that in case of proportionate allotment of shares, there would be no taxability u/s 56(2)(vii)(c). He also submitted that, as held in Dy. CIT vs. Dr. Rajan Pai [IT Appeal No. 1290 (Bang.) of 2015, dated 29-4-2016], since the Gift tax Act was not applicable to issue of shares, the provisions of section 56(2) would not apply to transaction of nature stated above. He also relied on the decision of Hon’ble Supreme Court in Khoday Distilleries Ltd. vs. CIT [2009] 176 Taxman 142/[2008] 307 ITR 312, which held that shares [thus, property, as stipulated in Section 56(2)(vii)] comes into existence only on allotment. However, at
the same time, it was admitted by the assessee that similar argument was rejected by Mumbai Tribunal in Sudhir Menon HUF (supra) wherein the bench held that though allotment of shares is not to be regarded as transfer but since the assessee is receiving property in the form of shares, the provisions of section 56(2)(vii) would apply.

The CIT(A) upheld the addition, however, restricted the same to the extent of gain in value on account of disproportionate allotment of shares to the assessee. Aggrieved, the revenue filed appeal with the ITAT for the amount of addition not sustained by the CIT(A), while the assessee filed cross objection as regards the amount of addition sustained by the CIT(A).

HELD
The ITAT observed that there was a fallacy in the conclusion of the lower authorities that the allotment was disproportionate and skewed in favour of the assessee in that the rights offer made on two occasions during the year in the same proportion to all existing shareholders. It was only because few of the other shareholders did not exercise their right that the assessee’s shareholding in the company increased; there was no disproportionate allotment. Therefore, the ratio of decision in Sudhir Menon (supra) would be applicable.

It also considered the decision of the coordinate bench of Mumbai Tribunal in Asstt. CIT vs. Subodh Menon [2019] 103 taxmann.com 15/175 ITD 449 which, applying the ratio held in Sudhir Menon (supra), held that the provisions of section 56(2)(vii) did not apply to bona fide business transaction. The CBDT Circular No. 1/2011 dated 6th April, 2011 explaining the provision of section 56(2)(vii) specifically stated that the section was inserted as a counter evasion mechanism to prevent money laundering of unaccounted income. In paragraph 13.4 thereof, it is stated that “the intention was not to tax transactions carried out in the normal course of business or trade, the profit of which are taxable under the specific head of income”. Therefore, the aforesaid transactions, carried out in normal course of business, would not attract the rigors of provisions of section 56(2)(vii).

The ITAT, on perusal of orders of lower authorities, did not find any allegations of tax evasion or abuse by the assessee. The transactions were ordinary transactions of issue of rights shares to existing shareholders in proportion to their existing shareholding and therefore, no abuse or tax evasion was found to be made by the assessee.

The ITAT also took into consideration Circular No. 03/2019 dated 21st January, 2019 wherein it was mentioned, inter alia, that intent of introducing the provisions was anti-abusive measures still remain intact, and there is no reason to depart from the understanding that the provisions were counter evasion mechanism to prevent the laundering of unaccounted income. Therefore, the same does not apply to a genuine issue of shares to existing shareholders. The position was also duly supported by the decision of Bangalore Tribunal in Dr. Rajan Pai (supra) which is further affirmed by the Hon’ble Karnataka High Court in Pr. CIT vs. Dr. Rajan Pai IT Appeal No. 501 of 2016, dated 15-12-2020.

On these grounds, the ITAT deleted the addition made by the A.O. and dismissed the appeal filed by revenue and allowed the cross-objections filed by the assessee.

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Sec. 36(1)(va): Contribution deposited by assessee-employer after the due date prescribed in Sec. 36(1)(va) but before the due date of filing return u/s 139(1) was allowed as a deduction until A.Y. 2020-21 since the amendment to Sec. 36(1)(va) brought by Finance Act, 2021 is prospective and not retrospective

8 Digiqal Solution Services (P.) Ltd. vs. ACIT [2021] 92 ITR(T) 404 (Chandigarh – Trib.) ITA No.: 176 (Chd.) of 2021 A.Y.: 2019-20; Date of order: 4th October, 2021

Sec. 36(1)(va): Contribution deposited by assessee-employer after the due date prescribed in Sec. 36(1)(va) but before the due date of filing return u/s 139(1) was allowed as a deduction until A.Y. 2020-21 since the amendment to Sec. 36(1)(va) brought by Finance Act, 2021 is prospective and not retrospective

FACTS
Addition of employees’ contribution to ESI and PF deposited beyond the due date prescribed in Section 36(1)(va), but before the due date of filing return of income u/s 139(1) was made to the assessee’s income in the intimation u/s 143(1). Aggrieved, the assessee filed an appeal before the CIT(A). The CIT(A) held that the said amendment though effected by the Finance Act, 2021 but when read in the background of the decision of the Hon’ble Apex Court in the case of Allied Motors (P.) Ltd. vs. CIT (1997) 91 taxmann.com 205 / 224 ITR 677, the intention of Legislature set out through memorandum through the Finance Act while introducing the Explanations to section made it clear that the said amendments would apply to all pending matters as on date. The CIT(A) thus upheld the addition. Aggrieved, the assessee filed a further appeal before the Tribunal.

HELD
The ITAT considered the following decisions rendered by co-ordinate benches of the ITAT:

• ValueMomentum Software Services (P.) Ltd. vs. Dy. CIT [ITA No. 2197 (Hyd.) of 2017]

• Hotel Surya vs. Dy. CIT [ITA Nos. 133 & 134 (Chd.) of 2021]

• Insta Exhibition (P.) Ltd. vs. Addl. CIT [ITA No. 6941 (Delhi) of 2017]

• Crescent Roadways (P.) Ltd. vs. Dy. CIT [ITA No. 1952 (Hyd.) of 2018]

These decisions held that the amendment to Section 36(1)(va) and Section 43B of the Act effected by the Finance Act, 2021 are applicable prospectively, reading from the Notes on Clauses at the time of introduction of the Finance Act, 2021, specifically stating the amendment being applicable in relation to A.Y. 2021-22 and subsequent years.

It also considered the following decisions of jurisdictional High Court holding that employee’s contribution to ESI & PF is allowable if paid by the due date of filing return of income u/s 139(1) of the Act:

• CIT vs. Nuchem Ltd. [ITA No. 323 of 2009]
• CIT vs. Hemla Embroidery Mills (P.) Ltd. [2013] 37 taxmann.com 160/217 Taxman 207 (Mag.)/ [2014] 366 ITR 167 (Punj. & Har.)

Following these High court decisions and ITAT decisions, the ITAT allowed the assessee’s claim of deduction and set aside the order of CIT(A).

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ITRs and Appeal forms of only individuals and Companies can be signed by a valid power of attorney holder in certain circumstances. Other categories of assessees (e.g. HUF/Firm) do not have this `privilege’ u/s 140 read with Rule 45(3) / 47(1) The benefit of the general rule that if a person can do some work personally, he can get it done through his Power of Attorney holder also is not intended to be extended to all categories of assessees

7 Bangalore Electricity Supply Co. Ltd. vs. DCIT [137 taxmann.com 287 (Bangalore – Trib.)] A.Y.: 2008-09; Date of order : 7th April, 2022 Section: 140

ITRs and Appeal forms of only individuals and Companies can be signed by a valid power of attorney holder in certain circumstances. Other categories of assessees (e.g. HUF/Firm) do not have this `privilege’ u/s 140 read with Rule 45(3) / 47(1)

The benefit of the general rule that if a person can do some work personally, he can get it done through his Power of Attorney holder also is not intended to be extended to all categories of assessees

FACTS
The appeal filed in this case was found by the Tribunal, at the time of hearing on 6th March, 2022, to be defective on the ground that the appeal was not signed by the competent authority and it was signed by the General Manager (CT&GST), BESCOM. The Tribunal asked the AR of the assessee to cure the defect by 16th March, 2022. On 16th March, 2022, none appeared on behalf of the assessee and therefore the Tribunal proceeded to decide the appeal by hearing the DR.

The Tribunal noted that the focus in the present appeal is to decide whether the appeal filed is invalid or defective.

HELD
On going through the provisions of section 140, the Tribunal noted that clauses (a) and (c) contain the provisions for the signing of return by a valid power of attorney holder while other clauses do not have such a provision. Thus, there is a clear line of demarcation between the classes of assessees, who, in certain circumstances, can get their returns signed and verified by the holder of a valid PoA, in which case such PoA is required to be attached to the return and, on the other hand, the classes of assessees who do not enjoy such privilege.

It held that it is not permissible for a non-privileged assessee to issue PoA and get his return filed through the holder of a PoA. It is true that in common parlance if a person can do some work personally, he can get it done through his PoA holder also. But section 140 has made separate categories of assesses, and the said general rule has been made applicable only to some of them and not all. It is obvious that the intention of the Legislature is not to extend this general rule to all the classes of the assessees. If that had been the situation, then there was no need of inserting proviso to clauses (a) and (c) only but a general provision would have been attached as extending to all the classes of assessees.

From the language of section 140, it can be easily noticed that only the returns of individuals and companies can be signed by a valid Power of Attorney holder in the specified circumstances and the other categories of the assessee are not entitled to this privilege.

The Tribunal noted that the provisions of section 140(c) had been amended w.e.f. 1st April, 2020 where it was stated that the return could be filed by any other person as may be prescribed for this purpose. It observed that even if this amendment is held to be applicable retrospectively also, it is not clear whether the General Manager (CT&GST), BESCOM, was holding a valid PoA from the assessee company to verify the appeal of the assessee even as provided u/s 140(c). Since this information was not available on the record, the Tribunal dismissed the appeal.

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Taxable loss cannot be set off against income exempt from tax under Chapter III. Short term capital loss arising on sale of shares cannot be set off against long term capital gains arising from the sale of shares, which are exempt u/s 10(38)

6 Mrs. Sikha Sanjaya Sharma vs. DCIT [137 taxmann.com 214 (Ahmedabad – Trib.)] A.Y.: 2016-17; Date of order: 13th April, 2022 Sections: 10(38), 70, 74

Taxable loss cannot be set off against income exempt from tax under Chapter III. Short term capital loss arising on sale of shares cannot be set off against long term capital gains arising from the sale of shares, which are exempt u/s 10(38)

FACTS
The assessee, an individual, filed her return of income declaring a total income of Rs 17,25,67,630 and claimed carry forward of long term capital loss (in respect of transactions on which STT was not paid) of Rs. 15,41,625 and also a short term capital loss of Rs. 5,06,74,578. The assessee also claimed long term capital gain (in respect of transactions on which STT was paid) of Rs. 2,62,06,472 to be exempt u/s 10(38).

The Assessing Officer (AO) completed the assessment u/s 143(3) by accepting the returned income but reduced the claim of carry forward of loss by setting off exempt long term capital gain of Rs. 2,62,06,472 against long term capital loss (in respect of transactions on which STT was not paid) of Rs. 15,41,625 and also a short term capital loss of Rs. 5,06,74,578. Therefore, the AO reduced the quantum of losses claimed to be carried forward by the assessee.

Aggrieved, the assessee preferred an appeal to CIT(A), who relying on the decision of the Mumbai Bench of the Tribunal in the case of Raptakos Brett & Co. Ltd. In ITA No. 3317/Mum./2009 & 1692/Mum./2010 dated 10.6.2015 and of the Gujarat High Court in the case of Kishorbhai Bhikhabhai Virani vs. ACIT [(2014) 367 ITR 261] upheld the action of the AO.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal noted that the short controversy before it is whether the assessee was legally correct in claiming carry forward of full amount of losses without setting off such losses against long term capital gain exempted u/s 10(38). To resolve the controversy, the Tribunal noted the scheme of the Act and analysed the decisions relied upon, on behalf of the assessee. It noted that the CIT(A) has dismissed the claim of the assessee by relying upon the decision of the Gujarat High Court, in the case of Kishorbhai Bhikhabhai Virani (supra) and the AR appearing on behalf of the assessee has relied upon this decision to support the claim of the assessee. The Tribunal observed that the Hon’ble Court has held that the exempted long term capital loss u/s 10(38) does not enter into the computation of total income. Therefore such loss cannot be set off against taxable income. Likewise the exempted LTCG u/s 10(38) does not enter into the computation of total income and therefore a taxable loss cannot be set off against such income. The Tribunal held the reliance of CIT(A) on this decision to be totally misplaced. It held that the decision was in favour of the assessee.

As regards the decision of the Mumbai Bench of the Tribunal in the case of Raptakos Brett & Co. Ltd. (supra), the Tribunal observed that the Tribunal, in this case, was persuaded to follow the decision of the Calcutta High Court in preference to the decision of the Gujarat High Court in the case of Kishorbhai Bhikhabhai Virani (supra). The Tribunal found itself bound by the decision of the jurisdictional High Court.

The Tribunal held that the assessee has rightly claimed the carry forward of Long Term Capital Loss (STT not paid) of Rs. 15,41,625 and Short Term Capital Loss of Rs. 5,06,74,578 without setting off against the exempted long term capital gain (STT paid) of Rs. 2,62,06,472 u/s 10(38).

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S. 271(1)(c) – Penalty – concealment of income – inaccurate particulars of income – mistake committed in calculation

4 The Commissioner of Income Tax, International Taxation-1 vs. Ashutosh Bhatt [Income Tax Appeal No.1424 of 2017; Date of order: 11th April, 2022 (Bombay High Court)]

S. 271(1)(c) – Penalty – concealment of income – inaccurate particulars of income – mistake committed in calculation

The assessee was an individual and non-resident so far as the assessment year under consideration was concerned. For A.Y. 2007-2008, the assessee had filed return of income on 31st July, 2007 declaring total income of R8,31,287. Thereafter the assessee revised his income and further offered an income of R1,76,68,508. A notice u/s 148 was issued thereafter on 29th March, 2012 as a consequence of which, the assessment was finalized u/s 143(3) r.w.s 147. Assessment order dated 21st March, 2013 came to be passed where total income was assessed at R1,85,69,800, which is the same amount as was declared by the assessee originally, plus the income revised subsequently.

Later, the Assessing Officer held the assessee guilty of concealment of income within the meaning of section 271(1)(c ) of the Act and levied a penalty of 200% of the tax sought to be levied on the amount of R1,76,68,508 which was declared subsequent to the filing of original return of income. Consequently, a penalty of R1,17,82,234 has been levied.

The CIT(A), vide order dated 26th March, 2014, deleted the entire penalty levied by the A.O. on the ground that the assessee has suo-moto and voluntarily offered additional income to tax and that the income which was offered for tax by the assessee in the revised returns of income was in any case, not chargeable to tax in India. Against the said decision, the Revenue filed an appeal before the Tribunal.

Subsequently, CIT (A) issued a notice u/s 148 of the Act on 10th November, 2014 requiring the assessee to show cause as to why earlier order passed by him on 26th March, 2014 to be not amended as it was passed without taking note of the fact that assessee had made supplementary affidavit declaring additional income of R1,03,49,908 which according to CIT(A) was not voluntary because summons dated 29th September, 2011 by ADIT (Inv) Unit-II(3), Mumbai had been issued u/s 131. CIT (A) rejected the reply of the assessee, and by an order dated 8th December, 2014, amended his earlier order dated 26th March, 2014 and upheld the levy of penalty to the extent it related to the additional income of R1,03,49,908 disclosed by the assessee in his second revisional declaration. Against that order, an appeal was preferred by the assessee before the Tribunal and Revenue also filed cross appeal to the extent of CIT(A) not adding R73,18,600 declared in the first revised declaration.

The Tribunal, after hearing the parties, dismissed the original appeal filed by Revenue and cross-appeal filed by Revenue and upheld the appeal filed by the assessee.

The Hon. Court observed that indisputable fact that during the period when the assessee was non-resident, from A.Y. 2000-2001 to the year in question, the assessee was in employment with a U.S. Company and was resident of United States of America. During that time, he had set up a business and was beneficial owner of a Company Jonah Worldwide Limited (JWL) and beneficiary of a Foundation, namely, Selinos Foundation (SF), both set up in Mauritius in 2003. Both these entities were non-residents as far as it is relevant for the purpose of the Act and did not have any source of income in India.

In the year 2011, the assessee decided to settle down in India and, after returning to India, filed an affidavit dated 7th September, 2011 offering to tax income of R73,18,600 being peak balance lying in the accounts of these two entities JWL and SF and for this purpose filed revised return on 20th September, 2011. Immediately thereafter, the assessee realised that he had committed a mistake in calculating the peak balance lying in bank accounts held by these two entities JWL and SF and, therefore, made a supplementary affidavit on 7th November, 2011 offering to tax additional income of R1,03,49,908. Consequent thereto, second revised return dated 15th November, 2011 was filed showing total additional income of Rs. 1,76,68,508 on account of funds lying in the bank accounts held by JWL and SF with HSBC Bank, Zurich. After receiving notice u/s 148 of the Act, as noted earlier, the Assessing Officer finalized assessment u/s 143 r.w.s 147 by accepting income as per revised return without making any further addition or raising any fresh demand. Even additional income assessed at R1,76,68,508 was exactly the same as returned by the assessee in the revised returns.

The Tribunal found that the second affidavit of 7th November, 2011 declaring an additional amount of Rs 1,03,49,908 due to a mistake in calculating bank peak balance was filed not because of any issue of summons and declaration, but was purely because of the mistake committed in the earlier calculation. The Tribunal came to a finding of fact that Revenue had no information of any undisclosed income in the hands of the assessee except the declarations made by the assessee. What also impressed the Tribunal was that at no stage it was the case of the Revenue that the funds that were lying in the bank accounts held by the two entities (JWL and SF) with HSBC Bank, Zurich could have been brought to tax in India. These monies have been offered to tax in India because the assessee made voluntary declarations, and considering that aspect, the Tribunal felt that levy of penalty u/s 271(1)(c ) of the Act was not justified.

The Hon. Court observed that the Tribunal has not committed any perversity or applied incorrect principles to the given facts. When the facts and circumstances are properly analysed, and the correct test is applied to decide the issue at hand, then, no substantial question of law arises for consideration. The appeal was dismissed.

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VIRTUAL REALITY

INTRODUCTION

The 21st Century is constantly experiencing disruptions, with the latest one being the emergence of Crypto Trade (Virtual currency). VC (Bitcoin being the first) is based on the modern philosophy of ‘self-empowerment’ rather than operating on a ‘trust-based central bank system’. While there is an environment of uncertainty on the legality of trading in such alternative currencies by individuals on a peer-to-peer basis and by-passing the established banking systems, taxation laws are only concerned with the contractual obligations emerging therefrom. Hence, it is necessary that the tax obligations on such arrangements are ascertained. Pseudo ‘Satoshi Nakamoto’ developed the Bitcoin1 as a chain of encrypted digital signatures, functioning as an electronic coin, with a record of the ownership being placed in a public registry maintained under the distributed ledger technology (DLT/ blockchain).

TYPES OF VIRTUAL CURRENCIES
1. Closed virtual schemes – generally termed as ‘in-game schemes’, these operate only in the virtual world (such as gaming) wherein the participants earn coins and are permitted to use those coins to avail goods or services in the virtual world. These coins are not exchangeable with fiat currency.

2. Uni-directional virtual scheme – virtual currency can be purchased with fiat currency at a specific exchange rate but cannot be exchanged back to the original currency. The conversion conditions are established by the scheme owner (e.g. Facebook credits can be purchased with fiat currency and utilized for services on the Facebook portal)

3. Bi-directional virtual scheme – users can buy and sell virtual money according to exchange rates with their fiat currency. The virtual currency is similar to any other convertible currency with regard to its interoperability with the real world. These schemes provide for the purchase of virtual and real goods or services (e.g. Bitcoins).

LEGALITY VS. ILLEGALITY
This concept is of limited relevance under tax laws, but it may be important in understanding the nature of VC transactions. Though the Finance Minister’s speech2 lauded the development of blockchain technology, it stated that VCs are not legal tender. Hence, measures ought to be taken to eliminate the use of such VCs in illegitimate and illicit activities3. Subsequently, RBI4 enforcing its powers under various laws, through a circular, barred financial institutions from engaging with persons engaged with VC trade. This Circular was challenged in the Apex Court in Internet Mobile & Mobile Association of India5 which finally observed that Governments and money market regulators have come to terms with the reality that VCs are capable of being used as ‘real money’ but they do not have the legal status of money. As an obiter it stated as follows:

“But what an article of merchandise is capable of functioning as, is different from how it is recognized in law to be. It is true that VCs are not recognized as legal tender, as it is true that they are capable of performing some or most of the functions of real currency” …. RBI was also caught in this dilemma. Nothing prevented RBI from adopting a short circuit by notifying VCs under the category of “other similar instruments” indicated in Section 2(h) of FEMA, 1999 which defines ‘currency’ to mean “all currency notes, postal notes, postal orders, money orders, cheques, drafts, travelers’ cheque, letters of credit, bills of exchange and promissory notes, credit cards or such other similar instruments as may be notified by the Reserve Bank.” After all, promissory notes, cheques, bills of exchange etc. are also not exactly currencies but operate as valid discharge (or the creation) of a debt only between 2 persons or peer-to-peer. Therefore, it is not possible to accept the contention of the petitioners that VCs are just goods/ commodities and can never be regarded as real money..
(emphasis supplied)

1 Bitcoin: A Peer-to-Peer Electronic Cash System sourced from
www.bitcoin.org

2 Budget 2018-19

3 Incidentally, the Government is proposing to table “The
Cryptocurrency and Regulation of Official Digital Currency Bill, 2021” to
regulate Crypto trade including banning all private virtual currencies

4 Circular Dt. 05-04-2018 issued under 35A read with Section
36(1)(a) and Section 56 of the Banking Regulation Act, 1949 and Section 45JA
and 45L of the Reserve Bank of India Act, 1934 and Section 10(2) read with Section
18 of the Payment and Settlement Systems Act, 2007

5 WP 528/2018 dt. 04.03.2020

Subsequently, the Court affirms that unregulated VCs could jeopardise the country’s financial system and RBI is within its powers to regulate VCs thereby rejecting the ground that VCs are goods/ commodities not falling within RBI’s purview. In addition, while responding to the challenge under the Payments & Settlement Systems Act, the Court observed the definition of ‘payment system’, ‘payment instruction’ or ‘payment obligation’ and held that RBI has the power to regulate banks with respect to such payment transactions.

VC AS MONEY, GOODS, SERVICES, SECURITIES, ACTIONABLE CLAIM OR VOUCHERS?
The following features thus emerge in a bi-directional VC scenario:

• Clearly not ‘money’ in a legal sense since yet to be recognised as legal tender by RBI.

• Has the characteristics of ‘money’ in economic sense: (a) a medium of exchange; and/or (2) a unit of account; and/or (3) a store of value6.

• No tangible underlying but merely a set of digital signatures and a central DLT registry maintaining a record of ownership.

• Certainly, it falls under RBI’s regulatory powers but is yet to be termed as illegal.

• Digital representation of value.

6 FATF report in June 2014

A) Whether Money?
The meaning of ‘money’ may be different in an ‘economic/social sense’ and ‘legal sense’. There is no doubt that VCs are money based on the characteristic features – medium of exchange, store of value and unit of account. The difficulty arises on account of the definition of money (u/s 2(75)), which is limited to legal tender currency and other recognised instruments recognized by RBI as used as settlement of payments. Interestingly, Service tax law also contained a definition of money (u/s 65B(33)) which seemed to cover all instruments which were used for payments (though not recognised by RBI for such purposes) as money. Therefore, on a comparative basis, the GST law seems to be narrower and unless courts consciously widen the literal wordings, VCs do not seem to be falling within the meaning of money.

B) Whether Goods?
Goods have been defined u/s 2(52) as ‘every kind of movable property’ other than money and securities. It would be appropriate to notice the definition of ‘property’ under the Transfer of Property Act, 1882 (TOPA) – which reads: ‘property’ means general property in goods, and not merely a special property.” The phrase ‘property’ has been consistently interpreted by Courts in a fairly expansive manner and sufficient enough to include any right over which a person can exercise dominion over, thereby including VCs in the present case.

In the context of central excise, the Apex Court in UOI vs. Delhi Cloth & General Mills7 held that goods refer to an article which can ordinarily be bought and sold in the market. In Tata Consultancy Services8, in the context of software, the Court laid down the principles for constituting ‘goods’ – though the tests are not finite, it reasonably covers the ingredients for treatment as goods:

“The term “all materials, articles and commodities” includes both tangible and intangible/incorporeal property which is capable of abstraction, consumption and use and which can be transmitted, transferred, delivered, stored, possessed etc. The software programmes have all these attributes.”

Test	Application to VCs
Abstraction	Capable of being mined by miners
Consumption & Use	Capable of being used for purchase of other goods/ services
Transmitted, Transferred & Delivered	Though ownership of the coin is anonymous, it is capable of being transferred
Stored & possessed	Capable of being possessed in electronic wallet and record of ownership present in DLT which is reported in an electronic wallet

Test

Application to VCs

Abstraction

Capable of being mined by miners

Consumption & Use

Capable of being used for purchase of other
goods/ services

Transmitted, Transferred & Delivered

Though ownership of the coin is anonymous,
it is capable of being transferred

Stored & possessed

Capable of being possessed in electronic
wallet and record of ownership present in DLT which is reported in an
electronic wallet

7 1977 (1) E.L.T. (J 199) (S.C.)

8 2004 (178) E.L.T. 22 (S.C.) – 5 Judge Bench

The above tabulation depicts good grounds for classification of VCs as ‘goods’. Ultimately, Courts are also converging on the proposition that transferrable software is per se in nature of goods. Courts could interpret VCs as being a transferrable code through a system of digital signatures.

A deeper examination of the Customs HSN schedule adopted to fix tax rates should also be tested to support this proposition. On first blush, there does not seem to be any entry depicting a resemblance to VCs. The rate schedule containing residual goods entry (No. 453) specifies that goods classifiable under ‘any chapter’ (HSN) would fall within this entry. While there could always be a debate on the HSN classification most akin to VCs, the settled law on residual entries undeniably places a very large onus on the taxpayer to establish that VCs are even not falling within the residual entry. Since this task is significantly onerous for taxpayers to overcome, it would be reasonable to reconcile that VC’s are goods.

C) Whether Vouchers?
Vouchers u/s 2(118) are also instruments which are acceptable as a consideration in respect of the supply of goods or services. There is a developing debate on whether vouchers by themselves are goods. Be that as it may, the Supreme Court, in IMMA’s decision (supra) recognizes that VCs are a form of settlement of payment obligations and not goods or services (refer to extracts above). RBI was permitted to regulate the payments through VCs as such payments were part of the country’s financial system.

The phrase ‘consideration’ u/s 2(31) refers to any payment made in money or ‘otherwise’ in response to a supply of goods or services. The phrase ‘otherwise’ is significant as it intends to consider forms of payment which is not money. Loyalty points/ vouchers fall within the scope of this phrase. As mentioned above, loyalty points/ air miles are also a form of closed VC usable for the purchase of goods or services under conditions of the issuer. Unidirectional VCs represent entitlements emerging from real money and usable against specified goods or services. The fact that this is not an instrument recognized by RBI (e.g. cheques, drafts, etc.) does not disentitle them from being termed as payment instruments. Applying this analogy, Bidirectional VCs (being inter-operable with fiat currency) may also have a good case of being characterized as vouchers.

D) Whether Securities?
Like money, securities also have a very definite connotation u/s 2(101) of GST law. Section 2(h) of Securities Contracts (Regulation) Act, 1956 adopted for GST, has been defined inclusively to include traditional instruments (such as shares, stocks, bonds, etc.), derivatives of such instruments, units of collective investment schemes and any other instrument recognized by Government as ‘securities’. Securities, in the traditional sense, are means of securing finance and are represented by underlying assets. VCs do not fit this understanding on account of a lack of an underlying asset and any legal recognition as securities.

E) Whether actionable claim?
Section 2(1) of GST law r.w.s 3 of TOPA defines an actionable claim as a claim to any debt (other than a secured debt). Actionable claims are goods under GST law but are specifically excluded from the GST levy under Schedule III. For something to be termed as an actionable claim, there must be an unsecured debt, and one must have a claim of that unsecured debt. In the context of VCs, there does not exist any pre-existing debt between the transferor and the transferee. There is a mutual exchange of virtual currency with fiat currency. Therefore, bi-directional VCs do not seem to fall within the scope of actionable claims. In the case of closed virtual schemes or uni-directional schemes, the entitlement to claim a specific list of goods or services in exchange for the VCs is driven by contractual obligations and does not result in a debt claimable in money and hence may not satisfy the definition of actionable claim.

F) Whether Services?
This ensuing analysis is relevant only on the assumption that VCs are not goods. Services u/s 2(102) refers to anything other than goods, money and securities but includes activities relating to the use of money or its conversion by cash or by any other mode from one form, currency or denomination to another form, currency or denomination. ‘Anything other than goods’ does not solve the issue of whether VCs are services. Services should be understood in its general sense as an activity performed for consideration. The activity could be any value-added activity for which a person is willing to pay the price. The phrase ‘anything other than goods’ is really to prevent an overlap in classification between goods and services (largely prevalent in the legacy laws). Therefore, if one were to contend that VCs are not goods, it does not automatically result in a situation of being covered as services. The fundamental feature of being an ‘activity for consideration’ is still a sine-qua-non for something to be termed as service. Applying this analogy, VCs do not seem to fall within the first part of the definition as a service as understood in the general sense.

It is very plausible for the revenue to state that VCs are not goods, and hence services falling within the definition of ‘Online-information database access and retrieval services’ (OIDAR) which are being performed through an electronic commerce operator. Consequently, such services would be liable to tax in India, and the E-commerce operator ought to impose TCS provisions at the time of exchange of funds. The revenue may also mandate implementation of the TCS provisions even where the exchanged currency is virtual and not in money form leaving the exchange in an absurd valuation position. Overall, the revenue is certainly starting reaching out to exchanges for such imposts.

THE EU PERSPECTIVE
Interestingly, the European Court of Justice ruling in Skatteverket vs. David Hedqvist9, was examining whether transactions to exchange a traditional currency for the ‘Bitcoin’ virtual currency or vice versa were subject to VAT. The opinion of the court was to the effect that:

(i) Bitcoin with bidirectional flow which will be exchanged for traditional currencies in the context of exchange transactions cannot be categorized as tangible property since virtual currency has no purpose other than to be a means of payment.

(ii) VC transactions do not fall within the concept of the supply of goods as they consist of exchange of different means of payment and hence, they constitute supply of services.

(iii) Bitcoin virtual currency being a contractual means of payment could not be regarded as a current account or a deposit account, a payment or a transfer, and unlike debt, cheques and other negotiable instruments, Bitcoin is a direct means of payment between the operators that accept.

(iv) Bitcoin virtual currency is neither a security conferring a property right nor a security of a comparable nature.

(v) The transactions in issue were entitled to exemption from payment of VAT as they fell under the category of transactions involving ‘currency and bank notes and coins used as legal tender’.

(vi) Article 135(1)(e) EU Council VAT Directive 2006/112/EC is applicable to nontraditional currencies i.e., to currencies other than those that are legal tender in one or more countries in so far as those currencies have been accepted by the parties to a transaction as an alternative to traditional currency

9 Case C 264/14 DT. 22.10.2015

Germany is one of the first EU jurisdictions that introduced a definition of ‘crypto assets’ under its financial regulatory law10.

“a digital representation of value which has neither been issued nor guaranteed by a central bank or public body, does not have the legal status of currency or money but,
on the basis of an agreement or actual practice, is accepted by natural or legal persons, as a means of exchange or payment or serves investment purposes and that can be transferred, stored and traded by electronic means.”

Therefore, the EU has taken a stand in the context of their law that VCs are not goods. It falls prey as a ‘service’ but exempted as a form of acceptance of a payment obligation or a means of exchange akin to money and hence per se, not taxable. Whether the framework within which this ruling has been delivered would deliver a persuasive value in the Indian context, is a slippery issue. Hence, the ruling per se should not be considered as having a precedential value in India.

RECENT INCOME TAX AMENDMENTS
Finance Act, 2022 has inserted a new concept termed as ‘virtual digital asset’ which has been defined as follows:

(a) any information or code or number or token (not being Indian currency or any foreign currency), generated through cryptographic means or otherwise, by
whatever name called, providing a digital representation of value which is exchanged with or without consideration, with the promise or representation of having inherent value, or functions as a store of value or a unit of account and includes its use in any financial transaction or investment, but not limited to, investment schemes and can be transferred, stored or traded electronically

10 Sec. 1 (11) sent. 4 of the German Banking Act (KWG)

(b) A Non Fungible Token or any other token of similar nature, by whatever name called

This omnibus definition attempts to tax the investment profit/ gains arising from holding and transferring of crypto/ virtual assets. The Government has specified its intent to treat them as an asset but has failed to narrow down the cases to only bi-directional tokens. Be that as it may, the intent is very clear that until Cryptos are not banned/ regulated, the Government would like to build an information trail and collect the tax revenues therefrom.

Summary
The wide amplitude of the definition of ‘goods’ seems to be a formidable barrier to overcome. Until then, VCs ought to be treated as goods, and an arguable case on it being a voucher for discharge of consideration is worth examining.

APPLICATION OF THE ABOVE UNDERSTANDING
Taking forward the indication that VCs are goods, the incidental matters associated with this legal proposition may also be examined:

Whether one can say the supply of VC’s is in the course of furtherance of business?
One of the essentialities of supply is that the supplier should be engaging in any ‘business’. The definition is wide enough to include any trade, commerce or adventure, even if such activity is infrequent or lacks continuity. Business is otherwise generally understood as a systematic and periodic activity occupying the time of an individual. Trading in crypto is generally not systematic and purely dependent on public news. Cryptos are not purchased for holding or long-term investments but merely for profits in the near term. Moreover, unlike investments / trading in shares or securities performed after research studies, cryptos are clearly more erratic and impulsive trading.

In income tax, the constant argument is that in-frequent activities performed as an investment for capital appreciation from reserve funds indicate that they are ‘capital assets’ rather than stock in trade. CBDT11 has provided tests to examine whether investments in financial securities are for trading or investment purposes. Extending those tests here, VCs are always adopted for capital profit. Rarely has one claimed to be consuming/ trading in VCs for business purposes. Therefore, one may claim they are not chargeable as ‘supply’ u/s 7 of the GST law.

What would be the location of such VC’s for enforcing taxation?
Goods ought to be identified to a particular location for enforcing geographical jurisdiction over the same for taxation. While this concept is abstract, inference may be drawn from other intangibles (IPRs, etc.). As a matter of principle and practice, the owner’s location has been the guiding factor in locating the intangible goods. Therefore, VCs located in electronic wallets (whether in India or outside) should be understood as located at the place where the owner resides. Consequently, resident persons engaging in VC trade (whether indigenous or foreign) would be subjected to the scope of GST in India on account of their presence in India.

Characterization of Import/ Export?
Treating VCs as goods should flow seamlessly into other provisions. But the ‘anonymous’ nature of VCs poses a challenge in identifying the legal movement of such VCs. The buyer and/ or seller are anonymous to each other, and the transfer happens through instructions placed on the electronic wallet. The digital address assigned to a person helps identify the person behind the scenes. In India, stock exchanges have been directed to perform the KYC of the digital wallets holding VCs, and this would help in tracing the movement of goods. The exchanges are the only data source of information on the buyer and seller. The problem expounds when one has to comply with the definition of export /import of goods. The identity of the supplier and recipient is essential to establish this international trade. Exchanges may not be in possession of this data or may not be willing to share this with the VC owner. In the context of importation of goods, the lack of a customs channel/frontier for VCs may make the law in its current form practically impossible to implement for VCs. Therefore, one may have to take a cautious approach in reporting these transactions on the GST portal.

11 INSTRUCTION NO. 1827 dt. 31.08.1989, Circular 6/2016 dt. 29.02.2016 & No 4/2007 dt. 15-06-2007

Whether Input Tax Credit conditions are satisfiable?
Adding to the ambiguity, ITC provisions require the seller of VCs to report the recipient’s identity through its GSTIN. In a typical VC trade through stock exchanges, tax is impossible to be collectible from the end consumer. Tax invoice can only be issued under a B2C category since the transacting parties are only known through digital addresses. Therefore, even if tax is paid at the supplier’s end, the recipient of VCs would not have any proof of tax being paid on such a transaction. Moreover, the ownership in VCs is generally fractional in nature. In such cases, the factum of receipt of VCs would also be difficult to explain, apart from the fact that such fractional ownership is visible on the electronic wallet.

Whether services of converting money to Crypto or vice-versa (crypto-fiat trade) are liable to GST?
Crypto Exchanges provide the services of converting money to Crypto and vice-versa in consideration for a fee (as a percentage, fixed float or a fixed fee). The activity is clearly a service in its general sense and should fall within the wide ambit of ‘service’ u/s 2(102) of GST law. One may minutely examine the inclusive part of the said definition, which is limited only to activities relating to the use of ‘money’ from one form, currency or denomination to another form, currency or denomination. The essential ingredient to fall within the inclusive part of the definition is whether the subject matter of conversion is ‘money’ in some form. VCs, as discussed above, are not ‘money’ and one may probably canvass that since the conversion of money into a VC form is not envisaged herein, even the service activity relating to the conversion activity ought not to be included in the definition. This challenge will face the daunting task of overcoming the means part of the definition, which is wide enough to cover any and all service activity.

Whether services provided by Crypto-exchanges in Crypto-crypto trade are liable to GST?
In such trades, both ends of the transaction are in Cryptos (e.g., Bitcoins to WazirX or viceversa), and there is no conversion into real money. The electronic wallets would, after the trade, have ‘X’ tokens of the BitCoins instead of ‘Y’ tokens of WRX. Applying the same argument as discussed in Crypto-fiat trade, the services relating to the use of VCs for its conversion from one form to another do not find mention in the inclusive part of the definition of services. Nevertheless, the said activity is a service and may find itself to be covered under the primary part of the definition itself and hence taxable.

What is the place of supply of such services conducted by exchanges owned by entities outside India?
Crypto exchanges are in a completely digital format, and hence the location of such exchange is difficult to ascertain. Where the crypto exchanges are established by entities located outside India, the question for consideration is whether they are in the nature of OIDAR or in the nature of intermediary services. OIDAR services are applicable for any digital services which have a minimal human intervention. Crypto exchanges work in a platform which is automated entirely and meets this definition. Similarly, exchange related services which make buyers/sellers meet to effect a trade also fall within the scope of intermediary services. Both these classifications result in diametrically opposite place of supply – OIDAR results in place of recipient with the place of supply while Intermediary results in the place of supplier being the place of supply. In our view, the said services should not fall within the scope of OIDAR (though literal reading suggests otherwise) and should appropriately fall within the scope of Intermediary and hence outside the geographical scope of GST.

CONCLUSION
The emergence of such disruptions is certainly challenging the lawmakers and resulting in ambiguity which cannot be resolved overnight. Governments are indeed in a dilemma on the character to be assigned to these VCs. Even if this is performed, it opens up a pandora’s box when applying the machinery provisions of law drafted for traditional trade. Governments would generally attempt to collect their taxes at the focal point where the transaction takes place – i.e. crypto exchanges rather than reaching out to each trader.

Lawmakers have adopted a pragmatic approach in refraining from pursuing the matter against crypto traders. Crypto exchanges are undeniably rendering services and hence ought to discharge the GST on the transaction services being rendered. Until this cloud of uncertainty looms over the trade, one may want to pay heed to Mr Warren Buffet’s statement – “Cryptocurrencies basically have no value and they don’t produce anything. They don’t reproduce, they can’t mail you a check, they can’t do anything, and what you hope is that somebody else comes along and pays you more money for them later on, but then that person’s got the problem. In terms of value: zero”

shailesh.kwebmaker

NON-GAAP PRESENTATION OF OPERATING SEGMENTS

INTRODUCTION

Financial statements represent only one of several reports used by entities to communicate decision-useful information. ‘Key performance measures’ beyond the ones reported in the financial statements add value to users and enhances the users’ ability to predict future earnings.

International Organisation of Securities Commission (IOSCO) guidelines require entities not to present Alternate Performance Measures (APMs), another way of describing Non-GAAP information, with more prominence than the most directly comparable GAAP measure. Additionally, APMs should not, in any way, confuse or obscure the presentation of the GAAP measures. The European Securities and Markets Authority (ESMA) has also issued similar guidelines. There are no guidelines issued by the Indian standard-setting authority on using Non-GAAP information in the financial statements. Financial statements presented under Ind AS and Schedule III framework will not comply with those frameworks if information not required therein is disclosed in the financial statements.

Interestingly, there is one exception to using Non-GAAP measures in financial statements. APMs that form part of segment disclosures under Ind AS 108 Operating Segments are excluded from these restrictions. Ind AS 108 allows the use of measures other than the measures applied in the preparation of financial statements, provided the information generated by using these measures is the one that the Chief Operating Decision Maker (‘CODM’) uses to evaluate the performance of segments and allocate resources to them.

This article looks at practical examples of how Indian and global entities have applied this.

EXTRACTS OF IND AS 108 OPERATING SEGMENTS

21 …….., an entity shall disclose the following for each period for which a statement of profit and loss is
presented:

a. ……….;

b. information about reported segment profit or loss, including specified revenues and expenses included in reported segment profit or loss, segment assets, segment liabilities and the basis of measurement, as described in paragraphs 23–27; and

c. reconciliations of the totals of segment revenues, reported segment profit or loss, segment assets, segment liabilities and other material segment items to corresponding entity amounts as described in paragraph.

Information about profit or loss, assets and liabilities

23. An entity shall report a measure of profit or loss for each reportable segment. An entity shall report a measure of total assets and liabilities for each reportable segment if such amounts are regularly provided to the chief operating decision maker. …….

Measurement.

25. The amount of each segment item reported shall be the measure reported to the chief operating decision maker for the purposes of making decisions about allocating resources to the segment and assessing its performance. Adjustments and eliminations made in preparing an entity’s financial statements and allocations of revenues, expenses, and gains or losses shall be included in determining reported segment profit or loss only if they are included in the measure of the segment’s profit or loss that is used by the chief operating decision maker. Similarly, only those assets and liabilities that are included in the measures of the segment’s assets and segment’s liabilities that are used by the chief operating decision maker shall be reported for that segment. If amounts are allocated to reported segment profit or loss, assets or liabilities, those amounts shall be allocated on a reasonable basis.

26. If the chief operating decision maker uses only one measure of an operating segment’s profit or loss, the segment’s assets or the segment’s liabilities in assessing segment performance and deciding how to allocate resources, segment profit or loss, assets and liabilities shall be reported at those measures. If the chief operating decision maker uses more than one measure of an operating segment’s profit or loss, the segment’s assets or the segment’s liabilities, the reported measures shall be those that management believes are determined in accordance with the measurement principles most consistent with those used in measuring the corresponding amounts in the entity’s financial statements.

27. An entity shall provide an explanation of the measurements of segment profit or loss, segment assets and segment liabilities for each reportable segment. At a minimum, an entity shall disclose the following:

a. the basis of accounting for any transactions between reportable segments.

b. the nature of any differences between the measurements of the reportable segments’ profits or losses and the entity’s profit or loss before income tax expense or income and discontinued operations (if not apparent from the reconciliations described in paragraph 28). Those differences could include accounting policies and policies for allocation of centrally incurred costs that are necessary for an understanding of the reported segment information.

c. the nature of any differences between the measurements of the reportable segments’ assets and the entity’s assets (if not apparent from the reconciliations described in paragraph 28). Those differences could include accounting policies and policies for allocation of jointly used assets that are necessary for an understanding of the reported segment information.

d. the nature of any differences between the measurements of the reportable segments’ liabilities and the entity’s liabilities (if not apparent from the reconciliations described in paragraph 28). Those differences could include accounting policies and policies for allocation of jointly utilised liabilities that are necessary for an understanding of the reported segment information.

e. …………..

f. the nature and effect of any asymmetrical allocations to reportable segments. For example, an entity might allocate depreciation expense to a segment without allocating the related depreciable assets to that segment.

Reconciliations

28. An entity shall provide reconciliations of all of the following:

a. the total of the reportable segments’ revenues to the entity’s revenue.

b. the total of the reportable segments’ measures of profit or loss to the entity’s profit or loss before tax expense (tax income) and discontinued operations. However, if an entity allocates to reportable segments items such as tax expense (tax income), the entity may reconcile the total of the segments’ measures of profit or loss to the entity’s profit or loss after those items.

c. the total of the reportable segments’ assets to the entity’s assets if the segment assets are reported in accordance with paragraph 23.

d. the total of the reportable segments’ liabilities to the entity’s liabilities if segment liabilities are reported in accordance with paragraph 23.

e. the total of the reportable segments’ amounts for every other material item of information disclosed to the corresponding amount for the entity.

All material reconciling items shall be separately identified and described. For example, the amount of each material adjustment needed to reconcile reportable segment profit or loss to the entity’s profit or loss arising from different accounting policies shall be separately identified and described.

ANALYSIS OF IND AS 108 REQUIREMENTS

Segment disclosures in the financial statements are those that an entity’s CODM uses to measure the segment’s performance and allocate the entity’s resources.

The measures used for determining segment revenue, segment profit or loss, and segment assets and liabilities need not be the same as those used to prepare financial statements. In other words, the accounting policies or basis used for preparing segment disclosures and those applied in preparing financial statements could differ.

If the CODM uses more than one measure of an operating segment’s profit or loss, the segment’s assets or the segment’s liabilities, the reported measures shall be those that management believes are determined in accordance with the measurement principles most consistent with those used in measuring the corresponding amounts in the entity’s financial statements.

An entity shall reconcile the segment disclosures to the financial statement balances. The differences between the segment disclosures and the financial statements shall be appropriately identified and explained. This is an important point. The logical interpretation of this is that information that cannot reconcile to financial statements should not be provided in segment disclosures; for example, the company’s operational data, such as the number of visitors on the company’s website, should not be provided in the segment disclosures.

ANALYSIS OF SEGMENT DISCLOSURES (INCLUDED IN ANNEXURE) THAT USE ALTERNATE PERFORMANCE MEASURES

1. For purposes of reporting to the CODM, certain promotion expenses, including upfront cash incentives, loyalty programs costs for customer inducement and acquisition costs for promoting transactions across various booking platforms, are reported by Yatra and Make-my-trip as a reduction of revenue (under IFRS/Ind AS financial statements), are added back to the respective segment revenue lines and marketing and sales promotion expenses.

2. In the case of Air-China, inter-segment sales are grossed up against the respective segment and not eliminated to disclose the segment revenue.

3. In the case of Akzo Nobel, EBITDA is presented for segments. In addition to excluding depreciation and amortization, certain identified items, such as special charges and benefits, effects of acquisitions and divestments, restructuring and impairment charges, effects of legal, environmental and tax cases, are also excluded from determining segment-wise EBITDA. Performance measures such as return on sales and operating income as a percentage of revenue are also disclosed in the segment presentation.

4. In the case of Bayer Group, leases continue to be presented as operating leases rather than being capitalized as required under IFRS 16 Leases. Additionally, EBIT, EBITDA before special items, EBITDA margin before special items, ROCE, net cash provided by operating activities, capital expenditures, R&D expenses, etc. are disclosed in the segment disclosures.

5. In the case of Cnova, revenue in the segment disclosures is grossed up, and the gross merchandise value (GMV) is disclosed. Disclosure of GMV in the financial statements is inappropriate. However, GMV should be disclosed in the segment disclosures if that is how the CODM is evaluating the company for internal purposes.

6. For segment reporting purposes, Wipro has included the impact of ‘Foreign exchange gains net’ in revenues (which is reported as a part of ‘Other income’ in the consolidated statement of profit and loss).

CONCLUSION

The use of Non-GAAP measures or APMs though not very frequent, are not uncommon globally or in India. Ind AS 108 requires the use of APMs for segment disclosures if that is how the CODM evaluates the segment for internal purposes. The use of APMs in segment disclosures seems to be on the rise globally.

ANNEXURE

1. AIR CHINA – F.Y. 2020 (IFRS)

Operating segments

The following tables present the Group’s consolidated revenue and (loss)/profit before taxation regarding the Group’s operating segments in accordance with the Accounting Standards for Business Enterprises of the PRC (“CASs”) for the years ended 31 December 2020 and 2019 and the reconciliations of reportable segment revenue and (loss)/profit before taxation to the Group’s consolidated amounts under IFRSs:

Year ended 31 December 2020	Airline operations RMB’000	Other operations RMB’000	Elimination RMB’000	Total RMB’000
Revenue Sales to external customers	66,343,963	3,159,786	–	69,503,749
Inter-segment sales	171,659	6,406,908	(6,578,567)	–
Revenue for reportable segments under CASs and IFRSs	66,515,622	9,566,694	(6,578,567)	69,503,749
Segment loss before taxation Loss before taxation for reportable segments under CASs	(18,129,295)	(62,012)	(283,213)	(18,474,520)
Effect of differences between IFRSs and CASs				8,114
Loss before taxation for the year under IFRSs				(18,466,406)

AKZO NOBEL N.V. – F.Y. 2021 (IFRS)The business units in the operating segment Performance Coatings are presented per market.
The tables in this Note include Alternative Performance Measures (APM’s). Refer to Note 4 for further information on these APM’s.

Information per reportable segment.

	Revenue (third parties)	Amortization and depreciation	Operating income	Identified items¹	Adjusted operating income²	EBITDA³	Adjusted EBITDA⁴	ROS%⁵	OPI Margins⁶
	2021	2021	2021	2021	2021	2021	2021	2021	2021
In € millions	3,979	(154)	640	42	598	794	745	15.0	16.1
Decorative Paints	5,603	(160)	650	2	648	810	807	14.1	11.6
Performance Coatings	5	(37)	(172)	(18)	(154)	(135)	(115)
Corporate and other	9,587	(351)	1,118	26	1,092	1,469	1,436	12.9	11.7

Identified items are special charges and benefits, results on acquisitions and divestments, major restructuring and impairment charges, and charges and benefits related to major legal, environmental and tax cases. The identified items, in this note exclude the items outside operating income.2.   Adjusted operating income is operating income excluding identified items.
3.   EBITDA is operating income excluding depreciation and identified items.

4.   Adjusted EBITDA is operating income excluding amortization, depreciation and identified items.

5.   ROS% is calculated as adjusted operating income (operating income excluding identified items) as a percentage of revenues from third parties. ROS% for Corporate and other is not shown as this is not meaningful.

6.   OPI margin is calculated as operating income as a percentage of revenues from third parties. OPI margin for Corporate and other is not shown, as this is not meaningful.

Note 4

In presenting and discussing Akzo Nobel’s segmental operating results, management uses certain alternative performance measures not defined by IFRS, which exclude the so-called identified items. Identified items are special charges and benefits, results on acquisitions and divestments, major restructuring and impairment charges, and charges and benefits related to major legal, environmental and tax cases. These alternative performance measures should not be viewed in isolation as alternatives to the equivalent IFRS measures and should be used as supplementary information in conjunction with the most directly comparable IFRS measures. Alternative performance measures do not have a standardized meaning under IFRS and therefore may not be comparable to similar measures presented by other companies. Where a non-financial measure is used to calculate an operational or statistical ratio, this is also considered an alternative performance measure. The following tables reconcile the alternative performance measures used in the segment information to the nearest IFRS measure.

2021	Continuing Operations	Discontinued Operations	Total
Operating Income	1,118		1,118
APM adjustments to operating income
Transformation costs	28		28
Brazil ICMS case	(42)		(42)
UK Pensions past service credit	(23)		(23)
Acquisition related costs	11		11
Total APM adjustments (identified items) to operating income	(26)		(26)
Adjusted operating income	1,092	–	1,092
Profit for the period attributable to shareholders of the company	823	6	829
Adjustments to operating income	(26)		(26)
Adjustments to interest	(29)		(29)
Adjustments to income tax	(15)		(15)
Adjustments to discontinued operations	–	(8)	(8)
Total APM adjustments	–	(8)	(8)
Adjusted profit for the period attributable to shareholders of the company	753	(2)	751

BAYER – F.Y. 2021 (IFRS)Segment reporting
At Bayer, the Board of Management – as the chief operating decision maker – allocates resources to the operating segments and assesses their performance. The reportable segments and regions are identified, and the disclosures selected, in line with the internal financial reporting system (management approach) and based on the Group accounting policies outlined in Note [3].

The segment data is calculated as follows:
• The intersegment sales reflect intra-Group transactions effected at transfer prices fixed on an arm’slength basis.
• The net cash provided by operating activities is the cash flow from operating activities as defined in IAS 7 (Statement of Cash Flows).
• Leases between fully consolidated companies continue to be recognized as operating leases under IAS 17 within the segment data in the consolidated financial statements of the Bayer Group even after the first-time application of IFRS 16 as of January 1, 2019. This does not have any relevant impact on the respective key data used in the steering of the company and internal reporting to the Board of Management as the chief operating decision maker.

Key Data by segment

				Reconciliations		Group
	Crop Science	Pharmaceuticals	Consumer Health	All other segments	Enabling Functions and Consolidations	Group
€ million	2021	2021	2021	2021	2021	2021
Net sales (external)	20,207	18,349	5,293	203	29	44,081
Currency- and portfolio-adjusted change¹	+ 11.1%	+ 7.4%	+6.5%	-11.6%		+8.9%
Inter segment sales	12	22			(34)
Net sales (total)	20,219	18,371	5,293	203	(5)	44,081
EBIT¹	(495)	4,469	808	(27)	(1,402)	3,353
EBITDA before special items¹	4,698	5,779	1,190	95	(583)	11,179
EBITDA margin before special items¹	23.2%	31.5%	22.5%			25.4%
ROCE¹	-0.9%	18.6%	6.4%		–	3.8%
Net cash provided by operating activities	1,272	3,493	1,030	144	(850)	5,089
Capital expenditures (newly capitalized)	1,240	1,308	207	93	156	3,004
Depreciation, amortization and impairments	1,435	1,001	336	70	214	3,056
of which impairment losses/impairment loss reversals	(822)	130	5	1	2	(684)
Clean depreciation and amortization¹	2,278	986	336	70	214	3,884
Research and development expenses	2,029	3,139	199	4	41	5,412

Reconciliations

The reconciliation of EBITDA before special items, EBIT before special items and EBIT to Group income before income taxes is given in the following table:

Reconciliation of Segments’ EBITDA Before Special Items to Group Income Before Income Taxes.

€ million	2021
EBITDA before special items of segments	11,762
EBITDA before special items of Enabling Functions and Consolidation	(583)
EBITDA before special items¹	11,179
Depreciation, amortization and impairment losses/loss reversals before special items of segments	(3,670)
Depreciation, amortization and impairment losses/loss reversals before special items of Enabling Functions and Consolidation	(214)
Depreciation, amortization and impairment losses/loss reversals before special items	(3,884)
EBIT before special items of segments	8,092
EBIT before special items of Enabling Functions and Consolidation	(797)
EBIT before special items¹	7,295
Special items of segments	(3,337)
Special items of Enabling Functions and Consolidation	(605)
Special items¹	(3,942)
EBIT of segments	4,755
EBIT of Enabling Functions and Consolidation	(1,402)
EBIT¹	3,353
Financial result	(1,307)
Income before income taxes	2,046

For definition see A 2.3 “Alternative Performance Measures Used by the Bayer Group.”

4. YATRA – F.Y. 2021 (IFRS)

Reconciliation of information on Reportable Segments to IFRS measures:

	Air Ticketing	Hotels and Packages	Others	Total
	March 31, 2021	March 31, 2021	March 31, 2021	March 31, 2021
Segment revenue	1,487,465	372,807	220,583	2,080,855
Less: customer inducement and acquisition costs**	(594,426)	(199,409)	(15,752)	(809,587)
Revenue	893,039	173,398	204,831	1,271,268
Unallocated expenses				(2,646,401)
Less : customer inducement and acquisition costs**				809,587
Unallocated expenses				(1,836,814)

Notes:

**For purposes of reporting to the CODM, certain promotion expenses including upfront cash incentives, loyalty programs costs for customer inducement and acquisition costs for promoting transactions across various booking platforms, which are reported as a reduction of revenue, are added back to the respective segment revenue lines and marketing and sales promotion expenses. For reporting in accordance with IFRS, such expenses are recorded as a reduction from the respective revenue lines. Therefore, the reclassification excludes these expenses from the respective segment revenue lines and adds them to the marketing and sales promotion expenses (included under Unallocated expenses).

5. MAKE MY TRIP – F.Y. 2021 (IFRS)

Information about reportable segments

For the year ended March 31

	Reportable segments
	Air ticketing	Hotels and packages	Bus ticketing	All other segments**	Total
	2021	2021	2021	2021	2021
Consolidated revenue	57,013	67,976	24,895	13,556	163,440
Add: customer inducement costs recorded as a reduction of revenue*	23,513	18,652	667	76	42,098
Less: Service cost**	293	19,146	2,712	66	22,217
Adjusted margin	80,233	67,482	22,850	13,566	184,131

Notes:
* For purposes of reporting to the CODM, the segment profitability measure i.e., Adjusted Margin is arrived by adding back certain customer inducement costs including customers incentives, customer acquisition cost and loyalty programs costs, which are recorded as a reduction of revenue and reducing service cost.
**Certain loyalty program costs excluded from service cost amounting to USD 91 (March 31, 2020: USD 5,053 and March 31, 2019: USD 2,467) for “All other segments”.

Assets and liabilities are used interchangeably between segments and these have not been allocated to the reportable segments.

6. CNOVA – F.Y. 2020 (IFRS)

Note 6 Operating segments

In accordance with IFRS 8 – Operating Segments, segment information is disclosed on the same basis as the Group’s internal reporting system used by the chief operating decision maker (the Chief Executive Officer) in deciding how to allocate resources and in assessing performance.

The Group only has one reportable segment “E-commerce”. This segment is comprising Cdiscount. C-Logistics, Cnova N.V. holding company and other subsidiaries of Cnova and corresponds to the consolidated financial statements of Cnova.

Management assesses the performance of this segment on the basis of GMV, operating profit /loss before strategic and restricting, litigation, impairment and disposal of assets costs and EBITDA. EBITDA (earnings before interest, taxes, depreciation and amortization) is defined as Operating Profit/(Loss) before strategic and restricting, litigation, impairment and disposal of assets costs plus recurring depreciation and amortization expense. Segment assets and liabilities are not specifically reported internally for management purposes, however as they correspond to consolidated balance sheet they are disclosed elsewhere in the financial statements.

Segment information is determined on the same basis as the consolidated financial statements.

€ thousands	2019	2020
GMV	3,899,181	4,207,366
Operating profit/(loss) before strategic and restructuring, litigation, impairment and disposal of assets costs	14,639	53,096
EBITDA	82,073	133,307

WIPRO – F.Y.2021 (Ind AS) Notes in Segment disclosures:
a. …..
b. For the purposes of segment reporting, the Company has included the impact of “Foreign exchange gains, net” of R2,995 and R3,169 for the year ended March 31, 2021 and 2020 respectively, in revenues (which is reported as a part of ‘Other income’ in the consolidated statement of profit and loss).

CORRIGENDUM

The following corrigendum is issued w.r.t the March 2022 BCAJ article ‘CARO 2020 Series: New Clauses and Modifications – Resignation of Statutory Auditors and CSR’:

a. On pages 17 and 18, the amended CSR rules mentioned as notified on 22nd January, 2022 should read as 22nd January 2021.

b. In the table on page 18, the sentence ‘Further, a mandatory impact assessment needs to be done by a Monitoring Agency in case of companies with mandatory spending of Rs. 10 crores or more in the three immediately preceding financial years for individual project outlays in excess of Rs.1 crores as per the amended Rules.’ should read as ‘Further, a mandatory impact assessment needs to be done by a Monitoring Agency in case of companies with mandatory spending of Rs. 10 crores or more in the three immediately preceding financial years and for individual project outlays in excess of Rs.1 crores as per the amended Rules.

c. On page 17, CDR Registration Number should read as CSR Registration Number.

We sincerely regret the inadvertent errors.

BCAJ Team

shailesh.kwebmaker

MLI SERIES COMMISSIONAIRE ARRANGEMENTS AND CLOSELY RELATED ENTERPRISES

The concept of permanent establishment (PE) was originally introduced to tackle cross-border business and transactions that were left untaxed in the country where the transaction was carried out on account of the absence of a legal entity or a concrete presence in the source country. An entity is said to have a PE in a jurisdiction if it has a fixed place of business through which it carries out business activities, either wholly or partly. The entity’s profits, which are attributable to the PE from which business activities were conducted, were liable to tax in the country where the PE was created.

In order to circumvent being liable to tax in the source country, the parties engaged in cross-border transactions entered into intricate arrangements to artificially avoid creating a PE in the source country. Resultantly, these transactions remained outside the scope of taxation in the source country, resulting in significant revenue loss to the country. These strategies also resulted in either negligible taxation in a low-tax country or altogether, double non-taxation of the transaction. To tackle this issue, an elaborate definition of PE was introduced in the domestic tax laws as well as covered in the bilateral tax treaties entered into by two countries/ jurisdictions. Both the UN Model Convention and the OECD Model Convention exhaustively cover the concept of PE. Despite this, tax strategies such as entering into commissionaire arrangements, artificially splitting contracts and exploiting exemptions for preparatory and auxiliary activities were implemented to avoid the creation of PE in the source country artificially.

Action Plan 7 of the BEPS (in the report titled ‘Preventing the Artificial Avoidance of Permanent Establishment Status, Action 7- 2015 Final Report’) proposed changes in the definition of PE to prevent such artificial avoidance through the use of commissionaire arrangements, specific activities exemption and other similar strategies.

The concept of commissionaire is found in European civil law systems (jurisdictions in which a codified statute is predominant over judicial opinions), which means a person who acts in their own name for the account of a principal. This means that a commissionaire, although contractually bound to deliver goods to the customer as per the terms and conditions agreed, does not own title or ownership in said goods and is therefore, an intermediary acting in its own name. Therefore, a commissionaire arrangement involvesthree parties, namely- Principal, Commissionaire, and the Customer with two separate contractual relationships – one is commissionaire arrangement itself (that is, between the Principal and the Commissionaire) and the other is between the Commissionaire and the Customer.

COMMISSIONAIRE ARRANGEMENT VERSUS AGENCY
While commissionaire is mainly found in civil law countries, common law countries (such as India) recognize the concept of agency. To briefly explain the difference between these two systems, the main feature lies in the binding force of judicial precedents of courts. In the civil law system (followed in most European countries), the court applies and interprets legal norms for deciding a case; because the law is codified and very prescriptive in nature. While under the common law system, the court’s decision is binding; the courts not only make rulings, but also provide guidance on resolving future disputes of similar nature by setting a precedent.

Under the Indian Contract Act of 1872, an agent is a person employed to do any act for another or represent another in dealings with third persons. Like a commissionaire arrangement, an agency involves three parties- the agent, principal and third party. The contract law also states that contracts entered through an agent and the obligations arising from the acts of the agent are enforceable in the same manner, and will have the same legal consequences, as if the contracts had been entered into and the acts done by the principal in person. This means that, unlike in a commissionaire arrangement where the principal is not a party to the contract and is therefore excluded from the legal consequences arising there from, an agency relationship binds the principal in the contract as much as the agent through which it was entered. This conveys that in an agency agreement, in case of breach of contract, the third party is entitled to initiate actions against the principal.

Further, as mentioned above, a commissionaire arrangement includes two separate contractual relationships – one is between principal and commissionaire, and other is between commissionaire and customer. However, in an agency relationship, there is only one contractual relationship- between the principal and the third party (customer).

While India does not recognize the concept of a commissionaire arrangement, it cannot be said that an entity can avoid PE status in India by entering a commissionaire arrangement for the sale of its products or services. The widened definition of PE under treaties, along with ‘business connection’ provisions in the domestic tax law act as a roadblock for structures created to avoid creating PE status in source country artificially.

The concept of commissionaire arrangement and the difference in tax liability between a standard arrangement and a commissionaire arrangement can be understood with an illustration:

In the given illustration: B Co. is a multinational company based in Country B specialising in producing chemicals. The average corporate income tax rate in B is 16%. B Co. has a subsidiary company A Co. in Country A. To sell these chemicals to its customers in Country A, B Co. sells its products to A Co. at arm’s length price, which A Co. then sells to the customers. The profits earned by A Co on such sales, which is generally 15% of the price at which products are sold to customers, are taxed in Country A at 30%. B Co. enters into a commissionaire arrangement with A Co. whereby A Co. will continue to sell these products to the customers based in Country A but on behalf of B Co. A Co, instead of profits, will now earn commission on the sale, which has been agreed at 2% of the customer’s sale price. The profits earned by B Co from the sale of products to the customers, after deducting the commission to A Co., are taxed in Country B.

This results in a reduction in the taxable base in Country A – previously, the entire profits earned by A Co. were taxed in Country A however, under the commissionaire arrangement, only the amount of commission is taxed in Country A while the entire profits on sale are taxed in Country B, a comparatively low-tax jurisdiction since the corporate tax rates are significantly lower than that of Country A.

The substantial reduction in tax liability and the tax base in Country A is depicted in the table below:

Therefore, the taxable base in Country A, where the average corporate income-tax rate is 30%, reduced from the 15% profits earned by A Co to 2% commission which resulted in a revenue loss of 3.75.

Article 5(5) of the OECD Model Tax Convention on Income and on Capital (‘OECD Model Convention’) states that barring specified exceptions, an enterprise is deemed to have a permanent establishment in a country if a person/entity in that country acts on behalf of the foreign enterprise and such person/entity habitually exercised authority to conclude the contracts which are in the name of the foreign enterprise.

The scope of Article 5 was subsequently expanded with effect from 21st November, 2017 through the report titled ‘The 2017 Update to the Model Tax Convention’ to also cover a person/entity which habitually concludes such contracts (which are in the name of the foreign enterprise and are for transfer of title in goods or for rendering services), or where such person/ entity has a major part in concluding such contracts without making any material modifications.

Further, Article 5(6) excludes a person/ entity from the scope of deemed PE if such person/ entity acts as an independent agent and acts for the foreign enterprise in the ordinary course of business. However, such an agent will not be considered independent if it is established that such agent is acting exclusively or almost exclusively for the foreign enterprise or on behalf of one or more enterprises to which it is closely related (discussed in subsequent paragraphs). Erstwhile language of Article 5(5) emphasized the conclusion of contracts in the name of the principal by an agent to constitute its PE. Therefore, commissionaire arrangements under civil law countries escaped constituting a PE as the contracts were entered through Commissionaire. Resultantly, the expanded scope of Article 5 leads to creation of an agency PE in that country if the above criteria are not fulfilled. Therefore, with the widened scope, a person is said to be dependent agent PE if it either has the authority to conclude contracts or habitually plays the principal role in concluding contracts. However, it must be kept in mind that an agency PE is not created in a situation where an activity is specifically mentioned in Article 5(4), that is, activities which do not qualify for creating a PE status. Further, independent agents, as mentioned in Article 5(6) also do not constitute a PE unless one of the cumulative criteria mentioned therein is not fulfilled.

Based on the recommendations made in the BEPS Action Plan 7, Article 12 of the Multilateral Convention Instrument (MLI) widens the scope of PE by including within its ambit cases where a person/ entity habitually concludes contracts or plays a principal role in the conclusion of contracts of the foreign enterprise. Further, although an independent agent which does not exclusively or almost exclusively act for the foreign enterprise does not constitute PE, if the agent acts outside its ordinary business, it may constitute ‘business connection’ as per Explanations 2 and 2A to section 9(1)(i) of the Income-tax Act, 1961. The concept of ‘business connection’ was introduced vide the Finance Act of 2003, which was later substantially modified by the Finance Act of 2018 to align its scope with the permanent establishments’ rules as modified by the MLI (explanatory memorandum).

ARTICLE 12 OF MLI AND ‘BUSINESS CONNECTION’
The scope of business connection under domestic law is analogous to dependent agent PE under tax treaties. Prior to the amendment made by the Finance Act of 2018, ‘business connection’ included business activities carried out by a non-resident through its dependent agents.

With the insertion and subsequent substitution of Explanation 2A, the scope of business connection was widened to include activities of a non-resident carried out through a person acting on its behalf, where the said person,

• has the authority to conclude contracts on behalf of the non-resident and such person habitually exercises such authority in India, or

• habitually concludes contracts, or

• habitually plays the principal role leading to conclusion of contracts by non-resident

and the contracts are in the name of the non-resident or are for transfer of ownership of property or granting right to use in the property, or for provision of services by the non-resident.

While both the provisions aim to expand the scope of permanent establishment, the concept of business connection also covers situations where the person has and habitually exercises in India, an authority to conclude contracts on behalf of the non-resident- this situation is not covered in Article 5(5) of the OECD Model Convention. Further, contrary to Article 5(5), which applies if a person routinely concludes a contract without any material modification made by the foreign enterprise, Explanation 2A does provide such qualification for determining business connection. Additionally, unlike Article 12, which excludes activities which are preparatory or auxiliary in nature, ‘business connection’ does not provide for such exclusion thereby making the scope of domestic law provisions wider than Article 12.

INDIA’S POSITION ON ARTICLE 12 OF MLI
Being a signatory to the MLI, India has chosen to adopt the provisions of Article 12 to implement measures for preventing the artificial avoidance of PE status through commissionaire arrangements and similar strategies. The provisions of Article 12 will apply to a tax treaty entered by India with another country/ jurisdiction if the treaty partner is also a signatory to the MLI and has not expressed any reservations under Article 12(4) regarding this provision. Article 12(1) of the MLI will replace or supplement the existing language of tax treaties to make it in line with Article 5(5) of the OECD Model Convention. Similarly, Article 12(2) will replace/ supplement the existing language of tax treaties to make it in line with Article 5(6).

Further, where two contracting jurisdictions choose to apply Article 12(2) of the MLI, Article 15(1) dealing with ‘closely related enterprise’ is also automatically applicable. Unlike other articles of MLI where a country/jurisdiction has those choices to implement a particular article by choosing one of the alternatives mentioned therein, Article 12 does not provide such options. This means that a country either has the option to implement both agency PE rule and independent agent provisions or opt out from adopting both. Treaty partners such as Austria, Australia, Finland, Georgia, Ireland, Luxembourg, Netherlands, Singapore and the United Kingdom have expressed reservations on the application of Article 12 to their respective Covered Tax Agreements. On the other hand, countries such as France and New Zealand have opted in to apply Article 12 to their Covered Tax Agreements.

IMPACT ON TRANSFER PRICING
Transfer pricing aims to allocate the income of an enterprise in jurisdictions where the enterprise conducts business, on an arm’s length basis. One of the most important aspects of transfer pricing provisions is to determine whether an enterprise has a permanent establishment in a jurisdiction and, accordingly, allocating the profits attributable to the PE based on a detailed analysis of the activities undertaken by it. In a way, transfer pricing provisions assist a country in eliminating the shift of profits resulting from avoiding PE status in the source country.

With India being a signatory to the MLI and adopting the provisions of Article 12, there have been fundamental changes in the definition of permanent establishment with regards to changes in rules determining agency PE, commissionaire arrangements and specific activity exemptions for foreign companies undertaking preparatory or auxiliary activities in India.

The modified definition of PE widens the test to determine dependent agency PE to include commissionaire arrangements by covering the situation where contracts are not formally concluded by the person acting on behalf of the foreign enterprise but where that person’s functions and actions results in the conclusion of the contract. Further, where the ownership or rights to use a property is to be transferred, and the said property is not in the name of the person entering into the contract (for example, a commissionaire) but is in the name of the foreign enterprise, such contracts for the transfer of ownership or grant of rights to use will also be included in the widened PE scope.

Enterprises, in order to avoid PE status in a country where they carry business activities, often restructure their business by converting, for example, a full-fledged distributor into a limited-risk distributor, agent or a commissionaire. As a general rule, a distributor is entitled to more profits earned from the source country if it performs more functions, assumes higher risks and employs more assets. In the previous example, A Co.’s status changed from being the distributor of B Co. to a commissionaire agent with B Co. acting as the principal. As a result of this, the functions and risks (such as product liability risk, bad debt risk, foreign exchange risk and inventory risk) undertaken by A Co. drastically reduced to a relatively lower level since the risks previously assumed by A Co. with respect to distribution functions have now shifted to B Co. Consequently, A Co. will be entitled to only the commission portion earned on sale instead of the entire profits earned from the source country A.

However, since the threshold for determining agency PE has been reduced under MLI, it is probable that foreign enterprises are likely to have increased PE exposure in the source country. While several judicial precedents have upheld the formation of an agency PE on the basis that agent were actively involved in negotiation, agency PE has been a litigious area; with the adoption of MLI provisions, these decisions now seem to have been accepted.

CLOSELY RELATED ENTERPRISES
For Articles 12, 13 and 14 of the MLI, Article 15(1) defines a person is said to be closely related to an enterprise if, based on the relevant facts, one person has control of the other or both are under the control of the same persons or enterprises. Further, if one person possesses, whether directly or indirectly, more than 50 per cent of the beneficial interest/voting power/equity interest or if another person possesses, directly or indirectly, more than 50 per cent of the beneficial interest/ voting power/ equity interest in the person and the enterprise, such person shall be considered as closely related to an enterprise.

Under this Article, the general rule is that a person is closely related to an enterprise if the one has control over the other, or both are under mutual control. All the relevant facts and circumstances are to be analysed before determining whether a person/ enterprise is closely related to another. The second leg of the provision provides various situations where a person or enterprise is considered as closely related to an enterprise, which can be split into the following:

a) the person who possesses directly or indirectly more than 50 per cent of the

• beneficial interest in the enterprise, or vice versa; or

• aggregate vote and value of the company’s shares or of the beneficial equity interest in the enterprise, or vice versa.

b) another person possesses directly or indirectly more than 50 per cent of the

• beneficial interest in the person and the enterprise; or

• beneficial equity interest in the person and the enterprise.

Like Article 12, a jurisdiction may either choose to adopt the entire Article 15 or may opt out completely. It is not possible to partially implement the provisions of Article 15. However, if either of the treaty partners has expressed reservations in adopting Article 12, 13 or 14, which results in non-application of said provision to a Covered Tax Agreement, Article 15 will automatically stand inapplicable since this article is solely for the purpose of Articles 12, 13 and 14.

CONCLUSION
In a nutshell, business arrangements involving Indian tax resident, acting for or on behalf of non-residents, requires careful consideration under the widened scope of business connection under section 9(1)(i) of ITA and in case tax of treaty applicability, the interplay of treaty provisions read with MLI needs due emphasis in the determination of tax position of such transactions. It is pertinent to note that contractual arrangement needs to be carefully considered while determining the tax applicability on a transaction, even when it is between unrelated entities.

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Sec 68 – unsecured loans – Enquiry conducted by AO – identity and creditworthiness of the creditors and the genuineness of transaction established

3 The Principal Commissioner of Income Tax-25 vs. Aarhat Investments [Income Tax Appeal No. 156 of 2018; A.Y. 2009-10; Date of order: 25th March, 2022 (Bombay High Court)]

Sec 68 – unsecured loans – Enquiry conducted by AO – identity and creditworthiness of the creditors and the genuineness of transaction established

The assessee received a sum of R7,00,00,000 from Wall Street Capital Markets Pvt. Ltd., a sum of R6,50,00,000 from Novel Finvest Pvt. Ltd., a sum of R5,07,68,100 from one Ganesh Barter Pvt. Ltd. and a sum of R13,50,00,000 from one Asian Finance Services. Admittedly, the amount of R7,00,00,000 received from Wall Street was repaid in the same year. Likewise, the amount received from Novel Finvest was also repaid in the same year. So also in the case of Asian Finance Services. In the case of Ganesh Barter, there was an amount outstanding at the close of the assessment year. There seems to be no issue regarding the amount received and paid back to Asian Finance Services.

The Ld. Assessing Officer had added the remaining three amounts mentioned above u/s 68 of the Act, on the basis that substantial amounts have been received by the assessee as unsecured loans and without being charged any interest. Therefore, the Assessing Officer had proceeded on the assumption that this must be the assessee’s own money circulated through the three entities mentioned above.

The Commissioner of Income Tax (Appeals), in regards to the amount received from Wall Street and Novel Finvest, set aside the order of the Assessing Officer. The CIT(A), as regards the amount from Ganesh Barter, did not interfere with the order of the Assessing Officer.

The Revenue, as well as the Assessee, carried the matter in appeal to Income Tax Appellate Tribunal (ITAT), and ITAT disposed of both the appeals by order pronounced on 30th November, 2016. The Revenue’s appeal was dismissed, and the assessee’s appeal was allowed.

The ITAT upheld the finding of CIT(A) with regard to the amounts received from Wall Street and Novel Finvest and set aside the order of CIT(A) as regards Ganesh Barter. The ITAT observed the factual position as noted by CIT(A) as well as that the amounts received from Wall Street and Novel Finvest were repaid during the year itself; that there was no dispute that the transactions were through banking channels and both these parties were assessed to income tax. Even their identity was not in dispute. The ITAT held that Section 68 of the Act casts the onus on the assessee to explain the nature and source of the credit appearing in the books of account. It can be discharged if the assessee is able to establish the identity and creditworthiness of the creditors and the genuineness of the transaction. The ITAT also observed that the Assessing Officer had issued commissions of enquiry u/s 131(1)(d) of the Act to the Investigating Wing in response to the independent enquiries made by the Assessing Officer wherein statements of the Director of Wall Street and Novel Finvest have been recorded, and nobody has disputed the transactions were in the nature of loans per se. The CIT (A) as well as ITAT were also satisfied with the creditworthiness of these two parties.

As regards Ganesh Barter, there was a credit balance outstanding as on 31st March, 2009. The Assessing Officer had accepted the identity of the creditor but was not satisfied with the credit worthiness of the creditor and the genuineness of the transaction. On the other hand, the CIT(A) was also satisfied with the creditworthiness of the creditor but was not satisfied with the genuineness of transaction. Hence, he had not interfered with the findings of the Assessing Officer so far as Ganesh Barter was concerned. The ITAT concluded that the implied view emanating from the order of CIT (A) that a transaction is to be held as not genuine if money is not returned when the purpose for which it was given was not achieved, would be simply based on suspicion and without properly evaluating the genuineness of transactions.

The Hon. High Court agreed with the conclusions of ITAT that just because in the end of the year money was yet to be repaid means the transaction itself has to be doubted is not correct particularly, when explanation rendered by the assessee has not been found to be false.

The Hon. High Court held that the ITAT has not committed any perversity or applied incorrect principles to the given facts and when the facts and circumstances are properly analysed and correct test is applied to decide the issue at hand, then, no substantial questions of law arises for consideration. The appeal was dismissed.

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Revision — Limitation — Original assessment u/s 143(3) on 28/12/2006 and reassessment on 30/12/2011 — Order of revision u/s 163 on 26/03/2014 in respect of issue concluded in original assessment — Barred by limitation

14 CIT vs. Indian Overseas Bank [2022] 441 ITR 689 (Mad) A.Y.: 2004-05 Date of order: 10th August, 2021 Ss.143, 147 and 263 of ITA, 1961

Revision — Limitation — Original assessment u/s 143(3) on 28/12/2006 and reassessment on 30/12/2011 — Order of revision u/s 163 on 26/03/2014 in respect of issue concluded in original assessment — Barred by limitation

For the A.Y. 2004-05, the assessment was completed u/s 143(3) of the Income-tax Act 1961 by order dated 28th December, 2006. Thereafter, the assessment was reopened concerning certain investments and prior period expenses of Rs. 93,04,142. The assessee submitted their reply. Thereafter, the assessment was completed by an order dated 30th December, 2011 u/s 143(3) r.w.s.147 of the Act. After taking into consideration the reply given by the assessee, the Assessing Officer held that no disallowance was required to be made in respect of the prior period expenses. In other words, the explanation offered by the assessee was found to be satisfactory by the Assessing Officer.

Thereafter, the Commissioner of Income-tax initiated proceedings u/s 263(1) of the Act proposing to revise the reassessment order dated 30th December, 2011 and claiming that the claim for deduction of business loss of R72.75 crores have been wrongly allowed in the assessment order. The assessee objected to the exercise of power u/s 263(1) on the ground of limitation as well as on the merits. However, by an order dated 26th March, 2014, the objections raised by the assessee were rejected by the Commissioner of Income-tax, the reassessment order dated 30th December 2011 was set aside, and the matter was sent back to the Assessing Officer for de novo consideration regarding the claim of business loss of
R72.75 crores.

The Tribunal allowed the assesse’s appeal and set aside the revision order passed by the Commissioner.

The Madras High Court dismissed the appeal filed by the Revenue and held as under:

“i) Where an assessment has been reopened u/s. 147 of the Income-tax Act, 1961 in relation to a particular ground or in relation to certain specified grounds and subsequent to the passing of the order of reassessment, the jurisdiction u/s. 263 of the Act is sought to be exercised with reference to issues which do not form the subject of the reopening of the assessment or the order of reassessment, the period of limitation provided for in sub-section (2) of section 263 of the Act would commence from the date of the order of original assessment and not from the date on which the order of reassessment has been passed. The order of assessment cannot be regarded as being subsumed within the order of reassessment in respect of those items which do not form part of the order of reassessment.

ii) The original assessment was completed u/s. 143(3) of the Act by order dated 28/12/2006. The reassessment was completed by order dated 30/12/2011. The reasons for reopening u/s. 147 of the Act were only two and the issue, on which, the Commissioner issued notice u/s. 263 pertained to a claim of business loss which was not one of the issues in the reassessment proceedings, but was an issue, which was raised by the Assessing Officer in the original assessment u/s. 143(3) of the Act, in which, a show-cause notice was issued, the assessee submitted its explanation and thereafter, the assessment was completed. The proceedings u/s. 263 of the Act ought to have commenced before March 31, 2009. Therefore, the proceedings were barred by limitation.

iii) For the above reasons, the tax case appeal is dismissed and the substantial questions of law framed are answered against the Revenue.”

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Reassessment — Notice u/s 148 — Validity: (i) New provisions inserted w.e.f 1st April, 2021 prescribing conditions for issue of notice for reassessment after that date — Provisions apply to all notices issued after that date for earlier periods — Notices for periods prior to 1st April, 2021 issued without compliance with conditions prescribed under new provision — Notices not valid; (ii) Limitation — Change of law — Explanations to notifications having effect of extending time limits prescribed under Act — Not valid; Notices quashed

13 Sudesh Taneja vs. ITO [2022] 442 ITR 289 (Raj) A. Y.: 2013-14
Date of order: 27th January, 2022 Ss. 147, 148, 148A and 151 of ITA 1961 and Notification Nos. 20 (S. O. No. 1432(E)) dated 31/03/2021 [1] and 38 (S. O. No. 1703(E)) dated 27-4-2021 [2]

Reassessment — Notice u/s 148 — Validity: (i) New provisions inserted w.e.f 1st April, 2021 prescribing conditions for issue of notice for reassessment after that date — Provisions apply to all notices issued after that date for earlier periods — Notices for periods prior to 1st April, 2021 issued without compliance with conditions prescribed under new provision — Notices not valid; (ii) Limitation — Change of law — Explanations to notifications having effect of extending time limits prescribed under Act — Not valid; Notices quashed

For the A.Y. 2013-14, notices u/s 148 of the Income-tax Act, 1961 were issued after 1st April, 2021 without following the mandatory procedure prescribed u/s 148A by the Finance Act, 2021. The validity of the notices was challenged by filing writ petitions in the Rajasthan High Court. It was also contended that the notices were barred by limitation.

The Rajasthan High Court quashed the notices and held as under:

“i) The substituted sections 147, 148, 149 and 151 of the Income-tax Act, 1961 pertaining to reopening of assessment u/s. 147 came into force on 1st April, 2021. The time limits for issuing notice for reassessment have been changed. The concept of income chargeable to tax escaping assessment on account of failure on the part of the assessee to disclose truly or fully all material facts is no longer relevant. Elaborate provisions are made u/s. 148A of the Act enabling the Assessing Officer to make enquiry with respect to material suggesting that income has escaped assessment, issue notice to the assessee calling upon him to show cause why notice u/s. 148 should not be issued and pass an order considering the material available on record including the response of the assessee if made while deciding whether the case is fit for issuing notice u/s. 148. There is no indication in all these provisions which would suggest that the Legislature intended that the new scheme of reopening of assessments would be applicable only to periods post 1st April, 2021. In the absence of any such indication all notices which are issued after 1st April, 2021 have to be in accordance with such provisions. There is no indication whatsoever in the scheme of statutory provisions suggesting that the past provisions would continue to apply even after the substitution, for the assessment periods prior to substitution, but there are strong indications to the contrary.

ii) Time limits for issuing notice have been modified under substituted section 149. The first proviso to section 149(1) provides that no notice u/s. 148 shall be issued at any time in a case for the relevant assessment year beginning on or before 1st April, 2021 if such notice could not have been issued at that time on account of being beyond the time limit specified under the provisions of clause (b) of sub-section (1) of section 149 as they stood immediately before the commencement of the Finance Act, 2021. Therefore, under this proviso no notice under section 148 would be issued for the past assessment years by resorting to the larger period of limitation prescribed in newly substituted clause (b) of section 149(1). This would indicate that the notice that would be issued after 1st April, 2021 would be in terms of the substituted section 149(1) but without breaching the upper time limit provided in the original section 149(1) which stood substituted. For any action of issuance of notice u/s. 148 after 1st April, 2021 the newly introduced provisions under the Finance Act, 2021 would apply. Mere extension of time limits for issuing notice u/s. 148 would not change this position that obtains in law. Under no circumstances can the extended period available in clause (b) of sub-section (1) of section 149 which now stands at 10 years instead of 6 years earlier available with the Revenue, be pressed in service for reopening assessments for past periods. A notice which has become time barred prior to 1st April, 2021 according to the then prevailing provisions, would not be revived by virtue of the application of section 149(1)(b) effective from 1st April, 2021.

iii) Under the new scheme of section 148A, the Assessing Officer has to first provide an opportunity to the assessee to show cause why notice u/s. 148 should not be issued on the basis of information which suggests that income chargeable to tax has escaped assessment. Though clause (b) of section 148A does not so specify, since the notice calls upon the assessee to show cause why assessment should not be reopened on the basis of information which suggests that income chargeable to tax has escaped assessment, the requirement of furnishing such information to the assessee is in-built in the provision. Therefore, the assessee has an opportunity to oppose even the issuance of notice u/s. 148 and he could legitimately expect that the Assessing Officer provides him the information which according to him suggests that income chargeable to tax has escaped assessment. The Assessing Officer has a duty to decide whether it is a fit case for issuing notice u/s. 148 of the Act. Such decision has to be taken on the basis of material available on record and the reply of the assessee, if any filed. The decision has to be taken within the time prescribed.

iv) The limitation period had expired prior to 1st April, 2021 and therefore, all the notices issued after 1st April, 2021 for reopening the assessments having been issued without following the procedure contained in section 148A were invalid. The reassessment notices issued under the erstwhile section 148 were to be quashed.

v) If the plain meaning of the statutory provision and its interpretation are clear, by adopting a position different in an Explanation and describing it to be clarificatory, the subordinate legislation cannot be permitted to amend the provisions of the parent Act. Accordingly, the Explanations contained in the circulars dated 31st March, 2021 and 27th April, 2021 issued by the CBDT are unconstitutional and declared invalid.”

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Reassessment — Notice u/s 148 — Validity — Law applicable — Effect of amendments to sections 147 to 151 by Finance Act, 2021 — Notice of reassessment under unamended law after 01/04/2021 — Not valid

12 Vellore Institute of Technology vs. CBDT [2022] 442 ITR 233 (Mad) Date of order: 4th February, 2022 Ss.147 and 148 of ITA, 1961

Reassessment — Notice u/s 148 — Validity — Law applicable — Effect of amendments to sections 147 to 151 by Finance Act, 2021 — Notice of reassessment under unamended law after 01/04/2021 — Not valid

The validity of notices issued after 1st April, 2021 u/s 148 of the Income-tax Act, 1961 for reopening the assessment under the unamended provisions was challenged before the Madras High Court. The High Court held as under:

“i) A reassessment proceeding emanating from a simple show-cause notice must arise only upon jurisdiction being validly assumed by the assessing authority. Till such time as jurisdiction is validly assumed by the assessing authority, evidenced by issuance of the jurisdictional notice u/s. 148 of the Act, no reassessment proceeding may ever be said to be pending before the assessing authority.

ii) It is settled law that the law prevailing on the date of issuance of the notice u/s. 148 has to be applied. On 1st April, by virtue of the plain effect of section 1(2)(a) of the Finance Act, 2021, the provisions of sections 147, 148, 149, 151 (as those provisions existed up to March 31, 2021), stood substituted, along with a new provision enacted by way of section 148A of that Act. In the absence of any saving clause, to save the pre-existing (and now substituted) provisions, the Revenue authorities could only initiate reassessment proceedings on or after 1st April, 2021, in accordance with the substituted law and not the pre-existing laws. Had the intention of the Legislature been to keep the erstwhile provisions alive, it would have introduced the new provisions with effect from 1st July, 2021, which has not been done. Accordingly, the notices relating to any assessment year issued u/s. 148 on or after 1st April, 2021 have to comply with the provisions of sections 147, 148, 148A, 149 and 151 of the Act, as specifically substituted by the Finance Act, 2021 with effect from 1st April, 2021.

iii) Consequently, the Taxation and Other Laws (Relaxation and Amendment of Certain Provisions) Act, 2020 and notifications issued thereunder can only change the time-lines applicable to the issuance of a section 148 notice, but they cannot change the statutory provisions applicable thereto which are required to be strictly complied with. Further, just as the Executive cannot legislate, it cannot impede the implementation of law made by the Legislature. Explanations A(a)(ii)/A(b) to the Notifications dated 31st March, 2021 and 27th April, 2021 are ultra vires the 2020 Act, and are therefore, bad in law and null and void.

iv) The reassessment notices u/s. 148 of the Act issued on or after 1st April, 2021 had to be set aside having been issued in reference to the unamended provisions and the Explanations would be applicable to reassessment proceedings if initiated on or prior to 31st March, 2021, but it would be with liberty to the assessing authorities to initiate reassessment proceedings in accordance with the provisions of the 1961 Act, as amended by the Finance Act, 2021, after making all the compliances as required by law, if limitation for it survived.”

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Offences and prosecution — Willful evasion of tax — Self assessment — Default in payment of tax on time — Assessee paying tax demand in instalments — No mala fide intention to evade tax — Willful attempt cannot be inferred merely on failure to pay tax on time — Prosecution quashed

11 S. P. Velayutham vs. ACIT [2022] 442 ITR 74 (Mad) A. Y.: 2013-14 Date of order: 28th January, 2022 Ss. 140A and 276C(2) of ITA, 1961

Offences and prosecution — Willful evasion of tax — Self assessment — Default in payment of tax on time — Assessee paying tax demand in instalments — No mala fide intention to evade tax — Willful attempt cannot be inferred merely on failure to pay tax on time — Prosecution quashed

An order of attachment of the immovable property u/s 226 of the Income-tax Act, 1961 was passed by the Department towards the remaining tax dues of the assessee since the assessee did not pay the entire tax demand. Prosecution was launched against the assessee u/s 276C(2) on the ground that the assessee did not pay the entire tax demand. It was stated in the complaint that the reason given in the reply for non-payment of tax was general in nature, and loss in business could not be an excuse for evading tax.

The Madras High Court allowed the revision petition filed by the assessee and held as under:

“i) To prosecute an assessee u/s. 276C of the Income-tax Act, 1961 there must be a wilful attempt on the part of the assessee to evade payment of any tax, penalty or interest. The Explanation to section 276C makes it clear that the evasion shall include a case where a person makes any false entry or statement in the books of account or other document or omission to make any entry in the books of account or other documents or any other circumstances which will have the effect of enabling the assessee to evade tax or penalty or interest chargeable or imposable under the Act or the payment thereof.

ii) “Wilful attempt” cannot be inferred merely on failure to pay the tax in time without any intention or deliberate attempt to avoid tax in totality or without any mens rea to avoid the payment.

iii) Sub-section (3) of section 140A makes it very clear that in the event of failure to pay tax the assessee shall be deemed to be in default. The word “wilful attempt to evade tax” is absent in section 140A(3) . If mere default in payment of tax in time is to be construed as a wilful attempt to evade tax the Legislature would have included the words “wilful attempt to evade tax” in sub-section (3) of section 140A which are absent. Therefore, mere default in payment of tax in time cannot be imported to prosecute for wilful attempt to evade tax. The penal provision has to be strictly construed. Only if the circumstances and the conduct of the accused show the wilful attempt in any manner whatsoever to evade tax or to evade payment of any tax, penalty or interest, can prosecution be launched.

iv) On the facts and the nature of the complaint there was no intention or wilful attempt made by the assessee to evade the payment of tax. Though the Explanation to section 276C is an inclusive one it was not the case of the Department that the assessee had made any false entry in the statements or documents or omitted to make any such entry in the books of account or other document or acted in any other manner to avoid payment of tax. The assessee had expressed his inability and mere failure to pay a portion of the tax could not be construed to mean that he had wilfully attempted to evade the payment of tax. When the return had been properly accepted and the assessment was also confirmed, mere default in payment of taxes unless such default arose out of any of the circumstances, which had an effect of the assessee to defeat the payment, the words “wilful attempt” employed in the provision could not be imported to mere failure to pay the tax.

v) From the inception there was no suppression and even in the reply to the notice the assessee had clearly stated the circumstances which had forced him to such default. If the intention of the assessee to evade the payment of tax was present from the very inception, he would not have made further payments. The statements filed by the Department also indicated that he had continuously paid the taxes in instalments. The assessee’s conduct itself showed that there was no wilful attempt to evade the payment of tax. The payment of tax in instalments probabilised his reply given to the notice but had not been considered by the Department. The criminal proceedings were quashed.”

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Industrial undertaking — Special deduction u/s 80-IA — Rule of consistency — Assessee carrying out operation and maintenance of multi-purpose berth in port — Deduction granted by appellate authorities on facts in first assessment year and order attaining finality — Deduction could not be disallowed for subsequent assessment years when there was no change in circumstances — Letter issued and agreement with port authorities would satisfy requirement

10 Principal ClT vs. T. M. International Logistic Ltd. [2022] 442 ITR 87 (Cal) A.Ys: 2004-05 and 2005-06 Date of order: 20th January, 2022 S.80-IA of ITA, 1961

Industrial undertaking — Special deduction u/s 80-IA — Rule of consistency — Assessee carrying out operation and maintenance of multi-purpose berth in port — Deduction granted by appellate authorities on facts in first assessment year and order attaining finality — Deduction could not be disallowed for subsequent assessment years when there was no change in circumstances — Letter issued and agreement with port authorities would satisfy requirement

The assessee was in the business of terminal port operation and maintenance. For the A.Ys. 2004-05 and 2005-06, the assessee filed the return of income and claimed deduction u/s 80-IA of the Income-tax Act, 1961. The Assessing Officer rejected the claim on the ground that the assessee was operating and maintaining a multi purpose-berth and did not operate a port. The assessee submitted a letter issued by the port authorities stating that the berth at the dock complex had been allotted to the assessee on a leave and licence basis for thirty years, and it had the exclusive licence to equip, construct, finance, operate, manage, maintain and replace the project facilities and services. The Assessing Officer held that the letter had no significance regarding the deduction claimed u/s 80-IA and that no details were furnished in respect of the arrangement for the construction of the berth either on build-operate-transfer (BOT) or build-operate-lease-transfer (BOLT) basis and transfer of the berth to the port authorities.

The Commissioner (Appeals) held that the assessee was entitled to deduction u/s 80-IA. The Tribunal affirmed the orders.

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

“i) The Commissioner (Appeals) for the A.Y. 2003-04 which was the first year in the period of ten years had on examination of the facts allowed the deduction u/s. 80-IA and his order was confirmed by the Tribunal. The Assessing Officer had also given effect to such order. There was nothing on record to show that there was any change in the situation.

ii) The letter from the port authorities and the agreement which were produced by the assessee were to be treated as a certificate issued by the port authorities and would satisfy the requirement in Circular No. 10 of 2005, dated December 16, 2005 ([2006] 280 ITR (St.) 1) issued by the Central Board of Direct Taxes. The Tribunal had rightly rejected the Department’s appeal and confirmed the order passed by the Commissioner (Appeals) allowing deduction u/s. 80-IA to the assessee.”

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Chit fund: (i) Method of accounting — Change in method of accounting from mercantile system of accounting to completed contract method — Profits accounted for chit discount on completed contract method — Result revenue neutral — Assessee’s method of computing justified; (ii) Business expenditure — Advertisement expenditure — Expenses incurred not on particular series of chit alone but for promotion and running of business — Allowable as revenue expenditure in year in which expenses incurred

9 Shriram Chits and Investments (P.) Ltd. vs. ACIT [2022] 442 ITR 54 (Mad) A.Ys.: 1987-88 to 1995-96 and 1999-2000 Date of order: 30th August, 2012 Ss. 37 and 145 of ITA, 1961

Chit fund: (i) Method of accounting — Change in method of accounting from mercantile system of accounting to completed contract method — Profits accounted for chit discount on completed contract method — Result revenue neutral — Assessee’s method of computing justified; (ii) Business expenditure — Advertisement expenditure — Expenses incurred not on particular series of chit alone but for promotion and running of business — Allowable as revenue expenditure in year in which expenses incurred

The assessee was in chit business. Till 31st December, 1985, in respect of the method of accounting u/s 145 of the Income-tax Act, 1961, the assessee followed the mercantile accounting system regarding the commission earned by it in its capacity as foreman, conducting the chit activity. However, thereafter, the assessee changed the method to the completed contract method of accounting, and the commission earned was accounted for on the completion of each series of chits. The Department did not accept the change of the accounting method on the ground that on the date the auction was conducted, the right of the assessee to receive the commission in the capacity as foreman accrued, and consequently, the assessee was not entitled to wait for the completion of each chit period, as there was no accrual of income at the end of each term.

The Commissioner (Appeals) upheld the order of the assessing authority. The Tribunal held that the remuneration or commission of the foreman accrued at the end of chit draw and that, therefore, the assessee’s commission had to be related to and determined based on every auction and not to be postponed to the completion period and dismissed the assessee’s appeal.

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

“i) A reading of the rights of the subscribers and responsibilities of the chit fund as foreman in the provisions of the Chit Funds Act, 1982 shows that the duty is cast on the foreman to conduct the chit to a duration assured and in the event of any default of payment of any one of the instalments, the foreman has the responsibility to make good that loss. At the end of the chit period, the subscriber is assured of the amount for which he participated in the scheme. In the background of the provisions of sections 21 to 28 of the 1982 Act read in the context of the definition of “discount” and “dividend”, on every auction, the discount that is arrived at is taken for the purpose of meeting the expenses of running the chit. The expenses normally include all expenses apart from the commission payable to the foreman, and the dividends that are payable to the subscribers, are normally carried to the end of the chit period. Every chit is an independent transaction containing a series of activities to be undertaken during the course of the transaction. Even though the discount and commission are recognised with the conduct of auction every month, yet, with all the load mounted on the discount, the uncertainties in the payment of subscriptions and the commitments that the assessee has to discharge under the 1982 Act, the revenue recognition, as a business proposition becomes determinable only at the end of the particular chit transaction.

ii) While in the proportionate completion method, revenue is recognised proportionately by referring to the performance of each act, the possibility of revenue recognition in the proportionate completion method being a fairly determinable one, in the completed services contract method, the difficulty in determining the revenue arises by reason of the significant nature of the services yet to be performed in relation to the transaction that normally, the revenue recognition is taken to the end of the performance. Therefore, even while adopting the proportionate completion method, where there is every possibility of identifying the revenue vis-a-vis the extent of services completed, there is a line of caution stated that when there is a better method available to assess the better performance, it may be adopted to the straight line basis for ascertaining the income. However, when the services yet to be performed are so significant in relation to the transaction, difficulty arises in recognising the revenue in the performed services. Therefore, in contrast to the proportionate completion method, necessarily, revenue recognition is postponed till the completion of the services of the contract. Under clause 9, “Basis for revenue recognition”, it is stated that so long as there is uncertainty on the ultimate collection, revenue is not normally recognised along with rendering of services. Even though payment may be made in instalments, when the consideration is not determinable within reasonable limits, recognition of revenue is postponed. Accounting Standards 9 and 7 both speak in one voice at least as regards the proportionate completion method, the completion contract method and both these methods aim at the methodology for arriving at the revenue recognition with a certain degree of certainty, taking into consideration, the significance of the services performed and to be performed in relation to the particular transaction.

iii) Section 21(1)(b) of the 1982 Act provides for entitlement to receive commission, remuneration or for meeting the expenditure of running the chit at a rate not more than 5 per cent. Therefore, at a given point of time, a foreman cannot, with any certainty, assert that his commission be paid irrespective of the expenses that he may have to incur for the conduct of the transaction. In the computation of income on the completed contract basis, the exercise would be seen as revenue neutral. Under the 1982 Act, the discount is the sum of money which is set apart under the chit agreement to meet the expenses of running the chit. This also has to take note of the default among the different classes of subscribers.

iv) While there may be a certainty as to the dividend received every month for purpose of assessment on accrual basis, as far as a company running the chit business is concerned, the dividend and the discount can properly be ascertained only at the completion of the transaction and not in the midway. Given the significant nature of the services yet to be performed in relation to the chit series, till the series come to an end, it is difficult to assess with any certainty, the amount that would be properly called as income for the purpose of assessment. “Discount” as defined under section 2(g) of the 1982 Act means the money set apart under the chit agreement to meet the expenses of running the chit or for distribution among the subscribers or for both. Dividend is the share of the subscriber in the amount of discount available for reasonable distribution among the subscribers at each instalment of the chit.

v) Given the rights of the subscriber, when section 21 of the 1982 Act provides for 5 per cent of the chit amount to be given to the assessee as foreman which was stated therein as commission, remuneration or for meeting the expenses of running the chits, and when the dividend to the assessee as foreman had to come only from out of the discount, the Department was not justified in contending that the assessee could not adopt the completed contract method for income recognition. The assessee was justified in adopting the completed contract method to arrive at the real income.

vi) The assessee’s expenditure was related both to the administrative costs and to the advertisement costs. The expenses could not be viewed as relatable to the particular series alone, but as relating to the running of the business and were revenue expenditure of the relevant assessment year in which it was incurred. The fact that the advertisement referred to the beginning of a new series, per se, would not mean that it was relatable to the conduct of the business of the assessee in general. The advertisement was more in the nature of information as to the business of the assessee and for its promotion.

vii) The plea of the Department that the change in the method of accounting was not bona fide was taken without any material. Except for the issue on mutuality relating to the A. Ys. 1988-89 to 1995-96 and 1999-2000 the findings of the Tribunal to the extent regarding the method of accounting were set aside.”

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CERTIFICATION ENGAGEMENTS

INTRODUCTION

Chartered accountants in practice are requested to certify and attest multiple documents. These can be a net-worth certificate, turnover certificate, an ITR (Income Tax Return) certificate, ODI (Overseas Direct Investment) certificate, certificate required by banks for loan/renewal/compliance purposes, and certifications for tender purposes as for local inputs or statutory compliance certificates.

Considering the importance of these certificates and the need to bring uniformity in reporting, the ICAI issued a Guidance Note on Reports or Certificates for Special Purposes (Revised 2016) (GN). The purpose of this GN is to guide on engagements requiring a practitioner to issue reports other than those issued in audits/reviews of historical financial information. Guidance Notes assist professional accountants in implementing the Engagement Standards and the Standards on Quality Control issued by the AASB under the authority of the Council of ICAI.

As per the GN, a report or certificate issued by a practitioner can provide either a reasonable or a limited level of assurance depending upon the nature, timing and extent of procedures to be performed based on the facts and circumstances of the case. Therefore, when a practitioner is required to give a certificate or a report for special purpose, a careful evaluation of the scope of the engagement needs to be undertaken, i.e., whether the practitioner would be able to provide an opinion (in a reasonable assurance engagement) or a conclusion (in a limited assurance engagement) on the subject matter.

Reasonable assurance engagement	Limited assurance engagement
• An assurance engagement in which the practitioner reduces engagement risk to an acceptably low level in the circumstances of the engagement, as the basis for the practitioner’s opinion. • The practitioner gives a report in the form of positive assurance (direct) and nature timing and extent of procedures are more extensive.	• An assurance engagement in which the practitioner reduces engagement risk to a level that is acceptable in the circumstances of the engagement but where that risk is greater than for a reasonable assurance engagement. • The practitioner gives a
	(continued) report in the form of negative assurance (indirect) and nature timing and extent of procedures are moderate.
Examples – Certificates Based on Reasonable Assurance ü Certification of Turnover for past years ü Certification of Net worth of entity ü Certification of Derivative Exposures ü Certification of compliance with Buyback Regulations ü Annual Performance Report (APR) Certificate ü Overseas Direct Investment (ODI) Certificate	Examples – Certificates Based on Limited Assurance ü Certification of Non-financial information required for Tender ü Certificate on Accounting treatment in conformity with Accounting standards ü Certificate issued by a Professional Accountant other than auditor

Reasonable assurance
engagement

Limited assurance engagement

• An
assurance engagement in which the practitioner reduces engagement risk to an
acceptably low level in the circumstances of the engagement, as the basis for
the practitioner’s opinion.

• The
practitioner gives a report in the form of positive assurance (direct) and
nature timing and extent of procedures are more extensive.

• An
assurance engagement in which the practitioner reduces engagement risk to a
level that is acceptable in the circumstances of the engagement but where
that risk is greater than for a reasonable assurance engagement.

• The
practitioner gives a

(continued)

report
in the form of negative assurance (indirect) and nature timing and extent of
procedures are moderate.

Examples – Certificates Based on Reasonable Assurance

ü Certification of Turnover for past
years

ü Certification of Net worth of
entity

ü Certification of Derivative Exposures

ü Certification of compliance with Buyback
Regulations

ü Annual Performance Report (APR)
Certificate

ü Overseas Direct Investment (ODI)
Certificate

Examples – Certificates Based on Limited Assurance

ü Certification of Non-financial
information required for Tender

ü Certificate on Accounting treatment
in conformity with Accounting standards

ü Certificate issued by a Professional Accountant
other than auditor

This article aims to highlight the key aspects relating to issuance/challenges of certificates that the auditor/professional accountant should consider.

ENGAGEMENT ACCEPTANCE PROCEDURES

The practitioner should consider relevant ethical and independence requirements while accepting or continuing an engagement. The practitioner should agree in writing the terms, i.e. objective, scope, responsibilities of practitioner and responsibilities of the engaging party, fees, type of assurance in detail and limitations on use based on the eventual use in the engagement letter. Any change in engagement scope should not be agreed to unless there is a reasonable justification. In case of limitation on scope imposed, the practitioner should not accept the assignment where he will end up disclaiming his opinion.

WHEN ASSURANCE REPORT/CERTIFICATE IS PRESCRIBED BY LAW OR REGULATION
Sometimes, the applicable law and regulation or a contractual arrangement that an entity might have entered into prescribes the layout or wording of reports or certificates. These wordings generally contain the words such as ‘Certify’ or ‘True and Correct’. These words, i.e., ‘True and Correct’ indicate absolute assurance. Absolute assurance indicates that the documents certified are 100% free from misstatements, and the auditor’s engagement risk has been reduced to zero. The practitioner should refrain from using words that indicate absolute assurance and clarify that only a reasonable or limited assurance is provided.

Points to consider when the format/layout is prescribed by law:

•   Certificate is to be prepared as per the format specified by the regulatory authority (e.g. APR certificate).
•   Enclose a statement containing essential elements of the assurance report to the certificate.
•   A separate line stating “to be read with the enclosed statement of even date” shall be inserted towards the end of the certificate and above the signature. Such statement shall be enclosed with the certificate.
•   Underlying management statement/annexure, duly attested, on which auditor will issue the certificate.
•   To evaluate whether intended users might misunderstand the assurance conclusion and whether additional explanation in the assurance report can mitigate possible misunderstanding.

Example1

RBI had alleged wrong certification of a Company by a CA Firm (Respondent) which did not meet dual principle business criteria (Income & Asset Criteria) as required in terms of the Non-Banking Financial (Non Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2015. Further, respondent failed to issue exception report to RBI.

Findings

The respondents are held guilty of gross negligence and professional misconduct falling within the meaning of Clause (7) of Part I of Second Schedule of Chartered Accountant Act,1949 for violation of “Non-Banking Financial Companies Auditor’s Report (Reserve Bank) Directions, 2013”.

1 Report/Orders issued by ICAI
disciplinary Committee on Non Compliances in issuing Certificate/Report.

WHEN ASSURANCE REPORT/CERTIFICATE IS TO BE GIVEN WHILE ISSUING/CERTIFYING PROVISIONAL/PROJECTED STATEMENTS

Usually, clients approach banks for new loans/renewal/enhancement of loans. Many bankers ask such clients to produce three years of audited financials/provisional/projected financials and get them signed. It is pertinent to note there is no circular by RBI requesting such underlying documents. The Chartered Accountants Act, 1949 (Clause 3 of Part I of the Second Schedule) deems a CA in practice guilty of professional misconduct if he permits his/firm’s name to be used in connection with an estimate of earnings contingent upon future transactions in a manner which may lead to the belief that he vouches for the accuracy of the forecast. This means that a practitioner cannot certify whether a business will achieve a future result or not as per the projected financial statements. However, the projections can be examined by a Chartered Accountant under SAE 3400-The Examination of Prospective Financial Statement (PFI). PFI could be in the form of a forecast, a projection or a combination of both, for example, a one year forecast plus a five-year projection. We must note PFI contains projections/forecasts involving uncertainty, and therefore adequate care must be taken on the type of assurance given. PFI is highly subjective, and it requires the exercise of considerable judgment. The practitioner needs to assess the source and reliability of the evidence supporting management’s assumptions/estimates and, where hypothetical assumptions are used, whether all significant implications of such assumptions are considered. The auditor should document important matters in providing evidence to support his report on the examination of prospective financial information and evidence that such examination was carried out in accordance with the SAE. The auditor can provide only a moderate level of assurance on the reasonableness of management’s assumptions used and reasonable assurance (opinion) on the PFI’s proper preparation based on the assumptions, and its presentation in accordance with the relevant financial reporting framework.

Similarly, for the certification of ITR, members are advised not to certify ITR as a true copy as per FAQs on UDIN-issued by ICAI. However, they can make an opinion/ certificate/ report about ITR based on its source, location and authenticity of data from which it is being prepared, and UDIN is required.

ICAI has also issued a Guidance Note on Reports in Company Prospectuses (Revised 2019). This Guidance Note guides compliance with the Companies Act, 2013 and the SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 relating to the reports required to be issued by CAs in prospectus issued by companies for Indian offerings. Underwriters and lead managers usually undertake a due diligence process on the information contained in the prospectus. As a part of that process, they also seek to obtain an added level of comfort from the auditors on various aspects of the prospectus (in the form of a comfort letter), in addition to the auditors’ report already contained in the prospectus. The auditor should agree with the lead manager on the scope and limitation of the issuance of a comfort letter.

MATTERS REQUIRING ATTENTION WHILE ISSUING CERTIFICATE/REPORT

Disclosures

It is generally seen that practitioners cannot provide complete disclosures such as disclosure of responsibilities of the parties involved, the subject matter, and disclosure of the intended purpose of the certificate. Disclosures provide clarity and help avoid misunderstandings of the objective, scope, responsibilities, subject matter, and applicable criteria. Issuers should make it a practice to provide detailed disclosures in their certificates and reports that will leave little to the imagination of the user. In case where a format is prescribed, or a certificate is to be issued in a specific format, there is always a challenge to detail the disclosures/qualifications etc. Also, where there are specific formats/certification over portals-Fixed formats, there is no specific place for mentioning/inserting UDIN, and this adds as a limitation while issuing a certificate.

Certification of non-financial information

While a client applies for tenders, many documents are required to be certified by the CA. Sometimes non-financial documents are also requested to be certified by a CA. The auditor may use the work of an expert for non-financial information after considering its competency, capability and objectivity.

Key Performance Indicators-SEBI Disclosures

In its consultation paper, SEBI has planned tougher pricing norms for startup IPOs. SEBI believes the disclosures made under the ‘Basis of Issue Price’ section in an offer document need to be ‘supplemented with non-traditional parameters’ and other Key Performance Indicators (KPIs). For example a technology or app-based startup, the KPIs could be figures like the number of downloads or average time spent on a platform. Further, it is not always possible to correlate KPIs with the issue price. KPIs can be dynamic, evolve with time, and can be volatile due to technology changes depending on the management’s strategies and learnings from previous quarters. KPIs would be further required to be certified by a statutory auditor/independent CA. It would be challenging for an auditor, and it will have to be seen if giving such a certificate is feasible since the auditor will not have the required skills for non-financial KPI’s. SEBI should provide guidelines on how KPIs need to be disclosed. For example, the guidelines could specify that the following information should be accompanied with the disclosure of KPIs:

• a clear definition of the metric, and
• how it’s calculated.

For example, when disclosing ‘acquisition of new customers’, it should define whether the numbers indicate the basis on which a new customer is identified. For example, it is a new customer because it has downloaded the App for a subsequent time, or it is a new customer because it has placed the first order in a particular period, or it is a new customer because it has logged in from a new device.

When report is issued based on Agreed Upon Procedures Engagement

In an Engagement to Perform Agreed-upon Procedures regarding Financial Information-SRS (Standard on Related Services) 4400, the client requires the auditor to issue a report of factual findings based on specified procedures performed on the specified subject matter of specified elements, accounts or items of a financial statement.

Example – An ongoing arbitration engagement – where the dispute pertains to revenue realisation/valuation from a real estate project, the client has requested the auditor to perform agreed-upon procedures concerning individual items of financial data, say, revenue and accounts receivable, and has provided books of accounts, supporting documents from buyers and valuation reports by independent valuers.

The procedures performed will not constitute an audit or a review. Accordingly, no assurance will be expressed, whereas in the issuance of a report/certificate (reasonable/limited assurance), an opinion is given.

Sources and Methodology

A practitioner will be better off stating the sources of his information. It will be better to state where the data/audit evidence is obtained. This will safeguard the practitioner and clarify the sources to the reader. Where the underlying data is relied upon by the practitioner, he may state so in his report. Often copies are provided by the client via scan on emails. The practitioner may consider evaluating the genuineness or otherwise of such documents. A practitioner may mention the methodology adopted by him in undertaking the assurance activity.

Example2 – The CA (Respondent) issued a certificate to a Bank for account opening without verifying the underlying documents and ensuring its genuineness. The board findings stated that the certificate is a written confirmation of the facts stated therein. When a Chartered Accountant issues a certificate, it is believed to be ‘True and Correct’. The respondent ought to have exercised due professional scepticism to see that the correct facts as to the existence of the necessary documents.

Findings – The respondent is guilty of ‘Other Misconduct’ falling within the meaning of item (2) of Part IV of First Schedule to the Chartered Accountants Act 1949 read with section 22 of the said act.

Representations and Documentation
Adequate guidance is available on obtaining management representations. A practitioner may be cautious when relying on representation as primary evidence. Considering the limited nature of assurance or reasonable assurance engagements, a practitioner should obtain adequate management representations to correlate these with other evidence. When representations are not provided, or clients disagree to do so, the practitioner may treat this as a red flag. A practitioner should maintain adequate documentation that forms the basis of his report / certificate and reference it appropriately.

2 Report/Orders issued by ICAI
disciplinary Committee on Non Compliances in issuing Certificate/Report.

Title, Content and Structure

The GN provides for the content, flow and structure of the report. It is observed that many practitioners continue to provide certificates like before without following the format prescribed. This especially involved obtaining UDIN and affixing the UDIN to the signature panel. One may refer to the recent FAQ on UDIN (January 2022) for various aspects relating to UDIN covering numerous situations. Addressing the report to the proper party is very important. The format also prescribes an opinion para, which requires clear and complete articulation of what is being reported.

Restriction on use

It is important to state that a certificate is issued for a specific purpose and therefore should only be used for that purpose and not for any other purposes. Often a certificate is issued for FEMA or specific banks, and the practitioner may state the purpose and/or user.

Issuance of incorrect certificates for taking benefit of license/scheme/tax benefits/subsidy

A practitioner should ensure utmost care while issuing a certificate after verifying all underlying documents and diligently performing necessary audit procedures. It is seen that authorities have held professionals guilty if the certificate is incorrectly issued based on significant errors/frauds in books of accounts which the practitioner ignored. In a few cases where certificates are to be issued to tax authorities, it is seen that figures are manipulated to take undue advantage of license/scheme/tax benefit/subsidy.

Example3 – The respondent had issued bogus certificates of past exports based on which the concerned importers were able to obtain advance licenses and DEEC Book for duty-free imports. This resulted in evasion of duty to the government to the extent of Rs. 1crore.

Findings – The respondent is guilty of ‘Other Misconduct’ falling within the meaning of Section 22 read with section 21 of the Chartered Accountant Act, 1949. The respondent is separately prosecuted under the Customs Act, and a penalty is imposed on him.

3 Report/Orders issued by ICAI
disciplinary Committee on Non Compliances in issuing Certificate/Report.

Other Points

Materiality – Materiality must be considered in the context of qualitative factors, and when applicable, quantitative factors. When considering materiality in particular engagements, the importance of both the factors is a matter of professional judgment.

Internal Audit Report and Internal Control – Where the practitioner plans to use the internal audit functions’ work, he should evaluate its competence, objectivity and quality control and whether its work is relevant for the engagement. The practitioner should obtain an understanding of internal controls and needs to evaluate its inherent limitations.

BOTTOM LINE

Considering the various challenges, there is a lot of risk and exposure for the auditor while issuing such certificates. The auditor may be called upon by various regulators if there is an issue related to the certificate/report. The auditor must ensure that he has obtained and preserved sufficient and appropriate audit evidence and apply professional scepticism and professional judgment while arriving at the opinion. Certificates serve numerous purposes, and as CAs, it is our responsibility to issue them with due care and diligence. There is an increasing requirement for the auditor to issue certificates in the statutory format. Considering the same, ICAI may consider looking at its Guidance Note to avoid rejection of such certificates.

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THE FINANCE ACT, 2022

1. BACKGROUND

Finance
Minister Smt. Nirmala Sitharaman presented her fourth regular Budget in
Parliament on 1st February,2022. In her Budget speech, she emphasised
four priorities, namely (i) PM Gatishakti, (ii) inclusive development,
(iii) productivity enhancement & investment, sunrise opportunities,
energy transition and climate action and (iv) financing of investments.
The Finance Minister has given a detailed explanation of the measures
that the Government proposes to take in the coming years.

The Finance Minister has also introduced the Finance Bill, 2022, containing 84 sections amending various sections of the Income-tax Act. Before the passage of the Bill, 39 amendments to the Bill were
introduced in Parliament. The Parliament passed the Bill with the
amendments on 29th March, 2022. The Finance Act, 2022, has received the
assent of the President on 30th March, 2022. By this Act, several
amendments are made to the Income-tax Act, increasing the burden of
compliance for tax payers. However, there are some amendments which will
give some relief to taxpayers. Contrary to the Government’s declared
policy , there are some amendments that will have retrospective effect.
In this article, some of the important amendments in the Income tax-Act
(Act) are discussed.

2. RATES OF TAXES FOR A.Y. 2023-24

2.1
There are no changes in the slabs and the rates for an Individual, HUF,
AOP and BOI. The tax rates remain unchanged in the case of a Firm
(including LLP), Co-operative Society and Local Authority. In the case
of a Domestic Company, the tax rate remains the same at 25% if a
company’s total turnover or gross receipts for F.Y. 2020-21 was less
than R400 Crore. In the case of other larger companies, the tax rate
will be 30%. The rate of 4% of the tax for ‘Health and Education Cess’
will continue for all assessees. Apart from what is stated in Para 2.2,
the rates of surcharge are the same as in earlier years.

2.2 It
may be noted that some relief in rates of surcharge is given in A.Y.
2023-24 (F.Y. 2022-23). The revised rates of surcharge are as under:

(i) Individual, HUF, AOP / BOI
There
is no change in the surcharge rates on slab rates in A.Y. 2023-24.
However, the surcharge on income taxable under sections 111A, 112, and
112A and dividend income will not exceed 15%.

(ii) AOP (having corporate members only)
In
the case of AOP having only corporate members, the rate of surcharge
will be 7% if the income exceeds R1 crore but does not exceed R10
crores. The rate of surcharge will be 12% if the income exceeds R10
crores.

(iii) Co-operative Societies
The rate of
surcharge is reduced for A.Y. 2023-24 to 7% if the income is more than
R1 crore, but less than R10 crore. In respect of income exceeding R10
crore, the rate of surcharge is unchanged at 12%.

2.3. Alternate Minimum Tax
In
the case of co-operative societies, the Alternate Minimum Tax (AMT)
payable u/s 115JC is reduced from 18.5% to 15% from A.Y. 2023-24 (F.Y.
2022-23).

3. TAX DEDUCTION AND COLLECTION AT SOURCE (TDS AND TCS)

3.1 Section 194-IA:
This section is amended w.e.f. 1st April, 2022 – tax at 1% is to be
deducted on higher of stamp duty value or the transaction value. When
the consideration and stamp duty valuation is less than R50 Lakhs, no
tax is required to be deducted.

3.2 Section 194R: (i) This new section comes into force from 1st April, 2022.
It provides that tax shall be deducted at source at 10% of the value of
the benefit or perquisite arising from business or profession if the
value of such benefit or perquisite in a financial year exceeds R20,000.

(ii) The provisions of this section are not applicable to an
Individual or HUF whose sales, gross receipts or turnover does not
exceed R1 crore in the case of business or R50 Lakhs in the case of
profession during the immediately preceding financial year.

(iii)
The section also provides that if the benefit or perquisite is wholly
in kind or partly in kind and partly in cash, and the cash portion is
not sufficient to meet the TDS amount, then the person providing such
benefit or perquisite shall ensure that tax is paid in respect of the
value of the benefit or perquisite before releasing such benefit or
perquisite.

(iv) In the Memorandum explaining the provisions of
the Finance Bill, 2022, it is clarified that section 194R is added to
cover cases where the value of any benefit or perquisite arising from
any business or profession is chargeable to tax u/s 28(iv). Therefore,
this new TDS provision will apply only when the value of the benefit or
perquisite is chargeable to tax in the hands of the person engaged in
the business or profession u/s 28(iv). It is also provided that the
Central Government shall issue guidelines to remove any difficulty that
may arise in implementing this section.

3.3 Section 194-S: (i) This is a new section which will come into force on 1st July, 2022
– which provides that any person paying to a resident consideration for
transfer of any Virtual Digital Asset (VDA) shall deduct tax at 1% of
such sum. In a case where the consideration for transfer of VDA is (a)
wholly in kind or in exchange of another VDA, where there is no payment
in cash or (b) partly in cash and partly in kind but the part in cash is
not sufficient to meet the liability of TDS in respect of the whole of
such transfer, the payer shall ensure that tax is paid in respect of
such consideration before releasing the consideration. However, this TDS
provision does not apply if such consideration does not exceed R10,000
in the financial year.

(ii) Section 194-S defines the term
‘Specified Person’ to mean a person being an Individual or a HUF, whose
total sales, gross receipts or turnover from business or profession does
not exceed R1 crore in case of business or R50 Lakhs in the case of
profession, during the financial year immediately preceding year in
which such VDA is transferred or being Individual or a HUF who does not
have income under the head ‘Profits and Gains of Business or
Profession’. In the case of a Specified Person –

(a) The
provisions of section 203A relating to Tax Deduction and Collection
Account Number and section 206AB relating to special provision for TDS
for non-filers of Income-tax returns will not apply.

(b) If the
value or the aggregate value of such consideration for VDA does not
exceed Rs. 50,000 during the financial year, no tax is required to be
deducted.

(iii) In the case of a transaction to which sections
194-O and 194-S are applicable, then tax is to be deducted u/s 194-S and
not u/s 194-O.

3.4 Sections 206AB and 206CCA: These
sections deal with a higher rate of TDS and TCS in cases where the payee
has not filed his Income-tax returns for two preceding years and in
whose case aggregate TDS/TCS exceeds R50,000. At present, section 206AB
is not applicable in respect of TDS under sections 192, 192A, 194B,
194BB, 194BL and 194N. By amendment, effective from 1st April, 2022,
it is now provided that TDS/TCS at higher rates in such cases will not
apply u/s 194IA, 194IB and 194M where the payer is not required to
obtain TAN. Further, the test of non-filing the Income-tax returns under
sections 206AB/206CCA has been now reduced from two preceding years to
one preceding year.

4. DEDUCTIONS

4.1 Section 80CCD: At
present, the deduction for employer’s contribution to National Pension
Scheme (NPS) is allowed to the extent of 14% of the salary in the case
of Central Government employees. For others, the deduction is restricted
to 10% of the salary. In order to give benefit to State Government
employees, section 80CCD(2) is amended with retrospective effect from A.Y. 2020-21 (F.Y. 2019-20).
By this amendment, the State Government employees will now get a
deduction for employer’s contribution to NPS to the extent of 14% with
retrospective effect.

4.2 Section 80DD: At present, a
deduction is allowed in respect of the contribution to a prescribed
scheme for maintenance of a dependent disabled person if such scheme
provides for payment of the annuity or lump sum to such dependent person
in the event of death of the assessee contributing to the scheme, i.e.
the parent or guardian. This section is amended effective from A.Y. 2023-24 (F.Y. 2022-23)
to allow a deduction for such contribution even where the scheme
provides for payment of annuity or lump sum to the disabled dependent
when the assessee contributor has attained the age of 60 years or more
and the deposit to such scheme has been discontinued. It is also
provided by the amendment that such receipt of annuity or lump sum by
the disabled dependent shall not result in the contribution made by the
assessee to the scheme taxable.

4.3 Section 80-IAC: At
present, an eligible start-up incorporated on or after 1st April, 2016
but before 1st April, 2022, is entitled to claim an exemption of profits
for three consecutive assessment years out of ten years from the year
of incorporation. For this purpose, the conditions laid down in this
section should be complied. This section is now amended to provide that
the above benefit will be available to a start-up company incorporated
on or before 31st March, 2023.

4.4 Section 80LA: This
section provides for specified deduction in respect of income arising
from the transfer of an ‘aircraft’ leased by a unit in International
Financial Services Centre (IFSC) if the unit has commenced operation on
or before 31st March, 2024. The amendment of this section has extended
this benefit to a ‘ship’ effective A.Y. 2023-24 (F.Y. 2022-23).

5. CHARITABLE TRUSTS AND INSTITUTIONS
Significant
amendments were made in the procedural provisions relating to
Charitable Trusts and Institutions in sections 10(23C), 12A and 12AA of
the Income-tax Act by Finance Acts 2020 and 2021. A new section 12AB was
added to the Income-tax Act. This year, far-reaching amendments are
made in sections 10(23C), 11 and 13 dealing with Specified Universities,
Educational Institutions, Hospital etc. (herein referred to as
‘Institutions’) and Charitable and Religious Trusts (herein referred to
as ‘Charitable Trusts’). These amendments are as under:

5.1 Institutions Claiming Exemptions u/s 10(23C)
Section
10(23C) of the Act provides for exemption to a Specified University,
Educational Institutions, Hospitals etc., (Institutions). This section
is amended as under:

(i) Section 10(23C)(v) grants exemption to
an approved Public Charitable or Religious Trusts. It is now provided
that if any such Trust includes any temple, mosque, gurudwara, church or
other notified place and the Trust has received any voluntary
contribution for the purpose of renovation or repair of these places of
worship, the Trust will have option to treat such contribution as part
of the Corpus of the Trust. It is also provided that this Corpus amount
shall be used only for this specified purpose and the amount not
utilized shall be invested in specified investments listed in section
11(5) of the Act. It is also provided that if any of the above
conditions are violated, the amount will be considered as income of the
Trust for the year in which such violation takes place. This provision
will come into force from A.Y. 2021-22 (F.Y. 2020-21).

It may be noted that a similar provision is added, effective A.Y. 2021-22 (F.Y. 2020-21), in section 11 in respect of Charitable or Religious Trusts claiming exemption u/s 11.

(ii)
At present, an Institution claiming exemption u/ 10(23C) must utilise
85% of its income every year. If this is not possible, it can accumulate
the unutilised income within 5 years. However, there is no provision
for any procedure to be followed for such accumulation. The amendment to
section 10(23C), effective from A.Y. 2023-24 (F.Y. 2022-23),
now provides that the Institution should apply to the Assessing Officer
(AO) in the prescribed form before the due date for filing the return
of income for accumulation of unutilised income within 5 years. The
Institution must state the purpose for which the income is being
accumulated. By this amendment, the provisions of section 10(23c) are
brought in line with section 11 of the Act.

(iii) At present,
section 10(23C) provides for an audit of accounts of the Institution. By
amendment, it is now provided that, effective from A.Y. 2023-24 (F.Y. 2022-23),
the Institution shall maintain its accounts in such manner and at such
place as may be prescribed by the Rules. Such accounts will have to be
audited by a CA, and a report in the prescribed form will have to be
given by him.

(iv) Section 10(23C) is also amended by replacing
the existing proviso XV to give very wide powers to the Principal CIT to
cancel approval or provisional approval given to the Institution for
claiming exemption. If the Principal CIT comes to know about specified
violations by the Institution, he can conduct an inquiry, and after
giving an opportunity to the Institution, cancel the approval or
provisional approval. The term ‘specified violations” is defined in this
amendment.

(v) By another amendment to section 10 (23C), effective from A.Y. 2023-24 (F.Y. 2022-23), it is provided that the Institution shall file their returns of income by the due date specified in section 139(4C).

(vi)
A new Proviso XXI is added in section 10(23C) to provide that if any
benefit is given to persons mentioned in section 13(3), i.e., author of
the Institution, Trustees or their related persons, such benefit shall
be deemed to be the income of the Institution. This will mean that if a
relative of a trustee is given free education in the educational
Institution, the value of such benefit will be considered as income of
the Institution. In this case, the tax will be charged at 30% plus
applicable surcharge and cess u/s 115BBI.

(vii) It may be noted that section 56(2)(x) has been amended from A.Y. 2023-24 (F.Y. 2022-23)
to provide that if the Author, Trustees or their related persons as
mentioned in section 13(3) receive any unreasonable benefit from the
Institution or Charitable Trust exempt under sections 10(23C) or 11, the
value of such benefit will be taxable as ‘Income from Other Sources’.

(viii)
At present, the provisions of section 115TD apply to a Charitable or
Religious Trust registered u/s 12AA or 12AB. Now, effective from A.Y. 2023-24 (F.Y. 2022-23), the
provisions of section 115TD will apply to any University, Educational
Institution, Hospital etc., claiming exemption u/s 10(23C) also. Section
115TD provides that if the Institution loses exemption u/s 10(23C) due
to cancellation of its approval or due to conversion into a
non-charitable organization or other reasons, the market value of all
its assets, after deduction of liabilities, will be liable to tax at 30%
plus applicable surcharge and cess.

5.2 Charitable Trusts claiming exemption u/s 11

Sections
11, 12 and 13 of the Act provide exemption to Charitable Trusts
(Including Religious Trusts), registered u/s 12A, 12AA or 12AB. Some
amendments are made in these and other sections as stated below:

(i)
As stated above, if a Charitable Trust owns any temple, mosque,
gurudwara, church etc., it can treat any contribution received for
repairs or renovation of such place of worship as corpus donation. This
amount should be used for the specified purpose. The unutilized amount
should be invested as provided in section 11(5). This provision will
come into force from A.Y. 2021-22 (F.Y. 2020-21).

(ii)
At present, if a Charitable Trust is not able to utilise 85% of its
income in a particular year, it can apply to the AO for permission for
the accumulation of such income for 5 Years. If any amount out of such
accumulated income is not utilised for the objects of the Trust up to
the end of the 6th year, it is taxable as income in the sixth year. This
provision has now been amended, effective from A.Y. 2023-24 (F.Y. 2022-23),
to provide that if the entire amount of the accumulated income is not
utilised up to the end of the 5th Year, the unutilised amount will be
considered as income of the fifth year and will become taxable in that
year.

(iii) If a Charitable Trust is maintaining accounts on an accrual basis of accounting, it is now provided that any
part of the income which is applied to the objects of the Trust, the
same will be considered as application for the objects of the Trust only
if it is actually paid in that year. If paid in a subsequent year,
it will be considered as application of income in the subsequent year.
This amendment will come into force from A.Y. 2022-23 (F.Y. 2021-22).

(iv)
Section 13 deals with the circumstances in which exemption under
section 11 can be denied to Charitable Trusts. At present, if any income
or property of the Trust is utilised for the benefit of the Author,
trustee or related persons stated in section 13(3), the exemption is
denied to the Trust. Now, effective from A.Y. 2023-24 (F.Y. 2022-23),
this section is amended to provide that only that part of the income
which is relatable to the unreasonable benefit allowed to the related
person will be subjected to tax in the hands of the Charitable Trust.
This tax will be payable at 30% plus applicable surcharge and cess.

(v)
At present, section 13(1)(d) provides that if any funds of the
Charitable Trust are not invested in the manner provided in section
11(5), the Trust will not get exemption u/s 11. This section is now
amended, effective from A.Y. 2023-24 (F.Y. 2022-23), to
provide that the exemption will be denied only in respect of the income
from such prohibited investments. Tax on such income will be chargeable
at 30% plus applicable surcharge and cess.

(vi) Section 12A has been amended, effective from A.Y. 2023-24 (F.Y. 2022-23),
to provide that the Charitable Trust shall maintain its accounts in the
manner as may be prescribed by Rules. These accounts will have to be
audited by a Chartered Accountant.

(vii) In line with the
amendment in section 10(23c) proviso XV, very wide powers are now given,
by amending section 12AB (4), to the Principal CIT to cancel
registration given to a Charitable Trust for claiming exemption. If the
Principal CIT comes to know about specified violations by the Charitable
Trust, he can conduct an inquiry and after giving opportunity to the
Trust, cancel its registration. The term ‘Specified Violations’ is
defined by this amendment.

5.3 Special Rate of Tax
A new section 115BBI has been added, effective from A.Y. 2023-24 (F.Y. 2022-23),
for charging tax at 30% plus applicable surcharge and cess. This rate
of tax will apply to registered Charitable Trusts, Religious Trusts,
Educational Institutions, Hospitals etc., in respect of the following
specified income:

(i) Income accumulated in excess of 15% of the income where such accumulation is not allowed.

(ii)
Where the income accumulated by the Charitable Trust or Institution is
not utilised within the permitted period and is deemed to be the income
of the year when such period expires.

(iii) Income which is not
exempt u/s 10(23c) or section 11 by virtue of the provisions of section
13(1)(d). This will include the value of benefit given to related
persons, income from Investments made otherwise then what is provided in
section 11(5) etc.

(iv) Income which is not excluded from the
total income of a Charitable Trust u/s 13(1) (c). This refers to the
value of benefits given to related persons.

(v) Income which is
not excluded from the total income of a Charitable Trust u/s 11(1) (c).
This refers to income of the Trust applied to objects of the Trust
outside India.

5.4 New Provisions for Levy of Penalty

New
section 271 AAE is added in the Income-tax Act for levy of penalty on
Charitable Trusts and Institutions claiming exemption under sections
10(23C) or 11. This penalty relates to benefits given by the Charitable
Trusts or Institutions to related persons. The new section provides that
If an Institution claiming exemption u/s 10(23C) or a Charitable Trust
claiming exemption u/s 11 gives an unreasonable benefit to the Author of
the Trust, Trustee or other related persons in violation of proviso XXI
of section 10(23C) or section 13(1) (c), the AO can levy penalty on the
Trust or Institution as under:

(i) 100% of the aggregate amount
of income applied for the benefit of the related persons where the
violation is noticed for the first time.

(ii) 200% of the aggregate amount of such income where the violation is noticed again in the subsequent year.

6. INCOME FROM BUSINESS OR PROFESSION

6.1 Section 14A:
At present, expenditure incurred in relation to exempt income is not
allowed as a deduction. There was a controversy as to whether section
14A would apply when there was no income from a particular investment.
This section is now amended effective from A.Y. 2022-23 (F.Y. 2021-22)
to clarify that the disallowance under this section can be made even in
a case where no exempt income had accrued or was received, and
expenditure was incurred. It is also clarified that the provisions of
section 14A will apply notwithstanding anything to the contrary
contained in the Income-tax Act.

6.2 Section 35 (1A):
Section 35 allows deduction of expenditure on scientific research. Under
section 35(1A), such deduction is denied under certain circumstances.
This section is now amended effective from A.Y. 2021-22 (F.Y. 2020-21) to
provide that the donor will not be allowed a deduction in respect of
the donation for research u/s 35 if the donee has not filed a statement
of donations before the specified authorities.

6.3 Section 17: This section is amended effective from A.Y. 2020-21 (F.Y. 2019-20) to
provide that any sum paid by the employer in respect of any expenditure
actually incurred by the employee on medical treatment of the employee
or any of his family members for treatment relating to COVID-19 shall
not be regarded as taxable perquisite. This will be subject to such
conditions as may be notified by the Central Government.

6.4 Section 37(1): At
present, Explanation 1 to section 37(1) provides that any expenditure
incurred for any purpose which is an offence or which is prohibited by
law shall not be allowed as a deduction while computing income under the
head ‘Profits and Gains of Business or Profession’. Now Explanation – 3
is added from A.Y. 2022-23 (F.Y. 2021-22) to clarify that the following types of expenses shall not be allowed while computing the business income of the assessee:

(i)
Expenditure incurred for any purpose which is an offence under, or
which is prohibited by, any law in India or outside India, or

(ii)
Any benefit or perquisite provided to a person, whether or not for
carrying on business or profession, where its acceptance is in violation
of any law or rule or regulation or guidelines governing the conduct of
such person, or

(iii) Expenditure incurred to compound an
offence under any law, in India or outside India. It may be noted that
this amendment may affect the benefits or perquisites provided by
pharmaceutical companies to medical professionals. If any benefit or
perquisite is received by a medical professional from a pharmaceutical
company, the same is taxable as the income of the medical professional
u/s 28 (iv). This will now suffer TDS at 10% of the value of such
benefit or perquisite under new section 194R. Further, it will be
difficult to find out whether a particular benefit is prohibited by law
in a foreign country.

6.5 Section 40(a) (ii): (i) Tax
levied on ‘Profits and Gains of Business or Profession’ is not allowed
as a deduction under this section. In the case of Sesa Goa Ltd vs. JCIT 117 taxmann.com 96,
the Bombay High Court held that the term ‘tax’ will not include ‘cess’
levied on tax. A similar view was taken by the Rajasthan High Court.
This section is now amended retrospectively effective from A.Y. 2005-06 (F.Y. 2004-05),
and it is now provided that the term ‘tax’ shall include any surcharge
or cess on such tax. Thus, no deduction will be allowable for ‘cess’ on
the basis of the above High Court decisions.

(ii) It may be noted
that section 155 has been amended from 1st April, 2022 to provide for
the amendment of the computation of income/loss in a case where
surcharge or cess has been claimed and allowed as a deduction in
computing total income. This amendment is as under:

(a) If the
assessee has claimed the deduction for surcharge or cess as business
expenditure, the AO can rectify the computation of income or loss u/s
154. He can also treat this deduction as under-reported income u/s
270A(3) and levy a penalty under that section. For this purpose, the
limitation period of 4 years u/s 154 shall be counted from 31st March
2022. This will mean that such a rectification order can be passed on or
before 31st March, 2026.

(b) However, if the
assessee makes an application to the AO in the prescribed form and
within the prescribed time, requesting for recomputation of the income
by excluding the above claim for deduction of surcharge or cess and pays
the amount due thereon within the specified time, no penalty under
section 270A will be levied. It appears that interest will also be
payable with the tax.

(iii) This is a retrospective legislation.
The claim for deduction of surcharge or cess may have been made by some
assessees in view of the High Court decision. To levy a penalty u/s 270A
for such a claim made in earlier years is a very harsh provision.

6.6 Section 43B:
This section provides that interest payable on an existing loan or
borrowing from Financial Institutions shall be allowed only in the year
of actual payment. The Supreme Court, in the case of M.M. Aqua Technologies Ltd. vs. CIT reported in 436 ITR 582
held that the interest payable in such a case can be considered to have
been actually paid if the liability to pay interest is converted into
debentures. The Explanation 3C, 3CA and 3CD of section 43B have been
amended from A.Y. 2023-24 (F.Y. 2022-23) to provide that
if such interest payable is converted into debenture or any other
instrument, by which the liability to pay is deferred to a future date,
it shall not be considered as actual payment.

6.7 Section 50: This section was amended by the Finance Act, 2021, from A.Y. 2021-22 (F.Y. 2020-21). Now, an explanation is added from A.Y. 2021-22 to
clarify that reduction of the amount of goodwill of a business or
profession from the ‘block of assets’ as provided in section 43(6) (c)
(ii) (B) shall be deemed to be transfer of goodwill.

6.8 Section 79A:
At present, there is no restriction on the set-off of any loss or
unabsorbed depreciation against undisclosed income detected during a
search or survey proceedings under sections 132, 132A or 133A (other
than 133A (2A)). Now, a new section 79A is added from the A.Y. 2022-23 (F.Y. 2021-22)
to provide that any loss, either of the current year or brought forward
loss or unabsorbed depreciation, cannot be adjusted against the
undisclosed income, which is defined as under:

(i) Any income of
the relevant year or any entry in the books of accounts or other
documents or transactions detected during a search, requisition or
survey, which has not been recorded in the books of accounts or has not
been disclosed to the Principal Chief CIT, Chief CIT, Principal CIT or
CIT before the date of search, requisition or survey, or

(ii) Any
expenditure recorded in the books of accounts or other documents are
found to be false and would not have been detected but for the search,
requisition or survey.

7. TAXATION OF VIRTUAL DIGITAL ASSETS
In
this year’s Budget, no ban has been imposed on dealing in
cryptocurrencies or other similar digital currencies. In para III of the
budget speech, the Finance Minister has stated that “Introduction of
Central Bank Digital Currency (CBDC) will give a big boost to digital
economy. Digital Currency will also lead to a more efficient and cheaper
management system. It is, therefore, proposed to introduce Digital
Rupee, using blockchain and other technologies, to be issued by the
Reserve Bank of India starting 2022-23”.

Further, in Para 131 of
the Budget Speech, the Finance Minister has stated that “There has been a
phenomenal increase in transactions in virtual digital assets. The
magnitude and frequency of these transactions have made it imperative to
provide for a specific tax regime. Accordingly, for taxation of virtual
digital assets, I propose to provide that any income from transfer of
any virtual digital assets shall be taxed at the rate of 30 per cent”.

To implement this decision the following amendments are made in various sections of the Income-tax Act effective A.Y. 2023-24 (F.Y. 2022-23).

7.1 Section 2(47A): This
is a new section which defines the term ‘Virtual Digital Asset’ (VDA)
to mean any information or code or number or token (other than an Indian
currency or a foreign currency) generated through cryptographic means
in or otherwise, by whatever name called, providing a digital
representation of value exchanged with or without consideration with the
promise or representation of having inherent value, or functions as a
store of value or a unit of account including its use in any financial
transaction or investment, but not limited to investment scheme, and can
be transferred, stored or traded electronically. This definition also
includes non-fungible tokens or any other token of a similar nature. It
also includes any other digital asset that may be notified by the
Central Government. This definition comes into force from 1st April,
2022.

7.2 Section 115BBH: This is a new section which comes into force from A.Y. 2023-24. It provides as under:

(i)
Where the total income of an assessee includes any income from transfer
of VDA, income tax on such income is payable at 30% plus a surcharge
and cess. It may be noted that in this provision, no distinction is made
between income from transfer VDA in the course of trading or VDA held
as a capital asset. However, it is clarified that the definition of the
term ‘transfer’ in section 2(47) shall apply whether VDA is a capital
asset or not.

(ii) No deduction in respect of any expenditure
(other than the cost of acquisition) or allowance or set-off of any loss
shall be allowed to the assessee under any provision of the Income-tax
Act in computing income from transfer of such VDA.

(iii) No
set-off of loss from the transfer of the VDA shall be allowed against
income computed under any provision of the Income-tax Act, and such loss
shall not be allowed to be carried forward.

7.3 Section 56(2)(x): Gift
of VDA received by a non-relative will be taxable u/s 56(2) (x) as
‘Income from Other Sources’. If a person receives a gift of VDA of the
aggregate market value exceeding R50,000 or VDA is transferred to him
for a consideration where the difference between the consideration paid
and its market value is more than R50,000, tax will be payable by him as
provided in section 56(2) (x). Amendment in section 56(2) (x) provides
that the expression ‘property’ includes ‘VDA’. The CBDT will have to
frame rules for the determination of market value of VDA for the
purposes of section 56(2) (x).

7.4 Section 194-S: This is a
new section which provides for deduction of TDS @1% from the
consideration for VDA. The provisions of this section are discussed in
Para 3.3 above. This provision comes into force on 1st July, 2022.

7.5 General: In
the Memorandum explaining the provisions of the Finance Bill, 2022, it
is stated that “Virtual digital assets have gained tremendous popularity
in recent times and the volumes of trading in such digital assets has
increased substantially. Further, a market is emerging where payment for
transfer of virtual digital assets can be made through another such
asset. Accordingly, a new scheme to provide for taxation of such virtual
digital assets has been proposed in the Bill”.

Reading the above amendments, some issues arise for consideration.

(i)
The new provisions do not clarify as to under which head the income
from transfer of VDA will be taxable i.e. whether it is ‘Income from
Business’ or ‘Capital Gains’ or ‘Income from Other Sources’.

(ii)
A transfer of VDA in exchange for another VDA is liable to tax. It is
not clear how the market value of the VDA received in exchange will be
determined. The Central Government will have to frame Rules for this
purpose.

(iii) VDA is defined u/s 2(47 A) and this definition
comes into force on 1st April, 2022. A question will arise as to whether
income from transfer of similar VDA prior to 1st April, 2022 will be
taxable and if so whether it will be considered as a ‘Capital Asset’ as
defined in section 2(14). Under this definition, ‘Capital Asset’ means
“property of any kind held by an assessee, whether or not connected with
his business or profession”.

(iv) If income arising from
transfer VDA before 1st April, 2022 is considered taxable, a question
will arise whether the loss in such transactions will be allowed to be
adjusted against other income and carried forward loss will be allowed
to be adjusted against income in subsequent years.

We will have to wait for some clarification from CBDT on all the above issues.

8. CAPITAL GAINS

8.1 Section 2(42C): This
section defines ‘slump sale’. Finance Act, 2021, had widened this
definition to cover a case of transfer of an undertaking ‘by any means’,
which till then was restricted to a case of transfer ‘as a result of
the sale’. There was some doubt about the interpretation of this
provision. Therefore, this definition is now amended from A.Y. 2021-22 (F.Y. 2020-21)
to substitute the word ‘sales’ by the word ‘transfer’. Thus, the
definition now covers a case of transfer of any undertaking by means of a
lump sum consideration without assigning individual values to assets
and liabilities for such transfer.

8.2 Surcharge on Capital Gains: As
stated in Para 2.2 above, a surcharge on tax on long-term capital gains
u/s 111A, 112 and 112 A in the case of Individual, HUF, AOP, BOI etc.
will not exceed 15% of tax from the A.Y. 2023-24 (F.Y. 2022-23).

9. INCOME FROM OTHER SOURCES

9.1 Section 56(2)(x): According
to the Government’s declared policy, amount received by a person for
medical treatment of COVID -19 illness should not be made liable to any
tax. Therefore, section 56(2) (x) has been amended to provide as under:

(i)
Any sum of money received by an Individual from any person in respect
of the medical treatment of himself or any member of his family for any
illness related to COVID -19, to the extent of the expenditure actually
incurred will not be taxable.

(ii) Any amount received by a
member of the family of a deceased person from the employer of the
deceased person will not be taxable.

(iii) An amount up to R10
lakhs received from any person by a member of the family of the deceased
person, whether the cause of death of such person was illness related
to COVID -19 will not be taxable. However, such amount should be
received within 12 months of the date of the death, and such other
conditions as may be notified by the Central Government are satisfied.

It
may be noted that for the purpose of (ii) and (iii), the word ‘family’
is given the meaning as defined in section 10(5). This word will,
therefore, mean (a) the spouse, (b) children of the individual and (c)
parents, brothers and sisters of the Individual or any of them who is
wholly or mainly dependent on the Individual.

The above amendments are made from A.Y. 2020-21 (F.Y. 2019-20)

9.2 Section 68: This
section provides that any sum credited in the books of the assessee
shall be considered as income if the assessee does not offer an
explanation about the nature and source of such sum. Even if the
explanation is offered by the assessee, but the AO is of the opinion
that the explanation offered by the assessee is not to his satisfaction,
the AO can treat such sum as income of the assessee. This section is
amended from A.Y. 2023-24 (F.Y. 2022-23). The amendment
now provides that where the amount received by the assessee consists of
loan or borrowing or otherwise, by whatever name called, the assessee
will have to give a satisfactory explanation to the AO about the source
from which the person in whose name the amount is credited obtained the
money. In other words, the assessee will now have to prove the source of
funds in the hands of the lender. However, this provision will not
apply if the amount is credited in the name of a Venture Capital Company
or a Venture Capital Fund.

It may be noted that this new
provision will create many practical difficulties for the assessee. If
the lender does not co-operate and share the details of the source of
his funds, the assessee borrower will suffer. Further, it is not clear
whether this new provision will apply to borrowings made on or after 1st
April, 2022 or to old borrowing also. There is also no clarity on
whether the assessee will have to prove the source of funds borrowed
from a Financial Institution, Banks or Co-operative Societies etc.

9.3 Dividend from Foreign Company:
At present, dividend income earned by an Indian Company from a Foreign
Company in which it holds 26% or more of the equity share capital is
taxed at the concessional rate of 15%. This provision is contained in
section 115BBD. By amendment of this section from A.Y. 2023-24 (F.Y. 2022-23),
this concession is withdrawn from 1st April, 2022. Thus, such dividends
will be taxed at the normal rate of 30%. However, the Indian Company
will be able to take benefit of deduction u/s 80M if it declares a
dividend out of such dividend from the Foreign Company.

10. ASSESSMENT AND REASSESSMENT OF INCOME

10.1 In the Finance Act, 2021, new
provisions were made for the procedure to be followed for assessment or
reassessment of income including that in the case of a search or
requisition. Sections 147, 148 and 149 were substituted and a new
section 148A was added from 1st April, 2021. The following amendments
are made in these provisions from A.Y. 2022-23 (F.Y. 2021-22):

10.2 Section 132 and 132B
dealing with search and requisition are amended to include reference to
the assessment, reassessment or re-computation under sections 14(3),
144 or 147 in addition to assessment under section 153A.

10.3 Explanation 1
to Section 148 lists items considered as information about income
escaping assessment. Following changes are made in this list:

(i)
One of the item relates to the final objection raised by C&AG. Now
the requirement is that if any ‘Audit Objection’ states that the
assessment for a particular year is not made in accordance with the
provisions of the Income-tax Act, it will become information, and the AO
can issue notice based on such information.

(ii) The scope of the ‘information’ is now extended to the following items:

(a) Any information received under an agreement referred to in section 90 or 90A.

(b)
Any information made available to the AO under the scheme notified u/s
135A, providing for the collection of information in a faceless manner.

10.4 Explanation 2 to
section 148 deals with information with the AO about escapement of
income in cases of search, survey etc. The following changes are made in
these provisions:

(i) Information about any function, ceremony
or event obtained in a survey u/s 133A (5) can now be used for reopening
an assessment u/s 148. This will include any marriage or similar
function.

(ii) The deeming fiction that Explanation 2 to section
148 was applicable for 3 assessment years immediately preceding the
relevant year has been removed.

10.5 The requirement of obtaining approval of any Specified Authority by the AO is modified as under:

(i)
If the AO has passed the order u/s 148A(d) to the effect that it is a
fit case for the issue of notice u/s 148, he is not required to take the
approval of the Specified Authority before issuing a notice u/s 148.

(ii) For serving a show-cause notice on the assessee u/s 148A(b), no approval of the Specified Authority is required.

(iii)
A new section 148B is inserted, providing that the AO below the rank of
Joint Commissioner is required to take the approval of Additional
Commissioner, Additional Director, Joint Commissioner or Joint Director
before passing an order of assessment or reassessment or re-computation
in respect of an assessment year to which Explanation 2 to section 148
applies.

10.6 Section 149(1)(b): This section provides for
extended time limit of 10 years for issuance of notice u/s 148. This
extended time limit applies where the AO has in his possession books of
accounts, documents or evidence to reveal that income represented in the
form of asset which has escaped assessment is of R50 Lakhs or more.
This provision is now amended to provide that the income escaping
assessment should be represented in the form of (a) an asset, (b)
expenditure in respect of a transaction or in relation to an event or
occasion or (c) An entry or entries in the books of account.

Further,
the words ‘for that year’ has been omitted. Thus, the threshold limit
of R50 Lakhs or more need not be satisfied for each assessment year for
which notice u/s 148 is to be issued.

10.7 Section 149(1A):
A new sub-section (IA) is added in section 149 to provide that, in case
investment in such asset or expenditure in relation to such event or
occasion has been made or incurred in more than one year within the 10
years period, a notice u/s 148 can be issued for every such assessment
year.

10.8 Section 148A: It is now provided that the
procedure for issue of a notice under this section will not apply where
the AO has received any information under the scheme notified u/s 135A.

10.9 It is now provided, effective from 1st April, 2021, that restriction in section 149(1) for issuance of a notice u/s 148 for A.Y. 2021-22 or
any earlier year, if such notice could not have been issued at that
time on account of being beyond the time limit as specified in section
149(1)(b) as it stood before 1st April, 2021, shall also apply to notice
under sections 153A or 153C.

10.10 Section 153: This section, dealing with the time limit for completing an assessment, has been amended from 1st April, 2021.
It is now provided that the assessment for the A.Y. 2020-21 (F.Y.
2019-20) should be completed by 30th September, 2022 (within 18 months
of the end of the assessment year).

10.11 Section 153A:
Explanation 1 to this section provides for excluding the period to be
excluded for limitation. This section is now amended from 1st April, 2021
to provide for the exclusion of the period (not exceeding 180 days)
commencing from the date on which search is initiated u/s 132 or
requisition is made u/s 132A to the date on which the books of account,
documents, money, bullion, jewellery or other valuable articles seized
or requisitioned are handed over to AO having jurisdiction over the
assessee. A similar amendment is made in section 153B.

10.12 Section 153B: The time limit for completing assessment u/s 153A relating to search cases have now been removed from 1st April, 2021. In all cases where a search is made on or after 1st April, 2021,
the assessment will be made under sections 143, 144 or 147. Time limit
provided for such assessments will apply. However, in a case where the
last authorization for search or requisition u/s 132/132A was executed
in F.Y. 2020-21, or books/documents/assets seized were handed over to
the AO in F.Y. 2020-21, the assessment in such case for the A.Y. 2021-22
can be made on or before 30th September, 2022.

10.13 Section 271 AAB: This
section provides for the levy of penalty at a lower rate in search
cases if the specified conditions are complied. One of the conditions is
that the assessee should have paid tax on undisclosed income and filed
the return of income declaring the undisclosed income before the
specified date. The definition of ‘specified date’ is now amended from 1st April, 2021 to include the date on which the period specified in the notice u/s 148 expires.

11. FACELESS ASSESSMENTS SCHEME

11.1
Section 92CA deals with the provisions for reference to the Transfer
Pricing Officer. Section 144C deals with reference to Dispute Resolution
Panel. Section 253 deals with the procedure for filing appeals before
ITA Tribunal. Under these sections, power is given to notify a scheme
for faceless procedure for assessments and appeals before 31st March,
2022. Similarly, u/s 255 dealing with the procedure for disposal of
appeals before the ITA Tribunal, the notification for a faceless hearing
can be issued before 31st March, 2023. In all these sections,
amendments are made, and the above time limit for issue of notification
for faceless procedure is now extended up to 31st March, 2024.

11.2 Section 144B dealing with the procedure for faceless assessments has been amended from 1st April, 2022.
The faceless assessment scheme has come into force on 1st April, 2021.
Some amendments are made in section 144B, modifying the procedure under
the scheme. In brief, these amendments are as under:

(i) At
present, the scheme applies to assessments under sections 143(2) and
144. Now, it will also apply to assessments, reassessments and
recomputation u/s 147.

(ii) At present, the time limit for a
reply to a notice u/s 143(2) is 15 days from the receipt of notice. This
time limit is removed. Now, the time limit will be stated in the notice
u/s 143(2).

(iii) The concept of Regional Faceless Assessment Centre is done away with.

(iv)
It is now specified that the Assessment Unit can seek the assistance of
the Technical Unit for (a) determination of Arm’s Length Price, (b)
valuation of property, (c) withdrawal of registration and (d) approval,
exemption or any other matter.

(v) The procedure for Assessment
Unit (AU) preparing the draft assessment order and revising the same on
getting comments has been done away with. Now, AU has to state in
writing if no variations are proposed to the returned income. If
variations are proposed a show-cause notice is to be issued to the
assessee. On receipt of the response from the assessee, the National
Assessment Centre shall direct the AU to prepare a draft order, or it
can assign the matter to the Review Unit.

(vi) After receiving
the suggestions from the Review Unit, the National Assessment Centre has
to assign the case to the same AU which had prepared the draft order.
In the old scheme, the case had to be assigned to another AU. To this
extent, the new provision that the matter goes back to the original AU
which made the draft order is a welcome change.

(vii) In the old
scheme, there was no provision for referring the case for special audit
u/s 142(2A). Now, it is provided that if AU is of the opinion that
considering the complexity of the case, it is necessary to get special
audit done, it can refer the matter to the National Assessment Centre.

(viii)
Under the old scheme, a request for a personal hearing through video
conferencing could be granted only if the Chief Commissioner or Director
General approved the same. This provision is now amended and it is
provided that if the request for personal hearing is made by the
assessee, the Income tax Authority of the concerned Unit has to allow
the same through video conferencing. This is a welcome provision.

(ix)
At present, section 144B(9) provides that the assessment shall be
considered non-est if the same is not made in accordance with the
procedure laid down u/s 144B. This provision is now deleted with retrospective effect from 1st April, 2021. This is very unfair. It removes the safeguard, which ensured that the department would follow the procedure u/s 144B.

(x)
At present, section 144B(10) provides that the function of the
verification unit can be assigned to another verification unit. This
sub-section is now deleted from 1st April, 2022.

12. TO SUM UP

12.1
Contrary to the declared policy of the present government, there are
more than a dozen amendments in the Income-tax Act which have
retrospective effect. In particular, the amendment to disallow surcharge
and cess while computing business income is retrospective and applies
from A.Y. 2005-06. Further, such a claim made by an assessee based on
the High Court decision will be subject to a levy of penalty if the
assessee does not recompute the total income for that year and pay the
tax within the specified time. It is not clear whether interest on the
tax due will be payable. The AO is given time up to 31st March, 2026 to
pass the rectification order u/s 154 and levy penalty u/s 270A. Such
type of retrospective amendment is very harsh and may not stand judicial
scrutiny.

12.2 It is true that there is no increase in the rates
of taxes, and some relief is given to specific entities in the matter
of rates of surcharge. The only new tax levied is on Virtual Digital
Assets (VDA). This is a new type of asset, and some issues will arise
while computing the income from transactions relating to VDAs. The CBDT
will have to clarify issues relating to the valuation and reporting of
transactions.

12.3 Significant amendments were made in the
Finance Act 2020 and 2021 in the provisions relating to Charitable
Trusts and Institutions claiming exemption u/s 10(23c) and 11. This
year, some further amendments are made to these provisions. Some of
these amendments are beneficial to Charitable Trusts and Institutions.
However, the manner in which the amendments are worded creates a lot of
confusion. It is necessary that a separate chapter is devoted in the
Income-tax Act, and all provisions of sections 10(23c), 11, 12, 12A,
12AA, 12AB, 13 etc., dealing with exemption to these Trusts and
Institutions are put under one heading. This chapter should deal with
rate of tax, interest, penalty etc., payable by such Trusts and
Institutions. This will enable the person dealing with Public Trusts and
Institutions to know their rights and obligations.

12.4 The
scope for deduction of tax at source (TDS) has been extended to two more
items. New section 194-R has been added, and TDS provisions will now
apply to the value of benefit or perquisite given to a person engaged in
business or profession. Further, under the new section 194-S, the TDS
provisions apply to the transfer of VDA. These provisions will increase
the compliance burden of assessees.

12.5 Significant amendments
are made in the provisions relating to computation of ‘Income from
Business or Profession’. Now, expenditure incurred in relation to exempt
income will be disallowed even if no exempt income is received.
Further, the value of any benefit or perquisite provided to a person
where acceptance of such benefit or perquisite is prohibited by any law,
rule or guidelines governing the conduct of such person will be
disallowed. This will affect most of the pharmaceutical and other
companies providing such benefits or perquisites to their agents or
dealers.

12.6 Another damaging provision introduced by new
section 79A relates to denial of adjustment of current years or carried
forward loss or unabsorbed depreciation against specified undisclosed
income. This provision comes into force from A.Y. 2022-23 (F.Y.
2021-22).

12.7 The amendment to section 68, putting the burden of
proving the source of the money in the hands of the person from whom
funds are borrowed is another amendment that will increase the
compliance burden of the assessees. Now assessees will have to maintain
evidence about the source of funds in the hands of the lender. This is
going to be difficult.

12.8 A new provision is made in section
139 (8A), allowing the assessee to file a belated return of income
within 24 months after the end of the specified time limit for filing a
revised return. There are several conditions attached to this provision.
Further, interest, fees for late filing, and additional tax is payable.
Reading these conditions, it is evident that such belated return cannot
be filed to claim any relief in tax. Thus, very few persons will be
able to take advantage of this provision.

12.9 Taking an overall
view of the amendments made in the Income-tax Act this year, one can
take the view that it is a mixed bag. There are some retrospective
amendments which are very harsh. There are some amendments which are
with a view to give some relief to assessees but they are attached with
several conditions. In this effort, the Income-tax Act has become more
complex, and the Government’ declared objective to simplify the tax laws
is not achieved.

(This article summarises key direct tax
provisions. Because of the extensive amendments, provisions related to
updated returns, penalties and prosecution, IFSC, appeals and revisions,
and certain other amendments are excluded due to space constraints –
Editor)

shailesh.kwebmaker

THE OTHER 5 TRILLION MARK

In our 75th year of independence, we Indians revisit our collective and individual dreams. As a civilisational nation – the last surviving civilisation – we have to talk honestly about our problems if we want to face them head-on. I thought of calling them the ‘other 5 trillion’, which we need to overcome. One may not be able to quantify accurately but these problems are old, deep rooted, and rancid. The list is not exhaustive and yet it is a drag on the 5 trillion economy dream.

1. Infinite compliances: India is obsessed, almost drunk on compliance. British rule continues through these compliances. Look at Schedule III – which requires converting numbers in thousands, lacs and crores. But GST returns, XBRL, or ITRs require exact numbers filled. Duplication, laws without timelines, discretion, the list is infinite. Charity Commissioner of Maharashtra: One lady sits on a tall bench and ‘passes’ an order if you wish to add a Trustee to a Trust. It’s not her money in the trust, the trust doesn’t even take public funds, it’s a family trust to do Charity, has no immovable property, but she can bully you and ‘take rent’ for approving something as basic as appointing a Trustee. PM has also talked about these matters to Babudom, but nothing much has happened. ‘Government is not a team. It is a loose confederation of warring tribes.’ – Sir Humphrey Appleby.

2. Corruption: It persists. Try and take a refund of CIT(A) order when you have to see a AO. At places where discretion exists, delay and bribe thrive. After taxes and inflation this eats into your earnings and savings every second.

3. Appeasement based on segregation: For votes, politicians do anything. Today, 70-80-90% reservation either persists or is sought. Caste-based, religion-based, social strata based reservation is a form of wholesale manufacturing of vote banks. The idea is to form a group that can bully and cast votes en masse for or against. Merit is secondary or even disregarded.

4. Supremely Slow Court: Broadband speeds have increased, car speeds have increased, but courts? Recently a HC said R10-12 crore fraud amount is not very big (after granting a hearing in 24 hours). Postman Umakant Mishra, after 29 years, was cleared of stealing $ 1 after being suspended for that long. The SC recently said every sinner has a future in case of a rapist-murderer of a four-year-old. Court doors open at odd hours for some when 73,000 cases are pending outside the same door. And to one wealthy lawyer, it charged R1 for contempt of court. Its suo motu notice sense has no parallel. One doesn’t know whether to be aghast, amused or ashamed at the behaviour of this broken pillar of the State.

5. Logic Defying Phenomena: We have towns/stations that glorify murderers – to reach Nalanda, you go to Bhaktyarpur Jn., named after Bhaktyar, who destroyed Nalanda. We have tomb tourism like Humayun and Lodhi tombs around Delhi and elsewhere. We have more taxes than transaction prices on essential things like fuel. We have ‘leaders’ who are lawmakers but do not pay government rents or electricity for years, whereas taxpayers get treatment in accordance with the law. State legalises encroachment to millions with impunity. We have recognised political parties that remember Stalin each year, who killed 9.5 million of his own people. The language of our oppressors is the bridge language for the nation. Even today Income Tax Department asks for address page in foreign passports when most don’t have address page for issuing PAN.

Ease of living and ease of doing business are closer to being a cruel joke than a reality. As we come close to the 75th anniversary called Amrit Mahotsav, we need solutions to survive and thrive. We have come a long way yet the road to be covered is longer. We must aim to surmount this other five trillion mark before we can meaningfully achieve the five trillion dream.

Raman Jokhakar
Editor

shailesh.kwebmaker

Section 23 – Annual Letting Value of house property is to be determined on the basis of municipal rateable value

4 Anand J. Jain vs. DCIT Amarjit Singh (J.M.) and Manoj Kumar Aggarwal (A.M.) ITA No.: 6716/Mum/2018 A.Y.: 2015-16 Date of order: 18th January, 2021 Counsel for Assessee / Revenue: Anuj Kishnadwala / Michael Jerald

Section 23 – Annual Letting Value of house property is to be determined on the basis of municipal rateable value

FACTS
During the previous year relevant to the assessment year under consideration, the assessee owned 19 flats at Central Garden Complex out of which seven were lying vacant whereas the remaining were let out. The assessee, in his return of income, offered an aggregate income of Rs. 1.26 lakhs on the basis of municipal rateable value (MRV). The A.O., applying the provisions of section 23(1)(a), opined that the annual letting value (ALV) shall be deemed to be the sum for which the property might reasonably be expected to be let out from year to year. Therefore, the municipal value was not to be taken as the ALV of the property. He applied the average rate per square metre at which the other 12 flats were let out by the assessee and worked out the ALV at Rs. 64.57 lakhs; after reducing municipal taxes and statutory deductions, he added a differential sum of Rs. 42.57 lakhs to the total income of the assessee.

Aggrieved, the assessee preferred an appeal to the CIT(A) where it relied upon a favourable decision of the Bombay High Court in the case of CIT vs. Tip Top Typography (48 taxmann.com 191) and also on the favourable orders of the Tribunal in its own case for A.Ys. 2009-10 and 2010-11 wherein the A.O. was directed to adopt the municipal rateable value as the ALV of the vacant flats held by the assessee. It was also mentioned that the predecessor CIT(A) has taken a similar view for A.Ys. 2012-13 to 2014-15. The CIT(A) distinguished the facts of the year under consideration by noticing that out of 19 flats, 12 were actually let out and that in the earlier years the A.O. did not make proper inquiry to estimate the rental income, but since this year 12 flats were actually let out, the same would give a clear indication of the rate at which the property might reasonably be expected to be let out. He confirmed the estimation made by the A.O.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The Tribunal noticed that the issue of determination of ALV was a subject matter of cross-appeals for A.Ys. 2013-14 and 2014-15 before the Tribunal in the assessee’s own case vide ITA No. 6836/Mum/2017 & Others, order dated 27th February, 2019 wherein the bench took note of the earlier decision of the Tribunal in A.Y. 2012-13 in ITA Nos. 3887 & 3665/Mum/2017. In the decision for A.Y. 2012-13, the co-ordinate bench after considering the relevant provisions of the Act and also following the decision of the Bombay High Court in Tip Top Typography [(2014) 368 ITR 330] and also Moni Kumar Subba [(2011) 333 ITR 38], upheld the determination of ALV on the basis of the municipal rateable value.

The Tribunal observed that it is the consistent view of the Tribunal in all the earlier years that municipal rateable value was to be taken as the annual rental value. There is nothing on record to show that any of the aforesaid adjudications has been reversed in any manner. The Tribunal held that the distinction of facts as made by the CIT(A) was not to be accepted. Following the consistent view of the Tribunal in earlier years in the assessee’s own case, the Tribunal directed the A.O. to adopt the municipal rateable value as the annual letting value. This ground of appeal filed by the assessee was allowed.

shailesh.kwebmaker

Sections 45, 48 – Extinguishment of assessee’s right in flat in a proposed building is actually extinguishment of any right in relation to capital assets and accordingly compensation received upon extinguishment of rights falls under the head ‘capital gain’

3 Shailendra Bhandari vs. ACIT Rajesh Kumar (A.M.) and Amarjit Singh (J.M.) ITA No.: 6528/Mum/2018 A.Y.: 2015-16 Date of order: 21st January, 2021 Counsel for Assessee / Revenue: Porus Kaka / T.S. Khalsa

Sections 45, 48 – Extinguishment of assessee’s right in flat in a proposed building is actually extinguishment of any right in relation to capital assets and accordingly compensation received upon extinguishment of rights falls under the head ‘capital gain’

FACTS
During the year under consideration the assessee cancelled an agreement entered into for purchase of a flat and received Rs. 2,50,00,000 as compensation along with refund of money already paid towards purchase of the flat amounting to Rs. 10,75,99,999. The said flat was booked by the assessee, as confirmed by the builder, vide a letter of intent dated 9th February, 2010 wherein the terms and conditions for the purchase of the property were duly mentioned. The letter of intent had to be cancelled as the sellers were not allowed to raise the building height up to the level on which the flats were to be constructed. The assessee, after giving various reminders and legal notices to the builders, succeeded in getting a compensation of Rs. 2,50,00,000 along with refund of money already paid, as evidenced by a letter dated 29th March, 2014.

These rights were transferred to the assessee by three persons, viz., Ms Vibha Hemant Mehta, Mrs. Anuja Badal Mittal and Mr. Sunny Ramesh Bijlani, who were shareholders in Kunal Corporation Pvt. Ltd. which was the owner of the plot and was to construct the building after obtaining necessary permissions from the Government authorities.

The A.O. held that the asset for which the letter of intent was issued in favour of the assessee did not exist on the date 9th February, 2010 when the letter of intent was issued by the assessee. The assessee has merely made a deposit with the developers which is refundable to the assessee along with compensation subject to certain terms and conditions. The A.O. also held that when an asset does not exist it is not a capital asset and therefore the assessee is not entitled to claim capital gain on the same. He rejected the claim of the assessee.

Instead of the long-term capital loss of Rs. 3,37,09,596 claimed by the assessee, the A.O. taxed Rs. 2,50,00,000 as income from other sources by holding that the said receipt is not from transfer of capital assets.

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

The aggrieved assessee preferred an appeal to the Tribunal where on behalf of the Revenue it was contended that the letter of intent issued by the builder for the purpose of allotment of flat, which was not in existence on the date of execution of the letter of intent as well as on the date of execution of the letter of intent and also not on the date of cancellation of the said letter of intent, is not an agreement. Since the seller has not followed the provisions of MOFA which are applicable in the state of Maharashtra, the letter of intent cannot be treated as having created any interest, right, or title in a capital asset in favour of the assessee.

HELD
The Tribunal held that the provisions of MOFA cannot regulate the taxability of any income in the form of long-term capital gain / loss which may arise from the cancellation of any letter of intent / agreement which is not registered. The Tribunal held that the assessee has rightly calculated the long-term capital loss upon cancellation of the letter of intent dated 9th February, 2010. It observed that the case of the assessee finds support from the decision of the jurisdictional High Court in the case of CIT vs. Vijay Flexible Containers [(1980) 48 taxman 86 (Bom)] and it is also squarely covered by the decision of the co-ordinate bench of the Tribunal in the case of ACIT vs. Ashwin S. Bhalekar ITA No. 6822/M/2016 A.Y. 2012-13 wherein the Tribunal has held that the extinguishment of the assessee’s right in a flat in a proposed building is actually extinguishment of any right in relation to capital assets and accordingly held that the compensation received upon extinguishment of a right which was held for more than three years falls under the head ‘capital gain’ u/s 45. Following these decisions, the Tribunal set aside the order of the CIT(A) and directed the A.O. to allow the claim of the assessee on account of long-term capital loss.

shailesh.kwebmaker

Extension for conducting special audit u/s 142(2A) cannot be granted by CIT, only the A.O. can grant such extension – Assessment concluded after such extended limitation period shall be considered as void ab initio

15 [2020] 82 ITR (Trib) 399 (Del) ACIT vs. Soul Space Projects Ltd. ITA Nos.: 193 & 1849/Del/2015 A.Ys.: 2007-08 & 2008-09 Date of order: 3rd June, 2020

Extension for conducting special audit u/s 142(2A) cannot be granted by CIT, only the A.O. can grant such extension – Assessment concluded after such extended limitation period shall be considered as void ab initio

FACTS
During assessment proceedings, the A.O. arrived at the conclusion that it was necessary to conduct a special audit u/s 142(2A) of the books of accounts of the assessee. The assessee raised objections to the proposed special audit and the A.O., after rejecting the objections and with the approval of the CIT, ordered a special audit in accordance with the provisions of section 142(2A). Thereafter, the Special Auditor requested for extension of time period and the A.O. forwarded this request to the CIT. The CIT granted extension of time. The assessments were completed after limitation period on account of the extension granted for special audit.

The assessment orders were challenged before the CIT(A) which provided relief to the assessee on merits. The orders of the CIT(A) were challenged by the Revenue before the Tribunal and the assessee filed cross-objections raising the issue of limitation in completing the assessment.

Before the Tribunal, the assessee argued that as per the proviso to section 142(2A) it was only the A.O. who had the power to extend the time period for conducting the audit; hence, the extension granted by the CIT was legally invalid. It was argued that the exercise of the statutory power of an authority at the discretion of another authority vitiates the proceedings.

On the other hand, the Department contended that the A.O. had applied his mind and was satisfied that the matter required extension; however, the extension application was forwarded only for the administrative approval of the CIT; even otherwise, since the CIT was the approving authority for special audit, therefore his involvement for extension of time as per the proviso was inherent. The Revenue argued that since on a substantial basis the requirement of the proviso to section 142(2A) was met, just on account of administrative approval of the CIT for sanctioning the extension, it should not vitiate the extension of time for the special audit.

HELD
The issue before the Tribunal was whether or not the action of the CIT in granting an extension for a further period u/s 142(2A) was legally valid.

The Tribunal held that the proviso to section 142(2A) clearly provides that the A.O. shall extend the said time period if the conditions as mentioned in the said proviso are satisfied. While the initial direction is to be given with the approval of the CCIT / CIT, however, for extension it is only the A.O. who has to take a decision for extension, the sole power to extend vests only with him.

There was no need for the higher authorities to be involved in the issue of extension. It may be an administrative phenomenon to inform the CIT about the extension, but statutorily that power is vested with the A.O.

The Tribunal held that the statutory powers vested with one specified authority cannot be exercised by another authority unless and until the statute provides for the same. The statute has accorded implementation of various provisions to specified authorities which cannot be interchanged. A power which has been given to a specified authority has to be discharged only by him and substitution of that authority by any other officer, even of higher rank, cannot legalise the said order / action.

Accordingly, it was held that the extension given by the CIT was beyond the powers vested as per the statute and therefore the assessment completed after the due date was void ab initio.

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Section 147 – Reopening of assessment – A.O. to provide complete reasons as recorded by him to the assessee and not merely an extract of reasons

14 [2020] 82 ITR(T) 235 (Del) Wimco Seedlings Ltd. vs. Joint CIT ITA Nos.: 2755 to 2757 (Delhi) of 2002 A.Ys.: 1989-90 to 1991-92 Date of order: 22nd June, 2020

Section 147 – Reopening of assessment – A.O. to provide complete reasons as recorded by him to the assessee and not merely an extract of reasons

FACTS
The assessee was a company engaged in the business of providing consultancy services in the field of agricultural forestry plants by undertaking research and development (R&D) activities. The A.O. had initiated reassessment proceedings u/s 147 for A.Ys. 1989-90 to 1991-92 and passed the order u/s 143(3) r.w.s. 147. These orders were challenged by the assessee and the matter went up to the Delhi High Court which remanded the appeals to the ITAT for a fresh adjudication on all issues, including on the aspect of reassessment.

In the remanded appeals, the assessee had challenged the reopening of the assessment proceedings u/s 147 for A.Ys. 1989-90 to 1991-92 on various grounds wherein the first ground of appeal was that the reasons provided by the A.O. in the course of reassessment proceedings and the reasons filed by the Department before the Delhi High Court were different.

HELD
One of the disputes arising in this case was whether while initiating reassessment proceedings the A.O. is supposed to provide complete details of reasons recorded and not merely a few extracts of the said reasons so that the assessee can prepare its defence effectively against the proposed reopening of the assessment. It was held that in all circumstances the A.O. is supposed to provide the complete reasons recorded for reopening of the assessment to facilitate the assessee to raise appropriate objections to the reopening. It cannot be the case of the Revenue that it gives a few extracts of the reasons to the assessee to defend it and when cornered before the higher authorities, the Revenue comes out with the detailed reasons recorded by the A.O. The reasons produced before the High Court were quite different from the reasons provided to the assessee and hence the ITAT held the reassessment proceedings to be invalid and quashed the assessment orders.

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Section 56(2)(vii) r.w.s. 2(14) – The term ‘property’ has been defined to mean capital asset, namely, immovable property being land or building or both and hence where immovable property does not fall in the definition of capital asset, it will not be subject to the provisions of section 56(2)(vii)

13 [2020] 82 ITR (T) 522 (Jai) Prem Chand Jain vs. Asst. CIT ITA No.: 98 (JP) of 2019 A.Y.: 2014-15 Date of order: 8th June, 2020

Section 56(2)(vii) r.w.s. 2(14) – The term ‘property’ has been defined to mean capital asset, namely, immovable property being land or building or both and hence where immovable property does not fall in the definition of capital asset, it will not be subject to the provisions of section 56(2)(vii)

FACTS

The assessee had purchased two plots of land during the year claiming these to be agricultural land. The sale consideration as per the respective sale deeds was Rs. 5,50,000 and their stamp duty value [SDV] as determined by the Stamp Duty Authority amounted to Rs. 8,53,636; therefore, there was a difference to the tune of Rs. 3,03,636. The A.O. invoked the provisions of section 56(2)(vii)(b) and held that agricultural land falls within the definition of property and, thus, added the differential amount under the head other sources. The CIT(A) upheld the addition. Consequently, the assessee filed an appeal before the ITAT.

HELD
The dispute in this case was whether agricultural land was to be included in the definition of immovable property and whether it was covered by the provisions of section 56(2)(vii)(b). It was the contention of the Department that there was no express exclusion provided for agricultural land from the operation of section 56(2)(vii). But it was submitted on behalf of the assessee that vide the Finance Act, 2010 in clause (d) in the Explanation, in the opening portion, for the word ‘means—‘ the words ‘means the following capital asset of the assessee, namely:—’ were substituted with retrospective effect from 1st October, 2009. It was further submitted that the substitution of the words ‘means’ for the words ‘means the following capital asset of the assessee, namely’ made the intention of the Legislature very clear, that henceforth the deeming provision of 56(2)(vii)(b) would apply in case of those nine specified assets, if and only if they were capital assets.

The ITAT referred to the provisions of clause (d) of the Explanation to section 56(2)(vii) where the term ‘property’ was defined to mean capital asset of the assessee, namely, immovable property being land or building or both. Hence, the ITAT held that if the agricultural land purchased by the assessee did not fall in the definition of capital asset u/s 2(14), they cannot be considered as property for the purpose of section 56(2)(vii)(b). The ITAT remanded the matter to the A.O. to determine whether or not the agriculture land so acquired falls in the definition of capital asset. It was further concluded that where it is determined by the A.O. that the agricultural land so acquired doesn’t fall in the definition of capital asset, the difference in the SDV and the sales consideration cannot be brought to tax under the provisions of section 56(2)(vii)(b) and relief should be granted to the assessee.

Further, it was also held that where the assessee had objected to the adoption of SDV as against the sale consideration, the matter should be referred by the A.O. to the Departmental Valuation Officer [DVO] for determination of fair market value.

Editorial Note:
In ITO vs. Trilok Chand Sain [2019] 101 taxmann.com 391/174 ITD 729 (Jaipur-Trib), the Tribunal had upheld the applicability of section 56(2)(vii) to the purchase of agricultural land. The decision in Trilok Chand Sain was not referred to by the ITAT in the above case. However, in another decision in Yogesh Maheshwari vs. DCIT [2021] 125 taxmann.com 273 (Jaipur-Trib), the ITAT, after considering the decision of co-ordinate benches at Pune in Mubarak Gafur Korabu vs. ITO [2020] 117 taxmann.com 828 (Pune-Trib) and at Jaipur in ITO vs. Trilok Chand Sain (Supra) and this decision held that if the agricultural land purchased by the assessee is not a capital asset, the provisions of section 56(2)(vii)(b) are not applicable.

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Section 56(2)(viib) – Issue of shares at face value to shareholders of amalgamating company, in pursuance of scheme is outside the ambit of section 56(2)(viib)

12 126 taxmann.com 192 DCIT Circle 3(1) vs. Ozone India Ltd. IT Appeal No. 2081 (Ahd) of 2018 A.Y.: 2013-14 Date of order: 27th January, 2021

Section 56(2)(viib) – Issue of shares at face value to shareholders of amalgamating company, in pursuance of scheme is outside the ambit of section 56(2)(viib)

FACTS
The assessee company was amalgamated with another company (KEPL) and in the process all the assets (except land) and all the liabilities of KEPL were taken in the books of the assessee at book value. Land parcels were taken at revalued price. The excess value of net assets vis-à-vis corresponding value of shares issued towards consideration for amalgamation was thus credited in the books of the assessee company as ‘capital reserve’.

The A.O. observed that the assessee received assets worth Rs. 60.26 crores and liabilities worth Rs. 6.05 crores of the amalgamating company, i.e., KEPL. Thus, the assessee received net assets worth Rs. 54.21 crores against the corresponding issue of shares having face value of Rs. 15 crores to the shareholders of KEPL. The A.O. taxed the excess net assets worth Rs. 39.21 crores received on account of amalgamation and credited as capital reserve of the amalgamated company, as being excess consideration for issue of its shares under the provisions of section 56(2)(viib). On appeal to the CIT(A), he held that the provisions of section 56(2)(viib) were not applicable and reversed the additions made by the A.O. Aggrieved, the Revenue preferred an appeal with the Tribunal.

HELD
The issue of shares at ‘face value’ by the amalgamated company (assessee) to the shareholders of the amalgamating company in pursuance of the scheme of amalgamation legally recognised in the Court of Law is outside the ambit of section 56(2)(viib). Section 56(2)(viib) creates a deeming fiction to imagine and fictionally convert a capital receipt into revenue income and its application should be restricted to the underlying purpose. Further, section 56(2)(viib), when read in conjunction with the Memorandum of Explanation to the Finance Bill, 2012 and CBDT Circular No. 3/2012 dated 12th June, 2012, is to be seen as a measure to tax hefty or excessive share premium received by private companies on issue of shares without carrying underlying value to support such premium.

Thus, the provisions of section 56(viib) would not be applicable where the assessee company has admittedly not charged any premium at all and the shares were issued at face value.

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Section 28 – Loss arising on capital reduction by a subsidiary company in whose shares investment was made for purpose of business of assessee, for setting up supply chain system and manufacturing units in global market, is a business loss

11 TS-189 ITAT-2021 (Ahd) DCIT vs. GHCL ITA Nos.: 1120/Ahd/2017 & CO 29/Ahd/2018 A.Y.: 2012-13 Date of order: 5th March, 2021

Section 28 – Loss arising on capital reduction by a subsidiary company in whose shares investment was made for purpose of business of assessee, for setting up supply chain system and manufacturing units in global market, is a business loss

FACTS
The assessee invested in the share capital of its subsidiary, namely, Indian Britain BV consisting of 2,285 shares @ Euro 100 each in A.Y. 2006-07. During the year under consideration, the said subsidiary reduced its share capital due to heavy losses. Consequently, the number of shares of the assessee company was reduced to 1,85,644 from 2,21,586 shares acquired in A.Y. 2006-07. Due to the aforesaid capital reduction, the assessee company incurred a loss of Rs. 99.89 crores on investment made in the equity shares of Indian Britain BV. The assessee claimed long-term capital loss of Rs. 157,97,38,428. In the course of assessment proceedings, it revised its claim of loss to Rs. 99,89,96,245 and claimed that loss on account of capital reduction be allowed as a business loss while computing income chargeable to tax under the head ‘profits and gains from business and profession’ on the ground that investment in the subsidiary was made for the purpose of business of the assessee company for setting up of a supply chain system and manufacturing units in the global market, i.e., overseas.

The assessee submitted that it was incorporated in 1983 and started its soda ash manufacturing in Gujarat in 1988. It entered the textile business in 2001. The entire investment in the wholly-owned subsidiary Indian Britain BV was made by the assessee acquiring global units of a soda ash manufacturing and textile business chain as a measure of commercial expediency to further its business objective. In its desire for expansion in the overseas market, the assessee looked for various acquisitions of home textile businesses in the U.S. and retail chains in the U.K. In this effort at expansion, after setting up of the Vapi home textile plant it showed that Indian products can be sold in the U.S. and the U.K. and, as such, India could become the processing hub for home furnishing textile items.

The A.O. rejected the claim made by the assessee in the course of the assessment proceedings by relying on the decision of the Supreme Court in Goetze (India) Ltd. vs. CIT (157 taxman 1).

Aggrieved, the assessee preferred an appeal to the CIT(A) who adjudicated the issue in favour of the assessee.

HELD
The Tribunal observed that it has adjudicated the issue determining the nature of transaction relating to business loss of acquiring of Rosebys Retail chain in the appeal of the Revenue vide ITA No. 976/Ahd/2014 for A.Y. 2009-10 wherein business loss allowed by the DRP in favour of the assessee was sustained on the ground that the assessee had acquired Rosebys Operation Ltd. to expand its textile business operation globally based on a study carried out by KSA Tech Pak, a renowned global consultant.

The Tribunal observed that:

(i) it is an undisputed fact that the assessee acquired S.C. Bega UPSAM (renamed as GHCL UPSAM Ltd.) in Romania for soda ash manufacturing and similarly acquired Rosebys U.K. Ltd. in the U.K. and Ban River Inc. in the U.S. to expand its home textile business as the company was having plants for textile manufacturing at Madurai and Vapi. The purpose of investment in the subsidiaries was to expand its business globally. After such acquisition, the sales and export shot up substantially and international concerns started taking the company’s products even after reduction in shares and liquidation of the subsidiary Indian Britain B.V. The assessee had explained its business expansion by making investment in a subsidiary company in Netherland from a commercial angle;

(ii) before the CIT(A), the assessee made a detailed submission demonstrating that loss claimed on account of investment in shares of the wholly-owned subsidiary company was a business loss. The assessee gave a detailed submission pointing out that there was recession in Europe and the U.S. Due to continued financial difficulty and other diverse factors, its subsidiaries incurred huge losses and became sick units. The assessee submitted to the CIT(A) that due to huge loss, its subsidiary company, Indian Britain BV passed a resolution to reduce its share capital of Euro 1,85,64,400 (1,85,644 shares) to 1,85,45,835.60 (1,85,644 shares) out of 2,21,586 shares so that such amount can be set off against the accumulated deposit. This resulted in loss amounting to Rs. 99,89,96,245 due to reduction in the value of the share of its subsidiary company.

The Tribunal held that the assessee has made investments in the subsidiary company for business development out of commercial expediency and thus on reduction of capital of the said subsidiary the loss incurred in the value of shares was in the nature of business loss. In the light of the facts and findings reported in the decision of the CIT(A), the Tribunal did not find any infirmity in the decision of the CIT(A) in allowing the losses on reduction in value of shares on investment in the subsidiary company as business losses in the hand of the assessee company. This ground of the appeal of the Revenue was dismissed.

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Section 115JB – Provision made for Corporate Social Responsibility, in accordance with the guidelines issued by the Department of Public Enterprises, constitutes an unascertained liability and needs to be added back while computing ‘book profits’ when how the amount is to be spent has neither been determined nor specified by the assessee

10 TS-205 ITAT-2021 Delhi Pawan Hans Ltd. vs. DCIT A.Y.: 2014-15 Date of order: 18th March, 2021

Section 115JB – Provision made for Corporate Social Responsibility, in accordance with the guidelines issued by the Department of Public Enterprises, constitutes an unascertained liability and needs to be added back while computing ‘book profits’ when how the amount is to be spent has neither been determined nor specified by the assessee

FACTS
The assessee, a public sector undertaking, filed its return of income for A.Y. 2014-15 declaring its total income to be a loss of Rs. 1,89,90,55,165 and paying taxes u/s 115JB on a declared book profit of Rs. 66,18,51,561. In the course of assessment proceedings, the A.O. noticed that the assessee has created a provision for Corporate Social Responsibility (CSR) in its books of accounts. The A.O. held that the said provision was an unascertained liability as the assessee had only created the provision but where the amount was to be spent was unascertained. He rejected the assessee’s contention that the provision had been created on the basis of the guidelines issued by the Department of Public Enterprises (DPE) which the assessee was bound to follow. The A.O. disallowed the sum of Rs. 35,09,480 being provision of CSR u/s 115JB considering it as an unascertained liability.

Aggrieved, the assessee preferred an appeal to the CIT(A) who confirmed the action of the A.O. who, while holding the disallowance to be justified, noted that the guidelines issued by the DPE were not the determinative factor to decide the allowability of the provisions.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The essential question before the Tribunal was whether or not the provision for CSR as made by the assessee amounting to Rs. 35,09,480 can be considered as an ascertained liability. The Tribunal noted that the assessee has made the impugned provision in terms of the calculation provided as per the DPE guidelines. However, although the amount to be provided towards meeting the liability of the CSR expenditure has been quantified in accordance with the said guidelines, how the amount is to be spent has neither been determined nor specified by the assessee. Considering the meaning of the word ‘ascertained’ as explained by dictionaries, the Tribunal held that, at best, it is just an amount which has been set aside for being spent towards CSR but without any further certainty of its end-use. Thus, it cannot be said that the liability is an ascertained liability. The decisions relied upon on behalf of the assessee were held to be distinguishable on facts as in those cases the nature / mode of expenditure ear-marked for CSR spending was very much determined and specified, i.e., the nature / mode of expenditure was ‘ascertained’. The Tribunal dismissed the ground of appeal filed by the assessee.

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Section 263 – A non est order cannot be erroneous and prejudicial to the interest of the Revenue – Assessment order passed without jurisdiction is bad in law and needs to be quashed – Order passed u/s 263 revising such an order is also bad in law

9 2021 (3) TMI 1008-ITAT Delhi Shahi Exports Pvt. Ltd. vs. PCIT ITA Nos.: 2170/Del/2017 & 2171/Del/2017 A.Y.: 2008-09 Date of order: 24th March, 2021

Section 263 – A non est order cannot be erroneous and prejudicial to the interest of the Revenue – Assessment order passed without jurisdiction is bad in law and needs to be quashed – Order passed u/s 263 revising such an order is also bad in law

FACTS
In both the appeals filed by the assessee, it raised an additional ground challenging the jurisdiction of the PCIT to review and revise the order passed by the A.O. u/s 153C which assessment order itself was illegal and bad in law due to invalid assumption of jurisdiction as contemplated u/s 153A/153C.

For A.Y. 2008-09, the A.O. on 30th March, 2015 framed an order u/s 153A read with sections 153C and 143(3) wherein the additions made while assessing the total income u/s 143(3) were repeated and consequently the total income assessed was the same as that assessed earlier in an order passed u/s 143(3).

The PCIT invoked provisions of section 263 and set aside the assessment order dated 30th March, 2015 on the ground that after the merger of Sarla Fabrics Pvt. Ltd. with Shahi Exports Pvt. Ltd. whatever additions were made in the hands of Sarla Fabrics Pvt. Ltd. were to be assessed in the hands of Shahi Exports Pvt. Ltd.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD
The Tribunal noted that since the income assessed in an assessment framed u/s 153A read with sections 153C and 143(3) was the same as that assessed earlier in an order passed u/s 143(3), the additions made had no link with incriminating material found at the time of the search. The Tribunal noted the ratio of the decision of the Delhi High Court in the case of CIT vs. Kabul Chawla in 380 ITR 573. In view of the ratio of the decision of the Apex Court in the case of Singhad Technical Educational Society (397 ITR 344) holding that in the absence of any incriminating material no jurisdiction can be assumed by the A.O. u/s 153C, the Tribunal quashed the assessment framed u/s 153C by holding it to be without jurisdiction and, therefore, bad in law.

In view of the decision of the Supreme Court in the case of Kiran Singh & others vs. Chaman Paswan & Ors. [(1955) 1 SCR 117] holding that the decree passed by a Court without jurisdiction is a nullity, the Tribunal held that the assumption of jurisdiction u/s 263 in respect of an assessment which is non est is also bad in law as a non est order cannot be erroneous and prejudicial to the interest of the Revenue.

The Tribunal quashed the order framed u/s 263 on the principle of sublato fundamento cadit opus, meaning that in case the foundation is removed, the super structure falls. In this case, since the foundation, i.e., the order u/s 153C has been removed, the super structure, i.e., the order u/s 263, must fall.

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Section 68 – Once the total turnover of the assessee is much more than the total cash deposit in the bank account, no addition is called for on account of unexplained cash deposit in said account

8. 2021 (3) TMI 1012-ITAT Delhi Virendra Kumar vs. ITO ITA No.: 9901/Del/2019
A.Y.: 2011-12 Date of order: 24th March, 2021

Section 68 – Once the total turnover of the assessee is much more than the total cash deposit in the bank account, no addition is called for on account of unexplained cash deposit in said account

FACTS
The assessee is an individual who derives his income from wholesale business. The assessment for A.Y. 2011-12 was reopened on the basis of information that he had deposited Rs. 12,07,200 in cash in his savings bank account with ICICI Bank Ltd. during the F.Y. 2010-11. In response to the said notice u/s 148, the assessee furnished his return of income on 16th October, 2018 declaring the total income at Rs. 1,57,440. In the course of reassessment proceedings, the A.O. asked the assessee to explain the source of deposit. He observed that cash from different places like Delhi, Jaipur and Narnaul was deposited in the account. In the absence of any satisfactory explanation, the A.O. held that the assessee has no valid and genuine explanation with regard to the cash deposit of Rs. 8,57,200 after giving benefit of Rs. 3,50,000.

Aggrieved, the assessee preferred an appeal to the CIT(A) where it was contended that full details were given before the A.O., stating that most of the cash deposit was from sale receipts and an amount of Rs. 3,50,000 was taken from his brother. The complete break-up of the cash deposit in the account was filed before the A.O. and, therefore, the addition made by the A.O. was not justified. The CIT(A), after considering the remand report of the A.O. and the rejoinder of the assessee to the remand report, sustained an addition of Rs. 3,62,000 being cash deposit of Rs. 3,16,000 at Jaipur, Rs. 15,000 at Jamnagar and Rs. 36,000 at Delhi, holding the same to be not out of regular sale.

The aggrieved assessee then preferred an appeal to the Tribunal where it was contended that he has declared gross receipt of Rs. 19,25,140 and has offered income u/s 44AD by applying the net profit rate of 8.16%. Therefore, once the gross receipts are accepted and not disputed and such gross receipt is much more than the total deposits in the bank accounts, no addition is called for merely by stating that the deposits are not out of sale proceeds.

HELD
The Tribunal noted that:
(i) The A.O. accepted an amount of Rs. 3,50,000 received by the assessee as gift from his brother and made an addition of Rs. 8,57,200 on the ground that the assessee could not successfully discharge his onus by providing evidence in support of the cash deposits;
(ii) Of the addition of Rs. 8,57,200 made by the CIT(A), it has already given relief to the extent of Rs. 4,90,200 and the Revenue is not in appeal before the Tribunal;
(iii) The CIT(A) sustained the addition of Rs. 3,67,000 on the ground that the assessee could not substantiate with evidence of sales the cash deposits made at Jamnagar, Delhi and Jaipur;
(iv) The assessee did furnish explanations about the deposits made at Jamnagar and Jaipur.

The Tribunal held that once the total turnover of the assessee is much more than the total cash deposit in the bank account (in this case sales is 227% of the cash deposit), no addition is called for on account of unexplained cash deposit in the bank account. The explanation of the assessee appears to be reasonable. The Tribunal held that the CIT(A) is not justified in sustaining the addition of Rs. 3,67,000, it set aside the order of the CIT(A) and directed the A.O. to delete the addition.

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YOUTUBE – HOW TO USE IT AS A BRANDING TOOL

HOW YOUTUBE CAN BECOME YOUR DIGITAL BRAND

Since its launch in 2005, YouTube has emerged as a powerhouse of reach and search engine optimisation (SEO). With more than two billion users and 30 million visits a day, YouTube has moved branding from video over static content. Gone are the days when a Facebook post, a tweet or newsletters to clients would suffice. Today, YouTube is no longer regarded as an entertainment site but a portal for self-education and branding.

Let us take a simple example – Your client calls and asks for simple steps to file his GST return. You prepare a four-page document spending a full day writing the same and share it with your client. The client now has to read the document and follow the steps in it and then visit the GST portal and try them out for himself to understand each step.

Alternatively, what can be far more valuable both to you and to the client is a screen recording the steps on the GST portal, making a video and sharing it with the client. You would have spent just ten minutes on it and the client would be more comfortable watching the video.

It is a well-known fact that visuals work better than text for both the consumer and the creator. Taking advantage of the visuals, professionals can build a brand for themselves that will have global reach. And if you are still not convinced that YouTube is ‘the next thing’ that you should choose for branding your firm, the following pointers may help convince you:

* YouTube is great in improving your SEO: The YouTube channel works as a second site and offers room for you to describe yourself. Additionally, you may also describe each video with tags to optimise search results and reach maximum people. Tagging videos for SEO purposes gives an advantage of being found in general.
* Global Audience: YouTube is analogous to Google or Bing where users visit to find useful tutorials, explanation videos, product reviews and so on.
* Posting on YouTube will help people find you on Google, which ultimately does the branding for you without you using any of the pull modes.
* Videos build a brand for you: Videos help humanise your brand. They bring it to life, taking your message from flat and static to dynamic and engaging. Videos help your brand build trust and authority in a unique way. If brands really want to connect with people, videos simply have to be a part of their digital marketing plans because videos capture our attention better than text and images.

Now that we have convinced you how important it is to have a YouTube channel for your brand, let us help you get started with some tips on launching your YouTube channel.

SETTING UP A BUSINESS YOUTUBE ACCOUNT
While almost all social media requires users to create an account to access their content, YouTube does not have any such requirement. A user can view its contents without having an account, but to upload your content you need an account. Membership is only required to view videos flagged as adult content. You can follow these steps to create your business YouTube account:

(i) Sign in to your company’s Google account.
(ii) Click on your Google account’s avatar (profile picture). You’ll find this in the top right corner. It’s a small circle containing your profile picture.
(iii) Click on ‘Your channel.’ It’s the top option in the first batch of icons.
(iv) Choose ‘Use a business or other name.’ You’ll need to select this option to get started with a business YouTube account. You can then enter your company’s name.
(v) Click ‘Create’ – and you have a business YouTube account!

In the top right-hand corner of the page, there are four buttons. The first one is an icon of a video camera that directs you to the page where you upload a video. The next icon is for YouTube apps. After that there is an icon for notifications and messages; it notifies you of your account activity, such as a new like or comment. The one closest to the right-hand side, which is an icon of your profile picture, will direct you to your account information pulled from Google.

CUSTOMISING YOUR YOUTUBE PROFILE AND VERIFYING YOUR CHANNEL
Once you’ve signed up for YouTube, you’ll need to customise your profile with your business’s information. Every user is assigned a channel according to the username and you will be given a specific URL so that other people can find your channel through a direct link – but you will need to do more than the basics to stand out from the competition.

A. Customise your channel
1. Add channel art;
2. Fill in your business info;
3. Create a channel trailer: While optional, a channel trailer (a brief video that introduces viewers to the content they’ll find on your YouTube channel) is an excellent customisation option to increase YouTube viewer engagement. Once you add this trailer, it will appear on your account’s homepage when viewers visit, helping to reel them in and acquaint them with your brand.

B. Interacting with others on YouTube
There are several ways to interact with other YouTube users:
(a) Comments and replies to the comments,
(b) Likes: If the channel likes are public, it works as a playlist for the channel,
(c) Subscription: The best way to get users,
(d) Playlists: You can organise related content together using the site’s playlist feature. If you choose to publicise your playlists, they will appear on your channel’s page below your uploaded content.
(e) Sharing: The site’s social widget allows users to share videos on other social media networks such as Twitter, Facebook, Google Plus, Blogger, Reddit, Tumblr, Pinterest and LinkedIn.

C. Verifying your YouTube channel
How will you know if a channel is verified or not? There will be a small checkbox which indicates a verification badge next to the channel’s name. To apply for verification, your channel must have 100,000 subscribers.

D. YouTube Live
Just like Facebook Live, YouTube has its own live-streaming feature. Broadcasts are usually oriented around news or sports but now many speakers have started taking their sessions on YouTube Live. And, many apps like Zoom allow internal integration where you can simply do a zoom meeting and live-stream it on YouTube.

STRATEGIES FOR BRANDING ON YOUTUBE
YouTube, like almost any other social media, is a lot about how many views you generate and how active is your audience. YouTube promotes channels and videos through its own unique Machine Learning Algorithm. There are no direct hacks available to achieve that but as always there is some smart work and a few tips which you can try to generate more views and create a successful channel.

Share videos on other social media platforms:
Link back to your videos whenever possible on your website and other social media networks. But don’t stop at direct video links. Link back to your channel so that your audience can see what it looks like and have the chance to subscribe.

Just uploading a video and sharing it on social media is not enough. You should have a proper video strategy on how you want to target your audience. For example, a video explaining GST3B around the due date will give you more views than on normal days.

Use relevant keywords in a video’s title, tags and description:
Experiment with different titles and descriptions. Selecting relevant keywords to increase hits is a common SEO strategy of marketers on any social networking site. It helps audiences find content that interests them. A quick exercise would be to watch one of your company’s videos from the beginning and to create a list of relevant words and phrases as you watch it.

Engage with similar content uploaded by other users:
Like and comment on videos uploaded by other users. Not only might those users stumble upon your videos and channel, but anyone else who sees that comment or like might do so as well. Do this with videos that have a similar topic, interest or theme as yours to attract new viewers.

Display content uploaded by other users:
In addition to liking and commenting on other users’ videos, you can highlight featured channels and your liked videos on your own account. In doing so, you show that you’re active in your industry’s YouTube community and direct traffic – a much-needed internet commodity – to other YouTube users in your realm. Be sure to highlight videos that are relevant to your viewer base and not uploads from your direct competitors.

Curate playlist:
If any of your videos follow a consistent theme, organise them together. Perhaps you upload a video every Friday morning; you could compile all those videos into a ‘Friday series’ playlist. Your playlists will appear on your channel’s page, right below your uploaded videos.

Upload content regularly – MOST IMPORTANT:
Especially if you’ve developed a decent pool of subscribers, viewers will be counting on you to create, edit and upload new content. This adds relevance to your brand. This also applies to any other website where users can follow and engage with your content.

Use clickable links to reference other content:
At the end of videos, you’ll notice that many videos reference previous, relevant or even newer content with a clickable link inside the video. You can add these while editing your video in the site’s video manager. This feature can also link to any pages or sites your video covers.

Use YouTube stories:
YouTube recently created YouTube stories, which are similar to Snapchat or Instagram stories. A ‘story’ is a collection of short videos that can remain visible for a day or until they’re deleted. It gives good visibility.

PERSONAL (FIRM) BRANDING ON YOUTUBE
Creating a brand for yourself and your firm is what you should primarily look at when going to YouTube and not to get clients or monetise. In the craving for more reach and gaining clients (which at first shouldn’t be the intent), the essence of branding should not be lost. However, there are still ways in which you may have a personal brand on YouTube.

Stick to your niche:
At first, find people you want to create your brand within. Your content should definitely be curated accordingly. For example, if you wish to showcase yourself as a GST expert, it is very important to regularly post videos on that topic. Diverging topics for the sake of gaining followers will not help in any way. The audience should be relevant and engaging and not more.

Call to action:
The Code of Ethics doesn’t allow us to mention contact or personal details in the educational video. However, the video description section is something that you may use to let people know how to reach you in case they have any queries. You may also use your profile to have contact details and email id or links to your professional social media profiles. This will make it easier for the viewer to reach out to you.

Start and end page:
Having a really good start and end page is as important as the content of the video. This is your chance to brand for yourself. For the end page, you may consider giving references to other videos which makes it convenient for the viewers to know where they will find their answers.

CONCLUSION
If used with correct strategies and efforts (which we have tried and put together in this article), YouTube can do branding for you and your firm (without, of course, in any way violating the Code of Ethics). However, it is also important to note that we do not violate any of the clauses in the COE. [For example, as per Clause 2.14.1.6(iv) – Q, the educational video should not make any reference to the CA firm and should not contain contact details or website in the video. However, your channel page may have such details in the description.]

shailesh.kwebmaker

CHANGES IN PARTNERSHIP TAXATION IN CASE OF CAPITAL GAIN BY FINANCE ACT, 2021

A. INTRODUCTION
In the case of partnership, there may be transfer of capital asset by a partner to a firm or vice versa. Section 45(3) deals with transfer of a capital asset by a partner to a firm; before its substitution by the Finance Act, 2021, section 45(4) dealt with transfer by way of distribution of a capital asset by a firm to a partner on dissolution or otherwise. These provisions were inserted with effect from 1st April, 1988 to provide for full value of consideration in respect of the aforesaid transfer of capital assets between firm and partner.

While the aforesaid sections apply to even AOPs and BOIs, for the purpose of this article reference is made only to firm and partners.

When a partner’s account is settled on retirement or dissolution, he may be given one or more of the following;

(a) Cash, (b) Capital asset, (c) Stocks.

The aforesaid provisions dealt with transfer of capital asset in the limited circumstances provided thereunder.These sections generated a lot of controversies and have given rise to a number of court rulings. A prominent issue is, when a partner upon retirement or dissolution takes home more cash than his capital account balance at the time of retirement, whether he or the firm is liable to pay any tax. The courts are almost unanimous in holding that mere payment of cash would not give rise to any taxable capital gains either in the hands of the firm or in the hands of the partner. It has been held that what he gets is in settlement of his account and nothing more.

B. FINANCE ACT, 2021
The changes proposed in the Finance Bill, 2021 by way of substitution of section 45(4) and insertion of section 45(4A) were not carried through. The Finance Act, 2021 discarded the proposed changes but seeks to change the scheme of taxation of capital gain in the following manner:

(a) Existing section 45(3) is retained,
(b) Existing section 45(4) is replaced by a new sub-section,
(c) New section 9B is introduced,
(d) New clause (iii) is added to section 48.

The new scheme, through the combination of sections 45(4) and 9B, provides for taxation in the hands of the firm in the case of receipt of capital asset or stock-in-trade or cash (or a combination of two or more of them) by the partner on reconstitution or dissolution of the firm. Section 48(iii) seeks to mitigate the impact of double taxation.

Sections 9B and 45(4) apply to receipts by partner from the firm on or after 1st April, 2020 in connection with dissolution / reconstitution. A question arises as to whether these sections apply to such receipts in connection with dissolution / reconstitution which took place prior to 1st April, 2020. The literal interpretation suggests that the date of receipt being critical, the date of dissolution / reconstitution is immaterial as long as the receipt is in connection with dissolution / reconstitution. One possible counter to this interpretation is that the erstwhile section 45(4) dealt with distribution of capital asset on dissolution or otherwise of the firm and it held the field till 31st March, 2020. Section 9B deals with receipt in connection with reconstitution or dissolution, while substituted section 45(4) deals with receipt in connection with reconstitution. One could notice some overlap between erstwhile section 45(4) and section 9B insofar as receipt of capital asset on dissolution is concerned.

On the basis of this reasoning, it is not unreasonable to expect that new provisions should be considered as applicable only when both the dissolution / reconstitution and receipt have taken place on or after 1st April, 2021. One more reason for this interpretation could be that once dissolution / reconstitution has taken place prior to 1st April, 2021, respective rights arising from such dissolution / reconstitution crystallised on the date of such dissolution / reconstitution. Any receipt thereafter is only in relation to such rights which crystallised before the effective date of the new provisions.

C. SECTION 9B
The Finance Bill, 2021 did not propose section 9B. It rather proposed a substitution of existing section 45(4) and insertion of new section 45(4A). However, while enacting the Finance Act, 2021, section 9B is introduced.

Explanation (ii) to section 9B defines ‘specified entity’ as a firm or other association of persons or body of individuals (not being a company or a co-operative society). Explanation (iii) defines ‘specified person’ as a person who is a partner of a firm or member of other association of persons or body of individuals (not being a company or a co-operative society) in any previous year. For the sake of convenience, in this article, specified entity is referred to as a firm and specified person is referred to as a partner.

Section 9B(1) provides that where a partner receives, during the previous year, any capital asset or stock-in-trade or both from a firm in connection with the dissolution or reconstitution of such firm, the firm shall be deemed to have transferred such capital asset or stock-in-trade, or both, as the case may be, to the partner in the year in which such capital asset or stock-in-trade or both are received by the partner.

Section 9B(2) provides that any profits and gains arising from such deemed transfer of capital asset or stock-in-trade, or both, as the case may be, by the firm shall be deemed to be the income of such firm of the previous year in which such capital asset or stock-in-trade or both were received by the partner. Such income shall be chargeable to income-tax as income of such firm under the head ‘Profits and gains of business or profession’ or under the head ‘Capital gains’ in accordance with the provisions of this Act.

As per section 9B(3), fair market value of the capital asset or stock-in-trade, or both, on the date of its receipt by the partner shall be deemed to be the full value of the consideration received or accruing as a result of such deemed transfer of the capital asset or stock-in-trade, or both, by the firm.

As per Explanation (i), reconstitution of the firm means, where
(a) one or more of its partners of firm ceases to be partners; or
(b) one or more new partners are admitted in such firm in such circumstances that one or more of the persons who were partners of the firm, before the change, continue as partner or partners after the change; or
(c) all the partners, as the case may be, of such firm continue with a change in their respective share or in the shares of some of them.

D. SALIENT FEATURES OF SECTION 9B
The purpose of placing section 9B outside the heads of income appears to be to avoid replication of charging and computation provisions under both heads of income, i.e., profits and gains from business or profession, and capital gains.

Section 9B would apply when a partner receives during the previous year any capital asset / stock-in-trade or both from a firm in connection with dissolution or reconstitution of firm.

Upon such receipt, the firm shall be deemed to have transferred such capital asset / stock-in-trade or both to the partner in the year of receipt of the same by the partner.

The business profits or capital gains arising from aforesaid deemed transfer shall be chargeable under the respective heads of income. Fair market value (FMV) of capital asset / stock-in-trade or both on the date of receipt shall be deemed to be the full value consideration (FVC) for determination of the business profits / capital gain.

Reconstitution would include the case of admission / retirement / change in profit-sharing ratio.

E. CERTAIN ISSUES ASSOCIATED WITH SECTION 9B
Section 9B(2) deems the profits and gains on deemed transfer of capital asset or stock-in-trade as the income of the firm in the year of receipt of asset by the partner. If receipts by one or more partners spread over to more than one year, the taxability thereof on the firm follows suit.

In the case of dissolved firm, it is interesting to note how the above fiction works when the partners receive the assets in the years subsequent to the year of dissolution. While there is a fiction to deem such receipt as a transfer by firm, there is no fiction to deem that the firm is not dissolved. In such a situation, whether the machinery provision of section 189(1) which permits the A.O. to proceed to assess the firm as if it is not dissolved, applies or not is a debatable issue.

The fair market value of the allotted asset shall be deemed to be the full value of consideration. For this purpose, the balance in the capital account of the partner is not relevant.

Section 9B does not as such provide for prescription of the rules for determination of the FMV. Therefore, recourse has to be had to section 2(22B) which defines FMV. Special provisions like sections 43CA and 50C do not apply in a case covered by section 9B.

The business profit arising u/s 9B, though chargeable under the head ‘profits and gains from business or profession’, does not fall u/s 28. Therefore, section 29 which provides that ‘the income referred to in section 28 shall be computed in accordance with the provisions contained in sections 30 to 43D’ may not apply. This is for the reason that section 29 refers only to income referred to in section 28. Therefore, business profits may have to be computed on commercial principles, without recourse to the aforesaid provisions providing any allowance or disallowance.

Unlike in the case of section 29 which refers only to section 28, section 48 refers to the head ‘capital gains’. Therefore, capital gains arising from section 9B will have to be computed after considering section 48. Therefore, the cost of acquisition, cost of improvement, their indexation and incidental transfer expenditure will be available as deduction.

While section 45 is saved by sections 54 to 54GB, there is no such saving provision in section 9B. Therefore, whether a firm is eligible for exemption u/s 54EC, etc., in respect of capital gains arising u/s 9B is an open question. While on a stricter note such exemption is not available, on a liberal note one may contend that exemption should be available if related conditions are fulfilled. Proponents of a stricter interpretation may argue that exemption u/s 54EC is inconceivable as there is no inflow in terms of actual consideration for satisfying the requirement of rollover. The proponents of a liberal interpretation may counter such contention by pointing out that deeming fiction requires logical extension and rollover sections do not require rupee-to-rupee mapping. If the liberal theory is accepted, the date of receipt being deemed to be the date of transfer, is relevant for reckoning the time limit irrespective of the date of change in constitution or dissolution.

F. SECTION 45(4)
Section 45(4) as it stood before substitution by Finance Act, 2021 read as follows:
‘(4) The profits or gains arising from the transfer of a capital asset by way of distribution of capital assets on the dissolution of a firm or other association of persons or body of individuals (not being a company or a co-operative society) or otherwise, shall be chargeable to tax as the income of the firm, association or body, of the previous year in which the said transfer takes place and, for the purposes of section 48, the fair market value of the asset on the date of such transfer shall be deemed to be the full value of the consideration received or accruing as a result of the transfer.’

The substituted section 45(4) by the Finance Act, 2021 reads as follows:
‘(4) Notwithstanding anything contained in sub-section (1), where a specified person receives during the previous year any money or capital asset or both from a specified entity in connection with the reconstitution of such specified entity, then any profits or gains arising from receipt of such money by the specified person shall be chargeable to income-tax as income of such specified entity under the head “capital gains” and shall be deemed to be the income of such specified entity of the previous year in which such money or capital asset or both were received by the specified person, and notwithstanding anything to the contrary contained in this Act, such profits or gains shall be determined in accordance with the following formula, namely:…’

The following table depicts some key differences between the two provisions:

Earlier section 45(4)	Substituted section 45(4)
It would apply to transfer of capital asset by a partner on the dissolution of a firm	It would apply upon receipt of capital asset or money or both by a partner *in connection with reconstitution of a firm*
Profits and gains arising from transfer are chargeable to tax as the income of firm	Profits and gains arising from such receipt by partner are chargeable to tax as income of the firm
Chargeable to tax in the PY in which the transfer took place	Such profits and gains chargeable to tax as income is deemed to be the income of the firm in the PY in which money or capital asset or both is received by partner
Capital gains are computed u/s 48	Capital gains are computed as per the formula provided therein notwithstanding anything to the contrary contained in the Act
FMV of the asset on the date of transfer shall be deemed to be the FVC	Formula does not provide for any full value of consideration However, aggregate of amount of money received and fair market value of capital asset received on the date of receipt constitutes consideration
Cost of acquisition, cost of improvement and incidental expenditure upon transfer are reduced from FVC	Amount of capital account balance of partner in the books of firm at the time of reconstitution is reduced from the above aggregate amount
Benefit of indexation is available	There is no element of cost of acquisition and cost of improvement, hence no indexation

Earlier
section 45(4)

Substituted
section 45(4)

It would apply to transfer of capital asset by a partner on
the dissolution of a firm

It would apply upon receipt of capital asset or money or both by
a partner in connection with reconstitution of a firm

Profits and gains arising from transfer are chargeable to tax as
the income of firm

Profits and gains arising from such receipt by partner are
chargeable to tax as income of the firm

Chargeable to tax in the PY in which the transfer took place

Such profits and gains chargeable to tax as income is deemed to
be the income of the firm in the PY in which money or capital asset or both
is received by partner

Capital gains are computed
u/s 48

Capital gains are computed as per the formula provided therein
notwithstanding anything to the contrary contained in the Act

FMV of the asset on the date of transfer shall be deemed to be
the FVC

Formula does not provide for any full value of consideration

However, aggregate of amount of money received and fair market
value of capital asset received on the date of receipt constitutes
consideration

Cost of acquisition, cost of improvement and incidental
expenditure upon transfer are reduced from FVC

Amount of capital account balance of partner in the books of
firm at the time of reconstitution is reduced from the above aggregate amount

Benefit of indexation is available

There is no element of cost of acquisition and cost of
improvement, hence no indexation

G. SALIENT FEATURES OF SECTION 45(4)
Section 45(4) would apply when a partner receives during the previous year any money or capital asset or both from a firm in connection with the reconstitution of a firm.

Any profits and gains arising from such receipt shall be chargeable in the hands of the firm under the head ‘capital gains’.

Such capital gain shall be deemed to be chargeable to tax in the previous year of receipt of such money or capital or both by the partner.

Reconstitution is defined in the same manner as is defined u/s 9B.

H. COMPUTATION OF CAPITAL GAIN U/S 45(4)
Capital gain shall be computed u/s 45(4) as per the formula provided therein, i.e., A=B+C-D.

The capital gain is computed by considering the following components:
B = Amount of cash received by the partner,
C = Amount of FMV of capital asset received by the partner,
D = Amount of capital account balance of a partner in the books of the firm at the time of its reconstitution.

The difference between capital account balance on the date of receipt and aggregate of cash received and FMV of capital asset received constitutes capital gains in the hands of the firm.

I. CORRIGENDUM TO SECTION 45(4)
On 22nd March, 2021, the Finance Ministry sent a notice of amendments to the Lok Sabha, wherein section 45(4) as proposed in the Bill was substituted completely by a new section 45(4). The newly-proposed section 45(4) had the words ‘…any profits or gains arising from receipt of such money by the specified person…’

On 23rd March, 2021, the Lok Sabha approved the Bill as amended by notice of amendments dated 22nd March, 2021. The Presidential Assent to the Bill was given on 28th March, 2021. The Finance (No. 13) Act, of 2021 was notified on 28th March, 2021. The Notified Finance (No. 13) Act, of 2021 carried Section 45(4) with the aforesaid words.

Two corrigenda were issued on 6th April, 2021 and 15th April, 2021. In the first corrigendum, for the words ‘…from receipt of such money by’, the words ‘…from such receipt by…’ were substituted. While it is not known as to the exact content of section 45(4) as approved by the Lok Sabha, on the basis of Notified Finance (No. 13) Act, of 2021 it can be inferred that the Lok Sabha has approved the Bill which carried section 45(4) as stated in the notice of amendments dated 22nd March, 2021.

The aforesaid substitution is not just correcting a clerical error, but it has substantial implications. The originally introduced words would have confined the scope of section 45(4) only to receipt of money, whereas the substituted words would extend it not only to receipt of money but also to receipt of capital asset.

Unless an Amendment Act is enacted, substituted words by a corrigendum having the effect of amending a law passed by the Parliament may be open to challenge on the ground of overreach by the executive.

J. COMPARISON BETWEEN SECTION 9B AND SECTION 45(4)
The following table compares above two provisions;

Section 9B	Section 45(4)
It would apply upon receipt of capital asset or stock-in-trade or both by a partner from the firm on the dissolution or reconstitution of a firm	It would apply upon receipt of capital asset or cash or both by a partner from the firm in connection with reconstitution of the firm
Allotment of stock-in-trade is covered	Allotment of stock-in-trade is not covered
For the purpose of computation u/s 9B, FMV is deemed to be FVC and computation would be in accordance with Chapter IV-C or D, i.e., ‘Profits and gains of business or profession’ or ‘Capital gains’	Computation mechanism is given u/s 45(4) in the form of formula

Section
9B

Section
45(4)

It would apply upon receipt of capital asset or stock-in-trade
or both by a partner from the firm on the dissolution or reconstitution of a
firm

It would apply upon receipt of capital asset or cash or both by
a partner from the firm in connection with reconstitution of the firm

Allotment of stock-in-trade is covered

Allotment of stock-in-trade is not covered

For the purpose of computation u/s 9B, FMV is deemed to be FVC
and computation would be in accordance with Chapter IV-C or D, i.e., ‘Profits
and gains of business or profession’ or ‘Capital gains’

Computation mechanism is given u/s 45(4) in the form of formula

The following table summarises the applicability of the above two sections:

	Section 9B	Section 45(4)
Reconstitution	Yes	Yes
Dissolution	Yes	No
Cash to partner	No	Yes
Capital asset to partner	Yes	Yes
Stock-in-trade to partner	Yes	No

Section
9B

Section
45(4)

Reconstitution

Yes

Dissolution

Yes

Cash to partner

Yes

Capital asset to partner

Yes

Stock-in-trade to partner

Yes

K. DOUBLE TAXATION AND ITS MITIGATION
As may be seen from a close reading of sections 9B and 45(4), in the event of receipt of capital asset by a partner from a firm in connection with its reconstitution, the firm is liable to tax under both section 9B and section 45(4).

Explanation 2 to section 45(4) clarifies that when a capital asset is received by a partner from a firm in connection with the reconstitution of such firm, the provisions of section 45(4) shall operate in addition to the provisions of section 9B and the taxation under the said provisions thereof shall be worked out independently.

Therefore, it is a clear case where double taxation is explicitly intended or provided for. Where Parliament in its wisdom chooses to explicitly provide for double taxation, it has a plenary power to do so.

In this regard, reliance is placed on the following decisions:

Jain Bros vs. Union of India [1970] 77 ITR 107 (SC);

Laxmipat Singhania vs. CIT [1969] 72 ITR 291 (SC);

CIT vs. Manilal Dhanji [1962] 44 ITR 876 (SC);

Escorts Limited vs. UOI [1993] 199 ITR 43 (SC); and

Mahaveer Kumar Jain vs. CIT [2018] 404 ITR 738 (SC).

Thus, while double taxation cannot be inferred or implied, the same can be explicitly provided for.

Thus, it is a clear case of Parliament wanting to apply both sections in case of receipt of capital asset by a partner in connection with the reconstitution of a firm.

Section 48 is also amended by Finance Act, 2021 where Clause (iii) is inserted which reads as follows:
‘(iii) in case of value of any money or capital asset received by a specified person from a specified entity referred to in sub-section (4) of section 45, the amount chargeable to income-tax as income of such specified entity under that sub-section which is attributable to the capital asset being transferred by the specified entity, calculated in the prescribed manner:’

Section 48(iii) provides that the amount chargeable to tax u/s 45(4) to the extent attributable to the capital asset being transferred by a firm shall be reduced from the FVC of a capital asset being transferred by a firm. Such reduction, however, needs to be calculated in the prescribed manner. The rules in this regard are awaited. These provisions are applicable for PY 2020-21 and the rules were not out as on 1st April, 2021. Therefore, such rules when notified will have to be made retrospective so as to be applicable to PY 2020-21. If the retrospective application of rules causes prejudice to the taxpayer, the same may be open to challenge in terms of section 295(4).

As noted earlier, section 45(4) applies when a partner receives capital asset or money or both from a firm in connection with its reconstitution. If a partner receives capital asset with or without money, capital gain attributable to such receipt of capital asset will not be available for relief u/s 48(iii). This is for the obvious reason that the subject capital asset having already been given to a partner, could not be subsequently transferred by the firm to any other person. Upon allotment to a partner, the capital asset concerned ceases to exist with the firm.

However, if a firm is liable to tax on transfer of money with or without capital asset to the partner in connection with reconstitution of a firm, the capital gain on such transfer of money chargeable u/s 45(4) would be available for relief u/s 48(iii). This relief is given on the premise that when cash is paid to the retiring partner on reconstitution, the same may be attributed wholly or partly to the revaluation of one or more capital assets which are retained by the firm. Subsequently, when a firm transfers such revalued capital asset, it would be liable to pay tax on capital gain. In such a case, capital gain may include the revalued portion on which the firm would have discharged tax u/s 45(4). This will result in double taxation. In order to mitigate such double taxation, it is provided that capital gains already charged to tax u/s 45(4) to the extent attributable to the capital asset that is being transferred by a firm would be allowed as deduction u/s 48(iii).

It is interesting to note that section 48(iii) may also apply in a situation where both sections 9B and 45(4) are applied simultaneously in the same previous year.

As stated earlier, section 8 applies not only to capital gain chargeable u/s 45, but to any capital gains chargeable under the head ‘capital gain’. As section 9B provides for capital gains to be chargeable to tax under the head ‘capital gain’, section 48 is applicable to the capital gain covered u/s 9B as well.

While computing the capital gain chargeable u/s 9B read with section 48, capital gain chargeable u/s 45(4) to the extent attributable to the capital asset dealt with by section 9B would be reduced from the FVC determined u/s 9B(3). Section 48 does not provide for determination of the FVC. It only provides for deductions from the same. Therefore, there is no disharmony between section 9B(3) and deduction u/s 48(iii).

L. CERTAIN OTHER ISSUES OF SECTION 45(4)
What is the meaning of receipt of money? Whether receipt of money includes constructive receipt by way of credit to account? A mere credit to the account of the partner cannot be equated with the receipt of money. Upon reconstitution, certain sum may be credited to a partner’s account which is allowed to remain in the firm. In such case, it cannot be said that he received money from the firm upon a mere credit. However, when the amount so credited is withdrawn by him, section 45(4) is attracted. The answer could be different if the ratio of Raghav Reddy in 44 ITR 760 SC is applied to such credit unless such ratio is distinguished on the basis of Toshiku in 125 ITR 525 SC.

Whether receipt of rural agricultural land covered: As rural agricultural land is not a capital asset, section 45(4) is not attracted.

Receipt by legal heirs of deceased partner: Section 45(4) would apply to receipt by a partner from the firm. A receipt by the legal heir of the deceased partner cannot be regarded as receipt by the partner. Therefore, section 45(4) is not applicable.

Would capital balance include balances in current account and loan of partners: While the balance in current account could be appropriately called as part of capital balance, the same may not be so in the case of loan by partners.

Is proportionate share of reserves to be considered as part of capital: Credit balance in the profit and loss account or balances in the reserves should be credited to partners’ accounts before dissolution / reconstitution. In any case, payment from such credit / reserves cannot be regarded as payment in connection with dissolution / reconstitution.

How to compute if there is negative capital balance: A negative balance in the capital account represents money due by the partner to the firm. If such balance is not made good by him on dissolution / reconstitution, it amounts to a waiver which may in turn amount to payment of cash in the light of the ratio in Mahindra and Mahindra 404 ITR 1 SC.

M. WHEN GOODWILL IS TRANSFERRED
If goodwill, being a capital asset, is transferred to a partner, sections 45(4) and 9B as discussed earlier would apply. This is so irrespective of whether the goodwill is self-generated or acquired.

If goodwill is self-generated, in terms of section 55(2)(a) and section 55(1)(a) the cost of acquisition and cost of improvement shall be deemed to be nil.

If goodwill is purchased for a consideration, newly-introduced proviso to section 55(2)(a) would apply. This proviso provides that the actual cost of goodwill shall be reduced by the depreciation allowed up to A.Y. 2020-21.

Provisions of section 50 along with the newly-introduced proviso to section 50(2) may not apply in view of the fact that sections 45(4) and 9B are special provisions.

Additionally, upon such transfer, if no consideration is received or is accrued, provisions of section 50 may not operate unless the fiction of section 9B(3) is read into section 50. In any case, section 45(4) does not have any such fiction.

ACKNOWLEDGEMENTS: The author acknowledges the inputs from Mr. S. Ramasubramanian and Mr. H. Padam Chand Khincha and the support of Mrs. Sushma Ravindra for the purposes of this analysis.

shailesh.kwebmaker

PERSONAL BRANDING FOR CAs

It is always thought that being the best wins at anything. That might be true for sports but not for life and our profession. When it comes to sports, there is only one place to be – at the top. And to ace the game, you have to be the best. But when it comes to career progression and self-development, it’s different. Instead of being the best, you must strive for competency, credibility, differentiation in a unique and specialised niche.

In their book The Blue Ocean Strategy, authors W. Chan Kim and Renée Mauborgne write that ‘Blue ocean strategy challenges companies to break out of the red ocean of bloody competition by creating uncontested market space that makes the competition irrelevant instead of dividing up existing – and often shrinking – demand and benchmarking competitors. Blue ocean strategy is about growing demand and breaking away from the competition.’

The authors may be talking about businesses, although this thought if applied on a personal level makes one think, ‘But how do I break away from the competition?’ The answer is, Be different. Don’t just ask yourself, ‘What am I better at?’ Ask also, ‘How am I different?’

Anyone who tries can be different in their area of work by developing themselves, not just professionally but by getting better at one or more of the following skills:

Writing – We’re all writers.

Public speaking – Getting over the mental block most of us face. It helps you be a better leader.

Selling – Develop a personal brand. We all have something to sell – our products, services, our ideas or even ourselves. To be able to create the right influence and impact gives an edge. Persuasion and negotiation skills matter.

What is branding? Simply put, your brand is your promise to your customer. It tells him what he can expect from your products and services, and it differentiates your offering from that of your competitors. Your brand is derived from who you are, who you want to be and who people perceive you to be. Similarly, personal branding is the practice of marketing people and their careers as brands. It is an on-going process of developing and maintaining a reputation and impression of an individual, group, or organisation. Your personal brand is how you promote yourself. It is the unique combination of skills, experience and personality that you want your followers to see. It is the telling of your story and the impression people gain from your online reputation.

PRINCIPLES FOR PERSONAL BRANDING
1. Credibility: The foundation for building credibility is trust. To boost credibility, you need to be honest. Keeping your communication open and honest not only sets an example for your co-workers but also shows others that they can trust you.
2. Competence: Building and polishing your core competence is imperative to establish yourself.
3. Values: Values help you establish a sense of purpose and direction for your personal brand. They act as guideposts that assist you in evaluating choices in your life. Values change as you change; they reflect what’s important to you at any given moment.

Strategy to build your brand through a five-step process
1. Brand clarity and strategy. To genuinely make a difference by being helpful, useful and relevant at all times with trust.
2. A website that wows. Updated at all times and within the guidelines of what the Institute regulations permit.
3. Authentic social media engagement that attracts, engages and compels people to do business with visibility and trust by sharing insightful views, dishing out wisdom or perspectives to benefit one and all.
4. Captivating and engaging content that converts, a communication plan that is purposeful and creative based on unique strengths. Communicate not to sell but to serve. Communicate not to advertise but to create meaningful conversations that enrich and enlighten.
5. Marketing to serve people with honesty, encouragement, generosity, compassion, kindness and respect, influence with integrity and transparency.

A Chartered Accountant is bound by his Code of Conduct & Ethics and cannot advertise or solicit for work. Hence, personal branding for a CA has to be done within the framework of this Code. Some guidelines prescribed by the Institute:

1. Website
Ensure that the website is on pull mode and not push mode. The details in the website should be so designed that they do not amount to soliciting clients or professional work. Be aware of the information that can be displayed on your website.

2. Publications
It is not permissible for a member to mention in a book or an article published by him, or a presentation made by him, any professional attainment(s) whether of the member or the firm of chartered accountants with which he is associated. However, he may indicate in a book, article or presentation the designation ‘Chartered Accountant’ as well as the name of the firm.

3. Public interviews
While giving interviews or otherwise furnishing details about themselves or their firms in public interviews or to the press or at any forum, the members should ensure that it should not result in publicity. Due care should be taken to ensure that such interviews or details about the members or their firms are not given in a manner highlighting their professional attainments.

4. Issue of greeting cards / invites
Issue of greeting cards or personal invitations by members indicating their professional designation, status and qualifications, etc., is not allowed. However, the designation ‘Chartered Accountant’ as well as the name of the firm may be used in greeting cards, invitations for marriages and religious ceremonies, etc., provided they are sent only to clients, relatives and friends of the members concerned.

5. Educational videos
While videos of an educational nature may be uploaded on the internet by members, no reference should be made to the chartered accountants’ firm wherein the member is a partner / proprietor. Further, it should not contain any contact details or website address.

6. Use of logo / monogram
The use of logo / monogram of any kind / form / style / design / colour, etc., whatsoever by a CA is prohibited. Members may use the common logo created for the CA profession.

A brand is a simple but complex perception in the minds of the beholder. Brands are built not by accident but by design. A great positioning statement is an opener for any conversation about your business. Know who you are, what you do, what is different about what you do and for whom you do it and how you are a good fit. It is not the client’s job to remember you. It is your job that they do not forget you. You have many options but select the one that works best for you. This is similar to a client having many options but he selects you.

* Don’t create a design without strategy – Strategise
* Don’t try to do everything on your own – Outsource
* Don’t wait for the perfect moment – Speed and agility matters with flexibility.

Have a tagline or a brand manifesto formula in three words you want to be spoken for you
* What action are you doing? Verb
* Which audience are you serving? Noun
* What are you bringing to the table, uniquely, differentiated, unlike anybody else? Noun – Verb (competition has failed to address).

Some questions you should introspect before you start building your brand
* The key messaging, positioning, unique promise or value offered by my competition;
* The gaps seen or the category that can be created or value added that is unique;
* Carving a niche, building, strengthening and dominating it to be out of bounds of competition;
* Top three mistakes / weaknesses of competition that can be leveraged to create exceptional value to be at a different level;
* Perspectives offered that are unique and radically distinct from other industry leaders;
* Key distinguishing factors in personal brand management at a global level.

Social media as a medium for personal branding
Amidst the global lockdowns as a result of the pandemic, we have found a lot more time on our hands. Many of us have actively started building an online presence. It may be the best time to do it – while the global economy is taking a massive hit which will have long-reaching implications, digital platforms are seeing higher engagement rates than ever, with more and more people looking for information and entertainment online and focusing their attention on social platforms and other apps. This could provide an opportunity to get your thoughts out there and to build your profile with a captive audience.

Using LinkedIn effectively
LinkedIn is the older, more responsible sibling of Facebook. The benefits of LinkedIn are endless. With a few clicks, you can find your dream job or your dream client. LinkedIn not only makes it easier for you to find people but also for others to discover you.

A few tips to get you started

Be active on social media.

Tap into your network. Networking is the key.

Write a simple but engaging LinkedIn summary or headline – the short, one-line description which readers will first see along with your name.

Keep your profile updated with skillsets possessed, experience, recommendations, etc.

Post original content.

Network not to sell and market blatantly but develop connects for creating mutual win-wins and helping each other grow and develop as better human beings. The business conducted as a result of the trust and the bonding developed is purely incidental.

A BLUEPRINT TO BUILD A PERSONAL BRAND
1. Serious soul-searching, introspection and brainstorming to find purpose, vision, to get clarity on What am I doing, why am I doing it and for whom?
2. Understanding the competitive landscape to grab opportunities in the external eco-system at play.
3. Thinking like a thought leader to focus outside in, to enrich and add value with personal mastery which no one else is doing.
4. Create your Brand Universe (Strategy) – Thought Leadership Capital – Repurposing and targeting your message to your audience. The new way of thinking is to claim and dominate your niche. Personify your topic so that no one dares to try it.
5. Define and own your Brand Intellectual Property as there is no dearth of copycats or thieves. Ring-fence and protect your idea by all means. You are the brand ambassador of your IP.
6. Define your target audience and what value you give them.
7. Building your network blueprint around those to whom you can add value. It doesn’t matter whom you know but what matters is who knows you and your personal brand. Expand your visibility across three degrees of network.
8. Design a content strategy. Your brand is as good as your content. Context is relevant for your content; know where your audience stays or is visible; have a signature style of expression.
9. Launch your brand – strategise the timing of making your completed profile public and then creating a complimentary engagement strategy to keep the brand vibrant and relevant.
10. Build your speaker brand. Craft a ‘rockstar’ speech with signature topics. Position and craft stellar speeches by presenting them brilliantly. Be awesome, full of energy and enthusiasm, don’t be boring.
11. Build your author brand. Write a book on your niche that showcases your knowledge and is useful to your target audience and helps effectively in solving their pain-points. Don’t just be visible but also relevant.
12. Build a tribe of like-minded professionals who can give quality feedback to fast-track your speed and development whilst earning their trust and love.

Branding takes time. Start now. Massive learnings happen on the way. Integrity, Transparency, Authenticity, Originality, Competency and Credibility matter. Be consistent to leave a legacy that far outlives your physical life. Stay Branded – Stay Blessed – and Serve the World.

Credit share: My Branding Guru – Tanvi Bhatt / My CA colleague – Cynora Lemos.

shailesh.kwebmaker

STRATEGY: THE HEART OF BUSINESS – PART II

Strategy is the heart of running and changing a winning business, as we saw in Part I (BCAJ, March, 2021). Crafting a good strategy is critical for an enterprise to realise its growth and value creation aspirations. This is a capability which successful organisations have in abundance, otherwise they use external experts (aka consultants). What is equally important is Strategy Deployment, i.e. executing the strategy effectively. In many contexts I would say that a higher weightage can be accorded to smart execution. Even a first mover of a strategy may lose out over time if execution does not keep pace. Ford Motor Company, for example, invented cars, but Japanese cars rule the roost in the automobile world now. In this Part II, I will share some aspects about successful execution which I have experienced over the years in running businesses.

The Vision, Mission and Values set, an enterprise typically aspires for a Strategic Target to be achieved in a defined time frame. Towards this goal, a Strategy Map is drawn out which clarifies the strategic objectives and initiatives to be deployed. We have seen how a Strategy Deployment Matrix1 is a great tool to align and integrate individual, team, department and functional goals with that of the enterprise. Now on to some detail on deployment.

LEAD AND LAG

An individual or a Function planning activities by setting goals can use two types – Lead and Lag actions or goals. A Lead action or activity is one which can be executed or influenced and which will result in an outcome or achievement in the desired direction. Lag goals are the ones which are the targeted or intended results. A typical example is the case of a person who wishes to get fitter or become healthier. A Lag goal s/he can have is to lose say five kilograms of weight. The Lead actions or goals which will result in delivering this Lag goal can be (i) eat right, say 2,000 calories per day, and (ii) be active, say walk 10,000 steps daily. The Lag measure is thus the outcome driven by the Lead measure or actions driving the process as indicated in Figure 1 below:

Therefore it is essential to have a healthy mix of Lead and Lag goals while crafting the plan for the year. The goals chosen should be spread over the four perspectives to make a Balanced Scorecard2. With this structure, it lends itself to constructive periodic reviews on how the actions are progressing towards the set goals. This is pictorially depicted in Figure 2 hereunder.

ALIGNMENT AND INTEGRATION
The goals thus planned to be executed in any organisation have to be aligned with the enterprise objectives, at every level and person all the way down. While this will be a vertical flow, it is also important that these are integrated well across functions or departments to make a synergistic impact pulling in the same direction. In all this, robust communication at every level individually or in groups is absolutely critical for the team to comprehend the collective goals and develop a collaborative and committed mind-set. This is outlined in Figure 3.

TOOLS FOR EXECUTION
Having structured and deployed the goals meaningfully, I have utilised a number of effective tools to drive and monitor execution. The purpose is to ensure a discipline in the desired actions being performed as well as to have a structured process in place to review progress. The idea is that attention is given and focused on the exceptions and escalation happens to the appropriate level in time for interventions to help delivery. These are based on two fundamental tenets:

Let us examine some tools which are helpful for the purpose.

ORGANISATIONAL REVIEWS
The strategic target broken down into executable actions on the lines mentioned above will need to be monitored for performance. A broader framework on integrating the review fora and the areas to be covered was touched upon earlier3. This can be detailed out into a review framework as illustrated in Figure 4. The purpose of structuring the review discipline across the organisation is to ensure that not only the right areas are reviewed at the appropriate levels, but also to avoid overlap and superfluous efforts. This process also clarifies the periodicity of each review, the timing, topics as well as the attendance. The team is thus clear on the forum available and the expectation of right feedback.

In these review meetings the agenda being set, it is expected that the concerned will circulate pre-read papers so that the participants can come into the discussion with preparation. That way time is not frittered away in sharing fundamental data and base information. Furthermore, the areas and items which require decision-making in the forum are highlighted. The bulk of the time is therefore focused on decision-making and the team collectively addressing exceptions or areas which record tardy progress.

Performance Review Structure

Review Forum	Key Measures / Objectives	Frequency	Probable date and duration	Participation	Agenda
Board	Strategy and Operational, Performance Measures	5 times a year		Board members, MD & CEO	Policies & Capabilities, Changing Org. Needs, Adherence to strategic goals
Executive Committee	Scorecard achievement, Corporate, Projects, Major issues	Monthly	1^st and 2^nd week, 3 hrs.	Executive Committee members, MD & CEO, Invitee for specific session	Performance, capabilities, Comp., Performance, Changing Org. needs, LT / ST plans, innovation
ORM (Operational review meeting)	Execution of actions planned, Decision on issues	Monthly	2^nd week, full day	MD & CEO, COO, EVP Finance, VP Mfg, EVP-TBD, VP-DS, VP-IBD, VP-HR, GMs, Mkt Heads, Identified, Functional heads, Other Invitees	Operational performance, EPM measure, KPI, real contribution, working capital, Customer Feedback / Supplier’s Inputs, People Issues, Environment Innovation.
Cross Functional Teams reviews	Result of cross functional Initiatives	Monthly	3^rd week, 2-3 hrs.	MD & CEO, COO, EVP-Finance, Cross Functional Team members, Special Invitees	Operational performance, status of projects, improvement initiatives, Capital projects, Supply chain, Fund Management
Functional review meetings (Factory / Zones)	Operational performance review	Monthly	1^st week, full day	Chiefs, Factory heads, Zonal managers, Other department heads, Special Invitee	Divisional performance, Project status, Market / Customer Issues, Finance Issues, Safety & Env.
Dept. Review	Achievement against projected performance	Weekly / Monthly	Specified day, 2-3 hrs	Dept. Heads & Dept. Staff as required, Cross Functional Team members	Unit Performance, Capabilities, SHE related Issues, Initiatives, Supply chain

COLOUR CODE TRACKING VISION (CCTV)
The CCTV is a simple yet powerful mechanism to visually comprehend the problem areas in any project or goal delivery. Equally, it also provides comfort at a glance on the projects or areas which are going well. Thus, it does not require intervention at any senior level and can be left to the person / team responsible to deliver as intended. Such a visual representation as portrayed in Figure 5 is quite helpful in any review meeting for the team to quickly pick up and focus on the areas which deserve collective attention.

As can be seen, the CCTV highlights in the traffic signal colours over a period of time the health of the various interventions. Remarks on sluggish progress where applicable are given along with the suggested actions. Discussion can be forthwith focused on the points highlighted in red as well as yellow items with the result that the meetings conclude with specific actions agreed to get the laggard items back on track.

CCTV (colour code tracking vision)

Project/ Initiative	Original Target Date	Status as of					Remarks	Action required
Project/ Initiative	Original Target Date	01- Jan -21	08- Jan -21	15- Jan -21	22- Jan -21	29- Jan -21	Remarks	Action required

ORGANISATIONAL RESPONSIVENESS
In times of uncertainty and volatility, responsiveness in organisations has to be real-time. Often, delayed responses which occur due to blindness in information lead to lost opportunities and may even result in longer-term adverse impact, such as loss of market share. This is being experienced by entities and has been telling since early 2020 due to disruptions from the Covid pandemic.

Businesses can witness significant volatility in terms of cost escalations, supply bottlenecks, changing terms of business, disruption in external environment, etc. This necessitates a change in the way of making business decisions.

An effective way I have experienced in the past is to form a cross-functional team consisting of all key operational departments (vide Figure 6). This team keeps a weekly (even daily) track of changes in the environment and decides appropriate actions to address the changes. For example, the team could introduce a concept of pricing that is based on replacement cost. Based on inputs from the procurement department, the finance team circulates the replacement cost to all the departments, which is used for frequently reviewing pricing decisions in the organisation. This will result in protection from margin erosions in a highly volatile environment. It will also help in timely sourcing of the key materials to cater to the emerging business opportunities.

Cross-functional Action team:
A Weekly feature

Forum for discussion on changing scenario and taking appropriate actions

DRIVING EXECUTION: AGILITY INDEX
It is common to find organisational review fora having a system of making minutes of the meeting. I have found that in doing so some simple tweaks can bring in greater efficiency:
(i) at the end of the meeting, every participant shares the takeaway of his / her actions. Not only does this clarify what each person / team has understood but also instils ownership in delivering actions;
(ii) the secretary of the meeting ensures that the minutes are circulated within 24 hours of the close of the meeting; and
(iii) measuring the speed of execution in terms of ‘Agility Index’.

A score of 9 is assigned to completed actions (Colour Code: Green).
A score of 3 is assigned to actions that are yet to be completed but are in progress (Colour Code: Yellow).
And a score of 1 is assigned to actions that have not been initiated (Colour Code: Red).

The Agility Index (Figure 7) is computed by summing up the item-wise score expressed as a percentage to the total possible, which is the sum of all items times 9 which indicates completion. This, at a glance gives the efficiency of implementation of the agreed actions in an objective manner. This index can also be used to track the action implementation efficiency of Board Meetings as well.

Agility Index

Action Agreed	Responsibility /Owner	Timeline	Status	Tracker points

1. xxx	ABC	15-Apr		9

2. yyy	PQR	18-Apr		3

3. zzz	XYZ	21-Apr		1

DIGITAL ENABLERS
Digital age now has pervaded all aspects of life at work and in personal domain. Digital technologies such as Cloud, Mobility, Internet of Things, Artificial Intelligence and Virtual Reality are enabling organisations to reimagine and transform businesses. A plethora of tools and information is available through the digital platform greatly enhancing execution capability. In agriculture, for example, gone are those bad old days like the protagonist in Do Bigha Zameen physically labouring away. In advanced agriculture economies such as USA and Brazil, farmers control the entire farming through electronic and mechanical processes using drones, hi-tech machines4, etc. to make the right decisions based on soil and environmental insights and practice precision farming. All this sitting in a control room away from the field! AI and predictive technologies have enabled to customise practices with understanding of future weather and pest changes. Manufacturing operations are guided today by Computer-aided Design, Big Data, Machine Learning, Robotics, etc. which significantly improve productivity and quality. All this, however, has led to an explosion of information available and it is crucial to design internal systems to process and focus these for effective execution.

EXECUTION: A DISCIPLINE
Authors Larry Bossidy and Ram Charan wrote in their remarkable book5 that ‘execution is a specific set of behaviours and techniques that companies need to master in order to have competitive advantage’. Execution is therefore a discipline which ensures that the strategy to achieve the strategic goals of the enterprise is duly deployed and implemented to have sustained competitive advantage. Therefore, we can conclude that Performance is Strategy plus EXECUTION.

This is the last article in this series by Mr. V. Shankar. For the previous five articles, please refer to the BCAJ issues of January 2020, March 2020, June 2020, August 2020 and March 2021

References
1.   Strategy: The Heart of Business – Part I, BCAJ, March, 2021, Page 13
2.    ‘The Balanced Scorecard: Translating Strategy into Action’ by David P. Norton and Robert S. Kaplan
3.    Governance & Internal Controls: The Touchstone of Sustainable Business – Part II, BCAJ, June, 2020, Page 15
4.    https://youtu.be/FNn5DB1Zen4
5.   ‘Execution: The Discipline of Getting Things Done’ by Larry Bossidy and Ram Charan

shailesh.kwebmaker

JDA STRUCTURING: A 360-DEGREE VIEW

“When a subject is multidimensional, a different approach is necessary. Instead of a series of standalone articles on the topic, a single article covering important aspects of the subject (JDA here) and have domain experts comment on each aspect of the subject was deemed worthwhile. The uniqueness of the article is in its subject coverage from the standpoint of each of the four perspectives: accounting, direct and indirect taxes and general and property law at once. This has resulted in an integrated piece where each facet is at once analysed from each of the four perspectives. Sunil Gabhawalla, CA, conceptualised the content and format of this article and shared the outline with three other domain experts. Through the medium of video calls, each one of them shared his perspectives on a number of touch-points outlined by Sunil. These were eventually compiled into this article. Ameet Hariani, advocate and solicitor, covered the Legal side; Pradip Kapasi, CA, covered the Direct tax aspects; Sudhir Soni, CA, covered Accounting aspects; and Sunil took on the Indirect taxation aspects. Thus, the article is a ‘joint development’ by all of them! – Editor”

Joint development of real estate – A win-win for both landowner and developer?

In today’s scenario, joint development is the preferred mode of development of urban land. A joint development agreement (JDA) is beneficial for both the landowner as well as the developer. It is a win-win situation for both. Conceptually, the resources and the efforts of the landowner and the developer are combined together so as to bring out the maximum productive result post-construction.

What are the possible risk factors?

Having said so, real estate development is spread over quite a few years and is fraught with risks as diverse as price risk (the expected market price of the developed property at the end of the project not commensurate with the expectations), regulatory risk (frequent changes in development regulations at the local level), tax risk (significant lack of clarity on the tax implications of the present law as well as the risk of possible amendments therein before the project completion), business risk (inability of the landowner / developer to fulfil the commitments resulting in either substantial losses or disputes), financial risk (inability to match the regular cash outflows till the time the project becomes self-sustaining) and so on. Like many other businesses, there are risks involved in real estate development in general and joint development projects in particular.

Why this article?

It is not only the diversity of the risks but also the interplay of these risks which makes the entire subject complex and also results in varying models or transaction structures between the landowner and the developer for the joint development of the real estate project. This article attempts to draw upon the experiences of the respective domain experts to apprise the readers of the complex interplay of the risk factors which go into the structuring of the joint development agreements and provide a holistic view of this complex topic. It aims to introduce the nuances and niceties across multiple domains but is not intended to be an exhaustive treatise on the topic.

What are the possible transaction structures?

Well, there are choices galore. Each joint development agreement is customised to suit the specific needs of the stakeholders. While in most of these structures the landowner would pool in the development rights in the property already held by him, the developer would undertake development obligations and compensate the landowner either in the form of money or developed area (either fixed or variable, again either upfront or in instalments). Within this broad conceptual definition of the ‘deliverables’ by the respective stakeholders, a multitude of factors and a complex interplay between them will determine the ‘terms and conditions’ and, therefore, the essence of the joint development agreement. Without diluting the specificity of each joint development agreement, one may compartmentalise the scenarios into a few baskets as listed below:

1. Outright sale of land / grant of development rights by the landowner to the developer against a fixed monetary consideration either paid upfront or in deferred instalments over the project period.
2. Grant of development rights by the landowner to the developer against sharing of gross revenue earned by the developer from the sale of the project.
3. Grant of development rights by the landowner to the developer against sharing of net profits earned by the developer from the project.
4. Grant of development rights by the landowner to the developer against sharing of area developed by the developer in a pre-determined ratio.

How does one choose an appropriate structure?

Well, this is the million-dollar question. The experts spent a considerable amount of time brainstorming this question and identifying various parameters which will help in choosing an appropriate structure.

From the landowners’ perspective, the structure could be determined based on the fine balancing of the timing of the transfer of legal title in the property from the landowner and the timing of the flow of consideration to him. Throw in the subjective metrics of the risk-taking ability of the stakeholders and the level of comfort that the landowner and the developer have with each other in terms of the extent of trust and / or mistrust, and the entire equation starts becoming fuzzy. To add to the fizz, compliance obligations under regulations like RERA and restrictions under FEMA could also act as show-stoppers.

Ameet Hariani says, ‘For example, under RERA it is the promoter’s obligation to obtain title insurance of the real estate project. The relevant section of RERA, among other things, requires a promoter to obtain all such insurances as may be notified by the appropriate Government, including in respect of the title of the land and building forming the real estate project and in respect of the construction of the said project. Since both the landowner as well as the developer will be classified as promoters, it would be prudent for parties entering into a JDA to specify which party (among the “promoters”) will be responsible for obtaining the title insurance for the project.’

In some transaction structures, tax obligations (both direct tax as well as indirect tax – GST and, not to forget, stamp duty) could act as the final nail in the coffin. For example, the upfront exposure towards payment of stamp duty and income-tax coupled with the ab initio parting of the title may rule out the possibility of an outright sale of land by the landowner against deferred consideration from the developer. As stated by Ameet Hariani, ‘From a legal perspective, legal rights should be retained by the landowner till the performance by the developer of the developer’s obligations. Only then should legal rights be transferred.’

While stamp duty is a duty on the execution of the document and could be paid by either of the parties, Ameet Hariani has this to say, ‘So far as stamp duty implications are concerned, normally these are borne by the developer. All documents relating to immovable property should be registered and consequently the quantum of stamp duty is an important determinant to be worked out.’

The above factors are relevant from the developer’s perspective as well. However, many more aspects become relevant. While the landowner would like to protect and retain his title in the property to the last possible milestone, for the developer a restricted right in the land could present significant constraints in financing the project, especially if he is dependent on funding from banks. Ameet Hariani has a word of advice, ‘Legally speaking, agreements for development rights are significantly different from those for sale of land. Courts have held that some types of development agreements cannot be specifically enforced. The key is to ensure that the development agreements that are executed should be capable of being specifically enforced.’ More importantly, the marketability of the project to the end customer / investor depends significantly on the buyer taking a loan from the bank. Therefore, the customer’s and the customer’s lending institution’s perception of the transaction structure and the clarity of the title of land become very important factors.

Hence, Ameet Hariani warns, ‘Financial institutions normally will not give finance in respect of the development agreement unless there is a specific clause in the development agreement entitling the developer to raise finance on the property; and the developer must also have the right to also mortgage the developer’s proportionate share in the land. This often makes the landowner extremely uncomfortable, especially because the landowner’s contribution, i.e., the land comes into the “hotchpotch” almost immediately. This is a matter that is often debated strongly while financing the development agreement’. The local development regulations and restrictions may also play an important part. ‘Is the plot size economically viable? Is there some arbitrage available due to an adjacent plot of land also available for development? Does the development fit within the overall vision of the developer?’ These are some questions which occupy the mind-space of the developer.

Is there one dominant parameter determining the transaction structure?

With such a high level of subjectivity and associated complexity, the discussion amongst the panel of experts tried to focus on identifying whether there was one dominant factor for determining the transaction structure. ‘Cash, Cash and Cash’ was the vocal emphasis factor from the experts. Let’s see what Ameet Hariani has to say: ‘The essential part of the transaction is the cash flow requirement of the landowners. Based on this, all the other issues can be structured.’

Sudhir Soni concurs: ‘The commercial considerations are largely dependent on the cash flow requirements of the developer and the landowner. Grant of development rights against sharing of revenue or developed area are the more prevalent JDA structures and there is not much difference in the business context. Grant of development rights against share of net profits is rare. The commercial considerations for a landowner to select between an area share or revenue share arrangement also depend on the cash flow requirements and taxation implications.’

There is a financial facet other than cash which is equally important – the timing of revenue recognition. Says Ameet Hariani, ‘So far as the developer’s requirements are concerned, since revenues can now only be recognised effectively upon the Occupation Certificate being obtained, and keeping the RERA perspective in mind, the speed of completion of the project is of paramount importance. This is especially true so far as listed developers are concerned.’

Practically, joint development arrangements have specific performance clauses for both the parties and will not allow a mid-way exit to either party. However, the future is uncertain. What if a developer runs out of cash mid-way and needs to exit and bring in another developer? Ameet Hariani opines, ‘Normally, a landowner would be uncomfortable to have a provision whereby development rights can be transferred / assigned without the landowner’s consent. It will be a very rare case where such right is allowed to the developer. There is a high likelihood of litigation where there is a transfer of rights proposed to a third party developer by the current developer’.

The litigation risk is not only at the developer’s end but also at the landowner’s end. Ameet Hariani continues, ‘Also, in the event the landowner wants the developer to exit and wants to appoint a new developer, once again there is a high likelihood of litigation.’ But Ameet Hariani has a golden piece of advice suggesting the incorporation of an arbitration clause in the agreement. ‘Earlier, there was a debate as to whether developer agreements could be made subject to arbitration or not. Recent judgments read with the amendments to the Specific Relief Act and the Arbitration Act have now clarified the position significantly and a well-drafted arbitration clause would be key to ensure protection for both the parties’, he says.

But new transaction structures are emerging

While the discussion was around the traditional options of transaction structuring, the experts did agree that the scenario is fluid and specific situations may suggest the evolution of new transaction structures. While income-tax and stamp duty outflows act as a deterrent to the transaction structure of an outright sale of land, the grant of development rights could possibly be a subject matter of GST. There appears to be a notification which obliges the developer to pay GST on acquisition of development rights (under reverse charge) and another notification which obliges him to also pay GST on the area allotted to the landowner (under forward charge). Much to the chagrin of the developer, the valuation of such a barter transaction is far away from business reality and input tax credits (ITC) are also not allowed. Perhaps the only sigh of relief is that the substantial cash outflow on this account is deferred till the date of receipt of the completion certificate.

But wait! Weren’t transactions in immovable property expected to be outside the purview of GST? ‘Though there is a strong case to argue that such transactions should not be subjected to GST, there are conflicting interpretations on this front and the lower judicial forums are divided. One therefore has to wait for the Supreme Court to provide a final stand on this aspect,’ says Sunil Gabhawalla. Unluckily, businesses can’t wait and the stakes involved are phenomenal. The industry therefore tries to adapt and innovate newer transaction structures which are perhaps more tax-efficient.

Welcome the new concept of ‘Development Management Agreement’ wherein the developer acts as a project manager or a consultant to the landowner in developing the identified real estate. Suitable clauses are inserted to ensure that the developer and the landowner appropriate the profits of the venture in the manner desired. Essentially, this concept turns the entire relationship topsy-turvy and the key challenge is to ensure that the developer has a suitable title in the property while under development. ‘Safeguarding the developer’s rights and title in the property being developed becomes the most important aspect in this structure. Further, the brand value of the developer and past experience of other landowners with the developer is crucial for the landowner to make a choice as to which developer the landowner will go with,’ says Ameet Hariani.

It’s not really new for a tax aspect to be an important determinant for deciding a transaction structure. In case of corporate-owned properties put up for redevelopment, it is not uncommon to explore the route of demerger or slump sale and seek the associated benefits under the income-tax law. Pradip Kapasi says, ‘In case of demerger, the transfer of land by the demerged company to the resulting company would be tax-neutral provided the provisions of section 2(19AA) and sections 47(vib) and 47(vic) are complied with. No tax on transfer would be payable by the company or the shareholders. The cost of the land in the hands of the resulting company would be the same as was its cost in the hands of the demerged company’. Sunil Gabhawalla supports this approach, ‘GST is not payable on a transaction of transfer of business under a scheme of demerger’.

Well, the devil lies in the details. The provisions referred to above effectively require continuity of shareholding to the extent of at least 75%. This may not be possible in all cases. There comes up another option, of slump sale. Pradip Kapasi suggests, ‘The provisions of section 2(42C) r/w/s 2(19AA) and section 50B would apply on transfer of land as a part of the undertaking. No separate gains will be computed in respect of land. The company, however, would be taxed on the gains arising on transfer of the business undertaking in a slump sale. The amendments of 2021 in sections 2(42C) and 50B would have to be considered in computing the capital gains in the hands of the assignor company’. Effectively, income-tax becomes due on slump sale. What happens to GST? Sunil Gabhawalla opines, ‘There is an exemption from payment of GST.’

While such exotic products and arrangements may exist and appeal to many, there would always be takers for the plain vanilla example. The essential business case is that of the landowner and the developer coming together to jointly develop the property. A simple transaction structure could be to recognise the same as a joint venture, as an unincorporated association of persons. In fact, this is a risk parameter always at the back of the mind of any tax consultant. A less litigative route would be to grant such concept a legal recognition by entering into a partnership. To limit the liability of the stakeholders, the LLP / private limited company route can be considered. What could be the tax consequences of introduction of land into the entity?

Pradip Kapasi has this to say, ‘In such an event, of introduction in the partnership firm or LLP, provisions of section 45(3) of the Income-tax Act would be attracted and the landlord’s income under the head capital gains would be computed as per section 45(3) read with or without applying the provisions of section 50C. The profit / loss on subsequent development by the SPV would be computed under the head profits and gains of business and profession. In computing the income of the SPV, a deduction for the cost of land would be allowed on adoption of the value at which the account of the partner introducing the land is credited’. Would such introduction of land into the partnership have any GST implications? ‘Apparently, no, since such transactions are structured as in the nature of supply of land per se’, says Sunil Gabhawalla. He further comments, ‘If the transaction is structured as an introduction of a development right in the partnership firm, things can be different and reverse charge mechanism as explained earlier could be triggered’.

The next steps

Having dabbled with the possible transaction structures with an overall understanding of the complex factors at play in determining the possible transaction structures, we now proceed to dive into the accounting and tax issues in some of these specific structures. Since the landowner and the developer would be distinct legal entities, the discussion can be undertaken from both the perspectives separately.

Landowner’s perspective

Fundamentally different direct tax outcomes arise depending on whether the land or the development rights are contributed by the landowner as an investor or as a business venture.

Landowner as an investor
Essentially, in case the immovable property is held as an investor, it would be treated as a capital asset and the transfer of the capital asset or any rights therein would attract income-tax in the year of transfer itself under the head ‘capital gains’. While a concessional long-term capital gains tax rate and the benefits of reinvestment may be available, in order to curb the menace of tax evasion the Government prescribes that the value of consideration will be at least equivalent to the stamp duty valuation. This provision can become a spoilsport especially in situations where the ready reckoner values prescribed by the Government are not in alignment with the ground-level reality. However, Pradip Kapasi offers some consolation. While the said provisions would apply with full force to transactions of outright sale of land, the application of section 50C to grant of development rights transferred could be a matter of debate. But is the minor tax advantage (if at all) so derived really worth it? Remember the jigsaw puzzle of GST discussed above. But again, someone said that GST applies only on supplies
made in the course or furtherance of business. Did we not start this paragraph with the assumption that the landowner is an investor and is not undertaking a business venture?

Sunil Gabhawalla agrees with this thought process but at the same time cautions that the term ‘business’ is defined differently under the GST law and the income-tax law. He adds, ‘The valuation based on ready reckoner may be prescribed under income-tax law, but the same does not apply to GST where either the transaction value or equivalent market value become the key criteria’. Sudhir Soni endorses this thought from the accounting perspective as well, ‘The ready reckoner value will not necessarily be the fair value for accounting. The valuation for accounting purposes will be either based on the fair value of the entire land parcel received by the developer [or] based on the standalone selling price of constructed property given by the developer’.

In many cases, both the developer as well as the landowner wish to share the risks and rewards of the price fluctuations and also align cash flows. Accordingly, the consideration for the grant of development is both deferred as well as variable – either by way of share of gross revenue or share of profits, or sharing of area being developed. In cases where the landowner does not receive the money upfront and is keen on deferring the taxation to a future point of time, is it possible? The views of Pradip Kapasi are very clear, ‘Provision in agreement or deed for deferred payment or even possession may not help in deferring the year of taxation’. In the case of sharing of gross revenue, he further cautions that the fact of uncertainty of the quantum of ‘full value of consideration’ and its time of realisation may be impending factors but may not be conclusive for computation of capital gains, unless ‘arising’ of profits and gains on transfer itself is questioned. There could be debatable issues about the year of taxation of overflow or the underflow of consideration.

How does one really question or defer the timing of ‘arising’ of profits and gains on transfer? Without committing to the conclusiveness of the end position, which would be based on multiplicity of factors, Pradip Kapasi has a ray of hope to offer. In his words, ‘The cases where either the profit or developed area is shared could be differentiated on the ground that the landlord here has agreed to share the net profits of a business and therefore has actively joined hands to carry on a business activity for sharing of profits of such business. In such circumstances, his “share of profits” could arise as and when it accrues to the business’.

But tax law is full of caveats and provisos. Pradip Kapasi further warns, ‘There is a possibility that the landowner’s association with the developer here could be viewed as constituting an AOP and his action or treatment could activate the provisions of section 45(2) dealing with conversion of capital asset into stock-in-trade and / or the provisions of section 45(3) for introduction of capital asset into an AOP. In case of application of section 45(2) and / or 45(3), there would arise capital gains in the hands of the landlord and would be subjected to tax as per the respective provisions. The surplus, if any, could be the business profits; however, where the transactions are viewed as constituting an AOP, he would be receiving a share in the net profits of the AOP and the share of profit received from the AOP would be computed as per provisions of sections 67B, 86 and 110 of the Income-tax Act’.

Phew, that’s a barrage of cryptic sections to talk about! Let’s keep our fingers crossed and assume that the landlord survives this allegation of the transaction being treated as an AOP. The battle is then nearly won. Pradip Kapasi continues, ‘Where no profits and gains are brought to tax in the year of grant of development rights under the head “capital gains”, the capital gains can be held to have arisen in the year of receipt of the ready flats, where the gains would be computed by reducing the COA (cost of acquisition) of land from the SDV (stamp duty value) of the flats received. Further, if the transaction is structured such that no capital gains tax is levied in the year of receipt of ready flats, the capital gains may be taxed in the year of sale of the flats allotted by the developer’. He further warns about some practical difficulties in this stand being taken; ‘where the landlord on receipt of flats does not sell them but lets them out, difficulties may arise for bringing to tax the notional gains in the hands of the landlord’.

In case all this mumbo-jumbo has dumbed your senses, a landlord who is an individual or HUF may consider the possibility of entering into a ‘specified agreement’ prescribed u/s 45(5A) that involves the payment of consideration in kind, with or without cash consideration in part, for grant of development rights. Under the circumstances, the capital gains on execution of the development agreement shall stand deferred to the year of issue of the completion certificate of the project or part thereof where the full value of consideration for the purpose of computation of capital gains would be taken as the aggregate of the cash consideration and the stamp duty value of his share of area in the project in kind on the date of the issue of the completion certificate. This assumed concession is made available on compliance of the strict conditions including ensuring that the landlord does not transfer his share in the project prior to the date of issue of the completion certificate. Subsequent sale of the premises received under the agreement would be governed as per the provisions of section 45 r/w/s 48.

That’s too much of income-tax. Let’s divert our attention to GST. As a welcome change, Sunil Gabhawalla has a bit of advice for the landowners entering into joint development agreements after 1st April, 2019, ‘Sit back and relax. As stated earlier, the burden of paying the tax on supply of development rights has been transferred to the developer’. What happens when the landowner resells the developed area allotted to him under the area-sharing agreement? Sunil Gabhawalla adds, ‘If the developed area is sold after the receipt of the completion certificate, there is no tax. If the developed area is sold while the property is under construction, the landowner can argue that he is not constructing any area and therefore he is not liable for payment of GST. Remember, the GST on the area allotted to the landowner would also be paid by the developer’.

But life in GST cannot be so simple, right? Nestled in the by-lanes of a condition to a Rate Notification disentitling a developer from claiming input tax credit (ITC) for residential projects is an innocent-looking sentence which permits the landowner to claim ITC on units resold by him if he pays at least equivalent output tax on the units so resold. Sunil Gabhawalla says, ‘Well, the legal tenability of such a position can be questioned. But in tax laws, with the risk of litigation and retrospective amendments, the writing on the wall is that the boss is always right. If the landowner opts to fall in line, he would require a registration and would be paying additional GST on the difference between the tax charged to him and that which he charges to the end buyer. While this also brings commercial parity vis-à-vis the buyers for landowner’s inventory and the developer’s inventory, it could also result in some cash flow issue if not structured appropriately.’

In a nutshell, therefore, the key tax issue bothering the landowner in case of joint development agreements is not really GST but the upfront liability towards a substantial capital gains tax irrespective of actual cash realisation.

Landowner as a businessman
Will things change if the land is held as stock-in-trade? Actually, yes, and substantially. As a businessman, the landowner forfeits his entitlement of concessional long-term capital gains tax rate. But that pain comes with commensurate gain – the tax is attracted not when the transfer takes place but at a point of time when the income accrues in relation to such land. Says Pradip Kapasi, ‘The point of accrual of income is likely to arise on acquisition of an enforceable right to receive the income with reasonable certainty of realisation. The method of accounting and sections 145 and 28 may also play a vital role here. Provisions of ICDS and Guidance Note, where applicable, would apply’. Welcome to the wonderland of accounting and its impact on taxation!

Sudhir Soni says, ‘There may be alternatives. If it is treated as a capital gain, the amounts received as revenue share will be accumulated as advance and recognised at the end of the project, on giving possession. If it is treated as a business, at each reporting date apply percentage of completion to the extent of its share’. But is it really that simple? Well, the situation is fluid and the conflict is nicely summarised by Pradip Kapasi, ‘The fact that there was a “transfer” would not be a material factor in deciding the year of taxation. At the same time, the deferment of receipt may not be the sole factor for delaying the taxation where the enforceability of realisation is reasonably certain’.

Pradip Kapasi further cautions, ‘The provisions of section 43CA may play a spoilsport by introducing a deeming fiction for quantifying the revenue receipts.’ He has an additional word of advice. He suggests the preference of variable consideration models like gross revenue sharing, profit sharing or area sharing over the fixed consideration model. To quote him, ‘The case of the landlord here to defer the year of taxation could be better unless an income can be said to have accrued as per section 28 r/w/s 145, ICDS, where applicable, and Guidance Note of 2012’.

As usual, he has a few words of caution: firstly, ‘There is a possibility that the development rights held by the landlord are considered as a capital asset within the meaning of section 2(14) by treating such rights as a sub-specie of the land owned by him. In such case, a challenge may arise on the income-tax front where transfer of such
rights to the developer is subjected to taxation in the year of transfer itself. This possibility, however remote, could not be ignored though the better view is that even this sub-specie is a part of this stock-in–trade’; and secondly, ‘The possibility of treating the association with the developer as an AOP is not altogether ruled out especially in view of the amendment of 2002 for insertion of Explanation of section 2(31) dealing with the definition of “person” w.e.f. 1st April, 2002. In such an event, though remote, issues can arise in application of the provisions of section 45 to 55, particularly of sections 45(2), 45(3), 50C and 50D.’ Again, a plethora of sections to study and analyse. Well, that’s for the homework of the readers.

What happens on the GST front if the landowner is a businessman? Sunil Gabhawalla reiterates, ‘Sit back and relax if the development agreement is entered into after 1st April, 2019’. But what happens in cases where the development agreement is prior to that date? ‘I’m afraid, definitive answers are elusive. Whether transfer of development rights is liable for GST or not is itself a subject matter of debate. The issues of valuation and the timing of payment of tax are also not settled. We may need a separate article to deal with this,’ he adds.

Is Development Management Agreement a panacea for the landowner?
The concept of Development Management Agreement (DMA) has already been explained earlier. A quick sum and substance recap of the transaction structure would help us appreciate that the appointment of a development manager by the landowner vide a DMA would tantamount to the landowner donning the hat of a real estate developer and the development manager acting as a mere service provider. It will effectively mean that the landowner is the real estate developer who is developing a real estate project in his own land parcel. While this model offers significant respite in the GST outflow on development rights and also avoids the stretched interpretation of barter and consequent GST on free units allotted to existing members for self-consumption (remember, a redevelopment agreement entered into by a co-operative society is a sub-specie of a development agreement), it also helps the landowner in deferring the income-tax liability to a subsequent stage due to his becoming a businessman.

In the words of Pradip Kapasi, ‘In this case, the appointment of a Development Consultant under a DMA would itself be treated as a business decision in most of the cases. The appointment would signal the undertaking of an enterprise by the landlord on a systematic and continuous basis, constituting a business. Such an appointment would not be regarded as a “transfer” of capital asset and no capital gains tax would be payable on account of such an appointment. The first effect of such a decision would be to invite the application of section 45(2) providing for conversion or treatment of a capital asset into stock-in-trade and as a consequence lead to computation of capital gains that would be chargeable in the year of transfer of the stock-in-trade being developed. The market value of the land on such happening would be treated as the cost of the stock-in-trade and the rest would be governed by the computation of Profits and Gains of Business and Profession r/w/s 145, ICDS and Guidance Note’.

But is all hunky-dory as far as GST is concerned? Sunil Gabhawalla cautions, ‘While there is a respite in taxation for the landowner, it may be important to note that the developer relegates himself to the position of a contractor rather than a developer. This would disentitle him from claiming the concessional tax rate of 5% for developers and instead he would be liable for the general tax rate of 18% on the value of the services provided by him. However, this higher rate of tax comes with the eligibility towards claiming input tax credit.’

Developer’s perspective
Well, that was a lot of discussion from the point of view of the landowner. What happens at the developer’s end? Pradip Kapasi has a very simple and affirmative answer on this front. ‘The payment agreed to be made towards the development rights / land acquisition to the landowner would constitute a business expenditure that will be allowed to be deducted against the sale proceeds of the developed area, and if not sold by the yearend, would form the stock-in-trade and would be reflected in the books of accounts as its carrying cost’.

But what happens if the payment towards the development rights is deferred like in gross revenue sharing arrangements? ‘The net receipts subject to his method of accounting would be taxed in respective years of sale and / or realisation. The carrying cost of the stock would be represented by the amount of direct expenditure incurred by him excluding the notional cost of acquiring DR. In the alternative, the payment to be made to the landlord would constitute a business expenditure that will be allowed to be deducted against the gross sale proceeds, and if remaining to be sold by the yearend, would form part of the stock-in-trade and would be reflected in the books of accounts as its carrying cost’, says Pradip Kapasi.

In case of profit-sharing arrangements, however, he cautions about the risk of constitution of an AOP and the associated perils of sections 67B, 86 and 110. He is also afraid that the land cost may not be available as a deduction to the AOP. How does one deal with area-sharing agreements? Pradip Kapasi responds, ‘The net receipts of the balance area coming to the share of the developer would be taxed in respective years of sale and / or realisation where the cost of construction of all the flats would be allowed to be deducted as business expenditure. The carrying cost of the stock could be represented by the amount of direct expenditure incurred by him excluding the notional cost of acquiring DR. In the alternative, the payment to be made to the landlord in kind would constitute a business expenditure that will be allowed to be deducted against the gross sale proceeds, and if remaining unsold by the yearend, would form a part of the stock-in-trade and would be reflected in the books of accounts as its carrying cost.’

The clear essence of the above discussion is that the accounting treatment is important. But depending on certain criteria, enterprises are required to follow either IGAAP or Ind AS. Let us check out what Sudhir Soni has to say. ‘While there is very limited guidance available under IGAAP for accounting of joint development agreements, the cost that is incurred by the developer towards construction of the entire project is treated as cost towards earning the revenue from sale to the developer’s customers. Accordingly, in case of area share for landowner there is no separate accounting and in case of revenue share to landowner it is accounted through the balance sheet. Elaborate guidance is, however, available under Ind AS 115’.

He adds, ‘The JDA is a contract for specific performance and does not have a cancellation clause. For projects executed through joint development arrangements, it is evaluated that the arrangement with land owners are contracts with customers. The transaction is treated as if the developer is buying land from the landowner and selling the constructed area to the landowner. This results in a “grossing” of revenue and land cost, which is a difference from the accounting under Indian GAAP.’ Whether such a difference in accounting treatment will have any ramifications under the income-tax or GST law, only time will tell.

Having treated the transaction as a barter, there comes the issue of accounting for such a transaction. Sudhir Soni says, ‘For real estate projects executed through JDA not being jointly controlled operations, wherein the landowner provides land and the developer undertakes the development work on such land and agrees to transfer certain percentage of constructed area / revenue proceeds to the landowner, the revenue from the development and transfer of agreed share of constructed area / revenue proceeds in exchange of such development rights / land is accounted on gross basis. Revenue is recognised over time (JDA being specific performance arrangements) using input method, on the basis of the inputs to the satisfaction of a performance obligation relative to the total expected inputs to the satisfaction of that performance obligation. The gross accounting at fair value for asset in form of land inventory (subsequently recognised as land cost over time basis stage of project completion) and the corresponding liability to the landowner (subsequently recognised as revenue over time basis stage of project completion) may be accounted on signing of JDA, but in practice the accounting is done on the launch of the project, considering the time gap between the signing of the JDA and the actual launch of the project. The developer’s commitments under the JDA, which is executed and pending completion of its performance obligation, are disclosed in the financial statements.’

Further, ‘For real estate projects executed through a JDA being jointly controlled operations, which provide for joint control to the contracting parties for the relevant activities, the respective parties would be required to account for the assets, liabilities, revenues and expenses relating to their interest in such jointly controlled JDA.’

Now comes the next accounting issue of measurement of fair value for such a barter. Sudhir Soni says, ‘The fair value for the gross accounting of JDA is the market value of land received by the developer or based on the standalone selling price of the share of constructed property given by the developer. In case the same cannot be obtained reliably, the fair value is then measured at the fair value of construction services provided by the developer to the landowner’. Well, but the valuation provisions under GST are different. Sunil Gabhawalla agrees and says that each domain will have to be independently respected.

The bottom line, it seems, is that the direct tax consequences for the developer will closely follow the generally accepted accounting principles for determination of net profit for a year. But are things equally simple in GST? Not really. Sunil Gabhawalla shares his inputs. ‘Unless the developer in essence constitutes a contractor, all new residential projects attract 5% GST on the sale proceeds of the units sold while under construction. Even area allotted to the landowner attracts this 5% GST on the equivalent market value of the units allotted to the landowner. Affordable housing projects enjoy a concessional tax rate of 1%. However, no input tax credit is available to the developer’.

But wait a minute! This is not all. A plethora of reverse charge mechanism Notifications require the developer to pay tax on the expenses incurred by him. For example, the proportionate value of the development rights acquired by him from the landowner is liable to GST in the hands of the developer at the time of receipt of the occupation certificate. As Sunil Gabhawalla adds, ‘It may make sense for the developer to procure goods and services from registered dealers only since another Notification requires the developer to pay GST on reverse charge if the procurement from unregistered dealers exceeds 20%. Notably, no tolerance limit has been provided for procurement of cement, where reverse charge mechanism triggers from the first rupee of procurement from unregistered dealers.’

Summing up
This article was an attempt to apprise the readers of the nuances of this complex topic. All experts agreed that the tax efficiencies of each structure over the other would be determined largely by the available circumstances and the needs of the parties. No structure, in such an understanding, is superior to other structures, nor inferior to any.

shailesh.kwebmaker

PAYMENT GATEWAYS

A Payment Gateway is a service that provides a payment transaction interface between a customer and the supplier. It can be used for direct payments in-store or for e-businesses or online commercial transactions. Earlier, banks were the primary payment gateway service providers. However, today specialised Fintech organisations are the preferred providers of this service.

When a customer makes a payment using a Payment Gateway, the following tasks are performed to complete the transaction:

1. Typically, the credit / debit card number is entered online, or a credit / debit card is swiped or scanned using a contactless card-reading device. In the case of online transactions, the CVV and the name on the card is also requested.
2. The card number is encrypted as soon as it is entered and transmitted to the Card Association (Master / Visa / Amex) through the Acquiring Bank.
3. The Card Association then routes the transaction to the appropriate Card Issuing Bank.
4. The Card Issuing Bank verifies the debit or credit available on the card concerned and sends a response back to the Acquiring Bank and subsequently to the Payment Gateway with a response code, i.e., whether approved or denied.
5. The Payment Gateway then conveys the response back to the device or website from which the transaction originated.
6. The merchant will then process the transaction for goods or services based on his own internal guidelines.
7. The entire process will take not more than five to ten seconds!
8. At the end of the day, or at periodic intervals, the Issuing Bank will settle the aggregate of transactions to the Acquiring Bank after deducting its commission on the same.
9. The Acquiring Bank will pay the Payment Gateway service provider who will in turn settle all amounts received on behalf of the merchant after deducting its charges for the same.

Many payment gateways also provide tools to automatically screen orders for fraud, blocked card lookups, velocity pattern analysis, ‘black-list’ lookups, IP address lookups, etc.

Points to be considered by a seller of goods and services while choosing a good Payment Gateway:

(i) The Payment Gateway needs to be fast and secure. Speed and security are the main considerations, since without either of them the Payment Gateway would be unsuitable for use.
(ii) A good Payment Gateway also needs to provide a variety of payment options to the user. Apart from Credit Cards and Debit Cards, many Payment Gateways in India also allow use of e-wallets, Online Banking and Virtual Cards. This gives total flexibility to the client and ensures that the client can complete the transaction, irrespective of his preferred mode of payment.
(iii) If your business is global, multi-currency options would be a great advantage.
(iv) Many Payment Gateways make it extremely easy to integrate them in your website or other software platforms, which can get you up and running immediately.
(v) The settlement cycle may vary from a day to a week which will depend on the number and value of transactions.
(vi) Earlier, there used to be one-time setup charges being levied by Payment Gateways – nowadays, the one-time setup charge is waived by many providers.
(vii) The per transaction fees may vary for each Payment Gateway and for each type of transaction. This is negotiable with the Payment Gateway service. The higher the value and volume of transactions, the lower will be
the per transaction fee. Typical transaction costs may have a fixed component and a variable component. The variable component may range from 0.25% to 3% of the value of the transaction.

PayPal is one of the pioneers in the field. It has an international presence and handles a variety of currencies. It is different in the way it handles payments. You have to enter your credit card information only once and create a user-id and password. PayPal will then handle all your payments going through its gateway. The merchant never gets to access your credit card information at all, hence it is completely safe.

Amazon Pay is designed for Amazon merchants and shoppers. It facilitates easy payment through its wallet which needs to be refilled from time to time.

Square is a Payment Gateway which also has its own hardware, making it very easy to acquire payments. The hardware may be in the form of a POS terminal, contactless slide-in, magstripe squares connected to your mobile or in-Stand form.

Among the Indian Payment Gateways, the most popular are Razorpay, CCAvenue, PayUBiz, Instamojo, PayTm and Atom. Each of them has similar features with ease of use and a variety of payment options. PayTm is easiest to deploy – both for the customer and the seller for offline and online transactions. However, Razorpay and Instamojo are the easiest to integrate
into your website. A detailed comparison between the 15 popular Payment Gateway providers is available at http://bit.ly/pgcomparison.

As for the risk factors, all Payment Gateways are regulated by Reserve Bank of India and have strict reporting norms. Transactions are encrypted with 128 bit (or higher) security protocol and are therefore extremely safe and reliable. Breaches, if any, are to be instantly reported and monitored. Hence, most of the popular Payment Gateways are safe and reliable on all counts. RBI Guidelines on Regulation of Payment Aggregators and Payment Gateways are available at https://bit.ly/3tpmCwm.

In these days of growing online transactions, a Payment Gateway for your website is a must-have tool, not only for selling goods and services but also for easy and smooth collection of payments!

shailesh.kwebmaker

SAT SETS ASIDE INSIDER TRADING ORDERS

As discussed several times earlier in this column, SEBI has been investigating stock market frauds, insider trading, etc., by tracking the use of social media / messaging applications. About a year back, we also discussed certain SEBI orders where it was held that some persons shared unpublished price-sensitive information through the popular chat application WhatsApp. Stiff penalties were levied on such persons under the Insider Trading Regulations. Those who were penalised appealed to the Securities Appellate Tribunal (‘SAT’) which has now reversed those orders. SAT has held that, on the facts, there was no violation of the SEBI Regulations on insider trading.

This decision of SAT has several interesting aspects. Has SAT made any significant interpretation of the law that has far-reaching implications as suggested by some reports? When can a person, who shares unpublished price-sensitive information (‘UPSI’), be held to have violated the Regulations? Is it necessary that a link be established between the person having the UPSI and the source within a company who had leaked such information? There are also lessons generally for persons using social media applications. Let us consider this decision (Shruti Vora vs. SEBI, dated 22nd March, 2021) in greater detail.

BROAD SCHEME OF SEBI (PROHIBITION OF INSIDER TRADING) REGULATIONS, 2015 AS RELEVANT HERE
The Regulations seek to prohibit and punish insider trading. They prohibit what is commonly understood as insider trading – that is, trading by an insider who is in possession of, or has access to, UPSI. However, they also prohibit several other things like communication of UPSI except where permitted under the Regulations. The Regulations also have further requirements of disclosure of holdings and dealings by certain insiders, prohibition of trading during periods when the trading window is required to be closed, etc.

In the present case, the relevant provision is related to the sharing of UPSI. Insiders are prohibited from sharing UPSI. The reason for this prohibition is obvious. Sharing such information may result in the recipient dealing and profiting out of it. However, such recipient may also further pass on such information to others. Such sharing is also covered by the offence of ‘insider trading’.

However, as this case shows, three interesting questions arise: Is it required to show that a person who shared UPSI had received it from a particular person within the company? Is it required that he should know that such information was UPSI? Would the offence of insider trading also cover sharing of UPSI by a person who is not aware that it is UPSI?

The first question has been answered by a deeming provision in the Regulations itself. It is provided that a person would be deemed to be an insider even if he is in mere possession of UPSI. Thus, it is not required that his source of such information be traced within the company (a little more on this later). He is deemed to be an insider. If he then deals in the securities, or shares such UPSI, he would be deemed to have committed the offence of insider trading.

The second question is interesting and indeed became, as we will see, the core issue in this case. Should a person know that the information in his possession is UPSI? The Regulations have not made an express provision on this. SAT has held that a person should be aware that such information is UPSI and it is only in such a case that the person would be deemed to be an insider. However, the equally critical question is how does one establish whether a person knows that the information he possesses is UPSI? This can be tricky as this would be something in the person’s mind. This aspect will be discussed further while analysing the decision.

The third question would be answered by implication from the answer to the second question although, again, the Regulations have no express provision about it. If a person does not know that the information he possesses is UPSI, then sharing of such information would not make him guilty of the offence of insider trading.

With this brief background, let us consider the case and then discuss what SAT has held.

FACTS OF THE CASE AND SEBI’S ORDER
It appears that SEBI was alerted especially by media reports that financial results of reputed companies were being leaked and shared in advance on social media through chat applications like WhatsApp. It conducted investigations and amongst its findings was some data relating to two appellants in the present case. It was found that they worked in the industry and had forwarded financial results through WhatsApp to many persons, including clients. The financial results forwarded were eerily accurate and very closely matched the actual results published soon after. However, SEBI could not trace who had sent this information to such persons. Even the companies concerned could not find any leak that could have happened internally from within the companies themselves.

SEBI, however, held that the law was clear. Possession of UPSI made the person an insider. The law also prohibited insiders from sharing UPSI with others. Since these persons did share the UPSI, they committed the offence of insider trading. It levied stiff penalties on such persons. Since similar orders were passed separately for sharing of results for each company, the penalties cumulatively rose to an even larger amount.

The parties had argued that not only these messages but several others were also forwarded in the same manner. And these messages were forwarded to groups of numerous persons. The messages were sent almost as soon as they were received. The other messages had information which was not UPSI and in any case often did not even match with the actual financial results in those other cases. However, SEBI stuck to its position and held that they had indulged in insider trading and levied penalties.

APPEAL BEFORE SAT
In the appeal before SAT, the appellants made several arguments. It was pointed out that they were not aware that what they had was UPSI. They had received numerous such messages and those were also forwarded along with the ones under question. They had no means to verify the authenticity of any of the information. The messages / information so received could be compared to ‘heard in the street’ columns common in media and while such pieces are read by many, it was accepted that their authenticity was not assured. Indeed, some could be just rumours or informed guesses. The appellants also pointed out that the specific messages that were of concern were not differently coded while being forwarded. So the recipients could not distinguish those messages from the others.

DECISION OF SAT
SAT accepted the arguments of the appellants and set aside the orders of SEBI levying penalties. It also made some important points about the interpretation of the law.

At the outset, SAT confirmed that possession of UPSI did make a person an insider under law and sharing of such UPSI by such person would be an offence under the Regulations. SEBI did show that the person was in possession of the UPSI and hence it may appear that one part was fulfilled. The information was shared, too.

However, and this was the crucial point, did such person know the information received and shared was UPSI? And, if not, would the information still be UPSI qua such person? The law is silent on this point. However, this did matter because it is from the perspective of the person accused of insider trading. If such person did not know it was UPSI, then that person cannot be held to be in possession of UPSI and hence is not an insider. And if this was so, his sharing of the information was not insider trading.

It was apparent from the record itself that the persons had received numerous bits of information and had forwarded the same to many other persons. Neither the persons sending them nor the persons receiving them could have had any way of knowing that the information was authentic and hence UPSI. SAT observed, ‘The above definitions of the “unpublished price sensitive information” and “insider” would show that a generally available information would not be an unpublished price sensitive information… The information can be branded as an unpublished price sensitive information only when the person getting the information had a knowledge that it was unpublished price sensitive information’. Thus, the information was not UPSI. One could take the example of the numerous WhatsApp forwards many of us receive. We have become used to examine them with so much scepticism that we generally have stopped even reading most of them.

While it is true that possession of UPSI was sufficient to make a person an insider, there were sufficient circumstances to doubt that it was UPSI and thus the onus shifted back to SEBI. It was now up to SEBI to prove, even with a reasonably low benchmark of proof or of the preponderance of probability, that the persons knew it was UPSI. SEBI could not and it did not so prove.

SAT also noted that SEBI has not connected the information to any source within the companies and even the companies did not have any such findings of leakage.

The order was thus set aside.

CONCLUSION
The important legal point thus is that UPSI is from the perspective of the person who is in possession of the same. If I have a pile of stones with me and I do not know that a couple of the ‘stones’ are really diamonds, I may give the same to someone else for a low value. And even he may do the same with them.

That said, this does not mean one should be lax with the law. The law provides for serious consequences for insider traders and the benchmark of proof remains relatively low. In this particular case, the facts were peculiar and hence did not allow any wider generalisation. One should remain ever vigilant while forwarding information. The law has sufficient deeming provisions. Chartered Accountants are typically and even otherwise deemed to be insiders as auditors, advisers, CFOs, etc. They are also expected to know the importance of figures and it is even possible that information shared by them may be given more weightage by the recipient, and thereby also by SEBI while deciding guilt. Thus, this case should induce even more caution.

shailesh.kwebmaker

OCI: A FEW CHANGES, BUT LOTS OF CONFUSION

INTRODUCTION
The Overseas Citizen of India or OCI was a modified form of dual citizenship introduced by the Indian Government in 2005 for the benefit of Non-Resident Indians (NRIs) and Persons of Indian Origins (PIOs) resident abroad. India currently does not permit dual citizenship, i.e., a person cannot be the citizen of both India and a foreign country, say the USA. He must select any one. An OCI cardholder is not a full-fledged citizen but he has certain benefits at par with a citizen. As of 2020, there were over six million OCIs abroad.

This scheme has seen certain regulatory and legal developments which have caused a great deal of confusion and anxiety amongst the OCI cardholders resident abroad. The University of WhatsApp (sic!) has played a stellar role in fuelling this fire. The intent of this article is to discuss those forwards and dispel some myths.

WHAT IS REGULATORY FRAMEWORK?
An OCI card is granted by the Government of India to a person under the aegis of the Citizenship Act, 1955. Section 7A of this Act provides for the registration of OCIs. At the cost of repetition, an OCI is not a full-fledged Indian citizen under the Citizenship Act but he is only registered as an OCI. Section 7A allows the Government to register the following individuals as OCIs on an application made by them:

(a) Any person who currently is a foreign citizen but was an Indian citizen at the time of commencement of the Constitution of India, i.e., in 1950;
(b) Any person who currently is a foreign citizen but was eligible to be an Indian citizen at the time of commencement of the Constitution of India, i.e., in 1950;
(c) Any person who currently is a foreign citizen but belonged to a territory that became part of India after Independence;
(d) Any person who is a child or a grandchild of the above persons;
(e) A minor child of a person mentioned in the clause above;
(f) A minor child both of whose parents are citizens of India or one of whose parents is a citizen of India;
(g) Spouse of a citizen of India or spouse of an Overseas Citizen of India cardholder;
(h) Spouse of a person of Indian origin who is a citizen of another country and whose marriage has been registered and subsisted for a continuous period of not less than two years immediately preceding the presentation of the application under this section.

Thus, all of the above persons are eligible to be registered as OCIs. Interestingly, even a person of non-Indian origin can be registered as an OCI if he marries a citizen / an OCI cardholder. For example, a Caucasian American man marries an Indian OCI woman residing in the USA. He, too, would be eligible to be registered as an OCI along with their children. The Act further provides that the OCI card granted u/s 7A to a spouse is liable to be cancelled upon dissolution of marriage by the competent court. The special privileges can then be withdrawn.

The Bombay High Court in Lee Anne Arunoday Singh vs. Ministry of Home Affairs, WP 3443/2020 has held that the provisions of section 7 of the Act cast a duty on the Government to take necessary steps regarding cancellation of the OCI card issued on spouse basis, if the marriage is dissolved by a competent court of law.

The Government of India has recently made a submission in a similar case before the Delhi High Court that a foreigner registered as an OCI on the strength of marriage to an Indian citizen loses that status when the marriage is dissolved. Such foreigners are no longer eligible to be registered as OCIs under the Citizenship Act. Such a person could, however, continue to visit India by applying for an ordinary / long-term visa. A PIL (public interest litigation) has also been filed before the Delhi High Court in Jerome Nicholas Georges Cousin vs. Union of India, W.P. (C) 8398/2018 by a French national against this provision. In his plea he states that he would have to close down his business and go back to France since he would now not have permission to run a business in India.

WHAT ARE THE BENEFITS AVAILABLE TO AN OCI?
The OCI card is a life-long visa granted to these foreign citizens. While their passport is the primary document to enter India, the OCI card is an additional document that they receive. They can visit India as many times as they want and stay as long as they wish. They can even permanently reside in India and work and study here. Non-OCI cardholders need to get registered with the Foreigners Regional Registration Office if they want to stay for more than six months in India. These procedures are not applicable to OCIs.

Earlier, there was a concept of a Person of Indian Origin (PIO) card which was also a long-term visa. However, issuance of new PIO cards has been discontinued and all PIO cardholders are being encouraged to migrate to the OCI card.

The Government has made some changes in the benefits available to OCIs by a Notification issued in March, 2021. This Notification has caused a lot of confusion amongst the Indian diaspora. The revised list of benefits available to OCIs is as follows:

(1) It grants a multiple entry life-long visa for visiting India for any purpose. The revised Notification has added that for undertaking the following activities, the OCI cardholder shall be required to obtain a special permission or a Special Permit, as the case may be, from the competent authority or the Foreigners Regional Registration Officer or the Indian Mission concerned, namely:
(i) to undertake research;
(ii) to undertake any missionary or tabligh or mountaineering or journalistic activities. This amendment is to overrule the Delhi High Court’s decision in the case of Dr. Christo Thomas Philip vs. Union of India, W.P. (C) 1775/2018 where an OCI card was cancelled on the ground that the person was involved in missionary activities in India. The Court held that there is no law which prevents missionary activities by an OCI and hence the cancellation was invalid. The Court had held that prima facie the rights under Article 14 (equality before law) and 19 (freedom of speech and expression) of the Constitution of India which are guaranteed to the citizen of India, also appear to be extended to an OCI card-holder;
(iii) to undertake internship in any foreign Diplomatic Missions or foreign Government organisations in India or to take up employment in any foreign Diplomatic Missions in India;
(iv) to visit any place which falls within the Protected or Restricted or prohibited areas as notified by the Central Government or competent authority.

(2) Exemption from registration with the Foreigners Regional Registration Officer or Foreigners Registration Officer for any length of stay in India. The revised Notification has added that the OCI cardholders who are normally resident in India shall intimate the jurisdictional Foreigners Regional Registration Officer or the Foreigners Registration Officer by email whenever there is a change in permanent residential address and in their occupation.

(3) It provides parity with NRIs in the matter of
(i) inter-country adoption of Indian;
(ii) appearing for the all-India entrance tests to make them eligible for admission against any NRI seat. However, the OCI cardholder shall not be eligible for admission against any seat reserved exclusively for Indian citizens. This overrules the decision of the Karnataka High Court in the case of Pranav Bajpe vs. The State of Karnataka, WP 27761/2019 which held that when the parity between the OCI cardholder and Non-Resident Indians is removed, the concept of OCI cardholder cannot be given a restricted meaning as Non-Resident Indian so as to restrict such admission only to Non-Resident Indian quota in the State quota of seats and not in the institutional quota or Government quota of seats under the NEET Scheme. It had concluded that the minor children of Indian citizens born overseas must have the same status, rights and duties as Indian citizens, who are minors;
(iii) purchase or sale of immovable properties other than agricultural land or farmhouse or plantation property; and
(iv) pursuing the following professions in India as per the provisions contained in the applicable relevant statutes or Acts as the case may be, namely, doctors, dentists, nurses and pharmacists; advocates; architects; chartered accountants.

(4) In respect of all other economic, financial and educational fields not specified in this Notification or the rights and privileges not covered by the Notifications made by the Reserve Bank of India under the Foreign Exchange Management Act, 1999, the OCI cardholder shall have the same rights and privileges as a foreigner. This is a new addition by the March, 2021 Notification. Thus, if any benefit is not specifically conferred either under the Citizenship Act or under the FEMA, 1999, then the OCI would only be entitled to such privileges as are available to a foreigner.

An OCI is not entitled to vote in India, whether for a Legislative Assembly or Legislative Council, or for Parliament, and cannot hold Constitutional posts such as those of President, Vice-President, Judge of the Supreme Court or the High Courts, etc., and he / she cannot normally hold employment in the Government.

CAN AN OCI BUY PROPERTY IN INDIA?
One of the benefits of being an OCI is that such a person can buy immovable property in India other than agricultural land. The Foreign Exchange Management (Non-Debt Instrument) Rules, 2019 deal with this aspect. Rule 21 permits an OCI to purchase any immovable property in India other than agricultural land or farmhouse or plantation property. An OCI is also allowed to get a gift of such a property from an Indian resident / NRI / OCI who is a relative as per the definition under the Companies Act, 2013. Citizens of certain countries, such as Pakistan, Bangladesh, Sri Lanka, Afghanistan, China, Iran, Nepal, Bhutan, Hong Kong or Macau, or the Democratic People’s Republic of Korea (DPRK), cannot purchase immovable property in India without permission from the RBI but even this prohibition is not applicable to OCI cardholders. It may be noted that the above relaxations under the FEMA Rules are only for OCI cardholders and not for all persons of Indian origin. If a foreign citizen of Indian origin does not have an OCI card, then he cannot buy immovable property in India without prior permission of the RBI. This is one of the biggest benefits of having an OCI card.

In this respect, misunderstanding of a Supreme Court decision in Asha John Divianathan vs. Vikram Malhotra, CA 9546/2010 Order dated 26th February, 2021 has created great heartburn amongst the OCI community. This was a decision rendered under the erstwhile Foreign Exchange Regulation Act, 1973 (which has been superseded by the FEMA in 1999). Section 31 of the erstwhile law provided that any foreign citizen desirous of buying immovable property in India required the prior approval of the RBI. The Court held that entering into any such transaction without RBI approval was treated as an unenforceable act and prohibited by law. It further held that when penalty was imposed by law for the purpose of preventing something on the ground of public policy, the thing prohibited, if done, would be treated as void, even though the penalty if imposed was not enforceable. It is important to note that this decision is not applicable in the light of the current provisions of the FEMA Regulations. As explained above, the law now, by virtue of Rule 21 of the Foreign Exchange Management (Non-Debt Instrument) Rules, 2019 expressly provides that an OCI can purchase any immovable property in India other than agricultural land or farmhouse or plantation property.

WHAT DOES FEMA PROVIDE IN RESPECT OF OCIs?
The provisions relating to OCIs have been dealt with in great detail under the FEMA Regulations and it would be difficult to elaborate on all of them here. However, a few examples are explained here. At most places under the FEMA Regulations, the provisions available to persons of Indian origin have been replaced with OCIs. Thus, it is mandatory for the PIOs to have an OCI card. For instance, the facility of investment on a non-repatriable basis under Schedule IV of the Foreign Exchange Management (Non-Debt Instrument) Rules, 2019 is allowed only to Non-Resident Indians and OCI cardholders. Persons of Indian origin who do not have OCI cards cannot avail of this facility.

Similarly, under the Foreign Exchange Management (Borrowing and Lending) Regulations, 2018 an Indian bank is allowed to lend in Indian rupees only to an NRI or an OCI cardholder.

However, in a few Regulations under FEMA, it is not mandatory to have an OCI card. For example, a Non-Resident External (NRE) Bank Account or a Non-Resident Ordinary (NRO) Bank Account can be opened by any Person of Indian origin. It is not necessary that such a person has an OCI card. Similarly, the Foreign Exchange Management (Remittance of Assets) Regulations, 2016 allows a PIO to remit up to US $1 million every year out of balances held in the NRO account and from the sales proceeds of assets.

IS THE DEEMED RESIDENCY PROVISION APPLICABLE?
Under section 6 of the Income-tax Act, any Indian citizen having total Indian income exceeding Rs. 15 lakhs during the previous year is deemed to be an Indian tax resident in that year, if he is not liable to tax in any other country or territory by reason of his domicile or residence or any other criteria of similar nature. This provision is applicable only to an Indian citizen, i.e., a person holding an Indian passport. An OCI does not have an Indian passport and so he would be out of the deemed taxation net.

CONCLUSION
The law relating to OCIs is dynamic in nature. In respect of all other economic fields not expressly specified or not covered by the Notifications under the FEMA, 1999, the OCI cardholder is equated with the same rights and privileges as a foreigner. Thus, it becomes very important to understand what are the benefits and provisions for an OCI cardholder.

shailesh.kwebmaker

GSTN COMMON PORTAL: E-GOVERNANCE

Digitisation of tax administration has been a progressive step of the Government in the recent past. Understandably, the primary thrust for it came from increasing tax complexities and allegedly evasive measures adopted by business enterprises. This warranted Governments to arrest such activities through real-time and non-erasable trails of events. Now, tax administrations are increasingly harnessing the benefits of digitisation by instant identification, examination and conclusion of tax challenges.

Therefore, a robust IT infrastructure was the key to the success of the implementation of a ‘self-policing’ GST in India. The need for such infrastructure led to the birth of the GST Network (GSTN) which was entrusted with the responsibility of setting up, operating and the maintenance of IT systems. GSTN was established as a special purpose vehicle by the Ministry of Finance to provide common IT infrastructure, systems and services to the Central and State Governments, taxpayers and other stakeholders for supporting the implementation and administration of the GST in India.

Much like the GST scheme, the GST Network has also been subjected to critiques. Firstly, the structure and functioning of the GSTN with the possibility of interference by non-governmental bodies, and secondly, the privacy concerns emerging from such large-scale collection of data. That apart, the GSTN has been entrusted to operate the GST common portal under the domain and boundaries of the GST law.

LEGAL BACKGROUND
Section 146 of the CGST / SGST Act, 2017 empowers the Government to notify a common electronic portal for facilitating registration, tax payments, furnishing of returns, computation / settlement of integrated tax, electronic way-bill and such other functions as may be necessary. Notification No. 4/2017-CT dated 19th June, 2017 notified www.gst.gov.in (the website managed by GSTN) as the common portal for the purpose of facilitating ‘registration, payment of tax, furnishing of returns and computation and settlement of integrated tax’. On the GST portal, the website states that the said portal includes all its sub-domains, internal and external services serviced by the domain and mobile applications of the GST portal. Similarly, Notification No. 9/2018-CT dated 23rd January, 2018 has notified www.ewaybillgst.gov.in as the Common Goods and Services Tax Electronic Portal for furnishing of electronic way-bill.

Recently, Notification No. 69/2019-CT dated 13th December, 2019 notified www.einvoice1-10.gov.in as the portal for e-invoice preparation. Parallel Notifications were issued by States for recognising the said web-portal(s) for specific purposes. Through such provisions, legal sanctity was sought to be provided to the said portal(s) but only for limited functions as specified in the Notifications. Interestingly, transition returns, refund applications and appeals do not find mention in the enabling Notifications notifying the common portal for specific purposes and one may resort to this as a legal contention in the days to come.

LEGAL QUESTIONS
Some critical questions arising from the e-governance initiatives of the Government are:
(a) What is the scope of the common portal in administration of the law?
(b) Whether the Notification issued under the CGST / SGST on the common portal would apply to the IGST Act even though a Notification has not been issued for this purpose?
(c) Whether the frameworks / contents, conditions, restrictions in the portal are backed by legal provisions? Is the Government imposing its view of the law on the taxpayer? Are there any remedies left to the taxpayer where the GST portal does not permit one to apply the law in a particular manner?
(d) What are the consequences of a failure in the GSTN systems, especially on down-time, lack of proper response, etc.? Whether the ‘proper officer’ can cite helplessness in matters of substantive rights where the portals restrict functionalities? What is the legal sanctity of the response / lack of response of GSTN helpdesks?

SETTLED PRINCIPLES
Before going into details, it may be important to assimilate the critical concepts of law which would govern the above questions. The first one is the well-settled provision that delegated authorities would have to operate within the framework of law and the legislations or actions are subject to the vires of the governing statute. This reminds one of the decision of the Supreme Court in St. Johns Teachers Training Institute vs. Regional Director, NCTE (2003) 3 SCC 321 at page 331 which held that regulations and rules are directed towards ‘supplementing’ the law rather than ‘supplanting’ the law. The Court stated as follows: ‘What is permitted is the delegation of ancillary or subordinate legislative functions, or, what is fictionally called, a power to fill up details.’

The other principle is that ‘forms / returns’ forming part of a statute cannot drive its interpretation1. The Supreme Court in the context of adjustment of MAT credit referred to the forms and held in CIT vs. Tulsyan NEC Ltd. (330 ITR 226) as follows: ‘It is immaterial that the relevant form prescribed under the Income-tax Rules, at the relevant time (i.e., before 1st April, 2007), provided for set-off of MAT credit balance against the amount of tax plus interest, i.e., after the computation of interest under section 234-B. This was directly contrary to a plain reading of section 115-JAA(4). Further, a form prescribed under the Rules can never have any effect on the interpretation or operation of the parent statute.’

And finally, procedural laws are meant to further the object of the substantive provisions and not restrict their scope [CCE vs. Home Ashok Leyland (2007) 4 SCC 51].

RELATIONSHIP BETWEEN GSTN AND GOVERNMENT OF INDIA
GSTN was incorporated on 28th March, 2013 for the purpose of implanting e-governance and technology initiatives for the efficient rollout of the GST law. As per media reports, it can be inferred that work on the creation of the IT infrastructure commenced much before the passage of the Constitution (One Hundred and First Amendment) Act, 2016. It was during the 4th GST meeting on 3rd-4th November, 2016 that GSTN made a presentation about the status of the web development and the services being offered by GSTN on this front.

_____________________________________

1 LIC vs. Escorts Ltd. (1986) 1 SCC 264

Interestingly, the statute does not enlist the criteria for selection, operation and regulation of an IT service provider (whether Government-owned or otherwise). The GST Council in its minutes also does not formally identify / appoint the GSTN as the sole service provider for this massive task. This question is important because the 11th meeting had specifically approved a proposal of appointing GSTN for the development of the e-way bill IT infrastructure but the appointment of GSTN for the basic GST portal seems to be missing in the minutes. The legal sanctity of entrusting / delegating the IT infrastructure to GSTN through the Government of India is unclear from public domain documents and requires immediate attention.

ANALYSIS
Compliance under the erstwhile laws under Excise, Service Tax, VAT, Entry Tax was largely performed electronically. It was thus expected that the reporting and compliance under the GST law would also continue to be driven by technology. However, the level of technological complexities was relatively lower under those laws. The electronic forms under the erstwhile laws had limited functionalities and were meant for the limited purpose of capturing data. The administration then utilised the data collected at the back-end for risk management purposes.

However, the GST portal ushered in a much higher level of legal control at the data entry point itself by the taxpayers and in many instances hindered the decision-making of the taxpayer. Although the insertion of legal control might have been intended to assist taxpayers in accurate data capture, in certain cases it appears to have breached the legal framework. For a start, we should read this disclaimer of the GSTN portal for its users:

‘Though all efforts have been made to ensure the accuracy and currency of the content on this website, the same should not be construed as a statement of law or used for any legal purposes or otherwise. GSTN hereby expressly disowns and repudiates any claims or liabilities (including but not limited to any third party claim or liability, of any nature, whatsoever) in relation to the accuracy, completeness, usefulness and real-time of any information and contents available at this website, and against any intended purposes (of any kind whatsoever) by use thereof, by the user/s (whether used by user/s directly or indirectly). Users are advised to verify / check any information and contents, with the relevant Government department(s) and / or other source(s) and to obtain any appropriate professional advice before acting thereon as may be provided, from time to time, in the website.’

Thus, the GSTN portal clearly disclaims its responsibility over administering the law and states that the web functionality does not represent the interpretation of law. In fact, the portal also does not claim responsibility over the accuracy of the contents which are uploaded on it and has directed taxpayers to either approach Government officials or seek professional advice.

DAWN OF THE PORTAL
The e-governance initiative under GST commenced with the migration of registration(s) of erstwhile taxpayers into the GST regime. This involved the filling of Form REG-26 which contained checks and balances in terms of back-end validation of PAN numbers, legacy registration numbers, bank accounts, etc. This is usually done to sanitise the data at the entry point so that redundancies can be avoided. As time passed, additional functionalities were introduced on the GSTN portal. The most critically discussed of these were related to the returns in GSTR1, GSTR2, GSTR3 and their ancillary forms. Though these forms were notified in law, due to various reasons including lack of technical preparedness of the GSTN, the alternative summary form in GSTR3B was introduced. Subsequently, additional modules on transition returns, refunds, input tax credit (ITC), etc., were introduced in a phased manner. The transition module has been widely debated in legal forums since it directly impacted the eligibility of taxpayers to claim the said credit. Technical glitches in the form, lack of clarity in the transition module, coupled with the complexity of the user tabs, made the form difficult to comprehend for taxpayers resulting in non-availment of credit.

In September, 2019 the refund module was launched envisaging electronic processing of refund from application to disbursement. There have been instances where taxpayer refunds have been delayed due to internal technical glitches in the refund disbursement process and its interaction with other external databases (such as PFMS). Recently, the portal has enabled the functionality of appeals (including advance rulings) in respect of refunds, registrations, etc. The portal is progressively digitising the inter-face between the administration and taxpayers.

In the effort to digitise the process, internal controls / checkpoints have been placed at the point of data entry itself which may hinder even genuine cases. The GSTN assumes that taxpayers have uploaded accurate data at all entry points in the manner expected by the portal. Taxpayers in many cases have failed to understand the data expectations due to lack of technical guidance material or ineffective helpdesk support from the GSTN, thus resulting in incorrect data entry. Moreover, the portal has been developed based on the administration’s perspective / interpretation of law which may or may not be accurate. In an era of self-assessment (in contradistinction to officer-assessment), taxpayers should be granted the liberty to apply the law as per their own understanding without any technical hindrances. The vires of taxing statutes have been tested multiple times in higher forums and reading down or striking down of legal provisions is not unknown. With several technical restrictions (enlisted below), taxpayers have been thrust with the administration’s view of law.

The ensuing paragraphs are an attempt to list the technical challenges in the portal which appear to be either contradictory to law or hamper a taxpayer’s right to perform a self-assessment of his taxes based on his interpretation. The important pointers under each module are herewith tabulated2:

Return module

Table Ref.	Functionality	Comments
GSTR1: Aggregate turnover	Data filed auto-populated used for various threshold limits such as E-invoice, etc.	The functionalities use turnover for enabling facilities of e-invoicing, etc. This causes issues where taxpayers might have reported an incorrect turnover in the previous year(s) which may have been rectified in annual returns / left unrectified. The system merely aggregates the turnover and adopts this as the basis for enabling / disabling features
GSTR1: Date of invoice and invoice No.	Date of invoice cannot be before date of registration	A taxable person who has availed GST registration belatedly is barred from reporting the original tax invoice even though taxes may have been charged / paid in the said invoice to the recipient
GSTR1: B2C and B2B	Amendment from B2C to B2B	One may view section 39(7) as being a time limit only to rectify any particulars which have an impact on the tax liability. In cases where the particulars do not have any tax liability such as this, the time limit provisions should not apply, but the portal restricts such revisions
GSTR1 : SEZ	SEZ supplies liable for CGST / SGST	Certain advance rulings have stated that restaurant services are liable to CGST / SGST and not IGST. Return functionalities do not permit CGST / SGST for SEZ invoices
GSTR1 : B2CL	Amendment in B2CL invoices	B2C large invoices (in excess of Rs. 2.5 lakhs) are entered at an invoice level but amendment tables in GSTR1 do not provide any functionality to update the GSTIN of these invoices and shift them to the B2B section – taxpayers are forced to raise credit notes to the B2CL data and upload fresh invoices in the B2B section
GSTR1 – DNs / CNs	Linking DNs / CNs with multiple invoices	Until recently, DNs / CNs were mandatorily required to be linked to a single invoice. The law has been amended making the linking an open-ended feature. The GSTN portal has only recently opened this feature by de-linking the mapping of DNs / CNs with a single invoice. Till now, taxpayer(s) were unable to upload this data
GSTR1 – Export details	Alterations in type of exports	Alteration in invoices from ‘with payment’ to ‘without payment’ is not permissible which causes disabilities in other refund functionalities
GSTR3B: Taxable turnover	Negative turnover is not permissible	In cases where the credit note raised in a tax period exceeds the output turnover, the data field does not permit negative values. CBEC Circular / Helpdesk suggest that the unadjusted credit notes are to be reported in subsequent months. Moreover, due to zero-values being reported in GSTR3B, there arises a variance between GSTR1 and GSTR3B and disables certain other functionalities in other modules (such as refunds, etc.)
GSTR3B – ITC	ITC order of set-off	GSTR3B mandatorily requires the ITC to be utilised prior to making cash payments or performing inter-head set-offs. Taxpayers may choose to avail ITC and refrain from utilising the same on the grounds of ambiguity. But the utilisation is thrust upon them, consequently opening the scope for incorrect utilisation
GSTR9 – Table 9	Details of tax paid	Annual return auto-populates details of taxes paid in a non-editable format in GSTR9. Taxpayers who have paid taxes
GSTR9 – Table 9 (continued)	Details of tax paid	through DRC 03, etc., and have included the turnover in annual return would not be able to record this tax payment, resulting in glaring discrepancies
GSTR9 – Table 6	Details of input tax availed	Annual return permits reversal of ITC and accordingly directs filing of DRC 03 for such reversals but the reverse is not permissible. Taxpayers are not permitted to avail ITC through the annual return. In the absence of a clear GSTR1, 2 and 3 and a stop-gap GSTR3B, taxpayers have looked at GSTR9 as the only final return to report the tax credits / liabilities. The law neither specifies the document of availing credit nor bars claim of credit through GSTR9. Yet, the functionality in the tax portal does not permit availing of such ITC in the electronic credit ledger through GSTR9
GSTR9	Table 8 – GSTR2A	Details auto-populated in Table 8 representing input invoices uploaded by suppliers does not reconcile with the taxpayers’ GSTR2A. Until 2018-19, the taxpayers were not provided with item-wise listing of such auto-population and in many cases taxpayers were forced to file the document as it was auto-populated
GSTR9	Table 9 – Auto population	Form GSTR9 keeps the data fields for this table open to alteration by the taxpayer but the portal freezes the tax payment details through ITC and / or cash
GSTR1/9	Exempt supplies / HSN tables	The exempt supplies / HSN tables are static and not open to alteration. Without the functionality, the taxpayers would be faced with questioning on classification even though it may not be admittance by taxpayer in its strict sense
GSTR1/3B/9	Unfructified supplies	Taxpayers may have situations where supplies are rejected by the recipient at the doorstep. Though the law provides for cancellation of invoice, once the invoice is uploaded on the GSTR1 the portal does not have any feature to mark a particular invoice as cancelled, forcing the taxpayer to raise credit notes which is itself not permissible under law

Table
Ref.

Functionality

Comments

GSTR1: Aggregate turnover

Data filed auto-populated used for various
threshold limits such as E-invoice, etc.

The functionalities use turnover for
enabling facilities of e-invoicing, etc. This causes issues where taxpayers
might have reported an incorrect turnover in the previous year(s) which may
have been rectified in annual returns / left unrectified. The system merely
aggregates the turnover and adopts this as the basis for enabling / disabling
features

GSTR1: Date of invoice and invoice No.

Date of invoice cannot be before date of
registration

A taxable person who has availed GST
registration belatedly is barred from reporting the original tax invoice even
though taxes may have been charged / paid in the said invoice to the
recipient

GSTR1: B2C and B2B

Amendment from B2C to B2B

One may view section 39(7) as being a time
limit only to rectify any particulars which have an impact on the tax liability. In cases where the particulars do not
have any tax liability such as this, the time limit provisions should not
apply, but the portal restricts such revisions

GSTR1 : SEZ

SEZ supplies liable for
CGST / SGST

Certain advance rulings have stated that
restaurant services are liable to CGST / SGST and not IGST. Return
functionalities do not permit CGST / SGST for SEZ invoices

GSTR1 : B2CL

Amendment in B2CL invoices

B2C large invoices (in excess of Rs. 2.5
lakhs) are entered at an invoice level but amendment tables in GSTR1 do not
provide any functionality to update the GSTIN of these invoices and shift
them to the B2B section – taxpayers are forced to raise credit notes to the
B2CL data and upload fresh invoices in the B2B section

GSTR1 – DNs / CNs

Linking DNs / CNs with multiple invoices

Until recently, DNs / CNs were mandatorily
required to be linked to a single invoice. The law has been amended making
the linking an open-ended feature. The GSTN portal has only recently opened
this feature by de-linking the mapping of DNs / CNs with a single invoice.
Till now, taxpayer(s) were unable to upload this data

GSTR1 – Export details

Alterations in type of exports

Alteration in invoices from ‘with payment’
to ‘without payment’ is not permissible which causes disabilities in other
refund functionalities

GSTR3B: Taxable turnover

Negative turnover is not permissible

In cases where the credit note raised in a
tax period exceeds the output turnover, the data field does not permit negative
values. CBEC Circular / Helpdesk suggest that the unadjusted credit notes are
to be reported in subsequent months. Moreover, due to zero-values being
reported in GSTR3B, there arises a variance between GSTR1 and GSTR3B and
disables certain other functionalities in other modules (such as refunds,
etc.)

GSTR3B – ITC

ITC order of set-off

GSTR3B mandatorily requires the ITC to be
utilised prior to making cash payments or performing inter-head set-offs.
Taxpayers may choose to avail ITC and refrain from utilising the same on the
grounds of ambiguity. But the utilisation is thrust upon them, consequently
opening the scope for incorrect utilisation

GSTR9 – Table 9

Details of tax paid

Annual return auto-populates details of
taxes paid in a non-editable format in GSTR9. Taxpayers who have paid taxes

GSTR9 – Table 9

(continued)

Details of tax paid

through DRC 03, etc., and have

included the turnover in annual return
would not be able to record this tax payment, resulting in glaring
discrepancies

GSTR9 – Table 6

Details of input tax availed

Annual return permits reversal of ITC and
accordingly directs filing of DRC 03 for such reversals but the reverse is
not permissible. Taxpayers are not permitted to avail ITC through the annual
return. In the absence of a clear GSTR1, 2 and 3 and a stop-gap GSTR3B,
taxpayers have looked at GSTR9 as the only
final return to report the tax credits / liabilities. The law neither
specifies the document of availing credit nor bars claim of credit through
GSTR9. Yet, the functionality in the tax portal does not permit availing of
such ITC in the electronic credit ledger through GSTR9

GSTR9

Table 8 – GSTR2A

Details auto-populated in Table 8
representing input invoices uploaded by suppliers does not reconcile with the
taxpayers’ GSTR2A. Until 2018-19, the taxpayers were not provided with
item-wise listing of such auto-population and in many cases taxpayers were
forced to file
the document as it was auto-populated

GSTR9

Table 9 – Auto population

Form GSTR9 keeps the data fields for this
table open to alteration by the taxpayer but the portal freezes the tax
payment details through ITC and / or cash

GSTR1/9

Exempt supplies / HSN tables

The exempt supplies / HSN tables are static
and not open to alteration. Without the functionality, the taxpayers would be
faced with questioning on classification even though it may not be admittance
by taxpayer in its strict sense

GSTR1/3B/9

Unfructified supplies

Taxpayers may have situations where
supplies are rejected
by the recipient at the doorstep. Though the law provides for cancellation of
invoice, once
the invoice is uploaded on the GSTR1 the portal does not have any feature to
mark a particular invoice as cancelled, forcing the taxpayer to raise credit
notes which is itself not permissible under law

GSTR2A & 2B module

Table Ref.	Functionality	Comments
GSTR2B	ITC not available summary	The form provides an ‘advisory’ that invoices which do not meet the conditions of section 16(4), or the place of supply is different from the location of the recipient, should not be eligible for credit. The criterion of place of supply does not seem to emerge from any specific provision
GSTR2A / 2B time limit	Delayed reporting of invoice by counter-party	GSTR2A/ 2B mark credit which is belatedly reported as ineligible even though the supplier would have reported taxes appropriately and complied with section 16 in its entirety, e.g., alteration of an invoice from B2C table to B2B table involving updation of GSTINs
GSTR2A / 2B	DTA clearance by SEZ	Bill of entry filed by DTA on procurement of goods by an SEZ does not appear in the GSTR2B. This throws up red flags while filing GSTR3B as this data is not auto-populated in the said form

Table
Ref.

Functionality

Comments

GSTR2B

ITC not available summary

The form provides an ‘advisory’ that
invoices which do not meet the conditions of section 16(4), or the place of
supply is different from the location of the recipient, should not be
eligible for credit. The criterion of place of supply does not seem to emerge
from any specific provision

GSTR2A / 2B time limit

Delayed reporting of invoice by
counter-party

GSTR2A/ 2B mark credit which is belatedly
reported as ineligible even though the supplier would have reported taxes
appropriately and complied with section 16 in its entirety, e.g., alteration
of an invoice from B2C table to B2B table involving updation of GSTINs

GSTR2A / 2B

DTA clearance by SEZ

Bill of entry filed by DTA on procurement
of goods by an SEZ does not appear in the GSTR2B. This throws up red flags
while filing GSTR3B as this data is not auto-populated in the said form

__________________________________________________________

2 The tables are illustrative and not exhaustive – over the period GSTN has gradually addressed many such challenges

Adjudication modules

Table Ref.	Functionality	Comments
GST APL-01	Disputed tax	Taxes which are reported through DRC 03 challan are reported as ‘admitted tax’ even though the tax payments are made under protest to avoid the interest / penal consequences. While filing the appeal, the online module directs an additional 10% to be paid as pre-deposit towards disputed liability. Effectively, the taxpayers are required to pay 110% of the tax demanded for filing the appeal online

Table
Ref.

Functionality

Comments

GST APL-01

Disputed tax

Taxes which are reported through DRC 03
challan are reported as ‘admitted tax’ even though the tax payments are made
under protest to avoid the interest / penal consequences. While filing the
appeal, the online module directs an additional 10% to be paid as pre-deposit
towards disputed liability. Effectively, the taxpayers are required to pay
110% of the tax demanded for filing the appeal online

Job work module

Table Ref.	Functionality	Comments
ITC-04	Unit of measurement (UOM)	The form raised red flags where the UOM of outward movement towards job work is different from inward movement from job worker. The form does not appreciate that job work activity can result in complete transformation of inputs resulting in difference in UOMs. The portal attempts to map the outward dispatches with inward receipts at the same UOM

Table
Ref.

Functionality

Comments

ITC-04

Unit of measurement (UOM)

The form raised red flags where the UOM of
outward movement towards job work is different from inward movement from job
worker. The form does not appreciate that job work activity can result in
complete transformation of inputs resulting in difference in UOMs. The portal
attempts to map the outward dispatches with inward receipts at the same UOM

Refund modules

Table Ref.	Functionality	Comments
RFD-01	Sequential filing	RFD-01 are mandatorily required to be filed sequentially forcing the taxpayer to file Nil refund applications even though he / she may want to come back and file a refund for past period (of course within the time limit)
RFD-01	Export turnover	Incorrect reporting of export turnover in other tables (such as B2B, etc.) of GSTR3B / GSTR1 is not reflected in the refund form resulting in incorrect application of refund formula
RFD-01	Lower of three figures	RFD-01 restricts refunds to the lower of (a) input tax credit at the end of the tax period; (b) refund as on date of application; and (c) input tax credit as per formula. The refund module is not reflective of the law as it restricts refund of ITC based on the balance as at the end of the tax period. Taxpayers who have accumulated ITC after the relevant tax period would still be restricted to the ITC as at the end of the tax period
RFD-01	Input tax credit	Taxpayers may have reversed ITC pertaining to past periods while filing GSTR3B. Though prior period reversals are not relevant for refund computations, the online form auto-populates the net figure from GSTR3B, causing a deviation from the statutory formula

Table
Ref.

Functionality

Comments

RFD-01

Sequential filing

RFD-01 are mandatorily required to be filed
sequentially forcing the taxpayer to file Nil refund applications even though
he / she may want to come back and file a refund for past period (of course
within the time limit)

RFD-01

Export turnover

Incorrect reporting of export turnover in
other tables (such as B2B, etc.) of GSTR3B / GSTR1 is not reflected in the
refund form resulting in incorrect application of refund formula

RFD-01

Lower of three figures

RFD-01 restricts refunds to the lower of
(a) input tax credit at the end of the tax period; (b) refund as on date of
application; and (c) input tax credit as per formula. The refund module is
not reflective of the law as it restricts refund of ITC based on the balance
as at the end of the tax period. Taxpayers who have accumulated ITC after the
relevant tax period would still be restricted to the ITC as at the end of the
tax period

RFD-01

Input tax credit

Taxpayers may have reversed ITC pertaining
to past periods while filing GSTR3B. Though prior period reversals are not
relevant for refund computations, the online form auto-populates the net
figure from GSTR3B, causing a deviation from the statutory formula

E-way bill modules

Table Ref.	Functionality	Comments
EWB-01	Validity of E-way bill	The E-way bill portal calculates the validity automatically based on the PIN codes specified by the taxpayer. It is quite possible that transporters adopt a route of their choice depending on accessibility, convenience, etc. To freeze the validity based on pin codes from external third party data is not specified under law
EWB-01	Back-end validation of vehicle numbers	E-way bill portal performs a back-end validation of the vehicle numbers with the government-approved ‘vaahan’ website. Inefficiencies in those websites also creep into the GST system as the E-way bill portal raises red flags for a vehicle number not visible in the ‘vaahan’ website

Table
Ref.

Functionality

Comments

EWB-01

Validity of E-way bill

The E-way bill portal calculates the
validity automatically based on the PIN codes specified by the taxpayer. It
is quite possible that transporters adopt a route of their choice depending
on accessibility, convenience, etc. To freeze the validity based on pin codes
from external third party data is not specified under law

EWB-01

Back-end validation of vehicle numbers

E-way bill portal performs a back-end
validation of the vehicle numbers with the government-approved ‘vaahan’
website. Inefficiencies in those websites also creep into the GST system as
the E-way bill portal raises red flags for a vehicle number not visible in
the ‘vaahan’ website

JUDICIAL PRECEDENCE UNDER GST

The prominence of law over forms and procedures has been the hallmark of even recent decisions under GST. The Delhi High Court in Bharti Airtel Limited vs. UOI [2020 (5) TMI 169] examined the plea of the taxpayer who was restricted from rectifying the returns for a particular tax period and was directed by a CBEC Circular to rectify only in subsequent tax periods. The Court examined the limitations of the GSTN portal and held that the taxpayer had a right to rectify the very same return and claim refund of the excess taxes paid for the tax period under consideration. The Madras High Court in Sun Dyechem vs. CST 2020 TIOL-1858-HC-MAD-GST held that incorrect reporting of tax type by the supplier cannot be left unamended as it would hamper the tax credits at the customer’s end. The Court directed the jurisdictional officer to make amendments in supplier’s GSTR1 so that the correct tax type is reflected in the customer portal, thus undermining the influence of the portal over equity and law.

In another case, the Delhi High Court in Brand Equity Treaties Limited vs. UOI [2020 (5) TMI 171] recognised that technical glitches should be granted a wider scope to include even challenges faced at the taxpayer’s end (such as lack of internet connectivity, IT infrastructure, etc.). In the context of Transition Credit, Courts in many instances (such as Tara Exports [2020 (7) TMI 443]) have permitted manual filing of Tran-1 forms to avail the tax credit as an alternative to filing the same on the online portal. These decisions affirm the settled proposition that procedural laws are meant to further the substantive rights acquired under law.

However, one must also not lose sight of the decision of NELCO vs. UOI [2020 (3) TMI 1087] wherein the Bombay High Court upheld the vires of the rule defining technical glitches as being those arising at the GSTN end and cannot be interpreted to cover those difficulties prevailing at the taxpayer’s end. The Madhya Pradesh High Court in Shri Shyam Baba Edible Oils vs. CC 2020-VIL-567-MP held that the procedure prescribed in law should be strictly followed. Where the law prescribes SCNs, orders, etc., which are to be communicated through the common portal, they should necessarily be communicated only through the common portal. These decisions uphold the importance of the common portal and imply that taxpayers should take necessary steps to equip themselves with the technological upgradations warranted under the new law.

Let us now take up the question whether the GSTN portal can be described as a portal to report the numbers of the taxpayer or can be it designed to administer the law by placing checks and balances at the data entry point itself, thereby curbing the right of the taxpayer to self-assess its taxes. Going by the propositions laid down above, the portal cannot place fetters on the taxpayer’s right to fill up data as per its computation and should not be driven by pre-filled data points contained in the GST portal. Moreover, even where the data is auto-populated, the taxpayers should be granted the right to alter the auto-population and place their self-assessed values. The tax administration can without doubt examine the data at the back-end and seek clarifications to the alteration of the data plugged into the form, but that should be performed through a due process of adjudication or assessment. A website-driven automated assessment is not warranted under the GST law. Therefore, the GSTN portal should refrain from being a legislative or administrative tool and rather restrict itself to being a repository of information of all taxpayers.

A second question is to examine whether the enabling Notifications under the CGST / SGST Act of identifying the GSTN portal as a common portal would apply to the IGST Act as well. Whether separate Notifications are required to be issued under the IGST Act empowering the GSTN portal to operate as a common portal for all purposes of the IGST Act? Going by the implication of the phrase mutatis mutandis3 in section 20 of the IGST Act which links it to the CGST Act, the rules, notifications, including the prescription of the common portal, would apply equally to the IGST Act as well. The entire chapter of ‘Miscellaneous provisions’ under the CGST Act has been made applicable to the IGST Act and consequently the common portal notified in terms of section 146 of the CGST Act falling under this chapter would be operative for the IGST Act as well.

A third question, on the vires of the restrictions / controls placed in the GSTN portal, has been discussed above. The forms are aimed at capturing the self-assessed data of the taxpayers and not to regulate the taxpayer itself. The restrictions are questionable and even where the common portal is the primary forum for making necessary applications, the Court has devised an alternative approach of manual filing of the applications. The taxpayer ought to have a fit case for seeking this alternative remedy of filing manual applications. The taxpayers could face hurdles subsequently in enabling the functionalities of refund, reflection in electronic credit ledgers, etc., and hence should use this as a measure of last resort only.

_________________________________________________

3 (1983) 2 SCC 82 Ashok Service Centre vs. State of Orissa

Coming to a fourth, crucial question, proper officers have been the ‘go-to persons’ for taxpayers in case of technical difficulties. But the situation here is such that proper officers are neither equipped with legal nor technological powers and therefore claim helplessness. Taxpayers run from pillar to post between the GSTN helpdesk and the proper officer. In many cases the helpdesk directs taxpayers to reach out to the proper officer for technical snags. Without any specific direction from the Board, taxpayers are unable to enforce their right to receive a resolution to their technical problems from the proper officer. In certain cases, helpdesks also provide solutions without legal backing (for example, in one case a helpdesk directed the taxpayer to apply for cancellation and seek fresh registration due to a technical snag). The helpdesks are not proper officers under law and have no authority to decide on legal matters and it is imperative for the administration to issue binding guidelines to the field formations to accept the technical queries, seek speedy resolution at the back-end from the helpdesk and respond to the taxpayer with a solution. Until then, the taxpayers would be left on their own to comply with the law and then offer extensive explanations at the time of audits / assessments on what had transpired at the time of filing the applications on the portal and the reason for plugging the numbers as it stood therein.

In conclusion, the helpdesk does not have any legal authority to resolve taxpayer grievances and the proper officers should be directed through appropriate administrative instructions to take up these matters.

The authority to design, operate and regulate the IT infrastructure is open to questioning as the Legislature has not empowered the Government(s) or their Boards to direct the creation or regulation of the website. The involvement of GSTN as a separate entity appears to be on a questionable foundation and open to examination. Until then, taxpayers should make earnest efforts to reconcile themselves to the portal requirements and record the deviations from the data expectations suitably to enforce their legal rights of a self-assessment rather than a portal-assessment at higher forums.

shailesh.kwebmaker

IMPLEMENTATION OF Ind AS 116 ‘LEASES’ USING FULL RETROSPECTIVE APPROACH

Compiler’s Note
The Ministry of Company Affairs, on 30th March, 2019, notified Ind AS 116 ‘Leases’. Under Ind AS 116 lessees have to recognise a lease liability reflecting future lease payments and a ‘right-of-use asset’ for all material lease contracts. Almost all companies that adopted Ind AS 116 applied the standard using the modified retrospective approach, with the cumulative effect of initially applying the standard, recognised on the date of initial application. Accordingly, there was no restatement of comparative information; instead, the cumulative effect of initially applying this standard was recognised as an adjustment to the opening balance of retained earnings on the date of initial application (refer to this column in the BCAJ of July, 2020 for illustrative disclosures on the modified retrospective approach).

Given below is an illustration of a company that has adopted the full retrospective approach by restating of previous years’ figures to make them comparable.

NESTLE INDIA LTD. (31ST DECEMBER, 2020)

From Notes forming part of Financial Statements
Leases
Effective 1st January, 2020, the Company has applied Ind AS 116 ‘Leases’ using full retrospective approach recognising the cumulative effect of adopting Ind AS 116 as an adjustment to the retained earnings as on the transition date, i.e., 1st January, 2019. Accordingly, previous year figures have been restated to make them comparable. Ind AS 116 has replaced the existing leases standard, Ind AS 17 ‘Leases’.

The Company assesses whether a contract is or contains a lease at inception of a contract. A contract is or contains a lease if the contract conveys the right to control the use of an identified asset for a period of time in exchange for consideration.

At the date of commencement of the lease, the Company recognises a right-of-use asset (‘ROU’) and a corresponding lease liability for all lease arrangements in which it is a lessee.

The right-of-use assets are initially recognised at cost, which comprises the initial amount of the lease liability adjusted for any lease payments made at or prior to the commencement date of the lease plus any initial direct costs less any lease incentives. They are subsequently measured at cost less accumulated depreciation and impairment losses, if any. Right-of-use assets are depreciated from the commencement date on a straight-line basis over the shorter of the lease term or useful life of the underlying asset.

The lease liability is initially measured at the present value of the future lease payments. The lease payments are discounted using the interest rate implicit in the lease or, if not readily determinable, using the incremental borrowing rates. The lease liability is subsequently remeasured by increasing the carrying amount to reflect interest on the lease liability, reducing the carrying amount to reflect the lease payments made. A lease liability is remeasured upon the occurrence of certain events such as a change in the lease term or a change in an index or rate used to determine lease payments with a corresponding adjustment to the carrying value of right-of-use assets.

Lease liability and right-of-use assets have been separately presented in the Balance Sheet and lease payments have been classified as financing cash flows.

The Company’s leases mainly comprise of land, buildings and vehicles. The Company leases land and buildings primarily for offices, manufacturing facilities and warehouses.

The Company recognises lease payments as operating expense on a straight-line basis over the period of lease for certain short-term (one month or below) or low value arrangements.

From Notes forming part of Financial Statements
First time adoption, Ind AS 116 ‘Leases’
(i) The Company has adopted Ind AS 116 ‘Leases’ effective 1st January, 2020 using the full retrospective method with a transition date of 1st January, 2019. The impact of the Ind AS 116 adoption on the Balance Sheet as at 31st December, 2019 and 1st January, 2019 is as under:

As at 1st January, 2019
(Rs. in million)

Particulars

Pre-implementation
of Ind AS 116

Implementation
adjustments

Post-implementation
of Ind AS 116

Property, Plant & Equipment

24,006.2

(1,192.1)

22,814.1

Right of use assets

–

2,429.4

Others

56,874.6

–

56,874.6

Total assets

80,880.8

1,237.3

82,118.1

Other equity

35,773.2

(122.8)

35,650.4

Others

964.2

–

964.2

Total equity

36,737.4

(122.8)

36,614.6

Non-current lease liabilities

–

960.4

Current lease liabilities

–

440.9

Deferred tax liabilities (net)

588.2

(41.2)

547.0

Trade payables

12,403.7

–

12,403.7

Others

31,151.5

–

31,151.5

Total equity and liabilities

80,880.8

1,237.3

82,118.1

As of 1st December, 2019
(Rs. in million)

Particulars	Pre-implementation of Ind AS 116	Implementation adjustments	Post-implementation of Ind AS 116
Property, Plant and Equipment	22,267.1	(1,179.0)	21,088.1
Right of use assets	–	2,326.4	2,326.4
Others	48,314.9	–	48,314.9
Total assets	70,582.0	1,147.4	71,729.4
Other equity	18,358.4	(133.9)	18,224.5
Others	964.2	–	964.2
Total equity	19,322.6	(133.9)	19,188.7
Non-current lease liabilities	–	896.0	896.0
Current lease liabilities	–	462.0	462.0
Deferred tax liabilities	179.5	(45.1)	134.4
Trade payables	14,946.9	(31.6)	14,915.3
Others	36,133.0	–	36,133.0
Total equity and liabilities	70,582.0	1,147.4	71,729.4

Particulars

Pre-implementation
of Ind AS 116

Implementation
adjustments

Post-implementation
of Ind AS 116

Property, Plant and Equipment

22,267.1

(1,179.0)

21,088.1

Right of use assets

–

2,326.4

Others

48,314.9

–

48,314.9

Total assets

70,582.0

1,147.4

71,729.4

Other equity

18,358.4

(133.9)

18,224.5

Others

964.2

–

964.2

Total equity

19,322.6

(133.9)

19,188.7

Non-current lease liabilities

–

896.0

Current lease liabilities

–

462.0

Deferred tax liabilities

179.5

(45.1)

134.4

Trade payables

14,946.9

(31.6)

14,915.3

Others

36,133.0

–

36,133.0

Total equity and liabilities

70,582.0

1,147.4

71,729.4

(i) The cumulative impact of application of the standard net of deferred taxes has been adjusted through opening equity (1st January, 2019) and previous year’s equity has been restated. Reconciliation of equity as previously reported versus the restated equity is as under:

Particulars	As at 31^st December, 2019	As at 1^st January, 2019
Equity reported in accordance with Ind AS 17	19,322.6	36,737.4
a) Recognition of ROU assets	1,147.4	1,237.3
b) Recognition of short-term and long-term lease liabilities	(1,326.4)	(1,401.3)
c) Deferred tax impact	45.1	41.2
Restated equity in accordance with Ind AS 116	19,188.7	36,614.6

Particulars

As
at 31^st December, 2019

As
at 1^st January, 2019

Equity reported in accordance with Ind AS 17

19,322.6

36,737.4

a) Recognition of ROU assets

1,147.4

1,237.3

b) Recognition of short-term and long-term lease liabilities

(1,326.4)

(1,401.3)

c) Deferred tax impact

45.1

41.2

Restated equity in accordance with Ind AS 116

19,188.7

36,614.6

(ii) Reconciliation of profit reported for 2019 to restated profit after adoption of Ind AS 116 ‘Leases’ is as under:

Particulars	Pre-implementation of Ind AS 116	Implementation adjustments	Post-implementation of Ind AS 116
Revenue of operations	123,689.0	–	123,689.0
Total income	126,157.8	–	126,157.8
Finance costs (including interest cost on employee benefit plans)	1,198.3	92.9	1,291.2
Depreciation and amortisation	3,163.6	537.9	3,701.5
Employee benefit expenses	12,629.5	(47.8)	12,581.7
Other expenses	29,545.4	(568.0)	28,977.4
Others	52,871.1	–	52,871.1
Total expenses	99,407.9	15.0	99,422.9
Profit before tax	26,749.9	(15.0)	26,734.9
Tax expenses	7,054.4	(3.9)	7,050.5
Profit after tax	19,695.5	(11.1)	19,684.4
Other comprehensive income	(1,547.7)	–	(1,547.7)
Total comprehensive income	18,147.8	(11.1)	18,136.7
Profit from operations	25,862.5	77.9	25,940.4

Particulars

Pre-implementation
of
Ind AS 116

Implementation
adjustments

Post-implementation
of Ind AS 116

Revenue of operations

123,689.0

–

123,689.0

Total income

126,157.8

–

126,157.8

Finance costs (including interest cost on
employee benefit plans)

1,198.3

92.9

1,291.2

Depreciation and amortisation

3,163.6

537.9

3,701.5

Employee benefit expenses

12,629.5

(47.8)

12,581.7

Other expenses

29,545.4

(568.0)

28,977.4

Others

52,871.1

–

52,871.1

Total expenses

99,407.9

15.0

99,422.9

Profit before tax

26,749.9

(15.0)

26,734.9

Tax expenses

7,054.4

(3.9)

7,050.5

Profit after tax

19,695.5

(11.1)

19,684.4

Other comprehensive income

(1,547.7)

–

(1,547.7)

Total comprehensive income

18,147.8

(11.1)

18,136.7

Profit from operations

25,862.5

77.9

25,940.4

(iii) Effect on the statement of cash flows for the year ended 31st December, 2019 is as under:

Particulars	Pre-implementation of Ind AS 116	Implementation adjustments	Post-implementation of Ind AS 116
Profit before tax	26,749.9	(15.0)	26,734.9
Depreciation & amortisation	3,163.6	537.9	3,701.5
Interest on lease liabilities	–	92.9	92.9
Others	(7,576.8)	–	(7,576.8)
Net cash generated from operating activities	22,336.7	615.8	22,952.5
Net cash generated from investing activities	829.9	–	829.9
Interest on lease liabilities	–	(92.9)	(92.9)
Principal payment on lease liabilities	–	(522.9)	(522.9)
Others	(35,399.5)	–	(35,399.5)
Net cash used in financing activities	(35,399.5)	(615.8)	(36,015.3)
Net decrease in cash and cash equivalents	12,232.9	–	12,232.9
Total cash and cash equivalents at the beginning of the year	35,239.0	–	35,239.0
Total cash and cash equivalents at the end of the year	23,006.1	–	23,006.1

Particulars

Pre-implementation
of Ind AS 116

Implementation
adjustments

Post-implementation
of Ind AS 116

Profit before tax

26,749.9

(15.0)

26,734.9

Depreciation & amortisation

3,163.6

537.9

3,701.5

Interest on lease liabilities

–

92.9

Others

(7,576.8)

–

(7,576.8)

Net cash generated from operating activities

22,336.7

615.8

22,952.5

Net cash generated from investing activities

829.9

–

829.9

Interest on lease liabilities

–

(92.9)

Principal payment on lease liabilities

–

(522.9)

Others

(35,399.5)

–

(35,399.5)

Net cash used in financing activities

(35,399.5)

(615.8)

(36,015.3)

Net decrease in cash and cash equivalents

12,232.9

–

12,232.9

Total cash and cash equivalents at the
beginning of the year

35,239.0

–

35,239.0

Total cash and cash equivalents at the end of
the year

23,006.1

–

23,006.1

(iv) Impact of restatement on earnings per share (EPS) for the year ended 31st December, 2019 is not significant.

shailesh.kwebmaker

ACCOUNTING OF COMPLEX CONVERTIBLE BONDS WITH A CALL OPTION

A convertible bond instrument may have additional derivatives, such as a call or a put option. The accounting of such instruments can get very complex with regard to determining the values of and thereafter accounting for the host instrument, the equity element and the call option. The example in this article explains the concept in a very simplified manner.

EXAMPLE – MULTIPLE DERIVATIVES

Facts

• A Ltd. has issued Optionally Convertible Debentures (OCD) amounting to INR 300 crores to B Ltd. on the following terms:

Tenure: 4 years

Coupon: Nil

IRR: 15% p.a.

• During the tenure of the OCDs, A Ltd. can call the OCD and redeem it with the stated IRR.
• The market rate for similar debt without conversion feature is 17% p.a.
• B Ltd. can also ask for conversion at any time before maturity based on the following formula:

No. of equity shares = (Investment amount + applicable IRR) divided by (Face value of equity share; i.e.,

INR 10)
• If redemption or conversion doesn’t happen before maturity, then the OCDs will be redeemed mandatorily at maturity.

How is this instrument accounted for in the books of A Ltd. in the following two scenarios?
Scenario A – If B Ltd. opts for conversion before maturity at end of year 1.
Scenario B – B doesn’t opt for conversion and OCDs are redeemed at maturity.

Response

Let us first consider the relevant provisions under the Standards before we attempt to solve the problem.

Ind AS 32 Financial Instruments: Presentation

19. If an entity does not have an unconditional right to avoid delivering cash or another financial asset to settle a contractual obligation, the obligation meets the definition of a financial liability, except …………….

29. An entity recognises separately the components of a financial instrument that (a) creates a financial liability of the entity and (b) grants an option to the holder of the instrument to convert it into an equity instrument of the entity. For example, a bond or similar instrument convertible by the holder into a fixed number of ordinary shares of the entity is a compound financial instrument. From the perspective of the entity, such an instrument comprises two components: a financial liability (a contractual arrangement to deliver cash or another financial asset) and an equity instrument (a call option granting the holder the right, for a specified period of time, to convert it into a fixed number of ordinary shares of the entity). The economic effect of issuing such an instrument is substantially the same as issuing simultaneously a debt instrument with an early settlement provision and warrants to purchase ordinary shares, or issuing a debt instrument with detachable share purchase warrants. Accordingly, in all cases, the entity presents the liability and equity components separately in its balance sheet.

32. Under the approach described in paragraph 31, the issuer of a bond convertible into ordinary shares first determines the carrying amount of the liability component by measuring the fair value of a similar liability (including any embedded non-equity derivative features) that does not have an associated equity component. The carrying amount of the equity instrument represented by the option to convert the instrument into ordinary shares is then determined by deducting the fair value of the financial liability from the fair value of the compound financial instrument as a whole.

Ind AS 109 Financial Instruments

B 4.3.5 (e) A call, put, or prepayment option embedded in a host debt contract or host insurance contract is not closely related to the host contract unless:

i. the option’s exercise price is approximately equal on each exercise date to the amortised cost of the host debt instrument or the carrying amount of the host insurance contract; or

ii. ………..

The assessment of whether the call or put option is closely related to the host debt contract is made before separating the equity element of a convertible debt instrument in accordance with Ind AS 32.

DAY 1 ACCOUNTING

Compound financial instrument (see paragraphs 19, 29 and 32 of Ind AS 32)
• The OCD issued by A Ltd. is a compound financial instrument. The host instrument will be classified as liability, since there is contractual obligation to pay cash toward interest (i.e., guaranteed IRR of 15% p.a.) and principal repayment that issuer A Ltd. cannot avoid. The equity conversion option is accounted as equity.
• The equity conversion option can’t be considered as closely related to the host instrument, because an equity conversion option is not a normal feature of a typical debt instrument, so it needs to be separated. The usual treatment for an instrument with these terms is to conclude that the ‘fixed for fixed’ criterion is met. This is because the number of shares is predetermined at the outset and the only variable is the passage of time. Accordingly, conversion option is classified as equity on Day 1.
• During the life of the host bond, expectations about early conversion should not be taken into account when estimating the cash flows used to apply the effective interest rate. The early conversion option is a characteristic of the equity component (the conversion option) and not of the host liability. The estimated cash flows used to apply the effective interest rate method are, therefore, the contractual cash flows based on the contractual final maturity of the host liability. The Effective Interest Rate (EIR) is 17% p.a.

Early call option to redeem OCD [see paragraph B4.3.5(e) of Ind AS 109]
• The call option’s exercise price is set at par value of OCD plus stated IRR till the date of exercise of call option. Therefore, at each exercise date the option’s exercise price is likely to be approximately equal to the amortised carrying amount of the OCDs plus the equity conversion option. Therefore, the call option is closely related to the host debt instrument. As a result, the call option is not separately accounted for but it remains part of the liability component. The assessment of whether the call option is closely related to the host debt contract is made before separating the equity element of a convertible debt instrument in accordance with Ind AS 32.

Date	Particulars	Amount (rounded off in crores)
Day 1	Bank	300
	To Equity (balancing figure representing residual interest)		20
	To Debenture (future cash flows discounted at 17%)		280
	(Initial recognition of the financial instrument in the nature of a compound instrument comprising of elements of debt and equity)

Date

Particulars

Amount
(rounded off in crores)

Day 1

Bank

300

To Equity (balancing figure representing residual interest)

To Debenture (future cash flows discounted at 17%)

280

(Initial recognition of the financial instrument
in the nature of a compound instrument comprising of elements of debt and
equity)

Subsequent accounting

Date	Particulars	Amount (rounded off in crores)
End of Year 1	Interest on Debentures	48
	To Debenture (classified under ‘Liability component of compound financial instrument’)		48
	(Interest recognised in P&L at EIR of 17%; i.e. 280*17%)

Date

Particulars

Amount
(rounded off in crores)

End of Year 1

Interest on Debentures

To Debenture (classified under ‘Liability component of compound financial
instrument’)

(Interest recognised in P&L at EIR of 17%;
i.e. 280*17%)

Scenario A – If B Ltd. opts for conversion at end of Year 1
If B Ltd. opts for conversion before maturity – Since conversion was allowed under the original terms of instrument, the entity should determine the amortised cost of liability component using the original EIR till the conversion date. It will derecognise the liability component and recognise it as equity. There is no gain or loss on early conversion.

Date	Particulars	Amount (rounded off in crores)
End of Year 1	Debenture [280+48]	328
	To Equity share capital		328
	(Conversion of OCD into equity shares of the company)

Date

Particulars

Amount
(rounded off in crores)

End of Year 1

Debenture [280+48]

328

To Equity share capital

328

(Conversion of OCD into equity shares of the
company)

Scenario B – If B doesn’t opt for conversion and OCDs are redeemed at maturity

Date

Particulars

Amount
(rounded off in crores)

Year 1-4

Interest on debentures (cumulative interest for 4 years)

245

To Debenture

245

(Interest recognised in P&L at EIR of 17%)

End of Year 4

Debenture [280+245]

525

To Bank

525

(Being debentures redeemed)

KEY TAKEAWAYS:

In the case of a compound financial instrument, the instrument has to be separated for the liability and equity component;

The instrument may have additional derivatives, such as a put or a call option. The accounting of such derivatives will depend upon whether those are closely related to the liability component. If the option is closely related to the liability component it is not separated from the liability component. On the other hand, if the option is not closely related to the liability component, it is separately accounted for and marked to market at each reporting date, till such time as it is finally settled;

On settlement of the compound financial instrument, the equity element (INR 20) recognised initially, may be transferred to retained earnings.

shailesh.kwebmaker

ISSUES IN TAXATION OF DIVIDEND INCOME, Part – 2

In the first of this two-part article published in April, 2021, we had analysed the various facets of the taxation of dividends from a domestic tax perspective as well as the construct of the dividend Article in the DTAAs. In this second part, we analyse some specific international tax issues related to dividends, such as applicability of DTAA to the erstwhile dividend distribution tax (‘DDT’) regime, application of the Most Favoured Nation clause in a few DTAAs, some issues relating to beneficial ownership, application of the Multilateral Instrument to dividends and some issues relating to underlying tax credit.

1. APPLICATION OF DTAA TO THE ERSTWHILE DDT REGIME
From A.Y. 2004-05 to A.Y. 2020-21, India followed the DDT system of taxation of dividends. Under that regime, the company declaring the dividends was liable to pay DDT on the dividends declared. One of the issues in the DDT regime was whether the DTAAs would restrict the application of the DDT. While this issue may no longer be relevant for future payments of dividends, with the Finance Act, 2020 reintroducing the classical system of taxation of dividends, this may be relevant for dividends paid in the past.

This controversy has gained significance because of a recent decision of the Delhi ITAT in the case of Giesecke & Devrient (India) (P) Ltd. vs. Add. CIT [2020] (120 taxmann.com 338). However, before considering the above decision, it would be important to analyse two decisions of the Supreme Court which, while not specifically on the issue, would provide some guidance in analysing the issue at hand.

The first Supreme Court decision is that of Godrej & Boyce Manufacturing Company Limited vs. DCIT (2017) (394 ITR 449) wherein the question before the Court was whether section 14A applied in the case of dividend income (under the erstwhile DDT regime). The issue to be addressed was whether dividend income was income which does not form part of the total income under the Act. In the said case, the assessee argued that DDT was tax on the dividends and, therefore, dividends being subject to tax in the form of DDT, could not be considered as an income which does not form part of the total income of the shareholder. The Supreme Court did not accept this argument and held that the provisions of section 115-O are clear in that the tax on dividends is payable by the company and not by the shareholders and by virtue of section 10(34) the dividend income received by the shareholder is not taxable. Therefore, the Apex Court held that the provisions of section 14A would apply even for dividend income in the hands of the shareholders.

Interestingly, in the case of Union of India & Ors. vs. Tata Tea Co. Ltd. & Anr. (2017) (398 ITR 260), the Supreme Court was asked to adjudicate on the constitutional validity of DDT paid by tea companies as the Constitution of India prohibits taxation of profits on agricultural income. In this case the Court held that DDT is not a tax on the profits of the company but on the dividends and therefore upheld the constitutional validity of DDT.

Now the question arises, how does one read both the above decisions of the Supreme Court, delivered in different contexts, to give effect to both the orders in respect of DDT. One of the interpretations of the application of DDT, keeping in mind the above decisions of the Supreme Court, is that while DDT is not a tax on the shareholders but the company distributing dividends, it is a tax on the dividends and not on the profits of the company distributing dividends.

One would need to evaluate whether the above principle emanating from both the above judgments could be applied in the context of a DTAA. Article 10 of the UN Model Convention reads as under:

‘(1) Dividends paid by a company which is a resident of a Contracting State to a resident of the other Contracting State may be taxed in that other State.
(2) However, such dividends may also be taxed in the Contracting State of which the company paying the dividends is a resident and according to the laws of that State, but if the beneficial owner of the dividends is a resident of the other Contracting State, the tax so charged shall not exceed:…..’ (emphasis supplied).

Therefore, the UN Model Convention as well as the DTAAs which India has entered into provide for taxation of the stream of income and do not refer to the person in whose hands such income is to be taxed. Accordingly, one may be able to take a view that a DTAA restricts the right of taxation of the country of source on dividend income and this restriction would apply irrespective of the person liable for payment of tax on the said dividend income. In other words, one may be able to argue that DTAA would restrict the application of DDT to the rates specified in the DTAA.

Interestingly, the Protocol to the India-Hungary DTAA provides as under,

‘When the company paying the dividends is a resident of India the tax on distributed profits shall be deemed to be taxed in the hands of the shareholders and it shall not exceed 10 per cent of the gross amount of dividend.’

In other words, the Protocol deems the DDT to be a tax on the shareholders and therefore restricted the DDT to 10%.

Further, as Hungary is an OECD member and the DTAA between India and Hungary was signed in 2003, one could also have applied the Most Favoured Nation clause in the Protocols in India’s DTAAs with Netherlands, France and Sweden to apply the above restriction on shareholders resident in those countries.

The Delhi ITAT in the case of Giesecke & Devrient (India) Pvt. Ltd. (Supra) also held that the DDT would be restricted to the tax rates as prescribed under the relevant DTAA. The argument that the Delhi ITAT has considered while applying the tax treaty rate for dividends is that the introduction of the DDT was a form of overriding the treaty provisions, which is not in accordance with the Vienna Convention of the Law of Treaties, 1969 and hence the DTAA rate should override the DDT rate.

Now, the question is whether one can claim a refund of the DDT paid in excess of the DTAA rate applying the above judicial precedents and, if so, which entity should claim the refund – the company which has paid the dividends or the shareholder? In respect of the second part of the question, the Supreme Court in the case of Godrej & Boyce (Supra) is clear that DDT is a tax on the company declaring the dividends and not on the shareholders. Therefore, the claim of refund, if any, for DDT paid in excess of the DTAA rates should be made by the company which has paid the dividends and not by the shareholders.

In order to evaluate whether one can claim refund of the excess DDT paid, it is important to analyse two scenarios – where the case of the taxpayer company is before the A.O. or an appellate authority, and where there is no outstanding scrutiny or appeal pending for the taxpayer company.

In the first scenario, where the taxpayer is undergoing assessment proceedings or is in appeal before an appellate authority, such a refund may be claimed by making such a claim before the A.O. or the relevant appellate authority. While the A.O. may apply the principle of the Supreme Court in the case of Goetze (India) Ltd. vs. CIT (2006) (284 ITR 323), the appellate authorities are empowered to consider such a claim even if not claimed in the return of income following various judicial precedents, including the Bombay High Court in the case of CIT vs. Pruthvi Brokers & Shareholders (P) Ltd. (2012) (349 ITR 336).

In the second scenario, the options are limited. One may evaluate whether following certain judicial precedents this could be considered as a mistake apparent from record requiring rectification u/s 154 or whether one can obtain an order from the CBDT u/s 119.

In the view of the authors, if the taxpayer falls in the category as mentioned in the first scenario, one should definitely consider filing a claim before the A.O. or the appellate authority as even if such claim is rejected or subsequently the Supreme Court rules against the taxpayer on this issue, given that the DDT has already been paid by the taxpayer company, there may not be any penal consequences.

2. ISSUE IN APPLICATION OF MFN CLAUSE IN SOME TREATIES
Another recent issue is the application of the MFN clause to lower the rate of taxation of dividends. While application of the MFN clause is not a new concept, this issue has been exacerbated with the reintroduction of the classical system of taxation.
Article 10(2) of the India-Netherlands DTAA provides for a 10% tax in the country of source. Paragraph IV(2) of the Protocol to the India-Netherlands DTAA provides as follows,

‘If after the signature of this Convention under any Convention or Agreement between India and a third State which is a member of the OECD, India should limit its taxation at source on dividends, interests, royalties, fees for technical services or payments for the use of equipment to a rate lower or a scope more restricted than the rate or scope provided for in this Convention on the said items of income, then as from the date on which the relevant Indian Convention or Agreement enters into force the same rate or scope as provided for in that Convention or Agreement on the said items of income shall also apply under this Convention’ (emphasis supplied).

The India-Netherlands DTAA was signed on 13th July, 1988. Pursuant to this, India entered into a DTAA with Slovenia on 13th January, 2003. Article 10(2) of the India-Slovenia DTAA provides for a lower rate of tax at 5% in case the beneficial owner is a company which holds at least 10% of the capital of the company paying the dividends.

While the DTAA between India and Slovenia was signed in 2003, Slovenia became a member of the OECD only in 2010. In other words, while the Slovenia DTAA was signed after the India-Netherlands DTAA, Slovenia became a member of the OECD after the DTAA was signed.

Therefore, the question arises whether one can apply the MFN clause in the Protocol of the India-Netherlands DTAA to restrict India from taxing dividends at a rate not exceeding 5%.

In this context, the Delhi High Court in a recent decision, Concentrix Services Netherlands BV vs. ITO (TDS) (2021) [TS-286-HC-2021(Del)] has held that one could apply the rates as provided under the India-Slovenia DTAA by applying the MFN clause in the India-Netherlands DTAA. In this case, the assessee sought to obtain a lower deduction certificate from the tax authorities u/s 197 by applying the rates under the India-Slovenia DTAA. However, the tax authorities issued the lower deduction certificate with 10% as the tax rate. Following the writ petition filed by the taxpayer, the Delhi High Court upheld the view of the taxpayer. The Delhi High Court relied on the word ‘is’ in the India-Netherlands DTAA in the term ‘….which is a
member of the OECD…’ of the Protocol. The High Court held that the said word describes a state of affairs that should exist not necessarily at the time when the subject DTAA was executed but when the DTAA provisions are to be applied.

Interestingly, the High Court also referred to the contents of the decree issued by the Netherlands in this respect wherein the India-Slovenia DTAA was made applicable to the India-Netherlands DTAA on account of the Protocol. In this regard, the Court followed the principle of ‘common interpretation’ while applying the interpretation of the issue in the treaty partner’s jurisdiction to the interpretation of the issue in India.

Therefore, one may be able to apply the lower rates under the India-Slovenia DTAA (or even the India-Colombia DTAA or India-Lithuania DTAA which also provide for a 5% rate) to the India-Netherlands DTAA by virtue of the MFN clause in the latter.

Similarly, India’s DTAAs with Sweden and France also contain a similar MFN clause and both the DTAAs are also signed before the India-Slovenia DTAA. Therefore, one can apply a similar principle even in such DTAAs.

However, it is important to consider the practical aspects such as how should one disclose the same in Form 15CB or in the TDS return filed by the payer as the TDS Centralised Processing Centre may process the TDS returns with the actual DTAA rate without considering the Protocol.

3. SOME ISSUES RELATING TO BENEFICIAL OWNER
In the first part of this article, we analysed the meaning of the term ‘beneficial owner’ in the context of DTAAs. This article seeks to identify some other peculiar issues around beneficial owner in DTAAs.

Firstly, it is important to understand that the term ‘beneficial owner’ is used in relation to ownership of income and not of the asset. Therefore, in respect of dividends one would need to evaluate whether the recipient is the beneficial owner of the income. The fact that the recipient of the dividends is a subsidiary of another company may not have any influence on the interpretation of the term. If, however, the recipient is contractually obligated to pass on the dividends received to its holding company, it may not be considered as the beneficial owner of the income.

Article 10 relating to dividends in most of India’s DTAAs requires the recipient of the dividends to be a beneficial owner of the income. For example, Article 10(2) of the India-Singapore DTAA provides as follows,

‘However, such dividends may also be taxed in the Contracting State …… but if the recipient is the beneficial owner of the dividends, the tax so charged shall not exceed….’ (emphasis supplied).

On the other hand, some of India’s DTAAs require the beneficial owner to be a resident of the Contracting State as against the recipient being the beneficial owner. For example, Article 10(2) of the India-Belgium DTAA provides as follows,

‘However, such dividends may also be taxed in the Contracting State ….. but if the beneficial owner of the dividends is a resident of the other Contracting State, the tax so charged shall not exceed….’ (emphasis supplied).

Now, the question arises whether the difference in the above languages would have any impact. In order to understand the same, let us consider an example wherein I Co pays dividends to A Co which is a resident of State A and A Co is obligated to transfer the dividends received to its holding company HoldCo, which is also a resident of State A. In other words, the recipient of the income is A Co and the beneficial owner of the income is HoldCo, and both are tax residents of State A.

In case the DTAA between India and State A is similar to that of the India-Singapore DTAA, the benefit of the lower rate of tax under the DTAA may not be available as the lower rate applies only if the recipient is the beneficial owner of the dividends, and in this case the recipient, i.e., A Co, is not the beneficial owner of the dividends.

On the other hand, if the DTAA between India and State A is similar to that of the India-Belgium DTAA, the benefit of the lower rate of tax under the DTAA would be available as the beneficial owner of the dividends, i.e., HoldCo, is a resident of State A. Therefore, one should also carefully consider the language in a particular DTAA before applying the same.

Another peculiar issue in respect of beneficial owner is the consequences of the recipient not being considered as the beneficial owner. The issue is further explained by way of an example.

Let us consider a situation where I Co, a resident of India, pays dividend to A Co, a resident of State A, and A Co is obligated to transfer the dividends received to its holding company B Co, a resident of State B.

In this scenario, the benefit of the DTAA between India and State A would not be available as the beneficial owner is not a resident of State A. This would be the case irrespective of whether the language is similar to the India-Singapore DTAA or the India-Belgium DTAA. Now the question is whether one can apply the DTAA between India and State B as the beneficial owner, B Co, is a resident of State B. While B Co is the beneficial owner of the income, the dividend is not ‘paid’ to B Co. Therefore, the Article on dividend of the DTAA between India and State B would not apply. Moreover, in the Indian context, the entity in whose hands the income would be subject to tax would be A Co and therefore evaluating the application of the DTAA between India and State B, wherein A Co is not a resident of either, would not be possible. Accordingly, in the view of the authors, in this scenario the benefit of the lower rate of tax on dividends in both the DTAAs would not be available.

4. APPLICATION OF THE MULTILATERAL INSTRUMENT (‘MLI’)
Pursuant to the Base Erosion and Profit Shifting Project of the OECD, India is a signatory to the MLI. The MLI modifies the existing DTAAs entered into by India. Some of the Indian DTAAs are already modified, with the MLI being effective from 1st April, 2020. We have briefly evaluated the relevant articles of the MLI which may apply in the context of dividends.

(a) Principal Purpose Test (‘PPT’) – Article 7 of the MLI
Article 7 of the MLI provides that the benefit of a Covered Tax Agreement (‘CTA’), i.e., DTAA as modified by the MLI, would not be granted if it is reasonable to conclude that obtaining the benefit of the said DTAA was one of the principal purposes of any arrangement or transaction, unless it is established that granting the benefit is in accordance with the object and purpose of the relevant provisions of the said DTAA.

In respect of dividends, therefore, the benefit under a DTAA may be denied in case it is reasonable to conclude that the transaction or arrangement was structured in a particular manner with one of the principal purposes being to obtain a benefit of that DTAA.

For example, US Co, a company resident in the US, wishes to invest in I Co, an Indian company. However, as the tax rate on dividends in the India-US DTAA is 15%, it interposes an intermediate holding company in the Netherlands, NL Co, with an objective to apply the India-Netherlands DTAA to obtain a lower rate of tax on dividends (5% after applying the MFN clause and the India-Slovenia DTAA as discussed above). In such a scenario, the tax authorities in India may deny the benefit of the dividend article in the India-Netherlands DTAA as one of the principal purposes of investment through the Netherlands was to obtain the benefit of the DTAA.

The PPT is wider in application than the General Anti-Avoidance Rules (‘GAAR’). Further, as it is a subjective test, there are various issues and challenges in the interpretation and the application of the PPT.

(b) Dividend transfer transactions – Article 8 of the MLI
Article 10(2) of some of the DTAAs India has entered into provide two rates of taxes as the maximum amount taxable in the country of source, with a lower rate applicable in case a certain holding threshold is met. For example, Article 10(2) of the India-Singapore DTAA provides for the following rates of tax as a threshold beyond which the country of source cannot tax:
(i) 10% of the gross amount of dividends in case the beneficial owner is a company which owns at least 25% of the shares of the company paying dividends; and
(ii) 15% in all other cases.

Such DTAAs provide a participation exemption by providing a lower rate of tax in case a certain holding threshold is met.

Article 8 of the MLI provides that the participation exemption which provides for a lower rate of tax in case a holding threshold is met would not apply unless the required number of shares for the threshold are held for at least 365 days, including the date of payment.

Therefore, in case of an Indian company paying dividends to its Singapore shareholder which holds more than 25% of the shares of the Indian company, the tax rate of 10% would be available only in case the Singapore company has held the shares of the Indian company for a period of at least 365 days.

One of the issues in the interpretation of Article 8 of the MLI is that the Article does not specify the manner of computing the period of holding – whether the period of 365 days should be considered for the period immediately preceding the date of payment of dividends, or can one consider the period after the dividend has been paid as well. While one may be able to take a view that as the Article does not require the holding period to be met on the date of the payment of the dividend, the period of holding after the payment of dividend may also be considered. However, there may be practical challenges, especially while undertaking withholding tax compliances for payment of such dividend.

5. ISSUES RELATED TO TAX CREDIT ON DIVIDENDS RECEIVED
Having analysed various aspects in the taxation of dividends in the country of source, we have also analysed some specific issues arising in respect of dividends in the country of residence. India follows the credit system of relieving double taxation.

One of the issues in respect of tax credit is that of conflict of interpretation between both the Contracting States. Let us take an example; F Co, a resident of State A, pays dividend on compulsorily preference shares to I Co, an Indian company. Assume that under the domestic tax law of State A such a payment is considered as interest. Assume also that the tax rate for interest and dividends is 15% and 10%, respectively, under the DTAA between India and State A.

In this scenario, State A would withhold tax at the rate of 15%. Now the question is whether India would provide a credit of 15% or would the tax credit be restricted to 10% as India considers such payment as dividends? The Commentary on Article 23 of the OECD Model Convention provides that in the case of a conflict of interpretation, the country of residence should permit credit for the tax withheld in the country of source even if the country of residence would treat this income differently. The only exception to this rule provided by the Commentary is when the country of residence believes that the country of source has not applied the provisions of a DTAA correctly, would the country of residence deny such higher tax credit.

In the present case, one may be able to contend that the country of source, State A, has correctly applied the DTAA in accordance with its domestic tax law and therefore India would need to provide tax credit of 15% subject to other rules relating to foreign tax credit.

Another peculiar aspect in respect of tax credit for dividends received from a foreign jurisdiction is that of the underlying tax credit. Some of the DTAAs India has entered into provide for an underlying tax credit.

For example, Article 25(2) of the India-Singapore DTAA, dealing with tax credit, provides as under,

‘Where a resident of India derives income which, in accordance with the provisions of this Agreement, may be taxed in Singapore, India shall allow as a deduction from the tax on the income of that resident an amount equal to the Singapore tax paid, whether directly or by deduction. Where the income is a dividend paid by a company which is a resident of Singapore to a company which is a resident of India and which owns directly or indirectly not less than 25 per cent of the share capital of the company paying the dividend, the deduction shall take into account the Singapore tax paid in respect of the profits out of which the dividend is paid.’

Therefore, tax credit would include the corporate tax paid by the company which has declared the dividend. This is explained by way of an example. Let us consider that I Co, an Indian company, is a 50% shareholder in Sing Co, a tax resident of Singapore. Assuming that Sing Co has profits (before tax) of 100 which are distributed (after payment of taxes) as dividend to the shareholders, the tax credit calculation in the hands of I Co would be as follows:

	Particulars	Amount
A	Profit of Sing Co	100
B	(-) Corporate tax of 17% in Singapore	(17)
C	Dividend payable (A-B)	83
D	Dividend paid to I Co (50% of C)	41.5
E	(-) Tax on dividends in Singapore	(0)
F	Net amount received by I Co (D-E)	41.5
G	Tax in India u/s 115BBD (15% of F)	6.2
H	(-) Tax credit for taxes paid in Singapore (=E)	0
I	(-) Underlying tax credit for taxes paid by Sing Co (50% of B)	(8.5)
J	Actual tax credit [(H + I ) subject to maximum to G]	(6.2)
K	Tax payable in India (G – J)	0
L	Net amount received in India (net of taxes) (F – K)	41.5

Particulars

Amount

Profit of Sing Co

100

(-) Corporate tax of 17% in Singapore

(17)

Dividend payable (A-B)

Dividend paid to I Co (50% of C)

41.5

(-) Tax on dividends in Singapore

(0)

Net amount received by I Co (D-E)

41.5

Tax in India u/s 115BBD (15% of F)

6.2

(-) Tax credit for taxes paid in Singapore (=E)

(-) Underlying tax credit for taxes paid by Sing Co (50% of B)

(8.5)

Actual tax credit [(H + I ) subject to maximum to G]

(6.2)

Tax payable in India (G – J)

Net amount received in India (net of taxes) (F –
K)

41.5

6. CONCLUSION

Each DTAA may have certain peculiarities. For example, the India-Greece DTAA provides for an exclusive right of taxation of dividends to the country of source, and the country of residence is not permitted to tax the dividends. With the reintroduction of the classical system of taxation of dividends, therefore, it is important to understand and evaluate the DTAA in detail in cross-border payment of dividends.

It is also important to evaluate the tax credit article in respect of dividends received from foreign companies in order to examine whether one can apply underlying tax credit as well.

shailesh.kwebmaker

PREMIUM RECEIVED BY LANDLORD ON TRANSFER OF TENANCY RIGHTS – CAPITAL OR REVENUE?

ISSUE FOR DISCUSSION

A person acquiring the right to use an immovable property on a month-to-month basis without acquiring the ownership right is known as the tenant and the person continuing to be the owner of the property is known as the landlord. The monthly compensation paid for the use of the property is known as the rent. Various States in India have tenancy laws, whereby tenants are protected from eviction by the landlord from premises in which they are tenants. The rights so acquired by the person to use the property are known as tenancy rights. These rights may be acquired for a consideration known as salami or premium, though many States prohibit payment of such consideration.

On the other hand, many States permit the transfer of tenancy rights by the tenant for a consideration with the consent of the landlord, who may consent to the transfer on receipt of a payment or even without it. These tenancy rights are recognised by the tax laws as capital assets of the tenant and accordingly the gains if any on their transfer are taxed under the head capital gains. Section 55 provides that the cost of acquisition of the tenancy is to be taken as Nil unless paid for, in which case the cost would be the one that is paid for acquiring the tenancy. Tenancy rights when acquired for a fixed period under a written instrument are known as leasehold rights. Acquisition of a license to use the property, although similar to lease or tenancy, is not the same.

An interesting issue has arisen as to the manner of taxation of the receipt by the landlord for consenting to such transfer of tenancy – whether it is capital in nature and therefore not taxable or taxable as capital gains, or whether it is revenue in nature and taxable as income. There have been conflicting decisions of the Mumbai Bench of the Tribunal on this issue. The taxation of such receipt under the provisions of section 56(2)(x) is another aspect that requires consideration.

THE VINOD V. CHHAPIA CASE
The issue came up before the Mumbai Bench of the Tribunal in the case of Vinod V. Chhapia vs. ITO (2013) 31 taxmann.com 415.

In this case, the assessee was a HUF which owned an immovable property. Part of the property was let out to a tenant since 1962 and part of the property was occupied by the members of the HUF. The tenant expired in 1986 and the tenancy rights were inherited by her daughter.

A tripartite agreement was entered into between the daughter, new tenants and the landlord for surrender of tenancy by the daughter and grant of tenancy by the landlord in favour of the new tenants. The daughter surrendered her tenancy rights in favour of the landlord to facilitate renting of the property to the new tenants. The incoming tenants paid an amount of Rs. 14.74 lakhs to the daughter and an amount of Rs. 7.26 lakhs to the assessee-landlord simultaneously. The assessee accepted the surrender of tenancy rights and possession of the property and received the amount from the new tenants as consideration for granting the new tenants monthly tenancy of the flat.

The assessee invested the amount of Rs. 7.26 lakhs in bonds issued by NABARD, treated the amount received from the new tenants as capital gains and claimed exemption u/s 54EC.

During assessment proceedings, the assessee claimed that the amount was received towards surrender of a right, which was part of the bundle of rights owned by the assessee in respect of the property. The assessee claimed that the receipt of the consideration of Rs. 7.26 lakhs was for the extinguishment of the rights and therefore was capital gains eligible for exemption u/s 54EC. Various decisions were cited by the assessee in support of the proposition that the amount received on surrender of tenancy rights was a capital receipt, which was taxable under the head ‘capital gains’.

But the A.O. brought out the distinction between transfer of tenancy rights vis-à-vis surrender of tenancy rights. According to him, the receipt by the landlord was for consenting to a transfer of the right of residence by the existing tenant to the new tenants. He sought to support this view by the fact of payment of consideration by the new tenants to both the original tenant and the landlord. The A.O. distinguished the judgments cited before him, since all of those related to surrender of tenancy rights.

According to the A.O., the outgoing tenant (the daughter) surrendered (transferred) the tenancy rights in favour of the new tenants and not to the assessee-landlord. He held that the amount of Rs. 7.26 lakhs was received by him from the new tenants for consenting to the transfer of tenancy to the new tenants, and not for surrender of tenancy, and was therefore not a capital receipt. The A.O. therefore taxed the amount of Rs. 7.26 lakhs as income of the assessee under the head ‘income from other sources’, rejecting the claim of exemption u/s 54EC.

Before the Commissioner (Appeals), the assessee submitted that consent of the landlord was mandatory for the new tenants to enjoy the right of residence. Thus, by consenting, the assessee gave up (transferred) some of the rights out of the bundle of rights attached to the said property, a capital asset. Reliance was placed on the Supreme Court decision in the case of CIT vs. D.P. Sandu Bros. Chembur (P) Ltd. 273 ITR 1 and on the Bombay High Court decision in the case of Cadell Weaving Mill Co. (P) Limited vs. CIT 249 ITR 265, for the proposition that the amount received on surrender of tenancy rights is a capital receipt taxable under the head ‘capital gains’, and not ‘income from other sources’.

The Commissioner (Appeals) rejected the appeal, confirming the order of the A.O. and held that the assessee continued to hold the ownership rights even after the new tenants entered the house and that the outgoing tenant transferred the tenancy rights to the new tenants. The assessee merely gave its consent for such transfer, for which it received the sum of Rs. 7.26 lakhs which could not be termed as a receipt for surrender of tenancy rights. Had it amounted to a surrender of tenancy rights in favour of the landlord, the consideration would have been paid by the landlord to the outgoing tenant. Therefore, it was a case of encashment of the power of consent for transfer of the tenancy rights to the new tenants. The Commissioner (Appeals) next observed that if the new tenants further transferred the property to some other tenant, the assessee would be entitled to receive a similar amount and the ownership rights of the property would continue to vest with the assessee.

Before the Tribunal, on behalf of the assessee it was submitted that the rights attached to an immovable property constituted a bundle of rights. Exploitation of these rights gives rise to capital gains. Without the surrender of tenancy rights by the original tenant to the assessee, the assessee could not have consented to the transfer of residence in favour of the new tenant. Therefore the consideration received by the assessee was for surrender of tenancy rights, which was a capital receipt, taxable as capital gains.

Attention was drawn by the assessee to the tripartite agreement between the assessee, the original tenant and the new tenants, which mentioned that the original tenant was the sole owner of the tenancy rights and she surrendered the flat to the landlord including the tenancy rights.

On behalf of the Revenue it was argued that normally in the case of surrender of tenancy rights the tenant would receive the consideration from the landlord for surrender of the same. In the case before the Tribunal, the landlord did not pay the consideration to the original tenant, but it was the new tenants who paid the consideration to the original tenant. Further, the assessee continued to hold the right of ownership of the property and tenancy rights were transferred from the old tenant to the new tenants. It was therefore submitted that the amount was rightly taxed as ‘income from other sources.’

The Tribunal noted that all the decisions cited before it, whether by the assessee or by the Revenue, were in the context of undisputed surrender of tenancy rights and were therefore distinguishable on facts. Analysing the facts of the case, the Tribunal was of the view that the consideration paid by the new tenants was for consent of the landlord for the transfer of tenancy rights between the new and old tenants and the amount of Rs. 7.26 lakhs was the consideration for consent. According to the Tribunal, generally in matters of tenancy rights disputes it is the tenant who gets the financial benefit, which flows from the pockets of the landlord in lieu of surrender of the tenancy rights by the tenant, and the landlord does not receive any amount. Therefore, according to the Tribunal, the settled law relating to taxation of a receipt on surrender of tenancy rights would not apply in the case before it.

The Tribunal also examined whether the assessee actually received all the rights over the property, including the tenancy rights. It noted the clause in the agreement which indicated that the existing tenant surrendered the tenancy rights along with the property to the assessee. It questioned the need for the existing tenant to be a signatory to the agreement giving the property on monthly rent to the new tenants and the need for a tripartite agreement. According to the Tribunal, letting of the property to the new tenant was a matter of agreement between the landlord and the new tenant.

Noting that the monthly rental and rental advance were nominal, the Tribunal was of the view that the sum of Rs. 7.26 lakhs paid to the landlord by the new tenant was consideration for the consent. As per the Tribunal, the receipt was for the consent for transfer by the old tenant to the new tenants, for a consideration of Rs. 14.48 lakhs and there was a need for the consent of the landlord. The Tribunal accordingly held that there was no transfer of any capital asset by the landlord to the new tenants and that the sum of Rs. 7.26 lakhs was neither a capital receipt nor a rental receipt.

The Tribunal also noted that there was no time gap between the vacation of the property by the old tenant and grant of rental rights to the new tenants. There was continuity of renting of the property and there was no evidence to infer that the house was in the vacant possession of the assessee even after the alleged end of the tenancy of the old tenant. Therefore, the assessee never got the property in vacant condition. Hence the Tribunal held that the amount received was consideration for consent, it did not involve any transfer of capital rights attached to the property, and it constituted a windfall gain to the assessee, which was taxable under the head ‘income from other sources’.

NEW PIECE GOODS BAZAR CO. LTD. CASE
The issue again came up before the Mumbai Bench of the Tribunal in the case of Jt. CIT vs. New Piece Goods Bazar Co. Ltd., ITA No. 6983/Mum/2012 dated 25th May, 2016.

In this case, the assessee was the owner of several shops in the cloth market which were given on rent to different tenants. Every year, some tenants transferred the possession of shops to new tenants, with the consent of the assessee, who was the owner of the shops. In consideration of giving its consent to the transfer of possession of the shops from old tenants to the new tenants, the assessee was receiving a certain premium from the old tenants.

Earlier, the receipt of premium by the assessee was shown as income under the head ‘capital gains’. During the relevant year also, certain old tenants transferred their possessory rights of the rental shops to the new tenants with the consent of the assessee. In consideration of giving consent for such transfer of possessory rights, the assessee received a premium of Rs. 1,15,50,000 from the old tenants. The assessee treated such amount as income from ‘capital gains’ and claimed exemption from taxation of a part thereof u/s 54EC.

The A.O. held that the assessee was the owner of the shops, the old tenants had transferred the tenancy rights in favour of the new tenants along with rights of possession and the assessee remained the owner of the shops as before. Consequently, there was no transfer of the capital assets, being shops, as even after the transfer of tenancy rights the assessee continued to remain the owner of the shops. According to the A.O., while the transfer of tenancy rights indisputably resulted in capital gains, such capital gains would be taxable in the hands of the outgoing tenants and could not be taxed as the capital gains of the assessee. The A.O. therefore held that the amount received by the assessee as premium was taxable in the hands of the assessee as ‘income from other sources’ and not as ‘capital gains’, and that the assessee was therefore not entitled to exemption u/s 54EC.

In an appeal before the Commissioner (Appeals), the assessee submitted that in earlier and subsequent years also, a similar amount was offered to tax as capital gains and was accepted by the Income-tax Department. It was further argued that tenancy rights was undoubtedly a capital asset under the law and therefore any gains arising from the transfer of such rights had to be assessed under the head ‘capital gains’.

The Commissioner (Appeals) noted that a right was a bundle of benefits embedded in some asset or independent thereof. Capital asset meant property of any kind held by an assessee. Therefore, a right, whether or not attached to any asset, was also a property. The old tenant could transfer the possessory rights of the shops only with the consent of the landlord. According to the Commissioner (Appeals), such right of consent was a property in the hands of the assessee. Since that right or property was connected to the capital asset, i.e., shops, therefore such a right of consent was also a capital asset in the hands of the assessee which was more or less similar to a tenancy right, which was also a capital asset.

The Commissioner (Appeals) therefore held that on giving consent to change in the possession of rented premises from an old tenant to a new tenant, there was a transfer of capital asset. He, therefore, held that such receipt was liable to tax as capital gains and the assessee was entitled to exemption u/s 54EC.

On appeal by the Revenue, the Tribunal expressed its agreement with the observations of the Commissioner (Appeals) that the assessee acquired a bundle of rights (ownership) with respect to the shops. These rights included, inter alia, the right of grant of tenancy. The term ‘capital asset’ was defined in the widest possible manner in section 2(14) and had been curtailed only to the extent of exclusions given in the said section, including stock-in-trade and personal effects. The asset under consideration clearly did not fall within the above exclusions. The bundle of rights acquired by the assessee was undoubtedly valuable in terms of money.

On the above reasoning, the Tribunal held that the tenancy rights formed part of a capital asset in the hands of the assessee and therefore any gains arising therefrom would be assessable under the head ‘capital gains’, eligible for deduction u/s 54EC.

In Sujaysingh P. Bobade (HUF) vs. ITO (2016) 158 ITD 125 (Mum) a similar view was taken that the amount received by the landlord was a capital receipt, subject to tax as capital gains. However, in that case the appeal was against an order of revision passed u/s 263 and the landlord had received the amount from the new tenants for allotment of tenancy rights under tenancy agreements.

A similar view has also been taken by the Tribunal in the case of ITO vs. Dr. Vasant J. Rath Trust, ITA No. 844/Mum/2014 dated 29th February, 2016 wherein the old tenants had surrendered their tenancy rights to the landlord without receiving any consideration and the landlord directly entered into tenancy agreements with the six new tenants on receipt of consideration for grant of tenancy rights.

OBSERVATIONS
Any property, especially immovable property, comprises of a bundle of rights where each such right is a capital asset capable of being transferred by the owner for an independent consideration to different persons. Ownership of the land and / or building is the classic case of owning such a bundle of rights. The right to grant tenancy flows from such a bundle. The Supreme Court in the case of A.R. Krishnamurthy, 176 ITR 417, in the context of the ownership of a mine, held that the mining rights were a part of the mine and were capable of being held as an independent asset and therefore of being transferred independent of the ownership of the mine. It held that the grant of the lease to mine the asset or the mining rights resulted in the transfer of a capital asset, negating the case of the assessee that there was no transfer of capital asset on grant of the mining rights where the ownership of the mine continued with the assessee. The court also rejected the contention that there was no cost of acquisition of such rights or the cost could not be attributed to such rights.

Receipt of a salami or premium by a landlord from a tenant for grant of tenancy rights in an immovable property owned by him is a capital receipt and not a revenue receipt [Durga Das Khanna vs. CIT 72 ITR 796 followed by the Bombay and the Calcutta High Courts in CIT vs. Ratilal Tarachand Mehta 110 ITR 71 and CIT vs. Anderson Wright & Co. 200 ITR 596, respectively]. The Courts held that unless such a receipt is proved to be in the nature of rent or advance rent, it could not be taxed under the Act as revenue income.

The Supreme Court, in the case of CIT vs. Panbari Tea Co. Ltd. 57 ITR 422 held that a premium received on parting with the lessor’s interest was a capital receipt and the rent receipt was revenue in nature:

‘When the interest of the lessor is parted with for a price, the price paid is premium or salami. But the periodical payments made for the continuous enjoyment of the benefits under the lease are in the nature of rent. The former is a capital income and the latter a revenue receipt. There may be circumstances where the parties may camouflage the real nature of the transaction by using clever phraseology. In some cases, the so-called premium is in fact advance rent and in others rent is deferred price. It is not the form but the substance of the transaction that matters. The nomenclature used may not be decisive or conclusive but it helps the court, having regard to the other circumstances, to ascertain the intention of the parties.’

The amount received for giving consent is certainly not an advance rent. Can the giving of a consent in relation to user of a capital asset amount to a revenue receipt, even where it is assumed, though not right, that there is no transfer of the capital asset itself (in this case, tenancy rights) by the landlord? The character of a receipt depends upon its relation with the capital asset. For a receipt to be considered as income, it should be a receipt that is of revenue in nature. Normally, the amount received for use of an asset, such as rent, is revenue in nature and is income. However, that logic may not apply to all receipts in relation to a capital asset. Again, for a receipt to be a capital receipt it is not necessary that there should be a transfer of a capital asset or a diminution in value of a capital asset. Transfer of a capital asset is only necessary in order to subject a capital receipt to tax as capital gains.

When a landlord gives his consent for transfer of a tenancy, in substance, he is consenting to grant of the possessory rights to a new tenant. Therefore, he is giving up his possessory rights over the premises in favour of a new tenant. This can be viewed as a right in respect of the premises being agreed to be foregone for the future as well.

Another way of examining the matter is whether the receipt is in relation to a capital asset. The right to consent to a new tenant is also a right associated with the ownership of the immovable property. It is therefore part of the bundle of rights which constitute the immovable property. The exercise of such right in favour of the incoming tenant amounts to exercise of a capital right, the compensation for which would necessarily be capital in nature.

Therefore, the better view of the matter is that the premium received by the landlord for according his consent to transfer of tenancy rights is a capital receipt, subject at best to capital gains tax, and is not a revenue income.

The connected important issue is whether there is any cost of acquiring / holding such a right in the hands of the landlord. Can a part of the cost of acquiring the immovable property be attributed to the cost of the tenancy rights and be claimed and allowed as deduction in computing the capital gains? In our considered opinion, yes, such cost though difficult to ascertain is not an impossible task and should be determined on commercial consideration and be allowed in computing the capital gains arising on grant of the consent to transfer the tenancy rights or for creation of such rights.

Once it is held that the receipt is in the nature of a capital receipt that is liable to tax in the hands of the landlord under the head capital gains, the question of applicability of section 56(2)(x) should not arise. In any case, the receipt, in our opinion, is for a lawful consideration and cannot be subjected to the provisions of this provision that should not have had any place in the Income-tax Act.

shailesh.kwebmaker

Vivad se Vishwas sections 2(1)(o) and 9(a)(ii) – Prosecution – Pending prosecution for assessment year in question on an issue unrelated to tax arrears – Holding that an assessee would not be eligible to file a declaration would defeat very purport and object of Vivad se Vishwas Act – Question No. 73 vide Circular No. 21/2020 dated 4th December, 2020 is not in consonance with section 9(a)(ii) of Vivad se Vishwas Act

3 Macrotech Developers Ltd. vs. Pr. Commissioner of Income Tax [Writ Appeal No. 79 of 2021, date of order: 25th March, 2021 (Bombay High Court)]

Vivad se Vishwas sections 2(1)(o) and 9(a)(ii) – Prosecution – Pending prosecution for assessment year in question on an issue unrelated to tax arrears – Holding that an assessee would not be eligible to file a declaration would defeat very purport and object of Vivad se Vishwas Act – Question No. 73 vide Circular No. 21/2020 dated 4th December, 2020 is not in consonance with section 9(a)(ii) of Vivad se Vishwas Act

The assessee is a public limited company engaged in the business of land development and construction of real estate properties. Initially, Shreeniwas Cotton Mills Private Limited (‘Cotton Mills’ for short) was a subsidiary of the assessee company. Subsequently, it was merged with the assessee company on the strength of the amalgamation scheme sanctioned vide order dated 7th June, 2019 passed by the National Company Law Tribunal, Mumbai Bench. The merger had taken place with effect from 1st April, 2018. However, the pending tax demand against the cotton mills under the Act continued in the name of the cotton mills since migration of the permanent account number of the cotton mills to the permanent account number of the assessee company had not taken place. Therefore, it is pleaded that the tax demand of the cotton mills should be construed to be that of the assessee company and reference to the assessee company would mean and include the assessee company as well as the cotton mills.

For the A.Y. 2015-16, the assessee had filed return of income u/s 139(1) disclosing total income of Rs. 2,05,71,01,650. The self-assessment income tax payable on the returned income as per section 115JB was Rs. 69,92,08,851. At the time of filing of the return, an amount of Rs. 27,34,77,755 was shown to have been paid by way of tax deducted at source. The balance of the self-assessment tax of Rs. 42,57,31,096 (Rs.69,92,08,851 less Rs. 27,34,77,755) with interest thereon under sections 234A, 234B and 234C aggregating to Rs. 12,36,74,855 (totalling Rs. 54,94,05,951) was paid by the assessee after the due date for filing of the return.

The Pr. CIT issued notice to the assessee on 19th September, 2017 to show cause as to why prosecution should not be initiated against it u/s 276-C(2) for alleged wilful attempt to evade tax on account of delayed payment of the balance amount of the self-assessment tax. The assessee in its reply denying the allegations, made a request to the Pr. CIT to withdraw the show cause notice. The assessee did not apply for compounding u/s 279(2).

In the meanwhile, on 17th December, 2017, the A.O. passed the assessment order for the A.Y. 2015-16 u/s 143(3). In this order, he disallowed certain expenses claimed by the assessee towards workmen’s compensation and other related expenses. After disallowing such claim, the A.O. computed the tax liability of the assessee at Rs. 61.75 crores, inclusive of interest.

When the aforesaid assessment order was challenged by the assessee, the Commissioner (Appeals) dismissed it and upheld the assessment order vide order dated 27th December, 2018.

Aggrieved by this order, the assessee preferred further appeal before the ITAT which is pending before the Tribunal for final hearing.

While the appeal of the assessee was pending before the Tribunal, the Central Government enacted the Direct Tax Vivad se Vishwas Act, 2020 which came into force on and from 17th March, 2020. The primary objective of this Act is to reduce pending tax litigations pertaining to direct taxes and in the process grant considerable relief to the eligible declarants while at the same time generating substantial revenue for the Government.

Circular No. 9 of 2020 dated 22nd April, 2020 was issued whereby certain clarifications were given in the form of questions and answers. The Central Government vide a Notification dated 18th March, 2020 has made the Vivad se Vishwas Rules.

With a view to settling the pending tax demand, the assessee submitted a declaration in terms of the Vivad se Vishwas Act on 23rd September, 2020 in the name of the cotton mills in respect of the tax dues for the A.Y. 2015-16 which is the subject matter of the appeal pending before the Tribunal.

While the assessee’s declaration dated 23rd September, 2020 was pending, it came to know that the Pr. CIT had passed an order on 3rd May, 2019 authorising the Joint Commissioner of Tax (OSD) to initiate criminal prosecution against the cotton mills and its directors by filing a complaint before the competent magistrate in respect of the delayed payment of self-assessment tax for the A.Y. 2015-16. On the basis of such sanction, the Income-tax Department filed a criminal complaint under section 276-C(2) r/w/s 278B before the 38th Metropolitan Magistrate’s Court at Ballard Pier. However, no progress has taken place in the said criminal case.

The impugned Circular No. 21/2020 dated 4th December, 2020 was issued giving further clarifications in respect of the Vivad se Vishwas Act. Question No. 73 contained therein is: when in the case of a taxpayer prosecution has been initiated for the A.Y. 2012-13 with respect to an issue which is not in appeal, would he be eligible to file declaration for issues which are in appeal for the said assessment year and in respect of which prosecution has not been launched? The answer given to this is that ineligibility to file declaration relates to an assessment year in respect of which prosecution has been instituted on or before the date of declaration. Since for the A.Y. 2012-13 prosecution has already been instituted, the taxpayer would not be eligible to file a declaration for the said assessment year even on issues not relating to prosecution.

It is the grievance of the assessee company that on the basis of the answer given to Question No. 73 its declaration would be rejected since the declaration pertains to the A.Y. 2015-16 and prosecution has been launched against it for delayed payment of self-assessment tax for the A.Y. 2015-16. It is in this context that the assessee approached the High Court by a writ petition seeking the reliefs as indicated above.

The High Court held that the exclusion referred to in section 9(a)(ii) is in respect of tax arrears relating to an assessment year in respect of which prosecution has been instituted on or before the date of filing of declaration. Thus, what section 9(a)(ii) postulates is that the provisions of the Vivad se Vishwas Act would not apply in respect of tax arrears relating to an assessment year in respect of which prosecution has been instituted on or before the date of filing of declaration. Therefore, the prosecution must be in respect of tax arrears relating to an A.Y. The Court was of the view that there is no ambiguity insofar as the intent of the provision is concerned and a statute must be construed according to the intention of the Legislature and that the Courts should act upon the true intention of the Legislature while applying and interpreting the law. Therefore, what section 9(a)(ii) stipulates is that the provisions of the Vivad se Vishwas Act shall not apply in the case of a declarant in whose case a prosecution has been instituted in respect of tax arrears relating to an assessment year on or before the date of filing of declaration. The prosecution has to be in respect of tax arrears which naturally is relatable to an assessment year.

The Court observed that a look at clauses (b) to (e) of section (9) shows that there is a clear demarcation in section 9 of the Act inasmuch as the exclusions provided under clause (a) are in respect of tax arrears, whereas in clauses (b) to (e) the thrust is on the person who is either in detention or facing prosecution under the special enactments mentioned therein. Therefore, if we read clauses (b) to (e) of section 9, it would be apparent that such categories of persons would not be eligible to file a declaration under the Vivad se Vishwas Act in view of their exclusion in terms of section 9(b) to (e).

Apart from this, the Court observed that under the scheme of the Act and the purpose of the Rules as a whole, the basic thrust is on settlement in respect of tax arrears. Under section 9 certain categories of assessees are excluded from availing the benefit of the Vivad se Vishwas Act. While those persons who are facing prosecution under serious charges or those who are in detention as mentioned in clauses (b) to (e) are excluded, the exclusion under clause (a) is in respect of tax arrears which is further circumscribed by sub-clause (ii) to the extent that if prosecution has been instituted in respect of tax arrears of the declarant relating to an A.Y. on or before the date of filing of declaration, he would not be entitled to apply under the Vivad se Vishwas Act. Now, tax arrears has a definite connotation under the Vivad se Vishwas Act in terms of section 2(1)(o) which has to be read together with sections 2(f) to 2(j).

Further, the High Court held that to say that the ineligibility u/s 9(a)(ii) relates to an assessment year and if for that assessment year a prosecution has been instituted, then the taxpayer would not be eligible to file declaration for the said A.Y. even on issues not relating to prosecution, would not only be illogical and irrational but would be in complete deviation from section 9(a)(ii) of the Act. Such an interpretation would do violence to the plain language of the statute and, therefore, cannot be accepted. On a literal interpretation or by adopting a purposive interpretation of section 9(a)(ii), the only exclusion visualised under the said provision is pendency of a prosecution in respect of tax arrears relatable to an assessment year as on the date of filing of declaration and not pendency of a prosecution in respect of an A.Y. on any issue. The debarment must be in respect of the tax arrears as defined u/s 2(1)(o) of the Vivad se Vishwas Act. Therefore, to hold that an assessee would not be eligible to file a declaration because there is a pending prosecution for the A.Y. in question on an issue unrelated to tax arrears would defeat the very purport and object of the Act. Such an interpretation which abridges the scope of settlement as contemplated under the Act cannot, therefore, be accepted.

Insofar as the prosecution against the petitioner is concerned, the same has been initiated u/s 276C(2) because of the delayed payment of the balance amount of the self-assessment tax. Such delayed payment cannot be construed to be a tax arrear within the meaning of section 2(1)(o). Therefore, such a prosecution cannot be said to be in respect of tax arrears. Since such a prosecution is pending which is relatable to the A.Y, 2015-16, it would be in complete defiance of logic to debar the petitioner from filing a declaration for settlement of tax arrears for the said A.Y. which is pending in appeal before the Tribunal.

Considering the above, the clarification given by way of answer to Question No. 73 vide Circular No. 21/2020 dated 4th December, 2020 is not in consonance with section 9(a)(ii) of the Vivad se Vishwas Act and, therefore, the same would stand to be set aside and quashed. The declaration of the petitioner dated 23rd September, 2020 was directed to be decided by the Pr. CIT in conformity with the provisions of the Vivad se Vishwas Act dehors the answer given to Question No. 73 which was set aside and quashed. The writ petition was allowed.

shailesh.kwebmaker

POLITICAL RESPONSE

The devastation wrought by the virus over the last few weeks has been unnerving, both psychologically and physically, for everyone. Each one of us would know or have someone in the family who has suffered or died in this wave.

However, as we are painfully aware, accountability is NOT the strength of Government, be it Central or State, or as an institution. In the time of this medical calamity wrecking death and distress, the verbal response of the political leadership has been typical – below par. Here is a succinct articulation of the tone, tenor, nature, classification, propensity and quality of responses from the political class in general and which is accentuated during this time:

1. Deflect: Not answer honestly and directly. A direct question seeks a straightforward and not just a smart, cheeky answer (the difference between and ). But when a Cabinet Minister was asked that by attending election rallies, weren’t you spreading infection, he replied, ‘Check me now!’

2. Collecting and sharing data: Many data points are not calculated, or not calculated properly, or not made available. Data is critical. What gets measured gets changed. Someonewrote:

(The numbers show that the situation is bad, the situation shows that the numbers are incomplete.)

3. Cherry-pick: A commonly shared social media (SM) post compares India with the US and China in the number of doses administered. Yes, delightful and praiseworthy, but not PACEWORTHY as India has five times the population compared to at least the US and the percentage of the total inoculated is the real KPI. What is not stated, especially by the Health Minister (HM), is the number of days it will take to inoculate the 70 to 80 crore eligible / target population. As I write this on 1st May, 2021, I referred to the Twitter timeline of the Minister, when the surge is at its all-time peak of 4,00,000 plus new cases per day: But there is no reference to this daily indicator in the last 48 hours. Posts are about vaccination, WHO meeting, condolences for well-known persons… but nothing that can be said to be challenges – deaths, positivity rate, the task ahead, etc. One wonders whether the data shared is to ‘build a narrative’ or to also share important ‘facts’. If a government believes that the entire nation is with them and they are with the people, they would share facts without hesitation. The Lancet1 Editorial called this out as ‘perpetuating a too positive spin in government communication’.

4. Congress did it – After seven years, as someone pointed out, the Central Government still thinks that Congress rule is continuing. While there are legacy issues, as soon as a challenge appears, this is the one common point in the responses. Does it implicitly suggest to 130 crore people – you all need to wait for the next 70 years!

5. Credit without debit – Single entry accounting. All credit belongs to the Government or its leader, and debits are unaccounted for. Ministers ‘hailing’ the PM each day during the crisis and communication on SM is talking about how the PM was involved, instrumental, etc. Constant self-congratulatory behaviour seems out of place when people are scrambling for oxygen to stay alive in the national capital and in the States.

6. Victory before even the battle is over: The Government constantly seeks another moment to bask in the glory. I wonder if this is due to insecurity or lack of confidence. The HM said we are in the endgame of Covid on 15th March. Announcing victory when not even 1% of the population is vaccinated with two doses and we were at least 140 crore doses away! Generally, Mantri (ministers), Tantri (administrator), Santri (yes-men, wah-wahkaars and the media) displayed posters with leaders on them, subliminally saying things are nearing an end without the critical caveat that we have a long way ahead and that it’s NOT OVER till it is OVER.

_____________________________________________________________________

1 https://www.thelancet.com/journals/lancet/article/PIIS0140-6736(20)32001-8/fulltext

7. Respond in the future tense: When the question is of the immediate past or the present, the answer is about the future – how we have started doing some grand things.

8. State subject: A federation must work together and if States are underperforming or need help, they need to be pulled up or pushed and / or guided. States blame the Centre and vice versa. Democracy or Blamocracy?

9. Politicising: Sad to see politicising even in dire times. Action and words seem to have some added political motive.

10. Denial: This is the most ‘effective’ response. One very vocal CM said in April that we are fully equipped and there is no problem. In a week, he was calling for help.

(The above list of verbal responses excludes justification, excuse morphed as an explanation, wordplay, making grand announcements, conspiracy theories and other forms of responses. After observing these attributes of political response, I feel these could be a chapter of a book titled Manual for Politicians – say, Chapter 2021 on ‘Responding to Accountability Questions’!)

Government has all powers and resources at its disposal. It is Government’s job to be able to FORESEE what is coming based on data. In spite of the early March report by the national supermodel committee, which said that the second wave had already set in, the Governments didn’t do enough.

India had the maximum benefit of hindsight from all over the world. Many Governments didn’t learn the lesson of what can go wrong and what response may be required.

Take the example of vaccines: Knowing that there are no vaccines, an announcement for the 3rd age group is made for 1st May. In Mumbai, people are running from pillar to post since two weeks for a second dose. The US booked 400 million doses in August, 2020, the EU 800 million by November, 2020. India’s first order of vaccines was in January, 2021. States were not sure about how this will pan out till April. And this is despite a $30 billion pharma industry in the country with the finest minds! Now the Supreme Court is telling the administration to license vaccine-making to generate enough. Same for oxygen plants and the rest: Delhi had eight plants approved with funds from the PM Cares Fund. But it managed only one plant till April. If the planned 162 plants had been set up around the country, they could have produced 80,500 litres of medical oxygen per minute2. This translates approximately to one ton of liquid oxygen per day per plant. So, it’s not a crisis of ‘lack of funds’ or ‘lack of talent’, it’s a crisis of ‘lack of execution’, ‘lack of intent’ and ‘lack of vision’. In the words of our Rashtra Kavi Dinkarji:

Someone said, what you see now is not the crumbling of infrastructure but what was already there. Everything is exposed – from logistics to coordination, to the greed of hospitals, black marketing, wrong medication, careless disregard and casual behaviour of citizens about appropriate behaviour. The point is we have to see the difference between taking credit vs. receiving compliments from people; making claims vs. taking questions about people’s claims; complacency vs. accountability; and arrogance vs. compassion.

Please take a moment to say a mantra, a chant, a prayer every day for those in pain and those who departed in pain and / or send good vibes. Many of you would have made a tangible contribution (monetary, help, blood, etc.) towards those that need it. The crisis has taught us one thing – that we are on our own and people have to support each other.

But, we can’t ignore the many remarkable things happening. Someone sold his car to provide oxygen cylinders, or someone driving overnight 1,200 km. Delhi-Bokaro-Delhi bringing oxygen for his friend – ordinary people doing extraordinary things! Let’s take a moment to send strength and gratefulness to those who have helped, to those who will help, to those who are helping tirelessly – the medical and frontline workers, the real unsung heroes whose photographs should be on Covid vaccine certificates for taking on this unending disaster for 14 long months. They deserve our deepest respect.
____________________________________________________________________________

2 The New Indian Express, 27th April, 2021, Article by S. Gurumurthy

Raman Jokhakar
Editor

shailesh.kwebmaker

DUAL RESIDENT ENTITIES – ARTICLE 4 OF MLI

(This is the second article in the MLI series of articles started in April, 2021)

1. INTRODUCTION
Section 90(1) of the Income-tax Act, 1961 (the Act) read with Article 253 of the Constitution enables the Central Government to enter into Tax Treaties. Accordingly, India has entered into Tax Treaties with over 90 countries. The overarching preamble to a Tax Treaty is to eliminate double taxation and, vide the Multilateral Instruments (MLI), the same is also extended to prevent double non-taxation, or treaty abuse, or treaty-shopping arrangements.

The Tax Treaty does not impose taxes but distributes taxing rights. It provides substantive rights but relies on the domestic tax law to provide for the rules and procedures to levy tax. As per section 90(2), the beneficial provisions of the Tax Treaty shall override the specific provisions of the Act, subject to the domestic General Anti-Avoidance Rules (GAAR) and issue of Tax Resident Certificate from the tax officer in the foreign country. Thus, it is imperative to understand the treaty entitlement issues.

The taxpayer would certainly apply the Tax Treaty when its income is taxable in its resident state as well as in the source state. In other words, when it is the recipient of income taxable in more than one jurisdiction. Once applicable, its application is dependent on the following:

Scope of Application	Rules of Application
‘Taxpayer’ in Article 1	Preamble to Tax Treaty
‘Taxes’ in Article 2	Principal Purpose Tests
‘Residence’ in Article 4	Limitation of benefit clause, etc.

Scope of Application

Rules of Application

‘Taxpayer’ in Article 1

Preamble to Tax Treaty

‘Taxes’ in Article 2

Principal Purpose Tests

‘Residence’ in Article 4

Limitation of benefit clause, etc.

While the above relates to treaty entitlement, this article is focused on Article 4 of the MLI on Dual Resident Entities (non-individuals) that are usually referred to in Article 4(3) of the relevant Tax Treaty. As a pre-cursor, a Dual Resident Entity (DRE) is defined as such when an entity is deemed to be a resident of more than one jurisdiction under the domestic provisions. For example, when a UK-incorporated entity is a tax resident of UK as per its domestic tax law (say, because of its incorporation under the UK tax law) and is also deemed to be a resident of India as per the Indian domestic tax law (say, because of the POEM rule under the Income-tax Act, 1961). The present Tax Treaty, without the effect of MLI, dealt with the conflict of dual resident entities and contained a tie-breaker rule for determination of the effective treaty residence.

2. ARTICLE 4(3) OF THE TAX TREATY
In accordance with Article 1(1) of the OECD Model Tax Convention, the Tax Treaty shall apply to persons who are residents of one or both of the Contracting States. Article 2 defines ‘persons’ to include an individual, a company and any other body of persons and defines ‘company’ to mean a body corporate or an entity that is treated as a body corporate for tax purposes, whereas Article 4 defines ‘residence’ for treaty purposes. In relevance, the Tax Treaty allocates or distributes taxing rights on the basis of the treaty residence.

The term ‘residence’ in Article 4(1) of the relevant Tax Treaty refers to the domestic definition of the residence, which, for Indian purposes, is section 6 of the Act. However, for resolving the issue of dual residency for non-individuals, the Tax Treaty refers to its own rule specified in Article 4(3) of the relevant Tax Treaty, i.e., Place of Effective Management (POEM). The OECD does not impose any restrictions or criteria for determination of residence in Article 4(1). In the case of dual residency for non-individuals, Article 4(3) refers to the POEM criterion as a single tie-breaker rule to determine ‘treaty residence’.

The term POEM is not defined in the OECD Model Tax Convention or in the relevant Tax Treaty. An analogy is drawn from the OECD Commentary which in itself does not provide sufficient and reliable guidance on its key determinants. Dual resident non-individuals are known to have abused this guidance gap. The tax authorities, as a last resort, have determined POEM on the basis of their domestic tax law vide Article 3(2) of the OECD Model Tax Convention. Under the Act, section 6 deems a foreign company to be a resident of India if it has its POEM in India. The CBDT Circular 6/2017 further provides guidance on how to determine POEM on the basis of various parameters for active business outside India and in India.

3. MULTILATERAL INSTRUMENTS
In order to curb tax abuse or evasion, article 4(1) of the Multilateral Instruments (MLI) amends the existing article 4(3) of the relevant Tax Treaty for resolving dual residency. It provides that the resolution of dual residence shall be through mutual agreement between the Contracting Jurisdictions concerned. It departs from the current treaty practice1, insofar as the POEM may no longer be the main rule to resolve the dual residence; and that the competent authorities will have the freedom to consider a number of factors to be taken into account while determining treaty residence of Dual Resident Entities (DRE). Article 4(1) of MLI also provides that the benefit of the Tax Treaty shall not be available until and unless the mutual agreement is concluded.

While Article 4(2) of MLI elucidates the manner in which the existing text of the Tax Treaty will change or modify, Article 4(3) of MLI provides an option to the Contracting States to make reservations. Article 4(4) of MLI elucidates the manner in which a Contracting Jurisdiction shall notify its partner Contracting Jurisdiction and thereby the Tax Treaty agreements to be covered under MLI.

4. DUAL RESIDENT ENTITIES – ARTICLE 4 OF MULTILATERAL INSTRUMENTS
4.1 Paragraph 1 of Article 4 of MLI states the following:
Paragraph 1. Where by reason of the provisions of a Covered Tax Agreement a person other than an individual is a resident of more than one Contracting Jurisdiction, the competent authorities of the Contracting Jurisdictions shall endeavour to determine by mutual agreement the Contracting Jurisdiction of which such person shall be deemed to be a resident for the purposes of the Covered Tax Agreement, having regard to its place of effective management, the place where it is incorporated or otherwise constituted and any other relevant factors. In the absence of such agreement, such person shall not be entitled to any relief or exemption from tax provided by the Covered Tax Agreement except to the extent and in such manner as may be agreed upon by the competent authorities of the Contracting Jurisdictions.

1 United Nations’ Manual for the Negotiation of
Bilateral Tax Treaties between Developed and Developing Countries 2019, page 61

The key phrases for discussion are given below:

‘A person other than an individual is a resident of more than one Contracting Jurisdiction.’

‘shall endeavour to determine by mutual agreement.’

‘having regard to its place of effective management, the place where it is incorporated or otherwise constituted and any other relevant factors.’

‘shall not be entitled to any relief or exemption from tax.’

‘except to the extent and in such manner as may be agreed upon by the competent authorities of the Contracting Jurisdictions.’

MLI provides for a shift in the initial determination of treaty residence, from the taxpayer / tax authority (determination using POEM) to now the Competent Authority of the Contracting Jurisdiction concerned (determination by mutual agreement).

Until its final determination by mutual agreement, the DRE is not entitled to any relief or exemption from tax under the Tax Treaty to which MLI applies. However, the last sentence also contemplates a discretionary power in the hands of the Competent Authority to grant some relief under the relevant Tax Treaty. From the perspective of the Act, with no access to the Tax Treaty, a foreign company shall be deemed to be a domestic resident if its POEM (as per domestic guidance) is in India. A foreign limited liability partnership (being a body corporate) shall be deemed to be a resident in India where the control and management of its affairs is situated wholly or partly in India. Paragraph 52 of the Explanatory Statement to MLI provides the following:

‘Existing “tie-breaker” provisions addressing the residence of persons other than individuals take a variety of forms. For example, some [such as Article 4(3) of the UN Model Tax Convention, and of the OECD Model Tax Convention prior to the BEPS Project] break the tie in favour of the place of effective management, some focus on the place of organisation, and others call for determination by mutual agreement but do not explicitly deny benefits in the absence of such a determination.’

It must be noted that the POEM, being one of the various determinants, is in itself an anti-avoidance measure. It applies the substance-over-form approach in order to determine the location where ‘key management and commercial decisions’ were made. It seems that POEM is the key criterion for Competent Authorities to determine treaty residence and thereby entitlement to the relevant Tax Treaty. MLI or its Explanatory Statement does not provide any guidance on how to determine treaty residence and how to determine POEM or which aspect to consider for ‘any other relevant factor’. It seems that the domestic guidance on determination of POEM may not be relevant for determination of treaty residence as the purpose of section 6(3) is to make a foreign company a resident in India and thereby enabling dual residency, whereas the purpose of Article 4(1) of the MLI is to resolve the conflict of dual residency.

With high discretion in the hands of the Competent Authority, there is no obligation on the Competent Authority to reach a mutually acceptable agreement. Further, the DRE may not have any say in the matter and may not have any right to appeal or arbitrate a negative decision on treaty residence.

Lastly, the CBDT has in Rule 44G of the Income-tax Rules, 1962 provided for the manner in which an Indian resident can apply to the Competent Authority in India for initiation of MAP. It also provides for a suggestive timeline (not mandatory) of 24 months for arriving at a mutually agreeable resolution of the tax dispute. However, a foreign entity is not allowed to apply to the Competent Authority in India.

4.2 Paragraph 2 of Article 4 of MLI states the following:
Paragraph 1 shall apply in place of or in the absence of provisions of a Covered Tax Agreement that provide rules for determining whether a person other than an individual shall be treated as a resident of one of the Contracting Jurisdictions in cases in which that person would otherwise be treated as a resident of more than one Contracting Jurisdiction. Paragraph 1 shall not apply, however, to provisions of a Covered Tax Agreement specifically addressing the residence of companies participating in dual-listed company arrangements.

The key phrases for discussion are given below:

‘in place of or in the absence of.’

‘companies participating in dual-listed company arrangements.’

This Paragraph is the compatibility clause that describes the interaction between Article 4(1) of the MLI and the existing Article 4(3) of the relevant Tax Treaty (also known as the Covered Tax Agreement). The effect of ‘in place of or in the absence of’ is as provided below:

4.3 Paragraph 3 to Article 4 of MLI states the following:
A party may reserve the right:
a) for the entirety of this Article not to apply to its Covered Tax Agreements;
b) for the entirety of this Article not to apply to its Covered Tax Agreements that already address cases where a person other than an individual is a resident of more than one Contracting Jurisdiction by requiring the competent authorities of the Contracting Jurisdictions to endeavour to reach mutual agreement on a single Contracting Jurisdiction of residence;
c) for the entirety of this Article not to apply to its Covered Tax Agreements that already address cases where a person other than an individual is a resident of more than one Contracting Jurisdiction by denying treaty benefits without requiring the competent authorities of the Contracting Jurisdictions to endeavour to reach mutual agreement on a single Contracting Jurisdiction of residence;
d) for the entirety of this Article not to apply to its Covered Tax Agreements that already address cases where a person other than an individual is a resident of more than one Contracting Jurisdiction by requiring the competent authorities of the Contracting Jurisdictions to endeavour to reach mutual agreement on a single Contracting Jurisdiction of residence, and that set out the treatment of that person under the Covered Tax Agreement where such an agreement cannot be reached;
e) to replace the last sentence of paragraph 1 with the following text for the purposes of its Covered Tax Agreements: ‘In the absence of such agreement, such person shall not be entitled to any relief or exemption from tax provided by the Covered Tax Agreement’;
f) for the entirety of this Article not to apply to its Covered Tax Agreements with parties that have made the reservation described in sub-paragraph e).

This Paragraph relates to the reservation which can be entirely, partially or in a modified format. The signatories are free to express their reservation and restrict the extent of the application of Article 4 of MLI. It may opt out of Article 4 of MLI in the manner stated above and continue with the existing provisions of the Tax Treaty, without giving effect of MLI.

For example, in the India-Austria Tax Treaty, Austria has reserved the right for the entirety of Article 4 of MLI not to apply to its Covered Tax Treaty. India has notified India-Austria Tax Treaty and has not provided any reservation. Accordingly, Article 4 would not apply.

Likewise, in the India-Australia Tax Treaty, Australia has reserved the right to deny treaty benefits in absence of mutual agreement in accordance with Article 4(3)(e) of MLI above. Both India and Australia have notified the relevant article in the India-Australia Tax Treaty. India has not provided any reservation [including reservation as per Article 4(3)(f)]. Accordingly, Article 4(1) of MLI shall replace the existing Article 4(3) of the India-Australia Tax Treaty, with the last sentence of Article 4(1) of MLI to be modified by Article 4(3)(e) of the MLI.

The signatory party to the MLI that has not made a reservation of this article is required to notify the Depository of its Covered Tax Treaty purported to be covered or already covered in its existing treaty. The procedure is discussed in Article 4(4) of the MLI discussed below.

4.4 Paragraph 4 to Article 4 of MLI states the following:
Each party that has not made a reservation described in sub-paragraph a) of paragraph 3 shall notify the Depository of whether each of its Covered Tax Agreements contains a provision described in Paragraph 2 that is not subject to a reservation under sub-paragraphs b) through d) of Paragraph 3, and if so, the article and paragraph number of each such provision. Where all Contracting Jurisdictions have made such a notification with respect to a provision of a Covered Tax Agreement, that provision shall be replaced by the provisions of Paragraph 1. In other cases, Paragraph 1 shall supersede the provisions of the Covered Tax Agreement only to the extent that those provisions are incompatible with Paragraph 1.

This Paragraph complements the application of Article 4(2) of MLI. Refer to the diagram illustrated in Paragraph 2 above, wherein each party has to notify the Depository of whether each of its Covered Tax Agreements contains an existing provision that is not subject to a reservation under Paragraph 3(b) through (d). Such a provision would be replaced by the provisions of Article 4(1) of MLI where all parties to the Covered Tax Agreement have made such a notification. In all other cases, 4(1) of MLI would supersede the existing provisions of the Covered Tax Agreement only to the extent that those provisions are incompatible with Article 4(1) of MLI.

Paragraph 52 of the Explanatory Statement to MLI provides that ‘Where a single provision of a Covered Tax Agreement provides for a tie-breaker rule applicable to both individuals and persons other than individuals, Paragraph 1 would apply in place of that provision only to the extent that it relates to a person other than an individual.’

5. EXCEPTION
Paragraph 2 of Article 4 of MLI provides an exception to this Article, i.e., ‘Paragraph 1 shall not apply, however, to provisions of a Covered Tax Agreement specifically addressing the residence of companies participating in dual-listed company arrangements.’

The above clause has a restricted effect from the Indian perspective as it refers to the existing treaty clause addressing the residence of companies participating in dual-listed company arrangements, e.g., the UK-Netherlands Tax Treaty. In the dual-listed company arrangement, like merger, two listed companies operating in two different countries enter into an alliance in which these companies are allowed to retain their separate legal identities and continue to be listed and traded on the stock exchanges of the two countries. It is a process that allows a company to be listed on the stock exchanges of two different countries. In a typical merger or acquisition, the merging companies become a single legal entity, with one business buying the other. However, ‘a dual-listed company arrangement’ is a corporate structure in which two corporations function as a single operating business through a legal equalisation agreement but retain separate legal identities and stock exchange listings2. The arrangement reflects a commonality of management, operations, shareholders’ rights, purpose and mission through an agreement or a series of agreements between two parent companies, operating as one business.

2 http://www.legalservicesindia.com/article/1580/Dual-Listing-of-Companies.html
and Explanatory Statement in respect of Article 4(2) of MLI

6. WAY FORWARD
MLI is seeking to replace / supersede the existing framework of the Tax Treaty. While MAP was a well-known measure present in the Tax Treaty to resolve tax conflicts, Article 4 of MLI purports to use this measure for determining the Treaty Entitlement, more particularly the issue on treaty residence. Until the coming into force of Article 4(1) of MLI, the treaty entitlement was never doubted in the existing Article 4 of the relevant Tax Treaty [except in rare cases like in article 4(3) of the Indo-USA DTAA]. However, post-amendment through MLI, the DRE would be entitled to Tax Treaty only on conclusion of MAP, the outcome of which is uncertain. The MAP pursuant to Article 4(3) of MLI should not be confused with the MAP pursuant to Article 25 of the OECD Model Tax Convention.

For example, Article 27 of the India-UK Tax Treaty provides that ‘Where a resident of a Contracting State considers that the actions of one or both of the Contracting States result or will result for him in taxation not in accordance with this Convention, he may, notwithstanding the remedies provided by the national laws of those States, present his case to the competent authority of the Contracting State of which he is a resident.’

Whereas Paragraph 58 of the Explanatory Statement to MLI states that where Article 4(1) of MLI denies the benefits of the Covered Tax Agreement, in the absence of the concluded MAP for treaty residence, such denial cannot be viewed as ‘taxation that is not in accordance’ with the provisions of the Covered Tax Agreement.

Accordingly, Article 27 of the India-UK Tax Treaty would not apply for two reasons: (a) by referring to ‘resident of a contracting state’, it is referring to treaty residence and not domestic residence. Since treaty residence is not yet determined, the said clause is not applicable; (b) by referring to taxation that is ‘not in accordance with this Convention’, the said clause is not applicable when Paragraph 58 of the Explanatory Statement is read along with this clause.

Furthermore, MAP concluded under one Tax Treaty (e.g. UK-India Tax Treaty) would not have any precedence when contemplating another Tax Treaty (e.g. Netherlands-India Tax Treaty) and would be time-consuming and exhaustive for the DRE, especially when the MAP discussion fails under one Tax Treaty and it might be late for the DRE to initiate MAP for past years under another Tax Treaty.

Secondly, there is no obligation on the competent authorities to actually reach an agreement. The wording used in Article 4(1) of MLI is ‘shall endeavour’ to agree in MAP, pending which the taxpayer’s treaty entitlement is at stake. The discretion afforded to the Competent Authorities under Article 4 of MLI is wider in scope than the domestic General Anti-Avoidance Rule. Possibly, it was intentional to curtail treaty abuse and provide powers in the hands of the contracting state. Further, if POEM is the key determinant for the Competent Authority, it should be based on a regulated guidance, not at the free discretion of the respective Competent Authorities who may give different relevance to a particular factor. Howsoever it may be, the lifting of corporate veil under a cross-border scenario should be avoided in genuine cases and should be used only as a tool to prevent tax abuse or tax evasion. The form and governance of DRE should be respected to the extent it is appropriate and reasonable.

Thirdly, the DRE would not be entitled to the Tax Treaty, in the absence of mutual agreement, even if MAP discussion is ongoing, where the last sentence of Article 4(1) of MLI is replaced by the specific sentence in Article 4(3)(e) of MLI, or where the DRE would not be entitled to the Tax Treaty except to the extent the Competent Authorities grant some relief to it [assuming Article 4(3)(e) is not applicable]. In the absence of guidelines, the questions that may arise are: That once the MAP is concluded, whether the outcome shall apply to the DRE retrospectively or prospectively? Whether the person who is responsible for payment (payer) to DRE is obliged to withhold taxes without considering the benefit from Tax Treaty, considering that it may not be privy to the MAP or tax conflict? Whether the right to deny treaty entitlement is for the DRE and not for the payer who is obliged to withhold taxes at the applicable Tax Treaty rate or the Act rate, whichever is more beneficial? As a way forward, in order to reduce the hardship, the Competent Authorities should suspend or defer the collection of taxes while MAP discussions are ongoing and provide rules for the taxpayer to comply with withholding tax issues in these scenarios.

Lastly, the DRE should have a right to contest the conclusions drawn under the MAP in an international court or in its resident Contracting Jurisdiction, or under a multilateral arbitration. At present, MLI assumes that the MAP would be concluded in the right manner with right determinants, giving full discretionary power to the Competent Authorities to decide which determinants would be key to determine treaty residence, as against the guidance given in the OECD Commentary for, say, POEM, wherein it has discussed various determinants with examples. As a way forward, the Contracting Jurisdictions that participated in MAP should permit DRE a legal remedy to contest MAP in its domestic forum and, if successful, to allow the court decision to become an addendum to the concluded MAP. Further, if the MAP is not concluded, the DRE is not entitled to the Tax Treaty. DRE should not suffer from permanent fracture for the rigidness of the Competent Authorities. DRE should be provided with legal remedy to resolve the impending dispute.

shailesh.kwebmaker

VIRTUAL HEARING

The other day I visited the office of a senior Chartered Accountant (hereinafter ‘the senior’) unannounced after a long time. He is indeed very ‘senior’, not less than 80, but still in practice. Age is just a number for him; he is both energetic and active. Before I entered the chamber, his driver Jaya told me, ‘Sir is about to begin a virtual hearing’. But as soon as I knocked on the door, I heard him shout, ‘Get out, Tommy!’

Tommy, for your information, is his pet dog. The senior operates from his four-bedroom flat, with the hall converted into his office. And believe me, Tommy ran out as soon as I opened the door, brushing against my leg. I was caught unawares and got scared. The senior was scanning the papers littered on his table, maybe making last-minute preparations. As he heard the sound of my footsteps, he looked up, squinted at me and hurriedly waved to me to sit down. I slowly lowered myself into the chair in front of him.

‘Herambh, you! What a pleasure!’ he greeted me, as if he had been waiting for me.

‘Sir, just a courtesy call, nothing more.’

‘Herambh, you know, today is the first-ever virtual hearing of my life,’ he stated.

‘Sir, Jaya told me that when I was entering your cabin,’ I said.

‘Jaya told you? Okay, no problem.’ But the senior seemed to be nervous, his nervousness conspicuous on his face. I thought it would be better to leave.

‘Sir, I could come some other day,’ I said politely.

‘No, no, Herambh, I have no problem, you stay till the end of the hearing; look, I am not computer-savvy and this new technology, internet blah blah… you would be a great help to me,’ he said.

‘I can understand your concern, Sir, when I began to learn computers long back, I was afraid of pressing a button on the keyboard thinking something would go wrong!’

‘Are you scaring me, Herambh?’ he asked.

‘No, Sir, not at all! I was just telling you my experience from my initial days,’ I hastily clarified.

‘Look, I have learnt the ABC of computers from my grandsons Bunty and Babli who are in the 7th and 8th standards; very smart chaps. Let me call them.’ The senior got up, went to the balcony and shouted ‘Bunty-Babli, come up immediately!’

Bunty and Babli replied in chorus ‘Yes, Grandpa, coming! Last ball!’

After a while the door behind me cracked open and Bunty with a bat and Babli with the ball, both with cricket caps on their heads, entered the hall-turned-office.

‘Relax, Bunty-Babli, relax! Sit by my side, drink a glass of water.’ I observed that two chairs were arranged for Bunty and Babli on either side of the senior’s chair. They settled down and wiped their faces that were full of sweat and dust. The senior was looking at them with great pride and hope [hope, maybe, for a successful hearing]. Then he brought out two medium-size chocolate bars from a drawer and gave these to them. I was watching the scene silently, seeing the grandpa and his love and affection for his grandsons.

‘Well, Herambh, because of on-line education, Bunty and Babli are well versed with this internet technology, they will guide me in this “virtual hearing”, the first ever in my life, you know,’ confessed the senior without being asked.

‘Hello Bunty, Babli,’ I greeted them.

They somehow managed to say ‘Hi, Uncle’, in chorus, still munching on the chocolate bars.

As soon as they finished them, they took charge of all the computer apparatus on the table – keyboard, mouse, headphone, etc.

‘Grandpa, let’s start; Babli, switch on,’ Bunty ordered.

‘Yes, Dadu,’ Babli got up and switched on the main supply.

As the computer turned on, Bunty and Babli glued their eyes to the screen, searching for the internet connection.

‘Yes! Grandpa, we got the internet connection,’ shouted Bunty. Both the senior and I became alert. Following Bunty’s declaration, the senior wore his spectacles and started to locate the hearing notice which had the log-in details.

‘Bunty beta, these are the log-in details,’ the senior handed over the paper to Bunty, looking at him with great hope and placing one hand on his shoulder. On the other side, Babli was fidgeting in his chair, waiting to contribute his bit.

‘Grandpa, you are not allowing me to do anything; only Bunty beta do this, Bunty beta do that,’ complained Babli.

‘Calm down, Babli, you find my pen and mobile,’ the senior said.

Babli moved swiftly to look for the two articles in the heap of papers and files littered on the table. He somehow succeeded in his search, messing up the papers and files even further. And he handed over the mobile and the pen to the senior.

‘Good boy, God bless you.’ the Senior said, looking at Babli.

As the time of hearing was approaching, he told Bunty to log in. Doing as told, Bunty logged in and declared, ‘Grandpa, put on your specs and headphone, we are about to start the virtual hearing session.’

Fortunately, the case was before a single-member bench. At the scheduled time, there was some movement on the screen and the Member appeared.

‘Speak, grandpa, speak,’ advised Bunty and Babli in hushed tones.

‘Good morning, Sir,’ greeted the senior.

‘How are you, Bhishmacharya?’ asked the Member. Being the senior-most in Tribunal practice, the senior was addressed as ‘Bhishmacharya’ with reverence.

‘I’m fine,’ replied the senior. Having exchanged initial pleasantries, the case references were brought on record. However, the departmental representative was still not in the loop.

On the other hand, the senior was very eager to begin his first-ever experience of a ‘virtual hearing.’ But all of a sudden, the screen went blank.

‘Bunty-Babli, see what happened,’ shouted the senior.

‘Grandpa, wait, the internet may be down on the other side,’ advised Bunty.

After a while, the Member appeared on the screen. ‘Internet trouble, connectivity dropped, I wonder the learned DR is still not on air,’ said the Member.

‘Your Honour, I emailed my paper book for your ready reference well in advance, it must have reached the learned DR also,’ said the senior.

There was a pause. The senior could hear the Member’s mobile ringing. The Member picked up his phone and the senior overheard the conversation, ‘What happened? Not possible… why… power outage plus no connectivity… Oh my God!… No alternative… adjourn… next date… wait, I will call you back…”

‘Sorry, Counsel, we will have to adjourn the hearing; the learned DR says no power, no connectivity… Counsel can we make it to 1st April, is it suitable to you?’ the Member asked.

‘No problem, Your Honour, make it to 1st April,’ said the senior with a heavy heart. The Member logged off instantly. Bunty did the same. The senior took a long breath and removed the headphone. Bunty and Babli ran away to complete their interrupted cricket match. I, too, got up and consoled the senior.

‘Better luck next time, Sir; don’t be nervous, it happens very often, you are not an exception,’ and moved towards the door. And Tommy ran in to meet his master.

Thus, the first-ever virtual hearing ended with the first-ever virtual adjournment!

shailesh.kwebmaker

TDS – Payments to contractors – Section 194C – Assessee, Department of State Government – Government directing assessee to appoint agency for construction of college buildings providing percentage of project cost for each building as service charges – Payments to agencies for construction of college buildings – Appellate authorities on facts holding that assessee not liable to deduct tax – Concurrent findings based on facts not shown to be perverse – Order need not be interfered with

19 CIT vs. Director of Technical Education [2021] 432 ITR 110 (Karn) A.Y.: 2011-12 Date of order: 10th February, 2021

TDS – Payments to contractors – Section 194C – Assessee, Department of State Government – Government directing assessee to appoint agency for construction of college buildings providing percentage of project cost for each building as service charges – Payments to agencies for construction of college buildings – Appellate authorities on facts holding that assessee not liable to deduct tax – Concurrent findings based on facts not shown to be perverse – Order need not be interfered with

The assessee was a Department of the Government of Karnataka and was in charge of the academic and administrative functions of controlling technical education in the State of Karnataka. As part of its activities, the assessee entrusted the construction of engineering and polytechnic college buildings under construction agreements to KHB and RITES. The Deputy Commissioner treated the assessee as an assessee-in-default and passed an order u/s 201(1) on the ground that the assessee had failed to deduct the tax as required u/s 194C on the payments made under the contracts with KHB and RITES. Accordingly, a demand notice was also issued.

The Commissioner (Appeals), inter alia, held that the Government of Karnataka directed the assessee to appoint a particular agency like KHB or RITES for every new building on remuneration by providing a specific percentage of the project cost for each building in the form of service charges and that the provisions of section 194C were not applicable. The Tribunal upheld the order of the Commissioner (Appeals).

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

‘The Tribunal was right in holding that the assessee was not liable to deduct tax u/s 194C on payments made to KHB and RITES for rendering of services in connection with the construction of engineering and polytechnic college buildings in the State of Karnataka. The Commissioner (Appeals) had gone into the details of the memorandum of understanding entered into with KHB and RITES and had held that the provisions of section 194C were not applicable to the assessee. The concurrent findings of fact by the appellate authorities need not be interfered with in the absence of any perversity being shown.’

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TDS – Commission – Scope of section 194H – Transactions between banks for benefit of credit card holders – Transactions on principal-to-principal basis – Section 194H not applicable

18 CIT vs. Corporation Bank [2021] 431 ITR 554 (Karn) A.Y.: 2011-12 Date of order: 23rd November, 2020

TDS – Commission – Scope of section 194H – Transactions between banks for benefit of credit card holders – Transactions on principal-to-principal basis – Section 194H not applicable

The assessee is a nationalised bank. For the A.Y. 2011-12, the A.O. made disallowance u/s 40(a)(ia) of service charges paid to National Financial Switch (NFS) on the ground that tax was not deducted at source u/s 194H.

The Commissioner of Income-tax (Appeals) and the Tribunal allowed the assessee’s claim.

On appeal by the Revenue, the following question was farmed:

‘Whether, on the facts and in the circumstances of the case, the Tribunal erred in holding that on the payment made towards the service charges rendered by M/s NFS is neither commission nor brokerage which does not attract tax deduction at source u/s 194H of the Income-tax Act?’

The Karnataka High Court upheld the decision of the Tribunal and held as under:

‘i) In case the credit card issued by the assessee was used on the swiping machine of another bank, the customer whose credit card was used to get access to the internet gateway of acquiring bank resulting in realisation of the payment. Subsequently, the acquiring banks realise and recover the payment from the bank which had issued the credit card. The relationship between the assessee and any other bank is not of an agency but that of two independents on principal-to-principal basis. Even assuming that the transaction was being routed to National Financial Switch and Cash Tree, even then it is pertinent to mention here that the same is a consortium of banks and no commission or brokerage is paid to it. It does not act as an agent for collecting charges. Therefore, we concur with the view taken by the High Court of Delhi in CIT vs. JDS Apparels (P) Ltd. [2015] 370 ITR 454 (Delhi) and hold that the provisions of section 194H of the Act are not attracted to the fact situation of the case.

ii) In the result, the substantial question of law is answered against the Revenue and in favour of the assessee.’

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Settlement of cases – Sections 245D, 245F and 245H – Powers of Settlement Commission – Application for settlement of case following search operations and notice u/s 153A – Order of penalty thereafter as consequence of search – Assessment and penalty part of same proceedings – Order of penalty not valid

17 Tahiliani Design Pvt. Ltd. vs. JCIT [2021] 432 ITR 134 (Del) A.Y.: 2018-19 Date of order: 19th January, 2021

Settlement of cases – Sections 245D, 245F and 245H – Powers of Settlement Commission – Application for settlement of case following search operations and notice u/s 153A – Order of penalty thereafter as consequence of search – Assessment and penalty part of same proceedings – Order of penalty not valid

A search and seizure operation u/s 132 as well as a survey u/s 133A were carried out on 29th May, 2018 in the case of the assessee. Thereafter, the Investigation Wing referred the case to the A.O. The Range Head of the A.O. of the assessee, after going through the seized material, presumed that the assessee had violated the provisions of section 269ST and issued a notice to it for the A.Ys. 2018-19 and 2019-20 to show cause why penalty u/s 271DA for violating the provisions of section 269ST should not be imposed on it. Meanwhile, in pursuance of the search and seizure operation, notices u/s 153A were issued to the assessee for the A.Ys. 2013-14 to 2018-19. The assessee applied for settlement of the case on 1st November, 2019 for the A.Ys. 2012-13 and 2013-14 to 2019-20 and in accordance with the provisions of the Act on 1st November, 2019 itself also informed the A.O. about the filing of the application before the Settlement Commission. The A.O., however, proceeded to pass a penalty order dated 4th November, 2019.

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

‘i) Though section 245A(b) while defining “case” refers to a proceeding for assessment pending before an A.O. only and therefrom it can follow that penalties and prosecutions referred to in sections 245F and 245H are with respect to assessment of undisclosed income only, (i) section 245F vests exclusive jurisdiction in the Settlement Commission to exercise the powers and perform the functions “of an Income-tax authority under this Act in relation to the case”; and (ii) section 245H vests the Settlement Commission with the power to grant immunity from “imposition of any penalty under this Act with respect to the case covered by the settlement”. The words, “of an Income-tax authority under this Act in relation to the case” and “immunity from imposition of any penalty under this Act with respect to the case covered by the settlement”, are without any limitation of imposition of penalty and immunity with respect thereto only in the matter of undisclosed income. They would also cover penalties under other provisions of the Act, detection whereof has the same origin as the origin of undisclosed income. Not only this, the words “in relation to the case” and “with respect to the case” used in these provisions are words of wide amplitude and in the nature of a deeming provision and are intended to enlarge the meaning of a particular word or to include matters which otherwise may or may not fall within the main provisions.

ii) Both the notices u/s 153A as well as u/s 271DA for violation of section 269ST had their origin in the search, seizure and survey conducted qua the assessee as evident from a bare reading of the notice u/s 271DA. Both were part of the same case. The proceedings for violation of section 269ST according to the notice dated 30th September, 2019 were a result of what was found in the search and survey qua the assessee and were capable of being treated as part and parcel of the case taken by the assessee by way of application to the Settlement Commission.

iii) The Settlement Commission had exclusive jurisdiction to deal with the matter relating to violation of section 269ST also and the A.O., on 4th November, 2019, did not have the jurisdiction to impose penalty for violation of section 269ST on the assessee. His order was without jurisdiction and liable to be set aside and quashed.’

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New industrial undertaking in free trade zone – Export-oriented undertaking – Exemption under sections 10A and 10B – Shifting of undertaking to another place with approval of authorities – Not a case of splitting up or reconstruction of business – Assessee entitled to exemption

16 CIT vs. S.R.A. Systems Ltd. [2021] 431 ITR 294 (Mad) A.Ys.: 2000-01 to 2002-03 Date of order: 19th January, 2021

New industrial undertaking in free trade zone – Export-oriented undertaking – Exemption under sections 10A and 10B – Shifting of undertaking to another place with approval of authorities – Not a case of splitting up or reconstruction of business – Assessee entitled to exemption

While completing the assessment u/s 143(3) read with section 147 for the A.Ys. 2000-01 and 2001-02, the A.O. disallowed the claim of deduction made by the assessee under sections 10A and 10B on the ground that an undertaking was formed by splitting up / reconstruction of the business already in existence. While completing the assessment u/s 143(3) read with section 263(3) for the A.Y. 2002-03, the A.O. disallowed the claim u/s 10A on the ground that an undertaking was formed by splitting up / reconstruction of the business already in existence among others.

The Commissioner of Income-tax (Appeals) allowed the appeals for the A.Ys. 2000-01 and 2001-02 by following the order of the Tribunal. The Department filed appeals before the Income-tax Appellate Tribunal and the Tribunal confirmed the order of the Commissioner of Income-tax (Appeals). The Tribunal held that this was not a case of setting up of a new business but only of transfer of existing business to a new place located in a software technology park area and, thereafter, getting the approval from the authorities.

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

‘On the facts and in the circumstances of the case, the assessee was entitled to deduction u/s 10A/10B.’

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Deduction u/s 80-IA – Electricity undertaking – Expenditure on renovation and modernisation of existing lines – Condition precedent for deduction u/s 80-IA(4) – Work of renovation need not be completed – Expenditure need not be capitalised in accounts – Expenditure need not result in increase in value of assets – Assessee undertaking renovation and modernisation of existing lines more than 50% of book value of assets as on 1st April, 2004 – Assessee entitled to deduction u/s 80-IA(4)

15 Bangalore Electricity Supply Company Ltd. vs. Dy. CIT [2021] 431 ITR 606 (Karn) A.Y.: 2005-06 Date of order: 27th January, 2021

Deduction u/s 80-IA – Electricity undertaking – Expenditure on renovation and modernisation of existing lines – Condition precedent for deduction u/s 80-IA(4) – Work of renovation need not be completed – Expenditure need not be capitalised in accounts – Expenditure need not result in increase in value of assets – Assessee undertaking renovation and modernisation of existing lines more than 50% of book value of assets as on 1st April, 2004 – Assessee entitled to deduction u/s 80-IA(4)

The assessee was a public limited company which was wholly owned by the Government of Karnataka and was engaged in the activity of distribution of electricity. For the A.Y. 2005-06, it claimed deduction of Rs. 141,84,44,170 u/s 80-IA(4)(iv)(c), but the A.O. disallowed the claim. This was upheld both by the Commissioner (Appeals) and the Tribunal.

In its appeal to the High Court, the assessee submitted that its case fell within the third category of undertakings and, therefore, the amount undertaken towards renovation and modernisation had to be considered. Alternatively, it submitted that capital work-in-progress was to be included and should not be restricted only to those amounts which were capitalised in the books and substantial renovation and modernisation could be at any time during the period beginning on 1st April, 2004 and ending 31st March, 2006. It contended that it had undertaken substantial renovation and modernisation of existing lines which was more than 50% of the book value of assets as on 1st April, 2004 under the Explanation to section 80-IA(4)(iv)(c).

The Karnataka High Court allowed the appeal and held as under:

‘i) From a perusal of section 80-IA(4) it is evident that there are three types of undertakings which are considered by the Legislature eligible for deduction u/s 80-IA, viz., an undertaking which is (i) set up for generation or generation and distribution of power, (ii) starts transmission or distribution by laying network of new transmission or distribution lines, (iii) undertakes substantial renovation and modernisation of the existing network of transmission or distribution lines. Thus, for each type of undertaking the Legislature has used different expressions, viz., “set up”, “starts” and “undertakes”. These words have different meanings. The expression “undertake” has not been defined under the Act. Therefore, its common parlance meaning has to be taken into account. The meaning of the word “undertake” used in section 80-IA(4)(iv)(c) cannot be equated with the word “completion”.

ii) The Circular dated 15th July, 2005 [(2005) 276 ITR (St.) 151] issued by the CBDT clearly states that the tax benefit under the section has been extended to undertakings which undertake substantial renovation and modernisation of an existing network of transmission or distribution lines during the period beginning from 1st April, 2004 and ending on 31st March, 2006. The provisions of section 80-IA(4)(iv)(c) use the expression “any time” during the period beginning from 1st April, 2004 and ending on 31st March, 2006 and do not use the word “previous year”. Wherever the Legislature has intended to use the expression “previous year”, it has consciously done so, viz., in section 35AB, section 35ABB, section 35AC and section 35AD as well as in 77 other sections of the Act.

iii) There is no requirement of capitalisation of the amount in the books of accounts mentioned in section 80-IA(4)(iv)(c) which does not mandate that there has to be an increase in the value of plant and machinery in the books of accounts. Therefore, such a requirement which is not prescribed in the language of the provision cannot be read into it.

iv) The assessee had undertaken substantial renovation and modernisation of existing lines which was more than 50% of the book value of the assets as on 1st April, 2004 under the Explanation to section 80-IA(4)(iv)(c). Thus, it could safely be inferred that the assessee had undertaken the work towards renovation and modernisation of existing transmission or distribution lines. The assessee was entitled to deduction u/s 80-IA(4).’

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Appeal to High Court – Court quashing order and remanding matter to Tribunal – Effect – Search and seizure – Appeal arising out of block assessment – Assessee entitled to raise question of limitation in remand proceedings – Tribunal refusing to adjudicate issue of limitation holding it was not subject matter of remand – Not sustainable – Matter remanded to Tribunal

14 Karnataka Financial Services Ltd. vs. ACIT [2021] 432 ITR 187 (Karn) A.Ys.: 1986-87 to 1996-97 Date of order: 8th February, 2021

Appeal to High Court – Court quashing order and remanding matter to Tribunal – Effect – Search and seizure – Appeal arising out of block assessment – Assessee entitled to raise question of limitation in remand proceedings – Tribunal refusing to adjudicate issue of limitation holding it was not subject matter of remand – Not sustainable – Matter remanded to Tribunal

The assessee carried on the business of equipment leasing. Pursuant to a search, a notice was issued to it u/s 158BC for the block period 1986-87 to 1996-97 and the assessee filed its return of income. The A.O. held that the assessee had purchased the assets from one PLF at a higher value with a view to claim depreciation on the enhanced value as against the actual written down value in the books of accounts of PLF and restricted the depreciation to assets of value Rs. 1 crore. The Tribunal deleted the disallowance of depreciation and held in favour of the assessee.

The Department filed an appeal before the High Court against the order of the Tribunal. During the pendency of the appeal, the Court by an order directed the assessee to be wound up and appointed the official liquidator to take charge of its assets. The Court set aside the order of the Tribunal and remitted the matter to the Tribunal for fresh adjudication considering the amended provisions of section 158BB. The Tribunal thereupon passed an order with respect to the question of depreciation but did not adjudicate the ground raised by the assessee with regard to limitation on the ground that it was not the subject matter of the order of remand of the Court.

The Karnataka High Court allowed the appeal of the assessee and held as under:

‘i) The order passed by the Tribunal had been set aside in its entirety by this Court. Therefore, it was open to the assessee to raise the plea of limitation.

ii) Since the Tribunal had not adjudicated the issue with regard to limitation, the order passed by the Tribunal insofar as it pertained to the finding with regard to the issue of limitation was quashed and the Tribunal was directed to decide the issue of limitation with regard to the order of assessment passed by the A.O. for the block period 1986-87 to 1996-97. It would be open to the parties to raise all contentions before the Tribunal on this issue.’

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Appeal to High Court – Sections 92CA and 260A – Powers to disturb findings of fact recorded by Tribunal – Only upon specific question being raised as to their being perverse – Transfer pricing – Exclusion of comparables and depreciation on goodwill – High Court cannot go into facts

13 Principal CIT vs. Samsung R&D Institute Bangalore Pvt. Ltd. [2021] 431 ITR 615 (Karn) A.Y.: 2009-10 Date of order: 30th November, 2020

Appeal to High Court – Sections 92CA and 260A – Powers to disturb findings of fact recorded by Tribunal – Only upon specific question being raised as to their being perverse – Transfer pricing – Exclusion of comparables and depreciation on goodwill – High Court cannot go into facts

The assessee was a wholly-owned subsidiary of SECL and rendered software development services to its associate enterprises. In the A.Y. 2009-10 the assessee realised a net profit margin of 15.45% in respect of the international transactions with its associate enterprises. The Transfer Pricing Officer made a transfer pricing adjustment in respect of software development services and passed an order u/s 92CA which was incorporated by the A.O. in his order.

Before the Commissioner (Appeals) the assessee challenged the selection of the entity IL as comparable. The Commissioner (Appeals) excluded IL on account of its enormous size and bulk and partly allowed the appeal. The Tribunal directed the Transfer Pricing Officer to exclude certain companies from the list of comparables on the basis of functional dissimilarity. The Tribunal also held that the assessee was entitled to depreciation on goodwill.

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

‘i) The Tribunal is the final fact-finding authority and a decision of the Tribunal on the facts can be gone into by the High Court only if a question has been referred to it which says that the finding of the Tribunal is perverse.

ii) The issue whether the entity IL was comparable to the assessee and was functionally dissimilar was a finding of fact. The Commissioner (Appeals) had dealt with the findings recorded by the Transfer Pricing Officer and had been approved by the Tribunal by assigning cogent reasons. The findings were findings of fact.

iii) Even in the substantial questions of law, no element of perversity had either been pleaded or demonstrated. The Tribunal was justified in removing certain companies from the list of comparables on the basis of functional dissimilarity and in holding that the assessee was entitled to depreciation on goodwill.’

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Appeal to Appellate Tribunal – Powers of Tribunal – Sections 253 and 254 and Rule 24 – No power to dismiss appeal on ground of non-prosecution – Duty to dispose of appeal on merits – Tribunal to restore appeal and afford opportunity of hearing to both parties

12 Rabindra Kumar Mohanty vs. Registrar ITAT [2021] 432 ITR 158 (Ori) A.Y.: 2009-10 Date of order: 18th March, 2020

Appeal to Appellate Tribunal – Powers of Tribunal – Sections 253 and 254 and Rule 24 – No power to dismiss appeal on ground of non-prosecution – Duty to dispose of appeal on merits – Tribunal to restore appeal and afford opportunity of hearing to both parties

The Income-tax Appellate Tribunal issued notice for hearing of the appeal filed by the assessee on 6th July, 2017. On that date, the authorised representative of the assessee filed an adjournment application and the case was placed for hearing on 30th August, 2017. However, on that date neither the assessee nor his authorised representative or his counsel was present. The Tribunal, therefore, dismissed the appeal for want of prosecution.

On a writ petition filed by the assessee the Orissa High Court held as under:

‘i) The Income-tax Act, 1961 enjoins upon the Appellate Tribunal to pass an order in an appeal as it thinks fit after giving both the parties an opportunity of being heard. It does not give any power to the Appellate Tribunal to dismiss the appeal for default or for want of prosecution in case the appellant is not present when the appeal is taken up for hearing.

ii) Article 265 of the Constitution of India mandates that no tax can be collected except by authority of law. Appellate proceedings are also laws in the strict sense of the term, which are required to be followed before tax can legally be collected. Similarly, the provisions of law are required to be followed even if the taxpayer does not participate in the proceedings. No assessing authority can refuse to assess the tax fairly and legally merely because the taxpayer is not participating in the proceedings. Hence, dismissal of appeals by the Income-tax Appellate Tribunal for non-prosecution is illegal and unjustified.

iii) Merely because a person is not availing of his right of natural justice it cannot be a ground for the Tribunal to refuse to perform its statutory duty of deciding the appeal. An appellate authority is required to afford an opportunity to be heard to the appellant.

iv) The Tribunal could not have dismissed the appeal filed by the assessee for want of prosecution and it ought to have decided the appeal on merits even if the assessee or its counsel was not present when the appeal was taken up for hearing. The Tribunal was to restore the appeal and decide it on the merits after giving both the parties an opportunity of being heard.’

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Appeal to Appellate Tribunal – Powers of Tribunal – Sections 253 and 254 and Rule 24 – No power to dismiss appeal on ground of non-prosecution – Duty to dispose of appeal on merits – Appeals restored before Tribunal

11 Daryapur Shetkari Sahakari Ginning and Pressing Factory vs. ACIT [2021] 432 ITR 130 (Bom) A.Ys.: 2002-03 to 2004-05 Date of order: 24th November, 2020

Appeal to Appellate Tribunal – Powers of Tribunal – Sections 253 and 254 and Rule 24 – No power to dismiss appeal on ground of non-prosecution – Duty to dispose of appeal on merits – Appeals restored before Tribunal

For the A.Ys. 2002-03, 2003-04 and 2004-05, against the orders of the Commissioner (Appeals), the assessee had filed appeals before the Tribunal. The Tribunal dismissed all three appeals by a common order on the ground that none appeared on behalf of the assessee which meant that the assessee was not interested in prosecuting those appeals.

The Bombay High Court allowed the appeals filed by the assessee and held as under:

‘i) Rule 24 of the Income-tax (Appellate Tribunal) Rules, 1963 mandates that when an appeal is called for hearing and the appellant does not appear, the Tribunal is required to dispose of the appeal on merits after hearing the respondent.

ii) The order passed by the Tribunal dismissing the appeals in limine for non-appearance of the appellant-assessee holding that the assessee was not interested in prosecuting the appeals was unsustainable. The Tribunal was duty-bound to decide the appeals on the merits after hearing the respondent and the Department according to the mandate under Rule 24 of the 1963 Rules and in terms of the ratio laid down by the Supreme Court.

iii) The order of the Tribunal being contrary to Rule 24 of the 1963 Rules was quashed and set aside. The respective appeals were restored for adjudication on the merits before the Tribunal.’

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Appeal to Appellate Tribunal – Section 254 of ITA, 1961 and Rule 24 of ITAT Rules, 1963 – (i) Application for recall of order – Tribunal dismissing appeal for non-prosecution – Duty of Tribunal to decide appeal on merits; (ii) Application for recall of order – Limitation – Amendment in law – First application for restoration of appeal dismissed for non-prosecution within period of limitation – Tribunal dismissing second application invoking amendment to section 254(2) – Erroneous

10 Pradeep Kumar Jindal vs. Principal CIT [2021] 432 ITR 48 (Del) A.Y.: 2008-09 Date of order: 19th February, 2021

Appeal to Appellate Tribunal – Section 254 of ITA, 1961 and Rule 24 of ITAT Rules, 1963 – (i) Application for recall of order – Tribunal dismissing appeal for non-prosecution – Duty of Tribunal to decide appeal on merits; (ii) Application for recall of order – Limitation – Amendment in law – First application for restoration of appeal dismissed for non-prosecution within period of limitation – Tribunal dismissing second application invoking amendment to section 254(2) – Erroneous

The assessee filed an application in March, 2017 before the Tribunal for recall of the order dated 10th December, 2015 dismissing its appeal for non-prosecution. The application was dismissed by the Tribunal in limine by an order dated 7th February, 2018. The Tribunal dismissed the assessee’s contention that between 8th and 10th December, 2015 he was ill and hence could not appear when the appeal was heard on 10th December, 2015, and held that u/s 254(2) as amended with effect from 1st June, 2016, any miscellaneous application had to be filed within six months from the date of the order and that, therefore, the application for restoration of the appeal dismissed on 10th December, 2015 was barred by limitation. Thereafter, the assessee filed another application on 26th February, 2018 for recall of the order dated 7th February, 2018 which was also dismissed by an order dated 23rd December, 2020 on the ground that a second application was not maintainable.

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

‘i) There was no adjudication by the Tribunal of the appeal on merits. Its order dated 10th December, 2015 dismissing the assessee’s appeal was for non-prosecution and not on merits, as it was required to do notwithstanding the non-appearance of the assessee when the appeal was called for hearing, was violative of Rule 24 of the Income-tax (Appellate Tribunal) Rules, 1963 and thus was void. The action of the Tribunal, of dismissing the appeal for non-prosecution instead of on merits and of refusal to restore the appeal notwithstanding the applications of the assessee, was not merely an irregularity. The Tribunal had erred in dismissing the first application of the assessee filed in March, 2017 for restoration of the appeal invoking the amendment to section 254(2) requiring application thereunder to be filed within six months and in not going into the sufficiency of the reasons given by the assessee for non-appearance.

ii) The application filed by the assessee in March, 2017 invoking Rule 24 of the 1963 Rules was within time and could not have been dismissed applying the provisions of limitation applicable to section 254(2).

iii) In view of the aforesaid, the petition is allowed. I.T.A. No. 3844/Del/2013 preferred by the petitioner before the Income-tax Appellate Tribunal is ordered to be restored to its original position, as immediately before 10th December, 2015, and the Tribunal is requested to take up the same for hearing on 15th March, 2021 or on any other date which may be convenient to the Income-tax Appellate Tribunal.’

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Section 195 read with section 40(a)(i) – A payment may be treated as reimbursement, and consequently not be subject to TDS u/s 195, if it satisfies twin tests of: (a) one-to-one correlation between outflow and inflow of recipient; and (b) receipt and payment being of identical amount

2 TS-203 ITAT-2021 (Pune) BYK Asia Pacific Pte. Limited vs. ACIT ITA No: 2110/Pun/2019 Date of order: 24th March, 2021

Section 195 read with section 40(a)(i) – A payment may be treated as reimbursement, and consequently not be subject to TDS u/s 195, if it satisfies twin tests of: (a) one-to-one correlation between outflow and inflow of recipient; and (b) receipt and payment being of identical amount

FACTS
The assessee was the branch in India of a Singapore Company (Singapore HO). The Singapore HO was a subsidiary of a German parent company. The assessee was engaged in providing technical support services and testing facility to Asia-Pacific customers of the German parent – although it appears that such services were pursuant to an understanding with the Singapore HO. The assessee operated on cost-plus basis and recovered all its costs (including reimbursement) with a mark-up of 10%. The assessee was treated as a PE of the Singapore HO and was charged to tax on mark-up.

The assessee had made certain payments to Singapore HO which the HO had defrayed towards seminar, IT, training, printing expenses and staff welfare expenses for the assessee branch and which were claimed as deductions from income. Further, the branch had not deducted tax from the said payments on the ground that said payments were reimbursement of expenses. The A.O. disallowed payments u/s 40(a)(i). The DRP upheld the order of the A.O.

The aggrieved assessee appealed before the Tribunal.

HELD

Section 195 applies only if amount is chargeable to tax in the hands of recipient. Chargeability presupposes some profit element. If the recipient merely recovers the amount spent by it, without any profit element, such recovery is reimbursement and not a sum chargeable to tax.

Two conditions should co-exist to fall within reimbursement. First, one-to-one direct correlation between the outgo of the payment and inflow of the receipt must be established. Second, receipt and payment should be of identical amount.

The first condition is satisfied when at the time of incurring the amount is directly identifiable as payment made for the benefit of the other.

The second condition is satisfied when repayment of the amount originally spent is made without any mark-up.

The assessee had provided back-to-back invoices of identical amounts in respect of payments made towards seminar, training and printing expenses. Accordingly, such payments were in the nature of reimbursement of expenses. Consequently, the assessee was not required to deduct tax from the same u/s 195.

As regards IT expenses, it was observed that payments were made on monthly basis. The assessee had contended that payments were apportionment of head office expenditure to the assessee at cost. While the burden of proving ‘reimbursement’ is on the assessee, the assessee had not placed any agreement or evidence on record in support of its contention. Hence, the payments could not be said to be in the nature of reimbursement of expenses. Therefore, the matter was remanded to the A.O. for examining the true nature of the payment.

Note – It is not clear why ‘make available’ argument was not advocated in respect of monthly reimbursements.

shailesh.kwebmaker

Sections 22, 56 – Since the nature of services provided by the assessee to the tenants / lessees was linked to the premises and was in the nature of the auxiliary services which were directly linked to the leasing of the property, gross receipts on account of amenities / services provided by the assessee to its tenants are chargeable to tax under the head ‘Income from House Property’ and not ‘Income from Other Sources’

5 ACIT vs. XTP Design Furniture Ltd. Pramod Kumar (V.P.) and Saktijit Dey (J.M.) ITA No. 2424/Mum/2019 A.Y.: 2013-14 Date of order: 19th January, 2021 Counsel for Assessee / Revenue: None / T.S. Khalsa

Sections 22, 56 – Since the nature of services provided by the assessee to the tenants / lessees was linked to the premises and was in the nature of the auxiliary services which were directly linked to the leasing of the property, gross receipts on account of amenities / services provided by the assessee to its tenants are chargeable to tax under the head ‘Income from House Property’ and not ‘Income from Other Sources’

FACTS
The assessee had leased its office premises at Unit Nos. 201, 301 and 401 in Peninsula Chambers to Group Media Pvt. Ltd. and Hindustan Thompson Associates Ltd. The assessee had given the lessees additional common facilities like lift, security, fire-fighting system, common area facilities, car parking, terrace use, water supply, etc. The assessee charged license fees and also amenities fees. Both these amounts were offered by the assessee for taxation under the head ‘Income from House Property’. The A.O. taxed the license fees under the head ‘Income from House Property’, whereas the amenities fees were taxed by him as ‘Income from Other Sources’.

Aggrieved, the assessee preferred an appeal to the CIT(A) who, following the decision of the Tribunal in the assessee’s own case for A.Ys. 2009-10 and 2010-11, decided the appeal in favour of the assessee.

Aggrieved, the Revenue preferred an appeal to the Tribunal.

HELD
The Revenue fairly accepted that the issue under consideration is clearly covered by the decision of the Tribunal, in the assessee’s own case, for A.Ys. 2009-10 and 2010-11 in favour of the assessee. The Tribunal noted that the CIT(A) has decided the issue by following these decisions of the Tribunal wherein for the A.Y. 2009-10 the Tribunal has held as under:

‘We find that the nature of services provided by the assessee to the tenants / lessees were linked to the premises and were in the nature of the auxiliary services which were directly linked to the leasing of the property. Since there is a direct nexus between the amenities and leased premises, the CIT(A) has rightly directed the A.O. to treat the income from amenities under the head, “Income from House Property”’.

The Tribunal while deciding the appeal for A.Y. 2010-11, has in its order dated 9th February, 2016, concurred with the above view by holding that ‘the income of Rs. 4,38,61,486 received by the assessee company from amenities shall be chargeable to tax under the head “Income from House Property”.’

The Tribunal held that it found no reason to take any other view of the matter than the view taken by the co-ordinate bench. It held that there is no infirmity in the order of the CIT(A) in deciding the issue in favour of the assessee in consonance with the decision of the co-ordinate bench.

shailesh.kwebmaker

‘YATHECHCHHASI TATHA KURU’ | DO AS YOU WISH

Giving advice is an integral part of our profession. For that matter, every person, whether a professional or not, has to act as a consultant in some way or other. As a brother, sister, parent, friend, teacher, elderly person, colleague and so on, everyone gives some kind of advice to others.

The ‘title’ above is picked from the greatest advice ever given by anybody in human history – the Shreemad Bhagawad Geeta. As you know, the Bhagawad Geeta is the advice given by Lord Shreekrishna to his favourite and most intelligent disciple, Arjun. It contains 700 shlokas (rhymes) full of philosophy and guidance useful for day-to-day life. Its supremacy in philosophical literature has been recognised by renowned scholars of all countries and religions. It is our true Indian philosophy not restricted to any religion as such.

What is the implication of this – ‘Do as you wish’? This is the 63rd shloka from the concluding, 18th Chapter of the Geeta. Bhagwaan says:

‘(Arjun), thus, I have narrated to you the full knowledge which is the secret of all secrets (deepest knowledge). After listening to all this and thinking over it, Do as you wish!’

Friends, this apparently simple sentence has a great message and teaching for all of us – not only for CAs but for everyone. In fact, this has been the guiding principle for me in not only the 40 years of my professional life, but in my personal life as well. It is capable of giving great peace of mind to us.

What is so great about it? Remember, it has been said by none other than Bhagwaan Shreekrishna whose preachings are considered to be impeccable and irrefutable. The philosophy is told on a battle-field. It symbolises our life which is a constant battle – between two thoughts, good versus evil. Yet, Bhagwaan is not over-insistent on what HE advised. He has no ego. He does not make it a prestige issue. He doesn’t sit on Arjun’s head and say that he should act only according to His advice. In fact, the greater the insistence, the more the resistance. He leaves it to Arjun’s discretion.

As against this, many of us are very possessive about our views. We feel that what we think is the only ultimate truth and that it is the only correct view.

Be it in a family, in office, in institutions or in social groups, everybody puts across his views vehemently on practically every subject ranging from politics, economics, cricket, Covid, interpretation of laws, etc., to social issues… I have seen CAs trying to prevail on their clients and imposing their advice on them.

This is one of the main reasons for disputes and misgivings. One has to understand one’s role. If one is an adviser or consultant and not the decision maker, one needs to stop at a certain stage. Try to express one’s honest views, explain with examples, put them in writing, wherever required, argue with an open mind, explain the consequences if one’s views are not accepted, point out that the advice is in the listener’s interest, but leave the decision to the other person. Just say, ‘I have explained my views. Now it is up to you to decide and act. If anything goes wrong, please don’t blame me’ and then see the results. This has a better impact!

Needless to say, when you know that the other person is weak, or not competent to decide, or dependent on you and you yourself have to face the consequences, the approach could be different. You have to use your discretion and adopt the appropriate strategy.

This ‘Do as you wish’ approach may also develop the decision-making ability of the person concerned, making him aware that the ultimate responsibility is his own. Further, our spiritual thought preaches ‘detachment’ or ‘absence of attachment’.

‘Do as you wish’ is a classic example of not being attached to your views.

Friends, these are my views. And after reading these, Do as you wish!

shailesh.kwebmaker

Section 244A – Refunds – Interest on – Where assessee, a contractor, followed project completion method of accounting and during A.Y.s. 2003-04 to 2005-06 it had received certain payments after deduction of tax at source and in the return of income filed for A.Y. 2005-06 it had disclosed payments received during three A.Y.s., 2003-04 to 2005-06 and AO passed assessment order and granted refund to assessee, on such refund, interest in terms of section 244A would be payable from respective assessment years

Principal CIT vs. Kumagai Skanska HCC ITOCHU Group; [2019] 102 taxmann.com 416 (Bom): Date of order: 29th January, 2019 A.Y.s..: 2003-04 to 2005-06

Section 244A – Refunds – Interest on – Where assessee, a contractor, followed project completion method of accounting and during A.Y.s. 2003-04 to 2005-06 it had received certain payments after deduction of tax at source and in the return of income filed for A.Y. 2005-06 it had disclosed payments received during three A.Y.s., 2003-04 to 2005-06 and AO passed assessment order and granted refund to assessee, on such refund, interest in terms of section 244A would be payable from respective assessment years

The assessee was engaged in the business of civil construction. It followed the project completion method of accounting to offer its income to tax. During the A.Y.s. 2003-04, 2004-05 and 2005-06, it had received certain payments as a contractor on which the payer had deducted tax at source. In the return of income filed for A.Y. 2005-06, it had declared a certain loss. In the said return, it had claimed the income relatable to the payments made during the said year as well as during the earlier two A.Y.s. 2003-04 and 2004-05.

The assessment order passed by the Assessing Officer gave rise to refund. The assessee contended before the Assessing Officer that on such refund interest in terms of section 244A would be payable from the respective assessment years. The Assessing Officer held that the income in relation to the payments on which tax was deducted at source was returned by the assessee in the A.Y. 2005-06 and, therefore, interest could not be paid on the refund for any period prior to the said assessment year.

The Tribunal held in favour of the assessee.

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

“i) Section 244A pertains to interest on refunds. In the instant case, the assessee’s case falls under clause (a) of sub-section (1) of section 244A. Clause (a) of sub-section (1) of section 244A covers situations where the refund is out of any tax collected at source or paid by way of advance tax or treated as paid u/s. 199. This reference to treat tax as paid u/s. 199 would clearly cover the tax deducted at source. In the instant case, the assessee had suffered deduction of tax at source at the time of payments. In that view of the matter, the case of the assessee would clearly be covered under clause (a) to sub-section (1) of section 244. In such a situation, this clause provides that interest shall be calculated at the rate of 1/2 per cent for every month or part thereof, comprising a period from the 1st day of April of the assessment year to the date on which the refund is granted, provided the return is filed before the due date, specified in sub-section (1) of section 139.

ii) Here the reference ‘from the 1st day of April of the assessment year’, which is the starting point for computing the interest payable, must be to the assessment year in which the tax was deducted at source. This expression has to be read along with the main body of clause (a) which refers to the refund arising out of, inter alia, the tax treated to have been paid as per section 199. Any other view would be held untenable, since the Revenue which has received the tax deducted at source from the payments to be made to the assessee and appropriated the same would refund the same but the interest would be accounted much later when the return giving rise to the refund is filed.

iii) In view of the aforesaid, the Tribunal had not committed any error. The appeal filed by the Revenue deserved to be dismissed.”

shailesh.kwebmaker

Section 54F – Even after amendment w.e.f. A.Y. 2015-16, investment of long-term capital gain in two bungalows located adjacent to each other and used as one residential unit qualifies for exemption u/s 54F – Benefit of exemption could not have been denied on reasoning that there were two different registries of buildings / properties as both properties purchased by assessee were a single property located in same geographical area

7. [2020] 114 taxmann.com 508 (Ahd.)(Trib.)

Mohammadanif Sultanali Pradhan vs. DCIT

ITA No. 1797/Ahd/2018

A.Y.: 2015-16

Date of order: 6^th January, 2020

Section 54F – Even after amendment w.e.f. A.Y. 2015-16,
investment of long-term capital gain in two bungalows located adjacent to each
other and used as one residential unit qualifies for exemption u/s 54F –
Benefit of exemption could not have been denied on reasoning that there were
two different registries of buildings / properties as both properties purchased
by assessee were a single property located in same geographical area

FACTS

During the previous year relevant to the A.Y. 2015-16, the
assessee in his return of income declared income under the head capital gain at
Rs. 23,84,101 after claiming exemption u/s 54F for Rs. 1,08,00,000. In support
of the exemption claimed, the assessee contended that he has made investment in
two bungalows which are adjacent to each other, bearing Nos. 18 and 19 located
at survey No. 606/2, TPS No. 92, Sarkhej – Makarba – Okaf – Fatewadi of Mouje
Sarkhej, taluka Vejalpur, district Ahmedabad.

The A.O. was of the view that the assessee can claim
exemption u/s 54F with respect to the investment in one bungalow only.
Accordingly, he computed the exemption with respect to one bungalow only
amounting to Rs. 43,77,118 and thus disallowed the excess claim u/s 54F of Rs.
64,22,882.

Aggrieved, the assessee preferred an appeal to the CIT(A) and
submitted that both the bungalows are in the same society, adjacent to each
other. As such both the bungalows are one unit for residential purposes.
Therefore, he claimed that he is entitled to deduction / exemption for both the
bungalows u/s 54F.

The CIT(A) rejected the claim of the assessee on the ground
that there is an amendment under the provisions of section 54F of the Act where
the expression previously used, ‘a residential house’, has been substituted
with ‘one residential house’. Such amendment is effective with effect from A.Y.
2015-16, i.e., the year under consideration.

Aggrieved, the assessee preferred an appeal to the Tribunal.

HELD

The Tribunal observed that:

(i) the
issue relates to whether the assessee is eligible for exemption u/s 54F of the
Act against the long-term capital gain for the investment made in the two
properties which are adjacent to each other and used as one residential unit.
It noted that indeed, the provision of the law requires that the exemption will
be available to the assessee u/s 54F for the investment in one residential
unit;

(ii) under
the provisions of section 54F, there is no definition / clarification provided
about the area of the residential property. It means that one assessee can buy
a huge bungalow / property of, say, one thousand square metres and can claim
the deduction subject to conditions. Similarly, another assessee acquired two
different residential properties adjacent to each other but both the properties
put together were only two hundred square metres – but he will be extended the
benefit of the exemption with respect to one unit only because there are two
different properties based on registry documents;

(iii) there can be a situation that the family of the assessee is quite
large, comprising of several members, and therefore he needs two properties
adjacent to each other to accommodate them. So from the point of view of the
assessee it is a single property but he got two different properties registered
as per the requirement of the builder;

(iv) the
assessee cannot be deprived of the benefit conferred under the statute merely
on the reasoning that there were two different registries of the buildings /
properties;

(v) it
is also not a case of the Revenue / assessee that both the properties purchased
by the assessee were located in different geographical areas. In such a
situation the law amended u/s 54F appears to be applicable where the assessee
buys two properties in two different areas;

(vi) the
principles laid down by the courts cannot be just brushed aside on the aspect
of defining one residential unit. It noted the observations of the Hon’ble High
Court of Karnataka in the case of CIT vs. D. Ananda Basappa [(2009) 309
ITR 329].

The Tribunal held that the assessee
is entitled to claim exemption u/s 54F in respect of investment made in two
adjacent bungalows used as one residential unit. The Tribunal deleted the
addition made by the A.O. and confirmed by the CIT(A).

This ground of appeal filed by the assessee was
allowed.

shailesh.kwebmaker

INTERPLAY BETWEEN DEEMING FICTIONS OF SECTIONS 45(3) AND 50C

ISSUE FOR
CONSIDERATION

Section
45(3) of the Act provides for taxation of the capital gains on transfer of a capital
asset by a person to a firm in which he is or becomes a partner, by way of
capital contribution or otherwise, in the year of transfer and further provides
that the amount recorded in the books of accounts of the firm shall be deemed
to be the full value of the consideration received or accruing as a result of
such transfer of the capital asset for the purposes of section 48. Section 50C
of the Act provides that the value adopted or assessed or assessable by the
stamp valuation authority for the purpose of payment of stamp duty in respect
of transfer of a capital asset, being land or building or both, shall for the
purposes of section 48 be deemed to be the full value of the consideration
received or accruing as a result of such transfer if it is higher than its
actual consideration.

Whether both
the aforesaid provisions of the Act can be made applicable in a case where the
capital asset transferred by a partner to his firm by way of his capital
contribution is land or building or both is the issue that is sought to be
examined here. Whether for the purposes of section 48 the full value of
consideration should be the amount as recorded in the books of the firm in
accordance with the provisions of section 45(3), or whether it should be the
value as adopted or assessed or assessable by the stamp valuation authority in
accordance with the provisions of section 50C? Whether in computing the capital
gains, the higher of the two is to be adopted or not?

The Lucknow
bench of the Tribunal has held that the provisions of section 50C shall prevail
over the provisions of section 45(3) in a case where the stamp duty value was
higher than the value recorded in the books of the firm. As against this, the
Mumbai, Kolkata, Hyderabad and Chennai benches of the Tribunal have held that
the provisions of section 45(3), ignoring the provisions of section 50C, alone
can apply in a case where land or building has been introduced by a partner by
way of his capital contribution.

THE CARLTON HOTEL
(P) LTD. CASE

The issue
first came up for consideration of the Lucknow bench of the Tribunal in the
case of Carlton Hotel (P) Ltd. vs. ACIT 35 SOT 26 (Lucknow) (URO).
In this case, during the previous year relevant to A.Y. 2004-05 the assessee
company entered into a partnership with two other persons. The assessee company
contributed 2,40,000 sq. ft. of land as its capital contribution which was
valued at Rs. 7,81,96,735 and was so recorded in the books of the partnership
firm. The assessee was given 5% share in the partnership firm, whereas the
other two partners were given 95% share.

For the
purposes of computing capital gains in the hands of the partner assessee on
transfer of the land to the partnership firm, the A.O. invoked the provisions
of section 50C and applied circle rates for the purpose of calculating the
consideration for transfer. He valued the consideration at Rs. 29,75,46,468
instead of Rs. 7,81,96,735 and on that basis he calculated the long-term
capital gains. The A.O. inter alia doubted the genuineness of the
introduction of land and noted that the assessee has contributed 88% of capital
in lieu of only 5% share in profits which was beyond the normal business
prudence and the transfer of the land to the firm was as good as a sale. For
the purpose of holding so, he referred to the clauses of the partnership deed
and observed that the assessee had little role to play in the partnership
business, the assessee was not a managing partner in the firm, construction on
the plot was to be carried out by another partner of the firm, the assessee was
not having any civil, criminal or financial liability, the business of the
partnership was to be exclusively carried out by other partners of the firm,
the bank account could be independently operated only by the other two
partners, whereas the assessee could operate only with joint signatures of the
other two partners; it was only the other partners who had been empowered to
introduce new partners, the assessee did not have any right over the goodwill
of the firm, was not authorised to make any change in the composition of the
board which had controlling interest in its share capital, etc.

Thus, the A.O. alleged that the
assessee had adopted a device to evade capital gains tax by showing lower value
of sale consideration in the books of the firm, whereas the actual market value
of the land was much higher as reflected from the circle rate. He relied on the
decisions of the Supreme Court in the case of McDowell & Co. Ltd. vs.
CTO 154 ITR 148 for the proposition that if an assessee adopts a tax
avoidance scheme, then the form can be ignored. Thus, by taking the substance
of the transaction into consideration, the market value of the land transferred
to the firm as capital contribution was adopted by invoking section 50C,
contending that mere reliance on section 45(3) in isolation would defeat the
intent and purpose of the taxing statute.

Importantly, the A.O. also took a
view that section 50C was applicable even in a situation covered by section
45(3). The A.O., ignoring the facts that the transfer of land as capital
contribution was not through a registered document and that the provisions of
section 50C were amended only thereafter to rope in even the transfer of
immovable property otherwise than through a registered document, applied the provisions
of section 50C.

Upon further appeal, the CIT(A)
confirmed the order of the A.O. confirming that the value adopted by the
assessee for transferring the land to the firm was a collusive one and that the
provision of section 50C being a specific provision was applicable even where
provisions of section 45(3) had been invoked.

Upon further appeal to the
Tribunal, it was contended on behalf of the assessee that the provisions of
section 45(3) and section 50C were mutually exclusive; where section 45(3) was
applicable, section 50C would not be applicable and vice versa. It was
further submitted that section 45(3) created a deeming fiction whereby the
consideration recorded by the firm in its books was deemed to be the full value
of consideration for the purpose of computing capital gains. Section 50C was
another deeming section which empowered the A.O. to substitute the valuation
done by the stamp valuation authority as sale consideration in place of
consideration shown by the parties to the transaction. Once one deeming section
was invoked, another deeming section could not be made to nullify the effect of
the earlier deeming section. The application of section 50C in such a situation
would render section 45(3) otiose. Regarding the allegation that the assessee
had entered into a collusive transaction and accordingly had shown lower value
of consideration in the books of the firm, it was submitted that the firm would
be paying tax upon its further sale by adopting the value of land as recorded
in the books and, hence, there would not be any revenue loss.

On the other hand, the Revenue
supported the order of the A.O. and the CIT(A) and claimed that the form of the
transaction had to be ignored and its substance had to be considered, since the
assessee had entered into a collusive transaction.

The Tribunal
for the reasons recorded in the order rejected one of the contentions of the
Revenue that since section 50C required adoption of the circle rates for the
purpose of levy of the stamp duty which rates, once declared, could be
‘adopted’ for the purpose of substituting the full value of consideration for
section 48 and it was not necessary that the document for transfer of asset was
actually registered before invoking section 50C.

On the issue under consideration,
however, the Tribunal held that the provisions of section 50C could be invoked
even though the case was otherwise covered under section 45(3); section 50C
would override section 45(3). Section 45(3) was a general provision, while
section 50C was a special provision which would override section 45(3). In the
final analysis, however, the Tribunal rejected the action of the A.O. in
applying the provisions of section 50C on the ground of non-registration and
non-payment of the stamp duty.

It may be noted for the record
that the Revenue had filed a further appeal before the Allahabad High Court
against the decision of the Tribunal mainly for pleading that the transaction
was a colourable transaction executed with the intention to evade the tax
liability. And the High Court upholding the contention held that there existed all
the facts and circumstances to show prima facie that the entire
transaction of contribution to partnership was a sham and fictitious
transaction and an attempt to devise a method to avoid tax and remanded the
matter back to the Tribunal to look into this aspect of the matter, which was
an issue directly raised by the Revenue right from the stage of assessment. No
findings have been given by the High Court with respect to the issue of
applicability of section 50C to the transaction of introduction of capital
asset by the partner in the firm which is otherwise covered by section 45(3).

AMARTARA PVT. LTD.
CASE

Thereafter,
the issue came up for consideration of the Mumbai bench of the Tribunal in DCIT
vs. Amartara Pvt. Ltd. 78 ITR (Trib.)(S.N.) 46 (Mum).

In this
case, during the previous year relevant to A.Y. 2012-13 the assessee entered
into a limited liability partnership with the object of developing,
constructing and operating resorts, hotels and apartment hotels and / or for
carrying out such other hospitality businesses. The assessee transferred an
immovable property, being a plot of land admeasuring 6,869.959 metres situated
at Powai, Mumbai, as its capital contribution to the newly-created LLP vide
a supplementary agreement dated 29^th December, 2011.

The said
plot of land was valued at Rs. 5.60 crores on the basis of the valuation report
obtained and it was recorded at that value in the books of the LLP. The
assessee, while computing capital gains on transfer of land into the
partnership firm in accordance with the provisions of section 45(3), had taken
the value as recorded in the books of the firm, i.e., Rs. 5.60 crores, as the
full value of the consideration deemed to have been received or accrued as a
result of transfer of capital asset to the partnership firm. The supplementary
agreement through which the said plot of land was introduced by the assessee
into the LLP was registered on 24^th April, 2012 and the stamp duty
authority had determined the market value of the property for the purpose of
payment of stamp duty at Rs. 9,41,78,500.

The A.O.
invoked the provisions of section 50C and adopted the amount of Rs.
9,41,78,500, being the value determined by the stamp valuation authority at the
time of registration of the supplementary partnership deed, as the full value
of consideration for the purpose of computing capital gains. He observed that
the provisions of section 45(3) did not begin with a non-obstante clause
and, therefore, there was no specific mention of non-applicability of section
50C in the cases covered by section 45(3). He also relied upon the Lucknow
Tribunal decision in the case of Carlton Hotel (P) Ltd. (Supra)
for the proposition that section 50C, being a specific provision, would
override the provisions of section 45(3). The CIT(A) confirmed the order of the
A.O. by following the said decision in the case of Carlton Hotel (P) Ltd.
(Supra).

On further
appeal before the Tribunal, the assessee contended that sections 45(3) and
45(4) were special provisions for computation of capital gains on transfer of
capital assets between the partnership firm and the partners and that both the
provisions were deeming fictions created for the purpose of taxation of
transfers of capital assets in such special cases; importing another deeming
fiction to determine the full value of consideration in such special cases was
incorrect in view of the decision of the Hon’ble Supreme Court in the case of CIT
vs. Moon Mills Ltd. 59 ITR 574. It was submitted that the decision
rendered by the Lucknow bench of the Tribunal was per incuriam, in the
light of the decision of the Hon’ble Supreme Court in the case of CIT vs.
Moon Mills Ltd. (Supra), as per which a deeming fiction could not be
extended by importing another deeming fiction for the purpose of determination of
the full value of consideration.

It was also
contended on behalf of the assessee that section 50C of the Act had no
application where no consideration was received or accrued, and hence,
computing full value of consideration by applying the provisions of section 50C
in a case where there was a transfer between partners and the partnership firm
without there being any actual consideration received or accrued, was
incorrect.

In reply,
the Revenue heavily relied upon the said decision of the Lucknow bench of the
Tribunal in the case of Carlton Hotel (P) Ltd. (Supra) and
contended that section 50C overrode the provisions of section 45(3) once the
document of transfer was registered as per the provisions of the Registration
Act, 1908 and the stamp duty was paid for the registration of such document.

The Tribunal held that the
purpose of insertion of section 45(3) was to deal with cases of transfer
between a partnership firm and partners and in such cases the Act provided for
the computation mechanism of capital gains and also provides for consideration
to be adopted for the purpose of determination of full value of consideration.
Since the Act itself provided for deeming consideration to be adopted for the
purpose of section 48 of the Act, another deeming fiction provided by way of
section 50C could not be extended to compute the deemed full value of
consideration as a result of transfer of capital asset. It held that the
Lucknow bench had simply observed that the provisions of section 50C overrode
the provisions of section 45(3) but had not given a categorical finding.
Accordingly, the addition made towards the long-term capital gain by invoking
the provisions of section 50C
was deleted.

This decision of the Mumbai bench
of the Tribunal has been subsequently followed by the Tribunal in the cases of ACIT
vs. Moti Ramanand Sagar (ITA No. 2049/Mum/2017); ACIT vs. Kethireddy Venkata
Mohan Reddy (ITA No. 259/Hyd/2019); and ITO vs. Sheila Sen (ITA No.
554/Kol/2016).

OBSERVATIONS

The issue
under consideration arises due to two conflicting provisions of the Act which
can be invoked for a given transaction wherein the capital asset transferred by
a partner to his firm, as a capital contribution or otherwise, is land or
building. Section 45(3) provides for the amount recorded in the books of
accounts of the firm as deemed consideration. Section 50C provides for the
value adopted, assessed or assessable by stamp valuation authorities as deemed
consideration, if it exceeds the consideration received or accruing. Thus, both
the provisions deal with the determination of the full value of consideration
for the purpose of computation of capital gains by creating a deeming fiction.
Apart from considering the legislative intent behind both the provisions in
order to resolve the conflict between these two provisions, there are various
other aspects which are also required to be considered, like whether two
deeming fictions can operate simultaneously with respect to the same component
of the computation; whether one of these two provisions can be considered as a
general provision and the other one as a special provision whereby it can
override the general one; and which one will prevail if both the provisions are
required to be considered as special provisions.

Sub-section (3) was inserted in
section 45 by the Finance Act, 1987 with effect from A.Y. 1988-89. Prior to the
insertion of sub-section (3), the issue of taxability of the transfer of
capital asset by a partner to his firm was decided by the Supreme Court in the
case of Sunil Siddharthbhai vs. CIT 156 ITR 509. In this case,
the Supreme Court held that when the assessee brought his personal assets into
the partnership firm as his contribution to the capital, there was a transfer
of a capital asset within the meaning of the terms of section 45. This was
because the asset which was, till the date of such bringing in as firm’s
capital, an individual asset, after bringing it in became a shared asset. The
Supreme Court further held that the transfer of asset by the partner to the
firm as capital contribution would not necessarily result in receipt of any
consideration by the assessee so as to attract section 45 and the credit entry
made in the partner’s capital account in the books of the partnership firm did
not represent the true value of consideration. It was a notional value only,
intended to be taken into account at the time of determining the value of the
partner’s share in the net partnership assets on the date of dissolution or on
his retirement.

Therefore,
according to the Supreme Court, it was not correct to hold that the
consideration which a partner acquires on making over his personal asset to the
partnership firm as his contribution to its capital can fall within the
provisions of section 48. Since section 48 was fundamental to the computation
machinery incorporated in the scheme relating to determination of charge
provided in section 45, the Supreme Court held that such a case must be
regarded as falling outside the scope of capital gains taxation altogether.

It was in
this background that the legislature had introduced a specific provision so as
to bring the transfer of the capital asset by a partner to his firm to tax, as
is evident from Circular No. 495 dated 22^nd September, 1987, the
extract from which is reproduced below:

Capital
gains on transfer of firms’ assets to partners and vice versa and by way of compulsory acquisition

24.1 One of
the devices used by assessees to evade tax on capital gains is to convert an
asset held individually into an asset of the firm in which the individual is a
partner. The decision of the Supreme Court in Kartikeya V. Sarabhai vs. CIT [1985] 156 ITR 509 has set at rest the controversy as to whether such a conversion amounts
to transfer. The Court held that such conversion fell outside the scope of
capital gains taxation. The rationale advanced by the Court is that the
consideration for the transfer of the personal asset is indeterminate, being
the right which arises or accrues to the partner during the subsistence of the
partnership to get his share of the profits from time to time and on
dissolution of the partnership to get the value of his share from the net
partnership assets.

24.2 With a
view to blocking this escape route for avoiding capital gains tax, the Finance
Act, 1987 has inserted new sub-section (3) in section 45. The effect of this
amendment is that profits and gains arising from the transfer of a capital
asset by a partner to a firm shall be chargeable as the partner’s income of the
previous year in which the transfer took place. For purposes of computing the
capital gains, the value of the asset recorded in the books of the firm on the
date of the transfer shall be deemed to be the full value of the consideration
received or accrued as a result of the transfer of the capital asset.

In view of
the above, it is clear that but for the specific provision of section 45(3),
the transfer of any capital asset by a partner to his firm could not have been
charged to tax under the head capital gains. In addition to providing for the
chargeability, section 45(3) also addresses the lacuna of the inability of
section 48 to cover such transfer within its ambit which was noticed by the Supreme
Court in the case of Sunil Siddharthbhai (Supra), by deeming the
amount recorded in the books of accounts of the firm as the full value of
consideration received or accruing as a result of such transfer.

Therefore,
it is obvious that section 45(3) needs to be invoked in order to charge the
capital gains tax in respect of transfer of a capital asset by a partner to his
firm. Having invoked the provisions of section 45(3) for the purpose of
chargeability, it needs to be applied in full and the alteration in the
computation mechanism as provided in that section also needs to be considered.
It would not be possible to invoke the provisions of section 45(3) only for the
purpose of creating a charge and, then, compute the capital gain in accordance
with the other provision, i.e., section 50C, by ignoring the computational
aspect of section 45(3) altogether.

The Mumbai
bench of the Tribunal in the case of ACIT vs. Prem Sagar (ITA No.
7442/Mum/2016) has held that both the limbs of section 45(3), i.e.,
charging provision and deeming fiction providing for the full value of
consideration, go hand in hand for facilitating quantification of the capital
gains tax. In case the quantification of the capital gains tax as envisaged in
section 45(3) is substituted by section 50C, then the charging to tax of the
transaction under consideration would in itself stand jeopardised and the
section would be rendered inoperative.

Having said
that the computation of capital gains needs to be made in accordance with the
provisions of section 45(3), the question may arise as to whether the amount of
consideration as decided in accordance with it can then be amended by invoking
the provisions of section 50C, in a case where the valuation adopted, assessed
or assessable by the stamp valuation authority is found to be higher than the
amount recorded in the books of the firm. For the purpose of section 50C the
comparison is required to be made between the consideration received or
accruing as a result of the transfer of the capital asset and the value
adopted, assessed or assessable by the stamp valuation authority for the
purpose of payment of stamp duty in respect of such transfer. Here, the
consideration received or accruing should be the real consideration received or
accruing, and not the consideration which is deemed to have been received or
accrued. This is because the expression ‘the consideration received or accruing
as a result of the transfer’ cannot be construed to include the consideration
deemed to have been received or accrued.

Wherever
required, the legislature has included a specific reference to something which
has been deemed to be so, in addition to the reference of the same thing in
simple terms. For example, section 9 provides for incomes which shall be deemed
to accrue or arise in India under certain circumstances. For the purpose of
including such income which is deemed to accrue or arise in India within the
scope of total income, clause (b) of section 5(1) makes specific reference to
it in addition to referring to the income which accrues or arises (in real and
not on deemed basis). The relevant clause is reproduced below:

(b) accrues
or arises or is deemed to accrue or arise to him in India during such year

There was no
need to make such a specific reference to the income which is deemed to accrue
or arise in India, if a view is taken that the income which accrues or arises
in India will in any case include the income which is deemed to accrue or arise
in India. As a corollary, the expression ‘the consideration received or
accruing as a result of the transfer’ as used in section 50C cannot include the
consideration deemed to be received or accrued in terms of the provisions of
section 45(3).

Further,
section 45(3) deems the amount recorded in the books of accounts of the firm as
a consideration only for the purpose of section 48. Therefore, the deeming
fiction created in section 45(3) has limited applicability and it cannot be
extended to section 50C, to deem the amount so recorded in the books of
accounts of the firm as consideration received or accruing for the purpose of
making its comparison with the valuation adopted, assessed or assessable by the
stamp valuation authorities. As a result, the provisions of section 50C cannot
be made applicable to the transfer of a capital asset by a partner to his firm
for which the true value of consideration received or accruing cannot be
determined, as held by the Supreme Court in the case of Sunil
Siddharthbhai (Supra).

The Supreme
Court in the case of CIT vs. Moon Mills Ltd. 59 ITR 574 has held
that one fiction cannot be imported within another fiction. Two different
provisions of the Act are providing for a fiction by deeming certain amounts as
the full value of consideration for the purpose of computation of capital gains
as per section 48. Section 45(3) deems the amount recorded in the books of the
firm as the full value of consideration and section 50C deems the value
adopted, assessed or assessable by the stamp valuation authority as the full
value of consideration. If section 50C has been made applicable over the amount
deemed to be the full value of consideration in terms of section 45(3), then it
will amount to superimposing a fiction upon a fiction – which would be contrary
to the decision of the Supreme Court.

In the case
of ITO vs. United Marine Academy 130 ITD 113 (Mum)(SB), a special
bench of the Tribunal has dealt with the interplay of deeming fictions as
provided in sections 50 and 50C and has observed as under:

For the
reasons given above and on interpretation of the relevant provisions of
sections 48, 50 and 50C, we are of the view that there are two deeming fictions
created in section 50 and section 50C. The first deeming fiction modifies the
term ‘cost of acquisition’ used in section 48 for the purpose of computing the
capital gains arising from transfer of depreciable assets, whereas the deeming
fiction created in section 50C modifies the term ‘full value of the
consideration received or accruing as a result of transfer of the capital
asset’ used in section 48 for the purpose of computing the capital gains
arising from the transfer of capital asset being land or building or both. The
deeming fiction created in section 50C thus operates in a specific field which
is different from the field in which section 50 is applicable. It is thus not a
case where any supposition has been sought to be imposed on any other
supposition of law. On the other hand, there are two different fictions created
into two different provisions, and going by the legislative intentions to create
the said fictions, the same operate in different fields. The harmonious
interpretation of the relevant provisions makes it clear that there is no
exclusion of applicability of one fiction in a case where another fiction is
applicable. As a matter of fact, there is no conflict between these two legal
fictions which operate in different fields and their application in a given
case simultaneously does not result in imposition of one supposition on another
supposition of law.

Thus,
insofar as transfer of an asset forming part of a block is concerned, the
Tribunal has held that both the provisions of the Act, i.e. sections 50 and
50C, can operate simultaneously. This is primarily for the reason that they
operate in different fields of the computation of capital gains. It was
categorically observed by the Tribunal that it was not a case where any
supposition has been sought to be imposed on another supposition of law.
Therefore, the inference which can be drawn indirectly on the basis of these
observations of the special bench is that two deeming fictions cannot operate
simultaneously if they operate in the same field like in the issue under
consideration.

It is also a
settled principle of interpretation that if a special provision is made on a
certain matter, the matter is excluded from the general provisions. This
principle is expressed in the maxims Generalia specialibus non derogant
(general things do not derogate from special things) and Generalibus
specialia derogant (special things derogate from general things).

However, it won’t be correct to
claim here that either of the two sections is a special one and, hence, it
overrides the other. Section 45(3) is a special provision insofar as
computation of capital gains resulting from capital contribution made by a
partner to the firm is concerned, and section 50C is a special provision
insofar as transfer of immovable property is concerned. Therefore, the issue
can better be resolved having regard to the other considerations as discussed
instead of merely relying upon these principles of interpretation.

In Canora
Resources Ltd., In Re 180 Taxman 220, the AAR was dealing with a case
where the transfer pricing provisions contained in sections 92 to 92F were also
becoming applicable to the transaction of the type which was covered by section
45(3). In this case, the AAR rejected the contention of the assessee that
section 45(3) being a special provision shall prevail over the general
provisions of sections 92 to 92F with regard to the transfer pricing.
Considering the purpose for which the transfer pricing provisions have been
made, the AAR held that section 45(3) would not apply to international
transactions and they should be dealt with in accordance with the transfer
pricing provisions. Insofar as such purposive interpretation is concerned with
respect to the issue under consideration, recently, the Chennai bench of the
Tribunal in the case of Shri Sarrangan Ashok vs. ITO (ITA No.
544/Chny/2019) has held that had it been the intention of the
legislature to make section 50C applicable even to the transaction of the
contribution of immovable property by a partner into the firm, the Parliament
could have repealed section 45(3) while introducing the provisions of section
50C. However, the fact that Parliament in its wisdom had retained section 45(3)
shows that Parliament intended to apply only the provisions of section 45(3) to
such transfer of capital assets by the partner to his firm.

The better view in our considered opinion, therefore,
is that the provisions of section 50C cannot be made applicable to a
transaction which falls within the scope of the provisions of section 45(3).

shailesh.kwebmaker

Domestic Tax Considerations Due To Covid-19

Background

The intensifying Covid-19
pandemic and the looming uncertainty on future business outlook have put the
emergency brakes on India Inc. Sudden lockdown, supply side disruption, adverse
foreign exchange rate, travel restriction as also uncertainty on vaccine to
cure the misery have added to the uncertainty, pushing Captains of India Inc.
into rescue mode. Clearly, while the immediate focus is to save the ship from
sinking, tax considerations also require due consideration in time to come.
This article focuses on some of the direct tax issues which are likely to be
faced by Indian taxpayers.

Deduction
of expenses incurred on Covid 19

As the pandemic increased its
spread into the country, India Inc. rose to the occasion and started supporting
various noble causes of the society in terms of supplying food, medical
supplies, setting up of quarantine centres, etc. Most of the corporates joined
hands in the national interest and contributed to PM CARES and CM Covid-19
Funds to support frontline workers and assist in the medical war. MCA, with a
noble intention, amended Schedule VII of the Companies Act, 2013 (‘Cos Act’) to
include Covid-19 expenditure as eligible CSR expenditure in compliance with CSR
law.

Explanation 2 to section 37(1) of
the Income-tax Act, 1961 (‘the Act’) provides that any expenditure incurred by
an assessee on the activities relating to corporate social responsibility referred
to in section 135 of the Companies Act, 2013 (18 of 2013) shall not be deemed
to be an expenditure incurred by the assessee for the purpose of the business
or profession.

The amendment to Schedule VII of
the Companies Act read with the Explanation 2 to section 37(1) of the Act
raises the following issues:

a) Whether the expenditure on Covid-19 is tax deductible for an
assessee not required to comply with CSR regulations of the Companies Act,
2013?

b) Can an assessee claim business expenditure for
Covid -19 related expenditure which he does not claim to be CSR for the purpose
of compliance with section 135 of Cos Act?

It is possible to take a view
that Explanation 2 to section 37(1) of the Act is applicable only to those
assessees who are covered by section 135 of the Companies Act. Thus, if an
assessee is not covered by the said regulation, the limitation of Explanation 2
to section 37 is not applicable. Courts have held that factors like meeting
social obligation, impact on goodwill on contribution to society, etc. meet the
test of commercial expediency and deduction has been granted¹. Thus,
onus will be on the assessee to prove nexus of the expenditure with the
business and the positive impact on business to perfect the claim of deduction.
Branding of company on distribution of food and essential requirements, images
of employees wearing company branded shirts and supporting larger cause, media
reports, posting on social websites will all support the claim for deduction.

The issue arises in the second
category i.e. an assessee who is otherwise covered by section 135 of Companies
Act who does not claim Covid-19 related expenditure for compliance with CSR
laws. The difficulty arises as Explanation 2 to section 37(1) disallows
expenditure ‘referred to in section 135’. Referred to would mean ‘mentioned’ in
section 135 of the Companies Act. Explanation 2 to section 37(1) fictionally
deems such expenditure as not being for business purpose. Whilst argument in
favour of deduction seems a better view of the matter, it is recommended that
assessee should take fact-specific legal advise before claiming deduction.

Impact on lease rental

Lockdown and
social distancing are likely to have significant impact on lease rentals. The
impact may be deep for let-out properties in shopping malls and hotels.
Further, the sudden lockdown may have resulted in economic disruption of
business of the lessee, impairing its ability to pay rent. Following situations
are likely to arise:

a) Lessee does not pay rent for lockdown period by invoking force
majeure, which is accepted by the lessor;

b) Lessee invokes force majeure which is not accepted by the
lessor;

c) Lessor and lessee defer rent for a mutually
agreed period;

d) Lessee is unable to pay rent and vacates the
premises;

e) Lessor is subsequently unable to find a
lessee for the property either on account of lockdown or lower rental yield;

In case of situation a), act of force
majeure goes to the root of the contract making the contract unworkable. On
account of the said event, a view could be taken that the property ceases to be
a let-out property. Accordingly, it may be possible for the lessor to seek
benefit of vacancy allowance u/s 23(1)(c). The said provision states that in
case actual rent received or receivable is less than deemed Annual Let out
Value (ALV) on account of vacancy then, actual rent received or receivable will
be deemed to be ALV. In this case, vacancy arises contractually. In other
words, even though goods or assets of lessee may continue to be lying in said
property but still it has to be treated as not let out, absolving the lessee from the liability to pay rent.
Vacancy in the context in which it is used in section 23(1)(c) will need to be
interpreted as the antithesis of let out.

Situation b) is tricky as there
is a rent dispute during the lockdown period. Section 23(1)(b) provides that
when actual rent received or receivable is higher than ALV, then said amount
will be treated as ALV. ‘Receivable’ postulates concept of accrual. As per one
option, lessor may treat same amount as unrealised rent and offer the same in
the year of receipt u/s 25A. However, if it is required to keep rent as
receivable in books of accounts to succeed under the Contract Act, then in such
an event, tax liability will arise.

Situation c) involves mere
deferment of payment of rent and accordingly lessor will be required to pay tax
on rent component as it fulfils the test of receivable u/s 23(1)(b).

Situation d) is a case comparable
to unrealised rent. Explanation to section 23 read with Rule 4 provides for
exclusion of such rent if the conditions prescribed in Rule 4 are complied
with.

Issue in case of situation e)
arises as section 23(3) permits only two houses to be treated as self-occupied.
Situation narrated in e) needs to be distinguished from a situation wherein
assessee in past years has offered income from more than two houses under the
head Income from house property. Conclusion does not change for such assessee.
Situation e) deals with a situation wherein assessee desires to actually let
out his house but could not find a tenant. In such situations, the Tribunal² has held that even if the house remains
vacant for the entire year despite the best attempts of the assessee, then
benefit of vacancy allowance u/s 23(1)(c) should be granted to the assessee and
accordingly ALV for such property would be Nil. Against this proposition, there
is also an adverse decision in the case of Susham Singla [2016] 76
taxmann.com 349 (Punjab & Haryana)³. Perhaps a
distinguishing feature could be that in cases where vacancy allowance was
granted by the Tribunal, the assessee was able to demonstrate efforts made to
let out property.

Impact on business income

Revenue
recognition

Revenue recognition for computing
income under the head ?profits and gains of business or profession’ is governed
by the principles of accrual enshrined in section 4 as also ICDS IV dealing
with revenue recognition. ICDS IV permits revenue recognition in respect of
sale of goods only if the following criteria are met:

Whether significant risks and rewards of ownership have been
transferred to the buyer and the seller retains no effective control

Evaluate reasonable certainty of its ultimate collection

These criteria are relevant for
revenue recognition for F.Y. 2019-20. On account of lockdown and logistics
issues, it is possible that goods dispatched could not reach the customer.
Contractually, even though the transaction may have been concluded, the seller
was obliged to deliver goods to the buyer. In such a case, because of lockdown,
goods may be in transit or in the seller’s warehouse. In such a situation,
significant risk and reward of ownership continues to be with the seller.
Accordingly, the seller may not be required to offer the said amount to tax.
Further, economic stress may change the credit profile of the customer, raising
a question on the realisability of sale proceeds of the goods sold even
pre-Covid-19 outbreak. In such a case, even though the test of accrual would be
met, since there is uncertainty in ultimate collection, the assessee may not
recognise such revenue. This criterion is also important as the customer may
invoke force majeure clause or material adverse clause and turn back
from its commitment.

Section 43CB of the Act read with
ICDS IV requires the service industry to apply Percentage of Completion Method
(POCM). If duration of service is less than 90 days, the assessee can apply
Project Completion Method (PCM) and offer revenue to tax on completion of the
project. Disruption caused due to pandemic and work from home is likely to
impact numerous service contracts. Assessee will have to determine stage of
completion of contract on 31^stMarch 2020 for each open contract at
year end to determine its chargeable income. It is equally possible that a
contract which was estimated to be completed in less than 90 days may take more
time and accordingly move from PCM to POCM basis of recognition. Thus, it is
possible that an income which was estimated to be offered to tax in F.Y.
2020-21 may partially be required to be taxed in F.Y. 2019-20, changing the
assumptions at the time of computing advance tax. An issue which judiciary is
likely to face is whether the 90 days period should be read as a rigid test or
exceptional events like Covid-19 can be excluded for computing the 90 days’
periods.

Provision
for onerous contract

Ind AS 37 requires recognition of
provision for onerous contract. An onerous contract is a contract in which the
unavoidable costs of meeting the obligations under the contract exceed the
economic benefits expected to be received under it. If an entity has a contract
that is onerous, the present obligation under the contract shall be recognised
and measured as a provision.

Section 36(1)(xviii) of the Act
provides that mark to market (M2M) loss or other expected loss shall be
computed in accordance with ICDS. Section 40A(13) of the Act provides that no
deduction or allowance shall be allowed in respect of any M2M loss or expected
loss except as allowable u/s 36(1)(xviii). ICDS 1 provides that expected loss
shall not be recognised unless the same is in accordance with other ICDS. ICDS
X provides that no provision shall be recognised for costs that need to be
incurred to operate in the future. On co-joint reading of aforesaid law, no
deduction shall be allowed for onerous contract under normal provisions.
However, for MAT purposes, such provision will be deductible as it cannot be said
that such provision is for unascertained liability. This treatment will require
an assessee to accurately track expenses incurred on such contract in future
years and claim it as deduction in year of incurrence.

Liquidated
damages

Disruption in the supply chain
may result in claims or counter claims as it is possible that the assessee
would not be in a position to meet its contractual obligations. The contract
may provide for payment of liquidated damages. Courts have held that such
payment is tax deductible⁴.

Remeasurement
of provision

Lockdown and social distancing
have resulted in India Inc. rethinking on extension of warranty and service
period in respect of goods sold prior to Covid-19. This is likely to result in
change in warranty provision. Provision for warranty is tax deductible if
otherwise the requirements of ICDS X are met. Practically for companies
following Ind AS, warranty provisions are discounted to fair value. However,
ICDS X expressly prohibits deduction based on discounting to net present value
basis. This mismatch will require an assessee to accurately reconcile claims
made in the past ignoring NPV basis, revise the provision and ignore NPV
discounting for claiming deduction. This is much easier said than done.

Further, companies following Ind
AS are required to make provision for debtors based on Expected Credit Loss
(ECL) method. This method requires consideration of not only the historic data
but also of the future credit risk profile of debtor. In turbulent times like
these, making an estimate of the future profile of a customer is likely to be
challenging since the business outlook is uncertain. Further, the impact of
lockdown on each customer, its ability to raise finances and stay afloat
involves significant assumptions and customer-specific data. Normative
mathematical models cannot be relied upon. It is possible that ECL provision
may increase for F.Y. 2019-20. Such provision may not be tax deductible under
normal computation provisions [Explanation 1 to section 36(1)(vii)]. As regards
MAT, the issue is debatable. Gujarat High Court’s Full Bench in case of CIT
vs. Vodafone Essar Gujarat Ltd⁵ has held that if the provision is accounted
as reduction from debtor / asset side and not reflected separately in
liabilities side then, in such case said provision is not hit by any limitation
of Explanation 1 to section 115JB and is tax deductible.

Inventory
valuation

ICDS 2 permits valuation of
inventory at cost or Net Realisable Value (NRV) whichever is lower. It is
possible that on account of prolonged shutdown, disruption in supply chain,
overhaul of non-essential commodities, some of the inventory which may be lying
in warehouse or stuck in transport may no longer be marketable e.g perishable
goods, inventory with short shelf life (food products) may be required to be
disposed of. In such case, it should be possible to recognise NRV at Nil. Care
should be taken to obtain corroborative
evidence in terms of internal technical reports, subsequent measures to
dispose of, etc. to substantiate Nil realisable value.

Fixed
Asset

The spread of Covid-19 has had a
differing impact on various nations. It is possible that some of the fixed assets
acquired could not be installed on account of cross border travel prohibitions
not only in India but across the globe. In such a case, such assets which were
earlier contemplated to start active use in F.Y. 2019-20 will miss the
deadline. In absence of satisfaction of the user test, no depreciation can be
claimed in F.Y. 2019-20. Further in terms of ICDS V – tangible fixed assets,
cost attributable to such fixed asset may also be required to be capitalised.
Further, if such asset is purchased out of borrowed funds, interest expenditure
will be required to be capitalised. Unlike Ind AS 23, ICDS IX does not suspend
capitalisation when active development is suspended. This mismatch will require
the assessee to accurately determine interest cost which is expensed for books
purpose and capitalise it as part of borrowing for tax purposes. It is equally
possible that unexpected delay may impact advance tax projections made for F.Y.
2019-20.

Shares and securities

The Act provides special
anti-abuse provisions in respect of dealing in shares and securities. Sections
50CB and 56(2)(x) regulate transactions
where actual consideration is less than fair market value. Rule 11UA provides a
computation yardstick to compute fair market value. The economic downturn may force
some promoters to sell their shares at less than Rule 11UA value to genuine
investors either to repay debts borrowed on pledge of shares or to raise
capital for future survival. Provisions of sections 50CB and 56(2)(x), if
invoked, may result in additional tax burden. Fortunately, Mumbai Tribunal in ACIT
vs. Subhodh Menon relying on the
Supreme Court decision in the case of K P Varghese read down the provision to apply only in
abusive situations.

Further, the pandemic may require
promoters to pump in capital into the company. Section 56(2)(viib) regulates
share infusion by a resident shareholder. The provision proposes to tax
infusion of share capital above the fair market value as computed by a merchant
banker. DCF is a commonly accepted methodology to value business. DCF requires
reasonable assumption of future cash flows, risk premium, perpetuity factor
etc. Considering that the present situation is exceptional, it may involve
significant assumptions by the valuer as also the company. Further, there will
be an element of uncertainty, especially when the business outlook is not
clear. It is possible that the actual business achievements may be at material
variance with genuine assumptions.

In contrast, the existing
situation may have an impact on capital infused in the past, say 2-3 years,
which were justified considering the valuation report availed from the Merchant
Banker at the said time. Tax authorities may now rely upon actual figures and question
the valuation variables used by the Merchant Banker. Tax authorities may
attempt to recompute fair value considering actual figures. In such a
situation, the onus will be on the assessee to demonstrate impact of Covid-19
on valuation assumptions made in the past. Evidence such as loss of major
customer, shutdown in major geographies, increased cost of borrowing, capacity
underutilisation will support the case of the assessee to justify valuation
done before Covid-19 breakout.

Conclusion

One hopes normalcy returns soon.
Aforesaid are some of the issues which, in view of the authors, are only the
tip of the iceberg. If the pandemic deepens its curve, it is likely to result
in significant business disruption. Every impact on business has definite tax
consequences and tax professionals have a special role to play.

________________________________________________

1 CIT vs. Madras Refineries Ltd., (2004) 266 ITR 170 (Mad);
Orissa Forest Development Corporation Ltd. vs. JCIT, (2002) 80 ITD 300
(Cuttack); Surat Electricity Co. Ltd. vs. ACIT, (2010) 5 ITR(Trib) 280 (Ahd)

2 Sachin R. Tendulkar vs.
DCIT [2018] 96 taxmann.com 253 (Mumbai – Trib.); Empire Capital (P.) Ltd vs.
DCIT [2018] 96 taxmann.com 253 (Mumbai – Trib.); Ms. Priyananki Singh Sood vs. ACIT [2019] 101 taxmann.com 45 (Delhi –
Trib.)

3 SLP dismissed by Supreme Court [2017] 81 taxmann.com 167 (SC)

4 PCIT vs. Green
Delhi BQS Ltd [2019] 417 ITR 162 (Delhi); CIT vs. Rambal
(P.) Ltd [2018] 96 taxmann.com 170 (Madras); PCIT vs. Mazda Ltd
[2017] 250 Taxman 510 (Gujarat) ; Haji Aziz and Abdul Shakoor Bros [1961] 41
ITR 350 (SC)

5 [2017] 397 ITR 55 (Gujarat)

6 [2019] 103 taxmann.com 15 (Mumbai)

7 [1981] 131 ITR 597 (SC)

shailesh.kwebmaker

Always Clean the Light

When we
are no longer able to change a situation, we are challenged to change
ourselves. – Viktor E. Frankl

As we have
progressed economically, we have started measuring our joy with what we
possess. External objects and experiences are ‘the cause’ of our happiness. We
also justify this approach as ‘normal’ and ‘obvious’. Therefore, when the
situation doesn’t measure up to our past expectation and experience, we feel on
edge. We feel our goals and dreams have blurred and even shattered by
uncertainty. The challenge of the downturn is both real and psychological.
The real challenges include matters such as cash crunch, difficulties in
getting things done, people backing out on commitments, disruption, and the
like. Such problems have actual consequences. These challenges require actual
resolution through skills, persuasion and patience.

On the other side, there are psychological
challenges which are the ‘real’ challenges (pun intended). They accentuate real
challenges with a sticky layer of fear and anger that smear our thinking. The
psychological challenges are constructed by thoughts, but since they are inside
us and are impulsive, they have more power over us.

Take the example of uncertainty relating to the
reduction of fees, loss of clients, clients folding up, looking for
alternatives, or loss of profit. These by themselves are actual real challenges
as they could result in cash flow issues. However, the ‘obvious’ anxiety about
it is like putting slimy dirt on a wound which makes it harder to cure.

The following pages carry nine wonderful articles
on the impact of Covid-19. So this longer editorial is dedicated to some
principles and practices to face challenging times with understanding and
resolve and make the most out of it:

1. Freedom
of Response

Viktor Frankl
spent three years in four Nazi concentration camps including Auschwitz. His
father, mother and brother were killed during that time. He saw people taken to
gas chambers knowing he could be next.

Viktor
survived to write one of the most influential books of our times – Man’s
Search for Meaning – where he wrote some of the most exceptional thoughts ever
expressed.

We who lived in concentration camps can remember
the men who walked through the huts comforting others, giving away their last
piece of bread. They may have been few in number, but they offer sufficient
proof that everything can be taken from a man but one thing: the last of the
human freedoms – to choose
one’s attitude in any given set of circumstances, to choose one’s own way.

If we think
about it, we can’t change circumstances every time; however, we can choose our
response to them. The quality of our response can change our experience
completely. Viktor calls this the last of human freedoms. Most of us
would have seen this in the movie Life is Beautiful. Lives of the great
ones such as Mandela demonstrated it when he was in prison in a seven square
foot cell for 18 years with the floor as his bed and a bucket for a toilet.

Viktor wrote:
Life is never made unbearable by circumstances, but only by lack of meaning
and purpose.

2.
Gratitude

If you are
reading this, you are undoubtedly better off than millions of others who are in
a much worse situation than you are. Vala Afshar of Salesforce wrote: If you
have a family that loves you, a few good friends, good health, food on your
table and roof over your head, you are richer than you think.

If one were
to sit down and think of the blessings one has – caring people, events,
moments, things we have in varying measures deserve an appropriate response of
gratitude. What we take for granted or even disregard, is nothing short of a
blessing if we know how to value it. The feeling of gratitude is also
associated with a beneficial chemical effect – it activates a neurotransmitter
and hormone called dopamine which has a massive influence on both body and
brain.

3.
Acceptance

What is
can only be accepted. Just as one cannot deny the existence of a tree outside
the window, we cannot deny what is. Once we look at things this way and accept
them as they are – not how we feel about them or how we would want them to be –
a miracle unfolds. One comes out of psychological clutches. And acceptance does
not mean turning off effort. It means being in the right spot before the effort
to change the situation.

4. Cycle
of Impermanence

What we see
is there, but not forever. We have heard that change is permanent. The likeable
and resentful is temporary. Almost everything you have experienced or possessed
– age, people, time, health, money, people, objects – are subject to
impermanence.

Joy or sorrow
fades with time – be it a new house, a new car or new phone or a nasty notice
from the tax office. Transitory nature of things has a positive side, ?this too
shall pass keeps us going’ wrote a Chartered Accountant recently. All
unpleasant situations are more likely to pass, as movement is the nature of the
universe.

5.
Learning

My teacher
had once told me: If you keep learning, you will always remain young. Being
young means growing, fresh, curious and full of energy. Learning means staying
away from stagnation, in touch with the context and ever ready to face
challenges.

No one will
deny that this has been the best time to learn. Just look at the webinars
taking place on all topics all over the world. Look at the quiet time we have
at our disposal due to slow client response. Learning develops a learning
mindset, not just skills.

This is the most durable shield we have. The
lowest 20-30% of skills that are available for a charge today will vanish due
to low demand or technology takeover. Our existing saleable skill sets can
vanish too. Imagine Google with your permission throwing up a simple bank
summary or tax return based on reading what is there in your inbox. So we need
to learn the skills of the future to stay relevant.

We better up-skill
ourselves even if it is outside our existing area of interest or expertise.
Let’s broaden our spectrum and come out of that ‘specialised’ area and learn
about digital technologies, law, management, and new areas of practice. A great
idea is where we can blend two or three different areas.

6. Take
care of yourself

a. Meditate:
Just sit comfortably for 20-60 minutes with back upright, close your eyes and
do nothing. If thoughts come, watch them. If you need to hold on to something,
focus on the breath.

b. Exercise:
Take care of the body with three different types of exercises (health
permitting) – aerobic training (increase heart rate depending on age and body
parameters), strength training (work muscles, especially doable at home) and
flexibility training (yoga asanas).

c. Read:
Reading opens the mind to the perspectives and wisdom of others. Today we don’t
even have to read. The technology reads most written material, or we can see a
video of that subject. All of this for free or little cost. Find the most
encouraging authors and catch up with all that you wanted to read or listen to.

d. Thoughts
and Words: Watch the narrative inside the mind. Choose the track that is
uplifting and gives strength. Best way to find strength is to give comfort to others.
Use those that you would like to hear – words of strength, appreciation, and
care.

7. Act

It’s not
what you know, but what you do with what you know that counts. There is so
much one can do today without going anywhere, without spending money and with
little effort.

I have been
reading Naval Ravikant who writes: Doing something is better than doing
nothing. Doing something focused is even better. Doing something focused and
unique is even better. (Paraphrased)

We can do a
lot – master a subject, learn a health hack, update processes and policies,
take training, learn better communication, take on to writing and start a blog
or a YouTube channel, take online long duration courses, build something with
technology, overcome a bad habit, develop healthy new habits, check-in with
people and see how they are doing. And of course, the routine work.

8. Always
clean the light first

I heard an
African American tell her story. Since the age of twelve, she worked after schools
hours, cleaning homes and banks. On her way back from cleaning jobs, she would
talk to older women who did similar jobs at the bus stop. She asked them about
how to clean, what to clean, what were the best ways to clean.

One woman never took part in the conversation. But one day
she spoke: ‘Girl, always clean the light first. Always take care of the lights.
Every house when you go in has a big chandelier that nobody has cleaned. Get a
ladder, climb up to the light, take your solution and clean each crystal, each
bulb. Make sure you clean the light because nobody cleans the light, and if
you take care of the light, everything shines‘.

The young girl did exactly that on her next cleaning visit.
That day the woman of the house came out and asked: ‘What did you do?
Everything looks amazing in here!’ The husband came in the evening and said
whoever this girl is, get her back here and make sure you pay her extra.

That little girl, who is now a doctor, was telling her story
on a video, concluded: ‘There is a light inside each one of us that must be
nurtured. That must be cared for, that must shine brightly. That light hasn’t
been addressed, it hasn’t been talked to. We are given this time to take care
of this light.’

She is spot on! This inner light changes everything –
not on the outside, but the way we see it, and the way we feel. The reality is
‘shaped’ by this light within each one of us.

shailesh.kwebmaker

BEYOND NATIONALISM

Thousands
of years ago, many different tribes lived along the Yellow River (the river
Huang He), which was their source of survival and sustenance. But they also
suffered from occasional floods and periods of drought. Individually they were
powerless against the fury of nature, but collectively they could perhaps tame
the mighty river. So they came together to build dams and canals to regulate
the river and mitigate the ravages of floods and droughts. Then, in a long and
complicated process over many decades, the tribes coalesced together to form
the Chinese nation which controlled the entire Yellow River and raised the
level of prosperity and safety for everybody.

From
clans to tribes to nation states, homo sapiens has evolved. Perhaps it
is time for him to take the next collective leap and come together as one
humanity.

The
problems faced by the world today require global, collaborative solutions. Yet,
paradoxically, we are leaning towards extreme nationalism. US President Donald
Trump announced that he is not a ‘globalist’ but a ‘nationalist’. He said,
‘…globalist is a person that wants the globe to do well, frankly, not caring
about our country so much, and you know what? We can’t have that’.

Rabindranath
Tagore and Mahatma Gandhi had some deeply philosophical discussions on the
perils of nationalism. World War I showed the havoc that extreme nationalism
can create and Tagore urged nationalists to rise from ‘Self-interest’ and
instead work for ‘Welfare of the world’. From now onward, he said, ‘Any nation
which takes an isolated view of its own country will run counter to the spirit
of the New Age and know no peace’.

In stark
contrast to the sentiments expressed by Trump, H.G. Wells said, ‘Our true
nationality is (and should be) mankind’.

The need
of the hour is to encourage people to be loyal to humankind and to planet Earth
in addition to their own countries. We can have deep affinity to our family,
our village, our profession, our country and also to the whole human species.
Occasionally, there may be conflicts in maintaining this balance; but there is
no contradiction. In fact, provoking the sentiment of ‘othering’ or ‘we’
against ‘them’ can be dangerously destabilising.

Sometimes
we put work before family, sometimes family before work. Similarly, sometimes
we need to put the national interest first, but there are occasions when we
need to privilege the global interests of humankind. Loyalty to one’s country
and to the world are not mutually exclusive sentiments.

Like the
tribes along the Yellow River, humanity is now living alongside the cyber ocean
which no single nation can regulate by itself. Climate change, technological
disruption, bioengineering and the most recent Covid-19 pandemic are all global
problems that make a mockery of all national borders and cry out for global
co-operation.

Take just
one example of the impact of genetic engineering on humanity. Assume that the
US chooses to outlaw all genetic experiments in humans on ethical grounds, but
if North Korea continues to pursue that agenda, the US will very quickly have
to re-evaluate its priorities. If even one country follows this high-risk
experiment, the other countries will be under tremendous pressure to follow suit
as no country can afford to be left behind in this dangerous race.

We take tremendous pride in our
countries, forgetting that large nations appeared in the history of mankind
only in the last few thousand years – just yesterday morning in the time
scale of evolution. As Tagore put it, ‘There is only one history – the history
of man. All national histories are merely chapters in the larger one’. Indeed,
nation states developed to deal with large-scale problems that small tribes
could not solve by themselves.

Now, in
the 21^st century, we face problems that even large nations cannot
solve by themselves. It may have been the Yellow River then and the cyber ocean
now that require taming through global co-operation. So let’s heed the words of
Tagore, ‘Nationalism cannot be our final spiritual shelter; my refuge is
humanity’.

A true
patriot is equally a global citizen.

Note: A lot of thoughts,
including the analogy of the Yellow River, have been taken from the books of
Yuval Noah Harari and a recent interview with him

shailesh.kwebmaker

Section 64 – Entire loss arising to wife of assessee in the business of Futures and Options (F&O) which business was started by her during the previous year with contribution from assessee in shape of gifts, was liable to be clubbed in hands of assessee in terms of Explanation 3 read in conjunction with section 64(1)(iv) – Assessee was entitled to club full loss from business of F&O in his personal income

8. [2020] 113 taxmann.com 378 (Pune)(Trib.)

Uday Gopal Bhaskarwar vs. ACIT

ITA No. 502/Pune/2019

A.Y.: 2014-15

Date of order: 20^th January, 2020

Section 64 – Entire loss arising to wife of assessee in the
business of Futures and Options (F&O) which business was started by her
during the previous year with contribution from assessee in shape of gifts, was
liable to be clubbed in hands of assessee in terms of Explanation 3 read in
conjunction with section 64(1)(iv) – Assessee was entitled to club full loss
from business of F&O in his personal income

FACTS

The assessee, in the return of
income filed by him, clubbed the loss from the business of his spouse amounting
to Rs. 31,56,429 in view of the provisions of section 64. In the course of
assessment proceedings, on being called upon to justify such a claim, the
assessee submitted that during the year under consideration he gifted a sum of
Rs. 94.50 lakhs to Mrs. Priti Bhaskarwar, his wife, who started a business of
Futures and Options (F&O) on 18^th September, 2013. The assessee
claimed that she incurred a loss of Rs. 31,56,429 in the business which was
clubbed in his hands.

The A.O. accepted the primary claim
of the assessee of his wife having incurred a loss of Rs. 31.56 lakhs in the
business of F&O, which was set up on 18th September, 2013, and further that
the loss from such business was eligible for set-off against the income of the
assessee in terms of section 64(1)(iv) read with Explanation 3 thereto. He,
however, did not accept the assessee’s contention that the entire loss of Rs.
31.56 lakhs be set off against his (the assessee’s) income. Considering the
mandate of Explanation 3 to section 64(1), the A.O. held that only that part of
the business loss incurred by the assessee’s wife could be set off against the
assessee’s income which bears the proportion of amount of investment out of the
gift on the first day of the previous year to the total investment in the
business as on the first day of the previous year.

He, therefore, computed the amount
of loss eligible for set-off against the assessee’s income at Rs. 9,72,563 by
multiplying Rs. 31,56,429 (loss incurred by wife in the business) with Rs.
25.00 lakhs (gifts made by the assessee to his wife up to 18^th
September, 2013) as divided by Rs. 81,13,648 (opening capital as on 1^stApril,
2013 as increased by the gift of Rs. 25.00 lakhs given by the assessee up to 18^th
September, 2013).

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

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

HELD

The Tribunal noted that the core of
controversy is the computation of eligible amount of loss incurred by the
assessee’s wife which is eligible for set-off against the assessee’s income.

On going through the mandate of
section 64(1)(vi) of the Act in juxtaposition with Explanation 3 to the
sub-section, it transpires that there can be two possible situations of
utilisation of the assets transferred by husband to wife triggering the
clubbing provision. The first situation can be where the amount of assets
received by the wife is exclusively invested in an asset and further there is
no investment by the wife in such a new asset. The full income resulting from
such an exclusive investment is liable to be clubbed with the total income of
the husband. An example of such a situation can be a wife making a fixed
deposit with a bank, etc. out of the gift of money received from her husband.
The full amount of interest income arising on such FDR is liable to be clubbed
with the income of the husband.

The second situation can be where
the amount of assets received by the wife as a gift from her husband is not the
exclusive investment in the business carried on by her. Rather, she has also
made separate investment in the said business. In such a situation of a common
pool of unidentifiable investments in the business, there arises difficulty in
precisely attributing the income of such a business to the investments made out
of the gift received from the husband attracting clubbing and to investments
made out of funds other than the gift received from the husband not attracting
the clubbing provision. It is in such a scenario that the prescription of
Explanation 3 comes into play by providing that the amount of income from the
combined business as relatable to the assets transferred by the husband should
be computed by taking the income from such business earned during the year as
multiplied with the amount of assets received by the wife from her husband as
invested in the business and divided by her total investment in the business,
including the amount of assets received from the husband.

In a nutshell, there are three
components in this formula. The first component is the income of the business,
which is to be considered for the year. The second is the amount of assets
received by the wife from her husband as invested in the business, and the
third is the total investment in the business including the amount of assets
received from the husband. The latter two figures are required to be taken as
on the first day of the previous year. Section 3 defines ‘Previous year’ to
mean ‘the financial year immediately preceding the assessment year.’ The proviso
to section 3 states that, in the case of a business newly set up in a financial
year, the previous year shall be the period beginning with the date of the
setting up of the business and ending with the said financial year. Since the
wife of the assessee started the new business of F&O on 18^th
September, 2013, the extant case is, ergo, covered by the proviso
to section 3.

Having examined the factual position
in detail, the Tribunal held that the entire amount of loss resulting from the
business of F&O started by Mrs. Priti Bhaskarwar with the gifts received
from the assessee is liable to be clubbed in the hands of the assessee.

This ground of appeal filed by the assessee was
decided in favour of the assessee.

shailesh.kwebmaker

COVID-19 IMPACT ON INDIAN ECONOMY AND THE FINANCIAL MARKETS

INTRODUCTION:
THE ECONOMIC IMPACT

It was mid-January when we
started to hear stories about a virus in China which had locked down the entire
Wuhan city, the epicentre of the virus. Its effect had also spread to other
Asian countries and by 30^th January, 2020¹ India reported
its first Covid-19 case. After two and a half months of the first reported
case, India is now in the second phase of lockdown. India took early calls to
go for a complete lockdown and implemented strict guidelines due to the
experience of other countries, the rate of transmission of the virus from one
person to another and also the strain which this virus could cause on the
healthcare system of the country.

Observers state that the lockdown
slowed the growth rate of the virus by 6^th April to a rate of
doubling every six days, from a rate of doubling every three days earlier. The
metric called R-Naught or R-Zero, estimates that the infection rates in India
have fallen to 1.55 on 11^th April from 1.83 on 6^th April,
further indicating that lockdowns could be helping².

This article seeks to explore the
consequences and impact of the current health crisis on the overall Indian
economy and the Indian financial markets.

Looking back to the situation
till a couple of years ago, India was going through its own economic slowdown:

(i) The primary reasons were the ‘shocks’ of demonetisation in 2016 and
the introduction of the Goods and Services Tax (GST) in 2017.

(ii) India recorded the lowest quarterly GDP growth rate in the last
decade of 4.7% in Q3FY20³ and the growth outlook (pre-Covid-19) for
FY21 was upwards of 5%.

(iii) The economy had started to show some signs of recovery when the
index of industrial production (IIP) grew by 2% on a y-o-y basis in January,
2020. The manufacturing index also improved by 1.5%.

(iv) To boost the economy, the Finance Minister reduced the base
corporate tax rate to 22% (effectively ~ 25%) for companies which do not seek
to take certain exemption benefits. This led to earnings recovery for many
companies and a boost to the stock markets as well.

What impact will the current
crisis have on the GDP growth rate?³

(a) It has been estimated by various rating agencies that the advanced
economies will contract by 0.5% to 3% in 2020 as against a global growth of
1.7% in 2019.

(b) China is estimated to grow ~ 3% in 2020, while India’s growth
forecast for FY21 has been revised downwards and is estimated to be between
1.8% and 2.5% from more than 5% estimated before the lockdown was announced.

(c) Having said that, even a 2% growth rate is still good news for
India. Due to the low base rate, the expected GDP growth in FY22 is expected to
be upwards of 7%.

With what is now happening across
the world (post the Covid-19 outbreak), including India, a slowdown in each and
every economy is imminent. The extent of impact in different geographies will
vary based on the severity of the virus, the stimulus packages by the
governments to revive the economy and how fast a nation is able to commence its
economic activities.

MEASURES
TAKEN SO FAR BY THE GOVERNMENT OF INDIA

Though India has been very slow
in announcing economic packages for industry, there have been three major
announcements – two by the RBI (monetary policy) and one by the Finance
Ministry (fiscal policy).

(1) On 26^th March, Finance Minister Nirmala Sitharaman
announced a Rs. 1.7 lakh-crore fiscal package for the poor, including cash
transfers, free food grains and free cooking gas.

(2) On 27^th March, the RBI announced a 75-basis points cut in
the policy rate and a 100-bps cut in the cash reserve ratio for banks to inject
liquidity in the system and provide moratoriums for loan repayments for three
months (March to May, 2020).

(3) On 17^th April, RBI freed up more capital for banks to
lend, announced a fresh Rs. 50,000-crore targeted long-term repo operation to
address the liquidity stress of NBFCs and microfinance institutions and hinted
at the possibility of further rate cuts going forward. RBI also announced a Rs.
50,000-crore special finance facility to NABARD, SIDBI and NHB for onward
lending to NBFCs in the space. The RBI Governor also announced that India would
do ‘whatever it takes’.

To sum up, the government has
first prioritised the containment of the virus and providing relief to the
poorest sections of society. In the days to come, it will dole out sector- and
industry-specific packages as well.

IMPACT ON VARIOUS INDUSTRIES

It
goes without saying that the lockdowns will certainly have an impact on each
and every industry in varying degrees.

S.No.	Industry	Impact	Likely nature of effect
1	Auto and auto components	High	Weak PV and CV demand due to liquidity shortage with NBFCs, economic uncertainties, weaker consumer purchasing power, likely NPAs in the sector Stuck with inventories of unsold BS-IV vehicles with the original deadline of selling them before 31^st March, 2020
2	Aviation and tourism	High	Uncertainty over travel restrictions which can extend or remain restricted for a longer period of time, borders might remain closed Loss of jobs and pay cuts 102 of 137 airports managed by AAI have recorded losses to the tune of Rs. 1.6 billion Estimated to render more than 50% of tourism industry workforce jobless in hospitality industry⁴
3	Agriculture	Low	Since agriculture is the backbone of the country and part of government-announced essential category, the impact is likely to be low on both primary agricultural production and usage of agri-inputs like seeds, pesticides and fertilisers Agro-chemicals: Companies that depend on exports for finished goods sale and imports of raw ingredients will be impacted Food exports: Major destinations like the U.S., Europe expected to grapple with Covid-19 for the next few months and Indian export-based companies will be impacted due to low consumer demand and port hurdles The economic packages likely to be announced will provide relief to farmers and the allied sectors and, hence, the overall impact on agriculture will be low
4	Chemicals and petrochemicals	Medium	Weakening in crude oil prices and cascading impact on petrochemicals, coupled with uncertain domestic and global demand; petrochemicals prices are likely to remain low Uncertain demand outlook and weak prices are expected to lead to weak market sentiments and delayed investments in the sector
5	Consumer, retail & internet business	Low to medium	Essential commodities: Growth seen for essential commodities players, with possible margin improvements, unless there is price control by government There will be increased pressure on supply chain for deliveries of products amidst the lockdown Non-essential commodities: Markets likely to crash due to low discretionary demand. Overdependence on imports could pose a threat Industries facing severe challenges: Apparel, durables, restaurants and other on-premise services like gyms / salons, etc.
6	Banking and NBFC’s	Medium to high	Banking sector to be under pressure due to reduced off-take of loans in expected recessionary market conditions and cautious lending Possibility of increased delinquencies post the moratorium period, and may also result in depressed NIMs in a low interest rate regime Drop in transaction fee-based income due to lower cross-border trade Affordable housing, two-wheeler financing, micro-finance and gold loans exposures to be adversely impacted
7	Insurance	Low	Fresh demand for health insurance and life insurance witnessed a surge in the current scenario Renewals may get delayed due to shortage of money in the hands of policyholders Usage of AI / ML / technology can assist in reduction of operating costs, increasing customer satisfaction and policy management
8	MSMEs	High	Many MSMEs to face closure of business if the lockdown continues for more than eight weeks due to heavy leverage costs and no production output for more than eight weeks More than 114 million people are likely to get affected, with a dent in their contribution to GDP (~ 30-35% of GDP)
9	Transport and logistics	Medium to high	Crude price reduction is likely to positively impact the transportation costs in the short term Freight traffic volume is expected to slow down Post-monsoon, the demand is anticipated to spike on account of accrued consumer savings as well as onset of festive season Lower utilisation of ports infra, road and rail infra, storage infra due to reduced cargo traffic in short to medium term
10	Healthcare and pharmaceuticals	Low to medium	Generic drugs are most impacted – reliance is high on imports (~ 70%) from China Non-availability of labour, transport of ingredients and supply side issues could impact production volume High exports demand for certain products over the short term – as developed countries(U.S., EU, etc.) look to stockpile medicines Probable price controls of essential drugs Online pharmacies – medicine delivery has been affected due to non-availability of delivery staff
11	Construction and real estate	High	The housing sector is expected to see muted demand with significant reduction in new launches The existing demand for commercial real estate may either get curtailed or postponed till H2 of the current year One of the largest employment generators in the country, it will have a multiplier effect on around 250 allied industries There is a likelihood of the government providing relief to the sector in terms of relaxation for project delays in residential housing sector, easing financial stress by extending loan repayment, etc.
12	Overall imports and exports	High	India’s merchandise exports slumped by a record 34.6% in March, 2020 while imports declined 28.7% as countries sealed their borders to combat the Covid-19 outbreak⁵ Business Process Outsourcing, one of the India’s largest exports, will be severely affected as lockdown measures, both in origin and destination countries, have forced offices to close. It will be further accelerated with the cost-cutting measures by the destination countries However, it is likely that India’s balance of payments position may improve. Weak domestic demand, low oil prices and Covid-19-related disruptions are expected to narrow the current account deficit to 0.2% in FY21 and to keep it low in the following years

S.No.

Industry

Impact

Likely nature of effect

Auto and auto components

High

Weak PV and CV demand due to
liquidity shortage with NBFCs, economic uncertainties, weaker consumer
purchasing power, likely NPAs in the sector

Stuck with inventories of
unsold BS-IV vehicles with the original deadline of selling them before 31^st March, 2020

Aviation and tourism

High

Uncertainty over travel
restrictions which can extend or remain restricted for a longer period of
time, borders might remain closed

Loss of jobs and pay cuts

102 of 137 airports managed
by AAI have recorded losses to the tune of Rs. 1.6 billion

Estimated to render more than 50% of tourism industry workforce
jobless in hospitality industry⁴

Agriculture

Low

Since agriculture is the
backbone of the country and part of government-announced essential category,
the impact is likely to be low on both primary agricultural production and
usage of agri-inputs like seeds, pesticides and fertilisers

Agro-chemicals: Companies
that depend on exports for finished goods sale and imports of raw ingredients
will be impacted

Food exports: Major
destinations like the U.S., Europe expected to grapple with Covid-19 for the next few months and Indian export-based companies will be impacted
due to low consumer demand and port hurdles

The economic packages likely
to be announced will provide relief to farmers and the allied sectors and,
hence, the overall impact on agriculture will be low

Chemicals and petrochemicals

Medium

Weakening in crude oil
prices and cascading impact on petrochemicals, coupled with uncertain
domestic and global demand; petrochemicals prices are likely to remain low

Uncertain demand outlook and weak prices are
expected to lead to weak market sentiments and delayed investments in the sector

Consumer, retail & internet business

Low to medium

Essential commodities:

Growth seen for essential
commodities players, with possible margin improvements, unless there is price
control by government

There will be increased
pressure on supply chain for deliveries of products amidst the lockdown

Non-essential commodities:

Markets likely to crash due to low discretionary
demand. Overdependence on imports could pose a threat

Industries facing severe challenges: Apparel, durables, restaurants and other on-premise services like gyms / salons, etc.

Banking and NBFC’s

Medium to high

Banking sector to be under
pressure due to reduced off-take of loans in expected recessionary market
conditions and cautious lending

Possibility of increased delinquencies post the
moratorium period, and may also result in depressed NIMs in a low interest
rate regime

Drop in transaction fee-based income due to lower cross-border
trade

Affordable housing, two-wheeler financing,
micro-finance and gold loans exposures to be adversely impacted

Insurance

Low

Fresh demand for health insurance and life
insurance witnessed a surge in the current scenario

Renewals may get delayed due
to shortage of money in the hands of policyholders

Usage of AI / ML / technology can assist in
reduction of operating costs, increasing customer satisfaction and policy
management

MSMEs

High

Many MSMEs to face closure of business if the
lockdown continues for more than eight weeks due to heavy leverage costs and
no production output for more than eight weeks

More than 114 million people
are likely to get affected, with a dent in their contribution to GDP (~ 30-35% of GDP)

Transport and logistics

Medium to high

Crude price reduction is
likely to positively impact the transportation costs in the short term

Freight traffic volume is expected to slow down

Post-monsoon, the demand is
anticipated to spike on account of accrued consumer savings as well as onset of festive season

Lower utilisation of ports
infra, road and rail infra, storage infra due to reduced cargo traffic in short to medium term

Healthcare and pharmaceuticals

Low to medium

Generic drugs are most impacted – reliance is high on imports (~
70%) from China

Non-availability of labour,
transport of ingredients and supply side issues could impact production volume

High exports demand for
certain products over the short term – as developed countries(U.S., EU, etc.) look to stockpile medicines

Probable price controls of essential drugs

Online pharmacies – medicine
delivery has been affected due to non-availability of delivery staff

Construction and real estate

High

The housing sector is
expected to see muted demand with significant reduction in new launches

The existing demand for
commercial real estate may either get curtailed or postponed till H2 of the current year

One of the largest employment generators in the
country, it will have a multiplier effect on around 250 allied industries

There is a likelihood of the
government providing relief to the sector in terms of relaxation for project
delays in residential housing sector, easing financial stress by extending
loan repayment, etc.

Overall imports and exports

High

India’s merchandise exports
slumped by a record 34.6% in March, 2020 while imports declined 28.7% as
countries sealed their borders to combat the Covid-19 outbreak⁵

Business Process
Outsourcing, one of the India’s largest exports, will be severely affected as
lockdown measures, both in origin and destination countries, have forced
offices to close. It will be further accelerated with the cost-cutting
measures by the destination countries

However, it is likely that India’s balance of
payments position may improve. Weak domestic demand, low oil prices and
Covid-19-related disruptions are expected to narrow the current account deficit
to 0.2% in FY21 and to keep it low in the following years

Source: KPMG report, news articles

Some general and overarching
impacts on the overall economy could be:

(i) Unemployment – The unemployment in
India has shot up from 7% to 23% in the last two weeks of March, 2020⁶

(ii) Poverty – As per the estimates of the Indian Labour
Organisation, more than 400 million people in India are at the risk of sinking
back below the poverty line.

While the current lockdown will
be ending on 3^rd May and some relaxations have been offered post 20^th
April, if the number of infections surges, there could be further lockdowns.
This could further affect the businesses and the economy and we should be
prepared for the same.

THE IMPACT ON THE FINANCIAL MARKET

Let us now look at how the Indian
financial markets have been impacted in the past during various crises – from
the Harshad Mehta and Ketan Parekh scams to the Global Financial Crisis (GFC)
and the recent China-US trade wars. Table 2 (next page) denotes the time
required for the market (Nifty) to bottom out from its peak and then the time
taken to reach back to its peak:

Peak	Trough (Bottom)	Peak to Trough	Recovery Month and Value	Months to Recovery
Mar-92	1262	Apr-93	622	13	-50.7	Feb-94	1,349	23M
Feb-94	1349	Nov-96	830	33	-38.5	Aug-99	1,412	66M
July-97	1222	Nov-98	818	16	-33.1	July-99	1,310	24M
Feb-00	1655	Sept-01	914	19	-44.8	Dec-03	1,880	46M
Dec-03	1880	May-04	1,484	5	-21.1	Nov-04	1,959	11M
Dec-07	6139	Nov-08	2,755	11	-55.1	Dec-10	6,135	36M
Dec-10	6135	Dec-11	4,624	12	-24.6	Oct-13	6,299	34M
Feb-15	8902	Feb-16	6,987	12	-21.5	Mar-17	9,174	25M
Aug-18	11681	Aug-19	10,793	6	-7.6	Apr-19	11,748	8M
Jan-20	12362	23-Mar-20	7,610	2	-38.4	??	??	??

Peak

Trough (Bottom)

Peak to Trough

Recovery Month and Value

Months to

Recovery

Month

Value

Month

Value

Months

Extent (%)

Month

Value

Mar-92

1262

Apr-93

622

-50.7

Feb-94

1,349

23M

Feb-94

1349

Nov-96

830

-38.5

Aug-99

1,412

66M

July-97

1222

Nov-98

818

-33.1

July-99

1,310

24M

Feb-00

1655

Sept-01

914

-44.8

Dec-03

1,880

46M

Dec-03

1880

May-04

1,484

-21.1

Nov-04

1,959

11M

Dec-07

6139

Nov-08

2,755

-55.1

Dec-10

6,135

36M

Dec-10

6135

Dec-11

4,624

-24.6

Oct-13

6,299

34M

Feb-15

8902

Feb-16

6,987

-21.5

Mar-17

9,174

25M

Aug-18

11681

Aug-19

10,793

-7.6

Apr-19

11,748

Jan-20

12362

23-Mar-20

7,610

-38.4

Source: Nifty historical data

The Indian equities reached the
trough (bottom) on 23^rdMarch, 2020. The current down-turn is still underway
and has shown the trough as on 23^rd March, 2020.

What has happened to the Indian
financial markets since the start of the crisis?⁷

The valuations have corrected significantly
on a trailing PE basis – from a high of 29.9 a few months back to ~ 16-17 now.
During the GFC, the Nifty PE had touched a low of ~ 11-12 trailing PE.

The long-term EPS growth has been 13%
year-on-year and in the quarter ended December, 2019 the EPS growth was ~ 15%.
This was mainly due to the tax cuts which led to recovery in Q3 FY20.

The long-term average of Nifty Earnings has
been ~ 12.5% while in the last five years the average has fallen to ~ 3-4%.
There was a marginal recovery in the last financial year but now the recovery
has been deferred to FY22.

The benchmark indices – Nifty50 and the
Sensex – have fallen ~ 25% year-to-date (YTD), 2020.

Within the large-cap, mid-cap and small-cap
space, the fall has been as under:

• small
cap has fallen ~ 33%

• followed
by mid-cap at ~ 26% and

• large
cap at ~ 19% on a YTD, 2020 basis.

Nifty Bank has fallen the most during this
crisis, plunging almost 50% and certain NBFCs falling more than 50% as well.
The markets recovered somewhat in the first two weeks of April, 2020 and today
the Nifty Bank is sitting at a 40% discount to its peak valuation.

While Nifty Bank has fallen significantly,
Nifty Pharma has been the biggest beneficiary and is the only index with a
positive YTD return of ~ 16%. The rest of the indices (sectors) have seen
negative returns, the least negative being Nifty FMCG at ~ (-)5%.

In the credit scenario the investment grade
ratings have fallen from 40% earlier to ~ 30% now. The downgrades are much higher
in value – ~ Rs. 1,990 billion worth papers have been downgraded.

On the global front, the US Dow Jones has
fallen by ~ 20% on YTD, 2020 basis, while most of the European markets have
fallen upwards of 20% on YTD, 2020 basis. The China market has been the most
resilient and has fallen only ~ 8% on YTD, 2020 basis.

Before the Covid-19 crisis, the
banking and financial services were facing massive problems with the collapse
of IL&FS and DHFL and the Yes Bank fiasco. In the current market scenario,

NPAs are likely to increase as the private
banks, NBFCs and even micro-finance institutions have aggressively built their
retail loan book and there will likely be massive layoffs

Further, these loans are majorly unsecured
and there can be a slew of defaults, especially on the MFI side, and can also
bring the mid and smaller NBFCs to the brink of collapse

Some of the new-age digital financial
startups which simply opened the liquidity tap to trap the young earners with
huge interest rates, may be forced to shut shop

However, the liquidity and moratoriums
provided by RBI will come to the rescue

More clarity in this regard will emerge only
after three to six months when the economic activity resumes

Meanwhile, credit off-take can be low for
the next couple of quarters as companies rework on their capex plans due to
weak demand and the uncertain global environment.

ANY
SILVER LINING IN THE MIDST OF THIS CRISIS?

While all of the above sounds
quite alarming, there are many positives in India’s current state of affairs:

Forex reserves: India has forex reserves to
the tune of USD 476.5 billion as on 10^th April, 2020 and in a
worst-case scenario this will take care of 11.8 months of India’s import bills⁸.

Crude prices: The crude prices have fallen
to record lows, lower than $10 per barrel as on 20th April, 2020. If India can
import and store additional crude at this level, it will save huge import bills
once normalcy kicks in and crude prices rise. Since 80% of India’s oil
requirement is met through imports, a fall in crude oil prices can save USD 45
billion on crude oil imports⁹.

MSCI Index re-jig: Indian stocks are
expected to see an inflow of more than USD 7 billion on account of a likely
increase in their weight on the MSCI Index. FIIs have been net sellers and they
have sold more than Rs. 30,000 crores in the last four weeks. Therefore, a
re-jig of the MSCI index will bring in fresh FII inflows¹⁰.

Low inflation: The food inflation is on a
declining trajectory and has eased ~ 160 basis points from its peak in January,
2020. The CPI inflation as on 19th March, 2020 was 5.9% and the RBI is
confident of bringing it below 4% by the second half of 2020.

Normal monsoons: The Indian Meteorological
Department has forecast a normal monsoon in 2020. This will benefit agriculture
which is the backbone of the Indian economy.

Shift from China to other geographies: Many
countries are envisaging a shift of dependency from China and also to shift
their manufacturing bases from China to either their home country or to find a
suitable alternative. Japan has announced packages for its companies bringing
back manufacturing home. India can benefit a lot if some of this shift happens
from China to India. It will significantly improve FDI flows into India.

FOOD FOR THOUGHT

The way the economy will recover
or fall will depend on how the pandemic plays out. No doubt a vaccine is the
need of the hour, but that will take a minimum of nine months to a year to
develop and then to be distributed to every human being on the planet. While
there may be some medicinal cure which could be developed, there will be
uncertainties in the interim. During these times, the following possibilities
could emerge:

Will there be de-globalisation? Will
countries close borders – partially or completely?

Will India gain a lot of market share with
a shift in manufacturing base to India?

Will there be a V-shaped, U-shaped,
W-shaped or L-shaped recovery of the Indian and global financial markets?

Will there be disruption in existing
industries – Will Information Technology be the new king? Will the pharma
sector be the best performer index in the market?

We are fighting with an ‘unknown
unknown’ phenomenon and only over time will we be able to get the answers to
the above questions.

I would like
to conclude with a quote from Joel Osteen – ‘Quit worrying about how
everything is going to turn out. Live one day at a time’. This, too, shall
pass and we will emerge as a stronger and better economy in the end.

Disclaimer: The views, thoughts and opinions expressed
in this article belong solely to the author; the data has been gathered from
various secondary sources which the reader needs to independently verify before
relying on it. The information contained herein is not intended to be a source
of advice or credit analysis with respect to the material presented, and does
not constitute investment advice

________________________________________________________

1 Ministry of Health, https://www.mohfw.gov.in/, News Articles

2 https://theprint.in/science/r0-data-shows-indias-coronavirus-infection-rate-has-slowed-gives-lockdown-a-thumbs-up/399734/

3 IMF estimates,
Various rating agencies
4 https://economictimes.indiatimes.com/news/economy/indicators/indias-tourism-sector-may-lose-rs-5-lakh-cr-4-5-cr-jobs-could-be-cut-due-to-covid-19/articleshow/74968781.cms?from=mdr

5 https://www.livemint.com/news/india/india-s-trade-deficit-narrows-to-9-8-bn-in-march-exports-dip-34-6-11586955282193.html

6 CMIE
database,
https://www.cmie.com/kommon/bin/sr.php?kall=warticle&dt=2020-04-07%2008:26:04&msec=770

7 Newspaper Articles, Nifty50 Returns

9 https://www.energylivenews.com/2020/03/24/india-to-save-45bn-on-crude-oil-imports-next-financial-year/

10 https://www.bloombergquint.com/markets/morgan-stanley-sees-71-
billion-inflows-into-india-on-msci-rejig

shailesh.kwebmaker

SOME REFLECTIONS ON COVID-19 AND THE ECONOMY: RESET TIME

I am presenting a few thoughts on
the reasons for the pandemic, how to stop future pandemics, its impact on the
economy and steps for its revival, the oil shock and its domino effect and
other related issues.

PANDEMIC REASON – VIRUS AND STRESS IN
ANIMALS

I have seen
a video on the reasons for pandemics published by the Nutrition Facts Organisation
of the USA in 2010. Dr. Michael Greger, M.D., FACLM, explains that (i)
this is a zoonotic disease and the virus which is present in animals infects
mankind, (ii) most viruses are completely neutralised within 30 minutes under
direct sunlight; however, in dark, damp and shaded conditions they can survive
for weeks, (iii) viruses which have existed for thousands of years innocuously
have now become deadly.

Why is this so? Clearly, the stress
and the pain suffered by animals results in even an innocent virus turning
into a deadly one. When these stressed animals / birds are eaten by men,
they get infected. If we don’t stop industrial animal farming for food, then we
should be prepared for a pandemic of deadly proportions equivalent to the
Indonesian tsunami of 2004 simultaneously hitting all the major cities around
the world. In case a pandemic hits the USA, it may be necessary to lockdown
the whole country for 90 days. This prediction was made in the year 2010. (See
the video: https://nutritionfacts.org/video/pandemics-history-prevention/)

In short, extreme cruelty by
mankind on animals and birds has caused this pandemic. And all nations are
responsible for this cruelty. Industrial farming of pigs and chicken, of cows
for milk, etc., several such cruel practices were started in the capitalist western
countries and this is the chief cause of this virus.

According to me, in the same way,
globally, half the human population lives in stress because of poverty and wars
inflicted by greedy lobbies and nations. This stress also affects world peace
and welfare. It is time we take notice of this fact.

PREVENTING FUTURE VIRAL PANDEMICS

To prevent such pandemics, one
should not only turn vegetarian, one should turn vegan. It is a simple
philosophy. Love your animals as you love your family. Love your employees as
your own family. Love is a great strength. The absence of love or callousness
has immeasurable negative power. Philosophy includes the principles of how to
live happily in society and the world. In Hindi it is called: In English, it’s ‘The
relationship amongst: Individuals, Universe and God’.

A useless plastic straw that we
throw away travels a few thousand miles through the ocean and hurts a tortoise.
The tortoise is in stress. Its stress affects world peace. We do not give
cognition to the stress suffered by billions of lives around the world. It is
high time that we recognise the philosophy that the stress caused in the
tiniest of lives will one day come back to haunt us. We have ignored the
warnings of numerous environmentalists. Let us now hear this warning by Mother
Nature or This is the time to RESET
everything and challenge all our assumptions. The virus has proved that we
have to live as one family, The solution to this virus and many other
problems may be found by the world in co-operation and not in competition. All
national boundaries are man-made and artificial. The ultimate truth is – We Are
All One,

If someone
had said before seeing the above video, ‘Don’t be cruel with animals’, the mass
commercialised industrialist as well as the consumer would not have listened to
him. The government would not interfere considering ‘philosophy and ethics as a
matter of personal choice’. But after seeing the video anyone who believes in prevention
of pandemics and other mass tragedies may want to practice and spread the
message of Universal Love and Truth.

A reader may ask, ‘Okay. I have
understood that the cause of the current pandemic is human cruelty to animals
and birds. But as an individual, what can I do?’ The answer to that is,
‘One individual cannot change the world. He cannot stop industrialised animal
farming. But he can stop eating animals and consuming dairy products.’ When
many individuals stop buying any product which involves cruelty, businesses
will have to change their practices. If we do not reset our business practices
and our personal lives, nature may (or may not) give us another warning.

PANDEMIC’S IMPACT ON ECONOMY

Both the Indian and the global
economies have suffered a serious setback due to the current pandemic.
How serious is it? How long will it take to recover? As recently stated by Mr.
Sanjiv Mehta, CA, Chairman of Hindustan Unilever, no one can provide a proper
answer to these questions. Economics is a social subject. Unlike the laws of
physics, the results of actions in economics cannot be predicted. They depend
upon society’s psychology, culture, readiness to put in hard work and so on.

To explain the issue in simple
terms, one can use the analogy of a person who has suffered a heart attack.
He knows the reasons of the attack: Lack of exercise, an over-indulgent
lifestyle, and so on. ‘Can he or will he recover? How good will be the
recovery?’ The answer to these questions is, ‘Of course he will recover.’ ‘How
well he will recover depends upon whether he has learnt his lesson. Will he
change his over-indulgent lifestyle? Will he start exercises? And does he have
the will power to return to a healthy life? Is he a positive thinker? Does his
positivity translate into action?’

This analogy can be applied not
only to individuals hit by disease, but also to nations hit by disasters.

The current pandemic has already
caused serious damage to economies. And the damage will continue for some time.
Nations and the world are not going to die. We will all recover. How well do we
recover is the issue. The quality of recovery depends upon how well we reset
our businesses and our personal lives.

Supply chains have been broken
and damaged. The demand for many goods and capital assets has evaporated. When
both supply and demand go down, there is necessarily a contraction of the
economy. There is no alignment between reduction in supply and demand. In other
words, the supply of goods A, B and C has stopped. The demand for goods C, Y
and Z has evaporated. Hence the contraction in the economy can be even worse.

In agriculture, tea gardens and
mango and grape orchards, vegetables and so on are adversely affected.
Agriculture has been exempted from the lockdown. But then a lot of migrant
workers have gone back to their native places. Transport is affected. Even the
manufacture of medicines is seriously affected.

Where does a nation start with relief
and recovery actions? The Government of India (GOI) and the RBI have
already announced different packages of financial relief – all together
amounting to Rs. 5 trillions. (One trillion is a short term for one lakh
crores.) Food Security is provided to 80 crores of Indians. The
GOI has started with ensuring that the poor daily wage-earners do not stay
hungry. They are being provided food and fuel in different ways. It is my
personal knowledge that, at least in Gujarat, the GOI is reaching the poor.

Having discussed stress and the
pain in animals, let us turn to the stress and the pain in human beings.
Let us take an example. The Covid-19 virus has spread in the Dharavi slum.
Hundreds of people are infected. This has raised fears of community spread. The
Central and the State Governments are worried. They do not see any practical
solution. They are frustrated. Imagine an invisible tiny virus frustrating the
Government of India. Why has this situation arisen?

In Mumbai, some flats are sold at
a price of Rs. 1,00,000 per square foot, or even more. In the same city,
several million people live in slums, on footpaths and in chawls. Many
people just do not have a roof over their heads.

Why is there such a wide
difference in incomes and wealth?

We do not ask this question.
Society in general doesn’t care. The government has excellent schemes for slum
development. Market forces will make it practical to give decent homes to
many slum-dwellers. And instead of spending money on slum redevelopment, the
government will get revenue. And yet, the Dharavi redevelopment scheme has not
taken off for so many years. Why? Because of corruption and greed.

Imagine a poor person living in
Dharavi. Most people there do not have toilets and bathrooms within their tiny
homes. They use common facilities. Imagine their fear of viral infection. They
can’t leave Dharavi due to the lockdown. And they can’t live in Dharavi because
of the abysmal living conditions. What amount of fear and stress are the people
living in Dharavi suffering from right now? Won’t that stress affect us and our
governments? Nature has already provided the answer. It will affect all of us.

There are many individuals and
NGOs who question the current pitiable condition of the poor. They work on the
ground in helping the poor. Many of them have achieved good success. May their
tribe grow; may their enthusiasm to help the poor infect society and
governments. May we see a day when every family in India has a home. One
such dreamer is Prime Minister Narendra Modi. He has already planned a
scheme for this purpose. I remember saying in my presentation at the BCAS
Economics Study Circle in 2015: ‘If all the welfare schemes planned by Mr. Modi
are executed in reality (not just on paper), then India can have 12% GDP growth
for the next 20 years.’ This is the solution and the answer to the question,
’How will the economy be affected by the present pandemic?’

India has a huge unsatisfied
need. And India has sufficient natural resources to provide food, clothing and
homes to every individual in the country. But the market system will not permit
it. Under a capitalist market system, farmers, teachers and doctors earn less
than share market speculators and tax consultants. A producer of goods and
services earns less than a film star and a sportsman. This market system has
to be reset.

GDP

GDP is a
misleading statistical figure that has become popular to such an extent that it
has become harmful. When a jungle is destroyed and factories are set up, GDP
goes up. But there is no consideration for the damage to the environment, the
loss of life of animals, the huge difficulties to tribals and so on. If the
Indian rupee rises to Rs. 36 per dollar, our GDP will jump from $2.8 trillion
to $5.6 trillion. This shows that the exchange conversion market is an
illusion. When liquor and cigarette production goes up, the GDP goes up. Share
market speculators speculate and GDP goes up with zero contribution to the real
economy. I am not worried if the GDP falls, but the people would be free from
pollution and the resultant diseases.

There is none and there will be
no direct relationship between welfare and GDP.

THE
CORONA SHOCK: NEGATIVE OIL PRICE

On Monday, 20^thApril,
and also on Thursday, 23^rd April, 2020, the price for a barrel of
crude oil on the New York Commodity Exchange dropped to negative $38. What is a
negative oil price? Why did it happen? And what can be the consequences?

This has happened because of
excess supply of crude oil and lack of storage capacity for the excess. Global
production (extraction from oil wells) is 100 million barrels per day (MBD).
With the almost global lockdown, the entire transport system and factories have
stopped. Now only domestic and agricultural consumption of power continues. As
per oil experts’ opinion, the demand has gone down by at least 25%. However,
production of crude oil continues at the same pace. Saudi Arabia, Russia and
the USA have agreed to cut down production by about 10.3 MBD. This cut will be
effective from 1^stMay, 2020. But the surplus of supply over
consumption will continue. Global storage tanks are almost full. In the USA,
people holding a ‘Buy’ contract have no storage space. Assume that a buyer has
already paid the full price. Now, either he has to lift the oil, or pay $38 per
barrel to cancel the contract. A negative price reflects the cost of storage
for an indefinite period. However, these negative prices will not last. It is
estimated that in the short term the price may settle around $20/barrel.

Crude oil is the most important
component of energy today. Hence, the USA has used it as an instrument in its currency
war. Its government insists that all global trade must happen in US
Dollars. Some nations refused. They were ready to sell their oil in Euros.
Hence the attacks on Iraq, Lebanon and Libya and the sanctions on Venezuela and
Iran. This is a classic illustration of a currency war using commodities as
weapons. When the opponents do not succumb to sanctions, the USA starts a
weapons war. [See a clip of the news on CNN dated 23^rd April, 2020:
New York (CNN Business) 22^nd April, 2020.]

The report said, ‘The Trump
administration ordered Chevron to halt oil production in Venezuela, dealing
another blow to the nation. The directive is part of President Donald Trump’s
effort to pressure the regime of Venezuelan President Nicolas Maduro by starving
it of cash. Despite having more oil reserves than any other country on earth,
Venezuela’s production has imploded because of tough sanctions imposed by the
United States and other reasons.’

But there are other factors to be
considered. When oil was sold at $100 per barrel, the USA started shale oil
production on such a scale that it became free from imports of crude oil. The
average cost of production of shale oil is estimated to be $40 per barrel
(estimates vary). When the oil price was high, shale gas producers took huge
loans on small capitals and did business. Now, with the oil price being less
than $40 per barrel, most of them are making losses. Because of the viral
pandemic, the global economy has slowed down. The demand for oil may remain low
in the short term. Hence prices may remain under $40 for many months. Some
shale oil producers may even go insolvent.

Domino Effect: When an
oil producer goes insolvent, the following people also suffer losses:
Speculators in oil prices, speculators in shares of oil companies, banks and
institutions that lent to the oil producers, speculators in bank shares;
employees of all of the above entities suffer and ultimately the government
loses tax revenues.
When these loss-making companies are bailed out, the common man, the taxpayer,
suffers. Thus, one loss has a domino effect.

We have seen this oil industry
projection at some length. There are many other enterprises that are also
highly leveraged. The airline industry is a capital intensive, high
revenue cost industry with widely fluctuating profit margins. The lockdown may
have caused huge losses for all airline companies. Some may go insolvent. Many
other enterprises will also go insolvent. That means huge losses for banks
and the financial system. Will it result in banks going insolvent? Will central
bankers around the world be able to save the banking system?

In Maharashtra, mango and
grape orchard owners can’t export their fruits. All over the country, many
farmers cannot sell their products even within India. Most of their products
are perishable. They will suffer huge losses. Who will bear these losses? The
list can go on.

Suddenly, the force majeure
clause is being invoked by parties for not fulfilling their part of the
performance. Everyone looks at themselves. As if the ship is sinking! If this
happens on a very large scale, then the economy can come crashing down. The
economy is really like a giant machine with several wheels within wheels.
All these wheels are connected by bearings, gears and chains. Some wheels
stopping or slowing down may disrupt the machine. But if several wheels stop
functioning, then the bearings can break down and the machine stop. We need to
identify all the wheels, bearings, gears and chains in the economic machine.
Observe them, help them, and ensure that almost all parts function.

SOLUTION: ECONOMIC ACTION

Confidence at the highest level
is crucial. The US and European economies have been built over a few hundred
years. The Indian and Chinese economies and societies have been built over a
few thousand years. How can these economies be destroyed if a pandemic
disturbs them for a few months? Only when an economy has its fundamentals
seriously wrong can it be damaged. Probably, all countries, including communist
countries, are working on Capitalist Market Economics. These need to be RESET.
In other words, extreme disparities in income, wealth and welfare have to be
reduced. Every producer of goods and services must get at least a living wage.
There should be no or minimum stress caused by unfair economics at the human
level. Poor people constitute the base of the economic pyramid. When the base
is strong, the structure will be steady. And it can come up fast. If the poor
at the base die due to starvation, the whole economy will be badly affected And
it cannot recover fast enough.

The Government of India has
effected a large financial relief package. And the Prime Minister has
his heart in the right place. First priority is being given to the poor, daily
wage earners, hawkers and others. Cooked and uncooked food is reaching the poor
in villages through the government machinery. There are corners where the government
may not reach. These are being reached by NGOs. Cash is reaching the poor under
‘Direct Benefit Scheme’. Tax refunds are being expedited. Banks are asked to
release more loans. Provident fund claims are being released quickly. Through
all practical measures the government is ensuring that cash flow in the nation
must continue. Cash in the society is like blood in the body. It must remain
circulating. Otherwise the body parts will get numb. And even the smallest part
going numb will affect the whole body.

One big relief this time is from
the tax departments. Every year, from January to March, Income-tax and
GST officers get into overdrive to collect tax revenues, whether departmental
claims were right or wrong. Big refund claims, howsoever legitimate, are
withheld for the 4th quarter. That pressure is off this year. And revenue
targets have naturally gone for a toss.

Will this huge expenditure of Rs.
5 trillion cause a budgetary deficit? Yes, certainly the budgetary
deficit will increase. Will it cause inflation? May be, maybe not. The
Food Corporation of India (FCI) has over 70 million tonnes of food stocks.
Every year, substantial quantities of food rot and have to be disposed of. If
this stock of food is used, the market demand-supply equations will not be
affected. There need not be any inflation in the price of food. There are some
other items whose demand has fallen. In the case of some other items, it is the
supply that has fallen. All together, as a combined figure, there may be a
minor inflation. (Any guess for the future is to be taken with a pinch of
salt.) But in times of recession, it will help the economy rather than damage
it.

ON TOP OF THE ECONOMIC CHAIN

Man is at the top of the food
chain. No other animal eats man. Man eats almost every animal and plant.
Man contributes little to the nature, but he exploits nature to the maximum
extent. Similarly, there are many people within mankind who are on top of the
economic chain. They contribute little to the economy / society and yet earn
disproportionately large incomes. It is for governments to identify the
enterprises on the top of the economic chain. Do not spend a single rupee
and a single minute on these people. They will manage.

BAILOUT PACKAGES

All nations
have announced huge bailout packages. Most of the funds for these packages will
come simply by ‘printing money’. How long can money supply influence and when
does it become useless or even counter-productive? To understand this point,
consider an extreme hypothesis: Indian GDP is Rs. 190 trillion. Can we
say, ‘Just print Rs. 190 trillion and no one has to do any work? They can relax
and enjoy.’ We cannot do that. People have to work and produce goods and
services. A currency note that cannot buy anything has no value. Having
ruled out the extreme hypothesis, one needs to work out the right balance.
Every enterprise that breaks down due to the pandemic will be a wheel that
stops functioning. Save that wheel. Lend it sufficient cash to make it turn
again. Once it starts running, stop lending. Slowly take back the loans. On the
other hand, the daily wage earner can be given food free as long as the
lockdown runs. Probably, for one more week. Then stop all free doles. His
hunger will make him hunt for work. And those millions of wheels will start
functioning once again. Bailout packages is a huge subject by itself. But I
will not go into that right now.

There should be no central
command in the sense of planning from top-down. A central command will make
mistakes and commit blunders. Let everyone find their own way. Ensure
continuity of infrastructure. Those who need help should be helped. Give
priority to very small enterprises, then to small and medium, and finally to
large. Let individual spirits find individual solutions. Open up the market
with safety. Planning by every individual and every enterprise, with the
government supporting them, is the best approach.

Note: This
article was written on 24^th April. Before it gets published in our
journal, I had the opportunity to listen to the Economic Wizard – Mr. Mohandas
Pai on BCAS Webinar on 9th May. I am adding a few more notes.

i) When India works for full year, it generates
GDP of say Rs. 200 Trillions. It is clear that Indian economy will not work for
at least two months due to Covid 19 Pandemic. As simple arithmetics, GDP should
fall by 17%. There are many variables. Some things continued even during lock
down. Some things will not work even after the lock down is lifted. On the
whole, Indian GDP for the financial year 2020-21 can fall by 20%. From an
estimated growth rate of 5% if there is a fall of 20%, our GDP may fall by 15%.
This can cause massive repercussions. As discussed earlier, Government, RBI
& peoples’ job is to ensure that the wheels within wheels work with minimum
damage. Otherwise the domino effect can cause far more losses.

ii) Long term stability lies in
Indian economy being an independent economy. Neither based on exports, nor
based on imports. In still longer terms, when we all – Government to people are
sensitive to the weakest of the lives; and when we ensure welfare of all lives;
we can have a truly satisfied, peaceful India.

CONCLUSION

India
and the world have suffered huge personal and economic losses. All this because
of a tiny, invisible organism which probably does not even have life. This is a
warning that Mother Nature has given to Mankind. If we learn the lesson, if we
reset our lifestyle and our capitalist market economics, we can prevent future
pandemics. If we ensure that every individual and every fit enterprise survives
this pandemic, then the human spirit will ensure that in the short term the
economy will be functioning well. Ignore the share market indices and GDP
statistics. Focus on welfare of all – ‘Unto The Last’. Adopt Gandhiji’s and
Vinobaji’s concept of SARVODAYA.

shailesh.kwebmaker

IMPACT OF COVID-19 ON CORPORATE AND ALLIED LAWS

Prior to the manifestation of the
Covid-19 pandemic, most of us would have heard about a disaster recovery plan
or business continuity plan as part of the risk management plans. Such disaster
recovery plans would seldom have envisaged a situation of countrywide, or even
global, lockdowns which most of the world is currently experiencing. Therefore,
it is unwise to expect that such a well-thought-out disaster recovery or
continuity plan would have been prepared for a country as a whole. No doubt,
there are certain legislations like the Disaster Management Act, 2005 and the
Epidemic Diseases Act, 1897 which have come handy to the government in this
unprecedented calamity.

Coming to the specific subject of
the impact of Covid-19 on the Corporate and Allied Laws, we need to briefly
touch base with the typical limitations that all of us are suffering from. The
current situation of countrywide lockdown and social distancing norms is making
most of us feel handicapped at not being able to attend office as we would
generally do, have free access to the enabling office environment of accessing
computers, the internet, physical records, printing and scanning documents, DSCs
and all other tools that create a smooth working environment and enable the
ease of working. For most of our working lives easy availability of such basic
office infrastructure has been taken for granted and we did not pause and think
even for a minute what would happen if the easy availability of such office
infrastructure is interrupted for any length of time.

These aspects are highlighted to
pinpoint the limitations which business enterprises are facing today as far as
operational aspects are concerned. Apart from these operational limitations or
micro issues, there are many substantive effects or macro issues which Covid-19
has triggered globally. Therefore, in the context of Corporate and Allied Laws
we would need to dissect the Covid-19 impact from two broad perspectives, viz.,
(1) Operational or micro issues; and (2) Substantive or macro issues.

Various operational or micro
issues are more to do with operational difficulties currently faced by
corporates causing hindrances in timely and adequate compliances for the short
time span during the ongoing lockdown. On the other hand, the substantive or
macro issues would require a much deeper understanding of certain provisions of
the Corporate and Allied Laws in the context of the unique environment created
by Covid-19 and its possible effects, which would have a long-lasting impact on
Indian corporates in the medium to long term, say over a period of six to 18
months.

Many relaxations announced
address the operational or micro issues under the Companies Act, 2013, FDI
norms to check opportunistic takeovers of Indian companies and reducing the
post buyback period for raising further capital from 12 months to six months
under SEBI Regulations amongst others. Therefore, as the Indian corporates
battle the disruptions caused by Covid-19 and endeavour to revive and
streamline business operations post relaxations of the lockdown measures, there
would be a greater need to evaluate the Corporate and Allied Laws provisions
which could create hindrances or pose substantive or macro limitations to
effective recovery and announce enabling relaxations to provide a free runway
for a smooth take-off.

Most of us would be aware about
these relaxations by now given the quick spread of such updates on social media
platforms (even faster than coronavirus). Therefore, without getting into the
details, I would like to briefly summarise most of the relaxations as a quick
refresher for ease of reference.

I. Companies Act, 2013 and related rules

1. Board meeting permitted through video conferencing or other
audio-visual means in respect of certain matters for which mandatory
physical meeting is otherwise required, which includes approval of financial
statements, Board’s report, prospectus and matters relating to mergers,
amalgamations, demergers, acquisitions and takeovers – up to 30^th
June, 2020.

2. Maximum time gap between two consecutive Board meetings
relaxed from the existing 120 days to 180 days for the next two quarters, i.e. till
30^th September, 2020.

3. Non-holding of at least one meeting of Independent Directors in
a financial year without the attendance of Non-Independent Directors will
not be treated as violation for F.Y. 2019-20.

4. Non-compliance of residency in India for a minimum period
of 182 days by at least one director of every company will not be treated as
violation for F.Y. 2019-20.

5. Implementation of reporting by auditors as per the Companies
(Auditor’s Report) Order, 2020 deferred by one year to F.Y. 2020-21.

6. The time limit for (i) creating Deposit Repayment Reserve of
20% of deposits maturing during F.Y. 2020-21; and (ii) making specified
investment or deposit of at least 15% of the amount of debentures maturing during
F.Y. 2020-21 extended from 30^th April to 30^thJune,
2020.

7. The time limit for filing of declaration for commencement of
business by newly-incorporated companies extended from 180 days to 360
days.

8. Contribution to newly-formed PM CARES Fund covered
under CSR spending of corporates and FAQs released in relation to CSR
spending in view of the peculiar situation of the Covid-19 pandemic.

9. Conduct of Extraordinary General Meetings through video
conferencing or other audio-visual means permitted till 30^th June,
2020 in unavoidable cases, subject to certain safeguards and protective
mechanisms as detailed in MCA Circular No. 14/2020 dated 8^th April,
2020 as further clarified by MCA Circular No. 17/2020 dated 13^th
April, 2020.

10. Extension of due date of AGM to 30^th September, 2020
for companies whose financial year has ended on 31^st December,
2019, i.e. time limit extended from six months from the end of the
financial year to nine months.

11. Companies Fresh Start Scheme, 2020 (CFSS) has been announced
in order to enable certain eligible defaulting companies to regularise their
filings without payment of additional fees and granting immunity from launching
prosecution or proceedings for imposition of penalty on account of delay
associated with certain filings. The detailed guidelines and operational
procedures have been laid out in MCA Circular No. 12/2020 dated 30^thMarch,
2020.

12. LLP Settlement Scheme, 2020 (LSS) which was announced through
MCA Circular No. 06/2020 dated 4th March, 2020 has been modified vide MCA
Circular No. 13/2020 dated 30^th March, 2020 keeping in mind the
prevalent situation.

II. Securities and Exchange Board of India (SEBI)
Regulations applicable to listed companies

A. SEBI (Listing Obligations and Disclosure Requirements) Regulations,
2015 (‘LODR’)

1. The following relaxations, in the form of extension of timeline
for certain compliance requirements / filings by entities whose equity
shares are listed, have been announced (Refer Table A).

Further, vide a separate
circular¹, SEBI has granted similar relaxations to issuers who have
listed their debt securities, non-convertible redeemable preference shares and
commercial papers, and to issuers of municipal debt securities.

2. As per Regulations 17(2) and 18(2)(a), the Board of directors and
the audit committee need to meet at least four times a year, with a maximum
time gap of 120 days between two meetings. The listed entities are exempted
from observing this maximum time gap for the meetings held / proposed to be
held between 1^st December, 2019 and 30^th June, 2020.
However, listed entities need to ensure that there are at least four Board and
audit committee meetings conducted in a year.

3. The effective date of operation of the new SEBI circular on
Standard Operating Procedure (SOP) dated 22^nd January, 2020 in
relation to imposition of fines and other enforcement actions for
non-compliance with provisions of the LODR, has been extended to compliance
periods ending on or after 30^th June, 2020 instead of 31^st
March, 2020. Thus, the existing SEBI SOP Circular dated 3^rd May,
2018 would be applicable till such date.

4. Publication of newspaper advertisements for certain
information such as notice of Board meetings, financial results, etc. as
required under Regulations 47 and 52(8) has been exempted for all events
scheduled till 15^th May, 2020.

Table A

No.	Regulation No.	Compliance requirement / filings	Relaxations w.r.t. quarter / F.Y. ending 31^st March, 2020
1.	7(3)	Half-yearly compliance certificate on share transfer facility	30^th April, 2020	31^st May, 2020
2.	13(3)	Quarterly statement of investor complaints	21^stApril, 2020	15^th May, 2020
3.	24A	Annual secretarial compliance report	30^th May, 2020	30^th June, 2020
4.	27(2)	Quarterly corporate governance report	15^th April, 2020	15^th May, 2020
5.	31	Quarterly shareholding pattern	21^st April, 2020	15^th May, 2020
6.	33	Quarterly financial results	15^thMay, 2020	30^th June, 2020
Annual financial results	30^th May, 2020	30^th June, 2020
7.	40(9)	Half-yearly certificate from practicing CS on timely issue of share certificates	30^th April, 2020	31^stMay, 2020
8.	44(5)	Holding of AGM by top 100 listed entities by market capitalisation	31^st August, 2020	30^thSeptember, 2020
9.	19(3A), 20(3A) and 21(3A)	Nomination and Remuneration Committee, Stakeholders Relationship Committee and Risk Management Committee need to meet at least once in a year	31^st March, 2020	30^th June, 2020
10.	Circular issued in terms of Regulation 101(2)	Disclosure requirement by large corporates
Initial disclosure	30^th April, 2020	30^th June, 2020
Annual disclosure	15^th May, 2020	30^th June, 2020

No.

Regulation
No.

Compliance
requirement / filings

Relaxations
w.r.t. quarter / F.Y. ending
31^st March, 2020

Due date

Extended date

7(3)

Half-yearly compliance certificate on share
transfer facility

30^th April, 2020

31^st May, 2020

13(3)

Quarterly statement of investor complaints

21^stApril, 2020

15^th May, 2020

24A

Annual secretarial compliance report

30^th May, 2020

30^th June, 2020

27(2)

Quarterly corporate governance report

15^th April, 2020

15^th May, 2020

Quarterly shareholding pattern

21^st April, 2020

15^th May, 2020

Quarterly financial results

15^thMay, 2020

30^th June, 2020

Annual financial results

30^th May, 2020

30^th June, 2020

40(9)

Half-yearly certificate from practicing CS on
timely issue of share certificates

30^th April, 2020

31^stMay, 2020

44(5)

Holding of AGM by top 100 listed entities by
market capitalisation

31^st August, 2020

30^thSeptember, 2020

19(3A), 20(3A) and 21(3A)

Nomination and Remuneration Committee, Stakeholders
Relationship Committee and Risk Management Committee need to meet at least
once in a year

31^st March, 2020

30^th June, 2020

10.

Circular issued in terms of Regulation 101(2)

Disclosure requirement by large corporates

Initial disclosure

30^th April, 2020

30^th June, 2020

Annual disclosure

15^th May, 2020

30^th June, 2020

5. Regulation 29(2) specifies that listed entities should give prior
intimation to stock exchanges about Board meeting (i) at least five days
before the meeting wherein financial results are to be considered, and
(ii) two working days for all other matters. This requirement of prior
intimation has been reduced to two days in all cases for Board meetings
to be held till 31^st July, 2020.

6. Any delay in submission of information to stock exchanges
regarding loss of share certificates and issue of duplicate share certificates
within two days of receiving such information as required under Regulation
39(3) will not attract penal provisions for intimations to be made between 1^st
March, 2020 and 31^st May, 2020.

7. In line with the relaxations announced by the MCA for allowing
companies whose financial year ended on
31^stDecember, 2019 to hold their AGM till 30^th
September, 2020, SEBI has granted similar relaxation to top 100 listed
entities, whose financial year ended on 31^st December, 2019,
for holding their AGM within a period of nine months instead of within a period
of five months from the year-end.

8. SEBI has further clarified that authentication / certification of
any filing / submission made to the stock exchanges under LODR may be done
using digital signature certificate (DSC) until 30^th June, 2020.

Suggested relaxations: Apart from the above
relaxations proactively given by SEBI, the following further relaxations may be
considered by it:

1. There were a few amendments made to the LODR based on the
recommendations of the Kotak Committee which came into effect from 1^st
April, 2020, mostly relating to Board of directors and its meetings. These
include (i) requirement of having at least one Independent woman director by
the top 1,000 listed entities [Reg. 17(1)(a)]; (ii) requirement of having at
least six directors on the Board by top 2,000 listed entities [Reg. 17(1)(c)]
and (iii) a person shall not be a director in more than seven listed entities
(Reg. 17A). While most of these provisions were introduced well before time for
listed entities to be compliant beforehand, the current situation warrants
reconsideration in extending the effective date of these provisions.

2. Regulation 25(3) of LODR requires Independent directors to hold at
least one meeting in a year without the presence of Non-Independent directors
and members of management. Here, too, relaxation should be granted by extending
the due date to 30^th June, 2020 as done for compliance of
Regulations 19(3A), 20(3A) and 21(3A) in respect of committee meetings. It is
worthwhile to recall that the MCA has waived the similar requirements under the
Companies Act as stated above.

B. SEBI (Substantial Acquisition of Shares and Takeovers) Regulations,
2011 (‘SAST’)

The time limit for filing annual
disclosures under Regulations 30(1) and 30(2) by persons holding 25% or more
shares / voting rights in a listed company and by promoters (including persons
acting in concert), respectively, regarding aggregate shareholding and voting
rights held in the listed company, have been extended till 1^st June,
2020 instead of seven working days from the end of the financial year. Further,
a similar time limit extension has been granted for disclosure to be made by
promoters under Regulation 31(4) regarding non-encumbrance of shares held by
them, other than those already disclosed during the financial year.

C. SEBI (Issue of Capital and Disclosure Requirements) Regulations,
2018 (‘ICDR’)

1. Rights Issues: SEBI has proactively announced certain
much-needed relaxations to listed entities in order to create an enabling
environment for fund-raising through rights issues that open on or before 31^st
March, 2021. SEBI, vide a Circular² , has granted relaxations
from strict application of certain provisions relating to rights issues, which
broadly include the following:

a) Eligibility conditions relating to Fast Track Rights Issues:
Certain eligibility conditions have been relaxed, inter alia, in the
form of reduction of certain time periods and monetary caps so that companies
can find it easy to comply with such conditions and come out with Fast Track
Rights Issues for quick fund raising.

b) Relaxation with respect to minimum subscription amount: The
requirement of receipt of minimum subscription amount in a rights issue has
been relaxed from the existing 90% to 75%, provided that such companies
need to ensure that at least 75% of the issue size is utilised for the objects
of the issue other than general corporate purpose.

c) Relaxation with respect to minimum threshold required for
non-filing of draft offer document with SEBI for its observations: The
listed entities with a rights issue size of up to Rs. 25 crores (instead of Rs.
10 crores as earlier applicable) need not file draft letter of offer with SEBI
and can directly proceed to issue letter of offer to shareholders.

2. Validity of Observations issued by SEBI: As per the
existing provisions, a public issue / rights issue may be opened within a
period of 12 months from the date of issuance of Observations by SEBI. This has
been relaxed vide a SEBI Circular³ which provides that the validity of the SEBI
Observations, where the same have expired / will expire between 1^stMarch,
2020 and 30^th September, 2020 has been extended by six months from
the date of expiry of such Observations, subject to a requisite undertaking
from the lead manager to the issue.

3. Relaxation from fresh filing of offer document with SEBI in
case of increase / decrease in fresh issue size: As per the existing
provisions, fresh filing of the draft offer document along with fees is
required in case of any increase or decrease beyond 20% in the estimated fresh
issue size. This has been relaxed vide a SEBI Circular³
whereby issuers have been permitted to increase or decrease the fresh issue
size by up to 50% of the estimated fresh issue size without the requirement to
file a fresh draft offer document with SEBI subject to fulfilment of certain
conditions. This relaxation is applicable for issues (IPO / Rights Issues /
FPO) opening before 31^st December, 2020.

D. SEBI (Buy-back of Securities) Regulations,
2018 (‘Buy-back Regulations’)

Regulation 24(i)(f) of the
Buy-back Regulations imposes a restriction that companies shall not raise
further capital for a period of one year from the expiry of the buy-back
period, except in discharge of their subsisting obligations. Vide a SEBI
Circular⁴, this restrictive timeframe of one year has been reduced
to six months in line with the provisions of section 68(8) of the Companies
Act, 2013. This relaxation is applicable till 31^st December, 2020.
This is a welcome relaxation, much needed in the current scenario where many
companies had announced buy-back prior to the outbreak of Covid-19 and may now
need capital to survive these difficult times.

III. Insolvency and Bankruptcy Code, 2016 (‘IBC’)

The provisions of the IBC can
play a crucial role to make or break an entity in this turbulent business
environment. It is obvious that many businesses would find it difficult to
honour their financial obligations on time due to loss of business, revenue and
profit, as well as due to lack of liquidity in the market. In this regard, the
government has already announced its intention to put in place requisite
safeguards so that business entities are not dragged to insolvency proceedings
to further worsen the ongoing business crisis. The following few key decisions
/ announcements have already been made or are at an advanced stage of
consideration:

1.
The threshold limit of debt default for invoking the Corporate
Insolvency Resolution Process (CIRP) has been increased to Rs. 1 crore from Rs.
1 lakh.

2. An amendment has been made to the IBBI CIRP Regulations to provide
that the period of lockdown imposed by the Central Government due to Covid-19
shall not be counted for the purposes of the time-line for any activity that
could not be completed due to such lockdown in relation to a CIRP.

3. As per a news article, the provisions of
sections 7, 9 and 10 relating to initiation of CIRP is proposed to be suspended
for a period of six months which can be extended up to one year through
promulgation of an ordinance.

To conclude,
we must acknowledge the proactive relief measures announced by the government
and Regulators as far as Corporate and Allied Laws compliances are concerned,
which would provide a much-needed breather to India Inc. to successfully sail
through these difficult times. It would be imperative to continuously evaluate
and announce further substantive reliefs that should be provided till business
normalcy is achieved.

Let
me recall the words of Swami Vivekananda, ‘To think positively and
masterfully, with faith and confidence, life becomes more secure, richer in
achievement and experience’ in the hope that all of us would imbibe this
thought in these difficult times; and once we overcome this situation, we will
cherish this novel experience for the rest of our lives.

___________________________________________________

1 SEBI Circular No. SEBI/HO/DDHS/ON/P/2020/41 dated 23^rdMarch,
2020

2 SEBI Circular No.
SEBI/HO/CFD/CIR/CFD/DIL/67/2020 dated 21^stApril, 2020

3 SEBI Circular No.
SEBI/HO/CFD/DIL1/CIR/P/2020/66 dated 21^st April, 2020

4 SEBI Circular No.
SEBI/HO/CFD/DCR2/CIR/P/2020/69 dated 23^rdApril, 2020

shailesh.kwebmaker

FINANCIAL REPORTING AND AUDITING CONSIDERATIONS ON ACCOUNT OF COVID-19

Most countries, businesses and
companies are expected to be impacted by the Covid-19 pandemic and the
increased economic uncertainty may have major financial reporting consequences.
Supply-chains,distribution-chains, cash-flows, demand, price variations,
facility access, workforce availability, debt obligations, contract
cancellations, are experiencing turbulence.
Such a holistic and cumulative impact on different spheres of business
operations carries a definite, and acute consequence on the financial reporting
by the entity.

The role of preparers of
financial statements, audit committees, auditors and regulators become critical
in this situation. Distilling the impact through the requirements of existing
accounting and auditing requirements frameworks and communicating it
effectively will enable financial markets to base their decisions on such
robust and dependable inputs.

Auditors’ role will require
special attention in relation to appropriate treatment of the financial impacts
and disclosures thereof. The Institute of Chartered Accountants of India has
issued an ‘Accounting & Auditing Advisory on Impact of Coronavirus on
Financial Reporting and the Auditors Consideration’ to help its members in
effectively discharging their obligations.

There will be issues to consider
for this year’s reporting as well as in future years. Every entity would need
to consider the financial impact on itself and the areas of the financial
statements that will be affected along with determining the required
disclosures. Financial reporting areas that are likely to require close
consideration include the following:

(1) Impairment of assets

Impairment of assets becomes the
foremost financial reporting consideration, given that testing of impairment is
predominantly based on the earnings realisation from a group of assets.

The assumptions such as
the fall in demand, impact of lockdown, fall in commodity prices, decrease in
market interest rates, manufacturing plant shutdowns, shop closures, reduced
selling prices for goods and services, cost of capital, etc. may have a
meaningful impact on the impairment testing performed by entities. Whilst most
entities would perform impairment testing on an annual basis, the current
Covid-19 situation would qualify for being an ‘indicator’, thereby requiring
entities to test for impairment even in the interim.

(2) Going concern

Financial statements are prepared
on a going concern basis unless management intends either to liquidate the
entity or to cease trading, or has no realistic alternative but to do so.

With business models being
challenged especially in the travel, hospitality, leisure and entertainment
segments, companies may need to consider the implications on the assessment of
going concern and whether these circumstances will result in prolonged
operational disruption which will significantly erode the financial position of
the entity or otherwise result in failure.

It is the
responsibility of management to make an assessment as to whether the entity is
a going concern or otherwise. The unprecedented and uncertain nature of the
pandemic makes it imperative for an entity to evaluate various scenarios that
are possible and assess their impact on the assumption of going concern.
Inability to satisfy the assumptions of going concern would lead to deviation
from historical cost-based accounting and other impacts.

Management should also expect an informed
and sometimes contrarian dialogue with auditors on the aspect of going concern.

(3) Valuation of inventory

With social distancing norms in
place, entities may not have been able to carry out their annual physical
inventory count fully or even partially on the cut off date. Due to the
lockdowns, auditors and companies may need to rely on additional alternate
procedures to gain comfort on the position and valuation as on 31^stMarch,
2020.

Companies would need to assess
whether, on their reporting date, an adjustment is required to the carrying
value of their inventory to bring them to their net realisable value in
accordance with the principles of Ind AS 2 –Inventories and AS 2 – Valuation
of Inventories.

Given the pandemic, net
realisable value calculation will likely require more detailed methods and
assumptions, e.g. write-down of stock due to lesser expected price realisation,
reduced movement in inventory, expiry of perishable products, lower commodity
prices, or inventory obsolescence. The usability of raw materials and work in
progress may also require close consideration.

A typical question arises in
relation to allocation of overheads to the valuation of inventory. If an entity
ceases production or reduces production for a period of time, significant
portions of unallocated fixed production overheads (e.g., rent, depreciation of
assets, some fixed labour, etc.) will need to be expensed rather than
capitalised, even if some reduced quantity of inventory continues to be
produced.

(4) Lease and onerous contracts

The implications of force
majeure provisions on contracts and leases remain to be tested. It is
possible that there may be changes in the terms of lease arrangements or
lessors may grant concession to lessees with respect to lease payments,
rent-free holidays, additional days in subsequent period, etc. Such revised
terms or concessions shall be considered while accounting for leases which may
lead to the application of accounting relating to the modification of leases.
However, generally anticipated revisions are not taken into account.

Some entities may encounter
situations wherein certain contracts may become onerous to perform. Ind AS 27
defines an onerous contract as a contract in which the unavoidable costs of
meeting the obligations under the contract exceed the economic benefits
expected to be received under it. Price erosions, long-term commitment, salvage
discount, commitment of additional performance are certain triggers to evaluate
whether a contract has turned onerous. As soon as a contract is assessed to be
onerous, a company applying Ind AS 37 records a provision in its financial
statements for the loss it expects to make on the contract.

(5) Expected credit loss (ECL)

ECL is an expectation-based
probability weighted amount determined by evaluating a range of possible
outcomes. It enables entities to make adequate provisions for non-realisation
of financial assets including trade receivables.

Ind AS 109 – Financial
Instruments requires an entity, amongst other matters, to also evaluate the
likelihood of the occurrence of an event if this would significantly affect the
estimation of expected losses of financial assets. In assessing the expected
credit loss, management should consider reasonable and supportable information
at the reporting date. Covid-19 impact would require to be factored in the ECL
probability model of entities.

Expected credit losses may
increase due to an increase in the probability of default for financial assets.
Additionally, the effects of the coronavirus may trigger a significant increase
in credit risk, and therefore the recognition of a lifetime ECL provision on
many financial assets.

Event-based provisioning in
relation to specific instances, like a customer turning insolvent or a specific
financial investment getting affected, would continue to be factored in
irrespective of the ECL.

(6) Revenue recognition and borrowing costs

Ind AS 15 – Revenue from
Contracts with Customers often requires a company to make estimates and
judgements determining the timing and amount of revenue to be recognised.
Covid-19 may result in a likely increase in sales returns, decrease in volume
discounts, higher price discounts, etc. Entities may need to account for
returns and refund liabilities towards the customers whilst recognising the
revenue.

Ind AS 115 requires an entity to
defer a component of revenue to be recognised when the contract includes
variable consideration. This may result in some entities recognising a contract
liability rather than revenue, if significant uncertainty exists surrounding
whether the entity will realise the entire consideration.

Separately, the guidance on
borrowing costs requires an entity to suspend the capitalisation of borrowing
costs to an asset under construction for such extended periods that the actual
construction of the asset is suspended.

(7) Government grant

Governments may support entities
with monetary and non-monetary measures, but such benefits may be one-time
events or spread over time.

Entities may need to establish an
accounting policy regarding government assistance which needs to be appropriate
and in line with the requirements of Ind AS 20 – Accounting for Government
Grants and Disclosure of Government Assistance. It is essential to distinguish
between government assistance and government grants and ensure that grants are
recognised only when the recognition criterion in Ind AS 20 is met. Some of the
government assistance may involve deferral of tax payments or other tax
allowances. The accounting treatment of tax allowances may need to be accounted
for under Ind AS 12 – Income Taxes
rather than Ind AS 20.

The current relaxation by the
Reserve Bank of India allowing a moratorium on loan instalments may not qualify
as a government grant.

(8) Deferred tax

Ind AS 12 – Income Taxes
requires that the measurement of deferred tax liabilities and deferred tax
assets shall reflect the tax consequences that would follow from the manner in
which the entity expects, at the end of the reporting period, to recover or
settle the carrying amount of its assets and liabilities.

Covid-19 could affect future
profits and / or may also reduce the amount of deferred tax assets or create
additional deductible temporary differences due to various factors (e.g. asset
impairment, non-utilisation of available losses, change in projections).
Entities having deferred tax assets on account of accumulated tax losses would
need to reassess their measurement with a newer set of business projections.

Entities may have considered the
assumption of ‘indefinite reinvestment’ and not recognised deferred tax on
accumulated undistributed earnings of subsidiaries. Such assumptions may need
to be revisited to determine if they remain appropriate given the entity’s
current cash flow projections.

(9) Fair value and hedge accounting

Ind AS 113 – Fair Value
Measurement recognises the fact that observable inputs being considered for
deriving fair value may be either of (i) observable market price (quoted price
in an active market – Level 1) or (ii) application of valuation techniques
(Level 2 and Level 3).

With 1,500 companies trading at
their 52-week low on the Bombay Stock Exchange, the fair value measurement
considered by entities may need a re-look across all three methods of observable
inputs.

While volatility in the financial
markets may suggest that the prices are aberrations and do not reflect fair
value, it would not be appropriate for an entity to disregard market prices at
the measurement date, unless those prices are from transactions that are not
orderly.

The financial assumptions in a
valuation model like discounting rate, weighted average cost of capital, etc.
that are considered in a Level-3 valuation would need a reassessment.

Hedge effectiveness assessment is
required to be performed at the inception and on an on-going basis at each
reporting date or in case of a significant change in circumstances, whichever
occurs first. The current volatility in the markets may result in an entity
requiring to either re-balance the hedge where applicable, or discontinuing
hedge accounting if an economic relationship no longer exists, or the
relationship is dominated by credit risk. Certain opportunistic and speculative
transactions may also take place.

When a hedging relationship is
discontinued because a forecast transaction is no longer highly probable, a
company needs to determine whether the transaction is still expected to occur.
If the transaction is:

(i) still expected to occur, then gains or losses on the hedging
instrument previously accumulated in the cash flow reserve would generally
remain there until the future cash flows occur; or

(ii) no longer expected to occur, then the accumulated gains or losses
on the hedging instrument need to be immediately reclassified to profit or
loss.

(10) Disclosures and management guidance

Transparent disclosures should be
made on the effects and risks of this outbreak on the entity. The Securities
and Exchange Commission instructed publicly traded companies to provide
‘robust’ disclosures on the impact of Covid-19 on their operations and results.
Entities would need to disclose the impact of Covid-19 on their performance,
including qualitative aspects of the business.

Difficult times also warrant
accuracy in guidance; in an uncommon move, leading Indian bell-wether companies
like Wipro and Infosys have refrained from giving any annual guidance to
their shareholders for F.Y. 2020-21, citing the uncertain impact of Covid-19.

The relevance of an audit effort
on the financial statements is further emphasised in uncertain times like
these. Some of the common questions that auditors could encounter would
include:

(A) Have the risk considerations relevant to an entity changed, thereby
requiring an amendment to the audit approach?

Standards on auditing require an
auditor to identify and assess the risk of material misstatements and
materiality in planning and performing an audit. This assessment may have been
made during the earlier half of the financial year 2019-20 and the audit
procedures tailored on the basis of such earlier assessment. Due to Covid-19
and its far-reaching implications, the risk considerations relevant to an
entity may change significantly, thereby requiring an auditor to revisit the
audit plan, materiality and the approach to testing.

The perfect storm that Covid-19
offers has the potential to usurp good and healthy business models and push
profitable companies into a survival challenge. It would be important for
auditors to revisit the audit plan and the risk considerations once again given
the exposure an entity would have to Covid-19.

(B) Have the audit procedures been compromised on account of
restrictions, lockdowns and social distancing?

Auditors may face a challenge in
performing routine audit procedures during times of lockdown, social
distancing, travel restrictions, lesser access to management teams, etc.
Typically, audit procedures that have either a physical work-stream or
dependency on a third party are likely to get impacted. These could include
physical verification of inventory, cash on hand reviews, seeking external
balance confirmations, requiring comfort from component auditors, etc.

SA 501 requires the auditor to
observe some physical inventory counts on an alternative date if the attendance
of physical counting cannot be performed at the year-end date, or perform
alternative audit procedures where attendance of physical inventory counts is
impracticable. The standard also requires an auditor to perform roll-back procedures
to derive the desired comfort on inventory level on a reporting date.

Audit procedures should be
simulated to understand the potential impacts on such procedures to be
performed and alternate procedures identified to supplement or otherwise replace
such an audit procedure.

(C) How does an auditor provide comfort on the operating effectiveness
of internal financial controls given the altered way of working, such as work
from home, no wet signatures, cloud dependency, etc.?

Standards on auditing require an
auditor to assess the design and implementation along with the operating
effectiveness of internal controls over financial reporting. The sudden impact
of Covid-19 and the precautionary measures taken by governments across the
world have resulted in newer work models of work from home, no wet signatures,
cloud dependency, etc.

Auditors would need to evaluate
the impact of such differentiated working models on the internal control
framework and the desired reliance by the auditor on their operating
effectiveness. If the level of expected controls reliance changes, it is
important to document this and any other resulting changes to the planned audit
response.

(D) Is Covid-19 an adjusting event or a non-adjusting event?

According to Ind AS 10 – Events
after the reporting date, events occurring after the reporting period are
categorised into two, viz. (a) Adjusting events, i.e. those that require
adjustments to the amounts recognised in the financial statements for the
reporting period, and (b) Non-adjusting events, i.e. those that do not require
adjustments to the amounts recognised in the financial statements for the
reporting period.

Entities and auditors would need
to ascertain the impact of Covid-19 as either an adjusting or non-adjusting
event given the peculiarity that the effects of Covid-19 and lockdown were
prevalent in March, 2020 itself. Entities impacted by the Covid-19 pandemic
will need to assess how these events have, and may in future impact their
operations. Managements will need to consider the facts and apply critical
judgement in assessing what specific events and, more importantly, the timing
of those events, provide evidence of conditions that existed at the end of the
reporting period in order to determine if an adjustment is required. If it is
concluded as non-adjusting, the entity will need to determine if disclosure of
the event is required.

(E) Does Covid-19 require added consideration to emphasis of matter and
in relation to going concern uncertainty?

If the auditor considers it
necessary to draw users’ attention to a matter presented or disclosed in the
financial statements that in the auditor’s judgement is of such importance that
it is fundamental to users’ understanding of the financial statements, the
auditor shall include an ‘Emphasis of Matter’ paragraph in the Auditor’s
Report. SA 706 also cites instances that may warrant an emphasis of matter
observation by the auditor. One such instance is ‘A major catastrophe
that has had, or continues to have, a significant effect on the entity’s
financial position.’ Depending on the circumstances of the entity, the
auditor may consider appropriate reporting as emphasis of matter.

When
preparing financial statements, management is required to make an assessment of
an entity’s ability to continue as a going concern. In line with SA 570
(Revised), the auditor’s responsibilities are to obtain sufficient appropriate
audit evidence regarding, and conclude on, the appropriateness of management’s
use of the going concern basis of accounting in the preparation of the
financial statements, and to conclude, based on the audit evidence obtained,
whether a material uncertainty exists about the entity’s ability to continue as
a going concern.

Depending
on the circumstances, the auditor would need to consider whether to include a
separate section ‘Material Uncertainty Related to Going Concern’ in the
auditor’s report.

shailesh.kwebmaker

COVID AND FAIR VALUE MEASUREMENT

Fair value measurements are
required or permitted under Ind AS for many financial instruments and
non-financial assets and liabilities. They are required for quoted and unquoted
investments in shares, bonds, receivables, payables, derivatives, etc. As also
in certain situations for non-financial items, such as in determining
impairment of property, plant, equipment or goodwill. This article attempts to
discuss whether the current markets post the Covid outbreak can be considered
as not being orderly and therefore ignored for determining the fair values for
the year ending 31^st March, 2020 financial statements.

Before we attempt to address the
moot question, whether markets as on 31^st March, 2020 were orderly
or not, let us first look at the various provisions of Ind AS 113 Fair Value
Measurement.

(i)
Paragraph 2 of Ind AS 113 states that ‘Fair value is a market-based
measurement, not an entity-specific measurement. For some assets and
liabilities, observable market transactions or market information might be
available. For other assets and liabilities, observable market transactions and
market information might not be available. However, the objective of a fair
value measurement in both cases is the same – to estimate the price at which an
orderly transaction to sell the asset or to transfer the liability would take place
between market participants at the measurement date under current market
conditions (i.e., an exit price at the measurement date from the
perspective of a market participant that holds the asset or owes the
liability).’

(ii) Paragraph 3 of Ind AS 113
states that ‘When a price for an identical asset or liability is not
observable, an entity measures fair value using another valuation technique
that maximises the use of relevant observable inputs and minimises the use of
unobservable inputs. Because fair value is a market-based measurement, it is
measured using the assumptions that market participants would use when pricing
the asset or liability, including assumptions about risk. As a result, an
entity’s intention to hold an asset or to settle or otherwise fulfil a
liability is not relevant when measuring fair value.’

(iii) Paragraph 61 of Ind AS 113
states as follows ‘An entity shall use valuation techniques that are
appropriate in the circumstances and for which sufficient data are available to
measure fair value, maximising the use of relevant observable inputs and
minimising the use of unobservable inputs.’

(iv) Ind AS 113 defines orderly
transaction as ‘A transaction that assumes exposure to the market for a
period before the measurement date to allow for marketing activities that are
usual and customary for transactions involving such assets or liabilities; it
is not a forced transaction (e.g. a forced liquidation or distress sale.).’

IDENTIFYING TRANSACTIONS THAT ARE NOT
ORDERLY

Ind AS 113.B38 states that ‘If
an entity concludes that there has been a significant decrease in the volume or
level of activity for the asset or liability in relation to normal market
activity for the asset or liability (or similar assets or liabilities), further
analysis of the transactions or quoted prices is needed. A decrease in the
volume or level of activity on its own may not indicate that a transaction
price or quoted price does not represent fair value or that a transaction in
that market is not orderly.’

Ind AS 113.B43 provides guidance
for determination of whether a transaction is orderly (or is not orderly).
Whether there has been a significant decrease in the volume or level of
activity requires comparison to normal market activity level. B43 lists down
the following circumstances that may indicate that a transaction is not
orderly:

(a) There was not adequate
exposure to the market for a period before the measurement date to allow for
marketing activities that are usual and customary for transactions involving
such assets or liabilities under current market conditions.

(b) There was a usual and
customary marketing period, but the seller marketed the asset or liability to a
single market participant.

(d) The seller was required to
sell to meet regulatory or legal requirements (i.e., the seller was forced).

(e) The transaction price is an
outlier when compared with other recent transactions for the same or a similar
asset or liability.

OBSERVATIONS AND CONCLUSIONS

Fair value is a measurement of a
date-specific exit price estimate based on assumptions (including those about
risks) that market participants would make under current market conditions.
The fair value measurement objective is to determine an exit price at the
measurement date from the perspective of a market participant. Fair value of
the asset or liability reflects conditions as of the measurement date and not
a future date. It would not be appropriate for an entity to disregard
market prices at the measurement date, unless those prices are from
transactions that are not orderly. The concept of an orderly transaction is
intended to distinguish a fair value measurement from the price in a distressed
sale or forced liquidation. The intent is to convey the current value of
the asset or liability at the measurement date, not its potential value at a
future date.

The current situation may make it
challenging to estimate the price that would be obtained due to highly volatile
markets and / or a lack of an active market existing for certain instruments
(e.g. derivatives that are not traded on an exchange). However, the objective
of ‘fair value’ will continue to be to determine a price at which an orderly transaction
would take place between market participants under conditions that existed at
the measurement date. It would not be appropriate to adjust or disregard
observable transactions unless those transactions are determined to be not
orderly. There is a high bar to conclude that a transaction price is not
orderly under Ind AS 113.B43, which provides a list of factors to consider if a
transaction is not orderly. The author believes that there is an implicit
rebuttable presumption that observable transactions between unrelated parties
are orderly. In almost all instances, such transactions are considered orderly.
Therefore, the evidence necessary to conclude an observable transaction between
unrelated parties is not orderly should be incontrovertible. Accordingly,
the fair value of an investment in an active market (e.g. BSE, NSE, etc.) would
continue to be calculated as the product of the quoted price for the individual
instrument times the quantity held (commonly referred to as ‘P times Q’), even
in times of significant market volatility. Volatility may raise questions
as to whether current pricing is reflective of fair value. However, the
standard does not permit current market evidence to be dismissed on the basis
of volatility alone.

Some may argue that in the
current environment there is an element of forced selling and that fair value
measurement is not intended to reflect prices in a forced or distressed sale.
Nevertheless, the presence of distressed or forced sellers in a market may
influence the price that could be obtained by a non-distressed seller in an
orderly transaction.

Fair value measurement would
consider how the Covid outbreak and any actions taken by governments at the
reporting date would have impacted market participants’ valuation assumptions.
Current market conditions may appear to be a ‘distress sale’, however, if such
conditions exist broadly in the market, then those factors should be
incorporated into a fair value measurement. It would be incorrect to adjust a
measure for expected ‘rebounds’ in value. For financial instruments with level
1 prices (those that are quoted on an active market), even if there is a
significant decline in activity on that market, this does not mean that the
price has become unobservable or that it was
under a distress sale or a forced liquidation.

Whilst determining a valuation
for other than level 1 category of instruments (i.e., those that are quoted in
an active market), preparers of financial statements may have to use valuation
techniques. This may be the case for several unquoted shares or derivatives or
bonds, etc. Preparers using valuation techniques may have to consider the
impact of Covid-19 on various assumptions including discount rates,
credit-spread / counter-party credit risk, etc. In doing so, the aim will
be to maximise observable inputs and minimise unobservable inputs. The
observable inputs will reflect current market conditions at the balance sheet
date and should not be ignored.

The
ICAI guidance ‘Impact of Corona Virus on Financial Reporting and the
Auditors Consideration’ states that ‘It may not be always appropriate to
conclude that all transactions in such a market are not orderly. Preparers
should be guided by the application guidance in Ind AS 113 that indicates
circumstances in which the transaction is not considered an orderly
transaction.’ Though the ICAI guidance does not provide any detailed
guidance, it makes no exception to complying with the requirements of the
Standards. For Indian GAAP, similar considerations will apply in respect of
financial assets within the scope of AS 13 Accounting for Investments.

shailesh.kwebmaker

Section 69C – Unexplained expenditure – Bogus purchases – Mere reliance by the A.O. on information obtained from the Sales Tax Department, or the statements of two persons made before the Sales Tax Department, would not be sufficient to treat the purchases as bogus

5. Pr. CIT-13 vs. Vaman International Pvt. Ltd. [Income tax Appeal
No. 1940 of 2017]

Date of order: 29^th January, 2020

ACIT vs. Vaman International Pvt.
Ltd. [ITA No. 794/Mum/2015; Date of order: 16^th November, 2016;
A.Y.: 2010-11; Bench ‘F’]

Section 69C – Unexplained
expenditure – Bogus purchases – Mere reliance by the A.O. on information
obtained from the Sales Tax Department, or the statements of two persons made
before the Sales Tax Department, would not be sufficient to treat the purchases
as bogus

The assessee is a company engaged
in the business of trading and sale of furniture and allied items on wholesale
basis. The A.O. doubted the expenditure of Rs. 4,75,42,385 stated to be on
account of purchases from two parties, viz., Impex Trading Co. (for an amount
of Rs. 2,90,80,292) and Victor Intertrade Pvt. Ltd. (Rs. 1,84,62,093). The A.O.
acted on the basis of information received from the office of the
Director-General of Income Tax (Investigation), Mumbai and from the Sales Tax
Department that in the list of bogus sales parties the names of the two
aforesaid parties were included which rendered the purchase transaction
doubtful.

The A.O. observed that the
assessee did not produce lorry receipts and other related documents to reflect
the movement of goods sold and purchased which were crucial for determining the
genuineness of the purchase transaction. In the absence thereof, the A.O. added
the said amounts to the total income of the assessee u/s 69C by treating the
expenditure as bogus purchases.

The first appellate authority
held that such addition by the A.O. could not be sustained. Accordingly, he deleted
the addition of Rs. 4,75,42,385. The Tribunal, by an order dated 16^th
November, 2016, upheld the order of the first appellate authority and dismissed
the appeal of the Revenue.

On further appeal, the Hon. High
Court observed that section 69C deals with unexplained expenditure. But it also
contains a deeming provision which states that if an assessee incurs any
expenditure in the relevant previous year but offers no explanation about the
source of such expenditure or part thereof, or if the explanation provided is
not satisfactory to the A.O., then the amount covered by such expenditure or
part thereof shall be deemed to be the income of the assessee; and once it is
so deemed, the same shall not be allowed as a deduction under any head of
income.

The Court relied on the Gujarat
High Court decision in Krishna Textiles vs. CIT, 310 ITR 227 wherein it has been held that u/s 69C the
onus is on the Revenue to prove that the income really belongs to the assessee.

The Hon. Court observed that the
A.O. did not doubt the sales and stock records maintained by the assessee. By
submitting confirmation letters, copies of invoices, bank statements, payment
orders, payment by account payee cheques, etc., the assessee had proved that
the sales and purchases had taken place. By highlighting the fact that all the
payments against the purchases were made through banking channels by way of
account payee cheques, the first appellate authority held that the source of
expenditure was fully established by the assessee beyond any doubt. He had
further recorded that during the appellate proceedings the assessee had
furnished complete quantitative details of the items of goods purchased during
the year under consideration and their corresponding sales. Mere reliance by
the A.O. on information obtained from the Sales Tax Department, or the
statements of two persons made before the Sales Tax Department, would not be
sufficient to treat the purchases as bogus and thereafter to make the addition
u/s 69C.

The Tribunal also held that if
the A.O. had doubted the genuineness of the purchases, it was incumbent upon
him to have caused further inquiries in the matter to ascertain the genuineness
or otherwise of the transactions and to have given an opportunity to the
assessee to examine / cross-examine those two parties vis-a-vis the
statements made by them before the Sales Tax Department. Without causing such
further inquiries in respect of the purchases, it was not open to the A.O. to
make the addition u/s 69C of the Act.

_____________________________________________________________________________________________________

Errata

IN THE HIGH COURTS, March 2020

We regret to point out a typographical error
on Page 51 of the caption issue in respect of the following decision:

The Pr CIT -1 v/s M/s. Ami Industries (India)
P Ltd [ Income tax Appeal no 1231 of 2017 dt : 29/01/2020
(Bombay HighCourt)].

where “Addition is
not justified “ should be replaced in place of “Addition is justified” and be
read accordingly.

shailesh.kwebmaker

Condonation of delay – 458 days – Belated appeal against section 263 order before ITAT – Appeal filed after consequential assessment order and dismissal of appeal – Delay condoned on payment of costs

4. Procter & Gamble Hygiene and Healthcare Ltd. vs.
Commissioner of Income Tax-8 [Income tax Appeal No. 1210 of 2017]

Date of order: 4^th February, 2020

Procter & Gamble Hygiene
& Healthcare Ltd. vs. CIT, Range-8 [ITA No. 4866/Mum/2015; Date of order:
30th November, 2016; A.Y.: 2008-09; Bench ‘H’ Mum.]

Condonation of delay – 458 days –
Belated appeal against section 263 order before ITAT – Appeal filed after
consequential assessment order and dismissal of appeal – Delay condoned on
payment of costs

The issue involved in the appeal
is condonation of delay in filing of the appeal u/s 254 of the Act by the
appellant before the Tribunal. The A.O. passed the assessment order on 1^stFebruary, 2012 in which certain deductions were allowed u/s 80IC. The
CIT-8, Mumbai was of the view that the A.O. had wrongly allowed deduction u/s
80IC. He was of the further view that the assessment order so made was
erroneous and prejudicial to the interest of the Revenue. Accordingly, he
invoked jurisdiction u/s 263 and vide an order dated 31^st
March, 2014 set aside the assessment order by directing the A.O. to pass a
fresh assessment order by taxing the interest income earned by the petitioner
on the amount covered by the deduction sought for u/s 80IC under the head
‘income from other sources’. The A.O. passed the consequential assessment order
dated 9^th June, 2014. It was against this assessment order that the
assessee preferred an appeal before the CIT(A)-17.

However, by
the appellate order dated 28^thAugust, 2015 the first appellate
authority dismissed the appeal of the assessee, holding that it was not
maintainable as the A.O. had only given effect to the directions given to him
by the CIT, relying on the decision in Herdillia Chemicals Ltd. vs. CIT
[1997] 90 Taxman 314 (Bom.). Aggrieved by this, the petitioner
preferred an appeal before the Tribunal which was registered as ITA No.
5096/Mum/2015. In the meanwhile, the assessee, having realised that the order
passed by the jurisdictional administrative commissioner u/s 263 of the Act had
remained unchallenged, belatedly filed an appeal before the Tribunal which was
registered as ITA No. 4866/Mum/2015. In the process there was a delay of 450
days. The assessee filed an application before the Tribunal for condonation of
delay in filing ITA No. 4866/Mum/2015 and in support thereof also filed an
affidavit dated 12^th September, 2016 explaining the delay. The
assessee stated in its affidavit that the appellant did not prefer an appeal as
the Learned CIT had set aside the assessment so that the issues involved would
be agitated before the A.O. or the appellate authorities, i.e., against the
order of the A.O.

Both the appeals were heard
together and by a common order dated 30^thNovember, 2016 both the
appeals were dismissed. The appeal ITA No. 5096/Mum/2015 was dismissed on the
ground that there was no question of any consequential assessment as per the
revision order. The assessee’s appeal was rightly dismissed by the CIT(A).

Insofar as
ITA No. 4866/Mum/2015 was concerned, the same was dismissed as being
time-barred as the delay in filing the appeal was not condoned. The ITAT
observed that the assessee had clearly, and presumably only on the basis of a
legal opinion, taken a conscious decision not to appeal against the revision
order. No reasonable, much less sufficient, cause had been advanced for
condonation of delay. It also stated that there was no basis for the said bona
fide belief which is stated as the reason for the assessee having not
preferred an appeal against the revision order.

The
Hon. High Court observed that when the Tribunal had entertained the appeal
arising out of the consequential assessment, it was not justified on the part
of the Tribunal to have rejected the appeal filed by the appellant against the
order passed by the jurisdictional administrative commissioner u/s 263 of the
Act because that was the very foundation of the subsequent assessment
proceedings. Therefore, in the interest of justice the delay in filing appeal
was condoned and the said appeal was directed to be heard on merit by the
Tribunal. The appellant was directed to pay costs of Rs. 25,000 to the
Maharashtra State Legal Services Authority.

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Complaint filed u/s 276C (1) of the Act – Wilful attempt to evade tax – Appeal pending before CIT(A) – Criminal proceedings kept in abeyance

3. M/s Beaver Estates Pvt.
Ltd vs. The Assistant Commissioner of Income Tax Corporate Circle 1(1);
OP(Crl.) No. 400 of 2019

Date of order: 23^rd
October, 2019

(Kerala High Court)

[Complaint filed CC No. 65/2015
of Additional Chief Judicial Magistrate (E&O), Ernakulam]

Complaint filed u/s 276C (1) of
the Act – Wilful attempt to evade tax – Appeal pending before CIT(A) – Criminal
proceedings kept in abeyance

In the instant case, the
prosecution was launched u/s 276C(1) of the Act for wilful attempt to evade tax
before the Additional Chief Judicial Magistrate’s Court (Economic Offences),
Ernakulam. The first petitioner is a company and the second petitioner is the
Managing Director of the said company.

The plea of the petitioners was
that they have filed an appeal before the statutory authority challenging the
assessment and that the decision in the appeal has got a bearing on the
prosecution against them; therefore, the criminal proceedings pending against
them may be kept in abeyance till the disposal of the appeal. The petitioners
contended that if the statutory appeal filed by them under the Act is allowed,
it would knock down the very basis of the prosecution against them and,
therefore, the criminal proceedings may be ordered to be kept in abeyance.

The Hon. Court noticed that
section 276C provides the punishment for wilful attempt to evade tax, penalty
or interest. Section 278B provides for offences by companies. In the instant
case, the prosecution is u/s 276C(1) for wilful attempt to evade tax. The
decision of the statutory appellate authority regarding the assessment and
computation of tax would have a bearing on the prosecution against the
petitioners.

The Court relied on the decision
of the Apex Court in the case of K.C. Builders vs. Assistant Commissioner
of Income Tax (2004) 2 SCC 731 wherein it held that the levy of
penalties and prosecution u/s 276C are simultaneous and, hence, once the penalties
are cancelled on the ground that there is no concealment, the quashing of
prosecution u/s 276C is automatic. In the instant case, the prosecution is u/s
276C(1) for wilful attempt to evade tax. The decision of the statutory
appellate authority regarding the assessment and computation of tax would have
a bearing on the prosecution against the petitioners.

Similarly, in Commissioner
of Income Tax vs. Bhupen Champak Lal Dalal AIR 2001 SC 1096, the Court
had observed that the prosecution in criminal law and proceedings arising under
the Act are undoubtedly independent proceedings and, therefore, there is no
impediment in law for the criminal proceedings to proceed even during the
pendency of the proceedings under the Act. However, a wholesome rule will
have to be adopted in matters of this nature where courts have taken the view
that when the conclusions arrived at by the appellate authorities have a
relevance and bearing upon the conclusions to be reached in the case,
necessarily one authority will have to await the outcome of the other
authority.

The Department relied on the
decision of the Apex Court in Sasi Enterprises vs. Assistant Commissioner
of Income Tax (2014) 5 SCC 139. The Court held that the decision in Sasi
Enterprises (Supra) has got no application to the present case because
the prosecution against the petitioners is for committing the offence u/s 276C
and not for the offence u/s 276CC.

The
Court held that the decision of the statutory appellate authority regarding the
assessment and computation of tax would have a bearing on the prosecution
against the petitioners for wilful attempt to evade tax. Therefore, the
Additional Chief Judicial Magistrate (Economic Offences), Ernakulam was
directed to keep in abeyance all further proceedings against the petitioners in
the criminal case till the disposal of the appeal filed before the Commissioner
of Income Tax (Appeals), Kochi.

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