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Search and seizure (presumption u/s 132[4A]) – Section 132(4A) of ITA, 1961 – No addition could be made on account of undisclosed income only on basis of presumptions u/s 132(4A) without recording any findings as to how loose sheets found during search were linked to assessee – In absence of corroborative evidence, Tribunal was not justified in reversing finding of CIT(A)

18. Ajay Gupta vs. CIT

[2020] 114 taxmann.com 577 (All.)

Date of order: 13th November, 2019

 

Search and seizure (presumption u/s 132[4A]) – Section 132(4A) of ITA, 1961 – No addition could be made on account of undisclosed income only on basis of presumptions u/s 132(4A) without recording any findings as to how loose sheets found during search were linked to assessee – In absence of corroborative evidence, Tribunal was not justified in reversing finding of CIT(A)

 

The residential premises of the assessee were searched u/s 132 of the Income-tax Act, 1961 on 28th February, 2000. Pursuant to a notice u/s 158BC, the assessee filed return of income declaring NIL undisclosed income. The A.O. assessed the undisclosed income at Rs. 65,33,302.

 

The CIT (Appeals) partly allowed the appeal of the assessee. The CIT (Appeals) deleted the addition of Rs. 5,58,870 made by the A.O. on account of papers found during the search. The Tribunal reversed the order of the CIT (Appeals) and restored that of the A.O. The appeal by the assessee was admitted on the following questions of law:

 

‘1. Whether the presumption u/s 132(4A) of the Income-tax Act can be raised in the assessment proceedings?

 

2. Whether, apart from section 132(4A) of the Act, the burden to explain the documents seized from the possession of the assessee during search is upon him, and if it is so, then has he discharged the burden?’

 

The Allahabad High Court allowed the appeal and held as under:

 

‘i) It is not in dispute that two loose papers were found during search from the premises of assessee, however, during block assessment proceedings, the assessee had denied the documents and statement was recorded by Deputy Director of Investigation; he had submitted that he had no concern with the said documents so seized. Further, the A.O. while passing the assessment order, had only on basis of the loose papers found during search made addition to the undisclosed income of the assessee while the entries of said papers remained uncorroborated.

 

ii) This Court, in the case of CIT vs. Shadiram Ganga Prasad, 2010 UPTC 840, has held that the loose parchas found during search at the most could lead to a presumption, but the Department cannot draw inference unless the entries made in the documents so found are corroborated by evidence.

 

iii) As section 132(4A) of the Act provides that any books of accounts, documents, money, bullion, jewellery or other valuable articles or things found in possession of, or in control of any person in course of search may be presumed to be belonging to such person, and further, if the contents of such books of accounts and documents are true. But this presumption is not provided in absolute terms and the word used is “may” and not “shall”, as such the Revenue has to corroborate the entries made in the seized documents before presuming that transactions so entered were made by the assessee. Presumption so provided is not in absolute terms but is subject to corroborative evidence.

 

iv) In the present case, the Tribunal only on basis of presumption u/s 132 (4A) of the Act, reversed the finding of CIT (Appeals) without recording any finding as to how the loose sheets which were recovered during search were linked with the assessee. In the absence of corroborative evidence, the Tribunal was not justified in reversing the finding by the CIT (Appeals).

 

v) In view of the above, we are of the considered view that the order passed by the Tribunal reversing the finding of CIT (Appeals) in regard to deletion of the addition made of Rs. 5,58,870 and restoring the order of the A.O. on mere presumption is unsustainable. The order dated 12th March, 2010 is set aside to that extent and the matter is remitted back to the Tribunal to decide afresh as far as addition of Rs. 5,58,870 is concerned, within a period of three months from today.’

Revision – Business loss – Allowable (as share trading) – Section 28(i) r.w.s. 263 of ITA, 1961 – Assessee company, engaged in business of financing and trading in shares – During assessment, A.O. before accepting assessee’s claim of operational loss in share trading, verified demat accounts, sale, purchase and closing stocks of assessee company and inquired about said loss – Show cause notice u/s 263 for revising assessment could not be issued on the basis that said accounts were to be examined

17. Principal CIT vs. Cartier Leaflin (P) Ltd.

[2019] 112 taxmann.com 63 (Bom.)

[2020] 268 Taxman 222 (Bom.)

Date of order: 15th October, 2019

A.Y.: 2011-12


Revision – Business loss – Allowable (as share trading) – Section 28(i) r.w.s. 263 of ITA, 1961 – Assessee company, engaged in business of financing and trading in shares – During assessment, A.O. before accepting assessee’s claim of operational loss in share trading, verified demat accounts, sale, purchase and closing stocks of assessee company and inquired about said loss – Show cause notice u/s 263 for revising assessment could not be issued on the basis that said accounts were to be examined

 

The assessee was engaged in the business of financing and trading in shares. In its return of income, the assessee declared a total loss of Rs. 11.29 crores. In assessment, the A.O. made a few additions / disallowances which resulted in the assessee’s taxable income reaching Rs. 35.50 crores. Subsequently, the Principal Commissioner opined that the amount of Rs. 8.79 crores shown under ‘other operating losses’ seemed to be a trading loss incurred by the assessee company out of its business of financial and capital market activities, which was its main business activity. He opined that on perusal of the assessment records, it was noticed that no examination of the books of accounts, transaction accounts of the share trading activity carried out by the assessee company vis-a-vis the demat accounts was carried out by the A.O. and that the entire operating loss as mentioned was accepted without any verification or proper application of mind. He, thus, held that the assessment order passed by the A.O. appeared to be erroneous and prejudicial to the interest of Revenue. Notice u/s 263 of the Income-tax Act, 1961 was issued by the Principal Commissioner.

 

On the assessee’s appeal, the Tribunal noted that from the records available it was evident that complete details in support of the claim of operating loss of Rs. 8.79 crores were made available by the assessee company to the A.O. In fact, the manner in which the operating loss was arrived at was submitted in a tabulated form along with item-wise details of all transactions during the assessment proceedings. Thus, the Tribunal concluded that the show cause notice u/s 263 by the Principal Commissioner was issued without examining the assessment records and the view taken by the A.O. after examination of exhaustive details and evidence was a possible view. The Tribunal held that the notice u/s 263 is not valid.

 

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

‘i) The finding of fact in the order of the Tribunal is that the proceedings u/s 263, on the face of it, have been initiated without examination of records before the A.O. is not shown to be perverse. It is clear that the show cause notice proceeds on the basis that the books of accounts, transaction accounts of share trading carried out by the assessee vis-a-vis demat accounts have not been examined by the A.O. during the course of assessment proceedings. However, in the assessment order dated 28th March, 2014 itself, the A.O. had recorded that he examined the demat account in order to verify the share trading activities claimed by the assessee. Moreover, before passing the assessment order, sale, purchase and closing stocks were also examined by the A.O.

 

ii) Thus, the basis to invoke section 263 factually did not exist as there was due inquiry by the A.O. during the assessment proceedings leading to the assessment order. Thus, it is amply clear that the A.O. had applied his mind while accepting the claim of the assessee of operating loss of Rs. 8.79 crores making the proceedings u/s 263 bad in law. In any event, the view taken on facts by the A.O. is a possible view and the same is not shown to be bad.

 

iii) In the above view, the question as proposed does not give rise to any substantial question of law. Thus, not entertained. And appeal is, therefore, dismissed.’

I – Section 115JB – Provision for leave encashment is not to be added back to the book profit for computation u/s 115JB as it is an ascertained liability determined on actuarial basis II – Provision for wealth tax was not to be reduced from book profit to be computed u/s 115JB

6. [2020] 114 taxmann.com 538 (Mum.)(Trib.)

Caprihans India Ltd. vs. DCIT

ITA No. 4252/Mum/2011

A.Y.: 2005-06

Date of order: 23rd December, 2019

 

I – Section 115JB – Provision for leave encashment is not to
be added back to the book profit for computation u/s 115JB as it is an
ascertained liability determined on actuarial basis

 

II – Provision for wealth tax was not to be reduced from
book profit to be computed u/s 115JB

 

FACTS I

While assessing the total income of the assessee u/s 153C
r.w.s. 143(3) of the Act, the A.O. for the purpose of computing book profits
added the amount of provision for leave encashment of Rs. 15,30,070 on the
ground that it was an unascertained liability. He held that the liabilities
pertaining to leave encashment were not ascertained by the end of the financial
year, therefore the assessee had made a provision for the same.

 

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

 

The assessee then preferred an appeal to the Tribunal where,
relying on the ratio of the decision of the Punjab & Haryana High
Court in the case of CIT vs. National Hydro Electric Power Corporation
Ltd. [2010] 45 DTR 117 (P&H) it was contended that the provision
for leave encashment was made in the books on actuarial basis, therefore the
same could not be held to be in the nature of a provision for an unascertained
liability.

 

HELD I

The Tribunal held that if a business liability had definitely
arisen in the accounting year, the deduction should be allowed although the
liability may have to be quantified and discharged at a future date.

 

It observed that this view is fortified by the judgment of
the Hon’ble Supreme Court in the case of Bharat Earth Movers vs. CIT
[2000] 245 ITR 428 (SC). In the said case, it was observed by the
Hon’ble Apex Court that what should be certain is the incurring of the
liability and the fact that the same is capable of being estimated with
reasonable certainty, although the actual quantification may not be possible.
The Apex Court had observed that the provision for meeting the liability for
encashment of earned leave by the employees is not a contingent liability and
is admissible as a deduction.

 

In view of the above, the Tribunal held that as the provision
for leave encashment had been made by the assessee on actuarial basis,
therefore the same being in the nature of an ascertained liability could not
have been added by the A.O. for the purpose of determining the ‘book profit’
u/s 115JB. This ground of appeal of the assessee was allowed.

 

FACTS II

The assessee, while computing the ‘book profit’ u/s 115JB had
added back the amount of the wealth tax provision. On appeal, the assessee by
way of a specific ground had assailed the addition of the provision for wealth
tax while computing the ‘book profit’ u/s 115JB. However, the CIT(A) declined
to accept the aforesaid claim. Observing that the said provision was covered
u/s 115JB, the CIT(A) had upheld the view taken by the A.O.

 

Aggrieved, the assessee preferred an appeal to the Tribunal
where it was contended that as the provision for wealth tax does not fall
within any of the items of the ‘Explanation’ to section 115JB, the same could
not be added back while computing the ‘book profit’ under the said statutory
provision. In support of the aforesaid contention, reliance was placed on the
order of the ITAT, Kolkata, Special Bench in the case of JCIT vs. Usha
Martin Industries Ltd. [2007] 104 ITD 249 (SB).

 

HELD II

The Tribunal observed that an addition to the
‘book profit’ which during the period relevant to the year under consideration
was computed as per Part II of Schedule VI of the Companies Act, 1956 could be
made only if the same was permissible as per Item No. (a) to (k)
of the Explanation to section 115JB. As contemplated in clause (a) of
the ‘Explanation’ to this section, ‘the amount of Income-tax paid or payable,
and the provision therefor’ was liable to be added for computing the ‘book
profit’ u/s 115JB. However, as there was no such provision for making the
addition with regard to wealth tax, the A.O. could not have added the same for
computing the ‘book profit’ of the assessee company u/s 115JB. It observed that
its view is fortified by the order of the ITAT, Kolkata, Special Bench in the
case of JCIT vs. Usha Martin Industries Ltd. [2007] 104 ITD 249 (SB).
The Tribunal directed the A.O. to rework the ‘book profit’ u/s 115JB after
deleting the provision for wealth tax. This ground of appeal of the assessee
was allowed.

Return of income – Filing of, in electronic form (set-off and carry-forward of losses) – Section 139D r.w.s. 72 of ITA, 1961 and Rule 12 of ITR, 1962 – Procedure of filing electronic return as per section 139D r.w. Rule 12 cannot bar assessee from making claim which he was entitled to – Assessee was directed to make representation before CBDT where he was not able to reflect set-off available in terms of section 72 in prescribed return of income in electronic form

16. Samir Narain Bhojwani
vs. Dy.CIT

[2020] 115 taxmann.com 70
(Bom.)

Date of order: 22nd
October, 2019

A.Y.: 2019-20

 

Return of income – Filing of, in
electronic form (set-off and carry-forward of losses) – Section 139D r.w.s. 72
of ITA, 1961 and Rule 12 of ITR, 1962 – Procedure of filing electronic return
as per section 139D r.w. Rule 12 cannot bar assessee from making claim which he
was entitled to – Assessee was directed to make representation before CBDT
where he was not able to reflect set-off available in terms of section 72 in
prescribed return of income in electronic form

 

The assessee was obliged u/s 139D
of the Income-tax Act, 1961 read with Rule 12 of the Income-tax Rules, 1962 to
file his return of income electronically with his digital signature. However,
he was not able to reflect in the prescribed return of income in electronic
form the set-off available in terms of section 72, i.e., setting off of current
year’s business income against the carry-forward loss from the earlier years.
This was because the return which was filed electronically required certain
columns to be filled in by the petitioner while the other columns were
self-populated. The assessee was thus unable to change the figures and make a
claim for set-off u/s 72 in the present facts. This resulted in excess income
being declared, resulting in an obligation to pay more tax on income which in
terms of section 72 was allowed to be set off against carried-forward losses of
earlier years.

 

Therefore, the assessee filed a
writ petition under Article 226 of the Constitution of India and sought a
direction from the High Court to the Respondent No. 1, the A.O., and Respondent
No. 2, the CBDT, to accept the petitioner’s return of income for A.Y. 2019-20
in paper form u/s 139(1) of the Act and the same be taken up for assessment in
accordance with the Act.

 

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

 

‘i) The claim sought to be urged by the assessee,
viz., set-off of business profits of this year offered to tax under the head
“capital gain” being set off against carried-forward loss is prima facie
supported by the decisions of the Tribunal in the case of M.K. Creations
vs. ITO [IT Appeal No. 3885 (Mum.) of 2014, dated 7th April, 2017]
and in ITO vs. Smart Sensors & Transducers Ltd. [2019] 104 taxmann.com
129/176 ITD 104 (Mum.–Trib.). It is also not disputed by the Revenue
that the return of income in electronic form is self–populated, i.e., on
filling in some entries, the other entries in the return are indicated by the
system itself. Thus, the petitioner is unable to make a claim which according
to him he is entitled to in law. In case the petitioner is compelled to file in
the prescribed electronic form, it could be declared by the A.O. as defective
(if all entries are not filled), or raise a demand for tax on the basis of the
declared income u/s 143(1), or if the assessment is taken to scrutiny u/s
143(3), then the petitioner will not be entitled to raise a claim of set-off
u/s 72 during the assessment proceedings. This, in view of the decision of the
Hon’ble Supreme Court in the case of Goetze (India) Ltd. vs. CIT [2006]
157 Taxman 1/284 ITR 323 wherein it has been held that if a claim is
not made by the assessee in its return of income, then the A.O. would have no
power to entertain a claim otherwise than by way of revised return of income.
The revised return of income, if the petitioner attempts to file it, would
result in the petitioner not being able to make the claim for which the revised
return is filed as the revised return of income would also have to be filed in
the prescribed electronic form which does not provide for such an eventuality.
Thus, for the purposes of the subject assessment year if the return of income
is filed electronically, it (the assessee) would have given up, at least before
the A.O., his claim to benefit of section 72; this, whether the return of
income is processed u/s 143(1) or undergoes scrutiny u/s 143(3).

 

ii) The purpose and object of e-filing of return is simplicity and
uniformity in procedure. However, the above object cannot in its implementation
result in an assessee not being entitled to make a claim of set-off which he
feels he is entitled to in accordance with the provisions of the Act. The
allowability or disallowability of the claim is a subject matter to be
considered by the A.O. However, the procedure of filing the return of income
cannot bar an assessee from making a claim under the Act to which he feels he
is entitled.

 

iii) It is true that in terms of Rule 12 of the Rules the returns are
to be filed by the petitioner only electronically and he is bound by the Act
and the Rules, thus (the Department) cannot accept the paper return. However,
in terms of section 139D, it is for the CBDT to make rules providing for filing
of returns of income in electronic form. This power has been exercised by the
CBDT in terms of Rule 12 of the Rules. However, the form as prescribed does not
provide for (the) eventuality that has arisen in the present case and may also
arise in other cases. Thus, this is an issue to be brought to the notice of the
CBDT, which would in case it finds merit in this submission, issue necessary
directions to cover this gap.

 

iv) In the normal course, the petitioner would have been directed to
file representation with the CBDT making a demand for justice, before
considering issuing of a writ of mandamus. However, in the peculiar
facts of this case, the petitioner is required to file return of income by 31st
October, 2019. It is only when the petitioner was in the process of
filing his return electronically that he realised that he is unable to make a
claim of set-off u/s 72, even though the claim itself is prima facie
allowable in view of the decisions of the Tribunal in M.K. Creation
(Supra) and Smart Sensors & Transducers Ltd. (Supra). In the
absence of the petitioner filing its return of income on or before 31st
October, 2019, the petitioner is likely to face penal consequences. The issue
raised is a fundamental issue, which needs to be addressed by the CBDT.

 

v) Therefore, it would be appropriate that the petitioner make a
representation on the above issue to the CBDT, who would then consider it in
the context of the facts involved in the instant case and issue necessary
guidelines for the benefit of the entire body of assessees if the petitioner is
right in his claim that the prescribed return of income to be filed
electronically prohibits an assessee from making its claim. However, in the
meantime, the petitioner, without prejudice to his rights and contentions, would
file the return of income in electronic form on the system before the last
date. Besides, (he would) also file his return of income for the subject
assessment year in paper form with the A.O. before the last date. This return
of income in paper form would be accepted by the A.O. without prejudice to the
Revenue’s contention that such a return cannot be filed.

 

vi) In the meantime, till such time as the
CBDT takes a decision on the petitioner’s representation, the Revenue would not
act upon the electronically filed return of income so as to initiate any
coercive recovery proceedings.’

Recovery of tax – Stay of demand pending first appeal – Section 220(6) of ITA, 1961 and CBDT Circular No. 530 dated 6th March, 1989 – The Circular stating that a stay of demand be granted if there are conflicting views of High Court can be extended to conflicting views of different Benches of Tribunal as well

15. General Insurance
Corporation of India vs. ACIT

[2019] 111 taxmann.com 412
(Bom.)

[2019] 267 Taxman 596 (Bom.)

Date of order: 14th
October, 2019

A.Y.: 2017-18

 

Recovery of tax – Stay of demand
pending first appeal – Section 220(6) of ITA, 1961 and CBDT Circular No. 530
dated 6th March, 1989 – The Circular stating that a stay of demand
be granted if there are conflicting views of High Court can be extended to
conflicting views of different Benches of Tribunal as well

 

For the A.Y. 2017-18, the
assessee filed an appeal against the assessment order. The assessee also filed
an application for stay of demand u/s 220(6) of the Income-tax Act, 1961. The
assessee was directed to deposit 20% of tax demand during pendency of appellate
proceedings.

 

The assessee filed a writ
petition challenging the order and claimed that the assessee is entitled to
unconditional stay till disposal of appellate proceedings in view of the fact
that there were conflicting decisions of co-ordinate Benches of the Tribunal so
far as the merit of the assessee’s case was concerned. The Bombay High Court
allowed the writ petition and held as under:

 

‘i) The CBDT Circular No. 530 dated 6th March, 1989 states that stay
of demand be granted where there are conflicting decisions of the High Court.
This principle can be extended to the conflicting decisions of the different
Benches of the Tribunal. Thus, in the above facts a complete stay of the demand
on the above head, i.e., Item No. 1 of the above chart, was warranted in the
petitioner’s favour.

ii) Therefore, unconditional stay was to be granted to assessee till
disposal of appellate proceedings.’

Reassessment – Sections 147, 148 and 151 of ITA, 1961 – Where A.O. issued reassessment notice on basis of sanction granted by Chief Commissioner – Since Chief Commissioner was not specified officer u/s 151(2) to grant such sanction, impugned notice was to be quashed

14. Miranda Tools (P) Ltd.
vs. ITO

[2020] 114 taxmann.com 584
(Bom.)

Date of order: 14th
November, 2019

A.Y.: 2014-15

 

Reassessment – Sections 147, 148
and 151 of ITA, 1961 – Where A.O. issued reassessment notice on basis of
sanction granted by Chief Commissioner – Since Chief Commissioner was not
specified officer u/s 151(2) to grant such sanction, impugned notice was to be
quashed

 

The petitioner is a company
engaged in the business of manufacture and marketing of fabrics. The petitioner
filed its return of income for the A.Y. 2014-15 on 22nd September,
2014 declaring NIL income. The assessment was completed u/s 143(3) of the
Income-tax Act, 1961 by an order dated 1st September, 2016.
Thereafter, on 26th February, 2019, the A.O. issued a notice u/s 148
of the Act on the ground that he has reason to believe that the income
chargeable to tax in respect of share application money for the relevant
assessment year has escaped assessment. The petitioner submitted its
objections. The A.O. rejected the objections.

 

The assessee filed a writ
petition and challenged the reopening of the assessment. The Bombay High Court
allowed the writ petition and held as under:

 

‘i) As per the provisions of section 151(2) of the Act, a sanction to
issue notice for reopening u/s 148 of the Act has to be given by the Joint
Commissioner of Income Tax in case the reassessment is sought to be done before
(or within) four years. Under section 2(28C) of the Act, a Joint
Commissioner also means Additional Commissioner of Income Tax. In the present
case, the A.O. submitted a proposal to the Principal Chief Commissioner of Income
Tax for reopening the assessment u/s 148 on 6th February, 2019.

 

ii) The question arises whether the sanction granted by the Chief
Commissioner of Income Tax would fulfil the requirement of section 151. It has
long been settled that when the statute mandates the satisfaction of a
particular authority for the exercise of power, then it has to be done in that
manner only. Adopting this principle, the Division Benches of this Court in the
cases of Ghanshyam K. Khabrani vs. Asstt. CIT [2012] 20 taxmann.com
716/210 Taxman 75 (Mag.)/346 ITR 443 and CIT vs. Aquatic Remedies
(P) Ltd. [2018] 96 taxmann.com 609/258 Taxman 357/406 ITR 545 have held
that sanction for issuance of reopening notice has to be obtained from the
authority mentioned in section 151 and not from any other officer, including a
superior officer. In the present case the Chief Commissioner of Income tax is
not the officer specified in section 151 of the Act. There is thus a breach of
requirement of section 151(2) of the Act regarding sanction for issuance of
notice u/s 148 of the Act. Consequently, the impugned notice and the impugned
order cannot be sustained in law. The petitioner, therefore, is entitled to
succeed.

 

iii) Accordingly, the impugned notice dated
26th February, 2019 and the impugned order dated 15th
July, 2019 are quashed and set aside.’

Principal Officer (condition precedent) – Section 2(35) of ITA, 1961 – Where neither service of notice nor hearing of petitioner before treating petitioner as a Principal Officer was involved, and connection of petitioner with management and administration of company was also not established, A.O. could not have named petitioner as Principal Officer

13. A. Harish Bhat vs. ACIT (TDS)

[2019] 111 taxmann.com 210 (Karn.)

Date of order: 17th October, 2019

F.Ys.: 2009-10 to 2012-13

 

Principal Officer (condition
precedent) – Section 2(35) of ITA, 1961 – Where neither service of notice nor
hearing of petitioner before treating petitioner as a Principal Officer was
involved, and connection of petitioner with management and administration of
company was also not established, A.O. could not have named petitioner as
Principal Officer

 

The petitioner was treated as a
Principal Officer of the company Kingfisher Airlines for the F.Ys. 2009-10 to
2012-13 u/s 2(35) of the Income-tax Act, 1961. The petitioner filed a writ
petition and challenged the order.

 

He contended
that to come within the ambit of key management personnel, the petitioner had
to be either Managing Director or the Chief Executive Officer, whole-time
director / company secretary / chief financial officer / or in any way be
connected with the management or administration of the company. The Revenue, on
the other hand, justifying the said order, submitted that the petitioner was
the treasurer of the U.B. Group of Companies during the relevant financial
years and hence he was treated as Principal Officer. Further, neither a
personal hearing nor an order was necessary to treat the person as a Principal
Officer. It was sufficient if a notice of the intention of the A.O. of treating
any person as Principal Officer was issued. The petitioner assailed the order
of the Commissioner on the ground that the objections submitted by the
petitioner to the notice had not been duly considered and hence sought to set
aside the said order.

 

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

‘i) The impugned order deserves to be set aside for the reason that a
Principal Officer, as contemplated u/s 2(35), used with reference to a local
authority or a company or any other public body or any association of persons
or any body of individuals, means the secretary, treasurer, manager or agent of
the authority, company, association or body, or any person connected with the
management or administration of the local authority, company, association or
body upon whom the A.O. has served a notice of his intention of treating him as
the Principal Officer thereof.

 

ii) It is clear that to treat any person as a Principal Officer, such
person should be connected with the management or administration of the local
authority / company or association or body. Such connection with the management
or administration is the basis for treating any person as a Principal Officer.
Such connection has to be established or to be supported with substantial
material to decide the connection of any person with the management or
administration. Without disclosing the basis, no person can be treated as a
“Principal Officer” of the company recognising him as the Key Management Personnel
of the company. The details of such information on the basis of which the Key
Management Personnel tag is made, have to be explicitly expressed in the notice
of the intention of treating any person as a Principal Officer by the A.O.
Neither in the show cause notice nor in the order impugned was such a
connection of the petitioner with the management or administration of the
company Kingfisher Airlines Limited established. The phrase “Key Management
Personnel” of the company has a wide connotation and the same has to be
supported with certain material; unless such connection is established, no
notice served on the petitioner would empower the respondent authority to treat
the petitioner as a “Principal Officer”.

 

iii) In the instant case, the question inasmuch as
(sic) neither service of notice nor hearing of the petitioner before
treating the petitioner as a Principal Officer is involved. The fulcrum of
dispute revolves around the aspect whether the petitioner is the person
connected with the management or administration of the company. Such finding
has to be supported by substantial material and has to be reflected in the
notice issued u/s 2(35) to treat a person as a Principal Officer of the company
which will have wider consequences. The said aspect is lacking in the present
order impugned. Merely on surmises and conjectures, no person shall be treated
as a Principal Officer.

 

iv) The writ petition is to be allowed. The
impugned order is to be quashed.’

OECD’S ‘GloBE’ PROPOSAL – PILLAR TWO (Tax Challenges of the Digitalisation of the Economy – Part II)

The current international tax
architecture is being exploited with the help of digitalised business models by
the Multinational Enterprises (MNEs) to save / avoid tax through BEPS. To
counter this, the existing tax rules require reconsideration and updation on
the lines of the digitalised economy. Many countries have introduced unilateral
measures to tackle the challenges in taxation arising from digitalisation which
restricted global trade and economy.

 

Now, OECD has set the deadline of
end-2020 to come out with a consensus-based solution to taxation of
cross-border transactions driven by digitalisation. For this, OECD has
published two public consultation documents, namely (i) ‘Unified Approach under
Pillar One’ dealing with Re-allocation of profit and revised nexus rules, and
(ii) ‘Global Anti-Base Erosion Proposal (GloBE) – Pillar Two’. It is important
to understand these documents because once modified, accepted and implemented
by various jurisdictions, they will change the global landscape of international
taxation in respect of the digitalised economy.

 

Part I of this article on ‘Pillar
One’ appeared in the January, 2020 issue of the BCAJ. This, the second
article, offers a discussion on the document dealing with GloBE under ‘Pillar
Two’.

 

1.0 BACKGROUND

Thanks to advances in technology,
the way businesses were hitherto conducted is being transformed rapidly. In
this era of E-commerce, revenue authorities are facing a lot of challenges to
tax Multinational Enterprises (MNEs) who are part of the digital economy. To
address various tax challenges of the digitalisation of the economy, OECD in
its BEPS Action Plan 1 in 2015 had identified many such challenges as one of
the important areas to focus upon. Since there could not be any consensus on
the methodology for taxation, the Action Plan recommended a consensus-based
solution to counter these challenges. OECD has targeted to develop such a
solution by the end of 2020 after taking into account suggestions from the
various stakeholders. Meanwhile, on the premise of the options as examined by
the Task Force on the Digital Economy (TFDE), the BEPS Action Plan 1 suggested
three options to counter the challenges of taxation of the digitalised economy
which could be incorporated in the domestic laws of the countries. It is
provided that the measures to tackle the challenges of taxing digitalised
economy shall not be incompatible with any obligation under any tax treaty or
any bilateral treaty. They shall be complementary to the current international
legal commitments.

 

OECD issued an interim report in
March, 2018 which examines the new business framework as per the current
digitalised economy and its impact on the international tax system. In January,
2019 the Inclusive Framework group came up with a policy note to address the
issues of taxation of digitalised economy into two complementary ‘pillars’ as
mentioned below:

 

Pillar 1 – Re-allocation of
Profits and the Revised Nexus Rules

Pillar 2 – Global Anti-Base
Erosion Mechanism

 

The three proposals suggested under
Pillar 1 are as follows:

(i) New Nexus Rules – Allocation based on sales rather than physical
presence in market / user jurisdiction;

(ii) New Profit Allocation Rules – Attribution of profits based on
sales even in case of unrelated distributors (in other words, allocation of
profits beyond arm’s length pricing, which may continue concurrently between
two associated enterprises);

(iii) Tax certainty via a three-tier mechanism for profit allocation:

(a) Amount A: Profit allocated to market jurisdiction in absence of
physical presence.

(b) Amount B: Fixed returns varying by industry or region for certain
‘baseline’ or ‘routine’ marketing and distributing activities taking place (by
a PE or a subsidiary) in a market jurisdiction.

(c) Amount C: Profit in excess of fixed return contemplated under
Amount B, which is attributable to marketing and distribution activities taking
place in marketing jurisdiction or any other activities. Example: Expenses on
brand building or advertising, marketing and promotions (beyond routine in
nature).

 

Thus, it highlights potential
solutions to determine where the tax should be paid and the basis on which it
should be paid.

 

Let us look at the proposals
under Pillar Two in more detail.

 

2.0 PILLAR TWO – GLOBAL
ANTI-BASE EROSION PROPOSAL (‘GloBE’)

The public consultation document
has recognised the need to evolve new taxing rules to stop base erosion and
profit shifting into low / no tax jurisdictions through virtual business
structures in a digitalised economy. According to the document, ‘This Pillar
seeks to comprehensively address remaining BEPS challenges by ensuring that the
profits of internationally operating businesses are subject to a minimum rate
of tax. A minimum tax rate on all income reduces the incentive for taxpayers to
engage in profit shifting and establishes a floor for tax competition among
jurisdictions.’

 

The harmful race to the bottom on
corporate taxes and uncoordinated and unilateral efforts to protect the tax
base has led to the increased risk of BEPS, leading to a lose-lose situation
for all jurisdictions in totality. Therefore, the GloBE proposal is an attempt
to shield the tax base of jurisdictions and lessen the risk of BEPS.

 

Broadly, the GloBE proposal aims
to have a solution based on the following key features:

 

(i) Anti-Base Erosion and Profit Shifting

It not only aims to eliminate
BEPS, but also addresses peripheral issues relating to design simplicity,
minimise compliance and administration costs and avoiding the risk of double
taxation. Taxing the entities subject to a minimum tax rate globally will seek
to comprehensively address the issue of BEPS. Such a proposal under Pillar Two
will cover the downside risk of the tax revenue of the MNEs globally by
charging a minimum tax rate, which otherwise would lead to a lose-lose
situation for various jurisdictions.

(ii) New taxing rules through four component parts of the GloBE proposal

The four component parts of the
GloBE proposal, proposed to be incorporated by way of changes into the domestic
laws and tax treaties, are as follows:

 

(a) Income inclusion rule

Under this rule, the income of a
foreign branch or a controlled entity if that income was subject to tax at an
effective rate that is below a minimum rate, will be included and taxed in the
group’s total income.

 

For example, the profits of the
overseas branch in UAE of a Hong Kong1  (HK) company will be included in the taxable
income in HK, as the UAE branch is not subjected to tax at the minimum rate,
say 15%. But for this rule, profits of the overseas branch of an HK company
would not have been taxed in HK. Of course, HK may have to amend its domestic
law to provide for such taxability.

 

Example 1 – Accelerated taxable
income (as given in the public consultation document). In our
opinion, this example throws light on the income inclusion rule.

 

Application of income inclusion
rule

Example 1

Year 1

Year 2

Inclusion rule (Book)

Inclusion rule (Book)

Country B (Tax)

Inclusion rule (Book)

Country

B (Tax)

Income

50

100

50

0

Expenses

(10)

(20)

(10)

(0)

Net income

40

80

40

(0)

Tax paid

(16)

(16)

0

0

Minimum tax (15% x net income)

(6)

 

(6)

 

Excess tax (= Tax paid – Minimum tax)

10

 

0

 

Tentative inclusion rule tax

–

 

6

 

Excess tax carry-forward
used

–

 

(6)

 

Inclusion rule tax

–

 

0

 

Remaining excess tax
carry-forward

10

 

4

 

 

(b) Undertaxed payments rule

It would operate by way of denial
of a deduction or imposition of source-based taxation (including withholding tax)
for a payment to a related party, if that payment was not subject to tax at or
above a minimum rate.

(c) Switch-over rule

It is to be introduced into tax
treaties such that it would permit a residence jurisdiction to switch from an
exemption to a credit method where the profits attributable to a Permanent
Establishment (PE) or derived from immovable property (which is not part of a
PE) are subject to an effective rate below the minimum rate.

(d) Subject to tax rule

It would complement the
under-taxed payment rule by subjecting a payment to withholding or other taxes
at source and adjusting eligibility for treaty benefits on certain items of
income where the payment is not subject to tax at a minimum rate.

 

The GloBE proposal recognises the
need for amendment of the domestic tax laws and tax treaties to implement the
above four rules. However, it also cautions for coordinated efforts amongst
countries to avoid double taxation.

 

3.0  DETERMINATION OF TAX
BASE

The first step towards applying a
minimum tax rate on MNEs is to determine the tax base on which it can be
applied. It emphasises the use of financial accounts as a starting point for
the tax base determination, as well as different mechanisms to address timing
differences.

 

3.1 Importance of consistent tax base

One of the simple methods to
start determining the tax base is to start with the financial accounting rules
of the MNE subject to certain agreed adjustments as necessary. The choice of
accounting standards to be applied will be subject to the GloBe proposal. The
first choice to be made is between the accounting standards applicable to the
parent entity or the subsidiary’s local GAAP. The next choice is which of the
accounting standards will be acceptable for the purposes of the GloBE proposal.

 

As per the public document, it is
suggested to determine the tax base as per the CFC Rules or, in absence of CFC
rules, as per the Corporate Income Tax Rules of the MNE’s jurisdiction. Such an
approach will overcome the limitation of the inclusion of only certain narrow
types of passive income. However, it would mean that all entities of an MNE
will need to recalculate their income and tax base each year in accordance with
the rules and regulations of the ultimate parent entity’s jurisdiction. There
can be differences in accounting standards between the subsidiary’s
jurisdiction and the ultimate parent entity’s jurisdiction, and to address the
same the public document recommends that the MNE groups shall prepare the
consolidated financial statements and compute the income of their subsidiaries
using the financial accounting standards applicable to the ultimate parent
entity of the group as part of the consolidation process.

 

Accounting standards which are
accepted globally can serve as a starting point for determining the GloBE tax
base.

 

3.2 Adjustments

Financial accounting takes into
account all the income and expenses of an enterprise, whereas accounting for
tax purposes can be different. Relying on the unadjusted figures in accounts
could mean that an entity’s net profits may be overstated or understated when
compared to the amount reported for tax purposes. Most of the differences among
the accounting standards will be timing differences and some of the differences
may be permanent differences or temporary differences that require further
consideration, and some of the timing differences may be so significant that
they warrant the same consideration as permanent differences.

 

3.2.1  Permanent differences

Permanent differences are
differences in the annual income computation under financial accounting and tax
rules that will not reverse in the future. Permanent differences arise for a
variety of reasons. The need to adjust the tax base may depend upon the level
of blending ultimately adopted in the GloBE proposal. Inclusions and exclusions
of certain types of income and expenses in domestic tax policy may lead to
permanent differences. Thus, consideration for such differences is of utmost
importance while determining the tax base.

 

Examples of permanent differences

Dividends received from foreign
corporations and gains on sale of corporate stocks may be excluded from income
to eliminate potential double taxation. Under the worldwide blending approach,
the consolidated financial statements should eliminate dividends and stock
gains in respect of entities of the consolidated group. However, under a
jurisdictional or entity blending approach, the financial accounts of the group
entities in different jurisdictions would be prepared on a separate company
basis and dividends received from a ‘separate’ corporation would be included in
the shareholder’s financial accounting income.

Permanent difference also arises
due to disallowance of certain deductions under the domestic tax laws of a
particular jurisdiction, such as entertainment expenses, payment of bribes and
fines, etc.

 

3.2.2  Temporary differences

Temporary differences are
differences in the time for taking into account income and expenses that are
expected to reverse in the future. It can lead to a low cash effective tax rate
at the beginning of a period and high cash effective tax rate at the end of a
period, or vice versa. A separate blending approach may lead to
difference volatility in the ETR from one period to another. Temporary
differences are very important in determination of the tax base and also affect
the choice of blending.

 

Approaches to addressing
temporary differences

The public consultation document
on Pillar Two lists three basic approaches to addressing the problem of
temporary differences, namely,

(i) carry-forward of excess taxes and tax attributes,

(ii) deferred tax accounting, and

(iii) a multi-year average effective tax rate.

 

It also provides that these basic
approaches could be tailored and elements of the different approaches could be
combined to better or more efficiently address specific problems.

 

4.0 BLENDING OF HIGH-TAX
AND LOW-TAX INCOME FROM ALL SOURCES

According to the public
consultation document, ‘Because the GloBE proposal is based on an effective
tax rate (“ETR”) test it must include rules that stipulate the extent to which
the taxpayer can mix low-tax and high-tax income within the same entity or
across different entities within the same group. The Programme of Work refers
to this mixing of income from different sources as “blending.”’

 

Blending means the process of mixing
of the high-tax and low-tax income of an MNE from all the sources of all the
entities in the group. Blending will help to calculate the ETR on which the
GloBE proposal is based. It can be done on a limited basis or a comprehensive
basis, from a complete prohibition on blending to all-inclusive blending.
Limited basis will lead to no or less blending (mixing) of income and taxes of
all different entities and jurisdictions. This would restrict the ability of an
MNE to reduce charge of tax applied on all entities across all jurisdictions
through mixing the high-tax and low-tax income.

 

It is suggested to apply the
GloBE proposal (minimum tax rate rule) in the following manner:

First Step: Determine
the tax base of an MNE and then calculate the Effective (blended) Tax Rate
[ETR] of the MNE on the basis of tax paid.

Second Step: Compare
the ETR with the Minimum Tax Rate prescribed according to the relevant blending
approach.

Third and the final Step: Use any
of the four components as specified in the GloBE proposal to the income which
is taxed below the minimum tax rate prescribed. [The four components as
discussed above are: (i) Income inclusion rule, (ii) Under-taxed payments rule,
(iii) Switch-over rule and (iv) Subject to tax rule].

 

Determining the Effective
(blended) Tax Rate [ETR] of the MNEs forms the second step in applying a
minimum tax rate rule. It throws light on the level of blending under the GloBE
proposal, i.e., the extent to which an MNE can combine high-tax and low-tax
income from different sources taking into account the relevant taxes on such
income in determining the ETR on such income.

 

There are three approaches to
blending:

4.1   Worldwide blending approach

4.2   Jurisdictional blending approach

4.3   Entity blending approach.

 

The above three different
blending approaches are explained in brief below:

4.1 Worldwide blending approach

In this case, total foreign
income from all jurisdictions and tax charged on it are mixed. An MNE will be
taxed under such an approach if the total tax charged on such foreign income of
an MNE is below a prescribed minimum rate. The additional tax charged on such
income will be the liability of an MNE to bring the total tax charged to the
prescribed minimum rate of tax.

4.2 Jurisdictional blending approach

In this case, blending of foreign
income and tax charged on such income will be done jurisdiction-wise. The
liability of additional tax would arise when the income earned from all the
entities in a particular jurisdiction is below the minimum rate, i.e., if an
MNE has been charged lower tax on the income from a particular jurisdiction
than the minimum rate of tax. The sum of the additional taxes of all the
jurisdictions will be the tax liability of an MNE.

4.3 Entity blending approach

Under this approach blending is
done of income from all sources and tax charged on such income in respect of
each entity in the group. Additional tax will be levied on an MNE whenever any
foreign entity in a group is charged with tax below the minimum tax rate
prescribed for that foreign entity.

 

All three approaches have the
goal congruence of charging MNEs a minimum rate of tax globally with different
policy choices.

 

In addition, in respect of
blending, the public consultation document on Pillar Two also explains in
detail the following:

(1)   Effect of blending on volatility

(2)   Use of consolidated financial accounting information

(3)   Allocating income between branch and head office

(4)   Allocating income of a tax-transparent entity

(5)   Crediting taxes that arise in another jurisdiction

(6)   Treatment of dividends and other distributions.

 

5.0 CARVE-OUTS

Implementation of the GloBE
proposal is fraught with many challenges and therefore, to reduce the
complexity and restrict the application, the Programme of Work2,
through its public consultation document, calls for the exploration of possible
carve-outs as well as thresholds and exclusions. These carve-outs / thresholds
/ exclusions will ensure that small MNEs are not burdened with global
compliances. They would also provide relief to specific sectors / industries.

 

The Programme of Work calls for
the exploration of carve-outs, including for:

(a) Regimes compliant with the standards of BEPS Action 5 on harmful tax
practices and other substance-based carve-outs, noting, however, that such
carve-outs would undermine the policy intent and effectiveness of the proposal.

(b) A return on tangible assets.

(c) Controlled corporations with related party transactions below a
certain threshold.

 

The Programme of Work also calls
for the exploration of options and issues in connection with the design of
thresholds and carve-outs to restrict application of the rules under the GloBE
proposal, including:

(i)   Thresholds based on the turnover or other indications of the size
of the group.

(ii) De minimis thresholds to exclude transactions or entities
with small amounts of profit or related party transactions.

(iii) The appropriateness of carve-outs for specific sectors or industries.

 

6.0 OPEN ISSUES

There are several open issues in
the proposed document, some of which are listed below:

 

6.1 Appropriate Accounting Standards

Determination of tax base is the
starting point to apply measures given in the GloBE proposal. Thus, the use of
financial accounting is the basis to determine the tax base. Hence, the issue
could be, which of the accounting standards would be appropriate and
recommended for determining the tax base across various jurisdictions?

 

6.2 Non-preparation of consolidated accounts by smaller MNEs

There can be some instances when
smaller MNEs are not required to prepare consolidated accounts by the statute
for any purpose. In such a case where the information is not consolidated, how
will the tax base be determined?

 

6.3 Compliance cost and economic effects

The blending process,
irrespective of the policy approach, will have a lot of compliance costs which
may even exceed the economic benefit out of the process. How does the GloBE
proposal deal with this?

 

6.4 Changes in ETR due to tax assessments in subsequent years

MNEs operate in different
jurisdictions and each jurisdiction may have different tax years, assessment
procedures and so on. It is very likely that tax determined for a particular
year based on self-assessment may undergo significant change post-assessment or
audit by tax authorities. This may change the very basis for benchmarking of
ETR with a minimum tax rate. There should be a mechanism to make adjustments
beyond a tolerable limit of variance.

 

7.0 CONCLUSION

OECD had asked for public
comments on its document on GloBE not later than 2nd December, 2020.
However, there are several areas yet to be addressed which are ambiguous and to
find solutions to them within a short span of time till December, 2020 is
indeed a daunting task. However, it is also a fact that in the absence of
consensus and delay in a universally acceptable solution, more and more
countries are resorting to unilateral measures to tax MNEs sourcing income from
their jurisdictions.

 

In this context, it is important
to note that vide Finance Act, 2016 India introduced a unilateral
measure of taxing certain specified digitalised transactions by way of
Equalisation Levy (EL) @ 6%. The scope of EL is expanded significantly by the
Finance Act, 2020 by providing that E-commerce operators, including
facilitators, shall be liable to pay EL @ 2% on the consideration received
towards supply of goods and services.

 

Determination
of a tax base globally on the basis of consolidated profits is a very complex
process. To give effect to all the permanent and temporary differences while
determining the tax base along with blending of income from different sources
from all jurisdictions will be a challenging task for the MNEs. It is to be seen
how effectively the four components of the GloBE proposal, individually and in
totality, will be practically implemented. The success of the GloBE proposal
also depends upon the required changes in the domestic tax laws by the
countries concerned. The cost of compliance and uncertainty may also need to be
addressed. A higher threshold of revenue could take care of affordability of
cost of compliance by MNEs, whereas clear and objective rules may take care of
uncertainty.

 

All
in all, we are heading for a very complex global tax scenario.

COVID-19 AND TRANSFER PRICING – TOP 5 IMPACT AREAS

Starting December, 2019, the
world has witnessed the once-in-a-generation pandemic. Multinational
Enterprises will have to consider the effect of COVID 19 on their transfer
pricing policies due to large scale economic disruption. It will be imperative,
especially in this economic environment, to adhere to and demonstrate arms
length behaviour. Many MNEs have started revisiting transfer pricing policies,
inter company agreements, and documentation standards.

 

This article highlights the top
five transfer pricing impact areas arising out of Covid-19:

 

  • Supply chain restructuring
  • Renegotiation of pricing and other terms
  • Cash optimisation
  • Balancing business uncertainty with tax
    certainty
  • Benchmarking

 

Towards the end of the article,
some recommendations have also been outlined for consideration of the
government authorities to make it easier for taxpayers to demonstrate
compliance with arm’s length principles.

 

1.  Supply chain restructuring

MNE groups with geographically
diverse supply chains are affected severely due to the pandemic. Any disruption
to any part of the supply chain tends to impact the entire group, though the
extent of the impact depends on the importance of the part of the supply chain
which has been disrupted and the availability of alternatives.

 

Many MNE groups have discovered
the fragility in their value chains as a result of the disruption caused by the
pandemic. They are faced with one or more of the following situations:

  • Longer than needed supply chain involving
    various countries
  • Overdependence on a particular supplier /
    set of suppliers / region / country for materials / services / manufacturing /
    market
  • Affiliate(s) finding it difficult to sustain
    their businesses owing to disruption caused by the pandemic
  • Unviable non-core businesses.

 

MNE groups could consider this as
an opportunity to revisit their existing supply chains and also potentially
restructure the supply chain to achieve one or more of the following:

  • Shorter supply chains involving lesser
    number of geographical locations
  • Creation of alternate sourcing destinations
    for materials and services
  • Setting up of manufacturing / service
    facilities in alternate destinations
  • Closure and / or monetisation of non-core
    businesses / entities.

 

These restructuring transactions
could raise multiple transfer pricing issues, including:

  • Exit charges for that affiliate which will
    be eliminated from the supply chain / will get reduced business because of
    creation of an alternate destination
  • New transfer pricing agreements, policies
    and benchmarks to be developed in case of setting up of affiliates in new /
    alternate jurisdictions
  • Valuation issues in case non-core assets are
    transferred to affiliates
  • Issues relating to bearing of closure costs
    in case some group entities or part of their businesses face insolvency /
    closure
  • Issues around identification and valuation
    of intangibles involved in the restructuring exercise
  • Appropriate articulation of restructuring
    transactions in the local files of the entities concerned and the Master File
    of the group.

 

2.  Renegotiation of pricing and other terms

In arm’s length dealings,
businesses are in fact renegotiating prices as well as other terms, mainly with
their vendors.

 

In the case
of many MNEs it would be perfectly arm’s length behaviour for different
entities within the group to start discussions and re-negotiations regarding
prices and other terms of their inter-company transactions. In fact, in many
cases it might be non-arm’s length for companies to not renegotiate with their
affiliates. In almost all cases, it would be arm’s length behaviour to have
inter-company agreements which mirror agreements that would have been entered
into between third parties.

 

Renegotiations of existing
arrangements / agreements could be of at least the following types:

 

2.1. Compensation for limited
risk entities in the group

Many MNEs
have entities which operate as limited risk entities, such as captive service
providers, contract manufacturers, limited risk distributors, etc. As a general
rule, these limited risk entities are eligible for a stable income, all
residual profits or losses being attributed to the Principal affiliate.
However, in today’s dynamic business environment, no-risk entities do not exist
and limited risk entities also bear some risks. For example, limited risks
captive service providers or contract manufacturers have a significant single
customer risk; therefore any adverse disruption to that single customer will
adversely impact the captive as well.

 

In times of disruption like this,
exceptions to the general rule may be warranted and compensation for limited
risk activities may need to be revisited, depending, inter alia, on the
type of activity performed, type of disruption faced and the control and decision-making
capabilities of each of the parties involved.

 

In third party situations the
service provider would be better off to agree to reduced income (or even losses
in the short term) from the Principal, especially if the Principal itself is
facing challenges relating to its own survival. Accordingly, on a case-to-case
basis, certain MNEs may have the ability / necessity to revisit their
arrangements with their captive entities for the short to medium term. The
revision in the inter-company agreements could take several forms. For
instance, such revised agreements may provide for compensation for only costs
(without a mark-up), reduced mark-up, compensation for only ‘normal’ costs
(with or without mark-up), etc.

 

2.2.  Renegotiations of other terms

It is common for entities in an
MNE group to negotiate prices of their inter-company transactions from time to
time in line with the prevailing business dynamics. However, in emergencies
like these certain other terms of the agreements between affiliates may also
need to be renegotiated. For example, the commitment relating to quantities
which a manufacturer will purchase from the related raw material supplier may
undergo a significant renegotiation. Given the non-recovery of fixed costs due
to the resulting idle capacity, the raw material cost per unit may increase
which the supplier may want to pass on to the manufacturer. A higher per unit
cost, on the other hand, may make the related supplier uneconomical for the
manufacturer. In the interest of the long-term commercial relationship, the
parties may agree to an in-between pricing mechanism, as is likely to be the
case in third-party dealings. Which party would bear which types of costs would
depend on the characterisation of the parties, the decision-making evidenced
through capabilities of the persons involved, and the options realistically
available to the parties involved.

 

3. Cash optimisation

Cash optimisation is currently
one of the most important considerations of businesses across the world.

 

Many MNE groups facing a cash
crunch have started looking at the cash position with different group entities
and trying to optimise the cash available with them. This could lead to some
new funding-related transactions and benchmarking issues such as those relating
to interest and guarantee fees transactions between affiliates.

 

In some situations, taxpayers
that have borrowed funds from their affiliates and are not in a position to
honour their interest / principal repayment commitments could approach their
affiliate lenders to negotiate for a reduction in interest rate / interest
waiver / moratorium at least for some period of time. On the other hand, the
lender affiliate may want to balance the moratorium with a revision in the
interest rate. Significant movements in exchange rates of currencies primarily
attributable to the pandemic could make this negotiation even more dynamic. Any
kind of negotiation should take into account the perspectives of both parties
and options realistically available to them.

 

Similarly, payment terms for
goods or services purchased from or sold to AEs or other inter-company
transactions, such as royalties, could also be renegotiated at least for the
short term, to enable different entities within the MNE group to manage their
working capital cycle more efficiently.

 

4. Balancing business uncertainty with tax certainty

4.1. Advance Pricing Agreements (APAs)

Globally, APAs have been an
effective tool for taxpayers and tax authorities to achieve tax certainty.
However, in times like these businesses go through unprecedented levels of
uncertainty. Therefore, many taxpayers may find it against their interest to be
bound by the terms of the APAs, especially where these provide for a minimum
level of tax profits to be reported by the taxpayer.

 

If their circumstances warrant
it, taxpayers who have already entered into an APA may consider applying for
revision of the same. The law provides that an APA may be revised if, inter
alia, there is a change in the underlying critical assumptions1.  Most Indian APAs have a critical assumption
of the business environment being normal through the term of the APA. In times
like these, a request for revision may be warranted if the business environment
for the taxpayer is considered to be abnormal based on the specific facts and
circumstances of its case and the impact of the uncertainty on the transaction
under consideration.

 

If the taxpayer and the
authorities do not agree to the revision, the taxpayer may potentially also
request for cancellation of the agreement2. On the other hand, in
case the tax authorities believe that cancellation of the agreement is
warranted due to failure on the part of the taxpayer to comply with its terms,
the taxpayer should utilise the opportunity provided to it to explain the
pandemic-related impact on the APA and the related reason for its failure to
comply with the terms of the agreement.

 

For taxpayers who are in the
process of negotiating for their APAs, and for whom the business impact is very
uncertain right now, it may be prudent to wait to get some more clarity
regarding the full impact of the pandemic on their business before actually
concluding the APA.

 

Alternatively,
taxpayers should request for an APA for a shorter term, say a period of up to
Financial Year (F.Y.) 2019-20, even if it means entering into the APA for, say
three or four years. Another APA could then be applied for, starting F.Y.
2021-22, based on the scenario prevailing then.

 

4.2. Safe harbours

The government has not yet
pronounced the safe harbours for the F.Y. 2019-20. Once these are pronounced,
depending on their industry, extent of business disruption, expected loss of
business / margins and the safe harbours provided for F.Y. 2019-20 and onwards,
taxpayers should evaluate whether or not to opt for safe harbours at least for
the F.Y.s 2019-20 and 2020-21.

5. Benchmarking

The current economic situation is
likely to create some unique benchmarking issues which should be borne in mind.
While some of these issues are common to taxpayers globally, a few issues are
specific to India given the specific language of the Indian transfer pricing
regulations.

 

5.1. Justification of losses / low margins

Taxpayers are facing several
business challenges including cost escalations / revenue reductions which are
not related to their transactions with affiliates. Taxpayers in several sectors
have recorded sharp declines in revenues due to lockdowns in various parts of
the world, including India. Some taxpayers are faced with the double whammy of
escalated costs even in times of reduced revenues. Escalated costs could
include, for example, additional costs relating to factory personnel who are
provided daily meals and other essentials, additional transportation costs
incurred to arrange special transport for essentials owing to most fleet
operators not plying, etc.

 

It is pertinent for taxpayers to
identify and record these expenses separately from the expenses incurred in the
regular course of business (preferably using separate accounting codes in the
accounting system). Depending on the transfer pricing method and comparables
selected, taxpayers should explore the possibility of presenting their
profitability statements excluding the impact of these additional costs /
reduced revenues.

 

Another alternative available to
taxpayers is to justify their transfer prices considering alternative profit
level indicators (PLIs).

 

In any case, given the fact that
a lot of information about comparable benchmarks is not available in the public
domain currently, business plans, industry reports, business estimates, etc.,
prepared / approved by the management of the organisation should be maintained in
the documentation file and presented to the transfer pricing authorities if
called for.

 

5.2.  Loss-Making Comparables

During times of emergency like
these, for many businesses the focus shifts from growth / profitability to
survival. Therefore, many businesses could try operating at marginal costing
levels to recover committed costs / utilise idle capacity. Therefore, businesses
operating at net operating losses could be a normal event at least in times
like these. Secondly, even the taxpayer could have been pushed into losses
because of completely commercial reasons and even such losses could be arm’s
length and commercially justifiable.

 

From the
perspective of transfer pricing benchmarking, persistently loss-making
companies are typically rejected as comparables mainly because they do not
represent the normal economic assumption that businesses operate to make
profits. However, in times when business losses are normal events, benchmarking
a loss-making taxpayer with only profit-making comparables would lead to
artificial benchmarks and, potentially, unwarranted transfer pricing additions
in the hands of taxpayers.

 

In case loss-making comparables
are indeed rejected, it could be more prudent to reject companies making losses
at a gross level.

 

5.3.  Unintended comparables

The current
focus of many businesses is survival. Businesses which have created capacities
to cater to their affiliates may find it difficult to sustain if the impact of
the pandemic lasts longer than a few months. For example, consider the case of
an Indian manufacturer whose manufacturing capacities are created based on
demand projections and confirmed orders from its affiliates. Since the
capacities are completely used up in catering to demand from its affiliates,
the manufacturer does not cater to unrelated parties. In case there is a
disruption in the demand from such affiliates expected in the medium term, in
order to sustain in the short to medium term, the Indian manufacturer could
start using its manufacturing set-up for other potential (unrelated) customers
also. While this appears to be a purely rational business decision by the
Indian manufacturer, a question arises whether such third-party dealings will
be considered as comparable transactions for dealings with affiliates. The
Indian manufacturer in this case would need to be able to document the business
justification for entering into these transactions with unrelated parties and
whether these are economically and commercially different from the routine
related party transactions. Similar issues could arise in respect of other
transactions such as temporary local procurement, local funding, etc.


5.4.  Mismatch in years and adjustments

The Indian transfer pricing
regulations provide for the use of three years’ data of comparables to iron out
the impact of cyclical events from the benchmarking analysis. However, data of
the last two years may not be representative of the conditions prevailing in
the current year (in this context, current year could be F.Y. 2019-20 as well
as 2020-21, both years being impacted to different extents due to the
pandemic).

 

Since the financial data of a lot
of comparables is not available up to the due date of transfer pricing
compliance, this mismatch may lead to a situation where normal business years
of comparables are compared with the pandemic-affected years of taxpayers – a
situation which is very likely to give skewed results.

 

Adjustments are regularly made to
minimise the impact of certain differences between a tested party (say,
taxpayer) and the comparable benchmarks. Depending on the industry in which the
taxpayer operates and the manner in which its affiliates are impacted,
taxpayers may need to make adjustments, including some unique adjustments, to
more aptly reflect the arm’s length nature of inter-company prices.

 

However, in the Indian context
the law does not provide for the making 
of adjustments to the tested party and the adjustments are to be
necessarily made to comparable data3. Given the lack of reliable
data for making adjustments, the reliability of the adjustments themselves may
be questioned.

 

It must be borne in mind that the
principle which necessitates downward adjustments to comparables’ margins
currently being made to normal years will also require upward adjustments to
comparables’ margins in respect of pandemic-affected years going forward. This
situation is simplistically illustrated in Table 1 below. For the purpose of
the illustration, it is assumed that:

 

  • F.Y. 2017-18 and 2018-19 are considered as
    normal business years
  • F.Y. 2019-20 is impacted by the pandemic,
    but to a lesser degree
  • F.Y. 2020-21 is impacted severely by the
    pandemic
  • F.Y. 2021-22 is a normal business year
  • At the time of conducting the benchmarking
    analysis, comparables’ data is available for only the last two years.

 

 

Table 1 – Year-wise comparability4
and adjustments5

 

Tested
Financial Year

Comparable
Financial Years

Adjustments
Required (say, adjustments to margins)

Remarks

2019-20

2018-19, 2017-18

Downward

Downward adjustment due to loss of business
compared to normal years (2018-19, 2017-18)

2020-21

2019-20, 2018-19

Downward

Downward adjustment due to loss of business
compared to normal / less impacted years (2019-20, 2018-19)

2021-22

2020-21, 2019-20

Upward

Upward adjustment due to normal business compared
to impacted years (2020-21, 2019-20)

 

 

6.  Recommendations to government authorities

Government authorities could
consider the following recommendations by way of amendments to the law to relax
adherence to transfer pricing regulations for taxpayers, especially for F.Y.s
2019-20 and 2020-21, i.e., the impacted years:

 

  • Expansion of arm’s length range –
    Since different industries and different companies in the same industry will
    respond to the pandemic in different ways, the margins of comparables over the
    next two years could be extremely varied. Therefore, for the impacted years the
    arm’s length range may be expanded from the current 35th to 65th
    percentile to a full range, or inter-quartile range (25th to 75th
    percentile), as is used globally. Similarly, the applicable tolerance band
    could be appropriately increased from the current 1% / 3%.
  • Extending compliance deadline – In
    case the deadline for companies to file their financial statements for F.Y.
    2019-20 with the Registrar of Companies (RoC) is extended, the deadline for
    transfer pricing compliance should also be extended, to give the taxpayers
    their best chance to use comparable data for F.Y. 2019-20.
  • Extending deadlines for Master File
    compliance     – It is expected that companies will take time to be able to
    fully assess the impact of the pandemic on their business models, value chains,
    profit drivers, etc., and then appropriately document the same in their Master
    File. Therefore, the due date for Master File compliances may be extended at
    least for F.Y. 2019-20.
  • Adjustment to taxpayer data – At
    least for the impacted years, the law could be amended to provide an option to
    the taxpayer to adjust its own financial data since the taxpayer will have a
    better level of information regarding its own financial indicators.
  • Multiple year tested party data – As
    discussed earlier, the Indian transfer pricing regulations currently provide
    for using multiple year data of the comparables as benchmarks for current year
    data of the tested party. For F.Y.s 2019-20 and 2020-21, use of multiple year
    data could be allowed even for the tested party to average out the impact of
    the pandemic to a certain extent.
  • Safe harbours relaxation – Safe
    harbours for F.Y. starting 2019-20 are currently pending announcement. The
    authorities could use this opportunity to rationalise these safe harbours to
    levels representative of the current business realities and reduce the safe
    harbour margins expected of Indian taxpayers. Safe harbours which are
    representative of the current business scenario will be very helpful to
    taxpayers potentially facing benchmarking issues discussed earlier in the
    article.
  • Relaxation in time period for
    repatriation of excess money (secondary adjustment)     – Given the cash crunch
    being faced by MNEs worldwide, the time period for repatriation of excess money6  could be extended from the current period of
    only 90 days7.

 

CLOSING REMARKS

While the pandemic has impacted
almost every business in some way or the other in the short term and in many
inconceivable ways in the long term, just this claim alone will not be enough
from a transfer pricing perspective. Taxpayers will need to analyse the exact
impact of the pandemic on their entire supply chain and to the extent possible
also quantify the impact for their specific business. The impact of the
pandemic, steps taken by the management to mitigate the adverse impact,
negotiations / renegotiation (with third parties as well as affiliates),
business plans and business strategies, government policies and interventions
are some of the key factors which will together determine the transfer pricing
impact of the pandemic on the taxpayer.

 

The pandemic has brought to the
fore the importance of having robust agreements. While the current discussion
revolves mostly around force majeure clauses in third-party agreements,
inter-company agreements are equally important in the context of transfer
prices between the entities of an MNE group. Going forward, for new
transactions with affiliates or at the time of renewal of agreements relating
to existing transactions, care should be taken to draft / revise inter-company
agreements specifically outlining emergency-like situations and the
relationship between the parties in such times. Which party will be responsible
for which functions and would bear what type of risks and costs should be
clarified in detail. Agreements could potentially also include appropriate
price adjustment clauses. MNEs could consider entering into shorter term
agreements till the time the impact of the pandemic is reasonably clear. Having
said that, even if the agreement permits price adjustments, any pricing / price
adjustment decisions taken should also consider the economic situation and the
implication of such decisions under other applicable laws, including transfer
pricing laws of the other country/ies impacted by such decisions.

 

 

These times require businesses to
act fast and address several aspects of their business, and often, to keep the
business floating in the near term. Needless to say, taxpayers should
adequately document the commercial considerations dictating these decisions on
a real time basis and be able to present the same to transfer pricing
authorities in case of a transfer pricing scrutiny. Further, in the Master File
taxpayers should include a detailed industry analysis and a description of
business strategies as well as the corporate philosophy in combating the
financial impact of Covid-19, including the relationships with employees,
suppliers, customers / clients and lenders.

 

Governments and
inter-governmental organisations around the world are closely monitoring the
economic situation caused by the pandemic. Organisations such as OECD are also
monitoring various tax and non-tax measures taken by government authorities to
combat the impact of Covid-198. Taxpayers would do well to
continuously monitor the developments (including issuance of specific transfer
pricing guidelines relevant to this pandemic) at the level of organisations
such as OECD and UN, and also look out for guidance from the government
authorities.  

____________________________________________________________

 

1   Refer Rule 10Q of Income Tax Rules, 1962

2   Refer Rule 10Q of
Income Tax Rules, 1962

3   Refer Rule 10B of Income Tax Rules, 1962

4   Refer Rule 10CA of Income Tax Rules, 1962

5   Refer Rule 10B of
Income Tax Rules, 1962

6   Refer section 92CE of Income-tax Act, 1961

7   Refer Rule 10CB of Income-tax Rules, 1962

8   For instance, the OECD has recently published a report on tax and
fiscal policy in response to the coronavirus crisis. The OECD has also compiled
and published data relating to country-wise tax policy measures. Both, the
report as well as the country-wise data, can be accessed at www.oecd.org/tax

THE IMPACT OF COVID-19 ON INTERNATIONAL TAXATION

The rapid
outbreak of Covid-19 has had a significant commercial impact globally. As
globalisation has led to the world becoming one market (reducing borders and
increasing economic interdependence), the virus knows no borders and the impact
is being experienced by all of us.

 

Nearly 162 countries and their
governments are enforcing lockdowns and travel restrictions and taking other
measures to control further spread of the virus. The business community across
the world is operating in fear of an impending collapse of the global financial
markets and recession. This situation, clubbed with sluggish economic growth in
the previous year, especially in a developing country like India, is leading to
extremely volatile market conditions. In fact, 94% of the Fortune 1000
companies are already seeing Covid-19 disruptions1.

 

Amongst many tax issues (covered
separately in this Journal), this article focuses on cross-border elements in
the new equations. Such cross-border elements include unintended Permanent
Establishment exposure, incidental (and / or accidental) tax residency,
taxation issues relating to cross-border workers and so on. Transfer Pricing
issues have been covered separately in this Journal. In such a background, this
article attempts to throw some light on the impact of the Covid-19 outbreak on
these aspects.

 

IMPACT
ON CREATION OF PERMANENT ESTABLISHMENT

As the work scenario has changed
across the world due to Covid-19, with most employees working from their homes
while others may have got stuck in foreign countries because of the lockdown,
it has created several questions for companies as to the existence of their
Permanent Establishments in such countries.

 

The various treaties provide for
several types of PEs such as Fixed Place PE, Agency PE, Construction PE and
Service PE.

Fixed Permanent Establishment
(‘Fixed Place PE’)

 

 

A Permanent Establishment is ‘a
fixed place of business through which the business of an enterprise is wholly
or partly carried on’. This is commonly referred to as ‘basic rule of PE’, or
fixed place PE. A fixed place PE exists if the business of the enterprise is
carried out at a fixed place within a jurisdiction, typically for a substantial
period depicting permanence.

 

For a home office to be
considered the PE of an enterprise, the home office must be used on a
continuous basis for carrying on its business and the enterprise must require
the individual to use that location to carry on the said business.

 

It is worthwhile to note that the
Hon’ble Apex Court recently in the case of E-funds IT Solutions Inc2
which also relied on the ruling in the case of Formula One3,
held that ‘a Fixed Place PE can be created only if all the tests for the
constitution of a Fixed Place PE are satisfied, i.e., there is a “fixed place
at the disposal of the foreign enterprise”, with some “degree of permanence”,
from which the “business is carried on”’.

 

The OECD in its Secretariat
Analysis of Tax Treaties and the Impact of the Covid-19 Crisis4  in paragraphs 5, 8 and 9 provides that under existing
treaty principles it is unlikely that a business will be considered to have a
fixed place PE in a jurisdiction as a result of the temporary presence of its
employees during the Covid-19 crisis. It has stated that ‘individuals who
stay at home to work remotely are typically doing so as a result of government
directives; it is force majeure, not an enterprise’s requirement.
Therefore, considering the extraordinary nature of the Covid-19 crisis, and to
the extent that it does not become the new norm over time, teleworking from
home (i.e., the home office) would not create a PE for the business / employer,
either because such activity lacks a sufficient degree of permanency or
continuity, or because, except through that one employee, the enterprise has no
access or control over the home office’.

 

A typical
remote work from home scenario in the present crisis is a result of force
majeure, i.e., government travel restrictions or work from home directives
which have been imposed during the pandemic and as such should not result in
the creation of a Fixed Place PE in a foreign jurisdiction. However, time is of
the essence to show how courts and tax authorities interpret Fixed Place PEs
under Covid-19.

 

Agency Permanent Establishment

The concept of PE has taken birth
in the context of two tax principles, i.e. the residence and source principles
of taxation. As per the source principle, if a tax resident of a particular
country earns income through another person (a separate legal entity) in
another country and where such other person can conclude contracts, then such
person creates an Agency PE in the latter country. The issue which needs to be
addressed is whether the activities of an individual temporarily working from
home for a non-resident employer during the present pandemic could give rise to
a dependent Agent PE.

 

In the case
of Reuters Limited vs. Deputy Commissioner of Income Tax (ITA No. 7895/Mum/2011)
the concept of Agency PE was discussed in detail wherein it was held that ‘A
qualified character of an agency is providing authorisation to act on behalf of
somebody else as to conclude the contracts’. This means that the presence
which an enterprise maintains in a country should be more than merely
transitory if the enterprise is to be regarded as maintaining a PE, and thus a
taxable presence, in that country.

 

OECD in its Secretariat Analysis
of Tax Treaties and the Impact of the Covid-19 Crisis has stated that ‘an
employee’s or agent’s activity in a State is unlikely to be regarded as
habitual if he or she is only working at home in that State for a short period
because of force majeure and / or government directives extraordinarily
impacting his or her normal routine’.

 

Construction Permanent
Establishment

The concept of Construction PE
provides that profits generated from construction works will be taxed in the
country in which the permanent establishment (construction site) is placed or located.

 

In general, a construction site
will constitute a PE if it lasts more than 12 months under the OECD Model, or
more than six months under the UN Model. However, the threshold may vary in
different tax treaties. It appears that many activities on construction sites
are being temporarily interrupted by the Covid-19 crisis.

 

In this regard, it has been seen
that the Indian tax authorities do not assume that interruptions of works at
site are to be excluded from the project period. OECD in its Secretariat
Analysis of Tax Treaties and the Impact of the Covid-19 Crisis has stated that ‘it
appears that many activities on construction sites are being temporarily
interrupted by the Covid-19 crisis. The duration of such an interruption of
activities should however be included in determining the life of a site and
therefore will affect the determination, whether a construction site
constitutes a PE. Paragraph 55 of the Commentary on Article 5(3) of the OECD
Model explains that a site should not be regarded as ceasing to exist when work
is temporarily discontinued (temporary interruptions should be included in
determining the duration of a site).’

 

However, it is questionable
whether this case can be applied to the current pandemic situation which was
simply unpredictable. It is a natural event, but not seasonal. It is not even
predictable with a sufficient probability, as in bad weather. It is simply not
calculable; it is a classic force majeure scenario.

 

Service Permanent Establishment

Globalisation has led Multinational
Enterprises (MNEs) to increase cross-border secondment of technical, managerial
and other employees to their subsidiaries located in low-cost jurisdictions
such as India. The rationale behind seconding such employees is sometimes to
help the subsidiaries avail the benefit of the skill and expertise of the
seconded employees in their respective fields, and sometimes to exercise
control.

 

Secondment of employees has
become a really significant area, given that some bank staff or companies’
staff on assignments or secondments may be trapped in their non-native country
due to the travel restrictions, while others may have come back earlier than
expected; such situations might create a Service Permanent Establishment
(Service PE) for the companies.

 

Forced quarantine may delay the
intended secondment of an employee abroad or make a person employed on a
foreign contract decide to return to India due to reasons beyond control. In
this case, work for a foreign employer will be performed from India. This may
result in the creation of taxability of the employee’s income in India and in
some cases may even create risk of a permanent establishment. It is pertinent
to note, of course, that each case should be analysed on its own merits.

 

The concept of PE has been
defined extensively in various places but the interpretation of the same
continues to be complex and subjective. The distinct nature of each transaction
makes the interpretation of the law and the judicial precedents worth noting.
There can be no thumb rule which can be inferred from the jurisprudence or OECD
guidelines at present to the current crisis. Whether the virus-induced duration
of interruption would be included in the deadline in individual cases will
depend upon the specific circumstances.

 

We have
experienced in the recent past that India has been the frontrunner in
implementing the recommendations of OECD G-20 nations which are being discussed
under the initiative of BEPS Action Plans. Examples of this are introduction of
the concept of Significant Economic Presence (SEP) and Equalisation Levy (EL)
in the statute. However, it is important to see whether the same enthusiasm is
shown while implementing the recommendations on Covid-19-related aspects.

 

IMPACT
ON RESIDENTIAL STATUS OF A COMPANY (PLACE OF EFFECTIVE MANAGEMENT)

A company is generally tax
resident in the country where it is incorporated or where it has its ‘Place of
Effective Management’ (‘POEM’). The residential status of a company dictates
where a company will be taxed on its worldwide profits.

 

The OECD MC has defined POEM as ‘the
place where key management and commercial decisions that are necessary for the
conduct of the business as a whole are in substance made and that all relevant
facts must be examined to determine POEM’.

 

In India,
POEM has been recognised by amendment in section 6(3) of the Income-tax Act,
1961 under the Finance Act, 2015 which states that a company is said to be
resident in India in any previous year, if it is an Indian company, or its
place of effective management in that year is in India. The Explanation to
section 6(3) provides that POEM means a place where key management and
commercial decisions that are necessary for the conduct of the business of an
entity as a whole are, in substance, made. POEM is also an internationally
recognised residency concept and adopted in the tie-breaker rule in many Indian
treaties for corporate dual residents and is also adopted in many jurisdictions
in their domestic tax laws.

 

Due to Covid-19, management
personnel / CEO may not be able to travel to the habitual workplace on account
of restrictions and may have to attend Board meetings via telephone or video
conferencing which will create a concern as to the place / jurisdiction from
which decisions are being taken.

 

It is pertinent
to note that the Central Board of Direct Taxes (‘CBDT’) had issued POEM
guidelines vide Circular No. 06 dated 24th January, 2017. In
the context of cases where the company is not engaged in active business
outside India, the Guidelines state that the location of the company’s head
office is one of the key determinant factors.

 

In this connection, CBDT has
considered a situation where senior management participates in meetings via
telephone or video-conferencing. In such a situation, CBDT states that the head
office would normally be the location where the highest level of management
(e.g., the Managing Director / Financial Director) and their direct support
staff are located.

 

OECD in its Secretariat Analysis
of Tax Treaties and the Impact of Covid-19 states that ‘it is unlikely that
the Covid-19 situation will create any changes to an entity’s residence status
under a tax treaty. A temporary change in location of the Chief Executive
Officers and other senior executives is an extraordinary and temporary
situation due to the Covid-19 crisis and such change of location should not
trigger a change in residency, especially once the tie breaker rule contained
in tax treaties is applied’.

 

Although the OECD Guidance
provides relief in this respect, however, taxpayers should be mindful of the
specific clarifications issued by respective tax jurisdictions on this aspect.
Recently, the US IRS has announced5 cross-border tax guidance
related to travel disruptions arising from the Covid-19 emergency. In the
guidance, IRS stated that ‘U.S. business activities conducted by a
non-resident alien or foreign corporation will not be counted for up to 60
consecutive calendar days in determining whether the individual or entity is
engaged in a U.S. trade or business or has a U.S. permanent establishment, but
only if those activities would not have been conducted in the United States but
for travel disruptions arising from the Covid-19 emergency’.

 

 

Similarly, jurisdictions such as
Ireland, UK and Jersey, Australia have issued guidance providing various
relaxations to foreign companies in view of Covid-19.

 

While the OECD Secretariat has
done an analysis on treaty impact, it may be worthwhile exploring a
multilateral instrument (on the lines of MLI) for avoiding conflict of
positions while granting treaty benefit to the taxpayers.

 

IMPACT ON RESIDENTIAL STATUS OF AN
INDIVIDUAL

Generally, number of days
presence is considered as a threshold (the total number of days that an
individual is present in a particular jurisdiction) for determining individual
tax residency. An exception to this principle is where citizens are taxed
irrespective of their presence.

 

Due to the Covid-19 outbreak,
travel is restricted, which gives rise to two main situations:

i. A
person is temporarily away from his home (perhaps on holiday, perhaps to work
for a few weeks) and gets stranded in the host country because of the Covid-19
crisis and attains domestic law residence there.

ii. A person/s is working in a country (the ‘current home country’)
and has acquired residence status there, but they temporarily return to their
‘previous home country’ or are unable to return to their current home country
because of the Covid-19 situation.

 

According to
the OECD, in the first scenario it is unlikely that the person would acquire
residence status in the country where he is temporarily staying because of
extraordinary circumstances. There are, however, rules in domestic legislation
considering a person to be a resident if he or she is present in the country
for a certain number of days. But even if the person becomes a resident under
such rules, if a tax treaty is applicable, the person would not be a resident
of that country for purposes of the tax treaty. Such a temporary dislocation
should therefore have no tax implications.

 

In the second scenario, it is
again unlikely that the person would regain residence status for being
temporarily and exceptionally in the previous home country. But even if the
person is or becomes a resident under such rules, if a tax treaty is
applicable, the person would not become a resident of that country under the
tax treaty due to such temporary dislocation.

However, in litigious countries
like India, and in the context of recent legislative amendments where NRIs have
been targeted for ?managing’ their period of stay in India, the very thought of
having to substantiate to the authorities that as per any tie-breaker test, a
person is non-resident in India is daunting.

 

With a view to remove genuine
hardships to individuals, CBDT has issued a clarification through Circular No.
11 of 2020 dated 8th May, 2020 in respect of determination of
residency u/s 6 due to Covid-19. The circular is applicable to individuals who
came on visit to India on or before 22nd March, 2020 and have
continued to be in India in different scenarios. This circular applies only for
determination of residency for FY 2019-2020.

 

Accordingly, in case of
individuals who have come on a visit to India on or before 22nd
March, 2020 and are falling under the following categories, relaxation will be
provided while determining their number of days’ presence in India for the
purpose of section 6 for FY 2019-20, as explained hereunder:

 

a. Scenario 1: where an
individual (who is on a visit to India) is unable to leave India before 31st
March, 2020 – the period of stay between 22nd and 31st
March, 2020 (both inclusive) shall not be counted for determining presence in
India.

 

b. Scenario 2: where an individual
has been quarantined in India on account of Covid-19 on or after 1st
March, 2020 and such individual has departed on an evacuation flight before 31st
March, 2020 or is unable to depart – the period starting from the start
of the quarantine period up to 31st March, 2020 or date of actual
departure shall not be counted for determining presence in India.

 

c. Scenario 3: where an
individual (who is on a visit to India) has departed on an evacuation flight
before 31st March, 2020 – the period of stay between 22nd
March, 2020 and date of his departure shall not be counted for determining
presence in India.

 

It has also
been stated that another circular will be issued in due course for determining
residency for FY 2020-2021. These pro-active clarifications bring relief to
many individuals facing difficulties in determining their residential status
amidst the measures taken by various governments to contain the impact of
Covid-19. It should be noted that this circular provides relief only from the
residence test u/s 6 of the Act. The issue of an individual’s forced stay in
India playing a role in constituting residence for a foreign company, HUF,
etc.; or determination of a business connection or Permanent Establishment of a
non-resident in India; and other such implications are not covered in the
circular. The US has recently issued a clarification which states that up to 60
consecutive calendar days of presence in the USA that are presumed to arise from
travel disruption caused by Covid-19 will not be counted for purposes of
determining US tax residency.

 

IMPACT ON CROSS-BORDER WORKERS

Cross-border
workers are persons who commute to work in one state but live in another state
where they are resident.

 

As per the
Income from Employment Article of the DTAAs, income from employment is taxable
only in a person’s state of residence unless the ‘employment is exercised’ in
the other state. However, there are certain conditions for not taxing
employment income in a state where employment is exercised (presence of employee
in that state not exceeding 183 days; and remuneration is paid by an employer
who is not a tax resident of that state; and such remuneration is not borne by
the employer’s PE in that state).

 

The issue which will come up here
is the taxation of wages and salaries received by such cross-border workers in
cases where they cross the threshold of 183 days due to travel restrictions.

OECD in the Secretariat Analysis
of Tax Treaties and the Impact of Covid-19 has stated that income should be
attributable to the state where they used to work before the crisis.

 

THE WAY FORWARD

The issues discussed above are
some of the common issues on which clarification / guidance should be issued by
the respective tax jurisdictions in order to protect taxpayers from unnecessary
hardship. We expect that CBDT will also consider these issues and come out with
relevant relief measures. Though the OECD guidelines have a persuasive value,
they are not binding in any manner, especially to non-OECD member countries. In
fact, taxpayers may have certain other issues on which they may need
clarifications; therefore, a mechanism should be put in place where they can
describe the facts and get redressal from the tax authorities. It is
recommended that companies / individuals must maintain robust documentation
capturing the sequence of facts and circumstances of the relevant presence
inside or outside of India during the Covid-19 crisis to substantiate the bona
fides of their case before the tax authorities if and when they arise in
future.

 

‘Presume not that I am the thing
I was’ – Shakespeare‘Come what come may, time and the hour run
through the roughest day’ – Shakespeare  



____________________________________________

1   https://fortune.com/2020/02/21/fortune-1000-coronavirus-china-supply-chain-impact/
dated 21st February, 2020

2   ADIT vs. E-funds IT Solution Inc. (Civil Appeal No. 6802 of 2015
SC)

3   Formula One World Championship Ltd. vs. CIT (IT) [2016] 76
taxmann.com 6/390 ITR 199 (Delhi)(SC)

4   https://read.oecd-ilibrary.org/view/?ref=127_127237-vsdagpp2t3&title=OECD-Secretariat-analysis-of-tax-treaties-and-the-impact-of-the-COVID-19-Crisis

5   https://www.irs.gov/newsroom/treasury-irs-announce-cross-border-tax-guidance-related-to-travel-disruptions-arising-from-the-covid-19-emergency

INTERPLAY OF GST & EMPLOYMENT REGULATIONS

INTRODUCTION
– SERVICE BY EMPLOYEES EXCLUDED FROM GST

GST is a tax on all supplies of
goods or services, or both, made in the course or furtherance of business.
However, Schedule III, Entry 1 treats services by an employee to the employer
in the course of or in relation to his employment as neither a supply of goods
nor a supply of services, effectively resulting in the situation that such
services are excluded from the purview of GST.

 

HOW TO
DETERMINE EMPLOYER-EMPLOYEE RELATIONSHIP

It,
therefore, becomes important to analyse the scope of the abovementioned entry.
Since the exact tests of determination of employment contract are not
specifically listed in the GST law, it will be important to understand the said
tests from legal precedents under the general law including various labour
legislations. To begin this journey it may be worthwhile to refer to the
decision of the larger Bench of the Supreme Court in the case of Balwant
Rai Saluja & others vs. Air India Limited & others [Civil Appeal No.
10264-10266 of 2013]. In this case, the Court laid down the following
tests which are required to be satisfied to demonstrate the existence of an
employer-employee relationship:

 

(i)   Who appoints the workers?

(ii)   Who pays the salary / remuneration?

(iii) Who has the authority to dismiss?

(iv) Who can take disciplinary action?

(v) Whether there is continuity of service?

(vi) What is the extent of control and supervision?

 

Various legislations have been
enacted to safeguard the interest of employees employed by employers. Some of
the key legislations are the Factories Act, 1948, the Industrial Employment
Act, 1946, the Industrial Disputes Act, 1947, the Contract Labour Regulation
Act, 1970, the Workmen’s Compensation Act, 1923, and so on. Each of these
legislations has defined the term employee, identified as worker, workmen, etc.
However, it is important to note that the definition of employee referred
to in one legislation is restricted only to that legislation and merely because
a person is an employee under one legislation he does not become an employee in
general of the employer. The Supreme Court in the above decision has
held that for matters which are not related to the specific legislations, one
needs to satisfy the above test to establish the existence of an
employer-employee relationship.

 

WHAT IS THE SCOPE OF THE ENTRY?

The next point that needs to be
analysed is what all will be included within the scope of the consideration /
remuneration paid to an employee. Generally, the consideration paid to an
employee carries two components, one being the monetary component which would
cover payouts like salary, wages, allowances, etc., and the other being
non-monetary components such as perquisites, rent-free accommodation, etc.,
which are made available to employees under the terms of the employment
contract. Some components may be mandated by the legislature and some may be
part of the employment policy of the employer.

 

The legislations referred to
above also deal with the meaning of ‘consideration’. For example, section 2
(rr) of the Industrial Disputes Act, 1947 defines the term ‘wages’ to mean all
the remuneration capable of being expressed in terms of money and payable to a
workman in respect of his employment or work done in such employment, and also
includes (a) allowances that the workman is entitled to, (b) the value of the
house accommodation or of the supply of light, water, medical attendance or
other amenities, or of any service, or of any concessional supply of food
grains or other articles, (c) any travelling concession, and (d) any commission
payable on the promotion of sales or business, or both. However, it also
excludes certain items such as (i) any bonus, (ii) any contribution paid /
payable by the employer to any pension fund / provident fund / for the benefit
of the workman under any law for the time being in force, and (iii) any
gratuity payable on the termination of service.

Similarly, section 2(v) of the
Payment of Wages Act, 1932 defines the term ‘wages’ as all the remuneration
(whether by way of salary, allowances or otherwise) expressed in terms of
money, or capable of being so expressed, which would be payable to a person
employed in respect of his employment, or of work done in such employment and
includes (a) any remuneration payable under any award or settlement between the
parties or order of a Court, (b) overtime remuneration, (c) additional
remuneration payable under the terms of employment, (d) any amount due on
termination of employment, and (e) any sum which the employee is entitled to
under any scheme framed under any law for the time being in force, excluding
any bonus, value of benefits, such as house accommodation, electricity or water
supply, medical attendance or other amenity, or of any service excluded from
the computation of wages by a general or special order of the appropriate
government, any contribution paid by the employer to any pension or provident
fund and the interest accrued thereon, any travelling allowance or the value of
any travelling concession and any sum paid to the employed person to defray
special expenses entitled to him by the nature of work.

 

The above two definitions in the
context of specific legislations clearly point towards what shall constitute
‘consideration’ and it generally intends to include within its scope all
payments made to the employees, except for specific items which are also
excluded only for the purpose of the specific legislations. But the general
principle laid down in the said legislations indicates that all payments made
or facilities extended to the employees as a part of employment contracts would
be treated as a part of the consideration to the employee. This principle was
laid down by the Supreme Court in the case of Gestetner Duplicators
(Private) Limited vs. CIT [1979 AIR 607 = 1979 SCR (2) 788] wherein the
Court held as under:

 

It is thus clear that if under
the terms of the contract of employment, remuneration or recompense for the
services rendered by the employee is determined at a fixed percentage of
turnover achieved by him, then such remuneration or recompense will partake of
the character of salary, the percentage basis being the measure of the salary
and therefore such remuneration or recompense must fall within the expression
‘salary’ as defined in Rule 2(h) of Part A of the Fourth Schedule to the Act.
In the instant case before us, admittedly, under their contracts of employment
the assessee has been paying and did pay during the previous years relevant to
the three assessment years to its salesmen, in addition to the fixed monthly
salary, commission at a fixed percentage of the turnover achieved by each
salesman, the rate of percentage varying according to the class of article sold
and the category to which each salesman belonged. The instant case is,
therefore, an instance where the remuneration so recompense payable for the
services rendered by the salesmen is determined partly by reference to the time
spent in the service and partly by reference to the volume of work done. But it
is clear that the entire remuneration so determined on both the basis clearly
partakes of the character of salary.

 

In fact, while determining what
shall and what shall not constitute consideration, one should refer to the
principle of dominant intention theory, as laid down by the Supreme Court in Bharat
Sanchar Nigam Limited vs. UoI [2006 (2) STR 161 (SC)]. The Court in the
said decision held that one needs to look into the substance of the transaction
in order to determine how the same would get covered. Once it is established
that any payment made to an employee or any benefit / facility made available
to him is in the course of an employment contract, irrespective of whether the
same is a mandatory requirement or not, it gets covered within the purview of
that contract and cannot be distinguished from it.

 

Employer and employees are
related persons – Does this impact the tax treatment of the facilities /
benefits provided to employees?

 

Section 15 provides that an
employer and his employee shall be deemed to be related persons. Further, Entry
2 of Schedule I deems certain activities to be supplies even if the same are
without consideration. The entry reads as under:

 

Supply of goods or services or
both between related persons or between distinct persons as specified in
section 25, when made in the course or furtherance of business:

 

Provided that gifts not exceeding
fifty thousand rupees in value in a financial year by an employer to an
employee shall not be treated as supply of goods or services or both.

 

In the normal course, various
facilities / benefits are provided by the employer to his employees. Let us
first analyse whether or not the same constitute a supply under GST (without
considering the scope of entries under Schedule I and Schedule III). It is
imperative to note that generally when an employer makes available any
facilities / benefits to the employee, it is not mandatory in nature. For
example, commutation facility extended by the employer may not be availed of by
employees who prefer to travel on their own. It is upon the employee to decide
whether he intends to avail of the facility. Similarly, it is not necessary
that all employees might avail the canteen facility. Rather, they might want to
make arrangements on their own. It is only as a part of the employer’s HR
policy / statutory requirement that the employer makes available the facilities
/ benefits.

 

However, once it becomes part of
the employment policy, which the employee would have accepted, it becomes part
of the employment contract, i.e., the employer has made available the
facilities / benefits in pursuance to the services supplied by the employee to
the employer. However, there is no contrary service supplied by the employer.
The employer has merely undertaken the activity of incurring the cost to make
available the benefits / facilities to its employees. However, merely because a
cost is incurred does not necessarily mean that the employer has supplied the
service. In Kumar Beheray Rathi vs. Commissioner of Central Excise, Pune
[2014 (34) STR 139], the Tribunal held that the assessee was acting
merely as a trustee or a pure agent as it was not engaged in providing any
service but only paying on behalf of various flat-buyers to various service
providers. In this particular case, even though there was recovery of cost, the
Tribunal has held that there was no provision of service. The argument would therefore
get stronger in a case where consideration is not involved. Similarly, in the
case of Reliance ADAG Private Limited vs. CST, Mumbai [2016 (43) STR 372
(Tri.)(Mum.)], the Tribunal has held that merely incurring expenses on
behalf of group companies and recovering them would not amount to provision of
service. The principles laid down in the said case should also apply to the
current case.

 

Another aspect to be noted is
that in certain cases, such as telephone facilities / insurance services, there
is a legal impediment to the employer providing such service since they are
regulated services and only those people who are authorised by the Department
of Telecommunication (DOT) or the Insurance Regulatory Development Authority of
India (IRDAI) can provide such a service. Therefore, this is one more basis to
say that by merely making available the facilities / benefits the employer has
not made a supply to his employees, but rather it is a cost incurred by him in
the course of receiving services from his employee and, therefore, is nothing
but just an employment cost for him. This aspect has also been discussed in our
previous article ‘Decoding GST: Inter-Mingling of Income tax and GST’ (BCAJ,
April, 2020).

 

Therefore, once a view is taken
that making available benefits / facilities does not constitute supply, Entry 2
of Schedule I which deems an activity of supply of goods or services between a
distinct person / related person as supply, even if made without consideration,
would not be applicable. This would be because Entry 2 pre-necessitates that
the activity has to be treated as supply u/s 7.

 

Another point to be noted is that
if a view is taken that by incurring the above expenses / making available the
benefits to the employees, there is a supply made by the employer, it could
result in additional unwarranted compliances on the part of the employer. Let’s
take an example of insurance facilities / benefits extended to the employee. If
a view is taken that the employer has indeed provided these services, then they
would be in violation of the IRDAI guidelines since they would be engaged in
providing insurance services without necessary approvals. Similar would be the
situation in case of telecommunication facilities made available to the
employees where one needs to obtain approval from DOT, or in the canteen
facilities from FSSAI. Further, in some cases such an interpretation would
result in an absurd application from other aspects also. For example, in case
of rent-free accommodation provided by the employer to the employee, if a view
is taken that the same is a supply of service in view of Entry 2 of Schedule I,
while there would be no tax liability on the outward side since the services of
renting of residential accommodation is exempted from tax, correspondingly, the
Department might take a view that the employer is engaged in providing exempt
services, thus triggering the applicability of the provisions of sections 17(2)
and 17(3) of the Central Goods & Services Tax Act, 2017 requiring
compliances under Rules 42 and 43 of the Central Goods & Service Tax Rules,
2017.

 

Therefore,
it is apparent that whether or not any amount is recovered from the employee
for any facilities / benefits made available to him, it would be wrong to treat
the same as a supply itself under GST. In fact, the next proposition would be
important, which is to say that the facilities / benefits which are made
available to the employees is nothing but a part of the employee cost incurred
in the course of receiving the services of the employee in pursuance of the
employment contract. This view finds support from the decision of the Andhra
Pradesh High Court in the case of Bhimas Hotels Private Limited vs. Union
of India [2017 (3) GSTL 30 (AP)] wherein, in the context of canteen
recoveries, the Court held that such recoveries have to be seen as part of any
pay package that workers have negotiated with employers and therefore cannot be
construed as service falling within the definition of ‘service’ u/s 65B(44) of
the Finance Act, 1994. The logic behind the above conclusion was that under
service tax the definition of service excluded any service provided by the
employee to the employer in the course of employment from its purview. Since
the recoveries were made in pursuance of the employment contract, they were
excluded from the scope of the definition of service. It is imperative to note
that even under GST, Entry 1 of Schedule III provides that services provided by
an employee to the employer in the course of the employment contract shall be
treated neither as supply of goods nor as supply of services. Therefore, it can
be said that under GST,

 

(a) Any facilities / benefits made available to the employees would not
be liable to GST as they do not amount to supply of service itself

(b) The facilities / benefits made available to the employees even if
not a statutory requirement but part of the employment policy, should be
treated as covered under Entry 1 of Schedule III and therefore excluded from the
scope of supply itself

(c) Even if any amounts are recovered from the employees, the same would
also be covered under Entry 1 of Schedule III in view of the decision in the
Bhimas Hotels case (Supra) and should be treated as nothing short of
reduction in the employee cost.

 

Readers might also take note of
the contrary AARs under GST on this subject. In the case of Caltech
Polymers Private Limited [2018 (18) GSTL 350 (AAR)] and upheld by the
Appellate Authority in [2018 (18) GSTL 373 (AAR)], the Authority
has held that the employer is liable to pay GST on amounts recovered from
employees for the canteen facilities extended to them. However, in the context
of recovery of insurance premia from employees, the authority has held that as
the same do not constitute an activity incidental or ancillary to their
business activity, they cannot be treated as supply of service. One may refer
to the ruling in the case of Jotun India Private Limited 2019 (29) GSTL
778 (AAR).

 

Eligibility
of Input Tax Credit on employee-related costs

 

There are
specific provisions which restrict claim of Input Tax Credit u/s 17(5) as
under:

(b) the following supply of goods or services or
both:

(i) food
and beverages, outdoor catering, beauty treatment, health services, cosmetic
and plastic surgery, leasing, renting or hiring of motor vehicles, vessels or
aircraft referred to in clause (a) or clause (aa), except when used for the
purposes specified therein, life insurance and health insurance:

Provided
that the input tax credit in respect of such goods or services or both shall be
available where an inward supply of such goods or services or both is used by a
registered person for making an outward taxable supply of the same category of
goods or services or both or as an element of a taxable composite or mixed
supply;

(ii) membership of a club, health and fitness
centre; and

(iii) travel benefits extended to employees on
vacation such as leave or home travel concession:

Provided
that the input tax credit in respect of such goods or services or both shall be
available, where it is obligatory for an employer to provide the same to its
employees under any law for the time being in force.

(g) goods
or services or both used for personal consumption;

 

Building on
the above discussion, it is important to note that while making available the
various benefits / facilities to their employees, the employers incur various
costs on which GST would have been charged by their suppliers. Therefore, the
question that needs consideration is whether or not credit shall be available
on such expenses incurred.

 

The
specific reason for this query is that section 17(5) lists items on which
credit shall not be allowed. These are termed as blocked credits. For various
expenses while there is a restriction on claim of credit, an exception has been
provided when the expense is incurred as a statutory requirement. For example,
while in general ITC on food and beverages is not allowed, however, vide
an exception it has been provided that if it is a statutory requirement to
provide such facilities, Input Tax Credit shall be available. For instance,
under the Factory Act, 1948 every factory employing more than 250 employees is
required to maintain a canteen for them. As discussed earlier, for the purpose
of this Act the employees also include those who are not on the payroll of the
employer, i.e., while in general, an employer-employee relationship does not
exist, for the purposes of the Factory Act, 1948 they are treated as employees
and therefore the question that needs consideration is whether the eligibility
to claim credit will apply for such an outsourced workforce also. This would be
specifically important in cases such as construction contracts where generally
the labour is outsourced.

The same
applies to rent-a-cab services, insurance services, etc., as well. However, at
times there are inward supplies received which facilitate the making available
of benefits / facilities to employees. For example, equipment / crockery
purchased for a canteen. There is no specific restriction on the claim of
credit on such items. The restriction applies only to food and beverages and
these do not constitute food and beverages. Therefore, credit on such items
could be claimed.

 

Another
area that would need deliberation is clause (g) of section 17(5) which
restricts claim of credit on goods or services or both used for personal
consumption. The scope of this entry has seen substantial confusion as to
whether it would apply to goods or services used for employee consumption. For instance,
the company organises a picnic for its staff. Will this get covered under this
entry or not? To understand this, one needs to analyse the scope of the term
‘personal consumption’. However, before proceeding further it would be relevant
to refer to the similar entry in CENVAT Credit wherein Rule 2 (l) states that
specific services which were meant for ‘personal consumption of any employee’
shall not constitute input service. It is imperative to note that while the CCR
specified whose personal consumption, the same is apparently silent under GST.
This would indicate that in the absence of a specification, a view can be taken
that the term ‘personal consumption’ is to be seen in the context of the
taxable person and not the employees and, therefore, subject to other clauses
of section 17(5), credit would be available even if they were meant for
consumption of the employees.

 

However,
the answers would change in the above case where the cost of making available
the benefits / facilities, whether wholly or partly, is recovered from the
employees. In such a case, it would result in a reduction of cost for the
employer and therefore, to that extent, the employer would not be entitled to
claim credit. However, there are instances where employers take a view that in
a case where credit is allowable and the corresponding costs are recovered from
the employees, GST should be paid on the recovery amount to avoid complicating
ITC calculations. However, one should take a view that paying GST on the
recovery would mean that the employer has accepted liability under Entry 2 of
Schedule I and there might be challenges on the valuation of the supply claimed
to be made by the employer to his employees because section 15 of the Central
Goods & Services Tax Act, 2017 requires such a transaction to be valued as
per the Valuation Rules.

 

Applicability of GST on payments made to
directors of a company

 

Entry 6 of
Notification 13/2017 – CGST Rate requires that the GST in case of service
supplied by a director of a company or a body corporate to the said company /
body corporate shall be paid by the service receiver, i.e., the company in case
the service provider is a director / body corporate. However, this particular
aspect of the GST law has seen its share of controversy, with conflicting
decisions under the Service Tax regime as well as a ruling issued by the
Authority for Advance Ruling.

 

However, before proceeding further, it would be
necessary to go through the background of the concept of directors. Directors
are individuals who are appointed on the Board of a company to protect the
interests of the shareholders and manage the affairs of the company. Generally,
there are two types of directors: executive directors who are involved in the
day-to-day activities of the business, and non-executive directors, also known
as independent directors, whose role is mainly to ensure that the interest of
the shareholders and other stakeholders is largely protected. The maximum
remuneration that can be paid to each class of directors is also regulated.
However, when determining whether the directors satisfy the test of an
employer-employee relationship, there would be a different outcome which is
evident from the following:

Condition

Executive Director

Non-Executive / Independent Director

Who appoints the workers?

Shareholders, on the recommendation of Board, or Board, to be
subsequently ratified by the shareholders

Who pays the salary / remuneration?

Company

Company

Who has the authority to dismiss?

Shareholders

Who can take disciplinary action?

Shareholders

Whether there is continuity of service?

Generally, appointed till end of next general meeting

What is the extent of control and supervision?

Full control and supervision by shareholders

No control / supervision

As is apparent from the above, in
the case of Executive Directors, the test of employer-employee relationship
laid down by the Supreme Court in Balwant Rai Saluja (Supra) is
satisfied. However, it is not so in the case of Independent directors as the
key element of existence and control and supervision is missing. It is
therefore sufficient to say that while Executive Directors satisfy the test of
the employer-employee relationship, the same is not so in the case of
Non-executive / Independent directors. Therefore, in case of directors, while
admittedly notification 13/2017 – CT (Rate) imposes a liability on the company
to pay tax on reverse charge, the issue that remains is whether the payment
made to directors who are in an employer-employee relationship will get covered
within this entry or will it be excluded from the purview of Entry 1 of
Schedule III.

 

Therefore,
since Schedule III itself excludes transactions where an employer-employee
relationship exists from the purview of supply itself, notification 13/2017 –
CT (Rate) imposing the liability to pay tax on the service recipient is ultra
vires of the provisions of the Act and, therefore, not maintainable. This
aspect has already been considered by the Gujarat High Court in the recent
decision in Mohit Minerals Private Limited vs. UoI & others [2020 VIL 36
Guj.].

 

In fact, it
is imperative to note that a similar entry requiring payment of tax under RCM
was applicable even under the Service Tax regime where there were two
conflicting decisions. The Division Bench of the Mumbai Tribunal in the case of
Allied Blenders & Distillers Private Limited vs. CCE & ST,
Aurangabad [2019 (24) GSTL 207 (Tri.)(Mum.)] held that directors’
salary would be excluded from the purview of service tax and therefore no tax
would be liable to be paid under Reverse Charge. However, the Kolkata Tribunal
(SMB) has, in the case of Brahm Alloy Limited vs. Commissioner [2019 (24)
GSTL 616 (Tri.)(Kol.)] held otherwise and confirmed the liability to
pay tax on directors’ remuneration, described as salary by concluding that an
employer-employee relationship didn’t exist on account of two reasons; firstly,
the resolution of the company confirming the appointment of the directors did
not cover the terms of appointment / hiring of services and also the action to
be taken for non-performance of specified duties without which it cannot be
construed as to whether an individual was appointed as Promoter-Director or an
employee director; and secondly, payments made in a quarterly and not monthly
manner. It is apparent that the decision in the case of Brahm Alloy
Limited is contrary to the established principles and might not survive
if appealed before a higher authority.

 

It is also
important to note that under the GST regime, the AAR has, in the case of Clay
Craft India Private Limited [Raj/AAR/2019-20/33] also held to the
contrary, that tax is payable under Reverse Charge. The Authority has concluded
that the services rendered by the director to the company are not covered under
Entry 1 of Schedule III as the directors are not employees of the company.

 

The next
issue relating to directors is the applicability of reverse charge in case of
directors deputed on behalf of investing companies, in which case the
remuneration is paid to the company and not to the representative directors.
The issue revolves around whether such transactions would be covered under
notification 13/2017 – CT (Rate) or not? It is imperative to note that in this
transaction structure, the transaction is between two different companies /
body corporates wherein one body corporate has deputed a person as a director
on the Board of the other company. In other words, both the supplier and the
recipient of service are a body corporate / company. The notification requires
that the service provider must be an individual, being a director of the
company. However, that is not so in the case of the current set of
transactions. In other words, Entry 6 does not get triggered at all and,
therefore, no reverse charge would be applicable on such transactions.

 

Is GST applicable on notice period
recoveries / claw-back of payments to employees?

 

Before
looking into the tax implications of notice period recovery / claw-back, let us
understand the background of these transactions.

 

Notice
period recovery: Generally, the employment contracts have a clause that if an
employee intends to leave the organisation or an employer intends to
discontinue the services of an employee, each party will be required to give a
notice to the other of their intention to do so, and once the notice is served,
the party giving the notice will be required to serve a notice period, i.e., if
the employee is serving notice, he will be required to continue in employment
for a pre-decided period to enable the employer to make alternate arrangements.
Similarly, if the employer has served notice to the employee, he will have to
allow the employee to continue in employment for a pre-decided period to enable
the employee to find new employment, or prepare for transition. This is
generally treated as serving notice period. However, there are times when the
party giving the notice does not intend to honour the commitment in which case
they are required to compensate the other person monetarily. In case the
employee refuses to serve the notice period, he would be required to pay
compensation to the employer, which would be either adjusted from his full and
final settlement or recovered from him, and vice versa; if the employer
abstains from honouring the notice period clause, he would monetarily reimburse
the employee.

 

Similarly,
claw-back refers to recovering the amounts already paid to the employees. In
case of senior management employees, there are generally clauses in the
agreement which provide that in case of non-satisfaction of certain conditions
of the employment contract, the payments made to the employees shall be
recovered back from them. For example, if a top level employee is joining a
company from another company, in order to lure him to accept the employment he
is offered ‘joining bonus / incentive’ with the condition that if he does not
continue the employment for a specified period, the same would be liable to be
recovered from him. Similarly, even in case of incentives / bonus, there are
clauses for claw-back of the bonus if there is some action on the part of the
employee which is detrimental to the employer.

 

The issue
that needs consideration is whether recoveries such as the above would
constitute a supply and therefore liable for GST? It is imperative for the
readers to note that the applicability of GST on notice period recoveries has
been a burning issue right from the service tax regime wherein the following
service was declared to be a deemed service u/s 66E: agreeing to the
obligation to refrain from an act, or to tolerate an act or a situation, or to
do an act;…

 

A similar
entry has continued even under the GST regime with Entry 5(e) of Schedule II of
the Central Goods & Services Tax Act, 2017 which declares the above to be
treated as supply of service under the GST regime as well, thus keeping the
issue alive. Let us analyse the same.

 

Whether such recoveries would be covered under Entry 1 of Schedule III?

However,
what needs to be noted is that the above recoveries emanate from a contract of
employment which is covered under Schedule III as neither being supply of goods
nor supply of services. A contract is the logical starting point for any
transaction. In any contractual obligation, the contracting parties are under
an onus to perform the contract. The contracting terms determine the
responsibility and enforce the performance on each contracting party. In case
of non-performance by any party, resort has to be taken to the contractual
relationship to determine the scope of recovery, if any. Hence, the contract is
in toto the binding force in any relationship.

A Latin
maxim, Nemo aliquam partem recte intelligere potest antequam totum perlegit,
says that no one can properly understand a part until he has read the whole.
Hence, it is important to analyse the entire transaction matrix, the
contractual relationship between the employer and the employee, the relevant
contracts / documents before diving into a discussion on the applicability of
service tax. An employment contract is a written legal document that lays out
binding terms and conditions of an employment relationship between an employee
and an employer. An employment contract generally covers an overview of job
responsibilities, reporting relationships, salary, benefits, paid holidays,
leave encashment benefits, details of employment termination and also provides
that in case an employee wants to quit, the employee should provide one month’s
notice before resigning or compensation in lieu of notice period.

 

The
employment contracts are long-term contracts with the employees. The
understanding and expectations from the employer are that the employee should
provide his services on a continuous basis. The employees are working on
important client projects or certain functions important for the operation of
the business; if any employee resigns in between, that impacts the progression
of the project adversely. To avoid such a situation and give sufficient time to
the employer to make alternative arrangements, the mandatory notice period is
prescribed under the employment contract. However, if the employee wishes to
leave without serving the notice period, the contract provides for recovery of
a certain amount which is generally deducted from the amounts due to the
leaving employee earned in the course of employment.

 

The ‘notice
period recovery’ is a provision for an eventuality that may arise as per
mutually-agreed terms of the employment contract. Notice period recovery is a
condition of the employment contract agreed mutually and hence is intricately
linked with the employer-employee relationship and arises out of an employment
contract only.

 

In the case
of Lakshmi Devi Mills Limited vs. UP Government [AIR 1954 All. 705, 714]
it has been held that ‘terms and conditions of service’ not only include the
recruitment or appointment but also all aspects like disciplinary matters,
removal from service, dismissal, etc. Therefore, termination or quitting the
organisation on notice or notice period recovery in lieu thereof is an
integral part of the employment contract. Thus, notice period recovery is just
another condition of the contractual relationship of an employer and employee
just like other terms of the same employment agreement. Hence, the notice
period recovery in lieu of not adhering to the notice period emanating
from the employment contract should get covered under Entry 1 of Schedule III
and therefore excluded from the scope of supply itself.

 

Is there
any service provided by the employer?

Another
point to be noted is that merely because there is recovery would not convert
the same into consideration. In permitting the employee to leave the
organisation, there is nothing that the employer has done to qualify as
service. For treating something as service, there has to be an activity which
requires doing something for another person. In case of notice period
recoveries, there is no rendition of service from the employer in the case of
permitting the employee to leave the organisation before the completion of the
notice period. The events which precede the employee leaving the organisation
are:

 

(a) The decision to leave is that of the
employee

(b) The request for termination is made by
the employee

(c) The employer has no choice to retain the
employee if he really wants to leave

(d) If the employer decides not to insist on
the notice period, even then he cannot insist on the recovery of the notice pay
if the employee wants to serve the notice period; he will be required to
continue the employment till that period

(e) Therefore, the employer has no choice to
decide on whether the employee should stay back for the notice period or
whether he should leave early against recovery of notice pay. This choice is
also made by the employee.

 

From the
above it is evident that all the activities and decisions are actually carried
out by the employee. And the employer does nothing. He neither decides nor is
in a position to decide. Hence, there is no provision of service by the
employer. Merely because the employee is permitted to leave by the employer
does not by any stretch of the imagination get covered by ‘activity performed
for the employee’.

 

Would mere recovery of amounts characterise it as consideration?

Another
aspect which would need deliberation is whether or not the amounts recovered on
account of notice period recovery / claw-back clauses can be treated as
consideration? Merely because money is received would not give it the
characteristic of consideration. In the case of Cricket Club of India vs.
Commissioner of Service Tax, Mumbai [2015 (40) STR 973] it was held
that mere money flow from one person to another cannot be considered as
consideration for a service. The relevant observations of the Tribunal in this
regard are extracted below:

 

‘11.
…Consideration is, undoubtedly, an essential ingredient of all economic
transactions and it is certainly consideration that forms the basis for
computation of service tax. However, existence of consideration cannot be
presumed in every money flow. The factual matrix of the existence of a monetary
flow combined with convergence of two entities for such flow cannot be moulded
by tax authorities into a taxable event without identifying the specific
activity that links the provider to the recipient.

12. …Unless
the existence of provision of a service can be established, the question of
taxing an attendant monetary transaction will not arise.’

 

Even in the celebrated case of UoI
vs. Intercontinental Consultants and Technocrats Pvt. Limited
[2018-TIOL-76-SC-ST], the Apex Court upheld the decision of the Delhi
High Court that observed that ‘…and the valuation of tax service cannot be
anything more or less than the consideration paid as quid pro quo for
rendering such a service’.

 

In the case of HCL Learning
Limited vs. Commissioner of CGST, Noida [2019-TIOL-3545-CESTAT-All.],
the Hon’ble Tribunal of Allahabad has categorically held as under:

 

‘1… From
the record, we note that the term of contract between the appellant and his
employee are that employee shall be paid salary and the term of employment is a
fixed term and if the employee leaves the job before the term is over then
certain amount already paid as salary is recovered by the appellant from his
employee. This part of the recovery is treated by Revenue as consideration for
charging service tax… terms of contract between the appellant and his
employee are that employee shall be paid salary and the term of employment is a
fixed term and if the employee leaves the job before the term is over then
certain amount already paid as salary is recovered by the appellant from his
employee. This part of the recovery is treated by Revenue as consideration for
charging service tax.

 

2. We hold
that the said recovery is out of the salary already paid and we also note that
salary is not covered by the provisions of service tax. Therefore, we set aside
the impugned order and allow the appeal.’

Therefore,
whether recovery is from salary due / retained or salary already paid, the fact
remains that salary is excluded from service tax and such recovery cannot be
termed as consideration.

 

Will notice period recovery be covered under Entry 5(e) of Schedule II
to treat the same as supply of service?

The
decision to quit the organisation by the employee is a unilateral decision. The
same is forced upon the employer and he has to accept it. The employer cannot
make any employee work without his consent. Article 23(1) of the Indian
Constitution prohibits forced labour in any form. In other words, statutorily
no employee can be forced to work against his wish. In case the employee wishes
not to serve the notice period and opt to leave the organisation before
completion of the notice period, in such a situation the employer can only
recover the notice period dues.

 

Further,
the employer would not be tolerating any act in such a case. If the employer
has the option to tolerate or not to tolerate, then it can be said to be a
conscious decision. In such cases, in view of the above discussion, the decision
to quit is thrust upon the employer without any option. Therefore, it cannot be
said that the employer has agreed to tolerate the said act of the employee.

 

A breach of
contract cannot be said to be ‘tolerated’ and that is why an amount is imposed
to deter breach in contracts. The contract of employment is for receipt of
services from the employee and not for the breach. The Court of Appeal (UK) in
the case of Vehicle Control Services Limited [(2013) EWCA Civ 186],
has noted that payment in the form of damages / penalty for parking in wrong
places / wrong manner is not a consideration for service as the same arises out
of breach of contract with the parking manager.

          

The Madras
HC has critically analysed the levy of service tax on notice period recoveries
in the case of GE T&D India Limited vs. Deputy Commissioner of
Central Excise, Large Tax Payer Unit, Chennai [2020-VIL-39-Mad-ST] wherein
the OIO had confirmed the demand treating the recoveries as consideration for
providing declared service u/s 66E. In this case, the Court held as under:

 

‘11. The
definition in clause (e) of section 66E as extracted above is not attracted to
the scenario before me as, in my considered view, the employer has not “tolerated”
any act of the employee but has permitted a sudden exit upon being compensated
by the employee in this regard.

12. Though
normally a contract of employment qua an employer and employee has to be read as a whole, there are
situations within a contract that constitute rendition of service such as
breach of a stipulation of non-compete. Notice pay, in lieu of sudden termination, however, does not give rise to the
rendition of service either by the employer or the employee.’

 

The above
judgment clearly lays down the principle that notice period recovery cannot be
treated as ‘service’ by an employer, more so a ‘declared service’. Some
monetary recovery by an employer from an employee on account of breach of
contract cannot be said to be consideration for any different service. Breach
of contract leading to recovery does not lead to the creation of a new contract
of tolerating any act of the employee. The notice period recovery, at best,
represents nothing but reduction in salary payable which is due to the employee
which emanates only from the employment agreement. To draw an analogy, for
breach of contracts, certain companies recover liquidated damages from the
amounts due to the opposite party who fails to execute his duties as stipulated
under the contract. In case of notice period recoveries, the employer recovers
notice period recovery from the employee for breach of contract conditions as
stipulated in the employment agreement. The Tribunal has in the case of Reliance
Life Insurance Company Limited [2018-TIOL-1308-CESTAT-Mumbai = 2018 (19) GSTL
J66 (Tri.)(Bom.)] held that the surrender / discontinuance charges
represent penalty or liquidated damages and cannot be considered as a
consideration for any services. On a similar footing, in another case of Gondwana
Club vs. Commissioner of Customs & Central Excise, Nagpur
[2016-TIOL-661-CESTAT-Mum.] the club had recovered certain charges from
the employees for the accommodation provided to them. In this case also, the
Tribunal held as under:

 

‘7… The
contractual privileges of an employer-employee relationship are outside the
purview of service tax and this activity of the appellant does not come within
the definition of the taxable service of “renting of immovable property” sought
to be saddled on the appellant in the impugned order. Accordingly, the demand
under the head “renting of immovable property service” does not sustain.’

 

In a very
recent decision, the Hon’ble High Court of Bombay had the opportunity to
analyse the concept of ‘supply’ in relation to violation of legal right and
claim of compensation / damages in the context of the Central Goods &
Services Tax Act, 2017. The Hon’ble High Court in the case of Bai Mamubai
Trust & Ors vs. Suchitra Wd/O. Sadhu Koraga Shetty & Ors
[2019-VIL-454-Bom.] observed as under:

 

56. I am in
agreement with the submissions of the Learned Amicus Curiae that where a dispute concerns price / payment for a
taxable supply, any amount paid under a court’s order / decree is taxable if,
and to the extent that, it is consideration for the said supply or a payment
that partakes that character. In such cases, the happening of the taxable event
of ‘supply’ is not disputed, but the dispute may be in regard to payment for
supplies already made. This could be, for example, where the defendant denies
the liability to pay the price forming consideration for the supply. The order
/ decree of the court links the payment to the taxable supply and the requisite
element of reciprocity between supply and consideration is present.

 

57.
However, where no reciprocal relationship exists, and the plaintiff alleges
violation of a legal right and seeks damages or compensation from a Court to
make good the said violation (in closest possible monetary terms), it cannot be
said that a ‘supply’ has taken place.

 

58. The
Learned Amicus Curiae correctly submits that
enforceable reciprocal obligations are essential to a supply. The supply
doctrine does not contemplate or encompass a wrongful unilateral act or any
resulting payment of damages. For example, in a money suit where the plaintiff
seeks a money decree for unpaid consideration for letting out the premises to
the defendant, the reciprocity of the enforceable obligations is present. The
plaintiff in such a situation has permitted the defendant to occupy the premises
for consideration which is not paid. The monies are payable as consideration
towards an earlier taxable supply. However, in a suit, where the cause of
action involves illegal occupation of immovable property or trespass (either by
a party who was never authorised to occupy the premises or by a party whose
authorisation to occupy the premises is determined) the plaintiff’s claim is
one in damages.

 

The above
judgment of the Hon’ble High Court clearly explains that a contractual
obligation forced out of a contract for legal violation cannot be said to be an
activity on which tax is applicable. Although the context is under the Goods
& Services Tax law, but the same can be very well correlated with the
Service Tax laws. Violation of contractual terms by way of monetary
compensation does not result into a ‘contract’ between the parties on which tax
is payable. Reciprocal relationship is a must, which is missing in the case of
notice period recovery as succinctly explained in the grounds above.

 

Based on the
above judgments, analogies and justification as to why notice period recovery
cannot be said to be a ‘declared service’, it is apparent that the recoveries
made from employees on account of non-serving of notice period / claw-back
clauses should not be liable to GST.

 

INTERPLAY WITH PROFESSION TAX ACT

Each
business having a presence in a particular state and employing a specified
number of employees is required to deduct Profession Tax from the salary
payable to the employees and deposit it with the respective State Profession
Tax Authorities of the branch where the employees are based.

 

In the
pre-GST regime, entities engaged in providing services in multiple states had
an option to take single registration and, therefore, had limited exposure to
the state authorities. In many cases, it was observed that the Profession Tax
deducted from employee’s salary was deposited in only one state though the
employee was based in a branch in a different state. While under the pre-GST
regime the state had no overview over such cases, with the introduction of GST
such entities are under the radar of the authorities of multiple states and
issues such as non-registration under Profession Tax, non-payment of profession
tax in the correct state and so on might start coming to the fore. In case of
non-compliance, there might be repercussions which might need to be taken care
of.

 

CONCLUSION

In view of the specific exclusion for services
rendered by employees to employers, it may be important to ensure that the said
exclusion is interpreted in the context of the precedents set under other
legislations.

OPERATIONAL IMPACT OF CORONAVIRUS OUTBREAK ON GST

India has been in lockdown mode
in response to the coronavirus pandemic since 24th March, 2020. It
all started on 30th January when Kerala confirmed the first case of
the disease. In most of the states a semi-lockdown situation started on 12th
March with the closure of schools, colleges and cinema halls, malls, night
clubs, marriages and conferences as a precautionary measure. In Maharashtra,
the provisions of the Epidemic Diseases Act, 1897 were invoked on 13th March.
The impact on business houses started when the State Government ordered private
offices to operate with less than 50% of total attendance and allow the rest to
work from home. The orders were given on 17th March and the
restrictions further tightened on 20th with the announcement of the
closure of all workplaces excluding essential services.

 

And on the 24th of
March, 2020, the Government of India issued a nationwide lockdown order for
containment of the Covid-19 epidemic to be effective for 21 days from the 25th
of March. This lockdown was further extended up to 3rd May. It is
thus seen that the lockdown started affecting trade and business operations in
most of the states from 15th March, a period which coincided with
the compliance period (GST payments and filing of returns) under GST for the
month of February, 2020.

 

It will not be incorrect to state
that in a country like India, considering the present tax rate structure, tax
collection is one of the indicators of the economic growth of trade and
commerce. The indirect tax, which is a tax imposed on consumption, reflects
directly on the economic health of trade and commerce. With the introduction of
the Goods and Services Tax from July, 2017, the tax rate structures of various
commodities and services have been rationalised multiple times to ensure steady
growth in revenue collection. Over the past few months, the GST has been
contributing over Rs. 1 lakh crores in the indirect tax receipts of the Centre
and the states. However, in March, 2020 the GST collections slipped below the
said psychological mark – a fall that may partially be attributable to the
Covid-19 situation (the government announcement extending the due dates for
making payment of GST for the said month came very late). It is, however,
important to note that the GST collections for March, 2020 are at Rs. 97,597
crores and are still higher as compared to the numbers for September and
October of 2019. Considering the economic lockdown in the entire month of
April, 2020, the collection for this month is certainly going to be a
challenge.

 

The Hon’ble Finance Minister has
announced various tax compliance-related reliefs / measures for the next few months
to enable the trade and businesses to effectively address this unprecedented
situation while managing their tax compliances and cash flow. Some of the
important relaxations made are given below:

 

(i) Extension of time limit for filing of GSTR3B for the months of
February, March and April to 30th June, 2020 for assessees having a
turnover of less than Rs. 5 crores.

(ii) For assesses with a turnover more than Rs. 5 crores (large
assessees), the rate of interest for delayed payment of tax has been conditionally
reduced from 18% to 9% p.a. from 15 days after the due date. However, there is
no extension of the due date. No late fee / penalty shall be charged for delay
relating to this period.

(iii) Time limits for notices, notifications, approval orders, sanction
orders, filing of appeals, furnishing applications, reporting any other
document, etc., or for any other compliance (barring a few exceptions) expiring
between 20th March and 29th June are extended to 30th
June, 2020.

(iv) 24/7 clearance at all customs stations till 30th
June, 2020 to address any congestion, delay or surge on account of the
prevailing conditions.

(v) RBI extended the time period for realisation and repatriation of
export proceeds for export of goods or software made up to or on 31st
July to 15 months (from the existing nine months) from the date of export.

(vi) (For a detailed note on GST amendments refer to Recent
Developments in GST in the BCAJ issue dated April, 2020).

 

The extension in payment of GST
for the months of February to April, 2020 is certainly a big relief to the
taxpayers. However, it is strongly felt that it would have been more
appropriate for the government to completely waive off the interest for those
making the payments for the months of February to May on or before 31st
July, 2020. As per the said extension, for assessees having a turnover of more
than Rs. 5 crores no interest will be charged if they make the payment on or
before 4th May. Considering that the lockdown has been extended from
the earlier 14th April to 3rd May, a further 15 days’
extension in the said date is the least that trade and commerce can expect.

 

The lockdown was implemented
without any advance announcement, as a result of which a lot of practical
problems have arisen.

 

(a) The problem of Invoice / E-way bill
generation and printing: As we all know, under GST the movement of goods is
allowed only with proper supporting documents such as Invoice / E-way bills,
etc. Any goods not accompanied by proper documentation are liable to be seized
and attract a heavy penalty. During the lockdown period and the related mandate
to work from home, many have experienced difficulties in printing invoices /
generating E-way bills due to the lack of a printing set-up at home. In a few
cases, as a temporary measure the transportation was done without adequate
documentation based only on oral information about Invoice No. and E-way bill
Nos. provided by the supplier to the transporter.

 

(b) Possibility of clandestine movement of goods: There is
a high risk of clandestine movement of goods by certain anti-social tax evaders
during the lockdown period, especially since the tax authorities may not be in
a position to keep a check on in-transit movements of goods due to scaling down
in the mobile squad staff during this period. The government, perhaps in
anticipation of this issue, has not relaxed the requirement of generating E-way
bills and issuing invoices.

 

(c) Preparation of manual invoices: Many organisations did not
have sufficient IT infrastructure in place to enable access to their accounting
/ invoicing software from home. Therefore, in many cases invoices were prepared
manually (i.e., outside the regular systems), resulting in various control
lapses such as no consecutive system-generated invoice number, the challenge as
to the proper accounting thereof, etc. Further, it’s not unlikely that instead
of paying interest, the large assessees may consider filing of GSTR3B on an ad
hoc basis and prefer to reconcile the amounts later whenever the GSTR1
returns are filed, increasing the compliance burden due to added
reconciliation.

 

(d) Digital signature: Use of digital signature is a
must for carrying out many important compliances under GST, for example, filing
of GST Returns, making payment of GST using DRC-03, refund applications, etc.
As the duration of the lockdown period and gravity of the situation were
unknown, many employees / consultants working with the GST compliance team did
not carry the digital signature home with them which added to their compliance
hindrances during the lockdown period. To address this issue, as a temporary
measure the GSTIN has permitted filing of returns without digital signature and
only on the basis of EVC code.

 

(e) Transitional consignments: Many consignments were in
transit during the lockdown period. Since many states sealed their borders from
12th March onwards, a huge volume of consignments was immobilised.
The problem relating to the expiry of the E-way bill was partially addressed by
the subsequent relief measures extending the validity of the E-way bills
expiring between 20th March and 15th April up to 30th
April, 2020. However, most of the consignments, perishable in nature, resulted
in spoilage of goods. The GST law requires a reversal of Input Tax Credit on
goods lost due to damage / spoilage etc. Unfortunately, no relief has so far
been given in respect thereof. Besides, delays in delivery resulted in many
such orders being cancelled, the tax on which was already paid, adding to the
working capital woes of the trade. In cases involving stock transfers between
different registered units of the same entity, the supplying unit ended up
paying taxes, whereas the receiving unit could not avail the ITC due to
non-receipt of goods.

 

(f) Cancellation of services: The hospitality, tourism and
airline industries suffered a major setback due to the cancellation of their
services during the lockdown. In many cases, the advance was refunded with some
cancellation charges. The issue as to the applicability of the rate of
cancellation charges is still unsettled and hence is likely to remain in focus
during assessments dealing with the said period.

 

(g) Delays in processing refunds: Since the
tax department is functioning with limited staff during the lockdown period,
various refund applications are pending processing, thus adding to the
cash-flow problems of the assessees. This has also impacted various other
administrative processes, such as matters dealing with the restoration of GST
registrations, the release of bank account attachment / blockage of electronic
credit ledger, etc.

(h) Goods supplied free under CSR initiative: During
the lockdown period many entities have been involved in CSR initiatives by
donating masks, gloves, sanitizers, food packets, etc. The eligibility of ITC
on such donations is also doubtful in the light of the provisions of section
17(5)(h) of the CGST Act and no tax incentive has been provided for the same.

 

As part of an administrative
relief package, the time limits for notices, notifications, approval orders,
sanction orders, filing of appeals, furnishing applications, reporting any
other document, etc., as also the time limit for any other compliance expiring
between 20th March and 29th June is extended to 30th
June, 2020. However, certain provisions have been excluded from the purview of
such relaxations. For example, no relaxation was given for time limit stated in
section 31 for issue of invoices. Hence, in cases involving continuous supply
of services, if the event obligating the payment falls during the lockdown
period, then the issue of invoice is mandatory and shifting of liability is not
permissible.

 

Similarly, if during the lockdown
period the turnover of any person exceeds the threshold limit provided for
obtaining GST registration, then such person shall be required to obtain the
registration within 30 days thereof as no relaxation from the same has been
provided. And in cases where the assessee could not make the previous
compliances before the due dates on account of various reasons and the default
continued owing to inability to take any corrective action during the lockdown
period, the imposition of late fees and interest for the lockdown period will
continue. In this background, it would be interesting to see whether an
assessee can exclude the lockdown period from the limitation period citing force
majeure or impossibility of performance?

 

Unfortunately, in many states
such notifications were not issued by the State VAT / Commercial Tax Departments
as regards pre-GST matters. In an attempt to prevent the spread of coronavirus,
the Maharashtra State Goods and Services Tax Department issued detailed
guidelines to its officers and staff discouraging personal appearances of
assessees / their representatives and completing the time-barring assessments
by obtaining the details through emails and to pass manual orders. However, no
extension of the time limit was given for cases that were getting time-barred
in March, 2020. This may have far-reaching implications, especially where the
orders are passed ex parte and because the Maharashtra VAT Act contains
no provision for cancellation of assessment order and an appeal is not admitted
without depositing 10% of the disputed tax liability by way of pre-deposit.

 

It also appears that the decision
of the department in not extending the statutory due date is in direct
contravention of the order of the Hon’ble Supreme Court in the suo motu
WP (Civil) No. 3/2020 vide order dated 23rd March, 2020,
wherein the Apex Court in the exercise of its powers under Article 141 of the
Constitution (binding on all Courts / Tribunals and authorities), has ordered
that the period of limitation in all proceedings, irrespective of the
limitation prescribed under the general law or special law whether condonable
or not, shall be extended with effect from 15th March, 2020 till
further orders. The service tax audits / inquiries under the pre-GST laws also
continued during the lockdown period (admittedly not on a full scale)
increasing the risk of best-judgment SCNs due to the inability of the assessee
to produce proper data during the said period. In some cases, the authorities
issued notices for conducting personal hearing through video conferencing.

 

The
economic impact of coronavirus on GST is directly linked to the economic health
of trade, commerce and industry during the said period and will become clearer
in the days to come and could even become permanent. However, the operational
impact and practical difficulties explained above are temporary in nature and
are expected to have a short life. Hopefully, with the re-opening of the
economy these things will come back on track and certain cases of fait
acompli experienced during the said period will be addressed wherever
possible by appropriate administrative orders. The whispers seeking more relief
are getting louder and there is a possibility that the government is likely to
announce further relaxations if the lockdown period is further extended. One only
hopes that this happens sooner rather than later.

Section 9(1)(vii)(b) of Act – On facts, since payments made by assessee to foreign attorneys for registration of IPs abroad were not for services utilised in profession carried on outside India, or for making or earning any income from any source outside India, FTS was sourced in India and not covered by exception carved out in section 9(1)(vii)

7. [2020] TS-117-ITAT-(Kol.)

ACIT vs. Sri Subhatosh Majumder

ITA No. 2006/Kol/2017

A.Y.: 2011-12

Date of order: 26th February, 2020

 

Section 9(1)(vii)(b) of Act – On facts, since payments made
by assessee to foreign attorneys for registration of IPs abroad were not for
services utilised in profession carried on outside India, or for making or
earning any income from any source outside India, FTS was sourced in India and
not covered by exception carved out in section 9(1)(vii)

 

FACTS

The assessee (resident in
India) was a patent attorney who provided IP registration services to its
clients in India. For registration of the IP of his clients abroad, the
assessee had made payments to foreign lawyers and attorneys. According to the
assessee, services were performed abroad and hence the payments were not
chargeable to tax in India. Therefore, the assessee did not withhold tax from
these payments.

 

But according to the A.O.,
the assessee had obtained technical information or consultancy services from
foreign attorneys. And although services were rendered outside India, they were
essentially connected with the profession carried on by the assessee in India.
Therefore, the payments were in the nature of FTS in terms of section
9(1)(vii), read with Explanation 2 thereto. Accordingly, the A.O. disallowed
the expenses u/s 40(a)(i).

 

On an appeal, following the
earlier years’ order in the assessee’s case5, the CIT(A) deleted the
addition by the A.O.

 

Being aggrieved, the tax
authority appealed before the Tribunal.

 

HELD

(1) Foreign attorneys were appointed for
registration of IP under patent laws of foreign countries where products were
sold. They had specialised knowledge and experience of foreign IP laws and
procedures for IPR registrations. Only because of the advice of foreign
attorneys the assessee and / or his clients could prepare the requisite,
technically intricate documentation necessary for preparing IP rights
registration applications in foreign countries. Foreign attorneys also
represented the clients of the assessee before the IP authorities abroad and
provided clarifications and explanations necessary for registrations.

(2) The following facts did not
support the contention of the assessee that he had merely acted as a
pass-through facilitating the payment to foreign attorneys or as an agent:

(a) Perusal of the documents furnished by the assessee did not show the
existence of direct and proximate nexus or direct contact between clients and
foreign attorneys.

(b) Clients had not issued any letters which showed that the appointment
of the foreign attorneys was made by the assessee on their specific
instructions or request.

(c) Perusal of the engagement letter issued by a client showed that it
had engaged the services of the assessee for registration of trade marks in
several foreign countries. It nowhere suggested engaging the services of, or
coordinating with, any particular foreign attorney. The manner of performance
was also left to the sole discretion of the assessee. The contractual terms did
not mention reimbursement of costs by the client.

(d) Copies of invoices raised by foreign attorneys showed that privity
of work was between the assessee and the foreign attorneys who performed their
work in terms of the appointment made by the assessee.

 

(3) Thus,
the foreign attorneys were engaged by the assessee. Payments to them were also
made by him. Such engagement was in the performance of professional services by
the assessee in India. The source of income of the assessee was solely located
in India. The assessee had engaged the services of foreign attorneys for
earning income from sources in India. Accordingly, the services rendered by the
foreign attorneys were in the nature of FTS in terms of section 9(1)(vii)(b)
and were not covered in the exception carved out therein.

_______________________________________________________________

5              Said
order pertained to years prior to amendment made vide Finance Act, 2010

Section 9(1)(i) of Act – As appearance of non-resident celebrity for promotional event outside India was for the benefit of the business in India, there was significant business connection in India and hence appearance fee paid was taxable in India

6. [2020] 115 taxmann.com 386 (Mum.)(Trib.)

Volkswagen Finance (P) Ltd. vs. ITO

ITA No. 2195/Mum/2017

A.Y.: 2015-16

Date of order: 19th March, 2020

 

Section 9(1)(i) of Act –
As appearance of non-resident celebrity for promotional event outside India was
for the benefit of the business in India, there was significant business
connection in India and hence appearance fee paid was taxable in India

 

FACTS

The assessee was an Indian
member-company of a global automobile group. It organised a promotion event in
Dubai jointly with another Indian member-company of the group for the launch of
a car in India. For this purpose, the assessee paid appearance fees to a
non-resident (NR) international celebrity outside India. In consideration, the
assessee and its group company had full rights to use all the event footage /
material / films / stills / interviews, etc. (event material) for its business
promotion.

The assessee contended before the A.O. that the event took place in
Dubai; the NR made his appearance in Dubai; the NR or his agent had not
undertaken any activity in India in relation to the appearance fee; and hence,
appearance fee could not be treated as accruing or arising in India, or deemed
to be accruing or arising in India. Therefore, the income was not taxable under
the Act. Consequently, no tax was required to be withheld. Accordingly, there
was no question of claiming any DTAA benefit.

 

But the A.O. held that the
payment was in the nature of royalty u/s 9(1)(vi) and further, Article 12 of
the India-USA DTAA also did not provide any relief. Hence, the assessee was
liable to withhold tax.

 

On appeal, the CIT(A)
confirmed the conclusion of the A.O. and further held that the sole purpose of
organising the event in Dubai was to avoid attracting section 9(1)(i) relating
to Business Connection in India. Being aggrieved, the assessee filed an appeal
before the Tribunal.

 

HELD

(i) The Tribunal relied upon the Supreme Court’s observations in the
R.D. Agarwal case4  to hold
that business connection is not only a tangible thing (like people, businesses,
etc.), but also a relationship. From the following facts it was apparent that
the event in Dubai and the business of the assessee in India had a
relationship.

 

(a) The event was India-centric and the benefits thereof were to accrue
to the assessee and its group company in India because the target audience was
in India.

(b) The assessee and its group company were permitted non-exclusive use
of the event material.

(c) Both the assessee and its group company had business operations only
in India.

(d) The claim of entire expenses of the event by the assessee and its
group company showed that they had treated the same as ‘wholly and
exclusively for the purposes of business’.

 

(ii) As a consequence of the relationship between the event in Dubai and
the business of the assessee in India, income had accrued to the NR. In this
case, the business connection was intangible since it was a ‘relationship’ and
not an object. However, it was a significant business connection without which
the appearance fee would not have been paid.

Accordingly, the NR had
business connection in India. Hence, the payment made to the NR was taxable in
India. Consequently, the assessee was required to withhold tax.

 

______________________________

3   Decision
does not mention particulars of circumstantial evidence provided by the
assessee for proving residency

4   (1965)
56 ITR 20 (SC)

Article 15(1) of India-Austria DTAA – Sections 6(1), 90(4) of the Act – Notwithstanding section 90(4), submission of TRC is not mandatory to claim DTAA benefit if assessee otherwise provides sufficient circumstantial evidence

5. [2020] TS-15 -ITAT-(Hyd.)

Sreenivasa Reddy
Cheemalamarri vs. ITO

ITA No. 1463/Hyd/2018

A.Y.: 2014-15

Date of order: 5th
March. 2020

 

Article 15(1) of
India-Austria DTAA – Sections 6(1), 90(4) of the Act – Notwithstanding section
90(4), submission of TRC is not mandatory to claim DTAA benefit if assessee
otherwise provides sufficient circumstantial evidence

 

FACTS

The assessee was deputed by
his employer in India to Austria. He was paid certain foreign allowance outside
India on which the employer had deducted tax in India. The assessee contended
that since he was in India for less than 60 days, he was a non-resident (NR).
Further, he was a tax resident of Austria. Hence, in terms of Article 15(1) of
the India-Austria DTAA, the salary earned by a tax resident of Austria was
taxable only in Austria. Accordingly, he filed a NIL return as an NR in India.
The assessee also expressed his inability to furnish the Tax Residency
Certificate (TRC) on the ground that the issuance of a TRC was dependent upon
the Austrian tax authority.

  

Therefore, relying on section
90(4)1  of the Act, the A.O.
denied DTAA benefit on the ground that the assessee could not furnish the TRC.
The assessee preferred an appeal before the CIT(A). Agreeing with the view of
the A.O., the CIT(A) dismissed the appeal. The assessee then filed an appeal before
the Tribunal.

 

HELD

(i) If, in spite of his best possible efforts, the assessee could not
procure the TRC from the country of residence, the situation may be treated as
impossibility of performance2. In such circumstances, the assessee
cannot be obligated to do an impossible task and be penalised for the same.

 

(ii) If the assessee provides sufficient circumstantial3 evidence
for proving residency, the requirement of section 90(4) ought to be relaxed.

 

(iii) In case of conflict between the DTAA and the Act, DTAA would prevail
over the Act. In terms of the DTAA, the assessee was liable to tax in Austria
for services rendered in Austria. Therefore, notwithstanding the Act requiring
a TRC for proving residency, not providing the same to the tax authorities
cannot be the only reason for denial of DTAA benefit to the assessee.

 

Note: In the absence of
any such specific mention, it is not clear whether the Tribunal read down
section 90(4) of the Act, impliedly treating it as a case of ‘treaty override’.

____________________________________________________________________________________________

1   Section
90(4) provides that an NR assessee will be entitled to claim relief under DTAA
only if he has obtained a TRC from the government of that country

2      Decision does not mention particulars of
‘best possible efforts’ of assessee or basis on which ITAT considered the
situation to be that of ‘impossibility of performance’. Decision merely
mentions that ‘normally it is a herculean task to obtain certificates from
alien countries for compliance of domestic statutory obligations’

Section 199/205 – Assessee cannot be made to suffer because of non-deposit of tax deducted with the government by the deductor – Under section 205, the assessee / deductee cannot be called upon to pay the tax – Credit for the tax deducted at source has to be allowed in the hands of the deductee irrespective of whether or not the same has been deposited by the deductor to the credit of the Central government

4. Aricent
Technologies Holdings Ltd. vs. Addl. CIT (Delhi)

Sushma
Chawla (J.M.) and Dr. B.R.R. Kumar (A.M.)

ITA. No.
5708/Del/2019

A.Y.:
2015-16

Date of
order: 23rd December, 2019

Counsel
for Assessee / Revenue: Ajay Vohra, Neeraj Jain and Anshul Sachar / Sanjay I.
Bara

 

Section 199/205 – Assessee cannot be
made to suffer because of non-deposit of tax deducted with the government by
the deductor – Under section 205, the assessee / deductee cannot be called upon
to pay the tax – Credit for the tax deducted at source has to be allowed in the
hands of the deductee irrespective of whether or not the same has been
deposited by the deductor to the credit of the Central government

 

FACTS

The assessee in its
return of income had claimed credit to the extent of Rs. 18,79,68,945. The
A.O., upon completion of the assessment u/s 144 r.w.s. 143(3), allowed the
credit of TDS of Rs. 16,57,18,029. Thus, credit for TDS was short-granted to
the extent of Rs. 2,22,50,916.

 

The assessee had, along with the
return of income, furnished complete details including the names of the
parties, the amount paid by them and the tax deducted at source in respect of
the TDS of Rs. 18.79 crores.

 

HELD

The Tribunal observed that the issue
which has arisen in the present ground of appeal is against the short credit of
tax deducted at source. It noted that the assessee had furnished the party-wise
details of the amounts aggregating to Rs. 18.79 crores deducted out of payments
due to the assessee, which are also furnished as part of the Paper Book.

 

It also noted that the grievance of
the assessee is two-fold. First of all, it was pointed out that in case
subsequent to the processing of the assessment order, if changes are made in
the Form No. 26AS by the parties who had deducted tax at source out of the
payment made to the assessee, then the credit of the same should be allowed to
the assessee. The Tribunal held that it found merit in the plea of the assessee
though the AR for the assessee has not filed any evidence in this regard. But
in case necessary evidence is available, then it is the duty of the A.O. to
allow the claim as per Revised Form No. 26AS.

 

As regards the next stand of the
assessee, that in case the deductor deducts tax at source, i.e. withholds tax
out of payments due / paid to the assessee but does not deposit the tax
withheld by it, then why should the assessee suffer? The Tribunal held that

(i) Under
section 199(1) it is provided that if tax has been deducted at source in
accordance with the provisions of Chapter XVII and paid to the Central
government, the same shall be treated as payment of tax on behalf of the person
from whose income the deduction was made; and

(ii) Under
section 205 it is further provided that where the tax has been deducted at
source by the deductor out of the payments due to the deductee, then such
deductee cannot be held liable for payment of such tax which was deducted at
source by the deductor.

 

Once tax has been deducted then the
deductor is liable to deposit the same into the credit of the Central
government. Such amount which is withheld by the deductor out of the amount due
to the deductee, i.e., the person to whom the payments are made, then the said
deduction shall be treated as payment of tax on behalf of the person from whom
such deduction was made as per the provisions of section 199(1).

 

It also observed that there are
provisions under the Act dealing with the recovery of tax at source from the
person who has withheld the same. In terms of section 205 of the Act, the
assessee / deductee cannot be called upon to pay tax to the extent to which tax
had been deducted from the payments due.

 

Consequently, it follows that credit
for such tax deducted at source, which is deducted from the account of the
deductee by the deductor, is to be allowed as taxes paid in the hands of the
deductee irrespective of the fact whether or not the same has been deposited by
the deductor to the credit of the Central government.

 

The
deductee in such circumstances cannot be denied credit of tax deducted at
source on its behalf. It held that where the assessee is able to furnish the
necessary details with regard to tax deduction at source out of the amounts due
to it, then the action which follows is allowing the credit of such tax
deducted at source to the account of the deductee.

 

In
case where the deductor deposits the tax deducted at source to the credit of
the Central government and the deduction reflects in Form No. 26AS, may be on a
later date, then it is incumbent upon the assessee to produce the necessary
evidence in this regard and it is also the duty of the A.O. to allow such
credit of tax deducted at source as taxes paid in the hands of the deductee
assessee.

 

It observed that its view is
supported by the ratio laid down by the Bombay High Court in Yashpal
Sahani vs. Rekha Hajarnavis, Assistant Commissioner of Income-tax [(2007) 165
taxman 144 (Bom.)] and the Gujarat High Court in the case of Sumit
Devendra Rajani vs. Assistant Commissioner of Income-tax [(2014) 49 taxmann.com
31 (Gujarat)].

 

Applying the same parity of reasoning
in the decision of the Bombay High Court in Pushkar Prabhat Chandra Jain
vs. Union of India [(2019) 103 taxmann.com 106 (Bombay)], the Tribunal
directed the A.O. to allow the credit of tax deducted at source in the hands of
the assessee where the assessee produces the primary evidence of the same being
deducted tax at source out of the amount due to it.

 

This ground of appeal filed by the assessee was allowed.

Income from undisclosed sources – Section 69 of ITA, 1961 – Addition on basis of statement made by partner of assessee u/s 108 of Customs Act, 1962 – No other corroborative evidence – Addition not justified

12. Principal CIT vs. Nageshwar Enterprises

 [2020] 421 ITR 388 (Guj.)

Date of order: 3rd February, 2020

A.Y.: 2007-08

 

Income from undisclosed sources –
Section 69 of ITA, 1961 – Addition on basis of statement made by partner of
assessee u/s 108 of Customs Act, 1962 – No other corroborative evidence –
Addition not justified

 

In the course of a search
conducted by the Customs Department, a partner of the assessee in his statement
recorded on oath admitted before the Directorate of Revenue Intelligence the
undervaluation of goods, part of which pertained to A.Y. 2007-08, the year of
search. He admitted that the undervalued amount was paid in cash to the sellers
which were foreign companies. During the assessment the A.O. rejected the
submissions of the assessee and made additions on account of unaccounted
investment and unaccounted purchases.

 

The
Commissioner (Appeals) found that the A.O. did not make further inquiries and
that the only evidence with him was in the form of a confessional statement of
the partner of the assessee recorded on oath u/s 108 of the Customs Act, 1962
and that in the absence of any corroborative evidence or finding, no addition
could be made merely on the basis of the admission statement. The Tribunal
found that the addition was made based on the show cause notice issued by the
Revenue Intelligence, that the statement was retracted by the partner and that
the Customs Excise and Service Tax Appellate Tribunal had dropped the
proceedings initiated against the assessee. The Tribunal held that in the
absence of any documentary evidence no addition could be made on the action of
a third party, i.e., the Directorate of Revenue Intelligence.

 

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

‘i) The Tribunal was correct in holding that no addition could be made
on the basis of the action of the third party, i.e., the Directorate of Revenue
Intelligence. The Department could not start with the confessional statement of
the assessee. The confessional statement had to be corroborated with other
material on record.

 

ii) The appellate authorities had
concurrently recorded a finding that except the statement of the partner
recorded u/s 108 of the Customs Act, 1962, there was no other evidence. No
question of law arose.’

Income – Exemption u/s 10(24) of ITA, 1961 – Registered trade union – Amount received on settlement of dispute between company and its workers disbursed to workers – Amount not assessable in hands of trade union

11. Gujarat Rajya Kamdar Sabha Union Machiwadi vs. ITO

[2020] 421 ITR 341 (Guj.)

Date of order: 7th January, 2020

A.Y.: 2009-10

 

Income – Exemption u/s 10(24) of
ITA, 1961 – Registered trade union – Amount received on settlement of dispute
between company and its workers disbursed to workers – Amount not assessable in
hands of trade union

 

The assessee was a registered
trade union. Its managing committee passed a unanimous resolution that as a
result of a compromise arrived at between the assessee and a company in the
Labour Court, whatever amount was received from the company would be fully
distributed to the workers of the company. In such circumstances a settlement
was arrived at on 15th May, 2008, which was reduced into writing in
the form of a memorandum of settlement between the company, i.e, the employer,
and the assessee. In view of the settlement, the assessee received payment of
Rs. 60,96,818. The amount was assessed in the hands of the assessee as income
for the A.Y. 2009-10.

 

The Tribunal upheld the
assessment and the addition.

 

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

 

‘i) Once the factum of settlement was not disputed coupled with
the factum of receipt of a particular amount from the company, and the
amount had been distributed amongst the employees, the case would squarely
stand covered u/s 10(24) of the Income-tax Act, 1961. Though the contribution
from the employer was received as per the settlement agreement, it was only
incidental to the activities of the services of the assessee in resolving the
dispute between the member workers and the employer with the intention of
advancement of welfare of the members.

 

ii) The amount was not assessable as income of the assessee.’

Income – Accrual of (time of accrual of income) – Section 5 of ITA, 1961 – Where assessee sold a land during relevant assessment year and as per MOU part of sale consideration was payable by purchaser on completion of assessee’s obligation under MOU – Assessee having not met conditions of MOU during relevant year, such amount was not taxable in relevant assessment year

10. Principal CIT vs. Rohan
Projects

[2020] 113 taxmann.com 339
(Bom.)

Date of order: 18th
November, 2019

A.Y.: 2012-13

 

Income – Accrual of (time of
accrual of income) – Section 5 of ITA, 1961 – Where assessee sold a land during
relevant assessment year and as per MOU part of sale consideration was payable
by purchaser on completion of assessee’s obligation under MOU – Assessee having
not met conditions of MOU during relevant year, such amount was not taxable in
relevant assessment year

 

The assessee
is engaged in the business termed Promoter and Developer. It had sold land to
M/s Symboisis which transaction took place in the previous year relevant to the
A.Y. 2012-13. The land was sold under  a
Memorandum of Understanding (MOU) dated 2nd February, 2012 for a
total consideration of Rs. 120 crores. However, the assessee offered only a sum
of Rs. 100 crores for tax in the return for the A.Y. 2012-13. This was because
the MOU provided that a sum of Rs. 20 crores would be paid by the purchaser
(M/s Symboisis) on execution of the sale deed after getting the plan sanctioned
and on inclusion of the name of the purchaser in the 7/12 extract. However, as
the assessee was not able to meet the conditions of the MOU during the subject
assessment year, the sum of Rs. 20 crores, according to the assessee, could not
be recognised as income for the subject assessment year. The A.O. did not accept
this and held that the entire sum of Rs. 120 crores is taxable in the subject
assessment year.

 

The Tribunal, after recording the
above facts and relying upon the decision of the Supreme Court in Morvi
Industries Ltd. vs. CIT [1971] 82 ITR 835, held that the income accrues
only when it becomes due, i.e., it must also be accompanied by corresponding
liability of the other party to pay the amount. On facts it was found that the
amount of Rs. 20 crores was not payable in the previous year relevant to the subject
assessment year as the assessee had not completed its obligation under the MOU
entirely. Moreover, it also found that Rs. 20 crores was offered to tax in the
subsequent assessment year and also taxed. Thus, the Tribunal allowed the
assessee’s appeal.

 

On appeal by the Revenue, the
following question of law was raised:

‘Whether on the facts and in the
circumstances of the case and in law, the Tribunal was justified in holding
that a sum of Rs. 20 crores is not taxable in the subject assessment year?’

 

The Bombay High Court upheld the
decision of the Tribunal and held as under:

 

‘i) We note that the finding of fact arrived at by the Tribunal that
the respondent was not able to comply (with) its obligations under the MOU in
the previous year relevant to the subject assessment year so as to be entitled
to receive Rs. 20 crores is not shown to be perverse. In fact, the issue is
covered by the decision of the Apex Court in the case of CIT vs. Shoorji
Vallabdas & Co. [1962] 46 ITR 144 wherein it is held that “Income
tax is a levy on income. No doubt, the Income-tax Act takes into account two
points of time at which the liability to tax is attracted, viz., the accrual of
the income or its receipt; but the substance of the matter is the income; if
income does not result at all, there cannot be a tax ” So also in Morvi
Industries Ltd. (Supra), the Supreme Court has held that income accrues
when there is a corresponding liability on the other party. In the present
facts, in terms of the MOU there is no liability on the other party to pay the
amounts.

 

ii) In any event, the amount of Rs. 20 crores has been offered to tax
in the subsequent assessment year and also taxed. This Court, in the case of CIT
vs. Nagri Mills Co. Ltd. [1958] 33 ITR 681 (Bom.) has observed as
follows:

 

“3. We have often wondered why
the Income-tax authorities, in a matter such as this where the deduction is
obviously a permissible deduction under the Income-tax Act, raise disputes as
to the year in which the deduction should be allowed. The question as to the
year in which a deduction is allowable may be material when the rate of tax
chargeable on the assessee in two different years is different; but in the case
of income of a company, tax is attracted at a uniform rate, and whether the
deduction in respect of bonus was granted in the assessment year 1952-53 or in
the assessment year corresponding to the accounting year 1952, that is, in the
assessment year 1953-54, should be a matter of no consequence to the
Department; and one should have thought that the Department would not fritter
away its energies in fighting matters of this kind. But, obviously, judging
from the references that come up to us every now and then, the Department
appears to delight in raising points of this character which do not affect the
taxability of the assessee or the tax that the Department is likely to collect
from him whether in one year or the other.”

 

Nothing has been shown to us as
to why the above observation will not apply to the present facts.

 

iii) In the aforesaid circumstances, the
view taken by the Tribunal on facts is a possible view and calls for no
interference. In any event the tax on the amount of Rs. 20 crores has been paid
in the next year. Therefore, the proposed question does not give rise to any
substantial question of law. Hence, not entertained. The appeal is, therefore,
dismissed.’

BCAJ SURVEY ON IMPACT OF COVID-19 ON CHARTERED ACCOUNTANT FIRMS

The BCAJ carried out a
dipstick survey in April, 2020 to identify the challenges faced by
professionals and firms. Respondents were asked to share their perspectives,
challenges and how they are responding. 

 

Attributes of the respondents:

 

A>  Location and Presence

52% respondents had presence in
Non-Metros and about 48% in both Metros and Non-Metros.

 

B>  Nature of Respondents

48% respondents were proprietors,
37% were firms having up to 4 partners, 10% were firms having 5-9 partners and
5% were firms having more than 10 partners.

 

SURVEY QUESTIONS AND RESPONSES

 

1.  Have you made a systematic assessment of probable impact on the
firm?

 

 

2.  Time frame you have considered in the above assessment for impact
of lockdown / slowdown?

 

 

 

 

3.  Is downsizing of staff on the horizon or under consideration during
the next 6 months?

 

 

4.  Increments for FY 2020-21

 

 

5.  Bonuses for FY 19-20 to staff

 

 

 

6.  Partner and Senior Staff pay and payouts: What is the most likely
scenario?

 

 

7.  Have you considered or are already in the process of renegotiating
rent or other contracted expenses?

 

 

8.  Based on the Type of Work and Nature of Clients and assuming
lockdown and gradual lifting – do you see your firm’s cash flow:

 

 

 

9.  To manage Working Capital, you are likely to

 

 

10.   Do you expect some clients seeking fees reduction?

 

HOW TO RESTART THE ENGINE AFTER THE LOCKDOWN

As India is
slowly MOVES towards a step by step removal of national lockdown imposed due to
the Covid-19 pandemic, there have been wide-ranging discussions in government
circles on what should be India’s strategy for an exit scenario. The Ministry
of Home Affairs from time to time has issued various guidelines for managing
with the Covid 19 impacts; Aarogya Setu App, state guidelines,mandatory wearing
of mask, social distancing amongst other 
elements in the fight against Covid-19.

 

With the
restarting of economy and life on the governments’ agenda,  various guidelines on ‘restarting’ India and
among these the most important one is to create Standard Operating Procedures
(SOPs) to ensure that preventive measures are executed  in a systematic manner post–lockdown;  the other guiding principles are as follows:

  • Guidance
    from Central Government, State Government 
    and WHO
  • Protection
    of personnel and visitors
  • Social
    distancing in travel to and from workplace and during interaction with
    suppliers and those in the distribution chain
  • Business
    protection and continuity
  • Implementing
    best practices for safety and prevention
  • Introducing
    audit procedures to monitor and ensure that safe practices are implemented and
  • Action
    plan in the event of persons feeling unwell at the workplace.

 

PROCESS FOR IMPLEMENTATION
OF SOPS

  • The
    organisation should begin with forming an internal team of Covid-19 fighters

The Covid-19
team should comprise of a factory / warehouse / shop / office in-charge, human
resource manager, business supervisor or head of business, administration /
utility in charge, medical expert on site (or identify the nearest medical
expert and security personnel). In case of local market or mandi
operators, the same can be managed by the market / trade association or local mandi
operator.

 

  • Prepare
    the SOP and plan for its deployment

Ground Zero: Online involvement of staff, if possible online training, to fight the
disease and restrict / minimal onsite interactions

Week 1: Framing the SOP; the company should get the SOP verified by the local
authorities or an internal / external expert

Week 2: Start operation as per government regulations; however, only staff who
have observed clear 14 days’ quarantine should attend the office; and only
necessary staff should attend in person, the support staff can operate from
home

Week 3: Organisations in manufacturing / trading or service should try and
achieve minimum capacity utilisation

Week 4: Entering this stage, and if all things go well and no additional
positive patients are identified in the organisation, then the capacity
utilisation can be increased by 20% per week moving forward, subject to
government guidelines.

 

The broader
framework of the SOP should cover at least the following:

 

1.   Identify the risk area

a.  Entrance

b.  Office meeting room

c.  Change room

d.  Canteen

e.  Shopfloor

f.   Restrooms

g.  Warehouse / storage areas, etc.

 

2.   Identify / implement the
mitigating measures

 

3.  Define the processes to be
implemented to prevent / report for Covid-19 occurrences based on severity

a.  If the locality is Covid-free,
then business as usual

b.  If the locality is in the
vicinity of an impacted locality, then business as usual with close monitoring

c.  Locality impacted and declared as
hotspot: severe impact

d.  Locality declared as containment
zone: highly severe impact

 

4.  Identify the person responsible for
implementation of measures

5.  Reporting to local health authorities /
municipal corporation or others

6.  Mandatory checklist for business continuity
plan post-lockdown to be implemented

7.  Regular monitoring, review and update of the
protocols.

(* Sector-specific
SOPs are recommended)

 

SUGGESTED ELEMENTS OF SOPS FOR SERVICE INDUSTRY

Client-facing
operations such as banking, insurance, other professional services, etc. should
consider continuing online / mobile servicing of clients where possible. Office
workers to include bare minimum staff required to run back-end operations. As
the risk and rate of infection drops in an area, officer attendance can slowly
be increased.

 

(A) Delivery of office supplies

  • All
    office supplies should be properly sanitised for each material movement (in /
    out / transport)

 

(B) Labour / employee

  • Social
    distancing norms to be defined and maintained
  • Mandatory
    wearing of face masks at all times
  • Disposable
    facemasks not to be  re-used, cloth masks
    to be encouraged
  • All
    washrooms to be sanitised, at least twice daily
  • Each
    employee’s temperature to be checked on entry
  • Staff
    showing any symptoms, even a mild cough or low-grade fever, to stay at home
  • Employees
    should maintain hygiene during transport from home to workspace / client’s
    place
  • Avoid
    in-person meetings to the extent possible.

 

(C) Office setup

  • Reduce
    staff movements onsite
  • Work
    From Home options to be made available to staff
  • Regular
    sanitisation of entire facility, including meeting rooms, offices, canteens,
    equipment, washrooms, machine touch points, operating panels, tissue boxes,
    hand sanitizers, seats and covers requiring human touch to be sanitized twice a
    shift
  • Social
    distancing during lunch break, batch-wise option or similar
  • Display
    posters promoting and instructing about respiratory hygiene
  • Workshop
    / guidance on maintaining occupational health and safety
  • Arrange
    seats so that employees / participants are at least one  metre apart
  • Maintain
    log of names and contact details of all participants of meetings for at least
    one month
  • Identify
    a room or area where someone who is feeling unwell or has symptoms can be
    safely isolated
  • Create
    follow-up protocol for a situation where a meeting participant / staff member /
    service provider tests positive for Covid-19 during or just after the meeting
    in conjunction with partner healthcare provider or local health department.

 

(D) Travel / business trip

  • Each
    employee to be tested before business trips
  • Avoid
    sending employees who may be at higher risk of serious illness or where
    Covid-19 is spreading
  • Employees
    should comply with any local restrictions on travel, movement or large
    gatherings
  • Employees
    who have returned from an area where Covid-19 is spreading should monitor their
    temperature and other symptoms for 14 days.

 

(E) Dealing with clients and partners

  • Social
    distancing norms to be followed
  • Promote
    video meetings as much as possible
  • Carry
    / ensure sufficient hygiene equipment such as hand sanitizer for all meeting
    participants
  • Visit
    only those client offices who have complied with the necessary requirements of
    Covid-19 prevention measures
  • Self-declaration
    at the gate and maintaining traceability and screening of persons entering the
    office premises.

 

(F) Dealing with bank / financial
institutions

  • Make
    effective use of online banking options

 

(G)
Infrastructure for safety of staff / labour

  • Surfaces
    (e.g. desks and tables) and objects (telephones, keyboards) need to be wiped
    with disinfectant regularly
  • Hygiene
    and social distancing to be encouraged for canteens and accommodation usage
  • Refrain
    from usage of ACs as much as possible.

 

The above is
an illustrative list and not exhaustive; additionally, industry / sector-wise
specific SOPs are recommended.

 

IMPLEMENT, REVIEW
AND IMPROVE

There still remains significant uncertainty about the
potential for more widespread transmission of Covid-19, hence organisations
should incorporate these practices as part of their Business Continuity Plan
and all the employees and people associated with the business should be trained
to deal with such situations in future. The implementation of the SOP and
checklist should be audited by the organisations as well as local authorities.

MAKING A WILL WHEN UNDER LOCKDOWN

INTRODUCTION

We are currently living in times
of uncertainty due to Covid-19. Hopefully, by the time this issue reaches you
India’s lockdown would have eased. However, it could also be extended or
re-enforced at any time. It is in times such as these that we realise that life
is so fragile and fleeting. This lockdown has also forced several of us to
consider making a Will. During these past 30 days, the author has drafted
several Wills for people who are concerned about what would happen if they
contracted the virus. Through this month’s feature, let us look at the unique
issues and challenges which one faces when drafting a Will during a lockdown.

 

DECODING
THE JARGON

Wills are usually associated with
a whole lot of jargon which make them appear very complex to the man on the
street. However, most of these legal words are used by legal professionals and
a person making a Will can avoid using them. However, it is beneficial to
understand the meaning of these words in order to understand various other
things. All or some of the following terms are normally involved in a Will:

 

(a) Testator / testatrix: A person who makes the Will. He
/ she is the person whose property is to be disposed of after his / her death
in accordance with the directions in the Will.

(b) Beneficiary / legatee: The person to whom the
property will pass under the Will. He is the person to whom the property of the
testator would be bequeathed under the Will.

(c) Estate: The property of the testator remaining after his
death. It consists of the sum total of such assets as are existing on the date
of the testator’s death. The estate may also increase or decrease after the
testator’s death due to the actions carried out by the executors. For example,
the executors may carry on the business previously run by the deceased in the
name of the estate.

(d) Executor / executrix: The person who would
administer the estate of the testator after his death in accordance with the
provisions of the Will. The executor is normally named in the Will itself. An
individual, limited company, partnership firm, etc., may be appointed as an
executor. In many cases, a bank is appointed as the executor of a Will. For all
legal and practical purposes, the executor acts as the legal representative of
the estate of the deceased. On the death of the testator, the property cannot
remain in a vacuum and hence the property immediately vests in the executor
till the time the directions contained in the Will are carried out and the
property is distributed to the beneficiaries.

(e) Bequest: The property / benefits which flow under the
Will from the testator’s estate to the beneficiary.

(f) Bequeath: The act of making a bequest.

(g) Witnesses: The persons who witnesses the signing
of the Will by the testator.

 

BACK
TO BASICS

First things first, making a Will
involves certain basics which one needs to remember. Any adult, owning some
sort of property or assets can and should make a Will. If a Will is not made,
then the personal succession law as applicable would take over. For instance, Hindus
would be governed by the Hindu Succession Act, 1956. Only adults of sane mind
can make a Will. Thus, anyone who is insane or is a lunatic, or has lost
control over his mental faculties cannot make a Will.

 

A Will is a document which
contains the last wishes of a person as regards the manner and mode of
disposition of his property. A person expresses his will as regards the
disposition of his property. The Indian Succession Act, 1925 (which governs the
making of Wills in India) defines a Will to mean ‘the legal declaration
of the intention of the testator with respect to his property which he desires
to be carried into effect after his death’. However, the intention manifests
only after the testator’s death, i.e., posthumous disposition of his property.
Till the testator is alive, the Will has no validity. He can dispose of all his
properties in a manner contrary to that stated in the Will and such action
would be totally valid.

For example, ‘A’ makes a lockdown
Will bequeathing all his properties to his brother. However, post the lockdown
he, during his lifetime itself, transfers all his properties to his son with
the effect that at the time of his death he is left with no assets. Such action
of the testator cannot be challenged by his brother on the ground that ‘A’ was
bound to follow the Will since the Will would take effect only after the death
of the testator. In this case, as the property bequeathed would not be in
existence, the bequest would fail. The Will can be revoked at any time by the
testator in his lifetime. Hence, it is advisable to at least make a basic Will.
It can always be revised once things improve.

 

The testamentary capacity of the
testator is paramount in case of a Will. If it is proved that he was of unsound
mind, then the Will would be treated as invalid. What is a ‘sound mind’ is a
question of fact and needs to be ascertained in each case. Hence, if a person
has been so impacted by the Covid-19 that his mental faculties are arrested,
then he cannot make a valid Will.

 

The most important element of a
Will is its date! The last Will of a deceased survives and hence the date
should be clearly mentioned on the Will.

 

LOCKDOWN
ISSUES

Let us now consider the singular
situations which arise in making a Will during a lockdown. People making a Will
may experience some or all of these in these testing times:

(a) Format: There is no particular format for making a Will.
Several persons have expressed apprehension that during the lockdown they are
unable to obtain a stamp paper, unable to print a document or unable to get
ledger paper, etc. A Will can be handwritten (provided it is legible
handwriting); it could be on a plain paper and it need not be on a stamp paper.
Thus, there should not be any problems from a format perspective.

 

(b) Witness: Section 63 of the Indian
Succession Act, 1925 requires that the Will should be attested by two or more
witnesses, each of whom has:

(i) seen the testator sign the Will or affix his mark; or

(ii) received from the testator a personal acknowledgement of his
signature or of the signature of such other person.

 

Each of the witnesses must sign
the Will in the presence of the testator. No particular form of attestation is
prescribed. It is important to note that the attesting witnesses need not
know the contents of the Will. All that they attest is the testator’s signature
and nothing more.

 

A problem which many people could
face is getting two Witnesses to witness the Will. Neighbours may be requested
to help out. However, what if the neighbours are reluctant to do so due to
social distancing issues, or in the case of persons living in bungalows? In
such cases, one’s domestic servants, maids, watchmen may be asked to act as
witnesses. They must, as witnesses, either write their name or at least affix
their thumb impression – left thumb for males and right thumb for females.

 

However, what can people do if
there are no servants also? In such a case, the adult family members of the
testator may be approached. However, a question which arises is that if such
members are beneficiaries under the Will, can they act as witnesses, too?
Generally speaking, No. The Indian Succession Act states that any bequest
(gift) to a witness of a Will is void. Thus, he who certifies the signing of
the Will should not be getting a bequest from the testator. However, there is a
twist to the above provision. This provision does not apply to Wills made by
Hindus, Sikhs, Jains and Buddhists and, hence, bequests made under their Wills
to attesting witnesses would be valid. Wills by Muslims are governed by their
Shariyat Law. Thus, the prohibition on gifts to witnesses applies only to Wills
made by Christians, Parsis, Jews, etc. Accordingly, any Will by a Hindu can
have a witness as a beneficiary.

 

A related question would be, can
an executor be a witness under the Will? Thus, if a person names his wife as
the executor, can she also be an attesting witness? The answer is, Yes. An
executor is the person who sets the Will in motion. It is the executor through
whom the deceased’s Will works. There is no bar for a person to be both an
executor of a Will and a witness of the very same Will. In fact, the Indian
Succession Act, 1925 expressly provides for the same. Accordingly, people of
all religions can have the executor as the witness.

 

To sum up, in the case of Hindus,
Sikhs, Jains and Buddhists, the witness can be a beneficiary and an executor.
However, in the case of Wills made by Christians, Parsis, Jews, etc., the
witness can be an executor but not a beneficiary.

 

Can witnesses practice social
distancing and yet witness the signing of the Will? Some English cases throw
some light on this issue. In Casson vs. Dade (1781) 28 ER 1010 a
testatrix signed her Will in her lawyer’s office and went to sit in her horse
carriage before the witnesses signed it. Since she could, through the
carriage’s window and the office’s window, see the witnesses signing, it was
held that the Will was valid.

 

This case is an example of where
the circumstances were enough to meet the witnessing requirements. This case
was followed by the UK Court of Protection in Re Clarke in
September, 2011 when a lasting power of attorney in the UK was held to
have been validly executed where the donor was in one room and the witnesses in
another, separated by a glass door. Even though the witness was sitting in the
adjacent room, there were clear glass doors with ‘Georgian bars’ between the
two rooms and it was held that the witness had a clear line of sight through
those glass doors. It was held that the donor would also have been able to see
the witness by means of the same line of sight through the glass doors.

 

As the Indian law stands today, a
witness cannot witness the execution of a will by Zoom or Skype. Scotland is
one of the places where this is possible. To deal with the witness issue, the
Law Society of Scotland has amended its guidance on witnessing the signing of a
Will. It allows the lawyer to arrange a video link with the client. If this can
be done, the solicitor can witness the client signing each page. The lawyer
should assess the capacity of the client and using his professional judgement,
consider whether any undue influence is being exerted on the client.

 

The signed Will can then be
returned to the solicitor by post. The lawyer can then sign as witness on the
receipt of the signed Will. This is a truly revolutionary step!

 

(c) Doctor’s Certificate: Quite
often, a doctor’s certificate as to the mental fitness of the deceased is
attached to a Will. This is especially so in the case of very old persons so as
to show that the Will is valid. The doctor would certify that the testator is a
person who is alert and able to understand what he is doing. A question which
now arises is how to obtain a doctor’s certificate if the testator cannot visit
the doctor? One option to consider if the doctor is being regularly consulted
is that a video conference could be arranged and if the doctor can issue the
certificate on that basis, then that would suffice. Of course, the doctor’s
certificate may not physically reach the testator but the same could be
collected once the lockdown eases and attached to the Will. It is advisable in
the case of very old / feeble persons that the certificate is obtained from a
neurophysician or a psychiatrist.

An alternative to this would be
to obtain a video recording of the Will execution process with the testator
reading out the entire Will. This helps show that he understands what he is
doing and is useful for very old persons who cannot obtain a medical
certificate.

 

(d) Enumerating all assets: It is generally preferable
that the Will be specific and enumerate all assets of the testator along with
account numbers, etc. so that it would help the beneficiaries in identifying
the assets. However, in a lockdown it may happen that such details are in the
office or in a bank locker and the testator is unable to access them and write
the details in the Will. In such a case, as many details as possible may be
given, or the Will may make a general bequest of the entire estate of the
testator as on the date of his death. On a separate note, it is always a good
idea to keep a complete inventory of assets along with details of nominations,
account numbers, addresses, etc., both at office and at home.

 

While bequests can be general or
specific, they cannot be so generic that the meaning itself is unascertainable.
For instance, a Will may state ‘I leave all my money to my wife’. This is a
generic bequest which is valid since it is possible to quantify what is
bequeathed. However, if the same Will states ‘I leave money to my wife’ then it
is not possible to ascertain how much money is bequeathed. In such an event,
the entire Will is void.

 

The Will must also create a
repertoire of digital assets which should enumerate all important passwords,
online accounts, e.g., emails, social media accounts, bank accounts, etc.

 

(e) Registration: Registration of
Wills is out of the question in a lockdown. However, registration is not
compulsory. Again, a video Will can act as an alternative.

 

(f) Bequest to minors : In the
case of nuclear families, there is a tendency to leave everything to one’s
spouse and in case of death of the spouse before the death of the testator, to
the children. However, in the case of minor children it is not advisable to
bequeath assets directly to them. In such situations, a trust is advisable. In
times such as these setting up a trust is not possible since it would not be
feasible to obtain a PAN, open a bank account / demat account, etc. What, then,
can one do? A trust under a Will may be considered, in which case the trust
comes into effect only when the Will is executed and no trust is set up at the
time of making the Will. Thus, the act of settling the assets into the trust is
pushed till when the Will is executed. This trust could own all the assets to
be bequeathed to the minors.

 

If at all assets are to be bequeathed
directly to minors, then a guardian should be appointed under the Will. In this
case, the Hindu Minority and Guardianship Act, 1956 lays down the
law relating to guardianship of Hindus and the powers and duties of the
guardians. A Hindu father who can act as the natural guardian of his legitimate
children can appoint a guardian by his Will. Such a guardian could be for the
minor and / or for his property. Such an appointment would be invalid if the
father dies before the mother, because in such a case the mother would take
over as the natural guardian. However, once the mother dies, and if she dies
without appointing a person as the guardian under her Will, then the father’s
testamentary guardian would be revived. The testamentary guardian is subjected to
a dual set of restrictions. Firstly, those specified in the Will appointing
him, and secondly, those contained in this Act which apply to natural
guardians. Thus, the testamentary guardian is subjected to the restrictions on
sale of immovable property just as a natural guardian would be. The rights of
the testamentary guardian would be the same as those of a natural guardian. In
case the minor is a girl, then the rights of the testamentary guardian would
end on her marriage.

 

(g) Living Will: A living Will is not recognised
in India. However, as per the Supreme Court’s decision in Common Cause
vs. UOI, WP (Civil) 215/2005 (SC), an Advanced Medical Directive is
possible. This can state as to when medical treatment may be withdrawn, or if
specific medical treatment that will have the effect of delaying the process of
death should be given. However, one of the stringent requirements of such a
document is the requirement of two independent witnesses and the directive
should be countersigned by a Jurisdictional Judicial Magistrate, First Class
(JMFC), so designated by the district judge concerned. This requirement would
not be possible in the case of a lockdown and hence, having an Advanced Medical
Directive is not possible till such time as normalcy returns.

 

(h) Hospital bed Wills: What happens in case a
person is unfortunate to contract the virus and is placed in a hospital
quarantine? Can such a person make a Will? The above peculiar issues would
apply to him also. As always, the biggest challenge would be getting two
witnesses. He could request the doctors / nurses treating him to help out. That
is the only way out for a patient in the isolation ward.

    

CONCLUSION

It is evident that a Will under
lockdown would throw up several unique issues. However, as explained above, a
solution exists for even the strangest of problems. An overarching question is,
should one adopt a DIY (Do It Yourself) approach or consult a professional for
preparing the Will? At the risk of sounding biased, I would always suggest consulting
a professional, especially when the Will is being executed during a lockdown.

 

While
legal planning does not prevent a healthcare crisis, it can and would ensure
that you control who makes decisions. It also prevents your loved ones from
being left with a stressful legal situation to fix in a short time. Getting
one’s legal affairs in order today would give you the peace of mind that you
have taken tangible steps to truly be prepared for an uncertain future. Till
then, stay safe and don’t forgot to wash your hands!

SEBI’S BROAD ORDER ON ENCUMBERED SHARES – REPERCUSSIONS FOR PROMOTERS

In the ongoing Covid-19 crisis,
where the world is reeling and stock markets are crashing three times and then
recovering once, a recent SEBI order on disclosure of encumbered shares could
have widespread repercussions on promoters. Increasingly, over the years, the
regulatory outlook of SEBI has been one of disclosures and self-education
rather than close monitoring and micro-management. Material events relating to
a company should be disclosed at the earliest so that the public can educate
itself and take an informed decision. In this context, an order levying a
fairly stiff penalty in a complex case of encumbrance of shares held by a
promoter company makes interesting reading (Adjudication Order in respect of
two entities in the matter of Yes Bank Ltd. Ref No.: EAD-2/SS/SK/89/252-253
/2019-20, dated 31st March, 2020).

 

BRIEF
BACKGROUND

Disclosure of holding of shares
in listed companies by promoters and certain other persons (substantial
shareholders, etc.), is an important feature of the securities laws in India.
Promoters typically have large holdings of shares, they control the company and
their continued involvement in it as substantial shareholders is an aspect
considered by the public as relevant in investment decision-making. Being
insiders with control of the company, their dealings in shares are also closely
monitored. Thus, movements in shareholding of shares are required to be
disclosed by several provisions of the securities laws. These disclosures are
event-based and also periodical. Quarterly / annual disclosures are mandated.
So are disclosures based on certain types of transactions or crossing of
certain values / quantities / percentage of movement in the shares held.

 

Interestingly, and this is the
topic of this article, disclosure of encumbrance in the shares of promoters and
their release is also a requirement under the provisions of SEBI (Substantial
Acquisition of Shares and Takeovers) Regulations, 2011 (‘the Takeover
Regulations’). Regulation 31 of the Takeover Regulations requires disclosure by
the promoters of the creation, release or invocation of any encumbrance on
their shares.

 

The definition of what constitutes
‘encumbrance’ has undergone changes over the years and the present case relates
to a matter before the recent amendment made in July, 2019, though the
principle would apply even now. The earlier definition was short – ‘“encumbrance”
shall include a pledge, lien or any such transaction, by whatever name called’.

 

It is of particular interest to
shareholders whether and to what extent the shareholding of promoters is
encumbered. The Satyam case is often referred to in this regard.

 

COMPLEXITY
OF ENCUMBRANCES

Pledging and hypothecation of
shares are the classic and most familiar of encumbrances on shares. A
shareholder may, for example, transfer his shares to a lender who would hold
them till the loan is repaid. If there is a default, the lender may simply sell
the shares in the market and realise his dues. But now that shares are held
digitally in demat accounts, a special process has been made to enable pledge /
hypothecation of shares. The shares are not transferred to the lender but a
record is made of the pledge / hypothecation in the demat account.

 

However, encumbrance, as the
definition shows, is a wider term rather than mere pledge / hypothecation. The
definition is inclusive and also has a residuary clause that says such
transactions ‘by whatever name called’ are also covered. As we will see later,
the parties in the present case, however, claimed that encumbrances should be
limited to pledge / hypothecation.

 

A question arises whether
restrictions placed on the disposal or other transactions in respect of shares
amounts to encumbrance as so envisaged. The classic case is of giving a
Non-Disposal Undertaking, popularly referred to as an NDU, in respect of the
shares. This means an undertaking is given that the shares held shall not be
disposed of till certain conditions (say, loans / interest are repaid) are met.
Even if a plain vanilla NDU is held to be an encumbrance, there are actually
many variants of an NDU or similar encumbrances as the present case shows. The
question is whether the definition should be treated as a generic catch-all
definition or whether it should be given a restrictive meaning. This has been
the core question addressed in this decision. Let us consider the specific
facts.

 

FACTS
OF THE CASE

The matter concerns two promoter
companies of Yes Bank Limited. Broadly summarised, the essential facts (though
there is some variation in details) are as follows: Both took loans by way of
differently structured non-convertible debentures from entities. The total
amount of loans taken was Rs. 1,580 crores. The shares held and which were the
subject matter of the alleged encumbrance, constituted 6.30% of the share
capital of Yes Bank. The debenture documents / terms placed certain
restrictions on the promoter entities. They were required to maintain a certain
cover ratio / borrowing cap. If such limits were violated, there were certain
consequences, principally that the promoter entity could be held to have
defaulted. There was, however, some flexibility. The promoter entities could
make certain variations after the approval of debenture holders in a specified
manner or after complying with certain conditions.

 

SEBI’S
ALLEGATION

SEBI held that the cover ratio /
borrowing cap effectively amounted to an encumbrance on the shares and thus
required disclosures under the Takeover Regulations. It alleged that the
entities would effectively face a restriction on the sale of their shares
because if they sold the shares, the ratios / caps would get exceeded and hence
the terms of the debentures could get violated. It was an admitted fact that no
disclosure of this alleged encumbrance was made as required under the
Regulations. Thus, there was a violation of the Regulations and SEBI issued a
show cause notice as to why penalty should not be levied.

 

CONTENTIONS
OF THE PROMOTER ENTITIES

The promoters gave several
detailed technical and substantive arguments to support their view that there
was no violation and hence no penalty could be levied. Technical arguments like
inordinate delay in initiating the proceedings were given. It was also argued
that since then the structure had undergone substantial changes, and
particularly on revision of terms, disclosure was required and was duly made.

 

It was argued that the definition
of encumbrance effectively limited it to things like pledge, hypothecation,
etc. The principle of ejusdem generis applied for the words used ‘by any
other name called’ considering that they were preceded by the words ‘such
transaction’.

 

Some of the other major arguments
were as follows: It was argued that the structure and terms of debentures did
not amount to encumbrance as understood in law. The caps on borrowings, etc.
were of financial prudence. There were many alternatives for the entities to
sell the shares if they wanted to do so within the terms of the debentures
themselves. References were made to FAQs and press releases where some
clarifications were given about encumbrances. It was argued that examples were
given of the type of encumbrances that were envisaged to be given and the
present facts did not fit those examples.

 

Incidentally, the parties had
earlier applied for settlement of the alleged violations but the application
was returned due to expiry of the stipulated time under the relevant settlement
regulations.

 

REPLY
AND DECISION OF SEBI

SEBI rejected all the arguments.
The debenture documents were made in late 2017 / early 2018 and thus SEBI held
that there was no inordinate delay in initiating the proceedings. The mere fact
that the structure was changed later and the disclosures duly made did not
affect the fact that no disclosure was made originally when the alleged
encumbrance was made.

 

It also rejected the core
argument that ‘encumbrance’ should be given a limited meaning more or less
restricting it to cases like pledge and hypothecation or the like. SEBI pointed
out that the definition was inclusive and even more descriptive than limiting.
The use of the words ‘by any other name called’ could not be restricted to
examples given of pledge / hypothecation. The principle of ejusdem generis
did not apply.

 

SEBI also traced the history of
the regulations and explained the dilemma that was faced regarding identifying
the many types of encumbrances. It was accepted that encumbrances on shares of
promoters needed disclosure in the interest of the securities markets.
Considering the varied and often sophisticated nature of encumbrances, the
definition was made descriptive / inclusive and not exhaustive. It was well
settled, SEBI argued, that securities laws being welfare regulations, needed
wider beneficial interpretation.

 

Although the definition was
modified recently whereby some specific instances were further added, it did
not mean that the earlier definition should be construed narrowly.

 

SEBI noted that the effect of the
conditions regarding limits was that the shares of the entities could not be
sold. This amounted to an encumbrance on shares and hence non-disclosure
amounted to violation of the Regulations.

 

SEBI thus levied a penalty of Rs.
50 lakhs on each of the two entities.

 

CONCLUSION

It goes without saying that
disclosure of encumbrances matters at any stage. Indeed, SEBI has required,
over a period, more and more information relating to encumbrances including,
most recently, the purpose for which the encumbrances were made.

 

However, their effect would be
seen particularly when the encumbrances end up being given effect to with
shares being sold in the market on invoking of the encumbrances, to take an
example. This may particularly happen when the price of the shares goes down
sharply, resulting in a vicious circle. The coverage / margin required by the
encumbrance documents gets violated and there is need to provide more shares as
encumbrance or sale of shares (and) which results in further lowering of price.
This would again affect the interests of shareholders. We are seeing now a huge
crash in share prices. It is possible that there may be many such similar
encumbrances and they may come to light because of the impact of share sale or
other transactions. There may be more cases in which SEBI may have to act.

 

This decision is relevant even
under the amended regulations. It lays down the principles and intent of the
regulations relating to encumbrances. Thus, unless reversed on appeal, it would
matter particularly (if and) for any fresh encumbrance as understood in a broad
manner in the SEBI order is undertaken. Such encumbrances then would advisably
be disclosed duly in accordance within the time limits and manner prescribed.

 

There
may be entities that have not disclosed the encumbrances till now, taking a
stand similar to that taken by the entities in the present case. They may need
to revisit their stand and documents and see whether due disclosures need to be
made, even if belatedly, but voluntarily. Better late than never.

REVIEW OF FOREIGN DIRECT INVESTMENT POLICY DUE TO COVID-19 PANDEMIC

(A)   BACKGROUND – FDI Regulations pre-October, 2019

Under the erstwhile FEMA regulations
governing Foreign Direct Investment into India (‘FDI’), i.e., FEM 20(R),
Foreign Exchange Management (Transfer of Issue of Security by a Person Resident
outside India) Regulations, 2017 (‘FDI Regulations’) dated 7th November, 2017,
the RBI had powers to govern FDI which included equity investments into India.

 

The above regulations were issued
after superseding the earlier regulation dealing with FDI, i.e., the Foreign
Exchange Management (Transfer or issue of Security by a Person Resident outside
India) Regulations, 2000 which were issued by RBI on 3rd May, 2000 (‘Old FDI
Regulations’).

 

Thus, under the FDI regulations, RBI
had powers to regulate FDI into India. At the same time, the Government of
India used to issue a consolidated FDI Policy which contained a broad policy
framework governing FDI into India. The last such consolidated FDI Policy (‘FDI
Policy’) was issued on 28th August, 2017 by the Department of
Industrial Policy and Promotion, Government of India. However, as only the RBI
had the powers to govern FDI, Para 1.1.2 of the FDI Policy stated that any
changes in it made by the Government of India will need to be notified by the
RBI as amendments to the FDI regulations. Further, it was specifically
clarified that if there was any conflict between changes made in the FDI Policy
through issuance of Press Notes / Press Releases and FDI Regulations, the FDI
Regulations issued by RBI will prevail. Further, the FDI Policy defined FDI in
Para 2.1.14 as under:

 

‘FDI’ means investment by
non-resident entity / person resident outside India in the capital of an Indian
company under Schedule I of Foreign Exchange Management (Transfer or Issue of
Security by a Person Resident Outside India) Regulations, 2000.

Schedule I of the Old FDI
Regulations dealt with investment by person resident outside India in the
equity / preference / convertible debentures / convertible preference shares of
an Indian company.

 

Hence, under the earlier FEMA regime
FDI was governed by the RBI through FDI Regulations and the policy framework
was given by the Government through issuance of an annual FDI Policy and
amendments by issuance of Press Notes / Press Circulars as and when required.

 

(B)   BACKGROUND – FDI Regulations post-October, 2019

However, the above position
governing FDI was completely overhauled with effect from October, 2019. From 15th
October, 2019 the Government of India assumed power from the RBI to regulate
non-debt capital account transactions. Subsequently, vide 16th
October, 2019, the Central Government notified the following list of instruments
which would qualify as non-debt instruments:

 

List of instruments notified
as non-debt instruments

(a) all
investments in equity instruments in incorporated entities: public, private,
listed and unlisted;

(b) capital
participation in LLPs;

(c) all
instruments of investment recognised in the FDI Policy notified from time to
time;

(d) investment
in units of Alternative Investment Funds (AIFs), Real Estate Investment Trusts
(REITs) and Infrastructure Investment Trusts (InvIts);

(e) investment
in units of mutual funds or Exchange-Traded Funds (ETFs) which invest more than
fifty per cent in equity;

(f)   junior-most
layer (i.e. equity tranche) of the securitisation structure;

(g) acquisition,
sale or dealing directly in immovable property;

(h) contribution
to trusts; and

(i)   depository
receipts issued against equity instruments.

Thus, all investments in equity
shares, preference shares and convertible debentures and preference shares were
classified as non-debt and came to be regulated by the Central Government
instead of by the RBI.

 

Thereafter, on 17th
October, 2019 the Central Government issued the Foreign Exchange Management
(Non-Debt Instruments) Rules, 2019 (‘Non-Debt Rules’) for governing Non-Debt
transactions.

 

Hence, upon issuance of the above Non-Debt
Rules, the power to regulate FDI into India was taken over by the Central
Government from the RBI. Accordingly, the FDI Policy effectively became
redundant as it governed FDI as defined under the erstwhile FDI Regulations
which was superseded by the Non-Debt Regulations with effect from 17th
October, 2019.

 

(C) Amendments to FDI Policy by issuance of Press Note No. 3 (2020)
dated 17th April, 2020

The existing FDI Policy, vide
Para 3.1.1, provided that a non-resident entity could invest in India under the
automatic route subject to the FDI Policy. However, investments by an entity or
an individual based in Bangladesh and Pakistan was allowed only under the
Government route.

 

In view of the Covid pandemic, the
Government of India has amended the FDI Policy by issuing the above Press Note
No. 3 (2020) dated 17th April, 2020 under which the FDI Policy is
now amended to provide that if any investment is made by an entity, citizen or
beneficial owner who is a resident of a country with whom India shares its land
border, will be under the Government route. Further, any transfer of ownership
of existing or future FDI in an Indian entity to a person resident of the above
countries would also require Government approval.

 

Additionally, it has also been
provided that the above amendment in the FDI Policy will take effect from the
date of the FEMA notification.

 

Subsequently, the Government of
India has issued a notification dated 22nd April, 2020 (‘FEMA
Notification’) to amend Rule 6(a) of the Non-Debt Rules which deals with FDI
for giving effect to the above Press Note No. 3.

 

(D) Implication of above amendment to Non-Debt Rules

(i)   Restrictions on investment from neighbouring countries

As on date, India shares its land
boundary with the following seven countries: Pakistan, Bangladesh, China,
Nepal, Myanmar, Bhutan and Afghanistan.

 

As per the pre-amended Rule 6(a) of
the Non-Debt Rules, a person resident outside India could make investment
subject to the terms and conditions specified in Schedule I which dealt with
FDI in Indian companies. However, there was a proviso which specified
that investment from the following persons / entities was under the Government
route:

 

  • An entity incorporated in Bangladesh or
    Pakistan;
  • A person who is a citizen of Bangladesh or
    Pakistan.

 

As per the amendment made on 22nd
April, 2020, the above provision has been amended to provide that investment
from the following persons / entities will be under the Government route:

  • An entity incorporated in any of seven
    neighbouring countries mentioned above;
  • If the beneficial owner is situated in any
    of the above seven neighbouring countries;
  • The beneficial owner is a citizen of any of
    the above seven neighbouring countries.

 

Further, transfer of ownership of
any existing or future FDI in an Indian entity to the above persons will also
be under the Government route.

 

Accordingly, for example, if earlier
a company based in China wanted to undertake FDI in any Indian company, the
same was allowed under the automatic route subject to sectoral caps, if any,
applicable to the industry in which the Indian company was operating. However,
post-22nd April, 2020 a Chinese company which has made investment in
an Indian company which is engaged in a sector where FDI is permissible up to
100% without any restrictions, would neither be allowed to undertake any fresh
investment in such Indian company nor acquire shares in any existing Indian
company under the FDI route without Government approval.

 

The above restriction has come in
the wake of news reports that the People’s Bank of China has acquired more than
1% stake in HDFC. The Government’s intention is to ensure that when the
valuation of Indian companies is low due to the impact of Covid-19, Indian
companies are not taken over by Chinese companies. However, the above
restriction is not directed only at China but covers investment from all the
seven countries mentioned above.

(ii) Meaning of beneficial ownership

It is interesting to note that the
term ‘beneficial owner’ has not been defined under FEMA. Rule 2(s) of the
Non-Debt Rules, 2019 while defining the term ‘foreign investment’ clarifies
that where, in respect of investment made by a person resident in India, if a
declaration is made under the Companies Act, 2013 that the beneficial interest
in the said investment is to be held outside India, such investment even though
made by a person resident in India, will be considered as foreign investment.
Thus, the Non-Debt Rules, 2019 refer to the provisions of the Companies Act,
2013 (‘Cos Act’) for determining whether a beneficial interest exists or not.

 

Section 89(10) of the Cos Act
defines beneficial interest in a share to include directly or indirectly,
through any contract, arrangement or otherwise, the right or entitlement of a
person alone or together with any other person to –

(a) exercise
or cause to be exercised any or all of the rights attached to such share;

(b) receive
or participate in any dividend or other distribution in respect of such share.

 

Hence,
based on the above provision of the Cos Act, it can be concluded that ‘beneficial
interest’ means a person who has the right to exercise all the rights attached
to the shares and also receive dividend in respect of such shares.

 

Further, section 90 of the Cos Act
read with Rule 2(e) of the Companies (Significant Beneficial Owners) Rules,
2018 specifies that if an individual, either directly or indirectly, is holding
10% or more of shares or voting rights in a company, such individual will be
considered to be a significant beneficial owner of shares and will be required
to report the same in the prescribed format.

 

Additionally, Rule 9(3) of the
Prevention of Money Laundering (Maintenance of Records) Rules, 2005 (‘PMLA Rule
9’) defines beneficial owner as a natural person holding in excess of the
following thresholds:

 

Nature of entity

Threshold limit

Company

25% of shares or capital or profits

Partnership firm

15% of capital or profits

Unincorporated body or body of individuals

15% of property or capital or profits

Trust

15% interest in trust

 

Further, the above-referred PMLA
Rule 9 also provides that in case any controlling interest in the form of
shares or interest in an Indian company is owned by any company listed in India
or overseas or through any subsidiaries of such listed company, it is not
necessary to identify the beneficial owner. Thus, in case of shares or
interest-held listed companies, beneficial ownership is not to be determined.

 

The above PMLA Rule 9 is followed by
SEBI for the purposes of determining beneficial ownership in any listed Indian
company.

 

Hence, we have a situation where the
Cos Act determines a significant beneficial owner as a natural person holding
10% or more directly or indirectly in the share capital, whereas SEBI, for the
purposes of a listed company, considers a threshold of shareholding exceeding
25% to determine beneficial ownership.

 

Additionally, the OECD Beneficial
Ownership Implementation Toolkit, March, 2019 states that beneficial owners are
always natural persons who ultimately own or control a legal entity or
arrangement, such as a company, a trust, a foundation, etc. Accordingly, where
an individual through one or more different companies controls the investment,
all intermediate controlling companies will be ignored and the individual would
be considered to be the beneficial owner of the ultimate investment.

 

However, in the absence of any
clarity given under the FEMA notification or by the Press Note regarding the
percentage beyond which an individual would be considered to be having
beneficial interest in the investment, one may take a conservative view of
considering shareholding of 10% or more as beneficial interest for the purposes
of FEMA. The same is explained by the example below:

 

Example

An Indian company is engaged in the
IT sector in which 100% FDI is permitted under the automatic route having the
following shareholding pattern:

In the above fact pattern, where the
Chinese Co. or a Chinese individual are holding 10% or more beneficial interest
either directly or indirectly through one or more entities in an Indian
company, the same will be covered under the restriction imposed by the FEMA
notification. Accordingly, any future investment of the Mauritius Co. into the
Indian Co. will be subject to Government approval.

 

Further, any change in shareholding
at any level which will transfer beneficial interest from a non-Chinese company
/ individual to a Chinese company or Chinese individual, will also be subject
to Government approval.

 

(iii) Meaning of FDI

Rule 6(a) of the Non-Debt Rules
provides that a person resident outside India can make investment subject to
the terms and conditions specified in Schedule I which deals with FDI in Indian
companies. FDI is defined to include the following investments:

  • Investment in capital instruments of an
    unlisted Indian company; and
  • Investment amounting to 10% or more of
    fully diluted paid-up capital of a listed Indian company.

 

Capital instruments means equity
shares, fully, compulsorily and mandatorily convertible debentures, fully,
compulsorily and mandatorily convertible preference shares and share warrants.

 

As per the amendment made on 22nd
April, 2020 the above Rule 6(a) has been amended to provide that
investment from entities or a beneficial owner located in the above seven
neighbouring countries will be under the automatic route.

 

Any investment of less than 10% in a
listed Indian company is considered as Foreign Portfolio Investment and is
covered by Schedule II of the Non-Debt Rules.

 

Further, the following schedules of Non-Debt
Rules cover different types of investments into India:

Schedule reference

Nature of investment

Schedule II

Investment by Foreign Portfolio Investment

Schedule III

Investment by NRIs or OCIs on repatriation basis

Schedule IV

Investment by NRIs or OCIs on
non-repatriation basis

Schedule V

Investment by other non-resident investors like sovereign
wealth funds, pension funds, foreign central banks, etc.

Schedule VI

Investment in LLPs

Schedule VII

Investment by Foreign Venture Capital investors

Schedule VIII

Investment in an Indian investment vehicle

Schedule IX

Investment in depository receipts

Schedule X

Issue of Indian depository receipts

As the amendment is made only in
Rule 6(a) which deals with FDI in India covered under Schedule I, investment
covered by the above-mentioned Schedules II to X (excluding investment in LLP
covered by Schedule VI) will not be subject to the above restrictions placed on
investors from China and other neighbouring countries.

 

For example, any investment of less
than 10% in a listed Indian company will be considered to be Foreign Portfolio
Investment and, accordingly, will not be subject to the above restrictions
placed on investors from China and other neighbouring countries.

 

With regard to investment in LLPs,
the same is covered by Schedule VI of the Non-Debt Rules. Clause (a) of
Schedule VI provides that a person resident outside India, not being Foreign
Portfolio Investor (FPI) or Foreign Venture Capital Investor (FVCI), can
contribute to the capital of an LLP which is operating in sectors wherein FDI
up to 100% is permitted under the automatic route and there are no FDI-linked
performance conditions.

 

Accordingly, post-22nd April,
2020, as FDI by person / entities based in neighbouring countries will fall
under the approval route they will not be eligible to make investment in any
LLP, irrespective of the sector in which it operates. Thus, persons / entities
based in neighbouring countries will neither be able to undertake fresh
investment in an existing LLP where they are already holding partner’s share,
or incorporate new LLPs or buy stakes in any existing LLP even under the
Government route.

 

Thus, unlike investment in companies
which will be allowed with the prior approval of the Government, investment in
LLPs will no longer be permissible either under the automatic route or the
approval route irrespective of the business of the LLP. Similarly, a company
having FDI with investors who belong to the neighbouring countries will not be
allowed to be converted into an LLP.

 

Meaning of transfer of
existing or future FDI

The amended provision says
Government approval is required before transfer of existing or future FDI in an
Indian entity to persons / entities based in the neighbouring countries. Hence,
transfer of existing FDI in an Indian entity as well as transfer of any FDI
which is made in future to persons / entities based in the neighbouring
countries will require Government approval.

 

Restriction
on issuance of shares against pre-incorporation expenses

Under the existing provisions, a WOS
set up by a non-resident entity operating in a sector where 100% FDI is
permitted under the automatic route, is permitted to issue shares against
pre-incorporation expenses incurred by its parent entity subject to certain
limits.

 

Going forward, as investment by
neighbouring countries will now fall under the Government route, a WOS set up
by a parent entity which is based in the neighbouring countries will not be
permitted to issue shares against pre-incorporation expenses incurred by the
parent entity.

 

Convertible instruments

FDI includes equity shares, fully,
compulsorily and mandatorily convertible debentures, fully, compulsorily and
mandatorily convertible preference shares, and share warrants. Accordingly, any
issuance or transfer of convertible instruments to persons / entities of
neighbouring countries will now be subject to Government approval irrespective
of the fact that convertible instruments have not yet been converted into equity.

 

However, determining beneficial
ownership in case of convertible instruments will be challenging. The case may
be more complicated where overseas investors in an Indian company have issued
optionally convertible instruments.

 

In this regard, one may place
reliance on the definition of FDI under Rule 2(r) which requires FDI to be
computed based on the post-issue paid-up equity capital of an Indian company on
fully diluted basis. Hence, a similar analogy could also be applied for
computing beneficial ownership of residents / entities of neighbouring
countries on the assumption that the entire convertible instruments have been
converted into equity.

 

(iv) Indirect foreign investment – Downstream
investment

Indirect foreign investment is
defined to mean downstream investment received by an Indian entity from:

(a) another
Indian entity (IE) which has received foreign investment and (i) the IE is not
owned and not controlled by resident Indian citizens or (ii) is owned or
controlled by persons resident outside India; or

(b) an
investment vehicle whose sponsor or manager or investment manager (i) is not
owned and not controlled by resident Indian citizens or (ii) is owned or
controlled by persons resident outside India.

 

The above amendment will also affect
downstream investment made by an existing Indian company which is owned or
controlled by persons resident outside India. Hence, if persons / entities of
neighbouring countries have beneficial interest in such an Indian company which
is owned or controlled by persons resident outside India, any downstream
investment made by such a company would also be under Government route.

 

The above can be illustrated as
follows:

 

 

Thus, in the instant case, as Indian Co. is owned or
controlled by persons resident outside India, any investment made by Indian Co.
will be considered to be downstream investment and will be required to comply
with the applicable sectoral caps. Hence, if persons / entities of neighbouring
countries hold beneficial interest in Indian Co., any subsequent investment
made by Indian Co. will require Government approval. Further, any downstream
investment made by WOS would also need prior Government approval.

 

Additionally, downstream investment by an LLP which is owned
or controlled by persons resident outside India and having beneficial ownership
of persons / residents of neighbouring countries will not be allowed in any
Indian company, irrespective of the sector.

 

(v) Effective date of changes made in FDI Policy

It is interesting to note that the Government had decided to
make changes in the FDI Policy by issuing a Press Note. Further, the Press Note
has itself stated that the above changes will come into effect from the date of
issuance of the relevant notification under FEMA. The relevant FEMA
Notification has been issued on 22nd April, 2020 and hence the above
changes will be effective from that date.

 

(vi) Status of FDI from Hong Kong

Hong Kong is one of the major contributors to FDI in India.
As per Government of India records, FDI from Hong Kong is almost double that
from China and hence it is essential to evaluate whether Hong Kong will be
considered separate from China to determine whether it will be covered under
the new restrictions imposed by Press Note No. 3. It is interesting to note
that Hong Kong is governed separately as Hong Kong Special Administrative
Region of China but it forms part of China. However, for the purpose of
reporting FDI, Hong Kong is classified as a separate country by the Government
of India. Similarly, the Indian Government has entered into a separate tax
treaty with Hong Kong in addition to China for avoidance of double taxation.
Additionally, Hong Kong has separately signed the Multilateral Convention in
addition to China as part of OECD’s BEPS Action Plans.

 

Based on the above, it appears that the Government is taking
the view that Hong Kong is separate from China; and if such is indeed the case,
then it is possible to take the view that the above restrictions imposed by Press
Note No. 3 will not affect FDI from Hong Kong and the same should be covered
under the automatic route as hitherto applicable. However, it is advisable that
the Government issue an appropriate clarification on the same.

 

SUMMARY

Based on the above discussions, the amendment in
the FDI regime by putting investment from neighbouring countries under the
Government route has given rise to several issues. It is expected that the
Government will quickly issue necessary clarifications in this regard.

Sections 2(47), 45 – A cancellation of shares consequent to reduction of capital constitutes a ‘transfer’ – Loss arising from the cancellation of shares is entitled to indexation and is allowable as a long-term capital loss – The fact that the percentage of shareholding remains unchanged even after the reduction is irrelevant

3. Carestream Health Inc. vs. DCIT (Mumbai)

M. Balaganesh (A.M.) and Amarjit Singh (J.M.)

ITA No.: 826/Mum/2016

A.Y.: 2011-12

Date of order: 6th February, 2020

Counsel for Assessee / Revenue: Nitesh Joshi / Padmapani Bora

 

Sections 2(47), 45 – A cancellation of shares consequent to
reduction of capital constitutes a ‘transfer’ – Loss arising from the
cancellation of shares is entitled to indexation and is allowable as a
long-term capital loss – The fact that the percentage of shareholding remains
unchanged even after the reduction is irrelevant

 

FACT

The assessee was a company
incorporated in and a tax resident of the United States of America. It made
investments to the extent of 6,47,69,142 equity shares of the face value of Rs.
10 each in Carestream Health India Private Limited (CHIPL), its wholly-owned
Indian subsidiary. During the previous year relevant to the assessment year
under consideration, viz. A.Y. 2011-12, CHIPL undertook a capital reduction of
its share capital pursuant to a scheme approved by the Bombay High Court. Under
the capital reduction scheme, 2,91,33,280 shares (out of the total holding of
6,47,69,142 shares) held by the assessee were cancelled and a total
consideration amounting to Rs. 39,99,99,934 was received by the assessee towards
such cancellation / capital reduction. This consideration sum of Rs.
39,99,99,934 worked out to Rs. 13.73 for every share cancelled by CHIPL. This
was also supported by an independent share valuation report.

 

As per the provisions of section
2(22)(d), out of the total consideration of Rs 39,99,99,934, the consideration
to the extent of accumulated profits of CHIPL, i.e., Rs. 10,33,11,000 was
considered as deemed dividend in the hands of the assessee. Accordingly,
Dividend Distribution Tax (DDT) on such deemed dividend @ 16.609% amounting to
Rs. 1,71,58,924 (10,33,11,000 * 16.609%) was paid by CHIPL. Since the aforesaid
sum of Rs. 10,33,11,000 suffered DDT u/s 115-O, the assessee claimed the same
as exempt u/s 10(34) in the return of income. The balance consideration of Rs.
29,66,88,934 was appropriated towards sale consideration of the shares and
capital loss was accordingly determined by the assessee as prescribed in Rule
115A to Rs. 3,64,84,092 and a return was filed claiming such long-term capital loss.
Thus, the assessee had claimed long-term capital loss of Rs. 3,64,84,092 upon
cancellation of the shares held by it in CHIPL pursuant to reduction of capital
in the return of income for the year under consideration.

 

The A.O. held that there was no transfer
within the meaning of section 2(47) in the instant case. He observed that the
assessee was holding 100% shares of its subsidiary company and during the year
it had reduced its capital. The assessee company had 100% shares in the
subsidiary company and after the scheme of reduction of capital also, the
assessee was holding 100% of the shares. According to the A.O., this clearly
establishes that by way of reduction of capital by cancellation of the shares,
the rights of the assessee do not get extinguished. The assessee, both before
and after the scheme, was having full control over its 100% subsidiary. The
conditions of transfer, therefore, were not satisfied. Further, the shares have
been cancelled and are not maintained by the recipient of the shares.

 

Before the A.O. the assessee also
made an alternative argument of treating the same as a buyback. The A.O.
observed in this regard that since the assessee had taken approval from the
High Court for reduction of capital, the same cannot be treated as a buyback.
He, therefore, disallowed the claim of long-term capital loss in the sum of Rs.
3,64,84,092 due to indexation and also did not allow it to be carried forward.

 

The assessee filed objections before
the DRP against this denial of capital loss. The DRP disposed of the objections
of the assessee by holding that the issue in dispute is covered by the decision
of the Special Bench of the Mumbai Tribunal in the case of Bennett
Coleman & Co. Ltd. reported in 133 ITD 1. Applying
the ratio laid down in the said decision, the DRP observed that the
share of the assessee in the total share capital of the company as well as the
net worth of the company would remain the same even after capital reduction /
cancellation of shares. Thus, there is no change in the intrinsic value of the
shares and the rights of the shareholder vis-a-vis the other
shareholders as well as the company. Thus, there is no loss that can be said to
have actually accrued to the shareholder as a result of the capital reduction.

 

Pursuant to this direction of the
DRP, the A.O. passed the final assessment order on 23rd December,
2015 disallowing the long-term capital loss of Rs. 3,64,84,092 claimed by the
assessee in the return of income.

 

Aggrieved, the assessee preferred an
appeal to the Tribunal.

 

HELD

At the outset, the Tribunal noted
that the assessee had incurred capital loss only due to claim of indexation
benefit and not otherwise. The benefit of indexation is provided by the statute
and hence there cannot be any mala fide intention that could be
attributed to the assessee in claiming the long-term capital loss in the said
transaction.

 

As regards the contention of the A.O.
that there is no transfer pursuant to reduction of capital, the Tribunal
observed that –

i) it
is a fact that the assessee had indeed received a sale consideration of Rs.
39.99 crores towards reduction of capital. This sale consideration was not
sought to be taxed by the A.O. under any other head of income. The Tribunal
held that this goes to prove that the A.O. had indeed accepted this to be the
sale consideration received on reduction of capital under the head ‘capital
gains’ only, as admittedly the same was received only for the capital asset,
i.e., the shares. The Tribunal held that the existence of a capital asset is proved
beyond doubt. The capital gains is also capable of getting computed in the
instant case as the cost of acquisition of the shares of CHIPL and the sale
consideration received thereon are available. The Tribunal held that the
dispute is, how is the A.O. justified in holding that the subject mentioned
transaction does not tantamount to ‘transfer’ u/s 2(47).

 

ii) there
is a lot of force in the argument advanced by the A.R. viz. that merely because
the transaction resulted in loss due to indexation, the A.O. had ignored the
same. Had it been profit or surplus even after indexation, the A.O. could have
very well taxed it as capital gains.

 

The ratio that could be
derived from the decision of the Hon’ble Supreme Court in CIT vs. G.
Narasimhan reported in [236 ITR 327 (SC)], is that
reduction of capital amounts to transfer u/s 2(47). Even though the shareholder
remains a shareholder after the capital reduction, the first right as a holder
of those shares stands reduced with the reduction in the share capital.

 

The Tribunal observed that it is not
in dispute that in the instant case the assessee had indeed received
consideration of Rs. 39.99 crores towards reduction of capital and whereas in
the facts of the case before the Mumbai Special Bench reported in 133 ITD
1 relied upon by the DR, there was no receipt of consideration at all.
Out of the total consideration of Rs. 39.99 crores arrived @ Rs. 13.73 per
share cancelled in accordance with the valuation report obtained separately, a
sum of Rs. 10.31 crores has been considered by the assessee as dividend to the
extent of accumulated profits possessed by CHIPL as per the provisions of
section 2(22)(d) and the same has been duly subjected to dividend distribution
tax. The remaining sum of Rs. 29.67 crores has been considered as sale
consideration for the purpose of computing capital gain / loss pursuant to
reduction of capital.

 

The most crucial point of distinction
between the facts of the assessee and the facts before the Special Bench of the
Mumbai Tribunal was that in the facts before the Special Bench, the Special
Bench was concerned with a case of substitution of one kind of share with
another kind of share, which has been received by the assessee because of its
rights to the original shares on the reduction of capital. The assessee got the
new shares on the strength of its rights with the old shares and, therefore,
the same would not amount to transfer. For this purpose reference has been made
to section 55(2)(v). According to the Special Bench, the assessee therein will
take the cost of acquisition of the original shares as the cost of substituted
shares when capital gains are to be computed for the new shares.

 

In the present case section 55(2)(v)
has no application. The cost of acquisition of 2,91,33,280 shares shall be of
no relevance in the assessee’s case at any later stage. In paragraph 23 at page
13 of the decision of the Special Bench, it has been observed that though under
the concept of joint stock company the joint stock company is having an
independent legal entity, but for all practical purposes the company is always
owned by the shareholders. The effective share of the assessee in the assets of
the company would remain the same immediately before and after reduction of
such capital. It has thus been observed that the loss suffered by the company
would belong to the company and that cannot be allowed to be set off in the
hands of the assessee.

 

The law is now well settled by the
decision of the Hon’ble Supreme Court in the case of Vodafone
International Holdings B.V [341 ITR 1] wherein it was held that the
company and its shareholders are two distinct legal persons and a holding
company does not own the assets of the subsidiary company. Hence, it could be
safely concluded that the decision relied upon by the DR on the Special Bench
of the Mumbai Tribunal in 133 ITD 1 is factually distinguishable
and does not come to the rescue of the Revenue.

 

The Tribunal held that the loss arising to the
assessee for cancellation of its shares in CHIPL pursuant to reduction of
capital in the sum of Rs. 3,64,84,092 should be allowed as long-term capital
loss eligible to be carried forward to subsequent years. The ground of appeal
filed by the assessee was allowed.

Business expenditure – Section 37(1) of ITA, 1961 – Where assessee company engaged in business of development of real estate had, in ordinary course of business, made certain advance for purchase of land to construct commercial complex but same was forfeited as assessee could not make payment of balance amount – Forfeiture of advance would be allowed as business expenditure

9. Principal CIT vs.
Frontiner Land Development P. Ltd.

[2020] 114 taxmann.com 688
(Delhi)

Date of order: 25th
November, 2019

A.Y: 2012-13

 

Business expenditure – Section
37(1) of ITA, 1961 – Where assessee company engaged in business of development
of real estate had, in ordinary course of business, made certain advance for
purchase of land to construct commercial complex but same was forfeited as
assessee could not make payment of balance amount – Forfeiture of advance would
be allowed as business expenditure

 

The assessee, a company engaged
in the business of real estate development, had entered into a contract with
HDIL for purchase of land to construct a commercial complex in 2004 and had
paid an advance of Rs. 3.50 crores. However, it could not pay the balance
amount and, therefore, HDIL forfeited the advanced amount in 2011. In the
relevant year, i.e., A.Y. 2012-13, the entire capital gain and interest income
of the assessee company was offset with the amount so forfeited. The A.O. held
that forfeiture of advance was a colourable device to adjust capital gains. He
characterised the forfeiture as capital expenditure and made an addition.

 

The Commissioner (Appeals)
allowed the assessee’s appeal and deleted the addition of Rs. 3.5 crores. The
Tribunal upheld the decision of the Commissioner (Appeals).

 

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

 

‘i)   From the facts narrated in the impugned order, it emanates that
the transaction between the assessee and HDIL is not disputed. The transaction,
in fact, has also been accepted by the A.O. while treating the write-off as
capital expenditure. Thus, the only question that arises for consideration is
whether such a transaction could be categorised as “colourable device”
and the forfeiture of Rs. 3.50 crores could be treated as capital expenditure.
Since the genuineness of the transaction is not disputed, we are unable to find
any cogent ground or reason for the same to be considered as colourable device.
In fact, the assessee had produced several documents in support of the
forfeiture, such as the copy of the agreement to sell dated 12th
October, 2004; letter requesting for extension of agreement; letters granting
extension from HDIL; letter granting final opportunity; and letter of
forfeiture of advance, which in fact has been extracted in the impugned order.

 

ii) In order to claim deduction, the assessee has
to satisfy the requirements of section 37(1) of the Act which lays down several
conditions, such as, the expenditure should not be in the nature described
under sections 30 to 36; it should not be in the nature of capital expenditure;
it should be incurred in the previous year; it should be in respect of business
carried out by the assessee; and be expended wholly and exclusively for the
purpose of such business.

 

iii) The assessee is a company which is engaged in the business of real
estate. The main object of the business of the company is development of real
estate. It made a payment of Rs. 3.50 crores as advance to HDIL for purchase of
land to construct a commercial complex for the development of real estate.
Since it did not make the payment of the balance amount, for whatever reason,
the advance given was forfeited. In this view of the matter, the advance given
in the ordinary course of business has been rightly treated as loss incurred by
the company.

 

iv) We are unable to find any material on
record to suggest to the contrary. In view of the aforesaid factual findings,
the treatment given to the forfeiture of advance of Rs. 3.50 crores could not
be categorised as capital expenditure. Therefore, the question of law urged by
the appellant does not arise for consideration as the issue is factual. The
appeal is, accordingly, dismissed.’

TEAM PERFORMANCE REVIEW IN PROFESSIONAL SERVICE FIRMS

People in professional service firms are
their greatest asset. In that context, we need to ask:

 

(1) Are we doing everything we can to
provide our teams the best of career and personal growth opportunities that
they deserve? (2) Do we spend the necessary time on reviewing our team’s
performance, giving feedback and offering it the mind space and focus that is
necessary?

 

This article is a take on how professional
service firms should review performance, encourage team members to perform
better and reward them for the performance that they deliver for the firm.

 

The Context

Professionals at every stage of their career
are normally inquisitive about their next phase of growth. Sometimes, even
without spending sufficient time on thinking through the roadmap for their
practice area development. It is important for partners to take the onus of
providing leadership, mentorship, guidance and a roadmap to the professionals
in their team so that they are not left scampering without a direction. It is
the obligation of partners and firm leaders to provide a high-quality
environment in which merit and performance are rewarded, apart from offering
experience and seniority. It is binding on the partners to ensure that they
work with the millennials in understanding how they think and work and, through
that understanding, to develop a framework that enables individual development
and provides a career roadmap to the persons involved.

 

GOAL – SETTING


The first step in the process of a
performance review is to ask the question: What do we measure the
performance against?

 

The objective of performance assessment is
served only when team members have clarity of thought and vision. Hence, each
individual in the firm should be provided with written, clear and specific
goals for the upcoming year, clearly highlighting where and how each individual
is supposed to perform. Key performance indicators should also be highlighted.
Effectively, one is developing a scorecard for an individual, relative to the
individual’s capacity and capability to execute and develop on a
mutually-agreed set of goals.

 

So, how does one really set achievable and
measurable goals? Here are five steps that one can consider:

 

  •    The first step in the
    process is to look at the past twelve months and analyse: How did the
    individual perform?
  •    The second is to identify
    the individual’s core strengths and where he/she needs improvement;
  •    The third step is to agree
    upon a process and timeline to streamline those areas which need improvement by
    making actionable plans and which should be discussed with the team members
    threadbare;
  •    Next, the partners must
    identify the roles a team member can play in areas which are relevant and
    critical for the practice in the coming year and incorporate them in the
    scorecard;
  •    The final step is to hold a
    discussion with team members and agree upon mutually acceptable goals and close
    it with documentation.

 

PERFORMANCE REVIEW MECHANISM


Once the goals are set, it is important that
these goals are actually pursued and they get reflected in individual and
team performances. For this purpose the firm must establish a proper
performance review mechanism. It is not enough to just hold an annual review at
the end of the year – by then, the damage could already have been done. Quarterly
reviews ensure a gradual step towards improving performance by quicker
admission and follow-up on the areas which need improvement.

 

But how should one go about assessing
employee performance? The process of assessment can be divided into two parts:

•    Facilitating self-evaluation, and

•    360-degree feedback.

 

The employee must first exercise his own
judgement and rate his performance on the parameters and goals previously set.
He must question himself: Have I worked on my weaknesses? Have I met my
performance targets? What was my contribution to the firm? The employee must
appreciate and be able to see areas that need improvement.

 

External feedback is also necessary to
assess actual performance. The firm’s seniors and reporting managers must
comment on the improvement seen with respect to the pre-decided,
mutually-agreed goals.  At the same time,
feedback should be obtained from the entire eco-system in which the employee is
working. The employer should seek feedback from other team members, juniors and
clients to know how an employee has performed on various fronts. With
concurrent, self, upward, downward and external feedback, the employer now gets
a 360-degree review of the actual performance of the employee. The employer can
now discuss his observations with the employee and jointly decide the areas
which need further improvement.

 

ATTRIBUTES AND MOTIVATION


The key attributes which a leader must focus
on while reviewing performance are integrity, team spirit, attitude, the
individual’s orientation to the firm’s goals and performance management.

 

The attitude of the employees is a very
critical factor driving the performance of the firm. The partner must ensure
that all the employees feel good about what they do and that they perceive the
firm’s growth to be in consonance with their personal development. Such
motivation should also be seen at the team level by having a team-first
attitude.

 

FEEDBACK


Communication is the key to any process. The
way the employer conveys feedback influences the way the feedback would be
perceived.

 

Firstly, the
firm must create a culture where giving and receiving feedback (both positive
and constructive) is the norm. Secondly, acknowledging the importance of the
manner of delivering feedback; the partners must attempt to deliver even
negative feedback in a constructive way. Simple experiences can help us to
learn how to deliver constructive feedback. For instance, recall an experience
in which you were given constructive feedback. Now delve into the reasons why
the experience was positive or negative. What did the giver say or do that made
the experience positive or negative? Work on the areas which made the
experience negative and imbibe the qualities which made the experience
positive. This way, one can provide at least reasonably well-communicated
feedback.

 

Being emphatic and understanding while
providing feedback will ensure greater acceptance and improvement.

 

A PLAN FOR NEXT YEAR


An integral part of the performance review
process is to develop a plan for an individual. Let’s call it an Individual
Development Plan (IDP). This plan should ensure that the scorecard, the
individual development sheets, and the KPIs, along with the goals, are
documented after a joint discussion between the team member and the partner.
This annual plan will serve as the guiding plan for the next year’s evaluation.

 

The key aspect in completing the IDP and
planning for the season ahead is that the team member’s SWOT analysis should be
conducted and a joint IDP should emerge from it.

 

HAPPY TEAM MEMBER


The process of a performance review is meant
to enhance employee morale and give the firm a chance to evaluate the team
member. It is essential for the partners to understand how the employees
perceive the review process because it will make all the difference. A
performance review should be thought of as constructive feedback for individual
and organisational development. At the end of the process, the employee
should feel that the review actually contributed to his individual and team
learning. The best outcome of the review should be that the individual
comes out as a happy team member. Happiness stems from the fact that he/she has
a clear set of goals and a roadmap in mind which is directly in consonance with
his goals and needs.

 

ASPIRATIONAL TEAM MEMBER


Team members should be encouraged by
partners to achieve the highest standards of performance and integrity that
will help them to grow individually and also as a team. Aspirational team
members wish to see themselves ahead from where they were before. They need to
believe they are headed somewhere in life and have a purpose. A performance
review should, therefore, aim at a convergence 
of individual development goals with the organisational goals to provide
value to each individual.

 

MEANINGFUL OUTCOMES


The ultimate objective of a performance
review is to get meaningful outcomes. Outcomes
don’t just mean improvement in the firm’s revenue and operations. The clear
identification of each team member’s strengths and weaknesses, improvement in
employee efficiency and alignment of the practice goals with the employee goals
is effectively the right step in the right direction. These outcomes are what
constitute a well-rounded and comprehensive performance review mechanism.
Professionals must strive to achieve this consistently.

 

Performance review is a process to help team
members evaluate: How did the year go by? What could he/she have done
differently? What are the learnings carried forward to the next year? While
executing this process, there will be emotional and professional upheavals
which a team member should accept with dignity and grace. Therein lies true
learning for a professional.

 

While all of the above may sound daunting,
is it worth the effort? Totally.   

 

Coping with Compliances

Laws are meant to serve a number of
purposes: Establishing standards, maintaining order, resolving disputes, and
protecting liberties and rights, etc. Indian laws often fail to achieve these
purposes and even produce opposite outcomes! Often Rule of Law does not bring
intended results when laws are not equally applicable (say between State and
citizens or amongst groups of people), not equally enforced, not adjudicated
fairly and lacks a timely and cost-effective justice delivery system. In the
Indian context people avoid or dodge laws due to many reasons such as:

 

a.  Following rules does not necessarily lead to
intended / expected outcomes (low standard of service to a tax-payer or bad
quality of service delivery from State or administrative underperformance).

b. Laws are larger than the purpose they serve
(disproportionate compliance, corruption, red tape, treating the tax-payer as
evader, arbitrariness, lack of accountability).

c.  Justice delivery and adjudication process is
so convoluted and takes so much longer than it should even for routine matters.

 

The above can only be remedied by government
empathy and innovation so that citizens are encouraged to abide by the spirit
of the law and don’t get worn out by burden of doing business which is more
akin to doing compliances. It is said: Tax evasion is reprehensible; it is
social injustice by the evader to his fellow citizens. Arbitrary or excessive
taxation is equally reprehensible; it is social injustice by the government to
the people. In today’s context excessive, reactive, and irrelevant laws
constitute reprehensible acts of social injustice by government on its own
people. Constant tweaking, amending, notifying, not notifying for months and
years1, changing schema, dysfunctional compliance portals (take GST
and PT) and the list is unending.

 

Let’s take the example of Digital Signatures
Certificates (DSC) in case of non-resident directors. They require Apostille /
Notary every two years. Add KYC process by MCA to this (aka duplication). Such
authentication costs Rs. 8,000 to 14,000 per document in many countries. While
authentication is a valid aim, its feasibility (cost, benefit, time, risk) in a
given context (say a non-operational or non-public interest entity) requires
balance. On top of this, banks ask for their own KYC. That is not all. New
changes require a video of the person (perhaps to check he is alive) before he
can get a DSC! Additionally, MCA has brought out new forms that necessitate
giving a photograph of the Director and latitude and longitude to keep the
company ‘active’! Moreover, the requirement for a full-time company secretary
is a cost burden due to a threshold / basis that is not reflective of the
actual need for having one. In a connected world, numerous disconnected laws
translate into a barrage of futile compliances that give a false sense of
conformity especially for mid-sized businesses.

 

Take obsolete laws! Inter-state change of registered
office requires that creditors give NOC. In a recent case, creditors gave their
no objection on email through scanned letters. After uploading them, the MCA
asked for proof of calling for the confirmations. Well, there was no choice but
to post those letters to creditors, enrich the postal department and upload
proof of sending by ‘Registered AD’. And yes that ‘compliance’ met the legal
requirements and the registered office shifting got approved.

 

Every form and procedure necessitates
periodic evaluation by an independent questioning group and a survey from users
– to ensure that these forms and procedures remain effective, smooth, and
meaningful. This is especially necessary for a compliance averse society like
ours. New compliances coming out every few months seem like surgical strike –
but on the wrong side – numbing the already low and overburdened base.

 

________________________________________

1   In 643 days of GST (known as Good and Simple
Tax) at the beginning of April 2019: 1 Amendment Act, 31 amendments in CGST
Rules, 364 Notifications, 224 Circulars and Orders. That is 620 changes in CGST
and IGST alone or nearly 1 per day and SGST changes are disregarded.



 

Raman Jokhakar

Editor

PUNARJANMA (REBIRTH)

Indian thinkers believe firmly in the theory
of ‘rebirth.’ It is considered as an integral part of ‘Hindu’ culture.
Many modernists and atheists discard ‘rebirth’ as a ‘myth’ and
a meaningless concept. Life after death is indeed a mystery and the desire
to unravel it is probably universal. Despite this belief even in India, there
were atheists like Charvak and there are many even today who ridiculed the
concept of ‘rebirth’ by questioning as to how a body which is burnt can be
reborn. However, most religions believe in the concept of ‘judgement day’
when the soul will rise to receive ‘judgement’.

 

The answer to this perennial question is: It
is a fact that the body does not return – what returns is the soul (Atma)
in another body. Soul is an observer, what actually comes along with soul is
our sub-conscious which carries the past. As there is still research on this
subject, the purpose of this article is to see: How the western world is
responding to and looking at ‘rebirth’.

 

There are departments in several
universities doing research on ‘Soul and Rebirth’. Henry Ford, the
acclaimed industrialist, realised at the age of 26 the truth of
rebirth. Ford believed that the skills a person has are ‘the legacy of many
prior births.’ Henry Ford dedicated his wealth to this research and Dr.
Stevenson carried out the research for 4 decades.

 

Friedrich Nietzsche, the German philosopher,
says that rebirth is the turning point of human existence. He adds, whatever
you do, rebirth is imminent! Corroborating this, Stuart Cheshire, an
American thinker, states wise people don’t need evidence; and there is no
use giving evidence to ‘extra-wise’ people’.

 

Kahlil Gibran believed in rebirth and so did
Socrates, and Leo Tolstoy. Even a politician, Benjamin Franklin, believed in
‘rebirth’. There are many surgeons who have written that they have actually
experienced the existence of the soul while performing ‘surgery’. A few
of their patients have related their ‘near death experience’.

 

We ourselves have observed and experienced
that some children have phenomenal ‘in-born’ knowledge and skills. This
establishes that the soul has brought with it the knowledge from its last life.

 

Scientists
and psychiatrists have also developed the technique of ‘Past Life Regression’
which helps in diagnosing many chronic and psychological disorders. This also
establishes that ‘life’ is a cycle that rarely ends. Hence, all
religions motivate people to do righteous acts or ‘satkarma’ and deter them
from doing wrong things (dushkarma) because it is an inherent belief
that ‘rebirth’ carries with it our acts of the past life.



The concept of ‘karma’ is based on
‘rebirth’. – ‘as you sow, so shall you reap’.

 

There is another interesting observation
made by researchers. They say the journey of the soul from one body to another
may not be a one-time event! It may be a slow process and ‘rebirth’ happens in
a phased manner and even after some time after death. Some also believe ‘soul
can enter even a living body resulting in a change in behaviour’. The
scientists have observed that one suddenly acquires the skills or abilities
which one never possessed!

 

Several books have chronicled where a young
child remembers his / her past life and have visited their abode in previous
births and have met their families.

 

Hence there is ‘rebirth’. The lesson is: Let us live our life according to our simple
belief of ‘being good and doing good’ so that what the soul carries with it
to the next birth is nothing but goodness – Rebirth is a fact and let us
accept it.

Section 37 and Insurance Act, 1938– Business expenditure – Disallowance – Payments prohibited by law – Effect of Explanation 1 to section 37 – Reinsurance payments to non-residents – Not prohibited by law – Deduction allowable

8. Cholamandalam
MS General Insurance Co. Ltd. vs. Dy. IT; 411 ITR 386 (Mad): Date
of order: 12th December, 2018 A.Y.:
2009-10

 

Section
37 and Insurance Act, 1938– Business expenditure – Disallowance – Payments
prohibited by law – Effect of Explanation 1 to section 37 – Reinsurance
payments to non-residents – Not prohibited by law – Deduction allowable

 

The legal
issue in this appeal before the High Court relates to disallowance of
reinsurance premium ceded to non-resident reinsurers. The assessee has raised
the following substantial questions of law for consideration:

 

“i)   Whether the ITAT erred in deciding the
validity of reinsurance ceded to the non-resident reinsurers when such issue
was not even raised before it by either the Department or the appellant?

ii)   Whether the ITAT erred in holding that the
IRDA (General Insurance-Reinsurance) Regulation, 2000 is contrary to section
101A of the Insurance Act, 1938 when it does not have the power to decide the
validity of regulations made by the IRDA?

iii)   Whether the ITAT erred in holding that
reinsurance payments to non-residents are prohibited by law and therefore hit
by Explanation 1 to section 37 of the Income-tax Act, 1961?”

 

The Madras
High Court held in favour of the assessee and held as under:

“i)   The Tribunal has no jurisdiction to declare a
transaction to be either prohibited or illegal occurring under a different
statute over which it has no control.

ii)   The Insurance Act, 1938 stood amended w.e.f.
01.04.1961. It inserted section 101A. Section 2(16B) of the Act defines
‘reinsurance’ to mean the insurance of all or part of one insurer’s risk by
another insurer who accepts the risk for a mutually-acceptable premium. There
is no distinction drawn between an Indian reinsurer and a foreign reinsurer. On
and after the introduction of section 101A to the Insurance Act, 1938 there is
a mandatory requirement for other insurer to reinsure with Indian reinsurers
and such percentage is put to a maximum of 30%. The language of section 101A
nowhere prohibits the reinsurance with foreign reinsurance companies above the
percentage specified by the authority with previous approval by the Central
government.

iii)   A reading of the Insurance Regulatory and
Development Authority (General Insurance-Reinsurance) Regulations, 2000 also
clearly shows that there is absolutely no prohibition for reinsurance with a
foreign reinsurance company.

iv)  A reading of Circular No. 38(XXXIII-7), dated
03.10.1956 would clearly reveal that at no point of time has the Income-tax
Department taken a stand that the reinsurance business with a foreign
reinsurance company was a prohibited business.

v)   A reading of the order passed by the Tribunal
showed that the decision of the Tribunal on the effect of certain provisions of
the Insurance Act, 1938, whether reinsurance was permissible with foreign
entities and whether it was prohibited or valid in law, were all queries which
were raised by the Tribunal suo motu when the appeals were heard.

vi)  The sum and substance of the conclusion of the
Tribunal was that the entire reinsurance arrangement of the assessee company
was in violation and contrary to the provisions of section 2(9) of the
Insurance Act and, therefore, the entire reinsurance premium had to be
disallowed u/s. 37 of the Act. The Tribunal held that there was a clear
prohibition for payment of reinsurance premium to non-resident reinsurance companies.
The Tribunal held that an Indian insurer could not have any reinsurance
arrangement with a reinsurance company other than the insurer, as defined in
section 2(9) of the Insurance Act. The Tribunal was of the view that unless and
until a branch was opened by the foreign reinsurance company, the question of
conducting reinsurance business in India could not be done. This conclusion of
the Tribunal was not sustainable. Such a finding was without noticing the
reinsurance regulations, which had been provided by the Insurance Regulatory
Authority of India.

vii)  The Tribunal erred in drawing a presumption
regarding prohibition of reinsurance with foreign reinsurance companies. This
presumption was erroneous for the simple reason that the statement of objects
of the Insurance Act itself clearly stipulated wherever there was a
prohibition.

viii) The Tribunal had no jurisdiction to declare any
provisions of the regulations to be inconsistent with the provisions of the
Insurance Act. This was wholly outside the purview of the Tribunal.

ix)  The Tribunal did not consider the correctness
of the order passed by the Assessing Officer or that of the Commissioner
(Appeals). Therefore, the Tribunal could not have held that the Assessing
Officer rightly disallowed the insurance premium u/s. 40(a)(i).”

Section 48 – Legal and professional expenditure incurred by assessee, a foreign company, for sale of shares of its Indian subsidiary is an expenditure incurred wholly and exclusively in connection with transfer and is allowable as deduction while computing capital gains

5. [2019] 103
taxmann.com 297 (Mum) AIG Offshore
Systems Services Inc. vs. ACIT ITA No.:
6715/Mum/2014 A.Y.: 2010-11 Dated:  18th January, 2019

 

Section 48 – Legal
and professional expenditure incurred by assessee, a foreign company, for sale
of shares of its Indian subsidiary is an expenditure incurred wholly and
exclusively in connection with transfer and is allowable as deduction while
computing capital gains

 

FACTS


During the previous
year relevant to the assessment year in dispute, the assessee, a foreign
company, carrying on activities as a Foreign Institutional Investor, sold
shares held by it in its Indian subsidiary and offered long-term capital gains
arising from sale of shares of the Indian subsidiary.

 

During the course
of assessment proceedings, the Assessing Officer (AO) observed that the
assessee had claimed deduction of expenditure incurred towards transfer of
shares. The assessee submitted that the said expenditure represented legal /
professional fees paid to lawyers / accounting firms for assisting in transfer
of shares. The AO, however, held that:

 

(i)   the expenditure claimed by the assessee was
not of such nature that without incurring those expenses sale of shares could
not have been done;

(ii)   the objective behind incurring the expenses
was to optimise the economic value of the business and not for the purpose of
transfer of shares; and

(iii)  the documentary evidences relied upon by the
assessee also did not mention the name of the buyer.

 

The AO disallowed
the assessee’s claim for deduction of expenditure while computing capital
gains.

Aggrieved, the
assessee preferred an appeal to the CIT(A) who upheld the disallowance by
holding that the expenditure incurred is in the nature of business expenditure.

 

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

 

HELD


The Tribunal,
relying on various decisions, held that expenditure which is intrinsically
connected to the transfer of a capital asset is allowable as deduction u/s.
48(i) of the Act. On a perusal of the documents filed by the assessee, the
Tribunal observed that the expenses were towards advice on sale of entire
shareholding, preparation of share / sale / purchase agreement, preparation of
closing documents including board resolution, share transfer forms, etc., and
were therefore for the transfer of shares. The Tribunal held that it was clear
from the scope of the work that the services rendered by the legal /
professional firm was intrinsically related to transfer of shares of the Indian
subsidiary and therefore the expenditure qualified for deduction u/s. 48(i).
The Tribunal also held that non-mentioning of the name of the buyer did not, in
any way, militate against the fact that the expenditure incurred by the
assessee on account of legal and professional fees was in connection with the
transfer of shares.

 

The appeal of the
assessee was allowed by the Tribunal.

Section 37(1) – Business expenditure – Allowability of (Consultancy charges) – Assessee made payments to one ‘S’, a consultant, and claimed deduction of same as business expenditure – AO, on the basis of a statement of ‘S’ recorded during search operations, held that ‘S’ had not rendered any service to assessee so as to receive such payments and disallowed expenditure – Appellate Authorities allowed payments made to ‘S’ holding that there was sufficient evidence justifying payments made to ‘S’ and AO, other than relying upon statement of ‘S’ recorded in search, had no independent material to make disallowance – Allowance of payments made to ‘S’ was justified

7. CIT
vs. Reliance Industries Ltd.; [2019] 102 taxmann.com 372 (Bom): Date
of order: 30th January, 2019

 

Section
37(1) – Business expenditure – Allowability of (Consultancy charges) – Assessee
made payments to one ‘S’, a consultant, and claimed deduction of same as
business expenditure – AO, on the basis of a statement of ‘S’ recorded during
search operations, held that ‘S’ had not rendered any service to assessee so as
to receive such payments and disallowed expenditure – Appellate Authorities
allowed payments made to ‘S’ holding that there was sufficient evidence
justifying payments made to ‘S’ and AO, other than relying upon statement of
‘S’ recorded in search, had no independent material to make disallowance –
Allowance of payments made to ‘S’ was justified

 

The
assessee made payments to one ‘S’, a consultant, and claimed deduction of same
as business expenditure. The Assessing Officer on the basis of a statement of
‘S’ recorded during search operations held that the said person had not
rendered any service to the assessee so as to receive such payments. He
accordingly disallowed the payments made to ‘S’.

 

The
Commissioner (Appeals) allowed the payments made to ‘S’ holding that ‘S’ had
retracted the statement recorded during search, the assessee had pointed out
the range of services provided by ‘S’, and the Assessing Officer had no other
material to disallow the expenditure. The Tribunal confirmed the view of the
Commissioner (Appeals). It held that ‘S’ retracted his statement within a short
time by filing an affidavit. Subsequently, his father’s statement was recorded
in which he also reiterated the stand taken in the affidavit.

 

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

“The
entire issue is based on the appreciation of materials on record. The
Commissioner (Appeals) and the Tribunal concurrently held that there was
sufficient evidence justifying the payments made to ‘S’, a consultant, and the
Assessing Officer other than relying upon the statement of ‘S’ recorded in
search had no independent material to make the disallowance. No question of law
arises.”

Articles 12 and 14 of India-Uganda DTAA – Where services provided by non-resident individuals outside India were covered under Article 14 (which is specific in nature), Article 12 (which is general in nature) could not apply; hence, the payments were not chargeable to tax in India

7. TS-177-ITAT-2019 (Bang) Wifi Networks P. Ltd. vs. DCIT ITA No.: 943/Bang/2017 A.Y.: 2011-12 Dated: 5th April, 2019

 

Articles 12 and 14 of India-Uganda DTAA –
Where services provided by non-resident individuals outside India were covered
under Article 14 (which is specific in nature), Article 12 (which is general in
nature) could not apply; hence, the payments were not chargeable to tax in
India

 

FACTS


The assessee, an Indian company, had engaged
certain non-resident individuals for providing certain technical services
outside India. The assessee had made payments to them without withholding tax
from such payments.



The AO held that the payments were in the
nature of Fee for Technical Services (FTS) under the Act. Since the assessee
had not withheld tax u/s. 195, the AO disallowed the payments u/s. 40(a)(i) of
the Act.

 

Aggrieved, the assessee appealed before the
CIT(A) who upheld the order of the AO on the ground that the payments qualified
as FTS under the Act as well as DTAA, and hence, tax should have been withheld
from the payments. Thus, CIT(A) upheld the order of the AO.

 

Aggrieved, the assessee appealed before the
Tribunal.

 

HELD


  •     Perusal of the order of
    CIT(A) shows that his conclusion is based only on Article 12 of the
    India-Uganda DTAA and section 9(1)(vii) of the Act. He had not considered
    Article 14 of the India-Uganda DTAA.
  •     Article 14 applies in case
    of professional services performed by independent individuals. Article 12(3)(b)
    of the India-Uganda DTAA specifically excludes from its ambit payments made for
    services mentioned in Articles 14 and 15. Reliance was placed on the decision
    of Poddar Pigments Ltd. vs. ACIT (ITA Nos. 5083 to 5086/Del (2014) dated
    23.08.2018)     wherein it was held that specific or special provisions in DTAA
    should prevail over the general ones. Hence, Article 12 which is broader in
    scope and general in nature, will be overridden by Article 14 which
    specifically applies to professional services provided by individuals.
  •     As per the terms of the
    agreement between the assessee and the payees, and considering the scope of
    their services, the services rendered by the payees were professional services
    covered under Article 14. Professional services covered under Article 14 could
    be technical in nature but merely because they were technical in nature it
    cannot be said that Article 14 was not applicable.
  •    
    Further, having regard to specific exclusion in Article 12(3)(b) in respect of
    services covered in Article 14, the payments made by the assessee would be
    covered by Article 14 and on non-satisfaction of conditions specified therein,
    such income was taxable only in Uganda. Hence, tax was not required to be
    withheld from such payments. 

 

 

 

Sub-sections 9(1)(vii), 40(a)(i) of the Act – payments made to foreign agent for services rendered outside India, which assessee was contractually required to perform, were not covered within section 9(1)(vii); hence, payments were not subject to tax withholding; payment for market survey, being for managerial, technical or consultancy services, was subject to tax withholding

6. TS-183-ITAT-2019 (Ahd) Jogendra L. Bhati vs. DCIT ITA No.: 2136/Ahd/2017 A.Y.s.: 2013-14 Dated: 5th April, 2019

 

Sub-sections 9(1)(vii), 40(a)(i) of the Act
– payments made to foreign agent for services rendered outside India, which
assessee was contractually required to perform, were not covered within section
9(1)(vii); hence, payments were not subject to tax withholding; payment for
market survey, being for managerial, technical or consultancy services, was
subject to tax withholding

 

FACTS


The assessee had a sole proprietary business
of trading and export of medicines. The assessee had procured an order from the
Government of Ecuador for supply of medicines to 300 hospitals in Ecuador.

 

The assessee had hired a local agency of
Ecuador (FCo) to undertake various activities to fulfil the conditions of the
order. Such activities included liaising with the local authorities,
registration of products at Ecuador, export of goods to Ecuador, clearing of
goods from customs authorities, storage in warehouse, and physical delivery of
goods to various hospitals across the country; the assessee did not withhold
taxes on such payments.

 

Further, the assessee also made certain
payments towards market survey for new products or territory to other non-resident
entities (FCo1). However, it did not withhold tax while making payments for
such services.

 

According to the AO, since the services
rendered by FCo were specialised services in the field of pharmaceuticals, they
were covered within the expression “management technical or consultancy
services” used in Explanation 2 to section 9(1)(vii) of the Act. Since
the assessee had not withheld tax from such payments, the AO disallowed the
expenditure u/s. 40(a)(i) of the Act.

 

However, the assessee contended that payments
made to FCo and FCo1 did not accrue or arise in India and hence were not taxable in India. Aggrieved, the assessee appealed before
the CIT(A) who upheld the order of the AO.

 

Aggrieved, the assessee appealed before the
Tribunal.

 

HELD

  •     Section 9 of the Act
    defines FTS as any consideration for rendering of any ‘managerial, technical or
    consultancy services’, but does not include the consideration for any
    construction, assembly, etc.
  •     ‘Managerial’ service means
    managing the affairs by laying down certain policies, standards and procedures
    and then evaluating the actual performance in the light of the procedure so
    laid down. The ‘managerial’ services contemplate not only execution but also
    planning of the activity. If one merely follows directions of the other for
    executing a job in a particular manner without planning, it could not be said
    that the former is ‘managing’. Similarly, for ‘consultancy’ some consideration
    should be given to rendering of advice, opinion, etc.
  •     The activities of FCo included
    liaison with local authorities, registration of products in Ecuador, clearing
    of goods from customs, storage in warehouse and physical delivery of the goods
    to various hospitals across the country. The assessee necessarily had to carry
    out these activities to fulfil its obligation under the agreement with the
    Government of Ecuador. The assessee had appointed FCo to render these services
    and incur the expenses. The assessee had also not debited any other expenditure
    separately for these activities.
  •     Thus, the payments made to
    FCo were simplicitor reimbursement of actual expenditure as well as
    commission to FCo for performing the activities that the assessee was obligated
    to perform. All the services were rendered in Ecuador.
  •     Section 195 would apply if payment
    has an element of income. If there is no element of income, tax is not required
    to be withheld.
  •     In several decisions, High
    Courts as well as ITAT have held that the nature of services of foreign agents
    should be determined on the basis of the agreement. If they are services simplicitor
    for procurement of a contract and fulfilment of certain obligations like
    logistics, warehousing, etc., then such services could not be classified as
    technical, managerial or consultancy services.

 

However, as the expenses incurred by the
assessee towards market survey for new products or territory would provide the
assessee with information which would be used by the assessee for exploring new
business opportunity, provision of such information would thus qualify as
managerial, technical or consultancy services. Hence, the assessee was required
to withhold tax from payment made to FCo1.

 

Articles 4, 16 of India-USA DTAA; section 6 of the Act – in case of dual residency, residential status shall be determined by applying tie-breaker test under the DTAA

5. (2019) 104 taxmann.com 183 (Bangalore –
Trib) DCIT vs. Shri Kumar Sanjeev Ranjan ITA No.: 1665 (Bang.) of 2017 A.Y.: 2013-14 Dated: 15th March, 2019

 

Articles 4, 16 of India-USA DTAA; section 6
of the Act – in case of dual residency, residential status shall be determined
by applying tie-breaker test under the DTAA

 

FACTS

The assessee, a US citizen,  was working in the USA since 1986. His spouse
and two children were all US citizens. The assessee was deputed to India by his
employer from June, 2006 to August, 2012. Upon completion of his assignment in
India, the assessee left India on 10.08.2012 and resumed his employment in the
USA. Since then he was residing with his family in the USA.

 

Prior to 1986, the assessee had lived in
India for 21 years. He relocated to the USA in 1986 and became a permanent
resident in 1992. After marriage, his spouse was also residing in the USA.
Their two children were born there. When he was on assignment to India, the
assessee was taking his vacations in the USA.

 

The assessee had a house in India as well as
in the USA. He had let out his house in the USA while he was on assignment to
India.

 

On the basis of his physical presence in
India, the assessee was a tax resident of India for FY 2012-13. The assessee
also qualified as a tax resident of the USA for FY 2012-13. During the period
11.08.2012 to 31.03.2013 the assessee earned a salary in the USA. According to
the AO, since the assessee was a tax resident in India during the relevant AY,
his entire global income, including salary earned in the USA, was liable to tax
in India. Hence, the AO sought to tax his salary in the USA for the period
11.08.2012 to 31.03 2013.

 

The assessee
contended before the AO that he should be considered a tax resident of the USA
under the tie-breaker rule of the India-USA DTAA on the basis that the assessee
furnished detailed particulars on different aspects[1]  to establish that his ‘centre of vital
interests’ was closer to the USA than to India. And to establish that his
habitual abode was in the USA, the assessee highlighted two aspects, namely,
time spent and intent of settling down in the USA on completion of the
assignment.

 

The AO, however, noted that:

 

  •     personal and economic
    relations refer to a long and continuous relation that an individual nurtures
    with a State;
  •     it could not be broken so
    casually into bits and pieces by claiming that on one day the assessee has an
    economic and personal relationship with State A and after a few days with State
    B;
  •     the concept of economic and
    personal relationship is a qualitative one which has to be analysed in a
    holistic manner rather than being compartmentalised;
  •     merely by moving to the USA
    for an assignment from 11.08.2012 to 31.03 2013, the assessee could not claim
    that his economic and personal relationships were suddenly closer to the USA
    than to India, particularly when during the preceding entire AY the assessee
    was present in India.

 

The AO, accordingly, did not accept the
contention of the assessee that his ‘centre of vital interests’ was in the USA.
He further rejected the concept of dual (or split) residency on the ground that
the Act or the India-USA DTAA did not recognise it. The assessee had claimed
exemption under Article 16 of the India-USA DTAA. The AO also rejected this
claim since the assessee had not furnished tax residency certificate.

 

On appeal before CIT(A), the assessee
furnished the tax residency certificate. The CIT(A) noted that the tax
residency certificate furnished by the assessee showed that he was also a tax
resident of the USA. Further, since the assessee had a permanent home in India
as well as in the USA, the CIT(A) applied the test of closer personal and
economic relations (‘centre of vital interests’) and concluded that the ‘centre
of vital interests’ of the assessee was closer to the USA than to India.
Accordingly, the CIT(A) held that the Assessee qualified for exemption under
Article 16 of the India-USA DTAA. Therefore, the AO could not tax the salary
income of the assessee earned in the USA in India.

 

HELD

  •     Article 4 of the India-USA
    DTAA determines the tax residential status of a person. Where a person is a tax
    resident of both the States, Article 4 provides certain tie-breaker tests:
  •     The first test pertains to
    the availability of a permanent home: The assessee had a house in India as well
    as in the USA. However, since he had let out his house in the USA, it was
    deemed to be ‘unavailable for use’. Hence, he did not satisfy the first test.
  •     The second test is about
    ‘centre of vital interests’. After examining various aspects, the CIT(A) had
    found that the ‘centre of vital interests’ of the assessee was closer to the
    USA than to India. The conclusion of the CIT(A) arrived at based on facts
    cannot be faulted.

[1] These were: (i)
where dependent members resided; (ii) where assessee had his personal
belongings such as house, car, personal effects, etc.; (iii) where assessee
exercised his voting rights; (iv) driving licence and vehicle tax payments; (v)
which country was ordinarily his country of residence; (vi) in which State the
assessee had better social ties; (vii) in which State the assessee

had
substantial investments, savings, etc.; (viii) in which State the assessee ultimately
intended to settle down; and (ix) in which State the assessee was contributing
to social security.

Section 45(4) read with section 2(14) – Receipt of money equivalent to share in enhanced portion of the assets re-valued by the Retiring Partners do not give rise to capital gain u/s. 45(4) read with section 2(14)

4. D.S. Corporation vs. Income Tax Officer
(Mum) Members: P.M. Jagtap (V.P.) – Third Member I.T.A. Nos.: 3526 & 3527/MUM/2012 A.Y.s: 2006-2007 and 2007-2008 Dated: 10th January, 2019 Counsel for Assessee / Revenue: Dr. K.
Shivaram and Rahul Hakani / Ajay Kumar

 

Section 45(4) read with section 2(14) –
Receipt of money equivalent to share in enhanced portion of the assets
re-valued by the Retiring Partners do not give rise to capital gain u/s. 45(4)
read with section 2(14)

 

FACTS


The assessee, a partnership firm, was
originally constituted vide the deed of partnership entered into on 01.08.2005
with the object to carry on the business of real estate development and
construction. The firm was reconstituted from time to time. On 23.09.2005, the
assessee firm purchased a property at a suburb in Mumbai for a consideration of
Rs. 6.5 crore. After arriving at a settlement with most of the tenants
occupying the said property and obtaining permission of the competent authority
concerned for construction of a five-star hotel, the said property was revalued
at Rs. 193.91 crore as per the valuation report of the registered valuer. The
resultant revaluation surplus was credited to the capital accounts of the
partners in their profit sharing ratio. Two of the five partners retired from
the partnership firm, on 27.03.2006 and on 22.05.2006. On their retirement,
both these partners were paid the amounts standing to the credit of their
capital accounts in the partnership firm including the amount of Rs. 30.88 crore
credited on account of revaluation surplus.

 

According to the AO, there was transfer of
capital asset by way of distribution by the assessee firm to the retiring
partners in terms of section 45(4) of the Act and the assessee firm was liable
to tax on the capital gain arising from such transfer. According to the CIT(A)
there was no dissolution of partnership firm at the time of retirement, there
was only reconstitution of the partnership firm with change of partners.
Therefore, he held that the provisions of section 45 (4) were not attracted.

 

On appeal before the Tribunal, there was a
difference of opinion between the Accountant Member and the Judicial Member.
The Accountant Member relied on the decision of the Supreme Court in the case
of Tribhuvan G. Patel vs. CIT (236 ITR 515), wherein it was held that
even where a partner retires and some amount is paid to him towards his share
in the assets, it should be treated as falling under clause (ii) of section 47
of the Act. Accordingly, the Accountant Member held that payment of amount to
the retiring partner towards his share in the assets of the partnership firm
amounted to distribution of capital asset on retirement and the same falls
within the ambit of section 45(4). He held that use of the word “otherwise”
in section 45(4) takes within its ambit not only the case of transfer of
capital asset by way of distribution of capital asset on dissolution of the
firm, but also on retirement.

 

Further relying on the decision of the
Supreme Court in the case of CIT vs. Bankey Lal Vaidya (79 ITR 594) and
the decision of the Bombay High Court in the case of CIT vs. A.N. Naik
Associates (265 ITR 346), he upheld the addition made by the AO on account
of capital gain to the total income of the assessee firm by application of section
45(4), but only to the extent of surplus arising out of revaluation of property
which stood distributed by way of money equivalent to the retiring partners.
According to him, the balance addition made by the AO on account of capital
gain in the hands of the assessee firm on account of revaluation surplus
credited to the capital of the other partners, who continued and did not retire
during the years under consideration, could not be sustained as there was no
transfer or distribution of capital asset to those non-retiring partners.

 

According to the Judicial Member, however,
the cases relied upon by the Accountant Member were rendered on altogether
different facts and the ratio of the same, therefore, was not applicable to the
facts of the assessee. In the case of the assessee, except payment of money
standing to the credit of the partners’ capital account in the partnership,
there was no physical transfer of any asset by the partnership firm so as to
attract the provisions of section 45(4). He also relied on the decisions of the
Karnataka High Court in the case of CIT vs. Dynamic Enterprises [359 ITR 83]
and the Mumbai Tribunal in the cases of Keshav & Co. vs. ITO [161 lTD
798] and Mahul Construction Corporation vs. ITO (ITA No. 2784/MUM/2017
dated 24.11.2017).

 

On account of the difference in opinion
between the members, the matter was referred to the Third Member, i.e., in
these facts and circumstances of the case, whether the money equivalent to
enhanced portion of the assets revalued constitutes capital asset and whether
there was any transfer of such capital asset on dissolution of the firm or
otherwise within the meaning of section 45(4) read with section 2(14).

 

Before the Third Member, the Revenue
contended that the assessee’s case was a clear case of transfer of right in the
land by the retiring partners to the continuing / incoming partners giving rise
to the capital gain. According to it, the decision of the Bombay High Court in
the case of A.N. Naik Associates and the decision of the Supreme Court in the
case of Bankey Lal Vaidya relied upon by the Accountant Member are relevant and
the same squarely cover the issue in favour of the Revenue.

 

HELD


According to the Third Member, the
partnership firm in the present case continued to exist even after the
retirement of two partners from the partnership. There was only a
reconstitution of partnership firm on their retirement without there being any
dissolution and the land property acquired by the partnership firm continued to
be owned by the said firm even after reconstitution without any extinguishment
of rights in favour of the retiring partners. The retiring partners did not
acquire any right in the said property and what they got on retirement was only
the money equivalent to their share of revaluation surplus (enhanced portion of
the asset revalued) which was credited to their capital accounts. There was
thus no transfer of capital asset by way of distribution of capital asset
either on dissolution or otherwise within the meaning of section 45(4) read
with section 2(14) of the Act.

 

According to him, the money equivalent to
enhanced portion of the assets re-valued does not constitute capital asset
within the meaning of section 2(14) and the payment of the said money by the
assessee firm to the retiring partners cannot give rise to capital gain u/s.
45(4) read with section 2(14). Accordingly, the Third Member agreed with the
view of the Judicial Member and answered both the questions referred to him in
favour of the assessee.

 

Section 251 – Power of enhancement conferred on CIT(A) can be exercised only on the issue which is the subject matter of the assessment. The CIT (Appeals), even while exercising its power for enhancement u/s. 251, cannot bring a new source of income which was not subject matter of assessment

12. (2019) 69 ITR (Trib) 261 (Jaipur) Zuberi Engineering Company vs. DCIT ITA Nos.: 977-979/JPR/2018 A.Y.s: 2012-13 to 2014-15 Dated: 21st December, 2018

 

Section 251 – Power of enhancement
conferred on CIT(A) can be exercised only on the issue which is the subject
matter of the assessment. The CIT (Appeals), even while exercising its power
for enhancement u/s. 251, cannot bring a new source of income which was not
subject matter of assessment

 

FACTS


The assessee was a
partnership firm and a contractor engaged in erection and fabrication work. The
assessment was completed making disallowances of various expenses claimed by
the assessee. On appeal, the Commissioner (Appeals) enhanced the assessment by
rejecting books of accounts and estimating higher net profit. On further appeal
to the Tribunal, the Tribunal allowed the assessee’s appeal and held as under.

 

HELD


The power of
Commissioner (Appeals) to enhance an assessment exists in section 251. However,
this power can be exercised only on the issue which is a subject matter of the
assessment. In the instant case, the issue of not accepting the books of
accounts was never taken up by the Assessing Officer in the scrutiny
proceedings. Therefore, the same did not constitute the subject matter of the
assessment. Consequently, it is beyond the scope of the power of enhancement
available with Commissioner (Appeals).

 

It is a settled proposition of law that the
Commissioner (Appeals), even while exercising the power for enhancement u/s.
251, cannot bring a new source of income which was not a subject matter of the
assessment. An issue or claim discussed / taken up in the course of assessment
proceedings becomes the subject matter of assessment but all the probable
issues that are capable of being taken up for scrutiny but are not so taken up
can at most collectively constitute scope of assessment, for which Commissioner
(Appeals) cannot exercise power of enhancement.

 

However, the
Commissioner can exercise revisionary powers in respect of the same subject to
fulfilment of conditions specified u/s. 263. Thus, in the instant case, since
the issue of rejection of books of accounts was not the subject matter of
assessment, the Tribunal set aside the order of the Commissioner (Appeals) qua
the issue of the power of the Commissioner (Appeals) to reject the books of
accounts.

Even in a limited scrutiny case there is no bar on the AO as regards adjudication of issues raised by the assessee

11. (2019) 69 ITR (Trib) 79 (Amritsar) Thakur Raj Kumar vs. DCIT ITA No.: 766/Asr/2017 A.Y.: 2014-2015 Dated: 29th November, 2018

 

Even in a limited scrutiny case there is no
bar on the AO as regards adjudication of issues raised by the assessee

 

FACTS


The assessee’s case was selected for complete scrutiny under
Computer-Assisted Scrutiny Selection. However, later, it was converted to
limited scrutiny to examine an issue pertaining to capital gains on securities.
The assessee had sold an agricultural land and offered relevant capital gains
to tax. However, in the course of assessment proceedings, the assessee made a
fresh claim to substitute the cost of acquisition of the land claimed by him in
return of income, for another value. The AO denied his claim citing that the
scrutiny being a limited one, he had no jurisdiction to discuss and pass
judgment on issues not covered within the reasons of scrutiny and the only
recourse available to the assessee was to file a revised return. On appeal to
Commissioner (Appeals), the issue was decided against the assessee. The
assessee therefore preferred an appeal to the Tribunal.

 

HELD


The Tribunal held
that though the AO has no jurisdiction to touch upon issues which are not a
subject matter of limited scrutiny, however, there is no bar to adjudicate the
issues raised by the assessee. This is because an AO is obliged to make correct
assessment in accordance with provisions of the law. Further, in terms of
Circular No. 14 dated 11.04.1955, the department cannot take advantage of
ignorance of the assessee to collect more tax than what is legitimately due.

 

The matter was,
thus, remanded to the file of the Assessing Officer to adjudicate the
assessee’s claim. Though the decision in Goetz (India) Limited vs. CIT
(2006) 284 ITR 323(SC) was relied on by the D.R., the same does not seem to
be discussed by the Tribunal.

 

Section 54 – An assessee is entitled to claim deduction u/s. 54 if he purchases a new house property one year before or two years after the date of transfer of the original asset, irrespective of the fact whether money invested in purchase of new house property is out of sale consideration received from the transfer of original asset or not

10. (2019) 198 TTJ (Mum) 370 Hansa Shah vs. ITO ITA No.: 607/Mum/2018 A.Y.: 2011-12 Dated : 5th October, 2018

 

Section 54 – An assessee is entitled to
claim deduction u/s. 54 if he purchases a new house property one year before or
two years after the date of transfer of the original asset, irrespective of the
fact whether money invested in purchase of new house property is out of sale consideration
received from the transfer of original asset or not

 

FACTS


During the year,
the assessee had sold a flat jointly held with others and declared her share of
capital gain at Rs. 55,82,426. However, she claimed deduction of the capital
gain u/s. 54 of the Act towards investment made of Rs. 98,90,358 in purchase of
a new flat. The AO noted that the investment of Rs. 98,90,358 included housing
loan of Rs. 50 lakh availed from Citibank. The assessee submitted that the
housing loan was not utilised for the purchase of the new house. The assessee
had produced the loan sanction letter of the bank as well as bank statement to
demonstrate that the housing loan was disbursed much after the purchase of the
new house by the assessee. In fact, the assessee had also explained the source
of funds utilised in the purchase of the new house. However, the AO rejected
the claim of the assessee and reduced the housing loan from the cost of the new
house and allowed the balance amount of Rs. 48,93,358 towards deduction u/s. 54
of the Act. Accordingly, he made an addition of Rs. 6,92,068 towards long-term
capital gain.

 

Aggrieved by the
assessment order, the assessee preferred an appeal to the CIT(A). The CIT(A)
sustained the addition made by the AO.

 

HELD


The Tribunal held that even assuming that the housing loan was utilised
for the purpose of purchase of new house property, it needed to be examined
whether by the reason of utilisation of housing loan in purchase of new house
property, the assessee would not be eligible to claim deduction u/s. 54 of the
Act. For this purpose, it was necessary to look into the provisions of section
54. On a careful reading of the aforesaid provision as a whole and more
particularly sub-section (1) of section 54 of the Act, it became clear that the
only condition which required to be fulfilled was, one year before or two years
after the date of transfer of the original asset the assessee must have
purchased the new house property.

 

In case the logic of the department that for availing deduction the
consideration received by the assessee from the sale of the original asset had
to be utilised for investment in the new house property was accepted, the
provision of section 54(1) would become redundant because such a situation
would never arise in case assessee purchased the new house property one year
before the date of transfer of new asset.

 

Thus, on a plain
interpretation of section 54(1) of the Act, it had to be concluded that if the
assessee purchased a new house property one year before or two years after the
date of transfer of the original asset, he was entitled to claim deduction u/s.
54 of the Act irrespective of the fact whether money invested in the purchase
of the new house property was out of the sale consideration received from transfer
of original asset or not. In the present case, the assessee had purchased the
new house property within the stipulated period of two years from the date of
transfer of the original asset. That being the case, the assessee was eligible
to avail deduction u/s. 54 of the Act.

Section 12A read with section 11 and 12 – Where return of income had been filed in response to notice u/s. 148, requirement u/s. 12A filing of return of income stood fulfilled

9. [2019] 198 TTJ (Chd) 498 Genius Education Society vs. ACIT ITA No.: 238/Chd/2018 A.Y.: 
2012-13 Dated: 20th August, 2018

     

Section 12A read with section 11 and 12 –
Where return of income had been filed in response to notice u/s. 148,
requirement u/s. 12A filing of return of income stood fulfilled


FACTS


The assessee applied for registration u/s. 10(23C)(vi) which was denied
by the Chief Commissioner. The assessee had also applied for registration as a
charitable society u/s. 12AA on the same day which was granted by the Principal
Commissioner, with effect from 01.04.2012 effective from assessment year
2013-14. Subsequently, the Assessing Officer (AO) noticed that for the impugned
assessment year, no return of income had been filed by the assessee and the
assessee’s application for approval u/s. 10(23C)(vi) had been rejected.
Consequently, reopening proceedings were initiated by issuing notice under section
148. In response to the same, the assessee filed Nil return of income. During
assessment proceedings, the assessee contended that having been granted
registration u/s. 12AA effective from assessment year 2013-14, the benefit of
the same was available to it in the impugned year also by virtue of the first
proviso to section 12A(2).

 

Aggrieved, the
assessee preferred an appeal to the CIT(A). The CIT(A) upheld the order of the
AO, holding that benefit of second proviso was not available to the assessee since
in the present case the assessee was ineligible to claim exemption not on
account of absence of registration u/s. 12A, but because of the fact that
assessee had failed to file its return of income and report of audit, as
required under the provisions of section 12A(b).

 

HELD


The Tribunal held
that it was not the case of the Revenue that the reopening was valid on the
ground of absence of registration u/s. 12A for the impugned year, therefore
making its income taxable. In fact, the CIT(A) had accepted that reopening
could not have been resorted to on account of absence of registration u/s.12A
for the impugned year on account of the second proviso to section 12A(2).
Therefore, the contention of the assessee on this count was accepted by the
Revenue. But the argument of the Revenue was that because the assessee failed
to comply with the conditions of section 12A(1)(b) which was necessary for
claiming exemption u/s. 11 and 12, its income for the impugned year was
taxable, which had thus escaped assessment and, therefore, the reopening was
valid. The said conditions, as pointed out by the CIT(A), were the filing of
return of income accompanied with the report of an auditor in the prescribed
form.

 

The requirement of filing of return of income and the report of audit
have been specified for being eligible for claiming exemption u/s. 11 and 12
along with the grant of registration u/s. 12AA. The section nowhere prescribed
the filing of return by any due date, therefore the findings of the CIT(A) that
the assessee having not filed its return within the prescribed time it had
failed to comply with the requirement prescribed, was not tenable. As for the
requirement of filing report of audit in the prescribed form, the said
condition has been held by courts to be merely procedural and, therefore,
directory in nature and not mandatory for the purpose of claiming exemption
u/s. 11 and 12.

 

Therefore, in view
of the above, no merit was found in the argument of the Revenue that the
assessee was not eligible for exemption u/s. 11 and 12 on account of not having
complied with the requirements of section 12A(1)(b). Since this was the sole
basis for upholding the validity of the reassessment proceedings, it was noted
that the reassessment in the present case was invalid, on account of the second
proviso to section 12A(2) which specially debarred resort to the same in view
of registration having been granted from the immediately succeeding assessment
year. The reassessment framed was therefore set aside and the addition made was
deleted.

 

Sections 10(37), 45 – Interest on enhanced compensation received from government on compulsory acquisition of agricultural land is exempt u/s. 10(37) of the Income-tax Act, 1961 and consequently TDS deducted on account of enhanced compensation was liable to be refunded

8. [2019] 104 taxmann.com 99 (Del) Baldev Singh vs. ITO ITA No.: 2970/Del./2015 A.Y.: 2011-12 Dated: 8th March, 2019

 

Sections 10(37), 45 – Interest on enhanced
compensation received from government on compulsory acquisition of agricultural
land is exempt u/s. 10(37) of the Income-tax Act, 1961 and consequently TDS
deducted on account of enhanced compensation was liable to be refunded

 

FACTS

The assessee, in
the return of income filed by him, claimed exemption u/s. 10(37) of the Act in
respect of enhanced compensation of Rs. 4,69,20,146, received by him during the
previous year in respect of agricultural land inherited by him from his
parents.

 

During the course
of assessment proceedings, the Assessing Officer (AO) observed that the said
compensation of Rs. 4,69,20,146 comprised of Rs. 2,70,33,074 as principal and
balance Rs. 1,98,85,972 as interest and TDS amounting to Rs. 93,84,030 was
deducted, out of which Rs. 74,45,433 was refunded to the assessee and credited
to his account.

 

The AO, based on
the amendments made in sections 56(2), 145A(b) and 57(iv) of the Act which were
applicable with effect from 1.04.2010 held that interest on enhanced
compensation was liable to be taxed as income in the year in which it was
received, irrespective of the method of accounting followed and accordingly
taxed Rs. 99,42,986 being the interest received after allowing 50% deduction.

 

Aggrieved, the
assessee preferred an appeal to the CIT(A). In the appellate proceedings before
CIT(A) it was contended that the Supreme Court has in CIT vs. Ghanshyam Dass
(HUF) [2009] 315 ITR 1 held interest on enhanced compensation to be a part
of compensation and therefore the same is exempt u/s. 10(37) of the Act. This
decision of the Supreme Court in CIT vs. Ghanshyam Dass (HUF) (supra)
has been followed in the case of CIT vs. Gobind Bhai Mamaiya [2014] 367 ITR
498 (SC)]. The CIT(A) upheld the action of the AO and observed that the
decision of the Supreme Court in the case of Gobind Bhai Mamaiya (supra)
did not deal with exemption u/s. 10(37) of the Act but held that interest u/s.
28 of the Land Acquisition Act is interest on enhanced compensation and is to
be treated as an accretion to the value and part of compensation. He held that
the decision of the SC in Gobind Bhai Mamaiya (supra) is not applicable
to the facts of the case.

 

Aggrieved, the
assessee preferred an appeal to the Tribunal.

 

HELD

The Supreme Court
has, in Union of India vs. Hari Singh [(2018) 254 Taxman 126 (SC)]
relied by the assessee, set aside the matter to the AO and specifically directed
the AO to examine the facts of the case and apply the law as contained in the
Act. The SC also directed the AO to find out whether the land was agricultural
land and if that be the case then the tax deposited with the Income-tax
Department shall be refunded to the assessee.

 

The Tribunal
observed that the CIT(A), in his order, did not state that an amount shall be
brought to tax u/s. 45(5) without applying provisions of section 10(37) of the
Act which exempts receipts from being taxed. The Tribunal held that section
45(5) did not make reference to the nature of property acquired but dealt with
the category of cases which fell within the description of “capital assets”.
However, section 10(37) specifically exempted income chargeable under the head
capital gains arising from transfer of agricultural land. It was therefore
clear that the Supreme Court specifically directed the AO to examine if the
compensation received was in respect of the agricultural land, (and if so) the
tax deposited with the Income-tax Department shall be refunded to the
depositors.

 

The Tribunal,
therefore, following ratio laid down by the Supreme Court in the case of CIT
vs. Ghanshyam Dass (supra) and Union of India vs. Hari Singh (supra)
directed the AO to refund the TDS amount deducted on account of enhanced
compensation.

 

The Tribunal
allowed the appeal filed by the assessee.

 

Explanation 2 to section 37(1) – Explanation 2 to section 37(1) inserted with effect from 01.04.2015 is prospective

7. [2019] 103 taxmann.com 288 (Del) National Small Industries Corp Ltd. vs. DCIT ITA No.: 1367/Del/2016 A.Y.: 2012-13 Dated: 25th February, 2019

 

Explanation 2 to section 37(1) –
Explanation 2 to section 37(1) inserted with effect from 01.04.2015 is
prospective

 

FACTS


The assessee, a
public sector undertaking, established to promote and develop “Skill India”
through cottage and small industries, incurred expenses under the head
“Corporate Social Responsibility” (CSR) and claimed the same as deduction in
the return of income.

 

The Assessing
Officer (AO) was of the opinion that the claim of such expenses was towards CSR
and therefore could not be allowed. He invoked Explanation 2 to section 37(1)
of the Act and disallowed the expenditure so claimed.

 

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 held
that Explanation 2 has been inserted in section 37(1) with effect from
01.04.2015 and the same is prospective. The amendment could not be construed as
a disadvantage to the assessee for the period prior to the amendment. The Tribunal
observed that the expense sought to be disallowed under Explanation 2 to
section 37(1) of the Act was the expenditure on CSR which provision itself came
into existence under the Companies Act in the year 2013. It observed that the
lower authorities disallowed the expenditure merely on the ground that
Explanation 2 to section 37(1) of the Act applied to the year under
consideration and the expenditure was therefore to be disallowed.



The Tribunal,
following the decision of the Supreme Court in the case of CIT vs. Vatika
Townships Pvt. Ltd. [(2014) 367 ITR 466 (SC)] held that the amendment would
not affect the allowability of expenses for the assessment year under
consideration.

 

The appeal filed by
the assessee was allowed.

Sections 50, 72 and 74 – Brought-forward business loss and brought-forward long-term capital loss can be set off against deemed short-term capital gains u/s. 50 arising on sale of factory building

6. [2019] 104 taxmann.com 129 (Mum) ITO vs. Smart Sensors & Transducers Ltd. ITA No.: 6443/Mum/2016 A.Y.: 2011-12 Dated: 6th March, 2019

 

Sections 50, 72 and 74 – Brought-forward
business loss and brought-forward long-term capital loss can be set off against
deemed short-term capital gains u/s. 50 arising on sale of factory building


FACTS


The assessee
company in its original return of income declared long-term capital loss on the
sale of its factory building. During the course of assessment proceedings, the
Assessing Officer (AO) noted that the factory building was a depreciable asset
and the gain on sale of such depreciable asset was to be treated as deemed
short-term capital gains as per section 50 of the Act. Subsequently, the
assessee revised its return of income and offered the gains from the sale of
factory building as short-term capital gains after setting-off brought-forward
business loss and brought-forward long-term capital loss.

 

The AO noted that
in view of section 74 of the Act, long-term capital loss can be set off only
against long-term capital gains and that as per section 72 of the Act,
brought-forward business loss can be set off against business income and not
against short-term capital gains. The AO, thus, disallowed the assessee’s claim
for brought-forward business loss and brought-forward capital loss.

 

The aggrieved
assessee preferred an appeal to the CIT(A) who, considering the decision of the
Bombay High Court in CIT vs. Manali Investments [(2013) 219 Taxman 113 (Bom
HC)] allowed the assessee’s appeal.

 

Aggrieved, the
Revenue preferred an appeal to the Tribunal.

 

HELD


The Tribunal,
following the decision of the Bombay High Court in the case of CIT vs.
Manali Investments (supra), allowed the assessee’s claim for set-off of
brought-forward long-term capital loss against deemed short-term capital gains
u/s. 50. The Tribunal noted that the Hon’ble Bombay High Court in its decision
had held that by virtue of section 50, only the capital gain is to be computed
u/s. 50 and the deeming fiction is restricted only for the purposes of section
50 and the benefit of set-off of long-term capital loss u/s. 74 has to be
allowed.

 

As regards the
set-off of brought-forward business loss, this issue was also covered by the
decision of the Bombay High Court in CIT vs. Manali Investments (supra).
The Tribunal held that the CIT(A) had rightly allowed the assessee’s claim for set-off of brought-forward business loss as well as
brought-forward long-term capital loss against deemed short-term capital gains
computed u/s. 50.

 

The Tribunal
dismissed the appeal filed by the Revenue.

(Tring! Tring!)

Mr. Phonewala was a very busy Chartered
Accountant practising over three decades; always running around income tax
offices, sales tax and service tax offices, audit clients, and many other
places. He could hardly sit peacefully in his office. Even while in office,
there was constant disturbance of phone calls, visitors, compliance deadlines
and so on.

 

He had come up
in life the hard way. He slogged and struggled a lot to establish his practice.
He sacrificed his family life and the many other pleasures of life; and was
dedicated to the profession round the clock. One secret of his success was his
soft-spokenness, public relations and goodwill. He never learnt to say ‘No’ to
anyone. Another quality (?) of his was that he was ‘always available’!
Naturally, everyone took him for granted. He did join some courses of time-management,
leadership training, delegation, etc.; but he remained the original ‘Phonewala’
only.

 

Once he was
sitting in his office. A client came with an appointment at 2:30 pm. Mr.
Phonewala entered his office, back from the income tax department at 3 o’clock,
sweating and talking on his cell-phone. He just gave a smile to the client who
was waiting patiently and entered his cabin. After finishing the phone-call, he
called the client inside. Mr. Phonewala had had no time to have his lunch so he
ordered sandwiches. By that time some staff and articles entered his cabin with
many questions and queries of many clients. The receptionist entered and gave
him a list of messages. The client was sitting patiently as he had been
associated with him for 25 years! The client shared the sandwich and had a cup
of tea, watching Mr. Phonewala’s hectic activity – firefighting on many fronts.
At 3:45 pm he could utter his first sentence – “You see, Mr. Phonewala, I
have a property at Lonavala………” and there was a ring! Mr. Phonewala took
the call. There were so many interruptions –

  •    Calls on landline and mobile
    were simultaneously received – every five minutes.
  •    There were a couple of
    intruders dropping in for ‘five minutes’ but consuming 20 minutes.
  •    Phone-calls were from
    clients, tax departments, staff, friends, bank loan offers, booksellers, credit
    card offers; and also from his residence for the evening programme. He gave
    detailed advice to many persons on the phone.

 

In turn, Mr. Phonewala also called back many
persons who had called in his absence.

 

After a gap of every 20 to 25 minutes, the
client sitting in front attempted to speak. But he never went beyond the first
sentence, “I have a property at Lonavala ………”, and Mr. Phonewala sweetly
apologised for every interruption.

 

Finally, at 5:30 pm, his secretary entered
and said she wanted to leave early. Mr. Phonewala suddenly remembered some
urgent matter for which he wanted to dictate a letter. He requested the client
very politely to bear with him for about 30 minutes!

 

The client coolly said, “No problem I
will just have a stroll around and come. You finish off your work”.
And he went away. After just two minutes, Mr. Phonewala received a call on
landline. The secretary sitting in front of him took it and said, “Mr.
Phonewala is not there in office”.

 

The caller said, “Madam, I am the same
person who was sitting in your office since 2:30. Just give it to Mr.
Phonewala”. Mr. Phonewala had no option! He took it and the client said,
“Sir, I observed that you always give priority to phone-callers; rather than to
the person sitting before you. So I tried this trick! You see, Sir, I have a
property at Lonavala …………….”!  

 

 

COURT AUCTION SALES: STAMP DUTY VALUATION

Introduction


Last month, we examined a
decision of the Bombay High Court rendered by Justice Gautam Patel in respect
of stamp duty on antecedent title documents. That was a pathbreaking decision
which will help ease the property-buying process. This month, we will examine
another important decision, again rendered by Justice Gautam Patel and again in
the context of the Maharashtra Stamp Act, 1958.

 

The issue before the Bombay
High Court this time was what should be the value on which stamp duty should be
levied in the case of sale of property through a Court public auction. Would it
be the value as mentioned by the Court on the Sale Certificate, or would it be
the value as adjudicated by the Collector of Stamps? This is an important issue
since many times the Stamp Duty Ready Reckoner rate is higher than the value
arrived at through a public auction.

 

THE CASE


The decision was rendered
in the case of Pinak Bharat & Co. and Bina V. Advani vs. Anil Ramrao
Naik, Comm. Execution Application No. 22/2016, Order dated 27.03.2019 (Bom).
The facts of the case were that there was a plot of land at Dadar, Mumbai which
was being auctioned to satisfy a Court decree. The Court obtained a valuation
which pegged the value at more than Rs. 30 crore. It was then sought to be sold
through a Court-conducted public auction twice but both attempts failed.
Finally, the claimants offered Rs. 15.30 crore as the auction price for the
property. Their bid was accepted by the Court which issued a Sale Certificate
in their favour. The Sheriff’s Office directed the Stamp Office to register the
sale certificate on the basis of the auction price of Rs. 15.30 crore.

 

When the purchasers went to
register the Sale Certificate, the Collector first stated that the fair market
value as per its adjudication was Rs. 155 crore. Aggrieved, the purchasers
moved the High Court since they would have had to pay stamp duty based on the
valuation of Rs. 155 crore and there would also have been adverse consequences
u/s. 56(2) of the Income-tax Act for the buyers.

 

At the hearing, the
Collector stated that the earlier assessment was tentative or preliminary, without
having all necessary information at hand. Now that additional material was
available, including a confirmation that there were tenants, the market value
had been reckoned again and was likely to be assessed in the region of about
Rs. 35 crore. This value, too, was more than double the Court-discovered price
of Rs. 15.30 crore. Hence, the question before the Court was which valuation
should be considered – the adjudication by the Collector or the
Court-discovered public auction price?

 

COURT’S ORDER


The Bombay High Court held
that the questions that arose for determination were that when a sale
certificate issued under a Court-conducted public auction was submitted for
adjudication under the Maharashtra Stamp Act, how should the Collector of
Stamps assess the ‘market value’ of the property? Was he required to accept the
value of the accepted bid, as stated in the Court-issued Sale Certificate, or
was he required to spend time and resources on an independent enquiry? Could a
distinction be drawn between sales by the government / government bodies at a
predetermined price, which had to be accepted by the Collector as the market
value, and a sale by or through a Court?

 

For
this purpose, Article 16 of Schedule I to the Maharashtra Stamp Act provides
that a Certificate of Sale granted to the purchaser of any property sold by
public auction by a Court or any other officer empowered by law to sell
property by public auction was to be stamped at the same duty as is leviable on
a conveyance under Article 25 on the market value of the property. Thus,
it becomes necessary to determine the market value of the property.
When an instrument comes to the Collector for adjudication, he must determine
the duty on the same. If he has reason to believe that the market value of the
property has not been truly set forth in the instrument, he must determine ‘the
true market value of such property’ as laid down in the Maharashtra Stamp
(Determination of True Market Value of the Property) Rules, 1995.

 

Thus, the Collector is not
bound to accept as correct any value or consideration stated in the instrument
itself. Should he have reason to believe that it is incorrect, he is to
determine the true market value. Rule 4(6) of these Rules states that every
registering officer shall, when an instrument is produced before him for
registration, verify in each case the market value of land and buildings, etc.,
as the case may be, determined in accordance with the above statement and
Valuation Guidelines issued from time to time (popularly, known as the Stamp
Duty Ready Reckoner). However, it provides an important exception inasmuch as
if a property is sold or allotted by government / semi-government body /
government undertaking or a local authority on the basis of a predetermined
price, then the value determined by said bodies shall be the true market value
of the subject matter property. In other words, where the sale is by one of the
government entities, then the adjudicating authority must accept the
value stated in the instrument as the correct market value. He cannot make any
further enquiry in this scenario. However, it is important that this exception
makes no mention of a sale through a Court auction!

 

The Court raised a very
important question that why should a sale through a Court by public auction on
the basis of a valuation obtained, i.e., by following a completely open and
transparent process, be placed at any different or lower level than the
government entities covered by the first proviso? It observed that the process
that Courts follow was perhaps much more rigorous than what the exception
contemplates, because the exception itself did not require a public auction at
all but only that the government body should have fixed ‘a predetermined
price’. The Court explained its system of public auction:

 

(a) A sale through the Sheriff’s Office was always
by a public auction.

(b) If it was by a private treaty, it required a
special order.

(c) A sale effected by a Receiver was not,
technically, a sale by the Court. It was a sale by the Receiver appointed in
execution and the Receiver may sell either by public auction or by private
treaty.

(d) Wherever a sale took place by public auction,
there was an assurance of an open bidding process and very often that bidding
process took place in the Court itself.

(e) Courts always obtained a valuation so that they
could set a reserve price to ensure that properties were not sold at an
undervaluation and to avoid cartelisation and an artificial hammering down of
prices.

(f)  The reserve price was at or close to a true
market value. Usually, the price realised approximates the market value.
Sometimes the valuation was high and no bids were at all received. However, in
such a scenario, the decree holders could not be left totally without recovery
at all and it was for this reason that Courts sometimes permitted, after
maintaining the necessary checks and balances, a sale at a price below the
market value even by public auction.

 

The Court held that if the
sale by the Deputy Sheriff or by the Court Receiver was by a private treaty,
then it was definitely open for the adjudicating authority to determine the
true market value.

 

However, it held that
totally different considerations arose where there was a sale by a
Court-conducted public auction and such a sale was preceded by a valuation
obtained beforehand. The Court held that such a sale or transaction should
stand on the same footing as government sales excluded in Rule 4. The correct
course of action in such a situation would be for the adjudicating authority to
accept the valuation on the basis of which the public auction was conducted as
fair market value; or, if the sale is confirmed at a rate higher than the
valuation, then to accept the higher value, i.e., the sale amount accepted.

 

The Court
laid down an important principle that there could not be an inconsistency
between the Court order and a Court-supervised sale on the one hand and the
adjudication for stamp duties on the other. This was the only method by which
complete synchronicity could be maintained between the two. It held that
consistency must be maintained between government-body sales at predetermined
prices and Court-supervised sales.

 

If a Court was satisfied
with the valuation and accepted it, then it was not open to the adjudicating authority
to question that valuation. The Court emphatically held that it was never open
to the adjudicating authority to hold, even by implication, that when a Court
sold the property through a public auction by following due process, it did so
at an undervaluation! The seal / confirmation of the Court on the sale carries
great sanctity. It held that if the validity or the very basis of the sale was
allowed to be questioned by an executive or administrative authority, then it
would result in the stamp authority calling into question the judicial orders
of a Court. This, obviously, cannot be the case!

 

An important principle
reiterated by the Court was that the Stamp Act was not an Act that validated,
permitted or regulated sales of property. It only assessed the transactions for
payment of a levy to the exchequer. The stamp adjudicating authority can only
adjudicate the stamp duty and can do nothing more and nothing less. It cannot,
therefore, question the sale in any manner. Hence, the Court-discovered public
auction price could never be questioned by the stamp office. The Court,
however, added a caveat that this principle would only apply to a situation
where the Court had actually obtained a fair market value of the property
before confirming the sale (even if the sale took place at a value lower than
such a valuation). If there was no fair market valuation obtained by the Court,
or an authenticated copy of a valuation was not submitted along with the sale
certificate, then the adjudicating authority must follow the usual provisions
mentioned in the Rules.

 

Hence,
the Court laid down a practice that in all cases where the Deputy Sheriff
lodges a sale certificate for stamp duty adjudication, it must be accompanied
by a copy of the valuation certificate which must be authenticated by the
Prothonotary and Senior Master of the High Court. It negated the plea of the
government to use the valuation carried out by the Town Planner’s office in all
public auctions conducted by the Court. It held that the discretion of a Court
could not be limited in such a manner. The Court could use such a valuation, or
it may prefer to use the services of one of the valuers on its panel, or may
even obtain a valuation from an independent agency. That judicial discretion
could not be circumscribed on account of a Stamp Act requirement.

 

Finally, the Court laid
down the following principles when it came to levying stamp duty on
Court-conducted sales:

 

(a)    Where there was a sale by a private treaty,
the usual valuation rules stipulated in the Maharashtra Stamp Act would apply,
i.e., adjudication in accordance with the Reckoner;

(b)   Where the sale was by the Court, i.e., through
the office of the Sheriff, or by the Court Receiver in execution, and was by
public auction pursuant to a valuation having been  previously obtained, then –

 

(i)     If the sale price was at or below the
valuation obtained, then the valuation would serve as the current market value
for levying stamp duty;

(ii)    If the final sale price, i.e., the final bid,
was higher than the valuation, then the final bid amount and not the valuation
would be taken as the current market value for the purposes of stamp duty;

(iii)   Where multiple valuations were obtained, then
the highest of the most recent valuations, i.e., most proximate in time to the
actual sale, should be taken as the current market value.

 

Accordingly, since in the
case at hand the valuation was obtained at Rs. 30 crore, that value was treated
as the value on which stamp duty was to be levied. Thus, the lower auction
price of Rs. 15.30 crore was not preferred but the valuation of Rs. 30 crore
was adopted.

 

CONCLUSION


The above judgement would
be relevant not only for levying stamp duty in Court-conducted public auctions,
but would also be useful in determining the tax liability of the buyer and the
seller. The seller’s capital gains tax liability u/s. 50C of the Income-tax Act
or business income u/s. 43CA of the Income-tax Act, are both linked with the
stamp duty valuation. Similarly, if the buyer buys the immovable property at a
price below the stamp duty valuation, then he would have Income from Other
Sources u/s. 56(2)(x) of the Income-tax Act. Several decisions have held in the
context of the Indian Stamp Act and the Stamp Acts of other States that the
Ready Reckoner Valuation is not binding on the assessees. Some of the important
decisions which have upheld this view are Jawajee Nagnatham (1994) 4 SCC
595 (SC), Mohabir Singh (1996) 1 SCC 609 (SC), Chamkaur Singh, AIR 1991 P&H
26. This decision of the Bombay High Court is an additional step in the
same direction.

 

However, it must be
remembered that in cases where the valuation is higher than the auction price,
the auction price would be considered for levying stamp duty. Hence, this
decision has a limited applicability to those cases where the Reckoner Value is
higher than the valuation report and the public auction price.  

 

 

TIME OF SUPPLY UNDER GST

INTRODUCTION


1.  It’s a trite law that for a tax
law to survive there needs to be a levy provision which determines when
the levy of tax would be triggered, i.e., when the taxable event takes place;
and a collection provision which determines when the levy of tax
triggered can be collected by the Department. The levy provision precedes the
collection provision and in the event the levy is not triggered, the collection
provision also does not get triggered. In other words, without levy getting
triggered, the collection mechanism fails. This distinction between the levy
and collection provisions has been dealt with by the Supreme Court on multiple
occasions.

 

2.  In this article, we shall
discuss in detail the provisions relating to collection of tax dealt with in
Chapter IV of the CGST Act, 2017.

 

TIME OF SUPPLY – CASES UNDER FORWARD CHARGE
(OTHER THAN CONTINUOUS SUPPLY)


3.  Section 9, which is the charging
section for the levy of GST, provides that the tax shall be collected in such
manner as may be prescribed. The manner has been prescribed u/s. 12 to 14 of
the CGST Act, 2017. Sections 12 and 13 thereof deal with time of supply of
goods and services, respectively, while section 14 deals with instances when
there is a change in the rate of goods / services supplied.

 

4.  Sections 12 (1) and 13 (1)
thereof provide that the liability to pay tax on supply of goods and / or
services shall arise at the time of supply of the said goods and / or services
and then proceeds to list down events when the time of supply shall be
triggered in the context of goods and services, respectively. The provisions
relating to time of supply, in cases where the tax is liable under forward
charge, is tabulated alongside:

Time of supply in
the case of supply of goods

Time of supply in
the case of supply of services

Section 12 (2):

The time of supply shall be earliest of:

  •  Date
    of issue of invoice by supplier or the last date on which the invoice is
    required to be issued u/s. 31 (1) with respect to the supply [Clause (a)]
  •  Date on which the supplier receives the payment for
    such supply [Clause (b)]

Section 13 (2):

The time of supply
shall be earliest of:

  •     If
    the invoice is issued within the time prescribed u/s. 31 (2) – date of issue
    of invoice OR the date of receipt of payment, whichever is earlier [Clause
    (a)]
  •     If
    the invoice is not issued within the time prescribed u/s. 31 (2) – the date
    of provision of service OR the date of receipt of payment, whichever is
    earlier [Clause (b)]
  •     If
    the above does not apply – date on which the recipient shows the receipt of
    service in his books of accounts [Clause (c)]

 

 

5.  As can be seen from the above,
sections 12 (2) and 13 (2) provide that in normal cases, the time of supply
shall be determined based on the issuance of invoice within the timeline
prescribed u/s. 31. The time limit for issuing invoice u/s. 31 is as under:

 

In case of supply of
goods

In case of supply of
services

Section 31 (1):

Invoice shall be
required to be issued before or at the time of

  •     Removal
    of goods for supply to recipient, where supply involves movement of goods
  •     Delivery
    of goods or making available thereof to the recipient in any other case

Section 31 (2):

Invoice shall be required to be issued before or after
the provision of service, but within prescribed time limit of issue of
the invoice, which has been prescribed as 30 days u/r. 47 of CGST Rules, 2017

 

6.  From the above, it is evident
that in case of goods, the time of supply is determined based on the nature of
goods. For tangible goods, there are two scenarios envisaged, namely:

 

  •    Where there is movement of goods involved –
    this would cover both, ex-works as well as CIF contracts. Before the movement
    of goods is initiated, the supplier will have to issue the invoice,
    irrespective of whether the risk and rewards associated with the goods have
    been transferred or not;
  •    Where there is no movement of goods – this
    would cover situations where the supply of goods takes place only by way of
    transfer of title. For instance, transactions in a commodity exchange, where
    the sale has culminated and ownership changed hands, but the movement of goods
    does not take place. Instead there is merely an endorsement on the warehouse
    receipts. In such cases, the invoice will have to be issued before the
    endorsement takes place. Further, there are transactions wherein a supplier is
    required to keep a bare minimum stock of goods for a particular customer and
    the said stock cannot be sold to a third party. In such cases also, when the
    goods are appropriated for a particular customer, though the delivery is not
    taken by the customer, the time of supply shall get triggered at the moment
    when the appropriation towards a particular customer takes place.

7.  However, in case of intangible
goods, since the question of movement does not arise, in such cases the time of
supply shall be the date when the transfer takes place. For instance, in a
transaction involving permanent transfer of copyrights, time of supply shall be
the date when the transfer is executed, i.e., when the ownership of the rights
is transferred as per the provisions of the Copyright Act.

 

PROVISION OF SERVICE – ISSUES


8.  However,
the issue arises in the case of services since the triggering of time of supply
is predominantly based on completion of provision of service. However, what is
meant by completion of provision of service is a subjective issue and has its
own set of implications as discussed below:



  •    Method of accounting – it is possible that
    the supplier of service would be required to recognise revenue on accrual
    basis; however, the provision of service may not have been completed. It is
    possible that the Department may treat that the accrual is on account of
    completion of service, without appreciating the fact that the service provision
    might not have been completed in toto and, therefore, the supplier is
    not in a position to issue invoice for claiming the amount from the recipient,
    though he may have been required to accrue the invoice as per the accounting
    standards.

  •    Client
    approval of work proof of completion of service – There are instances when the
    actual execution of service might have been completed, but the confirmation of
    the same by the client might be pending. For instance, in case of contractors
    there is an industry practice of lodging a claim with their principal by
    raising a Running Account Bill which contains the detail of work done by the
    contractors, which would be then certified by the principal for its correctness
    and based on the certification alone would payment be made to the contractor.
    In such cases (assuming this is not classifiable as continuous supply of
    services), the question that arises is whether the completion of service shall
    be on raising the RA bill or when the same is approved by the client? The
    answer to this question can be derived from the CBEC Circular 144 of 2011 dated
    18.07.2011 which was issued in the context of Point of Taxation Rules, 2011
    under the erstwhile service tax regime and clarified as under:




2. These representations have been examined. The
Service Tax Rules, 1994 require that invoice should be issued within a period
of 14 days from the completion of the taxable service. The invoice needs to
indicate inter alia the value of service so completed. Thus it is important
to identify the service so completed. This would include not only the physical
part of providing the service but also the completion of all other auxiliary
activities that enable the service provider to be in a position to issue the
invoice. Such auxiliary activities could include activities like measurement, quality
testing, etc., which may be essential prerequisites for identification of
completion of service. The test for the determination whether a service has
been completed would be the completion of all the related activities that place
the service provider in a situation to be able to issue an invoice.
However, such activities do not include flimsy or irrelevant grounds for delay
in issuance of invoice.

 

CASES WHERE INVOICE HAS NOT BEEN ISSUED BUT
RECEIPT OF SERVICE ACCOUNTED BY RECIPIENT


9.  A specific anomaly lies in
section 13 (2). Clauses (a) and (b) thereof provide for determination of time
of supply of service where the invoice has been issued within the prescribed
time limit or not issued within the prescribed time limit. In other words,
these two scenarios can be there in any supply. However, clause (c) further
introduces a new scenario where neither clause (a) nor (b) applies. Clause (c)
deals with a situation wherein the recipient has accounted for receipt of
service. The question that therefore arises is whether the recipient accounting
for receipt of service can be a basis to say that the provision of service has
been completed? There can be cases where the recipient has merely provided for
expenses on accrual basis, though the service provision may not be completed.

 

TIME OF SUPPLY – CONTINUOUS SUPPLY


10. However, the above general rule
for cases covered under forward charge mechanism will not be applicable in
cases where the supply is classifiable as continuous supply of goods / services
as defined u/s. 2. and reproduced below for ready reference:

 

Continuous supply of goods

Continuous supply of services

(32) “continuous supply of goods” means a supply of
goods which is provided, or agreed to be provided, continuously or on
recurrent basis, under a contract, whether or not by means of a wire, cable,
pipeline or other conduit, and for which the supplier invoices the recipient
on a regular or periodic basis and includes supply of such goods as the
government may, subject to such conditions as it may deem fit, by
notification specify;

(33) “continuous supply of services” means a supply of
services which is provided, or agreed to be provided, continuously or on
recurrent basis, under a contract, for a period exceeding three months with
periodic payment obligations and includes supply of such services as the
government may, subject to such conditions as it may deem fit, by
notification specify;

 

 

11. The question that therefore
arises from the above, is what shall be covered within the purview of
continuous supply? In the view of the authors, what would classify as
continuous supply would be instances where the supply of goods / service is
continuous in the sense that whenever the recipient, say, starts his stove, the
goods are available. Similarly, renting of immovable property service would
also qualify as continuous supply since the service is continuous in nature.

 

12. On the other hand, recurrent
supply would mean a supply which is provided in the same form over and over
again, but not on a continuous basis. For instance, a GST consultant has agreed
to file the returns of his client on a monthly basis. This would classify as
recurrent service which the consultant keeps on providing over a period of time
and therefore classified as being in the nature of continuous supply.
Similarly, even in the context of goods, there can be examples of recurrent
supply. A mineral water supplier supplying two bottles of water on a daily
basis is an example of recurrent supply. All such supplies shall qualify as
continuous supply and accordingly the time limit for issuance of invoice shall
be as follows:

In case of
continuous supply of goods

In case of
continuous supply of services

Section 31 (4):

Where successive statements of accounts or successive
payments are involved, the invoice shall be issued before or at the time when
such successive statements are issued or each such payment is received.

Section 31 (5):

Invoice shall be
issued:

  •    Where
    due date of payment is ascertainable from the contract – on or before the due
    date of payment.
  •    Where
    due date of payment is not ascertainable from the contract – before or at the
    time when the supplier receives the payment.
  •    Where
    payment is linked to completion of an event – on or before the date of
    completion of event.

 

 

TIME OF SUPPLY – REVERSE CHARGE CASES


13. Sections 12 (3) and 13 (3) deal
with the provisions relating to time of supply in cases where reverse charge
mechanism is applicable. The relevant provisions are tabulated below for ready
reference:

 

Time of supply in
case of supply of goods

Time of supply in
case of supply of services

Section 12 (3):

The time of supply shall be earliest of:

  •     Date of receipt
    of goods.
  •     Date of payment
    as entered in the books of accounts of the recipient or the date on which the
    payment is debited in the books of account.
  •     Date
    immediately following 30 days from the date of issue of invoice or any other
    document by the supplier.

 

If time of supply cannot be determined as per the above,
the same shall be the date of entry in the books of accounts of the recipient
of supply.

Section 13 (3):

The time of supply shall be earliest of:

  •     Date of payment
    as entered in the books of accounts of the recipient or the date on which the
    payment is debited in the books of account.
  •     Date
    immediately following 60 days from the date of issue of invoice or any other
    document by the supplier.

 

If time of supply cannot be determined as per the above,
the same shall be the date of entry in the books of accounts of the recipient
of supply or date of payment, whichever is earlier.

 

Further in case of supply by associated enterprises
located outside India, the time of supply shall be the date of entry in the
books of accounts of recipient / date of payment, whichever is earlier.

 

 

CASES WHERE THERE IS A DELAY IN ACCOUNTING
THE INVOICE


14. At times, it so happens that the
recipient receives the invoice after the lapse of the prescribed time limit,
thus resulting in delay in accounting such invoices as well as discharge of
liability. In such cases, the question that arises is whether there is a delay
in accounting the invoice on account of factors beyond the control of the
recipient; for instance, in non-receipt of invoice within the prescribed time
limit, can interest liability be triggered for late payment of tax? In this
regard it is important to note that the provisions of section 12 (3) as well as
section 13 (3) clearly provide for triggering of liability upon completion of
the event, without any scope of exception.

 

Therefore, on a literal reading of the provisions, it is evident that interest
would be payable in such instances.

15. However, a contrary view can be
taken that the provision imposes a condition on the recipient which cannot be
fulfilled. It can be argued that the principle of lex non cogitadimpossibilia’
is triggered, i.e., an agreement to do an impossible act is void and is not
enforceable by law. This principle has been accepted in the context of indirect
taxes as well1. Based on the same, it can be argued that since on
the date of expiry of 30 / 60 days period the invoice itself was not available
with the recipient, it was not possible for him to discharge the tax liability
and therefore it cannot be said that the recipient has failed to make payment
of tax and is therefore liable to pay interest.

 

TIME OF SUPPLY IN CASE OF VOUCHERS


16. The term voucher has been
defined u/s. 2 (118) to mean

“an instrument where there is an obligation to
accept it as consideration or part consideration for a supply of goods or
services or both and where the goods or services or both to be supplied or the
identities of their potential suppliers are either indicated on the instrument
itself or in related documentation, including the terms and conditions of use
of such instrument”.

 

17. Vouchers are generally
classified as Prepaid Instruments and are governed by the Payment &
Settlement Systems Act, 2007 read with RBI Circular DPSS/2017-18/58 dated
11.10.2017 wherein it has been provided that there can be two type of vouchers,
namely:

 

  •    Closed System PPI – wherein the voucher is
    issued directly by the supplier (for example, recharge coupons issued by
    telecoms, DTHs, etc.) for facilitating the supply of their own goods /
    services. In fact, closed system PPI can be used for specific purposes only.
    For instance, hotel vouchers issued by various hotel brands can be used for
    availing specific service that would be mentioned on the voucher only;
  •    Semi-closed System PPI – wherein the voucher
    is issued by a system provider which can be used by the voucher holder to
    purchase goods / services from suppliers who are registered as system
    participant (for example, Sodexo, Ticket Restaurant® Meal Card, etc.). Such
    semi-closed system PPI can be used for procuring any supplies that the system
    participant would be making. For example, Sodexo voucher can be used for buying
    food-grains as well as vegetables from the system participant.

18. In view of this distinct nature
of the vouchers, depending on the nature of voucher and the underlying
deliverable from the voucher, the time of supply provisions have been prescribed
as under:

 

In case the voucher
is consumed / to be consumed towards procuring goods

In case the voucher
is consumed / to be consumed towards procuring services

The time of supply,
if voucher used / to be used for supply of goods shall be:

  •     If
    underlying supply is identifiable at the time of supply of voucher, the date
    of issue of voucher.
  •     In
    other cases, the date of redemption of voucher.

The time of supply,
if voucher used / to be used for supply of service shall be:

  •     If
    underlying supply is identifiable at the time of supply of voucher, the date
    of issue of voucher.
  •     In
    other cases, the date of redemption of voucher.

 

 

TIME OF SUPPLY – RESIDUARY PROVISIONS


19.     Further,
sections 12 (5) and 13 (5) provide that in case the time of supply of goods /
services is not determinable under any of the above sections, the same shall be
determined as under:

  •    If periodical return is to be filed, the date
    on which such return is to be filed.
  •    Else, the date on which tax is paid.

20. In addition, sections 12 (6) and
13 (6) provides that the time of supply in case of addition in value of supply
on account of interest, late fee or penalty for delayed payment of
consideration received from customer, shall be at the time of receipt of such
amount and not at the time of claiming the same from the customer.

 

TIME OF SUPPLY – TAX ON ADVANCES


21. Sections 12 (2) as well as 13
(2) provide that in case the earliest event is the date of receipt of payment,
in such a scenario tax shall be payable at the time of receipt of such advance
consideration. However, it has to be noted that such advance payment has to
pass the test of consideration, as per the definition provided u/s. 2 (31)
which is reproduced below for ready reference:

 

(31) “consideration” in relation to the supply of goods or services
or both includes —

 

(a) any payment made or to be made, whether in
money or otherwise, in respect of, in response to, or for the inducement of,
the supply of goods or services or both, whether by the recipient or by any
other person but shall not include any subsidy given by the Central government
or a State government;

(b) the monetary value of any act or forbearance,
in respect of, in response to, or for the inducement of, the supply of goods or
services or both, whether by the recipient or by any other person but shall not
include any subsidy given by the Central government or a State government:

 

Provided that a deposit given in respect of the
supply of goods or services or both shall not be considered as payment made for
such supply unless the supplier applies such deposit as consideration for the
said supply.

 

22. From the above, it is more than
evident that for any payment received to be considered as supply, it has to be
in relation to the supply of goods or service. If such relation cannot be
established, the payment would not partake the character of consideration and
therefore tax would not be payable on the same. In fact, in the context of
service tax, the Mumbai Bench of the Tribunal has in the case of Thermax
Instrumentation Limited vs. CCE [2017 (51) STR 263] held as under:



8. In the present case the advance is like earnest
money for which a bank guarantee is given by the appellant. It is a fact that
the customer can invoke the bank guarantee at any time and take back the
advance. Hence the appellant does not show the advance as an income, not
having complete dominion over the amount, and therefore, the same cannot be
treated as a consideration for any service provided. Therefore, the
findings lack appreciation of the complete facts and evidences (only relevant
extracts).

 

23. It is also pertinent to note
that proviso to sections 12 (2) as well as 13 (2) provide that if a supplier
receives an excess payment up to Rs. 1,000 in excess of the amount indicated in
the tax invoice, the time of supply of such excess payment shall be the date of
issue of invoice in respect of such excess payment, at the option of the
supplier.

24. However, it is important to note
that the tax payable on receipt of advance for supply of goods has been
exempted vide notification 40/2017 – CT dated 13.10.2017 for taxable person having
aggregate turnover not exceeding Rs. 1.5 crore. The same has been further
extended to all taxable persons vide notification 66/2017 – CT dated
15.11.2017.

 

TIME OF SUPPLY – IN CASE OF CHANGE IN RATE OF
TAX


25. Section 14 deals with the
provisions relating to determination of time of supply in cases where there is
a change in the rate of tax in respect of goods / services / both based on the
following:

 

Provision of Service

Issuance of Invoice

Receipt of Payment

Effective tax rate
as applicable on

Before change in tax
rate

After change in tax
rate

After change in tax
rate

The date of invoice
or payment, whichever is earlier

Before change in tax
rate

Before change in tax
rate

After change in tax
rate

The date of invoice

Before change in tax
rate

After change in tax
rate

Before change in tax
rate

The date of receipt
of payment

After change in tax
rate

Before change in tax
rate

After change in tax
rate

The date of receipt
of payment

After change in tax
rate

Before change in tax
rate

Before change in tax
rate

The date of invoice
or payment, whichever is earlier

After change in tax
rate

After change in tax
rate

Before change in tax
rate

The date of invoice

 

 

26. However, it is important to note
that the above table will apply only in case where there is a change in rate of
tax or a supply which was earlier exempted becomes taxable and  vice versa. This position has been
settled under the pre-GST regime in the case of Wallace Flour Mills Company
Limited vs. CCE [1989 (44) ELT 598 (SC)] wherein the Court held that if at
the time of manufacturing, goods were exempted but the same was withdrawn
during removal, they would be liable to duty on the date of their removal.

27. However, the above cannot be
applied in case an activity which was not classifiable as supply is made liable
to tax in view of the decision of the Supreme Court in the case of Collector
of Central Excise vs. Vazir Sultan Tobacco Company Limited [1996 (83) ELT 3
(SC)] wherein the Court held that once the levy is not there at the time
when the goods are manufactured or produced in India, it cannot be levied at
the stage of removal of the said goods.

 

CONCLUSION


28. Under the pre-GST regime, the
tax payers were saddled with multiple provisions relating to levy and
collection. The same situation continues even under the GST regime, with levy
being consolidated into a single event of supply and the collection provisions
continue to be complicated with distinct provisions prescribed for goods as
well as services.

29.          Failure to comply with the collection
provisions may not only expose the taxable person to interest u/s. 51 in case
of self-determination of such non-compliance, but may also expose them to
recovery actions u/s. 73 if action is initiated by the tax authorities.
Therefore, all taxable persons will have to be careful while dealing with the
provisions relating to time of supply of goods and / or services to avoid such
consequences.

THE FUGITIVE ECONOMIC OFFENDERS ACT, 2018 – AN OVERVIEW – PART 2

In Part 1 of the
article published in the April, 2019 issue of the Journal, we have covered the
need and rationale for the FEO Act, an overview of the Act and the Rules framed
thereunder, and various aspects relating to a Fugitive Economic Offender.

 

In this
concluding Part 2 of the article, we have attempted to give an overview of some
of the remaining important aspects of The Fugitive Economic Offenders Act, 2018
[the FEO Act or the Act].

 

1.  SCHEDULED OFFENCES


Section
2(1)(m) of the Act defines the Scheduled Offences as follows:

 

(m) “Scheduled Offence” means an offence specified
in the Schedule, if the total value involved in such offence or offences is
one hundred crore rupees or more;”

 

The Schedule
to the Act lists out offences under 15 different enactments and 56 different
sections/sub-sections. The Schedule of the FEO Act is given in the Annexure to
this article for ready reference.

 

The Schedule covers offences under the Indian
Penal Code, 1860; Negotiable Instruments Act, 1881; Reserve Bank of India  Act, 1934; Central Excise Act, 1944; Customs
Act, 1962; Prohibition of Benami Property Transactions Act, 1988; Prevention of
Corruption Act, 1988; Securities and Exchange Board of India Act, 1992;
Prevention of Money-Laundering Act, 2002; Limited Liability Partnership Act,
2008; Foreign Contribution (Regulation) Act, 2010; Companies Act, 2013; Black
Money (Undisclosed Foreign Income and Assets) and Imposition of Tax Act, 2015;
Insolvency and Bankruptcy Code, 2016; and Central Goods and Services Tax Act,
2017.

 

It is
pertinent to note that the aforesaid list of 15 enactments does not include the
offences under the Income-tax Act, 1961, though it includes offences under the
Black Money Act, PMLA and the Benami Act.

 

In order to
ensure that courts are not overburdened with such cases, only those cases
where the total value involved in such offences is Rs. 100 crore or more
are covered within the purview of the FEO Act.

 

2.  DECLARATION OF AN INDIVIDUAL AS AN FEO


Section 12(1)
of the Act provides that after hearing the application u/s. 4, if the Special
Court is satisfied that an individual is a fugitive economic offender (FEO), it
may, by an order, declare the individual as an FEO for reasons to be recorded
in writing. The order declaring an individual as an FEO has to be a speaking
order.

 

Section 16
deals with rules of evidence. Section 16(3) of the Act provides that the
standard of proof applicable to the determination of facts by the Special Court
under the Act shall be preponderance of probabilities. Preponderance of
probabilities means such proof that satisfies the Special Court that a certain
fact is true rather than the reverse. The proof of beyond reasonable doubt
applicable to criminal law is not applicable in case of the FEO Act.

 

3.  CONSEQUENCES OF AN INDIVIDUAL BEING DECLARED AS AN FEO

3.1  Confiscation
of Property

3.1.1  Section 12(2) of the Act provides that on a
declaration u/s. 12(1) as an FEO, the Special Court may order that any of the
following properties stand confiscated by the Central government:

 

(a)  the proceeds of crime in India or abroad,
whether or not such property is owned by the FEO; and

(b)  any other property or benami property in
India or abroad owned by the FEO.

Article 2(g)
of the UNCAC defines confiscation as follows: “Confiscation”, which includes
forfeiture where applicable, shall mean the permanent deprivation of property
by order of a court or other competent authority. It results in the change of
ownership and property vesting in the government, which is irreversible unless
the individual declared as an FEO succeeds in appeal.

 

Section
2(1)(k) defines proceeds of crime as follows:

 

“proceeds
of crime” means any property derived or obtained, directly or indirectly,
by any person as a result of criminal activity relating to a Scheduled Offence,
or the value of any such property, or where such property is taken or
held outside the country, then the property equivalent in value held within the
country or abroad.

 

The fact that
the benami property of an FEO can be confiscated shows that section 12(2)
emphasises de facto ownership rather than de jure ownership.

 

3.1.2  Section 21 of the FEO Act provides that the
provisions of the Act shall have effect, notwithstanding anything inconsistent
therewith contained in any other law for the time being in force. Section 22
provides that the provisions of the Act shall be in addition to and not in
derogation of any other law for the time being in force.

 

A question
arises for consideration as to whether adjudication under Prohibition of the
Benami Property Transactions Act, 1988 [Benami Act] is necessary for
confiscation of the benami property of the FEO. From the aforesaid provisions,
it appears that if the alleged FEO does not return to India and submit himself
to the Indian legal system, the Special Court can order confiscation of benami
properties of the FEO after adjudicating whether property is benami property
owned by the FEO or not.

 

It is
important to note that adjudication and confiscation of benami property under
the Benami Act will apply when the individual returns to India and submits
himself to the Indian legal process.

 

The
confiscation of benami property under the FEO Act will apply when an individual
evades Indian law and is declared an FEO and consequently confiscation is
ordered by the Special Court.

 

It is
important to note that the adjudication and confiscation under the Benami Act
would cover only benami property in India, whereas under the FEO Act benami
property abroad of the FEO can also be confiscated.

 

3.1.3  Section 12(3) of the Act provides that the
confiscation order of the Special Court shall, to the extent possible, identify
the properties in India or abroad that constitute proceeds of crime which
are to be confiscated and in case such properties cannot be identified,
quantify the value of the proceeds of crime.

 

Section 12(4)
of the Act provides that the confiscation order of the Special Court shall separately
list any other property owned by the FEO in India which is to be
confiscated.

 

3.1.4  As pointed out in para 2.1 of Part 1 of the
article, the non-conviction-based asset confiscation for corruption-related
cases is enabled under provisions of the UNCAC. The FEO Act adopts the said
principle and accordingly it is not necessary that the FEO should be
convicted for any of the scheduled offences for which an arrest warrant was
issued by any court in India.

 

3.1.5  A further question arises as to whether
confiscation can be reversed if the FEO returns to India and submits himself to
the court to face proceedings covered by his arrest warrant. The answer appears
to be “No”, as once an individual is declared an FEO and his assets are
confiscated, his return to India will not reverse the declaration or the
confiscation.

 

3.2  Disentitlement
of the FEO as well as his Companies, LLPs and Firms to defend civil claims

Section 14 of the Act provides that
notwithstanding anything contained in any other law for the time being in
force,

 

(a)  on a declaration of an individual as an FEO,
any court or tribunal in India, in any civil proceeding before it, may disallow
such individual from putting forward or defending any civil claim; and

(b)  any court or tribunal in India in any civil
proceeding before it, may disallow any company or LLP from putting forward or
defending any civil claim, if an individual filing the claim on behalf of the
company or the LLP, or any promoter or key managerial personnel or majority
shareholder of the company or an individual having a controlling interest in
the LLP, has been declared an FEO.

 

3.3 Individual found to be not an FEO

Section 12(9)
of the Act provides that where, on the conclusion of the proceedings, the
Special Court finds that the individual is not an FEO, the Special Court shall
order release of property or records attached or seized under the Act to the
person entitled to receive it.

 

4.  POWERS OF AUTHORITIES

4.1  Power
of Survey

Section 7 of
the FEO Act contains the provisions relating to power of survey. It appears
that power of survey may be exercised at any time before or after filing an
application u/s. 4 for declaration as an FEO.

 

Section 7(1)
provides that —

 

  •     notwithstanding anything
    contained in any other provisions of the FEO Act,
  •     where a director or any
    other officer authorised by the director,
  •     on the basis of material in
    his possession,
  •     has reason to believe (the
    reasons for such belief to be recorded in writing),
  •     that an individual may be
    an FEO,
  •     he may enter any place –

(i)   within the limits of the area assigned to
him; or

(ii)   in respect of which he is authorised for the
purposes of section 7, by such other authority who is assigned the area within
which such place is situated.

 

Section 7(2)
provides that if it is necessary to enter any place as mentioned in s/s. (1),
the director or any other officer authorised by him may request any proprietor,
employee or any other person who may be present at that time, to – (a) afford
him the necessary facility to inspect such records as he may require and which
may be available at such place; (b) afford him the necessary facility to check
or verify the proceeds of crime or any transaction related to proceeds of crime
which may be found therein; and (c) furnish such information as he may require
as to any matter which may be useful for, or relevant to, any proceedings under
the Act.

 

Section 7(3)
provides that the director, or any other officer acting u/s. 7 may (i) place
marks of identification on the records inspected by him and make or cause to be
made extracts or copies therefrom; (ii) make an inventory of any property
checked or verified by him; and (iii) record the statement of any person
present at the property which may be useful for, or relevant to, any proceeding
under the Act.

 

4.2  Power
of Search and Seizure

Section 8 of
the Act and Fugitive Economic Offenders (Procedure for Conducting Search and
Seizure) Rules, 2018 contain the relevant provisions and procedure to be
followed in respect of search and seizure.

 

Section 8(1)
of the Act provides that:

 

Notwithstanding
anything contained in any other law for the time being in force, where the
director or any other officer not below the rank of deputy director authorised
by him for the purposes of this section, on the basis of information in his
possession, has reason to believe (the reason for such belief to be recorded in
writing) that any person –

 

(i)   may be declared as an FEO;

(ii)   is in possession of any proceeds of crime;

(iii)  is in possession of any records which may
relate to proceeds of crime; or

(iv)  is in possession of any property related to
proceeds of crime,

then, subject
to any rules made in this behalf, he may authorise any officer subordinate to
him to —

 

(a)  enter and search any building, place, vessel,
vehicle or aircraft where he has reason to suspect that such records or
proceeds of crime are kept;

(b)  break open the lock of any door, box, locker,
safe, almirah or other receptacle for exercising the powers conferred by
clause (a) where the keys thereof are not available;

(c)  seize any record or property found as a result
of such search;

(d)  place marks of identification on such record
or property, if required, or make or cause to be made extracts or copies
therefrom;

(e)  make a note or an inventory of such record or
property; and

(f)   examine on oath any person who is found to be
in possession or control of any record or property, in respect of all matters
relevant for the purposes of any investigation under the FEO Act.

 

Section 8(2)
of the Act provides that where an authority, upon information obtained during
survey u/s. 7, is satisfied that any evidence shall be or is likely to be
concealed or tampered with, he may, for reasons to be recorded in writing,
enter and search the building or place where such evidence is located and seize
that evidence.

 

4.3  Power
of Search of Persons

Section 9 of
the Act contains provisions relating to power of search of persons and it
provides as follows:

(a)  if an
authority, authorised in this behalf by the Central government by general or
special order, has reason to believe (the reason for such belief to be recorded
in writing) that any person has secreted about his person or anything under his
possession, ownership or control, any record or proceeds of crime which may be
useful for or relevant to any proceedings under the Act, he may search that
person and seize such record or property which may be useful for or relevant to
any proceedings under the Act;

(b)  where an authority is about to search any
person, he shall, if such person so requires, take such person within
twenty-four hours to the nearest Gazetted Officer, superior in rank to him, or
a Magistrate. The period of twenty-four hours shall exclude the time necessary
for the journey undertaken to take such person to the nearest Gazetted Officer,
superior in rank to him, or the Magistrate’s Court;

(c)  if the requisition under clause (b) is
made, the authority shall not detain the person for more than twenty-four hours
prior to taking him before the Gazetted Officer, superior in rank to him, or
the Magistrate referred to in that clause. The period of twenty-four hours
shall exclude the time necessary for the journey from the place of detention to
the office of the Gazetted Officer, superior in rank to him, or the
Magistrate’s Court;

(d)  the Gazetted Officer or the Magistrate before
whom any such person is brought shall, if he sees no reasonable ground for
search, forthwith discharge such person but otherwise shall direct that search
be made;

(e)  before making the search under clause (a)
or clause (d), the authority shall call upon two or more persons to
attend and witness the search and the search shall be made in the presence of such
persons;

(f)   the authority shall prepare a list of records
or property seized in the course of the search and obtain the signatures of the
witnesses on the list;

(g)  no female shall be searched by anyone except a
female; and

(h)  the authority shall record the statement of
the person searched under clause (a) or clause (d) in respect of
the records or proceeds of crime found or seized in the course of the search.

 

5. CONCLUDING REMARKS

In response
to unstarred question No. 3198, the Minister of State in the Ministry of
External Affairs on 14-03-18 answered in the Parliament that as per the list
provided by the Directorate of Enforcement, New Delhi, 12 persons involved in
cases under investigation by the Directorate of Enforcement are reported to
have absconded from India who include Vijay Mallya, Nirav Modi, Mehul Choksi
and others. In addition, as per the list provided by the CBI, New Delhi, 31
businessmen, including the aforementioned Vijay Mallya, Nirav Modi and Mehul
Choksi are absconding abroad in CBI cases.

 

It is hoped
that the stringent provisions of the FEO Act creating a deterrent effect would
certainly help the government in compelling FEOs to come back to India and
submit themselves to the jurisdiction of courts in India.

Annexure

THE SCHEDULE

[See section 2(l) and (m)]

Section

Description of offence

I.

Offences under the Indian Penal Code, 1860 (45 of 1860)

 

120B read with any offence in this Schedule

Punishment of criminal conspiracy.

 

255

Counterfeiting Government stamp.

 

257

Making or selling instrument for counterfeiting Government
stamp.

 

258

Sale of counterfeit Government stamp.

 

259

Having possession of counterfeit Government stamp.

 

260

Using as genuine a Government stamp known to be counterfeit.

 

417

Punishment for cheating.

 

418

Cheating with knowledge that wrongful loss may ensue to
person whose interest offender is bound to protect.

 

420

Cheating and dishonestly inducing delivery of property.

 

421

Dishonest or fraudulent removal or concealment of property to
prevent distribution among creditors.

 

422

Dishonestly or fraudulently preventing debt being available
for creditors.

 

423

Dishonest or fraudulent execution of deed of transfer
containing false statement of consideration.

 

424

Dishonest or fraudulent removal or concealment of property.

 

467

Forgery of valuable security, will, etc.

 

471

Using as genuine a forged [document or electronic record].

 

472

Making or possessing counterfeit seal, etc., with intent to
commit forgery punishable u/s. 467.

 

473

Making or possessing counterfeit seal, etc., with intent to
commit forgery punishable otherwise.

 

475

Counterfeiting device or mark used for authenticating
documents described in section 467, or possessing counterfeit marked
material.

 

476

Counterfeiting device or mark used for authenticating
documents other than those described in section 467, or possessing
counterfeit marked material.

 

481

Using a false property mark.

 

482

Punishment for using a false property mark.

 

483

Counterfeiting a property mark used by another.

 

484

Counterfeiting a mark used by a public servant.

 

485

Making or possession of any instrument for counterfeiting a
property mark.

 

486

Selling goods marked with a counterfeit property mark.

 

487

Making a false mark upon any receptacle containing goods.

 

488

Punishment for making use of any such false mark.

 

489A

Counterfeiting currency notes or bank notes.

 

489B

Using as genuine, forged or counterfeit currency notes or
bank notes.

II.

Offences under the Negotiable Instruments Act, 1881 (26 of
1881)

 

138

Dishonour of cheque for insufficiency, etc., of funds in the
account.

III.

Offences under the Reserve Bank of India Act, 1934 (2 of
1934)

 

58B

Penalties.

IV.

Offences under the Central Excise Act, 1944 (1 of 1944)

 

9

Offences and Penalties.

V.

Offences under the Customs Act, 1962 (52 of 1962)

 

135

Evasion of duty or prohibitions.

VI.

Offences under the Prohibition of Benami Property
Transactions Act, 1988 (45 of 1988)

 

3

Prohibition of benami transactions.

VII.

Offences under the Prevention of Corruption Act, 1988 (49 of
1988)

 

7

Public servant taking gratification other than legal
remuneration in respect of an official act.

 

8

Taking gratification in order, by corrupt or illegal means,
to influence public servant.

 

9

Taking gratification for exercise of personal influence with
public servant.

 

10

Punishment for abetment by public servant of offences defined
in section 8 or section 9 of the Prevention of Corruption Act, 1988.

 

13

Criminal misconduct by a public servant.

VIII.

Offences under the Securities and Exchange Board of India
Act, 1992 (15 of 1992)

 

12A read with section 24

Prohibition of manipulative and deceptive devices, insider
trading and substantial acquisition of securities or control.

 

24

Offences for contravention of the provisions of the Act.

IX.

Offences under the Prevention of Money-Laundering Act, 2002
(15 of 2003)

 

3

Offence of money-laundering.

 

4

Punishment for money-laundering.

X.

Offences under the Limited Liability Partnership Act, 2008 (6
of 2009)

 

Sub-section (2) of section 30

Carrying on business with intent or purpose to defraud
creditors of the Limited Liability Partnership or any other person or for any
other fraudulent purpose.

XI.

Offences under the Foreign Contribution (Regulation) Act,
2010 (42 of 2010)

 

34

Penalty for article or currency or security obtained in
contravention of section 10.

 

35

Punishment for contravention of any provision of the Act.

XII.

Offences under the Companies Act, 2013 (18 of 2013)

 

Sub-section (4) of section 42 of the Companies Act, 2013 read
with section 24 of the Securities and Exchange Board of India Act, 1992 (15
of 1992)

Offer or invitation for subscription of securities on private
placement.

 

74

Repayment of deposits, etc., accepted before commencement of
the Companies Act, 2013.

 

76A

Punishment for contravention of section 73 or section 76 of
the Companies Act, 2013.

 

Second proviso to sub-section (4) of section 206

Carrying on business of a company for a fraudulent or
unlawful purpose.

 

Clause (b) of section 213

Conducting the business of a company with intent to defraud
its creditors, members or any other persons or otherwise for a fraudulent or
unlawful purpose, or in a manner oppressive to any of its members or that the
company was formed for any fraudulent or unlawful purpose.

 

447

Punishment for fraud.

 

452

Punishment for wrongful withholding of property.

XIII.

Offences under the Black Money (Undisclosed Foreign Income
and Assets) and Imposition of Tax Act, 2015 (22 of 2015)

 

51

Punishment for wilful attempt to evade tax.

XIV.

Offences under the Insolvency and Bankruptcy Code, 2016 (31
of 2016)

 

69

Punishment for transactions defrauding creditors.

XV.

Offences under the Central Goods and Services Tax Act, 2017
(12 of 2017)

 

Sub-section (5) of section 132

Punishment for certain offences.  

 

 

Ind AS ACCOUNTING IMPLICATIONS FROM SUPREME COURT RULING ON PROVIDENT FUND

For many small entities,
the Supreme Court (SC) order will have a crippling effect at a time when they
are already suffering the blow of demonetisation. The ruling may also trigger a
whole litigious environment not only on Provident Fund (PF), but also around
other labour legislation such as bonus, gratuity, pension, etc. This article
deals only with the limited issue of accounting and disclosure under Ind AS
arising from the SC ruling on PF. Entities are required to do their own legal
evaluation or seek legal advice and consider an appropriate course of action.

 

BACKGROUND

Under the PF Act, the PF
contributions are required to be calculated on the following:

 

  •    Basic wages;
  •    Dearness allowance;
  •    Retaining allowance; and
  •    Cash value of any food
    concession.

 

An allowance like city
compensatory allowance, which is paid to compensate/neutralise the cost of
living, will be in the nature of dearness allowance on which PF contributions
are to be paid u/s. 6 of the EPF Act.

 

The term ‘basic wages’ is
defined to mean all emoluments which are earned by an employee in accordance
with the terms of contract of employment and which are paid or payable in cash,
but does not include the following:



  •    Cash value of any food
    concession;
  •    Dearness allowance, house
    rent allowance, overtime allowance, bonus, commission or any other similar
    allowance payable in respect of employment;
  •    Present made by the
    employer.

 

Multiple appeals were
pending before the SC on the interpretation of definition of ‘basic wages’ and
whether or not various allowances are covered under its definition for
calculation of PF contributions. The Court pronounced its ruling on 28th
February, 2019 on whether various allowances such as conveyance allowance,
special allowance, education allowance, medical allowance, etc. paid by an
employer to its employees fall under the definition of ‘basic wages’ for
calculation of PF contributions. It ruled that allowances of the following
nature are excluded from ‘basic wages’ and are not subject to PF contributions:



  •    Allowances which are
    variable in nature; or
  •    Allowances which are
    linked to any incentive for production resulting in greater output by an
    employee; or
  •    Allowances which are not
    paid across the board to all employees in a particular category; or
  •    Allowances which are paid
    especially to those who avail the opportunity, viz., extra work, additional
    time, etc.

 

The SC placed reliance on
the following rulings:

 

  •    Bridge and Roof Co.
    (India) Ltd. vs. Union of India     – The crucial test for coverage of allowances
    under the definition of ‘basic wages’ is one of universality. If an allowance
    is paid universally in a particular category, then it must form part of ‘basic
    wages’. It also held that the production bonus which is paid based on
    individual performance does not constitute ‘basic wages’.

 

  •    Muir Mills Co. Ltd. vs.
    Its Workmen     – Any variable earning which may vary from individual to
    individual according to their efficiency and diligence will be excluded from
    the definition of ‘basic wages’.

 

  •    Manipal Academy of
    Higher Education vs. PF Commissioner     – A component which is universally,
    necessarily and ordinarily paid to all across the board is included. The
    question was whether the amount received on encashment of earned leave has to
    be reckoned as ‘basic wages’. The Court answered the query in the negative and
    held that ‘basic wages’ never intended to include the amount received for leave
    encashment. It held that the test to be applied is one of universality. In the
    case of encashment of leave, the option may be available to all the employees,
    but some may avail of it and some may not. That does not satisfy the test of
    universality.

 

  •  Kichha Sugar Company Limited through General Manager vs. Tarai
    Chini Mill Majdoor Union, Uttarakhand     – The dictionary meaning of ‘basic
    wages’ is a rate of pay for a standard work period exclusive of such additional
    payments as bonuses and overtime.

 

Employers paid various
allowances such as travel allowance, canteen allowance, special allowance,
management allowance, conveyance allowance, education allowance, medical
allowance, special holidays, night shift incentives and city compensatory
allowance to their employees. Most employers have not considered these cash
allowances as part of ‘basic wages’ for calculation of PF contributions.
Consequently, many employers will suffer huge financial and administrative
burden to comply with the SC order.

 

INTERIM ACCOUNTING GUIDANCE
ON PF MATTER


For the
year ended 31st March, 2019 in Ind AS financial statements (and
Indian GAAP), should a provision on the incremental PF contribution be made
prospectively or retrospectively?

 

The SC ruling has clarified
the term ‘basic wages’, but has created huge uncertainties around the following
issues:



  •    From which date will the
    order apply?
  •    Whether HRA that is paid
    across the board to all employees should be included or excluded from ‘basic
    wages’?
  •    For past periods, whether
    employer’s liability is restricted to its own contribution or will also include
    the employees’ contribution, in accordance with the PF Act?
  •    A review petition has been
    filed in the SC by Surya Roshni Ltd., raising several issues. What will
    be the outcome of this petition?
  •    What is the impact of the
    SC order on employees drawing ‘basic wages’ greater than Rs. 15,000?
  •    How will the order be
    complied with for employers using contract labour?

 

A very vital aspect will
arise for the consideration of the employers and the PF authorities as to the
date from which the judgement should be made effective. It will all depend upon
the position to be taken by the PF authorities and the position taken by the
employers. The SC only interprets the law and does not amend the law. The
interpretation laid down by the Hon’ble SC to any particular statutory
provisions shall always apply from the date the provision was introduced in the
statute book, unless it is a case of prospective overruling, i.e., the Court,
while interpreting the law, declares it to be operative only prospectively so
as to avoid reopening a settled issue. In the instant case, there is nothing on
record to even remotely suggest that the order pronounced by the Hon’ble SC is
prospective in its operation.

 

The PF law does not lay down
any limitation period and/or look back period for determination of dues u/s. 7A
of the EPF & MP Act, 1952. This may cause grave and undue hardship to the
employee as well as the employer if the demands for the prior period without
imputing a reasonable time limitation is sought to be recovered from the
employer. Therefore, in the event any differential contribution is sought to be
recovered from employers by the PF authorities, the employers may press the
plea of undue hardship to salvage and/or limit their liability for the prior
period by referring to the decision of the Hon’ble SC rendered in the case of Shri
Mahila Griha Udyog Lijjat Papad vs. Union of India & Ors. reported in 2000.

 

Alternatively, it can also
be argued that the employers in any event cannot be saddled with the liability
to pay the employees’ contribution for the retrospective period given that the
employer has no right to deduct the same from the future wages payable to the
employees as held by the Hon’ble SC in the case of District Exhibitors
Association, Muzaffarnagar & Ors. vs. Union of India reported in AIR (1991)
SC. There is no settled jurisprudence on what would constitute a reasonable
period.

 

Given the uncertainty at
this juncture, it would be advisable for the employers to comply with the said
Judgement dated 28th February, 2019 prospectively, i.e., effectively
from 1st March, 2019 and thereafter, if any claims are made by the
PF authorities for the retrospective period, the same can be dealt with
appropriately having regard to the facts and circumstances of each case.

 

There is uncertainty on the
determination of the liability retrospectively, because theoretically there is
no limit on how much retrospective it can get, and can begin from the very
existence of the company or the beginning of the law. Additionally, the review
petition and the fact that the PF department will need to consider hardship
before finalising a circular to give effect to the SC order, is exacerbating
the uncertainty. Furthermore, companies are not required to retain accounts for
periods beyond certain years. In rare cases, when a liability cannot be
reliably estimated, Ind AS 37, paragraph 26 states as follows, “In the
extremely rare case, where no reliable estimate can be made, a liability exists
that cannot be recognised. That liability is disclosed as a contingent
liability.” This approach can be considered for the purposes of Ind AS (and
Indian GAAP) financial statements for the year ended 31st March,
2019.

 

It should also be noted
that there is little uncertainty that the order will at the least apply from 28th
February, 2019. Consequently, a provision for both employers’ and employees’
contribution for the month of March, 2019 along with likely interest should be
included in the provision. However, any provision for penalty at this stage may
be ignored. For the purposes of an accounting provision, HRA should be excluded
from ‘basic wages’ even if these are paid across the board to all employees,
because under the PF Act ‘basic wages’ excludes HRA. However, the SC order has
created uncertainty even on this issue and employers may take different
positions on this matter.

 

The above position will
remain dynamic and may change with further developments. The following note
should be included in the financial statements as a contingent liability:

 

“There are numerous
interpretative issues relating to the SC judgement on PF dated 28th
February, 2019. As a matter of caution, the company has made a provision on a
prospective basis from the date of the SC order. The company will update its
provision, on receiving further clarity on the subject.”

 

The above
note is a contingent liability and not a pending litigation. Therefore, this
matter should not be cross-referenced as a pending litigation in the main audit
report.

 

SHOULD
A PROVISION BE MADE FOR EMPLOYEES DRAWING SALARY ABOVE Rs. 15,000 PER MONTH,
SINCE PF DEDUCTION FOR THESE EMPLOYEES IS IN ANY CASE VOLUNTARY?


Domestic
workers with basic salary exceeding Rs. 15,000 per month may not get impacted
due to this ruling – where PF contributions are made by the employer on full
basic salary or on minimum Rs. 15,000 per month. Such domestic workers may be
covered under proviso to Para 26A of the PF Scheme. The SC has not dealt with
this aspect in its ruling. At the outset, it may be noted that the provisions
of the EPF Scheme do not, inter alia, apply to an employee whose pay
exceeds Rs. 15,000 per month. Such an employee is construed as an excluded
employee within the meaning of Para 2(f)(ii) of the EPF Scheme and an excluded
employee is not statutorily entitled to become a member of the statutory PF
under Para 26(1) of the EPF Scheme. Even if the membership of the PF is
extended to such an employee in terms of Para 26(6) of the EPF Scheme, the PF
contribution statutorily required to be made by the employer in respect of such
an employee is restricted to Rs. 15,000 per month in terms of the proviso to
Para 26-A(2) of the EPF Scheme.

 

Even otherwise, it is well
settled by the decision of the Hon’ble SC rendered in the case of Marathwada
Gramin Bank Karamchari Sanghatana & Ors. vs. Management of Marathwada
Gramin Bank & Ors. that the employer cannot be compelled to pay the
amount in excess of its statutory liability for all times to come just because
the employer from its own trust has started paying PF in excess of its
statutory liability for some time. Therefore, no obligation can be cast upon the
employer to remit PF contributions in excess of its statutory liability under
the EPF Scheme. Having said that, the service regulation and/or contract of
employment entered into by the employer with the employees should not be
inconsistent and/or should not provide otherwise.

 

Another view is that the
employees in the workman category may demand the PF contributions on the
increased basic wages. If the demand is not met, they can raise an industrial
dispute under the Industrial Disputes Act, 1947 for grant of such increase. In
the case of management staff, though they cannot take up the matter under the
Industrial Disputes Act, in law, they can enforce their right through a Civil
Court. Whether or not the bargaining staff or the management staff will demand
the enhanced basic wages is altogether a different matter, but in law they have
a right to raise a demand.

 

For the purposes of an
accounting provision, most employers will assess that Ind AS 37 does not
require a provision with respect to PF contributions for employees drawing
salary greater than Rs. 15,000 at this juncture, because the liability is
remote.  

 

TDS – YEAR OF TAXABILITY AND CREDIT UNDER CASH SYSTEM OF ACCOUNTING

ISSUE FOR
CONSIDERATION


Section 145
requires the assessee to compute his income chargeable under the head “Profits
and gains of business or profession” or “Income from other sources” in
accordance with either cash or mercantile system of accounting, which is
regularly followed by the assessee. The assessee following cash system of
accounting would be offering to tax only those incomes which have been received
by him during the previous year. On the other hand, most of the provisions of
Chapter XVII-B provide for deduction of tax at source at the time of credit of
the relevant income or at the time of its payment, whichever is earlier.
Therefore, often tax gets deducted at source on the basis of the mercantile
system of accounting followed by the payer, which requires crediting of the
amount to the account of the assessee in his books of account. However, the
underlying amount on which the tax has been deducted at source is not
includible in the income of the assessee till such time as it has been received
by him.

 

Section 198
provides that all sums deducted in accordance with the provisions of Chapter
XVII shall be deemed to be income received, for the purposes of computing the
income of an assessee.

 

Till Assessment Year 2007-08, section 199 provided for grant of credit
for tax deducted at source to the assessee from income in the assessment made
for the assessment year for which such income is assessable. From Assessment
Year 2008-09, section 199 provides that the CBDT may make rules for the
purposes of giving credit in respect of tax deducted or tax paid in terms of
the provisions of Chapter XVII, including rules for the purposes of giving
credit to a person other than the payee, and also the assessment year for which
such credit may be given.

 

The corresponding
Rule 37BA, issued for the purposes of section 199(3), was inserted with effect
from 01.04 2009. The relevant part of this Rule, dealing with the assessment
year in which credit of TDS can be allowed, is as follows:

 

(3) (i) Credit
for tax deducted at source and paid to the Central Government, shall be given for
the assessment year for which such income is assessable.

 

(ii) Where tax
has been deducted at source and paid to the Central Government and the income
is assessable over a number of years, credit for tax deducted at source shall
be allowed across those years in the same proportion in which the income is
assessable to tax.

 

After the amendment, though the section does not expressly provide for
the year of credit as it did prior to the amendment, Rule 37BA effectively
provides for credit  similar to the erstwhile
section. In fact, under Rule 37BA, more clarity has now been provided in
respect of a case where the income is assessable over a number of years.

 

In view of these
provisions, an issue has arisen in cases where the assessee’s income is
computed as per the cash system of accounting regarding the year in which the
TDS amount is taxable as an income, and the year of credit of such TDS to the
assessee, when the underlying income from which tax has been deducted is not
received in the year of deduction. The Delhi bench of the Tribunal took a view
that the income to the extent of TDS has to be offered to tax as an income as
provided in section 198 in the year of deduction, and the credit of TDS is
available in such cases in the year of deduction, irrespective of Rule 37BA. As
against this, the Mumbai bench of the Tribunal did not concur with this view,
and denied credit of TDS in the year of deduction.

 

CHANDER SHEKHAR
AGGARWAL’S CASE


The issue had come
up before the Delhi bench of the Tribunal in the case of Chander Shekhar
Aggarwal vs. ACIT [2016] 157 ITD 626.

 

In this case, the
assessee was following cash system of accounting. He filed his return of income
for A.Y. 2011-12, including the entire amount of TDS deducted during the year
as his income, claiming TDS credit of Rs. 80,16,290.

 

While processing
the return u/s. 143(1), the Assessing Officer allowed credit of only Rs.
71,20,267, on the ground that the income with respect to the balance amount was
not included in the return filed by the assessee. The assessee appealed to the
CIT (A), disputing the denial of credit of the differential amount of TDS.
Placing reliance on Rule 37BA, the CIT (A) concluded that the assessee was not
entitled to credit for the amount though mentioned in the certificate for the
assessment year, if income relatable to the amount was not shown and was not
assessable in that assessment year.

 

The assessee
contended before the Tribunal that the amount equivalent to the TDS had been
offered as income by him in his return of income. This was in accordance with
the provisions of section 198, which mandates that all sums deducted under
Chapter XVII would be deemed to be income received for the purposes of computing
the income of an assessee. It was argued that the provisions of Rule 37BA are
not applicable to assessees following cash system of accounting. Since, as per
provisions of section 199, any deduction of tax under Chapter XVII and paid to
the Central Government shall be treated as payment of tax on behalf of the
person from whose income deduction of tax was made, it was pleaded that the
credit of the disputed amount should be allowed to the assessee.

 

The Tribunal duly
considered the amended provisions of section 199 as well as Rule 37BA. It
concurred with the view that once TDS was deducted by the deductor on behalf of
the assessee and the assessee had offered it as his income as per section 198,
the credit of that TDS should be allowed fully in the year of deduction itself.
Once an income was assessable to tax, the assessee was eligible for credit,
despite the fact that the remaining amount would be taxable in the succeeding
year.

 

With regard to Rule
37BA(3)(ii) providing for proportionate credit across the years when income was
assessable over a number of years, the Tribunal held that it would apply where
the entire compensation was received in advance but was not assessable to tax
in that year, but was assessable over a number of years. It did not apply where
the assessee followed cash system of accounting.

 

This was supported by an illustration – suppose an assessee who was
following cash system of accounting raised an invoice of Rs. 100 in respect of
which deductor deducted and deposited TDS of Rs. 10. Accordingly, the assessee
would offer an income of Rs. 10 and claim TDS of Rs. 10. However, in the
opinion of the Revenue, the assessee would not be entitled to credit of the
entire TDS of Rs. 10, but would be entitled to proportionate credit of Re. 1
only. Now let us assume that Rs. 90 was never paid to the assessee by the
deductor. In such circumstances, Rs. 9 which was deducted as TDS by the
deductor would never be available for credit to the assessee though the said
sum stood duly deposited to the account of the Central Government. Therefore,
as per the Tribunal, Rule 37BA(3) could not be interpreted so as to say that
TDS deducted at source and deposited to the account of the Central Government,
though it was income of the assessee, but was not eligible for credit of tax in
the year when such TDS was offered as income.

 

The Tribunal also
placed reliance upon the decisions of the Visakhapatnam bench in the case of ACIT
vs. Peddu Srinivasa Rao Vijayawada [ITA No. 234 (Vizag.) of 2009, dated
03.03.2011] and of the Ahmedabad bench in the case of Sadbhav
Engineering Ltd. vs. Dy. CIT [2015] 153 ITD 234. In these cases, it was
held that the credit of tax deducted at source from the mobilisation advance
adjustable against the bills subsequently was available in the year of
deduction, though it was not considered while computing the income of the
assessee.

 

Accordingly, the
Tribunal held that the assessee would be entitled to credit of the entire TDS
offered as income in the return of income.

 

SURENDRA S. GUPTA’S
CASE


A similar issue
recently came up for consideration before the Mumbai bench of the Tribunal in
the case of Surendra S. Gupta vs. Addl. CIT [2018] 170 ITD 732 .

 

In this case, the assessee, following cash system of accounting, did
not offer consultancy income of Rs. 83,70,287 to tax, since the same was not
received during the relevant A.Y. 2010-11. However, he offered corresponding
TDS to tax in respect of the same, amounting to Rs. 8,41,240, and claimed the
equivalent credit thereof in the computation of income. The  Assessing Officer, applying Rule 37BA(3)(i),
restricted the credit to proportionate TDS of Rs. 84,547, against income of Rs.
8,41,240 offered to tax by the assessee, and disallowed the balance credit of
Rs. 7,56,693.

 

The assessee contested the denial of TDS credit before the CIT (A),
who upheld the order of the Assessing Officer, and directed that credit for the
balance amount should be given in the subsequent years in which income
corresponding to such TDS is received.

 

On the basis of
several decisions of the co-ordinate bench on the issue, the Tribunal noted
that there were two lines of thought on the issue; one which favours grant of
full TDS credit in the year of deduction itself, and the other which, following
strict interpretation, allows TDS credit in the A.Y. in which the income has
actually been assessed / offered to tax. Reference was made to the following
decisions wherein the former view was taken –

 (i). Chander
Shekhar Aggarwal vs. ACIT (supra)

(ii).  Praveen Kumar Gupta vs. ITO [IT Appeal No.
1252 (Delhi) of 2012]

(iii). Anil Kumar Goel vs. ITO [IT Appeal No. 5849
(Delhi) of 2011]

 

The Tribunal found
that in none of the above cases was the decision of the Kerala High Court in
the case of CIT vs. Smt. Pushpa Vijoy [2012] 206 Taxman 22 considered by
the co-ordinate bench. In this case, the Kerala High Court had held that the
assessee was entitled to credit of tax only in the assessment year in which the
net income, from which tax had been deducted, was assessed to tax. Following
this decision, the Tribunal rejected the claim of the assessee to allow the
full credit of TDS.

 

OBSERVATIONS

There are two
aspects to the issue – the year in which the amount of TDS should be regarded
as income of the assessee chargeable to tax (the year of deduction, or the year
in which the net income is received by the assessee), and accordingly accounted
for under the cash system of accounting; and secondly, to what extent credit of
the TDS is available against such income.

 

Therefore, it
becomes imperative to analyse the impact of the provisions of section 198 with
respect to the assessment of the income of an assessee who is following cash
system of accounting. Section 198 provides as under:

 

All sums
deducted in accordance with the foregoing provisions of this Chapter shall, for
the purpose of computing the income of an assessee, be deemed to be income
received.

 

It can be seen that
section 198 creates a deeming fiction by considering the amount of TDS as
deemed receipt in the hands of the deductee, though it has not been received by
him. This deeming fiction operates in a very limited field to consider the
unrealised income as realised. It appears that the legislative intent behind
this provision is to negate the probability of exclusion of the amount of TDS
from the scope of total income by the assessee, on the ground that it amounted
to a diversion of income by overriding title. It also precluded the deductee
from making a claim on the payer for recovery of the amount which had been deducted
at source in accordance with the provisions of Chapter XVII-B. But, this
section, by itself, does not create a charge over the amount of tax deduction
at source.

 

A careful reading
of this provision would reveal that it does not provide for the year in which
the said income shall be deemed to have been received. In contrast, reference
can be made to section 7, which also provides for certain incomes deemed to be
received. It has been expressly provided in section 7 that “the following
incomes shall be deemed to be received in the previous year….” unlike section
198. Therefore, it would not be correct to say that, once the sum is deducted
at source, it is deemed to be the income received in the year in which it has
been deducted and assessable in that year, de hors the other provisions
determining the year in which the said income can be assessed.

 

For instance, the
buyer of an immovable property may deduct tax at source u/s. 194-IA on the
advance amount paid to the assessee transferring that property. In such a case,
the capital gain in the hands of the transferor is taxable in the year in which
that immovable property has been transferred as provided in section 45.
Obviously, tax deducted at source u/s. 194-IA cannot be assessed as capital
gain in the year of deduction merely by virtue of section 198, if the capital
asset has not been transferred in the same year.

 

Similarly, in case
of an assessee who is following cash system of accounting, it cannot be said
that the amount of tax deducted at source is deemed to have been received in
the very same year in which it was deducted. Section 145 governs the
computation of income, which is in accordance with the method of accounting
followed by the assessee. The income equivalent to the amount of tax deducted
at source cannot be charged to tax de hors the method of accounting
followed by the assessee. In case of cash system of accounting, unless the
balance amount is received by the assessee, the amount of tax deducted at
source cannot be included in the income on the ground that it is deemed to be
received as per section 198. The reference to ‘sums deducted’ used in section
198 should be seen from the point of view of the recipient assessee and not the
payer. The ‘deduction’, from the point of view of the recipient, would happen
only when he receives the balance amount, as prior to that, the concerned
transaction would not be recognised at all in the books of account maintained
under the cash system of accounting.

 

In the context of
section 198 and the pre-amended provisions of section 199, in a Third Member
decision in the case of Varsha G. Salunkhe vs. Dy CIT 98 ITD 147, the
Mumbai Bench of the Tribunal has held as under:

 

“Both the sections, viz., 198 and 199, fall within
Chapter XVII which is titled as ‘Collection and recovery – deduction at
source’. In other words, these are machinery provisions for effectuating
collection and recovery of the taxes that are determined under the other
provisions of the Act. In other words, these are only machinery provisions
dealing with the matters of procedure and do not deal with either the
computation of income or chargeability of income….

 

Sections 198 and
199 nowhere provide for an exemption either to the determination of the income
under the aforesaid provisions of sections 28, 29 or as to the method of
accounting employed under section 145 which alone could be the basis for
computation of income under the provisions of sections 28 to 43A. Section 198
has a limited intention. The purpose of section 198 is not to carve out an
exception to section 145. Section 199 has two objectives – one to declare the
tax deducted at source as payment of tax on behalf of the person on whose
behalf the deduction was made and to give credit for the amount so deducted on
the production of the certificate in the assessment made for the assessment
year for which such income is assessable. The second objective mentioned in
section 199 is only to answer the question as to the year in which the credit
for tax deducted at source shall be given. It links up the credit with
assessment year in which such income is assessable. In other words, the
Assessing Officer is bound to give credit in the year in which the income is
offered to tax.

 

Section 199 does
not empower the Assessing Officer to determine the year of assessability of the
income itself but it only mandates the year in which the credit is to be given
on the basis of the certificate furnished. In other words, when the assessee produces
the certificates of TDS, the Assessing Officer is required to verify whether
the assessee has offered the income pertained to the certificate before giving
credit. If he finds that the income of the certificate is not shown, the
Assessing Officer has only not to give the credit for TDS in that assessment
year and has to defer the credit being given to the year in which the income is
to be assessed. Sections 198 and 199 do not in any way change the year of
assessability of income, which depends upon the method of accounting regularly
employed by the assessee. They only deal with the year in which the credit has
to be given by the Assessing Officer.

 

It could not be
disputed that according to the method of accounting employed by the assessee,
the income in respect of the three TDS certificates did not pertain to the
assessment year in question but pertained to the next assessment year and, in
fact, in that year, the assessee had offered the same to tax. Therefore, the
credit in respect of those three TDS certificates would not be given in the
assessment year under consideration, but in the next assessment year in which
the income was shown to have been assessed.”

 

Following this
decision, the Bilaspur bench of the Tribunal, in the case of ACIT vs. Reeta
Loiya 146 TTJ 52 (Bil)(URO), has held as under:

 

“It is a settled
proposition that the provisions of s. 198 are merely machinery provisions and
are not related to computation of income and chargeability of income as held by
the Bombay Tribunal in the case of Smt. Varsha G. Salunke (supra). In
the absence of the charging provisions to tax such deemed income as the income
of the assessee, the provisions of s. 198 of the Act cannot by themselves
create a charge on certain receipts.”

 

The Mumbai bench of
the Tribunal, in the case of Dy CIT vs. Rajeev G. Kalathil 67 SOT 52
(Mum)(URO), observed:

 

“It is a fact
that deduction of tax for the payment is one of the deciding facts for
recognising the revenue of a particular year. But TDS in itself does not mean
that the whole amount mentioned in it should be taxed in a particular year,
deduction of tax and completion of assessment are two different things while
finalising the tax liability of the assessee and Assessing Officer is required
to take all the facts and circumstances of the case not only the TDS
certificate.”

 

In the case of ITO
vs. Anupallavi Finance & Investments 131 ITD 205, the Chennai bench of
the Tribunal, while dealing with the controversy under discussion, has dealt
with the impact of section 198 as follows:

 

We are unable to
understand as to how the said provision assists the assessee’s case. All the
section says, to state illustratively, is that if there is deduction of tax at
source out of income of Rs. 100 [say at the rate of 10 per cent], crediting or
paying assessee Rs. 90, the same, i.e., Rs. 10 is also his income. It nowhere
speaks of the year for which the said amount of TDS is to be deemed as income
received. The same would, understandably, only correspond to the balance 90 per
cent. As such, if 30 per cent of the total receipt/credit is assessable for a
particular year, it shall, by virtue of section 198 of the Act be reckoned at
Rs. 30 [Rs. 100 × 30 per cent] and not Rs. 27 [Rs. 90 × 30 per cent]. Thus,
though again a natural consequence of the fact that tax deducted is only out of
the amount paid or due to be paid as income, and in satisfaction of the tax
liability on the gross amount to that extent, yet clarifies the matter, as it
may be open to somebody to say that TDS of Rs. 10 has neither been credited nor
received, so that it does not form part of income received or arising and,
thus, outside the scope of section 5 of the Act. That, to our mind, is sum and
substance of section 198.

 

Similar
observations have been made by the Mumbai bench of the Tribunal in the case of ITO
vs. PHE Consultants 64 taxmann.com 419 which are reproduced hereunder:

 

It is pertinent
to note that the provisions of sec. 198, though states that the tax deducted at
source shall be deemed to be income received, yet it does not specify the year
in which the said deeming provision applies. However, section 198 states that
the same is deemed to be income received “for the purpose of computing the
income of an assessee.” The provisions of section 145 of the Act state
that the income of an assessee chargeable under the head “Profits and
gains of business or profession” or “Income from other sources”
shall be computed in accordance with either cash or mercantile system of
accounting regularly employed by the assessee. Hence a combined reading of
provisions of section 198 and section 145 of the Act, in our view, makes it
clear that the income deemed to have been received u/s. 198 has to be computed
in accordance with the provisions of section 145 of the Act, meaning, thereby,
the TDS amount, per se, cannot be considered as income of the assessee by
disregarding the method of accounting followed by the assessee.

 

The Kerala High
Court has also expressed a similar view as extracted below in the case of Smt.
Pushpa Vijoy (supra), although without referring expressly to section 198.

 

We also do not
find any merit in the contention of the respondents-assessees that the amount
covered by TDS certificates itself should be treated as income of the previous
year relevant for the assessment year concerned and the tax amount should be
assessed as income by simultaneously giving credit for the full amount of tax
remitted by the payer.

 

Further, deeming
the amount of tax deducted at source as a receipt in the year of deduction and
assessing it as income of that year would pose several difficulties. Firstly,
the assessee might not even be aware about the deduction of tax at source on
his account while submitting his return of income. This may happen due to delay
on the part of the deductor in submitting the TDS statement and consequential
reflection of the information in Form 26AS of the assessee. Secondly, the tax
might be deducted at source while making the provision for the expenses by the
payer following mercantile system of accounting. For instance, tax is deducted
at source u/s. 194J while providing for the auditor’s remuneration. In such a
case, treating the amount of tax deducted at source as income of the auditor in
that year, would result into taxing the amount, even before the corresponding
services have been provided by the assessee.

 

Moreover, for an
amount to constitute a receipt under the cash method of accounting, it should
either be actually received or made available unconditionally to the assessee.
As held by the Supreme Court in the case of Keshav Mills Ltd. vs. CIT 23 ITR
230, “The ‘receipt’ of income refers to the first occasion when the
recipient gets the money under his own control.” In case of TDS, one can
take a view that such TDS is not within the control of the payee until such
time as he is eligible to claim credit of such TDS. That point of time is only
when he receives the net income after deduction of TDS, when he is eligible to
claim credit of such TDS.

 

Since the amount of
tax deducted at source cannot be charged to tax in the year of deduction merely
by virtue of section 198, no part of that income is assessable in that year, in
the absence of any receipt, in view of the cash system of accounting followed
by the assessee. The Delhi bench of the Tribunal in the case of Chander Shekhar
Aggarwal (supra) has decided the whole issue on the basis of the fact
that the amount equivalent to TDS was being offered to tax by the assessee in
accordance with the provision of section 198. Since the income was assessed to
that extent, the Tribunal opined that the assessee was eligible for full credit
of TDS, notwithstanding Rule 37BA(3)(ii), which provided for allowance of
proportionate TDS credit when the income was not fully assessable in the same
year. Thus, the very foundation on the basis of which the Delhi bench of the
Tribunal has allowed the full credit of TDS to the assessee in the case of
Chander Shekhar Aggarwal (supra) appears to be incorrect.

 

Having analysed the provisions of section 198, let us now consider the
issue about the year in which the credit for tax deducted at source is
allowable. As per section 4, the tax is chargeable on the ‘total income’ of the
assessee for a particular previous year. When the assessee pays the income-tax
under the Act, he does not pay it on any specific income but he pays it on the
‘total income’. Thus, it cannot be said that a particular amount of tax has
been paid or payable on a particular amount of income. However, when it comes
to TDS, the erstwhile provision of section 199 expressly provided that its
credit shall be given for the assessment year in which the relevant income is
assessable. After its substitution with effect from 01.04.2008, new section 199
has authorised CBDT to prescribe the rules which can specifically provide for
the assessment for which the credit may be given. As per the mandate given in
section 199, Rule 37BA provides that the credit shall be given for the
assessment year for which the concerned income is assessable. In view of such
express provisions, the credit cannot be availed in any year other than the
assessment year in which the income subject to deduction of tax at source is
assessable.

 

The Delhi bench of the Tribunal took a view that Rule 37BA does not
apply where the assessee follows cash system of accounting insofar as it
provides for the year in which the credit is available. In order to support its
view, it has been pointed out that the credit would not be available otherwise
in a case where the assessee does not receive the underlying income at all.
Certainly, the law does not provide about how the credit would be given for
that amount of TDS which was deferred for the reason that the relevant income
is assessable in future but, then, found to be not assessable at all for some
reason. However, this lacuna under the law can affect both types of assessees,
i.e., assessees following cash system of accounting, as well as assessees
following mercantile system of accounting.



Circular No. 5
dated 02.03.2001 has addressed one such situation wherein the tax has been
deducted at source on the rent paid in advance u/s. 194-I and subsequently the
rent agreement gets terminated or the rented property is transferred due to
which the balance of rent received in advance is refunded to the tenant or to
the transferee. It has been clarified that in such a case, credit for the
entire balance amount of tax deducted at source, which has not been given
credit so far, shall be allowed in the assessment year relevant to the
financial year during which the rent agreement gets terminated / cancelled or
rented property is transferred and balance of advance rent is refunded to the
transferee or the tenant, as the case may be. Similarly, in a few cases, the
Courts and Tribunal have held that where income has been offered to tax in an
earlier year, but tax has been deducted at source subsequently, credit for the
TDS should be allowed in such subsequent year [CIT vs. Abbott Agency,
Ludhiana 224 Taxman 350 (P&H), Societe D’ Engineering Pour L’ Industrie Et.
Les Travaux Publics, (SEITP) vs. ACIT 65 SOT 45 (Amr)(URO)].

 

Therefore, in our
view, the mere probability of income not getting assessed in future cannot by
itself be the reason for not applying the express provision of the law, unless
suitable amendment has been carried out to overcome such difficulty. Taking a
clue from the CBDT’s clarification vide aforesaid Circular, it is possible to
take a view that the credit of TDS should be made available in the year in
which the assessee finds that the relevant income would not be assessable at
all due to its irrecoverablity or any other reasons.

 

The view taken by the Mumbai bench of the
Tribunal in the case of Surendra S. Gupta (supra) by following the
decision of Kerala High Court in the case of Pushpa Vijoy (supra)
therefore seems to be the more appropriate view. The amount of tax deducted at
source is neither assessable as income nor available as credit in the year of
deduction, if the assessee is following the cash system of accounting, and has
not received the balance amount in that year. The taxation of the entire
amount, as well as credit for the TDS, would be in the year in which the net
amount, after deduction of TDS, is received. In case the net amount is received
over multiple years, the TDS amount would be taxed proportionately in the
multiple years, and proportionate TDS credit would also be given in those
respective years.

Section 147 – Reassessment – Natural justice – Order passed without disposing of objections raised by assessee to the report of DVO – reopening was improper and null and void

6. Pr
CIT-17 vs. Urmila Construction Company [ITA No. 1726 of 2016, Dated 18th
March, 2019 (Bombay High Court)]

 

[Urmila
Construction Company vs. ITO-12(3)(4); dated 06/11/2009; ITA. No.
2115/Mum/2009, A.Y. 2005-06 Mum. ITAT]

 

Section
147 – Reassessment – Natural justice – Order passed without disposing of
objections raised by assessee to the report of DVO – reopening was improper and
null and void

 

The assessee was engaged in
the business of building development. During such proceedings, the A.O. had
disputed the valuation of the work in progress in relation to the incomplete
construction work on a certain site. The A.O., therefore, referred the
valuation to the Departmental Valuation Officer (DVO) on 30.12.2007. The report
of the DVO did not come for some time. In the meantime, the assessment was
getting barred by limitation on 31.12.2007. The A.O., therefore, on 27.12.2007
passed an order of assessment u/s. 143(3) of the Act. This assessment was
subject to receiving the report of the DVO. The DVO report was received on
3.12.2009. Thereupon, the A.O. reopened the assessee’s return for the said assessment year, relying upon the report of the DVO.

 

Being aggrieved with the
A.O order, the assessee filed an appeal to the CIT(A). The CIT(A) upheld the
action of the A.O.

 

Being aggrieved with the
CIT(A) order, the assessee filed an appeal to the ITAT. The Tribunal held that
the report of the DVO cannot be the basis for reopening the assessment. The
Tribunal relied upon the decision of the Supreme Court in the case of Asst.
CIT vs. Dhairya Construction (2010) 328 ITR 515 and other decisions of High
Courts.

 

Being aggrieved with the
ITAT order, the Revenue filed an appeal to the High Court. The Court held that
the notice of reopening of assessment was issued within a period of four years
from the end of the relevant assessment year. The original assessment was
completed, awaiting the report of the DVO. Under such circumstances, whether,
upon receipt of such report of DVO, reopening of the assessment can be validly
made or not, is the question.The court observed that it was not inclined to
decide this question. This was so because of the reason that once the A.O.
reopened the assessment, the assessee had strongly disputed the contents of the
DVO report. Before the A.O. the assessee had highlighted various factors as to
why the report of the DVO was not valid. The A.O., instead of deciding such
objections, once again called for the remarks of the DVO. The response of the
DVO did not come and in the meantime, the re-assessment proceedings were
getting time-barred. The A.O., therefore, passed an order of assessment under
section 143(3) r.w.s. 147 of the Act on the basis of the report of the DVO,
without dealing with the objections of the assessee to such a report.

 

The methodology adopted by
the A.O. in such an order of reassessment was wholly incorrect. Even if the notice
of reassessment was valid, the A.O. was to pass an order of reassessment in
accordance with the law. He could not have passed a fresh order without dealing
with and disposing of the objections raised by the assessee to the report of
the DVO. On this ground, the Revenue’s appeal was dismissed. 

 

Section 28(ii)(c) – Business income – Compensation – the agreement between assessee and foreign company was not agreement of agency but principal-to-principal – compensation received for terminated contract could not be taxed u/s. 28(ii)(c)

5. Pr.
CIT-2 vs. RST India Ltd. [Income tax appeal No. 1798 of 2016, Dated 12th
March, 2019 (Bombay High Court)]

 

[ITO-2(3)(1)
vs. RST India Ltd., dated 03/02/2016; ITA. No. 1608/Mum/2009, A.Y. 2005-06;
Bench: D, Mum. ITAT]

 

Section
28(ii)(c) – Business income – Compensation – the agreement between assessee and
foreign company was not agreement of agency but principal-to-principal –
compensation received for terminated contract could not be taxed u/s. 28(ii)(c)

 

The assessee had entered
into an agreement with US-based company Sealand Service Inc. Under the
agreement the assessee was to solicit business on behalf of the said Sealand
Service Inc. After some disputes between the parties, this contract was
terminated pursuant to which the assessee received a compensation of Rs. 2.25
crore during the period relevant to the A.Y. in question. The assessee claimed
that the receipt was capital in nature and therefore not assessable to tax. The
AO, however, rejected the contention and held that it would be chargeable to
tax in terms of section 28(ii)(c) of the Act.

 

The CIT (A) allowed the
assessee’s appeal holding that there was no principal agent relationship
between the parties and the contract was on principal-to-principal basis and
therefore section 28(ii)(c) would not apply.

 

In further appeal by the
Revenue, the Tribunal confirmed the view of the CIT Appeals, inter alia
holding that the entire source of the income was terminated by virtue of the
said agreement and that in view of the fact that there was no
principal-to-agent relationship, section 28(ii)(c) will not apply.

 

Being aggrieved with the
ITAT order, the Revenue filed an appeal to the High Court. The Court held that
it is not disputed that upon termination of the contract the assessee’s entire
business of soliciting freight on behalf of the US-based company came to be
terminated. It may be that the assessee had some other business. Insofar as the
question of taxing the receipts arising out of the contract terminating the
very source of the business, the same would not be relevant. The real question
is, was the relationship between the assessee and the US-based company one in
the nature of an agency?

 

Section 28(ii)(c) of the
Act makes any compensation or other payment due, i.e, the receipt by a person
holding an agency in connection with the termination of the agency or the
modification of the terms and conditions relating thereto, chargeable as profits
and gains of business and profession. The essential requirement for application
of the section would therefore be that there was a co-relation of agency
principal between the assessee and the US- based company. In the present case,
the CIT (A) and the tribunal have concurrently held that the relationship was
one of principal-to-principal and not one of agency.

 

The Court further observed
that the true character of the relationship from the agreement would have to be
gathered from reading the document as a whole. This Court in the case of Daruvala
Bros. (P). Ltd. vs. Commissioner of Income Tax (Central), Bombay, reported in
(1971) 80 ITR 213 had found that the agreement made between the parties was
of sole distribution and the agent was acting on his behalf and not on behalf
of the principal. In that background, it was held that the agreement in
question was not one of agency, though the document may have used such term to
describe the relationship between the two sides. In such circumstances the Revenue’s
appeal was dismissed.

Section 271(1)(c) – Penalty – Concealment – Merely because the quantum appeal is admitted by High Court penalty does not become unsustainable – However as issue is debatable, therefore penalty could not be imposed

4. The
Pr. CIT-1 vs. Rasiklal M. Parikh [Income tax Appeal No. 169 of 2017, Dated 19th
March, 2019 (Bombay High Court)]

 

[Rasiklal
M. Parikh vs. ACIT-19(2); ITA. No. 6016/Mum/2013, Mum. ITAT]

 

Section
271(1)(c) – Penalty – Concealment – Merely because the quantum appeal is
admitted by High Court penalty does not become unsustainable – However as issue
is debatable, therefore penalty could not be imposed

 

The assessee is an
individual. He filed his ROI for the A.Y. 2006-07. The assessment of his return
gave rise to disallowance of exemption u/s. 54F of the Act. During the year the
assessee had transferred the tenancy rights in a premises for consideration of
Rs. 1.67 crore and claimed exemption of Rs. 1.45 crore u/s. 54F of the
investment in residential house. Such exemption was disallowed by the A.O. He
also initiated penalty proceedings. The disallowance was confirmed up to the
stage of the Tribunal, upon which the Assessee filed an appeal before the High
Court, which was admitted. The A.O. imposed a penalty of Rs. 50 lakh.

 

This was challenged by the
Assessee before the CIT (A) and then the Tribunal. The Tribunal, by the
impugned judgement, deleted the penalty only on the ground that since the High
Court has admitted the assessee’s quantum appeal, the issue is a debatable one.

 

Being aggrieved with the ITAT order, the
Revenue filed an appeal to the High Court. The High Court was not in agreement
with the observations of the Tribunal that merely because the High Court has
admitted the appeal and framed substantial questions of law, the entire issue
is a debatable one and under no circumstances the penalty could be imposed. In
this context, reference was made to a decision of a division bench of the
Gujarat High Court in the case of Commissioner of Income Tax vs. Dharamshi
B. Shah [2014] 366 ITR 140 (Guj).



However, the Hon’ble Court
held that despite the above-cited decision, this appeal need not be
entertained. This is so because independently, too, one can safely come to the
conclusion that the entire issue was a debatable one. The dispute between the
assessee and the Revenue was with reference to actual payment for purchase of
the flat and whether, when the assessee had purchased one more flat, though
contagious, could the assessee claim exemption u/s. 54F of the Act.

 

It can thus be seen that
the Assessee had made a bona fide claim. Neither any income nor any
particulars of the income were concealed. As per the settled legal position,
merely because a claim is rejected it would not automatically give rise to
penalty proceedings. Reference in this respect can be made to the decision of
the Supreme Court in the case of Commissioner of Income Tax, Ahmedabad vs.
Reliance Petroproducts Pvt. Ltd. Under the above circumstances, for the
reasons different from those recorded by the Tribunal in the impugned
judgement, the Revenue’s appeal was dismissed.

Section 194-IA and 205 – TDS – Bar against direct demand on assessee (Scope of) – Assessee sold property – Purchaser deducted TDS amount in terms of section 194-IA on sale consideration – Amount of TDS was not deposited with Revenue by purchaser – As provided u/s. 205, assessee could not be asked to pay same again – It was open to department to make coercive recovery of such unpaid tax from payer whose primary responsibility was to deposit same with government Revenue promptly because, if payer, after deducting tax, fails to deposit it in government Revenue, measures could always be initiated against such payers

13. Pushkar
Prabhat Chandra Jain vs. UOI; [2019] 103 taxmann.com 106 (Bom): Date
of order: 30th January, 2019

 

Section
194-IA and 205 – TDS – Bar against direct demand on assessee (Scope of) –
Assessee sold property – Purchaser deducted TDS amount in terms of section
194-IA on sale consideration – Amount of TDS was not deposited with Revenue by
purchaser – As provided u/s. 205, assessee could not be asked to pay same again
– It was open to department to make coercive recovery of such unpaid tax from
payer whose primary responsibility was to deposit same with government Revenue
promptly because, if payer, after deducting tax, fails to deposit it in
government Revenue, measures could always be initiated against such payers

 

The petitioner sold an immovable property for Rs. 9 crore. The
purchasers made a net payment of Rs. 8.91 crore to the petitioner after
deducting tax at source at 1% of the payment in terms of section 194-IA of the
Income-tax Act, 1961. The petitioner filed the return of income and claimed
credit of TDS of Rs. 10.71 lakh. The Income-tax department noticed that only an
amount of Rs. 1.71 lakh was deposited with government Revenue and, thus, gave
the petitioner credit of TDS only to the extent of such sum. In an intimation
issued by the respondent u/s. 143(1), a demand of Rs. 10.36 lakh was raised
against the petitioner. This comprised of the principal tax of Rs. 9 lakh and
interest payable thereon. Subsequently, the return of the petitioner was taken
in limited scrutiny. During the pendency of such scrutiny assessment
proceedings, the Revenue issued a notice to the branch manager of the bank
attaching the bank account of the assessee. A total of Rs. 3.68 lakh came to be
withdrawn by the department from the petitioner’s bank account for recovery of
the unpaid demand.



The
assessee objected to attachment of the bank account on the ground that the
purchasers had deducted the tax at source in terms of section 194-IA. Further,
the petitioner had already offered the entire sale consideration of Rs. 9 crore
to tax in the return filed. The petitioner referred to section 205 and
contended that in a situation like the present case, recovery could be made
only against the deductor-payer. The petitioner could not be asked to pay the
said amount again. However, the respondent did not accept the representation of
the petitioner, upon which the instant petition has been filed.

 

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

 

“i)   The purchasers paid the petitioner only Rs.
8.91 crore retaining Rs. 9 lakh towards TDS. The department does not argue that
this amount of Rs. 9 lakh so deducted is not in tune with the statutory
requirements. It appears undisputed that the deductor did not deposit such
amount in the government Revenue. Under the circumstances, the petitioner is
asked to pay the said sum again, since the department has not recognised this
TDS credit in favour of the petitioner.

ii)   Section 205 carries the caption ‘Bar against
direct demand on assessee’. The section provides that where tax is deducted at
the source under the provisions of Chapter XVII, the assessee shall not be
called upon to pay the tax himself to the extent to which tax has been deducted
from that income.

iii)   The situation arising in the present petition
is that the department does not contend that the petitioner did not suffer
deduction of tax at source at the hands of payer, but contends that the same
has not been deposited with the government/Revenue. As provided u/s. 205 and in
the circumstances of the instant case, the petitioner cannot be asked to pay
the same again. It is always open for the department, and in fact the Act
contains sufficient provisions, to make coercive recovery of such unpaid tax
from the payer whose primary responsibility is to deposit the same with the government
Revenue scrupulously and promptly. If the payer after deducting the tax fails
to deposit it in the government Revenue, measures can always be initiated
against such payers.

iv)  The Revenue is correct in pointing out that
for long after issuing notice u/s. 226(3), the petitioner has not brought this
fact to the notice of the Revenue which led the Revenue to make recoveries from
the bank account of the petitioner. In that view of the matter, at the best the
petitioner may not be entitled to claim interest on the amount to be refunded.

v)   Under the circumstances, the respondents
should lift the bank account attachment. Further, the respondent should refund
a sum of Rs. 3.68 lakhs to the assessee.”

 

 

Sections 245 and 245D – Settlement Commission – Procedure on application u/s. 245C (Opportunity of hearing) – Section 245D(2C) does not contemplate affording an opportunity of hearing to Commissioner (DR) at time of considering application for settlement for admission and, at best, Commissioner (DR) may be heard to deal with any submissions made by assessee, if called upon by Settlement Commission; however, under no circumstances can Commissioner (DR) be permitted to raise objections against admission of application at threshold and to make submissions other than on basis of report submitted by Principal Commissioner – Since, in instant case, Settlement Commission had first heard objections raised by Commissioner (DR) against admission of application for settlement based on material other than report of Principal Commissioner and thereafter had afforded an opportunity of hearing to assessee to deal with objections raised by Commissioner (DR) and had thereafter proceeded to declare appl

12. Akshar
Developers vs. IT Settlement Commission; [2019] 103 taxmann.com 76 (Guj): Date
of order: 4th February, 2019

 

Sections
245 and 245D – Settlement Commission – Procedure on application u/s. 245C
(Opportunity of hearing) – Section 245D(2C) does not contemplate affording an
opportunity of hearing to Commissioner (DR) at time of considering application
for settlement for admission and, at best, Commissioner (DR) may be heard to
deal with any submissions made by assessee, if called upon by Settlement
Commission; however, under no circumstances can Commissioner (DR) be permitted
to raise objections against admission of application at threshold and to make
submissions other than on basis of report submitted by Principal Commissioner –
Since, in instant case, Settlement Commission had first heard objections raised
by Commissioner (DR) against admission of application for settlement based on
material other than report of Principal Commissioner and thereafter had
afforded an opportunity of hearing to assessee to deal with objections raised
by Commissioner (DR) and had thereafter proceeded to declare application
invalid based on material pointed out by Commissioner (DR), Settlement
Commission had clearly violated provisions of section 245D(2C) by providing an
opportunity of hearing to Commissioner (DR) to object to admission of application
instead of rendering a decision on the basis of report of Principal
Commissioner as contemplated under said
sub-section

 

A raid
came to be carried out in the case of the assessee u/s. 132 of the Income-tax
Act, 1961 and some documents came to be seized. The assessee preferred
application u/s. 245(C)(1). The form was filled by the assessee along with
which the statement of particulars of issues to be settled, as well as the
statement showing full and true disclosure came to be submitted. The matter came
up for the purpose of admission and the Settlement Commission admitted the
application u/s. 245(D)(1). Thereafter, the Principal Commissioner submitted a
report u/s. 245D(2B). The assessee filed a rejoinder to the above report u/s.
245D(2B) meeting with the objections raised by the Principal Commissioner. The
matter was heard for the purposes of decision u/s. 245D(2C). The Commissioner
(DR) had raised objection based on several materials other than the report of
the Principal Commissioner, whereupon the Settlement Commission passed an
adverse order u/s. 245D(2C) rejecting the application of the assessee.

 

The
assessee filed a writ petition and challenged the order. The assessee contended
that the Settlement Commission, instead of passing the order on the basis of
the report of the Principal Commissioner as clearly laid down in section
245D(2C), had passed the order on the basis of what was not in the report,
which rendered such order bad in law. It was not open for the Commissioner (DR)
to raise objections and the Commissioner had gone beyond what his superior
Principal Commissioner had stated in the report, and if there was any
objection, it was for the Principal Commissioner to take such objection in the
report. There was grave error on the part of the Settlement Commission
permitting the Commissioner (DR) to raise objections to the admission of the
application and more so in permitting him to go beyond the report.

 

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

 

“i)   After amendment, section 245D
contemplates three stages for dealing with an application made u/s. 245C(1).
The scheme of admission of a case has been completely altered with effect from
01.06.2007 and now there are two stages for admission of the application. The
third stage is for deciding the application. In the first stage, on receipt of
an application u/s. 245C, the Settlement Commission is mandated to issue a
notice to the applicant within seven days from the date of receipt of the
application, requiring him to explain as to why the application made by him be
allowed to be proceeded with, and on hearing the applicant, the Settlement
Commission is further mandated to either reject the application or allow the
application to be proceeded with by an order in writing, within a period of
fourteen days from the date of the application. The proviso thereto provides
that where no order has been passed within the aforesaid period by the
Settlement Commission, the application shall be deemed to have been allowed to
be proceeded with. Thus, at the first stage, no report or communication from
the department is required for the Settlement Commission to decide whether or
not to allow an application to be proceeded with.

ii)   Thus, the Principal Commissioner has not
stated in the report that there is no full and true disclosure by the assessee,
but has raised certain doubts about the adequacy of the disclosure and has
reserved the right to comment at a later stage of the application on the basis
of the material seized.

iii)   The Settlement Commission in the impugned
order has recorded that the Commissioner (DR) has objected to the admission of
the settlement applications for the reason that the applicants have not made
full and true disclosure in the petitions. In the opinion of this court,
section 245D(2C) does not contemplate any such objection being raised by the
Commissioner (DR). Section 245D(2C) contemplates hearing to the applicant only
in case the Settlement Commission is inclined to declare the application
invalid. In case the report does not say that there is no full and true
disclosure and the Settlement Commission is inclined to accept such report, it
is not even required to hear the applicant. Therefore, when the sub-section
which requires an opportunity of being heard to be given to the applicant only
if the application is to be declared invalid, the question of Principal
Commissioner or Commissioner raising any objection to the application at this
stage, does not arise.

iv)  A perusal of the impugned order reveals that
the Settlement Commission has first heard the objections raised by the
Commissioner (DR) to the admission of the applications based on material other
than the report, and thereafter has afforded an opportunity of hearing to the
applicants to deal with the objections raised by the Commissioner (DR) and has
thereafter proceeded to declare the application invalid based on the material
pointed out by the Commissioner (DR) from the seized material. On a plain
reading of section 245D(2C) it is evident that it contemplates passing of order
by the Settlement Commission on the basis of the report of the Principal
Commissioner or Commissioner. Therefore, the scope of hearing would be limited
to the contents of the report. The applicant would, therefore, at this stage be
prepared to deal with the contents of the report and if any submission is made
outside the report, it may not be possible for the applicant to deal with the
same. On behalf of the respondents it has been contended that the Commissioner
(DR) has not relied upon any extraneous material and that the arguments are
made on the basis of the seized material and the evidence on record. In the
opinion of this Court, insofar as the record of the case and other material on
record is concerned, consideration of the same is contemplated at the third
stage of the proceedings u/s. 245D(4) and not at the stage of s/s. (2C).

v)   Sub-section (2C) of section 245D contemplates
a report by the Principal Commissioner/Commissioner and consideration of such
report by the Settlement Commission and affording an opportunity of hearing to
the applicant before declaring the application to be invalid. The sub-section
does not contemplate an incomplete report which can be supplemented at the time
of hearing. While the sub-section does not contemplate hearing the Principal
Commissioner or Commissioner at the stage of section 245D (2C), at best,
requirement of such hearing can be read into the said sub-section for the purpose
of giving an opportunity to the Commissioner (DR) to deal with the submissions
of the applicant in case the Settlement Commission hears the applicant. But the
sub-section does not contemplate giving an opportunity to the Commissioner (DR)
to raise any objection to the admission of the application and hearing him to
supplement the contents of the report. The report has to be considered as it is
and it is on the basis of the report that the Settlement Commission is required
to pass an order one way or the other at the stage of section 245D(2C). Going
beyond the report at a stage when the order is to be passed on the basis of the
report, would also amount to a breach of the principles of natural justice.
Moreover, no grave prejudice is caused to the Revenue if the application is
admitted and permitted to be proceeded with inasmuch as in the third stage, the
entire record and all material including any additional report of investigation
or inquiry if called for by the Settlement Commission would be considered and
the Principal Commissioner or Commissioner would be granted an opportunity of
hearing.

vi)  The Settlement Commission was, therefore, not
justified in permitting the Principal Commissioner to supplement the report
submitted by the Commissioner by way of oral submissions which were beyond the
contents of the report. At best, if the applicant had made submissions in
respect of the report, the Commissioner may have been permitted to deal with
the same, but under no circumstances could the Commissioner be permitted to
raise objection to the admission of the application and be heard before the
assessee and that, too, to supplement an incomplete report on the basis of the
material and evidences on record. As already discussed hereinabove, any hearing
based upon the material and evidences on record is contemplated at the stage of
section 245D(4), and insofar as sub-section (2C) of section 245D is concerned,
the same contemplates a decision solely on the basis of the report of the
Commissioner.

vii)  Section 245D(2C) does not contemplate
affording an opportunity of hearing to the Commissioner (DR), and at best, the
Commissioner (DR) may be heard to deal with any submissions made by the
assessee, if called upon by the Settlement Commission. However, under no circumstances
can the Commissioner (DR) be permitted to raise objections against the
admission of the application at the threshold and to make submissions on the
basis of material on record to supplement the report submitted by the Principal
Commissioner in the manner as had been done in this case.

viii) In the light of the above discussion, the
impugned order passed by the Settlement Commission being in breach of the
provisions of section 245D(2C) and also being in breach of the principles of
natural justice inasmuch as at the stage of section 245D(2C), the Settlement
Commission has placed reliance upon material other than the report, cannot be
sustained. The impugned order passed by the Settlement Commission is hereby
quashed and set aside.”

Sections 147 and 148 – Reassessment – Notice after four years – Validity – Transfer of assets to subsidiary company and subsequent transfer by subsidiary company to third party – Transaction disclosed and accepted during original assessment – Notice after four years on ground that transaction was not genuine – Notice not valid

10. Bharti
Infratel Ltd. vs. Dy. CIT; 411 ITR 403 (Delhi): Date
of order: 15th January, 2019 A.Y.:
2008-09

 

Sections
147 and 148 – Reassessment – Notice after four years – Validity – Transfer of
assets to subsidiary company and subsequent transfer by subsidiary company to
third party – Transaction disclosed and accepted during original assessment –
Notice after four years on ground that transaction was not genuine – Notice not
valid

 

BAL
transferred telecommunications infrastructure assets worth Rs. 5,739.60 crores
to the assessee, its subsidiary (BIL), on 31.01.2008 for Nil consideration
under a scheme of arrangement approved by the Delhi High Court. According to
the scheme of arrangement, BIL revalued the assets to Rs. 8,218.12 crore on the
assets side of the balance sheet for the year ending 31.03.2008. Within 15 days
of the approval of the scheme of arrangement, a shareholders’ agreement on
08.12.2007 was entered into by BIL whereby the passive infrastructure was
transferred by it to a third party, namely, I. The return for the A.Y. 2008-09
was taken up for scrutiny assessment by notices u/s. 143(2) and 142 of the
Income-tax Act, 1961. Questionnaires were issued to which BIL responded
furnishing details and documents. Assessment was made. Thereafter, reassessment
proceedings were initiated and notice u/s. 148 issued on 01.04.2015.

The
assessee filed a writ petition and challenged the validity of the notice. The
Delhi High Court allowed the writ petition and held as under:

 

“i)   Explanation 1 to section 147 would not apply
as all the primary facts were disclosed, stated and were known and in the
knowledge of the Assessing Officer. This would be a case of ‘change of opinion’
as the assessee had disclosed and had brought on record all facts relating to
transfer of the passive infrastructure assets, their book value and fair market
value were mentioned in the scheme of arrangement, as also that the transferred
passive assets became property of I including the dates of transfer and the
factum that one-step subsidiary BIV was created for the purpose.

ii)   These facts were within the knowledge of the
Assessing Officer when he passed the original assessment order for A.Y.
2008-09. The notice of reassessment was not valid.”

 

 

THINK BEFORE YOU SPEAK, MR. CHAIRMAN!

The Securities and Exchange Board of India
(SEBI) recently charged the Chairman of a major listed FMCG company with making
a fraudulent/misleading statement. The reason? He had allegedly said to a
leading newspaper that he was interested in buying out a large competitor
listed company. According to SEBI, this resulted in a substantial rise in the
price of the shares of the competitor. Such rise in price is an expected result
when there is news that an acquisition is likely.

 

But soon, both the Chairman and his company,
as well as the competitor, clarified that no such buyout plans were afoot and
the price of the shares fell. SEBI alleged that this was a fraudulent/reckless
statement. Public shareholders who may have bought the shares on the basis of
the statement would have suffered a loss on account of this. Therefore, SEBI
levied a monetary penalty on the said Chairman.

 

While the Securities Appellate Tribunal
(SAT) exonerated the Chairman pointing out several errors of fact and law in
the SEBI order, this case raises critical issues, reminders and lessons on how
such price-sensitive matters should be handled. There are several provisions of
law that prescribe for care in dealing with price-sensitive information. It has
been found that companies/promoters deliberately and fraudulently “create”
price-sensitive information so that the market price rises owing to public
interest and then they can offload their shares (often held in proxy names) and
profit. Even in cases where there is no fraudulent intent, the concern may be
whether there was an element of negligence or irresponsibility.

 

Securities laws have several provisions for
handling price-sensitive information. These include prohibitions against abuse,
illegal leaking, timely disclosures, etc.

 

Let us consider this case first in a summary
manner and then consider the provisions of the law and also some related,
relevant issues.

 

SEBI’S ORDER LEVYING PENALTY AND THE SAT ORDER REVERSING IT


It appears that the Chairman of a leading
listed FMCG company gave an interview to a large daily newspaper. The reporter
asked whether his company was in the process of acquiring a leading competitor.
This was in the context of significant interest in the shares of the competitor
with there being higher volumes of trading and rapid rise in price; there also
appeared to be rumours of a significant acquisition of shares by a specified
but unnamed entity. The Chairman reportedly said that he would be interested to
buy out the competitor, though he added that he did not know who had acquired
that significant lot of shares in that company. SEBI alleged that the
publishing of this news resulted in a sharp increase in price and volumes.
Later, indeed on the afternoon of the very next trading day, the Chairman, his
company as well as the competitor company clarified that no such buyout was
envisaged. SEBI alleged that the price and volumes immediately fell the day
after that. The Chairman was alleged to have violated the provisions relating
to fraudulent/unfair trade practices and a penalty of Rs. 8 lakh was levied on
him (vide order dated 27.12.2017).

 

On appeal, SAT reversed the penalty [R.
S. Agarwal vs. SEBI (Appeal No. 63 of 2018, order dated 13.03.2019)]. It
was noted that the rise in both price and volumes was much prior to the said
statement. Thus, there was already a market interest. It was pointed out that
analysts had projected higher profits/EPS for the company and that was also a
contributing factor. The Chairman or his company had not acquired/sold any
shares. The SAT even raised doubts about the authenticity of the press report.
Even otherwise, it does not make sense that a potential acquirer would make a
statement that may result in further increase in the price. As an important
point of law, SAT highlighted that the onus of proving such a serious
allegation of fraud in such a background rested on SEBI, which onus it did not
fulfil. In conclusion, SAT reversed the order of penalty.

 

 

IMPORTANT PROVISIONS OF SECURITIES LAWS DEALING WITH PRICE-SENSITIVE INFORMATION


Proper handling of price-sensitive
information is a very important tenet of safeguarding the integrity of capital
markets as provided in securities laws. Price-sensitive information is required
to be carefully guarded. It should be disclosed in a timely manner – neither
too early so as to be premature and thus misleading, nor too late that there
are chances of leakage and abuse and that the public may be deprived of
knowledge of such significant price-sensitive information. It should be clear,
complete and precise, neither understating nor exaggerating anything.

 

Several provisions in the SEBI Insider
Trading Regulations, in the SEBI Regulations relating to Fraudulent and Unfair
Trade Practices (FUTP) and in the SEBI Listing Obligations and Disclosure
Requirements Regulations (“the LODR Regulations”), make elaborate provisions
relating to price-sensitive information.

 

The insider trading regulations have
price-sensitive information at the core. Insiders have access to
price-sensitive information and they are required to carefully handle it. The
Regulations have been progressively broadened over the years. There are several
deeming provisions. The Regulations even require a formal code of disclosure of
price-sensitive information to be made along prescribed lines that the company
must scrupulously follow. One requirement of this code, for example, requires
that selective disclosures should not be made to a section of public/analysts,
and if at all it is anticipated that this may happen, there should be parallel
disclosure for all. Dealings in shares by “designated persons”, who are close
insiders, are required to be carefully monitored and they can deal in them only
after prior permission and that, too, during a period when the trading window
is open.

 

The LODR Regulations require that material
developments be disclosed well in time. An elaborate list has been provided of
what constitute such material developments and an even more elaborate process
by which they should be decided upon and disclosed.

 

The FUTP Regulations particularly have
several provisions that deal with such price-sensitive information and how they
could constitute fraud. There are generic provisions which prohibit “any
manipulative or deceptive device or contrivance” or engaging in “any act,
practice, course of business which operates or would operate as fraud or deceit
upon any person in connection with any dealing in or issue of securities…”.
There are several specific provisions. One such provision, for example,
prohibits “publishing or causing to publish or reporting or causing to report
by a person dealing in securities any information which is not true or which he
does not believe to be true prior to or in the course of dealing in
securities”. Yet another provision prohibits “planting false or misleading news
which may induce sale or purchase of securities”. These practices are
considered fraudulent practices and can result in stiff penalties, prosecution
and other adverse consequences.

 

Thus, price-sensitive information has to be
handled delicately, and with full realisation of the impact it may potentially
have if there is under- or over-disclosure, too early or too late disclosure,
or misleading, fraudulent or even negligent disclosure. While there are
provisions that deal with fraudulent practices, even unintentional
acts/omissions would be severely dealt with. It is not surprising that
companies have — and are expected to have —carefully-laid-down procedures and
systems for dealing with such information.

 

ROLE OF CHAIRMAN / TOP MANAGEMENT IN DEALING WITH THE MEDIA OR OTHERWISE SHARING INFORMATION


The Chairman, the Managing Director, the
Company Secretary, etc., are often approached by the media for their views on
developments or even generally. Such persons may even engage on social media
(as in the recent Tesla case, discussed separately below). Often, even
authorities such as exchanges approach a company for a response to certain
rumours or news. Thus, engaging with outsiders is common and even expected of
the company executives. However, even one loose statement can have disastrous
consequences.

 

It is also important for promoters and
others to be aware that there are elaborate procedures and governance
requirements which have to be complied with. In the present case, the question
is whether the Chairman’s statement could be seen to be that of the company?
This is relevant because even the law requires approval of the Board and
recommendation/clearance of the Audit Committee in important matters. The
public does not view a statement by a Chairman or Managing Director as subject
to such conditions. Internal requirements are presumed to have been complied
with. A declaration by the Chairman, for example, that his company would be
buying out another company would be taken at face value and will have a market
reaction leading to unwanted consequences. Hence, it is important that
statements by such persons should be carefully worded. Ideally, a well-reviewed
press release should be released.

 

 

TESLA’S CASE


The importance for top management to be
careful while interacting with the public becomes even more important in these
days of social media where posts and comments are made several times a day,
often on the spur of the moment and without a second thought. Last year, it was
reported that Elon Musk, the Chairman of Tesla, tweeted that he intended to take
the company private and that funding for this purpose was secured. It was
alleged that this statement did not have sound basis. Eventually, in a reported
settlement, Musk had to resign as Chairman, accept a ban from office for at
least three years and he and Tesla had to pay $ 20 million each.


In addition, the company was required to add two independent directors and the
Board was required to keep a close watch on his public communications.

 

CONCLUSION

Corporate communications are no more meant
to be merely for public relations but have to be increasingly in compliance
with securities laws that require deft treading as in a minefield. Social media
is particularly vulnerable as proved by the Elon Musk episode. We have seen how
SEBI is monitoring and scrutinising social media reports and has even made
adverse orders relying on “friendships” and other connections. Messaging apps
like WhatsApp have also been reported to be used for sharing inside
information. On the other hand, there is often pressure, both internal and
external, to make statements. Exchanges, for example, want prompt responses to
rumours/news in the media to ensure that the official position of the company
is known to the public. The LODR Regulations provide for fairly short time
limits for sharing of material developments. In short, sharing of information,
plans and developments about the company requires more careful handling than
ever before.

 

The moral of the episode is: Think before you speak, Mr. Chairman,
though speak you must!
  

 

Section 43D – Public financial institutions, special provisions in case of income of (Interest) – Where income on NPA was actually not credited but was shown as receivable in balance sheet of assessee co-operative bank, interest on NPA would be taxable in year when it would be actually received by assessee bank

9. Principal
CIT vs. Solapur District Central Co-op. Bank Ltd.; [2019] 102 taxmann.com 440
(Bom):Date
of order: 29th January, 2019 A.Y.:
2009-10

 

Section
43D – Public financial institutions, special provisions in case of income of
(Interest) – Where income on NPA was actually not credited but was shown as
receivable in balance sheet of assessee co-operative bank, interest on NPA
would be taxable in year when it would be actually received by assessee bank

 

During the
assessment for A.Y. 2009-10, the Assessing Officer noticed that the assessee
co-operative bank had transferred an amount of Rs. 7.80 crore to the Overdue
Interest Reserve (OIR) by debiting the interest received in profit and loss
account related to Non-Performing Assets. He was of the opinion that the
assessee-bank had to offer the interest due to tax on accrual basis. The
explanation of the assessee-bank was that the Reserve Bank of India guidelines
provide that income on Non-Performing Assets (‘NPA’) is not to be credited to
profit and loss account but instead to be shown as receivable in the balance
sheet, and it is to be taken as income in the profit and loss account only when
the interest is actually received. It was also pointed out that, as per the
Reserve Bank of India norms, interest on assets not received within 180 days is
to be taken to the OIR account. Similarly, the interest which was not received
for the earlier years was also taken into OIR account. In this manner, only the
interest received during the year was credited to profit and loss account and
offered to tax. However, the Assessing Officer discarded the explanations of
the assessee, principally on the basis of accrual of interest income and
assessed such interest to tax.

 

On the
assessee’s appeal, the Commissioner (Appeals) confirmed the decision of the
Assessing Officer. On appeal, the Tribunal reversed the decisions of the
Revenue authorities. The Tribunal broadly relied upon the principle of real
income theory and referred to the decision of the Supreme Court in case of CIT
vs. Shoorji Vallabhdas & Co. [1962] 46 ITR 144 (SC).

 

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

 

“i)   The issue is squarely covered by the
judgements of Gujarat High Court and Punjab & Haryana High Courts. The
Gujarat High Court in case of Pr. CIT vs. Shri Mahila Sewa Sahakari Bank
Ltd. [2017] 395 ITR 324/[2016] 242 Taxman 60/72 taxmann.com 117 had
undertaken a detailed exercise to examine an identical situation. The Court
held that the co-operative banks were acting under the directives of the
Reserve Bank of India with regard to the prudential norms set out. The Court
was of the opinion that taxing interest on NPA cannot be justified on the real
income theory.

ii)   The Punjab & Haryana High Court in case
of Pr. CIT vs. Ludhiana Central Co-operative Bank Ltd. [2018] 99 taxmann.com
81 concluded that the Tribunal while relying upon the various
pronouncements had correctly decided the issue regarding taxability of interest
on NPA in favour of the assessee as being taxable in the year of receipt; the
Tribunal had upheld the deletion made by the CIT(A) on account of addition of
Rs. 3,02,82,000 regarding interest accrued on NPA and that there was no
illegality or perversity in the aforesaid findings recorded by the Tribunal.

iii)   The issue is thus covered by the decisions of
two High Courts. Against the judgement of the Gujarat High Court, the appeals
have been dismissed by the Supreme Court. Thus, the Supreme Court can be seen
to have approved the decision of the Gujarat High Court. Therefore, there is no
reason to entertain these appeals, since no question of law can be stated to
have arisen.

iv)  For the reference, it may also be noticed that
subsequently, legislature has amended section 43D. Section 43D essentially
provides for charging of interest on actual basis in case of certain special
circumstances, in the hands of the public financial institutions, public
companies, etc. Explanation to section 43D defines certain terms for the
purpose of the said section. Clause (g) was inserted in the said Explanation by
Finance Act, 2016 which provides that for the purpose of such section,
Co-operative Banks, Primary Agricultural Credit Society and Primary
Agricultural and Rural Development Bank shall have meanings, respectively
assigned in Explanation to sub-section 4 of section 80B. By virtue of such
insertion, the co-operative banks would get the benefit of section 43D. One way
of looking at this amendment can be that the same is curative in nature and
would, therefore, apply to pending proceedings, notwithstanding the fact that
the legislature has not made the provision retrospective.

v)   As per the Memorandum explaining the
provision, the insertion of clause (g) to the Explanation was to provide for a
level playing field to the co-operative banks. This may be one more indication
to hold a belief that the legislature, in order to address a piquant situation
and to obviate unintended hardship to the assessee, has introduced the amendment.
However, in the present case, there is no need to conclude this issue and leave
it to be judged in appropriate proceedings.”

From the Editorial – 1969

Reproduced from The Bombay Chartered Accountant
Journal

Volume 1, January 1969

 We seem to have convinced ourselves that the following
sayings are all outdated: –

“Practice is better than precept”.

 “Substance is
important than the form”.

“Knowledge is vital than the show of it”.

“Begin not with a programme but with a deed”.


We excuse the
deterioration in the Professional Standards on the plea that we are but a part
of Society, and the deteriorations in the Nation are bound to be reflected in
us.

The need of the
hour is that we professionals should withstand these forces. Our duty is to
make the people look to the future.


Our conscience must
be clear ; we should be of a ‘steel frame’; and must dispel the devils.


We must be
convinced that we have a role to play. We should not beat about the bush, but
turn the corner for the better.


The fountainhead of
our strength should be sound knowledge, which increases, when given. We should
avoid a show of knowledge, which is nothing but an exhibition of a weak mind.


We are the
guardians of the Nation’s finances, and with it the Nation’s morale. Our
actions and behavior should inspire the society at large to better themselves.


Let each of us
resolve to be the vanguard, and help and guide others to help themselves.


– Sham G. Argade

 

16 Return of income – Revised return – Due date u/s. 139(1) – Delay in filing return – Condonation of delay – Where assessee-company could not file return of income u/s. 139(1) before due date on account of some misunderstanding between erstwhile auditor and assessee and, assessee could not even obtain NOC from said erstwhile auditor immediately for appointment of an alternative auditor, in such circumstances, delay of 37 days in filing return of income alongwith audit report was to be condoned

REGEN
Powertech (P) Ltd. vs. CBDT; [2018] 91 taxmann.com 458 (Mad);

Date
of Order 28/03/2018:  A. Y. 2014-15:

Sections
139(1) and 119(2)(b); Art. 226 of Constitution of India


For the A.
Y. 2014-15, the assessee-company could not file the return of income u/s.
139(1) of the Income-tax Act, 1961 before due date on account of some
misunderstanding between erstwhile auditor M/s. S. R.Batliboi & Associates,
Chartered Accountant and assesee and, the assessee could not even obtain NOC
from erstwhile auditor immediately for appointment of an alternative auditor.
The erstwhile auditors gave NOC on 15/12/2014. The new Auditor viz., M/s.CNGSN
Associates had completed the audit work and issued a Tax Audit Report dated
29/12/2014 and the petitioner Company, based on this, uploaded the Return Of
Income on 07/01/2015 along with the Tax Audit Report.


The
petitioner Company wished to file a revised return of income, after making
certain modifications to the earlier one, which is uploaded on 07/01/2015. Such
filing of the revised return is possible only if the original return had been
filed within the time prescribed u/s. 139 (1) of the Act. Therefore, the
petitioner company made an application to CBDT u/s. 119(2)(b) of the Act for
condonation of delay of 37 days in filing the return of income and accepting
the return of income filed on 07/01/2015 as filed u/s. 139(1). By an order
dated 01/06/2016, CBDT refused to condone the delay. The petitioner company
filed a writ petition before the Madras High Court and challenged the said
order of CBDT.


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


 “i)  It
is pertinent to note that without the Tax Audit Report u/s. 44 AB, the return
of income cannot be filed and the same will not be accepted by the System as a
correct return. According to the petitioner, the Auditors were delaying the
process of audit completion without proper reasons inspite of the petitioner
providing expert valuation report from other professional firm to satisfy their
concerns. The petitioner, left with no other alternative, but to look for an
alternative Auditor, after getting the NOC from M/s. S. R. Batliboi &
Associates. Thereafter, the petitioner Company appointed M/s.CNGSN Associates,
LLP, Chartered Accountant, Chennai as their Tax Auditor and requested them to
prepare the Tax Audit Report. The assignment was accepted by M/s. CNGSN
Associates on 29/11/2014, subject to NOC from the existing auditors viz.,
M/s.S.R.Batliboi & Associates. M/s.CNGSN Associates, by their letter dated
29/11/2014, also requested M/s. S. R. Batliboi & Associates to issue NOC.
However, no such NOC was given by the erstwhile Auditors. After repeated
requests made by the petitioner, M/s. S. R. Batliboi & Associates gave
their written communication dated 15/12/2014 expressing their inability to
carry out their audit and to issue a report.


ii)    It is pertinent to note that the petitioner
cannot appoint an alternative Auditor without getting the written letter/NOC
from the existing Auditor. Thereafter, after getting NOC from the erstwhile
Auditor, the petitioner uploaded the return of income along with the Tax Audit
Report on 07/01/2015, hence, there was a delay of 37 days in filing the Return
Of Income. By delaying the submission of the return of income, the petitioner
did not stand to benefit in any manner whatsoever.


iii)   When the petitioner had satisfactorily
explained the reasons for the delay in filing the return of income, the
approach of the 1st respondent should be justice oriented so as to advance the
cause of justice. The delay of 37 days in filing the return of income should
not defeat the claim of the petitioner. In the case of the petitioner failing
to explain the reasons for the delay in a proper manner, in such circumstances,
the delay should not be condoned. But, when the petitioner has satisfactorily
explained the reasons for the delay of 37 days in filing the return of income,
the delay should be condoned.


iv)   Since the petitioner has satisfactorily
explained the reasons for the delay in a proper manner, I am of the considered
view that the 1st respondent should have condoned the delay of 37
days in filing the Return Of Income along with the Audit Report.


v)   In these circumstances, the impugned order
passed by the 1st respondent dated 01/06/2016 is liable to be set aside.
Accordingly, the same is set aside. The Writ Petition is allowed. No costs.”

15 Penalty – Concealment of income – Assessment u/s. 115JB – Assessment of income determined by legal fiction – Penalty for concealment of income cannot be imposed

Princ.
CIT vs. International Institute of Neuro Sciences and Oncology Ltd.; 402 ITR
188 (P&H); Date of Order: 23/10/2017:

A.
Y. 2005-06:

Sections
115JB and 271(1)(c)


The
assessee is a company. For the A. Y. 2005-06, the income of the assessee was
assessed u/s. 115JB of the Income-tax Act, 1961. The Assessing Officer also
imposed penalty u/s. 271(1)(c) of the Act for concealment of income.


The
Tribunal deleted the penalty holding that when the income is assessed u/s.
115JB penalty for concealment of income cannot be imposed.


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


“i)   Under the scheme of the Income-tax Act, 1961,
the total income of the assessee is first computed under the normal provisions
of the Act and tax payable on such total income is computed with the prescribed
percentage of the book profits computed u/s. 115JB of the Act. The higher of
the two amounts is regarded as total income and tax payable with reference to
such total income. If the tax payable under the normal provisions is higher,
such amount is the total income of the assessee, otherwise the book profits are
deemed as the total income of the assessee in terms of section 115JB of the
Act.


ii)    Where the income computed in accordance with
the normal procedure is less than the income determined by legal fiction namely
the book profits u/s. 115JB and income of the assessee is assessed u/s. 115JB
and not under the normal provision, the tax is paid on the income assessed u/s.
115JB of the Act, and concealment of income would have no role to play and
would not lead to tax evasion.


iii)   Therefore, penalty cannot be imposed on the
basis of disallowance or additions made under the regular provisions. Appeal
stands dismissed.”

14 Princ. CIT vs. Swapna Enterprise; 401 ITR 488 (Guj); Date of Order: 22/01/2018: A. Y. 2011-12: Sections 132, 132(4) and 271AAA(2)(i), (ii), (iii)

Penalty – Presumption of
concealment in case of search – Condition precedent – Finding that statement
specified manner in which such income earned – No evidence to show that such
income earned from any other source – Payment of tax with interest before
assessment made – Conditions satisfied – Deletion of penalty justified

 

The
assessee-firm was in the business of development of housing projects. Search
and seizure operations were conducted, u/s. 132 of the Income-tax Act, 1961, at
the business and residential premises of the assessee. In the course of search,
a statement of one of the partners of the firm, AGK, was recorded u/s. 132(4)
wherein he had admitted Rs. 15 crore as undisclosed income. The said income was
offered in the return filed pursuant to search. The  Assessing 
Officer  levied  penalty, 
u/s.  271AAA  of Rs. 15
lakh at the rate of 10% of the admitted undisclosed income on the ground that
the assessee failed to substantiate the source of such undisclosed income.


The
Commissioner (Appeals) found that AGK, during the course of recording his
statement, had explained that the unaccounted income represented net taxable
income of the project undertaken by the assessee and that the details mentioned
in the seized diary represented the net taxable income for the projects and
during the course of assessment proceedings, the assessee had filed relevant
details in that regard. He also found that no evidence was found to show that
the assessee had earned the undisclosed income from any other source instead of
the project income. On the basis of such finding, he held that the first
condition as prescribed under clause (2)(i) of section 271AAA was fulfilled in
the case of the assessee. As regards second condition u/s. 271AAA(2)(ii), the
Commissioner (Appeals) found that the undisclosed income of Rs. 8.10 crore was
admitted by AGK in his statement u/s. 132(4), the basis of which was a diary
found and seized during the course of search. The diary contained the entries
of the unaccounted/undisclosed income of Rs. 8.10 crore belonging to the
assessee firm, which had been explained by AGK, while recording his statement.
Therefore, he held that the second condition also was satisfied since such
undisclosed income had been accepted by the Assessing Officer in the assessment
proceedings. As regards the third condition u/s. 271AAA(2)(iii) the
Commissioner (Appeals) noted that the tax together with interest, if any, in
respect of undisclosed income should have been paid by the assessee for getting
immunity from the penalty and the Assessing Officer had stated in the penalty
order itself that full tax including interest on the undisclosed income had
been paid by way of adjustment out of the seized cash or otherwise in response
to the notice of demand but before conclusion of the penalty proceedings. In
the light of the fact that the assessee had satisfied all the three conditions
set out in sub-section (2) of section 271AAA, the Commissioner (Appeals)
deleted the penalty. The Tribunal upheld the decision of the Commissioner
(Appeals).


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


“i)   Both the Commissioner (Appeals) as well as
the Tribunal had recorded concurrent findings of fact that the partner of the
firm, AGK, during the course of recording of his statement at the time of the
search, had stated that the income was earned by accepting on-money in its
building project. Therefore, the manner in which income has been derived has
been clearly specified in his statement.


ii)    It was not the case of the Department that
during the course of recording of the statement of AGK any specific questions
had been asked to substantiate the manner in which the income was derived. Thus
the findings recorded by the Commissioner (Appeals) and the Tribunal regarding
the satisfaction of clause (i) and (ii) of sub-section (2) of section 271AAA
did not suffer from any legal infirmity.


iii)   In so far as the satisfaction of clause (iii)
of sub-section (2) of section 271AAA was concerned, the penalty order revealed
that the entire amount of tax and interest had been paid, prior to making the
assessment order.


iv)   In the light of the above discussion, there
being no infirmity in the impugned order passed by the Tribunal, no question of
law, as proposed or otherwise, can be said to arise. The appeal, therefore,
fails and is, accordingly, summarily dismissed.”

13 Industrial undertaking – Deduction u/s. 80-IA can be claimed in return filed pursuant to notice u/s. 153A – Finding that assessee developer and not contractor – Assessee is eligible for deduction u/s. 80-IA(4)(i)

Princ. CIT vs. Vijay Infrastructure Ltd; 402
ITR 363 (All); Date of Order: 12/07/2017:

A.
Y. 2009-10:

Sections
80-IA and 153A


The
assessee was a developer eligible for deduction u/s. 80-IA(4)(i) of the
Income-tax Act, 1961. For the A. Y. 2009-10, the assessee claimed deduction
u/s. 80-IA in the return of income filed pursuant to notice u/s. 153A of the
Act. The Assessing Officer held that the assessee was a contractor and hence
was not eligible for deduction u/s. 80-IA(4)(i) of the Act.


The
Commissioner (Appeals) found that the assessee fulfilled all the criteria of a
developer in accordance with section 80-IA(4)(i) and by his works a new
infrastructure facility in the nature of road had come into existence and the
assessee was eligible for tax benefit u/s. 80-IA(4)(i) of the Act. The Tribunal
confirmed this. On the question whether the assessee is entitled to deduction
u/s. 80-IA(4)(i) when the claim is made in the return of income filed pursuant
to notice u/s. 153A of the Act, the Tribunal held that for the A. Y. 2009-10
and onwards, the time for filing revised return had not expired and therefore,
claim for deduction u/s. 80-IA if not made earlier could have been made in the
revised return. Once it could have been claimed in the revised return u/s.
139(1), it could have also been claimed u/s. 153A of the Act.


In appeal
by the Revenue, the following questions were raised before the Allahabad High
Court:


“i)   Whether the Income-tax Appellate Tribunal was
justified in allowing the deduction u/s. 80-IA to the assessee on the basis of
a return filed after the issue of notice u/s. 153A of the Act?

ii)    Whether the Income-tax Appellate Tribunal
was justified under the facts and circumstances of the case in confirming the
order of the Commissioner of Income-tax (Appeals) who has travelled beyond the
statutory provision of Chapter VI-A, u/s. 80-A(5) of the Income-tax Act, 1961
which clearly provides that if the assessee fails to make a claim in his return
of income of any deduction, no deduction shall be allowed to him thereunder?”


The
Allahabad High Court upheld the decision of the Tribunal and held as under:


“i)   Sri Manish Misra, the learned counsel for the
appellant contended that the return u/s, 153A is not a revised return but it is
a original return. If that be so, then in our view, deduction u/s. 80-IA, if
otherwise admissible, always could have been claimed and we are not shown any
authority otherwise to take a different view. Therefore, in both ways,
deduction u/s. 80-IA, if otherwise admissible could have been claimed by the
assessee. Hence we answer both the aforesaid questions in favour of the
assessee and against the Revenue affirming the view taken by the Tribunal.


ii)    It is next contended that there is another
substantial question of law that the assessee is not a “developer” but a
“contractor” and in this regard detailed finding has been recorded otherwise by
the Assessing Officer. The fact that the assessee was a “developer” and not a
“contractor” was a finding of fact concurrently recorded by the Commissioner
(Appeals) and the Appellate Tribunal, which was not shown to be perverse or
contrary to record. No substantial question of law arose.”

 

12 Company – Recovery of tax from director – There should be proper proceedings against the company for recovery of tax and only thereafter the balance outstanding can be recovered from directors u/s. 179 – Precondition for a valid notice u/s. 179(1) is that the notice indicate the steps taken to recover the tax dues from the company and its failure – The notice and order u/s. 179(1) quashed and set aside

Mehul
Jadavji Shah vs. Dy. CIT (Bom); W. P. No. 291 of 2018; Date of Order:
05/04/2018:

A.
Y. 2011-12:

Section
179(1) :

Art.
226 of Constitution of India


The
petitioner was a director of a private limited company viz., Shravan Developers
Pvt. Ltd. He had resigned from the company in the year 2013. The company had
failed to pay tax dues of Rs. 4.69 crore for the A. Y. 2011-12. On 06/02/2017,
the Assessing Officer of the company issued notice u/s. 179(1) of the
Income-tax Act, 1961 seeking to recover from the petitioner the tax dues of Rs.
4.69 crore of the company for the A. Y. 2011-12. The petitioner responded to
the notice and sought details of the notices issued to the company for recovery
of the tax dues. However, without responding to the particulars sought, the
Assessing Officer passed order u/s. 179(1) on 26/12/2017 making a demand of Rs.
4.69 crore upon the petitioner.


The
petitioner filed a writ petition before the Bombay High Court challenging the
validity of recovery proceedings u/s. 179(1) of the Act and the order u/s.
179(1) dated 26/12/2017. The Bombay High Court allowed the writ petition,
quashed the order dated 26/12/2017 passed u/s. 179(1) of the Act, and held as
under:


“i)   It is clear that before the Assessing Officer
assumes jurisdiction u/s. 179(1) of the Act, efforts to recover the tax dues
from the delinquent Private Limited Company should have failed. This effort and
failure of recovery of the tax dues must find mention in the show cause notice
howsoever briefly. This would give an opportunity to the noticee to object to
the same on facts and if the Revenue finds merit in the objection, it can take
action to recover it from the delinquent Private Limited Company. This has to
be before any order u/s. 179(1) of the Act is passed adverse to the noticee.


ii)    In this case, admittedly the show cause
notice itself does not indicate any particulars of the failed efforts to
recover the tax dues from the delinquent Private Limited Company. Thus, the
issue stands covered in favour of the petitioner by the order of this Court in Madhavi
Kerkar vs. ACIT; W. P. No. 567 of 2016 dated 05/01/2018.


iii)   In the above circumstances, the impugned
order dated 26/12/2017 is quashed and set aside.”

11 Appeal to High Court – Delay – Condonation of delay – Period of limitation should not come as an hindrance to do substantial justice between parties – However, at same time, a party cannot sleep over its right ignoring statute of limitation and without giving sufficient and reasonable explanation for delay, expect its appeal to be entertained merely because it is a State – Delay of 318 days – No reasonable explanation – Delay not condoned

CIT(Exemption)
vs. Lata Mangeshkar Medical Foundation; [2018] 92 taxmann.com 80 (Bom); Date of
Order: 18/03/2018:

A.
Ys. 2008-09 and 2009-10:

Section
260A


For the A.
Ys. 2008-09 and 2009-10, the Department had filed appeal to the High Court u/s.
260A of the Income-tax Act, 1961 against the order of the Tribunal. There was
delay of 318 days in filing the appeals. An application was made for
condonation of delay. Sequence of events were narrated during the period of
delay. It was stated that the tax effect involved was over Rs. 6 crore for A.
Y. 2009-10 and over Rs. 3.4 crore for A. Y. 2008-09.


The Bombay
High Court refused to condone the delay and held as under:


“i)   There is no proper explanation for the delay
on the part of the Commissioner. In fact, the affidavit, dated 16-9-2017 states
that, he handed over the papers to his subordinate i.e. the Deputy
Commissioner. This is also put in as one of the reasons for the delay. This
even though when they appear to be a part of the same office. In any case, the
date on which it was handed over to the Deputy Commissioner (Exemptions),
Circle, Pune is not indicated. Further, the affidavit dated 16-9-2017 also does
not explain the period of timse during which the proposal was pending before
the Chief Commissioner, Delhi for approval. The Chief Commissioner is also an
Officer of the department and there is no explanation offered by the Chief
Commissioner at Delhi or on his behalf, as to why such a long time was taken in
approving the proposal. In fact, there is even no attempt to explain the same.
The Commissioner being a Senior Officer of the revenue would undoubtedly be
conscious of the fact that the time to file the appeals was running against the
revenue and there must be averment in the application of the steps he was
taking to expedite the approval process.


Further,
there is no proper explanation for the delay after having received the approval
from the Chief Commissioner of Delhi on 29-5-2017. No explanation was offered
in the affidavits dated 16-9-2017 for having filed the appeal on 20-7-2017 i.e.
almost after two months. The additional affidavits also does not explain the
delay except stating that the Advocate to whom the papers were sent for
drafting asked for some document without giving particulars. Thus, the reasons
set out in the Affidavits and additional Affidavits in support were not
sufficient so as to condone the delay in filing the accompanying Appeal.


ii)    The officers of the revenue were conscious
of the time for filing the appeal. This is particularly so as on an average
over 2000 appeals every year from the order of the Tribunal is filed by it
before this Court. Inspite of the above said callous delay. Thus, the delay
could not be condoned.


iii)   The reasons that come out from the Affidavits
filed is, that the work takes time and, therefore, the period of limitation
imposed by the State should not be applied in case of revenue’s appeal where
the tax effect involved is substantial. Such a proposition could not be
accepted as it would be contrary to the law laid down by the Apex Court that
there is no different period of limitation for the State and the citizen.


iv)   One more submission made on behalf of the
revenue is that, the assessee have been served and they have chosen not to
appear. Therefore, it must necessarily follow that they have no objection to
the delay being condoned and the appeal being entertained. Thus, it is
submitted that the delay be condoned and the appeal be heard on merits. This
submission ignores the fact that the object of the law of limitation is to
bring certainty and finality to litigation. This is based on the Maxim ‘interest
reipublicae sit finis litium’ i.e. for the general benefit of the community
at large, because the object is every legal remedy must be alive for a
legislatively fixed period of time. The object of law of limitation is to get
on with life, if you have failed to file an appeal within the period provided
by the Statute; it is for the general benefit of the entire community so as to
ensure that stale and old matters are not agitated and the party who is
aggrieved by an order can expeditiously move higher forum to challenge the
same, if he is aggrieved by it. As observed by the Apex Court in many cases,
the law assists those who are vigilant and not those who sleep over their
rights as found in the Maxim ‘Vigilantibus Non Dormientibus Jura Subveniunt’.
Therefore, merely because the assessee does not appear, it cannot follow that
the revenue is bestowed with a right to the delay being condoned.


v)   The period of limitation should not come as a
hindrance to do substantial justice between the parties. However, at the same
time, a party cannot sleep over its right ignoring the statute of limitation
and without giving sufficient and reasonable explanation for the delay, expect
its appeal to be entertained merely because it is a State. Appeals filed beyond
a period of limitation have been entertained, where the delay has been sufficiently
explained such as in cases of bona fide mistake, mala fide action
of the Officer of the State etc; however, to seek that the period of
limitation provided in the statute be ignored in case of revenue’s appeals
cannot be accepted. The appeals which are filed by the revenue in this Court
u/s. 260A of the Act are very large in number and on an average over 2000 per
year from the orders of the Tribunal. Thus, the officers of the revenue should
be well aware of the statutory provisions and the period of limitation and
should pursue its remedies diligently and it cannot expect their appeals be
entertained, because they are after all the State, notwithstanding the fact
that delay is not sufficiently explained.”

Can Box Collection By Charitable/Religious Trusts Be In The Nature Of Corpus?

Issue for
Consideration

Voluntary contributions received by a
charitable or religious trust are taxable as its income, by virtue of the
specific provisions of section 2(24)(iia) of the Income-tax Act, 1961, subject
to exemption under sections 11 and 12. Section 12(1) provides that any
voluntary contribution received by a trust created wholly for charitable or religious
purposes (not being contributions made with a specific direction that they
shall form part of the corpus of the trust), shall be deemed to be income
derived from property held under trust wholly for charitable or religious
purposes for the purposes of section 11. Section 11(1)(d) provides for a
specific exemption for income in the form of voluntary contributions made with
a specific direction that they shall form part of the corpus of the trust.
Therefore, on a comprehensive reading of sections 2(24), 11 and 12,  it can be inferred that corpus donations are
entitled to the benefit of exemption, irrespective of whether the trust has
applied 85% of the corpus donations for charitable or religious purposes, or not.

Many charitable or religious trusts keep
donation boxes on their premises for donors to donate funds to such trusts.
Such donation boxes can be seen in various temples, hospitals, etc. At
times, some of the donation boxes have an inscription or a sign nearby stating
that the donation made in that particular box would be for a particular capital
purpose, or that it is for the corpus of the trust. The question has arisen
before the various benches of the Tribunal as to whether such amounts received
through the donation boxes having such inscription or sign would either not be
regarded as income, being receipts in the nature of contributions to corpus, or
even otherwise be eligible for exemption as corpus donations u/s. 11(1)(d), or
whether such amounts of box collection would be voluntary contributions in the
nature of regular income of the trust.

While the Chandigarh bench of the Tribunal
has taken the view that such box collections are corpus donations, and
therefore not income of the trust, the Mumbai and Calcutta benches of the
Tribunal have taken the view that such box collections could not be regarded as
corpus donations.

Prabodhan Prakashan’s case

The issue first came up before the Bombay
bench of the Tribunal in the case of Prabodhan Prakashan vs. ADIT 50 ITD
135.

In that case, the main object of the
assessee was promotion and propagation of ideologies, opinions and ideas for
furtherance of national interest, and for this purpose, publishing of books,
magazines, weeklies, dailies and other periodicals, as also establishing and
running printing presses for this purpose. Contributions were invited by the
assessee from the public towards the corpus fund of the trust through an appeal
as under:

“Establishing a firm financial foundation
for Dainik Saamana and Prabodhan Prakashan is in your hands. For this strong
foundation, we are establishing a Corpus Fund. Offeratory boxes for the corpus
will be placed in today’s meeting and meetings to be held in future. In order
to assist our activities, which will always have a nationalistic fervour and social
relevance, it is our earnest request that you contribute to the Corpus Fund
Offeratory boxes to the best of your ability”.

The words “donations towards corpus” were
written on the offeratory boxes. The boxes were opened in the presence of
Trustees, and the amount of Rs. 13,77,465 found in these boxes was credited to
the account “Donations Towards Corpus”.

Before the assessing officer, it was claimed
that the donations were made to the corpus of the trust, and were therefore
exempt u/s. 11(1)(d). The assessee was asked to furnish specific letters from
the donors confirming that they had given directions that the donations were to
be utilised towards the corpus of the trust. Such letters could be furnished
only for donations of Rs. 3,90,277, but not for the balance of Rs. 9,86,188.
For such balance amount, it was submitted that the Income-tax Act did not
specify that the directions of the donors should be in writing. It was claimed
that in view of the appeal issued for donations, and the words “donations
towards corpus” on the offeratory boxes, it should be held that specific
directions were indeed given by the donors. The assessing officer did not
accept this contention, and treated donations of Rs. 9,86,188 as ordinary
contributions, which were taxable.

The Commissioner(Appeals) referred to the
provisions of section 11(1)(d), according to which, income in the form of
voluntary contributions made with the specific direction that they shall form
part of the corpus of the trust, would not be included in the total income of
the person in receipt of the income. According to him, a specific direction of
the donor was necessary, and the circumstances relevant to prove such direction
included the need to establish the identity of the donor, which was not established
in this case. According to the Commissioner(Appeals), merely writing “donations
towards corpus” on the offeratory boxes was not sufficient, since many of the
donors might not even know as to what was the corpus of the trust. The
Commissioner(Appeals) was of the view that the burden lay upon the assessee to
prove that the donations were received towards the corpus of the trust, and
that burden had not been discharged. He therefore, upheld the action of the
assessing officer in treating the donations of Rs. 9,86,188 as voluntary
contributions in the nature of income.

Before the Tribunal, on behalf of the
assessee, it was argued that the appeal had been issued for donations towards
the corpus, and the offeratory boxes had the inscription that the donations
were towards the corpus. The trust records of collection showed that the
donations were credited to the corpus account. It was argued that there was no
provision in the Act that the specific directions from the donor should be in
writing, and that the directions were to be inferred from the facts and
circumstances.

Considering the provisions of section
11(1)(d), the Tribunal noted that it was true that there was no stipulation in
that section that the specific directions should be in writing. It agreed that
it should be possible to come to a conclusion from the facts and circumstances
of the case, whether a specific direction was there or not, even where there
were no written directions accompanying the donation. However, according to the
Tribunal, at the same time, it needed to be kept in mind that the specific
direction was to be that of the donor, and not that of the donee. It was not
sufficient for the donee alone to declare that the voluntary contributions were
being allocated to the corpus, and there should be evidence to show that the
direction came from the donor.

In the opinion of the Tribunal, when there
was no accompanying letter to the effect that the donation was towards corpus,
at least such subsequent confirmation from the donor was a necessity. In the
case before it, such subsequent confirmation was also absent, and all that was
there, according to the Tribunal, was the intention of the donee and the actual
carrying out of that intention.

The Tribunal therefore held that the facts
did not fulfil the requirement of section 11(1)(d), and that it could not be
said that there was a specific direction from the donor to use the contribution
towards the corpus of the trust. It accordingly held that the amount was not
exempt u/s. 11(1)(d).

A similar view was taken by the Calcutta
bench of the Tribunal in the case of Shri Digambar Jain Naya Mandir vs. ADIT
70 ITD 121, which was the case of a religious trust running a temple, which
had kept two boxes in the premises of the temple, one marked “Corpus Donations”
and the other marked as “Donations”. In that case, the Tribunal held that the
assessee had not made out that the donors were able to give the direction
before/at the time of donation, and that for an ordinary devotee, it was not
possible to distinguish the corpus and non-corpus funds.

Shree Mahadevi Tirath Sharda Ma Seva Sangh’s
case

The issue again came up before the
Chandigarh bench of the tribunal in the case of Shree Mahadevi Tirath Sharda
Ma Seva Sangh vs. ADIT 133 TTJ 57(Chd.) (UO).

In the case, the assessee was a society
registered under the Societies Registration Act, 1860 and u/s. 12AA of the
Income-tax Act, 1961, running a temple, Vaishno Mata Temple, at Kullu. A
resolution had been passed whereby the different boxes were decided to be kept
in the temple premises for enabling the devotees to make donations according to
their discretion. It included keeping of a box for collection of donations,
which were to be used for undertaking construction of building. Any
devotee/donor desirous of making a donation towards construction of buildings
would put the money in this box. In the temple premises, donation boxes were
kept with different objectives. One donation box was kept for “Construction of
Building”, and other boxes for donations meant for langar and general purposes.
At specified intervals, the boxes were opened and the amounts collected were
put into respective accounts. The donations were duly entered in either the
building fund donation register or the normal donation account, and thereafter
entered in the books of account accordingly.

The return of income was filed, claiming
exemption for donations received in the box kept for donations for construction
of building. The donations were reflected in the balance sheet under the head
“Donation for Building Construction with Specific Directions from Individuals”.

The assessing officer however, treated such
donations of Rs. 40,55,480 as donations, and not as receipts towards corpus,
and included the donations in the total income liable to tax. It was done on
the reason that the assessee did not possess any evidence to show that the
donation credited under the Building Fund had been donated by donors with the
specific direction to utilise the same for building construction only.

The Commissioner(Appeals) rejected the
appeal of the assessee, on the ground that the assessee failed to provide the
requisite details or any documentary evidence to prove that the donations were
made with specific directions for construction of building.

Before the Tribunal, it was pointed out that
the assessee had collected donations earmarked for being spent on construction
of building in the same manner as in the past years. It was pointed out that
the amount was credited to the Building Fund in the balance sheet, which also
included the opening balance, and, on the assets side, the assessee had shown
the expenditure on construction of the building. The amount had been spent
exclusively towards construction of the building, on which there was no
dispute. The fact that the donation boxes were kept with different objectives
in the temple premises was demonstrated with the help of photographs and
certificates from the local gram panchayat, Councillor, etc. It was
claimed that the certificates testified the system evolved by the assessee
since earlier years for collection of donations towards construction of
building.

It was further argued that in view of the
nature of collection undertaken by the assessee, which was supported by past
history, the assessing officer was not justified in insisting on production of
specific names of donors.

On behalf of the revenue, it was pointed out
that the assessee could not furnish the complete names and addresses of the
donors who had made the donations with specific directions for building
construction, though such details were asked for during the course of
assessment proceedings. It was only because such information was not available
that the amounts had been treated as voluntary/general donations, and not as
corpus donations.

The Tribunal considered the various facts
placed before it, supported by photographs, testimony of the local gram
panchayat, resolution, the fact that different boxes were kept for separate
purposes, the utilisation of the Building Fund, etc. It noted the fact that the
assessee had received general donations of Rs. 19,53,094 and other incomes,
which were credited to the income and expenditure account.

Analysing the provisions of section 12(1),
the Tribunal noted that any voluntary contributions made with a specific
direction that they shall form part of the corpus of the trust were not to be
treated as income for the purposes of section 11. It observed that the moot
question was whether or not the manner in which the assessee had collected the
donations could be said to signify a direction from the donor that the funds
were to be utilised for the construction of building. It noted that the manner
in which the specific direction was to be made had not been laid down in the
Act or the Rules; there was no method or mode prescribed by law of giving such
directions. Therefore, according to the Tribunal, it was in the fitness of
things to deduce that the same was to be gathered from the facts and
circumstances of each case.

The Tribunal noted that the resolution of
the Society clearly showed that a donation box had been kept in the temple
premises with the appeal that the amount collected would be spent for building
construction. The devotees visiting the temple or other donors were depositing
money in the donation box, which was to be utilised for construction of
building only. The assessing officer had not disputed the manner in which such
donations had been collected by the assessee. The only dispute was that the
assessee could not provide the names and addresses of individual donors who had
contributed towards Building Fund. According to the Tribunal, since the
donations were being collected from the devotees at large, the insistence of
the assessing officer of production of individual names and addresses was not
justified. Further, the bona fides of such practice being carried out by the
assessee, either in the past or during the year under consideration, was not doubted.

Therefore, in the opinion of the Tribunal,
having regard to the facts and circumstances of the case, the donations of Rs.
40,55,480 collected by the assessee were to be considered as carrying specific
directions for being used for construction of the building. Ostensibly, the
devotees putting money in the donation box did so in response to the appeal by
the society that the amounts collected would be used for construction of
building. Under such circumstances, the Tribunal was of the view that the assessee’s
plea, that these amount should be taken as donations towards corpus, was
reasonable.

The Tribunal accordingly held that such
amounts received in the box for construction of building would form part of the
corpus of the Society, and would not constitute income for the purposes of
section 11.

Observations

When one analyses both these decisions
(Prabodhan Prakashan & Shree Mahadevi Tirath Sharda Ma Seva Sangh), one
realises that the common thread running through both these decisions is that
both confirm that the direction of the donors, that the amount of donation is
towards corpus need not be in writing, and that it is sufficient if the
surrounding circumstances indicate that the donors intended to give the funds
put in the boxes for corpus/capital purposes, for such amounts to be treated as
corpus donations. In Prabodhan Prakashan’s case, the Tribunal went further and
held that there should be evidence to show that the direction came from the
donor, while in Shri Digambar Jain Naya Mandir’s case, the Tribunal observed
that the assessee had not made out that the donors were able to give the
direction before or at the time of donation to the corpus funds. Both the
Bombay and Calcutta decisions, therefore, placed the onus on the assessee to
show the existence of the directions from the donors.

A view similar to the Chandigarh bench’s
view has been taken by the Karnataka High Court in the case of DIT vs. Sri
Ramakrishna Seva Ashrama 357 ITR 731, where the High Court held that it was
not necessary that a voluntary contribution should be made with a specific
direction to treat it as corpus. If the intention of the donor was to give that
money to a trust, which would be kept in a deposit, and the income from the
same was to be utilised for carrying on a particular activity, it satisfied the
definition part of the corpus. It further held that whether a donation was in
the nature of corpus or not was to be gauged from the intention of the donor
and how the recipient treated the receipt. In that case, the assessee had
received various donations for Rural Health Project, which were kept in fixed
deposits. The income derived from those deposits was utilised for carrying on
its various rural activities.

Similarly, in
the case of Shri Vasu Pujiya Jain Derasar Pedhi vs. ITO 39 TTJ (Jp) 337,
the receipts by the trust were issued under the head “Mandir Nirman”, and the
dispute was whether the donations could be said to be received with specific
directions that they shall form part of the corpus of the trust. It was held by
the Jaipur bench of the Tribunal that the donations were to be treated as
corpus donations.

In the case of Agnel Charities (Agnel
Sewa Sang) vs. ITO 31 TTJ (Del) 160, the assessee had staged a drama for
raising funds for construction of a school building. The circular issued
relating to the drama mentioned that the assessee was inviting subscriptions
and donations for school building. The Delhi bench of the Tribunal held that
such donations received were corpus donations, entitled to exemption.

In the case of N. A. Ramachandra Raja
Charity Trust vs. ITO 14 ITD 230 (Mad), the receipts given to the donors
had a rubber stamp “towards corpus only” on each of the receipts. In addition,
certificates were obtained from some of the donors confirming the fact that the
donations were towards corpus. In that case, the Madras bench of the tribunal
held that it was clear from the inception that the amounts received by the
assessee and held by it were under an obligation to appropriate the same
towards the corpus of the trust alone. While so holding, the tribunal relied
upon the decision of the Supreme Court in the case of CIT v. Bijli Cotton
Mills 116 ITR 60, whereof the Supreme Court confirmed that certain amounts
received by the assessee and shown in the bills issued to the customers in a
separate column headed “Dharmada” was not income of the assessee, since right
from inception, these amounts were received and held by the assessee under an
obligation to spend the same for charitable purposes only, being earmarked by
the customers for Dharmada.

In Prabodhan Prakashan’s case, the
Tribunal, perhaps, was not justified in inferring  that the specific direction in that case was
that of the donee, and not that of the donor. Perhaps, in that case, the
tribunal was not convinced by the evidence placed before it that the donor was
aware of the fact that the donation was being given for a capital purpose.

The observation of the Tribunal in Shri
Digambar Naya Mandir’s case that, for an ordinary devotee, it was not
possible to distinguish the corpus and non-corpus funds did not seem to be
justified. While a devotee may not know what is the meaning of corpus, a
devotee would certainly be aware of the purpose for which his donation into a
particular box would be used, particularly when there are clear indications in
the form of inscription or signs on the box or near the box stating the
purpose. This would be all the more relevant when there are boxes for more than
one purpose placed in the same premises, some for corpus purposes and others
for non-corpus purposes. By putting his donation in a particular box, the
devotee should be regarded as having exercised his option as to how his
donation is to be used.

Therefore, where a trust receives certain
box collections for capital purposes, the surrounding circumstances clearly
indicate that the donor intended the amounts deposited in the box to be
utilised for such capital purposes, and such receipts are bona fide for
such capital purposes (as perhaps indicated by fairly large collection for
non-corpus purposes as well), such collections should certainly be
regarded  as   corpus 
donations  eligible  for  
exemption u/s. 11(1)(d).

All the above decisions were rendered in the
context of the law prior to the insertion of section 56(2)(x), and therefore
the Tribunals did not have the opportunity to consider taxation of such box
collections under that section. Section 56(2)(x) provides that where any person
receives any sum of money aggregating more than Rs. 50,000 in a year from any
persons, such amount is chargeable to income-tax as Income from Other Sources.
There is no exemption for amounts received by a charitable or religious trust.
After the insertion of section 56(2)(x), would such box collection be taxable
under that section?

If one looks at section 2(24)(iia) and
section 12(1), these operate specifically to tax voluntary contributions
received by a charitable or religious trust as its income. Being specific
sections, these would prevail over the general provisions of section 56(2)(x),
which apply to all assessees. Therefore, in our view, section 56(2)(x) would
not apply to a charitable or religious trust, the specific exclusions u/s.12(1)
cannot be taxed by roping in the general provisions of section 56(2)(x).

One more section which needs to be kept in
mind, in the context of box collections, is section 115BBC. This section, which
does not apply to wholly religious trusts, provides that, where the total
income of an assessee referred to in section 11, includes any anonymous
donations, such anonymous donations in excess of the specified limit, shall be
chargeable to tax at the rate of 30%. Box collection of wholly religious trusts
would not be taxable under this section, whereas only donations made for the
purposes of a medical institution or educational institution would be taxable
in case of partly charitable and partly religious trusts. While this section
would apply to normal box collections of charitable trusts, the issue is
whether it would apply to box collections for a capital purpose of such
charitable trusts, which would otherwise be regarded as corpus donations?

Given the specific exclusion in section
12(1) for corpus donations, a view is possible that such corpus donations (box
collections) are capital receipts, which do not fall within the domain of
income of a charitable trust at all, and that therefore, the provisions of
section 115BBC do not apply to such box collections for capital purposes. In
fact, in DCIT vs. All India Pingalwara Charitable Society 67 taxmann.com
338, the Amritsar bench of the Tribunal took a view that section 115BBC
does not apply at all to box collections of genuine charitable trusts.
According to the Tribunal, the object of the section was to catch the
‘unaccounted money’ which was brought in as tax free income in the hands of
charitable trusts, and this section was never meant for taxing the petty
charities. The Legislature intended to tax the unaccounted money or black money
which was brought in the books of charitable trusts in bulk, and not to tax the
small and general charities collected by genuine charitable trusts.

In Gurudev Siddha Peeth vs. ITO 59
taxmann.com 400, the Mumbai bench of the Tribunal also held that amount of
offerings put by various devotees in donation boxes of the assessee-trust, a
sidh peeth/deity, could not be treated as anonymous donations taxable u/s.
115BBC merely on ground that assessee had not maintained any records of such
offerings. According to the Tribunal, it is clear that the provisions of
section 115BBC(1) will not apply to donations received by the assessee in
donation boxes from numerous devotees who have offered the offerings on account
of respect, esteem, regard, reference and their prayer for the deity/siddha
peeth. Such type of offerings are made/put into the donation box by numerous
visitors and it is generally not possible for any such type of institutions to
make and keep record of each of the donors, with his name, address etc.
This section is meant to curb the flow of unaccounted money into the system,
with a modus operandi to introduce such black money into accounts of
institutions such as university, medical institutions, where there is a problem
relating to the receipt of capitation fees, etc.

Therefore, a view is possible that section
115BBC does not apply at all to box collections of genuine charitable trusts.

 

 

The Finance Act 2018

1.  INTRODUCTION:

1.1  The Finance Minister, Shri Arun Jaitley, has
presented his last full Budget of the present Government for 2018-19 in the
Parliament on 1st February, 2018. This Budget can be described as
Pro-Poor and Pro-Farmer Budget. The Budget contains several schemes for
Agriculture and Rural Economy, Health, Education and Social Protection,
Encouragement to Medium, Small and Micro Enterprises (MSME), Employment
Generation, Improving Public Service Delivery etc.

1.2  The Finance Minister has summarized his views
about economic reforms in Para 3 of his Budget Speech.

1.3  In the field of Direct Taxes he has made some
amendments in the Income-tax Act. These amendments can be classified under the
following heads.

 

(i)    Tax Incentives for
promoting post-harvest activities  of
agriculture;

(ii)   Employment Generation;

(iii)   Incentive for Real
Estate;

(iv)  Incentive to MSMEs.

(v)   Relief to Salaried
Taxpayers;

(vi)  Relief to Senior
Citizens;

(vii)  Tax Incentives for
International Financial Services Centre (IFSC)

(viii) Measures to Control cash
Economy,

(ix)  Rationalisation of Long
term Capital Gains Tax.

(x)   Health and Education Cess

(xi)  E-Assessments

 

1.4  Out of the above, the
major amendment in the Income tax Act relates to levy of Long-term Capital
Gains Tax on Shares and Units of Equity Oriented Mutual Funds on which
Securities Transaction Tax (STT) is paid. Hitherto, this long term capital gain
was exempt from tax. This one proposal will bring in about Rs.20,000 crore
additional revenue to the Government. The logic for this new levy is explained
in Para 155 of the Budget Speech.

1.5  This year’s Budget and
the Finance Bill, 2018, has been passed, with some procedural amendments,
suggested by the Finance Minister, by the Parliament without any debate. The
Finance Act, 2018, has received the assent of the President on 29th
March, 2018. Most of the amendments in the Income-tax Act have come into force
from 1.4.2018 i.e. F.Y. 2018-19 (A.Y. 2019-20). In this Article some of the
important amendments in the Income-tax Act have been discussed.

 

2.  RATES OF TAXES:

2.1  There are no changes in
tax rates or tax slabs in the case of non-corporate assessees. There is no change
in the rates of surcharge applicable to all assessees. Similarly, there is no
change in the rebate from tax allowable u/s. 87A of the Income-tax Act.

 

2.2 The existing Education Cess (2%) and Secondary and Higher
Education Cess (1%) levied on tax payable has now been replaced from A.Y.
2019-20 by a new cess called “Health and Education Cess” at 4% of the tax
payable by all assessees.

 

2.3 In the case of domestic companies, there are some modifications
as under w.e.f. A.Y. 2019-20:

 

(i)  At present, where the
total turnover or gross receipts of a company does not exceed Rs. 50 cr., in
F.Y. 2015-16, the rate of tax is 25%. From A.Y. 2019-20, it is provided that
where the turnover or gross receipts of a company does not exceed Rs. 250 cr.,
in F.Y. 2016-17, the rate of tax will be 25%. This will benefit many small and
medium size companies.

 

(ii)  In the case of a
Domestic company which is newly set up on or after 1.3.2016, which complies
with the provisions of section 115BA, the rate of tax is 25% at the option of
the company.

(iii) In all
other cases, the rate of tax will be 30%.


2.4   There are no changes in the rates of tax and
surcharge chargeable to foreign companies. The rate of education cess is
increased from 3% to 4% as stated above.

2.5  As stated earlier, one major amendment this
year relates to levy of tax on long term capital gain on transfer of shares and
units of equity Oriented Mutual Funds on which STT is paid. Hitherto, this
capital gain was exempt from tax. By insertion of a new section 112A, it is now
provided that in respect of transfer of such shares or units on or after
1.4.2018, the long term capital gain in excess of Rs. 1 Lakh will be taxable at
the rate of 10% plus applicable surcharge and cess.

2.6  There is no change in the rate of Minimum
Alternate Tax (MAT) chargeable to companies. However, in the case of a Unit
owned by a non-corporate assessee located in an International Financial
Services Centre (IFSC), the rate of AMT payable u/s. 115 JC in respect of
income derived in foreign currency has been reduced from 18.5% to 9% plus
applicable Surcharge and Cess.

2.7  Section 115-O is amendment to levy tax at
the  rate of 30% plus applicable
surcharge and cess on a closely held company in respect of any loan given to a
related party to whom section 2(22) (e) applies. Hitherto, tax was payable by
the person receiving such loan u/s. 2(22)(e). This burden is now shifted to the
company giving such loan and the person receiving such will not be liable to
pay any tax from A.Y. 2019-20.

      

2.8  Section 115R has been amended to provide for
levy of tax on Mutual Fund in aspect of income distributed to Unit holders of
equity oriented mutual fund. This tax is at the rate of 10% plus applicable
surcharge and cess.

 

2.9  In view of the above, the effective maximum
marginal rate of tax (including surcharge and Health & Education Cess) for
A.Y. 2019-20 will be as under:

 

Assessee

Up to Rs. 50 lakhs

Above Rs.50 lakhs and up to Rs.1 crore.

Above Rs. 1 cr., and up to Rs.10 cr.

Above
Rs.10 cr.

Individual,
HUF etc.

31.2%

34.32%

35.88%

35.88%

Firms
(including LLP)

31.2%

31.2%

34.944%

34.944%

Domestic
Companies with turnover / gross receipts in F.Y.2016-17 not exceeding Rs. 250
cr.

26%

26%

27.82%

29.12%

New
Domestic Companies complying with the  conditions of section 115BA

26%

26%

27.82%

29.12%

Other
Domestic Companies

31.2%

31.2%

33.384%

34.944%

Foreign
Companies

41.6%

41.6%

42.432%

43.68%

 

2.10  Commodities
Transaction Tax:

The Finance
Act, 2013, has been amended to provided that the Commodities Transaction Tax
(CTT) shall be payable at the following Rates w.e.f. 1.4.2018.

 

Sr. No.

Taxable
Commodities Transaction

Rate

Tax payable
by

1

Sale of a
Commodity derivative

0.01%

Seller

2

Sale of an
option on Commodity derivative

0.05%

Seller

3

Sale of an
option on commodity derivative, where option is exercised

0.0001%

Purchaser

 

3.   TAX DEDUCTION AT SOURCE:

(i)   7.75% Savings (Taxable) Bonds, 2018 – Section 193           

              

It is now provided
tax shall be deducted at source on interest exceeding Rs. 10,000/- payable on
the above Bonds at the rates provided in section 193.

           

(ii) Interest on Deposits by Senior Citizens – Section
194A

 

Section 194A has
been amended w.e.f. 1.4.2018 to provide that tax will not be deducted at source
by a Bank, Co-operative Bank or Post Office in respect of interest upto Rs.
50,000/- on a deposit made by a Senior Citizen. 
It may be noted that under the newly inserted section 80TTB, it is now
provided that in the case of a Senior Citizen, deduction of interest up to Rs.
50,000/- received from a bank, co-operative bank or post office on all deposits
will be allowed for computing the Total Income.

 

4.   EXEMPTIONS
AND DEDUCTIONS:

4.1  Exemption
on withdrawal from NPS  – Section 10(12A)

At present,
withdrawal by an employee contributing to National Pension Scheme (NPS),
referred to in section 80CCD, on closure of account or opting out of the Scheme
is exempt from tax to the extent of 40% of the amount withdrawn on closure of
the account or opting out of the scheme.

The benefit of
this exemption u/s. 10(12A) is now extended to all other persons who are
subscribers to the NPS from the A.Y. 2019-20 (F.Y. 2018-19). It may be noted
that the exemption given for partial withdrawal from NPS to employees u/s.
10(12B) from A.Y. 2018-19 has not been extended to other assessees.

4.2 Exemption from Long term Capital Gains Tax –
Section 10(38)

At present, long
term capital gain on transfer of equity shares of a company or units of equity
oriented Mutual Fund is exempt from tax u/s. 10(38) if STT is paid. This
exemption is now withdrawn by amendment of this section w.e.f. 1.4.2018. This
issue is discussed in detail in Para 9 under the head “Capital Gains.”


4.3  Deduction
from Gross Total Income – Section 80AC

At present,
Section 80AC provides that deductions u/s. 80 – IA, 80-IAB, 80-IB, 80-IC, 80-ID
or 80-IE will not be allowed if the assessee has not filed the return of Income
before the due date mentioned u/s. 139(1) of the Income tax Act. This section
is now amended w.e.f. A/Y: 2018-19 (F.Y:2017-18) to provide that deduction in
respect of Income under sections 80 H to 80 RRB (Part “C” of Chapter VIA) will
not be allowed if the return of Income is not filed within the time allowed
u/s. 139(1).


4.4  Deduction
for Health Insurance Premium – Section 80D

At present, the amount paid for health
insurance  premium, preventive health
check-up or medical expenses is allowed to Senior Citizens upto Rs.
30,000/.  This limit is increased, by
amendment of Section 80D from A.Y. 2019-20 (F.Y. 2018-19), to Rs. 50,000/-.
This amendment applies to all Senior Citizens (including Very Senior Citizens).

A new subsection
(4A) is added to provide that where the amount has been paid in Lump Sum to
keep in force an Insurance Policy on the health of the specified person for
more than a year, then deduction will be allowed in each year, on proportionate
basis, during which the insurance is in force.

4.5  Deduction for
medical treatment for Special Diseases – Section 80DDB

 At present,
Section 80DDB provides for deduction for medical expenses in respect of certain
critical illness, as specified in Rule 11DD. In the case of a Senior Citizen
this deduction is allowable upto Rs. 60,000/-. In the case of a very Senior
Citizen, the limit for this deduction is Rs. 80,000/-.  By amendment of this
section from  A.Y. 2019-20 (F.Y.
2018-19), this limit for Senior Citizens (including very Senior Citizens) is
increased to Rs.1,00,000/-.

4.6  Incentives
to Start – Ups – Section 80 IAC

Section 80IAC
provides for 100% deduction of profits of an eligible start-up for three
consecutive years out of seven years beginning from the year of its
incorporation.  This section is amended
with retrospective effect from A.Y. 2018-19 (F.Y. 2017-18). Some of the
conditions for eligibility of this exemption have been relaxed as under.

(i)  At present, this benefit is available to an
eligible start-up incorporated between 01.04.2016 to 31.03.2019. Now it is
provided that this benefit can be claimed by a start-up incorporated between
01.04.2016 to 31.03.2021.

(ii)  At present, this benefit is available to an
eligible start-up only if the total turnover of the business does not exceed
Rs. 25 crore during any of the years between F.Y. 2016-17 to F.Y. 2020-21. It
is now provided that this benefit can be claimed if the total turnover of the
business in the year for which the deduction is claimed does not exceed Rs. 25
crore.

(iii)  The definition of the term “Eligible
Business” has been substituted by a new definition as under;

“Eligible
Business” means a business carried out by an eligible start-up engaged in
innovation, development or improvement of Products or processes or services or
a scalable business model with a high potential of employment generation or
wealth creation.”

From the above,
it will be noticed that the existing requirement of development of ‘new
products’ and of the business being driven by technology or intellectual
property is now removed.

4.7  Incentives
for Employment Generation – Section 80 JJAA

(i) Section 80JJ
AA has been amended from A.Y. 2019-20 (F.Y. 2018-19). This section provides for
an additional deduction of 30% in respect of salary and other emoluments paid
to eligible new employees who are employed for a minimum period of 240 days
during the year. At present, this requirement of 240 days of employment in a
year is relaxed to 150 days in the case of Apparel Industry. This concession
has now been extended to “Footwear and Leather” industry.

(ii)  The above deduction is available for a period
of 3 consecutive years from the year in which the new employee is employed. The
amendment in the section now provides that where the new employee is employed
in a particular year for less than  240 /
150 days but in the immediately succeeding year such employee is employed for
more than 240/150 days, he shall be deemed to have been employed in the
succeeding year. In such a case, the benefit of this section can be claimed in
such succeeding year and also in the two immediately succeeding years.

 4.8  Incentive to
Producer Companies – New Section 80 PA

(i)  Section 80PA is a new section inserted from
A.Y. 2019-20 (F.Y. 2018-19). This section provides that a Producer Company (as
defined in section 581 A (l) of the Companies Act, 1956) shall be entitled to
claim deduction of 100% of its profits from eligible business during 5 years
i.e. A.Y. 2019-20 to A.Y. 2024-25. This benefit can be claimed by such a
company only in the year in which its turnover is less than Rs.100 crore.

For this
purpose, the eligible business is defined to mean-

(a) The
marketing of Agricultural Produce grown by its members;                       

(b) The purchase
of agricultural implements, seeds, livestock or other articles intended for
agriculture for the purpose of supplying to its members.

(c) The
processing of the agricultural produce of its members.

(ii)  It may be noted that the provisions of
section 581A to 581 ZT of the Companies Act, 1956 are applicable also to
Producer Companies registered under the Companies Act, 2013, by virtue of
section 465 of the Companies Act, 2013. The term ‘Producer Company’ is defined
in section 581A(l) and the term “Member” of such company is defined in section
581A (d).

 (iii)  It may be noted that the above deduction u/s.
80PA will be allowed in respect of the above 100% income included in the Gross
Total Income after reducing any other deduction claimed under Chapter VIA of
the Income-tax Act. It may further be noted that the above benefit of deduction
of 100% income is not available while computing book profits u/s.115 JB.
Therefore, such producer company will be required to pay MAT under Section 115
JB.

(iv)  Further, it may be noted that the above
benefit given under sections 80IAC, 80 JJAA or 80 PA will not be available if
the assessee does not file its return of income before the due date as provided
in section 139(1) in view of the fact that section 80AC is amended from A.Y. 2019-20.

4.9  Deduction
of Interest on Bank Deposits by Senior Citizens New Section 80TTB

(i)  At present, interest received on savings
account with a bank, co-operative bank or post office upto Rs. 10,000/- is
allowed as deduction in the case of an individual or HUF u/s. 80TTA. By an
amendment of section 80TTA, it is now provided that the said section shall not
apply to a Senior Section from A/Y:2019-20 (F.Y:2018-19).

(ii)  To give additional benefit to a Senior
Citizen (An Individual whose age is 60 years or more), a new section 80TTB is
inserted from A.Y. 2019-20 (F.Y. 2018-19). This section provides that in the
case of a Senior Citizen deduction can be claimed upto Rs. 50,000/- in respect
of interest on any deposit (savings, recurring deposit, fixed deposit etc.)
with a bank, co-operative bank or post office. This deduction cannot be claimed
by a Senior Citizen who holds any such deposit on behalf of a Firm, AOP or BOI
in which he is a partner or member. As stated earlier, the bank, co-operative
bank or post office will not be required to deduct tax at source u/s. 194A from
the interest upto Rs. 50,000/- on such deposit.

 

5.   CHARITABLE
TRUSTS:

Sections 10(23C)
and 11 have been amended w.e.f. A.Y. 2019-20 (F.Y2018-19) to provide for
certain restrictions while computing the income applied for objects of the
Trust. These sections apply to Educational Trusts, Hospitals and other Public
Charitable or Religious Trusts, which claim exemption u/s. 10(23C) or Section
11. It is now provided that restrictions on cash payment u/s. 40A(3) / (3A) and
consequences of non-deduction of tax at source u/s. 40 (a)(ia) will apply to
these Trusts. In other words, any payment in excess of Rs. 10,000/- made to a
person, in a day, otherwise than by an account payee cheque / bank draft will
not be considered as application of income to the objects of the Trust. Similarly,
if any payment is made to a person by way of salary, brokerage, interest,
professional fees, rent etc., on which tax is required to be deducted at
source under Chapter XVII of the Income-tax Act, and is not so deducted or paid
to the Government, the same will not be considered as application of income to
the extent provided in section 40(a)(ia). It may be noted that u/s. 40(a) (ia),
it is provided that 30% of such payment will not be allowed as deduction. Thus,
30% of the amount paid by the Trust without deduction of tax will not be
considered as application of income to the objects of the Trust.  Therefore, all public trusts claiming
exemption under the above sections will have to be careful while making
payments for scholarships, donations, professional fees, rent and other
expenses as they have to make sure that they comply with the provisions of
section 40A(3), 40A(3A) and 40(a) (ia).

 

6.   INCOME
FROM SALARY:

Sections 16 and
17 have been amended from A.Y. 2019-20 (F.Y. 2018-19). The effect of these amendments
is
as under:

(i)  All salaried employees will now be allowed
standard deduction of Rs. 40,000/- while computing income from salary u/s 16
and 17. This deduction can be claimed by persons getting pension from the
employer.

(ii)  At present, exemption is given to the
employee in respect of reimbursement of medical expenses incurred upto Rs.
15,000/- while computing perquisites u/s 17. This exemption is withdrawn from
A.Y. 2019-20 as standard deduction is now allowed.

(iii)  At present, u/s. 10(14)(i) read with Rule
2BB, an employee can claim deduction upto Rs. 1,600/- P.M. by way of transport
allowance while computing the income from salary. As stated in Para 151 of the
Budget Speech, this benefit will be withdrawn from A.Y. 2019-20 as standard
deduction is now allowed.

The above
amendment will reduce compliance burden of providing and maintaining records
relating to medical expenditure incurred by the employees. The net effect of
the above amendment will be that a salaried employee will get additional
deduction of Rs. 5800/- in the computation of Salary Income.

7.   INCOME
FROM BUSINESS OR PROFESSION:

7.1  Compensation
or termination or modification of contracts – Section 28(ii)

Section 28(ii)
is now amended from A.Y. 2019-20 (F.Y. 2018-19) to provide that any
compensation or other payments (whether of a revenue or capital nature) due to
or received by an assessee on termination of a contract relating to its
business will now be treated as its business income. Similarly, any such amount
due or received on modification of the terms and conditions of such contract
shall also be considered as business income.

7.2  Trading
in Agricultural Commodity Derivatives

At present,
section 43(5) considers a transaction of trading in commodity derivatives
carried on a recognised association which is chargeable to Commodities
Transactions Tax (CTT) as non-speculative. Since no CTT is payable on
transactions of Agriculture Commodity Derivatives, this section is amended from
A.Y. 2019-20 (F.Y. 2018-19) to provide that in case of trading in Agricultural
Commodity Derivatives the condition of chargeability of CTT shall not apply.

7.3  Full Value of
Consideration for Transfer of assets

Section 43CA,
50C and 56(2)(X) have been amended from A/Y:2019-20  (F.Y:2018-19) giving some relief in
computation of full value of consideration for transfer of Immovable Property.
Briefly stated, the effect of these amendments is as under:

(i)  At present, section 43CA(1) provides that in
case of transfer of any land or building or both, held as stock-in-trade, the
value adopted or assessed or assessable by Stamp Duty Authority (Stamp Duty
Value) shall be deemed to be the full value of the consideration, if the actual
consideration is less. Similarly, section 50C, dealing with transfer of land,
building or both held as capital asset and section 56(2) (X) dealing with
receipt of consideration by any person on transfer of land, building or both
contains a similar provision.

(ii)  In order to provide some relief in cases of
such transactions, the above sections are amended to provide that where Stamp
Duty Value does not exceed the actual consideration by more than 5% of the
actual consideration, no adjustment under these sections will be made and
actual consideration will be considered as full value of the consideration.
Thus, if the sale consideration is Rs.1,00,000/- and the stamp duty value is
Rs. 1,04,000/- the sale consideration will be considered as full value of the
consideration.

(iii)  If, however, the Stamp Duty Value is more
than 5% of the actual consideration, the Stamp Duty Valuation will be
considered as the full value of the consideration. Thus, if the sale
consideration is Rs. 1,00,000/- and the stamp duty value is Rs. 1,06,000/-, the
stamp duty value will be considered as full value of the consideration.

7.4  Presumptive Taxation – Section 44 AE

Section 44 AE
provides for computation of income on a presumptive basis in the case of
business of plying, hiring or leasing of goods carriers carried on by an
assessee who owns not more than 10 goods carriers at any time during the year.
At present, this section does not provide for presumptive income rates based on
capacity of vehicles. Therefore, this section is amended effective from A.Y.
2019-20(F.Y. 2018-19) to provide that in respect of heavy goods vehicles (i.e.
where gross vehicle weight is more than 12000 Kilograms) the presumptive income
u/s. 44AE will be computed at the rate of Rs. 1,000/- per tonne of gross
vehicle weight or Unladen weight, as the case may be, for every month or part
of the month or such higher amount as earned by the assessee. In the case of
vehicles, other than heavy vehicles, the presumptive income shall be Rs.
7,500/- from each goods vehicle for every month or part of the month during
which the vehicle is owned by the assesse or such higher income as earned by
the assessee. The other conditions of the existing section 44 AE will continue
to apply to the assesse who opts to be assessed on presumptive income under
this section.

 7.5  Carry forward
and set-off of Losses – Section 79

At present,
section 79 allows carry forward and set off of loses by a closely held company
only if the beneficial ownership of shares carrying at least 51% of the voting
power, as on the last day of the year in which the loss is incurred, is
continued.

In order to give
relief to cases covered by Insolvency and Bankruptcy Code, 2016, (IBC-2016)
this section is amended retrospectively from A.Y. 2018-19 (F.Y. 2017-18). The
effect of the amendment is that the carry forward and set off of losses shall
be allowed, even if the change in the beneficial ownership of shares carrying
voting power is more than 51% as a result of the Resolution Plan under
IBC-2016, after providing an opportunity of hearing to the concerned
commissioner of Income tax. 

7.6  Taxation of
Book Profits – Section 115JB

(i)  Section 115 JB is amended from A.Y. 2018 – 19
(F.Y. 2017-18). – By this amendment, relief is given in the case of a company
against which an application for insolvency resolution has been admitted by the
Adjudicating Authority under IBC-2016. By this amendment it is now provided
that, from A.Y. 2018-19, the aggregate of unabsorbed depreciation and brought
forward losses, as per the books, shall be reduced in computing book profit.

(ii)  At present, the provisions of section 115JB
apply to Foreign Companies. Exception is made for companies which have no
permanent establishment in India and which are residents of countries with whom
India has entered into Double Tax Avoidance Agreement (DTAA). The exception is
also made with regard to companies resident of other countries with which there
is no DTAA and which are not required to seek registration under any applicable
laws. The section is now amended retrospectively from A.Y. 2001-02 to provide
that this section will not apply to foreign companies opting for presumptive
taxation under sections 44B, 44BB, 44BBA or 44BBB, where total income of such
companies comprises solely of income from business referred to in these sections
and such income has been offered for tax at the rates specified in those
sections.

8. INCOME computation AND DISCLOSURE
STANDARDS (ICDS):

8.1  Section 145(2) of the Income-tax Act
authorised the Central Government to notify ICDS. Accordingly, CBDT notified 10
ICDS by a Notification No. 87/2016 dated 29.09.2016. These ICDS came into force
from A.Y. 2017-18 (F.Y. 2016-17). Under section 145(2), it is provided that
income from Business or Profession or Income from Other Sources should be
computed in accordance with ICDS. Further, ICDS applies to all assessees (other
than an Individual or HUF who is not required to get their accounts audited
u/s. 44AB) who follow the Mercantile System of Accounting for computation of
Income from Business or Profession or Income from Other Sources.

8.2 
The Delhi High Court, in the case of Chamber of Tax Consultants vs.
Union of India (252 Taxman 77) have struck down some of the ICDS fully and
read down some of the ICDS partially holding them to be contrary to the
judicial precedents or the provisions of the Income-tax Act.

8.3  It may be noted that in the above judgement
of Delhi High Court ICDS –I (Accounting Policies) ICDS II (Valuation of
Inventories), ICDS VI (Effects of Changes in Foreign Exchange Rates), ICDS VII
(Government Grants), and Part “A” of ICDS VIII (Securities) have been held to
be Ultra vires the Income-tax Act and have been struck down. Further,
Para 10(a) and 12 of ICDS III (Construction Contracts), Para 5 and 6 of ICDS IV
(Revenue Recognition) and Para 5 of ICDS IX (Borrowing Costs) have been held to
be Ultra Vires the Act and therefore struck down.

8.4  In order to overcome the effect of the above
judgment of Delhi High Court specific provisions are made in sections 36(1)
(xviii), 40A(13), 43 AA, 43CB, 145A and 145B with retrospective effect from
A.Y. 2017-18 (F.Y. 2016-17). In other words, these new provisions now validate
the objectionable provisions of ICDS which were struck down by the Delhi High
Court. The provisions of the above sections are as under:

(i)  Deduction
of marked-to-market loss

A new clause
(xviii) has been inserted in section 36(1) to provide for deduction of
marked-to-market loss or other expected loss as computed in accordance with the
ICDS VI. Further, a new sub-section (13) is inserted in Section 40A, to provide
that no deduction/ allowance of any marked-to market loss or other expected
loss shall be allowed, except those which are allowable as per the provisions
of section 36(1) (xviii).

(ii) Foreign Exchange Fluctuations – Section 43AA

New Section 43AA
has been inserted to provide that any gain or loss arising on account of any
change in foreign exchange rates shall be treated as income or loss, as the
case may be. Such gain or loss shall be computed in accordance with ICDS VI and
shall be in respect of all foreign currency transactions, including those
relating to –

(a) Monetary
items and non-monetary items

(b) Translation
of financial statements of foreign operations

(c) Forward
exchange contracts

(d) Foreign
currency translation reserve

The provisions
of this section are subject to the provisions of  section 43A.

(iii)  Income from Construction and Services Contracts –
Section 43 CB

New section 43CB
has been inserted to provide that –

 (a)  Profits and gains arising from a construction
contract shall be determined on the basis of percentage of completion method in
accordance with ICDS III, notified under section 145(2).

(b)  In respect of contract for providing services
–

(i) Where the duration of contract is not more
than 90 days, profits and gains from such service contract shall be determined
on the basis of project completion method;

(ii) Where the
contract involves indeterminate number of acts over a specific period of time,
profits and gains from such contract shall be determined on the basis of
straight line method;

(iii) In respect
of contracts not covered by (i) or (ii) above, profits and gains from such
service contract shall be determined on percentage of completion method in
accordance with ICDS III.

(c) For the
purpose of project completion method, percentage of completion method or
straight line method revenue shall include retention money and accordingly
retention money will be considered for the above purposes. Further, contract
costs shall not be reduced by any incidental income in the nature of interest,
dividend or capital gains.

(iv) Inventory valuation – section 145A

The existing
section 145A has been replaced by a new section 145A from A.Y. 2017-18 (F.Y.
2016-17) to provide as under:

(a)  The valuation of inventory shall be made at
lower of actual cost or net realisable value computed in accordance with the
ICDS II. In case of securities held as inventory, it shall be valued as
follows:

 

Type of
Securities

Method of
Valuation

Securities
not listed on a recognised stock exchange or listed but not quoted on a
recognised stock exchange with regularity from time-to-time

At actual
cost initially recognised in accordance with the ICDS II

Securities
listed and quoted on a recognised stock exchange with regularity from
time-time

At lower of
actual cost or net realisable value in accordance with the ICDS II. The
comparison of actual cost and net realisable value shall be made category
wise.

In the case
of securities held as Inventory by a Scheduled Bank or a Public Financial
Institution

The
valuation shall be made as provided in ICDS II after taking into account the
applicable guidelines issued by the RBI

 

(b) The existing
section 145A provides for inclusion of the amount of any tax, duty, cess or fee
actually paid or incurred by the assesse to bring the goods to the place of its
location and condition as on the date of valuation of purchase and sale of
goods and inventory. The new section 145A retains the above provision and also
extends it to valuation of services. Therefore, services are required to be
valued inclusive of taxes which have been paid or incurred by the assesse.

(v)  Year of
taxability of certain Income – New section 145B

The applicable
ICDS provides for taxability of certain incomes even before they have accrued.
In order to validate such provisions of ICDS, the corresponding provisions have
also been incorporated in the new section 145B from the A.Y. 2017-18
(F.Y.2016-17) as follows:-

 

Type of
Income

Previous
year in which it shall be taxed

Any claim
for escalation of price in a contract or export incentives

Previous
year in which reasonable certainty of its realisation is achieved

Income
referred to in section 2(24) (xviii) i.e., subsidy, grant etc.

Previous
year in which it is received, if not charged to tax in any earlier previous
year.

Interest
received by the assessee on any compensation or on enhanced compensation

Previous
year in which such interest is received


9.   CAPITAL
GAINS:

9.1  Long Term
Capital Gains On Transfer Of Quoted Shares And Securities

At present, long
term Capital Gain on transfer of quoted shares and Securities is exempt if
Securities Transaction Tax (STT) is paid on acquisition as well as on transfer
through Stock Exchange transactions. Now, under the new section 112A tax on
such long term capital gains on transfer of such shares and securities, on or
after 1.4.2018, will be payable at the rate of 10%. The rationale for this
proposal is explained by the Finance Minister in Para 155 of his Budget Speech.

9.2  Impact of New
Section 112A

The New Section
112A is inserted in the Income tax Act effective from A.Y. 2019-20 (i.e F.Y.
2018-19). Briefly stated, this new section provides as under.

(i) This section
will apply to transfer of following long term assets (hereinafter referred to
as “specified assets”) if the following conditions are satisfied.

(a) Quoted
Equity Shares on which STT is paid on acquisition as well as on sale. If such
shares are acquired before 1.10.2004 the condition for payment of STT on
acquisition will not apply. The Central Government will notify the cases where
the condition for payment of STT on acquisition will not apply.

(b) Units of
Equity Oriented Fund of a Mutual Fund and Business Trust on which STT is paid
at the time of redemption of the units. The above condition of payment of STT
will not apply where the transaction is entered into in an International
Financial Services Centre.

(ii) The rate of
tax on such Long term capital gains is 10% plus applicable surcharge and Health
and Education Cess on the capital gain in excess of Rs. 1 Lakh. If the capital
gain in any F.Y. is less than Rs. 1 Lakh no tax is payable on such capital gain

(iii) The cost
of acquisition of specified assets for computing capital gain in such cases
shall be computed as provided in section 55(2) (ac). This provision is as
under:-

If the above
specified assets are acquired before 1.2.2018 the cost of acquisition shall be
computed as per formula, given in section 55(2)(ac). According to this formula,
the cost of acquisition of the specified assets acquired on or before 31.1.2018
will be the actual cost. However, if the actual cost is less than the fair
market value of the specified assets as on 31.1.2018, the fair market value of
the specified assets as on 31.1.2018, will be deemed to be the cost of
acquisition.

Further, if the
full value of consideration on sale/transfer is less than the above fair market
value, then such full value of consideration or the actual cost, whichever is
higher, will be deemed to be the cost of acquisition.

Illustration to explain the above formula


 

A

B

C

D

Actual Cost
–Purchase prior to 1.2.2018

100

550

300

500

Market Value
as at 31/1/2018

150

350

450

300

Sale Price

500

600

350

450

 

——

——

——-

—–

Deemed Cost

150

550

350

500

Sale Price

500

600

350

450

 

——-

——-

——-

——

Capital Gain

350

50

Nil

(50)

 

——

——-

——-

——

 

(iv) No
deduction under Chapter VI A shall be allowed from the above Capital Gain.
Therefore, if Gross Total Income includes any such capital gain, deduction
under chapter VIA will be allowed from the gross total income after reducing
the above long term capital gain.

(v) Similarly,
tax Rebate u/s. 87A will be allowed from income tax on the total income after
deduction of the above long term capital gain.

(vi) For the
purpose of applicability of the above provisions for taxation of such long term
capital gains, the expression “Equity Oriented
Fund” means a fund set up by a Mutual 
Fund specified u/s. 10(23D) which satisfies the following conditions-

A.  If such a Fund invests in Units of another
Fund which is traded on the recognised Stock Exchange-

 –  A minimum of 90% of the
proceeds are invested in units of such other Fund and

 – Such other Fund has invested 90% of its Funds in Equity Shares of
listed domestic companies.

B. In cases of
Mutual Funds, other than “A” above, minimum 65% of the total proceeds of the
Fund are invested in Equity Shares of listed domestic companies.

(vii)  The expression” Fair Market Value” as at
31.1.2018 for the Formula stated in (iii) above is defined in Explanation below
section 55 (2) (ac) to mean the highest price quoted on the Recognised Stock
Exchange. If there was no trading of a particular script on 31.1.2018 then the
highest price quoted for that script immediately prior to 31.1.2018. In the
case of Units of Equity Oriented Fund not quoted on the Stock Exchange the NAV
as on 31/1/2018 will be considered as fair market value.

(viii)  It is not clear from the above definition as
to how the highest price of a quoted script will be considered when the script
is quoted in two or more recognised Stock Exchanges. Whether highest of the
closing prices in these Stock Exchanges is to be considered or the highest
price quoted during the day in any one of the Stock Exchanges is to be
considered. This requires clarification.

(ix)  It may be noted that in respect of the
specified assets purchased on or after 1.2.2018, the Formula given in (iii)
will not apply for determining the actual cost of such specified assets. In
such a case, the actual cost of the specified assets will be deducted from the
sale price and, as stated in the third proviso to section 48, benefit of
Indexation will not be available.

(x)  It may also be noted that the above tax on
long term Capital Gain is not payable if the specified assets are sold on or
before 31.03.2018. This tax is payable only on sale of such specified assets on
or after 1.4.2018.

(xi)  Section 115 AD dealing with tax on income of
FII on Capital Gain has also been amended. It is clarified that any FII to
which section 115AD applies will have to pay tax on long term Capital Gain
arising on sale of quoted shares/units as provided in section 112A. In the case
of FII also, the rate of tax on such capital gain will be 10% in respect such
capital gain in excess of Rs. 1 Lakh in the A/Y:2019-20 (F.Y:2018-19) and
onwards.

(xii)  The exemption given to such long term capital
gain u/s. 10(38) has now been withdrawn w.e.f. 1.4.2018.

(xiii) It may be
noted that the above provisions of the new section 112A will not apply to
equity shares of a listed company acquired by an assessee after 1.10.2004 under
an off market transaction and no STT is paid. 
Similarly, where such equity shares are acquired prior to 1.10.2004 or
after that date and STT is paid at the time of acquisition, the above provisions
of section 112A will not apply if the shares are sold on or after 1.4.2018 in
an off market transaction. In such cases the normal provisions applicable to
computation of capital gain will apply and the assessee can claim the benefit
of indexation u/s 48 for computing cost of acquisition. Tax on such long term
capital gains will be payable at the rate of 20%. Therefore, the assessee will
have to ascertain, before selling the equity shares on or after 1.4.2018, the
tax impact under both the methods and decide whether to sell the shares in an off
market transaction or through Stock Exchange.

9.3  Capital Gains
Bonds

At   present,  
an   assessee   can 
claim  deduction  upto Rs. 50 lakh from
long term Capital Gain on sale of any capital asset by making an Investment in
specified bonds u/s. 54EC within 6 months of the date of sale. There is a
lock-in period of 3 years for such investment. In order to restrict this
benefit the following amendments are made in section 54EC.

(i)  The benefit of section 54EC can be claimed
only if the long term capital gain is from sale of immovable property (i.e.
land, building or both) on or after 1.4.2018. Thus, this benefit cannot be
claimed in respect of long term capital gain on any other capital asset in A.Y.
2019-20 or thereafter. The effect of this amendment will be that benefit of
section 54EC will not now be available in respect of long term capital gain
arising on or after 1-4-2018 in respect of compensation received on surrender
of tenancy rights or sale/transfer of shares, units of Mutual Fund, goodwill or
other movable assets.

(ii)  The
lock in period for this investment made on or after 1.4.2018 will be 5 years
instead of 3 years. From the wording of the amendments in section 54EC it
appears that investment in Bonds of National Highway Authority of India or
Rural Electrification Corporation Ltd., or other notified bonds made before
31.3.2018 will have a lock-in period of 3 years. In respect of investment in
bonds made on or after 1.4.2018 the lock-in period will be 5 years. Therefore,
it appears that even in respect of long term capital gain made on or before
31.3.2018 if the investment in such bonds is made within 6 months of the date
of sale but on or after 1.4.2018, the Lock-in period will be 5 years.

9.4  Conversion Of
Stock-In –Trade Into Capital Asset

(i)  The concept of conversion of a capital asset
into stock-in-trade is accepted in section 45(2) at present. It is provided in
this section that on such conversion there will be no tax liability. The tax is
payable only when the stock-in-trade is sold.

(ii)  New clauses (via) is now added in section 28
w.e.f. AY. 2019-20 (F.Y. 2018.19) to provide that “the fair market value of
inventory as on the date on which it is converted into, or treated as, a
capital asset determined in the prescribed manner” shall be chargeable to
income tax under the head “ Profits and gains of business or profession”. This
will mean that on conversion of stock-in-trade (inventory) into a capital
asset, the difference between the cost and the market value on the date of such
conversion will be taxable as business income. This will be the position even
if the stock-in-trade is not sold. It may be noted that by insertion of clause
(xiia) in section 2(24) it is now provided that such notional difference
between the fair market value and cost of stock-in-trade shall be deemed to be
income liable to tax.

(iii)  Further, section 49 is also amended by
addition of clause (9) w.e.f. A.Y. 2019-20 (F.Y. 2018-19) to provide that where
capital gain arises on sale of the above capital asset (i.e. stock-in-trade
converted into capital asset) the cost of acquisition of such capital asset
shall be deemed to be the fair market value adopted under section 28(via) on
conversion of the stock-in-trade into capital asset. By an amendment in section
2(42A), it is also provided that in such a case, the period of holding such
capital asset shall be reckoned from the date of conversion of stock-in-trade
into capital asset.

(iv)  A new Explanation (1A) has been added in
section 43 (1) to provide that, if the above capital asset (after conversion of
stock-in-trade to capital asset) is used for the business or profession, the
fair market value on the date of such conversion shall be treated as cost of
the capital asset. Depreciation on such cost can be claimed by the assessee.

9.5  Exemption Of
Specified Securities From Capital Gain

Section 47 has
been amended by insertion of a new clause (viiab) w.e.f. AY. 2019-20
(F.Y.2018.19). It is now provided that any transfer of a capital asset viz (i)
Bond or Global Depository Receipt mentioned in section 115AC(1), (ii) Rupee
Denominated Bond of an Indian Company or (iii) a Derivative made by a
non-resident on a recognised Stock Exchange located in an International
Financial Services Centre shall not be considered as transfer. In other words,
any capital gain arising by such a transaction will be exempt from capital gain
tax.

9.6  Full Value of
consideration – Section 50C

As discussed in
Para 7.3 above, concession is now given from A/Y:2019-20 (F.Y:2018-19) for the
computation of full value of consideration on transfer of Immovable
Property.  Section 50C is amended to
provide that if the difference between the actual consideration and stamp duty
value is less than 5% the same will be ignored.

9.7  Tax On
Distributed Income Of Unit Holders Of Equity Oriented Fund – Section 115-R

(i)  Section 115R dealing with tax on distributed
income to holders of units in Mutual Funds has been amended w.e.f. 1.4.2018. At
present any income distributed to a unit holder of equity oriented fund is not
chargeable to tax. Since new section 112A now provides for levy of 10% tax on
the capital gains arising to unit holders of equity oriented funds, in excess
of Rs.1 lakh, section 115R has now been amended to provide for Dividend
Distribution Tax (DDT) at the rate of 10% by the Mutual Fund at the time of
distribution of income by an equity oriented fund.

(ii)  It is stated that this amendment is made with
a view to providing a level playing field between growth oriented funds and
dividend paying funds, in the wake of the new capital gains tax regime for unit holders of equity oriented funds. 

                 

10.  INCOME FROM OTHER SOURCES:

10.1  Transfer of
Capital Asset by a Holding Company to its wholly owned subsidiary company –
Section 56(2) (x)

Section 56(2)(x) of the Income tax Act provides
that if any person receives any property without consideration or for a
consideration which is less than its fair market value the difference between
the fair market value and the value at which the property is received will be
taxable as income from other sources in the hands of the recipient. There are
certain exceptions to this rule as provided in the Fourth Proviso. Clause IX of
this Fourth Proviso is now amended from the A.Y. 2018-19 (F.Y. 2017-18) to
provide that the provisions of section 56(2) (x) will not apply to any transfer
of a capital asset by a holding company to its wholly owned subsidiary company
or any transfer of a capital asset by a wholly owned subsidiary company to its
holding company.

10.2  Gift of
Immovable Property

As discussed in
Para 7.3 above, concession is now given from A/Y:2019-20 (F.Y:2018-19) for the
computation of full value of consideration on transfer of Immovable Property.
Section 56(2)(x) is amended to provide that if the difference between the
actual consideration and stamp duty value is less than 5% the same will be
ignored for the purpose of taxation in the hands of the recipient of Immovable
Property.

10.3  Compensation
on termination /modification of any contract of employment – Section 56(2) (xi)

A   new  
clause (xi)   is   inserted  
in   section 56(2)  from A.Y. 2019-20
(F.Y. 2018-19) to provide that any compensation received by any employee on
termination or modification of the terms and conditions of the contract of
employment on or after 1.4.2018 shall be taxable as Income from Other Sources.


10.4  Deemed
Dividend

(i)  Dividend Income is taxable under the head
Income from Other Sources – Section 2(22) defines the term “Dividend”.  Under section 2(22) (a) to (e) it is provided
that distribution by a company to its members under certain circumstances shall
be deemed to be Dividend to the extent of its “accumulated profits”. The
definition of the term “accumulated profits” is given in the Explanation to the
section 2 (22). From the A.Y. 2018-19 (F.Y. 2017-18), a new explanation (2A)
has been added to provide that the accumulated profits (whether capitalised or
not) or loss of the amalgamated company, on the date of amalgamation, shall be
added / deducted to/from the accumulated profits of the amalgamating company.

 (ii)  At present, section 2(22) (e) provides that
any loan or advance given by a closely held company to a Related Party, as
defined in that section, shall be taxable as deemed dividend in the hands of
that related party to the extent of the accumulated profits of the Company.
There was some debate whether this deemed dividend can be taxed in the hands of
the related party if it is not a share holder of the company.

To eliminate
this doubt, it is now provided that the company giving such loan or advance
will pay tax at the rate of 30% plus applicable surcharge and Cess w.e.f.
1.4.2018.  Thus, the shareholder or
related party receiving such loan will not be required to pay tax on such
deemed dividend.

 

11.  TAXATION OF NON-RESIDENTS:

11.1 Expansion of scope of Business Connection –
Section 9

At present,
Explanation 2 to section 9(1)(i) defines the concept of “Business connection”
through dependent  agents. With an
objective to align with Article 12 of the Multilateral Instrument (MLI) forming
part of the BEPS Project to which India is a signatory, Explanation 2(a) has
been amended. By this amendment the term “business connection” will include any
business activity carried on through an agent who habitually concludes contract
or habitually plays a principal role leading to conclusion of contracts by the
non-resident where the contracts are:

 – In the name of
that non-resident; or

– For the
transfer of ownership of, or for granting the right to use of, the property
owned by that non-resident or that non-resident has the right to use; or

– For the
provision of services by that non-resident.

 11.2  Significant
economic presence resulting in Business Connection

(i)   At
present, section 9(1) (i) provides for physical presence based nexus for
establishing business connection of the non-resident in India. A new
Explanation (2A) to section 9(1)(i) now provides a nexus rule for emerging
business models such as digitized business which do not require physical
presence of the non-resident or his agent in India. This amendment is made from
A/Y:2019-20 (F.Y:2018-19).

 (ii) Accordingly, this amendment provides that a
non-resident shall be deemed to have a business connection on account of his
significant economic presence in India. This amendment would apply irrespective
of whether the non-resident has a residence or place of business in India or
renders services in India. The following shall be regarded as significant
economic presence of the non-resident in India.

–  Any transaction in respect of any goods,
services or property carried out by non-resident in India including provision
of download of data or  software in
India, provided that the transaction value exceeds the threshold as may be
prescribed; or

–  Systematic and continuous soliciting of
business activities or engaging in interaction with number of users in India
through digital means, provided such number of users exceeds the threshold as
may be prescribed.

In such cases,
only so much of income as is attributable to the above transactions or
activities shall be deemed to accrue or arise in India.

(iii)  It is further clarified in this section that
the transactions or activities shall constitute significant economic presence
in India, whether or not

 (a)  the agreement for such transactions or
activities is entered in India, or

 (b) the
non-resident has a residence or place of business in India, or

 (c) the
non-residnet renders services in India.

11.3  Exemption to
Royalty etc. under section 10(6D)

New clause (6D)
is added in section 10 from A/Y: 2018-19(F.Y. 2017-18) to grant exemption to a
non-resident.  This clause provides that
any income of a non-resident or a Foreign Company by way of Royalty from, or
fees for technical services rendered in or outside India to National Technical
Research Organisation will be exempt from tax. In view of this exemption no tax
will be deductible at source from this Royalty or Fees u/s 195.

11.4  Global
Depository Receipts – Section 47 (viiab)

As discussed in
Para 9.5 above transfer of a Bond or Global Depository Receipts (GDR) referred
to in section 115AC(1), or Rupee Denominated Bond of any Indian company, or
Derivative, executed by a non-resident on a recognized stock exchange located
in any International Financial Services Center (IFSC) shall not be considered
as a transfer under newly inserted section 47(viiab), if the consideration for
the transfer is paid in foreign currency. As a result of this amendment,
capital gains from such transaction will not be taxable.

12.  TAX ON INCOME REFERRED TO IN SECTIONS 68 TO
69D AND SECTION 115BBE:

(i)  Section 115BBE provides that income referred
to in sections 68,69,69A, 69B,69C or 69D shall be charged to tax at the rate of
60%. Section 115BBE(2) provides that no deduction in respect of any expenditure
or allowance or set off of any loss shall be allowed to the assessee under any
provision of the Act in computing his income referred to in the above sections.
However, sub-section (2) applied only to cases where such income is declared by
the assesse in the return of income furnished u/s. 139.

(ii)  Section 115BBE(2) has now been amended with
retrospective effect from A.Y.2017-18 (F.Y. 2016-17) to provide that even in
cases where income added by the Assessing Officer includes income referred to
in the above sections, no deduction in respect of any expenditure or allowance
or setoff of any loss shall be allowed to the assessee under any provision of
the Act in computing the income referred to in these sections.

13.
ASSESSMENTS AND APPEALS:

13.1 Obtaining Permanent Account Number (PAN) in
certain cases – Section 139A

To expand the
list of cases requiring the application for PAN and to use PAN as Unique Entity
Number (UEN), amendment has been made w.e.f. 01.04.2018 by way of insertion of
clause (v) and clause (vi) in section 139A as under:

(i)  A resident, other than an individual, which
enters into a financial  
transaction   of   an  
amount  aggregating  to Rs. 2,50,000 or
more in a financial year is required to apply for PAN.

(ii) Managing
director, director, partner, trustee, author, founder, Karta, chief executive
officer, principal officer or office bearer or any person competent to act on
behalf of such entities is also required to apply for PAN.

 It may be noted
that the term “financial transaction” has not been defined.

13.2  Verification
of Return in case of a company under insolvency resolution process – Section
140

Section 140 has
been amended w.e.f. 1.4.2018 to provide that, during the resolution process
under the Insolvency and Bankruptcy Code, 2016 (“IBC”), the return of Income
shall be verified by an insolvency professional appointed by the Adjudicating
Authority.

13.3  Assessment
Procedure – Section 143

(i)  Section 143 (1)(a) provides that at the time
of processing of return, the total income or loss shall be computed after
adding income appearing in Form 26AS or Form 16A or Form 16 which has not been
included in the total income disclosed in the return of Income, after giving an
intimation to the assessee. A new proviso to section 143(1)(a) has been
inserted to provide that no such adjustment shall be made in respect of any
return of Income furnished for Ay 2018-19 and subsequent years.

13.4  New Scheme for
scrutiny Assessments – New Section 143(3A) 143(3B)

A new
sub-section (3A) is inserted in section 143 w.e.f 01.04.2018. This new section
143(3A) authorises the Government to notify a new scheme for “e-assessments” to
impart greater efficiency, transparency and accountability. It is stated that
this will be achieved by-

(i) Eliminating
the interface between the Assessing Officer and the assesse in the course of
proceedings to the extent of feasibility of technology.

(ii) Optimising
utilisation of the resources through economics of scale and functional
specialisation.

(iii)
Introducing a team-based assessment with dynamic jurisdiction.

For giving
effect to the above scheme, section 143(3B) authorizes the Government to issue
a Notification directing that the provisions of the Income-tax Act relating to
assessment procedure shall not apply or shall apply with such exceptions,
modifications and adaptations as may be specified in the notification. No such
notification can be issued after 31.03.2020. The Government has set up a
technical study group to advise about the Scheme for e-assessments.

13.5  Appeal to
Tribunal against the order passed under section 271J – Section 253

Section 253 has
been amended w.e.f. 01.04.2018 to provide for filing of an appeal by the
assessee before the ITA Tribunal against an order passed by the CIT(A) levying
penalty u/s. 271J on an accountant, a merchant banker or a registered valuer
for furnishing incorrect information in their report or certificate.

13.6  Increase in
penalty for failure to furnish statement of financial transaction or reportable
account – Section  271FA

Section 271FA
has been amended w.e.f. 01.04.2018 to enhance the penalty for delay in
furnishing of the statement of financial transaction or reportable account as
required u/s. 285BA to ensure greater compliance:

 

Particulars

Penalty

Delay in
furnishing the statement

Increased
from Rs.100 to       Rs. 500 for each
day of default

Failure to
furnish statement in pursuance of notice issued by tax authority

Increased
from Rs. 500 to Rs. 1000 for
each day of default

13.7  Failure to
furnish return of income in case of companies –Section 276CC

Section 276CC
provides that if a person willfully fails to furnish the return of income
within the due date, he shall be punishable with imprisonment and fine.
Immunity from prosecution is granted inter alia in a case where the tax
payable on the total income determined on regular assessment, as reduced by the
advance tax, if any paid, and any withholding tax, does not exceed Rs. 3,000
for any assessment year commencing on or after 1st April 1975.  By amendment of this section, w.e.f.
1.4.2018, it is now provided that this immunity will not apply to companies.

14.  TO SUM UP:

14.1  It is rather unfortunate that this year’s
Finance Bill has been passed in the Parliament without any discussion. Various
professional and commercial organisations had made post budget representations
and expressed concerns about some of the amendments proposed in the Finance
Bill. As there was no discussion in the Parliament, it is evident that these
representations have not received due consideration.

14.2  The Finance Act has provided some relief to
salaried employees, small and medium sized companies, senior citizens, other
assessees who have invested in NPS, start-up industries, producer companies and
to employers for employment generation. There are some provisions in the
Finance Act which will simplify some procedural requirements.

14.3  Last year, several amendments were made to
tighten the provisions relating to taxation of capital gains. Most of the
assessees have not yet understood the impact of the new sections 45(5A), 50CA,
56(2)(x) etc., introduced last year. This year, the introduction of new
section 112A levying tax on capital gain on sale of quoted shares and units of
equity oriented funds is likely to create some complex issues. There will be
some resistance to this levy as there is no reduction in the rates of STT. The
levy of tax on Mutual Funds on distribution of income by equity oriented funds
will affect the yield to the unit holders. Let us hope that the above impact on
the tax liability of the investors is accepted by all assessees as this
additional burden is levied in order to provide funds for various Government
Schemes for upliftment of poor and down trodden population of our country.

14.4 The concept
of Income Computation and Disclosure Standards (ICDS) was introduced from A.Y.
2017-18. The assessees have to maintain books of accounts by adopting
Accounting Standards issued by the Institute of Charted Accountants of India.
Recently the Government has notified Ind-AS which is mandatory for large
companies. Therefore, compliance with Ten ICDS notified u/s. 145(2) of the
Income tax Act was considered as an additional burden. When Delhi High Court
struck down most of the ICDS the assessees felt some relief. Now the Finance
Act, 2018, has amended the relevant sections of the Income-tax Act with
retrospective effect from A.Y. 2017-18 to revalidate some of the provisions of
ICDS. With these amendments the responsibility of professionals assisting tax
payers in the preparation of their Income tax Returns will increase. Similarly,
Chartered Accountants conducting tax audit u/s. 44AB will now have report in
the tax audit report about compliance with ICDS.

 

14.5 Section 143
of the Income-tax Act has been amended authorising the Government to notify a
new scheme for “e-assessments” to impart greater efficiency, transparency and
accountability. Under this scheme, it is proposed to eliminate the interface
between the assessing officer and the assessee, optimise utilisation of
resources and introduce a team based assessment procedure. There is
apprehension in some quarters as to how this new scheme will function.
Considering the present infrastructure available with the Government and the
technical facilities available with the assessees, it will be advisable for the
Government to introduce the concept of ‘e-assessment’ in a phased manner. In
other words, this scheme should be made applicable in the first instance in
cases of large listed companies with turnover exceeding Rs. 500 crore. After
ascertaining the success, the scheme can be extended to other corporate assessees
after some years. There will be many practical issues if the scheme is
introduced for all assessees immediately.

14.6   Taking an overall view of the amendments
discussed in this Article, it can be concluded that the provisions in the
Income-tax Act are getting complex. There is a talk about replacing this six
decade old law by a new simplified law. We have seen the fate of the Direct Tax
Code which was introduced in 2009 but not passed by the parliament.
Let us hope that we get a new simplified tax law in the coming years.

 

VIEW AND COUNTERVIEW:NFRA: An Unwarranted Regulator?

There are at least two views, if not more, on almost everything. Call it
perspectives or facets. VIEW and COUNTERVIEW seeks to bring before a reader,
two opposite sides of a current issue and everything in between. Our world is
increasingly becoming linear and bipolar. VIEW and COUNTERVIEW aims to inform
the reader of multi dimensional totality of an issue, to enable him to see a
matter from a broad horizon.

 

This second ‘VIEW and COUNTERVIEW’ is on National Financial Reporting
Authority (NFRA). NFRA, a creation of the Companies Act, 2013, was not notified
for more than 3 years. The recent PNB scam resulted in sudden activation of
NFRA. NFRA is mandated with formulation of accounting and auditing standards,
to monitor and enforce their compliance on members and firms, and oversee the
quality of services of professions associated with compliance with such
standards. The body will have the same powers as a civil court. With NFRA, the
international practice of an ‘independent’ audit regulator has finally arrived
in India. In the USA, PCAOB has about 1,935 firms registered with it, has a
staff of about 700 people and has a budget of $259 million. Unlike in the US,
ICAI is a body formed by the parliament to regulate the audit profession.  Is it intentionally sidelined by the
government? While NFRA is a reality now, the question remains whether the audit
fraternity requires another regulator without better regulations and regulating
machinery?

 

VIEW: Without regulations another regulator may not work

 

Santanu Ghosh   

Chartered Accountant

 

The Issue:


It is
said that the government should govern the country and not run business.
Regulating business is a difficult business and requires competence, budget,
credibility and rigour. These are generally not what our administrators are
known for. 

 

Not so
long ago, the government thought it fit to step in to the domain of the
Chartered Accountants of India to pronounce accounting and auditing standards
to be followed by a section of the corporate world. In fact, Section 209 and
211 of the Companies Act, 1956 were amended to make the accounting and auditing
standards mandatory. This created a form of ‘advisory’ function by the
government within the domain of accounting and auditing. However, it was
announced that till NACAS pronounced the standards, the ICAI standards will
remain in force.

 

After
the Satyam and Global Trust Bank scams, the effectiveness of accounting
standards to avoid fraudulent transactions were put to test again by the
government and Amendments were brought about in Sections 211, which added new
Subsections- 3A, 3B, 3C in 1999 in the 1956 Act. In addition, Section 210A was
also inserted. The government was probably not satisfied with its ‘advisory’
role but thought it fit to assume ‘regulatory’ powers by creation of National
Financial Reporting Authority (NFRA). In the Companies Act, 2013, Section 132
was inserted for implementation of NFRA compliance to be effective from the
date of notification to be published in this respect. Till February 2018, such
notification was not issued but on the news of PNB Scam, very hurriedly the
notification was issued by the government.

 

NFRA: In the wake of recent
scams, post Satyam and more immediately relating to Winsome Diamonds, Nirav
Modi, Mehul Choksi, has created a belief within the government that one of the
causes could be non application of proper auditing methodology. Presumptions
are rebuttable. NFRA was notified in the wake of recent scams and rules have
been prescribed for its operations.

 

The key powers and functions of NFRA are:


a.   To investigate either Suo moto
or on the reference made by the Central Government in matters of Professional
Misconduct committed by any member or a CA firm.


b.  To make recommendations to the
central government on formulation or laying down of accounting standards and
auditing policies by companies or their auditors.


c.   To monitor and implement
compliances relating to accounting standards and auditing policies as
prescribed.


d.  To oversee the quality of
service of professions associated with compliance of accounting standards and
auditing policies as suggested measures for improvement.


e.   To exercise powers as of a
civil court under the Code of Civil Procedure, 1908.


f.   Impose penalties:


i.    Not less than 1 lakh rupees
which may extend up to 5 times of the fees received in case of individuals


ii.   Not less than 10 lakh rupees
which may extend up to 10 times of the fees received in case of firms.


g.  To consider an investigation
based on monitoring and compliance review of auditor upon audit firms upon
recommendations by member – accounting and member – auditing.


h.   To receive a final report from
the committee on enforcement on matters referred to them and issue a notice in
writing to the investigated company or the professional on whom the action is
proposed to be taken.


i.    To conduct quality review for
the following class of companies:

–    Listed companies

–   Unlisted companies having net worth or paid
up capitals of not less than 500 crores or annual turnover of not less than 100
crores as on 31st March of immediately preceding financial year.

 –   Companies having securities listed outside
India.


j.    To debar any member or firm
from engaging himself or itself from practice as a member of institute of
chartered accountants of India for a minimum period of six months which may
extend up to 10 years on account of proved misconduct.


k.   To accept or overrule
clarifications received or objections raised in writing.


l.    To investigate against the
auditor or audit firms which conducts


i.    200 or more companies in a
year or,

ii.   Audit of 20 or more listed
companies.


ICAI: Section 21A of the
Chartered Accountants (Amendment) Act, 2006 provides for constitution of board
of discipline and prescribes its powers which are as follows:


i.    To consider the prima
facie opinion of the director (discipline) in respect of all information
and complaints where opinion of the director is that the member is prima
facie guilty of professional or other misconduct mentioned in the First
Schedule to the Act and all cases where prima facie opinion is that the
member is not guilty of any professional or other misconduct irrespective of
schedules and passing of orders.

ii.   To enquire into, arrive at a
finding and thereafter award punishment in respect of guilty cases of any
professional or other misconduct in First Schedule to the Act.

iii.  To consider letter of
withdrawal from complainants and permit withdrawal if the circumstances so
warrant.


Section 21B of the Chartered Accountants (Amendment) Act, 2006 provides
for the scope of work for the committee


i.    To consider the prima
facie opinion of the director discipline in respect of all information and
complaints where opinion of the director is that the member is prima facie guilty
of professional or other misconduct mentioned in the Second Schedule or in both
the Schedules to the Act and passing of orders.

ii.   To enquire into the
allegations of professional or other misconduct issuing notices to the
witnesses and their examinations, arrive at a finding and award punishment in
respect of guilty cases of any professional or other misconduct mentioned in
Second Schedule or in both the Schedules to the Act.

iii.  To consider letter of
withdrawal from the complainants and permit withdrawal if the circumstances so
warrant.



The Crisis:

1)   The ICAI is created by an Act
of parliament to control and regulate the profession of Chartered Accountants
in the country since 1949 and its members have creditably served the society as
professionals, as industrialists, as CFOs, as business leaders, as
parliamentarians, as social workers, as ministers in central and state
cabinets.


2) The
disciplinary directorate of the institute have been functioning also reasonably
well in spite of various external factors like injunctions, stay petitions,
interlocutory applications etc., which have mainly slowed down the process of
quasi-judicial process including delayed production of relevant details at
times by the complainants and also delayed response thereto by
the accused.


3) Mr.
Manoj Fadnis, past president of the Institute said in an interview in February
2015 as follows:-


“there
is no delay as in each case is required to be examined based on facts and
merits and due procedures under the rule has to be adhered to. The matter
(Mukesh P. Shah) is receiving due attention and it would be our endeavour for
an expeditious disposal. The matter is under examination for formation of prima
facie opinion by the director (discipline) under Rule 9 of the Chartered
Accountants (Procedure of Investigations of professional and other misconducts
and conduct of cases) Rules 2007 and it is only thereafter the appropriate
authority-board of discipline, disciplinary committee as the case may be would
be required to consider and pass orders on the opinion.” He also stated that
there is no timeline as such prescribed in the rules notified by the government
of India for taking action against erring members. He also stated that “as on
date there are 116 cases pending before the disciplinary committee and 18 cases
before the board of discipline for enquiry.” Mr. Fadnis mentioned that between
February 12, 2014 and February 11, 2015, 53 cases have been heard and concluded
by the disciplinary committee. Board of discipline in the same time heard and
concluded 9 cases. He stated that “the delay if any, in concluding a particular
case is generally on account of adjournments sought by the concerned parties.
This could also be because of procedure required to be followed by citing and
summoning of witnesses by the parties and witnesses to make their depositions
or submissions before the committee so that interest (principle) of natural
justice is maintained.


4) The
Hon. Prime Minister himself questioned the efficacy of disciplinary mechanism.
It was alleged that in spite of so many wrong things having taken place only 25
Chartered Accountants were punished in 10 years and around 1400 cases were
pending for years. There had not been any denial or acceptance of such
accusations, at least not to my knowledge.


5)
From the foregoing paragraphs it can be seen that the charges sought to be
levelled against ICAI are:


–   Inaction or delayed action

 –   Principles of natural justice sought to be
given is more in form than substance

 –  A disciplinary case may go on for a long time
because there is no time frame to conclude the proceedings, not many Chartered
Accountants were penalised

 –   An individual Chartered Accountant can be
prosecuted but not his firm

 –   Self regulation.

 Certain
suggestions are given for pondering.


6) To
my mind, the ICAI has sufficient powers under its legal mandate and
regulations/rules. Therefore, just like any other law, if the intention is to
upgrade the law to its desired level, the law itself requires amendments. The
Amendments that have taken place in the Income Tax Act, The Companies Act, the
Constitution itself are glaring examples of how the existing laws can be
upgraded or modified to the satisfaction of the legislature.


7) I
also believe that instead of amending the existing law, to its desired level,
enactment of another law and allowing the new law to coexist with the existing
law by demarcating its relative powers to judge cannot be a solution to the “so
called” problems.


8) A
regulatory mechanism that seeks to regulate listed companies, large unlisted
companies and companies listed abroad on the one side and leaving unlisted
companies of lesser dimension with the disciplinary directorate of ICAI can
have new set of challenges. Maintaining two parallel quasi-judicial authorities
is definitely not in the best interest of the country as well as the
profession.

 

9) The
speed at which the notification under NFRA was issued after the PNB scam has
raised the eyebrows.

 

10) It
is surprising that even before the due process of law could be initiated
charges and accusations have been levelled against the auditors.

 

11) It
is widely reported in newspapers and sections of the media that:

 

–   There was no concurrent audit of the branch
concerned by Chartered Accountants

 –   Probably there was no inspection by RBI

 –   The branch in-charge (deputy manager) was in
the same office for 11 years and it is also reported that he himself was the
maker, checker and authoriser of the transactions routed through SWIFT without
being routed via the CBS and

 –   He was allowing ever greening of LOUs issued
without having applications for each LOU.


 12) Profession or vocations do have
few black sheep. That does not make or prove the entire profession to be full
of black sheep. Adverse criticisms are bound to demoralize the entire
community.


Suggestions for Solution:


–   Amend Chartered Accountants Act /Regulations
/ rules to incorporate timeline for conclusion of proceedings of the
disciplinary mechanism.


 –   Create appellate tribunal for redressal of
grievances with respect to the orders pronounced under the Chartered
Accountants Act


 –   For consideration of points of law which are
in dispute, the aggrieved party pursuant to the order of the tribunal may
prefer to file a second appeal before the Honourable Supreme court of India.


–   High Courts shall have no jurisdiction to try
any matter under the Chartered Accountants Acts and regulations.


–   All applications, interlocutory applications,
stay petitions, injunctions and/ or directions under the law, be only preferred
before the tribunal


 –   If nexus can be proved, firm can also be
prosecuted together with the concerned partner. However, such action against
the firm should invariably be probed before inducting the firm as a party. The
firms that are highly professionalised may have a system where partners are
independently taking decisions with respect to handling of any client and such procedure
is duly documented. The burden of proof that such independence exists in the
firm and that the firm does not influence the partner shall rest on the firm
itself.


 –   Repeal / Delay NFRA as a regulatory body and
reintroduce NACAS as an advisory body.


The way NFRA is structured, and seemingly undermining the ICAI, will not
bring intended results. Without adequate manpower, high calibre staff,
investigative teeth, and infrastructure, NFRA could create a situation that was
sought to be overcome.


Other questions and apprehensions that need to be addressed:


a.  In terms of setting the
standards, if ICAI were to still prepare the standards and NFRA were to
approve, will it be a mere pass through or a hurdle in between?


b.  Can there be different regulators
for corporate and non corporate? It appears that NFRA will deal with large
corporate only. Will auditors now be subjected to two sets of rules – one of
the ICAI and one of NFRA?


c.  Basis on which complaints will
be accepted? How will it deal with frivolous complains? Will this body put
Chartered Accountant profession into an unwarranted round of litigation? If the
complainant is disproportionately large, how will an auditor represent himself
to get a deal?


d.  How will independence of
members of NFRA be dealt with? Will there be detailed rules framed and some
other body will regulate it?


e.  Conflict of interest with other
regulators: Say SFIO – could be a potential issue when a fraud matter is
involved. The NFRA being quasi judicial will carry out both investigative and
quasi judicial functions. Can an enforcement agency – say SFIO which is part of
MCA – be part of the NFRA?


f.   Location of NFRA needs to be
spread out and certainly not in Delhi and preferably kept where maximum
corporate economic activity takes place, such as Mumbai. 


g.  QRRB has struggled to find
people to carry out reviews. Can we expect qualified people with requisite
experience, skill and judicious predisposition to join the NFRA?


h.  Will the salary and fees be
commensurate with qualification to pay such reviewers?


i.   Will these Rules put Auditors
at a disadvantage – with companies threatening to complain against auditors?
Safeguards for false complaints are not visible.


The members of the CA Profession of their own volition have to rise and
clean up the mess we are in. We ourselves have to regulate the way a profession
should be run, as the ultimate users of our services is society at large. We
have to prove our worth and if we consciously try to keep an image of honest
professionals, then no other authority, such as NFRA would be necessary.


The ICAI has not fared badly when compared to other professional bodies
and legal machinery. Look at the way justice is denied / delayed, with almost 3
crore cases pending in Courts! So friends, revamping of existing machinery of
Regulation could have been a better proposition rather than having another
Regulator.


 

Counterview: NFRA is a change for better


 

Nawshir Mirza

Chartered Accountant

The
notification announcing the activation of a National Financial Regulatory
Authority (NFRA) has set the proverbial fox within the Institute of Chartered
Accountants of India. It is likely to see this move as a public humiliation of
the profession; as a withdrawal of the recognition that the profession had had
from Indian society in the past nearly seventy years. Long before the prime
minister of India rebuked the profession at a meeting of a “competing”
profession, the Companies Act had already framed the provision for the
setting-up of the NFRA. The question is, was this justified? Has the profession
lost the trust implicit in self-regulation: that it would always place public
interest over the interests of its own members, were there to be a conflict
between the two? It is also important to understand that trust is based on
both, fact as also perception. Indeed, because few members of the public have
access to facts, it is perception of the profession’s functioning that
determines its utility to society.


Indeed,
the NFRA is only one more amongst many independent regulators of the accounting
profession that have come up in many countries around the world. This has been
the trend in most major jurisdictions and the regulation of the profession and
the preparation of accounting standards had been taken away from professional
bodies in many places. So, to that extent the change may well have been a
result of overseas influence on the government. But, it would be self-deceiving
if we failed to look at how the profession weakened its case to remain
self-regulating, over the past couple of decades.


So
long as the ICAI leadership inspired confidence in the public and in government
officials by their intellectual breadth and dignified conduct, the profession’s
trust was secure. Members were rightly held in high regard and their voice
carried weight in business and government. Whilst there have always been black
sheep, their numbers were smaller, the media was not interested in the topic
and the high standards maintained by most members diluted the dark impact of a
few maligned individuals.


Today,
conversations with business people and other members of society clearly
indicate a collapse in the dignity of the profession. As a body representing a
profession that exists because of the capitalist system ironically it has done
everything in its power to undermine the basic philosophy of that system in its
own membership. It has created divisions in the profession between the larger
firms and their smaller counterparts. Society struggles to see how that has
been to its benefit.


The
intellectual quality of the ICAI’s output has deteriorated even as the quantity
has exploded. There is little originality in its publications and those that
attempt to be so, often suffer from poor standards of expression and
comprehension.


Whilst
the ICAI has postured to be a defender of India’s right to frame its own
accounting and auditing standards, the sad reality is very different. Its
commitments to international bodies expect it to harmonise its standards with
international ones and the exceptions that have been carved out are
comparatively trivial, giving the lie to the original posture. Whilst there
exists a mechanism for some degree of adherence to accounting standards
(independent auditors and audit committee oversight), the self-governing
mechanism that oversees adherence to auditing standards is ineffectual. The
quality reviews by peers appear to be ineffectual. Apart from the bigger audit
firms that must adhere to their respective firms’ global standards and a few of
the larger medium sized firms, the quality of audit is abysmal.


The
profession’s reputation in the field of taxation too is at a low. Whether true
or not, repeated newspaper reports now name chartered accountants complicit in
devious tax evasion schemes. The practice of “managing” public sector bank
loans has been another disgrace. The author struggles to discover any concrete
action by the institute and its office bearers to remedy this.


The
spectacle of the undignified scramble for votes every time council elections
come around, with a candidate’s community being considered the principal reason
for supporting him or her, creates the poorest of impressions. In this
free-for-all, the best suited have no chance of success and the winners do not
always prove to be thought leaders, a necessity for leadership of a learned
profession.


Sadly,
the disciplinary process too has had challenges. For one, proceedings take too
long. There are valid reasons for this, the least of which are that part time
members on the bench can only meet once a while. One can go on. To sum it up –
if members and the council failed to see in the early years of this century the
NFRA looming and to take corrective action, they have only themselves to thank.


The
NFRA has taken away three roles from the ICAI – the right to discipline
chartered accountants, the right to set accounting standards and the right to
set auditing standards.


Let me
first address the disciplinary process. I have been its object (the respondent)
several times in my career. In every case, spread from the mid-1970’s to the
Harshad Mehta scam in the early 1990’s, I was treated with spotless fairness.
Major matters such as the Harshad Mehta scam’s slew of disciplinary cases were
concluded within a relatively short time. But the final case, originating in a
dispute between two partners in a trading business (annual turnover one crore
rupees) took nearly a decade to reach conclusion. It is now slow, even when the
complainants and respondents are not the reason for delay, and it is viewed by
respondents from the large firms as not being scrupulously fair. Fair justice
is a fundamental right. If there is a continuing perception that it is not so
in even a few of those arraigned, a remedy is needed. Sadly, the ICAI did not
heed the signs. Nor did it address the core issue: why are there so many
complaints against members? Why are members with poor ethics proliferating? Why
are members in practice stooping to conduct more suited to a trader than to a
high-minded professional? What has the ICAI done effectively to set this right?


Another
point is that the NFRA may proceed more strongly against members preparing
financial statements (i.e., members in industry) and against their employers,
something the ICAI was constrained from doing because of the nature of the
process.


Moving
to the standard setting role, once again, the institute has provided poor
thought leadership. There was a time when its publications were a pleasure to
read and provided enduring guidance to preparers of financial statements. Take,
for example, the “Guidance note on Expenditure During Construction” or the one
on “The Payment of Bonus Act”. Examples of lucid expression, clarity of
thought, conceptual soundness and comprehensiveness. Something that cannot be
said for much of the material issued in recent years. It is unfair to not
recognise the guidance on Ind AS issued in the past couple of years; that has
been valuable. Transfer of this role from the ICAI to the NFRA is not a major
issue. The ICAI will continue to have the right to issue guidance to its
members. That is where the real value of its thought leadership will lie and it
will retain it. It needs to work out a process by which it does not get into
conflict with the NFRA. I read section 132 of Companies Act, 2013 to mean that
the NFRA will restrict itself to accounting standards and that it will not
issue further guidance. Were it to do so it would be important for the NFRA and
the ICAI to be in harmony.


As for
auditing standards, if all that the NFRA does is adopt the international
standards with minor modifications, they would be doing what the ICAI currently
does. However, if the NFRA seeks to impose on auditors uninformed public
expectations of them, auditors may find their work becoming unduly onerous, to
the point of impossible. That would be a matter for concern to the profession
as also to industry and commerce. Here again, the ICAI would need to build a
harmonious relationship so that auditing standards and expectations are pitched
right and so that the institute has sufficient time to prepare members for new expectations.


It is
very early days. It is not possible to state categorically that the NFRA will
be an improvement on the ICAI in the areas that are now being transferred to
it. Only time will tell as to how it functions, the extent of political and
bureaucratic influence over its functioning, its ability to remain independent
of government and its protection of the public interest. The fact that it is to
be in Delhi is an unhappy augury. Considering that most of its stakeholders
(auditors and preparers of financial statements) reside in or near Mumbai, it
should have been located there. That would have distanced it from the influence
of politicians and the bureaucracy and would have offered convenient access to
the stakeholders it has been created to deal with.


Finally,
all is not lost for the ICAI. It has had for many years an admirable record and
did command high regard from society. It is not impossible to win it back. But
it is not easy either because it would require a total change in the
profession. To do that it needs to reconsider how it has viewed its role. It is
not a trade union for its members seeking to aggrandise. For too long has its
leadership manoeuvred to win more work for its practicing members, often
regardless of industry and society that must bear the cost of that enhanced
role. The institute’s role is to ensure that its members make a positive
contribution to industry and commerce. For that it must ensure that members
undergo practical training that prepares them for making such a contribution.
It should not be licensing members who stoop to unethical practices to succeed.
The institute must be far more rigorous in vetting aspirants for its imprimatur
so that people with a weak ethical grounding do not receive it. It should be
zealous in protecting society from its cowboy members. Its leadership must not
fall into the trap of bombast and high-sounding statements whilst, at the same
time, behaving to the contrary. These leaders should demonstrate integrity in
their thought, speech and behaviour. The process by which its leaders are
selected should ensure that only individuals of such integrity and who possess
a high intellect and are well regarded for their professional knowledge go to
council.


I view
the NFRA not as a lost battle but as a wake-up call to the whole profession.
Chartered accountants have many centuries to go and one companies act does not
mean that we cannot win-back the right to regulate ourselves.


Is the
NFRA a change for the better? As with all such things, only time can answer
that question.  

 

Editorial

The New Oil, The Rig And The Extraction



Over the centuries mankind found things that
were considered rare and precious. The Native Americans exchanged their gold
for mirrors which the Spanish brought with them to the new continent. Napoleon
III is believed to have used aluminium vessels instead of gold cutlery, as it
was believed to be rare. When oil found its new use in the twentieth century,
it was named ‘black gold.’ Oil transformed nomadic economies into some of the
wealthiest ones. Today, data is the new oil.


Recently, Facebook CEO was questioned
publicly by the US lawmakers. The testimony has raised several questions. Four
areas for public and regulatory consideration can be placed under the
following:


1. Collection of data

2. Protection of data

3. Individual Privacy

4. Data use – propaganda, surveillance,
manipulation


The world of technology is fast, vast and
tangled for a lay user. As of January 2018, about 4 billion people use the
internet, 3 billion active social media users and 5 billion unique mobile users
around the world. Questions about privacy and secrecy of personal data are
critical. The EU is implementing GDPR (General Data Protection Regulation) from
26th May 2018. The GDPR has extra territorial applicability, massive
fine (higher of 4% of annual turnover or Euro 20m) and onus of clarity in the
consent is on the data processers.


As citizens we are a subject matter of
possible if not actual digital surveillance although some of it comes across as
convenience. Consider these examples we can relate to:


1. Say you wish to buy a product. You enter
the words ‘Apple Cider Vinegar price’ in your browser. For next several hours
or days the application you use show advertisements selling that product.


2. I was travelling outside India. My phone
did not have data, wifi or local sim card. I was using the phone only for its
camera. I returned to my hotel, turned on the wifi and started to look at the
pictures I had taken during the day. Each picture showed with it, the location
where it was taken.


3. I was looking out for a new car. I searched
and clicked on a link on a browser. The website asks me my location.


Knowing about who you are, what you do, where
you go, what you buy, what you like and what you pay is invaluable. Today,
YOU are the new oil – the subject matter of digital data collection. Data
about you is saleable and fetches big bucks. Although some services come
‘free’, they could be collecting your data in return and making use of that
data to suit their objectives. As a popular quote goes: ‘If you’re not paying
for it, you are not the customer; you are the product being sold.’


Data today can be used to control us – our
minds, opinions, judgements, and decisions. By knowing vulnerabilities of
people, technology can manipulate our individual and collective psyche to the
advantage of some. Recent reports show that personal data was sold and personal
data was used to manipulate elections. We all know how social media is used for
propaganda, fake news and to influence public opinion.


Today Facebook has 1.44 billion monthly
active users (MAU). That is 188 million more than India’s population. Alphabet,
Apple, Amazon, Microsoft and Facebook put together have market capitalisation
more than $3 Trillion. That means these companies collectively are larger than
individual GDPs of France, India, UK and Italy. However, these aren’t nations
or cooperatives; they are corporations with private ownership. Some are even
monopolies, but they seem like neutral public forums or platforms. Today we are
faced with the question: When we use an app, is it simply a ‘pass through’
or is it a ‘gate keeper’ who controls what we should see?


One of the US lawmakers raised an important
question to the Facebook CEO – It is not about would you do it, it is about
could you do it! When we give access to our personal data on the phone, say our
contacts, do we know what that data will be used for? How secured it is? When
we press ‘I agree’, we hardly know what we are consenting to!


If data were new oil, your devices and apps
could well be the oil rigs. The feed you see could probably be a feed organised
by some vested interest – for propaganda, fake news or influencing your
decision. If individual freedom and liberty were to remain supreme in the
digital age, individual privacy cannot be disregarded. And if one were to
ask about the value of privacy, answer these questions – Do you like to be
spied on, stalked, watched or manipulated? Who would you want to give the right
to watch you and to what extent? What will be the dos and don’ts that you would
want an entity to follow with the information you shared?


There is no doubt that the gains of
technology outweigh most other drawbacks. At the same time, there is no legacy
more precious than individual freedom and liberty. Remaining a ‘private’
citizen is a challenge today. The question is can we even choose to be
one? 


 

Raman
Jokhakar

Editor

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Learnings From Ramayana: Steadfastness to His Word

In this series of short articles on
Ramayana, I am presuming some knowledge on the part of the readers about the
broad story of the epic. In the last month’s article, I had quoted a verse. The
correct reading of the verse is as under:

  

In this article, we will see Shree Ram’s
sense of steadfastness to his word. The strength of his word was such that
nothing could deter him from his pledge. His intention and speech were so
aligned, that he never deviated from his word by giving lame excuses or finding
loop-holes. His well-known words are Ram never makes two (contradictory)
statements! There is no inconsistency between his utterances. Here are four
instances which demonstrate his complete alignment between what he meant and
what he said, what he said and what he did and between his utterances at
different times. In today’s world, these examples would inspire and open our
eyes.


1. When he was
going to exile, mother Kausalya tried to stop him by ‘emotional blackmailing’.
She said “Ram, do you agree that mother’s word is superior to that of the
father? Her word should prevail?” Ram nodded in approval.


“Then” she said, “Your father
Dasharatha is sending you to exile; but I am asking you not to go”.
Immediately, Ram retorted, “Mother, this command to go to exile is that of my
mother Kaikeyi only!”. He did not take shelter that Kaikeyi was his
step-mother.


2. While in exile, Ram never entered any
city. Since he had pledged to be in exile, he remained in exile.When he killed
Bali and handed over the kingdom of Kishkindha to Bali’s brother Sugreeva; Ram
refused to enter Kishkindha for attending his coronation. So also, after
killing Ravana, he installed Bibheeshana as the king of Lanka. Still, he did
not attend his coronation. Not only that, he sought his permission as a king,
to meet Seetaji as Seetaji was detained by Ravana in Lanka. This was the height
of courtesy and decorum.


3. When Bharata came to see Ram in the
forest to take him back, the sage Jabali said to Ram, “when you handed over the
kingdom to Bharata, you discharged your duty of honouring the word of your
father Dasharatha. Now, when that same Bharata is offering it back to you, what
is wrong in accepting it? There is no breach of your vow!”. “No”
Shree Ram said, “there were two parts of my father’s promise to mother Kaikeyi
– one was handing over the heirdom to Bharata; and 14 years’ exile for myself!
If I accept the kingdom, there will be a breach of the other part!”


4. While in exile, the sages and their
pupils staying in Ashramas came to request him for protection from cruel
and wicked demons. Shree Ram, duty conscious to the core, replied to them
politely, “It is a pity; rather shameful on my part that you have to
approach me with such a request! As a representative of King Bharata, it is my
bounden duty to protect all the subjects from evil. Your request clearly
reflects on my failure. Don’t worry. I will destroy the demons and make your
lives safe and comfortable”.

 

These are only a few illustrations. Ramayana
is full of such instances demonstrating a sense of duty in thought word and
deed, not only on the part of Shree Ram but also many others. We can learn from
these examples and apply them in day-to-day life.  

 

Board Meetings By Video Conferencing Mandatory For Companies? – Yes, If Even One Director Desires

Background

Is a company
bound to provide facilities to directors to participate in board meetings by
video conferencing? The NCLAT has answered in the affirmative even if one
director so desires. This is what the Tribunal has held in its recent
decision in the case of Achintya Kumar Barua vs. Ranjit Barthkur ([2018] 91
taxmann.com 123 (NCL-AT)).

Section 173(2)
of the Companies Act, 2013 provides that a director may participate in a board
meeting in person or through video conferencing or through audio-video visual
means. Clearly, then, a director has three alternative methods to attend board
meeting. The question was: whether these three options arise only if a company
provides such facility or whether a director can insist that he be provided all
the three choices the director has the option of using any one of the three.

It is clear
that, for video-conferencing to work, facilities would have to be at both ends.
Indeed, as will also be seen later herein, the company will have to arrange for
far more facilities to ensure compliance, than the director participating by
video conference. The director may need to have just a computer – or perhaps
even a mobile may be sufficient – and internet access. Apart from providing
these facilities, the process of the board meeting itself would undergo a
change in practice where meeting is held by video conference.

While one may
perceive that, particularly with internet access and high bandwith
proliferating, video conferencing would be easy. However, the formal process of
Board Meetings by video conferencing has May 2018 video conferencing article
first post board been simplified. This would not only require bearing the cost
of video conference facilities but also carrying out several other compliances
under the Companies Act and Rules made thereunder. This makes the effort
cumbersome and costly particularly for small companies. Moreover, the
proceedings would become very formal. Directors would be aware that their words
and acts are being recorded. These video recordings can be reviewed later very
closely for legal and other purposes particularly for deciding who was at fault
in case some wrongs or frauds are found in the company.

Arguments before the NCLAT

Before the
NCLAT, which was hearing an appeal against the decision of the NCLT, the
company argued that the option to attend by video conferencing to a director
arises only if the company provides such right.

It was also
argued that the relevant Secretarial Standards stated that board meeting could
be attended by video conferencing only if the company had so decided to provide
such facility.

Additional
issues raised including facts that made it difficult for the company to provide
such facility.

Relevant provisions of law

Some relevant
provisions in the Companies Act, 2013 and the Companies (Meetings of Board and
its Powers) Rules, 2014 are worth considering and are given below (emphasis supplied).

 Section 173(2)
of the Act:

173(2) The
participation of directors in a meeting of the Board may be either in person or through video conferencing or other
audio visual means, as may be prescribed, which are capable of recording and
recognising the participation of the directors and of recording and storing the
proceedings of such meetings along with date and time:

Provided
that the Central Government may, by notification, specify such matters which shall not be dealt with in a meeting through video
conferencing or other audio visual means:

Provided
further that where there is quorum in a meeting through physical presence of
directors, any other director may participate through video conferencing or
other audio visual means in such meeting on any matter specified under the
first proviso. (This second proviso is not yet brought into force)

Some relevant
provisions from the Rules:

3. A company shall comply with the
following procedure, for convening and conducting the Board meetings through
video conferencing or other audio visual means.

(1) Every
Company shall make necessary arrangements to avoid failure of video or audio
visual connection.

(2) The
Chairperson of the meeting and the company secretary, if any, shall take due
and reasonable care—

(a) to
safeguard the integrity of the meeting by
ensuring sufficient security and identification procedures;

(b) to ensure availability of proper
video conferencing or other audio visual equipment or facilities for providing
transmission of the communications for effective participation of the directors
and other authorised participants at the Board meeting;

(c) to record
proceedings and prepare the minutes of the meeting;

(d) to store for safekeeping and marking the tape
recording(s) or other electronic recording mechanism as part of the records of
the company at least before the time of completion of audit of that particular
year.

(e) to ensure that no person other than
the concerned director are attending or have access to the proceedings of the
meeting through video conferencing mode or other audio visual means; and

(f) to ensure that participants attending the meeting
through audio visual means are able to hear and see the other participants
clearly during the course of the meeting:


What the NCLAT held

The NCLAT,
however, held that the right to participate board meetings via
video-conferencing was really with the director. This is clear, it pointed out,
from the opening words of Section 173(2) that read: “The participation of
directors in a meeting of the Board may
be either in person or through video conferencing or other audio visual means“.
Thus, if the director makes the choice of attending by video-conferencing, the
company will have to conduct the meeting accordingly.

The NCLAT
analysed and observed, “We find that the word “may” which has been
used in this sub-Section (2) of Section 173 only gives an option to the
Director to choose whether he would be participating in person or the other
option which he can choose is participation through video-conferencing or other
audio-visual means. This word “may” does not give option to the
company to deny this right given to the Directors for participation through
video-conferencing or other audio-visual means, if they so desire.”.

The NCLAT
further stated, “…Section 173(2) gives right to a Director to participate
in the meting through video-conferencing or other audio-visual means and the
Central Government has notified Rules to enforce this right and it would be in
the interest of the companies to comply with the provisions in public
interest.”.

On the issue of
the relevant Secretarial Standard that stated that video conferencing was
available only if the company had provided, the NCLAT rejected this
argument saying that in view of clear words of the Act, such standards could
not override the Act and provide otherwise. In the words of the NCLAT, “We
find that such guidelines cannot override the provisions under the Rules. The
mandate of Section 173(2) read with Rules mentioned above cannot be avoided by
the companies.”.

The NCLAT
finally stressed on the positive aspects of video conferencing. It said that
vide conferencing it could actually help avoid many disputes on the proceedings
of the Board meeting as a video record would be available. To quote the NCLAT, “We
have got so many matters coming up where there are grievances regarding
non-participation, wrong recordings etc.” It also upheld the order of the
NCLT which held that providing video conferencing facility was mandatory of a
director so desired, and said, “The impugned order must be said to be
progressive in the right direction and there is no reason to interfere with the
same.”.

Implications and conclusion

It is to be
emphasised that the requirements of section 173 apply to all companies –
listed, public and private. Hence, the implications of this decision are far
reaching. Even if one director demands facility of video conferencing, all the
requirements will have to be complied with by the company.

Rule 3 and 4 of
the Companies (Meeting of Board and its Powers) Rules, 2014, some provisions of
which are highlighted earlier herein, provide for greater detail of the manner
in which the meeting through video conferencing shall be held. Directors should
be able to see each other, there should be formal roll call including related
compliance etc. There are elaborate requirements for recording decisions
and the minutes in proper digital format. 

In these days,
meetings so held can help avoid costs and time, particularly when the director
is in another city or town or in another country. However, there are attendant
costs too. Even one director could insist on attending by video conferencing
and the result is that the whole proceedings would have to be so conducted and
the costs have to be borne by the company.

Certain
resolutions such as approval of annual accounts, board report, etc.
cannot be passed at a meeting held by video-conferencing. A new proviso has
been inserted to section 173(2) by the Companies (Amendment) Act, 2017. This
proviso, which is not yet brought into force, states that if there are enough
directors physically present to constitute the quorum, then, even for such
resolutions, the remaining directors could attend and participate by video
conferencing.

Thus, in
conclusion, it is submitted that the lawmakers should review these provisions
and exclude particularly small companies – private and public – from their
applicability.  

Note: in the april 2018 issue of
the journal, in the article titled “tax planning/evasion transactions on
capital markets and securities laws – supreme court decides”, on page 110, the
relevant citation of the decision of the supreme court was inadvertently not
given. the citation of this decision is sebi vs. rakhi trading (p.) limited
(2018) 90 taxmann.com 147 (sc).

 


 

Fugitive Economic Offenders Ordinance 2018

Introduction

Scam and Scat is the motto
of the day! The number of persons committing frauds and leaving the country is
increasing. Once a person escapes India, it not only becomes difficult for the
law enforcement agencies to extradite him but also to confiscate his
properties. In order to deter such persons from evading the law in India, the
Government has introduced the Fugitive Economic Offenders Bill, 2018 (“the
Bill”). The Bill has been tabled in the Lok Sabha. However, while the Bill
would take its own time to get cleared, the Government felt that there was an
urgent need to introduce the Provisions and so it promulgated an Ordinance
titled, the Fugitive Economic Offenders Ordinance, 2018. This Ordinance was
promulgated by the President on 21st April 2018 and is in force from
that date.

 

Fugitive Economic Offender

The Preamble mentions that
it is an Ordinance to provide for measures to deter fugitive economic offenders
from evading the process of law in India by staying outside the jurisdiction of
Indian courts, to preserve the sanctity of the rule of law in India.

The Ordinance defines a
Fugitive Economic Offender as any individual against whom an arrest warrant has
been issued in India in relation to a Scheduled Offence and such individual
must:

(a) Have left India to avoid criminal prosecution;
or

(b) If he is abroad, refuses to return to India to
face criminal prosecution.

Thus, it
applies to an individual who either leaves the country or refuses to return but
in either case to avoid criminal prosecution. An arrest warrant must have been
issued against such an individual in order for him to be classified as a
`Fugitive Economic Offender’ and the offence must be an offence mentioned in
the Schedule to the Ordinance. The Ordinance provides for various economic
offences which are treated as Scheduled Offences provided the value involved in
such offence is Rs. 100 crore or more. Hence, for offences lesser than Rs. 100
crore, an individual cannot be treated as a Fugitive Economic Offender. Some of
the important Statutes and their economic offences covered under the Ordinance
are as follows:

 (a) Indian Penal Code, 1860 – Cheating, forgery,
counterfeiting, etc.

 (b) Negotiable Instruments Act, 1881 – Cheque
Bouncing u/s. 138

 (c) Customs Duty, 1962 – Duty evasion

 (d) Prohibition of Benami Property Transactions
Act, 1988 – Prohibition of Benami Transactions

 (e) SEBI Act, 1992- Prohibition of Insider Trading
and Other Offences for contravention of the provisions of the SEBI Act in the manner
provided u/s. 24 of the aforesaid Act.

 (f)  Prevention of Money Laundering Act, 2002 –
Offence of money laundering

 (g) Limited Liability Partnership Act, 2008 –
Carrying on business with intent to defraud creditors of LLP

 (h) Companies Act, 2013 – Private Placement
violation; Public Deposits violation; Carrying on business with intent to defraud creditors / fraudulent purpose; Punishment for fraud in the
manner provided u/s. 447 of the Companies Act.

(i)  Black Money (Undisclosed
Foreign Income and Assets) and Imposition of Tax Act, 2015 – Wilful attempt to
evade tax u/s. 51 of the Act. It may be noted that this offence is also a
Scheduled Cross Border Offence under the Prevention of Money Laundering Act,
2002. Thus, a wilful attempt to evade tax under the Black Money Act may have
implications and invite prosecutions under 3 statutes!

(j)  Insolvency and Bankruptcy Code, 2016 –
Transactions for defrauding creditors

(k) GST Act, 2017 – Punishment for certain offences
u/s. 132(5) of the GST Act, such as, tax evasion, wrong availment of credit,
failure to pay tax to Government, false documents, etc.   

Applicability

The
Ordinance states that it applies to any individual who is, or becomes, a
fugitive economic offender on or after the date of coming into force of this
Ordinance, i.e., 21st April 2018. Hence, its applicability is
retroactive in nature, i.e., it applies even to actions done prior to the
passing of the Ordinance also. Therefore, even the existing offenders who
become classified as fugitive economic offenders under the Ordinance would be
covered.

Declaration of Fugitive Economic Offender

The
Enforcement Directorate would administer the provisions of the Ordinance. Once
the ED has reason to believe that any individual is a Fugitive Economic
Offender, then he (ED) may apply to a Special Court (a Sessions Court
designated as a Special Court under the Money Laundering Act) to declare such
individual as a Fugitive Economic Offender. Such application would also contain
a list of properties in India and outside India believed to be the proceeds of
crime for which properties confiscation is sought. It would also mention a list
of benami properties in India and abroad to be confiscated. The term `proceeds
of crime’ means any property derived directly or indirectly as a result of
criminal activity relating to a scheduled offence, and where the property is
held abroad, the property of equivalent in value held within the country or
abroad.

With the
permission of the Court, the ED may attach any such property which would
continue for 180 days or as extended by the Special Court. However, the
attachment would not prevent the person interested in enjoyment of any
immovable property so attached. The ED also has powers of Survey, Search and
Seizure in relation to a Fugitive Economic Offender. It may also search any
person by detaining him for a maximum of 24 hours with prior Magistrate
permission.

Once an
application to a Court is made, the Court will issue a Notice to the alleged
Fugitive Economic Offender asking him to appear before the Court. It would also
state that if he fails to appear, then he would be declared as a Fugitive
Economic Offender and his property would stand confiscated. The Notice may also
be served on his email ID linked with his PAN / Aadhaar Card or any other ID
belonging to him which the Court believes is recently accessed by him.

If the
individual appears himself before the Court, then it would terminate the
proceedings under the Ordinance. Hence, this would be the end of all
proceedings under the Ordinance. However, if he appears through his Counsel,
then Court would grant him 1 week’s time to file his reply. If he fails to appear
either in person or Counsel and the Court is satisfied that the Notice has been
served or cannot be served since he has evaded, then it would proceed to hear
the application.

Consequences

If the
Court is satisfied, then it would declare him to be a Fugitive Economic
Offender and thereafter, the proceeds of crime in India / abroad would be
confiscated and any other property / benami property owned by him would also be
confiscated. The properties may or may not be owned by him. In case of foreign
properties, the Court may issue a letter of request to a Court in a country
which has an extradition treaty or similar arrangement with India. The
Government would specify the form and manner of such letter. This Order of the
Special Court is appealable before the High Court.

The Court,
while making the confiscation order, exempt from confiscation any property
which is a proceed of crime in which any other person, other than the
FugitiveEconomic Offender, has an interest if the Court is satisfied that such
interest was acquired bona fide and without knowledge of the fact that
the property was proceeds of crime. Thus, genuine persons are protected.

One of the
other consequences of being declared as a Fugitive Economic Offender, is that
any Court or Tribunal in India may disallow him to defend any civil claim in
any civil proceedings before such forum. A similar restriction extends to any
company or LLP if the person making the claim on its behalf/the promoter/key
managerial person /majority shareholder/individual having controlling interest
in the LLP has been declared a Fugitive Economic Offender. The terms
promoter/majority shareholder /individual having controlling interest have not
been defined under the Ordinance. It would be desirable for these important
terms to be defined or else it could either lead to inadvertent consequences or
fail to achieve the purpose. This ban on not allowing any civil remedy, even
though it is at the discretion of the Court/Tribunal, is quite a drastic step
and may be challenged as violating a person’s Fundamental Rights under the
Constitution. Although the words used in the Ordinance are that “any Court
or tribunal in India, in any civil proceeding before it, may, disallow
such individual from putting forward or defending any civil claim”; it
remains to be seen whether the Courts interpret may as discretionary or as
directory, i.e., as ‘shall’?

The
Ordinance also empowers the Government to appoint an administrator for the
management of the confiscated properties and he has powers to sell them as
being unencumbered properties. This is another drastic step since a person’s
properties would be confiscated and sold without him being convicted of an
offence. A mere declaration of an individual as a Fugitive Economic Offender
could lead to his properties being confiscated and sold? What about charges
which banks/Financial Institutions may have on these properties? Would these
lapse? These are open issues on which currently there is no clarity. It is
advisable that the Government thinks through them rather than rushing in with
an Ordinance and then have it struck down on various grounds!

An
addition in the Ordinance as compared to the Bill is that no Civil Court has
jurisdiction to entertain any suit in respect of any matter which the Special
Court is empowered to determine and no injunction shall be granted by any Court
in respect of any action taken in pursuance of any power conferred by the
Ordinance.

Onus of Proof

The onus
of proving that an individual is a Fugitive Economic Offender lies on the
Enforcement Directorate. However, the onus of proving that a person is a
purchaser in good faith without notice of the proceeds of crime lies on the
person so making a claim. 

Epilogue

This
Ordinance together with the Prohibition of Benami Transactions Act, 1988; the
Prevention of Money Laundering Act, 2002 and the Black Money(Undisclosed
Foreign Income and Assets) and Imposition of Tax Act, 2015 forms a
four-dimensional strategy on the part of the Government to prevent wilful
economic offenders from fleeing the country and for confiscating their
properties. Having said that, there are many unanswered questions which the
Ordinance raises:

 (a) Whether a mere declaration of an individual as
a Fugitive Economic Offender by a Court would achieve the purpose– Is it not
similar to bolting the stable after the horse has eloped?

 (b) How easy is it going to be for the Government
to attach properties in foreign jurisdictions?

 (c) Would a mere Letter of Request from a Special
Court be enough for a foreign Court / Authority to permit India to confiscate
properties in foreign jurisdictions?

 (d) Would not the foreign Court like to hear
whether due process of law has been followed or would it merely take off from
where the Indian Court has left?

 (e) The provision of attachment of property is
common to the Ordinance, the Prohibition of Benami Transactions Act, 1988, and
the Prevention of Money Laundering Act, 2002. In several cases, all three
statutes may apply. In such a scenario, who gets priority for attachment? 

These and several unanswered questions
seem to create a fog of uncertainty. Maybe with the passage of time many of
these doubts would get cleared. Till such time, let us all hope that the
Ordinance is able to achieve its stated purpose of deterring economic offenders
from fleeing the Country and create a Ghar Vapsi for them…!!

Money Laundering Law: Dicey Issues

INTRODUCTION

United Nations General Assembly held a special
session in June 1998. At that session, a Political Declaration was adopted
which required the Member States to adopt national money-laundering
legislation.

On 17th January, 2001, the President
of India gave his assent to The Prevention of Money-Laundering Act, 2002
(“PMLA”). Enactment of PMLA is, thus, rooted in the U.N. Political Declaration.


EVOLUTION OF LAW


The preamble to PMLA shows that it is an “Act
to prevent money-laundering and to provide for confiscation of property derived
from, or involved in, money-laundering and for matters connected therewith or
incidental thereto”.


After PMLA was enacted, the Government had to
deal with various issues not adequately addressed by the existing legal
framework. Accordingly, the Government modified the legal framework from time
to time by amendments to PMLA. The amendments made in 2005, 2009, 2013 and 2016
helped the Government to address various such issues which were reflected in
the Statement of Objects and Reasons appended to each amendment.


JUDICIAL REVIEW


In addition to the issues addressed by the
amendments to PMLA, many more issues came up for judicial review before Courts.
The Supreme Court and various High Courts critically examined such further
issues and gave their considered view in respect of such issues.

In this article, the author has dealt with the
following dicey issues and explained the rationale underlying the conclusion
reached by the Court.


1)  Does
possession of demonetised currency notes constitute offence of
money-laundering?

2)  Whether
a chartered accountant is liable for punishment under PMLA?

3)  Doctrine
of double jeopardy – whether applicable to PMLA?

4)  Right
of cross-examination of witness.

5)  Whether
the arrest under PMLA depends on whether the offence is cognisable?

6)  Whether
the arrest under PMLA requires the officer to follow CrPC procedure?
(Registering FIR, etc.)

7)  How
soon to communicate grounds of arrest?


1) Does possession of demonetised currency notes
constitute offence of money-laundering?


This issue was examined by the Supreme Court in a
recent decision[1] in the
light of the following facts.


In November 2016, the Government announced
demonetisation of 1000 and 500 rupee notes. The petitioner conspired with a
bank manager and a chartered accountant (CA) to convert black money in old
currency notes into new currency notes. In such conspiracy, the CA acted as
middleman by arranging clients wanting to convert their black money. The CA
gave commission to the petitioner on such transactions.


The petitioner opened bank accounts in names of
different companies by presenting forged documents and deposited Rs. 25 crore
after demonetisation.      


Statements of 26 witnesses were recorded.
However, the petitioner refused to reveal the source of the demonetised and new
currency notes found in his premises.


The abovementioned facts were viewed in the light
of the relevant provisions of PMLA and thereupon, the Supreme Court explained
the following legal position applicable to these facts.


Possession of demonetised currency was only a
facet of unaccounted money. Thus, the concealment, possession, acquisition or
use of the currency notes by projecting or claiming it as untainted property
and converting the same by bank drafts constituted criminal activity relating
to a scheduled offence. By their nature, the activities of the petitioner were
criminal activities. Accordingly, the activity of the petitioner was replete
with mens rea. Being a case of money-laundering, the same would fall
within the parameters of section 3 [The offence of money-laundering] and was
punishable u/s. 4 [Punishment for money-laundering].


The petitioner’s reluctance in disclosing the
source of demonetised currency and the new currency coupled with the statements
of 26 witnesses/petitioner made out a formidable case showing the involvement
of the petitioner in the offence of money-laundering.


The volume of demonetised currency and the new
currency notes for huge amount recovered from the office and residence of the
petitioner and the bank drafts in favour of fictitious persons, showed that the
same were outcome of the process or activity connected with the proceeds of
crime sought to be projected as untainted property.


The activities of the petitioner caused huge
monetary loss to the Government by committing offences under various sections
of IPC. The offences were covered in paragraph 1 in Part A of the Schedule in
PMLA [sections 120B, 420, 467 and 471 of IPC].


On the basis of the abovementioned legal
position, the Supreme Court held that the property derived or obtained by the
petitioner was the result of criminal activity relating to a scheduled offence.


The possession of such huge quantum of
demonetised currency and new currency in the form of Rs. 2000 notes remained
unexplained as the petitioner did not disclose their source and the purpose for
which the same was received by him. This led to the petitioner’s failure to
dispel the legal presumption that he was involved in money-laundering and the
currencies found were proceeds of crime.


2) WHETHER A CHARTERED ACCOUNTANT IS LIABLE TO
PUNISHMENT UNDER PMLA?


A chartered account can act as authorised
representative to present his client’s case u/s. 39 of PMLA.


In the event of the client facing charge under
PMLA, can his chartered account be also proceeded against and punished under
PMLA?


This topical issue was examined by the Supreme
Court in the undernoted decision[2].


In this case, CBI was investigating the charge of
corruption on mammoth scale by a Chief Minister which had benefitted his son –
an M. P. When CBI sought custody of the respondent chartered accountant, he
contended that he was merely a chartered accountant who had rendered nothing
more than professional service.


The Supreme Court rejected such contention having
regard to serious allegations against the chartered accountant and his nexus
with the main accused. The Supreme Court gave weight to the CBI’s allegation
that the chartered accountant was the brain behind the alleged economic offence
of huge magnitude. The bail granted to the chartered accountant by the Special
Court and the High Court was cancelled by the Supreme Court.


The ratio of this decision may be used by
CBI/Enforcement Directorate to rope in chartered accountants for their role in
the cases involving bank frauds and transactions which are economic offences
which are recently in the news.


3) DOCTRINE OF DOUBLE JEOPARDY- WHETHER
APPLICABLE TO PMLA


When a person facing criminal charge in a trial
is summoned under PMLA, can he raise the plea of double jeopardy in terms of
Article 20(2) of the Constitution?


This issue was examined by the Madras High Court
in the undernoted decision[3].

In this case, the charge-sheet was filed by
police to investigate the offences of cheating punishable under sections
419-420 of the Indian Penal Code. Under PMLA, these offences are
regarded as “scheduled offences”.


When summon under PMLA was issued to the
petitioner, she pleaded that the summon cannot be issued to her. According to
her, the summon was hit by double jeopardy as police had already filed
charge-sheet alleging the offence under the Indian Penal Code.


It was held by the Madras High Court that
issuance of summon under PMLA was merely for preliminary investigation to trace
proceeds of crime which did not amount to trying a criminal case. Hence, there
was no double jeopardy as envisaged under Article 20(2) of the Constitution.


 The plea of double jeopardy was also raised in
another case[4].


In this case, the petitioner was acquitted from
criminal charges under the Indian Penal Code. After such acquittal,
however, the proceedings under PMLA continued. Hence, the petitioner claimed
the benefit of double jeopardy on the ground that the proceedings under PMLA
regarding seized properties cannot be allowed to continue after his acquittal
from criminal charges under the Indian Penal Code.


The Orissa High Court held that even when the
accused was acquitted from the charges framed in the Sessions trial, a
proceeding under PMLA cannot amount to double jeopardy since the procedure and
the nature of onus under PMLA are totally different.


4)  RIGHT
OF CROSS-EXAMINATION OF WITNESS


Whether, at the stage when a person is asked to
show cause why the properties provisionally attached should not be declared
property involved in money-laundering, can he claim the right of
cross-examining a witness whose statement is relied on in issuing the
show-cause notice?


This was the issue before the Delhi High Court in
the under mentioned case[5].


The Delhi High Court observed that, prior to
passing of the Adjudication Order u/s. 8 of PMLA, it cannot be presumed that
the Adjudicating Authority will rely on the statement of the witness sought to
be cross-examined by the petitioner. On this ground, it was held that the
noticee did not have the right to cross-examine the witness at the stage when
he merely received the show-cause notice.


5)  WHETHER
THE ARREST UNDER PMLA DEPENDS ON WHETHER THE OFFENCE IS COGNISABLE


 The Bombay High Court has discussed this issue in
the undernoted decision[6].


The Court referred to the definition of ‘cognisable
offence‘ in section 2(c) of CrPC and observed that if the offence falls
under the First Schedule of CrPC or under any other law for the time being in
force, the Police Officer may arrest the person without warrant. The Court also
referred to the following classification of the offences under the ‘First Schedule’
of CrPC.


– ‘cognisable’ or ‘non-cognisable’;

– bailable or non-bailable

– triable by a particular Court.


Under Part II of the First Schedule of CrPC,
[‘Classification of Offences under Other Laws’], it is provided that ‘offences
punishable with imprisonment for more than three years would be cognisable and
non-bailable’.


The punishment u/s. 4 for the offence of
money-laundering is described in section 3. The punishment is by way of
imprisonment for more than three years and which may extend up to seven years
or even upto ten years. Therefore, in terms of Part II of the First Schedule of
CrPC, such offence would be cognisable and non-bailable. 


In the opinion of the Bombay High Court,[7] however,
for arresting a person, the debate whether the offences under PMLA are
cognisable or non-cognisable is not relevant.


The Court explained that section 19 of PMLA
confers specific power to arrest any personif three conditions specified in
section 19 existde hors the classification of offence as cognisable.


According to section 19, the following three
conditions need to exist for arresting a person.


Firstly, the authorised officer has the reason to believe
that a person is guilty of the offence punishable under PMLA.


Secondly, such reason to believe is based on the material
in possession of the officer.


Finally, the reason for such belief is recorded in
writing.


Section 19 nowhere provides that only when the
offence committed by the person is cognisable, such person can be arrested.


6) WHETHER THE ARREST UNDER PMLA REQUIRES THE
OFFICER TO FOLLOW CRPC PROCEDURE (REGISTERING FIR, ETC.)?


Section 19 of PMLA does not contemplate the
following steps before arresting the accused in respect of the offence
punishable under PMLA.


– registration of FIR on receipt of information relating to cognisable offence.

– obtaining permission of the Magistrate in case of non-cognisable offence.


 According to the Court[8], when
there are no such restrictions on the ‘power to arrest’ u/s. 19 it does not
stand to reason that in addition to the procedure laid down in PMLA, the
officer authorised to arrest the accused under PMLA be required to follow the
procedure laid down in CrPC (viz., registering FIR or seeking Court’s
permission in respect of non-cognisable offence) for arrest of the accused.


The Court observed that if the provisions of
Chapter XII of CrPC (regarding registration of FIR and Magistrate’s permission)
are to be read in respect of the offences under PMLA, section 19 of PMLA would
be rendered nugatory. According to the Court, such cannot be the intention of
the Legislature. Thus, a special provision in PMLA cannot be rendered nugatory
or infructuous by interpretation not warranted by the Legislature.


7)  HOW
SOON TO COMMUNICATE THE GROUNDS OF ARREST?


Whether the grounds of arrest must be informed or
supplied to the arrested person immediately or “as soon as possible” and
whether the same must be communicated in writing or orally.


The Bombay High Court[9] addressed
this issue as follows.


Section 19(1) of PMLA does not provide that the
grounds of arrest must be immediately informed to the arrested person. The use
of the expression ‘as soon as may be‘ in section 19 suggests that the
grounds of arrest need not be supplied at the very time of arrest or
immediately on arrest. Indeed, the same should be supplied as soon as may be.


The Court observed that if the intention of the
Legislature was that the grounds of arrest must be mentioned in the Arrest
Order itself and that, too, in writing, the Legislature would have made clear
provision to that effect by using the word ‘immediately’ or ‘at the time of
arrest’. According to the Court, the fact that the Legislature has not done so
and instead, used the words ‘as soon as may be‘, is clear indication
that there is no statutory requirement that the grounds of arrest should be
communicated in writing and that also at the time of arrest or immediately
after the arrest. The use of the words ‘as soon as may be‘ implies that
the grounds of arrest should be communicated at the earliest.


SUMMATION


All the aforementioned dicey issues considered by
the Supreme Court and High Courts have significant relevance to chartered
accountants in practice while advising their clients on the matters concerning
PMLA.

As discussed in the Supreme Court’s decision in
the case of Vijay Sai Reddy[10], there is always a possibility that
the bail initially given to the chartered accountant by the Special Court or
High Court may be cancelled by the Supreme Court.


Hence, it is important for chartered accountants
to take a conservative view while giving their professional advice or view.
They must keep abreast of the important issues discussed in this article which
would enable them to give proper advice to their clients.

 

[1] Rohit Tandon vs. ED
[2018] 145 SCL 1 (SC

[2] CBI vs. Vijay Sai Reddy (2013) 7SCC 452

[3] M.Shobana vs. Asst
Director (2013) 4 MLJ (Cr.) 286

[4] Smt. Janata Jha vs.
Asst Director (2014) CrLJ2556 (Orri)

[5] Arun Kumar Mishra
vs. Union (2014) 208 DLT 56

[6]Chhagan Chandrakant Bhujbal vs. Union
[2017] 140 SCL 40 (Bom)

[7] Chhagan Chandrakant Bhujbal vs. Union [2017] 140 SCL 40 (Bom)

[8] Chhagan Chandrakant Bhujbal vs. Union [2017] 140 SCL 40 (Bom)

[9] Chhagan Chandrakant Bhujbal vs. Union [2017] 140 SCL 40 (Bom)

[10] CBI vs. Vijay Sai
Reddy (2013) 7 SCC 452

Daughter’s Right In Coparcenary – V

The Hindu Succession Act, 1956 (“the Act”)
was amended by the Hindu Succession (Amendment) Act, 2005 (“the Amending Act”)
with effect from 9th September 2005, whereby the law recognised the
right of a daughter in coparcenary. Unfortunately, the amended provisions of
section 6 of the Act has caused a lot of confusion and resulted in litigation
all over the country. My articles in BCAJ published in January 2009, May 2010,
November 2011 and February 2016 have made some attempt to analyse and explain
the legal position as per the decided case law.

When my last article was published in BCAJ
in February 2016, it was safe to assume that in view of the then latest Supreme
Court decision in the case of Prakash and others vs. Phulavati and others (now
reported in (2016) 2 SCC 36) the law was finally settled and there would be no
need for any further discussion on the subject. However, Supreme Court is
supreme. Its latest decision in case of Danamma vs. Amar (not yet
reported) has not only prompted me to write this fifth article on the subject,
but may also open floodgates of new controversy for further litigation on the
issue all over the country.

Sub-section (1) of section 6 of the Amendment
Act inter alia provides that on and from the commencement of the
Amendment Act, the daughter of a coparcener shall, by birth become a coparcener
in her own right in the same manner as the son; have the same rights in the
coparcenary property as she would have had if she had been a son; and be
subject to the same liabilities in respect of the said coparcenary property as
that of a son.

The aforesaid recent decision seems to be
contrary to the earlier decisions of the Supreme Court. With a view to understand
the issue, it may be necessary to consider the earlier case law although some
of it was already a part of my earlier articles.

The Supreme Court in the case of Sheela
Devi vs. Lal Chand [(2006), 8 SCC 581] has clearly observed that the
Amendment Act would have no application in a case where succession was opened
in 1989, when the father had passed away. In the case of Eramma vs.
Veerupana (AIR 1966 SC 1880), the Supreme Court has held that the
succession is considered to have opened on death of a person. Following that
principle in the case of Sheela Devi cited above, the father passed away in
1989 and it was held that the Amendment Act which came into force in September
2005 would have no application.

The same issue was considered by the Madras
High Court in the case of Bhagirathi vs. S. Manvanan. (AIR 2008 Madras 250)
and held that ‘a careful reading of section 6(1) read with section 6(3) of the
Hindu Succession Amendment Act clearly indicates that a daughter can be
considered as a coparcener only if, her father was a coparcener at the time of
coming into force of the amended provision.’

Para 14 of the said judgement reads as
under:-

“In the present case, admittedly the father
of the present petitioners had expired in 1975. Section 6(1) of the Act is
prospective in the sense that a daughter is being treated as coparcener on and
from the commencement of the Hindu Succession (Amendment) Act, 2005. If such
provision is read along with S. 6(3), it becomes clear that if a Hindu dies
after commencement of the Hindu Succession (Amendment) Act, 2005, his interest
in the property shall devolve not by survivorship but by intestate succession
as contemplated in the Act.”

In the said case, the Hon’ble Court relied
upon its earlier decision in the case of Sundarambal vs. Deivanaayagam
(1991(2) MLJ 199). While interpreting almost a similar provision, as
contained in section 29-A of the Hindu Succession Act, as introduced by the
Tamil Nadu Amendment Act 1 of 1990 where the Learned Single Judge had observed
as under:-

“Under sub-clause (1), the daughter of a
coparcener shall become a coparcener in her own right by birth, thus enabling
all daughters of the coparcener who were born even prior to 25th
March, 1989 to become coparceners. In other words, if a male Hindu has a
daughter born on any date prior to 25th March, 1989, she would also
be a coparcener with him in the joint family when the amendment came into
force. But the necessary requisite is, the male Hindu should have been alive on
the date of the coming into force of the Amended Act. The Section only makes a
daughter a coparcener and not a sister. If a male Hindu had died before 25th
March, 1989 leaving coparcenary property, then his daughter cannot claim to be
a coparcener in the same manner as a son, as, on the date on which the Act came
into force, her father was not alive. She had the status only as a sister vis-a-vis
her brother and not a daughter on the date of the coming into force of the
Amendment Act …”.

The Madras High Court had occasion to
consider the similar issue in the case of Valliammal vs. Muniyappan (2008
(4) CTC 773) where the Court has observed as under:-

“6. In the plaint, it is stated that the
father of the plaintiffs died about thirty years prior to the filing of the
suit. The second plaintiff as P.W.1 has deposed that their father died in the
year 1968. The Amendment Act 39 of 2005 amending S. 6 of the Hindu Succession
Act, 1956 came into force on 9-9-2005 and it conferred right upon female heirs
in relation to the joint family property. The contention put forth by the
learned Counsel for the appellant is that the said Amendment came into force
pending disposal of the suit and hence the plaintiffs are entitled to the
benefits conferred by the Amending Act.

The Amending Act declared that the daughter
of the coparcener shall have the same rights in the coparcenary property as she
would have had if she had been a son. In other words, the daughter of a
coparcener in her own right has become a coparcener in the same manner as the
son insofar as the rights in the coparcenary property are concerned. The
question is as to when the succession opened insofar as the present suit
properties are concerned. As already seen, the father of the Plaintiffs died in
the year 1968 and on the date of his death, the succession had opened to the
properties in question.  In fact, the
Supreme Court itself in the case of Sheela Devi vs. Lal Chand has
considered the above question and has laid down the law as follows:-

19.
The Act indisputably would prevail over the old Hindu Law. We may notice that
the Parliament, with a view to confer the right upon the female heirs, even in
relation to the joint family property, enacted the Hindu Succession Act, 2005.
Such a provision was enacted as far back in 1987 by the State of Andhra
Pradesh. The succession having opened in 1989, evidently, the provisions of
Amendment Act, 2005 would have no application.

In view of the above statement of law by the
Apex Court, the contention of the appellant is devoid of merit. The succession
having opened in the year 1968, the Amendment Act 39 of 2005 would have no
application to the facts of the present case.”

Even in the case of Prakash vs. Phulavati
cited above which was decided in 2016, the Supreme Court has held that
“the rights under the Amendment Act are applicable to living daughters of
living coparceners as on 9.9.2005 irrespective of when such daughters are
born”.

Thus, there is a plethora of cases deciding
that the father of the claiming daughter should be alive if the daughter makes
a claim in the coparcenary property. Moreover, it is necessary that the male
Hindu should have been alive on the date of coming into force of the Amended
Act.

With a view to understand the problem, it is
necessary to consider the facts leading to Danamma judgement. Danamma and her
sister, who were the appellants before the Supreme Court, were daughters of
Gurulingappa. Apart from these two daughters, Gurulingappa had two sons Arun
and Vijay. Gurulingappa died in 2001 leaving behind two daughters, two sons and
his widow. After his death Amar, son of Arun, filed a suit for partition. The
trial court denied the shares of the daughters. Aggrieved by the said
judgement, the daughters appealed to the High Court but the High Court
dismissed the appeal. The Supreme Court held in favour of the daughters giving
each of them shares equal to the sons. Paras 24 and 28 (part) read as follows:-

“24. Section 6, as amended, stipulates that
on and from the commencement of the amended Act, 2005, the daughter of a
coparcener shall by birth become a coparcener in her own right in the same
manner as the son. It is apparent that the status conferred upon sons under the
old section and the old Hindu Law was to treat them as coparceners since birth.
The amended provision now statutorily recognizes the rights of coparceners of
daughters as well since birth. The section uses the words in the same manner as
the son. It should therefore be apparent that both the sons and the daughters
of a coparcener have been conferred the right of becoming coparceners by birth.
It is very factum of birth in a coparcenary that creates the
coparcenary, therefore, the sons and daughters of a coparcener become
coparceners by virtue of birth. Devolution of a coparcenary property is the
later stage of and a consequence of death of a coparcener. The first stage of a
coparcenary is obviously its creation as explained above, and as is well
recognised. One of the incidents of coparcenary is the right of a coparcener to
seek a severance of status. Hence, the rights of coparceners emanate and flow
from birth (now including daughters) as is evident from sub-s (1)(a) and (b).”

“28. On facts, there is no dispute that the
property which was the subject matter of partition suit belongs to joint family
and Gurulingappa Savadi was propositus of the said joint family
property. In view of our aforesaid discussion, in the said partition suit,
share will devolve upon the appellants as well. …”

It is apparent that Gurulingappa had died in
the year 2001 i.e. before the Amendment Act came into force and the succession
opened before coming into force of the Amendment Act. That being so, if we
apply the principles laid down by the Supreme Court in Sheela Devi’s case, the
daughter would not have any claim or share. The earlier case law (including
Supreme Court) contemplates that the male Hindu (in whose estate the daughter
is making a claim) should have been alive on the date of coming into force of
the Amendment Act. While in the present case, Gurulingappa had died before the
Amendment Act came into force. However, in that case the Supreme Court had no
occasion to consider its own earlier decision in case of Sheela Devi cited
above.

It is submitted
that Sheela Devi’s case was well considered and had settled the issue.
Therefore, the recent decision of the Supreme Court in Danamma’s case can
result in further litigation and court cases. I can only end with a fervent
hope that the Apex Court will review its decision in Danamma’s case so that the
apparent conflict is resolved without resulting in further litigation.

Voluntary Revision Of The Financial Statements

Background

With respect to voluntary
revision of financial statements, following is the provision of The Companies
Act, 2013 (as amended). 


131.(1)
If it appears to the directors of a company that— (a) the financial statement
of the company; or (b) the report of the Board, do not comply with the
provisions of section 129 or section 134, they may prepare revised financial
statement or a revised report in respect of any of the three preceding
financial years after obtaining approval of the Tribunal on an application made
by the company in such form and manner as may be prescribed and a copy of the
order passed by the Tribunal shall be filed with the Registrar…….


The MCA notified section
131 of the Act dealing with voluntary revision of financial statements on 1
June 2016 and the section is applicable from the notification date. In
accordance with the section, if it appears to the directors of a company that
its financial statement or the board report do not comply with the requirements
of section 129 (dealing with preparation of financial statements, including
compliance with accounting standards) or section 134 (dealing with aspects such
as signing of financial statements and preparation of the board report), then
directors may prepare revised financial statements or a revised report for any
of the three preceding financial years after obtaining the National Company Law
Tribunal (NCLT) approval. The section and related rules prescribe the procedure
to be followed in such cases. The procedure include:


– The company will make an application to the NCLT in prescribed
manner.

– Before passing any orders for revision, the NCLT will notify the
Central Government and the Income tax authorities and will consider
representations received, if any.

– The company will file a copy of the NCLT order with the
Registrar.

 –  Detailed reasons for revision of financial statements or report
will also be disclosed in the board’s report in the relevant financial year in which such revision is being made.


Ind AS 1 Presentation of
financial statement and Ind AS 8 Accounting Policies, Changes in Accounting Estimates and Errors


A company may decide to
change one or more accounting policies followed in the preparation of financial
statements or change classification of certain items or correct an error in
previously issued financial statements. In these cases, Ind AS 8/ 1 requires
that comparative amounts appearing in the current period financial statements
should be restated.


In the case of an error,
there may be rare circumstances when the impact of error in financial
statements is so overwhelming that they may become completely unreliable. In
such cases, the company may need to withdraw the issued financial statements
and reissue the same after correction. The auditor may also choose to withdraw
their audit report. However, in majority of cases, the impact of error will not
be so overwhelming requiring withdrawal of already issued financial statements.
Rather, the company will correct the error in subsequent financial statements.
Ind AS 8 requires that comparative information presented in subsequent
financial statements will not be the same as originally published. Those
numbers will be restated/ updated to give effect to the correction of the
error. Similar treatment applies for change in accounting policy or
reclassification. The subsequent financial statements in which correction is
made will also include appropriate disclosures to explain impact of the
changes.


Issue


Whether restatement of
comparative amounts in subsequent financial statements is tantamount to
revision of financial statements? Consequently, whether such restatement will
trigger compliance with section 131 of the Act?


Author’s View


Section 131 of the Act is
triggered only in cases where the company needs to withdraw previously issued
financial statements and re-issue the same. For example, this will be required
when the impact of error on previously issued financial statements is so
overwhelming that they have become completely unreliable.


Section 131 will not be
triggered in cases related to restatement of comparative information appearing
in the current period financial statements. This view can be supported by the
following key arguments:


– Restatement of comparative information appearing in subsequent financial
statements is not tantamount to change or revision or reissuance of
previously issued financial statements. If one reads section 131 carefully, it
is about preparing (and consequently reissuing) revised financial statements,
at the behest of the board of directors. It cannot be equated to restating
comparative numbers for errors or changes in accounting policies where there is
no revision or reissuance of already issued financial statements. There
is a change in the comparative numbers in subsequent financial statements; but
there is no revision or reissuance of already issued financial
statements.


– Section 131 can be triggered only if
the previously issued financial statements were not in compliance with section
129. In the case of a change in accounting policy or reclassification, there
was no such non-compliance in previously issued financial statements. Hence,
section 131 does not apply. The Ind AS 8 requirement to restate an error in
subsequent financial statements is the same as change in accounting
policy/reclassification. Hence, section 131 should apply in the same manner for
correction of errors as well.

9 Section 9 of the Act; Article 12 of India-Singapore DTAA – Amounts paid to a Singapore company for providing global support services were not FTS in terms of Article 12(4)(b) of India-Singapore DTAA since no technical knowledge, experience, skill, know-how, or process was made available which enabled Taxpayer to apply technology on its own.

[2018] 92 taxmann.com 5 (Mumbai – Trib.)

Exxon Mobil Company India (P.) Ltd. vs. ACIT

I.T.A. NO. 6708 (MUM.) OF 2011

A.Y.: 2007-08

Date of Order: 21st February 2018


Facts


The Taxpayer was an Indian member-company of a global group. The
Taxpayer had an affiliate company in Singapore (“Sing Co”), which was providing
global support services to the group member-companies. During the relevant
year, the Taxpayer had made two kinds of payments to Sing Co. One, payment for
Global Information Services and two, global support service fee. Global support
service included management consulting, functional advice, administrative,
technical, professional and other support services.


The Taxpayer treated the first kind of payment as royalty and withheld
tax accordingly. The Taxpayer did not withheld tax from global support service
fee on the footing that Sing Co did not have a PE in India and since the
services were rendered outside India, the payment cannot be considered as
income deemed to accrue or arising in India u/s. 9(1)(i) of the Act.


The Taxpayer submitted that the payment made to Sing Co could not be
considered fees for technical services (“FTS”) and brought within the ambit of
section 9(1)(vii) of the Act. Further, under India-Singapore DTAA only payment
for services which result in transfer of technology could be considered FTS.


The AO observed that the payment made by the Taxpayer was in the nature
of FTS as defined in Explanation 2 to section 9(1)(vii) of the Act since Sing
Co had rendered services which were highly technical in nature and involved
drawing and research. Further, since Sing Co had earned such fees because of
its business connection in India, it was liable to be taxed in India. Hence,
the Taxpayer was required to withhold the tax.


The DRP confirmed the disallowance made by the AO.


Held


–   The limited question was whether the payment
made was FTS in terms of Article 12 of India-Singapore DTAA.


–  The AO treated the payment made as FTS on the
footing that Sing Co had ‘made available’ managerial and technical services to
the Taxpayer.

–   The expression “make available”
also appears in Article 12(4)(b) of India-USA DTAA. It means that the recipient
of such service is enabled to apply or make use of the technical knowledge,
knowhow, etc., by himself and without recourse to the service provider.
Thus, “make available” envisages some sort of durability or
permanency of the result of the rendering of services.


–   In CIT vs. De Beers India Mineral (P.)
Ltd. [2012] 346 ITR 467 (Kar.), Karnataka High Court has observed that
“make available” would mean that recipient of the service is in a
position to derive an enduring benefit out of utilisation of the knowledge or
knowhow on his own in future and enabled to apply it without the aid of the
service provider. The payment can be considered as FTS only if the twin test of
rendering service and making technical knowledge available at the same time is
satisfied.


–   The agreement between the Taxpayer and Sing
Co had clearly mentioned provision of management consulting, functional advice,
administrative, technical, professional and other support services. There was
nothing in the agreement to conclude that by providing such services, Sing Co
had ‘made available’ any technical knowledge experience, skill, knowhow, or
process which enabled the Taxpayer to apply the technology contained therein on
its own in future without the aid of Sing Co.


–  Accordingly, applying the aforesaid twin
tests laid down by Karnataka High Court to the facts of the present case, it cannot be said that the payment made by the Taxpayer was FTSs defined in Article 12(4)(b) of India-Singapore DTAA.  

 

 

8 Sections – 9(1)(vi)(b), 40(a)(i), 195 of the Act – Royalty paid by an American company tax resident in India to a non-resident company for IPRs which were used for manufacturing products in India was taxable in India even if products were entirely sold outside India.

Dorf Ketal Chemicals LLC vs. DCIT

ITA NO. 4819/Mum/2013

A.Ys.: 2009-10

Date of Order: 22nd March 2018


Facts       


The Taxpayer was a LLC incorporated in, and tax resident of USA. It was
engaged in the business of trading of specialty chemicals. The Taxpayer was
100% subsidiary of an Indian company (“Hold Co”). The Taxpayer was also treated
as a tax resident of India since its control and management was situated in
India and was filing returns of its income in India as a resident company.
Thus, it was assessed to tax both in USA and India.


The Taxpayer had acquired certain patents and copyrights from an
American company for which it paid royalty computed as a fixed percentage of
sales in USA. The Taxpayer had certain customers in USA. The Taxpayer got the
products manufactured from Hold Co which were sold only in USA, and not in
India. According to the Taxpayer since the royalty was paid to an American
company (“USA Co”) for business carried out in USA, it was not required to
withhold tax from the royalty.


Hold Co had full and unconditional access to technical know-how and
information regarding manufacturing procedure and technology, which was used
for the purpose of manufacture in India. Hence, the AO held that in terms of
section 9(1)(vi) of the Act, the payment of royalty by the Taxpayer to USA Co
constitutes chargeable income, on which, tax was required to be withheld u/s
195 of the Act. Since the Taxpayer had not withheld tax, the AO invoked section
40(a)(i) and disallowed the royalty.


On appeal, the CIT(A) confirmed the order of the AO.


Held:


–   The relationship between the Taxpayer and the
holding company was not merely that of a contract manufacturer. The IPRs were
utilised for manufacturing in India. Export to USA was in conjunction with this
activity and was not isolated. Hence, the CIT(A) was correct that Taxpayer
merely carried out marketing of the products which are exported by it.
Therefore, there was a business connection with India. Further, Hold Co was a
guarantor under the agreement between the Taxpayer and USA Co.


–  Services were rendered in India as well as
utilised in India. Accordingly, the payment did not fall under the exception in
section 9(1)(vi)(b) of the Act. Hence, the CIT(A) was correct in disallowing
royalty paid in terms of section 40(a)(i) of the Act.


–  The decision of the Supreme Court in
Ishikawajima-Harima Heavy Industries Ltd.1 and that of Madras High
Court in the case of Aktiengesellschaft Kuhnle Kopp and Kausch2  were distinguishable on the facts of this
case.


 ___________________________________________________

1   DIT
v. Ishikawajima-Harima Heavy Industries Ltd. [2007] 158 Taxman 259 (SC)

2     CIT v. Aktiengesellschaft Kuhnle Kopp
and Kausch [2003] 262 ITR 513 (Mad)

 

7 Section 9(1)(vi) of the Act – Domain being similar to trademark, the receipts for domain registration services were in the nature of royalty within the meaning of section 9(1) (vi) of the Act, read with Explanation 2(iii) thereto

Godaddy.com LLC vs. ACIT

ITA No 1878/Del/2017

A.Y: 2013-14

Date of Order: 3rd April 2018


Facts


The Taxpayer was a LLC in USA. However, it was not a tax resident of
USA. It was engaged in the businesses of an accredited domain name registrar
and providing web hosting services. During the relevant year, the Taxpayer had
two streams of income. First, receipts from web hosting services/on demand
sale. Second, receipts from domain registration services.


The Taxpayer had contended that: domain registration services were
provided from outside India; the business operations were undertaken from
outside India; none of its employees had visited India for this purpose; the
Taxpayer did not have any fixed business presence in India in the form of any
branch/liaison office; and the Taxpayer merely facilitated in getting domain
registered in the name of the customer who paid the consideration for availing
such services. Accordingly, the receipts in respect of domain name registration
were not in the nature of royalty as defined in Explanation 2 to section
9(1)(vi) of the Act. In support of its contention, the Taxpayer relied on the
decisions of Delhi High Court in Asia Satellite Telecommunications Co. Ltd
vs. DIT [2011] 197 Taxman 263 (Delhi) and of AAR in Dell International
Services (India) Private Limited [2008] 218 CTR 209 (AAR).


On appeal, DRP upheld the finding of the AO.


Held

–   The limited question was whether the domain
registration fee received by the Taxpayer was in the nature of royalty.


–  While the facts in Asia Satellite
Telecommunications Co. Ltd. were totally different, in Satyam Infoway Ltd.
vs. Siffynet Solutions Pvt. Ltd. [2004] Supp (2) SCR 465 (SC), the Supreme
Court held that the domain name is a valuable commercial right, which has all
the characteristics of a trademark. Accordingly, the Supreme Court held that
the domain name was subject to legal norms applicable to trademark. In Rediff
Communications Ltd vs. Cyberbooth AIR 2000 Bombay 27, Bombay High Court
held that domain name being more than an address, was entitled to protection as
trademark.


–  It follows from the aforementioned decisions
that domain registration services are similar to services in connection with
the use of an intangible property similar to trademark. Therefore, the receipts
of the Taxpayer for domain registration services were in the nature of royalty
within the meaning of section 9(1) (vi) of the Act, read with Explanation
2(iii) thereto.


Note: In terms of Explanation 2(iii) to
section 9(1)(vi) of the Act, “royalty means consideration
for the use of any patent, invention, model, design, secret formula or
process or trade mark or similar property”.
The decision does not make it clear how mere domain registration services
result in “use of … … trademark or similar property.

6 Ss. Section 9 of the Act; Article 16 of India-USA DTAA; Article 15 of India-Germany DTAA – Employees deputed to Germany and USA for rendering services abroad being non-residents, salary would accrue to them in respective foreign countries during period of deputation and would not be liable to tax in India

[2018] 91 taxmann.com 473 (AAR – New Delhi)

Hewlett Packard India Software Operation
(P.) Ltd., In re

A.A.R. NO. 1217 OF 2011

Date of Order: 29th January 2018


Section 9 of the Act; Article 25 India-USA
DTAA; Article 23 of India-Germany DTAA – On return to India when employees
become residents, the payment to be made being in nature of salaries, section
192(2) would apply subject to credit for taxes deducted during their deputation
outside India


Facts


The Applicant was incorporated in India and was engaged in the business
of software development and IT Enabled Services. The Applicant had sent one
each of its employees on deputation to USA and Germany, respectively.


During the deputation period, though the employees would render services
in the respective country of deputation, they would continue to be on the
payrolls of Applicant. They would regularly receive salaries in India from the
Applicant and certain allowances in the respective country of deputation to
meet local living expenses.


While on deputation, the employees would be non-residents in India
during one financial year. In the year of their return after completion of assignment,
they would be Resident and Ordinarily Resident (ROR).


The Applicant sought ruling on the following questions.


–   Whether salary paid by the Applicant to the
employees was liable to be taxed in India having regard to provisions of the
Act and the DTAA?


–   Whether the Applicant can take credit for
taxes paid abroad in terms of Article 25 of India-USA DTAA and Article 23 of India-Germany
DTAA while discharging its tax withholding obligations u/s. 192?


Held – 1


–  The employees would render services in
USA/Germany and would be non-residents for tax purposes during one financial
year.


–   As per section 4 of the Act, tax is chargeable
in accordance with, and subject to, the provisions of the Act in respect of the
total income of the previous year of every person. Section 5(2) deals with
income of non-residents. Section 5(2) is ‘Subject to the provisions of this
Act’, which brings Chapter IV (computation of total income) into play. In
Chapter IV, section 15 deals with the head ‘Salaries’. Thus, chargeability to
tax under the head ‘Salaries’ arises under section 5(2), read with section 15.
Merely because section 5(2) is the charging section, income that the employees
would receive in India should not be taxed in India.


 –   The income accrues where the services are
rendered. Though the employees are covered in section 15(a), being
non-residents, and since they would be rendering services in USA/Germany, the
salary would accrue to them in USA/Germany. Merely because the
employer-employee relationship would exist in India, and they would be paid in
India, they could not be taxed in India. Hence, the income would not be
chargeable to tax in India. This view is supported by the Explanation to
section 9(1)(ii) of the Act.


–   An employer is required to deduct tax from
salary payable to an employee but only if the employee is liable to pay tax on
salary. In case of the employees, since the salary would accrue to them outside
India, the Applicant would not be required to withhold tax u/s. 192 of the Act
at the time of payment.


Held – 2


–  The employees would be covered by the tax
credit provisions of Articles 25 of the India-USA DTAA and Article 23 of
India-Germany DTAA, respectively. Hence, they would be entitled to foreign tax
credit. When they become residents, and since the nature of payments made to
them would be salaries, section 192 applies. Therefore, if payments were to be
received by the employees from more than one source during a particular year,
the present employer could give credit for foreign taxes to be deducted during
their deputation outside India.

17 Search and seizure – Presumption as to seized documents – Can be raised in favour of assessee -– Documents showing expenditure incurred on account of value addition to property – Failure by AO to conduct enquiry or investigation regarding source of investment or genuineness of expenditure – Expenditure to extent supported by documents allowable

CIT vs. Damac Holdings Pvt. Ltd. 401 ITR 495 (Ker); Date of Order: 12/12/2017:
A. Ys. 2007-08 and 2008-09:
Sections 37, 132 and 132(4A)


The two
assessee companies, D and R, were involved in the business of real estate,
purchased landed property and developed and sold it. D purchased a piece of
land for about Rs. 5 crore which he sold for about Rs. 13 crore and R purchased
property for about Rs. 4 crores and sold it for about Rs. 9 crore. Both
incurred certain expenditure on developing the land in order to make it fit for
selling. D’s transactions took place in the A. Ys. 2007-08 and 2008-09 and R’s
in A. Y. 2008-09. Assessments were initiated on the basis of searches conducted
u/s. 132 of the Income-tax Act, 1961, in the residence of the directors of both
the assessee-companies. The assessee’s claimed the deduction of the expenditure
incurred on developing the properties in order to make them fit for selling.
The claims were supported by the various documents seized from the assesses
during the searches conducted. The assesses claimed the benefit of presumption
u/s. 132(4A) of the Act. The Assessing Officer worked out the total expenditure
and apportioned it to the total area and computed the cost expended. However,
he disallowed the claim for deduction. He was of the view that the vendors of
the property had incurred and claimed expenditure for leveling the property and
hence, there was no requirement for the assesses to make the expenditure to the
extent claimed.

The
Commissioner (Appeals) allowed the claims of both assesses to the extent of the
cheque payments as disclosed from the documents seized from the premises and
disallowed the balance. The Tribunal allowed the entire expenses as claimed by
the assessee.  


On appeal
by the Revenue, the Kerala High Court held as under:


“i)   Section 132(4A) of the Income-tax Act, 1961
provides for presumption, inter alia, of contents of the books of
account and other documents found in the possession and control of any person
in the course of a search, u/s. 132, to be true, and the presumption applies
both in the case of the Department and the assessee and could be rebutted by
either.


ii)    The presumption u/s. 132(4A) applied in
favour of the assessee in so far as the expenditure being supported by the documents
seized at the time of search was concerned. There was no need for further proof
u/s. 37, since the Assessing Officer did not endeavour to carry out an enquiry
and investigation into the source of investment or the genuineness of the
expenditure made. However, the presumption could have effect only to the extent
of the documents seized and nothing further.


iii)   There was no basis for the Assessing
Officer’s computation of the leveling expenditure. His finding that the vendors
of the property had spent for leveling the property and hence, there was no
requirement for the assessee to make the expenditure to the extent claimed,
could not be sustained. He had proceeded on mere conjectures and had ignored
the seized documents which contained the evidence of cheque payments and
vouchers of cash payments effected for the development of the lands. He also
did not verify the source of income for such expenditure. The fact that the
sale price was astronomical as against the purchase price raised a valid
presumption in favour of the contention of the assesses that, but for the
development of the property to a considerable extent that would not have been
possible, especially when there is no unusual spurt in the land prices during that short period.


iv)   The Commissioner (Appeals) had considered the
documents produced and had allowed the claim to the extent that there were cheque
payments, as was discernible from the documents seized. Therefore, in the teeth
of the presumption as to the truth of the documents seized, no further proof
was required u/s. 37, the Department having failed to rebut such presumption.


v)   The allowance of expenditure for leveling the
land was to be confined to the documents revealed from the seized documents,
whether it was cash or cheque payments.”

 

18 TDS – Certificate for deduction at lower rate/nil rate – Cancellation of certificate – Judicial order – Recording of reasons is condition precedent – No change in facts during period between grant of certificate and order cancelling certificate – No valid or cogent reasons recorded and furnished to assessee for change – Violation of principles of natural justice – Order of cancellation quashed

Tata Teleservices (Maharashtra) Ltd. vs. Dy.
CIT; 402 ITR 384 (Bom); Date of Order:16-25/01/2018:

A.
Y. 2018-19:

Section
197; R. 28AA of ITR 1962; Art. 226 of Constitution of India


The
assessee provided telecommunication services. For the A. Ys. 2014-15 to
2016-17, it filed return declaring loss aggregating to Rs. 1330 crore and
making a claim of refund of an aggregate sum of Rs. 121 crore. In the course of
its business, the assessee received various payments for the services rendered
which were subject to tax deduction at source (TDS) under Chapter XVII of the
Income-tax Act, 1961. According to the assessee it was not liable to pay
corporate tax in the immediate future in view of the likely loss for the A. Y. 2018-19
and the carried forward losses. Therefore, it filed an application/s. 197 of
the Act for a certificate for nil/lower TDS to enable it to receive its
payments from various parties which were subject to TDS, without actual
deduction at source. On 04/05/2017, the Dy. Commissioner (TDS) issued a
certificate u/s. 197 and directed the deduction of tax at nil rate by the
various persons listed in the certificate while making payments to the assessee
u/ss. 194, 194A, 194C, 194-I, 194H and 194J. Thereafter, the Dy. Commissioner
(TDS) communicated that he was reviewing the certificate u/s. 197 which had
been issued, in respect of cases in which outstanding tax demand was pending.
Consequently, the assessee furnished the details of tax outstanding. The Dy.
Commissioner (TDS) issued a show cause notice and granted a personal hearing to
the assessee. By an order dated 23/10/2017, the certificate dated 04/05/2017
issued u/s. 197 was cancelled on the ground that any future tax payable might
not be recoverable from the assessee and that there was an outstanding tax
demand of Rs. 6.90 crore payable by the assessee.


The Bombay
High Court allowed the writ petition filed by the assessee, quashed the order
of the Dy. Commissioner (TDS) dated 23/10/2017 cancelling the certificate and
held as under:


“i)   The issuance of the certificate was the
result of an order holding that the assessee was entitled to a certificate u/s.
197. In the absence of the reasons being recorded, the certificate u/s. 197
would not be open to challenge by the Department, as it would be impossible to
state that it was erroneous and prejudicial to the Revenue. The recording of
reasons was necessary as only then it could be subject to revision by the
Commissioner u/s. 263. Therefore, there would have been reasons recorded in the
file before issuing a certificate dated 04/05/2017 and that ought to have been
furnished to the assessee before contending that the aspect of rule 28AA was
not considered at the time of granting the certificate. Further, if the Department
sought to cancel the certificate on the ground that a particular aspect had not
been considered, before taking a decision to cancel the certificate already
granted, it must have satisfied the requirement of natural justice by giving a
copy of the same to the assessee and heard the assessee on it before taking a
decision to cancel the certificate.


ii)    The notices which sought to review the
certificate did not indicate that the review was being done as the certificate
dated 04/05/2017 was granted without considering the applicability of rule 28AA
in the context of the assessee’s facts. Therefore, there was no occasion for
the assessee to seek a copy of the reasons recorded while issuing the
certificate. Moreover, it was found on facts that there was no change in the
facts that existed on 04/05/2017 and those that existed when the order dated
23/10/2017 was passed. Thus, there was a flaw in the decision-making process
which vitiated the order dated 23/10/2017. The grant or refusal to grant the
certificate u/s. 197 had to be determined by parameters laid down therein and
rule 28AA and it could not be gone beyond the provisions to decide an
application.


iii)   The order dated 23/10/2017 did not indicate,
what the profits were likely to be in the near future, which the Department
might not be able to recover as it would be more than the carried forward
losses. However, such a departure from the earlier view had to be made on valid
and cogent reasons. Therefore, on the facts, the basis of the order, that the
financial condition of the assessee was that any further tax payable might not
be recoverable, was not sustainable and rendered the order bad.


iv)   Neither section 197 nor rule 28AA provided
that no certificate of nil or lower rate of withholding tax could be granted if
any demand, however miniscule, was outstanding. Rule 28AA(2) required the
authority to determine the existing estimated liability taking into
consideration various aspects including the estimated tax payable for the
subject assessment year and also the existing liability. The existing and
estimated liability also required taking into account the demands likely to be
upheld by the appellate authorities. The assessee’s appeal with respect to the
demand of Rs. 6.68 crore was being heard by the Commissioner (Appeals) and no
order had been passed thereon till date.


v)   The order in question did not deal with the
assessee’s contention that the demand of Rs. 28 lakh was on account of mistake
in application of TRACE system nor did it deal with the assessee’s contention
that the entire demand of Rs. 6.90 crore could be adjusted against the
refundable deposit of Rs. 7.30 crore, consequent to the order dated 27/05/2016
of the Tribunal in its favour. The order dated 23/10/2017 seeking to cancel the
certificate dated 04/05/2017 was a non-speaking order as it did not consider
the assessee’s submissions. Therefore, the basis of the order cancelling the
certificate, that there was outstanding demand of Rs. 6.90 crore payable by the
assessee, was not sustainable.


vi)   In the above view, the impugned order dated
23/10/2017 is quashed and set aside.”

Sale Of Composite Package Vis-À-Vis Levy Of Tax On Component Of Package – Legality

Introduction


Under
VAT laws, tax can be levied on sale of ‘goods’. What is ‘goods’ is always a
question of facts. However, a very peculiar situation arose in taxation under
VAT era.


Normally
when a package is sold, it is considered as single ‘goods’ for levy of tax. The
rate of tax is applied as per rate applicable to goods sold by such package.
The situation was thus very simple and straight.


But,
the Judgement in State of Punjab vs. Nokia India Pvt. Ltd. (77 VST
427)(SC) has brought in a different aspect. In this case, battery of
mobile was sold along with mobile as one unit and tax rate applicable to mobile
i.e. 5% was charged. However, when the battery was sold separately, it was
considered as liable to tax @ 12.5% as other goods.


Hon.
Supreme Court held that, even if battery is sold as one unit with mobile still
the tax on the value of battery should be at 12.5%. Thus, the price was
separated into two rates. This has created many issues in taxation under VAT
era.


Allahabad High Court judgement

Recently
Hon. Allahabad High Court had an occasion to deal with ratio of above
judgement.


The
facts, as narrated by Hon. High Court in case of Samsung (India)
Electronics vs. Commissioner of Commercial Taxes, U.P. (57 GSTR 1) (All)
are as under:


“The
seminal issue which arises in this batch of revisions is whether a mobile
charger when sold as part of a composite package comprising the said article as
well as a mobile phone is liable to be taxed separately treating it to be an
unclassified item under the provisions of the U.P. VAT Act 20081. The issue
itself has arisen consequent to the Department taking the position that the
charger is liable to be taxed separately in light of the decision rendered by
the Supreme Court in State of Punjab Vs. Nokia India Pvt Ltd2. The principal
questions of law as framed and upon which the rival submissions centered read
thus:


“A.
Whether the Tribunal ought to have held that the entire composite set having a
mobile phone and mobile charger having a single MRP was liable to assessed to a
single classification under Entry No. 28 of Schedule-II, Part B of the Act?


B.  Whether the Tribunal erred in applying the
judgment dated 17.12.2014 by the Hon’ble Supreme Court, in the case of State of
Punjab V. Nokia Private Limited, to the Applicant’s facts and circumstances and
in view of the fact that Entry No.28 of Schedule-II, Part-B of the Act reads
differently from the entry considered by the Hon’ble Supreme Court?”


This
revision has called in question an order of the Tribunal dated 12th
January 2017 which has affirmed the view taken by the assessing authority that
the charger although sold as part of a composite package was not liable to be
taxed at the rate of 5% as contemplated under Entry-28 appearing in Part-B of
Schedule-II but as an accessory and therefore liable to be treated as an unclassified item and chargeable to tax @
14%. The relevant entry of the Schedule reads as follows:-


“Cell
phones and its parts but excluding cell phone with MRP exceeding Rs.
10,000/-.”


Both the
assessing authority as well as the Tribunal have rested their decisions on the
judgement of the Supreme Court in Nokia to hold that a charger is liable
to be treated and viewed as an accessory and not an integral part of the mobile
phone. It is in the above backdrop that these revisions have travelled to this
Court.”


Contentions


On
behalf of dealer it was submitted that the ratio of Nokia cannot be
applied when it is composite one package and assumption of separate sale of
charger as an accessory is not permissible.


The
prime submission was that facts in case of Nokia before Supreme Court
were different. It was further submitted that there was no intent to affect a
separate sale of charger and that on an application of the dominant intention
test it would clearly be evident that the charger could not have been taxed
separately. It was the submission that the sale of the charger along with the
mobile phone in a composite package would fall within the specie of a composite
contract and therefore, tax could have been levied only in terms of Entry-28 as
one goods. 


It
was explained that since the composite package carried and bore a single MRP,
it was not permissible for the respondents to levy tax separately on the
charger and the mobile phone.


In
addition, other judgements rendered with reference to above Nokia
judgment were brought to notice of High Court as well as Circular issued by
Central Government clarifying upon judgement of Nokia, was also cited.


On
behalf of Department, amongst others, the main thrust was that the ratio of
judgement in Nokia is applicable.


Judgements
were cited to stress that charger is accessory and hence liable at separate
rate.


Holding of High Court


Hon.
High Court analysed judgement in Nokia and about principles of
applicability of judgment of Hon. Supreme Court. It is observed as under:


“From
the aforesaid authorities, it is quite vivid that a ratio of a judgement has
the precedential value and it is obligatory on the part of the Court to cogitate
on the judgement regard being had to the facts exposited therein and the
context in which the questions had arisen and the law has been declared. It is
also necessary to read the judgement in entirety and if any principle has been
laid down, it has to be considered keeping in view the questions that arose for
consideration in the case.


One
is not expected to pick up a word or a sentence from a judgement de hors
from the context and understand the ratio decidendi which has the
precedential value. That apart, the Court before whom an authority is cited is
required to consider what has been decided therein but not what can be deduced
by following a syllogistic process.” (emphasis supplied) As has been
succinctly explained in the decisions noticed above, the ratio is the principle
deducible from the application of the law to the facts of a particular case and
it is this which constitutes the true ratio decidendi of the judgement.


Each
and every conclusion or finding recorded in a judgement is not the law
declared. The law declared is the principle which emerges on the reading of the
judgment as a whole in light of the questions raised. It is on these basic
principles that the Court proceeds to ascertain the ratio decidendi of Nokia.”          


Regarding
facts in Nokia vis-à-vis Present case before it, Hon. High Court
observed as under:


“A
careful reading of the entire decision establishes beyond doubt that the Court
found that a charger and mobile phone are not composite goods. This evidently because
a charger cannot possibly be recognised as an integral part or constituent of a
mobile phone. A mobile phone is not an amalgam of various products and a
charger. Since the submission advanced before the Court was that these were
composite goods, the Supreme Court proceeded to recognise a charger to be an
accessory to a mobile phone.


The
contention which is urged before this Court namely that the sale of the mobile
phone along with its charger in a single retail package constitutes a composite
contract and requires the application of the dominant intention test was
neither urged nor considered by the Supreme Court. The Supreme Court
consequently in Nokia did not record any finding nor did it declare the law to
be that the sale of a mobile phone and its charger in a single retail package
would not constitute a composite contract.


On an
overall consideration of the aforesaid aspects, this Court finds itself unable
to hold that Nokia is a precedent at all on the question of a composite contract being subjected to tax.”


Hon.
High Court ultimately decided issue in favour of dealer by observing as under:


“Proceeding
then to the doctrine of “dominant intention” or the “dominant
nature” test [as the Supreme Court chose to describe it in BSNL], what it
basically bids the Court to do is to identify and recognise the “substance
of the contract” and the true intent of parties. The enquiry liable to be
undertaken must pose and answer the question whether in a composite contract
there exists a separate and distinct intent to sell. While BSNL dealing with
the dominant nature test was concerned with the splitting of the element of
sale and service, in the facts of the present case, the application and
invocation of that principle requires the Court to consider whether there was a
separate and distinct intent to effect a sale of the charger or whether its
supply was a mere concomitant to the principal intent of sale of a mobile
phone.


Admittedly,
the mobile phone and charger are sold as part of a composite package. The
primary intent of the contract appears to be the sale of the mobile phone and
the supply of the charger at best collateral or connected to the sale of the
mobile phone. The predominant and paramount intent of the transaction must be
recognised to be the sale of the mobile phone. In the case of transactions of
the commodity in question, the Court must also bear in mind that a charger can
possibly be purchased separately also. However in case it is placed in a single
retail package along with the mobile phone, the primary intent is the purchase
of the mobile phone. The supply of the charger is clearly only incidental. In
any view of the matter, there does not appear to be any separate or distinct
intent to sell the charger.


Regard
must also be had to the fact that the Court is considering the case of a
composite package, which bears a singular MRP. The charger is admittedly
neither classified nor priced separately on the package. It is also not
invoiced separately. The MRP is of the composite package. The respondents
therefore cannot be permitted to split the value of the commodities contained
therein and tax them separately. This especially when one bears in mind that
entry 28 itself correlates the article to the MRP.


The
third aspect which also commends consideration is that the MRP mentioned on the
package is for the commodities or articles contained therein as a whole. It is
not for a particular commodity or individual article contained in the composite
retail package. The Court notes that Shri Tripathi, the learned standing
counsel, was unable to draw its attention to any provision or machinery under
the 2008 Act which may have conferred or clothed the assessing authority with
the jurisdiction to undertake such an exercise. It is pertinent to note that the
only category of composite contracts which stand encapsulated under the 2008
Act are works contract and hire purchase agreements. The other part of Article
366 (29-A) which stands engrafted is with respect to the transfer of a right to
use. The composite contracts which arise from the sale of a composite package
are not dealt with under the 2008 Act. The Act also does not put in place or
engraft any provision which may empower the assessing authority to severe or
bifurcate the assessable value of articles comprising a purchase and sale of
composite packages. This is more so in the absence of a specific, independent
and identifiable element to sell. In the absence of any procedure or provision
in the 2008 Act conferring such authority, the Court concludes that in the case
of a sale of composite packages bearing a singular MRP, the authorities under
the 2008 Act cannot possibly assess the components of such a composite package
separately. Such an exercise, if undertaken, would also fall foul of the
principles enunciated by the Supreme Court in Commissioner of Commercial Tax
vs. Larsen & Toubro14 and CIT vs. BC Srinivasa Shetty15.” 


Thus,
after analysing position very minutely, Hon. High Court held that in given
facts there is sale only of mobile phone and not of charger and no separate tax
on charger is permissible. The judgements of Tribunal were set aside.


Conclusion     


The
judgement is very important in light of fact that it distinguishes the
judgement of Hon. Supreme Court in Nokia, with reference to facts and
ratio application, relying upon almost all important case laws. This judgement
will also settle down unexpected and unintended result for dealers.


It is
expected that the law laid down will be well followed as amongst others, it is
also held that if there are no provision to bifurcate value, no bifurcation can
be done by revenue authorities.


 We
hope above will be a guiding judgement for deciding similar cases.

Place Of Supply Of Services – Part III

Introduction

As discussed in the previous article,
generally, the place of supply is determined on the basis of the location of
the recipient except in cases where the recipient is unregistered and his
address on record is not available, in which case location of supplier is
treated as the POS. This general rule is subject to various exceptions where
the POS is to be determined in a different manner.

While in the previous article we discussed
at length the exception rule in case of services relating to immovable property,
in this article, we shall specifically deal with the following exceptions:

–   Certain Performance based services (restaurants, catering services,
personal grooming, health services, etc.)

–    Service relating to
training & performance appraisal

–    Services relating to events
(admission as well as organisation)

–   Transportation services
(goods, passengers, as well as services on board a conveyance)

–    Telecommunication services

–   Banking & other
financial services

–    Insurance services

–    Advertising services
provided to Government.

We will now discuss each of the above
exceptions as well as specific issues surrounding the same.

Certain Performance based services:

This exception to the general rule, covered
u/s. 12 (4) of the IGST Act provides that the Place of Supply in case of
services of restaurant & catering, personal grooming, fitness, beauty
treatment, health service including cosmetic and plastic surgery shall be the
location where services are actually performed. 

While this rule is not expected to have any
interpretational issues, the same has probable issues on credit front, in case
of B2B transactions. Let us try to understand with the help of following example:

ABC is a film production house operating out
of Mumbai. They have a film titled “###” under production, which is to be shot
extensively in Chandigarh. The local production activities are being managed
in-house by ABC. They have hired a catering company to supply food for their
employees as well as other people involved in the production activity. In
addition, they have make up artists who travel from Mumbai, Delhi as well as
outside India to Chandigarh for the said activity. The entire revenue from this
project will be earned in Mumbai. On account of this exception, in all cases
(including where Reverse charge applies), the Place of Supply will be taken as
Chandigarh while the Location of Recipient of Service is Maharashtra, thus
making the taxes attached with the services as ineligible for credit and thus
increasing the costs.

While admittedly, the performance of the
service is in Chandigarh, owing to the fact that the transaction is a B2B
transaction, the ultimate benefit / consumption of the said service takes place
in Mumbai where the recipient is located and hence, a hybrid rule for the
industry would have been beneficial.

 

Training & Performance Appraisal:

This exception to the general rule, covered
u/s. 12 (5) of the IGST Act provides for a hybrid rule for determination of
place of supply in case of services in relation to training & performance
appraisal as under:

 –   If services are provided to
registered person – place of supply shall be the location of such registered
person i.e. the recipient.

 –   If services are provided to
a person other than a registered person – place of supply shall be the location
where services are actually performed.

The important issue that needs to be
considered here is whether the “and” between training and performance appraisal
has to be read as “and” only or should it be read as “or”? The reason behind
this is if the word “and” is actually read as “and”, it will restrict the scope
of this particular section, as “and” is normally conjunctive.

For example, ABC Limited is a company
engaged in the business of providing education support services. They have
entered into an agreement with CBSE to evaluate the papers of all the students
of HSC / SSC. The papers are located at various locations across the country and
ABC shall send its’ evaluators at all those locations. The issue that needs
consideration is whether these services of performance appraisal will be
classified under this exception rule, since the services provided by ABC
Limited are only of performance appraisal and no element of training is
involved? Similarly, if PQR Limited undertakes training courses and does not
undertake any activity of performance appraisal, will it get covered under this
clause?

It is in this context that the need to
analyse whether “and”, which is normally conjunctive in nature has to be read
as “or”, i.e., give it a disjunctive interpretation or not for the purpose of
interpreting this exception. In this context, reference to the Supreme Court
decision in Union of India vs. Ind-Swift Laboratories Limited [(2011) 4 SCC
635] is made. The case was in the context of Rule 14 of the erstwhile
CENVAT Credit rules which provided for levy of interest in cases where credit
was taken or utilised wrongly or erroneously refunded. The issue in the
case was whether the or had to be read as and necessitating the
satisfaction of both the conditions, i.e., taking as well as utilisation of
credit for invocation of these rules or occurrence of either of the event would
suffice? The Supreme Court, relying on the decision of Commissioner of Sales
Tax, UP vs. Modi Sugar Mills Limited in (1961) 2 SCR 189 held that a taxing
statute must be interpreted in the light of what is clearly expressed and it is
not permissible to import provisions so as to supply any assumed deficiency.

Similarly, in A.G vs. Beauchamp (1920) 1
KB 650, it was held that the words “and” and “or” can be interchangeably
used if the literal reading produces an unintelligible or absurd result even if
the result of such interchange is less favourable to the subject provided that
the intention of the legislature is otherwise quite clear. For instance,
section 7 of the Official Secrets Act, 1920 reads:

“Any person who attempts to commit any
offence under the principal Act or this Act, or solicits or incites or
endeavours to persuade another person to commit an offence, or aids or abets
and does any act preparatory to the commission of an offence”.

The word “and” was read as “or”, for by
reading “and” as “and”, the result produced was unintelligible and absurd and
against the clear intention of the Legislature. (R v. Oakes (1959) 2 All ER 92)

However, in one particular case involving
the use of expression “sports and pastimes” in Common Regulation Act, 1965, it
was held that sports and pastimes are not two classes of activities but a
single composite class which uses two words in order to avoid arguments over
whether an activity is a sport or pastime. As long as the activity can properly
be called a sport or a pastime, it falls within the composite class (R vs.
Oxfordshire County Council (1999) 3 All ER).

It is felt that the test of purposive
interpretation will permit the reading of “and” as “or” and standalone
activities of training or performance appraisal may be covered under this exception
rule.

Event based services – admission &
organisation

There are two different exceptions to be
discussed here, which are covered u/s. 12 (6) & 12 (7) of the IGST Act. The
relevant provisions are reproduced below for ready reference:

(6) The place of supply of
services provided by way of admission to a cultural, artistic, sporting,
scientific, educational, entertainment event or amusement park or any other
place and services ancillary thereto, shall be the place where the event is
actually held or where the park or such other place is located.

(7) The place of supply of services
provided by way of ,—

(a) organisation of a cultural, artistic,
sporting, scientific, educational or entertainment event including supply of
services in relation to a conference, fair, exhibition, celebration or similar
events; or

(b) services ancillary to organisation of
any of the events or services referred toin clause (a), or assigning of
sponsorship to such events,––

(i) to a registered person, shall be the
location of such person;

(ii) to a person other than a registered
person, shall be the place wherethe event is actually held and if the event is
held outside India, the place of supply shall be the location of the recipient.

Explanation.––Where the event is held in
more than one State or Union territory and a consolidated amount is charged for
supply of services relating to such event, the place of supply of such services
shall be taken as being in each of the respective States or Union territories
in proportion to the value for services separately collected or determined in
terms of the contract or agreement entered into in this regard or, in the
absence of such contract or agreement, on such other basis as may be
prescribed.

It is important to note that section 12 (6)
deals with services provided by way of admission to events while section 12 (7)
deals with services of organisation of event as well as services ancillary to
the organisation of such event.

However, the scope of services to be covered
u/s 12 (6) is limited. It is important to note that the said section does not
cover within its’ scope one specific class of events, i.e., business events,
being conferences, seminars, etc. wherein company sponsors delegates for
attending the events. This distinction is also evident from the fact that while
section 12 (6) does not specifically mention the services of admission to
conference, in the context of services classifiable u/s. 13 (5), i.e., cases
where location of supplier or recipient is outside India, the services of
admission to conferences is specifically covered. In fact, it can be said that
the intention of the law is to ensure free flow of credits in case services are
provided to registered persons, which is evident from the example taken in the
next paragraph.

Let us now try to understand the interplay
of operations of sub-sections (4), (6) & (7) with the help of an example in
the context of a charitable institution (XYZ) conducting a Residential
Refresher Course (RRC) for its’ members. The institution may have an inhouse
team which manages the logistics for the organisation of the event. They enter
into a contract with a hotel to provide accommodation, conference and catering
facilities during the course of the RRC. The issue that needs to be determined
is whether the services provided by XYZ to its’ members will get covered under
sub-section (4), (5) or (6) of Section 12?

Before analysing the probable answer to this
query, let us first decide on the nature of supply, i.e., whether the supply
will have to be treated as composite supply or mixed supply considering the
fact that there is only a single consideration charged for the entire RRC
without any breakup? In our view, it would be safe to conclude that this is a
composite supply with the principal supply being the participation in
conference. Having concluded so, let us now proceed to analyse the exception
rule in which the services provided by XYZ to its’ members will be covered.

 

Section analysed

Conclusion

Basis for conclusion

12 (4)

No

Since multiple services are provided to the members and
principal supply is that of conference services, this exception will have to
be ruled out

12 (6)

No

As already discussed above, admission to conference as a
service is not covered under this rule. Hence, this exception will also have
to be ruled out.

12 (7)

No

XYZ does not provide services in relation to organisation of
the event. The access to participation in a conference cannot be considered
as services in relation to organisation of event. Services of event managers
are in relation to organisation of the event.

 

Therefore, it can be argued that the
services rendered by XYZ do not fall under any of the exception rules mentioned
above and would be classifiable under the general rule.

Another issue that arises in the context of
Explanation provided in section 12 (7) is whether the explanation will have to
be read in the context of services provided to both, registered as well as
unregistered persons? This is because the explanation is silent with regards to
its’ applicability. However, one can apply the intention theory behind the said
explanation and say that this covers only services supplied to unregistered
persons, as in case of registered persons, the intention of the law is to provide
free flow of credit. Providing for multiple place of supplies would defeat the
said intention.

Therefore, in cases where the events are
held in multiple states, in cases where the agreement identifies consideration
for each event, the supplier will have to divide his invoicing state wise as
even practically, there is no provision to provide for multiple place of
supplies in the same invoice. However, the issue arises in the context of
services where the agreement is silent with regards to division of contract
state wise. Notwithstanding the same, even if the manner for determination of
POS is prescribed, even then it has to be noted that there is no provision
under the GST law for splitting of value / supply itself. The provisions exist
only for splitting of POS. Therefore, the question that needs consideration is
whether the levy will sustain in the absence of proper provision for
determination of value of supply, even if the notifications are issued in this
regard? In this context, reference can be made to the decision of the Supreme
Court in the case of CIT vs. B C Srinivasa Shetty wherein it was held
that the charging sections and the computation provisions together constitute
an integrated code and the transaction to which the computation provisions
cannot be applied must be regarded as never intended to be subjected to charge
of tax.

Services
relating to transportation of goods

This exception is contained u/s. 12 (8) of
the IGST Act. The relevant provisions are reproduced below for ready reference:

(8) The place of supply of services by
way of transportation of goods, including by mail or courier to,––

(a) a registered person, shall be the
location of such person;

(b) a person other than a registered
person, shall be the location at which suchgoods are handed over for their
transportation.

One important shift in policy is that while
under the service tax regime, in case of service of transportation of goods
outside India, as per Rule 10 of Place of Provision of Service Rules, 2012, the
destination of goods was the place of supply, the GST law provides for the
place of supply to be the origin of goods. In other words, export cargo was not
liable to service tax. The same applied even for services provided by shipping
companies / airlines. However, in view of the above provisions, the position
changed under GST and the tax was imposed on service of transportation of goods
outside India as well. It is however important to note that w.e.f 25.01.2018,
an exemption has been provided for services of transportation of goods by an
aircraft / vessel from customs station of clearance in India to a place outside
India. However, the said exemption is not applicable in case the services are
provided by a supplier located in India for transportation of goods or arranging
for transportation of goods where the origin and destination, both is outside
India.

Services relating to transportation of
passengers

This exception is contained u/s. 12 (9) of
the IGST Act. The relevant provisions are reproduced below for ready reference:

(9) The place of supply of passenger
transportation service to,—

(a) a registered person, shall be the
location of such person;

(b) a person other than a registered
person, shall be the place where the passenger embarks on the conveyance for a
continuous journey:

Provided that where the right to passage
is given for future use and the point of embarkation is not known at the time
of issue of right to passage, the place of supply of such service shall be
determined in accordance with the provisions of sub-section (2).

Explanation––For the purposes of this
sub-section, the return journey shall be treated as a separate journey, even if
the right to passage for onward and return journey is issued at the same time.

One critical
issue under this entry for determination of place of supply is in the context
of structuring of transactions as principal to principal basis vis-à-vis principal
to agent. Let us take the example of an air travel agent, who books tickets on
behalf of passengers with the airlines. The issue that arises here is whether
the airline will have to treat the agent as the recipient of service or the
passenger, considering the definition of supply of service? This will be
important because if the transaction is structured as P2P, the agent will have
issues in claiming credit since the condition u/s. 16 (2)(b) regarding receipt
of services may not be satisfied. However, the second option of treating the
transaction as P2A will also have its’ own set of operational difficulties,
especially in case of B2B transactions. This is because each airline operating
from multiple states would be issuing invoice in the name of recipient, in
which case each of the invoice would have to be accounted separately by the company
for each ticket as against single invoice for multiple tickets that were issued
under the service tax regime. This can also have issues on the credit matching
front as well as the agent might have mentioned wrong GST details of the
company in which case communication with the airline would be required to be
initiated which in itself would be a long drawn out process.

Telecommunication Services

This exception
is contained u/s. 12 (10) of the IGST Act and prescribes different place of
supply provisions depending on the transaction entered into, which is tabulated
below:

Nature of service supplied

Place of Supply

Services by way of fixed telecommunication line, leased
circuits, internet leased circuit, cable or dish antenna

Place where the line / leased circuit / cable or dish is
installed

Post-paid mobile connection for telecom services / internet /
DTH services

Location of billing address of the recipient of services on
record

Pre-paid mobile connection for telecom services / internet /
DTH services through a voucher or any other means

u
If service provided through a selling agent or a re-seller or a distributor
of subscriber identity module card or re-charge voucher, the address of the
selling agentor re-seller or distributor as per the record of the supplier at
the time of supply

u
If service supplied to the final subscriber, location where such prepaymentis
received or such vouchers are sold

In any other case

Address of recipient on record of supplier of service

If not available, the location of supplier of service

 

Further, this sub-section has two provisos,
which read as under:

Provided that where the address of the
recipient as per the records of the supplier of services is not available, the
place of supply shall be location of the supplier of services:

Provided further that if such pre-paid
service is availed or the recharge is made through internet banking or other
electronic mode of payment, the location of the recipient of services on the
record of the supplier of services shall be the place of supply of such
services.

In addition, there is also an explanation
for cases where the place of supply is determined to be in multiple states
(similar to the explanation provided for immovable properties/event related
services and hence not reproduced for the sake of repetition).

Let us now try to understand some peculiar
issues faced in the above set of supplies for which provisions for determining
place of supply have been prescribed.

Example: ABC Limited is a e-education
service provider wherein it does live streaming of lectures provided by its
faculties from its head office located in Mumbai to various franchise
locations, spread across the country. The responsibility for arranging the
internet services to enable live streaming is on ABC. Accordingly, ABC has
entered into an arrangement subsequent to which, the vendor has agreed to
provide dedicated lines for enabling unhindered connection between the Head
Office and the franchise locations and a single invoice is issued for these
services. The issue that arises is that there are multiple Place of Supplies
and therefore, the supplier will have to divide his invoicing state wise as
even practically, there is no provision to provide for multiple place of
supplies in the same invoice. However, the issue arises in the context of services
where the agreement is silent with regards to division of contract state-wise.
Notwithstanding the same, even if the manner for determination of POS is
prescribed, even then the issues discussed in the context of events, where the
POS is spread across multiple states will continue to persist here as well.

In the context of online recharges, at the
time of selling the online vouchers to the portal, the supplier would charge
tax as per the location of the online portal. However, when the online portal
further sells the recharge to the end customer, the place of supply has to be
taken as per the address on record of the supplier. In other words, a telecommunication company/DTH company will have to open up its customer
database to each of the online portals to enable the sale of vouchers for
provision of service.

Similarly, even in the context of post-paid
services, there can be instances wherein between the billing cycle, there is a
change in the billing address of the service recipient after having provided
service for a specified number of days. In such a case, the question that
arises is whether the billing address has to be considered as applicable at the
start of billing cycle or end of the cycle or will there be a need to actually
do split billing, i.e., one invoice for the service provided before change in
the billing address and second invoice for service provided after change in
billing address.

Banking & Other Financial Services

This exception is covered u/s 12 (12) of the
IGST Act which provides that in general cases, the place of supply shall be the
location of recipient of service on record of the supplier of service, except
in cases where the location of recipient of service is not available on record
of the supplier.

The exception will generally apply in cases
of a walk-in customer who avails services for which KYC facilities may not be
mandatory, for instance availing demand draft facilities, money changing
services, etc. In all other cases, the place of supply will have to be taken as
per the address available on records.

The aspect of change in the location of
recipient of service cannot be ruled out in the context of banking & other
financial services as well as between two billing cycles and hence, proper
strategy will need to be developed to deal with such instances.

Insurance Services

This exception is covered u/s. 12 (13) of
the IGST Act, which is similar to the general rule for determination of place
of supply of services. The section provides as under:

–  In case of services provided
to registered persons – the place of supply shall be the location of such
person.

–  In case of services provided
to other than registered persons – location of recipient of services on the
records of the supplier.

Conclusion:

In the context of other services for which
exceptions for determination have been carved out, there are various important
aspects that needs to be considered, right from the stage of classification of
supply to the contractual treatment (P2P vs. P2A) to the contractual arrangement
(bifurcation of consideration in case of multiple place of supplies) and the
need to take care of minor issues (like change of address between the billing
cycle in case of telecom/banking services) and may also have credit impacts.
Therefore, businesses will have to be careful while determining the applicable
POS for their activities.  

 

 

4 Section 80P – Interest earned by a co-operative society from deposits kept with co-operative bank is deductible u/s. 80P.

Marathon Era Co-operative Housing Society Ltd. vs. ITO
Members : B. R. Baskaran, AM and Pawan Singh, JM
ITA No. : 6966/Mum/2017
A.Y.: 2014-15    Dated:  06.03.2018
Counsel for assessee / revenue: Ajay Singh /
V. Justin


FACTS

The assessee, a co-operative housing
society, derives income from subscription, service charges, etc. from
members and interest income from savings and fixed deposits kept with various
banks.  In the return of income filed,
the assessee claimed that interest of Rs. 88,70,070, earned on fixed deposits
with co-operative banks as deductible u/s. 80P(2)(d) of the Act. The Assessing
Officer (AO) while assessing the total income of the assessee denied the claim
for deduction of Rs. 88,70,070 made u/s. 80P of the Act on the ground that
section 80P(4) has withdrawn deduction u/s. 80P to co-operative banks. 

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 observed that an identical
issue was considered in the case of ITO vs. Citiscape Co-operative Housing
Society Ltd. (ITA No. 5435 & 5436/Mum/2017 dated 8.12.2017). In the
said case the Tribunal has noted that there are divergent views on this
matter.  The Karnataka High Court has in
the case of Pr. CIT vs. The Totagars Co-operative Sale Society & Others
(ITA No. 100066 of 2016  dated 16.6.2017)
has held that interest income earned by a co-operative society from a
co-operative bank is not deductible u/s. 80P(2)(d) of the Act.  The  
Himachal   Pradesh   High 
Court has in the case of CIT vs. Kangra Co-operative Bank
(2009)(309 ITR 106)(HP) has held that interest
income from investments made in any co-operative society would also be entitled
for deduction u/s. 80P. Having noted the divergent decisions, the Tribunal in
the case of ITO vs. Citiscape Co-operative Housing Society Ltd. (supra)
held that if two reasonable constructions of a taxing statute are possible that
construction which favors the assessee must be adopted. The Tribunal held that
interest income earned by assessee from co-operative banks, which are basically
co-operative societies carrying on banking business, is deductible u/s.
80P(2)(d) of the Act.

Consistent with the view taken by the
co-ordinate bench in ITO vs. Citiscape Co-operative Housing Society (supra),
the Tribunal set aside the order passed by CIT(A) and directed the AO to allow
deduction of interest earned by the asseessee from co-operative banks u/s.
80P(2)(d) of the Act.

 

The appeal filed by the assessee was
allowed.

3 Section 69C – There is subtle but very important difference in issuing bogus bills and issuing accommodation bills to a particular party. The difference becomes very important when a supplier in his affidavit admits supply of goods. In a case where the assessee has proved the genuineness of the transactions and the suppliers had not only appeared before the AO but they had also filed affidavits confirming the sale of goods, addition cannot be sustained.

Shantivijay Jewels Ltd. vs. DCIT (Mumbai)

Members : Rajendra, AM and Ram Lal Negi, JM

ITA No. : 1045 (Mum) of  2016

A.Y.: 2011-12  Dated: 
13.04.2018

Counsel for assessee / revenue: R. Murlidhar
/

V. Justin


FACTS 

Assessee company, engaged in the business of
manufacturing of jewellery, filed its return of income declaring the total
income of Rs.60.56 lakh. During the assessment proceedings, the AO called for
details / evidences of purchases from three parties namely (i) M/s. Aadi Impex;
(ii) M/s. Kalash Enterprises and (iii) M/s. Maniprabha Impex Pvt Ltd, which all
essentially were controlled and managed by Rajesh Jain Group. He observed that
Dharmichand Jain (DJ) had admitted during the search and seizure proceedings
carried out u/s. 132 of the Act, that the group was merely providing
accommodation entries. He invoked the provisions of section 133(6) of the Act.
All the three suppliers relied on the book entries, bills, bank statements in
support of their claim of genuine sales made to the assessee.  However, the AO rejected the said explanation
and proceeded to make addition of Rs. 14.00 Crore to the income of the
assessee.

Aggrieved, the assessee preferred an appeal
to the CIT(A) and during the appellate proceedings, the assessee filed copies
of the affidavits of the suppliers and relied on various decisions against the
said additions on account of bogus purchases. After obtaining the remand report
of the AO on the said affidavits, the CIT (A) held that the addition of entire
purchases is not sustainable and relied on the jurisdictional High Court
judgment in the case of Nikunj Eximp Enterprises (372 ITR 619).  Relying on the decision of the Gujarat High
Court in the case of Simit P Sheth (356 ITR 451), he restricted the addition to
12.5% of the said purchases.  Thus, he
confirmed the addition of Rs. 1,75,04,222/- being 12.5% of Rs. 14,00,33,775/-
and deleted the balance of Rs. 12,25,29,553/-.

Aggrieved with the said decision of CIT(A),
the assessee filed appeal before the Tribunal with regard to bogus purchases. While
deciding the appeal the Tribunal restored back the issue of bogus purchase to
the file of the AO for fresh adjudication. In an order u/s. 254 of the Act, the
Tribunal held as under.

 

HELD  

The Tribunal noted that the assessee engaged
in the business of manufacturing of studded gold jewellery and plain gold
jewellery, had during the year under consideration exported its manufactured
goods, it did not sell goods locally, the AO had not doubted the sales, the
suppliers had appeared before the AO and admitted that they had sold the goods
to the assessee, and they had filed affidavits in that regard.  The Tribunal found that DJ had admitted of
issuing bogus bills.  But, nowhere he had
admitted that he had issued accommodation bills to assessee.  The Tribunal held that in its opinion, there
is a subtle but very important difference in issuing bogus bills and issuing
accommodation bills to a particular party. 
The difference becomes very important when a supplier in his affidavit
admits supply of goods. 

The Tribunal noted that the assessee had
made no local sales and goods were exported. 
There is no doubt about the genuineness of the sales.  It is also a fact that suppliers were paying
VAT and were filing their returns of income. 
In response to the notices issued by the AO, u/s. 133(6) of the Act, the
supplier had admitted the genuineness of the transaction.  The Tribunal referred to the order in the
case of Smt. Romila M. Nagpal (ITA/6388/Mumbai/2016-AY.2009-10, dated
17/03/17), wherein in similar circumstances, addition confirmed by the first
appellate authority were deleted. It observed that in that order, the Tribunal
had referred to the case of M/s. Imperial Imp & Exp.(ITA No.5427/Mum/2015
A.Y.2009-10) in which case also the assessee was exporting goods.  After referring to the portions of the
decision of the Tribunal in Imperial Imp & Exp., the Tribunal held that the
CIT(A) was not justified in partially confirming the addition.  It held that the assessee has proved the
genuineness of the transactions and the parties suppliers had not only appeared
before the AO but they had also filed affidavits confirming the sale of
goods.  The Tribunal reversed the
decision of the CIT(A) and decided this ground in favour of the assessee.

 

This ground of appeal filed by the assessee
was allowed.

2 Section 80IB(10) – Amendments made to s. 80IB(10) w.e.f. 1.4.2005 cannot be made applicable to a housing project which has obtained approval before 1.4.2005. Accordingly, time limit prescribed for completion of project and production of completion certificate have to be treated as applicable prospectively to projects approved on or after 1.4.2005.

Mavani & Sons vs. ITO (Mumbai)

Members : B. R. Baskaran, AM and Pawan
Singh, JM

ITA No. 1374/Mum/2017

A.Y.: 2007-08.   Dated: 16.03.2018.

Counsel for assessee / revenue: Ajay Singh /

V. Justin


FACTS 

During the previous year relevant to the
assessment year under consideration, assessee filed its return of income
claiming a deduction of Rs. 52,91,537 u/s. 80IB(10) of the Act, in respect of a
housing project, known as Maruti Mahadev Nagar. The housing project undertaken
by the assessee was approved by the local authority on 9.1.2003 but the project
commenced in October 2003. As per sanctioned plans, the project consisted of
four wings – Wing Nos. 1 to 3 consisted of Blocks A to G and Wing No. 4
consisted of blocks H to K.  The first
phase of completion certificate was issued vide occupation certificate dated
14.3.2007 and second completion certificate was issued on 26.3.2009. The
deduction of Rs. 52,91,537 was in respect of Blocks F and G under Building (sic Wing) No. 3.


The Assessing Officer (AO) while assessing
the total income u/s. 143(3) r.w.s. 147 of the Act denied the claim for
deduction u/s. 80IB(10) on the ground that the project was not completed within
a period of five years from the date of approval of the project and for this
purpose the period of five years has to commence with the date of approval of
the project and not from the date of commencement of work on the project.  The project was partially completed on
14.3.2007 and was finally completed on 26.3.2009.  According to the AO, partial completion was
not final completion as per provisions of section 80IB(10). 


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


Aggrieved, the assessee preferred an appeal
to the Tribunal where it was contended, on behalf of the assessee, for grant of
deduction u/s. 80IB(10), the conditions prevalent at the time of commencement
of the project need to be satisfied.


HELD  

The Tribunal noted that the Madras High
Court has in the case of CIT vs. Jain Housing Construction Co [2013] 30
taxmann.com 131 (Mad.) while considering similar issues held that
furnishing of completion certificate to be produced as a condition for grant of
deduction u/s. 80IB(10) was introduced by Finance Act, 2004 w.e.f. 1.4.2005 and
prior thereto there was no such requirement and in the absence of any requirement
u/s. 80IB(10)(a) of the Act and going by the proviso as it stood during the
relevant year 2004-05, it is difficult to accept the contention of revenue that
claim for deduction rested on production of completion certificate.  It also noted that the Delhi High Court has
in the case of CIT vs. CHD Developers Ltd. 362 ITR 177 (Del.) held that
when approval related to the project was granted prior to 2005 i.e. before
amendment, the assessee was not required to produce the completion certificate
to avail deduction u/s. 80IB.  Similarly,
Hyderabad Bench of the Tribunal has in the case of ITO vs. Kura Homes (P.)
Ltd. [2004] 47 taxmann.com 161 held that furnishing of completion
certificate in respect of housing project was brought into statute only w.e.f.
1.4.2005 and would apply prospectively. The Apex Corut in CIT vs. Akash
Nidhi Builders & Developers [2016] 76 taxmann.com 86 (SC) has held that
assessee was entitled for proportionate profit in respect of different wings of
the project.

 

Considering the ratio of the decisions of
the Delhi High Court in CHD Developers (supra), Madras high Court in
Jain Housing & Construction Ltd. (supra) and Hyderabad Bench in
ITO vs. Kural Homes (P.) Ltd. (supra), the Tribunal held that condition
precedent for grant of deduction for seeking completion within the time
prescribed has to be treated as applicable prospectively and accordingly, the
assessee is not required to produce completion certificate as the project was
approved before the amendment to section 80IB(10).

 

The appeal filed by the assessee was
allowed.

7 Sections 71, 72, 73 and Circular No. 23D dated 12.9.1960 issued by the Board – Business losses brought forward from earlier years can be adjusted against speculation profits of the current year after the speculation losses of the current year and also speculation losses brought forward from earlier years have been duly adjusted.

[2018] 92 taxmann.com 133 (Mumbai-Trib.)

Edel Commodities Ltd. vs. DCIT

ITA Nos. : 3426 AND 356 (Mum) OF 2016

A.Y.: 2011-12        Dated: 
06.04.2018


FACTS 

The assesse company engaged in the business
of trading in securities, physical commodities and derivative instruments filed
its return of income wherein against the speculation profit of Rs. 4,77,37,754
brought forward business loss of AY 2010-11 of Rs. 1,92,98,587 was set
off.  The Assessing Officer (AO) on
examination of clause 25 of the Tax Audit Report and also the relevant schedule
of the return of income as also the assessment record of AY 2010-11 observed
that the loss of AY 2010-11 which has been set off against speculation profit
of the current year was not a speculation loss but was a business loss other
than loss from speculation business.  The
AO denied the set off of non-speculation business loss brought forward from
earlier years against speculation profit of the current year.

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 where relying on the provisions of sections 71 and 72 of the
Act relating to carry forward of losses. it was submitted that there is no bar
in the Act for adjustment of brought forward non-speculation losses against the
speculation profit of the current year. 
Reliance was placed on CBDT Circular No. 23D dated 12.9.1960 and also on
the decisions of the Calcutta High Court in the case of CIT vs. New India
Investment Corporation Ltd. 205 ITR 618 (Cal); and of Allahabad High Court
in the case of CIT vs. Ramshree Steels Pvt. Ltd. 400 ITR 61 (All.).

 

HELD  

The Tribunal noted that the Allahabad High
Court has in the case of Ramshree Steels Pvt. Ltd. (supra) held that
loss of current year and brought  forward
losses of earlier year from non-speculation income can be set off against
profit of speculation business of current year. 
It also noted that the Calcutta High Court in the case of New India
Investment Corporation Ltd. (supra) referred to the Bombay High court
decision in the case of Navnitlal Ambalal vs. CIT [1976] 105 ITR 735 (Bom.)
and also to the CBDT Circular which has held that if speculation losses for
earlier years are carried forward and if in the year under consideration  speculation profit is earned by the assessee
then such speculation profits for the year under consideration should be
adjusted against the brought forward speculation loss of the previous year
before allowing any other loss to be adjusted against these profits. 

 

The Tribunal held that a reading of sections
71, 72 and 73, Circular and case laws makes it clear that there is no blanket
bar as such on adjustment of brough forward non-speculation business loss
against current years speculation profit. 
These provisions provide that loss in speculation business can neither
be set off against income under the head “Business or profession” nor against
income under any other head, but it can be set off only against profits, if
any, of another speculation business. Section 73 effects complete segregation
of speculation losses, which stand distinct and separate and can be mixed for
set off purpose, only with speculation profits. 
The said circular of the Board (which has been held by the Hon’ble
Bombay High Court to be still holding the field) provide that if speculation
losses for earlier years are carried forward and if in the year of account a
speculation profit is earned by the assessee, then such speculation profits for
the current accounting year should be adjusted against brought forward  speculation losses of the earlier year,
before allowing any other losses to be adjusted against these profits.  Hence, it is clear that there is no bar in
adjustment of unabsorbed business losses against speculation profit of current
year provided the speculation losses for the year and earlier has been first
adjusted from speculation profit.

 

The Tribunal noted that in the present case
no case has been made out by the revenue that the current or earlier
speculation losses have not been adjusted from the speculation profit.  In view of the aforesaid decision of  Hon’ble jurisdictional High Court and CBDT
Circular mentioned above, the Tribunal set aside the order of lower authorities
and decided the issue in favour of the assessee.

6 Sections 200, 201 – Since no retrospective effect was given by the legislature while amending sub-section (3) by Finance Act, 2014, it has to be construed that the legislature intended the amendment made to sub-section (3) to take effect from 1st October, 2014 only and not prior to that.

[2018] 92 taxmann.com 260 (Mumbai-Trib.)
Sodexo SVC India (P.) Ltd. vs. DCIT
ITA No. : 980 (Mum) OF 2018
A.Y.: 2012-13  Dated:  28.03.2018

FACTS 

The assessee, an Indian company, is engaged
in the business of issuing meal, gift vouchers, smart cards, to its clients who
wish to make benefit in kind for their employees. The employees use these
vouchers / smart cards at affiliates of the assessee company across India and
who are engaged in different business sectors such as restaurants, eating
places, caterers, super markets. For this purpose, the assessee has entered
into an agreement with the affiliates who accept the vouchers/smart cards
towards payment for goods or services provided by them. Further, the assessee also
enters into agreement with its clients/customers for issuance of vouchers/cards
for which it charges in addition to face value certain amount towards service
and delivery charges.  The entire amount
paid by client/customer is deposited in an escrow account of the assessee kept
with Reserve Bank of India as per guidelines of Payment and Settlement Systems
Act, 2007 and Revised Consolidated Guidelines 2014.  The assessee, in turn, after deducting
certain amounts as service charges and applicable taxes makes payments to
affiliates as per the terms and conditions of agreement towards cost of
goods/services provided by them.

In the course of a survey, u/s. 133(2A) of
the Act, conducted in the business premises of the assessee on 21.01.2016, it
was found that assessee was deducting tax at source only in respect of payments
made to caterers whereas no tax was deducted at source on payments made to
other affiliates. Therefore, the AO issued a notice to assessee directing it to
show cause why it should not be treated as assessee in default u/s. 201(1) for
non-deduction of tax at source on such payment. The assessee responded by
stating that the provisions of section 194C are not applicable in respect of
payments made by it to other affiliates (other than caterers).  The AO did not agree with the submissions made
by the assessee.  He held the assessee to
be an assessee in default for not having deducted tax at source and accordingly
passed an order u/s. 201(1) and 201(1A) raising demand of Rs. 36,97,34,000
towards tax and Rs. 20,09,04,420 towards interest.

Aggrieved, the assessee preferred an appeal
to the CIT(A) interalia on the ground that the order passed u/s. 201(1)
and 201(1A) is barred by limitation as per section 201(3) as was applicable for
the relevant period.  The CIT(A) held
that the amendment to section 201(3) being clarificatory in nature will apply
retrospectively.

Aggrieved, the assessee preferred an appeal
to the Tribunal.

HELD  

The Tribunal noted that Finance Act, 2009
with a view to provide time limit for passing an order u/s. 201(1) introduced
sub-section (3) of section 201.  The time
limit was two years for passing an order u/s. 201(1) from the end of the
financial year in which the statement of TDS is filed by the deductor and in a
case where no statement is filed the limitation was extended to before expiry
of four years from the end of financial year in which the payment was made or
credit given. 

Subsequently, the Finance Act, 2012 amended
section 201(3) with retrospective effect from 1.4.2010 and the time period of
four years was extended to six years in case where no statement is filed.  However, the time period of two years, in
case where statement is filed, remained unchanged. 

Finance Act, 2014 once again amended
sub-section (3) with effect from 1.10.2014 to provide for a uniform limitation
of seven years from the end of the financial year in which the payment was made
or credit given.  The distinction between
cases where statement has been filed or not was done away with. 

The issue before the Tribunal was whether
the un-amended sub-section (3) which existed before the amendment by the
Finance Act, 2014 applies to the case of the assessee.  The Tribunal noted that by the time the
amended provisions of sub-section (3) was introduced by the Finance Act, 2014,
the limitation period of two years as per clause (i) of sub-section (3) of
section 201 (the unamended provision) has already expired.

The Tribunal held that on a careful perusal
of the objects for introduction of the amended provision of sub-section (3) it
does not find any material to hold that the legislature intended to bring such
amendment with retrospective effect.  If
the legislature intended to apply the amended provision of sub-section (3)
retrospectively it would definitely have provided such retrospective effect
expressing in clear terms while making such amendment.  It observed that this view gets support from
the fact that while amending sub-section (3) of section 201 by the Finance Act,
2012, by  extending the period of
limitation under sub-clause (ii) to six years, the legislature has given
retrospective effect from 1st April, 2010.  Since, no such retrospective effect was given
by the legislature while amending sub-section (3) by Finance Act, 2014, it has
to be construed that the legislature intended the amendment made to sub-section
(3) to take effect from 1st October, 2014, only and not prior to
that.

The Tribunal noted that the principles
concerning retrospective applicability of an amendment have been examined by
the Supreme Court in the case of CIT vs. Vatika Township Pvt. Ltd. [2014]
367 ITR 466 (SC). It observed that the decision of the Gujarat High Court
in the case of Tata Teleservices Ltd. vs. Union of India [2016] 385 ITR 497
(Guj.) is directly on the issue of retrospective application of amended
sub-section (3) of section 201.  The
court in this case has held that the amendment to sub-section (3) of section
201 is not retrospective.  Following the
decision in the case of Tata Teleservices (supra), the Gujarat High
Court in the case of Troykaa Pharmaceuticals Ltd. vs. Union of India [2016]
68 taxmann.com 229(Guj.) once again expressed the same view.

Considering the principle laid down by the
Supreme Court as well as the ratio laid down by the Gujarat High Court in the
decisions referred to above which are directly on the issue, the Tribunal held
that the order passed u/s. 201(1) and 201(1A) having been passed after expiry
of two years from the financial year wherein TDS statements were filed by the
assessee u/s. 200 of the Act, is barred by limitation, hence, has to be
declared as null and void.

The Tribunal kept the question of
applicability of section 194C of the Act open.

This ground of appeal filed by the assessee
was allowed.

 

5 Section 56(2)(viia), Rule 11UA – As per Rule 11UA, for the purposes of section 56(2)(viia), fair market value of shares of a company in which public are not substantially interested, is to be computed with reference to the book value and not market value of the assets.

[2018] 92 taxmann.com 29 (Delhi-Trib.)
Minda S. M. Technocast Pvt. Ltd. vs. ACIT
ITA No.: 6964/Del/2014
A.Y.: 2014-15.  Dated: 07.03.2018.

FACTS  

During the previous year relevant to the
assessment year under consideration, the assessee, a private limited company,
having rental income and interest income acquired 48% of the issued and paid up
equity share capital of Tuff Engineering Private Limited from 3 private limited
companies for a consideration of Rs. 5 per share.  The assessee supported the consideration paid
by contending that the purchase was at a price determined in accordance with
Rule 11UA. The assessee produced valuation report of Aggrawal Nikhil & Co.,
Chartered Accountants, valuing the share of Tuff Engineering Private Limited
(TEPL) @ Rs. 4.96 per share.

The Assessing Officer (AO) in the course of
assessment proceedings observed that while valuing the shares of TEPL the
assets were considered at book value. He was of the view that the land
reflected in the balance sheet of TEPL should have been considered at circle
rate prevailing on the date of valuation and not at book value as has been done
in arriving at the value of Rs. 4.96 per share. The AO substituted the book
value of land by the circle rate and arrived at a value of Rs. 45.72 per equity
share. He, accordingly, added a sum of Rs. 11,84,46,336 to the income of the
assessee on account of undervaluation of shares. The amount added was arrived
at Rs. 40.72 (Rs. 45.72 – Rs. 5) per share for 29,08,800 shares acquired by the
assessee.

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

Aggrieved, the assessee preferred an appeal
to the Tribunal.

HELD 

The Tribunal noted that the issue for its
consideration is as to whether the land shown by the TEPL should be taken as
per the book value or as per the market value while valuing its shares. The
Tribunal having noted the provisions of section 56(2)(viia) and the definition
of “fair market value” in Explanation to section 56(2)(viia) and Rule 11UA
observed that on the plain reading of Rule 11UA, it is revealed that while
valuing the shares the book value of the assets and liabilities declared by the
TEPL should be taken into consideration. There is no whisper under the
provision of 11UA of the Rules to refer the fair market value of the land as
taken by the Assessing Officer as applicable to the year under consideration.

The Tribunal relying on and finding support
from the decision of the Bombay High Court in the case of Shahrukh Khan vs.
DCIT reported in 90 taxmann.com 284 held that the share price calculated by
the assessee of TEPL for Rs. 5 per share has been determined in accordance with
the provision of Rule 11UA. The Tribunal reversed the orders of the lower
authorities and allowed the appeal filed by the assessee.

The Tribunal decided the appeal in favour of
the assessee.

Please note: The provision of law has
since changed.

8 Method of accounting – Section 145(3) – AO cannot reject the accounts on the basis that the goods are sold at the prices lower than the market price or purchase price – the law does not oblige/compel a trader to make or maximise its profits

The
Pr. CIT vs. Yes Power and Infrastructure. Pvt. Ltd. [AY 2005-06] [Income tax
Appeal no. 813 of 2015 dated:20/02/2018 (Bombay High Court)].  [ACIT vs. Yes Power and Infrastructure. Pvt.
Ltd.[ITA No.7026/Mum/2012; dated 17/12/2014 ; Mum.  ITAT ]

The assessee is engaged in
trading of steel and other engineering items. The A.O during year found that
the assessee had sales of Rs. 52.17 crore while gross profit was only Rs. 26.08
lakh. This led the A.O. to call for an explanation for such low profits from
the Assessee.


In response, the Assessee
pointed out that the company, is a concern mainly engaged in trading of steel
& engineering products. The company 
purchase and sale these goods on very competitive low margin but our
volume are very high. Normally, company purchases the goods and resale them at
the minimum time gap. It is a known fact that rates of steel keep fluctuating
and it is a very volatile item. To avoid any risk due to market price
fluctuation, company  has to take the
fast decision to sell at the available rate received from the market, some time
it may be sold on a low price or some times at a higher price. During the year,
some of the transactions are sold at lower price because of the expectation of
the rate of steel going lower and lower. Moreover, due to fact that assessee
works with a very small capital and no borrowing from banks, assessee does not
have capacity to hold stock for longer periods. Hence, company has to take
decision to sell and purchase, keeping the time gap at the minimum.


However, the A.O. did not
accept the explanation for low profits and rejected the books of accounts. This
on the ground that the purchase price of goods was much higher than the selling
price of those very items. On rejection of the books of accounts, the A.O.
estimated the gross profit on the basis of 2 percent of the sales. This
resulted in enhancement of gross profits from Rs. 26.08 lakh to Rs. 1.18 crore.


Being aggrieved with the
order, the assessee filed an Appeal to the CIT(A). The CIT(A) dismissed the
assessee’s appeal.


On further Appeal, the
Tribunal allowed the assessee’s Appeal. This inter alia on the ground
that it found that the assessee had along with return of income filed audited
accounts along with audit report for the subject assessment year. Moreover,
during the course of scrutiny, complete books of accounts with item-wise and
month-wise purchase and sales in quantitative details were also furnished. It
found that the A.O. did not find any defect in the books of accounts nor with
regard to quantity details furnished by the assessee. In the above
circumstances, it held that merely because the assessee being a trader has sold
goods at prices lower than the purchase price and/or the prevailing market
price would not warrant rejection of the books of accounts.


Being aggrieved with the
order, the revenue filed an Appeal to the High Court. The grievance of the
Revenue with the impugned order is that the assessee has sold goods at price
lower than its purchase price. Therefore, the books of accounts cannot be relied
upon. Thus, the rejection of the books of accounts and estimation of profits in
these facts should not have been interfered with.

The High Court held  that it is not the case of the Revenue that
the amounts reflected as sale price and/or purchase price in the books do not
correctly reflect the sale and/or purchase prices. In terms of section 145(3)
of the Act, the A.O. is entitled to reject the books of accounts only on any of
the following condition being satisfied.


(i) Whether he is not
satisfied about the correctness or completeness of accounts; or

(ii) Whether the method of
accounting has not been regularly followed by the Assessee; or

(iii) The income has been
determined not in accordance with notified income and disclosure standard.


 It is not the case of the Revenue that
any of the above circumstances specified in section 145(3) of the Act are
satisfied. The rejection of accounts is justified on the basis that it is not
possible for the assessee who is a trader to sell goods at the prices lower
than the market price or purchase price. In fact, as observed by the Apex
Court, Commissioner of Income Tax, Gujarat vs. A. Raman & Co. and in
S.A. Builders vs. Commissioner of Income Tax – 2, the law does not
oblige/compel a trader to make or maximise its profits. Accordingly, the
revenue Appeal was dismissed.

7 Unexplained expenditure – Section 69C – payment made to parties – the assessee filed details of all parties with their PAN numbers, TDS deducted, details of the bank – assessee could not be held responsible for the parties not appearing in person – No disallowance

The Pr. CIT vs. Chawla Interbild Construction Co. Pvt.
Ltd. [AY: 2009-10] [Income tax
Appeal no. 1103 of 2015 dated:28/02/2018 (Bombay High Court)].  [ACIT, Circle-9(1) vs. Chawla
Interbild Construction Co. Pvt. Ltd.[ITA No.7026/Mum/2012;  Bench:C ; dated 11/03/2015 ; Mum. ITAT]


The assessee is a firm
engaged in Civil Engineering and execution of the contracts. During the course
of the assessment proceedings, the A.O doubted the genuineness of payments made
to 13 parties and claimed as expenditure. The notices issued to 13 parties by
the A.O were returned by the postal authorities. Consequently, on the above
ground, the A.O made adhoc disallowance of 40% on the total payment made i.e.
Rs. 4.88 crore out of Rs.12.20 crore and added the same to the assessee’s
income.


Being aggrieved by the assessment
order, the assessee preferred an appeal to the CIT(A). In appeal, the assessee
filed details of all 13 parties with their PAN numbers, addresses, TDS
deducted, date of bill, date of cheque and its number, details of the bank etc.
The CIT(A) after taking the additional evidence on record sought a remand
report from the A.O. The A.O in his remand report submitted that out of 13
parties, 8 parties had appeared before him and the payments made to them stood
satisfactorily explained. However, the remand report indicates that out of 13
parties, 5 parties had not appeared before him. On the basis of the remand
report and the evidence before it, the CIT(A) while allowing the assessee
appeal held that the assessee had done all that was possible to do by giving
particulars of the parties and their PAN numbers. In these circumstances, the
CIT(A) held that the  assessee could not
be held responsible for the parties not appearing in person and allowed the
appeal. Thus, holding that the payments made to all 13 parties were genuine and
the addition on account of disallowance was deleted.


Being aggrieved by the
order, the Revenue carried the issue in appeal to the Tribunal. In appeal, the
Tribunal observed  that all the details
including the dates of payments, net amounts paid, cheque numbers, details of
the bank branches, amount of TDS deducted, details of the bills, including the
details of the TDS made etc. have been furnished in the tabular form
before the CIT(A). Thus, the assessee discharged the initial onus cast upon him
in respect of the payments made to all 13 parties. The order further records
that thereafter, the responsibility was cast upon the A.O if he still doubted
the genuineness of the payments made to those 13 parties. In the aforesaid
circumstances, the appeal of the Revenue was dismissed. 


Being aggrieved by the ITAT
order, the Revenue  preferred an appeal
to the High Court. The Court held that the A.O while passing the assessment
order has disallowed 40% of the total payments made on the basis of the
payments made to 13 parties, who were not produced before him during the
assessment proceedings. This on the ground that payments are not genuine. The
court observed that the assessee had done everything to produce necessary
evidence, which would indicate that the payments have been made to the parties
concerned. The details furnished by the assessee were sufficient for the A.O to
take further steps if he still doubted the genuineness of the payments to
examine whether or not the payments were genuine. The A.O on receipt of further
information did not carry out the necessary enquiries on the basis of the PAN
numbers, which were available with him to find out the genuineness of the
parties. The CIT(A) as well as the Tribunal have correctly held that it is not
possible for the assessee to compel the appearance of the parties before the
A.O. In the above circumstances, the view taken by the Tribunal is a reasonable
and possible view. Consequently,  the
appeal of revenue was dismissed.

6 Business Expenses – Section 37 – loss/ liability arising on account of fluctuation in rate of exchange in case of loans utilised for working capital of the business – allowable as an expenditure

The Pr. CIT-20 vs. Aloka Exports.
[ AY 2009-10] [Income tax  Appeal no. 806 of 2015 dated: 26/02/2018 (Bombay High Court)].    
[ACIT, Circle-17(2) vs. Aloka Exports.[ITA No. 4771/Mum/2012;  Bench : A ; dated 27/08/2014 ; Mum.  ITAT ]

The assessee is engaged in
the business of manufacture and export of readymade garments, imitation
jewellery, handicrafts etc. The AO noticed that the assessee claimed deduction
of expenses relating to foreign exchange rate difference.

The assessee submitted that
the term loan was availed  for working
capital purposes. At the year end, the assessee worked out the foreign exchange
difference and claimed the loss arising thereon as deduction.


The AO noticed that the
EEFC account is maintained in foreign currency and accordingly held that the
assessee could not have incurred loss on account of foreign exchange difference.
The assessee explained before the AO about the method of accounting of “foreign
exchange loss/gain”. However, the assessing officer took the view that the loss
accounted by the assessee is against the accounting principles. Accordingly he
disallowed the foreign exchange difference loss claimed by the assessee.


The Ld CIT(A) deleted the
disallowance of loss arising on foreign exchange difference by following the
decisions rendered by Hon’ble Supreme Court in the followingcases:-


(a) Sutlej
Cotton Mills Ltd vs. CIT (116 ITR 1)(SC)

(b) CIT
vs. Woodward Governor India Pvt Ltd (312 ITR 254)(SC).


On further appeal by the
Revenue, the Tribunal upheld the order of the CIT(A). It held that the foreign
exchange term loan was utilised for working capital requirements. Thus, the
loss on account of foreign exchange difference is allowable as a revenue loss.


The Hon. High Court
observed that  both the CIT(A) as well as
the Tribunal have on perusal of the record, come to a conclusion that the loan
taken was utilised only for working capital requirements. Therefore, loss on
account of foreign exchange variation would be allowable as a trading loss. In
fact, even the Assessing Officer has held that term loan was not utilised for
purchase of plant and machinery.


The Court held that this
issue stands covered by the decisions of the Supreme Court in Sutlej Cotton
Mills Ltd., vs. CIT 116 ITR 1 (SC) that loss arising during the process of
conversion of foreign currency is a part of its trading asset i.e. circulating
capital, it would be a trading loss. Further, as held by the Apex Court in CIT
vs.Woodward Governor India Pvt. Ltd., 312 ITR 254 – that loss/liability
arising on account of fluctuation in rate of exchange in case of loans utilised
for revenue purposes, is allowable as an expenditure. Accordingly, the question
of law  raised in the appeal of revenue
was dismissed.

5 Expenses or payments not deductible-Section 40A(3) -the payment is made to producer of meat in cash in excess of Rs.20,000/– Circular issued by the CBDT cannot impose additional condition to the Act and / or Rules adverse to an assessee – No disallowance can be made

Pr. CIT – I, Thane vs. Gee Square
Exports.     

[AY
2009-10] [Income tax Appeal no. 1224 of 2015 dated : 13/03/2018 ; (Bombay High
Court)]. 

[Affirmed
Gee Square Exports vs.  I.T.O.

[dated
: 31/10/2014 ; Mum.  ITAT ]


The assessee is a
partnership firm engaged in the business of exporting frozen buffalo meat and
veal meat to countries like Oman, Kuwait and Vietnam etc. The assessee
purchases raw meat from various farmers and after processing and packaging in
cartoons, exports the same. The assessee had in the course of its above
activity, made its purchases of meat in cash in excess of Rs.20,000/-. The AO
disallowed payments made in cash for purchases of meat in excess of Rs.20,000/-
i.e. Rs.26.79 crore in the aggregate u/s. 
40A(3) of the Act. Thus, the AO rejected 
the appellant’s contention that in view of the proviso to sec. 40A(3) of
the Act read with Rule 6DD(e) and (k) of the Income Tax Rules, they would not
be hit by section 40A(3) of the Act. This rejection was primarily on the ground
that in view of CBDT Circular No.8 of 2016, wherein in paragraph 4 thereof, one
of the conditions for grant of benefit of section 6DD of the Income Tax Rules
was certification from a Veterinary Doctor certifying that the person certified
in the certificate is a producer of meat and slaughtering was done under his
supervision.


Being aggrieved by the
order of AO, the assessee filed appeal before CIT(A). The CIT(A) upheld the
Assessment order.


Being aggrieved by the order
of CIT(A), the assessee filed appeal before ITAT. The Tribunal observed  that section 40A(3) of the Act provides that
no disallowance thereunder shall be made if the payment in cash has been made
in the manner prescribed i.e. in circumstances provided in Rule 6DD of the
Rules. The Tribunal held that the payment is made to producer of meat in cash
and would satisfy the requirement of Rule 6DD(e) of the Rules, which is as
under :


“(e) Where the payment
is made for the purchase of (i) ……. (ii) the produce of animal husbandry
(including livestock, meat, hides and skins) or dairy or poultry farming; or”


There were no other
conditions to be satisfied in terms of the above Rules. This Tribunal further
helds that neither the Act nor the Rules provides that the benefit of Rule 6DD
of the Rules would be available only if the further conditions / requirements
set out by the board in its Circular are complied with.


The Tribunal also observed
that the power of the board to issue circulars u/s. 119 of the Act is mainly to
remove hardship caused to the assessee. In the above view, it was held by the
Tribunal that the scope of Rule 6DD of the Rules cannot be restricted and/or
fettered by the CBDT Circular No.8 of 2016. 


Before the High Court, the
Revenue states that the assessee had failed to satisfy the conditions of CBDT
Circular. Therefore, the  order of the
Tribunal could not have allowed the assessee’s appeal. 


The Court observed that the
basis of the Revenue seeking to deny the benefit of the proviso to section
40A(3) of the Act and Rule 6DD(e) of the Rules is non satisfaction of the
condition provided in CBDT Circular No.8 of 2016. In particular, non furnishing
of a Certificate from a Veterinary Doctor. The proviso to section 40A(3) of the
Act seeks to exclude certain categories/classes of payments from its net in
circumstances as prescribed. Section 2(33) of the Act defines “prescribed”
means prescribed by the Rules. It does not include CBDT Circulars. It is a
settled position in law that a Circular issued by the CBDT cannot impose
additional condition to the Act and / or Rules adverse to an assessee. In UCO
Bank vs. Commissioner of Income Tax, 237 ITR 889, the Apex Court has
observed “Also a circular cannot impose on the taxpayer a burden higher than
what the Act itself, on a true interpretation, envisages”.

Thus, the view of the
Tribunal that the CBDT Circular cannot put in new conditions for grant of
benefit which are not provided either in the Act or in the Rules framed
thereunder, cannot be faulted. More particularly so as to deprive the assessee
of the benefit to which it is otherwise entitled to under the statutory
provisions. Needless to state, it is beyond the powers of the CBDT to make a
legislation so as to deprive the respondent assessee of the benefits available
under the Act and the Rules. The assessee having satisfied the requirements
under Rule 6DD of the Rules, cannot, to that extent, be subjected to
disallowance u/s. 40A(3) of the Act. Besides, we may in passing point out that
the impugned order of the Tribunal holds that a Certificate of Veterinary
Doctor was rejected by the Authorities under the Act, only because it was not
in proper form. In the above facts, the revenue appeal was dismissed.

Section 92CE and Section 94B – Analysis and Some Issues

This article deals with some of the issues which warrant
attention with respect to section 92CE and section 94B of the Income-tax Act
1961, (Act) as introduced by the Finance Act 2017. 

                                                        
                               

Section 92CE – Secondary adjustment in certain cases

1.      As per the memorandum explaining the
provisions of the Finance Bill 2017, the provision has been introduced to align
transfer pricing provisions with the OECD transfer pricing guidelines and the
international best practices. The said memorandum explains that “Secondary
adjustment” means an adjustment in the books of accounts of the assessee
and its associated enterprise to reflect that the actual allocation of profits between
the assessee and its associated enterprise are consistent with the transfer
price determined as a result of primary adjustment, thereby removing the
imbalance between cash account and actual profit of the assessee. The OECD
recognises that secondary adjustment may take the form of constructive
dividends, constructive equity contributions, or constructive loans. India has
opted for form of secondary adjustment i.e. constructive advance.

2.1.   The section provides that the assessee shall
make a secondary adjustment in certain cases only i.e. where the primary
adjustment to transfer price,

a)  has been made suo motu by the assessee
in his return of income; or

b)  has been made by the Assessing Officer (AO)
and accepted by the assessee; or

c)  is determined by an advance pricing agreement
entered into by the assessee u/s. 92CC; or

d)  has been made as per the safe harbour rules
framed u/s. 92CB; or

e)  is arising as a result of resolution of an
assessment by way of the mutual agreement procedure under an agreement entered
into u/s. 90 or 90A.

2.2.    The provisions will apply only if the
primary adjustment exceeds INR one crore and the excess money attributable to
the adjustment is not brought to India within the prescribed time. From the
above, it is clear that the provision will have a limited applicability and
hence there is no need for the panic. In fact, it will be interesting if the
Government publishes the data that in the last decade of transfer pricing
scrutiny, how many cases were covered by aforesaid clauses.

2.3.    As regards clause (b), once the primary
adjustment made by the AO is contested by the assessee in appeal, he will not
be covered by the same even if the appellate authority upheld the adjustment
made by the AO and assessee accepts the said addition.

2.4.    The taxpayer invoking the MAP to resolve the
transfer pricing dispute needs to be mindful of this provision. In fact, there
is a possibility that the taxpayer may be discouraged to resolve the transfer
pricing dispute through MAP because of this provision.

3        The assessee is not required to make any
secondary adjustment in respect of any primary adjustments made in the
assessment year 2016-17 or any of the earlier years. In other words, the
assessee shall make secondary adjustment only in respect of primary adjustment
made in the assessment year 2017-18 and subsequent years. The provision is
applicable in relation to the assessment year 2018-19 and subsequent years.
Thusfore, the assessee is expected to make a secondary adjustment from   AY 18-19 in respect of primary adjustments
made in AY 17-18 or subsequent years.

4        Section 92CE(3) (iv) provides that
“primary adjustment” to a transfer price means the determination of transfer
price in accordance with the arm’s length principle, resulting in an increase
in the total income or reduction in the loss, as the case may be of the
assessee. The wordings of the definition are not clear and do not seem to
reflect legislative intent.

          In my view, primary adjustment is the
increase in the income or reduction in the loss of the assessee as a result of
the computation of income u/s. 92C(4) r.w.s 92. i.e. if the taxpayer has
imported the goods worth INR 100 from its AE and if the AO computes the ALP of
such import at INR 95, he will increase the income of the taxpayer by INR 5 and
the same would be regarded as the primary adjustment. If the case of the
taxpayer falls in any of the cases listed in paragraph 2.1 above, he is
required to make a secondary adjustment.

5.1     What
secondary adjustment is envisaged? and when should the assessee make the
secondary adjustment? In the above case, the assessee has already made payment
of INR 100 towards the import to the AE and the AE is sitting with the fund
representing the primary adjustment i.e INR 5 .The assessee is required to
debit the account of the AE and credit the profit and loss account (P&L
A/C) with the amount of the primary adjustment. If the amount representing the
debit balance in the account of the AE is repatriated to India within the
stipulated time, no further consequence arises. However, if the amount is not
repatriated to India, the said debit balance in the account of the AE would be
deemed to be an advance made by the assessee to the AE and the interest on such
advance is required to be computed in a prescribed manner.

5.2     The timing of the secondary adjustment in
the books would possibly vary from case to case and would depend on the exact
clause of section 92CE(1) under which the primary adjustment is made. If the
primary adjustment is made suo motu by the assessee in his return of
income, the same should be done in the same year. However, if the assessee is a
company and its accounts are closed, it will have to comply with provisions of
the Companies Act and make the adjustment in the books in accordance with the
Companies Act. 

6        Further issues that may arise in this
regard are:

6.1     Whether the credit to P&L A/C would
form part of book profit for the purpose of section 115JB? Considering the
provision of section 115JB and 92CE, it appears that the said credit would form
part of the book profit.

6.2     Whether the section envisages a
identification of the AE which can be correlated to the primary adjustment and
rule out the mandate to carry out secondary adjustment in other cases?

          In practice, an assessee enters into
various transactions with different AEs and the TPO makes an overall adjustment
following TNM method without identifying the exact transaction or the AE. In
such cases, a question will arise as to which AE’s account is to be debited for
secondary adjustment. Should the adjustment be prorated to various AEs? If the
primary adjustment cannot be identified with an AE, a view may be taken that
the obligation to carry out secondary adjustment does not arise.

6.3   Whether the debiting the account of the AE
with the primary adjustment be regarded as constructive payment? If yes, it may
further require examining the applicability of the provisions of section
2(22)(e) especially when the AE holds more than the threshold level of shares in
the Indian company.

          It must be noted that the deeming
fiction are to be strictly construed and should be confined to the purpose for
which they are enacted. Hence, the primary adjustment which is deemed to be an
advance made by the assessee to its AE should be confined to that only and
should not be extended to any other provision.

6.4     The section requires adjustment in the
books of account of the AE also. Whether the same is warranted, whether the
same is in the control of the assessee and what if it is not carried out in the
books of the AE? If the adjustment is not carried out in the books of the AE,
then the assessee has not carried out the secondary adjustment as envisaged
u/s. 92CE(1) and further consequences in accordance with law should follow.

6.5     The section provides that the assessee
shall make the secondary adjustment, i.e. the assessee is under an obligation
to carry out secondary adjustment. What if the assessee does not make such
adjustment? Whether the existing provisions under the Act are enough to empower
the revenue authorities to make such adjustment when the assessee does not make
such adjustment?

        Currently, there is no separate penal
provision for non-compliance with section 92CE. However, one needs to examine
whether there is an under reporting or misreporting of the income within the
meaning of section 270A when the assessee does not carry out the secondary
adjustment when it is under an obligation to carry out the same.

7    Recently, revenue has made primary
adjustment in the case of nonresident associated enterprises (AE) and such
adjustment has been upheld by the Tribunal i.e. the non-resident should have
earned more royalty from the Indian resident assessee. The newly inserted
section 92CE requires the assessee to repatriate the excess money attributable
to primary adjustment to India. Thus, obviously there cannot be any secondary
adjustment when the primary adjustment is made in the case of foreign AE, since
there cannot be any question of repatriation to India in such cases. In fact,
logically it may require the Indian resident to remit the amount to the non
resident AE representing primary adjustment. This becomes an additional
argument to advance the case of the assessee that primary adjustment cannot be
made in the case of foreign AE.

8       The language of the section needs
attention of the draftsmen so as to bring home the intent and also to provide
clarity and certainty. The following may be noted in this respect:

8.1     In addition to the other terms, the section
defines the term “primary adjustment” and “secondary adjustment”. It may be
noted that sub-section (1) provides that the assessee shall make a secondary
adjustment where there is a primary adjustment to transfer price in certain
cases. However, neither the term “transfer price” nor the term “primary
adjustment to transfer price” is defined either in the section or in the
relevant chapter.

8.2     There is no link between sub-section (1)
and sub-section (2) of the section and hence there is an apprehension that the
deeming fiction of treating the amount representing the primary adjustment as
advance and further consequence as provided in sub-section (2) is applicable to
all cases and not confined to those covered by sub-section(1). However, If
sub-section (2) is interpreted in this manner, then consequence of sub-section
(1) would stop at passing the entry in the books of the assessee. The debit
balance in the books need not be repatriated and would be treated in accordance
with the other provisions. The above does not seem to be the intention. The
intention of the legislature is achieved only when both sub sections are read
together. However, this anomaly in the drafting needs to be corrected.

Section 94B – Limitation on Interest deduction in certain
cases

9        The provision has been introduced to
address the issue of thin capitalisation. The memorandum explaining the
provisions of the Finance Bill 2017 states “A company is typically financed or
capitalised through a mixture of debt and equity. The way a company is
capitalised often has a significant impact on the amount of profit it reports
for tax purposes as the tax legislations of countries typically allow a
deduction for interest paid or payable in arriving at the profit for tax
purposes while the dividend paid on equity contribution is not deductible.
Therefore, the higher the level of debt in a company, and thus the amount of
interest it pays, the lower will be its taxable profit. For this reason, debt
is often a more tax-efficient method of finance than equity. Multinational
groups are often able to structure their financing arrangements to maximise
these benefits. For this reason, the country’s tax administrations often
introduce rules that place a limit on the amount of interest that can be
deducted in computing a company’s profit for tax purposes. Such rules are
designed to counter cross-border shifting of profit through excessive interest
payments, and thus aim to protect a country’s tax base……….”

        In view of the above, it is proposed
to insert a new section 94B, in line with the recommendations of OECD BEPS
Action Plan 4, to provide that interest expenses claimed by an entity to its
associated enterprises shall be restricted to 30% of its earnings before
interest, taxes, depreciation and amortisation (EBITDA) or interest paid or
payable to associated enterprise, whichever is less.

10.1   It provides that the deduction towards interest
incurred by an Indian company or permanent establishment of a foreign
company (specified entity or borrower) in respect of any debt issued by its non-resident
AE (specified lender) will be restricted while computing its income under the
head “profits and gains of business and profession”. The deduction will be
restricted to 30% of earnings before interest, taxes, depreciation and
amortisation (EBITDA) or the actual interest whichever is less.

10.2   The restriction will be applicable only if
the borrower incurs expenditure by way of interest or of similar nature
which exceeds INR one crore in respect of debt issued by the specified lender.
In other words, when such payment is less than INR one crore, the claim for
interest will not be restricted to 30% of EBIDTA. i.e If the EBIDTA is one
crore and such payment is 40 lakh, the claim for interest will not be
restricted under this section. The restriction is also not applicable to
borrower which is engaged in the business of banking or insurance.

10.3   At times, the restriction will apply even if
the debt is issued by a third party which is not an AE. This will be the case
when the AE (resident or non-resident) provides an express or implicit
guarantee in respect of the debt or it places deposit matching with loan fund
with the third party. In such a case debt which is issued by a third party shall
be deemed to have been issued by an AE.

11    The amount so disallowed will be carried
forward and will be eligible for deduction for the next eight assessment years.
However, the deduction for the carried forward amount will be allowed in the
same manner subject to the same upper limit.

12.1   The provision is applicable only when the
expenditure towards “interest or of similar nature” exceeds INR one
crore. The term interest is defined u/s. 2(28A) of the Act. However, a question
may arise as to what can be included within the term “of similar nature”? It
may be noted that the term “debt” has been defined and one can draw on this
definition so as to understand what other nature of payments are likely to be
covered by the term “of similar nature.”

12.2   Section 94B(5)(ii) states that “debt” means
any loan, financial instrument, finance lease, financial derivative, or any
arrangement that gives rise to interest, discounts or other finance charges
that are deductible in the computation of income chargeable under the head
“Profits and gains of business or profession.”

12.3   It needs to be noted that the restriction
towards deduction is applicable to only “interest” expenditure, though for the
purpose of applying threshold limit of INR one crore, one needs to take into
account expenditure of similar nature together with interest.

13      The section provides for the cases when
the debt will be deemed to be issued by the AE. One such case is when there is
an implicit guarantee provided by the AE to the third party lender.
This provision has the potential to create litigation and hence there needs to
be a very clear guidance as to what are the circumstances that could be
regarded as provision of implicit guarantee.

14.1   Whether a special provision dealing with
interest in section 94B excludes applicability of section 92 to such interest
payment? It does not seem to be so. Thus, there can be situations when there is
interplay of both the sections. i.e EBIDTA of the Indian company is INR 20
crore and the interest payment to AE is INR 10 crore. Such interest is paid
@10%. Arm’s length interest rate determined u/s. 92 is 6.5%. This would lead to
an adjustment of INR 3.5 crore u/s. 92. Section 94B would restrict the
deduction of interest to 30% EBIDTA i.e 6 crore. Thus, the income of the Indian
company would be increased by INR 7.5crore.(3.5 crore u/s. 92 and 4 crore u/s.
94B). This leads to an absurd result and does not seem to be intention of the
law.

14.2   In my view, the base for disallowance u/s.
94B should be substituted after giving effect to the adjustment u/s. 92 i.e to
6.5 crore from 10 crore. This will have the effect of restricting the
disallowance u/s. 94B to 50 lakh resulting into an aggregate adjustment of only
4 Crore. Thus, any increase or decrease in the adjustment u/s. 92 will have
consequential impact on the limitation u/s. 94B. The interplay needs to be
clarified by CBDT with examples. 

15      In the above example, section 92CE
requires the assessee to make a secondary adjustment of 3.5 crore in respect of
the primary adjustment made u/s. 92. The Indian company is required to charge
interest on the said deemed advance. Thus, there will be a debit to the
interest account and credit to the interest account in respect of the same
lender in subsequent years. Can such debit and credit be net off while applying
provisions in subsequent years? This question will not arise if the assessee
maintains only one account of the AE in its books and passes the debit entry
for the deemed advance in the same account.

16      The deduction towards interest is
restricted only when the lender is non-resident. In other words, if the lender
is a resident AE, the restriction will not apply. Would it meet the provision
of non-discrimination article in a treaty when the non-resident is a resident
of a treaty country?

          Relevant extract of Article 24(4) of
the OECD and UN model convention (both are identical) is reproduced hereunder
for ready reference:

24(4)
Except where the provisions of paragraph 1 of Article 9, paragraph 6 of Article
11 or paragraph 4 of Article 12, apply, interest, royalties and other
disbursements paid by an enterprise of a Contracting State to a resident of the
other Contracting State shall, for the purpose of determining the taxable
profits of such enterprise, be deductible under the same conditions as if they
had been paid to a resident of the first-mentioned State…..

From the above text, it is clear that the model
article 24(4) prohibits such discrimination when the deduction is restricted
only to non-residents. However, the article provides exceptions when such
nondiscrimination is permitted. Section 94B possibly may fall into such
exception if it excludes application of section 92 when 94B is applied.

Works Contract Vis-À-Vis Nature of Goods Sold In Works Contract

Introduction

Taxation of Works Contract
is a debatable issue from beginning. In fact the theory of works contract came
into existence because of complicated nature of the transaction. In case of
works contract, there is more than one element involved like goods, services,
labour and there may be other elements like land etc. Works Contracts
are composite transactions involving supply of goods as well as services.

Taxation of Works Contract

After judgment of the Hon.
Supreme Court in case of Gannon Dunkerly and Co. (9 STC 353)(SC), the
transaction of works contract remained outside the purview of sales tax. In the
above case, it was held that only “Sale” as understood under Sale of Goods Act
is covered under Sales Tax net and transactions of works contract etc. cannot be
covered. It is in 1983, that the 46th Amendment was effected to the
Constitution, whereby clause (29A) was inserted in Article 366 of the
Constitution so as to include ‘deemed sale transactions’ in the taxation net of
sales tax. There are in all six transactions included in the Constitution. One
of them is works contract transaction. Thus, works contract transaction became
taxable transaction under sales tax as ‘deemed sale’.

Value of goods under Works
Contract

After the above amendment,
issue arose about taxable quantum of the works contract under Sales Tax. The
landmark judgment in case of Builders Association of India (73 STC 370)(SC)
gave the guidelines about taxation of works contract under sales tax. Hon.
Supreme Court held that under Works Contract the sales tax can be levied on the
value of the goods and not on the total value of contract including labour
charges. The relevant portion can be reproduced as under:

“Even after the decision
of this Court in the State of Madras vs. Gannon Dunkerley & Co. (Madras)
Ltd. [1958] 9 STC 353; [1959] SCR 379, it was quite possible that where a
contract entered into in connection with the construction of a building
consisted of two parts, namely, one part relating to the sale of materials used
in the construction of the building by the contractor to the person who had
assigned the contract and another part dealing with the supply of labour and
services, sales tax was leviable on the goods which were agreed to be sold
under the first part. But sales tax could not be levied when the contract in
question was a single and indivisible works contract. After the 46th
Amendment, the works contract which was an indivisible one is by a legal
fiction altered into a contract which is divisible into one for sale of goods
and the other for supply of labour and services. After the 46th
Amendment, it has become possible for the States to levy sales tax on the value
of goods involved in a works contract in the same way in which the sales tax
was leviable on the price of the goods and materials supplied in a building
contract which had been entered into in two distinct and separate parts as
stated above.”

Thus, after 46th
Amendment, the State Government can levy sales tax on the value of the goods
involved in the execution of works contract. It is also clear that the levy
will be similar to tax levied on normal sale of goods.

Rate of tax

Under Sales Tax Laws, one
more important issue is about rate of tax to be applied to value of goods so as
to arrive at tax payable. In other words, after finding value of goods, it is
also equally important to find out the rate of tax applicable to goods involved
in the execution of works contract. This is again a vexed issue. Different
types of goods may be involved in a works contract. One view can be that there
is passing of property in all goods as one category of goods, attracting one
rate. The other view is that different goods are getting transferred and the
rate applicable to such goods respectively should be applied. So there can be
separate rates applicable to respective values of the goods.

Smt.
B. Narasamma vs. Deputy Commissioner Commercial Taxes Karnataka and another (96
VST 357)(SC)

This is the latest
judgment wherein the issue about rate of tax in works contract is dealt with by
Hon. Supreme Court. The issue arose out of Karnataka Sales Tax Law. The brief
facts of the case narrated in the Supreme Court judgment are reproduced below.

“This group of appeals
concerns the rate of taxability of declared goods- i.e., goods declared to be
of special importance u/s. 14 of the Central Sales Tax Act, 1956. The question
that has to be answered in these appeals is whether iron and steel reinforcements
of cement concrete that are used in buildings lose their character as iron and
steel at the point of taxability, that is, at the point of accretion in a works
contract. All these appeals come from the State of Karnataka and can be divided
into two groups—one group relatable to the provisions of the Karnataka Sales
Tax Act, 1957 and post April 1, 2005, appeals that are relatable to the
Karnataka Value Added Tax Act, 2003. The facts in these appeals are more or
less similar. Iron and steel products are used in the execution of works
contracts for reinforcement of cement, the iron and steel products becoming
part of pillars, beams, roofs, etc., which are all parts of the ultimate
immovable structure that is the building or other structure to be constructed.”

Thus, the controversy was
about rate of tax applicable on iron and steel products used in reinforcement
of cement in construction. The argument of State was that the items once used
lose their individual existence and they are chargeable at one rate as
residuary rate. However, Supreme Court has appreciated the contention of the
dealers. The factual position of the use of goods is also narrated by Supreme
Court in this judgment as under:

“Different types of
steel bars/rods of different diameters are used as reinforcement (like TMT
bars, CTD bars, etc.). The reinforcement bars/rods need to be bent at
the ends in a particular fashion to with- stand the bending moments and
flexural shear. The main reinforcement bars/rods have to be placed parallel
along the direction of the longer span. The diameters of such main
reinforcement rods/bars and the distance between any two main reinforcement
bars/rods is calculated depending on the required loads to be carried by the
reinforced cement concrete structure to be built based on various engineering
parameters. At right angles to the main reinforcement bars/rods, distribution
bars/rods of appropriate lesser diameters are placed and the intersections
between the distribution bars/rods and main reinforcement bars/rods are tied
together with binding wire. The tying is not for the purposes of fabrication
but is to see that the iron bars or rods are not displaced during the course of
concreting from the assigned positions as per the drawings. Welding of
longitudinal main bars and transverse distribution bars is not done. In fact,
welding is contra-indicated because it imparts too much rigidity to the
reinforcement which hampers the capacity of the roof structure to oscillate or
bend to compensate varying loads on the structure besides welding reduces the
cross section of the bars/rods weakening their tensile strength. The
reinforcements are placed and tied together in appropriate locations in
accordance with the detailed principles and drawings found in standard bar bending
schedules which lay down the exact parameters of interspaces between bars/rods,
the required diameters of the steel reinforcement bars/rods and contain the
required engineering drawings for placement of bars in a particular manner. The
placement of reinforcement bars/rods for different structures is done under the
supervision of qualified bar tenders and site engineers who are well versed
with the engineering aspects related to steel reinforcement for creating
reinforced cement concrete of desired load bearing capacities.“

After noting the above,
the Hon. Supreme Court held that the steel products were used as it is and they
were not different goods at the time of incorporation. Therefore, the rate
applicable to the goods purchased would apply. The relevant observations are as
under:

“Given the fact-situation
in these appeals, it is obvious that paragraph 101 of this judgment squarely
covers the case against the State, where, commercial goods without change of
their identity as such goods, are merely subject to some processing or
finishing, or are merely joined together, and therefore remain commercially the
same goods which cannot be taxed again, given the rigor of section 15 of the
Central Sales Tax Act. We fail to see how the aforesaid judgment can further
carry the case of the Revenue.”

Thus, the Hon. Supreme
Court laid down that the rate applicable to the goods transferred was
applicable. Further, if the goods transferred are same goods as purchased or
processed goods but the process was not amounting to manufacture, then also the
rate will be same as applicable to goods purchased. Thus, deciding nature of
goods, getting transferred in the contract, is important to decide the rate of tax.         

Conclusion

The above judgment will be
useful to resolve the issue about rate of tax. It will be a guiding judgment on
the given issue.

CENVAT Credit – Third Party Services

Preliminary

It is very common in business to outsource a wide range of
third party services that are availed for business activities by manufacturers
and service providers. However, the said services may not be received / availed
in the factory / business premises. In such cases, efforts are often made by ST
Department to deny CENVAT credit availed by the manufacturers / service
providers in regard to service tax paid on such services. This aspect has been
recently considered in a Kolkata Tribunal ruling as discussed below:

Ruling in Tata
Motors Ltd. vs. CCE (2017) 50 STR 28 (Tri – Kolkata)

a)  Facts in brief

     In this case, the appellants were engaged
in the manufacture of commercial motor vehicles & chassis and parts thereof
at their factory located at Jamshedpur. The appellants availed CENVAT credit of
duty paid on inputs as well as input services received and used by them in the
manufacture of final products. Appellants did not have facility to manufacture
axles and gear boxes in their factory and accordingly, they supplied raw
materials to job workers to manufacture axles, gear boxes and components
thereof. The inputs procured/ purchased by the appellants were supplied
directly to the job workers and they always belonged to the appellants.

     The appellants had also availed services of
some third party processors, who processed the raw materials / inputs sent to
job workers on behalf of the appellants and send those processed inputs / raw
materials to the said job workers for manufacturing of axles and gear boxes which
are used by the appellants in the manufacture of motor vehicles. The appellants
had paid processing charges to these third party processors along with
applicable service tax under the “Business Auxiliary Services”. Accordingly,
the appellants had taken credit of the service tax paid since the said services
were used in the manufacture of axles and gear boxes, which are used in the
manufacture of final products manufactured by the appellants.

     However, Show Cause Notices were issued and
after due process of law, the demand was confirmed under Rule 14 of CENVAT
Credit Rules, 2004 read with section 11A of Central Excise Act, 1944. The
appellants went in for appeal before the Tribunal against the adjudication
order.

b)  Arguments before the Tribunal in brief.

     The appellant company reiterated the
grounds of appeal and submitted that they were receivers of services rendered
by the job workers and the said services were used directly or indirectly, in
or in relation to the manufacture of final products and accordingly they were
entitled to credit of service tax paid on the input services. It was further
submitted that the ld. commissioner in the impugned order totally ignored the
expression “services used by the manufacturer whether directly or indirectly, in
or in relation to the manufacture of final product”. It is a settled legal
position that the expression “in or in relation to the manufacture of final
product” itself is of wide import. Definition of “input services” not only uses
the expression “in or in relation to the manufacture of final product” but has
also used the expression “whether directly or indirectly, in or in relation to
the manufacture of final products.” Various judicial rulings to support the
stand were relied upon.

     AR reiterated the discussion and findings
of the impugned order.

c)   Findings of the Tribunal

     On this issue paragraphs 7.2 and 7.3 of the
case law Endurance Technologies Pvt. Ltd. vs. CCE (2011) 273 ELT 248 (Tri. –
Mumbai) are relevant and are as follows:

     “Para
7.2 Input services
rendered for manufacture of wind mills for generation of electricity is not in
dispute. The electricity so generated is used in the manufacture of final
product. Therefore, the service falls under the definition of input service. As
regards input service used at a different place it is pertinent that there is
no mandate in law that it should be used in the factory unlike inputs, which is
clear from Rules 4(1) and 4(7) of the CENVAT Credit Rules, 2004 reproduced
herein : –

     Rule 4(1).
– The CENVAT credit in respect of inputs may be taken immediately on receipt of
the inputs in the factory of the manufacturer or in the premises of the
provider of output service:

     ……………

     Rule
4(7) – The CENVAT credit in respect of input service shall be
allowed, on or after the day which payment is made of the value of input
service and the service tax paid or payable as is indicated in invoice, bill
or, as the case may be, challan referred to in Rule 9.”

     Para 7.3

     The Hon’ble High Court in the case of
Ultratech Cement Ltd. has held that the definition of input service read as a
whole makes it clear that the said definition not only covers services, which
are used directly or indirectly in or in relation to the manufacture of final
product, but also includes other services, which have direct nexus or which are
integrally connected with the business of manufacturing the final product. In
the case of CCE & C vs. Ultratech Cement Ltd. – 2010 – TIOL – 1227 – CESTAT
– MUM = 2011 (21) S.T.R. 297 (Tri.-Mum), this Tribunal has held that the denial
of CENVAT Credit on the ground that services were not received by the
respondent in factory premises is not sustainable.”

     In the aforesaid decision, it was held that
services rendered outside the factory when having a nexus with the manufacture
of final product then such services are covered under definition of “input
service” of the CENVAT Credit Rules, 2004. This decision of the Tribunal has
been upheld by the Hon’ble High Court of Bombay in CCE&C vs. Endurance
Technology Pvt. Ltd. [2015 – VIL – 221-BOM-ST]. Similar view has been
expressed by the Larger Bench of the Tribunal in Parry Engg. &
Electronics. P. Ltd. vs. C.C.E. & S.T. 
(2015) 40 S.T.R. 243 (Tri – LB)]. Paragraph No. 7 is relevant and is
reproduced as follows:

     “We find that the Hon’ble Bombay High Court
in the case of Endurance Technologies Pvt. Ltd. (supra) held that CENVAT credit
is eligible on maintenance or repair services of windmills, located away from
the factory. It is well-settled that the decision of Hon’ble High Court is
binding on the Tribunal. It was pointed out at the time of hearing that the
definition of “input service” credit was subsequently amended in 2011. We find
that the present appeals are involving for the period 2006-2007. In any event,
this issue is not before the Larger Bench. Hence, the view taken by the
Tribunal in the case of Endurance Technologies Pvt. Ltd. (supra) is correct.”

     Respectfully
following the above decision of the Hon’ble High Court and the Coordinate Bench
of the Tribunal, we hold that the appellants are the receiver of the services
rendered by the third party job workers and the said services have been used
directly or indirectly, in or in relation to the manufacture of motor vehicles
chassis. Hence, the appellants are entitled to credit of service tax paid on
the input service. The definition of input services is very clear; that the
receiver of service does not mean receiver of inputs. The CENVAT Credit Rules,
2004 itself recognise the distinction between input and input services
according to which it has been made mandatory to receive inputs in the factory
of production to avail CENVAT credit on inputs. There is no condition to avail
CENVAT credit on input services that services availed should be received by the
service receiver/ manufacturer in the registered premises. In the case on hand,
the goods, on which services were provided, instead of coming to the appellants
factory were dispatched to another job workers of the appellants. As already
emphasised, definition of input services does not specify that the services
should be received in the factory of the manufacturer. The condition to avail
CENVAT credit on input service is that it should be used in or in relation to
the manufacture of final products. In this case, the service was used in the
manufacture of motor vehicle chassis directly or indirectly. It is also a fact
that the service charge paid by the appellants to the job worker is included in
the assessable value of the final products. 

In view of the above observations, the appeal was allowed
with consequential relief.

Conclusion

It is felt that the ratio of the Kolkata
Tribunal ruling discussed above would be relevant for deciding similar matters
under litigation.

Analysis of Input Tax Credit (Revised Provisions in the Act and Draft ITC Rules)

Introduction:

The Central GST Act, Union Territory GST Act, Integrated GST
Act and GST Compensation Act passed by the Central Government and received
presidential assent on 29th March 2017 contain several changes vis a
vis the provisions contained in the draft Model GST Law which was released in
November 2016 (‘Earlier Draft Law’). Further various draft rules have also come
in public domain recently which include rules relating to ITC as well. In the
April 2017 issue of the BCAJ, the provisions relating to ITC contained in
Earlier Draft Law were discussed. The objective of this Article is to highlight
the changes in the ITC related provisions contained in the Earlier Draft Law
and in the enacted law (Revised Law) and also to discuss the draft rules
dealing with ITC.

I.    Changes in the Earlier Draft Law and Revised
Law

1.   Non- Payment of Value of Supply along with
Taxes to Supplier of Goods/Services.

      Earlier Draft Law provided that, where the
recipient fails to pay to the supplier of services, the amount towards the
value of supply of services along with tax payable thereon within a period of 3
months from the date of issue of invoice by the supplier, an amount equal to
the Input Tax Credit (ITC) availed by the recipient shall be added to his
output tax liability, along with interest thereon.

      Under the Revised Law provisions, this
time limit has been extended from 3 months to 180 days. The scope of provision
is expanded to cover not only the inward supply of services, but also inward
supply of goods. It’s further provided that, recipient shall be re-entitled to
avail the credit of such input tax on payment of amount towards the value of supply
of goods or services along with tax payable thereon. However, the recipient
shall not be entitled to re-claim the amount paid towards interest.

2.   Meaning of “Exempt Supply” for the purpose of
Computation of goods/services used partly or fully for the purpose of exempt
supply.

      Under the Earlier Draft Law, the term
“Exempt Supply” included (i) supply of goods/services not taxable under the Act
(ii) supply of goods/services which attract Nil rate of tax and (iii) supply of
goods/service exempted under the Act. However, “exempt supply” for the purpose
of ascertaining quantum of ineligible ITC also included the supplies on which
supplier was not liable to pay tax due to reverse charge mechanism.

      Under the Revised Law, the definition of
exempt supply has remained the same. However, besides supplies covered under
RCM, it has now been explicitly provided that, such ‘exempt supply’ shall also
include transactions in securities, sale of land and sale of building (except
activity covered as deemed supply of service under Para 5(b) of Schedule II),
although in terms of Revised Law, they are neither regarded as
goods/services. 

3.   Non- Reversal of 50% ITC in case of banking
company or Financial Institution / Non-Banking Financial institution for
supplies made between ‘distinct persons’

      The Revised law, provides that, although
banking companies or financial institutions or NBFCs, engaged in supplying
services by way of accepting deposits, extending loans or advances has availed
the option of availing only 50% of the ITC every month, such restrictions shall
not apply to tax paid on supplies made by one registered person to another
registered person having same PAN. (i.e. distinct persons covered u/s. 25(4)
& 25(5)). This is a welcome provision.

4.   Rent-a-cab, life insurance and health
insurance services – the scope of Negative List of ITC reduced.

      As regards rent-a-cab services, the
Earlier Draft Law provided that, ITC in respect of such services would be
allowed, where the Government notifies such services as obligatory for an
employer to provide its employee under any law. In the Revised Law, the ITC of
such services is permitted also in respect of cases where such services are
availed by the registered person for providing outward supplies of the same
category of goods or services or as the case may be mixed or composite
supplies.

5.   The ITC available to non-resident taxable
person is reduced:

      The Revised Law disentitles a non-resident
taxable person to avail ITC in respect of goods or services received by him
except on the goods imported by him.

6.   The credit in respect of telecommunication
towers and pipelines laid outside the factory premises will not be eligible for
ITC

      The Earlier Draft Law included pipelines
and telecommunication tower fixed to the earth by foundation a structural
support as “plant and machinery” and consequently the ITC in respect thereof
was allowed. In the Revised Law, they are specifically excluded from the
definition of “plant and machinery”. It therefore appears that, ITC of works
contract services or other goods or services for construction of
telecommunication towers and pipelines laid outside the factory premises would
not be an eligible credit.

II.   Model Draft Input Tax Rules.

      Although the Central GST Act and
Integrated GST Act has been enacted, the State GST Acts are yet to be enacted.
Besides the Rules discussed below are only draft rules and hence are subject to
change.

1.   Rule 1 – General Rule – The ITC u/s.
16(1) shall be available subject to prescribed conditions. General conditions
are contained in Rule 1. As per Rule 1 following are regarded as eligible duty
paying documents:

(a)  an invoice issued by the supplier of goods or
services or both in accordance with the provisions of section 31;

(b)  a debit note issued by a supplier in
accordance with the provisions of section 34;

(c)  a bill of entry;

(d)  an invoice issued in accordance with the
provisions of section 31(3)(f) (i.e. in case of inward supplies on which tax is
payable under RCM);

(e)  a document issued by an Input Service
Distributor in accordance with the provisions of Invoice Rule 7(1) ;

(f)   a document issued by an Input Service
Distributor, as prescribed in Rule 4(1)(g) – [clause (f) seems to be a
duplication of clause (e)]

      The aforesaid documents will qualify as
duty paying documents only if all the applicable particulars as prescribed in
Invoice rules are contained in the said documents and the relevant information
is furnished in GSTR-2. (However, it’s felt that, this condition is no longer
required especially in view of the fact that, authenticity of such invoices,
will no longer be an issue since these invoices will be ‘matched’ on GSTN
portal which already contains all the requisite particulars)

      No ITC shall be availed by a registered
person in respect of any tax that has been paid in pursuance of any order where
any demand has been raised on account of any fraud, willful misstatement or
suppression of facts.

2.   Rule 2 – Reversal of ITC in case of
non-payment of consideration

      Section 16(2) mandates reversal of ITC,
where the supplier fails to pay the amount towards value of the goods/services
and taxes thereon within 180 days of the date of issue of invoice. The details
of such supply and the amount of credit availed shall be furnished in form
GSTR-2 for the month immediately following the period of 180 days from the date
of issue of invoice. Such amount shall then be added to the output tax
liability of the registered person for the month in which the details are
furnished. The interest shall be payable on such amount from the date of
availing credit on such supplies till the date when the amount added to the
output tax liability. [Author is of the view that, there is no need for such
kind of provision in the Act or in the Rules. It’s only creating additional
compliance burden on the business community as also the burden of additional
interest. The law should not be drafted in a manner that would interfere with
the contractual relations between the parties. There will be various issues as
to non-payment of disputed amounts, retention amounts, the contracts allowing
the parties credit period beyond 180 days, settlement of accounts by way of
adjustment of debts, credit relating to deemed value (i.e. value of
non-monetary consideration or value as a result of deemed supply without
consideration, in which cases no monetary payment is involved)]

3.   Rule 3 – Claim of credit by a banking company
or a financial institution

Banking company /NBFC / Financial institutions which are in
the business of supplying services by way of accepting deposits, extending
loans or advances, and opting to pay 50% ITC, shall avail ITC using following
formula.

 

Total Credit

100

(Less)

Credit of tax paid on
inputs/input services that are used for non-business purpose*

12

(Less)

Credit attributable to
supplies included in the negative list supplies for the purpose of ITC u/s.
17(5).

16

 

Balance Credit

72

(Multiplied by)

50%

36

(Add)

ITC in respect of supplies
received from deemed distinct persons ( i.e. person under the same PAN)

24

 

Total eligible Credit

60

*There is however no guideline as to how to compute the
credit of tax paid attributable to non-business purpose, in case of banking and
financial institution. It’s not clear whether it includes only those
input/input services which are exclusively used for non-business purpose or
also those common credits which are used partly for non-business purpose.

4.   Rule 4 – Manner of distribution of ITC by
Input Service Distributor (ISD).

The draft rules require that, an ISD shall distribute the tax
credit in the same month in which it’s available for distribution. The ISD
shall separately distribute ineligible ITC as well as eligible ITC. The
particulars to be included in ISD invoice, are prescribed in sub-rule (1) of
rule invoice-7 and such invoice shall clearly indicate that it is issued only
for distribution of ITC. The credit on account of central tax, State tax, Union
territory tax and integrated tax shall be distributed separately. The manner of
distribution of ITC is similar to the one contained in current provisions of
rule 7 of the CENVAT credit Rules. The credit shall be distributed to all units
whether registered or not including the recipient(s) who are engaged in making
exempt supply, or are otherwise not registered for any reason. The ISD can
distribute the credit by issuing debit notes / credit notes. Any additional
amount of ITC on account of issuance of a debit note to an Input Service
Distributor by the supplier shall be distributed in the month in which the
debit note has been included in the return. However, any ITC required to be
reduced on account of issuance of a credit note to the Input Service
Distributor by the supplier shall be apportioned to each recipient in the same
ratio in which ITC contained in the original invoice was distributed. The ITC
shall be distributed under ISD mechanism as under:

a)   The ITC on account of integrated tax shall be
distributed as ITC of integrated tax to every recipient.

b)   If the recipient and ISD are located in the
same State, then the ITC on account of central tax and State tax shall be
distributed as ITC of central tax and State tax respectively.

c)   If the recipient and ISD are located in the
different State, then the ITC on account of central tax and State tax shall be
distributed as integrated tax and the amount to be so distributed shall be
equal to the aggregate of the amount of ITC of central tax and State tax that
qualifies for distribution to such recipient.

[It’s felt that, distribution of ineligible credit u/s.
177(5) of the Act, to the units by the ISD is an unwanted exercise of
distributing the credit by issuing a separate invoice and then reversing the
credit as the end of each of the units. This will lead to increased compliance.
Such ineligible credit are never added to the electronic credit ledger of any
registered persons and therefore, such credits shall be deducted and only
balance credit shall be allowed to be distributed to the units.]

5.   Rule 5 provides for conditions for the
purpose of availment of ITC for the purpose of section 18(1). Section 18(1)
covers the following four situations:

a)   a person applying for registration within 30
days from the date on which he becomes liable to pay tax.

b)   A person applying for voluntary registration.

c)   A registered person who switches from
composition levy to normal levy u/s. 9.

d)   A registered person who supplies good /
services which were exempt earlier and becomes taxable subsequently.

In case of (a) and (b), ITC of only inputs will be eligible,
whereas in case of (c) and (d) ITC of input as well as capital goods would
become admissible. In case of capital goods, tax paid on such goods shall be
reduced by 5 % per quarter or part thereof from the date of invoice shall be
available. A registered person shall in such case make a declaration in Form
GST ITC 01 within 30 days from the date of his becoming eligible to avail of
ITC u/s. 18(1), to the effect that he is eligible to avail ITC specifying
details of eligible stock and such details shall be duly certified by a
practicing chartered account or cost accountant if the aggregate value of claim
on account of central tax, State tax and integrated tax exceeds two lakh rupees. 

6.   Rule 6 provides for transfer of
credit on sale, merger, amalgamation, lease or transfer of a business for cases
covered u/s. 18(3). In the case of demerger, the ITC shall be apportioned in
the ratio of the value of assets of the new units as specified in the demerger
scheme. CA Certificate shall also be required the sale, merger, de-merger,
amalgamation, lease or transfer of business has been done with a specific
provision for transfer of liabilities. Transferor shall submit the details in
form GST ITC 02 and Transferee shall accept such details. Upon such acceptance
the un-utilised credit specified in FORM GST ITC-02 shall be credited to
electronic credit ledger of the transferee. 

7.   Rule 9 provides for reversal of ITC in
special circumstances mentioned in section 18(4) and section 29(5). Section
18(4) deals with a case where a registered person shifts from normal levy to
composition levy or where the goods /services supplied by him become wholly
exempt. Section 29(5) deals with cancellation of registration. In all these
cases, such person is required to determine ITC in respect of inputs held in
stock and inputs contained in semi-finished or finished goods held in stock and
on capital goods. Rule 9 provides for manner of computation as under:

(a)  For inputs – ITC shall be proportionate
on the basis of corresponding invoices on which credit had been availed by
registered taxable person. For determining the amount contained in
semi-finished or finished goods, the registered person shall be required to
maintain the record of input-output ratio. There is no proper guideline in the
rules, as to how to determine the same. In many cases, such records would not
be available to identify the corresponding invoices. In such cases, it is not
clear whether the assessee can use methods like FIFO/LIFO to identify such
invoices. However, the rule provides that, where the tax invoices related to
such inputs are not available, the registered person shall estimate the amount,
based on prevailing market price of goods on such date of happening of event
mentioned in section 18(4) or section 29(5).

(b)  For Capital Goods – The useful life
shall be regarded as 5 years and the ITC involved in the remaining useful life,
if any, shall be computed on pro-rata basis and will be accordingly reversed.
For example, if ITC pertaining to capital goods is ‘C”, and remaining useful
life is 12 month and 15 days, then ITC pertaining to 12 months shall be
reversed as C x 12 / 60                        
                        

Details of such amount shall be furnished in Form GST-ITC 03
[in cases covered u/s. 18(4)] or as the case may be in Form GSTR-10 [in cases
covered u/s. 29(5)]

8.   Rule 7 – Computation of ITC attributable to
Inputs and Input Services.

      As per section 17(1) where the goods /
services are used “partly for the purpose of business and partly for other
purposes”, the amount of credit shall be restricted to so much of the input
tax as is attributable to the purposes of business. As per section 17(2) where
the goods / services are used by the registered person “partly for effecting
taxable supplies (including zero-rated supplies) and partly for effecting
exempt supplies”, the amount of credit shall be restricted to so much of
the input tax as is attributable to the said taxable supplies including
zero-rated supplies. The manner of computation of ITC of input and input
services, for the purposes of section 17(1) and section 17 (2) is contained in
Rule 7 & Rule 8 of the Draft Input Tax Rules. Rule 7 covers a situation,
where input/input services are used exclusively for making taxable
supplies zero rated supplies or exempt supplies. Further, it appears that the
expression “partly for the purpose of business and partly for other purposes”
is wide enough to cover supplies which are exclusively used for the other than
purposes also. It’s not applicable to ITC in respect of capital goods. The
computation of such credit that is required to be reversed is as under:

Step – 1 Identification of ITC relating to input/input
services:

1

ITC in a tax period which is
exclusively relating to taxable supplies.

100% Eligible

2

ITC in a tax period which is
exclusively relating to zero rated supplies

100% Eligible

3

ITC in a tax period intended
to be used exclusively for purposes other than business

100% Ineligible

4

ITC in a tax period intended
to be used exclusively for effecting exempt supplies

100% Ineligible

5

ITC which is not eligible in
terms of negative list of supplies covered u/s. 17(5)

100% Ineligible

6

Bifurcation of common ITC
into eligible and ineligible credit

Refer below

Step – 2 Apportionment of Common ITC attributable to
input/ input services.

The Balance amount of ITC attributable to input/input
services after deducting the amounts mentioned above 1 to 5 shall be regarded
as “Common ITC” used partly for the purpose of business and partly for other
business as also the credit which is used partly for effecting taxable supplies
and partly for exempt supplies. Of the said amount the ineligible is computed
as under:

Ineligible common credit relating to exempt supplies =
Common ITC (multiplied by) aggregate value of “exempt supplies” during
the tax period (divided by) total turnover of the registered person
during the tax period.

Where the registered person does not have any turnover during
the said tax period or the aforesaid information is not available, the ratio of
exempt supplies to total turnover of the last tax period for which details of
such turnover are available, previous to the month for which calculation is to
be made, shall be considered. In such case, the reversal of amount shall be
calculated finally for the financial year before the due date for filing the
return for the month of September following the end of the financial year to
which such credit relates. In case of short reversal, the interest becomes
payable from 1st April of next financial year till the date of
reversal/payment. Similarly, excess amount of reversal, if any, shall be
claimed as credit.  [Author is of the
view that, levy of interest on such amount from April onward of the next
financial year is not correct. Even today, in service tax law, interest is
levied only if the excess ineligible credit is not paid up to June of the next
financial year.] 

Ineligible common credit relating to non-business purposes
= Common ITC x 5%

It may be noted that,
reversal of 5% of the common input credit is warranted only when there is use
of such common credit for non-business purpose. The rule does not presume that
in all cases, 5% of the common ITC is towards non-business purposes. [Readers
may compare this provision with the practice of voluntary disallowance of
certain expenses as non-business expenses in the Income-tax Act]

The remainder of the common credit shall be the eligible ITC
attributed to the purposes of business and for effecting taxable supplies
including zero rated supplies

The aforesaid computations shall be made separately for ITC
of central tax, State tax, UT tax and integrated tax.

9.   Rule 8 – Computation of ITC attributable to
capital goods.

Rule 8 provides for manner of determination of ITC in case of
capital goods and reversal thereof u/s. 17(1)/(2) of the Act as under:

1

ITC of capital goods in a tax period which is exclusively
relating to taxable supplies. (Note 1)

100% Eligible

2

ITC of capital goods in a tax period which is exclusively
relating to zero rated supplies (Note 1)

100%
Eligible

3

ITC of capital goods in a tax period intended to be used
exclusively for purposes other than business (Note 2)

100%
Ineligible

4

ITC of capital goods in a tax period intended to be used
exclusively for effecting exempt supplies. (Note 2)

100%
Ineligible

5

Bifurcation of common ITC into eligible and ineligible credit

Refer below

Note
1:.Where
capital goods covered under (1) and (2) above are subsequently used for common
purposes, from the total input tax attributable to such capital goods, 5% shall
be reduced for every quarter or part thereof for which they were used
exclusively for making taxable or zero rated supplies, and the balance ITC
shall be treated as common ITC for that tax period, and shall accordingly be
reversed, every month ( upto 5 years) as per the computation explained in Step
2 to 4 below.

Note
2: Where
capital goods covered in (3) and (4) above are subsequently used for common
purposes, from the total input tax attributable to such capital goods, 5% shall
be reduced for every quarter or part thereof for which they was used
exclusively for making non-business or exempted supplies, and the balance ITC
shall be re-credited to the electronic credit ledger and added to the common
ITC for that tax period.

It may be noted that, the rule does not provide for any
adjustment, where the capital goods earlier used exclusively for exempted or
non-business supplies are subsequently used exclusively for making taxable or
zero rated supplies and vice versa. The only adjustment which is
provided is when such capital goods are subsequently used for common purpose.

Step – 2 Apportionment of ITC attributable to other
Capital Goods used for common purpose.

The balance ITC attributable to other capital goods, shall be
treated as “Common ITC” and shall be credited to electronic ledger and the
useful life of such goods shall be taken as 5 years. It shall include, ITC
availed during the tax period in respect of such capital goods which are not
exclusively used for making taxable supply or zero rated supply or exempt
supply. The opening balance of the tax period shall also include, balance
credit (computed in the prescribed manner) in respect of capital goods received
earlier and used earlier for exclusively making exempt supply or taxable supply
or zero rated supply, and now intended to be used for making common supply. It
appears that, the remaining useful life of such already used capital goods
shall also be deemed as 5 years for the purpose of computation.

Step- 3 Computation of common ITC for a tax period.

Total common ITC permissible during tax period shall be
computed as under:

Total common ITC for a tax period = Total common ITC / 60.

Step-4 Computation of Common ITC attributable towards
exempt supplies.

Common ITC attributable towards exempt supplies =
Total common ITC for a tax period (multiplied by) aggregate value of
exempt supplies during tax period (divided by) total turnover of the
registered person during the tax period

Since the ITC attributable to common capital goods are
already credited to the electronic ledger (as a part of opening balance), the
monthly ineligible amount of such common credit computed in Step – 4 shall be
added to output tax liability of the person making the claim, every month along
with applicable interest, during the period of residual life of the concerned
capital goods.[The author is of the view that, the tax payer should be given
an option to pay the entire amount in the same tax period in which such assets
are used for common purpose. In that case, the question of making payment of
interest every month would not arise]

10. Rule 10 deals with conditions and
restrictions in respect of inputs and capital goods sent to the job-worker.
Every Principal taking ITC in respect of goods sent to job-worker shall send
such goods under the cover of a delivery challan and such challan shall be
reflected in Form GSTR -1. If the goods are not returned within prescribed time
u/s. 143, such challan shall be deemed to be invoice. Surprisingly, section
143 only allows the Principal to avail the ITC but does not deal with reversal
of ITC, and therefore author is of the view that, Rule 10 should not form part
of ITC Rules. 

Conclusion:

A cursory look at the provisions of the draft
input tax rules, gives a feeling that, there is still a scope for lot of
improvement in the same. The calculations dealing with reversal of input tax
credit contained in rule 7 and rule 8 are tedious and hence are not at all
assessee–friendly. Both the Act as well rules fail to address the situation as
to how the ITC in respect of supplies received by a person acting as a ‘Pure
agent’ of the receiver will be transferred to the actual recipient. Neither the
Act nor the rules, permit the ‘pure agent’ to avail the ITC and transfer the
same to the receiver under the cover of tax invoice. All these finer aspects
need to be looked into for the success of GST is largely dependent upon
seamless transfer of credits onwards from the principal supplier to end
customer through the chain of intermediary suppliers.

Section 271(1)(c) – Penalty imposed on account of omission to offer correct income and the wrongful deduction deleted on the ground that auditors also failed to report.

9.  Wadhwa Estate &
Developers India Pvt. Ltd. vs.  Asstt.
Commissioner of Income Tax (Mumbai)

Members: Saktijit Dey (J. M.) and Rajesh Kumar (A. M.)

ITA no.: 2158/Mum./2016

A.Y.: 2011–12. Date of Order: 24th February, 2017

Counsel for Assessee / Revenue:  Jitendra Jain /  Pooja Swaroop

FACTS

In respect of the year under appeal, the assessee had filed
return of income declaring loss of Rs. 2.49 lakh. On the basis of AIR
information available on record, the AO found mismatch in the interest income
as per books of account and as per Form–26AS. The assessee submitted that due
to over sight the assessee had offered interest income on fixed deposit at Rs.
18.90 lakh (on the basis of audited accounts) as against actual interest
received of Rs. 24.83 lakh. Further, the AO noticed that the assessee had
debited the sum of Rs. 1.82 lakh on account of fixed asset written–off. Since
the same was of capital in nature, it was disallowed u/s. 37(1) of the Act. The
assessee accepted the aforesaid decision of the AO and did not contest the
additions. On the basis of these two additions, the AO initiated proceedings
for imposition of penalty u/s. 271(1)(c). Rejecting the explanation of the
assessee, the AO imposed the penalty which was confirmed by the CIT(A). 

Before the Tribunal, the assessee contended that the lapse
was due to oversight on the part of the accountant.  It was also submitted that, though the
assessee’s accounts were subjected to tax audit as well as statutory audit, the
mistake was not pointed out by either of the auditors. Further, it was pointed
out that the AO, in the order passed, had not recorded his satisfaction whether
the assessee had concealed the particulars of its income or had furnished
inaccurate particulars of income. Also, in the notice issued u/s. 274 r/w
271(1)(c), the AO had not specified which limb of section 271(1)(c) was attracted
by striking–off one of them.

HELD

According to the Tribunal, the assessee’s explanation that
non–disclosure of two items of income was on account of omission due to
oversight was believable since the auditors had also failed to detect such
omission in their audit reports. 
Therefore, relying on the ratio laid down by the Supreme Court in Price
Water House Coopers Pvt. Ltd. vs. CIT (348 ITR 306), it was held that
imposition of penalty u/s. 271(1)(c) was not justified.

The Tribunal also agreed
with the assessee that neither the assessment order nor the notice issued u/s.
274 indicated the exact charge on the basis of which the AO intended to impose
penalty u/s. 271(1)(c). Therefore, in the light of the principles laid down by
the Supreme Court in Dilip N. Shroff vs. JCIT (291 ITR 519), the
Tribunal held that the AO having failed to record his satisfaction, while
initiating proceedings for imposition of penalty u/s. 271(1)(c) as to which
limb of the provisions of section 271(1)(c) is attracted, the order imposing
penalty was invalid.

Section 14A read with Rule 8D – disallowance should be computed taking into consideration only those shares which yielded dividend income.

8.  Kalyani Barter Private Limited
vs. ITO (Kolkata)

Members: Waseem Ahmed (A. M.) S.S.Viswanethra Ravi (J. M.)

I .T.A. No.: 824 / Kol / 2015. 

A.Y.: 2010-11. Date
of Order: 3rd March, 2017

Counsel for Assessee / Revenue: 
Subash Agarwal / Tanuj Neogi

FACTS

The assessee is engaged in the business of trading in shares
& securities.  During the year the
assessee had earned dividend income of Rs. 0.41 lakh. In his assessment order
passed u/s. 143(3) the AO disallowed the following sum u/s. 14A read with rule
8D:

– Direct expenses Rs. 3.08 lakh;

– Interest expenses Rs. 34.42 lakh; and

– Administrative expenses Rs. 2.4 lakh
(restricted to actual expense incurred).

On appeal, the CIT(A), relying on the decision of DCIT vs.
Gulshan Investment Company Ltd. (31 taxman.com 113) (Kol), deleted the
addition made by the AO under the provisions of rule 8D(2)(ii) and (iii) by
observing that the assessee is engaged in the business of shares trading and
the shares were classified as stock in trade in its books of accounts.
Therefore, according to him, the assessee was entitled for the deduction of
interest expenses and administrative expenses. 

Before the Tribunal the revenue relied on CBDTs Circular No.
5/2004 dated 11.02.2014, wherein it has been clarified and emphasized that
legislative intent behind introduction of section 14A is to allow only that
expenditure which is relatable to earning of income.  Therefore, the revenue contended that the
expenses, which are relatable to exempt income, are to be considered for
disallowance. Thus, according to the revenue, the disallowance of expenses was
required u/s. 14A of the Act even in relation to the investment held as stock
in trade.

The assessee on the other hand, without prejudice to his main
argument and as an alternative, contended that the disallowance u/s. 14A had
been wrongly worked out by the AO under Rule 8D by taking the entire value of
stock-in-trade, instead of taking the value of only those shares, which
actually yielded dividend income during the year under consideration

HELD

The Tribunal relying on the decision of the
Calcutta High Court in the case of Dhanuka & Sons vs. CIT (339 ITR 319)
held that the provisions of section 14A are applicable to even those
investments which are held as stock in trade. However, the Tribunal by relying
on the decision of the Coordinate Bench in the case of REI Agro Ltd. vs. Dy.
CIT (35 taxmann.com 404 /144 ITD 141), (affirmed by the Calcutta High Court
vide its order dated 19.04.2014 in ITAT No. 220 of 2013) agreed with the
assessee that the disallowance as per Rule 8D should be computed by taking into
consideration only those shares which have yielded dividend income in the year
under consideration.

Section 37(1) – Loss on account of export proceeds realised short in subsequent year allowed as deduction in current year.

7.  ACIT vs. Allied
Gems Corporation (Bombay)

Members: G.S. Pannu (A. M.) and Ram Lal Negi (J. M.)

ITA No.: 2502/Mum/2014

A.Y.: 2009-10. Date
of Order : 20th January, 2017

Counsel for Revenue / Assessee:  A. Ramachandran / Jignesh A. Shah

FACTS

The assessee was engaged in the business of dealing in cut
and polished diamonds and precious and semi precious stones. During the course
of assessment proceedings, the AO noticed that assessee had claimed a loss of
Rs. 49.64 lakh on account of short realisation of export proceeds, which was
outstanding as on 31.03.2009.  According
to the AO, though the said loss pertained to export proceeds receivable as on
31.03.2009, but the actual realiation of the export proceeds took place in the
subsequent financial year, corresponding to assessment year 2010-11.  Hence, such loss could not be allowed. 

On appeal, the CIT(A) noted that the AO did not doubt the
amount short realied from the debtors. 
Therefore, relying on the decision of the Mumbai Tribunal in the case Voltas
Limited vs. DCIT, 64 ITD 232, he agreed with the assessee that applying the
principle of prudence, claim for was allowable.

Before the Tribunal, the revenue contended that the said loss
had not accrued as on 31.03.2009, since as on that date, the corresponding
export receivables were not actually realised, and that such realization
happened in the subsequent year and, therefore, it was only at the time of
actual realisation that said loss could be accounted for allowed.

HELD

The Tribunal noted that the
assessee was maintaining its accounts on mercantile system and that the Revenue
also did not dispute the short realisation from debtors of Rs. 49.64
lakhs.  Therefore, referring to the
principle of prudence as emphasised in the Accounting Standard -1 notified u/s.
145(2), it agreed with the assessee that though the export proceeds was
realised in the subsequent period, the loss could be accounted for in the
instant year itself, applying the principle of prudence. The Tribunal also
referred to a decision of the Allahabad high court in the case of CIT vs.
U.B.S. Publishers and Distributors (147 ITR 144).  In the said case, the issue related to the
A.Y. 1967-68 (previous year ending on 31.05.1966). In the assessment
proceedings, it was found that assessee therein had claimed expenditure by way
of purchases of a sum of Rs. 6.39 lakh representing additional liability
towards foreign suppliers in respect of books imported on credit up to the end
of 31.05.1966. The said additional claim was based on account of devaluation of
Indian currency, which had taken place on 06.06.1966 i.e. after the close of
the accounting year.  According to the
High Court, since the actual figure of loss on account of devaluation was
available when the accounts for 31.05.1966 ending were finalised, the same was
an allowable deduction in assessment year 1967-68 itself.  Applying the ratio of the said decision, the
Tribunal dismissed the appeal of the revenue.

Section 2(42A) – The holding period of an asset should be computed from the date of allotment letter.

6. Anita D. Kanjani vs. ACIT (Mumbai)

Members : D. T. Garasia (JM) and Ashwani Taneja (AM)

ITA No. 2291/Mum/2015

A.Y.: 2011-12. Date
of Order: 13th February, 2017.

Counsel for assessee / revenue: Viraj Mehta & Nilesh
Patel / Omi Ningshen

FACTS 

During the previous year
relevant to the assessment year under consideration, the assessee sold an
office unit located in Mumbai vide agreement dated 11.3.2011.  The office unit was allotted to the assessee
on 11.4.2005, the agreement to sell was executed on 28.12.2007 and was
registered on 24.4.2008. The capital gain arising on transfer of this office
unit (flat) was returned by the assessee as long term capital gain. The
Assessing Officer (AO) relying on the decision of the Supreme Court in the case
of Suraj Lamps & Industries Ltd. vs. State of Haryana 304 ITR 1 (SC),
held that the flat transferred was a short term capital asset and therefore,
the gain arising on transfer was assessed by him as short term capital gain.

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
where two-fold arguments were made viz. that the holding period should be
computed with reference to the date of allotment of the property and
alternatively, the same should be computed with reference to date of execution
of the agreement and not the date of registration of the agreement because the
document on registration operates from the date of its execution.

HELD 

The Tribunal noted that the allotment letter mentioned the
identity of the property allotted, the consideration and the part payment made
by cheque before the date of allotment. 

The Tribunal held that issue before the Apex Court in the
case of Suraj Lamps & Industries Ltd. (supra) was different from the
issue in the present case.

It noted that the ratio of the following cases where this
issue has been examined, by various High Courts –

i)    CIT vs. A Suresh Rao 223 Taxman 228
(Kar.) – in this case, the court held that for the purposes of holding an
asset, it is not necessary that the assessee should be the owner of the asset
based upon a registration of conveyance conferring a title on him;

ii)   Madhu Kaul vs. CIT 363 ITR 54 (Punj. &
Har.) – in this case, the Court analysed various circulars and provisions
of the Act and held that on allotment of a flat and making first instalment the
assessee would be conferred with the right to hold a flat which was later
identified and possession delivered on a later date. The mere fact that the
possession was delivered later would not detract from the fact that the
assessee was conferred a right to hold the property on issuance of an allotment
letter. The payment of balance amount and delivery of possession are
consequential acts that relate back to and arise from the rights conferred by
the allotment letter upon the assessee;

iii)   Vinod Kumar Jain vs. CIT  344 ITR 501 (Punj. & Har.) – in this
case, the Court held that the holding period of the assessee starts from the
date of issuance of the allotment letter;

iv)  CIT vs. K. Ramakrishnan 363 ITR 59 (Delhi)
– in this case, it was held that the date of allotment is relevant for the
purpose of computing the holding period and not date of registration of
conveyance deed;

v)   CIT vs. S. R. Jeyashankar 373 ITR 120
(Mad.) – in this case also the Court held that the holding period shall be
computed from the date of allotment.

Following the ratio of the abovementioned decisions of
various High Courts, the Tribunal held that the holding period should be
computed from the date of issue of the allotment letter. Upon doing so, the
holding period becomes more than 36 months and consequently, the property sold
by the assessee would become long term capital asset and the gain arising on
transfer thereof would be long term capital gain.

The Tribunal decided the appeal in favor of the assessee.