Subscribe to the Bombay Chartered Accountant Journal Subscribe Now!

Month: May

[2015-TIOL-576-CESTAT-KOL] M/s AI Champdany Industries Ltd., M/s. Murlidhar Ratanlal Exports Ltd. vs. Commissioner of Central Excise, Kolkatta-IV

fiogf49gjkf0d
Pre-deposit mandatory even in respect of orders passed prior to 06-08-2014 and appeals filed thereafter.

Facts:
The Appeals have been filed after 06-08-2014 against the orders passed prior to the amendment to section 35F of the Central Excise Act, 1944 without making any pre-deposit.

Held:
In terms of the amended provisions of section 35F, the Tribunal is barred from entertaining any appeal unless pre-deposit as mentioned in section 35F is complied with accordingly the appeals are not maintainable and are dismissed.

Note: Readers may note a recent CONTRARY decision of the Kerala High Court in the case of M/s. Muthoot Finance Ltd. [2015-TIOL-632-HC-Kerala-ST] reported in BCAJ-April 2015 issue and the decision of the Andhra Pradesh High Court in the case of M/s. K. Rama Mohanarao & Co [2015-TIOL-511-HC-APCX].

levitra

2015-TIOL-739-HC-AP-ST] Commissioner of Customs, Central Excise and Service Tax vs. M/s Hyundai Motor India Engineering (P) Ltd.

fiogf49gjkf0d
Relevant date for filing the refund claim under Rule 5 of the CENVAT Credit Rules, 2004 is the date of receipt of payment and not the date when the services were provided.

Facts:
Appellant is a 100% export oriented unit (EOU) engaged in export of computer software and Information Technology enabled services. The refund claims filed were rejected by the lower authorities on the ground that the relevant date for calculating the time limit for grant of refund was the date of rendering services and thus the claims were time barred. However, the learned CESTAT accepted the refund claim and the revenue is in appeal.

Held:
The Hon’ble High Court relying on the decision of the Mumbai Tribunal in the case of CCE Pune-I vs. Eaton Industries P. Ltd 2011(22) S.T.R. 223 [2011-TIOL-166- CESTAT-MUM] held that the relevant date for calculating the time limit for grant of refund would be the date of receipt of consideration and not the date of services provided.

levitra

[2015] 37 STR 976 (Mad.) Shri Shanmugar Service vs. Commissioner of Central Excise (Appeals), Madurai

fiogf49gjkf0d
Though order of pre-deposit is complied belatedly but for the reason not attributable to gross negligence of the appellant, the appeal may be restored.

Facts:
The appellant paid full pre-deposit belatedly because of fault of former advocate and complied with payment of pre-deposit order belatedly and approached the Tribunal for restoration of appeals. Relying on various judicial pronouncements, the Tribunal dismissed the application on the grounds that it did not have power to entertain appeal in absence of compliance of pre-deposit order. In order to observe substantial justice, the High Court considered the present appeal.

Held:
Hon’ble High Court observed that the reason for non-compliance of order was attributable to the fault of the former advocate and the appellant was pursuing matter diligently from adjudication stage. Therefore, in view of appellant’s bonafides, though order of pre-deposit was complied belatedly, the appeal was allowed and the original appeal was restored before Tribunal to decide the case on merits.

levitra

[2015] 37 STR 970 (Guj.) Sanjayraj Hotels And Resorts Pvt. Ltd. vs. Union of India

fiogf49gjkf0d
CESTAT not to reject the application for condonation of delay without giving opportunity of being heard on merits specially when the petitioner shows sufficient cause for delay in filing appeal.

Facts:
The petitioners filed appeal before CESTAT with an application for condonation of delay of 175 days mentioning the reason for delay. The Tribunal rejected the application on the ground that they had not replied to Show Cause Notice nor did the petitioner’s representative participate in adjudication proceedings. When first appeal was filed, there was a delay of 15 days which showed that they had taken issue lightly. In second appeal, there was a delay of 175 days and the affidavit filed with application for condonation of delay was not sworn by the Director or authorised representative and therefore, the application for condonation of delay was rejected. Accordingly, present petition is filed.

Held:
The petitioners had shown sufficient cause for belated filing of appeal and should have been granted an opportunity to present their case on merits before CESTAT . Therefore, it was held that the Tribunal had committed an error. Accordingly, the present petition was allowed along with direction to CESTAT to decide the matter in accordance with law and on merits.

levitra

[2015] 37 STR 967 (AP) Rites Ltd. vs. Commissioner Of C. Ex. & Cus., Service tax

fiogf49gjkf0d
Once it is proved that service tax is not passed on to the customer, refund shall be granted. Departmental Officials shall provide appropriate advice to Government Organisations.

Facts:
The petitioner, a Government of India undertaking made payment of service tax on a non-taxable service inadvertently. Refund claim filed was partly disallowed as it was time barred and partly allowed on the condition of submission of proof to the effect that the liability was not passed on to the consumer.

It was contended that since it is a Government undertaking, the provisions of time limit u/s. 11B of the Central Excise Act, 1944 need not be applied.

The respondents contended that though the activity was not covered under service tax net, vide Circular dated 18- 12-2002, the activity was leviable to service tax. Further, since requisite documentary proof was not submitted and the claim was barred by limitation, the petitioner was not entitled to refund.

Held:
The departmental officials shall differentiate between the ordinary assessee and Government of India undertaking and not pass orders mechanically. When it was asserted that the liability was not passed on to the customer, department could have verified the said fact.

The Circular relied upon by the respondents was already withdrawn by CBEC vide Circular dated 13-05-2004 and they did not act bonafide to the extent that no reference of such withdrawal was made.

Accordingly, the writ petition was allowed and the respondents were directed to refund the amount with interest within four weeks from the date of this decision failing which, the official shall be personally held responsible for contempt of Court.

levitra

Non-resident -Taxability in India – Royalty – Section 9(1)(vi) – Income from supply of software embedded in hardware equipment or otherwise to customers in India – Does not amount to royalty –

fiogf49gjkf0d
CIT vs. Alcatel Lucent Canada; 372 ITR 476 (Del):

The assessee, a non-resident, manufactured, traded in and supplied equipment and services for global system for mobile cellular radio. The assessee supplied hardware and software to various entities in India. The software licensed by the assessee embodied the process required to control and manage the specific set of activities involved in the business use of the customers. The software also made available the process to its customers, who used it to carryout their business activities. The Assessing Officer held that the consideration for supply of the software amounted to royalty u/s. 9(1)(vi) of the Incometax Act, 1961. The Tribunal held that the payment did not constitute royalty and, therefore, section 9(1)(vi) was not attracted and for the same reasons, article 13(3) of the DTAA s between India and France, Canada, Germany, China were not attracted.

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

“The income of the assessee from supply of software embedded in the hardware equipment or otherwise to customers in India did not amount to royalty u/s. 9(1)(vi).”

levitra

Income – Accrual of – A. Y. 1996-97 – Mercantile system – Civil construction – Sums retained for payment after expiry of defect free period – Right to receive amount contingent upon there being no defects – Accrual only on receipt of amount after defect free period –

fiogf49gjkf0d
CIT vs. Shankar Constructions; 271 ITR 320(T&AP):

The assessee is a civil contractor. The contract provided for deduction of 7.5% of each bill. Out of this, 5% was payable on successful completion of the work and the balance 2.5% after the expiry of the defect-free period. For the A. Y. 1996-97 the assessee did not include the amount representing 2.5% of the bills. The Assessing Officer held that since the assessee was following the mercantile system of accounting, the amount of 2.5% of the bills could be said to have accrued to it, along with the amount paid under the bills and was liable to be treated as income for that year. The Tribunal held in favour of the assessee.

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

“The right to receive the amount was contingent upon there not being any defects in the work, during the stipulated period. It was then, and only then, that the amount could be said to have accrued to the assessee.”

levitra

Constitutional validity – Amendment made in section 80-IB(9) by adding an Explanation was not clarificatory, declaratory, curative or made “small repair” in the Act – On the contrary, it takes away the accrued and vested right of the Petitioner which had matured after the judgments of ITAT. Therefore, the Explanation added by the Finance (No.2) Act 2009 was a substantive law – Explanation added to section 80-IB(9) by the Finance (No.2) Act, of 2009 is clearly unconstitutional, violative of Arti<

fiogf49gjkf0d

Niko Resources Ltd. vs. UOI: [2015] 55 taxmann.com 455 (Guj):

The
Petitioner is a foreign company based in Canada and has set up a
project office in India with the permission of Reserve Bank of India.
The Petitioner has been claiming benefit of deduction of 100% of the
profits and gains from the production of mineral oil and natural gas
u/s. 80-IB(9) of the Income Tax Act, 1961, as it stood prior to the
amendment by the Finance (No.2) Act 2009. In these proceedings, the
constitutional validity of the amendment to sub-section (9) of section
80-IB and Explanation added to it under the Act by the Finance (No.2)
Act, 2009, has been challenged.

The disputed question was as to
whether the benefits of tax holiday of seven years was available on each
undertaking which has now been taken away by the amendment made in
section 80-IB(9) by adding on Explanation that provides that all blocks
licensed under a single contract shall be treated as a single
undertaking.

The Gujarat High Court held as under:

“i)
Arbitrarily, the 100% tax deduction benefit could not be withdrawn by
the Finance Minister or the legislature by amending section 80-IB(9) of
the Act retrospectively from an anterior date.

ii) The amendment
in such cases where already tax benefit had accrued and vested in the
assessee could not be taken away by giving retrospective amendment to
section 80-IB(9) which is nothing but a substantive provision inserted
by amendment and it can only operate prospectively and not
retrospectively.

iii) Explanation added to section 80-IB(9) by
Finance (No.2) Act, of 2009 is clearly unconstitutional, violative of
Article 14 of the Constitution of India and is liable to be struck
down.”

levitra

A. P. (DIR Series) Circular No. 121 dated 10th April, 2014

fiogf49gjkf0d
Trade Credits for Imports into India – Review of all-in-cost ceiling

This circular states that the present all-in-cost ceiling for trade credits, as mentioned below, will continue till 30th June, 2014: –

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

levitra

A. P. (DIR Series) Circular No. 120 dated 10th April, 2014

fiogf49gjkf0d
Rupee Drawing Arrangement – ‘Direct to Account’ Facility

This circular, subject to certain terms and conditions, now permits banks (called Partner Banks) in India to credit the proceeds of foreign inward remittances received under Rupee Drawing Arrangement (RDA) directly to the KYC compliant beneficiary bank accounts through electronic mode, such as, NEFT, IMPS, etc.

levitra

A. P. (DIR Series) Circular No. 119 dated 7th April, 2014

fiogf49gjkf0d
Foreign investment in India in Government Securities

Presently, resident individuals are allowed to book foreign exchange forward contracts, without production of underlying documents, up to a limit of US $ 100,000 on self-declaration basis, to hedge/ manage their actual/anticipated foreign exchange exposures.

This circular now permits all resident individuals, firms and companies, to book foreign exchange forward contracts, up to US $ 250,000 on the basis of a simple declaration (as per format annexed to this Circular) without any requirement of further documentation, to hedge/manage their actual or anticipated foreign exchange exposures.

levitra

A. P. (DIR Series) Circular No. 118 dated 7th April, 2014

fiogf49gjkf0d
Foreign investment in India in Government Securities

Presently, FII, QFI, long term investors and FPI, registered with SEBI, can invest in Government securities including T-Bills (sub-limit of US $ 5.50 billion) and dated Government Securities (sub-limit of US $ 10 billion) within the overall limit of US $ 30 billion.

This circular provides that FII, QFI, long term investors and FPI, registered with SEBI, can now invest in Government dated securities having residual maturity of 1 year and above and existing investments in T-bills and Government dated securities of less than 1 year residual maturity will be allowed to taper off on maturity/sale.

The revised position is as under: –

levitra

A. P. (DIR Series) Circular No. 117 dated 4th April, 2014

fiogf49gjkf0d
Foreign Exchange Management Act, 1999 (FEMA) Foreign Exchange (Compounding Proceedings) Rules, 2000 (the Rules) – Compounding of Contraventions under FEMA, 1999 This circular has expanded the list of offences that can be compounded by Regional Offices of RBI. The expanded list is as under: –

 

The Regional offices at Panaji and Kochi can compound the above offences provided the amount involved is less than Rs. 10,000,000. All other Regional Offices can compound the above offences without any monetary limit.

For compounding of any other offence application will have to be made, as is the present procedure, to Cell for Effective Implementation of FEMA (CEFA), Foreign Exchange Department, 5th floor, Amar Building, Sir P. M. Road, Fort, Mumbai 400001.

levitra

A. P. (DIR Series) Circular No. 115 dated 28th March, 2014

fiogf49gjkf0d
Merchanting Trade Transactions – Revised guidelines

This circular contains the revised guidelines with respect to Merchanting Trade Transactions. These guidelines will apply to merchanting trade transactions initiated after 17th January, 2014.

Merchanting traders must be genuine traders of goods and not mere financial intermediaries. Confirmed orders have to be received by them from the overseas buyers. Handling bank must satisfy themselves about the capabilities of the merchanting trader to perform the obligations under the order. The overall merchanting trade must result in reasonable profits to the merchanting trader.

The highlights of the said guidelines are as under: –

i) For a trade to be classified as merchanting trade the following conditions must be satisfied: –

a. Goods acquired must not enter the Domestic Tariff Area; and

b. The state of the goods must not undergo any transformation.

ii) Goods involved in the merchanting trade transactions (transaction) must be those that are permitted for exports / imports under the prevailing Foreign Trade Policy (FTP) of India, as on the date of shipment and all the rules, regulations and directions applicable to exports (except Export Declaration Form) and imports (except Bill of Entry), are complied with for the export leg and import leg respectively.

iii) The bank handling the transaction must be satisfied with the bonafides of the transactions.

iv) Both the legs of the transaction must be routed through the same bank.

v) The entire transaction must be completed within an overall period of nine months and there must not be any foreign exchange outlay beyond four months.

vi) The commencement date would be the date of shipment/export leg receipt/import leg payment, whichever is first. The completion date would be the date of shipment/export leg receipt/import leg payment, whichever is the last.

vii) Short-term credit either by way of suppliers’ credit or buyers’ credit will be available for merchanting trade transactions, to the extent not backed by advance remittance for the export lag, including the discounting of export leg LC by a bank, as in the case of import transactions.

viii) In case advance against the export leg is received by the merchanting trader, the bank must ensure that the same is earmarked for making payment for the respective import leg.

ix) Merchanting traders can make advance payment for the import leg on demand made by the overseas seller. In case where inward remittance from the overseas buyer is not received before the outward remittance to the overseas supplier, the bank can provide credit facility based on commercial judgement. However, where the advance payment for the import leg is more than US $ 200,000 per transaction, than advance must be given against bank guarantee/LC from an international bank of repute except in cases and to the extent where payment for export leg has been received in advance.

x) Letter of credit to the supplier is permitted against confirmed export order keeping in view the outlay involved and provided the completion of the transaction will happen within nine months.

xi) Payment for the import leg can also be made out of the balances in Exchange Earners Foreign Currency Account (EEFC) of the merchant trader.

xii) The handling bank must ensure one-to-one matching in case of each transaction and report defaults in any leg by the traders to the concerned Regional Office of RBI, on half yearly basis in the format as annexed to the circular, within 15 days from the close of each half year, i.e. June and December.

xiii) The names of defaulting merchanting traders, where outstandings reach 5% of their annual export earnings, will be caution-listed.

levitra

A. P. (DIR Series) Circular No. 114 dated 27th March, 2014

fiogf49gjkf0d
Risk Management and Inter Bank Dealings

Presently, exporters are allowed to hedge currency risk on the basis of a declaration of exposure up to an eligible limit which is the average of the last 3 financial years’ (April to March) actual export turnover or last year’s actual export turnover, whichever is higher. Similarly, importers are allowed to hedge up to an eligible limit which is 25% of the average of the last three financial years’ actual import turnover or last year’s actual import turnover, whichever is higher. All forward contracts booked under this facility by both exporters and importers have to be on fully deliverable basis. In case of cancellation, exchange gain, if any, cannot be passed on to the exporter/importer by the bank.

This circular provides that, exporters/importers will now be entitled to the gains/losses resulting from the cancellation of up to 75% of the contracts booked within the eligible limit (as mentioned above). Contracts booked in excess of 75% of the eligible limit will be on deliverable basis and cannot be cancelled. Hence, in the event of cancellation the exporter/ importer will have to bear the loss but will not be entitled to receive the gain.

levitra

A. P. (DIR Series) Circular No. 113 dated 26th March, 2014

fiogf49gjkf0d
External Commercial Borrowings (ECB) for Civil Aviation Sector

Presently, airlines Companies, subject to certain terms and conditions, could avail ECB for working capital up to 31st December, 2013. This circular now permits airlines Companies to raise ECB for working capital up to 31st March, 2015.

levitra

A. P. (DIR Series) Circular No. 112 dated 25th March, 2014

fiogf49gjkf0d
Notification No. FEMA.297/2014-RB dated 13th March 2014 – G.S.R. No. 189(E) dated 19th March 19, 2014

Foreign Portfolio Investor – investment under Portfolio Investment Scheme, Government and Corporate debt

The present scheme in respect of Portfolio Investment in India by FII & QFI has been replaced by a new scheme called the Foreign Portfolio Investment Scheme.

Important features of the said new scheme are as under: –

a. Portfolio investor registered in accordance with SEBI guidelines will now be called ‘Registered Foreign Portfolio Investor (RFPI)’. All existing portfolio investor classes, namely, FII and QFI registered with SEBI will be subsumed under RFPI. b. RFPI may purchase and sell shares and convertible debentures of Indian company through registered broker on recognized stock exchanges in India as well as purchases shares and convertible debentures which are offered to public in terms of relevant SEBI guidelines / regulations.

c. RFPI may sell shares or convertible debentures so acquired:

a) In open offer in accordance with the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011; or

b) In an open offer in accordance with the SEBI (Delisting of Equity shares) Regulations, 2009; or

c) Through buyback of shares by a listed Indian company in accordance with the SEBI (Buyback of securities) Regulations, 1998. d. RFPI may also acquire shares or convertible debentures: –

a) In any bid for, or acquisition of, securities in response to an offer for disinvestment of shares made by the Central Government or any State Government; or

b) In any transaction in securities pursuant to an agreement entered into with merchant banker in the process of market making or subscribing to unsubscribed portion of the issue in accordance with Chapter XB of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009.

e. Subject to applicable composite sectoral cap under FDI policy, RFPI investment will as under: –

a) The individual investment limits for RFPI will be below 10% of the total paid-up equity capital or 10% of the paid-up value of each series of convertible debentures issued by an Indian company; and

b) The aggregate investment limits for RFPI will be below 24% of the total paid-up equity capital or 24% of the paid-up value of each series of convertible debentures issued by an Indian company.

f. RFPI can open a Special Non-Resident Rupee (SNRR) account and a foreign currency account with a bank in India to transfer amounts from foreign currency account to SNRR account at the prevailing market rate for making genuine investments in securities. The bank can transfer repatriable proceeds (after payment of applicable taxes) from SNRR account to foreign currency account.

g. RFPI can invest in government securities and corporate debt subject to limits specified by the RBI and SEBI from time to time.

h. All investments by RFPI will be subject to the SEBI (FPI) Regulations 2014, as modified by SEBI /Government of India from time to time.

i. RFPI can trade in all exchange traded derivative contracts on the stock exchanges in India subject to the position limits as specified by SEBI from time to time.

j. RFPI can offer cash or foreign sovereign securities with AAA rating or corporate bonds or domestic Government Securities, as collateral to the recognized Stock Exchanges for their transactions in the cash as well as derivative segment of the market.

Any FII that holds a valid certificate of registration from SEBI will be deemed to be a RFPI till the expiry of the block of three years for which fees have been paid as per the Securities and Exchange Board of India (Foreign Institutional Investors) Regulations, 1995.

A QFI can continue to buy, sell or otherwise deal in securities subject to the SEBI (FPI) Regulations, 2014 for a period of one year from the date of commencement of these regulations, or until he obtains a certificate of registration as foreign portfolio investor, whichever is earlier.

All investments made by a FII/QFI in accordance with the regulations prior to registration as RFPI shall continue to be valid and taken into account for computation of aggregate limit.

A RFPI is required to report transactions to RBI as is presently being reported by FII in LEC Form.

levitra

Is It Fair Not To Exclude Personal Payments By Individuals/Hindu Undivided Families (for Any of Its Members) from TDS?

fiogf49gjkf0d
Introduction:

Provisions of Tax
Deduction at Source (TDS) contained in Chapter XVII-A of Income-tax Act,
1961 (“the Act”) impose a heavy burden on tax payers, especially
businessmen. Readers are aware of highly damaging consequences of
defaults in respect of contraventions of these provisions – viz. section
201, 40(a)(i), 40a(ia), 271-C, 272A, 276 B and so on. Having regard to
the complications in implementation and the harsh consequences of
default, law-makers in their wisdom have generally kept the common man
viz. individuals and Hindu Undivided Families (HUF) out of the
obligation to deduct tax. However, under certain circumstances, even
individuals and HUF’s are required to comply with these provisions.
These situations are:-

(a) payments of salaries

(b) payment to non-residents ; and

(c) if the individual/HUF’s business or profession was subject to tax audit u/s. 44AB under turnover criterion.

The unfairness:

Obligation
in respect of payment to non-residents is to some extent reasonable
since it entails the outflow of money from the country.

The Act
in certain sections also provides exception so that an individual/HUF,
though otherwise liable to deduct tax is not required to do so on
payments for personal purposes. Thus, s/s. (4) of section 194.C (payment
to contractors) exempts payments made exclusively for personal purpose.
(e.g., repairs/painting of the businessman’s residential house). So
also, the 3rd proviso to s/s. (1) of section 194.J (payments to
professionals) grants similar exemption. Hence, payments to lawyers,
architects, doctors for personal purposes by businessman will not
attract TDS provisions.

As against this, no such exemption is provided in respect of the following payments:-

Section 192 – Salaries (say salary payable to personal attendant for a patient/disabled person)

Section 194A- Interest other than interest on securities (say interest on housing loan taken from friends, relatives, etc.).

Section 194H- Commission or brokerage (say brokerage on sale/purchase of house/car/other assets) Section

194I – Rent for residential house, or rent for personal car/other assets.

There
appears to be no logical reason for such discrimination. Due to such
inconsistencies, the study and implementation of law also becomes
difficult.

Suggestion:

Similar exceptions should be provided in aforesaid sections as well.

levitra

Political Contributions by Companies-Delhi High Court Reminds Us of the Wide Prohibitory Law

fiogf49gjkf0d
Contributions from companies with more than 50% “foreign” holding prohibited

The Delhi High Court decision in the case of Association for Democratic Reforms vs. UOI ([2014] 43 Taxmann.com 443 (Del.)) is both a reminder and an eye opener, of certain very widely framed provisions of law originally of FERA times that continue to have impact. It is very timely too in this election season when many companies have given electoral contributions. Even more so considering the fact that the new section 182 of the Companies Act, 2013, has permitted a higher electoral contribution of 7.50% of profits as compared to 5% under the 1956 Act.

The Court has held that political parties/election candidates cannot accept foreign contributions – i.e., electoral contributions from an Indian company with more than 50% foreign holding, as so defined. The definition of what constitutes “foreign contribution” is so wide that it may bring numerous Indian listed and unlisted companies in its net. In short, acceptance of political contributions from certain Indian companies, whose number could be quite large, has been confirmed to be in violation of the law.

The decision deals with several issues, some of which arise out of defense offered by the political parties/Central Government who were the respondents. However, this article focusses on the core and important issue, which is, whether electoral contributions can be accepted by political parties from companies registered and operating in India but which have more than 50% foreign holding.

Misleading reports about the nature of decision and contribution from “foreign sources”

It is important to go into some details of certain facts of this case because several newspaper reports gave either incorrect facts or were misleading. The impression created was that contributions from “foreign sources” were received and these were held to be prohibited, without explaining how wide the term foreign sources was under the law. Foreign sources, as will be seen later, is defined in a wider manner than the literal meaning of the term suggests.

Some reports even said that a foreign company – Vedanta – gave the contributions. This, apart from being factually incorrect, again conveys that the decision has limited application. The impression conveyed is that it applies only to the rare situation when a political party accepts contributions from a foreign company.

Facts of the case

Here are, summarised and simplified, the facts as stated and the law as per the decision. Vedanta Resources plc is a company incorporated in England and Wales. It held majority/controlling stake in two companies registered in India – Sterlite Industries Limited and Sesa Goa Limited. Sterlite and Sesa Goa made electoral contributions to certain political parties. The question before the Court was whether the parties that accepted contributions violated the Foreign Contribution (Regulation) Act, 1976 (FCRA).

FCRA 1976 vs. FCRA 2010

At this juncture, it is important to note the law that the Court was concerned with was the FCRA 1976. The Court emphasised this and noted that the FCRA 1976 was replaced by the FCRA 2010. However, it can be seen that, on this aspect, the FCRA 2010 provisions are substantially similar to the FCRA 1976. Hence, I submit that the ratio of the Court’s decision ought to apply for the FCRA 2010 too.

What is “foreign contributions”?

The FCRA prohibits acceptance of “foreign contributions” by political parties/candidates. However, as was common with the laws introduced in the late 60s and mid 70s, they were very broadly framed and this led to a fairly complex definition, with one definition leading one to refer to another. The term “foreign contribution” is defined to mean receipt of certain things such as money, etc. from a “foreign source”. The term “foreign source” is defined to mean several entities including a “foreign company” and certain specified Indian companies. It is the definition of these two terms and, for the purposes of this article, the latter one with which we are concerned.

Contributions received from the following companies are also treated as contribution from “foreign sources”:-

“(vi) a company within the meaning of the Companies Act, 1956 (1 of 1956), if more than one-half of the nominal value of its share capital is held, either singly or in the aggregate, by one or more of the following, namely,

(a) the government of a foreign country or territory,

(b) the citizens of a foreign country or territory,

(c) the corporations incorporated in a foreign country or territory,

(d) the trusts, societies or other associations of individuals (whether incorporated or not), formed or registered in a foreign country or territory,”

It can be seen from the definition given above that the foreign sources includes a company registered in India in which more than 50% shares are held by certain specified foreign parties such as foreign corporations, foreign citizens, foreign trusts/societies, etc.

It was an undisputed fact that Sterlite and Sesa Goa were both (i) companies under the Companies Act, 1956 and (ii) more than one-half of their capital was held by Vedanta, a corporation incorporated in a foreign country. Hence, the inevitable conclusion was that the contributions received from Sterlite/ Sesa Goa was a contribution from a foreign source. The FCRA specifically prohibited the acceptance of foreign contributions.

Curiously, it was also noted that Anil Aggarwal, an Indian citizen, held more than 50% capital in Vedanta. Thus, in a sense, the ultimate holder was an Indian citizen. However, since the FCRA did not make any relaxation for such companies, the Court held that the FCRA prohibition applied.

Decision of court

The Court held that there was a violation of the FCRA. It finally observed, summarising the facts, law and ratio:

“72. It is not disputed by the respondents that more than one-half of the nominal value of the share-capital of Sterlite and Sesa is held by Vedanta. It has already been held by us in the preceding paragraph that Vedanta is a corporation incorporated in a foreign country or territory within the meaning of Section 2(e) (vi)(c) of the Foreign Contribution (Regulation) Act, 1976. Therefore, this leads to the irresistible conclusion that the present case is also squarely covered under Section 2(e)(vi)(c) of the Foreign Contribution (Regulation) Act, 1976.

73. For the reasons extensively highlighted in the preceding paragraphs, we have no hesitation in arriving at the view that prima-facie the acts of the respondents inter-se, as highlighted in the present petition, clearly fall foul of the ban imposed under the Foreign Contribution (Regulation) Act, 1976 as the donations accepted by the political parties from Sterlite and Sesa accrue from “Foreign Sources” within the meaning of law.”

The Court also directed the Central Government to inquire whether contributions from other similar placed companies have been received and take necessary action within six months. It stated:

“The second direction would concern the donations made to political parties by not only Sterlite and Sesa but other similarly situated companies/corporations. Respondents No.1 and 2 would relook and re- appraise the receipts of the political parties and would identify foreign contributions received by foreign sources as per law declared by us hereinabove and would take action as contemplated by law. The two directions shall be complied within a period of six months from date of receipt of certified copy of the present decision.”

FCRA 2010

The  provisions  of  the  FCRA  2010  are  substantially similar to those of the FCRA 1976, even though the phrasing  and  structure  is  a  little  different.  Political parties  continue  to  face  total  prohibition  from  ac- cepting “foreign contribution”. Foreign contribution continues to mean receipt of specified things from “foreign sources”. And, “foreign sources” continue to include companies in which the specified foreign entities  hold  more  than  50%  of  the  capital.  These specified  foreign  entities  include  foreign  corporations, foreign citizens, foreign trusts, etc. Thus, acceptance of such foreign contributions by political parties/candidates will continue to be a violation of law, as  the Delhi High Court has  confirmed.

Companies in which specified foreign persons hold more than  50%

The  implications  of  these  provisions/decisions  are very wide. There are numerous companies in India that  have  such  foreign  holding  of  more  than  50% of  their  capital.  There  are  subsidiaries  of  foreign companies in India. There are also companies that have  more  than  50%  FDI.  So  are  companies  that have more than 50% holdings by FII/PE/non-citizens. All such companies, private, public as well as listed companies  with  a  wide  public  shareholding  would be thus covered.  The contributions accepted from them in the past and future would be under a cloud.

Contribution through Electoral Trusts

A recent variant of making electoral contribution   is through Electoral Trusts. One advantage of such trusts is that such Trusts can pool donations from various sources/entities. Thereafter, the Electoral Trust, run usually by public spirited individuals, decide which party/candidate should get and how much of the amount collected. In such a case, the receiving political party may not know who is the ultimate donor from the pool and whether it is a foreign source or not. It is submitted that the wide definitions of terms used will result in the law being still violated if the contributors are such companies. In such a situation, the responsibility would lie on the Electoral Trust to ensure that the contributions received by it are not from a foreign source.

Responsibility of the contributing Company

The  FCRA  places  the  primary  responsibility  of complying  with  the  law  on  the  receiving  political party/election candidate. As is apparent, it may be difficult  for  it  to  verify  whether  the  contributing company  has  more  than  50%  foreign  holding  and they may ask the company to confirm/certify. Even otherwise, the question is whether the contributing company  would  be  violating  the  law  if  they  gave such contributions. While the law principally applies to  the  receiving  entity  and  certain  intermediaries in  the  process,  the  way  the  law  has  been  broadly framed, it is possible that depending on the facts, the officers of the company may be held liable. For example,  the  law  also  holds  that  anyone  “assisting”  any  political  party  in  accepting  such  foreign contribution as  liable  to  punishment.

Conclusion
The fear of the foreign hand – the driving force behind this law as originally framed – is relevant today too. However, in these changed times, con- tinuing such a blanket prohibition does not seem  to make sense.

A Government that we can trust!

fiogf49gjkf0d
By the time this issue reaches you, the elections of 2014 will be in their last phase and all of us will be waiting for the results, on 16th May. Over the past few months we have witnessed vitriolic campaigns, run by all the political parties. As in the past, emotive issues have been raised, though speeches have also been laced with the promise of development. While this election had many similarities with elections of the past, in some ways it was distinct and different. There was a large contingent of first-time voters, social media played a significant role, and there was the presence of a party which at least promised to represent the “Aam Aadmi.” These factors cumulatively may make a difference in the outcome.

Whichever government assumes power, (and one hopes that we will have a stable one), will have to meet the rising aspirations of the people. What should citizens expect from the new government? What we need is a government that “governs” and people feel that they are governed. To put it in one line we want a government in which the people of this country can place their trust.

When will such trust be created? That can happen when the government acts fairly, transparently and is accountable for its actions. These are the basic minimum attributes of governance, which have seen a steep fall in the last decade. How unfair is the administrative arm of the government will be apparent from the scathing comment of the Income-tax Appellate Tribunal in the Bharti Airtel’s case. The Tribunal observed “….If an action of the assessing officer is so blatantly unreasonable that such seasoned senior officers well versed with functioning of judicial forums, as the learned departmental representatives are, cannot even go through the convincing motions of defending the same before us, such unreasonable conduct of the assessing officer deserves to be scrutinised seriously. At a time when evolving societal pressures demand a greater degree of accountability in governance also, it does no good to the judicial institutions to watch such situations as helpless spectators. If it is indeed a case of frivolous addition, someone should be accountable for the resulting undue hardship to the taxpayer, rather than being allowed to walk away with a subtle, though easily discernible admission to the effect that, yes it was a frivolous addition ……. The paragraph aptly describes the conduct of the government. Those who do business expect the government of the day to act equitably, fairly. While no one denies the right of a sovereign country to collect tax, would it be wrong for businesses beyond Indian shores to expect that we will have a fair, stable and consistent tax regime?

The actions must not only be fair but they must be transparent. Let us take the legislative process as an example. The Direct Tax Code Bill, brought in with fanfare, has been hanging fire for over 4 years. Innumerable man-hours have been invested (or wasted?) in the stupendous effort of understanding, analysing the Bill and its versions to make representations thereon. After all these efforts, one feels frustrated if one does not know the outcome/response to the representation. Having received representations/suggestions, reasons as to why some of them are not accepted are never made public. While one appreciates that it is the government’s prerogative to legislate, it is equally important that the stakeholders for whom the legislation is made participate in the process and truly feel a part of it.

 Accountability is the most significant parameter of good governance. One can give innumerable illustrations of how citizens feel slighted when there is no politician or bureaucrat who takes responsibility for their actions. In the past, in our country taking responsibility for actions of one’s juniors was the norm. Such politicians/bureaucrats are now a forgotten breed, the South Korean premiere being an exception. Let us take the recent case of the deletion of a huge number of voters from the electoral rolls, with Maharashtra witnessing this problem on a very large scale. It is possible that the election commission with its limited machinery acted in an absolute bona fide manner. The problem possibly was on account of software glitches, callous data entry or equally careless data verification. Whatever be the reason, the right of franchise of an Indian citizen was lost. It may be virtually impossible to redress the same but the person responsible must be held accountable. It is only if this happens that events like this will not recur.

To ensure that the government of the day acts equitably, fairly transparently and to hold it accountable we must have a robust, consistent and responsive judicial system. We must see that justice is delivered and delivered quickly. Justice delayed is justice denied may sound a clichéd phrase, but it is true. We cannot have the situation where after more than a decade, a trial of a simple hit and run case of an eminent actor has to restart on account of a legal lacuna. Such delay virtually negates the value of any justice that may be delivered. The government that assumes office will have to address these problems, on a war footing.

Finally, if we are going to ensure that democracy survives and flourishes in our country , we the citizens and particularly the educated class will have to do their might. In the words of Alexander Woolcott, “I am tired of hearing it said that democracy doesn’t work. Of course it doesn’t work. We’re supposed to work it!” So, my fellow citizens, put your shoulder to the wheel of democracy and make it run!

levitra

Sexual Harassment Act-II

fiogf49gjkf0d
Synopsis

With the increasing number in women employment, their security is of paramount importance. The codification of the Sexual Harassment Act – II (‘The Act’) is a much-awaited development and a significant step towards creating awareness on the issue of workplace sexual harassment and ensuring women a safe and healthy work environment.

The author in this article has explained the key provisions of the Act, like applicability for employers to constitute an Internal Complaints Committee (ICC) to address sexual harassment complaints made by women workers, applicability of the Legal Compliance Committee where the ICC is not required, the manner in which the inquiry process is to be carried out by the ICC, etc.

Internal Complaints Committee

Every employer of a workplace, employing 10 or more workers must constitute an Internal Complaints Committee (ICC) to which aggrieved women employees can complain. Thus, if a workplace has less than 10 workers then it need not have an ICC. Note that it refers to 10 workers not 10 female workers. Hence, even if only 1 employee is a lady and the other 9 are males, an ICC is required. Further, the reference is to “workers” and not “employees”. The term workers has not been defined under the Act but one may presume it to be at par with the term “employee”. The Act is silent as to what happens when a workplace employs no women.

The constitution of the ICC should be as follows:

(a) A workplace must have an ICC for each office if the offices/administrative units are located at different places or at a divisional level.

(b) The ICC must have a minimum of 4 members of which at least half should be women.

• The Presiding Officer must always be a women employed at a Senior Level at the workplace. Hence, she must always be an internal senior employee. In case there is no senior level women employee then she can be nominated from any other workplace belonging to the same employer.

What happens if the employer has only 1 workplace and that has only 1 female employee who is not a senior level employee? Who then would be the Presiding Officer? Take a case of an office which has a receptionist as its only lady employee. Would she be the Presiding Officer even though she may be a junior level employee?

• Minimum 2 employees preferably committed to the cause of women/experience in social work or who have legal knowledge. Thus, these 2 members could be male or female.

• One external member from an NGO committed to the cause of women/familiar with issues relating to sexual harassment. Such person must have an expertise on issues relating to sexual harassment and may include a social worker with minimum 5 years’ experience with these issues or a person familiar with labour, service, civil or criminal law. Several organisations have nominated a Lady Lawyer or a Lady NGO worker with experience in this field. This person must always be an external person, i.e., not employed by the workplace. She could be a Consultant/Lawyer to the organisation also but not on its payroll.

• The employee members of the ICC should be replaced by new faces every 3 years.

Local Complaints Committee

For every District, a District Officer would be appointed under the Act. The District Magistrate/ Collector/Deputy Collector could act as such District Officer. Such District Officer would constitute a Local Complaints Committee (LCC) under the Act. The LCC would act as the redressal forum for all organisations not required to constitute an ICC, e.g., those which have less than 10 workers.

Complaint by Aggrieved Woman

Any aggrieved woman can lodge a written complaint of sexual harassment at a workplace with the ICC or the LCC as the case may be. The complaint must be lodged within 3 months from the incident or within 3 months from the last incident in case of a series of incidents. Hence, a stop gap has been provided for lodging the complaint. The Committee can provide a further 3 months’ extension for special cases. The complaint must be filed in 6 copies along with supporting documents and details of the witnesses, if any. The woman may chose to file a complaint under the IPC or any such Law with a Police Station. The Act does not take away this right of a lady.

The first response of the ICC/LCC before initiating an inquiry can be to propose a settlement between the respondent and the aggrieved woman through a conciliation process. However, the offer for such settlement must come from the aggrieved woman alone. Further, a monetary settlement cannot be made as the basis for the conciliation. A settlement would conclude the inquiry process under the Act.

One question which begs attention is must the respondent be a male only? If one reads the Act and the Rules, the definition of the respondent is only a person against whom a complaint is lodged. However, at several places the Rules refer to the preposition “he” for the respondent which tends to suggest that it must be a male alone. But there is no conclusive answer to this question. A similar position exists under the IPC. Recently, the Bombay High Court has raised a question “Can a woman be accused of outraging the modesty of another woman ..?”

Inquiry Process

If a settlement has not been reached/proposed, the Committee would make a thorough inquiry into the complaint against the respondent in the following manner:

(a) Forward a copy of the complaint to the respondent within 7 working days.

(b) Respondent to file his reply within 10 working days of the receipt of complaint by him.

(c) Committee to make a detailed inquiry as per the principles of natural justice. The inquiry must consider all facets. At least 3 members, including the Presiding Officer of the Committee must be present. It must complete its inquiry within 90 days.

(d) Where the Committee feels that there is a prima facie case for a criminal complaint, then it shall forward the same to the police for action under the IPC. Section 354 of the IPC deals with punishment for assault on a woman with an intent to outrage her modesty.

(e) No lawyer can represent either party before the Committee.

(f) During the inquiry the Committee may recommend that the employer transfers the aggrieved women, grants her leave up to 3 months or grants her any other relief. Other relief may include recommendations on restraining the respondent from reporting on the work performance of the aggrieved woman or supervising her academic activity in the case of an educational institution. Thus, the idea is to prevent victimisation as a result of the complaint.

(g) Based on its inquiry, the Committee must arrive at a finding whether or not the respondent is guilty. Accordingly, in cases where they feel that the allegation has been proved, the Committee must recommend to the employer or the District Officer to take action for sexual misconduct. The actions prescribed include:

• Writing a written apology
• Warning/reprimand/censure
• Withholding of promotion/increments • Termination of Service
• Undergoing Counseling sessions
• Carrying out community service – this is probably the first time that we are seeing community service as a means of reprimand. This is very common in the USA.

The Committee may also recommend to deduct such sum from his remuneration to be paid to the aggrieved woman. While determining the sum they will consider the mental suffering of the woman, loss in her career due to the incident, medical expenses incurred on physical/psychiatric treatment; respondent’s financial status.

(h)    The entire process from complaint to action, in- cluding the names and identity of the aggrieved woman, respondent, witnesses, are to be kept confidential from the public, press, media, etc. Even an RTI Query cannot be filed in respect of the same since the Act overrides the Right to Information Act, 2005. The penalty for making such information public is Rs. 5,000. However, justice meted out can be disclosed without revealing the names and identity of the aggrieved woman, respondent, witnesses, etc.

(i)    Either party may prefer an Appeal against the Committee’s Order before the Appellate Authority notified under the Industrial Employment (Standing Orders) Act, 1946.

Annual Report by ICC

Every ICC must prepare an Annual Report on their committee’s functioning and submit the same to the employer and the District Officer. It must be prepared every calendar year and should include the following:

(a)    Number of complaints received in that year

(b)    Number of complaints disposed off during that
year

(c)    Number of cases pending for more than 90 days

(d)    Number of workshops/awareness programmes
organised

(e)    Nature of action taken by the employer/District Officer.

Duties of Employer

Every employer has been given certain duties and obligations under the Act:

(a)    provide a safe working environment at the workplace and safety from the persons coming into contact at the workplace;

(b)    display at any prominent place in the workplace, the penal consequences of sexual harassments and the order constituting, the ICC;

(c)    organise workshops and awareness programmes at regular intervals for sensitising the employees with the provisions of the Act and orientation programmes for the members of the ICC- this   is an important role which employers can play. They must educate the employees as to what constitutes harassment and the consequences of the same. A standard operating policy or a manual would be very helpful and each and every employee (whether junior or senior) should be educated on the same. External help from Lawyers/NGOs may also be taken for this purpose.  It would be useful to lay down illustrations of real life situations which may be construed as harassment. Some organisations are implementing etiquette/gender sensitisation workshops/role play situations. HR Heads have a very important role to play in this respect.

(d)    provide necessary facilities to the ICC/LCC for dealing with the complaint and conducting an inquiry;

(e)    assist in securing the attendance of the respondent and the witnesses before the Committee;

(f)    make available such information to the Committee as it may require for a complaint;

(g)    provide assistance to the woman if she so chooses to file a complaint in relation to the offence under the IPC;

(h)    cause to initiate action, under the IPC against the perpetrator, or if the aggrieved woman so desires, where the perpetrator is not an em- ployee, in the workplace at which the incident of sexual harassment took place;

(i)    treat sexual harassment as a misconduct under the service rules and initiate action for such misconduct;

(j)    monitor the timely submission of the Annual Reports by the ICC and include in the same the number of case filed and their disposal. If no report is to be filed by an ICC then he must intimate this number to the District Officer.

Penalty on Employer

The employer would be penalised for his failing to comply with the provisions of the Act:

(a)    If he does not constitute an ICC although re- quired to do so;

(b)    Does not take action against a respondent on the basis of the recommendation of the ICC’s inquiry;

(c)    Contravenes any provisions of the Act.

The  first  penalty  is  a  fine  of  up  to  Rs.  50,000.  For a  second  conviction  of  the  same  offence,  he  shall be liable to twice the punishment meted out during the  first  offence.  Further,  it  could  also  lead  to  the cancellation  of  his  trade  licence/approval/registration  required  for  carrying  on  his  business.  Thus,  a repeat offence carries a very serious consequence.

Dwelling Place / House

The Act has one more interesting facet. It even applies to a dwelling place or a house. The definition of a workplace includes a dwelling place or a house. The employer is defined to include a person or a household who employs or benefits from the employment of a domestic worker. The worker could be for any time, for any nature of work, etc. Further, a domestic worker has been defined as a woman who is employed to do household work for remuneration (in cash/kind) whether directly or through a placement agency. She could  be temporary or permanent, part-time or full-time but excludes any member of the employer’s family. Interestingly, an employee is defined to include one who works without remuneration but a domestic worker must be one who works for a remuneration. In relation to a house, an aggrieved woman must be one who is employed at such house. Thus, in case of a workplace (which is not a house), any lady can allege harassment whether or not she is an employee. However, in case of a dwelling house, she must be an employee of that house. Hence, there are two major differences between a house as compared to a workplace other than a house.

All the provisions discussed above would apply even to a dwelling place/house which means that if a house employs 10 or more domestic workers/ servants (male or female) then it would have to constitute an ICC headed by a senior level lady servant and include one external NGO worker/ lawyer. So, if a household has a maid servant and 9 other male servants, drivers, cooks, gardeners, etc., it would have to form an ICC. One wonders whether domestic workers would be in a position to head and handle such an ICC? Is it feasible to ask them to conduct an inquiry, prepare reports and follow principles of natural justice?

Where the ICC/LCC feels that there is a prima facie case of sexual harassment against a domestic worker, then it shall forward the same to the police for action under the IPC.

False Complaints

One fear of this Act is that it could be misused and could go way of section 498A of the IPC (anti-dowry law which has been misused in some cases). Harsh penal provisions have been laid down as a deterrent for false complaints. In case of a false/malicious complaint by a lady, the ICC/LCC can take action against such complainant. The punishment could be on the same lines as that on the respondent    in case of a sexual harassment.

Conclusion

Let us hope that this Act achieves the true objectives for which it was enacted and does not end up becoming just another tick-the-box/compliance list. Men would be well advised to remember Shake- speare’s Henry IV, Part I: “The better part of Valour, is Discretion; in the which better part, I have saved my life”. Think before you act or repent in leisure.

PART D: GOOD GOVERNANCE

fiogf49gjkf0d
Quote from Shashi Tharoor, Minister of State for Human Resources Development:

“The RTI ACT has changed Governance in the country, yet UPA is given no credit for it.”

Quote From Arindam Chaudhari:

“Good governance is Narendra Modi’s promise. Good governance is surety not about pointing fingers randomly at others! It is about walking the talk. And here is a man who has walked the talk for 12 years and more, and shown how to win hearts and make a progressive State with good governance.”

levitra

Right to Information – School run by Society– Society covered under the Act. : Right to Information Act, 2005.

fiogf49gjkf0d
Shahada Taluka Co-op. Education Society vs. Kalyan Sajan Patil 2014 (301) E.L.T. 234 (Bom.)(HC)

It is the case of the petitioner, Shahada Taluka Co-operative Education Society Limited, that the said society has been registered under the provisions of the Cooperative Societies Act in the year 1952 i.e., prior to coming into existence in the Maharashtra Cooperative Societies Act and the said registration is continued inadvertently and later on in the year 1955, it came to be registered under the provisions of the Bombay Public Trust Act, 1950.

It is the case of the petitioner society that on 16.03.2011, the respondent No.1 herein submitted an application seeking information under the Right to Information Act, 2005 before the petitioner society in the capacity of Chairman of the Shahada Taluka Co-operative Education Society.

It is the contention of the petitioner society that, as the petitioner society is registered under the Societies Registration Act and under the Bombay Public Trust Act, as per the Right to Information Act the petitioner society does not fall under the definition of “public authority”, and hence the petitioner society is not duty bound to supply information sought by the respondent No.1.

The Court observed that it was not in dispute that the schools run by the petitioner society are receiving grant in aid from the State Government. The distinction which is sought to be made by the counsel for the petitioner is that the petitioner is the Chairman of the Shahada Taluka Cooperative Education Society and the information sought is in respect of the affairs of the society and not about the school which is receiving grant in aid directly in the account of the Head Master, and therefore, the petitioner is not obliged to give information sought for. It clearly appears that the Shahada Taluka Cooperative Education Society is established for imparting education. The sole purpose of forming such society is for establishing school and imparting education.

Therefore, the distinction which is tried to be made by the petitioner, as aforementioned, needs no consideration. Though the Information Officer is appointed, the petitioner, when called upon to furnish the information, is bound to supply the same to the respondent No.1.

By way of impugned order, only direction is issued to the petitioner to furnish the information as sought by the respondent no.1 within 15 days. Acceptance of the interpretation of the arguments of the petitioner that information sought is in respect of affairs of the society and not in respect of the school receiving grant in aid, would defeat the object of introducing the Right to Information Act, 2005. The Right to Information Act, 2005 has been introduced with laudable object and said cannot be defeated by accepting narrow interpretation as canvassed by the petitioner.

In that view of the matter, the contention of the petitioner was not accepted.

levitra

Registration – Document not compulsorily registrable: Registration Act, 1908.

fiogf49gjkf0d
Brahaman Swarnkar Samaj, Pali & Others vs. Medh Kshatriya, Swarnkar Samaj Vikas Samiti, Pali & Another AIR 2014 Raj. 37

The respondent No.1 – plaintiff filed a suit for cancellation of a trust deed, getting it declared void and for permanent injunction against the petitioner-defendants, inter alia, seeking relief for cancellation of the trust deed registered on 31- 05-1997 by the defendant Samaj and permanent injunction in the nature of non-interference in the right of the plaintiff to worship in the temples, which were subject matter of the trust deed. The suit was, inter alia, founded on an agreement dated 15-07-1968 said to have been executed qua the temples between the parties.

The said document dated 15-07-1968 was filed and the same was sought to be exhibited in evidence; petitioner No.1 filed the application, inter alia, with the averments that as in the document dated 15-07-1968, there is a version relating to the property being joint, the same is undervalued and requires registration u/s. 17 of the Registration Act, 1908 and as the document has been undervalued and is unregistered, the same cannot be led in evidence and cannot be marked as an exhibit; it was prayed that it be held that the document was inadmissible.

The Court observed that a bare reading of the document dated 15-07-1968 reveals that the parties therein have termed the same as writing between two temples and further goes on to state that the said both temples have been joint from the beginning and the same would remain so in future also.

The contents of said document, which start with an indication that both the temples are joint merely indicate the existing state of affairs, as on the date of executing the document, recites the status from before the execution of the document and as to what was to continue in future. As per the said document, the property i.e., the temples in question were joint from the beginning and would continue to remain so, does not bring into existence any new state of affairs different from what was existing. The document thereafter merely goes on to indicate that none of the two Samaj would claim exclusive possession and both would be entitled to spend money on the said temples, but would not claim reimbursement of the same.

For a document to be compulsorily registrable u/s. 17(1)(b) of the Act of 1908, it is necessary that the same should purport or operate to create, declare, assign, limit or extinguish whether in present or in future, any right, title or interest to or in the immovable property. So far as the creation of any right, title or interest as submitted by learned counsel for the petitioners is concerned, in view of the clear language of the document, which indicates a pre-existing right, it cannot be said that any right was ‘created’ by the said document in favour of any of the parties.

In so far as the ‘declaration’ as envisaged by section 17(1)(b) of the Act of 1908 is concerned, as the word ‘declare’ has been placed alongwith create, limit or extinguish and the said words imply a definite change of legal relation to the property by an expression of will embodied in the document referred to, the said word ‘declare’ has to be read ejusdem generis with the words create, assign or limit. For a document to fall within the ambit of 17(1)(b) of the Act of 1908 on its declaration, it must imply a declaration of will and not a mere statement of fact, as there is a clear distinction between a mere recital of a fact and something which in itself create a title.

Therefore, the document in question is not compulsorily registrable under provisions of section 17(1)(b) of the Act of 1908.

levitra

Negligence-Torts–Medical Practitioner– Liability to pay damages-It does not Transcend into criminal liability as to make him liable – Section 338 of the Indian Penal Code, (1860).

fiogf49gjkf0d
Dr. P.B. Desai vs. State of Maharashtra & Anr. AIR 2014 SC 795

In the instant case, a patient suffering from cancer was examined by the appellant, a renowned surgeon who advised an ‘Exploratory Laparotomy (Surgery)’, in order to ascertain whether the patient’s uterus could be removed in order to stop vaginal bleeding. The main allegation against the appellant was that he did not take personal care and attention by performing the operation himself. On the contrary, he did not ever bother to even remain present when another doctor started the surgical procedure and opened the abdomen. Moreover, when the other doctor, on opening of the abdomen, found that cancer was at a very advanced stage and it would not be possible to proceed because there was fluid and intestines were plastered, he called the appellant for advice. Even then the appellant did not examine the patient minutely. Instead, after seeing her from the entrance of the operating room, he advised him to close the abdomen. So such so, even after the formation of the fistula and the pathetic condition of the patient, the appellant never bothered to examine or look after her. It was thus alleged that the aforesaid acts of omission and commission amounted to professional misconduct as well as an offence punishable u/s. 338 of the I.P.C. Since there was no overt act on the part of the appellant, as the surgical procedure was performed by another doctor, the charge of abetment u/s. 109 of I.P.C. was also leveled against the appellant. Held, the decision of the appellant advising Exploratory Laparotomy was not an act of negligence, much less wanton negligence, and under the circumstances it was a plausible view which an expert like the appellant could have taken, keeping in view the deteriorating and worsening health of the patient. As a consequence, opening of the abdomen and performing the surgery cannot be treated as causing grievous hurt. It could have been only if the doctors would have faltered and acted in a rash and gross negligent manner in performing that procedure. At the same time, his act of omission, in not doing the surgery himself and remaining absent from the scene and neglecting the patient, even thereafter, when she was suffering the consequences of fistula, is an act of negligence and is definitely worthy of blame (though that is not the part of criminal charge). However, the omission is not of a kind which will give rise to criminal liability. No doubt, he did not do it himself, but it is not the case of the prosecution that another doctor did not do it deftly either. It is because of the condition of the patient, the surgery could not be completed, as on the opening of the abdomen, other complications were revealed. This would have happened in any case, irrespective of whether the abdomen was opened by another doctor or by the appellant himself. The appellant’s omission in not rendering complete and undivided legally owed duty to the patient and not performing the procedure himself has not made any difference. It was not the cause of the patient’s death which was undoubtedly because of the acute chronic cancer condition. The negligent conduct in the nature of omission of the appellant is not so gross as to entail criminal liability on the appellant u/s. 338 of the I.P.C. Thus, though the conduct of the appellant constituted not only professional misconduct for which adequate penalty has been meted out to him by the Medical Council, and the negligence on his part also amounts to actionable wrong in tort, it does not transcend into a criminal liability, and in no case makes him liable for offence u/s. 338, I.P.C. as the ingredients of that provision have not been satisfied.

If the patient has suffered because of negligent act/omission of the doctor, it undoubtedly gives the right to the patient to sue the doctor for damages. This would be a civil liability of the doctor under the law of tort/contract.

levitra

Market Value – Sale Deed-Stamp Duty-Circle rate by itself does not provide true market value of property: Stamp Act, 1899.

fiogf49gjkf0d
Amit Kumar Tyagi & Another vs. State of U.P. & Others AIR 2014 All 40

The issue raised in the petition was that the authorities have determined market value of the property by enhancing it by 25% without giving any reason.

The instrument was executed and registered on 13-08-2010 in respect of the house’s total area of 252.42 sq. mtrs. The proceedings u/s. 47-A(iv) of Indian Stamp Act, 1899 were initiated pursuant to a spot inspection made by the Additional District Magistrate, Finance and Revenue, Ghaziabad and his report dated 20-10-2010, stated that the value set forth in the instrument appears to be less than the minimum residential circle rate prescribed by the Collector and, therefore, the proceedings for determining market value should be initiated.

The same officer, who submitted the inspection report dated 20-10-2010 and at whose instance the proceedings were initiated, took upon himself to consider the matter finally u/s. 47-A(4) and passed order dated 23-02-2011. He held that 25% should be added to the circle rate prescribed at the relevant point of time and accordingly thereto, the market value of the property comes to Rs. 68,47,060/-, whereupon the the stamp duty payable is Rs. 4,79,300/- and since only Rs. 3,91,000/- has been paid, therefore, there was a deficiency of stamp of Rs. 88,300/-.

It is contended that on the one hand, the Assistant Collector suggested that the stamp duty was to be paid according to the prescribed circle rate/ market value of the commercial land, but while passing the impugned order he has increased the value by 25% from the circle rate for which no reason has been assigned at all. On this ground, the petitioners challenged the order.

The Hon’ble Court observed that it goes without saying that proceedings u/s. 47-A(4) can be initiated only when there exists a ground that the correct market value has not been set forth in the instrument. The determination of market value does not depend on the fancy, imagination and conjectures of the Collector or any other competent authority.

The Court further observed that under the provisions of the Act, 1899 stamp duty is payable on the market value of the property in transacted by the sale deed. It is also true that the market value does not mean the circle rate itself but it is only a guiding factor. The Collector has to determine the market value taking into account various factors. In the case in hand, the Additional Collector has simply referred to the circle rate and in a mechanical way, passed the impugned order enhancing the circle rate by 25%.

U/s. 47-A of the Act, the obligation is on the Collector to find out the correct market value of the property which is alleged to have not been mentioned in the instrument. For the purpose of determining the market value, no machinery is provided in statutory provisions. However, a procedure has now been provided vide U.P. Stamp (Valuation of Property) Rules, 1997 (hereinafter referred to as the “1997 Rules”) in accordance whereto the Collector would determine the market value.

The term “market value” has not been defined under the Act. However, there are some precedents laying down certain guidelines as to how and in what manner a market value would be determined. The consensus is that the market value of any property is the price which the property would fetch or would have fetched if sold in the open market, if sold by a willing seller, unaffected by the special need of a particular purchaser. It is interesting to note that the Act provides first for the determination of minimum value of the property and further says that if the market value of the property set forth in the instrument is less than the minimum value determined under the Act, then before registering the instrument the registering authority shall refer the instrument to Collector for determination of the market value of the property and the proper duty payable thereon. Therefore, a market value of the property in all cases cannot be said to be higher than the minimum value determined under the rules by the concerned authority, inasmuch as, it is only a kind of guideline provided to the authorities for the purpose of considering as to whether the proper stamp duty is being paid by setting forth the true market value of the property in question in the instrument. The entire object of legislature in the various provisions of the Act is to require the parties concerned to set forth the correct market value of the property at which the transaction has taken place so that appropriate duty in accordance with the Act is paid by them. The various provisions with respect to the minimum value etc. are only in aid and assistance of the authorities to find out the true amount of consideration on which the parties have entered into transaction so that the correct duty is collected therefrom.

It is thus clear that the circle rate by itself does not provide a true market value of the property, which is the subject matter of the instrument. It is only a guiding factor. In the present case, interestingly, the proceedings were initiated on the assumption that the stamp duty has not been paid according to the prevailing circle rate/market value treating the market value at par with the circle rate, but when the impugned order has been passed instead of confining to the circle rate, the Additional Collector has gone on to increase the value by 25% further to the prescribed circle rate and in doing so he has not given any reason. The proceedings in question show a complete nonapplication of mind on the part of the authorities. Such proceedings are nothing but amounting to a sheer harassment of public at large and in particular, the person who actually suffers due to such whimsical order passed by the authorities. A serious statutory duty has been cast upon the respondents but instead of doing justice with their statutory requirement, the authorities are passing unmindful, arbitrary orders, whereby not only the large public is being harassed but it also results in burdening the Courts though such litigation otherwise could have been avoided. The petition was allowed.

levitra

Corporate Social Responsibility – Companies Act, 2013:

fiogf49gjkf0d

A Paradigm Shift in Corporate Moral Responsibility (or Inner Transformation for Corporates)

Since the time provisions relating to Corporate Social Responsibility (CSR) have been announced, it is the most heated topics under discussion in the corporate world. It is, however not a totally new concept in India as the Securities and Exchange Board of India (SEBI) had ordered 100 largest companies listed on BSE and NSE to disclose their CSR activities and the amount spent on CSR. It is also to be noted that in parliament also, CSR was one of the most debated issues. The reasons for this may be political, but the fact that the issue caught the attention of our elected members indicates its significance.

Despite the problems that will be discussed in the following paragraphs the, initiative taken by the government is to be appreciated and we hope that the proper implementation of the same benefits the public at large. As the name suggests, CSR is a corporate’s responsibility and initiative towards upliftment of society and social welfare. In India, we look to the government and public authorities when it comes to spending towards social welfare. Internationally it is an accepted practice, but India is the first country to introduce statutory provisions with respect to CSR.

The Ministry of Corporate Affairs through the Companies Act 2013 (‘the Act’) has prescribed the provisions of CSR. Section 135 of the Act prescribes the basic provisions for the applicability and other requirements. CSR Rules 2014 contain the procedural part. Schedule VII to the Act prescribes list of activities on which amount can be spent to comply with the provisions of CSR. :

• Effective date

On 27th February 2014, the Ministry of Corporate Affairs (MCA) has notified section 135, Schedule VII of the Act and Companies (Corporate Social Responsibility Policy) Rules, 2014 (‘Rules’). As per the notification, CSR provisions will be effective from 1st April 2014.

• Applicability

Every company including its holding or subsidiary, and a foreign company having branch/project office in India, which fulfills any of the following criteria in any of the financial years will have to comply with the provisions of CSR.

Further, every company which does not meet the criteria for three consecutive financial years is not required to (a) constitute a CSR Committee and (b) comply with the CSR provisions till such time it meets the below criteria. Criteria are as under:

1. Net worth of Rs. 500 crore or more, or
2. Turnover of Rs. 1,000 crore or more, or
3. Net profit of Rs. 5 crore or more

‘Net profit’ is defined in the CSR Rules as tabulated below

B – For a Foreign company

‘Net profit’ for a foreign company means the net profit as per profit and loss account prepared in terms of Clause (a) of s/s. (1) of section 381 read with section 198 of the Companies Act, 2013.

Issues which may have to be clarified by MCA

• For the purpose of deciding the applicability of CSR provision, the net profit after tax would be considered. Net profit as per financials would normally be understood as profit after tax.

• Since only profit of overseas branch is mentioned, in our view, loss of overseas branch will not be added for determining net profit criteria.

• According to Section 135, the criteria for applicability of CSR are to be applied to each company. However, as per CSR Rules, it could be interpreted that if CSR is applicable to parent company then it would automatically apply to its subsidiary or vice versa even though those entities do not meet the criteria.

• For reducing the dividend received from Indian companies from Net profit, practical difficulty will arise in determining whether such companies are complying with the provisions of section 135 or not.

• CSR Contribution

Company covered under the CSR provisions will have to spend, in every financial year, at least 2% of ‘average net profits’ of last 3 financial years on CSR activities. In the event such a company fails to spend such amounts in pursuance to its CSR Policy, the Board is required to provide reasons for not spending the specified amounts in the Board’s annual report. The ‘average net profit’ shall be calculated in accordance with section 198 [i.e., calculation of net profit prescribed for the purpose of determining the maximum managerial remuneration]

Issue which may have to be clarified by MCA

Since ‘average net profit’ is to be computed as per section 198, the definition of ‘net profit’ as given in the CSR rules will not apply i.e., profit of overseas branch and dividend from other companies in India complying with CSR provisions will not be reduced for calculation of ‘average net profit’.

• Schedule VII of the Companies Act, 2013

CSR policy relates to activities to be undertaken by the Company as specified in Schedule VII to the Act and the expenditure thereon, excluding activities undertaken in pursuance of normal course of business of the Company. Following CSR activities are specified in Schedule VII.

1. Eradicating hunger, poverty and malnutrition, promoting preventive health care and sanitation and making available safe drinking water;

2. Promotion of education, including special education and employment enhancing vocational skills especially among children, women, elderly, and the differently abled and livelihood enhancement projects;

3. Promoting gender equality, empowering women, setting up homes and hostels for women and orphans; setting up old age homes, day care centres and such other facilities for senior citizens and measures for reducing inequalities faced by socially and economically backward groups;

4. Ensuring environmental sustainability, ecological balance, protection of flora and fauna, animal welfare, agroforestry, conservation of natural resources & maintaining quality of soil, air & water;

5. Protection of national heritage, art and culture including restoration of buildings and sites of historical importance and works of art; setting up public libraries; promotion and development of traditional arts and handicrafts;

6. Measures for the benefit of armed forces veterans, war widows and their dependents;

7. Training to promote sports [rural, nationally recognised sports, Paralympic & Olympic sports];

8. Contribution to the Prime Minister’s National Relief Fund or any other fund set up by the Central Government for socio-economic development and relief and welfare of the Schedule Castes, the Schedule Tribes, other backward classes, minorities and women;

9. Contribution or funds provided to technology incubators located within academic institutions which are approved by the Central Government;

10. Rural development projects.

• CSR Committee and the Board of Directors

1. The companies shall constitute a CSR Committee consisting of 3 or more directors including at least 1 independent director. However, unlisted public company or a private company or foreign company shall have its CSR Committee without independent director. A private company having only two directors on its Board shall constitute its CSR Committee with two such directors.

2. The key role of the CSR Committee is to formulate and recommend CSR policy to the Board of Directors, recommend the amount of expenditure to be incurred on the CSR and monitor the Corporate Social Responsibility Policy of the company.

3.    The Board of Directors shall approve the CSR policy after considering recommendations from CSR Committee and disclose contents in Directors Report forming part of the annual report and also place it on the company’s website. Further, the Board shall ensure that the activities as are included in CSR Policy of the company are under- taken by the company.

4.    The Company shall give preference to the local area and areas around it where it operates for spending the amount earmarked for CSR.

5.    The format for the annual report on CSR activi- ties to be included in the Board’s report is also given. This has to be certified by the Director and Chairman of CSR Committee. In case of foreign company, the authorised representative resident in India shall also certify.

•    Other key points as per the CSR Rules

1.    CSR expenditure includes all expenditure including contribution to corpus, or on projects or programs relating to CSR activities approved by the Board on the recommendation of its CSR Committee, but does not include any expenditure on an item not in conformity with Schedule VII of the Act.

2.    A company may carry out CSR activities, through registered trust or society or a company estab- lished by the company or its holding or subsidiary or associate company. The following 2 CONditions are prescribed

a.    If trust, society, or company is not established by the company, etc., it shall have an established track record of 3 years in undertaking CSR activities.

b.    Company has specified the project or programmes to be undertaken through these entities, the mo- dalities of utilisation of funds on such projects and programmes and the monitoring and reporting mechanism.

3.    A company may also collaborate with other companies for undertaking CSR activities in such a manner that the CSR Committees of respective companies are in a position to report separately on such activities.

4.    The CSR expenditure has to be only on projects/ programmes undertaken in India only.

5.    CSR projects or programmes that benefit only employees of the company or their families is not considered as CSR activities.

6.    Companies may build CSR capacities of their own personnel as well as those of their Implementing agencies through Institutions with established track records of at least 3 financial years but such expenditure shall not exceed five percent of total CSR expenditure of the company in one financial year.

7.    Contribution to any political parties directly or indirectly is not considered as CSR activity.

8.    The CSR policy of the company shall specify that the surplus arising out of the CSR activities shall not form part of the business profit of the com- pany.

•    Substantial changes compared to draft rules:

Significant changes in final rules/schedule has been made as compared to the draft CSR rules and Schedule VII. Notably amongst them are as under:

(i)    removal of 3 year block period concept,

(ii)    hitherto programs integrating business models with social and environmental priorities and processes in order to create shared value was covered,

(iii)    restricting expenses on personnel engaged in CSR to not more than 5% of CSR spend,

(iv)    removing contribution to fund set up by State Government for socio economic development and relief and welfare of the SC/ST/BC, minorities and women,

(v)    restricting the health care initiative to prevention

(vi)    expanding the applicability of Section 135 to Foreign Companies having branch/project office in India (though section 135 only refers to Companies (which as per definition will include companies incorporated in India only),

(vii)    removing the enabling clause in Schedule VII for notifying any other activities as part of CSR and substituting business social projects with rural social project.

•    Conclusion

There is no clarity on tax treatment of amount spent on CSR. In the draft CSR rules it was specified that tax treatment will be in accordance with the Income Tax Act as may be notified by CBDT. However in the Rules notified, this para is removed. Clarity is also required in respect of accounting treatment for the unspent amount on CSR especially in view of expert advisory  opinion  issued  by  ICAI  in  June  2013  which opined  that  provision  may  not  be  required  where there is no present obligation.

Key challenges for corporates would be where they are already spending money on the general welfare of the employees per se like housing, education, medical facilities etc. and now they will also have to spend on CSR as spending on employee welfare is not covered. So for such corporates this will be an additional financial outflow. To conclude, in India CSR would be successful only if it is implemented   in its true spirit. It should be noted that there are  no penal consequences for not spending on CSR in a particular year, however there is an indirect pressure on corporates to spend on CSR. We hope that CSR results in overall development of the society and general public at large and CSR becomes the game changer in terms of transforming India from  a developing country to a developed nation.

ACCEPTANCE OF DEPOSITS BY COMPANIES

fiogf49gjkf0d
1. Companies Act, 2013

The Companies Act, 2013 (Act) has been in vogue since August, 2013. Out of 470 sections, 98 sections have been notified since 12th September, 2013. Recently, vide notification dated 26th March,2014, 183 sections have been notified and they are in force from April 01,2014. Thus in all today 281 sections are in operation. The Ministry of Corporate Affairs have notified the Rules in matters covered by the sections which are in force and these Rules have come into force on 01-04-2014. This Act and Rules replace the Companies Act, 1956 (old Act) and the Rules made there under.

2. Acceptance of Deposits:
Chapter V of the Act, deals with Acceptance of Deposits by companies. It contains four sections viz. sections 73 to 76. Of which, section 73, 74(1) and 76 are operative from1st April,2014. The Companies (Acceptance of Deposits) Rules, 2014 (Rules) have also been notified and they have come into force on 01-04-2014. These Rules are framed in consultation with RBI. It may be noted that these sections and the Rules apply to Public and Private Companies.

3. Deposit:
Section 2(31) of the Act, defines “deposit” which includes any receipt of money by way of deposit or loan or in any other form by a company, but does not include such categories of amount received as provided in Rule 2(1)(c).

4. Exempted Deposits:
As per Rule 2(1)(c) the following amounts received by a company are not to be considered as Deposits under the above provisions.

(i) Receipt from the Central Government, or a State Government, (including from any other source whose repayment is guaranteed by the Central Government or a State Government), from a local authority , or from a statutory authority constituted under an Act of Parliament or a State Legislature;

(ii) Receipt from foreign Governments, foreign or international banks, multilateral financial institutions, foreign Governments owned development financial institutions, foreign export credit agencies, foreign collaborators, foreign bodies corporate and foreign citizens, foreign authorities or persons resident outside India subject to the provisions of FEMA Act and rules and regulations made there under;

(iii) Any loan or facility from any banking company, from a banking institution notified by the Central Government u/s. 51 of the Banking Regulation Act, 1949, or a notified Co-operative Bank.

(iv) Any loan or financial assistance from any Public Financial Institutions notified by the Central Government;

(v) Any amount received against issue of commercial paper or any other instruments issued in accordance with the guidelines or notification issued by RBI;

(vi) Intercorporate Deposits;

(vii) Any amount received and held pursuant to an offer made in accordance with the provisions of the Act towards subscription to any securities, including share application money or advance towards allotment of securities pending allotment, so long as such amount is appropriated only against the amount due on allotment of the securities applied for. It is also provided that such allotment should be made within 60 days of receipt or refunded within 15 days on the expiry of 60 days. Adjustment for any other purpose shall not be considered as refund. It may be noted that there was no such time limit for allotment of securities under the old Companies Act or Rules. The above time limit will apply to amounts received before 01-04-2014 and outstanding as on that date;

(viii) Receipt from a person who, at the time of the receipt of the amount, was a director of the company. He should give a declaration that he has deposited the amount out of his own funds. It may be noted that under the Old Act in the case of Private Companies, exemption was given to relative of a Director and to a Member of the Company. This exemption is now withdrawn;

(ix) Any amount raised by issue of secured bonds or debentures or bonds or debentures compulsorily convertible into shares of the company within five years. It may be noted that under the Old Act there was no such time limit for conversion of debentures within 5 years;

(x) Any amount received from an employee of the company not exceeding his annual salary under a contract of employment with the company in the nature of non-interest bearing security deposits. Under the Old Act there was no limit about the amount of Security Deposit;

(xi) Any non-interest bearing amount received or held in trust;

(xii) Any amount received in the course of, or for the purposes of, the business of the company,-

(a) as an advance for the supply of goods or provision of services accounted for in any manner whatsoever provided that such advance is appropriated against supply of goods or provision of services within a period of 365 five days. There was no such limit of 365 days under the Old Act.

(b) as advance, against consideration for sale of any property;

(c) as security deposit for the performance of the contract for supply of goods or provision of services;

(d) as advance received under long term projects for supply of capital goods.

(xiii) Any amount brought in by the promoters of the company by way of unsecured loan in pursuance of the stipulation of any lending financial institution or a bank subject to specified conditions.

5. Prohibition on Acceptance of Deposits from Public

(i) Section 73(1) provides that no company shall invite, accept or renew any deposit under this Act from the public except in the manner provided under this chapter.

(ii) Section 73(2) provides that a company may accept deposits from its members, subject to passing of a resolution in General Meeting, on such terms and conditions including the provision of security, if any, or the repayment of such deposits with interest as may be agreed upon between the company and its members on fulfillment of the following conditions:

(a) Issuance of a circular to its members including therein a statement showing the financial position of the company, the credit rating obtained, the total number of depositors and the amount due towards deposits in respect of any previous deposits accepted by the company and such other particulars in form DPT-1 pursuant to Rule 4.

(b) Filing a copy of the circular alongwith such statement with the ROC within 30 days before the date of issue of the circular.

(c) Depositing such sum which shall not be less than 15% of the amount of its deposits maturing during a financial year and the financial year next following and kept in a scheduled bank in a separate bank account to be called as “Deposit Repayment Reserve Account”. This reserve can be used for repayment of deposits only u/s. 73(5).

(d) providing such Deposit Insurance in such manner and to such extent as stated in Rule 5.

(e) Certifying that the company has not committed any default in the repayment of deposits accepted either before or after the commencement of this Act or payment of interest on such deposits ; and

(f) In the case of secured Deposits, the company should provide for the due repayment of the amount of deposit or the interest thereon including the creation of such charge on the property or assets of the company. The manner in which the security is to be created is stated in Rule 6. In the case of secured deposits, the company will have to appoint Trustees for Depositors as provided in Rule 7.

If in any case a company does not secure the deposits or secures such deposits partially, then, the deposits shall be termed as “unsecured deposits” and shall be so quoted in every circular, form, advertisement or in any document related in invitation or acceptance of deposits.

(iii)    Section 73(3) provides that every deposit ac- cepted by a company shall be repaid with interest in accordance with the terms and conditions of the agreement with the depositors.

(iv)    Section 73 (4) provides that if a  company fails to repay the deposit or part thereof or any interest thereon, the depositor concerned may apply to the Tribunal as provided in that section.

6.    Acceptance of Deposit from public by certain companies (eligible companies)

(i)    Section 76(1) provides that, a public company, having networth of Rs. 100/- crore or more or turn over of Rs. 500/- crore or more may accept deposits from public on the condition that the prior consent of the company in general meeting by a special resolution has been obtained and the said resolution has been filed with the ROC before making any invitation to the public for acceptance of deposit. Such company is defined as an ‘eligible company’ as per Rule 2 (1)(e) of  the  Rules. The said rule provides that an ‘eligible company’ which is accepting deposits u/s. 180 (1)( (c ) may accept deposits by means of an ordinary resolution, if the amount to be borrowed together with amount already borrowed does not exceed aggregate of paid up capital plus free reserve.

(ii)    Every such company accepting deposit shall be required to obtain rating (including its networth, liquidity and ability to pay its deposits on due date) from a recognised credit rating agency and the company should inform the public, the rating given to the company at the time of invitation of deposits from the public which ensures adequate safety and the rating shall be obtained for every year during the tenure of deposits;

(iii)    Further, in the case of a company accepting secured deposits from the public it shall, within thirty days of such acceptance, create a charge on its assets of an amount not less than the amount of deposits accepted in favour of the deposit holders in accordance with the Rule 6 of the Rules.

(iv)    Such eligible Company has also to comply with procedure listed in Para 5(II) above.

7.    Repayment of deposits, accepted before com- mencement of 2013 Act

(i)    Section 74(1) provides that in the case of any deposit accepted by a company before 01-04-2014, if the amount of such deposit or part thereof or any interest due thereon remains unpaid on the above date or becomes due at any time thereafter the company shall

(a)    file, within a period of 3 months from 01- 04-2014 or from the date on which such pay- ments are due, with the ROC a statement of all the deposits accepted by the company and sums remaining unpaid on the above date with the interest payable thereon alongwith the arrangement made for such repayment in form DPT-4, pursuant to Rule 20 of the Rules.

(b)    repay within 1 year i.e., by 31-03-2015 or from the date on which such repayments are due, whichever is earlier.

8.    Manner and extent of deposit insurance:

As stated above, Rule 5(1) provides that every com- pany  referred  to  in  Para  5  and  6  above  shall  enter into  a  contract  for  providing  deposit  insurance  at least  thirty  days  before  the  issue  of  circular  or  advertisement or   at least thirty days before the date of renewal, as the case may be. Further, it clarifies that  amount  as  specified  in  the  deposit  insurance contract  shall  be  deemed  to  be  amount  in  respect of both principal amount and interest due thereon.

Rule  5(2)  provides  that  the  deposit  insurance  contract shall specifically  provide that in case the company defaults  in repayment of  principal amount  and interest thereon,   the depositor shall be entitled to the repayment of principal amount of deposits and interest thereon by the insurer upto the aggregate monetary  ceiling  as  specified  in  the  contract.  In case of   any deposit and interest not exceeding Rs. 20,000, the deposit insurance contract shall provide for payment of   the full amount of the deposit and in case  of any deposit and interest thereon in excess of  Rs.  20,000,  the  deposit  insurance  contract  shall provide  for payment of an amount not less than Rs. 20,000  for  each  depositor.  Rule  5(3)  provides  that the insurance premium for such deposit insurance shall be paid by the company.

9.    Limit & Terms and  Conditions of acceptance of deposits by companies:

Rule 3 of the Rules provides for limits and other terms of deposits as under:

(i)    No company referred to in section 73(2) and eligible company shall accept or renew any deposit, whether secured or unsecured, which is repayable on demand or upon receiving a notice within a period of less than 6 months or more than 36 months from the date of acceptance or renewal of such deposit:

However, that company may, for the purpose of meeting any of its short term requirements of funds, accept or renew such deposits for repayment earlier than 6 months from the date of deposit or renewal subject to the conditions that-

(a)    such deposit shall not exceed 10% of the aggregate of the paid up share capital and free reserves of the company, and

(b)    such deposits are repayable not earlier than  3 months from the date of such deposits or renewal thereof.

(ii)    No company referred to in section 73(2) shall accept or  renew any deposit from its members, if the amount of such deposits together with the amount of other deposits outstanding as on the date of acceptance or renewal of such deposits exceeds 25% of the aggregate of the paid up share capital and free reserves of the company. For this purpose paid up share capital shall include preference share capital also.

(iii)    No eligible company shall accept or renew-

(a)    any deposit from its members, if the amount of such deposit together with the amount of deposits outstanding as on the date of acceptance or renewal of such deposits from members exceeds 10% of the aggregate of the paid-up share capital  and free reserves  of the company;

(b)    In the case of deposits from others, if the amount of such deposit together with the amount  of  such  other  deposits,   other  than the  deposit referred to Clause (a),  outstanding  on  the  date  of  acceptance   or  renewal exceed 25% of aggregate  of the paid-up share capital and  free  reserves  of  the  company.

(c)    In other words, an eligible company can accept deposits upto 35% of paid up share capital (including preference share capital) and free reserves subject to the sub-limit of 10% from members.

(iv)    No Government company eligible to accept deposit u/s. 76 shall accept or renew any deposit if the amount of such deposit together with the amount of other deposits outstanding as on the date of acceptance or renewal exceeds 35% of the aggregate of its paid-up share capital and free reserves of the company.

(v)    No company referred to in section 73(2) or any eligible company shall invite or accept or renew any deposit in any form carrying a rate of interest or pay brokerage thereon at the rate exceeding the maximum rate of interest or brokerage as prescribed by RBI for acceptance of deposits by NBFC.

For this purpose, it is provided that the person who is  authorised,  in  writing,  by  a   company  to  solicit deposits on its behalf and through whom deposits are  procured  shall only be entitled to the brokerage and payment of brokerage to any other person for procuring deposits shall be deemed to be in violation of this rule. It may be noted that Para 4 (7) of NBFC Acceptance of Public Deposits (Reserve Bank) Directions, 1998, that no NBFC shall pay more than 12.5%P.A. interest on public deposits.  Similarly,  Para 4(8) provides that the rate of Brokerage/Commission to brokers shall not exceed 2% of the deposit collected. Brokers  can  be  paid  actual  expenses  incurred  for this purpose but the same shall not exceed 0.5% of the  deposit so collected.

(vi)    The company shall not reserve to itself either directly or indirectly right to alter, to prejudice or disadvantage of the depositor any of the terms and conditions of the deposit, deposit trust deed and deposit insurance contract after circular or circular in the form of advertisement is issued and deposits are accepted.

(vii)    Deposits may be accepted in joint names, not exceeding 3, with or without any of the Clauses viz.“jointly”  “Either or Survivor” “Anyone or Survivor”.

10.    Application mandatory

As per Rule 10 of the Rules , no company shall accept, or renew any deposit, whether  secured or unsecured, unless an application, in such form   as specified by the company, is submitted by the intending depositor for the acceptance of such deposit. The form of application referred to above shall contain a declaration by the intending de- positor to the effect that the deposit is not being made out of any money borrowed by him from any other person.

11.    Furnishing of deposit receipts to depositors:

Rule  12  of  the  Rules  mandate  that  every  company shall,  on  the  acceptance  or  renewal  of  a  deposit, furnish  to  the  depositor  or  his  agent,  a  receipt for the amount received by the company, within a period of 21   days from the date of receipt of money or  realisation of  cheque or  date of  renewal.

The receipt referred to above shall be signed by  an officer of the company duly authorised by the Board in this behalf and shall state the date of deposit, the name and address of the depositor, the amount received by the company as deposit, the rate of interest payable thereon and the date on which the deposit is repayable.

12.    Maintenance of liquid assets and creation of deposit repayment reserve account:

As per Rule 13 of the Rules, every company referred to in section 73(2) and every eligible company shall, on  or  before  30th  April  of  each  year,  deposit  the sum  not  less  than  15%  as  specified  in  Para  5  (ii)  (c) above  with  any  scheduled  bank  and  the  amount so deposited shall not   be utilised for any purpose other  than   for  the  repayment of  deposits:

Further, it also mandates that the amount remaining deposited  shall  not  at  any  time  fall  below  15  %   of the  amount  of  deposits  maturing,  until  the  end  of the current financial year and the next financial year.

13.    Registers of deposits:

As per Rule 14 of the Rules, every company accepting deposits shall maintain at its registered office one or more separate registers for deposits accepted  or renewed, in which there shall be entered separately in the case of each depositor the particulars as listed in Rule 14.

The entries specified in this Rule shall be made within 7 days from the date of issuance of the receipt duly authenticated by a director or secretary of the company or by any other officer authorised by the Board for this purpose. The register referred to above shall be preserved in good order for a period of not less than eight years from the financial year in which the latest entry is made in the register.

14.    Premature repayment of deposits:

(i)    Rule 15 of the Rules provides that, if a company makes a repayment of deposits, on the request of the depositor, after the expiry of a period of six months from the date of such deposit but before the expiry of the period for which such deposit was accepted, the rate of interest payable on such deposit shall be reduced by 1 % from the rate which the company would have paid had the deposit been accepted for the period for which such deposit had actually run and the company shall not pay interest at any rate higher than the rate so reduced:

(ii)    However, nothing contained in this rule shall apply to the repayment of any deposit before the expiry of the period for which such deposit was accepted by the company, if such repayment is made solely for the purpose of (a) complying with the provisions of Rule 3; or (b) providing  war risk  or other related benefits to the personnel of the naval, military or air forces or to their families, on  an application made by the associations or societies formed by such personnel, during the period of emergency declared under Article 352 of the Constitution:

(iii)    If a company referred to in section 73(2) or any eligible company permits a depositor to renew his deposit, before the expiry of the period for which such deposit was accepted by the company, for availing of a higher rate of interest, the company shall pay interest to such depositor at the higher rate if such deposit is renewed in accordance with the other provisions of these rules and for a period longer than the unexpired period of the deposit.

(iv)    Further, the Rule provides, where the period for which the   deposit had run contains any part   of a year then, if such part is less than 6 months,     it shall be excluded and if such part is 6 months or more, it shall be reckoned as 1 year.

15.    Return of deposits to be filed with the Registrar:

Rule 16 of the Rules requires that the company shall on or before 30th June, every year, file with the ROC a return in Form DPT-3 along with the prescribed fee and furnish the information contained therein as on 31st March, of that year duly audited by the auditor of the company.

16.    Penal rate of interest:

Rule 17 of the Rules provides that every company shall pay a penal rate of interest of 18 % per annum for the overdue period in case of deposits, whether secured or unsecured, matured and claimed but remaining unpaid.

17.    Penalty of Default

Sections 74(2), 74(3) and 75 of the Act, which have not yet been brought into force, provide as under.

(i)    If the company fail to repay any existing deposit or interest due to depositors within the time allowed u/s. 74, the following penalties can be levied.

(a)    The company shall be punishable with minimum fine of Rs. 1 crore which may be extend to Rs. 10 crore. This will be over and above the amount of Deposit and interest in respect which default is made for repayment.

(b)    Every defaulting Officer shall be punishable with imprisonment which may extent to 7 years or with minimum fine of Rs. 25 lakh which may extend to Rs. 2 Crore or with both.

(ii)    It may be noted that in both the above cases, the amount of minimum fine has no relationship with the amount in respect of which the  default  in repayment of deposit or interest is made. It may so happen that the default may be in respect of deposit of Rs. 25 lakh, against which minimum fine payable by the company is Rs. 1 crore. To this extent, the above provision is very harsh.

(iii)    If it is found that there is default in repayment of outstanding Deposit or  interest u/s. 74  and it  is proved that such Deposit was accepted by the Company with intent to defraud the depositors or that the same was accepted for fraudulent purpose, every defaulting officer shall be personally responsible for any loss or damage that is incurred by the depositor. It may be noted that this penal action is without prejudice to the penalty leviable u/s. 74(3) as stated in (i) above. Further, the defaulting Officer will also be punishable u/s. 447 which provides for the following penalties.

(a)    Imprisonment for minimum period of 6 months which may extend to 10 years.

(b)    If the fraud involves Public interest, the mini- mum imprisonment can be for 3 years.

(c)    Minimum fine will be of amount involved in the fraud which may extend to 3 times the amount involved in the fraud.

(iv)    Rule 21 of the Rules provides that if any com- pany referred to in section 73(2) or any eligible company inviting deposits or any other person contravenes any provision of these rules for which no punishment is provided in the Act, the company and every officer of the company who is in default shall be punishable with fine which may extend to Rs. 25,000 and where the contravention is a continuing one, with a further fine which may extend to Rs. 500 for every day after the first day during which the contravention continues.

18.    To Sum Up:

The above provisions for acceptance of deposits by Companies are very stringent as compared to the provisions under the Old Act. Considering these requirements, it will be difficult for some companies to comply with these provisions and will have to find alternate source of funds. In particular these provisions are very harsh for private companies as exemption for deposits or loans taken from members has now been withdrawn. The exemption is now given to deposits or loans from directors only. Under the Old Act exemption was given to deposits or loans from relatives of directors of private companies. This is not given under the New Act.

It is true that these provisions are made in the New Act in view of the fact that the Government has noticed in recent years that some Companies are defaulting in refunding the amount of deposits and interest on the due dates. Hence, such stringent provisions can be justified in the interest of persons who invest their hard earned monies in such public deposits. The provisions for Deposit Insurance, Credit Rating, Creation of Deposit Repayment Reserve Account, Creation of Security, appointment of Trustees for secured deposits etc. are provisions made to safeguard the interest of small depositors. However, it appears that there is no justification to rope in Private Companies which get deposit or loan from their members or their relatives.

Moreover, the penal provisions under which minimum fine can be levied for  default in  repayment of deposits or interest on due date are very harsh. The said fine can be levied on the Company and defaulting officer irrespective of the amount of the deposit and interest in respect of which default may occur.

Related Party Transactions – A Potential for Abuse?

fiogf49gjkf0d
While auditing related party transactions, an auditor is usually confronted with questions such as:

“Why should auditing related party transactions be any different from like transactions that are entered into with unrelated parties?”

“How does one ensure completeness of identification of all related party relationships and transactions with such parties?”

“How does an auditor deal with situations where the related party is the only source of supply of goods or services for an enterprise?

Related party transactions can be legitimate and value-enhancing for a corporation but they can also serve as a vehicle for illegitimate expropriation of corporate value by management or controlling shareholders. Related party transactions do not merely pose the potential harm of direct expropriation of value from minority investors, but they also reinforce negative perception of the country’s capital markets as a whole, and lead to a general discounting of equity markets.

Generally, related party transactions are not regarded as mechanisms for fraud, and their presence need not indicate fraudulent financial reporting. It is important for the auditor to understand the benign nature of most related party transactions, the differentiating features between benign and fraudulent transactions, and the importance of evaluating a company’s related party transactions in light of its broader corporate governance structure. However, at the same time, the auditor should not discount the fact that, related party relationships may present a greater opportunity for collusion, concealment or manipulation.

Enterprises establish a matrix of related party entities/ structures for tax efficiencies, compliance with regulatory requirements, ring fencing promoter interests, protecting intellectual property rights, providing common services etc. At times, related parties may be the only source of supply of goods and services. It is imperative that management designs, implements and maintains adequate controls over related party relationships and transactions so that these are identified and appropriately accounted for and disclosed in accordance with the reporting framework. In their oversight role, those charged with governance are required to monitor how management discharges its responsibility for such controls.

Standard on Auditing (SA) 550 Revised – Related Parties deals with the auditor’s responsibilities regarding related party relationships and transactions when performing an audit of financial statements.

As per the standard, the objectives of the auditor are:

a) Irrespective of whether the applicable financial reporting framework establishes related party requirements, to obtain an understanding of related party relationships and transactions sufficient to be able:

i. To recognise fraud risk factors, if any, arising from related party relationships and transactions that are relevant to the identification and assessment of the risks of material misstatement due to fraud; and

ii. To conclude whether the financial statements, insofar as they are affected by those relationships and transactions:

– Achieve a true and fair presentation (for fair presentation frameworks); or

– Are not misleading (for compliance frameworks); and

(b) In addition, where the applicable financial reporting framework establishes related party requirements, to obtain sufficient appropriate audit evidence about whether related party relationships and transactions have been appropriately identified, accounted for and disclosed in the financial statements in accordance with the framework.

Now, let us understand the application of SA 550 considering the following two case studies.

Case study I- Fraudulent financial reporting

ABC limited (‘ABC’) was engaged in the business of selling electronic items to retail, individual customers. The Company operates through retail outlets across the country and recognises revenue on sale to the retail customer on transfer of ownership of the goods. During the financial year ended 31st March 20X0, the Company entered into an arrangement with XYZ Limited (‘XYZ’) to sell goods and the Company recognised revenue on delivery of goods at the premises of XYZ. XYZ would in turn sell goods to retail customers. XYZ is an entity in which a whole time director of ABC owns 51% of the share capital. XYZ would fall within the definition of related party as per Accounting Standard 18-Related Parties (AS-18) as a key managerial personnel of ABC is able to exercise significant influence over XYZ. Sales made to XYZ constitute 15% of ABC’s total sales for the year. Initially, the auditor’s procedures were restricted to verification of documents such as delivery challans and sales invoices and ensuring that appropriate disclosures have been made as per the requirements of the AS- 18. Further, management asserted that related party transactions were conducted on terms equivalent to those prevailing in an arm’s length transaction.

The facts that were not discovered by the audit team were as follows:

• The risks of ownership were not transferred from ABC Limited to XYZ Limited on delivery of goods as XYZ was required to pay ABC only on further sale of goods and collection of money from XYZ’s end customers.

• Further, XYZ had an unlimited right to unilaterally return unsold goods back to ABC.

• The prices at which the goods were sold to XYZ were substantially higher prices than those charged to other customers.

• ABC limited also had a retail outlet in close proximity of XYZ Limited.

• The auditor should have obtained sufficient appropriate audit evidence supporting management’s representation that the transactions with XYZ were at arm’s length.

This above facts came to light when the internal auditors identified that XYZ had returned goods in the subsequent financial year and such returns constituted a significant value and volume of sales pertaining to earlier periods.

Analysis with respect to SA 550

Auditors’ Responsibilities

1 Identification and assessment of risk of material misstatement associated with related party transactions

Historically, the Company had not entered into any such transactions with any related/unrelated party as the Company’s ordinary business constituted selling of goods to individual end-customers. The Company already had an outlet in close proximity of XYZ. The sales were undertaken at prices higher than those with normal customers. Hence, this transaction should have been considered as a significant related party transaction giving rise to significant risk of fraud while performing risk assessment procedures.

2. Response to the risk of material misstatement

– The auditor should have then appropriately responded to the identified risk by performing the following procedures:

a. Inspecting the underlying contract with XYZ and evaluating –

i. The business rationale (or lack thereof) of the transaction which may suggest the same has been entered into to engage in fraudulent financial reporting.

ii. Consistency of the terms of transactions with management’s representation

b. Obtaining evidence that the transactions have been appropriately discussed and approved.

c. Where applicable, reading the financial statements of the related party or other relevant financial information, if available, for evidence of accounting of transactions in the accounting records of related party.

d. Confirming the purpose, specific terms or amounts of the transactions with the related parties. (This procedure will be less effective where the auditor judges that the Company is likely to influence the response of the related party)

3.  Communication to those charged with governance:
    The auditor in the above case would need to promptly communicate to those charged with governance to arrive at a common understanding of the issues involved and the expected resolution. The auditor would also need to communicate the impact on the financial statements and any resultant impact on the auditor’s report.

4.  Independent Auditor’s report:
    The auditor would need consider the requirement to appropriately modify the main report considering the materiality of amounts involved. Further, the auditor would also have to appropriately modify the reporting relating to paragraph 4(xxi) of the Companies (Auditor’s Report) Order, 2003 (‘CARO’) report.

We would now evaluate another case study which involves a complex structure of related party transactions.

Case Study 2
Mr. P and Mrs. P, well-known fashion designers, incorporated ABC Ltd. in April 20X0 as a 100% export oriented company to be engaged in the business of manufacturing and export of garments. The initial capital contribution was Rs. 5 crore. Given their expertise, the couple were able to attract investment from other individual shareholders of Rs. 45 crore. The shareholding pattern of ABC comprised of promoter shareholding of 51% held by Mr. P and Mrs. P whereas the balance 49% was held by other non-related shareholders. The shareholder agreement with individual shareholders mandated appointment of 3 independent directors. This appointment was made with the objective of protecting the interests of the minority shareholders.

During the year 20X1, ABC Ltd. incorporated XYZ Ltd (‘XYZ’), a subsidiary in the United States of America (US) with 60% shareholding by ABC and the balance 40% held by Mr. P and Mrs. P. ABC entered into an exclusive arrangement with XYZ by virtue of which the entire production of ABC was to be sold to XYZ. The agreement stipulated that given the commitment to buy-out the entire production, the sales consideration to be paid by XYZ to ABC for goods purchased should be just sufficient for ABC to earn a margin of 10% on cost of goods sold. This arrangement was approved by all the directors (including the 3 independent directors) in the board meeting held on 1st April 20X1. The arrangement was also approved in an extra ordinary general meeting held on 15th April
20X1 wherein only Mr. P and Mrs. P were present as shareholders.

XYZ in turn sold the goods purchased from ABC at a margin of 5% to M/s. PQR & Co., a partnership firm formed by Mr. P and Mrs. P in the US.  M/s. PQR & Co. sold the goods in the retail market in the US at a margin of 40% of its cost. Against the aggregate purchases of Rs. 30 crore made by XYZ from ABC during the years 20X1-20X4, payments made by XYZ to ABC aggregated to only Rs. 10 crore. The balance payment of Rs. 20 crore could not be made by XYZ pending collection from PQR. The chief accountant at XYZ provided a confirmation to ABC for the year-end balance. PQR & Co. too provided a balance confirmation to XYZ for the amount due. The financial statements of ABC and XYZ have been audited by M/s. DEF & Associates (‘DEF’) since incorporation. Let us examine the factors which the auditors of ABC Ltd. would need to be cognizant of to comply with the requirements of SA 550

1.  While assessing the risk of material misstatement, the auditors would need to assess the isk associated with related party transactions as significant risk given the existence of a related party with dominant influence–Mr. P and Mrs. P were significant shareholders in ABC and XYZ.

2.  The auditors would need to understand the controls established by ABC and XYZ for identifying, accounting and disclosing related party relationships. DEF were the auditors for both ABC and XYZ. Assuming that Mr. P and Mrs. P would have disclosed their interest in the partnership firm, M/s. PQR & Co. in the notice of disclosure, DEF as auditors would need to ensure that the sales made by XYZ to PQR were disclosed as related party transactions in the financial statements of XYZ.

3.  The terms of the contract between ABC and XYZ were authorised by the board as well as by the shareholders by an ordinary resolution. Authorisation and approval alone, however, may not be sufficient in concluding whether risks of material misstatement due to fraud are absent  because authorisation and approval could have been ineffective, given that ABC was subject to the dominant influence of a related party.

4.  Given that the related party transaction involved a clear conflict of interest, the auditors of ABC would need to consider whether the independent directors had appropriately challenged the business rationale of the contract, for  e.g., by seeking advice from external professional advisors.

5.  The contract was approved by way of an ordinary resolution passed by Mr. P and Mrs. P in their capacity as shareholders. DEF would need to consider whether the contract should have been approved by members (other than Mr.P and Mrs.P) who were not interested in the contract and whether all facts were made available to these members to enable decision -making.

6.  DEF would need to evaluate the business rationale of the contract from the perspective of the related parties, XYZ and PQR to better understand the economic reality of the transaction. The subsidiary XYZ was used as a conduit to transfer goods to PQR at a price far lower than the market price so as to benefit the dominant shareholders. DEF would need to evaluate whether the transactions between the related parties were at arms’ length and complied with the benchmarking norms as per local transfer pricing regulations. Another important aspect was the disparity in the margins earned by PQR on the re-sale of goods to retail customers as against the margin earned by XYZ on
sale of goods to PQR. DEF in their capacity as auditors of PQR would need to be cognizant of this aspect in their risk assessment for related party transactions.

7.  In view of the non-collection of the amounts due from PQR, the ability of XYZ to settle the receivable of Rs. 20 crore was significantly impacted. The mere fact that XYZ had provided a confirmation of the balance due to ABC would not be sufficient evidence in support of the recoverability of the amount due. The auditor would need to evaluate the realisability of receivables in the books of ABC.

Concluding remarks

Considering that a large number of frauds in the corporate world involve related parties, governments and standard setting bodies have adopted stronger and proactive standards and laws to provide for guidance and monitoring of companies and auditors for accounting, disclosures and validation requirements of related party transactions.The Companies Act, 2013 has widened the scope of coverage in terms of the definition of related party and the nature of transactions covered and at the same time mandated approval of such transactions by the audit committee/board of directors/shareholders as applicable. The tax laws have also been amended to cover transactions with specified domestic related parties in addition to cross border transactions with overseas affiliates and has made it obligatory on the tax payer to substantiate that such transactions are at arms’ length.  With sweeping changes in legislation, the auditor would need to exercise heightened professional skepticism in identification of related party transactions, related risk of material misstatement (including fraud risk) and design adequate procedures to ensure compliance with the financial reporting and legal framework.

GapS in gaap ? Consolidated Financial Statements

fiogf49gjkf0d
Section 129(3) of the 2013 Act requires that a company having one or more subsidiaries will, in addition to Separate Financial Statements (SFS), prepare Consolidated Financial Statements (CFS). Hence, the 2013 Act requires all companies, including non-listed and private companies, having subsidiaries to prepare CFS.

The 2013 Act also provides the following:

(a) CFS will be prepared in the same form and manner as SFS of the parent company.

(b) The Central Government may provide for the consolidation of accounts of companies in such manner as may be prescribed.

(c) The requirements concerning preparation, adoption and audit of SFS will, mutatis mutandis, apply to CFS.

(d) An explanation to the section dealing with the preparation of CFS states that “for the purposes of this sub-section, the word subsidiary includes associate company and joint venture.”

While there is no change in section 129(3), Rule 6 under the Companies (Accounts) Rules, 2014 deals with the “Manner of consolidation of accounts.” It states that the consolidation of the financial statements of a company will be done in accordance with the provisions of Schedule III to the 2013 Act and the applicable accounting standards. The proviso to this rule states as below:

“Provided that in case of a company covered under s/s. (3) of section 129 which is not required to prepare consolidated financial statements under the Accounting Standards, it shall be sufficient if the company complies with provisions on consolidated financial statements provided in Schedule III of the Act.”

Given below is an overview of key requirements under the Schedule III concerning CFS:

(a) Where a company is required to prepare CFS, it will, mutatis mutandis, follow the requirements of this Schedule as applicable to a company in the preparation of the balance sheet and statement of profit and loss.

(b) In CFS, the following will be disclosed by way of additional information:

(i) In respect of each subsidiary, associate and joint venture, % of net assets as % of consolidated net assets.

(ii) In respect of each subsidiary, associate and joint venture, % share in profit or loss as % of consolidated profit or loss. Disclosures at (i) and (ii) are further sub-categorised into Indian and foreign subsidiaries, associates and joint ventures.

(iii) For minority interest in all subsidiaries, % of net assets and % share as in profit or loss as % of consolidated net assets and consolidated profit or loss, separately.

(c) All subsidiaries, associates and joint ventures (both Indian or foreign) will be covered under CFS.

(d) A company will disclose the list of subsidiaries, associates or joint ventures which have not been consolidated along with the reasons of nonconsolidation.

Practical issues and perspectives

AS 21 does not mandate a company to present CFS. Rather, it merely states that if a company presents CFS for complying with the requirements of any statute or otherwise, it should prepare and present CFS in accordance with AS 21. Keeping this in view and proviso to the Rule 6, can a company having subsidiary take a view that it need not prepare CFS?

This question is not relevant to listed companies, since the listing agreement requires listed companies with subsidiaries to prepare CFS. This question is therefore relevant from the perspective of a non-listed company.

Some argue that because neither AS 21 nor Schedule III mandates preparation of CFS, the rules have the effect of not requiring a CFS. Instead, a company should present a statement containing information, such as share in profit/ loss and net assets of each subsidiary, associate and joint ventures, as additional information in the Annual Report. In this view, the rules would override the 2013 Act. If it was indeed the intention not to require CFS, then it appears inconsistent with the requirement to present a statement containing information such as share in profit/loss and net assets of each of the component in the group.

Others argue that the requirement to prepare CFS is arising from the 2013 Act and the rules/ accounting standards cannot change that requirement. The proviso given in the rules is to deal with specific exemptions in AS 21 from consolidating certain subsidiaries which operate under severe long-term restrictions or are acquired and held exclusively with a view to its subsequent disposal in the near future. If this was indeed the intention, then the proviso appears to be poorly drafted, because the exemption should not have been for preparing CFS, but from excluding certain subsidiaries in the CFS.

In our view, this is an area where the MCA/ ICAI need to provide guidance/ clarification. Until such guidance/ clarifications are provided, the author’s preferred approach is to read the “proviso” mentioned above in a manner that rules do not override the 2013 Act. Hence, all companies having one or more subsidiary need to prepare CFS.

The subsequent issues are discussed on the assumption that the preferred view, i.e., all companies having one or more subsidiary need to prepare CFS, is finally accepted. If this is not the case, the views on subsequent issues may change.

IFRS exempts non-listed intermediate holding companies from preparing CFS if certain conditions are fulfilled. Is there any such exemption under the 2013 Act read with the rules?

Attention is invited to discussion on the previous issue regarding need to prepare CFS. As mentioned earlier, the preferred view is that all companies having one or more subsidiary need to prepare CFS. Under this view, there is no exemption for non-listed intermediate holding companies from preparing CFS. Hence, it requires all companies having one or more subsidiaries to prepare CFS.

Currently, the listing agreement permits companies to prepare and submit consolidated financial results/ financial statements in compliance with IFRS as issued by the IASB. For a company taking this option, there is no requirement to prepare CFS under Indian GAAP. Will this position continue under the 2013 Act?

Attention is invited to discussion on the earlier issue regarding the requirement to prepare CFS. As mentioned earlier, the preferred view is that CFS is required for all companies having one or more subsidiary. The rules are clear that consolidation of financial statements will be done in accordance with the provisions of Schedule III to the 2013 Act and the applicable accounting standards. Hence, the companies will have to mandatorily prepare Indian GAAP CFS, and may choose either to continue preparing IFRS CFS as additional information or discontinue preparing them.

An explanation to section 129(3) of the 2013 Act states that “for the purpose of this sub-section, the word subsidiary includes associate company and joint venture.” The meaning of this explanation is not clear. Does it mean that a company will need to prepare CFS even if it does not have any subsidiary but has an associate or joint venture?

The following two views seem possible on this matter:

(a) One view is that under the notified AS, the application of equity method/ proportionate consolidation to associate/joint ventures is required only when a company has subsidiaries and prepares CFS. Moreover, the rules clarify that CFS need to be prepared as per applicable accounting standards. Hence, the proponents of this view argue that that a company is not required to prepare CFS if it does not have a subsidiary but has an associate or joint venture.

b)The second view is that the above explanation requires associates/ joint ventures to be treated at par with subsidiary for deciding whether CFS needs to be prepared. Moreover, the 2013 Act decides the need to prepare CFS and the rules are relevant only for the manner of consolidating entities identified as subsidiaries, associates and joint ventures. Hence, CFS is prepared when the company has an associate or joint venture, even though it does not have any subsidiary. The associate and joint venture are accounted for using the equity/proportionate consolidation method in the CFS.

We understand that the MCA/ ICAI may provide an appropriate guidance on this issue in the due course. Until such guidance is provided from the author’s perspective, the second view appears to be more logical reading of the explanation. Hence, the preference is to apply the second view.

Section 129(4) read with Schedule III to the Act suggests that disclosure requirements of Schedule III,  mutatis mutandis, apply in the preparation of CFS. In contrast, explanation to paragraph 6 of AS 21 exempts disclosure of statutory information in the CFS. Will this exemption continue under the 2013 Act?

A company will need to give all disclosures required by Schedule III to the 2013 Act, including statutory information, in the CFS. To support this view, it may be argued that AS 21 (explanation to paragraph 6) had given exemption from disclosure of statutory information because the 1956 Companies Act did not require CFS. With the enactment of the 2013 Act, this position is likely to change. Also, the exemption in AS 21 is optional and therefore this should not be seen as a conflict between AS 21 and Schedule III. In other words, the statutory information required by Schedule III for SFS will also apply to CFS.

The disclosures given in the CFS will include information for parent, all subsidiaries (including foreign subsidiaries) and proportionate share for joint ventures. For associates accounted using equity method, disclosures will not apply. This ensures consistency with the manner in which investments in subsidiaries, joint ventures and associates are treated in CFS.

There would be some practical issues in implementing the above requirement. For example,
(a)  It is not clear as to how a company will give disclosures such as import, export, earnings and expenditure in foreign currency, for foreign subsidiaries and joint ventures. Let us assume that an Indian company has US subsidiary that buys and sells goods in USD. From CFS perspective, should the purchase/sale in US be treated as import/export of goods? Should such purchase/sale be presented as foreign currency earning/expenditure?

(b) How should a company deal with intra-group foreign currency denominated transactions which may get eliminated on consolidation? Let us assume that there are sale/purchase transactions between the Indian parent and its overseas subsidiaries, which get eliminated on consolidation. Will these transactions require disclosure as export/ import in the CFS?
    
The ICAI should provide appropriate guidance on these practical issues. Until such guidance is provided by the ICAI, differing views are possible on this this matter. To help resolving this issue, one may argue that the MCA has mandated these disclosures to be included in the financial statements to present information regarding imports/exports made and foreign currency earned/spent by Indian companies. In the absence of specific guidance, the preference is to use the said objective as a guiding principle to decide the disclosures required.
Assume that the 2013 Act requires even non-listed and private groups to prepare CFS. Under this assumption, the following two issues need to be considered:

(a) The date from which the requirement concerning preparation of CFS will apply. Particularly, is it mandatory for non-listed/ private groups to prepare CFS for the year-ended 31st March 2014?
(b) Whether the comparative numbers need to be given in the first set of CFS presented by an existing group?

(a)  Based on the General Circular No. 8/2014 dated 4th April 2014, non-listed/private groups need to prepare CFS only for financial year beginning on or after 1st April 2014.
(b) Regarding the second issue, Schedule III states that except for the first financial statements prepared by a company after incorporation, presentation of comparative amounts is mandatory. In contrast, transitional provisions to AS 21 exempt presentation of comparative numbers in the first set of CFS prepared even by an existing group.

  One may argue that there is no conflict between transitional provisions of AS and Schedule III. Rather, AS 21 gives an exemption which is not allowed under the Schedule III. Hence, presentation of comparative numbers will be mandatory in the first set of CFS prepared by an existing company.

TS-76-ITAT-2014(Del) Bharti Airtel vs. ACIT A.Y: 2008-2009, Dated: 11-03-2014

fiogf49gjkf0d
10. TS-76-ITAT-2014(Del) Bharti Airtel vs. ACIT A.Y: 2008-2009, Dated: 11-03-2014

Section 92 – Notwithstanding the amendment to the ITA, issuance of corporate guarantee that does not have a bearing on the profits or losses or assets of enterprise does not amount to “international transaction” for transfer pricing provisions.

Facts:
The Taxpayer is an Indian company engaged in the provision of telecommunication services. The Taxpayer had during the financial year issued a corporate guarantee on behalf of its associated enterprise (AE) and also contributed to the share capital in its foreign subsidiaries.

With respect to the corporate guarantee issued by the Taxpayer on behalf of its AE guaranteeing the repayment of a working capital facility advanced by a bank, the Taxpayer contended that it had not incurred any costs or expenses on account of issue of such guarantee and the guarantee was issued as a part of the shareholder activity. Accordingly, there was no requirement to charge a guarantee fee under the TP provisions.

The Taxpayer, however, in its TP documentation study determined an arm’s length (AL) guarantee fee and offered this income to tax.

During the Transfer Pricing Audit, the Tax Authority observed that by issuing the corporate guarantee, the AE’s credit rating benefited from association to the Taxpayer and the Taxpayer, was therefore, required to receive AL consideration and accordingly estimated the AL fee and a TP adjustment was made with respect to the differential guarantee fee.

For the contribution to the share capital of its foreign subsidiaries, the Taxpayer did not benchmark the said transaction as the payments were in the nature of capital contributions. However, during the course of the audit proceedings, the Tax Authority noted there was a significant delay in the allotment of shares to the Taxpayer and treated the contributions as interest free loans for the period between the date of payment and the date on which shares were actually allotted and imputed an AL interest on the amounts deemed as an interest free loan.

The issue before the Tribunal was whether a corporate guarantee issued without a charge is to be considered as “international transaction” and whether transfer pricing provisions apply to such transaction. Further the Tribunal was required to decide on whether the share application money can be treated as interest free loan to AE’s

Held:
On issue of corporate guarantee to its AE

Reviewing the definition of the term “international transaction”, the Tribunal held that in order for the transaction to be an “international transaction” subject to TP, the transaction should be such as to have a bearing on profits, income, losses or assets of such enterprise.

Accordingly, the Tribunal held that a corporate guarantee issued without a charge is outside the ambit of ‘international transaction’ and transfer pricing provisions do not apply to such arrangements, even after the amendment introduced by the Finance Act, 2012.

On Capital contribution to AEs

The Tribunal held that the characterisation of the payment made by the Taxpayer to its AEs as capital contribution was not in dispute and were in the nature of payments for share application money.

The Tribunal noted there was no provision enabling deeming fiction under the Indian transfer pricing regulations to regard share application money as interest free loan.

Further, the Tribunal observed there is no finding about what is the reasonable and permissible time period for allotment of shares. Even if one was to assume there was an unreasonable delay in the allotment of shares, the capital contribution could have, at best, been treated as an interest free loan only for such period of “inordinate delay” and not the entire period from the date of making the payment to date of allotment of shares.

This aspect of the matter is determined by the relevant statute, which is different than that of an interest free loan on a commercial basis between the share applicant and the company to which the capital contribution is being made.

Since the Tax Authority did not bring any evidence on the payment of interest to an unrelated share applicant for the period between making the share application payment and allotment of shares, the Tribunal held it was unreasonable and inappropriate to treat the transaction as partly in the nature of an interest free loan to the AE.

levitra

S-179-ITAT-2014(Mum) Huawei Technologies Co. Ltd. vs. ADIT A.Ys: 2005-2009, Dated: 21-03-2014

fiogf49gjkf0d
9. S-179-ITAT-2014(Mum) Huawei Technologies Co. Ltd. vs. ADIT A.Ys: 2005-2009, Dated: 21-03-2014

Premises of Indian subsidiary used by parent company to perform core sales activities constitutes fixed place PE for the parent company in India.

The employees of Indian subsidiary securing orders on behalf of the parent company constitutes dependent agent PE for the parent company.

Facts 1:
The Taxpayer, a company incorporated in China, was engaged in supplying telecommunications network equipment. The Taxpayer had not filed any return of income in India.

Taxpayer had a wholly owned subsidiary in India (ICo). A survey was undertaken by the Tax Authorities at the ICo’s premises. On the basis of the documents found at the time of survey, the Tax Authority concluded that the Taxpayer has a PE in India and the income that has accrued from the supply of telecommunications network equipment during the previous year is taxable in India.

Held 1:
The Tribunal observed that the business of the Taxpayer was carried on India through the active involvement of the employees of the ICo. The employees of the ICo and the Taxpayer had jointly prepared bidding contracts, as well as negotiated and concluded the contract on behalf of the Taxpayer with its Indian customers from ICo’s premises.

Since the premises of the ICo was used to carry out core selling activities of the Taxpayer, the Taxpayer had a fixed place PE in India in the form of office premises of the ICo.

The employees of the ICo were part of the sales team of the Taxpayer, who habitually secured orders in India wholly or almost wholly for the Taxpayer in India. Further, the ICo was economically and financially dependent on the Taxpayer. Thus the ICo also created a Dependent Agency PE as per the India- China DTAA as well as a business connection as per the ITA for the Taxpayer in India

Software embedded in equipment necessary for the operation and control of the equipment does not constitute Royalty

Facts 2:
The Taxpayer was engaged in the supply of telecommunications network equipment. The Tax Authority artificially allocated the revenue from such supply between the Hardware and Software, although there was one consolidated price for the supply.

In respect of the Hardware portion, the Tax Authority computed the operating profits and allocated a part of it to the PE in India. In respect of the Software portion, the Tax Authority contended that it amounted to Royalty as per the India-China DTAA.

The Taxpayer contended that there was no separate supply of software and the software was embedded with the hardware/equipment. Thus, the entire receipt must be taxed as Business Income. Reference in this regard was made to the Delhi High court decision in the case of Ericsson A.B. (2012)(204 Taxman 192) and Nokia Networks OY (2013)(212 Taxman 68).

Held 2:
From the agreement with the Indian customers it is clear that the Software is a set of programmes embedded in the equipment and is necessary for control, operation and performance of the equipment.

The buyers were granted non-exclusive, nontransferable and non-sub-licensable licence to use the software. No ownership rights or interests are transferred to the buyer.

Hence following the decision in the case of Ericsson A.B (supra) it was held that the entire income is to be taxed as business income in India.

levitra

TS-179-ITAT-2014(Mum) Viacom 18 Media Pvt. Ltd vs. ADIT A.Y: 2009-2012, Dated: 28-03-2014

fiogf49gjkf0d
8. TS-179-ITAT-2014(Mum) Viacom 18 Media Pvt. Ltd vs. ADIT A.Y: 2009-2012, Dated: 28-03-2014

Section 9(1)(vi): As the term “process” is not defined under the DTAA, in terms of Article 3(2) of DTAA, it will have the same meaning as provided under the ITA; payments made for the transponder service amounts to “royalty” as per the India-USA DTAA.

Facts:
The Taxpayer, an Indian Company, was engaged in broadcasting television channels from India, marketing of advertising airtime on these channels, distribution of the channels, marketing and distribution of films through its film division ‘Studio 18’ and production of program content/television software.

The Taxpayer had entered into an agreement with an US Company (US Co) for availing 24 hour satellite signal reception and retransmission service (‘transponder service’). In consideration of the transponder service, the Taxpayer was required to pay transponder service fee (‘fee’)

Relying on the Delhi High court’s decision in the case of Asia Satellite communications Co. Ltd. (332 ITR 340), the Taxpayer contended that the payments made to US Co. were not taxable under the ITA. Further reference was made to the decision in the case of WNS North America (152 TTJ 145) and Siemens Aktiengesellschaft (310 ITR 320) to contend that the retrospective amendment in the ITA will not affect the benefit available under the DTAA and since the payments are not in the nature of Royalty and fee for included service (FIS) under the India-USA DTAA they are not taxable in India in the absence of a permanent establishment (PE), accordingly approached the Tax Authority requesting Nil withholding order for such payments.

The Tax Authority contended that the payments are taxable as royalty in light of amended provisions of 9(1)(vi) of the ITA and also under Article 12 of the India-USA DTAA and consequently subject to tax withholding.

On Appeal, the First Appellate Authority upheld the Tax Authority’s contention. Aggrieved, the taxpayer appealed to the Tribunal.

Held:
It is well settled that the Taxpayer will be governed either by the provisions of DTAA or the ITA, whichever is more beneficial.

The term “Royalty” is defined in the DTAA, therefore, any amendment in the definition of “Royalty” adversely affecting a Taxpayer covered by the DTAA would be inconsequential due to the protection of the DTAA.

Article 3(2) of the India-US DTAA provides that a term not defined in the DTAA, shall, unless the context requires otherwise, have the meaning which it has under the laws of the contracting state. The term “process” is not defined in the DTAA. Therefore, the meaning of such term under the ITA has to be applied.

However, Explanation 6 was inserted to clarify the meaning of the term “process” in the context of transmission by satellite and it does not in any way modify the definition of the term “royalty”. Thus this amendment cannot be considered as overriding the DTAA.

The use of transponder by the Taxpayer for telecasting/broadcasting the programme involves the transmission by the satellite (including uplinking, amplification, conversion for downlinking of signals) and hence falls within the definition of the term “Process” as per Explanation 6 of section 9(1)(vi). This meaning will also be applicable for interpreting the term “process” existing in the DTAA in terms of Article 3(2). Hence, the payments made for use/ right to use of process would fall in the ambit of the expression “royalty” as per the DTAA as well as the provisions of the ITA.

levitra

TS-161-ITAT-2014(Del) JC Bamford Excavators Limited. vs. DDIT A.Y: 2006-2007, Dated: 14-03-2014

fiogf49gjkf0d
7. TS-161-ITAT-2014(Del) JC Bamford Excavators Limited. vs. DDIT A.Y: 2006-2007, Dated: 14-03-2014

Consideration for the use of IPRs includes occasional onsite support. Such visitors perform stewardship activities and do not give rise to service PE.

Employees of parent company visiting the premises of an Indian Company for quality inspection to ensure that the licensed products meet the global quality standards perform stewardship activities and do not trigger service PE. Performance of technical services by employees on behalf of the Taxpayer results in a Service PE for the Taxpayer as per India-UK DTAA.

Effective connection is to be seen between the PE and the “contract, right or property” from which royalty or FTS arise.

Facts:
The Taxpayer, a UK company, was engaged in the business of manufacture, assembly, research, design and sale of material-handling equipment. The Taxpayer entered into a Technology Transfer Agreement (TTA) with its wholly-owned Indian subsidiary (ICo).

As per the terms of the TTA, the Taxpayer was required to perform the following activities for a consideration:

• Grant license to manufacture, permit the ICo to use know-how, trademark, inventions and any confidential information (IPRs) belonging to the Taxpayer.

• Provide technical assistance to the ICo’s personnel through its technical consultants to enable the licensed products to be manufactured as per the quality standards.

• Conduct random testing and inspection of licensed products manufactured by the ICo to ascertain if they meet the quality standards. For this purpose, employees of the Taxpayer occasionally visited the premises of the ICo.

For the technical assistance as stated under the TTA, the Taxpayer deputed eight employees to work with the ICo. The cost of such employees was recovered from the ICo. Such personnel occupied key managerial positions and were engaged in managing overall operations of the ICo.

The Tax Authority contended that the employees deputed for more than 90 days constituted a Service PE and the payments from the ICO being effectively connected to the PE need to be considered as business profits under the DTAA.

However, the Taxpayer contended that it did not have a PE in India as:

• Occasional visits of the Taxpayer’s employees for inspection and quality check were an integral part of royalty. Hence, the entire consideration for IPR under the TTA (embedded with the cost of occasional visit of employees) was taxable as royalty/fees for technical services (FTS) under Article 13 of the DTAA, as well as ITA.

• Personnel deputed under the IPAA ceased to be employees of the Taxpayer and they became the employees of the ICo. Accordingly, the presence of such personnel did not constitute a PE of the Taxpayer in India and reimbursement of salary of such employees under the IPAA was not taxable in India.

On appeal, the CIT(A) upheld the position adopted by the Taxpayer. Aggrieved, the Tax Authority filed an appeal with the Tribunal.

Held:
On constitution of Service PE

Based on the facts, the following factors supported the view that the assignees continued to be the employees of the Taxpayer:

• Assignment of employees to the ICo was pursuant to the license of IPRs to the ICo, for which, the Taxpayer committed to provide technical assistance to the ICo from time to time at the ICo’s request and subject to the availability of specialists or engineers.

• No employment contract between the ICo and the Assignees/appointment letter/terms and conditions of deputation were placed on record before the Tribunal.

• Assignees retained lien on their employment with the Taxpayer such that, after completion of assignment, the Assignees would resume employment with the Taxpayer at a level no less favourable than that which they left prior to the deputation.

• Agreements clearly mentioned that the Assignees would be subject to the rules and regulations of the ICo but would not be considered as employees of the ICo.

• The Taxpayer had full responsibility to remunerate the Assignees. Recovery of cost from the ICo is nothing but consideration for supply of the Assignees.

• The Assignees have no legal recourse to the ICo for any grievances or disciplinary actions.

It is quite natural that persons deputed with the ICo for a consideration will work under the direction of the ICo and could not have worked for the benefit of the Taxpayer. Since all the conditions of Service PE were satisfied, it was held that Taxpayer constituted a Service PE on account of assignees.

On account of service integral to a royalty arrangement under the TTA, the Tribunal held that occasional visitors undertook activities in India in terms of the obligation integral to the TTA i.e., testing and inspections, which were carried out to ensure that the licensed products adhered to the global standards of quality. Such activities were required by and in the interest of the Taxpayer and it amounted to stewardship activities which cannot be considered for constituting a PE in India. Reliance in this regard was placed on the SC decision in the case of Morgan Stanley (supra).

On Taxability under Article 7 on business profits visà- vis Article 13 on royalty and FTS

Consideration for granting the IPRs in relation to the technical know-how, patent rights and confidential information for the manufacture and sale of licensed products falls within the scope of royalty as defined under the DTAA, as well as the ITA.

Consideration received for the provision of services of personnel was for the application/enjoyment of IPRs and it qualified as FTS under the DTAA, as well as the ITA.

Effectively connected with PE

In terms of the DTAA, where a right or property or contract for which the royalty or FTS is paid is effectively connected with a PE through which the beneficial owner of the income carries on business in the source state, (i.e., India in the present case), then such royalty/FTS would be taxed as “business profits” under Article 7 and Article 13 on royalty and FTS would cease to apply.

For applicability of Article 7, effective connection should exist between the PE on the one hand and right, property or contract on the other, and not royalties or FTS flowing from such right, property or contract.

The words “effectively connected” are akin to “really connected”. In the context of royalties, it is in the nature of something more than the mere possession of the property or right by the PE but equal to or a little less than the legal ownership of such property or right. But, in no case, remote connection between the PE and property or right can be categorised as effectively connected.

It is of significance to note that an effective connection is required to be seen between the PE and the “contract” from which such fees resulted and not such FTS per se. The mere fact that such fee is effectively connected with the PE is not sufficient to bring the amount within the purview of business profits.

Taxation of various streams

For the different set of considerations, it was concluded:

• For royalty income from IPRs embedded with the salary of Occasional Visitors:

Royalty income cannot be said to be effectively connected with Service PE and the same would be taxable as Royalty on gross basis under the DTAA, as well as the ITA..

• For Service PE:

Service PE is represented by the Assignees deputed to the ICo. Thus, the contract, by virtue of which the Assignees were sent to India, is effectively connected with the Service PE and FTS arising out of such contract would be taxable as business profits under Article 7 of the DTAA.

levitra

TS-150-ITAT-2014(Mum) Antwerp Diamond Bank NV vs ADIT A.Y: 2004-2005, Dated: 14.03.2014

fiogf49gjkf0d
6. TS-150-ITAT-2014(Mum) Antwerp Diamond Bank NV vs ADIT A.Y: 2004-2005, Dated: 14.03.2014

On facts, payments made by Indian Branch office
for accessing the software installed in the server belonging to the head
office is in the nature of reimbursement of expenses and not royalty
under the India-Belgium Double Taxation avoidance agreement (DTAA).
Definition of Royalty as widened in Income-tax Act (ITA) is not relevant
for the purpose of DTAA.

Facts:
The Taxpayer, a tax resident of Belgium, was operating in India through a Branch office (BO).

The
Taxpayer (HO) acquired a banking application software named as
“Flexcube” (Software) from an Indian software company. The software was
installed in the server at Belgium and was apparently used for banking
purposes by the HO all over the world. The said software license was
also amended to allow the Indian BO to use it by making it accessible
through a server located in Belgium.

The cost to get data processed was reimbursed by the BO, on a pro-rata basis to the HO.

The
Tax Authority disallowed the above payment on the basis that the
payment constituted ‘royalty’ on which no taxes were withheld at source.

The Taxpayer submitted that:

• The payment was in the nature of reimbursement;
•
Also, it did not satisfy the requirement of payment made for ‘use of’
or ‘right to use’ any copyright for it to be treated as ‘royalty’ under
the India – Belgium DTAA.

On appeal, the CIT(A) agreed with the
Taxpayer and held that the data processing cost paid by the Indian BO
does not amount to ‘royalty’.

Aggrieved, the Tax Authority appealed before the Tribunal.

Held:
The
BO sends data to the HO for getting it processed as per the requirement
of banking operations. As per the terms of the agreement between the HO
and the third party, the HO has non-transferable rights to use software
and the HO cannot assign, sub-license or otherwise transfer the
software. The HO allocates expenditure of the I.T. resources on a
pro-rata basis.

Insofar as the BO is concerned, it is only
reimbursing the cost of processing of its business data to the HO, which
has been allocated to it on a pro-rata basis. Such reimbursement does
not fall within the ambit of the definition of “royalty” under the DTAA.

In
the present case, the payment made by the BO is not for ‘use of’ or
‘right to use’ software. The BO does not have any independent right to
use or control over the main frame of the computer software installed in
Belgium. To qualify as ‘royalty’ under the DTAA, the payment should be
qua the use or the right to use the software exclusively by the BO. The
BO should have exclusive and independent use or right to use the
software and for such usage, payment should be made.

It is also
not the case of the Tax Authority that the HO has provided any copyright
of the software or copyrighted article developed by the HO for the
exclusive use of the BO for which the BO is making royalty payment along
with a mark-up exclusively for royalty.

The definition of
‘royalty’ under the DTAA is exhaustive and not inclusive. Therefore, it
has to be given the meaning as contained in the DTAA itself and the
widened definition of royalty after its retroactive amendment by the
Finance Act 2012 should not be looked into.

Reimbursement of
data processing cost to the HO does not fall within the ambit of
definition of ‘royalty’ under the DTAA and accordingly, there is no tax
withholding obligation for the BO.

levitra

Transfer Pricing Regulations for Financial Transactions

fiogf49gjkf0d
Cross Border Financial Transactions such as intercompany loans and guarantees between Associated Enterprises have received prominent attention worldwide due to implications under the Transfer Pricing Regulations. Several issues arise in respect of benchmarking and documentation of such transactions. Divergent rulings by Tribunals on these issues have caused further complications. This article attempts to throw light on Indian Regulations, Judicial Rulings and some of the international practices in this arena. This Article is written in Questions and Answers format for elucidating relevant provisions/law more succinctly.

Q.1 Which types of financial transactions are covered by the Transfer Pricing Regulations?

A.1 Most common Financial Transactions (FTs) undertaken between Associated Enterprises (AEs) are in the nature of loans and guarantees, as such the scope of discussion in this Article is restricted to Transfer Pricing Regulations (TPRs) pertaining to such transactions. Other types of FTs such as “Cash Pooling” and “Factoring Arrangements” etc. are not discussed in this Article.

Transfer Pricing Regulations world over primarily seek to cover inter-company loans and/or guarantees. Focus on other types of FTs under TPRs is limited.

Q.2 What are OECD’s views on loans to AEs?

A.2 There is no specific guidance in OECD’s Transfer Pricing Guidelines regarding FTs. However, OECD implicitly guides to apply the relevant method in determining the “arm’s length rate of interest” on inter-company loans. Therefore, one needs to look at the jurisdictional transfer pricing rules, if any, in determining the arm’s length rate of interest on intercompany loans between AEs.

Q.3 What are the provisions under the UN Transfer Pricing Guidelines?

A.3 The Department of Economic & Social Affairs of the United Nations has published a “Practical Manual on Transfer Pricing for Developing Nations” (Manual) in 2013. The object of this Manual is to provide clearer guidance on the policy and administrative aspects of transfer pricing analysis by developing countries. The Manual is addressed at countries seeking to apply “arm’s length standard” to transfer pricing issues. Since India has adopted the “arm’s length” principle in its Transfer Pricing regime, the Manual would provide a useful guide.

While the Manual provides a practical guidance on issues faced by developing countries, it has its inherent limitations, in that it represents views of the authors and members of the Sub-committee entrusted with the task of preparing it. Chapter 10 of the Manual represents an outline of particular country’s administrative practices as described in detail by representatives from those countries. Commenting on the practices followed by Indian Transfer Pricing Administration (ITPA), the Manual states (Paragraph 10.4.10 on page 405) that the following practices are followed by the ITPA in determination of the arm’s length pricing of inter-company loans:

  • Examination of the loan agreement;
  • Comparison of terms and conditions of loan agreement;
  • Determination of credit rating of lender and borrower;
  • dentification of comparable third party loan agreement;
  • Suitable adjustments to enhance comparability

The ITPA prefers to apply the Prime Lending Rate (PLR) of Indian banks for outbound loans (i.e., loans advanced by an Indian Company to its overseas AEs), on the premise that loans are advanced from India in Indian currency which are subsequently converted into foreign currency. This stand is formally accepted and incorporated into the Safe Harbour Rule which provides for acceptable interest rates based on Prime Lending Rates of Indian Banks.

However, the above stand of the Tax Department has been challenged by tax payer and the Tribunal has ruled in favour of the tax payers. (Refer answer to question no. 6 infra).

Q.4 What are the provisions under the Income-tax Act, 1961?

A.4 Explanation to section 92B has been retrospectively amended vide Finance Act 2012 to bring FTs under TPRs in India. Accordingly, the following Clause has been added to the definition of the term “International Transaction”:

“Explanation—For the removal of doubts, it is hereby clarified that—

(i) the expression “international transaction” shall include—

(c) Capital financing, including any type of longterm or short-term borrowing, lending or guarantee, purchase or sale of marketable securities or any type of advance, payments or deferred payment or receivable or any other debt arising during the course of business;

From the above explanation, it is clear that loans and guarantees between AEs are covered under the TPRs of India retrospectively w.e.f. 1st April 2002.

Safe Harbor Provisions as applicable to loan transactions [Notified on 18th Sept. 2013 applicable for Five Assessment Years beginning from AY 2013-14]




Q.5 Under what circumstances interest free loan can be justified?

A.5 Interest free loans prima facie are not at arm’s length as normally a lender would not give any interest free loans to a stranger. However, the lender may justify such loan to its AE on considerations other than interest. For example, if the interest free loan is in the nature of quasi capital, then it can be justified.

In April 2002, the Central Government constituted an Expert Group to recommend transfer pricing guidelines for companies for pricing their products in connection with the transactions with related parties and transactions between different segments of the same company. The Group submitted its Report in August 2002. It generally recommended arm’s length principle except in following cases:

“Exceptions to arm’s length transfer price

In exceptional cases, the company may decide to use a non-arm’s length transfer price provided:

• the Board of Directors as well as the audit committee of the Board are satisfied for reasons to be recorded in writing that it is in the interest of the company to do so, and
• the use of a non-arm’s length transfer price, the reasons therefore, and the profit impact thereof are disclosed in the annual report

Remarks: Examples of such exceptional cases could be a company giving an interest free loan to a loss making subsidiary or a company accepting the offer of a controlling shareholder to work as the CEO on a nominal salary.”

However, the same Report identifies “Borrowing or lending on an interest-free basis or at a rate of interest significantly above or below market rates prevailing at the time of the transaction” as one of the undesirable corporate practices related to transfer pricing.

In nutshell, interest free loans may be justified in following circumstances:

• When loan has more of an equity substance than loan i.e. it is in the nature of Quasi Capital.

The Australian Taxation Office in its Discussion Paper on “Intra-group Finance Guarantees & Loans Application of Australia’s Transfer Pricing and Thin Capitalization Rules –June 2008” (paragraph 58 on page 15 of the Paper) has opined that to the extent that the debt funding performs the role of an equity contribution it would seem appropriate that portion of the debt funding be regarded as quasi equity and that it be costed on an interestfree basis, consistent with its purpose and effect. This is in line with the OECD view that the cost of funding a company’s participation is a ‘shareholder activity’ and that it would not justify a charge to the borrowing company.

On  the  peculiar  facts  of  the  case,  (where  loan was  converted  into  equity  upon  receipt  of  RBI approval)  the  Tribunal,  in  case  of  Micro  Inks  Ltd. vs.  ACIT  [2013]  36  taxmann.com  50,  held  that  the loan  provided  was  in  the  nature  of  quasi  capital. One  of  the  interesting  observations  made  by  the Tribunal  was  regarding  consideration  of  the  com- mercial  business  consideration  between  AEs.  The Tribunal  held  that  sustainability  of  business  of  the step  down  subsidiary  in  USA  was  crucial  to  the Indian company (who advanced loan to it) in view of  the  fact  that  the  Indian  company  has  substan- tial  business  transactions  with  it  and  therefore  it would  not  be  appropriate  to  equate  the  relations between  AEs  to  that  of  a  lender  and  a  borrower.

The  above  observations  are  significant  as  in  ear- lier  in  case  of  VVF  Ltd.  [2010]  TII  4  ITAT,  the Mumbai Tribunal held that commercial expediency to  be  irrelevant  as  the  impact  of  any  such  inter- relationship  should  be  neutralised  by  arm’s  length treatment.  Further,  in  the  case  of  Perot  Systems TSI India Ltd. [2010] 130 TTJ 685, the Delhi Tribunal had refused to accept the contention of the as- sessee that the outbound loan  was  quasi  capital in nature on the grounds that no lender  would  lend money to new company or the intention of  the lender company was to earn dividends  and  not interest.

  •  Loan is in the nature of a Hybrid Instrument.

The loan may be structured in the form of con- vertible debentures or bonds where there may not be any interest or very low interest for the initial period and may be converted into equity at a later date. This may be resorted by a parent company   to give sufficient time to its subsidiary to make profit without much financial burden.

Every case of thin capitalisation may not be to avoid tax. Sometimes, host countries regulations justify low equity and high debt especially when companies do not want to compromise on liquid- ity. Moreover, loans require less documentation, highly flexible in their repayment and lending in- stitutions also take them at par with equity when they are from AEs.

Q.6If interest has to be charged on inter-company loans, how does one bench mark it? Who shall be the tested party – the borrower or the lender?

Also elucidate on Separate/Standalone Entity Approach vs. Group Entity/On-lending Approach

A.6    Indian Transfer Pricing Regulations do not have special rules (except in case of Safe Harbor Rules) or guidance on benchmarking loan transactions between AEs. However, one needs to apply general provisions of transfer pricing regulations while determining arm’s length interest rate on loans between AEs.

Consider a case where an Indian Company “A” has advanced loan to its wholly owned subsidiary “B” in UAE. While undertaking the benchmarking analysis to determine arm’s length rate of interest, often a dilemma arises as to whether one should look at the rate at which “B” would have  been  able  to  borrow  in UAE market or the rate at which ‘A” would have earned interest, had it advanced loan to    a non-related party. Normally, Indian Entity is used as a tested  party and also it being the assessee under the Indian Transfer Pricing Regulations, benchmarking of in- terest charged is done from Indian Entity’s point   of view. In the given example, what company “A” would have earned had it given a loan to non AE would be relevant. For determining income of “A” in an arm’s length scenario, sources of funds  of “A” i.e., cost of funds (i.e. whether it is back to back loan or out of internal accruals), foreign ex- change risks, risk of default, availability of internal or external CUP etc. would be relevant.

As stated earlier, in such a scenario, Indian Transfer Pricing Administration would prefer to apply Prime Lending Rate of the Company  A’s  bank  in  India  as an external CUP as loan would be advanced  from India in Indian currency rather than LIBOR or EURIBOR. The idea seems to arrive at opportunity cost of earning, i.e., if Company “A” would have advanced similar loan to Company “B” in India, what would have been the rate of interest?

On  similar  facts,  in  case  of  Bharti  Airtel  Ltd.  vs. ACIT  [2014]  43  taxmann.com  150  (Del.  Trib.),  the assessee  contended  that  the  loans  were  given  in foreign  currencies  and  in  the  international  market where  the  bank  lending  rates  are  based  on  LIBOR rates. Hence, the LIBOR rate should be considered for determining the arm’s length interest rate. The Tribunal  upheld  the  contentions  of  the  assessee.

In case of M/s. Siva Industries & Holdings Ltd. vs. ACIT [(I.T.A. No. 2148/Mds/2010) paragraph 11], the Chennai Tribunal held that “Once the transaction between the assessee and the Associated Enter- prise is in foreign currency and the transaction is   an international transaction, then the transaction would have to be looked upon by applying the commercial principles in regard to international transaction. If this is so, then the domestic prime lending rate would have no applicability and the international rate fixed being LIBOR would come into play. In the circumstances, we are of the view that it LIBOR rate which has to be considered while determining the arm’s length interest rate in respect of the transaction between the assessee and the Associated Enterprises”.

Thus, one has to benchmark the Indian entity and find out what interest it would have earned, had it advanced loan to an independent entity operating in same circumstances, located in the same market and on similar terms and conditions. In the process one also needs to benchmark the borrower based on the separate entity approach taking into account the circumstances in which it operates.

General Rules of Transfer Pricing Analysis suggest that one needs to arrive at arm’s  length  inter-  est rate as if Company “B” is an independent/ standalone entity. Here one needs to examine various factors such as terms and tenor of loan, guarantee offered, nature of interest rate such as fixed vs. floating, the overall financial market in UAE, credit rating of “B”, nature of loan instru- ment i.e., whether pure loan or hybrid instrument with conversion option etc. Thus if “A” were to lend to any  other  independent  entity  operating  in UAE with similar terms and conditions, then what it would have earned or if there is any  other comparable data already available in public domain then that may be used.

In real life situations company “B” would be able  to borrow at LIBOR linked rate. Therefore, the starting point of benchmarking analysis would be LIBOR which may further be fine tuned consider- ing various factors other discussed above.

Thus, one may conclude that while arriving at the arm’s length interest rate especially in case of outbound loans from India, one may take LIBOR/ EURIBOR, as the case may be, as base rate and make adjustments to arrive at arm’s length interest rate taking into account facts  and circumstances in the country in which the borrower AE operates.

It may however be noted that the Safe Harbor Rules in India does  not  support  above  view  and it requires Indian entity to apply the interest rate based on the Base Rate of State Bank of India . (Refer answer to Q.4 supra). It may also be noted that Safe Harbor Rules prescribes “acceptable price/ range of margins and/or rate of interest” without determining arm’s length price,  margin or interest. More often than not, unilateral Safe Harbor Rule results in litigation in the opposite country as the acceptable range in one country would  lead  to loss of revenue  in the other country.

Group Entity or On-lending Approach
Another approach which is followed  is  known as Group Entity or On-lending Approach. In this case, the taxpayer has a central treasury which raises loan at the group level and then allocates funds to various subsidiaries. In this case,  there  will not be a separate evaluation of subsidiary’s borrowing capacity or credit rating as the loan is advanced at the group level and therefore implic- itly subsidiary assumes the same credit  rating  as its parent. This approach makes sense in real life commercial/financial world.

However, the standalone entity approach is widely practiced as it supports arm’s length standard. Even OECD prefers this approach.

Australian Transfer Pricing Rules
The  Australian  Transfer  Pricing  Rules  have  been comprehensively amended for the first time in past 30  years  vide  Tax  Laws  Amendment  (Countering Tax  Avoidance  and  Multinational  Profit  Shifting) Act  2013.

The  new  rules  are  applicable  for  income  year  on or  after  1st  July  2013.  The  new  rules  provide  for independent/standalone  party  approach.  Australia also has Thin Capitalisation Rules in place. The new rules provide that in order to determine the arm’s length  conditions  between  two  AEs  on  the  same footing  as  they  may  exist  between  two  indepen- dent enterprises, one may need to consider issues such as whether independent entities operating in comparable  circumstances  would  have  advanced loans  with  the  same  or  similar  characteristics, provided  various  forms  of  credit  support,  sought to  refinance  at  a  different  market  interest  rate, issued  shares  or  paid  dividends.

In short, the taxpayers need to:

•    Assess if the quantum of debt meets arm’s length conditions.

•    Consider if the capital structure (debt/equity mix) is arm’s length.

•    Re-consider the interest rate with regard to fac- tors such as the impact of the rate on profits    of the company, and whether or not the rate     is adjusted as the parent company’s cost of funds changes.

Q.7 Are there any judicial precedents in India  on  the above issue?

A.7So far decisions on the issue of inter-company loans have come from Tribunals only. Ratios laid down by various decisions are as follows:



Other Relevant Decisions:

•    Tata Autocomp Systems Ltd. vs. ACIT [2012] 21 taxmann.com 6 (Mum.)
•    Aurinpro Solutions Ltd. vs. ADCIT [2013] 33 taxa- mann.com 187 (Mum.)
•    Mascon Global Ltd. vs. DCIT ITA No. 2205/
MDS/2010
•    Four Soft Limited vs. DCIT – TS-518-ITAT-201 (Hyd)
•    DCIT vs. Tech Mahindra Ltd. [2011] 12 taxmann. com 132(MUM.)
•    Aithent Technologies (P.) Ltd. vs. ITO [2012] 17 taxmann.com 59 (Del)
•    Mahindra & Mahindra vs. DCIT – TS-408-ITAT- MUM-2012
•    Cotton Naturals (I) (P.) Ltd. vs. DCIT [2013] 32 taxmann.com 219 (Del-Trib)
•    Hinduja Global Solutions Ltd. vs. ADCIT – TS-147- ITAT-MUM-2013
•    ITO vs. Maharishi Solar Technology Pvt. Ltd. TS- 306-ITAT-2012-DEL

for outbound loans. At  times  benchmarking of inbound transactions is more crucial than outbound as it results in base erosion, interest being deductible expense.

Though  India  does  not  have  Thin  Capitalisation Regulations  in  place,  it  has  robust  Foreign  Ex- change  Laws  which  regulates  borrowing  from overseas.  Borrowing  from  overseas  shareholder requires  minimum  25  %  of  shareholding.  There  are several  restrictions  for  use  of  borrowed  money as  well  as  the  sectors  which  can  borrow.  For example  only  real  sector  (i.e.  industrial  sector), infrastructure  sector  and  certain  service  sectors such  as  software,  hospital  and  hotel  are  allowed to  borrow  from  overseas.  Borrowing  for  general corporate  purpose  or  for  working  capital  require- ment  is  practically  banned.

The biggest benchmarking or safe harbor limit (so to say) is contained in “all-in-cost borrowing limit” prescribed under the Foreign Exchange Manage- ment Act, 1999 (FEMA). Since RBI does not allow payment of interest beyond this limit, generally payment of interest at the rate  prescribed  by RBI should be considered as arm’s length. One may draw support for this contention from  the  fact that the Indian Safe Harbor Rules prescribes the acceptable limit of minimum interest to be charged for loans advanced by Indian entity  (i.e. for outbound loans) but does not prescribe limit
 
From the above case laws, it is apparent that different tribunals have taken divergent views. Transfer pricing cases being  more  facts  based,  it is difficult to arrive at standard conclusion and perhaps that is why transfer pricing analysis is regarded as an “art” and not a “science”.

However, Tribunals have upheld application of LIBOR rate for determination of arm’s length inter- est rate in contradiction of Indian Transfer Pricing Administration’s stand of applying PLR of Indian Banks. It would be interesting to see how this jurisprudence develops further at higher forums.

Inbound Loans

Q.8 What are the provisions applicable to inbound loans?

A.8    The same transfer pricing rules and regula- tions apply to inbound loans as are applicable or maximum interest that may be allowed as deduction on inbound loans.

Present limits of all-in-cost borrowing under External Commercial Borrowing (ECB)  route  are  as follows:

Average Maturity Period

All-in-cost
over 6 month LIBOR*

Three years and up to five years

350 bps

More than five years

500 bps

* for the respective currency of borrowing or applicable
benchmark

All-in-cost limit includes rate of interest, other fees and expenses in foreign currency except commit- ment fee, pre-payment fee, and fees payable in Indian Rupees.

Maharashtra Ordinance No. VII OF 2014 dated 03-03-2014

fiogf49gjkf0d
The Government of Maharashtra has promulgated this Ordinance whereby in case of builders and developers the limitation for making an order of assessment for any of the periods which expires on 31-03-2014 has been extended up to 30-09-2015.

levitra

Supreme Court Judgment in the case of Bansal Wire Industries

fiogf49gjkf0d
Trade Circular 11T of 2014 dated 04-04-2014

As per the Supreme Court judgment ‘Stainless Steel Wire’ is not declared goods taxable @5%, but it is taxable as the residual entry.

levitra

Extension of date for filing Audit Report in Form 704 for 2012-13 by developers

fiogf49gjkf0d
Trade Circular 9T of 2014 dated 29-03-2014 In case of developers (other than those opting for composition scheme), if Mvat audit report for the period 2012-13 is filed by 10th May, 2014, it is decided administratively not to levy penalty u/s. 61(2) of the MVAT Act.

levitra

Submission of Annexures with/as part of returns for the periods starting from 1st April 2014

fiogf49gjkf0d
Trade Circular 9T of 2014 dated 25-03-2014

From 01-04-2014 onwards with every MVAT return, whether monthly, quarterly or half yearly, Annexure J1 & J2, that is buyer-wise sales and supplier-wise purchase will have to be filed.

For a composition dealer required to file Annexure J2 –supplier wise purchase, this requirement is over and above annual Annexure J1 & J2 and Form 704

levitra

State of Tamil Nadu vs. M/S. Mahaveer Chemical Industries, [2012] 49 VST 200 (Mad)

fiogf49gjkf0d
Central Sales Tax – Subsequent Sale By Transfer of Document of Title To Goods – Transporters Giving Delivery of Goods To Buyers As Per Instruction of Dealer – Not a Continuation of Inter-State Sale–S/s. 3(b) and 6(2) Of The Central Sales Tax Act, 1956.

FACTS
The assessee, a dealer in chemicals having office at Coimbatore, Tamil Nadu, had purchased liquid/gaseous chemicals from M/s. Cochin Refineries Limited Ernakulum, Kerala. The said goods were further sold to the dealers either in Coimbatore or to the dealers out side the state of Tamil Nadu and claimed exemption from payment of tax u/s. 6(2) of the CST Act, 1956 by producing the required E-1 and Form C. The assessing authority rejected the claim after noticing the fact that after taking delivery from the transporters, the assessee had issued from XX delivery notes to transport chemicals in same tankers to the end users within and outside the state of Tamil Nadu. The Tribunal allowed the claim and the department filed revision petition before the Madras High Court.

HELD
As per section 3(b) of the CST Act, 1956 all subsequent inter-State sales effeted by transfer of document of title to the goods also qualified to be inter-state sales. However, when there is a break in the movement and it comes to an end, the exemption u/s. 6(2) of the Act is no longer available to claim benefit of second inter-state sale. Such subsequent inter-state sale could be made between two dealers residing in the same street provided that there is a sale by transfer of document of title to the goods while they are in transit from one state to another. The burden of proof is on the assessee. The Court further held that in the present case, the journey of goods started from Cochin to Coimbatore and there was no obligation on the part of carrier to transport the goods further to any place beyond Coimbatore. Thus, the subsequent arrangement that the assessee had with the transporter to carry the goods to another place for a different person however did not make the movement a continuation of the original inter-state sale. Once the movement of goods terminated at Coimbatore, on the doctrine of constructive delivery, the authorities rightly rejected the assessee’s claim of exemption u/s. 6(2) of the CST Act. Accordingly, the High Court allowed revision petition filed by the department and set aside the judgment of the Tribunal.

levitra

M/S.Shree Shyam Enterprises vs. Joint Commissioner, Sales Tax, Bally Circle And Others, [2012] 49 VST 177 (WBTT)

fiogf49gjkf0d
Value Added Tax – Input Tax Credit – Tax Invoice Purchase of Goods Under Auction – Sale Release Order Issued By Vendor Containing Prescribed Particulars – Disallowance of Claim For Want of Tax Invoice – Not Correct, Section 21 of The West Bengal Value Added Tax Act, 2003 and R. 91 (7) Of The West Bengal Value Added Tax Rules, 2005

FACTS
The assessee dealer purchased goods from M/s. South Eastern Railway on auction after paying due tax to it. The vendor issued sale release order containing particulars, i.e., date of sale, sale order number and date, name and address of selling dealer, full description of goods sold, quantity or number of goods sold, value of the goods sold, rate and amount of tax charged. The dealer claimed input tax credit in returns. The department rejected the claim for want of proper tax invoice and did not consider the sale release order as tax invoice. The dealer filed application u/s. 8 of The West Bengal Taxation Tribunal Act, 1987 against the rejection of claim of input tax credit.

HELD
The vendor issued sale release order containing all the particulars required under sub-Rule (7) of Rule 91. The documents having contained all the particulars, as required in sub-rule (7) of rule 91 of the VAT Rules, 2005, the Sale Release Order ought to have been equated with and treated at par with the Tax Invoice. The appeal was allowed and assessing authority was directed to allow the claim on verification of documents, treating the sale release order as tax invoice.

levitra

M/S. IFB Industries Ltd. vs. State of Kerala, [2012] 49 VST SC 1.

fiogf49gjkf0d
Sales Tax – Turnover of Sales – Trade Discount – Given Subsequently – By Credit Notes – Deductible, Section 2 (xxvii) of The Kerala General Sales Tax Act, 1963 and R 9(a) of The Kerala General Sales Tax Rules, 1963.

FACTS
The appellant Company is a manufacturer of home appliances. The company as a part of Sales Promotion Scheme allowed discount to its dealers on achieving pre-set sale targets subsequent to issue of sales invoices by way of credit notes. The Company claimed deduction of such trade discount from turnover of sales. The assessing authority principally accepted the claim but there was a dispute in the computation thereof. The matter was disputed up to the High Court. The Kerala High Court held that discount in question was not a trade discount at all and it was not eligible for deduction in terms of Rule 9(a) of the Rules. The appellant company filed appeal before the SC.

HELD
The definition of the term “turnover” contained in section 2(xxvii) read with Explanation (2)(ii) to it recognises discounts other than cash discounts and provides that those other discounts like the cash discount shall not be included in the turnover. Further, Rule 9(a) stipulates that the accounts should show that the purchaser has paid only the sum originally charged less discount. There is nothing in Rule 9(a) to read it in a restrictive manner to mean that a discount in order to qualify for exemption under its provisions must be shown in the invoice itself. Accordingly, the SC allowed the appeal and remanded the matter back to the assessing authority to pass fresh orders in light of the judgment of the SC.

levitra

[2014] 43 taxmann.com 172 (Mumbai – CESTAT) – Hiranandani Constructions (P.) Ltd vs. CCE

fiogf49gjkf0d
Stay – Whether charges collected by the Promoter developer from flat buyers in terms of provisions of Section 5 of the Maharashtra Ownership of Flats (Regulation) Act, 1963 are liable to service tax under ‘Management, maintenance and repair services’ – Held, prima facie – No.

The appellant was engaged in the construction of residential complex and collected certain amounts as the development and maintenance fees from the flat buyers before handing over to them possession of the flats. Such sum was collected by it as a promoter to discharge payments towards outgoing expenses including any municipal local taxes, property tax, water charges, electric charges, revenue assessment or interest or any mandatory charges under the provisions of section 5 of the Maharashtra Ownership of Flats (Regulation) Act, 1963. The Appellant was under obligation to return the balance amount, if any, after debiting the expenses, while handing over the possession. The department considered the a ctivity as taxable under the category of “management, maintenance and repair services”. The Tribunal after perusing the provisions of section 5 of the Maharashtra Ownership of Flats (Regulation) Act, 1963, held that the Appellant has made out a strong case in their favour and accordingly unconditional waiver and stay for recovery was granted.

levitra

[2014] 43 taxmann.com 41 (Mumbai – CESTAT) – Maharashtra State Co-op. Bank Ltd vs. CCE

fiogf49gjkf0d
Pre-deposit waiver – Whether lease rental received from letting of property acquired from defaulting borrower under the provisions of SARFAESI Act is liable to service tax as renting of immovable property service or is regarded as recovery of outstanding loan? Held, since the appellent is the lessor, it is liable to Service Tax.

Facts:
The appellant is a co-operative bank rendering banking and financial services. It took possession of the Borrower’s factories’ plant and machinery in terms of section 13(4)(a) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, for the default in repayment of loan. Thereafter, the bank leased out the factory and received lease rent from lessee which it adjusted against the loan amount. As per the terms of the lease agreement, the lessee was required to maintain the plant and machinery in good condition at the lessee’s own cost and accordingly the lessee incurred certain expenditure. The department was of the view that the Appellant-bank is liable to discharge service tax liability not only on the amounts received towards rent for the lease of the factories but also on the expenditure incurred by the lessees towards maintenance and repair on the grounds that such activities are undertaken by the lessees on behalf and on account of the appellant.

The appellant contended that the action of letting of the factories cannot be construed as renting of immovable property per se but should be considered as recovery of outstanding loans. As regards, maintenance expenses incurred by the lessee, it submitted that, this cost has been incurred by the lessees and the service provider is the person who actually undertook the maintenance and repair services and not the bank, therefore the appellant is not rendering any service towards management, maintenance or repair.

Held:
The Tribunal observed that, in the lease rental agreements, the appellant is treated as a lessor and therefore, lease rentals received by bank are prima facie liable to service tax. As regards the maintenance and repair costs incurred by the lessee, the Tribunal expressed a prima facie view that the Appellant is not the service provider and there is no liability on the appellant in respect of those transactions. Considering the fact that, the appellant had already discharged entire liability of rental income under protest, the waiver from pre-deposit of balance taxes was granted by the Tribunal.

levitra

[2014] 43 taxmann.com 259 (Ahmedabad – CESTAT) – SOS Enterprise vs. CCE&ST

fiogf49gjkf0d
Whether, a service provider can be directed to pay differential service tax if the recipient of his service is found to have claimed credit in excess of that paid by the service provider? Held, no.

Facts:
The Appellant provided services as direct selling agent to its principal and raised invoices on the principal for such services. In a proceeding against the principal, on verification of records, it was found that, the principal has taken the CENVAT Credit more than service tax actually paid by the Appellant. On this ground demand was confirmed against the Appellant to the extent of excess CENVAT Credit and penalties were imposed. The Appellant explained that the differences arise because the Appellant paid the service tax on “receipt basis”, whereas the Principal may have taken the CENVAT Credit on the basis of invoice.

Held:
The Tribunal held that, if the department has to make out an offence case against the appellant, it is the responsibility of the department to show that the appellant had received the amount but did not pay the service tax. In the absence of any evidence to show that the Appellant has not paid the tax on the amount received and in the absence of specific allegation in the show cause notice or in the findings of the lower authorities, requirement of pre-deposit of taxes was waived.

levitra

[2014] 43 taxmann.com 42 (New Delhi – CESTAT) Balaji Tirupati Enterprises vs. CCE

fiogf49gjkf0d
Whether a contract of maintenance can be held as divisible if material portion and service portion is separately mentioned in the Contract between the parties? Held, yes.

Facts:
In this case, the issue before the Tribunal was that in terms of works contract of repair of transformers, whether the goods deemed to be sold in the execution of works contract were liable for Service Tax.

Held:
The Tribunal on the perusal of the Works Order executed by the Appellant with the power supply authorities categorically observed that, both parties to the contract were conscious of the terms which involved both sales and service. The composition of the goods used for repair contract of transformer is patently clear. Tribunal relied upon the decision in the case of CCE vs. Kailash Transformers [Final Order No. ST/A/402/12-Cus, dated 23-05-2012] in which the Tribunal assigned weightage to the manner how the parties operated with the understanding of sale of goods as well as service provided to effectuate the contract. Accordingly it was held that the Finance Act, 1994 is not a Commodity Taxation Law. As a result of which the goods which were deemed to be sold in the execution of works contract shall not enter into the purview of the levy of the Service Tax.

levitra

Section 194H – Provisions of section 194H apply when the payments are made to the agents or credited to the agent’s accounts, whichever is earlier, and not when the payment is credited to the provision account.

fiogf49gjkf0d
5. DCIT vs. Telco Construction Equipment Co. Ltd.
ITAT  Bangalore `C’ Bench
Before P. Madhavi Devi (JM) and Jason P. Boaz (AM)
ITA No. 478/Bang/2012
Assessment Year : 2007-08.                                      
Decided on:   7th March, 2014.
Counsel for revenue/assessee: Priscilla Singsit/S. Anantha.

Section 194H – Provisions of section 194H apply when the payments are made to the agents or credited to the agent’s accounts, whichever is earlier, and not when the payment is credited to the provision account.

Facts:

The assessee-company was carrying on the business of manufacturing, purchase and sale of excavators, loaders, cranes, dumpers and spare parts etc. For the relevant assessment year, the assessee filed its return of income declaring income of Rs. 282,44,84,066/-. In the course of the assessment proceedings, the Assessing Officer (AO) observed that the assessee has debited a sum of Rs. 14,84,26,424 as sales commission, out of which a sum of Rs. 6,46,11,000/- relates to the provision made towards commission. The assessee was asked to explain as to how the provision has been made and on what basis it is worked out and as to why no TDS was made from this amount. The assessee explained that the provision was made on the basis of sales made during the year from different sales offices of the company and on the basis of communication received from these offices regarding commission payable on such sales. As to why no TDS was made from this amount, it was clarified that no TDS was made from the provision but as and when the commission payments were made in the subsequent year, TDS was made and remitted to the Government account.

The AO disallowed a sum of Rs. 6,46,11,000 u/s. 40(a) (ia) since according to him the provisions of section 194H were applicable and the assessee failed to comply with the same. Aggrieved, the assessee filed an appeal to CIT(A) who relying on the decision of the jurisdictional High Court in the case of ACIT vs. Motor Industries Co. (249 ITR 141) held that the amount credited by the assessee is only a provision and not actual payment of commission to the party and till the amounts are credited to the respective party’s account, it cannot be said that the same have become finally quantified and hence, the provisions of section 194H are not attracted. Aggrieved, the revenue preferred an appeal to the Tribunal.

Held:

 The amount credited by the assessee is to the provision account and not to the respective agent’s accounts. Therefore, it is clear that the assessee has not made any payment to the agents. The provisions of section 194H would apply when the payments are made to the agents or credited to the agent’s accounts, whichever is earlier, and not when the payment is credited to the provision account. As rightly pointed out by the learned counsel for assessee, the agents would get vested right to receive the commission only when they fulfill the obligations under the agreement for commission. We find that the CIT(A) has properly appreciated the issue before deleting the addition made by the AO. In view of the same, we do not see any reason to interfere with the finding of the CIT(A) on this issue. This ground of appeal of the revenue was dismissed.

levitra

S/s. 143(2), 292B, 292BB – Where a revised return filed is treated as non-est since the original return was not filed within due date mentioned in section 139(1), the period of issue of notice u/s. 143(2) needs to be computed with reference to date of filing original return of income. Notice issued u/s. 143(2) beyond the period stated in the proviso to section 143(2)(ii) does not fall within the term `any mistake, defect or omission’ stated in section 292B. The provisions of section 292BB canno<

fiogf49gjkf0d
4. Amiti Software vs. ITO
ITAT  Bangalore `A’ Bench
Before N. V. Vasudevan (JM) and Jason P. Boaz (AM)
ITA No. 540/Bang/2012
A.Y.: 2008-09.  Decided on: 7th February, 2014.
Counsel for assessee / revenue: H. N. Khincha / Bijoy Kumar Panda  

S/s. 143(2), 292B, 292BB – Where a revised return filed is treated as non-est since the original return was not filed within due date mentioned in section 139(1), the period of issue of notice u/s. 143(2) needs to be computed with reference to date of filing original return of income. Notice issued u/s. 143(2) beyond the period stated in the  proviso  to section 143(2)(ii) does not fall within the term `any mistake, defect or omission’ stated in section 292B.  The provisions of section 292BB cannot extend to a case where the question of limitation is raised on admitted factual position in a given case.


Facts:

For the assessment year 2008-09, the assessee filed the original return of income on 01- 10-2008 declaring a total loss of Rs. 16,15,127 and also claiming deduction u/s. 10A amounting to Rs. 1,54,83,511. The assessee computed tax payable under MAT u/s. 115JB. The return of income was processed on 27.8.2009 and it resulted in a demand of Rs. 2,05,710. The return filed was beyond the due date prescribed u/s. 139(1).

The assessee filed a revised return on 30.9.2009 in which business income was stated to be Rs. Nil after claiming exemption of Rs. 1,53,83,511 u/s. 10B. Since the original return was filed beyond the due date, the AO treated the revised return to be non-est. A notice dated 19-08-2010 was issued by the AO and served on the assessee. There was no dispute that this was the only notice issued and served and the assessee did not dispute having received this notice.

Since the original return was filed beyond due date mentioned in section 139(1), the AO in view of the provisions of proviso to section 10A(1A) of the Act, denied the deduction claimed u/s. 10A of the Act. He completed the assessment assessing the total income under the normal provisions of the Act and not u/s. 115JB. Aggrieved, the assessee preferred an appeal to the CIT(A) where it was contended that the assessment be annulled since the notice u/s. 143(2) was issued beyond the time limit mentioned in proviso to 143(2) (ii). The CIT(A) did not agree, since the assessee had attended the hearings and participated in the assessment proceedings. Aggrieved, the revenue preferred an appeal to the Tribunal.

Held:

The admitted factual position is that the notice u/s. 143(2) of the Act dated 09-08-2010 was admittedly beyond the period of six months from the end of the financial year in which the return of income was filed by the assessee, as laid down in proviso to section 143(2)(ii) of the Act. It is also not in dispute that this is the only 143(2) notice issued by the AO. The order of assessment is very clear on this aspect. The law is by now well settled that issuance of a notice u/s. 143(2) of the Act within the statutory time limit is mandatory and it is not a procedural requirement which is inconsequential. Reference may be made to the decision of the Hon’ble Delhi High Court in the case of Alpine Electronics Asia Pvt. Ltd. vs. DGIT, 341 ITR 247 (Del), CIT vs. Vardhana Estates Pvt. Ltd., 287 ITR 368 and ACIT vs. Hotel Blumoon, 321 ITR 362 (SC). The contrary view expressed by the Hon’ble Madras High Court, in our view, cannot be followed as the decisions relied on by the ld. counsel for the assessee of the Hon’ble Punjab & Haryana High Court and Allahabad High Court also took the view that non issuance of notice u/s. 143(2) of the Act renders assessment order invalid. Admittedly, notice u/s. 143(2) of the Act not having been served on the assessee within the period contemplated under law, the order of assessment has to be held to be invalid and annulled.

As far as section 292B is concerned, we do not think that the notice issued by the AO u/s. 143(2) of the Act in the present case will fall within any mistake, defect or omission which is in substance and effect in conformity with or according to the intent and purpose of this Act. The requirement of giving of the notice cannot be dispensed with by taking recourse to the provisions of section 292B of the Act. As far as provisions of section 292BB is concerned, as laid down in the decisions of the Allahabad High Court in the case of Manish Prakash Gupta (supra) & Parikalpana Estate Development (P) Ltd. (supra) and Hon’ble Punjab & Haryana High Court in the case of Cebong India Ltd. (supra), the provisions of section 292BB cannot be applied in a case where admittedly no notice u/s. 143(2) had been issued within the time limit prescribed in law.

We may also clarify that the dispute in the present case is not with regard to issue and service of notice u/s. 143(2) of the Act, as admittedly there was only one notice u/s. 143(2) dated 19-08-2010 issued and served on the assessee before completion of the assessment proceedings.The question is as to, whether the said notice was issued and served within the time contemplated u/s. 143(2) of the Act. The provisions of section 292BB lay down the presumption in a given case. It cannot be equated to a conclusive proof. The presumption is rebuttable. The provisions of section 292BB cannot extend to a case where the question of limitation is raised on admitted factual position in a given case. We therefore hold that the provisions of section 292BB of the Act will not be applicable to the present case.

The appeal filed by the revenue was dismissed.

levitra

Section 54EC –Term ‘month’ used in the provisions does not mean 30 days but it means ‘calendar month’ therefore investments made before the end of the calendar months eligible for deduction.

fiogf49gjkf0d
3. Alkaben B. Patel vs. Income Tax Officer
In the Income Tax Appellate Tribunal Special
Bench, Ahmedabad
Before G.C. Gupta V. P.), Mukul Kr. Shrawat
(J. M.) and N.S. Saini (A. M.)
ITA No.1973/Ahd/2012
Asst. Year 2009-10.  Decided on 25/03/2014
Counsel for Assessee / Revenue:  U.S. Bhati / P.L. Kureel and O.P. Vaishnav

Section 54EC –Term ‘month’ used in the provisions does not mean 30 days but it means ‘calendar month’ therefore investments made before the end of the calendar months eligible for deduction.

Issue:

The issue before the Tribunal was – whether for the purpose of section 54EC the period of investment of six months should be reckoned after the date of transfer or from the end of the month in which transfer of capital asset took place? The assessee had earned Long Term Capital Gain on sale of a flat. She invested the gain earned in purchase of NHAI bonds and claimed deduction u/s. 54 EC. The sale of flat took place on 10th of June, 2008 and the bonds were purchased on 17th of December, 2008.According to the AO, the assessee was required to invest the capital gain in the specified asset within a period of six months from the date of thetransfer i.e. 10th of December 2008, and that requirement was not complied with by the assessee; hence, not eligible for the deduction u/s. 54EC of IT Act. The contention of the assessee was that since the application for the purchase ofthose bonds was tendered in the bank on 8th December, 2008,which was within the period of six months from the date of the transfer of the Long Term Capital Asset, the assesseewas eligible for the deduction u/s. 54EC.

Alternatively, the assessee’s contention was that up to the endof the month of December 2008, the said investment waseligible for the deduction. According to the AO as well as the CIT(A), the assessee was unable to establish that the impugned application for investment in NHAI bond was actually tendered on 8th of December, 2008. They were also not convinced with the alternate contention of the assessee.

Before the Tribunal, the revenue justified the orders of the lower authorities and contended that the Income-tax Act and the Income-tax Rules have used two types of phraseology in respect of the computation of period for the purpose of prescribing a limitation. The first type of wordings used is “not exceeding 6 months from the date on which application is made” or “anytime within a period of 6 months after the date of suchtransfer”. These words are used in section 54EC and section 281 B as well as in Rule 10K(2) and Rule 11AA(6). The second type of wordings used are “6 months/4months/1 month from the end of the month” in which a particular order is made/received/application is received. This wording is found in section 275 and section 154(8) aswell as in Rule 6DDA(5). It was emphasised that the wordings are unambiguous and the intention of the legislation is apparent that wherever the end of the month is to be calculated then the intention is made clear in the statute itself. Otherwise as per the language, a particular date is to be taken into account for the purpose of calculation of days/ months. It was therefore pleaded that in a situation when the intention of the legislation is clear, then there is no necessity to take the help of “General Clauses Act,1897” as suggested by the assessee. Further, it was pleaded that in section 54EC, the limitation of period for an investment has beenprescribed as “at any time within a period of 6 months from thedate of such transfer”. In ordinary sense, a ‘month’ is a period from a specified date in a month to the date numerically corresponding to the date in the following months, less one. For example, if a particular date is 10th June, 2008, one month shall be up to 9th July, 2008. Therefore, the term”month” has been used in section 54EC in an ordinary sense and the same should not exceed more than 30 days.The wordings of the section should not be replaced by any other wordings. Therefore, in the said example, one month cannot be extended up to 31st July, 2008. If that would have been the intention of the legislation, then certainly these words ought to have been prescribed in the provisions of section 54EC of the Act.

The revenue also relied on the following decisions:
 • Dhanraj Singh Choudhary vs. Nathulal Vishwakarma 16 taxmann.com249 (SC);
• Chironjilal Sharma HUF vs. UOI,(unreported decision of the Supreme Court);
• Jethmal Faujimal Soni vs. ITAT231 CTR332(Bom.);
• Kumarpal Amrutlal Doshi vs. DCIT (Appeal) (ITA No, 1523Mum/2010, order dated 09.02.2011);
• Shree Ram Engg. & Mfg Industries vs. ACIT (ITANo. 3226& 3227/Ahd/2011);
 • Hindustan Unilever Ltd. vs. Deputy Commissioner of Income-tax [191 Taxman 119 (Bom.)];
• S. Lakha Singh Bahra Charitable Trust [15Taxmann. com 97(Asr)].

Held:

The Tribunal noted the argument of the revenue thatsince the statute has prescribed the limitation of six months, the words viz.,“at any time within a period of six months” must not be replaced by the words “at any time within a period of end of six months”. However, according to the tribunal, the incentive provision is to be examined by “purposive construction of statute” or “constructive interpretation of statute” which is neither “liberal interpretation of statute” nor a ‘literal interpretation of statute’. It further added that, it is the true intention of the enactment, which is required to be considered by a court of law.

To resolve the controversy i.e., whether the intention of the legislator was to compute six calendar months or to compute 180 days,the tribunal relied on a decision of the Allahabad High Court in the case of Munnalal Shri Kishan Mainpuri, 167 ITR 415 where the Court while answering the dispute in respect of law of limitation held that, there is nothing in the context of section 256(2) to warrant the conclusion that the word ‘month’ in it refers to a period of 30 days. Therefore, it was held by the Apex court that reference to six months in section 256(2) is to six calendar months and not 180 days. Similarly, it was noted that in the case of Tamal Lahiri vs. Kumar P. N. Tagore, 1978 AIR 1811/1979 SCC (1) 75, the Apex court opined while interpreting section 533 of Bangalore Municipal Act, 1932 the expression six months in the said section means sixcalendar months and not 180 days.

The Tribunal also noted that in a few more sections of the Income-tax Act, the legislature had not used the terms “Month” but has used the number of days to prescribe a specific period e.g. first proviso to section 254(2A) where it is provided that the Tribunal may pass an order granting stay but for a period not exceeding 180 days.This according to the Tribunal was an important distinction made in the statute while prescribing the limitation period. Therefore, the tribunal concluded that in the absence of any definition of the word ‘month’ in the Act, the definition of General Clauses Act 1897 shall be applicable. Accordingly, the tribunal held that the investment in question qualifies for the deduction u/s. 54EC.

levitra

Section 80-IB – Assessee engaged in development of Geographical Information System software, claimed deduction u/s. 80IB –AO and CIT(A) denied deduction u/s. 80IB holding that the assessee was not engaged in the manufacture or production of any article– Tribunal held that the software came into existence after carrying on several processes and was transferred only on completion of the said processes. When transfer of property is an ongoing process at each stage of work, then it will amount to p<

fiogf49gjkf0d
9. [2013] 146 ITD 641 (Ahmedabad – Trib.)
Bhavin Arun Shah. v. ITO
A.Y. 2003-04
Order dated- 28th June 2013

Section 80-IB – Assessee engaged in development of Geographical Information System software, claimed deduction u/s. 80IB –AO and CIT(A) denied deduction u/s. 80IB holding that the assessee was not engaged in the manufacture or production of any article– Tribunal held that the software came into existence after carrying on several processes and was transferred only on completion of the said processes. When transfer of property is an ongoing process at each stage of work, then it will amount to provision for services. The fact that software is produced on a platform not owned by the assessee is irrelevant, when what is being transferred by the assessee is not the platform but the end product and hence assessee was held eligible for deduction u/s. 80-IB.


Facts:

The assessee was engaged in the business of development of Geographical Information System (GIS) software for municipality. And it was undisputed fact that the assessee was engaged in the business of development of customised software on job work basis. The process of development of GIS software involved collection of maps in paper form from municipality. The maps were then digitised by the assessee and also demographic features, geographical features and other infrastructure available in particular areas were incorporated. The maps so prepared were then integrated into software solution to attach further attribute, information and to provide reports and analytical options to the municipalities. The assessee had claimed deduction u/s 80-IB in respect of his business income.

The Assessing Officer had disallowed claim of deduction u/s. 80-IB on the ground that the customised software developed by the assessee was not manufacture of articles or things. The CIT (A) had upheld the order of the Assessing Officer. The Tribunal, relying on decision of Supreme Court in case of CIT vs. Oracle Software India Ltd., (2010) 320 ITR 546, had held that if a process renders a software usable for which it is otherwise not fit then the said process can be termed as manufacture. However, Tribunal was also of the opinion that if one party engages another party to create an item of property that the first party will own from the moment of its creation, then no property will have been acquired by the first party from the other and the transaction should be characterised as the provision of services. However, in case of customised software when the originally developed software is owned by the developer and not by the receiver of such software prior to its transmission then the consideration paid by the receiver is towards the software and not towards the intellectual skills employed by the software developer and in such cases the developer can be held as engaged in manufacture of a customised software and thereby be entitled to deduction u/s. 80IB. Hence Tribunal remitted the matter to the Assessing Officer to show the point of time at which the client of the assessee acquired property in the software, developed by the assessee.

The Assessing Officer, in remand proceedings, expressed the view that since basic area maps were the material on the basis of which the software was developed, and since basic area maps always belonged to the client, it was a case of provision of services. The Commissioner (Appeals) also confirmed the view of the Assessing Officer. Aggrieved, the assessee filed appeal before Tribunal again.

Held:

On demonstration of this software in court, it was noticed that what was produced by the assessee was not a mere compilation of map simplictitor but a much value added product that produced a variety of information which was big help in efficient administration of the municipal work.

The software, came into existence after carrying on several processes, and it was only on completion of these processes, the property in the product could be transferred to the client and the mere fact that one of the inputs was owned by the client itself, did not mean that the property in the product never belonged to the assessee. The transfer of property was therefore not an ongoing process at each stage of work as it is in the case of a provision of services and therefore assessee was held eligible for deduction u/s. 80-IB.

The Tribunal also held that, though the basic inputs (area maps) were given by the client, i.e. the municipality itself, but the product was much more than the compilation of the input and the fact that was being produced, was on a platform (basic inputs) not owned by the assessee, was irrelevant, inasmuch as what was being transferred by the assessee was not the platform but the end product.

levitra

Section 5(2): Salary received by a non-resident from a foreign employer for rendering services outside India, is not taxable in India merely because said salary was credited to NRE bank account of the assessee in India.

fiogf49gjkf0d
8. (2014) 101 DTR 79 (Agra)
Arvind Singh Chauhan vs. ITO
A.Ys.: 2008-09 & 2009-10   Dated: 14-02-2014

Section 5(2): Salary received by a non-resident from a foreign employer for rendering services outside India, is not taxable in India merely because said salary was credited to NRE bank account of the assessee in India.

Facts:

The assessee, an individual, was in employment of a Singapore Company (ESM-S) and worked on merchant vessels and tankers plying on international routes. The assessee’s stay in India in the relevant previous year, was less than 182 days, and so the residential status of the assessee is ‘non-resident’. In the income tax return filed by the assessee, the salary received from ESM-S was not offered to tax on the grounds that his salary income was accruing and arising outside India. As for the salary income being credited to the bank account in India, the assessee’s contention was that the salary income deposited in the bank account in India, directly from the bank account of the company outside India. Thus, it was outside the ambit of section 5(2). However, the Assessing Officer was of the view that the assessee’s explanation could not be accepted for several reasons. One of the reasons is that since the appointment letter was issued by a foreign employer’s agent in India, it is to be deemed that the salary income accrued in India. The Assessing Officer further took note of the fact that the salary cheques were credited to the assessee’s account with HSBC Bank in Mumbai. Hence, the salary of Rs. 13,34,884 received from ESM-S was brought to tax in the hands of the assessee.

Held:

The above issue is analysed in two parts as follows:

1. Whether issuance of an appointment letter gives the assessee the right to receive salary?

 Once it is not in dispute that the assessee qualifies to be treated as a ‘non-resident’ u/s. 6, as is the undisputed position in this case, the scope of taxable income in the hands of the assessee is restricted to section 5(2), Therefore, it is only when at least one of the two conditions u/s. 5(2) is fulfilled that the income of a non-resident can be brought to tax in India. In the present case, the services are rendered outside India as crew on merchant vessels and tankers plying on international routes. A salary is compensation for the services rendered by an employee and, therefore, situs of its accrual is the situs of services, for which salary paid, being rendered. It is wholly incorrect to assume that an employee gets the right to receive the salary just by getting the appointment letter. An employee has to render the services to get a right to receive the salary and unless these services are rendered, no such right accrues to the employee. Undoubtedly, if an assessee acquires a right to receive an income, the income is said to have accrued to him even though it may be received later on, it’s being ascertained, but this proposition will be relevant only when the assessee gets a right to receive the income, and, in the present case, the assessee gets his right to receive salary income when he renders the services and not when he simply receives the appointment letter. Thus, the receipt of an appointment letter cannot be the sole basis for deciding situs of accrual of salary.

2. Whether salary amount remitted to bank account in India attracts taxability u/s 5(2)(a)?

The law is trite that the ‘receipt’ of income, for this purpose, refers to the first occasion when the assessee gets the money in his own control – real or constructive. What is material is the receipt of income in its character as income, and not what happens subsequently once the income, in its character as such is received by the assessee or his agent; an income cannot be received twice or on multiple occasions. As the bank statement of the assessee clearly reveals these are US dollar denominated receipts from the foreign employer and credited to non-resident external account maintained by the assessee with HSBC, Mumbai. The assessee was in lawful right to receive these monies, as an employee, at the place of employment, i.e. at the location of its foreign employer, and it is a matter of convenience that the monies were thereafter transferred in India. The connotation of an income having been received and an amount having being received are qualitatively different. The salary amount is received in India in this case but the salary income is received outside India. Thus, when the salary has accrued outside India, and thereafter, by an arrangement, the salary is remitted to India and made available to the employee, it will not constitute as receipt of salary in India by the assessee so as to trigger taxability u/s. 5(2)(a).

levitra

Section 40A(3) – In a case where liability for an expense is incurred in one year and the payment thereof is made in a subsequent year, the law applicable in the year in which the liability was incurred would be applicable and not the law applicable in the year in which the payment is made.

fiogf49gjkf0d
7. 149 TTJ 205 (Ahm)
Tushar A. Sanghvi (HUF) vs. ITO
ITA No. 1901/Ahd/2011
Assessment Years: 2008-09.  
Date of Order: 09-02-2012

Section 40A(3) – In a case where liability for an expense is incurred in one year and the payment thereof is made in a subsequent year, the law applicable in the year in which the liability was incurred would be applicable and not the law applicable in the year in which the payment is made.

Facts :

In the course of the assessment proceedings for the assessment year 2007-08, the Assessing Officer noticed that the assessee had shown creditors’ outstanding at Rs. 1,95,17,664 as on 31-03-2007. He asked the assessee to give details of payments made to the said outstanding creditors in the subsequent years. Upon receiving the details from the assessee, the AO made enquiries with the concerned banks where the cheques issued by the assessee were presented for clearance. From the replies furnished by the bank, the AO noticed that the cheques issued in the name of the creditors M/s. Bhavi Enterprises, M/s. Patel Traders and M/s. Jayraj Traders were deposited in some other persons accounts. Cheques of amounts aggregating to Rs. 62,10,000 issued in favour of M/s. Bhavi Enterprises were deposited in accounts of another person. Cheques of amounts aggregating to Rs. 12,10,000 issued in favour of Patel Traders were deposited in accounts of other persons. The AO called upon the assessee to give details as to in which assessment year expenses have been claimed on account of the above creditors. The assessee expressed inability to furnish the reply. The AO concluded that the payments were made otherwise than by account payee cheques and accordingly Rs. 62,10,000 is required to be treated as income in the assessment year 2008-09 and Rs. 12,10,000 is required to be treated as income in the assessment year 2010-11. He reopened the assessment for the assessment year 2008-09 u/s. 147 of the Act. The assessee vide its reply informed the AO that the above mentioned parties were mediators who were entitled only to commission which is evident from the sample copy of the bill. Without prejudice, it was submitted that the purchases were made in the year 2004 and as the transactions related to the said year only 20% of the disallowance should be made of the amounts paid otherwise, than by account payee cheques or drafts as per provisions applicable in that assessment year. The AO added Rs. 62,10,000 to the total income of the assessee for assessment year 2008-09. 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 found that there is no dispute about the facts. It noted that the expenses were incurred in the assessment year 2004-05 and the payment was made in the assessment year 2008- 09 by crossed cheques. It then noted the provisions of section 40A(3) as applicable in assessment year 2004-05 and also as applicable in assessment year 2008-09. It held as under: When we go through the provisions applicable in assessment year 2004-05 and assessment year 2008-09, we find that there are three major differences;

(i) The first difference is that, as per the provisions of the assessment year 2004-05, the assessee is required to make payment by way of crossed cheque/crossed bank draft whereas as per the provisions of assessment year 2008-09, the assessee is required to make payment by way of a/c. payee cheque/a/c payee bank draft;

(ii) The second difference is this, that as per the provisions applicable in assessment year 2004-05, the disallowance was to be made to the extent of 20% of payments made in contravention to the prescribed mode whereas, as per the provisions applicable in the assessment year 2008-09, such disallowance is to the extent of 100% of such payment in contravention to the prescribed mode;

(iii) The third difference is with regard to payment in a subsequent year in contravention to the prescribed mode. As per the provisions applicable in the assessment year 2004- 05, the disallowance was to be made in the relevant year in which the expenditure was incurred whereas as per the provisions of assessment year 2008-09, addition is to be made in the year in which payment in contravention to the prescribed mode was made by the assessee irrespective of the fact as to whether the expenditure was incurred in an earlier year. Now, the question to be decided by us, is as to whether if an expenditure incurred in the assessment year 2004-05 for which payment is made in the assessment year 2008-09, provision of section 40A(3) applicable in assessment year 2004-05 is required to be applied or the provisions in assessment year 2008-09 being the year of payment, are to be applied. The A O has applied the provisions of section 40A(3) as amended w.e.f. 01-04-2008, because the payments were made by the assessee in the assessment year 2008-09 and the claim of the assessee before us is this, that since the expenses were incurred in the assessment year 2004-05, such expenses are to be subjected to the provisions applicable in assessment year 2004-05.

The Tribunal noted that the decision of the Tribunal in the case of Anand Kumar Rawatram Joshi (supra) is under similar facts with small difference that in that case, the expenses were incurred in assessment year 2007-08 and the payments were made in assessment year 2008-09. It noted that in the said case the Tribunal has in para 8 held that if the liability is incurred up to 2007-08 but the payment made is in a subsequent year i.e., in the assessment year 2008-09 or any subsequent year, the provisions of section 40A(3) as applicable in that year in which the liability was incurred should be applied, as per which, if the assessee does not make payment for such a liability in a sum exceeding Rs. 20,000/- by an a/c payee cheque drawn on a bank or by an a/c payee bank draft, the allowances originally made shall be deemed having wrongly been made and the assessment order of that year in which liability was incurred should be rectified as per the provisions of section 154 and for the purpose of reckoning the limitation period of four years, it shall be reckoned from the end of the assessment year following the previous year in which the payment was so made.

The Tribunal held that the present issue is squarely covered in favour of the assessee by this Tribunal decision rendered in the case of Anand Kumar Rawatram Joshi (supra). Applying the ratio of the said decision, if the provisions of section 40A(3) as applicable in the assessment year 2004-05 are applied, no addition in the present year is justified and no disallowance can be made in the assessment year 2004-05 also because as per the provision of section 40A(3) as applicable in the assessment year 2004-05, the payments are required to be made by a crossed cheque/crossed bank draft and the assessee has made the payment by way of crossed cheque and, therefore, no disallowance is called for in the present case as per the provisions of section 40A(3) applicable for the assessment year 2004-05. The Tribunal allowed the appeal filed by the assessee.

levitra

Section 54F – Since assessee had entered into a registered agreement within time period prescribed u/s. 54F, he was entitled to claim exemption even in respect of amounts paid at the time of booking which was more than one year prior to the date of transfer. New house vests in the assessee by registered deed and not by availing of housing loan or payment of booking amount.

fiogf49gjkf0d
6. 62 SOT 59 (Bang)
Gopilal Laddha vs. ACIT
ITA No. 1356/Bang/2012
Assessment Years: 2009-10.          
Date of Order: 31-10-2013

Section 54F – Since assessee had entered into a registered agreement within time period prescribed u/s. 54F, he was entitled to claim exemption even in respect of amounts paid at the time of booking which was more than one year prior to the date of transfer. New house vests in the assessee by registered deed and not by availing of housing loan or payment of booking amount.

Facts:

During the previous year relevant to assessment year 2009-10, land belonging to the assessee was acquired by the Karnataka Industrial Development Board for Bangalore Metro Rail Corporation and the assessee received compensation of Rs. 84,61,701 on 21-07-2008. The assessee acquired a residential flat at Bangalore for Rs. 50,98,720 by registered sale deed dated 11-09-2008. He, accordingly, claimed exemption of Rs. 46,11,166 u/s. 54F of the Act.

In the course of assessment proceedings the Assessing Officer (AO) noticed that the said flat whose cost was considered for claiming exemption u/s. 54F of the Act was booked on 19-01-2006 and the assessee had taken a loan of Rs. 40 lakh from Syndicate Bank which was sanctioned on 24-05-2006 for investment in purchase of the said flat. Thus, the AO noticed that the amount of Rs. 44,70,852 was paid by 31-03-2007 i.e., more than one year prior to acquisition of the new asset. The AO was also of the view that since the assessee invested Rs. 40 lakh out of the Housing Loan from Syndicate Bank in the purchase of the new asset and therefore only Rs. 6,23,433 qualified for exemption. He accordingly, worked out the exemption u/s. 54F at Rs. 6,23,433 and allowed Rs. 6,23,433 instead of Rs. 46,11,166 as claimed.

Aggrieved, the assessee preferred an appeal to Commissioner of Income-tax (Appeals), who dismissed the appeal by holding that the assessee is not eligible for exemption u/s. 54F as claimed.

Aggrieved, the assessee preferred an appeal to the Tribunal.

Held:

The Tribunal noted that the AO had restricted the claim for exemption for the reason that though the flat was purchased by registered deed dated 11-09-2008, the booking was made on 09-01-2006 and a housing loan of Rs. 40 lakh was taken from Syndicate Bank on 24-05-2006 which was invested in the said property before 31-03-2007.

The Tribunal did not agree with the view of the authorities below that both these investments amounting to Rs. 44,70,852 being made more than one year prior to the date of receipt of compensation of Rs. 84,61,701 for asset, on 21-07-2008, the assessee would not be eligible for exemption u/s. 54F of the Act. The Tribunal was of the view that the amounts paid by the assessee on booking of the asset on 09- 01-2006 and the housing loan of Rs. 40 lakh availed from Syndicate Bank for investment in the purchase thereof have not vested the assessee with the ownership of the new asset. The assessee has been vested with the ownership of the new asset only by virtue of the Registered Sale Deed dated 11-09- 2008. It held that the authorities below have erred in restricting the exemption u/s. 54F of the Act to Rs. 6,23,433. It held that the assessee is entitled to exemption of Rs 46,11,166 as claimed by it.

This ground of appeal filed by the assessee was allowed.

levitra

S/s. 54B, 54F – Assessee is not entitled to claim exemption under s/s. 54B/54F in respect of investments made in the name of major married daughters. The term `assessee’ used in section 54B/54F cannot be extended to mean the major married daughters.

fiogf49gjkf0d
5. 160 TTJ 236 (Vishaka)
Ganta Vijaya Lakshmi vs. ITO
ITA No. 253/Viz/2012
Assessment Years: 2008-09.   
Date of Order: 22-07-2013

S/s. 54B, 54F – Assessee is not entitled to claim exemption under s/s. 54B/54F in respect of investments made in the name of major married daughters. The term `assessee’ used in section 54B/54F cannot be extended to mean the major married daughters.

Facts:

During the previous year relevant to the assessment year 2008-09, the assessee transferred wet agricultural land for a consideration of Rs. 1,41,12,000. The assessee purchased an agricultural land, for a consideration of Rs. 52 lakh, in the name of her younger daughter and a residential house in the name of her eldest daughter for a consideration of Rs. 58 lakh. The long term capital gain arising on such transfer was claimed to be exempt under s/s. 54B/54F on the grounds that the investment made in the names of two daughters qualifies for exemption under s/s. 54B/54F. The assessee claimed that she has entered into “Possession purchase agreements” with her two daughters to comply with the provisions of s/s. 54B/54F. It was also contended that the daughters should be considered as her benamidars.

The Assessing Officer (AO) denied the exemption claimed by the assessee on the ground that the properties purchased were not registered in the name of the assessee. The claim of “benami” was rejected by the AO on the grounds that the Benami Transactions (Prohibition) Act provides exemption to the property purchased in the name of unmarried daughters only. He also refused to recognise both the “possession purchase agreements” as they were unregistered documents and did not transfer the properties. Tribunal news Aggrieved, the assessee preferred an appeal to the CIT(A) who upheld the action of the AO.

Aggrieved, the revenue preferred an appeal to the Tribunal.

Held:

The decision of the jurisdictional High Court in the case of Late Mir Gulam Ali Khan vs. CIT 56 CTR 144 (AP) was rendered on typical facts of the case before the Court viz. that the assessee in that case entered into an agreement for purchasing a residential property and had also paid earnest money in furtherance of the same. Unfortunately, he passed away before the completion of the purchase transaction. Hence, the legal representative of the assessee completed the purchase of property. Thus, in effect, the new house property was not purchased in the name of the assessee, who sold the old property. Since the said legal representative of the assessee is liable to be assessed in respect of the capital gain on the property sold by his father, he claimed the cost of new property as deduction u/s. 54 of the Act. Thus, the facts prevailing in the case of Late Mir Gulam Ali Khan are peculiar and further, u/s. 159 of the Act, the legal representative is treated as assessee in respect of liability of the deceased person. The liberal view taken by the High Court in that case cannot be stretched in each and every case, where the property was not purchased in the name of the assessee who sold the property. It held that the assessee in the present case cannot derive support from this decision.

In respect of the other decisions relied upon, on behalf of the assessee, the Tribunal noted that in all those cases, the new property was either purchased in joint names i.e., in the names of the assessee and others, or it was purchased in the names of spouse or minor daughter. The Tribunal held that in its view the Courts have considered the investments made in the name of wife or minor daughter as an investment made by the assessee himself for the reason that there was no real intention to provide consideration for the benefit of wife/minor daughter alone.

In the instant case, undisputedly, the investments have been made in the names of the married daughters and apparently both of them are also majors. Thus, it is not a case of joint ownership along with the assessee. Both the daughters of the assessee shall have every right over the property purchased in their respective names. Thus, it cannot be said that the intention of purchasing the properties was not to give benefit to them. The assessee claims that she has entered into purchase possession agreement with her two daughters. However, we tend to agree with the view of the learned CIT(A) that the said agreement does not actually effect transfer of assets to the name of the assessee. Further, as pointed out by the AO, the said agreements have been entered only to show some compliance with the provisions of section 54B/54F of the Act.

The appeal filed by assessee was dismissed.

levitra

Valuation of closing stock: Section 145: A. Y. 2006-07: Land purchased by assessee in dispute before civil court: Adverse impact on market value of land: Assessee reduced value of closing stock and adopted the same in the subsequent years accepted by Revenue. Addition on account of under valuation of closing stock not proper: CIT vs. Satish Estate P. Ltd; 361 ITR 451 (P&H):

fiogf49gjkf0d
The assessee had purchased a land in respect of which one A had filed a suit against the assessee on 11-03-2006. This dispute had an adverse impact on the market value of the land. The assessee valued the land at Rs. 75 lakh below the cost price and accordingly reduced the value of the closing stock as on 31-03-2006. The Assessing Officer made an addition of Rs. 75 lakh on the ground of undervaluation of closing stock. Commissioner (Appeals) deleted the addition holding that the assessee had not changed the method of valuing the closing stock. The Tribunal found that the Revenue did not challenge the value of the opening stock of the land in the subsequent assessment year while passing the assessment order u/s. 143(3) and accepted the valuation. The Tribunal dismissed the appeal filed by the Revenue. On appeal by the Revenue, the Punjab and Haryana High Court upheld the decision of the Tribunal and held as under:

“i) A civil suit was filed by A in which the assessee was impleaded as a party. There was an interim order passed by the trial court which was affirmed by the Court as well. Thus, the assessee was justified in reducing the valuation of the closing stock.

ii) The assessee had reduced the closing stock and the same was taken as opening stock in A. Y. 2007-08 which was accepted by the Assessing Officer while framing the assessment u/s. 143(3). Thus no loss to Revenue had been caused.

iii) In view of the above, no substantial question of law arises. Consequently the appeal stands dismissed.”

levitra

Recovery of tax: Power of TRO u/s. 281: Petitioner had purchased a property from one ‘M’ on 17-05-1995: TRO having found that ‘M’ inspite of several demand notices issued during years 1989 to 1994 had not paid income tax dues passed an order u/s. 281 declaring above sale transaction as void: TRO had no power u/s. 281 to declare sale transaction as void:

fiogf49gjkf0d
Karsanbhai Gandabhai Patel vs. TRO; [2014] 43 taxmann. com 415 (Guj):

The petitioner purchased a property from one ‘M’ on 17-05-1995. ‘M’ had defaulted in making payment of income tax dues for various assessment years. The Assessing Officer issued several demand notices on ‘M’ during the years 1989 to 1994 for recovery of the unpaid taxes. However, ‘M’ had not paid such taxes. Thereupon the Tax Recovery Officer (TRO) attached the above property by issuing an order dated 22-05-1995. Thereafter, he passed an order dated 08- 11-1995 u/s. 281 declaring the above sale transaction as void. He passed the order without any notice to the petitioner. Later on 03-02-2004, he wrote to ‘M’ indicating that the department would proceed with the auction sale of the property under attachment to recover the dues of ‘M’. The Gujarat High Court allowed the writ petition filed by the petitioner and held as under:

“i) Section 281 provides certain transfers to be void. S/s. (1) thereof provides that where, during the pendency of any proceedings under the Act or after the completion thereof, but before the service of notice under rule 2 of the Second Schedule, any assessee creates a charge on, or parts with the possession (by way of sale, mortgage, gift, exchange or any other mode of transfer) of, any of his assets in favour of any other person, such charge or transfer shall be void as against any claim in respect of any tax or any other sum payable by the assessee as a result of completion of the said proceedings or otherwise. Proviso to s/s. (1), however, provides that such charge or transfer shall not be void if made for adequate consideration and without notice of pendency of such proceedings or without notice of such tax or other sum payable by the assessee or with the permission of the Assessing Officer.

ii) It can thus be seen that, even if the transaction creating a charge or parting of possession has been entered into by the assessee during the pendency of any proceedings under the Act or after completion thereof, the eventuality of such charge or transfer being declared void can be avoided provided one of the two conditions contained in the proviso is satisfied. Under such circumstances, the transferee can demonstrate that the transaction had taken place with the previous permission of the Assessing Officer or that the same was entered into for adequate consideration and without notice of pendency of such proceedings or without notice of such tax or other sum payable by the assessee.

iii) This element of the transaction being with adequate consideration and without notice would equally apply to the assessee as well as the transferee. In a given case, it may even be open for the assessee to establish that the transaction was for adequate consideration without notice. In a given case, even if the assessee had notice of the pendency or the outstanding tax or sum payable, the transferee can still take shelter of the transactions having been entered into by him for adequate consideration and without notice.

 iv) It is, therefore, that the Courts have read into this provision the requirement of hearing the transferee also. Quite apart from this, Courts have taken a view that s/s. (1) of section 281 only provides for the eventuality of the transaction hit by the said provision as being void. It does not create any machinery for the revenue authorities to entertain dispute and declare the transaction to be void for which purpose, only a civil suit would lie.

v) The Bombay High Court in the case of Gangadhar Vishwanath Ranade (No. 2) vs. T.R.O. [1989] 177 ITR 176 held that u/s. 281, the TRO has no power to declare a transfer as void. This decision of the Bombay High Court was carried in appeal before the Supreme Court. The Apex Court in TRO vs. Gangadhar Vishwanath Ranade [1998] 234 ITR 188/100 Taxman 236 confirmed the view of the Bombay High Court.

vi) The issue involved in the instant case is squarely covered by the decision of the Supreme Court in the case of Gangadhar Vishwanath Ranade (supra). Therefore, the order passed by the Tax Recovery Officer u/s. 281 was liable to be set aside.”

levitra

Recovery of tax: Liability of directors: Section 179: A. Y. 1998-99: Debts Recovery Tribunal directing recovery of bank’s dues by sale of properties of company: Balance due to bank supplied by directors from their personal resources: Directors agreeing to forgo their loans to company in order to have its name struck of register of companies: Facts establishing that non-recovery of tax due from company not attributable to gross neglect, misfeasance or breach of duty on part of directors: Recover<

fiogf49gjkf0d
(2014) 43 taxmann.com 288 (Guj):

The petitioners were directors of a private company. On 24-06-2002, the Assessing Officer issued notices to the directors u/s. 179(1) of the Income-tax Act, 1961, for recovery of the tax dues of the company of Rs. 7,53,649/- in respect of the A. Y. 1998-99. Being not satisfied by the reply given by the directors, the Assessing Officer passed order u/s. 179 for recovery of the tax dues from the directors. The Commissioner dismissed the revision petition made u/s. 264 of the Act.

The Gujarat High Court allowed the writ petition filed by the directors and held as under:

“i) The company had run into losses. The company had substantial dues towards the bank from which it had taken loan. Certain properties were also mortgaged to the bank. To realise its dues, the bank filed a petition before the Debt Recovery Tribunal where the parties agreed to settle the total dues for Rs. 25 lakh. The properties of the company were valued at Rs. 18 lakh. The balances was supplied by the directors from their personal resources. Additionally, in order to strike the name of the company off the register of companies, the directors agreed to forgo their loans to the company which were in excess of Rs. 16 lakh.

ii) When such facts were established, the Assessing Officer ought to have held that the petitioners had succeeded in establishing that non-recovery of the tax dues of the company could not be attributed to gross neglect, misfeasance or breach of duty on the part of the directors in relation to the affairs of the company.

iii) The assets of the company may not have been mortgaged to the bank. Nevertheless, the Debts Recovery Tribunal held the bank entitled to recover the suit dues by sale of hypothecated machinery and movables and by sale of immovable property. This would not bring the action of the petitioners within the expression of gross neglect, misfeasance or breach of duty on their part.

iv) The contention of the counsel of the Revenue that the petitioners should have offered the properties for recovery of the Department was not tenable. The orders passed by the Income Tax Officer and the Commissioner were to be quashed.”

levitra

Reassessment: Change of opinion: S/s. 147 and 148: A. Y. 2005-06: AO completed original assessment u/s. 143(3) on 24-12-2007: Subsequently issued notice u/s. 148 on basis of investigation report dated 13-03-2006 received from investigation wing: Reasons to believe did not state that investigation report was not with Assessing Officer when he completed original assessment: Attempt to reopen assessment was result of a change of opinion: Reopening not valid

fiogf49gjkf0d
Rasalika Trading & Investment Co. (P.) Ltd. vs. Dy. CIT; [2014] 43 taxmann.com 371 (Delhi):

The assessee, an investment and security business company, had raised additional capital and offered shares at a premium of Rs. 90 per share during the previous year relevant to the A. Y. 2005-06. The Assessing Officer completed the assessment of the assessee for the A. Y. 2005-06 u/s. 143(3) on 24-12-2007. Subsequently the Assessing Officer issued notice u/s. 148 on the basis of the investigation report dated 13- 03-2006 received from the DIT (Investigation), New Delhi. The said report indicated that the assessee was amongst the beneficiaries of bogus accommodation entries. The Delhi High Court allowed the writ petition filed by the assessee and held as under:

“i) It is evident from the aforesaid that the reassessment proceedings were initiated by the impugned notice which expressly and plainly states that ‘reasons to believe’ are based upon the materials contained in the investigation report of 13-03-2006. The notice itself does not spell out that the report was not on the record when the original assessment was completed on 24-12-2007, nor did the revenue even suggest so in the counter affidavit filed in the proceedings. It is only in a subsequently filed additional affidavit that the position is sought to be clarified. Clearly, the High Court refrains from making such an enquiry at a time when the Assessing Officer has, in the first instance, failed to spell out clearly in section 148 notice itself that such report was not on record. In other words ‘the reasons to believe’ do not state even in one sentence that the investigation report was not with the Assessing Officer when he completed the assessment.

ii) The material on record in fact suggests otherwise. The nature of the queries put to assessee and the replies and confirmation furnished to the Assessing Officer in the course of the regular assessment clarify that what excited the suspicion was indeed gone into by the Assessing Officer himself while framing the assessment u/s. 143(3).

iii) Such being the case the Court has no doubt that the impugned notice, in the circumstances of the case, is based upon stale information which was available at the time of the original assessment and in fact appears to have been used by the Assessing Officer at the relevant time, i.e., during the completion of proceedings u/s. 143(3).

iv) Therefore, the attempt to reopen the proceedings u/ss 147 and 148 is really the result of a change of opinion. Consequently, the impugned notice and all proceedings further thereto are beyond the authority of law and were liable to be quashed.”

levitra

Hindu Undivided Family – Not in existence prior to the coming into force of Hindu Succession Act, 1956 – Suit for Partition – Suit not maintainable

fiogf49gjkf0d
Sushant vs. Sunder Shyam Singh AIR 2014 (NOC) 90 (Del.)

A Hindu Undivided Family was not in existence prior to the Hindu Succession Act coming into force. The Properties in question, inherited by the deceased owner on the demise of his father, would become his persona properties. The son of the deceased owner would not acquire any coparcenary share in the properties till the owner was alive. The suit property would devolve on the son of the deceased in his individual capacity on the death of the owner. Therefore, the claim of the grandson of the deceased for partition of suit properties on the grounds that the same were ancestral, was held not maintainable.

levitra

Quantitative Easing- An Exit In Three Acts

fiogf49gjkf0d
The first act in the exit from extraordinary monetary stimulus in the US began in January. The Fed has been trimming its bond purchases by $10 billion a month since then. Quantitative easing will end by December at the current strike rate.

The second act could start around July 2015. Fed chairperson Janet Yellen has hinted that she may begin to push up the benchmark federal funds rate around that time if the US economic recovery stays on track.

There is a possible third act that nobody in the financial markets seems to be considering. The US central bank has quadrupled its balance sheet since September 2008—from $1 trillion then to $4 trillion now. The explosive growth in the monetary base has not been inflationary, but the return to normal monetary policy should eventually lead the Fed to monetary contraction. Such an endgame will be far more painful than what financial markets are anticipating.

levitra

CBI Follies: This Is No Way To Check Crony Capitalism

fiogf49gjkf0d
The Supreme Court seeks to ensure a strong, independent Central Bureau of Investigation (CBI) to check corruption. Sadly, the CBI is using this enhanced power to pursue frivolous charges against honourable officials. This simply demoralizes and paralyses the bureaucracy, without catching the big fish.

If the CBI is going to chase officials long after they retire, why will they risk taking quick decisions?

The CBI has now registered ten FIRs against six companies for defaulting on loans from public sector banks. How is loan default a crime? Maybe many loans were given because of political connections, but while that’s undesirable, it isn’t criminal. Even willful default is not criminal – the answer is to seize the assets of the defaulters through court action. If the companies in question gave bribes to obtain loans or debt relief, or if they cooked their books, that is certainly criminal. But it is not clear that the CBI understands these distinctions.

Few analysts think the CBI has enough specialized domain knowledge to tackle financial crime. In the West, financial companies are constantly probed and prosecuted, but this requires high financial expertise that can match the best on Wall Street. By contrast, the CBI’s recent efforts suggest a sad lack of expertise, and even of basic financial understanding.

It must be able to distinguish between bad and criminal decisions, and between mere mistakes and crookery. Fast decision-making requires the use of discretion, short-cutting wooden procedures. To treat every use of discretion as criminal is plain wrong, and a recipe for paralyzing decision-making.

Part of the problem lies in a silly legal provision which says that if a decision benefits any private party, the bureaucrat concerned can be charged with corruption even if there is no evidence that he gained personally. A more stupid provision would be difficult to imagine. Can there be any decision that does not benefit somebody? And if indeed there are some decisions that benefit absolutely nobody, would such decisions be worth taking? The UPA government once drafted legislation to remove this provision but did not follow through.

As long as this clause remains law, the CBI can claim it is legally bound to prosecute virtually any decision-taker. Narendra Modi talks of improving governance if he comes to power. That approach must include an immediate ordinance to delete this stupid clause. Other political parties will surely support the conversion of such an ordinance into law.

levitra

Value Every Raindrop

fiogf49gjkf0d
There is no doubt that water will determine whether India becomes wealthy or remains poor. But the management of water is not simply about building more dams or pipelines to take the water to our cities and then more pipelines to flush the waste from our homes. The management of water is about building a relationship between society and its water, so that we can understand the value of each raindrop and understand that unless we are prudent – indeed frugal – with our use of this precious resource, there will never be enough water for all.

Water management is, then, about society and its ability to build technologies to maximise the use of water and, more importantly, technologies to share water with all. It is for this reason that we must re-learn the water wisdom of the past. In the late 1990s, the Centre for Science and Environment published its book Dying Wisdom: Rise, Fall and Potential of India’s Traditional Water Harvesting Systems, which documented the extraordinary wealth and ingenuity of the country’s people living across different ecological systems to manage water. The systems ranged from ways of harvesting glacier water in the cold deserts to delivering water with precision over long distances through bamboo drip irrigation systems in the north-eastern hills.

The kundi of the hot desert of India incorporates the simplest of technologies for powerful impact. Rain is harvested on an artificially created piece of land, which is sloped towards a well to store precious water. The water maths is equally simple; as little as 100 millimetres of rainwater harvested over one hectare of land will collect one million litres of water in this structure.

On the other hand, in the other regions of the country, people harvested floodwater. In other words, people had learnt to live with an excess of water and with its scarcity. And all the coping used the principle of rainwater harvesting in a country that gets rain for only 100 hours of the 8,760 hours in a year. They knew that all the rain of the year could come in just one cloudburst. The solution was to capture that rain and to use it to recharge groundwater reserves for the remaining year. The answer, ultimately, was to use the land for storing and channelling the rain – over or under the ground, catching water where it falls and when it falls.

This tradition of yesterday has crucial relevance in todays and tomorrows urban India. Today, our cities get their water supply from further 261 (2014) 46-A BCAJ and further away – Delhi gets Ganga water from the Tehridam; Bangalore is building the Cauvery IV project, pumping water 100 kilometres to the city; Chennai’s water will travel 200 km from the Krishna river; Hyderabad from the Manjira, and so on. The point is that the urban-industrial sector’s demand for water is growing by leaps and bounds. But this sector does little to augment its water resources – and does even less to conserve and minimise its use. Worse, because of the abysmal lack of sewage and waste treatment facilities, it degrades scarce water even further. Even so, its water greed is not met. Groundwater levels are declining precipitously in urban areas, since people bore deeper in search of the water that municipalities cannot supply.

In new India, the water imperative is that cities must begin to value their rainfall endowment. This means implementing rainwater harvesting in each house and colony. But it also means learning again about the hundreds of tanks and ponds that built, indeed nourished, the city. Almost every city had a treasure of tanks, which provided it the important flood cushion and allowed it to recharge its groundwater reserves. But urban planners cannot see beyond land. So land for water has never been valued or protected. Today, these water bodies are a shame – encroached, full of sewage, garbage or just filled up and built over. The city forgot it needed water. It forgot its own lifeline.

But the real tragedy is that we have lost knowledge of how to value the raindrop.

levitra

The accomplice to crime of corruption is frequently our own indifference.

fiogf49gjkf0d
The accomplice to crime of corruption is frequently our own indifference.
?Bess Myerson

No one would deny that corruption is a worldwide phenomenon.

However. the issue to be considered is the extent of it – both the amount of money changing hands and the number of citizens directly affected by it, i.e., the extent to which low-level corruption affects ordinary people. It is unfortunate that the Prevention of Corruption (Amendment) Bill 2013, inspite of the Parliament Standing Committee on Personnel Public Grievances Law and Justice having already submitted its report on the above bill, and presented in Lok and Rajyasabha on 8th February 2014, did not come for passing in the Parliament in its last session. Some of the proposed amendments therein included:

1) Criminalise bribe-giving to the same extent as receiving bribes (In the present Prevention of Corruption Act, 1969 only receiver of bribe is prosecuted.)

2) Expand the scope of offences that will be termed ‘corruption’;

3) Make bribe-taking and bribe-giving in the corporate sector offences; and

4) Provide for procedures to confiscate the ill-gotten gains from corruption even before the completion of the trial.

According to our Constitution, as the last Lok Sabha was dissolved before the passage of this Bill, it is deemed to have lapsed. It has dealt an enormous blow to the anti-corruption movement. However at least the whistleblowers’ Protection bill, to protect those who make public interest disclosures against corruption is passed.

The need for such a legislation has been strongly felt, as a large number of RTI activists have been targeted and killed for probing corruption. Without legislative protection for a whistleblower, the enabling RTI legislation is rendered ineffective and the fight against corruption crippled.

The corruption perception index 2013 released by Transparency International ranks India at the 94th spot on a global list. Releasing the list, Transparency International said that its “Corruption Perceptions Index 2013 offers a warning that the abuse of power, secret dealings and bribery continue to ravage societies around the world”. “The Corruption Perceptions Index 2013 demonstrates that all countries still face the threat of corruption at all levels of the Government, from the issuing of local permits to the enforcement of laws and regulations,” said Huguette Labelle, chair of Transparency International.

“Corruption within the public sector remains one of the world’s biggest challenges,” Transparency International said, “particularly in areas such as political parties, police, and justice systems.”

“It is time to stop those who get away with acts of corruption. The legal loopholes and lack of political will in the Government, facilitate both domestic and crossborder corruption, and call for our intensified efforts to combat the impunity of the corrupt,” Labelle said. On 10th February, CBI Director Ranjit Sinha addressed the 7th Interpol Global Programme on Anti-Corruption, Financial Crime and Asset Recovery for South Asia in Delhi.

He stated that India’s anti-corruption laws must focus on confiscations of ill-gotten wealth. The proposed amendments in the Prevention of Corruption (Amendment) Bill, 2013 include provisions for procedures to confiscate the ill-gotten gains from corruption even before the completion of the trial. Unfortunately, legislation did not see the light of the day.

The CBI director said that majority of illicit funds that are moved across the border originate from three sources; bribery and corruption, criminal activity and commercial tax evasion. Their movement is facilitated by loopholes in the international financial system.

levitra

Criminalisation of Politics – Netas not serious about Electoral Reforms.

fiogf49gjkf0d
Law Commission chairman and former Delhi High Court chief justice A P Shah has said the “political class doesn’t seem to be serious about electoral reforms”. This was one of the reasons why criminal elements entered politics and tainted money came into the economy, he said.

Justice Shah told that when the law panel called a meeting of major parties for consultation — just before responding to the Supreme Court on the issue of disqualification of charge-sheeted politicians from contesting elections — Aam Aadmi Party, BJP and Congress stayed away.

“When we held a national level seminar (on February 1) on this subject, all the major parties, including AAP, BJP and Congress did not attend the meet, and neither did they send any representation,” Justice Shah said. “Institutional integrity is important to preserve. Criminals should not be allowed to get elected to assemblies and Parliament as that will weaken these institutions,” he added.

The Law Commission has been entrusted with suggesting electoral reforms by the government. The apex court too, relies on the commission for its suggestion on important issues such as electoral and judicial reforms. The SC had earlier asked the commission to give its opinion on whether politicians against whom charges have been framed by a court for serious offences should be disqualified from contesting elections. The panel had in its opinion strongly backed disqualification of candidates against whom a court has framed charges for serious offences like rape, murder etc. However, the apex court has kept the case sub-judice with an interim order saying trials against lawmakers facing serious charges should be completed in a time-bound period of one year.

“All earlier suggestions made by the Law Commis- sion on electoral reforms remain unimplemented,” Justice Shah said, elaborating how in 1999, the commission had made extensive suggestions, one of which pertained to disqualification of chargesheeted politicians from participating in elections.

 “Particularly on decriminalization of politics, the 1999 report had made several suggestions but no government took any action. This is one of the reasons why criminal elements enter politics and tainted money comes into the economy,” Justice Shah said. He also emphasized how these criminal elements have the potential to subvert the judicial process. “These criminal elements have the potential to subvert the judicial process and as a result you can see trials are delayed for several years and that is the reason why the rate of conviction is less,” Shah observed.

 “Even after the Lily Thomas judgment of the Supreme Court (which struck down Sec 8(4) of the RP Act disqualifying a convicted MP/MLA from membership of the House) there has been only three disqualifications so far,” he explained, saying how the number of lawmakers facing serious criminal charges are frighteningly high. More than 160 MPs in the last Lok Sabha were those who had serious criminal charges against them.

“Earlier there was unhealthy connection between politicians and underworld. Now these criminals are seeking elections themselves,” the law panel chairman said. Law breakers should not be allowed to become lawmakers, he emphasized.

levitra

ICAI News

fiogf49gjkf0d
Placement Programme of ICAI

ICAI had organised placement programme for new Members in the months of February and March, 2014. Details are given on P. 1561 – 1562. Some factures are as under.

• No. of candidates interviewed 2,327

• No. of organisations participated 80

• No. of Interview Teams 136

• No. of Jobs offered 717- Accepted 681

• Highest Salary offered – Domestic posting Rs. 21 lakh P.A. and for International posting Rs. 20.25 lakh P.A

• Average CTC offered Rs. 7.30 lakh P.A. (ii) ICAI Publications (a) Compendium of opinion Vol. XXXII (12-02-2012 to 11-02-2013) (b) Study on Compliance of Financial Reporting Requirements (Vol – II) ( P. 1578 – 1579).

levitra

Rotation of Auditors

fiogf49gjkf0d
In February, 2014, the Journal of BCAS (P.631) the issue relating of Rotation of Auditors was discussed. It may be noted that section 139 of the Companies Act, 2013, has now come into force w.e.f. 01-04-2014. This section provides for rotation of auditors. In the case of a CA firm, the maximum period is fixed as 10 years and in the case of an Individual the period is 5 years with rest period of 5 years for audit of a company to which the section applies.

The Ministry of Corporate Affairs has now notified Companies (Audit and Auditors) Rules, 2014. These Rules have come into force on 01-0402014. Rule 5 provides that the provision for Rotation of Auditors u/s. 139 will apply to only(a) Listed Companies, (b) Unlisted Companies having paid up Share capital of Rs. 10 crore, (c) Private Companies having paid share capital of Rs. 20 crore and (d) Any Public or Private Company, not covered by (a) (b) or (c) above, which has public borrowings from financial institutions, banks or public deposits of Rs. 50 crore or more.

Rule 6 states that the period for which the auditor has held office as an auditor prior to the commencement of the Act (i.e., 01-04-2014) should be taken into account for calculating the period of 5 consecutive years (For the individuals) or 10 consecutive years (For the firm). This will mean that if a CA Firm is an auditor of a company to which the section applies for 10 years or more prior to 01-04-2014, that firm can continue as auditor of that company for grace period of 3 years only. This Rule gives a chart explaining the years for which the auditor can continue as an auditor of the specified company after 01-04-2014.

levitra

EAC Opinion

fiogf49gjkf0d
The accounting for Expenditure on Shared Infrastructure Facilities and Depreciation thereon:

Facts:

A company, during the year 1984-85, was engaged in the construction and operation of the thermal power plant in the State of Odisha. The company had set up two power plants. (Units I and II e.g., Stage 1) as its maiden venture in the district of Jharsuguda known as IB Thermal Power Station and the Units were commercially operated during December, 1994 and June, 1996 respectively. The company is setting up two new power plants (Units III and IV, i.e., Stage 2) at the same location. The company has stated that the power generated from Units I and II is sold to ABC Ltd., a Government of Odisha Undertaking, at a tariff determined as per bulk Power Purchase Agreement (PPA) executed during the year 1996. The company has further stated that for setting up new power plant Units III and IV (new power plant), total estimated capital cost will be met out of 75% long term loans and 25% as equity from the investors. 50% of the power generated from the new power plant is to be sold to ABC Ltd., and balance 50% of power is to be sold to different power purchasers on long term and short term basis. The new power plant will share some of the existing infrastructure facilities originally constructed for Units I and II which are under direct control of the company. The infrastructure facilities will require substantial capital expenditure for renovation, improvement and addition to make them usable in support of construction of the new power plant. Without the above proposed expenditure, the infrastructure facilities may not support the construction of Stage 2.

Query:

 In view of the above facts and accounting requirements, the company has sought the opinion of the EAC as to whether the accounting method of additional expenditure incurred for shared infrastructure facilities and calculation of depreciation separately for charging to operation for Stage 1 and expenditure during construction for capitalisation for Stage 2 as well as inclusion in the capital cost of Stage 2 is in consonance with the generally accepted accounting principles and Accounting Standards followed in India.

EAC Opinion:

After considering paragraph 23 of the Accounting Standard (AS) 10, “Accounting for fixed assets”, the Committee is of the view that expenditure on fixed assets subsequent to their installation may be categorised into (i) repairs and (ii) improvements and betterments. Normally, expenditure on repairs, including replacement cost necessary to maintain the previously estimated standard of performance, is expensed in the same period. Similarly, the cost of adopting a fixed asset to a new use or modernisation /renovation of such asset without actually improving the previously estimated standard of performance is also expensed. Expenditures that add new fixed asset units, or that have the effect of improving the previously assessed standard of performance are capitalised.

The Committee notes from the facts of the case that the capital expenditure is being incurred on existing infrastructure facilities which will support the construction as well as operation of new power plant. Further, the expenditure shall increase the future benefits from the existing asset beyond its previously assessed standard of performance and such asset will be used beyond the original useful life assessed for existing power plants. Accordingly, such additional expenditure incurred on common infrastructure facilities for new power plant can be capitalized.

Further, after considering paragraphs 12.2 of AS 10 and paragraphs 9, 23 & 24 of AS 6, the Committee is of the view that it is only an addition or extension which retains a separate identity and is capable of being used after the existing asset is dispose off, is accounted for and depreciated independently on the basis of an estimate of its useful life. However, in the company’s case, such expenditure is not creating any new asset which is separately identifiable but such asset will be used beyond useful life assessed for existing power plant. Accordingly, it should be capitalised with the cost of existing assets.

As regards the inclusion of the depreciation charged on the asset used in the construction activities of the new power plant in the cost of asset(s) capitalised, the Committee is of the view that to the extant the asset is being used for construction activity, depreciation on the asset is a directly attributable cost of bringing the asset to its working condition for its intended use and accordingly, as per paragraph 9.1 of AS 10, it should be capitalised with the cost of asset(s) as per AS 10.

Therefore, the Committee is of the opinion that the accounting treatment of the expenditure incurred on infrastructure facilities and calculation of depreciation separately for charging to the operation for the existing units and expenditure during construction for capitalisation for the new power plant as well as inclusion in the capital cost of new power plant is not inconsonance with the generally accepted accounting principals and Accounting Standards followed in India.

levitra

Some Ethical Issues

fiogf49gjkf0d
The Ethical Standards Board of the ICAI has given answers to some Ethical Issues on Pages 1462 to 1464 of the C.A. Journal for April, 2014. Some of these issues are as under:

(i) Issue No.1

Whether the statutory auditors consisting of ten or more members can conduct the branch audits of the same company?

The Council has prescribed certain self regulatory measures in order to ensure a healthy growth of the profession and an equitable flow of professional work among the members. One of the recommendations of this nature is that the branch audits of a company should not be conducted by its statutory auditors consisting of 10 or more members, but should be conducted by the local firms of auditors consisting of less than ten members. This should not be understood to mean any restriction on the right of the statutory auditors to have access over branch accounts conferred under the Companies Act, 1956. This restriction may not apply in the following cases:

(a) where the accounting records of the branches are maintained at the head office of the respective companies; and

(b) where significant operations of an undertaking or a company are carried out at its branch office.

(ii) Issue No.2

What should be the size of signboard for the office?

With regard to the size of the signboard for his office that a Member can put up, it is a matter in which the members should exercise their own discretion and good taste. The size of the signboard should be reasonable. The use of glow signs or lights on large-sized boards as is used by traders or shopkeepers would not be proper. A member can have a name board at the place of his residence with the designation of Chartered Accountant, provided it is a name plate or name board of an individual member and not of the firm.

(iii) Issue No.3

Can a member share profits with the widow of his deceased partner?

When there are two or more partners and one of them dies, the widow of the deceased partner can continue to receive a share of the profit of the firm. A legal representative, say widow of a deceased partner, would be entitled to share the profits only where the partnership agreement contains a provision that on the death of the partner his widow or legal representative would be entitled to such payment by way of sharing of fees or otherwise for the specified period.

levitra

The Aayakar Seva Kendra, situated at Ground Floor, Aayakar Bhavan, Mumbai will accept the Dak/Tapal of the charges of Commissioner of Income Tax-I to Commissioner of Income Tax -13 from assesses/their representatives between 10.30 a.m. to 4.00 p.m. (Lunch Time 1.30 to 2.00 p.m.). Copy of the order available at www.bcasonline.org

A Press Note bearing No.402/92/2006-MC dated 17th April, 2014 has been issued by CBDT giving instructions to Assessing Officers, laying down Standard Operating Procedure (‘SOP’) for verification and correction of tax-demand. The taxpayers can get the outstanding tax demand reduced/ deleted by applying for rectification along with documentary evidence of tax/demand already paid. The SOP also makes special provisions for dealing with the tax demand upto Rs. 1,00,000/- in the case of Individuals a<

Intervention application opposing amalgamation – Direct Tax Circular No. 279-Misc.-M-171- 2013-ITJ dated 11th April 2014 –

fiogf49gjkf0d
CBDT has directed the Commissioners to send comments/ objections of the Income tax department to the scheme of amalgamation, if the same is found to be prejudicial to the interest of the revenue. The comments/objections be sent to Regional Director, MCA for incorporating them in its response to the Court.

levitra

New tax returns forms notified – Notification no- 24/2014 [S.O. 997(E) dated 1 April, 2014 – Income tax (Fourth amendment) Rules, 2014

fiogf49gjkf0d
New forms SAHAJ (ITR-1), ITR-2, SUGAM (ITR-4S) and ITR-V” have been notified. Further Rule 12 has been amended with effect from 1st April, 2014 and provides as under :

a) Every partnership firm is required to file its return of income for A.Y. 2014-15 and in subsequent years electronically.

b) Every political party (if its income exceeds the maximum amount not chargeable to tax) is required to file its return of income for A.Y. 2014-15 and in subsequent years electronically.

c) Every Charitable officer by filing form 10. It is now provided that Form 10 is required to be filed electronically.

levitra

Interest expenditure: Section 57(iii): Money borrowed for investing in shares in company owning immovable property: Dividend not received: Interest not disallowable on ground that investment was not made for purpose of earning dividend:

fiogf49gjkf0d
Sri Saytasai Properties and Investment P. Ltd. vs. CIT; 361 ITR 641 (Cal):

The assessee borrowed money for investment in shares of a company P owning an immovable property the value of which was much higher than the book value. The assessee had not received dividend. The assessee’s claim for deduction of interest on borrowed funds u/s. 57(iii) of the Income-tax Act, was disallowed by the Assessing Officer on the ground that the investment could not be said to have been made for earning dividend. The Tribunal upheld the disallowance.

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

“i) Even though the language of section 37(1) of the Income-tax Act, 1961, is a little wider than that of section 57(iii), that cannot make any difference in the true interpretation of section 57(iii). The language of section 57(iii) is clear and unambiguous and it has to be construed according to its plain natural meaning and merely because a slightly wider phraseology is employed in another section which may take in something more, it does not mean that section 57(iii) should be given a narrow and constricted meaning not warranted by the language of the section and, in fact, contrary to such language.

ii) There was no reason why a proper expenditure should have been disallowed only because the investment was not made for the purpose of earning dividend. There is no finding that the investment was made otherwise than for the purpose of making an income. The Tribunal and the Assessing Officer were wrong in disallowing the expenditure.”

levitra

Housing project: Deduction u/s. 80-IB(10): A. Y. 2007-08: Amendment w.e.f. 01/04/2005 requiring certificate of completion of project within four years of approval: Not applicable to projects approved prior to that date: Assessee entitled to deduction:

fiogf49gjkf0d
CIT vs. CHD Developers Ltd.; 362 ITR 177 (Del):

The assessee, a real estate developer obtained approval for a housing project on 16-03-2005 from the Development Authority. It completed the project in 2008 and by a letter dated 05-11-2008 applied to the Competent Authority for the issue of the completion certificate. The assessee’s claim for deduction u/s. 80-IB(10) was denied inter alia, on the ground that the completion certificate was not obtained within the period of four years as prescribed by the Finance Act, 2004 w.e.f. 01-04-2005. The Tribunal allowed the assessee’s claim for deduction accepting the assessee’s claim that, since the approval was granted to the assessee 16-03-2005 i.e., prior to 01-04-2005, the assessee was not expected to fulfill the conditions which were not on the statute when such approval was granted to the assessee.

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

“i) The approval for the project was given by the Development Authority on 16-03-2005. Clearly, the approval related to the period prior to the amendment, which insisted on the issuance of the completion certificate by the end of the four year period, was brought into force. The application of such stringent conditions, which are left to an independent body such as the local authority who is to issue the completion certificate, would have led to not only hardship but absurdity.

ii) As a consequence, the Tribunal was not, therefore, in error of law while holding in favour of the assessee.”

levitra

CBDT Circular: Binding on Revenue: S/s. 119 and 143(2): A. Y. 2004-05: Circular prescribing time limit of three months from date of filing of return for issuing notice u/s. 143(2): Return filed on 29-10-2004: Notice u/s. 143(2) issued on 14-07-2005: Not valid

fiogf49gjkf0d
Amal Kumar Ghosh vs. ACIT; 361 ITR 458 (Cal):

For the A. Y. 2004-05, the assessee had filed return of income on 29-10-2004. The Assessing Officer issued the notice u/s. 143(2) of the Income-tax Act, 1961 on 14-07-2005. The assessee claimed that the notice u/s. 143(2) was not valid since it has been issued beyond the period of three months of date of filing of the return as prescribed by the CBDT Circulars Nos. 9 and 10. The Tribunal rejected the assessee’s contention and dismissed the appeal filed by the assessee. The Tribunal accepted the contention of the Revenue that the Assessing Officer was competent to issue notice u/s. 143(2) after the expiry of period of three months from the date of filing of the return.

In the appeal by the asessee before the High Court, the Revenue contended that such a notice u/s. 143(2) could have been issued within 12 months from the date of filing of the return and, therefore, the notice was well within time. The Calcutta High Court allowed the assessee’s appeal, reversed the decision of the Tribunal and held as under:

“i) Even assuming that the intention of the CBDT was to restrict the time for selection of the cases for scrutiny to a period of three months, it could not be said that the selection in the case of the assessee was made within the period. The return was filed on 29-10-2004, and the case was selected for scrutiny on 06-07-2005. By any process of reasoning, it was not open to the Tribunal to come to the finding that the Department acted within the four corners of Circular No.s 9 and 10 issued by the CBDT. The Circulars were evidently violated. The Circulars were binding upon the Department u/s. 119.

 ii) Even assuming that the circulars were not meant for the purpose of permitting unscrupulous assessees from evading tax, it could not be said that the Department, which is the State, can be permitted to selectively apply the standards set by itself for its own conduct. When the Department has set down a standard for itself, the Department is bound by that standard and cannot act with discrimination. If it does that, the act of the Department is bound to be struck down under Article 14 of the Constitution. In the facts of the case, it was not necessary to decide whether the intention of the CBDT was to restrict the period of issuance of the notice from the date of filing of the return laid down u/s. 143(2).

 iii) Thus, the notice u/s. 143(2) was not in legal exercise of jurisdiction.”

levitra

Charitable trust: Exemption u/s. 11 : A. Y. 2009-10: Where assessee-trust, failing to use 85 % of income from property, wrote letter conveying department for option available under Clause (2) of Explanation to section 11(1) to allow it to spend surplus amount to next year, no disallowance was to be made merely on ground that declaration was not made in a prescribed manner:

fiogf49gjkf0d
CIT vs. Industrial Extension Bureau; [2014] 43 taxmann. com 392 (Guj)

The assessee, a registered public charitable trust, being unable to utilise income from property to extent of 85 % wrote a letter conveying department to exercise option available under Clause (2) of Explanation to section 11(1) for allowing accumulation of income. The Assessing Officer added to the income of assessee on ground that for claiming exemption the assessee had to give declaration in the prescribed form which was not done by the assessee. While exercising option a mistake was committed by the assessee, as the amount was wrongly mentioned to a lower figure, but later on the same was rectified. On appeal, the Commissioner (Appeals) allowed only that part which was declared by the assessee in original letter before due date and disallowed remaining revised amount by observing that the revision option was not exercised within due date. On cross appeals, the Tribunal allowed the assessee’s claim and deleted entire amount on ground that the mistake was bona fide and the requirement of exercising option within prescribed time was only directory in nature.

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

“i) U/s. 11, a charitable trust unable to utilise its income derived from property held under trust wholly for charitable or religious purposes to the extent of 85 % would have an option either in terms of clause (2) of Explanation to s/s. (1) thereof, or as provided u/s/s. (2). When such an option is covered u/s/s. (2) i.e., the income is sought to be accumulated or set apart for the period prescribed, that the requirement of making a declaration in the prescribed manner arises. In case of an option under Clause (2) of Explanation to s/s. (1), there is no such requirement of making declaration but the requirement is exercising of such option in writing before the expiry of the time allowed u/s/s. (1) of section 139 for furnishing the return of income.

 ii) In the present case, the assessee did exercise such option as is apparent from the letter dated 22-09-2009. In such letter, the assessee conveyed to the department that the assessee gave a notice of option exercised by the trust to allow to spend surplus amount of Rs. 59,17,600 that may remain at the end of the previous year ended on 31-03-2009, during the immediately following the previous year, i.e., 2009-10. In the caption, the assessee referred to as the subject-notice of option exercised as required under Clause (2) of Explanation to section 11(1). These things are thus abundantly clear – firstly, that such option was exercised before last date of filing the return, which was 30-09-2009 and secondly, that such option was exercised in terms of clause (2) of Explanation to section 11(1). That was clearly not an option u/s/s. (2) of section 11. The caption of the said communication dated 22-09–00- as well as the contents of the letter make this clear. If that be so, the assessee cannot be precluded from pursuing such option on the ground as was done by the Assessing Officer that no declaration in the prescribed form was made. As we have noticed that such declaration was required only if the assessee’s option was to be covered by the provision of section 11(2).

 iii) It is true that in such option exercised on 22/09/2009, the assessee indicated a smaller figure of Rs. 57,17,600 and it was only later that the same was corrected to Rs. 1,05,67,047. However, the Tribunal has taken note of facts on record namely that the option in fact was exercised within the time permitted under the statute. It was a bona fide error to indicate a wrong figure. The intention to avail carry over of the un-spend income to the next year was clear.

iv) The requirement of exercising an option within the time permitted under Clause (2) of Explanation to section 11(1) is directory and not mandatory. Substantial compliance thereof would therefore be sufficient.

v) Even otherwise, without going to the extent of holding such time limit as directory and not mandatory, in the facts of the present case, the Tribunal committed no error in granting the benefit to the assessee for the entire amount since it was a mere oversight or bona fide error in not indicating the correct and full amount for the option under clause (2) of Explanation to section 11(1).”

levitra

Business expenditure: Disallowance: TDS: Commission/trade discount: S/s. 40(a)(ia) and 194H: A. Y. 2005-06: Assessee in business of manufacture and trade of pharmaceutical products: Incentive to dealers, distributors, stockists under different schemes: Not commission: Section 194H not applicable: Disallowance u/s. 40(a)(ia) not proper:

fiogf49gjkf0d
CIT vs. Intervet India Pvt. Ltd. (Bom); ITA No. 1616 of 2011 dated 01/04/2014:

The assessee was engaged in the business of manufacture and trading of pharmaceutical products. The assessee gave incentives to its distributors/dealers/ stockists under different schemes. In the relevant year, i.e. A. Y. 2005-06, the incentive so given of Rs. 70,67,089/- was disallowed by the Assessing Officer u/s. 40(a)(ia) of the Income-tax Act, 1961, treating the same as commission, on the ground that the assessee has not deducted tax at source u/s. 194H of the Act. CIT(A) and the Tribunal deleted the addition holding that the payment was not commission and the provisions of sections 194H and 40(a)(ia) were not applicable.

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

“i) The assessee had undertaken sales promotion scheme viz., product discount scheme and product campaign under which the assessee had offered an incentive on case to case basis to its stockists/ dealers/agents. An amount of Rs. 70,67,089/- was claimed as deduction towards expenditure incurred under the said sales promotional scheme. The relationship between the assessee and the distributors/ stockists was that of principle to principle and in fact the distributors were the customers of the assessee to whom the sales were effected either directly or through the consignment agent. As the distributors/ stockists were the persons to whom the product was sold, no services were offered to the assessee and what was offered to the distributor was a discount under the product distribution scheme or product campaign scheme to buy the assessee’s products.

ii) The distributors/stockists were not acting on behalf of the assessee and that most of the credit was by way of goods on meeting the sales target, and hence, it could not be said to be a commission payment within the meaning of Explanation (i) to section 194H of the Act. The contention of the Revenue in regard to the application of Explanation (i) below section 194H being applicable to all categories of sales expenditure cannot be accepted. Such reading of Explanation (i) below section 194H would amount to reading the said provision in abstract. The application of the provision is required to be considered to the relevant facts of every case.

iii) We are satisfied that in the facts of the present case that as regards sales promotional expenditure in question, the provisions of Explanation (i) below section 194H of the Act are rightly held to be not applicable as the benefit which is availed by the dealers/ stockists of the assessee is appropriately held to be not a payment of any commission in the concurrent findings as recorded by the CIT(A) and the Tribunal.

iv) We do not find that the appeal gives rise to any substantial question of law. It is accordingly dismissed.”

II. REPORTED:

1. Business Expenditure: Disallowance: Ss. 40(a)(ia), 40A(3) and 194C(2): A. Ys. 2005-06 and 2009-10: ONGC acquiring lands from farmers and others: Land losers forming society for enabling to survive by way of alternate means of plying vehicles on rent to the ONGC: Society receiving amounts from ONGC and distributing to farmers/members: Payments not expended by society and would not come within the meaning of expenditure either u/s. 40(a)(ia) or section 40A(3): No disallowance can be made: ITO vs. Ankleshwar Taluka ONGC and Land Loser Travellers Co-operative Society; A. Y. 2005-06; 362 ITR 87 (Guj): CIT vs. Ankleshwar Taluka ONGC and Land Loser Travellers Co-operative Society; A. Y. 2009-10; 362 ITR 92 (Guj):

ONGC acquired lands in a particular area from farmers and other persons. Land losers formed the assessee society to enable them to earn a source of livelihood by means of plying vehicles on rent to ONGC. The assessee society received the amounts from ONGC on behalf of the members and distributed the same amongst the members. ONGC deducted the tax at source on such payment to the assessee society.

A. Y. 2005-06:

 In the A. Y. 2005-06, the assessee society received Rs. 2,57,62,253 and distributed the same to the members. The Assessing Officer was of the view that the society was a sub-contractor and that it ought to have deducted tax at source on payments made to each of the farmers u/s. 194C(2) and disallowed the whole of the amount of Rs. 2,57,62,253/- u/s. 40(a)(ia) of the Income-tax Act, 1961. He made a further addition of Rs. 51,47,250/- being 20% of the said amount by way of disallowance u/s. 40A(3) on the ground that the said amount was paid to the members in cash. The Commissioner (Appeals) deleted the addition. He held that there was no element of works contract in terms of the provisions of section 194C in the activities performed by the society and, accordingly, set aside the disallowance u/s. 40(a)(ia). He also held that there was no case for disallowance u/s. 40A(3) as no expenditure was incurred by the society in distributing the rentals to the members. The Tribunal concurred with the findings of the Commissioner (Appeals) and dismissed the appeal filed by the Revenue.

In appeal before the High Court, the Revenue raised the question of disallowance u/s. 40(a)(ia) but did not raise the question of disallowance u/s. 40A(3) of the Act. The Gujarat High Court upheld the decision of the Tribunal and held as under:

“i) In the light of the concurrent findings of fact recorded by the Tribunal upon appreciation of evidence on record, the reasoning adopted by the Tribunal was just and reasonable.

 ii) Thus, it was not possible to state that there was any infirmity in the order of the Tribunal so as to give rise to any question of law, much less, a substantial question of law so as to warrant interference.” A. Y. 2009-10: In this year, the assessee society had received an amount of Rs. 3.79 crore from ONGC and the same was distributed by the assessee society to its members. The Assessing Officer made an addition of 20% of the said amount by way of disallowance u/s. 40A(3) of the Act, on the ground that the assessee had paid these amounts to its members in cash. The Tribunal deleted the addition.

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

“The view of the Commissioner (Appeals) and the Tribunal that the payments were not expended by the assessee and that, therefore, would not come within the meaning of expenditure (be it based on section 40(a)(ia) or section 40A(3) of the Act) was to be confirmed.”

levitra

Income from property held for charitable or religious purposes – A charitable and religious trust which does not benefit any specific religious community would not be covered by section 13(1)(b) of the Act and would be eligible to claim exemption u/s. 11 of the Act.

fiogf49gjkf0d
The respondent, a registered Public Trust under the M. P. Public Trusts Act, 1951, filed an application for registration before the Commissioner of Income Tax (for short, “the Commissioner”) as envisaged u/s. 12A read with section 12AA of the Act for availing the exemption u/s. 11 of the Act. The Commissioner, after affording an opportunity of hearing to the applicant, came to the conclusion that the respondent was a charitable trust but since the object and purpose of the trust was confined only to a particular religious community the same would attract the provisions of section 13(1)(b) of the Act and therefore, declined the prayer made for registration of the trust by his order dated 14-09-2007.

Aggrieved by the order so passed, the respondent carried the matter by way of an appeal before the Tribunal. The Tribunal after going through the objects of the respondent-trust came to the conclusion that the respondent was a public religious trust as the objects of the trust were wholly religious in nature and thus, the provisions of section 13(1)(b) which are otherwise applicable, in the case of the charitable trust would not be applicable and therefore, held that the respondent-trust was entitled to claim registration u/se. 12A and 12AA and accordingly, allowed the appeal and set aside the order passed by the Commissioner and further directed the Commissioner of Income-tax to grant registration u/s. 12A read with section 12AA of the Act to all the applicant-trust.

Aggrieved by the aforesaid decision passed by the Tribunal, the Revenue approached the High Court u/s. 260-A of the Act. The court primarily, was of the view that the decision of the Tribunal was rendered purely on the factual matrix of the case and therefore, it would be improper to disturb the finding of fact so arrived by the Tribunal. Secondly, the court observed that the provisions of section 13(1)(b) would not be applicable to the respondent-trust as the trust was not created or established for the benefit of any particular religious community or caste. Consequently, the court has dismissed the appeal filed by the Revenue by judgment and order dated 22-06-2009.

Disturbed by the aforesaid ruling, the Revenue approached the Supreme Court.

According to the Supreme Court, the determination of the nature of trust as wholly religious or wholly charitable or both charitable and religious under the Act was not a question of fact. It was a question which required examination of legal effects of the proven facts and documents, that is, the legal implication of the objects of the respondent-trust as contained in the trust deed. It is only the objects of a trust as declared in the trust deed which would govern its right of exemption u/s. 11 or 12. It is the analysis of these objects in the backdrop of fiscal jurisprudence which would illuminate the purpose behind the creation or establishment of the trust for either religious or charitable or both religious and charitable purpose. The Supreme Court therefore held that the High Court had erred in refusing to interfere with the observations of the Tribunal in respect of the character of the trust.

Having said so, the Supreme Court proceeded to examine the question, whether the Courts below were justified in coming to the conclusion that the respondent-trust was a public religious trust and therefore, outside the purview of section 13(1) (b) and eligible for exemption u/s. 11 of the Act.

The Supreme Court noted that the Tribunal had analysed the objects of the trust in the light of the holy scriptures and the Quran and recorded its satisfaction as follows: “16… The objects of the assessee-trust reproduced above clearly refer to the religion and are supported by reference made to different pages of Holy Quran. The learned Counsel for the assessee referred to the true copies of several pages of Holy Quran written by two of the authors referred to above in which giving of food in days of hunger or orphan is considered as highly religious ceremony. Reference is also made that who will give to the people or poor then Allah will give them in return and, i.e., who will give loan then Allah will give double to them. Likewise, for helping the needy people for religious activities and to carry out religious activities or spend for good, spending wealth in the way of Allah, bestowing mercy, teaching were considered to be highly religious activities. On going through several true pages of Holy Quran written by the authors referred to above, we are satisfied that the learned Counsel for the assessee was justified in contending that all the objects of the assesee-trust are solely religious in nature because each of them refers to religious occasions, religious education or to religious activities. The learned Counsel for the assessee also explained that the words ‘Shariat-e- Mohammadiyah’ means the path shown by prophet Mohammed. Therefore, the objects of Shariat-e- Mohammadiyah are identical with those of ‘Dawate- Hadiyah’. For Dawoodi Bohras, true path shown by the prophet is the one indicated and shown by their living guide Dai-al-Mutlaq of the time who is the living and visible guide for Dawoodi Bohras. It is an undisputed fact that for the people believing in Islam, writings in Quran are words of Allah for them. The directions given in the Holy Quran are considered by the people of Islamic faith as orders from Allah and the people of Islamic faith obey such orders as holy and religious. The learned Counsel for the assessee has been able to demonstrate that all the objects of the assessee-trust, as noted above, came out from the writings in Quran and as such these are the orders for them while observing Islamic faith.”

The Supreme Court observed that unquestionably, objects (c) and (f) which provide for the activities completely religious in nature and restricted to the specific community of the respondent-trust are objects with religious purpose only. However, in respect to the other objects, in our view the fact that the said objects trace their source to the Holy Quran and resolve to abide by the path of godliness shown by Allah would not be sufficient to conclude that the entire purpose and activities of the trust would be purely religious in colour. The objects reflects the intent of the trust as observance of the tenets of Islam, but do not restrict the activities of the trust to religious obligations only and for the benefit of the members of the community. The Privy Council in Re The Tribune, 7 ITR 415 has held that in judging whether a certain purpose is of public benefit or not, the Courts must in general apply the standards of customary law and common opinion amongst the community to which the parties interested belong to. Therefore, it is pertinent to analyse whether the customary law would restrict the charitable disposition of the intended activities in the objects.
The provision of food to the public on religious days of the community as per object (a) and (b), the establishment of Madrasa and organisations for dissemination  of  religious  education  under object
(d) and rendering assistance to the needy and poor for religious activities under object (e) would reflect the essence of charity. The objects (a) and
(b)    provide for arrangement for nyaz and majlis (lunch and dinner) on the religious occasion  of  the birth anniversary and Urs Mubarak of Awliya-e- Quiram (SA) and the Saints of the Dawoodji Bohra community and for arrangement of lunch and din- ner on religious occasions and auspicious days of the Dawoodi Bohra community, respectively. Nyaz refers to the food a person makes and offers to others on any particular occasion on the occasion of the death of a saint and Majhlis implies a place  of gathering or meeting. The activity of providing for food on certain specific occasions and other religious and auspicious events of the Dawoodi Bohra community do not restrict the benefit  to  the members of the community. Neither the religious tenets nor the objects as expressed limit  the service of food on the said occasions only to the members of the specific community. Thus, the activity of Nyaz performed by the respondent-trust does not delineate a separate class but  extends the benefit of free service  of  food  to  the  public at large irrespective of their religious, caste or sect and thereby qualifies as a charitable purpose which would entail general public utility.

Further, the establishment of the Madrasa or institutions to impart religious education to the masses would qualify as a charitable purpose qualifying under the head of education under the provisions of  section  2(15)  of  the  Act.  The  institutions  established  to  spread  religious  awareness  by  means of  education  though  established  to  promote  and further religious thought could not be restricted to religious  purposes.  The  House  of  Lords  in  Barralet vs.  IR,  54  TC  446,  has  observed  that  “the  study and  dissemination  of  ethical  principles  and  the cultivation  of  rational  religious  sentiment”  would fall  in  the  category  of  educational  purposes.  The Madrasa  as  a  Mohommedan  institution  of  teaching  does  not  confine  instruction  to  only  dissipation  of  religious  teachings  but  also  contributes  to the  holistic  education  of  an  individual.  Therefore, it  cannot  be  said  the  object  (d)  would  embody a  restrictive  purpose  of  religious  activities  only. Similarly, assistance by the respondent-trust to the needy  and  poor  for  religious  activities  would  not divest  the  trust  of  its  altruistic  character.

Therefore, the objects of  the  trust,  according to the Supreme Court, exhibited dual tenor of religious and charitable purposes and activities. Section 11 of the Act shelters such trust with composite objects to claim  exemption  from  tax  as a religious and charitable trust subject to pro- visions of section 13. The activities of the trust under such object would therefore be entitled to exemption accordingly.

According to the Supreme Court, the second issue which arose for its consideration and decision was, whether the respondent-trust was a charitable and religious trust only for the purposes of a particular community and therefore, not eligible for exemption u/s. 11 of the Act in view of provisions of section 13(1)(b) of the Act.

The Supreme Court held that in the present case, the objects of the respondent-trust  were  based  on religious tenets under the Quran according to the religious faith of Islam. As already  noticed,  the perusal of the objects and purposes of the respondent-trust clearly demonstrated that the activities of the trust though both charitable and religious were not exclusively meant for a particular religious community. The objects, as explained in the preceding paragraphs, did not channel the benefits to any community if not the Dawoodi Bohra Community and thus, would not fall under the provisions of section 13(1)(b) of the Act.

In that view of the matter, the Supreme Court  held that the respondent-trust was a charitable and religious trust which did not benefit any specific religious community and therefore, it  could  not  be held that section 13(1)(b) of the Act would be attracted to the respondent-trust and thereby, it would be eligible to claim  exemption  u/s.  11  of  the Act.

Year of Taxability of Interest on Refund of Tax

fiogf49gjkf0d
Synopsis

Section 244A of the Income Tax Act,
entitles an assessee to receive interest on amount of refund of tax due
to him. For an assessee, following the mercantile system of accounting,
the issue arises on the year of accrual of such interest and taxability
thereon.

 The issue being whether such interest is accrued in each year
and hence to be taxed by spreading it over the number of years for which
it is granted or should it be taxed in the year in which it is granted.
This issue had been a subject matter of adjudication before various
courts. Here, the author has analysed various judicial pronouncements in
this regard.

Issue for Consideration:

An assessee is entitled to
receive simple interest, on the amount of refund of tax that becomes due
to him, at the specified rate, for the period commencing from the date
of payment of tax to the date on which the refund is granted, as per the
provisions of section 244A of the Income-tax Act.

Such interest is
usually chargeable to tax under the head “Income From Other Sources” and
is computed in accordance with the method of accounting regularly
employed by the assessee. This interest is taxed in the year of receipt,
in case of an assessee following the cash system of accounting, and in
case of an assessee following the mercantile system of accounting, is
taxed in the year of the accrual of such interest.

The period for which
such interest is granted usually exceeds 12 months. The quantum of
interest also varies in many cases on passing of orders from time to
time, subsequent to the intimation or the first order, ranging from
assessment orders to appellate orders. Again, in many cases, the
assessees are forced to pay taxes towards demands raised in pursuance of
orders that finally do not stand the scrutiny of the appellate
authorities. In all these cases, barring a few cases, the assessee
receives interest only on the final settlement of the disputes
concerning computation of the total income by the highest appellate
authority.

The issue that arises, for consideration, in all such cases
of receipt of interest, is about the year or years of taxation of such
interest, for the period exceeding 12 months, in the hands of the
assessees following the mercantile system of accounting. The issue in a
nutshell is about ascertaining the year of accrual of such interest.
Does such interest, under the mercantile system, accrue from year to
year from the date of payment of tax till the date of the receipt of
such interest or does it accrue only when the refund is ordered by an
authority and interest thereon is granted to the assessee? In the first
case, the interest so received is taxable in more than 1 year, on the
understanding that the interest accrues on a daily basis and is taxable
in more than 1 assessment year while in the later case, it is taxed only
in the year of the passing of an order grating interest.

 The courts
have been asked to adjudicate as to whether such interest accrued form
year to year and is therefore to be taxed by spreading it over the
number of years for which it is granted or should it be taxed in the
year in which it is granted. Recently, the Andhra Pradesh High Court has
held that such interest accrued from year to year and for taxation, it
should be spread over the number of years for which interest is granted
dissenting from the decisions of the Kerala, Orissa and Allahabad High
Court.

Smt. K. Devayani Amma’s case

The issue of years of accrual of
interest on refund, granted u/s. 244, was examined by the Kerala High
Court in the case of Smt. K. Devayani Amma vs. DCIT, 328 ITR 10. In that
case, the Court was asked, by the assessee, to decide whether the
Tribunal was justified in holding that interest received by the assessee
on refund was assessable in the assessment year in which such interest
was granted. In that case, the Assessing Officer granted an amount of
interest of Rs. 2,87,537, u/s. 244, on refund of tax computed in
pursuance of the order passed to give effect to an appellate order for
A.Y. 1983-84, that was decided in favour of the assessee. The order of
refund was passed in the previous year relevant to A.Y. 1994-95 and the
refund together with interest was also received in the said year. The
Assessing Officer taxed the entire interest of Rs. 2,87,537 in the A.Y.
1994-95, by treating such interest as the income of A.Y. 1994-95, on the
ground that interest had accrued during that year.

The assessee
however, contested the liability for tax on the entire interest in one
assessment year on the ground that the interest in question accrued from
year to year, from the date of payment of excess tax till the date of
refund. The contention of the assessee was upheld by the CIT(A), but the
Tribunal agreed with the Assessing Officer by holding that the said
interest accrued in A.Y. 1994-95, only, following the decisions in the
case of CIT vs. Sri Popsingh Rice Mill, 212 ITR 385 (Orissa) and J.K.
Spinning and Weaving Mills Co. vs. Addl. CIT, 104 ITR 695 (All.). The
assessee, in the appeal before the High Court, contended that interest
income was assessable on a year to year basis, spread over the period
commencing from the year in which the tax was paid and ending with the
year in which it was refunded together with interest thereon, by relying
on the decision of the Supreme Court in the case of Rama Bai vs. CIT,
181 ITR 400.

In reply, the standing counsel for the Income-tax
Department submitted that the interest income accrued only on passing of
the order for granting refund. He also submitted that the decision in
Rama Bai’s case (supra) was delivered in respect of an interest received
under the Land Acquisition Act and was not relevant for determining the
year of taxation of interest received under the Income-tax Act. He also
pointed out that the decision in the case of Sri Popsingh Rice Mill
(supra), delivered by the Orissa High Court, had followed the subsequent
decision of the Supreme Court in preference to its decision in Rama
Bai’s case to hold that the interest was taxable in the year of grant
thereon.

The Kerala High Court noted that the decision in Rama Bai’s
case(supra) concerned itself with taxation of interest under the Land
Acquisition Act and was not binding for deciding an issue of taxation of
interest, granted under the Income-tax Act and that the issue therefore
was required to be considered in light of the statutory provisionsof
the Income-tax Act. The court also observed that the law declared by the
Supreme Court was neutralised by the amendments in section 145A(b) and
section 56(viii) by the Finance (no.2) Act, 2009 concerning the year of
taxation of interest received on compensation or enhanced compensation
for compulsory acquisition .

The Kerala High Court found that the
assessee’s eligibility for interest arose only when the effect was given
to the appellate order and till such time the assessee was not entitled
to any refund at all; that the right to interest on refund arose only
when the refund was ordered in favour of the assessee. Accordingly, in
view of the Court, interest accrued only when the assessee was found to
be eligible for refund of the excess tax, based on the revision of the
assessment order. The Court took notice of the fact that not only the
interest was granted during A.Y. 1994-95, but was also paid during the
said assessment year. The assessee’s appeal was dismissed and the order
of the Tribunal was confirmed by the Court by holding that interest on
refund of tax accrued in the year of passing the order granting refund .

M. Jaffersaheb (Decd.)’s case
The  issue  once  again  arose  recently,   before  the Andhra  Pradesh  High  Court,  in  the  case  of  Shri  M. Jaffer  Saheb  (Decd.)  vs.  CIT,  43  taxmann.com,123. The facts in this case were that for the assessment year 1982-1983, an assessment was completed with substantial additions resulting into a huge demand for  payment  of  taxes.  The  assessee  paid  the  de- manded  tax  and  thereafter  availed  the  appellate remedies and in that process the appellate tribunal finally passed an order granting substantial relief to the assessee on 16-06-1989. The AO gave effect to the  order  of  the  Tribunal  by  an  order  dated  18-09- 1989, refunding the excess amount paid along with interest of Rs. 79,950/- for the period 30-10-1985 to 31-08-1989  which  was  received  thereafter.  The  AO brought  to  the  tax  the  amount  of  interest  in  the assessment year 1990-1991, ignoring the claim of the assessee  to  spread  over  the  said  amount  for  the assessment  years  starting  with  assessment  orders 1985-1986 to 1988-1989. The Appellate Commissioner allowed the claim of the assessee and directed that the  interest,  other  than  the  part  pertaining  to  the assessment year 1990-91, be taxed in the preceding previous years. The Tribunal, on further appeal by the Revenue, reversed the order of the Appellate Commissioner and restored the assessment order passed by the A.O.

At the instance of the assessee, the following two questions of law for the assessment year 1990-1991 were referred to the Andhra Pradesh High Court :

1)    “Whether on the facts and in the circumstances of the case, is the Appellate Tribunal correct in law in holding that interest U/S.244(1A) of the Income-tax Act on the refund due accrues on the date when the Appellate Tribunal passed order and did not accrue on any day anterior to the date of the Tribunal order?”

2)    “Whether on the facts and in the circumstances  of the case, the Appellate Tribunal is correct in law;  in refusing to accept the contention of the applicant that interest on the refund accrued from the previous year relevant to the assessment year 1982-1983 and interest is chargeable to tax in the respective years for which interest is paid?”

The   assessee  submitted  before  the  High  Court that  he  was  entitled  to  the  refund  from  the  date of  payment  of  the  tax  till  the  date  of  granting  of the  refund  and  that  such  interest  accrued  on  day to  day  basis  on  the  excess  amount  paid.  He  submitted  that  the  entitlement  of  the  interest  was  a right conferred by the statute that did not depend on  the  order  for  the  refund  being  made  which was  only  consequential  and  in  law  was  required to  be  made  more  in  the  nature  of  complying  with the  procedural  requirement,  but  his  right  to  claim interest was a statutory right conferred by the Act and  in  that  view  of  the  matter,  it  was  but  fair  to spread the interest amount in the respective years in issue. He relied on the judgment of the Calcutta High Court in the case of   CIT vs. Hindustan Motors Ltd.,   202  ITR   839     for  the  proposition  that  “Accrual  of  interest  takes  place  normally  on  day  to  day basis. Where there is no due date fixed for payment of  interest,  interest  accrues  on  the  last  day  of  the previous  year.  Accrual  of  interest  does  not  depend upon making up of the accounts.” He also relied on the  judgment  of  the  Kerala  High Court  in  the  case of  Peter  John  vs.  CIT,  157  ITR   711  (Ker)(FB)  for  the proposition  that  “Interest  is  separate  from  refund. Interest whether statutory or contractual represents profit  the  creditor  might  have  made  if  he  had  used that money or loss he suffered because he had not that use. It is something in addition to the refund (capital amount) though it arises out of it.” He also relied on the judgment of the Supreme Court  in the case of Ramabai vs. CIT, 181 ITR 401 (SC).

On  the  other  hand,  the  Income-tax  Department submitted  that  the  right  to  claim  interest  by  the assessee was dependent on an orders being passed u/s. 240 and section 244 of the Income-tax Act and in that view of the matter, the right to claim interest  accrued  to  the  assessee  only  on  the  date  of consequential  order  passed  pursuant  to  the  order of the Appellate Authority and as such, the interest income was assessable in the assessment year 1990- 1991.  Reliance was placed on the judgments of the Orissa, Kerala and Allahabad High Courts in the cases of Commissioner of Income-Tax vs. Sri Popsingh Rice Mill,  212 ITR 385 (Orissa), Smt. K. Devayani Amma vs. Deputy Commissioner of Income-Tax and Another 328 ITR 10 (Ker),)and J.K. Spinning and Weaving Mills Co., vs. Additional Commissioner of Income-Tax, Kanpur104 ITR 695  (Allahabad).

The  Andhra  Pradesh  High  Court  examined  the provisions  of  sections  237,  240,  244  and  244A  for ascertaining the statutory position relating to grant of refund and interest thereon. A close scrutiny of the sections 237 and 240, revealed to the Court  that the statutory right was conferred on the assessee to get refund of the excess tax paid and such refund was made available to the asssessee even without his  having  to  make  any  claim  in  that  behalf   in  as much  as  section  244A  of  the  Act  entitled  the  assessee  to  get  interest  on  the  refund  amount  and such  interest  was  payable  from  the  date  of  payment  of  tax  or  payment  of  penalty  from  the  date till  refund was granted.

It  was  clear  to  the  High  Court,  from  the  statutory provisions as applicable to the relevant assessment years, that there was no requirement of the assessee for making a claim either for refund or for interest. As a matter of fact, the Court noticed that sections 243 and 244, were made inapplicable in respect of any assessment for the assessment year commenc- ing on the first day of April, 1989 or any subsequent assessment years.

On a detailed analysis of the decisions of the various Courts in the cases of   Rama Bai vs. CIT, 181 ITR 401 (SC),  CIT  vs.  Sankari  Manickyamma  105  ITR  172  (AP).

Mrs. Khorshed Shapoor Chinai vs. ACED 90 ITR 47 (AP), CIT vs. Govindarajulu Chetty (T.N.K.) 165 ITR 231 (SC),T.N.K.  Govindarajulu  Chetty  vs.  CIT  87  ITR  22  (Mad.), CIT vs.Dr. Sham Lal Narula, 84 ITR 625 (P&H), and CIT, Mysore vs. V.Sampangiramaiah, 69 ITR 159 (Kar), the court  significantly  noted  that   the  principle  which could be culled out was that once the income had legally  accrued  to  the  assessee,  i.e.,  the  assessee had  acquired  a  right  to  receive  the  same,  though its valuation might   be postponed to a future date, the determination or quantification of the amount did  not  postpone  the  accrual.  In  other  words,  if the right had legally accrued to the assessee, then the right should be deemed to have accrued in the relevant  year,  even  though  the  dispute  as  to  the right  was  settled  in  the  later  year,  by  the  one  or the  other  of  the  authorities in the  hierarchy.

The Andhra Pradesh High Court expressly dissented with the decision of the Kerala High Court in the case of Smt. K. Devayani Amma (supra) by observing that;

•    though the Kerala High Court, in the said judge- ment, referred the case of Rama Bai (supra), there was no discussion about the principles that were approved in the judgment of the Supreme Court;

•    though the provisions of sections 240 and 244(1A) of the Act were referred to, the Kerala High Court held that interest on refund arose only on passing an order in favour of the assessee;

•    the eligibility of interest u/s. 244(1A) of the Act arose on an order of revision of assessment passed pursuant to the appellate order which led to grant of refund of excess tax paid by the assessee;

•    the reading of sections 237, 240 and 244(1A) cast a duty on the AO to charge that much of tax which the assessee was liable to pay and mandated the refund of the excess amount along with interest;

•    the hierarchy of appeals provided were only to ensure that the tax authorities adhere to strict rules of taxation and the statutory provisions. Even the final order that might be passed by the higher authority in the hierarchy of authorities provided under statue was also an order of assessment only for the simple reason that the final order passed was nothing but a correction of the original assessment order, which was erroneous.

•    the opinion expressed by the Kerala High Court that interest u/s. 244(1A) of the Act accrued to the assessee only, when it was granted to the assessee along with the refund order issued u/s. 240 of the Act was not correct, especially,   in view of the law laid down by the Supreme Court as quoted in the judgment of the Madras High Court in T. N. K. Govindarajulu Chetty’s case (supra).

•    The court was unable to accept the judgment of Kerala High Court reported in K. Devayani Amma’s case (supra) on the issue.

The  judgment  of  the  Allahabad  High  Court  in  J.K. Spinning  and  Weaving  Mills  Co.  (supra)  was  found to  be  distinguishable  and  not  applicable  in  view of  the  variance  in  the  statutory  scheme  contained in  the  provisions  contained  in  Indian  Income-tax Act,  1922,  with  the  statutory  scheme  under  the Income-tax Act, 1961 and the Allahabad High Court had  taken  into  consideration  that  interest became payable to the assessee only when the assessments for  the  years  in  dispute  were  made  which  were  in fact  made  in  1956,  though  the  assessments  were 1951-1952 and  1952-1953.

The Andhra Pradesh High Court was  unable to agree with  the  reasoning  of  the  judgment  of  the  Orissa High Court in Sri Popsingh Rice Mill case (supra), as the  question  considered  by  the  Orissa  High  Court was in relation to section 244 of the Act and not in relation  to  section  244A  of  the  Act  and  the  Orissa High  Court  had  failed  to  notice  the  judgments  of the  Supreme  Court  and  instead  relied  on  three judgments  which  were  not  dealing  with  interest. Likewise, the other two judgments referred to in the said   judgment also were found to be not relevant for  the  purpose of  deciding the  issue.

The court accordingly answered the questions referred to it in favour of the assessee and against the revenue by holding that the interest on refund accrued from year to year and was not to be taxed in the year of the order granting refund.

Observations
An assessee, following the mercantile system of accounting, is taxed on his income, including interest income, in the year in which the income accrues or arises. An income, in ordinary circumstances, is said to have been accrued on vesting of a legal right to receive such income irrespective of whether it is received or not. Such accrual, based on a right to receive, is independent of the order of any Court  or an authority passed for confirming such right to receive, for the reason that such right to receive arises to a person on the basis of the terms of the agreement or the statutory provisions of any law.

It is an accepted position in law that interest accrues from day to day, in case of a person maintaining books of account and accrues on yearly basis   in case of a person not maintaining the books of account. In both the cases, the interest income is spread over number of years and is taxed on year to year basis.

The Supreme Court in E.D. Sassoon Company Ltd. vs. CIT, 26 ITR 51, observed that the computation of the profits,  whenever  it  may  take  place,  cannot  possi- bly be allowed to suspend its   accrual. The accrual happens  irrespective  of  the   quantification  of  the profits, and is not always linked to computation. For attracting the charge of taxation, what has however got to be determined is whether the income, profits or  gains  accrued  to  the  assessee;  before  it  can  be said  to  have  accrued  to  him,  it  is  necessary  that he must have acquired a right to receive the same or  that  a  right  to  the  income,  profits  or  gains  has become vested in him though its valuation may be postponed or its material station depends on some contingency.

The Supreme Court in Rama Bai (supra)’s case was concerned  with  the  taxability  of  interest  received on account of enhanced compensation, where the assessee’s lands were acquired and not being satis- fied  with  the  compensation  awarded  by  the  Land Acquisition  Officer,  the  assessee  appealed  to  the higher  Courts  and  finally  received  enhanced  com- pensation  along  with  interest  payable  u/s.  28  and 34  of  the  Land  Acquisition  Act.  The  said  amounts were  received  in  the  year  1967  and  were  sought to be assessed in the year 1968-1969. The assessee claimed  that  interest  was  allocable  and  assessable in  different  assessment  years  as  it  accrued  from year  to  year  and  only  that  portion  of  the  interest relating  to  the  period  April,  1967  to  March,  1968 was assessable for the assessment year 1968-1969. The Tribunal referred the following question to the Supreme  Court:  “Whether,  on  the  facts  and  in  the circumstances  of  the  case,  the  interest  received  by the  assesses  as  per  the  City  Civil  Court’s  award  for the period commencing from the date of possession till  31st  March,  1968,  was  entirely  assessable  for  the assessment  year  1968-1969?”  The  Supreme  Court answered  the  question  in  favour  of  assessee  and against the revenue by following its earlier judgment in  the  case  of  CIT  vs.  Govindarajulu  Chetty  (T.N.K.) 165  ITR  231  (SC)  wherein  in  a  short  judgment,  the Apex Court approved the judgment of the Madras High  Court  in  the  case  of  T.  N.  K.  Govindarajulu Chetty  vs.  CIT,  87  ITR  22  (Mad.).  The  Madras  High Court held that;   “11. In this case the liability to pay interest would arise when the compensation amount due  to  the  assessee  had  not  been  paid,  in  each  of the relevant years. Therefore, the accrual of interest has to be spread over the years between the date of acquisition  till  it  was  actually  paid.  We  are  not  in  a position to accept the contention of the revenue that …………… basis for assessing the income. When a statute brings to charge certain income, its intention is to enforce the charge at the earliest point of time.”

The  Supreme  Court  has  pointed  out  in  Laxmipat Singhania  vs.  CIT,72  ITR  291,  that:  “Again,  it  is  not open  to  the  Income-tax  Officer,  if  income  has  accrued to the assessee, and is liable to be included in the  total  income  of  a  particular  year,  to  ignore  the accrual and thereafter to tax it as income of another year on the basis of receipt.” Similar view was taken by the Panjab & Haryana High Court in the case of CIT  vs.  Dr.  Sham  Lal  Narula,  84  ITR  625   and  by  the Karnataka High Court in the case of CIT, Mysore vs. V.  Sampangiramaiah,  69  ITR  159   where  under  the question  which  was  considered  was  “Whether,  on the  facts  and  in  the  circumstance  of  the  case,  the Appellate  Tribunal  was  right  in  law  in  holding  that the  entire  interest  amount  of  Rs.  87,265/-  was  not assessable  in  the  assessment  year  1962-63  and  that only  the  proportionate  interest  referable  to  the  assessment  year  1962-63  was  assessable  in  that  year?” The  Karnataka  High  Court  answered  the  question in the affirmative and in favour of the assessee and against the  revenue.

The  right  to  receive  interest  u/s.  244A  is  entirely based  on  the  right  to  refund  u/s.  240  of  the  Act. Unless an assessee is entitled to a refund of taxes, no  right  to  receive  an  interest  arises  in  his  favour. The  key  consideration  therefore  is  the  right  to a  refund  of  excess  taxes  paid.  Whether  such  a right  to  refund  arises  on  passing  of  an  order  by an  Income-tax  Authority,  for  granting  a  refund,  or that such a right arises with payment of taxes and is  independent  of  the  order  of  the  authority.  The fact that interest u/s. 244A, whenever granted and paid,  is  paid  for  the  period  commencing  with  the date  of  payment  of  tax,  apparently  conveys  that such a right is associated with the payment of excess taxes and only its (interest) payment is deferred to the  year  of  grant  by  an  authority.  This  prima  facie understanding is, further confirmed by the amendments  in  section  145A(2)(B)  and  section  56(2)(Viii) of  the  Act  by  the  Finance  (NO.2)  Act,  2009,  that expressly  provide  that  interest  on  compensation shall  be  taxed  in  the  year  of  receipt  only.  In  other words,  in  the  absence  of  any  provision  for  taxing the  interest income  in  the  year  of  receipt, interest will be taxed in the year of accrual and when such interest pertains to a period exceeding 12 months, its  accrual  happens  on  year  to  year  basis  in  more than 1  assessment year.

On a conspectus reading of the scheme of refund, contained  in  Chapter  XIX  u/s.  237  to  245,  it  is gathered  that  the  right  to  refund  of  excess  taxes paid  is  independent  of  any  requirement  to  claim such  refund.  While  it  is  true  that  an  assessee  is entitled  to  a  refund  of  the  excess  taxes  paid,  only on  satisfaction  of  the  A.O  that  the  taxes  paid  by him  exceeds  the  amount  of  tax  payable  by  him,  it none  the  less  is  independent  of  any  order  section 237  does  not  require  an  Assessing  Officer  to  pass an  order  of  refund,  it  rather  requires  an  Assessing Officer to refund the excess taxes. Likewise, section 244A entitles an assessee to simple interest on the amount of  refund that becomes due to  him.

An assessee is entitled to receive interest u/s. 244A(1) where refund of any amount becomes due to him. The  language  of  section  244A  (1)  may  convey  that unless  an  assessee  becomes  entitled  to  a  refund, he is not entitled to interest and as a consequence of  such  an  understanding,   entitlement  to  interest is  postponed  to  the  time  when  a  refund  becomes due  to  him;  no  interest  therefore  accrues  to  him till  such  time  an  order  of  refund  is  passed.  Such an understanding, we feel, is not supported by the scheme of the Act and in particular by the scheme of  the  refund  and   the  grant  of  interest  thereon. Under  the  scheme,  the  moment  an  excess  tax  is paid,  the  refund  thereof  becomes  due  to  him  and the  entitlement  to  interest  runs  with  the  right  to receive  refund  which  right  arises  with  payment  of taxes, irrespective of an order of refund. This understanding is fortified with the decision of the Andhra Pradesh High Court in Jaffersaheb’s case, in as much as the issue therein concerned  taxation of interest received u/s. 244A   in assessment year 1990-91 and the  Court  while  deciding  the  issue  of  the  year  of taxation, examined the implications of the provisions of section 244A w.r.t to the scheme of refund and applied  the  ratio  of  the  decision  of  the  Supreme Court  in  Rama  Bai’s  case.  In  our  considered  view, no  material  difference  exists  between  the  interest that  was  granted  u/s.  244  r.w.s  240  and  the  one now being granted u/s. 244A   r.w.s 240   of the Act as  regards  the  time  of  entitlement.  In  conclusion, it  is  safe  to  hold  that  the  right  to  refund  and  the right to interest thereon are statutory rights which rights arise  on payment of  excess taxes.

The case for the taxation of interest, received under the Income-tax Act, on the year to year basis, by yearly spread over, is greater as compared to the interest received under the Land Acquisition Act for the reason under the scheme of taxation, an amount of refund becomes due, the moment an assessee pays excess tax which is neither dependent on the claim for refund nor on the order of the authorities. Accordingly the decisions of the courts, holding that the interest under the Land Acquisition Act is taxable on the year to year basis, shall apply with greater force, to the cases of receipt of interest, under the Income-tax Act.

Having so concluded that interest is taxable on year to year basis, an assessee is placed in an unenviable position in a case where an Assessing Officer makes substantial additions to the returned income and demands additional tax instead of granting refund. The issue that is required to be considered is about the liability to pay tax on interest that could be said to have accrued, even though the eligibility to refund and consequent interest thereon depends on the outcome of the appeal filed to contest the aforesaid additions to the returned income. While the assessee may not be asked to make the payment of regular taxes but may be required to pay taxes on the accrued interest, which is included in the assessed income, in the hope that he will suc- ceed in the appeal and will be entitled to refund and interest thereon. Nothing  could  be  more  confusing  than  this  in  as much  as,  it  leads  to  an  inference  that  interest  on refund  accrues,  even  before  the  finality  of  refund itself. This confusion is aptly conveyed by Palkhivala’s words  when  he  states  that  ‘one  of  the  delights  of income tax law is occasional incongruities’.  The Bombay  High  Court  noticing  the  confusion  in  the  case of CIT vs. Abbasbhoy, 195 ITR 28, arising on account of the contrasting decisions of the Supreme Court in  the  case  of  Govindarajulu  Chetty  (supra)  and the earlier decision in the case of CIT vs. Hindustan Housing  ,  161  ITR  524,   with  the  hope  that  the  Su- preme Court will resolve the controversy observed that  “the incongruity does not end here. Despite the conclusion  that  interest  in  such  cases  accrues  from year to year, it is doubtful whether it will be possible to hold the assessee responsible for not disclosing interest income in the past on accrual basis.” Kanga & Palkhivala in the 4th edition of their book titled The Law  and  Practice  of  Income  tax  have  commented on  the  assessee’s  obligation  to  return  income,  on account of accrued interest, where the refund is in dispute  in  the  following  words  ,”the  assessee  can always  take  a  stand  that  the  amount  of  compensation  including  enhanced  compensation  or  damages having  been  determined  subsequently,  he  could  not possibly  anticipate  accrual  of  interest”.  Kindly  also see,   pg.  1085  of  volume  1  of  the  10th  edition  of Sampath Iyengar’s Law  of  Income Tax.

This unenviable situation may however be remitted by resorting to rectification proceedings u/s. 154 for amending the order where such interest on disputed refund is taxed on accrual basis. Please see Garden Silk  Mills  Ltd., 221 ITR 861(Guj.)

Rules prescribed under Companies Act 2013:

fiogf49gjkf0d
The Following rules under the Companies Act 2013 have been prescribed on 27th March, 2014

• Chapter III – The Companies (Prospectus and Allotment of Securities) Rules, 2014.

• Chapter IV – The Companies (Share Capital and Debentures) Rules, 2014.

• Chapter VI – The Companies (Registration of Charges) Rules, 2014.

• Chapter VII – The Companies (Management and Administration) Rules, 2014.

• Chapter VIII – The Companies (Declaration and Payment of Dividend) Rules, 2014.

• Chapter IX – The Companies (Accounts) Rules, 2014.

• Chapter XI – The Companies (Appointment and Qualification of Directors) Rules, 2014.

• Chapter XII – The Companies (Meetings of Board and its Powers) Rules, 2014.

The following Rules under the Companies Act 2013 have been prescribed on 31st March 2014

• Chapter I – The Companies (Specification of definitions details) Rules, 2014.

• Chapter II – The Companies (Incorporation) Rules, 2014.

• Chapter V – The Companies (Acceptance of Deposits) Rules, 2014.

• Chapter X – The Companies (Audit and Auditors) Rules, 2014.

• Chapter XIII- The Companies (Appointment and Remuneration of Managerial Personnel) Rules, 2014.

• Chapter XIV- The Companies (Inspection, Investigation and Inquiry) Rules, 2014.

• Chapter XXII- The Companies (Registration of Foreign Companies) Rules, 2014.

• Chapter XXI -The Companies (Authorised to Registered ) Rules, 2014.

• Chapter XXIV – The Companies (Registration Offices and Fees) Rules, 2014.

• Chapter XXVI – Nidhi Rules, 2014.

• Chapter XXIX – The Companies (Adjudication of Penalties) Rules, 2014.

• Chapter XXIX – The Companies (Miscellaneous) Rules, 2014.

levitra

Clarification regarding maintenance of books of accounts and preparation of financial statements:

fiogf49gjkf0d
Vide General Circular No. 08/2014 dated 04-04-2014 the Ministry of Corporate Affairs has clarified regarding that the provisions of the Companies Act 2013 with regard to maintenance of books of accounts and preparations/adoption/filing of financial statements, Auditors Report, Board Report and attachments to such statements and reports would be applicable for financial Years commencing from 1st April 2014.

levitra

Fees Table notified

fiogf49gjkf0d
The Ministry of Corporate Affairs has issued the Table of Fees (pursuant to Rule 12 of the Companies’ (Registration of Offices and Fees ) Rules 2014.

levitra

Waiver of fees for all event based filing for April 2014 :

fiogf49gjkf0d
Vide Circular No. 6/2014, the Ministry of Corporate Affairs has on 28th March informed that it shall waive fees for all event based filing whose date falls between 01-04-2014 to 30-04-2014. Only few forms can be filed presently mostly relating to filing of annual accounts, annual return, appointment of Cost Auditors , FTE ( Fast Track Exit Mode) Form , and Form 21 pertaining to Order of court / Authority till 14-04-2014. A list of New Forms along with the Old Form (in case any) have been given in the Circular.

levitra

Enabling payment of Stamp Duty and Court fees through MCA site:

fiogf49gjkf0d
Vide Circular No. 5/2014 dated 28th March 2014, The Ministry of Corporate Affairs has tried to remove the delay in the issue of Certified Copies filed with the ROC. The Ministry has enabled the payment of Stamp Duty and Court Fee online through the MCA portal. The circular is effective from 31st March 2014.

levitra

Clarification in respect of resolutions u/s. 293 of Companies Act, 1956 wrt to compliance u/s. 180 of Companies Act, 2013:

fiogf49gjkf0d
Vide General Circular No. 4/2014, the Ministry of Corporate Affairs has issued clarification to Section 180 of Companies Act 2013 referring to borrowings and or creation of security based on Ordinary resolution. The ministry has clarified that where before 12th September 2013, the resolution u/s. 293 of the Companies Act 1956 have been passed, they will be considered sufficient compliance u/s 180 of Companies Act 2013 for a period of 1 year from the date of notification of Section 180 of the Act.

levitra

Central Government notifies 183 additional new sections:

fiogf49gjkf0d
The Central Government has on 26th March 2014 has notified 183 additional new sections in addition to the earlier 99 notified provisions of the Companies 2013 and Rules made thereunder, forms under the new Act are mandatorily numbered alpha-numeric. Initial of forms is to be started with alphabet of two or three letters based on the subject of the Chapter, followed by serial number of the form. This will define the nature of the forms and would be easy to recognise.

There are total 29 chapters under the Companies Act, 2013. Chapters I and XXIII have been notified but no form is prescribed under these chapters. Following table is the summary of chapter wise nomenclature of forms Act 2014 which come into effect from 1st April 2014.

A ready reckoner Table containing provisions of Companies Act, 2013 as notified up to date and corresponding provisions thereof under Companies Act, 1956 and corresponding provisions of Companies act 1956 which shall remain in force.

levitra

Names of Forms for e-filing on the MCA site have been Changed:

fiogf49gjkf0d
To facilitate easy understanding of the e-forms being rolled out under the provisions of Companies Act,
 

levitra

Change in Depreciation Rates:

fiogf49gjkf0d
The Central Government has notified an Amendment to Schedule II of Companies Act 2013 which pertains to the Useful Lives to compute depreciation.

levitra

D/o IPP F. No. 5(1)/2014-FC.I dated the 17-04- 2014

fiogf49gjkf0d
Consolidated FDI Policy Circular of 2014

The DIPP has announced the yearly FDI Policy Circular. The said Circular is effective from 17th April 2014. This Circular consolidates, subsumes and supersedes all Press Notes/Press Releases/Clarifications/ Circulars issued by DIPP, which were in force as on 16th April, 2014 and reflects the FDI Policy as on 17th April, 2014.

This Circular will remain in force until superseded in totality or in part thereof. Reference to any statute or legislation made in this Circular will include modifications, amendments or re-enactments thereof. This circular is divided into 7 Chapters and contains 11 Annexures.

levitra

A. P. (DIR Series) Circular No. 124 dated 21st April, 2014

fiogf49gjkf0d
Press Note No. 1 (2014 series) D/O IPP dated 8th January, 2014

Notification No. FEMA. 296/2014-RB dated 3rd March, 2014, vide G.S.R. No. 270(E) dated 7th April 2014

Foreign Direct Investment in Pharmaceuticals sector – clarification

This circular states that, with immediate effect, the ‘non-compete’ clause will not be permitted in the case of FDI in Pharmaceuticals sector, except with FIPB approval. Hence, whenever parties want to incorporate the ‘non-compete’ clause in their agreements FDI will have to be under the Approval Route.

levitra

S/s. 43(6), 50 – The term `acquired’ used in section 50 is not synonymous with acquisition of title to the property. Use of asset is not a condition for availing the benefits of section 50. In a case where amounts are paid and registration had been complete, though possession was not received, it can be said that the assessee has acquired the property for the purpose of section 50.

fiogf49gjkf0d
6. ITO vs. D. Chetan Kumar & Co.
ITAT  Mumbai `D’ Bench
Before Rajendra (AM) and Dr. S. T. M. Pavalan (JM)
ITA No. 6886/Mum/2011
Assessment Year : 2008-09.                                      
Decided on:  5th March, 2014.
Counsel for revenue/assessee: Sanjeev Jain/Hiro Rai.

S/s. 43(6), 50 – The term `acquired’ used in section 50 is not synonymous with acquisition of title to the property. Use of asset is not a condition for availing the benefits of section 50. In a case where amounts are paid and registration had been complete, though possession was not received, it can be said that the assessee has acquired the property for the purpose of section 50.

Facts:

The assessee had, vide agreement dated 05-04-2007, sold business premises, whose stamp duty value was Rs. 48,47,850, for a consideration of Rs. 39,00,000. Depreciation was claimed on the premises sold and they constituted part of block of asset. The assessee had purchased two new galas vide agreements dated 28-03-2008 for Rs. 27,28,462 and Rs. 12,71,538. The building in which the galas were situated were under construction and possession of these galas was not with the assessee as on 31-03-2008.

The Assessing Officer held that since the possession of new galas purchased were not with the assessee as on 31–03-2008, they could not be said to be forming part of block of assets for financial year 2007-08 and therefore when the sale consideration of the property sold is reduced from the block of assets, the block would cease to exist and the sale consideration in excess of the opening written down value would be taxed u/s. 50. Since the stamp duty value was not disputed by the assessee, the AO adopted stamp duty value to be the sale consideration. He charged Rs. 47,69,046 as short term capital gains.

Aggrieved, the assessee preferred an appeal to CIT(A) who held that a reading of Clause (c) of section 43(6) would reveal that the written down value had to be adjusted by actual cost of any asset falling within the block acquired during the year. The assessee had purchased two galas and the entire amount of Rs. 40 lakh had been paid, registration had been completed, therefore, the assessee had acquired the assets as per section 43(6)(c). The term used in section 50 was “acquired during he previous year”. Referring to the decision of the jurisdictional Tribunal in the case of Orient Cartons Ltd. (60 ITD 87), he held that the use of the asset was not a condition precedent for making an adjustment in block of asset. There was no explicit requirement in the statutory provision to the effect that the new asset should also be used in a business carried on by the assessee and that if there was no business carried on by him, the deduction could not be given. He also held that the word “acquired” in section 50 was of a very amorphous word and the acquisition of the property in that section was not synonymous with acquisition of title to the property. Accordingly, he held that the assessee had acquired the premises within the meaning of section 50 of the Act and therefore was entitled for adjustment of cost of the property with that of WDV of the block of assets for the purposes of capital gains. He allowed the appeal filed by the assessee. Aggrieved, the revenue preferred an appeal to the Tribunal.

Held:

The Tribunal noted that a similar view had been taken in the case of Lalbhai Kalidas & Co. Ltd. (ITA No. 5832/Mum/2011, AY 2007-08 dated 08-11-2013). Following the said decision, the Tribunal upheld the order of the CIT(A) on this ground. This ground of appeal of the revenue was dismissed.

levitra

2014 (33) STR 704 (Tri- Kolkata) Sen Brothers vs. CCE, Bolapur

fiogf49gjkf0d
Whether penalty u/s. 76 would be leviable where service tax was deposited along with interest before issuance of show cause notice? Held, no.

Facts:
The appellant provided taxable services of commercial or industrial construction services and manpower recruitment agency service. The appellant was registered under Service Tax and was filing Service Tax returns. Due to the acute shortage of funds, the Appellant could not deposit the Service Tax. The department initiated proceedings for the non-payment of taxes. Later on, the appellant deposited Service Tax along with interest. A show cause notice was issued demanding service tax, interest and penalty u/s. 76.

According to the appellant, when the Service Tax along with interest was deposited before issuance of the show cause notice, then issuance of SCN itself was not warranted and further imposition of penalty u/s. 76 also was not called for in view of section 73(3) of the Finance Act, 1994. The Appellant relied on the decision of the Karnataka High Court in CCE, ST, LTU, Bangalore vs. Adecco Flexione Workforce Solution Ltd. 2012 (26) STR 3 (Kar) for issue of SCN post deposit of service tax with interest and also relied on the decision of the Karnataka High Court in case of Comm. of ST vs. Master Kleen – 2012 (25) STR 439 (Ka.) for non-imposition of penalty u/s. 76 where service tax was deposited with interest and intimation was given to department. In both the cases, the High Court held that if the assessee has paid service tax along with interest before issuance of SCN, the department should not waste its time in issuing SCN.

Held:
The Tribunal relying on the above stated decisions of the High Court held that where Service Tax was deposited along with interest before the issuance of SCN, penalty u/s. 76 was not invokable.

levitra

2014 (33) STR 701 (Tri- Ahmd) Patel Infrastructure Pvt. Ltd. vs. CCE, Rajkot

fiogf49gjkf0d
Whether service would be applicable on the toll collection on highways under the category of business auxiliary service? Held, no.

Facts:
The Appellant collected toll charges from the users of highways. The department demanded service tax under business auxiliary services on the entire collection of toll. The appellant relied upon the judgement in Intertoll India Consultants (P) Ltd -2011 (24) STR 611 (Tri-Delhi) and contended non-applicability of service tax on toll collections.

Held:
The Tribunal relying upon the above stated decision held that the ratio laid down was squarely applicable to the present case and set aside the demand.

levitra

2014 to (33) STR 711 ( Tri-Bang.) Freightlinks International (I) Pvt Ltd vs. CCEC& ST, Cochin

fiogf49gjkf0d
Whether an Order-in-Original which does not consider or discuss various decisions cited by assessee and provides no finding regarding invocation of extended period and penalty imposition is a no speaking order? Held, yes. Matter remanded.

Facts:
The appellant was a steamer agent for a shipping company and also used to book space in the ships belonging to other companies and was collecting ocean freight from customers on behalf of the principal as well as from other shipping companies. The department took the view that service tax should have been paid on the ocean freight and confirmed the demand of service tax. The appellant argued that the lower authorities did not consider their submissions on judicial pronouncement available on the same set of facts in the case of Gudwin Logistics vs. CCE – 2010 (18) STR 348 (Tri-Ahmed), also not offered any explanation on invocation of extended period of limitation and levied penalties without any reasoning.

Held:
The Tribunal observed that the appellant in its written submission and in personal hearing relied upon number of case laws which were not at all considered by the lower authorities in the Order-in-Original. In view of the absence of findings in relation to the applicability of services tax, invocation of extended period of limitation, imposition of penalties, the Tribunal remanded the case to pass a considered and well reasoned order.

levitra

2014 (33) STR 696 (Tri-Ahmd.) Essar Projects (India) Ltd. vs. Comm. C. Ex & ST, Rajkot

fiogf49gjkf0d
Whether the value of free supply material be included in the gross amount charged for the purpose of calculation of Service Tax in respect of contracts executed prior to 7th July 2009? Held, no.

Facts:
The appellant entered into two contracts with its customer on 24-08-2007. One of the contracts was for supply of equipment and materials (supply contract) and the other one was for the construction/erection/ installation of the plant (construction contract). In addition, the customer also procured imported equipment and materials which were also supplied to the appellant. The department contended that as per Rule 3(1) of the Works Contract (the Composition Scheme for payment of Service Tax) Rules 2007 gross amount for the purpose of payment of Service Tax should include the value of the cost of free supplied material and accordingly service tax demand was issued on the value of free supplied material.

Held:
The Tribunal relying on the clarification issued by the CBEC Circular No. 150/1/2012-ST dated 08-02-2012 held that Rule 3(1) of the Works Contract Rules, 2007 was applicable to contracts entered after 07-07-2009 and not to ongoing contracts and accordingly held that service tax would not be applicable on the value of the free supplied material.

levitra

2014 (33) S.T.R. 514 (Tri-Mumbai) Talera Logistics Pvt. Ltd. vs. Commissioner of Central Excise, Pune-III

fiogf49gjkf0d
Whether on facts of the case, the storage of spare parts for motor vehicles/their transportation/dispatch etc. would be treated as Clearing and Forwarding Agent’s Service? Held, yes.

Facts:
The appellant’s services to M/s. Ford India Ltd. were considered Clearing and Forwarding Agent’s Services by the department. However, according to the appellant, they were business support services. The spare parts of motor vehicles were kept in the godown of Ford who would manufacture motor vehicles. Further, the computers were provided to the appellant for their day-to-day operations and the appellant was not engaged in arranging transport for receiving or dispatching goods. Since the appellant was under the bonafide belief that their activities did not fall under the Clearing and Forwarding Agent’s Services, the appellant contested invocation of extended period of limitation. Demands were computed on the basis of bills raised and not on the basis of receipt. Since the appellant did not collect service tax, extension of cum duty benefit was pleaded for.

The department in terms of the agreement between the appellant and Ford, the appellant was engaged in receiving service parts, packing, etc., carry out inventory control, to maintain customer relations, to do distribution, handling shipping, documentation and outbound transportation etc. Thus, the activities were essentially in the nature of Clearing and Forwarding Services. Further, since there was no registration at Tamil Nadu and the appellant had centralised registration at Pune, the case was within the jurisdiction of the Pune Commissionerate. Since the appellant had not paid service tax and filed returns, the appellant had suppressed the facts with intention to evade service tax.

Held:
Considering the activities were to receive goods, warehouse the goods, receive and arrange dispatches, maintaining records for delivery etc. and the provisions of law, it was held that the services were Clearing and Forwarding services and not business support services. Further, the delayed registration, non-payment, non-filing of returns and disputing service tax liability at a later date post registration were the core reasons proving suppression of facts and wilful intention to evade tax. Therefore, the extended period of limitation and penalty was held justified. Since all payments were received though belatedly, the delay in receipt would not affect service tax liability except shifting of dates. Since the amounts collected were for various components of services, it could not be considered as inclusive of service tax and therefore even benefit of cum duty was not extended.

levitra

2014 (33) S.T.R. 522 (Tri.-Del.) DCM Engineering Products vs. Commissioner. Of C. Ex. & S. T., Chandigarh-II

fiogf49gjkf0d
Whether service tax paid for insurance of company’s vehicles used by senior officials of the company for official work and for commuting between residence and factory eligible CENVAT Credit? Held, yes.

Facts:
The appellant, a manufacturer of Iron Castings had a factory in a remote area. They provided vehicles to their senior officials to commute between residence and factory. The appellant availed CENVAT Credit of service tax paid on insurance of such vehicles. Taking a view that there is no nexus between such insurance services and manufacturing activity, the department denied CENVAT Credit on insurance services.

Held:
Tribunal observed that the vehicles were used for company’s work as well as for commutation of senior officials and it was not a welfare activity but was an activity related to business and therefore, CENVAT was held admissible.

levitra

[2014] 43 taxmann.com 34 (Gujarat) Central Excise vs. Inductotherm India (P.) Ltd.

fiogf49gjkf0d
Whether the exporter-manufacturer is entitled to CENVAT Credit in respect of cargo handling service under rule 2(l) of Cenvat Credit Rules, 2004 (CCR) being input service used up to “place of removal.” Held, yes.

Facts:
The assessee, manufacturer – exporter claimed CENVAT credit in respect of cargo handling services. The department denied the credit on the ground that, in absence of express mention of such service in the definition Clause in Rule 2(l) of CCR, the same cannot be termed as “input service”. Both the Commissioner (Appeals) and the Tribunal held in favour of the assessee. Before the High Court, Revenue contended that cargo handling service cannot be treated as input service since the place of removal cannot be said to be the port of shipment. The question before the High Court was that, whether the input credit of Service Tax paid by the assessee-respondent on the cargo handling service would be admissible and whether the same would fall under the purview of the definition of “input service.”

Held:
The Hon’ble High Court observed that the cargo handling service is rendered on clearance of the final product from the port for the purpose of export. In light of the various decisions rendered in this area, the High Court adopted such interpretation to hold that in case of export of the final product, place of removal would be the port of shipment and not factory gate and therefore, the manufacturer would be entitled to avail the amount claimed towards cargo handling as ‘input service’ under the CENVAT Credit Rules. Considering the expression used in the ‘means’ part of the definition of “input service” in Rule 2(l) of CCR, i.e., it includes services used by the manufacturer directly or indirectly in or in relation to manufacture of the final product and in relation to the clearance of the final product from the place of removal, High Court held that, the definition is very wide in its expression, since number of services used by manufacturer are included in the same, whether used directly or indirectly.

levitra

[2014] 43 taxmann.com 257 (Madras) CCE vs. Rajshree Sugars & Chemicals Ltd.

fiogf49gjkf0d
Whether, accumulated CENVAT Credit of one unit can be utilised for discharging duty liability of another unit, if both the units in fact constitute single factory and had erroneously obtained two different registration certificates in the past? Held, yes.

Facts:
The assessee, a manufacturer in sugar was running two units viz. the sugar unit and the distillery unit situated in the same premises adjacent to each other. The assessee had obtained separate registration certificates in respect of both the units, although both units are under one management. The by-products arising on the manufacture of sugar in the sugar unit, namely, molasses was again used by the assessee in the manufacture of Ethyl Alcohol in the distillery unit. The assessee cleared molasses on payment of duty and availed credit of the same for the distillery unit for payment of duty on the dutiable Ethyl Alcohol. Over a period of time, there was huge accumulation of credit in the distillery unit and the same remained unutilised. Thereafter, the assessee requested the department to grant a single registration in respect of both the units and on getting the same, it sought to utilise the unutilised credit in respect of the distillery unit against the duty payable on the manufactured sugar.

The department denied credit on the ground that, there is no provision for transfer of unutilised CENVAT Credit of one registered unit to another registered unit. It further denied the CENVAT benefit on the grounds that credit of duty paid against molasses cannot be utilised for payment of duty paid against sugar since sugar was not manufactured in the distillery unit.

Held:
The High Court observed that, (i) the sugar unit and the distillery unit belonged to the self-same management and they are in the same premises. (ii) the resultant molasses from the manufacture of sugar on which duty was paid and credit was claimed was used by the assessee in the manufacture of denatured Ethyl Alcohol which is a dutiable product. (iii) although in respect of two activities, it had maintained two accounts, yet, it related to the business of the same assessee in respect of two activities, which are interconnected too. In the circumstances the High Court held that, the mere taking of a single registration as against the two registrations, would not imply that there was a merger or amalgamation or transfer to hold that the assessee would not be entitled to any credit adjustment on the duty payable on the sugar manufactured. Both before and after the so called transfer, the same management continued to be in charge of both the units and hence the alleged credit is available. The High court further observed that the credit of duty allowed in respect of any input be utilised towards the payment of duty on any other final product, is available irrespective of whether such inputs have been used actually in the manufacture of such a final product. The only condition is that the inputs should have been received and used in the factory. Hence, the revenues appeal was dismissed.

levitra