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Year: 2008

Underlying tax credit Concept and its significance

 

1. Overview :

 

The taxation of dividends has its origin in the classical
system of taxation, which in fact taxes corporate profit twice: once at the
company level and again at the shareholder level where the company’s profits
after tax are distributed by way of dividend to its shareholders. This is known
as economic double taxation as distinct from juridical double taxation. In
simple words, economic double taxation means double taxation of the same items
of economic income in the hands of different taxpayers.

 

 

From a tax policy perspective, economic double taxation
distorts investment decision making, and therefore the optimally efficient
allocation of resources, by inducing tax payers to invest by means of channel
that provides the best after-tax return, rather than by means of the most
appropriate commercial route to achieve the best pre-tax return.

 

 

2. Meaning of underlying Tax Credit :

 

Underlying tax credit relieves the economic double taxation
on foreign dividend income. The underlying tax credit is given for the pro-rata
share of the corporate tax paid by the foreign dividend distributing company. It
is computed as percentage of the corporate tax paid by the company that the
gross dividend distribution bears to the after-tax profits. The net dividend
received plus the withholding tax, if any, is taken as percentage of the related
after-tax profits of the paying company and multiplied by the corporate tax
paid. Dividend is grossed up by the underlying tax credit to compute the foreign
income subject to tax in home country. The ordinary credit limitation is applied
on the grossed-up dividend.

 

 

The underlying tax (or indirect) credit system on foreign
dividends is found in several countries under their domestic laws or tax
treaties. These countries include Argentina, Australia, Austria, Canada,
Denmark, Estonia, Finland, Germany, Greece, Ireland, Japan, Korea, Malta,
Mauritius, Mexico, Namibia, Nigeria, Singapore, Spain, Poland, the UK and the
US. It typically only applies if :

 

  • The shareholder has a significant shareholding in the dividend distributing
    company (e.g. in the UK, 10% is needed), and

 

  • The shareholder is a company.

 

  

Upon receipt of a dividend by the shareholder, the pre-tax
income of the distributing company is included as a taxable income. The
shareholder jurisdiction’s normal rate of company tax is then applied, but the
resulting tax (mainstream tax) is reduced by the company tax paid by the
dividend distributing company (i.e., reduced by the underlying tax). If
the underlying tax exceeds the amount of mainstream tax then there will be no
further tax to pay by the shareholder, who will, thus, receive tax-free
dividends.

 

 

The result is that the group will always pay the higher of
the two taxes — the dividend distributing company tax or the shareholder country
tax.

 

 

It is referred to as underlying tax credit because credit is
given for the tax paid in the underlying entity. It is also referred to as the
‘Indirect tax credit’ method because shareholder receives credit for tax which
it has only paid indirectly. In the U.S. Internal Revenue Code the same is
referred to a ‘Deemed paid credit’. The concept of ‘Imputation Credit’ is almost
similar to underlying tax credit.

 

 

In addition, most jurisdictions provide for a tax credit to
the parent company for the foreign tax paid by the subsidiary when its
undistributed income is attributed under the Controlled Foreign Corporation
Rules. In this article the focus is on underlying tax credit in respect of
dividend income.

 

 

3. Example of the underlying tax credit :

 

Company X is a resident of the UK and owns 60% share capital
of Company Y, a resident in India. Tax rate in India is assumed to be 34% and
tax rate in the UK is assumed to be 28%. Company X has no other taxable income
in the UK.

Since the dividends may be paid out of both current and past profits, domestic law or practice generally provides the ‘ordering rules’. These rules relate the dividends to the relevant post-tax profit out of which the distribution has been made and the creditable tax is determined by the effective tax rate imposed on those profits. In the US, the dividends are deemed to be distributed from a pool of retained profits and the underlying foreign tax is the average effective tax rate.

The computation is also affected by the exchange rate used to translate the creditable foreign tax. It could be either the rate prevailing at the time of payment of the foreign tax (historical rate), or the rate when the dividend was distributed (current rate). The US law requires that the foreign tax be translated at the historical rate, while the United Kingdom generally applies the current rate.

4. Underlying tax credit in respect of taxes paid by the lower tier companies:

In the context of International business structuring, it is quite common for the Multinational Enterprises (MNEs) to structure their business operations in various countries by way of creating various subsidiaries  of the same parent  company and to have further downward subsidiary companies of its subsidiary companies, to achieve their business objective in most efficient and profitable manner. The subsidiaries and the subsidiaries of the subsidiary companies are commonly referred to as ‘lower tier companies’.

Many countries allow the underlying tax credit computation to include taxes paid by lower tier companies. For example, Australia, Ireland, Mauritius, South Africa, and the UK allow the credit for taxes suffered by all lower tier companies, provided prescribed minimum equity or voting rights are maintained at each tier. Similarly Argentina, Japan and Norway permit the underlying tax credit upto two tiers of subsidiaries, Spain gives the underlying tax credit for taxes paid upto three tiers and the United States grants them upto 6 tiers, of qualifying foreign subsidiaries.

Thus, for example, a UK parent company investing in a Mauritian subsidiary, which in turn invests in its Indian subsidiary, subject to fulfillment of the shareholding percentage and other relevant conditions and compliance with regulations, would be eligible to take credit of underlying corporate taxes paid by the Indian subsidiary, to the extent of dividends paid by Indian Company, which are forming part of the dividends paid by the Mauritian Company, against the tax payable in respect of dividends received by the UK Company in UK.

5. Significance of underlying tax credit :
Foreign tax credit planning plays a major role in structuring investments in a foreign tax jurisdiction, in case of various multi-nationals based in jurisdictions such as the UK, the US and Ireland etc., where the credit system predominates and where the underlying tax credit is given. India’s Double Taxation Avoidance Agreements (DTAAs) with ten countries contains the provisions regarding underlying tax credit in respect of dividends paid by a company resident of India. Similarly India’s DTAAs with Mauritius and Singapore contain the provisions regarding underlying tax credit in respect of dividends paid by a Mauritian or Singaporean company.

In respect of planning  for all inbound  investment into India, from the countries  where the respective DTAAs with India/ domestic law contain the underlying tax credit provisions,  it is very important  to keep  in mind  the  exact  operation   of respective -1 underlying  tax credit  provisions  in the DTAAs/ domestic  law, to arrive  at the net tax cost of the MNE/Group  in respect  of dividend  income.  This will facilitate a proper decision-making in respect of investments into India. However, it is important to note that a detailed knowledge of the domestic law provisions of the underlying tax credit in the respective jurisdictions is of utmost importance. Therefore, wherever required, the services of the local consultants/tax experts may be utilised to know the law and practice in respect of exact operations of the underlying tax credit provisions.

In respect of outbound investments also, a proper consideration of the underlying tax credit would be of great help in properly arriving at the actual net tax cost of the enterprise/ group in respect of dividends and thus making the right investment decisions.

6. Underlying tax credit under Indian Scenario:

India does not have any domestic regulations in respect of underlying tax credit. However, as mentioned above, India’s DTAAs with ten countries contain the provisions relating to underlying tax credit. The relevant provisions relating to underlying tax credit contained in various articles are given below for ready reference:

In most of the above mentioned DTAAs, the definition of the term ‘Indian tax payable’ include provisions relating to tax sparing for the ordinary tax credit. However, in respect of DTAA with Ireland, the provisions relating to tax sparing are includible only in respect of clause relating to underlying tax credit.

It is interesting to note that in case of India’s DTAAs with 9 counties (except Singapore), the relevant provisions of the Articles mention about the under-lying tax credit where a dividend paid by a company which is a resident of India to a company which is a resident of the other state. However, in case of Singapore in Article 25(4) of the India-Singapore DTAA, it is mentioned that a dividend paid by a company which is a resident of India to a resident of Singapore. Thus apparently, in case of Singapore underlying tax credit would be available even if the shares in Indian company are not held by any Singaporean Company but are held by any other resident of Singapore.

7. Domestic regulations in respect of underlying tax credit in some of the important jurisdictions:

(a) Mauritius:

Provisions relating to underlying foreign tax credit are contained in Regulation 7 of the Income-tax (Foreign Tax Credit) Regulations, 1996. These regulations have been made by the Ministry u/s.77 and u/s.161 of the Income-tax Act, 1995.

(b)  Credit  for underlying taxes

As regards dividends received from subsidiary, the state in which the parent company is a resident gives credit as provided for in paragraph 2 of Article 23A or in paragraph 1 of Article 23B, as appropriate, not only for the tax on dividends as such, but also for the tax paid by the subsidiary on the profits distributed (such a provision will frequently be favoured by States applying as a general rule the credit method specified in Article 23B).”

(c) United States:
The provisions relating to underlying tax credit referred to in the Internal Revenue Code of 1986, as ‘Deemed Paid Credit’ are contained in section 78 and 902 of the Code.

8. OECD Commentary:
Paras 49 to 54 and para 69 of the commentary on Articles 23A & 23B summarise the OECD approach towards tax credit in respect of dividends from substantial holdings by a company. It recognises that recurrent corporate taxation on the profits distributed to parent company: first at the level of subsidiary and again at the level of the parent company, creates very important obstacle to the development of international investments. Many states have recognised this and have inserted in the domestic laws provisions designed to avoid these obstacles. Moreover, provisions to this end are frequently inserted in double taxation conventions. In view of the diverse opinions of the states and the variety of the possible solutions, it preferred to leave the states free to choose their own solution to the problem. For states preferring to solve the problem in their conventions, the solutions would most frequently follow one of the principles i.e. credit for underlying taxes.

Paragraph 52 of OECD Commentary on Article 23A & 23B mentions as under:

“(b) Credit for underlying taxes
As regards dividends received from subsidiary, the state in which the parent company is a resident gives credit as provided for in paragraph 2 of Article 23A or in paragraph 1 of Article 23B, as appropriate, not only for the tax on dividends as such, but also for the tax paid by the subsidiary on the profits distributed (such a provision will frequently be favoured by States applying as a general rule the credit method specified in Article 23B).”

9. Dividend Distribution Tax:
It is important to note that the Dividend Distribution Tax (DDT) paid by the Indian company u/s.115-0 of the Indian Income-tax Act, 1961 may not be the same as “the Indian tax payable by the company in respect of the profits out of which such dividend is paid” as used in relevant articles of the various DTAAs mentioned above containing underlying tax credit provisions. Whether the DDT will be available as ordinary tax credit, is an issue not free from doubt and litigation. We have been given to understand that U.S. allows credit for DDT in USA under the provisions of S. 904 of the Internal Revenue Code. Similarly, we understand that Mauritian authorities have issued a circular clarifying that DDT credit would be available in Mauritius.

10. Conclusion:
From the above, it is evident that the concept of underlying tax credit is very important in mitigating the economic double taxation of dividends paid to companies. This is equally important in planning both inbound and outbound investments. However, in view of the complexities, one will have to carefully understand the provisions of the domestic laws of the applicable foreign tax jurisdictions and treaties before applying the same.

Bibliography:
1. Basic International Taxation, Second edition, Volume-l : Principles, by Roy Rohatgi, Chapter 4, Para 8.4.3 page 281.

2. International Tax Policy and Double Tax Treaties – An introduction to Principles and Application by Kevin Holmes. Chapter 2, page 37 to 38.

3. Interpretation and Application of Tax Treaties, by Ned Shelton. Chapter 2, Para 2.52, page 101.

 

Underlying tax credit — Concept and its significance

International Taxation

1. Overview :


The taxation of dividends has its origin in the classical
system of taxation, which in fact taxes corporate profit twice: once at the
company level and again at the shareholder level where the company’s profits
after tax are distributed by way of dividend to its shareholders. This is known
as economic double taxation as distinct from juridical double taxation. In
simple words, economic double taxation means double taxation of the same items
of economic income in the hands of different taxpayers.

From a tax policy perspective, economic double taxation
distorts investment decision making, and therefore the optimally efficient
allocation of resources, by inducing tax payers to invest by means of channel
that provides the best after-tax return, rather than by means of the most
appropriate commercial route to achieve the best pre-tax return.

2. Meaning of underlying Tax Credit :


Underlying tax credit relieves the economic double taxation
on foreign dividend income. The underlying tax credit is given for the pro-rata
share of the corporate tax paid by the foreign dividend distributing company. It
is computed as percentage of the corporate tax paid by the company that the
gross dividend distribution bears to the after-tax profits. The net dividend
received plus the withholding tax, if any, is taken as percentage of the related
after-tax profits of the paying company and multiplied by the corporate tax
paid. Dividend is grossed up by the underlying tax credit to compute the foreign
income subject to tax in home country. The ordinary credit limitation is applied
on the grossed-up dividend.

The underlying tax (or indirect) credit system on foreign
dividends is found in several countries under their domestic laws or tax
treaties. These countries include Argentina, Australia, Austria, Canada,
Denmark, Estonia, Finland, Germany, Greece, Ireland, Japan, Korea, Malta,
Mauritius, Mexico, Namibia, Nigeria, Singapore, Spain, Poland, the UK and the
US. It typically only applies if :

  • The shareholder has a significant shareholding in the dividend distributing
    company (e.g. in the UK, 10% is needed), and


  • The shareholder is a company.




Upon receipt of a dividend by the shareholder, the pre-tax
income of the distributing company is included as a taxable income. The
shareholder jurisdiction’s normal rate of company tax is then applied, but the
resulting tax (mainstream tax) is reduced by the company tax paid by the
dividend distributing company (i.e., reduced by the underlying tax). If
the underlying tax exceeds the amount of mainstream tax then there will be no
further tax to pay by the shareholder, who will, thus, receive tax-free
dividends.

The result is that the group will always pay the higher of
the two taxes — the dividend distributing company tax or the shareholder country
tax.

It is referred to as underlying tax credit because credit is
given for the tax paid in the underlying entity. It is also referred to as the
‘Indirect tax credit’ method because shareholder receives credit for tax which
it has only paid indirectly. In the U.S. Internal Revenue Code the same is
referred to a ‘Deemed paid credit’. The concept of ‘Imputation Credit’ is almost
similar to underlying tax credit.

In addition, most jurisdictions provide for a tax credit to
the parent company for the foreign tax paid by the subsidiary when its
undistributed income is attributed under the Controlled Foreign Corporation
Rules. In this article the focus is on underlying tax credit in respect of
dividend income.

3. Example of the underlying tax credit :


Company X is a resident of the UK and owns 60% share capital
of Company Y, a resident in India. Tax rate in India is assumed to be 34% and
tax rate in the UK is assumed to be 28%. Company X has no other taxable income
in the UK.

Since the dividends may be paid out of both current and past profits, domestic law or practice generally provides the ‘ordering rules’. These rules relate the dividends to the relevant post-tax profit out of which the distribution has been made and the creditable tax is determined by the effective tax rate imposed on those profits. In the US, the dividends are deemed to be distributed from a pool of retained profits and the underlying foreign tax is the average effective tax rate.

The computation is also affected by the exchange rate used to translate the creditable foreign tax. It could be either the rate prevailing at the time of payment of the foreign tax (historical rate), or the rate when the dividend was distributed (current rate). The US law requires that the foreign tax be translated at the historical rate, while the United Kingdom generally applies the current rate.

4. Underlying tax credit in respect of taxes paid by the lower tier companies:

In the context of International business structuring, it is quite common for the Multinational Enterprises (MNEs) to structure their business operations in various countries by way of creating various subsidiaries  of the same parent  company and to have further downward subsidiary companies of its subsidiary companies, to achieve their business objective in most efficient and profitable manner. The subsidiaries and the subsidiaries of the subsidiary companies are commonly referred to as ‘lower tier companies’.

Many countries allow the underlying tax credit computation to include taxes paid by lower tier companies. For example, Australia, Ireland, Mauritius, South Africa, and the UK allow the credit for taxes suffered by all lower tier companies, provided prescribed minimum equity or voting rights are maintained at each tier. Similarly Argentina, Japan and Norway permit the underlying tax credit upto two tiers of subsidiaries, Spain gives the underlying tax credit for taxes paid upto three tiers and the United States grants them upto 6 tiers, of qualifying foreign subsidiaries.

Thus, for example, a UK parent company investing in a Mauritian subsidiary, which in turn invests in its Indian subsidiary, subject to fulfillment of the shareholding percentage and other relevant conditions and compliance with regulations, would be eligible to take credit of underlying corporate taxes paid by the Indian subsidiary, to the extent of dividends paid by Indian Company, which are forming part of the dividends paid by the Mauritian Company, against the tax payable in respect of dividends received by the UK Company in UK.

5. Significance of underlying tax credit :
Foreign tax credit planning plays a major role in structuring investments in a foreign tax jurisdiction, in case of various multi-nationals based in jurisdictions such as the UK, the US and Ireland etc., where the credit system predominates and where the underlying tax credit is given. India’s Double Taxation Avoidance Agreements (DTAAs) with ten countries contains the provisions regarding underlying tax credit in respect of dividends paid by a company resident of India. Similarly India’s DTAAs with Mauritius and Singapore contain the provisions regarding underlying tax credit in respect of dividends paid by a Mauritian or Singaporean company.

In respect of planning  for all inbound  investment into India, from the countries  where the respective DTAAs with India/ domestic law contain the underlying tax credit provisions,  it is very important  to keep  in mind  the  exact  operation   of respective -1 underlying  tax credit  provisions  in the DTAAs/ domestic  law, to arrive  at the net tax cost of the MNE/Group  in respect  of dividend  income.  This will facilitate a proper decision-making in respect of investments into India. However, it is important to note that a detailed knowledge of the domestic law provisions of the underlying tax credit in the respective jurisdictions is of utmost importance. Therefore, wherever required, the services of the local consultants/tax experts may be utilised to know the law and practice in respect of exact operations of the underlying tax credit provisions.

In respect of outbound investments also, a proper consideration of the underlying tax credit would be of great help in properly arriving at the actual net tax cost of the enterprise/ group in respect of dividends and thus making the right investment decisions.

6. Underlying tax credit under Indian Scenario:

India does not have any domestic regulations in respect of underlying tax credit. However, as mentioned above, India’s DTAAs with ten countries contain the provisions relating to underlying tax credit. The relevant provisions relating to underlying tax credit contained in various articles are given below for ready reference:

In most of the above mentioned DTAAs, the definition of the term ‘Indian tax payable’ include provisions relating to tax sparing for the ordinary tax credit. However, in respect of DTAA with Ireland, the provisions relating to tax sparing are includible only in respect of clause relating to underlying tax credit.

It is interesting to note that in case of India’s DTAAs with 9 counties (except Singapore), the relevant provisions of the Articles mention about the under-lying tax credit where a dividend paid by a company which is a resident of India to a company which is a resident of the other state. However, in case of Singapore in Article 25(4) of the India-Singapore DTAA, it is mentioned that a dividend paid by a company which is a resident of India to a resident of Singapore. Thus apparently, in case of Singapore underlying tax credit would be available even if the shares in Indian company are not held by any Singaporean Company but are held by any other resident of Singapore.

7. Domestic regulations in respect of underlying tax credit in some of the important jurisdictions:

(a) Mauritius:

Provisions relating to underlying foreign tax credit are contained in Regulation 7 of the Income-tax (Foreign Tax Credit) Regulations, 1996. These regulations have been made by the Ministry u/s.77 and u/s.161 of the Income-tax Act, 1995.
 

(b)  Credit  for underlying taxes

As regards dividends received from subsidiary, the state in which the parent company is a resident gives credit as provided for in paragraph 2 of Article 23A or in paragraph 1 of Article 23B, as appropriate, not only for the tax on dividends as such, but also for the tax paid by the subsidiary on the profits distributed (such a provision will frequently be favoured by States applying as a general rule the credit method specified in Article 23B).”

(c) United States:
The provisions relating to underlying tax credit referred to in the Internal Revenue Code of 1986, as ‘Deemed Paid Credit’ are contained in section 78 and 902 of the Code.

8. OECD Commentary:
Paras 49 to 54 and para 69 of the commentary on Articles 23A & 23B summarise the OECD approach towards tax credit in respect of dividends from substantial holdings by a company. It recognises that recurrent corporate taxation on the profits distributed to parent company: first at the level of subsidiary and again at the level of the parent company, creates very important obstacle to the development of international investments. Many states have recognised this and have inserted in the domestic laws provisions designed to avoid these obstacles. Moreover, provisions to this end are frequently inserted in double taxation conventions. In view of the diverse opinions of the states and the variety of the possible solutions, it preferred to leave the states free to choose their own solution to the problem. For states preferring to solve the problem in their conventions, the solutions would most frequently follow one of the principles i.e. credit for underlying taxes.

Paragraph 52 of OECD Commentary on Article 23A & 23B mentions as under:

“(b) Credit for underlying taxes
As regards dividends received from subsidiary, the state in which the parent company is a resident gives credit as provided for in paragraph 2 of Article 23A or in paragraph 1 of Article 23B, as appropriate, not only for the tax on dividends as such, but also for the tax paid by the subsidiary on the profits distributed (such a provision will frequently be favoured by States applying as a general rule the credit method specified in Article 23B).”

9. Dividend Distribution Tax:
It is important to note that the Dividend Distribution Tax (DDT) paid by the Indian company u/s.115-0 of the Indian Income-tax Act, 1961 may not be the same as “the Indian tax payable by the company in respect of the profits out of which such dividend is paid” as used in relevant articles of the various DTAAs mentioned above containing underlying tax credit provisions. Whether the DDT will be available as ordinary tax credit, is an issue not free from doubt and litigation. We have been given to understand that U.S. allows credit for DDT in USA under the provisions of S. 904 of the Internal Revenue Code. Similarly, we understand that Mauritian authorities have issued a circular clarifying that DDT credit would be available in Mauritius.

10. Conclusion:
From the above, it is evident that the concept of underlying tax credit is very important in mitigating the economic double taxation of dividends paid to companies. This is equally important in planning both inbound and outbound investments. However, in view of the complexities, one will have to carefully understand the provisions of the domestic laws of the applicable foreign tax jurisdictions and treaties before applying the same.

Bibliography:
1. Basic International Taxation, Second edition, Volume-l : Principles, by Roy Rohatgi, Chapter 4, Para 8.4.3 page 281.

2. International Tax Policy and Double Tax Treaties – An introduction to Principles and Application by Kevin Holmes. Chapter 2, page 37 to 38.

3. Interpretation and Application of Tax Treaties, by Ned Shelton. Chapter 2, Para 2.52, page 101.

Underlying tax credit — Concept and its significance

International Taxation

1. Overview :


The taxation of dividends has its origin in the classical
system of taxation, which in fact taxes corporate profit twice: once at the
company level and again at the shareholder level where the company’s profits
after tax are distributed by way of dividend to its shareholders. This is known
as economic double taxation as distinct from juridical double taxation. In
simple words, economic double taxation means double taxation of the same items
of economic income in the hands of different taxpayers.

From a tax policy perspective, economic double taxation
distorts investment decision making, and therefore the optimally efficient
allocation of resources, by inducing tax payers to invest by means of channel
that provides the best after-tax return, rather than by means of the most
appropriate commercial route to achieve the best pre-tax return.

2. Meaning of underlying Tax Credit :


Underlying tax credit relieves the economic double taxation
on foreign dividend income. The underlying tax credit is given for the pro-rata
share of the corporate tax paid by the foreign dividend distributing company. It
is computed as percentage of the corporate tax paid by the company that the
gross dividend distribution bears to the after-tax profits. The net dividend
received plus the withholding tax, if any, is taken as percentage of the related
after-tax profits of the paying company and multiplied by the corporate tax
paid. Dividend is grossed up by the underlying tax credit to compute the foreign
income subject to tax in home country. The ordinary credit limitation is applied
on the grossed-up dividend.

The underlying tax (or indirect) credit system on foreign
dividends is found in several countries under their domestic laws or tax
treaties. These countries include Argentina, Australia, Austria, Canada,
Denmark, Estonia, Finland, Germany, Greece, Ireland, Japan, Korea, Malta,
Mauritius, Mexico, Namibia, Nigeria, Singapore, Spain, Poland, the UK and the
US. It typically only applies if :

  • The shareholder has a significant shareholding in the dividend distributing
    company (e.g. in the UK, 10% is needed), and


  • The shareholder is a company.




Upon receipt of a dividend by the shareholder, the pre-tax
income of the distributing company is included as a taxable income. The
shareholder jurisdiction’s normal rate of company tax is then applied, but the
resulting tax (mainstream tax) is reduced by the company tax paid by the
dividend distributing company (i.e., reduced by the underlying tax). If
the underlying tax exceeds the amount of mainstream tax then there will be no
further tax to pay by the shareholder, who will, thus, receive tax-free
dividends.

The result is that the group will always pay the higher of
the two taxes — the dividend distributing company tax or the shareholder country
tax.

It is referred to as underlying tax credit because credit is
given for the tax paid in the underlying entity. It is also referred to as the
‘Indirect tax credit’ method because shareholder receives credit for tax which
it has only paid indirectly. In the U.S. Internal Revenue Code the same is
referred to a ‘Deemed paid credit’. The concept of ‘Imputation Credit’ is almost
similar to underlying tax credit.

In addition, most jurisdictions provide for a tax credit to
the parent company for the foreign tax paid by the subsidiary when its
undistributed income is attributed under the Controlled Foreign Corporation
Rules. In this article the focus is on underlying tax credit in respect of
dividend income.

3. Example of the underlying tax credit :


Company X is a resident of the UK and owns 60% share capital
of Company Y, a resident in India. Tax rate in India is assumed to be 34% and
tax rate in the UK is assumed to be 28%. Company X has no other taxable income
in the UK.

Since the dividends may be paid out of both current and past profits, domestic law or practice generally provides the ‘ordering rules’. These rules relate the dividends to the relevant post-tax profit out of which the distribution has been made and the creditable tax is determined by the effective tax rate imposed on those profits. In the US, the dividends are deemed to be distributed from a pool of retained profits and the underlying foreign tax is the average effective tax rate.

The computation is also affected by the exchange rate used to translate the creditable foreign tax. It could be either the rate prevailing at the time of payment of the foreign tax (historical rate), or the rate when the dividend was distributed (current rate). The US law requires that the foreign tax be translated at the historical rate, while the United Kingdom generally applies the current rate.

4. Underlying tax credit in respect of taxes paid by the lower tier companies:

In the context of International business structuring, it is quite common for the Multinational Enterprises (MNEs) to structure their business operations in various countries by way of creating various subsidiaries  of the same parent  company and to have further downward subsidiary companies of its subsidiary companies, to achieve their business objective in most efficient and profitable manner. The subsidiaries and the subsidiaries of the subsidiary companies are commonly referred to as ‘lower tier companies’.

Many countries allow the underlying tax credit computation to include taxes paid by lower tier companies. For example, Australia, Ireland, Mauritius, South Africa, and the UK allow the credit for taxes suffered by all lower tier companies, provided prescribed minimum equity or voting rights are maintained at each tier. Similarly Argentina, Japan and Norway permit the underlying tax credit upto two tiers of subsidiaries, Spain gives the underlying tax credit for taxes paid upto three tiers and the United States grants them upto 6 tiers, of qualifying foreign subsidiaries.

Thus, for example, a UK parent company investing in a Mauritian subsidiary, which in turn invests in its Indian subsidiary, subject to fulfillment of the shareholding percentage and other relevant conditions and compliance with regulations, would be eligible to take credit of underlying corporate taxes paid by the Indian subsidiary, to the extent of dividends paid by Indian Company, which are forming part of the dividends paid by the Mauritian Company, against the tax payable in respect of dividends received by the UK Company in UK.

5. Significance of underlying tax credit :
Foreign tax credit planning plays a major role in structuring investments in a foreign tax jurisdiction, in case of various multi-nationals based in jurisdictions such as the UK, the US and Ireland etc., where the credit system predominates and where the underlying tax credit is given. India’s Double Taxation Avoidance Agreements (DTAAs) with ten countries contains the provisions regarding underlying tax credit in respect of dividends paid by a company resident of India. Similarly India’s DTAAs with Mauritius and Singapore contain the provisions regarding underlying tax credit in respect of dividends paid by a Mauritian or Singaporean company.

In respect of planning  for all inbound  investment into India, from the countries  where the respective DTAAs with India/ domestic law contain the underlying tax credit provisions,  it is very important  to keep  in mind  the  exact  operation   of respective -1 underlying  tax credit  provisions  in the DTAAs/ domestic  law, to arrive  at the net tax cost of the MNE/Group  in respect  of dividend  income.  This will facilitate a proper decision-making in respect of investments into India. However, it is important to note that a detailed knowledge of the domestic law provisions of the underlying tax credit in the respective jurisdictions is of utmost importance. Therefore, wherever required, the services of the local consultants/tax experts may be utilised to know the law and practice in respect of exact operations of the underlying tax credit provisions.

In respect of outbound investments also, a proper consideration of the underlying tax credit would be of great help in properly arriving at the actual net tax cost of the enterprise/ group in respect of dividends and thus making the right investment decisions.

6. Underlying tax credit under Indian Scenario:

India does not have any domestic regulations in respect of underlying tax credit. However, as mentioned above, India’s DTAAs with ten countries contain the provisions relating to underlying tax credit. The relevant provisions relating to underlying tax credit contained in various articles are given below for ready reference:

In most of the above mentioned DTAAs, the definition of the term ‘Indian tax payable’ include provisions relating to tax sparing for the ordinary tax credit. However, in respect of DTAA with Ireland, the provisions relating to tax sparing are includible only in respect of clause relating to underlying tax credit.

It is interesting to note that in case of India’s DTAAs with 9 counties (except Singapore), the relevant provisions of the Articles mention about the under-lying tax credit where a dividend paid by a company which is a resident of India to a company which is a resident of the other state. However, in case of Singapore in Article 25(4) of the India-Singapore DTAA, it is mentioned that a dividend paid by a company which is a resident of India to a resident of Singapore. Thus apparently, in case of Singapore underlying tax credit would be available even if the shares in Indian company are not held by any Singaporean Company but are held by any other resident of Singapore.

7. Domestic regulations in respect of underlying tax credit in some of the important jurisdictions:

(a) Mauritius:

Provisions relating to underlying foreign tax credit are contained in Regulation 7 of the Income-tax (Foreign Tax Credit) Regulations, 1996. These regulations have been made by the Ministry u/s.77 and u/s.161 of the Income-tax Act, 1995.
 

(b)  Credit  for underlying taxes

As regards dividends received from subsidiary, the state in which the parent company is a resident gives credit as provided for in paragraph 2 of Article 23A or in paragraph 1 of Article 23B, as appropriate, not only for the tax on dividends as such, but also for the tax paid by the subsidiary on the profits distributed (such a provision will frequently be favoured by States applying as a general rule the credit method specified in Article 23B).”

(c) United States:
The provisions relating to underlying tax credit referred to in the Internal Revenue Code of 1986, as ‘Deemed Paid Credit’ are contained in section 78 and 902 of the Code.

8. OECD Commentary:
Paras 49 to 54 and para 69 of the commentary on Articles 23A & 23B summarise the OECD approach towards tax credit in respect of dividends from substantial holdings by a company. It recognises that recurrent corporate taxation on the profits distributed to parent company: first at the level of subsidiary and again at the level of the parent company, creates very important obstacle to the development of international investments. Many states have recognised this and have inserted in the domestic laws provisions designed to avoid these obstacles. Moreover, provisions to this end are frequently inserted in double taxation conventions. In view of the diverse opinions of the states and the variety of the possible solutions, it preferred to leave the states free to choose their own solution to the problem. For states preferring to solve the problem in their conventions, the solutions would most frequently follow one of the principles i.e. credit for underlying taxes.

Paragraph 52 of OECD Commentary on Article 23A & 23B mentions as under:

“(b) Credit for underlying taxes
As regards dividends received from subsidiary, the state in which the parent company is a resident gives credit as provided for in paragraph 2 of Article 23A or in paragraph 1 of Article 23B, as appropriate, not only for the tax on dividends as such, but also for the tax paid by the subsidiary on the profits distributed (such a provision will frequently be favoured by States applying as a general rule the credit method specified in Article 23B).”

9. Dividend Distribution Tax:
It is important to note that the Dividend Distribution Tax (DDT) paid by the Indian company u/s.115-0 of the Indian Income-tax Act, 1961 may not be the same as “the Indian tax payable by the company in respect of the profits out of which such dividend is paid” as used in relevant articles of the various DTAAs mentioned above containing underlying tax credit provisions. Whether the DDT will be available as ordinary tax credit, is an issue not free from doubt and litigation. We have been given to understand that U.S. allows credit for DDT in USA under the provisions of S. 904 of the Internal Revenue Code. Similarly, we understand that Mauritian authorities have issued a circular clarifying that DDT credit would be available in Mauritius.

10. Conclusion:
From the above, it is evident that the concept of underlying tax credit is very important in mitigating the economic double taxation of dividends paid to companies. This is equally important in planning both inbound and outbound investments. However, in view of the complexities, one will have to carefully understand the provisions of the domestic laws of the applicable foreign tax jurisdictions and treaties before applying the same.

Bibliography:
1. Basic International Taxation, Second edition, Volume-l : Principles, by Roy Rohatgi, Chapter 4, Para 8.4.3 page 281.

2. International Tax Policy and Double Tax Treaties – An introduction to Principles and Application by Kevin Holmes. Chapter 2, page 37 to 38.

3. Interpretation and Application of Tax Treaties, by Ned Shelton. Chapter 2, Para 2.52, page 101.

BCAJ January 2008

BCAJ February 2008

BCAJ March 2008

Vikram Aur Vetal

Cancerous Corruption

Vikram was fond of moving around in the graveyard in the
horrifying night to catch Vetal after daylong practice as chartered accountant.
For Vikram friendship with Vetal was real education. Vetal being the spirit of
an intelligent human being frustrated in its lifetime was still on the earth
posthumously to find answers to innumerable questions lingering in his mind
during his stint as human being. He developed friendship with Vikram. After
playing hide and seek game Vikram used to catch Vetal in the wee hours of
morning. Then he would put Vetal on his shoulder and tread through woods of the
graveyard. Vetal would laugh weirdly in the silence of the graveyard and
thunder :

“So Vikrambhai you succeeded to catch me once again, keep
walking don’t look back, if you speak a word I will vanish. Well I would tell
you a story involving your professional colleague which happened in a metro. To
keep the flow of the story I would name my characters one by one as the story
moves on. Your professional colleague, let’s say Gopal, was a fresh chartered
accountant. He started his practice as soon as he passed his final exam. He had
no ‘Godfather’ in the profession and was on his own. He was very enthusiastic
and honest. He was well-versed with the code of conduct of the ICAI. He was
approached by an old man called Purshottam aged about 60 years.

Purshottam retired as chief engineer from a manufacturing
company. Purshottam had four daughters. Only one daughter got married during his
service tenure. Other three were still pursuing their studies. Obviously
Purshottam was financially not that strong to spend on his daughters’ higher
education and their marriages after retirement down the line. During the fag end
of his service he came into contact with Duryodhan, a high-profile government
officer in charge of ‘safety audits’ prescribed under the Factories Act.
Duryodhan was aware that Purshottam was ‘a chartered engineer’ by qualification.
Vikrambhai you know in our country under Factories Act you are required to
observe number of safety measures. For this purpose the factory owner has to get
the report from a ‘chartered engineer’ as to the implementation of safety
measures by the factory satisfactorily.

You may be aware of Bhopal Gas tragedy of Union Carbide. For
the factory owner it is a big threat to its very existence, a small
non-compliance would lead to suspension of manufacturing activity,
investigations and litigation besides huge business loss, so on and so forth.

So this Duryodhan, a hard core corrupt government officer,
made an offer to Purshottam in connivance with the factory owners, to undertake
‘safety audits’. Purshottom was aware that audit fee for a single ‘safety audit’
runs in lacs. However the offer was not without price. Purhottam would pay out
60% of audit fees to Duryodhan that too in cash. Against the 40% share of
Purshottam there was hardly any expenditure, just windfall profit for Purshottam.
So Purshottam having thought over his future financial requirement, accepted the
lucrative offer made by Duryodhan.

Against this backdrop, Purshottam being an honest and law
abiding person, approached Gopal. Purshottam narrated him the modus operandi of
sharing of audit fees with Duryodhan and asked him whether he would be required
to pay any income tax. The moment Purshottam told him that his professional
receipts were likely to cross Rs. ten lacs, Gopal explained him about
maintenance of books of accounts, record and getting them audited by a chartered
accountant u/s.44AB apart from tax liability.

For a week or so Purshottam was musing over the ‘wake up’
call given by Gopal. He checked his audit fees received as per his bank account;
the amount was staggering well above Rs.10 lacs, near about 27 lacs.

So he met Gopal again. He told him his actual professional
receipts would be around Rs.27 lacs whereas his actual expenses would be just
one lac. It was a challenge to Gopal’s conscience and the ethical values he
cherished. Gopal was in dilemma over whether to advise or not to advise
Purshottam about ‘manufacturing’ fake record of expenses like staff salary in
the absence of staff, office rent in the absence of rented office, driver’s
salary in the absence of driver, travelling expenses, etc. to arrive at some
reasonable taxable income. If he did not advise, probably Purshottam would
approach other chartered accountant. He would lose his first ever ‘Tax Audit’ of
his career. On the other hand if he advises Purshottam to ‘manufacture’ fake
record of expenses which would be audited by him, it was a blatant violation of
law and code of conduct of the ICAI of which he was a proud member. Gopal’s
professional career was at stake. Eventually, evil-mind prevailed over his
conscience. He advised Purshottam to create fake record of expenses for the
purpose of ‘tax audit’. Gopal convinced Purshottam that there was no option but
to create fake record of expenses of a huge amount. Purshottam was repenting on
his decision to accept the offer of Duryodhan just for greed of money. Gopal
also confessed to Purshottam that whatever he was asking him to do was not
ethically correct.

Purshottam arranged record for all those expenses as
suggested by Gopal. Gopal conducted tax audit and submitted tax audit report
with the return of income of Purshottam. Nothing went wrong from income tax
point of view, I mean Purshottam’s case was not selected for scrutiny, since
nothing was illegal prima-facie.

Now Vikrambhai my questions to you : who is being protected
by the act of Gopal and Purshottam ? How do you define the conduct of Gopal and
Purshottam ? And how do you differentiate between Gopal, Purshottam and
Duryodhan character-wise ?

“Vetalbhai, first, Gopal and Purshottam were protecting Duryodhan, the corrupt government officer. Secondly, on the part of Gopal and Purshottam, it was breach of conscience but within the framework of law. That is what happens the world over. Thirdly, I would differentiate Gopal, Purshottam and Duryodhan as “the bad, the worse and the ugly” respectively. Gopal and Purshottam were in need of money whereas Duryodhan was in greed of money”

“Vikrambhai you broke the silence, I am vanishing”. Again Vetal’s laugh was echoing in the grave-yard.

The beginning of the end of US GAAP

Accountant Abroad

There is an increasing indicative trend that US accounting
standards — which were once considered sacrosanct for accountants the world over
— have begun to decline in terms of importance. Instead, the International
Finance Regulatory Standard (IFRS) are emerging as the most popular accounting
standard internationally.

The Financial Accounting Standards Board and the Financial
Accounting Foundation of USA plan to host a public forum in June 2008 to discuss
a new national blueprint for moving the United States to International Financial
Reporting Standards.

The forum will include participation by the American
Institute for Certified Public Accountants, the Internal Revenue Service, the
Securities and Exchange Commission, the Public Company Accounting Oversight
Board, business representatives, educators, and lawyers, who will discuss the
stumbling blocks on the way to setting up international accounting standards.

FASB Chairman noted that the board continues to work with the
International Accounting Standards Board (IASB) on their convergence project to
create “something better than either U.S. GAAP or IFRS alone.”

Developing an ‘improved version of IFRS will be a complex
process,’ and that ‘a smooth transition will not occur by accident.’ As a
result, the blueprint looks to ‘identify the most orderly, least disruptive, and
least costly approach’ to move U.S. public companies to IFRS.

Those changes include getting rid of ‘carve-outs,’ local rule
exceptions adopted by some countries that deviate from the version of IFRS that
is sanctioned by the IASB. Another adjustment supported by FASB Chairman would
be to strengthen IASB’s position as an independent standard setter by
establishing a sustainable source of funding. (It currently is supported by
private-sector donations.)

One idea is to require countries that adopt IFRS to fund the
organisation. In 2002, the Sarbanes-Oxley Act boosted FASB’s independence by
requiring government funding for the board and its parent, the FAF. Before that,
funding came from the private sector.

The call for a single set of global accounting standards will
mostly likely require a single standard setter, and that organisation may
probably not be FASB. Indeed, last week FASB member Thomas Linsmeier said the
“least important question [regarding the switch to IFRS] is what happens to FASB.”
Linsmeier, speaking at an industry conference sponsored by Pace University’s
Lubin School of Business, said that from a broad perspective, FASB’s survival
should not be what motivates the decision about moving to IFRS.

Before a transition to IFRS becomes a reality, however, other
issues will have to be addressed, including how to change the CPA exam to
coincide with IFRS, and how to rework accountant training, education, and
auditing standards to put the American system in sync with international rules.
What’s more, the industry will have to evaluate how adoption of IFRS may change
SEC policy and legal arrangements that are based on U.S. GAAP.

Next month’s blueprint meeting will also be a good
opportunity to work out which road companies eventually will take to become
compliant with IFRS. The most pressing question is whether to operate dual
accounting systems and have companies choose their adoption date within a
specified window of time, or have FASB set a specific deadline for all companies
to make the jump to IFRS.

Whichever path is taken, a few big accounting-practice issues
will have to be settled between FASB and IASB before U.S. companies adopt the
global standards. They include defining liabilities and equity, reworking
financial statement presentations, and revamping lease accounting and
revenue-recognition rules.

In the meantime, FASB will continue to work on wringing
complexity out of GAAP. For example, by the end of June, FASB’s staff is due to
release proposals on hedge accounting to resolve practice issues and make
disclosures easier to understand. Further, the staff expects to issue proposals
to eliminate qualified special-purpose entities from the accounting literature
by revising FAS 140, and improve FIN 46R, the rule on consolidating
variable-interest entities.

The SEC is also committed to moving U.S. companies to IFRS.
The commission’s chief accountant said that ‘theme’ at the SEC continues to be
to move toward international accounting standards. To quote the chief accountant
“I think to compete in the future, we will have to move to IFRS.”

(Source : CFO.Com/US)

levitra

Vikram Aur Vetal

Cancerous Corruption

Vikram was fond of moving around in the graveyard in the
horrifying night to catch Vetal after day-long practice as chartered accountant.
For Vikram friendship with Vetal was real education. Vetal being a spirit of
intelligent human being frustrated in its lifetime was still on the earth
posthumously to find answers to innumerable questions lingering in his mind
during his stint as human being. He developed friendship with Vikram. After
playing hide and seek game Vikram used to catch Vetal in the wee hours of
morning. Then he would put Vetal on his shoulders and tread through woods of the
graveyard. Vetal would laugh weirdly in the silence of graveyard and thunder :

“So Vikrambhai, you succeeded to catch me once again, keep
walking, don’t look back, if you speak a word I will vanish. Well, I would tell
you an episode you may find utopian. Gopal was an Assessing Officer in the
Income-tax Department. Occasionally he would take bribes from taxpayers, most of
the times under pressure from the higher ups. Otherwise he was Mr. Clean in the
Income-tax Department. At times he would revere social values. His helping
nature was known to all. But his demeanour was utter nuisance for those
indulging in rampant corruption particularly for Duryodhan, an assessing officer
having his cabin next to Gopal’s. He was always on the lookout to trap Gopal and
demolish him. So he would spy in Gopal’s activities in and off the office.

On that fateful day it was post-lunch session. Gopal was
desperate to ‘settle’ the assessment of Dhanraj. Dhanraj along with his
consultant was sitting in front of Gopal and whispering something as Gopal was
busy on the phone. In the previous hearings Gopal had detected a number of
irregularities in Dhanraj’s assessment. Finally those irregularities resulted in
additional income. Anticipating those additions, Dhanraj being a ‘seasonsed’
tax-dodger had already been hinting Gopal about his willingness to ‘comply’ with
his demand to hush up the case with reasonable additions. It was two days
before that fateful day that Gopal had agreed to settle the case for fifty
thousand, most reasonable amount of bribe for a hardcore tax-dodger like Dhanraj.

As I told you earlier, Gopal was not a hardcore corrupt
bureaucrat. Gopal finished his call and said,

“So Dhanraj, did you bring the amount ?”

“Yes Sir” replied Dhanraj.

Again the phone rang. Gopal was listening intently to the
caller on the other end. He responded,

“I will try my level best to arrange something. Don’t keep on
postponing the surgery of your son, come down to my office”.

As soon as he finished the call his assistant peeped in and
informed.

“Sir there is a call from bada sab“

While getting out of the chair Gopal said,

“Dhanaraj, I will be back in 10 minutes”

Gopal left the cabin. En route he met Duryodhan who was just
returning back to his cabin. They just greeted each other. As usual Duryodhan
addressed him sarcastically “How are you Dharmaraj ?” Gopal did not respond
verbally, he just chuckled nervously. Driven by suspicion and hatred Duryodhan
intruded in Gopal’s cabin. He saw Dhanraj along with his consultant and
overheard their whispering about how reasonable the ‘amount’ was. Dhanraj being
‘old customer’, Duryodhan greeted him with smile.

“What’s up Dhanraj ?” asked Duryodhan.

“My case is selected for scrutiny Sir” responded Dhanraj.

“Any trouble” queried Duryodhan.

“No trouble Sir, the case will be over today only”said
Dhanraj.

” How much ?” Duryodhan.

“Very reasonable” Dhanraj.

Duryodhan got the required ‘ammunition’ to demolish
‘Dharmaraj’ Gopal, he left the cabin hurriedly. Gopal was still with Bada Sab
nearabout half an hour after Duryodhan’s exit. Dhanraj and his consultant were
anxiously waiting for Gopal’s arrival. There was a knock on the door and an aged
person in his sixties entered the cabin.

“Where is Mr. Gopal ?” he asked with bewildered look at
Dhanraj and his consultant.

“Sir has gone to Bada Sab” Dhanraj replied.

The aged person was about to ask the next question, when
Gopal entered in the cabin and hurriedly sank in the chair. He asked the aged
person to take a seat.

“So Dhanraj, you’ve brought the money ?” asked Gopal.

“Yes Sir” Dhanraj replied.

“Hand over that money to Mr. Sudam (the aged person). Let me
tell you in brief. After two hours from now his son aged about 14 will be
operated for heart ailment, the only hope of Sudam and being retired person he
is not in a position to pay for the operation on his own” explained Gopal. The
moment the envelope containing the money was being handed over by Dhanraj to
Sudam, two persons barged into the cabin.

“Don’t move, stay where you are” ordered one of the two.

“We are from Anti-Corruption Bureau” said one. Gopal realised
that he was caught red handed, but he did not lose his cool. Quickly he
recovered from the shock and requested,

“Sir I am guilty of accepting bribe from Dhanraj, but Sir
please let Mr. Sudam go with the money. I am here to face your interrogation.”

Duryodhan, the protagonist of the raid of ACB, could not
control his excitement and joy. He deliberately came out of his cabin to watch
the ‘demolition drama’. Meanwhile the news of the raid spread like wild fire.

So Vikarmbhai, my question, how do you reckon the acts of
Gopal and Duryodhan ?”

“Vetalbhai, legally speaking Gopal is guilty of accepting bribe, he cannot plead social cause behind the bribe since the Goddess of justice is blind. However socially I still hold Duryodhan guilty of manipulating the law to demolish Gopal who by his conduct invoked Duryodhan’s conscience. He manipulated the law for his own convenience.

Apparently one may appreciate Duryodhan for his alertness to unearth corruption. Vetalbhai, you will agree with me that persons like Gopal are always in minority. Further, a manipulator of law is more dangerous than an occasional offender of law in the society.”

“Vikrambhai, you have broken the silence. I am vanishing” again Vetal’s laugh was echoing in the graveyard.

The beginning of the end of US GAAP

Accountant Abroad

The International Federation of Accountants (IFAC) has voiced
strong opposition to what it sees as attempts to radically change or suspend the
use of fair value accounting without proper due process.


The federation warns against making changes at a national or
regional level which would worsen reporting differences and further confuse
financial markets, resulting in a lessening of confidence in financial
reporting. This would be exact opposite of what is required in current
circumstances. Reducing transparency is not the answer . . . . and it will not
serve the interests of investors.

IFAC believes the additional guidance from the International
Accounting Standards Board (IASB) and the United States Financial Accounting
Standards Board, as well as the International Auditing and Assurance Standards
Board in its Staff Audit Practice Alert, Challenges in Auditing Fair Value
Accounting Estimates in the Current Market Environment, has been very
valuable and will contribute to the public interest through more consistent
application of the standards.

Investors require a single set of accounting rules but a
current European Commission review of fair value accounting threatens to
undermine transparency and comparability. The Commission is due to host a
meeting in Brussels to discuss accounting reform, including further relaxation
to fair value.

Transparency, comparability and consistency in financial
reports is of utmost importance to the investor. In the view of the Investment
Management Association, making changes suggested by the Commission by the end of
October poses a risk that this may not be maintained and that such changes could
result in unhelpful reporting. Even though the current credit crisis requires
swift measures by governments and regulators, fundamental changes in accounting
should be implemented only after due process and the involvement of all
stakeholders.

The International Accounting Standards Board agreed to rush
through changes that allowed some valuations of some financial instruments —
securities — to duck a fair value calculation by being reclassified from ‘held
for sale’ to ‘held for investment. The European Commission eventually endorsed
this move in mid week, but only after considering pushing through changes that
would have allowed financial institutions to reclassify a much wider spectrum of
financial assets, including derivatives.

The US Securities and Exchange Commission is to take
mark-to-market accounting to task in a series of roundtables that will examine
the role fair value played in the current market turmoil.

The first roundtable takes place on 29 October and consists
of two panels, one discussing the relationship between fair value and the
financial crisis that has enveloped the major banks and the second examining
potential changes to the current accounting models.

Fair value has been lambasted by financial figureheads and
politicians in the US, UK and Europe for intensifying the effects of the credit
crunch, with many calling for the model to be suspended during the current
turmoil.

(Source : www.accountancyage.com)

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From The President

From The President

Dear professional colleagues,

Accounting standards are formulated with a view to eliminate
the use of different accounting policies and practices, thereby ensuring
comparability of financial statements of different enterprises and providing
meaningful information to various users of financial statements to enable them
to make informed economic decisions.

A financial reporting system based on uniform standards
reposes faith of investors and contributes to the economic growth. Further,
global expansion of businesses has made enterprises recognise the advantages of
having a commonly understood financial reporting framework i.e., a single set of
accounting standards across the world.

The IFAC has formulated International Financial Reporting
Standards (IFRS) and has set the goal to achieve international convergence of
financial reporting standards. Presently, 100 countries are using IFRS. Even the
USA is joining in the promotion of and convergence with IFRS. The ICAI has
justifiably opted for convergence of Indian accounting standards with IFRS by
2011.

In the present Indian scenario, different sets of accounting
standards exist viz. standards formulated and pronounced by the ICAI, standards
prescribed u/s.211(3C) of the Companies Act, 1956, as per the advice of National
Advisory Committee for Accounting Standards and standards notified by the CBDT
u/s.145 of the Income-tax Act, 1961.

These different sets of accounting standards issued by
various authorities lead to confusion for the enterprises and the users of
financial statements. The compliance obligation of different accounting
standards on various entities are as under :

  • accounting standards
    notified u/s.211(3C) of the Companies Act are to be compulsorily followed by
    the companies.


  • SEBI (Disclosure &
    Investor Protection) Guidelines, 2000, stipulate that the ICAI standards
    should be followed while preparing the financial statements in case of
    conversion of a firm into a company.


  • the listing agreement
    provides for preparing the financial results as per the accounting standards
    laid down by the ICAI or as applicable to the issuer under relevant statutes.


  • RBI guidelines require
    banks to comply with the standards promulgated by the ICAI, subject to
    provisioning guidelines.


  • Under Income-tax,
    assessees are required to adopt accounting standards notified by the CBDT
    u/s.145 of the Income-tax Act, 1961.


  • Chartered Accountants are
    mandated to ensure compliance of the accounting standards issued by the ICAI.


The differences, though minor, prevailing in the various sets
of accounting standards result in confusion. India too, should aim at adopting
one set of accounting standards at a time when the world is moving towards
convergence. When the standards issued by the ICAI are passed by the Council
having representatives from the Government, would it not be in the interest of
business enterprises and the users to have only one set of accounting
standards ?

Simultaneously, it is imperative that the Revenue authorities
too need to consider and accept the financial statements prepared following the
accounting standards. Tax laws should generally be in harmony with the
accounting standards. The accounting standards themselves are becoming
increasingly complex. When income computation for the purposes of taxation
deviates from the accounting profit, it only adds to the complexity and is bound
to result in litigation. The divergence from the accounting income should be
minimal. Accounting standards should not be defied merely for collecting revenue
at an earlier point of time. In this connection, the following observation of
the Supreme Court in J. K. Industries 165 Taxman 323, are relevant.

“Main object sought to be achieved by Accounting Standards
which are now made mandatory is to see that accounting income is adopted as
taxable income and not merely as the basis from which taxable income is to be
computed.”

While we march towards adopting IFRS, there is an area of
concern regarding application of accounting standards to small and medium-sized
enterprises (SMEs). The present requirement of compliance needs a review. SMEs
find it difficult to implement the complex standards. The concessions given to
SMEs are generally exemption from extensive disclosure and in some cases in
respect of measurement. This is not sufficient. SMEs form a very big component
of the economy and they should not be burdened with unduly heavy cost of
compliance without commensurate benefit. There is a need for change and what is
required is a set of simple accounting standards for SMEs.

With regards,
Rajesh Kothari

levitra

Section B : Miscellaneous

New Page 1

Suggestion of Expert Advisory Committee of ICAI for AS-22 not
followed pending revision of AS-22 by ICAI


Power Finance Corporation Ltd.

— (31-3-2008)

From Notes to Accounts :



20. The Deferred Tax Assets/Liabilities have been created
in terms of the Accounting Standard 22 issued by the Institute of Chartered
Accountants of India (ICAI) since the year it became applicable to the
company, i.e., 2001-02 except on account of ‘Special reserve created
and maintained under Section 36(1)(viii) of the Income Tax Act’ on which the
DTL was created by debiting profit & loss account for 2004-05 and by charging
revenue reserve for 2001-02 to 2003-04. However, PFC has taken up the issue
for total withdrawal of DTL on Special Reserve with the ICAI and with the
Ministry of Corporate Affairs. The Institute in its letter dated 4-4-2007
stated that the Accounting Standard Board examined AS-22, Accounting for Taxes
on Income, in the light of the opinion of the Expert Advisory Committee. It is
further stated that “the Board decided to take up the revision of the standard
on the lines of the corresponding IAS, namely, IAS-12, Income taxes, as a part
of its convergence with IFRS project. It was argued that since IAS-12 is based
on the ‘balance sheet approach’ as against ‘income statement approach’ on
which the existing AS-22 is based, the problem being encountered by the
company may not arise”. The Ministry of Corporate Affairs also endorsed the
letter issued by ICAI to PFC.

In view of this, rectification as suggested by the ICAI
vide their letter dated 31-1-2006 regarding creation of DTL on Special Reserve
created and maintained under Section 36(1)(viii) of the Income-tax Act, 1961
for the period 2001-02 to 2003-04 by charging to P&L Account and crediting the
reserves by Rs.539.39 crores has not been carried out and pending revision of
AS-22, the Company has maintained status quo and continued the practice
of creating the DTL on the Special Reserve created and maintained under
Section 36(1)(viii) of the Income-tax Act, 1961.

 


From Auditors’ Report :

Attention is drawn to the following Notes in Schedule 18 :

(j) Note No. 20 regarding the suggestion of the Expert
Advisory Committee of the ICAI suggesting the rectification by creating the
Deferred Tax Liability on ‘Special Reserve created and maintained’ under
Section 36(1)(viii) of the Income-tax Act, 1961 for the period 2001-02 to
2003-04, by charging the Profit & Loss Account (Prior Period Items) and
crediting the Reserves by Rs.539.39 crores, has not been carried out by the
Company pending the decision of the ICAI on the Company’s request for total
withdrawal of provision of AS-22 regarding creation of Deferred Tax Liability
for the Special Reserve Created and Maintained under Section 36(1)(viii) of
the Income-tax Act, 1961. Pending the decision of the ICAI, the Company has
not given effect to the suggestion of the Expert Advisory Committee of the
ICAI.

 


Intangible assets, etc. acquired under a Business Transfer
Agreement adjusted against General Reserve pursuant to High Court Order

Blue Star Ltd. — (31-3-2008)

From Notes to Accounts :



7. The Company has acquired the electrical contracting business of Naseer Electricals Private Ltd. (NEPL) under a business purchase agreement on a slump sale basis for Rs.48,09.77 lakhs (including Rs.5,00.00 lakhs held in Escrow account till the conditions stipulated in the said agreement are fulfilled) with effect from January 24, 2008. After adjusting the value of tangible fixed assets acquired of Rs.1,16.65 lakhs, the balance consideration along with the incidental expenses have been allocated towards various intangible assets and goodwill as valued by an independent valuer as detailed hereunder :
8.    As per the Scheme of Arrangement approved by the shareholders at the Extra-ordinary General Meeting held on March 4,2008 and duly approved by the Hon’ble High Court at Bombay vide its order dated April 11, 2008, the Company has, in accordance with the accounting treatment prescribed therein, adjusted the following amounts against the General Reserve of the Company:

(a)    The intangible assets of Rs.41,18.62 lakhs and Goodwill of Rs.8,32.32Iakhs arising on acquisition of electrical contracting busi-ness of NEPL.

(b)    Loss of Rs.35.10 lakhs on sale of 3,98,000 equity shares of Blue Star Design & Engineering Ltd.


3. Qualification  in Auditors’  Report  on Consolidated  Financial  Statements

NAVIN FLUORINE INTERNATIONAL LTD. – (31-3-2008)

From Auditors’ Report:

5.    Attention is invited to the following in Schedule 17, out of which points i and ii were also the subject matter of our report similarly modified in the previous year:

(i)    Note 3.a, regarding accounts of the joint venture company not having been consolidated which is in contravention of the provisions of AS-27, ‘Financial Reporting of Interests in Joint Ventures’.

(ii)    Note 16, regarding non-accounting of rent/ recovery of expenses of Rs.Nil; aggregate to date as at the year end, Rs.108.83 lacs (previous year, Rs.Nil; aggregate to date as at the previous year end, Rs.108.83 lacs);.

(iii)    Note 12, regarding recognition of deferred tax asset of Rs.285.94 lacs (previous year, Rs.Nil) by the associate in respect of unabsorbed depreciation and carry-forward losses.

We further report that without considering item 5(i) above, the effect of which on the financial statements for the year ended 31st March 2008 and on the corresponding figures in the previous year ended 31st March, 2007, could not be determined, had the observation made by us in item 5(ii) and (iii) been considered, there would have been a loss of Rs.145.53 lacs, as against the reported profit of Rs.56.83 lacs (previous year, a profit of Rs.1,719.09 lacs, as against the reported figure of profit of Rs.1622.47 lacs), reserves and surplus would have been Rs.18,091.65 lacs, as against the reported figure of Rs.18,294.01 lacs (as at 31st March, 2007, Rs.18,450.90 lacs, as against the reported figure of Rs.18,354.28 lacs), investments would have been 1,464.55 lacs, as against the reported figure of Rs.1,750.49 lacs, loans and advances would have been Rs.6,227.21 lacs, as against the reported figure of Rs.6,118.38 lacs (as at 31st March, 2007, Rs.3,124.99lacs, as against the reported figure of Rs. 3,016.16 lacs) and provisions would have been Rs. 842.52 lacs, as against the reported figure of Rs.817.27lacs (as at 31st March, 2007, Rs.880.65 lacs, as against the reported figure of Rs.868.44 lacs).

Subject to the foregoing………….   

ICAI And Its Members

ICAI & Its Members

1. Disciplinary case :


In the case of U.V. Bendikar v. C.A. N. G. Kulkarni
the articled clerk of the member lodged a complaint against the member. In this
complaint, it was alleged that the member did not give his consent for transfer
of articleship as requested for by the complainant. It was also alleged that the
member had not paid stipend to the articled clerk and that the articled clerks
were asked to work for more than 35 hours in a week and that they were asked to
work on all public holidays and also on Sundays.

The Disciplinary Committee as also the Council of ICAI found
the member guilty of professional misconduct under clause (i) of Part II of the
second schedule of the C.A. Act. According to the Council, the member was guilty
of non-compliance with Regulations 32 B (Non-payment of monthly stipend) and 45
(Excess working hours). The Council recommended to the High Court to award
punishment of ‘Reprimand’ to the member.

The Bombay High Court has accepted the above recommendation
of the Council. According to the High Court, under Regulation 32B, a member is
required to pay stipend to the articled clerk on a month-to-month basis and the
member has no option to make payment in lump sum at any time. The High Court has
also accepted that the member’s office was open from 9.30 a.m. to 8.30 p.m. on
all 365 days and articled clerks were required to attend the office work even on
Sundays and public holidays. Thus, the articled clerks were asked to work for
more than 35 hours in a week.

(Refer Pages 1744-1746 of C.A. Journal-April, 2008)

2. Disclosure of Internal Consumption in the Profit & Loss Account :


The Expert Advisory Committee (EAC) has recently given an
opinion on the above issue (C.A. Journal April, 2008 P. 1686-1691) as under :

(i) The company owns and operates (i) gas pipeline of natural
gas, (ii) gas-based LPG manufacturing plants in different parts of the country,
(iii) an integrated gas-based petrochemical plant for producing polymers, and
(iv) LPG pipelines for transmission of LPG. The company has a number of
accounting units which record and maintain the accounts for the respective
business activities carried out by them.

(ii) There are inter-unit transfers of materials manufactured
in the respective units. Each unit records raw materials, fuel, etc. received
from the other unit and debits the price to ‘Raw Materials’ A/c. and/or ‘Power,
Fuel and Water Charge’ A/c. The unit transferring the material credits the
amount to ‘Other Income’ A/c. In the final consolidated Profit & Loss A/c. of
the company, these items appear on the debit side as expense and on the credit
side as other income.

(iii) The auditors objected to the above and observed that
disclosure of internal consumption in Profit & Loss account under the head
‘Income’ on the credit side and ‘consumption’ on the debit side was not proper.

(iv) The following two questions have been considered by EAC :

(a) Whether the disclosure of internal consumption of gas
separately from ‘Sales’ on the ‘Income’ side of the Profit & Loss account with
corresponding debit to ‘Raw Material Consumed’ and ‘Power, Fuel and Water
Charges’ on the ‘Expenses’ side of the Profit & Loss account by the company is
correct and in compliance with AS-9.

(b) In case the answer to (a) above is in the negative, an
appropriate method of accounting and disclosure to be followed by the company
for such internal consumption of gas, which will comply with the requirements
of AS-9, AS-17 and clause 2 of Part II of Schedule VI to the Companies Act,
1956, may kindly be suggested.

(v) EAC has given the following opinion :

(a) The disclosure of consumption of gas separately from
‘Sales’ on the ‘Income’ side of the Profit & Loss account with corresponding
debit to ‘Raw Material consumed’ and ‘Power’, Fuel and Water Charges’ on the
‘Expense’ side of the Profit & Loss account by the company is not correct even
though it is not shown as ‘revenue’ within the meaning of AS-9.

(b) The Committee is of the view that intersegment transfer
entries should be ignored while generating the financial statements of the
enterprise as a whole, even though these have to be considered for segment
reporting purpose under AS-17. This will ensure that there is no double
booking of the consumption and at the same time statistical information
required to be disclosed under Part II of Schedule VI to the Companies Act,
1956 would be available without including any profit element. For this
purpose, depending upon the basis of inter-segment pricing, some adjustments
may be needed, so that apart from quantitative information, financial value of
information disclosed is proper. In this regard, ‘Statement’ gives detailed
guidance. In other words, the Committee is of the view that merely for the
purposes of AS-17, it is not appropriate to bring various elements of
inter-segment transfers as a whole. Segment reporting can be done on the basis
of the information otherwise available with the company.


3. CPE credit requirement for Members :


In March, 2008 issue of BCA Journal (Page 710), it was
reported that members, unless exempted, may undergo unstructured programmes of
learning for specified period in each rolling three-year period. For members in
practice, this period is 30 CPE credit hours and for others it is 15 CPE credit
hours over a period of 3 years.

The following is the indicative list of unstructured CPE
activities :

  • Web-based learning modules

  • Self-learning modules and courses (use of audiotapes, videotapes, correspondence courses, computer-based learning programmes)

  • Reading and individual home study

  • Group or bilateral discussion  on technical issues

  • Acting as visiting faculty or guest faculty at the various universities/management institutions/ institutions of national importance

  • Participation in CPE teleconferencing programmes without the supervision of the POD

  • Providing solutions to questionnaires/puzzles available on web/professional journals

  • Internal training programmes being organised by firms of Chartered Accountants with seven or more partners.

 
It is reported that a self-declaration given by a member about participation in such activities each year will be accepted by ICAI for giving CPE credit. It appears that in ‘Group or bilateral discussion on technical issues’ attendance in seminars, work-shops, study circle meetings, etc. organised by any professional association, society or other similar body will be recognised for unstructured programmes.   

4. ICAI News:

(Note: Page Nos. given below are from CA. Journal for April, 2008)

i. Annual  Membership  Fees:

As reported earlier, the Annual Membership Fees payable by members to ICAI have been revised as under w.e.f. 1-4-2008.

(Pages 1629, 1779-1781)

ii. Quality  Review  Board:

The Central Government has constituted the Quality Review Board under Chapter VII (a) of the C.A. Act consisting of following members:

(a) Shri K. N. Memani  –  Chairman
(b) Shri A. K. Awasthi,
(c) Shri P. S. Sharma,
(d) Shri Dr. B. C. Jain,
(e)Shri Dushyant  Tyagi,
(f)Shri R. Vasudevan,
(g)Shri Ved Jain,
(h)Shri Jayant  Gokhale,
(i)Shri Manoj Fadnis,
(j) Shri K. P. Khandelwal,    and
(k) Shri G. Ramaswamy.   
(Page 1789)   

(iii) ICAI    publications:

The following new publications are issued by ICAI :

a) Compendium   of Opinions,  Vol. XXV

b)Insurance  Broking

C) Canadian Advantage (A Research Study on Canadian Business Opportunities).

ICAI And Its Members

ICAI & Its Members

1. Disciplinary cases :


In the case of Shri A. R. Chitlangi v. Shri P. L. Tapdiya,
the Articled Clerk (A.R. Chitlangi) had filed a complaint against the member
Shri P. L. Tapdiya alleging that the member did not pay stipend to him during
the period of his articles. The defence of the member was that the articled
clerk used to remain absent from his duties frequently without informing the
office, he was undisciplined and had irregular behaviour. The matter was
referred to the disciplinary committee. In the meantime, the member paid the
stipend due to the articled clerk and also issued Form 20, certifying the period
during which the articled clerk served his articles with him. In this Form there
was no mention about the irregularity or indiscipline of the articled clerk. The
only remark which the member had made was that the performance of articled clerk
was not satisfactory.

The Disciplinary Committee held the member guilty on the
ground that the member did not pay the stipend to the articled clerk and this
contravened Regulation 32 B of C.A. Regulations, 1964. The Council accepted this
finding and recommended to the High Court to award punishment of reprimand to
the member.

The Bombay High Court has not accepted the defence of the
member and held that in the facts of this case, the member was guilty of
contravention of Regulation 32 B for non-payment of stipend to the articled
clerk. The High Court has accepted the recommendation of the Council and
reprimanded the member.

(For details please refer P. 1890 of C.A. Journal for May,
2008).

2. Working hours of Articled Assistants :


Some doubts were raised about the working hours of Articled
Assistants. The Council believes that article training is an important part of
the C.A. curriculum and the same needs to be carried out in accordance with the
scheme framed by ICAI. Therefore, the following clarifications are issued by
ICAI :

(i) The working hours for the articled assistants shall be
35 hours in a week excluding the lunch break.

(ii) The office hours of the Principal for providing
article training to the articled assistants shall not be generally before 9.00
a.m. or after 7.00 p.m.

(iii) The normal working hours for the articled assistants
shall not start after 11.00 a.m. or end before 5.00 p.m.

(iv) The working hours for the articled assistants should
not exceed 35 hours in a week excluding the lunch break and normally an
articled assistant should be required to work during the normal working hours
fixed for articled assistants.

(v) In case of the exigencies of work with the Principal,
an articled assistant may be required to work beyond his/her normal working
hours. However, under such circumstances, the aggregate number of working
hours shall not exceed 45 hours per week. The requirement to work beyond 35
hours in a week should not be a practice, but be applicable only in
exceptional circumstances. Further, where the articled assistant is required
to work beyond normal working hours, and aggregate of such hours exceeds 35
hours per week, he/she shall be entitled to compensatory leave calculated with
reference to number of completed working hours, over and above, 35 hours per
week.

(vi) The facility of allowing flexible office hours stands
withdrawn.

(vii) To ensure that the working hours do not clash with
the graduation or any other course, if any pursued by the article assistant,
each articled assistant registered on or after 1st April 2008 shall now be
required to obtain specific permission from the ICAI for pursuing graduation
or other course as permitted under the Chartered Accountants Regulation by
submitting Form No.112, within one month from the date of joining the college
or course to the ICAI.

(viii) The articled assistant presently registered and
undergoing graduation or any other course and who has not obtained specific
permission shall be required to obtain the specific permission from the ICAI
by submitting Form No. 112 within six months of issue of these guidelines
i.e., by 30th September 2008.


(ix) The Certificate in Form No.112 indicating college
timings, etc. shall be countersigned by the concerned Principal of the college
with the seal and stamp of the College and also indicating the telephone
number/s and full address of the College.

(x) In case a student does not comply with the above
requirements or violates any of the above guidelines, his/her articleship
period shall not be recognised.


(For details
refer to p. 1940 – 1941 of C.A. Journal for May, 2008)


3. Accounting technicians :


ICAI on 3rd April, 2008, announced to launch a course for
Accounting Technicians from 22nd April for undergraduate students. This is a new
course which ICAI wants to introduce in our country. Brief details about the
need for Accounting Technicians in our country are stated in the President’s
Message at Page 1806 of C.A. Journal for May, 2008 as under :


“The multi-faceted growth of Indian economy has resulted in huge demand for second-tier accounting personnel for large as well as small and medium enterprises. For long, a need was being felt for persons with accounting and related skills commensurate with the requirements at the operational level. Responding to this ever-increasing demand in industry as well as in the services sector, the Council has decided to launch ‘Accounting Technicians Course’. These accounting technicians will not only fill gaps at the operational level as accountants but will also ensure that the value chain in the accounting process does not suffer. With closer integration of agriculture and informal sectors with the mainstream economy, the demand for such professionals is expected to go up every year. I believe that this step will provide a much needed service and further boost our image as a premier accounting Institute in the country. As per the proposal, a step-up approach is being adopted whereby a student having qualified the Accounting Technicians Course will be eligible to enrol for the CA Course. At the same time, a student who has enrolled for a CA course but who for one reason or the other is not able to complete the CA Course will have the option to become an accounting technician. Further, all those students who have passed Intermediate or FE-II Examination of the Institute at any time in the past and have completed articled training shall also be eligible for Accounting Technician Certificate.”

4. ICAI News:
(Note: Page Nos. given below are from CA. Journal for May, 2008)

i) Auditing  Standard:

Exposure draft on Revised Standard on Auditing (SA) 260 on ‘Communication with those charged with Governance’ is published for comments by members by 15-6-2008. Similarly, Explanatory Memorandum to this Exposure draft is also published (Pages 1959-1975).

ii) Clause 49 of Listing  Agreement:

SEBI has issued a Circular on 8-4-2008 making some modifications in clause 49 of the Listing Agreements. This Circular clarifies that 50% of the Directors on the Board of Directors of a listed company should be independent directors if the non-executive chairman of the Board is a promotor or related to the promotors or persons occupying management positions. At present, if the chairman is a non executive director, the requirement is that only 1/3rd of the Board should consist of independent directors. SEBI has also stated that the minimum age of an independent director should be 21 years (Page 1952).

iii) Perspective  Planning  Committee:

ICAI has appointed the above committee which will identify the areas of concern by flagging issues which affect the profession. The committee hag invited the views of the members. (Page 1948).

iv) New Branches  of ICAI :

Following new Branches have been established w.e.f 27-3-2008 :

a) Amravati  Branch  of WIRC
b) Pimpri Chinchwad Brach of WIRC (Refer page 1946)

v) Delivery  of Journal at Residential  Address:

Presently the monthly journal of the Institute is delivered only at the professional address registered with the Institute. However, with a view to ensuring timely delivery of the journal to members and to enable them to read it at their convenience, ICAI has decided to give an option to the members to get their copy of journal at the residential address, if they so desire. All those members who are desirous of getting the journal at the residential address may send  a request  in writing  (page  1807).

ICAI And Its Members

ICAI & Its Members

1. Disciplinary
case :


ICAI v.
Shri B. R. Kurhade (C.A. Journal, June 2008, Page 2016)


In the above case, the Jt. Director of Industries, Mumbai,
filed a complaint against the member alleging that the member had certified
information of past consumption, production, etc. in respect of import
applications made by 12 SSI units located in Ahmednagar district. It was found,
on subsequent investigation, that these certificates given by the member were
wrong. It was also found that some of the SSI units were not working regularly
or had not maintained required consumption, etc. records or did not require or
could not use the raw material applied for in their manufacturing process.

The Council found the member guilty of professional
misconduct under clauses (7) and (8) of Part I of the Second Schedule of the
C.A. Act and recommended to the High Court to remove the name of the member for
2 years. The Bombay High Court accepted this finding, but reduced the punishment
for removal of name of the member to 3 months.

2. Capitalisation of exchange loss :


The Expert Advisory Committee (EAC) of ICAI has considered
the above issue on pages 2002–2004 of C.A. Journal of June, 2008.

(i) The facts in this case are as under :

The company entered into an agreement for foreign currency
loan in respect of its expansion projects. As on 31-3-2007, there was a
reduction in exchange rate of Euro. As a result of this the liability for the
foreign loan is reduced. The question for consideration was as to whether the
exchange rate variations on the foreign exchange currency loan taken for the
expansion project, during the period of construction, should be capitalised or
abated.

(ii) EAC has given the following opinion :

The foreign exchange loss on foreign currency loan can be
capitalised only to the extent mentioned in para 4(e) of AS-16 (Borrowing
Costs). Any excess exchange loss should be treated as revenue loss. The exchange
gain with respect to the qualifying asset under AS-16 can be adjusted against
the cost of the asset only to the extent mentioned in para 4(e) of AS-16. The
exchange gain in excess of this amount should be credited to Profit & Loss A/c.

3. Advertisement by practising CAs :


The Council of ICAI has framed guidelines allowing practising
CAs and their firms to advertise their services through a write-up issued,
circulated or published through print or electronic media. These guidelines have
been hosted on the website of the Institute. Brief outline of these guidelines
is as under.

(1) The member(s)/firm(s) should ensure that the contents of
the write-up are true to the best of their knowledge and belief and are in
conformity with these guidelines and be aware that the ICAI does not own any
responsibility whatsoever for such contents or claims by the writer member(s)/firm(s).

(2) The word ‘write-up’ is defined to mean the writing of
particulars according to the information given in the guidelines setting out
services rendered by the members or firms and any writing or display of the
particulars of the member(s) in practice or of firm(s) issued, circulated or
published by way of print or electronic media or otherwise including in
newspapers, journals, magazines and websites (in Push as well in Pull mode) in
accordance with the guidelines.

(3) The write-up may include only the following information :

(A)
For members






(i) Name . . . . . . . . . . . . . . .Chartered
Accountant,

(ii) Membership No. with Institute,

(iii) Age,

(iv) Date of becoming ACA,

(v) Date of becoming FCA,

(vi) Date from which COP held,

(vii) Recognised qualifications,

(viii) Languages known,

(ix) Telephone/Mobile/Fax No.,

(x) Professional address,

(xi) Web,

(xii) E-Mail,

(xiii) CA logo,

(xiv) Passport size photograph,

(xv) Details of employees (Nos. —)

(a) Chartered Accountants,

(b) Other professionals,

(c) Articles/Audit assistants,

(d) Other employees —

(xvi) Names of the employees and their particulars on the
lines allowed for a member as stated above, and

(xvii) Services provided —

(a) ,

(b) ,

(c) [Note : Item (ii) is mandatory]





(B)
For firms



(i) Name of the firm . . . . chartered accountants,

(ii) Firm Registration No. with Institute,

(iii) Year of establishment,

(iv) Professional address(s),

(v) Working hours,

(vi) Tel. No.(s)/Mobile No./Fax No(s),

(vii) Web address,

(viii) E-Mail,

(ix) No. of partners,

(x) Name of the proprietor/partners and their particulars on the lines allowed for a member as stated above including passport-size photograph,

(xi) CA logo,

(xii) Details of employees (Nos. —)

(a) Chartered Accountants,
(b) Other professionals,
(c) Articles/Audit assistants,
(d) Other employees
(xiii) Names of the employees of the firm and their particulars on the lines allowed for a member as stated above, and

(xiv) Services provided:
(a)
(b)
(c)………… [Note: Item (ii) is mandatory]

(4) Other conditions relating to the write-up:
(i) It should not be false or misleading and bring the profession into disrepute.
(ii) It should not claim superiority over other member(s)/firm(s).
(iii) It should not be indecent, sensational or otherwise of such nature which may likely to bring the profession into disrepute.
(iv) It should not contain testimonials or endorsements concerning member(s).
(v) It should not contain any other representation(s) that may likely to cause a person to misunderstand and/or to be deceived.
(vi) It should not violate the provisions of the CA Act and Rules made thereunder and CA Regulations.
(vii) It should not include the names of the clients (both past and present).
(viii) It should not be of font size exceeding 14.
(ix) It should not contain any information other than stated in Para (3) hereinabove.
(x) It should not contain any information about achievements/ award or any other position held. A.

4. Prospects for members in industry :
ICAI had organised Campus Placement Programme for members during February-April, 2008 at 16 centres in India. Out of members who qualified in November, 2007 examination, 3781 candidates (preceding programme: 1823 candidates) participated in this programme. 243 Interview Boards representing 109 organisations interviewed the candidates at 16 centres. More than 1250 candidates were selected for jobs in various industries. Maximum salary offered to 4 candidates was Rs.16.17 lacs P.A. for international posting. For Indian posting maximum salary offered to 5 candidates was Rs.12 lacs P.A. The following are the figures for salary range. (Refer pages 2084-2086 of C.A. Journal for June, 2008).

5. Amendment to CA. Regulations 1988 :
Notification dated 5-5-2008 giving draft of the amendments to C.A. Regulations has been published on pages 2069-2073 of CA. Journal, June, 2008. Broadly stated the draft regulations provide for the following:
(i) Amount payable for obtaining copies of list of members.

(ii) Revision in fees payable for restoration of membership, restoration of COP, filing complaints against members, etc.

(iii) Permitting members to enter into partnership or arrangement for sharing fees with members of (a) Institute of Company Secretaries of India, (b) Institute of Cost and Works Accountants of India, (c) Bar Council of India, (d) Indian Institute of Architects, (e) Institute of Actuaries of India, and (f) Engineer, Technician, MBA, etc. from recognised universities.

(iv) Functions of Executive Committee of ICAL

(v) Functions of Finance Committee of ICAL

6. ICAI News:
(Note: Page Nos. given below are from CA. Journal for June, 2008)

(i) Unstructured CPE Learning Activities:
In May, 2008, issue of BCA Journal (Page 224) details about CPE credit requirement for ICAI members are given. The indicative list of unstructured CPE activities is also given. Now, details of unstructured CPE Learning Activities have been published on pages 2005-2006 of C.A. Journal of June, 2008.

(ii) Observations during conduct of Peer Review:
Observations of reviewers during conduct of Peer Review on Compliance with AAS-6, AAS-7, AAS-8, AAS-ll and AAS-14 to improve audit quality have been published (Page 2058).

(iii) Audit and Assurance Standard Board (AAS Board) Recent developments relating to AAS are explained by ICAI at pages 2060-2065.

(iv) ICAI Publications:
The following publications are released by ICAI :
(a) What is an Audit – Understanding an Audit of Financial Statements.
(b) Practitioners’ Guide to Audit of Small Industries.
(c) Background Material on Auditing and Assurance Standards
(d) Implementation Guide to SQC-1
(For details refer to page 2066 and 2076)

(v) ICAI Vision – 2021 :
ICAI has appointed a Special Purpose Committee for bringing out a vision – 2021 document. The questionnaires for members in practice and in industry are published on pages 2094-2017. Members may send their responses to ICAL

(vi) Accounting Standards for Local Bodies (ASLB) :
The following exposure drafts are issued for comments by members:
(a) Revenue from Exchange Transactions (Pages 2108-2120)
(b) Borrowing Costs (Pages 2121-2127)

(vii) Auditing Standards (Revised Standard (SA) 600) :
Exposure draft of Revised Standard on Special Considerations – Audits of Group Financial Statements (including the work of component auditors) and Explanatory Memorandum to the above standard has been issued by AASB (pages 2128-2155).

(viii) Revival of Membership of CA :
With a view to encourage those CAs who have ceased to be members of the Institute for some reason or the other, a new scheme has been formulated by ICAL They will be able to revive their membership on payment of specified fees. This scheme is hosted on the Institute’s website (Page 1986).

(ix) PE-II Examination to continue till May, 2009 :
ICAI has decided to continue PE-II examination till May, 2009. Therefore, students who have not been able to pass in May, 2008 PE-II examination will get two more attempts in November, 2008 and May, 2009. Thereafter, they will have to shift to new PCC examination (Page 1987).

(x) New Chapter in New York:
ICAI has set up a new Chapter in New York. This is the 20th Chapter of the Institute outside India (Page 1989)

ICAI And Its Members

ICAI & Its Members

I. CPE programme exemption to senior citizens withdrawn :


1. ICAI has introduced the Continuing Professional Education
(CPE) Scheme under which members are required to attend certain CPE programmes
for specified number of hours. Under this Scheme, exemption was given to members
who have attained the age of 60 years. It is surprising that when our Institute
is entering the 60th year and we are celebrating the Diamond Jubilee year, this
exemption has been withdrawn with effect from 15th May, 2008. One may ask
whether this is a gift to our members who are senior citizens. Notification to
this effect has been published in C.A. Journal for July, 2008 on page 200.

2. CPE learning programms are divided into two parts viz.
structured and unstructured learning as under :

(i) Structured Learning :


(a) Attendance at conferences, seminars and symposia
organised by ICAI, its branches, regional councils, study circles and other
institutions or organisations approved by CPE Committee of ICAI.

(b) Presentation of papers, delivering lectures, acting as
faculty at such conferences, seminars, etc.

(c) Contributing articles in ICAI Journal.

(d) Undertaking technical research under the aegis of ICAI.

(e) Such other activities as may be prescribed by CPE
Committee of ICAI.

(ii) Unstructured learning :


(a) Web-based learning modules.

(b) Self-learning modules and courses (use of audio-tapes,
video-tapes, correspondence courses, computer-based learning programmes).

(c) Reading and individual home study (Reading and
individual home study may constitute reading articles in the C.A. Journal,
reading technical, professional, financial or business literature).

(d) Group or bilateral discussion on technical issues.

(e) Acting as visiting faculty or guest faculty at various
universities, management institutions or institutions of national importance.

(f) Participation in CPE teleconferencing programmes
without the supervision of the Programme Organising Unit (POU).

(g) Providing solutions to questionnaires, puzzles
available on web or professional journals.

(h) Internal training programme being organised by firms of
Chartered Accountants having seven or more partners.

Details of the above learning programmes can be obtained from
pronouncements on Continuing Professional Education Publication of ICAI as well
as from CPE portal (www.cpeicai.org) and ICAI website (www.icai.org).

3. Members residing in India, who are below 60 years of age
and who hold Certificate of Practice, (unless they are exempted) are required
to :

(i) Complete at least 90 CPE Credit hours in each rolling
3-year period (2008-2010). Out of this 60 CPE credit hours should be of
structured learning.

(ii) For the above purpose such member will have to
complete minimum of 20 CPE Credit hours of structured learning in each year.

From the above it will be noticed that structured learning is
mandatory for such member for 60 CPE Credit hours. He will have the option to
devote balance 30 CPE Credit hours in unstructured learning.

4. Members residing in India, who are below 60 years of age
and who do not hold Certificate of Practice as well as all members residing
abroad (whether holding Certificate of Practice or not), unless exempted, are
required to

(i) Complete at least 45 CPE Credit hours of structured or
unstructured learning in each rolling 3-year period (2008-2010).

(ii) For the above purpose, such member will have to
complete minimum of 10 CPE Credit hours of structured or unstructured learning
in each year.


From the above it will be noted that structured learning is
not mandatory for such members. They can take up unstructured learning for the
entire period of 45 CPE Credit hours.

5. As stated earlier, members who have attained 60 years of
age (Senior citizens) were exempt from complying with this requirement. However,
the Council of ICAI has now withdrawn this exemption w.e.f. 15-5-2008. Since 4½
months have passed in the current year, the total period of CPE Credit hours
required to be completed in the rolling period of 3 years (2008-2010) has been
reduced to (i) 70 in the case of such members residing in India and holding
Certificate of Practice and to (ii) 35 in cases of members residing abroad
(whether holding certificate of practice or not) and other members residing in
India and not holding certificate of practice. It may be noted that all such
Senior Citizens will have an option to undertake structured or unstructured
learning. In other words, structured learning is not mandatory for them and they
can select unstructured learning for the entire period of CPE Credit hours.

6. Notification published on page 200 of CA Journal for July
2008 states that Senior Citizen Members (unless exempted) have to complete CPE
Credit hours of structured or unstructured learning as under :

(i) Senior citizen members residing in India and holding
Certificate of Practice — 70 CPE Credit hours in the rolling 3-year period
(2008-2010). Out of this minimum of 10 CPE hours should be in 2008 and minimum
of 20 CPE hours should be in 2009 and 2010 each, respectively.

(ii) Senior citizen members residing in India and not
holding Certificate of Practice and those residing abroad (whether holding
certificate of practice or not) — 35 CPE Credit hours in the rolling 3-year
period (2008-2010). Out of this, minimum of 5 CPE Credit hours should be in
2008 and minimum of 10 CPE Credit hours should be in 2009 and 2010 each,
respectively.


7. It may be noted that under the CPE Scheme, exemption from
the above requirements is available to the following members :


(i) A member, for the year during which he gets his membership for the first time.

(ii) A member or class of members to whom the CPE Committee or its sub-committee may, in their absolute discretion, grant full/partial exemption either specific/general, on account of facts and circumstances of the case which in their opinion prevent such member from compliance with the requirements of completing CPE credit hours

 8. CPE Scheme provides for detailed procedure for keeping records by the Institute about attendance of members who attend structured learning programmes of the Institute and other eligible entities. This enables ICAI to issue certificates for CPE Credit hours completed by the members in every calendar year.

9. As regards unstructured learning, the member who wants to take CPE Credit hours, the requirement is that he should submit a self-declaration Form to the Institute every year. This Form is to submitted to the decentrallsed / sub-decentralised offices of the Institute every year before 31st May. The format of this Form is given on the next page.

10. Considering the above requirements of unstructured learning for members who are senior citizens, it appears that the most convenient mode of learning will be as under:

i) Reading and individual home study i.e., reading articles in the CA. Journal, reading technical, professional, financial or business literature.

ii) Group or bilateral discussion on technical issues –

This will include attendance in group discussions at workshops, study groups, seminars, symposia, conferences, etc. organised by any voluntary body such as a society, association, chamber, group, etc. on technical issues relating to the accounting profession.

iii) Participation at internal training programme organised by firms of Chartered Accountants having seven or more partners.

11. With the above coverage of all senior citizens under the CPE Scheme, it has become mandatory for all members of the Institute (over 1.46 lacs members) to comply with the CPE Scheme. The Institute will have to create a machinery to scrutinise over 1.46 lacs self-declaration forms received from members every year and determine whether all members have complied with the requirements of CPE. In this exercise, the records maintained by the Institute for attendance of members in structured learning programmes will also be required to be considered. ICAI will have to issue comprehensive guidelines about the punishment to be awarded to defaulting members who are holding certificate of practice and those who are not holding certificate of practice.

II. ICAI News

(Note: Page Nos. given below are from c.A. Journal for July, 2008)

1. General amnesty for restoration of names of members and C.P.:

ICAI has introduced an amnesty scheme for restoration of names of members with retrospective effect on payment of certain fees and filing Form No.9. The member can also apply for certificate of practice in Form No.6 prospectively on payment of fees. This scheme will be in force up to 31-12-2008. Details of the scheme are on page 198.

2. Data of members on Board of directors of companies:

ICAI is compiling data about members who are presently working as executive/non-executive/in-dependent directors of public companies (whether listed or not) so that they can share their experience with other aspiring Board members. Such details have to be furnished in the format given on page 201.

3. Chapter at Muscat:

ICAI has decided to set up  a chapter in Muscat. Details are given on page  201.

4. Campus placement programme:

As in the past, ICAI has organised campus placement programme for candidates who qualify in May, 2008, Final examination. The schedule is as under;

(i) 2-9-2008 to 5-9-2008 :
Ahmedabad, Baroda, Chandigarh, Coimbatore, Ernakulam, Hyderabad, Indore, Jaipur, Kanpur, Nagpur, Nashik, Pune and Surat.

ii) 17-9-2008 to 25-9-2008 (excluding  Sunday)  :
Bangalore, Chennai, Kolkata, Mumbai and New Delhi (Details on page 203).

5. Guidance Notes:
The following Guidance Notes issued by Research Committee have been withdrawn by ICAI.

i) Mode of Valuation of Fixed Assets (Revised in 1976)

ii) Guidance  Note  on Accounting  for Changing Prices (Issued in 1982) ./ (Refer page 204)

6. Advertisement by practising CAs:

In July issue of BCA Journal (P. S09) details about this issue are given. ICAI Notification in this respect is published on pages 206 and 208.

7. Approval of Accounting Standard (AS-32) :

The Council of ICAI has approved Accounting Standard (AS) 32, ‘Financial Instruments; Disclosures’. The objective of this Accounting Standard is to require entities to provide disclosures in their financial statements to enable users to evaluate the following;

i) the significance of financial instruments for the entity’s financial position and performance; and

ii) the nature and extent of risks arising from financial instruments to which the entity is exposed during the period and at the end of the reporting period, and how the entity manages those risks.

In view of the above, the Accounting Standard will bring about greater transparency in the disclosures related to financial instruments, such as derivatives and the exposures to the risks related to such financial instruments, and how the entity manages its risks.

It may be noted that ICAI has already issued the related Accounting Standards, namely, Accounting Standard (AS) 30, ‘Financial Instruments; Recognition and Measurement’ and Accounting Standard (AS) 31, ‘Financial Instruments: Presentation’. Issuance of this standard completes Accounting Stardards on the subject of Financial Instruments. Like AS-30 and AS-31, the Council has made AS-32 recommendatory from 1st April 2009 and mandatory from 1st April 2011.

ICAI And Its Members

ICAI & Its Members

1. Disciplinary case :


In the case of ICAI v. Sri S. R. Bhandary, the
Registrar of Companies filed a complaint against the member alleging, inter
alia, that during the inspection of accounts of one of the companies,
certain violations of the Companies Act came to light which had a bearing on the
accounts and transactions of the company. The member who had audited the
accounts of the said company failed to report such violation in his audit report
on the accounts of the company.

The Disciplinary Committee and the Council came to the
conclusion that the member was grossly negligent in the performance of his
duties and he was guilty of professional misconduct under Clause (7) of Part I
of Second Schedule to the C.A. Act. The Council recommended to the High Court
that the member be reprimanded.

The Karnataka High Court has observed that the Council was
justified in taking the above view. The High Court has pointed out that the
member had not reported on the following matters.

The member did not qualify the following points in his report
dated 6-4-1992 :

(i) The Company acquired shares at Rs.14,59,510 in two
private limited companies. These investments were in excess of the limits laid
down u/s.372 of the Companies Act, 1956. The Company did not obtain prior
approval from the Government of India.

(ii) The Company paid interest of Rs.2,21,669 on share
application money received pending allotment. The payment was neither
authorised under the Companies Act, nor under the Memorandum and Articles of
Association of the Company. The payment is, therefore, unauthorised.


The High Court agreed with the Council and accepted its
recommendation that the member be reprimanded for his above negligence.



(Refer pages 1519-1520 of C.A. Journal, March, 2008)


2. Whether Auditor of a subsidiary company can be a Director of its
Holding Company :



The Ethical Standards Committee (Committee) of ICAI has
examined this issue in detail. In terms of Clause (II) of Part I of the First
Schedule to the C.A. Act, a practising C.A. cannot engage in any business or
occupation without permission of the Council. He can, however, be a
non-executive director of a company wherein he or any of his partners is not an
auditor. According to the Committee, the public conscience is expected to be
ahead of the law. Members are, therefore, expected to interpret the requirement
as regards independence much more strictly than what the law requires and should
not place themselves in positions which would either compromise or jeopardize
their independence.

In view of the above, the Committee has decided that an
auditor of a subsidiary company cannot be a director of its holding company, as
it will affect the independence of the auditor. On the same analogy, an auditor
of a holding company cannot be a director of its subsidiary company.



(Refer page 1590 of C.A. Journal, March, 2008)


3. Guidelines for fees payable for Special Audit u/s.142(2A) of Income-tax
Act :


As the members are aware, S. 142 (2D) of the Income-tax Act
was amended by the Finance Act, 2007 w.e.f. 1-6-2007. According to this
amendment, the audit fees for a Special Audit ordered on or after 1-6-2007
u/s.142(2A) is to be determined by the Chief Commissioner or Commissioner and to
be paid by the Central Government. For this purpose, guidelines have now been
issued by a Notification dated 5-2-2008 [298 ITR (St) P.1]. A new Rule 14B has
been added in the Income-tax Rules, which provides as under :

(i) Every Chief Commissioner has to maintain a panel of
Chartered Accountants.

(ii) The Chartered Accountant who is required to conduct
such Special Audit u/s.142(2A) has to maintain a time-sheet and has to submit
it to the Chief Commissioner/Commissioner along with his bill.

(iii) The Audit fees will not be less than Rs.3750 per hour
and will not be more than Rs.7500 per hour for the Chartered Accountant,
qualified assistants, semi-qualified and other assistants.

(iv) The Chief Commissioner/Commissioner will ensure that
the number of hours claimed for billing purposes is commensurate with the size
and quality of the report submitted by the Chartered Accountant.


(Refer page 1508 of C.A. Journal for March, 2008)

4. Accounting treatment in respect of amount withheld from a contractor in
respect of customs duty :


The Expert Advisory Committee (EAC) of ICAI has considered
the above issue in its opinion which appears on pages 1489-1492 of C.A. Journal
of March, 2008. In this case, the company had entered into a lump sum turn-key
agreement with a foreign contractor for installation of process plant. The
contractor submitted its bill which included customs duty paid by it. The
company raised objection with regard to payment of the customs duty, on the
ground that evidence in the form of proof of payment of customs duty was not
furnished. The company withheld the payment of customs duty to the contractor.
The matter was referred to an Arbitrator. The company raised the following two
questions :

(i) Whether the accounting treatment of capitalising plant
at the total lump sum price (including taxes and duties) payable to the
foreign contractor for lump sum turn-key contract is in order by providing for
liability for the amount withheld towards balance customs duty on account of
non-submission of customs documents, against which the contractor has invoked
arbitrator proceedings.

(ii) In case the answer to the above question is in the
negative, whether the amount withheld from the contractor, which is under
arbitration, is to be treated as contingent liability.

ICAI And Its Members

ICAI & Its Mebers

1. Disciplinary case :


In the case of ICAI v. Shri V. C. Agarwarl, on the
basis of information given by the ITO, Circle 5(7) Mumbai, a disciplinary case
was registered against the member. In this case the member audited the books of
WIE P. Ltd. and also conducted audit u/s.44AB of the Income-tax Act. During the
course of assessment proceedings of the company, the ITO noticed that there were
cash deposits in the bank account of the company. In the audited accounts this
was shown as cash sales. It was also shown in the audited accounts that the
company carried on trading activities whereas, the ITO on inquiry, found that
the company was only acting as Hawala broker and cash deposits related to Hawala
business.

The disciplinary committee conducted the enquiry. The member
did not attend before the committee but made written representation. The
committee held that the member was guilty of professional misconduct under
clauses (5) to (8) of Part I of the Second Schedule of the C.A. Act. This
finding was accepted by the Council which recommended to the High court that the
name of the member be removed for a period of six months.

The Bombay High Court has accepted the findings of the
Council and confirmed the penalty of removal of the name of the member for six
months. (Refer page 646 of C.A. Journal for October, 2008).

2. Guidelines for members of ICAI :


Prior to the enactment of the Chartered Accountants
(Amendment) Act, 2006, clause (ii) of Part II of the Second Schedule to the C.A.
Act authorised the Council of ICAI to issue a Notification whereby it could
provide that a member of ICAI would be held guilty of professional misconduct if
he is guilty of such act or omission as may be specified by the Council in the
Notification issued under this clause. Since this power of issuing such
Notification is not given to ICAI by amendment of the above Schedule by the
Amendment Act of 2006, old Notifications issued from 1965 to 2004 have now been
repealed w.e.f. 8-8-2008.

ICAI has now issued ‘Council General Guidelines, 2008’ by a
Notification dated 8-8-2008. These guidelines are published at pages 686-689 of
C.A. Journal of October, 2008. These guidelines deal with the following subjects
which were covered by the various Notifications issued from 1965 to 2004 under
erstwhile clause (ii) of Part II of Second Schedule to the C.A. Act :

(i) Conduct of a member being an employee.

(ii) Prohibition of appointment of member as cost auditor.

(iii) A member shall not express opinion on financial
statements of any business or enterprise in which one or more of his
relatives, either by themselves or in conjunction with such member, has
substantial interest in such business or enterprise. It may be noted that
under the earlier Notification dated 20-3-1971, under clause (ii) of Part II
of Second Schedule, it was provided that if such opinion is expressed, the
member should disclose his interest in his report. Under the above guidelines,
such member is prohibited from expressing his opinion on financial statements
of any enterprise in which he and/or his relatives have substantial interest.

(iv) Maintenance of books of accounts by a member in
practice or a firm of Chartered Accountants.

(v) Ceiling on tax audit assignments u/s.44 AB of the
Income-tax Act.

(vi) Appointment of an auditor in case of non-payment of
undisputed fees to previous auditor.

(vii) Specified number of audit assignments under the
Companies Act, 1956. This specified number under the Companies Act is 20
audits of public companies per partner (including 10 audits of public
companies with paid-up share capital of Rs.25 lacs or more). It may be noted
that this ceiling of 20 audits does not apply to audits of private companies.
Therefore, the Council of ICAI had decided in 2001 that an overall ceiling of
30 for public and private company audits (including 10 audits of public
companies with paid-up capital of Rs.25 lacs or more) should be observed by
members. The member/firm is required to maintain a register relating the
ceiling of 30 audits giving the particulars of (a) name of the company, (b)
registration No. of the company, (c) date of appointment, (d) date on which
Form 23-B filed with ROC.

(viii) Appointment of statutory auditor — A member or his
firm cannot accept fees for other assignments for fees exceeding the statutory
audit fees.

(ix) A member who is indebted to a concern for an amount
exceeding Rs.10,000 cannot accept audit of that concern.

(x) Directions of Council/committee in case of unjustified
removal of auditors is binding on members.

(xi) Minimum audit fees in respect of audits in specified
cases.


3. Amendments to C.A. Regulations :


By a Notification dated 25-9-2008, C.A. Regulations, 1988
have been amended. Some of the important amendments are as under :

(i) List of members as on 1st April every year will now be
available to members only on payment of cost. The rates for Western, Southern
and Northern Regions are Rs.500 each, for Eastern Region Rs.300, for Central
Region Rs.400 and for All India Rs.750 per copy.

(ii) Any person, (other than the Central or State Government
or any statutory authority) desiring to file a complaint against a member will
have to pay a fee of Rs.2,500. The procedure for conducting an enquiry against a
member on the basis of information or complaint shall be as specified in the
‘Chartered Accountants (Procedure of Investigations of Professional and other
Misconduct and Conduct of Cases) Rules, 2007’.

(iii) A member in C.A. practice can now share his fees from
professional practice with other professionals or can get a share from the fees
of such other professionals or accept professional assignments by an arrangement
with such other professionals. For this purpose, the list of such other
professionals is provided in new Regulation 53A as under :


(a)    Company  Secretary,
(b)    Cost Accountant,
(c)    Actuary,
(d)    RE.,
(e)    R Tech,
(f)    Architect
(g)    Lawyer,  and
(h)    MBA.

(iv)    New Regulation 53B now permits a CA. in practice to enter into partnership with (a) Company Secretary, (b) Cost Accountant, (c) Advocate, (d) Engineer, (e) Architect, and (f) Actuary. It may be noted that these professionals should be members of their respective regulatory bodies. Further, it will have to be ensured that these regulatory bodies permit their members to enter into such partnerships.

(v) Amendments are made in the following Regulations dealing with certain administrative matters :
(a)    137Co-option  by Regional  Council

(b)    175Functions  of Executive  Committee

(c)    176A   Functions  of Finance  Committee

(d)    194Maintenance  of Accounts

(e)    197Comparison of Actual Income & Expenditure with Budget Estimates.

4.    Accounting  Standards:

(i)    Accounting  Standard  (AS-32) –  Financial  Instruments  –  Disclosures:

(Note: Page Nos. given below are from CA. Journal for October, 2008)

Text of AS-32 is published on pages 690-705. This standard is recommendatory for accounting periods commencing on or after 1-4-2009 and mandatory for accounting periods commencing on or after 1-4-2011. The principles in this standard complement the principles for recognising, measuring and presenting financial assets and financial liabilities in AS-30 – Financial Instruments – Recognition and Measurement and AS-31 – Financial Instruments – Presentation.

(ii)    Limited  Revision  of AS-19 –  Leases:

This limited revision of AS-19 (Leases) is consequential to issue of AS-32 dealing with Financial Instruments – Disclosures. (Refer Page 705)

(iii)    Exposure Draft –  Accounting  Standard (AS- 2)    (Revised) :

Exposure Draft of Revised AS-2 – Inventories is published for comments by members on pages 724-727.

5. Standards on Auditing (SA) :

(Note: Page Nos. given below are from c.A. Journal of October, 2008)

(i)    SA580 –  Written  representations:

The above standard is revised and published on pages 706-710. Earlier this standard was known as ‘Representations by Management’ AAS-11.

(ii)    Exposure Drafts:

The following Exposure Drafts are published for comments by members:

(a)    Audit Considerations Relating to an Entity Using a Third Party Service Organisation (Revised) SA-402 with Explanatory Memorandum (Pages 728-736).

(b)    Initial Audit Engagements – Opening Balances with Explanatory Memorandum – (Re-vised) SA 510 (Pages 737-741).

6.    Standards  on Internal  Audit  (SIA) :

(Note: Page Nos. given below are from c.A. Journal of October, 2008)

(i)    Framework for standards  on Internal Audit:

ICAI has decided to publish standards on Internal Audit (SIA). The framework for these standards is published on page 711.

(ii)    SIA-4 –  Reporting:

The purpose of this standard is to establish standard on the form and content of Internal Auditor’s Report. This is published on pages 712-714.

(iii)    SIA-5 –  Sampling:

This standard explains the design and selection of an audit sample for Internal Audit. It is published on pages 714-718.

(iv)    SIA-6 –  Analytical  Procedure:

SIA-6 establishes standard on the application of analytical procedures during an internal audit. This is published on pages 718-721.

(v) SIA-7 – Quality Assurance in Internal Audit:
The purpose of SIA-7 is to establish standards and provide guidance regarding quality assurance in internal audit. This is published on pages 721-723.

(vi)    Exposure Drafts:

Following Exposure Drafts are issued for Standards on Internal Audit (SIA) :
(a)    Terms of Internal Audit Engagement (Pages 742-743).

(b)    Internal  Audit  Evidence  (Pages 743-744).

(c)    Communication with Management (Page 744-746).

(d)    Co-ordination with External Auditors (Pages 746-747).

(e)    Consideration of Fraud in Internal Audit (Pages 747-748).


7. ICAI News:

(Note: Page Nos. given below are from C.A. Journal for October, 2008)

(i) ICAI Awards for 2008 to members in industry :

ICAI has decided to honour members in industry for 2008 on 25th January 2009. The Awards will be given under three categories viz. (a) Business Achievers,

(b)    Chief Financial Officers (CFO’s), and (c) Professional Achievers. Nominations are invited for this purpose by 30-11-2008 (Refer pages 589 and 669).

(ii)    Convocation  for new members of ICAI :

First ICAI convocation to give away Certificate of Passing CA. Final Examination, Certificate of Membership and Certificate of Practice to new members will be held at New Delhi on 2-11-2008. Similar convocation will be held at various Regional Centres later on (Refer pages 588 and 596).

(iii)    Common Proficiency Test (CPT) – ONLINE Examination:

ICAI has decided that in addition to the existing paper-pencil mode of CPT Examination to be held on 14-12-2008, online Examination will also be held on 7-12-2008 in 11 cities viz. Ahmedabad, Mumbai, Pune, Nagpur, Chennai, Bangalore, Hyderabad, Kolkata, Kanpur, Jaipur and New Delhi. Students will have option to select anyone mode of examination. (Details on page 596)
 

(v)    SIA-7 –  Quality Assurance in Internal Audit:

The purpose of SIA-7 is to establish standards and provide guidance regarding quality assurance in internal audit. This is published on pages 721-723.

(iv)    Enhancing Audit  Quality:

Some observations made by Reviewers while conducting peer review are listed in order to enable the members to improve the quality of audit of corporate bodies. (Page 655)

(v)    Accounting  Technician  Course:

As reported earlier, ICAl proposes to introduce a new course called ‘Accounting Technician Course’ to enable students who are not able to complete CA. course to get a certificate as ‘Accounting Technician’. Draft Regulations for this purpose are published for comments by members at pages 682 to 685.

(vi)    New Publications  of lCAl :

(a)    Technical Guide on Accounting for Micro-finance Institutions (Page 678).

(b)    Introduction to WTO and Opportunities for CAs in International Trade Laws and WTO (Page 678).

(c)    Compendium of Standards and Statements on Auditing as on 1-4-2008 Vol. I and Compendium of Guidance Notes Vol. II (Page 679).

(d)    A study on Basel II and Risk-based supervision (Page 679).

(e)    Frame work for Standards on Internal Audit and Standards on Internal Audit (SIA) 4 – Reporting, SIA 5 – Sampling, SIA 6 – Analytical Procedure, and SIA 7 – Quality Assurance in Internal Audit (Page 680).

From The President

From The President

Dear professional colleagues,

India’s growing economy, infrastructure growth, booming
market and rising international trade have induced companies to draw up robust
business plans to seize the available opportunities. At the same time, the
companies look for various avenues to raise finance from the public. From the
various available options, Initial Public Offers (IPOs) remain the obvious
choice for garnering resources.

IPOs offer various benefits to companies, like access to
expansion capital, unlocking the value, debt swap, transparency of operations,
etc. India’s booming stock market, at least until early this year, witnessed
many IPOs being oversubscribed. In 2007, 100 companies raised Rs.34,179 crores
from the primary market, while in the first four months of 2008, 18 companies
have raised about Rs.14,908 crores. This shows the rise in the volume of the
IPOs.

Presently, the entire share application money is withdrawn
from the investor’s bank account on his making an application for shares through
IPOs. On completion of the allotment, the company has to ensure that the shares
are credited to the investor’s demat account and excess application money is
refunded through electronic banking channels within 15 days from the close of
the issue. In this process, investor’s money gets locked up without interest
payment for almost a month once he applies in the IPO, while the banks
incidentally use this float during this period.

Recently, SEBI has given ‘in principle’ approval to the new
payment mechanism for IPOs, with the objective to eliminate protracted refund
process. It is an investor-friendly proposition.

Under the proposed system, application money will remain in
the investor’s bank account until the completion of allotment process and his
account will be debited only if and to the extent shares allotted to him. This
concept is based on the ‘lien marking’ process. Under this, once a person
applies for shares, the share application amount is blocked by the bank and a
confirmation is sent to the company about availability of funds. The amount is
transferred from the investor’s account to the concerned company’s bank account
on completion of the allotment process. This system will eliminate the process
of refunding investor’s money as the funds will remain in his account and also
will relieve primary market investors from the anxiety of getting refunds on
non-allotment of shares in public issues.

It is hoped that SEBI will soon work out the modalities in
this regard in consultation with banks. It should also be seen that a large
number of banks get involved and gear up to implement this payment mechanism in
case of IPOs. It is expected that all the drawbacks attached to the earlier
Stock Invest Scheme will be taken care of.

Presently, Qualified Institutional Buyers are permitted to
pay only 10% of the bid application money in IPOs. But, other investors have to
put 100% of the bid amount. This needs correction. With the introduction of the
new payment mechanism, it is hoped that this disparity too would be eliminated.

On this subject, another important issue is with regard to
the share premium at which a company issues its shares. Under the present
regulations, the issue price is evaluated by the merchant banker. The SEBI
Guidelines require the company to file the prospectus that gives all the
relevant information of the company to an investor with regard to management,
business plans, liabilities, risk factors and so on, but in view of the
investors’ level of education in understanding the key parameters of the
business and financial position, it is difficult for a large number of investors
to analyse this information critically and take an informed decision. Recently,
SEBI has made it mandatory to get IPOs graded from a credit rating agency.
However, investors will always have to be watchful in view of the subjectivity
involved in IPO grading.

In spite of the stringent regulations, grey market operations
are in existence. At times, the grey market operations have adverse
repercussions on the listing price of the shares.

A company has to list its shares within 21 days from the
closing of its allotment process. It is felt that a reduction in this period of
21 days will make the primary market more efficient, transparent and may
eliminate or reduce grey market operations in the long run.

The basic philosophy of book building is based on the fact
that the price of any scrip mainly depends upon the perception of the investors
about the issuer company. The process of price determination starts on filing of
red-herring prospectus indicating the price band and inviting offers from
institutional buyers and intermediaries eligible to act as underwriters.
Simultaneously, the issuer company also collects bids from the general public.
After the bidding process is over, issue price is determined based on the bids
received. On determination of the price, the underwriter enters into an
underwriting agreement with the issuer. At this moment, effectively the issuer
company and the underwriter are aware about the total bids received and the
application money/margin collected by the company. Effectively, this undermines
the utility of the underwriting process. We expect that SEBI will consider these
issues in days to come.

At the Society, the transition process has begun for the
ensuing Diamond Jubilee Year. Anil Sathe and Ameet Patel have been elected as
the President and the Vice-President respectively for the year 2008-09. My
hearty congratulations to both of them and I wish them a successful tenure
ahead.

With regards,
Rajesh Kothari

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From The President

From The President

Dear Professional colleagues,

Bombay Chartered Accountants’ Society is entering 60th year.
The recognition it received from various quarters viz. professionals, taxpayers,
and the Government is the testimony of the Society’s successful journey of 59
glorious years. This achievement is the result of efforts of several dedicated
professionals who served the profession before serving self.

However, the Society cannot be complacent. The solid
foundation it has laid over the years is only a part of continuous journey
towards accomplishing its mission. Let us all re-dedicate ourselves to the
progress of our Society which in turn will only benefit each one of us.

Paradoxically, India has gone through a contradictory
trajectory in its global relevance since the visionary Nehru years. Five decades
ago, when India’s economic and military strengths were less dominant, India
brought many distinctive and normative ideas to the global table — be it
disarmament, or non-alignment. Today, in the early 21st century, when India is
recognised as an economic and military power and the Indian
entrepreneur/professional is acknowledged globally, India appears to be devoid
of innovative ideas and thoughts backed by assertive political conviction.

Thoughtful leadership of our profession should actively
involve in formulating International Accounting Standards suited to developing
and developed countries both. The profession can also play an effective role in
formulating consensus views on sharing tax revenues between two countries in the
international trade. The present method of sharing of revenue leaning in favour
of developed countries needs to be neutralised by putting across the various
issues in the right perspective. The profession can play an active role in
evolving equitable transfer pricing regime across the globe.

Today, the profession faces the danger of widening the gap
between what investors and other stakeholders expect from the auditors and what
the auditors do or can actually do. While it is imperative to educate the public
about the auditor’s role and bridge the expectation gap, the profession at the
same time needs to do some introspection, put its own house in order and avoid
situations giving rise to conflict of interests. Even one failed audit causes
great damage to the reputation of the profession. The profession will have to
meet the challenge with impeccable integrity and high ethical standards.

Corruption is one more area of concern. Its global presence
cannot make it acceptable. It has devastating effects — it hinders economic
growth, sustainable development and generates apathy and cynicism. The country’s
moral fabric is its first casualty. Transparency particularly in administration
and decision-making process of the government acts as a great deterrent to
corruption. Though, the RTI and e-governance have started showing positive
results at a slow pace, a lot needs to be done. The profession will have to put
collective efforts to raise the issue of accountability, transparency and equity
at various levels of social and economic systems.

Technological revolution in the present decade has
far-reaching ramification on the profession. The rapid pace of technological
innovation is making the future of global business impossible to predict and it
is rapidly changing the business world. The profession will have to prepare
itself and stand out in this time of technological revolution. The profession
will have to be ready to react, to adapt, to improvise, to innovate at a faster
pace than ever before.

Global inflation rates are climbing to historic levels after
five years of solid growth in the world economy. Inflation has soared to its
highest level in 16 years across the EU, to a 14-year high in Switzerland, a
25-year high in Singapore, an 11-year high in China and a 13-year high in India.
Rising crude oil prices and the food crisis are supposed to be the causes for
this inflationary trend.

The world will have to address this issue collectively.
Economic development the world over has led to large-scale migration of
employment away from agriculture, because industry and services are able to
sustain higher growth and incomes. In India too, growth rates in agriculture
have dipped and its share in national income has halved from about 36% in 1980
to 18% in 2007. India will have to think of various avenues to enhance
agricultural productivity and also explore ways to allow corporate farming and
co-operative farming to ultimately raise productivity. It seems we have
tremendous potential that can be unlocked through new opportunities thrown up by
the current global food crisis.

As I lay down the office of the President of this august
institution, I must say I owe a lot to all of you for giving me this honour. I
have enjoyed communicating to you through this page for the last one year. I
have learnt a lot. The interaction with all of you at various forums has
enhanced my knowledge and experience too. I thank each one of you for your
whole-hearted support in discharging my duties. I would certainly cherish the
memory for ever. Adieu.

With regards,
Rajesh Kothari

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From The President

From The President

“If you think for positive things in life, you will find
them.”

Over the last few months I have got used to hearing gloomy
predictions, meeting people with worry and concern writ large on their face, and
walking into business meetings which discuss a bleak future. So, when I bumped
into an old friend from the IT sector beaming from ear to ear, I was pleasantly
surprised. I enquired whether he had got a promotion. “No, in fact I have been
asked to take long leave, possibly some time before they show me the door !” he
laughed, “But I have never enjoyed life more than I have in the last month. I
just learnt what a great family I have. I have experienced a number of joys
because I stopped to pause and ponder something which I have not done in the
last ten years. As for my job, I will find a new one when I lose the one that I
have.” His words really set me thinking. I marvelled at his attitude. Any other
person would have grieved that he was about to lose his job and here was my
friend having a whale of a time with his family. It was all due to a positive
attitude.

If one really makes an analysis, the economic slowdown has a
large number of positives. The first is that we will all start to think and act
rather than react. When life is going at full pace we all tend to react to
situations; when things slow down we will have to be proactive and make things
happen, a habit which many of us have forgotten in the recent past.

The second positive is a welcome change in the mindset. The
situation has now forced us to do away with the linear mode of thinking. The
thought process of most people, especially those who belong to our profession is
to rely on precedent and predict the future. We tend to bench-mark everything on
past performance and past experience. Recent events have proved that the past is
not necessarily an indicator of future. Once we make a break from the past, we
will recognise and rediscover our ability to innovate. Some of the business
failures in the United States have not been on account of the financial crisis
but a sheer failure to innovate and deliver the products that the consumer
needed.

Another very significant positive fallout of the financial
turmoil is the recognition of the need to save in generation next. I saw this
manifestation when I visited a young relative of ours who is working with a
large KPO. A management graduate, she used to try and convince me that spending
drove economic activity and therefore needed to be encouraged. I was therefore
surprised to learn that she had decided not to go on her annual foreign jaunt,
but would settle for a short holiday in Kerala. I enquired as to whether her job
was safe. “Yes it is as of now, but who knows ?”

Having dwelt upon all these positives on the human front, I
think the single most important lesson that we have learnt is that the western
world is not infallible, and the United States is certainly not. For long, a
large part of the world has looked upon the U.S. as a powerful, super rich
saviour, whose actions were to be emulated. For more than six decades the US has
played the role of Big Brother. The follies that the institutions in the US and
the rest of the western world have committed have not only been witnessed by the
rest of the world, it is likely to suffer from their acts of commission and
omission in the next few years.

On the professional front, I believe this slowdown is a great
opportunity to sit down and introspect. Many of us have been accepting the
unending flow of professional work without paying heed to the creaking
infrastructure and the strain on our existing systems. Some of the problems the
profession has been facing are on account of lack of training of articled
students and staff.

In the next few years the government will have to increase
its spend on infrastructure in general, while we must invest our time and effort
enhancing the knowledge-base of our staff, remembering to upgrade our own
skills. Multidisciplinary firms are a reality. We must explore these
possibilities and network. When the inevitable turnaround comes, we must be
ready to seize all opportunities.

We must end 2008 on a cheerful note. Do not let the prophets
of doom bother you. Go on a holiday with your family and friends. If you are in
‘Aapli Mumbai’, enjoy whatever ‘winter’ the city offers you. Goodbye 2008 and
welcome 2009.

With warm regards,

Anil Sathe

P.S. :

As this issue goes to the press, the country has been facing
one of the gravest terrorist attacks. In the past two days we have seen in the
media, exemplary courage, and supreme sacrifice from the security personnel,
hotel staff, ordinary citizens, who beyond all were Indians. We salute these
brave individuals. We only hope that the powers that be, recognise this
sacrifice and act quickly, decisively. It is a time that we stand united and
show the world that our buildings can be attacked and weakened but our spirit
can never be. We the BCAS family are with those who lost their near and dear
ones. For those who are battling for their lives, we pray for a speedy recovery.
We pledge our support in the huge tasks that lie ahead. It is our duty not only
as professionals, intellectuals, but as concerned citizens of this great
country. We must demand competent governance from those in power. If we all
contribute our mite, India will emerge as a strong, vibrant nation.

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From The President

From The President

Dear Professional Colleagues,

I wish you all a very happy Diamond Jubilee Year. The Bombay
Chartered Accountants’ Society celebrated its 59th founding day and entered the
Diamond Jubilee Year. I am grateful to all of you for having reposed your trust
in me, and bestowing on me the honour of being the president of this august
institution in a landmark year. I am conscious of the responsibility that this
office carries and I will make every effort to discharge it to the best of my
ability.

I have already expressed my thoughts for the ensuing year in
my acceptance address at the Annual General Meeting, which appears elsewhere in
this issue. To recapitulate, the thrust areas would be




  • A
    comprehensive programme for students — our future.



  • Programmes to reach out to members in industry.



  •  
    Events/programmes to make the busy professional a complete individual.



  • To spread awareness of the activities of the Society among the public.



In this year, various committees of the Society and the
Diamond Jubilee Celebration Committee headed by K. C. Narang and Narayan Varma,
will organise number of programmes to celebrate this year. One of them will be
the Diamond Jubilee Conference scheduled on 8th November 2008. I would request
you to mark the date in your diary.

As I write this piece, the Government has just won a trust
vote. The high-voltage drama which commenced three weeks ago has ended.
Newspapers are filled with stories of how events unfolded in the Parliament.
Many citizens feel that the actions of many to whom we have entrusted the
responsibility of governance, are shameful. When such events occur we feel sad,
but that sadness does not translate into action.

We must share a part of the blame. When enlightened citizens
shy away from public duty, the nation suffers. Corruption is one of the greatest
ills that our country suffers from. The short-term remedy is to keep the members
of the public well informed. To meet that objective, the Right to Information
Act is serving as an excellent tool. However, I fear that its overuse may blunt
this weapon and unscrupulous users may reduce its credibility. In the long term,
an educated citizen will act as a great check to the spread of corruption. I am
under no illusion that education will eradicate this evil, being aware that it
exists in most developed countries where the entire public is expected to be
well educated. It will however, act as a strong deterrent.

In this context of education, I must commend the ‘Teach
India’ initiative. Projects like this must receive all the support they deserve.
I appeal to each one of you, your relatives and family members to enrol for the
programme in whatever capacity possible. We at the BCAS must also find ways and
means and explore as to how as an organisation we can contribute to this cause.

This brings me to the aspect of education in our profession.
Over the last year or so, the curriculum has been changed in a manner that
students entering the course are of a far younger age. Like every change, this
change has had its share of criticism. Every change has its own advantages and
problems. While the technical content of the curriculum is at the same level
that it was earlier, there is little provision to take care of the inherently
lower levels of maturity of the students. The young students joining the course
are bright and many of them are focussed on their careers. However, the
significance of the practical training that is imparted during the period of
articleship is not fully appreciated. This results in conflict and a great gap
between the expectations of students and their employers. The need of the hour
is counselling of students, their parents and Chartered Accountants as well.

This year is also the Diamond Jubilee Year of our alma mater,
the Institute of Chartered Accountants of India (ICAI). The ICAI entered its
Diamond Jubilee Year on 1st July 2008. We at the Society are just 6 days
younger. The Society has always believed that it can play a role complementary
to that of the ICAI. The selfless devotion of its founders, its illustrious past
presidents, its enthusiastic core group have made the Society a premier
institution. In this Diamond Jubilee Year, it is this brand image of the BCAS
that we have to protect, promote and enhance.

For the success of the programmes that the Society will
undertake, I will need your support and I am sure I can bank on it. What I need
further is your response and feedback. Please feel free to communicate with me
or my team, about your thoughts, suggestions and yes, your criticism, for I am
sure that you have the interests of the Society at heart.


With warm regards.
Anil Sathe

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ICAI And Its Members

ICAI and Its Members

1. Disciplinary case :


In the case of ICAI v. P. V. Mehta the Department of
Customs, Government of India, filed a complaint against the member. It was
alleged that the member had issued a false certificate about export performance
by two concerns. On the basis of such certificates the parties obtained import
licences, effected imports and cleared the goods imported free of duty. The
matter was investigated by the Disciplinary Committee which found that the
member was grossly negligent in the discharge of his professional duties under
clause (7) of Part I of the second schedule of the C.A. Act. The Council, after
accepting the above report, decided to recommend to the Bombay High Court for
removal of the name of the member for one month.

The Bombay High Court has accepted the recommendation of the
Council. The High Court has observed that the member has admitted that he did
not verify the books or the relevant records or documents as also the figures of
turnover of the two concerns. The member admitted that he had signed the export
performance certificates prepared by the Internal Auditor who was also a member
of the Institute. The High Court, after considering the facts of the case,
accepted the finding of the Disciplinary Committee and the Council and confirmed
the punishment of removal of the name of the member for one month (Refer page
831 of C.A. Journal for November, 2008).

2. EAC opinion :


The Expert Advisory Committee (EAC) of ICAI has considered
the question of valuation of investment in shares of a subsidiary company for
non-cash consideration on pages 788-790 of C.A. Journal for November, 2008. In
this case a State Government company (ABC Ltd.) engaged in mining and selling of
rock phosphate, gypsum, etc. received an ‘in-principle approval’ from the
Government of India for allocating coal blocks in certain Lignite mines to the
company. For this purpose, ABC Ltd. was required to form a separate company to
undertake this mining activity. The company entered into a joint venture with a
private sector company and decided to form one JVC Ltd. It was agreed between
the parties that JVC Ltd. will be a subsidiary of ABC Ltd. in which it will hold
51% share capital, and private sector company will hold 49% share capital.

JVC Ltd. issued certain shares to ABC Ltd. for which no
payment was made by ABC Ltd. In the J.V. agreement it was provided that ABC Ltd.
will obtain licences, approvals, etc. and will also contribute its local
knowledge, technical knowledge and other expertise in relation to the mines. JVC
Ltd. was required to allot equity shares carrying 51% voting right to ABC Ltd.
for which no payment was to be made. The private sector company was to hold 49%
shares, arrange entire investment and also provide management support.

ABC Ltd., on allotment of 51% shares in JVC Ltd., debited
face value of shares to Investment A/c. and credited the amount to Capital
Reserve A/c. The amount debited to Investment A/c. was shown by ABC Ltd. under
the head ‘Investments’ in the balance sheet. The Auditors qualified the audit
report by stating that this should have been valued at ‘Nil’ as no payment was
made. According to the Auditors, assets of ABC Ltd. were stated at a higher
figure to this extent.

The EAC has examined the issue on the basis of paras 28/29 of
AS-13 ‘Accounting for Investments’ and given the opinion that the correct
accounting treatment in the books of ABC Ltd. for shares of JVC Ltd. issued/to
be issued in future to ABC Ltd. would be to recognise the same at fair value of
the services and licence to be provided by ABC Ltd. to JVC Ltd. Whether ABC Ltd.
has made actual payment or not is not material. In this case, consideration is
in kind and, therefore, valuation of investment in JVC Ltd. should be made as
explained in para 28/29 of AS-13.

3. Companies Bill — 2008 :


Companies Bill, 2008, has been introduced by the Minister of
Company Affairs in Lok Sabha on 22nd October, 2008. This Bill contains 426
sections and there are no schedules. This Bill, when enacted, will replace the
existing Companies Act, 1956.

4. Limited Liability Partnership (LLP) :


Limited Liability Partnership Bill (LLP Bill) providing for
establishment of Limited Liability Partnerships (LLP) in our country was
introduced in the Rajya Sabha by the Minister of Company Affairs on 15th
December 2006. This Bill was referred to the Parliamentary Standing Committee.
This committee’s report was presented to Lok Sabha and Rajya Sabha on 27th
November 2007. Based on the report of the committee some changes were made in
the original Bill. The revised LLP Bill, 2008 was presented to Rajya Sabha on
21st October 2008, and passed by Rajya Sabha in October, 2008. It will now be
placed before the Lok Sabha in December and may, hopefully, be passed before the
end of the current year. It may be noted that the basic structure proposed in
LLP Bill, 2006, has been retained in LLP Bill, 2008. Some changes are made in
the original Bill, which are of procedural nature. Concept of LLP is accepted in
USA, U.K., Australia and other countries. The new Bill, when enacted, will
provide for an alternative corporate business vehicle that provides the benefits
of limited liability and allows its members the flexibility of organising their
internal structure as a partnership based on a mutually arrived agreement. This
enactment will come into force on the date to be notified by the Central
Government after the Bill is passed by the Parliament. Salient features of
revised LLP Bill are as under :


i) Any two or more persons can form LLP for the purpose of carrying on any business, trade, profession, service or occupation. Even a limited company, an LLP, Non-resident, foreign LLP/Company can be a partner in LLP.

ii) Every LLP has to have at least two designated partners, at least one of whom should be a resident Indian. Designated partners shall be responsible for compliance with all legal requirements of the LLP Act, Rules and other Laws.

iii) LLP has to get itself registered with the Registrar of Companies (ROC) by filing the pre-scribed form of incorporation document and on payment of the prescribed fees. The incorporation document is to be accompanied by a statement about legal compliance signed by an advocate, a chartered accountant, a company secretary or a cost accountant.

iv) Upon incorporation, LLP will be treated as a body corporate and will be considered as a legal entity separate from its partners. It shall have a common seal and perpetual succession.

v) The procedure for obtaining name of LLP is the same as in the Companies Act. For this purpose, the name has to be approved by ROC.

vi) The limit of 20 partners (for business or profession) and 10 partners (for banking business) which applies to partnerships will not apply to LLP. It will be possible for Chartered Accountants to form LLP for rendering management consultancy service and there can be more than 20 partners in such LLP.

vii) Upon incorporation of LLP, its partners will have to enter into a partnership agreement in writing, stating capital contribution of each partner, share of each partner in profits and losses, interest/remuneration payable to each partner and other rights and duties of partners of LLP. The agreement is to be filed with ROC. If no such agreement is executed, the relationship between the partners shall be governed by the provisions of the First Schedule to the LLP Act.

viii) Agreement is to be executed when there are changes in partners or there are changes in the terms and conditions of the partnership. Such agreement is also to be filed with the ROC.

ix) Every partner of LLP is an agent of LLP.How-ever, he is not an agent of other partners. The liability of each partner is limited to the extent of his contribution as specified in the partnership agreement. The liability of LLP is limited to the extent of its assets.

x) LLP has to maintain its books of accounts either on cash or on accrual basis. Such accounts have to be audited every year in such manner as may be provided by the rules. LLP has to file audited statements with a solvency statement with ROC within six months of close of financial year (i.e., on or before 30th September). It has also to file an annual return with ROC in the prescribed form within 60 days  of close of Financial  Year (i.e., 31st May).   

xi) Any existing partnership can be converted into LLP by complying with the procedure laid down in the Second Schedule to the Bill.

xii) Similarly, a Private Limited Company or a Public unlisted company can also convert it-self into LLP by following the procedure laid down in the Third/Fourth Schedule to the Bill.

xiii) The Central Government is authorised to frame rules providing for procedure to wind up a LLP.

xiv) ROC is empowered to collect fees for filing documents with him and for levying penalties for defaults on the part of LLP. The Central Government is authorised to frame rules for administration of LLP Act.

xv) The National Company Law Tribunal is given powers to sanction arrangement, reconstruction, mergers, demergers, compromise with creditors, etc.

xvi) LLP Bill, 2008 is divided into 14 chapters and contains 81 sections and four schedules. The Central Government has power to alter any of the schedules.

xvii) The LLP Bill does not deal with tax aspects of LLP. The Income-tax Act will have to be amended for this purpose. It is likely that LLP will be considered as ‘Firm’ and all the provisions of the Income-tax Act applicable to Firms will apply to LLP. We have to await the amendments in this respect in the forthcoming Budget.


Standards  on Auditing  (SA) :

The following Exposure Drafts are published for comments in November, 2008, CA. Journal at pages stated below:

i) ‘Agreeing the Terms of Audit Engagements’ SA-210 (Revised) together with Explanatory Memorandum (Pages 912-924).

ii) “The Auditors’ Responsibility in Relation to Other Information in Documents containing Audited Financial Statements” SA-720 together with Explanatory Memorandum (Pages 925-930).

6. ICAI  News:

(Note: Page Nos. given below are from CA. Journal for November,2008)

(i) New Certificate courses for members (Page 768):

Following two certificate courses are started for members:

(a) Forex and Treasury Management – This course covers the areas of foreign exchange market, money market, bond market operations and related financial products.
 
b) Derivatives – This course covers financial derivatives such as forward contracts, futures contracts, options, swaps and other new derivatives.

i) Enhancing Audit  Quality:

Some observations made by reviewers while conducting peer review are listed in order to enable members to improve the quality of audit of corporate bodies. These observations relate to training programmes for staff (including articled and audit assistants) concerned with attestation function, including appropriate infrastructure (Page 910).

ii) ICAI –  New Branch:

ICAI has opened a new branch in “Beawar” (CIRC) w.e.f. 5-10-2008 (Page 890).

iii) New Publication  of ICAI :

Implementation Guide to Risk-based Audit of Financial Statements – (Page 892).

ICAI And Its Members

ICAI & Its Members

1. Disciplinary case :


In the case of ICAI v. Shri Ramesh R. Kapadia,
reported on page 292 of C.A. Journal for August 2008, the complainant (Joint
Director of Industries) alleged that the member had issued the certificates of
consumption of raw materials and production in respect four units of the
enterprise. There was no correlation between the cost of raw materials and the
value of finished goods. It was also alleged that in the certificates, the value
of raw materials was shown as CIF value, whereas this value should be at landed
cost including customs duty. This was not taken into consideration by the member
while reporting the figures of production. It was further alleged that there
were no records with the enterprise and the above certificates were issued
without any verification with the records.

The Disciplinary Committee held that the member was guilty of
professional misconduct under clauses (7) and (8) of Part I of Second Schedule
to the C.A. Act. The ICAI Council accepted this decision and recommended to the
Bombay High Court that the member be reprimanded.

The Bombay High Court has accepted the findings of the
Disciplinary Committee and the ICAI Council and held that the above certificates
were issued by the member without proper care and caution. However, since the
member had admitted his mistake, the High Court held that the member be awarded
the punishment by way of a reprimand.

2. EAC opinion on provision for diminution in value of investments :


The Expert Advisory Committee (EAC) has given an opinion on
the above issue which is reported on page 145 of Volume XXII of the Compendium
of Opinions published by ICAI.

Facts :

A public sector company engaged in the business of refining,
transportation and marketing of petroleum products, acquired shares in another
public sector company at the rate of Rs.1,551 per share as against the book
value of Rs.192.58 per share and market value of Rs.876 per share as on the date
of purchase of shares. The investor company submitted that the above investment
was a strategic investment and the premium of Rs.675 per share was paid
considering the various tangible and intangible benefits such as :

(a) Maintaining the current market share.

(b) Avoidance of erosion of refining volume currently
supplied to acquired company.

(c) Higher refinery throughput.

(d) Significant potential to add value to the existing
retail marketing capabilities.

(e) Higher retail volume, thereby providing stability to
cash flow, as the retail sale is less susceptible to risk as compared to bulk
sale.

(f) Retail margins are relatively insulated as compared to
bulk sales.

(g) Access to positive cash flow and zero debt company —
significant leverage to raise debt.


On the above basis, the investor company took the view that
the shares of the investee company were acquired as a strategic investment and,
therefore, it was not necessary to provide for any diminution in the value of
investment which was a long-term investment.

Opinion of EAC :

EAC has considered the facts of this case and stated in its
opinion that the company had acquired shares of another company for strategic
reasons and it wanted to hold the shares for a long-term period. The Committee,
therefore, took the view that this was a long-term investment. Thereafter, the
Committee has considered para 17 and 32 of AS-13 and observed as under :

“On the basis of the above, the Committee is of the view
that in case of long-term investments only where there is a decline, other
than temporary, in the value of investments, the carrying amount thereof is
reduced to recognise the decline. The Committee is further of the view that to
determine whether there is a decline other than temporary in the value of
investments, an assessment should be made keeping in view of the assets of the
acquired company, its results, the expected cash flows from the investment,
etc. The market value of the shares is not the sole indicator of decline,
other than temporary, in the value of investments.”


While concluding the opinion, the Committee has stated that
the accounting treatment ‘at cost’ under the head ‘Long-term Investments’ in the
financial statements of the above public sector company, without providing for
diminution in the value, is correct and is in accordance with the provisions of
AS-13.

3. MOU with Information Systems Audit and Control Association (ISACA) :


ICAI has entered into an MOU with ISACA, which is the world’s
leading association serving IS Audit professionals. Under this MOU, our members
will be able to freely access and make use of internationally accepted
standards, guidelines and procedures of ISACA. It will not only bring increased
global acceptability of our DISA qualification in carrying out IS Audits, but
also facilitate active participation of our members in further research being
conducted by ISACA for development of IS Audit standards. The Indian corporate
sector will also benefit by having a framework within which IS Audits will be
carried out by the professionals (Refer p. 227-228 of C.A. Journal for August,
2008).

4. Examination results :

C.  Girl  students:

i) Out of total of 1,45,378 members, 21038 (14.47%) are women members.

ii) Out of 10,580 students who appeared in CA. Final Examination (Both Groups) held in May, 2008 2767 (26%) were girls.

iii) Pass Percentage – Girl students 27.57% – Boy students 24.09%.

iv) Out of the first five positions in c.A. Final, May, 2008 examination, three (2nd, 3rd and 4th) are girls.

(Source:  P. 228 of C.A. Journal  for August,  2008)

5. Measures for welfare of members and students:

As a part of the Diamond  Jubilee Celebrations  of the Institute, ICAI has  decided as under:

i) Chartered Accountant’s Benevolent Fund (CABF) :

Chartered    Accountant’s Benevolent Fund  (CABF) will now  make  the following ex-gratia payments:

a) Rs.1 lac will be given to the legal heirs of a member in case of unnatural/premature death of a member below the age of 45 years.

b) Financial assistance to the tune of Rs.l lac will be given for medical treatment of a member for specified ailments.

c) Rate of monthly assistance given to members or his/her heirs by the above Fund has now been increased from Rs.3000/ 4500 to Rs.4000/ 5500.

ii) Benevolent  Fund for  CA.  Students:

ICAI has decided to set up a Fund similar to CABF for C.A. Students. ICAI will raise a substantial corpus for c.A. Students Benevolent Fund to provide similar benefits for C.A. Students.
(Refer page 228 of CA Journal,  August,  2008)

6. ICAI News:

(Note: Page Nos. given below are from CA. Journal for August, 2008)

i) Enhancing Audit  Quality:

Some of the observations made by reviewers while conducting peer review are listed on page No. 343 in order to enable the members to improve the quality of audit of corporate bodies.

ii) Guidance Notes:

The following  Guidance Notes are issued by ICAI:

(a)Applicability  of AS-20 ‘Earning  Per Share’.

(b)Remuneration paid to Key Management Personnel- whether a related party transaction (AS-18).
(c)Applicability of AS-25 to Interim Financial Results.
(d) Turnover  in case of Contractors – AS-7.

(Referpages374-376)

iii) Exposure Drafts:

a) Exposure Draft of Standard on Auditing (SA) 265 – Communicating Deficiencies in Internal Control and Explanatory Memorandum on the above subject is published on pages 378 to 387.

b) Exposure Draft of Standard on Auditing (SA) 500 (Revised) – Considering the Relevance and Reliability of Audit Evidence and Explanatory Memorandum on the above subject is published on pages 388 to 395.

iv) ICAI Publications:

Technical Guide on Internal Audit in Telecommunications Industry (Page 361).

v) For Students:

All students who have passed PE-II are permitted to appear in the Final Examination, irrespective of whether they have been registered under Final (Old) syllabus or (New) syllabus, provided they have completed practical training or are serving the last 12 months of articled training on the first day of the month in which the Final Examination is scheduled to be held and complied with other eligibility conditions. (Page 332).

Verification fees of answer books of CA. examinations has been revised. This fee will now be Rs.100 per paper, subject to maximum of Rs.400 effective from May, 2008, examination (Page 355).


Exploration and development costs

New Page 1GAIL (INDIA) LTD. — (31-3-2007)

5. Exploration and development costs :

‘Successful Efforts Method’ is being followed for accounting
of oil and gas exploration and production activities which include :

(a) Survey costs are expensed in the year in which these
are incurred.

(b) Cost of exploratory wells is carried as ‘Exploratory
wells in progress’. Such exploratory wells in progress are capitalised in the
year in which the producing property is created or is expensed in the year
when determined to be dry/abandoned.

(c) All wells appearing as ‘Exploratory wells in progress’
which are more than two years old from the date of completion of drilling are
charged to Profit and Loss Account except those wells which have proved
reserves and the development of the fields in which the wells are located has
been planned. Such wells, if any, are written back on commencement of
commercial production.


Revenue recognition :

12. Sale proceeds are accounted for, based on the consumer
price inclusive of statutory levies and charges up to the place where ownership
of goods is transferred.

13. The interest allocable to operations in respect of assets
commissioned during the year is worked out by adopting the average of debt
equity ratios at the beginning and closing of that year and applying the average
ratio of debt thus worked out to the capitalised cost.

14. Pre-project expenditure relating to projects which are
considered unviable/closed is charged off to revenue in the year of
declaration/closure.


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Exploration and Development Costs

New Page 1Hindustan Oil Exploration Company Ltd. — (31-3-2007)

2. Exploration and Development Costs :

The Company generally follows the ‘Successful Efforts Method’
of accounting for its exploration and production activities as explained below :

(i) Cost of exploratory wells, including survey costs, is
expensed in the year when determined to be dry/abandoned or is transferred to
the producing properties on attainment of commercial production.

(ii) Cost of temporary occupation of land, successful
exploratory wells, development wells and all related development costs,
including depreciation on support equipment and facilities, are considered as
development expenditure. These expenses are capitalised as producing
properties on attainment of commercial production.

(iii) Producing properties, including the cost incurred on
dry wells in development areas, are depleted using ‘Unit of Production’ method
based on estimated proved developed reserves. Any changes in reserves and/or
cost are dealt with prospectively. Hydrocarbon reserves are estimated and/or
approved by the management committees of the joint ventures, which follow the
International Reservoir Engineering Principles.


Explanatory Notes :

1. All exploration costs including acquisition of geological
and geophysical seismic information, licence and acquisition costs are initially
capitalised as ‘Capital Work in Progress-Exploration Expenditure’, until such
time as either exploration well(s) in the first drilling campaign is determined
to be successful, at which point the costs are transferred to ‘Producing
Properties’ or it is unsuccessful in which case such costs are written off
consistent with para 2 below.

2. Exploration costs associated with drilling, testing and
equipping exploratory well and appraisal well are initially capitalised as
‘Capital Work in Progress — Exploration Expenditure’, until such time as such
costs are transferred to ‘Producing Properties’ on attainment of commercial
production or charged to the Profit and Loss Account, unless :

(a) such well has found potential commercial reserves; or

(b) such well test result is inconclusive and is subject to
further exploration or appraisal activity like acquisition of seismic, or
re-entry of such well, or drilling of additional exploratory/step out well in
the area of interest, such activity to be carried out no later than 2 years
from the date of completion of such well testing;

Management makes quarterly assessment of the amounts included
in ‘Capital Work in Progress-Exploration Expenditure’ to determine whether
capitalisation is appropriate and can continue. Exploration well(s) capitalised
beyond 2 years are subject to additional judgment as to whether facts and
circumstances have changed and therefore the conditions described in (a) and (b)
no longer apply.

Site restoration :

Estimated future liability relating to dismantling and
abandoning producing well sites and facilities whose estimated producing life is
expected to end during next ten years is expensed in proportion to the
production for the year and remaining estimated proved reserves of hydrocarbons
based on latest technical assessment available with the Company.

Revenue recognition :



(i) Revenue from the sale of crude oil and gas net of
Government’s share of Profit oil and Value Added Tax is recognised on transfer
of custody to refineries/others.

(ii) Sale is recorded at the invoiced price, which is
subject to the approval of the Government of India, Ministry of Petroleum &
Natural Gas (MOP&NG). The difference between the invoiced price and the final
approved price, if any, is adjusted in the year in which the aforesaid
approval is received.


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From The President

From The President

Dear professional colleagues,

Indian taxpayers live in an
atmosphere of uncertainty with regard to various tax issues, e.g., applicability
of tax rates, chargeability of income to tax, allowability of claim for
expenses, liability to deduct tax at source, retrospective amendments and so on.
These uncertainties and consequential tax risk become apparent if one looks at
high pitched assessments, conflicting judicial decisions, abnormal delay in
settling tax disputes and above all the trend to change tax laws with
retrospective effect.

Indian taxpayers as well as the
global investors consider this as high risk. Business plans, profit estimation,
cash flows, etc., go haywire when the unexpected tax demand is raised on the
taxpayers particularly when the law is amended with retrospective effect. Along
with the tax liability there is additional liability for mandatory interest for
non-payment of advance tax or delayed payment of tax for the relevant year.

The Finance Bill, 2008,
presented before the parliament has the distinction of introducing many direct
tax proposals to be effective from earlier dates. The reason given for these
retrospective amendments is that they are proposed to clarify the legislative
intent. Now, it is a moot question as to how the taxpayer will be able to
ascertain the legislative intent behind insertion or modification of any
provisions in the statute.

Once the judiciary including
apex court interprets the law after analysing the statute, one wonders whether
it is ethical and equitable for the Government to amend the law retrospectively
under the guise of legislative intent.

The trend of retrospective
changes in the law destroys the trust between the Government and the taxpayer.
If the Government genuinely wishes to develop atmosphere of mutual trust with
the taxpayers, it must refrain from bringing retrospective changes in law for
small revenue gain. No regulation can be truly effective unless it is
accompanied by ethical approach.

Any inequitable action of the
Government that shakes taxpayers’ confidence will not help the nation in the
long run. When a taxpayer who succeeds in the apex court after a long drawn
legal battle is compelled to pay tax on account of retrospective change in the
law, he considers it to be mockery of justice and equity. The Government, after
losing the tax matter in the Court should not become a winner by changing the
rules of the game through retrospective amendment. At least the retrospective
changes should spare those who have succeeded at the appeal stage.

One does not question the power
of the legislature to make retrospective amendment, but one believes such power
should be used sparingly and that too only for extra-ordinary matters. It should
not be used merely to overrule every single judicial development that causes
discomfort to the administration.

That apart, the taxpayer is
burdened with the levy of mandatory interest under sections 234A and 234B on
additional tax liability due to retrospective change in the law without any
justification. Such an interest burden is unjust. There should be in-built
provision in the law for not charging interest in case of increase in tax
liability due to retrospective amendments to the law.

Accountability, a virtue for a
good administration and good governance is yet to be brought on the statute.
Accountability as applicable to the taxpayer should equally be made applicable
to the tax collector. Accountability, if introduced, will certainly infuse
confidence amongst the taxpayers. Today, the taxpayer is liable for penal
consequences for any default committed by him. Similarly, tax administration
should also be made responsible for any lapse on its part.

Instead of bringing much
awaited accountability in the administration, the Finance Bill, 2008, seeks to
provide that a notice issued by an income tax authority will be presumed to have
been served in a proper manner and in time, if the assessee co-operates or
appears in the assessment proceeding.

Such co-operation will validate
the assessing officer’s lapse in serving a valid notice. The irony of this
proposal is that the assessee who co-operates in the assessment proceeding in
spite of improper service of notice is penalised for his cooperation. Such
procedural changes in the law to cover up the lapses of the tax officials have
demoralising effect on the taxpayers.

At the end, any taxpayer
prefers to have reasonable estimate of its tax consequence. He should be in a
position to manage tax risk without having any unexpected or unreasonable impact
on liquidity, profitability, cost structure and future investment plans.
Unexpected tax burden due to retrospective amendments shakes the confidence of
the taxpayers.

Various retrospective
amendments including proposal to modify the penalty provisions, are proposed in
the Finance Bill, 2008. The Society has made representation to the Finance
Minister on such issues. It is hoped that the Society’s representation to the
Hon’ble Finance Minister would be considered in right earnest and the tax
proposals will be modified before they are enacted into law.

With regards,
Rajesh Kothari

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From The President

From The President

Dear Professional Colleagues,

Many of you will now be gearing up for the busy month ahead.
This year the due date for filing of corporate returns and the returns of those
assessees who are liable to tax audit has been advanced by one month. Whatever
the reason, it will leave us free to enjoy the festival of lights, though we may
have to work a little harder. One often marvels at the effort that chartered
accountants make to ensure that their clients comply with the law, while clients
themselves are in total bliss having delegated this job to the hapless
professional. We need to educate clients that while it is our duty to aid and
assist them to comply with the law, it is primarily their responsibility.

Recently the media was filled with reports of the legal
battle waged by a young couple. The lady was pregnant with a child which had
been diagnosed with a serious health problem and had few chances of leading a
normal life if born into this world. The time up to which medical termination of
pregnancy was possible had passed and the lady sought the Court’s permission to
do so. The case has many nuances which have already been discussed threadbare. I
would only salute the young lady and her husband for the respect they showed for
the law. While the order of the Court was not what she wanted, it brought to the
fore the inadequacies and limitations of the law, which will hopefully be
addressed in the future.

While on adherence to laws, many of us seem to employ double
standards. We expect others to comply with rules and regulations, while we flout
them with impunity. It is this duplicity which creates confusion, particularly
in young impressionable minds. I am reminded of an incident which occurred just
two days ago. I was driving my daughter to school early in the morning. The
signals had just started operating. I waited at the red signal, and the man
behind me started honking. I showed him the red signal. He overtook and broke
the signal, berating me on the way. I was saddened by his behaviour more due to
the fact that seated next to him was his young son, studying in the same school
as my daughter’s. The school would have taught him to wait at a red signal,
while his father not only broke the signal, but was critical of someone who was
abiding by the rules. This behaviour would obviously leave the child confused.
Such confusion may have tragic consequences in future.

Why do people break laws ? Personal and immediate gain is one
of the obvious reasons. The second is when people find that continuous violation
leads to no retribution. The third is when laws are so complex and ill conceived
that it is almost impossible to comply with them or the cost of compliance is so
high that a person is almost forced to flout them. The fourth is when the law is
totally out of sync from the ground realities or has become archaic with the
passage of time. It is the problems/issues that arise in the third and fourth
category that the government has to address at the earliest.

Finally there is an issue of the efficiency of the justice
delivery system, and the attitude of the administration. One often finds that
improving the judiciary is not on the priority list of politicians. This is
possibly because bringing about a change in the system is a painfully slow
process and it is difficult to show tangible progress in a short time. A lot of
time of the bureaucracy and the legislature is wasted in drafting laws and
enacting them, when in fact, it would be better to concentrate on ironing out
the problems in existing laws and trying to ensure that they are administered
more efficiently. The government must allocate far greater resources for
ensuring a better quality of presiding officers, better equipment in courts, and
increasing the use of information technology as a tool. Habitual litigants must
be dissuaded from clogging courts while genuine public interest litigation needs
to come to the fore.

What is true of general law is equally true of revenue
statutes. A new direct tax code is to be introduced. A similar exercise was
undertaken a decade ago, and the result is well known. Instead of embarking on
such projects it may be worthwhile to iron out the problems in existing
regulations. To illustrate, it took the government close to a year to realise
the hardship that tax deductors were facing in trying to comply with the
mandatory PAN percentage for filing TDS returns. I am conscious that such
problems will always arise, but they could have been solved earlier if the
administration had shown the right approach and attitude.

We are in a profession where we advise clients on compliance
with commercial and tax laws. In both, the dividing line between avoidance and
evasion is thin. Every professional needs to be clear about what his role is and
apprise the client about the same. This responsibility and role definition is
extremely important and needs to be well documented. Many of us are weak in this
area and should take remedial measures.

I will stop here and leave you to the arduous task of
completing your tax audits. As good professionals, we must encourage our clients
to comply with laws, and agitate for their rights before judicial forums. Out of
all the pillars of democracy it is this one which despite suffering some damage,
is serving as a lighthouse among otherwise murky and muddy waters !

With warm regards,

Anil Sathe

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From The President

From The President

Dear Professional Colleagues,

When this issue of the Journal reaches you, the deadline for
completion of audits and filing of returns will have just passed. You, along
with your partners, colleagues and staff, must have burnt midnight oil (in some
parts of the country literally) to comply with this deadline. You will have
placed in the hands of your clients, and other stake holders, your reports which
are expected to contain your opinion as to whether the financial statements show
a true & fair view and whether the particulars which you have verified are true
and correct.

The audit process which you follow, and which culminates in
your report is expected to comply with certain assurance standards. The accounts
which are audited have to be compliant with accounting standards. Over the past
few years we have seen, in many forums, protracted debate over the extent of
disclosure required in the accounts. The tenor of discussion often is that if an
opinion need not be expressed according to the letter of the law or if a
disclosure is not required, such an opinion should not be expressed or a
disclosure should not be made.

According to the classical definition of the role of an
auditor, he is required to express his opinion as to whether on the basis of
generally accepted accounting principles (GAAP), the financial statements show a
true and fair view. Today these GAAPs have to be read with accounting standards.
In respect of corporate entities the accounts have to comply with the standards
prescribed by the Central Government in consultation with the National Advisory
Committee on Accounting Standards. Non-corporate assessees have to follow most
of the accounting standards prescribed by the Institute of Chartered Accountants
of India. Non-compliance attracts a qualification in the auditor’s report. Some
of these standards are so complex that Chartered Accountants have to debate
interpretation of some of their aspects. In most cases neither the owner/
promoter nor his ill-equipped accountant understands the true import of these
standards. In this scenario, General Purpose Financial Statements at times lose
their purpose of communicating the state of affairs to the reader.

I am conscious of the fact that businesses have become global
and competitive. Measurement and reporting standards have to have an
international acceptance, since the financial statements of entities doing
global business have to be interpreted by users in different countries. However,
the number of entities carrying on such scale of activity is minuscule compared
to the number of entities whose accounts are subjected to audit under one
statute or the other. My only concern is that in the quest for standardisation
and perfection, we should not make presentation of accounts and related
disclosure requirements so complex that the expectation gap between what the
society expects from us and what we deliver becomes so large that we cannot
bridge it.

The accounting standards and reporting requirements mandated
by various statements have the objective of standardising the measurement of
accounting estimates, various disclosures and the manner in which opinions are
expressed by auditors. This is done to make financial statements by various
entities comparable and understood by all users in the same way. However, in
trying to achieve this objective, if both, financial statements and the reports
thereon become lengthy and incomprehensible, it defeats that very objective.
Once this happens, these statements and reports are put away for future
reference but are rarely referred to. It would be interesting to note that the
tax audit report has been with us for twentyfour years. Yet a note from the CAG
dated 31st July 2008 exhorts revenue officials to read this report and in the
same breath asks action to be taken against professionals who have issued
erroneous reports.

Over the years, regulatory authorities, if I may use the
term, ‘outsourced’ responsibility to the auditor. The auditor is required to
comment on or report on aspects which are inherently the domain of the auditee
or the regulatory authorities. With the onus on the auditor being increased
substantially, he may tend to comply with the letter of a regulation rather than
the spirit. He may side-step the regulation, rule or reporting requirement, if
he can do so with some justification and adequate protection. Often more
attention is paid to documentation and working papers, rather than verifying
accounting records to form an opinion. Audit then becomes a compliance ritual
and the soul of audit which is an expression of opinion in regard to the true
and fair view, is lost. It is this opinion that a reader is looking for. The
world accepts that accounts are essentially estimates. The assurance that it
expects from us is that these estimates are made bonafide and in compliance with
the generally accepted accounting principles. If there is something amiss, the
attention of the user must be drawn to that fact. This assurance or if I can use
the term ‘blowing of the whistle’, must be in the simplest form.

I think there is a need to extensively deliberate upon these
issues and find solutions quickly. The International Accounting Standards Board
(IASB) is already in the process of formulating IFRS for SMEs. The only issue is
what constitutes a small and medium enterprise would be materially different in
different countries. If compliance is to be encouraged, India should take the
lead in formulating these simpler standards for SMEs. Stringent measurement and
reporting standards should be restricted to those entities where the users of
those statements and reports can understand them and appreciate their nuances.

If the reports are for different users with different
objectives, distinct formats of both financial statements and reports can be
contemplated. There will be problems in doing this but I am sure they can be
sorted out. For a vast majority of entities, especially non-corporate, the
disclosure requirements should be far simpler as should be the reporting
formats. This will strengthen the faith of the public in our profession which
has been repeatedly shaken in the recent past due to failures of corporate
giants.

All what I have said above actually passed through my mind
during this September. I felt that before we commence audits for the new year it
would be appropriate to leave my thoughts on the subject with you.

This year the advancement of the due date has left us free to enjoy the
festival. I take this opportunity to wish all readers and their families a happy
Diwali and a very prosperous and happy new year !

Anil Sathe

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From The President

From The President

Dear Professional Colleagues,

I am proud to place in your hands, this special issue of the
Diamond Jubilee year with the theme ‘Challenges of Change — Always Ahead’.

Charles Darwin, the renowned scientist said,

“It is not the strongest species that survive, nor the most
intelligent, but the one most responsive to change.”

Change is the only thing that is certain in life, and yet
most changes are normally treated with circumspection and many a time with
suspicion. Most of us are averse to change and treat it as a threat. This is
presumably because we carry the baggage of the past and use the prism of the
present to predict the future. Anything that has an image different from what we
have seen earlier is perceived as a danger rather than a challenge to be
accepted. An adult will be worried or be suspicious of the object while a child
will grab it. This signifies the difference in attitudes. A child treats
something new as an opportunity, while an adult is likely to see it as a hurdle.

Every change evokes a reaction. The challenge is to ensure
that the positive reactions outnumber the negative ones. We are today in a world
where every day brings about a change which is a huge challenge. We are
witnessing tumultuous changes in the economy.

Institutions that have looked invincible have crumbled
against the onslaught of economic downturn. What is the primary cause of this
debacle ? It is the belief that the past will dictate the future. Consequently
some institutions that felt that the growth story was eternal have faltered.
Those who were able to predict the economic avalanche (though their number is
few) have become wealthier; those who saw it coming have escaped with minor
bruises. So the moral seems to be that you have to accept that there will be a
change, face that challenge and if possible, try and remain ahead of the change.

What is true in the economic scene is equally true on
professional front. There is substantial change in the nature of services that a
chartered accountant renders as well as the expectations of the client from him.
Today a client is not satisfied just with compliance of laws and regulations but
wants some value addition for the remuneration that he pays. With the advent of
technology and increase in size of the corporate, there is risk in audit. There
is a feeling in some quarters that in the zeal to mitigate that risk, the basic
soul of audit, the expression of opinion is being lost. In the accounting field
the adoption of the concept of fair value is being advocated strongly by some.
Acceptance of this concept may change the accounting scene totally. However,
looking to the current economic scenario, the breed of those who are against
this concept is increasing, while its votaries are also possibly having second
thoughts.

With laws constantly being amended, a professional has to
continuously hone his skills to remain abreast of the amendments. The
composition of the profession has also changed in the last decade. With
employment pastures growing greener, the numbers of those who join whole-time
practice have reduced considerably. Consequently, while opportunities have
increased, the number of those who have the ability to seize them has dwindled.
This situation is however likely to change. With recession looming large and
employment opportunities on the wane, the number of self-employed professionals
is likely to increase. Clients today require a wide range of services and expect
them to be available under one roof. Multidisciplinary firms are now a reality.
While today the number of disciplines in which such firms can have partners is
limited, the same will increase in future.

Throughout its existence, the Society has seen the profession
face many challenges. The Society has always met these challenges squarely. The
reason why it has earned the respect of its members is that it has attempted to
foresee the challenges of change and tried to equip its members to remain ahead
of them. It appreciated the need for continuing professional education long
before it became a buzzword. It recognises that students are the future and has
always strived to cater to their needs. It is the first to start an E-learning
course. A number of visionaries have contributed to this Society to make it an
institution of excellence. However, the one distinct factor that makes this
institution stand apart is the tradition that it has inculcated. Its presidents
do not turn their back on the institution as they lay down their office, but
make a transition to being mentors.

It is with the good wishes and support of these individuals
that our team has organised a Diamond Jubilee conference at which this special
issue will be released. The issue contains a number of thought-provoking
articles on a wide variety of subjects including those to which, I have made a
reference in the foregoing paragraphs.

I am confident you will enjoy reading it.

Wishing you a happy and prosperous new year.

Anil Sathe

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ICAI And Its Members

ICAI and Its Members

1. Disciplinary case :


In the case of ICAI and Shri M. D. Loya, reported on Page 461
of C.A. Journal for September, 2008, ICAI received information against the
member. It was alleged that in the audit report given by the member in the case
of a public trust u/s.12A(b) of the Income-tax Act (in Form No. 10B) it was
certified that no income or property of the trust was used or applied during the
previous year for the benefit of persons referred to u/s.13(3) of the Income-tax
Act. It was, however, found that certain fixed deposit receipts of the trust
were pledged by the trustees with a bank and a loan was obtained on security of
these FDRs by a firm in which some of the trustees were partners.

The matter was referred to the Disciplinary Committee of the
Institute which found that the member was guilty of professional misconduct
under clauses (7) and (8) of Part I of Second Schedule to the C.A. Act. The
Council of ICAI accepted this finding and recommended to the Bombay High Court
that the member be reprimanded.

After hearing the matter, the High Court observed that it was
clear that the member did not seriously challenge the lapse on his part in not
calling for all the FDRs for physical verification before signing the audit
report. The High Court has accepted the view of the ICAI Council that the member
be reprimanded for this lapse on his part and accordingly passed the order of
reprimand.

2. Revision of Guidance Note on Tax Audit

u/s.44AB of Income-tax Act :

Clause 17(L) was added to Form 3CD by a Notification No.
208/2006, dated 10-8-2006. This clause deals with ‘Amount of deduction
inadmissible in terms of S. 14A of the Income-tax Act in respect of expenditure
incurred in relation to income which does not form part of the Total Income’.
ICAI had issued a supplementary Guidance Note for Tax Audit u/s.44AB in
September, 2006, explaining the implications of the requirement of clause 17(L)
in Form 3CD. The Government has now amended the Income-tax Rules and inserted
New Rule 8D which lays down the method for determining the amount of expenditure
to be disallowed u/s.14A. ICAI has revised the Guidance Note on Tax Audit
u/s.44AB in the month of August, 2008. The text of this revised Guidance Note is
available on Institute’s website www.icai.org. Operative part of this Guidance
Note (Para 40.6) reads as under :


“40.6 The method prescribed under sub-rule (2) of Rule 8D
is applicable when the Assessing Officer is not satisfied with the correctness
of the claim of expenditure made by the assessee or with the claim made by the
assessee that no expenditure has been incurred. Normally this situation would
arise at the time of assessment i.e., after the tax audit has been
completed and the return has been filed. Therefore, at the time of tax audit
the tax auditor will have to verify the amount of inadmissible expenditure as
determined by the assessee. The method under sub-rule (2) of Rule 8D does not
mandate that the assessee should necessarily compute the disallowance as per
the method prescribed under sub-rule (2). Therefore, the assessee may or may
not adopt the same.”


Further, in para 40.11, it is stated that the Tax Auditor
should verify the amount of inadmissible expenses as worked out by the assessee.
If he is in agreement with the assessee, he should report the amount with
suitable disclosures of material assumptions. If he is not in agreement with the
assessee, he should suitably qualify his report as stated in the above Guidance
Note.

(Refer P. 461 of C.A. Journal for September 2008)

3. Accounting Standard (AS-2) (Revised) — ‘Inventories’ :


Exposure Draft of this revised standard has been published
for comments of members by 15-11-2008. There is no major difference between this
Exposure Draft and the International Accountancy Standard (IAS-2) dealing with
‘Inventories’.

The major difference between the Exposure Draft of revised
AS-2 and the existing AS-2 is as under :

(i) On the lines of IAS 2, the Exposure Draft deals with
the subsequent recognition of cost/carrying amount of inventories as an
expense, whereas the existing AS-2 does not provide the same.

(ii) The Exposure Draft provides explanation with regard to
inventories of service providers, whereas the existing AS-2 does not contain
such an explanation.

(iii) The Exposure Draft does not apply to measurement of
inventories held by commodity broker-traders, who measure their inventories at
fair value less costs to sell. However, this aspect is not there in the
existing AS-2. Accordingly Exposure Draft defines ‘fair value’ and provides an
explanation in respect of distinction between ‘net realisable value’ and ‘fair
value’.

(iv) The Exposure Draft provides detailed guidance in case
of subsequent assessment of net realisable value. It also deals with the
reversal of the write-down of inventories to net realisable value to the
extent of the amount of original write-down, and the recognition and
disclosure thereof in the financial statements. The existing AS-2 does not
deal with such reversal.

(v) The Exposure Draft excludes from its scope only the
measurement of inventories held by producers of agricultural and forest
products, agricultural produce after harvest, and minerals and mineral
products, though it provides guidance on measurement of such inventories.
However, the existing AS-2 excludes from its scope, such types of inventories.

(vi) The existing AS-2 specifically provides that the
formula used in determining the cost of an item of inventory should reflect
the fairest possible approximation to the cost incurred in bringing the items
of inventory to their present location and condition, whereas the Exposure
Draft does not specifically state so and requires the use of consistent cost
formulas for all inventories having a similar nature and use to entity.

(vii) The Exposure Draft requires more disclosures as
compared to the existing AS-2.


4. CPE requirements for members in Industry and senior citizens :


ICAI President has clarified the position on this subject on Page 406 of CA. Journal for September, 2008, as under:

“As you are aware, the unstructured learning activities have been made applicable from January this year and we have already issued.a Continuing Professional Education (CPE)Advisory in this regard. However, I notice that there is some apprehension among certain members in industry and senior citizens about this requirement. I may clarify that for members in industry and senior citizens it is not necessary to attend regular CPE programmes. These regular CPE programmes such as seminars, study circle meetings, etc. are called structured learning activities and are mandatory for members holding certificates of practice, but they are optional for members in industry and senior citizens. Members in industry not holding a certificate of practice and senior citizens could comply with the new CPE requirement by reading articles in journals, books, etc. They could read those articles at their leisure.

You will be glad to know that taking this important initiative forward, it has been decided to grant one hour CPE Credit each for reading some selected article(s) published in the Institute’s journal as part of unstructured learning activities from the September 2008 issue itself.”

5. Exposure Drafts on Auditing Standards:

The following Exposure Drafts are issued for comments by members:

(i) Auditing Accounting Estimates, including Fair Value Accounting Estimates, and Related Dis-closures [Revised Standard on Auditing (SA) 540]

(Refer pages 536-560 of CA. Journal for September 2008)

(ii) Related Parties [Revised Standard on Auditing (SA) 550]

(Refer pages 561-576 of CA. Journal for September 2008)

6.    ICAI News:

(Note: Page Nos. given below are from CA. Journal for September, 2008)

(i)    Internal  Audit  of Accounts  of Stockbrokers:

By letter dated 22-8-2008, SEBI has advised that all Stockbrokers/Clearing members of Stock Exchange should get Internal Audit of their accounts carried out by independent qualified Chartered Accountants. Similarly, the Insurance Regulatory and, Development Authority has also amended its Regulations to provide that every insurance company having Assets under Management (AUM) of not more than Rs.1000 crore shall get Internal Audit conducted on quarterly basis. Insurance companies with AUM of above Rs.1000 crore should appoint a Chartered Accountant firm for Concurrent Audit (Page 406).

(ii) Certificate Course on IFRS and Valuation:

ICAI has decided to conduct (a) a Certificate Course on ‘International Financial Reporting Standards’, and (b) a Certificate Course on ‘Valuation’. Both the courses are to be launched in September/October 2008. (Page 406)

(iii) Rules  of Arbitration:

ICAI has issued the ‘ICAI Rules of Arbitration’ and also decided to start a Certificate Course on Arbitration for our members. Details are hosted on Institute’s website. (Page 407)

(iv) ICAI Toll-free telephones:

Toll-free telephones for getting services from ICAI are now available as under:

(v)  Examination on alternate days:

To reduce stress of our students, it has been decided that from November 2008, Institute examinations will be held on alternate days. Thus November 2008 examinations will be held from 1st to 16th November 2008. (Refer Pages 408 and 532)

(vi) International Conference at Jaipur in November, 2008:

The above conference for members is to be held from 20th to 22nd November, 2008. The details are on Institutes website. (Page 408)

(vii) Recognition for Ph.D Course:

University of Rajasthan has recognised the CA. Course for the purpose of doing Ph.D from that University. (Page 418)

(viii) Peer review:

Some major deficiencies noticed by reviewers while conducting peer review are published on Page 513.

(ix) Director (Discipline) :

ICAI has appointed CA Smt. Vandana Nagpal, Senior Deputy Secretary, as Director (Discipline) to head the Disciplinary Directorate. This Directorate is for making investigations in respect of information and complaint cases against members.
 
(x) New  publication    of ICAI :

Technical Guide on E-Commerce – Consideration for Audit of Financial Statements. (Page 531)

(xi) Obituary:

(a)    CA P. M. Narielvala, former President of our Institute, passed away on 8-8-2008 at Kolkata. He was our President in 1975-76 and a Council Member of ICAI for two terms for 1967-70 and 1973-76. The accountancy profession in India has lost one of its leading lights. We pay our respectful homage and pray that the departed soul may rest in peace. (Page 418)

(b)    CA S. P. Chhajed, Former President of our Institute passed away on 18-9-2008 at Mumbai. He was our President in 1999-2000 and Council Member of ICAI from 1982 to 2001. Shri Chhajed was a very popular figure in Mumbai and other places. Our profession has lost a leading personality. We pay our respectful homage and pray that the departed soul may rest in peace.

Section B : Miscellaneous

CENVAT credit

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II. Tribunal :


4. CENVAT credit :



Vodafone Essar Digilink Ltd. v. CCE., Jaipur-I, 2008 (10)
STR 139 (Tri. – Del).

  •  BSNL provided taxable
    service to the appellant and paid service tax on port and space charges. Credit
    was denied for service tax paid, alleging that BSNL was not liable to pay
    service tax in respect of port and space charges.


It was held that since the payment of service tax by BSNL was
not challenged, credit cannot be denied. Pre-deposit of duty and penalty was
waived and stay petition was allowed.

levitra

To be precise

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3 To be precise


 

v
“India cannot be held to any emission control target. They (developed
countries) should get off our backs. We are an expanding economy. How can we
levy a cap when millions are living with deprivation ?”

R.
K. Pachauri, Head of the Intergovernmental Panel on Climate Change (IPCC), to
IANS

v
“If you have not been a villain at a certain point in time, you will never be
a hero. And even if you are a hero one day, you may well become a villain the
next”


Carlos Ghosn, CEO, Nissan and Renault, in Newsweek

v
“Technology will not be a differentiator between rich and poor consumers;
personalised experience will be”

C.
K. Prahalad, Professor, Ross School of Business, at the University of
Michigan, in Mint

v
“Being a CEO is like answering a call to bring the organisation to a better
place than where you found it”


Edward J. Ludwig, CEO, Becton, Dickinson and Company, in Harvard Business
Review

v
“I don’t see anybody in Washington or anywhere else saying, look, this energy
crisis is the biggest one we’ve had, let’s really put the best people to work
on figuring out how to reduce the country’s dependence on oil”


Indra Nooyi, Chief Executive Officer, PepsiCo, in Reuters.com

v
“People in India are simple folks, who work hard and save. I believe that the
simpler the product (insurance), the better will be the reception”

P.
Chidambaram, Finance Minister, in Hindustan Times

v
“Over the last several decades, revolutions in communication and technology
have sent jobs wherever there’s Internet connections; that have forced
children in Raleigh and Boston to compete for those jobs with children in
Bangalore and Beijing. We live in a more competitive world, and that is a fact
that cannot be reversed”


Barack Obama, Democrat Party candidate for the US presidential election, in
The Times of India

v
“Once things start slowing down in India, we think that the competition may
give up. We see that as an opportunity”


Martin Sorrell, CEO, WPP Group, in Mint

v
“You have to encourage experimentation. You must hire people who don’t listen
to you. You have to create a sandbox where people can play — and fail, often
and early”


Anand Mahindra, Vice-Chairman & MD, Mahindra & Mahindra, in Harvard Business
Review

(Source :
Business Today, 10-8-2008, 13, 27-7-2008)

levitra

Part B — Some recent judgments

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Service Tax

An important Larger Bench decision : Services provided by service providers from outside India :



Hindustan Zinc Ltd. v. CCE, Jaipur 2008 TIOL 1149 CESTAT
Del. LB [2008 (11) STR 338 (Tri.-LB)]

1. Background :


1.1 The law relating to Service Tax is contained in Chapter V
of the Finance Act, 1994 (The Act) as amended from time to time. Service Tax
Rules, 1944 (The Rules) contain machinery provisions in terms of the Act. S. 68
of the Act deals with payment of Service Tax i.e., who shall pay the tax
and the manner. For easy reference S. 68 is reproduced below :

S. 68 :



“(1) Every person providing taxable service to any
person shall pay Service Tax at the rate specified in S. 66 in such manner and
within such period as may be prescribed.


(2) Notwithstanding anything contained in Ss.(1), in
respect of any taxable service notified by the Central Government in the
Official Gazette, the Service Tax thereon shall be paid by such person and in
such manner as may be prescribed at the rate specified in S. 66 and all the
provisions of this Chapter shall apply to such person as if he is the person
liable for paying the Service Tax in relation to such service.”



1.2 Thus the general rule is that person providing taxable
service is the person liable to pay Service Tax. However, U/ss.(2) of S. 68, a
clause is contained which provides that in case of ‘notified’ taxable services,
any other person as may be prescribed is liable to pay Service Tax.

1.3 In the year 2002, a new sub-clause (iv) was inserted in
Rule 2(1)(d) of the Rules with effect from 16-8-2002 (vide Notification
12/2002-ST) which reads as under :


“Rule
2(1)





(d) Person liable for paying Service Tax means —


(iv) in relation to any taxable service provided by a
person who is non-resident or is from outside India and does not have any
office in India, the person receiving taxable service in India”.



1.4 Later i.e., on December 12, 2004, the Government
issued Notification No. 36/2004-ST to come into effect from January 01, 2005
wherein persons other than service providers were specifically notified
u/s.68(2) of the Act. This inter alia also included taxable service
provided by non-resident or person from outside India and who did not have an
office in India.

1.5 Thus, the dispute related to whether the liability to pay
Service Tax could be fastened on the recipient of taxable service from January
01, 2005, the date of issue of Notification No. 36/2005-ST or August 16, 2002,
the date from which Rule 2(1)(d)(iv) was prescribed.

2. In the above background, a single member Bench of Delhi
Tribunal in the case of Aditya Cement v. CCE, 2007 (7) STR 153 in the
context of Rule 2(1)(d)(iv) observed that :

“It is well-settled law that the rules are
subservient to the Sections and if Sections do not provide for discharge of
tax by the recipient of services from non-resident having no office,
then it would be futile exercise to rely upon the rules to collect the tax”
(emphasis supplied). It also stated as follows :

“If the contention of the learned SDR is to be accepted,
then there was no necessity for the Government to issue Notification No.
36/2004-S.T. notifying the service receiver from non-resident having no
office, to pay Service Tax, as receiver. By issuing the said Notification, the
Central Government intended to tax the service receiver from non-resident,
with effect from 1-1-2005, which, in corollary would be that no Service Tax is
payable by this category prior to 1-1-2005.”

The above decision was followed by a Division Bench in case
of Ispat Industries Ltd. v. CCE, 2007 (8) STR 282 (Mum). Doubting the
correctness of these decisions in case of Samcor Glass Ltd. v. CCE, Jaipur-1
Delhi 2007 TIOL 935 CESTAT Del while hearing the stay application the Bench
observed as follows :

“Thus, the person receiving the service from abroad was by
the said clause 2(d)(iv), made liable to pay Service Tax in respect of taxable
services received. This clause is clearly relatable to the provisions of S.
68(2) which contemplates making of such provision under the rules, as is clear
from the word ‘prescribed’ which means ‘prescribed under the rule’. The
statutory effort so created cannot be reduced to a subsequently issued
notification repeating the contents of clause (iv) under sub-heading (B).
The learned Single Member has however taken a different view, while the
Division Bench has not taken into consideration the provisions of Rule
2(d)(iv) of the Rules . . . . . . We do not want to pre-empt the course of
referring the matter to the Larger Bench that may be adopted by the Bench
hearing this appeal” (emphasis supplied).

It however further observed :

“The expression ‘taxable service’ occurring in clause (iv)
of Rule 2(d) is to be understood in the concept of taxable service which are
enumerated in S. 65(105) of the Act and therefore, this Rule will apply to all
taxable services. Prima facie, there was no need to make any further
Notification to repeat what was already prescribed by the said Rule.”


3. The Larger Bench, in misc. order No. CT/85/08 analysed S.
68(2) as follows :

3.1 S. 68(2) according to the Larger Bench could be broadly
divided into two parts :

  • The first part envisages specifying ‘services’ in relation to which a person other than service provider is to be made liable. Accordingly, these services have to be identified and specified and this could be done by way of issuing notification.

  • The second part envisages specifying the person liable to pay service on such service notified as per the first part. This is done by the Rules already prescribed.

According to the Bench, it was not an acceptable contention that the manner of collection of tax could be extended to include the person liable to pay the tax. It observed:

“The person liable to pay is an integral component of any tax – as a concept distinct from the mechanism for its collection and recovery.”

3.2 Thus,  combined    reading of Notification 12/2002 notifying  Rule 2(1)(d)(iv) and Notification 36/2004 notifying various persons other than service providers including non-residents or persons from outside India liable for Service Tax, would be necessary as both the notifications complemented or supplemented each other and in the absence of either, Service Tax could not be collected or received in respect of specified services. It is required to note that the levy is on rendering of taxable service and not on a person. No sooner than the taxable event takes place, tax must be collected and therefore provision has to be made to fasten the liability to pay Service Tax.

The Bench stated that the first part of the requirement of S. 68(2) had to be carried out by way of notification and the latter could be implemented by making rules. It also stated:

“It is well known that where the law provides the manner for doing something, it should be done in that manner or not at all”.

3.3 In the context of Rule 2(1)(d), it observed “sub-clause (d) of Rule 2 is the definition clause of the Service Tax Rules. The definition clause cannot be read as a substantive provision creating liability much less in a tax statute.”

Referring to Notification No. 36/2006-ST, it observed, “the service specified in Part B was omni-bus, namely, ‘any taxable service’, meaning thereby all types of taxable services provided by a person who is a non-resident or from outside India and does not have any office in India, the recipient became liable for paying Service Tax.”

The Bench also opined that in case of services provided from abroad, the service provider could not be made liable to pay Service Tax and brought un-der the tax net in absence of apparent mechanism for collection and recovery of tax from them. A different provision had to be made.

3.4 The appellant relying on Laghu Udyog Bharti v. UOI, 1999 (112)ELT 365 (SC) argued that provisions of Rule 2(d)(xii) and (xvii) of the Rules were struck down on the ground that the scheme of the Finance Act created charge on the person collecting service tax, whereas Rule 2(d)(xii) and (xvii) treated customers as the assessees, This clearly was in conflict with S. 65 and S. 66 of the Act. The Revenue on the other hand relied on the decision in the case of Gujarat Ambuja Cements Ltd. v. UOI, 2005 (182) ELT 33 (SC) and argued that amendments made with retrospective effect in this regard were upheld and therefore it could not be relied upon. The Bench observed that the Rule 2(1)(d)(xii) and (xvii) were held illegal in Laghu Udyog Bharti’s case (supra) because of charging provisions provided otherwise. When charging Section itself was amended to make the Act and the Rules compatible, criticism of the earlier law upheld by the Court cannot be availed of and that the Legislature was competent to remove infirmities and validate what was declared invalid. However, there was no question of the Finance Act, 2000 overruling the decision of the Court in Laghu Udyog Bharti as the law itself was amended.

3.5 The Revenue also referred to the explanation inserted at the end of Ss.(105) of S. 65 with effect from 16-6-2005. The Bench stated that explanation was a temporary measure to tax imports of services and was subsequently replaced by S. 66A. However, in the opinion of the Bench, the issue involved in the case had no relevance with the explanation.

There being  no dispute as to the service involved viz. the  consulting engineer’s service as taxable service, any reference  to the erstwhile explanation in S. 65(105) was held  as misplaced by the Bench.

3.6 In summation, it was held that recipient of taxable service could be held as liable for paying Service Tax only from 1-1-2005 and express concurrence to the decisions in the cases of Aditya Cement and Ispat Industries (supra) was also made.

Part B — Some recent landmark judgments

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1.
Board’s Circulars when in
conflict with SC’s decision : Whether binding ?

Supreme
Court (Constitution Bench) :

CCE v. Bolpur Ratan Melting and Wire Industries, 2008
TIOL 194 SC-CX-CB :

(i) In this case, a Bench of three Judges of the Supreme
Court made a reference to a Larger Bench whereby observations made in the
decision of the Supreme Court in the case of Dhiren Chemical Industries, 2002
(2) SCC 127 were referred to be clarified, since the decision in the case of
Dhiren Chemicals (supra) was given by a Bench of five judges, it was
considered appropriate that a Bench of similar strength hands down an
authoritative pronouncement.

 

(ii) Background :

In the case of Dhiren Chemicals (supra), the decision
of the Supreme Court in the case of Usha Martin Industries 1997 (7) SCC 477 was
overruled based on an interpretation of a particular phrase whereby benefit of
exemption notification was denied, however, as per Board’s clarification,
exemption was granted. However, during the hearing of case of Dhiren Chemicals,
it was pointed out that based on the Board’s Circular, benefit of exemption
notification was granted to many cases. These were likely to be reopened if
interpretation in the case of Dhiren Chemicals was to be followed. Therefore,
para in the judgment of Dhiren Chemicals (para 11 in SCC) included a para as
follows :

 

“We need to
make it clear that regardless of the interpretation that we have placed on the
said phrase, if there are Circulars which have been issued by the Central
Board of Excise and Customs which place a different interpretation upon the
said phrase, that interpretation will be binding upon the Revenue.”

 


This was done to ensure to bind the Department wherever
exemption benefit was granted.

 

(iii) The counsel for the assessee laid stress on the binding
nature of Circulars qua the revenue authorities and argued that even if a
circular ran counter to the decision of Supreme Court, the Revenue was bound by
the circular and it could not take advantage of the Supreme Court’s decision. It
was also contended that once a Circular was brought to the notice of the Court,
the Revenue’s appeal based on the ground contrary to the Circular should be
turned down.

 

(iv) The Apex Court in the instant case observed that while
Circulars issued by the Board are undoubtedly binding on the authorities under
the respective statutes, the law declared by the Supreme Court would be binding
in terms of Article 141 of the Constitution and as such, Circular cannot prevail
once Supreme Court order to deny appeal to the Revenue and lay content with the
Circular would mean that there is no scope for adjudication by the High Court or
Supreme Court and this would be against the concept of majesty of law of the
Supreme Court. The appeal by the Revenue was allowed.

 

2. Penalty u/s.11AC of the Central Excise Act : Whether
mandatory ?

Supreme Court : Larger Bench :

Union of India v. Dharmendra Textile Processors, 2008
(231) 3 ELT (SC)

 

(i) Background :

The Division Bench of the Supreme Court referred the
controversy involved in several appeals to a Larger Bench to examine whether the
view expressed in Dilip N. Shroff v. Joint Commissioner of Income-tax,
Mumbai, 2007 (219) ELT 15 (SC) was correct. The issue involved related to
whether mens rea was an essential ingredient for penalty leviable
u/s.11AC of the Central Excise Act, 1994, and whether or not there was a scope
for levying penalty below the prescribed minimum. The Revenue contended that
there was no discretion with the authority in the matter of imposition of
penalty and they were duty bound to impose penalty equal to the duty determined
or payable. The assessee’s contention was that it was open for the authority not
to impose any penalty, as the basic scheme of the said S. 11AC was identical to
one u/s.271(1)© of the Income-tax Act and in the given case, it was open to
the Assessing Officer not to impose penalty. The Division Bench held the view
that correct position in law was laid down in Chairman, SEBI v. Shriram
Mutual Fund & Anr., 2006 (5) SCC (361). Hence, the matter was referred to a
Larger Bench.

 

(ii) The Division Bench also made reference to Rule 96ZQ and
Rule 96ZO of the Central Excise Rules, 1944. It was noted that in some cases,
the assessee challenged vires of Rule 96ZQ(5) and the Gujarat High Court held
that the said Rule incorporated the requirement of mens rea. The Division
Bench stated that even if Larger Bench took a view that penalty under this
clause was mandatory, it was open for an assessee to challenge vires of Rule
96ZQ(5). Further, it was also agreed that similar issue was involved in Rule
96ZO. However, the Additional Solicitor General submitted that in Rules 96ZQ and
96ZO, there was no reference to any mens rea as in S. 11AC where mens
rea was prescribed statutorily. This was evident from the fact that extended
period of limitation was permissible u/s.11A of the Act. In essence, it was
contended that penalty was for statutory offence and it was observed that
proviso to S. 11A provided the time for initiation of action, whereas S. 11AC
meant only a mechanism for computation and the quantity of penalty. Thus the
onus lay on the Revenue to establish that extended period is applicable and on
crossing this hurdle, the assessee is exposed to penalty and the quantum is
already fixed. It was also observed that in the statutes where mens rea
exists, if any penalty limit or a maximum penalty, etc. is prescribed, it is to
be levied in accordance with the said limits, but if no variable is provided, no
discretion exists.

iii) On the other hand, on behalf of appellants, reference of SC’s decision in case of State of MP & Ors. v. Bharat Heavy Electricals, 1997 (7)SCC 1 was made to contend that even if the Court held that imposition of penalty was mandatory, yet there was a scope for exercise of discretion. It was further submitted that various degrees of culpability cannot be on the same footing and S. llAC could be con-strued in a manner by reading into it the discretion and that was considered a proper way of giving effect to statutory intention.

iv) Relevant provision of each of S. llAC, Rule 96ZQ, Rule 96Z0 and also of S. 271(1)(c) of the IT Act were gone into. Further, observations made in Chairman SEBI’s case were also gone into at length and it was contended that a specific Section in the SEBIAct viz. S. 24 dealt with criminal offences under the Act and its punishment. Therefore, penalty leviable under Chapter VIA of the said Act was neither criminal nor quasi-criminal, but related to breach of civil obligation i.e., default or failure of statutory obligation and as such, mens rea by the appellant was not required. A catena of decisions were gone into where it was held that mens rea was not an essential foundation for imposing penalty for breach of civil obligations.

v) The Court further observed that the decision of Bharat Heavy Electricals’ case (supra) was not of assistance to the assessee, as the same proceeded on the basis of concessions and even otherwise, it was not open to the Bench to read into a statute which was specific and clear, something which was not specifically provided. The Bench further observed, “The statute is an edict of the Legislature. The language employed in a statute is the determinative factor of legislative intent”. The Court cited observations of many decisions on similar issues which inter alia included, “Rules of interpretation do not permit the Courts to do so unless the provision as it stands is meaningless or of doubtful meaning. The Courts are not entitled to read words into the Act of Parliament unless clear reason for it is found within the four corners of the Act itself. (Per Lord Loreburn, L’C, in Vickers Sons)”. The Court at the end stated “it is of significance to note that conceptual and contextual difference between S. 271(1)(c) of the IT Act was lost sight of in Dilip Shroff’s case (supra).

vi) The explanations appended in S. 271(1)(c) entirely indicate the element of strict liability on the assessee for concealment or for providing inaccurate particulars while, filing the return. The penalty under that provision is a civil liability. The Section read with the explanations indicates that the said Section has been enacted to provide for a remedy for loss of revenue and willful concealment is not an essential ingredient to attract a civil liability as in the case of prosecution u/ s.276C of the IT Act. Accordingly it was ruled that penalty u/s.llAC of the Act was mandatory.
 

3. CENVAT Credit whether admissible on outdoor caterer’s service in canteen of a manufacturer:

Larger Bench  decision:

CCE Mumbai 5 v. GTC Industries Ltd., 2008 (12) STR (Tri.LB)

i) The issue in the instant case relates to whether or not service of an outdoor caterer provided in the canteen of a manufacturer be considered ‘input service’ within the meaning of the definition of input service under Rule 2(1) of the CENVAT Credit Rules, 2004. The definition contains two parts – the first being the definition of input service and the second part is an inclusive clause listing various services. The Revenue contended that the inclusive clause is limited only to services enumerated in the said clause and since the disputed service i.e., out-door catering service is not one of them, it will not qualify as an input service.

ii) The appellant’s contention on the other hand was that the term ‘includes’ enhances the scope of the definition and therefore, a restrictive approach cannot be adopted. The appellant also contended that the words in the definition ‘activities relating to business’ were followed by the words ‘such as’ which was further followed by a list of services. Thus, the term ‘such as’ was used to provide only an illustrative list of services and not exhaustive. Any activity that related to business could form part of the expression ‘input service’.

(iii) The appellant also discussed an extract of press note dated August 12, 2004 along with the draft rules issued by the Ministry of Finance prior to introduction of CENVAT Credit Rules, 2004 which provided indication of the object of the Legislature. The notified rules expanded the scope of the draft rules by including the activities such as coaching and training, computer networking, credit rating, share registry and security, etc. In view of this, the appellant submitted that the argument of the Department that the scope of the definition was restricted to the services specified in the inclusive part of the definition was incorrect inasmuch as the scope of the term ‘activities relating to business’ was expanded and illustrated further when the rules were notified. Thus, the Legislature intended to allow credit on all such services which were activities relating to business. It was also argued that Service Tax being a value added tax and a consumption tax, it essentially formed part of the value of the goods
services, the credit of which  could  not be denied.

iv) In support of the above, para 4.1 of CAS-4 was referred to, which defined ‘cost of production’, and under the head ‘direct wages and salaries’ subsidised food is considered as part of direct wages and salaries being fringe benefits. It was also noted by the Tribunal that it was mandatory on part of the factories to provide canteen facility and failure of which attracts prosecution and penalty u/s.92 of the Factories Act, 1948. Service Tax on outdoor catering service is paid by the manufacturer for running the canteen, irrespective of the fact whether subsidised food is provided or not. Since this cost has bearing on the cost of production, it was held that catering services have to be considered as an input service relating to the business and CENVAT credit in respect thereof would be admissible. The view of the Tribunal expressed in the case of Victor Gaskets India Ltd. & Others, 2008 (10) STR 369 was accordingly approved.




Part B — Some recent judgments

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1. Supreme Court :

Clearing and forwarding service : Consignment
agent :

Super Polyfabriks Ltd. V. CCE, Punjab, 2008 (10) STR
545 (SC)

The appellant under an agreement with Gas Authority of India
is a ‘consignment stockist’. The period in question was from 1-9-1999 to
31-7-2002. Both the Appellate Authority and the Tribunal dismissed respective
appeals. The short question was, whether in the facts and circumstances of the
case, the petitioner was providing services of clearing and forwarding. The
appellant pleaded that lower authorities proceeded only on the premise that the
agent was clearing and forwarding agent relying on the decision in the case of
Prabhat Zarda Factory P. Ltd. V. CCT, Patna 2002 (145) ELT 222 —
which was subsequently overruled by a Larger Bench in the case of Larsen &
Toubro Ltd. V. Commissioner, 2006 (3) STR 321. The Supreme Court relying on
the decision in the case of V. Lakshmanan v. B. R. Mangalagiri & Others,
(1995 Supp 2 SCC 33) opined that for determination of the liability, the
agreement has to be read as a whole. The purport and object in a contract could
be ascertained only from terms and conditions thereof. Neither nomenclature nor
a particular activity would be decisive. Whether in substance and effect the
person was a clearing and forwarding agent must be ascertained from the terms of
the agreement and conclude whether job of clearing and forwarding agent’s
operation was incidental to the main activity of getting the orders and selling
to clients or otherwise. Matter was remitted back to the assessing authority as
the orders were passed ex-parte because the appellant had not appeared
either before the assessing authority or the Appellate Authority.

2. High Court :

2.1 Construction service : Whether value of material
supplied free of charge includible in the value of taxable service ?

Era Infra Engineering Ltd. V. UOI, 2008 (11) STR 3
(Del.) :

The petitioner, engaged in providing commercial or industrial
construction service, received material free of cost from the owner company, was
issued show cause notice proposing to levy Service Tax on such free supply of
material, based on the explanation in Notification No. 1/2006-ST, which provides
for inclusion of value of goods supplied, provided or used by the provider of
construction service. Relying on the provisions of S. 67(3) and interim order in
the case of Larsen & Toubro v. UOI, 2007 (7) STR 123 (Mad.), the High
Court ruled that until conclusion of adjudication proceedings, material value
supplied free of charge would not be added for determining the taxable value and
that explanation in the Notification would not be applied to the detriment of
the petitioner. [CESTAT Delhi in the case of Millennium Constructions Pvt.
Ltd. V. CST, Delhi, 2008 TIOL 838 CESTAT Del. Waived pre-deposit of interest
and penalty levied when Service Tax demanded on addition of cement and steel
value received from recipient of services was already paid by the  appellant.]

2.2 Penalty : Whether reducible below the minimum prescribed limit ?

UOI v. Aakar Advertising, 2008 (11) STR 5 (Raj.)

The Tribunal in the appeals in question :


à
reduced the penalty imposed to 10% of the duty demanded

à
Entertained an appeal on merits when order was passed dismissing the appeal
for non-payment of pre-deposit.


Short questions that arose in the two appeals aggregated
were :


à
Whether the Tribunal could reduce the penalty imposable u/s.76 below the
minimum prescribed limit ?

à
Whether the Tribunal could entertain an appeal on merits when the Commissioner
(appeals) rejected the appeal because of default in making pre-deposit u/s.35F
of the Central Excise Act, 1944 ?


For the question no. 2, it was pleaded that since the
Tribunal already allowed the appeal, the assessee be granted reasonable time to
comply with requirement of pre-deposit even at such stage and set aside the
order of the Commissioner (Appeals) and direct the Commissioner to decide on
merits. The High Court acceded to such request and directed the Commissioner to
decide the appeal on merits on condition of complying with pre-deposit within 4
weeks’ time.

As regards the question no. 1, it was held that if cause of
failure was reasonable, penalty may be set aside. Penalty could be played with
only between minimum and maximum prescribed limits and could not be reduced
below the minimum prescribed limit under the garb of any discretion. Yet it was
not always necessary to impose maximum penalty. The matter was remitted back to
the Commissioner (Appeals) with a direction to decide the penalty afresh
objectively and dispassionately after hearing the parties and in view of the
above observations in the instant order.

3. Tribunal :

3.1 Cargo handling service :

M/s. Jet Airways (India) Ltd. V. CST, Ahmedabad, 2008
TIOL 979 CESTAT Ahm.

The appellant, an airlines that transports passengers and cargo by air, receives booking of cargo to be transported by themselves at the booking office or through lATA agents appointed at various locations all over the country. The Revenue demanded Service Tax considering the appellant as cargo handling agency, although the appellant neither collected cargo from the premises of consignor, nor delivered the same to the consignee. The appellant contende ‘ that the service of transportation of goods by air was ” made taxable w.e.f. 10-9-2004 without disturbing any of the existing entries. Further that, the Board’s Circular F. No. B/11/1/2002, dated 1-8-2002 while detailing cargo handling services cited illustrations of services provided by Airports Authority of India, Inland Container Depot, Container Freight Station, etc. did not refer to any airlines undertaking transportation of goods. Accepting these pleas and relying on the Tribunal decisions inter alia cases of Dr. Lal Nath Lab. (P) Ltd. v. CCE, 2006 (4) STR 527 (Tri. Del.) and Glaxo SmithKline v. CCE, 2005 (188) EL 171 (Tri.-Mum.), it was held that when new entry is introduced without disturbing existing entries, it has to be held that the new entry was not covered by any previous entry.

3.2 CENVAT Credit:

Hindustan Coca Cola Beverages Pvt. Ltd. v. CCE, Meerut, 2008 TIOL 1022 CESTAT Del.

Considering that manpower supply service was not liable for Service Tax prior to 16-6-2005, the credit of Service Tax paid by the contractor of the company was denied. Stay application was allowed on the ground that since the Revenue accepted Service Tax paid by the contractor, applicant had prima facie – strong case.

3.3 Construction Service:

M/s. Greenview Land & Buildcon Ltd. v. CCE Chandigarh, 2008 TIOL 900 CESTAT Del.

The appellant, a developer and a builder, constructed complex himself without engaging a contractor and sold flats. The order of the original authority was based on DGST Circular dated 16-2-2006, which provided that Service Tax was attracted on such construction. The Commissioner (Appeals) rejected the appeal for non-fulfilment of pre-deposit vide – stay order. The plea of the appellant was that CBCE Circular No. 96/7/2007-ST of 23-8-2007 suppressed the DGST Circular and clarified that when builder did not engage contractor for construction, no service provider-service recipient relationship existed to attract provision of Service Tax. This was accepted by the Tribunal and the matter was remanded for de novo consideration in the light of Circular No. 96/ 7/2007 and without insisting on pre-deposit.

3.4  Export of service:

i) Blue Star Ltd. v. CCE, Bangalore, 2008 (11) STR 23 (Tri.-Bang.)

The appellant booked orders of foreign principals and received commission in convertible foreign exchange and accordingly, contented that such business auxiliary services were provided from India and used outside India fulfilled conditions to construe the services as ‘exports’ in terms of Export of Services Rules, 2005. The Department’s contention was that services were provided in India and refund of Service Tax paid on ‘exported’ services was rejected. The Tribunal held that refund be granted as the conditions of Rule 3(2) were satisfied and the appellant’s services were held as exports. The Tribunal allowed the appeal stating that the Commissioner had not considered the clause in the agreement relating to services rendered by the appellant.

ii) M/s. National Eng. Industries Ltd. v. CCE, [aipur, 2008 TIOL 939 CESTAT Del.

The appellant, an agent of General Motors, USA provided services of sourcing them on contract with Indian Railways. The appellant, although ‘exported’ service, paid Service Tax on the commission received from General Motors through Indian Railways. Refund claim was rejected on the ground that the commission from General Motors was received through Indian Railways in Indian rupees in lieu of foreign exchange and therefore, condition of Rule 3(1)(b) of the Export Rules was violated. According to the appellant, the purchase order of the party provided that agency commission of certain amount of US dollars be paid in equivalent non-convertible Indian rupees at prevailing exchange rate on relevant date and based on this, Indian Railways paid to the foreign party net of the said commission amount.

The Tribunal held that the purpose of Rule 3(2) was to extend benefit of exemption of Service Tax to persons earning convertible foreign exchange and since the equivalent amount payable to the appellant was not released to Indian Railways, the appellant complied with the provision of Rule 3(1)(b). The appeal was allowed while stating that machinery of a statute should be interpreted so as to promote the object and purpose of the scheme and the case should be decided in fulfilment with the legislative intention.
 
3.5  Import of Services: Effective date: Whether 18-4-2006 or 16-8-2002 ?

CCE Raipur  v. Jindal Steel Power Limited,  2008 (11) STR 14 (7)

Contention of the Revenue that services provided by foreign-based commission agent were liable for Service Tax prior to 18-4-2006 under the category of business auxiliary service under Rule 2(1)(d)(iv) of the Service Tax Rules was rejected as the issue is considered settled in the case of Foster Wheeler’s [2007 (7) STR 443], wherein it was held that services provided by a service provider not having an office in India is taxable with effect from 18-4-2006 only with the insertion of S. 66A of the Finance Act, 1994.

3.6  Subcontractor’s services:

JAC Air Services Pvt. Ltd. v. CCE, New Delhi, 2008 TIOL 839 CESTAT DEL

The appellant provided cargo handling services in terms of agreement with Airports Authority of India for import of cargo. Relying on the Board’s instructions contained in F. No. 43/5/97-TRU of 2-7-1997 as to sub-consultancy, the plea of the appellant that they were subcontractors to Airports Authority of India was considered and waiver of pre-deposit was granted.

3.7 Refund: Under Rule 5 of the CENVAT Credit Rules, 2004:

Caliber Point Business Solutions Ltd. v. CCE, Belapur, 2008 (11) STR 15 (Tri.-Mum.)

The appellant exported taxable services and availed CENVAT credit on input services. Refund claim filed under Rule 5 of the CENVAT Credit Rules, 2004 was rejected on the premise of non-application of the said rule to service providers prior to 14-3-2006. Relying on the decision in the case of MNS Global Services (P) Ltd. v. CCE, 2008 (10) STR 273 (7), wherein it was held that any claim filed on or after 14-3-2006 even pertaining to the past period satisfying other requirements of the Rule and the Notification cannot be turned down on a ground which was not a condition of the Rule or Notification, it was held that the issue being identical, the ruling was binding on the Bench. The matter was remanded for a limited purpose of verifying other conditions of Notification 5/2006 CE(NT) as earlier rejection was  made only  on the  ground of non-applicability of Rule 5.

Words and deeds

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31 Words and deeds


 



  • Quote of the month

“Anything
that smells like a conglomerate is going to be gone. We have to get rid of
those business.”

Vikram Pandit,
CEO, CITIGROUP, in Financial Times.

  •  Risk-management

“Sometimes
you need to say, ‘No model is better than a faulty model’ — like no medicine
is better than the advice of an unqualified doctor”

Nassim Taleb,
Risk Management Guru and

Author of the
Black Swans in Fortune.

  •  Finance

“Derivatives
are like race cars. Part of the performance comes from the machine, and part
from the experience and capability of the driver”

Omer Helvin,
Sales Director, Super Derivatives,

in Business
Line.

“Finance has
gotten so complicated with so much interdependency. What you’ve done is
interconnected the solvency of institutions to a degree that probably nobody
anticipated”

Warren Buffet,
Chairman & CEO, Berkshire Hathaway, in Fortune.

(Source :
Indian Management, May, 2008.)

 

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To be precise

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29 To be precise


 



  •  ‘If bankruptcy is a permissible form of business outcome in industry, what is
    irrational about this waiver (of loans to farmers) ?’

Manmohan
Singh, Prime Minister, in Business Standard

  •  ‘If you’re on a beach and a tsunami hits, you’ll drown whether you’re a small
    child or an Olympic swimmer. Some things will go bad no matter how good you
    are’

Lloyd
Blankfein, CEO, Goldman Sachs, in Fortune

  •  ‘Originality and creativity are deeply intrinsic to India. The Indian mind is
    distinct. Then, diversity is in India’s DNA’

Prasoon Joshi,
Executive Chairman and Regional Creative Director (Asia Pacific), McCann
Erickson,

in Business
Standard

(Source :
Business Today, 6-4-2008)

  •  “India, which always used last year’s fashion to dress itself up, is becoming
    the knowledge centre of the world”

Alok Sharma,
Chief Executive of the US-based Telsima, the leading WiMAX tech provider in
the world,

in Business
Week online.

  •  “Every Country in the world is facing an upsurge in inflation. China’s
    inflation rate is about 9%, much worse than ours. We should recognise that
    this is a global phenomenon.”

Montek Singh
Ahluwalia, Deputy Chairman,

Planning
Commission in Indian Express.

  • “We are not committed to using Indian resources. We will go where we find the
    right skills at the right price.”

Virender
Aggarwal, Head, Satyam Asia Pacific and Middle East, in Forbes.

(Source :
Business Today, 4-5-2008)


  • “I hold market fundamentalism primarily responsible for the current financial
    crisis. This is a man-made crisis and is a result of this false belief that
    markets correct their own excesses. That is the job of the regulator. And the
    regulators failed to perform their job.”

George Soros,
Chairman, Soros Fund Management

in
moneycontrol.com.

 

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Right to Information

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Part A : CIC’s decisions



Mr. D. E. Robinson of Goa requested for certain financial information from the
Commissioner of Income Tax, Panjim in respect of all the contesting candidates
for election in Goa in the year 2006.


The information sought was :

Whether in all the cases where the contesting candidates have
declared immovable property viz. ‘urban land’ as defined in S. 2(ea),
explanation 1(b) of the Wealth Tax Act, (including agricultural land situated
within the 8 km limit of notified towns), the values declared were verified in
the context of tax liability under the Wealth Tax Act.

Further he had asked in how many cases such lands were
declared in the tax records or not declared and in how many cases action was
taken to bring the said properties to tax under the Wealth Tax Act, etc.

The information was declined citing exemption u/s.8(1)(j) of
the RTI Act. Reply also stated that the matter was under verification and the
results could be disclosed only after the process was completed.

The Appellate Authority interestingly dealt the matter very
differently. He held that information requested by the appellant was general
statistical information and there was no question of referring it to a third
party — as was done by the CPIO — as the requisite information was not supplied
by that third party. He noted that this information was presented by private
persons/party in the affidavits filed before the Election Commission. The CPIO,
according to the AA, was responsible only to furnish information held by his
office and not which was held by other public authorities such as the Election
Commission. He noted that information requested covered information relating to
all candidates who contested election in Goa in the year 2006, which according
to the Appellate Authority was ‘general in nature’. He advised the appellant to
identify and specify the information required by him and to submit a fresh
application to the CPIO where the information was known to be held. The
Appellate Authority dismissed the first appeal of the appellant.

The appellant before CIC contested the conclusion of the
Appellate Authority with very detailed submissions in writing. In one of the
paras he also wrote : “It is evident from the facts that neither the field
officers, nor their superiors took any action to collect the revenue
legitimately due to the State by performing their bounden duty. In such
circumstances, the CPIO should have informed the appellant that no action had
been taken and the field officers and the Commissioner have failed to do their
duty. The reply given by the CPIO is evasive and seeks to cover up serious lapse
on the part of the Department.”

CIC gave interesting decision. He praised the appellant as a
public-spirited person who wishes to use the RTI Act to bring into open,
attempts by certain candidates in the elections to State Legislatures and the
Parliament to escape public scrutiny of the statements they make to the Election
Commission and to the Income-tax authorities as well as to other State agencies
about their personal wealth. The appellant believes — and rightly so — that if
declarations by these candidates were to be carefully analysed by public
authorities dealing in tax collection as well as those engaged in conducting
free and fair elections such as the Election Commission, a number of skeletons
will come tumbling out of cupboards. He bemoaned the fact that public
authorities failed to take coordinated action to prevent, what he believed to
be, manifest violation of the laws of the land by contesting candidates in
election.

However the issue is decided as under :

The response of the Appellate Authority (AA) has been to
examine the matter strictly within the four-corners of the RTI Act. Hence his
conclusion that the CPIO was required only to give that information which he
held and not what was in the control of other public authorities. AA did not go
into the subject of the obligation of the Income-tax Department to collect all
information from wherever it might be available in order to make a correct tax
assessment of an assessee and especially when such assessee happens to be a
candidate contesting in an election, which requires him to make a correct and
complete disclosure of his income and wealth.

The force of the logic employed by the appellant is
compelling. All he urges is that public authorities expand the focus of their
responsibilities and travel beyond the narrow limits of their assignments to
reach out to the information held at multiple points in order to make a correct
assessment which will have vast implications for tax collection as well as for
the sanctity of elections. One would be tempted to grant him the information he
has requested, but the difficulty is that the type of information he has asked
for is not maintained centrally by the public authority to which his RTI
petition is addressed.

In view of the above, it is not possible for the Commission
to go against the decision of the Appellate Authority. The type of information
which the appellant has requested is decidedly not maintained centrally in the
usual course of business. The RTI Act cannot be invoked to force a public
authority to collect information in a particular manner. In fact, it can only
direct disclosure of the information that is available. As such, in spite of
empathy with the spirit of the appellant’s RTI application, this Commission is
unable to order the public authority to provide him the requested information.

However, considering much of what this appellant has said in his RTI submissions – which from all accounts, appears to be an expression of the anguish of a public-spirited and a concerned Indian citizen about overt violations of law regarding various types of disclosures – the public authorities connected with the type of information he has requested, viz. the respective Income-tax Departments and the Election Commission, may take note of these submissions to consider putting in place systems and mechanisms which would create conditions for automatic cross-check and scrutiny of incomes and wealth statements filed, not only before the Income-tax authorities, but also before authorities such as the Election Commission by contesting candidates. The system, if devised, has the potentiality to help the long reach of law to force candidates in elections (who also happen to be tax assessees) to act truthfully and responsibly in matters of disclosure of incomes.

CIC then directed that a copy of his order may be sent to the Chief Election Commission as well as to the Revenue Secretary of the Government of India and the Chairman of the CBDT for such action as they may deem fit, given the objectives spelt out above.

[Mr. D. E. Robinson v. Income-tax Department, ENo. CIC/ AT/ A/2007 /01522 of 27-6-2008]

•  What  is the Third    Party  infonnation?

Shri R. K. Sarkar in his RTI application sought information pertaining to Shri Kalyan Chowdhury, who was the Commissioner of Income-tax, Burdwan. The queries were generally related to whether any enquiry was conducted against Shri Chowdhury by his superiors as, according to the appellant, Shri Chowdhury attended office only thrice a week on account of he residing in Kolkata although his posting was at Burdwan. Besides, the appellant wanted to know the details of reimbursement of his telephone bills and so on.

The information was denied on the ground that this was personal information and exempt u/s.8(1)(j) of the RTI Act.

CIC in his decision held that the reasoning of the respondents is flawed. The queries which the appellant has made were regarding Shri Kalyan Chowdhury’s functioning as a government employee and there is no reason why such information should be withheld from the appellant. The Commission in the past has authorised disclosure of information related to individual government servants, which concerned his function as such public servant.

In view of the above, the matter was remitted back to the Appellate Authority to examine the issue denovo with regard to the each query in the light of the observations made as above and to give his finding within 4 weeks from the date of receipt of the order.

[Shri R. K. Sarkar v. Income-tax Department, ENo. CIC/ AT/ A/2008/00232 of 30-6-2008]

Part B : The RTI Act

In the August issue, I had reported on some of the major recommendations on ‘Enforcement of S. 4 of the RTI Act’ of the conference of all ercs and SICs. In this issue, I report on some interesting recommendations of the said conference on other issues connected with the RTI Act.

1. There are instances  of non-compliance    of orders passed by the Commission. Specific provisions may be included in the RTI Act itself for dealing with contempt proceedings.

2. S. 20 of the RTI Act provides that subject to the contents and conditions of that Section, CIC/ SIC shall impose a penalty.

Issue is: What is the meaning of the word ‘shall’. Does it mean that it is mandatory on CIC/SIC to levy the penalty if the conditions of the Section are covered or is it discretionary?

 To reduce uncertainty in this matter, the conference recommends: S. 20 should be amended so as to give discretion to the Commission to decide the quantum of penalty. The word ‘shall’ appearing in S. 20(1) may be substituted by the word ‘may’.

3. Today, only PIOs are made accountable under the Act, the conference recommends: Accountability of public authorities and First Appellate authorities should be ensured: Amendments may be made in S. 20 and S. 2l.

4. The conference also recommends that the Commission be given power to dismiss frivolous or vexatious complaints and the power to review its own decisions.

5. For furthering evolution of the RTI regime, the conference recommends:

  • The RTI Act should be included in the syllabus at high school and college-level education.
  • Information of public interest can be taken to door-steps of citizens.
  • Commissions  can prioritise  second appeals/ complaints,  which  are  of public  interest, over the ones which are self-centric and self-serving.
  • Uniformity in fees, further fees (costs) and charges for inspection, etc. throughout the country.
  • Uniformity as regards disclosure obligations for items such as Annual Confidential Reports (ACRs), Annual Property returns (APRs), DPC proceedings, Income-tax returns, etc.
  • More publicity on the RTI Act should be done by Doordarshan and All India Radio. Alternatively, the Central Information Com-mission can run its own private TV channel dedicated to RTI.
  • RTI journal be made for circulation among the Commissions.
  • Honorarium/incentives to PIOs/ APIOs for doing additional work.

Part C : Other News

Good  governance:

N. Vittal, the former CVC writes regularly in Mumbai Mirror. In one of his recent articles, what he has written is very relevant for all of us to read:

Non-governmental organisations represent a growing significant element in the dynamics of better governance in our country. In a backward State like Rajasthan, the activism shown by Aruna Roy and her Mazdoor Kisan Shakti Sangathan (MKSS)have made the Right to Information (RTI) Act a significant element in checking and monitoring programmes affecting the public. The national Rural Employment Scheme, perhaps, is best monitored in that State, thanks to the tradition of MKSS activism.

An interesting aspect was highlighted by a visiting American professor, Sussman, an expert on the Freedom of Information Act in the United States, who has been studying the implementation of the Right to Information Act in India. He found that in West Bengal, the bureaucracy was very defensive, making access to information  as difficult as possible. All applications  have to be made on a Rs.10 stamp paper, which most of the time is not available. On – the other hand, in Bihar, he found that the Government and the media were going out of the way to introduce jingles and advertisements to educate the public about the right available to them under the RTI Act. In Tamil Nadu, the Information Commissioner is optimistic that in due time, this Act may turn out to be effective in empowering the people by bringing greater transparency in the system.

Using the Right to Information Act, active NGOs can effectively monitor the performance of bureaucracies and ensure that there is greater transparency and less corruption. This is the formula needed for good governance.

Travel bills of the Ministers of Maharashtra Government:

Ministers of Maharashtra Government ran up travel bills worth over Rs.7 crore in the first three years of their tenure. The public exchequer had to shell out these funds to pay for Ministers’ trips to their constituencies as well as some foreign jaunts.

Chief Minister Vilasrao Deshmukh’s globe-trotting took him to the top of the list as he incurred expenses of Rs.63.96 lakh. The CM’s domestic travel expenses came to Rs.32.45 lakh, while his foreign jaunts cost Rs.31.51 lakh.

Next in line whose travel bills ran up to Rs.47.86 lakh is Anil Deshmukh, Public Works Department. Maharashtra’s Ministers incurred a total travel bill of Rs. 7.44.crore from April 1, 2004 to March 31,2007, according to figures provided by the Pay and Accounts Office of the State Government in reply to the RTI query.

•  Do MPs/ MLAs constitute public authorities? :

UPA Chairperson Sonia Gandhi, who played a pivotal role in seeing the RTI Act through, is herself in the dock. As an MP, she faces the possibility of being penalised Rs.250 per day for not responding to an RTI plea, as a citizen has complained to the Central Information Commission (CIC).

Whether information sought by an applicant from public representative qualifies as information sought under the RTI is the issue. Whether an individual, as an MP or an MLA, constitutes a public authority is also an issue. The Lok Sabha Secretariat (LSS) has taken a stand implying that an MP is not a public authority as defined under the RTI Act.

An RTI. application is also made to MP Rahul Gandhi seeking information on recommendations made by him or his representatives to Ministries and Departments on assistance to NGOs.

The CIC has taken up hearing of five complaints under the RTI, two against Sonia Gandhi and one each against MP Rahul Gandhi, MLA Sahib Singh Chouhan, and Sunita Sharma, municipal councilor. As the issues were related, the complaints were grouped together.

The CIC, in its interim decision, held that an MP has been conferred a specific authority by the Constitution, in return of which he receives remuneration from public funds. But, before taking a decision in this regard, it felt that the interested parties be given an opportunity to be heard.
 
The CIC has asked the Central Public Information Officer of LSS to appear before it on September 15.

CAG wants to conduct ‘performance audit’ of the Central Information Commission:

In a clash between two apex bodies of accountability, the Central Information Commission (CIC) has reacted adversely to the ‘performance audit’ proposed by the Comptroller and Auditor General (CAG) on the implementation of the Right to Information Act.

CIC questions the very jurisdiction of CAG to hold it to account. It asked CAG to ‘specify the terms of the reference’ of the proposed performance audit before it takes a call on whether it should submit at all to the constitutional body’s jurisdiction.

In an attempt to give a legal cover to its jurisdictional objection, the CIC pointed out that it was “an autonomous entity and the orders passed by it are final and binding, subject to scrutiny only by way of a writ under the Constitution of India.”

Already, very sensitive issue, whether the RTI Act covers the Courts beyond their administrative matters is under controversy. Now this becomes another sensitive issue.

•  Power  bills:

In the July issue, report was made on power bills of the President of India. Now the RTI application has brought to light ‘light’ bills of the Maharashtra Ministers. The following table shows two interesting figures where the bills in 2007-08 cross Rs.I0 lakhs.

The elected representatives defended themselves stating that the power bills are’ quite normal’ as the residential area is huge and they also have servant quarters which have connection from the same meter. “We see to it that the power consumption is minimised in all ways. Strict instructions have been given to all those who are employed here to use the power judiciously”, Bhujabal said.

•  Driving licence:

The RTI query reveals that the three RTOs in Mumbai issued 11.12 lakh duplicate licences in the last five years, while they issued 12.12 lakh new licences during the same period.

This effectively means that Mumbaikars lose 609 licences every day, which looks more like a Ripley’s believe-it-or-not factoid.

•  PMO  does  not  respect the  spirit of RTI :

On taking the oath of office, every Minister is handed a copy of the code of conduct. It says, among other things, that Ministers should disclose to the PMO details of their assets, liabilities and business interests along with those of their family members.

On 6-11-2007, ‘India Today’ invoked the RTI, seeking information from the Prime Minister’s Office (PMO) whether Union Ministers had filed details of their assets and liabilities.

No information is provided on this application except replies that “the matter is under consideration of the competent authority and the information/reply will be sent in due course.”

Three reminders have been sent, but there is no action. Complaint has been made to CIC on 17-3-2008. Even that is yet not taken up for action.

•  RTI fee may be scrapped:

A Parliamentary Committee has decided to recommend scrapping of fees at the time of filing applications seeking information from Government Departments under the Right to Information Act. The Parliamentary Committee, headed by Dr. E. M. Sudarasna Natchiappan, has said scrapping of fees at the initial stage would help in effective implementation of the two-year old law.

“The technicality of admitting an application only on receiving a fee of Rs.10 is undermining such a revolutionary law. We feel that there is an urgent need to do away ‘With this step which reflected a bureaucratic mindset,” Natchiappan told HT.
 
Study efficacy of RTI :
The Department of Personnel and Training has decided to get international accounting firm Pricewaterhouse Coopers to study the efficacy of the Right to Information Act as it marks its third year on October 12. The RTI Act has been showcased by the UPA Government as one of its key achievements.

Suspicious that this study could end up helping babus instead of citizens, leading RTI activists, including Aruna Roy and her Mazdoor Kisan Shakti Sangathan (MKSS) and Shekhar Singh and his National Campaign for People’s Right to Information (NCPRI) have launched their own alternative study.

They have formed RAAG (RTI Accountability and Assessment Group) which will examine what they call/the RTI regime.’ Significantly, Google Foundation has stepped in to make this study possible by offering $ 250,000 as an initial grant.

•  PAN card:

In one appeal before ClC, the appellant wanted to know from the Income-tax Department as to what has happened to his application for cancellation of his PAN card. In reply, the Department has informed the appellant that the Income-tax Department was not empowered to cancel any PAN card once it was issued.

Readers may consider whether information furnished is correct. Ss.(7) of S. 139(A) provides:

7) No person who has already been allotted a permanent account number under the new series shall apply, obtain or possess another permanent account number.

All those who were issued two PAN cards were compelled to surrender one. Obviously the same must have been cancelled by the Income-tax Department. Further, what happens after the PAN holder dies, the firm which is allotted PAN gets dissolved, etc. Are PAN numbers not to be cancelled?

Right To Information

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Part A : Decision of the High Court of Delhi

This feature, divided into three parts, normally starts with
CIC’s decisions. In past, more than once a departure was made, instead of CIC’s
decisions, it covered Courts’ decisions. Since long, I have been making efforts
to procure RTI decisions of the Courts, High Courts and Supreme Court, when
CIC’s/SIC’s decision is challenged under the writ. Search has remained elusive.
However, one CA member requested me to give him citation of the Delhi High Court
Order reported under ‘Other News’ in BCAJ of April, 2008 under “Mere existence
of an investigation, no ground for refusal of information”. I had no citation
available. It gave me the motivation to really search hard — a challenge. With a
friend of mine, we went on serious search on Net and finally traced out the
order through Google search. It deals with the tax evasion petition submitted to
the investigation wing of the Income-tax Department, hence interesting to the
readers. The said order is briefly summarised hereunder :


Before I do so, let me record that CIC’s decision against
which the writ is filed was reported in this feature in September, 2006.


Mr. Bhagat Singh, the petitioner in this case, was married in
2000 to Smt. Saroj Nirmal. In November, 2000, she filed a criminal complaint
alleging that she had spent/paid as dowry, Rs.10 lakhs. Alleging that these
claims were false, the petitioner, with a view to defend the criminal
prosecution launched against him, approached the Income-tax Department with a
tax evasion petition (TEP) dated 24-9-2003. Thereafter, in 2004 the Income-tax
Department summoned the petitioner’s wife to present her case before them.
Meanwhile, the petitioner made repeated requests to the DIT (Investigation) to
know the status of the hearing and TEP proceedings. On failing to get a
response, he moved an application under the RTI Act in November 2005. He
requested for the following information :

(i) Fate of the petitioner’s complaint (tax evasion
petition) dated 24-9-2003.

(ii) What is the other source of income of the petitioner’s
wife Smt. Saroj Nirmal than from teaching as a primary teacher in a private
school.

(iii) What action the Department had taken against Smt.
Saroj Nirmal after issuing a notice u/s. 131 of the Income-tax Act, 1961,
pursuant to the said TEP.


The application was rejected by PIO of the Income-tax
Department u/s.8(1)(j) of the RTI Act, holding that information sought was
personal in nature and did not further public interest. The Appellate Authority
also dismissed the appeal citing provisions of S. 8(1)(j) and also 8(1)(h) under
which exemption is granted, if the information would impede the process of
investigation or apprehension or prosecution of offenders.

In the second appeal, CIC vide its order dated 8th May 2006,
set aside the rejection of information and held that “as the investigation on
TEP has been conducted by DIT (Inv), the relevant report is the outcome of
public action which needs to be disclosed. The same cannot be exempted
u/s.8(1)(j) as interpreted by the Appellate authority. Accordingly, DIT (Inv)
was directed to disclose the report as per the provision u/s.10(1) and (2),
after the entire process of investigation and tax recovery, if any, is complete
in every respect.

After the above Order also, the Income-tax Department did not
furnish the information, probably
holding that the entire process of investigation is not complete yet. Enquiry by
CIC’s office at the instance of the petitioner, to the Income-tax Department
(Investigation) for its comments with respect to non-compliance of the Order and
to show cause as to why a penalty should not be imposed u/s.20 of the RTI Act,
also brought no response.

The petitioner in this writ petition requested the Court to
partially quash CIC’s Order insofar as it directs disclosure after the entire
process of investigation and tax recovery is completed. “It was urged that CIC,
after appreciating that there was no merit in the plea regarding applicability
of S. 8(1)(h), and being satisfied, should not have imposed the condition
regarding completion of proceedings, which could take years. Such power to
restrict access to information did not exist under the Act.

Paragraphs 11 to 14 of the Order reflect the tenor of the RTI
Act and hence instead of paraphrasing them are reproduced in original :

11. The Universal Declaration of Human Rights, adopted by the United Nations in 1948, assures, by Article 19, everyone the right ‘to seek, receive and impart information and ideas through any media, regardless of frontiers’. In (the case of) Secretary, Ministry of Information and Broadcasting, Govt. of India and Ors v. Cricket Association of Bengal and Ors., [1995 (2) SCC 161], the Supreme Court remarked about this right in the following terms :

The right to freedom of speech and expression includes the right to receive and impart information. For ensuring the free speech right of the citizens of this country, it is necessary that the citizens have the benefit of plurality of views and a range of opinions on all public issues. A successful democracy posits an ‘aware’ citizenry. Diversity of opinions, views, ideas and ideologies is essential to enable the citizens to arrive at informed judgment on all issues touching them.

This right to information was explicitly held to be a fundamental right under Article 19(1)(a) of the Constitution of India for the first time by Justice K. K. Mathew in State of UP v. Raj Narain, (1975) 4 SCC 428. This view was followed by the Supreme Court in a number of decisions and after public demand, the Right to Information Act, 2005 was enacted and brought into force.

12. The Act is an effectuation of the right to freedom of speech and expression. In an increasingly knowledge-based society, information and access to information holds the key to resources, benefits and distribution of power. Information, more than any other element, is of critical importance in a participatory democracy. By one fell stroke, under the Act, the maze of procedures and official barriers that had previously impeded information has been swept aside. The citizen and information seekers have, subject to a few exceptions, an overriding right to be given information on matters in the possession of the state and public agencies that are covered by the Act. As is reflected in its preambular paragraphs, the enactment seeks to promote transparency, arrest corruption and to hold the Government and its instrumentalities accountable to the governed. This spirit of the Act must be borne in mind while construing the provisions conained therein.

13. Access to information u/s.3 of the Act is the rule and exemptions u/ s.8, the exception. S. 8 being a restriction on this fundamental right, must therefore be strictly construed. It should not be interpreted in a manner as to shadow the very right itself. U / s.8, exemption from releasing information is granted if it would impede the process of investigation or the prosecution of the offenders. It is apparent that the mere existence of an investigation process cannot be a ground for refusal of the information; the authority withholding information must show satisfactory reasons as to why the release of such information would hamper the investigation process. Such reasons should be germane, and the opinion of the process being hampered should be reasonable and based on some material. Sans this consideration, S. 8(1)(h) and other such provisions would become the haven for dodging demands for information.

14. A rights-based enactment, akin to a welfare measure, like the Act, should receive a liberal interpretation. The contextual background and history of the Act is such that the exemptions, outlined in S. 8, relieving the authorities from the obligation to provide information, constitute restrictions on the exercise of the rights provided by it. Therefore, such exemption provisions have to be construed in their terms; there is some authority supporting this view [See Nathi Devi v. Radha Devi Gupta, 2005 (2) SCC 201; B. R. Kapoor v. State of Tamil Nadu, 2001 (7) SCC 231 and V. Tulasamma v. Sesha Reddy, 1977 (3) SCC 99]. Adopting a different approach would result in narrowing the rights and approving a judicially mandated class of  restriction on the rights  under  the Act, which is unwarranted.

Thus holding,  the Court stated  that Orders of PIO, and CIC do not reflect any reasons why the investigation process would be hampered. It further stated “S. 8(1)(j) relates only to investigation and prosecution and not to recovery. Recovery in tax matters, in the usual circumstances, is a time-consuming affair, and to withhold information till that eventuality, after the entire proceedings, despite the ruling that investigations are not hampered by information disclosure, is illogical.

As to the issue of whether the investigation has been complete or not, the Court held that the authorities have not applied their mind about the nature of information sought. As is submitted by the Petitioner, he merely seeks access to the preliminary reports of investigation pursuant to which notices u/s.131, u/s.143(2), u/s.148 of the Income-tax Act have been issued and not as to the outcome of the investigation and reassessment carried out by the Assessing Officer. As held in the preceding part of the judgment, without a disclosure as to how the investigation process would be hampered by sharing the materials collected till the notices were issued to the assessee, the respondents could not have rejected the request for granting information. The CIC, even after overruling the objection, should not have imposed the condition that information could be disclosed only after recovery was made.

The Court then ruled that “the order of the CIC dated 8th May 2006 insofar as it withholds information until tax recovery orders are made, is set aside”. PIO and AA were directed to release the information sought, on the basis of the materials available and collected with them, within two weeks.

The Court also made adverse comments on the Income-tax Department’s PIO and AA by stating that the materials on record clearly show the lacka-daisical approach by them in releasing the information sought.

Part B : The RTI Act
 

Chapter 5 of the Annual Report 2005-06 as published by the Central Information Commission is titled: Significant initiatives by Ministries/Departments/Public Authorities (hereinafter referred to as entities) and suggestions for reforms.

Some significant initiatives taken by the entities are summarised hereunder.

S. 25(3)(f) of the RTI Act mandates the public authorities to report:
“Any facts which indicate an effort by the public authorities to administer and implement the spirit and intention of the Act.”

Report presents efforts made by some entities to administer and implement the Act beyond mandatory requirements.

10 entities have set up Information Facilitation Centre/RTI Cell to accept information requests and payment of fees and/ or a separate RTI Section/Cell to implement the Act.

Some entities have drafted an internal procedure to implement the RTI Act, some have set up cash register for application and other information fees, so that the money received can be monitored and accounted for. Some reported that they have taken the initiative of designating alternate Public Information Officers and Assistant PIOs. Three of them viz. the Noida Special Economic Zone (Ministry of Commerce & Industry), the Office of the Registrar of Companies Tamil Nadu-Coimbatore (Ministry of Company Affairs) and the State Bank of India (Ministry of Finance) have reported that they have disseminated awareness about the Act amongst the public.

Several public authorities have also reported that they have undertaken training of their Public Information Officers and issued guidelines about implementing the Act.

The National Information Centre (NIC) is in the process of setting up a RTI Request Management Information System (RRMIS) to monitor requests received u/ s.6 of the Act. There are three modules. The concerned public authority, the Central Information Commission and the Assistant Public Information Officer at the Department of Posts can use these modules:

  • Request and First Appeal Module for Public Authority

  • Second Appeal Module for Central Information Commission (CIC)

  • Request and Appeal Module for Central Assistant Public Information Officer (CAPIO), Department of Posts.

There is also an updation system  where  the stage at which the application is, can be updated as and when required.
 
Suggestions received from public authorities for reforms shall be covered in the next issue.
 

Part C: Other News
 
RTI gives visually impaired great relief:
The RTI Act came to the rescue of 200 visually impaired and physically-challenged Thane residents. Their battle of five years came to an end when in response to RTI application, State Chief Information Commissioner (SCIC) directed Thane Municipal Corporation (TMC) to provide details of the allotment of telephone booths and also requested TMC to expedite the matter. It is understood that the applicant has received the details and also the allotments have been made. serc Mr. Joshi was very pleased and remarked:

“The Order went beyond the RTI Act’s ambit as the panel considered the anguish of the hundreds of physically-challenged people who were willing to put in hard labour, but denied employment opportunities”.

• CIC’s office has no information:
RTI application revealed the shocking state of affairs in the very office which is the last refuge under RTI regime. One RTI activist, Shruti Singh Chauhan sought details of cases heard by the erc, but where verdicts were still not announced. She was told that the Commission did not maintain records of cases with it. Information has shocked one and all including erc Chief, Mr. Habibullah. He has now cracked the whip and ordered an in-house upgrade of records. CIC advises public authorities to ensure transparency in maintaining records. The Act also so provides. It was a shame that CIC’s own office defaulted in it. Who will fine it! Now it is ordered that within one month it will get up-to-date in its record keeping.

The Times of India wrote an editorial in this context to say that it is unconscionable that the very body created to bring about greater transparency in the working of public bodies is itself unable to furnish information about its own operation. Further two paras read :

  • The Right to Information Act is perhaps the most powerful legislation that empowers citizens to check on the functioning of public establishments. It has the ability to curb corruption, which is one of the biggest evils facing the country. Lack of transparency and accountability on the part of Government officials increases the propensity for corruption.

  • Although the Right to Information Act is landmark legislation, it is just a stepping stone towards eradicating corruption and bringing about lucidity in the working of the Government. Right to information has to mature and translate into duty to inform. Just like businesses are accountable to investors, the Government too should be made accountable to citizens.

• Maharashtra MLAs – unjust allowance:
RTI has many dimensions. Recently unexpected dimension came to light: Action taken out of fear of exposure under RTI. It is understood that the Maharashtra State Government has approved a proposal to allow each legislator to claim Rs.25,000 per month as mileage allowance without any obligation to produce bills to avoid giving explanations to citizens under the Right to Information Act or in response to a Public Interest Litigation (PIL).

As per existing rules, a legislator can demand a vehicle from the district collector to tour his/her constituency. If the administration fails to. provide one, the legislator can make his own arrangements and produce the bills before legislature secretariat and claim a maximum of Rs.25,000 in a month (based on a rate of Rs.I0/km).

Being aware that RTI can expose the legislators, it is now suggested to remove the need to produce bills, the mileage allowance would be credited to the account of each legislator every month. The State Cabinet accepted the proposal.

• Our MPs don’t pay MTNL telephone bills!
The telephone line of an average Mahanagar Telephone Nigam Limited subscriber would be disconnected if he did not pay bills by the stipulated due date. But the telephone lines of several MPs and various State and Central Government establishments ate still operational even though bills amounting to crores are still pending.

RTI query revealed that outstanding from such leaders (?) who have to set example of discipline have outstanding dues of Rs.375 crores over the last 3 years.

• S. 8(1)(a), (d) and (e) of the RTI Act:
Can the details of a Memorandum of Understanding (MOU) signed between the State Government and a multinational chemical firm undermine the sovereignty and integrity of the nation? The Maharashtra State Industries Department thinks so.

RTI application had sought information on MOU signed between the Industries Secretary and Dow Chemicals International Pvt. Ltd. for starting a facility to manufacture some chemicals at Chakan near Pune. Dow is responsible for producing Agent Orange and napalm – used in the Vietnam War. It also produces ozone-depleting CFCs and the widely-used insecticide, Dursban.

In reply to RTI application, the PIO of the Indutries Department rejected the application by stating that it is exempt information under clauses (a), (d) and (e) of S. 8(1) of the RTI Act.

It is felt that denial is unjustified as it is difficult to appreciate how a commercial deal between private chemical firm and the State can harm the interests of the nation [clause (a)], or can be considered as disclosing trade secrets / intellectual property [clause (d)] or can be considered as information pertaining to private party held in a fiduciary relationship [clause (e)].

• Asset declaration by judges:
In response to RTI application, the Supreme Court’s CPIO has stated that the information relating to declaration of assets by Judges is “not held by or under the control of” its registry and therefore could not be furnished by him.

Reply has exposed the SC’s resistance to transparency. Though the CJI can easily say whether Judges have been filing declarations of their assets, the CPIO has claimed that the information is not in possession of the registry. The matter is now pending before the CIC.

• Mumbai City Police:
The details of the city police budget obtained under the RTIAct reveal that Rs.559 crore (i.e., more than 75%) is being spent only to keep 40000 personnel in service out of the budget of Rs.716 crore.

Experts feel that at a time when the city faces the threat of organised crime and terrorism, the police should not spend all its money on salaries, though conceding that maintaining a police force is expensive as unlike other Government departments, it does not earn revenue. Yet, it still does not justify the present scenario.

Right To Information

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r2iPart A : CIC’s decisions

Guidelines on scrutiny
of income-tax returns by CBDT :

A very interesting and important issue regarding scrutiny
policy for non-corporate assessees and disclosure of instructions, directions
and clarifications issued by the CBDT on the scrutiny policy came up before CIC.
The same is decided by a Bench of 3 Commissioners.

Shri Kamal Anand of People for Transparency of Sangrur was
the appellant. He had sought for a number of information, some were furnished by
PIO and AA, and some were denied by holding that the same are exempt u/s.8(1)(a)
of the RTI Act. Hence, the matter came up before CIC. The issue for
determination before CIC was :

Whether supply of instructions, directions, clarifications
relating to scrutiny policy for non-corporate sector could be held to be
prejudicial to economic interest of the State and hence could be denied
u/s.8(1)(a) of the Right to Information Act, particularly when broad
parameters of the scrutiny guidelines have already been provided to the
appellant ?


It may be noted that initially this appeal was heard by a
Single Member of the Commission and he had directed the Department of Revenue to
have the matter considered by the highest level in the public authority and come
up to the Commission with the Department’s viewpoints.

The Department made detailed submissions
after having been duly considered by the Union Finance Minister and as approved
by him. In the submissions, the Department stated that it is of the view that
disclosure of scrutiny guidelines adversely affects the economic interest of the
State and facilitates committing the offence of tax evasion. Therefore, these
should not be disclosed to the public.

Three Members’ Bench after considering the submissions
received, held as under :

It is certainly within the domain of the concerned public
authority to decide and determine as to whether disclosure would adversely
affect the economic interest of the State or not. The Commission can only look
into as to whether the determination by the Department about the probable effect
of a particular policy disclosure is based on objective criteria or not, or as
to whether the Department has arrived at a particular conclusion in a reasoned,
or in a mechanical or arbitrary manner. Here is a case where a public authority
at the highest level has analysed the whole issue at our behest and has given
its considered opinion to this Commission about the possible effect of the
disclosure on economic interest of the State. We must conclude that the
implications of disclosure have been put to the closest scrutiny.

The Commission cannot, therefore, enter into the adequacy or
otherwise of the criteria taken into account by the concerned public authority.
It cannot surpass an objective consideration and place its own subjective
consideration thereon. When a denial is covered by an exemption clause u/s.8 of
the Right to Information Act, so long as such application of exemption is based
on objective criteria and is not arrived at in a mechanical or arbitrary manner,
this Commission does not intend to interfere in such issues.

Based on the above, the Commission held that denial of
information is justified u/s.8(1)(a) of the RTI Act.

[No. CIC/AT/A/2007/00617 : Shri Kamal Anand v. Central
Board of Direct Taxes, 11-2-2008]


For the information of the readers, S. 8(1)(a) reads as
under :

8. Exemption from disclosure of information —


(1) Notwithstanding anything contained in this Act, there
shall be no obligation to give any citizen, —

(a) information, disclosure of which would
prejudicially affect the sovereignty and integrity of India, the security,
strategic, scientific or economic interests of the State, relation with
foreign State or lead to incitement of an offence.





RTI Act v.
S. 138 of the Income-tax Act :


Three issues for determination before the Bench of 3 Members
of the Central Information Commission were :

1. Whether certain information can be provided to the
appellant under the RTI Act when S. 138 of the Income-tax Act prohibits
disclosure of such information ?

2. Whether in such a situation the overriding provision as
contained in S. 22 of the RTI Act comes into play ?

3. Whether S. 8(1)(j) of the RTI Act is applicable to the
case of the appellant ?

The application was made by Shri G. A. Rawal of Ahmedabad,
who is an informant to get information on ‘Tax payable as per the decision of
Settlement Commission in the case of Winprolene Plastics and tax paid by the
said company.’ Information sought was denied by holding that the same is
prohibited u/s.8(1)(j) of the RTI Act.

Decision and reasons :

l
Both the Right to Information Act, 2005 and S. 138 of the Income-tax Act, 1961
deal with disclosure of information. While the Right to Information Act is a
general law concerning the disclosure of information by public authorities, S.
138 of the Income-tax Act is a special legislation dealing with disclosure of
information concerning assessees. This Commission in Rakesh Kumar Gupta v.
ITAT, of 18th September, 2007 decided by a Full Bench, has dealt with the
issue of applicability of special law to the exclusion of the general law. (Note
: This decision was extensively covered in this feature in the BCAJ of November
2007.)


•  Crucial two terms u/s.8(1)(j) are ‘personal information’ and ‘invasion of the
privacy’. In the decision, the Commission has analysed the ambit and scope of
both the terms.


•    The interpretation of S. 8(1)(j) has been the subject of some dispute. The Section deals with excluding from the purview of the RTI Act (a) in-formation of a personal nature which has no relationship to a public activity or interest, and (b) whose disclosure would lead to unwarranted invasion of privacy.

•    Insofar as (b) is concerned, there is very little doubt that there could be a set of information which may  be said  to belong to the  exclusive private domain and hence not be liable to be disclosed. This variety of information can also be included as ‘sensitive and personal’ information as in the U.K. Data Protection Act, 1998. Broadly speaking, these may include religious and ideological ideas, personal preferences, tastes, political beliefs, physical and mental health, family details and so on.

•    But when the matter is about personal information unrelated to public activity, laying down absolute normative standards as touchstones will be difficult. This is also so because the personal domain of an individual or a group of individuals is never absolute and can be widely divergent given the circumstances. It is not possible to define ‘personal information’ as a category, which could be positively delineated; nevertheless it should be possible to define this category of information negatively by describing all information relating to or originating in a person as ‘personal’ when such information has no public interface. That is to say, in case the information relates to a person which in ordinary circumstances would never be disclosed to anyone else; such information may acquire a pub-lie face due to circumstances specific to that information and thereby cease to be personal. It is safer that what is personal information should be determined by testing such information against the touchstones of public purpose. All information which is unrelated to a public activity or interest and if that information be related to or originated in person, such information should qualify to be personal information u/s.8(1)(j).

•    Insofar as the assessment details are concerned, they are definitely personal information concerning some individual or legal entity. The assessment details if disclosed may result in an undue invasion to the privacy of an individual. Disclosure of such details, therefore, cannot be permitted unless there is an overriding public interest justifying disclosure. But in the instant case, what has been asked for by the appellant in his RTI application is as follows:

“Tax payable as per the decision of the Settlement Commission in the case of Winprolene Plastics and tax paid by said company.”

•    Based on above, the Commission directed the CPIO to provide the information within a period of two weeks from the date of the order.

[No. CIC/ AT/ A/2007 /00490, dated  5-3-2008 in the matter of Shri G. R. Rawal v. Director General of Income Tax (investigation), Ahmedabad]

Note: S. 24 of the RTI Act provides that the Act shall not apply to certain organisations. The Second Schedule lists such organisations. Ss.(2) of S. 24 empowers the Central Government to amend the Schedule by including therein any further organisation. It is understood that on 28-3-2008, (may be to undo such decision in future) the Notification is issued, under which the Directorate General of Income-tax (Investigation) is included in the Second Schedule.


Part B : The RTI Act

Chapter 6 of the Annual Report 2005-06 as published by the Central Information Commission (CIq deals with suggestions to reform by the CIC.

•    All stakeholders – citizens, civil society organisations, public authorities and the Information Commissions – have felt that the implementation of the RTI Act has been a mixed experience.

•    CIC is of the view that though S. 4, requiring the Government to publish all information except that which  the law permits  to be kept  a secret, is the key to the RTI Act, unfortunately,   public  authorities  neglected  it the most  in 2005-06. Public authorities  find  themselves  too overwhelmed   by information  seekers to focus their energies  on furnishing  or even  expanding  the scope  of suo moto disclosures  of information.  For this exercise to be fruitful,  there has to be an attitudinal change.

Based on the above, CIC suggests that Citizen’s Charters adopted by most public authorities should be made an integral part of S. 4(1)(b) disclosures, so that the public is aware of the commitments of a public authority towards it.

•    There has been a lot of demand to expand the modes of depositing the fee of making an RTI application. In an effort to do so, the Government recently decided to accept Indian Postal Orders as a mode of payment. The Commission would recom-mend that even a Rs.lO postal stamp affixed to the application should be considered as valid payment of fee for registration of an RTI application. There is also a case for ensuring that rates of fees across the country are made uniform.

•    One complaint has been that the beneficiaries of the Act have largely been public officials and the educated urban people, and the benefits have not percolated to the poor and the people from the rural areas. This indicates that there is a need on the part of Government to fulfil its obligations u/ s.26 of the Act. Public authorities must set aside a specific budget for dissemination of knowledge amongst citizens, so that the provisions of the Act can be utilised at all levels of society, through heightened public awareness.

•    The Commission feels handicapped about not being able to hold Central PIOs and public authorities accountable for non-implementation of its orders/ decisions. To give teeth to its powers, it is essential that the Commission be given powers of contempt of Court.

•    Provision will need to be made to apply the CIC’s decisions to States with all attendant penalty provisions; to allow State Commissions to refer a matter to the CIC; and to empower the CIC to withdraw a case, which may be before it or a State Commission for appeal.

•    The Commission should be empowered, financially and administratively, to allocate funds and undertake suitable research and development activities for the promotion of relevant programmes that are critical for strengthening the information regime, as envisaged in the Act. The Government may set up a Centre for Accountability and Transparency for undertaking activities relating to research in best practices in creating an open access regime and other such related activities that would effectively strengthen the Commission in pursuing its mandate.


Part C : Other News

•  BCAS appreciated in Loksatta:

CA Prof. Suresh Mehta has sent a cutting of an article in the Marathi daily ‘Loksatta’ in which appreciation is made of the contribution of BCAS in spreading of RTI movement.

•    No provisions for flats for differently abled citizens:

Vijaya Kalan (37) is partially paralysed and she is a heart patient. But what makes her situation worse is the fact that she has to drag herself up and down seven floors from her apartment, whenever there is load shedding in her complex at Kharghar.

From the reply received in response to RTI application, it is gathered that CIDCO, that developed the housing complex, has blatantly over-looked the rights of handicapped people. They have not reserved any apartments for them in the housing societies developed since 1995.

•  Is the RTI effective in curtailing corruption?

Ms. Aruna Roy, the mother of the RTI movement in India, is of the view that response of the people has been better than expected. The existing statistics on RTI are based on appeals made to Commissioners and do not reflect the real picture. Actually, a much larger number of people ask for information and get it. Media coverage has focussed on the use of RTI by urban activists or the controversies that have arisen by denial of information in some cases. On the other hand, in rural areas, in a more routine manner, a lot of information is being sought and obtained regularly to serve very useful purposes such as improving the public distribution system.

•  Suppression of information:

Justice Chandrachud, talking about his experience as a Judge, said that each time he heard a matter he asked himself “Do I make a difference ?” because he did not see the orders being implemented. “We must contemplate the need to incorporate citizens as stakeholders and increase the participation of citizens in governance as well as allow experimentation”. One of the greatest problems faced by the judiciary was access to information. There is a deliberate act of suppression of information and the Right to Information.Act is performing a valuable function.

•  PIO seeking bribe!

In the first case of its kind after the Right to Information Act was enacted nearly three years ago, the Anti-Corruption Bureau (ACB) has trapped an Ulhasnagar Information Officer and his assistant while they were accepting a bribe.

Ulhasnagar resident Gulshan Anand Sachdeo had submitted an RTI application for information on certain plots of land. While the Public Information Officer (PIO) gave him the documents, they were not attested. The PIO and his assistant told Sachdeo that he would have to first pay Rs. 12,000 for things to move.

Sachdeo went straight to the Thane ACB Deputy Commissioner Kishore Jadhav. He named the officer, Raosaheb Govind Bhalerao, and senior clerk Ramchandra Gavit. The ACB told Sachdeo to go back and pretend to hand over the money, which he did. Bhalerao and Gavit were caught in the act.

This is the first time an Information Officer has been caught for asking for a bribe to provide certified documents.

•  Power  bills of the  President of India:

The whole country suffers from power shortage. However, Rashtrapati Bhavan is always kept brightly lit ! Rashtrapati Bhavan has incurred power bills of Rs.16.71 crore over the past five years, almost doubling from Rs.2.4 crore in 2003 to Rs.4.39 crore in 2007.

The information on electricity usage in the President of India’s official residence was revealed in a recent RTI reply. In the five-year period from January 2003 to December 2007, Rashtrapati Bhavan consumed 2.69 crore units of electricity. Its usage rose from 37 lakh units of power in 2003 to 68 lakh in 2007. Last year’s bill of Rs.4.39 crore was higher than the Rs.4.02 crore spent in 2006.

•    UNDP report, just released, has found that corruption continues to be a crippling problem in countries in the Asia-Pacific region:

The report has published three sets of ranking produced by Transparency International, the World Bank and the International Country Risk Guide. While India has improved slightly on Transparency International’s corruption index for 2007, it has done worse or remained static in the other two rankings. This is a worrying trend which shows that India’s rapid growth over the past few years hasn’t contributed to a decline  in corruption.

Under’ A Thought for Today’ (june 16) “It is difficult, though not impossible, to stop government officials from hiding their corrupt take.” Editorial in The Times of India writes:

“However, the picture is not entirely gloomy. There are encouraging signs of success in tack-ling corruption. Right to Information (RTI) laws have had the effect of making governments more accountable. In 1990, there were only 13 countries in the Asia-Pacific with RTI laws. By 2007, the number had risen to 70. In India, RTI, which is considered to be one of the most progressive such legislations in the developing world, has forced government officials to become more transparent.”

•  Fight for your Rights:

A new programme on Right to Information is being telecast every Saturday at 9 p.m. on NDTV Metro Nation (not NDTV India or Profit or Imagine or other associated channels). It is a one-hour long programme called ‘Fight for your Rights’. Arvind Kejriwal is the anchor. The first episode was telecast on Saturday, May 17th. Repeat telecasts can be viewed on Sundays (it is available on the regular cable channel and on Tata Sky DTH, you can access it on NDTV  24 x 7 channel).

Right To Information

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r2i

Part A : Decisions of CIC and SIC



  • Concept of privacy
    vis-à-vis     the public servant :


As reported in BCAJ of October 2008, 4 more Information
Commissioners have been appointed at the Central Information Commission, one of
them being the RTI Activist from Mumbai, Shailesh Gandhi. In the very first
month of performing as CIC, he has discharged his duties well. He has disposed
of 142 appeals, has issued show-cause notice for imposing penalty in 32 matters
and has levied penalty of Rs. 7,500 in one case. Hereunder, is a brief report on
one of the 142 appeals decided by Shailesh Gandhi :

Mrs. Shruti Singh Chauhan had sought information from
Additional Secretary (Home), Government of NCT of Delhi about prosecution of
certain officers during the period 1-1-2000 to 30-4-2007.

PIO replied that information relates to personal information,
the disclosure of which has no relationship to any public activity or interest
and it would cause unwarranted invasion of privacy of the individuals. First AA
dismissed the appeal “on grounds of non-merit of the case, as the information
sought for is voluminous, sensitive and does not serve any public interest.”


CIC held : Firstly, if charges have been investigated and
found to have been substantiated, leading to asking for a sanction for
prosecution, this information cannot be considered as relating to the privacy of
an individual. Acts of public servants, where there is a reasonable ground to
believe wrongdoing, cannot be a private matter of a public servant. It has been
well accepted that the charges against public servants must also be disclosed to
the people. It has also been held that Members of Parliament and other
representative bodies must themselves declare charges against themselves on
oath, even when they stand for an election. Given this background, a claim that
disclosing names of those against whom sanction for prosecution has been sought
is an invasion of privacy and has no public interest, is completely erroneous.
In any case, as soon as prosecution is launched, the names and identities of
those being prosecuted would be in the public domain.

Based on the above view, CIC allowed the appeal and ruled :
“The Commission disapproves of the practice of PIOs using the exemptions of S.
8(1) without providing reasoning. The Commission is likely to view such practice
as a denial of information without reasonable cause and take consequent actions
as per the law. This time however, we feel the ends of justice will be met by
directing the Public Authority to be more diligent when using the exemption
clause. The PIO will give the information to the appellant by 10th November
under intimation to the Commission.

[In the matter of Mrs. Shruti Singh Chauhan : Decision No.
CIC/WB/A/2007/01096/SG/0080, decided on 16-10-2008]


  •  Civil work relating to open pit in Mulund (W), Mumbai :


An interesting decision is given by Chief SIC, Maharashtra,
Dr. S. V. Joshi on 10-11-2008.

Shri S. K. Nangia filed a complaint application u/s.18 of the
RTI Act on 9-9-2008. His original application sought information from MMRDA
about details of civil work relating to an open pit in Mulund (W) which caused
an accident of a car falling in a pit on account of the same being left open and
unfenced. In reply, the PIO advised the applicant to seek this information from
police station. In response to the first appeal on PIO’s reply, the AA directed
the PIO to provide the information sought. However, it was still not furnished.
Shri Nangia then filed a complaint with the Commission. SCIC held :

Firstly, it was totally wrong on the part of the PIO to
direct applicant to seek information from the concerned police station. In this
case, information was really with MMRDA, but even if it was with police station,
it was the responsibility of the PIO to send that application to the police
station asking them to provide information directly to the applicant. This is
considered to be serious lapse on the part of PIO.

The applicant’s application is to get information about who
were in charge of work. Police has already registered the offence and judicial
verdict will come in due course. It is pertinent to note that applicant is not
asking who is responsible for this mishap. He is merely asking the names of
officers who were entrusted with overseeing and supervision. This information if
already not given to the applicant be given in 5 days time on the receipt of
this order.

Lastly, applicant has stated that he has spent time, effort
and money for filing an appeal with AA, filing fresh application with police and
making payment of charges to the Police Department for information which all
could have been avoided had the PIO provided correct and complete information
for which he demanded a token compensation of Rs.100. The Commission appreciates
the concern of the applicant that he wants to stress the point of accountability
and is really not interested in financial reimbursement. He ordered that this
amount should be given to the applicant by MMRDA by recovering it from the PIO.

In short, the PIO has to pay penalty for the delay of 38 days
i.e., Rs.250 * 38 of Rs.9,500. This be recovered from his salary in two
instalments and deposited as per the Government’s procedure. The copy of
challans having paid this amount be sent to the Commission for record.

[Shri S. K. Nangia, Mumbai v. PIO, MMRDA : Complaint
No. 2008/622/02, decided on 10-11-2008]



Part B : The RTI Act


Challenges of Change

When we are no longer able to change a situation,

we are challenged to change ourselves.

— Viktor Frankl

This year is the diamond jubilee year of glorious services of
BCAS. Theme of the Diamond Jubilee Conference held on 8th November was :
Challenges of Change — Always ahead.

BCAS has always been ahead in its services to the profession, to its members and other CAs, CA students and society at large : the view endorsed by all speakers at this above conference.

However, at times I think that to be ahead holistically and in real terms, BCAS cannot be a bystander to just watch the changes that have been happening on the national scene and challenges that are being faced by concerned citizens. BCAS and its members can’t limit solving only challenges of change to the professional areas. On that yardstick, I believe that to be ahead, it has to gear itself much more proactively to the challenges of change that the nation faces.

The Right to Information Act has brought in changes which have challenged the sleeping and non-inclusive minds et built up in the governance of this country. Frankly, citizens have also remained passive and maintained a lackadaisical attitude and in keeping with the Indian psyche, have remained tolerant to all injustice, corruption, non-accountability, etc.

There are many stakeholders in the implementation of the RTIAct. They include: (1) Public Authorities and PIOs & AAs (information providers) (2) Information Commissions, States and Central (3) Central and State Governments (4) Indian Citizens (both urban & rural) (Information seekers) (5) Media (6) Activists’ groups, NGOs, CBOs, etc. (7) Competent authorities such as the Courts, the House of the people, etc.

The RTI Act has heralded citizens’ rights to be recognised, has operationalised the fundamental right of the citizen guaranteed under Article 19 of the Constitution of India and has empowered citizens to be part of democratic operation of the country. The Act has thrown a challenge to all stakeholders to get tuned to changes in the governance brought in by this revolutionary and extremely powerful Act, the likes of which India has never witnessed before. Prime Minister, Dr. Manmohan Singh, while inaugurating 3rd Annual Convention of the Central Information Commission on 3rd November talked on various challenges of change brought about by the RTI Act. He said:

There will be a major challenge for public authorities in the arena of information house-keeping. There is a challenge for the information seekers in not misusing the right available in the Act by making vexatious demands and thus deprive genuine information seekers of their legitimate claims on limited public resources and so on.

Mahatma Gandhi had once said: Political freedom has no meaning unless it leads to win economic, social and moral freedom. The Right to Information Act and National Rural Employment Guarantee Act (NREGA) are two acts which are tools to bring social and economic freedom respectively, which would then lead to moral freedom.

Weprofessionals, educated and intellectuals are the major stakeholders for the success of these two Acts. As Barack Obama, the President-elect of the USA said “So tonight, let us ask ourselves – if our children should live to see the next century, what change will they see? What progress will we have made? This is our chance to answer that call. This is our moment. This is our time …. “

We professionals need to raise the same questions to ourselves: How are we going to shoulder challenges of sweeping changes happening on the national scene on account of implementation of these two Acts: RTIand NREGA. Are we going to just witness sea change in the lives of millions of citizens with the operation of those two instruments legislated by the Government of India or be a part of the makers of this change, partners in advancing its benefits to really go ahead? I hope that in coming years BCASFoundation and BCASmembers becomepart of this movement of change and go ahead in bringing new standards of transparency and accountability, bringing positive change that shall give hope for better INDIA, happier inclusive society,so essential for experiencing the value of democracy.


                                                              Part C : Other News

•  Landlease of Gujarat farmers:

The farmers in Gujarat are moving RTIapplications to the State Government seeking documents related to land ownership. Armed with archaic documents prepared during the British Raj and written in rich Gujarati prevalent during the rule of the Gaikwads, farmers are approaching the State Government with a hope. The farmers are optimistic that the land leased to the then Bombay Province by their fore-fathers in 1912,for 99 years would be returned to them. The State Government, however, is unper-turbed and says the British did compensate the farmers for the land, and that there is no question of the situation taking a Singur-like turn.

Not prepared to wait until the lease period gets over in 2011, the farmers became active with RTI applications ever since they learnt that the State has allotted 1,100acres of land to the Tatas. However, they clarify that they are neither against Nano, nor are they creating a noise because of its arrival. “Documents in our possession are older than Tata Group’s presence in Gujarat. We are not trying to ride the wave and earn an extra buck. We are just seeking our land back, once the lease period is over.”

• RTI Activist Chetan Kothari :

Mr. Chetan Kothari writes in Sunday MID DAYof October 12, 2008: “I was duped to the tune of Rs. 11 lakh that I invested in plantation and holiday packages of Suman Motels Limited in the late 90s. I used RTI to get information about the company,so that I could pursue my case in the Court.” The two RTI applications revealed that despite 200warrants and summons issued in the name of the MD of the company, none of them were executed. This made his case strong as he was representing 600 people who were duped similarly.

Mr. Kothari believes that information is a tool which when used in a positive way can bring about a revolution and zeroing in on subjects requires a lot of reading and general awareness.

• Documentaries  on RTI :

The awareness about the RTI Act, 2005 is slowly catching up in the country. Helping this cause is a small tribe of documentary makers, who through the visual medium are trying to make people aware of RTI’s power.

Documentary-filmmaker Priyanka Tiwari, who works for a Delhi-based NGO Kabir that works on RTI,has made 15 short films in the last two years. She says apart from creating awareness, they also portray success stories. (Some of these CDs are available at BCAS Library.)

Satish Shinde from Films Division claims to have made the first feature film on RTI. “The challenge was how to make the act visually appealing,” recalls Shinde. The film has also been dubbed in 12 languages. Like NGO,Kabir, Shinde’s film is also widely used by NGOs. He feels that, generally, the RTI awareness has risen by 30 to 40%.

• BMC becoming Pro-RTI:

Getting information under the RTIAct will soon be just a click away. In a month’s time, citizens will be able to file their RTI application on the website of Brihanmumbai Municipal Corporation.

According to BMC officials, the process will be centralised and the applications will be forwarded to the civic body’s concerned departments. The payments can be made in the same way as property taxes are paid. The website will allow people to post their address, so that they can be provided with the necessary documents.

•  Refund    for delayed courier charges:

What if an important document couriered to you through the postal services reached you after a day’s delay? You would have either cursed the system or may not even have noticed it as most courier parcels hardly reach their destinations on time. But Dadar resident Milind Mulay decided not to take it lying down. Mulay used the Right to Information (RTI) Act to get a refund when two articles he had sent through speed post reached their destination after a day’s delay. He had sent two couriers to Thane and Kalyan from the Shivaji Park post office at Dadar.

He first did some leg-work and found out from the website of the Indian Postal Service about the rules and regulations in case of delay. The web site also has an option by which one can track the path of the courier. But the web site had not updated the path of his courier. So he went to the post office’s west division headquarters and asked them to give a copy of the delivery slips. The receipts showed that the parcels were not delivered on time. Mulay then wrote a letter to the post office asking for compensation for the delay. The officials at the post office did not bother to answer his letter, he then filed an RTI application.

The senior superintendent of the Mumbai city west division responded within 10 days and refunded the entire amount Rs.50 for the delay. He also said this was in accordance with the money-back guarantee scheme. The delay occurred due to a service fault and a detailed report has been sought from the respective section.

Mulay said he was prompted to file an RTI query as numerous people in the country faced this problem. More than the financial part, he wanted to show that the RTI Act can be put to everyday use and cut the red tape in the Government.


Right to Information

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Part A : CIC’s decisions


Public Notaries

Mr. Dhiresh Shah, advocate and notary of Ahmedabad made an
application-appeal to the Central Information Commission in connection with the
processing of the applications of Public Notaries for the renewal of their
licences issued by the Department of Legal Affairs.

During the hearing of the appeal, Mr. Shah pointed out that
there were gross and avoidable delays in renewing the licences of Notaries,
which not only frequently resulted in breaks in their service as Public
Notaries, but also caused them financial hardship and mental worry, and in some
cases, even loss of reputation. He pointed out that the main purpose of his
coming before the Commission was to ensure that a transparent and accountable
system was kept in place, so that not only the renewal applications of Public
Notaries were attended to with speed, but also there was certain accountability
about timely renewal of these licences.

CPIO, Implementation Cell, Department of Legal Affairs,
Ministry of Law and Justice, New Delhi submitted that the information as
requested by the appellant was not centrally maintained. As such, it was beyond
their power to collect and collate it in order to supply it to the appellant.

Upon hearing the parties, the impression the Commission got
was that the respondents were aware of the shortcomings in the system of renewal
of licences of Public Notaries, which caused unexplained and avoidable delays in
effecting these renewals. There was no centralised monitoring of receipt of
renewal applications, their processing and issue of renewal certificates.

The Commission felt that this is one system which was crying
out for reform. The Commission recommended to the public authority — the
Department of Legal Affairs — to institute a system of centralised monitoring of
receipt, processing and final approval of all applications received from Public
Notaries for renewal of their licences. This information should be placed on the
website in order to enable those whose interest it touched to keep themselves
informed about the progress of their renewal applications. Since the number of
such applications in a year is not more than 500 to 600, there is no reason why
centralised monitoring for it could not be put in place. The effort on the part
of the public authority should be to renew the licences well before the expiry
of the time for which the licences were initially issued. This system will not
only save Public Notaries a good deal of anxiety and botheration, it will help
bring to the system much needed accountability and transparency.

Based on the above, CIC directed the head of the public
authority, viz. Secretary, Department of Legal Affairs, to apprise the
Commission within two months of the receipt of the order as to the action taken
by it in respect of the above recommendation of the Commission [S. 19(8)(a) of
RTI Act].

In the course of the hearing, Mr. Shah also pointed out that
the public authority was required to publish in an Official Gazette all
notary-related information which included the issue of notary licences and their
renewals. This has not been done for the past several years.

The Commission also directed that a notice be issued to the
head of the public authority as to why a compensation of Rs.15,000 (Rupees
fifteen thousand only) not be awarded to the appellant for the detriment
suffered by him.

However, Mr. Shah pointed out that he was not interested in
either imposition of a fine or penalty on the respondents, nor was he interested
in compensation. What he actually wanted was that the system must be so improved
as to free it from its several shortcomings which affected a broad cross-section
of Public Notaries. The Commission appreciated the appellant’s position.

We also appreciate Mr. Dhiresh Shah’s spirit.

[No. CIC/AT/A/2007/01451 of 22-4-2008 : Shri Dhiresh
Shah v. Department of Legal Affairs, Ministry of Law and Justice, New Delhi]


Travel cost of RTI applicant :

This is the case of complaint by Mr. Yogesh Mehta of Mumbai (BCAS
Foundation assists him in his fights from time to time) requesting for penalty
[S. 20(1)] on SEBI and compensation from SEBI [S. 19(8)(b)].

In one RTI application received by SEBI on 6-2-2006,
information was furnished on 14-7-2006. In the other RTI application received by
SEBI on 13-2-2006, information was furnished on 29-9-2006.

The Order of CIC is as under :

  •  The main contention of the respondents (SEBI) is that delay on their part was not intentional and occurred as the requested information was not readily available with SEBI and has to be obtained from BSE. They have emphasised the fact that, as acknowledged by appellant, all information has been provided to him. The respondents have maintained that the information requested by the appellant/complainant, Mr. Yogesh Mehta pertained to several transactions and agencies, collecting and collating the same naturally took time. They have urged that the delays were not without reasonable cause.

  •  On perusing the records and hearing the submissions of both parties, it is decided that no penalty need by imposed on the respondents, because the delay that has occurred in providing the information to the complainant is attributable to the complex nature of the information request

  • On perusing the records and hearing the sub-missions of both parties, it is decided that no penalty need by imposed on the respondents, because the delay that has occurred in providing the information to the complainant is attributable to the complex nature of the information requested, which needed time-consuming collection and collation process, which brings it within the ambit of ‘reasonable cause’ u/s.20(1) of the RTI Act.

  • However, the Commission cannot be oblivious to the fact that the delays in this matter have resulted in detriment to the complainant and has impacted the complainant’s rightful claim to timely information under the RTI Act. He has been compelled to attend CIC hearings on several dates at his own cost for pressing his complaints against the respondents. He has suffered avoidable expenditure in doing so. It is, therefore held that the complainant is entitled to a suitable compensation under Section 19(8)(b) of the RTI Act.

  • In view of the above, it is directed that the public authority, viz. SEBI shall pay an amount of Rs. 10,000 (Rupees Ten Thousand only) as compensation to the complainant within 2 weeks from the date of receipt of this order and intimate the fact of payment to the Commission within 1 week of effecting it. The compensation amount may be paid from the resources of the public authority, viz. SEBI.

[No. ClC/ AT/ A/2006/00591 & 00592 of 26-6-2008 : Mr. Yogesh Mehta v. SEBI]

Income-tax records of a Charitable Trust:
A very significant issue of the concept of personal information vis-a-vis public charitable trust is involved in this case. Mr. J. K. Sachdeva sought information from Directorate General of Income-tax (Exemptions) of one NGO, the Institute of Business Studies and Research, Belapur, Navi Mumbai.

He sought  the following information:

a) Have the trustees filed income-tax returns fo;: years 2004-05 and 2005-06 ?

b) If yes, how  much  income-tax  they have paid for the trust? Copies of the audited statements be provided to me.

c) Has all the expenditure incurred by them been for charitable purpose?

d) How much salaries either in cash or in kind/ movable properties been drawn by the trustees?

e) Have they accounted for all the cash amount received as advanced premium from the students?

f) Have they submitted to the department the purchase agreements of all the properties bought in personal name or in the name of trustees? If yes, copies may be provided to me please.

Information was provided for (a) above, but PIa declined to disclose the rest citing exemption u/ s. 8(1)0) read with S. 11(1) of the RTI Act and on re-lying on number of CIC’s decisions in similar cases.

The Commission, however, noted that this appeal is different from other petitions regarding access to income-tax-return-related information, in the sense that the present appeal is about information regarding a public charitable trust. Given the character of a public charitable trust, it is important to decide whether the income-tax-related information of such trust, when all of its activities are open to public scrutiny, at all be allowed to remain confidential. In other words, whether or not to disclose such information will have to be examined in the context of the Indian Trusts Act, 1882 and whether there could be a public interest in disclosure of such information u/s.8(2) of the RTI Act. Applying S. 8(1)(j), which speaks about personal and private information, to a public charitable trust also needs to be closely examined.

The Commission then felt that these matters should be first seen at the level of the public authority (Appellate Authority) given the public authority’s experience in similar matters. Income Tax Commissioners enjoy the power, u/ s.138(b) of the Income-tax Act, to decide whether confidentially held information, such as certain classes of income-tax returns, be disclosed in public interest. A determination regarding whether to disclose in public interest income-tax returns of public charitable trust, is thus quite in order.

In view of the above, the Commission remitted back the matter to the Appellate Authority (AA), Mr. Laxman Das, Director General of Income Tax (Exemptions), with a direction that he shall give a earing to the parties, including the third-party, and take a decision in this matter within 4 weeks from the date of receipt of this Order.

We shall follow up this case with interest as to what is the final decision in the matter (hopefully shall report in BCAJ next issue).

[No. CIC/ AT/ A/2008/00170 of 30-6-2008: Mr. J. K. Sachdeva v. Directorate of Income-tax (Exemptions)]


Part B : The RTI Act

I am of the opinion that S. 4 of the RTI Act, which provides for ‘Obligations of public authorities’, is the most important Section of the Act to achieve its objectives. To enable the public authorities to comply and carry out these obligations effectively, the Act which received the assent of the President of India on 15-6-2005, vide S. 1(3) read with S. 4(1)(b) provided that every public authority shall publish within one hundred and twenty days (i.e., 12-10-2005) from the enactment of this Act (i.e., 15-6-2005) 17 different items of information.

It is the experience of all that many public authorities even more than 32 months after 12-10-2005 have not complied with these obligations.

Conference was held of all CICs and SICs on 17-10-2007. One of the topics of the discussion was:

“Enforcement of S. 4 of the RTI Act and creation of ‘E-Districts”‘. Some of the major recommendations (9 out of 17) of the conference are hereunder listed:

1. The duty of the Government is to pro-actively make available key information to all. The Public Authorities to ensure that all records that are appropriate to be computerised are, within a reasonable time and subject to availability of resources, computerised and connected through a network all over the country on different systems so that access to such records is facilitated.

2. It is suggested that strict directions be issued by the Central Government, that all the State Governments/Public Authorities should fulfil their obligations laid down u/ sA of the RTIAct, 2005. Failing which, it may lead to penal provisions being invoked against such Public Authority. Secretary of the Department may be held responsible in this regard and be clearly held culpable in case of non-compliance of S. 4(1)(b).

3. The Central and State Governments must necessarily make adequate fiscal allocations for computerisation and connectivity from Information Commission level to Mandal/Taluk level Public Authorities, so as to effectively operationalise the provisions of the RTI Act.

4. Standardisation of procedure is a must for the disclosures mandated u/ sA of the Act.

5. Make all Government services accessible to the common man in his locality, through common service delivery outlets and ensure efficiency, transparency and reliability of such services at affordable costs to realise the basic needs of the common man.

6. Citizen-centric approach to delivery of selected (bulk) services through Common Service Centres (CSC) involving back-office enablement, by way of digitisation of relevant records, process redesign and automation of processes/work-flow.

7. Notification of e-District services u/sA(l) of the Act to enable and legally enforce sharing of information as prescribed, electronically.

8. e-District  to act as an enabler  for facilitating objectives/services relating to RTI being achieved/ delivered. RTI’s legal framework to be leveraged by e-District to make information sharing/ e-services irreversible.

9. Need/feasibility of notifying CSCs as APIOs under the Act.


Part C : Other News

•  Personal Information:

Residential phone number, mobile number and e-mail fall under the category of personal information. This was decided by the Information Commission in response to the RTI application seeking such details for the President of India.

•  PIO provides false information:

PIO of the Brihanmumbai Municipal Corporation (BMC) replied in response to an RTI query that BMC has already written to SSC Board when asked as to what BMC is doing to make instructions in Tamil medium possible up to class X, which presently is only up to class VII in select BMC schools. Fact is that such letter was not written and was written a few days after such a query was raised. Interesting point is that when BMC Commissioner Jairaj Phatak was informed on this issue, he said: “There must have been some technical error. What they would have meant is that the letter was in the process of being drafted.”

•  Cabinet    documents:

Mr. Suresh Joshi, SIC, Maharashtra holds the view that u/s.8(1)(i) of the RTI Act, all the documents brought before the State Cabinet are confidential and there is no access to such documents under the RTI. The senior official in the Secretariat also says “Once decisions are taken, we will issue specific orders. However, applicants are asking for the cabinet note, which contains stringent remarks on all the departments. In our opinion, such documents should not be made public.”

However, it is the view of the Central Information Commission that all file notings are available for access in the RTI. Further, S. 8(1)(i) which provides for exemption also has proviso thereto restricting the exemption. Clause with two provisos is as under:

8(1)(i):    Cabinet papers including records of deliberations of the Council of Ministers, Secretaries and other officers:

Provided that the decisions of Council of Ministers, the reasons thereof, and the material on the basis of which the decisions were taken shall be made public after the decision has been taken, and the matter is complete, or over:

Provided further that those matters which come under the exemptions specified in this Section shall not be disclosed.

•  Information on FIls under the RTI Act:

Acting on an RTI appeal over SEBI’s denial to divulge details on yearly net investment figures by each FII during 2005, 2006 and 2007, the apex information panel has asked SEBI to consult other stake-holders like the Finance Ministry, the RBI and over 800 FII and decide on the matter afresh. SEBI has to take a call on this matter within two months.

While issuing the order, Information Commissioner, A. N. Tiwari said: “SEBI would examine the matter closely in terms of extant practices/instructions, consult all or a section of stakeholders, examine international practices and obtain views of top functionaries in the field and the Government, before formulating a response.”

Even as the Commission had brought stock exchanges under the RTI last year, the Bombay Stock Exchange and the National Stock Exchange havo challenged it before the Courts. Ironically, in that case the SEBI stood against the Finance Ministry to argue that bourses should be brought under the transparency law.

Air-travel on Air India of high-profile passengers:
Air India has requested the Government to exempt travel information on high-profile passengers -like politicians, businessman and film stars – from being divulged under the Right to Information (RTI) Act as it would hamper its business interests.

In the request made, it is stated: Aviation is a competitive industry and only Air India is covered under the RTI. We will lose out on business interests if we give out details.

Air India is also troubled with a recent query by a TV channel on how Judges were holidaying at public expense, which class the Judge (and his wife) travelled. According to some report, “The Chief Justice of India, K. V. Balkrishnan, made seven tripss abroad in 2007 travelling first class with his wife at Rs.39 lakh (air fare) – something that no other airline would ever divulge.”


Right To Information

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CIC’s decisions :

Schools, aided or otherwise, are covered under RTI :

In one interesting case, the Central Information Commission,
vide its order dated 18-5-2007, had directed the Directorate of Education, GNCT
of Delhi to obtain u/s.2(f) of the Act, the minutes of the Managing Committee
(MC) meetings from March 2002 to March 2007 from the Purna Prajna Public School,
Vasant Kunj, New Delhi and provide a copy to the appellant, Shri D. K. Chopra.
Subsequently, the ap-pellant informed the Commission that the PIO had not
complied with the above decision and when asked about it, the PIO stated that he
had no legal authority to obtain the information from the school.

The PIO at the hearing in this adjunct matter reiterated that
under the Delhi Education Act, the documents which could be obtained are
specified under Annexure-II in which the document, namely, minutes of the
meeting of the Managing Committee of schools is not included. The Department of
Education was therefore unable to acquire the minutes of the Managing Committee
from the concerned school as directed by the Commission. Though an official of
the respondent is a member of the MC, the PIO has, however, no access to the
minutes of MC.

In the decision, the Information Commissioner noted :

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A major objective of the RTI Act is to ensure transparency and accountability in
functioning of the institutions, particularly the service providers that have
considerable interface with a larger section of people. The documents, in
question, contain such information that foretell about the health and vitality
of the schools which are responsible for preparing our children to lead the
nation. Moreover, the information asked for is an outcome of deliberations of
the major stakeholders — school authorities, teachers, representatives of PTA
and the Government of Delhi. The minutes of MCs are thus already in public
domain, as these are circulated among the members. How can it be treated as
confidential or secret ? Unfortunately, the Principal of the school and the PIO
have connived to withhold the minutes of the MCs for reasons that contravene
with the larger purpose of creating an information regime for good governance.


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All the aided or unaided schools are performing
governmental functions to promote high quality of relevant education. An
official of the GNCT of Delhi is nominated by the Directorate of Education as a
member of the Management Committee of all the schools. The nominated member of
the Directorate of Education is therefore the custodian of the minutes of the
MCs u/s.5(4) of the RTI Act. And, there is no reason why such minutes,
reflecting the aspects of governance of the school, should not be put in public
domain. The Government has the control on the functioning of the schools and,
therefore, it has access to the information asked for. And, so has a citizen.


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Not only the land allotted to private educational institutes is provided at
subsidised rates, but also the fees paid by the students/parents enjoy
income-tax concession. There is thus some element of indirect Government funding
in the activities of even private and un-aided schools. In view of this, the
respondent, which is represented through its officials on the Managing
Committee, is surely the custodian of the information asked for by the
appellant. The decisions of the MCs have significant bearing on the life and
career of the students as well as their parents/guardians and, therefore, there
is no reason why the minutes of the Managing Committee should not be disclosed
to the affected persons i.e., the citizens.


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The PIO’s contention that the minutes of the MCs are not included in Annexure-II
of the Delhi Education Act and, therefore, he cannot acquire them is not
acceptable, as S. 22 of the RTI Act, 2005 has an overriding effect on all such
provisions that come in the way of promotion of transparency in functioning of
the schools, the activities of which are governmental in nature. The PIO is
directed again to furnish the information at the earliest under intimation to
the Commission.


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In view of lackadaisical attitude of the concerned PIO and the principal of the
school towards the implementation of the RTI Act, the Commis-sion’s order dated
18-5-2007 has not been compiled with, which is unfortunate. The Director (Edu.),
Directorate of Education, GNCT of Delhi is therefore directed to initiate
appropriate action against the school, including cancellation/withdrawal of its
recognition, as the school has chosen to function in a manner which is not duly
transparent and is, thus, inconsistent with the ethos and purpose of the RTI
Act. An action taken report should be submitted to the Commission at the
earliest.


From the above decision, one can conclude that schools,
whether aided or otherwise, are covered under the RTI Act.

(Shri D. K. Chopra v. Directorate of Education, GNCT
of Delhi : Decision under F. No. CIC/MA/A/2007/00104 of 12-9-2007)



The RTI Act :

Chapter 4 of the Annual Report 2005-06 as published by the
Central Information Commission deals with overview of implementation of the RTI
Act, 2005.

It is a report u/s.25 of the RTI Act on the implementation of
the provisions of this Act during the year 2005-06 (for the period from
12-10-2005 to 31-3-2006).

The implementation report (IR) is made up of various charts and tables. It is interesting to note that in many aspects, the Ministry of Finance tops the chart, some noted as under:

 Further, statistics show that out of 4770 requests received by the Ministry of Finance (which forms at least 20% of the total RTI requests in the year) they rejected 1748, which forms 51.6% of all the rejected applications in the year.

This disproportionately high ratio of rejection calls for introspection and training of the staff of public authorities under this Ministry in disposing of the RTI requests.

 It seems that out of total 24436 RTI applications furnished in the year (as above) ended 31-3-2006, only 451 went for second appeal to the Central Information Commission (CIC). It disposed of 441 of them. CIC also received 252 complaints u/s. 18; it disposed of 241 of them as on 31-3-2006.

Other  News

Mere existence of an investigation, no ground for refusal of information:

Recently, the Delhi HC strengthened the RTI law by interpreting its provisions. Justice S. Ravindra Bhat said: a person who has been accused of dowry demand by a woman or her parents is entitled to get information about the details of income-tax returns filed by the complainant.

One Bhagat Singh, who had been charged by his wife with demanding dowry, sought information about the complainant’s tax returns to prove that the latter spent money on the wedding from unknown sources or had concealed wealth. Any expenditure on marriage must be listed and the source of wealth accounted for.

It is apparent that the mere existence of an investigation process cannot be a ground for refusal of information. The authority withholding information must show satisfactory reasons as to why the release of such information would hamper the investigation process. Such reasons should be germane, and the opinion of the process being hampered should be reasonable and based on some material. Without this consideration, S. 8 and other such provisions would become the haven for dodging demands for information. Moreover, rights-based enactment is akin to a welfare measure and it should be open to liberal interpretation. Otherwise a social act becomes unsocial.

 Editorial  in DNA:

Given India’s  notorious red-tapism, corruption  and lack of official accountability, the importance of the Right to Information Act (RTI) cannot be overestimated. Since the RTI was implemented in October 2005, Indians have taken to it in a big way, sensing an opportunity to get information on matters critical to their local communities and to citizens in general.

The bigger problem is that the bureaucracy has still not fully come to terms with the full import of RTI, or if it has, then there have been attempts to ignore it. We have heard of all kinds of impediments, from the silly to the sinister, that are put in the way of the applicant. Then there are departments and ministries which find various excuses to stay out of the ambit of the RTI Act; in one recent case even the PMO was cagey about giving information on the disappearance of Subhas Chandra Bose. India has no law like in the US where archival material automatically comes into the public domain after 30 years. Most citizens will want information on things that touch their lives; but the general principle of openness should apply everywhere, and that is not happening.

 Dial  up for RTI :

The year 2008 may ring in Right to Information (RTI) on telephone as the Central Information Commission (CIC) has a proposal to open a call centre in Delhi for facilitation of RTI use.

In Bihar, a call centre  has been  in operation since january 2007. In case of information provided on telephone, the fee stipulated for the use of RTI is added    to the  telephone bill  of the  information seeker.    .

The centre will also intensify the campaign to train and sensitise designated Public Information Officers on the RTI Act. Till now, only 10 percent of information officers and other government officials have been trained. The officers are being trained in Administrative Training Institutes in different states. These one-day to three-day courses have been devised by Yashada in Pune, Centre for Good Governance in Hyderabad and Institute of Secretarial Training and Management in Delhi.

 The  Chief  Minister’s   Relief  Fund:

In this feature in February 2008, a small news item was given on this fund. Now the Chief Minister has conceded to get CM Relief Fund covered under the RTI Act. The disclosure obtained under the RTI application has shocked  the citizens  of the State.

The fund, which lists assisting people trapped in natural disasters as its sole objective, was registered with the Charity Commissioner in 1967. The RTI query has now revealed that a large part of the Rs.50 crore or thereabouts which the CM’s office received in donations between 2003 and 2005 (when first Sushilkumar Shinde and then Vilasrao Deshrnukh were at the helm) went to events conducted by institutions that were in no way related to calamities and disasters.

All details disclosed  show blatant  misuse of funds.

  •  RTI v. Courts  and  Legislative  Bodies:

Right from inception of the RTIAct, there have been ongoing debates regarding powers of RTI Information Commissioners v. the powers of the Court Judges. Now conflicts have started between RTI Information Commissioners and the State Legislative Assembly. Taking serious note of the issue of notices to the Vidhan Sabha Principal Secretary by the UP Information Commission, the State Assembly resolved that any such summons will be considered a violation of the privileges of the House and necessary action will follow.

The decision of the House comes in the wake of the issuance of two notices by the Commission to the Principal Secretary R. P. Pandey on two petitions to the panel.

In both cases, the Secretary had pleaded that the House was not covered under the Act. On this, the applicants approached the State Information Commission, which in turn issued notices to Pandey. Meanwhile, both matters had been referred to the privileges committee, though one of the notices was later cancelled by the Commission.

  •  Mumbai  gets first Information  Commissioner:

Ramanand Tiwari is appointed as SIC stationed in Mumbai. It may be interesting to note that only 5% of SICs and CICs are non-bureaucrats, one of them is SIC for Pune division, Vijay Kuwalekar, who is a senior journalist.

  •  ATM operation:

Commercial banks cannot be compelled under the Right to Information (RTI) Act to divulge the operational details of their ATMs installed across cities, the Central Information Commission (CIC) has ruled. “Information pertaining to operation of ATMs is really a matter of commercial confidence. As a matter of fact, a lot of security is involved in such a procedure and such information cannot be given to any outsider,” CIC’s Information Commissioner Padma Balasubramanian held in a ruling on January 29.

  •  Fanners’  suicide:

According to information obtained under the RTI Act, more than 800 farmers committed suicide in the first six months of 2007.

The agrarian crisis has forced 607 farmers to commit suicide in Maharashtra, while 114 have ended lives in Andhra Pradesh. Seventy-three have killed themselves in Kamataka and 13 cases were reported from Kerala in the first half of the last year alone, the information revealed. This despite NDA-ruled States like Punjab and Gujarat having failed to furnish details about the number of farmer suicides to the Union Agriculture Department.

Right to Information

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Part A : Decisions of CIC and SIC



  • Provisions of S. 19(8) of the RTI Act :


S. 19(8) provides for the powers of the Information
Commissions and includes the power to require the public authority to compensate
the complainant for any loss or other detriment suffered.

An interesting case came up before the State Information
Commission, Goa. Mr. Harihar Chodankar, Mapusa, Bardez, Goa made an RTI
application seeking information of certain details of conservations in different
properties within the jurisdiction of the Calangute Village Panchayat.
Application was rejected by PIO u/s.8(j) of the RTI Act. The first appellate
authority directed PIO to give the information within 15 days. PIO still did not
furnish the information. Hence Mr. Chodankar made a complaint to SIC, Goa u/s.18
of the RTI Act. Even under proceedings before SIC, the PIO went on taking
adjournments and finally wrote to Mr. Chodankar that documents requested are not
available and files not traceable; only in respect of one property, part of the
information was furnished.

SIC then ruled that there is a willful disobedience by PIO.
However as in one year a number of individuals had occupied the position of PIO,
it was difficult to find out who in particular is responsible for the defaults.
SIC, therefore directed the Director of Panchayats to hold an inquiry, fix up
responsibility for missing records in this case and initiate disciplinary
proceedings against the persons found responsible. He directed the Director to
file compliance report to the Commission in six months time.

SIC further noted : “As the appellant/complainant was put to
considerable hardship and also this not being the first case the Village
Panchayat has misplaced its records, we consider it proper to award compensation
to the appellant/complainant in exercise of powers vested in us u/s.19(8) of the
RTI Act. However, as the High Court in a writ petition No. 327/2007, is seized
of the jurisdiction of this Commission to award compensation u/s.19(8) in a
complaint proceeding u/s.18 of the RTI Act, we restrain ourselves from awarding
the compensation.

We shall await to find out what the High Court decides about
the powers u/s.19(8) as CIC has already awarded compensation to the complainant
u/s. 19(8). (See BCAJ : August 2008). No information available whether SEBI who
has to pay this compensation has gone in writ.

[2008 (2) ID 157 (SIC, Goa) : Mr. Harihar Chodankar,
Mapusa, Goa v. PIO, Secretary, Village Panchayat of Calangute, Goa and the
first AA, BDO, Goa]



  • Fee for certified copy of the information :


Very often at the RTI Clinic of BCAS Foundation, individuals
come to enquire as to what fees are payable for certified copies of the
documents under the RTI Act. The rules provide fee for copies of the document.
Under the RTI (Regulation of fees and cost) Rules of the Central Government, it
is Rs.2 for each page (in A4 or A3 size paper) created or copied. The same is
the fee in the rules of many states. However, there is no rule providing for
fees for certified copies.

Before SIC, Maharashtra, Mr. Bomi Mistry made a complaint
that BMC has been charging fees for certified copies which are not in consonance
with the RTI Act.

However in view of what the Rules provide, SIC (Dr. Suresh
Joshi, CIC) has ruled as under :


  • Rule 4 does not prescribe the fees for certified copies, therefore, if an
    appellant needs certified copies, whatever rates are prescribed by BMC for
    certified copies should be charged.



  • At many places under BMC schedule of rates separate rates for copy and
    separate rates for attestation has been mentioned. In such case, for a copy
    the fee prescribed under rule 4(b) i.e., Rs.2 per page, etc. should be
    charged and for attestation the fees prescribed under schedule of rates of BMC
    should be charged.

[Shri Bomi Mistry, Mumbai v. PIO, Assessment and
Collection Department, MCGM, Head Office, Mumbai]



  • Whether Co-operative Societies are covered under the RTI Act :

Hundreds of individuals have raised this issue. It is
understood that SIC in Maharashtra generally rules that as such the co-operative
societies are not covered, but the information which the societies are required
to file with the Registrar of Co-operative Societies can be accessed from his
office and no information beyond it.

However, there has been a decision, extensively discussing
the issue, running into 42 pages of Gujarat Information Commission on this
subject. The decision/order reads as under :


(i) All co-operative societies registered under the Gujarat State Co-operative Societies Act, 1961 are bodies controlled falling within the ambit of the definition of ‘public authority’ given at S. 2(h)(i) of the Right to Information Act, 2005 and, therefore, are public authorities.

(ii) All co-operative banks since all such banks are registered as co-operative societies are also bodies controlled falling within the ambit of the definition of ‘public authority’ given at S. 2(h)(i) of the Right to Information Act, 2005 and, therefore, are public authorities.

(iii) In view of the above decision, all co-operative societies and co-operative banks are required to abide by the relevant provisions of the Right to Information Act, 2005, particularly Chapter II thereof, dealing with obligations of public authorities, including providing information to the citizens, subject to the provisions contained in S. 8(1), S. 9 and S. 10 of the Right to Information Act, 2005.

The decision is challenged and pending before the Gujarat High Court.


Part B : The RTI Act

The RTI Act is by now a three-year young Act, powerful and bringing solutions to many ills in society. However, no statistics of its implementation are available. It is funny to say that the Act to provide information does not provide information for its implementation! There have been many key issues and constraints in its implementation. In order to study the same, the Government of India, Department of Personnel and Training, in the Ministry of Personnel, Public Grievances and Pensions have appointed Price Waterhouse Coopers Private Limited to conduct a study. PWC has issued a separate questionnaire for feedback from each of the six stakeholders identified by them.

Answers to these questionnaires shall provide to PWC various missing, unavailable information and views of the information providers and information seekers.

Some of the information, very essential to assess the success of the Act, but not available are:

  • How many Public Authorities (AA) exist, how many of them have complied with their obligations.

  • How many PIOs and AAs are there in these PAs.

  • How many applications are made each year, how many go to the first AA and how many then give up and do not go for the second appeal to CIC/SIC.

  • What is the level of awareness of the RTI Act in urban areas and rural communities.

  • What are the major difficulties faced by information seekers in filing RTI applications, level of satisfaction or otherwise.

  • Similarly, what are the major complaints of PIOs in terms of their obligations, time-bound responsibilities to attend to RTI applications along with other duties assigned to them.

Let us hope that the study enlightens various stakeholders – Governments, Information Commissions, Public Authorities, Public Information Officers/ Appellate Authorities, Nodal Agencies (appointed for training of PIOs, etc. and awareness building) information seekers, RTI activists, media, etc.


Part C : Other News


• RTI Helpline :

RTI activists in many cities of India run RTI helpline. Telephone helplines today are an increasingly common part of communication. They are very easy, less expensive and fastest medium of communication in India. With the advent of mobile phone, every 4th/ 5th citizen has access to mobile.

The Public Concern for Governance Trust’s (PCGT) Right To Information (RTI) Helpline in MUMBAI, launched on 2nd October, is purported to be an effective initiative of dealing with governance issues in which large number of people need personal counselling or information for filing RTI applica-tions. RTI Helpline could answer basic questions such as: what is the fee for filing applications, how to pay fees for an RTI application, among other things.

The main goal of PCGT’s RTI Helpline is to inform the public of the many issues of governance that we as a society face today, while also encouraging the citizenry to take up the struggle for governance at individual level. As Mahatma Gandhi said, “The real Swaraj will come not by the acquisition of authority by a few, but the acquisition of capacity by all to resist authority when abused”.


PCGT’s RTI Helpline –  93228822881

  • RTI – on wheels:

An RTI-on-wheels facility started by the Gujarat Mahiti Adhikar Pahel, an NGO in Gujarat, was showcased in Mumbai and Pune by PCGT from 27th to 30th September. The mobile van is equipped with an LCD projector, screen and computer with internet, scanner, printer, copier and a small library. The vehicle showed films on RTI, distributed pamphlets and assisted people in filing RTI applications.

Thousands of individuals in Mumbai and Pune benefitted by the visit of this unique van to Maharashtra.

  • Mumbai has lost more  than  25000 trees:

Data obtained under the Right to Information Act revealed that the Tree Authority had collected deposits of Rs.9,24,19,OOOfor granting permissions for removal of trees up to March 2006. In subsequent period, further deposit of around Rs.2 crores is received.

Nominated member of the Tree Authority Nilesh Baxi said, “One. thing is certain – out of around 30,000 trees transplanted since 2000, not more than a couple survived. To assume that 25,000 have not been replanted because refunds of the massive deposits are not claimed is one inference. But, in many cases, small-time builders who transplant trees don’t reclaim the amount after getting the no-objection certificate.

  • RTI Appeals on BMC:

It is learnt that one Assistant Commissioner of Municipal Corporation of Greater Mumbai never even bothered to look at the pending 67 RTIappeals, a blatant violation of the RTI Act.

  • Penalty for delay in answering RTI application:

The Maharashtra State Information Commissioner, Suresh Joshi has penalised PIa, attached to crime branch’s economic offences wing, for not providing information under the RTI Act within the stipulated period. In his order, [oshi directed that Rs.2,750 should be deducted from PIa S. B. Mohite’s salary as he provided the required information after a delay of 11 days.

  • Special  Report in MIDDAY:

On 12th October 2008, The Right to Information Act completes three years. On this occasion, MIDDAY brought out a two-page special report which I had a privilege to edit. The report is available at BCAS Library for anyone to read. It contains articles by Arvind Kejriwal, Shailesh Gandhi, Julio Ribeiro and myself and one interesting story of 14-year young filing RTI application and bringing facilities to the town he resides in and much useful information.

Part B — Some recent judgments

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1. High Court :

(i) Service Tax on provision of service and not service provider :

Rashtriya Ispat Nigam Ltd. V. Dewanchand Ramsaran,
2008 (11) STR 453 (Bom.)

In this case, the appellant filed appeal against judgment
passed by a single Judge in an arbitration petition. The respondent was
appointed as a handling contractor handling iron & steel for the appellant. In
November 1997, because of creation of reverse charge in case of clearing and
forwarding services, while paying the respondent their handling charge the
appellant deducted 5% Service Tax under the assumption that the respondent was a
clearing and forwarding agent. The deduction was made in spite of objection
raised by the respondent. There being a dispute, the matter was referred to a
sole arbitrator. The arbitrator dismissed the claim and therefore, Dewanchand
Ramsaran filed petition against the award. The Single Judge allowed the petition
and set aside the arbitration award after perusing the agreement between the
parties and finding that the agreement contained no clause or provision fixing
liability of Service Tax on respondent. The payment of tax made by the appellant
to the Government as recipient of service did not imply that it was paid on
behalf of the contractor. The contractor being service provider was not liable
to make payment of Service Tax. The Court considered the arbitration award as
faulty, considering it as opposed to the scheme of Service Tax, which levies tax
on services and not on service provider. The decision in the case of All
India Federation of Tax Practitioners v. UOI, 2007 (7) STR 625 (SC) was
relied upon. The appellant’s appeal was dismissed as dismissal of arbitration
award was upheld.


(ii) Refund :

ICCE Bangalore v. Motorola India P. Ltd., 2008 (11)
STR 555 (Kol).

The assessee in this case paid duty by error in excess of
duty payable and drew attention of authorities who in turn directed to file a
claim of refund. A refund application was subsequently filed by the assessee,
however the same was rejected on the ground of lapse of time and this was also
confirmed by the Appellate Commissioner. On moving the Tribunal, the refund was
allowed. The Court observed that the Tribunal chose to allow the case on the
basis that amount paid by mistake cannot be termed as ‘duty’ and therefore, time
bar did not apply. Since under similar circumstances, the Apex Court in India
Cements Ltd. V. CCE, 1989 (4) ELT 358 had accepted the case of the assessee,
the Court decided not to interfere with the Tribunal’s decision and rejected the
Revenue’s appeal.

2. Tribunal :

(i) Banking and financial services — Machinery given on
lease on monthly user charge basis :

CCE Vadodara I v. M/s. GE India Industries (P) Ltd.,
2008 TIOL 1444 CESTAT-Ahm.

The noticee gave extrusion machinery on lease under an
agreement to a party, which the Revenue held as banking and financial service
and served show-cause notices. The respondent cited the decision in the case of
Thermax Ltd. V. CCE Pune, 2007 (8) STR 487 (Tri. Mum), wherein it was
held that the appellant was not a professional in leasing business, and the
activity was confined to own products and considering ‘interest on loan’ not
forming part of value of taxable service in view of explanation 1 to S. 67 of
the Finance Act, 1994, the demand was held unsustainable. Relevant portion of
the definition of banking and other financial service was analysed and financial
lease covered by the said service as opposed to monthly refutal charge was
discussed. Following the decision in the case of Thermax (supra), the
Revenue’s appeal was rejected.

(ii) Business auxiliary service : Whether
individual/proprietor — a commercial concern ?

(a) Anuradha Jain v. CCE Bhopal, 2008 TIOL 1452 CESTAT-Del.

The appellant pleaded only on the issue that individual or
proprietary concern cannot be treated as commercial concern and Service Tax
applied to only commercial concerns in case of business auxiliary service. The
issue, having been decided in the case of CCE v. R. S. Financial Services,
2008 (9) STR 231, it was no longer ‘res integra’, the service was held as
liable for Service Tax.

(b) CCE Belgaum v. Chadha Auto Agencies, 2008 TIOL
1388 CESTAT-Mad.

The assessee, a dealer in sale and services of two wheelers,
also arranged loan from financial institutions/banks for hire/purchase and thus
promoted/marketed services of banks for which they received commission from such
banks/institutions. The Department proceeded to consider the activity as
business auxiliary service. The Commissioner (Appeals) however held that there
was no evidence to confirm as to whether remuneration was in the nature of rent
or business support service and that assessee provided office space, furniture,
etc. to banks to sell their products and therefore, held it as business support
service, which was challenged by the Revenue. The Bench found that they had
examined similar issue in the case of Silicon Honda v. CCE Bang., 2007
(7) STR 475 (Tri.-Bang). The Bench stated that the assessee did not cause sale
or purchase of services on behalf of another person for a consideration.
Financial institutions paying for occupying table space in the premises of auto
dealer could not be considered business auxiliary service and the Revenue’s
appeal was rejected.

(iii) CENVAT Credit:

(a)    Maersk India Pvt. Ltd. v. CCE Raigad, 2008 TIOL 1477 CESTAT-MUM

The appellant, registered under the category of ‘storage & warehousing’ and ‘maintenance and repairs services’, got a part of its empty containers repaired through its subcontractors. The sub-contractors charged Service Tax on their ‘repair charges’ received from the appellant and in turn, the appellant, against his Service Tax liability on output service of ‘maintenance & repairs’, claimed credit of Service Tax paid on input services of subcontractors. CENVAT credit was denied on the ground that sub-contractors did not have Service Tax liability and that there did not exist an agreement between the appellant and the sub-contractor for providing the latter’s services. The Tribunal found that there existed an agreement between the parties, which even the lower Appellate Authority had taken note of and irrespective of the same, it was ruled that once Service Tax has been paid by the supplier, the same cannot be questioned at the receiver’s end and accordingly, credit cannot be denied. Credit for the period prior to 10-9-2004 (the date on which the CENVAT Credit Rules were prescribed) also was held allowable as the ground was the same and in terms of existence of the Service Tax Credit Rules, 2002, credit could not be denied.

(b)    Credit: Whether can be utilised for Service Tax payment on GTA service?

M/s. Sri Sarvana Spg. Mills P. Ltd. v. CCE Madurai, 2008 TIOL 1429 CESTAT-Mad.

The short issue involved in the appeal was whether input duty credit can be utilised for payment of Service Tax on GTA services for the period October 2005 to March 2006. Since by an earlier order the appellant was already given a decision in their favour (covered under MMS Steel Ltd. & Others v. CCE Trichy, 2007 TIOL 1317 CESTAT-Mad.) and identical decision was also given in the case of RRD Tex Pvt. Ltd. v. CCE Salem 2007 TIOL 891 CESTAT-Mad., the order of the lower authority was set aside after condoning the delay in filing the appeal.

(c)    Jindal Steel & Power Ltd. v. CCE Raipur, 2008 TIOL 1450 CESTAT-Del.

The appellant, after taking registration as recipient of consulting engineer’s service and on the sum paid to foreign party, paid Service Tax net of abatement for R & D cess paid by them. The foreign party however had transferred merely the technology. Holding that the appellant was not entitled to utilise CENVAT credit for payment of Service Tax on output services, Service Tax was demanded and penalties were imposed. Since output services were provided much later than the year in which Service Tax was paid as receiver of services i.e., deemed service provider, input services were not considered co-relatable with output services. It was held that the date on which the registration for providing output service was sought was not relevant and that Service Tax paid as deemed output service provider was eligible for taking credit of. Further, Service Tax on transfer of technology under ‘consulting engineering service’ was wrongly paid by the appellant at the instance of the department and therefore also credit could not be denied. The Tribunal also stated that there was no time limit prescribed for utilisation of credit and therefore Service Tax paid on deemed output service was available as credit. The decisions cited by the appellant also supported the case of the appellant (Bhushan Power & Steel Ltd. v. CCE, 2008 (10) STR 18 (Tri.-Kol) and CCE Nagpur v. Visaka Industries Ltd., 2007 (8) STR 231 (Tri. Mum). Accordingly, the credit taken and utilised was held regular.

(iv) Management Consultant’s Service: Services to group companies:

M/s.  RPG Enterprises  Ltd. v. CCE Mumbai-IV, 2008 (11) STR 488 (Tri.-Mum).

The appellant received licence fee from various group companies including CEAT Ltd. under agreement with them, They contended as follows:

  • The client-service provider relationship did not exist between the appellant and its group companies.
  • Recovery  of expenses  was not a service.
  • The recovery was only of costs and it operated on no-profit-no-loss basis.
  • Since only cost was shared by all licensees, principle of mutuality was advanced.
  • In-house organisation cannot contextually be considered impartial adviser meeting the criterion of specified category.

The Tribunal stated that being a company incorporated under the Companies Act, 1956 it was a separate legal entity independent of the entities among which its cost incurred was apportioned and it was essential to look at the very nature of the activities undertaken by M/ s. RPG so as to determine its taxability as management consultant as defined in S. 65(37) of the Finance Act, 1994. As per the Tribunal’s observation of company’s memorandum of association, the company’s objectives included developing and providing part of general economic and industrial intelligence, information in diverse areas of taxation, finance, legal, insurance risk management, data processing, information, systems, marketing, drafting, public relations, etc. to develop cadres of managers, provide infrastructure and administrative set-up for promotion, supervision, monitoring, etc. to the licensees. The Tribunal also found and reproduced extracts from income tax assessment order of CEAT Ltd. stating to the effect that RPG issued guidelines for MIS and possessed expertise in strategic planning, corporate finance, etc. In summation, RPG’s activities were held to be providing services with a view to improve the structure of organisations of licensees and therefore charges recovered by them were held to be leviable to Service Tax in the category of management consultancy.

On the plea of principle of mutuality, the Tribunal stated that the relationship between the two independent legal entities was not that of principal-agent and it did not fulfil the conditions enumerated in the decision of Chemsford Club, 200 (37) SCC 214 as the identity of fund contributors and the recipients of the fund was not the same. The amount paid to RPG by CEAT was shown as expense for the receipt of service in the latter’s balance sheet and therefore it was held that no one acted on behalf of the other in the instant case.

The plea of valuing gross amount charged as inclusive of Service Tax also was not accepted on the ground that explanation 2 to S. 67 of the Financial Act, 1994 was added from 10-9-2004 and was not applicable retrospectively for the period under dispute.

The plea for non-applicability of longer period of limitation based on solicitor’s opinion also was not found convincing on the ground that bona fide belief was not blind belief and the intention to suppress the facts existed and thus rejecting the appeal the demand of Service Tax and penalties was confirmed.

(v) Penalty: Bona fide belief held:

Tidewater Shipping Pvt. Ltd. v. Commissioner of Service Tax, 2008 (11) STR 475 (Tri.-Bang).

In four different appeals, the appellant paid entire Service Tax with interest on being pointed out the lapse and much prior to issuance of show-cause notice. The adjudicating authority did not levy penalty considering the discretion u/ s.80. However, the Commissioner reviewed the orders and imposed penalties u/s.76 and u/s.78. Finally, all the cases were held to be under bona fide belief, appeals were allowed with consequential relief.


(vi)  Penalty u/s.78  :

Industrial Security Agency v. CCE All., 2008 (11) STR 347 (Tri. Del).

In this case, circumstances under which penalty is leviable and provisions of S. 78 have been discussed at length. The Tribunal observed that non-submission of return; result and concomitant of non-registration for which penalty is already imposed. Penalty u/s.78 is not imposable simply because the assessee has not filed the Returns. Accordingly, the Tribunal set aside penalty u/ s.78 considering that the facts and circumstances of the case not led by suppression, fraud or even contravention of relevant statutory provisions with an intent to evade Service Tax. Further, according to the Tribunal, if reasonable cause for failure to pay Service Tax is proven, penalty u/s.76 may not be imposed at all. However, the facts of the case were found to be not justifying complete waiver of penalty. Yet, the penalty u/s.76 was reduced.
 

(vii)    Software (Imported) whether goods or service?

Perfect Technologies v. CCE & CS, Siliguri 2008 TIOL 1386 CESTAT-Kol.

The appellants imported software from a foreign company in a digitised form by downloading the same online. The plea was made by the appellant that downloaded software being ‘goods’ was not chargeable to Service Tax. According to the Revenue, it could be treated as online service as it was downloaded online. However, considering the fact that even if it was a service provided online, reverse charge did not apply prior to 18-4-2006 (in terms of S. 66A coming into force) and such view was supported by the decision of Lohia Starlinger v. CCEX Kanpur, 2008 (10) STR 483 (Tri.-Del.) and demand for the subsequent period was not quantified by the Revenue. Further, in the case, there also existed a doubt as to the jurisdiction of the adjudicating Commissioner and therefore it was held fit for waiving pre-deposit.

(viii) Valuation of reimbursements:

Rolex Logistics Pvt. Ltd. v. Commissioner Service Tax, Bangalore, 2008 (11) STR 394 (Tri.-Bang) :

The appellants, registered under ‘management consultancy services’ and ‘maintenance and repair services’, filed their returns and paid Service Tax. On search operation, it was found that no Service Tax was paid on reimbursements shown in the balance sheet and hence, differential Service Tax was demanded in the show-cause notice. The appellant pleaded that rent of godown, salary of employees, etc. were not management consultancy services. The Tribunal observed that order of the Commissioner (Appeals) was non-speaking on various case laws relied upon by the appellant. Further, the facts of appellants’ filing of return and checking and scrutinising of records, etc. by the Department could not be prima facie considered ‘suppression’ in the light of various Supreme Court decisions cited by the appellants, waiver of pre-deposit was granted.

Part B — Some recent judgments

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Service Tax

I. Supreme Court :

Sales tax : Decision of Supreme Court in case of K. Raheja Development
Corporation referred to Larger Bench :

Larsen & Toubro Ltd. v.
State of Karnataka, 2008
(16) STT 286 (SC)


The assessee is engaged in property development involving
construction and building of flats and subsequent sale thereof. Under a
development agreement, it developed a plot owned by an owner and accordingly
tripartite agreement was entered into between the assessee, owner of plot and
prospective buyer. Relying on the Supreme Court judgment in K. Raheja
Development Corporation v. State of Karnataka, (2005) 2 STT 178 (SC), the
Department alleged that construction of flats was on behalf of purchaser and it
was a works contract and as such, sales tax be levied on works contract. The
question therefore was whether the tripartite agreement was entered into by the
assessee on its own or on behalf of the owner or on behalf of prospective
purchaser of flat.

The appellant did not deem it fit to rely on para 20 of K.
Raheja’s (supra) decision prima facie on the following grounds :



  • The developer–assessee undertook the contract to develop property of the
    owner.



  • The SCN merely proceeded on considering tripartite agreement as works
    contract.



  • There was no allegation in the SCN as to existence of monetary consideration
    in the first contract of development agreement.



  •  Whether the ratio enunciated in para 20 of the K. Raheja’s judgment was
    correct (reproduced below):

“20. Thus the appellants are undertaking to build as
developers for the prospective purchaser. Such construction/development is to
be on payment of a price in various instalments set out in the agreement. As
the appellants are not the owners, they claim a ‘lien’ on the property. Of
course, under clause 7 they have right to terminate the agreement and to
dispose of the unit if a breach is committed by the purchaser. However, merely
having such a clause does not mean that the agreement ceases to be a works
contract within the meaning of the terms in the said Act. All that this means
is that if there is a termination and that particular unit is not resold but
retained by the appellants, there would be no works contract to that extent.
But so long as there is no termination, the construction is for and on behalf
of the purchaser. Therefore, it remains a works contract within the meaning of
the term as defined under the said Act. It must be clarified that if the
agreement is entered into after the flat or unit is already constructed, then
there would be no works contract. But so long as the agreement is entered into
before the construction is complete, it would be a works contract.”


According to the Apex Court, if ratio of K. Raheja (supra)
had to be accepted, there could be no difference between a works contract and a
contract for sale of a chattel as a chattel and further there was a question
whether the petitioner was the contractor for the prospective flat purchaser.
The stand of the Department that not the development agreement but the
tripartite agreement was a works contract was found fallacious by the Court and
the judgment was recommended to be reconsidered by the Larger Bench.

Withdrawal of exemption retrospectively held as not within
the power of State besides being arbitrary.


 MRF Ltd. v. A.C. Sales Tax, 2008 (12) STR 206 (SC)


Kerala State Sales Tax authorities in this case withdrew
retrospectively an exemption granted for a specified period and for a specified
amount under an MOU with the Government granted by the Board of Revenue. The
Court observed that the petitioner made a huge investment in
diversification/expansion of its industrial unit based on the exemption and the
State was benefited through central excise duty, industrial development of the
State and contribution to labour and employment. Therefore denial of right
accruing to the appellant was unfair, unreasonable, arbitrary and violative of
Article 14 of the constitution. Further, the Court held that the State did not
have power to withdraw the exemption retrospectively under the provisions of the
Kerala General Sales Tax Act and allowed the appeal.

II. High Court :

Time bar : Whether applies to duty paid mis-takenly ?

CCE, Bangalore v. Motorola India Pvt. Ltd., 2008 (11) STR 555 (Kar.)


An amount was mistakenly debited in excess of duty payable to
the PLA account by the assessee. On noticing the same, the Department was
informed about it. The authorities directed to file refund claim which was
rejected on the ground of lapse of time and it was also confirmed by the
Appellate Commissioner. The Tribunal accepted the assessee’s case on the ground
that the amount paid mistakenly did not amount to duty. The High Court relying
on the Apex Court’s decision in the case of India Cements Ltd. v. CCE,
1989 (41) ELT 358 and also noting that the Madras High Court also held the claim
reasonable in view of the Apex Court’s above decision, rejected Revenue’s
appeal.

Karamchand Thaper & Bros. (Coal Sales) Ltd. v. UOI, 2008 (11) STR 459
(Cal.)

The petitioner engaged in the business of leasing operation and supervision work for supply of coal to power plants applied for registration under business auxiliary service. The Department did not re-ject the application. There is a provision for deemed registration if not granted within 7 days. After 22 months, the Department on its own registered the firm under clearing ‘and forwarding service. Al-though the rate is the same, liability under the said category would arise from 1999. The case of the petitioner was restricted to the point that without appropriate order of adjudication, the petitioner could not be registered under a different category. Being a factual issue, service tax authorities offered to re-examine the issue. The Court ruled that certificate granted could not remain in operation until the Commissioner, Service Tax, gives reasoned decision after hearing the petitioner and until then, the petitioner would continue to pay service tax under business auxiliary service. However, the Court stated that it had not made any observation on merits which the Commissioner, Service Tax, had to adjudicate.

III. Tribunal:

Business Auxiliary Service – Data processing services whether taxable under this category?

Dataware Computer  v. CCEC & ST (A) Guntur, 2008 (12) STR 121 (Tri.-Bang). Final order dated 25-3-2008.

The appellants under the order provided services of data processing and preparing MIS reports to Andhra Pradesh Electricity Board from July 2003 to April 2004. The contract defined the scope of services which included generation of various MIS reports and development of software for the same. The decision in the case ofBellary Computers v. CCE Mangalore, 2007 (8) STR 470 (Tri.-Bang.) was relied upon. Considering the service of the appellants as ‘Information technology service’, it was held as excluded from the scope of ‘business auxiliary service’.

CENVAT Credit:

Availing CHA services, whether input services for exporter of goods?

(i) CCE Rajkot v. Rolex Rings (P) Ltd., (2008) 16 STT (Ahd.-CESTAT)

While exporting goods, the appellant utilised services of CHA and surveyors. The Revenue treated them as non-eligible being of post-manufacturing activity and post-clearance of goods. Considering the Board’s Circular No. 91/8/2007 and the definition of ‘input services’ (which the Revenue had not considered), if was held that exporter remained owner of the goods until export took place and place of removal is port area. Further, the services are clearly related to business activity and therefore the Revenue’s appeal was rejected.

(ii)    [indal Steel & Power Ltd. v. CCE Raipur, 2008 16 STT (N.D. – CESTAT)

For consulting engineer’s services received from abroad, the assessee got registered  this category and paid service tax from CENVAT account. Later they also registered as output  service provider  of consulting  engineer’s services. However, the  services availed from foreign company  related to transfer of technology. The assessee however, took credit for the service tax paid as receiver. The Revenue denied credit on the ground that considering the relevant period i.e., when credit was taken, the assessee did not provide any output service and therefore, services received were not ‘input services’ for output services provided later. The assessee contended that service tax on transfer of technology was paid only under the direction of the Department. The Tribunal observed that had the service tax been paid by actual service provider, the assessee would have been entitled to credit. Merely because tax was paid as receiver of service, its right as recipient could not be denied. Further, at the relevant time, in terms of Rule 2(p) of the CENVAT Credit Rules, service tax was paid as deemed output service provider. Also, there is no time limit prescribed for utilisation of credit. Therefore, the date on which output service registration was taken is not at all relevant. Utilisation of credit was permissible in view of the extended definition of ‘output services’. Further, case laws cited by the appellant viz. Bhushan Power & Steel Ltd. v. CCE & ST, (2008) 12 SIT 155 (Kol. – CESTAT) and CCE v. Florescence Microfinish Pumps (P) Ltd., (2008) 12 SIT 423 (Delhi – CESTAT) also supported the view and as such the appeal was allowed.

Subcontractor’s services:

Evergreen Suppliers v. CCE Mangalore, (2008) 16 SIT 122 (Bang. CESTAT) – Final order dated June 23, 2008.

Service tax was demanded from the assessee under cargo handling service and clearing and forwarding service, whereas the assessee contended that it acted as subcontractor and the main contractor had discharged the service tax liability. However, in absence of purportedly sustainable proof, the demand was confirmed. The assessee submitted that in their own case for the earlier period, the Tribunal held that the field officers failed in their duty by not verifying whether principal contractor discharged the tax liability as stated by the assessee and the said failure could not be used against the assessee as in terms of Trade Notice No. 39-CE of 11-06-97, subcontractor was not liable. The Tribunal felt bound by this ruling and held the demand as unsustainable.

CENVAT Credit

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3. CENVAT Credit :



(a) Repair and maintenance services used for residential
colony by appellant-manufacturer — Residential colony necessary as factory
situated in remote area — Presence of workmen on the spot required to maintain
continuity in manufacture — Impugned services relatable to business — Repairs
and maintenance and civil construction for residential colony held as being
input services and, credit thereon held as admissible — Rules 2(l), 3 and 14
of Cenvat Credit Rules, 2004.

[Manikgarh Cement v. CCE, (2008) 9 STR 554 (Tri —
Mumbai)]

(b) Service Tax paid was allowed as CENVAT credit in
impugned order in respect of commission paid to agent. However, Revenue filed
an application for stay of the said order. It was held that Input service
means any service used by manufacturer directly or indirectly in manufacture
of final products and their clearance from place of removal — Input service
includes services used in relation to advertisement and sales promotion — Stay
of impugned order not granted — S. 86 of the Act, Rules 2(l) and 3 of Cenvat
Credit Rules, 2004.

[CCE v. Abhishek Industries Ltd., (2008) 9 STR 562
(Tri — Del.)]

 

Voices

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25. Voices


v
“Reservations in student admissions is much more defensible. We can aspire to
have world standards even with such reservations, but not if they are extended
to the faculty.”

— Montek Singh Ahluwalia, Deputy Chairman of Planning
Commission.


v
“This one gold medal must make us introspect as to why India, a country that has
successfully taken its place in the world as a democracy, is still handicapped
at this level.”


— Sonia Gandhi,
Congress President.

(Source : India Today, dated 15-9-2008)

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New tax haven blacklist likely

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24. New tax haven blacklist likely


Seventeen countries led by France and Germany decided to draw
up a new blacklist of tax havens, which could include Switzerland, in a first
step toward rewriting the rules of global finance.

The world’s 40-odd tax havens, such as the Cayman Islands and
Jersey, are known hideaways for undeclared revenue and host many of the
non-regulated hedge funds that came under fire following the recent financial
meltdown.

French budget minister Eric Woerth said the 17 governments at
the Paris meeting agreed to task the OECD with drafting a new expanded blacklist
of countries that fail to cooperate on tax evasion and transparency.

“Banking secrecy has its limits,” Woerth added. “Switzerland
has made progress… but we must take matters farther.”

(Source : The Economic Times, dated 23-10-2008)

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Words and deeds

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17 Words and deeds


Mergers & Acquisitions

‘The playing field for acquisitions is a little less crowded
than before, mainly because many firms aren’t exactly in a position to be
writing cheques for acquisitions’

— Peter Sands, Group Chief Executive, Standard Chartered Bank
in Business Today.

Leadership

‘Plenty of leaders do not want to acknowledge their
weaknesses. That is fine with me as long as they work at a subconscious level on
those weaknesses’

— K. V. Kamath, CEO, ICICI BANK, in The Economic Times

Other voices

‘Nowhere in the world is so much capital being consumed. As
our consumption goes up, more and more money is required to fuel it’

— Gopal Srinivasan, Director, TVS Electronics, in India Today

Softly speaking

‘Compassion, like a mother’s care, is the essence of moral
ethics. If somebody is ethically or compassionately motivated to do things, his
actions will always be positive’.

— Dalai Lama, in a lecture at IIM, Ahmedabad on ‘Ethics and
Business’

(Source : Indian Management, March 2008)

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Penalty provisions under MVAT Act, 2002

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VAT

Penal provisions :


Penal provisions can be bifurcated in two parts, (i) express
penal provisions, and (ii) provisions which are not expressly stated to be penal
provisions, but the nature of provisions operating as penal provisions.

Let us take the second part first. In this category the
following important provisions can be mentioned.

1. Assessment — S. 23(1) :


This Section reads as under :

“23. Assessment : (1) Where a registered dealer fails to
file a return in respect of any period by the prescribed date, the
Commissioner may assess the dealer in respect of the said period to the best
of his judgment without serving a notice for assessment and without affording
an opportunity of being heard :

Provided that, if after the assessment order is passed, the
dealer submits the return for the said period along with evidence of payment
of tax due as per the return or submits evidence of return for the said period
having been filed before passing of the assessment order along with evidence
of payment of tax due as per the return, then the Commissioner shall cancel,
by order in writing, the said assessment order and after such cancellation,
the dealer may be assessed in respect of the said period under the other
provisions of this Section :

Provided further that, such cancellation shall be without
prejudice to any interest or penalty that may be levied in respect of the said
period :

Provided also that no order, under this sub-section, shall
be passed after three years from the end of the year containing the said
period.”


The Section is in the nature of penal action. Failure to file
return within prescribed time will invite this ex parte best judgment
order. Therefore, if after due date, return for relevant period is not available
on the file of the officer, he can pass best judgment assessment order raising
any demand. This order can be passed by him without giving any notice or hearing
opportunity to the concerned dealer. As per S. 85(2)(b-1), no appeal can lie
against such order. This order can be cancelled only if one approaches the
authority with proof of filing return and with proof of payment of tax admitted
in the return.

The harsh effect of this provision will be that even if the
dealer has filed return but it has not reached the file of the officer, an ex
parte action may take place. It may be noted that now returnwise assessment
is possible and therefore if a dealer is liable to file monthly returns, there
can be 12 such ex parte orders.

The Section will operate more harshly if the dealer is not in
a position to make the payment of admitted dues. For example, a dealer is liable
to pay Rs.1 lakh in the month of Feb. 2008. If he has not filed return, an ex
parte order can take place. In such an order, demand will be based on the
best judgment of the officer and the demand may be raised at, say, Rs.5 lakhs,
etc. Now the dealer can get this order cancelled by filing the return of Feb.
2008 and on showing proof of payment of Rs.1 lakh admitted in the return. If it
is not done, then recovery and other penal actions for Rs.5 lakhs can go on.
Thus a dealer, who is not in good financial position to make payment of admitted
dues, will suffer the most. The only escape route will be to file the return in
time and apply for instalments. Before due date, filing of return without
payment is possible, but once the order u/s.23(1) is passed for non-filing of
return in time, the same order will get cancelled only on making payment of
admitted dues. Thus filing of return within due date is now an onerous duty on
the dealers.

The passing of order under this Section can be said to be a
completed assessment and the dealer cannot be assessed under other provisions
for the period covered by the said order till such order is cancelled. Upon
cancellation a dealer can be assessed under other regular provisions.

The time limit for passing the order under this Section is 3
years from the end of the year containing the period for which such order is to
be passed. For example, the time limit for passing ex parte order
u/s.23(1) for Feb. 2008 return will be March 2011.

The above provision appears to be against principles of
natural justice. It is giving unrestricted powers in the hands of the officers.

2. Classification of turnover — S. 28 :


This is one more Section not specifically stated to be penal
in nature, but operating as penal Section. The text of the Section is as under :

“28. Classification of turnover:- Where any Court or
Tribunal or any Appellate authority or any other authority passes an order in
appeal or review to the effect that any tax assessed under this Act or any
other Act should have been assessed under the provisions of a law other than
that under which it was assessed, then in consequence of such order, such
turnover or part thereof may be assessed to tax at any time within five years
from the date of such order, and where any assessment has already been made,
the assessment shall be modified after giving the dealer a reasonable
opportunity of being heard, notwithstanding that any provision regarding
limitation applies to such assessment period.”


This Section operates very harshly and practically the
benefit of litigating the matter for long gets vanished. In other words, the
Section seems to give premium on the inefficiency of the officers.

The working of this Section can be seen with an example. Suppose a dealer is assessed under the VATAct for certain turnover. The dealer litigates the matter and claims that the said turnover cannot be liable to tax under VAT.The Appellate authority including the High Court and the Supreme Court may accept the contention and may hold that the turnover is not liable under the VAT Act. Now at this juncture the Department can assess such turnover under any other relevant Act. For example, if turnover is to be assessed under the CST Act the Department can assess the dealer under the CST Act within 5 years from date of such appeal order. The above assessment will be without restriction of limitation provisions. For example, even after 30 years, the order under other Act can be passed, irrespective of the fact that the limitation to pass or modify the order under such other Act is already over.

The Section is to operate when the Appellate authority decides that the turnover should have been taxed under other Act, than the one under which it has been actually assessed. If appeal is under VAT Act it is difficult to anticipate how any Appellate authority will be able to make order relating to other Act. The Appellate authority may be able to say that the turnover is wrongly held liable under the VAT Act. However, if it directs to assess the turnover under some other Act like the CST Act, it will perhaps be without jurisdiction. Also if corresponding provisions under other Act are not in confirmity with the provisions of above S. 28, then the limitation as per such other Act should remain applicable. Though the intention of the Section is to cover the turnover under some other relevant Act, because of above requirement of order from the Appellate authority, etc., in our opinion, practically the section will have limited application.

3. Adjustment of payment:

One more silent penal provision is about adjustment of payment. Under the erstwhile BST Act the law was that any payment made towards dues as per any order was first to be adjusted against tax dues and balance towards interest, penalties, etc. Now the law is changed and a provision similar to ‘pathani vyaj’ is created. S. 40 reads as under:

“40. Adjustment of any payment :- Any payment made by a dealer or person in respect of any period towards any amount due as per any order passed under the Act shall first be adjusted, ex-cept insofar as the recovery of the said amount or part thereof is stayed U Iss.(6) of S. 26, against the interest payable by him on the date of payment in respect of the said period and thereafter towards the amounts due as a penalty, sum for-feited and fine. Any amount remaining unadjusted shall then be adjusted towards the tax payable in respect of that period.”

As per this Section any payment against dues created by any order, will first be adjusted towards interest, then penalties and the balance, if any, towards tax. Thus the person will run the post-order interest till he pays out entire amount of the order. It seems the Government’s thinking is now more on the commercial basis rather than a fiscal statute to collect tax. Such treatment deserves strong objection. It is necessary that the law is amended at the earliest to save dealers from such humiliating provisions.

4. Set-off  – S. 48(5) :

This Section relates  to set-off. The Section reads as under:

“48. Set-off, refund,  etc. :

(1)–

(2)–

(3)–

(4)–

(5)    For the removal of doubt it is hereby declared that, in no case the amount of set-off or refund on any purchase of goods shall exceed the amount of tax in respect of the same goods, actually paid, if any, under this Act or any earlier law, into the Government treasury except to the extent where purchase tax is payable by the claimant dealer on the purchase of the said goods effected by him :

Provided that, where tax levied or leviable under this Act or any earlier law is deferred or is deferrable under any Package Scheme of Incentives implemented by the State Government, then the tax shall be deemed to have been received in the Government Treasury for the purposes of this sub-section. “

Though the intention of this Section is to protect the revenue loss, the same will hit innocent purchasing dealers very gravely. Though the purchasing dealer might have paid tax to his vendor, the failure of the vendor to discharge his liability to Government will disentitle the purchasing dealer from claiming set-off. This will happen without any defence or protection to the purchasing dealer.

In normal course, the purchasing dealer will claim set-off in the period in which he has affected the purchases. But the set-off so claimed will get disallowed if the Sales Tax Department proves that the vendor has not paid the tax on his sale of goods. What we fail to appreciate is that the Government has all the machinery to collect the money from defaulter. The Government can utilise its powers, including prosecution, etc. to recover the tax from that defaulting dealer who has sold the goods, issued tax invoice, collected tax, but has not depos-ited the same into the Government Treasury. However without performing its duty, just on very prima facie case of non-payment of tax by the vendor, if set-off is disallowed to purchasing dealer, then it will cause great injustice to the purchasing dealer. For inefficiency of the Department the purchasingdealer will have to suffer. It may be noted here that there is no machinery available to the purchasing dealer to check whether the vendor has made payment of his taxes or not. Thus the Section operates without any defence in the hands of the purchasing dealer. Under VAT,every dealer will be claiming set-off of taxes paid on his purchases and even one single weak link in the chain may disentitle set-off to every succeeding purchasing dealer.

5. Agreements to be void – S. 57:

This is one more mischievous Section under the VAT Act. The Section reads as under:

“57. Agreement to defeat the intention and application of the Act to be void: (1) If the Commissioner is satisfied that an arrangement has been entered into between two or more persons or dealers to defeat the application or purposes of this Act or any provision of this Act, then the Commissioner may by order declare the arrangement to be null and void as regards the application and purposes of this Act. He may, by the said order, provide for increase or decrease in the amount of tax payable by any person or dealer who is affected by the arrangement whether or not such dealer or person is a party to the arrangement, in such manner as the Commissioner considers appropriate so as to counteract any tax advantage obtained by that dealer from or under the arrangement.

(2)    For the purposes  of this Section,

(i)    ‘arrangement’ includes any contract, agreement, plan or understanding, whether enforceable in law or not, and all steps and transactions by which the arrangement is sought to be carried into effect;

(i)    ‘tax advantage’  includes,-

(a)    any reduction in the liability of any dealer to pay tax,

(b)    any increase in the entitlement of any dealer to claim set-off or refund,

(c)    any reduction in the sale price or purchase price receivable or payable by any dealer.

(3)    Before passing any order under this Section, the Commissioner shall afford a reasonable opportunity of being heard to any such person or dealer whose tax advantage is sought to be counteracted.”

It means now the Department has unrestricted powers to go beyond the agreements and to declare them void.

Although, the practical implications of this Section are yet to be seen, however, there are fears that Departmental officers may interfere in the normal sale/purchase transactions and in spite of the fact that the dealer has charged correct price as per his policy, the officer may take action to enhance the same by substituting the said price, using above powers. The Section does not speak of any proof before initiating action under this Section. It only speaks of reasonable opportunity of hearing. So even on mere suspicion an officer may give hearing and after such empty formality, pass an order enhancing the tax liability. The Section should have been with burden of providing contrary proof by the Department before initiating the provisions of this Section.

6.    Assessment proceedings, etc. not to be invalid on certain grounds – S. 62 :

This is one more Section safeguarding the inefficiency of Department. The Section reads as under:

“62. Assessment proceedings, etc., not to be invalid on certain grounds:
(1)    No assessment (including review, appeal, rectification, penalty and forfeiture, notice, summons or other proceedings furnished, made or issued or taken or purported to have been furnished, made or issued or taken in pursu-ance of any of the provisions of this Act shall be invalid or shall be deemed to be invalid merely by reason of any mistake, defect or omission in such assessment, notice, sum-mons or other proceedings, if such assess-ment, notice, summons or other proceedings are, in substance and effect in conformity with or according to the intent, purposes and re-quirements of this Act.

(2)    The service of any notice,  order  or communication shall not be called in question, if the said notice, order or communication, as the case may be, has already been acted upon by the dealer or person to whom it is issued or which service has not been called in question at or in the earlier proceedings commenced, continued or finalised pursuant to such notice, order or communication.

(3)    No order, including an order of assessment, review, appeal or rectification, penalty or for-feiture passed under the provisions of this Act shall be invalid merely on the ground that the action could also have been taken by any other authority under any other provisions of this Act.”

The text of the Section is sufficient to draw a conclusion that no responsibility is kept on the officer. He may take action in any way or serve notice the way he likes, no invalidity in order will take place. Up till today, any such deficiency is considered as nullifying the resultant order and there are number of judgments on this count. A reference can be made to judgment in the cases of CIT v. Bhushan Mallick, (55 CTR 73) (Cal.) and Kiran Oil Mills (S.A. 508 of 95 & 537 of 97 dated 31-5-2003), wherein defect in notice is considered as sufficient to declare the or-der as invalid. Similar is the position in respect of service of notice, especially when it is the case of revision, reassessment, etc. Reference can be made to the judgments in case of Prakash Electronics (S.A. 642 & 643 of 1995, dated 12-6-1998) and Zakaria Karim & Brothers (S.A. 68 of 1997, dated 9-10-1998).

However all this has been set at naught. This Section may be misused and in case of genuine injustice also, the dealer will not be able to come out of the clutches of this Section.

Above few provisions are illustrative of how penal provisions have been silently enacted without mentioning them as penal provisions.

Limitation of Benefits Articles — Concept and its Application in Indian Tax Treaties – Part – 2

Conclusion:

From the above, it is clearly evident that the significance of articles relating to Limitation of Benefits clause cannot be undermined. All concerned parties would need to pay specific attention to LOB clauses in India’s Tax treaties. India is increasingly including Limitation of Benefits clause in the new treaties and in some cases including the same in the existing treaties by renegotiating existing treaties through the protocols as in the cases of Singapore and UAE. A taxpayer would be well advised to look for and examine relevant LOB clauses very minutely before taking any decisions ‘in relation to the relevant DTAAs.

S. 80IB : DEPB receipt eligible for relief

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Part B — Unreported Decisions




19 Flora Exports v. ACIT


ITAT ‘E’ Bench, New Delhi

Before P. M. Jagtap (AM) and

George Mathan (JM)

ITA Nos. 4522 /Del./2004

A.Y. : 2001-02. Decided on : 31-1-2008

Counsel on assessee/revenue : Ved Jain/

Amit M. Govli

S. 80IB of the Income-tax Act, 1961 — Profits and gains from
industrial undertaking — Profits of the undertaking included DEPB — Whether DEPB
receipt eligible for relief — Held, Yes.

Per George Mathan :

Facts :

The issue in dispute in this appeal was against the action of
the CIT(A) in confirming the order of the Assessing Officer to the extent that
the amount of DEPB received by the assessee who was a supporting manufacturer,
was held to be not forming part of the business profits derived from the
manufacturing activity for the purpose of computing deduction u/s.80IB of the
Act.

The Revenue supported the orders of the lower authorities by
relying on the decision of the Delhi High Court in the case of Ritesh Industries
Ltd. where it was held that duty draw back was not income derived from an
industrial undertaking and not entitled to special deduction u/s.80I of the Act.

Held :

The Tribunal referred to the Supreme Court decision in the
case of Baby Marine Exports, where it was held that the premium paid by the
export house or the trading house to a supporting manufacturer on FOB was an
integral part of the turnover of the supporting manufacturer and was includible
in the profits of the business and was eligible for deduction u/s.80HHC.
Further, it noted that the Delhi Tribunal in the case of Maharashtra Seamless
Ltd., applying the ratio of the decision of the Supreme Court in the case of
Baby Marine Exports had taken a view that once such receipts were taken as part
of the turnover and formed part of the eligible profits, then the assessee would
be entitled to the deduction u/s.80IB on such DEPB receipts also. Accordingly,
the assessee’s appeal was allowed.

Cases referred to :



(1) Baby Marine Exports 290 ITR 323 (SC)

(2) Maharashtra Seamless Ltd. (ITA No. 1107/Del./2003 dated
30-11-2006 and MA No. 250/Del./2007 dated 20-12-2007)


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S. 37(1), S. 28, S. 36(1)(vii) : Access fee for usage of software is not capital expenditure; Claims for bad debts and alternatively, as business loss, of dues receivable against sales value of shares of clients allowed.

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Part B — Unreported Decisions


(Full texts of the following Tribunal decisions are available
at the Society’s office on written request. For members desiring that the
Society mails a copy to them, Rs.30 per decision will be charged for
photocopying and postage.)


18 Angel Capital & Debt Market Ltd. v. ACIT


ITAT ‘I’ Bench, Mumbai

Before R. K. Gupta (JM) and

Abraham P. George (AM)

ITA No. 7075 /Mum./2005

A.Y. : 2002-03. Decided on : 12-5-2008

Counsel for assessee/revenue : Rajiv Khandelwal/

Bharat Bhushan

(1) S. 37(1) of the Income-tax Act, 1961 — Capital or
revenue expenditure — Payment of access fee for the usage of software —
Whether allowable as revenue expenditure — Held, Yes.


(2) S. 28 and S. 36(1)(vii) of the Income-tax Act,
1961 — Assessee, a sharebroker — Dues against the sales value of shares of the
clients sold written off and claimed as bad debts and alternatively, as
business loss — Whether the claim of the assessee allowable — Held, Yes.



Per Abraham P. George :

Facts :

The assessee was a sharebroker and had effectively taken two
grounds in appeal before the Tribunal, the facts whereof were as under :

(1) During the year the assessee had paid the sum of
Rs.11.62 lacs as charges for client access licence of a software viz.,
Derivatives front-office software product for NSE. The amount paid was claimed
as business expenditure. However, the Assessing Officer as well as the CIT(A)
rejected the claim of the assessee and treated the same as capital
expenditure.

(2) The non-recoverable dues of Rs.10.25 lacs from its
clients, which were written off by the assessee in its books of accounts were
claimed as bad debts u/s.36(1)(vii). According to the AO, out of the total sum
receivable from the clients, that part which was not brokerage i.e.,
the value of the shares, was not covered u/s.36(2). Hence, the assessee’s
claim was rejected. The alternative claim of the assessee to allow the claim
u/s.28, by treating the same as business loss was not considered by the AO.

Before the Tribunal the actions of the lower authorities were
justified by the Revenue on the ground that the payment was made for acquisition
of system software and not application software.

Held :

(1) The Tribunal noted that the amount paid by the assessee
was for access to certain software used by sharebrokers for accessing NSE and
controlling its trading functions. By this, according to the Tribunal, the
assessee did not get any enduring benefit. This was so because the assessee was
required to pay the amount periodically in order to have its continuous access.
It was also noted by the Tribunal that the ownership to the software was not
transferred to the assessee. According to the Tribunal, though the software did
help the assessee to be competitive in its line of business and for the
efficient conduct of its day-to-day business, that alone would not be sufficient
to hold the payment as capital expenditure. Further, relying on the test laid
down by the Special Bench in the case of Amway India Enterprises, the Tribunal
allowed the appeal of the assessee.

(2) Relying on the decision of the Special Bench Tribunal in
the case of Oman International Bank SAOG, the Tribunal held that the assessee
having written off the non-recoverable dues, had satisfied the stipulation as
per S. 36(1)(vii). According to it, based on the decision of the Mumbai Tribunal
in the case of B. D. Shroff, the assessee was entitled to succeed even under the
alternative ground viz., by way of trading loss u/s.28.

Cases referred to :




(1) Amway India Enterprises & Others v. Dy. CIT, 21
SOT 1 (Del) (SB);

(2) Dy. CIT v. Oman International Bank, SAOG 100 ITD
257 (SB);

(3) CIT v. B. D. Shroff, (ITA No. 4475 / Mum. /
2000)



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DTAA between India and Botswana notified : Notification No. 70/2008, dated 18-6-2008

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44 DTAA between India and Botswana notified : Notification
No. 70/2008, dated 18-6-2008

This DTAA had been signed on 8 December, 2006 but was pending
notification in the official gazette. It has now been notified and made
effective from 1-4-2009.

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A.P. (DIR Series) Circular No. 50, dated 3-6-2008 — Export of goods and services — Realisation of export proceeds — Liberalisation.

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Part C : RBI/FEMA


Given below are the highlights of certain RBI Circulars.

 

54 A.P. (DIR Series) Circular No. 50, dated
3-6-2008 — Export of goods and services — Realisation of export proceeds —
Liberalisation.

 

This Circular has enhanced the present period of realisation
and repatriation to India of the amount representing the full value of goods or
software exported from the present period of six months to twelve months from
the date of export. There has been no change in the period of realisation in
case of exports by an SEZ unit or exports to overseas warehouses.

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A.P. (DIR Series) Circular No. 48, dated 3-6-2008 — Overseas Investments — Liberalisation/Rationalisation.

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Part C : RBI/FEMA


Given below are the highlights of certain RBI Circulars.

 

53 A.P. (DIR Series) Circular No. 48, dated
3-6-2008 — Overseas Investments — Liberalisation/Rationalisation.

This Circular has further liberalised the provisions of
Notification No. FEMA 120/RB-2004, dated July 7, 2004 in the following cases :

1. Overseas Investment in Energy and Natural Resources
Sectors — Indian companies can invest in excess of 400 % of their net worth as
on the date of the last audited balance sheet, after obtaining prior approval
of RBI, in the energy and natural resources sectors such as oil, gas, coal and
mineral oil.

2. Investment in Overseas Unincorporated Entities in Oil
Sector :

(a) ONGC Videsh Limited and Oil India Limited are
permitted to invest in overseas unincorporated entities in oil sector (for
exploration and drilling for oil and natural gas, etc.) without any limits.

(b) Subject to certain conditions, Indian companies can
invest up to 400% of their net worth as on the date of the last audited
balance sheet in overseas unincorporated entities in the oil sector.
Investments in excess of 400% of their net worth require prior approval of
RBI.

 



In case of capitalisation of exports — the time limit for
obtaining prior approval of RBI has been aligned with the time limit provided
for in the Foreign Trade Policy. Thus, prior approval of RBI for capitalisation
of export proceeds will be required only where the exports remain outstanding
beyond the period of realisation prescribed by the Foreign Trade Policy.

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A.P. (DIR Series) Circular No. 46, dated 2-6-2008 — External Commercial Borrowings (ECB) by Services Sector — Liberalisation.

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Part C : RBI/FEMA


Given below are the highlights of certain RBI Circulars.

 

52 A.P. (DIR Series) Circular No. 46, dated
2-6-2008 — External Commercial Borrowings (ECB) by Services Sector —
Liberalisation.

This Circular permits borrowers in service sector viz.
hotels, hospitals and software companies to avail ECB up to US $ 100 million,
per financial year, under the approval route for the purpose of import of
capital goods. This is in addition to the existing facility for availing trade
credit up to US $ 20 million per import transaction, for a period of less than 3
years.

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A.P. (DIR Series) Circular No. 44, dated 30-5-2008 — Reporting under FDI Scheme — Revised procedure.

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Part C : RBI/FEMA


Given below are the highlights of certain RBI Circulars.

 

51 A.P. (DIR Series) Circular No. 44, dated
30-5-2008 — Reporting under FDI Scheme — Revised procedure.

This Circular has made the following changes in respect of
reporting the details of the issue of shares/convertible debentures :

1. Form FC-GPR has been revised.

2. A standard format for reporting receipt of monetary
consideration for issue of shares/convertible debentures has been prescribed.
Upon receipt of this report, the concerned Regional office of RBI will allot a
Unique Identification Number.

3. A format for KYC report on the non-resident investor
from the overseas bank remitting the amount has been prescribed. This report
has to be submitted along with the report of receipt of money.

4. The annual report of all investments will now have to be
submitted before July 31 every year instead of June 30.


 

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A.P. (DIR Series) Circular No. 43, dated 29-5-2008 — External Commercial Borrowings Policy — Liberalisation.

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Part C : RBI/FEMA


Given below are the highlights of certain RBI Circulars.

 


50 A.P. (DIR Series) Circular No. 43, dated
29-5-2008 — External Commercial Borrowings Policy — Liberalisation.

Presently, borrowers proposing to avail ECB up to US $ 20
million for Rupee expenditure for permissible end-uses require prior approval of
the Reserve Bank under the approval route.

 

This Circular has relaxed the above limit of US $ 20 million
for Rupee expenditure under the approval route as under :

(i) Borrowers in infrastructure sector can avail ECB up to
US $ 100 million.

(ii) Other borrowers can avail ECB up to US $ 50 million.

 


The all-in-cost ceilings in respect of ECB have been revised,
with immediate effect, as under :

Maturity
period

All-in-cost ceiling over 6-month LIBOR for the respective
currency of credit or applicable benchmark
  Existing
 Revised
Three years
and up to five years 		150 basis
points		 200 basis
points
More than five
years 		250 basis
points 		350 basis
points

 

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A.P. (DIR Series) Circular No. 42, dated 28-5-2008 — Trade credits for imports into India — Review of all-in-cost ceiling.

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Part C : RBI/FEMA


Given below are the highlights of certain RBI Circulars.

 

49 A.P. (DIR Series) Circular No. 42, dated
28-5-2008 — Trade credits for imports into India — Review of all-in-cost
ceiling.

This Circular has revised the all-in-cost ceiling in respect
of Trade Credits, with immediate effect, as under :

Maturity
period

All-in-cost ceiling over 6-month LIBOR for the respective
currency of credit or applicable benchmark
  Existing
 Revised
Up to one year
 50 basis
points		 75 basis
points
More than one
year up to three years  		125 basis
points		 125 basis
points

 

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Processing of returns of A.Y. 2007-08 — Steps to clear the backlog — Instruction No. 6/2008, dated 18-6-2008 issued by CBDT.

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48 Processing of returns of A.Y. 2007-08 —
Steps to clear the backlog — Instruction No. 6/2008, dated 18-6-2008 issued by
CBDT.

Kindly refer to above. The issue of processing of pending
returns has been discussed by the Board and following decisions have been taken
in order to clear the backlog :

(i) It has been decided that all CCsIT (CCA) should
redeploy officers and staff to clear the backlog in high pendency charges
keeping in view the overall work load including pendency of scrutiny cases.
Concerned CCsIT may take recourse to outsourcing of data entry as per standing
instructions of the Board/Directorate of Systems on the subject. For this
purpose, necessary funds would be placed at the disposal of the CCIT (CCA) for
outsourcing of data entry. CCsIT (CCA) should send proposals to the
Directorate of Income-tax (Systems) for outsourcing of data entry.


(ii) It has also been decided that in order to clear the
backlog of I-T returns for A.Y. 2007-08 in networked stations, 2D based AST
Software would continue to be used for processing the returns in ITR 1, 2, 3,
4. For non-networked stations, TMS Software would continue to be used.


(iii) Non-networked stations using TMS Software would be
provided CDs with OLTAS data as was done previously by the RCC so that the
Assessing Officers could verify tax payments.


(iv) In all I-T returns for A.Y. 2007-08 where the
aggregate TDS claim does not exceed Rs.5 lakh and where the refund computed
does not exceed Rs.25,000, the TDS claim of tax payer should be accepted at
the time of processing of returns. In all remaining returns, the AO shall
verify the TDS claim from the deductor or assessee as the case may be, before
processing the return. In all cases selected for scrutiny, all TDS claims
should be verified. In all cases where PAN was earlier found to be duplicate
or bogus and in cases where TDS certificates were called for processing
returns for the A.Y. 2006-07 but were not produced, the credit for TDS shall
be given after full verification.


(v) The rules in AST Software for matching OLTAS data with
the claim for credit made in the return are being modified to take care of the
common data deficiencies.


(vi) It has also been decided to launch a time bound TDS
drive to make those deductors who have not filed their TDS returns for F.Y.
2006-07 do so. The CsIT in charge of TDS functions are requested to follow up
cases where TDS returns were filed but PAN of some deductors were not reported
in TDS returns even though the TDS deducted from such deductees exceeded Rs.l
lakh. Information relating to such deductors/deductees will be provided by DIT
(Systems). This drive is to be an intensive two month campaign which is to be
monitored weekly by the Board and has to be completed by 31-8-2008. This drive
should be followed up by a concerted effort in improving TDS compliance.
Proforma of sending compliance report after TDS verification shall be sent
separately by DIT (Systems), New Delhi.




 



 

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Procedure for selection of cases for ‘scrutiny’ for non-corporate assessees

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47 Procedure for selection of cases for
‘scrutiny’ for non-corporate assessees



In supersession of earlier instructions on the above subject,
the Board hereby lays down the following procedure for selection of
returns/cases of non-corporate assessees for scrutiny during the current
financial year i.e., 2007-08.

 

2. The following categories of cases shall be compulsorily
scrutinised :


(i) All assessments pertaining to search and seizure
cases.


(ii) All assessments pertaining to surveys conducted
u/s.133A of the Income-tax Act.


(iii)
1All returns where deduction
claimed under Chapter VIA of the Income-tax Act is Rs.25 lakhs or above in
stations other than the cities on computer network.


(iv) 1All returns, including those of non-residents,
where refund claimed is Rs.5 lakhs or above in stations other than the
cities on computer network.


(v) (a) All cases in which the CIT (Appeals) or ITAT
has confirmed an addition/disallowance of Rs.5 lakhs or above or if the
assessee has conceded an addition in any preceding assessment year and
identical issue is arising in the current year. But if the issue involves
a substantial question of law, the cases may be picked up for scrutiny,
irrespective of the quantum of tax involved. However, if the addition has
been deleted by a superior appellate authority and the Department has
accepted that decision, the case need not be taken up for scrutiny.

(b) All cases in which an appeal is pending before the
CIT (Appeals) against an addition/disallowance of Rs.5 lakhs or above, or
the Department has filed an appeal before the ITAT against the order of
the CIT (Appeals) deleting such an addition/disallowance and an identical
issue is arising in the current year. However, as in (i) above, the
quantum ceiling may not be taken into account if a substantial question of
law is involved.


(vi) All returns filed by statutory bodies, marketing
committees and other authorities assessable to income-tax.


(vii) All cases of banks and non-banking financial
institutions with deposits of Rs.5 crores and above.


(viii) Cases of universities, educational institutions,
hospitals, nursing homes and other institutions for rehabilitation of
patients (other than those which are substantially financed by the
Government), the aggregate annual receipts (including donations credited to
the corpus/ any other fund) of which exceed Rs.10 crores in Delhi, Mumbai,
Chennai, Kolkata, Pune, Hyderabad, Bangalore and Ahmedabad and Rs.5 crores
in other places [Ref. S. 10(23c) & Rule 2BC].


(ix) All cases where exemption is claimed u/s.11 of the
Income-tax Act and the gross receipts (including donations credited to the
corpus/ any other fund) exceed Rs.5 crores in Delhi, Mumbai, Chennai,
Kolkata, Pune, Hyderabad, Bangalore and Ahmedabad and Rs.1 crore in other
places.


(x) (a) All cases where total value of International
Transactions (as defined u/s.92B of the Income-tax Act) exceeds Rs.15
crores).

(b) In all other cases where the Transfer Pricing Audit
carried out in the earlier year had led to an adjustment/addition to the
total income.


(xi) All cases of stockbrokers and commodity brokers as
well as their sub-brokers where brokerage received is disclosed at Rs.1
crore or above.


(xii) All cases of stockbrokers and commodity brokers as
well as their sub-brokers where there are claims of bad debts of Rs.5 lakhs
or more.


(xiii) All cases of professionals with gross receipts of
Rs.20 lakhs or more if total income declared is less than 20% of gross
professional receipts.


(xiv) All cases of deductions u/s.10A, u/s.10AA,
u/s.10BA, u/s.10B of the Income-tax Act exceeding Rs.25 lakhs.


(xv) All cases of contractors (excluding transporters)
whose gross contractual receipts exceed Rs.1 crore if total income declared
from contract work is less than 5% of gross contractual receipts.


(xvi) All cases of builders following project completion
method.


(xvii) All cases in which fresh capital introduced during
the year exceeds Rs.50 lakhs in Delhi, Mumbai, Chennai, Kolkata, Pune,
Hyderabad, Bangalore and Ahmedabad and Rs.10 lakhs in other cities.


(xviii) ¹All cases in which new unsecured loan introduced
during the year exceeds Rs.25 lakhs.


(xix) All cases in which deduction u/s.80IA(4), u/s.80IB,
u/s.80IC, u/s.80JJA, u/s.80JJAA, u/s.80LA, u/s.10(21), u/s.10(22B), u/s.
10(23A), u/s.10(23B), u/s.10(23C), u/s.10 (23D), u/s.10(23EA), u/s.10(23FB),
u/s.10(23G), u/s.10(37), u/s.10A, u/s.10AA, u/s.10B, or u/s.10BA of the
Income-tax Act is claimed for the first time.


(xx) *All cases in which loss from house property is more
than Rs.2,50,000.


(xxi) *All cases in which investment in property is more
than five times the gross receipts (i.e., purchase of property (008
from AIR)/[Gross total income (746) + Agricultural income (762) + Income
claimed exempt (125)>5]


(xxii) *All cases in which sum of short-term capital
gains u/s.111A and long-term capital gain is more than Rs.25 lakh.


(xxiii) *All cases in which sale of property has been
shown as per AIR return, but no capital gains have been declared in the
return of Income.


(xxiv) *All cases in which commission paid is more than
Rs.10 lakhs.


(xxv) *All cases having business of real estate with
gross turnover exceeding Rs.5 crores.


(xxvi) *All cases having business of hotels/tour
operations with gross turnover exceeding Rs.5 crores if net profit shown is
less than 0.05%


(xxvii) *All cases in which total depreciation claimed at
the rates of 80% and 100% is more than Rs.25 lakhs.


(xxviii) All cases in which net agricultural income is
more than Rs.10 lakhs.

Cabinet agreed to amend the DTAA between India and Syria : Press release dated 1-6-2008.

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46 Cabinet agreed to amend the DTAA between
India and Syria : Press release dated 1-6-2008.


 

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(a) S. 68 — Since no new amount credited in accounts of creditors during year, addition could not be made u/s.68. (b) S. 41(1) — Brought forward balances of creditors could not be added to assessee’s income.

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19 (2008) 24 SOT 393 (Delhi)

Shri Vardhman Overseas Ltd. v. ACIT

ITA No. 440 (Delhi) of 2006

A.Y. : 2002-03. Dated : 11-7-2008



(a) S. 68 of the Income-tax Act, 1961 — Since no new
amount had been credited in accounts of creditors during year under
consideration, addition could not be made u/s.68.


(b) S. 41(1) of the Income-tax Act, 1961 — Brought
forward balances of creditors could not be added to assessee’s income, as
question of genuineness could be examined only in the year in which they were
credited to the account.


 



During the relevant assessment year, the Assessing Officer
asked the assessee-company to prove the genuineness of certain sundry creditors.
The assessee could not file confirmations from the said creditors except one.
The Assessing Officer, thus, treated the credit balances appearing in the
assessee’s books of account as unexplained credits u/s.68. On appeal, the CIT(A)
confirmed the additions u/s.41(1).


 


The Tribunal deleted the additions made u/s.68 and u/s.41(1).
The Tribunal followed the decisions in the cases of :

(a) CIT v. Sugauli Sugar Works (P.) Ltd., (1999) 236
ITR 518; 102 Taxman 713 (SC)

(b) Chief CIT v. Kesaria Tea Co. Ltd., (2002) 254
ITR 434/122 Taxman 91 (SC)

 



The Tribunal noted as under :


(a) No new amount had been credited by the assessee in
their accounts during the year under consideration. Therefore, applicability
of S. 68 was ruled out and addition could not be made under this Section.

(b) The balances were brought forward balances. If the same
were added on account of their non-genuineness, then also those amounts could
not be added to the income of the assessee for the year under consideration,
as the question of genuineness thereof could be examined only in the year in
which they were credited to the account.

(c) The amount could also not be considered to be the
income of the assessee on the ground of expiry of limitation, as according to
well-settled law explained by the Supreme Court in the case of CIT v.
Sugauli Sugar Works (P.) Ltd., (1999) 236 ITR 518; 102 Taxman 713 in the
absence of creditor, it is not possible for the Department to come to the
conclusion that the debt is barred and has become un-enforceable as there may
be some circumstances which may enable the creditor to come with a proceeding
for enforcement of the debt even after expiry of the normal period of
limitation, as provided in the Limitation Act, 1963.



(d) It had not been shown by the CIT(A) that the assessee
had acquired any benefit from these liabilities which were still outstanding
in the balance sheet of the assessee and it had also not been shown that these
liabilities had ceased finally without the possibility of revival. Thus, the
onus had wrongly been shifted by the Revenue on the assessee. The assessee had
shown these liabilities outstanding in its balance sheet. Therefore, there was
no occasion to treat the said amounts as taxable u/s.41(1) and if the
Department intended to assess the same by applying the provisions of S. 41(1),
then the onus was on the Revenue to show that the liabilities which were
appearing in the balance sheet had ceased finally and there was no possibility
of their revival.

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S. 48 r.w. S. 45 and S. 55 — Right to construct additional floors acquired without incurring any cost and had no inherent quality of being available on expenditure of money — Such right is outside scope of S. 45.

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18 (2008) 24 SOT 366 (Mum.)

Maheshwar Prakash-2 CHS Ltd. v. ITO

ITA No. 34 (Mum.) of 2008

A.Y. : 2003-04. Dated : 15-5-2008

S. 48, read with S. 45 and S. 55 of the Income-tax Act, 1961
— Right to construct additional floors under Development Control Regulations,
1991, acquired by assessee without incurring any cost and, moreover, such right
had no inherent quality of being available on expenditure of money — Such right
is outside the scope of S. 45.

 


The assessee, a co-operative housing society established in
the year 1962, owned a building in Santacruz, Mumbai. This building had been
constructed after utilising the entire FSI available to it and, therefore, no
right was available for any further construction on this plot of land. However,
the Bombay Municipal Corporation (BMC) relaxed the development regulations in
the year 1991 and on that account additional Transferable Development Right
(TDR) of FSI was allowed under the newly enacted Development Control
Regulations, 1991 (DCR). Thus, the assessee became entitled to construct
additional space of 15,000 sq.ft. In view of the availability of such right, the
assessee entered into an agreement with two developers on 25-11-2002 for
construction of additional floors on the existing structure of the society’s
building and development of the said property against a consideration of Rs.42
lacs. Under this agreement, TDR was to be arranged by the developers at their
own cost. For the relevant A.Y. 2003-04, the assessee did not admit of any
capital gain tax liability on the aforesaid amount of Rs.42 lacs. The Assessing
Officer held that as per the amended provisions of S. 55(2) applicable to the
year under consideration, the cost of acquisition was to be taken as NIL and,
since the assessee had surrendered its right to the developers against the
consideration, the income had accrued to it in the year under consideration. The
Assessing Officer, therefore, assessed the entire sum of Rs.42 lacs in the hands
of the assessee as long-term capital gain, holding that the right to construct
was embedded in the land which was held by the assessee for more than three
years.

 

The CIT(A) upheld the order of the Assessing Officer and also
held that the instant issue was akin to the issue of bonus shares, which are
issued only to the persons who own the original shares. He also held that the
decision of the Supreme Court in the case of B. C. Shrinivasa Shetty (1981) 128
ITR 294/5 Taxman, relied on by the assessee was not applicable in the instant
case.

 

The Tribunal set aside the orders of the lower authorities
and held that the sum of Rs.42 lacs received by the assessee was not chargeable
to tax u/s.45. Relying on the decision of the Mumbai Bench of the Tribunal in
the case of Jethalal D. Mehta v. Dy. CIT, (2005) 2 SOT 422, the Tribunal
noted as under :

(a) Clause (aa) and Clause (ab) of S. 55(2) deal with the
case of shares or securities and, therefore, the same are not relevant for
disposal of the instant appeal.

(b) The perusal of S. 55(2)(a) reveals that the cost of
acquisition is to be taken at NIL in those cases where the capital asset
transferred is either goodwill of business or a trademark or a brand name
associated with business or a right to manufacture, produce or process any
article or thing or right to carry on any business, tenancy rights, stage
carrier permits or loom hours. In the instant case, the assessee was not
carrying on any business and the right to construct additional floors was not
covered by any of the assets mentioned in the aforesaid Ss.(2) of S. 55.
Therefore, the amended provisions of S. 55(2) did not apply to the instant
case and the lower authorities were not justified in taking the cost of
acquisition of the capital asset being a right to construct the additional
floors at NIL.

(c) Further, the contention of the Revenue that right to
construct the additional floors was embedded in the land and, therefore, the
instant case was akin to the issue of bonus shares and, consequently, it could
not be said that there was no cost of acquisition in respect of such right,
was not acceptable for two reasons, firstly, because it was not the case of AO
or the CIT(A) that the cost of acquisition was taken by them as NIL as per the
amended provisions; secondly, because the theory of spreading over the cost of
original shares over the original shares and bonus shares was based on the
fact that bonus shares were issued to the detriment of the original shares. In
the instant case, the right to construct attached to the land on the date of
purchase of land had already been exhausted by construction of flats prior to
1991 as per the FSI available according to law as was in force. Therefore,
there was no further right to construct any flat on that land. It was because
of DCR, 1991 that additional right had accrued to the assessee, which was
distinct and separate from the original right. Therefore, it could not be said
that such right was embedded in the land. Even assuming, for the sake of
argument, that such right was embedded in the land, there was no detriment to
the cost of land by granting such right on the assessee-society. On the
contrary, price of the land had increased because of the additional right made
available to the assessee-society.

d) Ignoring the events involving the surrendered row house and on examination of the facts regarding the flat in Abhijit building, the assessee’s investment of capital gain in the purchase of block of shares of company, which, in turn, got him entitled to a flat in the Abhijit building, was within the period of three years. After all, the purchases of block of shares of company’S’ and procuring the entitlement to a flat were composite transactions which were interlinked. Therefore, the investment in block of shares of the company’S’ was the investment of capital gain in the flat.

e) On the issue of how the assessee’s case was a case of construction, the assessee’s reliance on Circular Nos. 471 and 672 was relevant. The combined reading of Circular Nos. 471 and 672 shows that investment as in the assessee’s case was to be treated as a case of construction for the purpose of 5. 54F. The assessee’s investment of Rs.30.50 lacs in the construction of the house in Abhijit building fell within three years of the first sale of the shares.

f) Therefore, the investment of the long-term capital gain in the flat in Abhijit building was a case of construction and applicable time limitation was three years and not two years as held in the impugned order by the CIT(A).

S. 54F — Investment in flat in building under construction was a case of ‘construction’ and time limit of 3 years (and not 2 years) applicable

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17 (2008) 24 SOT 312 (Mum.)


Mukesh G. Desai HUF v. ITO

ITA No. 2077 (Mum.) of 2007

A.Y. : 1996-97. Dated : 24-6-2008

S. 54F of the Income-tax Act, 1961 — On facts, investment of
long-term capital gain in a flat in a building under construction was a case of
‘construction’ and time limit of three years (and not two years) was applicable
— Exemption u/s.54F was available.

 

The assessee invested a sum of Rs.30.50 lacs with a builder
for purchase of a row house. Subsequently, the assessee having come to know that
there was a drive by District Authorities for demolition of row houses,
cancelled the aforesaid agreement dated 26-8-1996 and received back whole amount
from the builder. Subsequently, the assessee entered into an agreement with a
company ‘S’, which was engaged in construction of a building known as Abhijit,
and paid a sum of Rs.30.50 lacs to ‘S’ for purchasing ‘block of shares’ of
company ‘S’ and got them transferred to his name. On this basis, the assessee
became entitled to allotment of a flat in the under-construction building,
Abhijit. The said building was constructed and the assessee got occupancy
certificate from the Municipal Corporation of Greater Mumbai (MCGM). The
assessee’s claim for exemption u/s.54F was denied by the Assessing Officer, on
the ground that the investment in the row house was an investment for purchase
of a ‘new asset’ as per Ss.(1) of the S. 54F and that cancellation of the above
transaction amounted to transfer of new asset during the lock-in period of 3
years, violating the condition of Ss.(3) of S. 54F. He, therefore, ignored the
investment in flat in Abhijit building and, thus, denied the exemption u/s.54F.

 

The CIT(A) held that the assessee’s case is the case of
purchase of new asset and not the construction of new asset and, accordingly,
the applicable time limit is of two years and not three years, hence the
exemption is not available. Further, the CIT(A) also observed that the assessee
has not utilised long-term capital gains for the purchase or construction of new
asset before filing the return of income u/s.139 and also failed to deposit the
same as per the scheme specified in Ss.(4) of S. 54F and, therefore, the
exemption should be denied on this ground also.

 

The Tribunal held that the assessee was entitled to exemption
u/s.54F. The Tribunal relied on the decisions in the following cases :

(a) CIT v. T. N. Aravinda Reddy, (1979) 120 ITR 46/
2 Taxman 541

(b) Jagan Nath Singh Lodha v. ITO, (2004) 85 TTJ 173
(Jodh.)(Para 6)

(c) Asst. CIT v. Smt. Sunder Kaur Sujan Singh Gadh,
(2005) 3 SOT 206 (Mum.)(Para 6)

(d) Mrs. Seetha Subramanian v. Asst. CIT, (1996) 56
TTJ 417 (Mad.)

The Tribunal noted as under :

(a) The sequence of events in the instant case revealed
that the assessee’s intention to invest the capital gains in the residential
house to avail of the exemption u/s.54 was beyond any doubt. The Assessing
Officer had not established that the agreement with the first builder and the
agreement for cancellation were bogus. Therefore, the cancellation of the
agreement by the assessee would fall within the ambit of the doctrine of
caveat emptor (i.e., buyers beware) and surrender of row house was
legally justified. The assessee was not expected to proceed to buy a defective
residential house (new asset), which was prone to demolition by the Municipal
Authorities, in order to qualify for exemption for exemption u/s.54F.
Therefore, the decision of the lower authorities in treating the row house as
a new asset was misplaced.

(b) Ss.(3) of S. 54F stipulates that the ‘new asset’
purchased or constructed must not be transferred within the lock-in period of
3 years from the date of such purchase or construction of ‘new asset’. The
Assessing Officer denied the claim of exemption u/s.54F for the reason of
violation of the said condition, considering the row house as a ‘new asset’.
The assessee did not actually purchase a ‘new asset’ and, therefore, the
refund received by the assessee from ‘D’ in respect of the surrender of the
row house was not relatable to any transfer of the new asset. Resultantly, the
violation of the said condition in Ss.(3) of S. 54F did not arise.

(c) Ss.(4) of S. 54F provides for depositing the unutilised
capital gains in the bank as per the prescribed Capital Gain Scheme and manner
of taxing such gains if not utilised before the due date for furnishing the
return of income u/s.139. Since the assessee had already parted with the
capital gain before the due date for filing the return in connection with the
‘row house’ acquisition, there was no way in which the assessee would have
complied with the condition of depositing it in the bank as per Ss.(4) of S.
54F. There was no violation of the condition of Ss.(4) of S. 54F by the
assessee.

(d) Ignoring the events involving the surrendered row house
and on examination of the facts regarding the flat in Abhijit building, the
assessee’s investment of capital gain in the purchase of block of shares of
company ‘S’, which, in turn, got him entitled to a flat in the Abhijit
building, was within the period of three years. After all, the purchases of
block of shares of company ‘S’ and procuring the entitlement to a flat were
composite transactions which were interlinked. Therefore, the investment in
block of shares of the company ‘S’ was the investment of capital gain in the
flat.

S. 45 r.w. S. 28(i) — Where stock-in-trade is converted into investment and later sold on profit, formula favourable to assessee to be accepted

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16 (2008) 24 SOT 288 (Mum.)

ACIT v. Bright Star Investment (P.) Ltd.

ITA Nos. 6374 & 9543 (Mum.) of 2004

A.Ys. : 2000-01 and 2001-02. Dated : 2-7-2008

S. 45 r.w. S. 28(i) of the Income-tax Act, 1961 — In absence
of specific provision in S. 45(2) to deal with a situation where stock-in-trade
is converted into investment and later on investment is sold for profit, formula
which is favourable to an assessee should be accepted.

 


The assessee had converted some shares from stock-in-trade to
investment as on 1-4-1998 at its book value. Thereafter, the assessee sold some
of the shares out of the above shares and offered profit earned as long-term
capital gain. The Assessing Officer opined that in view of the provisions laid
down u/s.45(2), the income of the assessee would be computed separately as
business income till the date of conversion of the shares from the stock to
investment and, thereafter, as long-term capital gain. The AO, therefore, took
the highest market rate of the said shares on the date of conversion and
computed the business income, being the difference in the value at which the
said shares were converted into investment and the market value of the said
shares on the date of conversion, i.e., 1-4-1998 and, further computed
the long-term capital gain at Rs.457.62 lacs being the difference between the
market value and the actual sale value of the shares.

The CIT(A) held that the action of the Assessing Officer to
segregate the long-term capital gain as shown by the assessee in the return of
income into business income and capital gain was totally arbitrary and
unjustified.

The Tribunal held in favour of the assessee. The Tribunal
relied on the decisions in the following cases :

(a) Sir Kikabhai Premchand v. CIT, (1953) 24 ITR 506
(SC)

(b) CIT v. Dhanuka & Sons, (1980) 124 ITR 24; (1979)
1 Taxman 417 (Cal.)

The Tribunal noted as under :


(a) The provisions of S. 45(2) deal with the issue of
capital gain where the investment is converted into stock-in-trade.


(b) While incorporating Ss.(2) to S. 45, the Legislature
has not visualised the situation in other way round, where the stock-in-trade
is to be converted into investment and later on the investment is sold on
profit. In the absence of a specific provision to deal with this type of
situation, a rational formula should be worked out to determine the profits
and gains on transfer of the asset.


(c) In the absence of a specific provision to deal with the
present situation, two formulas can be evolved to work out the profits and
gains on transfer of the assets.


(d) One formula which had been adopted by the Assessing
Officer, i.e., difference between the book value of the shares and the
market value of the shares on the date of conversion should be taken as a
business income and the difference between the sale price of the shares, and
the market value of the shares on the date of conversion, be taken as a
capital gain.


(e) The other formula which was adopted by the assessee,
i.e., the difference between the sale price
of the shares and the cost of acquisition of shares, which was the book value
on the date of conversion with indexation from the date of conversion, should
be computed as a capital gain.


(f) In the absence of a specific provision, out of these
two formulae, the formula which was favourable to the assessee should be
accepted.



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S. 2(22)(e) — Payment made by a co. out of its share premium a/c. cannot be taxed as deemed dividend.

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15 (2008) 24 SOT 42 (Delhi)

Dy. CIT v. MAIPO India Ltd.

ITA No. 2266 (Delhi) of 2005

A.Y. : 1996-97. Dated : 7-3-2008

S. 2(22)(e) of the Income-tax Act, 1961 r.w. S. 78 of the
Companies Act, 1956 — Payment made by a company out of its Share Premium a/c.
cannot be taxed in hands of receiver as deemed dividend.


During the A.Y. 1996-97, an amount of Rs.25.43 lacs was
advanced to the assessee-company by another company ‘G’ Ltd., in which the
assessee held 40% of shares. The amount was advanced in the nature of loans and
advances. Towards the end of the year, the assessee repaid Rs.14.31 lacs and the
AO included the balance amount of Rs.11.12 lacs as deemed dividend in the hands
of the assessee u/s. 2(22)(e). The case of the assessee was that entire reserve
and surplus amount appearing in the books of ‘G’ Ltd. consisted of share premium
which was a capital receipt and could not have been distributed as dividend. The
AO, however, treated the amount as deemed dividend u/s.2(22)(e). The CIT(A)
accepted the assessee’s contention.

The Tribunal also ruled in favour of the assessee. The
Tribunal noted as under :


(a) S. 78(2) of the Companies Act, 1956 states the five
purposes for which the Share Premium a/c. may be used. The Share Premium a/c.
cannot be used otherwise than for the specified purposes.


(b) When there is a statutory bar on the Share Premium a/c.
being used for distribution of dividend, the deeming provisions of S. 2(22)(e)
cannot apply.


(c) Not only is there a prohibition on the distribution of
the Share Premium a/c. as dividend under the 1956 Act, but the same is obliged
to be treated as a part of the share capital of the company and this is made
clear in S. 78(1) of the 1956 Act, which says that any payment out of the
Share Premium a/c., except for purposes authorised by Ss.(2), will be treated
as reduction of share capital attracting the provisions of the 1956 Act in
relation thereto.


(d) This provision of the 1956 Act takes care of the
argument of the Revenue that S. 2(22)(e) does not use the expression ‘whether
capitalised or not’. These words can have application only where the profits
are capable of being capitalised. They are not applicable where the receipt in
question forms part of the share capital of the company under the provisions
of the 1956 Act.



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Mere inclusion of land in industrial zone could not convert agricultural land into NA land, given no infrastructure development, and use for non-agricultural purposes not established — Gain arising on sale of land by assessee exempted from tax

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14 (2008) 114 ITD 428 (Pune)

Haresh V. Milani v. JCIT

A.Y. :1995-96. Dated : 7-9-2006

Whether the mere inclusion of land in industrial zone could
convert agricultural land into non-agricultural land, given that there had been
no infrastructure development on the same, and the fact that it had been used
for non-agricultural purposes had also not been established — Held, No.
Therefore, whether the gain arising on sale of such agricultural land by the
assessee was exempted from tax — Held, Yes.

Facts :

The assessee sold certain agricultural land in the relevant
A.Y., and thus claimed exemption of the long-term capital gains arising
therefrom. The AO accepted the assessee’s claim in the assessment completed
u/s.143(3). Subsequently, the Commissioner noted the fact that the land was
located in industrial zone, the fact which the AO had failed to take note of,
and therefore, under powers assigned to him u/s.263, he set aside the order and
directed the AO to reconsider the exemption granted to the assessee from the
capital gains tax.

Accordingly, the AO after issue of notice u/s.143(2) and
after considering the assessee’s submission, concluded that the land was not
used for agricultural purposes, and hence was not an agricultural land, and the
exemption allowed earlier was withdrawn. On appeal, the Commissioner (Appeals)
upheld the AO’s decision.

On second appeal before the Tribunal, it was observed as
under :

1. The question as to whether a land is agricultural
or not is a question of fact to be answered having regard to the facts and
circumstances of each case. In the instant case, the said land had been
classified in the Revenue records as agricultural land. The assessee had not
given any evidence of incurring any expenditure on agricultural operations on
the said land, as also he had not established that any agricultural produce in
the nature of rice, jowar, etc. was produced from the land.

2. On the other hand, the Revenue has also not produced any
evidence to show that the land was used for other than agricultural purposes.
No permission for non-agricultural use had been obtained by the assessee, and
no evidence of such use was brought on record.

3. Merely the fact that the land in question was brought in
an industrial zone could not be a determining factor by itself to say that the
land was converted into use for agricultural purposes.

4. Further, the profit motive of the assessee in selling
the land, without anything more than itself, could never be decisive to say
that the assessee had used the land for non-agricultural purposes. Therefore,
the land in question sold by the assessee was an agricultural land in nature
at the relevant point of time when the land was sold, and any gain arising
from such sale was exempted from tax.

 


Cases referred to :



(i) CIT v. Raja Benoy Kumar Sahas Roy, (1957) 32 ITR
566 (SC)

(ii) ACIT v. Tarachand Jain, (1980) 123 ITR 567
(Patna)

(iii) CWT v. Officer-in-charge (Court of Wards) Paigah,
(1976) 105 ITR 133 (SC)



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Where assessee had advanced amounts to sister concerns as prevented by regulations from prepaying its ECBs, interest income assessable under head ‘business income’ — Post-amendment to S. 10B, assessee entitled to deduction of interest income, and expenses

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13 114 ITD 387 (Bang.) (2008)

ACIT v. Motorola India Electronics (P.) Ltd.

A.Ys. : 1997-98, 1998-99, 2001-02. Dated : 28-11-2006

Whether in view of the fact that the assessee had advanced
certain amounts to its sister concerns from the monies available to it, because
it had been prevented by Government regulations from prepaying its External
Commercial Borrowings, interest income on the same could be considered to have
close nexus with the business of the assessee, and would be assessable under the
head ‘business income’ — Yes. Post-amendment to S. 10B, as entire profits
derived from business of an undertaking are to be considered for calculation of
eligible deduction, whether the assessee would be entitled to deduction of such
interest income, and expenses incurred in relation to such income were allowable
— Yes.

 

Facts :

The assessee-company earned certain interest income from
deposits lying in the EEFC account and from advancing of intercorporate loans
out of the funds of the undertaking. The assessee had certain External
Commercial Borrowings (ECB’s) obtained in the earlier years, which could be
repaid only in accordance with the repayment schedule, and thus it could repay
only a small portion of its outstanding loans, even though it had the liquidity
to pay more. The assessee took a business decision to place these funds with
various sister concerns as inter- corporate deposits. The assessee claimed that
both these types of interest income were a part of ‘income from business’.

 

Further, from A.Y. 2001-02, S. 10B has been substituted and
as per the new provisions, the interest income so derived would be entitled to
deduction u/s.10B.

According to the AO, only those profits derived from an
eligible undertaking from export of article or thing were entitled for deduction
for A.Y. 2001-02. On appeal, the CIT(A) upheld the order of the AO. On second
appeal, the Tribunal held that :

1. The interest income arose on deposits in the EEFC
account from export profits. The Government had stipulated the maximum amount
that could be held as deposits in the EEFC account, and as per the relevant
regulations, the assessee had also been prevented from pre-paying the External
Commercial Borrowings. Therefore, the assessee advanced the monies to its
sister concerns. The interest income on the same could be considered as having
close nexus with the business activity of the assessee and was assessable
under ‘business income’.

2. For the A.Ys 1997-98 and 1998-99, the assessee was not
eligible for grant of relief on interest income while computing deduction
u/s.10A and 10B. From A.Y 2001-02, S. 10B was substituted. Earlier, it was an
exemption Section, and income from these undertakings did not form part of
total income. However from that particular year, even though the Section
appears in Chapter 3, a deduction from business income from the undertaking is
to be granted by applying the substituted provision. For the A.Y in
discussion, the AO was directed to recompute the deduction u/s.10A and
u/s.10B, such that entire profits derived from the business of the undertaking
would be taken into consideration.

3. Regarding the allowability of expenditure relatable to
the interest income, as it had already been held that interest income was
assessable as business income, all related expenditures had to be allowed in
computing the interest income.

Cases referred to :



(i) CIT v. Tirupati Woollen Mills Ltd., (1992) 193
ITR 252 (Cal.)

(ii) CIT v. Tamil Nadu Dairy Development Corporation
Ltd., (1995) 216 ITR 535 (Mad.)

(iii) Synopsys India (P.) Ltd v. ITO, Appeal No.
1100 (Bangalore) of 2003

(iv) K. S. Subbiah Pillai & Co., (India) (P.) Ltd v.
CIT, (2003) 260 ITR 304 (Mad.) distinguished.


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S. 36(1)(vii) r/w S. 36(2) — Money-lending activity of non-banking finance business — Where assessee provided funds to sister entity, and amount became irrecoverable, allowable as bad debts — Where assessee gave certain amount to entity for allotment of

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12 114 ITD 202 (Delhi)

Tulip Star Hotels Ltd. v. ACIT

A.Ys. : 1998-99, 1999-2000 and 2003-04

Dated : 1-6-2007

S. 36(1)(vii) r/w S. 36(2) — Money-lending activity is a part
of non-banking finance business — Providing funds to entities where assessee was
a promoter was a part of fund-based activities carried on by the company —
Whether where assessee had provided funds to one such assessee, and the said
amount had become irrecoverable, the same could be claimed as bad debts — Also,
where the assessee had given certain amount to an entity for allotment of
preference shares — The entity refused to allot the same, and further the said
amount advanced by the assessee to this entity also became irrecoverable — Held,
the same could be claimed as bad debts.

 

Facts :

The assessee, a non-banking finance company, was incorporated
in the year 1987, and was mainly engaged in providing fund- and non-fund-based
financial services. In the relevant assessment years,
the assessee had paid certain amount to some villagers as advance for purchase
of land for business of development activities. Further, the assessee had also
advanced money to two companies, ‘F’ and ‘P’. The assessee had promoted ‘F’ and
had deposited certain amount with a bank and stood guarantor for money given to
‘F’ by the bank. On the guarantee money, the assessee earned interest from bank
as well as from ‘F’ and offered the same for taxation. Business of ‘F’ was
abandoned and despite all efforts, the assessee was not able to recover the
amount from ‘F’ and claimed the same as bad debts u/s.36(1)(vii). Further, the
assessee had given certain amount to ‘P’ for allotment of preference shares, but
‘P’ refused to allot the same. The assessee, therefore, asked ‘P’ to refund the
amount with interest and on P’s failure, claimed the said amount as bad debts.

 

The assessee’s claim was disallowed on the ground that it was
not carrying on any money-lending business.

 

On appeal before the Tribunal, the Tribunal held the
following :

1. The contention of the lower authorities that the
assessee was not carrying on any money-lending business was incorrect. This
was because; carrying on money-lending activities was a part of doing
non-banking financial business. Huge amounts earned as interest were offered
for taxation, and the same had been taxed in the earlier years as well as the
year under consideration. The objects clause of the assessee-company clearly
stated that the object of the assessee was to run non-banking business and
advance money as intercorporate deposits.

2. The Delhi Bench of the Tribunal has held that there is
no qualification in S. 36(2) that the business of money lending should be
understood only in traditional sense.

3. Further, the guarantee stood by the assessee has to be
taken as an activity of money lending. The assessee has earned interest on the
guarantee amount from the bank as well as from ‘F’. As the business of ‘F’
company was abandoned, whatever amount was recoverable from it by the assessee
was treated as bad debts by the assessee. All the conditions of S. 36(1)(vii)
r/w S. 36(2) being satisfied in this case, amount recoverable from ‘F’ was
allowable as bad debts.

4. With regard to the amount advanced to ‘P’, for allotment
of preference shares, the Tribunal observed that since ‘P’ had refused to
allot the shares, the assessee had asked it to refund the amount. ‘P’ in turn
had instructed its debtor M to pay the said amount to the assessee on its
behalf. The assessee had shown this amount as intercorporate deposit with M,
and interest had also been shown. Therefore, it cannot be said that the said
amount had the character of share application money, as it was in the nature
of intercorporate deposit, on which the assessee was to receive interest. The
conditions of S. 36(2) were satisfied in this case, and the amount recoverable
from ‘P’ was allowable as bad debts u/s.36(1)(vii).

 


Case referred to :

DCIT v. SREI International Finance Ltd., 10 SOT 722
(2006) (Delhi) (para 11)


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Press Note 7 (2008) No. 5(10)/2006-FC, dated 16-6-2008 — Consolidated Policy on Foreign Direct Investment.

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Part C : RBI/FEMA


The Reserve Bank of India has issued 3 Circulars. The DIPP
has issued 1 Press Note.

 

61 Press Note 7 (2008) No. 5(10)/2006-FC,
dated 16-6-2008 — Consolidated Policy on Foreign Direct Investment.

This Press Note contains a summary of the FDI policy and regulations
applicable to various sectors and activities. The Press Note has incorporated
policy changes up to March 31, 2008.

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A.P. (DIR Series) Circular No. 1, dated 11-7-2008 —Security for External Commercial Borrowings — Liberalisation.

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Part C : RBI/FEMA


The Reserve Bank of India has issued 3 Circulars. The DIPP
has issued 1 Press Note.


60 A.P. (DIR Series) Circular No. 1, dated
11-7-2008 —Security for External Commercial Borrowings — Liberalisation.

Presently, RBI permission is required for creation of charge
on immovable assets, financial securities and issue of corporate or personal
guarantees, on behalf of the borrower in favour of the overseas lender, to
secure the ECB under automatic/approval route.

 

Through this circular RBI has delegated, subject to certain
terms and conditions, the power to grant ‘no objection’ under FEMA for creation
of charge on immovable assets, financial securities and issue of corporate or
personal guarantees, in favour of the overseas lender security trustee, to
secure the ECB to be raised by the borrower.

 

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A.P. (DIR Series) Circular No. 53, dated 27-6-2008 — Overseas Direct Investment by Registered Trust/Society.

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Part C : RBI/FEMA


The Reserve Bank of India has issued 3 Circulars. The DIPP
has issued 1 Press Note.


59 A.P. (DIR Series) Circular No. 53, dated
27-6-2008 — Overseas Direct Investment by Registered Trust/Society.

This Circular permits registered trusts and societies engaged
in manufacturing/educational sector to make investment in the same sector(s),
after obtaining prior approval of RBI, by way of joint venture or wholly-owned
subsidiary outside India. Application for permission has to be made in Form ODI.

 

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A.P. (DIR Series) Circular No. 52, dated 11-6-2008 — Deferred Payment Protocols dated April 30, 1981 and December 23, 1985 between Government of India and the erstwhile USSR.

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Part C : RBI/FEMA


The Reserve Bank of India has issued 3 Circulars. The DIPP
has issued 1 Press Note.

 

58 A.P. (DIR Series) Circular No. 52, dated
11-6-2008 — Deferred Payment Protocols dated April 30, 1981 and December 23,
1985 between Government of India and the erstwhile USSR.

The Rupee value of the special currency basket has been fixed
at Rs.62.5198 with effect from May 23, 2008 as against the earlier value of
Rs.60.5828.

 

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Suspension of collection of taxes during Mutual Agreement Procedure under the India-Danish Double Taxation Avoidance Convention (DTAC) — Instruction No. 7/2008, dated 24-6-2008.

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Part A : DIRECT TAXES

57 Suspension of collection of taxes during
Mutual Agreement Procedure under the India-Danish Double Taxation Avoidance
Convention (DTAC) — Instruction No. 7/2008, dated 24-6-2008.

Competent authorities of India and Denmark have entered into
a Memorandum of Understanding to avoid the unintended hardship to the taxpayers,
as well as for efficient management of collection of revenue for the captioned
subject.

 

Summary of amendments made to the Finance Bill, at the time of
enactment.


The following are the important additional amendments which
were made to the Finance Bill, which have been passed by the Parliament and
enacted in the Finance Act, 2008 :



  • Exemption available u/s.10A and u/s.10B has been extended by one more year


  •  Relief is given u/s.40(a)(ia) for TDS on amounts provided/payments in March
    and paid after the due date of payment of TDS, but before the due date of
    filing the return of income would be allowable as a deduction in that previous
    year itself. It is in line with the deduction available u/s.43B of the Act.
    This amendment is retrospective with effect from A.Y. 2005-06


  • Due date for obtaining the tax audit report has been pre-poned to 30 September


  • For eligibility of deduction u/s.80-IB, if an undertaking begins refining of
    mineral oil on or after April 1, 2009, deduction will be allowed to such
    undertaking only if the following conditions are satisfied :



  • It is wholly owned by a public sector company or any other company in which
    a public sector company or companies hold at least 49% of the voting rights


  • It is notified by the Central Government before June 1, 2008


  • It begins refining during April 1, 2009 and March 31, 2012



  • Since an amendment is made in S. 115JB for addition of deferred tax liability,
    similar adjustment has been provided for a credit in the deferred tax asset
    created during the previous year


  • Notice for scrutiny assessment for Fringe Benefit Tax u/s.115WE shall be
    served on the assessee within a period of 6 months from the end of the
    financial year in which return is furnished. This amendment is applicable from
    April 1, 2008


  • AOP/BOI have been made liable to TDS provisions u/s.194-C if they are subject
    to tax audit


  • Certain powers have been given to the Commissioner of Income-tax (Appeals) in
    case of an appeal filed against the assessment order in respect of which the
    proceeding before the Settlement Commission abates u/s.245HA. Similar
    amendment has been provided under the Wealth-tax Act also.


  • S. 292BB has been inserted, wherein if the assessee appears for proceedings, it
    would be deemed that the Notice has been duly served on him as per the provision
    of the Act. Consequently, claims of objection for the notice not served or
    served late, etc., would be precluded. However, in case the assessee has filed
    such an objection and then appeared for the proceedings, the provisions of S.
    292BB would not apply.
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Clarifications from CBDT regarding filing of returns of income for the assessment year 2008-09 — Circular No. 6/2008, dated 18-7-2008.

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Part A : DIRECT TAXES


56 Clarifications from CBDT regarding filing
of returns of income for the assessment year 2008-09 — Circular No. 6/2008,
dated 18-7-2008.

It has been reiterated by the Board that no annexures need to
be filed with the return of income for the captioned assessment year. It has
been emphasised that the CCIT needs to look into strict compliance of this rule.
TDS/TCS, Advance Tax and Self-Assessment Tax credit would be given on the basis
of the details filed in the return of income, subject to relevant instructions
on verification of TDS claims. However, the assessees are advised to retain all
the annexures, which otherwise would have been filed with the return of income.

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Clarifications from CBDT regarding e-payment of taxes — Circular No. 5/2008, dated 14-7-2008.

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Part A : DIRECT TAXES


55 Clarifications from CBDT regarding
e-payment of taxes — Circular No. 5/2008, dated 14-7-2008.

It has been clarified by the Board that in instances where
the taxpayer does not have a bank account, taxes can be paid from some other
person’s bank account. However, the challan should clearly reflect the PAN of
the person whose tax has been paid. Further, it has been clarified that the
rules for e-payment would apply to tax deducted at source and tax collected at
source.

 

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S. 43 (5) — Loss suffered in F&O transactions could not be considered as speculation loss.

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New Page 1

Part B — Unreported Decisions


(Full texts of the following Tribunal decisions are available
at the Society’s office on written request. For members desiring that the
Society mails a copy to them, Rs.30 per decision will be charged for
photocopying and postage.)


6 R. B. K. Securities Ltd.
v. ITO


ITAT ‘B’ Bench Mumbai

Before G. C. Gupta (JM) and

A. L. Gehlot (AM)

ITA No. 2465/Mum./2006

A.Y. 2003-04. Decided on : 21-7-2008

Counsel for assessee/revenue : Prakash K. Jotwani/ Niraj
Bansal

S. 43(5) of the Income-tax Act, 1961 — Speculation loss —
Whether the loss suffered in F&O transactions could be considered as speculation
loss — Held, No.

Per G. C. Gupta :

Issue :

Whether the losses suffered in F&O transactions could be
considered as speculation loss.

Held :

Relying on the Mumbai Tribunal decision in the case of SSKI
Investors Services Pvt. Ltd., it was held that dealings in derivatives was a
separate kind of transaction which did not involve any purchase & sale of shares
and therefore loss on account of derivative trading cannot be treated as
speculative loss. Further, the Tribunal also referred to the Bangalore Tribunal
decision in the case of C. Bharath Kumar, where the constructive or implied
delivery was held to be as good as actual delivery. Based on the same, the
Tribunal held that the loss claimed by the assessee on F&O transaction was a
business loss and not speculation loss as contended by the Revenue.

Cases referred to :



1. DCIT v. SSKI Investors Services Pvt. Ltd., (2008)
113 TTJ (Mumbai) 511,

2. C. Bharath Kumar v. DCIT, (2005) 4 SOT 593 (Bang.)

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S. 12A(a) — Once CIT is satisfied about objects of the trust and genuineness of activities, he is required to grant registration w.e.f. date of creation

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Part B — Unreported Decisions


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at the Society’s office on written request. For members desiring that the
Society mails a copy to them, Rs.30 per decision will be charged for
photocopying and postage.)




5 The Indus Entrepreneur
v. The CIT-II


ITAT ‘B’ Bench, Jaipur

Before I. C. Sudhir (JM) and

B. P. Jain (AM)

ITA No. 32/JP/2008

A.Y. : 2003-04. Decided on : 20-6-2008

Counsel for assessee/revenue : Mahendra Gargieya/

J. L. Basumatari

Assessee society was registered under Rajasthan Societies
Registration Act on 1-9-2005 — Assessee applied to CIT for registration
u/s.12A(a) of Income-tax Act, 1961 — CIT vide his order dated 7-11-2007 granted
registration w.e.f. 1-4-2007 — Whether once CIT is satisfied about objects of
the trust and genuineness of activities, he is required to grant registration
w.e.f. 1-9-2005 — Held, Yes.

Per B. P. Jain :

Facts :

The assessee is a Society registered under Rajasthan
Societies Registration Act on 1-9-2005. The assessee applied for registration on
10-4-2007 before the CIT. The CIT granted registration u/s.12A(a) of the Act
vide its order dated 7-11-2007 w.e.f. 1-4-2007. The assessee made application to
make the said registration effective from 1-9-2005.

Held :

At the outset, the Tribunal noted that the CIT has committed
an error by observing that the application has been made on 10-4-2007, whereas
the same was made on 2-8-2006. A reminder letter dated 10-4-2007 was made to the
CIT, which was wrongly taken as the date of application. Having noted this
error, the Tribunal held as under :

As per the Act, the assessee is required to make the
application in Form 10A before 1-1-1973 or before the expiry of the period of
one year from the date of creation of the trust. In the instant case, the Trust
was created on 1-9-2005 and the assessee has submitted the application on
2-8-2006, which is in time. The CIT is required to grant registration w.e.f.
1-9-2005, if he is satisfied about the objects of the trust and genuineness of
the activities. In the present case, the learned CIT is satisfied about the
objects and genuineness of the activities of the trust and so he has granted
registration, though from a wrong date on a wrong interpretation of the facts of
the case.

The learned CIT is required to pass an order for granting or
refusing the registration u/s.12AA(1)(b) of the Act before 6 months from the end
of the month in which the application is received. The language of the provision
makes it mandatory for the learned CIT either to grant or refuse the
registration within the stipulated period, failing which the assessee is
entitled to assume that its application has been accepted and the registration
granted.

Accordingly, the learned CIT was directed to grant
registration w.e.f. 1-9-2005.


Editor’s note : S. 12AA has been amended w.e.f. 1-6-2007,
whereby the exemption is now available from the financial year in which the
application is made.

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S. 80IB(10) — Land purchased in 1996 — Revised plan approved, commencement certificate issued, and use of land for non-agricultural purposes permitted after 1-10-1998 — Whether AO justified in denying deduction u/s.80IB(10) on ground that commencement of

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Society mails a copy to them, Rs.30 per decision will be charged for
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1 ITO, 14(3)(3) v.


Shri Vimalchand M. Dhoka

ITAT ‘A’ Bench, Mumbai

Before K. C. Singhal (JM) and V. K. Gupta (AM)

ITA No. 5520/Mum./2005

A.Y. : 2002-03. Decided on : 19-5-2008

Counsel for revenue/assessee : Sanjay Agarwal/

Vimal Punmiya


S. 80IB(10) of the Income-tax Act, 1961 — In respect of
Lonavala Project of the assessee for which deduction was claimed u/s.80IB(10),
land was purchased in 1996 — Wall was constructed — WIP of this project on
31-3-1998 was stated to be Rs.10,17,615 — Original plan expired after validity
period of one year — Revised plan was approved and commencement certificate
issued on 30-9-2000 — User of land for non-agricultural purposes was permitted
on 28-6-2001 — Whether AO justified in denying deduction u/s.80IB(10) on the
ground that the condition u/s.80IB(10)(a) viz. commencement of the
construction after 1-10-1998 was not satisfied — Held, No.


Per V. K. Gupta :

Facts :

The assessee was engaged in the business of textiles and
construction. In A.Y. 2002-03, in respect of construction business, the assessee
claimed deduction u/s.80IB(10) at Rs.62,21,131 in respect of his projects at
Virar and Lonavala. In respect of Lonavala project, land was purchased in 1996
for Rs.5.50 lakhs and work-in-progress as on 31-3-1998 was shown at
Rs.10,17,615. The AO disallowed the claim for deduction u/s.80IB(10) of
Rs.3,32,369 in respect of Lonavala project, on the ground that the project had
commenced prior to 1st October 1998, since land for Lonavala project was
purchased in 1996 and as on 31st March 1998, certain expenses were shown as
work-in-progress and also a wall was constructed. According to the AO, the
project did not satisfy the condition stated in S. 80IB(10)(a). Before the CIT(A)
the assessee contended that :

(a) no construction work actually took place before 1st
October 1998;

(b) the wall was constructed merely to prevent the entry of
trespassers;

(c) the plan, originally submitted, expired after the
validity period of one year, hence revised plan was submitted, which was
approved by the concerned statutory authorities and, thereafter construction
work started after 1-10-1998;

(d) the land was an agricultural land and conversion of
land use was permitted only on 28-6-2001;

(e) the expenses shown in the balance sheet were of
administrative nature and not of construction activity. The CIT(A) found force
in the arguments of the assessee that the expenses incurred on architect fees,
landscape and elevation on filling the plot are the expenses which were
necessary for submitting the plan for the project and that incurring of these
expenses cannot be taken as commencement of the project. The fact that
permission for conversion of land from agricultural use to non-agricultural
use was issued on 28-6-2001 and also the commencement certificates were issued
by the relevant authority only on 30-9-2000 also weighed with the CIT(A). The
CIT(A) also stated that before getting the order for conversion and
commencement certificate, the construction activity cannot be started. He,
therefore, agreed with the assessee and directed the AO to grant deduction to
the assessee as claimed by it. The Revenue preferred an appeal to the
Tribunal.


Held :

The expenses incurred for change of land use and other
administrative/other land development expenses incurred prior to statutory
approvals, which approvals have been received after 1st October 1998 cannot
result into commencement of the project before 1st October 1998. The Tribunal
observed that the CIT(A) has examined the issue in detail and found itself to be
in agreement with the findings of the learned CIT(A), hence the Tribunal
confirmed the order passed by CIT(A). Accordingly, appeal filed by the Revenue
was dismissed.

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S. 2(14) and S. 45 : Amount received by a member of the housing society from a developer who constructed additional floors in a building owned by the housing society not liable to capital gains tax

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Part B — Unreported Decisions


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at the Society’s office on written request. For members desiring that the
Society mails a copy to them, Rs.30 per decision will be charged for
photocopying and postage.)



20 Deepak S. Shah v. ITO


ITAT ‘D’ Bench, Mumbai

Before R. K. Gupta (JM) and

A. L. Gehlot (AM)

ITA No. 1483/Mumbai/2001

A.Y. : 1995-96. Decided on : 16-6-2008

Counsel for assessee/revenue : Arvind Sonde/

Virendra Ojha

S. 2(14) and S. 45 of the Income-tax Act, 1961 — Capital
Gains — Amount received by a member of the housing society from a developer
holding TDR, who constructed additional floors in a building owned by the
housing society — Whether Assessing Officer justified in levying capital gain
tax from a member of the housing society — Held, No.

Per A. L. Gehlot

Facts :

The assessee derived income from salaries, dividend, etc. He
was a member of the housing society (‘the Society’). There was an estate
developer (‘the Developer’) who was in possession of TDR, and was looking out
for properties, whereon it could utilise the TDR. In March, 1995, the Society
and the Developer entered into an agreement whereunder the Society gave
permission to the Developer to utilise its TDR in raising the superstructure on
the existing building of the Society. In consideration thereof the members of
the Society, including the assessee, received the aggregate sum of Rs.1.21
crores from the Developer, wherein the share of the assessee was Rs.5.8 lacs.

According to the assessee, the said sum of Rs.5.8 lacs
received by him from the Developer was not taxable. However, according to the
Assessing Officer, the Society through its members had transferred the
development rights to the Developer for the aggregate consideration of Rs.1.21
crore and the same was taxable in the hands of the members of the Society.

On appeal before the CIT(A), he opined that the assessee and
the other members had drafted an agreement with the Developer to make believe
that the compensation receivable was for the hardship caused to the members on
account of construction activity. However, in effect and in reality it was the
benefit that each member was given corresponding to the valuable right that he
possessed in the land and building of the Society. Accordingly he held that the
assessee and other members of the Society had transferred a capital asset within
the meaning of S. 45 and therefore, capital gain was chargeable thereon. In
arriving at the conclusion, the CIT(A) also relied on the Supreme Court decision
in the case of A. R. Krishnamurthy and another.

Before the Tribunal the Revenue relied on the orders of the
lower authorities and also on the decision of the Gauhati Tribunal in the case
of Md. Nasser Ahmed.

Held :

The Tribunal noted that neither the Society nor the members
owned or possessed any TDR. The TDRs were owned and possessed by the Developer
and in terms of the regulations framed by the Municipal Corporation, it was
permissible for the building to utilise the said TDR in or with respect to the
prescribed area, including the land and building owned by the Society. The
members of the Society had consented to suffer the hardships and in terms of the
regulations of the Society or otherwise or in law the members did not have any
say in the matter once the Society decided to give its consent. According to the
Tribunal, the members of the Society had paid for purchase of the flat, which
conferred very limited rights and ‘right to grant permission for additional
construction’ as such did not form part of any rights; but it arose on account
of the volition or voluntary desire of a person. Such permission could not be
obtained by enforcing any rights or obligation arising from the agreement to
purchase the flat and/or the regulations of the Society. Accordingly, the
voluntary consent given by the members cannot constitute or form part of the
bundle of rights which were owned or possessed by the member in or with respect
to the tenure of the flats granted to the member by the Society. The area
occupied by the members was only a ‘measure’ in quantitative terms inasmuch as
the extent of hardship which may be faced cannot be quantified; When an
additional construction was made, the location of the flat, as such, was of no
significance or importance, since everyone suffered the hardship and the extent
could not be determined through any ‘measurer’. It further observed that the
members had not transferred any rights in or with respect to the flat or
suffered any deficiency or limitation in or with respect to the rights in the
flat; in fact they had added the risk of adding load to the building.
Accordingly, it held that the cost of flat cannot be any measure for the purpose
of finding out the cost of the alleged ‘capital asset’ and the alleged
‘transfer’ of such asset.

According to the Tribunal, the decisions relied on by the
CIT(A) as well as the Revenue in its submission, both were distinguishable on
the facts. It further observed that the assessee was neither holding any capital
asset, nor was there any transfer of capital asset. Accordingly it held that S.
45 of the Act was not attracted and the assessee was not liable to capital gain
tax u/s.45 of the Act.

Cases referred to :



(1) A. R. Krishnamurthy and Another v. CIT, 176 ITR
417 (S.C.)

(2) ITO v. Md. Nasser Ahmed, 2 SOT 389 (Gauhati)


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S. 14A – Where surplus earned is more than the investment made, no disallowance u/s.14A could be made

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photocopying and postage.)



4 Faze Three Exports Ltd. v. Addl. CIT


ITAT ‘I’ Bench, Mumbai

Before J. Sudhakar Reddy (AM) and V. D. Rao (JM)

ITA Nos. 7701 and 4677/Mum./2004 and 2005

A.Ys. : 2001-02 and 2002-03. Decided on : 28-7-2008

Counsel for assessee/revenue : Jitendra Jain/Bharat Bhushan

S. 14A of the Income-tax Act, 1961 — Disallowance of expenses
in relation to exempt income — Assessee, an exporter, had made investments in
shares of different companies, including group companies — Assessee able to show
earnings more than the amount of investment made — Whether Assessing Officer
justified in disallowing interest — Held, No.

Per J. Sudhakar Reddy :

Facts :

The assessee was in the business of exports of goods. As the
assessee had investments in equity shares, in addition to Rs.4.52 crore invested
in preference shares of a group company in the year under appeal, the Assessing
Officer disallowed part of the interest cost u/s.14A of the of the Act.

On appeal the CIT(A) held that interest paid on term loan,
discounting charges and other bank charges as well as interest on vehicles’ loan
cannot be disallowed, as the same can be held to have been utilised for specific
purposes. However, with reference to interest paid on packing credit, the CIT(A)
was of the view that the same could be subjected to S. 14A, and he accordingly,
restricted the disallowance to Rs.4.57 lacs.

Before the Tribunal the Revenue justified the orders of the
authorities below and contended that certain interest expenditure could
definitely be attributable to the investments made by the assessee. It further
relied on the Delhi High Court decision in the case of Motor General Finance
Ltd.

Held :

According to the Tribunal, the CIT(A) had erroneously
concluded that the packing credit was available for all the activities of the
assessee and that since the assessee was having only one bank account, it should
be presumed that the investment had also gone out of packing credit loan and the
same was required to be apportioned. The Tribunal noted that as per the terms of
the packing credit facility, the fund is released only against export orders.
According to the Tribunal, the presumption of the CIT(A) that the assessee would
have violated the stipulation laid down by the bank was unwarranted, especially
when there was no evidence in that regard. Further, it was noted that the
assessee was able to demonstrate that its earning during each of the years was
much more than the investment made in the particular year. It had own fund of
Rs.48.44 crore as against the borrowed fund of Rs.6.3 crore, while the
investment in equity was Rs.4.52 crore. Based on the above and also relying on
the Supreme Court decision in the case of Munjal Sales Corpn., the Tribunal
allowed the appeal of the assessee.

Cases referred to :



1. Munjal Sales Corpn. v. CIT, 298 ITR 298 (SC)

2. CIT v. Motor General Finance Ltd., 254 ITR 449
(Del.)



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S. 43B – Interest on Custom duty not covered in S. 43B

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Part B — Unreported Decisions


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3 Royal Cushion Vinyl Products Ltd. v. ACIT


ITAT ‘F’ Bench, Mumbai

Before Sushma Chowla (JM) and

Abraham P. George (AM)

ITA No. 2824/M/2006

A.Y. 2002-03. Decided on : 31-7-2008

Counsel for assessee/revenue : Mayur Shah/

K. M. Varma

S. 43B of Income-tax Act, 1961 — Interest on Customs duty —
Whether such interest falls within the ambit of provisions of S. 43B — Held, No.

Per Abraham P. George :

Facts :

The assessee was a manufacturer of PVC flooring, leather
cloth, etc. It had imported certain raw materials under advance licence without
the payment of customs duty. This exemption was granted with the condition that
the assessee would export required value of goods. However, for its failure to
export goods, the assessee was made to pay the customs duty of Rs.9.52 crore,
which was waived on goods imported, along with the interest of Rs.3.78 crore. In
its tax audit report, the assessee had shown Rs.13.20 crore as disallowable
u/s.43B. However, in its return of income filed, the assessee had disallowed the
sum of Rs.9.52 crore only i.e., the amount equal to the custom duty. The
interest of Rs.3.78 crore was claimed as not covered u/s.43B. The Assessing
Officer as well as the CIT(A) held that the interest was disallowable u/s.43B.

Held :

The Tribunal referred to the Calcutta High Court decision in
the case of Hindustan Motors Ltd., where it was held that interest payable under
the Customs Act, 1962 was not part and parcel of customs duty payable and hence,
such interest did not attract S. 43B of the Act. According to it, the same High
Court followed the said decision in Orient Beverages Ltd., where it was held
that interest payable on outstanding municipal taxes could not be disallowed
u/s. 43B. Further, it also referred to the Apex Court decision in the case of
Harshad Mehta, where it was held that penalty or interest could not be
considered as tax. In view of the same, and the fact that there were no
decisions of the jurisdictional High Court, though there were decisions which
were against the assessee but of a different High Court, the Tribunal allowed
the appeal and deleted the disallowance of Rs.3.78 crore.

Cases referred to :



1. Hindustan Motors Ltd. v. CIT, 218 ITR 450 (Cal.)

2. CIT v. Orient Beverages Ltd., 247 ITR 230 (Cal.)

3. Harshad Mehta v. Custodian and Others, 231 ITR
871 (SC)



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Whether CIT(A) was justified in refusing to admit additional evidence — Held, No

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2 Anmol Colours India (P) Ltd.
v. ITO


ITAT ‘A’ Bench, Jaipur

Before I. C. Sudhir (JM) and

B. P. Jain (AM)

ITA No. 379/JP/2008

A.Y. : 2002-03. Decided on : 20-6-2008

Counsel for assessee/revenue :

Mahendra Gargieya/P. C. Sharma

Assessing Officer issued notice u/s.143(2) of the Income-tax
Act, 1961 and gave the assessee various opportunities to produce documents in
support of the return filed — None appeared for the assessee — AO proceeded to
make an ex-parte assessment u/s.144 by treating addition to unsecured loans and
share application money during the year as unexplained u/s.68 of the Act —
Before CIT(A), assessee contended that it had given all documents/evidences to
its counsel who failed to appear before the AO — Assessee should not be made to
suffer for no lapse on his part — Assessee filed application under Rule 46A
along with documents/ evidences for admission thereof as additional evidence —
CIT(A) refused to admit additional evidence — Whether CIT(A) was justified in
refusing to admit additional evidence — Held, No.

Per B. P. Jain :

Facts :

The assessee was served notice u/s.143(2) of the Act on
29-10-2003. Thereafter, the assessee was given various opportunities and show
cause for producing the documents in support of the return filed. No one
appeared and the AO proceeded to make an ex-parte assessment u/s.144 of
the Act. The AO treated the addition to the unsecured loans and share
application money during the year as unexplained u/s.68 of the Act and added the
same to the income of the assessee. The AO further denied the claim of the
business loss of Rs.1,77,365 and treated the business income as Nil. Before the
CIT(A), the assessee contended that all the documents/evidences were given to
the counsel of the assessee and that the assessee was totally dependent upon his
counsel for representing the matter before the AO, but he did not care to attend
the proceedings. It was submitted that the assessee should not be made to suffer
for the serious lapse on the part of his counsel. The assessee stated that upon
receipt of the assessment order it came to know for the first time about the
additions made by the AO. The affidavit in this regard was filed before CIT(A).
The assessee contended that the circumstances were beyond the control of the
assessee and therefore, assessee was prevented by sufficient cause from
producing the documents/evidence before the AO. The assessee filed an
application under Rule 46A and produced the necessary evidences, before the
CIT(A), which were, in the opinion of the assessee, required for disposal of the
case. The CIT(A), upon receipt of the application along with documents/evidences
sent the said application along with documents/evidences to the AO. In response
thereto, the AO wrote a letter to the CIT(A) stating that assessee had not
appeared and had not produced any evidence despite various opportunities and now
on the basis of evidence filed before the CIT(A), the said loans and share
application money are verifiable from the books of the assessee. Upon receipt of
the letter from the AO, the CIT(A) held that none of the conditions specified
under Rule 46A are fulfilled and therefore he refused to admit the additional
evidence and confirmed the action of the AO. The assessee preferred an appeal to
the Tribunal.

Held :

The explanation of the assessee appears to be bona fide
and the assessee was prevented by sufficient cause from producing the evidence
which it was called upon to produce before the AO. Therefore, the CIT(A) was not
justified in not admitting the additional evidence under Rule 46A of the
Income-tax Rules, 1962.

When the application under Rule 46A along with documents was
sent to the AO and the AO in his letter to the CIT(A) stated that on the basis
of evidence filed before the CIT(A), the said loans and share application money
are verifiable from the books of the assessee, then the CIT(A) within his power
under sub-rule 4 of Rule 46A could direct the AO to examine the
documents/evidences filed by the assessee to dispose of the appeal.

The powers of the first Appellate Authority are very wide and
co-terminus with those of the AO and what AO can do, he can do and what AO fails
to do, that also he can do [refer Kanpur Coal Syndicate, 53 ITR 225 (SC)]. S.
251 and S. 252 of the Act have also been worded keeping the same spirit, as also
Rule 46A.

S. 250(4) empowers the CIT(A) to make further inquiries on
its own or to direct the AO to make further inquiry and to report to him.

The embargo put on his power under Rule 46A(1) and (2) has
also been loosened by sub-rule 4 which empowers the CIT(A) to direct the
production of any document/examination of witness, to enable him to dispose of
the appeal. Thus, the legislative intent is quite clear and the CIT(A) should
not jump straightway to reject, if the appellant files some evidence before him
under the provisions of Rule 46A(1).

The powers of the CIT(A) as submitted above are also to be
interpreted in the context of the amended law, wherein he is no more empowered
to restore back any matter which was earlier u/s.251(1)(a), necessitating a
compulsory admission of the evidence before him in the interest of justice.

Since all the evidences have to be examined by the AO,
therefore, in the interest of justice, the matter is restored back to the file
of the AO who will examine the evidences filed by the assessee before the CIT(A)
and decide the issue de novo, but by providing adequate opportunity of
being heard to the as-sessee. The assessee may submit further documents or
evidences as required in support of his claim before the AO. The AO is directed
to act accordingly.


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Non est factum

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The Word

Non est factum is the stand taken by a party to the suit
when he challenges the enforceability of an agreement or a document on the
ground that even though the document bears his signatures, the same is not his
document as his signatures were obtained by fraud, coercion or misrepresentation
or he signed under misunderstanding of substantial nature. Such pleas generally
do not find acceptance by courts except under special circumstances. On
acceptance of the plea, a document is held void as opposed to voidable as the
element of consent is regarded as totally absent.


2. The term ‘non est factum’ is a latin expression and
is used in legal parlance to mean ‘not his document’. Such a claim is made by
the party signing the document to dispel a general presumption that the person
signing ought to be aware of its meaning, content and character. The law
protects an innocent person raising such plea only when it is diligently proved
that he was swayed into signing the document without knowing the true content
and character as a result of some tricky situation he was placed in.

3. The defence to the plea of non est factum is
basically on facts evidencing that the person arguing non est factum
signed the document with full knowledge and will, or that even if there was some
misunderstanding, the effect thereof is unsubstantial. In Anirudhan v. The
Thomco’s Bank Ltd., 1963 AIR 746 (SC), the plaintiff stood surety for an
overdraft granted by the respondent bank to the principal debtor. A blank signed
surety bond was given by the appellant-surety to the principal debtor who
submitted the same to the lending bank, after filling in the amount of
Rs.25,000. As the bank was not prepared to grant an overdraft of Rs.25,000, the
figure was changed by the principal debtor to Rs.20,000 without the knowledge of
the surety. When the guarantee was sought to be enforced on the default made by
the principal debtor, the surety on ground of non est factum claimed that
he stands discharged after unilateral alteration. Rejecting the claim, the Court
held that the document was not altered in the possession of the promisee, the
principal debtor was acting as agent of the surety and above all the alteration
has not caused any prejudice to the promisor, the same being unsubstantial.
Quoting with approval the observations of Cotton L. J. in Holme v. Bruskill,
(1877) 3QBD 495, the Court held — “The true rule in my opinion is that, if there
is any agreement between the parties with reference to the contract guaranteed,
the surety ought to be consulted, and that if he has not consented to the
alteration, in cases where it is without enquiry evident that the alteration is
unsubstantial or that it cannot be otherwise than benefit to the surety, the
surety may not be discharged.”

4. The plea of non est factum has greater force when
taken by an illiterate or otherwise deficient person not adequately equipped
with power of proper understanding or a person acting under dominance of others.
This, however, is not a decisive factor. In Smt. Hansraj v. Yasodanand,
1996 AIR 761 (SC), the plaintiff was an illiterate, harijan, childless widow who
was given employment in Railways on the death of her husband on compassionate
ground. She wanted to make a will of her inherited house in favour of her
brother’s son. A person pretending to assist her in preparing the document of
will got her signed some papers and, as claimed by her, prepared a sale deed
instead of the will in favour of the brothers’ son. Having lost in all the
Courts, the lady appealed to the Supreme Court taking additional ground based on
non est factum, alleging that the signatures were never made for the
purpose of sale deed. Dismissing the appeal, the Supreme Court held that the
transfer was not vitiated for non est factum. As observed “when it has
been concurrently found by all Courts below on evidence on record that the
document was executed as a sale deed by the appellant, the aforesaid additional
ground pales into insignificance.”

5. Subhash Mahadevasa Habib v. Nemasa Ambasa Dharamdas (D)
by LRS & Ors. INSC 303 (19-3-2007) is a case where alienation was questioned
on the ground that it was vitiated by fraud, coercion and undue influences. The
plea was that the executor of the document was under the impression when he
executed the sale deed that he was executing a document to secure repayment of a
loan of Rs.10,000 which he had taken. He had not intended to execute a sale
deed. The document writer had played a fraud on him. He, in other words, pleaded
a case of non est factum. The Courts negatived the claim and dismissed
the suit as the claimant was not able to prove any fraud on the part of the
document writer, which finding was not disturbed by the Supreme Court.

6. The decisions in such matter rest on direct and
circumstantial evidence. The maxim follows the provisions of the Contract Act
which makes the consent actuated by coercion, under influence and
misrepresentation as voidable at the option of the consenting persons. Non
est factum even defies the maxim ‘ignorantia juris non excusat’ and
even such ignorance can be a valid defence in appropriate cases particularly
involving illiterate persons genuinely but not negligently falling victim to an
unintended action.

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Ex debito justitiae

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The Word

The expression ‘ex debito justitiae’ literally stands
for doing justice. In legal usage, it speaks of a remedy which enables one to
get justice when principles of equity and justice are violated in any order of
the Court. The principle embodied in the maxim is that a Court of plenary
jurisdiction should have powers to correct its own judgments and order of
subordinate Courts, regardless of any specific power conferred on it, for the
purpose of preventing abuse of process and grave palpable errors.


2. A judgment pronounced by a Court is generally final until
disturbed by a Court of competent jurisdiction. However, if for any reason — a
glaring omission or a patent mistake — there is some manifest illegality or want
of jurisdiction in the order, the Courts are empowered to remedy the abuse of
process by reviewing its decisions on petition or suo motu ‘ex debito
justitiae’, as no suitor should suffer for the wrong of the Court.

3. Drawing distinction between remedies available for regular
and irregular orders, the Privy Council in Isaacs v. Robertson, (1984) 3
AER 140 observed that “if an order is regular it can be set aside by an
Appellate Court; if the order is irregular, it can be set aside by the Court
that made it on application being made to that Court either under the rules of
that Court dealing expressly with setting aside orders for irregularity or,
‘ex debito justitiae’, if the circumstances warranted, namely, violation of
the rules of natural justice or fundamental rights.

4. Cases of frank failure of natural justice are obvious
cases where relief is granted as of right. The principle finds acceptance in S.
151 of the Code of Civil Procedure which reads :

“151. Nothing in this code shall be deemed to limit or
otherwise affect the inherent power of the Court to make such orders as may be
necessary for the ends of justice or to prevent abuse of the process of the
Court.”


5. In criminal cases, the maxim was recognised in spirit by
S. 561A of the 1898 Code which finds expression in S. 482 of the Code of
Criminal Procedure, 1973. The Section reads :

“482. Nothing in this Code shall be deemed to limit or
affect the inherent powers of the High Court to make such orders as may be
necessary to give effect to any order under this Code, or to prevent abuse of
the process of any Court or otherwise to secure the ends of justice.”


6. The Apex Court relied heavily on the maxim in A. R.
Antulay v. R. S. Nayak & Anr., [1988 AIR 1513 (SC)] where the appellant, the
then Chief Minister of Maharashtra who resigned in deference to a High Court
judgment, but continued as MLA, was charged before the Special Judge u/s.161 and
u/s. 165 IPC for taking gratification in respect of official act. After several
proceedings in lower and the High Court, the Supreme Court, in appeal before it,
set aside the order of the Special Judge discharging the accused and, as the
proceedings had dragged too long, withdrew the case from the Special Judge
suo motu and assigned it to a sitting Judge of the High Court. As the order
of the Supreme Court was in disregard of the provisions of the Criminal Law
Amendment Act, 1952, under which such offences could be tried by Special Judge
only, the same was challenged before the High Court and then, in appeal, before
the Supreme Court. Admitting the wrong, the Court repelled the argument that as
the Superior Court is deemed to have general jurisdiction, the law presumes that
the Court acted within jurisdiction. The Court observed that ‘the impugned
direction were in deprival of the constitutional rights, contrary to the express
provisions of the Criminal Law Amendment Act, 1952, in violation of the
principles of natural justice, and without precedent in the background of the
Act of 1952. The directions definitely deprived the appellant of certain rights
of appeal and revision and his rights under the Constitution. The Court further
observed “having regard to the enormity of the consequences of the error to the
appellant and by reason of the fact that the directions were given suo motu,
there is nothing which detracts the power of the Court to review its judgment
‘ex debito justitiae’, in case injustice has been caused.

7. The maxim can operate even against the express bar on
review, if circumstances so require. In Madhu Limaye v. State of Maharashtra,
1978 AIR, SC 47, the appellant was prosecuted u/s.500 IPC for making defamatory
statement against the then Law Minister Shri A. R. Antulay. The same was
challenged on the ground that the statement made was in personal capacity. The
challenge having been rejected by the Sessions Judge, revision petition was
filed before the High Court, which was held not maintainable on the ground of
specific bar in relation to interlocutory orders in S. 397(2) of the Cr. P.C.
Holding that the High Court has inherent power to be exercised ‘ex debito
justitiae’ to do the real and substantial justice for the administration of
which alone Courts exist, the Supreme Court observed that “The instant case
wherein the order impugned rejected the application challenging the jurisdiction
of the Court to proceed with the trial, undoubtedly fell for exercise of the
power of the High Court in accordance with S. 482, even assuming, although not
accepting that invoking the revisional power of the High Court is
impermissible.” Similar issue was involved in V. C. Shukla v. State, 1980
AIR 962 SC where the jurisdiction to issue directions by the Judge of Special
Court for charges to be framed against the appellant were challenged. The High
Court held the revision petition not maintainable on the ground of the order
being interlocutory. Not agreeing with the High Court, the Supreme Court held
that “apart from the revisional power, the High Court under the code of 1898
possessed an inherent power to pass order ‘ex debito justitiae’ in order
to prevent abuse of the process of the Court.”

8.    The power of review or revision ‘ex debito justi-tiae’ is exercisable only by Courts exercising original, appellate or revisional jurisdiction. The High Court’s power to grant stay of demand in reference proceedings u/s.256 of the Income-tax Act, 1961 came for consideration before the Supreme Court in CIT Delhi v. Bansidhar and Sons, [157 ITR 665 (SC)]. The assessee sought injunction and stay of demand relying upon the inherent jurisdiction u/ s. 151 of the Code of Civil Procedure, which was granted by the High Court on condition of furnishing of adequate security. Upholding the Revenue’s challenge, the Supreme Court ruled that the power to act I ex debito justitiae’ related to matters of procedure and not substantive rights of the parties. In answering questions or disposing of references either u/ s.66 of the 1922 Act or S. 256 of 1961 Act, the High Courts do not exercise any jurisdiction conferred upon them by the C.P.C. or the Charters or by the Act establishing respective High Courts. It is a special jurisdiction of a limited nature conferred by the Income-tax Act for limited purpose of”obtaming the High Court’s opinion on questions of law. Rendering advice has nothing to do with recovery of tax or granting stay. Therefore, the concept of granting stay In a reference’ ex debito justitiae’ does not arise. That concept might arise in case of the Appellate Authority exercising its power to grant stay where there is no express provision.

9.    With the deletion of S. 256 and insertion of S. 260A and S. 260B conferring Appellate jurisdiction on High Courts, the aforesaid observations no longer remain relevant.

10.    Even though it is neither advisable nor possible to enumerate all the grounds on which the petition ‘ex debito justitiae’ is maintainable, the Courts have been acting only in cases of grave justice and breach of principle of natural injustice where consequences are grave for the aggrieved. In Shivnath Prasad v. State of W.B. and Others, [2006] INSC 62, the High Court’s order refusing to intervene in proceedings launched u/s.120B, u/s.406, u/s.417 and u/s.420 of IPC against R S Lodha in connection with the allegedly forged will of Late Smt. Priyamvada Birla was challenged. An argument was made that since the complaint was frivolous, vexatious, oppressive and malicious, the High Court should have exercised its powers u/ s.482 of Cr. P. C, because such powers are required to be exercised ‘ex debito justitiae’ or for the ends of justice. After going in detail into the facts of the case and scope of the inherent power enshrined in S. 482, the Apex Court declined to inter-fere and the appeal was dismissed.

Res Ipsa Loquitur

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The Word

1. The maxim res ipsa loquitur is used as an aid to
evidence when the fact situation speaks for itself or tells its own story.
Literally meaning, ‘thing speaks for itself’ the latin maxim eases the burden of
establishing an abstract situation or a mental state when the event by its very
nature points glaringly to the existence of such a state. It is used as an aid
in the evaluation of evidence and in appropriate cases, a substitute for
evidence itself at least shifting the onus of proof to the accused.


2. Res ipsa loquitur is a rule of evidence which in
reality belongs to the law of torts. There are two lines of approach, as held by
the Supreme Court in Syad Akbar v. State of Karnataka, 1979 AIR 1848, in
regard to the application and effect of the maxim. According to the first, the
maxim, wherever it applies, operates as an exception to the general rule that
the burden of proof of the alleged negligence is, in the first instance, on the
plaintiff. In such a case the burden shifts to the defendant to disprove his
liability. According to the other line of approach ‘Res ipsa loquitur’ is
not a rule of substantive law; but only an aid in the evaluation of evidence, a
means of estimating logical probability from the circumstances of the event. It
does not require raising of any presumption of law which must shift the onus on
to the defendant. It only allows the drawing of a permissive inference of fact,
as distinguished from a mandatory presumption, having regard to the totality of
the circumstances and the probabilities of the case. The Courts do not generally
favour invoking the first line of approach in the trial of criminal cases as an
abstract doctrine, for the reason that in a criminal trial the burden of proving
everything essential to the establishment of the charge rests on the
prosecution. Also, while in civil proceedings, a mere preponderance of
probability is sufficient to establish a fact in issue, it is not so in criminal
proceedings where the presumption of guilt must amount to such a moral certainty
as convinces the Court beyond all reasonable doubt.

3. The other line of approach treating the maxim as a
convenient aid in assessment of evidence and in drawing permissive inferences
under the Evidence Act does not conflict with the provisions and principles of
the Evidence Act peculiar to criminal jurisprudence if inferring a fact in issue
from another circumstantial fact is subjected to satisfaction of essential
conditions for an accused to be convicted on the basis of circumstantial
evidence alone. As held by Lahoti J in Jacob Mathew v. State of Punjab and
Anr., (2005) INSC 390 (5.8.2005), res ipsa loquitur is only a rule of
evidence and operates in the domain of civil law specially in case of torts and
helps in determining the onus of proof in action relating to negligence. It
cannot be pressed in service for determining per se the liability for
negligence within the domain of criminal law. Res ipsa loquitur has, if
at all, a limited application in trial on a charge of criminal negligence.

4. In cases, however, where because of the very nature of the
event the plaintiff can only prove the accident, but cannot prove how it
happened to establish negligence, the rule of res ipsa loquitur has been
invoked. In Pressing Co. Pvt. Ltd. and Another (AIR 1977 SC 1735) the Apex Court
observed :

“The normal rule is that it is for the plaintiff to prove
negligence, but as in some cases considerable hardship is caused to the
plaintiff as the true cause of the accident is not known to him, but is solely
within the knowledge of the defendant who caused it, the plaintiff can prove
the accident but cannot prove how it happened to establish negligence on the
part of the defendant. This hardship is sought to be avoided by applying the
principle of res ipsa loquitur. The general purport of the word res
ipsa loquitur is that the accident ‘speaks for itself’ or tells its own
story.”


5. In Syad Akbar case (supra) when the driver of a bus
was charged of causing the death of a child by negligent driving and where the
eye witness was treated hostile, the Sessions Judge applied ‘res ipsa
loquitur’ and held the accused guilty. The view was affirmed by the High
Court. After considering the facts of the case in detail and various judicial
pronouncements of Indian and foreign authorities regarding its application in
criminal cases, the Apex Court set aside the conviction awarded on the basis of
application of res Ipsa loquitur only.

6. Even though the principle is applied with great caution in
criminal cases, its application is not ruled out in cases with high probability
and where the defendant does not come forward to rebut the inference. In a case
where the conductor of a bus had committed similar misconduct 36 times prior to
the time he was found guilty, the Court observed “Be that as it may, the
principle of res ipsa loquitur, namely, the facts speak for themselves is
clearly applicable in the instant case [B. S. Hullikatti (2001) 2 SCC 574]. In
State of Punjab v. Modern Cultivators, Ladwa 1965 AIR 17, damages were
claimed for defendant’s negligence which caused break in the bank of canal. The
Supreme Court upheld the application of res ipsa loquitur holding that
there would not have been a breach in the bank of the canal if those in
management took proper care and the breach itself would be prima facie
proof of negligence. Similarly where damages were claimed by the heirs of three
persons who died as a result of the collapse of the clock tower in Chandni Chawk
Delhi, the SC upheld invoking the rule for the reason that the mere fact that
there was a fall of clock tower, which was exclusively under the ownership and
control of the appellant would justify raising an inference of negligence so as
to establish a prima facie case against the appellant (Municipal
Corporation of Delhi v. Subhagwanti and Ors., 1966 AIR 1750).

7. The application of the maxim was examined in cases of
corruption where the accused is trapped and caught. The following observations
of Krishna Iyer J in Rughubir Singh v. State of Haryana, 1974 AIR 1516
are often relied upon in such cases :


“But we may notice that even if the statutory presumption is unavailable, Courts may presume what may in the ordinary course be the most probable inference. That an Assistant Station Master has in his hands a marked currency note made over to him by a passenger whose bedding has been detained by him for which no credible explanation is forthcoming and he is caught red-handed with the note, is a case of res ipsa loquitur. The very thing speaks for itself in the circumstance. We need not, therefore, scrutinize the substance of the argument based on the inapplicability of S. 4 of the Evidence Act.”

Following the aforesaid observations, the Court in State of AP v. V. Vasudeva Rao, (2003) INSC 560 (13.11.03), where an Asstt. Collector, Weights and Measures was trapped for demanding bribe, held that the very fact that the accused was in possession of the marked currency notes against an allegation that he demanded and received the amount is res ipsa loquitur.

8.    Commenting on growing dependence on res ipsa loquitur in case of driver’s negligence, the Supreme Court in Shyam Sunder & Others v. The State of Rajasthan, (1974) INSC 53 observed that over the years the general trend in the application of the maxim has undoubtedly become more sympathetic to plaintiffs. Concomitant with the rise in safety standards and expanding know ledge of the mechanical devices of our age, less hesitation is felt in concluding that the miscarriage of a familiar activity is so unusual that it is most probably the result of some fault on the part of whoever is responsible for its safe performance.

9.    Proceeding for imposition of penalties under the Income-tax Act and other fiscal legislation, as distinguished from prosecution, are not criminal in nature. They are quasi criminal, but require existence of mens rea to be shown. The standard of proof for imposition of penalty is not as rigorous as that for prosecution which proceeds on proof of commission or omission beyond doubt. Penalties for any default under the Act are dictated by preponderance of probabilities as appearing from totality of circumstances. In cases where the fact situation is found to be res ipsa loquitur decisively pointing to such pre-ponderance of probabilities, the burden cast on Assessing Officer is considerably discharged in matters of penalty, which is not the case when prosecution proceedings are launched for any offence.

Autrefois acquit

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The Word

1. ‘Autrefois acquit’ is a preemptory plea to be taken
by the defendant in a criminal proceeding to estop the government from carrying
on with a trial against him. Its etymology is derived from Anglo-French meaning
‘formerly acquitted’. Related to this is ‘Autrefois convict’ and ‘autrefois
attaint’ literally meaning ‘formerly convicted’ and ‘formerly attainted’.


2. The significance of the term lies in the precept embedded
in Anglo-Saxon common law predating the eleventh century, which protects a
person from being tried and indicted for the same offence more than once. Once a
defendant is found not guilty; the case cannot be re-opened for holding him
guilty regardless of any compelling inculpatory evidence found subsequently, nor
can he be tried for the same offence under the same or any different Act.
Conversely, ‘autrefois convict’ protects a person convicted once to be
convicted again under any Act in any criminal proceeding involving action on the
same set of facts.

3. The roots of the principle, as stated by Bhagwati J. in
Maqbool Hussain v. State of Bombay, AIR 1953 SC 325, are to be found in the
well-established rule of common law of England that “where a person has been
convicted of an offence by a court of competent jurisdiction, the conviction is
a bar to all further criminal proceedings for the same offence”. [Per Charles J.
in Reg. v. Miles, (1890) 24 QBD 423(A)]. To the same effect is the
ancient maxim ‘Nimo bis debut punir pro uno delicto’ meaning no one ought
to be twice punished for one offence or, as it is sometimes written, ‘pro
eadem cause’ i.e., for the same cause. This is the principle on which
the party persued has available to him the plea of ‘autrefois convict’ or
‘autrefois acquit’.

4. The fifth amendment of the American Constitution
enunciated the principle as :

“. . . . . . nor shall any person be subject for the same
offence to be twice put in jeopardy of life or limb, not shall be compelled,
in any criminal case, to be witness against himself”.


The principle of protection against double jeopardy, as it
has come to be known, is another expression for ‘autrefois convict’ or ‘autrefois
acquit’.

5. The principle is embodied in Indian laws in S. 26 of the
General Clauses Act, 1897, which states that “where an act or omission
constitutes an offence under two or more enactments, then the offender shall be
liable to be prosecuted and punished under either or any of those enactments,
but shall not be liable to be punished twice for the same offence”. The maxim
finds expression also in S. 403(1) of criminal Procedure Code 1898 when it says,
“A person who has been tried by a Court of competent jurisdiction for an offence
and convicted or acquitted of such offence shall, while such conviction or
acquittal remains in force, not be liable to be tried again for the same
offence, nor on the same facts for any other offence for which a different
charge from the one made against him might have been made u/s.236, or for which
he might have been convicted u/s.237”.

6. The aforesaid common law doctrine and provisions in Indian
as well as foreign laws provided the background for the guarantee of fundamental
right enshrined in Article 20(2) of the Constitution of India, which reads as
under :

“No person shall be prosecuted and punished for the same
offence more than once.”


S. 3(38) of the General Clauses Act, applicable for the
interpretation of the constitution by virtue of Article 367, defines an
‘offence’ to mean any act or omission made punishable by any law for the time
being in force. Expatiating on Article 20(2), the Supreme Court in Maqbool
Hussain case (supra) observed :

“It incorporated within its scope the plea of ‘autrefois
convict’ as known to the British Jurisprudence or the plea of double jeopardy
as known to the American constitution but circumscribed it by providing that
there should be not only a prosecution, but also a punishment in the first
instance in order to operate as a bar to a second prosecution and punishment
for the same offence.”


The Court also, having regard to the whole background,
imported the requirement of prosecution and punishment ‘before a Court of law or
judicial Tribunal’ for invoking Article 20(2) of the constitution and held that
“in order that the protection of Art. 20(2) be invoked by a citizen, there must
have been a prosecution and punishment in respect of the same offence before a
Court of law or a Tribunal required by law to decide the matters in controversy
judicially on evidence on oath, which it must be authorised by law to
administer, and not before a Tribunal which entertains a departmental or an
administrative enquiry, even though set up by a statute, but not required to
proceed on legal evidence given on oath”.

7. The applicability of these two essential ingredients
viz. (i) prosecution and punishment, and (ii) by a Court of law or judicial
Tribunal, came to be examined in the above case where the question to be decided
was whether confiscation of gold by Customs authorities with option to pay an
amount in lieu of such confiscation is punishment by Court of law/judicial
Tribunal to justify the plea based on ‘autrefois convict’ against
pursuing criminal proceedings under the Sea Customs Act and Foreign Exchange
Regulations Act. The Court concluded that far from being authorities bound by
rules of evidence or procedure established by law and invested with power to
ensure their own judgments or orders, the Sea Customs Authorities are merely
constituted administrative machinery for the purpose of adjudging confiscation,
increased rates of duty and penalty prescribed in the Act. As to the nature of
confiscation, it was held that confiscation is more in the nature of proceedings
in rem than proceedings in personam. On both the counts the
protection of ‘autrefois convict’ was denied.

8. In effect the decision in earlier proceedings not only provides res judicata for the succeeding ones, but prevents proceedings to go ahead. In tax laws where an act or omission attracts penalty and is also subjected to prosecution, plea of double jeopardy has been raised in certain prosecution proceedings based on the order imposing penalty. In Gulab Chand Sharma v. H. P. Sharma, Commissioner of Income-tax, Delhi, 95 ITR 117, penalty was imposed u/s.274 read with S. 271 and S. 273 for making a false return and prosecution proceedings were also launched u/s.277 of the Income-tax Act, S. 193 of IPC and also S. 467/471 of IPC, the prosecution proceedings were sought to be quashed on the plea of ‘autrefois convict’. The Court after detailed discussion of various provisions held that the proceedings for the imposition of penalty taken against the accused under the Income-tax Act are distinct from the criminal complaints filed against him. They can, therefore, continue simultaneously. Imposition of penalty is neither a prosecution, nor a punishment for any offence to bar prosecution proceedings. The objects of the two provisions are different. It is an anathema to suppose that when a civil remedy is available, criminal prosecution is completely barred. The two types of actions are quite different in content, scope and import [Pratibha Rani v. Suraj Kumar, 155 ITR 190 (SC)]. The one containing the prosecution and punishment is to vindicate public justice by punishing the offender, whereas the object of the penalty proceedings is to render evasion unprofitable and to secure to the State the compensation for the damages for attempted evasion. They are mutually exclusive remedies [Po Ummali Umma V. lAC, (1967) 64 ITR 669 (Ker.)]


Actus Curiae Neminem Gravabit

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The Word

The legal maxim ‘Actus Curiae Neminem Gravabit’
expresses the fundamental principle that Courts are to dispense justice and any
action of theirs, which is found erroneous or bad should not be allowed to
prejudice the interest of any party. Literally meaning that the act of the Court
shall prejudice nobody, it is a maxim founded upon justice and good sense and
affords a safe and certain guide for administration of law. The maxim operates
on principle of restitution by relegating the parties to the same position which
prevailed before the order causing the prejudice was passed.


2. The doctrine as explained by the Supreme Court in
Karnataka Rare Earth & Anr. v. The Sr. Geologist, Department of Mines and
Geology, (2004) 2 SCC 783 is not confined in its application to erroneous
acts only. The same is applicable to all such acts as to which it can be held
that the Court would not have so acted had it been correctly apprised of the
facts and the law. In the case before the Apex Court (supra), the mining
lease granted to the appellant was challenged in a public interest litigation
and the grant order was quashed by a Single Judge Bench of the Karnataka High
Court. The order of the Single Bench was confirmed by the Division Bench and
also by the Supreme Court. During pendency of appeal before the Supreme Court,
however, the lessees were permitted, by an interim order, to operate the
quarries and transport granite blocks after paying applicable royalty. The
lessee appellant as a result of the interim order, continued the work of
extraction and exported granite on 24-1-1996, which was after their appeal was
dismissed on 18-1-1996. The Department of Mines, by an order, demanded price of
blocks exported against which writ petition was filed by the lessees. The
lessees’ writ petition was dismissed by the High Court. In appeal, the Supreme
Court rejected the plea of absence of knowledge of the Supreme Courts’ order
dismissing the appeal. Lahoti J. speaking for the Court referred to the doctrine
of ‘Actus Curiae Neminem Gravabit’ and observed —

“When an act of the party, persuading the Court to pass an
order which at the end is held as not sustainable, has resulted in one party
gaining advantage which it would not have otherwise earned, or the other party
has suffered an impoverishment which it would not have suffered but for the
order of the Court and the act of such party, then the successful party
finally held entitled to a relief, assessable in terms of money at the end of
the litigation, is entitled to be compensated in the same manner in which the
parties would have been if the interim order of the Court would not have been
passed.”

The applicants were asked to pay the price of exported blocks
as demanded by the Department. For the purpose of the law, the Court observed,
it is enough that the appellants have enjoyed the benefit under the interim
order of the Court which has stood vacated with the dismissal of their appeal.

3. The maxim has also formed the basis for interpreting the
provisions of statutes. In Bharat Damodar Kale and Anr. v. State of A.P.,
(2003) 8 SCC 599, the issue for consideration was whether the limitation of one
year contained in Chapter XXXVI of the Code of Criminal Procedure is applicable
to the institution of prosecution or to the taking of cognizance by the Court.
Taking support form the maxim, the Court held,

“The legal phrase ‘Actus Curiae Neminem Gravabit’
which means an act of the Court shall prejudice no man, or by a delay on the
part of the Court neither party should suffer, also supports the view that the
Legislature could not have intended to put a period of limitation on the act
of the Court of taking cognizance of an offence so as to defeat the case of
the complainant.”

It was, accordingly, held that the limitation governs the
filing of complaint and the Court will not take cognizance if the complaint is
filed beyond the prescribed period of one year.

The above decision also makes it clear that taking of
cognizance is an act of the Court over which prosecuting agency or the
complainant has no control. In other words, failure to take action of such a
nature is an act of the Court and, if it causes prejudice, the maxim is
attracted.

4. The maxim is quite significant in view of the delays in
dispensation of justice, particularly in criminal matters. The following
observations of the Supreme Court of US in Parker v. Ellis, 362 US 574
(1960) are quite relevant in the context of delays on the part of the Courts in
rendering judgments :

“The rule established by the general concurrence of the
American and English Courts is, that where the delay in rendering a judgment
or a decree arises from the act of the Court, that is, where the delay has
been caused either for its convenience, or by the multiplicity or press of
business, either the intricacy of the questions involved, or of any other
cause not attributable to the laches of the parties, the judgment or the
decree may be entered retrospectively, as of a time when it should or might
have been entered up. In such cases, upon the maxim ‘Actus Curiae Neminem
Gravabit’ which has been well said to be founded in right and good sense,
and to afford a safe and certain guide for the administration of justice — it
is the duty of the Court to see that the parties shall not suffer by the
delay. A nunc protunc order should be granted or refused, as justice
may require in view of the circumstances of the particular case.”


5. In a recent case of Food Corporation of India and
Another v. SEIL Ltd. & Others, (2008) 3 SCC 440 where while ordering payment
to be made by the appellant for sugar supplied to the Central Government, the
Court omitted to give direction about payment of interest and such directions
were given in the review petition. The Supreme Court in appeal found nothing
wrong in it holding that “A clear error or omission on the part of the Court to
consider a justifiable claim on its part would be subject to review, amongst
others, on the principle of ‘Actus Curiae Neminem Gravabit’ (an act of
the court shall prejudice none)”.

6. The maxim applicable to the action of the Courts is equally applicable in administration of law. Being based on justice and good sense it provides safe guidance in legislative as well as administrative actions. In tax laws collection of taxes on the strength of erroneous order is required to be refunded with interest. Failure of authorities to pass assessment orders within the prescribed period of limitation prevents the authorities to complete the assessment resulting in no prejudice to the assessees. Provisions exist where the legislature has laid down periods for completion of proceedings or passing of orders, but legislature has desisted from providing for consequences which are adverse to the assessees in case of failure to take action or pass order within the period. For instance, S. 254(2A) expects the Income Tax Appellate Tribunal to decide appeals within a period of four years, S. 12AA(2) enjoins upon the Commissioner to pass order granting or refusing registration of trust/institution before the expiry of six months from the end of the month in which application was received, but failure to adhere to these time limits does not result in dismissal of appeal or the application.

7. One has, in this context, to consider the provision of S. 245HA(1)(iv) introduced vide Finance Act 2007 where under, an application allowed to be proceeded with by the Settlement Commission is to abate if the Commission fails to pass settlement order u/s.245D(4) within the time prescribed u/s. 245D(4A), irrespective of whether the failure to pass order is attributable to applicant or not. One may attempt to justify the provisions technically on the basis that the Settlement Commission, even though proceedings before it are judicial proceedings, is not a Court. But what constitutes guidance to the Courts in dispensation of justice should ideally not be ignored by the Legislature in making laws. In the spirit of the Supreme Court decision in Bharat Damodar Kale’s case (supra), passing or not passing an order over which the applicant has no control is an act of the Commission. In the Scheme of the Settlement mode of determining the tax liabilities, it will not be correct to say that abatement does not prejudice the interest of the applicant, particularly when the facts disclosed and additional income offered for tax is allowed to be utilised for framing assessment under the normal assessment mode.

Ex Abundanti Cautela

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The Word

A Latin expression, literally meaning ‘as abundant
caution’ is a legislative practice followed to obviate any possibility of a
view different from what is intended by the Legislature. By its nature,
therefore, a provision ‘ex abundanti cautela’ explains the provision
contained in a statute to put certain areas beyond controversy and clarify the
legislative intent in situations where a reasonable apprehension can exist of a
different interpretation being taken by the courts.


2. Strangely, a provision to provide certainty and clarity is
often itself a matter of controversy as to its nature. Whether a particular
provision is ‘ex abundanti cautela’ or an independent provision is quite
often a subject of debate. This issue becomes significant because the provision
not considered ‘ex abundanti cautela’ results in a restricted meaning
eliminating, by implication, all that is not said therein. On the other hand a
provision held ‘ex abundant cautela’ does not restrict the provision in
any way and allows it to have the meaning which it would have, even if the
cautioning provision had not existed. It merely dispels apprehension about a
possible view in respect of certain items/areas in relation to the provision to
which it is ‘ex abundanti cautela’.

3. A few examples will make the import of the expression
clear. Under the Central Excise tariff, item 17(2) is ‘paper subject to
coating’. The nature of item 17(3) inserted for the category ‘carbon paper’ was
subject matter of dispute in a case where demand was raised in respect of
‘carbon paper’, for the period prior to introduction of item 17(3). The
Department took the plea that the amendment was merely ‘ex abundanti cautela’,
as carbon paper was always covered under item 17(2). The Supreme Court after
considering the case from different angles, upheld the Department’s view that
carbon paper was covered by item 17(2) (Collector of Central Excise Kanpur v.
Krishna Carbon Paper Co., 1988 AIR 2223).

4. In Central Provinces Transport Services Ltd. v.
Raghunath Gopal Patwardhan, (1957 AIR 104) — a case under the Industrial
Disputes Act — an employee was prosecuted for a charge of theft in 1950, but was
acquitted in 1952, after which he claimed reinstatement and compensation. The
employer refused to entertain the application, inter alia, on the ground
that the applicant was not an employee, as dismissed employees are not employees
under the Act. The Act in S. 2(10) defines an employee ‘to mean any person
employed by an employer to do any skilled or unskilled, manual or clerical work
for contract or hire or reward in any industry and includes an employee
discharged on account of any dispute relating to a charge, in respect of which a
notice is given u/s.31 or 32 whether before or after the discharge”.
(emphasis supplied). It was argued on behalf of the employer that the inclusive
part of the definition reflects the legislative intention to include only those
who are proceeded against u/s.31 and u/s.32 and not all the discharged employees
in general, as otherwise there was no need for the further provision in S. 2(10)
that discharged employees would in certain cases be employees. Disagreeing, the
Supreme Court observed :

“In our opinion, the clause was inserted ‘ex abundanti
cautela’ to repel a possible contention that employees discharged u/s.31
and u/s.32 of the Act would not fall within S. 2(10) and cannot be read as
importing an intention generally to exclude dismissed employees from that
definition.”


5. The provision ‘ex abundanti cautela’ is generally
in the form of a sub-section or an inclusive expression or explanations
expressly stated as ‘for benefit of doubt’ and also sometimes as non-obstante
clause. The examples of inclusive expression in tax laws can be multiplied.
Wherever the Legislature finds it difficult to express a term of wide import in
language, it leaves it open to the judiciary to provide meaning to it, taking
care to include or exclude specific areas where there can be possibility of
different interpretations, as a measure of precaution. The very definition of
‘income’ is of the nature. The same is the case with ‘transfer’ u/s.2(47),
‘salary’ u/s.17(1), ‘perquisite’ u/s.17(2) and host of other provisions where
specific areas are specified as included within these terms instead of a general
broad-based definition.

6. Examples of provisions expressly stated as for removal of
doubt can also be multiplied. One such example is explanation inserted in S.
10A, S. 10AA and S. 10B to repel the possibility of profits derived from the
site development of computer software not being treated as profit derived from
export of computer software. Another explanation in S. 10B dispels the possible
impression that cutting and polishing of precious and semi-precious stones do
not fall within ‘manufacture or produce’ in that Section. S. 263 which gives
power to the Commissioner of Income-tax to revise the order of the Assessing
Officer has provision ‘ex abundanti cautela’ by way of explanation to say
that orders passed by the Assessing Officer in pursuance of the directions
u/s.144A and orders passed by Joint Commissioners in exercise of power of
Assessing Officer conferred on them will be orders of the Assessing Officer,
subject to the revisional power of the Commissioner of Income-tax. More and more
explanations are being inserted, as a measure of precaution, to clarify the
legislative intention whenever there is any indication arising from the Court’s
decision that a view different from what is intended can possibly be taken.

7.    Even non-obstante clauses are sometimes taken as ‘ex abundanti cautela’. In a case relating to Administration Evacuation of Property Act, 1950 where the nature of a non-obstante provision contained in S. 12(1) came for consideration, the provisions “not-withstanding anything contained in any other law for the time being in force, the custodian may cancel any allotment or terminate any lease or agreement ….. ” was argued as being a provision which overrides a bar imposed by any law, but not the bar imposed by a contract under which the lease was held. The Supreme, Court, after considering various aspects of the case, came to the conclusion that the operative portion of the Section which confers powers on the custodians to cancel the lease or vary the terms thereof is unqualified and absolute and that power cannot be abridged by reference to the provision that it could be exercised “notwithstanding anything contained in any other law”. The non-obstante provision is obviously intended to repel a possible contention that S. 12 does not, by implication, repeal statutes conferring rights on lessees and cannot prevail as against them and has been inserted ‘ex abundanti cautela’. (Raibahadur Kanwar Rajnath & Others v. Pramod C. Bhatt, Custodian of Evacuee Property, 1956 AIR 105).

8. In deciding  as to whether  the expression  is ‘exabundanti cautela’ or not, the courts are generally guided by the object of the legislation and the purpose it is intended to serve. The following ex-tract from the decision rendered by Justice Krishna Iyer in R. S. Joshi STO, Guj. v. Ajit Mills Ltd., Ahd., & Another, 1977 AIR 2279 succinctly brings out the approach.

“A law has to be adjudged for its constitutionality by the generality of cases it covers, not by the freaks and exceptions it martyrs. The professed object of the law being clear, the motive of the Legislature is irrelevant to castigate an Act as a colour able device. The interdict on public mischief and the insurance of consumer interests against likely, albeit unwitting or ‘ex abundanti cautela’, excesses in the working of a statute are not merely an ancillary power, but surely a necessary obligation of a social welfare State.”

Certiorari

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The_Word

Certiorari is a latin term used in law referring to a
type of writ seeking judicial review. Derived from Certiorare, it
literally means ‘to search’. In law it is used for requesting the court to look
for irregularity and provide remedy against injustice meted out.


2. Historically in the U.K., Certiorari was used to
bring the record of an inferior court into the King’s Bench for review or to
remove indictment for trial from that court. It evolves now as a general remedy
to bring decision of an inferior court or Tribunal or Public Authority before
the superior court for review, so that the court can determine whether to quash
such decisions or allow them to operate. In the U.S.A., Certiorari is one
of the two ways to have a case from US Court of Appeal reviewed by the U.S.
Supreme Court. Appeal being one, Certiorari is the other. In India,
Certiorari is not an alternate remedy, but operates generally in cases where
the relevant statute does not provide for remedy and where gross injustice has
occurred or where fundamental rights are violated.

3. The provisions in many modern statutes attempt to keep
away decisions of authorities — administrative or judicial — from review by the
higher courts by making these decisions ‘final’ or ‘conclusive’. The legal
import of these words was discussed by Denning L.J. in R v. Medical Appeal
Tribunal ex p.Gilmore, (1957) I.O.B. 574, 583. His Lordship observed “The
remedy by certiorari is never to be taken away by statute except by the
most clear and explicit words. The word ‘final’ is not enough. That only means
‘without appeal’. It does not mean without recourse to certiorari. It
makes the decision final on facts, but not final in law. Notwithstanding that
the decision is by a statute made ‘final’, certiorari can still issue for
excess of jurisdiction or for error of law on the face of the record”.

4. The Constitution of India in Articles 32 and 226 grants
remedy by way of certiorari. Article 32 grants right to move the Supreme
Court for enforcement of fundamental rights by authorising the court to issue
directions or orders or writs including writs in the nature of habeas corpus,
mandamus, prohibition, quo warranto and certiorari. Similar
powers under Article 226 have been vested in High Courts. Powers of High Courts
are not confined to enforcement of fundamental rights, but extend to other cases
involving breach of right resulting in failure of justice.

5. Writs of certiorari are issued after review of
records of proceedings of the Tribunals or Public Authority having legal
authority to determine questions affecting the rights of subjects and having the
duty to act judicially. Writ quashes the orders which go beyond jurisdiction. It
is corrective in nature issued to the inferior tribunals dealing with civil
rights of persons as a public authority and is issued for absence of
jurisdiction, wrongly usurping the jurisdiction, acting in excess of
jurisdiction or failing to exercise jurisdiction. Certiorari is also
issued for violation of principles of natural justice. Errors apparent on the
face of the record are, for the purpose of interference by certiorari,
treated as errors of jurisdiction.

6. The Court acting in certiorari does not act in
appellate jurisdiction, but only in supervisory capacity. It, therefore, follows
that while a decision to deny certiorari lets the lower court’s ruling
stand, it does not constitute a decision by the Supreme Court/High Court on any
of the legal issues raised. The decision to grant or deny certiorari is
discretionary.

7. Determination of jurisdiction in many cases involves
decision about the existence of ‘jurisdictional fact’ which must exist before a
court, Tribunal or an Authority assumes jurisdiction over a particular matter.
By erroneously assuming existence of such jurisdictional fact, no authority can
confer upon itself jurisdiction which it otherwise does not possess. The Supreme
Court in Arun Kumar and Others v. U.O.I., (2006) 286 ITR 89 (SC) was
seized of the question of the legality of Rule 3 of I.T. Rules dealing with
house perquisite. While holding the Rule as intra vires, the Court held
that ‘concession’ under clause (ii) of Ss.(2) of S. 17 is a ‘jurisdictional
fact’. It is only when there is a concession in the matter of rent respecting
any accommodation provided by an employer to his employee that the mode, method
or manner as to how such concession can be computed can arise. In other words,
concession is a ‘jurisdictional fact’, method of fixation of amount is ‘fact in
issue’ or ‘adjudicatory fact’. It was therefore, held that in spite of the legal
position that Rule 3 is intra vires, valid and not inconsistent with the
provisions of the parent Act u/s.17(2)(ii) of the Act, it is still open to the
assessee to contend that there is no ‘concession’ in the matter of accommodation
provided by the employer to the employee and hence the case did not fall within
the mischief of S. 17(2)(ii) of the Act. The jurisdiction to invoke Rule 3
arises only when the existence of concession in the matter of rent is
established. The decision led to insertion of an explanation to S. 17(2)(ii)
nullifying the effect of the Supreme Court decision.

8. In Province of Bombay v. Kusaldas S. Advani  & Ors., 1950 AIR 222, where the order of the State Authorities requisitioning land was challenged in a writ of certiorari for want of jurisdiction, the existence of ‘Public purpose’ was a ‘jurisdictional fact’. The issue was whether determination of such fact is judicial, quasi-judicial or administrative act. Kania CJ, Fazal Ali, Patanjali Shastri and Das JJ held that on proper construction of S. 3 of the ordinance, the decision of the Bombay Government that the property was required for a public purpose was not a judicial or quasi-judicial decision, but an administrative act and the High Court of Bombay had, therefore, no jurisdiction to issue a writ of certiorari in respect of the order of requisition. In their dissenting judgment, Mahajan and Mukherjea JJ held the view that the Government of Bombay is a body of persons having legal authority to determine questions affecting the rights of subject and in deciding whether a land was required for public purpose ul s.3 of the Ordinance, it had to act judicially. The conditions necessary for the granting of a writ of certiorari were, accordingly satisfied and the High Court of Bombay had power to issue the writ.

9. The observations of Denning L. J. (supra) that the remedy by certiorari is never to be taken away by the statute, finds expression in Indian judicial decisions. Articles 323-A and 323-B provide for setting up Administrative Tribunals and other Tribunals for adjudication or trial of disputes in respect of recruitment and conditions of service of public servants and disputes with regard to other matters including levy, assessment collection and enforcement of any tax. Both these Articles exclude the jurisdiction of all courts except the jurisdiction of the Supreme Court under Article 136. The legality of ouster of jurisdiction of High Courts was considered by the Supreme Court in L. Chandrakumar v. UOI, (1997) 3 SCC 261 in a matter decided by the Central Administration Tribunal set up under Article 323-A. The Act constituting the Tribunal in S. 28 incorporated the provision of the Constitution providing for ouster of jurisdiction of courts except the Supreme Court under Article 136. The Apex Court was to decide whether the power to exclude jurisdiction of all courts runs counter to the powers of judicial review conferred on the High Courts under Article 226/227 and on the Supreme Court under Article 32 of the Constitution. It was held that such Tribunals could not be held to be substitute of the High Court for the purpose of exercising jurisdiction under Article 226/227 of the constitution. Following this judgment, the Court in RK lain v. U.O.I., 1993(4) SCC 119 held that judicial review applications lie to the High Court against judgment of CAT and only thereafter one can approach the Supreme Court. The procedure is based on the basic structure doctrine in relation to Art. 226, 227 of the Constitution which cannot be circumvented by any law which seeks to oust the jurisdiction of the High Court. National Tax Tribunal is a Tribunal set up under Article 323 B. The Act constituting the Tribunal having similar provision ousting the jurisdiction of High Courts is under challenge. With the view already taken by the Supreme Court in the matter, the sustainability of this part at least is doubtful.

10. Whether remedy of certiorari is available when remedy is prescribed in the relevant statute itself? The issue was considered by the Supreme Court in Commissioner of Wealth Tax, Hyderabad v. Trustees of H.E.H., (2003) INSC 193. As observed, it has been settled by a long catena of decisions that when a right or liability is created by a statute which itself prescribes the remedy or procedure for enforcing the right or liability, resort must be had to that particular statutory remedy before seeking the discretionary remedy under Article 226 of the Constitution.
This rule of exhaustion of statutory remedies is, no doubt, a rule of policy, convenience and discretion and the court may in exceptional cases issue a discretionary writ of certiorari. Such cases are where there is complete lack of jurisdiction for the officer or Authority or Tribunal to take the action or there has been a contravention of fundamental rights or there has been a violation of rules of natural justice or where the Tribunal acted under a provision of law, which is ultra vires.

India signed a DTAA with Luxemburg : Press release dated 2-6-2008.

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45
India signed a DTAA with Luxemburg : Press release dated 2-6-2008.

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S. 2(14) r.w. S. 45 : Receipt on sale of immovable property is capital gain, irrespective of imperfect title

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15 (2007) 110 TTJ 460 (Pune)

ITO v. Rina B. Parwani

ITA No.1426 (Pune) of 2004

A.Y. 2001-02. Dated : 31-5-2007

S. 2(14) read with S. 45 of the Income-tax Act, 1961 —
Receipt from sale of immovable property is capital gains, irrespective of
imperfect title.

For the relevant assessment year, the Assessing Officer held
that the receipt from sale of immovable property was to be taxed as mesne profit
to be included under ‘Income from Other Sources’ and also denied exemption
u/s.54F, on the ground that there were vital defects in the assessee’s legal
title to the immovable property and that there were certain Court disputes in
connection with this property and there were decisions against the assessee. The
CIT(A), however, allowed the assessee’s claim for long-term capital gain and
exemption u/s.54F.

The Tribunal, relying on the decision in the case of
Ashoka Marketing Ltd. v. CIT, (1986) 53 CTR 152 (Cal.)/(1987) 164 ITR 664
(Cal.), held that receipt from sale of immovable property, with howsoever
imperfect title, is chargeable as capital gains.

The Tribunal noted as under :

(a) All that the assessee is required to have, in order
that gains on sale of which can be taxed as ‘capital gains’, is a capital
asset and rights to a property, howsoever imperfect, constitute a capital
asset.

(b) There is no dispute that the assessee acquired these
rights in 1980 and the same were duly reflected in her tax returns. There is
also no dispute that these rights were sold in the relevant previous year. The
objections are only to the imperfections in the rights, but then that aspect
of the matter is not really relevant for the present purposes.

(c) As the CIT(A) has rightly observed that in case the
sale proceeds of these rights cannot be taxed as capital gains, it cannot be
taxed at all. The definition of income includes only such capital receipts as
are chargeable to tax u/s.45. In other words, capital receipts, not chargeable
to tax u/s.45, are outside the ambit of ‘income’.

(d) The receipt in question being referable to a capital
asset, i.e., the rights have been acquired by the assessee in
connection with the bungalow, the receipt can only be treated as capital
receipt. A receipt which is neither a capital gain nor a revenue receipt will
be outside the ambit of income chargeable to tax. One can also safely infer
that merely because a receipt is not a capital gain chargeable to tax, it
would not mean that such a receipt is revenue receipt in nature.






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S. 2(ea) — Office premises on leave-and-licence basis used for business are commercial establishments not includible in net wealth

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24 (2007) 112 TTJ 489 (Pune)


Satvinder Singh Kalra v. Dy. CWT

WTA Nos. 34 to 37 (Pune) of 2005

A.Ys. 1999-2000 to 2002-3. Dated : 29-9-2006

S. 2(ea) of the Wealth Tax Act 1957 — Office premises let out
on leave-and-licence basis and used by licensees for their business are in the
nature of commercial establishments and not includible in net wealth.

 

For the relevant assessment years, four office premises owned
by the assessee and let out by him were claimed as specifically exempt from net
wealth u/s.2(ea)(i)(5) as commercial establishments. The Assessing Officer
treated them as ‘assets’ defined u/s.2(ea). The CWT(A) confirmed the Assessing
Officer’s order.

 

The Tribunal held as under :

(a) If the assessee owns more than one property in the
nature of commercial establishments or complexes, the exemption shall be
available to all such properties and cannot be restricted to any one of them.

— Shri Balaganesan Metals v. M. N. Shanmugham Chetty,
(1987) 2 SCC 707, and

— CIT v. Arvind Investments Ltd., (1991) 94 CTR
(Cal.) 263; (1991) 192 ITR 365 (Cal.)

(b) A property would fall within the exceptions under
sub-clause (5) of clause (i) of S. 2(ea), if it is in the nature of commercial
establishment or complex and is also used for the purpose of any business or
trade, whether by the assessee or anybody else.

 


The Tribunal noted as under :

(1) In the main provisions as well as in the exception
clauses, the Legislature has used the words like ‘any building’, ‘any house’,
‘any residential property’, and ‘any property’. Therefore, ‘any house’, or
‘any property’, or ‘any building’ shall include all houses, or some of them or
one of them, as the case may be.

(2) Two of the four let out commercial properties were used
by the licensees for commercial purposes. Therefore, having regard to the
nature of the property as well its use, the property can be classified as
commercial establishment within the meaning of S. 2(ea)(i)(5) and, as such,
value thereof is not includible in the net wealth chargeable to tax under the
WT Act.

(3) The third property was given on rent on
leave-and-licence basis to National Eggs Research Institute for office
purposes. The National Eggs Research Institute has taken the premises for the
purpose of their dispensary-cum-laboratory and not for the purpose of carrying
on any business or trade. Since the property was not in use and occupation for
the purpose of any business, it is not covered by sub-clause (3) of clause (i)
of S. 2(ea). It cannot be said that it is in the nature of a commercial
establishment or complex. Therefore, this property was correctly included by
the Assessing Officer in taxable net wealth.

(4) In respect of the fourth property given on
leave-and-licence basis, it is not clear as to whether the property was given
for the purpose of carrying on business by establishing an office by the
licensee or for the purpose of residence of its any employee. No other
documents are on record to verify as to whether this property in question was
used in a business or trade carried on by the licensee. As to the nature of
the property, there is no dispute that it is in the nature of commercial
property being in the nature of office premises. But the second criteria as to
whether the property is used for the purpose of business or not is not
established from the papers available on record, so as to treat the same as a
commercial establishment within the meaning of sub-clause (5) of clause (i) of
Ss.(ea) of S. 2. This matter was restored to the file of the Assessing Officer
for further enquiry and verification.

 


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Advance tax — Shortfall in payment due to enhancement on reassessment — Interest cannot be charged u/s.234B — Held, Yes

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21 (2008) 299 ITR (AT) 286 (Mum.)


Datamatics Ltd. v. ACIT

ITA No. 6616 (Mum.) 2003

A.Y. 1993-94. Dated : 14-2-2007

Advance tax — Shortfall in payment of advance tax due to
enhancement of tax on reassessment — Interest cannot be charged u/s.234B — Held,
Yes.

 

Facts :

For the A.Y. 1993-94, the total tax payable by the assessee
in accordance with intimation u/s.143(1)(a) of the Income-tax Act, 1961, dated
March 21, 1995, was Rs.8,39,528. The assessee paid TDS at Rs.4,48,873 and
advance tax of Rs.59,00,000. An amount of Rs.68,06,075, including interest of
Rs.13,17,288 u/s. 244A was refunded. There was no interest u/s.234B payable by
the assessee in terms of intimation u/s.143(1)(a). The assessee received a huge
refund as a result of processing of the return u/s.143(1)(a). Subsequently, the
tax component was enhanced as a result of the reassessment done u/s.143(3) read
with S. 147. Interest was levied on the assessee u/s.243B.

 

The Commissioner (Appeals) held that from the date of the
order u/s.143(1)(a), i.e., December 15, 1996, to the date of the order
under appeal interest chargeable was to be worked out in terms of Ss.(3) of S.
234B, based on the shortfall due to enhancement.

 

On appeal to the Tribunal, it was held that the charging of
interest u/s.234B is mandatory when the conditions are fulfilled. The condition
is that the assessee should have defaulted. A reading of S. 234B(3) makes it
clear that where, as a result of an order of reassessment or recomputation
u/s.147 or S. 153A, the amount on which interest was payable U/ss.(1) is
increased, the assessee shall be liable to pay simple interest at the rate of
one percent. The Section further makes it clear that first of all there should
be a default on the part of the assessee in the regular assessment and the
assessee should have been held liable to pay interest u/s.234B. In that case, if
there was reassement or recomputation u/s.147 or u/s.153A, the liability of the
assessee is increased and not otherwise.

 

In the instant case, there was no default on the part of the
assessee in paying the advance tax. For the first time the dispute arose
consequent to the reassessment done u/s.143(3) read with S. 147. Interest could
not be charged u/s.234B.

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If Commissioner does not pass order granting/refusing registration within time limit u/s.12AA, then Commissioner is deemed to have allowed registration, though the Act does not provide as to what could be done if Commissioner does not pass order

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20 (2008) 299 ITR (AT) 161 (Delhi) (SB)


Bhagwad Swarup Shri Shri Devraha Baba Memorial Shri Hari
Parmarth Dham Trust v. CIT

Dated : 31-8-2007

S.12AA : If the Commissioner does not pass any order
granting/refusing registration within the time limit set u/s.12AA, then the
Commissioner is deemed to have allowed the registration, though the Act does not
provide as to what could be done if Commissioner does not pass the order.


Facts :

The assessee, a charitable institution, applied to the
Commissioner for registration u/s.12AA on October 23, 2001. The time limit for
passing the order was to come to an end on April 30, 2002. The Commissioner
initiated enquiries as late by 3rd April 2002 and ultimately refused
registration on 26th May 2003 i.e., after the time limit set u/s.12AA. On
appeal, the ITAT (SB) held that the registration would be deemed to have been
granted since the Commissioner did not pass the order within the time limit set
by-law. While allowing the appeal, the ITAT referred to the following :

The action of Commissioner of not passing any order either
granting or refusing registration would lead to following :

(1) If the application for registration were to abate, the
assessee would be required to apply again for no fault of his.

(2) If the application were to be treated as pending, then
the Commissioner would get extended period of limitation which the Section
does not allow.

(3) If the application were to be deemed to have been
refused, then the assessee must be in a position to file an appeal to the
Tribunal, which it will not be able to do in the absence of a written order.

(4) Therefore, by the process of exclusion, the
Com-missioner must be deemed to have allowed the registration. The rights of
the Department would also be protected in the sense that it would be open to
the Commissioner to cancel the registration by invoking Ss.3 of S. 12AA. If
aggrieved by the cancellation, the assessee would also have a right to appeal
to the Tribunal u/s.253 (1)(c).

 


Cases referred to :




(i) Sambodh Organisation v. CIT, (Delhi Bench)

(ii) Karnataka Golf Association v. DIT, (E) 2005
Bangalore 272 ITR (AT) 123 and a few more.

 


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